Unit - 1
• Economic Planning means “It is an outline or broad statement of
schemes on programmes designed to realize certain pre-determined
economic objectives, in a particular order of priorities, according to a
strategy within a specified period of time is called Economic Planning.”
If the government fallows the plans for the development of economy is
called plan policy.
• USSR (Russia) was the first country introduced planning in the world in
• After grate economic depression all countries tried to implement
Russian planning model.
• Netaji Subhash Chandra Bose was first recognized economic planning
• After the Second World War all the developed countries followed
Russian economic planning model.
• Centralized Planning: The resources are allocated into different sectors
and activities used to be done by the Central planning commission is
called Centralized planning.
• Decentralized Planning: Plans prepare at various levels i.e. Central
level by central planning commission, state level by state planning
commission and district level by District planning commission and
village level by Panchayati planning commission is called Decentralized
• Physical Planning: It means, if the resources are allocated in terms of
men, materials and machinery is called physical planning.
• Financial Planning: If the resources allocated in terms of outlay it is
called financial planning.
• Rolling Plan: A variant of short-term plans is what has come to be
known as rolling plans. Two major aspects of rolling plans: first, in a
rolling plan, the central outlay allotment for major sectors within the
overall five-year plan targets will be fixed on a yearly basis. Secondly,
the five year horizon (scope) will be extended each year by changing
the select central targets for an additional year.
• Indicative Planning: It provides direction for the development of the
economy by spelling (bring) out clear goals and providing help in
reaching them. These types of plans started first time in France during
• Structural Planning: If the plans involve changing the socio-economic
institutions it is called the structural planning.
• Long-run Plans: if the plans prepare for 10, 15, 20 and even more its
called long run plan. This also called Perspective plans.
• Medium term plan: it covers minimum period is 3 to 5 years and
maximum is 7 to 10 years.
• Short run Plan: It relates to as short a period as one year.
• Fixed term plans: if the plans fixed for particular period of time is
called fixed term plan.
• Imperative Planning (Comprehensive Planning): This type of plans
fallows the socialistic countries. In this model plans will not prepare
according consumers. All economic activities will determined by
Government. This is also called Compressive Plans.
Before 1950 Economic Planning in India:
• In 1934 M. Visweswarayya wrote “Planned for economy for India” and
he prepared plans for 10 years to India.
• In 1938 Indian National Congress established National Planning
Commission under the chairmanship of Pandit Jawaharlal Nehru. This
commission estimated natural resources, Human resources, plan
outlay in India.
• In 1943-44, in Bombay 8 important Maharastrian industrialists
prepared a plan popularly known as “Bombay plan”. They prepared
plan for 15 years to increase industrial, agricultural product and
service product. This plan draft prepared under the chairmanship of
• In 1943-44 M.N. Roy prepared “Peoples Plan”, in which more
importance was given to Agriculture, Village production based on
Ghandhian ideology. This plan was given more importance to increase
double per capita income in 10 years.
• In 1944 S.N. Agarwal prepared Ghandhian Plan based on the Gandhi
ideology. This plan was given more important to small scale industries,
Labour intensive method and rural development.
• In 1944 government established Planning and Development
department under the chairmanship of Adarsh Dalal.
• In 1946, interior government established advisory planning council
under the chairmanship of K.C. Niyogi to study and discuss the
problems of plans and development.
• In 1948, National Planning Commission recommended to Planning
Commission as advisory body.
• In 1950 Jayaprakash Narayana prepared Sarvodaya Planning. This
plan was given more important to agriculture, industries.
Features of Indian planning:
• Indian planning is based on mixed economy where public and private
sectors both existed in economy.
• Indian plans are preparing based on market oriented decisions
• Indian plans are based on Capital accumulation.
• Centralized Planning followed in Indian planning till the 7th Plan.
• Since 8th plan Indicative Planning following in Indian Planning.
• To achieve directive principle of state policy targets planning
commission established with parliament act.
• Planning commission established as advisory body.
• Prime Minister is the ex-officio chairman to the planning commission.
• One Deputy Chairman Will appointed to planning commission with
cabinet status. He will act permanent executive officer.
• Prime Minister Economic Advisory Council is a nodal agency to
• Present Prime Minister Economic Advisory Council chairman is Dr.
• Planning Commission is established on March 15, 1950 in India by the
Parliament Act, so it is not a Constitutional body and it is non –
• Planning Commission is only Advisory Body to government of India.
• The executive head or permanent employ to Planning Commission is
• Programme Evolution Organization (PEO) and National Informatics
Centre (NIC) are affiliated bodies to Planning Commission.
• PEO established in 1952 based on the government of India and Ford
• PEO will report various types of development activities to Planning
• NIC provide information and technological machines to Planning
• National Development Council (NDC) constituted on August 6, 1952. It
is also non-statutory body and non constitutional body.
• National Development Council constituted based on the
recommendation of Advisory Planning Council which was headed by
K.C. Niyogi (1946).
• Prime Minister is the Chairman of National Development Council.
• Planning commission members, all states, Pondcherry and Delhi Chief
Ministers and Union Territories Administrators are the members of
National Development Council.
• After 1967 all central cabinet ministers are the members in National
• Planning commission is preparing plans and this draft is sending to
National Development Council and after assent of National
Development Council plans are implanting by the government.
• Andhra Pradesh Planning Board established in 1974.
Strategies in Indian Planning:
Harrod – Domar Strategy:
• During the first five year plan this strategy followed in India
• Harrod and Domar both gave more important for capital accumulation
• According then capital accumulation have double character. The capital
accumulation can increase income one side and anther side production
• They tried to increase full employment in the long-run period
• Harrod wrote one book called Towards a dynamic economics in 1959
• In the Harrod model 3 main concepts are there
1. Actual rate of growth (G)
2. Warranted rate of growth (GW)
3. Natural rate of growth (GN)
• According Harrod growth rate = S/COR
• S= Saving
• COR= Capital output Ratio
• Domar wrote the fallowing books
1. Capital expansion
2. Rate of growth and employment
3. Essays in the poverty of economic growth
• He gave more important dual investment character
• According him investment increases productivity and real income also
• According him full employment get equilibrium when aggregate
demand is equal to aggregate supply
• Mahalanobis 2 sector model implemented during 3rd and 4th five ear
• Mahalanobis 4 sector model implemented during 2nd, 5th, 6th and 7th
five year plan.
Gandhian Strategy: This strategy implemented during rolling plan from
1978-79 to 1980-81.
Rao-Manmohan strategy: This strategy is also called Liberalization,
Privatization and Globalization (LPG model). This policy is also called new
economic policy. Since 8th five plan plannings are preparing based on LPG
• PURA prepared by A.P.J.Abdulkalam in 2003.
• PURA announced by government on August 15th, 2004.
• Since 2005 plans are preparing based on PURA strategy in the part of
Bharaat Nirman programme.
Objective of Indian planning: Each and every plan having their own
objectives. Along with that’s objectives Indian planning having common
objectives to follow in every plan.
• Growth: By increasing faster growth of economy in case of capital
goods and consumption goods.
• Modernization: Institutional changes and shifting feudal and colonial
economy to progressive and independent economy
• Self-Reliance: The reduction and ultimately elimination of dependence
on foreign aids and increase exports to earn foreign reserves for
• To reduce regional imbalance and income inequalities
• Economic and Social Justice
Plans are necessary for the country to achieve Socio Economic justice of the
In India plans are preparing for five years, so our plans are calling as five
In India five year plans are implementing since April 1, 1951.
Financial resources to plannings in India:
India planning commission is mobilizing resources through 3 ways. One is
domestic resources, foreign sources and deficit financing.
• Production of goods and services
• Public enterprises
• Administrative income and others
• World Bank
• International Monetary Fund (IMF)
• Asian Development Bank (ADB)
• Other international banks
• Foreign governments and foreign institutions and foreign individuals
• Currency printing
• Domestic loans
First Five year Plan:
• First five year plan period was April 1, 1951 - March 31, 1956.
• This plan was given more important to Agricultural sector.
• Increase of food production and correction of disequilibrium in the
economy caused by the Second World War and partition of India are
the other importance of this plan.
• First five year plan called as Agriculture and irrigation plan.
• This plan was prepared based on the Harrod- Domar model.
• First five year plan proposed outlay was Rs 2378, but actual
expenditure was Rs 1960 and private sector investment was Rs 1800.
• This plan was allocated 31% funds to Agricultural sector.
• This plan target growth rate was 2.1%.
• This plan actual growth rate was 3.6%.
• Food grain production target was 61.6 million tones but actual
production was 65.8 million tones from 52.2 million tones.
• Irrigation facility providing target was 70.7 million acres but actual
irrigation facilities provided only 56.2 million acres.
• Industrial growth rate during this plan was 3.8%.
• Electricity production target was 3.6MKW but actual production was
• NI Target was 11% But actual growth rate was 18%
• Per capita income also increased 11% (from Rs. 246 to Rs. 274)
• Per capita consumption level increased to 8% during this plan.
• During this one locomotive Rail factory at Chittaranjan in West Bengal
• Hindustan Cable industry at Durgapur in WB.
• National Instruments Factory established at Calcutta
• Fertilizer factory at Sindhri in Jharkhand established.
• Hindustan Ship yard at Vishakhapatnam.
• Integral Coach Factory established at Perambadur in Tamilnadu.
• Hindustan Machine tools established at Mysore in Karnataka.
• Indian Telephone Industry established at Bangalore.
• Bakra-nagal project was constructed during this plan.
• In 1952 Community Development Programme (CDP) started to over all
the development of villages with people participation.
Details of Public Sector Outlays of First Five year plan:
S.NO Sectors Expenditure Percentage
(Rs. In core)
1 Agriculture and Community 291.00 15.00
2 Large & medium irrigation 310.00 16.00
3 Power 260.00 13.00
4 Village and small scale 43.00 2.00
5 Industry and minerals 74.00 4.00
6 Transport & Communication 523.00 27.00
7 Social services and others 459.00 23.00
8 Total 1960.00 100.00
Second Five Year Plan:
• Second five year plan period was April 1, 1956 – March 31, 1961.
• This plan was prepared based on the P.C. Mahalanobis model.
• This plan was given more important to Rapid industrialization with
special emphasis on basic and Heavy industries.
• Provide more employment opportunities, reduction income inequalities
and economic distribution power were other important objective of this
• This plan known as Industrial and Transport plan
• This plan gave more important to Public sector than the Private sector.
• Public sector proposed outlay was Rs 4800 cores but actual
expenditure by the Government was only Rs 4672 cores and Private
sector investment under this plan was Rs 3100 cores.
• This plan targeted GDP at 5% and later reduced to 4.5% but actual
growth rate was only4.3%.
• Per capita growth rate was 2%.
• Food grain production increased from 65 MT to 75 MT (it is 15%).
• Irrigation increased from 22.5 million hectors to 28 million hectors.
• Power production increased from 3.4 MKW to 5.7 MKW.
• Around 9 million jobs created during the plan period
• General prices level increased 30% during this plan.
• 27% funds were allocated to Transport and Communication.
• 24.1% of funds allocated for heave and small scale industries.
• 1228KM of new rail lines & 3520KM of new roads were constructed
• Rs. 948 cores currency was issued during this and this was caused to
high inflation during this plan.
• In 1959 Bhilai iron and steel industry in Chattisgarh Pradesh with
cooperation of former USSR established during this plan.
• In 1955-56 agreement over and established during second five year
plan the Roorkela iron and Steel industry in Orissa with cooperation of
West Germany established.
• In 1960 Durgapur Iron and Steel industry in West Bengal with
cooperation of United Kingdom established.
• Production capacities of Tata Iron steel company, Indian Iron Company
and Mysore Iron and Steel Company further increased.
• Heavy engineering industry established at Ranchi in Jharkhand.
• 9.5 million Employment opportunities provided during this plan.
• One Industrial resolution based on socialistic economy introduced in
1956 popularly known as 1956 Industrial Resolution Policy.
Details of Public Sector Outlays of Second Five year plan:
S.NO Sectors expenditure Percentage
(Rs. In core)
1 Agriculture and Community 549.00 11.70
2 Large & medium irrigation 430.00 9.20
3 Power 452.00 9.70
4 Village and small scale 187.00 4.00
5 Industry and minerals 938.00 20.10
6 Transport & Communication 1261.00 27.00
7 Social services and others 855.00 18.30
8 Total 4672.00 100.00
Third Five Year Plan:
• Third five year plan period was April 1 1961 to March 31, 1966.
• This plan was prepared based on the Ashok Mehata model.
• This plan was given more important to Self-reliance, Self-sufficiency in
food grains and substantial expansion of employment opportunities.
• Targeted GDP growth rate was 5.6%, but actual growth rate was
• NI per annum target was 6% but it was declined too 4.2%
• Food grain production was targeted at 6% but actual growth rate was
• Industrial annual growth rate target was 14%, but actual growth rate
was only 5.7%.
• Currency (Rupee) is devaluated in this plan.
• In 1964, Bokaro iron and Steel industry at Bokaro in Jharkhand state
established with cooperation of Russia.
• Total investment during this plan was Rs.12677 cores.
• Public sector proposed outlay was Rs.7500 cores but actual
expenditure was Rs.8577 cores.
• Private sector investment was Rs.4100 cores.
• This plan was failure due to War with China in 1962 and War with
Pakistan in 1965 and failures of monsoons, because of these reasons
Government diverted funds foe defence purposes and the development
programmes could not be properly implemented.
• In 1963 National Co-operative Development Corporation (NCDC)
• In 1963 Agriculture Refinance Development Corporation (ARDC)
• In 1964 Unit Trust of India (UTI) and Industrial Development Bank of
India (IDBI) established
• In 1965 Food Corporation of India (FCI) and Agricultural Price
Commission (APC) established
Details of Public Sector Outlays of Third Five year plan:
S.NO Sectors Expenditure Percentage
(Rs. In cores)
1 Agriculture and Community 1089.00 12.70
2 Large & medium irrigation 664.00 7.80
3 Power 1252.00 14.60
4 Village and small scale 241.00 2.80
5 Industry and minerals 1726.00 20.10
6 Transport & Communication 2112.00 24.60
7 Social services and others 1493.00 17.40
8 Total 8577.00 100.00
In 1st, 2nd and 3rd five year plan government fallowed Trickle down Theory.
