Capsule Notes of Indian Economy, Class-XII

Prepared by: S C JENA, Principal, PM SHRI KV INS Chilka

Chapter: INDIAN ECONOMY ON THE EVE OF INDEPENDENCE

Dimensions of Indian economy

• Low level of economic development.
• Agricultural backwardness
• Industrial stagnation
• Foreign Trade
• Demographic condition
• Occupational structure
• Infrastructure

A. LOW LEVEL OF ECONOMIC DEVELOPMENT

Causes of low level of economic development:

Exploitive Economic policies of colonial government
Non estimation of national income
Low level of growth of output

B. AGRICULTURE SECTOR

Causes of backwardness of Indian agriculture sector:

 Faulty land settlement policy
 Exploitative revenue settlement policy
 Low level of technology
 Lack of irrigation facilities
 Negligible use of fertilizers
 Commercialization of agriculture
 Partition of India
C. INDUSTRIAL SECTOR
Causes of Industrial stagnation:
 British policy of de-industrialization
 Shutdown of Indian Handicraft industries
 Lack of modern industries
 Lack of capital goods industries
 Limited role of public sector
 Slow growth rate of industrial output

D. FOREIGN TRADE
Structure & composition of trade (Direction of trade)
India's foreign trade was associated with a colonial and agricultural economy
 Exports consisted primarily of raw materials and plantation crops, like raw silk , cotton , wool , sugar ,
indigo, jute etc
 While imports composed of light consumer merchandise and other manufactures like cotton , silk and
woolen clothes , light machinery produced in British industries
 More than 50% of the trade was restricted to Britain.The rest was allowed with a few other countries like
Ceylon (Sri Lanka) , China , and Persia (Iran)

Impacts of foreign trade

Generation of huge export surplus.
Drain of Indian wealth:

E. DEMOGRAPHIC CONDITION

Account of demographic conditions of India

 Before 1921 India was in the 1st stage of demographic transition and after 1921 it entered in to 2nd stage
 High birth rate and death rate : Birth rate 48% and death rate 40% (Growth Rate was 8% , current rate is 17.7%)
 Low literacy rate (percentage of people literate in the age of 7 years and above)
Literacy rate was less than 16% and female literacy rate was 7% (Current 2011 census literacy rate
= 73%, Male= 80.9% , Female = 64.6%)
 High infant mortality rate (no. of children died before attaining the age of 1 year per 1000 live birth in a year)
The IMR was 218 per thousand (presently in 2011 census = 40)
 Low life expectancy (on an average how many years a person live in the present environment condition)
Life expectancy was 32 years (currently in 2011 census = 68.13 years)
  High rate of poverty
In absence of the reliable data it is difficult to specify the extent of poverty but there is no doubt that
extensive poverty was prevailed in India during British period
 Inadequate public health facilities
The public health facilities were not available. As a result water and air borne disease were rampant
and there was high rate of morbidity

F. OCCUPATIONAL STRUCTURE

Sectors
Share of work force
in the year 1951 (in
Share of Workforce (in %)
%) Service
17%
Primary Industry
72.1 11%
(Agriculture)

Secondary
10.7
(Industry) Agriculture
72%
Tertiary
 Primary 17.2 sector was
(Service)
10.7%
 There was wide regional variation in occupational structure
 Parts of then Madras Presidency (Comprising Tamil Nadu , Andhra Pradesh , Kerala and Karnataka) ,
Maharashtra and West Bengal witnessed a decline in dependence of work force on agriculture
 There was increase in the share of work force in agriculture sector in the states like Odisha , Rajasthan and
Punjab
G. INFRASTRUCTURE
 interest

State of India’s infrastructure on the eve of independence

Roads:
 The British govt. could not accomplish much on building roads due to paucity of funds

Purpose:
 To mobilize the British army within India for administrative control over India
 To draw out raw materials from the country side to the nearest railway station or the port to send these to far
away England or other lucrative foreign destinations

Railway:
 The British introduced the railways in India in 1850
 It is most of the important contribution of the British govt. in India

Purpose:
 Effective control:
 Commercial objective
 Source of investment:

Positive contributions of British in India

 Introduction of Railways:
 Introduction of Commercialization of Agriculture:
 Introduced Free Trade to India:
 Development of Infrastructure:
 Promoted Western Culture:

Features of Indian Economy on the Eve of Independence

(a) Underdeveloped Economy
(b) Stagnant Economy:
(c) Semi-Feudal Economy:
(d) Depreciated Economy
(e) Pre-dominance of Agriculture:
(f) Low level of capital formation
(g) Industrial Backwardness:
Chapter-2: INDIAN ECONOMY: 1950-1990

