I ndian Economy Higher Secondary First Year Preparedasper the recommendationof the Textbook Development Committee, this new textbook is preparedaccordingto the syllabuspublishedin 2003-04 Untouchability is a sin Untouchability is a crime Untouchability is inhuman TextbookCorporation College Road, Chennai 600 006 ©Govemment First Edition of Tamil - 2007 Nadu Chairperson Dr. K. Jothi Sivagnanam Reader Departmentof Economics University of Madras Chennai 600 005 Reviewers Dr. S. Mumtaj Begum P. Asokan Reader Reader in Economics in Economics Lady Doak College ThiagarajarCollege Madurai625002 Madurai625009 Authors M. R. Gopal M-_Sing31'is Headmaster Assistant Headmaster Tnantnai penyarGovernment Presidency GirlsHr.Sec.School Hr.Sec. School, Puzhuthivakkam, Egmoreg Chennai500 091 Chennai600 008 V.Rajasekaran 5-Rajendran TheHinduHr Sec.School Triplicane, Chennai 600005 C0113ge_R0ad Chenna1600006 PGAssistant (Economics) Se1110FLeCtl1TeFDTERT P.Neelavathy 5-R-Kennedy PGAssistant (Economics) PGASS1Sta11t(EC0110m1CS) _ Saidapet, Chennai 600015 Triplicane, Chennai 600005 GovernmentModel Hr.Sec.School CS1Kellet HF-S30School Price : Rs. This book hasbeenpreparedby the Directorate of School Education on behalf of the Government of Tamil Nadu This book hasbeenprinted on 60 GSM Paper Printed by Offset at : Foreword Academics, parentsand the educationalmediahave represented to the Government of Tamil Nadu to reform the Plus one and Plus two textbooks, which were introduced in the academicyear 2005-06. Our beloved Chief Minister, who hasalways beenevincing keen interest in educational development, immediately constituted a Text Book DevelopmentCommittee undertheChairmanshipof theVice Chairman, StatePlanningCommission,Governmentof Tamil Nadu. The Text Book Development Committee solicited opinion from Teachers,Lecturers and Professorsfrom Higher Secondary Schools, CollegesandUniversities,Chairpersonsandauthorsof text books.After perusingthe opinions, the Text Book DevelopmentCommittee decided not to changethe syllabi, but recommendedsuitablechangesin the text books. In particular, it was proposedto rewrite the economicstextbook, and acceptingthis proposal, this Textbook is rewritten by experienced and efficient teachers. We are pleased to place on record our sincere gratitude to our beloved Chief Minister. Our thanks are due to Honble Minister for School Education, Secretaryand Director, Department of School Education, Governmentof TaInil Nadu for their valuablesupportand suggestions. We thank Teachers, Lecturers and Professors from Higher SecondarySchools,CollegesandUniversities,Chairpersons,Reviewers andAuthors of textbooks, non-teaching staff of Education Department and StatePlanning Commission for their help at various stagesin this endeavour. We wish the studentsto learnandperform well in the examinations. Prof M. N aganathan Chairman Text Book DevelopmentCommittee Government of Tamil Nadu Preface An earnestattempthasbeenmadein this book to presentthe basic issuesof Indian Economy in a lucid form, without sacricing the basic tenetsand without overburdeningthe studentwith an array of tablesand numbersandit is preparedin accordancewith the syllabusprescribedfor standard XI. The chairperson,the reviewersandthe authorsacknowledgewith gratitude the condence reposedin them by Dr. M. Naganathan,ViceChairman, State Planning Commission and Chairman, Textbook DevelopmentCommittee.Posterity will be indebtedto him for his deep perceptionof curriculum and syllabusfrom a broadersociologicalangle. The Committee wishes to thank Dr. R. Srinivasan,Full-time Member of the StatePlanning Commission,for his abiding interestin the project, andfor the encouragementand supporthe hasgiven during the courseof writing the book, for his helpful commentsand suggestionsand for his unfailingoourtesy. The Committeealsowishesto thank Thim ThangamThennarasu, Honble Minister for School Education, Thim M. Kutralingam, I.A.S., Secretary, School Education, Thiru R. Kannan, Director of School Education, Dr. R. PalaI1isaIni,the then Joint Director of School Education and Thim G Arivoli, the Joint Director of School Education and all other competentauthorities. The Committeeis grateful to Dr. V. Loganathan,chairpersonfor preparing Economic Theory textbook for standardXII, for his help at every stagein completing the book. The Committee wishes to thank Thiru Valavan for vettin g the translated version of the textbook in Tamil and to Thim Balasundaram of the StatePlanning Commission and Thiru N.Balamurugan for helping the Committeein typesettingandprinting themanuscript. iv The Committee wishes to thank Thim M. Paramasivam, Librarian, StatePlanningCommissionfor providingall facilitiesduringtheworkshop. The Chairmanwishesto placeon recordhis deepappreciationof the Reviewers and authors of the book for their excellent cooperation and good teamwork with perfect understanding. The Committeecravestheindulgenceof thereadersfor the errors thatmight havecreptin inadvertently. Suggestionsfor improvementarewelcome. Chairperson,Reviewers and Authors Contents Page no. 1 Economic Growth and Development 2 Population 17 3 Poverty and Unemployment 40 4 National 56 5 Economic Planning 75 6 Agriculture 93 7 Industrial 8 Banking 145 9 Foreign Trade 166 Income Sector 10 Human ResourceDevelopment 1 121 197 Contents Page no. 11 Statistica1Ana1ysisand Measuresof Central Tendency 12 Measuresof Variability 216 252 Chapter I Economic Growth and Development Introduction In this chapter,we shall study in outline the evolution of economic thought, the nature and meaning of the concepts of economic growth and development, the basic characteristicsof underdevelopedcountries (UDCs), the role of governmentin economic developmentand Rostows stagesof economic growth. Evolution of Economic Thought The history of economic thought deals with the origin and developmentof economicideasandtheir interrelations.We find economic ideas in the writings of ancient Hebrews, Indians, Greeks, Romans and the scholarsof middle ages.In the words of Prof. Bell, economic thought is a study of heritage left by writers on economic subjects over a period of about 2500 years ; and it freely draws upon all phases of human knowledge. If we study ancienteconomic thought, we canhave a proper understandingof the growth of economic theories and institutions. The Hebrew Economic Thought The Hebrews had one of the ancient civilizations of the world. The period dates back to 2500 B.C. The Hebrews never studied economic problems separately.In their writings, they gave top priority for religion andethics.And they gaveimportanceto agriculture.However, the Hebrews had definite ideas on subjects such as usury (interest), just price, property rights and monopoly. The Hebrew thought was againstlending of money on interest to fellow Hebrews. But they could lend money to strangersand get interest. In those days, as money was borrowed by the poor for consumption purposes,they thought that it was unethicalto chargehigh ratesof interest. We may note that the Hebrew thought on interest is similar to the ancient Indian thought an interest. The Hebrews had many laws against false weights and adulteration.They wantedbusinessmento chargeajust price and they imposed ceiling on the profit margin. The Hebrews realized the dignity of labour. The Hebrew civilization was a rural and agrarian civilization. One of their proverbs is : He that tilleth the soil shall have plenty of bread. The Hebrews did not cultivate the land every seventh year. They left it fallow. The object was to conserve the fertility of the soil. Another interesting feature of the Hebrew thought was the Jubilee year. Thejubilee yearwasthe 50 year.Accordingto Jubileeyear,the land sold to someonewas to revert to its owner in the 50 year. Money was used during the Hebrew Period. There are references to different kinds of money in the Old Testament. The Sabbath : The Sabbath was the weekly day of rest, relaxation and good living. In the words of Spiegel, the institution of the weekend was a social invention that has no parallel in the civilizations of Greece, Rome or other ancient cultures. In short, we find that religion, ethics, law, economics and philosophy were all bound together. Though the economic ideas of ancient Hebrews appear primitive to a modern economist, we should remember that they had a profound influence on mens minds. Greek thought, Roman law and Christian religion form the basis of Europeanculture. Economic Thought in Ancient India Life, work and thought in ancient India was not basedon a negation of life. It was not based on otherworldliness. As Pandit J awaharlal Nehru put it, There is no idolatry in them, no temples for the gods. The vitality and affirmation of life pervading them are extraordinary. The castesystemwas an important institution in ancientIndia. But we have to keep in mind that in the beginning, the basis of caste was profession and not birth. It was only during the latter period that the 2 castesystembecamerigid and led to many abuses.The joint family was anotherimportant institution in ancientIndia. Agriculture was an important occupation in ancient India and it was held in high esteemand monarchy was the most popular form of Government. There was a certain amount of decentralization. For example, village assemblies enjoyed a measurementof autonomy; interest rateswere regulated and regulations were there against false weights and measures.Kautilyas Arthasastra gives details of the political, social, economic and military organizations of the past. Thiruvalluvars Thirukkural is a book of ethics and it deals with Dharma or Aram (ethics), Artha or Porul (Polity) and Kama or Inbam (Love). Valluvars economic ideas are found mostly in the second part of the Thirukkural, the Porutpal or the part dealing with wealth. By Porutpal, Valluvar meant all that kautilya meant by Arthasastra. Valluvar consideredfreedom from hunger a fundamentalfreedom. He was against begging. He considered industry as real wealth and labour as the greatest resource. According to Thiruvalluvar, agriculture is the most fundamental activity. He tells that the ploughmen alone live as the freemen of the soil, the rest are mere slaves that follow on their toil. (Kural lO32). For Valluvar, good ethics is good economics. Medieval Economic Thought : The period from 476 A.D, which marked the fall of the Roman empire to 1453 A.D., the year in which the Turks capturedConstantinopleis generally regardedasthe Middle Ages. The society of the Middle Ages was a feudal society. People in middle ages lived in a natural economy. Men lived largely in small and selfsufficient units. The Church, the Bible and Aristotle exercised a great inuence on the life and thought of Middle Ages. Mercantilism The economic ideas and policies which were followed by European governments from the l5 centuryuntil thesecondhalf of the 18*century may be described as mercantilism. The mercantilists thought that the wealth of a nation could be increasedby trade. And they wanted to have more wealth by increasing the stock of gold and silver. 3 After feudalism came to an end, strong nation states emerged in England, France, Germany and Spain.And each country consideredthe other country as its potential rival. So the mercantilists regulated the economic activity of the State in order to create a strong and powerful State.Mercantilism was only economic meansfor the creationof a strong State. If a country hasmines, it can get gold and silver. Otherwise, it can get gold and silver only by meansof trade. They wanted favourable balance of trade. That is, exports should be more than imports. As Alexander Gray put it, it was thus a primary principle of the typical mercantilist to maximize exportswhile minimizing imports. According to mercantilists, trade was the most important occupation. Industry and manufacture were ranked second in importance. And agriculture was considered the least important occupation. The State played a very important and powerful role during mercantilism.It encouragedexportsanddiscouragedimports by a number of policies. Sometimesit is said that mercantilists confused money with wealth. But Keynespraisedthem saying that more money would promote businessexpansion.If eachcountry wantedmaximum exportsand almost zero imports, then who would import .7In short, mercantilism was a policy of power. The Physiocrats The physiocrats developed a body of economic theory in the 18 century in France. Adam Smith, who is regarded as the Father of Economics was greatly influenced by the physiocrats. The term physiocracy means Rule of Nature. Physiocracy was essentially a revolt by the French againstmercantilism. The physiocrats developed the concept of natural order. According to them, the natural order is an ideal order given by God. They believed that individual interests were identical with the interests of the society. They advocated laissezfai re. It means let things alone, let them take 4 their own course.According to this policy, the Statewill have a minimum role to play. The main functions of government is to protect life, liberty and property. And they believed that agriculture was a productive occupation. It alone produced net product. And they consideredother occupations as sterile. Quesnay, chief representative of physiocratic school explained how circulation of wealth took place in an economy in his TableauEconomique (The Economic Table)amongdifferent classes : the productive class (farmers); the proprietory class; and the sterile class(all thoseengagedin nonagricultural occupations,e.g., merchants, domestic servants). The physiocrats were great believers in the institution of private property. And they favoured free trade. The classical school Adam Smith, David Ricardo, T.R.Malthus and J .S. Mill are the leading economists of the classical school. Like the physiocrats, the classicaleconomistsbelieved in laissezfaire, and market economy based on free trade. Adam smith was interested in the nature and causes of the wealth of nations. We can call him the first development economist. Ricardo was interested in the problems of distribution. Malthus,who gave the theory of population was interested in finding out why some countries were prosperous at one time and why they were poor at other times. In other words, he was interested in studying the prosperity and the poverty of nations. J.S. Mill advocated believed socialist reforms in individualism in distribution as well as socialism. as the laws of distribution He were different from the laws of production. The historical school The historical school was dominant in Germany during the second half of the 19century. It was a revolt againstthe classical school. While the classical economists believed that 5 the laws of economics were of universal application, the economistsof the historical school arguedthat the laws of economics were relative. Thus, while the classical economists advocatedfree trade, the historical school advocatedprotection for new industriesthrough tariffs. Marxism Karl Marx (1818-1883) was the founder of scientific socialism. He was a great critic of the capitalist systemwhich was exploitative in nature and predicted that capitalism would give way to socialism. According to Marx, all history is a history of class struggle The teachings of Marx resultedin the birth of a socialistStatein RussiaandChina. Planning which is the gift of former Soviet Russiato the world is basedon socialist philosophy. The Marginal Revolution The Marginal Revolution that took place in the latter half of the l9 centuryis importantfor theory,especiallythetheoryrelatingto value. Today, we speakof human development. And man is brought to the centre stage.It was Alfred Marshall who pointed out that economics was on one side a study of wealth and on the other and more important side a part of the study of man. The Institutional school The institutional schoolis a 20* centuryphenomenonandit is of American origin. It emphasizesthe role of institutions in economic life. The term institutions includes customs, social habits, laws, ways of living and modes of thinking. For example, slavery is an institution. We celebratecertain days as festivals. That is also an institution. J.A. Schumpeter (l883l993) considered economic life mainly as a process of change and development. According to him, innovating entrepreneursplay a key role in the processof economic development. The Keynesian Revolution J.M. Keynesis considered the Father of New Economics. During the 1920sand 1930s,when the capitalist countries were affected by the Great Depressionmarked by bad trade and massunemployment, Keynes suggesteda greater role for government and a bold fiscal policy to tide over the crisis. The New Deal policy of America was greatly inuenced by Keynesian policy. Since 1950s, economic thought has focused on growth and development. Economic Growth and Development Economic growth has been defined by Arthur Lewis as the growth of output per head ofpopulation In other words, economic growth refers to an increase in per capita national income. It may be noted that the subject matter is growth and not distribution. For example,during the Industrial Revolution in the U.K., therewas economicgrowth. But therewas no improvementin the standard of living of the working classesbecausethey were exploited and made to work for long hours at low wages. According to Arthur Lewis, economic growth is conditioned by (1) economic activity, (2) increasing knowledge and (3) increasing capital. In other words, these three factors are labour, technical improvements and capital. We may add land or resources to the list. Economic growth and economic development have received a lot of attention in the 20 century.In an economythere must be balanced economic growth of all sectors- agriculture, manufacturing industry and the service sector.Only then, economic growth will benefit all sectorsof the population. Not only that, economic welfare dependsnot only on the growth of output but on the way it is distributed among different factors of production in the form of rent, wages, interest and profits. In the past, economic growth and economic development were used more or less with the same meaning. For example, they used rate of growth of income per capita or per capita GNP as index of economic development. And they wanted to seewhether the rate of growth of per capita income was greater than the rate of growth of population. We have to note one more thing. The wellbeing of population dependson the rate of growth of real per capita GNP. Real per capita GNP refers to the monetary growth of GNP per capita minus the rate of inflation. In general terms, we may say if there is decline in poverty, unemployment, and inequality, there is economic development in the country. Otherwise, even if per capita income doubled, we cannot say there is economic development. So when we say there is development, there must be improvement in the quality of life. That means, people must have higher incomes, better education, better health care and nutrition, lesspoverty and more equality of opportunity. So according to Michael P. Todaro and Stephen C. Smith, development must be conceived of as a multidimensional processinvolving major changesin social structures, popular attitudes and national institutions, as well as the accelerationof economic growth, the reduction of inequality, and the eradication of poverty. Characteristics of underdeveloped countries The terms underdeveloped, less developed, backward, and poor and developing are generally used to refer to low income countries. The countries which have low standard of living becauseof their low per capita incomes are known as underdeveloped countries. Countries are classified into developed and underdeveloped countries according to their per capita income. For example, in 1949,high income countries with l8% of world population enjoyed 67% of world income, whereaslow income countries which had 67% of world population got only l5% of world income. The rich countries include United States, Canada,Western Europe and Australia. The poor counties cover most of Asia, Africa, south easternEurope and Latin America. And there were middle income countries with a population of 15% which got l8% of 8 world income.They consistedof countriessuchasArgentina,SouthAfrica, Israel and former soviet Russia. The poor countries are collectively referred to as the Third World. Even in 1973,theThird World with 77 percentof the world population subsisted on only 22 per cent of the world income. Even the meagre income is maldistributed within these countries and the bulk of the population live in abject poverty. According to Meier and Baldwin, an underdeveloped country has six basic economic characteristics. They are : (1) it is primary producing ; 2) it faces population pressures ; 3) it hasunderdevelopednaturalresources; 4) it hasan economicallybackward population ; 5) it is capital deficient and 6) it is foreign trade oriented. 1) Primary production: The UDCs produce mostly raw materials andfoodstuffs.A majority of the population will be engagedin agriculture. Somepoor countries dependupon non agricultural primary production (eg.minerals like tin, copper,aluminium andpetroleum).And agricultural productivity is low. So rural incomes are low. There is pressure of population on land. 2) Population pressures: Generally, there is over population in many poor countries. Population pressurestake many forms. First, for example, they have rural underemployment. This is sometimesreferred to as disguised unemployment. That is, there will be more number of people working on the farm that what is really necessary.The marginal productivity of the extra hands will be almost zero. Second, high birth ratescreatea large number of dependentchildren and lastly falling death rateswith high birth rateswill bring about a large increasein population. 3) Underemployment: Natural resources in poor countries are underdeveloped.They areunutilized, underutilized or misutilized. 4) Economic Backwardness 2The economic backwardness of the population in the poor countriesis reflectedin low labour efficiency, factor immobility, lack of entrepreneurship,economic ignoranceand so on. The population is ruled by customs and traditions. And people are not 9 economically motivated. The tax system is marked by inefficiency in collection and there is tax evasion. The governments in thesecountries are generally weak, incompetent and corrupt. 5) Capital Deficiency : Capital deficiency is an important characteristic of poor countries. Capital formation or investment is low in thesecountries.According to Ragnar Nurkse, low capital formation is oneof thebasiccausesof poverty in thesecountries.Low capital formation leads to low productivity. Low productivity results in low incomes and low incomes result in low savings and low savings lead to low capital formation. Thus, it forms a vicious circle of poverty. 6) Foreign Trade Orientation : Some of the poor countries depend heavily upon foreign trade. For example, in 1952, cotton contributed about 90 percent of foreign exchangeearningsof Egypt. A risk involved hereis if there is someseriouseconomicproblem in the importing nation, the country which dependson export of one or two commodities will be affected badly. And in the early stagesof development, UDCs depended upon imports. India as UDC : India, has most of the typical characteristics of an underdeveloped country. Nearly 65 to 70 percent of its population dependsupon agriculture.And agricultural productivity is low. There are population pressures.There is underdevelopment of natural resources and economic backwardness.Until recently,there was capital deficiency. That is why, we had to borrow heavily from foreign countries and international institutions like I.M.F. andWorld Bank. So we may describe India as a typical underdeveloped country. Nowadays, they call it a developing economy. Role of the State in Economic Development The State plays an important role in the economic development of nations. Japan, after 1870 and soviet Russia after world war I are good examples. But the economic development of the U.K. and the U.S.A. took place under a system of market economy and laissez faire policy. 10 For underdevelopedcountries, laissezfaire policy is a luxury. The State has to play the role of an entrepreneurin the underdevelopedcountries. Nowadays, it is agreedthat the governments in these countries have to play a dominant role in implementing plans for economic government.In fact, government is regarded as a factor of production in poor countries. For example, India is a mixed economy with a public sector and private sector.Until recently, the public sector played a major role in economic planning. Through Five Year Plans, the State has been making attempts to achievethe goals of increasingeconomic growth, rapid industrialization, expansionof employment opportunities and reduction of inequalities of income and wealth. The government plays a very big role in the field of social services like education and health. Investment in education and health promote human capital formation, which is as important as physical capital formation. Education and health increaseproductivity of labour. These are the days of globalization, liberalization and privatization. We invite foreign investmenton a largescale.But they want goodphysical infrastructure like good transportation, postal and telecommunications, power facilities, and water supply. All these things are referred to as social overheadcapital. The governmenthasto make huge investment in these things. Not only that, there is shortage of entrepreneurs in these countries. So the government has to encouragethem. There is shortageof foreign exchangein UDCs. The governmenthas to take stepssuch aspromotion of exports, making investment attractive for foreigners through fiscal measures. If development is left to market forces, there will be not be balanced regional development. So the government formulates policies and programmesin sucha way that there is a balancedregional development. And the State has to regulate and control monopolies. Thus, the State has to play a dominant role in economic development. 11 Rostows Stages of Economic Growth W.W. Rostow, American economic historian described the transformation of countries from underdevelopment to development in terms of stagesof growth. He is of the View that all countries must pass through the following stages. Lowcapital formation Low vings Low Productivity Low income L Fig. 1.1 : ViciousCircleof Poverty 1) The traditional society ; 2) The transitional society ; 3)The take off stage ; 4) The mature stage and ; 5) The ageof high massconsumption The traditional society will be custombound and traditionoriented. There will be economic backwardness.The poor countries of today are good examples of traditional society. In short, the factors which are essentialfor economic growth will be missing from such a society. 12 In the transitional society, the conditions for takeoff stage will be established. During this stage,the force of customs and traditions will become less ; there will be economic motivation, and there will be improvements in physical and social infrastructure. When once an economy attainsthe takeoff stage,there will be self sustaininggrowth. The takeoff stage refers to a situation where an economy transforms itself from a predominantly agricultural to a predominantly industrial society. For an economy to attain the takeoff stage, it must make an annual investment equal to 20 ~ 25 percent of GDP mobilized from its own savings. The takeoff stage was made possible in some countries by leading sectors like railways and defence. After the take off stage, when the economy attains self sustaining growth, it enters the mature stage.During this stage,the governmenthasto make somebasicdecisions. As there will be abundantresourcesand goods, it has to divide whether it has to usethem for strengtheningthe nation into a strong and powerful state militarily or to use the resourcesfor improving the welfare of the people. The final stageis the ageof high massconsumption. During this period, people will consumeall kinds of goods especially durable goods like cars on a mass scale. Rostowsstagesof economicgrowth areonly broadly true.All nations have not gone through the order in which he has described the stages. Chapter 1 Exercise PART the correct A 1. Choose l. The Sabbath (weak end) was introduced by A. Hebrews B. Greeks C. Romans answer D. Indians 13 The author of Arthasastra is A. Thiruvalluvar B. Kautilya C. Jawaharlal Nehru D. Mahatma Gandhi The Mecantilists gave utmost importance to A. Agriculture B. Manufacturing industry C. Trade D. Imports. The physiocrats consideredonly the following asproductive occupation A. Manufacturing industry B. Agriculture C. Service sector D. Soldiers. The father of New Economics is A. Adam Smith B. Marshall C. Karl Marx D. J.M. Keynes II. Fill in the blanks The economic ideas of Thiruvalluvar are found in the ........ ........ .. and minimum .. Part of Thirukkural The Mercantilists believed in maximum imports 8. The physiocrats belonged to ...... .. 9. The classical economistsbelieved in ............. .. policy. l0. The author of stagesof growth theory is ............. .. III. Match the Following ll. Historical school a) Karl Marx 12. Scientific Socialism h) U.S.A l3. Institutional School c) Germany 14. Low capital formation d) ValueTheory l5 . Marginal School e) Underdevelopedcountry 14 IV. Answer each one of the questions in a word or two l6. l7. l8. What is the basisof Europeanculture .7 Did mercantilismencouragesexportsor imports ? l9. Who was the author of TableauEconomique .7 WasRicardo interestedin the problemsof production or distribution 20. ? What is the annualinvestmentthat mustbe madefor aneconomy to take off ? Part Write Very short answers 2l. B PART D 3 1. Discussthe mercantilist thought. 32. What are the essential ideas of the physiocrats .7 33. Explain the role of the Statein economic development 34. What are the basic characteristics of underdeveloped countries .7 35. Describe Rostows stagesof economic growth. 16 Chapter2 Population The study of humanresourcesis important from the point of view of economicwelfare.It is particularly importantbecausehumanbeingsarenot only instruments of production but also ends in themselves.A study of population is necessaryas it is an important determinant of economic development Meaning of Population The term population refers to the whole numberof peopleor inhabitantsin a country or region. Factors determining population growth The basicfactorsdeterminingpopulationgrowth are 1. Birth 2. Death rate rate 3.Migration a. Outmigration (Emigration) b. Inmigration(Immigration) Birth Rate Birth ratehasa positiveinuence on growth of population.Higher the birth rate,higher will be the growth of population. The birth rate dependson the following factors: i) the ageof marriage iii) social customs and beliefs and iv) llliteracy andignoranceof controllingbirths. Early marriage,higherchild birth, higher the spreadof socialcustoms andbeliefs (like sonpreferenceto do thereligious functions) andhigher the rateof illiteracy andignoranceof birth controlling measures,higher will be the birth rate andpopulation growth. Social awarenessand spreadof education among the people can help to increasethe mean ageof marriage, increasethe knowledge about family planningmethodsandfamily welfaremeasures to controlbirths,reduce the rapidity of child birth andtherebyreducethe birth rate. Death Rate Lower the deathrate,higher will be the population growth and vice versa. High death rates may be due to hunger, starvation, malnutrition, epidemics,lack of propermedical andsanitaryfacilities. On the otherhand, low deathratesmay be theresultof betterdiet,puredrinking water,improved hospital facilities, control of epidemicsand contagiousdiseasesandbetter sanitation. Migration Outmigration will reducepopulationgrowth while inmigration will increasethepopulationgrowth. Migration is not an important factor contributing to the population growth due to the restrictionsimposedby different countries.Thus,the two major causesfor the variations in population arebirth rate and deathrate. Population and Economic Development Population growth can be both a stimulant aswell as an obstacleto economicdevelopment. 18 Population as a stimulant to economic development 1. In a backward economy,population growth resultsin increasein supplyof labour.This in turn resultsin the availability of cheaplabourin the economy.Therefore,undera giventechnologywith theavailabilityof capital, production canbe increasedby increasingthe labour use. 2. Population growth results in increased demand for products. Increaseddemandresultsin increasedproduction,employmentandincome in the economy.As a result,the economywill develop. 3. Due to population growth, the supply of goods and services increases.Increasedsupply results in increasedproduction, which in turn resultsin specialisation. Specialisation will inducetechnologicalimprovements. 4. Increaseddemandandincreasedsupplyof productsresultin scarcity of resources,which inducetechnologicalimprovements. Population Explosion Populationexplosionmeansthe alarmingandrapid rateof increase in population. Causesof Population Explosion 1. High Birth Rate High Birth rate is a major causeresponsiblefor the rapid growth of population. In India, although the birth rate has declined from 45.8 per thousandduring the period 1891-1900to about25.8 per thousandin 2001, it is still consideredto be substantiallyhigh. This showsthatthebirth ratehas not come down considerably in spite of the increase in the widespread propagandaof family planning,family welfareprogrammesandpopulation educationcampaigns. 19 2. Low Death Rate Thephenomenalfall in thedeathratein recentyearsis anotherimportant factor that has contributed to the rapid increasein population. The death rate in India is about 8.5 per thousand in 2001. Due to advancementin medical science,dreadful and chronic diseasessucha small pox, cholera, plague, typhoid are no longer dreaded.Better facilities for sanitation and cleanliness,provision of prenatal and postnatal carehasreducedinfant mortality rate. 3. Early Marriage The practice of early marriage is another important reasonfor the rapid increasein population in India. The meanageof marriagefor girls is about 18years,which is low, comparedto the other countriesof the world, which is about23 to 25 years.This resultsin a longer spanfor reproductive activity andthe increasein the numberof children. 4. Social and Religious reasons In India, everypersonhasto marry becausemarriageis a compulsory institutionasper socialnorms.In joint family system,nobodyfeelsindividual responsibility and everybody has accessto equal level of consumption. Therefore,peopledo not hesitateto increasethe sizeof the family. Most of the peoplethink that at leastone male child shouldbe born in the family. In theexpectationof gettinga malechild, they go on increasingthefamily size. 5. Poverty Povertyis anothercausewhich contributesto theincreasein population. Children aresourcefor income of the family. The children at a very young agehelp their parentsin work, insteadof going to school and thusprove to be an assetfor the family. Every additional child will become an earning memberandthussupplementthefamily income. 20 6. Standard of living Peoplewhose standardof living is low tend to have more children becausean additional child is consideredasan assetrather than a liability. Sincea majorityof thepopulationis uneducated, theyareunableto understand the needfor family planning.They areunawarethat a smallersizeof family will help them enjoy a betterstandardof living. 7. Illiteracy A major part of thepopulation (about60%) in India is eitherilliterate or hasthe minimum education.This leadsthem to acceptminimal work in which they cannot even support themselves.Unemployment and underemployment further lead to poverty. Moreover due to the prevalence of higher rate of illiteracy, thereis widespreadignorancein the form of social customsandbeliefs like early marriageandpreferencefor a malechild. As a result,thereis high rateof population growth in the country. Population Explosion as an obstacle to Economic Development India is facingthesituationof populationexplosion.Although we need more labour supply for our economicdevelopment,it is alsotrue that if our population keepson rising, the processof economic developmentwill be affected.Therising populationin India affectseconomicdevelopmentin the following ways: (1) Food Shortage If thepopulation of India goeson rising andthereis no proportionate increasein agricultural production, the country will face a serious food problem. (2) Burden of unproductive Consumers The greaterthe increasein population, the greateris the number of children andold persons.Children and old personsconsumewithout their 21 making any contribution to output. The increasingnumber of children and old people increasethe burdenin terms of more requirementsof nutrition, medicalcare,public healthandeducationthatgo unattendedto a largeextent. (3) Reduction in National and Per Capita Income Thefastgrowingpopulationretardstheaveragegrowthrateof national income and per capita income. This is becausewhatever is addedto the nationalincomeis consumedby everincreasingpopulation. (4) Low savings and investment The most seriousconsequencesof a rapid increasein population is that it reducesthe capacityto saveandinvest. The national income andper capitaincomein India is very low to leaveanymargin for thepeopleto save. Further, there will be a fall in effective demandasthe peoplespurchasing power is low. Rapidpopulationgrowth thusmakesit difficult to increasethe rateof savingswhichdeterminesthepossibilityof achievinghigherproductivity andincomesin a country. (5) Reduction in Capital Formation Capitalformation is very essentialfor theeconomicdevelopmentof a country,particularly for a developingcountry like India. Capital formation dependsupon saving and investment. This is not possible when there is a rapid growth of population, which results in more unemployment and underemployment. Thus, the fastgrowing population affects the capital formation in thecountry adversely. (6). Unemployment and Underemployment Risingpopulationaggravates theproblemof unemployment.Thelabour force alsoincreaseswith theincreasein population;andthis increasedlabour forceis notfully absorbeddueto lackof employmentopportunities.Therefore, therearemore unemployedandunderemployedpeople. 22 (7) Loss of Womens Labour Rapidandfrequentchildbirthsmakea largenumberof womenunable to take part in productive activity for longer periods. This is a waste of humanresource,andit retardseconomicdevelopment. (8) Low Labour efficiency The increasingpopulation adverselyaffectsthe national income and theper capitaincome.Due to this, the peoplehavea low standardof living, which makesthem lessefficient. This hindersthe rapid developmentof the country. (9) More Expenditure on Social Welfare Programmes A rise in population increasesthe number of children. This would demandmoresocialexpenditureon medicalcare,publichealth,family welfare, educationandhousing,etc. (10) Agricultural Backwardness The increasein population hasled to uneconomicholdings through subdivisionandfragmentationof landholdingsin India. The sizeof holding is sosmallthatmechanisedfarmingis notpossible.Although somesuccessful efforts towardsdevelopmentof agriculturehavebeenmadeunderthe Five YearPlans,agricultural production still far short of the requirementsof the population andthe agroindustriesin the country. (11) Underdeveloped Industries The rapid growth of population adversely affects industrial development. This is the reasonwhy neither the cottage and smallscale industriesnor largescaleindustriescould developadequatelyin thecountry. Both big and small industriesrequire adequatecapital, whereasthe rate of capitalformationis low in India. Public investmentin India is insufficient for theindustrial developmentof the country. 23 (12) Financial Burden on Government Rapid increasein population is a financial strain to the government. Theresourceshaveto be spenton launchingpoverty alleviationprogrammes andsocialwelfareschemes.This includesprovision of gooddrinking water, housing,sanitary,healthandmedicalfacilitiesin orderto increasethestandard of living of the people.Ifthe population is controlled, thenthe government can spendon more productive purposeswhich would increasethe national andper capitaincomeandtherebyraisethe standardof living of thepeople. All theseabovementionedfactorsemphasisetheurgencyof checking the population growth in India. The rapid rate of population growth affects theeconomicprogressof thecountry adversely.That is why, it is sometimes saidthat in India we have to run andrun to remain in the sameplace. Stepsto check rapid growth of population (1) Couple Protection Rate (CPR) CPR should be increased,which meansthe percentageof couples usingbirth control or family planningmethodsshouldgo up. (2) Infant Mortality rate (IMR) IMR must be reduced further because when infants die in lesser numbers,thereis an incentiveto adoptsmall family norm by thepeople. (3) Industrialisation of the country The burdenof populationon land mustbereduced.Cottageandsmall scaleindustriesmustbe developedin villagesto provide employmentto the maximum number of people. This leads to increasein standardof living which actsasa check on population growth. (4) Increase in Female Literacy Rate and Education The educatedpeople have a better and more responsible outlook towardsthe sizeof their families. They can understandthe advantagesof a 24 small family and adoptfamily planning methodsto reducethe family size. This will help in reducingthebirth rate. (5) Late Marriages Late maniagesmustbe encouraged.At thesametime, earlymarriages mustbe strictly checked.The minimum ageof marriagefor boys at 21 years andfor girls at 18yearsshouldbe strictly followed in real life. (6) Legal Steps Strict laws must be made and enforced to check early marriages and polygamy. (7) Family Planning This is themostimportantmeasureto checktherapidgrowthof population. Family Planningmeanslimiting the sizeof the family. The Family Planning Campaignshouldbe a nationalmovement.Educationaboutfamily planning mustbemadecommon.Peoplemustmemadeawareof thedifferentmethods of birth control. Theories of Population Malthusian Theory of Population The Malthusian theory of population is the most wellknown theory on population in economics.Malthus pointed out that an acceleratedincrease in poplation would outweigh the increasein food production. This would have an adverseimpact on the developmentof an economy.This theory is explainedin thefollowing propositions: l.The rateof growth of populationis limited by the availability of the meansof subsistence i.e.food.Ifthe meansof subsistence increase,population also increases 2. unless it checked. Population increasesat a fasterrate than food production. In other 25 words,while populationincreases in ageometricprogression,food production increasesin an arithmeticprogression. 