Trickle down theory means government gave more important to increase
economic growth. Government planned to reduce poverty, unemployment
and income in equality reduces if economic growth increases this concept is
called Trickle down theory.
Annual Plans: (1966-1969):
• Due to failure of third five year plan Government of India did not
implemented fourth five year plan.
• Some time stopped five year plans and implemented 3 Annual plans by
replacing five year plan.
• This period (April 1, 1966 to March 31, 1969) known as plan holiday in
Indian planning period.
• The main objective of Annual Plans are:
1. To remove the strains in the economy arising from many
unforeseen events during the third plan.
2. To secure a feasible growth rate without generating inflationary
pressures in the economy.
3. To have fuller utilization of the infrastructure already created
during previous plan periods.
• Annual plans given more importance to irrigation and Agriculture
sector and to control inflation y increasing agricultural production.
• 1966-67 Annual plan outlay was Rs.2081 core and further increased to
• 1967-68 Annual plan outlay was RS.2246 cores.
• 1968-69 Annual plan outlay was Rs.2377 cores.
• Growth rate in GDP increased 1.1% during 1966-67, 9.9% during
1967-68 and 10.2% during 1968-69.
• Industrial growth rate was 2.8% during 1966-67, 2.2% during 1967-
68 and 7% during 1968-69.
• Agricultural production increased from 76MT in 1966-67 to 95.1MT in
1967-68 and 98MT in 1968-69.
• These three annual plans paved the way for removing the strains on
economy caused by failure of the Third plan.
• In 1968 government started National Textile Corporation.
• In 1969 Lead bank scheme started based on the recommendation of
Fourth Five Year Plan:
• Fourth five year plan period was April 1, 1969 to March 31, 1974.
• This plan prepared based on the D.R. Gadgil model.
• Leontiff input and output model implementing since 4th five year
plan in India.
• This plan given more importance to Attainment of Economic
stability and Self-sufficient in food grain production.
• Social and economic justice by providing more employment
opportunities to weaker sections and balanced regional
development to generate the confidence among the people in
planning, which was almost lost due to the failure of Third five year
• Total investment during this plan was Rs.24759 cores.
• Public sector proposed outlay was Rs.15902 cores, but actual
expenditure was Rs.15779 cores. And Private sector investment
was Rs.8980 cores.
• Agricultural target growth rate was 5%.
• Industrial target growth rate was 8-10%, but actual growth rate
was only 3.9%.
• Exports target growth rate- 7%.
• Per capita target growth-1%.
• GDP target growth rate-5.7%, but actual growth rate was only
• Food grain production increased from 98 MT to 125MT.
• During the fourth plan general prices increased to 61%.
• At the end of fourth plan then and now Prime Minister Mrs. Indira
Gandhi gave slogan of “Garibi Hatavo” to eradicate poverty in
• In 1970-71 Rural Works Programme started
• In 1971 North East Council established
• Crash Scheme for Rural Employment (CSRE) introduced in 1971-72
for rural development through the generation of new employment.
• Pilot Intensive Rural Employment Programme (PIREP) introduced in
1972-73 for construction work in village.
• In 1972-73 employment guarantee scheme in Maharastra started
by central government.
• In 1973-74 Marginal Farmers and Agriculture Labour Agency
• During this five year plan government implanted 6 points formula
for backward development area and started regional development
• Drought Prone Areas Programme (DPAP) introduced in 1973-74 to
develop natural resources in drought prone areas.
• In 1974-75 Small Farmers Development Agency (SFDA) started
• In 1972-73 there was surplus in Balance of Trade
• In 1969 July 14 banks were nationalized
• In 1969 Monopoly Restriction on Trade and Practice (MRTP) act
made to decentralize the economic concentration.
• In 1969 Rural Electrification Corporation started
• In 1973 Foreign Exchange Regulated Act (FERA) made by the
• In 1974 Andhra Pradesh Planning board established.
• The following industries established during the fourth five year
1. Salem Steel plant at Salem in Tamilnadu.
2. Vishaka Steel plant at Vishakhapatnam in Andhra Pradesh.
3. Vijayanagaram Steel plant at Vijayanagaram in Karnataka.
4. Alloy Steel plant at Durgapur in West Bengal.
• To control Steel plants Government of India established Steel
Authority of India Limited (SAIL) in 1973.
Details of Public Sector Outlays of Fourth Five year plan:
S.NO Sectors Expenditure Percentage
(Rs. In core)
1 Agriculture and Related Area 2320.00 14.70
2 Irrigation and Flood Control 1354.00 8.60
3 Power 2932.00 18.60
4 Village and small scale 243.00 1.50
5 Industry and minerals 2864.00 18.20
6 Transport & Communication 3080.00 19.50
7 Social services and others 2986.00 18.90
8 Total 15779.00 100.00
Fifth Five Year Plan:
• Fifth five year plan period was April 1, 1974 to March 31, 1979.
• But Janata Government terminated before one year.
• This plan prepared based on the D.P.Dhar Model.
• This plan was give more importance for poverty eradication, Self-
Reliance, to control Inflation and Reduction of Economic Inequalities.
• National Income target growth rate was 5.5%, but actual growth rate
• GDP target first was 5.5% but it reduced to 4.4%, but actual growth
rate was 4.83%.
• In 1974 Minimum Needs Programme was started.
• 1st July, 1975, 20 points formula stared.
• During this five year plan RRBs established on 2nd October, 1975.
• Food grain production target was 125 MT. but did not reach.
• Agriculture growth target was 3.3%, but actual growth rate was
• Industrial growth rate was 6.2%.
• Electricity production growth rate was 9%.
• Total public sector outlay was Rs.39, 000 cores, but actual expenditure
was 39, 426Cores.
• 19, 893 cores funds allocated for the development programmes.
• Self-reliance was one of the objectives of the plan but during this plan
Rs.5830 Cores taken the foreign aid.
• Exports were encouraged in this plan, but due to low level production
and rapid population growth resulted in a increase of prices and
• The fifth plan started with problem and ended with problem. But
overall satisfactory is good.
• Janata Government came into power in March 1977 and terminated
fifth five year plan one year before i.e. after four years it was
completed and started the concept of rolling plan.
• In 1976 National Population Policy first time announced by the central
• In 1977 National Institute of Rural Development established at
• In 1977-78 Food for Works Programme started by government
• In 1977-78 Antyodaya Yojana started by central government in
S.NO Sectors expenditure Percentage
(Rs. In core)
1 Agriculture and Related Area 4,865.00 12.40
2 Irrigation and Flood Control 3,877.00 9.80
3 Power 7,400.00 18.80
4 Industry and minerals 9581.00 24.30
5 Transport & Communication 6870.00 17.40
6 Social services and others 6833.00 17.3
7 Total 39,426.00 100.00
• The Janata Government ended the fifth five year plan one year earlier
to its term i.e. only within four years span (1974-78) and introduced a
new plan since April 1, 1978.
• This plan was named as the Rolling plan.
• Rolling plan period was 1978-1980.
• The concept of rolling plan was introduced by Gunnar Myrdal in Asian
• Ghandhian Strategy was fallowed during the Rolling plan.
• Rolling plan given more important for village and cottage industries.
• In the first phase of this rolling plan, the sixth plan was initially started
for 5 years (1978-83) on April 1, 1978.
• In 1980, the sixth plan (rolling plan) prepared by the Janata
Government was abandoned by the congress Government and a new
sixth plan was introduced for the period 1980-85.
• In 1979 Training for Rural Youth Self employment programme started
but this was merged with Swarna Jayanthi Gram Swarajgari Yojana in
• According planning commission (in 1979) poverty line means 2400
calories per day consumption in rural area and 2100 calories in urban
Sixth Five Year Plan:
• Sixth five year plan period was April 1, 1980 to March 31, 1985.
• D.T Lakdawala model prepared during the sixth five year plan
• The main objectives of the sixth five year plan were elimination of
unemployment, eradication and poverty, higher rate of economic
growth and self-reliance in technology.
• Other objectives:
1. To achieve higher rate of growth of economy by way of optimum
utilization of available resources and by improving productivity.
2. To bring a rise in the standard of living of the poorest of the
3. To reduce inequalities in income and wealth.
4. To provide basic need like drinking water, health care and roads
to rural areas.
5. GDP target was 5.2%, but actual growth rate was 5.7%.
6. NI annual average growth rate was 5%. PCI Increased around
7. Food grain production target was 154 MT, but actual production
was 151.5 MT.
8. Industrial production of target growth rate was 7%, but actual
growth rate was 5.5%
• In 1980 total 6 banks were nationalized.
• 1980-(National Rural Employment Programme (NREP).
• 1980 Oct 2- Integrated Rural Development Programme (IRDP).
Actually this programme was introduced in 1978-89 but implementing
• July 12, 1982- National Agricultural Bank for Rural Development
• September 1982- Development of Women and Child in Rural Areas
• In 1982 EXIM bank established
• August 15, 1983- Rural Landless Employment Guarantee Programme
• February, 1984- NFRD (National Fund for Rural Development).
• March, 1985- IRBI (Industrial Reconstruction Bank of India).
• In 1984 government established Gas Authority of India Limited (GAIL)
to protect oil resources.
• In 1985 government made Sick Industrial Company Act (SICA)
• At the time of 1980 poverty was in India was 47%.
• This plan target to reduce the poverty was 30%, but actually poverty
reduced to 37%.
• Total sixth five year plan outlay was 1, 72, 210 cores.
• Public sector outlay was 97, 500 cores. But actual expenditure was 1,
09, 292 cores.
• Private sector investment was 74, 710 cores.
S.NO Sectors expenditure Percentage
(Rs. In core)
1 Agriculture 6624.00 6.10
2 Rural development 6997.00 6.40
3 Special area programme 1580.00 1.40
4 Irrigation and flood control 10930.00 10.00
5 Energy 30, 751.00 28.10
6 Industries and minerals 16, 948.00 15.50
7 Transport 14, 208.00 13.00
8 Communication, information 3, 469.00 3.20
and broad costing
9 S&T 1020.00 0.90
10 Social Services 15,917 14.60
12 Total 1,09,292.00
Seventh Five Year Plan:
• Seventh five year plan period was April 1, 1985 to March 31, 1990.
• This plan prepared based on the Vakil and Prof. Bramhanada wage
• The main objectives of this planning were promotion of efficiency
through modern technology and productivity, reduction of poverty,
unemployment and regional imbalances.
• Other importance:
1. Establishment of an independent self sufficient economy.
2. Establishment of the social system based on equality and justice.
3. Environmental protection.
• GDP target growth rate 5.0%, but actual growth rate was 6.0%.
• Food grain production wax 151.5 MT in 1985, it was reduced to 138.41
MT in 1987-88. But at the time ending of this plan (1990) it increased
to 172.17 MT.
• Industrial growth rate was 6%.
• Electricity generation capacity increased from 47705 MW (1985) to
58080 MW in 1989.
• In 1986 speed post system started in postal department.
• In 1986 government announced new educational policy and
established Navodaya schools and government gave important to
• In 1985-86 Integrated Crop Insurance Programme started
• In 1986 September Council for Advancement of People in Action and
Rural Technology (CAPART) established at New Delhi.
• In 1986 Self Employment Programme for the Urban Poor (SEPUP)
• In 1988 Million Well Scheme started
• In 1988 Security Exchange Board of India (SEBI) established
• 1989 April JRY – started to provide employment facilities in rural
areas. And in this programme NREP, RLEGP, DWACRA and IRDP were
• 1989 September, NRY started to provide employment facilities in
urban areas. And in this programme SEPUP merged.
• Total out lay was 3, 48, 148 cores.
• Public sector outlay was 1, 80,000 cores. But actual expenditure was
• Private sector investment was 1, 68,148 cores.
S.NO Sectors expenditure Percentage
(Rs. In core)
1 Agriculture 12,793.00 5.80
2 Rural development 15,246.00 7.00
3 Special area programme 3470.00 1.60
4 Irrigation and flood control 16,590.00 7.60
5 Energy 61,789.00 28.10
6 Industries and minerals 29,220.00 13.40
7 Transport 29,548.00 13.50
8 Communication 8,426.00 3.90
9 S & T and Environment 3024.00 1.40
Economic services 2,250.00 1.00
11 Social Services 34,,960.00 16.00
General services 1514.00 0.70
13 Total 2,18,730.00 100.00
Prof Raj Krishna described the 7th five year plan as Hindu rate of growth
• Due to political instability and crisis in BOP five years plans could not
implemented during 1990-92.
• In 1991 congress again came into power and stared the 8th five year
• In 1990 SIDBI (small industrial development bank of India) started by
government for the development of small scale industries.
• In 1990 government started inter state council
• In 1990-91 Urban Poor Basic Service for the development of poor in
urban areas started.
• In 1991 government announce economic reforms in India.
Eighth Five Year Plan:
• Eight five year plan period was April 1, 1992 to March 31, 1997.
• 8th five year plan given more important for HRD, full employment and
• Indicative planning implemented since 8th five year plan onwards.
1. Universilization of elementary education and complete
eradication of illiteracy among the people within 15 to 35 years.
2. Provision of safe drinking water and health care system.
3. Strengthening of infrastructure.
4. GDP target growth rate was 5.6% and actual growth rate was
5. Highest growth rate was occurred in 8th five year plan.
6. Per capita income target was 3.8% but actual growth rate was
7. Mining and quarrying target growth rate was 8.1% Actual growth
rate was 4.1%.
8. Manufacturing target growth rate was 7.5% but actual growth
rate was 9.5%.
9. Electricity, gas, water supply target growth was 7.8% but actual
growth rate was 7.3%.
10. In 1993 PMRY (Prime Minister Rojgar Yojana) started to
provide self employment facilities for educated unemployers.
Economic Indicators of the 8th five year plan:
S.No Economic indicators Target Actual
1 Domestic Saving Rate at 21.6% 23.8%
2 Investment rate at GDPFC 23.2% 24.9%
3 ICOR 4.1% 3.7%
4 Export growth rate 13.6% 11.9%
5 Import Growth rate 8.4% 11.7%
6 BOP deficit in Current 1.6% 1.1%
• Total plan outlay was 7, 98, 100 Cores.
