Britishers transformed the country into a supplier of raw materials and a

consumer of finished goods & industrial products from Britian.

INDIAN ECONOMICS
Indian Economy on the eve of
Independence (Ch – 1)
Origin of British Rule:
 The foundation of British Empire was laid by the Battle of Plassey ,
fought in 1757.
 After the revolution of 1857, the rule was transferred from the East
India Company to the British Crown.
Basic Purpose of British rule/ Aim of Britishers :
 The main purpose of British rule in India was to use Indian economy
as a feeder economy for the development of the British economy.
Finally, after 200 years, India gained Independence on 15th August,
1947.
 Britishers took over raw materials and sold us their finished goods.
Features of the Indian economy before the arrival of the Britishers:
1) Prosperous Economy : India was self – reliant and prosperous
economy before the arrival of the Britishers.
2) Agrarian Economy: Agriculture was the main source of livelihood
and it engaged about 2/3rd of the total population.
3) Well – known Handicraft Industries : India was well known for its
handicraft industries in the fields of cotton and silk textiles, metal
and precious stone works, etc.
 Economists who have made certain attempts for National Income
are:
 Some Individual attempts to estimate National income & per capita
income was by Dada Bhai Naoroji; William Digby; VKRV Rao; RC
Desai and Findlay Shirras.
 The economists whose calculations was considered accurate for the
calculation of NY was Dr. VKRV Rao.
Exploitation of Indian Economy under British Rule:
The Indian economy under British rule is subjected to colonial
exploitation, by the British government.

Colonial Exploitation :
Agricultural Sector
Industrial Sector
Foreign Sector
Colonial Exploitation of Agricultural Sector :
Agriculture was exploited and stagnant due to the following reasons :
Main Reasons for Stagnation in Agricultural Sector :
o Land Settlement System
o Commercialization of Agriculture
o Low Level of Productivity
o Scarcity of Investment

1) Land Settlement System

 Under this System, profits accruing out of the agricultural sector went to
the zamindars in the form of ‘ lagan’.
  Zamindars were declared as the owners of the soil and they had to pay a
fixed amount to the government by way of land revenue and they were
free to extract as much as they wish from the tillers of the soil.
 On the other hand, Zamindars spent their revenue income on the luxury
of life.
 In return, tillers get only some food or crops given by zamindars from the
land.
2) Commercialization of Agriculture
 It means the production of crops for crops for sale in the market rather
than for self – Consumption.
 Indian markets are subsistence markets but Britishers finish this
subsistence system.
 Britishers forced farmers to produce cash crops (i.e. cotton, jute, indigo)
rather than food crops (i.e. wheat, pulses, etc.) which led farmers
ultimately into debt.
3) Low Level of Productivity
 Our land is less productive due to :
a) Low level of Technology
b) No irrigation facilities
c) No fertilizers/ insecticides/ pesticides
 Cultivator had neither meant nor any incentive to invest to invest in
agriculture.
 British rule spent little on agriculture, technical or mass education.
4) Scarcity of Investment
 India’s agriculture was facing a scarcity of investment in terracing, flood
control, and drainage.
 They neither had resources & technology nor had the incentive to invest
in agriculture

Colonial Exploitation on Industrial Sector : The most popular Industry is

handicraft industries but Britishers finished these industries by :
1) De – Industrialization :
  Britishers systematically destroy the handicraft industry in two folds.
 Take raw materials from India at cheaper rates and use them in
modern industries in Britian.
 Self – finished products of British Industries in Indian markets at
Higher prices.
 This two – fold policy led to the decline of Indian Industries.
2) Discriminatory Tariff Policy :
 The British Found Indians the best source of raw materials as well as
best markets for their industrial products.
 As a result, a discriminatory tariff policy was pursued
 It includes :
a) Tariff – free export of raw material from India; and
b) Tariff – free import of British Industrial products into India.
 As a consequence :
a) British products started gaining Indian markets and Indian
handicrafts products started closing their domestic as well as
foreign market.
b) The decay of handicrafts was the result.
3) Competition from Machine – made goods :
 The competition forced Indian craftsmen to shut down their
Enterprises
a) As the Machine – made products from Britian were low – cost
products and gave stiff competition to Indian handicrafts
products.
b) Also, machine – made products compete with Indian handicraft
products in precision and Quality.
4) Low Contribution to Gross Domestic Product (GDP) :
 Since industries have perished, there is no Production of goods and
services.
 So the growth rate of the new industrial sector and its contribution to
the GDP remained very small.
5) Adverse effects of decline of Handicraft industry :
 High level of Unemployment :
  The decline of Indian handicrafts results in unemployment
which forces artisans to take up agriculture.
 Import of Finished goods :
 Indian goods can’t compete with the foreign competition of
Machine - made cheap goods which encouraged import from
Britian.
6) Lack of Capital goods Industries :
 The capital goods industry refers to those industries which can
produce machine tools, which are, in turn, used for producing articles
for current consumption.
7) Limited role of the public sector :
 The Public sector did nothing for the industrial sector.
 The Public sector remained confined only to railways,
communication, power, ports, etc.

Adverse Effects of Partition

1) Shortage of Raw Material :
 Partition created the serious problem of shortage of raw
material for the jute mills of Kolkata and Textile Mills of
Mumbai and Ahmedabad.
 The whole fertile land under jute production went to East
Pakistan (now Bangladesh).

2) Food Problem :
 West Punjab and Sindh are the food granaries of India, as a result,
these areas went to Pakistan.
 India had to face the problem of the food crisis.
3) Loss of Market :
 Partition had reduced the size of market which was a severe blow to
Indian Industries.

India’s Foreign Trade during British Rule

The state of India’s Foreign Trade during British Rule is discussed as
under :
State of India’s Foreign Trade during British Rule:
 Exporter of Primary Products & Importer of Finished Goods.
 Monopoly Control of British Rule.
 The drain of Indian Wealth during British Rule.
1) Net Exporter of primary products and Importer of finished
goods:
 Because of the colonial exploitation of the Indian economy, India
became a net exporter of primary raw materials of silk, cotton, wool,
Sugar, indigo, etc.
 On the other hand, it became a net importer of finished goods,
produced by British industries which includes capital goods, woolen
clothes, silk, etc.
2) Monopoly control of India’s foreign trade :
 During British rule, the import and export of the country came under
the monopoly control of the British government.
 More than 50% of India’s foreign trade was restricted to Britain while
the rest was allowed with countries like China.
 The opening of the Suez Canal in 1869 served as a direct route for
ships between India & Britain.
3) The Drain of Indian wealth during British rule :
 India became an exporter of raw materials and an importer of
finished goods.
 Revenue earned from raw materials was used :
a) To meet expenses on the war fought by the government.
b) To import invisible items/ services like banking.
c) To make payments incurred by offices set up in Britain
 Hence, the wealth has degraded/ drained to a large extent during
British Rule.

Occupational Structure
It refers to the distribution of the working population across primary, secondary,
and tertiary sectors of the economy :

1) Agriculture – The Principle Source of Occupation

 During the colonial period about 75% of the working population was
engaged in agriculture.
 On the other hand, only 5 % of the working population belonged to
the manufacturing and service sectors.
2) Regional Variation
 States like Tamil Nadu, Kerela, and Karnataka faced a decline in the
workforce of the agriculture sector whereas an increase in the
manufacturing & service sectors.
 On the other hand, states such as Orissa , and Rajasthan faced an
Increase in the share of the workforce in agriculture.
3) Unbalanced Growth
 Growth is said to be balanced when all sectors of the economy are
equally developed.
 However, in the case of India, secondary and tertiary sectors were in
their infant stage of growth.
Hence the conclusion that the Indian economy at the time of
independence was lopsided and backward.

4) Industry – An insignificant Source of Occupation

 On the eve of independence, barely 9.0% of the working population
in India was engaged in manufacturing industries, mining, etc.
 Against it, 3% in the USA, 42% in England, and 39% in Japan are
engaged in these activities. In further proves how backward the
Indian economy was at the time of Independence.

Infrastructure
Railways :
 The most important contribution of British rule was to introduce railways in
India in 1850.
 Railways enabled people to undertake long – distance travel.
  Railways also promote foreign trade but it benefited Britishers more than
Indians.

Air & Water Transport :

 The British government took measures for developing water & air
transport, however, this as far from satisfactory.
 The Inland waterways proved uneconomical because :
a. Severe competition from foreign shipping companies
b. Lack of support from the British rulers in India.
Roads :
 Roads were developed by Britishers to facilitate trade by roadways.
 Roads were built for mobilizing the army and shifting raw materials.
Communication :
 Posts and telegraphs were the most popular means of communication.
 The introduction of an inexpensive system of the electric telegraph in India
served the purpose of maintaining law and order.

Reasons for Infrastructural Development

Roads Railways
  Roads were developed to  It was developed due to following
facilitate the transportation of reasons :
raw material and finished goods a) To transport finished goods
from different parts of the from Britain to the interior of
country to the ports colonial India. The main aim as
to widen the size of the
 On the other hand, roads were market for British products in
built for mobilizing the army for India.
drawing out the raw material. b) To have effective control &
administration over vast
Indian Territory.
c) To earn profits through foreign
trade by linking railways with
major ports.
d) To make a profitable
investment of British funds in
India.

The system of Electric Telegraph was introduced at a high cost to serve

the purpose of maintaining law and order.

