DAV International School

Amritsar

Support material for students

Economics - XII
2024-25

DAV International School, Amritsar

 Under the guidance of
Dr. Anjana Gupta
ARO Punjab Zone- C
&
Principal DAV International School Amritsar

Editor:
Mr. Adesh Nanda (HOD-Commerce)

Contributors:
Ms. Amita Gupta (Commerce Faculty)

DAV International School, Amritsar

 Unit-wise Marking Scheme
S.No. Unit Marks
Part A Introductory Macroeconomics
I National Income and Related Aggregates 10
II Money and Banking 6
III Determination of Income and Employment 12
IV Government Budget and the Economy 6
V Balance of Payments 6
Total 40

Part B Indian Economic Development

VI Development Experience (1947-90) and 12
Economic Reforms since 1991
VII Current Challenges facing Indian Economy 20
VIII Development Experience of India – A 8
Comparison with Neighbours
Total 40
Theory Paper (40+40 = 80 Marks)

Part C Project Work 20

DAV International School, Amritsar

 Ch- National Income Accounting
Keynotes
Three phases in circular flow of income: There are three different phases of
circular flow of national income viz production, income and expenditure.

Production of goods and services is the result of combined efforts of factors of

production (land, labour, capital and entrepreneur). The net output emerging from
production process gets distributed in the form of money income(rent, wages,
interest and profit). Thus, production generates income. Income creates demand for
goods and services leading to expenditure and expenditure in turn leads to further
production and this circle moves on and on.

Circular flow of income in two sector model-:

Real Flow/Physical Flow: The term real flow means the flow of factor services
from households to firms. Similarly, the flow of goods and services from firms to
households.
Nominal Flow/ Money Flow: The money flow refers to the flow of factor payments
from firms to households for factor services and flow of consumption expenditure
from households to firms.
Goods: In economics a goods is defined as any physical object, man-made, that
could command a price in the market and these are the materials that satisfy human
wants and provide utility

Investment : Addition made to the physical stock of capital during a period of time
is called investment. It is also called capital formation.
capital formation:- Change in the stock of capital is also called capital formation.
Depreciation :means fall in value of fixed capital goods due to normal wear and
tear and expected obsolescence. It is also called consumption of fixed capital.
Gross Investment :Total addition made to physical stock of capital during a period
of time. It includes depreciation. OR Net Investment + Depreciation
Net Investment :Net addition made to the real stock of capital during a period of
time. It excludes depreciation.
Net Investment = Gross investment – Depreciation.
Stocks :Variables whose magnitude is measured at a particular point of time are
called stock variables. Eg. National Wealth, Inventory etc.
Flows :Variables whose magnitude is measured over a period of time are called flow
variable. Eg. National income, change in stock etc.
Leakage :It is the amount of money which is withdrawn from circular flow of
income. For eg. Taxes, Savings and Import. It reduces aggregate demand and the
level of income.
Injection :It is the amount of money which is added to the circular flow of income.
For e.g. Govt. Exp., investment and exports. It increases the aggregate demand and
the level of income.
Economic Territory :Economic (or domestic) Territory is the geographical territory
administrated by a Government within which persons, goods, and capital circulate
freely.

Scope of Economic Territory :

(a) Political frontiers including territorial waters and airspace.
(b) Embassies, consulates, military bases etc. located abroad.
(c) Ships and aircraft operated by the residents between two or more countries.
(d) Fishing vessels, oil and natural gas rigs operated by residents in the international
waters.
Normal Resident of a country: is a person or an institution who normally resides
in a country and whose Centre of economic interest lies in that country.
Exceptions:- (a) Diplomats and officials of foreign embassy.
(b) Commercial travellers, tourists students etc.
(c) People working in international organizations like WHO, IMF, UNESCO etc. are
treated as normal residents of the country to which they belong.

The related aggregates of national income are:-

(i) Gross Domestic Product at Market price (GDPMP)
(ii) Gross Domestic Product at Factor Cost (GDPFC)
(iii) Net Domestic Product at Market Price (NDPMP)
(iv) Net Domestic Product at FC or (NDPFC)
(v) Net National Product at FC or National Income (NNPFC)
(vi) Gross National Product at FC (GNPFC)
(vii) Net National. Product at MP (NNPMP)
(viii) Gross National Product at MP (GNPMP)
(i) Gross Domestic Product at Market Price : It is the money value of all the
final goods and services produced within the domestic territory of a country
during an accounting year.
GDPMP = Net domestic product at FC (NDPFC) + Depreciation + Net
Indirect tax.
(ii) Gross Domestic Product at FC : It is the value of all final goods and services
produced within domestic territory of a country which does not include net
indirect tax.
GDPFC = GDPMP – Indirect tax + Subsidy
or GDPFC = GDPMP – NIT
(iii) Net Domestic Product at Market Price : It is the money value of all final
goods and services produced within domestic territory of a country during an
accounting year and does not include depreciation.
NDPMP = GDPMP – Depreciation
(iv) Net Domestic Product at FC : It is the value of all final goods and services
which does not include depreciation charges and net indirect tax. Thus it is
equal to the sum of all factor incomes (compensation of employees, rent,
interest, profit and mixed income of self employed) generated in the domestic
territory of the country.
NDPFC = GDPMP – Depreciation – Indirect tax + Subsidy
(v) Net National Product at FC (National Income) : It is the sum total of factor
incomes (compensation of employees + rent + interest + profit) earned by
normal residents of a country in an accounting year
or
NNPFC = NDPFC + Factor income earned by normal residents from abroad -
factor payments made to abroad.
(vi) Gross National Product at FC: It is the sum total of factor incomes earned
by normal residents of a country along with depreciation, during an accounting
year.
GNPFC = NNPFC + Depreciation OR
GNPFC = GDPFC + NFIA
(vii) Net National Product at MP : It is the sum total of factor incomes earned by
the normal residents of a country during an accounting year including net
indirect taxes.
NNPMP = NNPFC + Indirect tax – Subsidy
(viii) Gross National Product at MP : It is the sum total of factor incomes earned
by normal residents of a country during an accounting year including
depreciation and net indirect taxes.
GNPMP = NNPFC + Dep + NIT

Domestic Aggregates

Gross domestic Product at Market Price is the market value of all the
final goods and services produced by all producing units located in the domestic
territory of a country during an accounting year. It includes the value of depreciation
or consumption of fixed capital.
Net Domestic Product at Market Price Depreciation
(consumption of Fixed capital). It is the market value of final goods and services
produced within the domestic territory of the country during a year exclusive
of depreciation.

It is the factor income accruing to owners of factors of

production for suppling factor services with in domestic territory during an
accounting year.
NATIONAL AGGREGATES

Gross National Product at Market Price ) is the market value of all the
final goods and services produced by normal residents (in the domestic territory and
abroad) of a country during an accounting year.
National Income :It is the sum total of all factors incomes which are earned
by normal residents of a country in the form of wages. rent, interest and profit during
an accounting year.

Methods of Estimation of National Income:

1. VALUE ADDED METHOD

For Example-:

Calculate the net value added at the market price of a firm:

Items Amount

Sale 400
Change in stock -20
Depreciation 30
Net indirect taxes 40
Purchase of machinery 200
Purchase of an intermediate product 250

Value of Output = Sale + Change in Stock

= 400 + (-) 20
= 380
Gross Value added at MP = Value of output – Purchase of an intermediate product
= 380 – 250 = 130
Net value added at MP = Gross value added at MP – Depreciation
= 130 – 30 = 100
Thus, the final answer = ₹ 100
2. Income method

NNP fc= NDP fc + NFIA

For example
Calculate National Income.
Solution-:
NDPfc= COE+OS+MY
= 1000+260+140= 1400
NNPfc= NDPfc+NFIA
= 1400+30=1430 crores

3. Expenditure method

For example-:
Calculate National income by Expenditure Method.
Final Consumption Expenditure Private Sector = 350
Government Sector = 100
Mixed income of self-employed = 35
Gross domestic fixed capital formation = 70
Opening stock = 15
Compensation of employees = 250
Closing stock = 25
Imports = 20
Rent = 75
Consumption of fixed capital = 10
Net indirect taxes = 25
Interest = 25
Net factor income from abroad = -5
Exports = 10
Profit = 100.
Solution
GDP at MP = Private final consumption expenditure + Government final
consumption expenditure + Gross domestic capital formation (Gross domestic fixed
capital formation + Change in stock {Closing stock - Opening stock}) + Net exports
(Exports - Imports) = Rs.[350 + 100 + 70 + {25 - 15} + (10 - 20)] = Rs.520.
NNP at FC = GDP at MP - Consumption of fixed capital - Net indirect taxes + Net
Factor Income From Income= Rs.[520 - 10 - 25 + (-)5] = Rs.480.
Value of Output :Market value of all goods and services produced by an enterprise
during an accounting year.
Value added :It is the difference between value of output of a firm and value of
inputs bought from the other firms during a particular period of time.
Problem of Double Counting :Counting the value of a commodity more than once
while estimating national income is called double counting. It leads to
overestimation of national income. So, it is called problem of double counting.
Ways to solve the problem of double counting.
(a) By taking the value of only final goods.
(b) By value added method.
Net Factor Income from Abroad NFIA = It is difference between factor income
received/earned by normal residents of a country and factor income paid to non-
residents of the country.
Components of NFIA :
1. Net Compensation of Employees
2. Net Income from Property and entrepreneurship
3. Net Retained earning of resident companies abroad
Hints NFIA = Factor Income Received from Abroad. –Factor Income Paid to
Abroad.
OR
NFIA = Net compensation of Employees + Net income from property and
entrepreneurship. + Net retained earning of resident companies abroad
National Income at Current Prices : It is also called nominal National income.
When goods
and services produced by normal residents within and outside of a country in a year
valued at current years prices i.e. current prices is called national income at current
prices.
National Income at Constant Prices :It is also called as real national income. When
goods and services produced by normal residents within and outside of a country in
a year valued at constant price i.e. base year's price is called National Income at
Constant Prices.
GDP and Welfare :
In general GDP and Welfare are directly related with each other. A higher GDP
implies that more production of goods and services. It means more availability of
goods and services. But more goods and services may not necessarily indicate that
the people were better off during the year. In other words, a higher GDP may not
necessarily mean higher welfare of the people. There are two types of GDP:
Real GDP : When the goods and services are produced by all producing units in the
domestic territory of a country during an a/c. year and valued these at base year’s
prices or constant price, it is called real GDP or GDP at constant prices. It changes
only by change in physical output not by change price level. It is called a true
indicator of economic development.
Nominal GDP : When the goods and services are produced by all producing units
in the domestic territory of a country during an a/c. year and valued these at current
year’s prices or current prices, it is called Nominal GDP or GDP at current prices. It
is influenced by change in both physical output and price level. It does not consider
a true indicator of economic development.

For Example
If Real GDP=600 and nominal GDP=660,find GDP deflator (price index).
Sol. GDP deflator (Price index)=Nominal GDP/Real GDP×100=660/600×100=110
It shows increase in the general price level by 10%.
Price index plays the role of deflator deflating current price estimates into constant
price estimates. In this way it may be called GDP deflator.
Welfare mean material well being of the people. It depends on many economic
factors like national income, consumption level quality of goods etc and non-
economic factor like environmental pollution, law and order etc. the welfare which
depends on economic factors is called economic welfare and the welfare which
depends on non-economic factor is called non-economic welfare. The sum total of
economic and non-economic welfare is called social welfare. Conclusion thus GDP
and welfare directly related with each other but this relation is incomplete because
of the following reasons.
Limitation of percapita real GDP/GDP as a indicator of Economic welfare :
Non-monetary exchange
Externalities not taken into GDP but it affects welfare.
Distribution of GDP.
All product may not contribute equally to economic welfare.
Contribution of some products may be negative.
Inflation may give falls impression of growth of GDP.

Choose the correct option-:

1. Which of the following items are not included while measuring the Gross National
Product?
a) Illegal and leisure activities b)Purely financial transactions
c) Transferring of used goods and non-market goods and services d)All of the
above
Answer: d
2) Which of the following statements is false?
(a) Use of public parks increases welfare.
(b) Distribution of GDP increases welfare
(c) Higher GDP always cause higher welfare
(d) None of the above
Answer c
3) Due to setting up of factory near residential area increase_____but decreases
.
(a) Welfare, GDP
(b) GDP, welfare
(c) Both (a) and (b)
(d) None of the above
Answer b
4) Which organisation is accountable for calculating the Gross Domestic Product of
India?
a) Indian Statistical Institute b) Reserve Bank of India
c) National Statistical Office d) Ministry of Commerce and Industry
Answer C
5) Who measured the first National Income of India?
a) Dadabhai Naoroji b)William Digboi c)V.K.R.V. Rao d)Professor P.C.
Mahalanobis
Answer A
6) Consider an economy with three firms X, Y and Z. The following data is available:
Particulars Firm X Firm Y Firm Z
Sales 500 400 700
Intermediate consumption 100 150 300
Depreciation 50 25 100
What is the total value added by the three firms?
a) ₹1050 b) ₹1025 c) ₹1075 d) ₹1125
Answer a
7) Which of the following is an example of a final good?
a) Flour purchased by a household
b) Stationery used by a school
c) Steel purchased by an automobile company
d) Electricity used in a factory
Answer a
8) Which of the following is a factor payment?
a) Old age pension
b) Interest received on investments
c) Crop insurance claim
d) Lottery winning
Answer: b) Interest received on investments
9) When net factor income from abroad is positive, it indicates:
a) Outflow on income account b) Inflow on income account c) Outflow on capital
account d) Balance on current account
Answer: b) Inflow on income account
10)Income earned by a foreign company from its domestic operations is:
a) Included in GDP b) Excluded from GNP c) Part of net factor income from abroad
d) None of the above
Answer: c) Part of net factor income from abroad
11) National income at factor cost excludes:
a) Indirect taxes b) Subsidies
c) Corporate taxes d) Transfer payments
Answer: a) Indirect taxes
12)Out of the following which items will be included in national income-:
i) Payment of school fees by parents
ii) Purchase of shares by a business
iii) Income tax paid by a salaried person
iv) Goods exported to another country
v) Monthly insurance premium paid
alternatives -:
a) i,ii,iii,iv c) i,iv,v
b) i,iv d) i,ii,iv,v
13) Which of the following describes the value added method of calculating GDP?
A) It measures the total value of final goods and services produced within an
economy over a period of time.
B) It calculates the difference between the value of inputs and the value of outputs
for each stage of production.
C) It sums the value added at each stage of production to estimate the total value of
final goods and services.
D) It estimates GDP based on total expenditures on consumption, investment,
government and net exports.
Answer is C.
14) The objective of macroeconomics is to understand:
a) Maximizing personal profits as producers
b) Individual markets of demand and supply
c) Economic behavior at the micro-level
d) Aggregate variables and their impact on the entire economy
Answer: d) Aggregate variables and their impact on the entire economy
15) Which of the following is an example of a final good?
a) Raw cotton
b) Yarn
c) Cloth
d) Home-cooked food
 Answer: d) Home-cooked food
16)Why do we measure the total final goods produced in the economy using a
common measuring rod?
a) To avoid double counting of intermediate goods
b) To give a fuller description of total economic activity
c) To measure the total stock of capital
d) To assess the wear and tear of consumer durables
Answer: a) To avoid double counting of intermediate goods
17) Which factor(s) contribute to the distinction between consumer goods and
capital goods?
a) Their durability and wear and tear
b) Their role in the production process
c) Their classification as final goods
d) Both a) and b)
Answer: d) Both a) and b)
18) Annual profits and production are examples of:
A) Stocks
B) Flows
C) Variables
D) Investments
Answer: B) Flows

Assertion Reason questions-:

a) Both Assertion(A) and Reason(R) are True and Reason(R) is the correct explanation
of Assertion (A)
b) Both Assertion(A) and Reason(R) are True and Reason(R) is not the correct
explanation of Assertion (A)
c) Assertion(A) is false and Reason(R) is true
d) Assertion(A) is true and Reason(R) is false
1) Assertion (A) – Domestic income can be greater than national income.
Reason (R )- If factor income from abroad is less than factor income to abroad ,
NFIA is negative.
Answer a
2) Assertion (A)- “Market Price” is the market value of final goods and services and
“Factor Cost” is the money value of final goods and services.
Reason (R )- Factor income is not included in National income whereas transfer
income is included
Answer c
3) Assertion (A)- By including the value of final goods only we can solve the
problem of double counting.
Reason (R )-The problem of double counting doesn’t exist in a closed economy.
Answer c
4) Assertion (A)- Intermediate goods are not included in national income
Reason (R )- Production of goods for self consumption is included in national
income.
Answer b
5) Assertion (A)- Transfer payments are not included in national income.
Reason (R )- Purchase of financial assets is included in the national income
Answer d
6) Assertion (A)- Rent, Interest and profit are termed as transfer Income
Reason (R )- Transfer income is the income received without rendering any
productive services in return.
Answer d
7) Assertion (A)- GDP deflator refers to the average price level of all gods and
services produced in the economy.
Reason (R )- There are two types of GDP, Real GDP and Nominal GDP.
Answer b
8) Assertion (A)- Variable which is measured at a certain point of time is called flow
variable.
Reason (R )- Real GDP is better as it truly reflects the growth of the economy.
Answer d
9) Assertion: Capital goods are used in the production process but do not get
transformed themselves.
Reason: They are tools, implements, and machines that enable the production of
other commodities.
Answer a
10) Assertion: Intermediate goods are used as raw materials or inputs in the
production of other commodities.
Reason: They include goods like steel sheets used for making automobiles and
copper used for making utensils.
Answer a
11) Assertion: Consumer durables have a shorter lifespan compared to food and
clothing.
Reason: Consumer durables, like home computers and television sets, are not
quickly extinguished by immediate consumption.
Answer d
12) Assertion: Foreign exchange reserves are a stock variable.
Reason: Foreign exchange reserves represent the stockpile of foreign currencies held
by a central bank or monetary authority at a particular point in time, without
considering changes due to foreign exchange transactions.
Answer a
Statement based Questions-:
a. Both the statements are true
b. Both the statements are false
c. Statement 1 is true and Statement 2 is false
d. Statement 1 is false and Statement 2 is true

1)Statement 1- In an open economy, domestic income is always equal to national

income.
Statement 2- Government final consumption expenditure is expenditure on the free
services provided to the people by the government.
Answer d
2)Statement 1- Depreciation can be negative also.
Statement 2- Depreciation is also known as consumption of final resources.
Answer b
3)Statement 1- Domestic income can be more than national income.
Statement 2- National income is included in Domestic income.
Answer c
4) Statement 1- Imports are separately included in national income as per value
added method.
Statement 2-Value of output is value of final product produced by a production unit.
Answer d
5) Statement 1-Corporate tax is a part of profits.
Statement 2- Free education to children of employees is an example of
compensation in kind
Answer a
6) Statement 1- Higher GDP will always lead to higher welfare.
Statement 2- Low level of welfare will always lead to higher GDP.
Answer b
7) Statement 1- Purchase and sale of financial assets is included in national income.
Statement 2- Income from subsoil assets is included in National income.
Answer d
8) Statement 1- Stocks represent income, output, or profits that occur within a
specific period of time.
Statement 2: Flow refer to the accumulation of resources or goods over time

Case Study-

Case study 1

Goods produced within an economy can be categorized into three main types:
consumption goods, capital goods, and intermediate goods. Consumption goods,
also known as consumer goods, are items or services purchased and directly
consumed by the end consumer. Examples include food, clothing, and recreational
services. Capital goods, on the other hand, are durable tools, implements, and
machines used in the production process. While they do not undergo transformation
themselves, they enable the production of other commodities. Intermediate goods,
such as raw materials or inputs, are used in the production of other goods and are
not meant for final consumption. When measuring the total output of an economy,
it is essential to have a common measuring rod. Money serves as this common
measuring rod, allowing for the summation of the diverse commodities produced.
By assigning a monetary value to each good or service, a quantitative assessment of
the aggregate level of final goods produced can be obtained. One important
consideration is the distinction between stocks and flows. Stocks represent
accumulated resources or goods at a specific point in time, while flows refer to
economic activities that occur within a defined period. It is crucial to specify the
time period when discussing income, output, or profits to provide a meaningful
context. While intermediate goods play a significant role in the production process,
counting them separately when measuring economic activity would result in double
counting. The value of intermediate goods is already included in the value of the
final goods produced. Hence, focusing on final goods provides a more accurate
measure of economic activity without exaggerating its value. Understanding the
classification and measurement of goods is crucial for businesses and policymakers.
Accurate classification enables companies to identify their products correctly, assess
their economic impact, and make informed decisions. Likewise, policymakers rely
on accurate measurements to understand the overall health of the economy,
formulate appropriate policies, and monitor economic trends. In conclusion, the
classification and measurement of goods play a vital role in understanding economic
activity. Distinguishing between consumption goods, capital goods, and
intermediate goods helps in accurately assessing their value and impact. Using
money as a measuring rod and considering the distinction between stocks and flows
ensures reliable and meaningful measurements, providing insights into the overall
economic performance of a country or business.

1.What are the three main types of goods discussed in the comprehension?

2.Give examples of consumption goods mentioned in the comprehension.

3.How do capital goods differ from consumption goods?

4.Explain the distinction between stocks and flows in the context of economic
analysis.

Case study 2

Introduction: This case study focuses on the concepts of Real Gross Domestic
Product (GDP) and Nominal GDP in the fictional country of Econotopia. Real GDP
and Nominal GDP are two crucial indicators used to measure the economic
performance of a country. The case study aims to explore the differences between
these measures and their significance in assessing Econotopia's economic growth.

Scenario: Econotopia is a developing country with a diverse economy,

encompassing agriculture, manufacturing, and services sectors. Over the last five
years, the country has experienced notable economic growth, which policymakers
and economists seek to evaluate and analyze.

Data: The following data for Econotopia's Gross Domestic Product (GDP) is
available for the last five years:

Nominal GDP (in

billions of currency GDP Deflator (Base
Year units) Year: 2020)

2019 250 110

2020 280 100

2021 300 105

2022 320 115

2023 340 120

Q1. Calculate real GDP for different years?

Q2. Out of real GDP and nominal GDP which is better indicator of economic growth
and why?

Q3.Compare percentage change in real and nominal GDP for the years 2023 and
2020.

Numericals

1) On the basis of the data given in the table below, estimate the value of Gross
National Product at Market Prices:
Items Amount (₹ in crore)
Private Final Consumption Expenditure 350
Government Final Consumption Expenditure 200
Gross Domestic Capital Formation 100
Change in Stocks 25
Exports 150
Imports 120
Net Factor Income from Abroad 10
Consumption of Fixed Capital 20
2) On the basis of the data given in the table below, estimate the value of National
Income at Factor Cost:
Items Amount (₹ in crore)
Net National Product at Market Prices 600
Net Indirect Taxes 30
Items Amount (₹ in crore)
Subsidies 10
Net Factor Income from Abroad 20
3) From the following information, calculate the Net Value Added at market
price
Particulars (₹ in crores)
Sales 400
Raw materials purchased 150
Depreciation 20
Rent 10
Interest paid 5
Salaries and wages 25
Change in stock 10
Intermediate goods 30
Consumption of fixed capital 15
4) From the following data, estimate the value of National Income by the Income
Method:
Particulars (₹ in crores)
Compensation of employees 250
Rent 100
Interest 150
Profit 200
Mixed income of self-employed 80
Net factor income from abroad (-) 20
5) From the following data, estimate the National Income
 (₹ in
Particulars
crores)
Private final consumption
400
expenditure
Government final consumption
100
expenditure
Net Fixed Capital Formation 130
Change in stocks 10
Exports 80
Imports 60
Consumption of fixed capital 20
Subsidies 40

Net factor income to abroad 40

6) Suppose in a hypothetical economy there are 3 firms X, Y and Z. Firm X sold

goods worth ₹5,000 to Firm Y and ₹3,000 to Firm Z. Firm X also purchased
raw materials worth ₹2,000 from Firm Z. Firm Y sold goods worth ₹8,000 in
domestic market and exported goods worth ₹4,000. Firm Z purchased raw
materials worth ₹1,000 and sold goods worth ₹5,000 in domestic market. If
consumption of fixed capital is ₹500, calculate the Net Domestic Product at
market price.
7) In a hypothetical economy, there are 2 firms A and B. Firm A sold goods
worth ₹3,000 to Firm B and also exported goods worth ₹2,000. Firm A
imported raw materials worth ₹1,500. Firm B sold goods worth ₹5,000 in
domestic market and ₹3,000 to Firm A. Firm B also purchased raw materials
 domestically for ₹2,000. If consumption of fixed capital is ₹250, estimate the
Net Domestic Product at market price.
8) Calculate the net value added at the market price of a firm:

Items Amount

Sale 400
Change in stock -20
Depreciation 30
Net indirect taxes 40
Purchase of machinery 200
Purchase of an intermediate product 250

9) From the data given below, estimate the Net Value Added at market price:
Particulars Amount (₹)
Value of output 600
Change in inventories 15
Consumption of fixed capital 25
Net indirect business taxes 35
Intermediate consumption 350
Purchase of equipment 75
10) In a single day Raju, the barber, collects Rs 500 from haircuts; over this day, his
equipment depreciates in value by Rs 50. Of the remaining Rs 450, Raju pays sales
tax worth Rs 30, takes home Rs 200 and retains Rs 220 for improvement and buying
of new equipment. He further pays Rs 20 as income tax from his income. Based on
this information, complete Raju’s contribution to the following measures of income
a) Gross Domestic Product b) NNP at market price c) NNP at factor cost
11) Rita runs a grocery store. In a day, she sells goods worth Rs 800. Her store
equipment depreciates by Rs 100 over the day. Out of her net earnings, she
pays:Sales tax of Rs 50,Retains Rs 300 for herself,Puts Rs 100 for buying new
stock,Pays income tax of Rs 30 from her income. Based on this information,
calculate Rita's contribution to:
a) Gross Domestic Product c) Net National Product at market price
b) Net National Product at factor cost
12) The value of the nominal GNP of an economy was Rs 2,500 crores in a particular
year. The value of GNP of that country during the same year evaluated at the prices
of the same base year was Rs 3,000 crores. Calculate the value of the GNP deflator
of the year in percentage terms. Did the price level rise between the base year and
the year under consideration?
13) The nominal GNP of a country was Rs 3,000 crores in a particular year. The real
GNP of the same country evaluated at base year prices was Rs 3,500 crores in the
same year.
Based on this information:Calculate the GNP deflator of that year in percentage
terms and Has the price level risen or fallen between the base year and the year under
consideration?
14) In a particular year, the nominal GNP of a country was ₹5,000 crores. If the GNP
deflator for that year was 120, calculate the real GNP.
15) From the following data, estimate the national income by:
i) Income Method
ii) Expenditure Method
iii) Value Added Method
 Amount (₹
Particulars
crores)
Compensation of employees 800
Rent 100
Interest 150
Profit 250
Mixed income of self-employed 100
Household final consumption
1000
expenditure
Government final consumption
400
expenditure
Gross fixed capital formation 600
Change in inventories 50
Exports 500
Imports 450
Output 1500
Intermediate consumption 500
Depreciation 100
Net indirect taxes 150
Net factor income from abroad -10

16) Calculate the value of sales of a firm using the value added method from the
following data:
Particulars Amount (₹ crores)
Net value added at factor cost 150
Particulars Amount (₹ crores)
Depreciation 30
Intermediate consumption 80
Net indirect taxes 20
17) From the following information, calculate the operating surplus:
Particulars Amount (₹ crores)
Sales 500
Depreciation 50
Salaries and wages 100
Consumption of fixed capital 20
Intermediate consumption 150
Net indirect taxes 30
18) From the following data, calculate the value of intermediate consumption:
Particulars Amount (₹ crores)
Output 500
Consumption of fixed capital 50
Compensation of employees 100
Operating surplus 200
Net indirect taxes 150
Net value added at factor cost 400
19) Firm Z operates in the agricultural sector and provided the above data for a
specific period. Calculate the Gross Value Added (GVA) and the net value added at
Factor Cost for firm Z.
Items Price (in Rs. thousands)
Domestic Sales 1500
Exports 700

Opening stock 200

Closing stock 150

Imports 600

Purchase of machinery 700

Subsidy 100
Q20. Firm A operates in the construction sector and provided the above data for a
specific period. Calculate the Gross Value Added (GVA) and the Factor Cost for
firm A.
Items Price (in Rs. thousands)
Domestic Sales 2000

Exports 900

Opening stock 150

Closing stock 100

Imports 800

Purchase of machinery 900

Subsidy 120

Answers to numericals
1.700 2. 570 3. 245 4.760 5. 660 6. 15500

7. 3250 8. 100 9. 225 10. 500,450,420 11.800,700,650

12. 83.33, No 13.85.7, No 14. 4166.67 15. 1390,1840,840

16. 280 17. 330 18. 100 19.550,650 20. 2070,1950

Items to be included or not included

How will you treat the following which estimating national income of India? Give
reasons.

1. Dividend received by an Indian from his investment in shares of a foreign

company.
2. Money received by a family in India from relatives working abroad.
3. Interest received on loans given to a friend for purchasing a car.
4. Dividend received by a foreigner from investment in shares of an Indian
company.
5. Profit earned by a branch of an Indian bank in Canada.
6. Scholarship given to Indian students studying in India by a foreign company.
7. Fees received from students.
8. Profits earned by branch of a foreign bank.
9. Interest paid by an individual on a loan taken to buy a car.
10. Expenditure on machines for installation in a factory.
11. Profit earned by a branch of foreign bank in India.
12. Payment of salaries to its staff by an embassy located in New Delhi.
13. Interest received by an Indian resident from firms abroad.
14. Salaries received by Indians working in branches of foreign banks in India
15. Profits earned by an Indian bank from its branches abroad.
16. Rent paid by embassy of Japan in India to an Indian resident.
17. Imputed rent of self occupied house
18. Interest received on debentures
19. Financial help received for flood victims.
20. Free Medical facility to employees by the employer.
21. Money received from sale of old house.
22. Government expenditure on street lighting.
23. Interest received by a household from a commercial bank.
24. Receipts from sale of land.
25. Interest on public debt.
Ans.
included.-1,4,5,7,8,10,11,13,14,15,16,17,18,20,22,23
not included -2,3,6,9,12,19,21,24,25
Q2.How will you treat the following which estimating domestic factor income of
India? Give reasons.
1. Remittances from non-resident Indian to their families in India
2. Rent paid by the embassy of Japan in India to a resident Indian.
3. Profit earned by branches of foreign bank in India.
4. Payment of salaries to its staff by embassy located in India.
5. Interest received by an Indian resident from firms abroad.
Ans.1. Not included as it is a transfer payment
2. Not included because Japanese embassy in India does not fall with in the
domestic territory of India.
3. Included because it falls with in the domestic territory of India
4. Not included as an embassy located in India is not fall with in the domestic
territory of India
5. Not included in domestic product but it is the part of NFIA.
Short questions answers-:

1. Why should the aggregate final expenditure of an economy be equal to the

aggregate factor payments? Explain.
Ans: The sum of final expenditures in an economy must be equal to the income
received by all the factors of production taken together (final spending on final
goods, it does not include spending on intermediate goods). This follows from the
simple idea that the revenues earned by all the firms put together must be distributed
among the factors of production as salaries, wages, profits, interests earning and
rents.
2. What is the difference between planned and unplanned inventory accumulation?
Write down the relation between change in inventories and value added of a firm.
Ans: Planned Inventory. It refers to changes in the stock inventories that have
occurred in a planned way. In a situation of planned inventory accumulation, firm
will plan to raise its inventories. Unplanned Inventory. It refers to changes in the
stock of inventories that have occurred in an unexpected way. In a situation of
unplanned inventory accumulation, due to unexpected fall in sales, the firm will have
unsold stock of goods.
Value added of a firm (GVA) = Gross value of output produced by the firm – Value
of intermediate goods used by the firm.
3. Write down the three identities of calculating the GDP of a country by the three
methods. Also, briefly explain why each of these should give us the same value of
GDP.
Ans: National Income = National Product = National Expenditure. Each one will
give the same result. The only difference is that with product methods, NI is
calculated at production or creation level with income Method NI is measured at
distribution level, and with expenditure method NI is measured at disposal level.
Q4. Distinguish between domestic product and national product. When can domestic
product be more than national product?
Ans:

Domestic product will be greater than national product when net factor income
from abroad is negative.
5. Differentiate between Gross Domestic Product at Market Price Vs
National Income.

