Economics notes for ias

Important Topics Basic Economic Indicators: (Statistical Data) - National Income - Production - Price Index - Foreign Trade - Population Features of Indian Economy - Division of Economic activities - Unemployment - Types - Poverty - HDR - easures to eliminate poverty Population - Population gro!t" - Population policy #$$$ - %ensus - #$$& - %onsumption Pattern - Energy %onsumption - 'ources of energy - various programmes National Income - et"ods of National Income calculation - %oncepts of National Income Agriculture - Importance - %rops and seasons - (gricultural %redit agencies) N(*(RD+ RR*) Etc)+ - ,isan %redit 'c"emes - -and Reforms - (gricultural Insurance+ N(I'+ 'eed %rop Insurance - .reen+ /ello!+ 0"ite+ *lue revolutions - Irrigation pro1ects - Drip irrigation - Development measures Industry - Industrial Policies - &234+&256+&22& - Initiatives ta7en - 'mall 'cale Industries - 8arious 7ey industries - 8arious %ommittees and t"eir recommendations - Industrial sic7ness - Dis investment - P'E Policy - Industrial Finance oney and Ban!ing - (spects of money mar7et - %redit %ontrol - 8arious Rates - %ommercial *an7s+ %o-operatives+ N*F%) - %ommittees and recommendations - 'E*I - 'toc7 mar7et developments - Insurance Industry - Ne! *an7ing 'ector reforms - Inflation+ Deflation

- oney supply measures Foreign Trade - %omposition and direction - Exim policy and ot"er (cts - Foreign Trade improvement measures ta7en - 0T9 - *9P International "rganisation De#elopment and employment Programmes Planning - Planning %ommission - Five /ear Plans and imported features Pu$lic Finance - Finance %ommission - 8arious formulas for Plan assistance to states - Taxation - Reforms - Pu:lic spending and De:t) - Deficit financing

Distribution of Questions 1. Indian Economy majority of questions are asked from this area; there are usually about 40 4! questions "er year from this section. #. $tatistics there are about % 10 questions e&ery year. '. (ro)th and De&elo"ment about 10 questions. 4. *icro and *acro Economics about '! 40 questions e&ery year. !. International Economics about 1! #0 questions e&ery year. +. *oney, -ankin. / 0ublic 1inance about 10 1! questions e&ery year. 2eference 3 $ources 1. Indian Economy 4ny one .ood book on Indian economy, it can either be *ishra 0uri or Dutt $undaram. 0ratiyo.ita Dar"an s"ecial issue on economics,economic sur&ey and bud.et from ne)s "a"er. #. $tatistics class 115th 67E28 book is more than sufficient. '. (ro)th andDe&elo"ment * 9 :hin.an and 67E28 book of class 115th. 4. International Economics book by ;.(.*annur or $al&atoire. !. *oney, -ankin. / 0ublic 1inance $.-.(u"ta / 0ratiyo.ita Dar"an <$"ecial issue= for bankin. and ;.9.-hatia for 0ublic 1inance. +. *icro Economics 67E28 / >outsoyyiannis or 4huja. %. *acro Economics 67E28 / :;I6(46. ?. $ol&ed 10 years "a"er and any one "ractise book<e..II*$ Question bank= of any

"ublication. $trate.y 1. *ore em"hasis should be on 67E28 -@@>$ .Do it "ro"erly and don5t underestimate them because many questions are asked directly from them only. #. 0ractise and re&ise dia.rams re.ularly. '. 7oncentrate mainly on *icro, *acro / Indian Economy because majority of questions are asked from these areas. 4. $ol&e all the statistics questions from "re&ious year "a"ers. !. Do read economic sur&ey "ro"erly and "ay s"ecial attention to the boAes of sur&ey. +. It is not necessary to cram all data and fi.ures just memoriBe only im"ortant and rele&ant ones. %. $ol&e "re&ious year "a"ers and "ractise book<e..II*$ Question bank= re.ularly