Positive Contribution of British Rule on the Indian Economy

1) Self – sufficiency in food grains production :
 Forced commercialization in Indian agriculture under British rule led
to gradual changes in the Outlook of farmers.
 The farmer started considering the market price of the product at an
important determinant of these production decisions
2) Infrastructural Development :
  The Development of railways and roadways opened up new
opportunities for economic and social growth.
 It helped in the transportation of food to drought – hit areas and
promoted cultural affinity among people.
3) Check on famines :
 Roads and railways worked as a great check on the occurrence and
impact of natural calamities as food supplies could be transported to
the affected areas in case of droughts.
4) Shift to Monetary Exchanges :
 British rule helped the Indian economy to shift from a barter system
of exchange to a monetary system of exchange.
 The growth of the monetary system facilitates the division of labor,
specialization, and expansion of production.
5) Effective Administrative setup :
 The British government of India left an efficient system of
administration.
 This served as a readymade reference for our politicians and planners
State of Indian Economy in the Eve of Independence
1) Colonial Economy :
 British rule resulted in huge drain of wealth from India with the
supply of Raw materials from India.
 Encourage commercialization to transform the Indian economy into a
British colony.
2) Semi – Feudal Economy :
 Introduction of a feudal system led landlords to change very high
rates of ‘Lagaan’ and were very cruel to the cultivators.
 Introduction of the capitalist’s system led to the creation of two
classes – capitalists and laborers.
3) Stagnant Economy :
 An economy that is growing at a very low rate.
 India was a stagnant economy mainly in the agriculture sector.
4) Backward Economy :
 The Indian economy was backward and underdeveloped due to :
 a. Low level of productivity.
b. Traditional methods of agriculture.
c. Low per capita Income.
d. High birth and Death rate.
e. Mass illiteracy.
5) Depleted (Depreciated economy) :
 It refers to an economy where no arrangements have been made to
replace the physical assets, depreciated due to excessive use.
6) Amputated Economy :
 The British policy of ‘divide and rule’ always promoted discrimination
between various groups based on religion, caste, language, and
culture.
7) Industrial Backwardness :
 There was a virtual lack of basic and heavy industries in the country.
 Production of machines was almost negligible.
 Small – scale and cottage industries were almost ruined.
 For the bulk of its capital goods requirement, the Indian industry was
dependent upon imports from Britain.

Demographic Profile of India

Demographic conditions during the British rule exhibited all features of
a stagnant and backward Indian Economy :
 1st official census: the first official census was conducted in the
year1881. From 1881 onwards, census operations were carried
out every ten years.
 1921: year of the great divide: Before191, India was in the first
stage of a demographic transition. The second stage began after
1921.
The Demographic condition during the colonial rule is described in the
following points :
Demographic Condition during Colonial Rule :
  High Birth Rate & Death Rate
 Extremely Low Literacy Rate
 Poor Health Facilities
 High Infant Mortality Rate
 Low Life Expectancy
 Widespread Poverty

Important Dates :
1) Battle of Plassey – 1757
2) Setting up of Tata Iron and Steel Company (TISCO) – 1907
3) Year of Great Divide – 1921
4) First Official Census – 1881
5) Suez Canal Opening – 1869
6) Introduction of Railways in India by the Britishers – 1850
Indian Economy 1950 – 1990
(Ch – 2)

Economic System
Economic System refers to an arrangement by which central
problems of an economy are solved.
Main Central Problems of an economy :
 What to produce
 How to produce
 For whom to Produce
What to Produce ?
 It involves deciding the final combination of goods and services to
be produced, i.e., it involves the selection of goods and services
and the quantity of each, that the economy should produce.
How to Produce ?
 It involves deciding the technique of production, i.e. whether
selected goods be produced with more labor and less capital
(known as labor Intensive Technique) or with more capital and less
labor (known as Capital Intensive Technique).
For whom to Produce ?
 It involves deciding the distribution of output among people, i.e.,
it involves the selection of the category of people who will
ultimately consume the goods.
Different Types of Economic System
Types of Economic Systems

Mixed Economy
Capitalist Economy
Socialists Economy (Both the Public and
(Means of production are
(Means of production are Private Sector are allotted
owned, controlled, and
owned, controlled, and respective roles for solving
operated by Private
operated by Government) the Economy’s Central
Sector)
Problems)

Capitalist Economy :
A Capitalist Economy is an economic system in which means of
production are owned, controlled, and operated by the private sector.
Production is done mainly for earning profits. So, the central problems
(what, how and for whom to produce) are solved through the market
forces of demand and supply.
Under Capitalist Economy, the three central problems are solved in the
following manner :
1) What to Produce : Under this system, only those goods are produced
that can be sold profitably either in the domestic or in the foreign market.
2) How to Produce : Goods are produced using cheaper techniques of
production. In case of cheap labor, labor-intensive methods of production
are used and in case of costly labor, capital-intensive methods of
production are used.
3) For whom to Produce : In a capitalist society, goods produced are
distributed among people not on the basis of their needs but on the basis
of their income or purchasing power.
Features
a) There is Private ownership of the means of production.
b) Means of production are used in a manner such that the profits
are maximized.
c) The role of the government is largely confined to the
maintenance of law & order and defense of the country.
Socialist Economy :
A Socialistic Economy is one in which the means of production are
owned, controlled, and operated by the government.
Under Socialist Economy, the three central problems are solved in the
following manner :
1) What to Produce : In a socialist society, the government decides what to
produce in accordance with needs of the society.
2) How to Produce : The government decides how the goods are to be
Produced.
3) For whom to Produce : Distribution under socialism is supposed to be
based on what people need and not on what they can afford to purchase. A
socialist nation provides free health care to the citizens, who need it.
Features
 a) Means of production are collectively owned by society as a
whole or there is a public ownership of the means of
production.
b) Means of production is used in a manner such that social
welfare is maximized.
c) There is the direct participation of the government in the
process of production. The role of the government is not
merely confined to law & order and defense.
Mixed Economy :
 A mixed economic system refers to a system in which the public
sector and the private sector are allotted their respective roles for
solving the central problems of the economy.
 In a mixed economy, the government and the market together
solve the 3 central problems – what to produce, how to produce,
and for whom to produce.
 The private sector provides whatever goods and services it can
produce well, and the government provides essential goods and
services, which the market fails to do
Features
a) Means of production are owned by private entrepreneurs as
well as the government.
b) In the private sector, production decisions are governed by
the principle of profit maximization, while in the public
sector, social welfare had the upper hand.
c) Both private and public sectors play a significant role in the
process of production.
India adopted the Mixed Economy system because of the following reasons :
 After the freedom, leaders of Independent India (like Jawaharlal
Nehru) were confused about the economic system, to be followed in
 India. Some leaders were in favor of Socialist economy and some were
in favor of capitalist’s economy.
 As a result, a mixed economy (with the best features of both a socialist
and capitalist economy) was adopted by the Indian economy. In this
view, India would be a socialist society, with a strong public sector, but
also with private property and democracy.
Economic Planning
 For the development of the Indian Economy, it was necessary for the
Government to ‘plan’ for the economy, known as Economic Planning.
 Economic Planning can be defined as making major economic
decisions (what, how, and for whom to produce) by the conscious
decision of a determinate authority, based on a comprehensive survey
of the economy as a whole.
 The Industrial Policy Resolution of 1948 and the Directive Principles of
the Indian Constitution assigned a leading role to the public sector.
Private sector was also encouraged to be part of the plan efforts.
 To make economic planning effective, the Government of India set up
the Planning Commission in 1950, with the Prime Minister as the
Chairman. The first chairman of the planning commission was Prof.
Mahala Nobis.
 The purpose of the commission was to carefully assess the human and
physical resources of the country and to prepare the plans for the
effective use of resources.
 The Planning Commission fixed the planning period at five years, which
began the era of Five – Year Plans.
Meaning of Plan :
Plan is a document showing a detailed scheme, program and strategy,
worked out in advance for fulfilling an objective.
Reason for Marking Plans :
Planning is done to achieve some predetermined goals within a specified
time period. It involves detailed analysis of the problems at hand and making
conscious decisions to solve them.

Plans & Period Focus of the plan or the principal objectives

1st plan: April 1, 1951 I. Increase in agricultural Production
march 31, 1956 II. Equitable distribution of production, Income and wealth.
2nd plan: April 1, 1956 I. Increase in Industrial production.
march 31, 1961 II. Development of heavy Industry.
3rd plan: April 1, 1961 I. Self - sufficiency in food grain production.
march 31, 1966 II. Generation of employment opportunities.
III. Reduction in Equality.
Three Annual plans/ April 1, 1966 - March 31, 1969
4th plan: April1, 1969 I. Accelerating the process of growth.
march 31, 1974 II. Price stability.
5th plan: April 1, 1974 Raising the living standards with a focus on weaker sections of
march 31, 1979 society.
Annual Plan/April 1, 1979 -- March 31, 1980
6th plan: Aril 1, 1980 I. Removal of Poverty
march 31, 1985 II. Reduction of Inequality
III. Development of Infrastructure
7th plan: April 1, 1985 I. Generation of employment opportunities
march 31, 1990 II. Increase in agricultural productivity
Two Annual Plans/April 1, 1990 - March 31, 1992
8th plan: April 1, 1992 I. Fuller utilization of manpower by the turn of the century.
march 31, 1997 II. Universalization of elementary education.
III. Strengthening of Infrastructure
9th plan: April 1, 1997 I. Agricultural and rural development.
march 3, 2002 II. Growth with price stability.
III. Checking the growth of the population.
10th plan: April 1, 2002 I. Improving the quality of life through better health and
march 31, 2007 educational facilities and Improved levels of consumption.
II. Reduction in Inequality through inclusive growth.
11th plan: April 1, 2007 I. Multiple targets covering not only growth but also poverty
march 31, 2012 reduction II. Improving the quality of education and public health
services. III. The strategy of the second Green Revolution.
IV. Generating of High - quality of jobs.
V. Protection of the Environment.
12th plan: April 1, 2012
Faster, more sustainable, and more inclusive growth.
march 31, 2017
I. Economic Policy before 1991 indicated heavy reliance on the public
sector.
II. Thus, in Industrial Policy Resolution 1956, as many as 17 industries were
Heavy Reliance
reserved for the public sector as against 12 industries earmarked for
on the Public private sector.
Sector : III. It was realized that the objective of socialist pattern of society could be
achieved only through a comprehensive development of public sector
enterprises.
I. According to the Industrial (Development and Regulation) Act of 1948
Regulated
new industry in the private sector could not be established without a
Development license and registration.
of the Private II. The regulated development of the private sector was to ensure that
Sector : there was no concentration of economic power in the private hands
I. Large – scale industry was regulated through several acts, particularly
Protection of MRTP (Monopolistic and Restrictive Trade Practices Act).
Small – scale II. Small – scale industry, on the other hand, was offered protection from
Industry & the competition – certain areas of production were exclusively reserved
Regulation of for the small – scale industries, particularly labor – intensive Industries
such as readymade garments, chemicals, etc.
Large – scale III. Several boards (like Handloom board and Silk board) were established
Industry : to promote the products of small – scale industries in the global market.
I. Saving and Investment were identified as the key determinants of
Focus on Saving economic growth.
and Investment II. High - interest rates were offered to promote saving, while
Investment was induced through subsidies and capital grants.
Protection from I. Domestic industry was protected from foreign competition.
Foreign II. High import duties and quantitative restrictions were levied on
imports.
Competition
I. It implied the domestic production of goods that were imported
Focus on Import II. The basic idea was to save foreign exchange and become self -
of Substitution sufficient.