3. The preventive and positive checksarethe two measuresto keep thepopulationon the level with the availablemeansof subsistence. The first propositionstatesthatthe sizeof populationis determinedby the availability of food production. In other words, greaterproduction can sustaina larger population. If food production doesnot increaseto match the rate of growth of population, it will lead to poverty. The want of food would result in deathsandtherebyautomaticallylimit thepopulation.If the food productionincreases,thepeoplewill tendto increasetheir family size. This will leadto moredemandfor food, sotheavailability of food perperson will diminish. This will leadto a lower standardof living. The secondproposition statesthat population would increaseat a geometrical progression i.e. in the ratio of 2, 4, 8, 16, 32, etc., but food productionwould increaseat an arithmeticalprogressioni.e. in the order of 2, 4, 6, 8, l0, etc. If population increasesthere will be a burden on land, which is limited; asa resulttherewill bediminishingreturns.This will leadto a decreasein the output per worker and a corresponding decreasein the availabilityof food perperson.Theimbalancebetweenthepopulationgrowth andfood supplywould leadto abaresubsistence of living, miseryandpoverty. This imbalanceis correctedby two checksnamelypreventivechecks andpositive checks. Preventive checks are those checks applied by man to reduce the population. The preventivechecksinclude late marriage,selfrestraintand other similar measuresappliedby peopleto limit the family. Positive checks affect population growth by increasingdeathrate. The positive checkson population aremany andinclude every causeeither from vice or misery which helpsto shortenthe life span.Commondiseases, plagues,wars,faminesunwholesomeoccupations,excesslabour,exposure to the seasons,extremepoverty,bad nursingof children area few examples for positive checks. 26 Malthus thus recommendedthat the preventive checkscan be used by mankind to avoid misery or else the positive checkswould come into operation.As a result, therewill be a balancebetweenpopulation andfood production.Malthusiantheory is explainedin thefollowing Flow Chart. Malthusian Theory of Population Populationgrowsin Geometrical Progression Foodsuppy growsin ArithmeticalProgression (2, 4, 8, 16,32) (2, 4, 6, 8, 10) Imbalance between Population andFoodSupply Corrective Measures of Imbalance Positive Checks Preventive Checks (Misery,diseases, wars, earthquakes, oods, etc.) (Celibacy,latemarriages, moralrestraint,etc.) The Theory of Optimum Population The moderntheoryof optimum populationbringsout therelationship betweenchangesin population and the consequentchangesin per capita income.Modern economistssuchasSidgwick,Cannon,Dalton andRobbins havepropagatedthis theory. 27 Optimum populationmeanstheidealpopulationrelativeto thenatural resources,stockof capital equipmentandstateof technology.Therewill be an ideal size of population at which per capita output (or real income per head)will be the highest. In other words, optimum population is that level of population at which per capita output is the highest. A country is said to be underpopulatedif thepopulationis lessthentheoptimum andoverpopulated if the populationis more thanthe optimum. Illustration Let usassumethattheavailabilityof naturalresources, capitalequipment andstateof technologyremainfixed in a country.The populationis assumed to be smallrelativeto theseresources.When populationincreases,thelabour forcein a countryalsoincreases.As additionallabouris combinedwith xed amountsof theseresources,the per capita output will initially rise due to greaterof specialisationandmoreefcient useof naturalandcapitalresources available.As populationincreases,a point will be reachedwhen capital and naturalresourceswill be fully exploited andoutput will be the highest. Thus, the level of population at which theper capita output is the highest is known as optimum population. Beyond this point, if the population increases,the country will becomeoverpopulatedand the per capita output will start decreasingbecausethere are more women/men in relation to naturalresourcesin the economy. Thus, the given amount of capital and natural resourceshave to be sharedamong a larger number of workers resulting in smaller amount of equipment, materials and natural resourcesavailable per person to work with. Thus, the averageproductivity declines.With the fall in theoutputper head,per capita income and standardof living of the people also decline. Overpopulationleadsto a low standardof living, disguisedunemployment and food shortage. Both underpopulation and overpopulation have shortcomings.It is optimum population with the highestper capitaoutput which is bestsuited 28 for a country.This is explainedin Figure 2. 1. In the figure, sizeof population is measuredon theXaxis andoutput per capita on the Yaxis. It is clear that aspopulation increases,output per capitaalsoincreasestill OM. At OP level of population,output per capitais the highestandis equalto MP. If population increasesbeyondthe level OP, thenper capitaoutput will fall. ThereforeOP is the optimum Figure 2.1 Theory of Optimum Population Ciutput Capita Per Q P P-:q:Iulm:in11 population. If the actualpopulation is lessthan OP,a country is saidto be underpopulatedand if it is more then OP,it is overpopulated. The following formula measureswhetherpopulationat a point of time is optimum or not M=A-O O Where M= Maladjustme inlevel of outpu A= Actual population 0 = Optimumpopulation If M is zero,thenthe total population is equalto optimum population If M is positive,thetotalpopulationis morethentheoptimumpopulation. If M is negative,thetotal populationis lessthentheoptimum population The Theory of Demographic Transition Thedemographictransitionbringsouttherelationshipbetweenfertility andmotility, i.e. betweenthebirth rate andthe deathrate.Birth raterefersto the number of births occurring per 1000in a year.Death rate refers to the number of deathsoccurring per l000 in a year. This theory explains the changesin theserates as a consequenceof economic development. This theory points out that therearethreedistinct stagesof population growth. Stage I: High Birth Rate and Death Rate In the first stage, the country is backward and less developed. Agriculture will be themain occupationof thepeopleandprimitive modeof cultivationwill be used.The standardof living of thepeoplewill be low. This stageis characterisedby high birth rate andhigh deathrate.The high death rate is due to poor diets, improper sanitation and lack of proper medical facilities. Birth rateis high on accountof widespreadilliteracy, ignoranceof family planning techniques,early marriages,social beliefs, customsand attitudesof the people.In this stage,the rate of growth of population is not high sincehigh birth rate is offset by the high deathrate and the population Stage II: High Birth Rate and Low Death Rate As a country advances,it might result in increasein industrial activity, creatingmoreemploymentopportunities.This will raisethenationalandper capitaincomeof thepeople,therebyincreasingtheir standardof living. The economyreachesthe secondstageof high birth rate andlow deathrate.The advancementin scienceandtechnologywill resultin theavailability of better medical facilities. Theeradicationof manyepidemicsanddangerousdiseasesandbettersanitary conditions reduce the incidence of disease and death. The birth rate still remainshigh dueto theresistanceto change,andthelong establishedcustoms and beliefs. Thus there is an imbalance between high birth rate and low deathrate resulting in high population growth, and the country witnesses populationexplosion. Figure 2.2 The Demographic Transition Rama Death am! Birth (Innis 31 Stage III: Low Birth Rate and Death Rate Economic developmentleadsto changein the structureof the economy from an agrarian to a partially industrialised one. With the increase in industrialisation, people migrate from rural to urban areas,and there is a changein the attitude of the people.With the spreadof education,people prefersmallfamilies in orderto increasethestandardof living. Thusthebirth rate is reduced. Implementationof bettermedicalfacilities, control of diseaseandpublic sanitationresult in low deathrate. During this third stageof low birth and deathrates,thegrowth of populationtendsto be stable.Almost all countries havepassedthroughthesethreestages(demographictransition)of population growth. The threestagesof demographictransitionareshownin Figure 2.2. Census The term Census can be defined as the process of collecting, compiling, evaluating,analysingandpublishingthedemographiceconomic andsocialdatarelating to all personsin a country or a welldelimited part of a country at a specifiedtime. Censusof populationin India was takenin l872 andthenin 1881.From then onwards,the censusis taken once in l0 years.The latest censuswas taken in 2001. Censusis very important to know (1) the rate of growth of population (2) the changesin the distribution of thepopulation. Censusis useful for economicplanning, and for implementing welfare schemes and measures. The Use of Population Census The population censusprovides comprehensivedetails of Indias populationcharacteristics.The detailsrecordedin thepopulationcensusare as follows: a. TotalPopulation 32 b. SexComposition c. Rural VersusUrbanpopulation d. Age Composition e. Densityof Population f. Literacy Rate g. Urbanisation h. OccupationalPattern Characteristics of Indian Population India accountsfor about 2.4 percent of the total world areabut has to supportabout 16.84percentof the world population.The population in our country hasbeengrowing Veryrapidly from 238.5million in 1901to 1027 million in 2001. Thus during one century i.e. 100years, the population of India hasincreasedby nearly788.5million people.This orderof increaseis really alarmingandthreateningto the whole developmentprocessin India. Table 2.1 Characteristics of Indian Population Indiaspopulationgrowth canbe studiedfrom the following table: Population (F::1xa|:::er Pl)P'a_ttl° Literacy Rate . . . in2001 ens! y (m""'°) 1oooMales) (r=ersq.k.m.) (2001) Population growth in India Indias population growth during the twentieth century can be classifiedinto four distinct phasesasfollows. 33 Percentage Census Years growth per Nature of Growth annum 1991-1921 StagnantPopulation 1921-1991 195111991 Steadygrowth 1981 -20011.80 Rapidhigh growth High growth with definite signsof slowing down The growth of population was slow up to 1921but after this year it increasedsignificantly. It is for this reasonthat 1921is describedasthe year of the Great Divide. After 1921,India passedthrough successivelyall the phasesof demographictransition and now hasenteredinto the fifth phase which is characterised by rapidly decliningfertility. Rateof growth of population is a function of birth rate anddeathrate. The increasein populationin India canbe explainedby thevariationsin birth and deathrates.The birth rate in India declined from 49.2 per thousandin 1901 to 25.8 in 2001. In the sameperiod, the death rate has fallen from 42.6 per thousandto 8.5 per thousand. The natural growth rate during 1901-1911 was 6.6 (Birth rate minus deathrate during a given period) whereasit was 17.3 in 1991-2001.The increasein natural growth rate explainsthat the fall in deathrate was more thanthe fall in birth rate.The fall in deathrateswere dueto the development of medical facilities and control of epidemics and diseases.This is a very healthy sign of development.The censusresultsof birth rate showsthat the family planning programmeshaveto targetthe country especiallythe rural stable population by 2045, at a level consistent with the requirements of sustainabledevelopment,andenvironmentprotection. Population Policy India was the first developing country to adopt a population policy andto launch a nationwide family planning programmein 1952.The main objective of the population policy is to ensurethat there is reasonablegap between the fall of death and birth rates. Population policy refers to the efforts made by any Government to control and change the population structure. National Population Policy 2000 The National Population Policy (NPP) 2000 has the immediate objective of addressing the unmet needs of contraception, health infrastructure, health personneland integrating servicedelivery for basic reproductiveandchild healthcare. It alsolays emphasison the medium term objective of bringing total fertility ratesto replacementlevel by 2010.A Total Fertility Rate of 2.1 is known asreplacementlevel fertility. The policys long term objective is to stabilisepopulation by 2045. A National Commission on population presidedover by the Prime Minister, Chief Ministers of all Statesandother dignitariesasthe members has been constituted to oversee and review the policy (NPP2000) implementation. Similarto theNationalCommission,StateLevel Commissionspresided over by the respectiveStateChief Ministers have alsobeensetup with the sameobjectiveof ensuringimplementationof thepolicies. Measures to achieve a stable population TheNationalPopulationPolicyhaslistedthefollowing measures to achieve a stablepopulation by 2045. 35 Reductionof infantmortalityrate(IMR) below30per 1,00,000live births Reductionof maternalmortalityrate(MMR) to below 100per l, 00,000 live births Universal immunization To achieve80 percentdeliveriesin regulardispensaries,hospitalsand medical institutions with trained staff Accessto information , containingAIDS, prevention andcontrol of communicable diseases Incentiveto adopttwochild smallfamily norm Strict enforcementof Child Marriage RestraintAct andPreNatal DiagnosticTechniquesAct 8. Raising the ageof marriageof girls from 18to 20 9. A specialreward for women who marry after 21 The Action Plan of the programme includes the following: Selfhelpgroupsat village Panchayatlevelscomprisingmostly of housewiveswill interactwith healthcareworkers andgram panchayats (ii) Elementaryeducationto be madefree andcompulsory (iii) Registrationof marriage,pregnancyto be madecompulsoryalong with births and deaths TheGovernmenthopesto achievetheobjectiveof populationstabilisation by 2045 36 Chapter 2 Exercise PART A I. Choose the correct 1. 2. answer Mention which is not a causefor PopulationExplosion. a.High BR b. Social customs c. High DR d. Poverty T.R. Malthus published his book Essay on the Principles of Population in a. 1896 c. 1857 3. b. 1776 d. 1798 Population increasesin a ....... .. ratio, asexplainedby Robert Malthus. 4. 5. a. Proportionate b. Geometric c.Arithmetic d. Progressive According 2001 Census,the population of India was a. 236 million b. 890 million c. 1000 million d. 1027 million ...... .. refers to the rate of deathoccurring per thousandnew born babies. a.Natality c. infant mortality b. Mortality d. deathrate II Fill in the blanks 6. Density of population rose to ........ .. per sq. km. in 1991. 7. When per capitaincomeincreasesrapidly,it lowersthe ......... ..rate. 8. ........ ..wasthe first demographer. 9. The quality of population in a country dependson the ....... . . 10. India is saidto be in ......... ..stageof demographictransition. III Match the following 11. First census No. of deathsper 1000 12. Positive 2000 13. Death rate Limit thesizeof thefamily 14. NationalPopulationPolicy famine 15. FamilyPlanning check 187 1 IV Answer the following in a word or two 16. Which theory of populationis morerealistic thantheMalthusian Theory of Population? 17. What arethe manmadechecksof population growth? 18. Which is the most wellknown theory of populationin Economics? 19. Give examplesfor preventivechecks. 20. What is themeaningof populationexplosion? 38 PART B Answer the following in four or five line 21. Dene birth rate. 22. Dene Optimum Population. 23. Define 24. Write a note on National PopulationPolicy 2000. 25. What arethe factorsdeterminingpopulationgrowth? Census. PART C Answer the following in about a page 26. 27. Chapter3 Poverty and Unemployment Introduction Two major problems that the developingcountriesof the world face are masspoverty and massunemployment. They are interconnected. Peopleare poor becausethey do not have income. That is becausethey are unemployed. There are also caseswhere people are employed and poor. For centuries, the problem of poverty is there in India. Reducing poverty is one of the major goals of planning in India. We must have knowledge about the poor and their precise social and economic circumstances.Only then the government can adopteffective policies for removingpoverty. Definitions of Poverty Poverty hasbeen defined in a number of ways. The World Bank (1990) hasdefinedpoverty asthe inability to attain a minimal standard of living. In the words of Dandekar (1981) Want of adequate income, howsoeverdefined is poverty. . . Thus, lack of adequate income to buy the basic goods for subsistence living is an important element in the definitionsof poverty. Types of poverty Absolute poverty and Relative poverty When peopledo not have adequatefood, clothing and shelter,we say they arein absolute poverty. Relativepovertyrefersto differencesin incomeamongdifferentclasses of people or people within the samegroup or among people of different countries. If Wedivide the population of a country into different class 40 intervals basedon income and if we compare say, the top 20 percent of population with the bottom 20 percentof population, thenwe can say we arestudying about relative poverty. Temporary or chronic poverty In countries like India, when there is poor rainfall, the crops fail andthefarmers temporarilyenterinto a poverty sample.But when they are poor for long, then we call it chronic or structural poverty. For example, when agriculturists in many poor countries are dependent upon rain and when agriculture is marked by low productivity, we say farmers are in chronic poverty. 3. Primary Poverty and Secondary Poverty Rowntree (1901) madea distinction between primary poverty and secondarypoverty.Primarypovertyrefersto families whose total earnings are insufficient to obtain the minimum necessities for the maintenance of merely physical efficiency. Secondary poverty refers to a condition in which earningswould be sufficient for themaintenancefor merelyphysical efficiency were it not thatsomeportionof it is absorbedby otherexpenditure, either useful or wasteful such as drink, gambling and inefficient housekeeping. Rowntree said that secondarypoverty prevented many more people from meeting what he called human needsstandard than did primary poverty (that is, inadequateincomes). 4. Rural Poverty and Urban Poverty A majority of the people in rural areasarepoor becausethey do not own assetslike land andthey work as agricultural labourers; their wages are low and they get work only for a few months in a year. The urban poor, on the other hand, work for long hours but they get low incomes. They are employed mostly in the unorganized or informal sector. They are subemployed. Subemployed are those 1) who work part- time but want full time work; 2) family heads working full time who do not earnenough to bring their families over thepoverty line and3) discouraged workers who no longer seekwork. 41 Other Dimensions of Poverty In addition to the income based or economic view of poverty, there are other dimensions of poverty. For example, one can think of being housing poor, healthcare poor, education poor, poor in the possessionof desirable physical or mental attributes. Characteristics of Poor Households Generally,households with lowest income per persontend to be large, with many children or economically dependentmembers. Over a typical year, the poor spend nearly all their income on consumption of one sortor anotherand half of this consumptionis likely to be in the form of food. Naturally therelative prices of food staples(food grains,dhalls, oil, vegetables)are crucial to their welfare. Poor households generally invest in education for boys than for girls. The poor play little part in politics. In one sensethey are disenfranchised.Of course, there aresome exceptional cases. Crime, illhealth and lack of accessto the poor are consideredother correlatesof poverty. In many countries,poverty is correlated with casteand race. The scheduledcasteand tribal people in India and the Blacks in the USA are classic examples. The extentof poverty in a country depend mainly on two factors: (1) the averagelevel of national income and (2) the degreeof inequality in its distribution. Poverty Line PovertyLine refersto theminimum income,consumption,or, more generally accessto goods and services below which individuals are consideredto be poor.The poverty line is the expenditure level at which a minimum calorieintake andindispensablenonfood purchasesareassured. 42 It may be notedthat evenamongthepoor, therearedifferencesin the degreesof poverty. So the focus of the government policies shouldbe on the poorest of the poor. Nutrition based poverty lines areusedin many countries. Poverty in India Dandekar and Rath estimated the value of the diet with 2,250 calories as the desired minimum level of consumption. While the Planning Commission accepted Rs.20/ per capita per month (i.e. Rs.240/- p.a.), Dandekar and Rath suggested a lower minimum for rural population (Rs.180/-per capitap.a.) and a higher minimum (Rs.270/-per capitap.a.) for urban population at 1960-61 prices. At 1968-69 prices, the corresponding figures for the rural and urban population was Rs.324/and Rs.486/respectively. On this basis, they estimatedthat 40 percentof the rural population and about 50 percent of the urban population were below the poverty line. According to P.D.Ojha,the percentageof thosebelow the poverty line in rural sectorincreasedfrom 52 percentin 1960-61to 70 percentin 196768. B.S.Minhas by taking per capita annualconsumption expenditure of Rs.240/- as the barestminimum concluded that nearly half of the rural population (50.6 percent)was living below the poverty line in 1968. P.K.Bardhansstudy concludedthat the percentageof rural population below thepoverty line increasedfrom 38 percentin 1960-61to 54 percent in 1968-69. Montek Singh Ahluwa1iasstudy of rural poverty (1977) arrived at the conclusionthat the rural poverty declined initially from 50 per centin mid 1950sto around 40 percent in 1960-61,but increased to 56.5 percent in 1967-68.Whenever agricultural performancewas good, rural poverty declined andwheneverit waspoor, it rose. It may be notedthat Ahluwalia used an expenditure level of Rs.l5/- in 1960-61pricesfor rural areasand 43 Rs.20/ per person per month for urban areas.Ahluwalia accepted that this level of expenditure representsanextremelylow level of living. The SeventhFinanceCommissionused a conceptcalled the augmented poverty line. In it, along with private consumer expenditure per capita, public expenditureon (1) health and family planning; (2) water supply and sanitation;(3) education;(4) administrationof police,jails andcourts; (5) roads; and (6) social welfare were taken into account. According to theestimateof SeventhFinanceCommission, 52 percentof thepopulation was below the poverty line. It alsosaid that this percentage(52 percent) was applicable to urban aswell as rural areas. The Planning Commission estimatedthe poverty line by taking Rs.49.l and Rs.56.6per capita monthly expenditure for rural and urban areasrespectively. The World Bank estimated for India that in l988, 39.6percentof the population wasbelow poverty line. The percentagefor rural areaswas 4l .7 percent and urban areas39.6 percent. According to the Planning Commission, the incidenceof poverty for allIndia declined form 54.9 percent in 1973-74 to 39.3 percent in 1987-88. For the sameyears, rural poverty declined from 56.4 percentto 39.l percentandurbanpoverty declined from 49.2 percent to 40.l percent. Table 1: Percentage and Number of Poor in India Year Percentage of Poor Number of Poor . . . (In millions) Source: PlanningCommission,Governmentof India. 44 At presentasper Governmentof India, poverty line for the urbanareasis Rs. 296 per month and for rural areasRs. 276 per month. That is people who earn less than Rs. 10 per day is considered to be below thepoverty line. As per GOI, this amountwill buy food equivalentto 2200 caloriesper day,medically enough,to prevent death.At this level of earning,evenin a poor countrylike India, survivalon Rs. 10per day is a nightmare.The greater developmentaltragedyin India is thatabout260 million peoplearestill living without even Rs. l0 per day. Causes of Poverty in India The main causesof rural poverty in India areasfollows : l. Unemployment and underemployment:Even during the year in which therearegoodrains, agriculturallabourersdo not getwork throughout the year. 2. Population pressures: Becauseof population pressure,there are many dependentsper every earningmember. And there is the problem of disguised unemployment. On a farm, there may be work for only four persons.But six or sevenpersons may be there on the farm. The marginal productivity of the extra persons is almost zero. 3. Indian agriculture is markedby low productivity. So majority of those engagedin agriculture arepoor. 4. A majority of people in rural areasdo not have enough assets, especiallyland. The main reasonfor this is the concentrationof land in the hands of a few families. The regional variations in the incidence of poverty are also high. For example, in 1987-88, 58 percentof the poor peoplein India were living in five states,namely, Uttar Pradesh,Bihar, Maharashtra,West Bengal and Madhya Pradesh. Many workersin urbanareassuffered from subemployment.They are the working poor. And migration of people from rural to urban areas is also one of the causes of urban poverty. 45 Poverty alleviation programmes The problem of poverty eradicationis one of providing employment and raising the productivity of low level of employment. The following measureshavebeentakenby the governmentto remove poverty from the country. 1. Land Reforms Land reforms legislation hasbeenpassedby the stategovernments, which aim at improving the economic conditions of agricultural landless labourers. For instance, with the abolition of the Zamindari system, the exploitation associatedwith the systemhasbeenremoved.TenancyLaws have been passedin most of the statesfor protecting the interests of the tenantsandhelpingthemto acquirepossessionover thelandsthey cultivate. Every statehaspassedthenecessarylegislationxing ceiling on agricultural holdingsby which themaximum amountof landwhich apersoncanhold has beenfixed by law. The surpluslandsthus acquiredwere to be distributedto the landlesslabourersand small peasants. 2. Jawahar Gram Samridhi Yojana (JGSY) It wasintroducedin April 1999asa successorto JawaharRozgarYojana on a cost sharing basisof 75 : 25 betweenthe Union and States. 3. National Social Assistance Programme (NSAP) It was launchedon August 15, 1995to provide socialassistancebenefits to poor householdsaffectedby old age,deathof primary bread winner or needfor maternity care. 4. Employment Assurance Scheme (EAS) It was startedon October 2, 1993in 1778backward blocks in drought prone, desert,tribal and hill areas.It was expandedto cover all the 5,488 rural blocks of the country. It gave wage employment to the rural poor. In 46 September2001, it wasmergedinto new SampoomaGraminRozgarYojana alongwith JawaharGram SamridhiYojana. 5. Pradhan Mantri Gramodaya Yojana (PMGY) It was introducedin the Budget for 2000-2001with an allocation of Rs. 5,000crore.Its focusis on health,primary education,drinking water,housing and rural roads. Common Property Rights in grazing lands, wastelands,forests and water resourceswere made available to the rural people in the past. They have been cancelled in the recent past due to commercialisation and privatisationof theserural community resourcesin thecountry. 6. Swarna Jayanti Shahari Rozgar Yojana (SJSRY) Urban selfemployment and urban wage-employment are the two special schemes under it. It substituted in December 1997 various programmesoperatedearlier for urbanpoverty alleviation. It is funded on 75: 25 basisbetweenthe Union and the States.The expenditureunder this schemewas only Rs. 45.5 crore at the revised stage.It was Rs. 39.21crore in 2001-02 and an allocation of Rs. 105 crore was provided for 2002-03 (Economic Survey,2002-03,p.217). 7. Integrated Rural Development Programme (IRDP) The concept of an Integrated Rural Development Programmewas first proposedin the centralbudgetfor 1976-77,and a beginning wasmade in this regard. This programme was intended to assistrural population to derive economicbenefitsfrom the developmentof assetsof eacharea. The programme with some modifications was introduced on an expandedscalein 1978-79,beginning with 2,300 blocks, of which 2000 were undercommoncoveragewith SFDA, DPAPandCADP, with another 300 blocks addedup during l97980. Its coveragewas extendedto all the blocks of the country sinceOctober 2, 1980. 47 Besides the smaller and marginal farmers, this programme was more specific in regard to agricultural workers and landless labourers, and additionally brought within its purview rural artisansalso.The programme emphasised thefamily ratherthantheindividual approachin theidentication of the beneficiaries. Unemployment Meaning of Full Employment Full employmentrefersto a situationin which all theworkerswho are capableof working and willing to work get an employment at reasonable wages.It doesnot imply that all adultshavejobs. Meaning of unemployment Unemploymentrefersto a situationin which theworkerswho arecapable of working andwilling to work do not get employment. Unemployment Estimates A personworking 8 hoursa day for 73 daysof the year is regardedas employed on a standard person year basis. The following are the three estimatesof unemploymentgenerated in the27 roundof NSS(National SampleSurvey). 1. Usual Principal Status unemployment: It is measured as number of personswho remainedunemployedfor a major part of the year. This measureis more appropriateto thosein searchof regularemployment e.g., educatedand skilled personswho may not acceptcasualwork. This is alsoreferredto as openunemployment. 2. WeeklyStatusunemployment: It refers to the number of persons who did not find even an hour of work during the surveyweek. 3. Daily Status unemployment: It refers to the number of persons who did not find work on a day or somedays during the survey week. 48 Causes of Unemployment 1. High Population growth: The galloping increasein population of our countryduring thelastdecadehasfurther aggravatedtheunemployment problem in the country.Due to rapidly increasingpopulationof the country, a dangeroussituationhasarisenin which the magnitudeof unemployment goeson increasingduring eachplan period. 2. Insuicient Rate of Economic Progress: Although India is a developing country, the rate of growth is inadequateto absorbthe entire labourforcein thecountry.Theopportunitiesof employmentarenot sufficient to absorbthe additions in the labour force of the country, which aretaking placeasresult of therapidly increasingpopulationin India. 3. Absence of employment opportunities in activities other than agriculture: As enoughother employmentopportunitiesarenot available, agricultureis theprincipal areaof employmentin our country.Thus,pressure on land is high, as about 2/3 of the labour force is engagedin agriculture. Land is thusovercrowdedanda largepartof thework forceis underemployed andsufferfrom disguisedunemployment. 4. Seasonal Employment: Agriculture in India offers seasonal employment;thusagriculturallabourremainsidle during theoff season. 5. Joint Family System: Existence of joint family system in India promotesdisguisedunemployment.Usually the membersof a family work on their family farms or do family business.There aremore workers on a family farm thanwhat would be neededon them. 6. Increasing turnout of students from Indian Universities: During the last decade,educatedunemploymenthasincreaseddue to rapid turnout of graduatesby the Indian universities. Moreover, in the Indian educational system, more emphasisis placed on engineering and other Technicalsubjectsratherthanon Arts subjects.But thereis unemployment amongsttechnical graduatesaswell. There is a lack of proper vocational educationin the country. 49 7. Slow Developing of Industries: Industrialization is not rapid in our countryandindustriallabournds few job opportunities.The agricultural surplus labour force is not absorbedby the industrial sector.This leadsto disguisedunemploymentin agriculture. Measures to Solve Unemployment Problem in India A close reading of the FiveYear Plans reveals that in every FiveYearsPlan,employmentexpansionhasbeenemphasisedasanobjectiveof development. Despite all the plan pronouncements, the backlog of unemploymenthasincreased.This is becauseeachPlan was not even able to absorb the new entrants in the labour force. The following measures have been suggested for solving the unemploymentproblemin our country: 1. A Change in the pattern of investment The planning process in the initial stagesgave importance to an investmentallocationpatternwith a high capitallabourratio. Therefore,a shift in the emphasisto massconsumergoods industries would generate more employment to absorb the unemployed labour force. Moreover, increasein the supply of suchgoodsmay help arrestthe rising priceleVel and increasethe economic welfare of the people. This is the wagegoods model of developmentsuggestedby Vakil andBrahmanand. 2. Encouragement to small enterprises as against big enterprises The employmentobjectiveandtheoutput objectivecanbe achieved, if greater investment is directed to small enterprisesrather than to large enterprises.Now that the Government wants to undertakedecentralised developmentwith emphasison smallscaleenterprises,it would be desirable to reorientcredit,licensing,raw materialallocationandotherpoliciesin such a mannerthatboth employmentandoutput areenlargedsimultaneously. 50 3. Problem of Choice of technique It would be betterto switch over to intermediatetechnologiestill the processof industrialisation gets sucha powerful momentum that the new entrantsto labour force canbe absorbed.During the period of rapid growth in the labour force, it would be advisableto adjustthe choice of techniques consistentwith the employmentobjective.Intermediatetechnologywould be more suited to Indian conditions. 4. Encouragement of New Growth Centres in Small Towns and Rural Areas Experienceof planninghasrevealedthattheovercrowdedmetropolitan centreshave received a large share of investment.Therefore,the smaller towns should be developed as new growth centres for the future. The establishment of small industrial complexes can increase employment opportunitiesandprovide exibility to theeconomy. 5. Subsidies on the Basis of Employment All schemesof subsidiesandincentivesto largeandsmall industries have helpedoutput maximisation andgreateruseof capital resources.The patternof subsidesshouldbe altered.Creationof more employmentshould be treatedasthebasisfor thegrantof subsidesandincentives.This will shift the entire structureof governmentsupportfrom the largescaleproducerto the smallscale producer as this is more consistent with the objective of employmentgenerationandachievingequalityandsocialjustice. 6. Reorientation of Educational Policy One greatdefectof our educationalsystemis that it leadsone to take up theprofessionaldegreeonly. The high degreeof unemploymentamong the educatedsignifies the urgentneedto reorient our educationalsystemto greater employment opportunities. Education system should be more diversified. It should have more short term vocational courses that will cater to the local employment needs. Development of quality education is a prerequisitefor thedevelopmentof a nationasit is theremedyfor all problems 51 includingtheproblemof unemploymentin thecountry.Hence,ahigh priority needsto be accordedfor educationin public expenditure. 7. Underemployment in Rural Areas N.S.S. data have revealed the existence of a high degree of underemploymentin India. The total number of underemployedpersons availableandwilling to takeup additionalwork is estimatedto be more than two crores.It is necessaryto organisethe Rural works Programme.Failure of implementationof Rural Works Programmeunderlinestherelatively low importance given to the rural sectorto provide additional employment to millions of landlesslabourersandsmall andmarginalfarmers.Urgent action is neededin this direction so that work opportunitiesgrow in therural areas. This will raisethelevelof incomeandemploymentin niral areasandreduction in poverty levels.. Chapter 3 Exercise PARTA I Choose the correct 1. Basic needslike food, clothing and shelterare ............ ..needs. a.Physical 2. b. Social c. Psychological d. Cultural When a personlives below the minimum subsistencelevel, he is said to live in poverty. a. Absolute 3. answer b. Relative c. Abstract d. Non All poverty alleviationprogrammesimplementedsofar havelessor no effect due to a.Unemployment c. inequality b. Joint family system d. corruption 52 4. The PlanningCommissionof India definedpoverty on thebasisof 5. II a. Income b. Consumption c. Calorie intake of food d. Employment Agriculture givesrise to ......... .. unemployment. a.cyclical b. stru. c. seasonal d. professional Fill in the blanks 6. Poverty is of ......... .. types. 7. India presentlysuffersfrom ............ .. unemploymentwhich exists in openanddisguisedforms. 8. Our planning was not at all ............... 9. Many workers in urban areassufferedfrom ........... .. l0. Existenceof joint family systemin India promotes.......... . . III .. Match the following I l . Employmentassurancescheme April 1999 12. Disguisedunemployment Engineering l 3. Jawahargram samridhiyoj ana Rural works programme l4. IndianEducationalSystem low productivity employment 15. Underemployment I99 53 IV Answer the following in a word or two 16. What is the major goal of planning in India? l7. What wasthebasison which PlanningCommissiondened poverty line in rural areas? 18. What is the main reasonfor poverty in India? 19. What is the prerequisitefor the developmentof a nation? 20. How many underemployedpersonsaretherein India? PART B Answer the following in four or five lines 21. Why unemploymentamongeducatedpeopleis increasing? 22. Name the 5 statesin India where 58% of the poor people live? 23. Dene Poverty. 24. Dene Povertyline. 25. Dene unemployment. PART C Answer the following questions in about a page 26. DistinguishbetweenRural andUrbanpoverty. 27. What arethe estimatesof unemployment? 28. What arethe causesof poverty in India? 54 29. What arethe causesof unemployment? 30. Examinetheextentof poverty in India? PART D 31. Describethe variousmeasurestakento solveunemployment problemin India? 32. Briey explaintheprogramsimplementedto alleviatepoverty. 55 Chapter 4 National Income Somecountries arerich, someare poor and yet someothers are inbetween.How do we measuretheperfonrranceof aneconomy?Performance of an economyis relatedto the level of production (of goodsand services) or total economicactivity. Measuresof nationalincome andoutput areused in economicsto estimatethe total value of production in an economy.The standardmeasuresof incomeandoutputareGrossNational Product(GNP), Gross Domestic Product (GDP), Gross National Income (GNI), Net National Product (NNP), and Net National Income (NNI). In India, the CentralStatisticalOrganisationhasbeenestimatingthenationalincome. You measureyour academicperformancein relation to otherstudents by thepercentageof themarksscoredby you. Similarly a countryseconomic performancehasbeenmeasuredby indicators of national income suchas GDP or GNP.Further, measuringnational income is essentialfor various purposesthat include projection about the future courseof the economy, assistinggovernmentasthebasisto design(or redesign)suitabledevelopment policies, helping firms in forecastingfuture demandfor their productsand facilitatinginternationalcomparison. National income per personor per capita income is often usedasan indicator of peoples standard of living or welfare. However, many developmenteconomistshavecriticized that GNP asa measureof welfare hasmany limitations. They arguedthat humanWellbeingdoesnot depend on national income alone.As measuresof GNP exclude poverty, literacy, public health, genderequity, and many human issuesof Wellbeing, they developedothermeasuresof welfaresuchastheHumanDevelopmentIndex (HDI). Somerich countries in terms of national income are poor in human development. Similarly, poor countries in terms national income have performedwell in humandevelopment.In thecaseof India, thoughtheGDP 56 is growing faster,its performancein terms of HDI is far below than that of manycountries. Definitions of National Income Nationalincomeis a measureof thetotalvalueof thegoodsandservices (output)producedby aneconomyover a period of time (normally a year).It is alsoa measureof the incomeown from production,and/orthe sumtotal of all the spendinginvolved for the productionof output. The following are some of the notable Alfred Marshal denitions. : The labour andcapital of the country actingon its naturalresources produce annually a certain net aggregateof commodities, material and immaterial,including servicesof all kinds.. . This is thenet annualincomeor revenueof the country, or the nationaldividen . Irving Fisher: The nationaldividendor incomeconsistssolelyof servicesasreceived by ultimate consumers,whether from their material or from their human environment. National Income Committee of India,: National income estimate measures the volume of commodities and servicesturnedout during a given period countedwithout duplication. PaulA. Samuelson: Grossnational product (GNP) is the most comprehensivemeasure of a nations total output of goods and services.It is the sum of the dollar (money) value of consumption,grossinvestment,governmentpurchaseof goodsand servicesand net exports. Though therearesomevariations amongthesedefinitions, the basic ideais very clear nationalincomeis simply theincomeof thewhole nation. The basicconceptswill help to understandit more precisely. 