from seclusion to inclusion• highlights of latest social sector initiatives of goi • exclusive...

For Civil Services Preliminary and Main Examinations

Test Prep

Series

EDGEINDIANECONOMYFrom Seclusion to Inclusion

Amit Sinha

• Based on the Budget 2018-19 and Economic Survey 2017-18

• Exclusive coverage on Answer Writing Approach

Foreword by:

Rohit Anand, IRSJoint Commissioner (Income Tax)

2018

A PREVIEW


Test Prep

Series

EDGE

ISBN: 978-81-937468-5-1

`495/-

Indian Economy – from Seclusion to Inclusion, is a comprehensive book for Civil Services preliminary and main examinations. It will also help those preparing for various state services examinations.

As the name suggests, the book provides detailed insights on the changing paradigm of the Indian economy. Explaining the condition of Indian economy at the time of independence, the book delves deep into the gradual shift of Indian economy from agriculture-oriented to service-oriented. It explains the evolution of Indian economy in the era of interdependence. It also provides a brief analysis of changing facets of World economy and its impact on Indian economy. Mapped to the pattern of the questions asked in the General Studies Paper III of the Civil Services Examination (CSE), the book is embedded with latest economic data based on the Budget and Economic survey of 2018.

For facilitating a better understanding of the subject matter, attempt has been made to present the topics in a prescriptive manner. Written in the simple and lucid language, the book will serve as the comprehensive reference for the topics on Indian Economy.

Key features• Based on the Budget 2018-19 and Economic Survey 2017-18• Insights on changing paradigm of Indian economy• Brief analysis of world economy and its impact on Indian economy• Highlights of latest social sector initiatives of GoI• Exclusive coverage on Answer Writing Approach• Solved previous years’ papers of CSE from 2011-2018• Practice questions based on the latest pattern of the CSE

Amit Sinha is the co—founder Director of AAI. He pursued his M.A. and LLB from Delhi University. He also holds Post Graduate Diploma in Rural Development. He has been guiding the aspirants of Civil Services Examination for past 10 years on subjects like Indian Economy, International Relations and Social Issues. Under his guidance, many aspirants have cracked the Civil Services Examination and are contributing to the development of the nation.

INDIANECONOMYFrom Seclusion to Inclusion

Amit Sinha

• Based on the Budget 2018-19 and Economic Survey 2017-18

• Exclusive coverage on Answer Writing Approach

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From Seclusion to Inclusion

Amit Sinha

Foreword by:

Rohit Anand, IRSJoint Commissioner (Income Tax)9 788193 746851

2018

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Amit Sinha Indian Economy 20-7-2018.pdf 1 20/07/18 1:04 PM

INDIAN ECONOMYFrom Seclusion to Inclusion


Amit Sinha PG Diploma (Rural Development)

MA and LLB (Delhi University)

Foreword by:

Rohit Anand, IRSJoint Commissioner, Income Tax

IE_FM.indd 3 20-Jul-18 1:06:09 PM

Published by OakBridge Publishing Pvt. Ltd.

M 35, 1st Floor, Old DLF, Gurugram, 122001, Haryana, IndiaTel.: +91 124 4305970, E-mail: [email protected]

www.oakbridge.in

Copyright © Author, 2018

The views and opinions expressed in this book are the author’s own and the facts are as reported by him which have been verified to the extent possible, and the publishers are not in any way liable for the same.

All rights reserved.

No part of this publication may be reproduced, transmitted, or stored in a retrieval system, in any form or by any means, electronic, mechanical, photocopying recording or otherwise without the prior permission of the publishers.

Due care has been taken while preparing this book. Neither the author nor the publisher of the book holds any responsibility for any mistake that may have inadvertently crept in. The publishers shall not be liable for any direct, consequential or incidental damages arising out of the use of this book.

ISBN: 978-81-937468-5-1

Printed and bound at Saurabh Printers Pvt. Ltd.

This book is sold subject to the condition that it shall not, by way of trade or otherwise, be lent, resold, hired out, or otherwise circulated without the publisher’s prior consent in any form of binding or cover other than that in which it is published.

Published byOakbridge Publishing Pvt. Ltd.

M 35, 1st Floor, Old DLFGurugram, 122002,

Haryana, India

1_Prelims.indd 4 11-Aug-17 9:35:12 PM

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“This book is dedicated to 1.35 billion Indianswho has the potential to move the country

on the path of success and high level of development by 2050.”

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Foreword

I would like to congratulate Mr. Amit Sinha who painstakingly taken up the task of writing a precise and concise book on Indian Economy. There are various books available in the market on Indian Economy but a very few them caters to the demand of the complete syllabus of UPSC.

I personally believe that this book has been written keeping in mind the dynamism of the subject and the syllabus of UPSC which got changed in 2013.

Economy is a very dynamic subject. It encompasses the traditional/conceptual clarity with the developments in current affairs. Here, the author has tried to do justice by incorporating both the aspects of the subject in a meticulous manner.

India is in the midst of transformation from a middle income economy to a high income economy. Several macro-economic reforms have been undertaken in the past couple of years- the most noteworthy is introduction of Goods and Services Tax (GST). And, various others are in pipeline such as proposed reforms in the domain of direct taxation and banking sector. Hence, I believe that the book has incorporated all the new and relevant developments of Indian Economy.

I wish all the best to both the Author and the readers of the book for their future endeavors. The Aspirants of Civil Service Examination would definitely get benefitted from this book. I also wish them good luck!

ROHIT ANAND, IRS

Joint Commissioner, Income Tax

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Preface

The longer it takes to complete a particular work, the greater the depth it explores. India’s economic history has been instrumental in shaping India’s current economic scenario. The British colonial policy has derailed the progress of the Indian economy under the process of deindustrialisation and drain of wealth. This book has tried to examine the progress of Indian economy on various parameters viz., agriculture, industry, banking, etc.

Planning played an instrumental role in shaping Indian economy in early years. Planning in India derives its social and economic objectives from the Directive Principle of State Policy enshrined in the Constitution of India. India became a food reliant country and charted the path of modernisation on economic sectors because of the successful implementation of planning. It was the 12th five year plan which came to end in 2017 and afterwards India took another jump in reforming the institution of economic planning by replacing Planning Commission with NITI Aayog.

The momentous period of India’s economic reforms in 1990s witnessed a successful transition of India from an era of planned economy to a liberalised and globalised economy. The objective of these economic reforms was two-fold: (a) to attain macroeconomic stabilisation and (b) to place economy on higher growth path through reforming the milieu of investment and improvement in the functioning of the Public Sector Enterprises.

Not only this, major reforms were undertaken over the past years. The transformational Goods and Services Tax (GST) was launched at the stroke of midnight on July 1, 2017. And the long-festering Twin Balance Sheet (TBS) problem was decisively addressed by sending the major stressed companies for resolution under the new Indian Bankruptcy Code and implementing a major recapitalization package to strengthen the public sector banks. As a result of these measures, the dissipating effects of earlier policy actions, and the export uplift from the global recovery, the economy began to accelerate in the second half of the year. It is expected to allow real GDP growth to reach 6¾ percent for the year as a whole, rising to 7–7½ percent in 2018–19, thereby re-instating India as the world’s fastest growing major economy.

Currently,three areas of policy focus should remain on: Employment: finding good jobs for the young and burgeoning workforce, especially for women. Education: creating an educated and healthy labor force. Agriculture: raising farm productivity while strengthening agricultural

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x Preface

resilience. Hopefully, the seclusion as a major challenge of the Indian economy could be better addressed through the above mentioned areas of reforms thereby achieving Inclusion and Inclusive Growth in India. Above all, India must continue improving the climate for rapid economic growth on the strength of the only two truly sustainable engines—private investment and exports.

Thus, I must admit the title of the book deems fit here—“FROM SECLUSION TO INCLUSION.”

This book covers the syllabus of the Civil Services Examination word- by- word, in 15 chapters. Hence it is expected that the readers of the book would be able to get the exact yet concise material on their syllabus of Indian economy.

—Amit Sinha

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Acknowledgement

“To live a pure unselfish life, one must count nothing as one’s own in the midst of abundance.”

—Gautam Buddha.

I would like to candidly acknowledge the fact that “the Students are the greatest guide of their Teacher.” I admit to learn a lot of ideas, analysis, and interpretations from my students, friends, teachers and family members only.

First and foremost, I would like to thank my teacher Mr. Hemant Jha-Director of Career Point who actually taught me Indian Economy during my days of preparation for Civil Service Examination. Since then only I started developing interest in the subject. Secondly, I would like to acknowledge the Hindu Newspaper, which became not only my favourite newspaper but also it shaped my understanding on the subject of economy from contemporary relevance. Then onwards, I got to realise that the Economy as a subject is one of my favourite areas of studies.