Restriction on I. Foreign direct investment was controlled and regulated through

the Foreign Exchange Regulation Act (FERA).
Foreign Capital
 II. This was to minimize economic control of the domestic market by
foreign investors.
Features of Economic Policy Pursued under Planning 1950 – 1991

The various Points in Success / Achievement of Planning

1) Increase in national Income
An increase in national income indicates economic growth.
 During the period before planning, the national income of India
increased at rate of just 0.5 % per annum. The Indian economy
was, therefore, a stagnant economy.
 The Increase in national Income during the 12th (twelfth) plan was
6.8 % against the target of 8%. In 2018 – 19, the increase in
national income is estimated to be 6.9%.
Thus, during mist plans, we failed to achieve the targeted rate of
growth.

2) Increase in Per Capita Income.

Over time, per capita income has recorded a significant rise :
 During the period before planning, the rate of increase in per
capita income had only been nominal.
 The 12th plan estimated a growth of 5.5 % per annum. In 2017-18
and 2018-19, rate of increase in per capita income was 5.7% and
5.6% per annum respectively.
 Increase in per capita income is a significant achievement as it
implies greater availability of goods and services per head of
population of the country.
 3) Rise in Saving and Investment.
 In 1950-51, the rate of saving was 9.5% of national income.
 It increased to 31.3% by the of the eleventh plan (2011-12) and
was estimated to be 30.5% in 2017-18.
We all know that saving and investment are the principal drivers
of economic growth.
4) Growth and Diversification of Industry
 Five-year plans gave a big push to the basic and capital goods
industries.
 In the eleventh plan, the industrial production growth rate was
7.2%. It increased to 6.9% in 2018-19.
 Consumer goods industries have substantially grown to achieve a
level of self-sufficiency.
5) Employment
 Serious efforts have been made during plans to increase
employment opportunities.
 During the eleventh plan, the unemployment rate came down
from 8.3% in 2004-05 to 5.6% in 2011-12. It increased to 6.9% in
2018-19.
 In the twelfth five-year plan, the government has fixed the target
of creating 50 million employment opportunities.
Failures of Planning in India.
Abject Poverty
 In India, 21.9% of the population still lives below the poverty line.
 There are those people who are getting even the essentials of life.
 Nearly 50% of those who are poor in the world are living in India.
High Rate of Inflation
 We have failed to tackle the Inflationary spiral in the country
because the high rate of Inflation has tended to erode the real
income of the people.
 Also, the economic divide between haves and have – nots has
tended to rise.
 The first plan is the only exception in which the price level slides
down, in all other plans the prices recorded a steep rise.
Unemployment Crisis
 While more and more opportunities for employment have been
generated, the challenge of unemployment has not been
subsided.
 At the end of the First plan, 53 lakh persons were unemployed.
This number rose to over 4 crores at the end of the eleventh plan.
 This is emerging to be a serious cause of social unrest, threatening
the process of growth.
Inadequate Infrastructure
 Development of Infrastructure (including power, roads, dams,
bridges, schools, colleges, and hospitals) continues to be
Inadequate despite 67 years of planning.
 Consequently, actual growth has failed to match the targets of
growth. Particularly, the shortage of power has been a serious
constraint in the overall process of growth and development.

Different goals of the Five-Year Plan

Four Basic Goals of Five-Year Plans
 Modernization Equity
Growth Self - reliance
(Aims to adoption (Aims to ensure
(Aims to increase (Aims to make the
of new technology that everyone gets
country's capacity economy self-
and change in basic needs and to
to produce goods) reliant)
social outlook) reduce inequalities)

Growth
 Growth refers to the increase in the country’s capacity to produce
the output of goods and services within the country. Growth
Implies :
a) Either a larger stock of productive capital;
b) Or a larger size of supporting services like transport and
banking;
c) Or an increase in the efficiency of productive capital and
services.
 A good indicator of economic growth, in the language of
economics, is steady increase in the Gross Domestic Product
(GDP).
 GDP refers to market value of all the final goods and services
produced in the country during a period of one year. Increase in
GDP or availability of goods and services enables people to enjoy a
more rich and varied life.
 The GDP of a country is derived from the different sectors
(Agricultural sector, Industrial sector and Service sector) of the
economy.
 In some countries, growth in agriculture contributes more to the
GDP growth, while in some countries, growth in service sector
contributes more to GDP growth.
 Modernization
Indian planners have always recognized the need for modernization of
society to raise the standard of living of people. Modernization
includes:
 Adoption of new technology : Modernization aims to production
of goods and services through the use of new technology. For
example, a farmer can increase the output on the farm by using
new seed varieties instead of using the old ones. Similarly, a
factory can increase output by using a new type of machine.
 Change in social outlook : Modernization also requires a change in
social outlook, such as gender empowerment or providing equal
rights to women. A society will be more civilized and prosperous if
it makes use of the talents of women in the work place.
Self – reliance
The third Major objective is to make the economy self – reliant.
 Self – reliance under Indian conditions means overcoming the
need of external assistance, in other words, it means to have
development through domestic resources.
 To promote economic growth and modernization, the Five – Year
Plans stressed on the use of our own resources, in order to reduce
our dependence on foreign countries.
The policy of self – reliance was considered a necessity because of two
reasons :
a) To reduce Foreign Dependence : As India was recently freed from
foreign control, it is necessary to reduce our dependence on
foreign countries, especially for food. So, stress should be given to
attain self – reliance.
 b) To avoid Foreign Interference : It was feared that dependence on
Imported food supplies, foreign technology and foreign capital
may increase foreign interference in the policies of our country.
Equity
 The objectives of growth, modernization and self – reliance, by
themselves, may not improve the kind of life, which people are
living.
 So, it is important to ensure that the benefits of economic
prosperity are availed by all section (rich as well as poor) of the
economy.
 In addition to the objectives of growth, modernization and self –
reliance, equity is also important.
 According to Equity, every Indian should be able to meet his or her
basic needs (food, house, education and health care) and
inequality in the distribution of wealth should be reduced.
 In short, Equity aims to raise the standard of living of all people
and promote social justice.
Agriculture
 The agriculture sector accounted for the largest share of the
workforce with approximately 70 – 75%. So, agricultural
development was focused right from the First Five Year Plan.
 At the time of independence, the land tenure system was
characterized by intermediaries (like zamindars) who merely
collected rent (Lagaan) from the actual tillers of the soil.
 The low productivity of the agricultural sector forced India to
import food from the United States of America (USA).
Features of Agriculture
1. Low Productivity :
  The Indian agriculture sector was known for its low productivity. Lack
of knowledge was responsible for stagnation in this sector.
 Since the agricultural sector generates demand for the industrial
sector, the backwardness of agriculture Implies slow growth of the
sector.
2. Disguised Unemployment :
 Disguised unemployment is a situation of hidden unemployment. It
occurs when the number of persons engaged on a piece of land is
much higher than what is actually needed. So, apparently all are
employed. But, in reality, many are unemployed. Even when some
are withdrawn, total output will not fall.
3. High Dependency on Rainfall :
 The Indian economy is heavily dependent on agriculture and the
livelihood of the Indian farmer largely depends on the Monsoon
rains.
 Good rainfall means good crops and bad rainfall means bad crops.
Consequently, the growth process fails to be stable.
4. Subsistence Agriculture:
 It means the primary objective of the farmer is to secure subsistence
for his family; it is not to earn profits.
 Subsistence agriculture fails to generate a surplus for investment. It
leads to stagnation in agriculture.
5. Depreciated Technology :
 There were many obsolete technologies and harvesting machines.
Harvesting was generally done manually and was very tedious.
 The bulk of the farming population in Indian is extremely poor. Lack
of modern inputs leads to low productivity and therefore,
backwardness.
6. Landlord Tenant Conflicts :
 Farmers were often part of a critical contract that bound them to
their landlords. Landlords used to extract huge amounts of interest
from framers and deprived them of their necessities.
  Little or no surplus is left with the tenants for re – investment.
Accordingly, agriculture tends to stagnate.

Importance of Agriculture in the Indian Economy.

1) Contribution to GDP :
 Agriculture makes a significant contribution to the GDP in India.
 During the period of planning, contribution of agricultural sector to GDP
has tended to decline over time, from as high as 51% in 1950 – 51 to
14.4% in 2018 – 19.
 It often occurs owing to the relatively faster growth of secondary and
tertiary sectors of the economy.

2) Source of employment :
 In India, agriculture is a significant source of employment.
 Over 50% of the working population in India is engaged in the
agricultural sector implying that agriculture is the principal source of
subsistence for the people in India.
3) Supply of raw materials :
 Agriculture supplies industrial raw materials like cotton for the textile
industry, seeds for the oil industry, and sugarcane for the sugar mills.
 As a supplier of raw materials, the agricultural sector is of primary
significance for the growth of the Industrial sector in the economy.
4) Source of demand for industrial goods :
 The agricultural sector is an important source of demand for industrial
goods, particularly capital goods.
 Tractors and harvester-machines are demanded exclusively by the
agricultural sector. Thus, Agricultural prosperity leads to industrial
prosperity.
5) Contribution to international trade :
 Agriculture makes a significant contribution to India’s international
trade. Thus, in 2018-19, share of agricultural sector in total exports of
the country stood at 11.76%.
  India exports tea, jute, cashew nuts, tobacco, coffee, and spices. Exports
are a source of foreign exchange; which India needs for the import of
defense goods as well as crude oil.

Problems Faced by Indian Agriculture

1) Lack of Permanent Means of Irrigation :
 Crop farming in India is heavily dependent on rainfall. Permanent means
of Irrigation are extremely deficient.
 Dependence on rainwater makes Indian agriculture extremely
vulnerable, good rainfall brings good harvest, while droughts cause a
substantial loss of output.
2) Deficiency of Finance :
 For bulk of their financial needs, the small farmers depend upon non-
institutional sources, Including ‘mahajans’, moneylenders and the
landlords. They charge very high rate of interest.
 Ack of finance hinders the growth of Indian agriculture. The high cost of
borrowing leads to the vicious circle of poverty for the farmers.
3) Small and Scattered Holdings :
 Holdings in India are not only small but scattered as well. Smallholdings
do not follow the use of modern technology.
 Scattered holding increases the cost of management. This contributes to
the backwardness of farming and the poverty of the farmers.
4) Lack of Organized Marketing system :
 An agricultural marketing system is highly unorganized.
 They are obliged to sell their produce to the Mahajan’s and money
lenders (in the local markets) in return for the loans they raise from
these middlemen.
 At the level of marketing, the bulk of smallholders falls to get a
remunerative price for their crops, because of the lack organized
marketing system.
5) Exploitative Agrarian Relations :
 Agrarian relations refer to the business relations between landlords and
tenants.
  Having paid exorbitant rents to the absentee landlords, the tillers of the
soil are left with a little surplus for further investment.
 Accordingly, land continues to be used as a source of subsistence (or as a
means of livelihood) rather than a source of business profits.