• Public sector outlay was 3, 61, 100 cores. But actual expenditure
was 4, 34,100 cores.
• Private sector investment was 4, 37,000 cores.
• First time private sector investment crossed the public sector
S.N Sectors expenditure Percentage
O (Rs. In core)
1 Agriculture 22,467.00 5.20
2 Rural development 34,425.00 7.90
3 Special area programme 6750.00 1.60
4 Irrigation and flood control 32,525.00 7.50
5 Energy 1,15,561.00 26.60
6 Industries and minerals 46,922.00 10.80
7 Transport 55,926.00 12.90
8 Communication 25,110.00 5.80
9 S & T and Environment 9,042.00 2.10
General and Economic 6,320.00 1.50
11 Social Services 79,012.00 18.20
12 Total 4,34,100.00 100.00
Ninth Five year Plan:
• Ninth five year plan period was April 1, 1997 to March 31, 2002.
• More importance given to Growth with social justice and equality,
Rural development and Agriculture.
• Other importance:
1. Faster growth rate of the economy with stable prices.
2. To provide nutritional food for weaker sections
3. To provide basic needs.
4. Reduction of the growth rate of population.
5. GDP target rate was initially 7% and later it was changed to
6.5%. But actual growth rate was 5.4%.
6. in 1997 government started Targeted Public Distribution System
(TPDS) to improve public distribution system in the country.
• 1997-98 annual growth rate 4.8%
• 1998-99 annual growth rate 6.5%
• 1999-2000 annual growth rate 6.1%
• 2000-2001 annual growth rate 4.0%
• 2001-2002 annual growth rate 5.6%
• Average for five years 5.4%
• Agriculture sector growth rate 2.1%
• Industrial sector growth rate 4.5%
• Services sector growth rate was 7.8%
Economic indicators of the 9th five year plan:
S.No Economic indicators Target Actual
1 Domestic Saving Rate at 21.1% 23.3%
2 Investment rate at GDPFC 28.2% 24.2%
3 ICOR 5.35% 4.0%
4 Export growth rate 11.8% 14.5%
5 Import Growth rate 10.8% 12.2%
• Total 9th five year plan outlay was 22, 05,000 cores.
• Public sector outlay was 8, 75,000 cores, but it was reduced to 8,
59,200 cores out this 4, 89,361 cores spent by center and 3, 69,839
cores spent by states and union territories (57:43 ratio by center and
states). But actual expenditure was 9, 41,041 cores.
• Private sector investment was 12, 63,959 cores.
Sectoral allocation of public sector during 9th five year plan:
S.N Sectors expenditure Percentage
O (Rs. In core)
1 Agriculture & related 37,239.00 3.96
2 Rural development 88,965.00 9.45
3 Special area programme 5,408.00 0.57
4 Irrigation and flood control 69,830.00 7.42
5 Energy 2,19,243.00 23.30
6 Industries and mines 44,695.00 4.75
7 Transport 1,43,249.00 15.22
8 Communication 92,836.00 9.86
9 S&T 15,667.00 1.66
10 Economic services 13,734.00 1.46
11 Social Services 1,94,529.00 20.67
12 General services 15,646.00 1.66
13 Total 9,41,041.00 100.00
Tenth five year plan:
• Tenth five year plan period was April 1, 2002 to March 31, 2007.
• Tenth five year plan given importance for integrated rural
development, poverty, employment creation and agriculture.
• NDC approved an average annual growth rate of 8% in GDP.
• Reduction of poverty by 5% (from 26% to 21%) by 2007 and to 15%
by 2012 but actual reduction in poverty is 19%by the end of 10th five
• Providing gain full employment.
• All children in school by 2003.
• Reduction in gender gaps in literacy rate and wage rates by 2007.
• Reduction of population growth to 16.2% between 2001 and 2011.
• Literacy rate to 75%.
• Reduction of IMR rate 45 per 1000 by 2007 (but actual reduction was
58 per 1000) and to 28 by 2012.
• Reduction of MMR rate to 2 per 1000 by 2007 (but actual reduction
was 4 per 1000) and it was to 1 per 1000 by 2012.
• Increase in forest and tree cover to 25% by 2007 and 33% by 2012.
• Safe drinking water to all villages by 2007.
• Cleaning of all major polluted rivers by 2007.
• 750 $ billion revenue target by attracting foreign investments.
• Disinvestment target is 78,000 cores.
• 5 cores employment creation. (actual 1.9 crore people got
• In 2003 FRBM act made by Govt. It is implementing since July 2004.
• Universal access to primary education by 2007.
• VAT implementation in central and state level.
• 10.3% taxes share to GNP by 2007.
• Reduction of administrative expenditure and subsidies.
• Reduction of non-plan expenditure from 11.3% to 9%.
Economic indicators of the 10th five year plan:
S. Economic indicators Targ Actual
1 Domestic Saving Rate at 23.3 26.62%
2 Investment rate at GDP 28.4 28.10%
3 ICOR -- 3.58%
4 Export growth rate -- 12.38%
5 Import Growth rate -- 17.13%
6 Current a/c deficit in GDP -- 1.57% (or)
7 Average inflation based 5% 5.02%
8 Agriculture sector growth 4% 3.42%
9 Industry sector growth 8.90 8.74%
10 Services sector growth 9.40 9.30%
11 GDP target growth rate 8% 7.8%
Average annual growth rate in different years:
Year Agriculture Industrial Services Average
2002-2003 -6.9% 7% 7.3% 3.8%
2003-2004 10% 7.6% 8.2% 8.5%
2004-2005 0% 9.8% 9.6% 7.5%
2005-2006 3.9% 9.6% 9.8% 9.0%
2006-2007 2.7% 10% 11.2% 9.4%
Average (2002- 3.42% 8.74% 9.30% 7.6%
Review of the 10th five year plan:
• GDP growth rate was 7.8%.
• Fiscal deficit was 8.4%.
• Foreign currency reserves was 185 $ billions.
• Foreign investments increase around 76%.
• Poverty is 19% by 2007.
• Unemployment growth rate was 8.3%.
• IMR was 58 per 1000.
• MMR was 4 per 1000.
• In August 15, 2003 PURA (Provision of Urban Amenities in Rural
Areas) announced by prime minister.
• On November 14, 2004 NFWP (National Food Work Programme)
• NREGP (National Rural Employment Guarantee Programme) launched
on November 2nd, 2006 at Anantapur district. NFWP and SJGSRY
(Swarna Jayanthi Gram Swaraj Rojgar Yojana)
• Total public sector outlay was 15, 92,300 cores. But actual expenditure
was 15, 25,639 cores. Out of this center’s share at Rs.9, 21,291 cores
and states & UTs share at Rs.6, 71,009 cores.
Sectoral allocation of public sector during 10th five year plan:
S.N Sectors expenditure Percentage
O (Rs. In core)
1 Agriculture & allied activities 58,933.00 3.86
2 Rural development 1,21,928.00 7.99
3 Special area programme 20,879.00 1.37
4 Irrigation and flood control 1,03,315.00 6.77
5 Energy 4,03,927.00 26.47
6 Industries and mines 58,939.00 3.86
7 Transport 2,25,977.00 14.81
8 Communication 98,968.00 6.49
9 S&T 30,424.00 1.99
Economic services 2.53
11 Social Services 3,47,391.00 22.77
12 General services 16,328.00 1.07
Total 15,25,639.0 100.00
Eleventh Five Year Plan:
• Eleventh five year plan period was April 1, 2007 to March 31, 2012.
• Planning commission prepared 11th five year plan approach paper on
19th October 2006.
• Planning commission had meeting on November 8, 2007. Under the
chairman ship of prime minister and approved by the planning
• NDC approved final draft of the 11th plan on December 19, 2007.
• This plan given more important to faster economic growth and
• GDP annual target growth rate is 9% and GDP target for five years is
• Investment rate in GDP is 35.1%. (Public sector -10.2% and private
• Domestic Saving rate target rate is 32.3%. (House hold-22%,
corporate sector-6.1%, public sector enterprises- 3%, government-
• Agriculture target growth rate is 4.1%.
• Industrial sector target growth rate is 10.5%.
• Services sector target growth rate is 9.9%.
• Per Capita should be increase double by 2016-17.
• 7 cores employment creation.
• Poverty reduced to 12%.
• Reduce the headcount ratio of consumption poverty by 10% points.
• Literacy rate should be increase to 80%.
• Dropouts should be reduced from 52.2% to 20% by 2012.
• Reduction of educated unemployment rate to below 5%.
• Raise the real wage rate of unskilled workers by 20%.
• Reduce IMR to 28% and MMR to 1 per 1000 birth lives by 2012.
• Reduce total fertility rate to 2.1%.
• Provide clean and drinking water for all by y 2009.
• Raise the sex ratio for age group 0-6 years to 935 by 2011-12 and to
950 by 20116-17.
• Ensure that at least 33% of the direct and indirect beneficiaries of all
government schemes are women and children.
• Ensure electricity connection to all villages and BPL households by
• Telephone availability to all villages by November 2007.
• Broadband connectivity to all villages by 2012.
• Roads to all villages with 1000 and above population 500 population at
hilly and tribal areas by 2009. And ensure all significant habitation by
• Forest increase to 30% by 2011-12.
• FDI average per year target is 15 $ billions.
• Current account balance in GDP in is -2.8%.
• Government revenue balance is in GDP is -0.2%.
• Government Fiscal deficit is in GDP is -6.0%.
• Total public sector outlay is Rs.36, 44,718.
• Out this Rs.21, 56, 571 cores center outlay and Rs.14, 88, 147 cores is
states and UTs outlay. This is the 59.2:40.8 ratios between center and
states & UTs.
Sectoral allocation of public sector during 11th five year plan:
S.N Sectors expenditure Percentage
O (Rs. In core)
1 Agriculture & allied activities 6,74,105.00 18.5%
2 Energy 8,54,123.00 23.4%
3 Industries and mines 1,53,600.00 4.2%
4 Transport 6,67,793.00 18.3%
5 S&T 87,933.00 2.4%
6 Economic services 62,523.00 1.7%
General services 1.2%
Social Services 11,02,327.0 30.9%
9 Total 100%
11th five year plan power production target is 92, 577 MW. Out of this
16,553 MW is with Hydro production, 58,644 MW is with Thermal production,
3,380 MW is with nuclear production, 14000 MW is with wind production.
• Since the Prime Minister of India happens to be the ex-officio
chairperson of planning commission of India, the position of the
deputy chairperson has great significance.
• The appointments are made by the President of India, on the advice of
the Prime minister.