Ans.
6. Distinguish between real and nominal gross domestic
product.[CBSE(AI) 2010]
Ans:
7. State the various components of the income method that are used to calculate
national income
Ans:Compensation of employees: The amount earned by employees from their
employer, whether in cash or in kind or through any other social security scheme is
known as compensation of employees.
1. Operating Surplus: It is the sum of income from property and income from
entrepreneurship.
2. Mixed Income: Income of own account workers (like farmers, doctors,
barbers, etc.) and unincorporated enterprises (like small shopkeepers, repair
shops) is known as mixed income.
Note: (i) To estimate amount of factor payments made by each producing unit.
(ii) To add all factor incomes/payments within domestic territory to get
domestic income, i.e., NDPFC.
NDPFC = Compensation of employees + Operating Surplus + Mixed Income
3. Net factor income from Abroad(NFIA): NFIA is the difference between
income earned by normal residents from rest of the world and similar
payments made to Non residents within the domestic territory. Addition of
NFIA to NDPFC to get NY, i.e., NNPpc.
NNPFC = NDPFC + NFIA
8. Define double counting. How can the problem of double counting be avoided?
Ans: If a single transaction is recorded twice or more than twice in the calculation
of national income, then it is known as double counting.
The problem of double counting is solved by value added method. Theoretically to
avoid double counting there may be two alternative ways:
1. Final Product Approach
2. Value Added Approach
 1. Final Product Approach: According to this, value of only final products, i.e.
which go for final consumption or capital formation should be included. But
in practical application of this approach double counting still creeps in as
every producer treats the product he sells as final whereas the same might
have been used as intermediate product by the buyer.
2. Value Added Approach: Value added method is most effective in avoiding
double counting. According to this, instead of taking value of final goods,
only value added at each stage of production by a producing unit is taken.
Value added of a firm by subtracting intermediate consumption from value of
output.
9.Explain the components of NFIA.[3-4 Marks]
Ans: There are three components of NFIA.
1. Net Compensation of Employees: The net compensation of employees
receivable from the rest of the world is equal to the difference between
compensation of employees received by resident workers who are living
temporarily abroad or are employed abroad , and similar payments made to
non- residents workers that are temporarily staying or are employed within
the domestic territory of the country.
2. Net Income From Property and Entrepreneurship: Net income from property
and entrepreneurship is equal to the difference between the income received
by way of interest, rent and profits by the residents of a country and similar
payments made to the rest of the world.
3. Net Retained Earnings of Resident Companies Abroad: Retained earnings
refers to the undistributed profits of the companies. Resident companiesft.e.
companies belonging to one country and working in the domestic territory of
some other country) retain a part of their profits for further investment abroad.
 Likewise, foreign companies and their branches retain a part of their profits
in the countries of their operation.
The difference between the retained earnings of resident companies located abroad
and retained earnings of the foreign companies located in a country is equal to the
net retained earnings from abroad.
Note: It must be noted that NFIA is zero in a closed economy as such economy does
not deal with the rest of the world sector

Long Answer Question-:

Q1. Write down some of the limitations of using GDP as an index of welfare of a
countiy. [6 Marks]
Ans: Per Capita Real GDP can be taken as indicator for economy. But by itself is
not an adequate indicator. There are many reasons behind this. These are:
Many goods and services contributing economic welfare are not included in GDP
Or Non-Monetary exchanges.
(a)There are many goods and services which are left out of estimation of national
income on account of practical estimation difficulties e.g., services of housewives
and other members, own account production, etc.
(b)These are left on account of non availability of data and problem in valuation.
(c)It is generally agreed that these items contribute to economic welfare.
(d)So, if we depend only on GDP, we would be underestimating economic welfare.
Though externalities are not taken into account in GDP, they affect welfare.
(a)When the activities of somebody result in benefits or harms to others with no
payment received for the benefit and no payment made for the harm done, such
benefits and harms are called externalities.
(b)Activities resulting in benefits to others are positive externalities and increase
welfare; and those resulting in harm to others are called negative externalities, and
thus decrease welfare.
(c)GDP does not take into account these externalities.
(d)For example, construction of a flyover or a highway reduces transport cost and
journey time of its users who have not contributed anything towards its cost.
Expenditure on construction is included in GDP but not the positive externalities
flowing from it. GDP and positive externalities both increase welfare. Therefore,
taking only GDP as an index of welfare understates welfare. It means that welfare is
much more than it is indicated by GDP.
(e)Similarly, GDP also does not take into account negative externalities. For
examples, factories produce goods but at the same time create pollution of water and
air. River Yamuna, now a drain, is a living example. The pollution harms people.
The factories are not required to pay anything for harming people. Producing goods
increases welfare but creating pollution reduces welfare. Therefore, taking only GDP
as an index of welfare overstates welfare In this case, welfare is much less than
indicated by GDP.
Change in the distribution of income (GDP) may affect welfare.
(a)All people do not earn the same amount of income. Some earn more and some
earn less. In other words, there is unequal distribution of income.
(b)At the same time, it is also true that in the event of rise in ‘per capita real income’
all are not better off equally. ‘Per capita’ is only an average. Income of some may
rise by less and of some by more than the national average. In case of some it may
even fall.
(c)It means that the inequality in the distribution of income may increase or decrease.
(d)If it increase it implies that rich become more rich and the poor become more
poor.
(e)Utility of a rupee of income to the poor is more than to the rich. Suppose, the
income of the poor declines by one rupee and that of the rich increases by one rupee.
In such a case, the decline in welfare of the poor will be more than the increase in
welfare of the rich.
(f) Therefore, if the rise in per capita real income inequality increases, it may lead to
a decline in welfare (in the macro sense).
All products may not contribute equally to economic welfare.
(a)GDP includes different types of products, like food articles, houses, clothes,
police services, military services, etc.
(b)Some of these products contribute more to the welfare of the people, like food,
clothes, houses, etc. Other products like police services, military services etc. may
comparatively contribute less and may not directly affect the standard of living of
the people.
(c)Therefore, how much is the economic welfare would depend more on. the types
of goods and services produced, and not simply how much is produced.
(d) It means that if GDP rises, the increase in welfare may not be in the same
proportion.
Contribution of some products may be negative
(a)GDP includes all final products whether it is milk or liquor.
(b)Milk may provide both immediate and ultimate satisfaction to consumers On the
other hand, liquor may provide some immediate satisfaction, but because of its
harmful effects on health it may lead to decline in welfare.
(c)GDP include only the monetary values of the products and not their contribution
to welfare.
(d)Therefore, economic welfare depends not only on the volume of consumption but
also on the type or goods and services consumed
Q. Interpret the picture-:
 Ch- Money and Banking
Keynotes-:
Money: Money may be defined as anything which is generally acceptable as a
medium of exchange and at the same time acts as a measure, store of value and
standard of deferred payment.
Supply of Money: Total stock of money (currency notes, coins and demand deposit
of banks) in circulation are held by the public at a given point of time.
Supply of money does not include cash balance held by central and state govt. and
stock of money held by banking system of country as they are not in actual
circulation of the country.
Measures of Money Supply = Currency held by Public + Net Demand Deposits held
by commercial banks
M1 = C + DD + OD
C = Currency and coins with the public
DD = Demand deposits of the public with the banks
OD = Other deposits
M2 = M1+ Post office savings deposits
M3 = M1+ Time deposits of commercial banks
M4= M3+ Total deposits with the post office saving organisation excluding the
deposits on NSC
Functions of money-:
1. Medium of Exchange -: As a medium of exchange, money can be used to make
payments to all the transactions related to goods & services. It is the most important
function of money. As money is universally accepted, therefore all exchanges take
place in terms of money.
 This function of money eliminates the major problem of double coincidence of wants
and the problems related to the barter system.
 This function of money facilitates the trade in an economy and allows purchase and
sale to be conducted independently of each other.
 Money itself does not have the power to satisfy human wants. However, it
commands the power to buy goods and services wanted and required by human
beings, which can in return satisfy their wants.
2. Measure of Value-: As a measure of value money works as a common parameter,
in which the value of every good & service is expressed in monetary terms.
 This function of money helps in maintaining the business accounts, which would be
impossible otherwise.
 It helps in determining the relative prices of goods & services due to this, it is also
known as a Unit of Account. For example, In India, Rupees is the unit of account, in
America, it is Dollar, etc.
 By limiting the value of all goods & services to a single unit, it becomes very easy
to find out the exchange ratio between them and to compare their prices.
For example, the value of every product is estimated in monetary terms. The value
of 1 egg is estimated at ₹ 6 in India, and the value of a packet of bread is around ₹
45. So, money works as a measure of the value of all goods & services and is the
amount that is required to be received or paid during the transaction. Therefore, it is
one of the most essential functions of money.
3. Standard of Deferred Payments-: The Standard of deferred payments states that
money act as a “standard of payment”, which is to make in the present or in near
future. On a daily basis, millions of transactions are made in which payments are not
made immediately. Money encourages such transactions and facilitates capital
formation & economic development of the nation. This function of money is
important because:
 It leads to the creation of financial institutions.
 It simplifies the borrowing and lending operations.
For example, if someone borrows a certain amount from another person, they need
to repay the amount to that person with interest. With money as standard payment,
it is easy to pay the interest or make deferred payments. This has led to an increase
in lending and borrowing transactions and has contributed to the formation of
financial institutions.
4. Store of Value or Asset Function of Money-: Money as a store value can be
used to store wealth in the most economical and convenient way and to transfer the
purchasing power from the present to the future.
Money as a store value has the following advantages:
 It was very difficult to store wealth in terms of goods because of their perishable
nature and high cost. Money provides a solution to this problem as one can store
money for as long as possible.
 Money has the quality of universal acceptability. Therefore, one can at any time use
money in exchange for goods and services.
 Money is easily portable, and saving money is much easier and more secure than
saving goods for future use.
Banks:
Commercial Banks: Commercial Banks are financial institution who accepts
deposits from the public and provide loans facilities for investment with the aim of
earning profit.
Functions of Commercial Banks
Central Bank: The central Bank is the apex institution of monetary and
financial system of a country. It makes monetary policy of the country in public
interest. It manages, supervises and facilitates the banking system of the country.
Functions of Central Banks
MONEY CREATION OR CREDIT CREATION BY COMMERCIAL BANKS
CREDIT is defined as generating credit in the economy by commercial banks.
The capacity of banks to create money or credit depends on (i) Amount of primary
deposits and (ii) Legal reserve ratio(LRR).
Legal Reserve Ratio(LRR):- is fixed by the central bank of a country and it is the
minimum ratio of deposit legally required to be kept as cash by banks.
Cash Reserve Ratio(CRR):- It is a part of LRR which is to be kept with the central
bank.
Statutory Liquidity Ratio(SLR):- It is a part of LRR which is to be kept with the
bank themselves.
Commercial bank’s demand deposits are a part of money supply. Commercial banks
lend money to the borrowers by opening demand deposit account in their names.
The borrowers are free to use this money by writing cheques. According to definition
demand deposits are a part of money supply. Therefore, by creating additional
demand deposits bank create money. Money creation depends upon two factor:
Primary deposits and Legal Reserve Ratio (LRR). Deposit Multiplier = 1/LRR Total
Deposit creation = Initial deposit X 1/LRR.

Repo rate : Repo rate is the rate at which the central bank of a country (Reserve
Bank of India in case of India) lends money to commercial banks in the event of any
shortfall of funds. Repo rate is used by monetary authorities to control inflation.In
the event of inflation, central banks increase repo rate as this acts as a disincentive
for banks to borrow from the central bank. This ultimately reduces the money supply
in the economy and thus helps in arresting inflation.
Reverse repo rate : Reverse repo rate is the rate at which the central bank of a
country borrows money from commercial banks within the country. It is a monetary
policy instrument which can be used to control the money supply in the country. An
increase in the reverse repo rate will decrease the money supply and vice-versa, other
things remaining constant. An increase in reverse repo rate means that commercial
banks will get more incentives to park their funds with the RBI, thereby decreasing
the supply of money in the market.
Multiple Choice questions-:
1) Which function of money helps in determining the relative prices of goods and
services?
a. Standard of deferred payments
b. Measure of value
c. Store of value
d. Medium of exchange
Answer: b. Measure of value
2) Which function of money allows payments to be made in the present or in the
near future?
a. Standard of deferred payments
b. Store of value
c. Medium of exchange
d. Measure of value
Answer: a. Standard of deferred payments
3) What advantage does money have over goods in terms of storing wealth?
a. Goods are easily portable
b. Goods have universal acceptability
c. Goods are perishable
d. Money is not perishable and is easily stored
Answer: d. Money is not perishable and is easily stored
4) What problem does money solve in the barter system related to the standard for
deferred payments?
a. Lack of double coincidence of wants
b. Difficulty in comparing relative values of goods
c. Difficulty in storing wealth
d. Difficulty in executing credit transactions
Answer: d. Difficulty in executing credit transactions
5) What is the function of money as a common parameter to express the value of
goods and services?
a. Measure of value
b. Standard of deferred payments
c. Store of value
d. Medium of exchange
Answer: a. Measure of value
6) Which function of money facilitates capital formation and economic
development?
a. Measure of value
b. Store of value
c. Standard of deferred payments
d. Medium of exchange
Answer: c. Standard of deferred payments
7) What function of money refers to its ability to act as a standard for deferred
payments?
a. Store of value
b. Measure of value
c. Standard of deferred payments
d. Medium of exchange
Answer: c. Standard of deferred payments
8) What is the primary function of a central bank in a modern economy?
a) Issuing currency
b) Accepting deposits from the public
c) Providing loans to borrowers
d) Regulating commercial banks
Answer: a) Issuing currency
9) What is the profit earned by commercial banks called?
a) Spread
b) Interest
c) Profit margin
d) Markup
Answer: a) Spread
10) Why do people prefer to keep money in banks instead of at home?
a) Banks offer higher interest rates on deposits
b) Banks provide a safe and convenient medium of exchange
c) Banks ensure the security of precious metals
d) Banks guarantee the repayment of loans
Answer: b) Banks provide a safe and convenient medium of exchange

11) What does a bank do with the funds deposited by individuals or firms?
a) Invests in foreign exchange reserves
b) Lends the funds to borrowers at interest
c) Uses the funds to issue currency
d) Repays depositors immediately
Answer: b) Lends the funds to borrowers at interest
12) What is the crucial factor for a bank's survival according to the passage?
a) Issuing currency
b) Attracting depositors
c) Earning interest from loans
d) Regulating interest rates
Answer: b) Attracting depositors
13) What determines the maximum amount a bank can lend?
a) The interest rates charged to borrowers
b) The creditworthiness of the borrowers
c) The availability of funds from depositors
d) The profitability of the loan
Answer: c) The availability of funds from depositors
14) According to the given content, money creation by banks is similar to:
a) Lending funds to all depositors simultaneously
b) Issuing paper receipts as currency
c) Printing physical currency notes
d) Borrowing funds from the central bank
Answer: b) Issuing paper receipts as currency
15) Banks can lend money because they do not expect:
a) Any depositors to withdraw their funds
b) All depositors to withdraw their funds simultaneously
c) An increase in the money supply
d) The central bank to regulate their lending activities
Answer: b) All depositors to withdraw their funds simultaneously
16) When a bank lends to a person, a new deposit is opened in that person's name,
resulting in:
a) Decrease in the money supply
b) Increase in the money supply
c) Decrease in the bank's reserves
d) Increase in the bank's assets
Answer: b) Increase in the money supply
17) The accounting rule states that both sides of a balance sheet must:
a) Be equal in value
b) Include reserves and loans
c) Reflect the bank's net worth
d) List assets before liabilities
Answer: a) Be equal in value
18) In addition to the Cash Reserve Ratio (CRR), banks are also required to maintain
reserves in the form of:
a) Loans given to the public
b) Physical cash in vaults
c) Financial instruments like bonds and treasury bills
d) Foreign currency holdings
Answer: c) Financial instruments like bonds and treasury bills
19) In the fictional example, if the reserve ratio is 20%, a bank with deposits of Rs
100 can lend a maximum amount of:
a) Rs 20
b) Rs 40
c) Rs 80
d) Rs 100
Answer: c) Rs 80
20) The process of money creation by banks continues until:
a) All borrowers repay their loans
b) Reserves reach the required level
c) The central bank intervenes
d) The total deposits reach the limit set by the central bank
Answer: d) The total deposits reach the limit set by the central bank
21) With a Cash Reserve Ratio (CRR) of 20%, reserves of Rs 100 can support
deposits of:
a) Rs 20
b) Rs 80
 c) Rs 100
d) Rs 500
Answer: d) Rs 500
22) Which type of open market operation is permanent in nature?
a) Outright open market operations
b) Repo operations
c) Reverse repo operations
d) Qualitative open market operations
Answer: a) Outright open market operations
23) What is the rate at which money is lent in a repurchase agreement called?
a) Repo rate
b) Reverse repo rate
c) Bank rate
d) Interest rate
Answer: a) Repo rate
24) How does the RBI use qualitative tools to influence money supply?
a) By changing interest rates
b) By persuading banks to change their lending practices
c) By buying and selling government securities
d) By changing the reserve ratio
Answer: b) By persuading banks to change their lending practices
Assertion Reason questions-:
a) Both Assertion(A) and Reason(R) are True and Reason(R) is the correct explanation
of Assertion (A)
b) Both Assertion(A) and Reason(R) are True and Reason(R) is not the correct
explanation of Assertion (A)
c) Assertion(A) is false and Reason(R) is true
d) Assertion(A) is true and Reason(R) is false

1.Assertion: Money as a medium of exchange eliminates the problem of double

coincidence of wants in transactions.
Reason: Money is universally accepted, allowing transactions to take place
independently of the need for a direct exchange of goods and services.
Answer: a
2.Assertion: Money serves as a store of value, allowing individuals to store wealth
in an easily portable and secure form.
Reason: Money is not perishable and has universal acceptability, making it a
convenient and reliable means of storing wealth.
Answer: a
3.Assertion: The standard of deferred payments provided by money encourages
borrowing and lending operations.
Reason: Money simplifies credit transactions as it serves as a reliable standard for
future payments.
Answer: a
4.Assertion: Money serves as a unit of account by providing a common parameter
to express the value of goods and services.
Reason: Money allows for the estimation of the exchange ratio between different
commodities, simplifying price comparisons.
Answer: a
5.Assertion: Money serves as a measure of value by expressing the as a medium of
exchange
Reason: This measurement enables the comparison of prices and the determination
of exchange ratios between different commodities.
Answer: c
6.Assertion: Money, as a medium of exchange, allows transactions to occur
independently of each other.
Reason: Buyers can purchase goods using money, while sellers can accept money as
payment, enabling separate buying and selling activities.
Answer: a
7.Assertion: Banks can create money through the process of Printing.
Reason: Banks can lend money because they do not expect all depositors to
withdraw their funds simultaneously.
Answer: d
8.Assertion: The Cash Reserve Ratio (CRR) is the percentage of deposits that banks
must keep as cash reserves with the central bank.
Reason: The CRR helps regulate the amount of money banks can lend and ensures
financial stability.
Answer: a
9.Assertion: Banks are required to maintain reserves in liquid form in addition to
the Cash Reserve Ratio (CRR).
Reason: These reserves provide short-term liquidity and can include financial
instruments like bonds and treasury bills.
Answer: a
10.Assertion: The reserve requirements set by the central bank act as a limit to the
amount of credit that banks can create.
Reason: Reserve requirements ensure that banks overextend their lending capacity
and maintain sufficient reserves.
Answer: d
11.Assertion: If the reserve ratio is 20%, a bank with deposits of Rs 100 can lend a
maximum amount of Rs 80.
 Reason: The bank is required to keep 20% (Rs 20) as reserves and can lend the
remaining 90% (Rs 80).
Answer: d
12.Assertion: The requirement of reserves acts as a limit to the expansion of the
money supply.
Reason: The reserves set by the central bank restrict the amount of credit and new
money creation by banks.
Answer: a
13.Assertion: Banks' ability to create money is regulated by legal requirements such
as the Cash Reserve Ratio (CRR).
Reason: Legal requirements ensure that banks operate within specific limits and
maintain financial stability.
Answer: a

Statement Based questions-:

a) Both the statements are true
b) Both the statements are false
c) Statement 1 is true and Statement 2 is false
d) Statement 1 is false and Statement 2 is true

1. Statement 1: The commercial bank acts as a banker to the government.

Statement 2: The central bank provides financial services to the government,
including managing its accounts, handling transactions, and issuing government
securities.
Answer d
2. Statement 1: Commercial banks charge a lower interest rate on loans than the rate
paid to depositors.
Statement 2: The difference between the interest rates charged on loans and paid on
deposits allows commercial banks to generate profit and cover their operational
costs.
Answer d
3. Statement 1: Commercial banks act as intermediaries between savers and
borrowers.
Statement 2: Commercial banks accept deposits from savers and lend these funds
to borrowers, facilitating the flow of capital and financing economic activities.
Answer a
4. Statement 1: Commercial banks offer various types of loans, such as home loans
and crop loans.
Statement 2: Commercial banks provide different types of loans tailored to meet the
specific needs of individuals and businesses, supporting various sectors of the
economy.
Answer a
5. Statement 1: The commercial bank regulates the banking system to maintain
stability.
Statement 2: The central bank sets regulations and supervises commercial banks to
ensure their soundness, stability, and compliance with financial laws and
regulations.
Answer d
6. Statement 1: The central bank manages the country's monetary policy to achieve
macroeconomic objectives.
Statement 2: The central bank formulates and implements monetary policy
measures to stabilize prices, promote employment, and foster sustainable economic
growth.
Answer a
7. Statement 1: The central bank acts as a lender of last resort to commercial banks
during financial crises.
Statement 2: In times of liquidity shortages or financial instability, the commercial
bank provides emergency funding to commercial banks to maintain their solvency
and prevent systemic risks.
Answer c
8. Statement 1: Repo rate involve buying and selling government bonds.
Statement 2: The RBI conducts repo rate by purchasing or selling government bonds
in the open market, thereby injecting or withdrawing money from the economy.
Answer b
9. Statement 1: Repo rate is the interest rate at which the RBI lends money in a
repurchase agreement.
Statement 2: The repo rate determines the cost at which commercial banks can
borrow funds from the RBI against the collateral of government securities.
Answer a
10. Statement 1: Reverse repo operations help the RBI withdraw money from the
economy.
Statement 2: When the RBI sells securities through reverse repo agreements, it
withdraws funds from the banking system, leading to a reduction in the money
supply.
Answer c

Case Study 1
In a fictional country, economic activities were predominantly carried out through
the barter system. The lack of a common medium of exchange and the need for
double coincidence of wants hindered the efficiency of transactions. Recognizing
the limitations of this system, the country embraced the concept of money, leading
to a significant transformation. Money serves as a medium of exchange, overcoming
the challenges posed by the barter system. Money's universal acceptance enables
individuals to buy goods and services independently of their immediate sale,
simplifying trade and enhancing economic efficiency. Money acts as a measure of
value, providing a standardized parameter for pricing goods and services. Through
money, the relative worth of various commodities can be expressed in a common
monetary unit, facilitating price comparisons and enabling efficient allocation of
resources. Money functions as a store of value, allowing individuals to accumulate
wealth conveniently and securely. Unlike perishable goods, money retains its value
over time and can be stored for future use, providing individuals with a reliable
means of preserving wealth and meeting contingencies. The standard of deferred
payments offered by money supports borrowing and lending activities. Money's
acceptability as a future payment medium enables individuals and businesses to
engage in credit transactions, fueling economic growth and investment. Money's role
as a medium of exchange enhances transactional efficiency and expands economic
opportunities. By eliminating the need for a direct exchange of goods and services,
money streamlines trade and enables specialization, resulting in increased
productivity and overall economic growth. Money as a measure of value facilitates
price discovery and enhances market efficiency. Providing a common unit of
account, money enables market participants to assess the relative worth of goods and
services accurately, leading to efficient allocation of resources and informed
decision-making. The store of value function of money mitigates the challenges
associated with storing wealth in perishable goods. Money's durability and
widespread acceptance make it a reliable means of storing wealth, overcoming the
limitations of perishability and reducing storage costs. Financial Inclusion and the
Transition towards a Cashless Society:
On the basis of the above case study answer the following questions-:
Q1. What were the limitations of the barter system before the introduction of money?
Q2. How did the introduction of money as a medium of exchange simplify trade and
enhance economic efficiency?
Q3. Explain how money serves as a measure of value and facilitates price
comparisons in the market.
Case Study 2
The central bank issues the currency of economy. The RBI is responsible for printing
and distributing currency notes and coins, ensuring their availability and acceptance
as a medium of exchange. The RBI controls the money supply through various
methods. The RBI uses tools such as adjusting interest rates, conducting open market
operations, and setting reserve ratios to regulate the amount of money circulating in
the economy. The RBI acts as a banker to the government. The RBI manages the
government's accounts, handles financial transactions, and plays a vital role in
managing the country's fiscal operations. The RBI acts as a lender of last resort
during financial crises. In times of financial instability, the RBI provides emergency
liquidity to commercial banks to maintain their solvency and prevent systemic risks.
Commercial banks accept deposits from the public. Commercial banks provide
individuals and businesses with a secure place to deposit their money, which can be
withdrawn or used for various transactions. Commercial banks lend out a portion of
the funds deposited with them. Commercial banks utilize the funds deposited by
customers to provide loans and credit to individuals and businesses, stimulating
economic activity and investment. Commercial banks charge a higher interest rate
on loans than the rate paid to depositors. The spread between interest rates charged
on loans and paid on deposits enables commercial banks to generate profits and
cover their operational costs. Commercial banks act as intermediaries between
savers and borrowers. Commercial banks facilitate the flow of funds by accepting
deposits from savers and channeling those funds to borrowers who require capital
for various purposes. Commercial banks play a crucial role in providing financial
services to individuals and businesses. Commercial banks offer a wide range of
financial services, including accounts, loans, and investment options, meeting the
diverse financial needs of their customers.
On the basis of the above case study answer the following questions
1.What is the role of the central bank in a modern economy?
2.Which institution issues the currency in Economy?
3.How does the central bank control the money supply?
4. Why is the RBI considered the custodian of the foreign exchange reserves?
5. What is the role of commercial banks in the money-creating system?

Case Study 3
ABC Bank is a commercial bank operating in a country where it is the only bank.
The bank follows the regulations set by the central bank, which includes maintaining
reserve requirements to ensure financial stability and control the expansion of credit.
Let's explore how ABC Bank's credit creation process works based on the given
content.ABC Bank starts with initial deposits of Rs 100, made by various customers
who trust the bank with their funds. The central bank has set a Cash Reserve Ratio
(CRR) of 20%, meaning ABC Bank is required to keep 20% of its deposits as cash
reserves.With Rs 100 in deposits, ABC Bank needs to maintain reserves of Rs 20
(20% of Rs 100). Thus, the bank can utilize Rs 80 (Rs 100 - Rs 20) for lending
purposes.A customer named Mr. Mathew approaches ABC Bank for a loan of Rs
500. The bank assesses his creditworthiness and approves the loan. When Mr.
Mathew receives the loan amount, he deposits it back into ABC Bank.As Mr.
Mathew deposits the loan amount, a new deposit of Rs 500 is created in his name.
This increases the bank's liabilities (deposits) by Rs 500, resulting in a total deposit
amount of Rs 600 (Rs 100 initial deposits + Rs 500 new deposit).As per the reserve
requirements, ABC Bank must keep 20% of its total deposits as reserves. With Rs
600 in deposits, the bank must maintain reserves of Rs 120 (20% of Rs 600), leaving
Rs 480 (Rs 600 - Rs 120) available for lending.With the newly available funds, ABC
Bank can extend further loans to borrowers. This process continues, with each loan
resulting in new deposits and increasing the bank's lending capacity.The credit
creation process continues until the total deposits reach a point where the required
reserves are fully utilized. In this case, for deposits of Rs 500, the bank must maintain
reserves of Rs 100 (20% of Rs 500).Once the total deposits reach Rs 500 and
reserves amount to Rs 100, ABC Bank reaches its maximum lending capacity. Any
additional lending beyond this point would require the bank to exceed the reserve
requirements set by the central bank, which is not permissible.
On the basis of above case study answer the following questions-:
1.What is the initial deposit amount of ABC Bank?
2.What is the significance of the Cash Reserve Ratio (CRR) set by the central bank?
3.What is the total deposit amount after Mr. Mathew deposits the loan amount?
4.How much should ABC Bank maintain as reserves when the total deposits reach
Rs 600?
5.What is the maximum amount available for lending when the total deposits reach
Rs 600?
Case Study 4
The Reserve Bank of India (RBI) plays a crucial role in managing the money supply
and regulating the financial system in India. In this case study, we will explore the
various functions and tools used by the RBI to control money supply and maintain
financial stability.The RBI is the central bank of India and is responsible for issuing
currency, regulating monetary policy, and supervising the banking sector. It has the
authority to influence the money supply in the economy through various measures.
 These measures include quantitative tools such as Cash Reserve Ratio (CRR),
Statutory Liquidity Ratio (SLR), and Open Market Operations (OMOs), as well as
qualitative tools like moral suasion.In a scenario where the Indian economy is
experiencing high inflation and rapid credit expansion, the RBI takes actions to
manage the money supply and stabilize the economy.
On the basis of above case study answer the following questions-:
1. What is the main role of the Reserve Bank of India (RBI) in the economy?
2. Name two quantitative tools used by the RBI to control the money supply.
3. How does an increase in the Cash Reserve Ratio (CRR) impact the money supply?
4. What is the purpose of Open Market Operations (OMOs) conducted by the RBI?
5. How does the RBI implement OMOs to manage the money supply?
6. What is the significance of the Statutory Liquidity Ratio (SLR) set by the RBI?
Case study 5
In a modern economy, the concept of money plays a vital role in facilitating
economic transactions. This case study focuses on the monetary system in India,
particularly the issuance of currency, the role of the Reserve Bank of India (RBI),
and the measures of money supply. It also highlights the influence of monetary
policy tools on money supply in the economy. Money in India consists primarily of
currency notes and coins. While currency notes are issued by the RBI, coins are
issued by the Government of India. Additionally, savings and current account
deposits held by the public in commercial banks are considered as money since they
can be used for settlement through cheques. Such deposits are known as demand
deposits. The value of currency notes and coins is not based on their intrinsic value
but rather on the guarantee provided by the issuing authority. Currency notes bear a
promise from the Governor of RBI that the central bank will provide the holder with
purchasing power equal to the value printed on the note. This makes currency notes
and coins fiat money, lacking intrinsic value but considered legal tenders that cannot
be refused for transaction settlements.The RBI measures money supply through
various indicators, including M1, M2, M3, and M4. M1 represents the narrowest
measure and includes currency notes and demand deposits. M2 encompasses M1
along with savings deposits held with Post Office savings banks. M3 includes net
time deposits of commercial banks, while M4 expands to include total deposits with
Post Office savings organizations, excluding National Savings Certificates.The RBI
has a significant role in controlling money supply and implementing monetary
policy. It utilizes quantitative and qualitative tools to influence money supply in the
economy. Quantitative tools include changes in the Cash Reserve Ratio (CRR), bank
rate, and conducting open market operations. Qualitative tools involve moral suasion
and margin requirements to encourage or discourage lending by commercial
banks.Changes in monetary policy tools have a direct impact on money supply. For
instance, an increase in the reserve ratio by the RBI reduces the lending capacity of
commercial banks, leading to a decrease in money supply. Open market operations,
such as buying or selling government bonds, also affect money supply by injecting
or withdrawing reserves from the economy.
On the basis of the above case study answer the following questions-:
1.How does the value of currency notes and coins differ from their intrinsic value?
2.Why are demand deposits considered as money in the economy?
3.Explain the concept of different measures of money supply, such as M1, M2, M3,
and M4.
4.Discuss the impact of an increase in the reserve ratio on money supply.
5.What are open market operations and how do they affect money supply?
Short answer questions-
1. State the components of money .
Ans. The following are included in money supply:
(i)Currency notes held by public
(ii) Demand deposits of commercial banks

2. Explain the “Government’s Bank” function of a central bank.

Ans.A central bank conducts the banking account of government departments. It
performs the same banking functions for the government as commercial bank
performs for its customers. It accepts their deposits and undertakes inter-bank
transfers. It also gives loans to the government. A central bank also provides various
services as agent of the government. It manages public debt. It also gives advice to
the government regarding money market, capital market, government loans and
economic policy matters.

3. What do you mean by credit/money creation? Explain the process of Money

creation by the commercial banks with the help of a numerical example.
Ans. Money creation is a process in which a commercial bank creates total
deposits many times the initial deposits.
The capacity of commercial bank to create depends on two factors:
1. Amount of initial fresh deposit
2. Legal reserve ratio LRR

Money multiplier =
Money Creation = Initial Deposit ·
Money multiplier
The Working :
Suppose (i) Initial Deposit = Rs. 1000 (ii) LRR = 20%
As required, the bank keeps 20% ie Rs. 200 as cash reserve and lend the remaining
Rs. 800. Those who borrow use the money for making payments. As assumed
those who receive these payments put the money back into their bank accounts.
This creates a fresh deposit of Rs. 800. The bank again keep 20% ie Rs. 160 and
lend Rs. 640. In this way the money goes on multiplying leading to total money
creation of Rs. 5000.

Money creation = Initial Deposit · = 1000 ·1/0.20=5000

4. The central bank acts as lender of last resort. How?

Ans. The central bank also acts as lender of last resort for the other banks of the
country. It means that if a commercial bank fails to get financial accommodation
from anywhere, it approaches the central bank as a last resort. Central bank advances
loan to such a bank against approved securities. As a lender of the last resort, central
bank exercises control over the entire banking system of the country.

5. Central bank performs the function of a clearing house. How?

Ans. Every bank keeps cash reserves with the central bank. The claims of banks
against one another can be easily and conveniently settled by simple transfers from
and to their account. Supposing, Bank A receives a cheque of Rs 10,000 drawn on
Bank B and Bank B receives a cheque of Rs. 15000 drawn on Bank A. The most
convenient method of settling or clearing their mutual claims is that Bank A should
issue a cheque amounting to Rs 5000 in favour of Bank B, drawn on central Bank.
As a result of this transference, a sum of Rs 5000 will be debited to the account of
Bank A and credited to the account of B. There is not need of cash transactions
between the banks concerned. It facilitates cash transaction across the entire banking
system, it also reduces requirement of cash reserves of the commercial banks.

6. All the currency issued by the central bank is its monetary liability. How?
Ans. The Central Bank is obliged to back the currency with assets of equal value.
These assets usually consist of gold coin, gold bullion, foreign securities and the
domestic government’s local currency securities. The country’s Central government
is usually authorised to borrow money from the central bank. Government does this,
by selling local currency securities to the central bank. When the central bank
acquires these securities, it issues currency. Putting and withdrawing currency into
and from circulation is also the job of the central bank.

7.What are demand deposits?

Ans. Demand deposits are current and savings account deposits with banks or other
financial institutions, which are payable on demand. No interest payments are
given on current account deposits whereas, on saving account very low rate of
interest are given.

8. What are time deposits?

Ans. Time deposits are fixed term and recurring deposits having a fixed period of
maturity, where the term of deposit may vary. Cheques cannot be issued aganist
them and are not payable on demand and these deposits yield interests for the
depositor.

9. Explain the currency authority function of Central Bank.

Ans. Central Bank of the country has the sole authority of currency issue in the
country, which gives it a monopoly in issuing currency. As in India RBI issues the
currency, while currency notes are printed by the subsidies of RBI and coins are
minted by the Central Government of the country, however both currency notes and
coins are circulated by RBI, which gives RBI the power to control, supervise and
enhance the money supply in the economy.

10. Explain the banker to the government function of the Central Bank.
Central Bank acts as a banker, advisor and agent to the Central and State
Governments. As the common public keep their cash balance, demand deposits and
time deposits with commercial banks; the Central Bank manages the cash reserves
and demand deposits of governments in current accounts. It carries out the exchange,
remittance and other banking operations on behalf of the government, i.e. the Central
Bank maintains same relation with the government as commerical banks has with
genes.

11. State three main functions of commercial bank. Explain any one of them.
Ans. The three main functions of commercial banks are
(i) Accepting deposits
(ii) Advancing loans
(iii) Credit/money creation
Accepting deposits It is one of the primary function of commercial banks. It
accepts chequeable and non-chequeable deposits from public in the form of
demand deposits (which can be withdrawn on demand) and time deposits (which
cannot be withdraws on demand).

12. What is bank rate policy? How does it work as a method of credit control?
Ans. Central bank adopts bank rate policy as a quantitative technique to control
credit in an economy. This is the rate at which commercial banks can barrow funds
from Central Bank for a period of more than 90 days.
It works accordingly when the bank rate is increased by RBI, it discourages
commercial banks and people from taking loans. It decreases the credit multiplier
and the money/credit flow is controlled. On the other hand, at time of credit crunch,
RBI decreases the bank rate and this encourages commercial banks and people to
take more loans due to low interest payments. This enhances the flow of credit in the
economy.

13. What are open market operations? How do these work as a method of
credit Control? Ans. Under open market operations, RBI purchases or sells
government securities to commercial banks and general public for the purpose of
increasing or decreasing the stock of money in an economy. The purchase or sale of
securities controls the money in the hands of public as they deposit or withdraw the
money from commercial banks. Thus, money creation by commercial banks get
affected. By selling the securities, the Central Bank withdraws cash balances from
the economy and by buying the securities, the Central Bank adds to the balance in
the economy, in this way, it works as a method of credit control. Based on economic
conditions, the Central Bank conduct buying and selling of securities in the open
market.

14. Explain any two methods of credit control used by Central Bank. (All India
2013)
Ans. The Central Bank acts as a controller of money supply and credit, using the
following methods
(i) Margin requirement It is a qualitative method of credit control. A margin refers
to the difference between market value of the security offered for loan and the
amount loan offered by the ‘ commercial banks. During inflation, supply of credit
is reduced by raising the requirement of margin. During deflation supply of credit
is increased by lowering the requirement of ‘margin’. This measure is often used to
discourage the flow of credit into speculative business activities.
(ii) Open market operations Under open market operations, RBI purchases or sells
government securities to commercial banks and general public for the purpose of
increasing or decreasing the stock of money in an economy. The purchase or sale
of securities controls the money in the hands of public as they deposit or withdraw
the money from commercial banks. Thus, money creation by commercial banks get
affected.By selling the securities, the Central Bank withdraws cash balances from
the economy and by buying the securities, the Central Bank adds to the balance in
the economy, in this way, it works as a method of credit control. Based on
economic conditions, the Central Bank conduct buying and selling of securities in
the open market

15. Explain the components of Legal Reserve Ratio. (Delhi 2012)

Ans. The minimum percentage of a bank’s total demand and time deposits, that is
required to be maintained in the form of cash or specified liquid assets by the
commercial banks with the Central Bank is termed as Legal Reserve Ratio.
The components of Legal Reserve Ratio are as follows
(i) Cash Reserve Ratio The percentage of total deposits, which a commercial bank
needs to keep as reserve with the Central Bank, this ratio is termed as Cash Reserve
Ratio.
(ii) Statutory Liquidity Ratio Every commercial bank is required to maintain a fixed
percentage of its assets in the form of cash or other liquid assets. This is termed as
Statutory Liquidity Ratio.

16. How do changes in bank rate affect money creation by commercial banks? (Delhi
2010)
Ans. The rate at which commercial banks can borrow money from RBI, when they
run short of reserves, is called bank rate. When the Central Bank increase the bank
rate, it increases the cost of borrowing and hence, discourages the borrowers from
taking a loan. Due to this, the process of credit creation and flow of money also
reduces.
On the other hand, when the Central Bank decreases the bank rate, it encourages the
borrower to take more and more loan. A high demand of loan increases the credit
multiplier and credit creation process of the commercial banks.

17. Explain banker’s bank and supervisor function of Central Bank. (Delhi 2009c)
Ans. (i) Banker’s bank Central Bank keeps the cash balances of commercial banks
and issues loans to them on requirements in the same manner as the commercial
bank does for its customers. A Central Bank has almost the same relation with the
other commercial banks of the country that the commercial banks have with the
common public. That is why the Central Bank is also called as banker’s bank..
(ii) Supervisor A Central Bank supervises the operation of all commercial banks. It
supervises in the form of licensing of the commercial banks, expansion and opening
of branches of commercial banks, merger of banks and the liquidation of the banks.
Thus, the Central Bank supervises the smooth functioning of commercial banks.

Long Question
1. State the functions of money.
Ans. The following are the functions of money
(i) Unit of account: Money acts as a common denominator in terms of which the
value of all the commodities are expressed. The price and value of a commodity is
quoted in terms of money. This function of money helps to compare the value of
commodities and calculate the rate of exchange between two goods or services.
(ii) Medium of exchange: The primary function of money is, acting as a medium of
exchange between two parties involved in a transaction. It avoids the practical
problems of wastage of time and resources, involved in the barter system of an
exchange and it improves the transactional efficiency. It also promotes allocational
efficiency in the trade and production of goods and services. Hence, it can be said
that money was Seprated the acts of sales and purchases.
(iii) Standard of deferred payments: Money simplifies the mechanism of deferred
payments by a great deal. Deferred payments means future payment. When we take
a loan from somebody, we not only pay the principal amount but also the interest
amount. Under barter system of exchange, it was very difficult to make such
transactions. As money maintains a standard value over a period of time provided
price remains constant deferred payments can be easily done.
(iv) Store of value: Money is an asset that retains its value over time. People store
their wealth in the form of money. Money overcomes the problem of storing
perishable item under barter system of exchange. With money, people hold liquidity
and value in a much more convenient manner.

Q. Interpret the above image with the reference to money supply in the
economy-:
Q.Identify the function of Central bank and explain by using the image given
below-:

Q. Analyse the pie chart and interpret it

Q.Interpret the following table with the reference to money
 Ch- Government Budget
Keynotes
Budget is a financial statement showing the expected receipt and expenditure of
Govt. for the coming fiscal or financial year.
Main objectives of budget are:

Components of Budget
Revenue Budget consists of revenue receipts of govt. and expenditure met from such
revenue.
Capital budget consists of capital receipts and capital expenditure.
BUDGET RECEIPTS:
1. Revenue Receipts: The estimated receipts of the government which neither create
any liability nor reduces any assets of the government.
A. Tax: A compulsory payment paid to the government for which no productive
service can be asked directly in return.
a. Direct Tax- Tax whose impact and incidence lies on the same person on whom it
is imposed. Eg. Income tax, Corporate Tax, Wealth and Property Tax
b. Indirect Tax- Tax whose impact and incidence lies on the different persons
Eg Value added Tax, Service Tax, Excise Duty, Custom Duty, Entertainment Tax
B. Non-Tax- Revenue collected from other sources than taxes
a. Escheat b. Interest c. Dividend, Profits d. External Grants e. Administrative
Revenues
f. Fees, fines and penalties g. Cash grants-in-aid from foreign countries and
international org.
2. Capital Receipts
A. Borrowing and Other liabilities(debt creating capital receipt as it increases
liability of the government)
Non- debt creating capital receipt as they reduces assets of the government
B. Recovery of Loans C. Other receipts(Disinvestments)
BUDGET EXPENDITURE:
1. Revenue Expenditure (i) Neither creates assets (ii) Nor reduces liabilities.
e.g., Interest Payment, subsidies etc.
Capital Expenditure:(i) It creates assets (ii) It reduces liabilities.
e.g., Construction of school building Repayment of loans etc.
Budget Deficit:- It refers to a situation when budget expenditure of a govt. are
greater than the govt. receipts.
Budgetary Deficit=Total Expenditure - Total Receipts.