Agrarian Reforms
With a view to tackling the problems of Indian agriculture, the government has
taken a series of reform measures since independence. These reform measures
are popularly known as agrarian reforms.

Types of Agrarian Reforms

1) Technological Reforms/New Agricultural Strategy : Following steps
have been taken by the government to upgrade the level of technology in
Indian agriculture.
a. Use of (High Yielding) HYV seeds :
 HYV seeds have replaced conventional varieties. HYV seeds
(especially relating to wheat, bajra, rice, maize, jowar, and cotton)
have led to a substantial rise in crop productivity.
b. Use of chemical fertilizers :
 Chemical fertilizers are being increasingly used to enhance
productivity. The use of chemical fertilizers has considerably
increased over time.
c. Use of insecticides and pesticides for crop protection :
 Steps have been initiated to protect crops against diseases and
insects by using insecticides and pesticides.
 For plant protection, an integrated Pest Management Programme
was adopted along with the adoption of HYV technology.
d. Scientific farm Management Practices :
 Stress has been laid on scientific cultivation, as against
conventional farming.
 Scientific methods of farming relate to :
i. Selection of crops and their quality.
 ii. Preparation of soil
iii. Rotation of crops
iv. Selection of seeds
v. Use of fertilizers besides others.
2) Land reforms / Institutional Reforms : The action plan of the government
for land reforms includes the following steps :
a. Abolition of Intermediaries :
 Intermediaries (between the state and the actual tiller of the soil)
popularly known as zamindars have been abolished.
 Ownership rights have been conferred upon those who cultivate the
soil.
b. Regulation of Rent :
 To put an end to excessive and illegal extortions from cultivators,
rents have been fixed.
 Generally, these are not to exceed 1/3rd the value of the crop.
c. Consolidation of Holdings :
 To reduce fragmentation, steps have been initiated for the
consolidation of holdings.
 Consolidation is the practice to allot land to the farmer in one place
as a replacement for his scattered holdings here and there. It saves
the cost of cultivation.
d. Ceiling on Land Holdings :
 To promote equality in the distribution of land, a ceiling has been
imposed on the holding size.
 The surplus land has been resumed by the government and
redistributed among smallholders or landless laborers.
e. Cooperative Farming :
 Cooperative farming is encouraged to enhance bargaining power of
the small holders. Together they can buy inputs at a lower price and
sell their produce at a higher price.
3) General Reforms : General Reforms include the following Steps :
a. Expansion of Irrigation Facilities :
  To raise productivity in agriculture, irrigation facilities have been
expanded. Several major and minor irrigation projects have been
launched across different parts of the country.
 Now, irrigation is covering about 45% of land under cultivation.
b. Provision of credit :
 Cooperative societies have been set up to provide credit to farmers at
a low rate of interest.
 Commercial banks have also been catering to the credit needs of the
farmers.
 Regional Rural Banks have been established to further enhance credit
facilities for farmers.
 The National Bank for Agriculture and Rural Development (NABARD)
was established to institutionalize credit facilities for farmers at the
national level.
c. Regulated Markets and Cooperative Marketing Societies :
 Regulated Markets have been established to offer remunerative
prices to the farmers and protect them against exploitation by the
middlemen.
 These committees ensure timely payment to the farmers and also
ensure that only specified weights and measures are used to
weigh and value the farmers produce.
 Cooperative marketing societies have been established to enhance
the bargaining power of the farmers in the markets and Provision
for storage of the crops is made by the societies on behalf of the
member farmers.
d. Price Support Policy :
 Government assures a minimum support price (MSP) to the
farmer for his produce to protect him against uncertainties in the
market.
 The government is committed to buy the surplus produce of the
farmer at the minimum support price as and when the market
price is lower than that.
 Policies to solve
Agricultural
Main Features of Problems.
Role & Importance of i. Technical Reforms :
Indian Agriculture. Problems of Indian
Agriculture a) Use of HYV Seeds.
i. Low Productivity Agriculture. b) Use of Chemical fertilizers.
i. Contribution to GDP. c) Use of Insecticides & Pesticides
ii. Disguised i. Lack of Permanent
ii. Contribution to source for Crop Protection.
Unemployment. means of Irrigation. d) Scientific farm Management
of Employment
iii. High Dependency on. ii. Deficiency of Finance. Practices.
iii. Contribution to supply
Rainfall. iii. Small and Scattered ii. Land Reforms :
of Raw Material. a) Abolition of Intermediaries.
iv. Subsistence Holdings.
iv. Contribution to source b) Regulation of Rent.
Agriculture. iv. Lack of Organized c) Consolidation of Holdings.
of Demand for the
v. Depreciated Marketing System. d) Ceiling on Land holdings.
Industrial Goods.
Technology. v. Exploitative Agrarian e) Cooperative farming.
v. Contribution to
vi. Landlord Tenant Relations. iii. General Reforms
international Trade.
Conflicts. a) Expansion of Irrigation Facilities
b) Provision of credit.
c) Regulated Markets and
Cooperative marketing societies
d) Price Support policy.

Agricultural Policies (1950 – 90)

Green Revolution : New Agriculture Strategy

Green Revolution refers to the large increase in the production of food grains due
to the use of high yielding variety (HYV) seeds. The green revolution is a
spectacular advancement in the field of agriculture.
The new agricultural strategy was adopted in India during the Third Plan, i.e.,
during 1960’s. the traditional agricultural practices followed in India were
gradually being replaced by modern technology and agricultural practices. The
aim of this strategy was to raise agricultural production and productivity in
selected regions of the country through the introduction of modern inputs like
fertilizers, credit, marketing facilities, etc.
Indian Economy Experienced the success of Green Revolution in 2
Phases :
First Phase Second Phase

In the first phase (Mid 60s to Mid-

70s), the use HYV seeds was restricted
In the second phase (Mid 70s to Mid-
to more affluent states (like Punjab,
80s), the HYV technology spread to a
Andhra Pradesh, Tamil Nadu, etc.).
larger number of states and
Further, the use of HYV seeds
benefited more variety of crops.
primarily benefited the wheat
growing regions only.

Need for Green Revolution :

 At the time of Independence, about 75% of the country’s population was
dependent on agriculture.
 India’s agriculture vitally depends on the monsoon and in the case of
storage of monsoon; the farmers had to face a lot of troubles.
 Moreover, the productivity in the agricultural sector was very low due the
use of out – dated technology and the absence of required infrastructure.
 As a result, of the intensive and continued efforts of many agricultural
scientists, this stagnation in agriculture was permanently broken by the
‘Green Revolution’.

Effects of the Green Revolution :

1. Attaining Marketable Surplus : Green Revolution resulted in
Marketable Surplus. Marketable Surplus refers to that part of agricultural
produce which is sold in the market by the farmers after meeting their own
consumption requirement.
 Growth in agricultural output makes a difference to the economy only
when a large proportion of this increase is sold in the market.
 Fortunately, a good proportion of rice and wheat produced during the
green revolution period was sold by the farmers in the market.
 2. Buffer Stock of Food Grains : The green revolution enabled the
government to procure a sufficient amount of food grains to build a stock
which could be used in times of food shortage.
3. Benefit to Low – Income Groups : As a large proportion of food grains
was sold by the farmers in the market, their prices declined relative to other
items f consumption. The low – Income groups, who spend a large
percentage of their income on food, benefited from this decline in relative
prices.

Risk Involved in Green Revolution :

Risk of Pest Attack : The HYV crops were more prone to attack by pests. So, there
was a risk that small farmers who adopted this technology could lose everything
in a pest attack.
Risk of Increase in Income Inequalities : There was a risk that costly inputs
required under the green revolution will increase the disparities between small
and big farmers since only the big farmers could afford the required inputs.

Limitations of Green Revolution

Revolutionary rise in output (due to green revolution) is confined mainly to
Limited the production of food grains (wheat and rice). There has been no similar
Crops rise in the production of pulses and commercial crops like jute, cotton, tea,
etc.
Spread of Green Revolution has not been uniformed across all regions. In
Un - even states like Punjab, Haryana, Maharashtra, and Tamil Nadu, It made a
Spread remarkable impact. But in Eastern UP, Bihar, Madhya Pradesh and Odisha,
Its Impact was relatively insignificant.
Limited The bulk of the farming population in India consists of small and marginal
farmers. The gains of Green Revolution have eluded these farmers. Because,
Farming HYV technology require expensive inputs which are beyond the reach of
Population Marginal farmers.
Thanks to Green Revolution, the economic divide - the gap between the rich and
Economic the poor farmer has substantially risen over time Poverty is widespread and
Divide indebtedness is extremely high. Loan waivers are frequently offered. Yet, suicides
among the farmers are emerging to be serious challenge.

Industrial Development
The developing countries (like India) can progress only if they have a
good industrial sector. Industry provides employment, which is more
stable than the employment in agriculture. Industrialization promotes
modernization and overall prosperity.
At the time of Independence, the variety of industries was very limited.
The cotton textile and jute industries were mostly developed in India.
There were only two well – managed iron and steel firms: one in
Jamshedpur and the other in Kolkata. So, there was a strong need to
expand the industrial base with a variety of industries.
Features of Industrial Growth
 Public enterprises were to play a central role in the process of
industrialization.
 The process of industrialization focused on ‘import substitution’
implying that the production of such goods was to be accorded at
high priority which was imported from the rest of the world. The
idea was to achieve self-reliance as well as to economize the use
of the foreign exchange.
 As far as possible, domestic industry was to be protected from
foreign competition. Protection was to be offered through :
a. Heavy duty on imports, and
b. Fixation of import quotas. It was realized that protection
would foster the growth of the domestic industry.
 Large-scale industry was to be developed to build an
infrastructural base in the country.
Effects of Industrialization
Positive Effects
  Economic growth got a big push. Industrial output recorded a
significant rise. There was about a 6% annual increase in output
during the period 1950-1990.
 The growth of SSI made a substantial contribution to achieving the
objectives of growth with social justice.
 There was a marked diversification in the industrial sector. The
then sunrise industry (electronics in particular) marked its
emergence in the domestic economy.
 Growth of large-scale industries (like Rourkela and Bhilai Steel
Plants) projected an infrastructural shift in the Indian economy.
Negative Effects
 Public sector monopolies gradually turned out to be a ‘dead social
weight’. Inefficiency, corruption and leakage emerged as their
principal characteristics.
 Lack of competition promoted domestic entrepreneurs to focus on
monopoly control of the market. Growth through competition and
diversification was conveniently avoided.
 Saving foreign exchange through import substitution (rather than
generating it through an export promotion) proved to be an
inefficient policy instrument.