I would like to thank and give my gratitude to various economists/authors whose books, articles, and writings have been referred while penning down this book. Some of them are Indian Economy: Policies and Performances by Uma Kapila, Indian Economy by Mishra and Puri, INDIAN ECONOMY By Dutta and Sundaram, Indian Economy by I.C. Dhingra, An Uncertain Glory: India and its Contradictions by Jean Dreze and Amartya Sen and India's Tryst With Destiny by Arvind Panagariya and Jagdish Bhagwati ,etc. The list is unending.

My sincere gratitude is towards my elders-Mr. ALOK S. JHA, Mr. AJIT K. SINHA, Mr. NIRBHAY SHARMA, etc and thankful to my friends who actually kept me motivated to enhance and hone my skills and understandings on Indian Economy.

Besides, I am thankful to the entire team of OakBridge publication, especially to Mr. Sulekh Varma for constantly following me for writing this book with OakBridge publication. Without him, I perhaps would not have been able to motivate myself to write down the book on Indian Economy.

I am also thankful to my typist – Ms. Vandana who meticulously worked with me to get the manuscript into its perfect final form.

Last but not the least, my wife – Ms. NIDHI MISHRA and my little daughter-NAAVYA NARAYANI have always been the continuous source of inspiration.

It’s always the blessings of parents and almighty which keep you unvitiated from the right path. The way God is found everywhere your parents always remain with you. Hence, my charansparsh to all of them.

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Brief Contents

Part 1: Fundamentals of Indian EconomyChapter 1: Basics of Indian Economy 1.3

Chapter 2: Nature of Indian Economy 2.1

Part 2: Growth, Development and EmploymentChapter 3: Inclusive Growth 3.3

Chapter 4: Poverty in India 4.1

Chapter 5: Employment and Unemployment 5.1

Part 3: Planning and Resource MobilisationChapter 6: Planning 6.3

Chapter 7: Investments and Savings 7.1

Part 4: Agriculture, Land Reforms and Food Processing IndustriesChapter 8: Agriculture 8.3

Part 5: Liberalisation and Industrial GrowthChapter 9: Effects of Liberalization on Indian Economy 9.3

Chapter 10: Industries 10.1

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xiv Brief Contents

Part 6: Banking, Fiscal Policy and External SectorChapter 11: Money and Banking 11.3

Chapter 12: Taxation and Fiscal Policy Reform 12.1

Chapter 13: External Sector and Foreign Exchange 13.1

Part 7: Infrastructure and Investment Models Chapter 14: Investment Models 14.3

Chapter 15: Infrastructure 15.1

Part 8: Exercises Previous Years’ Questions (Preliminary Examination) B1.3

Previous Years’ Questions (Main Examination) B2.1

Practice Questions (Preliminary Examination) B3.1

Approach to Answer Writing B4.1

Practice Questions (Main Examination) B5.1

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Contents

Part 1: Fundamentals of Indian EconomyChapter 1: Basics of Indian Economy 1.3

Economics 1.3

Macroeconomics 1.3

Scope of Macroeconomics 1.4

Microeconomics 1.4

National Income of India 1.5

Gross Domestic Product 1.6

Main Features of GDP 1.6

Gross National Product 1.6

Net National Product 1.7

Relation between NNP at MP and NNP at FC 1.7

Gross National Product—Alternate Definition 1.7

Net Domestic Product at Factor Cost 1.8

National Income 1.8

Methods of Measuring National Income 1.8

Estimates of National Income in India 1.9

Main Features of National Income Concept 1.11

National Income at Factor Cost 1.11

Relation between Different Concepts of National Income 1.11

Chapter 2: Nature of Indian Economy 2.1

Agricultural Sector on the Eve of Independence 2.1

Industrial Sector on the Eve of Independence 2.3

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xvi Contents

Concept of Economic Growth 2.4

Concept of Economic Development 2.5

Traditional Measure of Economic Development 2.5

New View of Economic Development 2.5

Amartya Sen’s Capability Approach 2.5

Measurement of Economic Development 2.6

Physical Quality of Life Index 2.6

Human Development Index 2.6

Limitations of HDI 2.7

Comparison between Economic Growth and Economic Development 2.7

Part 2: Growth, Development and EmploymentChapter 3: Inclusive Growth 3.3

What is Inclusive Growth? 3.3

Issues Arising out of Inclusive Growth 3.5

Financial Inclusion 3.6

Strategy for Inclusive Growth 3.7

Hurdles to Inclusive Growth 3.8

Solutions to Ensure Equities in Society, Economy, Regional Balance in the Country 3.8

Chapter 4: Poverty in India 4.1

Income Inequalities in India 4.1

Poverty Line 4.2

Causes of Poverty 4.3

Underdevelopment of Indian Economy 4.3

Inequalities in Income and Asset Ownership 4.4

Rapid Increase in Population 4.4

Unemployment 4.5

Inflation 4.5

Rural Character of Indian Economy 4.5

Sociological Reasons for Underdevelopment and Poverty 4.5

Measures to Reduce Poverty 4.6

Accelerating the Growth Rate 4.6

Emphasis on Rural Development 4.6

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xviiIndian Economy: From Seclusion to Inclusion

Development of Village and Small-Scale Industries 4.6

Direct Attack on Poverty 4.7

Reducing Inequalities in Income Distribution 4.7

Limiting the Growth Rate of Population 4.7

Socio-economic and Caste Census 4.7

Why SECC? 4.8

Objectives of SECC 2011 4.8

Criteria used in SECC 2011 4.9

Key Findings of the SECC 4.11

Criticism of SECC 4.12

Way Forward 4.12

Chapter 5: Employment and Unemployment 5.1

Unemployment 5.1

Rate of Unemployment 5.1

Types of Unemployment 5.2

Cyclical Unemployment 5.2

Structural Unemployment 5.2

Frictional Unemployment 5.3

Seasonal Unemployment 5.3

Disguised Unemployment 5.3

Underemployment 5.4

Employment and Unemployment in India 5.4

Employment in the Organized and Unorganized Sectors 5.4

Types of Unemployment in India 5.5

Rural Unemployment 5.5

Urban Unemployment 5.6

Unemployment among the Youth 5.7

Statewise Variations in Rate of Unemployment 5.7

Causes of Variations in Unemployment Rates 5.8

Adverse Effects of Unemployment 5.8

Causes of Unemployment 5.9

Suggested Measures to Remove Unemployment: A Multipronged Strategy 5.11

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xviii Contents

Special Schemes to Remove Unemployment 5.12

MGNREGS 5.13

Critical evaluation of the MGNREGA 5.13

Part 3: Planning and Resource MobilisationChapter 6: Planning 6.3

Imperative Planning 6.3

Advantages of Imperative Planning 6.3

Disadvantages of Imperative Planning 6.4

Indicative Planning 6.4

Relevance of Planning in Pure Market Economy 6.4

Critical Evaluation of Planning Commission 6.5

Mobilization of Resources for Plans 6.5

Domestic Resources 6.6

Foreign/External Resources 6.6

NITI Aayog 6.7

Committees/Organs under NITI Aayog 6.7

Functions of NITI Aayog 6.8

Policy Making and Programme of NITI Aayog 6.8

Closure of Sick Central Public Sector Enterprises 6.8

Strategic Disinvestment of CPSEs 6.8

Significance of NITI Aayog 6.8

Criticism of NITI Aayog 6.9

Atal Innovation Mission 6.9

Functions 6.9

Other Functions of NITI Aayog 6.10

Digital Payments Movement 6.10

Holistic Development of Islands 6.10

Competitive Cooperative Federalism 6.11

Agriculture Marketing and Farmer Friendly Reforms Index 6.11

Indices Measuring States’ Performance 6.11

Performance in Health Outcomes Index 6.11

School Education Quality Index 6.12

Water Management Index 6.12

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xixIndian Economy: From Seclusion to Inclusion

Conference of Chief Secretaries and Planning Secretaries 6.12

Capacity Building of Urban Local Bodies 6.12

Three-Year Revenue and Expenditure Framework 6.13

Agriculture: Doubling Farmers’ Incomes by 2022 6.13

Finance Commission 6.13

Background 6.13

Formula for Financial Allocation under the Planning Commission 6.14

Special Category States 6.15

Fourteenth Finance Commission 6.15

Outcome of Fourteenth Finance Commission 6.15

Restructuring of CSS—Chaturvedi Committee Recommendations 6.16

Fifteenth Finance Commission 6.16

Composition of the Commission 6.17

Chapter 7: Investments and Savings 7.1

Gross and Net Capital Formation 7.1

Domestic Savings 7.2

Savings of the Household Sector 7.3

Savings of the Private Corporate Sector 7.3

Savings of the Government or Public Sector 7.3

Saving Rate 7.3

Reasons for Slow Growth in Saving Rate 7.4

Inflow of Foreign Funds 7.5

Capital Transfers from Rest of the World 7.5

Net Borrowings from Rest of the World 7.5

Concerns of Foreign Borrowings 7.6

Recent Trend in the Fall in Savings and Investment 7.7

Conclusion 7.7

Part 4: Agriculture, Land Reforms and Food Processing IndustriesChapter 8: Agriculture 8.3

