Indian Economy - 1 & 2 Modules
Indian Economy - 1 & 2 Modules
Indian Economy - 1 & 2 Modules
Semester – III
Student Workbook
2023
Course Outcomes:
CO1. Demonstrate knowledge of the characteristics of Indian economy.
CO2. Discuss various programmes implemented under economic planning.
CO3. Assess the policy measures for poverty alleviation and unemployment.
CO4. Illustrate the importance of industry and services sector in India
The managing agency firms may be described as partnerships of companies formed by a group
of individuals with strong financial resources and business experience. The managing agency
firm is entitled to the management of the whole affairs of the Company unless otherwise
provided in the agreement.
A similar situation prevailed in the civil administration. All the key positions and top ranks
were manned by British officers. They were also paid fabulous salaries and allowances. Besides
this, they were provided with other benefits for the maintenance of their children. These officers
had immense administrative powers. They could award contracts for supplies and stores and
thus the contractors paid them commissions for the favours. These unauthorised earnings had
also become a part of the system. These officers, after a certain specified period of service
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could seek retirement and thus were entitled to benefits of pension. The payments which were
remitted to England out of the savings of the officers living in India and also on account of
pension and other benefits were called as family remittances. These payments were a heavy
drain on our resources. Besides, India had also to pay interest on sterling loans raised for the
construction of railway and irrigation works. Payments accruing on account of interest on debts
incurred by India and those connected with civil departments in India, such as pensions,
gratuities, furlough allowances, and payments for stores purchased in India — all taken
together were called Home Charges. In 1931, the payments accruing to Britain on account of
home charges amounted to ` 43 crores.
Not only that, but India was also forced to pay for the various wars of the East India Company
like the Mysore and Maratha Wars, the Afghan and Burmese Wars. The British forced the
Indian people to pay through their nose for their expeditions to Prussia, Africa etc. The entire
cost of the telegraph line from England to India was charged from India.
During the two World Wars, India exported more to Britain than it imported. Against this
positive balance of trade, Britain authorised the Government of India to issue more currency
on the backing of the Sterling Balance held in England. India exported more and imported less.
The Sterling Balances, therefore, represented the sweat, the tears and the toil of the millions of
the poor people of India. But Great Britain by its policy only exported inflation to India. This
accounted for a much larger rise of the price level in India during the war. It imposed a heavy
burden on the Indian people.
The net result of the British policies was poverty and stagnation of the Indian economy.
The economic drain of wealth prevented the process of capital creation in India but the British
brought back the drained out capital and set up industrial concerns in India owned by British
nationals. The government protected their interests and thus the British could secure almost a
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monopoly of all trade and principal industries. The British component of industries established
in India further drained off Indian wealth in the form of remittances of profits and interest.
Thus, the economic drain which commenced right from the inception of the British rule acted
as a drag on economic development till 1947.
It is also not correct to argue that British capital showed a spirit of adventure. The British
developed the railways in India under the Guarantee System which assured a minimum return
on whatever capital they invested. Similarly, the development of tea and coffee plantations or
investment in jute industry was undertaken only when the British investor felt attracted by high
profits available in these areas. Not only that, the entire policy of protection was aimed at
protecting British industrial and commercial interests. The introduction of the clause of most
favoured nation treatment’ further made it clear that along with profit maximization, the British
used the arm of the state to obtain security maximization. There is, therefore, no basis for the
assertion that British capital was more adventurous than Indian capital.
Most of the food produced in the village was consumed by the village population itself. The
raw materials produced from primary industries were the feed for the handicrafts. Thus the
interdependence of agriculture and hand industry provided the basis of the small village
republics to function independently of the outside world. Sir Charles Metcalfe writes in this
connection : “The village communities are little republics having nearly everything they want
within themselves; and almost independent of foreign relations. They seem to last where
nothing lasts. This union of the village communities, each one forming a separate little state by
itself... is in a high degree conducive to their happiness, and to the enjoyment of a great portion
of freedom and independence.” The villages did acknowledge some out-side authority, may be
that of a local princeling, who in turn may be under a Muslim Nawab or a Hindu king, by
paying a portion of the agricultural produce varying between one-sixth to one-third or even in
some periods one-half as land revenue. The land revenue sustained the government.