There was a need for a leading role in the public sector due to
the following reasons :
Shortage of Capital with Private Sector : Private entrepreneurs did not
have the capital to undertake investment in industrial ventures,
required for the development of Indian economy.
Lack of Incentives for the Private Sector : The Indian market was not
big enough to encourage private industrialists to undertake major
projects, even if they had the capital to do so. Due to the limited size of
the market, there was a low level of demand for industrial goods.
The Objective of Social Welfare : The objective of equity and social
welfare of the government could be achieved only through the direct
participation of the state in the process of industrialization.
Industrial Policy Resolution 1956 :
 Industrial Policy Resolution of 1956 (IPR 1956) is a resolution
adopted by the Indian Parliament in April 1956.
 Industrial policy is a comprehensive package of policy measures
that cover various issues connected with different industrial
enterprises of the country.
 After the industrial policy, in 1948 the Indian economy had to face
a series of economic and political changes, which necessitated the
need for a fresh industrial policy for the country. So, on 30th April
1956, a second industrial policy resolution was adopted in India.

Classification of Industries
Classification of Industries as per IPR, 1956

Classification of Industries as per IPR, 1956

Schedule B
Schedule A Schedule C
(Comprises of 12 industries,
(Comprises of (Comprises of remaining
which would be
Industries exclusively industries which were to
progressively State -
owned by the State) be in the private sector)
owned)

a) Schedule A : This first category compromised industries which would be

exclusively owned by the government state. In this schedule, 17 industries
were included, like arms and ammunition; atomic energy; heavy and core
industries; aircraft; oil; railways; shipping; etc.
 b) Schedule B : In this schedule, 12 industries were placed which would be
progressively state-owned. The state would take the Initiative of setting up
industries and the private sector will supplement the efforts of the state.
c) Schedule C : This schedule consisted of the remaining industries which
were to be in the private sector. These industries were controlled by the
stated through a system of licenses, enforced under the industries
(Development and Regulation) Act 1951.
Industrial Licensing
An Industrial License is written permission from the government, for an
industrial unit to manufacture goods.
The industries (Development and Regulation) Act, 1951, empowered
the government, to issue licenses for :

Setting up of Expansion of Diversification of

New Industries Existing Ones Products

According to Industrial Licensing

 No new industry was allowed unless a license is obtained from the
government.
 It was easier to obtain a license if the industrial unit was
established in an economically backward area.
 The purpose of this policy was to promote regional equality.
 Licenses were needed even if an existing industry wants to expand
output or diversify production.
Small – scale Industry
 In 1955, the Village and Small – scale Industries Committee (Karve
Committee) recognized the possibility of using small – scale
industries to promote rural development.
 A small-scale industry is defined with reference to the maximum
investment allowed on the assets a unit. This limit has changed
from ₹ 5 lakh in 1950 to present limit of ₹ 1 crore.
Important Points about Small – Scale Industries
Employment Generation
 Small-scale industries are more labor intensive, i.e., they use more
labor than the large-scale industries and, therefore, they generate
more employment.
 After agriculture, small-scale industries provide employment to
the largest number of people in India.
Need for Protection from Big Firms
 Small-scale industries cannot compete with the big industrial
firms. They can flourish only when are protected from the large
firms. So, various steps were taken by the government for their
growth.
 Reservation of Products : Government reserved production of a
number of products for the small-scale industry. The criterion for
reserving the products depends on the ability of these units to
manufacture the goods.
 Various Concessions : Small-scale industries were also giving
concessions, such as lower excise duty and bank loans at lower
interest rates.
Foreign Tarde
 Every country in the world exports certain goods and imports
certain others. Export and import of goods and services across
different countries is called international or foreign trade.
 Foreign trade in India includes all imports and exports to and from
India. India entered into planned development era in 1950’s and
at that time ‘Import Substitution’ was a major element of India’s
Trade and Industrial Policy. In 1950, India’s share in the total world
trade was 1.78%.
Brief Composition of Foreign Trade
After Independence, there has been a substantial change in the
composition of India’s foreign trade :
Decline in percentage share of agricultural exports
It happened owing to the facts that :
  India started using its farm products as raw materials for its
domestic industry.
 Substantial rise in India’s population has raised the domestic
consumption of farm products.
Decline in Percentage share of conventional items
 Conventional items of India’s exports include jute, tea, food grains,
and minerals. These items constituted the bulk of India’s exports
at the time of independence.
 But with planned development programmes in place, domestic
demand for conventional items has tended to rise.

Increase in percentage share of manufactured goods

 The percentage share of manufactured goods in total exports has
tended to rise.
 Presently, Gems and precious metals, machinery and vehicles are
the notable exports of India.
Inward Looking Strategy
 Import substitution refers to a policy of replacement or
substitution of imports by domestic production.
 The basic aim of the policy was to protect domestic industries
from foreign competition.
 The policy of Import substitution can serve 2 definite objectives :
a) Savings of precious foreign exchange; and
b) Achieving self-reliance
 By adopting an inward-looking trade strategy, the government
preferred to economize the use of foreign exchange (through
import substitution) rather than maximize the generation the
generation of foreign exchange (through an export promotion).
 Also, the government wanted to protect the domestic industry
from international competition.
  For example : Instead of importing vehicles made in a foreign
country, domestic industries would be encouraged to produce
them in India itself.
Impacts do an inward -looking strategy left on the domestic
industry.

Good Impacts Bad Impacts

1) Diversification of Industrial Growth : 1) Growth of Inefficient Public
a. Modern industry was no longer confined Monopolies :
to textile and jute. Industrial growth started a. Protection of public sector industry led to
spreading across engineering goods and a the growth of inefficient monopolies.
wide range of consumer goods. b. Telecommunication was a government
b. It is widely recognized that the electronic monopoly till about 1990. We all know that
industry would have failed to take root in people had to wait for years and years just
the domestic economy, had the policy of for a telephone connection.
'protection' not been pursued. 2) Lack of Competition :
2) Investment Opportunities : a. old users of cars still remember that
a. Protection of SSI (small-scale industry) Ambassador and Flat were the only two
opened new opportunities for investment models produced by the domestic industry
for those who did not have much capital. in India.
b. new investment opportunities implied b. No doubt that the domestic car industry
new opportunities for self-employment. It flourished as a near-monopoly owing to the
promoted growth with equity. policy of protection.

Protection from Imports through ‘Tariffs’ and ‘Quotas’ :

The government made use of two ways to protect goods produced in
India from imports :
Tariffs : Tariffs refers to taxes levied on imported goods. The basic aim
for imposing a heavy duty on imported goods was to make them more
expensive and discourage their use.
Quotas : Quotas refer to fixing the maximum limit on the imports of a
commodity by a domestic producer.
 Reasons for Import Substitution
 The policy of protection is based on the fact that industries of
developing countries like India are not in a position to compete
against the goods produced by more developed economies. With
protection, they will be able to compete in the due course of time.
 Restriction on import was necessary to overcome the fear of the
drain of foreign exchange reserves on the import of luxury goods.

Critical Appraisal of Industrial Development (150 – 1990)

The achievements of India’s Industrial Sector during the First Seven
Plans are impressive indeed :
 The proportion of GDP contributed by the industrial sector
increased in the period from 11.8% in 1950-51 to 24.6% in 1990-
91. The rise in the industry’s share of GDP is an important
indicator of development.
 Indian industry was no longer restricted to cotton textiles and jute.
It also included engineering goods and a wide range of consumer
goods. The industrial sector became well diversified by 1990,
largely due to the public sector.
 The promotion of small-scale industries gave opportunities to
people with small capital to get into business.
 Protection from foreign competition enabled the development of
indigenous industries in the areas of electronics and automobile
sectors which otherwise could not have developed.
 Licensing policy helped the government to monitor and control
the industrial production.
 Public sector made a remarkable contribution by creating a strong
industrial base, developing infrastructure and promoting
development of backward areas.
Conclusion
The progress of the Indian economy in the three sectors can be
summarized as under :
In Agriculture Sector :
 India became self-sufficient in food production, thanks to the
green revolution.
 Land reforms resulted in the abolition of Zamindari system.

In Industrial Sector :
 The industries became far more diversified compared to the
situation of independence. However, many economists became
dissatisfied with the performance of public sector enterprises.
In Trade Sector :
 Our policies were ‘inward oriented’ and so we failed to develop a
strong export sector. The domestic producers were protected
against foreign competition and this did not give them the
incentive to improve the quality of the goods that they produced.

Classification of Industries as per IPR, 1956

Classification of Industries as per IPR, 1956

 New Economic Policy – 1991 (Ch – 3)
Economic Reforms
 Economic reforms refer to a set of economic policies directed to accelerate
the pace of ‘Growth and Development’.
 In 1991, the government of India initiated a series of economic reforms to
pull the economy out of the crises of 90’s. These reforms came to be known
as New Economic Policy (NEP).

Three broad components of the New Economic Policy are :

 The policy of Liberalization (L) in place of Licensing (L) for the industries and
trade;
 The policy of Privatization (P) in place of Quotas (Q) for the industrialists;
and
 The policy of Globalization (G) in place of Permits (P) for exports and
imports.
Thus, LPG was set to replace LQP in 1991.
Reasons for Making Economic Reforms
Reasons for Economic Reforms
 Poor Performance of the Public Sector
 Deficit in the Balance of Payments
 Inflationary Pressure
 Fall in Foreign Exchange Reserves
 Huge Burden of Debts
 Inefficient Management

Poor Performance of the Public Sector :

  In the 40 years period (1951-90), the public sector was assigned an
important role to work for the economic development of India. However,
except for few public industries, the overall performance was very
disappointing.
 Due to huge losses incurred by a good number of the public sector
enterprises, the government recognized the need for making necessary
reforms.