ECONOMIC GROWTH AND DEVELOPMENT

Introduction
Economies .ro) and de&elo", they eA"and and ad&ance, and they "ro.ress and "ros"er. 8here are "hases )hen they decline too, and there are economies that eA"erience continuous decay. If one considers lon. stretches of human history, one kno)s that economies <ci&iliBations= disa""eared alto.ether. Ce )ill not take into account such lon. stretches of time. Ce shall not consider too distant a "ast either. Ce )ill lea&e them to historians, may be, economic historians.
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9et us take a normal &ie). Ce shall then acce"t decline as an occasional, tem"orary "henomenon. Ce shall, therefore, use "ositi&e terms only. @f the "ositi&e terms, )hich ha&e been used to describe chan.es as )ell as to "rescribe chan.es, t)o ha&e sur&i&ed. 8hey are .ro)th and de&elo"ment. -ecause )e shall "rimarily look at nations and countries as economies, and use terms such as Deconomic .ro)th5 and Deconomic de&elo"ment5. Ce shall often try to distin.uish Deconomic5 from Dnoneconomic5 thou.h there are cases )here it becomes difficult to do so. In order to accommodate decline in le&el, )e use "hrase Dne.ati&e .ro)th5 and to

describe "er&erse tendencies, )e may use )ords Dde de&elo"ment5 or Dmalde&elo"ment5 thou.h, )e )ill not ha&e occasions to use them. Eou may find that, sometimes in many scientific treatises and &ery often in colloquy, )ords D.ro)th5 and Dde&elo"ment5 are used in interchan.eable fashion. -ut, normally a distinction is made bet)een the t)o, "articularly in economics literature. It is maintained alon. the follo)in. lines. Eou mi.ht ha&e noticed that the )ord D.ro)th5 is used to describe increase in stature or siBe. It is used to describe a uni dimensional chan.e, as in the case of stature of a child or a uniform eA"ansion in all directions, as in the case of siBe of a balloon. E&en )hen )e refer to de&elo"ment of a child, )e refer to &arious dimensions of its "ersonality. Chen )e do not refer to dimensional as"ects )e use the )ord D.ro)th5. E&en schools and institutes, colle.es and uni&ersities, hotels and hos"itals .ro). -ut, )e are often quick to "oint out certain features that are not ca"tured by )ord D.ro)th5. It is rare, if e&er, that .ro)th takes "lace )ithout de&elo"ment or de&elo"ment takes "lace )ithout .ro)th. In most cases, they )ould accom"any each other. 8here may be cases )hen one is dominant and the other is dormant. In such cases, "eo"le talk of .ro)th )ithout de&elo"ment or de&elo"ment )ithout .ro)th. It is, therefore, .ood to make an analytical distinction bet)een the t)o.

Economic %ro&t'
9et us take here a com"rehensi&e &ie) of the economy, takin. all acti&ities to.ether, and call its .ro)th as economic .ro)th. 9et us look at it from the &ie) "oint of "roduction. 8he total quantum of .oods and ser&ices "roduced in an economy in a .i&en year is referred to as (ross Domestic 0roduct. 9et us measure it at factor cost and )rite it in its abbre&iated form (D017. 8he (D017 in #000 01 )as around 2s 1%,00,000 crore. 8his is a flo) of .oods and ser&ices "roduced durin. the year #000 01, measured in &alue terms. Ce may be interested in kno)in. )hether the flo) this year is lar.er than the flo) last year. If so, )e should kno) the measure of the flo) last year. In order to see that )e measure the Dreal5 chan.e in flo), )e should com"ute the ma.nitude of flo)s in both the years in the same "rices. 8he "rices may belon. to #000 01 or 1FFF #000 or to 1FF' F4; the "oint is that the "rices should relate to only one common year so that )e measure only the chan.e in flo) of out"ut, not a miA of chan.e in out"ut and chan.e in "rices. $uch (D0s are said to be measured at constant "rices. $u""ose you look into a recent issue of the 6ational 4ccounts $tatistics "ublished by the 7entral $tatistical @r.anisation and find that at 1FF' F4 "rices, the (D017 for 1FFF #000 and #000 01 are 2s.10,00,000 crore and 2s.10,+0,000 crore res"ecti&ely. 8he .ro)th in flo) called (D017 in absolute terms is 2s.+0,000 crore. In relati&e terms it is + "er cent and it is called .ro)th rate. If )e "re"are a )hole series for 10, #0 or !0 years then )e often add )ords D"er annum5 or D"er year5 to .ro)th rate. 8he .ro)th rate is often eA"ressed in terms of "er cent "er annum. 8his is a "ositi&e chan.e; there could be a ne.ati&e chan.e also. $u""ose, )e look at a t)enty year "eriod and use yearly fi.ures for flo) of out"ut of