57 Basic Concepts Gross National Product GrossNational Product(GNP) is the total value of output (goodsand services)producedandincome receivedin a year by domesticresidentsof a country.It includesprots earnedfrom capital investedabroad. Gros s Domestic Product Gross Domestic Product (GDP) is the total value of output (goods and services) produced by the factors of production located within the countrys boundary in a year.The factors of production may be owned by any one~ citizensor foreigners. GNP Net income earned from abroad = GDP Thus, GDP measuresincome from where it is earned rather than who owns the factors of production. Net National Product Net National Product (NNP) is arrived at by making some adjustment,with regard to depreciation,in GNP.As noted above,GNP is thetotal valueof outputproducedandincomereceivedin a yearby domestic residentsof a country. Over this one year period, the available plant and machinery(capital) will wear andtear andget condemned.Suchdeclinein the capital assetsdue to wear andtearis measuredas capitaldepreciation. NNP is arrived at by deductingvalue of suchdepreciationfrom GNP. That is GNP Depreciation = NNP Net Domestic Product Net domestic product (NDP) is also arrived from GDP by making adjustmentwith regard to depreciationin the sameway describedabove. 58 (NDP is calculatedby deductingdepreciationfrom GDP). GDP Depreciation = NDP Per Capita Income Per capita income (or) output per person is an indicator to show the living standards of people in a country. If real PCI increases,it is consideredto be an improvement in the overall living standardof people. PCI is arrived at by dividing the GDP by the size of population. It is also arrivedby making someadjustmentwith GDP PCI GDP: GDP and _ Total numberof peoplein a country GNP While GDP indicatesproductive capacity of an economy,GNP is a crudeindicatorfor living standard.Thesignicanceof thedistinctionbetween GNP andGDP dependson the natureof a particular economy.For instance, if a country has more nonresident inows and produces a considerable portionof its outputby multinationalcorporations(i.e.with thehelpof external factors of production), its GNP will be higher than GDP. Otherwise the distinctionwill benegligible. Many countrieshaveforeign firms. In the caseof US Ford Motors in Chennai,the incomefrom the car factory would be countedasIndian GDP andnot asUS GDP But the amountof profit the companysendsto US will be addedto their GNP Similarly, our GNP canbe arrived by adding to our GDP thenet factor incomereceiptsfrom abroadfor the factor inputs owned by Indians. That is, the nonresidentIndians income will be addedto GDP to arrive at our GNP. 59 NI at Current Prices and Constant Prices The conceptsof national income discussedabovecan be measured either at current price or at constant price. The measurebasedon current price usesthe ongoing market prices to compute the value of output. It is quitepossiblethatthecurrentprice may alwaysbe higherthanrealvaluedue to many factors like taxes and ination (or rising prices). Hence, national income arrived at current price includes suchinuences asination and taxes. With ination as a common feature in almost all the economies, it is necessaryto measurethenationalincome afterdeductingany suchincrease in the value of any output or income. National income at constant price measuresthenationalincomeaftermakingnecessaryadjustmentto eliminate the effect of ination. Thus it is basedon unchangedprice of output. As the national income at constant price is computedbasedon the real worth of thepurchasingpower of income,it is alsocalledas real nationalincome or national income in real terms. Need for the Study of National Income A national income measure serves various purposes regarding economy, production, trade, consumption, policy formulation, etc. The following aresomesuchneeds. 1.To measurethesizeof theeconomyandlevel of countrys economic performance. 2. To trace the trend or speedof the economic growth in relation to previous year(s)aswell asto other countries. 3. To know the structureand composition of the national income in termsof varioussectorsandthe periodical variationsin them. 4. To make projection about the future development trend of the economy. 60 5. To help government formulate suitable development plans and policies to increasegrowth rates. 6. To fix various development targets for different sectors of the economyon the basisof the earlier performance. 7. To helpbusinessrms in forecastingfuturedemandfor theirproducts. 8. To makeinternationalcomparisonof peoplesliving standards. Circular Flow of Income Beforediscussingthecalculationof nationalincome,abrief introduction of thecircularow of incomewould be helpful. The circularflow of income is explainedwith a simplestmodel consistingbusiness(firms or producers) and public (households or consumers). The public own the productive resources(i.e.factorsof productionnamelyland,labourandcapital).Business sectoror producersemploy the factors of production to producethe goods and services.Suchgoodsand servicesarebought by the public. Thus public own the factors of production and provide them to producers. The producers employ the factor inputs to produce output of goods and services, which is bought by the consumers(public). For the employmentof factor services,thepublic receivethe factor incomenamely rent (for land), wages (for labour) and interest (for capital). This income ows backfrom thepublic to thebusinesssectorasconsumptionexpenditure to buy the goods and services. Thus, the flow chart consist two segments real flow and money flow. As the outer flow in Figure 4.1 shows the flow of input (factors viz. land, labour, capital and organisation) and output (goods and services), they representthe real economy (or real flow). The inner ow showsthe money received as factor income (rent, wage, interest, and profit) and it goes to the producer as consumption expenditure (commodity price) to buy thegoodsandservices.As this flow chartinvolvesonly incomereceived 61 andexpendituremadein termsof money,it representsthe money economy (or moneyow). Figure 4. 1 Circular Flow of Two Sectors Paymentfor Factor Services (Rent, Wages, Interest and Profit) Supply of Factors of Production (Land, Labour, Capital & Organisation) Households Firms ___.__j4___._.:_____:_ Supplyof Commodities (Goods and Services) Paymentfor Commodities (CommodityPrice) The most importantpoint to be notedfor the computationof national incomeis that income(Y) receivedis equalto the consumptionexpenditure (C) madeby the consumers,i.e. Y=C. This simple circular ow model is explained without the other componentsof national income namely savingsor investment (1),public expenditureby government(G) and expenditureon net exports (XM). If we include all the abovecomponentsof nationalincomeY: C will become Y=C+I+G+(X-M) 62 Thus national income is the aggregate summation of income or expendituremadethroughthesefour components,consumers(C ), investors (I), government(G) and foreign trade (Exports [X] Imports [M] ) Methods of Calculating National Income There arethree different methodsof calculating national income. They are 1. Product or Output Method 2. Income Method 3. ExpenditureMethod As notedabove,GDP is the measureof an economystotal output. It is also used as a measure of total income and total expenditure in that economy.Figure4.1 clearly showsthatfactorincomesreceivedby thepublic is being spentto buy the output of goods and servicesproduced. Hence, income is equal to expenditure and expenditure is equal to the value of output producedin the economy. Income = expenditure = output Y = E = O The model can further be extendedby adding the other components of nationalincomenamelyinvestment(I), government(G), andforeign trade (XM). In theextendedmodel,savingsof public, taxesandimport payments will be deductedfrom the income.Hence,they arecalledleakagesfrom the circularow. Similarly,investmentexpenditure,governmentexpenditureand netexpenditureon tradewill be addedin to thecircularow. Theseadditions arecalledinjections.However, after aggregatingall leakages(outow) and injections (inflow) in any one year, the total income components of the 63 economywill be equivalentto thetotalexpenditureor totaloutput.Therefore, all the threemethodsare supposedto give sameresults. Output or Product Method In theoutputor productmethod,themeasuresof GDP arecalculated by addingthe total value of the output (of goodsand services)producedby all activities during any time period, suchasa year.The major challengeof this methodis the problem of doublecounting. The outputof manybusinessesis theinputsof someotherbusinesses. For example,theoutputof thetyre industryis theinput of racingbike industry. Countingthe nal outputof both industrieswill resultin doublecountingof the value of tyre. This problem canbe avoidedby including only the value addedat eachstageof productionor by addingonly the final valueof output produced. Income Method In the income method, the measures of GDP are calculated by adding all the income earnedby variousfactorsof production which are engagedin theproductionof output.Thevariousincomesincludedto compute the grossnationalincome are: Wagesand salaries Incomeof selfemployed Profits anddividendsof businesscorporations Interest Rent Surplusof governmententerprises Net ow of income from abroad 64 All of them areknown asfactor incomesand they arepaid in return for the inputs engagedin someproductive processwhich haveresultedin correspondingoutput.The sumof all theseincomes(or factorprices) provide us the measure of national income. Expenditure Method In the expenditure method, the measuresof GDP are calculatedby addingall theexpendituresmadein theeconomy.The essential componentsof expenditureare: C = consumptionexpenditures I = G = governmentexpenditures X = exports of goods and services M = imports of goodsand services NR domestic investment net income receiptsfrom assetsabroad The sum of all theseaggregateexpenditureprovides us the measure of national income. GDP =E=C+I+G+(XM) whereE is aggregateexpenditure. All the abovethreemethodsmustyield the sameresultsbecausethe total expenditureson output must by definition be equalto the value of the output producedwhich mustbe equalto the total incomepaid to the factors that producedthesegoodsand services.However, in practice,therewill be minor differencesbetweentheseresultsdue to changesin inventory levels and timing discrepancies.The following are someof the national income identities. 65 NNP = GNP Depreciation NNI = NNP P1 PDI = Indirect taxes NNI Retainedearnings,corporatetaxesand interest on public debt = PI Personal taxes. Where, GNP - Gross National Product NNP Net National Product NNI Net National Income PI Personal Income PDI PersonalDisposableIncome Problems in calculating National Income The measurement of nationalincomeencountersmanyproblems.The problem of doublecountinghasalreadybeenoted.Though therearesome correctivemeasures,it is difficult to eliminate double-countingaltogether. And therearemany suchproblemsandthe following aresomeof them. Black Money In countrieswherelevel of illegal activities,illegal businessesandthe level of corruptionarevery high, thecirculation of black moneyis sohigh, it has createda parallel economy. It meansunreportedeconomy which is equivalentto the sizeof officially estimatedsizeof the economy.GDP does not take into account the parallel economy as the transactionsof black money arenot registered.In India, black money is allpervasive, affecting not only the economybut also the society at large. The black economy as percentageof GDP is estimatedto havegrown from about3 percentin the midfifties to 40 per cent by 1995-96. 66 NonMonetization In most of the rural economy,considerableportion of transactions occurs informally and they are called as nonmonetized economy. The presenceof suchnon-monetaryeconomyin developingcountrieskeepsthe GDP estimates at lower level than the actual. Growing Service Sector In recent years,the service sectoris growing faster than that of the agriculturalandindustrial sectors.Many new serviceslike businessprocess outsourcing (BPO) have come up. However, value addition in legal consultancy,healthservices,financial andbusinessservicesandthe service sector as a whole is not based on accuratereporting and hence underestimated in national Household income measures. Services Thenationalincomeanalysisignoresdomesticwork, andhousekeeping and social services.Most of suchvaluablework renderedby our women at home doesnot enterour national accounting. Social Services It ignores volunteer and unpaid social services. For example, the wonderfulservicesof MotherTeresais invaluablefor millionsof poor,destitute, orphansand the diseasedbut at the sametime not included in our GDP. Environmental Cost National income estimation does not distinguish between environmentalfriendlyandenvironmentalhazardous industries.The costof polluting industriesis not includedin theestimate. National Income Series in India After independence,a regularnational accountssystemwas initiated in themidsixties.Indian systemof nationalaccountstatistics(NAS) follows 67 the United Nations (UN) systemof nationalaccounts(1968).Basedon the National Income Committees recommendation (1954), the Central Statistical Organisation(CSO)hasbeenmakingcontinuouseffortsto improvethequality of these statistics. Shifting the base year to revise the series is one such effort. The CSO revised its national accounts seriesby shifting the base year to 1970-71. With improved data base and extended coverage, the CS0 revisedits seriesagainby shifting the baseyear to 1980-81,andthen to 1993-94.Recently CS0 hasrevised its serieswithin six year period by shifting the baseto 1999-2000. Trends in National Income As notedalready,nationalincomeis a rough indicator to measurethe economic growth performance of a country. The outcome of Indias developmenteffort canbe seen,to someextent,in termsof the size,growth andthe compositionof our nationalincome. Table 4.1 Growth of National Income in India ( in percent) 1950-1980 GDPTotal 1980-2005 5.0 GDP Per capita 3.6 Source: Computed from Central Statistical Organisation. Table4.1 provides the trend of the GDP growth from the year 1950 to 2005.The sizeof the nationalincome at constantpriceshasincreasedby about 15percentduring this period. The growth rateof nationalincomehas increasedfrom 3.5 percent during 1950-80 to 5.6 percent during 19802005 . 68 Trends in Per Capita Income Table 4.1 also gives the trend of per capita income. The size of the per capita income at constantprices hasrecorded only five fold increase from l950 to 2005. The growth rate of per capita income during the same period hasincreasedfrom l .4 percentto 3.6 percent.The per capitaincome is not the correct indicator for the living standardsof people. The actual income of the peoplewould havedeviatedwell aboveor below than that of thepercapitaincome.Somemeasureof povertyandincomeinequalitywould help us to understandthe actualdistribution of the incomegrowth achieved. Sectoral Composition of National Income National incomeis derivedfrom many sectors.We generallyclassify them into three major sectorsnamely primary, (agriculture), secondary (manufacturing)andtertiary(services).Duringtheinitial stageof development, shareof primarysectorin thenationalincomewill behigh.But thiswill decline during the courseof developmentand shareof industry will be greater.At very high level of development,the shareof service sectorin the national income will be more. Table 4.2 Sectoral Composition of National Income (in percent) -E§DtaP&# Source: Central StatisticalOrganisation. Note : Figures upto l9909l are basedon l99394 series.From 2000-01 onwards, figures arebasedon the new serieswith 1999-2000as the base year. Table 4.3 Sectoral Growth Rate of National Income in India (in percent) Primary Sector 2.2 2.9 Secondarysector 5.3 6.1 Teritary Sector 4.5 7.1 Source: CentralStatisticalOrganisation The sectoralcomposition of national income presentedin Table4.2 confirms suchgeneralpatternbut partially. The shareof primary sectorhas declinedfrom 59 per cent to 24 percent.However, the industrial sectorhas not grown to theexpectedlevel.Instead,theservicesectorhasalmostreached more than half (52 %) of our national income. The growth rates of these three sectorspresentedin Table4.3 also show similar trend. International Comparison of National Income We have compared the growth performance of India since independenceto date.How hasIndia performedwith other countriesof the world? Table 4.4 provides such a comparison of per capita income with referenceto someselectcountries.The performanceof India in termsof the per capitadollarsin 2001in relation to high andmiddle incomecountriesof theworld is far below.With a per capitadollar of 460,India hasjust managed to be marginally abovethe averageper capita income of (430) very poor countries in the world. 70 Table 4.4 International Comparison of National Income (2001) P C t I Name oftheCountry er agéargcome In High Income Countries Middlelncome 26,710 Countries 1850 Chapter 4 Exercise PART A I.Choose l. the correct answer The growth of an economyis indicatedby an a. Increasein generalprices b. Increasein national income C. Increasein savings d. Increasein investment 2. The per capita income of an economy can be calculatedby a. Dividing GDP by population b. Dividing GNP by population c. Multiplying GNP by population 3. The total money value of final goodsand servicesproducedin the country excludingdepreciationis called a. NDP 4. b. GDP The difference c. NNP between NNP d. GNP and NDP is a. Depreciation b. Current transfersfrom rest of the world c. Indirect d. tax Net factor income from abroad. 5. National income ascommonly understoodby every one refersto a. GNP II 6. c. GDP d. NDP Fill in the blanks Net value addedmethodof calculatingNational Income is also known 7. b. NNP as ......... .. method. Consumptionof fixed capital shouldbe . . . .....theGNP to arrive at the NNP. 8. In estimatingthe national income at constantprices,latestbaseyear used in India is ............ .. 9. In India ....... . . specificationis still incomplete. IO. ....... . . will give anexaggeratedfigure of National income. III Match the following 11. GDP 12. Net Income from 19931994 abroad XM 72 l 3. GNP Depreciation l4. CSO l5. PDI s latest IV Answer l6. l7. Personalincomepersonal taxes series - NNP Foreign tradeexcluded in one or two words What is obtainedby dividing theNational incomeby total population? What is the method distribution side of estimate of national income from the is called? l8. How many methodsarethereto computenational income? 19. What should be addedto the three sectoreconomy to make it to form four sectoreconomy? 20. Give formula for per capitaincome. PART B Answer the following in four or five lines 21. Dene national income. 22. What is the indicator of a countryseconomicdevelopment? 23. What doesnational income at constantprices mean? 24. Mention 25. Write a noteon double counting? the names of national income 73 series in India. PART C Answer the following questions in about a page 26. Explain the basicconceptsof nationalincome. 27. Distinguishbetweennationalincome at currentandconstantprices. 28. Why do we study nationalincome? 29. Explain the trend in national income from 1950to 2005. 30. Explain the sectoralcompositionof nationalincome. PART D 31. Examinethemethodsof calculatingnationalincome. 32. Describetheproblemsin calculatingthenationalincome. 74 Chapter 5 Economic Planning Meaning and Need for Planning The 20* century was an era of planning. Almost every country had some sort of planning. In socialist countries, planning is almost a religion. Even in countries like the U.S.A. and the U.K. with a capitalisticsystem,they havepartial planning.The 19century State was a Laissez faire state. It followed intervention in economic affairs. But the modern a policy of non State is a Welfare State. The two World Wars, the Great Depression of 1930s and the successof planning in former Soviet Russia have underlined the need for planning. Planning is a gift of former Soviet Russia to the world. For, it was the first country to practise economic planning on a national scale. According to Lionel Robbins, strictly speaking, all economic life involves planning. . .. To plan is to act with a purpose, to choose and choice is the essence of economic activity. In the words of Barbara Wootten, Planning may be defined as the conscious and deliberate choice of economic priorities by some public authorities. Many economists today agree that planning is an organized, conscious and continuous attempt to select the basic available alternatives to achieve specific goals. Planning involves the economizing of scarce resources. Most of the underdeveloped countries of the world became independent only fifty or sixty years back and most of them were poor at that time. So it became the main business of the Governments of the newly emergent nations to provide food, clothing and shelter to their people. For that, first of all, they had to increase their national 75 income. Since most of them were agricultural countries, they had to evolve some programmes for agricultural development. Not only that, they had to industrialize their economies. And they had to provide more jobs to their people. That means, they had to do something for expanding employment opportunities. Further, as most of them were wedded to some kind of socialism, they had to reduce inequalities of income and wealth. All these things, the poor countries attempted to do by means of economic planning. Laissezfaire policy is a luxury for modern governments. So they have economic plans. In the developed nations of the world, they plan for economic stability. But in the underdeveloped nations, they plan for economic growth and development. Another main reason for the emergence of planning in underdeveloped countries is the failure of the market mechanism. The capitalist economy is basically a market economy and price mechanism works through the market system. The price system is a basic institution of capitalism. The allocation of resources and distribution of rewards are done through the price system. All decisions of the businessmen, farmers, industrialists and so on are guided by the profit motive. If the market is perfect, price system is good. But if there is monopoly and other types of imperfect competition, the market system fails. And it calls for government intervention by way of planning. The dispute between planning and Laissezfaire is essentially about efficiency. The case against Laissezfaire rests on the following grounds: 1. Under Laissezfaire, income is not fairly distributed. As a consequence, less important and less urgent goods are produced for the wealthy people while the poor lack basic goods like education, health, housing, good food and ordinary comforts. Under such a situation, the State can control economic activity by means of planning and reduce inequalities of income and wealth. 76 2. The market economy is a victim of trade cycles. And there will be alternating periods of prosperity and depression. And during depression, there will be bad trade, falling prices and mass unemployment. So there is need for state intervention. By means of proper planning, the State can control trade cycles as they did in the case of former Soviet Russia. During the latter half of the 20 century,planning waspopular in many underdeveloped countries, in addition to former Soviet Russia and Eastern European countries. It does not mean that they believed in complete central planning. The central issue in planning is not whether there shall be planning but what form it shall take. The debate, in fact, centered on whether the State shall operate through the price system or by getting rid of it. Problems of Planning in backward countries Planning is much more necessary and much more difficult to execute in backward than in advanced countries. First of all, planning requires a strong, competent and incorrupt administration (Arthur Lewis). But most of the economically backward nations have weak, incompetent and corrupt administration. Further, they have democratic planning. So they cannot do things in a quick manner as was done in former Soviet Russia. They have to go slow. And agriculture is the main stay of their economies. Since agriculture depends upon natural factors which are uncertain, there is a lot of uncertainty about their agricultural programmes. Over~population and low capital formation are some other important problems of planning in underdeveloped nations. Characteristics of Economic Planning In a planned economy, major economic decisions such as what and how much is to be produced, when and where it is to be produced and to whom it is to be allocated will be determined by a central authority such as the State, through the Planning Commission. 77 And the Government will have the powers of implementation. Before the Plan is drawn up, a detailed survey of all available resources physical resources, financial resources and human resources has to be made. For example, in the former Soviet Russia, after the Revolution in 1917, there was War Communism between 1918 1921. And there was New Economic Policy (NEP) from 1921 to 1924. And from 1924, the Government made a detailed survey of all available resources and only in 1928, it implemented its First Five Year Plan. After the survey of resources, the objectives of planning will be determined. For example, one of the long term objectives of Soviet Planning was that Soviet Russia should catch up with the production levels of the leading capitalist nation of the world, namely U.S.A., in steel, coal and electricity. Keeping in mind, the objectives of the Five Year Plan, the physical targets will be fixed. And ways and means of mobilising financial resources will be explored. The Plan will also spell out the details in which the fruits of planning will be distributed in a fair and just manner. The nature of planning is determined by the type of economic system - capitalism, socialism, mixed economy in which it is practised. There will be partial planning in a capitalist economy, (e.g., U.K.) but a socialist economy is a totally planned economy (e.g., Former Soviet Russia). In a mixed economy like India, both public sector and private sector play important roles in economic planning. Usually, the period of a Plan is five years. The Plan has to be drawn in advance. It is done by the Planning Commission in India. A plan will be of a definite size and it will fix the targets for the Plan period and it will also indicate the ways by which the financial resources are to be mobilized for the Plan. The first step in drawing up a Plan is to determine a growth target for an economy over the Plan period. The planners then divide the economy into a number of sectors such as agriculture, industry 78 and service sector. The planners will fix the physical targets for the sectors and also decide how much investment must be made in each sector to achieve the targets. Then they will decide the right type of investment projects and production techniques. As the UDCs are poor, labourintensive techniques will expand employment opportunities. But some heavy industries like steel have to be capital intensive. The successor failure of a Plan dependsupon the choices that are made. Types of Planning 1. Centralized Planning : In a socialist economy (eg. Former Soviet Russia), there was centralized planning; it was planning by direction. In a socialist state, most of the means of production are owned by the State. All basic economic decisions such as whether priority is to be given for industrialization or for development of agriculture ; if it is decided to give importance to industrialisation, whether to give importance to basic and heavy industries or for consumer goods industries will be made by the central authority. 2. Planning by Inducement : In a democracy, Planning is done by inducement. For example, ours is a mixed economy where there is a public sector and a private sector. The government has to persuade the industries in the private sector to fulfil the goals of the Plan through inducements such as tax concessions and by providing incentives. 3. Indicative planning ~ In this type of planning, the government invites representatives of industry, and business and discuss with them in advance what it proposes to do in the Plan under question and indicates to them its priorities and goals. Then the Plan is formulated after detailed discussions with varied interests. Planning in France is a good example of indicative planning. After we embraced liberalization and privatization policies in l99l, even Indian planning, in a way, has become indicative planning. 79 Economic plans can also be divided into midterm plans, shorterm plans and perspective plans. Our Five Year Plans are in fact, midterm plans. Short term plans are Annual Plans. During the period of implementation, Five Year Plans operated by dividing them into Annual Plans. Perspective Plans are long term plans and the period ranges from 20 to 25 years. The Five Year Plans are formulated by taking into account the long term objectives of the Perspective Plan. Rolling Plan : Unlike the Five Year Plan with fixed targets, in the case of the rolling plan, at the end of each year, targets will be fixed by adding one more year to the Plan. That is, without fixed targets for all the five years, depending upon the performance of the Plan in the current year, targets will be fixed for one more year. Like this, it will go on a continuous basis. That is the idea behind the rolling plan. A great advantage of centralized planning is that plans can be implemented with great speedand targets and goals can be achieved. For example, by meansof planning, former Soviet Russia transformed its economy, which was predominantly agricultural into a predominantly industrial nation, within a short span of l2 years. But a demerit of centralized planning is that as the State enjoys a considerable degree of monopoly, in the absence of competition, it is rather difficult to test the productive efficiency of state owned units. Under planning by inducement (democratic planning), though there is a good deal of freedom for people, because of the procedures and delays associated with the democratic process and because of Parliamentary democracy, there will be a lot of delay in the implementation of programmes and economic growth will be slow. Evolution and Objectives of Planning in India The National Planning Commission was set up in India in l950. A major function of the Planning Commission was to formulate a plan for the most effective and balanced utilization of the countrys 80 resources. The Planning Commission formulated the First Five Year Plan for the period (l95 1-56). Since then, we completed nine Five Year Plans and we are now in the midst of Tenth Five Year Plan (2002-2007). Objectives of Planning in India The central objective of planning in India is to raise the standard of living of the people. Our Five Year Plans aim at increasing output. At the same time, they aim at reducing inequalities of income and wealth and providing equal opportunities for all. Growth with social justice is our basic goal. The major objectives of developmental planning in India may be listed as follows: l.To raise the national income. This is known as Growth Objective; 2.To increase investment to a certain level within a given time ; 3.To reduce inequalities in the distribution of income and wealth and to reduce concentration of economic power over resources ; 4.To expand employment opportunities ; and 5.To remove bottlenecks in agriculture, manufacturing industry (especially capital goods) and the balance of payments. In the agricultural sector, the main objective was increasing agricultural productivity and attaining self~sufficiency in foodgrains. In the industrial sector, the emphasis was on basic and heavy industries. In the foreign trade sector, the emphasis was on having a viable balance of payments position. The strategy adopted in Indian Planning is often referred to as Mahalanobis strategy. In this strategy, emphasis was laid on rapid industrialization with priority for basic and heavy industries. 81 Though achieving regional balance is mentioned in our plans, we have not succeeded much in reducing regional imbalances. In agriculture, there are surplus states and deficit states, with reference to foodgrains. In manufacturing industry, there are advanced regions and backward regions. Not only that, industrial growth is concentrated in and around Mumbai, Kolkata and Chennai. Our Five Year Plans pay attention to the problems of poverty and unemployment. The average Indian is among the poorest of the world. So, our Plans want to remove poverty and improve the lot of the common man and the weaker sections like SC/STs, OBCs, women and children. The standard of living depends upon per capita consumption and per capita consumption depends upon per capita income. And this in turn depends upon employment. So our plans have looked at employment as an integral part of the problem of the removal of poverty. In the rural sector, there is concentration of land in the hands of a few persons even today. In spite of our land reform programmes, nearly 50 percent of agricultural land is owned by l0 percent of the population. And Green Revolution has helped largely big landlords. Even the ownership of industrial assets is concentrated. Of course, the basic causesof poverty in India are low agricultural productivity and rapid growth of population resulting in low savings and disguised unemployment. The Government has not succeeded much in solving the problems of rural unemployment and underemployment by giving support to cottage and small scale industries. There is an urban bias in Indian Planning. Agriculture did not receive enough funds in the past. But we cannot say the planners have neglected agriculture. India began the process of planned economic development five decades back. The First Five Year (l95 1-56) stated that the purpose of planning in India was to initiate a process of development which will raise living standards and open out to the people new 82 opportunities for a richer and more varied life. The Second Five Year Plan (1956-61) aimed at rapid industrialization with particular emphasis on the development of basic and heavy industries. It was during the Second Plan period, the Government embraced the goal of democratic socialism. The Third Five Year Plan aimed at self - reliant and self - generating economy. After the Third Plan, we had a Plan Holiday The Fourth Plan did not commence immediately after the Third Plan. We had three Annual Plans (1966-69). The Fourth Five Year Plan (1969 74) had two basic objectiveszl. Growth with stability, and 2. Progressive achievement of self reliance. The Fifth Plan (1974-79) focused on growth with social justice. The slogan during the period was Garibi Hatao (Removal of Poverty). So, the two main objectives of the Fifth Plan were removal of poverty and attainment of selfreliance. When Janata Party was in power at Centre, it formulated the Sixth Plan (1978 83). But when the Congress came back to power, it discarded it and formulated a new sixth Five Year Plan (1980 - 85). It aimed at a direct attack on poverty by creating conditions for an expanding economy. The Seventh Five Year Plan (1985-90) emphasized on accelerating agricultural growth in foodgrains production, increasing employment opportunities and raising productivity in all sectors. When the final version of the Eighth plan (1992 97) was formulated, there were major changes in our economic policy marked by liberalization, privatization and globalization. The Eighth Plan 1992 97 reflected these changes and aimed at accelerating economic growth and improving the quality of life of the common man. The main objectives of Planning in India may be grouped under four heads: Growth, modernization, selfreliance and social justice. Growth In the first 30 years of planning, the trend rate of growth of national income was 3.5 percent. Eminent economist Raj Krishna called it the Hindu rate of growth. Agricultural production increased 83 at an average rate of 2.7 percent and industrial production at 6.1 percent. And per capita income increased at the trend rate of 1.3 percent. Though these rates appear rather small, we must remember that throughout the British period, for almost a century, there was stagnation in the Indian economy. For example, in the undivided India from 1901 46, the trend growth rate of the national income was only 1.2 percent. So one of the achievements of planning in Indian economy is that it has overcome stagnation and we have had a slow but steady economic growth. Table 5.1Gr0wth Rates of National Income (in percentage) First Plan Second Third Plan Plan Fourth Plan Fifth Plan Sixth Plan Seventh Plan Eighth Plan Ninth Tenth Plan Plan Sources : Various Five Year Plans and Tenth Plan (2002 2007) Approach paper. 84 The growth performance of the economy during different plan periods is given in Table 5.1. From the Table, it can be seen that there are shortfalls in the growth targets during early plan periods except the First Five Year Plan. During the Ninth Plan period, the GDP growth rate was 5.4 percent as against the target of 6.5 percent. Modernization The term modernization refers to a number of structural changes in the economy. Under planning, Indian economy got transformed from a colonial economy to an independent and modern economy. There has been a change in the composition of national income. For example, now agriculture contributes less and service sector contributes more. In agriculture, after the Green Revolution, there has been a change in the technology of agriculture. Self - Reliance During the early phase of our planning, we depended on external assistance for many things food, technology and foreign exchange.But since the Fifth Five Year Plan, selfreliance has become one of the major goals of our planning. Social Justice By socialjustice, we mean equal opportunities for all. That means, improving the standard of living of the poorest groups and reduction in inequalities in income and wealth. Ninth Five Year Plan (1997 - 2002) The Ninth Plan covered the period from l997 to 2002. The focus of the Ninth Plan was on growth with social justice and equality. The Planning Commission wanted it to be a people oriented plan where the people at large, particularly the poor will participate. The Plan was formulated keeping in mind the quality of life of people, 85 generation of productive employment, regional balance and self reliance. Main objectives of the Ninth Plan The main objectives of the Ninth Plan are as follows : 1. Priority to agriculture and rural development so as to generate adequateproductiveemploymentandto eradicatepoverty ; 2. Growth with stable prices; 3. To ensure food security to all, especially vulnerable sections of the society; 4. Providing basic minimum services of safe drinking water, primary health care facilities, universal primary education, shelter and connectivity to all in a time bound manner ; 5. Containing the growth of population ; 6. Ensuring environmental sustainability of the development process through peoples participation ; 7. Empowerment of women and socially disadvantaged groups such as SC/STs and OBCS and minorities as agents of socioeconomic change and development ; 8. Promotion and development of Panchayati Raj institutions, cooperative and selfhelp groups where the participation of people is large ; and 9. Strengthening efforts to build selfreliance. The Ninth Plan considered (1) Quality of life of citizens, (2) generation of productive employment and (3) regional balance as areas of special importance for State intervention. 86 The Ninth Plan aimed at achievement of an average growth rate of 6.5 per cent of GDP (at market prices). The Plan aimed at investing 28.2 percent of GDP during the Plan period. Table 5.2 Proposed Investment as percentage of GDP Private corporate sector 9.1% Household 9.7% Public sector Sector It may be significant to note that the Plan did not contemplate deficit financing as one of the sources for mobilizing financial resources Appraisal for the Plan. of the Ninth Plan 1. The growth rate of GDP during the Ninth Plan was 5.35 percent as against the target of 6.5 percent. 2. The Plan did not achieve the target of investment. It aimed at an investment of 28.2 percent of GDP but it achieved only 24.2 percent. 3. The size of the public sector plan got reduced by 18 percent. 4. The fiscal deficit of the central and state governments increased during the Ninth Plan period. 5. The Plan failed on the external trade front. The export target was ll.8 percent but actual increase was 5.6 percent. Imports inc reased by 4.1 percent as against the target of l0.8 percent and 6. The Ninth Plan failed to create 50 million jobs to reduce unemployment 87 Tenth Five Year Plan (2002 2007) The Tenth Five Year Plan aimed at explicitly addressing the issues of equity and social justice. It fixed a target of 8 percent GDP growth rate for 2002 ~ 2007. The key targets fixed for the Plan are as follows : l.Reduction of poverty by 5 percentage points by 2007 and 15 percentage points by 2012. 2.Gainful employment to the addition to the labour force during the Plan period; 3.Universal access to Primary education by 2007 ; 4.Reduction in the decadal rate of population growth between 2001 to 2011 to 16.2 percent; 5.Increase in literacy to 75 percent by 2007 6.Reduction in infant mortality rate (IMR) to 45 per 1000 live births by 2007 and to 28 by 2007; 7.Reduction of maternal mortality ratio (MMR) to 2 per 1000 live births by 2007 and to 1 by 2012. 8.Increase in forest and tree cover to 25 percent by 2007 and to 33 percent by 2012; 9.All villages to have access to potable water by 2012 ; and 10. Cleaning of all major polluted rivers by 2007. The past experience raises doubts about fulfilment of many targets such as the GDP growth rate of 8 percent, and fulfilment of employment target. Agriculture and small scale industries are still at 88 a low priority level. And there is too much of faith in the private sector. Conclusion So far, we implemented nine Five Year Plans and we are in the last year of the Tenth Plan. Growth with stability will be a real challenge for the government and the people. And we have not yet solved the problem of unemployment. Though we have reduced poverty to a certain extent, a lot has to be done in the area. An encouraging feature is since the Fifth Five Year Plan, employment schemes have been integrated into poverty alleviation programmes. Unless we contain the growth of population, it would be rather difficult to achieve the goals of economic planning in India. Furthermore, we have to increase our savings, investment and exports. Above all, the administrative machinery must become strong, competent and incorrupt to make our economic planning a success. Since the introduction of economic reforms in l99 l, there has been a qualitative change in our planning. In due course, it may become indicative planning. Chapter 5 Exercise PARTA I. Choose the correct 1. answer The first country to introduceFive YearPlan was a) U.K. b) U.S.A. c)FormerSovietRussia d) France 2. Planningin India is a) Centralizedplanning b) Democraticplanning C) Partial Planning d) Indicativeplanning 3. 