Deficit in Balance of Payments (BOP) :

 It arises when foreign payments for imports exceed foreign receipts from
exports.
 Even after imposing heavy tariffs and fixing quotas, there was a sharp rise in
imports.
 On the other hand, there was slow growth of exports due to the low quality
and high prices of Indian goods in the international market

Inflationary Pressure :
 There was a consistent rise in the general price level in the economy due to
increase in money supply and shortage of essential goods.

Fall in Foreign Exchange Reserves :

 In 1991, foreign exchange reserves fell to the lowest level and it led to the
foreign exchange crisis in the country.
 Foreign exchange reserves declined to a level that was not adequate to
finance imports for more than two weeks and pay the interest that needs to
be paid to international leaders.

Huge Burden of Debts :

 The expenditure of the government was much higher than the revenue.
 As a result, the government had to borrow money from banks, public and
from international financial institutions.

Inefficient Management :
 The government was not able to generate sufficient revenue from internal
sources such as taxation, running of public sector enterprises, etc.
  Government expenditure began to exceed its revenue by such large margins
that it became unsustainable.
 Also, the foreign exchange borrowed from other countries and international
financial institutions was spent on meeting consumption needs.

New Economic Policy

The New Economic Policy (NEP) was announced in July 1991. It consisted of wide
range of economic reforms. The main aim of the policy was to create a more
competitive environment in the economy and remove the barriers to entry and
growth of firms.

The New Economic Policy can be broadly classified into two kinds of
measures :
Stabilization Measures Structural Reforms Measures
They refer to short-term measures They refer to long-term measures which
which aim at : aim at :
a. Correcting weakness in the balance of a. Improving the efficiency of the economy;
payments by maintaining sufficient foreign and
exchange reserves; and b. Increasing international competitiveness
b. Controlling inflation by keeping the rising by removing the rigidities in various
prices under control. segments of the Indian economy.

Elements of the New Economic Policy (NEP)

Elements of NEP
 Liberalization Privatization
Globalization
(Refers to the removal of (Refers to transfer of
(Refers to Integrating the
Entry and Growth ownership, management,
National Economy with
restrictions on the Private and control of the Public
World Economy)
Sector) Sector to the Private Sector)

Liberalization
Liberalization of the economy means freedom of the producing units from direct
or physical controls imposed by the government.
Following are Some Notable Observations in this Regard
 Before 1991, the government had imposed several types of controls on private
enterprises in the domestic economy.
 These includes industrial licensing systems, price control or financial control on
goods, import license, foreign exchange control, restrictions on investment by big
business houses, etc.
 It was experienced by the government that several shortcomings had emerged in
the economy on account of these controls.
 These controls had given rise to corruption, undue delays, and inefficiency.
 The growth rate of GDP had fallen sharply and a high-cost economic system
(rather than a low-cost competitive economic system) came into being.

Note :
Economic reforms (with liberalization as its key component) were based on the
assumption that market forces would drive the economy toward the path of competitive
growth and development.

Purpose of Liberalization :
 It was done to unlock the economic potential of the country by encouraging
private sector and multinational corporations to invest and expand.
 To introduce much more competition into the economy and create
incentives for increasing the efficiency of operations.

Economic Reforms Included in the Liberalization

 1) Industrial Sector Reforms :
 Abolition of Industrial Licensing
 Freedom to Import Capital Goods
 Contraction of Public Sector
 Expansion of Production Capacity
 De -reservation of Production Areas
I. Abolition of Industrial Licensing :
 In July 1991, a new industrial policy was announced. It abolished the
requirement of licensing except for the following five industries :
a) Liquor,
b) Cigarette,
c) Defense equipment’s,
d) Industrial explosives, and
e) Dangerous chemicals.
II. Contraction of Public Sector :
 Under the new industrial policy, the number of industries reserved for the
public sector was reduced from 17 to 8.
 In 2010-11, the number of these industries was reduced merely to two :
a) Atomic energy, and
b) Railways.
III. De-reservation of Production Areas :
 Many production areas which earlier were reserved for SSI (small-scale
industries) were de-reserved. Forces of the market were allowed to
determine the allocation of resources.
IV. Expansion of Production Capacity :
 Earlier Production capacity was linked with licensing. Now, freedom from
licensing implied freedom from capacity constraints.
 What to produce and how much to produce was now a matter of the
producer’s choice depending on market conditions.
V. Freedom to Import Capital Goods :
 Liberalization also implied freedom for the industrialists to import capital
goods to upgrade their technology.
 Permission was no longer required from the government to enter into
international agreements for the import of technology.
2) Financial Sector Reforms :
 Change in Role of RBI
  Increase in Limit of Foreign Investment
 Origin of Private Banks
 Ease in Expansion Process
a) The Financial Sector Includes :
I. Banking and non-banking financial institutions
II. Stock exchange market, and
III. Foreign exchange market.
b) In India, the financial sector is regulated and controlled by the RBI (Reserve bank
of India).
c) Liberalization implied a substantial shift in the role of the RBI from ‘a regulator’ to
‘a facilitator’ of the financial sector.
d) As a regulator, the RBI (before liberalization) would fix the interest rate structure
for commercial banks. But as a facilitator (after liberalization) the RBI would only
facilitate the free play of the market forces and leave it to the commercial banks
to decide their interest rate structure. Now, competition (rather than control)
rules the decision-making process.
e) Free play of the market forces has led to the emergence of private bankers – both
domestic as well as International – in the Indian banking Industry.
f) Liberalization has also allowed FII (Foreign Institutional Investors) to Invest in
Indian Financial markets. (Examples of FII: merchant bankers, mutual funds, and
pension funds).
g) Consequent upon these changes, the financial sector in India has shown a multi-
dimensional growth and is playing a significant role in the growth and
development of the economy.
3) Fiscal Reforms :
a) Fiscal reforms relate to the revenue and expenditure of the government.
b) Tax reforms are the principal component of fiscal reforms.
c) Broadly, Taxes are classified as :
i. Direct Taxes : These are those taxes, the burden of which cannot be
shifted to others. (Examples : Income tax, Wealth tax). One who pays
such a tax himself bears the burden of it.
ii. Indirect Taxes : (levied on goods and services) are those taxes, the
burden of which can be shifted onto others. Examples : GST, custom duty.
d) Before liberalization, the tax structure in the country has been highly complex
and evasive. Fearing a heavy burden of taxation, people would often evade
taxes.
 e) Now tax structure has been simplified and moderated. This has raised tax
compliance and therefore tax revenue for the government.
4) External Sector Reforms :
a) External sector reforms include :
i. Foreign exchange reforms, and
ii. Foreign trade policy reforms.
b) Foreign exchange reforms were initiated in 1991 with the devaluation of
the Indian rupee against foreign currencies.
c) Devaluation implies a fall in the value of the rupee vis-à-vis (say) the US
dollar or British pound. Implying that a US Dollar or British pound can be
exchanged for more rupees than before. Or, implying that a US dollar or
British pound can buy more goods in the Indian market.
d) This increased the supply of foreign currency into the Indian economy by
way of higher exports of domestic goods and services.
e) Foreign trade policy underwent a substantial change in the wake of
liberalization.
f) Tariff restrictions have been considerably moderated, rather withdrawn for
many items of export and import.
g) Instead of policy of protection to the domestic industry, now there is the
policy of ‘survival of the fittest’.
h) Market competition has replaced the policy of quotas and tariffs.

Salient Features of Trade Policy after Liberalization :

 Import quotas have been abolished.
 Import licensing (except in the case of goods that are not environment-
friendly and hazardous) has been abolished.
 There is a moderation/reduction of import duty to enhance
competitiveness in the domestic market.
 Export duty has been withdrawn to enhance the competitiveness of Indian
goods in the international market.
 Briefly, trade policy after liberalization is to facilitate the integration of the
Indian market with the global market to achieve growth through
competition rather than protection.

Privatization
  Privatization is the process of involving the private sector in the ownership
or operation of a state-owned enterprise.
 It implies the gradual withdrawal of government ownership/management
from public sector enterprises.
It may happen in two ways
 Outright sale of government enterprises to private entrepreneurs or;
 Withdrawal of the government ownership and management from the mixed
enterprises (the enterprises jointly owned and managed by the government and
the private entrepreneurs).

Disinvestment :
 Disinvestment is a policy instrument to promote privatization.
 It occurs when the government sells off its share capital of PSUs (public sector
undertakings) to private investors.
 The argument in favor of disinvestment is the same as in the case of privatization.
 It is taken as a remedial measure to improve production and managerial
efficiency, as well as to facilitate modernization.
 Of course, disinvestment is also used as a means to manage fiscal deficit by the
government.

Need for Privatization

The need for privatization was felt mainly because of the poor performance
of PSUs
 It is beyond doubt that it was through the spread of PSUs that India could
diversify its industrial base between the period 1951-91.
 It as an account of the spread of PSUs that the Indian economy underwent a
structural transformation : people started shifting from agriculture to industry as
their source of livelihood, and there was a gradual increase in the percentage
contribution of Industry to GDP.
 Gradually, most public sector enterprises turned into a social deadweight (or a
social liability). Mounting losses of PSUs became unsustainable.
 Leakage, pilferage, inefficiency, and corruption had become so rampant in PSUs
that their privatization was considered the only remedy.
  Accordingly, in1991, the government decided to phase out public enterprises by
selling its equity to private entrepreneurs. Privatization was to replace public
ownership of a large number of enterprises.

Obvious Gains :
 Privatization expects private enterprises to work in a competitive environment –
both domestic as well as International. Competition induces Upgradation and
modernization. These are the essential conditions of growth and development.
 Privatization promotes the diversification of production. Unlike PSUs private
enterprises invariably generate high profits. These are used for expansion and
diversification of production.
 Privatization promotes consumer sovereignty. The higher degree of consumers
sovereignty implies wider choice and better-quality of life.

Imperative Losses :
 The socialistic pattern of the society (in which ‘social interest’ is accorded top
priority) is left to survive only as a theoretical possibility.
 Privatization encourages the free play of market forces. But in the process, goods
are produced only for those who have the means to buy them.
 When prices rise (which is an obvious tendency in a system driven by the free
play of market forces), weaker sections of society suffer deprivation.

Globalization
 Globalization means integrating the economy of a country with the
economies of other countries under conditions of free flow of trade and
capital across borders.
 Globalization may be defined as a process associated with increasing
openness, growing economic interdependence and deepening economic
integration in the world economy.