Revenue deficit: It is the excess of govt. revenue expenditure over revenue receipts.
Revenue Deficit= Total revenue expenditure - Total revenue receipts
Implications of Revenue Deficit are:
(i) A high revenue deficit shows fiscal indiscipline.
(ii) It shows wasteful expenditures of Govt. on administration.
(iii) It implies that government is dissaving, i.e. government is using up savings of
other sectors of the economy to finance its consumption expenditure.
(iv) It reduces the assets of the govt. due to disinvestment.
(v) A high revenue deficit gives a warning signal to the government to either curtail
its expenditure or increase its revenue.
Fiscal Deficit: When total expenditure exceeds total receipts excluding borrowing.
Fiscal Deficit= Total expenditures - Total Receipts excluding borrowing.
Implications of Fiscal Deficits are:
(i) It leads to inflationary pressure. (ii) A country has to face debt trap.
(iii) It reduces future growth and development. (iv) It increases liability of the
government.
(v) It increases foreign dependence.
Primary Deficit: By deducting Interest payment from fiscal deficit we get primary
deficit.
Primary Deficit = Fiscal deficit – Interest payments.
Implications of Primary Deficits are:
It indicates, how much of the government borrowings are going to meet expenses
other than the interest payments.
Measures to correct different deficits:-
(i) Monetary expansion or deficit financing. (ii) Borrowing from public.
(iii) Disinvestment
(iv) Borrowing from international monetary institution and other countries.
(v) Lowering govt. expenditure.
(vi) Increasing govt. revenue.

Multiple Choice questions-:

1. Which document constitutes the main budget document of the government?
a) Annual Economic Report
b) Budget Proposal
c) Annual Financial Statement
d) Economic Growth Forecast
Answer: c) Annual Financial Statement
2. What is the constitutional requirement in India related to the government budget?
a) Article 111
b) Article 112
c) Article 113
d) Article 114
Answer: b) Article 112
3. Which section of the government budget deals with the assets and liabilities of the
government?
a) Revenue account
b) Capital account
c) Expenditure account
d) Receipts account
Answer: b) Capital account
4. What is the term used to describe the measures taken to manage budget deficits?
a) Fiscal policy
b) Monetary policy
c) Debt containment
d) Budget control
Answer: c) Debt containment
5. What is the major difference between public goods and private goods?
a) Public goods are rivalrous, while private goods are non-rivalrous.
b) Public goods are excludable, while private goods are non-excludable.
c) Public goods are available to all, while private goods have restricted availability.
d) Public goods require direct payment, while private goods do not.
Answer: c) Public goods are available to all, while private goods have restricted
availability.
6. What is the difference between public provision and public production?
a) Public provision refers to financing through the budget, while public production
refers to private sector production.
b) Public provision refers to private sector production, while public production refers
to government production.
c) Public provision refers to financing through direct payment, while public
production refers to government financing.
d) Public provision and public production are synonymous terms.
Answer: b) Public provision refers to private sector production, while public
production refers to government production.
7. In which situation does the government need to intervene to raise aggregate
demand?
a) Inflationary conditions
b) Recessionary conditions
c) High employment conditions
d) Low credit availability conditions
Answer: b) Recessionary conditions
8. Which of the following is not an example of a private good?
a) Clothing
b) Housing
c) Healthcare services
d) Mobile phones
Answer: c) Healthcare services
9. Revenue receipts do not lead to a claim on the government and are therefore
termed:
a) Redeemable
b) Non-redeemable
c) Taxable
d) Non-taxable
Answer: b) Non-redeemable
10. Which of the following is not a tax receipt :
a) Personal income tax
b) Corporation tax
c) Dividends and profits on investments
d) Excise taxes
Answer: c) Dividends and profits on investments
11. When the government takes fresh loans, it means:
a) Decreased future liabilities
b) Increased future liabilities
c) Decreased interest payments
d) Increased interest payments
Answer: b) Increased future liabilities
12. The estimates of revenue receipts take into account the effects of:
a) Tax proposals made in the Finance Bill
b) Public sector investments
c) Non-tax revenue sources
d) Capital receipts from loans
Answer: a) Tax proposals made in the Finance Bill
13. Non-tax revenue of the central government can come from:
a) Interest receipts on loans
b) Dividends and profits on investments
c) Cash grants-in-aid from domestic organizations
d) Customs duties
Answer: b) Dividends and profits on investments
12.When the government sells an asset, it results in a(n):
a) Increase in financial assets
b) Decrease in financial assets
c) Increase in revenue receipts
d) Decrease in liabilities
Answer: b) Decrease in financial assets
14. The Fiscal Responsibility and Budget Management Act mandates the preparation
of:
a) Medium-term fiscal policy statement
b) Macroeconomic framework statement
c) Budget estimates
d) Capital expenditure plan
Answer: a) Medium-term fiscal policy statement
15. The Medium-term Fiscal Policy Statement sets targets for fiscal indicators and
examines the:
a) Revenue expenditure
b) Capital expenditure
c) Financing of revenue receipts
d) Productivity of capital receipts
Answer: d) Productivity of capital receipt
16. Mention the statement which is true among the following –
a) Fiscal deficit refers to the difference between total receipts and total expenditure.
b) Fiscal deficit refers to the sum of interest payments and primary deficit.
c) Primary deficit refers to the difference between interest payments and total
receipts.
d) Primary deficit refers to the difference between interest payments and revenue
deficit.
Answer b
17. Which of these measures primary deficit accurately?
a)Revenue deficit – interest payments
 b) Capital expenditure – revenue expenditure
c) Fiscal deficit – revenue deficit
d) Fiscal deficit – interest payments
Answer d
18. If the interest payment is Rs. 200 crores and the fiscal deficit is Rs. 500 crores,
what is the primary deficit?
a) Rs. 350 crores b)Rs. 550 crores c)Rs. 765 crores d)Rs. 200 crores
Answer a
Assertion Reason questions-:
e) Both Assertion(A) and Reason(R) are True and Reason(R) is the correct explanation
of Assertion (A)
f) Both Assertion(A) and Reason(R) are True and Reason(R) is not the correct
explanation of Assertion (A)
g) Assertion(A) is false and Reason(R) is true
h) Assertion(A) is true and Reason(R) is false
1) Assertion: The government budget plays a crucial role in the allocation of
resources in the economy.
Reason: Through its budget, the government determines the allocation of funds for
the provision of public goods and services that cannot be efficiently provided by the
market mechanism.
Answer: a
2) Assertion: Public goods are -excludable and non-rivalrous in nature
Reason: Public goods, such as national defence and public parks, are available to all
individuals regardless of whether they contribute financially to their provision.
Answer: c
3) Assertion: The redistribution function of the government budget aims to reduce
income inequality in society.
Reason: By collecting taxes from high-income individuals and providing transfers
to low-income individuals, the government can redistribute wealth and promote a
more equitable distribution of resources.
Answer: a
4) Assertion: The government's stabilisation function involves adjusting fiscal
policies to manage fluctuations in the economy.
Reason: During periods of recession, the government can increase its spending or
reduce taxes to stimulate aggregate demand and boost economic activity.
Answer: a
5) Assertion: Public provision refers to the government's direct production of goods
and services.
Reason: When the government produces and provides goods and services, it is
referred to as public provision, and these activities are financed through the
government budget.
Answer: a
6) Assertion: The government's allocation function ensures the provision of public
goods and services that are necessary for the well-being of society.
Reason: Public goods, such as healthcare services and infrastructure, are provided
by the government to meet the needs of the population.
Answer: a
7) Assertion: The government's redistribution function aims to increase government
revenue through tax collection.
Reason: The redistribution function focuses on changing the distribution of income
in society through measures such as progressive taxation and social welfare
programs.
Answer: c
8) Assertion: The government's stabilization function aims to address fluctuations
in income and employment through fiscal policies.
Reason: During periods of economic downturns, the government can implement
expansionary fiscal policies to stimulate aggregate demand and stabilize the
economy.
Answer: a
9) Assertion: The government budget plays a major role in influencing the
distribution of income in society.
Reason: The redistribution function of the government budget involves collecting
taxes from lower-income individuals and providing transfers to higher-income
individuals, which can impact the distribution of income.
Answer: d
10) Assertion: The government's allocation function ensures the provision of private
goods that are essential for individual consumption.
Reason: The allocation function primarily focuses on providing public goods that
benefit society as a whole, rather than private goods that are consumed individually.
Answer: c
11) Assertion: Public goods are financed solely through private sector investments.
Reason: Public goods are primarily financed through the government budget, which
is funded by taxes and other sources of revenue.
Answer: c
12) Assertion: The government's redistribution function aims to decrease the
personal disposable income of households.
Reason: The redistribution function seeks to promote a fair distribution of income
by providing transfers and social welfare benefits to households with lower incomes.
Answer: d
13) Assertion: The government budget has no influence on the level of employment
and prices in the economy.
Reason: Through its fiscal policies, the government budget can impact the overall
level of employment and prices by managing aggregate demand in the economy.
Answer: d
14) Assertion: Public goods are characterized by being excludable, meaning
individuals can be excluded from enjoying their benefits.
Reason: Public goods are non-excludable, meaning individuals cannot be easily
excluded from benefiting from them, regardless of whether they contribute
financially.
Answer: d
15) Assertion: The government's allocation function focuses on providing goods
and services that can be efficiently provided by the market mechanism.
Reason: The allocation function primarily involves the provision of public goods
and services that cannot be effectively provided through individual exchange in the
market.
Answer: d
16) Assertion: Indirect taxes are considered revenue receipts.
Reason: Indirect taxes, such as excise taxes and customs duties, are collected by the
government as a form of revenue from the production and consumption of goods and
services.
Answer a
17) Assertion: Progressive income taxation contributes to the redistribution of
income.
Reason: By imposing higher tax rates on higher-income individuals, progressive
income taxation aims to reduce income inequality and achieve a more equitable
distribution of wealth in society.
Answer a
18) Assertion: Interest receipts on loans are part of non-tax revenue.
Reason: The government earns interest receipts on loans it has taken, which are
considered tax revenue sources as they do not involve tax collection but rather
income from loan agreements.
Answer c
19) Assertion: PSU disinvestment decreases the financial assets of the government.
Reason: When the government sells its shares in public sector undertakings (PSUs)
through disinvestment, it reduces its financial assets by increasing its ownership
stake in these entities.
Answer c
20) Assertion: Revenue expenditure is incurred for the creation of physical or
financial assets.
Reason: Revenue expenditure is primarily allocated for the normal functioning of
government departments and services.
Answer: d
Statement based Questions-:
e) Both the statements are true
f) Both the statements are false
g) Statement 1 is true and Statement 2 is false
h) Statement 1 is false and Statement 2 is true

1) Statement 1: Public goods are funded solely through direct payments from
individuals who benefit from them.
Statement 2: Public goods are funded through the government budget, which is
financed by various sources, including taxes, and they are available to all individuals
regardless of whether they contribute financially.
Answer: d
2) Statement 1: Public goods can be efficiently provided by the market mechanism
through individual exchange.
Statement 2: Public goods have specific characteristics, such as non-excludability
and non-rivalry, which make them impractical to provide through individual
exchange in the market.
Answer: d
3) Statement 1: In case of inflation, government decreases rate of tax
Statement 2: Revenue deficit occurs when Revenue expenditure is more than
revenue receipts
Answer d
4) Statement 1- Fiscal deficit includes borrowings to create loan.
Statement 2- Fiscal deficit depicts borrowings required to meet current year budget
expenditure.
Answer d
5) Statement 1: Tax receipt from production of unsocial goods is used to grant
subsidy for production of necessary goods.
Statement 2: Government offers various types of concession on these products
Answer c
6) Statement 1: Government imposes high rate of income tax on higher income
groups.
Statement 2: Low-income groups are unable to pay high taxes.
Answer a
7) Statement 1: Government increases rate of tax and imposes new taxes and
reduces expenditure.
Statement 2: Government take resort of deficit budget to solve the problem of
deflation
Answer a
8) Statement 1- Fiscal deficit indicates requirement of borrowing to meet budget
expenditure
Statement 2- Fiscal deficit indicates management and discipline of government
Answer c
9) Statement 1: As a result of fiscal deficit, government gets caught in an unending
cycle of debt trap.
Statement 2: To meet its expenses government increases their borrowing which
eventually increases the fiscal deficit
Answer a
10) Statement 1: Revenue receipts incorporates charge incomes like personal duty,
company charge and non-charge income like fines and punishments, unique
appraisal, escheat and so forth
Statement 2: Government receipts that either make liabilities or decrease resources
are called capital receipts.
Answer a

Case Study 1
Country X is a mixed economy where both the private sector and the government
play crucial roles. The government's budget plays a significant role in the allocation
of resources in the economy. This case study explores the various functions of the
government budget and its impact on resource allocation.
Country X is facing increasing demand for public goods such as healthcare,
infrastructure development, and education. The government recognizes the need to
allocate resources efficiently to meet these demands while ensuring economic
stability and addressing income inequality. To address the demand for public goods,
the government utilizes its budget to allocate funds for their provision. For instance,
recognizing the importance of quality education for the overall development of the
society, the government allocates a significant portion of its budget towards
improving educational facilities, hiring qualified teachers, and providing
scholarships for students from disadvantaged backgrounds. The government's
intervention is necessary in providing public goods because they exhibit
characteristics that make their provision challenging through individual exchange in
the market. Public goods, such as national defense and public parks, are non-
excludable, meaning individuals cannot be easily excluded from enjoying their
benefits. Additionally, the consumption of public goods is non-rivalrous, as one
person's consumption does not diminish the availability of the good for others. These
characteristics necessitate government intervention to ensure equitable access to and
provision of public goods. The government also recognizes the importance of
addressing income inequality in society. Through its budget, it implements measures
to redistribute income and promote a fairer distribution of resources. For example,
the government imposes progressive taxation policies, where higher-income
individuals are taxed at higher rates, while providing social welfare programs and
subsidies to support low-income households. In times of economic fluctuations, the
government utilizes its budget to stabilize the economy. During periods of recession,
the government may implement expansionary fiscal policies by increasing its
spending or reducing taxes to stimulate aggregate demand and boost economic
activity. Conversely, during times of high inflation, the government may adopt
contractionary measures, such as reducing government expenditure or increasing
taxes, to control inflationary pressures and stabilize prices. The government's
budgetary decisions directly influence the allocation of resources in the economy.
By prioritizing the provision of public goods, the government ensures that essential
services are available to all citizens, regardless of their ability to pay. Through its
redistribution function, the government aims to reduce income inequality and
provide support to marginalized segments of society. Additionally, the government's
stabilisation function helps manage economic fluctuations, ensuring a stable
business environment and promoting sustainable growth.
1.What is the role of the government budget in resource allocation?
2.Why does the government intervene in the provision of public goods?
3.What distinguishes public goods from private goods?
4.How does the government address income inequality through the budget?
5.What measures can the government take during economic fluctuations to stabilize
the economy?
6.How does the government prioritize the allocation of funds for public goods?

Case Study 2
The government of a country is faced with the challenge of managing its revenue
and expenditure to meet the needs of its citizens. The government aims to achieve
economic stability, promote social welfare, and reduce income inequality through
its fiscal policies. The government relies on revenue receipts, which include tax and
non-tax revenues, to fund its expenditures. Tax revenues consist of direct taxes, such
as personal income tax and corporation tax, and indirect taxes like excise taxes and
customs duties. Non-tax revenue sources include interest receipts, dividends from
investments, fees for services rendered, and grants-in-aid from foreign countries and
international organizations. On the expenditure side, the government allocates funds
for public goods and services, such as national defence, infrastructure development,
and government administration. It also engages in redistribution activities to address
income inequality through progressive income taxation and targeted social welfare
programs.
What are the major sources of revenue for the government?
How are tax revenues classified? Provide examples of direct and indirect taxes.
Explain the concept of non-redeemable revenue receipts.
What are the components of non-tax revenue?
How does progressive income taxation contribute to reducing income inequality?

Case Study 3
Government prepares the price range for pleasing positive goals. These goals are the
direct final results of presidency’s financial, social and political rules. The numerous
goals of presidency price range are:
Reallocation of assets: Through the price range policy, authorities’ pursuits to
reallocate assets in according with the financial and social priorities of the country.
Government can impact allocation of assets via: (i) Tax concession or subsidies: To
inspire investment, authorities can deliver tax concession, subsidies, etc. to the
producers. For example, authorities discourage the manufacturing of dangerous
intake items via heavy taxes and encourages the usage of khadi merchandise via way
of means of imparting subsidies. (ii) Directly generating items and services: There
are many non-worthwhile financial sports, which aren’t undertaken via way of
means of the personal region like, water deliver, sanitation, regulation and order,
countrywide defence, etc. These are referred to as public items. Such sports are
always undertaken via way of means of the authorities in public hobby and to elevate
social welfare.
Reducing inequalities in profits and wealth: Economic inequality is an inherent a
part of each financial system. Government pursuits to lessen such inequalities of
profits and wealth, via its budgetary policy. Government pursuits to persuade
distribution of profits via way of means of enforcing taxes on wealthy and spending
extra at the Welfare of the poor. It will lessen profits of the wealthy and the increase
well known of residing of the poor, as a consequence decreasing inequalities inside
the distribution of profits. Three. Economic balance: Economic balance manner
absence of huge-scale fluctuation in costs. Such fluctuations create uncertainties
within the economic system. Government can exercising manipulate over those
fluctuations via taxes and expenditure. four. Management of public Enterprises:
There are huge numbers of public region industries, which might be set up and
controlled fall social welfare of the general public. Budget is ready with the goal of
creating numerous provisions for handling such Enterprises and imparting them
economic assist.
Q1. How do government effect the allocation of resources?
Q2. Government plays an important objective of price stability. How is it carried
out?
Q3. Is there any other objective of government budget given in the above case study?
Identify it and explain that objective.
Q4. How inequalities in income are reduced by the government?

Case Study 4
Revenue receipts seek advice from the ones receipts which neither create any legal
responsibility nor purpose any discount inside the belongings of the authorities. They
are ordinary and ordinary in nature and authorities gets them in its ordinary path of
sports. A receipt is a sales receipt, if it satisfies the subsequent crucial situations. The
receipt should now no longer create a legal responsibility for the authorities. For
example, taxes levied via way of means of the authorities are sales receipts as they
do now no longer create any legal responsibility. However, any quantity, borrowed
via way of means of the authorities, isn’t a sales receipt because it reasons a growth
within the legal responsibility in phrases of reimbursement of borrowings. The
receipt should now no longer purpose lower inside the belongings. For example,
receipts from sale of stocks of a public Enterprise isn’t a sales receipt because it ends
in a discount in belongings of the authorities. Revenue receipts of the authorities are
usually categorised beneath Neath heads: Tax sales and non-tax sales Tax sales
refers to sum general of receipts from taxes and different responsibilities imposed
via way of means of the authorities. Tax is a unilateral obligatory price made via
way of means of human beings and groups to the authorities without connection with
any direct advantage in return. Tax sales may be similarly categorised as: Direct
taxes and Indirect taxes.

Q1. Differentiate between direct and indirect taxes.

Q2. What is a revenue receipt?
Q3. “Escheat is a capital receipt”. Do you agree? Justify.
Q4. Is tax a unilateral or a bilateral payment? Support your answer with valid
arguments.

Case Study 5
In the modern world, govt. aims at maximizing the welfare of the people and the
country. It requires various infrastructure and economic welfare activities. These
activities require huge govt. spending through appropriate planning and policy.
Budget provides a solution to all these concerns. Budget is prepared by the
government at all levels.
Estimated expenditure and receipts are planned as per the objectives of the
government. In India, budget is prepared by the parliament on such a day as the
president may direct. The parliament approves the budget before it can be
implemented. The receipts and expenditures as shown in the budget are only the
estimated values for the upcoming fiscal year, and not the actual figure.

Q1. What is government budget?

Q2. Mention few objectives of government budget.
Q3. What is a capital receipt? How it differs from revenue receipt?
Q4. What are the components of government expenditure?

Short answer questions-;

1. What are revenue receipts?
Answer: Revenue receipts are receipts that do not lead to a claim on the government
and are divided into tax and non-tax revenues.
2. What are non-tax revenues?
Answer: Non-tax revenues of the government include interest receipts, dividends
and profits from investments, fees for services rendered, and grants-in-aid from
foreign countries and international organizations.
3. How does progressive income taxation contribute to reducing income
inequality?
Answer: Progressive income taxation imposes higher tax rates on higher incomes,
thereby redistributing wealth and reducing income inequality.
4. What are debt-creating receipts?
Answer: Debt-creating receipts refer to government receipts, such as loans, that
create liabilities and need to be repaid with interest in the future.
5. What are non-debt creating receipts?
Answer: Non-debt creating receipts include the sale of government assets, which
reduce the government's financial assets without creating additional liabilities.
6. Define government budget.
Ans. Government budget is a statement of expected receipts and expenditures of
7. Why is repayment of loan a capital expenditure?
Ans. Repayment of loan causes a decrease in the liabilities of the government. That
is why, it is a capital expenditure.
8. Why the taxes received by government are not capital receipts?
Ans. Taxes received by government are not capital receipts as taxes do not create
any liability for government, nor lead to decrease in government assets.
9. Explain the economic stability objective of government budget.
Ans. Economic stability an objective of government budget Government tries to
establish economic stability by its budgetary policies. It refers to a situation where
there is no fluctuation in price level in an economy. Economic stability is achieved
by saving the economy from harmful effects of various trade cycles and its phases,
i.e. boom, recession, depression and recovery, through various budgetary tools.
10. How can budgetary policy be used to reduce inequalities of income?
Ans. Even distribution of wealth and social welfare remains one of the main
objective of budgetary policy. The government uses progressive taxation policy to
reduce the inequalities of income and wealth in the country. People with higher
incomes are levied higher rate of tax and people with lower income are levied lower
rate of tax. People with income below a certain level are not levied any direct tax
altogether.
On the other hand, the government spent these tax receipts on granting subsidies and
providing other public services such as health and education free of cost, to people
with lower income groups. Thus, the wealth gets redistributed and reduction in
inequalities is achieved.
11. Explain the role of government in allocation of resources.
Ans. The government does the allocation of resources in such a manner that there is
a balance between the goals of profit maximisation of PSUs and social welfare in an
economy. This allocation is done with the help of government budgetary policy. The
government allocates the resources in accordance with the social and economic
priorities of the country.
Government encourages the production of certain commodities by giving tax reliefs
and providing necessary infrastructural requirements. On the other hand, it
discourages production of hazardous and harmful goods by imposing heavy taxes,
e.g. government imposes tax on liquors and cigarettes.
12. Distinguish between direct tax and indirect tax.
Ans. Direct taxes are those taxes for which the incidence and impact of tax falls on
the same person, i.e. actual burden of taxes cannot be shifted, e.g. income tax,
corporation tax, etc. Whereas indirect taxes are those taxes for which the incidence
and impact fall on separate persons, i.e. burden of these taxes can be shifted to other,
e.g. service tax, entertainment tax, etc.
13. On what basis is government expenditure classified into capital expenditure
and revenue expenditure? Give an example of each.
Ans. Government expenditures are aimed at providing benefits to the people and
enhancing the development of the country. On such basis expenditure is classified
into :
(i) Capital expenditure The expenditure by the government which leads to an
increase in government assets and reduction in government liabilities, is termed as
capital expenditure, e.g. expenses on the construction of national highways, dams
and repayment of loans, etc.
(ii) Revenue expenditure The expenditure of the government which neither cause
any increase in the government assets nor cause any reduction in government
liabilities, are termed as revenue expenditures, e.g. expenditure on old age pensions,
salaries, etc.
14. Give meanings of revenue receipts and capital expenditures with one
example for each.
Ans. Revenue receipts The receipts of government which neither create any
corresponding liability of the government, nor it create any reduction in assets, are
termed as revenue receipts, e.g. tax receipts of the government.
Captial expenditure The expenditure by the government which leads to an increase
in government assets and reduction in government liabilities, is termed as capital
expenditure, e.g. expenses on the construction of national highways, dams and
repayment of loans, etc.
15. Distinguish between balanced budget and surplus budget. (All India 2008)
Ans. When the expected receipts are equal to the expected expenditures in the
government budget, the budget is said to be balanced (Expected receipts = Expected
expenditures). Whereas when the expected receipts are more than the expected
expenditures in the government budget, it is termed as surplus budget (Expected
receipts > Expected expenditure).
Long answer questions-:
1) Discuss the concept of revenue receipts and provide examples of tax and non-
tax revenues.
Answer: Revenue receipts refer to the funds received by the government that do not
create any liability or claim on the government. They are further categorized into tax
and non-tax revenues. Tax revenues are generated through the imposition of taxes
on individuals, firms, and goods and services. Examples of tax revenues include
income tax, corporation tax, excise taxes, customs duties, and service tax. On the
other hand, non-tax revenues are generated through various sources other than taxes.
These can include interest receipts on loans, dividends and profits from government
investments, fees for services rendered by the government, and cash grants-in-aid
from foreign countries and international organizations.
2) Explain the rationale behind progressive income taxation and how it
contributes to reducing income inequality.
Answer: Progressive income taxation is a system where individuals with higher
incomes are subject to higher tax rates, while those with lower incomes pay lower
tax rates. The rationale behind progressive income taxation is based on the principle
of equity and the ability-to-pay concept. By imposing higher tax rates on higher-
income individuals, the government aims to redistribute wealth and reduce income
inequality. This approach ensures that those who can afford to contribute more
towards public finances do so, while providing relief to lower-income individuals
who may have limited financial resources. Progressive income taxation helps in
funding public goods and services, supporting social welfare programs, and
promoting a more equitable distribution of income within society.
3) How does the government generate non-tax revenues, and what are some
examples of non-tax revenue sources?
Answer: Non-tax revenues are generated by the government through sources other
than taxes. These revenues can be derived from various activities and transactions.
Some common examples of non-tax revenue sources include:
Interest receipts: The government earns interest on loans provided to individuals,
organizations, or other governments. These interest payments contribute to non-tax
revenue.
Dividends and profits: The government may hold shares in public sector
undertakings or invest in private companies. Dividends and profits earned from these
investments are considered non-tax revenue.
Fees for services: The government charges fees for various services it provides,
such as issuing licenses, permits, or certificates. These fees contribute to non-tax
revenue.
Cash grants-in-aid: Foreign countries and international organizations may provide
financial assistance to the government in the form of cash grants. These grants-in-
aid contribute to non-tax revenue.
These non-tax revenue sources play a crucial role in supplementing the government's
income and financing its expenditures.

4. Government has started spending more or providing free services like

education and health to the poor. Explain the economic value it reflects.
Ans. The economic value reflected by the above act of the government is ‘Promoting
Social Welfare’. The government uses the fiscal instruments of subsidies and
taxation to improve the distribution of income and wealth in the economy. By
spending more on provision of free services like education and health, government
is trying to promote social justice. Social justice is the principal objective of annual
budget of a developing country like India. It leads to fair and equitable distribution
of income in an economy.
5. Tax rates on higher income group have been increased. Which economic
value does it reflect? Explain.
Ans. The economic value that is reflected in the rise in tax rate for higher income
group is the ‘equality and social welfare’. The main objective of the budgetary policy
of the government is to reduce inequalities of income and wealth in the country.
Even distribution of wealth and social welfare remains the main objective of
budgetary policy. The government uses progressive taxation policy to reduce the
inequalities of income and wealth in the country. Government imposed high tax rates
on higher income group and low tax rate on lower income group. People with income
below a certain level are not levied any direct tax altogether. On the other hand, the
government spent these tax receipts on granting subsidies and providing other public
services such as health and education, to people with lower income groups, the
wealth gets redistributed and reduction in inequalities is achieved.
6. Government raises its expenditure on producing public goods. Which
economic value does it reflect? Explain.
Ans. The economic value that is reflected in the rise in the production of public
goods is the ‘social welfare’. The major objective of the budgetary policy of the
government is to enhance the welfare of the society as a whole. For this, it performs
the allocative function. The allocative function is concerned with allocating the
resources between private and public sectors. As the public goods cannot be
provided by the private sectors through market mechanism, hence the need for
providing such goods is to be fulfilled by the government.
In addition to this, private goods cannot be afforded by all, that is, only those who
can pay for these goods can avail the benefits of such goods. But, as the public goods
as required by all and are essential from welfare point of view, thus, government
provide these goods.

Q Interpret the given picture on the basis of budget deficit

Q Interpret the given graph

Q Classify the following receipts into revenue and capital and give reason for
the same.
Q Classify the expenditure into revenue and capital expenditure.
 Ch- BALANCE OF PAYMENTS AND FOREIGN
EXCHANGE RATE

Keynotes
The balance of payment is a comprehensive and systematic records of all economic
transaction between normal residents of a country and rest of the world during an
accounting year.

Accounts of Balance of Payments:

1.Current Account: The current account records export and import of goods and
services and unilateral transfers.

2. Capital Account: It records of all such transactions between normal residents of

a country and rest of the world which relates to sale and purchase of foreign assets
and liabilities during an accounting year.
Balance of trade is the net difference of Import and export of all visible items
between the normal residents of a country and rest of the world.

In the Bop accounts, all the receipts from abroad are recorded as credit and all
the payments to abroad are debits. Since the accounts are maintained by double
entry bookkeeping, they show the balance of payments accounts are always
balanced.
Deficit of Bop Account: When total inflows of foreign exchange on account of
autonomous transactions are less than total outflows on account such transaction
then there is a deficit in Bop.
Foreign exchange rate refers to the rate at which one unit of currency of a country
can be exchanged for the number of units of currency of another country. In simple
words, we can say that the price of one currency in terms of other currency is known
as foreign exchange rate or exchange rate.
SYSTEM OF EXCHANGE RATE:

In fixed exchange rate system, the rate of exchange is officially fixed or determined
by Government or Monetary Authority of the country.

In a system of flexible exchange rate (also known as floating exchange rates), the
exchange rate is determined by the forces of market demand and supply of foreign
exchange.
The demand of foreign exchange has the inverse relation with flexible exchange
rate. If flexible exchange rate rises the demand of foreign exchange falls. Vice versa.
Merits of Flexible Exchange Rate
(i) No need to hold foreign exchange reserves
(ii) Leads to automatic adjustment in the ‘balance of payments.
(iii) To enhances efficiency in resources allocation.
(iv) To remove obstacles in the transfer of capital and trade.
(v) It eliminates the problem of undervaluation or overvaluation of currency.
(vi) It promotes venture capital in the form of foreign exchange.
Demerits of Flexible Exchange Rate
(i) Fluctuations in future exchange rate.
(ii) Encourages speculation.
(iii) Discourages international trade and investment.
(iv) It creates a situation of market instability.
Determination of Equilibrium Foreign Exchange Rate: Equilibrium FER is the
rate at which demand of and supply of foreign exchange is equal. Under free market
situation, it is determined by market forces i.e., demand for and supply of foreign
exchange. There is inverse relation between demand for foreign exchange and
exchange rate. There is direct relationship b/w supply of foreign exchange and
exchange rate. Due to above reasons demand curve downward sloping and supply
curve is upward sloping curve Graphically intersection of demand Curve and supply
curve determines the equilibrium foreign exchange rate.
Devaluation of a currency: When government or monetary authority of a country
officially lowers the external value of its domestic currency (in respect of all other
foreign currency) is called devaluation of a currency. It takes place by government
order under fixed exchange rate system.
Revaluation of a currency: When government or monetary authority of a country
officially raises the external value of its domestic currency is called revaluation. It
takes place by government order under fixed exchange rates system.

Managed floating system is a system in which the central bank allows the exchange
rate to be determined by market forces but intervenes at times to influence the rate.
When central bank finds the rate is too high, it starts selling foreign exchange from
its reserve to bring down it. When it finds the rate is too low. It starts buying to raise
the rate.
Choose the correct option-:
1. Surplus in current account arises when
a) Credit side is more than debit side
b) Debit side is more than credit side
c) Debit side equals the credit side
d) None of the above
Answer: a) Credit side is more than debit side
2. Choose the correctly matched pair from the following
Column A Column B
A. Sum of credit is equals to 1. Accommodating items
B. Unilateral transactions 2. Transfer receipts
C. Autonomous items 3. Sum of debit
D. Change in foreign exchange reserves with government 4. Transactions above the
line
a) A-1
b) B-2
c) C-3
d) D-4
Answer b
3. “When we say, current account is in balance”, what can be the possible
reasons for it
a) Receipts and payments on current account are equal
b) Receipts and payments on capital account are equal
c) Receipts are more than payment in capital account
d) Receipts are less then payment on current account
Answer a
4. “Current account deficit is unfavourable for the country” because,
a) It signifies that the nation is a borrower from rest of the world
b) It reflects that the country does not have enough foreign exchange to finance its
international payment
c) It has demerits for the country
d) Both (a) and (b)
Answer d
5. Which of the following statement is incorrect
a) Current transactions affect output employment and income levels of economy
b) Capital transactions doesn’t affect assets and liabilities
c) Current transactions do not affect assets and liabilities
d) Capital transactions do not affect output employment and income levels of
economy
Answer: (b) Capital transactions doesn’t affect assets and liabilities
6. When there is a ____________ in the economy, a trade deficit emerges.
a) The value of commodities exported is less than the value of imported items.
b) Commodities are exported at a higher rate than they are imported.
c)The value of exported services is less than the value of imported services.
d)The value of exported services surpasses the value of imported services.
Answer: a
7. If a country has a trade deficit of Rs. 1000 crores and imports products of Rs.
2000 crores, the country’s exports will be worth Rs.
a) Rs. 2000 billion b) One thousand billion rupees c)Rs. 1500 billion d)Rs.
500 billion
Answer: b
8. Which of the following is correct?
a) Depreciation in value of domestic currency is caused because of fluctuations in
demand and supply
b) Devaluation in value of domestic currency is done intentionally by the
Government
c) Appreciation is done intentionally by the Government
d) Both (a) and (b)
Answer d
9. Which of the following is not correct in value of domestic currency
a) Devaluation is done by the Government
b) Revaluation is done by the market fluctuations of demand and supply
c) Appreciation is caused due to change in demand and supply of foreign exchange
d) None of the above
Answer b
10. Due to increase in demand of foreign currency, there is …. in the value of
domestic currency.
a) Appreciation
b) Depreciation
c) Devaluation
d) Revaluation
Answer b
11. Government has to hold huge reserves of foreign exchange to stabilize
foreign exchange rate in the presence of_______ rate. ( Fill in the blank with
the correct alternative).
a) Flexible exchange rate system
b) Floating exchange rate system
c) Fixed exchange rate system
d) Managed floating exchange rate system
Answer c
12.If a country has a surplus in the capital account, it means:
a) More money is flowing into the country than out
b) More money is flowing out of the country than in
c) The country has equal inflows and outflows
d) None of the above
Answer: a
13.Depreciation of a currency can help correct a deficit on the current account
by:
a) Making exports cheaper and imports more expensive
b) Making imports cheaper and exports more expensive
c) Having no impact on trade
d) None of the above
Answer: a
14. Unilateral transfers refer to:
a) Goods sent as aid from one country to another
b) Payments of interest on loans
c) Investments made by one country in another
d) Exports and imports between countries
Answer: a
15. If the reserve account shows a surplus, it indicates:
a) More money is flowing out of the country than in
b) More money is flowing into the country than out
c) Inflows equal outflows for the country
d) None of the above
Answer: b
16. Appreciation of a currency can worsen the current account deficit because:
a) It makes exports more competitive
b) It makes imports cheaper
c) It restricts capital inflows
d) It has no impact on the current account
Answer: b
17. Which of the following would lead to a surplus in the capital account?
a) Foreign aid received
b) Exports exceeding imports
c) Principal repayment of loans given to foreign countries
d) Portfolio investment into the country
Answer: d
18) The demand for a currency in the forex market rises if:
a) Income level in the country rises
b) Interest rates in the country fall
c) Inflation rate in the country rises
d) Political instability increases
Answer: a

Assertion Reason Questions-:

a) Both Assertion(A) and Reason(R) are True and Reason(R) is the correct
explanation of
Assertion (A)
b) Both Assertion(A) and Reason(R) are True and Reason(R) is not the correct
explanation of
Assertion (A)
c) Assertion(A) is true and Reason(R) is false
d) Assertion(A) is false and Reason(R) is true
1.Assertion (A)- Decrease in financial assets of the government is recorded on the
credit side
Reason ( R)- Government withdraws from foreign exchange reserves to use it in
their country
Answer: (a)
2. Assertion (A) – Unilateral transactions are an example of current account
component
Reason ( R)- Capital account is recurring in nature.
Answer: (c)
3. Assertion (A)- When Indian residents receives unilateral items it is recorded in
credit
Reason (R )- Indian residents receiving unilateral items leads to inflow of foreign
exchange
Answer: (a)
4. Assertion (A)- Foreign currency flows into the home country
Reason ( R)- Exports by a country leads to purchase of its domestic goods and
services by the foreigners
Answer a
5. Assertion ( A)- Under fixed exchange rate system, exchange rate is independent
of demand and supply of foreign exchange
Reason ( R)- Under fixed exchange rate system, exchange rate is officially declared
by the government
Answer b
6. Assertion (A)- Demand for foreign exchange leads to inflow of foreign exchange
Reason ( R)- Investment made by foreigners for purchasing financial and physical
assets causes inflow for foreign exchange
Answer a
7. Assertion (A)- If foreign exchange rate increases the demand for foreign
exchange will fall
Reason (R )- There is an inverse relationship between demand for foreign exchange
and foreign exchange rate
Answer a
8. Assertion (A)- Increase in foreign exchange rate makes Indian goods and services
relatively cheaper for foreigners
Reason ( R )- There is a negative relationship between supply of foreign exchange
and foreign exchange rate
Answer c
9.Assertion (A): A current account deficit indicates an economy is importing more
than it is exporting.
Reason (R): Higher imports than exports imply an outflow of foreign exchange
reserves.
Answer: a
10. Assertion (A): Devaluation of a currency improves the balance of payments
position.
Reason (R): Devaluation makes imports cheaper and promotes export
competitiveness.
Answer: b
11. Assertion (A): Surplus in the capital account implies net capital inflows exceed
outflows.
Reason (R): Surplus in capital account compensates for current account deficit.
Answer: c
12. Assertion (A): Appreciation of a currency worsens the current account position.
Reason (R): Appreciation makes exports more competitive internationally.
Answer: c
13.Assertion (A): High inflation leads to appreciation of a currency as per
purchasing power parity.
Reason (R): High inflation reduces the purchasing power of a currency.
Answer: d
14. Assertion (A): Depreciation of a currency improves the trade balance of a
country.
Reason (R): Depreciation makes exports cheaper and imports more expensive.
Answer: a
15.Assertion (A): Under free float, the central bank has no control over the exchange
rate.
Reason (R): The market forces of demand and supply determine the exchange rate
in a free float.
Answer: a
16.Assertion (A): Purchasing power parity theory states that currencies should trade
based on relative price levels between countries.
Reason (R): High inflation in a country leads to appreciation of its currency.
Answer: c

Statement based Questions-:

a) Both the statements are true
b) Both the statements are false
c) Statement 1 is true and Statement 2 is false
d) Statement 1 is false and Statement 2 is true
1. Statement 1- Visible transactions refers to import and export of physical goods.
Statement 2- Invisible transactions refers to import and export of non-factor services
Answer a
2. Statement 1- If foreign exchange rate of a country increases, Demand of foreign
exchange will also increase
Statement 2- If foreign exchange rate increases supply of foreign exchange will also
increase.
Answer d
3. Statement 1- Flexible exchange rate leads to wastage of resources
Statement 2- Under flexible exchange rate system government doesn’t need to hold
huge reserves of foreign exchange
Answer d
4. Statement 1- Under flexible exchange rate system economy doesn’t get the
advantage of open market
Statement 2- Under fixed exchange rate system economy gets the advantage of open
market
Answer b
5. Statement 1- Equilibrium under, floating exchange rate system is determined
where demand for foreign exchange is equals to supply of foreign exchange
Statement 2- Floating exchange rate system results in uncertainty in economy
Answer a
6. Statement 1: Depreciation of a currency improves the current account position of
the balance of payments.
Statement 2: Depreciation makes exports more competitive and imports more
expensive.
Answer: a
7. Statement 1: India has run persistent current account deficits in recent years.
Statement 2: This implies India has been exporting more than it imports during this
period.
Answer: c
8. Statement 1: Appreciation of rupee makes Indian exports more competitive
internationally.
Statement 2: It also makes imports into India cheaper.
Answer: d
9. Statement 1: A deficit in the capital account implies net capital outflows exceed
inflows.
Statement 2: It shows more foreign money is flowing out of the country than in.
Answer: a
10. Statement 1: Surplus in the current account enables a country to earn foreign
exchange.
Statement 2: It worsens the balance of payments position.
Answer: c
11. Statement 1: Purchasing power parity theory states that exchange rates adjust
to account for differences in price levels between countries.
Statement 2: According to PPP, currencies with high inflation tend to depreciate
against low inflation
Answer: a
12. Statement 1: In a floating exchange rate regime, the central bank intervenes
heavily to influence the exchange rate.
Statement 2: Market forces of demand and supply determine rates in a floating
regime.
Answer: d
13. Statement 1: Devaluation refers to a fall in the currency exchange rate due to
market forces.
Statement 2: Devaluation involves deliberate downward adjustment of a currency's
value by the government.
Answer: d
14. Statement 1: A current account surplus indicates an economy is exporting more
than it imports.
Statement 2: It leads to an overall strengthening of the balance of payments
position.
Answer: a

Case Study Based Questions

Case Study 1
India has been running persistent current account deficits over the past few years. In
2019-20, India had a current account deficit of 0.9% of GDP or $24.7 billion. The
trade deficit stood at $157 billion, offset by surplus in services and remittances.
FDI inflows in 2019-20 were $49 billion while portfolio flows were $14 billion.
India's foreign exchange reserves stood at $476 billion providing import cover of 12
months.
In 2020-21, due to the COVID-19 pandemic, India's trade deficit decreased but
remittance inflows also fell leading to a slightly higher CAD of 1.1% of GDP.
Portfolio flows turned negative due to risk aversion by foreign investors. However,
India received over $20 billion as its Special Drawing Rights allocation from the
IMF, providing support to its balance of payments.
1. Why has India been running current account deficits in recent years? What does
a current account deficit signify?
2. How have the capital account helped finance India's current account deficits?
3. What are the implications of persistent current account deficits for India's
economy?