• The appointees typically have either been economists of repute or
Deputy Chairpersons of the Indian Planning Commission
S.NO Deputy Chairpersons from to
1 Gulzari Lal Nanda (Minister of 1951 1953
2 V.T. Krishnamachari 17-02- 21-06-
3 Gulzari Lal Nanda (Minister of 22-06- 21-09-
Planning) 1960 1963
3 C.M. Trivedi 22-09- 02-12-
4 Ashok Mehta (Minister of Planning) 03-12- 01-09-
5 Dr. D.R. Gadgil 02-09- 01-05-
6 C Subramaniam (Minister of Planning) 02-05- 22-07-
7 D.P. Dhār (Minister of Planning) 23-07- 31-12-
8 P. N. Haksar 04-01- 31-05-
9 Dr. D. T. Lakdawala 01-06- 15-02-
10 Narayana Dutt Tiwari (Minister of 09-06- 08-08-
Planning) 1980 1981
11 Shankarrao Bhaurao Chavan (Minister 09-08- 19-07-
of Planning) 1981 1984
12 Prakash Chandra Sethi (Minister of 20-07- 31-10-
Planning) 1984 1984
13 P.V. Narasimha Rao (Minister of 01-11- 14-01-
Planning) 1984 1985
14 Dr. Manmohan Singh 15-01- 31-08-
15 P. Shiva Shankar (Minister of 25-07- 29-06-
Planning) 1987 1988
16 Madhav Singh Solanki (Minister of 30-06- 16-08-
Planning) 1988 1989
17 Ramakrishna Hegde 05-12- 06-07-
18 Prof. Madhu Dandavate (Finance 07-07- 10-12-
Minister) 1990 1990
19 Mohan Dharia 11-12- 24-06-
20 Pranab Mukherjee 24-06- 15-05-
21 Prof. Madhu Dandavate 01-08- 21-03-
22 Jaswant Singh 25-03- 04-02-
23 K.C.Pant 05-02- 17-06-
24 Monetk Singh Ahluwalia 04-07- continuing
Year Programme Objectives or purpose
1 1952 CDP (Community Over all development of rural areas with
development programme) people’s participation
2 1960-61 IADP (Intensive To provide loan, seeds, fertilizer tools to the
Agriculture District farmers
3 1966-67 HYVP (High Yielding To increase productivity of food grains by
Variety Programme) adopting latest varieties of inputs for crops
4 July Rural Electrification Electrification in rural areas
5 1972-73 Employment Guarantee To assist the economically weaker sections
Scheme of Maharashtra of the rural society
6 1972-73 Accelerated Rural Water To provide drinking water in the villages
7 1973-74 DPAP (Drought Prone Area To try an expedient for protection from
Programme) drought by achieving environmental balance
and by developing the ground water
8 1972-73 CSRE (Crash Scheme for To provide employment facilities in rural
Rural Employment) areas
9 1973-74 MFALA (Marginal Farmer For technical and financial assistance to
and Agriculture Labour marginal and small farmers and agriculture
10 1974-75 SFDA (Small Farmer For technical and financial assistance to
Development Agency) small farmers
11 1974-75 CADP (Command Area To ensure better and rapid utilization of
Development Programme ) irrigation capacities of medium and large
12 1974 MNP (Minimum Needs To provide basic necessaries for people
13 1975 Twenty points programme To poverty eradication and raising the
standard of living of people
14 1977 NIRD (National Institute of To provide training, investigation and
Rural Development) advisory organization for rural development
15 1977-78 DDA (Desert Development For controlling the desert expansion and
Programme) maintaining environmental balance
16 1977-78 Food for Work Programme Providing food grains to labour for the works
17 1977-78 Antyodaya Yojana To make the poorest families of the village
economically independent. It was
implemented only Rajasthan state
18 August TRYSEM (Training Rural Programme of training rural youth for self-
15th, Youth for Self- employment. This was merged with SJGSY
1979 Employment) in 1999.
19 October IRDP (Integrated Rural All round development of the rural poor
2nd , Development Programme) through a programme of asset endowment
1980 for self-employment. This was merged with
SJGSY in 1999. It was started in 1978-79,
but implementing since 1980
20 1980 NREP (National Rural To provide profitable employment
Employment Programme) opportunities to the rural poor. It was
merged with JRY in 1989
21 Septemb DWCRA (Development of To provide suitable opportunities of self
er, 1982 Women and Children in employment to the women belonging to the
Rural Areas) rural families who are living below the
poverty line. This was merged with SJGSY in
22 August RLEGP (Rural Landless For providing employment to land less
15th, Employment Guarantee farmers and labourers. It was merged with
1983 Programme) JRY in 1989.
23 1983-84 SEEUY (Self Employment To provide financial and technical assistance
to the Educated for self employment
24 February NFRD (National Fund for T o grant 100% tax rebate to donors and
, 1984 Rural Development ) also to provide financial assistance for rural
25 April 1, Comprehensive Crop To provide insurance for agricultural crops
1985 Insurance Scheme
26 Septemb CAPART (Council for To provide assistance for rural prosperity
er 1, Advancement of People’s
1986 Action and Rural
27 Septemb SEPUP (Self Employment To provide self employment to urban poor
er, 1986 Programme for Urban through provision of subsidy and bank credit
28 April, JRY (Jawhar Rojgar For providing employment facilities in rural
1989 Yojana) areas. RLEGP & NREP were merged with
29 October, NRY (Nehru Rojgar For providing employment facilities in Urban
1989 Yojana) areas.
30 1990 ARDRS (Agriculture and To exempt bank loans up to Rs. 10, 000 of
Rural Debt Relief Scheme) rural artisans and weavers
31 1990 SUME (Scheme of Urban To provide wages employment after
Wage Employment) arranging the basic facilities for poor people
in the urban areas where population is less
than one lack.
32 1990 SHASU (Scheme of To provide employment by the means of
Housing and Shelter Up shelter up gradation in the urban areas
gradation) where population is between 1 to 20 lacks
33 February NRF (National Renewal To protect the interest of the employees of
, 1992 Fund) Public sector
34 July, Supply of Improved To supply modern tool kits to the rural
1992 Toolkits to Rural Artisans craftsmen except the weavers, tailors,
embroiders and tobacco labourers who are
living below the poverty line
35 1993 PMRY (Prime Minister To provide self employment for educated un
Rojgar Yojana) employees
36 October EAS (Employment To provide employment of at least 100 days
2nd, Assurance Scheme) in a year in villages
37 Decembe MPLADS (Member of To sanction Rs. 1 crore per year to every
r 23rd, Parliament Local Area member of parliament for various
1993 Development Scheme) development works in their respective areas
through District Magistrate of the District.
38 1993-94 SIDMC (Scheme of To provide capital through special institution
Infrastructural for water supply, sewage, drainage, urban
Development in Mega transportation, land development and
Cities) improvement of slum projects undertaken in
Mumbai, Kolkata, Bangalore, Chennai and
39 1993 DRDA (District Rural To provide financial assistance for rural
Development Agency) development
40 October Mahila Samridhi Yojana To encourage the rural women to deposit in
2nd, Post Office Saving Account
Unit - 2
• India is an agrarian economy.
• Agriculture sector plays a crucial role in Indian economy.
• Agriculture sector is considered to be the backbone of the Indian
• Nearly 75% of the peoples were depended on agriculture during 1950-
51. It was reduced 56.7% in 2001 and present it was reduced to 52%.
• Majority of the population in our country depends on this sector for
livelihood. Around 52% of the peoples are depending on agriculture
sector because of the fallowing causes.
1. Since there is no encouragement of handicrafts during the British
period. So rural artisans started depending on agriculture.
2. The small and cottage industries could not compete with the
products of large scale industries. So these industries lost their
3. The growth rate of secondary and tertiary sectors failed in providing
employment opportunities to the growing population.
4. The regional and sect oral mobility of Labour in our country is very
low due to illiteracy and social barriers.
5. Employment creations are not increasing as population grows.
• The above causes are lead to increasing of the dependence on
• At the time of 1950-51 Agriculture sector share in National Income
was 55.4%, late it was reduced to 30.9% in 1990-91, 24.7% in 2000-
2001 and 18.5% in 2006-07, 17.8% in 2007-08 and it is 17.1% in
2008-09 (according provisional estimate). But primary sector
contribution is 21.2% in 2008-09. (17.1% agriculture sector + 4.1%
from mining and quarrying)
• Agriculture goods contributing 10.6% of our exports. And total 14.5%
foreign reserves are coming through Agricultural products.
• In 2007-08 agricultural sector growth rate was 4.86% and it is only
2.61% in 2008-09.
• Food grain production 51 MT in 1950-51, and is in 2008-09 is 229.85
MT as against 233 MT targets.
Year food grain production
1. 1950-51 51 MT
2. 2000-01 209 MT
3. 2001-02 212.9 MT
4. 2002-03 174.8 MT
5. 2003-04 213.2 MT
6. 2004-05 198.4 MT
7. 2005-06 208.6 MT
8. 2006-07 217.3 MT
9. 2007-08 230.78 MT
10. 2008-09 229.85 MT (target was 233 MT)
• Total 19.2 million tones food grains are buffer stocks in India.
• In 2007-08 the fallowing crops have the yield per hector in India and
having world’s highest yielding countries as fallows.
Crops Yield per hector World’s Highest Country
in India yield
Paddy 22.02 Quintals 88.80 quintals Egypt
Wheat 28.02 quintals 80.50 quintals Briton
Maize 23.35 quintals 96.50 quintals Italy
Sugar 690.0 quintals 1190.00 quintals Egypt
Causes for low productivity in Agriculture in India:
• Utilizing of Older or traditional Equipments.
• Lack of irrigation facilities, it was 18% of total cultivated land in 1950-
51 and 39% in 2002.
• Scarcity of Modern inputs like fertilizers, seeds and pesticides.
• Inequalities in the distribution of land.
• Small size land holdings.
• Defects in land tenure systems.
• Impact of the British regime.
• Pressure of population on agriculture.
• Discouraging rural atmosphere like poverty, land hunger.
• Lack of infrastructure facilities like market, credit, transport etc.
The fallowing Measures are taking by the government to increase the
1. Land reforms
2. Development of infrastructure.
3. Agricultural extension services.
4. Irrigation facilities
5. Farm mechanism
6. Controlling population growth rate
7. Literacy programmes.
8. Increases of Agriculture holdings
• According UNO land reforms means “the re distribution of land with a
view to safe guard the interests of small, marginal farmers and farm
Labour is called land reforms”.
• According Indian planning commission “Any reforms of land, under
taken by the government for agricultural development are called Land
Objectives of Land reforms:
• 1948 all India congress agricultural reforms committee constituted
under the chairmanship of Komarappa. This committee and In 1951
Planning Commission announced the fallowing objectives of Land
1. The removal of all restrictions for agriculture development.
2. The elimination of all forms of land exploitation
3. To provide social justice with agrarian system to provide security
for the tiller of soil.
4. To increases agricultural production by implementing land
Need for Land Reforms:
• For the development of Agriculture sector.
• For the economic development through agriculture sector.
• To increase agriculture productivity.
• To achieve social justice
Salient Features of Land Reforms:
• Government has introducing the Land Reforms after independence for
the welfare of backward people and agriculture development through
Abolition of intermediaries and Tenancy reforms.
Abolition of Intermediaries:
• In 1793 Caraon vallies introduced the Zamindari system
• This is also called permanent settlement
• This system introduced in Bengal, Bihar, Orissa.
• Tenants are 3 types
1. Occupancy tenants: Permanent tenants (zirayiti rights vunna
2. Sub-tenants: (upa kauludarulu): they will take land for rent from
3. Tenants at will: tenants which are without any rights.
• Rent was fixed by various states like the fallowing
1. Assam, Karnataka, Manipur and Tripura states fixed rent
between 1/5 to ¼ share in total production.
2. Gujarat, Maharashtra and Rajasthan states fixed rent between
1/6 to ¼ share total productions.
3. Orissa, Bihar states fixed rent ¼ share total productions.
4. Punjab, Haryana and Jammu and Kashmir state fixed rent with
1/3 share in the total production.
5. Tamilnadu state fixed rent between 33.3% - 40%.
6. Andhra Pradesh state fixed rent 25% to 30% in delta region land
and 20% to 25% in upland region.
• Ceiling on Land Holdings: In 1972 July in Chief Ministers meetings
takes some decision regarding ceilings
1. The ceiling on highly fertile land with assured irrigation facilities,
producing two crops in a year varies from 10 to 18 acres.
2. It should not exceed 27 acres in case of single crop in a year.
3. Other lands the ceiling should not be more than 54 acres.
• The unit of application shall be a family of 5 members. If the number
of members in the family exceeds 5, additional land may be allowed
for each member. How ever it should not exceed twice the normal
• D.T.Dantwala said that “the land reforms introduced in our country
are in proper direction but the implementation part is not proper”.
Land Utilization in India:
1. Total India Geographical area - 328.72 Million Hectors or
3.287 millions Sqkm -
(32, 87, 263 Sqkm).
2. Total reported area -306.00 Million Hectors.
3. Net cultivated land -166.04 Million Hectors.
4. Land under forests -68.97 Million hectors.
5. Barren and un- cultivable land -19.55 Million hectors.
6. Land not available for cultivation -42.34 Million hectors.
7. Land put to non-agriculture uses -22.80 Million hectors.
8. Land under pastures and trees -9.02 Million hectors.
9. Area sown more than once -30.66 Million hectors.
• Average size of Holding was in India like in the fallowing.
1. In 1970-71 2.28 hectors
2. 1985-86 1.69 hectors
3. 1990-91 1.55 hectors
4. 2000-01 1.35 hectors
• In USA in 2000-01 average land holding size was 122.5 hectors.
• According 1985-86 calculation Rajasthan was having the highest
average holding size with 4.34 hectors, after Rajasthan Punjab having
the second highest with 3.77 hectors and lowest land holding size was
in Kerala with 0.36 hectors.
• In 1990-91 land holding size have like in the fallowing
1. Marginal holdings are called with less than 1 hectors and total
marginal land holdings have 59% in I990-91.
2. Small holdings are called land holding between 1 hectors to 4
hectors and total small land holdings have 32.2% in 1990-91.
3. Medium holding are called land holding between 4 hectors to 10
hectors and total medium land holdings have 7.2%.
4. Large holdings are called land holdings between more than 10
hectors and total large holdings have 1.6%.
Cropping Pattern in India in percentage
Crops 1950-51 1980-81 2000-2001 2004-05
1.Food crops 74% 80% 75% 76%
2.Non Food 26% 20% 25% 24%
Total (1 + 2) 100% 100% 100% 100%
Different crops largest producers in India
• Paddy: 1. West Bengal, Andhra Pradesh and Uttar Pradesh.
• Wheat: Uttar Pradesh, Punjab and Haryana
• Maize: Andhra Pradesh, Karnataka and Bihar
• Ground Nut: Gujarat, Madhya Pradesh and Tamilnadu.
• Sun Flower: Karnataka, Andhra Pradesh and Maharashtra.
• Sugar Cane: Uttar Pradesh, Maharashtra and Punjab.
• Cotton: Gujarat, Maharashtra and Punjab.
• William .S. Gand is the first economist who used the term Green
Revolution in 1968 in German Conference.
• Father of Green Revolution is called Norman Borlaug from Mexico.
• Father of Indian Green Revolution is called M.S. Swaminathan.
• Green revolution means “Achieving revolutionary changes in the
agriculture sector by introducing new techniques of production is called
• The main objective of the green revolution is to increase the food grain
• According to Cowrie and John Green Revolution is also called in India
as Seed Fertilizer Revolution.
Causes for the Green Revolution:
1) Intensive Agriculture District Programme (IADP): This is started by
the central government in 1960-61. Mainly three districts were selected
under this programme as a pilot study. These are one is Ludhiana district
in Punjab, West Godavari district Andhra Pradesh and Tanjavore in
Tamilnadu. Later it was extended to 7 districts. These are
I. West Godavari district in Andhra Pradesh
II. Shabaad district in Bihar
III. Raipur district in Chhattisgarh
IV. Tanjavore district in Tamilnadu
The above 4 districts concentrated for Paddy
V. Ludhiana district in Punjab
VI. Aligarh district in Uttar Pradesh
The above 2 districts concentrated for Wheat
VII.Paali district in Rajasthan, this district
concentrated for Jowar.
2) Intensive Agriculture Area Programme (IAAP): this programme
started in 1964-65. Intensive Agriculture District Programme extended to
114 districts in this part of programme.
3) High Yielding Variety Programme (HYVP): It was started by central
government in 1966-67 to increase food grain production. With Joint
Efforts Of Indian Council of Agriculture Research (ICAR) and Agricultural
universities in the Punjab, various types of hybrid seeds have been
4) Introduction of Crops with Short Gestation Period: ICAR and
ICRISAT are trying to produce short gestation period seeds of paddy,
wheat and maize
5) In 1965-66 multi crop system started.
• Most benefited crops of Green Revolutions are Wheat, Paddy, Jowar,
Maize Ground nut, Oilseeds, Cotton and Sugar cane.
• The benefits of green revolution are limited only to some regions like
Punjab, Haryana and Andhra Pradesh.
• In 1963 National Seed Corporation started by government to produce
• In 1969 started State Farm Corporation of India to produce
• Out of total Water resources 83% of water consuming agriculture
sector, 4.5% of water consuming for house hold sector, 2.7% of
water consuming for electricity and 8% of water for other purposes.