Role of Agriculture in Indian Economy 8.4

Land Reforms 8.5

Abolition of Zamindari and Intermediaries 8.6

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xx Contents

Tenancy Reforms 8.6

Regulation of Rent 8.6

Security of Tenure 8.6

Right to Ownership 8.7

Reorganization of Agriculture 8.7

Analysis 8.7

Consolidation of Land Holdings 8.8

Cooperative Farming 8.8

Maintenance of Land Records 8.8

Criticism of Land Reforms 8.8

Small or Large Farmland—Which One is Better? 8.9

Land Acquisition Acts (1894–2015) 8.10

Major Challenges Faced by Indian Agriculture 8.12

Stagnation in Production of Major Crops 8.12

High Cost of Farm Inputs 8.12

Soil Exhaustion 8.12

Depletion of Fresh Ground Water 8.12

Adverse Impact of Global Climatic Change 8.13

Impact of Globalization 8.13

Providing Food Security 8.13

Farmer Suicides 8.14

Cropping Pattern 8.14

Dominance of Food Crops over Non-food Crops 8.14

Variety of Crops Grown 8.14

Dominance of Cereals among Food Crops 8.15

Decline in Coarse Cereals 8.15

Declining Importance of Kharif Crops 8.15

Major Crops of India 8.16

Food Crops 8.17

Rice 8.17

Wheat 8.18

Millets 8.18

Pulses 8.18

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xxiIndian Economy: From Seclusion to Inclusion

Commercial Crops 8.19

Sugarcane 8.19

Cotton 8.19

Oilseeds 8.20

Plantation Crops 8.20

Tea 8.20

Coffee 8.21

Horticulture 8.21

Spices 8.21

Fruit 8.22

Vegetables 8.22

Floriculture 8.22

Types of Farming 8.23

Dry Farming 8.23

Wet Farming 8.23

Irrigated Farming 8.23

Subsistence Farming 8.24

Shifting Cultivation 8.24

Terrace Cultivation 8.24

Plantation Agriculture 8.24

Commercial Farming 8.25

Contract Farming 8.25

Eco-Farming or Organic Farming 8.25

Intensive and Extensive Farming 8.25

Mixed Farming 8.26

Irrigation 8.27

Accelerated Irrigation Benefit Programme (AIBP) 8.28

Command Area Development 8.28

Micro-Irrigation 8.29

Sprinkler Irrigation 8.29

Drip Irrigation 8.30

Pradhan Mantri Krishi Sinchayee Yojana 8.30

Critical Analysis of Micro-Irrigation 8.31

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xxii Contents

Green Revolution 8.31

Agriculture Price Policy 8.32

Minimum Support Price 8.34

Critical Analysis 8.35

Public Distribution System 8.36

Evaluation of PDS 8.36

Reforms 8.37

Issue of Pulse Production in India 8.39

Reasons for Decline in the Production of Pulses 8.39

Impact of Poor Production and Availability of Pulses 8.39

Advantages of Pulse Production 8.41

Solutions to Incentivize Pulses Cultivation 8.41

Strategy to Increase Pulse Production 8.42

The Proposed New MSP Formula 8.42

Sugarcane Price Issue 8.43

Mill Owners’ Perspective 8.44

Farmers’ Perspective 8.44

Government Intervention to Ease the Situation 8.45

Recent Developments in the 2017 Sugar Pricing Issue 8.46

Food Security 8.46

Availability 8.48

Accessibility 8.49

Affordability 8.49

Food Security Act 8.49

Evaluation 8.50

Reforms 8.51

International Implications 8.51

WTO Impact on Indian Agriculture 8.55

Market Access 8.55

Domestic Support 8.56

Export Subsidies 8.57

Agricultural Subsidies 8.57

Fertilizer Subsidies 8.59

Retention Price Scheme 8.60

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xxiiiIndian Economy: From Seclusion to Inclusion

New Urea Policy, 2015 8.61

On Farmers 8.62

On Industries 8.62

On the Government 8.62

FDI in Agriculture 8.63

Agricultural Taxation 8.64

Rationality of Imposing Agriculture Taxation 8.64

Arguments against Imposing Agricultural Income Tax 8.65

Agriculture Marketing 8.66

Limitations of the APMC Law 8.67

Reforms 8.68

Agriculture Credit 8.69

Land Development Bank 8.70

Lead Bank Scheme 8.70

Cooperative Banks 8.70

Advantages of Cooperative Banks 8.72

Regional Rural Banks 8.73

Agriculture Insurance 8.74

Farm Income Insurance Scheme 8.76

Pradhan Mantri Fasal Bima Yojana 8.76

Critical Analysis of PMFBY 8.77

Technology in Agriculture 8.78

Green Revolution 8.78

Genetically Modified Crops 8.79

Technology Missions 8.83

E-Technology Mission 8.83

Food-Processing Industry 8.83

Need for Proliferation of FPI 8.84

Forward/Upstream Leakage 8.85

Backward/Downstream Leakage 8.85

Government Policies relating to FPIs 8.86

Mega Food Parks 8.86

National Mission on Food Processing 8.87

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xxiv Contents

Part 5: Liberalisation and Industrial GrowthChapter 9: Effects of Liberalization on Indian Economy 9.3

The Rationale of Economic Reforms—Crisis of 1991 9.3

Origin of Economic Crisis 9.3

Major Factors Responsible for Economic Crisis 9.4

External Factors 9.4

Internal Factors 9.4

New Economic Policy 9.6

Objectives of New Economic Policy 9.6

Components of New Economic Policy, 1991 9.6

Macroeconomic Stabilization: Short-term Measures 9.6

Structural Adjustment: Long-term Measures 9.7

Macroeconomic Stabilization 9.8

Fiscal Correction 9.8

Reforms in Tax Structure 9.10

Structural Adjustment 9.10

Liberalization 9.10

Industrial Sector Reforms 9.10

Financial Sector Reforms 9.11

Foreign Exchange Reforms 9.12

Trade Policy Reforms 9.12

Privatization 9.12

Globalization 9.13

Liberalization in Import Licensing 9.13

Rationalization of Tariff Structure 9.13

Foreign Exchange Management Reforms 9.13

Achievement of Economic Reforms 9.14

Rise in GDP Growth 9.14

Rise in Foreign Exchange Reserves 9.14

Control of Inflation 9.14

Rise in Inflow of Foreign Capital 9.14

Rise in Integration with the World Economy 9.14

Rise in Competitiveness of Industrial Sector 9.14

Fall in Deficit 9.15

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xxvIndian Economy: From Seclusion to Inclusion

Challenges of Economic Reforms 9.15

Agricultural Crisis 9.15

Changing Employment Pattern 9.15

Providing Essential Public Services to the Poor 9.15

Inadequacy of Physical Infrastructure 9.16

Protecting the Environment 9.16

Slowdown in Industrial Growth 9.16

Solution: Second-Generation Reforms 9.16

Conclusion 9.17

Chapter 10: Industries 10.1

Historical Bacakground 10.1

Changes in Industrial Policy (Structural Reforms) 10.2

Delicensing 10.3

De-reservation 10.3

Disinvestment 10.3

Evolution of Disinvestment Policy 10.4

Reasons for Supporting Disinvestments 10.4

Limitations 10.5

PSU Reforms 10.6

Legal Reforms 10.6

MRTP Act, 1969 10.6

Benefits of MRTP Act 10.7

Limitations of MRTP Act 10.7

Competition Act, 2002 10.7

Other Liberalization Reforms 10.9

Industrial Location Policy 10.9

Abolition of Mandatory Convertibility Clause for Industries 10.9

Micro, Small, Medium Enterprises, 2006 10.9

National Manufacturing Policy, 2011 10.10

Objectives of NMP, 2011 10.11

Make in India Campaign, 2014 10.12

Index of Industrial Production 10.13

Index of Eight Core Industries 10.13

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xxvi Contents

Part 6: Banking, Fiscal Policy and External Sector 11.1Chapter 11: Money and Banking 11.3

Functions of Money 11.3

Unit of Value 11.3

Medium of Exchange 11.4

Standard of Differed Payments 11.4

Store of Value 11.4

Meaning of Money 11.5

Functional Definitions of Money 11.6

Narrow versus Broad Definitions of Money 11.6

Money Market 11.6

Difference between Money Market and Capital Market 11.7

Money Market Instruments 11.7

Treasury Bills 11.7

Repurchase Agreements 11.7

Commercial Papers 11.8

Certificate of Deposit 11.8

Banker’s Acceptance 11.8

Indian Monetary System 11.9

Money Supply 11.9

Measurement of Money Supply 11.10

Banking 11.11

Classification of Commercial Banks in India 11.11

Scheduled Banks 11.11

Non-Scheduled Banks 11.12

Non-Banking Financial Companies (NBFCs) 11.12

Functions of Commercial Banks 11.13

Acceptance of Deposits 11.13

Giving Loans 11.14

Overdrafts 11.15

Discounting Bills of Exchange 11.15

Investment of Funds 11.15

Agency Functions of Banks 11.16

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xxviiIndian Economy: From Seclusion to Inclusion

