Economic Planning in India

Meaning and Features

Planning is a continuous process that involves choices and decision making about allocation of
available resources with the objective of achieving effective and efficient utilisation and growth
of these resources. In India, planning is done both at the center as well as the state level.
Economic planning is done by the central authority after a complete survey of the economic
situation. The policy objectives are designed based on the future development goals of the
country.

In India, until 2014, planning was the responsibility of the National Planning Commission that
was established on March 15, 1950. The first five-year plan was prepared by the Planning
Commission for the period 1951-56. The first Prime Minister of India, Pandit Jawaharlal Nehru
was the first chairman of the Planning Commission. The Prime Minister was always the ex-
officio chairman of the Planning Commission. The Deputy Chairman who was nominated by
commission held the rank of a cabinet minister.

In 2014, the government led by Prime Minister Narendra Modi dissolved the Planning
Commission and replaced it by the think tank called NITI Aayog. NITI here, stands for National
Institution for Transforming India.

Objectives of Planning:

Planning plays a very significant role especially in a developing country like India.

The following are some of the objectives of economic planning in India:

1. Economic Growth and Development:

Every five-year plan had a growth target that had to be achieved by the end of the planning
period. In order to bring about an improvement in standard of living of the people, the per capita
income has to rise. A rise in per capita income is necessary to overcome the problems of poverty
and its effects.

2. Increase in Employment:

The developing economies generally suffer from open unemployment and disguised
unemployment. India is no exception to it. Slow growth of the agricultural sector and lack of
investments in the industrial sector are major causes for high levels of unemployment in the
country. Measures have been taken in every five- year plan to create employment opportunities,
thereby, increasing labor productivity.

3. Increase in Investment:
Economic growth cannot be achieved unless adequate investments are made to bring about an
increase in output capacity. Investments help in creating employment opportunities. One of the
objectives of planning is, thus, to push up the rate of investment to ensure smooth flow of capital
to various sectors of the economy.

4. Social Justice and Equity:

The five-year plans also focused on reducing inequalities in the distribution of income in order to
ensure social justice. Prevalence of inequalities in the economy results in exploitation of the poor
wherein the rich become richer and the poor become poorer.

5. Balanced Regional Development:

In India, there exists a wide gap in the development of different states and regions. While
Gujarat, Tamil Nadu, Maharashtra etc., enjoy high levels of development, there are states like
Bihar, Odisha, Nagaland etc., which remain backward. Planning aims at bringing about a
balanced regional development by diverting more resources to the poor and backward regions.

6. Modernisation:

Modernisation refers to a shift in the composition of output, innovation and advancement in

technology. Modernisation helps an economy to advance at a faster pace and compete with the
developed nations of the world. The objective of planning is to encourage and incentivise
investments into various sectors of the economy, especially the industrial sector, to help them
adopt new technologies and thus, increase efficiency.

Major features of economic planning are as follows:

(i) It is concerned with survey and diagnosis of the present economic scenario.

(ii) It defines policy and objectives to be achieved in future.

(iii) It presents a macroeconomic projection for the whole economy.

(iv) It formulates strategies through which objectives are to be achieved.

(v) It guides and directs the economy along with the path of growth and development.

(vi) It creates productive capacity in the country.

Economic Planning in India- Definitions of Economic Planning

Some of the definitions of economic planning are:

Professor Robbins defines economic planning as “collective control or supervision of private

activities of production and exchange.”
To Hayek, planning means, “the direction of productive activity by a central authority”.

According to Dr. Dalton, “Economic planning in the widest sense is the deliberate direction by
person’s in charge of large resources of economic activity towards chosen ends.”

Economic Planning in India – Essentials of Economic Planning

In order that economic planning might be successful, certain essential conditions are to be
fulfilled.

These conditions are:

i. Well-Defined Aims and Objectives:

Every plan must be associated with certain well defined aims and objectives. In democratic
planning there must be a large measure of agreement in the community with regard to these aims
and objectives.

ii. Emerge Out of the Conscious Decisions:

Planning must emerge out of the conscious decision of a determinate authority.

iii. Purposive Direction:

In a federal structure, where there is the diffusion of power and responsibility, there must be an
overall unity of policy. The purposive direction, which planning involves, must come from the
Central Government.

iv. Carefully Fix the Targets:

The planning authority must carefully fix the targets without illusions as to what is possible. If
the targets are fanciful, the whole plan will be fanciful. And this is as true whether the targets are
too large or too small. Planners, who promise more than they can perform, throw everything out
of gear, so that the economy might use as well not be planned at all. Over-fulfilment is just as
much a sign of bad planning as is under-fulfilment.

v. Flexibility:

There should be some measure of flexibility in planning, which means that the plans can be
revised and rephrased if circumstances demand it.

vi. Appropriate Duration:

Planning very far ahead is not desirable. A general five-year plan for the whole economy is no
more than a game, because it is not possible to foresee what will happen to productivity in five
years.
vii. Scrupulously Earnest and Determined:

Once the targets are carefully fixed, the government must be scrupulously earnest and
determined to achieve the targets.

viii. Adoption of Judicious Price Policy:

In order that the objectives and targets, laid down in the plan, might be achieved, there must be a
judicious price policy, which will not only secure an allocation of the resources for making the
fulfillment of the targets possible, but will also maintain a certain balance between the various
classes of the community.

ix. Enthusiasm:

In a democracy the government should make the objectives and targets known to the people and
make the final acceptance or rejection of the plan, dependent on the will of Parliament. When the
plan emerges in its final shape, the government must try to enlist the active cooperation of the
citizens in implementing the plan. Popular enthusiasm is both the lubricating oil of planning, and
the petrol of economic development, a dynamic force that almost makes all things possible.

x. Efficient Administrative System:

Finally, there must be an administrative system with efficiency and unimpeachable integrity,
capable of discharging its responsibilities in connection with the execution of the plan.

Economic Planning in India- Nature of Economic Planning in India

Economic planning deals with the process of taking decisions with regard to use of available
resources for the fulfilment of certain objectives or goals. Actually, planning process decides the
nature, mechanism and beneficiaries of production behaviour of the economy.

It is generally defined as a continuous process which involved decisions or choices about

alternative ways of using available resources with the aim of achieving particular goals at some
time in future. Thus, economic planning develops a mechanism for identification and use of
resources for the betterment of society at large.

Economic Planning in India – Types of Economic Planning in India

Main types of planning are as follows:

1. Comprehensive Planning:

It is generally called as imperative planning. It is totalitarian in nature and works on the basis of
directions. It comprehends all the inputs and outputs and incorporates innumerable details in
respect of resources, factors and commodities and services. Plans formulated under this planning
process encompass different units owning resources viz. private companies, cooperatives,
individuals and public sector. Thus, the blueprints for the production of various goods and
services bore upon all the resources owned by the innumerable units of various types available in
the economy.

The comprehensive planning is governed by the centralized directions. The directions are based
on the use of implementing instruments which give commands to the economy to work in a
particular frame work. Implementing instruments consist of positive commands and negative
controls. The commands are concerned with orders, fiats and directions with regards to what to
do in the economy. However, negative controls are issued in terms of guidelines generally
concerned with what not to do.

Naturally, there is a need of centralized agency which formulates these implementing

instruments – Commands and controls. Since ultimate power of the country rests with the
government so it has power to authorize Central Agency meant for the purpose. In India, it is
Planning Commission who is responsible for doing all these things.

Thus, the government has an active role in comprehensive planning. Market mechanism does not
affect the planning process. It is the comprehensive planning which enables the planners to give
a concrete shape for vision of the government.

2. Decentralized Planning:

It is also called as indicative planning. It is democratic in nature. Under this type of planning,
decision making process is dispersed and the implementation of plans is carried through market
mechanism. Actually, it involves the dispersal of planning both in respect of formulation of the
plans and their implementation. It is argued that the devolution of planning functions is
necessary to different levels.

Public must have say in the planning process. It is important to say that public through elections
participates in the government and through its representatives shapes the plan process. So in the
present scenario in India too, there is need for decentralized planning as Panchayati Raj Institu-
tions are now mandatory and they must have right to participate in the planning process as State
Governments and Central Government involved themselves in formulation of their plans.

Decentralized planning also envisages the involvement of the social action groups organized on a
voluntary basis. Since these groups are in constant touch with the people particularly with
marginalized and deprived sections of society, they can contribute more in suggestive system of
the planning process.

It also assumes that there must be dilution of the planning authority by bringing in non-
government agencies like market prices, incentives together with public investment confined
only to essential projects rather than the entire economy. Under this planning, planning agencies
are involved in forecasting process rather than targeting. They also identify the major factors and
sectors that are quite important for the economic growth. They are also required to quantify the
contributions of these factors to keep them more effective and viable.

Decentralized planning is also based on an assumption that the market prices decide the nature of
choices. It also formulates a framework of prices and other incentives to guide both public and
private activity. However, it also earmarks the areas for the development of infrastructural
facilities viz. roads, education and health. It accommodates government intervention to safeguard
the environment from pollution, to eradicate poverty and deprivation, to correct inequalities of
income and wealth etc.

Economic Planning in India – Importance of Economic Planning in India

Planned economy has not been established in any country in a day or in a year. Planning in
practice has a history of its growth and change over few decades. History of economic growth in
some countries reveals that planning has been painfully evolved and its growth or change is
attributed to certain factors which have facilitated the growth of planned economy in an
increasing number of countries.

Its development is the extensive and intensive. It is intensive in the sense that its process of
perfection is never complete. It is always subject to improvement. Its requirements are greatly
changing, certain historical factors have profoundly favoured the development of planned
economy. A variety of factors have led to the adoption of planning in various countries.

The importance of economic planning may be explained as follows:

i. Best Utilisation of Natural Resources:

Economic planning facilitates best utilisation of natural resources. By adopting the process of
economic planning it is possible to utilise available labour and capital in the interest of nation
which helps in maximisation of national output.

ii. Growth in National and per capita Income:

The maximum level of production increases the level of savings and investment which ultimately
provide sufficient capital for economic development. Hence planned economy proves an
important instrument for growth in national and per capita income.

iii. Improvement in Living Standard:

The standard of living of India’s population is far below the required level. A subsistence
segment of population fails to even meet their basic needs of life. The main reason responsible
behind such a miserable situation has been low level of per capita income and social evils which
can be improved by adopting the process of planning.

iv. Balanced Economic Development:

The form of economic growth in India has always been unbalanced. While preparing industrial
plan, more emphasis has been given to development of consumer industries whereas much is left
remained to plan for development of basic industries. The process of planning may be helpful in
balanced economic development.

v. Full Employment:

The problem of unemployment can be scale-down by encouraging development of small and

cottage industries in the country. It will also reduce the pressure of population on agriculture. In
India’s five-year plans, efforts have been made to generate more and more employment
opportunities.

vi. Equal Distribution of Wealth and Income:

In India, there exists serious inequalities in the distribution of income and wealth. A small
minority of population is rolling in luxuries, while the vast masses of people are unable to make
their both ends meet. The existence of plenty for the few amidst mass poverty is indeed the most
undesirable phenomenon in the country and intensity of which can be minimised by adopting
planned economy.

vii. For Self-Sufficiency:

The initial process of economic development requires huge capital investment. By adopting the
process of planning available capital resources can be best utilised in the interest of nation.

Achievements of Economic Planning in India:

Economic planning in India, formally conceived in 1951, has come a long way in helping the
economy to tackle the challenges in various sectors and has enabled it to achieve rapid economic
progress.

Some of the major achievements of planning in India are as follows:

1. Economic Growth:

Economic planning in India has been successful in increasing the national income and the per
capita income of the country resulting in economic growth. The net national income at factor
cost increased from Rs. 4393.45 billion in 1966- 67 to Rs.45, 733 billion in 2011-12 (at 2004-05
prices). The per capita income increased from Rs.8876 to Rs.38, 048 during the same period (at
2004-05 prices).

The average growth rate has increased from 3.5 percent during 1950 to 1970 to about 5.5 percent
after 1990’s. The economy recorded a growth rate of 7.8 percent during the eleventh five- year
plan.
2. Progress in Agriculture:

The first five-year plan focused on agricultural development. However, agricultural sector did
not receive priority in the subsequent plans. Yet, with various initiatives implemented in the
agricultural sector such as the green revolution and agricultural pricing policies, there has been a
considerable increase in the output of the agricultural sector.

The index of agricultural production increased from 85.9 in 1970-71 to 165.7 in 1999-2000
(Base year- 1981-82). The production of major food grains which includes rice, wheat, coarse
cereals and pulses has increased from 77.14 million tons in 1958-59 to 252.22 tons in 2015-16.
With the introduction of green revolution, the yield per hectare of food grains has increased from
662 kg in 1959-60 to 2056 kg in 2015-16.

Similarly, the production of commercial crops has also recorded an increasing trend. Various
reforms in the agricultural sector such as the Rashtriya Krishi Bima Yojana and Kisan credit
cards during the ninth plan and National Food Security Mission and Rashtriya Krishi Vikas
Yojana during the eleventh plan have been quite successful in improving the performance of the
agricultural sector.

3. Industrial Growth:

Economic planning has also contributed to the progress of the industrial sector. The index of
industrial production increased from 54.8 in 1950-51 to 152.0 in 1965-66 (Base year- 1960-61)
which is about 176 percent increase in production during the first three five-year plans.

It went up from 109.3 in 1981-82 to 232.0 in 1993-94 (Base year- 1980-81). Taking 2004-05 as
the base year, the index of industrial production recorded an increase from 108.6 in 2005-06 to
181.1 in 2015-16. The introduction of reforms in 1991 relieved the industrial sector from
numerous bureaucratic restrictions that were prevalent earlier.

This has led to the rapid growth of the industrial sector in India. India has made remarkable
progress in cotton textiles, paper, medicines, food processing, consumer goods, light engineering
goods etc.

4. Public Sector:

The public sector played a predominant role in the economy immediately after the independence.
While there were only 5 industrial public sector enterprises in 1951, the number increased to 244
in 1990 with an investment of Rs.99, 330 cores. However, the number of public sector
enterprises fell to 217 in March 2010.

Yet, the cumulative investment went up to Rs.5, 79,920 cores. The ratio of gross profit to capital
employed increased from 11.6 percent in 1991-92 to 21.5 percent in 2004-05. Heavy engineering
and transport equipment industries recorded a 117 percent and 111 percent growth respectively
in 2006-07 over the previous year.

Very high profits were recorded by petroleum, telecommunication services, power generation,
coal and lignite, financial services, transport services and minerals and metal industries. The
government has eliminated a number of restrictions on the operational and financial powers of
the Navaratnas, Miniratnas and several other profit making public sector enterprises.

5. Infrastructure:

Development of infrastructure such as transport and communication, power, irrigation etc., is a

pre-requisite to rapid economic growth and development. Expansion of transport facilities
enables easy movement of goods and services and also enlarges the market. Irrigation projects
contribute significantly to rural development.

Power projects help in meeting the growing demand for power by both industrial and household
sector. The total road length increased from about 400,000 km in 1951 to about 4.7 million km in
2011. India has the second largest road network in the world with about 5,472,444 kilometers of
road, as on March 31, 2015.

The route length of the Indian railway network has increased from about 53,596 km in 1951 to
about 64,450 km in 2011. The investment in infrastructure as a percentage of GDP was about 5.9
percent during the tenth plan and increased to about 7.2 percent during the eleventh plan.

6. Education and Health Care:

Education and health care are considered as human capital as they contribute to increased
productivity of human beings. Considerable progress was achieved in the education as well as
health sector during the five-year plans. The number of universities increased from about 22 in
1950-51 to 254 in 2000-01. There were about 22 central universities, 345 state universities, 123
deemed universities and about 41,435 colleges in 2016.

The number of institutions in higher education has increased to over 100 percent since 2008.
With the growth in the number of institutions, the literacy rate in India has increased from 16.7
percent in 1950-51 to 74.04 percent in 2011. With improvements in the health infrastructure,
India has been able to successfully control a number of life threatening diseases such as small
pox, cholera, polio, TB etc.

As a result, there has been a fall in the death rate from 27.4 per thousand persons in 1950-51 to
7.3 per thousand persons in 2016. The life expectancy has increased from about 32.1 years in
1951 to 68.01 years in 2014. The infant mortality rate has declined from 149 per thousand in
1966 to 37.42 per thousand in 2015.

7. Growth of Service Sector:

Service sector is the key contributor to the economic growth of India. The service sector
contributed to about 53.2 percent of the gross value added growth in 2015-16. The contribution
of the IT sector to India’s GDP increased from about 1.2 percent in 1998 to 9.5 percent in 2015.
The service sector has recorded a growth rate of about 138.5 percent in the last decade.

Financial services, insurance, real estate and business services are some of the leading services
that have been recording a robust growth in the past few years. The rapid growth of the service
sector in India could be attributed to the inflow of huge amount of FDI in this sector. India’s
share of service exports in the world service exports has increased from 0.6 percent in 1990 to
3.3 percent in 2011.

8. Savings and Investment:

Savings and Investments are major driving forces of economic growth. The gross domestic
savings in India as a proportion of GDP has increased from 8.6 percent in 1950-51 to about 30
percent in 2012-13. The gross capital formation has increased from 8.4 percent in 1950-51 to
34.70 in 2012-13. Capital accumulation is the key to economic development. It helps in
achieving rapid economic growth and has the ability to break the vicious circle of poverty.

9. Science and Technology:

India is the third most preferred destination for technology investments. It is among the top most
countries in scientific research and space exploration. India is also making rapid progress in
nuclear technology. ISRO has made a record of launching 104 satellites in one go on a single
rocket. India today has the third largest scientific manpower after U.S.A and Russia.

The government has undertaken various measures such as setting up of new institutions for
science education and research, launching the technology and innovation policy in 2013,
strengthening the infrastructure for research and development in universities, and encouraging
public- private partnership etc.

10. Foreign Trade:

On the eve of independence, India’s primary exports were agricultural commodities and UK and
US were its major trading partners. India was largely dependent on other countries for various
capital and consumer goods. However, with the development of heavy industries during the five-
year plans, India has been able to reduce its dependence on other countries and was able to
achieve self-reliance in a number of commodities.

With the liberalisation of trade, India now exports about 7500 commodities to about 190
countries and it imports about 6000 commodities from about 140 countries. The exports of the
country increased from Rs. 54.08 billion in 1977- 78 to Rs. 17,144.24 billion in 2015-16. And
imports have increased from Rs. 60.20 billion in 1977-78 to Rs. 24, 859.27 billion in 2015-16.
Shortcomings of Economic Planning in India:

1. Slow Growth:

The planning process in India has been able to achieve considerable increase in the national
income and per capita income. Yet, the rate of increase has been slow as compared to developing
countries like China, which have been able to achieve more than 10 percent growth rate
consistently. India was able to achieve a growth rate of only about 4 to 5 percent during the pre-
reform period. It was only during the post reform period that is after 1991, that the country could
experience a growth rate of over 7 percent.

2. Neglect of Agriculture:

The five year plans failed to pay attention to the agricultural sector except for the first five-year
plan. As a result, the agricultural growth rate declined from 3.62 percent in 1991-92 to 0.81
percent during 2009-10. And the share of agriculture in GDP declined from about 50 percent
during 1950-51 to about 16 percent of the GDP in 2015.

3. Unemployment:

The plans have failed to address the problem of unemployment which is a cause of many social
evils. The unemployment rate has marginally reduced from 8.35 percent during 1972-73 to about
6.53 percent in 2009-10. It was about 4.19 percent in 2013. The growth rate of employment has
recorded a decline from 2.61 percent in 1972-73 to 1.50 percent during 2009-10. The
employment in primary sector recorded a negative growth rate of 0.13 percent in 2009-10.

4. Widespread Poverty:

Failure to address the problem of unemployment has resulted in widespread poverty in the
country. The first four plans failed to address the problem of poverty. It was only during the fifth
five-year plan that measures were taken to tackle poverty directly by introducing various poverty
alleviation programmes. These programmes, however, have achieved only limited success. The
poverty rate in India declined from about 26.1 percent in 2000 to 21.9 percent in 2011.

5. Inflation:

Poverty is aggravated under the situation of inflation. The five-year plans have not been able to
stabilise the prices due to which there has been a steep rise in the general prices. The inflation
rate was around 10 percent in 2012.

6. Rising Inequality:

With rapid economic growth, the country has been witnessing a rise in the level of inequality. It
has been estimated that the richest 1 percent own about 58 percent of the country’s wealth. Poor
performance of the agricultural sector and lack of investments in rural infrastructure are cited as
the primary reason for such rising inequalities.

7. Political Instability:

Political instability and inefficient administration are the major hurdles in successful
implementation of the plans. Though the plans are formulated after complete analysis of the
economic situation, most of the plans fail to achieve the targets due to inefficient administration,
corruption, vested interests and red tapism.

The achievements and failures of the economic planning in India, thus, reveal the underlying
gaps in the process of planning. It is an undeniable fact that the current level of growth and
development that the country has achieved could not have been possible without planning.

Yet, systematic and efficient implementation of the plans and strategic policies to tackle the
problem of unemployment and poverty could take the country to greater heights. It is strongly
believed that the NITI Aayog would address these gaps that existed in the planning process in
India and would strive to build a vibrant economy over the years.

New economic policy and globalization

The year 1991 is an important landmark in the economic history of post-Independence India. The
country went through a severe economic crisis triggered by a adverse Balance of Payment ,
lower GDP growth and higher inflation rate. The crisis was converted into an opportunity to
introduce some fundamental changes in the economic policy of the country.

Former Prime Minister Manmohan Singh is considered to be the father of New Economic Policy
(NEP) of India. Manmohan Singh introduced the NEP on July 24,1991.

Main Objectives of New Economic Policy – 1991, July 24

The main objectives behind the launching of the New Economic policy (NEP) in 1991 by
the union Finance Minister Dr. Manmohan Singh are stated as follows:

1. The main objective was to plunge Indian economy in to the arena of ‘Globalization and to give
it a new thrust on market orientation.

2. The NEP intended to bring down the rate of inflation

3. It intended to move towards higher economic growth rate and to build sufficient foreign
exchange reserves.

4. It wanted to achieve economic stabilization and to convert the economy into a market
economy by removing all kinds of un-necessary restrictions.
5. It wanted to permit the international flow of goods, services, capital, human resources and
technology, without many restrictions.

6. It wanted to increase the participation of private players in the all sectors of the economy. That
is why the reserved numbers of sectors for government were reduced. As of now this number is
just 2.

Beginning with mid-1991, the govt. has made some radical changes in its policies related to
foreign trade, Foreign Direct Investment, exchange rate, industry, fiscal discipline etc. The
various elements, when put together, constitute an economic policy which marks a big departure
from what has gone before.

The thrust of the New Economic Policy has been towards creating a more competitive
environment in the economy as a means to improving the productivity and efficiency of the
system. This was to be achieved by removing the barriers to entry and the restrictions on the
growth of firms.

Main Measures Adopted in the New Economic Policy

Due to various controls, the economy became defective. The entrepreneurs were unwilling to
establish new industries ( because laws like MRTP Act 1969 de-motivated entrepreneurs).
Corruption, undue delays and inefficiency risen due to these controls. Rate of economic growth
of the economy came down. So in such a scenario economic reforms were introduced to reduce
the restrictions imposed on the economy.

Globalization:

Literally speaking Globalisation means to make Global or worldwide, otherwise taking into
consideration the whole world. Broadly speaking, Globalisation means the interaction of the
domestic economy with the rest of the world with regard to foreign investment, trade, production
and financial matters.

Meaning:
By the term globalisation we mean opening up of the economy for world market by attaining
international competitiveness. Thus the globalisation of the economy simply indicates interaction
of the country relating to production, trading and financial transactions with the developed
industrialized countries of the world.

Accordingly, the term globalisation has four parameters:

(a) Permitting free flow of goods by removing or reducing trade barriers between the countries,

(b) Creating environment for flow of capital between the countries,

(c) Allowing free flow in technology transfer and

(d) Creating environment for free movement of labour between the countries of the world. Thus
taking the entire world as global village, all the four components are equally important for
attaining a smooth path for globalisation.

The concept of Globalisation by integrating nation states within the frame work of World Trade
Organisation (WTO) is an alternative version of the ‘Theory of Comparative Cost Advantage’
propagated by the classical economists for assuming unrestricted flow of goods between the
countries for mutual benefit, especially from Great Britain to other less developed countries or to
their colonies.

In this way, the imperialist nations gained much at the cost of the colonial countries who had to
suffer from the scar of stagnation and poverty. But the advocates of the policy of globalisation
argue that globalisation would help the underdeveloped and developing countries to improve
their competitive strength and attain higher growth rates. Now it is to be seen how far the
developing countries would gain by adopting the path of globalisation in future.

In the mean time, various countries of the world have adopted the policy of globalisation.
Following the same path India had also adopted the same policy since 1991 and started the
process of dismantling trade barriers along with abolishing quantitative restrictions (QRs) phase-
wise.

Accordingly, the Government of India has been reducing the peak rate of customs duty in its
subsequent budgets and removed QRs on the remaining 715 items in the EXIM Policy 2001-
2002. All these have resulted open access to new markets and new technology for the country.

Steps taken for Globalisation:

Following steps are taken for Globalisation:

(i) Reduction in tariffs:

Custom duties and tariffs imposed on imports and exports are reduced gradually just to make
India economy attractive to the global investors.

(ii) Long term Trade Policy:

Forcing trade policy was enforced for longer duration.

Main features of the policy are:

(a) Liberal policy

(b) All controls on foreign trade have been removed

(c) Open competition has been encouraged.

(iii) Partial Convertibility of Indian currency:

Partial convertibility can be defined as to convert Indian currency (up to specific extent) in the
currency of other countries. So that the flow of foreign investment in terms of Foreign
Institutional Investment (FII) and foreign Direct Investment (FDI).

This convertibility stood valid for following transaction:

(a) Remittances to meet family expenses

(b) Payment of interest

(c) Import and export of goods and services.

(iv) Increase in Equity Limit of Foreign Investment:

Equity limit of foreign capital investment has been raised from 40% to 100% percent. In 47 high
priority industries foreign direct investment (FDI) to the extent of 100% will be allowed without
any restriction. In this regard Foreign Exchange Management Act (FEMA) will be enforced.

If the Indian economy is shining at the world map currently, its sole attribution goes to the
implementation of the New Economic Policy in 1991.

What is Globalization?

Globalization is the free movement of people, goods, and services across boundaries. This
movement is managed in a unified and integrated manner. Further, it can be seen as a scheme to
open the global economy as well as the associated growth in trade (global). Hence, when the
countries that were previously shut to foreign investment and trade have now burned down
barriers.
Considering a precise definition, countries that abide by the rules and regulations set by WTO
(World Trade Organization) are part of globalization. These procedures include oversees trade
conditions among countries. Apart from this, there are other organizations such as the UN and
different arbitration bodies available for supervision. Under this, non-discriminatory policies of
trade are also enclosed.

Indian Economy Reacts to Globalization

When we talk about globalization and the Indian economy, one name strikes our mind, that is,
Dr. Manmohan Singh. He was the finance minister in the 1990s when globalization was fully
implemented and experienced in India. He was the front man who framed the
economic liberalization proposal. Since then, the nation has gradually moved ahead to become
one of the supreme economic leaders in the world.

Below mentioned are some of the quick reactions which were felt after the introduction of
globalization:

 After 1991, the rise in GDP that dropped to 13% in 1991 -92 extended momentum in the
following five years (1992-2001). Moreover, the annual average rate of growth in GDP
was recorded to be 6.1%.

 Furthermore, export growth skyrocketed to 20% in 1993-94. For 1994-95, the figures
were recorded to be 18.4 per cent. Export growth statistics in recent years have been very
impressive.

Benefits of Globalization Impacting India

Rise in Employment: With the opening of SEZs or Special Economic Zones, the availability of
new jobs has been quite effective. Furthermore, Export Processing Zones or EPZs are also
established employing thousands of people. Another factor is cheap labour in India. This has
motivated big firms in the west to outsource work to companies present in this region. All these
factors are causing more employment.

Surge in Compensation: After the outburst of globalization, the compensation levels have stayed
higher. These figures are impressive as compared to what domestic companies might have
presented. Why? The level of knowledge and skill brought by foreign companies is obviously
advanced. This has ultimately resulted in modification of the management structure.

Improved Standard of Living and Better Purchasing Power: Wealth generation across Indian
cities has enhanced since globalization has fully hit the nation. You can notice an improvement
in the purchasing power for individuals, especially those working under foreign organizations.
Further, domestic organizations are motivated to present higher rewards to their employees.
Therefore, a number of cities are experiencing better standards of living together with business
development.
Advantages of globalization

The following are some of the important advantages of globalisation for a developing
country like India:

(i) Globalisation helps to boost the long run average growth rate of the economy of the country
through:

(a) Improvement in the allocative efficiency of resources;

(b) Increase in labour productivity; and

(c) Reduction in capital-output ratio.

(ii) Globalisation paves the way for removing inefficiency in production system. Prolonged
protective scenario in the absence of globalisation makes the production system careless about
cost effectiveness which can be attained by following the policy of globalisation.

(iii) Globalisation attracts entry of foreign capital along with foreign updated technology which
improves the quality of production.

(iv) Globalisation usually restructure production and trade pattern favouring labour-intensive
goods and labour-intensive techniques as well as expansion of trade in services.

(v) In a globalized scenario, domestic industries of developing country become conscious about
price reduction and quality improvement to their products so as to face foreign competition.

(vi) Globalisation discourages uneconomic import substitution and favour cheaper imports of
capital goods which reduces capital-output ratio in manufacturing industries. Cost effectiveness
and price reduction of manufactured commodities will improve the terms of trade in favour of
agriculture.

(vii) Globalisation facilitates consumer goods industries to expand faster to meet growing
demand for these consumer goods which would result faster expansion of employment
opportunities over a period of time. This would result trickle down effect to reduce the
proportion of population living below the poverty line

(viii) Globalisation enhances the efficiency of the banking insurance and financial sectors with
the opening up to those areas to foreign capital, foreign banks and insurance companies.

Disadvantages of Globalization in India

If we are discussing globalization and the Indian economy, then talking about the negative
effects is also important. The informal sector is purposely not listed in the labor legislation. For
example, informal workers aren’t the subject considering the 1948 Factories Act. This scheme
covers vital factors such as common working conditions, safety, and health, the ban on child
labor, working hours etc. Also, globalization has caused poor health, disgraceful working
conditions, as well as bondage, happening in different parts of the country.

Disadvantages of Globalisation:

Globalisation has its disadvantages also.

The following are some of these disadvantages:

(i) Globalisation paves the way for redistribution of economic power at the world level leading to
domination by economically powerful nations over the poor nations.

(ii) Globalisation usually results greater increase in imports than increase in exports leading to
growing trade deficit and balance of payments problem.

(iii) Although globalisation promote the idea that technological change and increase in
productivity would lead to more jobs and higher wages but during the last few years, such
technological changes occurring in some developing countries have resulted more loss of jobs
than they have created leading to fall in employment growth rates.

(iv) Globalisation has alerted the village and small scale industries and sounded death-knell to it
as they cannot withstand the competition arising from well organized MNCs.

(v) Globalisation has been showing down the process to poverty reduction in some developing
and underdeveloped countries of the world and thereby enhances the problem of inequality.

(vi) Globalisation is also posing as a threat to agriculture in developing and underdeveloped

countries of the world. As with the WTO trading provisions, agricultural commodities market of
poor and developing countries will be flooded farm goods from countries at a rate much lower
than that indigenous farm products leading to a death-blow to many farmers.

(vii) Implementation of globalisation principle becoming harder in many industrially developed

democratic countries to ask its people to bear the pains and uncertainties of structural adjustment
with the hope of getting benefits in future.

Impact of Globalisation on India

Globalization has been defined as the process of rapid integration of countries and happenings
through greater foreign trade and foreign investment. It is the process of international integration
arising from the interchange of world views, products, ideas and other aspects of culture.

What are the factors aiding globalisation?

1) Technology: has reduced the speed of communication manifolds. The phenomenon of social
media in the recent world has made distance insignificant.
The integration of technology in India has transformed jobs which required specialized skills and
lacked decision-making skills to extensively-defined jobs with higher accountability that require
new skills, such as numerical, analytical, communication and interactive skills. As a result of
this, more job opportunities are created for people.

2) LPG Reforms: The 1991 reforms in India have led to greater economic liberalisation which
has in turn increased India’s interaction with the rest of the world.

3) Faster Transportation: Improved transport, making global travel easier. For example, there
has been a rapid growth in air-travel, enabling greater movement of people and goods across the
globe.

4) Rise of WTO: The formation of WTO in 1994 led to reduction in tariffs and non-tariff
barriers across the world. It also led to the increase in the free trade agreements among various
countries.

5) Improved mobility of capital: In the past few decades there has been a general reduction in
capital barriers, making it easier for capital to flow between different economies. This has
increased the ability for firms to receive finance. It has also increased the global
interconnectedness of global financial markets.

6) Rise of MNCs: Multinational corporations operating in different geographies have led to a

diffusion of best practices. MNCs source resources from around the globe and sell their products
in global markets leading to greater local interaction.

These factors have helped in economic liberalization and globalization and have facilitated the
world in becoming a “global village”. Increasing interaction between people of different
countries has led to internationalization of food habits, dress habits, lifestyle and views.

Globalization and India:

Developed countries have been trying to pursue developing countries to liberalize the trade and
allow more flexibility in business policies to provide equal opportunities to multinational firms
in their domestic market. International Monetary Fund (IMF) andWorld Bank helped them in
this endeavour. Liberalization began to hold its foot on barren lands of developing countries like
India by means of reduction in excise duties on electronic goods in a fixed time frame.

Indian government did the same and liberalized the trade and investment due to the pressure
from World Trade Organization. Import duties were cut down phase-wise to allow MNC’s
operate in India on equality basis. As a result globalization has brought to India new
technologies, new products and also the economic opportunities.

Despite bureaucracy, lack of infrastructure, and an ambiguous policy framework that adversely
impact MNCs operating in India, MNCs are looking at India in a big way, and are making huge
investments to set up R&D centers in the country. India has made a lead over other growing
economies for IT, business processing, and R&D investments. There have been both positive and
negative impacts of globalization on social and cultural values in India.

IMPACTS OF GLOBALISATION IN INDIA

Economic Impact:

1. Greater Number of Jobs: The advent of foreign companies and growth in economy has
led to job creation. However, these jobs are concentrated more in the services sector and
this has led to rapid growth of service sector creating problems for individuals with low
level of education. The last decade came to be known for its jobless growth as job
creation was not proportionate to the level of economic growth.

2. More choice to consumers: Globalisation has led to a boom in consumer products

market. We have a range of choice in selecting goods unlike the times where there were
just a couple of manufacturers.

3. Higher Disposable Incomes: People in cities working in high paying jobs have greater
income to spend on lifestyle goods. There has been an increase in the demand of products
like meat, egg, pulses, organic food as a result. It has also led to protein inflation.

Protein food inflation contributes a large part to the food inflation in India. It is evident from
the rising prices of pulses and animal proteins in the form of eggs, milk and meat.

With an improvement in standard of living and rising income level, the food habits of people
change. People tend toward taking more protein intensive foods. This shift in dietary pattern,
along with rising population results in an overwhelming demand for protein rich food, which the
supply side could not meet. Thus resulting in a demand supply mismatch thereby, causing
inflation.

In India, the Green Revolution and other technological advancements have primarily focused on
enhancing cereals productivity and pulses and oilseeds have traditionally been neglected.

 Shrinking Agricultural Sector: Agriculture now contributes only about 15% to GDP.
The international norms imposed by WTO and other multilateral organizations have
reduced government support to agriculture. Greater integration of global commodities
markets leads to constant fluctuation in prices.

 This has increased the vulnerability of Indian farmers. Farmers are also increasingly
dependent on seeds and fertilizers sold by the MNCs.

 Globalization does not have any positive impact on agriculture. On the contrary, it has
few detrimental effects as government is always willing to import food grains, sugar etc.
Whenever there is a price increase of these commodities.
  Government never thinks to pay more to farmers so that they produce more food grains
but resorts to imports. On the other hand, subsidies are declining so cost of production is
increasing. Even farms producing fertilizers have to suffer due to imports. There are also
threats like introduction of GM crops, herbicide resistant crops etc.

 Increasing Health-Care costs: Greater interconnections of the world has also led to the
increasing susceptibility to diseases. Whether it is the bird-flu virus or Ebola, the diseases
have taken a global turn, spreading far and wide. This results in greater investment in
healthcare system to fight such diseases.

 Child Labour: Despite prohibition of child labor by the Indian constitution, over 60 to a
115 million children in India work. While most rural child workers are agricultural
laborers, urban children work in manufacturing, processing, servicing and repairs.
Globalization most directly exploits an estimated 300,000 Indian children who work in
India’s hand-knotted carpet industry, which exports over $300 million worth of goods a
year.

Socio-Cultural Impact on Indian Society

Nuclear families are emerging. Divorce rates are rising day by day. Men and women are gaining
equal right to education, to earn, and to speak. ‘Hi’, ‘Hello’ is used to greet people in spite of
Namaskar and Namaste. American festivals like Valentines’ day, Friendship day etc. are
spreading across India.

 Access to education: On one hand globalisation has aided in the explosion of

information on the web that has helped in greater awareness among people. It has also led
to greater need for specialisation and promotion of higher education in the country.

 On the flip side the advent of private education, coaching classes and paid study material
has created a gap between the haves and have-nots. It has become increasingly difficult
for an individual to obtain higher education.

 Growth of cities: It has been estimated that by 2050 more than 50% of India’s
population will live in cities. The boom of services sector and city centric job creation has
led to increasing rural to urban migration.

 Indian cuisine: is one of the most popular cuisines across the globe. Historically, Indian
spices and herbs were one of the most sought after trade commodities. Pizzas, burgers,
Chinese foods and other Western foods have become quite popular.

 Clothing: Traditional Indian clothes for women are the saris, suits, etc. and for men,
traditional clothes are the dhoti, kurta. Hindu married women also adorned the red bindi
and sindhur, but now, it is no more a compulsion. Rather, Indo-western clothing, the
 fusion of Western and Sub continental fashion is in trend. Wearing jeans, t-shirts, mini
skirts have become common among Indian girls.

 Indian Performing Arts: The music of India includes multiples varieties of religious,
folk, popular, pop, and classical music. India’s classical music includes two distinct
styles: Carnatic and Hindustani music. It remains instrumental to the religious inspiration,
cultural expression and pure entertainment. Indian dance too has diverse folk and
classical forms.

 Bharatanatyam, Kathak, Kathakali, Mohiniattam, Kuchipudi, Odissi are popular dance

forms in India. Kalarippayattu or Kalari for short is considered one of the world’s oldest
martial art. There have been many great practitioners of Indian Martial Arts including
Bodhidharma who supposedly brought Indian martial arts to China.

 The Indian Classical music has gained worldwide recognition but recently, western music
is too becoming very popular in our country. Fusing Indian music along with western
music is encouraged among musicians. More Indian dance shows are held globally. The
number of foreigners who are eager to learn Bharatanatyam is rising. Western dance
forms such as Jazz, Hip hop, Salsa, Ballet have become common among Indian
youngsters.

 Nuclear Families: The increasing migration coupled with financial independence has led
to the breaking of joint families into nuclear ones. The western influence of individualism
has led to an aspirational generation of youth. Concepts of national identity, family, job
and tradition are changing rapidly and significantly.

 Old Age Vulnerability: The rise of nuclear families has reduced the social security that
the joint family provided. This has led to greater economic, health and emotional
vulnerability of old age individuals.

 Pervasive Media: There is greater access to news, music, movies, videos from around
the world. Foreign media houses have increased their presence in India. India is part of
the global launch of Hollywood movies which is very well received here. It has a
psychological, social and cultural influence on our society.

 McDonaldization: A term denoting the increasing rationalization of the routine tasks of

everyday life. It becomes manifested when a culture adopts the characteristics of a fast-
food restaurant. McDonaldization is a reconceptualization of rationalization, or moving
from traditional to rational modes of thought, and scientific management.

 Walmartization: A term referring to profound transformations in regional and global

economies through the sheer size, influence, and power of the big-box department store
 WalMart. It can be seen with the rise of big businesses which have nearly killed the small
traditional businesses in our society.

Psychological Impact on Indian Society

 Development of Bicultural Identity: The first is the development of a bicultural identity

or perhaps a hybrid identity, which means that part of one’s identity is rooted in the local
culture while another part stems from an awareness of one’s relation to the global world.

 The development of global identities is no longer just a part of immigrants and ethnic
minorities. People today especially the young develop an identity that gives them a sense
of belonging to a worldwide culture, which includes an awareness of events, practices,
styles and information that are a part of the global culture. Media such as television and
especially the Internet, which allows for instant communication with any place in the
world, play an important part in developing a global identity.

A good example of bicultural identity is among the educated youth in India who despite being
integrated into the global fast paced technological world, may continue to have deep rooted
traditional Indian values with respect to their personal lives and choices such as preference for an
arranged marriage, caring for parents in their old age.

1. Growth of Self-Selected Culture: means people choose to form groups with like-
minded persons who wish to have an identity that is untainted by the global culture and
its values. The values of the global culture, which are based on individualism, free market
economics, and democracy and include freedom, of choice, individual rights, openness to
change, and tolerance of differences are part of western values. For most people
worldwide, what the global culture has to offer is appealing. One of the most vehement
criticisms of globalization is that it threatens to create one homogeneous worldwide
culture in which all children grow up wanting to be like the latest pop music star, eat Big
Macs, vacation at Disney World, and wear blue jeans, and Nikes.

2. Emerging Adulthood: The timing of transitions to adult roles such as work, marriage
and parenthood are occurring at later stages in most parts of the world as the need for
preparing for jobs in an economy that is highly technological and information based is
slowly extending from the late teens to the mid-twenties. Additionally, as the traditional
hierarchies of authority weaken and break down under the pressure of globalization, the
youth are forced to develop control over their own lives including marriage and
parenthood. The spread of emerging adulthood is related to issues of identity.

3. Consumerism: Consumerism has permeated and changed the fabric of contemporary

Indian society. Western fashions are coming to India: the traditional Indian dress is
increasingly being displaced by western dresses especially in urban areas. Media- movies
 and serials- set a stage for patterns of behavior, dress codes and jargon. There is a
changing need to consume more and more of everything.

Globalisation is an age old phenomenon which has been taking place for centuries now. We can
experience it so profoundly these days because of its increased pace. The penetration of
technology and new economic structures are leading to an increased interaction between people.
As with other things there have been both positive and negative impacts on India due to it.

Conclusion: We cannot say that the impact of globalization has been totally positive or totally
negative. It has been both. Each impact mentioned above can be seen as both positive as well as
negative. However, it becomes a point of concern when, an overwhelming impact of
globalization can be observed on the Indian culture.

Every educated Indian seems to believe that nothing in India, past or present, is to be approved
unless recognized and recommended by an appropriate authority in the West. There is an all-
pervading presence of a positive, if not worshipful, attitude towards everything in western
society and culture, past as well as present in the name of progress, reason and science. Nothing
from the West is to be rejected unless it has first been weighed and found wanting by a Western
evaluation. This should be checked, to preserve the rich culture and diversity of India.

Human Resource Development

Human Resource Development is the part of human resource management that specifically deals
with training and development of the employees in the organization.
Human resource development includes training a person after he or she is first hired, providing
opportunities to learn new skills, distributing resources that are beneficial for the employee's
tasks, and any other developmental activities.

INTRODUCTION

Development of human resources is essential for any organisation that would like to be dynamic
and growth-oriented. Unlike other resources, human resources have rather unlimited potential
capabilities. The potential can be used only by creating a climate that can continuously identify,
bring to surface, nurture and use the capabilities of people. Human Resrouce Development
(HRD) system aims at creating such a climate. A number of HRD techniques have been
developed in recent years to perform the above task based on certain principles. This unit
provides an understanding of the concept of HRD system, related mechanisms and the changing
boundaries of HRD.
HRD concept was first introduced by Leonard Nadler in 1969 in a conference in US. “He
defined HRD as those learning experience which are organized, for a specific time, and designed
to bring about the possibility of behavioral change”.

Human Resource Development (HRD) is the framework for helping employees develop their
personal and organizational skills, knowledge, and abilities. Human Resource Development
includes such opportunities as employee training, employee career development, performance
management and development, coaching, mentoring, succession planning, key employee
identification, tuition assistance, and organization development.

The focus of all aspects of Human Resource Development is on developing the most superior
workforce so that the organization and individual employees can accomplish their work goals in
service to customers.

Human Resource Development can be formal such as in classroom training, a college course, or
an organizational planned change effort. Or, Human Resource Development can be informal as
in employee coaching by a manager. Healthy organizations believe in Human Resource
Development and cover all of these bases.

In 1970, Leonard Nadler published his book “Developing Human Resources” in which he coined
the term ‘human resource development’ (HRD). Human resource refers to the talents and
energies of people that are available to an organization as potential contributors to the creation
and realization of the organization’s mission, vision, values, and goals.

Development refers to a process of active learning from experience-leading to systematic and

purposeful development of the whole person, body, mind, and spirit. Thus, HRD is the integrated
use of training, organizational and career development efforts to improve individual, group, and
organizational effectiveness.

Definitions of HRD

HRD (Human Resources Development) has been defined by various scholars in various ways.
Some of the important definitions of HRD (Human Resources Development) are as follows:

 According to Leonard Nadler, "Human resource development is a series of organised

activities, conducted within a specialised time and designed to produce behavioural
changes."

 In the words of Prof. T.V. Rao, "HRD is a process by which the employees of an
organisation are helped in a continuous and planned way to (i) acquire or sharpen
capabilities required to perform various functions associated with their present or
expected future roles; (ii) develop their journal capabilities as individual and discover and
exploit their own inner potential for their own and /or organisational development
 purposes; (iii) develop an organisational culture in which superior-subordinate
relationship, team work and collaboration among sub-units are strong and contribute to
the professional well being, motivation and pride of employees." .

 According to M.M. Khan, "Human resource development is the across of increasing

knowledge, capabilities and positive work attitudes of all people working at all levels in a
business undertaking."

THE CONCEPT OF HUMAN RESOURCE DEVELOPMENT

Human resource development in the organisation context is a process by which the employees of
an organisation are helped, in a continuous and planned way to:

1. Acquire or sharpen capabilities required to perform various functions associated with

their present or expected future roles;

2. Develop their general capabilities as individuals and discover and exploit their own inner
potentials for their own and/or organisational development purposes; and

3. Develop an organisational culture in which supervisor-subordinate relationships,

teamwork and collaboration among sub-units are strong and contribute to the professional
well being, motivation and pride of employees.

This definition of HRD is limited to the organisational context. In the context of a state or nation
it would differ.

HRD is a process, not merely a set of mechanisms and techniques. The mechanisms and
techniques such as performance appraisal, counselling, training, and organization development
interventions are used to initiate, facilitate, and promote this process in a continuous way.
Because the process has no limit, the mechanisms may need to be examined periodically to see
whether they are promoting or hindering the process. Organisations can facilitate this process of
development by planning for it, by allocating organisational resources for the purpose, and by
exemplifying an HRD philosophy that values human beings and promotes their development.
Features of HRD:

1. Systematic approach:

HRD is a systematic and planned approach through which the efficiency of employees is
improved. The future goals and objectives are set by the entire organization, which are well
planned at individual and organizational levels.

2. Continuous process:
HRD is a continuous process for the development of all types of skills of employees such as
technical, managerial, behavioural, and conceptual. Till the retirement of an employee
sharpening of all these skills is required.

3. Multi-disciplinary subject:

HRD is a Multi-disciplinary subject which draws inputs from behavioural science, engineering,
commerce, management, economics, medicine, etc.

4. All-pervasive:

HRD is an essential subject everywhere, be it a manufacturing organization or service sector

industry.

5. Techniques:

HRD embodies with techniques and processes such as performance appraisal, training,
management development, career planning, counselling, workers’ participation and quality
circles.

Scope of HRD:

Human resource management (HRM) deals with procurement, development, compensation,

maintenance and utilization of human resources. HRD deals with efficient utilization of human
resources and it is a part of HRM.

Human resource being a systematic process for bringing the desired changes in the
behaviour of employees involves the following areas:

1. Recruitment and selection of employees for meeting the present and future requirements of an
organization.

2. Performance appraisal of the employees in order to understand their capabilities and

improving them through additional training.

3. Offering the employees’ performance counselling and performance interviews from the
superiors.

4. Career planning and development programmes for the employees.

5. Development of employees through succession planning.

6. Workers’ participation and formation of quality circles.

7. Employee learning through group dynamics and empowerment.

8. Learning through job rotation and job enrichment.

9. Learning through social and religious interactions and programmes.

10. Development of employees through managerial and behavioural skills.

Aims and Objectives of HRD:

HRD has following aims and objectives which can be attended through its multiple
processes:

(1) It provides extensive framework for the development of human resources of the organisation
and creates opportunities to inculcate talent.

(2) The aim of HRD is to facilitate all round development of employees so that their capabilities
to perform any job are enhanced.

(3) To maintain appreciable high level of motivation of the members of the organisation.

(4) To develop team spirit and an effective work culture.

(5) To build up healthy superior – subordinate relationship.

(6) To enhance better quality, higher productivity, higher profits.

(7) To provide correct position of human resources.

Objectives of HRD:

The prime objective of human resource development is to facilitate an organizational

environment in which the people come first. The other objectives of HRD are as follows:

1. Equity:

Recognizing every employee at par irrespective of caste, creed, religion and language, can create
a very good environment in an organization. HRD must ensure that the organization creates a
culture and provides equal opportunities to all employees in matters of career planning,
promotion, quality of work life, training and development.

2. Employability:

Employability means the ability, skills, and competencies of an individual to seek gainful
employment anywhere. So, HRD should aim at improving the skills of employees in order to
motivate them to work with effectiveness.

3. Adaptability:
Continuous training that develops the professional skills of employees plays an important role in
HRD. This can help the employees to adapt themselves to organizational change that takes place
on a continuous basis.

HRD Functions:

HRD functions include the following:

1. Employee training and development,

2. Career planning and development,

3. Succession planning,

4. Performance appraisal,

5. Employee’s participation in management,

6. Quality circles,

7. Organization change and organization development.

Nature:

Following points will explain the nature of human resource development:

(1) System Composition:

HRD is at the centre of Human Resource System. It relates with imparting learning to the
members of the organisation for development of skills, ability and competency. HRD is a
subsystem closely related with other subsystems in the organisation, production, marketing,
finance etc. The composition of HRD has several sub systems which are interrelated and
interdependent including communication, training and development, role analysis, job
enrichment performance appraisal and potential appraisal etc.

(2) Continuous Process:

HRD is a dynamic and planned process continuously undertaken for development of personnel’s
to enable them to face multiple challenges while performing in the organisation. The HRD
process differ from organisation to organisation as per their requirements. The subsystems of
HRD are closely interrelated with economic, social, political and cultural bias.

(3) Use of Behavioural Sciences:

HRD draws heavily from the behavioural sciences for the development of people. It makes use
of principles and concepts of psychology, sociology and anthropology for planning and
implementation of multiple programmes for individual and group development. Organisational
Development programmes are based on the concepts of behavioural sciences.

(4) Quality of Working Life:

HRD aimed at improving quality of working life in the organisation to increase the productivity.
HRD takes care of health and well being of the employees and their families by promoting
healthy environment at the workplace. It helps in achieving satisfaction of employees.

Difference between HRD and HRM

Both are very important concepts of management specifically related with human resources of
organisation. Human resource management and human resource development can be
differentiated on the following grounds:

 The human resource management is mainly maintenance oriented whereas human

resource development is development oriented.

 organisation structure in case of human resources management is independent whereas

human resource development creates a structure, which is inter-dependent and inter-
related.

 Human resource management mainly aims to improve the efficiency of the employees
whereas aims at the development of the employees as well as organisation as a whole.

 Responsibility of human resource development is given to the personnel/human resource

management department and specifically to personnel manager whereas responsibility of
HRD is given to all managers at various levels of the organisation.

 HRM motivates the employees by giving them monetary incentives or rewards whereas
human resource development stresses on motivating people by satisfying higher-order
needs.

THE NEED FOR HRD

Need of HRD:

In the fast moving business world of today, organisations are evolving. The role of manager has
become more diverse. Radical changes are taking place because of economic pressure and the
demand for enhancing efficiency and productivity. Growth of information technology facilitated
tasks to be completed within seconds than in days. To keep pace with such an environment,
organizations must develop its people and allow them to grow. HRD must therefore be viewed as
total system interacting with other systems of the organisation. The employee’s capabilities need
to be sharpened. This is possible through HRD.
The need for HRD arises because:

(1) To create a climate free from monotony and to improve the working life,

(2) To facilitate effective communication to surface creative ability of employees in full swing,

(3) To enable the members to attain self actualization through systematically developing their
potentials,

(4) Tapping the present and future creative abilities of the people to utilize for organisational
development,

(5) Facilitating growth of employees and making them aware about their strengths and
weaknesses,

(6) Helping organisations to utilize human resources to their maximum potentials,

(7) Availing opportunities for further development by the employees themselves.

HRD FUNCTIONS

The core of the concept of HRS is that of development of human beings, or HRD. The concept of
development should cover not only the individual but also other units in the organisation. In
addition to developing the individual, attention needs to be given to the development of stronger
dyads, i.e., two-person groups of the employee and his boss. Such dyads are the basic units of
working in the organisation. Besides several groups like committees, task groups, etc. also
require attention. Development of such groups should be from the point of view of increasing
collaboration amongst people working in the organisation, thus making for an effective decision-
making. Finally, the entire department and the entire organisation also should be covered by
development. Their development would involve developing a climate conducive for their
effectiveness, developing self-renewing mechanisms in the organisations so that they are able to
adjust and pro-act, and developing relevant processes which contribute to their effectiveness.

Hence, the goals of the HRD systems are to develop:

1. The capabilities of each employee as an individual.

2. The capabilities of each individual in relation to his or her present role.

3. The capabilities of each employee in relation to his or her expected future role(s).

4. The dyadic relationship between each employee and his or her supervisor.

5. The team spirit and functioning in every organisational unit (department, group, etc.).
 6. Collaboration among different units of the organisation.

7. The organisation’s overall health and self-renewing capabilities which, in turn, increase
the enabling capabilities of individuals, dyads, teams, and the entire organisation.

Features of Human Resource development

The essential features of human resource development can be listed as follows:

 Human resource development is a process in which employees of the organisations are

recognized as its human resource. It believes that human resource is most valuable asset
of the organisation.

 It stresses on development of human resources of the organisation. It helps the employees

of the organisation to develop their general capabilities in relation to their present jobs
and expected future role.

 It emphasise on the development and best utilization of the capabilities of individuals in

the interest of the employees and organisation.

 It helps is establishing/developing better inter-personal relations. It stresses on

developing relationship based on help, trust and confidence.

 It promotes team spirit among employees.

 It tries to develop competencies at the organisation level. It stresses on providing healthy

climate for development in the organisation.

 HRD is a system. It has several sub-systems. All these sub-systems are inter-related and
interwoven. It stresses on collaboration among all the sub-systems.

 It aims to develop an organisational culture in which there is good senior-subordinate

relations, motivation, quality and sense of belonging.

 It tries to develop competence at individual, inter-personal, group and organisational

level to meet organisational goal.

 It is an inter-disciplinary concept. It is based on the concepts, ideas and principles of

sociology, psychology, economics etc.

 It form on employee welfare and quality of work life. It tries to examine/identify

employee needs and meeting them to the best possible extent.

 It is a continuous and systematic learning process. Development is a life long process,

which never ends.
Benefits of Human Resource Development

Human resource development now a days is considered as the key to higher productivity, better
relations and greater profitability for any organisation. Appropriate HRD provides unlimited
benefits to the concerned organisation. Some of the important benefits are being given here:

 HRD (Human Resource Development) makes people more competent. HRD develops
new skill, knowledge and attitude of the people in the concern organisations.

 With appropriate HRD programme, people become more committed to their jobs. People
are assessed on the basis of their performance by having a acceptable performance
appraisal system.

 An environment of trust and respect can be created with the help of human resource
development.

 Acceptability toward change can be created with the help of HRD. Employees found
themselves better equipped with problem-solving capabilities.

 It improves the all round growth of the employees. HRD also improves team spirit in the
organisation. They become more open in their behaviour. Thus, new values can be
generated.

 It also helps to create the efficiency culture In the organisation. It leads to greater
organisational effectiveness. Resources are properly utilised and goals are achieved in a
better way.

 It improves the participation of worker in the organisation. This improve the role of
worker and workers feel a sense of pride and achievement while performing their jobs.

 It also helps to collect useful and objective data on employees programmes and policies
which further facilitate better human resource planning.

 Hence, it can be concluded that HRD provides a lot of benefits in every organisation. So,
the importance of concept of HRD should be recognised and given a place of eminence,
to face the present and future challenges in the organisation.

Importance of Human Resource Development

HRD is a system of introducing changes in the work culture and work environment without
dislocating the functioning of the organisation. The following points highlight its importance:
a) Competent employees: HRD helps in making people aware of the skills required for job
performance. There is greater clarity of work norms and standards. This results in a more
competent work force.

b) Role clarity: HRD encourages communication between work-teams. People not only
understand their roles better but also become aware of the expectations of the other members of
the team.

c) Committed work force: People become more committed to the jobs because rewards are
administered more objectively through the HRD process.

d) Greater trust and respect: By encouraging communication, HRD helps in developing

greater trust and respect for each other. Employees become more open and authentic and new
values can be generated easily.

e) Synergy effect: Effective communication, participate management and stress on teamwork

produce synergy effect within the organization.

f) Breaks resistance to change: HRD makes people better equipped with problem-solving
capabilities. This not only makes them proactive but also brings readiness on their part to accept
change.

g) Facilitates HRP: HRD generates a lot of useful and objective data on employees that
facilitates human resource planning.

h) Other benefits: The overall impact of HRD is observed in terms of higher productivity, cost
effectiveness, growth expansion, diversification and increased profits.

Outcomes of HRD:

Outcomes of HRD at the organisational level are the following:

(1) Training increases competence of the employees with development of knowledge, new skills
and attitude.

(2) Employees become aware of the skills required for job performance. They develop clarity of
norms and standards.

(3) Employees become more committed to their jobs. It increases objectivity. They become more
proactive.

(4) Team spirit goes up.

(5) Development of trust and respect for each other among employees.

(6) Collaboration and team work produces synergy effect.

(7) They accept change readily.

(8) Increase in capabilities to solve problems.

(9) Important and useful data in respect of employees are generated. This helps in human
resource planning.

(10) They participate in decision making leading to sense of pride and achievement of task.

(11) HRD improves human resource aspects like skill, knowledge, creative abilities and talents
and moulding of other aspects like values, beliefs, aptitude and attitude according to the
changing needs of groups, and organisation.

At the national level the outcomes of HRD are as under:

(1) HRD manifest development of basic human aspects such as aptitude, attitude, values, beliefs
on one hand and knowledge, skill, creative abilities and talent on the other. This process
improves the utilization value of society.

(2) HRD helps in fulfilling the needs in the fast changing environment like increase in
competition in and outside the country in an era of economic liberalizations and trends towards
market economy.

(3) Vitality of human resources to a nation is fulfilled through HRD.

(4) HRD makes national human resources dynamic and growth oriented.

(5) HRD makes human resources vital, useful and purposeful.

(6) HRD promotes an enabling culture where people use their initiative, risk, experiment,
innovate and makes things happen.

(7) It accelerates economic development as HRD creates conducive environment in the country.

(8) It enhances the quality of human life to achieve greater satisfaction and higher productivity
level in the country.

Industrial policy

The industrial policies pursued till 1990 enabled India to develop a vast and a diversified
industrial structure. India” attained self-sufficiency in a wide range of consumer goods. But the
industrial growth was not rapid enough to generate sufficient employment, to reduce regional
disparities and to alleviate poverty.
It was felt that government controls and regulations had put shackles on the growth of different
segments of Indian Industry. Lack of adequate competition resulted in inadequate emphasis on
the reduction of costs, up-gradation of technology and improvement of quality standards.

It is to reorient and accelerate industrial development with emphasis on the productivity, growth
and quality improvement to achieve international competitiveness that the Industrial Policy of
1991 was announced.

The industrial Policy Statement of 1991 stated that “the Government will continue to pursue a
sound policy framework encompassing encouragement of entrepreneurship, development of
indigenous technology through investment in research and development, bringing in new
technology, dismantling of the regulatory system, development of the capital markets and
increased competitiveness for the benefit of common man”. It further added that “the spread of
industrialisation to backward areas of the country will be actively promoted through appropriate
incentives, institutions and infrastructure investments”.

Objectives:

The New Industrial Policy,1991 seeks to liberate the industry from the shackles of licensing
system Drastically reduce the role of public sector and encourage foreign participation in India’s
industrial development. The broad objectives of New Industrial Policy are as follows:

(i) Liberalising the industry from the regulatory devices such as licenses and controls.

(ii) Enhancing support to the small scale sector.

(iii) Increasing competitiveness of industries for the benefit of the common man.

(iv) Ensuring running of public enterprises on business lines and thus cutting their losses.

(v) Providing more incentives for industrialisation of the backward areas, and

(vi) Ensuring rapid industrial development in a competitive environment.

The New Industrial Policy has made very significant changes in four main areas viz., industrial
licensing role of public sector, foreign investment and technology and the MRTP act. The major
provisions of this policy are discussed below.

(1) Abolition of Industrial Licensing:

In the earlier industrial policy, industries were subjected to tight regulation through the licensing
system. Though some liberalisation measures were introduced during 1980’s that positively
affected the growth of industry. Still industrial development remained constrained to a
considerable extent.
The new industrial policy abolishes the system of industrial licensing for most of the
industries under this policy no licenses are required for setting up new industrial units or for
substantial expansion in the capacity of the existing units, except for a short list of industries
relating to country’s security and strategic concerns, hazardous industries and industries causing
environmental degradation.

To begin with, 18 industries were placed in this list of industries that require licenses. Through
later amendment to the policy, this list was reduced. It now covers only five industries relating to
health security and strategic concerns that require compulsory licensing. Thus the industry has
been almost completely made free of the licensing provisions and the constraints attached with it.

(2) De-reservation of Industries for Public Sector:

The public sector which was conceived as a vehicle for rapid industrial development, largely
failed to do the job assigned to it. Most public sector enterprises became symbols of inefficiency
and imposed heavy burden on the government through their perpetual losses.

Since a large field of industry was reserved exclusively for public sector where it remained a
virtual non performer (except for a few units like the ONGC). The industrial development was
thus the biggest casualty.

The new industrial policy seeks to limit the role of public sector and encourage private sector’s
participation over a wider field of industry. With this view, the following changes were made in
the policy regarding public sector industries:

(i) Reduced reservation for public sector:

Out of the 17 industries reserved for the public sector under the 1956 industrial policy, the new
policy de-reserved 9 industries and thus limited the scope of public sector to only 8 industries.

Later, a few more industries were de-reserved and now the exclusive area of the public sector
remains confined to only 4 industrial sectors which are: (i) defence production, (ii) atomic
energy, (iii) railways and (iv) minerals used in generation of atomic energy.

However, if need be even some of these areas can be opened up for the private sector. The public
sector can also be allowed to set up units in areas that have now been thrown open for private
sector, if the national interest so demands.

(ii) Efforts to revive loss making enterprise:

Those public enterprises which are chronically sick and making persistent losses would be
returned to the Board of Industrial and Financial Reconstruction (BIFR) or similar other high
level institutions created for this purpose. The BIFR or other such institutions will formulate
schemes for rehabilitation and revival of such industrial units.
(iii) Disinvestment in selected public sector industrial units:

As a measure to raise large resources and introduce wider private participation in public sector
units, the government would sell a part of its share holding of these industries to Mutual Funds,
financial institutions, general public and workers.

For this purposes, the Government of India set up a ‘Disinvestment Commission’ in August 1996
which works out the modalities of disinvestment. On the basis of recommendations of the
‘Disinvestment Commission’ the government sells the shares of public enterprise.

(iv) Greater autonomy to public enterprises:

The New Industrial Policy seeks to give greater autonomy to the public enterprises in their day-
to-day working. The trust would be on performance improvement of public enterprises through a
mix of greater autonomy and more accountability.

(3) Liberalised Policy Towards Foreign Capital and Technology:

The inflow of foreign capital and import of technology was tightly regulated under the earlier
Industrial policy. Each proposal of foreign investment was to be cleared by the Government in
advance. Wherever foreign investment was allowed, the share of foreign equity was kept very
low so that majority of ownership control remains with Indians.

But such a policy kept the inflow of foreign capital very small and industrial development
suffered for want of capital resources and technology. The July, 1991 Industrial policy made
several concessions to encourage flow of foreign capital and technology into India, which are
follows:

(i) Relaxation in Upper Limit of Foreign Investment:

The maximum limit of foreign equity participation was placed at 40 per cent in the total equity
capital of industrial units which were open to foreign investments under the 1991 policy; this
limit was raised to 51 per cent. 34 specified more industries were added to this list of 51 per cent
foreign equity participation.

In some industries the ratio of foreign equity was raised to 74 percent. Foreign Direct
Investments (FDI) was further liberalised and now 100 per cent foreign equity is permitted the
case of mining, including coal and lignite, pollution control related equipment, projects for
electricity generation, transmission and distribution, ports, harbours etc.

Recent decision taken to further liberalise FDI include permission for 100 per cent FDI in oil
refining, all manufacturing activities in Special Economic Zones (SEZ’s), some activities in
telecom see tor etc.

(ii) Automatic Permission for Foreign Technology Agreement:

The New Industrial Policy states that automatic permission will be granted to foreign technology
agreements in the high priority industries. Previously technology agreement by an Indian
company with foreign parties for import of technology required advance clearance from the
government.

This delayed the import of technology and hampered modernisation of industries. Now the
Indian companies could enter into technology agreements with foreign companies and import
foreign technology for which permission would be automatically granted provided the
agreements involved a lump sum payment of upto Rs. 1 crore and royalty upto 5 percent on
domestic sales and 8 per cent on exports.

(4) Changes in the MRTP Act:

According to the Monopolies and Restrictive Trade Practices (MRTP) Act, 1969, all big
companies and large business houses (which had assets of Rs. 100 crores or more, according to
the 1985 amendment to the Act) were required to obtain clearance from the MRTP Commission
for setting up any new industrial unit, because such companies (called MRTP companies) were
allowed to invest only in some selected industries.

Thus, besides obtaining a licence they were also required to get MRTP clearance. This was a big
impediment for industrial development as the big business firms which had the resources for
development could not grow and diversify their activities.

The Industrial Policy, 1991 has put these industries on par with others by abolishing those
provisions of the MRTP Act which mediate mandatory for the large industrial houses to seek
prior clearance from MRTP Commission for their new projects.

Under the amended Act, the MRTP Commission will concern itself only with the control of
Monopolies and Restrictive Trade Practices that are unfair and restrict competition to the
detriment of consumer s interests. No prior approval of or clearance from the MRTP
Commission is now required for setting up industrial units by the large business houses.

(5) Greater Support to Small-Scale Industries:

The New Industrial Policy seeks to provide greater government support to the small-scale
industries so that they may grow rapidly under environment of economic efficiency and
technological upgradation. A package of measures announced in this context provides for setting
up of an agency to ensure that credit needs of these industries are fully met.

It also allows for equity participation by the large industries in the small scale sector not
exceeding 24 per cent of their total shareholding. This has been done with a view to provide
small scale sector an access to the capital market and to encourage their upgradation and
modernisation the government would also encourage the production of parts and components
required by the public sector industries in the small-scale sector.
(6) Other Provisions:

Besides above discussed measures, the Industrial Policy 1991 announced some more steps to
promote rapid industrial development. It said that the government would set up a special board
(which was established as Foreign Investments Promotion Board—FIPB) to negotiate with a
number of international companies for direct investment in industries in India.

It also announced the setting up of a fund (called National Renewal Fund) to provide social
security to retrenched workers and provide relief and rehabilitate those workers who have been
rendered unemployed due to technological changes.

The New Policy also removed the mandatory convertibility clause under which the Public Sector
Financial Institution were asked to convert the loans given by them to private industries in equity
(shares) and thus become partners in their management.

This removed a big threat to the private sector industries as they were always under threat that
their management and control could pass on into the hands of the Government owned financial
institutions.

Evaluation of the New Industrial Policy:

The New Industrial Policy 1991 aims to unshackle Indian’s industrial economy from the
cobwebs of unnecessary bureaucratic control. According to this policy the rate of the government
should change from that of only exercising control over industries to that of helping it to grow
rapidly by cutting down delays.

Removal of entry barriers and bringing about transparency in procedures. This policy therefore
also at virtually ending the ‘Licence-Permit Raj’ which has hampered private initiative and
industrial development. The new policy therefore throws almost the entire field of industry wide
upon for the private sector.

The public sector’s role has been confined largely to industries of defence, strategic and
environmental concerns. Thus new policy is more market friendly and aims at making the best
use of available entrepreneurial talent in a congenial industrial environment. The industry is thus
expected to grow faster under the new industrial policy 1991.

LPG: THE THREE PILLARS OF ECONOMIC REFORMS

LPG Model of development which was introduced in 1991 by the then Finance Minister Dr.
Manmohan Singh with a big bang was intended to charter a new strategy with emphasis on
liberalization, privatization and globalization (LPG). Several major changes at the domestic level
were introduced. LPG Model of development emphasizes a bigger role for the private sector. The
present and on –going process of economic reforms reflects an economics philosophy of the
government, which expressed a faith in the market forces, and freedom of economics enterprise.
It accepts the fact that government intervention and controls scuttle the spirit of private
enterprises and inhibit growth. It further accepts , thought tacitly, that there is over presence of
the public sector in the economy and it must be reduced according to the managerial capacity of
the government and be run on commercial lines to be viable. Finally, the philosophy recognizes
India is an integral part of the world economy which must adjust according to the changing
circumstances abroad.

Such a philosophy can be decomposed into three parts viz. liberalization, privatization and
globalization which are not distinct but interrelated in many respects. These components are
explained below.

Liberalization

It is the process of liberating the economy from the various regulatory and control mechanisms
of the State and giving freedom to private enterprise. Liberalization, therefore, is not the same
thing as decontrol, which is narrow concept and is a part of liberalization. Decontrol, in fact, is
essential for liberalization and may also require necessary legislative changes for legal sanction
and effectiveness.

In the process of economic reforms, liberalization has taken place in almost all the major sectors
of the economy including industry and services, infrastructure, banking, capital market, taxation
and external sector covering foreign trade and investments in international financial transactions.
Liberalization, as will be seen in the subsequent sections, has taken multiple forms as listed
below:

 Delicensing.

 Freedom from locational requirements and government clearance.

 Freedom to public sector undertakings to access capital market.

 Corporatization of departmental undertakings and public undertakings.

 Permission to corporate for buyback of shares.

 Increase in the investment ceiling of small-scale enterprises.

 Liberalization of tax provisions for selected sectors.

 Freedom to banks to enter the insurance sector.

 Shifting of products and industries from administered price mechanism.

 Freedom to transfer licenses and assets.

 Removal of restrictions on movement of products and scale-purchase of assets.

 Reduction in state pre-emption of loanable funds through fall in banking reserve ratios (CRR
and SLR).

 Conversion of excise system from specific to ad valorem rates and adoption of the system of
value-added tax.

 Simplification and rationalization of tax rate structures and procedures.

 Tax exemptions, holidays and concessions.

Liberalization allows greater room for flexibility reduces cost and saves time for business
enterprises. The external constraints on business planning and strategy formulation go down
thereby increasing efficiency and competitiveness.

Privatization

Privatization, both as a philosophy and a process, presses faith in the market system and its
forces. Privatization is not merely the transfer of ownership of government or publicly owned
assets into private hands; it also refers to a process in which major economic decisions
concerning production, exchange, distribution and consumption are entrusted to the market
forces and decisions are taken by a large number of individual and private economic units.
Marketization is therefore an integral part of privatization.

Privatization entails freedom to own and operate business assets and take independent business
decisions. This generally generates competition in the market and the market mechanism takes
care of the allocative function in the economy. Such a freedom is, however, hardly perfect or
complete

There are many imperfections and asymmetries built into the private enterprise system, which
warrant government or public policy intervention through regulation. Privatisation programmes
have been undertaken in a number of both developed and developing countries and have taken
one or more of the following forms:

 The sale of equity in full or part, of public sector units to private companies and individuals.

 Denationalization of the previously nationalized enterprises and their sale to the original or
new owners.

 Franchising of public sector services to designated private sector units.

 Licensing of technology of public sector units to private enterprises.

 Government withdrawal from a particular field of production or service to be occupied by
private enterprises.

 Privatization of management in which the government retains ownership but management is

entrusted to private hands through lease or management contracts.

Privatization has been the second important pillar of economic reforms in the country. It has
been greatly aided by the liberalization process in a number of areas and has taken a variety of
forms. Some of these are listed below:

 Disinvestment of the public sector.

 Opening up of a number of core sectors earlier reserved for public sector, to private investment
(like roads, ports, insurance, power transmission, international data gateways and
telecommunications).

 Freeing of deposit rates of banks.

 Freedom to banks to determine their own prime lending rates in view of market trends.

 Freeing of a number of products from administered price mechanism.

 Contracting out of a number of services by public sector units (like catering in Railways) to the
private sector.

Most of the above measures can be counted both on the sides of privatization and liberalization.
Nevertheless, together, these represent mercerization of the economy in which free and private
enterprise has a larger role to play in the economic system.

Globalization

Globalization is the third pillar of the economic reforms. It is the process of movement from a
closed economy to an open economy. The scope of globalization is wide. It is a process of global
integration of products, technology, labour, investment, information and even cultures. It tends to
narrow down international differences in prices, wage rate and interest rate. Globalization of
business basically takes place through international trade, foreign investment, joint ventures,
international licensing, franchising and sub-contracting, international horizontal and vertical
integration of industries, strategic alliances, international market sharing arrangements,
advertising and information exchange. Globalization has its own costs, risk and challenges,
which have to be managed.

A globalization economy symbolizes confidence of the international community in the economy.

Globalization opens new business opportunities, encourages competition, provides spinoff
advantages, enhances knowledge and helps to develop strategic vision. Necessary safeguards,
however, have to be provided to reduce its adverse likely effects in the form of dumping,
external dependence, erosion of economic sovereignty, deterioration of terms of trade and
balance of payments.

 Globalization, as a part of economic reforms in the country, is the result of internal economic
compulsions, external pressure from the international community particularly from such
multinational institutions like IMF, World Bank and WTO and trend towards globalization in a
number of developing countries. The progress in the direction of globalization has been slow and
has taken through trade liberalization and friendly policies towards foreign investment.

In conclusion, it may be state that the new Industrial policy may have been able to attract foreign
investment and given a boost to domestic investment, but whether it has led to more employment
along with higher output growth is doubtful. Besides, excessive freedom to foreign capital may
ultimately affect our economic sovereignty and as also push the country into a debt trap further.
These are gloomy forebodings, but the recent East Asian economic crisis as well as the
happenings in Russia and South American countries point out to the dangers of too much
dependence on market mechanism, uncontrolled liberalization and globalization and unfettered
freedom to import foreign capital.

ECONOMIC GROWTH AND DEVELOPMENT

INTRODUCTION -ECONOMY

Let us begin with the word 'economy'. It denotes the operations and management of theeconomic
system - the activities related to production of goods and services, consumption,investment,
exchange of goods and services within the geographical territory, and exports andimports with
rest of the world. You may have observed that production of goods and servicesrequires inputs
such as labor, capital (machineries, buildings, etc.) and raw materials. Theinputs are available in
limited quantity, i.e., there is a shortage of inputs. When these inputs areused in the production
process, they need to be paid some reward. For example, if you want toemploy a unit of labor
you have to pay some wage to him or her. Similarly, building can behired by paying some rent or
money can be borrowed by paying some interest. Ultimatelyutilization of inputs involves some
costs. Thus the objective before the economy is to utilizethe scarce resources efficiently so that
production of goods and services is maximized and costis minimized.

INDIAN ECONOMY-

The term Indian economy is the outcome of two words, Indian plus economy.”

Indian Economy “refers to all those activities and arrangements which thecitizens of a country,
either individually or collectively, undertake to satisfy their wants of food, clothing, shelter, etc.
Indian economy is not just a study of facts and figures relating toeconomic life of India rather it
undertakes to analyze the causes and effects of the problems pertaining to economic life. Nature
of Indian economy becomes clear from the followingcharacteristics:”1-Indian economy is an
underdeveloped economy2-Indian economy is a mixed economy3-Indian economy is a planned
developing economy

1-Indian economy is an underdeveloped economy-

Per capita income of some countries of the world like America, England, Japan etc. is
muchhigher than that of some other countries like India, Pakistan, Sri Lanka, Bangladesh,
etc.economies of the former countries are called developed economies. On the other hand, there
are countries like India, Bangladesh, Pakistan etc whose per capita income is much less thanthat
of the developed ones. Economies if such countries are called underdeveloped economies.

Economic Growth

is a narrower concept than economic development. It is an increase in acountry's real level of

national output which can be caused by an increase in the quality of resources (by education
etc.), increase in the quantity of resources & improvements in technologyor in another way an
increase in the value of goods and services produced by every sector of theeconomy. Economic
Growth can be measured by an increase in a country'sGDP (gross domestic product).

Economic development

is a normative concept i.e. it applies in the context of people's sense of morality (right and
wrong, good and bad). The definition of economic development given byMichael Todaro is an
increase in living standards, improvement in self-esteem needs and freedomfrom oppression as
well as a greater choice. The most accurate method of measuring developmentis theHuman
Development Indexwhich takes into account the literacy rates & life expectancywhich affects
productivity and could lead to Economic Growth. It also leads to the creation of more
opportunities in the sectors of education, healthcare, employment and the conservation of
theenvironment. It implies an increase in the per capita income of every citizen.The economic
level of a country is the single most important environmental element to which theforeign
marketer task. The stage of economic growth within a country affects the attitudes towardforeign
business activity, the demand for goods, the distribution systems found within a country,and the
entire marketing process. In static economies consumption patterns become rigid andmarketing
is typically nothing more than a supply effort. In a dynamic economy, consumption patterns
change rapidly. Marketing is constantly faced with the challenge of detecting and providing for
new levels of consumption and marketing efforts must be matched with ever changing market
needs and wants.Economic development presents a two sided challenge. First, a study of the
general aspects of economic development is necessary to gain empathy regarding the economic
climate withindeveloping countries. Second, the state of economic development must be studied
with respect tomarket potential, including the present economic level and the company’s growth
potential. Thecurrent level of economic development dictates the kind and degree of market
potential that exists,while knowledge of the dynamism of the economy allows the marketer to
prepare for economicshifts and emerging markets.Economic development is generally
understood to mean an increase in national production thatresult in an increase in the average per
capita gross domestic product (GDP). Besides an increase inaverage per capita GDP most
interpretations of the concept also imply a widespread distribution of the increased income.
Economic development, as commonly defined today, tends to mean rapideconomic growth and
increases in consumer demand – improvements achieved in decades rather than centuries.

GROWTH AND DEVELOPMENT: A CONTRAST IN CONCEPTS

Economic development is a broader term than economic growth Economic growth usuallymeans
the growth in production of an economy. On the other hand, Economic developmentincludes
other factors such as literacy health, child mortality Rate, equality, regional
balance,infrastructure, etc. Let us take the example of a child. As a child grows her weight and
heightincreases. Simultaneously, her capacity to learn, recognize and distinguish between
objectsdevelops. Thus growth is not sufficient; we need development also. Similarly, in the case
of theIndian economy economic growth is not enough; we need economic development. We
need better health of people, education for all, reduction in inequality among sections of people
andregions, reduction in infant mortality rate (IMR), access to drinking water for all, etc.
Thegovernment has to devise policies and allocate government expenditure so that these
facilitiesare available to all. Thus the additional income generated in the economy reaches the
backwardregions and the poorer sections of society. To achieve economic development we
needeconomic growth. In a stagnant economy, where there is no economic growth, realization
of economic development is difficult.Economic growth refers to increase over time in a
country’s real output of goods and servicesor more appropriately production per capita .The
economic development ,in contrast is morecomprehensive. It implies progressive changes in the
socio-economic structure of a country.Viewed in this way economic development involves a
steady decline in agriculture’s share inGNP and a corresponding increase in the share of
industries, trade, banking, construction andservices. Thus the economic growth signifies only the
rise in real national income and per capita income whereas, theTerm economic development
signifies the rise in real national income and per capita incomesalong with the following
structural changes in the economy-

1-Changing occupational structure:

The process of economic development is accompanied bythe flight of labor from primary to
secondary and tertiary sectors.

2-Changing sectoral structure of national income

: In the course of economic development, the relative contributions of secondary and tertiary
sectors in the generation of rise in national income.

3-Changing structure of industrial production

: The process of economic development involves industrialization .according to Haffman, as the
economy develops the ratio of production of capital goods to consumer goods rises.

4-Changing structure of foreign trade:

The development process leads to increasing consumption of raw-material in the growing

manufacturing industries.

5-Technological progress and innovations

: The traditional techniques of productions gradually give way to science based highly automated
techniques .The increasing proportion of GNP is devoted to R&D.

The Objectives of Economic Development:

From the study of Sen’s capability approach to development and Goulet’s core values of
development we are in a position to explain the objectives of development. The basic objective
of development is broad-based improvement in the economic and social conditions of our people
so as to achieve better quality of life for them.

Important Objectives of Development:

1. To Achieve a Higher Rate of GDP Growth:

The first and foremost objective of development is to achieve a higher rate of GDP growth so as
to raise the living standards of our people. Rapid growth of total GDP or per capita income is
considered necessary because it ensures an expansion in the productive capacity of the economy
without which broad based improvement in living standards of the people is not possible.
However, it should be recognized that faster economic growth, though necessary, is not a
sufficient condition for raising the living standards of our teeming millions. This is because one
can easily imagine a growth process which may not be sufficiently inclusive to ensure a spread
of benefits to the mass of our population.

There are three reasons why GDP growth is necessary for raising the living standards of the
population. First, rapid growth of GDP ensures a higher expansion in total income and
production which, if growth process is sufficiently inclusive, will make available a larger output
of goods and services to be consumed by the people and thus raise their living standards.

Secondly, rapid economic growth generates more employment opportunities and income
enhancing activities of the people, provided labour-saving technologies are not used for
production of goods both in the industrial and agricultural sectors.

Third, higher GDP growth is important because it generates higher revenues for government
which help to finance anti-poverty programmes started by the government.
2. To Eradicate Poverty and Unemployment:

The second important objective of development is to eradicate poverty. In Amartya Sen’s

approach to development, poverty should be viewed as deprivation of basic capabilities rather
than merely as low income. The existence of poverty or deprivation of basic capabilities is
reflected in hunger, significant undernourishment/ especially of children premature mortality,
permanent morbidity, widespread illness, and lack of basic education and other failures. Though
economic growth is necessary for elimination of poverty but is not a sufficient condition for it
because it is related to income distribution in a society as well.

Related to issue of poverty is the question of unemployment which exists on a large scale in
developing countries, especially in labour-surplus countries such as ours. Chronic and long-term
unemployment exists in the developing economies because due to higher population growth
relative to capital formation it has not been possible to absorb the increasing number of workers
in productive employment resulting in large-scale unemployment in developing countries.

Gainful employment is the means of livelihood for the masses of the population. The growth of
employment opportunities needs to be accelerated both in manufacturing and services sectors to
provide employment to increasingly educated population which has high expectations and
aspirations. Unemployment leads to the feelings of worthlessness and frustration among the
youth leading to the increase in incidence of crime in the society.

3. To Expand The Freedoms Enjoyed by The People:

The other important objective of development, as has been explained in Amartya Sen’s approach
to development and Goulet’s core values, is to expand the freedoms that people of a society
enjoy. Growth of GDP or of individual incomes or industrialization or technological progress are
merely means to expanding human freedoms but freedoms depend on other factors as well. As
Sen Stresses viewing development as expansion of substantive freedoms directs attention to end
or objective of development rather than means such as GDP growth or industrialization which
play an important role in the process of development.

If the objective of expansion of freedoms is to be achieved, the various sources of unfreedom

such as lack of public facilities of education and healthcare, denial of political liberty and basic
civil rights (such as liberty to participate in public discussion) and denial of equal rights to
women in the society have to be removed. It is worth mentioning here that some have supported
the denial of political liberty and basic civil rights to the people on the ground that they promote
economic growth.

DETERMINANTS OF ECONOMIC DEVELOPMENT -

The process of economic development is a highly complex phenomenon and is influenced by

numerous and varied factors such as political, social and cultural factors. According to prof. R.
Nurkse’Economic development has much to do with human endowments, social attitudes,
political condition and historical accidents .capital is necessary but not a sufficient condition of
progress. The supply of natural resources, the growth of scientific and technological knowledge
etc. have a strong bearing on the process of economic growth.

1. Economic determinants:

The three most important factors determining the rate of economic development are: a-Capital
formation b-Capital output ratio c-The rate of population growth

a) Capital formation

: Capital accumulation is the very core of economic development. It is quite necessary to step up
the rate of capital formation so that the community accumulates a large stock of machines, tools,
and equipment which can be geared into production. The process of building up the necessary
stock of capital equipments requires huge resources for financing it. Either a large part of
national income must be saved for production of capital goods or the necessary funds for the
purpose may be borrowed from abroad.

b) Capital output ratio

: The term capital output ratio refers to the number of units of capital that are required in order to
produce one unit of output. It is difficult to estimate the capital – output ratio for an economy. the
productivity of capital depends upon many factors such as degree of technological development
associated with capital investment, the efficiency of handling new types of equipments ,the
quality of managerial and organizational skills, the pattern of investment and the existence and
the extend of the utilization of economic overheads.

c) Rate of population growth

: Rapid growth of population is considered to be important determinants of growth. In terms of

per capita income, on account of rise in population, the country experiences a very thin spread of
the benefits of growth. This highlights the need or a large and active programmed of family
limitation so that the benefits of the massive development are not dissipated.

2. Non-economic determinants

a-social and cultural factors B-political factors C-adverse international efforts

a) Social and cultural factors

: These factors are no less important and are very extensive in scope. Each society has certain
institutions which have a strong bearing an economic development. In India for Example , the
institutions of caste, joint families , non-materialistic attitude of the people , and their fatalism
based on the philosophy of karma have been some of the serious impediments to economic
development .naturally the various relevant social and cultural factors will have to be suitably
adopted before the tempo of economic development can be expected to quicken.

b) Political factors

: In addition to the economic and social factors there are also the political factors which retard
economic growth .For example during the British regime, the government promoted British
interests at the expenses of Indian interest’s .After independence two things did not improve
dishonest and corruption. Favoritism, nepotism, and corruption were rampant all over the
country. The people too lacked sense of the duty and devotion to the country and were trying to
enrich themselves at the expense of the country.

c) Adverse international factors

: Economic relations with the advanced countries have alsokept the under-developed countries in
a state of under development. Developing countries arenot exposed to the beneficial effects of
foreign trade in terms of economic development.Developing countries are often exposed to the
cyclical effects of foreign trade which results ininstability and impede economic growth.

FACTORS AFFECTING ECONOMIC DEVELPOMENT

It depends on two sets of factors economic and non-economic.

A) Economic factors in economic development1. Capital formation

: It is now universally admitted that a country which wants to acceleratethe pace of growth, has
no choice but to save a high ratio of its income with the objective of raising the level of
investment. Economists rightly assert that due to lack of capital formationno development plan
will succeed unless adequate supply of capital is forthcoming.

2. Marketable surplus of agriculture

: Increase in agricultural production accompanied by arise in its productivity is important from

the point of view of the development of a country,with the development of an economy, the ratio
of the urban population increases and increasingdemands are made agriculture for food grains.
These demands must be met adequately;otherwise the consequent scarcity of food in urban areas
will arrest growth.

3. Conditions in foreign trade

: Foreign trade has proved to be beneficial to countries whichhave been able to set up industries
in a relatively short period. These countries sooner or later capture international markets for their
industrial products. Therefore the developing countryshould attempt to push the development of
its industries to such a high level that in the courseof the time manufactured goods replace the
primary products of the country principal exports.
4. Economic system

: The economic system and the historical settings of a country also decidethe developmental
prospects to a great extent. There was a time when a country could have alaizse faire economy
and yet face no difficulty in making economic progress .the third worldcountries of the present
times will have to find their own path of development only by adoptingcapitalism or socialism.

B) Non-economic factors in economic development

1. Human resources:

Economist often see population as an obstacle to growth rather than as afactor which assist the
developmental activity .nevertheless, man makes positive contributionto growth. Man provides
labor is efficient and skilled; its capacity to contribute to economicgrowth will decidedly be high.

2. Technical knowledge

: As the scientific and technological knowledge advances, mandiscovers more sophisticated

techniques of production which steadily raise the productivitylevels. If a country in modern times
neglects this activity, it will have to pay a heavy price interms of industrial under development.

3.Political freedom

: We all know that the under development of India ,Pakistan, Bangladesh,Sri Lanka and a few
other countries, which were in the past British colonies, was linked withthe development of
England . England recklessly exploited them and appropriated a large portion of the economic
surplus. This made a significant contribution to British’s economicdevelopment .hence political
freedom is an essential condition for the economic developmentof a country.

4. Social organization

: Under the circumstance, it is futile to hope that masses will participatein the development
projects undertaken by the state.

5. Corruption

: Until and unless there countries root out corruption in their administrativesystem, it is most
natural that the capitalists, traders, and powerful economic classes willcontinue to exploit natural
resources in their personal interests.

6. Desire to develop

: The pace of economic growth in any country depends to a great extendon people’s desire to
develop. If in some country level of growth consciousness is low and thegeneral mass of people
has accepted poverty as its fate, then there will be little hope for development of the nation.
FEATURES OF THE INDIAN ECONOMY

At the time of Independence the Indian economy was stagnant and highly underdeveloped.
Agriculture was the backbone of the economy but agricultural activities were undertaken through
obsolete technology. Industrial sector contributed very little to gross domestic product(GDP). In
order to give a direction to the economy the government initiated economic planning in the form
of Five Year Plans in 1951. Over the years the economy has witnessed increase in GDP, the
composition of GDP has changed, standard of living of people has improved, and there has been
up gradation in level of technology. The important features of the Indian economy are as follows:

1. Low per capita income:

Under developed economy is characterized by low per capital income. India per capital income
is very low as compared to the advanced countries. For example the capital income of India was
460 dollar, in 2000. Whereas their capita income of U.S.A in 2000 was 83 times than India. This
trend of difference of per capitain come between under developed and advanced countries is
gradually increasing in present times. India not only the per capita income is low but also the
income is unequally distributed. This mal-distribution of income and wealth makes the problem
of poverty and stands an obstacle in the process of economic progress.

2. Heavy Population Pressure:

The Indian economy is facing the problem population explosion. It is clearly evident from the
total population of India which was 102.67 cores in 2001census. It is the second highest
populated country China being the first. India’s population has reached 110 cores. All the under
developed countries are characterized by high birth rate which stimulates the growth of
population; the fast rate of growth of population necessitates a higher rate of economic growth to
maintain the same standard of living. The failure to sustain the living standard makes the poor
and under developed countries poor and under developed.

3. Excessive dependence on Agriculture:

Occupational distribution of population in India clearly reflects the backwardness of the

economy. One of the basis characteristics of an under developed economy is that agriculture
contributes a very large portion in the national income and a very high proportion of working
population is engaged in agriculture

4. Unemployment:

There is larger unemployed and under employment is another important feature of Indian
economy by which India suffers a lot. In dec,2009 the number of unemployed, registered in 969
employment exchanges of the country were 3.82 crore. On account of employment ,there is
wastage of labor power ,less production ,low per capita income and low rate of investment.
5. Low Rate of Capital Formation:

In backward economics like India, the rate of capital formation is also low. Capital formation
mainly depends on the ability and willingness of the people save since the per capita income is
low and there is mal-distribution of income and wealth the ability of the people to save is very
low in under developed countries for which capital formation is very low .

6. Poor Technology:

The level of technology is a common factor in under developed economy. India economy also
suffers from this typical feature of technological backwardness. The techniques applied in
agriculture industries milling and other economic fields are primitive in nature.

7. Back wards Institutional and social frame work:

The social and institutional frame work in under developed countries like India is hopelessly
backward, which is a strong obstacle to any change in the form of production. Moreover
religious institutions such as caste system, joint family universal marriage affects the economic
life of the people.

8. Under utilization of Resources:

India is a poor land. So our people remain economically backwards for the lack of utilization of
resources of the country.

9. Price instability:

Price instability is also a basis feature of Indian economy. In almost all the underdeveloped
countries like India there is continuous price instability. Shortage of essential commodities and
gap between consumption and productions increase the price persistently. Rising trend of price
creates a problem to maintain standard of living of the common people.

10. Inequality of income and wealth

is other important feature of Indian economy. There has been remarkable improvement in social
sectors such as education, health, housing,water supply, etc.

11.Planning process is also an important feature. As the government has adopted planned
developmental economy. Five years plans are framed for economic development.
 Role of public and private sector in india

ROLE OF PUBLIC SECTOR IN INDIAN ECONOMY

1.Capital formation

2.Development of infrastructure

3.Strong industrial base

4.Removal of regional disparities

5.Import substitution and export promotion

6.Check over concentration of economic power

PERFORMANCE OF PUBLIC SECTOR

1.Expansion of public sector as well as its share in nationalproduction

2.Employment and labor welfare

3.Contribution to Foreign exchange and its earnings

SHORTCOMINGS OF PUBLIC SECTOR

1.Mounting losses

2.Political influence

3.Problems of labor, personnel and management

4.Planning related to planning and construction of projects

5.Under utilization of capacity

6.Price policy

INDUSTRIAL POLICY 1991

1. Reduction in the number of industries reserved for the

public sector from 17 to 8 reduced further to 6.
2. Disinvestment of shares of a select set of public
sector enterprises in order to raise resources and to
encourage wider participation of general public and workers.
3. The policy towards sick public enterprises to be the same as that for the private sectors.
4. An improvement of performance through memorandum of
understanding system by which managements are to be
granted greater autonomy but held accountable for specified results .

ROLE OF PRIVATE SECTOR IN INDIAN ECONOMY

1.The dominant sector

2.General economic development

3.Private sector in agriculture

4.Extensive modern industrial sector

5.Private sector in trading

6.Potentialities due to personal incentive in the small sector

SHORTCOMINGS OF PRIVATE SECTOR

1.Emphasis on non priority industries and wastage of resources

2.Monopoly and concentration

3.Contribution to trade deficits

4.industrial disputes

5.Industrial sickness

6.Problems relating to foreign competition

7.Problems relating to finance and credit

PUBLIC SECTORS IN INDIAN ECONOMY

In India, a public sector company is that company in which the Union Government or State
Government or any Territorial Government owns a share of 51 % or more. Currently there are
just three sectors left reserved only for the government i.e. Railways, Atomic energy and
explosive material. Private sectors/players are not allowed to operate in these sectors.

Before the independence of India, there were only a few public sector companies in the country
this includes, Indian Railways, the Port Trusts, the Posts and Telegraphs, All India Radio and the
Ordinance Factory are some of the major examples of the country’s public sector enterprises.
However, post Indian independence, some policies for the development of the socio-economic
status of the country were planned out by the then visionary leaders, where the public sector
were used as a tool for the self-reliant growth of the nation’s economy.

This was the reason that the second five year plan of India was solely based on the development
of the different industries. Till 1990s major sectors of the economy were reserved only for the
government, this caused the great loss of our precious natural resources and the whole country
trapped into the great economic problem. From the very first five year plan till 1980s our country
grows with the average rate of 3.5% per year (which is called Hindu rate of growth by Prof.
Rajkrishna).

But later on the in 1991, july our new economic policy was launched under the leadership of Mr.
Manmohan Singh and P.V. Narsimha Rao.

The main objectives of this new economic policy were:

1. To maintain a sustained growth in productivity

2. To enhance gainful employment

3. To achieve optimum utilization of human resources

4. To transform India into a major partner and player in the global arena.

5. To take out Indian economy from the vicious circle of poverty.

6. Open the Indian economy to interact openly with the rest of the world.

The main result of this new policy was that reserved sectors were opened for the private players.
Public sectors were not able to operate at its optimum pace.

Objectives: The public sector aims at achieving the following objectives:

To promote rapid economic development through creation and expansion of infrastructure

• To generate financial resources for development

• To promote redistribution of income and wealth

• To create employment opportunities

• To promote balanced regional growth

• To encourage the development of small-scale and ancillary industries, and

• To accelerate export promotion and import substitution

Role of public sectors in the development of the country is explained below:

• Public Sector and Capital Formation: The role of public sector in collecting saving and
investing them during the planning ear has been very important. During the first and second five
year plan it was 54% of the total investment, which declined to 24.6 % in the 2010-11.

• Employment Generation: Public sector has created millions of jobs to tackle the
unemployment problem in the country. The number of persons employed in the as on march
2011 was 150 lakh. Public sector has also contributed a lot towards the improvement of working
and living conditions of workers by serving as a model employer.

• Balanced Regional Development: Public sector undertakings have located their plants in
backward parts of the county. These areas lacked basic industrial and civic facilities like
electricity, water supply, township and manpower. Public enterprises have developed these
facilities thereby bringing about complete transformation in the socio-economic life of the people
in these regions. Steel plants of Bhilai, Rourkela and Durgapur; fertilizer factory at Sindri, are
few examples of the development of backward regions by the public sector.

• Contribution to Public Exchequer: Apart from generation of internal resources and payment
of dividend, public enterprises have been making substantial contribution to the Government
exchequer through payment of corporate taxes, excise duty, custom duty etc. gross internal
resource generation in 1990- 2000 was 36000 cr which rose to 1, 11,000 cr in 2008-09, while net
profit was 92,077 cr in 2010-11.

• Export Promotion and Foreign Exchange Earnings: Some public enterprises have done
much to promote India’s export. The State Trading Corporation (STC), the Minerals and Metals
Trading Corporation (MMTC), Hindustan Steel Ltd., the Bharat Electronics Ltd., the Hindustan
Machine Tools, etc., have done very well in export promotion.

• Import Substitution: Some public sector enterprises were started specifically to produce
goods which were formerly imported and thus to save foreign exchange. The Hindustan
Antibiotics Ltd., the Indian Drugs and Pharmaceuticals Ltd. (IDPL), the Oil and Natural Gas
Commission (ONGC), the Indian Oil Corporation Ltd., the Bharat Electronics Ltd., etc., have
saved foreign exchange by way of import substitution.

• Promotion of Research and Development: As most of the public enterprises are engaged in
high technology and heavy industries, they have undertaken research and development
programmes in a big way. Public sector has laid strong and wide base for self-reliance in the
field of technical know-how, maintenance and operation of sophisticated industrial plants,
machinery and equipment in the country. Expenditure on research and development reduces the
cost of production.

Performance of Central Public Sector Undertakings

There were altogether 248 CPSEs under the administrative control of various
ministries/departments as on 31 March 2011. Out of these, 220 were in operation and 28 were
under construction. The share of cumulative investment (paid-up capital plus long-term loans) in
all the CPSEs stood at Rs. 6,66,848 crore as on 31 March 2011 ,showing an increase of 14.8 per
cent over 2009-10. The share of manufacturing in gross block, during 2010-11, was 27.8 per
cent. The share of mining, electricity, and services in total investment, in terms of gross block,
was 23.0 per cent, 25.2 per cent, and 23.2 per cent respectively. The net profit of (158) profit-
making CPSEs stood at Rs. 1,13,770 crore in 2010-11. The net loss of (62) loss-making
enterprises, on the other hand, stood at Rs. 21,693 crore during the same period. The year also
witnessed severe financial 'under-recoveries' by public-sector oil marketing companies (OMCs)
as they had to keep the prices of petroleum products low in the domestic market despite high
input prices of crude oil.

Problems of Public Sectors:

• Poor policy making and its execution

• Over staffing

• Wastage of resources or under utilization of resources

• Higher operating cost

• Lack of motivation for self improvement

• Lack of proper price policy

Conclusion:

The expansion of the public sector was aimed at the fulfillment of our national goals, that is., the
removal of poverty, the attainment of self-reliance, reduction in inequalities of income,
expansion of employment opportunities, removal of regional imbalances, acceleration of the
pace of agricultural and industrial development, to reduce concentration of ownership and
prevent growth of monopolistic tendencies by acting as effective countervailing power to the
private sector, to make the country self-reliant in modern technology and create professional,
technological and managerial cadres so as to ultimately rid the country from dependence on
foreign aid. But these motives could not be achieved up to the desired extent. That is why
government is on the spree of privatization of these enterprises.
ROLE OF PRIVATE SECTOR IN INDIA

While in various Western capitalist countries and in Japan, private sector played a responsible
role for their economic development but in socialist countries, public sector played a dominant
role for their industrial development. But India, being a mixed economy, adopted a middle
course where it has judicially mixed both the public sector and private sector for their respective
role in development activities of the country.

From the very beginning, the Government has earmarked some specific areas in the field of
industry, agriculture, infrastructure and trade for the private sector. Accordingly, the Industrial
Policy Resolutions of 1948, 1956 and 1991 have allotted a specific role to the private sector for
conducting the development activities of the country.

The private sector has been playing a dynamic role in introducing new products, new varieties,
new processes, new designs etc. and thereby updated the entire production system.

Thus, it is quite fruitful to study the role of private sector under the following heads:

(i) Private Sector and Industrial Development:

During the pre-independence period, the private sector has played a responsible role in Indian
economy where it set up and expanded cotton and jute textiles, sugar, paper, edible oil, tea etc.
After independence, the national government gave sufficient stress on industrialization.

The private sector also made a serious attempt to invest on industries producing wide range of
intermediate products which include machine tools, chemicals, paints, plastic, ferrous and non-
ferrous metals, automobiles, electronics and electrical goods etc.

In this way, the private sector has developed the consumer goods industry, producing both
durables and non-durables and became self-sufficient in the production of different types of
consumer goods.

(ii) Private Sector and Agriculture:

In India agriculture and other allied activities like animal husbandry, dairying, poultry etc. are
playing a dominant role as it contributes nearly 30 per cent of GDP and it provided employment
to nearly 67 per cent of the total working population of the country. Such a big sector is
completely owned and managed by the private sector. Thus, private sector is quite dominant in
respect of agriculture and other allied activities.

In India, agriculture is not conducted on commercial basis rather it is managed by the households
as much of these activities are in the hands of small and marginal farmers. In India, the new
agricultural strategy adopted by the Government has been implemented by the private sector
under the active support of the Government.
(iii) Private Sector and Trading:

Both the wholesale and retail trade in India is in the hands of private sector. In a big country like
India, having a huge size of population, the entire trading activities are managed by the private
sector in a best possible manner. But in case of scarcity of any essential commodities, the private
businessmen have their natural tendency in resorting to hoarding and black marketing of such
commodities leading to exploitation of the consumers. In order to control such illegal activities,
the Government has introduced various control and regulatory measures in the form of controls
on price, movement of goods and on storage etc.

Moreover, the Government has been procuring foodgrains through its premier organisation Food
Corporation of India (FCI) and has introduced a huge network of the public distribution system
(PDS) to participate in the trading of essential commodities for the interest of the consumer.

Moreover, in respect of international trade, the private sector is playing an important role in its
promotion through active government support. The State Trading Corporation (STC) and
Minerals and Metals Trading Corporation (MMTC) of the Government are playing a dominant
role in this regard. However, in a country like India, the private sector is dominating over the
entire trading sector of the country.

(iv) Private Sector and Infrastructure:

Private sector is also providing an active support to the infrastructural sector of the country.
Although, the major areas of the infrastructural sector lies in the hands of public sector but still
the private sector is participating in those areas which remain open for it.

Private sector has been playing dominant role in respect of road transport, water transport etc.
from the very beginning. But after the introduction of New Industrial Policy, 1991, the
Government has opened some areas like power generation, air transport etc. for the participation
of the private sector.

Accordingly, in the post-1991 period, the private sector has been actively participating in those
new areas like power generation, air transport, building highways and bridges on Build, Operate
and Transfer (BOT) basis etc.

(v) Private Sector and Services Sector:

The services sector of the country is almost totally under the control of the private sector. The
entire community and personal services, which contributed nearly 11.1 per cent of GDP in 1994-
95, is entirely managed by the private sector. The entire professional services, repairing services,
domestic services, entertainment services etc. are solely rendered by the private sector
throughout the country.

(vi) Private Sector in the Indian Economy:

Private sector is playing an important role in Indian economy. The importance of this sector in
the economy of the country can be visualised from the fact that it contributes to the major portion
of national income and employment.

As per the latest available statistics for the year 1984-85, the private sector contributed about
75.5 per cent of the net domestic product and the remaining 24.5 per cent as contributed by the
public sector. The role of private sector is quite dominant in agriculture and allied activities,
small scale industry, retail trade etc.

Again, as per 1981 census, the percentage of population working in the government sector,
including public enterprises and government administration was only 7 per cent and the
remaining 93 per cent of the working population are engaged in the private sector.

Thus, even after making a huge volume of investments in the public sector and completing more
than 45 years of planning, Indian economy is still broadly based on the private sector.

(vii) Private Sector and Small Scale and Cottage Industry:

In India, small scale and cottage industries are playing an important role in the industrial
development of the country. The entire small scale and cottage industry is owned and managed
by the private sector. As these industries are mostly labour-intensive in nature, thus they can
utilise the local employment opportunities suitably.

Considering the importance and the various problems faced by these industries, the Government
has taken various steps for the promotion and development of these industries. These measures
include both credit and non-credit measures. In India, there is vast potentiality for the expansion
of the small sector.

The Government has also announced a small-scale Industrial Policy, 1991 for the promotion and
development of the sector. The most important peculiarity of this sector is that the small scale
and cottage units of the country, producing variety of products would continue to remain within
the control and management of the private sector.

Considering the importance of the private sector, the Government has been undertaking various
supporting measures for promotion and development of this sector. But as this sector is mostly
guided by the profit motive and have little consideration about the national and social goals, thus
the Government has enacted various legislative measures for the control and regulations Of the
private sector during the last four decades.

But too much control and regulations imposed on the private sector has resulted in a lot of
hurdles on the path of their development leading to a slow rate of growth of the economy.
Realising this problem, the Government has introduced the policy of economic liberalisation for
the uninterrupted growth of the private sector through the announcement of new and liberal
industrial policy in 1991 and also introduced some other industrial policy reforms in the
subsequent years.

LIMITATION OF PRIVATE SECTOR IN INDIA

The following are some of the important weaknesses and limitations of the private sector:

(i) Too Much Emphasis on Low-Priority Industries:

The first important limitation of the private sector in India is that during the last four decades it
has invested most of its capital on the development and expansion of consumer goods industries,
having low priority elitist bias, like Television and other electronics, man-made fibres,
refrigerators, automobiles, perfumes and cosmetics, air conditioners etc.

Such an industrial trend diverted the scarce economic resources of the country into some
undesirable channels leading to undesirable waste, rise in elitist consumption pattern and
international demonstration effect. In this way, long term requirements of the economy are being
ignored deliberately and the required development of the essential sectors has been hampered.

But the entire blame of this undesirable trend cannot be solely shifted to the private sector alone.
Government by reserving most of the priority areas for the public sector has restricted the
operation of the private sector and also helped the private sector indirectly to increase the
production of non-essential goods.

(ii) Emergence of Monopoly Power and Economic Concentration:

Since introduction of development process along with economic planning in the country in 1951,
some existing industrial and business houses got the advantage to avail all those facilities
provided by the Government and gain its control over certain industries and gradually became
monopolistic in character.

By adopting unfair and restrictive trade practices, they restricted the entry of their rivals and
simultaneously eliminated their rivals smoothly. These houses have gained the control over huge
volume of wealth and economic power.

In this way, 20 big industrial houses with Tatas and Birlas at the top have emerged as the top
economic leaders of the country, which are controlling the economic lever of the country as per
their own interest.

As per the study made by the Mahalanobis Committee and the Monopolies Inquiry Commission,
it is found that planning process of the country has increased the monopoly and economic
concentration instead of reducing such trend.

(iii) Concentration of Black Money:

Growing economic concentration along with growing tendency on the part of the individual to
avoid taxes has led to a huge concentration of black money in the hands of private sector. Such
accumulation of black money and Government’s failure to arrest such tendency has resulted in a
huge drainage of real resources into undesirable channels, leading to considerable wastage,
economic scam, political tampering etc.

(iv) Industrial Disputes:

The private sector in India has been suffering from poor industrial relations. Since independence,
the country has been experiencing a good number of large scale strikes and lockouts leading to a
valuable loss of man-days as well as production.

Industrial disputes in the private sector of the country is mostly resulted from the issues like
wages and allowances, bonus, working hours, leave privileges, victimisation of workers,
retrenchment, recognition of unions etc. Moreover, the incidence of industrial disputes is much
higher in the private sector as compared to that of public sector of the country.

(v) Industrial Sickness:

Another important limitation of the private sector in India is the problem of growing industrial
sickness in different lines of industrial and business activity. In India, industrial sickness was
very much common to engineering industry, cotton and jute textiles industry.

But in recent times, the problem of sickness is gradually increasing in all different types of
industry irrespective of their scale of production. The factors which me mostly responsible for
such growing industrial sickness in the country include inefficient and corrupt management, lack
of proper marketing strategy, poor labour relations and faulty government policy.

The fundamental limitation of the private sector is that it has always been assigned with a
secondary role to play in the field of economic development of the country by the Government.
Naturally it could not find any chance to show its worth in basic, heavy and capital goods
industries and also in infrastructural sector.

With the gradual opening of the economy through economic liberalisation, the private sector has
now been assigned with a greater role to play in that priority sector during the post-1991 period,
which was earlier reserved solely for the public sector.

PROBLEMS OF PRIVATE SECTOR IN INDIA

The following are some of the problems with which the private sector of the country
usually suffers:

(i) Regulatory Procedure and Related Delays:

Too many regulatory measures imposed by the Government on the private sector has resulted in
lengthy procedure and delays in getting final clearance of a new industrial project. On the
Government level, decision making system is so poor that it normally takes 7 to 8 years for large
investment project to complete its gestation period.

Delegation of decision making in the Government bureaucracy is so poor that even the simple
decisions are rolled back to the top level leading avoidable procedural delays, huge cost
escalation, increasing interest burden and higher burden Oil Consumers.

(ii) Unnecessary Control:

From the beginning, the private sector of the country is subjected to unnecessary Government
control. Price controls imposed by the Government on certain goods have resulted in disincentive
to increase production.

Rather competition among the rival producers can enlarge the production base and thereby can
reduce the prices automatically. But in India, under the conditions of shortage, price controls,
dual pricing etc. has resulted in black marketing and hoarding of such commodities.

Moreover, the system of licensing of capacity as a capacity restraint has also resulted in
undesirable effects on the investors instead of preventing monopolistic tendencies. It is only
since 1980, that unnecessary controls on the utilisation of excess capacity and on the creation of
new capacities have been either abolished or liberalised.

(iii) Inadequate Diversification:

The private sector has been suffering from inadequate diversification as the Government did not
allow them to participate in those basic, heavy and infrastructural sectors which were earlier
reserved for the public sector. It is only in post-1991 period, some of these areas are now opened
for the private sector participation.

(iv) Reservation for the Small Sector:

From the initial stage of development, the Government is providing necessary support to the
small industrial sector in the form of reservation of certain products exclusively for the small
sector so as to save it from unfair competition of large units and also by providing excise
exemption or lower excise duties on the goods produced by the small sector.

But for the proper development of the small sector, modernization of their production
techniques, proper product-mix, updating of designs must be given adequate priority.

(v) Lack of Finance and Credit:

Although the large scale industrial corporate units of the private sector are mobilising their fund
from banks, development financial institutions and from the market through sale of their equities
or debentures but the small scale units are facing acute problem in raising fund for their
expansion.

(vi) Low Ratio of Profit:

Another important problem of the private sector enterprises is the declining trend in its net profit
ratio. Accordingly, the net profit to turnover ratio of these total Indian private sector enterprises
declined from 6.1 per cent in 1994-95 to 3.2 per cent in 1996-97 and then to 2.3 per cent in 1997-
98.

Moreover, the net profit to net worth (NP/NW). reflecting on return on investment, of the total
private sector enterprises also declined considerably from 15.2 per cent in 1994-95 to 6.5 per
cent in 1996-97 and then to 4.7 per cent in 1997-98 as compared to that of 5.4 per cent of the
Central Public Sector Enterprises (CPSEs).

DIFFERENCE BETWEEN PUBLIC AND PRIVATE SECTOR

BASIS FOR
PUBLIC SECTOR PRIVATE SECTOR
COMPARISON

Meaning The section of a nation's The section of a nation's

economy, which is under economy, which owned and
the control of government, controlled by private
whether it is central, state or individuals or companies is
local, is known as the Public known as Private Sector.
Sector.

Basic objective To serve the citizens of the Earning Profit

country.

Raises money Public Revenue like tax, Issuing shares and

from duty, penalty etc. debentures or by taking loan

Areas Police, Army, Mining, Finance, Information

Health, Manufacturing, Technology, Mining,
Electricity, Education, Transport, Education,
Transport, Telecommunication,
Telecommunication, Manufacturing, Banking,
Agriculture, Banking, Construction,
Insurance, etc. Pharmaceuticals etc.

Benefits of Job security, Retirement Good salary package,

benefits, Allowances, Competitive environment,
 BASIS FOR
PUBLIC SECTOR PRIVATE SECTOR
COMPARISON

working Perquisites etc. Incentives etc.

Basis of Seniority Merit

Promotion

Job Stability Yes No

Conclusion

Nowadays, Private Sector is progressing faster because promotes quality, not quantity; it
encourages talent. Public Sector is full of reservations like reservations for minority section,
females, a person with a disability and much more, here nobody sees talent, it is completely
ignored and because of this, competent youths remain unemployed.

Public sector enterprises give so many facilities to their employees, which makes them satisfied
that their job is secured, due to which, all the people are running after it like it is a marathon.
However in the Private Sector, your job is never secured, even if you give years to it, you can be
fired anytime just because of a single mistake.

Again in the private sector, where performance is king, the workload is much, but it keeps you
active, this is missing in the public sector due to which the work sometimes becomes
monotonous which creates boredom. One thing is really good in Private Sector i.e. it is
corruption free. In Public Sector, you have to pay lots of money to the government officers even
for a simple work, for no reason. It is an unending debate, both are good at their places, if the
drawbacks are removed, they will surely prove good for the economy.

POPULATION POLICY OF INDIA

‘Population policy’ in its narrower sense, according to the UNEP is “an effort to affect the size,
structure and distribution or characteristics of population”. In its broader range, it includes
“efforts to regulate economic and social conditions which are likely to have demographic
consequences”.

Nortman describes the narrower meaning as ‘explicit policy’ which affects directly the
population characteristics, and the broader meaning as ‘implicit policy’ which affects the
characteristics indirectly, sometimes without any explicit intention.

Two types of population policies have been suggested:

(a) The antenatal policy which aims at discouraging the growth of population, and

(b) The distributional policy which deals with distributional imbalances of population. The
National Academy of Sciences has discerned population policy as one (a) which influences the
demographic processes according to a pre-set objective (for example, encouraging people to
move from urban to suburban areas), and (b) which will cope with the demands created by the
demographic processes (for example, providing basic facilities to people in suburban areas).

The population policy of a developing country like India has to aim at:

(i) Decreasing birth rate,

(ii) Limiting the number of children in family to two,

(iii) Decreasing mortality,

(iv) Creating awareness among the masses regarding the consequences of galloping population,

(v) Procuring necessary contraceptives,

(vi) Enacting laws like legalizing abortion, and

(vii) Giving incentives as well as disincentives.

On the other hand, it also has to aim at:

(a) Checking concentration of people in congested areas,

(b) Providing necessary public services for effective settlement in new areas, and

(c) Relocation of offices to less populated areas.

Once the need for population control is realised, policy has to be framed by appointing various
committees and commissions for studying and advising and consulting experts. It has then to be
implemented through various programmes and also evaluated from time to time.

India’s population policy is the direct result of:

(a) The total size of the population,

(b) A high growth rate, and

(c) The problem of uneven distribution in rural and urban areas.

Since our policy needs to aim at ‘enhancing the quality of life’, and ‘increasing individual
happiness’, it has to act as a means to attaining a broader objective of achieving individual
fulfillment and social progress. Initially, the policy framed in 1952 was adhoc in nature, flexible,
and based on a trial and error approach. Gradually, it was replaced by more scientific planning.

NATIONAL POPULATION POLICY 2000

Government of India launched the National Population Policy in 2000 to improve quality of lives
of people of India and to provide them with equal opportunities to be productive individual of
society. India launched its first programme to emphasize the need for family planning in 1952
and became the first country in the world to do so. The government realised that the latter is
basically a function of making reproductive health care accessible and affordable for all,
providing primary and secondary education, etc. All this also essential for creating sustainable
development model.

Objectives of National Population Policy (NPP) 2000:

There are three types of objectives of National Population Policy (NPP), 2000:

1. The Immediate Objective:

The immediate objective is to address the unmet needs for contraception, health care
infrastructure and health personnel and to provide integrated service delivery for basic
reproductive and child health care.

2. The Medium Term Objective:

The medium term objective is to bring the Total Fertility Rate (TFR) to replacement level by
2010 through vigorous implementation in inter-sectorial operational strategies.

3. The Long Term Objective:

The long term objective is to achieve a stable population by 2045 at a level consistent with the
requirements of sustainable economic growth, social development, and environment protection.

Targets of National Population Policy:

The following are the targets of National Population Policy:

1. Achieve zero growth rate of population by 2045.

2. Reduce infant mortality rate of below 30 per thousand live births.

3. Reduce maternal mortality ratio of below 100 per 1, 00,000 live births.

4. Reduce birth rate to 21 per 1000 by 2010.

5. Reduce total fertility rate (TFR) to 2.1 by 2010.

Organisational Structure by National Population Policy (NPP) 2000:

To implement and achieve the various objectives, targets and socio- demographic goals, the
following organisational structure has been proposed by the National Population Policy:

1. The appointment of a National Commission on Population to be presided over by the Prime

Minister. The chief ministers of all States and related ministers will be its members.

2. There will be a State Commission on Population in every State headed by its chief minister.

3. The new policy will be implemented by the panchayats and municipalities at the grassroot
levels.

Motivational and Promotional Measures by National Population Policy:

The motivational and promotional measures for adoption of small family norms are:

1. Strict enforcement of Child Marriage Act, 1976.

2. Facilities for safe abortion to be expanded and strengthened.

3. Strict enforcement of the Pre-Natal Diagnostic Techniques Act, 1994.

4. Increased vocational training schemes for girls leading to self-employment to be encouraged.

5. Panchayats and ZilaParishads to be rewarded and honoured for exemplary performance in

universalising the small family norm, achieving reductions in infant mortality and birth rates and
promoting literacy with completion of primary schooling.

6. A revolving fund to be set up for income-generating activities by village level self-help groups
who provide community level health care services.

7. The BalikaSamridhiYojna run by the Department of Women and Child Development to

promote survival and care of the girl child to be continued. A cash incentive of Rs. 500 is
awarded at the birth of the girl child upto two children.

8. A Family Welfare-Linked Health Insurance Plan to be established. Couples below the poverty
line who undergo sterilisation with not more than two living children would become eligible
(along with children) for health insurance (for hospitalisation) not exceedingRs. 5,000 and a
personal accident insurance cover for the spouse undergoing sterilisation.

9. Maternity Benefits Scheme run by the Department of Rural Development to continue. A cash
incentive of Rs. 500 is awarded to mothers who have their first child after 19 years of age, for
birth of the first or second child only. Disbursement of cash award will in future be linked to
compliance with antenatal checkup, institutional delivery by trained birth attendant, registration
of birth and BCG immunisation.

10. Couples below the poverty line who marry after the legal age of marriage, register the
marriage, have their first child after the mother reaches the age of 21, accept the small family
norm and adopt a terminal method after the birth of the second child to be rewarded.

11. A wider affordable choice of contraceptives to be made accessible at diverse delivery points
with counselling services to enable acceptors to exercise voluntary and informed consent.

12. Products and services to be made affordable through innovative social marketing schemes.

13. Creches and child care centres to be set up for income generating activities by village level
self-help groups who provide community level health care services.
14. Local entrepreneurs at village levels to be provided soft loans and to be encouraged to run
ambulance to supplement the existing arrangements for referred transportation.

15. The 42nd Constitutional Amendment has frozen the number of representatives in the
LokSabha (on the basis of population) at 1971 Census levels. The freeze is currently valid until
2001, and has served as an incentive for State Governments to fearlessly pursue the agenda for
population stabilisation. This freeze needs to be extended until 2026.

Implementation of NPP, 2000: National Commission on Population:

In pursuance of NPP, 2000, the Central Government has set up a National Commission on
Population (NCP) on 11 May 2000. It is presided over by the Prime Minister, with the Chief
Ministers of all States and UTs and the Central Minister, in-charge of concerned Central
Ministries and Departments, reputed demographers, public health professionals and non-
government organisations as members. State Level Commissions on Population presided over by
the Chief Minister have been set up with the objective of ensuring implementation of the NPP.

The functions of the Commission are:

(i) to review, monitor and give direction for the implementation of the NPP with a view to
achieve the goals set by it;

(ii) to promote synergy between health, educational, environmental and developmental

programmes so as to hasten population stabilisation;

(iii) to promote inter-sectoral coordination in planning and implementation of the programmes

through different agencies at the Centre and in the States; and

(iv) to develop a vigorous people’s programme to support this national effort.

The first meeting of NCP was held on 22 July, 2000, where the Prime Minister announced
two major steps:

1. The formation of an Empowered Action Group within the Ministry of Health and Family
Welfare to focus on those States which are deficient in national socio-demographic indices.
2. Establishment of National Population Stabilisation Fund (NPSF) with a seed money of Rs. 100
crore to provide a window for channelising funds from national voluntary sources. The Prime
Minister appealed to the corporate sector, industry, trade organisations and individuals to
generously contribute to this fund and thus help in the national effort to stabilise population.

A Strategic Support Group consisting of secretaries of concerned sectoral ministries has been
constituted as a Standing Advisory Group to the Commission. Nine working groups have been
constituted to look into specific aspects of implementation of the programmes aimed at achieving
the targets set in NPP NCP has allocated funds for action plans drawn up by district magistrates
in poorly performing districts to implement programmes to accelerate the decline in fertility.

Measures to Control Population of India

Population of India is quite large and rapidly increasing. One percent growth rate means an
addition of 1 crore people every year but actually speaking 2 crore persons are being adding
every year.

So effective population control measures is the need of the hour. We know that birth rate is
mainly responsible for rapid population growth.

Hence measures which can reduce the birth rate should be adopted. These measures can be
classified into 3 heads.

A. Social Measure:

Population explosion is a social problem and it is deeply rooted in the society. So efforts must be
done to remove the social evils in the country.

1. Minimum age of Marriage:

As fertility depends on the age of marriage. So the minimum age of marriage should be raised. In
India minimum age for marriage is 21 years for men and 18 years for women has be fixed by
law. This law should be firmly implemented and people should also be made aware of this
through publicity.

2. Raising the Status of Women:

There is still discrimination to the women. They are confined to four walls of house. They are
still confined to rearing and bearing of children. So women should be given opportunities to
develop socially and economically. Free education should be given to them.

3. Spread of Education:

The spread of education changes the outlook of people. The educated men prefer to delay
marriage and adopt small family norms. Educated women are health conscious and avoid
frequent pregnancies and thus help in lowering birth rate.

4. Adoption:

Some parents do not have any child, despite costly medical treatment. It is advisable that they
should adopt orphan children. It will be beneficial to orphan children and children couples.

5. Change in Social Outlook:

Social outlook of the people should undergo a change. Marriage should no longer be considered
a social binding. Issueless women should not be looked down upon.

6. Social Security:

More and more people should be covered under-social security schemes. So that they do not
depend upon others in the event of old age, sickness, unemployment etc. with these facilities they
will have no desire for more children.

B. Economic Measures:

The following are the economic measures:

1. More employment opportunities:

The first and foremost measure is to raise, the employment avenues in rural as well as urban
areas. Generally in rural areas there is disguised unemployment. So efforts should be made to
migrate unemployed persons from rural side to urban side. This step can check the population
growth.

2. Development of Agriculture and Industry:

If agriculture and industry are properly developed, large number of people will get employment.
When their income is increased they would improve their standard of living and adopt small
family norms.

3. Standard of Living:

Improved standard of living acts as a deterrent to large family norm. In order to maintain their
higher standard of living people prefer to have a small family. According to A.K. Das Gupta
those who earn less than Rs. 100 per month have on the average a reproduction rate of 3.4
children and those who earn more than Rs. 300 per month have a reproduction rate of 2.8
children.

4. Urbanisation:

It is on record that people in urban areas have low birth rate than those living in rural areas.
Urbanisation should therefore be encouraged.

C. Other Measures:

The following are the other measures:

1. Late Marriage:

As far as possible, marriage should be solemnized at the age of 30 years. This will reduce the
period of reproduction among the females bringing down the birth rate. The govt. has fixed the
minimum marriage age at 21 yrs. for males and 18 yrs. for females.

2. Self Control:

According to some experts, self control is one of the powerful methods to control the population.
It is an ideal and healthy approach and people should be provided to follow. It helps in reducing
birth rate.

3. Family Planning:

This method implies family by choice and not by chance. By applying preventive measures,
people can regulate birth rate. This method is being used extensively; success of this method
depends on the availability of cheap contraceptive devices for birth control. According to
Chander Shekher, “Hurry for the first child, Delay the second child and avoid the third.”

4. Recreational Facilities:

Birth rate will likely to fall if there are different recreational facilities like cinema; theatre, sports
and dance etc. are available to the people.

5. Publicity:

The communication media like T.V., radio and newspaper are the good means to propagate the
benefits of the planned family to the uneducated and illiterate persons especially in the rural and
backward areas of country.

6. Incentives:

The govt. can give various types of incentives to the people to adopt birth control measures.
Monetary incentives and other facilities like leave and promotion can be extended to the working
class which adopts small family norms.

7. Employment to Woman:

Another method to check the population is to provide employment to women. Women should be
given incentive to give services in different fields. Women are taking active part in competitive
examinations. As a result their number in teaching, medical and banking etc. is increasing
rapidly. In brief by taking, all there measures we can control the growth of population.

MONETORY POLICY

Monetary Policy of India is formulated and executed by Reserve Bank of India to achieve
specific objectives. It refers to that policy by which central bank of the country controls(i) the
supply of money, and (ii) cost of money or the rate of interest, with a view to achieve particular
objectives.

In the words of D.C. Rowan, “The monetary policy is defined as discretionary act undertaken by
the authorities designed to influence (a) the supply of money, (b) cost of money or rate of
interest, and (c) the availability of money for achieving specific objective.”
Thus, monetary policy of India refers to that policy which is concerned with the measures taken
to regulate the volume of credit created by the banks. The main objectives of monetary policy are
to achieve price stability, financial stability and adequate availability of credit for growth.

Following are the main elements of the monetary policy of India:

i. It regulates the stocks and the growth rate of money supply.

ii. It regulates the entire banking system of the economy.

iii. It determines the allocation of loans among different sectors.

iv. It provides incentives to promote savings and to raise the savings-income ratio.

v. It ensures adequate availability of credit for growth and tries to achieve price stability.

Objectives of Monetary Policy:

According to RBI Governor Dr. D. Subba Rao, “The objectives of monetary policy in India are
price stability and growth. These are pursued through ensuring credit availability with stability in
the external value of rupee and overall financial stability.”

Following are the main objectives of monetary policy:

i. To Regulate Money Supply in the Economy:

Money supply includes both money in circulation and credit creation by banks. Monetary policy
is farmed to regulate the money supply in the economy by credit expansion or credit contraction.
By credit expansion (giving more loans), the money supply can be expanded. By credit
contraction (giving less loans) money supply can be decreased.

The main aim of the monetary policy of the Reserve Bank was to control the money supply in
such a manner as to expand it to meet the needs of economic growth and at the same time
contract it to curb inflation. In other words monetary policy aimed at expanding and contracting
money supply according to the needs of the economy.

ii. To Attain Price Stability:

Another major objective of monetary policy in India is to maintain price stability in the country.
It implies Control over inflation. Price level, is affected by money supply. Monetary policy
regulates money supply to maintain price stability.

iii. To promote Economic Growth:

An important objective of monetary policy is to make available necessary supply of money and
credit for the economic growth of the country. Those sectors which are quite significant for the
economic growth are provided with adequate availability of credit.

iv. To Promote saving and Investment:

By regulating the rate of interest and checking inflation, monetary policy promotes saving and
investment. Higher rates of interest promote saving and investment.

v. To Control Business Cycles:

Boom and depression are the main phases of business cycle. Monetary policy puts a check on
boom and depression. In period of boom, credit is contracted, so as to reduce money supply and
thus check inflation. In period of depression, credit is expanded, so as to increase money supply
and thus promote aggregate demand in the economy.

vi. To Promote Exports and Substitute Imports:

By providing concessional loans to export oriented and import substitution units, monetary
policy encourages such industries and thus help to improve the position of balance of payments.

vii. To Manage Aggregate Demand:

Monetary authority tries to keep the aggregate demand in balance with aggregate supply of
goods and services. If aggregate demand is to be increased than credit is expanded and the
interest rate is lowered down. Because of low interest rate, more people take loan to buy goods
and services and hence aggregate demand increases and vice-verse.

viii. To Ensure more Credit for Priority Sector:

Monetary policy aims at providing more funds to priority sector by lowering interest rates for
these sectors. Priority sector includes agriculture, small- scale industry, weaker sections of
society, etc.

ix. To Promote Employment:

By providing concessional loans to productive sectors, small and medium entrepreneurs, special
loan schemes for unemployed youth, monetary policy promotes employment.

x. To Develop Infrastructure:

Monetary policy aims at developing infrastructure. It provides concessional funds for developing
infrastructure.

xi. To Regulate and Expand Banking:

RBI regulates the banking system of the economy. RBI has expanded banking to all parts of the
country. Through monetary policy, RBI issues directives to different banks for setting up rural
branches for promoting agricultural credit. Besides it, government has also set up cooperative
banks and regional rural banks. All this has expanded banking in all parts of the country.

Instruments of Monetary Policy:

The instruments of monetary policy are of two types: first, quantitative, general or indirect; and
second, qualitative, selective or direct. They affect the level of aggregate demand through the
supply of money, cost of money and availability of credit. Of the two types of instruments, the
first category includes bank rate variations, open market operations and changing reserve
requirements. They are meant to regulate the overall level of credit in the economy through
commercial banks. The selective credit controls aim at controlling specific types of credit. They
include changing margin requirements and regulation of consumer credit. We discuss them as
under:

Bank Rate Policy:

The bank rate is the minimum lending rate of the central bank at which it rediscounts first class
bills of exchange and government securities held by the commercial banks. When the central
bank finds that inflationary pressures have started emerging within the economy, it raises the
bank rate. Borrowing from the central bank becomes costly and commercial banks borrow less
from it.

The commercial banks, in turn, raise their lending rates to the business community and
borrowers borrow less from the commercial banks. There is contraction of credit and prices are
checked from rising further. On the contrary, when prices are depressed, the central bank lowers
the bank rate.

It is cheap to borrow from the central bank on the part of commercial banks. The latter also
lower their lending rates. Businessmen are encouraged to borrow more. Investment is
encouraged. Output, employment, income and demand start rising and the downward movement
of prices is checked.

Open Market Operations:

Open market operations refer to sale and purchase of securities in the money market by the
central bank. When prices are rising and there is need to control them, the central bank sells
securities. The reserves of commercial banks are reduced and they are not in a position to lend
more to the business community.

Further investment is discouraged and the rise in prices is checked. Contrariwise, when
recessionary forces start in the economy, the central bank buys securities. The reserves of
commercial banks are raised. They lend more. Investment, output, employment, income and
demand rise and fall in price is checked.

Changes in Reserve Ratios:

This weapon was suggested by Keynes in his Treatise on Money and the USA was the first to
adopt it as a monetary device. Every bank is required by law to keep a certain percentage of its
total deposits in the form of a reserve fund in its vaults and also a certain percentage with the
central bank.

When prices are rising, the central bank raises the reserve ratio. Banks are required to keep more
with the central bank. Their reserves are reduced and they lend less. The volume of investment,
output and employment are adversely affected. In the opposite case, when the reserve ratio is
lowered, the reserves of commercial banks are raised. They lend more and the economic activity
is favourably affected.

Selective Credit Controls:

Selective credit controls are used to influence specific types of credit for particular purposes.
They usually take the form of changing margin requirements to control speculative activities
within the economy. When there is brisk speculative activity in the economy or in particular
sectors in certain commodities and prices start rising, the central bank raises the margin
requirement on them.

The result is that the borrowers are given less money in loans against specified securities. For
instance, raising the margin requirement to 60% means that the pledger of securities of the value
of Rs 10,000 will be given 40% of their value, i.e. Rs 4,000 as loan. In case of recession in a
particular sector, the central bank encourages borrowing by lowering margin requirements.

Conclusion:

For an effective anti-cyclical monetary policy, bank rate, open market operations, reserve ratio
and selective control measures are required to be adopted simultaneously. But it has been
accepted by all monetary theorists that (i) the success of monetary policy is nil in a depression
when business confidence is at its lowest ebb; and (ii) it is successful against inflation. The
monetarists contend that as against fiscal policy, monetary policy possesses greater flexibility
and it can be implemented rapidly.

Limited Scope of Monetary Policy in Developing Countries:

Monetary policy influences economic activity in two ways:

1. Directly through Money Supply:

Money supply is directly related to the level of economic activity. An increase in money supply
increases economic activity by enabling people to purchase more goods and services, and vice
versa.
2. Indirectly through Rate of Interest:

A change in money supply influences economic activity through its impact on rate of interest and
investment. Increase in money supply reduces the rate of interest, which in turn, increases
investment, and hence promotes economic activity, and vice versa.

The monetary policy in an economy works through two main economic variables, i.e., money
supply and the rate of interest. The efficient working of the monetary policy, however, requires
the fulfillment of three basic conditions- (a) The country must have highly organised,
economically independent and efficiently functioning money and capital markets which enable
the monetary authority to make changes in money supply and the rate of interest as and when
needed, (b) Interest rates can be regulated both by administrative controls and by market forces
so that consistency and uniformity exists in interest rates of different sectors of the economy, (c)
There exists a direct link between interest rates, investment and output so that a reduction in the
interest rate (for example) leads to an increase in investment and an expansion in output without
any restriction.

The developed countries largely satisfy all the necessary prerequisites for the efficient
functioning of the monetary policy, whereas the developing or underdeveloped economies
normally lack these requirements.

The monetary policy has the limited scope in the underdeveloped countries because of the
following reasons:

(i) There exists a large non-monetised sector in most of the underdeveloped countries which act
as a great hurdle in the successful working of the monetary policy.

(ii) Small-sized and unorganised money market and limited array of financial assets in
underdeveloped countries also hinder the effectiveness of monetary policy.

(iii) In most of the underdeveloped countries, total money supply mainly consists of currency in
circulation and bank money forms a very small portion of it. This limits the operation of central
bank’s monetary policy which basically works through its impact on bank money.
(iv) The growth of nonbank financial institutions also restricts the effective implementation of
monetary policy because these institutions fall outside the direct control of the central bank.

(v) In the underdeveloped countries (e.g., in Libya), many commercial banks possess high level
of liquidity (i.e, funds in cash form). In these cases, the changes in monetary policy cannot
significantly influence the credit policies of such banks.

(vi) Foreign-based commercial banks can easily neutralise the restrictive effects of tight
monetary policy because these banks can replenish their resources by selling foreign assets and
can also receive help from international capital market.

(vii) The scope of monetary policy is also limited by the structural and institutional realities of
the underdeveloped countries, weak linkage between interest rate, investment and output,
particularly due to structural supply rigidities.

Role of Monetary Policy in Developing Countries:

The monetary policy in a developing economy will have to be quite different from that of a
developed economy mainly due to different economic conditions and requirements of the two
types of economies. A developed country may adopt full employment or price stabilisation or
exchange stability as a goal of the monetary policy.

But in a developing or underdeveloped country, economic growth is the primary and basic
necessity. Thus, in a developing economy the monetary policy should aim at promoting
economic growth. The monetary authority of a developing economy can play a vital role by
adopting such a monetary policy which creates conditions necessary for rapid economic growth.

Monetary policy can serve the following developmental requirements of developing

economies:

1. Developmental Role:

In a developing economy, the monetary policy can play a significant role in accelerating
economic development by influencing the supply and uses of credit, controlling inflation, and
maintaining balance of payment.
Once development gains momentum, effective monetary policy can help in meeting the
requirements of expanding trade and population by providing elastic supply of credit.

2. Creation and Expansion of Financial Institutions:

The primary aim of the monetary policy in a developing economy must be to improve its
currency and credit system. More banks and financial institutions should be set up, particularly in
those areas which lack these facilities.

The extension of commercial banks and setting up of other financial institutions like saving
banks, cooperative saving societies, mutual societies, etc. will help in increasing credit facilities,
mobilising voluntary savings of the people, and channelising them into productive uses.

It is also the responsibility of the monetary authority to ensure that the funds of the institutions
are diverted into priority sectors or industries as per requirements of be development plan of the
country.

3. Effective Central Banking:

To meet the developmental needs the central bank of an underdeveloped country must function
effectively to control and regulate the volume of credit through various monetary instruments,
like bank rate, open market operations, cash-reserve ratio etc. Greater and more effective credit
controls will influence the allocation of resources by diverting savings from speculative and
unproductive activities to productive uses.

4. Integration of Organised and Unorganised Money Market:

Most underdeveloped countries are characterized by dual monetary system in which a small but
highly organised money market on the one hand and large but unorganised money market on the
other hand operate simultaneously.

The unorganised money market remains outside the control of the central bank. By adopting
effective measures, the monetary authority should integrate the unorganised and organised
sectors of the money market.

5. Developing Banking Habits:

The monetary authority of a less developed country should take appropriate measures to increase
the proportion of bank money in the total money supply of the country. This requires increase in
the bank deposits by developing the banking habits of the people and popularising the use of
credit instruments (e.g, cheques, drafts, etc.).

6. Monetisation of Economy:

An underdeveloped country is also marked by the existence of large non-monetised sector. In

this sector, all transactions are made through barter system and changes in money supply and the
rate of interest do not influence the economic activity at all. The monetary authority should take
measures to monetise this non-monetised sector and bring it under its control.

7. Integrated Interest Rate Structure:

In an underdeveloped economy, there is absence of an integrated interest rate structure. There is

wide disparity of interest rates prevailing in the different sectors of the economy and these rates
do not respond to the changes in the bank rate, thus making the monetary policy ineffective.

The monetary authority should take effective steps to integrate the interest rate structure of the
economy. Moreover, a suitable interest rate structure should be developed which not only
encourages savings and investment in the country but also discourages speculative and
unproductive loans.

8. Debt Management:

Debt management is another function of monetary policy in a developing country. Debt

management aims at- (a) deciding proper timing and issuing of government bonds, (b) stabilising
their prices, and (c) minimising the cost of servicing public debt.

The monetary authority should conduct the debt management in such a manner that conditions
are created “in which public borrowing can increase from year to year and on a big scale without
giving any jolt to the system. And this must be on cheap rates to keep the burden of the debt
low.”

However, the success of debt management requires the existence of a well- developed money
and capital market along with a variety of short- term and long-term securities.
9. Maintaining Equilibrium in Balance of Payments:

The monetary policy in a developing economy should also solve the problem of adverse balance
of payments. Such a problem generally arises in the initial stages of economic development
when the import of machinery, raw material, etc., increase considerably, but the export may not
increase to the same extent.

The monetary authority should adopt direct foreign exchange controls and other measures to
correct the adverse balance of payments.

10. Controlling Inflationary Pressures:

Developing economies are highly sensitive to inflationary pressures. Large expenditures on

developmental schemes increase aggregate demand. But, output of consumer’s goods does not
increase in the same proportion. This leads to inflationary rise in prices.

Thus, the monetary policy in a developing economy should serve to control inflationary
tendencies by increasing savings by the people, checking expansion of credit by the banking
system, and discouraging deficit financing by the government.

11. Long-Term Loans for Industrial Development:

Monetary policy can promote industrial development in the underdeveloped countries by

promoting facilities of medium-term and long-term loans to tire manufacturing units. The
monetary authority should induce these banks to grant long-term loans to the industrial units by
providing rediscounting facilities. Other development financial institutions also provide long-
term productive loans.

12. Reforming Rural Credit System:

Rural credit system is defective and rural credit facilities are deficient in the under-developed
countries. Small cultivators are poor, have no finance of their own, and are largely dependent on
loans from village money lenders and traders who generally exploit the helplessness, ignorance
and necessity of these poor borrowers.
The monetary authority can play an important role in providing both short-term and long term
credit to the small arrangements, such as the establishment of cooperative credit societies,
agricultural banks etc.

Conclusion:

It is true that monetary policy in a developing economy can play a positive role in facilitating the
process of economic development by influencing the supply and use of credit through well-
developed credit institutions, checking inflation, maintaining balance of payments equilibrium,
providing loan facilities to industrial and agricultural sectors, and so on.

But it must be clearly borne in mind that the role of monetary policy in economic development is
secondary and indirect, and not primary and direct. The fundamental problem of underdeveloped
countries is that of inadequate saving which cannot be solved merely by creating financial
institutions. The growth of saving basically depends upon the increase in productive capacity and
income of the country.

Financial institutions only provide facilities to encourage savings and smoothen the process of
economic development; they are not the primary movers of economic development. A.S. Meier
and Baldwin put it, “The currency and credit system must be responsive to the stimuli of
development, but monetary and financial institutions in themselves cannot be expected to be the
primary and active movers of development in a direct sense.”

RESERVE BANK OF INDIA

Central Banking in India

Key Facts:

 In the monetary system of all countries, the central bank occupies a most important place.

 The Central Bank is an apex institution of the monetary system which regulates the
functioning of the commercial banks of a country.

 The Central Bank of India is ‘Reserve Bank of India’.

  A Central Bank is primarily meant to promote the financial and economic stability of the
country.

 The Central Bank of a country promotes economic growth and stability and controls
inflation

Functions of the Central Banks/RBI

Issue of Currency Notes

 Under section 22 of RBI Act, the bank has the sole right to issue currency notes of all
denominations except one-rupee coins and notes.

 The one-rupee notes and coins and small coins are issued by Central Government, and
their distribution is undertaken by RBI as the agent of the government.

 The RBI has a separate issue department which is entrusted with the issue of currency
notes.

Banker to The Government

 The RBI acts as a banker agent and adviser to the government. It has an obligation to
transact the banking business of Central Government as well as State Governments.
  Example, RBI receives and makes all payments on behalf of the government, remits its
funds, buys and sells foreign currencies for it and gives it advice on all banking matters.

 RBI helps the Government – both Central and state – to float new loans and manage
public debt.

 On behalf of the central government, it sells treasury bills and thereby provides short-
term finance.

Banker’s bank And Lender of Last Resort

 RBI acts as a banker to other banks. It provides financial assistance to scheduled banks
and state co-operative banks in the form of rediscounting of eligible bills and loans and
advances against approved securities.

 RBI acts as a lender of last resort. It provides funds to the bank when they fail to get it
from any other source.

 It also acts as a clearing house. Through RBI, banks make inter-banks payments.

Controller of Credit

 RBI has the power to control the volume of credit created by banks. The RBI through its
various quantitative and qualitative measures regulates the money supply and bank credit
in an economy.

 RBI pumps in money during recessions and slowdowns and withdraws money supply
during an inflationary period.

Manages Exchange Rate and Is Custodian of the Foreign Exchange Reserve

 RBI has the responsibility of removing fluctuations from the exchange rate market and
maintaining a competitive and stable exchange rate.

 RBI functions as custodian of nations foreign exchange reserves.

 It has to maintain a fair external value of Rupee.

  RBI achieves its objective through appropriate monetary and exchange rate policies.

Collection and Publication of Data

 The RBI collects and compiles statistical/data information on banking and financial
operations, prices, FDIs, FPIs, BOP, Exchange Rate and industries etc., of the economy.

 The Reserve Bank of India publishes a monthly Bulletin/publication for the same.

 It not only provides information but also highlights important studies and investigations
conducted by RBI.

Regulator and Supervisor of Commercial Banks

 The RBI has wide powers to supervise and regulate the commercial and co-operative
banks in India.

 RBI issues licenses regulate branch expansion, manages liquidity and Assets,
management and methods of working of commercial banks and amalgamation,
reconstruction and liquidation of the banks.

Clearing House Functions

 The RBI acts as a clearing house for all member banks. This avoids unnecessary transfer
of funds between the various banks.

Measures of Credit Control in India

The management of the money supply and credit control is an important function of the Reserve
Bank of India. The money supply has an important bearing on the functioning of the economy.

Regulatory and Promotional Roles of Reserve Bank of India:

The Reserve Bank of India (RBI) has been playing an important role in the economy of the
country both in its regulatory and promotional aspects. Since the inception of planning in 1951,
the developmental activities are gaining momentum in the country. Accordingly, more and more
responsibilities have been entrusted with the RBI both in the regulatory and promotional area.
Now-a-days, the RBI has been performing a wide range of regulatory and promotional functions
in the country.

The following are some of the regulatory and promotional functions performed by the RBI:

1. Regulating the Volume of Currency:

The RBI is performing the regulatory role in issuing and controlling the entire volume of
currency in the country through its Issue Department. While regulating the volume of currency
the RBI is giving priority on the demand for currency and the stability of the economy equally.

2. Regulating Credit:

The RBI is also performing the role to control the credit money created by the commercial banks
through its qualitative and quantitative methods of credit control and thereby maintains a balance
in the money supply of the country.

3. Control over Commercial Banks:

Another regulatory role performed by the RBI is to have control over the functioning of the
commercial banks. It also enforces certain prudential norms and rational banking principles to be
followed by the commercial banks.

4. Determining the Monetary and Credit Policy:

The RBI has been formulating the monetary and credit policy of the country every year and
thereby it controls the Statutory Liquidity Ratio (SLR), Cash Reserve Ratio (CRR), bank rate,
interest rate, credit to priority sectors etc.

5. Mobilizing Savings:

The RBI is playing a vital promotional role to mobilize savings through its member commercial
banks and other financial institutions. RBI is also guiding the commercial banks to extend their
banking network in the unbanked rural and semi-urban areas and also to develop banking habits
among the people. All these have led to the attainment of greater degree of monetization of the
economy and has been able to reduce the activities of indigenous bankers and private money-
lenders.
6. Institutional Credit to Agriculture:

The RBI has been trying to increase the flow of institutional credit to agriculture from the very
beginning. Keeping this objective in mind, the RBI set up ARDC in 1963 for meeting the long
term credit requirement of rural areas. Later on in July 1982, the RBI set up NABARD and
merged ARDC with it to look after its agricultural credit functions.

7. Specialized Financial Institutions:

The RBI has also been playing an important promotional role for setting specialized financial
institutions for meeting the long term credit needs of large and small scale industries and other
sectors. Accordingly, the RBI has promoted the development of various financial institutions
like, WCI, 1DBI, ICICI, SIDBI, SFCs, Exim Bank etc. which are making a significant
contribution to industry and trade of the country.

8. Security to Depositors:

In order to remove the major hindrance to the deposit mobilization arising out of frequent bank
failures, the RBI took major initiative to set up the Deposit Insurance Corporation of India in
1962. The most important objective of this corporation is to provide security to the depositors
against such failures.

9. Advisory Functions:

The RBI is also providing advisory functions to both the Central and State Governments on both
financial matters and also on general economic problems.

10. Policy Support:

The RBI is also providing active policy support to the government through its investigation
research on serious economic problems and issues of the country and thereby helps the
Government to formulate its economic policies in a most rational manner. Thus, it is observed
that the RBI has been playing a dynamic role in the economic development process of the
country through its regulatory and promotional framework.

CONCENTRATION OF ECONOMIC POWER

In a study on monopoly and restrictive trade practices, the central problem is the concentration of
economic power since monopoly and restrictive trade practices may be appropriately considered
to be functions of such concentration. Confining to industries, two main kinds of concentration
of economic power may be said to prevail in industries. The first is, where production and
distribution of any particular commodity or service is controlled by a single family or a few
families or business houses, whether by reason of ownership of capital or otherwise.

This concentration of economic power may be called as “product wise” concentration. Where the
industry is engaged in the production of one product, it may sometimes be called “industry wise”
concentration. The second kind of concentration arises where a large number of concerns
engaged in the production and distribution of different commodities are in the controlling hands
of one individual or family or group of persons, whether incorporated or not, connected closely
by financial or other business interests. This has been called the country-wise concentration.

Definition of Economic Power

Most economists define market power as the ability to control price and exclude rivals. 1 In turn,
economic power is often assumed to be essentially the same as market power, but this
equivalence raises serious problems. Real world economic power encompasses much more than
market power, despite efforts by many economists to ignore the distinction.

Concentration of Economic Power:

To check concentration of economic power and diffuse and decentralise economic power has
become the accepted goal of a modern economy. Concentration of power in a few hands is a
negation of social justice since it leads to larger inequalities of income and wealth.

In free enterprise economies and in mixed economies with an important role for the private
sector there exists a tendency for the economic power to be concentrated in a few hands. In India
a few big business houses each being controlled by members of a family or house wield large
economic power.

The economic power is manifested in the control by few big businessmen over the price of
industrial products, the attempt and pattern of investment and the choices of technology and
therefore over the creation of employment opportunities in the economy.
Extent of the Concentration of Economic Power in India:

In a developing economy such concentration of economic power widens the gap of disparity in
income and wealth, which is harmful to the development of the country. This malady is growing
fast in India. Many committees were formed to study it and to suggest remedies.

1. Mahalanobis Committee (1960):

According to this committee, the working system of the planned economy has encouraged the
growth of big companies in Indian industries. These received financial assistance from Indian
Industrial Finance Corporation, National Industrial Development Corporation etc., which are
public institutions. These have derived more profit of tax reliefs and other facilities.

2. Monopoly Enquiry Commission (1964):

Monopoly Enquiry Commission (1964) has studied the extent, effect and causes of this
concentration and concludes that, “Concentration has been promoted more by way of planned
economy which was adopted for rapid industrialisation in the country.” The main causes,
according to the commission, are defective licensing system and discrimination in availability of
institutional loans.

3. Other Committees:

Hazari Committee Report (1966) and Batta Committee (1967) have also underlined that big
houses had adopted corrupt means for getting licences. 8% big houses received 38% licences.

Extent of Concentration:

According to the Mahalanobis Committee, in 1960-61 86% companies (which have paid up
capital less than Rs. 5 lakh) had only 14.6% of the total paid up capital in the country while Big
Companies having paid up capital above 50 lakh, and which are only 1.6% in number had 58.1%
of the total paid up capital of the corporate world in the country.

Monopoly Enquiry Commission found out that there is high grade of concentration in 65
commodities, medium in 10, low in 8 and zero in 17, and 2259 goods under study. These are
controlled by 82 Industrial houses.
According to the Sachhar Committee, “Top 20 houses had 89.4% growth in their assets during
1972-78.” They had assets of Rs. 648 crores in 1951, which were multiplied nine times up to
1978 (5795 crores).

Current Position:

According to the Economic Times Research Beareau, in 1987-88, There are 251 big companies
in private sector in which 101 are considered Jiant’ and 150 as mini Jiant. Rs 29,720 crore were
invested in the Jiants’ The Biggest in these is the Reliance Industries (which had 250,00 crore
rupees assets in 1988). Next come Tata Steel, Larson & Tubro, Tata Engineering. J. K.
Synthetics, and Southern Petro-Chemicals.

In 1987, Tata Group had the biggest assets. Then came Birlas and Reliance. Five Toppers out of
20 have increased their assets from 7312 crores in 1983 to 14311 crores in 1987 that is 95.7%
growth during the period of 5 years. Also they controlled 58.4% of the total resources under the
top 20.

This means that the utmost concentration has been in these 5 toppers. Among these five,
Reliance stood first in the growth rate, i.e., 259.2%. Among 20, Chidambaram Group had the
most spectacular growth rate. During 4 years it had 910% growth in its assets; it has leaped up
from the 47th position in 1983 to 9th in 1987.

Forms of Concentration of Economic Power:

Monopoly Enquiry Commission has mentioned two forms of concentration in 1964:

1. Product-Wise Concentration:

When a production or distribution of any commodity or service is controlled by any person or

group, it is called product-wise concentration.

It is divided in three parts:

(a) High Concentration:

On 75% or more by 3 main producers or distributors.

(b) Medium Concentration:

On 60% to 75% by 3 main producers or distributors.

(c) Low Concentration:

On 50% to 60% of production or distribution by 3 main producers, if the concentration is less

than 50% it will not be considered as concentration.

2. Country-Wise Concentration:

If ownership or control of most enterprises engaged in production or distribution of different

goods is in the hands of one person, family or industrial group it is called country-wise
concentration.

Causes of Concentration of Economic Power in India:

In a rapidly rising and growing economy like India some degree of inequality and concentration
of economic power and wealth in a few hands is to be expected, but the disturbing things is that
the degree of inequality and concentration is very much more that can be justified on a ground.

The following are the major causes for concentration of wealth and economic power in few
hands:

1. Government Policies:

The Dutta Committee (1969) pointed out nearly that the Government of India never specified
clearly to the licensing authority the objective of preventing concentration of economic power or
monopoly.

2. Rule of Government Financial Institutions:

The financial institutions contributed to the growth of concentration of wealth and economic
power. The financial institutions were set up with the ideal of helping the private sector. But the
large industrial houses managed to influence its lending policies of those institutions. The Dutta
Committee found that about 56 per cent of the total assistance provided by the IFC, IDBI etc.
had gone to the large industrial houses.

3. Guidelines of Large Industrial Houses:

So, after independence the Government of India launched upon a programme of massive
economic development. The government provided financial, tax benefits, etc. for the promotion
of the private sector. The industrial houses which were already in the field saw the abundant
chances for their growth and expansion. They took full advantage of the concessions.

4. Role of Commercial Banks:

Before Bank nationalisation the large industrial houses controlled the banking system. The bank
deposits coming from the general public were used exclusively for financing industries owned
and managed by large industrial houses. Even after nationalisation in 1969 there was not much of
a change in the lending policy of the nationalised banks.

5. Inter-Company Investments:

Inter-company investment means, purchasing shares of a company by other company. Big

companies or Industrial groups purchases stock of other companies on large scale and make them
as their subsidiaries.

6. Technological Progress:

Big firms can reduce the production cost through modern technology due to their sound financial
condition. Thus they get large economies and become more powerful.

7. Managing Agency System:

This system has greatly controlled in the development of big companies by providing financial
assistance. These maintained their credit through intercompany investments. Though the system
was abolished in 1970, its dominance still remained upon industrial groups.

8. Monopolistic and Restrictive Trade Practices:

Monopolistic firms adopt such practices as creating artificial shortage of goods, and get high
prices, decide high distribution rates of goods, exploit the consumer by distributing market
among themselves. Sell goods on different prices to different purchasers, rejecting sales to some
buyers or by other producers etc.

9. Strict Import Policy:

After independence the Government had given protection to various industries, and restricted
imports. This resulted in imposing monopoly by some Indian producers upon the market.

10. Foreign Collaboration:

After independence India has accepted foreign collaboration on large scale. Foreign industrialists
prefer to collaborate with big firms. Thus their dominance got increased.

11. Taxation Policy:

Government offers many concessions on starting new industries, such as relief in income tax and
sales tax. Grants are also provided. Big industries derived utmost advantage from this.

Evils of Concentration of Economic Power:

1. Concentration of economic power is associated with monopolies and therefore with high
prices and exploitation of consumers.

2. The small scale units are not in a position to compete with them without the development of
small and cottage industries concentration of economic power cannot be diffused.

3. The large profits made by the rich people are usually spent on luxurious consumption, this
creates demonstration effect and as a result propensity to consume of the other people is raised.
This reduces the rate of saving.

4. The big businesses block the entry of new young entrepreneurs in the industrial field by the
use of their advertising strength and large resources and influence.
5. Big businesses use their resources to corrupt officials and politicians. To quote the words of
the commission appointed by the government of India, “We cannot ignore the unfortunate reality
that some big business houses do not hesitate to use their deep pockets to try to corrupt public
officials in the attempt to continue and increase their industrial domain.”

In view of the serious evils of concentration of economic power steps should be taken to check
this concentration and ensure wider diffusion of economic power. Small scale industries,
cooperative enterprises should be encouraged.

Consequences of Economic Power Concentration

The problem of concentration of economic power is not new to India as we observe the same in
the rest of the world where capitalism exists in one form or the other. Perhaps, it is good in one
way because it helped the economic development of our country to some extent, as the top
business houses were able to attract foreign collaborations. On the other hand, it is claimed that
concentration of economic power could lead to monopoly. With monopoly power in their hands
the industrialists may try to dictate the economic life of the consumers. Industrialists wielding
economic power may also attempt to distort the economic progress of the country. Moreover,
they may put down their numerous competitors who are comparatively smaller units who may
prefer to merge with the big units or accept their control with a view to enjoying the same fruits.

Another adverse consequence of growing concentration of economic power would be increasing

uneven distribution of income and wealth which may lead to unnecessary social unrest. This also
results in widening the gap between the total income and total investment of the big industrialists
who are tempted to earn black money with a view to avoiding the tax net which, in turn, leads to
hoarding or spending unproductively on lordly luxuries. This may divert the resources from
essential goods production to production of luxury products which is bad.

Black money and parallel economy

Black money is defined as factor incomes, property incomes which should have been reported to
income tax authorities but are not. The various mediums of generating black money are Land
transactions, Encroachments on land, Payment of bribe, Misuse of public property,
Misappropriation of public funds, Evasion of taxes etc.
Black Money in Indian context

Many people confuse black money with

Parallel economy

A parallel economy is one which is illegal and runs opposite to legal economy. However in
Indian case the legal and illegal economy are interlaced together. The legal economy emerges
out of illegal and vice versa.

Illegal Economy

An illegal economy is one which completely originates out of illegal activities. However in
Indian case legal and illegal economy is interlaced.

Irregular economy

Irregular economy is one which is run by irregular institutions. Irregular institutions are those
which influence regular/formal institutions for economic advantage.

Unaccounted economy

It is one in which income is hidden from tax authorities. However Indian tax laws itself are full
of flaws and let people hide their income easily.

Why Black Money

In Indian context the generation of black money occurs due to the interactions between the triad.

There is a constant conflict between capital and labor markets, the unorganized sector which
always has been taken advantage of and a realization that manipulation of policies can win the
market place has led to the growth of black money in India.

Major chunk of black money in India is invested in Real Estate and Share markets as in both
these markets capital gains can exceed more than 30% mark. Both are ideal conduits for
circulating black incomes

Channels for black money

Hawala:

Illegal movement of money is done through a process called Hawala. An initial transaction can
be a remittance from a customer (CA) from country A, or a payment arising from some prior
obligation, to another customer (CB) in country B. A hawaladar from country A (HA) receives
funds in one currency from CA and, in return, gives CA a code for authentication purposes. He
then instructs his country B correspondent (HB) to deliver an equivalent amount in the local
currency to a designated beneficiary (CB), who needs to disclose the code to receive the funds.
HA can be remunerated by charging a fee or through an exchange rate spread. After the
remittance, HA has a liability to HB, and the settlement of their positions is made by various
means, either financial or goods and services.

Economics of Gold:

The next best option for investing black money is Gold. India is the highest consumer of gold in
the world! In the early 90s, import and export of gold was restricted as the government realised
that saving & investment in gold was leading to a loss of foreign exchange reserves. This was
also because privately held gold did not help India’s balance of payment situation. As a result,
gold smuggling became a huge racket which was funded extensively by black money as people
got a vehicle to park money which was illegally obtained. This was further accentuated by the
fact that the money which was given to the importer and the smuggler would leave the country
thus depleting resources. This eventually led to loss for our economy.

Rising share of services:

Black money has also played a big role in the development of the services sector mainly due to
the fact that valuation of the activity is difficult, as a result of which an activity which is
probably worth around Rs 5lakh is instead quoted at 10lakh to hide 5lakh of black money. Also,
it has a large component of the unorganised sector in it. In India, the demand for services has
increased manifold due to increased material production, specialisation in production and
increased expenditure on advertising and other such activities. So, due to surge in service sector
growth, the black money economy is also experiencing explosive growth.

Sources of Black Money:

Under-invoiced inventories: Sometimes the amount of inventory is under-invoiced so as to keep
extra amount to sale in the black market. And the amount of sale is never reported in the account
book.

Over-invoiced plant and equipments: The fixed costs on plant and inventory are reported higher
than the actual amount so as to generate black money. For example, companies buy for perhaps
Rs 5lakhs and instead get an invoice for Rs 10lakhs to cover up Rs 5lakhs of black money.

Informal sector activities including trade, films, production etc.: All the film industries in India –
be it Bollywood, Kollywood or Mollywood are doing dreadfully bad, but still they continue to
produce flop after flop after flop. Perhaps, it is because movies are being made simply to hide
excess black money.

Illegal holding of precious metals, gem and jewellery: The most favourite of the sources is hiding
metals and jewellery. There are countless instances of the same in the news all the time where
prominent personalities’ homes are raided and valuables worth crores are recovered.

Flight of capital for investments abroad: Also, black money is used to fund investments abroad
as people try to hide their incomes and put it in foreign banks which are situated in the tax haven
countries.

Transfer activities (like secondary share market and real estate) and buying of influence (bribe
for work): Giving and taking bribe in India is pretty common in almost every day activities.
Another common source of black money is real estate which is covered in detail later.

Illegal activities like smuggling, drugs, prostitution, and crime: The big fishes of all of these
sources are smuggling, drugs, prostitution and crime. Being illegal activities, all this money is
black money as there are no records of how they are generated and used.

Methods to estimate:

Methods have been developed to estimate and evaluate the illicit amounts of money, of which,
two well-established economic models are based on “Model of Capital Flight”.

The World Bank Residual model is based on change in external debt or CED
The Trade Mispricing model which is based on the IMF Direction of Trade Statistics or DOTS
database

But the problem with these methods has made the task of estimators all more difficult as these
methods cannot capture genuine reversal of capital flight. Also another weakness with this
method is that the inflows indicated by models of illicit flows are unrecorded, they cannot be
taxed or utilized for economic development.

The more recent and more accurate method has been developed by Global Financial Integrity. It
is called as “Block Recursive Dynamic Simulation Model of Illicit Flows”.

This dynamic simulation model examines the complex interactions between macroeconomic,
structural and governance factors that drive illicit flow from India. Further probe into the model
is out of scope of this study.

Conversion of black money to white money:

By far, the most important problem with black money has got to be, how do you distinguish
between them?

Here we see two economies with the same activities and entities. At any point of time, one
cannot make out whether black money is being used by households or white money is used in the
market. To an extent, black money in the financial market is limited due to compulsory
legislation that one must have a PAN Card number, but the money used for daily needs do not
come into picture. If a person goes to Reliance Fresh and buys some groceries using black
money, it has instantly been converted into white money the moment a receipt is obtained.

Few methods followed in real life to convert black money into white money are

Funding politicians: Suppose a businessman funds a politician with his black money to contest in
the elections. When these politicians get elected, they return the favor in the form of favorable
policies for the businessman which is known as “lobbying”. Finally the business man profits
from their “investment” and generate “White Money”.

Selling black income in form of jewellery: Suppose a person having huge amount of black
money in the form of gold or jewellery wants to change it to white money. He goes to a jewellery
shop and sells the jewellery and gives 5 to 10% of the value to the shop owner. The shop owner
then gives the person the receipt on which he has to just pay the capital gain tax and then the
amount turns to white.

Donation: When a person wanting his son to get a seat in a good MBA college and uses his black
money and give it off to college authorities, no one asks for a receipt. The amount one pays
cannot be shown officially because the giver and taker both will face government problem. Now
the son armed with his MBA degree is ready to earn white money.

Does black money improve employment

In India, black money is that which is taxable and is not taxed, i.e. money that is hidden from
taxation. However, in India, there are millions of people whose incomes do not touch the
minimum income level and are thus not taxed. They also might involve in illegal activities like
taking bribes which in effect must be classified as black money but are not. As a result, the value
addition to the economy is actually much higher than recorded. So, what should ideally happen is
that employment opportunities must increase and economy must grow because of more money
circulating in the economy due to black money.

However, as people actually do not spend the black money and try to just hide it, the rate of
savings gets increased and as a result the multiplier reduces which leads to lesser money in
circulation in the economy. This lowers the potential growth rate and the employment potential
and eventually leads to the dissatisfaction of the youth. So, what has happened is black money
which should have ideally led to increase in employment is actually leading to its decrease and
thus in India. As per statistics, black income generation results in overestimation of employment
and wages by 5 percent.

Consequences

The black economy results in policy failure both because of inadequate allocations and due to
ineffectiveness of expenditures. Primary schools intended to be set up do not materialize. Roads
either do not get built or are of sub-standard quality needing frequent repairs. Badly laid water
pipes lead to both shortage and contamination of drinking water. Investment gets diverted to
unproductive sectors leading to shortage of savings for real investment. Scarcity of foreign
exchange prevents import of essentials and technology.

The black economy has many economic ill-effects. The black economy and the erosion of
institutions of democracy are interlinked. The institutions of democracy, legislatures, learning
centres, judiciary, police, bureaucracy, police and media, are all compromised due to the
functioning of the black economy. They are not doing what they should be doing and people’s
faith in democracy has eroded. Issues in elections have ceased to matter, devaluating the
electoral process. As people’s pressure has declined, illegality has grown. The involvement of
the country’s elite in illegality has eroded their commitment to work and this pervades society.

The nation is not short of resources but because of the existence of black economy, a large chunk
of resources are not only wasted but are either lying idle or are siphoned off out of the nation.
Paradoxically, the interests of those who have benefited the most from the black economy have
been hurt the most since the growth has been stunted and dynamism has eroded. Much of the
activity in the black economy is like digging holes and filling them. Many are employed but
society makes little progress and remains poor. As policy fails, individual solutions are sought,
which result in making the resource shortage look worse and weakens the commitment to
national goals. Checking the growth of the black economy has become the single biggest task for
the nation.

What is parallel economy?

When economic activities goes unreported or not measured by societies current techniques to
monitor economic activity it falls under parallel economy. Money that have neither been reported
to the public authorities at the time of their generation or at any time of possession; no taxes have
been paid on it. Also known as Phantom trades or Shadow economy.

A hidden economy in its broadest sense may consist of - a) illegal economy, such as money
laundering, smuggling, etc; b) unreported economy including tax evasion; c) unregulated
economy, that is economic activities outside law and regulations.

History of the parallel economy in India:

The British East India Company in late 18th century laid the foundations of both a corrupt
bureaucracy and a parallel economy during World War II. The Indian black economy is
immense, lucrative, widespread, and has grown significantly since independence. The black
economy has grown from about 3% in the mid-50s to 20% by 1980, to 35% by 1990, and 40%
by 1995.

Supreme Court asked the central government to appraise it of steps taken to implement the
recommendations of the Special Investigation Team (SIT) on retrieving black money and to curb
the menace of unaccounted wealth.

What are the reasons behind the growth of the black money in the country?

Income generated from illegitimate activities like smuggling, arms trafficking, corruption; even
those generating income legitimate activities avoid paying taxes because of excessive taxation,
greed and perception that government is corrupt and won't use it for public good.

As a percentage of GDP and at almost $1 trillion in absolute terms, the black economy is larger
than both the industrial and agricultural sectors. Corruption is pervasive from the lowest to the
highest levels of public administration, public enterprise, bureaucracy, judiciary, law
enforcement, and elected officials.

After the ‘Gandhian and Nehruvian era’, officials who lacked their idealism, and were more
likely to engage in corruption and rent- seeking practices entered into the government. Speed
money for turning the blind eye to the violation of controls.

Control and licensing system, tax structure, donation to political parties, and generation of black
money in the public sector, deterioration in the moral and civic standards are the influential
factors in parallel economy.

Impact of the black money:

In India, the black economy has resulted in an immense loss of tax revenue. If it accounted for
40% of GDP in 1998-99, the loss of direct tax revenue at the prevailing rate would amount to at
least Rs. 200,000 crore. Only 2 million of India's billion people pay taxes, just 2% of the
population. The government therefore suffers a perennial shortage of funds and public services
languish.

Policies fail both at the macro-level and the micro-level. Targets for education, health, drinking
water and so on are not achieved because “expenditures do not mean outcomes.” Much
investment goes into wasteful and unproductive channels, like holding gold or real estate abroad.

A country is considered as capital-short has been exporting capital. A nation that gives
concessions to multinational corporations to bring in capital loses more capital than it gets, and
that too at a high cost, from foreign institutional investments or foreign direct investment.

Strategy for recovering black money

So far the Government has adopted a five-pronged strategy to tackle the sensitive issue of Black
Money –

• Joining the Global Crusade Against Black Money

• Creating an Appropriate Legislative Framework using DTAA and Tax Information Exchange
Agreement (TIEA)

• Setting up Institutions to Deal with Illicit Funds such as Income Tax Overseas Units.

• Manpower of FT&TR Division in CBDT has been doubled.

• Imparting Skills to the Manpower for Effective Action

Recommendations for Black Money Recovery

• Reducing disincentives by Rationalization of tax rates, reduce tax terrorism (retrospective

amendments), pass GST and Reducing transaction costs by providing internet-based services to
pay tax;

• Creation of effective credible deterrence by Setting up an investigation unit with Enforcement

Directorate as the nodal coordinating agency to remove problem of lack of coordination; CAG
should audit on suspicious exports vulnerable sectors like Real estate, jewelry, financial markets,
have Time frame for Income Tax and CBEC for completing cases.
• Amend PMLA, FEMA and Make Tax evasion a serious "criminal offence. Reform political
funding in India.

• Establishment of a central KYC (Know Your Customer) registry to deal with the problem of
multiple identities of an individual in financial transactions.

• To ensure that banks, on a real time basis, report all suspicious transactions, SIT must seek a
report from the Financial Intelligence Unit (FIU) of the Indian government on what it has done
about suspicious transactions reported by banks.

• To pressurize Swiss authorities to give name of US citizens who have opened numbered bank
account in Swiss Banks, US arrested senior bank officers of Union Bank of Switzerland on
charges of espionage. India also has Swiss bank branch offices in Mumbai.

Remedies

The system has become decrepit but the country does not lack well intentioned people. Those
substantially involved in the black economy are no more than 3% of the population. In other
words, 97% are either not involved or marginally involved. In essence, the vast majority of the
people are honest or can give up their expectations of involvement in illegality. Hence
countering the black economy is feasible.

One step alone cannot eradicate black economy, what needed is a joint effort at numerous levels.
First of all, the Political will is needed to curb the growth of Black Money. Double Taxation
Avoidance Agreement (DTAA) and Tax Exchange Information Agreements with Tax haven
countries will certainly help in bringing the capital flight problem. Electoral reform will not take
place since the vested interests would not allow it. Movements which change the consciousness
of people and make them strong enough to resist the temptations are needed for a turn around.
When we have sufficiently worked on the consciousness and trust issues we can look at the
following reforms as a package because if handled individually, they will turn out to ineffective:

Right to information, judicial, bureaucracy and Media Reforms should be encouraged which will
result in increase of transparency in the system. Also, building a special task force to enforce the
laws effectively will go a long way. Simplification of the tax laws should be done as it will make
it easy to catch those who are fudging the accounts. The link between the politician and money
power needs to be broken as this leads to the policy makers themselves resorting to sources for
easy money. There should be three tier and interlinked representation in the legislatures on the
same ground as party structures, which will increase the credibility of the contesting candidates.
Increasing the accountability of institutions and individuals and especially of the policy-makers
will act as big step in eradicating Black Economy in our country.

Remedies or Measures to Curb Black Money in India

The menace of ever raising black money in Indian economy is very high. It is a well known fact
that tax evasion generate black money.

It is estimated that the volume of black money in 1991 has crossed over Rs. 1,00,000 crores. At
present this is estimated to be about 1 trillion USD. Such staggering extent of black money has
activated a parallel economy in the countryand it affects the vital sectors of the economy.

The Government in the past has already tried certain measures with little success. If steps are not
taken immediately to reduce the black money, it may ruin the entire economy of the country.

The important remedial measures for controlling black money are given below:

1. Demonetization

Demonetization of currency of high value say Rs.1,000 could help to unearth the black money to
a large extent. However, in order to solve the problem arise on account of demonetization, proper
step should be taken. It is advocated for eroding a substantial part of black liquidity on the
presumption that black income held in cash will not be presented for conversion.

In 1978, Government cancelled currency note of Rs.1,000 denomination. But again it brought
out the currency note of Rs.1,000 denomination for circulation. Demonetization may succeed in
reducing the quantum of black money but it cannot prevent the generation of black money
altogether.

2. Voluntary Disclosure Scheme

The Government may adopt the policy that those who voluntarily disclose their black income of
the past to the taxation authorities will not be punished and penalties may be waived or
minimized.

3. Raids

Income tax department’s powers have to be considerably enlarged and it should be empowered
to conduct raids on the premises and properties of the taxpayers or any other individuals and can
seize the unaccounted income and wealth and take necessary legal actions against the tax
evaders.

4. Rationalization of Controls

Since ill-devised controls are major causes of black money, it is essential to rationalize the
control system. Government has taken some steps in this direction by easing the licensing policy
etc. But still there are many cumbersome rules and formalities and unnecessary control in many
areas, which need to be effectively rationalized.

5. Taxation Reforms

India needs a rationalized tax structure. Prof. Kaldor, Wanchoo Committee and many others
including the authors of the NIPFP Report have recommended a reduction in marginal tax rates,
simplification of tax structure, taxation laws and improvements in tax administration.

6. Vigorous Prosecution

The Wanchoo Committee also recommended that the department should completely reorient
itself to a more vigorous prosecution policy in order to instill a wholesome respect for the tax-
laws in the minds of the taxpayers.

7. Special Bearer Bonds

In 1981 and 1991 the Government has introduced a scheme of Special Bearer Bonds to drag
black money into the treasury’s coffer. It is advocated to unearth black money. But it is to be
modified suitably according to the prevailing economic conditions.

8. Rewards and Awards

In order to encourage the honest taxpayers and create a positive attitude in the minds of the
people towards the payment of tax, this can be adopted. The income tax department has
introduced a special award scheme for the first time in Tamil Nadu for the 1994-95 assessment
year, to encourage and recognize prompt tax payers and also create greater awareness in the
minds of tax paying public.

It is called as “Good Taxpayers Award” Scheme. The various categories considered for the
awarded scheme are: public and private sector companies, firms (both business and profession),
individuals, and Hindu undivided families (both business and professions).

The other qualifications considered for the purpose of the award are that

 the person concerned should not only pay the highest tax but should also file the returns
in time,

 prompt payment of taxes including self-assessment tax without default,

 no penalty for concealment of income should have been levied,

 no prosecution for offenses under the Direct Taxes Act and related provision of IPC
should have been launched,

 no search undertaken under the Direct Tax laws should have been conducted, and should
have been co-operative with the department in the completion of assessments.

Besides the above, no official patronage or recognition or awards should be given to persons who
have been penalized for keeping the black money or in whose case prosecution proceedings have
been taken.

9. Publicity

In view of the deterrent effect, the nature of all persons in whose cases penalties have been
imposed for the concealment of income, wealth etc. should be published in the gazette as well as
in the press, giving details of their names, addresses and the amount of penalties etc. If the
assessee is a company or firm, the names of all the Directors of the Company or Partners of the
firm should be published.
10. Arousing Public Conscience

A special drive should be undertaken to arouse public conscience by enhancing the co-operation
of the leaders in various walks of life.

11. Other Measures:

 People should be educated with regard to real object of collections of taxes through press,
radio, TV, and films.

 Steps should be taken to convince the taxpayers that the money collected through taxes is
not spent wastefully but put to proper use.

Conclusion:

The amount of black money stashed both inside and outside the country adds up to more than
40% of our GDP which could have solved a lot many problems plaguing India currently. Hence,
a more concerted effort is needed on the part of the Government as well as the citizens of the
country to put pressure on the tax haven countries to release information on these black accounts
which can be brought back to our country.

There had been umpteen talks and voluntary disclosure schemes in the past for checking evasion
and black money, but no perceivable results have come. Rather, the quantum of black money in
circulation has increased substantially in volume. A major factor contributing to the increasing
level of black money and there are Global reasons like Continuation of tax heavens.

Black money is 60 times the annual revenue from income tax in the Union Budget, only
committees after committees are setup, w/o concrete action; Failure of agencies i.e. lack of
coordination as said by SIT that government departments are not ready to share information and
thus hindering investigation.

Foreign aid

Meaning of Foreign Aid:

External assistance is considered to be a major element towards the advancement of the deve-
loping countries. It is said that aid, and not trade, is the engine of growth.
The term foreign aid or external assistance or development assistance or development aid is often
used synonymously, though there are certain subtle differences in their meanings.

In essence, all these term refer to transfer of resources (e.g., loans, growth, technical assistance)
from rich to poor countries or from international agencies like the IMF, the WB.

To start with, it is better to have a clear understanding of the notion “foreign aid”. Any transfers
of capital from one country to another cannot be treated as foreign aid. In the strict sense, all
governmental resource transfers from one country to another is to be called foreign aid. And
resource transfers by private foreign investors need not to be confused with aid. According to
economists, any flow of capital is included within the ambit of foreign aid to LDCs if it satisfies
three criteria.

Transfer of resources should be:

(i) developmental or charitable,

(ii) non-commercial, and

(iii) concessional.

Thus, loans to LDCs are treated as foreign aid if they contain a “growth element”.

Foreign aid or external assistance can thus be defined to include all official grants and conce-
ssional loans either in foreign currency or in kind, which aims at transferring resources from the
developed countries to the LDCs for developmental reasons.

Types of Foreign Aid:

1. Bilateral Aid

Assistance given by a government directly to the government of another country is Bilateral Aid.
It is when the capital flows from a developed nation to a developing country. Strategic political
considerations and humanitarian ones often direct Bilateral Aid. These are to assist in long-term
projects to promote democracy, economic growth, stability, and development.

2. Multilateral Aid
Multilateral Aid is assistance provided by many governments who pool funds to international
organizations like the World Bank, United Nations and International Monetary Fund that are
then used to reduce poverty in developing nations. Though this sector constitutes a minority of
the US’s foreign aid, the nation’s contributions make up a significant percentage of the donor
funds received by the organization.

3. Tied Aid

Tied Aid is one of the types of foreign aid that must be spent in the country providing the support
(the donor country) or in a group of selected countries. A developed country will provide a
bilateral loan or grant to a developing country, but mandate that the government spends the
money on goods or services produced in the selected country.

4. Project Aid

When the funds are used to finance a particular project, such as a school or a hospital, it is
considered to be Project Aid.

5. Military Aid

Military aid is never altruistic. The U.S. gave about $15 billion in Military Aid in 2011. Military
aid usually requires said nation to either buy arms or defense contracts directly from the USA or
in other cases just simplifies the process by having the federal government only purchase the
arms itself and ship them over on military transport.

6. Voluntary Aid

This is aid usually in the form of charity. For example, Médecins Sans Frontières (Doctors
Without Borders) is “is an international humanitarian non-governmental organization best known
for its projects in war-torn regions and developing countries affected by endemic diseases”

The two main forms of external assistance are:

(i) Private foreign direct investment by MNCs/ TNCs and portfolio investment that comprises
stock or equity holdings by non-residents in the recipient country’s joint stock companies, and
(ii) Public and private development assistance (call it foreign aid) from governments of foreign
countries and international donor agencies.

FDI is an investment involving the setting up of a new overseas operations or the mergers and
acquisitions of controlling interests in an already existing foreign company through the purchase
of shares and stocks. On the other hand, portfolio investment is just a transfer of capital through
equity holding from one country to another.

Broadly, loans and grants are the two forms of foreign aid. Loans are required to be repaid with
interest, however, on concessional terms. One may call it ‘soft’ loan also. However, outright
grants do not have any obligation of interest payment or anything else. But grant-recipient
countries sometimes may be asked to purchase commodity or ‘consultancy services’ from the
grant-donor countries.

Secondly, foreign aid may be project and programme aid. In the words of C.P.
Kindleberger: “Project aid is embodied in loans or grants that are intended to pay for
specific projects. Project aid allows the donor to influence and control the uses to which aid
is put. Programme aid embodies more general support, for example, for the activities of
sectors as a whole such as agriculture or education, or for balance of payments support
without reference to the goods being bought with the proceeds of the transfer.”

Thirdly, there is commodity aid. It is well known that the U.S. Government provided agricultural
commodities (mostly wheat) to India under PL 480 and 665 free of cost subject to the payment
of transport costs in hard currency.

Such commodities may serve the purpose of capital goods if through such transfer of resources
in the importing country previously used in food production are shifted out of agriculture into (i)
export production to provide foreign exchange to pay for imported capital goods, and (ii) capital
formation, to the extent that domestic capital is in short supply. Such transfer may also replace
existing purchased agricultural imports and thus release foreign exchange for buying capital or
other consumption goods.

Fourthly, aid is often given in a tied or non- tied form. Donors often force recipients to spend
their loan amount in the country where the aid originated. The result of aid-tying is two-fold.
First, projects with large import content are eligible for more aid than those using domestic
inputs.

This imposes a permanent burden on the aid- receiving countries. Purchase of one country’s
products initially implies continuing demand for spare parts and on-going technical advice on
operating the imported equipment. Second, aid tied to exports from a single donor country may
buy less than unrestricted (‘untied’) aid, if prices in the donor country are higher than elsewhere.

Fifthly, foreign aid may take a variety of physical forms. It may take the shape of capital goods,
technical assistance, agriculture commodities or even military support. Again, aid may be either
bilateral (i.e., nation-to-nation programmes of aid of particular countries) or multilateral (IMF,
W. B, ADB, aid from global and regional development banks, some United Nations agencies,
and aid consortia consisting of the principal donor countries and creditors of any given LDC,
e.g., the ‘Aid India Club’). In case of the latter, the donor countries, “surrender control over the
uses of those funds and agree to abide by the decisions which they make with other members of
the agency or institution.”

Sixthly, foreign aid may be hard or soft loan. If repayment of loan requires foreign currency then
such is called hard loan. Repayment of loan by home currency refers to soft loan. While the
World Bank loan is hard loan, loan of its affiliates is soft loan.

Impact of foreign aid

Foreign aid is meant to do three things, viz., (a) to supplement domestic savings, (b) make
available additional supplies of foreign exchange, and (c) facilitate transfer of technology. The
extent to which foreign aid can contribute to the development of the productive capacity of the
country depends, on the judicious use of foreign aid; the effort and the total disposable resources
of the recipient country. Besides, foreign aid creates growth potential far beyond the point where
it is applied. The import of capital goods may release non-aid resources for increasing the current
consumption while aid in terms of consumer goods may, in effect, help release domestic
resources for capital formation. Therefore, it is difficult to assess the impact of aid precisely.
Consequently we shall discuss the significance of the participation of aid in creating productive
capacity.
1. Foreign aid has helped to raise the level of investment. The rate of investment has
substantially increased from the annual level of over 10 per cent of the national income at the
beginning of the First Plan to nearly 25 per cent of the national income. With this increase in the
rate of investment the foreign exchange outlay had also to be correspondingly increased which
was beyond the resources of the country. Ever since 1972-73, the country has faced serious
foreign exchange crisis. But for aid, it would have been well nigh impossible for the country to
tide over this difficulty.

2. Aid used to stabilise food prices and import raw materials. Of the total aid utilised, a
significant proportion represented aid in kind or commodity, the bulk of which has been utilized
to import foodgrains which played a significant role in stabilisisng foodgrain prices. A part of the
aid has been used to import raw materials or spare parts in short supply in the economy and this
contributed substantially to increase in production in the country.

3. Aid used for the enlargement of irrigation and power potential. External assistance has
contributed to the productive capacity of agriculture in a big way by enlarging the irrigation
potential of the country. In the field of dairy and fishery, foreign aid has helped to modernize the
technique of production. Foreign aid has, in a big way, helped enlarge power potential of the
country. It has enabled the country to import machinery and equipment which has helped to
increase the installed capacity in the country (from 2.3million K.W. in 1950) to (113 million
K.W. in 1999-2000).

4. Aid for improving transport. Transport absorbed large proportion of total utilized aid, i.e., 14
per cent, out of which 12 per cent has gone to the railways. It has played an important role in the
renovation and modernization of the railway transport and it has helped to increase the rolling
stock and locomotives.

5. Aid used for building up steel industry. Foreign aid has played an important role in the
creation of capacity in such a basic line of production as steel in the country. Over eighty per
cent of the amount of aid utilized by manufacturing industry has gone into the expansion and
creation of capacity in the steel industry. The necessary aid was received from West Germany,
erstwhile U.S.S.R. and U.K.
6. Aid used to develop petro-chemical and electronics industry. India is making efforts to
develop the complex of petro-chemical and electronics industries. The 'sunrise industries', as
they are generally referred to, are the harbingers of new industrial revolution in the word. This
cannot be accomplished without the help of foreign aid and Government is now making all-out
efforts to modernize our industrial structure by entering into foreign collaborations.

7. Aid used to enlarge technical resources. External aid has also helped to enlarge technical
resources through: (a) the provision of expert services, (b) training of Indian personnel and (c)
helping the establishment of new or the development of existing educational research and
training institutions in the country.

Impact of Foreign Aid:

Foreign aid is playing an important role in the economic development of the country by
enlarging the production capacity of the various sectors through additional supply of foreign
exchange, transfer of technology and supplementing saving.

Thus the foreign aid had been creating a favourable impact on the economy of the country
on the following lines:

Advantages and Disadvantages of Foreign Aid

Anywhere in the world, there is a gap between the haves and the have-nots, the rich and the poor.
At the local level, this is obvious. A single neighborhood can house both the homeless and those
living in mansions. In a larger scale, say international, the same holds true – there rich and highly
developed nations, and then there are poor and less developed nations.
Even then, when disaster strikes such as that tsunami in Japan, the earthquakes in Bohol,
Philippines and Nepal, and the hurricane in the US – no matter how rich or poor a disaster
stricken country is, a foreign aid is always welcome. So then, all of us have been giving and
receiving of foreign aid at some point. Although the initial intention of foreign aid is to help, we
should know that it does have its drawbacks.

List of Advantages of Foreign Aid

1. Save Lives.

At the onset, foreign aid is there to save lives particularly during calamities and disasters, like in
the case of natural disasters.

2. Rebuild Livelihoods.

Foreign aid helps rebuild lives by providing livelihoods and housing right after a disaster so that
victims can start over.

3. Provide Medicines.

Medical missions are there to offer free medical and healthcare products and services where they
are needed the most.

4. Aids Agriculture.

Foreign support directed towards agriculture helps farmers and increase food production, which
leads to better quality of life and higher quantity of food.

5. Encourage Development.

Industrial development projects supported by foreign aid create more jobs, improve
infrastructure and overall development of the local community.

6. Tap Natural Resources.

Some less developed countries do not have the ability to maximize their otherwise rich natural
resources, but with foreign support, this is possible.
7. Promote Sanitation.

Less privileged communities benefit from foreign aid aimed at providing clean water and
sanitation facilities, which reduces risk of contracting infections and diseases.

List of Disadvantages of Foreign Aid

1. Increase Dependency.

Less economically developed countries (LEDCs) may become increasingly dependent on donor
countries, and become heavily indebted.

2. Risk of Corruption.

There is likelihood that foreign financial support do not reach their rightful recipients, but go to
the hands of corrupt political officials.

3. Economic/Political Pressure.

A donor country may place economic and political pressure on the receiving country, forcing
them to return the favor.

4. Overlook Small Farmers.

Foreign support may only benefit large-scale agricultural projects, and not the less privileged,
small farmers who need help the most.

5. Benefit Employers.

Most development may only benefit large corporations and already-wealthy employers, and not
the people who do not have jobs or proper livelihoods.

6. Hidden Agenda of Foreign-Owned Corporations.

Foreign aid is sometimes given to a country or recipient to benefit foreign-owned corporations

and entities. So the help is not actually directed to the less fortunate, but to its own people.

7. More Expensive Commodities.

When there is development and progress, there is inflation, which causes prices of commodities
to increase, making the poor people more deprived.

Giving help to LECDs is a noble thing, but nations must properly monitor and manage the flow
of foreign aid so that they reach the people who need it, and not go right into the pockets of
corrupt and greedy entities.

Problems of Foreign Aid:

In-spite of creating a favourable impact on the development of the country, the foreign aid has
also been creating various types of problems in the country.

These problems are described below:

(1) Increasing volume of foreign aid has been resulting in political pressures on the economy
from the donor countries. Insistence of USA to accept Dunkel proposal is an example in this
respect.

(2) Foreign aid has also been suffering from the problem of uncertainty and thus stands in the
path of perspective planning.

(3) The country is having lesser absorptive capacity of aid due to its lesser exportable potential.

(4) The foreign aid has been attached with a huge burden of external debt as the debt servicing
burden of the country has already reached serious proportion.

Suggestions:

Under such a situation, steps must be taken by the Government to attain flexibility approach for
ensuring optimum utilisation of aid. Thus Government should convince the donor country to
extend more of untied aid.

Moreover, to avoid uncertainty there should be long period regular commitments for aid. Again
the technological aid should be in the form of technology transfer for building indigenous
technology base.

Backwardness of agriculture
Introduction

Agriculture plays a vital role in the Indian economy. Over 70 per cent of the rural households
depend on agriculture. Agriculture is an important sector of Indian economy as it contributes
about 17% to the total GDP and provides employment to over 60% of the population. Indian
agriculture has registered impressive growth over last few decades. The food grain production
has increased from 51 million tonnes (MT) in 1950-51 to 250MT during 2011-12 highest ever
since independence.

Characteristics of Indian economy

The basic characteristics of India as a developing economy are:

 Low per capita income

 Occupational pattern – primary producing

 Heavy population pressure

 Prevalence of chronic unemployment and under-employment

 Need for a steady improvement in the rate of capital formation

 Inequal distribution of wealth and/or assets

 Poor quality of human capital

 Prevalence of low levels of technology

 Low level of living of an average Indian

 Demographic characteristics of an underdeveloped country

Some salient facts about Agricultural scenario

1. Agriculture is the largest provider of livelihood in rural India

2. It contributes 25 percent to India’s GDP

3. It is still dependent primarily on the monsoons

4. The growth in agricultural production has been stagnant for the past several years.

5. The drought in north and western parts in FY09 created shortages in supply of food grains.

Role of agriculture in Indian economy

1. Share in National Income:

2. Largest Employment Providing Sector:

3. Contribution to Capital formation:

4. Providing Raw Material to industries

5. Market for Industrial Products:

Role of Agriculture in Economic Development:

The agriculture sector is the backbone of an economy which provides the basic ingredients to
mankind and now raw material for industrialisation.

Therefore, the role of agriculture for the development of an economy may be stated as
below:

1. Contribution to National Income:

The lessons drawn from the economic history of many advanced countries tell us that
agricultural prosperity contributed considerably in fostering economic advancement. It is
correctly observed that, “The leading industrialized countries of today were once predominantly
agricultural while the developing economies still have the dominance of agriculture and it largely
contributes to the national income. In India, still 28% of national income comes from this sector.

2. Source of Food Supply:

Agriculture is the basic source of food supply of all the countries of the world—whether
underdeveloped, developing or even developed. Due to heavy pressure of population in
underdeveloped and developing countries and its rapid increase, the demand for food is
increasing at a fast rate. If agriculture fails to meet the rising demand of food products, it is found
to affect adversely the growth rate of the economy. Raising supply of food by agricultural sector
has, therefore, great importance for economic growth of a country.

Increase in demand for food in an economy is determined by the following equation:

D = P + 2g

Here,

D stands for Annual Rate of Growth in demand for food.

P stands for Population Growth Rate.

g stands for Rate of Increase in per Capita Income.

2 stand for Income Elasticity of Demand for Agricultural Products.

3. Pre-Requisite for Raw Material:

Agricultural advancement is necessary for improving the supply of raw materials for the agro-
based industries especially in developing countries. The shortage of agricultural goods has its
impact upon on industrial production and a consequent increase in the general price level. It will
impede the growth of the country’s economy. The flour mills, rice shellers, oil & dal mills,
bread, meat, milk products sugar factories, wineries, jute mills, textile mills and numerous other
industries are based on agricultural products.

4. Provision of Surplus:

The progress in agricultural sector provides surplus for increasing the exports of agricultural
products. In the earlier stages of development, an increase in the exports earning is more
desirable because of the greater strains on the foreign exchange situation needed for the
financing of imports of basic and essential capital goods.

Johnson and Mellor are of the opinion, “In view of the urgent need for enlarged foreign
exchange earnings and the lack of alternative opportunities, substantial expansion of agricultural
export production is frequently a rational policy even though the world supply—demand
situation for a commodity is unfavorable.”
5. Shift of Manpower:

Initially, agriculture absorbs a large quantity of labour force. In India still about 62% labour is
absorbed in this sector. Agricultural progress permits the shift of manpower from agricultural to
non-agricultural sector. In the initial stages, the diversion of labour from agricultural to non-
agricultural sector is more important from the point of view of economic development as it eases
the burden of surplus labour force over the limited land. Thus, the release of surplus manpower
from the agricultural sector is necessary for the progress of agricultural sector and for expanding
the non-agricultural sector.

6. Creation of Infrastructure:

The development of agriculture requires roads, market yards, storage, transportation railways,
postal services and many others for an infrastructure creating demand for industrial products and
the development of commercial sector.

7. Relief from Shortage of Capital:

The development of agricultural sector has minimized the burden of several developed countries
who were facing the shortage of foreign capital. If foreign capital is available with the ‘strings’
attached to it, it will create another significant problem. Agriculture sector requires less capital
for its development thus it minimizes growth problem of foreign capital.

8. Helpful to Reduce Inequality:

In a country which is predominantly agricultural and overpopulated, there is greater inequality of

income between the rural and urban areas of the country. To reduce this inequality of income, it
is necessary to accord higher priority to agriculture. The prosperity of agriculture would raise the
income of the majority of the rural population and thus the disparity in income may be reduced
to a certain extent.

9. Based on Democratic Notions:

If the agricultural sector does not grow at a faster rate, it may result in the growing
discontentment amongst the masses which is never healthy for the smooth running of democratic
governments. For economic development, it is necessary to minimize political as well as social
tensions. In case the majority of the people have to be kindled with the hopes of prosperity, this
can be attained with the help of agricultural progress. Thus development of agriculture sector is
also relevant on political and social grounds.

10. Create Effective Demand:

The development of agricultural sector would tend to increase the purchasing power of
agriculturists which will help the growth of the non-agricultural sector of the country. It will
provide a market for increased production. In underdeveloped countries, it is well known that the
majority of people depend upon agriculture and it is they who must be able to afford to consume
the goods produced.

Therefore, it will be helpful in stimulating the growth of the non- agricultural sector. Similarly
improvement in the productivity of cash crops may pave the way for the promotion of exchange
economy which may help the growth of non-agricultural sector. Purchase of industrial products
such as pesticides, farm machinery etc. also provide boost to industrial dead out.

11. Helpful in Phasing out Economic Depression:

During depression, industrial production can be stopped or reduced but agricultural production
continues as it produces basic necessities of life. Thus it continues to create effective demand
even during adverse conditions of the economy.

12. Source of Foreign Exchange for the Country:

Most of the developing countries of the world are exporters of primary products. These products
contribute 60 to 70 per cent of their total export earning. Thus, the capacity to import capital
goods and machinery for industrial development depends crucially on the export earning of the
agriculture sector. If exports of agricultural goods fail to increase at a sufficiently high rate, these
countries are forced to incur heavy deficit in the balance of payments resulting in a serious
foreign exchange problem.

However, primary goods face declining prices in international market and the prospects of
increasing export earnings through them are limited. Due to this, large developing countries like
India (having potentialities of industrial development) are trying to diversify their production
structure and promote the exports of manufactured goods even though this requires the adoption
of protective measures in the initial period of planning.

13. Contribution to Capital Formation:

Underdeveloped and developing countries need huge amount of capital for its economic
development. In the initial stages of economic development, it is agriculture that constitutes a
significant source of capital formation.

Agriculture sector provides funds for capital formation in many ways as:

(i) agricultural taxation,

(ii) export of agricultural products,

(iii) collection of agricultural products at low prices by the government and selling it at higher
prices. This method is adopted by Russia and China,

(iv) labour in disguised unemployment, largely confined to agriculture, is viewed as a source of

investible surplus,

(v) transfer of labour and capital from farm to non-farm activities etc.

14. Employment Opportunities for Rural People:

Agriculture provides employment opportunities for rural people on a large scale in

underdeveloped and developing countries. It is an important source of livelihood. Generally,
landless workers and marginal farmers are engaged in non-agricultural jobs like handicrafts,
furniture, textiles, leather, metal work, processing industries, and in other service sectors. These
rural units fulfill merely local demands. In India about 70.6% of total labour force depends upon
agriculture.

15. Improving Rural Welfare:

It is time that rural economy depends on agriculture and allied occupations in an underdeveloped
country. The rising agricultural surplus caused by increasing agricultural production and
productivity tends to improve social welfare, particularly in rural areas. The living standard of
rural masses rises and they start consuming nutritious diet including eggs, milk, ghee and fruits.
They lead a comfortable life having all modern amenities—a better house, motor-cycle, radio,
television and use of better clothes.

16. Extension of Market for Industrial Output:

As a result of agricultural progress, there will be extension of market for industrial products.
Increase in agricultural productivity leads to increase in the income of rural population which is
turn leads to more demand for industrial products, thus development of industrial sector.

According to Dr. Bright Singh, “Increase in agricultural production and the rise in the per-capita
income of the rural community, together with the industrialisation and urbanisation, lead to an
increased demand in industrial production.” In this way, agricultural sector helps promote
economic growth by securing as a supplement to industrial sector.

Importance of agriculture in Indian economy

During Independence there was extremely low productivity per hectare and per worker.

However, the previous trend of stagnant agriculture was completely changed due to the
introduction of economic planning since 1950-51, and with special emphasis on agricultural
development, particularly after 1962.

(i) A steady increase in the area under cultivation is noticed.

(ii) A substantial growth in the food crops is marked.

(iii) During the plan period there had been a constant increase in the yield per hectare.

Importance of Agriculture in Indian Economy:

Though industry has been playing an important role in Indian economy, still the contribution of
agriculture in the development of Indian economy cannot be denied.

This can be measured and gauged by the following facts and figures:

1. Agricultural influence on national income:

The contribution of agriculture during the first two decades towards the gross domestic product
ranged between 48 and 60%. In the year 2001-2002, this contribution declined to only about
26%.

2. Agriculture plays vital role in generating employment:

In India at least two-thirds of the working population earn their living through agricultural
works. In India other sectors have failed generate much of employment opportunity the growing
working populations.

3. Agriculture makes provision for food for the ever increasing population:

Due to the excessive pressure of population labour surplus economies like India and rapid
increase in the demand for food, food production increases at a fast rate. The existing levels of
food consumption in these countries are very low and with a little increase in the capita income,
the demand for food rise steeply (in other words it can be stated that the income elasticity of
demand for food is very high in developing countries).

Therefore, unless agriculture is able to continuously increase it marketed surplus of food grains,
a crisis is like to emerge. Many developing countries are passing through this phase and in a bid
to ma the increasing food requirements agriculture has been developed.

4. Contribution to capital formation:

There is general agreement on the necessity capital formation. Since agriculture happens be the
largest industry in developing country like India, it can and must play an important role in
pushing up the rate of capital formation. If it fails to do so, the whole process economic
development will suffer a setback.

To extract surplus from agriculture the following policies are taken:

(i) Transfer of labour and capital from farm non-farm activities.

(ii) Taxation of agriculture should be in such a way that the burden on agriculture is greater than
the government services provided to agriculture. Therefore, generation of surplus from
agriculture will ultimately depend on increasing the agricultural productivity considerably.
5. Supply of raw material to agro-based industries:

Agriculture supplies raw materials to various agro-based industries like sugar, jute, cotton textile
and vanaspati industries. Food processing industries are similarly dependent on agriculture.
Therefore the development of these industries entirely is dependent on agriculture.

6. Market for industrial products:

Increase in rural purchasing power is very necessary for industrial development as two- thirds of
Indian population live in villages. After green revolution the purchasing power of the large
farmers increased due to their enhanced income and negligible tax burden.

7. Influence on internal and external trade and commerce:

Indian agriculture plays a vital role in internal and external trade of the country. Internal trade in
food-grains and other agricultural products helps in the expansion of service sector.

8. Contribution in government budget:

Right from the First Five Year Plan agriculture is considered as the prime revenue collecting
sector for the both central and state budgets. However, the governments earn huge revenue from
agriculture and its allied activities like cattle rearing, animal husbandry, poultry farming, fishing
etc. Indian railway along with the state transport system also earn a handsome revenue as freight
charges for agricultural products, both-semi finished and finished ones.

9. Need of labour force:

A large number of skilled and unskilled labourers are required for the construction works and in
other fields. This labour is supplied by Indian agriculture.

10. Greater competitive advantages:

Indian agriculture has a cost advantage in several agricultural commodities in the export sector
because of low labour costs and self- sufficiency in input supply.

Causes of backwardness of agriculture in Indian economy

There are many factors responsible for low agricultural productivity (backwardness of
agriculture) which has been summarized below:

1. Small Size of Holdings:

The agricultural productivity is low due to small size of holdings. Indeed small size of the farm
fails to provide profitable employment to the farmers. In our country average size of holdings is
1.8 hectares while in developed countries like U.S.A. it is 122 hectares.

Apart from this, subdivision and fragmentation of holdings is another obstacle in the way of low
agricultural productivity. In this small size of holdings the scientific cultivation with latest
techniques is almost impossible.

2. Vicious Circle of Poverty:

To a greater extent, the vicious circle of poverty is also responsible for the poor performance of
agriculture. The vicious circle of poverty takes the following form in agricultural sector:

The crucial deficiencies in Indian agriculture relate to land, capital and management, etc. which
in turn hampers the agricultural productivity.

3. Indebtedness:

Another reason for low agricultural productivity is the indebtedness of the farmers. To perform
the social ceremonies a farmer has to borrow from moneylender at a very high rate of interest.

Unproductive borrowings do not add to his income and he always remains under debt.
Consequently, the farmer fails to avail incentives to improve the agricultural production.

4. Inadequate Irrigation Facilities:

Indian farmer is almost dependent on climatic conditions for irrigation. Monsoons are irregular.
Only a few farmers avail the facilities of irrigation from various sources such as canals, tube
wells, etc.

Moreover these facilities are found in some areas and where these are available, they are not
fully utilized. The result is that the produce is of bad quality and results in low productivity.
5. Lack of Adequate Finance:

Availability of finance is the basis of every industry. The supply of finance is inadequate in case
of Indian agriculture. Money is required for short period as well as for long period in order to
improve the agricultural production.

According to All India Rural Credit Survey Committee, in 1950-51 more than 90 per cent of the
total agricultural credit was advanced by the moneylenders. The co-operative societies accounted
for about 3 per cent respectively.

6. No Scientific Methods of Cultivation:

The ignorance and conservation of Indian farmer also results in the poor performance of
agriculture. They do not know the importance of modern technology. Still, seeds are sown by
wooden ploughs. Poor quality of seeds yields poor quantity of crops.

7. Lack of Marketing Facilities:

The defective marketing system also poses difficulties to the farmers. The farmers do not get a
due reward from the sale of his produce. The middleman takes away portion of their profits.
Unless farmers are guaranteed fair and remunerative prices there is little inducement for
agricultural output to increase.

Indian marketing has no facilities of godowns and warehousing where the cultivators may keep
their produce for a better price. Moreover, they lack transportation facilities. This results in low
price of the produce.

8. Agricultural Research:

Undoubtedly, a huge amount of money is spent on agricultural research; still the fruits do not
reach to the poor cultivators. There is a lack of co-ordination between laboratory and the farm.

9. Lack of Productive Investment:

Investment in jewelry, trade and money lending seems to be more attractive. Therefore, there is
less investment in land improvement. In the absence of productive investment in agriculture,
there is little scope for expanding production.
10. Social Factors:

In our country, poor performance of agriculture is also found due to the operation of various
socio economic factors. Illiteracy, ignorance, superstition and conservative outlook stands in the
way of the adoption of modern technology.

As such, farmers are against the use of bone manure and chemical fertilizer. Besides, they are
prejudiced against killing of monkeys and rats at the farm.

11. Natural Calamities:

Another reason of low productivity of Indian agriculture is that crops worth crores of rupees are
destroyed every year due to floods and other natural calamities. The soil erosion has been
regarded as creeping death of the farm.

12. Poor Livestock:

The quality of livestock is very inferior and they are thin and feeble. On account of their poor
quality, they are needed in more quantity which adds unnecessary burden on the poor cultivators.
Malnutrition is another cause for the degeneration of cattle in our country. As a result, they suffer
from one disease or the other.

13. Land Policy and Legislation:

The piece-meal character of land reform policy and its legislation is greatly, responsible for the
backwardness of agriculture. Excessive reliance on the administrative machinery has adversely
affected agricultural development, unnecessary delay in implementation and uncertainty about
the rights on land has tended to diminish land productivity.

Suggestion for removal of low productivity of Indian agriculture

The following are suggestions for removal of low productivity of Indian agriculture:

(i) Better Irrigation Facilities:

Indian agriculture is mainly dependent on monsoon. So permanent means of irrigation should be

developed.
There should be large number of tube wells and canals for irrigation.

(ii) Supply of Quality Seeds:

Quality seeds should be sold through co-operative societies or village Panchayats. Farmers
should be given awareness regarding various varieties of seeds. Marginal farmers should be
given seeds on loan.

(iii) Green Manure:

Production of chemical fertilizers should be increased and it should be made available to farmers
at sub-sidised rates. Farmers should be educated for firing green manure. Oil cakes may be used
as fertilizers.

(iv) Credit Facilities:

Farmers should be advanced loans at reasonable rates of interest. Regional Rural Banks should
be opened. Commercial banks should be directed to provide loans to small farmers on easy
terms. Local moneylenders should be scrutinized to stop their malpractices.

(v) Agricultural Marketing:

Agricultural marketing should be improved so that the farmer gets proper price for their produce
warehousing facilities should be improved. Means of Transport should be strengthened.
Regulated markets and Co-operative marketing societies should be established.

(vi) Land Reforms:

For the development of agriculture land reforms are essential. Zamindari system should be
abolished. Cultivators should be made owners of land. Ceiling on land holdings should be
imposed. Minimum size of farms should be fixed. Problem of soil erosion and waterlogging
should be solved. Waste land should be put in use for cultivation.

(vii) Mixed Farming:

Farmers should be educated for adopting mixed farming. Mixed farming refers to the practice of
crop cultivation, animal husbandry, vegetable and fruit growing simultaneously. Diary farming
should be encouraged with a view of improving the economic condition of the farmers.

(viii) Education:

Agricultural Department along with Extension Education Department of Agricultural

Universities should educate the farmers in general and farming operations in particular. They
will get new ideas of latest methods of cultivation. They will increase their production.

(ix) Help is Small Farmers:

Small and marginal farmers should be helped with high yielding variety seeds, fertilizers and
new agricultural techniques. Loans should be given to farmers at concessional rates of interest.

(x) Price Stability:

Due to mechanised farming and Green Revolution, production of crops will increase. So price of
crops will fall. Govt. should ensure that prices should not fall and proper price should be made
available to farmer.

(xi) Efficient Administration:

Plans are made for agricultural development but their proper implementation is not done and
farmers are not able to derive the required benefit. So for this efficient and dedicated officers
with agricultural background should post for proper implementation of these policies.

(xii) Decreased Pressure of Population:

The pressure of population on land should be decreased. More industrial units should be set up to
absorb the disguised unemployment of agriculture. Population control measures should be
followed.

(xiii) Mechanised Farming:

Farmers should be educated for adopting mechanised farming. Kisan Melas (Farmers’ Fair)
should be organized. In these Melas Agricultural tools and implements and new variety of seeds
should be displayed. Farmer should be given knowledge about these inputs.

(xiv) Scientific Cultivation:

Various scientific methods of cultivation should be employed to increase production. Farmers

should adopt techniques like rotation of crops, use of fertilizers, pesticides. Farmers using new
teclmiques must be encouraged. More research on the crops, seeds and fertilizers will be useful.

(xv) Tenancy Reforms:

For the development of agriculture, tenancy reforms are much needed. Land rent should be fixed.
Work without remuneration Beggar should not be taken from tenants. Cultivators should not be
evicted till they pay rent.

Conclusion:

From the above cited explanation we conclude that agricultural development is a must for the
economic development of a country. Even developed countries lay emphasis on agricultural
development. According to Muir, “Agricultural progress is essential to provide food for growing
non-agricultural labour force, raw materials for industrial production and saving and tax revenue
to support development of the rest of the economy, to earn foreign exchange and to provide a
growing market for domestic manufactures.”

Centre state financial relation

Centre State Relations

The Constitution of India provides a dual polity with a clear division of powers between the
Union and the States, each being supreme within the sphere allotted to it. The Indian federation
is not the result of an agreement between independent units, and the units of Indian federation
cannot leave the federation.

Thus the constitution contains elaborate provisions to regulate the various dimensions of the
relations between the centre and the states.
The relations between centre and state are divides as:

1. Legislative relations

2. Administrative relations

3. Financial relations

Indian Constitution has made elaborate provisions, relating to the distribution of the taxes as well
as non-tax revenues and the power of borrowing, supplemented by provisions for grants-in-aid
by the Union to the States. Article 268 to 293 deals with the provisions of financial relations
between Centre and States.

1. Centre State Legislative Relations

Articles 245 to 255 in Part XI of the Constitution deal with the legislative relations between the
Centre and the State.

Extent of laws made by Parliament and by the Legislatures of States

The Parliament can make laws for the whole or any part of the territory of India. Territory of
India includes the states, UTs and any other area for the time being included in the territory of
India. Whereas, the state legislature can make laws for whole or any part of state.

The Parliament can alone make ‘extra territorial legislation’ thus the laws of the Parliament are
applicable to the Indian citizens and their property in any part of the world.

Subject-matter of laws made by Parliament and by the Legislation of States

The Constitution divides legislative authority between the Union and the States in three lists- the
Union List, the State List and the Concurrent List. The Union list consists of 99 items. The
Union Parliament has exclusive authority to frame laws on subjects enumerated in the list. These
include foreign affairs, defence, armed forces, communications, posts and telegraph, foreign
trade etc.

The State list consists of 61 subjects on which ordinarily the States alone can make laws. These
include public order, police, administration of justice, prison, local governments, agriculture etc.
The Concurrent list comprises of 52 items including criminal and civil procedure, marriage and
divorce, economic and special planning trade unions, electricity, newspapers, books, education,
population control and family planning etc. Both the Parliament and the State legislatures can
make laws on subjects given in the Concurrent list, but the Centre has a prior and supreme claim
to legislate on current subjects. In case of conflict between the law of the State and Union law on
a subject in the Concurrent list, the law of the Parliament prevails.

Residuary powers of legislation

The constitution also vests the residuary powers (subjects not enumerated in any of the three
Lists) with the Union Parliament. The residuary powers have been granted to the Union contrary
to the convention in other federations of the world, where the residuary powers are given to the
States. However, in case of any conflict, whether a particular matter falls under the residuary
power or not is to be decided by the court.

Parliament’s Power to Legislate on State List

Though under ordinary circumstances the Central Government does not possess power to
legislate on subjects enumerated in the State List, but under certain special conditions the Union
Parliament can make laws even on these subjects.

a) In the National Interest (Art.249)

If the Rajya Sabha declares by a resolution supported by not less than 2/3 of its members present
and voting, that it is necessary or expedient in the national interest that the Parliament should
make laws with respect to any matter enumerated in the State List (Art.249). After such a
resolution is passed, Parliament can make laws for the whole or any part of the territory of India.
Such a resolution remains in force for a period of 1 year and can be further extended by one year
by means of a subsequent resolution.

b) Under Proclamation of National Emergency (Art.250)

Parliament can legislate on the subjects mentioned in the State List when the Proclamation of
National Emergency is in operation. However, the laws made by the Parliament under this
provision shall cease to have effect on the expiration of a period of six months after the
Proclamation has ceased to operate, except as respects things done or omitted to be done before
the expiry of the said period.

c) By Agreement between States (Art. 252)

The Parliament can also legislate on a State subject if the legislatures of two or more states
resolve that it is lawful of Parliament to make laws with respect to any matter enumerated in the
State List relating to those State. Thereafter, any act passed by the Parliament shall apply to such
states and to any other state which passes such a resolution. The Parliament also reserves the
right to amend or repeal any such act.

d) To Implement Treaties (Art. 253)

The Parliament can make law for the whole or any part of the territory of India for implementing
any treaty, international agreement or convention with any other country or countries or any
decision made at any international conference, association or other body. Any law passed by the
Parliament for this purpose cannot be invalidated on the ground that it relates to the subject
mentioned in the State list.

e) Under Proclamation of President’s Rule (Art.356)

The President can also authorize the Parliament to exercise the powers of the State legislature
during the Proclamation of President’s Rule due to breakdown of constitutional machinery in a
state. But all such laws passed by the Parliament cease to operate six months after the
Proclamation of President’s Rule comes to an end.

Centre State Administrative Relations

The administrative jurisdiction of the Union and the State Governments extends to the subjects in
the Union list and State list respectively. The Constitution thus defines the clauses that deal with
the administrative relations between Centre and States.

Centre State Relations During Normal Times

1. Executive Powers of State be exercised in compliance with Union Laws: Article 256 lays
down that the executive power of every State shall be so exercised as to ensure compliance with
the laws made by Parliament and any existing laws which apply in that State, and the executive
power of the Union shall extend to the giving of such directions to a state as may appear to the
Government of India to be necessary for that purpose.

2. Executive Powers of State not to interfere with Executive Power of Union: Article 257 of the
Constitution provides that the executive power of every state shall be so exercised as not to
impede or prejudice the exercise of the executive power of the Union, and the executive power
of the Union shall extend to giving of such directions to a state as may appear to the Government
of India to be necessary for that purpose. In short, the Union Government can issue directions to
the state Government even with regard to the subjects enumerated in the state list.

3. Maintain means of communication of National or Military importance: The Union

Government can give directions to the state with regard to construction and maintenance of the
means of communication declared to be of national or military importance.

4. Protection of the Railways: Union can issue State Governments necessary directions regarding
the measures to be taken for the protection of the railways within the jurisdiction of the State. It
may be noted that the expenses incurred by the State Governments for the discharge of these
functions have to be reimbursed by the Union Government.

5. To ensure welfare of Scheduled Tribes in the States: Union can direct the State Governments
to ensure execution of schemes essential for the welfare of the Scheduled Tribes in the States.

6. To secure instruction in the mother-tongue at the primary stage of education: Union can direct
the State Governments to secure the provision of adequate facilities for instruction in the mother-
tongue at the primary stage of education to children belonging to linguistic minority groups.

7. To ensure development of the Hindi language: Union can direct the State Governments to
ensure the development of the Hindi language.

8. To ensure government of a State is carried on in accordance with the provision of the

Constitution: Union can direct the State Governments to ensure that the government of a State is
carried on in accordance with the provision of the Constitution. If any State failed to comply
with any directions given by the Union in exercise of its executive power, then President may
hold that, a situation has arisen in which the Government of the State cannot be carried on in
accordance with the provisions of the Constitution. Thus he may proclaim President’s Rule in
that State.

9. Delegation of Union’s function to State: The President of India can entrust to the officers of
the State certain functions of the Union Government. However, before doing so the President has
to take the consent of the state Government. But the Parliament can enact law authorizing the
Central Government to delegate its function to the State Governments or its officers irrespective
of the consent of such State Government. On the other hand, a State may confer administrative
functions upon the Union, with the consent of the Union only.

10. Appointment of High Dignitaries: Union has major say in appointment and removal of
Governor and appointment of Judges of High Court and Members of State Public Service
Commission.

11. All India Services: The presence of the All India Services - the Indian Administrative
Services, Indian police Services - further accords a predominant position to the Union
Government. The members of these services are recruited and appointment by the Union Public
Service Commission. The members of these services are posted on key posts in the states, but
remain loyal to the Union Government.

12. Union to adjudicate Inter-State River Water Dispute: The Parliament has been vested with
power to adjudicate any dispute or complaint with respect to the use, distribution or control of
the waters of, or in any inter-state river or river-valley. In this regard, the Parliament also
reserves the right to exclude such disputes from the jurisdiction of the Supreme Court or other
Courts.

Centre State Relations During Emergencies

1. Under President’s Rule: The State Governments cannot ignore the directions of the Union
Government, otherwise the President can take the action against the Government of the State
stating that the administration cannot be carried on the accordance with the provisions of the
Constitution and thus can impose President's rule on the State. In such an eventuality the
President shall assume to himself all or any of the functions of the state Government.

2. Under Proclamation of National Emergency: During a Proclamation of National Emergency,

the power of the Union to give directions extends to the giving of directions as to the manner in
with the executive power of the State is to be exercised relating to any matter.

3. Under Proclamation of Financial Emergency: During a Proclamation of Financial Emergency,

Union can direct the State Governments to observe certain canons of financial propriety and to
reduce the salaries and allowances of all or any class of person serving in connection with the
affairs of the Union including the Judges of the Supreme Court and High Courts. Union also
requires all Money Bills or Financial Bills to be reserved for the consideration of the President
after they are passed by the Legislature of the State.

It is thus, evident that in the administrative sphere the States cannot act in complete isolation and
have to work under the directions and in cooperation with the Center.

Centre State Financial Relations

Indian Constitution has made elaborate provisions, relating to the distribution of the taxes as well
as non-tax revenues and the power of borrowing, supplemented by provisions for grants-in-aid
by the Union to the States.

Article 268 to 293 deals with the provisions of financial relations between Centre and States.

The Constitution divides the taxing powers between the Centre and the states as follows:
The Parliament has exclusive power to levy taxes on subjects enumerated in the Union List, the
state legislature has exclusive power to levy taxes on subjects enumerated in the State List, both
can levy taxes on the subjects enumerated in Concurrent List whereas residuary power of
taxation lies with Parliament only.

Distribution of the tax-revenue

1. Duties Levied by the Union but Collected and Appropriated by the States: Stamp duties on
bills of Exchange, etc., and Excise duties on medical and toilet preparations containing alcohol.
These taxes don’t form the part of the Consolidated Fund of India, but are assigned to that state
only.

2. Service Tax are Levied by the Centre but Collected and Appropriated by the Centre and the
States.

3. Taxes Levied as Well as Collected by the Union, but Assigned to the States: These include
taxes on the sale and purchase of goods in the course of inter-state trade or commerce or the
taxes on the consignment of goods in the course of inter-state trade or commerce.

4. Taxes Levied and Collected by the Union and Distributed between Union and the States:
Certain taxes shall be levied as well as collected by the Union, but their proceeds shall be divided
between the Union and the States in a certain proportion, in order to effect on equitable division
of the financial resources. This category includes all taxes referred in Union List except the
duties and taxes referred to in Article 268, 268-A and 269; surcharge on taxes and duties
mentioned in Article 271 or any Cess levied for specific purposes.

5. Surcharge on certain duties and taxes for purposes of the Union: Parliament may at any time
increase any of the duties or taxes referred in those articles by a surcharge for purposes of the
Union and the whole proceeds of any such surcharge shall form part the Consolidated Fund of
India.
Grants-in-Aid
Besides sharing of taxes between the Center and the States, the Constitution provides for Grants-
in-aid to the States from the Central resources.

There are two types of grants:-

1. Statutory Grants: These grants are given by the Parliament out of the Consolidated Fund of
India to such States which are in need of assistance. Different States may be granted different
sums. Specific grants are also given to promote the welfare of scheduled tribes in a state or to
raise the level of administration of the Scheduled areas therein (Art.275).

2. Discretionary Grants: Center provides certain grants to the states on the recommendations of
the Planning Commission which are at the discretion of the Union Government. These are given
to help the state financially to fulfill plan targets (Art.282).
Effects of Emergency on Center-State Financial Relations:-

1. During National Emergency: The President by order can direct that all provisions regarding
division of taxes between Union and States and grants-in-aids remain suspended. However, such
suspension shall not go beyond the expiration of the financial year in which the Proclamation
ceases to operate.

2. During Financial Emergency: Union can give directions to the States:-

1. To observe such canons of financial propriety as specified in the direction.

2. To reduce the salaries and allowances of all people serving in connection with the affairs of
the State, including High Courts judges.

3. To reserve for the consideration of the President all money and financial Bills, after they are
passed by the Legislature of the State.

Finance Commission

Although the Constitution has made an effort to allocate every possible source of revenue either
to the Union or the States, but this allocation is quite broad based. For the purpose of allocation
of certain sources of revenue, between the Union and the State Governments, the Constitution
provides for the establishment of a Finance Commission under Article 280. According to the
Constitution, the President of India is authorized to set up a Finance Commission every five
years to make recommendation regarding distribution of financial resources between the Union
and the States.

Constitution
Finance Commission is to be constituted by the President every 5 years. The Chairman
must be a person having ‘experience in public affairs’. Other four members must be
appointed from amongst the following:-

1. A High Court Judge or one qualified to be appointed as High Court Judge;

2. A person having knowledge of the finances and accounts of the Government;

3. A person having work experience in financial matters and administration;

4. A person having special knowledge of economics.

Functions
The Finance Commission recommends to the President as to:-

1. The distribution between the Union and the States of the net proceeds of taxes to be divided
between them and the allocation between the States of respective shares of such proceeds;

2. The principles which should govern the grants-in-aid of the revenue of the States out of the
Consolidated Fund of India;

3. The measures needed to augment the Consolidated Fund of a State to supplement the
resources of the Panchayats and Municipalities in the State;

4. Any other matter referred to the Commission by the President in the interest of sound finance

Conclusion:
In India, the Centre-States relations constitute the core elements of the federalism. The Central
Government and State Government cooperate for the well-being and safety of the citizens of
India. The work together in the field of environmental protection, terror control, family control
and socio-economic planning.

The Indian constitution aim at reconciling the national unity while giving the power to maintain
state to the State governments. It is true that the union has been assigned larger powers than the
state governments, but this is a question of degree and not quality, since all the essential features
of a federation are present in the Indian constitution. It is often defined to be quasi-federal in
nature. Thus, it can be safely said that Indian Constitution is primarily federal in nature even
though it has unique features that enable it to assume unitary features upon the time of need.
Federal but its spirit is unitary.