Case Study 2
India has run persistent current account deficits since the 2000s, mainly led by a
large trade deficit. However, the current account deficit has moderated in recent
years from around 5% in 2012-13 to an average of 0.7% in the last 5 years.
The trade deficit has reduced due to lower oil prices and rise in services exports.
Remittance inflows have been stable at around $70 billion. The capital account has
been in surplus supported by robust FDI and external borrowings. FDI equity
inflows averaged around $45 billion in the last 5 years.
India's foreign exchange reserves have risen steadily crossing $600 billion in 2021,
covering around 15 months of imports. The rupee has depreciated moderately
against the US dollar, acting as a shock absorber. However, India faces risks from
high global crude oil prices, tightening global liquidity and funds outflow from
capital markets. These can widen the current account deficit again.
Going forward, boosting merchandise exports through improved competitiveness,
signing trade deals and diversifying service exports can help lower the trade deficit.
Attracting stable FDI inflows will also provide sustainable financing of the current
account deficit.
1. What are the main factors causing India's trade deficit?
2. How can policymakers boost India's export competitiveness?
3. What types of inflows help finance India's current account deficit? Are they
stable?
4. What risks does India face regarding its balance of payments in the near future?
5. How can India strengthen its external sector resilience?

Case study 3
The Swiss franc (CHF) has historically been seen as a safe haven currency given
Switzerland's political stability and low inflation. During the European sovereign
debt crisis between 2010-12, the franc appreciated significantly against the euro and
US dollar.
As the crisis led to capital outflows from the weaker Eurozone economies, investors
moved funds into Swiss assets and franc deposits. This increased demand for francs,
causing it to appreciate. The euro fell from around 1.48 francs in 2010 to 1.20 francs
by mid-2011.
The sharp appreciation hurt Switzerland's exports to the Eurozone which is its
biggest trade partner. To curb the franc's rise, the Swiss National Bank imposed a
cap of 1.20 francs per euro in September 2011. It also cut interest rates to zero to
reduce capital inflows.
However, in January 2015, the SNB suddenly removed the exchange rate cap leading
to a sharp appreciation as the franc rose above parity against the euro. The SNB cited
its efforts being unsustainable to maintain the peg.
The abrupt spike inflicted losses on many Swiss companies and led to major forex
losses for traders and brokers. It demonstrated the challenges faced by central banks
in influencing currency movements for long periods.
1. What factors led to the appreciation of the Swiss franc during 2010-12?
2. How does appreciation of a currency impact exports?
3. What led to the SNB's sudden policy shift in January 2015? What were its
consequences?

Case study 4
In 2018, the Indian rupee depreciated by around 10% against the US dollar due to
macroeconomic factors impacting currency demand and supply.
On the demand side, India's current account deficit (CAD) widened to around 3% of
GDP in 2018 on the back of surging oil import bills as crude prices rose. The trade
deficit widened to $184 billion. This led to dollar outflows, reducing demand for
rupees.
On the supply side, global tightening of monetary policy by the US Fed led to foreign
investors pulling out nearly $10 billion from the Indian capital markets in 2018.
Reduced foreign inflows increased supply of rupees.
However, RBI interference in the forex market helped prevent excessive volatility
in the rupee exchange rate. The depreciation also made Indian exports more
competitive, helping narrow the trade deficit by end-2018.
Going forward, India needs to diversify its export markets and reduce dependence
on imported oil to improve CAD. Attracting stable FDI inflows can also offset
portfolio investment outflows.
1. What factors led to depreciation of the Indian rupee in 2018?
2. How do macroeconomic factors impact currency demand and supply?
3. What steps did RBI take to manage rupee depreciation?
4. How can policymakers reduce India's vulnerability to external shocks?
5. What reforms can help deepen India's foreign exchange market?

Short Answer Questions

1. What is the meaning of deficit in Balance of Payments?
Ans. When the payments of a country on account of autonomous transactions exceed
the receipts of the country on account of autonomous transactions, this difference is
termed as BoP deficit.
2. Distinguish between current account and capital account of the Balance of
Payments account on the basis of its components.
Ans. Current account of BoP measures the transaction of export and import natures
which do not affects the assets and liabilities positions of a country whereas, capital
of BoP includes of Investment and borrowing nature which has direct import on
assets and liabilities of a country.
Current account includes export and imports of visible and invisible items and
unilateral transactions to and from abroad, while capital account includes Investment
to and from abroad, Borrowings and landings to and from abroad and Official
reserves which contains foreign currency, SDRs and gold.
3. What is trade balance? What does a deficit in Balance of Trade indicate?
Ans. The difference between export and import of goods, i.e. only the visible items
of economic transactions is termed as Balance of Trade. A deficit in Balance of
Trade indicates that the value of exports of goods are less than the imports of goods
for a country.
4. Distinguish between autonomous and accommodating transactions of
Balance of Payments account.
Ans. Refer to Keynotes
5. Distinguish between Balance of Trade and balance on current account.
Ans Difference between Balance of Trade and balance on current account
BASIS BALANCE OF TRADE BALANCE ON CURRENT
ACCOUNT
MEANING Balance of Trade includes only Balance of current account is the
visible items. It is the difference difference between sum of credit
between exports and imports of items and sum of debit items on
goods of a country. current account.
COVERAGE Balance of Trade does not Balance of current account includes
record any transactions of balance of visible items, balance of
invisible items and transfers invisible items and balance of
unilateral transfer.
CONCEPT Balance of Trade is a narrow Balance of current account includes
concept and it is only a part of the Balance of Trade hence, it is a
the Balance of Payment broader concept.
account.

6. State the components of capital account of Balance of Payments.

Ans. Components of capital account of Balance of Payments:
(i) Investments It includes investments to and from abroad in the form of FDI and
Fll. Investment from abroad is a ‘credit’ item, whereas investment to abroad is a
‘debit’ item.
(ii) Borrowing and lending It includes the borrowings by residents from the residents
of abroad (credit item), and sending to the resident of foreign country (debit item).
(iii) Foreign exchange It includes the reserve of foreign currency gold and Special
Drawing Rights (SDRs) with the domestic country.
7. Explain the concept of surplus in the Balance of Payments account.
Ans. Refer Keynotes
8. Giving reasons, state whether the following statements are true or false
(i) Current account of Balance of Payment account records only export and
import of goods and services.
(ii) Foreign investments are recorded in the capital account of Balance of
Payments.
(iii) Excess of foreign exchange receipts over foreign exchange payments on
account of accommodating transactions equals deficit in the Balance of
Payments.
(iv) Export and import of machines are recorded in capital account of Balance
of Payments account.
Ans. (i) False, as current account of Balance of Payments account also records
unilateral transfers.
(ii) True, as all kind of foreign investments (foreign direct investments and portfolio
investments) are included in the capital account of Balance of Payments as they
affect the assets positions of the country.
(iii) False, as accommodating transactions removes both surplus and deficit of
Balance of Payments account.
(iv) False, export and import of machine, it will be recorded in current account as it
is a producer good exported.
9. Distinguish between current account and capital account of Balance of
Payments
Ans. Refer Keynotes
10. State two sources of supply of foreign exchange.
Ans. Refer Keynotes
11. How does giving incentives for exports influence foreign exchange rate?
Explain
Ans. The incentives for exports boosts exports for the country. As a result of
increase in exports the supply of foreign currency in the country increases. With
demand remaining the same, this results in a fall in the exchange rate implying
currency appreciation.
12. Recently Government of India has doubled the import duty on gold. What
impact is it likely to have on foreign exchange rate and how?
Ans. When government increase the import duty of gold, the import of gold will fall.
This reduces the demand for foreign currency. With the supply of foreign currency
remaining same, the foreign exchange rate would fall.This implies appreciation of
rupees.
13. Visits of foreign countries for sightseeing etc. by the people of India is on the
rise. What will be its likely impact on foreign exchange rate and how?
Ans. When there is a rise in the visit of foreign countries by the people in India, the
demand for foreign currency increases. With the supply of foreign currency
remaining same, the foreign exchange rises, implying a depreciation of rupee.
14. Foreign exchange rate in India is on the rise recently. What impact is it
likely to have on exports and how?
Ans. With the rise in foreign exchange rate in India, the demand for foreign currency
increases. This rise in exchange rate implies depreciation in domestic currency. It
encourages exports from a country.
15. When foreign exchange rate in a country is on the rise, what impact is it
likely to have on imports and how?
Ans. With the rise in foreign exchange rate in India, the demand for foreign currency
increases. This rise in exchange rate implies depreciation in domestic currency. It
encourages exports from a country and discourages imports from rest of the world.
16. What is ‘appreciation’ of domestic currency? What is its likely effects an
exports and how?
Ans. Domestic currency appreciates when there is a fall in foreign exchange rate,
the domestic economy can now buy more quantity of goods and services from
foreign countries with the same amount of domestic currency. As a result imports
rise.
17.Explain the effect of depreciation of domestic currency on exports.
Ans. Domestic currency depreciates when there is a rise in foreign exchange rate.
Depreciation has an expansionary effect on Aggregate Demand and output.
Depreciation increases the demand for domestically produced goods by reducing
their relative price. This will lead to increase in exports and hence fall in imports, as
now foreign country can buy greater units in the domestic country with same amount
of their currency.
18. How is exchange rate determined in the foreign exchange market?
Ans. Foreign exchange rate is determined by the market forces of demand and
supply in foreign exchange market. The point where demand and supply of foreign
exchange meet, gives the equilibrium rate of exchange as shown in figure and
quantity of foreign exchange.
19. How can Reserve Bank of India help in bringing down the foreign exchange
rate which is very high?
Ans. Central Bank starts selling foreign exchange from its reserve to bring down the
foreign exchange rate, as the demand for foreign exchange is very high.
20. Distinguish between devaluation and depreciation of domestic currency.
(Delhi 2010)
Ans. Devaluation is the fall in the value of domestic currency in relation to foreign
currency. It is planned by the Central Bank in situation, when exchange rate is not
determined by the forces of demand and supply.
Depreciation occurs when the value of domestic currency decreases in relation to the
value of foreign currency in the foreign exchange market under fixed regime.

Interpret the following picture

Analyse the table given below
 Ch- INDIAN ECONOMY ON THE EVE OF
INDEPENDENCE
Keynotes
On the eve of independence Indian economy was in very bad shape due to the
presence of British colonial rule. sole purpose of the British colonial rule in India
was to reduce the country to being a feeder economy for Great Britain’s own rapidly
expanding modern industrial base. Thus, in 1947, when British transferred power
back to India, we inherited a crippled economy.
Conditions in the Indian economy on the eve of independence:
(i) Low level of economic development: The colonial govt., never made any sincere
attempt to estimate India’s national and percapita income.
The estimates given by Dr. V.K.R.V. Rao suggested that growth rate of GDP was
about 2% per annum while the growth of per capita output was just 1/2 (0.5) percent
per annum.
(ii) Backward agricultural sector: Due to
A. Land tenure system- Zamindari system, Mahalwari system and Ryotwari
system.
B. Forced commercialisation of Agriculture
C. Partition of the country.
(iii) Less developed Industrial sector
A. De-industrialization- Decline of Indian handicraft industry.
B. Capital good industries were lacking
C. Limited operation of public sector
D. Discriminatory tariff policy.
E. Competition from Machine made products
F. Introduction of Railways in India
G. Lack of Heavy and Basic Industries
(iv) Foreign trade characteristic
A. Net exporter of raw material and importer of finished good.
B. Britain had the monopoly control on foreign trade.
C. Drain of India’s wealth.
(v) Adverse demographic condition
A. High death and Birth rate-40 and 48 per thousand respectively.
B. High infant mortality rate-218 per thousand.
C. Mass Illiteracy-84% illiterate.
D. Low life expectancy- 44 years
E. Low standard of living- People used to spend 80% to 90% of their income on
basic needs.
F. Lack of public health facilities
G. Female Literacy level was about 7%.
(vi) Underdeveloped infrastructure
Absence of good roads, electricity generation, health, education and
communication. However, some efforts have been made to develop basic infra-
structure like roads, railways, ports, water transport, post & telegraph by the
British rulers. The main motive was not to provide basic amenities to the Indian
people but for their colonial interest.
(vii) More dependence on primary sector
Largest share of work force which was 72% was engaged in agriculture.
10% in manufacturing while 18% workforce were engaged in service sector.
Some positive side-effects of the British rule in India
A. Provided transport facilities, largely in terms of railway.
B. Development of ports.
C. Provision of post and telegraph services.
D. British Govt. left a base of a strong and efficient administrative set up.

Important Data
1. 85 per cent of the country’s population lived mostly in villages and derived
livelihood directly or indirectly from agriculture.
2. The Tata Iron and Steel Company (TISCO) was incorporated in 1907
3. more than half of India’s foreign trade was restricted to Britain while the rest was
allowed with a few other countries like China, Ceylon (Sri Lanka) and Persia (Iran).
4. Various details about the population of British India were first collected through
a census in 1881
5. Suez canal opening in 1869
6. Before 1921, India was in the first stage of demographic transition. The second
stage of transition began after 1921
7. The overall literacy level was less than 16 per cent
8. the female literacy 7%
9. infant mortality rate was quite alarming—about 218 per thousand in contrast to
the present infant mortality rate of 40 per thousand.
10. Life expectancy was also very low—44 years in contrast to the present 68 years
11. Agriculture shared 70-75 per cent while the manufacturing and the services
sectors accounted for only 10 and 15-20 per cent respectively
12. Parts of the then Madras Presidency (comprising areas of the present-day states
of Tamil Nadu, Andhra Pradesh, Kerala and Karnataka), Bombay and Bengal
witnessed a decline in the dependence of the workforce on the agricultural sector
with a commensurate increase in the manufacturing and the services sectors.
However, there had been an increase in the share of workforce in agriculture during
the same time in states such as Orissa, Rajasthan and Punjab.
13. The British introduced the railways in India in 1850
14. First Railway Bridge linking Bombay with Thane, 1854
15. Tata Airlines, a division of Tata and Sons, was established in 1932

Multiple Choice questions-:

1. Which of the following was the main reason for the low productivity in
the agricultural sector on the eve of independence?
(a) Use of outdated methods of farming
(b) Lack of irrigation facilities
(c) Small and fragmented landholdings
(d) All of the above
Answer: (d)
2.Which of the following was the main problem faced by the Indian
economy on the eve of independence?
(a) Low productivity
(b) High poverty
(c) High unemployment
(d) All of the above
Answer: (d)
3.What was the share of agriculture in the national income on the eve of
independence?
(a) 50%
(b) 60%
(c) 70%
(d) 80%
Answer: (c)
4.What was the average annual growth rate of the Indian economy on the
eve of independence?
(a) 1%
(b) 2%
(c) 3%
(d) 4%
Answer: (a)
5. What was the per capita income of India on the eve of independence?
(a) Rs. 100
(b) Rs. 200
(c) Rs. 300
(d) Rs. 400
Answer: (a)
6. What was the literacy rate in India on the eve of independence?
(a) 10%
(b) 20%
(c) 30%
(d) 40%
Answer: (a)
7. What was the life expectancy in India on the eve of independence?
(a) 30 years
(b) 40 years
(c) 50 years
(d) 60 years
Answer: (a)
8. What was the infant mortality rate in India on the eve of independence?
(a) 100 per 1000 live births
(b) 200 per 1000 live births
(c) 300 per 1000 live births
(d) 400 per 1000 live births
9. Which of the following was NOT a feature of the Indian economy on the eve
of independence?
a) Agriculture was the mainstay of the economy
b) The industrial sector was well-developed
c) The economy was heavily dependent on foreign trade
d) The majority of people lived in rural areas
Answer: b) The industrial sector was well-developed
10. Which economist estimated India's per capita income to be around Rs. 20
in 1900-01?
a) Dadabhai Naoroji
b) R.C. Dutt
c) V.K.R.V. Rao
d) Amartya Sen
Answer: a) Dadabhai Naoroji
11. What was the two-fold motive behind British de-industrialization in pre-
independent India?
a) To promote agriculture and handicrafts industries
b) To reduce competition for British goods
c) To increase employment opportunities for Indians
d) To promote modern industries
Answer: b) To reduce competition for British goods
12. What were some notable features of rural society in pre-independence
India?
a) Caste-based occupational specialization
b) Joint family system
c) Patriarchal social structure
d) All of the above
Answer: d) All of the above
13. Which of the following was NOT a reason for the decline of traditional
handicrafts industries in pre-independent India?
a) Competition from modern industries
b) Lack of government support
c) High taxes and tariffs
d) Lack of skilled artisans
Answer: b) Lack of government support
14. Which of the following was the main reason for the slow development of the
industrial sector in India under the colonial rule?
(a) Lack of investment
(b) Low productivity
(c) High population growth
(d) Deliberate policy of the colonial government to deindustrialize India
Answer: (d)
15. Which of the following was the main reason for the slow development of the
capital goods industry in India?
(a) Lack of investment
(b) Low productivity
(c) High population growth
(d) Deliberate policy of the colonial government to deindustrialize India
Answer: (a)
16.Which factor adversely affected the structure, composition, and volume of
India's foreign trade during the colonial period?
a) Expansion of commodity production
b) Liberal trade policies
c) Restrictive policies of the colonial government
d) Increased foreign investments
Answer: c) Restrictive policies of the colonial government
17. Which country had a monopoly control over India's exports and imports
during the colonial period?
a) China
b) Ceylon (Sri Lanka)
c) Persia (Iran)
d) Britain
Answer: d) Britain
18. What percentage of India's foreign trade was restricted to Britain during
the colonial period?
a) Less than 10%
b) Around 25%
c) Approximately 50%
d) More than 75%
Answer: c) Approximately 50%
19. How did the introduction of railways affect the Indian economy?
a) Increased self-sufficiency of village economies
b) Hindered long-distance travel
c) Strengthened cultural barriers
d) Fostered commercialization of Indian agriculture
Answer: d) Fostered commercialization of Indian agriculture
20. What was the overall effect of railways on the benefits accrued to the Indian
people?
a) Indian people greatly benefited from railways
b) Benefits rarely accrued to the Indian people
c) Benefits were evenly distributed among the Indian population
d) Benefits primarily went to the rural population
Answer: b) Benefits rarely accrued to the Indian people

Assertion Reason Questions-:

i) Both Assertion(A) and Reason(R) are True and Reason(R) is the correct
explanation of Assertion (A)
j) Both Assertion(A) and Reason(R) are True and Reason(R) is not the correct
explanation of Assertion (A)
k) Assertion(A) is true and Reason(R) is false
l) Assertion(A) is false and Reason(R) is true

1. Assertion: The structure of India's present-day economy has historical roots,

particularly during the period of British colonial rule.
Reason: British colonial rule aimed to exploit India by reducing it to a raw material
supplier for Britain's industrial base.
Answer: b
2. Assertion: The primary objective of British colonial rule in India was to foster
the industrial development of the country.
Reason: British colonial rulers intended to utilize India's resources for the benefit of
their own expanding industrial base.
Answer: d
3. Assertion: The economic development of India under British colonial rule was
hindered due to due to exploitative policies.
Reason: The primary focus of the British was on promoting handicraft industries in
India.
Answer: d
4. Assertion: India had a diverse range of manufacturing activities, including
handicraft industries, before the advent of British rule.
Reason: India's reputation for fine-quality materials and craftsmanship contributed
to its worldwide market for exports.
Answer: a
5. Assertion: The Indian economy under British rule experienced a high level of
economic development.
Reason: British colonial rule promoted industrialization and modernization in India.
Answer d
6. Assertion: The book "Indian Economic Development" focuses solely on India's
present state and future prospects.
Reason: Understanding India's economic past is irrelevant to assessing its present
and future development.
Answer: d
7. Assertion: The textile industry in Bengal, particularly in places like Dhaka,
played a significant role in India's economy.
Reason: Bengal's textile industry primarily relied on the export of muslin to global
markets.
Answer: B
8. Assertion: The economic policies pursued by the colonial government in India
prioritized the protection and promotion of their home country's economic interests
over the development of the Indian economy.
Reason: These policies transformed India into a supplier of raw materials and a
consumer of finished industrial products from Britain.
Answer: a
9. Assertion: The colonial government made sincere efforts to accurately estimate
India's national and per capita income.
Reason: Various estimators, such as Dadabhai Naoroji and William Digby, provided
consistent and reliable estimates of India's income during the colonial period.
Answer: d
10. Assertion: The agricultural sector in India was stagnant during the British
colonial rule.
Reason: The expansion of the aggregate area under cultivation contributed to
increased agricultural productivity.
Answer: c
11. Assertion: The zamindari system introduced by the colonial government in
Bengal Presidency further degraded the economic condition of cultivators.
Reason: The zamindars actively worked to enhance agricultural productivity and
supported the interests of the cultivators.
Answer: c
12. Assertion: The lack of investment in irrigation, terracing, flood control, and
drainage negatively impacted India's agriculture under colonial rule.
Reason: The colonial government made significant investments in improving
irrigation facilities and soil desalinization.
Answer: a
13. Assertion: The dismal level of agricultural productivity in India during the
colonial period was primarily due to low levels of technology, lack of irrigation
facilities, and negligible use of fertilizers.
Reason: Farmers had access to advanced technology and adequate irrigation
facilities, but they lacked the incentive to invest in agriculture.
Answer: c
14. Assertion: The decline of India's indigenous handicraft industries led to a
decrease in employment and decreased supply of locally made goods in the Indian
consumer market.
Reason: The increasing imports of cheap manufactured goods from Britain
effectively met the demand created by the decline of indigenous industries.
Answer: c
15. Assertion: The establishment of cotton and jute textile mills in India during the
colonial period significantly contributed to the growth of the modern industrial
sector.
Reason: The dominance of Indian-owned cotton textile mills in western India and
foreign-owned jute mills in Bengal led to a balanced industrial development across
the country.
Answer: c
16. Assertion: The public sector in India's new industrial sector had a small area of
operation, including manufacturing, railways, power generation, communications,
and ports.
Reason: The public sector played a significant role in promoting industrialization
and economic growth during the colonial period.
Answer: c
 17. Assertion: The restrictive policies of the colonial government adversely affected
the structure, composition, and volume of India's foreign trade.
Reason: India became an importer of finished consumer goods and an exporter of
raw materials under the colonial rule.
Answer: d
18. Assertion: India's foreign trade during the colonial period generated a large
export surplus that resulted in a flow of gold and silver into the country.
Reason: The export surplus was utilized for making payments for the expenses
incurred by the colonial government in Britain and other imports, leading to a drain
of Indian wealth.
Answer: c

Statement based Questions-:

i) Both the statements are true
j) Both the statements are false
k) Statement 1 is true and Statement 2 is false
l) Statement 1 is false and Statement 2 is true

1) Statement 1: Colonial government levied 0% import duty on British goods imported

in India.
Statement 2: Colonial government systematically destroyed Indian handicraft
industry
Answer a

2) Statement 1: The Zamindars were declared as owners of the soil. They were
supposed to pay a fixed sum to the government while they could extract as much as
 they wanted from the actual tillers of the soil.
Statement 2: Agriculture was exploited through Zamindari system of Land
Revenue.
Answer a
3) Statement 1: The two important industries which were adversely affected by
partition were Cotton textile and Jute industry.
Statement 2: India faced problem of rehabilitation of large number of refugees from
Pakistan.
Answer a
4) Statement 1: More than Half of India’s Foreign trade was restricted to Pakistan
Statement 2 : Britain maintained Monopoly control on India’s Import and Export
Answer d

5) Statement 1: India was more of a consumer than a supplier of materials for finished
goods.
Statement 2: British policies were more directed towards their own economic
interests.
Answer d
6) Statement 1: The construction of railways was not at all beneficial to the Indian
economy.
Statement 2: It reduced commercialization of Indian agriculture, which adversely
affected the comparative self-sufficiency of the village economies in India.
Answer b
7) Statement 1: The British introduced the railways in India in 1857 and it is
considered as one of their most important contributions.
Statement 2: Along with the development of roads and railways, the colonial
dispensation also took measures for developing the inland trade and sea lanes.
 Answer d
8) Statement 1: The major policy initiatives that is land reforms and green revolution
helped India to become self-sufficient in food grains production.
Statement 2: The proportion of people depending on agriculture declined as
expected.
Answer c
9) Statement 1: Indian agriculture sector gained due to partition.
Statement 2: A sizeable proportion of the undivided countries highly irrigated and
fertilizers land went to Pakistan.
Answer c
10) Statement 1: There was lack of capital goods industries in India.
Statement 2: India had a dependent economy before the advent of British rule.
Though agriculture was the main source of livelihood for most people, yet, the
economy of the country was characterised by various kinds of manufacturing
activities.
Answer d

Case Study1 -:
India's struggle for independence from British colonial rule lasted for two centuries.
During this period, the British implemented policies that shaped the Indian economy,
leaving a lasting impact. This case study explores the consequences of these policies
and the challenges faced by India at the time of independence.The British colonial
rule had adverse effects on Indian agriculture. Land taxes, exploitative revenue
systems, and policies favoring cash crops resulted in the dispossession of farmers
and led to an overpopulated agricultural sector. The sector faced challenges such as
fragmented landholdings, outdated techniques, and low productivity.The industrial
sector was crying for modernisation, diversification, capacity building, and
increased public investment.The British policies focused on maintaining India as a
supplier of raw materials to support the Industrial Revolution in Britain. As a result,
Indian industries were neglected, and there was a lack of modernization,
diversification, and investment. The industrial sector faced challenges in terms of
outdated technologies, limited capacity, and a lack of infrastructure.
Foreign trade was oriented to feed the Industrial Revolution in Britain.British
colonial policies prioritized exporting Indian raw materials to meet the needs of
British industries. This one-sided trade orientation limited India's economic growth
and hindered the development of domestic industries. India became dependent on
foreign markets, leading to a trade imbalance and limited economic
benefits.Infrastructure facilities, including the famed railway network, needed
upgradation, expansion, and public orientation. The British introduced infrastructure
projects like railways primarily for their own strategic and economic interests. While
the railway network had its benefits, there was a need for further expansion,
modernization, and public orientation to meet the growing demands of an
independent India. Other infrastructure sectors, such as roads and communication,
also required significant improvements.Prevalence of rampant poverty and
unemployment required welfare orientation of public economic policy. British
colonial rule exacerbated poverty and unemployment in India. Exploitative
economic policies, land dispossession, and limited job opportunities left a large
segment of the population in poverty and struggling for employment. After
independence, India faced the enormous challenge of implementing welfare-
oriented economic policies to address these social issues.
On the basis of the above case study answer the following questions-:
a) What were the challenges faced by the agricultural sector in India during the
British colonial rule?
b) How did the industrial sector in India suffer under British colonial rule?
 c) What was the orientation of foreign trade during the British colonial period in
India?
d) What were the infrastructure needs in India at the time of independence?
e) What were the social challenges faced by India regarding poverty and
unemployment?
f) What were the infrastructure challenges faced by India at the time of
independence?

Case study 2
British colonial policies resulted in significant changes in land ownership and
control, leading to the concentration of land in the hands of a few landlords and
dispossessing many farmers of their lands.Under British rule, there was a shift
towards cash crop cultivation, such as indigo, opium, jute, and tea, which were
grown for export to meet the demands of the British market. This led to a decline in
food crop production and increased vulnerability to famines. The British introduced
the Permanent Settlement system in some parts of India, which fixed land revenue
obligations for zamindars (landlords) for an extended period. This system had long-
lasting negative effects on farmers, as it created rigid revenue demands and increased
rent burdens. The colonial government encouraged the commercialization of
agriculture, focusing on producing cash crops for export rather than fulfilling
domestic food requirements. This resulted in a neglect of food security and affected
the self-sufficiency of rural economies. The colonial administration did not prioritize
agricultural research, technological advancements, or modern farming methods.
Outdated techniques, lack of access to irrigation facilities, and limited infrastructure
hampered agricultural productivity.The agrarian economy's transformation and
agrarian distress led to social upheaval in rural communities. Displacement,
indebtedness, and poverty were prevalent, contributing to a cycle of exploitation and
economic vulnerability.The colonial period in India witnessed significant changes
and challenges in the agriculture sector. British policies, including land control, cash
crop cultivation, and commercialization, had a profound impact on the socio-
economic fabric of rural communities. The neglect of food security, technological
advancements, and infrastructure development further compounded the challenges
faced by farmers. Understanding the historical context of the colonial era helps shed
light on the agrarian struggles that shaped the trajectory of Indian agriculture and
laid the foundation for subsequent agricultural reforms and policies in independent
India.
On the basis of above case study answer the following questions-:
a) How did British colonial policies impact land ownership and control in India
during the colonial period?
b) What was the focus of agricultural production under British rule in India?
c) What were the consequences of the emphasis on commercialization of
agriculture during the colonial period?
d) What were the primary challenges faced by Indian farmers in terms of food
security during the colonial period?
e) What were the socio-economic consequences of agrarian distress in rural
communities during the colonial period?

Case study 3
The colonial period in India, spanning over two centuries, brought about significant
changes in the occupational structure of the country. This case study examines the
occupational composition, distribution, and the impact of British colonial rule on
various sectors during that time.During the colonial period, India's occupational
structure displayed limited signs of change. The majority of the workforce was
engaged in agriculture, comprising around 70-75% of the total labor force. The
manufacturing sector accounted for approximately 10% of the workforce, while the
services sector employed around 15-20%.There was a noticeable regional variation
in the occupational structure. Parts of Madras Presidency, Bombay, and Bengal
witnessed a decline in agricultural dependency, accompanied by an increase in the
manufacturing and services sectors. However, states like Orissa, Rajasthan, and
Punjab experienced an increase in agricultural employment during the same
period.The agricultural sector, although employing the largest share of the
workforce, faced challenges such as surplus labor and low productivity. Colonial
policies and land tenure systems contributed to the difficulties faced by farmers,
leading to socio-economic disparities and rural distress.The industrial sector in India
demanded modernization, diversification, capacity building, and increased public
investment. The lack of industrial development and limited capital goods industries
hindered the growth and productivity of the sector.The services sector, which
included areas such as trade, transport, and administration, employed a significant
portion of the workforce. However, it was relatively smaller in size compared to
agriculture and faced limited growth opportunities.
On the basis of above case study answer the following questions-:
a) What was the occupational composition during the colonial period in India?
b) What percentage of the workforce was engaged in agriculture during the
colonial period?
c) How did the occupational structure vary across different regions of India
during the colonial period?
d) What challenges did the agricultural sector face during the colonial period?
e) What were the demands of the industrial sector during the colonial period?
Case study 4
During the colonial period in India, the foreign trade system had a significant impact
on the country's economy. The policies and practices implemented by the colonial
government had far-reaching consequences for India's trade patterns, composition,
and volume. This case study examines the key aspects of foreign trade during the
colonial period and its implications for the Indian economy.Under British colonial
rule, India's foreign trade was heavily influenced by the policies of commodity
production, trade, and tariffs. The colonial government aimed to maintain control
over India's exports and imports to serve the interests of Britain. The trade
relationship between India and Britain was characterized by a trade surplus for
Britain and the limited diversification of India's exports.India primarily exported raw
materials such as raw silk, cotton, wool, sugar, indigo, and jute to Britain. These
exports were used as inputs for Britain's emerging modern industries during the
Industrial Revolution. India became a major importer of finished consumer goods,
including cotton, silk, and woolen clothes, as well as capital goods like light
machinery, mainly produced in British factories. Britain maintained a monopoly
control over India's exports and imports, with more than half of India's foreign trade
being restricted to Britain. Limited trade was also allowed with a few other countries
such as China, Ceylon (Sri Lanka), and Persia (Iran).India generated a large export
surplus, but the benefits of this surplus did not flow back into the Indian economy.
The surplus was used to make payments for British expenses and imports, leading
to the drain of Indian wealth. Despite the export surplus, there was a limited flow of
gold or silver into India, further hindering economic development. The structure of
India's foreign trade contributed to the decline of indigenous industries,
unemployment, and the dependence on imported manufactured goods from Britain.
This had a negative effect on the overall economy and contributed to the economic
challenges faced by India at the time of independence.
On the basis of above case study answer the following questions-
a) What were the primary commodities exported by India during the colonial
period?
b) How did the structure of India's foreign trade contribute to the decline of
indigenous industries?
c) What types of goods did India import from Britain during the colonial period?
d) What was the trade relationship between India and Britain characterized by?
e) What is drain of Indian wealth?