Miscellaneous Functions 11.16

The Central Bank 11.16

Currency Authority 11.17

Banker to the Government 11.17

Bankers’ Bank and Supervisor 11.17

Forex Control 11.18

Sterilization 11.18

Controller of Money Supply and Credit 11.18

Bank Rate Policy 11.19

Marginal Standing Facility 11.19

Open Market Operations 11.19

Varying Reserve Requirements 11.20

Imposing Margin Requirement on Secured Loans 11.20

Moral Suasion 11.21

Selective Credit Control 11.21

RBI’s Other Functions 11.23

Maintenance of CRAR (Capital to Risk-weighted Assets Ratio)/CAR (Capital Adequacy Ratio) 11.23

Basel Accord and India 11.24

Non-Performing Assets 11.24

Control of NPA 11.25

SARFAESI Act, 2002 11.25

Assets Reconstruction Companies 11.27

Debt Recovery Tribunal, 1993 11.27

Structured Debt Recovery Scheme 11.28

Scheme for Sustainable Structuring of Stressed Assets 11.28

Public Sector Asset Rehabilitation Agency 11.28

Banks and Monetary Policy 11.30

Monetary Policy Reform 11.30

Narasimhan Committee-I, 1991 11.31

Narasimhan Committee-II, 1998 11.32

Khan Working Group, 1998 11.32

T.R. Andhyarujina Committee, 2000–02 11.32

Urjit Patel Committee, 2013 11.32

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xxviii Contents

Analysis of Monetary Policy 11.34

Nachiket Mor Committee, 2013 11.35

P.J. Nayak Committee, 2014 11.35

Bimal Jalan Committee 11.35

Bank Board Bureau, 2016 11.36

Inflation 11.38

Inflation-Related Terminologies 11.39

Causes of Inflation 11.40

Demand-Pull Inflation 11.40

Cost-Push Inflation 11.40

Deficit Financing 11.40

Depreciation of Rupee 11.40

Shortage of Food Articles 11.41

Degree of Inflation 11.41

Effects of Inflation 11.41

Effects of Deflation 11.42

Philips Curve 11.43

Measures of Inflation 11.43

Consumer Price Index 11.44

Wholesale Price Index 11.44

Producer Price Index 11.47

Housing Price Index 11.49

Measures to Control Inflation 11.49

Fiscal Measures 11.49

Administrative Measures 11.49

Monetary Measures 11.50

Capital Market 11.50

Need for Capital Market 11.50

Capital Market Related Terms 11.51

Shares and Bonds 11.51

Stockbroker 11.51

Bulls and Bears 11.51

Primary and Secondary Capital Markets 11.52

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xxixIndian Economy: From Seclusion to Inclusion

Derivatives 11.52

Mutual Funds 11.53

Initial Public Offering 11.53

Debentures 11.53

Stock Exchange 11.54

Stock Market Index 11.55

Bombay Stock Exchange 11.55

National Stock Exchange 11.56

SME Exchange 11.56

Commodity Exchange and MCX 11.57

Commodity Exchanges and Commodities 11.57

Securities and Exchange Board of India 11.57

Objectives of SEBI 11.58

The Organizational Structure of SEBI 11.58

Functions of SEBI 11.58

Protective Functions 11.58

Developmental Functions 11.59

Regulatory Functions 11.59

Forward Markets Commission 11.60

Functions of FMC 11.60

Regulatory Tools 11.60

Foreign Investment in India 11.61

Foreign Direct Investment 11.61

Instruments for Receiving FDI 11.61

Sectors in which FDI is Prohibited in India 11.62

Benefits of FDI 11.62

Foreign Technology Collaboration Agreement 11.62

Foreign Portfolio Investment 11.63

Investment in Government Securities and Corporate Debt 11.64

Foreign Venture Capital Investment 11.64

Investment by Qualified Foreign Investors 11.64

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xxx Contents

GDR and IDR 11.65

Global Depository Receipts 11.65

Indian Depository Receipts 11.65

P-Notes 11.66

Rajiv Gandhi Equity Savings Scheme 11.66

Inflation-Indexed Bonds 11.67

Exchange Traded Funds 11.68

Gold ETFs 11.68

Bharat-22 ETF 11.69

Masala Bonds 11.69

PFRDA Act 2013 11.70

National Pension System 11.70

Chapter 12: Taxation and Fiscal Policy Reform 12.1

Taxation 12.1

Impact of Tax 12.1

Incidence of Tax 12.1

Direct Tax 12.1

Indirect Tax 12.2

Methods of Taxation 12.2

Progressive Taxation 12.2

Regressive Taxation 12.2

Proportional Taxation 12.3

Indian Tax System 12.3

Direct Taxes 12.3

Personal Income Tax 12.3

Corporate Income Tax 12.4

Minimum Alternative Tax 12.4

Fringe Benefit Tax 12.4

Dividend Distribution Tax 12.4

Banking Cash Transaction Tax 12.5

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xxxiIndian Economy: From Seclusion to Inclusion

Securities Transaction Tax 12.5

Wealth Tax 12.5

Capital Gains Tax 12.5

Indirect Taxes 12.6

Central Sales Tax 12.6

Value-Added Tax 12.6

Excise Duty 12.6

Customs Duty 12.7

Service Tax 12.7

Stamp Duty 12.7

State Excise 12.8

Tax Deduction at Source 12.8

Tax Collection at Source 12.8

Taxation Policy Reform 12.8

Direct Tax Code 12.10

Major Recommendations 12.10

Arbind Modi Committee, 2017 12.11

General Anti-Avoidance Rules, 2009 12.11

Tax Administration Reform Commission, 2014 12.11

Goods and Services Tax 12.11

History of GST 12.12

The Indian Version 12.12

Advantages of GST 12.13

Major Concerns Raised Over Implementation and Effectiveness of GST 12.13

GST Council 12.15

E-way Bill, 2018 12.16

Public Expenditure Policy Reform 12.17

Subsidies 12.18

Fiscal Responsibility and Budget Management 12.18

Preamble of FRBM Act 12.18

Objectives of FRBM Act 12.19

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xxxii Contents

Public Debt Policy 12.20

Effects of Deficit Financing 12.21

Budget 12.22

Components of the Government Budget 12.22

Budget Estimates 12.22

Revised Estimates 12.22

Actual Data 12.23

Capital Expenditure 12.23

Revenue Expenditure 12.23

Plan Expenditure 12.23

Non-plan expenditure 12.23

Revenue Budget 12.24

Capital Budget 12.25

Policy Statements 12.26

Different Types of Deficits 12.26

Revenue Deficit 12.26

Fiscal Deficit 12.27

Primary Deficit 12.27

Effective Revenue Deficit 12.27

Budget Policy 12.28

Types of Budgeting 12.29

Line-item Budgeting 12.29

Performance Budgeting 12.29

Zero-Based Budget 12.29

Outcome Budget 12.29

Gender Budget 12.30

Child Budgeting 12.31

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xxxiiiIndian Economy: From Seclusion to Inclusion

Chapter 13: External Sector and Foreign Exchange 13.1

Current Account 13.1

Capital Account 13.2

Balance of Payments 13.2

Foreign Exchange Reserves 13.2

Exchange-Rate Systems 13.3

Fixed and Floating Currency Regime 13.3

Managed Exchange Rates 13.3

Exchange Rate in India 13.4

The Foreign Exchange Regulation Act 13.4

Objectives of FERA 13.4

The Foreign Exchange Management Act 13.5

Change in Currency Value 13.5

Depreciation and Appreciation 13.5

Devaluation and Revaluation 13.6

External Sector Reform Policy 13.6

Trade Policy Before 1991 13.6

Trade Policy After 1991 13.7

Advantages 13.8

Disadvantages 13.8

Services Sector 13.9

Preferential Trade Agreements 13.11

Part 7: Infrastructure and Investment Models 14.1Chapter 14: Investment Models 14.3

Investment Models in India 14.4

Harrod-Domar Model 14.4

Nehru-Mahalanobis Growth Model 14.4

Rao-Manmohan Model of Development 14.5

Special Economic Zones 14.6

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xxxiv Contents

Public Private Partnership 14.7

Background 14.8

Forms of PPP 14.8

Appraisal of PPPs 14.9

Advantages of PPP 14.10

Concerns with PPPs 14.10

Reforms in PPP 14.10

Different Investment Models Around the World 14.12

Dubai Model 14.12

Qatar Model 14.12

China Model 14.12

Chapter 15: Infrastructure 15.1

Nature of Infrastructure in India 15.1

Pricing Issue 15.2

Public-sector Monopoly 15.2

National Investment and Infrastructure Fund 15.2

Objectives of NIIF 15.3

Fund Corpus 15.3

Reforms in Railway Infrastructure 15.3

Dedicated Freight Corridor Project 15.4

Roadways Infrastructure 15.5

Setu Bharatam Programme 15.6

Inland Waterways, Ports, and Shipping 15.6

Ocean Transport System 15.6

Inland Waterways System 15.7

IWT Activities and Projects 15.7

Advantages of Waterways 15.8

Limitations of Waterways 15.8

Energy Sector 15.8

Coal Pricing Issue 15.9

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xxxvIndian Economy: From Seclusion to Inclusion

Recent Reforms 15.10

Ujwal DISCOM Assurance Yojana 15.10

Energy Conservation 15.10

National Light-Emitting Diode Programme 15.10

Gas Pricing Issue 15.11

Hydrocarbon Exploration and Licensing Policy 15.11

Solar Energy 15.13

Green Energy Corridor 15.13

National Solar Mission Controversy 15.13

Latest Reforms in Infrastructure 15.14

Sagarmala Programme 15.14

Bharatmala Pariyojana 15.15

Metro Rail System 15.15

Civil Aviation 15.16

Regional Connectivity Scheme 15.16

Towards Better Infrastructure 15.16

Building an Inclusive Society 15.16

Health 15.16

Part 8: Exercises Previous Years’ Questions (Preliminary Examination) B1.3

Previous Years’ Questions (Main Examination) B2.1

Practice Questions (Preliminary Examination) B3.1

Approach to Answer Writing B4.1

Practice Questions (Main Examination) B5.1

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Fundamentals of Indian Economy

PART

1

Chapter 1 Basics of Indian Economy

Chapter 2 Nature of Indian Economy

“There are a few of the basic parameters, based on which the strength of Indian economy can be gauged. They include Gross Domestic Product (GDP), Gross National Product (GNP) and per capita income. India had been under the British rule for almost 200 years. The colonial policies had laid a major impact on Indian economy and had played an important role in shaping it. 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 than with the development of the Indian economy. Hence, revitalising the Indian economy after independence was one of the major challenges in front of the national leaders.”

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1.3

Basics of Indian Economy1

CHAPTER

The word ‘economy’ was derived from the Greek word ‘Oikonomia’, which literally means ‘household management’. The Oxford Dictionary defines economics as a social science that studies individual and group decisions on how to use scarce resources to satisfy their wants and needs. It defines economy as the state of a country or region in terms of the production and consumption of goods and services and the supply of money. An economy can be of two types—closed and open economy.

• A closed economy is a form of autarchy—an economy without contacts with the rest of the world by means of trade and movement of capital and labour; e.g., North Korea in current times.

• An open economy has transactions with the rest of the world for trade in goods and services and movement of labour, capital, and technology. A majority of countries today are either fully open or partially open; e.g., the U.S., India, and the EU.

Economics

In 1776, Adam Smith wrote a book titled An Enquiry into Nature and Cause of the Wealth of Nations and popularized the study of economics at the academic level. Hence, he is also known as the founder of modern economics. However, the earliest treatise in the world on the subject of economics and statecraft was written by Kautilya in Arthashastra during the Mauryan Age. Thus, Kautilya should be considered the originator of economics as a subject of study and research in the world. Broadly, economics can be divided into two parts—microeconomics and macroeconomics.

MacroeconomicsTo study and analyse any economic phenomenon, be it demand, supply, income, or employment in totality is extremely complicated, since each of these includes a vast number of different goods, firms, individuals, prices, etc. Hence to make the analysis manageable, aggregates are used. To do this, different individuals and different firms are arranged in a


1.4 Basics of Indian Economy

reasonably small number of categories by ignoring the differences between one individual and another or between one firm and another and assuming that the members of one category will behave in a reasonably uniform manner to make the generalizations sufficiently valid. This sort of approach for the study of economic phenomena is known as macroeconomic analysis or macroeconomics. Macroeconomics is that branch of economics which deals with aggregates. It deals with aggregate demand, aggregate supply, aggregate output, aggregate income, and so on.

In Greek terminology the term ‘macro’ means ‘large’. The term was for the first time used by Ragnar Frisch in 1933 and since then it has gained wide currency. The approach is in no way new, since the entire analysis of the ‘circulation of wealth’ by the physiocrats (French philosophers) was based on this kind of approach. The fact, however, remains that the most important developments in this field have taken place only after the Great Depression, barring of course the development of Keynes’ General Theory of Employment, Interest and Money in 1936. Hence, John Maynard Keynes is known as the father of macroeconomics.

Scope of Macroeconomics Macroeconomics is ‘economics in the large’. It studies the working of an economy in aggregates or averages—national income, national output, national consumption, employment, savings, investment, general price level, etc.

The broad problems which form the scope of macroeconomics are related to (a) fluctuations in the level of employment of labour, (b) fluctuations in the average price level, (c) fluctuations in the general level of money wages, (d) the allocation of resources between the production of consumer goods and capital goods, (e) the rate of growth of productive capacity, and (f) the relation between international trade and the levels of employment, prices, and growth in the economy.

Microeconomics In Greek terminology, the word ‘micro’ means small. Hence, microeconomics means ‘economics in the small’. It deals with small constituents or components of the economy, i.e., single economic units. It is selective in nature. It analyses the behaviour of the individual buyer and seller, the determination of the price of a commodity for a single firm, the level of employment, the wages paid to workers in a certain firm or industry, and so on.

It deals with the problems connected with the determination of prices of various commodities and factors of production as well as the problems related to the allocation of scarce resources among alternative uses.


1.5Indian Economy: From Seclusion to Inclusion

Difference between microeconomics and macroeconomics

Microeconomics

� When a particular firm is involved in economic activities, it is dealt with in microeconomics. For example, the performance of Reliance Industries Limited in a given financial year.

� Based on the theory of equilibrium, i.e., demand and supply.

� It is assumed that

◊ demand is proportional to supply

◊ no crisis situation can occur in an economy

◊ there will always be a balanced economy

� Came under criticism only after The Great Depression of 1929.

Macroeconomics

� Macro Economics is defined as when a whole segment of economic sectors is involved, e.g., the petroleum industry measures the aggregated performance of oil marketing companies in a given financial year.

� John Maynard Keynes—father of macroeconomics—wrote a book General theory of Employment, Interest and Money in 1936.

National Income of India

The national income of a country measures the net value of goods and services produced in the country during a year, including the net earned foreign income. In other words, the total national income measures the flow of goods and services in an economy. National income is a flow not a stock. As contrasted with national wealth, which measures the stock of commodities held by the nationals of a country at any point of time, national income measures the productive power of an economy to manufacture goods and services for final consumption in a given period. In India, national income estimates are related with the financial year (1 April to 31 March). The various concepts of national income are as follows.



Gross Domestic Product

The gross domestic product (GDP) is the total monetary value of all final goods and services produced within the geographical boundaries of the country during a given period of time. While domestic product emphasizes the total output raised within the geographical boundaries of the country, national product focuses attention not only on the domestic product but also on goods and services produced outside the boundaries of a nation. Besides, any part of GDP that is produced by the nationals of a country should be included in the GNP (gross national product).

Main Features of GDP1. GDP includes only those goods and services that are produced within the territory of a

country during a particular period of time.

2. The monetary value of all these goods and services is taken into account.

3. The value of these goods and services is included at the prevailing market price.

4. Only those goods and services are included in the GDP that have a market value and are brought for sale in the market.

5. The depreciation of capital goods during the course of production, transfer payment, and capital gains are not included in the GDP, since they do not contribute in any way to the total output.

Gross National Product

The gross national product refers to the monetary value of the total output or production of final goods and services produced by the nationals of a country during a given period of time, generally in a year. In the calculation of GNP, we also include the monetary value of goods and services produced by nationals residing outside the country. Hence, the income produced and received by nationals of a country within the boundaries of foreign countries should be added to the GNP of the country. Similarly, the income received by foreign nationals within the boundary of the country should be excluded from the GNP. In equation form,

GNP = GDP + X – M

where X is the income earned and received by nationals within the boundaries of foreign countries and M is the income received by foreign nationals within the country. If X = M, then GNP = GDP. Similarly, in a closed economy, X = M = 0, then also GNP = GDP.



Net National Product

The net national product (NNP) is obtained by subtracting the depreciation value (i.e., capital stock consumption) from the GNP. In equation form,

NNP = GNP – Depreciation

The NNP can be calculated in two ways:

(a) At the market prices of goods and services (NNP at MP)

(b) At factor cost (NNP at FC)

Relation between NNP at MP and NNP at FC NNP at MP is the sum total of the market value of the final goods and services produced during a specific period within the national boundaries of a country. NNP at FC is the total income received by the owners of the factors of production within the national boundaries of a country. These parameters are not the same but are undoubtedly related to each other. By deducting net indirect taxes from the NP at MP, we can get the NP at FC. The indirect taxes are deducted because they are included in the market price of goods and services but are not received by the factors of production. They are paid to the government. Hence, the market value of the total national output is more than the amount paid to all the factors of production. This excess amount is that of the indirect taxes paid to the government, and is to be deducted from the market value of the total national output.

Again, subsidies are also given by way of incentives to the producers so that they may sell their produce at lower prices. Subsidies are paid in the form of money. So, if the total value of the goods and services is calculated at the prevailing market price, then it would be less than the amount paid to the factors of production, or, in other words, it would be lower than the factor cost because, due to the payment of subsidies, the prices of certain products have been lowered by the producers. Hence, for calculating the NNP at FC, the amount of subsidies paid to the producers is to be added to the NNP at MP.

Gross National Product—Alternate Definition

We can now define gross national product (GNP) as the total output of goods and services produced by the labour and property of a country’s inhabitants in a given year, valued at factor cost, and with no part of the output counted more than once. If an estimate of depreciation is deducted from the GNP, it becomes the net national product NNP.



Factor cost is the amount paid to the owners of the factors of production that have produced the commodities. Thus, the factor cost is (P – T) + (S), where P is the market price of the commodity, T is the amount of indirect tax on it, and S is the amount of subsidy, if there is any. To simplify it we can say that NNP = GNP – D, i.e., depreciation or capital consumption.

Net Domestic Product at Factor Cost

The income earned by the owners of factors of production in the form of rent, interest, and profits within the national boundaries of a country is known as the net domestic product at factor cost (NDP at FC). It is also known as the domestic income. It includes

1. rents

2. wages and salaries

3. interests

4. dividends to the shareholders

5. reserve funds of firms or corporate savings

6. direct taxes

7. mixed-income of self-employed persons

8. profits of government enterprises

9. government income from properties

10. savings of non-departmental enterprises

National Income

The GNP, explained above, is based on the market prices of the produced goods, which includes indirect taxes and subsidies. The NNP at FC is known as the national income—the national income is calculated by subtracting the net indirect taxes (i.e., total indirect taxes – subsidy) from the NNP at market price. In equation form,

National Income (NNP at factor cost) = NNP at market price – (Indirect Taxes – Subsidy)

= NNPmp – Indirect Tax + Subsidy

Methods of Measuring National IncomeNational income can be seen in three different ways: from the point of view of receipts, expenditure, and volume of production. It is the total of the receipts of individuals, as well as the total of the expenditure incurred by individuals, since the expenditure of one is the receipt



of another. Again, since the goods and services are exchanged between individuals, the national income will represent the total value of the goods and services bought and sold. National income can, thus, be measured in three ways (Kuznets): (1) income method, (2) expenditure method, and (3) production method.

1. Income method—In this method, the total of net incomes earned by working people in different sectors and commercial enterprises is obtained. According to Dr Bowley and Robertson, incomes of both categories of people—those paying taxes and those not paying taxes—are added to obtain the national income. For adopting this method, sometimes a group of people from various income groups is selected, and the national income of the country is estimated on the basis of their income. In a broad sense, using the income method, the national income is obtained by adding the receipts of total rent, total wages, total interest, and total profit. In equation form:

National Income = Total Rent + Total Wages + Total Interest + Total Profit

2. Expenditure method—This is also called the consumption method. Income is either spent on consumption or saved. Hence, the national income is the addition of total consumption and total savings. For using this method, we need data related to the incomes and savings of the consumers. Generally, reliable data of savings and consumption are not easily available. Therefore, the expenditure method is generally not used for estimating national income.

3. Production method—Kuznets gave a new name to this method, i.e., product service method. In this method, the net value of the final goods and services produced in a country during a year is obtained and the total obtained value is called the total final product. This represents the GDP. Thereafter, the net income earned in foreign boundaries by nationals is added and the depreciation is subtracted from the GDP.

In India, a combination of the production and income methods is used for estimating the national income.

Estimates of National Income in IndiaNo specific attempts were made for estimating national income in India during the pre-independence era. In 1868, the first attempt was made by Dadabhai Naoroji. In his book Poverty and Un-British Rule in India, he estimated the Indian per capita annual income as INR 20. Some other economists followed and gave various estimates of Indian national income. Some of these estimates are as follows:

Findlay Shirras (1911): 49 (per capita income)

Wadia and Joshi (1913-14): 30–44 (per capita income)

Dr V.K.R.V. Rao (1925–29): 76 (per capita income)



Soon after independence, the Government of India appointed the National Income Committee in August 1949 under the chairmanship of Professor P.C. Mahalanobis to compile authoritative estimates of national income. The committee submitted its first report in 1951 and final report in 1954. According to this report, the total national income of the country was estimated at INR 8,650 crores and the per capita income was estimated at INR 246–90. The final report (1954) gave estimates of national income during the period 1950–1954. For further estimation of national income, the government established the Central Statistical Organization (CSO), which now regularly publishes national income data.

CSO & NSSO merged in 2006

The government has merged the Central Statistical Organisation (CSO) and National Sample Survey Organization (NSSO) for promoting the statistical network in the country. The newly merged unit is known as the National Statistical Commission (NSC). The head of the organization is designated as the Chief Statistician of India and has the rank of Chief Secretary. The NSC was initially constituted in 2006 to serve as a nodal and empowered body for all core statistical activities of the country; to evolve, monitor, and enforce statistical priorities and standards; and to ensure statistical coordination.

Recently, the CSO has introduced a new series on National Income, with 2011-12 as the base year. National income includes the contribution of three sectors of the economy—the primary sector (agriculture, forest, fisheries, and mining), secondary sector (manufacturing and construction industries), and tertiary sector (trade, transport, communications, banking, insurance, real estate, and community and personal services).

National Income Concepts at a Glance

� GDP (gross domestic product): Value of total goods and services produced by a country in a year within its geographical boundaries.

� GNP (gross national product): Total GDP + GDP of Indians in other countries – GDP of foreigners in India (in a year).

� National per capita income: GNP/Total Population

� National Sample Survey Organisation (NSSO): Collects data of all the samples and gives it to the CSO.

� Central Statistical Office (CSO): Analyses the data given by the NSSO and calculates the figures of GDP, GNP, national income, etc.



Main Features of National Income ConceptThe main features of the concept of national income are as follows:

1. National income is a flow and not a stock.

2. National income, in practical terms, is the flow of goods and services produced during a particular period in an economy.

3. National income, in monetary terms, is the money measure of the aggregate of all the goods and services available to the nation in a particular period.

4. National income is always expressed with reference to a particular period of time (usually a year).

5. In national income accounting, the concept of national income is visualized as a flow of (i) national output, (ii) national income, and (iii) national expenditure.

The three flows are equal to each other, i.e.,

National Income = National Output = National Expenditure.

National Income at Factor Cost The national income has also been conceived of as the total of incomes received by the owners of factors of production, i.e., land labour, capital, and entrepreneurship—in the form of rent, wages, interest, and profits. This could be arrived at by totalling up the money value of the total goods and services produced in the country over a period of time. This concept was introduced by Marshall. It is, however, not easy to get correct estimates of the total production of goods and services because of the difficulties of double counting and also because of lack of knowledge about that portion of the produce which is used for personal consumption.

Relation between Different Concepts of National Income (1) Gross Domestic Product at Market Price = Market value of final goods and services

produced within the national territory of a country

(2) Gross National Product at Market Price = GDP at MP + Net Factor Income from Abroad

(3) Net National Product at Market Price = GNP at MP – Depreciation

(4) Net Domestic Product at Market Price = NNP at MP – Net Factor Income from Abroad

(5) Net Domestic Product at Factor Cost or Domestic Income = Total Income of all the Factors of Production

(6) Gross National Product at Factor Cost = NDP at FC + Depreciation

(7) Gross National Product at Factor Cost = GDP at FC + Net Factor Income from Abroad

(8) Net National Product at Factor Cost or National Income = GNP at FC – Depreciation



New Base Year for IIP and CPI

The Statistics Ministry of the government of India has recently proposed the new base year for GDP and IIP as 2017-18 while for CPI it will be 2018. The reasons behind the change are:

� The Indian statistics should be in line with the global exercise to capture economic information accurately.

� Base year revision exercises are undertaken as per the internationally accepted practice to capture the changing structure of the economy.

� This ensures capturing latest information and hence accurately reflects the current economic situation in the country.


B1.3

Previous Years’ Questions (Preliminary Examination)

CSE-2011

1. India has experienced persistent and high food inflation in the recent past. What could be the reasons?

1. Due to a gradual switchover to the cultivation of commercial crops, the area under the cultivation of food grains has steadily decreased in the last five years by about 30%.

2. As a consequence of increasing incomes, the consumption patterns of the% people have undergone a significant change.

3. The food supply chain has structural constraints.Which of the statements given above1 are correct?(a) 1 and 2 only(b) 2 and 3 only(c) 1 and 3 only(d) 1, 2 and 3Solution (b)

2. In terms of economy, the visit by foreign nationals to witness the XIX Common Wealth Games in India amounted to

(a) Export(b) Import(c) Production(d) ConsumptionSolution (a)

3. Which one of the following statements appropriately describes the “fiscal stimulus”?

(a) It is a massive investment by the Government in manufacturing sector to ensure the supply of goods to meet the demand surge caused by rapid economic growth

(b) It is an intense affirmative action of the Government to boost economic activity in the country

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B1.34 Previous Years’ Questions (Preliminary Examination)

22. Consider the following statements:

1. Tax revenue as a percent of GDP of India has steadily increased in the last decade.2. Fiscal deficit as a percent of GDP of India has steadily increased in the last decade.

Which of the statements given above is/are correct?(a) 1 only (b) 2 only(c) both 1 and 2(d) neither 1 nor 2Solution: (d)

CSE-2018

1. As per the NSSO 70th Round “Situation Assessment Survey of Agriculture Households”, consider the following statements:

1. Rajasthan has the highest percentage share of agriculture households among its rural households.

2. Out of the total households in the country, a little over 60 percent being to OBCs.3. In Kerala, a little over 60 percent of agriculture households reported to have received

maximum income from sources other than agriculture activities.Which of the statements given above is/are correct?a) 2 and 3 onlyb) 2 onlyc) 1 and 3 onlyd) 1, 2 and 3Solution: (c)

2. Which one of the following best describes the term “Merchant Discount Rate” sometimes seen in news?

(a) The incentive given by a bank to a merchant for accepting payments through debit cards pertaining to that bank.

(b) The amount paid back by banks to their customers when they use debit cards for financial transactions for purchasing goods or services.

(c) The charge to a merchant by a bank for accepting payments from his customers through the bank’s debit cards.

(d) The incentive given by the Government to merchants for promoting digital payments by their customers through Point of Sale (PoS) machines and debit cards.

Solution: (c)


B1.35Indian Economy: From Seclusion to Inclusion

3. With reference to India’s decision to levy an equalization tax of 6% on online advertisement services offered by non-resident entities, which of the following statements is/are correct?

1. It is introduced as a part of the Income Tax Act that offers advertisement services in India.

2. Non-resident entities that offer advertisement services in Indian can claim a tax credit in their home country under the “Double Taxation Avoidance Agreements”.

Select the correct answer using the code given below:a) 1 onlyb) 2 onlyc) Both 1 and 2d) Neither 1nor 2Solution: (d)


1. The Fiscal Responsibility and Budget Management (FRBM) Review Committee Report has recommended a debt to GDP ratio of 60% for the general (combined) government by 2023, comprising 40% for the Central Government and 20% for the State Governments.

2. The Central Government has domestic liabilities of 21% of GDP as compared to that of 49% of GDP of the State Governments.

3. As per the Constitution of India, it is mandatory for a State to take the Central Government’s consent for raising any loan if the former owes any outstanding liabilities to the latter.

Which of the statements given above is/are correct?a) 1 onlyb) 2 and 3 onlyc) 1 and 3 onlyd) 1, 2 and 3Solution: (c)


1. The quantity of imported edible oils is more than the domestic production of edible oils in the last five years.

2. The Government does not impose any customs duty on all the imported edible oils as a special case.

Which of the statements given above is/are correct?a) 1 onlyb) 2 onlyc) Both 1 and 2d) Neither 1 nor 2Solution: (a)



6. Which one of the following links all the ATMs in India ?

a) Indian Banks’ Associationb) National Securities Depository Limitedc) National Payments Corporation of Indiad) Reserve Bank of IndiaSolution: (c)


1. Capital Adequacy Ratio (CAR) is the amount that banks have to maintain in the form of their own funds to offset any loss that banks incur if any account-holders fail to repay dues.

2. CAR is decided by each individual bank.Which of the statements given above is/are correct?a) 1 onlyb) 2 onlyc) Both 1 and 2d) Neither 1 nor 2Solution: (a)


1. The Food Safety and Standards Act, 2006 replaced the Prevention of Food Adulteration Act, 1954.

2. The Food Safety and Standard Authority of India (FSSAI) is under the charge of Director General of Health Services in the Union Ministry of Health and Family Welfare.


9. With reference to the provisions made under the National Food Security Act, 2013, consider the following statements:

1. The families coming under the category of ‘below poverty line (BPL)’ only are eligible to receive subsidised food grains.

2. The eldest woman in a household, of age 18 years or above, shall be the head of the household for the purpose of issuance of a ration card.

3. Pregnant women and lactating mothers are entitled to a ‘take-home ration’ of 1600 calories per day during pregnancy and for six months thereafter.

Which of the statements given above is/are correct?a) 1 and 2b) 2 onlyc) 1 and 3d) 3 onlySolution: (b)



10. India enacted The Geographical Indications of Goods (Registration and Protection) Act, 1999 in order to comply with the obligations to

a) ILOb) IMFc) UNCTADd) WTOSolution: (d)

11. With reference to digital payments, consider the following statements:

1. BHIM app allows the user to transfer money to anyone with a UPI-enabled bank account.

2. While a chip-pin debit card has four factors authentication, BHIM app has only two factors of authentication.


12. Consider the following countries:

1. Australia2. Canada3. China4. India5. Japan6. USAWhich of the above are among the ‘free-trade partners’ of ASEAN?(a) 1, 2, 4 and 5(b) 3, 4, 5 and 6(c) 1, 3, 4 and 5(d) 2, 3, 4 and 6Solution: (c)

13. Which one of the following statements correctly describes the meaning of legal tender money?

(a) The money which is tendered in courts of law to defray the fee of legal cases(b) The money which a creditor is under compulsion to accept in settlement of his

claims(c) The bank money in the form of cheques drafts, bills of exchange, etc.(d) The metallic money in circulation in a countrySolution: (b)



14. If a commodity is provided free to the public 1, by the Government, then

(a) the opportunity cost is zero.(b) the opportunity cost is ignored.(c) the opportunity cost is transferred from the consumers of the product to the tax-paying

public.(d) the opportunity cost is transferred from the consumers of the. product to the

Government.Solution: (c)

15. Increase in absolute and per capita real GNP do not connote a higher level of economic development, if

(a) industrial output fails to keep pace with agricultural output.(b) agricultural output fails to keep pace with industrial output.(c) poverty and unemployme crease.(d) imports grow faster than exports.Solution: (c)


Human capital formation as a concept is better explained in terms of a process which enables

1. individuals of a country to accumulate more capital.2. increasing the knowledge, skill levels and capacities the people of the country.3. accumulation of tangible wealth.4. accumulation of intangible wealth.Which of the statements given above is/are correct?(a) 1 and 2 (b) 2 only(c) 2 and 4 (d) 1, 3 and 4Solution: (c)

17. Despite being a high saving economy, capital formation may not result in significant increase in output due to

(a) weak administrative machinery(b) illiteracy(c) high population density(d) high capital-outputs ratioSolution: (d)

18. Economically, one of the results of the British rule in India in the 19th century was the

(a) increase in the export of Indian handicrafts(b) growth in the number of Indian owned factories(c) commercialization of Indian agriculture(d) rapid increase in the urban populationSolution: (c)




1. The Reserve Bank of India manages and services Government of India Securities but not any State Government Securities.

2. Treasury bills are issued by the Government of India and there are no treasury bills issued by the State Governments.

3. Treasury bills offer are issued at a discount from the par value.Which of the statements given above is/are correct?(a) 1 and 2 only(b) 3 only(c) 2 and 3 only(d) 1, 2 and 3Solution: (c)

20. With reference to solar power production in India, consider the following statements :

1. India is the third largest in the world in the manufacture of silicon wafers used in photovoltaic units.

2. The solar power tariffs are determined by the Solar Energy Corporation of India.Which of the statements given above is/are correct ?(a) 1 only(b) 2 only(c) Both 1 and 2(d) Neither 1 nor 2Solution: (d)

21. With reference to Pradhan Mantri Kaushal Vikas Yojana, consider the following state-ments :

1. It is the flagship scheme of the Ministry of Labour and Employment.2. It, among other things, will also impart training in soft skills, entrepreneurship, financial

and digital literacy.3. It aims to align the competencies of the unregulated workforce of the country to the

National Skill Qualification Framework.Which of the statements given above is/are correct?(a) 1 and 3 only(b) 2 only(c) 2 and 3 only(d) 1, 2 and 3Solution: (c)

22. With reference to the governance of public sector banking in India, consider the following statements:

1. Capital infusion into public sector banks by the Government of India has steadily increased in the last decade.



2. To put the public sector banks order, the merger of associate banks with the parent State Bank of India has been affected

Which of the statements given above is/are correct?(a) 1 only(b) 2 only(c) Both 1 and 2(d) Neither 1 nor 2Solution: (b)

23. Consider the following items:

1. Cereal grains hulled2. Chicken eggs cooked3. Fish processed and canned4. Newspapers containing advertising materialWhich of the above items is/are exempted under GST (Goods and Services Tax) ?(a) 1 only(b) 2 and 3 only(c) 1, 2 and 4 only(d) 1, 2, 3 and 4Solution: (a)


B2.1

Previous Years’ Paper (Main Examination)

2017

10 Marks1. Among several factors for India’s potential growth, savings rate is the most effective one.

Do you agree? What are the other factors available for growth potential?

2. Account for the failure of manufacturing sector in achieving the goal of labour-intensive exports rather than capital-intensive exports. Suggest measures for more labour-intensive rather than capital-intensive exports.

3. Examine the developments of Airports in India through Joint Ventures under Public-Private Partnership(PPP) model. What are the challenges faced by the authorities in this regard.

4. Explain various types of revolutions, took place in Agriculture after Independence in India. How these revolutions have helped in poverty alleviation and food security in India?

5. What are the reasons for poor acceptance of cost effective small processing unit? How the food processing unit will be helpful to uplift the socio-economic status of poor farmers?

15 Marks1. One of the intended objectives of Union Budget 2017-18 is to ‘transform, energize and clean

India’. Analyse the measures proposed in the Budget 2017-18 to achieve the objective.

2. “Industrial growth rate has lagged behind in the overall growth of Gross-Domestic-Product (GDP) in the post-reform period” Give reasons. How far the recent changes in Industrial Policy are capable of increasing the industrial growth rate?

3. What are the salient features of ‘inclusive growth’? Has India been experiencing such a growth process? Analyze and suggest measures for inclusive growth.

4. What are the major reasons for declining rice and wheat yield in the cropping system? How crop diversification is helpful to stabilize the yield of the crop in the system?

IE_Previous Years’ Questions (Main Examination)_2.indd 1 19-Jul-18 9:16:53 PM

B2.2 Previous Years’ Paper (Main Examination)

5. How do subsidies affect the cropping pattern, crop diversity and economy of farmers? What is the significance of crop insurance, minimum support price and food processing for small and marginal farmers?

2016

12.5 Marks1. How globalization has led to the reduction of employment in the formal sector of the Indian

economy? Is increased in formalization detrimental to the development of the country?

2. Women empowerment in India needs gender budgeting. What are the requirements and status of gender budgeting in the Indian context?

3. Pradhan Mantri Jan-Dhan Yojana (PMJDY) is necessary for bringing unbanked to the institutional finance fold. Do you agree with this for financial inclusion of the poorer section of the Indian society? Give arguments to justify your opinion.

4. What are ‘Smart Cities’? Examine their relevance for urban development in India. Will it increase rural-urban differences? Give arguments for ‘Smart Villages’ the light of PURA and RURBAN Mission.

5. Justify the need for FDI for the development of the Indian economy. Why there is gap between MOUs signed and actual FDIs? Suggest remedial steps to be taken for increasing actual FDIs in India.

6. Comment on the Challenges for inclusive growth which include careless and useless manpower in the Indian context. Suggest measures to be taken for facing these challenges.

7. What is water-use efficiency? Describe the role of micro-irrigation in increasing the water use efficiency.

8. What is allelopathy? Discuss its role in major cropping systems of irrigated agriculture.

9. Discuss the role of land reforms in agricultural development. Identify the factors that were responsible for the success of land reforms in India.

10. Given the vulnerability of Indian agriculture to vagaries of nature, discuss the need for crop insurance and bring out the salient features of the Pradhan Mantri Fasal Bima Yojana (PMFBY).

2015

12.5 Marks1. The nature of economic growth in India in described as jobless growth. Do you agree with

this view? Give arguments in favour of your answer.

2. In what way could replacement of price subsidy with Direct Benefit Transfer (DBT) change the scenario of subsidies in India? Discuss.



3. What are the impediments in marketing and supply chain management in industry in India? Can e-commerce help in overcoming these bottlenecks?

4. Craze for gold in Indians have led to a surge in import of gold in recent years and put pressure on balance of payments and external value of rupee. In view of this, examine the merits of Gold Monetization Scheme.

5. “Success of ‘Make in India’ programme depends on the success of ‘Skill India’ programme and radical labour reforms.” Discuss with logical arguments.

6. To what factors can the recent dramatic fall in equipment costs and tariff of solar energy be attributed? What implications does the trend have for the thermal power producers and the related industry?

7. There is a clear acknowledgement that Special Economic Zones (SEZs) are a tool of industrial development, manufacturing and exports. Recognizing this potential, the whole instrumentality of SEZs requires augmentation. Discuss the issues plaguing the success of SEZs with respect to taxation, governing laws and administration.

8. Normally countries shift from agriculture to industry and then later to services, but India shifted directly from agriculture to services. What are the reasons for the huge growth of services vis-a-vis industry in the country? Can India become a developed country without a strong industrial base?

9. Livestock rearing has a big potential for providing non-farm employment and income in rural areas. Discuss suggesting suitable measures to promote this sector in India.

10. In view of the declining average size of land holdings in India which has made agriculture nonviable for a majority of farmers, should contract farming and land leasing be promoted in agriculture? Critically evaluate the pros and cons.

11. How can the ‘Digital India’ programme help farmers to improve farm productivity and income? What steps has the Government taken in this regards?

2014

12.5 Marks1. While we found India’s demographic dividend, we ignore the dropping rates of

employability. What are we missing while doing so? Where will the jobs that India desperately needs come from? Explain.

2. The right to fair compensation and transparency land acquisition, rehabilitation and resettlement act, 2013 has come into effect from 1 January 2014. What implication would it have on industrialisation and agriculture in India?

3. Capitalism has guided the world economy to unprecedented prosperity. However, it often encourages short sightedness and contributes to wide disparities between the rich and the poor. In this light, would it be correct to believe and adopt capitalism driving inclusive growth in India? Discuss.


B2.4 Previous Years’ Paper (Main Examination)

4. Explain how private public partnership agreements, in longer gestation infrastructure projects, can transfer unsuitable liabilities to the future. What arrangements need to be put in place to ensure that successive generations’ capacities are not compromised?

5. National urban transport policy emphasizes on moving people instead of moving vehicles. Discuss critically the success of various strategies of the government in this regard.

6. Foreign direct investment in the defence sector is now said to be liberalised. What influence this is expected to have on Indian defence and economy in the short and long run?

7. There is also a point of view that agriculture produce market committees (APMCs) set up under the state acts have not only impeded the development of agriculture but also have been the cause of food inflation in India. Critically examine.

8. “In the villages itself no form of credit organisation will be suitable except the cooperative society.” All Indian rural credit survey. Discuss this statement in the background of agriculture finance in India. What constrain and challenges do financial institutions supplying agricultural finances? How can technology be used to better reach and serve rural clients?

2013

10 Marks1. With a consideration towards the strategy of inclusive growth, the new companies bill,

2013 has indirectly made CSR a mandatory obligation. Discuss the challenges expected in its implementation in right earnest. Also discuss other provisions in the bill and their implications.

2. What are the reasons for introduction of Fiscal responsibility and Budget Management (FRBM) act, 2003? Discuss critically its salient features and their effectiveness.

3. What is meaning of the term tax-expenditure? Taking housing sector as an example, discuss how it influences budgetary policies of the government.

4. Examine the impact of liberalization on companies owned by Indian. Are the competing with the MNCs satisfactorily?

5. (a) Discuss the impact of FDI entry into multi-trade retail sector on supply chain management in commodity trade pattern of the economy.

(b) Though India allowed foreign direct investment (FDI) in what is called multi brand retail through joint venture route in September 2012, the FDI even after a year, has not picked up. Discuss the reasons. (Two questions each with 5 Marks)

6. Discussion the rationale for introducing Good and services tax in India. Bring out critically the reasons for delay in roll out for its regime.

7. Write a note on India’s green energy corridor to alleviate the problems of conventional energy.



8. Adaptation of PPP model for infrastructure development of the country has not been free from criticism. Critically discuss the pros and cons of the model.

9. Food security bill is expected to eliminate hunger and malnutrition in India. Critically discuss various apprehensions in its effective implementation along with the concerns it has generated in WTO.

10. What are the different types of agriculture subsidies given to farmers at the national and state levels? Critically analyze the agriculture subsidy regime with the reference to the distortions created by it.

11. India needs to strengthen measures to promote the pink revolution in food industry for better nutrition and health. Critically elucidate the statement.

12. Establish the relationship between land reform, agriculture productivity and elimination of poverty in Indian Economy. Discuss the difficulty in designing and implementation of the agriculture friendly land reforms in India.


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