GOALS/OBJECTIVES OF FIVE YEAR PLANS

Each five year plan has its specific objectives. But all will be in the line of the general objective of five year plans.
General objectives
There are four general objectives of five year plans in India
 Growth :Growth refers to increase in country’s capacity to produce the output of goods and services within the
country
 Modernization: Adoption of New technology with change in Social Outlook.
 Self-reliance: avoiding imports of those goods which could be produced in India itself
 Equity : Equal distribution of national wealth among all sections of the people

AGRICULTURE SECTOR
Main Features Indian Agriculture
 Low productivity
 Disguised unemployment.
 Dependence on rainfall
 Subsistence farming-objective of farmer is to secure subsistence for his family not to earn profit.
 Traditional inputs
 Small holdings
 Backward technology.
 Landlord tenant conflict.
Reforms and Policies in Indian Agriculture
During British rule there was neither growth nor equity in agriculture sector. To bring reform in agriculture sector the
policy makers adopted two policies.
A. Institutional Reforms
 Land Reform Measures

Land to tiller : It is a policy implemented after the independence to bring equity in agriculture sector by abolishing
intermediaries and making the tillers the owner of the land.
Ceiling on land : It is a policy measures to fix the maximum size of land holding that an individual could own

A. STRATEGIC REFORMS : Implementation of Green Revolution

A revolutionary changes in green agriculture through increase in the production in to multiple times within a short
span by the use of HYV seeds, chemical fertilizers, pesticides etc is called Green Revolution
Impacts of green revolution
Advantages
 Increase in Agricultural Production:
 India achieve self sufficiency in food grains
 The farmers are now earning marketed surplus
 The price of food grains declined and the low income groups are benefited from it
 The govt. is able to maintain huge buffer stock

Disadvantages
 The method was not free from risk
 It increases the disparity between small and large farmers
 HYV crops were more prone to attack by pests
 In terms of crops, it remain largely confined to food grains only, not to all kinds of agricultural produce
 The excessive use of chemical fertilizers decreased soil fertility and also the use of electric tube wells
decreased ground water table below the previous level.

INDUSTRY & TRADE

Five year plans of India give more emphasis to industrial development for the following reasons
• A poor nation can progress only if they have a good industrial sector
• Industry provides stable and sustainable employment
• It provides modernization

Industrial Policy Resolution – 1956

Resolutions of IPR 1956
New Classification of industries:
• The Industrial Policy of 1956 adopted the classification of industries into three categories viz.,

• (i) Schedule A industries, (ii) Schedule В industries, and (iii) Schedule С industries according to the degree of state
ownership and participation in their development:
 • Schedule A, which contained 17 Industries. All new units in these industries, such where their establishment in the
private sector has ready been approved, would be set up only be the state.
• Schedule В which contained 12 industries, such industries would be progressively state owned, but private enterprise
is expected to supplement the efforts of the state in these fields.
• Schedule C. All remaining industries fell in this category; the future development of these industries had been left to
the initiative and enterprise of the private sector.

Other Focus Aras of Industrial Policy 1956

• It recognized the role of cottage and small scale sector in context of employment generation and balanced
regional growth and provided it tax concessions and subsidies.
• It gave priority to industrial development in the backward regions of the country to spur balanced growth.

SMALL SCALE INDUSTRIES

A small scale industry is defined as an industry in which the maximum investment limit allowed on the asset of a unit is Rs. 5
crores.
Promotion of small scale industries:
In 1955 the Village and Small Scale Industries Committee , also called Karve Committee recommended for the
promotion of Small scale industries for rural development. These industries are promoted for two reasons
 It uses labour intensive technique of production , so it can create more employment
 Use of rural resources for development of village economy
 It was promoted through the following ways
 Many products were reserved for small scale industries
 Tax holidays
 Lower excise duty
 Availability of loans at cheaper rate

Role of small scale industry in economic development

 It is a powerful tool for job creation
 It create employment in large scale
 It mobilizes resources and entrepreneurial skills
 It make equitable distribution of income
 It provides opportunities for development of technology
 It promotes exports
 It supports the growth of large scale industries
 It provides better industrial relations