4. 5. PerspectivePlan covers a period of a) 5 years b) 10 years c) 20 to 25 years d) 15 years The first Five Year Plan of India was launched a) 1947 b) 195 1 c) 1956 d) 1961 in Therewasplan holiday in India from a) 1966-69 b) 1961 ~63 c) 1980 d) 2002 84 2004 II. Fill in the blanks 6. In Soviet Russiathey had planning 7. Market Economy is a victim of 8. The planning strategyin India hasbeendescribedas cycles strategy. 9. Former Soviet Russia launched 10. During the SecondPlan period, India adopteddemocratic 90 its First Five Year Plan in III. Match the Following A B ll. Industrialdevelopmentin U.K. a)Ir1dianFiveYearPlans 12. Increasingstandard of living b) LaissezFairePolicy 13. SecondFive Year Plan c) Garibi Hatao (Removal of poverty) 14. Fifth FiveYearPlan d) Equity andsocialJustice 15. TenthFiveYearPlan e) Rapidindustrialization IV.Answer each one of the questions in a word or two l6. Who was the Prime Minister of India when the First Five Year Plan was launched? l7. Whatwasthepolicyfollowedduringthe 19century.7 l8. What is the body that draws Five Yearplans in India ? 19. What is the period of the TenthFive Year Plan .7 20. Who gavethe nameHindu rate of growth ? PART B Answer for each question should be about four or five lines 2l. Dene Planning. 22. What is the main problem of planning in underdevelopedcountries? 23. What is a rolling plan ? 91 24. Explain theconceptof Indicativeplanning ? 25. What is Mahalanobisstrategy? PART C Answer for each question should be about a page 26. What aretheproblemsof planning in underdevelopedcountries? 27. What arethe major objectivesof planning in India ? 28. What arethe key objectives of the Tenth Plan .7 29. Discussthe caseagainstLaissezFaire. 30. Explain theneedfor economicplanning. PART D Answer for each question should be about three pages 31. Discussthe problemsof planning in backwardcountries. 32. Describethecharacteristicsof economicplanning. 33. Explain thevarioustypesof planning. 34. Discussthe objectivesandachievementsof planning of India. 35. Explain the objectivesand achievementsof theNinth Five YearPlan 92 Chapter 6 Agriculture Role of Agriculture in Economic Development Agriculture occupiesa very important placein the economiclife our country. It is the backboneof our economic system. Agriculture hasbeen the major sourceof livelihood in the Indian economy. India is primarily an agriculturalcountry. The fortunesof theeconomyare,evennow,dependent on thecourseof agriculturalproduction.The importanceof agriculturein the nationaleconomycanbebestexplainedby consideringtherole of agriculture underthefollowing heads. 1. Contribution to National Income Agriculture contributesevennow a major shareof thenationalincome in India. Thedistributionof nationalincomeby industrialorigin for theperiod 1950-51to 1979-80showsthattheshareof variousagriculturalcommodities, animal husbandry and ancillary activities has always been more than 40 percent. As a matter of fact, during the fifties, it contributed aroundhalf of thenationaloutput.During eightiesandnineties,afurtherfall in thisproportion took place. During 2002-03, it stood at about 25 percent. 2. Major source of Livelihood Themainsourceof livelihoodis agriculture.Six outof everytenpersons in India dependuponagriculture.In industriallyadvancedcountrieslike U.K., U.S.A., etc, the number of people dependenton agriculture is very low as compared to India. Over the years 1921-2001, the size of labour force dependenton agriculturehad more than doubled. The sectoris plaguedby evilssuchasunderemployment, disguisedunemploymentandlow productivity employment. 93 3. Provider of Employment Agriculture provides employment and work to an overwhelming majority of the Indian masses.In villages, about seventyper cent of the peopleearntheir livelihood from cultivation and allied agroindustries. In absoluteterms, agricultureprovided employment to 97 million personsin l995 ; the number of people working on land (cultivators and agricultural labourers) increased to 235 million. 4. Industrial development Agriculture providesraw materialsto the industries. Cotton andJute textile industries, sugar,vanaspathiand plantations all thesedependon agriculture. Many of our small scaleand cottageindustrieslike handloom weavings,rice husking, coir, khadi etc., dependupon agriculture for their raw materials.Therearemanyotherindustries,which dependon agriculture in an indirect manner. 5. International Trade Indian agricultureplaysanimportantrole in thecountrysinternational trade. The main exportedagriculturalcommoditiesaretea,oil cakes,fruits andvegetables,spices,tobacco,cotton,coffee,sugar,raw wool andvegetable oils.Agriculture contributesto a sizeablepart of exportsandit is animportant segmentof imports of theeconomy.The agriculturalsectoris a netearnerof foreignexchange. 6. Capital Formation and Investment The major part of production assetsof the country is in the form of agriculturalassets like land,irrigationfacilities,tractors,agricultureimplements, ploughs, pump setsand storages. Since agriculture contributes about 25 percentof the national income, this sectoris the primary sourceof savings andhencecapital formation for the economy. 7. Food and Fodder In India, agriculturemeetsalmostthe entirefood requirementsof the people.Agriculture alsoprovidesfodderto sustainlivestock whosenumber runs to several crores. 94 8. Economic Planning Agriculture is the backboneof the Indian economyandprosperityof agriculturecan alsolargely standfor the prosperity of the Indian economy. Importanceof agriculturein thenationaleconomyis indicatedby manyfacts. For example, agriculture is the main support for Indias transport system, sincerailwaysandroadwayssecurebulk of theirbusinessfrom themovement of goods.Internaltradeis mostlyin agriculturalproducts.Agricultural growth hasdirect impact on poverty eradication. 9. International Ranking At thegloballevel,Indianagriculturehasrankedin certaincommodities. In the caseof groundnuts,India standsfirst in the world, for rice production it ranks second and in the case of tobacco it occupies third rank in the world. The signicanceof India arisesalsofrom thefact thatthedevelopment in agriculture is an essentialcondition for the developmentof the national economy. According to RagnarNurkse, surpluspopulation in agriculture shouldbe removedandusedin newly startedindustriesandpublic works in rural areas.By doing so, agricultural productivity will be increasedon the one handandon the other,new industrial units would be setup with the use of surplus labour. Agriculture is not only the largest and most important sectorof the Indian economy,but alsothe mostbackwardone. The growth of agriculture, therefore,is of vital importancefor the growth of the entire economy. Contribution of Agriculture to Economic Growth Simon Kuznetsidentifies four possibletypesof contribution that the agricultural sectoris capableof making for overall economicdevelopment. These are: l.Product contribution i.e., making availablefood andraw materials. 2.Market contribution i.e., providing the market for producergoods andconsumergoodsproducedin the nonagricultural sector. 95 3.Factorcontribution i.e., making availablelabour and capital to the nonagriculturalsectorand 4.ForeignExchangecontribution. Relationship between Agricultural and non-agricultural sector During the process of development, inter-dependencebetween agricultureandindustry hasbecomestrongerthroughthe l. Productionlinkages 2. Demandlinkagesand 3. Savingsandinvestmentlinkages. Production Linkages Productionlinkagesarisefrom theinterdependence of agricultureand industry for productive inputs i.e., supply of agricultural materialssuchas cotton,jute, sugarcaneetc.,to agrobasedindustriesandsupplyof fertilizes, machineryandelectricityby industryto agricultureover thelastfive decades. Theselinkageshavegot further strengthenedwith agriculturesdependence on industryreecting the modernizationof agriculturalsector. 2. Demand linkages There are strong demand linkages between the two sectors. The impact of incomes and industrialization on the demand for food and agriculturalraw materialsis generallyrecognized. 3. Savings and Investment linkages Equally significant is the impact of rural income on industrial consumption goods, i.e., clothing, footwear, sugar,edible oils, TV sets, washingmachines,refrigerators,motor bikes,etc. Arecent studyconcludes; Rural bazaaroutbuysurbanmarket. 96 Components of Agricultural Growth An increasein agriculturalproductioncanresultfrom anincreasein areaundercultivation (horizontalexpansion)and/or from anincreasein the productivity (vertical expansion). Productivity hastwo aspectsto it, viz., landproductivity andlabourproductivity. Productivity of Indian Agriculture India with its sizable agricultural sector has to face a number of problems.Low productionandlow productivity areatthecoreof agricultural problem In India. The productivity of agriculture is relatively low in India comparedto other countrieswith comparablenatural environment.There havebeensomeimprovementsin recentyears.But conditionsin agriculture have not changedmuch. It will be useful to analyzethe factorsresponsible for the backwardnessof areagriculture.The factors areclassifiedinto l. Demographicfactors 2. General factors 3. Institutional factors and 4. Technologiesfactors 1. Demographic factors The most important demographicfactor responsiblefor low yield in agricultureis the increasingpressureof populationon land.With population growth ratesbeing what they are,an increasingaddition to the labour force could be expectedto be absorbedin the industrial sectorof the economy. But the rate of growth in the industrial sectorhasbeenfar from adequate. Consequently, the increasing population has fallen back on land for its livelihood, with theresult that thepopulationpressurehascreateda number of problems like fragmentationand subdivision of holdings; the supply of improved practicesand serviceshasalwaysfallen shortof requirements.It hascreatedconditionsof unemploymentanddisguisedunemployment.All 97 theseevils, taken together have beenresponsible for low productivity in agriculture. 2. General Factors a) Excessor surplus labour in Agriculture The main causefor the low agricultural labour productivity is the overcrowding in agriculture. There are many people who depend on agriculture. As population increases,the pressureon land also increases, becausenatural increaseis not absorbedby the industrial sector. b) Discouraging Rural climate The farmers of India generally are poor, ignorant, superstitious, conservative,andilliterate andboundby outmodedcustomsandinstitutions suchasthe castesystemandthejoint family system.Superstitionandbelief in factarethecurses,which keepthefarmersfully satisedwith theirprimitive systemof cultivation. Except for a small group of farmers, who adopted quickly modern techniquesof production, vast majority of farmers arenot motivatedby considerationsof economicprogress. c) Inadequate non-farm services Indian agriculturehassufferedbecauseof theinadequacyof nonfarm servicessuchasprovision of finance,marketing etc.All thesefacilities are inadequatein India. Marketing system is defective and costly. Modern warehousingis inadequateand indigenous.Storing methodsaredefective andcostly.Modern credit facilities arestill poorly developedfor thefarmers. Farmersstill dependon moneylendersfor their daytoday requirements. 3. Institutional factors a) Size of holdings The averagesizeof holdingsin India is very low. About 80 percentof the land holdings are less than 2 acres.Not only agriculture holdings are 98 small but they arefragmentedtoo. In certain parts of the country, plots of landhavebecomesosmallthatit is impossibleto moveevenordinaryplough. Sincetheaverageagriculturalholdingsaretoo small,no scientic cultivation with improved implements,seedsetc. arepossible.Small size of holdings lead to great waste of time, labour and cattle power, difficulty in proper utilization of irrigation facilities, quarrelsandconsequentlitigation among farmers,wastageof cropsin the absenceof fencing etc. a) Defective land tenure structure The land tenuresystemin India hasbeendepressinganddisincentive ridden. It hasbuilt in featuresto supportstagnation.The main featureshave beenthepresenceof intermediaries;exploitativeownertenantrelationship; small andfragmentedholdings; andtheheavy andeverincreasingpressure of populationon land. 4. Technological factors a) Poor inputs and techniques Themethodandtechniquesof cultivationhavebeenold andinefficient. It resultsin high costandlow productivity.Thesemethodshavenot undergone anychangefor centuries.Theinvestmentin agriculturein theform of manures and fertilizers, improved seeds,irrigation, tools andimplements and other typesof assetshasbeenmiserably low. b) Inadequate irrigation facilities One of the basic causesfor the weaknessof Indian agriculture has beenthat most of the farmers throughoutthe country haveto dependupon rainfall andvery few of themcanavail thefacilities of artificial irrigation. c) Indebtedness of the farmers It is said that the farmers in India are born in debt, live in debt, die in debt andbequeathdebt.The causesof their indebtednessaremany suchas 99 hereditarydebt,litigation,wantof supplementary incomesandwastefulsocial expenditure. (1)Inadequate Research Benefit of researchanddevelopmenthasnot reachedall the farmers. Extensionis confinedto a few individualsandthemodernpatternof farming is yet to take roots in the countryside. e) Remedial measures The abovecausesof low agricultural productivity also suggesttheir own remedies.Following remedial measuresshould be taken in order to solvevariousproblemsof Indian agriculture. 1. Cooperativejoint farming shouldbe launchedon a national scale 2. Check on thepopulation growth 3. Arrangementsfor bettermanures 4. Use of better seeds 5. Alternativearrangements for irrigationfacilities. 6. Improvementsin agriculturalcredit 7. Reclamation of waste lands 8. Consolidationof holdings 9. Useof new implements 10. Soil conservation and intensive cultivation 11. Improvementin marketingsystem 12. Encouragementto agriculturalresearchandplant protection. 100 It is our responsibilityto do all within our meansto improveagriculture in India.Thefutureof our ruralpopulation,solutionof food andfoodproblems andindustrial developmentof our country dependupon agricultureonly. Agricul.tural Crops and Cropping Pattern With theintroductionof economicplanningin 1950-51andwith the adventof GreenRevolution after 1965,therewas a steadyincreasein area under cultivation and a steadyrise in averageyield per hectare(or) rise in agricultural productivity. As a result, generalproduction of all agricultural cropsrecordeda rising trend. Indias major food cropsarerice, wheat,maize,cerealsandpulses. The major cashcrops are sugarcane,jute, cotton, tea, coffee, groundnut and other oil seeds.In the pre green revolution period, i.e. 1949-65, foodgrainsproductionincreasedfrom 55 million tonnesto 89 million tonnes. It was accounted for 3.2% of annual rate of growth. In the postgreen revolutionperiod,i.e. 1965-2001,theproductionof food grainshasincreased from 89 million tonnesto 195.9 million tonnes.But the annualrateof growth was only 2.2%. Cropping Pattern in India Croppingpatternmeanstheproportionof areaunderdifferent crops at a point of time. In otherwords,it meansa ratio of different cropscultivated at a particular time. A changein cropping pattern implies a changein the proportion of areaunder different crops. Table: 6.1 Nature of crop distribution since 1951 The table indicatesthe shareof different categoriesof cropsin the total area sown. Factors aecting cropping pattern Natural Factors: Natural factors include the type of land, climate, rainfall and averagetemperatureetc. Thesearethe most important factors 101 affectingcroppingpatternbecausetherole of Natureis more importantthan man inagriculture. 1950-51 1980-81 2000-0 c)Non-foodgrains (01,) 26 20 25 cash crops SizeofHoldings: If the size of holding is small, farmers will prefer food grains andif the sizeof holding is sufficiently large,they may choose commercialcrops. Price ofAgricultural Products: Farmers like to produce the crops, which may yield maximumprot to them. Availability of Agricultural Inputs: If the farmers have inputs of high quality, they may go in for commercial crops.For this purpose,they requireagriculturalimplements,fertilizers,chemicals,high yielding seedsand irrigationfacilities. Social Factors: Social customs and attitude of farmers towards new technologyanddevelopmentalsoaffectcroppingpatternof a country.If the farmersarewilling to acceptnew technologyanddevelopment,they will be inducedto go for commercial crops. CropInsuranceScheme:Crop insuranceschemehelpsin diversifying cropping pattern of a country. This schemehelps farmers in adopting the crops,which involve risks. GovernmentEorts: Governmentcanalsohelp in the diversication of croppingpatternby adoptingfollowing measures~ (i) To distributehigh yielding variety seedsthrough governmentagencies,ii) To makechemical fertilizersavailableatconcessional ratesiii) To providethefacilitiesof storage andtransportationregardingagriculturalproducts,iv) to makethemarketing systemof agricultural products effective so that the farmers may get fair price for their products. Agricultural Holding Agricultural holding is the main determinantof the quantity,quality andstructureof agriculturalproduction.Agricultural holding meansthe size of land owned andcultivated by a farmer.It may be defined on the basisof ownership,(agriculturalholding meansthe sizeof land ownedby a farmer) andon the basisof cultivation. Agricultural holding meansthe sizeof land cultivated by a farmer at a particular time. Consolidation of holdings A major causeof low agriculturalproductivity is the fragmentation and subdivision of holdings which hasresultedin uneconomicholdings. Besidesthe tenancy systemand the ownership pattern, the programmeof land reforms coversthe task of consolidating the scatteredholdings of the small farmers so asto make them compactunits in oneplace. Land Reforms Land reformsrefer to all kinds of policyinducedchangesrelatingto the ownership,tenancyandmanagementof land. 103 Objectives of land reforms in India In Indiathelandreformprogrammehasbeenoneof themajorpolicies for rural development.The major objectivesof land reforms areasfollows: i) Restructuring of agrarian relation to achieve egalitarian social structure. ii) Eliminationof exploitationin landrelations iii) Actualization of the goal of land to the tiller iv) Improvementof socioeconomicconditions of the rural poor by widening their landbase. v) Increasingagriculturalproductionandproductivity vi) Facilitating land baseddevelopmentof rural poor vii) Infusion of a greatermeasureof equality in local institutions. Land reform measures in India The land reforms programme in India hasbeendone through three different methods: i) Voluntary adoptionfacilitated by incentivesprovided by the State throughmeasureslike cooperativefarming andconsolidationof holdings. ii) Voluntary adoptionsupplementedby statutorycompulsion made possible by the enactmentof legislation asin the caseof consolidation of holdings. 104 iii) Compulsion exercisedthrough different legislative measures,as with the abolition of intermediaries,tenancyreforms,ceilings on holdings etc. Agricultural marketing Agricultural marketing meansthe economicprocessunder which agricultural goods are exchanged. Process of agricultural marketing determinesthe valueof agricultureproductsin termsof money anddelivers them to their final consumer. Importance of agricultural marketing Agricultural marketingis a specic part of marketing.It is relatedto agriculturalproductsonly. It is thebaseof mostof the economicactivitiesof a country. It brings marketablesurplusto the market for sale.Farmerswill keep a portion of their produce for selfconsumption and cattle and the remainingportionsareleft for sale.Higher level of marketablesurplusleads to greatereconomicdevelopment.The importanceof agriculturalmarketing is as follows: 1) Provides raw materials for industries. 2) Providesfoodgrainsfor the entirepopulationandfodder for cattle. 3) Providesa basefor expansionof internal market of a country. 4) Helpsin theexpansionof internationalmarketalsowhenmarketable surplusfound in excessof the demandof a country, fetchesa considerableamountof foreign exchange. At present,most of the farmers sell their produce through village level markets,fairs, mandies;cooperative societiesand governmentalso purchasesagriculturalproducedirect from farmers. 105 Marketable Surplus Marketable surplus may be defined as the residual of produce left with the producer after meetinghis requirementsfor family consumption, farm needsetc.It alsomeanstheportion of produceleft for sale.Marketable surplus,which is genuineandnot artificial or forced,is thefountainsourceof not only agriculturaldevelopmentbut alsoof overalleconomicdevelopment. It is the real surplus generatedby agricultural sector.It can be measured thus: (Old stocks+ Current output) - (Consumption+ waste+ inventories for next season) Marketablesurplusis referredto as grosssurplusfrom agriculture, while marketedsurplusis referredto as net surplusfrom agriculture. Determinants of marketable surplus The variousvariablesthat determinemarketablesurplusare1)size of holding ii) productionof crop iii) sizeof family andiv) nonfarm income. In additionto this, the quantity of marketablesurpluswill alsodependon an efcient marketingsystem. Importance of marketable surplus Rising marketablesurplusesarethereal surpluses,which determine thereal income,real savings,real capitalformation andreal investmentand havegreatimportancein raisingthewelfarein ination freeeconomies.Fall in thereal marketablesurplusesin lessdevelopedeconomies,raisetheprices of not only foodstuffs but also of other Wagegoodsand invariably the real levelsof living of working classmay go down. Food Problem in India Food, clothing and shelter are the basic necessitiesof a person. Among these,food is the first most importantnecessity.No onecansurvive without sufficient food. It is a prime duty of every governmentto provide 106 sufficient food to all the peopleof a State.If a governmentfails to provide sufficient and nourishing food to her people, shefails on all the economic social andpolitical fronts. Therefore,sufficient food shouldbe provided to all the people of a State.Production of foodgrains should be sufficient to meettheir demand.If the production is lessthan demand,the country will haveto import food grainswhich will createtheproblem of adversebalance of trade andbalanceof payments. In India, food problem is a chronic problem. It datesback to 1937, the time of separationof Burma from India and 1947,the time of partition. Unemploymenthasfurther aggravatedtheproblem. Nature of food problem in India India is the secondmost populatedcountry of the world. Being so, food requirementsof the country areincreasingday by day.Food problem in India coversfour important aspects. 1. Quantitative Aspects Quantitative aspectsof food problem arerelated to the demandand supply of food grains. Production of foodgrains has been less than their demandfor a long period.Thoughin thelastfew years,domesticproduction of food grains has increasedconsiderably, yet the country has to import foodgrainsin largequantitiesfrom time to time. 2.Qualitative Aspects Qualitative aspectof food problem is relatedto nutritive elementsin food. Proteins, vitamins, minerals, carbohydratesetc. are the important elements of a balanced diet but these elements are not available in sufficient quantitiesto mostof theIndianpeople.Accordingto experts,apersonshould get 3,000 caloriesper day but on an average2100 calories are available to the peoplein India. Most important reasonof this situationis the poverty of most of the peoplein India. 107 3. Distributive Aspects Distributive aspectsof food problem are related to the system of marketingof agriculturalproducts.Due to defectivesystemof distribution, most of the personsdo not get foodgrains in sufficient quantities, at right time, andat fair prices.Antisocial elementscreatearticial shortageof these products in market and sell them at unreasonableprices. Most important reasonfor this situationis administrativesluggishness. 4. Economic Aspects Economic aspectsof food problem arerelated to purchasingpower of people.National incomeandper capitaincomeof India arevery low. The result is that most of the people in India are not in a position to afford the purchaseof nourishingfoodgrainsin sufficientquantities. Causes of food problem in India Important causesof food problem in India areasfollows: i) Rapid growth of population. ii) Low agriculturalproductivity. iii) Natural calamities. iv) Developmentof commercialcrops. v) Changesin the consumptionpattern. vi) Increase in income demand for food. vii) Economicdevelopmentandurbanisation. viii) Hoarding andblack marketing. 108 Food policy of Government of India Soonafterindependence, thegovernmenttook theproblemof shortage of food grains seriously. Severalimportant measureshave been taken by governmentto solve this problem. Thesemeasuresmay be enumeratedas follows: Increase in Production of Foodgrains Agricultural developmenthasbeenaccordedtop priority in almostall the Five Year Plans.Severalprogrammeshave beenlaunchedto increase agricultural production andproductivity suchasintensivefarming, multi crop programme,developmentof high yielding varietiesof seeds,intensive useof fertilizers. As a result of theseefforts, production of foodgrains has increased from 50.8 million tonnes in 1950-51 to 192.4 million tonnes in 1997-98. Import of Foodgrains To meettheshortageof foodgrains,thegovernmenthasbeenimporting food grainsfrom time to time. 48 lakh tonnesof food grainswere imported in 1951 which increased to 103 lakh tonnes in 1966. During 4 years 1991,1992,1995and 1996,the imports have beenalmost nil. Procurement of foodgrains Governmentadoptedthesystemof procurementof food grains.Under the system,governmentprocuresfoodgrains from market every year.For this purpose,procurementpricesor minimum supportpricesareannounced by government every year for all the important foodgrains and all the governmentpurchasesaremadeat theseprices.It helpsin protectingfarmers againstthe malpracticesof tradersandcommissionagents. Public Distribution of Food grains Government adopted public distribution system to ensure fair distribution of food grainsat controlled prices.Under the system,fair price 109 shops are opened.Each such shop is envisagedto serve a population of about 2000.As on 313March, 1998,there were about4.50 lakh fair price shops(Ration shops)in the country.Theseshopssupply rice, wheat,sugar, edible oils andkeroseneto peoplein certain quantity at controlled prices. Buffer Stock Scheme Governmentstarteda schemeof maintainingbuffer stockof important food grains to ensuretheir regular supply throughout the year.Whenever thereis a rise in their prices,governmentreleasesthem from buffer stockto stabiliseprices.Buffer stockoperationsarenormal thesedaysandtheyhave becomea normal part of the food policy of Governmentof India. Establishment of Specic Institutions A numberof specificinstitutionshavebeenestablishedby government to promote agricultural production and productivity and to ensureregular supplyandfair distributionof food grains.Importantinstitutionsare:National Seeds Corporation, Agroindustries Corporation, Agricultural Prices Commission, Food Corporation of India, Fertilizer Corporation of India, etc. Agricultural Research & Development Governmentis taking seriousstepsto promote agricultural research anddevelopment.A numberof agriculturaluniversitiesandIndianCouncilof Agricultural Research(ICAR) havebeenestablishedto undertakeresearch activities. Public Distribution System (PDS) Public distribution systemmeanstheregulatedandcontrolled distribution of essentialgoodsamongpeople.Under the system,essential consumergoodsareprovided to people at fair prices through government agencies. 110 Main Constituents of Public Distribution System Fair Price Shops or Ration Shops Public distribution systemensuressupply of essentialcommodities through a network of fair price shops.At present,there areabout4.50 lakh fair price shopsin India, out of which about3.60lakh shopsareoperatingin rural areasand 0.90 lakh shopsareoperating in urban areas.Each shop is envisagedto servea population of about 2000. Consumers Co-operative Stores Consumercooperativesplay animportantrole in thesupplyof quality goodsat reasonableratesto commonpeople.Thereis a threetier structure of consumercooperativesocietiesin India. They areprimary consumercooperative societies,central consumer cooperative storesand statelevel consumerfederations.More than50,000village level societiesareengaged in the distribution of consumergoodsin rural areas. Shops selling Cloth at Controlled Prices Theseshopssell cloth at controlled prices to consumerson the basis of theirrationcards.More than66,000shopsaresellingsuchcloth throughout thecountry. Super Bazaars Superbazaarsare the bazaarswhich provide all the goods of daily needsat controlledprices.Thesemarketsenablethe consumersto complete their purchasesfrom oneplace.Thesebazaarsareworking in almostall the major cities of India. Kerosene Retailers In somestates,keroseneis distributedthroughfair price shopswhile in other states,specific retailershavebeenlicensedfor the purpose. 111 Commodities of Distribution Six key essentialcommoditiesviz., wheat,rice, sugar,importededible oils, keroseneand soft coke are distributed to consumersthrough public distribution system.Besides,stategovernmentsareempoweredto include other essentialgoodsin the system. Responsibility of Supply of Commodities Different institutions have been assigned the responsibility of procurement,allocationanddistribution of different goodsasunder: i) Food Corporation of India for wheat,rice and other food grains, ii) Indian Oil Corporation andMinistry of Petroleumfor Kerosene, iii) Coal India Limited for soft coke, iv) National TextilesCorporation,and V) StateTrading Corporationfor imported edible oils. Agricultural Price Policy Agricultural price policy meansa policy to determine,regulateand controlthepricesof agriculturalproducts.Importantobjectivesof agricultural price policy are: (i). To determine,regulateand control agricultural prices; (ii). To preventviolent uctuations in agriculturalprices;(iii) To provide fair pricesfor agriculturalproductsto the farmers;(iv) To provide quality goods to householdsatreasonable prices;(v) To maintainanappropriaterelationship andbalancebetweenthe prices of foodgrains and nonfoodgrains; (vi) To integratepricesbetweenvarious states. 112 Price Policies of the Government 1. Minimum support prices A minimum supportpricesis declaredby government,normally at the beginningof sowingseasonfor everyimportantagriculturalcommodity.These prices area long term guaranteeto farmersthat the pricesof theseproducts will not be allowed to fall below a certain level. These prices assurethe farmers and encouragethem to carry on and to expand their production. Theyput theirbesteffortsto getmaximumproduction.If thepricesfall below minimum supportprices,governmentwill buy theentiremarketablesurplus at procurementprices. 2. Procurement Prices Thesearethe prices which aredeclaredby government,generally at the time of harvestof crops.Thesearethe prices at which the government buys agricultural productsfrom farmers.Theseprices servetwo important objectives: (i) To provide guaranteeto the farmers that the prices of these productswill not be allowed to fall below a certain level. If marketpricesfall below this level, the farmerscan sell their productsto government. (ii) It enablesgovernmentto procuretheseproductsfor maintaining public distribution systemandbuffer stocks.Theseprices are announcedby governmenton therecommendationsof Commissionfor Agricultural CostsandPrices(CACP). These prices arewidely usedby governmentfor the procurementof wheat andrice. Procurementpricesaregenerallyhigher than minimum supportprices. 3. Issue Prices Issue prices are the prices at which food grains are allocated and supplied by Food Corporation of India (FCI) to the states and union 113 territories.Thesepricesmeettherequirementsof public distribution system. Prices of goods to be supplied through fair price shops directly depend upon issueprices. Issue prices are normally less than market prices and higher thanprocurementprices. 4. Retail Prices Public distribution systemis carried on through the network of fair price shops(ration shops).Theseshopssupply essentialconsumergoodsto householdsat the prices fixed by government.Theseprices areknown as retail prices.Retail pricesarehigher thanissuepricessothat theexpensesof public distribution systemmay be recovered and the licenseesmay get a certainmargin. 5. Buffer Stock Operations Buffer stockoperationsrefer to buying andselling of food stocksby government.Theseoperationsservetwo important purposes: (i) To regulateandcontrol price uctuations within a reasonablelimit. (ii) To enablegovernmentto procurefood stockssothatregularsupply of thesestocksmay be ensuredthroughout the year aswell as throughout the country. Theseoperationsarecarried on by Food Corporationof India (FCI). Wheneverthereis a fall in thepricesof food stocks,FCI startsbuying them at procurementprices and wheneverthereis a rise in theseprices,FCI startsselling. Thus, bufferstockoperationsplay animportantrolein stabilizingagricultural prices. Agricultural Productivity Agricultural productivity is theratio of agriculturalinputs andoutput. It indicatestheefficiencywith which theinputshavebeenutilized.It indicates how much production hasbeenobtainedfrom a given amountof inputs. It can be measured as: 114 Total Production AgriculturalProductivity = -------------Amount of Inputs Employed Total Production Productivity of Land = Area of Land Total Production Productivity of Labour = No of Workers Employed Total Production Productivity of Capital = Total CapitalEmployed Trends of A gricultural Productivity in India 1. Productivity of Land Productivity of land in India is very low in comparisonto that of averageproductivity of land in other countries.It hasbeenmadeclear in following two tables: 115 Table6.2 revealsthat thoughproductivity of land is improving andis more thandoublethanthat at thebeginningof planningera,still it cannotbe regardedassatisfactory.When Welook at the productivity of land of other countriesof world (seeTable6.3),we find thatIndia lagsfar behind.Average production per hectarein India is much below the world averagein all the crops.We are far behind the productivity of agricultural lands in both the developedanddevelopingcountriesof the world. 2. Productivity per Worker Agricultural productivity per worker is very low when comparedwith the productivity per Workerin industrial andother sectors.According to an estimate,productivity per worker in thefield of agricultureis only onethird when comparedwith that of large industriesandonehalf when compared with that of small industries.In this regard,in agriculturethe part playedby Natureis moreimportantthanthepartplayedby man.Secondly,investment of capitalper worker in agricultureis much lessthan that of in industry. Table 6.2 Yield per Hectare of Major Crops (k.g./hectare) W 1307 116 1511 1981 2281 2713 Table 6. 3 International Comparison of Yield of Selected commodities (k.g per hectare) Commodity Country Egypt Ba9'adeS Wheat ' d Ground nutg Ar enuna 794 Chapter 6 Exercise PART A I. Choose the correct l. 2. answer Nearly 64% of labour force in India is engagedin a. Agriculture b. Industry c. Service sector d. Foreign trade Agricultural productivity canbe measuredin termsof a.consumptionof fertilizer b. Irrigationalfacilities c. Land andlabour productivity d. Mechanization 3. 4. Nearly 20% of the cultivated areais irrigated by a.Tube Wells b. Storagecanals c. Perennial d. Tanks canals The contribution of agricultural sectorto the GDP hasdeclinedto a. 29.7% b. 56.1% c.27 .9% d. 26% 5. Greenrevolutionincreasedthefoodgrainsproductionespeciallyin a. Rice and sugarcane b. Rice and wheat c. Wheat and sugarcane d. Ragi andrice II. Fill in the Blanks 6. ............. . .hasbeenthe major sourceof livelihood in the Indian Economy. 7. Agriculture provides ........ ..to the Industries. 8. ...meanstheproportionof areaunderdifferentcropsat apoint of time. 9. ........... ..meansthe sizeof land owned and cultivated by a farmer at a particular time. 10. .......... . .meansthe economicprocessunderwhich agricultural goodsareexchanged. III Match the following 1l . Sub division andfragmentation New Agricultural price policy 12. Suddenincreasein production per acreof land Declineof joint family system 13. Zamindarisystem Greenrevolution 14. Disguisedunemployment British period 15. 1986 Agriculture VAnswer the following in a word or two 16. What is the yield per hectarecalled? 17. What arethewaysin which agriculturalproductivitycanbemeasured? 18. Is capita1outputratiosmall in agriculture? 19. Give examplefor naturalfactorsaffecting croppingpattern? 119 20. Is crop insuranceschemeessentialfor the farmers? PART B Answer the following in four or five lines 21. 22. 23. 24. 25. What is the contribution of agricultureto economicgrowth? What arethe componentsof agriculturalgrowth? List out the factorsresponsiblefor the backwardnessof agriculture. 26. Dene croppingpattern. 27. Dene agricultural holding. 28. 29. 30. PART C Answer the following questionsin abouta page Explain therelationshipbetweentheagriculturalandnon-agricultural sectors. Examine theremedialmeasuresto solvethe Variousproblemsof Indianagriculture. 31 Describethe factors affecting croppingpattern. Explain the objectivesandmeasuresof land reforms in India. Chapter 7 Industrial Sector Need for Industrialisation The needfor androle of industrial sectorhavebeenfully recognized by the developmentthinking all over the world. Industrial sectorthroughits forward and backward linkages with other sectorsplays a very important role in achieving rapid growth and development. Most modern and rich countrieshavewell developedindustrial sectorthroughtheir early industrial revolution. Industrializationmeanswidespreaddevelopmentof manufacturingvast quantities of goods, employing a large number of people, promoting internationalmarket,characterization of specializedskill, science,technology, increasing application of electrical, electronic, computer technologiesto enhanceproductivity.Absenceof suchrigorousindustrializationis the main reasonfor the backwardnessof many poor countriestoo. Hence,the modern developmentstrategiesattachmore emphasisto rapid industrializationto achievefastergrowth andprogress.The following aresomeof the important needsfor the industrial sector. Raising National Income Vigorousindustrializationensuresa solid andsustainedbaseto increase the national income of an economy.A larger shareof national income of industrially advancedeconomiescomesfrom industrial sector. Employment Opportunities Availability of surplus labour and unemployment are the major challengesof developmentstrategy.Industrialization usesthe productive resourcesof the economyandexpandsemploymentopportunitieswhich in turn will improve the incomeandwellbeing of thepeople. 121 Higher Living Standard The increasingnationalincomethroughindustrializationhelpsto meet the demandsof the people for industrial products. It is also expected to improve the standardof living of the people by increasingtheir per capita income.This is possibleonly through a well designedgrowth process. Promoting Exports Industrially advancedcountriesareableto exportmore andearnlarge foreign exchange.The incomeelasticityof industrialgoodsis very high than that of the primary goods. Hence,exportscanbepromotedto earnadequate foreign exchangeby producingadvancedindustrial goods. Capital Formation Expandingemploymentopportunities,incomegenerationthroughrapid industrialisationwill alsoleadto increasedsavingandcapitalformationin the economy. This will help to diversify andexpandthe industrial basefurther throughhigherinvestment. Technological Progress Industrial sectorwill alsopromotetechnologicalprogressthroughits courseof developmentand expansion. The technological advancements andtheir dynamic contentsprovide therequiredelementsto strengthenthe economy asa whole. Patterns of Industrial Development The preindependentIndia, mostly characterisedby backwardness, did not have an organizedindustrial sector.The SecondWorld War made smallbeginningin theindustrialdevelopment.Still the shareof industriesin thecountrysnationalincomewasrelatively small. There had been a marked shift in the advancement of the industries after the implementation of five year Plansin the independentIndia. The 122 signicant role of industrialization asthe major channelof rapid economic growth and allround developmenthasbeenrecognizedby the plannersof modern India. Besides rapid growth and prosperity, the Indian strategy of developmentplanning,inspiredby economicnationalism,aimedat achieving selfsufciency underthedirectionof public sector.It alsoaimedto translate the economic growth into improved standard of living of the masses. Maximum productionandfull employment,andthe attainmentof economic equality were the long term objectivesdeclaredby theFirst Five PearPlan. The policies aimed at achieving economic growth with distributive justice. Then the rapid developmentof industriesandtheir diversification areconsideredto be absolutelynecessaryfor development. The experienceof statedominateddevelopmentplanningfor a period of more thanve decadeshasbroughtout many signicant achievementsin the growth andstructureof Indian industries. Growth with socialjustice hasbeenthe main objective of planning since l95 1. It hasbeen defined to be inbuilt in the production processso that themajor beneficiariesof the developmentplanning arethe majority of thepeopleandtherapid anddiversied industrializationservesthe needsof the massesby generatingadequateemploymentandincomedistribution. Thenew policy environmentfocusedon a mixed economyframework wherethepublic sectorwill play a major role in building the industrial base of the economy with the objectives of accelerating growth, generating employment, reducing regional disparities, checking concentration of economicpower andachievingself-reliance. Significance of Public Sector Thepatternof industrialgrowth dependson therelativerolesof private andpublic sector.Public sectormeansthepartof theeconomythatis publicly owned asdistinct from thoseownedby private individuals or firms. It hasa numberof absolutelyessentialfunctions. 