The agriculturists could be further divided into the land-owning and the tenants. Labour and
capital needed was either supplied by the producers themselves out of their savings or by the
village landlord or by the village moneylender.
Towns had a life much different from the villages. There existed a large variety of occupations
and trades in towns. They catered to wider markets.
The chief industry spread over the whole country was textile handicrafts. The high artistic skill
of the Indian artisans can be visualised from this account given by T.N. Mukherjee : “A piece
of the muslin 20 yards long and one yard wide could be made to pass through a finger ring and
required six months to manufacture.”Besides the muslins, the textile handicrafts included
chintzes of Lucknow, dhotis and dopattas of Ahmedabad, silk, bordered cloth of Nagpur and
Murshidabad. In addition to cotton fabrics, the shawls of Kashmir, Amritsar and Ludhiana were
very famous.
Not only that India was also quite well-known for her artistic industries like marble-work,
stone- carving, jewellery, brass, copper and bell-metal wares, wood-carving, etc. The cast-iron
pillar near Delhi is a testament to the high level of metallurgy that existed in India.
The Indian industries “not only supplied all local wants but also enabled India to export its
finished products to foreign countries.”Thus, Indian exports consisted chiefly of manufactures
like cotton and silk fabrics, calicos, artistic wares, silk and woollen cloth. Besides, there were
other articles of commerce like pepper, cinnamon, opium, indigo, etc. In this way, Europe was
a customer of Indian manufactures during the 17th and 18th centuries. It was this superior
industrial status of India in the pre-British period that prompted the Industrial Commission
(1918) to record :
“At a time when the West of Europe, the birth place of modern industrial system, was inhabited
by uncivilised tribes, India was famous for the wealth of her rulers and for high artistic skill of
her craftsmen. And even at a much later period, when the merchant adventurers from the West
made their first appearance in India, the industrial development of this country was, at any
rate, not inferior to that of the more advanced European nations.”
The process of commercial agriculture necessitated by the Industrial Revolution was intensified
by the development of an elaborate network of railway in India after 1850. Railways linked the
interior of the country with ports and harbours, urban marketing centres and thus Indian
agriculture began to produce for world markets. Large quantities of wheal from Punjab, jute
from Bengal and cotton from Bombay poured in for export to England. The same railways
which carried commercial crops from the various parts of the country, brought back the foreign
machine-made manufactures to India. Thus, railways and link-roads connecting the hinterland
of country with commercial and trading centres were instrumental in intensifying commercial
agriculture on the one hand and sharpening competition of machine-made goods with Indian
handicrafts, on the other. These factors led to the ruin of Indian industries.
During the 19th century, it was but natural that British business should pioneer industrial
enterprise in India. The Britishers had experience of running industries at home. British
enterprise received maximum state-support. Besides, much of the business developed in India
was related either to the Government or interests in some way connected with Britain. Though
industrialisation was started by the British in the 19th century, the Britishers were more
interested in their profit and not in accelerating the economic growth of India.
Private enterprise and industrial growth in the first half of the 20th century
Over 70 cotton mills and nearly 30 jute mills were set up in the country. Coal production was
more than doubled. Extension of railways continued at the rate of about 800 miles per annum.
The foundation of iron and steel industry was finally laid during this period.
The war of 1914-18 created enormous demand for factory goods in India. Imports from
England and other foreign countries fell substantially. Besides, the government demand for
war-purposes increased considerably. As a result, great stimulus was given to the production
of iron and steel, jute, leather goods, cotton and woollen textiles. Indian mills and factories
increased their production and were working to full capacity. But on account of the absence of
heavy industries and also of the machine tools industry, they could not develop fast enough.