Aim of Globalization
 It aims to create a borderless world and it is generally understood to mean
integration of the economy of the country with the world economy.
 It is a complex phenomenon. It is an outcome of the set of various policies
that aim to transform the world towards greater interdependence &
integration.
  It involves creation of networks and activities transcending economic,
social, and geographical boundaries.

Following are Some Important Policy Strategies that have Influenced the
process of the Globalization of the Indian Economy :
Increase in Equity Limit of Foreign Investment :
 The equity limit of foreign capital investment has been raised from the initial 40%.
It now ranges between 51 – 100%.
 Export trading houses have also been allowed foreign capital investment of up to
100%.

Partial Convertibility :
 Partial convertibility refers to the sale and purchase of foreign currency (for
foreign transactions) at the market price.
 To achieve the objective of globalization, partial convertibility of the Indian rupee
has been allowed for the following transactions :
a) Import and export of goods and services.
b) Payment of interest or dividend on investment,
c) Remittances to meet family expenses.

Reduction in Tariffs :
 In order to encourage competitiveness, tariff barriers have been withdrawn on
most goods traded between India and the rest of the world.

Withdrawal of Quantitative Restrictions :

 Since 2001, the quantitative restrictions on all import items have been totally
withdrawn. This is in conformity with India’s commitment to the WTO.

Changes Made by Globalization of the Indian Economy are :

 The New Economic Policy prepared specified list of high technology and
high investment priority industries, in which automatic permission will be
available for foreign direct investment up to 51% of foreign equity.
 Automatic permission is provided in high-priority industries up to a sum of
rupees 1 crore and no permission is now required for hiring foreign
technicians or for testing indigenously developed technology abroad.
  Rupee was devalued in July 1991 by nearly 20% to stimulate exports,
discouraged imports, and raised the influx of foreign capital.
 To integrate the Indian economy with the world, the Unio-budget 1992-93
made Indian rupee partially convertible, and then the rupee as made fully
convertible in the 1993-94 budget.
 A new five-year export-import policy (1992-97) was announced by the
government and this policy removed all restrictions and controls on
external trade and allowed market forces to play a greater role in respect of
exports and imports.
 To bring the Indian economy within the ambit of global competition, the
peak rate of customs duty has been reduced to a considerable extent i.e.
from 250 per cent to 10% in 2007-2008 budget.

Positive as well as Negative Traits of Globalization

The process of Globalization through liberalization and privatization policies, has
produced positive as well as negative results, both for India and other countries.
Positives :
Globalization resulted in :
 Greater access to global markets.
 Advanced technology
 Better future prospects for large industries of developing countries to become
important players in the international arena.
 Gains from the sharing of ideas/ skills/ technologies across national borders.

Negatives :
Globalization has been criticized by some scholars because according to them :
 The benefits of globalization accrue more to developed countries as they can
expand their markets in other countries.
 It comprises the welfare and identity of people belonging to poor countries.
 Market-driven globalization increases the economic disparities among nations
and people.

Merits of LPG Policies

1. Vibrant Economy :
  The Indian economy has become a more vibrant economy. The overall
level of economic activity has trended up as indicated by GDP growth. Post
LPG policies, the growth of GDP shot up to as high as 8% p.a.
2. Stimulant to Industrial Production :
 LPG policies have worked as a great stimulant to industrial production in
the Indian economy. It is owing to these policies that the IT industry in
India has achieved global recognition.
3. Consumer’s Sovereignty :
 Consumer’s sovereignty has expanded over time as a large variety of goods
and services from diverse global markets are now within the easy reach of
buyers.
 Producers are widely responding to the customer’s choice and preference.
4. A Substantial Increase in Foreign Exchange Reserves :
 Depletion of forex reserves was one of the compelling reasons for the
government to shift to LPG policies.
 Thanks to these policies, the forex reserves of the country have now
reached a comfortable level.
 A good amount of forex reserves enhances the economic confidence of
global investors in the Indian markets.
5. The flow of Private Foreign :
 This has been a matter of great relief to the government in view of facts
that :
i. Domestic economy was not generating enough of surplus for
reinvestment, and
ii. Indigenous technology was getting obsolete.
 It is significant to note that private foreign investment is often
accompanied with innovative techniques of production.

Demerits of LPG Policies

1. Neglect of Agriculture :
 The slow growth of the agricultural sector must ultimately hinder the
process of growth of the industrial sector as well. This is because :
i. The agricultural sector is an important source of raw material for the
industrial sector.
ii. The agricultural sector is the principal source of labor supply to the
industrial sector, and
 iii. The agricultural sector is a significant source of demand for industrial
products like tractors and thrashers.

2. Urban Concentration of Growth Process :

 LPG policies have resulted in the concentration of growth process in urban
areas.
 All MNCs are focusing only on urban areas, where they find conducive
infrastructural facilities. This has further widened the ‘rural-urban gulf’.
 Rural-urban gulf implies economic dualism which deepens social dualism
as well.
 Economic and social dualism are always a big threat to the process of
growth and development.
3. Economic Colonialism :
 India suffered nearly 200 years of political colonialism during British rule.
 New, while MNCs are expanding their economic control, we might suffer a
sort of economic colonialism.
 Implying a situation where MNCs are exploiting the Indian markets to sell
their products and in the process, domestic producers are marginalized
owing to their poor competitive strength.
4. Spread of Consumerism :
 The Spread of MNCs in the country as a consequence of LPG policies has
resulted in a large-scale spread of consumerism.
 Indian society is adapting itself to the western culture of spending through
borrowing.
 This may expand size of the market for the traders and the manufacturers
but certainly enhances the vulnerability of the households a consumer.
5. Cultural Erosion :
 Globalization has also led to cultural erosion in Indian society. Following
are some significant observations in this context :
 Economic prosperity has taken a lead over all other parameters of life.
 Everyone wants to be economically independent and well-off, regardless of
his responsibility towards the family or society.
 Loyalty towards the family and loyalty towards the society which used to
be the strongholds of the Indian social culture are being discarded.

GST (Goods & Service Tax)

  GST is a comprehensive indirect tax which has replaced many indirect taxes
in India. The Goods and service tax was passed in Parliament on 29th March,
2017 & this act came into effect on 1st July, 2017.
 It is a comprehensive, multi-stage, destination-based tax that is levied on
every value addition.
 It has been identified as one of the most important tax reforms post-
independences.
 The Government of India implemented GST following the credo of ‘One
Nation and One Tax’.
 It has replaced 17 Indirect taxes and 23 cesses of the centre and the states,
thereby eliminating the need for filing multiple returns & assessments.
Types of Taxes under GST
1) Central Goods & Services Tax (CGST) : It is the GST levied on the ‘Intra-state’
supply of goods and services by the centre.

2) State Goods & Services Tax (SGST) : It is the GST levied on the ‘Intra-state’
supply of goods & services by the state (including Union Territories with
legislature).

3) Integrated Goods & Service Tax (IGST) : It is the GST levied on the ‘Inter-state’
supply of goods or services and is collected by the centre IGST is equal to the sum
total of CGST & SGST.

Input Tax Credit under GST

An input tax credit means reducing the taxes paid on inputs from taxes to be paid
on output. When any supply of services or goods is supplied to a taxable person,
the GST changed is known as Input Tax.
I. Reduction in Overall tax burden.
II. No hidden taxes .
III. Development of a harmonized national market for goods & services.
IV. Higher disposable income in hand, education & essential needs.
V. Customers to have a wider choice.
VI. Increased economic activity.
VII. More employment opportunities.

GST Council
GST council is a constitutional body for making recommendations to the union
and state government on issues related to goods & services Tax.
1) Constitution : As per Article 279A of the amended constitution, the GST council
which will be a joint of forum of centre and states, consists of :
a. Chairperson : Finance minister.
b. Vice Chairman : Chosen amongst ministers of State Government.
c. Members : MoS (Finance) and all ministers of finance taxation of each state.
2) Quorum : 50% of the total number of members of the goods & Services tax
council shall constitute a quorum at its meetings.
3) The majority required for taking decisions :
 Every decision of the GST council shall be taken at a meeting by a majority
of not less than 75%of the weighted votes of the members present &
voting.
 Vote of the central government shall have a weightage of one-third of the
total votes cast, and
 Votes of all State governments taken together shall have a weightage of to-
thirds of the total vote casts, in that meeting.

Demonetization
 Demonetization is the act of removing a currency unit from its status as
legal tender.
 On the 8th Nov, 016, it was decided to demonetize high-value currency notes
of the denomination of Rs 500 and Rs 1000 with immediate effect, ceasing
to be legal tender, except for a few specified purposes.
 These notes accounted for almost 86% of the country’s cash supply.
 The aim of demonetization was to curb corruption, counter felting the use
of high denomination notes for illegal activities, and especially the
accumulation of ‘black money’ generated by income that has not been
declared to the tax authorities.

Features of Demonetization
Tax Administrative Measures :
 Demonetization is viewed as a tax administration measure as cash holdings
arising from declared income were readily deposited in banks and exchanged for
new notes.
Reduction in Tax Evasion
 Demonetization is also interpreted as a shift on the part of the government
indicating that tax evasion will no longer be tolerated or accepted.

Channelizing Savings into the Formal Financial System :

 Most of the cash deposited in the banking system is bound to be withdrawn.
 But, some of the new deposits scheme offered by the banks will continue to
provide a base loan, at lower interest rates.

Cash-less Economy :
 Demonetization also aims to create a less-cash or cash-lite economy, i.e.,
channeling more savings through the formal financial system and improving tax
compliance.

Human Capital Formation – 1991 (Ch – 4)

Human Capital
 Human Capital refers to the stock of ‘skill and expertise’ of a nation at a
point in time.
 It is the sum total of the skill and expertise of engineers, doctors, professors
and workers of all types who are engaged (or have the capacity and
expertise to be engaged) in the process of production.
Physical Capital
 It includes all those inputs which are required for further production, like
plant and machinery, factory, building, raw materials etc.
The differences between Physical and Human capital are :
Basis Physical Capital Human Capital
 It is tangible &can be easily It is intangible and cannot be sold in the
Tangibility
sold in the market. market
It depreciates with Although depreciation occurs with
continuous use, the passage ageing, but it can be reduced by making
Depreciation
of time and expected continuous investments in education
obsolescence and health.
Although physical capital is
Human capital is less mobile between
completely mobile between
countries as compared to physical
Mobility countries, but its mobility is
capital as movement is restricted by
restricted due to trade
nationality and culture.
barriers.
Physical capital (like
Separability Human capital (like skills of a person)
machinery) can be separated
from Owner from its owner.
cannot be separated from the owner.