123 By employing productive resources,the public sectorprovidesmost of the public goods,like primary education,public health, drinking water, social services,child nutrition, women andlabour welfare, social security, sanitation,poverty eradication,road,defence,etc.All of them will facilitate the overall developmentof the economyandpeople. As privatelyownedorganizationsor firms will notprovidethesepublic goods,thepublic sectorhasto assumesuchresponsibility.Thus,the mixed economyconsistingboth the private sectorand public sector,hasbeenthe featureof many modernstates. The postIndependent Indian State assumeda greater role in the reconstructionof thecountrythatincludesregulation,facilitation andwelfare promotion. To meettheserequirements,the Indian Stateadoptedthe public sectordominated,heavy industry basedimport substituting development planning over five decadessinceindependence. Public sectoris playing a significantrole in termsof its contributionto GDP in many developedaswell asdevelopingcountries. Much of the developing world in the early 1950sadoptedan inward orientedstrategyof industrializationguidedby theobjectiveof selfreliance anda philosophyof economicnationalism. The promotion of public sector throughdevelopmentplanningis basicallyusedto directtheresourcestowards optimumutilization andequitabledistribution. India too adoptedsimilar developmentstrategyof expandingpublic sectorto thecommandingheightsof theeconomyto meetthe constitutional obligation that the material resourcesof the communityare so distributed as best to subserve the common good SinceIndependence,public sectorplayed an important role to be the principaldriving forcebehindsteadygrowthof thefifties, sixtiesandseventies and eighties. The contribution of the public sectorto national income has increased from 7.5% in 1950-51 to 24% in l98283. 124 The contribution of the public sector through its basic, heavy and strategicindustriesto the economyandits growth arevery significant. The role andcontributionof thepublic sectorin thedevelopmentof many sectors like manufacturing industry, agriculture, and infrastructure and for the developmentof the whole private sectoris noteworthy.The rapid growth of public sectorinvestmentin industrieshasobviouslycreateda strongdiversied industrial base. All suchcontributionshavehelpedthe economyin many ways. It haspromoted small scaleand ancillary industriesasa result of the backward andforward linkages. It haspromotedagrobasedindustriesandsupportedagriculturesector by providing many inputslike fertilizer, power,etc. It hascreateda soundinfrastructural baseto help the private sector. Public sectorhas exerted a greater inuence on the welfare of the peoplethroughits vastemploymentopportunities. However, all thesedevelopmentrationalehavebeencriticized since ninetiesby theproponentsof marketeconomyandprivatesector.Still public sectorplays many critical roles. Pattern of Industrial Growth The specificpatternof industrial growth canalsobe seenthroughthe usebasedclassicationof industries.This classicationconsistsof four major componentsviz. 1.Basic goodssuchascement,chemicals,fertilizers, etc. 2. Capital goodssuchasmachineries,machinetools, andengineering goods. 3. Consumergoodssuchascycle, television, refrigerators,bikes, cars, food articles, soft drinks, etc. 125 4. Intermediate goods such aspaint, plywood, pipe & tube, ancillary parts, etc. Table 7.1 Pattern of Industrial Growth Average Annual Growth Rates 1980-91 1992-2000 2001-05 mum Source : CSO Table7. l indicatesthe trendsin the averageannualgrowth ratesof all these four sectors. The pattern shows that the industrial growth was consistentlyled by the growth of consumergoodsindustries.Its growth has increasedfrom 6 per cent in eighties to 8 per cent during 200105. The growth rateof capitalgoodsindustrieshasdeclinedfrom its peak of 9.4 per centduring eightiesto 5.4 per centduring ninetiesbeforemaking a recovery to 8.6 per cent in recent years. The growth of basicgoodsis declining steadilysinceeighties. Steel Industry Steelindustry, being the key industry, forms the basefor almost all otherindustries.Manufacturing,mining, construction,power,transportand other infrastructures and service sectorsare all using steel astheir inputs. 126 Thus the development of steel had a multiplier effect on almost all other sectorsof the economy.Hence,it is popularly called as motherindustry. Its critical role and importance in terms of its contribution to industrialization, national income, employmentgeneration,is noteworthy. However,unremunerativeprices,inefficient managementpracticesof giant public sector,mostly by bureaucratsratherthan technocratsaresomeof the major problemsof the steelindustry. The SteelAuthority of India (SAIL) wasestablishedin midseventies to extendsupportregardingraw materialsandcoordinatethe development of many steelindustries.The removalof price anddistributioncontrolswere the significantpolicy reform madein 1992. The production of steel has increasedmore than about fifty seven timessinceindependence. It hasincreasedfrom .7 million tonsper annumin 1951 to 40 million tons in 2004-05. Textiles Textile industry is oneof the oldestaswell asthe largestindustriesin India.It hasspreadto almostall partsof thecountry.It hasbeenwell organized in termsof the labour employedandturnover of the output. Textile industry accountsfor 20 per centof the total industrial output. It alsoemploys25 million people.The fabric producedduring theFirst Plan periodwas4775million squaremetres.Theindustryunderwentmanychanges sincethen. The productionof fabricsin 2004-05was45378 million square metres.This is almosttenfold increasesinceindependence. The majorproblemsof theindustryarenonavailabilityof enoughraw material(cotton),increasinginput costs,low protability of small mills, and high costof modernisation. In recentyears,budgetaryconcessions, rationalisationof duty structure and assistanceunder the Technology Upgradation Fund Scheme(TUFS) startedpaying somemarginaldividendsin the textile sector. 127 Cement Cement is one of the emerging major industries with greater developmentpotential.Cement,beingthekey raw materialof theconstruction industry,playsa signicant role in thecountryscurrentphaseof development. The industry is almostself-sufficient in termsof raw materials,machinery, technologyandincreasinglocal demand. India, with all such advantage,produces only 6 per cent of world cement production. It has recorded an annual growth rate of 8.4 per cent overthelasttwo decades.Cementindustryhasaninstalledcapacityof 140.53 million metric tons (mmt) with 120largeand365 mini plants.The capacity utilization of largeplantshasbeenvery high at 80 percent. The current policy reforms are expected to increase the capacity utilisation further. High input costsandpoor export infrastructurearesome of the problems facing the industry. The TenthPlan hasfixed a production target of 203 mmt and the estimatedinvestmentduring 2002-07 would be Rs. 17,600 crore. Sugar Sugarindustry is animportantagrobasedindustry.Its contributionto the economy is manifold. This industry has been the source of rural developmentthrough employment and income generation,and increased transport and communication facilities. In addition, sugar industry also providesinput for someotherindustry.It is alsoearningfrom abroadthrough exports. India hasemergedasthelargestsugarproducingcountryin theworld. It contributes15per centof theworld sugarproduction.However,the share of Indias sugarin the international trade is very meagreat 0.05 per cent. Underutilizationof capacity,unremunerativepricesto sugarcaneCultivators, industrial sicknessandindustrial closurearesomeof the major problemsof the sugarindustry. 128 Adequatesupportfrom government,banksandnancial institutions shouldcome forward to provide enoughrelief to revive the sick units. The TenthPlan hasestimatedan investmentof Rs. 1300crore during 2002-07. Industrial Policies During thepreindependentperiodtheindustrialsectorwasvery small and the country did not have any significant industrial policy. After independence,the first formal initiative towards industrialization was the declarationof the Industrial Policy Resolutionof 1948. However,the more comprehensive,concertedandreal plannedeffort towards industrialization commenced from the era of First Five Year Plan (FFYP) 1951-1956. The major step towards industrialization has been attributedto Industries(DevelopmentandRegulation)Act 1951. ThroughthisAct, theUnion Governmentbroughtmanykey andbasic industriesunderits control. The sectorsof nationalimportancenamelyatomic energy,armsandammunition,aircraft,shipbuilding,telephoneandtelegraph, iron andsteel,coal,minerals,oils etc.havebeenbroughtundertheexclusive sphereof government. The Second Five Year Plan (SFYP) made a marked shift in the industrialpolicy anddevelopmentof thecountry.Themain aim of thesecond plan was to accelerate the growth of the economy through rapid industrialization. Thebasicframeworkanddirectionfor suchrapidindustrializationwas laid down by the Industrial Policy Resolution of 1956in tune with many provisionsof the l950s Constitution. Theresolutionof 1956,havingdeclaredthe adoptionof thesocialistic patternof societyasthe nationalobjective urgedthat all industriesof basic andstrategicimportanceor in the natureof public utility servicesshouldbe in thepublic sectorfor plannedandrapid development.Thus,the Statehas, therefore, to assumedirect responsibility for the future development of industries. 129 Another strategicdimensionof the l956 resolutionwas its emphasis on basic and heavy industries and capital goods industries to attain selfreliance in important sectors. This strategy also believed that rapid developmentwithin alimited spanof time is possiblethroughthedevelopment of capital goodsindustriesrather then the consumergoodsindustries.The Plan createda strongfoundation for the future economicdevelopmentand provided supportto the agriculture, village and smallscaleindustries and infrastructures. Public Sector Restructuring The macro economic policy reforms launchedfrom 1991onwards have restructuredthe public sectorenterprisesto a significant extent. The new policy reforms areexpectedto alter drastically the basicparametersof erstwhileIndian economicpolicies that were followed sinceIndependence. The nationaleconomyhasbeenweanedawayfrom regime of statecontrols and towards a market dependent one. The process of macro economic stabilization through which a planned economy is changedinto a market driven competitiveeconomyis called aseconomicpolicy reforms. The processincludes liberalization, privatization and globalization (LPG). Thesenew setof polices reducedthe then dominant role of public sectorthrough various policy measureslike new Industrial Policy 199l, disinvestment,promotion of private andforeign investment. All thesepolicy initiatives haverestructuredthe Indian public sector thoroughly. The employmentgeneration,income distribution and welfare objectives of public sector have been replaced by profit maximization objectives. The performanceof the sectorhasbeencriticized on variousgrounds; particularly the questionof efficiency is measuredin termsof profit andnot by employmentandlabourwelfare. The welfareorientedpricing policy has alsobeensubjectedto criticism. 130 New Industrial Policy 1991 TheNew IndustrialPolicy declaredwason July, 1991with themajor aim of loosening the barriers to entry for private firms to encourage competitionin theindustrialsector.Theindustrialpolicy actedto consolidate the earlier gainsandto build further by correctingthe distortionsthat might havecreptin theIndustrial structuredevelopedin the earlierdecades.It also aims to sustaingrowth in the productivity and gainful employment and to attaininternationalcompetitiveness. The specificreforms relatedto the restructuringof public sector enterprisesareasfollows. (i) To encourageprivate participation in the economy.The areasof industry reservedfor the public sectorhasbeenconsiderably reducedfrom 17to 8. In particular, telecommunication,power, air transport,petroleum, sectorswere openedfor private sector. (ii) The disinvestmentof sharesof somepublic sectorenterprisesin order to raisethe resourcesandto encourageprivate participation in the public sectorenterprises. (iii) Public enterpriseswhich aresick, will be referred to the Board of Industrial and Financial Reconstruction for rehabilitation or reformulation. (iv) An improvementof performanceandaccountabilityhasto be ensuredthroughnew rulesandonly potentiallyviablepublic sector undertakings(PSUs)canbe revived. (V) Budgetarysupportto sick public sectorindustrieswill be reduced drastically. (Vi) Only potentially viable PSUscanbe revived andotherswill be closed down. 131 In 1998-99, another two sectors were removed from the exclusive public sectordomain and subsequentlyonly 3 sectorshavebeenleft under the public sector domain leaving the rest open for private and foreign investments.ThustheIndustrialPolicy of 1991hasdismantledtheindustrial controls,regulationsin a signicant way to restructurethepublic sectorand to promote private sector. Disinvestment of Public Enterprises The processof industrial restructuringcontinuedin responseto the new industrial policy of 1991. The new policy suggestedthe partial disinvestmentof public sectorwithout fixing anyceiling. Citing fiscalcrisisas thereason,comprehensive effortshavebeeninitiatedsubsequently to disinvest the equity of public sectorundertakingsto a greaterextent. This is nothing but the outright processof privatization. Therearethreemodelsviz. public offer, strategicsaleandcrossholding. The Governmentannouncedin 1998 to sell more than 51 percent in strategicsalesand the new cap was fixed at 74% to 100%. The objective of disinvestment is to mobilise enoughresourcesby way of withdrawing from somesectorin orderto investin priority areaslike particularly social sectors. The mobilized resourcesare usedto repay the public debt of the government to pay for various VRS schemes,labour retrenchmentandredeploymentschemesunderthe exit policy. The other objectives include the promotion of private sector, enhancementof efficiency andcompetition. In 1991-92, over Rs.30billion wasraisedthrough the disinvestmentof public sector. In 1992-93,Rs.18.6 billion againsta target of Rs.35billion was raised. Until 2002O3,a huge resourceof aroundRs.30Obillion wasraisedthroughthedisinvestmentpolicy. Thoughthepolicy of disinvestmentis criticizedvehementlyby theleft parties and trade unions, the government is moving towards further disinvestmentof many Public Sectorenterprisesincluding the strategicand prot making enterprises. 132 Liberalization and Privatization Liberalismmeanstheorderof themarketor capitalisteconomyrelying predominantly on competition andprivate sector.It envisagesfreer trade, full convertibility andnondiscriminatorytariffs. Liberalisationpoliciesaim at minimizing theroles andfunctions of the governmentin the economyto promote private sector. It aims at more external capital inows to finance thecurrentaccountdeficit, to augmentcapitalformation to generateexports earningsto raiseefciency of capital usedin India to improve the quality of theproducts.In India,theforms of liberalisationpolicy initially havebeenon generalliberalisationof controlsor marketisationandderegulationfollowed by privatization. Privatization policy hasbeen adoptedas a part of the liberalisation. Privatizationis dened astransferof ownershipfrom public sectorto private sector. It is the processof reducing the role of Stateor public sectorin the economicactivitiesof a country.Privatisationis expectedto ensureefciency in the allocation of resourcesand promotefastergrowth. In India, the processof intenseprivatization hasbeeninitiated since 1991. The variousmethodsthroughwhich it hasbeenundertakenincludes disinvestmentmeasures(i.e. settingthepublic ownershipto private sector), deregulationanddelicensingmeasures for theentryof privatesectorindustries into the reserved public sector domains, surrendering the control and managementof public sectorenterprisesto theprivate sectorandby halting anyfurtherpublic investmentanddiversification. Thus, public sectorrestructuring refers mainly to disinvestment or denationalization of existing public sectorenterprises,liberalisation and privatisationthroughderegulationanddelicensingultimatelylimiting therole of public sectorto social andeconomicinfrastructure. The Eighth Five YearPlan(1992-97)clearly arguedthat considerable restructuring was necessaryto reachthe new goals of public sectorwithin the framework of New Economic Policy. The new goal is public sector industry hasanimportant role asan autonomous,competitive andefficient 133 sectorto provide essentialinfrastructuregoodsand services,development of natural resourcesand areasof strategicconcern. The following arethe integratedstrategiesdevisedby theEighthPlanfor public sectorrestructuring: l. Restructuringinvolving modernization,rationalisation,productmix changes,selectiveexit andprivatisation. Increasein autonomyandperformanceaccountabilitythroughthe systemof Memorandumof Understanding(MOU) betweenthe administrativeministriesandcentralpublic enterpriseslaunchedin the Seventh Plan. Changesin managementpracticesat specic enterpriseslevel to promoteefficiency,dynamicleadership,resourcefulnessand innovation. A major effort by stategovernmentsto promotereformsin public sector. Technologyupgradationthrough an integratedR & D effort and import of technology. 6. Reorientationof approachin ministries andothergovernment agenciesregardingliberalisationanddismantlingof regulations. Environmental Hazards Environmentalhazardshavebecomea matterof very seriousconcern of humanity. The western societies,having beendriven by the culture of consumerism,increasedtheir production rapidly to meet the accelerated consumption.This hasresultedin mounting wastagesandgreaterdamages to the environment. The culture of rampant consumerismof the West has shiftedto theEastaccompaniedby vastnumberof useandthrow products. Further, the pressing developmental needsof the less developed countrieslike India haveresultedin a critical tradeoff betweengrowth and environment. The rich countries,after having doneenoughdamageto the 134 environment, now wants to impose many restrictions on the industrial developmentof lessdevelopedcountries.At the sametime they refuse to transfermany environmentalfriendly technologiesfree of cost in order to help the poor countriesaswell asto protect the environment. After independence, India launched its heavy industry based developmentstrategywhich hasresultedin thesettingup manynewindustries, upgradationandmodernizationof existing industries.Industrialisationand theenvironmentallyunfriendly GreenRevolutiontechnologyhaveinflicted heavydamagesto the environment.Further,deforestationand aquaculture have alsocausedseveredamagesto our environment. Many legislations and regulatory measures for the protection, conservationand developmentof the environment have beenintroduced both by the Union and Stategovernments.Pollution control boardshave beensetup at different levels of governmentto addressthe issues. The following aresomeof therecentpublic policy initiatives in India to control environmentalpollution. l. Formulationof NationalEnvironmentalPolicy 2. Settingup of National CleanDevelopmentMechanism(CDM) Authority asper Kyoto Protocol. 3. Reengineeringenvironmentalclearanceprocess 4. RevisingtheCoastalRegulationZones(CRZ) 5. Developinga National ChemicalManagementProfile for the country. Inspiteof all suchefforts,polluting industries,particularly many large scaleindustries,aquaculture,thermalandnuclearpower plantshavebeena significant sourceof air, water and land pollution on a large scale.At the internationallevel,largescalebombardmentof cities,oil fieldsandcontinuous wars like the one that Americans arewaging againstIraq, frequentnuclear 135 tests conducted by big and small countries, etc are the major sourcesof environmentaldamage. Industrial Finance Finance is the backbone of industrial development. The financial requirementof industriesmay be for the shorttermto meet working capital requirements. Or it may be for a long term to meet the fixed capital requirements.To meetsuchrequirements,the industriesraisefinancefrom different sources.In India, asin many other countries,industrial finance is available under two broad Internal Sources Internal sources sources of industrial viz. external finance and internal sources. consist of funds mobilized from own sourcesasin the caseof small scaleunits,paidup capitalin theform of equity sharessubscription asin the caseof large units, own surplusesand reserve funds of industries. External Sources Externalsourcesof industrialnanceincluderaisingof borrowedfinance from sourcessuchaspublic deposits,equity capital, debentureissuesand availingloansfrom commercialbanksandothernancial institutions. Financial Institutions The shorttermnancial requirementscanbe met from internalsources like public deposits,sharecapital andcommercialbank loans.However,for long term requirements, industries will approach specialized financial institutions.Financialinstitutionsin developingcountriesarealsoreferredto as development banks. This implies that their role must be development orientedandnot merelending alone.Thus,they arecapableof inducing the courseof developmentthroughtheirpoliciesandprogrammes.Thefollowing are some of the financial institutions available 136 at different levels in India. At National Level 1. Industrial FinanceCorporationof India (IFCI) 2. Industrial DevelopmentBank of India (IDBI) 3. Industrial Credit andInvestmentCorporation of India (ICICI) 4. Industrial Investment Bank of India (HBI) 5 . National Small IndustriesCorporation(NSIC) At State Level 1. Tamil Nadu Industrial InvestmentCorporation(TIIC) (First of its nature to be set up in India in 1949) 2. StateFinancial Corporations(SFC) 3. StateIndustrial DevelopmentCorporations(SIDC) At Intermediate Level 1. Unit Trust of India (UTI) 2. Life InsuranceCorporationof India (LIC) 3. GeneralInsuranceCorporation of India (GIC) Role of Small Scale Industries in Economic Development Small ScaleIndustries(SSIs)play an important role in the economic developmentof a country. Their role in terms of production, employment generation,contribution to exportsandfacilitating equitabledistribution of income is very critical. The small scale sector consists broadly of l) the traditional cottageandhouseholdindustriesviz., khadi & village industries, 137 handicrafts, handlooms, sericulture and coir industries; and 2) modern small scale industries. The traditional village and cottageindustries asdistinguished from modern small scaleindustries aremostly unorganisedand locatedin rural areasand semiurban areas.They normally do not use power operated machines/appliancesand use relatively lower levels of investment and technology.But they provide parttime employmentto a very largenumber of poorer sectionsof the society.They also supply someessentialproducts for massconsumptionandexports. The modernsmall scaleindustryis mostly definedin termsof the size of investmentandlabourforce.The Industries(Development& Regulation) Act 1951definesSSI having lessthan 50 workers with the aid of power or lessthan 100workers working without the aid of power. The more formal definition is in terms of the fixed assets less than Rs. 35 lakh (1981). In 1991the limit wasraisedto Rs. 60-75 lakh. The Ninth Planfixed the ceiling at Rs. 100 lakh and the Tenth Plan increased to it to 50 corers in the case of hitech and export oriented sectors. Governmentis extendingvarious stepsto the SSI. In India, a unique instrumentcalledreservationin the senseof legalbanon productionby large units introduced in 1970swas for the protection and promotion of SSI. During Ninth Planperiod,SSIwasproducingabout8000itemsout of which 8 12 items (15%) were reservedfor protection in the small scalesector.In addition,the SSIhasbeensupportedandencouragedby variousgovernment policiesfor infrastructuresupport,technologyupgradation,preferentialaccess to credit, preferentialpolicy support, etc. Overthelastfive decadesthesmallscaleindustries(SSIS)haveemerged asa dynamicandvibrant sectorof theIndianeconomyby helpingto generate morenew employmentavenues,supplyingvariety of products,contributing to exportsfacilitatingequitabledistributionof income,emergingasoutsourcing designations. 138 The SSI sector has been able to achieve 1 to 2 percentagepoints highergrowth thanthegrowth achievedby thewholeindustriessector.There were 3.4 million small scale industrial units in India that account for more than40% of thegrossvalue of output in themanufacturingsectorandabout 35 % of total exports by the end of march 2002. The following aresomeof the specific contributions of SSls. l. The contribution of SSIsto the manufacturingsectorandGDP as a whole is signicant in termsof its sharein total value added. 2. SSIperformsa very significantrole in generatingemployment opportunitiesin a sustainablemanner. 3. SSI canplay a role in mitigating the problem of imbalancein the balanceof paymentaccountsthrough its export promotion. 4. While the large scaleindustriesareexpectedto increasesthe inequitiesof income andconcentrationof wealth, SSI is expected to help widespreadequaldistribution of income andwealth. 5. SSI may provide opportunitiesto a large number of capableand potential entrepreneurswho aredeprivedof appropriate opportunities. 6. It can help to releasescarcecapital towards productive use. 7. SSI canreapthe benefits of lean production and can find new costefficienttechniquesof leanproduction. 8. As smallunitscanuseresourcesmoreefficiently to thefull capacity without anywastage,they may havehigher allocativeefficiency. 9. As the element of risk is minimum in small scale sectors, more resourceswill be employedby large numberof labour force. 139 Problems of Small Scale Industries SSIsarefacing many problems.The following aresomeof their major problems. a) b) C) d) 6. The Tenth Plan announceda policy packageon the basisof the recommendationsmadeby S.P. Guptas StudyGroup. It includes policiesregarding a) enhancementof exciseduty exemptionlimit b) increase in loan limits c) credit facilities d) enhancement of investment limit Chapter 7 Exercise PART A I Choose the correct l. 2. 3. answer Theproductivecapacityof a nationis represented by theprogressof a.agriculture b. Infrastructure c. Export d. Industries A nationsreal strengthis reected in its a.agriculture b. Export c. Import d. Industrialdevelopment The processof industrializationis the essentialpre requisitefor a.Generatingemployment b. Inducinginvestment 4. The new industrialpolicy was announcedin a. 1980 b. 1984 c. 1991 d. 2001 5. Which of thefollowing is calledasanimportantagrobasedindustry a. Steel b. Cement c. Sugar d. Jute II Fill in the blanks 6. .......... .. is one of the oldest aswell asthe largestindustriesin India. 7. The main aim of the ........ ..was to acceleratethe growth of the economy throughrapid industrialization. 8. .......... . .meansthe order of the market or capitalist economy relying predominantlyon competitionandprivate sector. 9. .......... . .is dened astransferof ownershipfrom public to private sector. 10. .......... . .plays animportant role in the economicdevelopment. III Match the following l l. Disinvestmentprocess Traditionalindustries 12. Cottageindustries l 3. Delicensing 14. Small scaleunits Intermediategood l5. Cement Industrial policy of 1991. - Privatization Labourintensive 142 IV Write in one word or two l6. Give anexampleof a country that follows mixed economicsystem. l7. Give anexamplefor largescaleindustry. l 8. Is sugarindustry an agrobasedindustry? l9. ExpandLPG 20. What was the main aim of Second PART Five Year Plan? B Answer the following in four or five lines 2l . Dene industrialization. 22. Dene mixed economy. 23. Define 24. What is the usebasedclassificationof industry? 25. Dene Privatization. liberalization. PART C Answer the following questions in about a page 26. Explain the signicance of public sector. 27. Explain theposition of industrializationunderpre andpost independenceperiod. 28. List out theorganizationswhich provideindustrialfinance. 29. Write aboutthe disinvestmentof public enterprises. 143 30. Explain the integratedstrategiesdevisedby theEighth Planfor public sectorrestructuring. PART D 31. Explain variouslargescaleindustriesandtheir performance. 32. Examine 33. Explain therole andimportanceof small scaleindustries. 34. Discusselaborately theVariousaspects of newindustrialpolicyof l99l . 35. Explain environmentalhazardsandits causesandthe measures takenby the Governmentto overcomethem. the needs of industrial sector. 144 Chapter 8 Banking History of Banking The name bank is usually usedin the senseof commercial bank. The word bankseemsto haveoriginatedfrom theGermanicworld banck which meansajoint stockfund or heap.It is possiblethat the word hasalso beenderived from the Frenchword banqueandthe Italian word bcmco. The Italian word banco refersto a benchat which the money changersor mediaeval bankers used to change one kind of money into another and transacttheir bankingbusiness.Thus,the early bankingwas associatedwith thebusinessof moneychanging. Thefirst public bankinginstitutionwasThe Bank of Venice,founded in 1 157. The Bank of Barcelona and the bank of Genoa were established in 1401and 1407respectively.Thesearetherecognizedforerunnersof modern commercialbanks.Exchangebanking was developedafter the installation of the Bank of Amsterdam in 1609andBank of Hamburg in 1690. The credit for laying the foundationof modernbanking in England goesto theLombardsof Italy who hadmigratedto otherEuropeancountries and England. The bankers of Lombardy developed the money lending businessin England. The Bank of England was establishedin 1694.The developmentof j oint stockcommercialbanking startedfunctioningin 1833. Themodernbankingsystemactuallydevelopedonly in thenineteenthcentury. In India, the first modernbank Bank of Bengal was establishedin 1806in the Bengalpresidency. Development of banking habits Before the Industrial Revolution, the sizeof businessunits was very small.After someyears,therewas a greatincreasein the sizeof thebusiness units.Therefore,joint stockforms of businessorganisationswereestablished. Suchform of businessorganisationwidenedthecircleof investors,by enabling peoplewith smallmeansto becomeshareholdersof big industrialenterprises. 145 Still, somepeople did not want to undertakeany kind of risk by investing their money.Hence,an institution was createdto mobilize funds on terms acceptableby thepeople.Suchaninstitutionis called Bank,whosebusiness is to mobilize capital. And hence,banks are connecting link betweenthe people,who have surplusmoney andthe peoplewho arein needof money. In additionto this,banksundertaketherisk arisingout of thepossibledefault of the ultimate borrower. The early stagesof banksincludedthreetypesof institutions i) The merchantbanker,who was primarily a trader.He accepted customersmoney andkept it under safecustody. ii) Themoneylender,who lent his surplusmoneyto theneedypersons on deriving someinterestpayment. iii) The gold smith,who acceptedthevaluableslike gold anddiamond of thecustomersandkeptit underhis safecustody.It will beretumed to the customer on demand and interest will be collected for that. Modern banksretain all the characteristicsof abovethree types of institutions.Theadvancement of societyandeconomicthinking,specialization andextendedmarketresultingfrom Industrial revolution pavedthe way for developingmoderncommercialbankingsystem.Therole of banksextended from merely being institutions of depositsanddiscountsto custodiansof nationalfinanceandtrusteesof thesurplusbalancesof thepublic. Themodern banks have now become the lifeblood of our commercial and industrial activities. Denition of Banking On account of multifarious activities of modern banks, the Bank or Banking hasbeendefinedby severaleconomistsasfollows: Dr.L. HerberandL. Hart dene thebanker,as onewho in theordinary courseof businesshonourschequesdrawn upon him by personsfrom and for whom he receivesmoney on currentaccounts. 146 Chambers Twentieth century Dictionary defines a bank as an, institution for thekeeping,lendingandexchangingetc.of money. According to Crowther, The bankersbusinessis to take the debts of other peopleto offer his own in exchange,and therebycreatemoney. Prof. Kent defines a bank as, an organisation whose principal operationsareconcernedwith theaccumulationof thetemporarilyidle money of thegeneralpublic for thepurposeof advancingto othersfor expenditure. It is evident from the above definitions that a bank is an institution which acceptsdepositsfrom thepublic andin turn advancesloansby creating credit. Role of Banks in economic development Banksplay a very usefulandcrucial role in theeconomiclife of every nation. They have control over a large part of the supply of money in circulation, andthey caninfluencethe natureandcharacterof productionin any country.In order to study the economicsignificanceof banks,we have to review the generalandimportant functions of banks. 1. Removing the deficiency of capital formation In anyeconomy,economicdevelopmentis not possibleunlessthereis an adequatedegreeof capital accumulation(or) formation. Deficiency of capital formation is the result of low saving madeby the community. The seriouscapitaldeciency in developingeconomiesis reectedin smallamount of capital equipmentper worker and the limited knowledge, training and scientificadvance.At thisjuncture,banksplay a usefulrole. Banksstimulate saving andinvestmentto remove this deficiency.A soundbanking system mobilizes small savingsof the community and makesthem available for investmentin productiveenterprises. Theimportantimplicationsof thisactivity include 147 i) Banksmobilise depositsby offering attractiveratesof interestand thusconvert savingsinto activecapital.Otherwisethat amount would have remained idle. ii) Banksdistributethesesavingsthroughloansamongproductive enterpriseswhich arehelpful in nationbuilding. iii) It facilitatestheoptimumutilization of thenancial resourcesof the community. 2) Provision of finance and credit Banks are very important sourcesof finance and credit for industry and trade. It is observed that credit is the lubricant of all commerce and trade. Hence, banks become nerve centers of all trade activities and therefore commerceandtradecould function in thepresenceof soundbankingsystem. The banks cover foreign trade transactions also. Big banks also undertakeforeign exchangebusiness.They help in concluding deferred payments,arrangementsbetweenthe domesticindustrial undertakingsand foreign firms to enable the former import machinery and other essential equipment. 3) Extension of the size of the market Commercialbankershelp commerceandindustryin yet anotherway. With the soundbanking system,it is possiblefor commerceandindustry for extendingtheir field of operation.Commercialbanksact asanintermediary between buyers and the sellers. Goods are supplied on bank guarantees, making it viable for industry andcommerceto cultivate andlocatemarkets for their products. The risks are undertakenby the bank. When the risks have been set free by the banks, the industry can look forward to derive economiesof the large sizeof the market. 4) Act as an engine of balanced regional development Commercialbankshelp in properallocationof funds amongdifferent regionsof the economy.The banksoperateprimarily for profits. When the 148 banks lend their funds for more productive uses, their profits will be maximized. Introduction of branch banking makesit possible to choose betweendifferent regions.Aregion with growth potentialattractsmorebank funds. But in recentyears,the approachof bankstowardsregional growth hasbeenundergoinga change.Bankshelp createinfrastructureessentialfor economic development. Thus banks are engines of balanced regional developmentin thecountry. 5) Financing agriculture and allied activities The commercial bank helps the farmers in extending credit for agricultural development.Farmersrequire credit for variouspurposeslike making their produce, for the modernization and mechanization of their ag1iculture,for providing irrigation facilities andfor developingland. The banks also extend their financial assistance in the areas of animal husbanding,dairy farming, sheepbreeding,poultry farming andhorticulture. 6) For improving the standard of living of the people The standardof living of the peopleis estimatedon the basisof the consumptionpattern.Thebanksadvanceloansto consumersfor thepurchase of consumerdurablesand other immovable property, which will raise the standardof living of the people. Stimulating humancapital formation, facilitating monetarypolicy formulation anddevelopingentrepreneursaresomeof theotherrolesplayed by commercialbanksin the economiclife of everynation. Commercial Banks A commercial bank is an institution that operatesfor profit. The traditionalfunctionsof a commercialbankrelateto theacceptance of deposits from the public andprovision of credit to different sectorsof the economy. However,with theevolutionof modernbankingandgrowthof bankingsystem as an integral part of the national economy, there has been a perceptible changein the attitude and outlook of the commercial banks. Thesebanks 149 have started providing a host of banking services to their customers. Nevertheless, thebasiccharacterof commercialbankingremainsunchanged. In the early days,commercialbanksareorganizedasajoint stockcompany to earnprofit. They cater to the needsof shortterm, medium term credit andprovide capital to businessmenandindustrialists.In therecentdays,the bankslend long term fundsto businessmenandindustrialists. Functions of Commercial Banks The various functions performed by commercial banks can be classified as follows: 1. Accepting or attracting deposits Commercialbanksacceptdepositsby mobilizing the savingsof the people. Thesedepositscanbe of three forms. a) Savings deposits: It is a kind of safety vault for the people with idle cash.Thesedepositsarekept under savingsaccount.Deposits in this account earn interest at nominal rates and the banks are entitled to release depositson demandby the depositholder. In practice, the bank imposesa limit on the number and amount of withdrawals during a period. Cheque facilities arealsogiven to the depositholder. b) Demand deposits: Demand deposits are kept under current account.Thedepositorcanwithdraw themoneyon demand.But, theaccount holder shouldspecifythe amountandthenumberof withdrawals.Banksdo not pay anyintereston theseaccounts.On thecontrary,bankimposesservice chargeson maintainingtheseaccounts. c) Fixed deposits:Thesearealsoknown astime deposits.The amount depositedcannotbe withdrawn before the maturity period for which they have contracted.Thesedepositscarry interestat higher ratesvarying with the length of the contract. 150 2) Advancing of loans Banks adoptseveralways for granting loans and advances.These operationstakedifferent forms. a) Cashcredit: Thebanksanctionsloansto individualsor firms against somecollateral security.The loan money is credited in the accountof the borrower and he can withdraw the amount asand when it is required. The ceiling of theloan amountis determinedby thebankon thebasisof the stock value of the borrower which in turn becomesBankers possession.The borrower can withdraw the cashwithin or upto the credit limit. The bank chargesinterestfor the amountwithdrawn only. b) Provision of overdraft facilities The respectableandreliable customers enjoy thesefacilities. The customercanissuechequesandoverdrawthe moneyin times of need,even if there is no adequatebalance in his account. The customer will pay the interest to the bank for the amount overdrawn. c) Discounting bills of exchange This operationis donethrough discountingof commercial papers, promissorynotesandbills of exchange,usuallyfor threemonths.The banks afterdeductinginterestchargesandcollectionchargesfrom thefacevalueof the bills, give the balanceamountto the customer.When the exchangebill matures,the bankscollect the paymentfrom the party. 3) Creation of money or credit Every loan sanctionedby the banker createsa deposit. Because, when a bank sanctionsloan to a customer,an accountis openedin his name and the loan amount is credited into his account. The borrower withdraws moneywheneverthe amountis required.The creationof suchdepositsleads 151 to increasein the money stock of the economy and through its circulation creates new money. 4) Other functions Someof the other important functions performed by thesebanks are as follows: a) Transfer of funds In the complexity of trade and commercein the modern days, the transferof funds from oneplaceto anotherbecomesdifficult. Bankshelp in eliminating this difficulty through the useof variouscredit instrumentslike cheques,bank drafts andpay orders,traveller cheques,etc. This processis called clearing andit is efficiently doneby bank operations. b) Agency functions Commercialbanksareincreasinglyactingasfinancialagentsfor their clients.Theymakeall sortsof paymentsonbehalfof theirclientslike insurance premium,pensionclaims,dividendclaimsor capitaldemandsetc.Likewise, they buy andsell gold, silver andsecuritieson behalf of their clients. c) General utility services A commercialbank performsgeneralutility servicessuchas i) providing safetylockersfor the safercustodyof valuables of the customers. ii) Issuing of letter of credit to the customers. iii) Underwriting loansto be raisedby public bodies and corporations. iv) Compiling statisticsandinformation relatingto trade, commerceandindustry. 