Case study 5
During the colonial rule in India, the development and management of infrastructure
played a significant role. This case study examines the state of infrastructure,
including railways, roads, ports, and communication systems, and its impact on the
Indian economy and society. Under British colonial rule, infrastructure development
in India served primarily colonial interests rather than meeting the needs of the local
population. The infrastructure projects aimed to facilitate the transportation of
goods, maintain law and order, and facilitate the exploitation of India's resources for
the benefit of the British Empire. The British introduced railways in India, which
had both positive and negative consequences. The railway network connected major
cities and regions, enabling long-distance travel and trade. However, it also led to
the commercialization of Indian agriculture, negatively affecting local self-
sufficiency. The existing road infrastructure in India was inadequate for modern
transportation. The British constructed roads primarily to mobilize their troops and
transport raw materials from rural areas to railway stations or ports for export. The
lack of all-weather roads in rural areas during the rainy season led to significant
hardships for the local population, especially during natural calamities and famines.
The colonial administration took measures to develop inland trade and sea lanes,
although their effectiveness varied. Inland waterways, such as the Coast Canal on
the Orissa coast, faced challenges competing with railways and were eventually
abandoned. Ports were developed to facilitate the export of Indian goods to Britain
and other foreign destinations, prioritizing colonial trade interests.The British
introduced the electric telegraph system for maintaining law and order, while postal
services were inadequate despite serving a useful public purpose. These systems
were primarily designed to serve colonial administrative and military needs rather
than prioritize the welfare of the Indian population.

On the basis of above case study answer the following questions:

a) What were the main objectives behind the development of infrastructure
during the colonial rule in India?
b) How did the introduction of railways impact the Indian economy during the
colonial period?
c) What were some challenges faced by the road infrastructure during the
colonial period?
d) What was the primary purpose of developing ports and water transport during
the colonial period?
e) How did the electric telegraph system and postal services contribute to the
colonial administration in India?

Short questions-:
Q1.”During the colonial period, the agricultural sector accounted for the
largest share of the workforce in India, while the manufacturing and services
sectors had smaller shares.” What was the occupational structure of India
during the colonial period?
Answer: The occupational structure of India during the colonial period showed that
the agricultural sector had the largest share of the workforce, accounting for
approximately 70-75% of the working population. The manufacturing sector
accounted for around 10% of the workforce, while the services sector accounted for
approximately 15-20%.

Q2: “The introduction of railways in India by the British had a significant

impact on the Indian economy.” How did the introduction of railways in India
affect the Indian economy?
Answer: The introduction of railways in India had a twofold impact on the Indian
economy. On one hand, it facilitated long-distance travel and helped break
geographical and cultural barriers. On the other hand, it led to the commercialization
of Indian agriculture, which had adverse effects on the self-sufficiency of village
economies in India. While the volume of India's exports expanded, the benefits of
this growth were often not realized by the Indian people. Overall, the social benefits
of the railways were overshadowed by the economic loss experienced by the
country.

Q3. What was the impact of the British policies on the farmers in India?
Answer: British policies, such as high land taxes, exploitative revenue systems, and
the introduction of commercial crops, burdened the farmers and often led to
widespread indebtedness and poverty.

Q4. How did the colonial rule affect land ownership and land rights in the
agriculture sector?
Answer: The colonial rule brought significant changes to land ownership and land
rights, with the introduction of the Zamindari and Ryotwari systems. These systems
often resulted in the displacement of peasants from their lands and led to increased
landlessness.

Q5. Did the colonial administration invest in improving agricultural

infrastructure in India?
Answer: The colonial administration focused primarily on infrastructure
development that served their own interests, such as railways and transportation for
exporting raw materials, rather than investing significantly in improving agricultural
infrastructure.

Q6. Did the agriculture sector witness any significant improvements or

advancements under colonial rule?
Answer: Overall, the agriculture sector in India did not experience significant
improvements or advancements under colonial rule. Instead, it faced challenges such
as low productivity, exploitative land revenue systems, and limited access to modern
technology and infrastructure.

Q7. What was the impact of colonial rule on India's manufacturing sector?
Answer: The manufacturing sector in India suffered under colonial rule as the
decline of indigenous handicraft industries and the absence of a modern industrial
base led to unemployment and the dependence on imported goods from Britain.

Q7. How did the decline of indigenous handicraft industries affect the Indian
consumer market?
Answer: The decline of indigenous handicraft industries resulted in massive
unemployment and created a new demand in the Indian consumer market, which
was then met by increasing imports of cheap manufactured goods from Britain.
Q8.What was the state of capital goods industry in India during the colonial
period?
Answer: There was a lack of a capital goods industry in India, which limited the
promotion of further industrialization. The absence of industries producing machine
tools hindered the production of articles for current consumption.

Q9. How did the restrictive policies of the colonial government affect India's
foreign trade?
Answer: The restrictive policies of the colonial government negatively impacted the
structure, composition, and volume of India's foreign trade, making India an exporter
of primary products and an importer of finished consumer goods and capital goods
from Britain.

Q10.How was the export surplus utilized by the colonial government?

Answer: The export surplus was used to make payments for expenses incurred by
the colonial government's office in Britain, expenses on wars fought by the British
government, and the import of invisible items, leading to the drain of Indian wealth.

Q11. What were some social development indicators during the colonial period
in India?
Answer: The overall literacy level was less than 16%, with female literacy at a
negligible low of about 7%. Public health facilities were inadequate, leading to
rampant water and air-borne diseases. The overall mortality rate was high, with an
alarming infant mortality rate of about 218 per thousand.
Q12.How did the introduction of railways in India affect the economy?
Answer: The introduction of railways enabled long-distance travel and broke
geographical and cultural barriers. However, it also led to the commercialization of
Indian agriculture, which negatively affected the self-sufficiency of village
economies.

Q13.What were the social benefits and economic losses associated with the
introduction of railways in India?
Answer: The social benefits of railways, such as enabling long-distance travel, were
outweighed by the economic losses suffered by the Indian people. The volume of
India's exports expanded, but the benefits rarely accrued to the Indian people.

Long Answer questions-:

Q1. What was the condition of agriculture during colonial period?
Ans. Agricultural productivity became low though, in absolute terms, the sector
experienced some growth due to the expansion of the aggregate area under
cultivation. This stagnation in the agricultural sector was caused mainly because of
The various systems of land settlement -: Many systems that were introduced by the
colonial government. Particularly, under the zamindari system which was
implemented in the then Bengal Presidency comprising parts of India’s present-day
eastern states,the profit accruing out of the agriculture sector went to the zamindars
instead of the cultivators. However, a considerable number of zamindars, and not
just the colonial government, did nothing to improve the condition of agriculture.
The main interest of the zamindars was only to collect rent regardless of the
economic condition of the cultivators; this caused immense misery and social
tension among the latter. To a very great extent, the terms of the revenue settlement
were also responsible for the zamindars adopting such an attitude; dates for
depositing specified sums of revenue were fixed, failing which the zamindars were
to lose their rights.
Low levels of technology-: Besides this, low levels of technology, lack of irrigation
facilities and negligible use of fertilisers, all added up to aggravate the plight of the
farmers and contributed to the dismal level of agricultural productivity.
Commercialisation of agriculture-: There was, of course, some evidence of a
relatively higher yield of cash crops in certain areas of the country due to
commercialisation of agriculture. But this could hardly help farmers in improving
their economic condition as, instead of producing food crops, now they were
producing cash crops which were to be ultimately used by British industries back
home.

Q2. What was the condition of Industrial sector during colonial rule?
Ans. A. De-industrialization- Decline of Indian handicraft industry.-
1) The intention was, first, to reduce India to the status of a mere exporter of
important raw materials for the upcoming modern industries in Britain
2) To turn India into a sprawling market for the finished products of those industries
so that their continued expansion could be ensured to the maximum advantage of
their home country — Britain
B. Capital good industries were lacking-: there was hardly any capital goods
industry to help promote further industrialisation in India. Capital goods industry
means industries which can produce machine tools which are, in turn, used for
producing articles for current consumption. The establishment of a few
manufacturing units here and there was no substitute to the near wholesale
displacement of the country’s traditional handicraft industries.
C. Limited operation of public sector -: Another significant drawback of the new
industrial sector was the very limited area of operation of the public sector. This
sector remained confined only to the railways, power generation, communications,
ports and some other departmental undertakings
D. Discriminatory tariff policy-: During the colonial rule, the British followed a
discriminatory tariff policy under winch they imposed heavy tariffs (export duties)
on India's export of handicraft products while allowing free export of India's raw
material to Britain and free import of British products to India.
E. Competition from Machine made products-: This was due to stiff competition
from the machine made textiles from Britain. The goods produced mechanically in
Britain using cheap raw material from India were comparatively lower in price and
of superior quality than the Indian handicraft goods. This narrowed the market for
Indian handicrafts industries.\
F. Lack of Heavy and Basic Industries-: Due to the confined growth of the PSUs
and the unbalanced industrial formation, the growth of the modern industry was
stagnant. In addition, there was a scarcity of basic and heavy industries.

Q3. What is drain of Indian wealth during british rule?

Ans. Drain of wealth means that economic policies of the British in India were
primarily motivated to snatch maximum benefits from India’s trade. India’s foreign
trade generated large export surplus. This export surplus did not result in any flow
of gold or silver into India. There was drain of India’s wealth into Britain.
It is clear from the following facts :-
The surplus was used to make payments for the expenses incurred by the office set
up by the colonial government in Britain.
The surplus was used to pay expenses on war fought by the British government.
Surplus was used to pay for the import of invisible items.
Q4. What was the structure, volume and composition of foreign trade during
british rule?
Ans. Structure-: India became an exporter of primary products such as raw silk,
cotton, wool, sugar, indigo, jute etc. and an importer of finished consumer goods
like cotton, silk and woollen clothes and capital goods like light machinery produced
in the factories of Britain. For all practical purposes, Britain maintained a monopoly
control over India’s exports and imports. As a result, more than half of India’s
foreign trade was restricted to Britain while the rest was allowed with a few other
countries like China, Ceylon (Sri Lanka) and Persia (Iran). The opening of the Suez
Canal further intensified British control over India’s foreign trade The most
important characteristic of India’s foreign trade throughout the colonial period was
the generation of a large export surplus. But this surplus came at a huge cost to the
country’s economy. Several essential commodities—food grains, clothes, kerosene
etc. — were scarcely available in the domestic market. Furthermore, this export
surplus did not result in any flow of gold or silver into India. Rather, this was used
to make payments for the expenses incurred by an office set up by the colonial
government in Britain, expenses on war, again fought by the British government,
and the import of invisible items, all of which led to the drain of Indian wealth.

Q5. What objectives did the British intend to achieve through their policies of
infrastructure development in India?
Ans. Under the colonial regime, basic infrastructure such as railways, ports, water
transport, posts and telegraphs did develop. However, the real motive behind this
development was not to provide basic amenities to the people but to serve various
colonial interests.
Roads-: Roads constructed in India prior to the advent of the British rule were not
fit for modern transport. The roads that were built primarily served the purposes of
mobilising the army within India and drawing out raw materials from the countryside
to the nearest railway station or the port to send these to far away England or other
lucrative foreign destinations. There always remained an acute shortage of all
weather roads to reach out to the rural areas during the rainy season. Naturally,
therefore, people mostly living in these areas suffered grievously during natural
calamities and famines
Railways-:The British introduced the railways in India in 1850 and it is considered
as one of their most important contributions. The railways affected the structure of
the Indian economy in two important ways. On the one hand it enabled people to
undertake long distance travel and thereby break geographical and cultural barriers
while, on the other hand, it fostered commercialisation of Indian agriculture which
adversely affected the self-sufficiency of the village economies in India. The volume
of India’s exports undoubtedly expanded but its benefits rarely accrued to the Indian
people. The social benefits which were accrued were outweighed by the country’s
huge economic loss.
Waterways-: the colonial dispensation also took measures for developing the inland
trade and sea lanes. However, these measures were far from satisfactory. The inland
waterways, at times, also proved uneconomical as in the case of the Coast Canal on
the Orissa coast. Though the canal was built at a huge cost to the government
exchequer, yet, it failed to compete with the railways, which soon traversed the
region running parallel to the canal, and had to be ultimately abandoned.
Post and telegraph-: The introduction of the expensive system of electric telegraph
in India, similarly, served the purpose of maintaining law and order. The postal
services, on the other hand, despite serving a useful public purpose, remained all
through inadequate.
Q6. Were there any positive contributions made by the British in India?
Discuss.
Ans. Yes, there were various positive contributions that were made by the British in
India though these contributions wore not made with the objective of welfare for
Indians but for the British interests. Some of the positive contributions made by
British are
Introduction of Railways -: The introduction of railways by the British was a
breakthrough in the development process of Indian Economy. It opened up the
cultural and geographical barriers and facilitated commercialization of Indian
agriculture.
Introduction of Commercialization of Agriculture -: The introduction of
commercial agriculture is an important breakthrough in trio history of Indian
agriculture. Prior to the advent of the British, Indian agriculture was of subsistence
nature. But with the commercialization of agriculture the agricultural production was
named out as per the market requirements leading to higher agricultural incomes.
Introduction of Free Trade -: British forced India to follow free trade pattern
during the colonial rule. This is the key concept of globalisation today. The free trade
provided domestic industry with a platform to compete with the British industries.
The introduction of free trade led to an increase in the volume of India's exports.
Development of Infrastructure-: The infrastructure developed in India by the
British proved to be useful for Indian people. The telegram and postal services
served Indian public and the roads built by British provided connectivity to interior
regions.
Q Interpret the following picture with the reference to Indian economy

Q Interpret the following graph with the reference to Indian economy

 Ch- INDIAN ECONOMY (1950-90)
Keynotes
Economic Planning: Means utilisation of country’s resources in different
development activities in accordance with national priorities.
Goals of Planning in India
a. Long Term Goals(To be achieved over a period of 20 years)
b. Short Term Goals(To be achieved over a period of five years)
LONG TERM GOALS
A. Modernisation - Adoption of new technology and changes in social outlook
B. Self reliance - Reducing dependence on imports.
C. Economic Growth - Increase in the aggregate output of Goods & services.
D. Equity - Reduction in inequality of income and wealth
E. Full employment - Refers to a situation when all the people in the working age
group is actually engaged in some gainful employment.
SHORT TERM GOALS / OBJECTIVES OR OBJECTIVES OF FIVE YEAR
PLANS
Short term objectives vary from plan to plan depending on current needs of the
country. For example first plan (1951-56) focused on higher agricultural
production while in second plan (1956-61) shifted the focus from agriculture to
Industry. In India growth and equity are the objectives of all the five year plans.
The goal of current five year plan (12th, 2012-17) was INCLUSIVE
DEVELOPMENT and from 2017 Planning commission is replaced by NITI Aayog
AGRICULTURE
Main Features of Indian Agriculture
1. Low productivity 2. Disguised unemployment. 3. Dependence on rainfall
4. Subsistence farming-objective of farmer is to secure subsistence for his family
not to earn profit. 5. Traditional inputs 6. Small holdings 7. Backward
technology. 8. Landlord tenant conflict.
Problems of Indian Agriculture
A. General Problems
1. Pressure of population on land 2. Land degradation
3. Subsistence farming 4. Social environment
5. Crop losses-by pest, insect, flood draught etc.
B. Institutional Problems.
1. Small and scattered holdings. 2. Poor implementation of land reforms.
3. Lack of credit and marketing facilities.
C. Technical Problems.
1. Lack of irrigation facilities. 2. Wrong cropping pattern.
3. Outdated technique of production.
Reforms in Indian Agriculture
A. Institutional Reforms also called Land reforms.
(i) Abolition of intermediaries. (ii) Regulation of rent.
(iii) Consolidation of holdings. (iv) Ceiling on land holdings.
(v) Cooperative Farming
B. General reforms.
(i) Expansion of irrigation facilities. (ii) Provision of credit
(iii) Regulated markets and co-operative marketing societies. (iv) Support price
policy.
C. Technical Reforms or Green Revolution
(i) Use of HYV seeds (ii) Use of chemical fertilisers.
(iii) Use of insecticides and pesticides for crop protection (iv) Scientific
rotation of crops
(v) Modernised means of cultivation.
ACHIEVEMENTS OF GREEN REVOLUTION
1. Rise in production and productivity. 2. Increase in income.
3. Rise in commercial farming.
4. Impact on social revolution-use of new technology HYV seeds, fertilisers etc.
5. Increase in employment. 6. Substantial Rise in Acerage
FAILURES OF GREEN REVOLUTION
1. Restricted to limited crops and areas such as two crops wheat & rice growing
states like Punjab, Haryana, U.P. and Andhra Pradesh.
2. Partial removal of poverty. 3. Neglected land reforms.
4. Increase in income disparity between small and big farmers
5. Ecological degradation.

INDUSTRIAL DEVELOPMENT SINCE INDEPENDENCE

Share of industrial sector in the GDP has increased upto 20% in 2013-14.
The following important changes have taken place:
(i) Development of infrastructure like power transport, communication, banking &
finance, qualified and skilled human resource.
(ii) Much progress in the field of research and development.
(iii) Expansion of public sector.
(iv) Building up of capital goods industry.
(v) Growth of non-essential consumer goods industries.
PROBLEMS OF INDUSTRIAL DEVELOPMENT IN INDIA
1. Sectoral imbalances- Agriculture and infrastructure have failed to provide the
support to the industrial sector.
2. Regional imbalance- Restricted to few states.
3. Industrial sickness- which raised the problem of unemployment.
4. Higher cost of industrial product due to lack of healthy competition.
5. Dependence on the Government- for reduction in tax or duty to make import
easier.
6. Poor performance of the public sector
7. Under utilisation of capacity.
8. Increasing capital-output ratio

ROLE OF PUBLIC SECTOR/GOVT. IN INDUSTRIAL DEVELOPMENT

Direct intervention of the state was considered essential in view of the following
factors:
1. Lack of capital with the private entrepreneurs.
2. Lack of incentive among the Pvt. entrepreneurs demand due to limited size of
the market.
3. Socialistic pattern of society-main aim of Govt. is to generate employment
rather than profits.
4. Development of infrastructure. 5. Development of backward areas.
6. To prevent concentration of economic power. 7. To promote import
substitution.
INDUSTRIAL POLICY RESOLUTION (IPR) 1956
FEATURES OF INDUSTRIAL POLICY RESOLUTION (IPR) OF 1956
Features of Industrial policy resolution of 1956 were.
1. New classification of Industries: Industries were classified into three schedule
depending upon role of state.
(a) Schedule-A- 17 industries listed in schedule-A whose future development
would be the responsibility of state.
(b) Schedule-B- 12 industries were included in schedule-B, Private sector could
supplement the efforts of the Public Sector, with the state taking sole responsibility
for starting new units.
(c) Schedule-C - other residual industries were left open to private sector.
2. Stress on the role of cottage and small scale industries.
3. Industrial licensing: Industries in the pvt. sector could be established only
through a licence from the government.
4. Industrial concessions-were offered-pvt. entrepreneurs for establishing industry
in the backward regions of the country. Such as tax rebate and concessional rates
for power supply.
SMALL SCALE INDUSTRY (SSI)
A small scale industry is presently defined as the one whose investment does not
exceed Rs. 5 crore.
CHARACTERISTICS OF SSI OR ROLE OF SMALL SCALE INDUSTRIES
1. Labour intensive-employment oriented 2. Self-employment.
3. Less capital intensive. 4. Export promotion.
5. Seed beds for large scale industries. 6. Shows locational flexibility.
PROBLEMS OF SMALL SCALE INDUSTRIES
1. Difficulty of finance. 2. Shortage of raw material.
3. Difficulty of marketing. 4. Outdated machines & equipment
5. Competition from large scale industries.
FOREIGN TRADE
In the first seven five year plans of India, the trade was commonly called an 'inward
looking' trade strategy.
This strategy is technically known as ‘import substitution’. Import substitution
means substituting imports with domestic production. Imports were protected by the
imposition of tariff and quotas which protect the domestic firms from foreign
competition. Impact of Inward looking Trade strategy on the domestic industry.
1. It helped to save foreign exchange by reducing import of goods.
2. Created a protected market and large demand for domestically produced goods.
3. Helped to build a strong industrial base in our country which directly lead to
economic growth.
Criticism of import substituting strategy
1. It did not lead to growth. 2. Lack of competition implied lack of
modernisation.
3. Growth of inefficient public monopolies. 4. It did not lead to efficiency.

PERMIT LICENCE RAJ

The licensing authorities many a times granted licence to big business houses
without proper scrutiny of their applications.

Data on Indian economy 1950 -90

1. Basically sympathising with the socialist outlook, they found the economy with
the private sector being encouraged to be part of the plan effort. The ‘Industrial
Policy Resolution’ of 1948 and the Directive Principles of the Indian Constitution
reflected this outlook
2. In 1950, the Planning Commission was set up with the Prime Minister as its
Chairperson. The era of five year plans had begun
3. Mahalanobis: the Architect of Indian Planning
4. Mahalanobis was born in 1893 in Calcutta.
5. In 1946 he was made a Fellow (member) of Britain’s Royal Society,
6. Mahalanobis established the Indian Statistical Institute (ISI) in Calcutta and
started a journal, Sankhya
7. During the second plan period, Mahalanobis invited many distinguished
economists from India and abroad to advise him on India’s economic development
8. In India, the share of agriculture in the GDP was more than 50 per cent in 1950—
as we would expect for a poor country.
9. But by 1990 the share of the service sector was 40.59 per cent
10. This phenomenon of growing share of the service sector was accelerated in the
post 1991 period
11. Just a year after independence, steps were taken to abolish intermediaries and to
make the tillers the owners of land
12. The abolition of intermediaries meant that some 200 lakh tenants came into direct
contact with the
government — they were thus freed from being exploited by the zamindars
13. At independence, about 75 per cent of the country’s population was dependent
on agriculture
14. the first phase of the green revolution (approximately mid 1960s upto mid
1970s), the use of HYV seeds was restricted to the more affluent states such as
Punjab, Andhra Pradesh and Tamil Nadu. Further, the use of HYV seeds primarily
benefited the wheat growing regions only.
15. In the second phase of the green revolution (mid-1970s to mid-1980s), the HYV
technology spread to a larger number of states and benefited more variety of crop
16. by the late 1960s, Indian agricultural productivity had increased sufficiently to
enable the country to be self-sufficient in food grains
17. On the negative side, some 65 per cent of the country’s population continued to
be employed in agriculture even as late as 1990.
18. In India, between 1950 and 1990, the proportion of GDP contributed by
agriculture declined significantly but not the population depending on it (67.5 per
cent in 1950 to 64.9 per cent by 1990)
19. Industrial Policy Resolution 1956 (IPR 1956): the basis of the Second Five Year
Plan, the plan which tried to build the basis for a socialist pattern of society.
20. This resolution classified industries into three categories. The first category
comprised industries which would be exclusively owned by the state; the second
category consisted of industries in which the private sector could supplement the
efforts of the state sector, with the state taking the sole responsibility for starting new
units; the third category consisted of the remaining industries which were to be in
the private sector.[ the sector was kept under state control through a system of
licenses
21. In 1955, the Village and Small-Scale Industries Committee, also called the Karve
Committee, noted the possibility of using small-scale industries for promoting rural
development
22. In 1950 a small-scale industrial unit was one which invested a maximum of
rupees five lakh; at present the maximum investment allowed is rupees one crore.
23.In the first seven plans, trade was characterised by what is commonly called an
inward looking trade strategy. Technically, this strategy is called import substitution
24. inward looking trade strategy/import substitution: This policy aimed at replacing
or substituting imports with domestic production
25. Nor was any serious thought given to promote exports until the mid-1980s.
26.the industrial sector increased in the period from 11.8 per cent in 1950-51 to 24.6
per cent in 1990-91. The six per cent annual growth rate of the industrial sector
during the period.
27. industrial sector became well diversified by 1990, largely due to the public sector
28. Due to the absence of competition, even till the late 1990s, one had to wait for a
long time to get a telephone connection.
29. In 2001 Modern bread was sold to the private sector.
30. GST and NITI Aayog came in 2017
Multiple choice questions-:
1. In a capitalist society, goods and services are distributed based on:
a) Consumer needs
b) Purchasing power
c) Government regulations
d) Individual preferences
Answer b
2. The primary factor influencing production methods in a capitalist society is:
a) Availability of labor
b) Availability of capital
c) Government intervention
d) Market demand
Answer d
3. In a socialist society, distribution of goods and services is primarily based on:
a) Consumer demand
b) Purchasing power
c) Government regulations
d) People's needs
Answer d
4. Which countries mentioned in the passage follow socialistic principles?
a) Cuba and China
b) India and Brazil
c) Germany and France
d) United States and United Kingdom
Answer a
5.In a mixed economy, the government intervenes to provide essential goods
and services that the market fails to deliver. Which of the following is an
example of such intervention?
a) Free education
b) Luxury cars
c) Designer clothing
d) High-end smartphones
Answer a
6.Which of the following is not one of the goals of the five-year plans?
a) Sustainability
b) Equity
c) Growth
d) Modernisation
Answer: a) Sustainability

7. Which government body was responsible for planning in India during the
five-year plans?
a) Planning Commission
b) Finance Ministry
c) Reserve Bank of India
d) Indian Statistical Institute
Answer: a) Planning Commission

8. The increase in the size of the Gross Domestic Product (GDP) indicates:
a) Economic growth
b) Increased government spending
c) Decreased inflation
d) Expansion of the service sector
Answer: a) Economic growth
9. The Planning Commission was headed by:
a) The President of India
b) The Prime Minister of India
c) The Finance Minister of India
d) The Chief Economic Advisor of India
Answer: b) The Prime Minister of India
10. What was the main objective of the Green Revolution in India?
a. Achieve self-sufficiency in food grains
b. Increase dependence on imported food supplies
c. Promote inequality between small and big farmers
d. Limit the use of high yielding variety seeds
Answer: a. Achieve self-sufficiency in food grains
11. What is the term used to describe the portion of agricultural produce sold
in the market by farmers?
a. Marketed surplus
b. Subsidized produce
c. Green revolution output
d. Land reform yield
Answer: a. Marketed surplus
12.What was one negative aspect of the Green Revolution in India?
a. Decreased agricultural productivity
b. Increased dependence on imported food grains
c. Decline in the proportion of population working in agriculture
d. Inability to achieve self-sufficiency in food grains
Answer: c. Decline in the proportion of population working in agriculture
13. What percentage of India's population was employed in agriculture by
1990?
a. 65%
b. 75%
c. 50%
d. 80%
Answer: a. 65%
14. Import substitution refers to a trade policy that aims to:
a. Increase imports to promote economic growth
b. Promote international trade agreements
c. Replace domestic production with imports
d. Replace imports with domestic production
Answer: d. Replace imports with domestic production

15. The growth of India's industrial sector during the first seven plans was
characterized by:
a. Limited diversification beyond textiles and jute
b. Heavy reliance on foreign direct investment
c. Strong competition from multinational corporations
d. Expansion of indigenous industries, including electronics and automobiles
Answer: d. Expansion of indigenous industries, including electronics and
automobiles

16. The new economic policy introduced in 1991 aimed to:

a. Nationalize all industries in the country
b. Promote import substitution strategies
 c. Liberalize and open up the Indian economy
d. Strengthen the role of the public sector
Answer: c. Liberalize and open up the Indian economy

17. The policy of protectionism in India was primarily aimed at:

a. Promoting international trade agreements
b. Encouraging foreign direct investment
c. Limiting the import of essential goods
d. Shielding domestic industries from foreign competition
Answer: d. Shielding domestic industries from foreign competition

18.The Indian economy's contribution from the industrial sector increased

from _____ in 1950-51 to _____ in 1990-91.
a. 13% to 24.6%
b. 28% to 40.5%
c. 59% to 34.9%
d. 24.6% to 13%
Answer: a. 13% to 24.6%
Assertion Reason Questions-:
m) Both Assertion(A) and Reason(R) are True and Reason(R) is the correct explanation
of Assertion (A)
n) Both Assertion(A) and Reason(R) are True and Reason(R) is not the correct
explanation of Assertion (A)
o) Assertion(A) is true and Reason(R) is false
p) Assertion(A) is false and Reason(R) is true
1. Assertion: In a market economy, goods and services are produced based on
demand and profitability.
Reason: The market economy operates on the principle of supply and demand.
Answer : a

2. Assertion: A socialist society prioritizes the needs of society over individual

consumer desires.
Reason: In a socialist society, the market determines what goods should be produced
based on the needs of society as a whole.
Answer : c

3. Assertion: A socialist society recognize private property ownership.

Reason: In a socialist society, private property is not acknowledged, and the state or
collective ownership prevails. This approach aims to prevent the concentration of
wealth and ensure equitable distribution of resources.
Answer : d

4.Assertion: The Industrial Policy Resolution of 1948 and the Directive Principles
of the Indian Constitution reflected the outlook of promoting economic development
through planning.
Reason: The Industrial Policy Resolution emphasized the role of the state in
directing industrial development and promoting self-sufficiency, while the Directive
Principles highlighted the need for equitable distribution of resources and
opportunities.
Answer : a
5. Assertion: The primary goals of the five-year plans in India were growth,
modernisation, self-reliance, and equity.
Reason: These goals were aimed at promoting economic development, adopting
new technologies, increasing dependency on imports, and ensuring unequal
opportunities and resource distribution.
Answer : c

6. Assertion: Economic growth is measured by the increase in Gross Domestic

Product (GDP) of a country.
Reason: GDP represents the market value of all goods and services produced within
a country in a specific period and serves as an indicator of the country's economic
performance and growth.
Answer : a
7. Assertion: Modernisation involves adopting new technology
Reason: Modernisation encompasses the use of old technology to increase
production and efficiency, as well as societal changes that promote equality,
inclusion, and utilization of human resources.
Answer : c

8. Assertion: Self-reliance in the five-year plans refers to reducing dependence on

imports by utilizing domestic resources.
Reason: The focus on self-reliance aimed to promote domestic industries, conserve
foreign exchange reserves, and strengthen the country's economic independence.
Answer : a

9. Assertion: Adoption of new technology is crucial for modernisation and

increasing the production of goods and services.
Reason: Upgrading technology enables higher productivity, improved efficiency,
and innovation in various sectors, contributing to overall economic growth and
development.
Answer : a

10. Assertion: The growth contribution to GDP varies among countries, with some
relying more on agriculture and others on the service sector.
Reason: Different countries have distinct economic structures, and the sectors
contributing to GDP growth can vary based on factors such as resource endowment,
historical development, and policy priorities.

11. Assertion: The five-year plans aimed to promote social justice and equal
distribution of wealth and resources.
Reason: The focus on equity in the five-year plans aimed to address socio-economic
disparities and ensure that the benefits of development reached all sections of
society.
Answer : a

12. Assertion: The decrease in the size of GDP indicates economic growth and
expansion of the country's productive capacity.
Reason: A growing GDP signifies increased production, consumption, investment,
and overall economic activity, reflecting positive economic growth and
development.
Answer : d

13. Assertion: The five-year plans played a significant role in India's economic
development by promoting industrial growth and infrastructure development.
 Reason: The five-year plans provided a comprehensive framework for directing
investment, promoting industrialization, and developing critical infrastructure,
which contributed to India's economic growth and development.
Answer : a

14. Assertion: The Green Revolution in India resulted in increased agricultural

productivity.
Reason: The introduction of high-yielding variety seeds and modern agricultural
techniques improved crop yields.
Answer: a

15. Assertion: The implementation of the Goods and Services Tax (GST) in India
simplified the taxation system.
Reason: The GST replaced multiple indirect taxes with a unified tax, streamlining
tax compliance and reducing complexity.
Answer: Both the assertion and reason are correct, and the reason is the correct
explanation.

Statement Based questions-:

m) Both the statements are true
n) Both the statements are false
o) Statement 1 is true and Statement 2 is false
p) Statement 1 is false and Statement 2 is true

1. Statement 1: The licensing policy in India was implemented to limit the quantity
of goods produced.
Statement 2: Licensing allowed the government to control production levels and
prevent excess supply.
Answer: a

2. Statement 1: Small-scale industries in India were provided tax benefits and lower
tariffs.
Statement 2: These concessions were granted to promote the growth and
competitiveness of small-scale enterprises.
Answer: a

3. Statement 1: The policy of protecting certain industries in India resulted in

limited innovation and efficiency improvement.
Statement 2: The shielded industries faced more competitive pressure, which
hindered their incentive to innovate and improve efficiency.
Answer: c

4. Statement 1: The new economic policy introduced in 1991 aimed to liberalize

and open up the Indian economy.
Statement 2: The policy sought to reduce government control, encourage
competition, and attract foreign investment.
Answer: a

5. Statement 1: The Green Revolution in India led to decrease in food production.

Statement 2: The introduction of high-yielding crop varieties and modern
agricultural practices increased agricultural output.
Answer: d
6. Statement 1: Land reforms in India aimed to abolish the zamindari system.
Statement 2: The reforms sought to redistribute land from large landlords to
landless farmers and reduce economic disparities.
Answer: a

7. Statement 1: Excessive regulation of industries in India led to delays in obtaining

licenses and permits.
Statement 2: The complex regulatory framework and bureaucratic processes make
easy for businesses.
Answer: c

8. Statement 1: Public sector enterprises in India should be evaluated based on their

contribution to the welfare of the nation.
Statement 2: Their primary objective is to serve public interest rather than
generating profits.
Answer: a

9. Statement 1: Protectionism in India aimed to shield domestic industries from

foreign competition.
Statement 2: The policy sought to protect domestic industries from being
outcompeted by foreign companies.
Answer: a

10. Statement 1: The Indian economy's contribution from the industrial sector
increased from 13% in 1950-51 to 24.6% in 1990-91.
Statement 2: Industrial development initiatives led to significant growth in the
industrial sector during this period.
Answer: a

Case study 1
The government of A is committed to improving the quality of life for its citizens
and ensuring the equitable distribution of goods and services. They are exploring
different economic systems and their potential impact on social welfare. The
government of A is evaluating three economic systems: capitalism, socialism, and a
mixed economy. They have gathered information and conducted a comprehensive
analysis of each system's ability to address three fundamental questions: what goods
and services to produce, how to produce them, and how to distribute them among
the people. Proponents of capitalism argue that it allows market forces to determine
the production and distribution of goods and services. They believe that by focusing
on consumer demand and profitability, capitalism can efficiently allocate resources
and foster economic growth. However, critics point out that capitalism's reliance on
purchasing power can lead to inequalities, as those with limited financial means may
struggle to access essential goods and services. For instance, low-cost housing for
the poor may not be a priority in a capitalist society due to the lack of purchasing
power among this demographic. Socialism, on the other hand, advocates for central
government planning, where production decisions are made based on the needs of
society. In a socialist society, goods and services are distributed based on people's
needs rather than their ability to pay. The provision of free healthcare to all citizens
exemplifies the focus on social welfare. However, critics argue that a central
planning approach may hinder innovation and responsiveness to consumer
preferences. Additionally, the absence of private property can limit individual
freedoms and entrepreneurship. Recognizing the merits and drawbacks of both
capitalism and socialism, A considers adopting a mixed economy. In this system,
the market and government work together to answer economic questions. The
 market is allowed to operate freely, producing goods and services efficiently based
on consumer demand. However, the government intervenes to ensure the provision
of essential goods and services that the market may fail to deliver adequately. This
approach seeks to strike a balance between market forces and social welfare
concerns.
On the basis of the above case study answer the following questions-:
1. What are the three economic systems given in above case study?
2. How does socialism prioritize distribution of goods and services?
3. What is the main advantage of a mixed economy?
4. How does a mixed economy address the shortcomings of capitalism and socialism?
5. What role does the government play in a mixed economy?

Case Study 2
The concept of economic planning has played a crucial role in shaping India's
development trajectory. This case study focuses on the five-year plans implemented
in India, beginning with the establishment of the Planning Commission in 1950.
These plans aimed to achieve specific goals, including growth, modernization, self-
reliance, and equity. Through a comprehensive analysis of the goals, strategies, and
outcomes of the five-year plans, we can gain insights into India's economic
development and the challenges faced during the planning process. Provide an
overview of the historical context leading to the initiation of economic planning in
India, including the Industrial Policy Resolution of 1948 and the establishment of
the Planning Commission in 1950
On the basis of the above case study answer the following questions-:
1.What were the primary goals of the five-year plans implemented in India?
2.How did the establishment of the Planning Commission in 1950 contribute to the
implementation of the five-year plans?
3.How did economic growth contribute to achieving the goals of the five-year plans
in India?
4.What role did modernization play in the context of the five-year plans? Provide
examples of how modernization was implemented in different sectors.
5.What is meant by self-reliance in the context of the five-year plans, and why was
it considered an important goal?

Case Study 3-:

India, like many developing countries, has witnessed a significant proportion of its
population engaged in the agricultural sector for a long time. However, despite
agricultural output growth, the shift from agriculture to industrialization has been
slow. Between 1950 and 1990, India experienced economic growth, but the
proportion of GDP contributed by agriculture declined while the population
dependent on agriculture remained high. This situation raises questions about why
the agricultural sector continued to absorb a large workforce despite technological
advancements and potential for increased productivity. The industrial and service
sectors failed to create sufficient job opportunities to absorb the surplus agricultural
workforce. Limited industrialization and inadequate infrastructure hindered the
growth of manufacturing and service industries, making them unable to
accommodate the large number of people leaving agriculture.The transition from
agriculture to industry requires a diverse skill set. Many agricultural workers lacked
the necessary skills and education to adapt to non-agricultural jobs, thereby facing
challenges in finding employment in other sectors. A significant portion of non-
agricultural employment in India is within the informal sector, characterized by low
wages, job insecurity, and lack of social security. This discouraged some individuals
from leaving agriculture, where they had established stability and informal support
systems. Limited connectivity and infrastructure between rural and urban areas
hindered the flow of resources, technology, and investment from urban centers to
rural regions. This lack of integration impeded the growth of non-agricultural sectors
in rural areas, keeping the population dependent on agriculture.
On the basis of the above case study answer the following questions-:
1.What was the trend in the proportion of GDP contributed by agriculture in India
between 1950 and 1990?
2.Did the proportion of the population dependent on agriculture change significantly
during the same period?
3.Despite the decline in the contribution of agriculture to GDP, why did a large
proportion of the population remain engaged in the agricultural sector?
4.What were the key factors that influenced the slow shift from agriculture to
industrialization in India?
5.Why did the industrial and service sectors fail to absorb the surplus agricultural
workforce?