• In 1995-96 Rural Infrastructure Development Fund (RIDF)
established by NABARD to increase the irrigation facilities
• In 1996-97 government started Accelerated Irrigation Benefits
Programme (AIBP). The main objective of AIBP is to complete
projects in the states with cooperation of central government.
• In India total 141.23 million hectors having irrigation capacity. This
is 43% in total India’s geographical area.
• In 1951 total 22.6 million hectors irrigation is providing and 81.1
MH provided at the time of 1991-92.
• Irrigation capacity is 102.8 million hectors at the end of 10th five
year plan but actual consumption only 87.2.MH.
• Central government is targeted to provide irrigation to 114 mh by
the end of 2010.
• Before 1978-79 irrigation projects were divided into three types
based on the investment to construct the projects.
1. Large scale irrigation project: more than Rs.5 crores
2. Medium scale irrigation projects: between Rs.25 lacks to Rs. 5
3. Small scale irrigation projects: less than Rs.25 lacks.
• Since 1978-79 irrigation projects were divided into three types
based on the irrigation capacity of the projects.
1. Large irrigation projects: more than 10, 000 hectares irrigation
facility projects are called heavy irrigation projects.
2. Middle irrigation projects: if irrigation facility is between 2000
hectares to 10,000 hectares.
3. Small scale irrigation projects: less than 2000 hectares.
• Irrigation sources are like in the fallowing in India.
S.N Irrigation Sources 1950-51 2005-06 2007-08
O irrigated irrigated Irrigated
area area area
1 Canals 40% 31.5% 29%
2 Wells (open & bore 29% 58.7% 60%
3 Tanks 17% 4.7% 5.81%
4 Others 14% 5.1% 5.19%
• Canals: UP, Punjab, Haryana, AP and Tamilnadu
• Wells: UP, Punjab, Haryana and Bihar.
• Tanks: AP, Tamilnadu, Orissa and Karnataka.
• Agricultural marketing can be classified into different stages in India.
1. Assembling: the out put of various farmers should be brought to
one place is called Assembling.
2. Transportation: the farm products should be transported from
the actual farms to the markets to make them available. This is
termed as transportation.
3. Grading: All the assembled products should be graded according
to the quality and durability. This process is called grading.
4. Sampling: Sample should be collected from the graded products
for standardization. This process of taking samples is called
5. Processing: All the farm products should be made use full for
direct consumption. This is called processing.
6. Packing: The processed farm products should be packed properly
to ensure better quality. This process is called packing.
7. Storing: All he farm products cannot be sold in the market
immediately. Some of these products should be stored until
appropriate prices are obtained.
• Defects in Indian Agricultural Marketing:
1. Lack of Transport facilities
2. Lack of Storage facilities
3. Existence of Middle man in the markets
4. Malpractices in the markets.
5. Lack of Grading facilities
6. Lack of organization among the farmers.
• Remedial Measures:
1. Regulate Markets: Regulated markets were started in 1951 with
200 markets and these were increase to 90, 200 in December
2000. Present 70% agricultural products selling in the regulated
2. Co-operative Farming: Co-operative farming is supporting by
Government and Reserve Bank of India through National Co-
operative Development Corporation.
3. Contract Farming is encouraging to get benefits small and marginal
4. Rythu Bazaars are started by Andhra Pradesh government to sell
products farmers directly.
5. Other facilities like AGMARK is providing by increasing grading
facilities. Grading facilities centers are started by central
government in India some places like Jaipur, Bhopal, Chandigarh,
Bhubaneswar and Shillong.
6. Warehousing facilities constructed by central government to store
the agricultural product up to beneficial prices available to farmers.
7. Transport and communication facilities are providing by the
government to increase the market facilities.
• All India credit survey committee divided the credit based on
time into three times.
• According this committee farmers need credit for three
necessaries one is Short term credit necessaries, second is
Medium credit Necessaries and Long- Term Credit necessaries.
1. Short –Term credit: this credit is necessary to purchase
seeds, fertilizers, pesticides and to hire the Labour and to
bear the Transportation cost. This credit period is between
6 months to one year.
2. Medium Term Credit: this is necessary to purchase cattle
and farm tools. This credit period is between 1 to 5 years.
3. Long-Term Credit: this to purchase new farm land,
Machinery like pump sets, tractors, to take up soil
conservation and land development activities.
• In 1951 Reserve Bank of India established All India Rural Agricultural
Credit Survey to give suggestions and to increase institutional credit.
And this committee recommended 3 tier co-operative system in the
country. According this committee recommendation imperial bank of
India changed as State Bank of India and agricultural credit.
• In 1963 RBI established Agricultural Refinance society to increase
institutional credit for agricultural sector.
• in 1964 government established National Agriculture Credit Council
under chairmanship of Dr. D.R.Gadgil and this committee
recommended area approach in credit.
• In 1969 total 14 banks nationalized to increase institutional credit for
• In 1969 Lead Bank scheme started based on the recommendation of
• In 1972 government started dual interest rate.
• Sources of Agricultural Credit:
• Agricultural credits are two types one is Institutional credit and
second is non-institutional credit.
1. Institutional Credit: commercial banks, Co-operative banks,
Regional Rural banks and Government etc are come under
2. Non- Institutional Credit: Money lenders, Land lords,
traders and Commission agents, friends and relatives are
come under non-institutional credit.
Institution 2002-03 2004-05 2005-06 2006-07 2007-08 2008-09
al Credit cores cores cores cores cores cores
(%) (%) (%) (%) (%) (%)
Commercia 39,774 81,481 1,25,477 1, 1,81,087 2, 02,
l Banks (57.00% (65.00% (69.80% 66,485 (71.11) 856
) ) ) (69.00%
Regional 6,070 12,404 15,223 20,435 25,312 25, 852
Rural (9.00%) (9.90%) (8.40%) (10.10% (10.0%) (9.77%)
Co- 23,716 31,424 39,786 42,480 48258 35,747
operative (34.00% (25.10% (21.80% (20.90% (18.95% (13.51%
Banks ) ) ) ) ) )
Total 69, 560 1, 25, 1, 80, 2, 29, 2, 54, 2, 64,
309 486 400 657 455
NABARD: (National Agricultural Bank and Rural Development)
• Agricultural Refinance Corporation established by RBI and this
was merged with NABARD.
• This was merged with NABARD, which is started in 1982, July
• NABARD started in 1982 with Rs. 500 crores capital. And it is
increased to Rs. 2000 crores in 1999-2000 and it increased to
Rs. 5000 crores later and private investment allowed up to 49%.
• Central government announced Farm credit package in June
2004 to increase institutional credit.
Kisan Credit Card system (KCC)
• Kisan Credit Card (KCC) system started in 1998-99.
• It is preparing by NABARD
• KCC main objective is to provide short term loans to farmers.
• KCC are issuing by RRB, Commercial Banks and Co-operative
• Minimum Rs.5000 credit get through KCC system
• In 2007-08 total 84.7 lacks credit cards is issued.
• Total 808 lacks KCC issued by the end of February 2009.
• This should be repaying within one year. If natural calamities
occur in the country it extended
• First KCC introduced in Rajasthan state.
• Highest KCC are there in Andhra Pradesh.
• In 1999-2000 NAIS (National Agricultural Insurance Scheme) started
by central government and General Insurance Corporation of India to
provide insurance for food grain products, Horticultural products and
• Present NAIS is calling as Rashtya Krishi Bhima Yojana. Present 21
states and 2 unio territories are implementing this scheme.
• In 1999-2000 government started seed insurance. Since 1999-2000
Seed Bank is operating through National Seed Corporation.
Government announced National Seed Policy in 2002 to provide the
frame work for the growth of the seed sector
• In 2002 established AICIL (Agricultural Insurance Corporation of India)
by government with General Insurance Corporation of India.
• In 2001 Krishi Shramika Suraksha Yojana started by government to
provide insurance and pension benefit for age group of 18 to 50 years
• In 2004 January, Farm Income Insurance Scheme implementing (it
was started in 2003) by the government to providing Insurance Safe
guards and economic security to farmers when support prices are not
available to farmers.
• In 2004 Varsha Bhima started by AICIL to provide rainfall insurance.
• In 2007-08 weather based crop insurance scheme (WBCIS) started by
• In 2007 government started National Food Security Mission to increase
Paddy, Wheat and Pulses production. Under National Food Security
Mission government started Village Knowledge Centre in the district
• According WTO subsidies should not cross 10%, but in India
subsidies not reached 15%.
• In 2004 Geneva conference decided that 5% developed countries
and 10% subsidies for developing countries.
• Agricultural subsidies are two types
• One is Food subsidies
• Second is Fertilizer subsidies
• Food subsidies giving to farmers by giving Minimum Support Price
(MSP) and purchasing the food grains through Food Corporation of
• Consumers are getting subsidies though Public Distribution System
• In 2008-09 budget total Rs.43, 668 cores allocated for food
• Smart card system started as a pilot programme in Haryana and
Chandigarh to distribute food grains through Public Distribution
• Haryana, Punjab, Western Uttar Pradesh, Andhra Pradesh and
Chattisgarh states are giving Minimum Support Prices (MSP)
through Food Corporation of India.
• Government is Fertilizer Subsidies are giving through Retention
Price Scheme for fertilizer producers.
• Retention Price Scheme started in November 2007 for Nitrogenous
fertilizers, this is extended to Complex in 1979 and to Phosphate in
• According agricultural scientists Nitrogen, Phosphorus and Potash
should be use in the ratio 4:2:1, but these are consuming in India
in 2005-06 is 5.6:2.2:1 ratio.
• In 2003-04 fertilizer subsidy was Rs.11,835 crores and it was
Rs.99,456 crores in 2008-09, in 2009-10 it allocated around
• More Fertilizer consuming per hectare is in Punjab, second
Tamilnadu and third is Andhra Pradesh.
• Green Box subsidies: This subsidy gives for the research on control
pests and increase basic facilities and food security.
• Blue Box subsidy: developed countries are giving these types of
subsidies. These countries are paying money to farmers directly to
National Agricultural Policy
• It was announced in the parliament on July 28, 2000.
• This policy has been planned under the provision of World Trade
Organization to face the challenges of agricultural sector.
• This policy emphasis to promote agricultural exports after
fulfilling domestic demand.
• 4% growth rate per annum for two decades.
• Land should be registered in the name of women.
• Land reforms should implement to distribute land to poor
• Consolidation of land holdings should be implement in all states
• Promoting private investments in agriculture sector.
• Insurance for crops should be provide
• Biotechnology should be implement in the agriculture sector
• Promoting research for developing new varieties and ensuring
protection to the developed varieties
• Institutional credit has to increase in agriculture sector
• Horticulture crops should be promote
• Markets are extended
• Contract farming and Corporate farming should be encouraged
• In the part of new agriculture policy Rainbow Revolution should
• In the part of Rainbow Revolution the fallowing revolutions are
announced on July 29, 2000.
1. Green Revolution -to increase FOOD GRAIN
2. Brown or Round Revolution -to increase POTATO
3. Yellow Revolution
(Operation Gold Flow) -to increase OILSEED
production (1986 started)
4. White Revolution -to increase MILK production
5. Pink Revolution -to increase
6. Blue Revolution -to increase FISH production
7. Red Revolution -to increase MEAT or
8. Golden Revolution -to increase FRUITS (apple)
9. Grey Revolution -to increase FERTILIZERS
10. Silver Revolution -to increase EGGS production
11. Black Revolution -to increase CRUDE OIL
• White Revolution started in 1970 by Vargis Kurian to develop
MILK production. Since 2001 India is the largest producer of
milk in the world.
• M.S. Swami Nathan gave a call for EVER GREEN Revolution to
increase double good grain production from 210 MT to 420
MT. he supported organic farming to succeed the double food
grain production. And he targeted to 4% growth rate in
agriculture sector and he given important to contract farming
and he suggested insurance for agriculture sector.
• In 2001 government encouraged to start Agri - Clinic to
research or to invent new seeds.
National Commission on Farmers
• In 2004 UPA government appointed national commission on
farmers under the chairman ship of M. S. Swami Nathan and
this committee submitted its report in 2006.
• This committee given 5 major recommendations
1. Land fertility should be increase
2. Irrigation facility should be increase
3. Credit and insurance facility should be increase
4. Technology in agriculture should be increase
5. Market facility should be increase.
Agricultural Price Policy
• In 1957 Ashok Mehta Committee appointed to enquiry food grain.
• In 1959 Ford Foundation recommended that before seeding Minimum
Support Price (MSP) should be announced.
• In 1964 L.K. Jha committee constituted for giving reasonable price for
paddy, wheat and also recommended that ration shops should be
established. Based on his recommendation Agricultural Price
Commission established in 1965. And this name is changed as
Commission on Agriculture Costs and Prices (CACP) in 1985.
• In 1966 Food Grain Committee also recommended that Minimum
Support Price (MSP) should be announced before seeding.
• Agricultural Prices are 3 types
1) Support Prices
2) Procurement Prices
3) Issues Prices
1). Support Prices:
• Government will give guarantee to the farmers of their production by
announcing support prices.
• Support prices are two type
1) Minimum Support Prices (MSP)
2) Statutorily Minimum Prices
• Government will purchase the farmers agricultural productions with
guarantee prices even the during Market fluctuations this prices are
called MSP. MSP are announcing by the Government based on the
advice of CACP before seeding. MSP are announcing for 24 crops.
• The statutory prices are announcing by the government to buyers.
Buyers should be purchase the products according the statutory prices.
2). Procurement Prices:
• For the purpose of PDS the government will procure the food grains for
certain prices from the farmers; this price is called Procurement prices.
• Generally this prices more than the Minimum Support Prices (MSP) and
less to Market Prices.
• FCI, State Civil Supply Corporation are procuring the food grains
behalf of Government.
3). Issue Prices:
• Central government announces these prices to supply the food grains
for the states for certain prices. These prices are called issue prices.
Agricultural Prices Commission (APC):
• APC Established in 1965 based on the recommendation of L.K. Jha
• Based on this recommendation first time in India Agricultural Support
Prices announced by Government in 1967-68.
• In 1985 government APC has changed as CACP present chairman is
Prof. Mahindra Singh Dev.