152 Thus,commercialbanksrendervaluableservicesto thecommunity. Developed banking systemensuresindustrial and economic progress.It constitutesthe lifeblood of an advancedeconomic society.In developing countrieslike India, commercialbankingmay be describedas development banking.It playsa critical developmentalrole in makingtheirfundsavailable to the priority sectors,weakersectionsandemploymentorientedschemes. Central Banks The banking system of a country can work systematically in coordinatedmanner,only if thereis an apexinstitution to direct the activities of the banks. Such apex institution is popularly known as central bank. The centralbank of the country is an autonomousinstitution, entrustedwith powers of control and supervision. It controls the monetary and banking system of the country. After World War II, the International Monetary conferenceheld at Brusselsin 1929recommendedthe settingup of a central bank in every country.The central bank of our country,known asReserve Bank of India was setup in 1935.The centralbank of England calledBank of England was establishedin l694. It is known asthe mother of central banks, sinceit providesthe fundamentalsof the art of centralbanking. The central bank of France called Bank of France was founded in l800. The USA establisheda centralbanking systemin the form of Federal Reserve Denition Banks in l9 l4. of a central bank A centralbankhasbeendefinedin termsof its functions.Thefollowing aresomeof thedefinitions given by economists. According to Smith, the primary definition of central banking is a banking system in which a single bank has either complete control or a residuarymonopoly of noteissue. H.A. Shaw defines a central bank, as a bank which controls credit. In the words of Hawtrey a centralbank is that which is the lenderof the last resort. 153 According to Samuelson,a central bank is a bank of bankers. Its duty is to control the monetarybaseand through control of highpowered moneyto control thecommunityssupplyof money. Distinction between central banks and commercial banks The centralbank is basically different from commercialbanksin the following respects. 1. Thecentralbankis theapexinstitutionof themonetaryandbanking systemof the country.Acommercial bank is only a constituent unit of the banking systemand a subordinateto the centralbank. 2. While the centralbank possessesthe monopoly of noteissue, commercialbanksdo not havethis right. 3. The centralbank is not a prot making institution. Its aim is to promotethegeneraleconomicpolicy of the government.But, the primary objective of commercialbanksis to earnprofit for their shareholders. 4. The centralbank maintainsthe foreign exchangereservesof the country.Thecommercialbanksonly dealin foreignexchangeunder the directions 5. of the central bank. The central bank is an organ of the governmentand actsasits banker and the financial advisor, whereas commercial banks act asadvisorsandbankersto the generalpublic only. Functions of Central bank The main functions of a central bank are common all over the world. But the scopeand content of policy objectives may vary from country to country andfrom period to period dependingon the economicsituationsof the respective country. Generally all the central banks aim at achieving economicstability along with a high growth rate and a favourableexternal 154 payment position through proper monetary management.The common functions of central banks are discussed below. 1. Regulator of currency The issueof papermoney is the most important function of a central bank. The central bank is the authority to issue currency for circulation, which is a legal tendermoney.The issuedepartmentof the centralbank has the responsibility to issue notes and coins to the commercial banks. The central bank regulatesthe credit and currency according to the economic situation of the country. In the methods of note issue, the central bank is required to keep a certain amountor a fixed proportion of gold andforeign securitiesagainstthetotalnotesissued.TheReserveBank of India is required to keep Rs.l 15crore in gold andRs.85crore in foreign securities,but there is no limit to the issue of notes. Having the monopoly of noteissue,centralbank gainsadvantagesas i) Ensuringuniformity of the notesissuedanda proper control over the supply of money canbe exercised. ii) Bring stabilityin themonetarysystemandcreatescondenceamong thepublic. iii) Governmentis ableto earnprofits from printing currencies. 2. Banker, Agent and Adviser to the Government The centralbank of the country actsasthe banker,fiscal agentand advisor to the government.As a banker,it keepsthe depositsof the central and stategovernmentsand makespaymentson behalf of governments.It buys and sellsforeign currencieson behalf of the government.It keepsthe stock of gold of the country. As a fiscal agent,the bank makesshortterm loans to the governmentfor a period not exceeding90 days.It floats loans and advancesto the State governments and local bodies. It managesthe entirepublic debton behalfof thegovernment.As an adviser,thebank gives 155 useful advice to the governments on important monetary and economic problemslike devaluation,foreign exchangepolicy andbudgetarypolicy. 3. Custodian of cash Reserves of commercial banks Commercial banksarerequired to keep a certain percentageof cash reserves with the central bank. On the basis of these reserves, the central bank transfersfunds from one bank to anotherto facilitate the clearing of cheques. 4. Custodian and Management of Foreign Exchange reserves The central bank keepsand managesthe foreign exchangereserves of thecountry.It fixes theexchangerateof thedomesticcurrencyin termsof foreign currencies.If thereareanyuctuations in theforeign exchangerates, it mayhaveto buy andsellforeigncurrenciesin orderto minimizetheinstability of exchangerates. 5. Lender of the last resort By giving accommodationin the form of rediscountsandcollateral advances to commercial banks, bill brokers and their financial institutions, the central bank acts as the lender of the last resort. The central bank lends to suchinstitutions in order to help them when they arefacedwith difficult situationsso asto savethe financial structureof the country from collapse. 6. Clearing Function The centralbank actsasa clearinghousefor otherbanksandmutual obligationsaresettledthroughtheclearingsystem.Sinceit holdscashreserves of commercial banks, it is easierfor the central bank to act as a clearing house. 7. Controller of credit The mostimportantfunction of thecentralbankis to control thecredit creation power of commercial banks in order to control inationary and 156 deationary pressureswithin theeconomy.For this purpose,thecentralbank adoptsQuantitativemethodsandQualitative(selective)methods.Quantitative methods aim at controlling the cost and quantity of credit by adopting i) bankratepolicy ii) openmarketoperationsiii) variationsin reserveratiosof commercial banks. Qualitative methods control the use and direction of credit. It involves i) regulation of margin requirementsii) regulation of consumer credit, iii) rationing of credit, iv) direct action by the central bank, and V) moral suasion Besidestheabovefunctions,thecentralbankperformsmanyadditional functions. It hasto study all problemsrelating to i) credit, ii) fluctuationsin priceleveliii) uctuationsin foreignexchangevalue.It hasto collectmonetary andfinancial statistics,conductresearchandprovide information. It hasto look after the mattersrelating to IMF andtheWorld Bank. All together,the centralbank is the financial andmonetaryguardianof the nation. Methods of credit control employed by the central bank Credit control is an important function of the central bank. Various methodsareemployedby the central bank to control the creation of credit by the commercial banks.The principal methodsareclassified under two headsviz. Quantitative methods and Qualitative methods. Quantitative credit control methodsareusedto expandor contractthe total volume of credit in thebanking system.For example,the centralbank of India believesthat the safelimit for bank credit is Rs.50, 000 crore. Suppose,at a particular time the actualbank credit is Rs.75,000 crore. ReserveBank of India may now use bank rate as a weapon to reduce the volume of credit by Rs.25,000 crore.As suchthe volume of bank credit is reducedin the country. On the otherhand,Qualitativecreditcontrolmethodsareusedto controlandregulate the flow of credit into particular industriesor businessesdependingon the economicpriorities setby the government.SupposeRBI estimatesthat the inationary pressurein India is dueto commercialbanksloanto speculators andhoarderswho havemanagedto control the supply of inationsensitive goods and thus have pushed up the price level. Now RBI may direct commercial banks not to lend to speculatorsand hoarders.It is concluded 157 from theaboveanalysisthatQuantitativecontrolsareindirect,while Qualitative controls are direct. Quantitative or General Credit control methods The important generalmethodsof credit control areasfollows: 1) Bank Rate (or) Discount Rate Policy The rate of interestof every centralbank is known as Bank Rate. It is otherwise known as discount rate . At this rate the central bank rediscounts bills of exchangeandgovernmentsecuritiesheld by the commercialbanks. When the cashreservesof thecommercialbankstendto fall below the legal minimum, thebanksmay obtainadditionalcashfrom thecentralbankeither by rediscountingbills with thecentralbank or by borrowing from thecentral bank againsteligible securities.The centralbankchargesinterestratefor this service.The central bank controls credit by making variations in the bank rate.A rise in the bank rate makesborrowing costly from the central bank. Socommercialbanksborrow lessandin turn theyraisetheir lendingratesto customers.This discouragesbusinessactivity. Therebythereis contraction of demand for goods and services and ultimately fall in the price level. Thereforebankrateis raisedto controlination. In theoppositecase,lowering the bank rate offsetsdeationary tendencies. 2) Open Market Operations Direct buying and selling of securities,bills, bondsof governmentas well asprivate financial institutionsby thecentralbank,on its own initiative, is called open market operations.In periods of inationary situation, the centralbank will sell in the moneymarketfirst classbills. Buyersof this bill say commercial banks make paymentsto the central bank. It reducesthe sizeof the cashreservesheld by thecommercialbank with the centralbank. Somebanksareforced to curtail lending. Thus,businessactivity basedon bank loans and which is responsiblefor boom conditions arecurtailed. In times of depression,the central bank will buy bills and securitiesfrom the commercialbanks.The centralbank will pay cashto the commercialbanks for suchpurchases.Hence,the cashreservesof the commercial banks are 158 increased.Thereby banksexpandtheir loansresulting in the expansionof investment,employment,productionandprices.Thuscentralbank through its open market operations inuences business activity and economic conditionsof the country. 3. Variable Reserve Ratio Every commercial bank is required by law to maintain a minimum percentageof its time anddemanddepositswith thecentralBank.The excess money remainswith the commercialbank over and abovetheseminimum reserves is known as the excess reserves. Commercial banks create credit only basedon theseexcessreserves.Central bank may bring changesin reserverequirements.Consequently,it will affectthe amountof reservesthat commercialbank must maintain asdepositswith the centralbank aswell as theamountsavailablefor lendingor investing.For instance,whenthecentral bank fixes the reserverequirement as 10percent,a commercial bank will haveto maintain a cashreserveof Rs.100for every depositof Rs.l00O and henceit canlend only upto Rs.900.To checkinflation the centralbank may raisethecashreserveratio from l0 percentto 15percent.This will force the commercialbanksto depositadditional 5 percentby reducingtheir amount available for lending. On the other hand, to check a deation the central bank may reducethe reserveratio from l0 percentto 7 percent. This will raisetheexcesscashwith thecommercialbanks;consequentlycreditwill be expanded. Qualitative or selective credit control Qualitativemethodsof credit control meantheregulationandcontrol of the supply of credit amongits possibleusers.The aim of suchmethodsis to channelisethe ow of bank credit from speculativeandotherundesirable purposesto socially desirable and economically useful uses.Important selectivecredit controls aregiven below. a) Margin Requirements The aim of this methodis to preventexcessiveuseof creditto purchase securitiesby speculators. Thecentralbankfixesminimummarginrequirements 159 on loansfor purchasingsecurities.Supposethecentralbankxes a 30percent asmargin requirements,then for Rs.1000 worth of security, commercial bank may keep Rs.300 asmargin and the remaining Rs.700 may be used for lending. If the central bank wants to curb speculativeactivities, it will raisethemarginrequirements.On theotherhand,if it wantsto expandcredit, it reducesthe marginrequirements. b) Regulation of consumer credit Underthis instrument,thecentralbankregulatestheuseof bankcredit by consumersin order to buy durable consumergoodsin instalments.To achievethis, it adoptstwo devicesi) Minimum down paymentii) Maximum periodsof repayment. c) Rationing of Credit Credit rationing is employedto control andregulatethe purposefor which credit is grantedby the commercialbanks.Credit rationing takestwo forms i) variableportfolio ceilings,whereincentralbank xes ceiling on the aggregateportfolios of the commercial bank. They cannot advanceloans beyondthis ceiling. ii) Variablecapital assetsratio wherein the centralbank fixes in relation to the capital of a commercialbank to its total assets. (1)Direct Action Direct action refers to directives of the central bank to enforce the commercial banks to follow a particular policy. The central bank gives directionto commercialbanksin respectof i) lendingpoliciesii) the purpose for which advancesmay be madeiii) themarginsto be maintainedin respect of secured loans. e) Moral suasion Moral suasionimplies persuasionand requestmadeby the central bank to the commercial banksto follow the generalmonetarypolicy in the context of the current economic situation. 160 f) Publicity The centralbankpublishesweekly or monthly or quarterlystatements of the assets and liabilities of the commercial banks for the information of the public. It also publishes statistical datarelating to money supply, prices, production,employment andof capital andmoney market etc. Nationalisation of Banks The Indian banking systempassedthrough a seriesof crises and henceits growth was very slow during the first half of the 20th century.But after Independence,the Indian banking systemrecordedrapid progress. This wasdueto plannedeconomicgrowth,increasein moneysupply,growth of banking habit, setting up of the State Bank of India and its associate banksin the 195Os,the control andguidanceby the ReserveBank of India andaboveall nationalizationof the 14commercialbanksin July 1969,and6 more banksin 1980by the Government. Priorto nationalization,it wasbelievedby someeconomiststhatIndian commercialbanking systemdid not play its role in theplanneddevelopment of thenation.Thebankingsystemwascontrolledby theleadingindustrialists andbusinessmagnates.They usedpublic fundsto build up privateindustrial empires. Small industrial and businessunits were consistently ignored. Agricultural credit was neverseriouslyconsidered.ThereforeGovernment of India took over 14 commercial banks in July 1969and 6 other banks in April 1980. Thecommercialbankingsectorin Indiahaswithin itsfold thefollowing banks. a) The State Bank of India b) The seven associated banks of State Bank of India. c) TwentynationalizedBanks. d) Indianjoint stockcommercialbanks 161 e) Foreignbanksfunctioning in India f) RegionalRural Banks. Performance of Nationalized Banks The most importantbenefit of nationalizationof commercialbanks wasthe achievementof homogeneityandstrengthaswell ascohesionin the banking structureof India, affording a better environment for effectively implementingbankingandmonetarypoliciesof thegovernment. The working of thecommercialbanksafternationalizationshowthat they have made a complete departurefrom the old conservativebanking practices and moving towards the objectives setforth in various fields of their operations.They havemadesignificant achievementsin the sphereof branchexpansion,depositmobilization, productionoriented financing, extensionof credit to neglectedsectorsandcreatingnew vistasin banking. Chapter 8 Exercise PART I Choose the correct l. The first bank in India A answer was established a. 1770 b. 1806 c. 1801 d. 1782 162 in Minimum reservesystemrelates a. Method of note issue b. Commercial bankskeep certain portion of their depositswith the RBI. c. Commercial banks shouldkeep certain portions of their deposits in cash d. Customersarecompelledto keepcertainminimum balancewith their deposits Separatethe bank whosemotive is not profitmaking a. Andhra bank b. Canara c. IOB bank d. RBI The 14commercialbankswere nationalizedin the year a. 1969 b. 195 l c. 1949 d. 1980 The primary functionsof the commercialbank is a. making loansand advances b. discountingbills of exchange c. acceptingdeposits d. participatingin the interbankborrowing 163 II Fill in the blanks 6. EXIM Bank provides credit for ............ .. trade. 7. RBI controls credit supply by changingbank rate or ............ .. 8. NABARD provides .... . .financeto medium andlong term basis. 9. The RBI was setup in April ........ .. 10. The amountof cashkept by commercial banks to meet the day to day transactionsis known as....... .. III Match the followings l 1. Monopoly of note issue commercialbanks 12. C R R Ofcial l 3. Bank rate Facility offeredto businessmen 14. Overdraft 3 l 5 percent of total deposits 15. Nationalisation Reserve IV Answer the following in one or two l6. minimum rate bank of India PART B Answer the following in four or five lines 21. What do you meanby a bank? 22. Write 23. What is CentralBank?Give example? 24. What is Open market operations? 25. What a note on commercial is moral banks. suasion? PART C Answer the following question in about a page 26. Explain therole of banksin economicdevelopment. 27. Distinguishbetweencentralbank andcommercialbank. 28. Give definitions of centralbank by variousmonetarytheorists. 29. Explain variousquantitativecredit control methodsof RBI. 30. Explain the different typesof loansand advancesmadeby the commercial banks. PART -D 31. Describe the functions of commercial 32. Examine the functions of central 165 bank. banks. Chapter 9 Foreign Trade Globalization The term Globalization meansthe integration of the economy of eachcountry with the world economy.The essenceof globalization is the increasingdegreeof opennessin respectof internationaltrade,international investment and international finance. In other words, globalization is the processof transformation of the world into a single integrated economic unit. In a global economy,all the barriers on the ow of tradein goodsand services and investment across the national frontiers are removed. According to Guy Brainbant, the processof globalisation not only includes opening up of world trade, development of advancedmeansof communication,internationalisation of financialmarkets,growingimportance of MN Cs,populationmigrationsandmore generallyincreasedmobility of persons,goods, capital, data and ideas but also infections, diseasesand pollution. The processof globalizationunderliefollowing trends. 1) Spreadof internationaltrade. 2) Increasingmigration of people. 3) Increasingow of money or meansof payments. 4) More capital ows. 5) Increasedflow of financecapital. 6) Emergenceof more andmore transnationalcompaniesandmulti nationalcompanies. 7) Increasingtradeof technologybetweendifferent countries. 166 8) Rapid spreadof print, electronicandcommunicationmedia. 9) Growth in tradeandproductionof servicesof all kinds including education. Liberalization India openedup the economy during early 1991following a major crisisthatled by a foreign exchangecrunchwith reserveswhich could hardly finance inputs for two weeksin India. The crisis hasdraggedthe economy closeto defaulting on loans. The credit rating of India hadgonedown and nonresident Indians (NRIS) had started withdrawing their deposits in foreign currencyandthe country was on the vergeof default with regard to the payments of short term credits incurred from foreign financial institutions. Hence,drasticpolicy measureswere introducedon the domesticand external sectorsto addressall theseissues.All thesepolicy measureswere partly prompted by the immediate needsand partly by the demandof the multilateralorganisationslike World Bank andInternationalMonetaryFund (IMF). The liberalisedpolicy regime rapidly pushedforward in favour of a more open and market oriented economy. Policy Measures of Liberalisation Maj or policy measures have been launched as a part of the liberalisation, privatisation and globalisation (LPG) programmes. The governmentannouncedthedevaluationof rupeeby about20% in July 199l , new industrialpolicy, new tradepolicy in I99 1,anda new export andimport policy were alsoannounced.Other measuresfollowed arescrappingof the industriallicensingregime,reductionin thenumberof areasreservedfor the public sector, amendmentof the Monopolies and the Restrictive Trade Practices Act, withdrawal of many governmental controls, start of the privatisationprogramme,sharpreductionin tariff rates,changeoverto market determinedexchangerates,manyfiscal andnancial sectorreforms.All these measureshavebeengroupedtogetherunder New EconomicPolicy (NEP). 167 Over the years there hasbeen a steadyliberalisation of the current accounttransactions,more and more sectorsopenedup for foreign direct investmentsandportfolio investmentsfacilitatingentryof foreigninvestorsin telecom,roads,ports, airports, insuranceand other major sectors. Liberalisation,privatisationandglobalisationin theform of increased integrationof India with the global economythrough tradeandinvestment since early nineties are some of the major reasonsfor the high level of economic growth in recent years.Despite this progress,unemployment, poverty,inequality andlow level of humandevelopmentstill remainsto be the most seriousdevelopmentchallengesto be reckonedwith. Foreign Investment Foreign investmentplays a very important role in the new economic policy (NEP) launchedin India to encounterthe economiccrisis of ninety. The main objective of NEP hasbeento achievea higher level of economic growth. The strategies that were adopted as the measures for the developmentof the economywere devaluation,restrictivemonetarytarget, minimizationof thephysicaldecit, tradeliberalization, privatizationof industrial sectorsandopeningof theeconomyfor foreign investmentandcompetition. Among themforeigninvestmentplaysa mostvital role.Theinflow of foreign investmentwas encouragedto bridge the investmentgapparticularly in the industrial sector. Foreign investment was supposedto bring technology, marketing enterprise,managerialtechniquesandnew possibilitiesof import promotion. For promoting foreign investmentin high priority industriesand advanced technology,it wasdecidedto provide approvalfor direct foreign investment upto 5 l % of foreign equity (earlier40% in suchindustries).This changewas expectedto make Indian policy on foreign investment more transparent. Such a framework would make it easyfor foreign companiesto invest in India. TheNEP 1991 canberegardedasminor revolutionasfar asdecisions concerning foreign investment and foreign technology agreementsare 168 concerned.The various changesin the foreign investment policy can be broadly classied into four categories. I) Choiceof Product: The number of productsin which foreign investmentis freely permittedhasbeensignicantly increased. 2) Choiceof Market: The foreign investorsarefree now to compete with the domesticproducersin the Indian market. 3) Choiceof OwnershipStructure:In mostcases,theforeign investor is free to own a majority sharein equity. 4) Simplication of Procedures:Foreign direct investment (FDI) ows throughthreedifferent routes. The first is with automaticapprovalby the ReserveBank of India. The secondroute for foreign direct investmentis from multinational companieson their Indian partnerswho want to investin anindustry outside these35 subsectorsor when an FDI holding or more than 51% is sought, permissionhasto be takenfrom the Secretariatof Industrialapprovals(SIA) or the Foreign InvestmentPromotion Board. (FIPB). The third route is investmentby nonresidentIndians. Transfer of Technology Technology is an important ingredient of the development mix. Developing countries are generally characterized by technological backwardness and a slow pace of technological progress. Transfer of technology from the developedto the developing countriesis a necessary measure to speed up the pace of the economic development and modernizationprocess.The new economicpolicy has sown a seedfor the freeow of technologytransferthroughliberalizationandglobalization. 169 Technology transfer hasbeentaking place on a large scalethrough licensingagreementsandj oint ventures.The methodsof technologytransfer are as follows. I . Training or Employmentof TechnicalExport 2. Contractsfor supply of machineryandequipmentand 3. Licensingagreements. The appropriatenessof the foreign technology to the physical, economicandsocialconditionsof the developingcountriesis an important aspectto be consideredin technologytransfer. Trade and Economic Development Evolution of Trade from barter system to money economy Trade is one of the key determinants of economic development. Developmentof tradecanimprove a countrysdevelopment.Tradeis simply theexchangeof commoditieswhich takesplaceatdifferentlevels.Theearliest form of tradewasprobablybarterin which onetype of goodwasexchanged for anothergood. In the beginning of humanexistence,needswere simple and every individual producedwhat he wanted. In courseof time, people settleddown in different occupations.When specializationemerged,trade cameinto existence.Initially direct exchangeof goodsfor goodsknown as bartersystemof tradeprevailed.For instance,in a bartereconomya person who hadplenty of food but no clothesexchangeda part of his food with the person who had plenty of clothes but no food. In this method of direct exchangeor barter,thereweremany difficulties andinconveniences. The main inconvenience of barter was the necessity for double coincidence of wants. For example, a person has a cow and he wants to exchangecow for rice. Another personwho hasrice doesnot want a cow but he wantsa horse.In this case,the transactioncannottakeplace,because thereis no doublecoincidenceof wants.The simpleprocessof bartermight haveworked well when transactionswere few andsimple.As the systemof exchangeprogressed,andwith the adventof industrialization,thedomestic 170 systemof productiongaveplaceto factory system.At thisjuncture, absence of doublecoincidenceof wantsposeda major problem in the transactionof goods.Further there were other difficulties of barter system,which hinder the tradepractices.Theseareproblems of storeof value, standardof value andmeasureof value.Becauseof theinconvenientsystemof exchangeunder barter system, man had to give up barter andhad to invent an intermediate commodity which makesthe buying and selling of goodsvery easy.This intermediatecommodity would haveto be familiar, easilyrecognizableand generally acceptableto all people, since it had to serve asthe medium of exchange.This medium of exchangewasknown asmoney. Money is oneof themostfundamentalof all mansinventions.In the whole of manssocial existence,money is the essentialinvention. Money acts a medium of exchange, a measureof value, a store of value and a standardof deferred payments. Thus barter economy has given place to money economy. With the introduction of money, the processof direct exchangeof goodsfor goodswas given up. Anew systemof exchangewas introduced. Under the new system,a personwho hasan article to exchange,sellsit for money and with the money he can purchasethe commodities he wants. The problem of expressingthe value of eacharticle in terms of all other is solvedandthe value was expressedin termsof a singlecommodity,money. Theproblem arisingfrom the absenceof doublecoincidenceof wantsis also solved. It is enoughif a personis ableto find a purchaserfor his goods.It is not necessarythat personshouldpossesswhat he requires. Money can be conveniently stored and a person can savea part of his income for future use. Thus money overcomes all the disadvantagesof barter system of exchange. Before the introduction of paper money, any commodity that was generally demanded was chosen by common consent as a medium of exchange.For example,peopleliving by seashorechoseshellsasmedium of exchange,in cold countriespeopleusedskinsof animalsandfur; in tropical countries, elephant tusks, plumage of birds and tiger teeth were used as medium of exchange. With the progress of civilization and economic development,metalslike gold, silver,andcoppercameto be usedasmoney. 171 It wasfound inconvenientaswell asdangerousto carry gold andsilver coins from place to place. In the l5th and 16th centuries,Europeanmerchants adoptedthepracticeof carryingproperreceiptsshowingtheir title to metallic money,which they hadkept with wellknown goldsmithsfor safecustody. In this way, papermoney was introduced asa substitutefor metallic money.Thenthe systemof monopolyof noteissueby thecentralbankof the respectivecountry was introduced.At presentlegal tendermoney consists mainly of currency notes or paper money issued by the central bank. Therefore, banking practices facilitate trade and development within the countryaswell asamongcountriesthroughemploymentof monetaryweapons like exchangerate. It would be right to saythat the presentday tradedimensionswould not havebeenpossiblewithout money. Need for International Trade The typeof tradewith which mostpeoplearefamiliar is retail trade,in which shopkeeperssell goods to individual consumersfor money. If it is done on a large scale it is called wholesale trade, in which factories or producerssellthegoodsto wholesalers,who in turn sell themto shopkeepers or retailers. The exchangeof goodsand servicesbetweendifferent regions within a country is referred to asinternal trade. Thus, international trade refers to the tradeor exchangeof goodsand servicesbetweentwo or more countries. No country can be completely self sufficient, and trade between countries is therefore essential to ensure a supply of a countrys needs. Moreover, it enablesthe people to enjoy those goods and serviceswhich they cannotproduce themselvesor which they canproduce at a relatively high cost. Thereis unequaldistribution of productiveresourcesby the natureon the surfaceof the earth. Countriesdiffer in respectof climatic conditions, availabilityof cultivableland,forests,mines,mineralproducts,labour,capital 172 technologyandentrepreneurialskills etc. Given their diversities,no country hasthe potential to produce all the commodities at the leastcost. Just asthere is division of labour in the caseof individuals, the countries alsoadoptthisprincipleattheinternationallevel. Eachoneof themspecializes in the production of only such commodities, which they can produce at comparatively lower cost than the others. They export suchproducts to othersandin return import thoseproductsin the production, of which they havecomparativecostdisadvantage. The existenceof costdifferencescreate price differential amongthevariouscountries. Theory of Comparative Advantage The theory of comparativeadvantagejust explains suchadvantages of free trade. David Ricardo (The Principles of Political Economy and Taxation l8 l7) shown that trade without barriers can be beneficial for two countriesif one is more efficient at producing goodsor servicesneededby the other.What mattersis not the absolutecostof production,but ratherthe ratio between how easily the two countries can produce different goods. Thus, according to the theory of comparative advantage, if countries specialize in producing what they are most eicient, then they can trade thesegoodsfor thoseproduced most eiciently by other country The conceptof comparativeadvantagecanbe illustratedwith at least two goods and two countries where each good could be produced with scarceresources in each country. Supposethe two goods are food and clothing,andthattheprice of food within country Ais 0.50unitsof clothing andthe price of clothing is 2 units of food. The price of food in country B is l.67 units of clothing andthe price of clothing is 0.60 units of food. Then we cansaythat country A hasa comparativeadvantagein producing food andcountry B hasa comparativeadvantagein producingclothing.It follows that in a trading relationshipthe country A shouldallocateat leastsomeof its scarceresourcesto producing food and country B should allocate at leastsomeof its scarceresourcesto producing clothing, becausethis is the 173 most efficient allocationof the scarceresourcesandallows theprice of food and clothing to be aslow aspossible. Hence, the theory argued that free trade will benefit all due to comparativeadvantage. Contribution of foreign trade to economic development Foreigntradehasworkedasan engineof growth in thepast.Recently theoutwardorientedgrowth strategyadoptedby theNewly Industrializing Economiesof Asia, hasenabledmany countriesto overcometheconstraints of small resourcepoor underdeveloped economies. Foreign trade contributesto economicdevelopmentin a numberof ways asfollows. i) It exploresmeansof procuring imports of capital goods,which initiatesthe developmentprocess. ii) It providesfor ow of technology,it allows an increasein factor productivity. iii) It generatespressurefor dynamic changethrough (i) competitive pressurefrom imports, (ii) pressureof competition for export markets, and (iii) a better allocation of resources. iv) Exportsallow fuller utilization of capacity,increasedexploitation of economiesof scale,separationof production patternsfrom domesticdemand,andincreasingfamiliarity with absorptionof new technologies.These,in turn,help increasetheprofitability of thedomesticbusinesswithout anycorrespondingincreasesin price. Foreign trade increasesworkers welfare. It doesso at least in four ways: (i) larger exportstranslateinto higher wages; 174 (ii) because workers are alsoconsumers,tradebrings themimmediategainsthroughcheaperimports; (iii) It enablesmost workers to becomemore productive asthe goodsthey produceincreasein value; (iv) tradeincreasestechnologytransfersfrom industrial nations to UDCs andthe transferredtechnologyis biasedin favour of skilled labour; vi) Increasedopennessto trade hasbeenstrongly associatedwith thereductionof poverty in most developingcountries. In thetwentyfirst century,we caneasilyidentify the conditionsthat arefavourablefor developingeconomiesto the conditionsto employ foreign tradeasa factor in economicgrowth. They areasfollows: i) Increasingspreadto globalizationtranslatesinto largermovement of goodsand servicesacrossthe nations. ii) Continuingreallocationof manufacturingactivitiesfrom industrial economiesto developingeconomiesoffers ampleopportunitiesto expandtradenot only in goods,but alsoin services,which are becomingincreasinglytradable. iii) Tradeis intertwinedwith anotherelementof globalization:thespread of internationalproductionnetworks. iv) Growth of tradeis firmly buttressedby internationalinstitutionsof long standing.TheWTO, built on thelegacyof theGATT, aimsto create a commercial environment more conducive to the multilateral exchangeof goodsand services. v) In recentyearstherehavebeensubstantialreductionsin tradepolicy andotherbarriersinhibitingdevelopingcountryparticipationin world trade. Lower barriers have contributed to a dramatic shift in the pattern of developing country tradeaway from dependenceon 175 commodity exportsto much greaterrelianceon manufacturesandservices. In addition,exportsto other developingcountrieshavebecomemuch more important. International Monetary Fund (IMF) A landmarkin thehistoryof world economiccooperationis thecreation of the International Monetary Fund (IMF). The decision to start IMF was takenat Brettonwoodsconferenceandit commencedits operationin March I947. According to the Articles of Agreement of IMF, the objectives of IMF are: 1) To promoteinternationalmonetarycooperation 2) To promotestability in foreign exchangerates; 3) To eliminateexchangecontrol 4) To establisha systemof multilateral tradeandpayments 5) To setright the disequilibria in thebalanceof payments. The following are the major functions of the IMF 1) 2) Functions as a short term credit institution. Providesmachineryfor the orderly adjustmentsof exchange rates. 3) Acts as a reservoir of the currencies of all the member countries from which aborrowernationcanborrow thecurrencyof other nations. 4) Functionsasa sortof lendinginstitution in foreign exchange.It grantsloansfor financingcurrenttransactions only andnotcapital transactions. 176 5) It alsoprovidesmachineryfor alteringsometimesthepar value of the currencyof a membercountry. 6) It alsoprovidesmachineryfor internationalconsultations. 7) Providestechnicalexpertsto membercountrieshaving BOP difculties andotherproblems. 8) Conductsresearchstudiesandpublishesthem in IMF Staff papers,Financeand developmentetc. The structure of IMF Thehighestauthorityof thefund is theBoardof Governors.It consists of Executive Board, a Managing Director, a council and staff with its headquarters in Washington, U.S.A. There are ad hoc and standing committees appointed by the Board of Governors and Executive Board. TheBoardof GovernorsandtheExecutiveBoardaredecisionmakingorgans of the fund. The decisionsarebinding on the fund andits members. Working of the Fund The capitalof theFund includedquotasof membercountries,amount received from the saleof gold and loans from member countries.When a country joins the fund it is assigneda quota that governs the size of its subscription,its voting power andits drawingrights.At thetime of formation of the fund eachmemberhasto pay 25% of its quotain gold. The remaining 75% was to be furnished in the countrys own currency. Fund borrowing The bulk of its financial resourcescomesfrom quota subscriptions, besides,sellinggold, borrowing from centralbanksor private institutionsof industrialized countries. 177 Fund lending The fund givesloansto membersto rectify thetemporarydisequilibria in BOP on current account. If a member has less currency with the Fund than its quotathe differenceis called reservetrench.It candraw up to 25% on its reservetrenchinterestfree but payablewithin a period of 3 to 5 years. A membercanfurtherdraw annuallyfrom thebalancequotain 4 instalments up to 100% of its quota from credit trenches Other credit facilities 1) Buffer stockFinancingFacility (BSFF) 2) ExtendedFund Facility (EFF) 3) SupplementaryFinancingFacility (SF) 4) StructuralAdjustmentFacility (SAF) 5) EnhancedStructuralAdjustmentFacility (ESAF) 6) CompensatoryandcontingencyFinancingFacility (CCFF) 7) SystematicTransformationFacility (STF) 8) EmergencystructuralAdjustmentLoans(ESAL) 9) Contingencycredit Line (CCL) IMF hasshownsufficientexibility to mould itself in keepingwith the changinginternationaleconomicconditions.The usefulnessandsuccessof the fund lies in its membership,which hasincreasedfrom 44 in 1947to l 82 in 2000. Trends in Foreign Trade Foreign trade of a country is gaining importance with the goal of achieving economic development and survival of the fittest with the 178 globalizationof themarket.Foreigntradebecomesmoreandmoreimportant for developing countries.Trendsin foreign trade will indicate a countrys development ratio. A proper analysis of a countrys foreign trade can be studiedthroughthefollowing components:1.Volumeof trade2. Composition of trade and 3. Direction Volume of trade. of trade It refers to size of international transactions. Large numbers of commodities are involved in international transactions. Volume of trade can be measuredby addingthe money value of all commodities andhenceit is also called value of trade.The trendsin the value of trade will identify the basic forces at operation in the economy.However, it is necessaryto find thechangesin the valueof tradein relationto i) shareof exportsandimports in GrossDomestic Productii) Shareof exportsandimports in world trade. The shareof exportsandimportsin GDP reflectsthenatureof tradestrategies adoptedin the country.The ratio of exportsto GDP meanssupplycapability of the economyin regardto exports.It canbe called an averagepropensity to export.Theratio of importsto GDP givestheaveragepropensityof imports. The shareof exports in the world trade indicates the importance of the country asa nation in the world economy.It reflects the market thrust areasto be realized in the midst of competitors in the world market. The changesin the valueof exportsmay be comparedto thechangesin the value of imports.Therelationshipbetweenthetwo variablesis known astheterms of trade (TT) i.e. the terms at which exports exchangefor imports. If the export Valuein terms of imports value showsan increase,the TT is said to be favourable. It implies that for a given value of exports,the country can import more.The unfavourableTT implies for a given value of imports, the country hasto export more. Volume of Indias foreign trade The volume of Indias trade hasbeenmultiplied. The trade to GDP 17 9 ratio has gone up from 13 percent in 1980 to 20 percent at present. The increasehasbeensharedboth by exports and imports. The trends of exports Indias total exports have increasedby more than 300 times during the last five decades, from Rs.606 crores in 1950-51 to over Rs.2, 91,582 crores in 2003-04. However the increase has not been uniform over the years. Before 1965-66, Indias exports were slow. The total exports was 6.8 percentof theNNP in 1950-51,fell to 3.9 percentin 1965-66indicating that growth in the exportssectorlaggedbehindthe growth in other sectorof the economy. Indias sharein the total world exports was 2.2 per cent in 1950-51,touched the low shareto 1.1 percent in 1965.After 1965-66,in orderto bring domesticpricesinto alignmentwith externalprices,theIndian rupeewas devalued.After devaluation,exportsslowly picked up. In 197273 a breakthrough changein exports occurred mainly due to substantial growth in the exportsof sugar,iron andsteel,fruits andvegetablesandfood products. A welcoming trend appearedin 1986-87dueto liberal import policy. Due to this, exportsincreasedat an annualaveragerateof more than25% in rupeeterms. The rising trend in exports turned down in 1996-97.Exports witnessed a sharp upward trend in 1999-2000. In the year 2000-2001, there was a 21% growth in exports.But a marked decline in world output, andtradeandslackeningof globaldemand,pushedthegrowthrateof exports downwards.Again exports recorded20.34% during 2002-03 mainly due to rise in international commodity prices, recovery of the domestic manufacturingsector,depreciationof therupeeandtheintroductionof various export promotion measures.The upward trend maintained itself in 200304. In short,Indias exportsduring the last threeand a half decadeshave shown a mixed trend whereasthe rate of growth asmeasuredin terms of past performance or in terms of its share of national income shows an appreciablerise.But it presentsapictureof poorperformancewhenmeasured in terms of the sharein world exports. 