Case Study 4
The Industrial Policy Resolution of 1956, formulated by the Government of India,
aimed to transform the Indian economy into a socialist pattern of society. The policy
emphasized the establishment and growth of public sector industries while limiting
the dominance of the private sector. It implemented a mixed economy approach,
with the government playing a significant role in industrial development. The policy
led to the establishment of key public sector enterprises, such as Steel Authority of
India Limited (SAIL), Bharat Heavy Electricals Limited (BHEL), and Hindustan
Aeronautics Limited (HAL). These enterprises played a vital role in industrializing
the nation and fostering self-reliance. The policy aimed to reduce the concentration
of economic power in the hands of the private sector. It encouraged the government's
active participation in various industries to ensure balanced growth and prevent the
exploitation of resources.While the policy contributed to the development of some
successful public sector enterprises, it also faced challenges. Inefficiencies, lack of
competitiveness, and bureaucratic hurdles hampered the growth of these industries.
Over time, the limitations of the policy became apparent, leading to subsequent
economic reforms in the 1990s.
On the basis of the above case study answer the following questions-:
1.What was the main objective of the Industrial Policy Resolution of 1956?
2.How did the policy aim to reduce private sector dominance in the Indian economy?
3.Name three public sector enterprises established as a result of the Industrial Policy
Resolution of 1956.
4.What were the challenges faced by public sector industries in achieving their
intended objectives?
5.What were the long-term effects of the Industrial Policy Resolution of 1956 on
India's economic development?

Case Study 5:
The Green Revolution led to a significant increase in agricultural productivity,
primarily in wheat and rice production. The introduction of high-yielding crop
varieties, such as the dwarf wheat and semi-dwarf rice, played a crucial role in
boosting crop yields.The increased agricultural output resulting from the Green
Revolution helped India achieve food self-sufficiency, reducing dependence on
imports and addressing food scarcity concerns. The country became a net exporter
of agricultural commodities.While the Green Revolution contributed to increased
agricultural productivity, it also had environmental and socio-economic
consequences. The heavy use of chemical fertilizers and pesticides raised concerns
about soil fertility, water pollution, and long-term sustainability. Additionally, the
adoption of modern agricultural practices had varying impacts on different sections
of society, leading to inequalities and disparities in rural areas
On the basis of the above case study answer the following questions-:
1.What was the main objective of the Green Revolution in India?
2.What were the key factors that contributed to increased agricultural productivity
during the Green Revolution?
3.How did the Green Revolution lead to self-sufficiency in food production in India?
4.What were the environmental and socio-economic consequences of the Green
Revolution?
5.What were the specific high-yielding crop varieties introduced during the Green
Revolution?

Short answer questions-:

1. Why did India opt for planning?
Answer. India achieved independence in 1947. The colonial government left India
in a poor, backward and stagnant situation. From that time efforts have been made
to solve people’s problems in a sovereign Indian republic through a system of federal
parliamentary democracy. Political independence has no meaning without economic
prosperity. Planning was undertaken to sustain political independence and generate
economic prosperity.

2. What are miracle seeds?

Answer. Miracle seeds are the high yielding variety of seeds which combined with
assured water supply, fertilizer, insecticides, etc. would result in high production
levels.
3. What is marketable surplus?
Answer. It is that part of the agricultural produce which is sold in the market by the
farmer.

4. Explain ‘growth with equity’ as a planning objective.

Answer. Economic Growth is an increase in the aggregate output of goods and
services in a country in a given period of time. Equity refers to reduction in
inequality of income or wealth, uplifting weaker sections of the society and equal
distribution of economic power. Higher levels of growth and social justice are two
main objectives of India’s economic planning. When these two objectives are
clubbed together, it is called development with social justice.

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

of employment generation? Explain.
Answer. Modernisation as a planning objective implies use of advanced technology.
Advanced technology requires less labour per unit of output. Thus, modernisation
creates unemployment.

6. Why was it necessary for a developing country like India to follow self-
reliance as a planning objective?
Answer. On the eve of independence, India was poor, stagnant and backward.
There were heavy imports of foodgrains. It was important to be self-reliance.
Features of Self reliance are:
(a) Self-sufficiency in foodgrains.
(b) Fall in foreign aid and reduced dependence on imports which is possible when
there is growth in domestic production.
(c) Rise in exports.
(d) Rise in contribution of industries in grass domestic product.

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

during the planning period?
Answer. Public sector has been playing a very significant role in the development
of industries in the following way:
(a) Creation of a strong industrial base. (b) Development of Infrastructure.
(c) Development of backward areas. (d) To mobilise savings and earn foreign
exchange.
(e) To prevent concentration of economic power.
(f) To promote equality of income and wealth distri-bution.
(g) To provide employment. (h) to promote import substitution.

Long answer questions-:

Q1. What are land reforms? Why were they introduced? How they were
implemented in India?
Need for land reforms:
Land revenue system: The colonial government in India introduced various systems
of land settlement. The zamindari system was one such land settlement system.
Under this system, zamindars were owners of the land and collected rent from
cultivators without any contribution to improvement of the farm.
Low productivity: The Indian agricultural sector was deprived of irrigation facilities
and technology advancement. As a result, the production of the agricultural sector
was solely dependent on the monsoon. This created an adverse situation for farmers
and led to a low level of agricultural productivity.
Landholding size: Due to sub-division and fragmentation of agricultural holding, the
adoption of advanced technology in the agricultural sector was very difficult.
Types of land reforms implemented in the agricultural sector:
Abolition of intermediaries: The idea behind the abolition of intermediaries was that
ownership of land will motivate cultivators to make improvement in agricultural
production with lot of efforts and investment. Nearly, 200 lakh tenants came into
direct contact with the state government; about 173 million acres of land were taken
away from zamindars and given to landless cultivators. Thus, the ownership of land
motivated them to make profit from the increased level of agricultural production.
Land ceiling: Under the land ceiling policy, a limit was set for individuals to own a
maximum size of land. This policy helped to reduce inequality in the agricultural
sector. By fixing a ceiling, surplus land can be redistributed among landless
cultivators and small farmers. On the other hand, the minimum limit will prevent
them from holding below the minimum size of land.
Landholding consolidation: In 1921, a law was introduced to prevent the
segmentation and sub-division of land holding. This was first initiated in Punjab by
converting various small parts of land holders into one plot. At the beginning, there
were few voluntary cooperative societies for consolidation of land holdings and later
compulsory legislation was passed for consolidation of land holdings in different
states. This helped to bring the scattered and fragmented land into one big piece and
helped farmers to use the same for productive purposes.
Regulation of rent: All the states enacted laws to determine the rent payable by tenant
cultivators. However, this rent structure varied between 30% and 40% of produce in
each state.

Q2. What is green revolution? Why was it implemented? How was it

implemented? How did it benefit the farmers?
Ans. Green Revolution refers to an increase in the production of food grains due to
the use of high yielding variety (HYV) seeds, use of fertilisers, pesticides and
irrigation facilities.
Reasons for implementation of Green Revolution:
At the time of independence, a large chunk of farmers were dependent on the
monsoon due to which they faced innumerable problems in farming activities.
The technology and machinery used in farming were obsolete which resulted in low
agricultural productivity.
Famines affected agricultural productivity in the 1940s.
Indian agriculture suffered from low productivity of food grains as more emphasis
was given to cash crops during the colonial rule. This resulted in the shortage of food
grains in India.
Indian farmers were dependent on landlords and rural money lenders to meet their
credit requirements. Landlords and lenders exploited farmers.
The Green Revolution ensured food security to the Indian population. The motive
behind implementing the Green Revolution was to increase agricultural productivity.
This was possible because nearly 75% of the country's population was engaged in
this sector. This resulted in a significant increase in the production of food grains.
Benefits to farmers:
Availability of inputs: It enabled farmers to use HYV seeds, pesticides, fertilisers
and well-developed agricultural methods in areas where the supply of water was
regular.
Scientific rotation of crops: It allowed the farmers to harvest more than two crops in
a year through the initiation of short-term HYV seeds for major crops.
Credit facility: It provided farmers with sufficient credit facilities and package of
inputs before the sowing season through government programmes.
Minimum support prices: It ensured farmers with reasonable prices for their produce
through minimum support prices and prevented income fluctuations.

Q3.Why was it necessary for a developing country like India to follow self-
reliance as a planning objective?
Self-reliance implies discouraging the imports of those goods that could be produced
domestically. Achieving self-reliance is of prime importance for a developing
country like, India as otherwise, it would increase the country’s dependence on
foreign products. Dependence on foreign goods and services can promote economic
growth of India but this would not contribute to the development of domestic
productive resources. Dependence on foreign goods and services provides impetus
to foreign country’s industries at the cost of domestic infant industries. Further,
imports drain away the scarce foreign reserves that are of prime importance to any
developing and underdeveloped economy. Therefore, achieving self-reliance is an
important objective for developing countries in order to avoid themselves from being
acquiescent to the developed nations.

Q4: Why was public sector given a leading role in industrial development
during the planning period?
Ans: At the time of independence, Indian economic conditions were very poor and
weak. There were neither sufficient foreign reserve nor did India have international
investment credibility. In the face of such poor economic condition it was only the
public sectors that need to take the initiative. The following are the reason that
explains the driving role of the public sector in the industrial development:

1. Need of Heavy Investment: There was a need of heavy investment for industrial
development. It was very difficult for the private sector to invest such a big amount.
Further, the risks involved in these projects were also very high and also these
projects had long gestation period. Thus, the government played the leading role to
provide the basic framework of heavy industries.

2. Low Level of Demand: At the time of independence, the majority of population

was poor and had low level of income. Consequently, there was low level of demand
and so there was no impetus for any private sector to undertake investment in order
to fulfill these demands. Thus, India was trapped into a vicious circle of low demand.
The only way to encourage demand was by public sector investments.

Q5.Explain the statement that green revolution enabled the government to

procure sufficient food grains to build its stocks thatcould be used during times
of shortage.
Ans: Green Revolution led to an increase in the production of food grains. With the
use of modern technology, extensive use of fertilisers, pesticides and HYV seeds
there was a significant increase in the agricultural productivity and product per farm
land. In addition, the spread of marketing system, abolition of intermediaries and
easy availability of credit has enabled farmers with greater portion of marketable
surplus. All these factors enabled the government to procure sufficient food grains
to build the buffer stock and to provide cushion against the shocks of famines and
shortages.

Q6: While subsidies encourage farmers to use new technology, they are a huge
burden on government finances. Discuss the usefulness of subsidies in the light
of this fact.
Ans: Subsidy means availing some important inputs to farmers at a concessional
rate that is much lower than its market rate. During 1960s, in order to adopt new
technology HYV seeds and use of modern fertilisers and insecticides, farmers were
provided inputs at a subsidised rate. Thus, the public sector role was needed to invest
heavily, so as to raise the income of people that will in turn raise the demand and so
on.
The following arguments are given in favour of subsidy:
1) Subsidy is very important for marginal land holders and poor farmers who cannot
avail the essential farm inputs at the ongoing market rate.
2) Subsidy in 1960s was basically an incentive for the farmers to adopt modern
techniques and vital inputs like fertilisers, HYV seeds, etc. The subsidy was mainly
of convincing and lucrative nature so that the farmers do not hesitate to use these
modern techniques.
3) Subsidy is generally provided to the poor farmers with the motive of reducing
inequality of income between rich and poor farmers and to promote an egalitarian
distribution of income.
4) It is argued that the adoption of new technology and techniques are not risk free
and only daring farmers are only willing to adopt them.
The following arguments are given against subsidy.
1) It is generally argued that subsidy favours and benefits fertiliser industries than
the farmers. Subsidies provide a protective shield against the market conditions and,
consequently, these industries need not to bother about their market share and
competition.
2) Subsidies are also enjoyed by the potential farmers who do not need them. This
often leads to the misallocation and wastage of the scarce resources.
3) Subsidies, if provided at a much lower rate than the market rate may lead to the
wastage of resources. For example, subsidised electricity leads to the wastage of
energy.
4) There is a general consensus that in order to assess the benefit and feasibility of a
particular technique, subsidy should be provided but once the performance has been
judged subsidies should be stopped.
Hence, based on the above pros and cons, we can conclude that although subsidies
are very useful and necessary for poor farmers and to overcome uncertainties
associated with farming, it put an excessive burden on the scarce government
finances. Thus, a proper planning, suitable reforms and allocation of subsidies only
to the needy farmers is required.

Q7.Though public sector is very essential for industries, many public sector
undertakings incur huge losses and are a drain on the economy’s resources.
Discuss the usefulness of public sector undertakings in the light of this fact.
Ans: Although, the mismanagement and wrong planning in PSUs may lead to
misallocation and, consequently, to wastage of the scarce resources and finance but
PSUs do have some positive and useful advantages.
1. Enhancing Nation’s Welfare: The main motive of the PSU was to provide goods
and services that add to the welfare of the country as a whole. For example, schools,
hospitals, electricity, etc. These services not only enhance welfare of country’s
population but also enhance the future prospects of economic growth and
development.
2. Long Gestation Projects: It was not feasible and economically viable for the
private sectors to invest in the big and wide projects like basic industries and
electricity, railways, roads, etc. This is because these projects need a very huge initial
investment and have long gestation period. Hence, PSU is the most appropriate to
invest in these projects.
3. Basic Framework: An important ideology that was inherited in the initial five year
plans was that the public sector should lay down the basic framework for
industrialisation that would encourage the private sector at the latter stage of
industrialisation.
4. Socialist Track: In the initial years after independence, Indian planners and
thinkers were more inclined towards socialist pattern. It was justified on the rational
ground that if the government controls the productive resources and production, then
it won’t mislead the country’s economic growth. This was the basic rationale to set
up PSUs. These PSUs produce goods not according to the price signals but according
to the social needs and economic welfare growth of the country.
5. Reduce Inequality of Income and Generate Employment Opportunities: It was
assumed that in order to reduce inequalities of income, eradicate poverty and to raise
the standard of living, government sector should invest in the economy via PSUs.

Q. Analyse the graph on the basis of GDP increase in various five year planning
periods
Q Analyse the following image in context to Indian agriculture-:

Q. Compare the trends of data between 1961-70 and 1991-1999

 Ch- Liberalisation, Privatisation and Globalisation
Keynotes
Economic Reforms:
Economic reforms or structural adjustment is a long term multi dimensional package
of various policies (Liberalisation, privatisation and globalisation) and programme
for the speedy growth, efficiency in production and make a competitive
environment. Economic reforms were adopted by Indian Govt. in 1991.

New Economic Policy:- It refers to economic reforms introduced since 1991 to

improve the productivity and profitability of economy and to make it globally
competitive.
In the new economic policy 1991, Structural reforms can be seen with respect to.
Liberalisation-: means removing all unnecessary control and restrictions like
permits licences, protectionist duties quotas etc. In other words, It may defined as
loosening of govt. regulation in a country to allow for private sector companies to
operate business transactions with fewer restrictions.

.
Economic reforms under liberalisation.
1. Industrial sector reforms

2. Financial sector reforms.

Reducing various Ratios(SLR, CRR)
Change in role of RBI from regulator to facilitator
De-regulation of interest rates
3. Fiscal reforms/Tax reforms
4. Foreign exchange reforms
Devaluation of rupee
5. Trade and investment reforms.

Privatisation-: is the general process of involving the private sector in the ownership
or operation of a state owned enterprises.
Policies adopted for privatisation
1. Contraction of public sector. 2. Abolish the ownership of Govt. in the
management of public enterprises. 3. Sale of shares of public enterprises.
Globalisation-: may be defined as a process associated with increasing openness,
growing economic interdependence and deepening economic integration in the
world economy.
An Appraisal of LPG Policies
1. Increase in foreign investment. 2. Increase in foreign exchange reserves. 3. A
check of inflation. 4. Increase in national income. 5. Increase in exports. 6.
Consumer sovereignty.
Negative Impact:
1. Neglect of agriculture. 2. Jobless growth. 3. Increase income
inequalities.
4. Adverse effect of disinvestment policy. 5. Spread of consumerism. 6. Cultural
erosion.
7. Encourages economic colonialism
World Trade Organisation(WTO)
World Trade Organisation, as an institution was established in 1995. It replaced
General Agreement on Trade and Tariffs (GATT) which was in place since 1948.
The overriding objective of the World Trade Organisation is to help trade flow
smoothly, freely, fairly and predictably; to meet its objective WTO performs the
following functions:-
Multiple choice questions-:
1. What was the main cause of the economic crisis faced by India in 1991?
a) Inefficient management of the Indian economy
b) Rising prices of essential goods
c) Decreasing foreign exchange reserves
d) Excessive government spending
Ans: a) Inefficient management of the Indian economy
2. What was the impact of the crisis on India's foreign exchange reserves?
a) Reserves increased significantly
b) Reserves remained stable
c) Reserves dropped to levels insufficient for even a fortnight
d) Reserves were not affected
Ans: c) Reserves dropped to levels insufficient for even a fortnight
3. Why did India's imports grow rapidly during the crisis?
a) Increased demand for foreign goods
b) Inefficient management of imports
c) Lack of export growth to balance imports
d) Government policies promoting imports
Ans: c) Lack of export growth to balance imports
4. Which finance minister played a pivotal role in implementing the new
economic reforms in India in 1991?
a) Manmohan Singh
b) Atal Bihari Vajpayee
c) Indira Gandhi
d) P. Chidambaram
Ans: a) Manmohan Singh
5. How many industries were reserved only for the public sector before the
deregulation of the industrial sector in 1991?
a) 20 b)17 c) 24 d)19
Ans: b
6. What is the full form of the LQP system that existed before the onset of the
New Economic Policy (NEP) in 1991?
a.License, quota and permit b.License, quota and privatisation
c.Liberalisation, quota and permit d.None of the above
Ans: a
7. Consider the following statements with regard to External Sector Reforms
and mark the correct combination.
I) It falls under the category of Liberalisation
II) Liberation of trade policy was a major reform undertaken
III) Devaluation of Indian rupee was another major reform
a) Only I
b) Only I and II
c) All of the above
d) None of the above
Ans c
8. Consider the following statements with respect to Industrial Deregulation
and state the correct combination : –
I) Restrictions imposed by Licensing policy was removed
II) Price fixation and controls were removed
III) Private sector was not allowed to enter the public space.
a) Only I
b) I and II
c) Only III
d) I, II and III
Ans b
9. Tax reforms are concerned with reforms in the Government’s __________
and ____________ Policies, which are collectively known as Fiscal policy.
a) Taxation ; Public Expenditure
b) Taxation, Non-taxation
c) Taxation, Private expenditure
d) Private Expenditure ; Taxation
Ans a
10. Under 1991, which of the following reforms were introduced in financial
sector. ( Choose the correct alternative)
a)Freedom to import capital goods
b)Reduction in CRR and SLR
c)Change in MRTP act
d)All of the above
Ans b
11. Match the following. Options are as below

A. a(ii), b(i), c(iii)

B. a(ii), b(iii), c(i)
C. a(iii), b(i), c(ii)
D. a(i), b(ii), c(iii)
Correct Ans: a(ii), b(i), c(iii)
12. Liberalisation leads to some limitation
a) Lesser participation of foreign investors
b) It neglects the social welfare
c) No improvement in productivity
d) No improvement in financial sector
Correct Ans: b

Statement based Questions-:

a. Both the statements are true
b. Both the statements are false
c. Statement 1 is true and Statement 2 is false
d. Statement 1 is false and Statement 2 is true

1. Statement 1- The reforms of 1991, neglected the agricultural sector

Statement 2- Direct tax consist of taxes on income of individuals and and profits of
businesses enterprises
Ans a
2. Statement 1- Economic reforms helped to control deflation
Statement 2- Economic reforms made India an emerging power in the world
economy
Ans d
3. Statement 1- IMF facilitates world trade
Statement 2- WTO was founded as the successor of IMF
Ans b
4. Statement 1- Privatisation helped in reviving sick public sector units
Statement 2- Social welfare was a concern of privatisation.
Ans c
 5. Statement 1- Government introduced fiscal reforms in order to raise non tax
revenue
Statement 2- GST stands for Goods and support tax
Ans c
6. Statement 1- Devaluation was adopted under fiscal reforms
Statement 2- Determination of exchange value was left on free play under reforms
of 1991
Ans d
7. Statement 1 – 1991 was a landmark moment in India’s post-independence history
as that changed the nature of the economy in fundamental ways.
Statement 2 –India’s economic establishment launched a multipronged reforms
agenda to repair India’s macroeconomic balance sheet and ignite growth.
Ans a

Assertion Reason questions-:

a) Both Assertion(A) and Reason(R) are True and Reason(R) is the correct explanation
of Assertion (A)
b) Both Assertion(A) and Reason(R) are True and Reason(R) is not the correct
explanation of Assertion (A)
c) Assertion(A) is false and Reason(R) is true
d) Assertion(A) is true and Reason(R) is false

1. Assertion: India's economic crisis in 1991 was primarily caused by inefficient

management of the Indian economy.
Reason: The government's continued spending on development programs without
generating additional revenue and its inability to reduce profligate spending or boost
exports led to a widening budget deficit and declining foreign exchange reserves.
Ans: a
2. Assertion: The new economic reforms in 1991 aimed to reduce the fiscal deficit
in India.
Reason: The reforms introduced measures to control government expenditure and
increase revenue generation.
Ans: a
3. Assertion: The new economic reforms in 1991 resulted in the privatization of
several state-owned enterprises in India.
Reason: The reforms aimed to reduce government control and encourage private
sector participation in various industries
Ans a
4. Assertion: The new economic reforms in 1991 resulted in the increase of foreign
direct investment (FDI) in India.
Reason: The reforms introduced strict regulations and restrictions on foreign
investors, discouraging their participation in the Indian economy.
Ans d
5. Assertion (A)- The number of industries, exclusively reserved for public sector,
reduced from 17 to 3.
Reason (R ) – Amendment were made in MRTP act under industrial reforms
Ans b
6. Assertion (A)- Government introduced various reforms in 1991 called tax reforms
Reason ( R )- Government needed to reduce tax evasion and raise tax and non tax
revenue under 1991 reforms
Ans a
7. Assertion (A)- Privatisation encourages free play of market forces.
Reason (R )- Resistance of labour union was an obstacle to Privatisation
Ans b
8. Assertion (A)- Globalisation is associated with change in ownership of public
sector units
Reasons ( R)- Globalisation is associated with growing economic independence
Ans d
9. Assertion (A)- Globalisation resulted in jobless growth in India.
Reason (R )- Ineffective policy of disinvestment is a negative effect of economic
reforms.
Ans d
10. Assertion (A)- The navratnas were granted financial and operational autonomy
in the working of the companies
Reason ( R)- The government decided to give special treatment to some profit
making PSU
Ans a
11. Assertion (A): In 1991, as an immediate measure to resolve the Balance of
Payments crisis, the rupee was devalued against foreign currencies.
Reason (R): Devaluation of currency was eminent, to replenish the deteriorated
foreign exchange reserves.
Ans a
12. Assertion (A) – India’s pre-1990 economic strategy dismantles the vast network
of controls and permits that dominated the economic system.
Reason(R) – The 1991 reforms unleashed the energies of Indian entrepreneurs, gave
untold choice to consumers and changed the face of the Indian economy.
Ans a
13. Assertion (A): Every year government fixes a target for disinvestment of Public
Sector Enterprises (PSEs).
Reason (R): Disinvestment is an excellent tool for discarding the loss incurring
Public Sector Enterprises (PSEs).
Ans b

Case Study: Outsourcing and its Impact on India's Economy

Outsourcing refers to the practice of delegating specific business functions or
processes to external companies, often located in different countries. India has
emerged as a major destination for outsourcing, particularly in the fields of
information technology (IT) services, customer support, and business process
outsourcing (BPO). This case study examines the impact of outsourcing on India's
economy.India's outsourcing industry experienced significant growth in the wake of
globalization and the new economic reforms in 1991. Foreign companies recognized
the availability of a skilled workforce, cost advantages, and a favorable business
environment. The growth of outsourcing in India led to job creation, increased
foreign exchange earnings, and the development of IT hubs and Special Economic
Zones (SEZs).

1. Analyze the factors that contributed to India's emergence as a preferred destination

for outsourcing.
2. How has outsourcing influenced the growth and development of India's IT and
BPO sectors?
3. Analyze the impact of outsourcing on skill development and human capital in
India.
Short Ans Question
Q1: Why is it necessary to become a member of WTO?
ANS:It is important for any country to become a member of WTO (World Trade
Organisation) for the following reasons:
i) WTO provides equal opportunities to all its member countries to trade in the
international market.
ii) It provides its member countries with larger scope to produce at large scale to
cater to the needs of people across the international boundaries. This provides ample
scope to utilise world resources optimally and provides greater market accessibility.
iii) It advocates for the removal of tariff and non-tariff barriers, thereby, promoting
healthier and fairer competition among different producers of different countries.
iv) The countries of similar economic conditions being members of WTO can raise
their voice to safeguards their common interests.
Q2:Why did RBI have to change its role from controller to facilitator of
financial sector in India?
ANS:Prior to liberalisation, RBI used to regulate and control the financial sector that
includes financial institutions like commercial banks, investment banks, stock
exchange operations and foreign exchange market. With the economic liberalisation
and financial sector reforms, RBI needed to shift its role from a controller to
facilitator of the financial sector. This implies that the financial organisations were
free to make their own decisions on many matters without consulting the RBI. This
opened up the gates of financial sectors for the private players. The main objective
behind the financial reforms was to encourage private sector participation, increase
competition and allowing market forces to operate in the financial sector. Thus, it
can be said that before liberalisation, RBI was controlling the financial sector
operations whereas in the post-liberalisation period, the financial sector operations
were mostly based on the market forces.
Q3: How is RBI controlling the commercial banks?
ANS: RBI controls the commercial banks via various instruments like Statutory
Liquidity Ratio (SLR), Cash Reserve Ratio (CRR), Bank Rate, Prime Lending
(PLR), Repo Rate, Reverse Repo Rate and fixing the interest rates and deciding the
nature of lending to various sectors. These are those ratios and rates that are fixed
by RBI and it is mandatory for all the commercial banks to follow or maintain these
rates. All these measures control the commercials banks' operations and also control
money supply in Indian economy.
Q4: What do you understand by devaluation of rupee?
ANS: Devaluation of Rupee refers to the fall in the value of rupee in terms of foreign
currency. Specifically, it implies deliberate official lowering of the value of the
country's currency with respect to the foreign currency. Devalutaion prevails under
the fixed exchange rate regime. This implies that value of rupee has fallen and the
value of foreign currency has risen. It means that now (after devaluation) one US$
can be exchanged for more rupees. This encourages exports and discourages imports
as the former is cheaper now for foreign countries and the latter is expensive for
Indians.

Q5: Why are tariffs imposed?

ANS: Tariffs are imposed to make imports from foreign countries relatively
expensive than domestic goods, thereby, t discouraging imports indirectly. These are
imposed to provide a safe and protective environment to the infant domestic firms
from their technologically advanced foreign counterparts. Tariffs facilitate the
domestic firms to survive and grow. Tariffs are also imposed on those goods that the
government thinks to be socially unwanted and imports of which will exert
unnecessary burden on the scarce foreign exchange reserves.
Q6: What is the meaning of quantitative restrictions?
ANS: Quantitative Restrictions (QRs) refer to the restrictions in the form of limits
or quotas on the amount of commodities that can either be imported or exported.
QRs usually on imports (refers to non-tariff measures) are imposed to discourage
imports of foreign goods and to reduce Balance of Payment (BOP) deficits. The
imposition of QRs provides impetus to the domestic firms to survive, grow and
expand in a protective and lesser competitive environment.
Q7: Those public sector undertakings which are making profits should be
privatised. Do you agree with this view? Why?
ANS: An efficient and profit earning PSU is a revenue generator for the government.
But if, a PSU is an inefficient and loss making one, then the same PSU exerts
unnecessary burden on the government's scarce revenues and further may lead to
budget deficit. The loss making PSUs should be privatised whereas it would not be
fair to privatise a profit making PSU. Privatising a PSU may lead to concentration
of monopoly power in the private hands. Further some of the PSUs like, water,
railways, etc. enhance the welfare of nation and is meant to serve general public at
a very nominal cost. Privatisation of such important PSUs will lead to loss of welfare
of poor people. Hence, only less important PSUs should be privatised while leaving
the core and important PSUs to be owned by the public sector. Instead of
privatisation of profit-making PSUs, government can allow more degree of
autonomy and accountability in their operations, which will not only increase their
productivity and efficiency but also enhance their competitiveness with their private
counterparts.
Q8: India has certain advantages which make it a favourite outsourcing
destination. What are these advantages?
ANS: The following points qualify India to be the favourite spot for outsourcing by
various MNCs.
1. Easy Availability of Cheap Labour: As the wage rates in India are comparatively
lower than that of in the developed countries, MNCs find it economically feasible to
outsource their business in India.
2. Reasonable Degree of Skills: Indians have fairly reasonable degree of skills and
techniques that need low training period and, thus, low cost of training.
3. Cheap and Abundant Availability of Raw Materials: India is well enriched in
natural resources. This ensures the MNCs cheap availability of raw material and
undisturbed and perennial supply of raw materials. This enables proper and smooth
operation of MNCs.
Q9: Do you think the navaratna policy of the government helps in improving
the performance of public sector undertakings in India? How?
ANS: To improve efficiency, infuse professionalism and to enable PSUs to compete
effectively in the market, government awarded the status of ‘navaratnas’ to the
following nine PSUs:
1) Indian Oil Corporation Ltd (IOCL)
2) Bharat Petroleum Corporation Ltd (BPCL)
3) Hindustan Petroleum Corporation Ltd (HPCL)
4) Oil and Natural Gas Corporation Ltd (ONGC)
5) Steel Authority of India Ltd (SAIL)
6) India Petro-chemicals Corporations Ltd (IPCL)
7) Bharat Heavy Electricals Ltd (BHEL)
8) National Thermal Power Corporation (NTPC)
9) Videsh Sanchar Nigam Ltd (VSNL)
These corporations were granted a greater degree of financial, managerial and
operational autonomy. This boosted their efficiency and effectiveness. They also
became highly competitive and some of them are becoming the giant global players.
Consequent to their better performance, government retained them under public
sector and enabled them to grow themselves not only in the domestic market but also
in the international market. These corporations are self-reliant and financially self-
sufficient. Thus, the navaratnapolicy has certainly improved the performance of
these PSUs.
Q10: Agriculture sector appears to be adversely affected by the reform process.
Why?
ANS: The economic reforms of 1991 did not benefit the agricultural sector
significantly. The following are the reasons that explain the adverse effects of the
economic reforms on India’s agriculture sector:
1. Reduction of Public Investment: There has been a drastic decrease in the volume
of public investment in the agricultural sector. There has been an acute cutback from
the Indian government to provide sufficient irrigation facilities, electricity,
information system, market linkages and roads. Moreover, investment in agricultural
research and development was not as extensive as it was during green revolution
phase
2. Removal of Subsidies: Removal of subsidies on fertilizers pushed up the cost of
production of agriculture. This made farming more expensive, thereby, adversely
affecting the poor and marginal farmers.
3. Liberalisation and Reduction in Import Duties on Agricultural Products: Due to
adherence to the WTO commitments, Indian government reduced import duties on
agricultural products that forced the poor and marginal farmers to compete with their
foreign counterparts in the international markets. Stiff competition in the
international market along with traditional techniques of farming badly affected the
poor farmers.
4. Shift towards Cash Crops and Lack of Food Grains: The export oriented
production strategies led to the shift of agricultural production from food grains to
the production of cash crops like cotton, jute, etc. This led to reduced availability of
food grains and, consequently, t lower nutritional values which further reduced their
productivity.
Q11: Why has the industrial sector performed poorly in the reform period?
ANS: Similar to the agricultural sector, industrial sector’s performance was also
poor. The poor performance of industrial sector may be attributable to the following
reasons:
1. Cheaper Imports: The demand for industrial output reduced due to the cheaper
imports. The imports from the developed countries were cheaper due to the removal
of import tariffs. These cheaper and quality foreign imports led to the fall in the
demand of domestic goods.
2. Lack of Investment: Due to the lack of investment in infrastructure facilities
(including power supply) the domestic firms could not compete with their developed
foreign counterparts in terms of cost of production and quality of goods. The
inadequate infrastructural investment pushed up the cost of production of the
domestic producers and, consequently, led to the non-feasibility of their growth
prospectus.
3. High Non-tariffs Barriers by the Developed Countries: It was very difficult to
access the developed countries market due to high non-tariff barriers maintained by
the developed countries. For instance, US did not remove quota restrictions on
imports of textiles from India and China.
4. Vulnerable and Infant Domestic Industries: During the pre-liberalised period, the
domestic industries were provided a protective environment to grow and expand.
But at the time of liberalisation, the domestic industries were still not developed up
to the extent it was thought and consequently, they could not compete with the multi-
national companies. The dependence of domestic industries on traditional
technologies which were neither cost effective nor quality effective was an important
reason for their poor growth. Thus, the domestic industries were adversely affected
by liberalisation.

Q12: Discuss economic reforms in India in the light of social justice and welfare.
ANS: The economic reforms have enabled India to access and compete in the
international markets. This facilitated the movement of goods and services across
the international boundaries. Further, the increased inflows of foreign capital and
investment to India have eliminated the shortage of foreign exchange to finance the
imports of sophisticated and advanced technologies to India. Moreover, the boom in
the outsourcing and the service sector led India’s economic growth and GDP to
increase by many folds. But on the other side, agriculture that employed a significant
proportion of population, failed to be benefited by these economic reforms. Also the
reforms favoured the high income group population at the cost of their poor
counterparts. This resulted in wide and still increasing economic and social
inequalities among different section of population. Further, the economic reforms
developed the areas that were well connected with the metropolitan cities leaving
the remote and rural area undeveloped. Consequently, there were wide regional
disparities. The boom in the service sector, especially in the form of quality
education, superior health care facilities, IT, tourism, multiplex cinemas, etc. were
out of the reach of the poor section of the population. The population engaged in the
agricultural and allied sectors has still not been able to share the fruits of advanced
technology and modern techniques. Further, the high income group has experienced
increase in income, thereby, appreciating the quality of their consumption basket,
leaving the low and middle income group to fight hard to earn their livelihood. Thus,
it can be concluded that the economic reforms failed to provide social justice and
enhance welfare of the general public of India.
Q12. Distinguish between the following
(i) Strategic and Minority sale
(ii) Bilateral and Multi-lateral trade
(iii) Tariff and Non-tariff barriers.
ANS

Strategic Sale Minority Sale

a) Strategic Sale refers to the sale of 51% Minority Sale refers to the sale of
or more stake of a PSU to the private less than 49% stake of a PSU to the
sector who bids the highest. private sector.

b) The ownership of PSU is handed over to The ownership of PSU still

the private sector. remains with the government as it
holds 51% of stakes.

Bilateral Trade Multilateral Trade

a) It is a trade agreement between It is a trade agreement among more than

two countries two countries.

b) This is an agreement that This is an agreement that provides equal

provides equal opportunities to opportunities to all the member countries
both the countries. in the international market
 Tariff Barriers Non-tariff Barriers

a) It refers to the tax imposed on the It refers to the restrictions other than
imports by the country to protect its taxes, imposed on imports by the
domestic industries. country.

b) It includes custom duties, export- It includes quotes and licenses.

import duties

c) It is imposed on the physical units (like It is imposed on the quantity and

per tonne) or on value of the goods quality of the goods imported.
imported.

Long Ans Question-

Q1: Why were reforms introduced in India?
Ans. Economic reforms were introduced in the year 1991 in India to combat
economic crisis. Economic Crisis of 1991 was a culminated outcome of the policy
failure in the preceding years. It was in that year the Indian government was
experiencing huge fiscal deficits, large balance of payment deficits, high inflation
level and an acute fall in the foreign exchange reserves. Moreover, the gulf crisis of
1990-91 led to an acute rise in the prices of fuel which further pushed up the inflation
level. Because of the combined effect of all these factors, economic reforms became
inevitable and were the only way to move Indian economy out of this crisis.
The following are the factors that necessitated the need for the economic reforms.
1. Huge Fiscal Deficit: Throughout 1980s, fiscal deficit was getting worse due to
huge non-development expenditures. As a result, gross fiscal deficit rose from 5.7%
of GDP to 6.6% of GDP during 1980-81 to 1990-91. Subsequently, a major portion
of this deficit was financed by borrowings (both from external and domestic source).
The increased borrowings resulted in increased public debt and mounting interest
payment obligations. The domestic borrowings by government increased from 35%
to 49.8% of GDP during 1980-81 to 1990-91. Moreover, the interest payments
obligations accounted for 39.1% of total fiscal deficit. Consequently, India lost its
financial worthiness in the international market and, fell in a debt trap. Thus,
economic reforms were needed urgently.
2. Weak BOP Situation: BOP represents the excess of total amount of exports over
total amount of imports. Due to lack of competitiveness of Indian products, India
was not able to earn enough foreign exchange through exports to finance our
imports. The current account deficit rose from 1.35% to 3.69% of GDP during 1980-
81 to 1990-91. In order to finance this huge current account deficit, Indian
government borrowed a huge amount from the international market. Consequently,
the external debt increased from 12% to 23% of GDP during the same period. On
the other hand, Indian exports were not potent enough to earn sufficient foreign
exchange to repay these external debt obligations. This BOP crisis compelled the
need for the economic reforms.
3. High level of Inflation: The high fiscal deficits forced the central government to
monetise the fiscal deficits by borrowings from RBI. RBI printed new money that
pushed up the inflation level, thereby, making the domestic goods more expensive.
The rate of inflation rose from 6.7% p.a. to 10.3% p.a. during 1980s to 1990-91. In
order to lower the inflation rate, government in 1991 had to opt for the economic
reforms.
4. Sick PSUs: Public Sector Undertakings were assigned the prime role of
industrialisation and removal of inequality of income and poverty. But the
subsequent years witnessed the failure of PSUs to perform these roles efficiently and
effectively. Instead of being a revenue generator for the central government, these
became liability. The sick PSUs added an extra financial burden on the government’s
budget.
Thus, because of all the above reasons existing concomitantly, the economic reforms
became inevitable.