Most of these estimates were the results of the efforts of individuals and as such they suffered
from serious limitations. The arbitrary assumptions of the authors undermined the reliability of
the estimates. Besides, these estimates were based on statistics from the agricultural sector
which were highly undependable.
2. Net Output Method : In agriculture, the output of each crop is estimated by multiplying the
area sown by the yield per hectare. For obtaining the average yield crop cutting experiments
were conducted. From the gross value of output so obtained, deductions for the cost of seed,
manures and fertilisers, market charges, repairs and depreciation are made so as to derive
net value of the product from agriculture. For animal husbandry, forestry, fishery, mining
and factory establishments, estimates of production are multiplied with market price so as
to obtain the gross value of the output. From the gross value of output deductions are made
for cost of materials used in the process of production and depreciation charges etc. to
obtain net value added of each sector.
For Banking and Insurance the balance sheets of the firms provide the requisite information.
Wages, salaries, directors’ fees and dividends (distributed and undistributed) are all added to
get the net contribution of the sector. For commerce and transport and for professions, liberal
arts and domestic services, the procedure is the same as for small enterprises.
For public sector, wages, salaries, pensions, other benefits, dividends or surplus, etc., are added
up to arrive at the contribution of the public sector. To this is added the contribution of
government construction and this gives the total contribution of the public sector.
National Income Series at 1960-61 prices : This series provided national income data at
current prices and at 1960-61 prices for the period 1960-61 to 1975-76.
Another series was started with 1970-71 as base year instead of 1960-61.
Estimates based on different base years indicate differences in magnitudes, even when they are
deflated at constant prices either at 1948-49 or 1960-61 or 1970-71 prices. This is due to the
differences in weights used for the series. The Central Statistical Organisation (CSO) brought
out another Series on national income with 1980-81 as base year in place of the series with
1970-71 as the base year.
During the Fifth Plan (1974-79) the average annual increase in national income was of the
order of 4.9 per cent and that of per capita income was barely 2.6 per cent. On the whole, the
performance of the economy during the Fifth Plan can be considered very satisfactory.
During the Seventh Plan (1985-90), India’s NNP grew on the average at the rate of 5.5 % per
annum and the annual growth of per capita NNP was 3.3 %. Obviously, Seventh Plan achieved
its objective of 5 per cent growth rate of NNP along with 3 % targeted growth rate of per capita
NNP. This was a welcome development.
The share of finance, insurance, real estate and business services marginally declined from 7.7
percent in 1950-51 to 7.5 percent in 1980-81 and thereafter improved to 17.4 percent in 2010-
11.
The structural change in the composition of national income by industrial origin is the
consequence of the process of economic growth initiated during the plans. Since the growth
process involved a rapid expansion of manufacturing in the organised sector, the share of
manufacturing was bound to indicate a relatively sharp increase. However, agriculture did not
indicate a fast rate of growth.
As is evident, the rate of growth of agriculture showed a decline from 3 per cent during 1950-
51 and 1960-61 to 1.5 per cent during 1970-71 and 1980-81 and thereafter, it picked up to 3.4
per cent during 1980-81 and 1990-91. However, it declined to 2.6 per cent during 1990-91 and
2000- 01 and then improved to 3.79 percent between 2004-05 and 2010-11.
The theory of economic growth also supports the structural change in the composition of
national product. The distribution of gross domestic product in developed countries indicates a
much higher share of industry and services and a relatively lower share for agriculture. The
disparity in per capita incomes between developed and underdeveloped countries is largely a
reflection of the disparity in the structure of their economies.
As is expected during the process of growth, India also experienced an improvement in the
share of the tertiary sector. This was largely due to an expansion in transport and
communication, banking and insurance and public administration. The rate of growth in all the
components of the tertiary sector was 4.9 per cent per annum during 1950-51 and 1990-91
which was higher than the overall rate of growth of gross domestic product (i.e., 4.1 per cent)
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in the economy. During 2004-05 and 2010-11, the growth rate of tertiary sector has picked up
to more than 10 per cent.