180 Composition of Trade and Direction of Trade Composition of trade means a study of the goods and services of importsandexportsof a country.In otherwords,it tellsaboutthecommodities of importsandthecommoditiesof exportsof a country.Thereforeit indicates the structureandlevel of economicdevelopmentof a country.Developing countriesexportraw materials,agriculturalproductsandintermediategoods; developed countries export finished goods, machines, equipments and technique. Direction of trademeansa studyof thecountriesto whom theexports aremadeand from whom the imports aremade. Composition of Imports of India Importsof India may be divided into threepartsnamelycapitalgoods, raw materialsandconsumergoods. Imports of capital goods Capital goodsinclude metals,machinesandequipments,appliances andtransportequipments,andmeansof communications.Thesegoodsare essentialfor industrial developmentof the country.Imports of thesegoods amounted to Rs.356 crore in 1960-61 which increased to Rs.26, 5 32 crore in 1997-98. Imports of raw materials and intermediate goods It includesthe imports of cotton,jute, fertilizer, chemicals,crudeoil etc.A numberof raw materialsandintermediategoodshaveto be imported during the processof economicdevelopment.If amountedto Rs.527crore in 1960-61 which increased to Rs.13, 966 crore in 1985-86. Petroleum productsincludecrudeoil, petrolandlubricatingoil. Importsof theseproducts haveeverbeenincreasing.In 1960-61,imports of theseproductsamounted to Rs.69 crore which increasedto Rs.30, 538 crore in 1997-98.Import of petroleum products constitutes about 23 percent of our total imports. Fertilizers are an important input for agriculture.Chemicalproductsarean 181 important input for industrial development.The import of theseproductsis continuouslyincreasingin India. In 1960-61import of theseitemsamounted to Rs.88 crore only which increasedto Rs.3755crore in 1997-98. Imports of consumer goods It includestheimport of food grains,electricalgoods,medicines,paper etc., India faced an acuteshortageof food grains till the end of Third Five Year Plan. As a result, India had to import food grains in large quantities. Import of food grainsin 1960-61was 3748thousandtonnes(Rs.181crore). In 1997-98 it was 1399 thousand tones. Now India has achieved self-reliance in food production. Direction or sources of imports of India Sourcesof importsof India haveundergoneseveralimportantchanges during theplanning period. Someimportant factsareasfollows: At the beginning of economic planning, we were importing from selectedcountriesonly. Now the picture haschanged.We import different goodsand servicesfrom different countriesof the world. At presentwe get our imports from almost all the countriesof the world. For the purchaseof machinesandequipments,we dependmainly on OECD (Organizationfor Economic Cooperation and Development) countries and East European countries.For the supplyof food grainsandpetroleumproducts,we depend on OPEC (Oil Producing andExporting Countries)countries.The OECD countries supply largest part of our imports. In 1997-98 out of the total imports of Rs.1,5 1,553 crore, the imports of Rs.75,593crore were made (49.9%) from thesecountries.Other important suppliersof our imports are USA, Belgium, Germany,JapanandBritain. Composition of exports of India Exports of India may be divided into two parts 1) Exports of traditionalitems andii) Exportsof non-traditionalitems. 182 Exports of traditional items It includes the exports of tea, coffee, jute, jute products, iron ore, species,animal skin, cotton,fish, sh products,mineral productsetc.At the beginningof theplanningera,their itemscontributedabout80 percentof out total exports.Gradually,the contribution of theseitems is declining andthat of non-traditionalitemsis increasing.At presentthecontributionof traditional items is about 18.8%in our total exports. Nontraditional items It includestheexportof sugar,engineeringgoods,chemicals,iron and steel electrical goods, leather products, gems and jewellery. There is a signicant changein thepatternof exportsof India duringrecentyears.India hasstartedto exportanumberof non-traditionalitemsto a numberof countries of theworld. Contributionof theseitemsis graduallyincreasingin totalexports of India and showsa declining trend during someyearsalso.Somefacts to illustratethechangesaregiven below: i) Agriculture andallied productswhich constituted20.4percentof total exports in 1996-97,decreasedto 18.8percentin 1999-2000.ii) Ores and minerals which constituted 3.5 percent of total exports in 1996-97, decreasedto 3 percent in 1999-2000. iii) Manufactured good which contributed 73.4 percent of total exports in 1996-97, increasedto 75.7 percent in 1999-2000.iv) Crude and petroleum products constituted 1.4 percent of total exports in 1996-97but decreasedto 1.0 percent in 19992000.V)With regardto otheritems of exportswhich constituted1.2percent in 1996-97increasedto 1.3percent in 1999-2000. Direction of exports of India During theplanningera,severalimportantchargeshavetakenplacein the destination of exports of India. At present, we deal with about 180 183 countriesincludingmanydevelopedcountries.Our majorexportsaredirected towardsthefollowing countries: 1. OECD countries(Belgium, FranceGermany,U.K. North America, Canada,USA, Australia andJapan).Our exportswhich constituted 53.5 percent of the total exports in 1990-91 increased to 55.7 percent in 1999-2000. OPEC countries (Iran, Iraq, Kuwait, SaudiArabia etc.). Our exportswhich constituted5.6 percentof the total exports in 199091 increasedto 10.0percent in 1999-2000. EasternEurope (GDR, Romania, Russiaetc.). Our exports which constituted 17.9 percent in 19909l decreasedto 3.1 percent in 1 999-2000. Other LDC s (Africa, Asia, Latin America). Our exports constitute 16.8 per cent in 1990-91, increasedto 28.2 percent in 1999-2000. To sum up, during the last ve decades,significant changeshave beenobservedin the volume, composition anddirection of Indias trade. Most of thesechangeshavebeenin consonancewith the development needsof the economy. Balance of Trade and Balance of Payment Meaning and definition of Balance of Payments Balanceof paymentsmeansa systematicrecordof all the economic transactionsof a countrywith therestof theworld during a given period,say oneyear.It throws light on the internationaleconomicposition of a country. Theinternationaleconomicperformanceof a countryis reectedin its balance of payments.Each country entersinto economic transactionswith other countries of the world. As a result of such transactions, it receives and makes paymentsto othercounties.Sobalanceof paymentsis a statementof accounts of thesereceiptsandpayments. 184 Benham defined Balance of payments as follows: Balance of Paymentsof a country is a recordof its monetarytransactionsover a period with the rest of the world In the words of Kindleberger, the balanceof paymentsof a country is a systematicrecordof all economictransactionsbetweenits residentsand residentsof foreign countries. Composition of Balance of Payments Balanceof paymentsis a statementor an account,which recordsall the foreign receiptsandpaymentsof a country.It recordsall the visible and invisible items.Visible itemsmeantheimports andexportsof commodities. Invisible items meanthe imports and exportsof servicesand other foreign transfers and transactions.BOPs is classified asbalanceof paymentson current accountand capital account.The BOPson current accountrecords the current position of the country in the transfer of goods, services and merchandise as well as invisible items such as donations, unilateral transfers etc. Balanceof paymentson capitalaccountshowsthecountrysnancial position in the international scenario,the extent of accumulatedforeign exchangereserves,foreign assetsand liabilities and the impact of current transactionson internationalfinancialpositions. Balance of Trade Balanceof tradeconfinesto tradein visible items only. Visible items are those,which arephysically exported and imported like merchandise, gold, silver and other commodities. The invisible items are the services mutually renderedby shipping,insuranceandbankingcompanies,payment of interest and dividend, tourist spendingand so on. The balanceof trade refersto thedifferencebetweenphysicalimports andexportsof visible items only for a given period, say,a year. During a given period, exports and imports may be exactly equal. Then, the balanceof trade is said to be balanced.If the value of exports is 185 in excessof thevalueof imports,thebalanceof tradeis saidto be favourable. If the value of imports is greaterthan the value of exports, the balanceof trade is said to be unfavourable. Accommodating and Autonomous Capital If a country hasa deficit in its current accountbalance,there will be alwaysoffsetting transactionson the capital accountto bring thebalanceof paymentsinto equilibrium. This may be possibleeitherthroughautonomous capitalflows or throughaccommodatingcapitalows. The Role of the General Agreement on Tariffs and Trade (GATT) TheGeneralAgreementonTariffsandTrade(GATT) wasamultilateral trade treaty betweencountriesto regulateinternational trade and tariffs in accordancewith specic rules,normsor codeof conduct.GATT was setup in 1948in Genevato follow theobjectivesof freetradein orderto encourage growth and developmentof all membercountries.There are ll7 member nationsin GATT. The principal purposeof GATT wasto ensurecompetition in commodity tradethrough the removal of or reduction in tradebarriers. GATT served as an important international forum for carrying on negotiationson tariffs.UnderGATT, membernationsmet atregularintervals to negotiateagreementsto reducequotas,tariffs and suchother restrictions on international trade. GATT became a permanent international trade institutionfor themultilateralexpansionof tradeuntil it wasreplacedby World TradeOrganisation(W.T.O) in 1995. Objectives of GATT 1) Expansionof internationaltrade; 2) Increaseof world production by ensuring full employment in the participatingnations. 3) Developmentandfull utilization of world resources;and 4) Revisingstandardof living of the world community asa whole. 186 The rules adoptedby GATT arebasedon the following fundamentalprinciples: l) Tradeshouldbe conductedin a nondiscriminatory way; 2) The useof quantitativerestrictionsshouldbe condemned;and 3) Disagreementsshouldbe resolvedthroughconsultations. Methods of achieving the objectives The GATT proposedto achievethe objectivesthrough the following methods: 1) Most favoured Nation clause The clause is also known as elimination of discrimination clause. This clauseis to be adoptedto avoid discrimination in international trade.The clauseimplies that eachcountry shallbe treatedasthemostfavourednation. Any particulartradeconcession offeredby a membercountry to her trading partnershouldalsobe availableto all the membersof the GATT at the same time. 2) Quantitative restrictions on Imports The GATT rulesprohibitedtheuseof import quotaxation. But three important exceptionswere allowed to this rule: a) Countries,which arefacing balanceof paymentsdifficulties, may use the deviceof input quotafixation. b) Developing countries may resort to quota fixation but only under procedureacceptedby the GATT. c) Quotasmay be appliedto agriculturalandfisheryproductsif domestic production is subjectto equally restrictivecontrols. 187 3) Tariff negotiations and Reduction of Tariff The GATT recognizedthat tariffs areoften an important obstacleto internationaltrade.Hence,theGATT would encouragenegotiationsfor tariff reductionto be conductedon a reciprocalandmutually advantageous basis, taking into considerationthevarying needsof individual contractingparties. The Uruguay Roundof talks 1993was most ambitiousandcomplex. Apart from the traditional tariff andnontariff measures,new areassuchas TraderelatedIntellectualpropertyRights(TRIPS),TradeRelatedInvestment Measures (TRIMS) and Trade in serviceswere taken up for discussion. Thereweredifferencesamongmemberscountriesin areassuchasagriculture, textiles,TRIPS andantidumping. The Uruguay Round hasenlarged the scopeof GATT to includeservicesandagriculture.The UruguayAgenda wanted to remove all trade barriers. World Trade Organization (WTO) Sevenroundsof negotiationsoccurredunderthe GATT andthe eight round known as Uruguay Round startedin 1989and concludedin l994 with the establishmentof the World Trade Organization (WTO) in l995 . The principles and agreementsof GATT were adoptedfor theWTO, along with new ones.Thereare 150membercountriesin WTO which wascharged with administeringandresolvingtradedisputesbetweenthemembers.Unlike theGATT, theWTO hasa substantialandeffectiveorganizationalstructure. PascalLamy is the DirectorGeneral of the WTO since 2005 for a term of four years. The WTO aims for a trading systemfree of any discrimination and with more freedom, that is, toward fewer trade barriers (tariffs and non- tariff barriers).It alsoaimsfor a trading systemwith greatercompetitionbut with more accommodationfor lessdevelopedcountries,giving them more time to adjust,greaterexibility, andmoreprivileges. Major Functions of WTO l. Administering WTO tradeagreements. 18 8 2. Forum for tradenegotiations. 3. Handling tradedisputes. 4. Monitoring nationaltradepolicies. 5. Technicalassistanceandtraining for developingcountries. 6. Cooperationwith otherinternationalorganizations. All membersof theWTO will meetoncein two yearsin theMinisterial Conference which can make decisions on all matters of the multilateral trade agreements. TheFourthMinisterialConferenceheld atDoha,Fifth atCancum (Mexico) and the Sixth at Hong Kong. The Seventhround to discussthe Doha DevelopmentAgendanegotiationswere suspendeddueto persisting disagreementsbetweendevelopedanddevelopingcountries. International Bank for Reconstruction and Development (IBRD) The InternationalBank for ReconstructionandDevelopment(IBRD) better known asWorld Bank was setup in 1944.SinceIMF was designed to providetemporaryassistance in correctingbalanceof paymentsdifficulties, aninstitutionwasneededto assistlongterminvestmentpurposes.ThusIBRD was establishedfor promoting long term investmentloanson concessional terms. Functions: l) To assist in the reconstruction and development in the member countriesby providing capital support. 2) To promoteprivateforeign investment. 3) To promotegrowth of internationaltradein the long run andimprove Balanceof Paymentsof membercountries. 4) To arrangefor loansthrough for small andlargeprojects. 189 Membership and Organization All the members of the IMF are members of IBRD. It had I 82 membersin 2000.Like IMF, IBRD hasa threetierstructurewith apresident, Executive Directors and Board of Governors. The Board of Governors is the supremebody. Every member country appointsone Governor and an alternateGovernorfor aperiodof 5 years.Thevoting powerof eachGovernor is related to the financial contribution of its Government. Capital Structure It was startedwith an authorizedcapital of $10 billion . In July 1992, it has risen to $184. l billion. Funding strategy The IBRD seeks to maintain unutilized access to funds in the markets in which it borrows. Its objective is to minimize the effective cost of those funds to its borrowers. It is to provide an appropriate degreeof maturity transformationbetweenits borrowing andlending.Maturity transformation refers to the Banks capacityto lend at longer maturities than it borrows. SpecialAction Programme (SAP) SpecialAction Programme(SAP) was startedin 1983to strengthen IBRDs ability to assistmembercountriesin adjustingto thecurrenteconomic environment. Structural Adjustment Facility (SAF) The StructuralAdjustmentFacility wasintroducedin 1985in orderto reducethebalanceof paymentsdecits of its memberswhile maintainingor regainingtheir economicgrowth. Conditions for lending l .An efficient regulatingmechanismfor ensuringtransparentpolicies anddepoliticisedenvironment. 190 2. Adequaterisk management. 3. Provisionfor longterm finance. 4. Increasein the shareof the private sectorin the countrys GDP. B.ank borrowing The IBRD is a corporateinstitution whosecapital is subscribedby its members.It nances its lending operationsprimarily from its own medium andlong term borrowing in the internationalcapital marketsandcurrency swap agreement(CSA). The Bank also borrows under the discount note programme.It hasenabledtwo new borrowing instruments.Central Bank Facility (CBF) borrowing inating ratenotesis meantto help IBRD to meet someof the objectivesof its funding strategy. Lending activities The Bank lendsmembercountriesin the following ways. l) 2) By marketingor participatingin loansout of its own funds. By making or participatingin direct loansout of fundsraisedin the market of a member. 3) By guaranteeingloansmadeby private investors. 4) The Bank alsoprovidesfacilities to membercountriesthroughSAF and SAP. The Bank is laying greateremphasison developinghumanresources suchaseducation,population,health,nutrition andenvironment. International Finance Corporation (IFC) The IFC was setup in July l956, asan affiliate of the World Bank. It wassetup with theobjectiveof assistingtheprivateenterprisesin developing 191 countriesby providing them risk capital.The IFC providesdebt andequity finance to projects sponsoredby the private sectordevelopingcountries. Though IFC is affiliated to World Bank, it is a separatelegal entity with a separatefund and functions. Members of IBRD are eligible for its membership. Objectives l) In associationwith private investors,to investin productiveprivate enterpriseswithout governmentguaranteeof repayment. 2) It servesasa clearinghouse,to bring togetherinvestmentopportunities, private capital andexperiencedmanagement. 3) To help in stimulatingproductiveinvestmentof private capitalboth at home and abroad. Industrial, agricultural, financial, and commercial and other private enterprisesareeligible for IFC financing. Their operationsareproductive and contribute to the development of the economy. It does not follow a policy of uniform interestratefor its investment.It is subjectto negotiation. International Development Association (IDA) IDA was set up in September l960, as a subsidiary of the World Bank.Theestablishment of IDA wasanotherstepin thedirectionof increasing internationalliquidity in theworld. TheIDA wassetup particularlyto provide financeto lessdevelopedcountrieson a soft loan basisie. on termsimposing lower servicingchargeon loansthanthe conventionalbank charges. Objectives 1)To promote economic development 2) To increaseproductivity 4) Furtheringthedevelopmentalobjectivesof theWorld Bank and supplementits activities. 5) To provide financeto the membercountriesto meettheir importantdevelopmentrequirements.IDA loanscan be utilized to financeboth foreign exchangeandlocal currency costs. The Multinational Investment Guarantee Agency (MIGA) MIGA is thenew affiliateof theWorld Bank family andwasestablished in 1988.It hasan authorizedcapital of $ l.08 billion. Objectives l) To encouragethe flow of direct foreign investmentinto developing member countries. 2) It providesinsurancecover to investorsagainstpolitical risks. 3) It insuresonly new investments. 4) Promotional and advising services are provided to increase the attractiveness of the investment climate. MIGAs guaranteeservesasa catalystfor multinational investments. Chapter 9 Exercise PARTA I Choose the correct l. Globalization answer means a. Integrationof the economywith world economy b. Increasingdegreeof opennessin respectof internationaltrade c. Processof transformationof the world in to a single economicunit. d. All the above. Technologytransferhasbeentaking placeon a large scalethrough a.licensingagreementsandjoint ventures b. choice of ownershipstructure c. simplification of procedures d. none The main inconvenienceof bartersystemwas a. transactionswere many andcomplex b. lack of double coincidence of wants c. The intermediatecommodity neednot be familiar d. prevalenceof domesticsystem The decision to start IMF a. Roundtable conference c. Bretton woods was taken at b. Geneva conference d. none IBRD was setup in a. 1983 b. l844 c. 1948 d. 1944 194 conference II Fill in the blanks 6. The goal of global economyis .......... .. 7. The SAPSnd their origin in the growth of ................. .. 8. ............... of man.. 9. .......... .. hasworked asan engine of growth in the past. .. is one of the most fundamental inventions 10. The highestauthority of the IMF is the ............. III .. Match the following 11. OPEC Countries a.Washington 12. IMF - b. Iran, Iraq, Kuwait 13. UruguayRound - c. Geneva 14. 182 members of IBRD 15. GATT d. 1993 - IV Answer e. Year 2000 in one or two words 16. Name four exportsof India. 17. Name the record of a countrys monetarytransactions. 18. When was SAP started? 19. Which is thecatalystfor multinationalinvestment? 20. What is SAF? 195 PART B V Answer the following in four or ve lines 21. What are the two classifications of NEP? 22. Name the threemethodsof technologytransfer. 23. What arethe functions of money? 24. What is balanceof payments? 25. What arethe componentsof foreign trade? PART C VI Answer the following questions in about a page 26. What arethe parametersof Globalization? 27. Describethe evolution of money. 28. What are the functions of IMF? 29. Differentiate the balanceof tradefrom balanceof payments. 30. What arethe objectives of GATT and what are its methodsof achieving them? PART D 3 l . Explain therole of Foreign Tradein the economicdevelopment. 32. Explain the componentsof Indias Foreign Trade. 33. What is IMF? Explain its functions? 34.What is IBRD? Explain its functioning. 196 Chapter 10 Human Resource Development Introduction In this chapter, we shall study about the concept of human resource development. We shall also study about educational development in India since 1951, and the concept of human capital. Human Resource Development The term Human Resource Development (HRD) is used with different meanings in different contexts. According to F.H. Harbison, human resources are the energies, skills, talent and knowledge of people which are, or which potentially can or should be applied to the production of goods or the rendering of useful services. In Human Resource Management, HRD is defined as organized learning activities arrangedwithin an organization in order to improve performance and / or personal growth for the purpose of improving the job, the individual and/or organization. According to this definition, HRD includes the areasof training and development, career development and organization development. But in this chapter, we are using HRD in a broad way to mean human capital development. The most important indicators of HRD can be generally classified into (1) those which measure a countrys stock of human capital, and (2) those which measure the additions to this stock. This is the rate of human capital formation over a specified period. The stock of human capital indicates the level of HRD in a country, Whereas the rate of human capital formation indicates its rate of improvement. 197 When we speak of human capital, what we mean is that an individual by investing in the following categories can improve his capabilities. They are (1) health facilities and services (2) on the ~ job training (including apprenticeship), (3) formal education, (4) study programmes for adults (e.g., Nonformal education) and extension programmesin agriculture and (5) migration of individuals and families in search ofjobs. In the past, economists believed that the rate of economic growth of nations could be increased only by increasing investment in physical capital. But since l960s they have realized that investment in human capital is as important as investment in physical capital. Of all the factors that increase human capital, education is considered very important. We have now a separatebranch known as economics of education. Its birth was announcedby Schultz in 1960 in his survey on Human Capital Theory. Though economists like Adam Smith and Marshall expressed opinions on the value of education, it is only since the last five decades, economists have started applying the tools of economics to study the economic importance of education. Sometimes, it is asked whether education is consumption or investment. We may note that it is no longer a major topic of controversy. It is generally agreedthat education is both consumption and investment. Nowadays, economists treat it mostly as investment. Harbison and Myers have given the following ashuman resource indicators. They are : 1. Number of teachers (first and second levels) per 10,000 population ; 2. Engineers and scientists per 10,000 population ; 3. Physicians and dentists per l0,000 population. 198 4. Pupils enrolled at first level (primary) education as a percentage of the estimated population aged five to fourteen inclusive ; 5. The adjusted school enrolment ratios for first and second levels 6. combined. Pupils enrolled at second level (secondary) education, as a percentage of the estimated population aged fifteen to nineteen 7. inclusive. . .. And Enrolment in third level (higher education) as a percentage of the age group twenty to twenty four. The first three indicators are used for measuring the stock of human resources and the last four are measures of additions to the stock. The following two indicators tell us about the orientation of higher education : l. The percentage of students enrolled in scientific and technical faculties in a recent year ; and 2. The percentage of students enrolled in the faculties humanities, fine arts and law in the same year. of Harbison and Myers constructed a simple composite index of HRD by taking the arithmetic total of (l) enrolment at second level of education as a percentage of the age group fifteen to nineteen, adjusted for length of schooling, and (2) enrolment at the third level of education as a percentage of the age group, multiplied by a weight of 5. (They have given more weightage to higher education than second level education). Based on the composite index of HRD, they classified countries into 1) underdeveloped, 2) partially developed, 3) semi advanced 199 and 4) advanced. HRD and Economic Development There is a close relationship between the indicators of HRD and indicators of economic development. The level of economic development can be studied by making use of the following indicators. Gross National Product (GNP) per capita in United States l. dollars ; percentage of the active population engaged in agricultural occupation ; public expenditures on education as a percentage of national income ; and the percentage of the total population in the age group five to fourteen inclusive. The findings of an important study by Harbison and Myers reveal l. There is a very high positive correlation between the composite index of HRD and G.N.P. per capita in U.S. dollars; there is a high negative correlation between the composite index and the percentage of the active population engaged in agriculture There are also high correlations between the adjusted second level enrolment ratio and GNP and percentage engaged in agriculture. Correlations between the first level enrolment ratio and GNP and percentage in agriculture are lower than the correlations 200 of either the composite index or the second level enrolment ratio with GNP and percentage in agriculture. This shows that an index based on higher levels of education correlates more significantly with measuresof economic development than one based on the lowest level of education. While evolving strategies for HRD, the government has to make some basic choices. l. It has to decide in formal education whether the emphasis should be on quantity or quality. In secondary and higher education, it has to decide whether priority should be given to science and technology or law, arts and humanities ; It has to decide in skill development whether the reliance should be placed on pre employment formal training or in-service training ; It has to decide whether incentives should be provided by manipulation of wages and salaries or should be left to market prices; and It has to consider needs the needs and desires of the individual and of the State. The choice between quantity and quality in educational development can take many forms. Some countries have to choose between education for all or high quality secondary and university education for a smaller number of potential leaders. There is also choice between educating fewer students with better qualified teachersand large numbers with unqualified teachers. In general, political and social pressures lead to emphasis on quantity whereas rapid economic growth requires high level manpower. And there should be proper balance in 201 the development of education in science and technology and law, arts and humanities in secondary and higher education. The theories of human resource development, in a general way, refer to educational planning. They can be divided into three categories (1) manpower approach (2) social demand approach and (3) rate of return approach. I. Manpower Approach: The manpower approach to educational planning assumes that manpower with different levels and types of education is essential to attain a certain target growth rate of GNP. Then, the target is divided into different sectoral contributions to GNP. In a given year, the GNP is divided into different sectors and manpower structure in each of the sectors is analysed. Then the needed manpower with different levels and types of education is estimated. Death, retirement and migration are taken into account to estimate the necessarymanpower. From the additional manpower requirements, enrolment figures are worked out. But the post manpower forecasts proved that the estimates are far away from actual requirements. Moreover, this approach to educational planning does not say anything about the method of financing education. 2. Social Demand Approach: Social demand approach for education can be studied by making use of the social rate of return analysis. 3. Rate of Return Approach: If we assume education as investment, then we may look at it as individual investment and social investment. Under conditions of perfect competition, individual investment would be undertaken if the internal rate was greater than the market rate of interest. But today education and health are largely in the public sector. The social investment criterion is that resources are to be allocated to levels of education and years of schooling so as to equalize the marginal social rate of return on educational investment (Mark Blaug). It may be noted that only pecuniary 202 (monetary) values are taken into account while calculating the social rate of return. But the economic case for state education is generally made on the ground that external or indirect benefits of education exceed the direct personal benefits to those who are educated. But nonpecuniary returns to education and externalities are usually left out in the estimates of social rate of return. This is a limitation of this approach. Educational Development in India since 1951 Mass education was never a priority during the British, period. The colonial rule transformed an intermediate literate society into a predominantly illiterate society. Ever since Independence, an educational explosion has taken place in India. As J.B.G. Tilak put it Today, the number of pupils in India outnumber the total population of England, France, Canada, and Norway taken together. Every sixth student in the world enrolled at the primary level, every seventh in the secondary level and every eighth in the tertiary level is an Indian. Before we launched our Five Year Plans, only about 1.2 percent of GNP was invested in education. But now the public investment increased to about 3.5 percent of GNP. Though the educational expansion in India is remarkable (see Table lO.l and 10.2 given at the end of the chapter), quantity, quality and equity have become an elusive triangle of the Indian education system. The greatest failure of the Indian educational system relates to the goal of universalisation of elementary education. At the secondary level, vocationalization has not yielded the desired results. Courses introduced in the vocational stream at the higher secondary level are of nominal nature and they do not really help the students get jobs. And it is only the upper and the middle classes who get the benefits of the education system. Even after thirty years of independence, in 203 l978 it was found that 70 percent of the seats is secondary schools and 80 per cent of the seats in higher education are taken up by the top 30 percent of income groups. There is no reason to believe that the position has changed for the better. There is mismatch between demand for and supply of manpower and growth in unemployment and fall in the quality of education. The Indian education system is marked by inequalities. There are differences in the rates of literacy between rural and urban population, between men and women, between backward and nonbackward castes, between states and between districts within a state. One of the basic problems of educational sector is under investment. The data relating to allocation of financial resources during the last fifty years confirms this point. Only during the First Five Year Plan, priority was given to mass education. Elementary education and adult education programmes received nearly three fifths of the resources allocated for education. There was decline in importance attached to them in subsequent plans. We should have achieved the goal of universalization of primary education by 1960, that is, within ten years from the commencement of the Constitution. But, we are nowhere near the goal even today. One of the secrets of the rapid economic development of Japan is the emphasis it laid on primary and vocational education and the allocation of huge financial resources to these sectors. Child labour is one of the important reasons for not achieving the goal of universlization of primary education. And majority of the children drop out from schools because of this. Educational progress in Tamil Nadu. Tamil Nadu is an educationally progressive state in India. In literacy, it is one of the three top states and it is next only to Kerala and Maharashtra. The progress of education in Tamil Nadu in terms 204 of literacy is given in Table 10.2. The literacy rates for both males and females are more than the national average. According to 2001 census, the overall literacy rate for Tamil Nadu was 73.47 as against the national average of 65.38 percent. Between l99l and 2001, the percentage of enrolment at the secondary level has increased from 13 percent to 59 percent. There was a steady increase in educational expenditure in Tamil Nadu from l96263 to 2000 2001. During the period, the expenditure on education increased from Rs.26 crores to Rs.4949 crores. This is a remarkable increase. The National Policy on Education (NPE) l986 of the Government of India gave first priority to Universal Primary Education (UPE). The UPE goal aimed at achievement of Education for All (EPA) covering only classes I and V. The main factors which influenced steady increase in enrolment of children in age group 6-11 years in Tamil Nadu are : (1) easy accessibility of schools ; (2) awareness among parents about the value of education ; 3) rising real per capita income ; (4) implementation of Chief Ministers Nutritious Noon Meal Scheme and 5) a number of inducements and concessions offered by the Government in the form of free supply of books, free bus passes and so on. Access to schools, in terms of distance, is a major factor that has made Tamil Nadu one of the three top states in literacy level. There is a primary school within a distance of one kilometre from habitations (99 percent of habitations), upper primary school within a distance of 3 kms (81 percent of habitations), secondary school within a distance of 5 kms (78 percent of habitations) and higher secondary school within a distance of 8 kms (76 percent of habitations). This is a remarkable achievement when compared with the all - India situation. 205 In recent years, there has been a decline in dropout rate. This has been made possible by many factors such as Chief Ministers Nutritious Noon Meal scheme, free health check ups, free education and other concessions like free bus passes, slates, books and uniforms. District Primary Education Programme (DPEP) : The DPEP has been introduced with the object of achieving the goal of universal primary education. It focuses on reducing gender disparities in education. Non-Formal Education and Adult Literacy : The measures taken by the Government of Tamil Nadu under adult education programme include : 1. Total Literacy campaign (TLC), 2. Post 3. Continuing Education Literacy campaign and All these measures come under Arivoli Iyakkam (Light of Knowledge movement). In this movement, an adult is defined as one in the age group 15-35. Non - Formal Education (NFE) and Adult Literacy In view of the high dropouts in the 6-14 age group, the government has introduced nonformal education for the benefit of working children, girls and those children who cannot attend full time schools owing to many socioeconomic conditions. Since1979, the Government of India has been running the NFE scheme with the help of state governments and voluntary agencies. 206 Secondary and Higher secondary Education : There has been quantitative expansion of schools, students and teachers at this level. Permanent buildings, additional teachers, more of science equipment, better laboratories and workshops and strengthening of the vocational stream are some of the immediate needs of the second level education. Tamil Nadu is a leading state in the implementation of vocational courses. And the government has more or less succeededin increasing the enrolment of students in 16- 18 age group by offering higher secondary education in schools instead of preuniversity course in the colleges. Arts and science colleges : The number of arts and science colleges increased from 57 in 1960 - 61 to 444 in 2004-05. Technical Education So far as technical education is concerned, self - financing colleges dominate the scene. More than 87 percent of the students study in selffinancing colleges. Though this goes against the equity principle, the selffinancing colleges grow in number. Only the non ~ poor manage to find places in these colleges. These colleges do not promote the goal of equal opportunities for all. Of late, selffinancing colleges are trying to make inroads into professional education (eg. Medical colleges) also. According to Weiner, the State has a very positive, very important role to play in the promotion of mass education, which cannot and should not be left to private sector alone. Early childhood care and education programme in India : It is an integrated approach to reduce malnutrition, and other related diseases among disadvantaged children, expectant and nursing mothers. The ICDS schemes focus on provision of services to improve nutrition and health requirement of children from the date 207 of conception till the age of six years. These services are rendered through child welfare centres known as anganwadis. They include supplementary nutrition, nonformal preschool education, health checkup, immunization and health education. Special Health Programme : The Government proposed to implement from l999 a special school health programme called Vazhvoli Thittam (which literally means light of life Scheme,referring to good health). Under the scheme, a field officer from the health department will visit schools once in a week and examine the children. If necessary he will take them to a Primary Health Centre for treatment. To make this scheme effective, teachers are also trained in the symptoms of the disease so that they can report to the medical officers visiting the school. They can also teach subjects on health education. Economics of Health Economics of Health is similar to economics of education in many respects. Health expenditures are also investment in people as educational expenditures. Quite often, expenditures on education and health arejoint expenditures made in the same person. Improved health lengthens life expectancy of a person and this in turn raises returns on investment in his education. Like education, health is consumption as well as investment. Health improves the quality as well as the quantity of labour. Health expenditures contribute to economic growth by reducing mortality and morbidity. There is a general consensus that health must be provided by the State according to need and not according to ability to pay. This is called Communism in health. Human Development Index Human development Index (HDI) is a holistic measure of living levels. The human development Report (1977) describeshuman development as follows : the process of widening peoples choices 208 and the level of well being they achieve are at the core of the notion of human development. But regardless of the level of development, the three essential choices for people are to lead a long and healthy life, to acquire knowledge and to have access to the resources needed for a decent standard of living. Human development does not end here. People want to have political, economic and social freedom, opportunities for being creative and productive and enjoy selfrespect and guaranteed human rights. It is true that income is very important for people. But it is only a means and human development is the end. The first Human Development Report was published in 1990 by UNDP under the guidance of MuhabubUlHaq, an eminent economist from Pakistan. Economic growth will contribute most to poverty reduction when it expands the employment, increases productivity and wages of poor people. And public resources must be directed to promoting human development. Only when economic growth is labour-using and employmentgenerating and when human skills and health improve rapidly, economic growth will promote economic development. The HDI ranks all countries on a scale of 0 (lowest human development) to I (highest human development) based on three goals of development : longevity as measured by life expectancy at birth, knowledge as measured by a weighted average of adult literacy (two - thirds) and mean years of schooling (one - third), and standard of living as measured by purchasing power Parity (PPP) of each countrys currency to reflect cost of living. Using thesethree measures of development, HDI ranks all countries into three groups. Low human development (00.0 to 0.499), medium human development (0.50 0.799), and high human development (0.80 to 1.0). According to HDR 2004, (based on HDI for 2002), India found place in Medium Human Development group. 