.oods, )hich is measured in terms of (D017 at constant "rices. 8he .ro)th rates calculated on yearly basis )ould differ from year to year. $hall )e use nineteen year to year fi.ures of .ro)th rate, some of )hich may be ne.ati&e, to describe the chan.eG @r, should )e just com"are the initial fi.ure )ith the final fi.ureG If )e ado"t the former, ho) to summarise the nineteen fi.uresG If )e ado"t the latter, it is "ossible that one of these <initial or final= fi.ures is just Dabnormal5 as it does not fall in line. Could it not be a .ood idea to s"eak of .eneral tendency and i.nore abnormal fluctuations around the .eneral tendency of increaseG Economic .ro)th should, therefore, be taken as a lon. term tendency reflected by increase in flo) of final .oods and ser&ices "roduced by the economy. If there is a .eneral tendency of .ro)th but there are occurrences of decline, the rates of .ro)th )ill be ne.ati&e in certain years. $hall )e then say that, )hile the "otential of economy to "roduce is continuously increasin., the "otential is sometimes not realisedG 8here could be &arious reasons for occasional decline. In economies that de"end to a lar.e eAtent on eAternal trade conditions in other countries may affect the realisation. *onsoon may )idely fail in certain years and economy may .et derailed for a )hile. Internal demand may for a &ariety of reasons fail to make full use of the "otential. $ome economists "ut too much em"hasis on su""ly "otential and i.nore demand conditions. 8hey define economic .ro)th as lon. term increase in "roduction "otential of the economy. $ome economists feel that it is .ro)th of "er ca"ita (D017, not (D017, that should be used to .au.e the .ro)th of an economy. -ut the "oint to be noted is that economic .ro)th is a lon. term "henomenon about the chan.e in total economic acti&ity of an economy.

Indicators of Develop ent

Introduction
Eou may recall that )e ha&e defined economic de&elo"ment as a "rocess but also referred to it as a le&el.
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In this subunit, our attention )ould be focussed on the le&el of de&elo"ment achie&ed at a .i&en "oint of time <.i&en year=. In fact, in this conce"tion, you may note that .ro)th is a quantitati&e chan.e bet)een t)o le&els of de&elo"ment or le&els of de&elo"ment at t)o "oints of time. (ro)th is basically an inter tem"oral com"arison. 1or com"arison bet)een t)o economies, )hich )e often resort to, there eAists no such term. -ut such a com"arison is often made. *ost "eo"le )ould a.ree that de&elo"ment is a "rocess and the "rocess is multi dimensional. Chen any "rocess is concei&ed as multi dimensional, it

becomes difficult to adequately ca"ture its character throu.h any indeA. ;o)e&er, some attem"ts ha&e been made to measure the le&el. Ce shall discuss four alternati&es to measure the le&el of de&elo"mentH 0er 7a"ita Income, 0hysical Quality of 9ife IndeA, ;uman De&elo"ment IndeA and Quality of 9ife IndeA.

Per (apita Income

(ross domestic "roduct is su""osed to measure the le&el of out"ut "roduced by the economy durin. an accountin. "eriod. ;o)e&er, the command of "eo"le o&er .oods is some)hat different than (D0. Ce ha&e our "ro"erty outside our o)n national economy and some of our nationals )ork in other countries. 4s a result, )e earn )a.e income or "ro"erty income outside the country. $imilarly, forei.ners ha&e "ro"erty in our economy and some forei.ners do )ork here. 4djustin. for these incomes, )e .et .ross national "roduct <(60=. In the case of lar.e countries and countries ha&in. little interaction )ith other countries for factors of "roduction, (D0 and (60 are not &ery different. -ut, there are economies )here (60 and (D0 are quite different. In our case, (60 is some)hat less than (D0. It may be noted that (60 better re"resents the entitlement of the nationals of a country <indi&iduals and their collecti&ities= )hile (D0 actually sho)s the out"ut of the acti&ities carried out )ithin the economic boundaries of the country. $till further, )e should take account of consum"tion of fiAed ca"ital in the "rocess of "roduction. Ce should ensure that the ca"ital stock is ke"t intact durin. the year; other)ise, )e shall, one day, eat a)ay the )hole of our fiAed ca"ital. $o, )e should subtract that amount of ca"ital, )hich )e think has been consumed in the "rocess of "roduction. 8hen, )hat )e shall .et is kno)n as 6et 6ational 0roduct <660=. 6et national "roduct is also kno)n as the national income. Ce shall use a "articular &ersion of net national "roduct kno)n as net national "roduct at factor cost and desi.nate as 66017. 6o), if )e )ant to com"are the )elfare of "eo"le at t)o "oints of time or of t)o economies at the same "oint of time, it becomes necessary to find out the siBe of "o"ulation. 1rom the &ie) "oint of )elfare or )ell bein. of the "eo"le, for )hich de&elo"ment is "ursued, it is su..ested that the 66017, &alued at constant "rices, should be di&ided by the siBe of the "o"ulation. 66017 di&ided by "o"ulation is "o"ularly kno)n as "er ca"ita income. It hel"s us to com"are the le&el of de&elo"ment of the country in #001 )hen )e are 100 crore )ith that in 1F+1 )hen )e )ere 4' crore only. In order to render international com"arisons meanin.ful, national incomes should be di&ided by siBes of their res"ecti&e "o"ulations. @ther)ise a country like 7anada, )hich by all standards, is considered a rich country, could be found to be "oorer than India. 8he "o"ulation of India may be '0 times that of 7anada. $uch a di&ision <deflation3normalisation= is needed e&en to assess the "ro.ress o&er time. 1or eAam"le, our 66017 has .ro)n a little more than ei.ht fold o&er the last fifty years but the "o"ulation has also almost trebled durin. this "eriod. 4s a result, "er ca"ita income has .ro)n less than three times. @ur li&in. conditions can be eA"ected to ha&e

become better by a factor of three rather than by a factor ei.ht. Cith this in &ie), "er ca"ita national income has come to be increasin.ly used. In short, it hel"s us to com"are the de&elo"ment of India )ith that of the I$4 or )ith that of 0akistan for any .i&en year as also our o)n de&elo"ment o&er time. Ce may further note that it is this indicator, )hich is often used to cate.orise countries as de&elo"ed3 underde&elo"ed countries or hi.h3 middle3lo) income countries. In the case of international com"arison, "er ca"ita incomes of different countries ha&e to be brou.ht to a common currency. ;o)e&er, it is &ery often "ointed out that its sco"e is quite limited. *ost of the limitations arise from the numerator )hate&er it may be, namely, (D0, (60 or 660. 8hese conce"ts do not account for the economic acti&ities "erformed inside the household, )hich are non marketed. -ulk of )omen5s household )ork .ets i.nored, )hile it is equally im"ortant from the "oint of &ie) of )ell bein. and )elfare of "eo"le. It does not adequately ca"ture acti&ities "erformed e&en outside household. 4s "roduction is &alued in terms of market "rices, acti&ities for )hich there does not eAist market do not adequately .et accounted for. It is also "ointed out that economic )elfare, )hich it can measure, e&en thou.h im"erfectly, is not the total )elfare that the "eo"le look for.

Gro!t" and #tr$ct$ral C"an%e in t"e Indian Econo &

Introduction
In this cha"ter you )ill study the .ro)th of and structural chan.e in the Indian economy in the last fifty years since 1F!0 !1 for )hich data on most of the macro a..re.ates are a&ailable on an annual basis.
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Ce shall concentrate on the .ro)th of .ross domestic "roduct at factor cost &alued at 1FF' F4 "rices. Ce shall consider the .ro)th of "er ca"ita national income, also &alued at 1FF' F4 "rices, )hich can be taken as the sim"lest indicator of the le&el of li&in. or de&elo"ment. In an earlier cha"ter, one of the notions of de&elo"ment )as "osed in terms of structural chan.e alon. )ith .ro)th. Chat do )e mean by structureG *ost "eo"le mean by it "roduction structure, that is, com"osition of out"ut "roduced by the economy. $ome )ould like to find out ho) and )here our labour is absorbed. @ther factors such as land and ca"ital are not .i&en equal im"ortance. $ome )ould also like to find out ho) the

"roduction of out"ut is di&ided bet)een rural and urban areas of the country or bet)een "ublic and "ri&ate sectors of the economy or bet)een or.anised and unor.anised sectors. Ce shall discuss all of them. -ut )e can a""reciate de&elo"ments since Inde"endence better once )e ha&e a little hint about the scene on the e&e of Inde"endence.

Economy on t'e e#e of Independence

Ce had inherited an economy, )hich )as basically .eared to the interest of our colonial masters. 8he rate of .ro)th of "er ca"ita income durin. the hundredyear "eriod before Inde"endence, from )hate&er scanty information is a&ailable, )as just 0.! "er cent "er annum. It has further been noted that there )ere lon. s"ells )hen the economy actually sta.nated or declined. In the "ast, )e )ere kno)n for "roducin. fine cotton fabric, handicrafts and other merchandise. E&en durin. the early -ritish 2aj, that is, before the onset of industrial re&olution in -ritain, our economy )as an industrial economy by the standards of those days )hereas the Euro"ean economies had yet to usher in modern ci&ilisation. Eet, by the time )e .ot Inde"endence, our economy )as "rimarily reduced to an a.ricultural economy and )e used to eA"ort mainly ra) materials and minerals for the -ritish industries and e&en food.rains )hile )e mi.ht ha&e been hun.ry oursel&es. In 1F!0 !1, our "er ca"ita income )as no more than 2s ',%00 at 1FF' F4 "rices <)hile in 1FFF #000, it is a little more than 2s 10,000=. 8he contribution of a.riculture sector <includin. animal husbandry and li&estock= to the (D0 )as around !4 "er cent by current "rices and !0 "er cent by constant "rices of 1FF' F4. If )e include forestry and lo..in. and fishin. in this sector, then the contribution turns out to be !% !? "er cent. 4nd, if )e add minin. and quarryin. and call the combined sector as "rimary sector, the contribution of "rimary sector is found to be about +0 "er cent. *anufacturin. contributed only around 10 "er cent. 7ontribution of the ser&ice sector )as thus around '0 "er cent. *ost of the "eo"le )ere en.a.ed in a.ricultureJas culti&ators on their o)n tiny holdin.s or as )a.e labourers on others5 fields.

%ro&t' of %DP since )*+,-+)

(ro)th of an economy is reckoned )ith .ro)th in its (D0 at constant "rices. Ce ha&e no) a com"lete series of .ross domestic "roduct at 1FF' F4 "rices from 1F!0 !1 on)ards but )e .i&e here the (D0 series at fi&e yearly inter&al <see abo&e table=.

;o)e&er, in order to .i&e you a feel about the .eneral tendency of rise and occasional decline in a fe) years in com"arison to their res"ecti&e "recedin. years, )e .i&e here a .ra"hical "resentation of the )hole series. Ce notice from the .ra"h that there )ere occasional dro"s in the (D0 )hich )e do not notice in the abrid.ed 8able "resented here. -ut, .enerally it has been risin.. @&er the "eriod of last fifty years, it has increased more than ei.ht times. -ut )e are and should be more interested to kno) )hether .ro)th rate itself has risen o&er time. Ce can also calculate rates of .ro)th for different "lan "eriods or different decades or for "eriods di&ided by si.nificant e&ents. 4ll such breaku"s ha&e been used by scholars. Ce shall calculate .ro)th rate "er annum by decades only. Ce shall use t)o "o"ular methods of calculation of annual rate of .ro)th for lon. "eriods, &iB. a&era.e annual .ro)th and com"ound annual .ro)th rate.

Econo ics 'asics( Prod$ction Possi)ilit& *rontier+ Gro!t"+ Opport$nit& Cost and Trade
Production Possi$ility Frontier (PPF)
Inder the field of macroeconomics, the "roduction "ossibility frontier <001= re"resents the "oint at )hich an economy is most efficiently "roducin. its .oods and ser&ices and, therefore, allocatin. its resources in the best )ay "ossible.
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If the economy is not "roducin. the quantities indicated by the 001, resources are bein. mana.ed inefficiently and the "roduction of society )ill d)indle. 8he "roduction "ossibility frontier sho)s there are limits to "roduction, so an economy, to achie&e efficiency, must decide )hat combination of .oods and ser&ices can be "roduced. 9etKs turn to the chart belo). Ima.ine an economy that can "roduce only )ine and cotton. 4ccordin. to the 001, "oints 4, - and 7 all a""earin. on the cur&e re"resent the most efficient use of resources by the economy. 0oint L re"resents an inefficient use of resources, )hile "oint E re"resents the .oals that the economy cannot attain )ith its "resent le&els of resources.

4s )e can see, in order for this economy to "roduce more )ine, it must .i&e u" some of the resources it uses to "roduce cotton <"oint 4=. If the economy starts "roducin. more cotton <re"resented by "oints - and 7=, it )ould ha&e to di&ert resources from makin. )ine and, consequently, it )ill "roduce less )ine than it is "roducin. at "oint 4. 4s the chart sho)s, by mo&in. "roduction from "oint 4 to -, the economy must decrease )ine "roduction by a small amount in com"arison to the increase in cotton out"ut. ;o)e&er, if the economy mo&es from "oint - to 7, )ine out"ut )ill be si.nificantly reduced )hile the increase in cotton )ill be quite small. >ee" in mind that 4, -, and 7 all re"resent the most efficient allocation of resources for the economy; the nation must decide ho) to achie&e the 001 and )hich combination to use. If more )ine is in demand, the cost of increasin. its out"ut is "ro"ortional to the cost of decreasin. cotton "roduction. 0oint L means that the countryKs resources are not bein. used efficiently or, more s"ecifically, that the country is not "roducin. enou.h cotton or )ine .i&en the "otential of its resources. 0oint E, as )e mentioned abo&e, re"resents an out"ut le&el that is currently unreachable by this economy. ;o)e&er, if there )as a chan.e in technolo.y )hile the le&el of land, labor and ca"ital remained the same, the time required to "ick cotton and .ra"es )ould be reduced. @ut"ut )ould increase, and the 001 )ould be "ushed out)ards. 4 ne) cur&e, on )hich E )ould a""ear, )ould re"resent the ne) efficient allocation of resources.

Chen the 001 shifts out)ards, )e kno) there is .ro)th in an economy. 4lternati&ely, )hen the 001 shifts in)ards it indicates that the economy is shrinkin. as a result of a decline in its most efficient allocation of resources and o"timal "roduction ca"ability. 4 shrinkin. economy could be a result of a decrease in su""lies or a deficiency in technolo.y. 4n economy can be "roducin. on the 001 cur&e only in theory. In reality, economies constantly stru..le to reach an o"timal "roduction ca"acity. 4nd because scarcity forces an economy to for.o one choice for another, the slo"e of the 001 )ill al)ays be ne.ati&e; if "roduction of "roduct 4 increases then "roduction of "roduct - )ill ha&e to decrease accordin.ly.