Q2: Do you think outsourcing is good for India? Why are developed countries
opposing it?
ANS: Yes, outsourcing is good for India. The following points suggest that
outsourcing is good for India.
1. Employment: For a developing country like India, employment generation is an
important objective and outsourcing proves to be a boon for creating more
employment opportunities. It leads to generation of newer and higher paying jobs.
2. Exchange of technical know-how: Outsourcing enables the exchange of ideas and
technical know-how of sophisticated and advanced technology from developed to
developing countries.
3. International worthiness: Outsourcing to India also enhances India’s international
worthiness credibility. This increases the inflow of investment to India.
4. Encourages other sectors: Outsourcing not only benefits the service sector but also
affects other related sectors like industrial and agricultural sector through various
backward and forward linkages.
5. Contributes to human capital formation: Outsourcing helps in the development
and formation of human capital by training, imparting them with advanced skills,
thereby, increasing their future scope and their suitability for high ranked jobs.
6. Better standard of living and eradication of poverty: By creating more and higher
paying jobs, outsourcing improves the standard and quality of living of the people
in the developing countries. It also helps in reducing poverty.
7. Greater infrastructural investment: Outsourcing to India requires better quality
infrastructure. This leads to the modernisation of the economy and larger investment
by the government to develop quality infrastructure and develop quality human
capital.
However, Outsourcing to India is good but developed countries oppose this because
outsourcing leads to the outflow of investments and funds from the developed
countries to the less developed countries. Also the MNCs contribute more to the
development of the host country than the home country. Further, outsourcing
reduces the employment generation in the developed countries as the same jobs can
be done in the less developed countries at relatively cheap wages. Moreover, this
leads to job insecurity in the developed countries as at a point of time jobs can be
outsourced to the developing countries.

Q3: What are the major factors responsible for the high growth of the service
sector?
ANS: The major factors that led to the growth of service sectors in India are as
follows;
1. High demand for services as final product: India was a virgin market for service
sector. So, when service sector started booming due to business outsourcing from
the developed countries to India, there was very high demand for these services
especially for banking, computer service, advertisement and communication. This
high demand in turn led to a high growth rate of service sector.

2. Liberalisation and economic reforms: The growth of Indian service sector is also
attributable to the liberalisation and various economic reforms that were initiated in
1991. Due to these reforms, various restrictions on the movement of international
finance were minimised. This led to huge inflow of foreign capital, foreign direct
investments and outsourcing to India. This encouraged the service sector growth.

3. Structural transformation: Indian economy is experiencing structural

transformation that implies shift of economic dependence from primary to tertiary
sector. Due to this transformation, there was increased demand of services by other
sectors which y boosted the service sector.

4. Advanced technology and growth of IT: The advancements and innovations in

the IT sector enabled the use of internet, telecommunication, mobile phone and
electronic transactions across different countries. All these contributed to the growth
of the service sector in India.

5. Increased volume of trade: Low tariff and non-tariff barriers on imports by India
are also responsible for high growth rate of service sector. The foreign trade reforms
enabled the domestic products to interact and compete in the international markets.

6. Cheap labour and reasonable degree of skill in India: Due to the availability of
cheap labour and reasonable degree of skilled man power in India, developed
countries found outsourcing to India feasible and profitable. The business
outsourcing in itself provides substantial encouragements (like development of
human capital that requires services like good coaching centers and reputed
institutions, etc.) to the growth of service sector.

Analyse the picture given below-:

Analyse the picture given below by listing the merits of globalization-:

Analyse the table given below-:
 Ch- Employment

Keynotes

Work plays an important role in our lives as an individual and as members of society.
A worker is an individual, who is involved in some productive activity, to earn a
living.
An economic activity refers to the activity performed by people to earn the living.
The main three types of economic activities are consumption, production and
distribution.
Production activity refers to all those activities which are under taken to produce
goods and services for generation of income.
Labour force: All persons, who are working (have a job) and those are not working
but able to work and willing to work at the existing wage rate constitutes labour
force.
Labour Force: Persons working + persons seeking and/or available for work.
Work force: The number of persons, who are actually employed at a particular time
are known as workforce. It includes all those persons who are actually engaged in
productive activities. This includes person between age group of 15-60 years.
Labour supply: It refers to various amount of labour that workers are willing to
work, corresponding to a particular wage rate.
Work Force Participation Rate(Ratio):- It is measured as the ratio between
workforce and total population of a country.

.
 Types of workers:
(a) Self employed (b) Hired workers i. Casual Workers ii. Regular
Workers
(a) Self Employed:- The worker who own and operate an enterprise to earn their
livelihood are known as self employed.
(b) Hired workers:- Those people who are hired by others and are paid wages or
salaries as a reward for their services are called hired workers.
1. Casual Workers:- Those people, who are not hired by their employers on a
regular/permanent basis and do not get social security benefits are said to be casual
workers.
2. Regular Workers(Salaried):– When a worker is engaged by someone or by an
enterprise and paid his or her wages on a regular basis, they are known to as regular
salaried employees or regular workers.
About two-fifth of the total population in the country is engaged in various economic
activities.
Men particularly rural men, form the major section of workforce in India.
Majority of workers in India are self employed, casual wage labourers and regular
salaried employees together account for less than half the proportion of India’s
workforce.
About three fifth of India’s workforce depends on agriculture and other allied
activities as the major source of livelihood.
Jobless Growth: It is defined as a situation where GDP grows faster than the
employment opportunities resulting in unemployment.
Casualisation and informalisation of employment: Casualisation refers to a
situation when the percentage of casually hired workers in the total workforce tends
to rise over time.
 Informalisation: Refers to a situation when people tend to find employment more
in informal sector of the economy, and less in formal sector of the economy.
Unemployment: It is a situation where a person is ready and willing to work at the
prevailing wage-rate but doesn’t get work.
Unemployment Rate: It is calculated as percentage of labour force who are
unemployed, not as percentage of total population.
Types of unemployment:

1. Rural unemployment a. Seasonal Unemployment b. Disguised

Unemployment
2. Other types of unemployment
a. Open b. Frictional c. Structural d. Cyclical
 3. Urban Unemployment
a. Industrial Unemployment b. Educated Unemployment c. Technological
Unemployment
 Frictional unemployment is defined as the unemployment that occurs because of
people moving or changing occupations.
 Structural unemployment is defined as unemployment arising from technical
change such as automation, or from changes in the composition of output due to
variations in the types of products people demand. For example, a decline in the
demand for typewriters would lead to structurally unemployed workers in the
typewriter industry.
 Cyclical unemployment is defined as workers losing their jobs due to business
cycle fluctuations in output, i.e. the normal up and down movements in the economy
as it cycles through booms and recessions over time.
 Open Unemployment refers to that situation wherein the worker is willing to work
and has the necessary ability to work yet he does not get work and remains
unemployed for full time.
 Seasonal Unemployment:- It refers to a situation where a number of person that are
not able to find a job in a particular season.
 Disguised unemployment is a kind of unemployment in which some people look
like being employed but are actually not employed fully. This situation is also known
as Hidden Unemployment. In such a situation more people are engaged in a work
than required.In other words it refers to a situation of employment with surplus
manpower in which some workers have zero marginal productivity. For example in
rural areas, this type of unemployment is generally found in agricultural sector.
 Technological Unemployment:- A somewhat structural unemployment may take
place in an economy as a result of technological improvement. Such unemployment
may be described as technological unemployment. Due to the introduction of new
 machinery, improvement in methods of production, labour-saving devices etc., some
workers tend to be replaced by machines. Their unemployment is termed as
“technological unemployment.”
 Educated Unemployment:- Among the educated people, apart from open
unemployment, many are underemployed because their qualification does not match
the job. Faulty education system, mass output, preference for white collar jobs, lack
of employable skills and dwindling formal salaried jobs are mainly responsible for
unemployment among educated youths in India. Educated unemployment may be
either open or underemployment.

Causes of unemployment:
 a. Slow rate of economic growth b. Population explosion c. Underdeveloped
agriculture d. Defective educational system e. Slow growth of Industry
f. Decline of cottage and small industry. g. Faulty planning
h. Inadequate employment planning. i. Low capital formation.
j. Excessive use of Foreign Technology k. Lack of financial resources
l. Increase in labour force
Remedial measures for unemployment:
a. Accelerating growth rate of GDP b. Control of population growth
c. Development to small scale enterprises. d. Encouragement in infrastructure.
e. Special employment programmes. f. Rapid industrialisation.
Special programmes to fight poverty and unemployment:
Mahatma Gandhi National Rural Employment Guarantee Act (MNREGA)
Its a significant recent attempt of govt, offering guaranteed employment to those in
the rural areas who are below poverty line.
a. Swarnjyanti sahari Rozgar yojna.
b. Swarnjyanti Gram Swarozgaar yojna.
c. Pradhan Mantri Gramodaya Rozgar yojna.

Multiple choice questions-:

1. Which of the following is an accurate definition of a self-employed person?
a. A self-employed person receives a salary from their employer on a regular basis
b. A self-employed person owns as well as operate a business
c. A self-employed person is employed only for a few months in a year
d. All of the above
Answer: b
2. Which of the following is the actual definition of a workforce?
a. The workforce is defined as the labour force that is employed by another individual
or organisation
b. The workforce is defined as the total population that is not employed by another
individual or organisation
c. The workforce is defined as the total population that is forced to work by another
individual or organisation
d. None of the above
Answer: a

3. Which of the following is a major form of livelihood for Indians as it accounts

for greater than 50 per cent of the total workforce?
a. Regular salaried employment
b. Casual wage labour
c. Self-employment
d. None of the above
Answer: c

4. Which of the following statements is not true for a worker?

a. Any person who is self-employed is not a worker
b. Any worker has the right to temporarily abstain from their work due to any illness
c. Any person who is helping the main worker is also called a worker
d. A worker also contributes to the gross domestic product (GDP) of a country
Answer: a

5. Which of the following workers is a regular salaried employee?

a. A vegetable vendor
b. A cashier in a bank
c. Both a and b are incorrect
d. Both a and b are correct
Answer: b

6. Which of the following statements is true about disguised unemployment?

a. The majority of disguised unemployed in India are found in the agriculture sector
b. The majority of disguised unemployed in India are found in the trade sector
c. The majority of disguised unemployed in India are found in the transport sector
d. The majority of disguised unemployed in India are found in the manufacturing sector
Answer: a

7. Which of the following statements is true about unemployment in rural India?

a. Structural unemployment is a common form of unemployment in rural India
b. Disguised unemployment is a common form of unemployment in rural India
c. Educated unemployment is a common form of unemployment in rural India
d. None of the above
Answer: b

8. Which of the following statements is true about unemployment in urban India?

a. Seasonal unemployment is a common form of unemployment in urban India
b. Disguised unemployment is a common form of unemployment in urban India
c. Open unemployment is a common form of unemployment in urban India
d. None of the above
Answer: c

9. Which of the following statements is true about unemployment in India?

a. Voluntary unemployment is the most common form of unemployment in India
b. Frictional unemployment is the most common form of unemployment in India
c. Structural unemployment is the most common form of unemployment in India
d. Technical unemployment is the most common form of unemployment in India
Answer: c

10.Which of the following agencies can provide the data for unemployment in
India?
a. Reports from the census of India
b. The Directorate General of Employment
c. National Sample Survey Organisation (NSSO)
d. All of the above
Answer: d

11.Which of the following statements is true about unemployment?

a. Seasonal unemployment occurs when there are more people working in a job than is
actually required
b. Open unemployment occurs when there are more people working in a job than is
actually required
c. Disguised unemployment occurs when there are more people working in a job than
is actually required
d. Educated unemployment occurs when there are more people working in a job than
is actually required
Answer: c
12.Which of the following statements is true?
a. An establishment that has four hired workers is known as an informal sector
establishment
b. An establishment that has four hired workers is known as a formal sector
establishment
c. Both a and b are correct
d. Both a and b are incorrect
Answer: a

13. Which of the following statements is true?

a. Seasonal unemployment occurs when some workers lose their jobs due to the
introduction of new machinery
b. Technological unemployment occurs when some workers lose their jobs due to the
introduction of new machinery
c. Mechanical unemployment occurs when some workers lose their jobs due to the
introduction of new machinery
d. Structural unemployment occurs when some workers lose their jobs due to the
introduction of new machinery
Answer: b

14. Which of the following measures can help to reduce unemployment in a

country within a very short period of time?
a) Increasing the investment in both public and private sector.
b) Reducing the growth rate of a country& population
c) Reducing the inequalities in terms of distribution of wealth and income
d) Encouraging startups
I) Only a
II) B and C
III) A and D
IV) Only d
Ans: III

15. Which of the following agencies can provide the data for unemployment in
India?
a)Reports front census of India
b)The directorate general of employment
c)NSSO
I)a, b and c
II)a and b
III)b and c
IV)Only a
Ans: I

16. Which of the following is the major formal sector employer in India.
A) government
B) MNC
C) private enterprise
I) A& B
II)A , B & C
III)Only A
IV)Only B
Ans: III
17. Less employment of females in comparison to males is an indicator of;
A. economic backwardness
B. social backwardness
C. political backwardness
I) A& B
II)B AND C
III) ONLY A
IV) ONLY B
ANS: I

Read the following statement and choose the correct alternative

1.Statement 1- Technology used in the informal sector is up to date.
Statement 2- Informal sector maintain proper account and record
a)Both are wrong
b)Both are correct
c)Only 1 is correct
d)Statement 1 is wrong and Statement 2 is correct
Answer a
2.Statement 1- Unemployment refers to a situation in which no one is working
Statement 2- Unemployment refers to the situation in which all those persons who
are willing and able to work doesn’t get work
a)Both are wrong
b)Both are correct
c)Statement 1 is correct
d)Statement 2 is correct
Answer c
3.Statement 1- Casualisation refers to a situation when the percentage of casually
hired workers in the total workforce tends to rise over time.
Statement 2- Informalisation refers to a situation when people tend to find
employment more in the informal sector of the economy, and less in the formal
sector of the economy.
Ans.b
4.Statement 1: The nature of the unemployment problem in India is uni-faceted.
Statement 2: Worker-population ratio is an indicator used for analyzing the
employment situation in a country.
In light of the given statements, choose the correct alternative from the following:
a. Statement 1 is true and Statement 2 is false.
b. Statement 1 is false and Statement 2 is true.
c. Both Statements 1 and 2 are true.
d. Both Statements 1 and 2 are false.
Ans. Option (b)
5. Statement1 .Mahatma Gandhi National Rural Employment Guarantee Act 2005.
It promises 100 days of guaranteed wage employment to all rural households who
volunteer to do unskilled manual work.
Statement 2. In the last few decades, there has been rapid growth in the gross
domestic product, but without simultaneous increase in employment opportunities.
Ans. b
6. Statement 1: Primary sector is the major contributor of formal sector employment
Statement 2: Focus on human capital formation would lead to increased demand
for labour
Ans c
7. Statement 1 When a labour does not get employment opportunity despite of his
willingness to work at the existing wage rate is called underemployment.
Statement 2. workers enjoys job security in organised sector.
Ans B
8. Statement 1. In case of self employment,worker uses his own resources to make
a living.
Statement 2. Self employment is a major source of livelihood in both urban areas
and rural areas.
Ans a

Assertion Reason
Q:1)Assertion: Number of women workers in India are generally over estimated.
Reason: Many activities undertaken by women workers are not recognised as
productive work
Answer: Assertion is false but reason is true

Q:2) Assertion: Women workers are underestimated in our country

Reason: Female employment is the sole decision of women with no social and
familiar interference
Answer – C) Assertion is true but reason is false

Q:3) Assertion: Public sector is largest sector for formal employment

Reason: Government, both state and Centre, generate employment opportunities
directly and indirectly.
Answer – A) Both assertion and reason are true and reason is correct explanation of
assertion
Q:4) Assertion: Urban employment is a spillover of rural unemployment
Reason: Owing to the lack of opportunities of employment, people in the rural areas
are compelled to migrate to the urban areas in search of livelihood.
Answer – A) Both assertion and reason are true and reason is correct explanation of
assertion

Q:5)Assertion: India is considered as favourite outsourcing destination leading to

increase in foreign exchange reserves
Reason: India’s growth rate of population is one major concern which makes this
country labour cost efficient
Answer – A) Both assertion and reason are true and reason is correct explanation of
assertion

Q:6 :Assertion: urban people have a variety employment opportunities

Reason : in urban areas, the nature of work is different and enterperise requires
Worker On regular basis.
Answer:(B )

Q:7)Assertion: lesser worker women are found in regular salaried employment

Reason: regular salaried employment do not require skills and high level of literacy
Answer: Assertion is true but reason is false

Q:8) Assertion: unemployment and poverty are in separable twins

Reason: Unemployment is the root cause of all social economic evils
Answer: Assertion is true but reason is false
Q:9) Assertion: more proportion of female work are employed in primary sector as
compared to proportion of male work force
Reason: Male workforce get opportunities in both standing and service sectors.
Answer: A) Both assertion and reason are true and reason is not correct explanation
of assertion

Q:10) Assertion (A)- Jobless Growth is defined as a situation where GDP grows
faster than the employment opportunities resulting in unemployment.
Reason (R )- The economy of India is growing at a slower rate.
Answer b

Short Answer Question-:

Q1Rajiv is going to school when he’s not in school, you will find him working
in his farm. can you consider him as a worker? Why?
Ans Rajiv can be consider as a worker this is because his work is contributing to the
total output of the farm .further ,as implied by the definition of worker a person who
is engaged in an economic activity or is assisting anyone in a economic activity and
their by contributing to the GDP of the country is regarded as worker.

Q2 workers are exploited in the unorganised sector. Do you agree with this
view? give reason in support of your answer.
Ans Unorganised sector comprises of small and scattered units, which are largely
outside the control of the government. workers in the unorganized sector are often
exploited because of the following reasons
A. No rules and regulations
B. Irregular and low paid jobs
C. No jobs security
 D. No provision for overtime, leaves etc.

Q3 ‘In recent times the Indian economy has experienced the problem of
casualisation of the work force. This problem has only been a aggravated by
the outbreak of covid-19’ Do you agree with the given statement ? Discuss any
two disadvantages of casualisation of the work force in light of the above
statement.
Ans The given statement is quite appropriate with their reference to the casualisation
of worker in India
a. For casual workers ,the rights of labour are not properly protected by labour laws.
Particularly ,during pandemic times as demand for goods and services fell the casual
labour were left jobless without any compensation or support .
b. During the lock down period ,millions of casual workers lost their jobs .Also
additional health expenditures added to their troubles.

Q4. Compared to urban women, more rural women are found working. Why?
ANSWER: The percentage of female workforce in the rural areas is nearly 30 %
while it is only 14 % in the urban areas. This depicts that as compared to the urban
women more rural women accounts for higher share in the female workforce. While
on the one hand, the rural women are less educated, unskilled and low productive,
on the other hand, urban women being more educated and more skilled and
productive have higher probability to get employment. Ironically, the urban female
accounts for lesser share in the female workforce as compared to their rural
counterparts. The following are the reasons for low share of urban females in the
total female workforce:
1.As in the agricultural and allied activities, high degree of skills and specialisations
is not required, so, rural women engage themselves to support their family on farms.
2.As poverty in the rural areas is more widespread than in the urban areas, so, the
rural women engage themselves in low productive jobs just to support the livelihood
of their families.
3.As the urban families usually earn comparatively higher income than the rural
families and, further, poverty in the urban areas is not as widespread as that of in the
rural areas, so, there is lesser need for female members to get themselves employed.
4.The decision to take up jobs by the female members rests on the family’s
decision rather than her individual decision.
5.Although female literacy in India is improving, yet it has to get much better before
urban female accounts for higher share in the total female workforce.

Q5.Why are regular salaried employees more in urban areas than in rural
areas?
ANS: Regular salaried employees are those hired workers who are on the permanent
payrolls of their employers. They are usually skilled workers and are entitled to all
types of social security benefits. The concentration of these workers is higher in the
urban areas as compared to the rural areas because such jobs require skilled and
specialised workers. The opportunities to acquire and enhance such skills are
available more in the urban areas. And these skills are acquired through the process
of training and education that cannot be accessed in the rural areas due to the lack of
investment, infrastructure and low literacy level of rural people. Further, the big
companies are concentrated only in the urban areas due to the presence of
infrastructure and availability of modern facilities like banks, transport and
communication, etc. Therefore, the bulk of the jobs for the regular salaried
employees are concentrated more in the urban areas resulting in the increase in
number of the regular salaried employees.
Q6. Why are less women found in regular salaried employment?
ANS: Lesser women are found in regular salaried employment as compared to men
because a larger proportion of women are engaged in the economic activities without
stable contracts and steady income. The stable contracts and steady income are two
features prevalent in the regular salaried employment. Women are engaged in
informal segments of the economy, where they are not entitled to any social security
benefits. Moreover, women work in more vulnerable situations than men and have
lower bargaining power and, consequently, are paid lesser than the male workforce.
Thus, the women workers are more likely to be found in the self-employment and
casual work as compared to men rather than regular salaried employment.

Q7.Analyse the recent trends in sectoral distribution of workforce in India.

ANS: The three major sectors of an economy i.e. Primary, Secondary and Tertiary
collectively are known as occupational structure of an economy. The primary sector
includes agriculture, forestry, fishing, mining, etc. The secondary sector consists of
manufacturing and construction activities. Tertiary sector includes various services
like transport, communication, trade, etc. Primary sector is the prime source of
employment for the majority of the workers in India. Its contribution is as high as
57.3 % of our total workforce. About 17.6% and 25.1% of the total workforce is
employed in the secondary and the service sector respectively. People living in the
urban areas are largely engaged in secondary and tertiary sectors and those in the
rural areas are involved basically in primary sectors. Also, the tertiary sector is taking
a lead over the secondary sector as a source of employment and increasing share in
India’s GDP. As far as the distribution of male and female is considered, a high
percentage of total female workforces are engaged in the primary sector than in the
secondary and tertiary sectors
Q8.You are residing in a village. If you are asked to advice the village
panchayat, what kinds of activities would you suggest for the improvement of
your village which would also generate employment.
ANSWER:The following are the suggestions that can generate employment
opportunities in village:

i. Increase Production: It is of prime importance to increase production in the

agricultural and industrial sectors in order to increase employment. For this purpose,
small scale and cottage industries should be promoted. This will not only generate
new employment opportunities but also assist the industrial sector, as the production
of the small scale and cottage industries act as subsidiaries to the industrial sector.

ii. Increase Productivity: The demand and productivity for labour are directly related
to each other. The higher productivity generates higher profits that in turn implies
higher investment and generates higher demand for labour. Rural workers should be
imparted technical knowledge and modern know-how that will not only increase
their productivity but also enhance their acceptability of modernisation.

iii. Control over Population: Population explosion is one of the important concerns
for India. It hinders economic growth prospects. The rising population leads to the
rise in unemployment and, therefore, poverty. Thus, rural people should be made
aware of various birth control measures and also the benefits associated with family
planning and nuclear-family.

iv. Creating Non-agricultural Employment: India being an agrarian economy

employs a major proportion of workforce in the agricultural sector. The development
of this sector is still a far cry and, consequently, suffers from disguised
unemployment. Moreover, as agriculture is a seasonal occupation, so, many farmers
remain unemployed for three to four months in a year. Thus, it is necessary to engage
these people in non-agricultural sectors for the phase they are off from cultivation.
Creation of non-agricultural job like pottery, handicrafts, not only reduces disguised
unemployment but also contributes to enhanced income to the farmers in the off-
season, which could be invested in the farm to improve farm productivity and farm
products.

v. Easy Credit and Finance: Often, the rural people find it difficult to access finance
due to the lack of sufficient financial institutions in the rural areas. Even if the
finance or the credit is available, then this is provided at higher lending rates. The
lack of credit acts as a bottleneck for the rural growth. Thus, financial institutions
and banks should be set up to provide easy credit to the rural people.

vi. Education and Health Facilities: Rural areas have always lagged behind in
education and health care facilities. This not only impedes their productivity but also
reduces their life expectancy and quality of standard of living. Along with primary
and secondary schools, night schools for adults, imparting technical education and
technical know-how, proper sanitation and hospitals should be established in the
rural areas.

Q9.Is it necessary to generate employment in the formal sector rather than in

the informal sector? Why?
ANSWER:
Formal Sector refers to the organised sector of the economy. It includes government
departments, public enterprises and private establishments that hire 10 or more
workers. Workers of the formal sectors enjoy social security benefits and also they
remain protected by the labour laws. On the other hand, the informal sector is an
unorganised sector of the economy. People engaged in this sector do not enjoy any
social security benefits and do not have any trade unions and, consequently, have
low bargaining power. This makes them more vulnerable to the uncertainties of the
market. Creating more jobs in the formal sector will not only absorb workforce from
the informal sector but also helps in reducing poverty and income inequalities. Thus,
in order to safeguard the interests of the informal sector and to utilise this portion of
the workforce for achieving economic growth, it is very important to generate more
employment opportunity in the formal sector rather than in the informal sector.

1.Interpret the above picture on account of type of unemployment in agriculture

sector

2) Interpret the image given below-:

Study the image given below and list the problems related to the given picture-:

Case Study based Question-:

Case Study 1
Prime Minister Narendra Modi on Thursday said India’s expanding economy is
creating new possibilities for the youth and the unemployment rate in the country is
at its lowest level in the last six years.
In a video message to the Kaushal Deekshant Samaroh of the Ministry of Skill
Development and Entrepreneurship, the prime minister noted that new possibilities
are being created for the youth as India’s economy is expanding.
He said that employment creation in India has reached a new height and the
unemployment rate in India is at its lowest level in 6 years according to a recent
survey.
Noting that unemployment is decreasing rapidly in both rural and urban areas of
India, the prime minister emphasised that the benefits of development are reaching
both villages and cities equally, and as a result, new opportunities are increasing
equally in both villages and cities.
He also pointed out the unprecedented increase in the participation of women in
India’s workforce and credited the impact of the schemes and campaigns that have
been launched in India in the past years regarding women empowerment.

Q1. Which program is encouraged by our prime minister to create employment

opportunities?
Q2. What are the benefits of being employed. Mention any three
Q3. Why women workforce is more in rural areas than in urban areas?

Case Study 2
The unemployment rate in India, amidst lockdown and restrictions on mobility, is
12.81% as of June 8th 2021 based on the data provided by the CMIE. Earlier, the
unemployment rate in India shot up from 6.5 per cent in March 2021 to 8 per cent in
April 2021, to 14.7% by May end, while the employment rate fell from 37.6 per cent
in March to 36.8 per cent in April, says the report of CMIE – Centre For Monitoring
Indian Economy.
In 2020, the unemployment rate in India fell to 7% in September 2020 from the
record high of 29% since the country went into lockdown from March
2020, However, it later increased to 9.1% in December 2020. The unemployment
rate again declined to 6.5 per cent in January 2021 from 9.1 per cent in December
2020, while the employment rate surged to 37.9 per cent as compared to 36.9 per
cent.The lockdown to contain the coronavirus outbreak has forced many industries
to shut down thus increasing unemployment across the country. The unemployment
in India stood at 6.1% in the financial year 2018 mentions the NSSO – National
Sample Survey Organisation Report 2019. Candidates can check the detailed
information on NSSO on the given link.

Q1. Name the agencies which collects data on unemployment.

Q2. What are the causes of unemployment in India? List any four.
Q3. What are the various types of unemployment in rural sector?
 Ch- Rural Development

Keynotes

Rural development is a comprehensive term which essentially focuses on action

for the development of area which is lagging behind in overall development of
village economy.

Objectives of rural development:

1. Increasing productivity of agricultural sector.
2. Generating alternative means of livelihood in rural sector.
3. Promoting education and health facilities in the rural areas.
Key issues in rural development.
(i) A robust system of rural credit.
(ii) A system of marketing that ensures remunerative price to the farmer for his
produce.
(iii) Diversification of crops that reduce risks of production and induces
commercialisation of farming.
(iv) Diversification of production activity with a view to find alternative means of
sustainable living other than crop-cultivation.
(v) Promotion of organic farming with a view to make crop cultivation
environmental friendly as well as a sustainable process over a long period of time.
(vi) Honest system of land reforms.
(vii) Development of human resource like health, addressing both sanitation and
public health.
(viii) Development of human resource including literacy, education and skill
development.
(ix) Development of Infrastructure like electricity, irrigation, transport facility, etc.
Rural credit means credit for the farming communities. Farmers require credit for
various purposes like purchasing agricultural tools and machines, digging wells and
tube wells, purchasing seeds, fertilizers, pesticides, etc.
The gestation period between sowing and harvesting is high. so, farmers have to
borrow to fulfill their needs during this period.
The above institutional structure of rural banking which is called multi-agency
system which has initiated by govt. in 1969.
Agricultural marketing
Defects of agricultural marketing

Measures adopted by the government to improve marketing system.

(i)Regulation of markets.
(ii) Co-operative agricultural marketing societies.
(iii) Provision of warehousing facilities.
(iv) Subsidised transport.
(v) Dissemination of marketing information.
(vi) Buffer stocks and minimum support price (MSP)
(vii) Public Distribution System (PDS)
(viii) Alternative marketing channels
(ix) Improvement of physical Infrastructure
Diversification in agriculture activities-It has the two aspects.

1. Diversification of crop production refers to a system of multiple cropping

rather than mono cropping. It may also mean a shift from subsistence farming to
commercial farming.
It has the three advantages:
(i) It lowers the risk of farmer on account of failure of monsoon.
(ii) It enhances the scope for commercialisation of farming.
(iii) Minimise the market risk arising due to price fluctuation.

2. Diversification of productive activities imply a shift from crop farming to non-

farming areas of employment. Non-farm areas of employment include.
(i) Animal husbandry. (ii) Fisheries. (iii) Horticulture. (iv) Cottage and
household industry.
(v) Information technology-every village a knowledge Centre
It has following advantages:
1. Reduce the risk from agriculture sector.
2. Provide ecological balance.
3. Provide sustainable livelihood option to people living in village.
Operation Flood
It is a system of milk co-operatives, launched in 1966. This system emphasised
the pooling of milk by farmers through co-operatives societies.
This increased the quantum of sale as well the market value of product. The
production in milk increased four-fold. This system if commonly called
operation flood.
Labour force: It refers to actual member of people available for work.
Non-farm sector: It refers to jobs in govt. manufacturing, services, construction,
mining, retail, etc.
Labour intensive Process: It refers to the process or industry that requires a large
amount of labour to produce its goods.
Mind Map-:
Multiple choice questions

1. Which of the following is NOT mentioned as an area requiring fresh

initiatives in rural India?
a) Health and sanitation
b) Female literacy
c) Development of urban infrastructure
d) Skill development
Answer: c) Development of urban infrastructure

2. Which of the following is not mentioned as a component of infrastructure

development in rural areas?
a) Electricity facilities
b) Marketing facilities
c) Internet access in every household
d) Transport facilities
Answer: c) Internet access in every household

3. Which of the following is NOT a measure for alleviating poverty in rural

development?
a) Providing vocational training
b) Promoting access to productive employment opportunities
c) Enhancing social welfare benefits without promoting self-sufficiency
d) Implementing microfinance programs
Answer: c) Enhancing social welfare benefits without promoting self-sufficiency

4. Which approach to rural development focuses on sustainable use of resources

and balanced growth?
a) Urbanization-oriented approach
b) Displacement-oriented approach
c) Industrialization-oriented approach
d) Sustainable development approach
Answer: d) Sustainable development approach

5. Which factor is NOT mentioned as an impediment to rural development in

the provided content?
a) Inadequate infrastructure
b) Decline in public investment
c) Increasing casualisation of employment
d) Decrease in population dependent on agriculture
Answer: d) Decrease in population dependent on agriculture

6. Which organization was established in 1982 to coordinate the activities of all

institutions involved in the rural financing system?
a) National Bank for Agriculture and Rural Development (NABARD)
b) World Bank
c) Reserve Bank of India (RBI)
d) Agricultural and Rural Development Bank (ARDB)
Answer: a) National Bank for Agriculture and Rural Development (NABARD)

7. What percentage of agriculture output grew during the period 2007-2012?

a) 1.2%
b) 2.5%
c) 3.2%
d) 4.8%
Answer: c) 3.2%

8. What was the growth rate of the agriculture sector during the period 1991-
2012?
a) 3% per annum
b) 5% per annum
c) 1% per annum
d) 8% per annum
Answer: a) 3% per annum

9. Which of the following are part of the institutional structure of rural

banking?
a) Commercial banks b) Regional rural banks (RRBs) c) Cooperative banks
d) Urban development banks
Alternatives
1. a, d and b 2. a, d and c 3. a, b, c 4. A, b ,d
Answer: 3.

10. Which of the following multi-agency institutions is specifically mentioned as

part of the rural banking structure?
a) Postal Savings Banks
b) Urban Cooperative Banks
c) Urban Development Banks
d) Land Development Banks
Answer: d) Land Development Banks
11. Why have other formal banking institutions besides commercial banks
failed in deposit mobilization and effective loan recovery?
a) Lack of technological advancements
b) Inadequate government support
c) Mismanagement of financial resources
d) Insufficient cooperation from rural communities
Answer: c) Mismanagement of financial resources

12. Which of the following is NOT a positive impact of Self-Help Groups (SHGs)
on rural development?
a) Empowerment of women in rural areas
b) Reduction of rural-to-urban migration
c) Poverty alleviation through improved financial access
d) Encouragement of rural savings and thrift
Answer: b) Reduction of rural-to-urban migration

13. What were some of the issues faced by farmers prior to independence when
selling their produce to traders?
A) Lack of proper storage facilities
B) High crop yields
C) Efficient transportation networks
D) Abundance of market information
Answer Key: A) Lack of proper storage facilities

14. What is the role of the Food Corporation of India (FCI) in the context of
agricultural marketing?
A) Promotion of urbanization in rural areas
B) Assurance of minimum support prices (MSP)
C) Maintenance of buffer stocks of wheat and rice
D) Encouraging private trade in agriculture
Answer Key: C) Maintenance of buffer stocks of wheat and rice

15. Which of the following is NOT mentioned as a challenge faced by

cooperatives in the passage?
A) Inadequate coverage of farmer members
B) Lack of appropriate links between marketing and processing cooperatives
C) Efficient financial management
D) Transforming the social and economic landscape
Answer Key: C) Efficient financial management

16) Which of the following highlights the role of IT in rural development?

i) Achievement of sustainable development ii) Attainment of food security
iii) Dissemination of information regarding emerging technologies
Alternatives-:
a) Only i b) Only ii c) i and ii d) i,ii,iii
Answer d
17) _________ is the apex institution which plans and evaluates policies related to
rural credit needs.
a) Cooperative credit societies b) Regional Rural banks c) Self help Groups
d) NABARD
Answer d
18) SHGs were introduced in
a) 1985 b) 1992 c) 1995 d) 1984
Answer b

19) Father of green revolution in India is

a) MS Swaminanthan b) Norman Borlaug c) PC Mahalanobis d) C.
Subramaniam
Answer a

20) Identify correct pair from Column I and Column II and choose the correct
alternatives-:
Column I Column II
A. Apni Mandi i) It is in Pune
B. Rythu Bazar ii) Fruit markets in Andhra Pradesh
C. Hadaspur Mandi iii) Located in Punjab and Haryana
D. Uzhavar Sandies iv) Farmers markets in Maharashtra
Alternatives
a) A- i b) B-ii c) C- iii d) D-iv
Answer b

Assertion Reason

1.Assertion: Skill development in rural areas aims to prepare individuals for urban
employment.
Reason: It focuses on providing training for industrial jobs to improve rural-to-
urban migration.
Answer: The Assertion is incorrect, but the Reason is correct.
2. Assertion: Encouraging non-farm activities is the only way to achieve rural
development.
Reason: Non-farm activities have higher profit margins than agricultural practices.
Answer: The Assertion is incorrect, and the Reason is incorrect as well.
3. Assertion: Rural development aims to reduce the dependence on agriculture and
shift towards non-farm activities. Reason: Non-farm activities are not financially
viable for rural communities.
Answer: The Assertion is correct, but the Reason is incorrect.
4. Assertion: The decline in the growth rate of the agriculture sector during 1991-
2012 is primarily due to a lack of alternate employment opportunities in the industry
and service sectors.
Reason: As people did not find alternative employment opportunities, they
continued to be dependent on agriculture, leading to slow growth in the sector.
Answer: Both assertion and reason are true, but the reason does not fully justify the
assertion.
5. Assertion: The Green Revolution resulted in an increased dependency on
moneylenders for loans in rural areas.
Reason: Farmers needed more credit to invest in agriculture due to the
diversification of the rural credit portfolio towards production-oriented lending.
Answer: The assertion is false, but the reason is true.
6. Assertion: The decline in public investment since 1991 is the sole reason for the
decrease in agriculture sector's contribution to GDP.
Reason: Public investment plays a crucial role in promoting agricultural
development and productivity.
Answer: The assertion is false, and the reason is true.
7. Assertion: The National Bank for Agriculture and Rural Development
(NABARD) was established to lend directly to farmers at lower interest rates.
Reason: NABARD provides refinancing facilities to institutions involved in rural
financing for better credit accessibility to farmers.
Answer: The assertion is false, and the reason is true.
8. Assertion: The decline in the agriculture sector's growth rate during 1991-2012
was due to an increase in agricultural diversification.
Reason: Diversification into non-farm activities reduced the focus on agriculture,
leading to a decline in its growth rate.
Answer: The assertion is false, and the reason is true.
9. Assertion: The decline in public investment since 1991 led to an increase in
casualization of employment in rural areas.
Reason: Lack of public investment resulted in a shift towards informal and low-
paying jobs in the agriculture sector.
Answer: The assertion is false, and the reason is true.
10. Assertion: Micro-credit programs offered by SHGs are primarily used for
consumption purposes.
Reason: The formal credit delivery mechanism has not been fully integrated into the
overall rural social and community development.
Answer: The assertion is correct, but the reason is not a correct explanation of the
assertion.
11. Assertion: SHGs have played a significant role in empowering women in rural
areas.
Reason: Women are reluctant to invest borrowed money for productive purposes.
Answer: Both the assertion and reason are correct, but the reason is not the correct
explanation of the assertion.
12. Assertion: The rapid expansion of the banking system has positively impacted
rural farm and non-farm output, income, and employment.
Reason: It has led to the modernization of non-farm sectors in rural areas.
Answer: The assertion is correct, but the reason is not the correct explanation of the
assertion.
13.Assertion: 'Kudumbashree' is a community-based poverty reduction program in
Kerala that has successfully mobilized savings from urban areas.
Reason: Kudumbashree has been acclaimed as the largest formal bank in Asia in
terms of participation and savings mobilized.
Answer: The assertion is incorrect, and the reason is correct.
14. Assertion: In 1982 NABARD was set up
Reason: NABARD helped improvement in institutional credit to satisfy rural needs.
Answer: Both assertion and reason are true, and the reason fully justify the assertion.
15. Assertion: In 1982, India adopted social banking approach
Reason: Moneylenders were charging high rate of interest from poor people and
manipulate their accounts
Answer: The assertion is incorrect, and the reason is correct.