• In 1990 C.H. Hanumantha Rao Committee recommended Support
• In 2002 Abhijit Sen Committee also supported the food grains
• In 2003 Prof. Alagh Committee also recommended the MSP
• IN 2006 M.S. Swami Nathan committee appointed to study the
problems of the farmers and to decide the MSP.
MSP for 2007-08:
1) Paddy Grade-A 880+50 = 930
2) Paddy Normal 850+50 = 900
3) Wheat 1080
4) Jowar 860
5) Maize 840
6) Raagi 915
7) Moong 2520
8) Green gram 2520
9) Arhar (tur) 2000
10) Cotton 2500 for staple length and 3000 for long
11) Ground Nut 2100
12) Masur (lentil) 1870
13) Rapeseed (mustard) 1830
14) barley 680
15) Gram 1730
16) Sun flower 2115
17) Sugar Cane 81.18 per Quintal (811.8 per Tones)
18) Tobacco Rs.32 to 34 based on the kind
Public Distribution System (PDS)
• In 1943 PDS started in India.
• After independence PDS started in 1965.
• Food grains, Sugar, Kerosene and oil etc are distributing through
• Below poverty line people get monthly food grains increased
from 10kgs to 20kgs in 2000-01 and it was increased to 35kgs in
• Below poverty line people will pay 50% less than normal price.
• Above poverty line people pays normal prices.
• In 1992 January RPDS (Reconstruction or Revamped Public
Distribution System) started. From this programme 160 million
people get benefit. According this programme essential
commodities are providing in drought areas, desert areas and
• RPDS implemented in 1775 blocks in India and in 1995,
additionally implemented in 671 blocks.
• In 1996 December TPDS (Targeted Public Distribution System)
started. From this programme total 320 million people got
benefit. Under this programme below poverty line family 10 kgs
get from central government with less than issue prices.
• In 2001 July rice per kg rate was Rs.5.65.
• Coupons system started in Andhra Pradesh in 1998-99.
• Horticulture crops are occupying 10% of the land out total
• India is the second place in case of Fruits and vegetable
• India is the largest producer of Sapota, Mango, and Banana.
• India is the first place in case of Grapes productivity
• India is the largest producer of Cauliflower in the world.
• India is the second largest producer of Onion in the world.
• India is the third largest producer of Cabbage in the world.
• India is the largest producer, consumer and exporter of
Spices in the world.
• India is the third largest producer of Coconut and largest
producer of Areca nut in the world.
• National Agricultural Mission was started in 2005 by the
• During the XI five year plan 85% center and 25% states
funds contributed for National Horticulture Mission.
• Total Rs.1100 cores funds allocated for this mission in 2008-
• Present National Horticulture Mission is working in 340
districts in India in 18 states and 2 Union territories
• Last three years total 7.6 lacks hectors land is under the
• In 1986 TMOP (Technology Mission on Oilseeds, Pulses and
Maize) to increase the oil seeds production and edible oil
• In April 2003 Price Stabilization Fund started to reduce the
price fluctuation in Tea, Coffee, Rubber and Tobacco.
• National Agricultural co-operative Marketing Federation of
India (NAFEED) started on October 1958. This head quarter is
Delhi. This is the apex bank in co-operative marketing.
• Tribal co-operative marketing development federation of India
(TRIFED) started in 1987. This will protect the tribal’s from
• 2006-07 year is called Agricultural Renewal Year.
• Industrial sector comprises Mining & Quarrying, Manufacturing,
electricity, gas & water supply and construction.
• But in secondary sector Mines and Quarrying not included.
• Mining and Quarrying contribute to GDP is 4.1% in 2008-09
• Manufacture sector contribute to GDP is 15.7%
• Electricity, Gas and Water supply contribute to GDP 2.4%
• Construction contribute to GDP is 1.5%
• Secondary sector contribute to GDP 19.6%
• Industrial sector is contributing 23.7% to GDP in 2008-09 (secondary
sector 19.6% + mining and quarrying 4.1%)
• Secondary sector contribution to National Income increased from
13.3% in 1950-51 to 26.4% in 2006-07.
• Industrial sector growth rate is 8.5% in 2007-08, but its growth rate is
2.4% in 2008-09.
• During 1951 around 11% employment provided industrial sector, but it
was increased to 19% in 2007-08.
• Industrial sector contribution in total exports is around 65%.
• During the British period traditional industries destroyed and modern
industries did not developed
• In 1944 government established palling and development department
under the chairman ship of Adarsh Dalal.
• Before independence government announced one industrial resolution
policy in 1945 April 21. This policy was base to announce 1948
industrial resolution policy.
• The 1945 industrial resolution policy identified the importance of
government role to industrial development or industrialization.
• Industrialization is the process of building up country’s capacity to
utilize raw materials and manufacture goods for consumption or
• A country’s economic development is determined by its
• According Singer “economic development means the changing 80%
agrarian working population to 15% agrarian working population”
Importance of Industrialization:
1. Raising income: Industrial development alone increase income. Due
to industrialization developed countries having more national
2. Industrial sector can generate productive employment.
3. Industrial sector can strength the Indian economy.
4. The national objective of self-reliance can be achieved only through
5. Industrial development changes the social factors. Mobility of labour
from agriculture sector to industrial sector can take place
Industrial policies in India:
1948 Industrial Resolution Policy:
• After independence, the first industrial resolution policy was declared
on April 16, 1948 by union industrial minister Mr. Shyam Prasad
• This industrial resolution policy announced a base for mixed and
• 1948 industrial resolution policy gave more important to public sector.
• This industrial resolution policy clearly divided the industrial sector into
public and private sector.
• This industrial resolution policy divided the industries into 4 types.
1. State Monopoly: Arms and ammunitions, atomic energy and rail
transport etc will come under this category.
2. Mixed sector: industries which are working under control of the
government are come under this category. Iron, Steel, Coal,
Ship Building Manufacture of Telephone, minerals oil etc will
come under this category. All the key industries are to be started
in public sector. The existing private undertakings in the field
were allowed to continue for ten years. The existing private
undertakings in the field were allowed to continue for ten years.
3. Regulated Industries: 18 industries are included in this category.
Automobiles, Tractors, Cement, Cotton, and Electrical
Engineering etc will come under this category. These industries
were allotted to private sector but they work under the control of
4. Private Industries: This category included which are not
mentioned above three categories.
• According this industrial resolution policy government made industries
development and regulated act in 1951.
• According 1951 industrial development and regulated act license
system is not necessary less than 5 lacks.
1956 Industrial Resolution Policy:
• 1956 Industrial Resolution Policy announced by Jawaharlal Nehru on
April 30th, 1956 at Avadi in Tamilnadu.
• This Industrial Resolution Policy announced based on Socialistic
• 1956 industrial resolution policy is called “financial constitution of
• 1956 Industrial Resolution Policy given more important to Public
• Objectives of the 1956 Industrial Resolution Policy
1. To speed up Industrialization
2. To expand Public sector
3. To develop heavy and basic industries
4. To increase employment opportunities
5. To prevent monopolies.
• 1956 Industrial Resolution Policy had divided all the industries into 3
1. Schedule A: This schedule consists of 17 industries which are
exclusive responsibility of the state. Arms and Ammunitions,
Atomic energy, iron and steel, coal, mineral oils, air craft, rail,
ship building and electricity etc.
2. Schedule B: It consists of 12 industries which were working
under the private sector but under the control of government.
Aluminum, chemical industry, fertilizers, rubber, road transport
and sea transport etc.
3. Schedule C: Those industries which are not included in the above
two schedules will come under this schedule.
• 1956 Industrial Resolution Policy also encouraged small scale
• 1956 Industrial Resolution Policy decided to start industrial estates and
training centers for the unskilled labour.
• 1956 Industrial Resolution Policy had laid down the foundation for the
industrial development in India.
• 1956 Industrial Resolution Policy given permission to import
technology, capital according necessary.
• In 1964 Mahalanobis committee appointed to decentralize the
economic power in the country.
• In 1964 Swami Nathan and K.C.Dasgupta committee appointed to
decentralize the economic power in the country.
• In 1967 Hazari committee appointed to study the license system in
• Based on 1956 Industrial Resolution Policy MRTP act made in 1969 to
control the concentration of economic power.
• In 1969 Monopoly Restriction Trade and Practice (MRTP) act made
based on the recommendation of Dutt (1967) committee and it was
implemented from 1970.
• According MRTP act any private company should not have more than
20 crores asset. But it was amended in 1980 and MRTP range
increased from 20 crores to 100 crores.
1970 Industrial Resolution amendment:
1956 industrial resolution policy amended in 1970. According this
amendment industries are divided into 4 categories based on the
1. Core industries: More than or equal to Rs. 35 crores investment
industries are called Core industries. Total 9 industries are included in
this sector. This sector is also called priority sector.
2. High Investment Industries: Between Rs. 5 crores to Rs. 35 crores
investment industries are called high investment industries.
3. Medium Investment Industries: Between Rs.1 crores to Rs. 5 crores
investment industries are called high investment industries
4. Reserved Industries: Less than or equal to 7.5 lacks investment
industries are called medium investment industries
• Less than or equal to Rs. 1 core investment industries removed from
license system in 1970.
1973 Industrial Resolution Amendment:
• In 1973 core industries in public sector increased from 19.
• In 1973 amended the MRTP act. According this amendment act every
bone can be participate to investment except schedule A and reserved
small scale industries.
• According R C Dutt committee joint sector encouraged by government
• In 1973 FERA act made by government to control foreign reserves in
private sector and to increase foreign reserves in government sector.
• In 1975 again government amended industrial resolution and 21
industries removed from license system.
1977 Industrial Resolution Policy:
• 1977 Industrial Resolution Policy announced on 23 rd December,
• 1977 Industrial Resolution Policy announced by Janata Government.
• This Industrial Resolution Policy is called Janata Industrial Resolution
• This is also Small Scale Industrial Resolution Policy.
• This policy announced based on decentralization in the country.
• This policy given more important to small scale industries.
• In this policy government introduced micro industries concept.
• 1977 Industrial Resolution Policy divided the Small Scale Industries
into 3 types.
1. Cottage industries:
2. Micro Industries or Tiny industries: those industries established
in less than 50,000 populated towns with less than one lack
investment industries are called micro industries according 1977
Industrial Resolution Policy.
3. Small Scale Industries: less than 10 lacks investment industries
are called small scale industries.
• According 1977 Industrial Resolution Policy told less than 15 lacks
investment industries are called auxiliary industries.
• According 1977 Industrial Resolution Policy Small scale reserved
industries increased from 180 to 807. In 1990these numbers increased
from 807 to 836 (present only 21 are there)
• In 1978 District industrial centre established (present total 422 district
industrial centers are there)
• According this policy government departments have should be
purchase small industries goods.
1980 Industrial Resolution Policy:
• This Industrial Resolution Policy announced on 3 rd July, 1980 by
• Objectives of 1980 Industrial Resolution Policy.
1. Optimum utilization of installed capacity.
2. Export promotion and import substitution.
3. Employment creation.
4. Government industries should be stabilize.
5. Government provided financial assistance to establish in
6. Government has taken initiation to establish small scale
industries in every district.
• Small Scale Industries investment increased in this Industrial
• Tiny or Micro industries investment increased from Rs.1 Lack to Rs.2
lack in 1980 and it increased to 5 lacks in 1990.
• Small Scale industries investment decided Rs.10 lacks in 1980 and it
was increased to 60 lacks in 1990.
• Auxiliary Industries investment increased from Rs.15 Lacks to Rs.25
• This Industrial Resolution Policy exempted License for 28 industries in
1980 and it was implemented in 1988.
• MRTP range increased from Rs.20 cores to Rs.100 cores based on
Sachar committee (1977) and it was implemented since 1985.
• Sick Industrial Company Act (SICA) made central government in 1985
based on Tiwari committee.
• Central Government established Board of Industries and Finance Re-
construction (BIFR) in 1987 to reconstruct sick industries or to merge
sick industries into other industries.
1991 Industrial Resolution Policy:
• 1991Industrial Resolution Policy announced in two times.
• First time Industrial Resolution Policy announced on 24 Th July, 1991
for Large and Medium Scale Industries.
• Second time Industrial Resolution Policy announced on August 6th,
1991 for Small Scale industries.
• This policy announced based on Liberalization, Privatization and
Globalization model or Rao and Manmohan model.
• 1991 Industrial Resolution Policy gave more important to Private
• Objectives of 1991 Industrial Resolution Policy.
1. To provide gain full employment in the private sector.
2. To increase the productive capacity of industries
3. To reduce economic inequalities and to achieve economic
4. To attain international competitiveness.
5. To expand private sector.
6. To increase economic growth.
• 1991 industrial resolution policy exempted license system to all
industries except 18. Or except 18 industries remaining industries
should not necessary license to establish.
• It is reduced to 15 industries in 1993
• It is reduced to 8 industries in 1998.
• It is reduced to 6 industries in 1999.
• It is educed to 5 industries in 2002. Present (2006-07) only 5
industries are necessary to get license and these are
1. Distillation of Alcoholic Drinks.
2. Cigarettes and Tobacco products.
3. Electronic, Aerospace and all defense equipments.
4. Industrial explosives
5. Hazardous Chemicals.
Note: If any body establish any industry in more than or equal to 10 lacks
population cities and around 25 kms from that cities that industry should be
get license system.
• 1991 Industrial Resolution Policy allotted 8 industries for Public sector.
• But it is reduced to 6 industries in 1993.
• Again it is reduced to 4 in 1999 (1. Arms and amenities, 2. Atomic
energy, 3. Railways and 4. Atomic minerals.)
• Again in 2001-02 these are reduced to 3.
• Present only 3 industries are allotted for public sector these are
1. Atomic energy
3. Atomic minerals.
• In 1960 Prasant Chandra. Mahalanobis, 1964 Das Gupta committee
recommended the MRTP act government made it in 1969 and
implementing since 1 st June, 1970. To control economic concentration
• In 1991 MRTP amended MRTP range removed.
• In 2002 according Raghavan committee MRTP act banned and in the
place of MRTP Competitive act came into force.
• According competitive act companies can earn asset but companies
should not made any agreement with competitive and small scale
industries should not be take over by large scale industries.