Human Capital Formation.

It is the process of acquiring and increasing the number of persons, who have the
skills, education and experience. It is associated with an investment in man and
his development as creative and productive resources.

Sources of Human Capital Formation

Expenditure on On-the-job
Migration
Education Training
Study
Expenditure on Expenditure on
Programmes for
Health Information
Adults

Expenditure on Education :
 Expenditure on education is the most effective way of raising a productive
workforce in the country. It is, therefore, a very important determinant of human
capital formation.
 Education enables an individual to make a good living throughout his life. His total
earnings during his life span would far exceed his initial expenditure on
education.
  The monetary benefits of education (in terms of earnings of the educated person
during his lifetime far exceed the cost of education.
 The difference between benefit and cost is an approximate market value of
human capital formation.

Expenditure on Health
 “A sound mind in a sound body” is an old saying. Expenditure on health makes a
man more efficient and, therefore, more productive. His contribution to the
production process tends to rise. He adds more to the GD of the nation than a
sick person.

On-the-Job Training :
 On-the-Job training helps workers to sharpen their specializes skills. It enables
them to raise the level of their efficiency/productivity.

Study Programmes for adults :

 Ither than formal education at the primary, secondary, and university levels, the
Government and NGOs organize study programmes for adults to make them
proficient in their work areas. This enhances their productivity, serving as a
source of human capital formation.

Migration :
 Migration contributes to human capital formation as it facilitates utilization of
(otherwise) inactive skills of the people, or it facilitates fuller/better utilization of
the skills.

Expenditure on Information :
 Information relating to job markets and educational institutions offering
specialized skills is an important determinant of skill formation. It enables people
to actualize their productive potential. Accordingly, expenditure on information is
another determinant of human capital formation.

Comparison Between Human Capital and Human Development

 Human Capital and Human Development are related concepts, but certainly not
identical.
 Human capital is a means to an end.
  Human capital is a means in the sense that consists of ‘skills’ as used in the
process of production. It consists of ‘know-how’, abilities, and expertise used as
inputs in the production activity. An increase in productivity (referring to output
per unit of input) is the end result. Thus, we want to achieve higher and higher
levels of output through extensive and intensive application of human capital.
 Human development is an end in itself. It refers to the development of individuals
as valuable personalities by acquiring a good education and attaining good health.
Human development occurs when more and more individuals in a society are
educated, healthy, and skill-oriented.

Roles of Human Capital Formation.

1) Change in Emotional and Material Environment of Growth : Human Capital
formation generates a change in the emotional and material environment of
growth.
a. The emotional environment becomes conducive to growth as people tend
to acquire growth-oriented attitude and aspirations.
b. The material environment becomes helpful to growth as the society now
possesses higher number of skilled and trained workers to implement the
plans and programmes of economic growth.
2) Higher Productivity of Physical Capital : Human Capital formation increases
the productivity of physical capital (referring to output per unit of capital).
Specialized engineers and skilled workers can certainly handle machines better
than others. It enhances productivity and accelerates the pace of growth.
3) Innovative Skills : Human Capital formation facilitates innovations, the under-
current of growth and development. Larger the number of skilled and trained
personnel, greater the possibilities of innovations in the area of production and
related activities. Innovation is the lifeline of growth, we all know.
4) Higher Rate of Participation and Equality : By enhancing the productive
capacities of the labor force, human capital formation induces greater
employment. This increases the rate of participation (percentage of labor force
participating in the process of production or simply the percentage of
employment of the existing labor force).
a. Thus, there is a cause-and-effect relationship between human capital and
economic growth. Human Capital formation stimulates the process of
economic growth.
b. Economic growth also impacts Human Capital formation. Growth implies
an increase in per capita real income (or an increase in per capita
 availability of goods and services). Higher income facilitates higher
investment on education and skill implying Human Capital formation.
c. Thus, Human Capital formation prompts the process of growth, and
growth prompts the process of human capital formation.

Note :
Human Capital formation (increase in the stock of human capital)→ Letter/Efficient utilization of
physical capital→ Increase in productivity (output per unit of labor/capital)→ Increase in GDP
growth along with the higher rate of participation/employment→ Higher level of income of the
individuals and households→ Higher expenditure on education and health→ Increase in the
stock of human capital (implying human capital formation).

Major Problems Human Capital formation Currently facing in India.

Problems of Human Capital formation

Insufficient
Deficient Low
Rising On-the-job
Brain Drain Manpower Academic
Population Training in
Planning Standards
primary Sector

 Rising Population
The rapidly rising population adversely affects the quality of human capital. This is
because it reduces the per-head availability of the existing facilities relating to housing,
sanitation, drainage, water-system, hospitals, education, power supply, etc.

 Brain Drain
Migration of persons (born, educated, and trained in India) to developed countries is a
serious threat to the process of Human capital formation in the country. Those who
decide to migrate are persons of high caliber such as scientists, administrators,
executives, engineers, physicians, educationists, etc. This is described as the problem of
brain drain. This slows down the process of human capital formation in the domestic
economy.

 Deficient Manpower Planning

Not enough efforts have been made to maintain the demand-supply balance of the
ever-rising labor force in the country. As a result, India is facing an explosive problem
relating to graduate unemployment.

 Insufficient On-the-job Training in primary Sector

Migration of persons (born, educated, and trained in India) to developed countries is a
serious threat to the process of Human capital formation in the country. Those who
decide to migrate are persons of high caliber such as scientists, administrators,
executives, engineers, physicians, educationists, etc. This is described as the problem of
brain drain. This slows down the process of human capital formation in the domestic
economy.

 Low Academic Standards

In our enthusiasm to spread higher education, we have been opening many universities,
unmindful of their academic standards. Consequently, we have a large army of half-
baked graduates and post-graduates whose deficient skills only lowers the level of
efficiency/productivity.

Education is an essential element of Human Resource Development

Education implies the process of teaching, training, and learning, (especially in schools
or colleges). It improves knowledges and develops skills.
Education and Literacy are not Identical terms :
 Education is a much wider concept than literacy.
 Literacy just refers to the ability to read and write.
 Education, on the other hand, encompasses three parameters, viz., primary
education, secondary education, and tertiary or higher education.
 While all educated people are literate, all literate people are not necessarily
educated.
Importance/ Objectives of Education :
 Education produces responsible citizens.
 It develops science and technology.
 It facilitates the use of natural & human resources in all regions of the country.
 It expands the mental horizon of the people.
 It helps economic development through greater participation of the people in the
process of growth and development.
 It promotes the cultural standards of the citizens.
  It develops a human personality.
Need for Govt. Intervention in Education & Health : The need for government
intervention in education & health arises primarily on account of the following facts :
 These sectors need huge investments with a very high fixed expenditure.
 It is difficult to expect private investors to invest in health and education unless
they are allowed to recover their huge costs through the high price of these
services.
 People in poor countries like India cannot afford high prices for education and
health.

Growth of the Education Sector in India :

Technical,
Adult and
Elementary Higher Medical, and
Female
Education Education Agricultural
Education
Education

Growth of the Education Sector in India

Secondary
Expansion of Vocationalization
and Senior Rural Total Literacy
General of Secondary
Secondary Education Campaign
Education Education
Education

Expansion of General Education :

 During the plans, the number of educational institutions providing elementary
education has increased roughly by five times and the number of students has
increased ten-fold.
Elementary Education :
 Elementary education covers students from class1 to class 8 (primary and middle)
in the age group of 6 to 14 years.
 The number of primary and middle schools has considerably increased.
 Social and economic poverty is the principal cause of educational backwardness
Secondary and Senior Secondary Education :
 In 1987-88, Navodaya Vidyalaya was established to import modern education of
good standard to talented students of rural areas. These schools provide
boarding facilities to the students.
 The central government has established Kendriya Vidyalaya (central schools) for
the benefit of the children of transferable employees.
Higher Education :
 After independence, higher education has shown a convincing growth over time.
 As many as 799 universities are providing higher education in the country.
 Of these, there are 44 central universities. Besides, there are 40 deemed to be
universities.
Vocationalization of Secondary Education :
 Under the plan, financial assistance is given to those schools that start the
vocational course at the higher secondary (+2) level.
 Vocational courses have been introduced in the areas of agriculture, trade and
commerce, engineering, technology, health and medicines.
Technical, Medical, and Agricultural, Education :
 Since Independence, the number of institutions imparting technical and
professional education has increased significantly.
 Many research centers have also been set up in the country, e.g., the Indian
institute of Technology, Agriculture Research Institute, Indian Statistical Institute,
National Physical Laboratory, National Chemical Laboratory, Institute of
economic growth, etc.
 Many agricultural universities have also been set up in the country.
Rural Education :
 Rural areas have also witnessed the wide expansion of education.
 National Rural Higher Education Council has been set up for this purpose.
 Under this council, 14 rural educational institutions have been functioning.
Adult and female education
 In order to eradicate illiteracy among adults, special arrangements have been
made for adult education.
  In order to provide technical education to women, many polytechnics have also
been established. ‘ Women Education Council’ is a significant step to promote
education among women.
Total Literacy Campaign
 National Literacy Mission was launched to render everybody literate in the
country.
 This Programme has now been recast as ‘ Saakshar Bharat’ with a central focus
on female education. The Programme covers all those in the age group of 15 and
above.

Education Still a Challenging Proposition

Large Number of Illiterates
 India harbors the largest numbers of illiterates in the world. Presently, nearly 36
crore people are estimated to be illiterate. The number exceeds even the total
population of most countries in the world.
Inadequate Vocalization
 Education continues to be largely degree-oriented throwing millions of educated
youths down to the corridors of employment exchanges. Vocationalization of
education is still a far cry.
Gender Bias
 There is still a significant ‘gender bias in offering opportunities for education to
male and female children. The enrolment ratio is relatively low for female
candidates and their drop-out ratio is considerably high.
Low Rural Excess Level
 There is a high degree of disparity in access to education. The ‘access level’ is
considerably low for the rural population compared to the urban population.
Privatization
 There is a growing trend toward privatization of education. Being very expensive,
private education has tended to widen the gulf between access levels for the rich
and the poor.
Low Government Expenditure on Education
 The government has failed to fulfil its commitment of spending nearly 6 % of GDP
on education: actual expenditure has been around 4 – 5 % only.
This points to the gap between what is intended or desired and what is actually
achieved.