There is a sudden jump of the Indian economy to pass on to the stage of a post-industrial
‘service’ economy without completing the phase of industrialisation. This only underlines the
need for strengthening the manufacturing sector by stepping up the process of industrialisation.
The changing structure of national income needs to be further strengthened by stepping up the
programme of industrialisation. This does not imply a neglect of agriculture, but for
accelerating the growth process in agriculture, industrialisation of the economy with emphasis
on agro- based industries and industries supplying inputs to agriculture is a sine qua non. It is
only then that the process of transition of the Indian economy from a developing to a developed
economy will be accomplished.
The share of public sector in gross domestic product was 14.9 per cent in 1970-71, it rose to
25.9 per cent in 1993-94 and then declined to 20.8 per cent in 2008-09. The gradual increase
in the share of the public sector is the direct result of the expansion of the economic activities
of the State, both on side of enlarging administrative services and of increasing productive
activities in public enterprises during the first four decades of development. Thereafter,
economic reforms intiated in 1991 stressed the need for restricting the area of operation of
public enterprises. It emphasized phasing out of enterprises incurring losses and withdrawing
from such sectors like consumer goods, hotels etc. which served no social purpose. The factors
contributing to the increase in the share of non-departmental enterprises are the setting up of
new industries, expansion of existing enterprises, nationalisation of coal mining companies,
banks and insurance and the like, and merger of private electricity companies into electricity
boards.
From the data given in Table 10, it is evident that the share of the organised sector has risen
from 30 per cent in 1980-81 to 42.9 per cent in 2007-08. Consequently, the share of the
unorganised sector declined from 70 per cent to 57.1 per cent during the same period. It may
also be noted that the share of the organised sector in mining, manufacturing etc. improved
from 56.8 per cent to 70.2 per cent and that in the services sector improved from about 40 per
cent in 1980-81 to 46 per cent in 2007-08. On the other hand, in agriculture, forestry and
fishing, the contribution of the unorganised sector slightly declined 95.2 per cent in 1980-81 to
91.2 per cent in 2007-08. The shift in the composition of NDP from the unorganised to the
organised sector is a consequence of the process of development.
Besides these conceptual problems, there are a number of limitations of national income
estimation which have a particular relevance in India.
The output of the non-monetised sector : While calculating national output, the assumption
normally made is that the bulk of the commodities and services produced are exchanged for
money. India, where agriculture is carried on a subsistence basis, a considerable portion of the
output does not come to the market for sale but is either consumed by the producers themselves
or is bartered away with other producers in exchange for other goods and services. To ignore
this portion of the output in agriculture would reduce the national output considerably. At
present, there is no objective method of finding out the total output of food crops and the
amount consumed at home. Hence, the difficulty that arises in India is to find out the imputed
value of the produce of the non-monetised sector and add it to the value of the monetised sector.
Absence of data on income distribution : The National Accounts Statistics do not generate
any data on income distribution of households or persons. For this purpose, instead of making
inquiries about household income or related variables, the National Sample Survey
Organisation (NSSO) have used data on consumer expenditure and collected through a pilot
survey on distribution of income, consumption and savings during 1983-84 in 5 selected states
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and 4 metropolitan cities. Al-though these surveys were questioned on the basis of the small
size of their samples, it was found that household incomes (Y) based on direct enquiries were
lower by 30-40 per cent than those derived indirectly as the sum of consumption and saving
(C+S). Conceding that the experience was disappointing, the NSSO has suggested full-scale
pilot surveys on household income, saving and consumption. There is a strong need to compile
data on income distribution so that the spread effects of the growth process on low income
households can be properly analysed.