• In 1973 FERA act made by government
• In 1991 FERA act amended by government.
• In 1999 FERA is replaced by FEMA.
• FEMA established in 2000 April but implementing since 1 st June,
• In 1992 government established National Renewal Fund to reconstruct
or to merge or to close small scale industries. But it was closed in
• In 2002 National company law tribunal established after abolishing
SICA and BIFR based on Raady committee.
• 1991 industrial resolution policy increased small scale industries
investment up to Rs. 5 lacks.
• In 1997 government started Voluntary Retirement Scheme (VRS) to
reduce supervisory cost.
Navaratnas and Min- Ratnas:
• Central government given Navaratna status to highest profit making
public sector to give autonomous status in 1997.
• Economic and administration freedom provided for Navaratnas
• Navaratnas can spend Rs.1000 crores or 15% of their net worth
without approval of government.
• Initially in 1997 total 9 companies are selected
1. Bharat Heavy Electricals Limited -1997
2. Bharat Petroleum Corporation Limited -1997
3. Hindustan Petroleum Corporation Limited -1997
4. Indian Oil Corporation Limited -1997
5. NTPC Limited -1997
6. Oil & Natural Gas Corporation Limited -1997
7. Steel Authority of India Limited -1997
8. Vidheshi Sanchar Nigam Limited – 1997
9. Indian Petroleum Chemical Limited – 1997.
• Later in 1997 November two companies one is Mahanagar Telephone
Nigam Limited and second is GAIL (India) Limited -1997 November got
Navaratna status. So Navaratna companies increased from 9 to 11.
But in 2002 Indian petroleum chemical limited sold to Reliance and
Vidheshi Sanchar Nigam Limited sold to TATA Company. Again
Navaratnas are reduced to 9. Later in course of time some more
companies are got Navaratna status.
10. Bharat Electronics Limited (Jun 2007),
11. Hindustan Aeronautics Limited -2007 June
12. Power Finance Corporation Limited -2007 June
13. National Mineral Development Corporation Limited -
14. National Aluminum Company Limited -2008 May
15. Power Grid Corporation of India Limited -2008 May
16. Rural Electrification Corporation Limited -2008May
17. Shipping Corporation of India Limited -2008.
18. Coal India Limited -2008.
• Net profit in past 3 years and in one year 30 cores profits getting
company get the mini ratna-I.
• Net profit earned past 3 years companies gets Mini Ratnas-II.
• Rs.500 crores or equal to its worth can spend without approval of
government by mini ratna-I
• Rs.300 crores or 50% of its worth which ever is lower can spend
without approval of the government by mini ratnas-II
• In March 31st, 2005 total mini Ratnas are 45 (30 – Mini Ratnas-I and
15 Mini Ratnas-II).
• In 2006 may total Mini Ratnas are 51 (41 – Mini Ratnas-I and 13 Mini
• In 2008 December total 55 mini ratnas are there (43 mini ratnas-I and
12 mini ratnas -II)
• In 2009-10 financial year central government gave Mahanavaratna
status for highest profit making public sectors.
• Mahanavaratna status companies can spend up to Rs, 5000 crores
without approval of government.
• The fallowing companies got Mahanavaratna status.
1. Oil companies.
2. Natural Gas companies
3. Iron and Steel industries.
4. Heavy Industries.
5. Electronic Companies.
6. Telecom Companies.
7. Power Sector.
8. Civil Aviation.
• In the part of economic reforms to encourage private participation in
public sector government started Disinvestment.
• Withdrawal of investment in public sector is called Disinvestment.
• In 1992-93 disinvestment committee established under chairmanship
• In August 1996 disinvestment commission established under the
chairmanship of G.V.Ramakrishna, in 2001 disinvestment commission
chairman was R.H Patil.
• This disinvestment committee divided the companies into core group
and noncore group and upto 49% Disinvestment can permit in core
• In December 1999 disinvestment ministry established and
disinvestment minister post created.
• In 2004-05 budget BRPSE (Board of Reconstruction in Public Sector
enterprises) enterprises established under the control of finance
• BRPSE chairman is Ratan Tata and Deepak Parekh and Ashok Gnguly
are members in this board.
• This board will look after disinvestment process.
• But UPA government banned disinvestment in profitable public
• After 2009 congress government started again dis- investment
• Total 34 priority sectors are allowing foreign investment between 51%
1. Power Generation is allowing 100%
2. SEZs are allowing 100%.
3. Oil refinery is allowing 100%.
4. E- commerce is allowing 100%
5. Non-Banking Financial companies are allowing 100%
6. Tourism, airports, roads and hotels are allowing 100%
7. Courier services are allowing 100%
8. Mines, printing, real estates are allowing 100%
9. Telecommunication is allowing 100%
10. Privates banks are allowing 74%
11. Insurance is allowing 49% (it was 26% before 2008)
12. Private media is allowing 26%
13. In Defense instruments production is allowing 26%.
• Foreign investment are two types one is FDI Second is FII
FDI (Foreign Direct Investment)
• FDI is inflows in India 6.2$ billion in 2001-02
• 23.0$ billion in 2006-07
• In 2007-08 but 24, 579$ million (Rs.98, 664 crores) FDI inflow
• In 2008-09 total 27, 309 $ million (Rs.1, 22, 919 crores) inflows
• From 2000 to November 2007 highest FDI inflows from Maritutes
• In 2008-09 highest FDI inflows from
1. Mauritius 44%
2. Singapore 8%
3. USA 8%
4. UK 7%
5. Netherland 5%
6. Japan 3%
• In 2008-09 highest FDI inflows to
1. Services sector 23%
2. Housing and real estate 10.23%
3. Telecom 9.53%
• According Global Development Report (2006) India is 10th
position in case of attracting FDI. First place is China, second
place is Hong Kong and third position is Mexico.
FII or Port Polio Investment:
• According Global Development Report (2006) FII 70% total
share in total Foreign Investment.
• In 2007-08, total 82% foreign investment inflows through FII.
And remaining 18% foreign investment through FDI.
• Through ADR & GDR portfolio investment getting by foreign
• In 2001-02 21.1$ billion , 2004-05 is 23.3$ billions, 2006-07 is
111.9$ billions (109622 $ million), 2007-08 235924 $ million
• In India Foreign Investment attracting states
• First place is Maharashtra
• Second place is Karnataka
• Third place is Tamilnadu
• Fourth place is Gujarat.
• Highest foreign investment attracting companies in India
• First place is electrical equipments 17.54%
• Second is transport and industry 12.69%
• Third place Soft ware sector 10.39%
Fourth place is 9.39%
Public Sector Enterprises:
• Since 1948 central government started to establish public sector
• In 1951 only 5 public sector enterprises were there in India with Rs.
29 crores investment. But these numbers increased to 242 with
investment of Rs. 4, 21, 089 crores.
• Corporation: if the companies established with government act they
were called corporations.
• Public Companies: If the companies established based on 1956
company act they were called public company.
Small Scale Industries
• In case of production small scale industries position is the 6th place in
the country after Maharashtra (1), UP (2), Punjab (3), Haryana (4) TN
• In case of number wise AP is 3rd position in the country, after UP (1).
• Total small scale industries export value in India is around 45% to
• Total small scale industrial share in industrial production is around
• Total small scale industries share in GDP is 6.7%.
• By the end of March 2006 total 123.40 lacks unregistered industries
and 118 lacks registered industries are there in the country.
• By the end of March 2006 total Rs. 1, 50, 242 crores small scale
production value exported.
• By the end of March 2007 total 29.49 million people are working in the
small scale industries.
• In India after agriculture sector highest people are getting
employment in small scale industries.
Small scale industries definitions:
• First time finance commission given definition for small scale industries
in 1951. According finance commission recommendation if investment
is up to Rs. 5 lacks or less than Rs. 5 lacks that type of industries are
called small scale industries. If investment is up to Rs. 7.5 lacks they
were called Auxiliary industries.
• According Industrial growth and regulated act 1951 small scale
industries means labours should be work up to 50 is that industry
consumes machines and if that industry can’t machine labours should
be work up to 100 to call small scale industry.
• After 1951 government changed investment for small scale industries
in course of time like the fallowing table for small scale industries,
micro industries and Auxiliary industries.
Year Micro Small scale Auxiliary
industries industries industries
1950- -- 5 lacks 7.5 lacks
1966 -- 7.5 lacks 10 lacks
1977 1 lack 10 lacks 15 lacks
1980 2 lacks 15 lacks 20 lacks
1985 2 lacks 35 lacks 45 lacks
1991 5 lacks 60 lacks 75 lacks
1997 25 lacks 3 crores --
1999- 25 lacks 1 crores --
2006 25 lacks 5 crores --
• According 2006 Small and Medium enterprises Development Act 2006
industries divided into 3categories based on the investment in
production sector and services sector.
Type of industries Production sector Services sector
(investment on Machines (investment on
and raw materials) equipments)
Micro industries Up to 25 lacks Up to 10 lacks
Small scale 25 lacks to 5 cores 10 lacks to 2 cores
Medium scale 5 cores to 10 cores 2 cores to 5 cores
Large scale Moe than 10 cores More than 5 cores
industries investment investment
Government measures for the development of small scale industries:
• Government taking so many measures for the development of small
scale industries in different five year plans.
• In 1947 central government established small scale industrial board.
But during first five year plan this board divided into different boards
like Rubber board, Tea Board, Coffee board, Handloom board etc.
• Central government taken initiation to establish industrial estates in
• In 1955 government established cottage and small scale industrial
development corporation to provide financial support to small scale
• In 1955 Karvey committee to give some suggestion for small scale
• In 1951 government made one act in parliament to establish state
• In 1967 Hazari committee for licensing system
• In 1967 Dutt committee for licensing system and also proposed MRTP.
• In 1977 Janata government announced small scale industrial
resolution policy. And this policy increased number of reserved small
scale industries from 180 to 807.
• In 1978 government established District industrial centers to provide
training and financial support to small scale industries.
• In 1986 government started small industrial development fund to
financial support for small scale industries.
• in 1990 central government established small industrial development
bank of India (SIDBI)
• In 1985 Sick Industrial Companies Act made only private companies
are come under this act but after 1991 Public sector industries also
coming under this company act.
• In 1992 National Renewable Fund started.
• In 1993 Goswami committee for sick industries
• In 1997 Abid Hussain committee recommended small scale industrial
investment ad this investment increased from Rs. 60 lacks to Rs. 3
crores. But again this investment range decreased fro Rs. 3 crores to
Rs. 1 crores.
• In 2001 government established Khadi Rural industrial committee
under the chairmanship of K.C.Panth.
• IFCI: this institute established in 1948. IFCI (industrial Finance
Corporation of India) is getting refinance from IDBI, Commercial
banks, LIC etc.
• SFC (State finance corporations): Central government made act in
1951 to establish state finance corporation. in 1953 first started by
Punjab state and Andhra Pradesh in 1956. Present total 18 state
finance corporations are there in India.
• ICICI (Industrial credit and Investment Corporation of India): it is
established in 1955. in 2002 ICICI bank limited merged with ICICI.
• UTI (Unit Trust of India): It is established in 1964. UTI mobilizing
fund through various schemes like India funds, India growth fund,
US-64, Rajyalakshmi, Master gain etc. but US-64 scheme made
many controversy in the country. (According Deepak Parekh
committee and Malegam committee suggestions Unit Trust of India
divided into UTI-I and UTI-II in 2003, present UTI-I is under the
control of Government of India and UTI-II is under the control of
LIC, SBI, Punjab National Bank and Bank of Baroda.). Present UTI-2
is working as a mutual fund.
• IDBI (Industrial Development Bank of India): it was established in
1964. Initially it was established as a affiliated body to RBI. It is the
Apex bank in industrial credit. In 1976 IDBI established as
autonomous institution. In 2005 IDBI limited merged with IDBI
• IIBI (Industrial Investment Bank of India): in 1971 government
started Industrial Reconstruction Corporation of India (IRCI) to
provide financial support for private sick industries. IRCI changed
as a Industrial Reconstruct Bank of India (IRBI) in 1984. Later in
1995 IRBI changed as Industrial Investment Bank of India (IIBI).
• SIDBI (Small Scale Industrial Development Bank of India): It was
established in 1990 to provide financial support to small scale
industries in the country.
• EXIM (Export and Import Bank): It was established in 1982 to
provide financial support to exports and imports.
• SIDCs (State Industrial Development Corporations): First SIDCs
established at Andhra Pradesh and Bihar in 1960. and present total
28 SIDCs are there in the country.
Important heavy industries in India:
• This industry was oldest industry in India.
• First textile industry established at Kolkatta (Port Gloster) in 1818.
• In 1854 Bombay Spinning and Weaving Company established and this
is the first modern textile industry in India.
• At the time of 1947 total 394 textile industries are there in India.
• Due to partition of India 40% of cotton production area went to
• This export share is around 38% in o total industrial export.
• Present around 2 crores people are working in textile industry in India.
• Technology up gradation introduced in textile industry in 1999 to
utilize modern technology in industry.
• In 2003-04 Apparel Parks established at 9 places in the country to
increase ready made exports. (in Andhra Pradesh Apparel park is there
Iron and steel industry:
• This is the most important heavy and basic industry in India.
• Present 20 Million tones steel production capacity is there in India.
• Government target is to increase steel production capacity to 40
million tones by the end of 2020.
• In 1870 Bengal iron works started at Kuldhi near Kolkatta. This is the
first iron and steel industry in India.
• In 1907 Tata iron and steel company established at Jhemshedpur and
in 1919 Indian and iron and steel company at Barampur established.
• In 2nd five year plan Bhilai iron and steel company with cooperation of
USSR, Durgapur Iron and steel industry with cooperation of United
Rukhela iron and steel industry with cooperation of West Germany
• In 3rd five year plan Bokaro iron and steel industry with cooperation of
• In 4th five year plan Salem iron and steel industry in Tamilnadu,
Vijayanagar Iron and steel industry in Karnataka and Vishakha iron
and steel industry in Andhra Pradesh established.
• In 1974 government established Steel Authority of India Limited
(SAIL) for the development of iron and steel industry in India.