TRADE POLICY: IMPORT SUBSTITUTION

In the first seven five year plans India adopted the inward looking trade strategy, technically called IMPORT
SUBSTITUTION POLICY. This means the policy of replacing of substituting imports with domestic products
Objectives:
 To protect domestic industries from foreign competition
 To save foreign exchange
 To achieve self reliance
 To make use of our own resources

CRITICAL APPRAISAL OF INDUSTRIAL DEVLOPMENT (1950-90)/Effects of industrial Policy

Positive effects:
 Due to public sector Indian industries were largely diversified
 The proportion of GDP contributed by the industrial sector increased from 11.8% in 1950-51 to 24.6% in 1990-
91
 Growth rate of industrial sector was 6% which is a commendable effect
 The promotion of small scale industries gave opportunities to the people having less capital to be in business
 Protection from foreign competition enabled the development of indigenous industries

Negative impacts:
 Public sector continues to produce the products which are not required
 Due to absence of competition people suffered in getting qualitative services
 Public sectors continues production though incur losses
 Obtaining license was misused by industrial houses
 Permit license raj prevent industries from becoming efficient
 Monopolization of producers don’t think in improving the quality of products

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Chapter-3 : ECONOMIC REFORMS SINCE 1991

Background
In the middle of 1991, need for major economic reforms were felt in the country. These were urgently needed to bring U-
turn in the economy. It was mainly due to following reasons :
 Excessive fiscal deficit:
 Balance of payment deficit:
 Rise in prices:
 Reduction in foreign exchange reserves:

NEW ECONOMIC POLICY 1991 or ECONOMIC REFORMS SINCE 1991

Meaning
Economic reforms or New Economic Policy 1991 is a long term multi-dimensional package of various policies (Liberalization,
privatization and globalization) and programme for the speedy growth, efficiency in production and make a competitive
environment.
Objectives:
 Creating a more competitive environment in the economy by removing unnecessary restrictions
 Improving the efficiency of the economy by removing rigidities in various segments of Indian economy
 Removing the barriers to entry and growth of firms
 To integrate Indian economy with the world economy
Policy measures
The NEP consisted of wide ranging economic reforms . This set of policies can broadly be classified into two groups:
(a) The stabilization measures
(b) The structural reform measures.
Stabilization measures
 These are short term measures
 It intended to
 correct some of the weaknesses that have developed in the balance of payments
 to bring inflation under control.
In simple words, this means that there was a need to maintain sufficient foreign exchange reserves and keep
the rising prices under control.
Structural reform policies
 These are long-term measures,
 It intended to
 Improve the efficiency of the economy
 Increase its international competitiveness by removing the rigidities in various
segments of the Indian economy.
The government initiated a variety of policies which fall under three heads
(a) Liberalization
(b) Privatization
(c) Globalization

LIBERALIZATION
Liberalization is the lessening of government regulations and restrictions in an economy in exchange for greater participation
by private entities.
LIBERALIZATION MEASURES TAKEN AFTER 1991
Industrial sector reforms
 Industrial licensing was abolished for almost all but product categories — alcohol, cigarettes, hazardous
chemicals, industrial explosives, electronics, aerospace and drugs and pharmaceuticals.
 The only industries which are now reserved for the public sector are defence equipment, atomic energy
generation and railway transport.
 Many goods produced by small scale industries have now been deserved.
 In many industries, the market has been allowed to determine the prices.

Financial sector reforms

 Role of RBI : Role of RBI has been reduced from regulator to facilitator of the financial sector
 There was continuous reduction in the rate of income tax to curb tax evasion
Foreign Exchange Reforms

 One of the important measures undertaken to improve the balance of payments situation was the devaluation of
rupee.
 The foreign exchange rate is allowed to be determined by the free play of market
 Trade policy reforms

 Quantitative restrictions (Quota) on import of manufactured consumer goods and agricultural products were fully
removed from April 2001
 Import licensing was abolished except in case of hazardous and environmentally sensitive industries

Investment Policy Reforms

 In 1991, the government announced a specified list of high technology and high-investment priority industries
wherein automatic permission was granted for foreign direct investment (FDI) up to 51 percent foreign equity.
 The limit was raised to 74 percent and subsequently to 100 percent for many of these industries. Moreover, many new
industries have been added to the list over the years.

PRIVATISATION
 Privatization implies shedding of ownership or management of a government owned enterprise
Methods of Privatization
Privatization is possible by two ways
 By withdrawal of the government from ownership and management of public sector companies. and or
 Selling off part of equity of PSEs to the public (Disinvestment) . and or
 By outright sale of public sector companies
GLOBALISATION
• Globalization is a process of integrating the domestic economy with rest of the world economy
APPRAISAL / IMPACTS OF GLOBALIZATION
Positive Impacts
• Increase in Foreign Trade
• Increase in Foreign investment
• Increase in Foreign Exchange Reserves:
Negative Impacts
• Loss of Domestic industries:
• Problem of Unemployment
• Increase in Inequalities:
DEMONETIZATION
• Demonetization is an act of taking away the legal tender rights of any currency.
Objectives of Demonetization of 2016
• To curb Black Money
• To expanding the tax base and increasing the number of taxpayers
• To reduce number of transactions carried out by cash and promoting digital and cashless transactions
• To reduce the finances available to terrorists and radical groups such as Maoists and Naxalites
• To integrate the formal and informal economies

Impacts of demonetization on Indian Economy

Positive Impacts
• Prime Minister Narendra Modi on a single stroke has choked the black money.
• This demonetization has proved to be a turning point for the economy by cleaning-up the black money which
in turn has brought more borrowings to the treasury, improved inflation outlook and increased GDP of India.
• Demonetization was a big thrash to the Hawala racketers.
Negatives Impacts
• Demonetization gave rise to liquidity problem as people found it difficult to get sufficient amount of cash to
fulfil their basic needs.
• Most of the population who constitute the lower middle and lower class uses currency to meet their daily
transactions. Such class of the society such as daily wage labourers, small traders and other marginal section
of the society use cash more often.
• Cash shortage adversely affected the consumption behavior of the people in India.
• The Q4'16–17 rate was 6.1% as against a forecast of 7.1% by economists.
• There was a loss of jobs and decline in wages due to demonetization, particularly in the unorganized and
informal sector and in small enterprises. Migrant workers were adversely affected by demonetization.

GOODS & SERVICES TAX (GST)

 The goods and services tax (GST) is a value-added tax levied on most goods and services sold for domestic
consumption. The GST is paid by consumers, but it is remitted to the government by the businesses selling the goods
and services. In effect, GST provides revenue for the government.
GST - An Introduction
  India has chosen the Canadian model of dual GST
 GST was implemented in India from 1st July 2017
Objectives of GST
 Ensuring that cascading effect of tax on tax will; be eliminated
 Improving the competitiveness of the original goods and services
 Ensuring the availability of input credit across the value chain
 Reducing the complications in tax administration and compliance
 Making a unified law involving all the tax bases
 Decreasing the unhealthy competition among the states due to taxes and revenues
 Reducing the tax slab rates to avoid further clarification issues

Advantages /Benefits of GST

GST has been envisaged as a mere efficient tax system, neutral in its application and attractive in distribution. The
advantages of GST are
 Wider tax base , necessary for lowering the tax rates and eliminating classification disputes
 Elimination of multiplicity of taxes and their cascading effects
 Rationalization of tax structure and simplification of compliance procedures
 Harmonization of centre and state tax administrations , which would reduce duplication and compliance
costs
 Automation of compliance procedures to reduce errors and increase efficiency
 Reduces transaction costs and unnecessary wastages
 Eliminates the multiplicity of taxation
 One point single tax
 Reduce average tax burdens
 Reduce the corruption
Disadvantages/demerits of GST
 Businesses are required to register for GST in each state they operate in
 New startups or small businesses who lack knowledge of GST may require hiring professionals for managing
their taxes
 Luxury items to get costly
 Right after implementation of demonetization bill and now GST bill India’s economy will take
approximately 1-2 years to become stable.
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Chapter-4: HUMAN CAPITAL FORMATION IN INDIA

Human capital is the stock of of knowledge, habits, social and personality attribtes, including creativity, embodied in the
ability of an individual to perform labor so as to produce economic value.

SOURCES OF HUMAN CAPITAL FORMATION

The sources of human capital formation are as follows.
 Investment on education:
 Investment on Health:
 Investment on on-the –job training:
 Investment on acquiring Information:
 Investment on Migration:

IMPORTANCE OF HUMAN CAPITAL FORMATION

The significance of the human capital can be assessed from the following arguments.

 Better use of Capital Goods:

 Better use of Improved Knowledge:
 Modernization of Attitudes:
 Economic Growth:
 Effective use of physical capital:
 Increases life expectancy:
 Improves Quality of life:
 Control of population growth:
 Problems of Human Capital Formation in India:
 The main problems of human capital formation in less developed countries like India in brief are as
under.
 1. Faster increase in population.
 2. Defective pattern of investment in education. In the developing
 3. More stress on the provision of building and equipments.
 4. Shortage of health and nutrition facilities.
  5. No facilities of on the job training.
 6. Study programme for adults.
 7. Half hearted measures for promotion of employment.
 8. No manpower planning.
 9. Neglect of agriculture education.

PROSPECTS OF HUMAN DEVELOPMENT IN INDIA

 The seventh five year plan stressed upon the importance of human capital.
 In India, ministry of education at the centre and state level NCERT, (National Council of
Educational Research and Training), UGC (University Grants commission) , AICTE (All India
Council of Technical Education) Regulate the education sector.
 In India, Ministry of Health at the union and the State level and ICMR (Indian Council of
Medical Research) regulate the health sector.
 World Bank states that India will become the knowledge economy. Also if India uses its
knowledge as much as Ireland does, than the per capita income will rise $ 3000 by the year
2020.
HUMAN CAPITAL AND HUMAN DEVELOPMENT
Human capital and human development are interlinked with each other. Still there is a line of distinction between these two.
This is as follows.
Basis Human capital Human development
The stock of knowledge and skill embodied Human development is the process of well being
Meaning
in human being of the human being
Human Capital consider education & Human Development is leased on the
Role of education and
health Idea that education & health are
health
as a means to increase labour productivity integral to human well being
In Human capital, investment in education
In case of human development,
and health is considered to be
Productivity of investments in education and health
unproductive,
investment is taken to be productive, even if it
if it does not increase output of goods &
does not leads to higher output
services
Human capital treats human beings as a
Treatment of Human Human capital treats human beings as an end in
means to an end; the end being the increase
being itself
in productivity

Chapter-5 : RURAL DEVELOPMENT

Rural development is the comprehensive socio-economic process to develop the areas that are lagging
behind the overall development of the village economy.
Or
Rural development is an action plan for the economic and social upliftment of rural areas.
DIMENSIONS/ISSUES OF RURAL DEVELOPMENT
The dimensions or key issues of rural development constitute of those areas in which a village economy
generally lagging behind in comparison to its counterparts. The challenging issues of rural development
in India are as follows.
 Development of human resources
 Land Reforms
 Development of productive resources
 Infrastructure development
 Measures for poverty alleviation

RURAL CREDIT
 Meaning:
Credit is an agreement in which the lender supplies the borrower with money ,
goods and services in return for the promise of future payment.
 Need of Credit in rural economy:
In rural areas credit is needed due to the following reasons:
o To realize higher productivity in agriculture and non-agriculture sector.
 o The time gestation between crop sowing and realization of income after production
is too long, so farmer has to borrow to meet his initial investment.
o The rural agriculture is dependent upon marginal and subsistence farming by the
millions of small farmers who are not in a position to save for productive purposes
due to low output.
 Sources of Credit:

Formal/Institutional lending System:

commercial banks, Credit by Regional Rural Banks (RRB’s), Credit by Land Development Banks
(LDB’s), Credit extended by NABARD , Credit by Cooperatives, Micro credit involving SHG linkage
Informal/Non-institutional System:
Credit extended by friends, Credit extended by relatives, Credit by money lenders, Credit by traders

AGRICULTURAL MARKETING
The process of assembling, storage , processing , transportation, packaging , grading and distribution of
agricultural commodities is called agricultural marketing.

 Functions of agricultural market:

o Collection of surpluses from the individual farmers
o Transportation to nearest assembling centre
o Grading and standardization
o Pooling
o Processing
o Warehousing
o Packing
o Transportation to the consuming centers
o Bringing the buyers and sellers together
o Sale to the ultimate consumers
o Arranging requisite finance for the above purposes
 Need of agricultural marketing in India
Agricultural marketing is needed due to the following reasons
 To give a better price of the produce to the farmer
 To link the farmer directly to the consumers by avoiding intermediaries
 To minimize wastage
 To save the farmers against exploitation and cheating from the traders
 Measures taken by the govt. to improve agricultural marketing
 Govt. regulated the markets
 Govt. made provision of physical infrastructures like roads , railways ,
warehouses , godowns , cold storage etc.
 Govt. establishes cooperatives to realize fair prices
 Govt. assured the farmers through Minimum Support Prices (MSP)
 Problems of agricultural marketing in India
o Predominance of private traders
o Improper warehouses
o Lack of grading and standardization
o Inadequate transport facilities
o Presence of large number of intermediaries
o Malpractices in unregulated markets
o Inadequate market information
o Inadequate credit facilities