Unreported illegal income : Studies about black economy pertaining to India have shown that
a significant part of the economy operates as hidden or subterranean economy and the income
generated in it goes as unreported income. According to a study by Dr. Arun Kumar, black
economy accounted for about 40 percent of total income generated (Gross National Product),in
2000-01. Obviously, national income estimates to that extent are under-estimates. It is also a
fact that the size of the black economy has been growing over time and as such the magnitude
of error on account of this factor alone has been becoming larger and larger.
Terminal Questions
Section A (5 Marks)
1. Explain the major forms of colonial exploitation
2. Explain the fields of direct foreign investments
3. List out the principal functions of the managing agents and explain in your own words
4. Explain the consequences of the various forms of exploitation
5. Explain about the structures and organisation of villages
6. Explain about Rural GDP
7. Highlight the Trends in distribution of National Income by Industrial Origin.
Section B
1. Discuss in detail about the exploitation through Trade Policy
2. Explain in detail about the Post-Independence Estimates
3. Explain in detail about the Limitations of National Income Estimation in India
Section C
1. Discuss in detail about the various Trends and Structures of Indian Economy (Pre-
Independence Period Estimates and Post-Independence Period Estimates).
2. Discuss the types of National Income Estimates.
The idea of economic planning for five years was taken from the Soviet Union under the
socialist influence of first Prime Minister Pt. Jawahar Lal Nehru.
• The first eight five-year plans in India emphasised on growing the public sector with
huge investments in heavy and basic industries, but since the launch of Ninth five-year
plan in 1997, attention has shifted towards making government a growth facilitator.
The Industrial Policy Statement published just after independence in 1948 recommended
setting up of a Planning Commission and following a mixed economic model. Here are the
major milestones related to economic planning in India:
Setting up the NITI Aayog was a major step away from the command economy structure
adopted by India till 1991. The Planning Commission’s top-down model of development had
become redundant due to present economic conditions and NITI Aayog approaches economic
planning in a consultative manner with input from various state governments and think tanks.
The evolution of planning in India is a fascinating journey that has shaped the country's
economic and social development. India's planning process can be divided into several distinct
phases, each marked by different approaches, policies, and objectives. Here is an overview of
the evolution of planning in India:
The basic overview of Five-Year Plan in India along with the timeline, target growth, and
actual growth is as under:
Plan Timeline Target Growth Actual Growth
First Five-Year Plan 1951 – 1956 2.1 % 3.6 %
Second Five Year 4.5% 4.3%
1956 – 1961
Plan
Third Five Year Plan 1961 – 1966 5.6% 2.8%
Three Annual Plans 1966 – 1969 – –
Fourth Five Year
(1969 – 74) 5.7% 3.3%
Plan
Fifth Five Year Plan (1974 – 79) 4.4% 4.8%
Rolling Plan (1978 – 80) – –
Sixth Five Year Plan (1980 – 85) 5.2% 5.7%
Seventh Five Year
(1985 – 90) 5.0% 6.0%
Plan
Eighth Five Year
(1992 – 97) 5.6 % 6.8%
Plan
Ninth Five Year Plan (1997- 2002) 6.5% 5.4%
Tenth Five Year Plan (2002 – 2007) 8% 7.6%
Eleventh Five Year
(2007 – 2012) 9% 8%
Plan
Here are some of the notable achievements and failures of the five-year plans in India:
Achievements:
1. Agricultural Growth: The five-year plans played a significant role in boosting
agricultural productivity and food production in India. Various irrigation projects,
research and development, and infrastructure development helped improve agricultural
practices and increase yields.
2. Industrial Development: The plans emphasized industrialization and the development
of key sectors such as steel, coal, power, and heavy machinery. This led to the
establishment of several public sector enterprises and contributed to India's industrial
growth.
3. Infrastructure Development: The five-year plans focused on developing
infrastructure, including transportation, communication, and power networks.
Construction of roads, railways, ports, and power plants improved connectivity and
facilitated economic activities.
4. Education and Healthcare: The plans emphasized the expansion of education and
healthcare facilities. Significant investments were made in building schools, colleges,
hospitals, and primary health centers, leading to increased literacy rates and improved
healthcare outcomes.
5. Poverty Alleviation and Social Welfare: The plans aimed to reduce poverty and
improve the standard of living for marginalized sections of society. Initiatives like the
Integrated Rural Development Program (IRDP) and the National Rural Employment
Guarantee Act (NREGA) provided employment opportunities and social security
measures.
Failures:
1. Implementation Challenges: The execution of the five-year plans faced various
challenges such as delays, inadequate monitoring, and corruption. These factors often
hindered the effective implementation of planned projects and targets.
It is important to note that the achievements and failures of the five-year plans varied across
different plan periods and were influenced by factors such as changes in government policies,
global economic conditions, and internal challenges faced by the Indian economy.
During this period, China aimed to achieve sustainable and balanced economic growth while
focusing on social development and environmental protection. The plan emphasized shifting
the economic model from being export-driven and investment-led to being more consumption-
driven and innovation-oriented. Some of the key goals and priorities of the 12th Five-Year Plan
included:
1. Economic Restructuring: The plan aimed to rebalance the economy by reducing
reliance on exports and investment, and promoting domestic consumption and services
sector development.
2. Innovation and Technology: There was a focus on promoting innovation, research
and development, and upgrading industries to enhance China's competitiveness in the
global market.
3. Urbanization: The plan aimed to promote sustainable urbanization, improve
infrastructure, and provide better living conditions for the growing urban population.
4. Social Welfare: The plan emphasized the development of social welfare programs,
including healthcare, education, social security, and poverty alleviation.
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5. Environmental Protection: Addressing environmental challenges and promoting
sustainable development were key priorities, including reducing pollution, conserving
resources, and promoting clean energy.
It's important to note that plans and policies may have evolved since 2015, and I do not have
information on any specific developments or revisions to the 12th Five-Year Plan after my
knowledge cutoff in September 2021. For the most up-to-date information, it would be best to
refer to official sources or recent news updates on China's economic and social development
plans.
The primary objective of NITI Aayog is to foster cooperative federalism by involving the states
in the economic policy-making process. It promotes sustainable development by formulating
medium and long-term strategic plans for various sectors of the economy. NITI Aayog aims to
achieve inclusive growth, enhance the welfare of citizens, and ensure effective governance.
NITI Aayog consists of a governing council headed by the Prime Minister of India, with Chief
Ministers of states and union territories, along with senior government officials and experts, as
its members. It operates through various verticals and specialized divisions to focus on different
sectors and policy areas.
Overall, NITI Aayog plays a crucial role in shaping India's development agenda and providing
policy recommendations to achieve sustainable and inclusive growth.
Although the traditional five-year plan was discontinued, the government continued to
implement sector-specific policies and projects. These targeted sectors such as infrastructure,
agriculture, health, education and technology. Initiatives like Make in India and Digital India
are examples of the government’s commitment to growth and development through targeted
policies focused on specific sectors, meaning deviations from strategic plans as it is located
around the center.
In addition, it prepares a three-year plan outlining key policy interventions, reforms and
initiatives to achieve short-term objectives Draw focus away from output-based planning
Develop local plans and initiatives in areas like infrastructure, digital transformation,
sustainable development, collaborate with ministries, states and stakeholders for
comprehensive planning and effective implementation Through NITI Aayog has played a
pivotal role in restructuring the Indian economy modernize it, promote inclusiveness and
promote sustainable development.
Terminal Questions
Section A (5 Marks)
1. Summarize the long-term objectives of Five-Year Plans in India
2. Explain the major milestones related to economic planning in India.
3. Describe the functions of NITI Aayog.
Section B (9 Marks)
1. Enumerate the objectives of economic planning in India.
2. Discuss the various achievements and failures of the five-year plans in India.