Statement Based questions-:

1. Statement 1: Agriculture output has shown a significant increase during 2007-
2012 due to the implementation of organic farming practices.
Statement 2: Organic farming leads to higher crop yields and reduced production
costs.
Answer: Both the statements are false.
2. Statement 1: The growth of the rural economy depends primarily on the infusion
of capital for higher productivity.
Statement 2: Social banking and multi-agency approaches were adopted in India
after 1969 to improve rural credit accessibility.
Answer: both the statements are true
3. Statement 1: The Green Revolution resulted in major changes in the credit
system and increased rural credit diversification.
Statement 2: The diversification of rural credit towards production-oriented lending
contributed to higher crop yields.
Answer: both the statements are true
4. Statement 1: Farmers in rural areas only borrow from various sources to meet
their initial investments in farming and family expenses.
Statement 2: Social banking has eliminated the need for farmers to borrow money
for agricultural activities.
Answer: Statement 1 is false, but Statement 2 is true
5. Statement 1: Change in cropping pattern is a form of diversification of farm
activities
Statement 2: Most agricultural activities are seasonal in nature
Answer: both the statements are true
6. Statement 1: Size of the farms are reduced due to fragmentation and sub division
of land holdings.
Statement 2: The purpose of a regulated market is to eliminate healthy market
practices to ensure fair price for agricultural produce
Answer: Statement 1 is true, but Statement 2 is false
7. Statement 1: Buffer stock is maintained by FCI in India
Statement 2: Cooperative farming help in getting fair price for farmers products
Answer: both the statements are true
8. Statement 1: Since independence the economic condition of many farmers across
India has improved as they have adopted horticulture as a secondary source of
income.
Statement 2: Varying climatic and soil conditions have given an added advantage
to the producer of diverse horticultural crops.
Answer: both the statements are true
Case Study

Case Study 1

Let’s set the basic rules in motion before we start the arguments about the lack of
banking facilities in the hinterlands. The Reserve Bank of India has announced that
Regional Rural Banks would be given more freedom to mobilise resources and to
deploy them within their geographical boundaries.
The RBI has highlighted that important forces boosting socio-economic growth are
the financial activity of the banking industry. Rural development also means
transformation of the rural population. It is a strategic move, in line with the
government’s aim to double farmers' income.
But is that happening. The answer is ‘No’ because banks, except State Bank of India,
have hardly ventured into rural India because of reasons ranging from poor
connectivity to lack of business growth.
Bankers say villagers are more keen on investing in real estate and commodities like
gold and silver than putting cash in banks.
This imbalance in the rural credit system must end. Banks must be encouraged to
open branches in villages. By providing financial services to rural areas, banks
facilitate the growth of small businesses and spur economic development.
The shortage of bank branches and ATMs across the hinterland could hold back PM
Narendra Modi’s financial inclusion efforts.
In 2014, Modi had set a target to open a bank account for every household to ensure
welfare funds flow directly to the poor, while improving access to credit and
insurance programmes. He pushed policies that helped bring 310 million people into
the formal banking system in just four years, according to the World Bank.
Claims of banks that they are penetrating the hinterland are not matching with their
records. These services are often slow to reach the rural population. The government
has been making efforts to rope in banking correspondents in rural areas. As of
FY22, there were 1.32 million banking correspondents compared with 1.13 million
in FY21 and 730,000 in FY20.
The finance ministry said last October that it plans to raise the number of female
banking correspondents by a third of the total by 2027. This is a great move because
women are considered better managers of household finances. The department of
financial services is trying to raise the number of banking correspondents from less
than 10% to over 30% in the next three years.
If banks go to the hinterland and rural areas are developed, they provide a conducive
environment for economic activities and contribute to the GDP, leading to an
increase in agricultural production, thereby helping the government address food
insecurity.
What is distressing is that despite a huge thrust on financial inclusion and high
economic activity, several districts do not have any banking presence — a fact
corroborated by Finance Minister Nirmala Sitharaman. She has directed lenders to
open either a full-fledged branch or an outpost rendering banking services.
The minister told the Indian Banks’ Association (IBA) recently that there are many
big panchayats which don’t have a physical bank. In many districts not even one
banking institution is physically present.
IBA has been asked to digitally map all districts to find out low coverage areas and
make provisions for a physical branch or an outpost.
If there is strong economic activity in a rural pocket, banks must set up their presence
there. But, will this happen? Policymakers have been focusing on financial inclusion
to ensure banking presence in every village with over 2,000 people. Let’s see the
work done by the Pradhan Mantri Jan Dhan Yojana, in which millions of new
accounts were opened. If a higher loan had to be given, the lenders have to move
beyond looking at such regions as a source of low-cost deposits. As many as 300
PSU branches will open in the hinterland. This is significant news. In India, 19% of
the population still lacks access to the formal credit system.
Answer the following questions on the basis of above questions-:

1.How has the Reserve Bank of India (RBI) addressed the lack of banking facilities
in rural hinterlands?
2.According to the RBI, what important forces are boosting socio-economic growth
in India's rural areas?
3.What specific efforts has Prime Minister Narendra Modi made towards financial
inclusion in rural India?
4.How has the Jan Dhan Yojana, launched in 2014, impacted financial inclusion in
India's rural households?

Case Study 2
The SHG Laksh was built in the month of November 2019, with the noble initiative
of Foundation with eleven women. Most of the women of the small village of Sobh
had never attended school before and the others had only 29.2 literacy rate. The
group sat through discussions and deliberations to identify the opportunities
available within their reach through which they could enhance their skills and also
provide economic support to their families, (which was otherwise very difficult in
the male dominated social fabric of their village life). It was decided that they would
learn the art of lac bangle making. Bangles are a central part of women’s cultural
life in Rajasthan and are always in high demand. For them, an initiative such as this
meant the opportunity to make bangles, learn skills to market them and the chance
to further their skill by becoming future entrepreneurs. Having decided, each
member of the SHG group soon began to deposit Rs. 100 as savings every month
and spent 4 to 5 hours every day at the training centre to learn bangle-making. The
training which was provided to the SHG has infused new hopes and dreams among
the women involved. They now enthusiastically speak about their wish to learn to
make other Lac ornaments. The SHG has provided women the space to discuss new
ideas and their aspirations. They not just want to learn new skills but also want to
start a shop in the village where they can sell bangles and other accessories of lac
made by them. To strengthen the SHG and develop it into an enterprise they would
put the earnings from the business in a joint SHG account. The savings are very
crucial for the success of the SHG as well as to meet the financial needs of the
members when required. The savings can also help start other businesses in the
village

Answer the following questions on the basis of above case study-:

a) What were the various gaps in formal credit system which led to creation of
SHG’s?
b) Write any three advantages of SHG’s to the women engaged with Laksh.

Case Study 3
‘Kudumbashree’ is a women-oriented community-based poverty reduction
programme being implemented in Kerala. In 1995, a thrift and credit society was
started as a small savings bank for poor women with the objective to encourage
savings. The thrift and credit society mobilised Rs 1 crore as thrift savings. These
societies have been acclaimed as the largest informal banks in Asia in terms of
participation and savings mobilised.

Q1. Discuss the role of SHG in meeting credit requirement of the poor.
Q2. List one drawback of micro- credit programme.

Short Questions Answers-:

Q1. Discuss the importance of credit in rural development.

Answer. Farmers need money to buy additional land, implements and tools,
fertilizers and seeds, paying off old debt, personal expenses like marriage, death,
religious ceremonies, etc. Since the gestation period between crop sowing and
realisation of income after sale of agricultural produce is very long, farmers need to
take credit.

Q2. Explain the role of micro-credit in meeting credit requirements of the poor.
Answer. SHGs (Self-Help Groups) and micro credit programmes promote thrift in
small proportions by a minimum contribution from each member. From the pooled
money, credit needs are fulfilled. The members have to repay the credit in small
instalments at low rate of interest. The borrowings are mainly for consumption
purposes.

Question 3. Why is agricultural diversification essential for sustain-able

livelihoods?
Answer. Diversification into non-farm activities is important because it will:
1. reduce the risk from agriculture sector.
2. provide sustainable livelihood options to people living in villages.
3. provide ecological balance.
Question 4. Critically evaluate the role of the rural banking system in the
process of rural development in India.
Answer. Since 1969, when the nationalisation of commercial banks took place, rural
banking has expanded a great deal. Significant expansion of rural banking system
played a positive role in:
1. Raising farm and non-farm output by providing services and credit facilities
to farmers.
2. Providing long term loans with better repayment options. It, thus helped in
eliminating moneylenders from the scene.
3. Generating credit for self-employment schemes in rural areas.
4. Achieving food security which is clear from the abundant buffer stocks of
grains.
Limitations of rural banking are:
1. The sources of institutional finance are inadequate to meet the requirements
of agricultural credit. Farmers still depend on money-lenders for their credit
needs.
2. There exist regional inequalities in the distribution of institutional credit.
3. Rural banking is suffering from the problems of large amount of overdues and
default rate.
4. Small and marginal farmers receive only a very small portion of the
institutional credit. A large portion of institutional credit is taken away by the
rich farmers.

Question 5. What do you mean by agricultural marketing?

Answer Agricultural Marketing is defined as a process of marketing farm produce
through wholesalers and stockists to ultimate consumers.
Question 6. Mention some obstacles that hinder the mechanism of agricultural
marketing.
Answer. Defects of Agricultural Marketing are :

1. Inadequate Warehouses
2. Multiplicity of Middlemen
3. Malpractices in Unregulated Markets
4. Improper Measuring for Weighing, Grading and Standardisation
5. Lack of Adequate Finance
6. Inadequate means of Transport and Communication
7. Inadequate Market Information.

Question 7. What are the alternative channels available for agricultural

marketing? Give some examples.
Answer. In India, alternative marketing channels are emerging. Through these
channels farmers directly
sell their produce to the consumers. This system increases farmers’, share in the price
paid by the consumers. Important examples of such channels are: (a) Apani Mandi
(Punjab, Haryana and Rajasthan), (b) Hadaspar Mandi (Pune); Rythu Bazars
(Vegetable and fruit market in Andhra Pradesh) and (c) Uzhavar Sandies (Tamil
Nadu), (d) Several national and international fast food chains and hotels are also
entering into contracts with the farmers to supply them fresh vegetables and fruits.

Question 8. Explain the term ‘Golden Revolution’.

Answer. The period between 1991-2003 is called ‘Golden Revolution’ because
during this period, the planned investment in horticulture became highly productive
and the sector emerged as a sustainable livelihood option. India has emerged as a
world leader in producing a variety of fruits like mangoes, bananas, coconuts,
cashew nuts and a number of spices and is the second largest producer of fruits and
vegetables.

Question 9. Explain the role of non-farm employment in promoting rural

diversification.
Answer. The non-farm sectors include agro-processing industries, food processing
industries, leather industry, tourism, etc. Some other sectors which have the potential
but lack infrastructure are traditional household-based industries like pottery, crafts,
handlooms, etc.

Long Answer Questions

Question 1. What do you mean by rural development? Bring out the key issues
in rural development.
Answer. Rural development is a comprehensive term which essentially focuses on
action for the development of areas that are lagging behind in the overall
development of the village economy.
Some of the areas which are in need of fresh initiatives for rural development are:
1. Development of human resources like literacy, more specifically, female literacy,
education and skill development.
2. Development of human resources like health, addressing both sanitation and
public health.
3.Honest implementation of land reforms.
4. Development of the productive resources in each locality.
5. Infrastructure development like electricity, irrigation, credit, marketing, transport
facilities including construction of village roads and feeder roads to nearby
highways, facilities for agriculture research-and extension, and information
dissemination.
Special measures for alleviation of poverty and bringing about significant
improvement in the living conditions of the weaker sections of the population

Q2. Explain the steps taken by the government in developing rural markets.
Answer. The government has taken various steps for improving agricultural
marketing system. These are:
1. Establishment of Regulated Markets. Government has formed regulated markets
to remove most of the evils of an unorganised market system.
Functions of regulated markets are:
(i) Enforcement of standard weights.
(ii) Fixation of charges, fees, etc.
(iii) Settling of disputes among the operating parties in the market.
(iv) Prevention of unlawful deductions and control of wrong practices of middlemen.
(v) Providing reliable market information.
2. Provision of Infrastructural Facilities. The government has taken measures to
develop infrastructural facilities like roads, railways, warehouses, godowns, cold
storages and processing units.
3.Co-operative Market. Co-operative marketing is a measure to ensure a fair price
to fanners. Member farmers sell their surplus to the co-operative society which
substitutes collective bargaining in place of individual bargaining. It links rural
credit farming marketing processes to the best advantage of the farmers.
4.Important Instruments to Safeguard the Interests of Farmers. The Government has
also developed some instruments to safeguard the interests of farmers. These
instruments are:
5. Fixation of Minimum Support Price (MSP)
(ii) Buffer Stock
(iii) Public Distribution System (PDS).

Q3. Bring out the importance of animal husbandry, fisheries and horticulture
as a source of diversification.
Answer.1. Animal Husbandry-:(a) In India, the farming community uses the mixed
crop-livestock farming system—cattle, goats, fowl are the widely held species.
(b) This system provides increased stability in income, food security, transport, fuel
and nutrition for the family without disrupting other food-producing activities.
(c) Today, livestock sector alone provides alternate livelihood options to over 70
million small and marginal farmers including landless labourers.
(d) Poultry accounts for the largest share. It is 42 per cent of total livestock in India.
(e) Milk production in the country has increased by more than four times between
1960-2002.
(f) Meat, eggs, wool and other by-products are also emerging as important
productive sectors for diversification.
2. Fisheries-:(a) The fishing community regards the water body as ‘mother’ or
‘provider’. The water bodies consist of sea, oceans, rivers, lakes, natural aquatic
ponds, streams, etc.
(b) Presently, fish production from inland sources contributes about 49 per cent to
the total fish production and the balance 51 per cent comes from the marine sector
(sea and oceans). Today total fish production accounts for 1.4 per cent of the total
GDP.
(c) Among states, Kerala, Gujarat, Maharashtra and Tamil Nadu are the major
producers of marine products.
3.Horticulture-:(a) Due to varying climate and soil conditions, India has adopted
growing of diverse horticultural crops such as fruits, vegetables, tuber crops,
flowers, medicinal and aromatic plants, spices and plantation crops.
(b) These crops play an important role in providing food, nutrition and employment.
(c) India has emerged as a world leader in producing a variety of fruits like mangoes,
bananas, coconuts, cashew, nuts and a number of spices and is the second largest
producer of fruits and vegetables.
(d) Flower harvesting, nursery maintenance, hybrid seed production and tissue
culture, propagation of fruits and flowers and food processing are highly profitable
employment opportunities for rural women. It has been estimated that this sector
provides employment to around 19 per cent of the total labour force.

Q4. ‘Information technology plays a very significant role in achieving

sustainable development and food security’—comment.
Answer. Information technology plays a very significant role in achieving
sustainable development and food security in the following ways:
1. It can act as a tool for releasing the creative potential and knowledge embedded
in our poeple.
2. Issues like weather forecast, crop treatment, fertilizers, pesticides, storage
conditions, etc. can be well administered if expert opinion is made available to the
farmers.
3. The quality and quantity of crops can be increased manifold if the farmers are
made aware of the latest equipments, technologies and resources.
4. IT has ushered in a knowledge economy.
5. It has potential of employment generation in rural areas.
Question 5. Explain four measures taken by the government to improve
agricultural marketing.
Answer. The government has taken various steps for improving agricultural
marketing system. These are:
1. Establishment of Regulated Markets. Government has formed regulated markets
to remove most of the evils of an unorganised market system. Functions of regulated
markets are:
(i) Enforcement of standard weights.
(ii) Fixation of charges, fees, etc.
(iii) Settling of disputes among the operating parties in the market.
(iv) Providing reliable market information.
2. Provision of Infrastructural Facilities. The government has taken measures to
develop infrastructural facilities like roads, railways, warehouses, godowns, cold
storages and processing units.
3. Co-operative Market. Co-operative marketing is a measure to ensure a fair price
to farmers. Member farmers sell their surplus to the co-operative society which
substitutes collective bargaining in place of individual bargaining. It links rural
credit farming marketing processes to the best advantage of the farmers.
4. Important Instruments to Safeguard the Interests of Farmers. The Government has
also developed some instruments to safeguard the interests of farmers. These
instruments are:
(i) Fixation of Minimum Support Price (MSP)
(ii) Buffer Stock
(iii) Public Distribution System (PDS).
Q. Interpret the following picture on the account of the role NABARD

Q. Interpret the given image on the account of the benefit of the body given in
it-:
Q Interpret the following graph-:

Q Interpret the given graph on the account of fish production in India. Also, state the
significance of fisheries sector in Indian economy.
 Ch- Human Capital Formation in India
Keynotes
Human capital refers to the stock of skill, ability, expertise, education and
knowledge in a nation at a point of time.
Physical capital refers to assets which themselves have been manufactured and are
used for production of other goods and services.
Difference between Physical Capital and Human Capital:-

Human capital formation is the process of adding to the stock of human capital
over a period of time.
Sources of human capital formation.

Human Resource Development:- It refers to the development of the set of

individual that makes up the workforce of an organisation, business sector or
economy.
Role of human capital formation in economic growth.
(i) Raises production
(ii) Change in emotional and physical environment of growth.
(iii) Improves quality of life.
(iv) Raises life expectancy.
(v) Innovative skills.
(vi) Raises social justice and equality.
Problems facing human capital formation.

Education :- It implies the process of teaching, training and learning especially in

schools, colleges, to improve knowledge and develop skills.
Importance and objectives of education
(i) Education produces good citizens.
(ii) Education facilitates use of resources in the country.
(iii) Develops science and technology.
(iv) Expands mental horizon of the people.
(v) Promotes cultural standard of the citizens.
(vi) Develops human personality.
Problems relating to development of education in India
(i) Large number of illiterates.
(ii) Inadequate vocationalisation.
(iii) Gender bias.
(iv) Low rural access level.
(v) Low government expenditure on education.
Human capital formation in India
(i) The seventh five year plan stressed upon the importance of human capital.
(ii) In India, ministry of education at the Centre and state level, NCERT (National
Council of Educational Research and Training), UGC (University Grant
commission), AICTE (All India Council of Technical Education) regulate the
education sector.
(iii) In India, Ministry of Health at the Union and the State level and ICMR (Indian
Council of Medical Research) regulate the health sector.
(iv) World Bank states that India will become the knowledge economy.
Also if India uses its knowledge as much as Ireland does, than the per capita
income will rise by $ 3000 by the year 2020.
Interrelationship between human capital formation and economic growth
Human capital formation raises the process of Economic Growth and economic
growth raises the process of human capital formation.
(i) Rise in human capital raise economic growth
Rise in Human Capital
↓
Modern attitude and outlook, better quality of life, Higher life expectancy
↓
More Efficiency
↓
More Production
↓
More economic growth
(ii) Rise in economic growth raises human capital formation
Rise in Economic Growth
↓
Rise in per capita income
↓
More investment in education and health
↓
Rise in human capital
EDUCATION SECTOR IN INDIA
1. Elementary education:
(A) Elementary education covers students from class 1 to class 8 (primary and
middle) in the age-group of 6 to 14 years. The number of primary and middle
schools has considerably increased from 2.23 lakhs (in 1950-51) to 11.92 lakhs (in
2011-12). Near about 97% children in the age-group of 6-14 years have been
receiving educating in schools.
(B) Various policies such as Sarva Shiksha Abhiyan, mid day meal scheme, district
primary education programme, right to education have been playing major role in
enhancing primary education in India.
2. Secondary and senior secondary education:
(A) As per a survey, number of secondary and senior secondary schools rose to 2.12
lakhs and number of students getting education at this level rose up to 482 lakhs.
(B) At central level, Navodaya schools and Kendriya Vidyalayas are playing a vital
role in promoting education at this level.
3. Higher education:
(A) As per a survey in India near about 665 universities are imparting education at
higher level and number of collages imparting general education is 35829.
(B) Number of students getting higher education is about 130 lakhs.
4. In addition to it, since independence, the number of institutions imparting
technical and professional education has increased significantly in India in which
polytechnical institutions, engineering colleges, medical collages, research centres
like IIT, agriculture research institute, India statistical institute, IIM etc. are playing
prominent roles.
MindMap-:
Multiple Choice Questions-:
1. Besides economic benefits, what does education provide?
A) Musical talent
B) Knowledge of ancient history
C) Better social standing and pride
D) Athletic skills
Answer: C) Better social standing and pride
2. What role does education play in fostering innovation?
A) It stifles creativity
B) It promotes critical thinking and problem-solving
C) It discourages experimentation
D) It limits access to information
Answer: B) It promotes critical thinking and problem-solving
3. Identify the incorrect statement from the following-:
a) Human capital represents enhanced labour productivity.
b) Investment in human capital enhances efficiency and skills, implying economic
growth.
c) Human capital is separable from the owner.
d) Human capital treats human beings as a means to an end
Answer c
4. ________ five year plan recognized the importance of human capital.
a) Seventh b) Third c) Eighth d) Sixth
5. Ms. Ramanpreet has started a new business venture. She intends to spend a
huge amount towards ‘on the job training’ of her workers before putting them
to work. It exhibits the right step in the direction of human capital formation.
Spot which of the following does not directly contributes to the process of
human capital formation by Ms. Ramanpreet
 a) Adds skill and expertise b) Ensures gender equity
c) Improves efficiency d) Increases output productivity
Answer b
6. Identify which of the following problems are associated with problem of
human capital in India?
i) Brain drain ii) Low academic standards iii) Rising population iv) Changes in
social outlook
Alternatives-:
a) i and ii b) ii and iii c) i, ii, iii d) I and iv
Answer c
7. “Since independence India has witnessed a considerable fall in Infant
Mortality rate.” Identify which of the following may not be one of the reasons
for fall in infant mortality rate?
a) Improvement in educational standards over the years.
b) Improvement in health facilities over the years.
c) Technological expansion over the years.
d) Fall in the standard of living of population over the years.
Answer d
8. Education Commission has recommended that at least ___ percent of GDP
should be spent on education.
a) 5 b) 3 c) 2 d) 6
Answer d
9. RTE was enacted in year
a) 2006 b) 2007 c) 2008 d) 2009
10. “India faces educated unemployment even though the number of educated
individuals ready for jobs has increased.” Which of the following is the most
likely reason for this?
a) The supply of labour is much higher than demand.
b) Investments in health have not taken place proportionately.
c) Although more students are enrolled in schools there is a high drop out rate.
d) Reverse migration has not been accompanied by alternative employment
opportunities.
Answer a
11. Match the following set of statements given in column I and column II and
choose the correct alternative-:

Column I Column II
A) Preventive medicine 1. Medical intervention during
illness
B) Medical research 2. Vaccination
body
C) Curative medicine 3. Spread of health literacy
D) Social medicine 4. ICMR

Alternatives

a) 2,4,3,1 b) 2,4,1,3 c) 4,3,1,2 d) 1,4,2,3

Answer b
12. The government organization that regulate education sector
a) NCERT b) ICMR c) UGC d) Both a and c
Answer d
13. Which of the following is not false?
a) Higher education takes a major share of the total educational expenditure in India.
b) No education cess is imposed by the government on all union taxes.
c) Human development is based on the idea that education and health are integral to
human well- being
d) Education and literacy can be used as synonyms of each other
Answer c
14. Which of the following is not an example of physical capital?
a) Raw material b) machinery c) building d) education
Answer d
15. Why do firms insist that workers should work for a specific period of time
after on-the-job training?
A) To limit workers' career choices
B) To recover the costs of training and benefit from enhanced productivity
C) To provide workers with extended vacation time
D) To reduce the need for healthcare services
Answer: B) To recover the costs of training and benefit from enhanced productivity
16. How does health expenditure contribute to the supply of a healthy labor
force?
A) By reducing the need for clean drinking water
B) By increasing the demand for medical intervention
C) By preventing illness through vaccination and clean water provision
D) By decreasing the need for social medicine
Answer: C) By preventing illness through vaccination and clean water provision

Assertion Reason questions-:

1. Assertion: Education is a fundamental driver of economic growth.
Reason: An educated workforce is more productive and innovative, contributing to
increased economic output.
Answer: Both the assertion and the reason are correct, and the reason explains the
assertion.
2. Assertion: Health expenditure is essential for human capital formation.
Reason: It indirectly improves the health and productivity of the labor force.
Answer: Reason is incorrect.
3.Assertion: On-the-job training is an investment in human capital.
Reason: It enhances the skills and productivity of workers, leading to increased
company profits.
Answer: Both the assertion and the reason are correct, and the reason explains the
assertion.
4. Assertion: Curative medicine is a form of health expenditure.
Reason: It aims to reduce the occurrence of illnesses and minimize the need for
costly medical interventions.
Answer: Reason is incorrect.
5. Assertion: The primary reason for rural-urban migration in India is the
availability of social amenities in urban areas.
Reason: Rural areas lack access to education, health, and other services, driving
people to migrate to urban centers.
Answer: The assertion is incorrect, but the reason is correct
6. Assertion: Expenditure on acquiring information about labor markets and
education is a form of human capital investment.
Reason: Informed individuals are more likely to make efficient choices regarding
their education and career paths.
Answer: Both the assertion and the reason are correct, and the reason explains the
assertion.
7. Assertion: Physical capital is not easily mobile between countries.
Reason: Physical capital is heavy in weight.
Answer: Assertion is false
8. Assertion: Investment in education is one of the source of human capital
formation.
Reason: Educated people earn better than uneducated people
Answer: Both the assertion and the reason are correct, and the reason explains the
assertion.
9. Assertion: Investment in early childhood education has a limited impact on
human capital.
Reason: Early childhood education primarily focuses on play and socialization, not
on skill development.
Answer: The assertion is incorrect
10. Assertion: Expenditure on vocational training is a source of human capital
formation.
Reason: Vocational training equips individuals with specific skills that make them
more employable.
Answer: Both the assertion and the reason are correct, and the reason explains the
assertion.
Statement Based Questions-:
1. Statement 1: Technological advancements in education have reduced the
importance of traditional classroom learning.
Statement 2: Access to quality education is a critical determinant of short-term
economic success.
Answer: Statement 2 is false
2. Statement 1: Government subsidies for higher education contribute to human
capital development.
Statement 2: Education provides the knowledge and skills, while healthcare ensures
the physical and mental well-being necessary for productive employment.
Answer: Both the statements are true.
3. Statement 1: The potential for enhanced earnings in the new location outweighs
the costs associated with migration.
Statement 2: Better Employment opportunities in rural areas is a key factor
motivating people to migrate to urban areas.
Answer: Statement 2 is false
4. Statement 1: On the job training help to bridge a gap between theoretical concepts
and practical experiences.
Statement 2: On the job training update the employees, with the latest changes in
their work field.
Answer: Both the statements are true
5. Statement 1: Human capital formation decreases by the way of investment in
education and health.
Statement 2: Human capital treats human beings as an end.
Answer: Statement 1 is false
6. Statement 1: People spend to acquire information relating to the labour market
and other markets like education and health.
Statement 2: Migration in both these cases involves cost of transport, lower cost of
living in the migrated places and psychic costs of living in a strange sociocultural
setup.
Answer: Statement 2 is false
7. Statement 1: Higher income causes building of high level of human capital and
vice versa, that is, high level of human capital causes growth of income.
Statement 2: India has a low stock of scientific and technical manpower in the
world.
Answer: Statement 2 is false.
8. Statement 1: Expenditures on education and health make substantial long-term
impact and they can be easily reversed.
Statement 2: Individual consumers of education and health do not have complete
information about the quality of services and their costs
Answer: Both the statements are false
9. Statement1: The National Education Policy 2020 states that the world is
undergoing rapid changes in the knowledge landscape.
Statement 2: It is difficult to establish a relation of cause and effect from the growth
of human capital to economic growth.
Answer: Both the statements are true
10. Statement 1: The peers, educators and society influence the decisions regarding
human capital investments even at the tertiary level.
Statement 2: Physical capital is tangible and cannot be easily sold in the market.
Answer: Statement 2 is false.
Case Study
Case Study 1
On-the-job training, also known as OJT, is a hands-on method of teaching the skills,
knowledge, and competencies needed for employees to perform a specific job within
the workplace. Employees learn in an environment where they will need to practice
the knowledge and skills obtained during their training.
On-the-job training uses the existing workplace tools, machines, documents,
equipment, and knowledge to teach an employee how to effectively do their job.
Consequently, no stand-ins exist that will require an employee to make the training
transfer to the workplace.
Questions:
1. How is on-the-job training source of human capital formation?
2. Why are workers required to work for a certain period after the on-the-job
training?
3. Which are the two different forms of on-the-job-training?
4 What is on-the-job-training?

Case Study 2
In the last decade, India's Education system has undergone a sea of changes and
improvements. There are changes in demand for courses, quality and access to
content and the most notable has been the move from physical to virtual. The advent
of online courses has made education accessible to all in the country. The
introduction of the New Education Policy in 2020 has made online education a part
of all education efforts in the country.
Covid has caused a tectonic change in the way education was delivered. “Hybrid” &
“Blended” became buzzwords in the education sector also. Experiential and project-
based learning has become an integral part.
Some of the significant changes have been:
Increasing digitalization: In the last 9 years, The Modi government has initiated and
executed various programs for digitizing the whole education sector. Making digital
classrooms, e-learning platforms, and giving away laptops for students so the
learning can’t stop, are some of the examples of this digitizing India initiative.
Recently we have launched AISECT Learn, a future-ready eLearning platform
designed for up-skilling and knowledge building.

Skill-based education: In the last decade, the government has emphasized a skill-
based education system to make the youth of India more future ready. The Indian
education system has shifted from the traditional way of learning to a more practical
and skill-oriented approach. The emphasis is on the holistic development of students
and nurturing their talents so they can flourish in any career path they choose in the
future. We have established Central India’s First NEP & NSQF aligned Skills
University, Scope Global Skills (SGS) University
Emphasis on Vocational education: The industry-employment gap goes beyond
formal education streams. The government has increased the focus on vocational
education to equip students with relevant employable skills. Initiatives like the
National Skill Development Mission and Skill India aim to provide vocational
training and skill development opportunities to students. Rabindranath Tagore
University (RNTU) Offers B.Voc & M.Voc courses in multiple streams to make
students industry ready.
Reforms in evaluation methods: The education system has seen substantial changes
in the way students are assessed and evaluated. The grading system, Continuous and
Comprehensive Evaluation (CCE), and online examination systems are a few
examples of the reforms the Modi Government brought for the betterment of our
education system.
Inclusivity: The government believes everyone deserves an equal opportunity to
educate themselves which will lead to a better and improved nation. With that vision,
The Government has made multiple efforts to make education more accessible and
inclusive, especially for girls, minorities, and economically deprived sections of
society.
Introducing National Education Policy 2020: The government has implemented
National Education Policy 2020 with an aim to transform the education system from
a content-based approach to a more holistic and multifaceted approach.
Overall, the Indian education system has evolved remarkably in the last decade, with
a focus on digitalization, skill-based education, vocational training, inclusivity, and
examination reforms.

Questions:
Q1. What were the problems in education system of India?
Q2. What is the aim of NEP?
Q3. What are the significant changes which have been done in the education sector
of India?

Short Answer questions-:

Q1. Why there is a need to promote women’s education in India.
Ans: Women’s Education need to be promoted because:
a) They can become economically independent
b) Women education makes favorable impact on fertility rate & health care of
women and children.
Q2. How is human development a broader term as compared to human capital?
Ans: Human capital is a narrow concept which treats human beings as a means to
achieve an end which is higher productivity, failing which the investment is not
considered to be productive.
Human development is a broader concept which considers human beings as ends in
themselves. Human welfare can be achieved through investments in education and
health. It considers welfare—a right of every individual irrespective of their
contribution to labour productivity. Every individual has right to be literate and lead
a healthy life.
Q3. Mention two government organisations each that regulate the health and
education sectors.
Ans: In India, the ministries of education at the Centre and State level, departments
of education and various organisations such as National Council of Educational
Research and Training (NCERT), University Grants Commission (UGC) and All
India Council of Technical Education (AICTE) regulate the education sector.
Similarly, the ministries of health at the Union and State level, departments of health
and various organisations like Indian Council for Medical Research (ICMR) regulate
the health sector.

Q4. Education is considered an important input for the development of a

nation. How?
Ans: Expenditure on education is an important source of capital formation.
Education is an important source of human capital formation, because:
1. It generates technical skills and creates a manpower which is suited for improving
labour productivity. It, thus, results in sustained economic development.
2.It tends to bring down birth rate which, in turn, brings decline in population
growth rate. It makes more resources available per person.
3. It results in social benefits since it spreads to others who may not be skilled. Thus,
investment in education leads to higher returns in future.

Q5. Discuss the following as a sources of human capital formation

(a) Health infrastructure
(b) Expenditure on migration.
Ans: Health Infrastructure. Health is another important source of human capital
formation. Preventive medicine (vaccination), curative medicine (medical
intervention during illness), social medicine (spread of health literacy) and provision
of clean drinking water and good sanitation are the various forms of health
expenditure. Health expenditure directly increases the supply of healthy labour force
and is, thus, a source of human capital formation.
Migration. People sometimes migrate from one place to the other in search of better
job. It includes migration of people from rural areas to urban areas in India and
migration of technical personnel from India to qther countries of the world.
Migration in both these cases involves cost of transport, higher cost of living in the
migrated places and psychic costs of living in a strange socio-cultural set-up. The
enhanced earnings in the new place outweigh the costs of migration. Expenditure on
migration is also a source of capital formation.

Q6. Establish the need for acquiring information relating to health and
education expenditure for the effective utilisation of human resources.
Answer. People need to have information on the cost and benefit of investment in
health and education. When people know the benefits of their investment in these
two areas, they make more expenditure. The result is more human capital formation.

Q7. ‘There is a downward trend in inequality world-wide with a rise in the

average education levels.Comment.
Answer. This is true, because education makes everyone equal and they earn similar
salaries. It reduces inequalities of income world wide.

Q8. Bring out the need for on-the-job-training for a person.

Answer. Technical training adds to the capacity of the people to produce more.
Firms given on-the-job- training to enhance the productive skills of the workers so
as to enable them to absorb new technologies and modem ideas. It can be given in
two forms:
The workers may be trained in the firm itself under the assistance of a senior and
experienced worker. The workers may be sent off the firm campus for the training.

Q9. Argue in favour of the need for different forms of government intervention
in education and health sectors.
Answer. Government intervention in education and health sectors is necessary
because of the following reasons:
a)Education and health care services create both private as well as social benefits.
Both private and public institutions are needed to provide these services and
government must keep its control on them.
b)Expenditure on education and health institutes are important for the growth of a
nation. The private providers of education and health services need to be regulated
by the government.

Long Answer Question-:

Q1. What are the main problems of human capital formation in India?
Answer. Main problems of human capital formation in India are:
1. Rising Population. Rapidly rising population adversely affects the quality of
human capital formation in developing countries. It reduces per capita availability
of existing facilities. A large population requires huge investment in education and
health. This diverts the scarce money to production of human capital at the cost of
physical capital.
2. Long Term Process. The process of human development is a long term policy
because skill formation takes time. The process which produces skilled manpower
is thus slow.
3. High Regional and Gender Inequality. Regional and gender inequality lowers the
human development levels.
4. Brain Drain. Migration of highly skilled labour termed as “Brain Drain” adversely
affects the economic development.
5. Insufficient on-the-job-training in agriculture. Agriculture sector is neglected
where the workers are not given on-the-job training to absorb emerging new
technologies.
6. High Poverty Levels. A large proportion of the population lives below poverty
line and do not have access to basic health and educational facilities. A large section
of society cannot afford to get higher education.

Q2. Trace the relationship between human capital and economic growth.
Answer. Human capital formation raises the process of economic growth and
economic growth raises the process of human capital formation. There is a cause and
effect relationship between human capital and economic growth. It is shown in the
figure.
Q Interpret the following picture on the account of source of human capital

Q Interpret the following picture on the account of the relationship between

human capital and economic growth
Interpret the following table: