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Indian Economic Development 1/44

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CLASS-XII

ECONOMICS-PART-B

INDIAN ECONOMIC DEVELOPMENT

Chapter –VI

DEVELPMENT EXPERIENCE (1947-90)

AND ECONOMIC REFORMS SINCE 1991

1. What do you understand by the drain of Indian wealth during the colonial

period?

Dadabhai Naroji advocated the theory of ‘Drain of Wealth’ in the 19th

century.

The colonial period was marked by the exploitation of Indian resources.

The sole motive of Britain to conquer India was to own a perennial source

of cheap raw materials to feed its own industrial base in Britain.

Further, British government used India’s manpower to spread its colonial

base outside India.

Also, the administrative expenses that were incurred by the British

government to manage the colonial rule in India were borne by Indian

Exchequer.

Thus, the British rule drained out Indian wealth for the fulfilment of its own

interests.

2. Which is regarded as the defining year to mark the demographic transition

from its first to the second decisive stage?

The year 1921 is regarded as the defining year or the ‘Year of Great Divide’

Because prior to 1921, population growth in India was never consistent.

India was in the first phase of demographic transition till 1921 that was

characterised by high birth rate and high death rate.


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It implies low survival rate (or low life expectancy), which was nearly 8

per thousand per annum.

Therefore, the period before 1921 witnessed stagnant population growth

rate.

After 1921, India’s population growth never declined and showed a

consistent upward trend.

3. When was India’s first official census operation undertaken?

First official census was undertaken in the year 1881.

4. Give a quantitative appraisal of India’s demographic profile during the

colonial period?

The demographic condition on the eve of independence was as follows:

i. High Birth Rate and Death Rate. High birth rate and high death rate

are treated as indices of backwardness of a country.

Both birth rate and death rate were very high at 48 and 40 per

thousand of person’s respectively.

ii. High Infant Mortality Rate. If refers to death rate of children below

the age of one year.

It was about 18 per thousand live births.

iii. Low Life Expectancy. Life expectancy means the number of years that

a new born child on an average is expected to live.

It was as low as 32 years.

iv. Mass Illiteracy. Mass illiteracy among the people of a country is taken

as an indicator of its poverty and backwardness.

The population census of 1941 (which was the last census under the

British rule) estimated the literacy rate at 17 per cent.

This means that 83 per cent of the total population was illiterate.

V. Low Standard of Living.

At the time of independence, people used to spend between 80 to 90 %

of their income on basic necessities,


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That is on food, clothing and housing. Even then, people did not get

adequate quantity of food or clothing or housing and millions of people

starved, went naked and lived in huts or in the open.

Moreover, some parts of India came under severe famine conditions.

The famines were so severe that millions died. One of the worst

famines in India was the Bengal famine of 1943, when three million

people died.

5. Underscore some of India’s most crucial economic challenges at the time of

independence?

Most crucial economic challenges at the time of independence were:

a) Little industrialisation

b) Decline of handicrafts.

c) Low agricultural output

d) High imports of grains.

e) Low figure of national income

f) Low figure Per capita income which showed extreme poverty.

g) Very sluggish economic progress.’

h) Unemployment and underemployment.

i) Very high infant mortality rate,

j) low life expectancy

k) Low standard of living.

l) Poverty and Inequalities

m) Lack in Infrastructure

6. Indicate the volume and direction of trade at the time of independence?

India has been an important trading nation since ancient times. But the

restrictive policies of commodity production, trade and tariff pursued by

the British government adversely affected the structure, composition and

volume of India’s foreign trade.

The state of India’s foreign trade on the eve of independence was as

follows:


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a) Net Exporter of Raw Material and Importer of Finished Goods.

b) India became an exporter of primary products such as raw silk, cotton,

wool, sugar, indigo, jute, etc.

c) An importer of finished consumer goods like cotton, silk and woollen

clothes and capital goods like light machinery produced in the factories of

Britain.

d) UK was the chief supplier to India contributing to over 31 per cent of total

import at the time of independence.

e) The principal item of import was food grains

f) By 1947 food grain imports had touched the level of 3 million tonnes.

g) Britain had Monopoly Control on Foreign Trade.

h) Opening of Suez Canal in 1869 served as a direct route for the ships

operating between India and Britain.

i) The canal connected Port Said on the Mediterranean Sea with the Gulf of

Suez.

j) It provided a direct trade route for ships operating between Europe.

7. What was the focus of the economic policies pursued by the colonial

government in India? What were the impacts of these policies?

The economic policies pursued by the colonial government in India were

concerned more with the protection and promotion of the economic interests

of their home country rather than with the development of the Indian

economy.

Thus, at the time of independence in 1947, India was a poor and

underdeveloped country.

At that time, agriculture was in a poor condition and mineral resources were

not fully used.

There were only a few industries and many of the cottage and small-scale

industries had declined under the British rule.

Millions of people were unemployed, not because they were unwilling to

work but because there were no jobs to be found.


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The per capita income of Indians was one of the lowest in the world,

indicating that the average Indian was extremely poor and could not afford

even the basic necessities of life.

For instance, the staple food of average Indian consisted of rice, wheat and

millets (like jowar and bajra). Most Indians could not afford to buy

nutritious and balanced diet.

The vast majority of people in India led a miserable life.

8. Name some modem industries which were in operation in our country at

the time of independence?

The Tata Iron and Steel Company (TISCO) were incorporated in August

1907 in India.

It established its first plant in Jamshedpur (Bihar).

Some other industries which had their modest beginning after Second World

War were: sugar, cement, chemical and paper industries.

9. What was the focus of the economic policies pursued by the colonial

government in India? What were the impacts of these policies?

The main focus of the economic policies pursued by the colonial government

was to make India a mere supplier of Britain’s own flourishing industrial

base.

The policies were concerned mainly with the fortification and advancement

for their home country.

The interests of the Indian economy were completely ignored. Such policies

brought structural changes in the Indian economy by transforming it to a

supplier of raw materials and consumer of finished products from Britain.

The impacts of these policies are discussed as follows in detail;

i. Low Economic Development

Throughout the British rule, Indian economy experienced very low level of

economic development. As per some researches, Indian economy grew at

even less than 2% during 1900-50.


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The reason for such a low level of development was that the British

government was more concerned with the promotion of economic interests of

their home country.

Consequently, the colonial rule transformed India’s agriculture sector to a

mere supplier of raw materials for the British industries.

This not only affected the production of the agricultural sector but also ruined

the small manufacturing units like handicrafts and cotton industries.

These manufacturing units faced a stiff competition from the British machine

made textiles and handlooms.

ii. Backwardness of Indian Agriculture

Under the colonial rule, India was basically an agrarian economy employing

nearly 85% of its population.

Nevertheless, the growth of the agriculture sector was meager.

This was due to the prevalence of various systems of Land Settlement,

particularly Zamindari system.

Under this system, the zamindars (owners of land) were required to pay very

high revenue to the British government, which they used to collect from the

peasants (landless labourers, who were actually cultivating).

The zamindars were mainly concerned with extracting high revenues from

the peasants but never took any steps to improve the productivity of the land.

Moreover, in order to feed British industries with cheap raw materials, the

Indian peasants were forced to grow cash crops (such as, indigo, cotton, etc.)

instead of food crops (such as, rice and wheat).

This commercialisation of agriculture not only increased the burden of high

revenues on the poor peasants but also led India to face shortage of food

grains.

Therefore, Indian agriculture remained backward and primitive.


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iii. Deindustrialisation of Indian Economy

India failed to develop a sound and strong industrial base during the colonial

rule.

The status of industrial sector during the British rule can be well defined by

the term ‘systematic deindustrialisation’. The cause of deindustrialisation can

be attributed to the downfall of India’s handicraft industry and the cause of

bleak growth of modern industry was the lack of investment.

On one hand, the British government imposed heavy tariffs on the export of

Indian handicraft products and on the other hand, allowed free exports of

Indian raw materials to Britain and free imports of British products to India.

As a result of the heavy tariffs, the Indian exports became costlier and its

demand in the international market fell drastically that led to the collapse of

Indian handicrafts industries.

Simultaneously, the demand for the handicrafts products also fell in the

domestic markets due to stiff competition from the machine made textiles of

Britain. As a result, the domestic industries lacked investment and growth

initiatives.

iv. Regression in Foreign Trade

During the colonial rule, the British government owned the monopoly power

over India’s foreign trade.

The British government used the trade policy according to the interests of

their home country.

The exports and imports transactions were restricted only to India and

Britain. On one hand, the exports from India provided the cheap raw

materials to the British industries and on the other hand, India's imports from

Britain provided a virgin market for Britain’s products.

In either ways, British industries were benefitted. Moreover, the surplus

generated from t foreign trade was not invested in the Indian economy;


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instead it was used in administrative and war purposes by Britain to spread

their colonial power.

10. Name some notable economists who estimated India’s per capita income

during the colonial period?

As the British government was never interested in upliftment of our country,

so they never took any initiative to measure India’s national and per capita

income.

Though some of the economists tried to estimate India’s national income and

per capita income during the colonial rule, but the results are mixed and

conflicting.

The following are some of the notable economists who were engaged in

estimation of national income and per capita income:

1. Dadabhai Naroji

2. William Digbay

3. Findlay Shirras

4. V.K.R.V Rao

5. R.C. Desai

Out of these, V.K.R.V Rao's estimates are considered to be significant.

Most of these studies revealed that Indian economy grew at even less than 2%

during 1900-50 with half per %t growth in per capita output per year.

11. What were the main causes of India’s agricultural stagnation during the

colonial period?

Under the colonial rule, India was basically an agrarian economy,

employing nearly 85% of its population. Nevertheless, the growth of

the agriculture sector was meager.

The following are the causes explaining stagnancy in Indian

agriculture sector during the colonial rule:

i. Introduction of Land Revenue System


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This was due to prevalence of various systems of Land Settlement,

particularly Zamindari system.

This system was introduced by Lord Cornwallis in Bengal in 1793.

Under this system, the zamindars(owners of land) were required to pay

very high revenue to the British government, which they used to collect

from the peasants (landless labourers, who were actually cultivating).

The zamindars were mainly concerned with extracting high revenues

from the peasants but never took any steps to improve the productivity of

the land.

This resulted in low agricultural productivity and worsened the peasants

economically.

ii. Forceful Commercialisation

Initially before the British rule, the farmers were practicing

conventional subsistence farming.

They used to grow crops like rice and wheat for their own

consumption. But afterwards, in order to feed British industries with

cheap raw materials,

The Indian farmers were forced to grow commercial crops (like

indigo required by British industries to dye textiles) instead of food

crops (like rice and wheat).

This led to the commercialisation of Indian agriculture. This

commercialisation of Indian agriculture not only increased the burden

of high revenues on the poor farmers but also led India to face

shortage of food grains, resources, technology and investment.

Therefore, Indian agriculture remained backward and primitive.

iii. Lack of Irrigation Facilities and Resources

Besides the above factors, Indian agricultural sector also faced lack of

irrigation facilities, insignificant use of fertilisers, lack of investment,

frequent famines and other natural calamities, etc. that further

exaggerated the agricultural performance and made it more vulnerable.


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12. Name some modern industries which were in operation in our country at

the time of independence.

The second half of the nineteenth century witnessed the emergence of

modern industries.

At the initial stage, development was confined to setting up of cotton

and jute textile mills.

The western parts of the country Maharashtra and Gujarat was the hub

for cotton textile mills which were mainly dominated by the Indians

whereas the jute industries were mainly concentrated in Bengal

and were dominated by the British. In the beginning of the 20thcentury,

Iron and steel industries also started emerging gradually.

It was incorporated in 1907. Some other industries that were operating at

a smaller scale during the British era were sugar industry, cement

industry and paper industry.

13. What was the two-fold motive behind the systematic deindustrialisation

affected by the British in pre - independent India?

The following are the two-fold motives behind the systematic

deindustrialisation affected by the British:

Making India a Supplier of Raw Materials: The main motive of the British

government was to make India a mere supplier of cheap raw materials to feed

its own flourishing industrial base.

Making India a Market for Finished Goods: Another important objective of

the British government was to use India as a virgin market to sell the finished

goods produced by the British industries

14. The traditional handicrafts industries were ruined under the British rule.

Do you agree with this view? Give reasons in support of your answer.

Yes, we do agree with the above statement that the traditional handicrafts

industries were ruined under the British times. The following are the reasons

in favour of the statement.


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I. Discriminatory Tariff Policy: The British rule in India corresponded

with its industrialisation. The British rule used India both as a source of

cheap raw materials as well as easy accessible market for their finished

products. Thereby, they imposed heavy tariffs (export duties) on India’s

export of handicraft products, while allowed free export of India’s raw

material to Britain and free import of British products into India. This

made Indian exports costlier and its international demand fell drastically

leading to the collapse of handicrafts industries.

II. Competition from Machine made Britain Goods: The demand for the

handicrafts products experienced a downward trend in the domestic

markets as well. This was due to stiff competition from the machine

made textiles from Britain. This was because of the reason that the goods

produced mechanically in Britain were comparatively cheaper and of

superior quality than the Indian handicraft goods. This narrowed the

market for Indian industries.

III. Emergence of New Class: The British rule in India popularised western

lifestyle in India. There was an emergence of a new section of population

(consisting mainly of zamindars) in India who liked the British goods.

This section used to spend lavishly on the British products that provided

impetus for the development of British industries at the cost of the

domestic industries. Hence, gradually Indian industries perished away.

IV. Disappearance of Princely State: Prior to the advent of British, India

was ruled by princely states. They used to patronise handicrafts industries

and consequently, Indian handicrafts gained reputation in the

international markets. But during the British rule, these princely states

were ruined thereby ruining the protection of these handicrafts industries.

Thus, gradually Indian handicrafts lost its reputation and its importance

deteriorated.

15. What objectives did the British intend to achieve through their policies of

infrastructure development in India?


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One cannot deny the fact that under the British rule, there was significant

change in the infrastructural development in the country.

But the bonafide motive of the British behind the infrastructure development

was only to serve their own colonial interests.

There was infrastructural development in the fields of transport and

communication.

The roads served the purpose of facilitating transportation of raw materials

from different parts of the country to ports, and ports were developed for

easy and fast exports to and imports from Britain.

Similarly, railways were introduced and developed for the transportation of

finished goods of British industries to the interiors of India.

Railways assisted British industries to widen the market for their finished

products.

Post and telegraphs were developed to enhance the efficiency and

effectiveness of the British administration.

Hence, the aim of infrastructural development was not the growth and

development of the Indian economy but to serve their own interest.

16. Highlight the salient features of India’s pre-independence occupational

structure?

The occupational structure that refers to the distribution of population

engaged in different occupations, showed no variation throughout the British

rule. The following are the salient features of India’s pre-independence

occupational structure:

I. Agriculture- The Prime Occupation: Under the colonial rule, India was

basically an agrarian economy, employing nearly 85% of its population. As

India had a massive poverty during the colonial rule, so a large proportion of

the population was engaged in agricultural sector to earn their subsistence. But

due to the prevalence of Zamindari system, agricultural sector lacked

investment and, thereby, its growth was highly constrained. Thus, in other


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words, despite employing a significant proportion of the population, the growth

of agriculture sector was meager.

II. Industry- The Bleak Occupation: Apart from agriculture, a small proportion

of population was employed in manufacturing sector. Nearly 10% of the total

workforce was engaged in manufacturing and industrial sector. This was due to

the stiff competition that the Indian industries faced from the machine made

cheap goods from Britain. Further, the lack of investment, initiatives and the

unfavourable tariff structure constrained industrial sector. Thus, the Indian

industrial sector failed to contribute significantly to India’s GDP.

III. Unbalanced Growth: The three sectors of Indian economy, i.e. agricultural,

industrial and tertiary sector were unequally developed. While the agricultural

sector was relatively developed, whereas, the other two sectors were at their

infant stage. In addition, there was regional variation in the occupational

structure of India. While on the one hand, states like Tamil Nadu, Andhra

Pradesh and Bombay experienced a fall in the agricultural work force on the

other hand states like Orissa, Rajasthan and Punjab experienced a rise in the

agricultural workforce.

17. Were there any positive contributions made by the British in India?

Discuss.

Yes, there were various positive contributions that were made by the

British in India. The contributions were not intentional but purely the

effects of colonial exploitation of the British.

The following are the positive contributions made by the British:

a) Introduction of Railways: The introduction of railways by the British was a

breakthrough in the development process of Indian economy. It opened up the

cultural and geographical barriers and facilitated commercialisation of Indian

agriculture.

b) Introduction of Commercialisation of Agriculture: The introduction of

commercial agriculture is an important breakthrough in the history of Indian

agriculture. Prior to the advent of the British, Indian agriculture was of


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subsistence nature. But with the commercialisation of agriculture, the

agricultural production was carried out as per the market requirements. It was

due to this factor that today India can aim at attaining self-sufficiency in food

grains production.

c) Introduced Free Trade to India: British forced India to follow free trade

pattern during the colonial rule. This is the key concept of globalisation today.

The free trade provided domestic industry with a platform to compete with the

Britain industries. The introduction of free trade led to an increase in the

volume of India’s export rapidly.

d) Development of Infrastructure: The infrastructure developed in India by the

British proved as useful tool to check the spread of famines. The telegram and

postal services served Indian public.

e) Promoted Western Culture: English as a language promoted westernised

form of education. The English language acted as a window to the outside

world. This has integrated India with the rest of the world.

f) Role Model: The way and the technique of British administration acts as a

role model for the Indian politicians and planners. It helped Indian politicians

to govern the country in an efficient and effective manner.

18. What do you mean by low productivity in agriculture?

Low output per hectare of land is called Low productivity.

19. What do you mean by economic structure?

Economic structure is a term that describes the changing balance of output,

trade, incomes and employment drawn from different economic sectors –

ranging from primary (farming, fishing, mining etc) to secondary

(manufacturing and construction industries) to tertiary and quaternary sectors.


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INDIAN ECONOMY 1950- 1990

1. Define a plan.

A plan is a proposed list of goals that an economy wants to achieve within a

specific period of time.

It suggests the optimum ways to utilise the scarce available resources to

achieve the enlisted goals. In India, planning is done for a period of five years,

which is called five year plan.

Plans have both specific and general goals. Some of the common goals are

economic growth, modernisation, self-reliance and equity.

Plans lay down the basic framework over which the policies are designed.

Often various goals are conflicting to each other,

for example, modernisation reduces labour employment. So there is a need to

maintain a balance among different goals.

2. Why did India opt for planning?

Soon after independence, India faced an important choice to opt either for

capitalism or socialism. Finally, India, inspired by the extraordinary success of

planning in Soviet Union, opted for socialism. Although, Indian political and

economic conditions were not as favourable as it was for Soviet Unions to opt

for socialism, yet India adopted socialism but with a difference.

India hinged upon the socialist idea with a strong emphasis on public sector

and active participation of the private sector in a democratic framework.

The Planning Commission (1950) was established with the motive that the

government would undertake comprehensive planning for the nation as a

whole, where public sector would lay down the basic economic framework and

would encourage private sector for their active contribution to the economic

growth.


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3. Why should plans have goals?

Every plan should have specified goals.

Plan without goal is like life without soul. While a plan specifies the means

and ways to allocate scarce resources to achieve proposed targets, goals are the

ultimate targets, the achievement of which ensures the success of plans. Thus,

plans must include the goals.

4. What are high Yielding Variety (HYV) seeds?

High Yielding Variety of seeds was developed by the Nobel Laureate

Dr. Narman Barlauf in Mexico.

These seeds are more productive and need regular and adequate irrigation

facilities along with greater use of fertilisers and pesticides. In 1966,

consequent to the use of HYV seeds,

Indian agricultural sector experienced Green Revolution, especially in the

crops of rice and wheat. HYV seeds grow faster than the normal seeds and,

consequently, crops can be harvested in a much shorter time period.

Initially, HYV seeds were used in states like Punjab, Andhra Pradesh and

Tamil Nadu (as these states had more suitable irrigation facilities) and later on

to other states. Consequent to the use of HYV seeds, the production of food

grains in 1967-68 increased by 25% .

5. What is marketable surplus?

Marketable surplus refers to the difference between the total output produced

by a farmer and his on-farm consumption.

In other words, it is that portion of the total output that the farmer sells in the

market.

Marketable surplus = Total farm output produced by farmer – Own

consumption of farm output.

6. Explain the need and type of land reforms implemented in the agriculture

sector?

The need for land reforms in India was very necessary due to the following reasons:


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I. Land Tenure System: There were three types of land tenure systems namely,

the Zamindari System, the Mahalwari System and the Ryotwari

System prevalent in the Indian agricultural sector at the time of independence.

The common feature of these three systems was that the land was mostly

cultivated by the tenants and the land revenues were paid by them to their

landlords. This led to the exploitation of tenants in the form of exorbitant

rents.

II. Size of Land Holdings: The size of land holdings owned by the farmers was

very small. In addition, the land holdings were fragmented. This obstructed

the use of modern techniques.

III. Lack of Initiative: As most of the land was owned by the landlords, so the

farmers lacked initiative and neither had enough means to undertake

mechanised methods of cultivation.

IV. Traditional Approach and Low Productivity: Indian farmers used to rely

on the conventional and the traditional inputs and methods and climatic

conditions that hampered the productivity of agricultural sector.

V. Absence of Marketing System: Due to the absence of well-developed

marketing system, the farmers used to rely on the intermediaries to sell their

product in the market. These intermediaries used to purchase the farm

products at a very low price and sell them at higher price at market.

Consequently, the correct profit share did not accrue to the farmer and, hence,

this led to the lack of finance and investment on farm.

VI. Nature of Farming: The basic motive for farming was for subsistence. That

is, farming was done basically to earn survival and not for sale and to earn

profit.

Due to the above problems in the Indian agriculture, it was very necessary to

undertake land reforms. Land reforms comprise of the following steps:-


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i. Abolishing Intermediaries: The prime focus of land reforms was to abolish

intermediaries like Zamindars, Jagirdars, etc. There were many steps

undertaken to make the tillers, the owners of the land.

ii. Regulation of Rent: The cultivators were exploited in the form of exorbitant

rents. In the first five year plan, the maximum rent fixed was one-fourth or

one-fifth of the total farm produce

The regulations of rent not only reduced the burden from the tenants but also

enabled them with greater portion of finance to invest on farm.

iii. Consolidation of Holdings: As the land holdings were small and also

fragmented, so it was very necessary to consolidate the land holdings for the

use of modern and advanced technology. The farmers were given consolidated

holdings equal to the total of the land in their various fragmented plots. This

enabled them the benefits associated with the large scale production.

iv. Land Ceilings: It means legislated fixed amount of land that an individual

may hold. The basic motive behind this step was to promote equality of

ownership of land holdings. This eradicated the concentration of land holdings

in few hands. Government used to confiscate the excess land over the fixed

amount of land and distribute it among the landless farmers.

v. Co-operative Farming: This step was taken to counter the problems due to

sub-division of holdings. Small scale farming by an individual land holder is

neither profitable nor productive, so, these steps encouraged different farmers

to pool their farms and perform farming jointly. This enhanced the

productivity and greater profits were shared by the individual farmers.

7. What is Green Revolution? Why was it implemented and how did it benefit

the farmers? Explain in brief.

Due to low productivity, frequent occurrence of famines and low levels of

agricultural products in the latter half of second five year plan, a team was

formed to suggest various ways to counter these problems.


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As per the recommendations of the team, government introduced the use of

HYV seeds, modern techniques and inputs like fertilisers, irrigation

facilities and subsidised credit.

These steps collectively are known as Intensive Area Development

Programme (IADP). Consequently, in the year 1967-68, food grains

production increased nearly by 25%.

Due to this substantial increase of food grains production, this outcome is

known as ‘Green Revolution’.

The word Green Revolution comprises of two words ‘Green’ that is

associated to crops and ‘Revolution’ is associated to the substantial

increase.

Need of Green Revolution

The needs of Green Revolution are as follows.

a) Low Irrigation Facility: The well irrigated and permanent irrigated area was

only 17% in 1951. The major part of area was dependent on rainfall and,

consequently, agriculture suffered from low level of production.

b) Conventional and Traditional Approach: The use of conventional inputs

and absence of modern techniques further hampered the agricultural

productivity.

c) Frequent Occurrence of Famines: Famines in India were very frequent

during the period 1940s to 1970s. Further, due to higher growth rate of

populations, agriculture failed to grow at the same speed.

d) Lack of Finance (credit): Small and marginal farmers found it very difficult

to get finance and credit at cheap rate from the government and banks ,hence,

fell an easy prey to the money lenders.

e) Self-sufficiency: Due to the traditional agricultural practices, low

productivity, and to feed growing population, often food grains were imported

that drained away scarce foreign reserves. It was thought that with the


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increased production due to Green Revolution, government can maintain

buffer stock and India can achieve self-sufficiency and self-reliable.

f) Marketising Agriculture: Agriculture was basically for subsistence and,

therefore, less amount of agricultural product was offered for sale in the

market. Hence, the need was felt to encourage the farmers to increase their

production and offer a greater portion of their products for sale in the market.

8. Explain ‘growth with equity’ as a planning objective?

Both growth and equity are the two important aspects of India’s five

year plans.

While growth refers to the increase in GDP over a long period of time

equity refers to an equitable distribution of GDP so that the benefits due

to higher economic growth are shared by all sections of population.

Equity implies social justice.

Growth itself is desirable but growth in itself does not guarantee the

welfare of people.

Growth is assessed by the market value of goods and services (GDP)

and it may be possible that the goods and services that are produced may

not benefit the majority of population.

In other words, only a few with high level of living and money income

may get the share of GDP.

Hence, growth with equity is a rational and desirable objective of

planning.

This objective ensures that the benefits of high growth are shared by all

the people equally and, hence, this not only leads to reduction of

inequality of income, poverty promotion of egalitarian society but also

enables everyone to be self-reliant.

Therefore, to conclude, it can be said that growth with equity is the most

important objective of an economic planning.

9. Does modernisation as a planning objective create contradiction in the light

of employment generation? Explain.


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No, modernisation as a planning objective does not contradict employment

generation. In fact both modernisation and employment generation are

positively correlated.

While modernisation refers to the use of new and modern technology in

production process that may make some people lose their jobs in the initial

stages. But gradually, the use of modern technology and input will raise the

productivity and, consequently, the income of the people that will further

raise the demand for goods and services.

In order to fulfil this increased demand, there will be more job

opportunities that will lead more people to be hired and, hence, more

employment opportunities will be generated. Hence, both modernisation

and employment generation are not contradictory but are complementary to

each other.

10. Why was it necessary for a developing country like India to follow self-

reliance as a planning objective?

Self-reliance implies discouraging the imports of those goods that could

be produced domestically. Achieving self-reliance is of prime

importance for a developing country like, India as

Otherwise, it would increase the country’s dependence on foreign

products.

Dependence on foreign goods and services can promote economic

growth of India but this would not contribute to the development of

domestic productive resources.

Dependence on foreign goods and services provides impetus to foreign

country’s industries at the cost of domestic infant industries. Further,

imports drain away the scarce foreign reserves that are of prime

importance to any developing and underdeveloped economy.


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Therefore, achieving self-reliance is an important objective for

developing countries in order to avoid themselves from being

acquiescent to the developed nations.

11. What is sectoral composition of an economy? Is it necessary that the service

sector should contribute maximum to GDP of an economy? Comment.

The sectoral composition of an economy is the contribution of different

sectors to total GDP of an economy during a year. That is, the share of

agricultural sector, industrial sector and service sector in GDP.

Yes, it is necessary that at the later stages of development, service sector

should contribute the maximum to the total GDP. This phenomenon is

called Structural Transformation.

This implies that gradually the country’s dependence on the agricultural

sector will shift from the maximum to minimum and, at the same time,

the share of industrial and service sector in the total GDP will increase.

This structural transformation together with the economic growth is

termed as economic development.

12. Why was public sector given a leading role in industrial development during

the planning period?

At the time of independence, Indian economic conditions were very poor

and weak.

There were neither sufficient foreign reserve nor did India have

international investment credibility.

In the face of such poor economic condition it was only the public

sectors that need to take the initiative.

The following are the reason that explains the driving role of the public

sector in the industrial development:

I. Need of Heavy Investment:

There was a need of heavy investment for industrial development.


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It was very difficult for the private sector to invest such a big

amount. Further, the risks involved in these projects were also

very high and also these projects had long gestation period.

Thus, the government played the leading role to provide the basic

framework of heavy industries.

II. Low Level of Demand:

At the time of independence, the majority of population was poor

and had low level of income.

Consequently, there was low level of demand and so there was no

impetus for any private sector to undertake investment in order to

fulfil these demands.

Thus, India was trapped into a vicious circle of low demand. The

only way to encourage demand was by public sector investments.

13. Explain the statement that green revolution enabled the government to

procure sufficient food grains to build its stocks that could be used during

times of shortage?

Green Revolution led to an increase in the production of food grains. With

the use of modern technology, extensive use of fertilisers, pesticides and

HYV seeds there was a significant increase in the agricultural productivity

and product per farm land.

In addition, the spread of marketing system, abolition of intermediaries and

easy availability of credit has enabled farmers with greater portion of

marketable surplus.

All these factors enabled the government to procure sufficient food grains to

build the buffer stock and to provide cushion against the shocks of famines

and shortages.

14. While subsidies encourage farmers to use new technology, they are a huge

burden on government finances. Discuss the usefulness of subsidies in the

light of this fact.


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Subsidy means availing some important inputs to farmers at a concessional

rate that is much lower than its market rate.

During 1960s, in order to adopt new technology HYV seeds and use of

modern fertilisers and insecticides, farmers were provided inputs at a

subsidised rate.

Thus, the public sector role was needed to invest heavily, so as to raise the

income of people that will in turn raise the demand and so on.

The following arguments are given in favour of subsidy:

a) Subsidy is very important for marginal land holders and poor farmers who

cannot avail the essential farm inputs at the on-going market rate.

b) Subsidy in 1960s was basically an incentive for the farmers to adopt modern

techniques and vital inputs like fertilisers, HYV seeds, etc. The subsidy was

mainly of convincing and lucrative nature so that the farmers do not hesitate to

use these modern techniques.

c) Subsidy is generally provided to the poor farmers with the motive of reducing

inequality of income between rich and poor farmers and to promote an

egalitarian distribution of income.

d) It is argued that the adoption of new technology and techniques are not risk

free and only daring farmers are only willing to adopt them.

The following arguments are given against subsidy.

a) It is generally argued that subsidy favours and benefits fertiliser industries

than the farmers. Subsidies provide a protective shield against the market

conditions and, consequently, these industries need not to bother about their

market share and competition.

b) Subsidies are also enjoyed by the potential farmers who do not need them.

This often leads to the misallocation and wastage of the scarce resources.


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c) Subsidies, if provided at a much lower rate than the market rate may lead to

the wastage of resources. For example, subsidised electricity leads to the

wastage of energy.

d) There is a general consensus that in order to assess the benefit and feasibility

of a particular technique, subsidy should be provided but once the

performance has been judged subsidies should be stopped.

Hence, based on the above pros and cons, we can conclude that although

subsidies are very useful and necessary for poor farmers and to overcome

uncertainties associated with farming, it put an excessive burden on the scarce

government finances. Thus, a proper planning, suitable reforms and allocation of

subsidies only to the needy farmers is required.

15. Why, despite the implementation of green revolution, 65 % of our population

continued to be engaged in the agriculture sector till 1990?

Although Indian agricultural production increased substantially that

enabled India to attain the status of self-sufficiency in food grains but

this increase is substantial only in comparison to food grain production

in the past.

Further, India failed to achieve structural transformation associated with

the agricultural revolution and development. That is, in other words,

industrial and service sector failed to generate significant employment

opportunities in order to attract and absorb excess agricultural labour.

The agricultural contribution to GDP has fallen from 51% in 1960-61 to

44% in 1970-71, on the other hand, the share of industry and service

sector in India’s GDP increased merely from 19% to 23% and from 30%

to 33% during the same period. Meantime, the percentage of population

dependent on agriculture decreased merely from 67.50% (in 1950) to

64.9% (in 1990).


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Hence, the industrial and service sector growth was not very significant

and, hence, failed to employ and attract surplus labour from agricultural

sector.

This may be because of the flaws in the economic policies that became

the bottleneck for the growth of secondary and tertiary sector.

16. Though public sector is very essential for industries, many public sector

undertakings incur huge losses and are a drain on the economy’s resources.

Discuss the usefulness of public sector undertakings in the light of this fact.

Although, the mismanagement and wrong planning in PSUs may lead to

misallocation and, consequently, to wastage of the scarce resources and finance but

PSUs do have some positive and useful advantages.

i. Enhancing Nation’s Welfare: The main motive of the PSU was to provide

goods and services that add to the welfare of the country as a whole. For

example, schools, hospitals, electricity, etc. These services not only enhance

welfare of country’s population but also enhance the future prospects of

economic growth and development.

ii. Long Gestation Projects: It was not feasible and economically viable for the

private sectors to invest in the big and wide projects like basic industries and

electricity, railways, roads, etc. This is because these projects need a very huge

initial investment and have long gestation period. Hence, PSU is the most

appropriate to invest in these projects.

iii. Basic Framework: An important ideology that was inherited in the initial five

year plans was that the public sector should lay down the basic framework for

industrialisation that would encourage the private sector at the latter stage of

industrialisation.

iv. Socialist Track: In the initial years after independence, Indian planners and

thinkers were more inclined towards socialist pattern. It was justified on the

rational ground that if the government controls the productive resources and

production, then it won’t mislead the country’s economic growth. This was the


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basic rationale to set up PSUs. These PSUs produce goods not according to the

price signals but according to the social needs and economic welfare growth of

the country.

v. Reduce Inequality of Income and Generate Employment Opportunities: It

was assumed that in order to reduce inequalities of income, eradicate poverty

and to raise the standard of living, government sector should invest in the

economy via PSUs.

17. Explain how import substitution can protect domestic industry?

In the initial seven five year plans, India opted for import substitution

strategy, which implies discouraging the imports of those goods that could

be produced domestically.

Import Substitution Strategy not only reduces an economy’s dependence on

the foreign goods but also provides impetus to the domestic firms.

Government provides various financial encouragements, incentives, licenses

to the domestic producers to produce domestically the import substituted

goods.

This would not only allow the domestic producers to sustain but also

enables them to grow as they enjoy the protective environment.

They need not to fear from any competition and also not to worry about

their market share as license gives them the monopoly status in the domestic

market.

Being monopolist, they earn more profits and invest continuously in R&D

and always look for new and innovative techniques.

This gradually improves their competitiveness and when they are exposed

to the international market they can survive and compete with their foreign

counterparts.

18. Why and how was private sector regulated under the IPR 1956?


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IPR 1956 was adopted in order to accomplish the aim of state controlling

the commanding heights of economy.

This policy was aligned with the Indian economy’s inclination towards

socialist pattern of system of Soviet Union. According to this resolution,

industries were classified into following three categories:

Category 1: Those industries that are established and owned exclusively by the

public sector.

Category 2: Those industries in which public sector will perform the primary role

while the private sector will play the secondary role. That is, the private sector

supplements the public sector in these industries.

Category 3: Those industries that are not included in Category 1 and Category 2 are

left to the private sector.


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19. Match the following:

1. Prime Minister A. Seeds that give large proportion of output

2. Gross Domestic

Product

B. Quantity of goods that can be imported

3. Quota C. Chairperson of the planning commission

4. Land Reforms D. The money value of all the final goods and

services produced within the economy in one

year

5. HYV Seeds E. Improvements in the field of agriculture to

increase its productivity

6. Subsidy F. The monetary assistance given by

government for production activities.

ANSWER:

1. Prime Minister C. Chairperson of the planning commission

2. Gross Domestic

Product

D. The money value of all the final goods and

services produced within the economy in one year

3. Quota B. Quantity of goods that can be imported

4. Land Reforms E. Improvements in the field of agriculture to

increase its productivity

5. HYV Seeds A. Seeds that give large proportion of output

6. Subsidy F. The monetary assistance given by government for

production activities.


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LIBERALISATION, PRIVATISATION & GLOBALISATION

1. Why were reforms introduced in India?

Economic reforms were introduced in the year 1991 in India to combat

economic crisis.

Economic Crisis of 1991 was a culminated outcome of the policy failure in

the preceding years.

It was in that year the Indian government was experiencing huge fiscal

deficits, large balance of payment deficits, high inflation level and an acute

fall in the foreign exchange reserves.

Moreover, the gulf crisis of 1990-91 led to an acute rise in the prices of fuel

which further pushed up the inflation level.

Because of the combined effect of all these factors, economic reforms

became inevitable and were the only way to move Indian economy out of

this crisis.

The following are the factors that necessitated the need for the economic

reforms.

I. Huge Fiscal Deficit: Throughout 1980s, fiscal deficit was getting worse due

to huge non-development expenditures. As a result, gross fiscal deficit rose

from 5.7% of GDP to 6.6% of GDP during 1980-81 to 1990-91. Subsequently,

a major portion of this deficit was financed by borrowings (both from external

and domestic source).

The increased borrowings resulted in increased public debt and mounting

interest payment obligations. The domestic borrowings by government

increased from 35% to 49.8% of GDP during 1980-81 to 1990-91.

Moreover, the interest payments obligations accounted for 39.1% of total fiscal

deficit. Consequently, India lost its financial worthiness in the international

market and, fell in a debt trap. Thus, economic reforms were needed urgently.

II. Weak BOP Situation: BOP represents the excess of total amount of exports

over total amount of imports. Due to lack of competitiveness of Indian


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products, India was not able to earn enough foreign exchange through exports

to finance our imports. The current account deficit rose from 1.35% to 3.69%

of GDP during 1980-81 to 1990-91. In order to finance this huge current

account deficit, Indian government borrowed a huge amount from the

international market. Consequently, the external debt increased from 12% to

23% of GDP during the same period. On the other hand, Indian exports were

not potent enough to earn sufficient foreign exchange to repay these external

debt obligations. This BOP crisis compelled the need for the economic

reforms.

III. High level of Inflation: The high fiscal deficits forced the central

government to monetise the fiscal deficits by borrowings from RBI. RBI

printed new money that pushed up the inflation level, thereby, making the

domestic goods more expensive. The rate of inflation rose from 6.7% p.a. to

10.3% p.a. during 1980s to 1990-91. In order to lower the inflation rate,

government in 1991 had to opt for the economic reforms.

IV. Sick PSUs: Public Sector Undertakings were assigned the prime role of

industrialisation and removal of inequality of income and poverty.

But the subsequent years witnessed the failure of PSUs to perform these roles

efficiently and effectively.

Instead of being a revenue generator for the central government, these became

liability. The sick PSUs added an extra financial burden on the government’s

budget.

Thus, because of all the above reasons existing concomitantly, the economic

reforms became inevitable.

2. Why is it necessary to become a member of WTO?

It is important for any country to become a member of WTO (World Trade

Organisation) for the following reasons:

i. WTO provides equal opportunities to all its member countries to trade in the

international market.


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ii. It provides its member countries with larger scope to produce at large scale to

cater to the needs of people across the international boundaries. This provides

ample scope to utilise world resources optimally and provides greater market

accessibility.

iii. It advocates for the removal of tariff and non-tariff barriers, thereby,

promoting healthier and fairer competition among different producers of

different countries.

iv. The countries of similar economic conditions being members of WTO can

raise their voice to safeguards their common interests.

3. Why did RBI have to change its role from controller to facilitator of financial

sector in India?

Prior to liberalisation, RBI used to regulate and control the financial sector that

includes financial institutions like commercial banks, investment banks, stock

exchange operations and foreign exchange market.

With the economic liberalisation and financial sector reforms, RBI needed to

shift its role from a controller to facilitator of the financial sector.

This implies that the financial organisations were free to make their own

decisions on many matters without consulting the RBI.

This opened up the gates of financial sectors for the private players.

The main objective behind the financial reforms was to encourage private

sector participation, increase competition and allowing market forces to

operate in the financial sector.

Thus, it can be said that before liberalisation, RBI was controlling the financial

sector operations whereas in the post-liberalisation period, the financial sector

operations were mostly based on the market forces.

4. How is RBI controlling the commercial banks?

RBI controls the commercial banks via various instruments like

Statutory Liquidity Ratio (SLR),

Cash Reserve Ratio (CRR),


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Bank Rate

Prime Lending (PLR),

Repo Rate, Reverse Repo Rate

and fixing the interest rates and deciding the nature of lending to various

sectors.

These are those ratios and rates that are fixed by RBI and it is mandatory for all

the commercial banks to follow or maintain these rates. All these measures

control the commercials banks' operations and also control money supply in

Indian economy.

5. What do you understand by devaluation of rupee?

Devaluation of Rupee refers to the fall in the value of rupee in terms of foreign

currency.

Specifically, it implies deliberate official lowering of the value of the country's

currency with respect to the foreign currency.

Devalutaion prevails under the fixed exchange rate regime. This implies that

value of rupee has fallen and the value of foreign currency has risen.

It means that now (after devaluation) one US$ can be exchanged for more

rupees.

This encourages exports and discourages imports as the former is cheaper now

for foreign countries and the latter is expensive for Indians.

6. Distinguish between the following

(i) Strategic and Minority sale

(ii) Bilateral and Multi-lateral trade

(iii) Tariff and Non-tariff barriers.


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ANSWER

(i) Strategic Sale Minority Sale

a)

Strategic Sale refers to the sale

of 51% or more stake of a PSU

to the private sector who bids

the highest.

Minority Sale refers to the

sale of less than 49% stake of

a PSU to the private sector.

b)

The ownership of PSU is

handed over to the private

sector.

The ownership of PSU still

remains with the government

as it holds 51% of stakes.

(ii) Bilateral Trade Multilateral Trade

a) It is a trade agreement between

two countries

It is a trade agreement among

more than two countries.

b)

This is an agreement that

provides equal opportunities to

both the countries.

This is an agreement that

provides equal opportunities to

all the member countries in the

international market

(iii) Tariff Barriers Non-tariff Barriers

a)

It refers to the tax imposed on

the imports by the country to

protect its domestic industries.

It refers to the restrictions other

than taxes, imposed on imports

by the country.

b) It includes custom duties,

export-import duties

It includes quotes and licenses.


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c)

It is imposed on the physical

units (like per tonne) or on

value of the goods imported.

It is imposed on the quantity

and quality of the goods

imported.

7. Why are tariffs imposed?

Tariffs are imposed to make imports from foreign countries relatively

expensive than domestic goods, thereby, discouraging imports indirectly.

These are imposed to provide a safe and protective environment to the infant

domestic firms from their technologically advanced foreign counterparts.

Tariffs facilitate the domestic firms to survive and grow.

Tariffs are also imposed on those goods that the government thinks to be

socially unwanted and imports of which will exert unnecessary burden on the

scarce foreign exchange reserves.

8. What is the meaning of quantitative restrictions?

Quantitative Restrictions (QRs) refer to the restrictions in the form of limits or

quotas on the amount of commodities that can either be imported or exported.

QRs usually on imports (refers to non-tariff measures) are imposed to

discourage imports of foreign goods and to reduce Balance of Payment (BOP)

deficits.

The imposition of QRs provides impetus to the domestic firms to survive, grow

and expand in a protective and lesser competitive environment.

9. Those public sector undertakings which are making profits should be

privatised. Do you agree with this view? Why?

An efficient and profit earning PSU is a revenue generator for the government.

But if, a PSU is an inefficient and loss making one, then the same PSU exerts


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unnecessary burden on the government's scarce revenues and further may lead

to budget deficit.

The loss making PSUs should be privatised whereas it would not be fair to

privatise a profit making PSU.

Privatising a PSU may lead to concentration of monopoly power in the private

hands. Further some of the PSUs like, water, railways, etc. enhance the welfare

of nation and is meant to serve general public at a very nominal cost.

Privatisation of such important PSUs will lead to loss of welfare of poor

people.

Hence, only less important PSUs should be privatised while leaving the core

and important PSUs to be owned by the public sector.

Instead of privatisation of profit-making PSUs, government can allow more

degree of autonomy and accountability in their operations, which will not only

increase their productivity and efficiency but also enhance their

competitiveness with their private counterparts.

10. Do you think outsourcing is good for India?

Yes, outsourcing is good for India. The following points suggest that outsourcing is

good for India.

I. Employment: For a developing country like India, employment generation is

an important objective and outsourcing proves to be a boon for creating more

employment opportunities. It leads to generation of newer and higher paying

jobs.

II. Exchange of technical know-how: Outsourcing enables the exchange of

ideas and technical know-how of sophisticated and advanced technology from

developed to developing countries.

III. International worthiness: Outsourcing to India also enhances India’s

international worthiness credibility. This increases the inflow of investment to

India.


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IV. Encourages other sectors: Outsourcing not only benefits the service sector

but also affects other related sectors like industrial and agricultural sector

through various backward and forward linkages.

V. Contributes to human capital formation: Outsourcing helps in the

development and formation of human capital by training, imparting them with

advanced skills, thereby, increasing their future scope and their suitability for

high ranked jobs.

VI. Better standard of living and eradication of poverty: By creating more and

higher paying jobs, outsourcing improves the standard and quality of living of

the people in the developing countries. It also helps in reducing poverty.

VII. Greater infrastructural investment: Outsourcing to India requires better

quality infrastructure. This leads to the modernisation of the economy and

larger investment by the government to develop quality infrastructure and

develop quality human capital.

However, Outsourcing to India is good but developed countries oppose this

because outsourcing leads to the outflow of investments and funds from the

developed countries to the less developed countries.

Also the MNCs contribute more to the development of the host country than

the home country. Further, outsourcing reduces the employment generation in

the developed countries as the same jobs can be done in the less developed

countries at relatively cheap wages.

Moreover, this leads to job insecurity in the developed countries as at a point of time

jobs can be outsourced to the developing countries.

11. India has certain advantages which make it a favourite outsourcing

destination. What are these advantages?

The following points qualify India to be the favourite spot for outsourcing by

various MNCs.


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I. Easy Availability of Cheap Labour: As the wage rates in India are

comparatively lower than that of in the developed countries, MNCs find it

economically feasible to outsource their business in India.

II. Reasonable Degree of Skills: Indians have fairly reasonable degree of skills

and techniques that need low training period and, thus, low cost of training.

III. International worthiness: India has a fair international worthiness and also

credibility. This enhances the faith of the foreign investors in India.

IV. Virgin Market: India has a virgin market for produced goods and services.

This not only helps the MNCs to explore the wide domestic market of India but

also conquer the international market as the cost of production in India is

relatively cheaper.

V. Stable Political Environment: The democratic political environment in India

provides a stable and secured environment to the MNCs to expand and grow.

VI. Favourable Government Policies: The most important point that makes India

as the most favourite spot for outsourcing is the favourable government and tax

policies. MNCs gets various types of lucrative offers from the Indian

government like tax holidays, low rate of tax, easy tax policies, etc. All these

policies enable the MNCs to retain a major portion of their earnings in the form

of savings that they can invest to grow and expand their business.

VII. Lack of Competitive Competitors: The most important for the MNCs in

India is that they don’t face stiff competition from the Indian domestic

industries. This almost enables them to enjoy a monopoly status in the Indian

markets.

VIII. Reasonable Degree of Infrastructural Investment: Indian government has

invested heavily in the past two decades in the infrastructural sector. Various

steps have been taken for connecting remote and rural areas to the metropolitan

and other major cities. This has not only reduced the cost of production of the

MNCs but also helped them operate efficiently and effectively.

IX. Cheap and Abundant Availability of Raw Materials: India is well enriched

in natural resources. This ensures the MNCs cheap availability of raw material


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and undisturbed and perennial supply of raw materials. This enables proper and

smooth operation of MNCs.

12. Do you think the navaratna policy of the government helps in improving

the performance of public sector undertakings in India? How?

To improve efficiency, infuse professionalism and to enable PSUs to compete

effectively in the market, government awarded the status of ‘navaratnas’ to the

following nine PSUs:

a. Indian Oil Corporation Ltd (IOCL)

b. Bharat Petroleum Corporation Ltd (BPCL)

c. Hindustan Petroleum Corporation Ltd (HPCL)

d. Oil and Natural Gas Corporation Ltd (ONGC)

e. Steel Authority of India Ltd (SAIL)

f. India Petro-chemicals Corporations Ltd (IPCL)

g. Bharat Heavy Electricals Ltd (BHEL)

h. National Thermal Power Corporation (NTPC)

i. Videsh Sanchar Nigam Ltd (VSNL)

These corporations were granted a greater degree of financial, managerial and

operational autonomy.

This boosted their efficiency and effectiveness.

They also became highly competitive and some of them are becoming the giant

global players.

Consequent to their better performance, government retained them under

public sector and enabled them to grow themselves not only in the domestic

market but also in the international market.

These corporations are self-reliant and financially self-sufficient. Thus, the

navaratna policy has certainly improved the performance of these PSUs.


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13. What are the major factors responsible for the high growth of the service

sector?

The major factors that led to the growth of service sectors in India are as

follows;

I. High demand for services as final product: India was a virgin market for

service sector. So, when service sector started booming due to business

outsourcing from the developed countries to India, there was very high demand

for these services especially for banking, computer service, advertisement and

communication. This high demand in turn led to a high growth rate of service

sector

II. Liberalisation and economic reforms: The growth of Indian service sector is

also attributable to the liberalisation and various economic reforms that were

initiated in 1991. Due to these reforms, various restrictions on the movement of

international finance were minimised. This led to huge inflow of foreign

capital, foreign direct investments and outsourcing to India. This encouraged

the service sector growth.

III. Structural transformation: Indian economy is experiencing structural

transformation that implies shift of economic dependence from primary to

tertiary sector. Due to this transformation, there was increased demand of

services by other sectors which y boosted the service sector.

IV. Advanced technology and growth of IT: The advancements and innovations

in the IT sector enabled the use of internet, telecommunication, mobile phone

and electronic transactions across different countries. All these contributed to

the growth of the service sector in India.

V. Increased volume of trade: Low tariff and non-tariff barriers on imports by

India are also responsible for high growth rate of service sector. The foreign

trade reforms enabled the domestic products to interact and compete in the

international markets.


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VI. Cheap labour and reasonable degree of skill in India: Due to the

availability of cheap labour and reasonable degree of skilled man power in

India, developed countries found outsourcing to India feasible and profitable.

The business outsourcing in itself provides substantial encouragements (like

development of human capital that requires services like good coaching centers

and reputed institutions, etc.) to the growth of service sector.

14. Agriculture sector appears to be adversely affected by the reform process.

Why?

The economic reforms of 1991 did not benefit the agricultural sector

significantly. The following are the reasons that explain the adverse effects of

the economic reforms on India’s agriculture sector:

I. Reduction of Public Investment: There has been a drastic decrease in the

volume of public investment in the agricultural sector. There has been an acute

cutback from the Indian government to provide sufficient irrigation facilities,

electricity, information system, market linkages and roads. Moreover,

investment in agricultural research and development was not as extensive as it

was during green revolution phase

II. Removal of Subsidies: Removal of subsidies on fertilisers pushed up the cost

of production of agriculture. This made farming more expensive, thereby,

adversely affecting the poor and marginal farmers.

III. Liberalisation and Reduction in Import Duties on Agricultural

Products: Due to adherence to the WTO commitments, Indian government

reduced import duties on agricultural products that forced the poor and

marginal farmers to compete with their foreign counterparts in the international

markets. Stiff competition in the international market along with traditional

techniques of farming badly affected the poor farmers.

IV. Shift towards Cash Crops and Lack of Food Grains: The export oriented

production strategies led to the shift of agricultural production from food

grains to the production of cash crops like cotton, jute, etc. This led to reduced


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availability of food grains and, consequently, t lower nutritional values which

further reduced their productivity.

V. Inflationary Pressures on Food Grains: The shift towards cash crops

production along with the removal of subsidies exerted inflationary pressures

on the prices of food grains. This in turn adversely affected the agricultural

sector’s performance by making the cost of producing food grains more

expensive.

15. Why has the industrial sector performed poorly in the reform period?

Similar to the agricultural sector, industrial sector’s performance was also

poor. The poor performance of industrial sector may be attributable to the

following reasons:

I. Cheaper Imports: The demand for industrial output reduced due to the

cheaper imports. The imports from the developed countries were cheaper

due to the removal of import tariffs. These cheaper and quality foreign

imports led to the fall in the demand of domestic goods.

II. Lack of Investment: Due to the lack of investment in infrastructure

facilities (including power supply) the domestic firms could not compete

with their developed foreign counterparts in terms of cost of production and

quality of goods. The inadequate infrastructural investment pushed up the

cost of production of the domestic producers and, consequently, led to the

non-feasibility of their growth prospectus.

III. High Non-tariffs Barriers by the Developed Countries: It was very

difficult to access the developed countries market due to high non-tariff

barriers maintained by the developed countries. For instance, US did not

remove quota restrictions on imports of textiles from India and China.

IV. Vulnerable and Infant Domestic Industries: During the pre-liberalised

period, the domestic industries were provided a protective environment to

grow and expand. But at the time of liberalisation, the domestic industries


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were still not developed up to the extent it was thought and consequently,

they could not compete with the multi-national companies.

The dependence of domestic industries on traditional technologies which

were neither cost effective nor quality effective was an important reason for

their poor growth. Thus, the domestic industries were adversely affected by

liberalisation.

16. Discuss economic reforms in India?

The economic reforms have enabled India to access and compete in the

international markets.

This facilitated the movement of goods and services across the international

boundaries.

Further, the increased inflows of foreign capital and investment to India have

eliminated the shortage of foreign exchange to finance the imports of

sophisticated and advanced technologies to India.

Moreover, the boom in the outsourcing and the service sector led India’s

economic growth and GDP to increase by many folds.

But on the other side, agriculture that employed a significant proportion of

population, failed to be benefited by these economic reforms.

Also the reforms favoured the high income group population at the cost of their

poor counterparts.

This resulted in wide and still increasing economic and social inequalities

among different section of population. Further, the economic reforms

developed the areas that were well connected with the metropolitan cities

leaving the remote and rural area undeveloped. Consequently, there were wide

regional disparities.

The boom in the service sector, especially in the form of quality education,

superior health care facilities, IT, tourism, multiplex cinemas, etc. were out of

the reach of the poor section of the population.


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The population engaged in the agricultural and allied sectors has still not been

able to share the fruits of advanced technology and modern techniques.

Further, the high income group has experienced increase in income, thereby,

appreciating the quality of their consumption basket, leaving the low and

middle income group to fight hard to earn their livelihood.

Thus, it can be concluded that the economic reforms failed to provide social

justice and enhance welfare of the general public of India.

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