209 One major advantage of HDI is that it tells that even countries with a low level of income can achieve better human development than countries with substantial incomes. The HDI points out that there are greater disparities in income than other indicators of development such as health and education measures. So by development, we mean broad human development, not just higher incomes. Some countries (oilrich countries), it is said experienced growth without development. Gender Related Development Index GDI adjusts the HDI to reflect the inequalities between men and women. The three measures used related to (1) female life expectancy, (2) female adult literacy and gross enrolment ratio and (3) female per capita income. Human poverty index (HPI) The I997 HDI introduced Human Poverty Index (HPI). It measures deprivation in longevity, knowledge and a decent living standard. If people are expected to die before the age of 40, if adult illiteracy rate is high, and if health services are poor, access to safe water is low and if the percentage of malnourished children under five is high, then human poverty index will be high and the country can be ranked as poor. Based on the lines of HDI, HDI for various states of India was constructed. The Planning Commission of India brought out National Human Development Report in 2001. It provides statewise as well as All India Human Development Indices. Some states like Tamil Nadu have also brought out Human Development Report. 210 woEm_m>_ aaszv E Eaaso .._e 28:8 :o_: .coo _m. _m .8m .o. £f$ as cus En ma 933% 2: 2:5 I 83 3 EI \.:..m:n.Z :8: .52 Em m. m _m. 211 S 9 3 m 8 D N w E ® »on Sa E £c: .25 =E .35 RS 5 o S. ._. _ $9 3.5 00 ow Ho> xoao scoemq cc o m xo i . E m _E R u w : 035. NA: .N 99 H8 wn SE .~ 33 co .82 . m w 29 .8 m Em mm Sam I :Ew._. 232 :3 Z qw 9 ..._. _ u_ _ .MH aoumo 30> monacw % Chapter 10 Exercise PARTA I. Choose the correct answer Human capitalcanbeincreased by investingin a) education b) health c)migration d) all Thebirthof economics of educationwasannounced by a)Marshall Education b) Karl Marx c) Schultz d) Keynes is a) consumption good b) investmentgood c) none d) both Thenumberof pupilsin Indiaoutnumber thetotalpopulationof a)England, b) France, c) CanadaandNorway, d) all thecountries puttogether A largepercentage ofpersons whoenjoyhigher education belong tothe a)higherincomegroups b) middleincomegroups c) lowerincomegroups d) all groups 213 II. Fill in the blanks The stock of human capital indicatesthe 6. of HRD in a country. Of all the factors that increasehumancapital, consideredvery important. Thereis closerelationshipbetweenHRD and is development The greatestfailure of the Indian educationsystemrelatesto the goal of universalisationof educaion I0. labour is one of the important reasonsfor not achievingthegoal of universalisationof primary education III.Match the following ll. Kerala a)reducinggenderdisparities l2. Tamil Nadu b) domination in technical education I3. DPEP c) Specialschoolhealthprogramme 14. Selfnancing colleges d) Educationallymostprogressivestate. I5. Vazhvoli Thittam e) Access to schools IV. Answer each one of the questions in a word or two l6. I7. 18. When was the birth of Human capital theory announced? Is the correlation higher or lower? between the first level enrolment ratio and GNP PART B Answer for each question should be about four or five lines 21. 22. 23. Chapter 11 Statistical Analysis and Measures of Central Tendency The word statisticsis derivedfrom theLatin word statusmeaning a political state.In thosedays,therefore,statisticswas simply the collection of numericaldataby thestateor kings.Now, statisticsis thescientificmethod of analysing quantitative information. It includes methodsof collection, classification, description and interpretation of data. It simply refers to numericaldescriptionof the quantitativeaspectsof a phenomenon. Denition of statistics Prof Horace Secrist defines statistics as follows. By statistics we meanaggregateof factsaffectedto a markedextentby multiplicity of causes numerically expressed,enumeratedor estimatedaccordingto reasonable standardsof accuracy,collectedin a systematicmannerfor a predetermined purposeandplacedin relation to eachother. According to Croxton and Cowden, Statistics may be defined asa scienceof collection,presentation,analysisandinterpretationof numerical data. Nature of data Statisticsrefersto dataor facts.It meansdatarelating to sex,religion, income, population, profit etc. The data may be broadly categorisedinto two as Qualitative and Quantitative data. Qualitative data Qualitativedataarecategoricaldata.They arenonnumericin nature andcannotbe measured.Examplesaresex,religion andplace of birth. Quantitative data Quantitative data are numerical in nature and can be measured. 216 Examplesareage,membersin the family, income andsavings. Raw Data Raw datarepresentnumbersandfactsin the original format in which data have been collected Examplefor raw data:Z The percentagemarks of 50 plus two studentsaregiven below Frequency Distribution FrequencyDistribution is a summarisedtable in which raw dataare arrangedinto classesandfrequencies.It is calledgroupeddata.The grouped datacanbe classifiedinto two. They arediscretedataandcontinuousdata. Discrete data Discrete data can take only certain specific Valuesthat are whole 217 numbers.Example: Number of classroomsin a school,numberof students in a class. Discrete Continuous numbers cannot take fractional values. data Continuousdatacantakeanynumericalvaluewithin a specic interval e.g. heightin centimetres;weight in kilograms;incomein rupees. Sources of Data Therearetwo basicsourcesof collectingthedata.They are(i) Primary source and (ii) Secondarysource.If the data are collected from primary source, it is called primary data. The data collected from the secondary sourcesare called the secondarydata. Primary data Datacollectedfor thefirst time for a specificpurposeis calledprimary data.They are original in character.They are collected by individuals or institutionsor governmentfor researchpurposeor policy decisions.Example: Datacollectedin apopulationcensusby theoffice of thecensuscommissioner. Secondary Data These data are not originally collected. They are obtained from publishedor unpublishedsources.Publishedsourcesarereportsandofficial publications like annualreportsof the bank, population census,Economic survey of India; unpublishedsourcesarethe Governmentrecords,studies madeby researchinstitutions.Examplefor the secondarydata:Censusdata usedby researchscholars. The censusdataareprimary to the office of the censuscommissioner who collected it and for othersit is a secondarydata. Classification of Data Classicationis theprocessof arrangingthecollecteddatainto classes andto subclassesaccordingto their common characteristics.Classification 218 is the grouping of related facts into classes.E.g. sorting of letters in post office Types of classication Therearefour typesof classification.They are (i) Geographicalclassication (ii) Chronologicalclassication (iii) Qualitative classication (iv) Quantitative classication (i) Geographical classication When data are classified on the basis of location or areas, it is called geographicalclassication Example: Classificationof productionof food grainsin differentstates in India. Production of food grains (in 000 tons) Tamil Andhra Nadu 4500 Pradesh 3600 (ii) Chronological classification Chronologicalclassication meansclassication on thebasisof time, like months,yearsetc. 219 Profits 2000 2004 I 2000 Example: Profits of a company from 2001 to 2005. Profits of a company from 2001 to 2005 (iii) Qualitative classication In Qualitative classification, data are classified on the basis of some attributesor quality suchassex,colour of hair, literacy andreligion. In this type of classification, the attribute under study cannotbe measured.It can only be found out whetherit is presentor absentin the units of study. Population Urban |__'_'L*"|f""'L'""| Male Female Male E.g. Peopleunder study canbe classified asfollows. 220 Female Quantitative classication Quantitativeclassicationrefersto theclassication of dataaccording to some characteristics, which can be measuredsuch as height, weight, income,profits etc. Example: The studentsof a school may be classified according to theweight asfollows Therearetwo typesof quantitativeclassificationof data.They are (i) Discretefrequencydistribution (ii) Continuousfrequencydistribution In this type of classification there are two elements(i) Variable (ii) frequency Variable Variablerefersto thecharacteristicthatVariesin magnitudeor quantity. E.g. weight of the students.A Variablemay be discreteor continuous. 221 Discrete variable A discretevariable can take only certain specific values that arewhole numbers(integers).E.g. Number of children in a family or Number of class rooms in a school. Continuous variable A Continuousvariablecantakeanynumericalvaluewithin a specic interval. Example: the averageweight of a particular classstudentis between 60 and 80 kgs. Frequency Frequency refers to the number of times each variable gets repeated. For examplethere are50 studentshaving weight of 60 kgs. Here 50 studentsis the frequency. Frequency distribution Frequencydistribution refers to dataclassified on the basisof some variable that canbe measuredsuchasprices,weight, height, wagesetc. The following are the two examples of discrete and continuous frequencydistribution Discrete frequency distribution Numberof children umberoffamilie 10 20 Continuous frequency distribution Weight(kgs) 40-50 50-60 Numberof students 50 200 30 60-70 300 20 70-80 100 12 80-90 30 90-100 20 Thefollowingtechnicaltermsareimportantwhenacontinuousfrequency distribution is formed (i) Class limits: Class limits are the lowest and highest values that can be included in a class.For example take the class40-50. The lowest value of the classis 40 andthe highestValueis 50. In this classtherecanbe no value lesser than 40 or more than 50. 40 is the lower class limit and 50 is theupperclasslimit. (ii) Classinterval: The differencebetweentheupperandlower limit of a classis known asclassinterval of that class.Examplein the class40-50 the class interval is 10 (i.e. 50 minus 40). (iii) Classfrequency: The numberof observationscorrespondingto a particular classis known asthe frequencyof that class Example: In the aboveexample,50 is the classfrequency.This meansthat 50 personsearn an income between Rs.1, 000 and Rs.2, 000. (iv) Class mid-point: Mid point of a classis formed out asfollows. Upper limit of the class+ lower limit of the class Midpoint of a class = 2 For example mid point of the class 1000- 2000, 1000 2000 The mid-point: »~»--~+2--=1500 223 Tabulation of Data A table is a systematicarrangementof statisticaldatain columnsand rows. Rows arehorizontal arrangementswhereasthe columns arevertical Ol1¬S. Difference (i) between classication and Tabulation Classificationis theprocessof grouping thedataon thebasisof some common characteristics. Tabulation is the process of placing the classified data in columns and rows. (ii) Classification is the first stepin tabulation.Tabulationprocessstarts only afterthe classificationis completed. (iii) Classificationis donefor thepurposeof tabulationwhereastabulation is donefor the purposeof analysisof data. Rules for tabulation The importantrulesfor tabulationaregiven below: (i) Number: Tablemustbe arrangedwith numberin orderto identify the table (ii) Title: Table must have a title. The title should be clear, brief and self- explanatory.It should convey the content andpurposeof the table. (iii) Stubs and Captions: Stubsare the row headingsand Captions are column headings.StubsandCaptionsshouldalsobe clear andbrief. (iv) Body of the table: The body of the table contains the numerical information. This is the most important part of the table and should containonly relevantinformation.Tableshouldnotbe overloadedwith details. 224 (V) Spacing: Proper spaceshould be provided in betweenvarious data presentedin the table. It helps for easyidentification of data.Proper spacinggives good appearancefor the table. (Vi) Total: Total must be given for eachcolumn androw. (vii) Head note: It is a brief explanation of the information given in the table. It is placedbelow the title in brackets (viii) Footnotes:If anyitem presentedin thetableneedsfurtherexplanation, it shouldbe given at the end of the table. (ix) Source: Source is an important requirement for the table. Source indicatestheplaceor personfrom whom the information is collected. It gives more authenticityfor the table. The following is a specimenof table Format of a table Table No. Title: Foot note (Head note) : Source: 225 Diagrams and Graphs One of the most attractive ways in which statistical results may be presentedis through diagramsandgraphs. Signicance of Diagrams and Graphs Diagramsandgraphsareextremelyusefulbecauseof thefollowing reasons: l. 2. They give a birds eye view of the entire data.Thereforethe information presentedis easilyunderstood. 3. They are attractiveto the eye They havea greatmemorisingeffect. 4. They facilitate comparisonof data. Difference between Diagrams and Graphs l. Diagrams are prepared in a plain paper whereasgraphs should be preparedin graph paper. A Graph representsmathematicalrelations betweentwo variables. But diagramsdo not representmathematicalrelationship.They help for comparisons. Diagrams aremore attractiveto the eye. Thereforethey are suitable for publicity and propaganda.They are not so useful for research analysiswhereasGraphsarevery much useful for researchanalysis. Types of Diagrams The followings aretheimportant typesof diagrams (i) (ii) Bar diagrams considered and width is not considered. There are different types of bar diagrams. They are (i) SimpleBar diagram (ii) Sub-dividedbar diagram (iii) Multiple bar diagram (a) Simple Bar Diagram A simple bar diagram is used to represent only one Variable. For example, the figures of sales,height, weight of students,production and population. In simple bar, the height of the bar representsthe magnitudeof the variable. Illustration 1: Simple Bar diagram EE@@ Noof 10001500 2000 2500 2400 students in Simple Bar Diagram 2200 coege 3000 2500- 2200 2000 2000 Pie Diagrams Pie diagram is usedto representthe componentsof a variable. For examplePie chart can show the householdexpenditure,which is divided underdifferentheadslike food,clothing,electricity,educationandrecreation. The pie chart is called so, becausethe entire graph looks like pie and the componentsresembleslice cut from pie. Steps to draw a pie chart 1. The different components of the variables are converted into percentage form to draw a pie diagram. These percentagesare convertedinto correspondingdegreeson the circle. 4. 5. Draw a circle of appropriate size with a compass.The size of the radius depends upon the available space and other factors of presentation. Measurethe points on the circle representingthe sizeof eachsector with the help of protractor. Arrange the sectorsaccordingto the size Different shadesandproperlabelsmustbe given to different sectors. Illustration 4 Pie E endi ture Chart percentage Food 60% Rent 1 2% Clothing 8% Fuel 8% Education 6% Miscellaneous 6% Pie Chart 6% 60% Miscellaneous Measures of Central Tendency One of the important objectives of statistical analysis is to get one singlevaluethat describesthecharacteristicsof the entiredata.Sucha value is called centralvalue or an average. Thus a central value or an averageis a single value that representsa group of values.That singlevalue (the average)explainsthe characteristics of theentiregroup.As the averagelies inbetWeenthelargestandthesmallest value of the series, it is called central value. Characteristics of a good average 1. It shouldbe rigidly definedsothat thereis no confusionregarding its meaning. It should be easyto understand It shouldbe simple to compute P°.\.°S Its denition It should must be in the form of a mathematical be based on all the items formula. of a series It shouldnot be influencedby a single item or a group of items It shouldbe capableof further algebraictreatment Itshould have sampling stability Central Tendency (Averages) MathematicalAverages Averagesof location i (Position) Arithmetic Mean Simple Weighted Median Mode Simple Arithmetic Mean or Arithmetic Mean It is the most common type and widely used measure of central tendency.Arithmetic meanof a seriesis equalto thetotal valueof thevarious itemsin a seriesdivided by thenumberof items.Arithmetic meanis denoted by f (X bar) X : Mean 2 X = Sumofthevariables (observations) n = number of observations 232 calculations 1. Raw Data or individual Illustration: observations 1 The marks of l0 studentsin a classaregiven below. CalculateArithmetic mean. Means: 40 45 60 65 60 50 45 30 50 55 Solution ;?':ZX 7! = 500/ Discrete l0 = 50 marks Series Stepsinvolved in the calculationof meanareasfollows Steps l. Multiply eachsizeof the item (x) by its frequency(f) (fx) 2. Addallthefx =Z 15; 3. DivideZ fx bythetotalfrequencyzf. Thiswillgive The formula is where =Arithmetic mean Illustration: 2 Calculatemeanfor the following data uiunnnmlminnum E Solution: Calculation of mean =940/ 180 )7 = 5.22 Continuous Series The following procedureis to be adoptedfor calculatingarithmetic mean in a continuous l. series Find out the mid point of eachgroup or class.The mid point is calculated as follows. lower limit +upper limit Midpoint ofaclass = 2 Mid point is denotedby m. 2. Multiply the mid point of eachclass(m) by the frequency(f) of that class mf 3. Add up all the products () 4. is divided by the total frequency Illustration: 3 The daily earnings(in rupees)of employeesworking on a daily basis in a firm are 90-110 110-130 130-150 150-170 170-190 90-210 210-230 Of -u----Calculatethe averagedaily earningsfor all employees. Solution The calculationof averagedaily earnings() for employees Dailyearnings umero employees 90-110 110-130 130-150 150-170 170-190 300 190-210 720 1400 210-230 The formula to calculateweightedarithmeticmeanis ;2'W=::_::L Where jfw =Weighted arithmetic mean wx = the product of items multiplied by its corresponding weight 2 w = sumof theWeights. Illustrations: 4 CalculateWeightedarithmeticmeanprice per ton of the coal purchased 4000 6000 7000 20 Solution Price per ton Tonnespurchased 1,50,000 2,40,000 2,45,000 2,00,000 Zwx=9,15,ooo X = 9,l5,00/ 150= Rs 6100 The Weightedarithmeticmeanshouldbe usedwhentheimportanceof all the items in the given datasetis not equal. Illustration: 5 Commenton the performanceof the studentsof the two universities given below usingsimple andweightedarithmeticaverage. Study ofpass st(1i0de)nts ofpass gtugents o 3 8 2 3 Solution Calculationof simple andweightedaverage Univetsity Chennai Courses S 4 83 3 3 438 Chennai: 432/ 6 = 72; Madurai: Arithmetic 432/ 6 = 72 mean is the same for both the universities. b) Weighted Arithmetic Mean: xw = Zwx / Zw Chennai University is better than Madurai University becausethe weighted meanfor Chennai(72.55) is greaterthan the weighted meanfor Madurai (70.60) Median Median is the value of the middle item, which divides the series into two equalpartswhen theseriesis arrangedin ascendingor descendingorder. The valuesof theitemson onesideof themedianwill be equalto or lessthan median and the values of the items on the other side will be equal to or greaterthanmedian. Eg: 2,3,5,5,5,l0,l5. In the above series, 5 is the median which divides the series into two equalhalves.The valuesleft of median arelessthan or equal to 5 whereas the valueson the right of medianaregreaterthan or equalto 5 asthe values are arrangedin an ascendingorder.Median is denotedby M. Calculation of Median (M) Individual series Steps 1. Arrange the data inascending or descending order 2.Apply theformula I N + 1 1/1I M=s1ze of T item Where of items N refers Illustration: to the number in a series. 6 The following arethe marks scoredby 7 students;find out the -EEEEEEEE Solution Arrange the datain ascendingorder El Median =size of item Size of = 4 item Size of 4 item = 40 Therefore, Median marks = 40 Even Numbers To find out the median from even numbered items, median is calculatedby the averageof the two middle Values. Illustration: 7 Find out themedianfrom the following data WE . . N + 1 . Med1an=s1ze of '*-3* item 8+1 Size of[ 2 J=4.5 item Size of 4.5 item = 4 item + 5 item / 2 60 +62 :61 Therefore Discrete Median marks : 61 series Steps 1. Arrange the data inascending or descending order 2. Find thecumulativefrequencies 3.Apply theformula Median = size of item Where N = Total frequency ize of shoes Frequency Cumulativefrequency 10 10 l8 28 22 40 25 65 20 85 5 Median = size of N + 1 ~ item 110 2 s"eof -5- =55hitem Size of 55 item Therefore Continuous Median = 6.5 size of shoe = 6.5 series Steps: 1. Find out the median byusing N/2where Where N= 2 f Totalfrequency 2. Find out the class in which median lies (median class) 9° Apply theformula Where L=Lower limit ofthe median class F: frequencyof Median class Cf: Cumulative frequencyof the classprecedingmedianclass C = Class interval Illustration: of median class. 9 CalculateMedian from thefollowing table: Solution Marks (X) T Frequency (f) Cumulative frequency (of) Median = (N/2) = (110/2) 2 55 M=L+_"l2_f£xc -E1-= 55,L=55,Cf=44,f= M = 40 + (55-44)/36) x 20 __40 + (11/36 x 20) = 40 + 220/36 = 40 + 6.1 Median = 46.1 Mode Mode is the common item of a series. Mode is the most fashionable or typical Valueof a distribution becauseit is repeatedthehighestnumberof times in the series.Mode is defined as the value of the Variable, which occurs mostfrequentlyin a distribution.Thusmodeis the sizeof that item which has the maximum frequency .A distribution may be unimodal or bimodal or multimodal. Unimodal : The distribution hasonly onemode Bimodal : The distribution has two modes Multimodal : The distribution has more than two modes Calculation of Mode: Mode canbe often found out by mere inspection in the caseof individual observations. 245 Illustration: 10 10personshavethe following income. Rs 1000, 850, 650, 780, 1000, 980, 1000, 850, 700, 900 Calculate Mode. Solution: Arrange the data 650, 700, 780, 850, 850, 900, 980, 1000, 1000, 1000 1000repeatsthree times. Therefore the mode salary is Rs 1000/Illustrution: 11 Calculate Mode. 450, 400, 380, 370, 400, 420, 450, 340 Solution: Arrange the data 340, 370, 380, 400, 400, 420, 450, 450 400 and 450 repeattwo times. Hence modes are 400 and 450. The distribution is Bimodal. Illustration: 12 For a distribution, arithmetic mean is 180 and median is 170.Ca1cu1ate Mode Solution: Mode =3Median 2Mean = (3 x170)(2x180) = 510 = 150 360 Mode =150. Chapter 11 Exercise The dataobtainedfrom publishedor unpublishedby someagency are called a. Primary data b. Secondarydata c. Statistics d. Information The processof arrangingthe datainto classesand subclasses accordingto the commoncharacteristics a. Tabulation b. Classication c.Distribution d.Arrangement The most preferreddiagram to representthe componentsof a Variable a. Line diagram b.Bar diagram c. Pie diagram II Fill d. Pictogram in the blanks 6. The data collected 7. ........... .. refers to the number of times eachVariablegets repeated. 8. The differencebetweenthe upper andlower limit of a classis known 9. as ..... for the first time is called ............. .. ........ ..isa systematicarrangementof statisticaldatain columns and rows. l0. .. ............ ..is the common item of a series. III Match the following 2 WX 11 Median XW= 2 W l 2. Central Mode Value 14. Average Observation 15. WeightedArithmetic - sizeof gN+1)h item Mean 2 IV Answer the following in a word or two 16. Which is animportant requirementfor a table? 17. Give the formula 1 8. What 19. What is the first stepin tabulation? 20. Which is the diagramthat describesonly oneVariable? for Mean is the formula X. for Median? PART B Answer the following in four or five lines 21 . Dene statistics. 22. What are the types of data? 23. Write a note on graphsand diagrams. 24. What arethe typesof classification? 25.Write anote on pie diagram. PART C Answer the following question in about a page 26. Distinguishbetweenclassication andtabulation. 28. Distinguishbetweengraphsanddiagrams. 29. Examine the characteristicsof a good average. 30. Calculatethe meanfor the following data. X12345678910 F 10 18 20 31 PART 3l . 25 20 15 10 5 D Representthe following datathrough a simplebar diagram. No. of students . in a college 32. 30 2001 2002 2003 2004 2005 2006 1000 1500 2000 2500 2400 2200 Constructa Pie diagramwith the given databelow: ItemsOf Food Rent Clothng Fuel EducationM1 Expenditure i Pereentege 60% 12% 'sc. 7 876' 6 80 0 0 % Chapter 12 Measures of Variability Measuresof centraltendency,discussedin theearlierchapter,measure only one aspectof a distribution namely the average.Being a single and crudeindicator,the averagemay not revealthe completepicture. Example 1: The averagemarks of two students(Anbu andArivu) in five subjectsmay be identical.But they may differ in many ways.Anbu has passedin all subjectswith an averageof 60 marks,whereasArivu too got an averageof 60 marksbut failed in one subjectandgot centumin another. H' t & hdarks scored 5 Thus,it is clearfrom the aboveillustrationthat averageis reliableonly whenthe setof datais homogeneous. Otherwise,the actualvaluewill deviate much from the averagevalue. The extentof suchdeviation is measuredby dispersionor measuresof variability. Thus, dispersionmeansthe tendencyof datavaluesto deviate from the meanvalues.It is an important measurein statisticalanalysis.It reects the reliability of the average.Knowledge of dispersionis useful to contain the dispersionandto improve the datavaluesin the future. Methods of Measuring Variabily Variability canbe measuredby different methods.The following are l . Range 2. Inter-quartileRangeor QuartileDeviation 3. Mean Deviation 4. Variance and Standard Deviation Range The simplestmeasureof variability is the rangeof the data.Rangeis the numericaldifferencebetweenthe largestandthe smallestvalue.Thus,in thepercentageof marksscoredby Arivu (in Example 1),the highestmark is 100percent and the lowest is 30 percent. For this data Range = L Where S L largestvalue; S- smallest value. = 100 30 Range = 70 Example 2 : Find out the rangefor the marks scoredby Anbu in five subjects. AnbussMarks: 68 65 55 Range = L - S L - S = 68 52 Range = 16 253 60 52 Mean Deviation (M.D.) The meandeviation is dened asthe averagedistancebetweenthe mean and eachpoint in the distribution. It is the arithmetic mean of the deviationsof eachpoint to the mean.Pointssmallerthanthe meanwill have negativesignsandthosewhich are largerthan the meanwill havepositive signs. To measurethe variation about the sample mean f (X bar), the distancefrom eachdatavalue ( i.e.X -) hasbeencomputedandthendivided by the total number of points (N). Thus, Zlx-XI Mean Deviation (M.D.) = n Where X = Actual data SC. = Mean 1X -ii = Deviations without plussign 2 = Sign of Summation( of the observations) n = numberof points (observations) Example 3: Calculatemeandeviation for the datagiven in the table. X 4 6 8 10 22 Togettheaverage, divide2| X -35]bythetotalnumber ofpoints which is 5 for the aboveexample.Hence, Mean Deviation (M.D.) = 2lx-xI n StandardDeviation (S.D.) Thevarianceandstandarddeviationarethemostwidely usedmeasures of variation.Varianceis themoststablemeasureof variabilityanditsderivative is standard deviation. Variance also resembles mean deviation where the negativesignsareremovedby taking mod values.Another way of removing negative sign is to squareeachof the deviations. For example we canuse Example 3 to calculatevarianceand standarddeviation. 255 2 (X55)= o2(x-x)2=20o Now to find theaverage,divide2(x-i) by totalnumberof points. Thus, Variance(62) = 2(x-E2 I1 Where X = Actual data X = Mean = Squared Deviations 2 = Sign of Summation( of the observations) n = numberof points (observations) 2(X 502 200 Variance((52)= =40 Standarddeviation canbe derived from variancesimply by taking its square root. 0' 2= Z(x-)7)? n 0' \/Z (X-X)2 I7 V200 G II 5 \/40 6.32 PercentileandQuartile Deviation (Q.D.) Supposethat you think that you haveperformedbetterin comparison with 40 studentsin a quiz contest.Oneway to measureyour performanceis to obtain the scoresanddemonstrateyour relative position amongall the 40 contestants. To measureyour positionin relationwith all theotherstudents, somemeasuresof positioncanbeused.Percentileis thewidely usedmeasure that locatesrelativepositions. Quartile deviation is the most commonly usedmeasureof position. It is alsoknown assemi-inter-quartile range.As the nameindicates,it is the quartile(Q1).Mediandiscussed in theearlierchapteris secondquartile(or P50)thatdividesthedistributionintotwo equalhalves.Quartiledividesthe distribution into four quarters.Hence,theprocedureto calculatethe quartile deviation is same as that of median. Q1 = First Quartile= 25 percentile P25) Q2= Second Quartile= 50percentile (P50) = Median Q5= ThirdQuartile= 75 percentile (P75) Quartile Deviation (Q.D.) 01: Where Q5 =Third quartile Q] = Firstquartile P75= 75percentile P25= 25percentile Example 4 : The following table provides the quiz scoresof forty studentsscoredagainstthemaximumtotalof 20marks.Calculatethe 10 percentile(P10), 25 percentile(P25)and5Opercentile(P50)quartile E 1 E E TheValueof 10thpercentile(P10)is naturallytheValuethatexceeds 10percentof all the dataValues.To computethesemeasures,we canarrange the datain ascending(increasing)order. Sfu/70e/7[5 ordered score Stu/7c/enls Ordered Score 2 3 22 3 23 4 To determinethe position of the tenth percentile we usethe following formula. P IIX 100 where the required percentile is P = 10 andthe total number of data points is n = 40. That is for the tenth percentile,the position is dened as4 asdetailed below. [1 X P 100 10 (or) 40 X = 4 100 Supposethe result is not a counting number,it shouldbe roundedup to thenext countingnumber.Thenthepercentileis the averageof thenumber Thus,the10thpercentile (P10) is anaverage of twodatapoints.25 percentile(P25) and50percentile (P50)canalsobecalculated in similar manner. 25 percentile (P25) P H X 100 25 (or) 40 X ' 10 100 50" percentile (P50) If you computethe medianvalue it will bethe same.Thus 50Percentile= Median= Q2 QuartileDeviation Quartile deviation or inter quartile rangecanbe estimatedjust like by range. QuartileDeviation " Todetermine thepositionof thethirdquartile(Q3)thesameformula, asin the caseof percentile,canbe usedwith minor changes. 8.. nX4 where the required quartile is Q = 3 and the total number of data points isn=40. 3 40XT=30 Thatisforthirdquartile(Q3)thepositionisdefinedas30asdetailed below. (30"value) + (31 value) Third Quartile (Q3)= 2 16+16 2 I! ll Todetermine thethirdquartile(Q3)thepositionisdefinedasdetailed below. 1 40x =10 4 FirstQuartile (Q) = (l0h value) + (l 1value) 2 lO+ll 2 H = 10.5 Notethatthevalueof PIOYandQ]aresame. Youcanalsocalculate thevalueof Q2andcompareit with the valueof P50. Index Numbers Meaning An index number is a statistical tool usedto measurechangesover time andto interpreteconomicgures. Index numbersarevaluesexpressed asa percentageof singlebasegures. Index numbersummariseschangesin a group of related variables. The consumerprice index (or cost of living index) is oneof thepopularindexes.It measurestherelativechangesin retail pricespaid by consumersover time. Economists for long have constructed price and quantity index numbers.Index numbershaveno distractingunits.They arestraightforward andthe computationis simple.For instance,cementproductionin the second year is referredto asjust 125,not 125million metric tonnes. Typesof Index Numbers Measuringchangesin economicvariableandtheir interpretationsneed lndex numbers are classified on the basis of the specic indicator whose changetheymeasure.Themeasurement maybeaboutanyoneof thefollowing three: Price - suchasthe market price of 1 metric ton of cement or 1 squaremetre of fabrics; Quantity - Suchasmillion metric tonnesof cementor million squaremetres of fabrics; Value such as the market Value of 1 metric ton of cement - or 1 squaremetre of fabrics; Accordingly, index numbersareclassifiedinto theremajor threetypes. 1. Price Index Numbers 2. Quantity lndex Numbers 3. Value Index Numbers All the abovethree (Price, Quantity andValue) are interrelated and the relationshipbetweenthem is simple. Quantitytimesprice equalsvalue. That is Price X Quantity =Value Uses of Index Numbers lndex number,beinga specializedindicator,hasmanypracticalutilities. The following aresometheir uses. l. lndex numbersareusefulto studythetrend of businessandeconomic Variable. 2. Economicandbusinesspolicy formulationswill beeasierwith thehelp of index numbers. 264 3. It canbe usedto measurethe purchasingpower of money or to know the real value of money. 4. Measurementof ination and cost of living are useful to know the changesin the standardof living of people. 5. As they measurethe trend of price, output, ination, trade andmany more variablesthey are consideredasbarometersof an economy. Methods of Constructing Index Numbers All themethodsof constructingindex numberscanbe classiedunder two main categories. 1.Unw eightedIndex Numbers 2. WeightedIndex Numbers Unweighted Index Numbers This is the simplestmethodof constructingindex numbers.Underthis method, the index number is expressedas a percentof aggregateprice of thecurrentyear(2 pt ) to theaggregate priceof thebaseyear(2 p0).Base year is usually the first year andthe current year is the year for which you would like to constructthe index. The index numberis calculatedsimply by dividingthecurrentyearptby thebaseyearpricepo. P:01 21% x 100 2130 Where 2pt_ aggregate price of the current year 2 p0- aggregateprice of thebaseyear The computationis simple asshownin tablebelow. ~ Commodities 2000 2005 To constructindex number for the year 2005 on the basisof the base year 2000 from the datagiven above,get the aggregateprices. __ Price (in rupees) Commodities 2000 2005 Baseyear( p0) ZR Pm= X 100 Currentyear(pt) 2130 WeightedIndex Numbers The quantity of rice consumedby peoplewill certainly be more than that of carrot. Index numbers constructed above does not account for such relative variation in quantities.When we constructindex numbersfor large number of commodities,the relative variation in their quantity needsto be accommodatedby assigningsuitableweights in suchway that theweights assignedshouldreect therelativesignificanceof variousitems. There arethree main methodsto calculateweighted index numbers. Theyarenamedaftertheeconomistswho haveconstructed themviz. Hermann Paasche,EtienneLaspeyresandIrving Fisher. 1. Paasche index 2. Laspeyresindex 3. Fishers Index The Paascheindex is computedas P P = zpt qt Zpoqt while the Laspeyresindex is computedas P L = Zpt Clo Zpoqo and the Fishers index is computedas P= F PP P 267 L P is the changein price level or index number. p0- thepricesin thebaseyear qo- quantitiesin thebaseyear pt - thepricesin the currentyear t qt - thequantitiesin the currentyeart In the Paascheindex, the currentyear quantitiesareusedasweights. In the Laspeyresindex, baseyear quantitiesareusedasweights. The third indexbyFisher,beingcalculated asthegeometric meanof PPandPLauses the averageof both the current and baseyearsasweight. Example 1 : Calculatethe threeweightedprice indicesviz. Paasche index, Laspeyresindex andFishersindex from the following data. 2000 2005 2000 1 5 2 The table gives the sameillustration asabove.The only difference is that the quantitiesof rice and carrot consumedareaddedfor the respective periods. The three formulae for the constructionof weighted index numbers Paasche index P P = Zpt qt Epoch ............... Laspeyres index Zpt (10 P L = Epoqo Fishers index PF = P1, PL To expressin termsof percentage, all final numbersshouldbemultiplied by hundred. (Q Poqo 2000 2005 2000 2000 P0 Pt qo qt H H1 U) > hi -B Laspeyresindex Fisher s index PF= x/ PPPL P = F 21%qt Epoch X 288 P = F 210 Zpt (10 zpoqo X 100 332 X 170 X 100 = \/1.3714 X 1.9529 X100 = xl2.6782 X100 = 16365 = X 100 163.65 Fisher s index is just the geometric meanof the first two methods. Hence,simply multiply the resultsof the first two methods(Paascheindex and Laspeyresindex ) andtake the squareroot to get Fishers index. _- «I 137.14 x 195.29 = 163.65 Time Series Meaning A time seriesis a sequenceof numerical data points at successive time. It is simply a sequenceof numbers collected at regular intervals over a period of time.Annual GDP,monthly whole saleprice level, weekly shareprices and daily temperatureare someof the examplesof time series data. Uses Time seriesanalysis are useful to examine how a given economic variable changesover time or how it changesin relation to other variables over a given time period. It is also usedto predict future eventsbasedon known pastmovementof a variable. Thus the two main usesof time series analysis:(1) identifying thenatureof the (economic)variablerepresentedby 271 the sequenceof observations,and(2) predicting(or forecasting)futurevalues of the time seriesvariable on the basisof the past. Time seriesanalysisidenties the natureanddescribesthepatternof a seriesof given dataor variable. Oncethe natureandpatternis examined,it canbe interpreted.The identified patterncanalsobe extrapolatedto predict future events. Componentsof Time Series The time series patterns can be described in terms of four basic components. 1.Trend component 2. Cyclical component 3. Seasonalcomponent 4. Irregular component Trendcomponentis a longtermmovementin atime series.It represents a generalsystematiclinear or nonlinear patternthat changesover time and doesnot repeat. Cyclical componentmay alsohavea similar nature(like that of trend) but it repeatsitself in systematicintervalsover time. Seasonalcomponentis that part of the movementwhich is assigned to the effect of the seasonson the year. Irregular component is suchvariation that cannot be predicted by anymethod.They arecausedby irregularchangesor erraticuctuations in a givenvariable. 272 Chapter 12 Exercise PARTA I Choose the correct answer 1. The averageis reliable only when the setof datais a. Discrete data b. homogeneous c. heterogeneous d. raw data Rangeis the numericaldifferencebetweenthe a. First and the Last value b. Medium value c. Largestandthe Smallestvalue d. Smallvalue The most stablemeasureof variability is a. Variance b. Mean c. Median d. Mode The most commonly usedmeasureof position is a. Percentiles b. Deciles c. Standarddeviation d. Quartiledeviation 5. The statisticaltool to measurechangesover time is a.Averages b. Index number c. Deviation d. Variance 273 II 6. Fill in the blanks ........ ..meansthe tendencyof the datavaluesto deviatefrom the mean values. 7. The simplestmeasureof variability is the ........ ..of the data. 8. Formula for Mean Deviation ............. 9. Standard Deviation .. can be derived from ........... .. l0. Quartile deviation is alsoknown as ............ .. III Match the following ll. Variance - 12.;(xx)2 n - Standard Deviation P P =ZPH01. Zpo+ qo l3. Quartile Deviation - PF=4/PPPL l4. FishersIndex - Q3 Q1 2 l5.Paasche Index - 2(X_i)2 r1 IV Answer the following in a word or two 16. What is the differencebetweenLarge and Small Value? l7. What can be derived from variance? l 8. Name the PopularIndex. l9. Which is the SpecializedIndicator? PART B Answer the following in four or five lines 21. What arethe methodsof measuringvariability? 22. What is mean deviation? 23. What is variance? 24. Name the three major types of Index Numbers. 25. What arethe threemain methodsto calculateweighted index number? PART C Answer the following questionsin abouta page 26. Explain the Mean Deviation. 27. What is meantby StandardDeviation? Explain. 28. What is QuartileDeviation?Explain. 29. What is Index Number? Explain the types. 30. What are the uses of Index Number? 3 1.Explain the methodsof constructingUnweightedIndex Number. PART D 32. Explainthemethodsof measuringvariability. 33. Find out P10, P25, Q2, Q3 for the following data. 275 1611 9 1010141811 7151913 18 12 713149 17 15 16 16 9131211171015 19131114 10 12 16 8121614 34. What is an index Number? Explain its kinds anduses. 35. Explain the methodsof constructingIndex Number. 36. Constructthe weighted Index Numbers in threemethods,for the following data. Quantity _ 2000 2005 276 2000 2005 Answers to Exercises Chapter 1 US3> .":*.".N.* HI CO Porutpal exports .°P°.\9" France Free Trade 10.W.W. Rostow 1. Germany Chapter 2 1.a 2.d 3.b 4.d 5.0 111 6.273 7. Fertility 8. T.R.Malthus 9.Levelof literacy 10. Second 1 1 . 1 871 12.famir1e 13.No.of deathsper 1000 14. 2000 15.Limit the sizeof the family Chapter 3 6.Two 7.Structural 8.employmentoriented 9.Sub-employment 111 l0.disguised unemployment 1 1. 1993 12.low productivity employment l3.April 1999 l4.EngineeIing 15.Rural works programme 16. Reducingpoverty 17. Rs.49.1% per capita 18.PopulationPressure 19.Quality education Chapter 4 I 1. b 2.b 4.d 5.b 6.Product method 7.deducted from 8. 1 99 3 -94 9.0ccupationa1 10.Doublecounting III 11.Foreign trade excluded 12. X M 13. NNP 14. 1993-1994 15. Personal taxes - Personal income 16. Per Capita Income Chapter 5 6.Central 7. Trade or Business 8. Mahalanobis 9. l 928 10. Socialism III 11.LaissezFaire Policy 12. Indian Five Year Plans 13.RapidIndustrialization 14. Garibi Hatao l5. Equity and socialJustice 16. J awaharlal Nehru l7.LaissezFairePolicy 18.The PlanningCommission 19. 2002-2007 20.Rajkrishna Chapter 6 l.a 2.c 3.d 4.a 5.b 6. Agriculture 7. Raw materials 8. Cropping Pattern 9. Agricultural holding 10.Agricultural Marketing 1l.Decline of Jointfamily system 12. Green Revolution 13. British Period 14. Agriculture 15.New agriculturalprice policy 16. Land Productivity Chapter 7 6. Textile Industry 7.II Plan 8.Liberalism 9.Privatisation 1Olndustrialisation III 11. Privatisation 12. Traditional Industries 13Industrial policy of 1991 14. Labour intensive 15.Intermediategood 16. India 17. Steelindustry 1 8.Yes l9.Liberalisation, Privatization, Globalization 20. Industrialization 283 Chapter 8 1.21 2.a 3.d 4.21 5.0 HI 6. Exports and Imports 7. C R R 8.Agriculture 9. 1 93 5 10.Liquid Cash 11.RBI 12.3 to15% oftotal deposits 13.0icia1 minimum rate 14.Faci1ityofferedto businessmen 15.Commercia1 banks Chapter 9 l.d 2.a 3.b 4.c 5.d Chapter 10 1.d 2.c 3.d 4.d 5.a 6.leVel 7.education 8. Economic 9. primary 10. child HI 11.Educationallymostprogressivestate 12. access to schools 13.reducinggenderdisparities 14. domination in technical education 15.specialschoolhealthprogramme 16. 1960 Chapter 11 I 1.0 2.d 3.b 4.b 5.0 II 6. Primary data 7. frequency 8.c1ass interval 9. Table 10.m0de HI ZWX 11. ZW 12. Central Value 13. 3 Median 2 Mean 14.ObserVati0n 15. size of N+1 item Chapter 12 1.b 2.c 3.a 4.d 5.b 6. Dispersion 7.Range 8. 2 X-X N 9. Variance 10.Serni-interquartilerange III 11. Z(x3x) I) 12' Standard Deviation 13. Q3Q1 14.PF: \/P P