• In 1951 total 317 sugar industries are there in India. And they are 615
b the end of March 2008.
• First sugar industry started at Bihar in 1903.
• Since 1979 government fallowing double price policy system in
• 60% output can sell for market price.
• 40% output government determined the price. After 2002 onwards
it reduced 10% so 30% product price determined by government.
• In 1998 government exempted licensing system for sugar industry.
• India is largest consumer of sugar in the world.
• India is second largest producer of sugar with 15% of the total
• First Jute industry was established in 1855 at Rishi in West Bengal
• Jute industry concentrated in Bengal area.
• Total 78 Jute industries are there in India, out of them 61 Jute
industries are concentrated in the Bengal area.
• After partition of Bengal 75% of the sugar cane producing land
went to Bangladesh.
• In 1987 government made the Packaging Materially Act to protect
Jute industry in India.
• 60% of the food grain product should be used Jute packing.
• 40% of the sugar package should be used Jute.
• National Jute policy announced by Government in 2005.
• India did not have clear cut trade policy before independence.
• But since 1923 some type of import restriction was adopted to protect
• After independence we have a clear trade policy.
Objective of Trade Policy:
1. Keeping to the Minimum import of non essential consumer goods.
2. Comprehensive control of various items of imports.
3. To produce import goods in India i.e. for import substitution
4. Export promotion
India’s major exports:
• Manufacture goods and petroleum -63.58%
• Agriculture and allied accounts -11.36%
• Hand made goods including Jems and Jewelleries
• Tea, coffee, rice, pulses, spices, tobacco, jute, iron ore, engineering
India’s major imports:
• Petroleum products, capital goods, carbon chemical, medical, edible
oils, fertilizers and paper.
India’s Trade in world trade:
year Export Import Total trade
share share share
1950 1.85% 1.71% 1.78%
1990 0.52% 0.66% 0.59%
1999- 0.70% 0.80% 0.70%
2004- -- -- 1.00%
2005- -- -- 1.00%
2006- 1.0% -- 0.6%
2007- -- -- 1.1%
2008- -- -- 2.2%
Total exports and imports in GDPMP:
Items/year 1990- 2002- 2004- 2006- 2007- 2008-09
91 03 05 07 08 (April to
Exports in GDPMP 5.8% 10.6% 12.2% 14.1% 14.1% 15.2%
Imports in GDPMP 8.8% 12.7% 16.9% 20.9% 21.9% 27.1%
Balance of Trade -3.0% -2.1% -4.8% -6.8% -7.8% -12.0%
Total exports and imports growth in BOP:
Items/Year 1990- 2005- 2006- 2007- 2008-09
91 06 07 08 (April to
Growth of export in 9.0% 23.4% 22.6% 28.9% 17.5%
BOP in %
Growth of imports in 14.4% 32.1% 21.4% 35.2% 30.6%
Balance of trade -5.4% -8.7% + 1.2% - 6.3% - 13.1%
• We can divide the trade policies into 2 types in India.
1. Trade policy in the pre reform period.
2. Trade policy in the post reform period.
1. Trade policy in the pre reform period:
• During this period government gave important two things in import
1. Import restrictions
2. Import substitution
• In 1980 a large number of capital goods were placed under OGL (Open
General License) category i.e. they could be imported without any
• During pre economic reforms period export was encouraged by various
methods like reducing tax system, providing finance and reducing
taxes for export services.
2. Trade policy in the post reform period:
• It was announced on July 24, 1991.
• This trade policy was called New trade policy
• Since 1991 because of economic reforms trade was liberalized.
• 1991 trade policy was reduced customs restrictions from 300%
to 85%., Based on the Raja Chelliah committee
• Later it was gradually y reduced and present there is taxes fro
non-agricultural product is 12.5%
Strategy of New trade policy:
1. Export promotion
2. Export led growth
3. Import substitution
4. SEZ led growth.
Main Features of New trade policy (1991):
• Removal of Quantitative restrictions
• Exchange rate liberalization
• Establishment of Trading or star hotels to give duty free imports of
exports raw materials.
• Reducing tariff rate
• Free trade Zones (FTZs) it was announced in 1999-2000. Here no
customs duty. Present FTZs are called export promotion zones.
• SEZs (Special Economic Zones) started in India on March 31st,
2000. Export Promotion Zones are converted into SEZs.
• May, 2005 government introduced SEZ bill introduced in the
parliament and it was paused by the parliament on June 23rd, 2005
and made as SEZ act. But SEZ act is implementing since February
• Present 195 SEZs are there with 1277 units in India.
• SEZs are providing direct employment over around 1.79 lack
people. Among them 40% are women.
• During 2007-08 exports expected from SEZs is 67, 300 cores but
actual amount is 66, 638 cores it was more than 92% over the
• In 2001 trade policy Agricultural exports zones introduced.
• In March 31st2002 government announced long term trade policy by
Murasolimaran for 2002-2007.
• Main target of the 2002-07 trade policy is to promote the exports of
agriculture products, Small Scale industries goods, textiles Gems
and Jewelers and electronics goods.
• Off-shore banks established to promote the exports units of SEZs in
2002-07 trade policy.
• To expand the market this trade policy started “focus Latin
America and Focus Africa”.
2004-2009 Trade policy:
• August 31st, 2004 UPA government announced trade policy for five
• The main objective of this trade policy is to increase India’s trade in
the world trade to 1.5% by 2009.
• To achieve this target exports has to increase from 61.8$ billion
(2002-03) to 195% billion by 2009.
• To achieve the above amount 26% annual growth rate should be
• 2004-09 trade policy special focused on five traditional exports like
agriculture, Handcrafts, handlooms, leather and footwear and Jems
• 2004-09 trade policy given important to increase exports along with
• 2004-09 trade policy exempted from services tax fro absolute export
sector for cutting down the export cost.
• 2004-09 trade policy introduced three new export promotion schemes
1. Target plus scheme
2. Vishesh Krish Upaj Yojana.
3. Served from India.
• Vishesh Krish Upaj Yojana to be introduced for boosting exports of
• Served from India scheme will boost exports of services
• New service export promotion council has been constituted to increase
• 2004-09 trade policy has been planned Free Trade and Warehousing
Zones (FTWZs) on lines of SEZs.
• Target plus Schemes started for exporters incentives.
• Liberalization of EPCG scheme (Export Promotion Capital Goods) in
2004-09 trade policy.
• Duty Free imports fro service exporters.
• Liberal Import conditions for seeds made in 2004-09 trade policy.
• Ban on old Machinery imports lifted in 2004-09 trade policy
• In the part of Long term trade policy (2004-09) complementary trade
policies announced for 2005-06, 2006-07, 2007-08 and 2008-09
2005-06 Trade policy:
• It is a complementary trade policy to 2004-09 trade policy.
• Main features of 2005-06 trade policy.
1. Employment creation in traditional areas like agriculture,
Handcrafts, handlooms, leather and footwear and Jems and
2. Setting up inter - state trade council.
3. No safeguards and anti-dumping duty on imports under advance.
4. Served from India Scheme liberalized.
2006-07 Trade policy:
• This trade policy announced by Kamalnath on April 17th, 2006 with a
slogan of “Export for Employment”.
• Exports target was 101$ billions
• Imports target was 140% billions.
• Trade deficit is 39$ billions.
• The target rate of exports is fixed at 20% for 2006-07.
• By 2010 country exports are targeted to be 165$ billions.
• Focus product and focus market have been introduced for promoting
employment opportunities in rural and urban areas.
2007-08 Trade policy:
• It was announced on April 19, 2007.
• Export target for 2007-08 is 160$ billions and Export target for 2008-
09 will be 200$ billions.
• All export oriented services delivered in India made exempted from
12.24% service tax.
• SEZs benefits should be extended. And DEPB (Duty Enlightenment
Pass Book) extended up to March 31st 2008.
Highlights of 2008-09 trade Policy
• DEPB scheme has been extended till May 2009.
• Refund of service tax on almost all the services.
• Income tax benefit to 100% EOUs has been extended by Government.
• Coverage of FMS has been increased and additional 10 countries have
been included. These are Mongolia, Bosnia-Herzegovina, Albania,
Macedonia, Croatia, Honduras, Djibouti, Sudan, Ghana and Colombia.
• Split-up facility under DFIA Scheme introduced.
• Duty free import of samples has been increased from Rs.75, 000 to
• Value of jeweler parcels, through Foreign Post Office is raised to US$
75,000. Earlier it was from US$ 50,000.
• EOUs shall be allowed to pay excise duty on monthly basis, instead of
the present system of paying duty on consignment basis.
• Customs duty payable under EPCG (Export Promotion Capital Goods)
Scheme has been reduced from 5% to 3%.
• Setting up a new Export Promotion Council for Telecom Sector.
Trade with USA
• India is the 24th rank among the trade partners of the USA in
terms of exports and 18th in terms of imports.
• Fish, Sea foods, Precious stones, textiles products and iron &
steel products are the major exports from India to USA.
• Medical and surgical equipments, computers and computer
parts, gas turbines, telecom, plastic are the major imports from
USA to India.
Trade with UK:
• Till 2002 India is the second partner with UK, but in 2007 India is
become 5th largest trading partner with UK.
• Major FDI inflows to India from UK have taken place in the power,
telecom, oil and gas and services sector.
• Rice, Tea, Garments, Gems and Jewelry, leather goods, software and
pharmaceutical products are the major exports from India to UK.
• Gold, Rough Diamond, Telecom Equipments, Power Generating
Equipments, Transport Equipments And Industrial Machinery Are The
Major Imports From UK to India.
Trade with Japan:
• Marine products, Cotton Yarn, Gems and Iron ore are the major
exports from India to Japan.
• Plant related products, Machinery, Electronic, Transport equipments
are the major imports from Japan to India.
Trade with China:
• Ores, iron and steel, plastics, organic chemicals and cotton are the
major exports from India to China. Among them iron ore is major
exports consisting of 53% of India’s exports to China.
• Electrical machinery and equipments, cement, organic chemicals,
Nuclear reactors, silk, oils are major imports from China to India.
Machinery is major imports from China with consisting of 36% of
China’s imports to India.
International Monetary Fund (IMF)
• IMF was established in December 27th, 1945 at Washington based on
the recommendation of Briton woods Conference. And it was started
functioning since March 1st, 1947.
• Present in IMF total 185 countries are members.
• Before 1971 all transactions and quotas made in terms US $
• In 1971 SDR (Special Drawing Rights) started and this is also called
• From 1971 to 1981 one SDR value = One US $ value (only US $
determined SDR value)
• Since 1981 5 currencies are determining SDR value
• In 1991 5 currencies are having weight like the fallowing
1. US $ 40%
2. German Mark 21%
3. Japan Yen 17%
4. British £ 11%
5. France Franck 11%
• In 1995 one SDR = 1.585 $
• IMF financial year is MAY 1st to April 30.
• India quota in IMF is 4158.2 million SDRs.
• This is 1.961% share n total quota.
• India is 13th largest quota holding country in IMF.
• 1. USA, 2. Japan, 3. Germany, 4.France, 5. UK, 6. Italy, 7. Saudi
Arabia, 8. Canada, 9. Russia, 10. Netherland, 11. China, 12. Belizium
and 13. India.
IBRD (International Bank for Development and Reconstruction)
or World Bank
• IBDR started in December 1945 based on the recommendation of
Briton woods conference.
• IBRD started functioning since June 1946.
• IBRD is one of the World Bank group.
• IBRD, International Finance Corporation, International Development
Association, Multilateral Investment Guarantee Agency (MIGA) and
International Centre for THE Statement Investment Disputes (ICSID)
are the members in World Bank group.
• India having membership in all World Bank group except in ICSID.
• India was founder member of World Bank among 30 countries.
• Present total 185 countries are the World Bank.
• Each member country have 250 Votes and additional vote given for 1,
00, 000 $ share in capital stock held.
• MIGA having 173 members
• ICSID having 143 members.
International Development Association (IDA)
• IDA (International Development Association) established September
• IDA is an association institution of World Bank.
• It kept membership open to all members of World Bank.
• Present 168 members are there in IDA.
• IDA provides loans to member’s countries but it will not collect any
interest for long-term loans.
• IDA provides loans for poor countries.
• IDA administered by the same group which manages the World Bank.
• During 1995-96 India rank is first among the nations getting
assistance from IDA.
International Finance Corporation (IFC)
• It was established in July 1956 by World Bank.
• It provides loans to private industries in developing countries without
any government guarantee.
• IFC memberships are total 181 countries by the end of March 2005.
GATT (General Agreement on Tariffs and Trade)
• October 30, 1947, 23 countries at Geneva signed an agreement
related to tariff imposed on trade.
• This is known as GATT.
• GATT came into force on January 1st, 1948.
• December 12th, 1994 GATT was abolished and replaced by WTO, which
came into existence on January 1st, 1995.
• Present there are 153 (as an 2007 July) countries are the members of
• The highest decision making body of the WTO is the Ministerial
Conference, which has to meet at least every two years once.
• Since the establishment of WTO, Six Ministerial Conferences have been
1. Singapore - December 9 to 13 1996.
2. Geneva (Switzerland) - May 18 to 20, 1998.
3. Seattle (USA) - November 30 to December 3, 1999.
4. Doha (Qatar) - September 9 to 14, 2001.
5. Cancun (Mexico) - September 1- to 14, 2003.
6. Hong Kong - December 13 to 18 2005.
Asian Development Bank (ADB)
• It was started in December 1960 on the recommendation of Economic
Commission for Asia and Far East (ECAFE). This bank started functioning
on January 1st, 1967.
• The main aim of this bank is to accelerate economic and social
development in Asia and Pacific region.
• The head of this bank is at Manila in Philippines.
• This bank chairman is always allotted for Japanese.
• 3 deputy chairmen are there for this bank one from USA, 2nd is from
Europe and 3rd is from Asia.
• Total 67 members are there at present.
• 39th ADB summit took place in Hyderabad on May 3 to 6th, 2006.
South Asian Association for Regional Co-operation (SAARC)
• It started on the recommendations of Dhaka conference on December 7-
• Head quarter is at Kathmandu (Nepal)
• In every year alternative countries are acting as Chairman of the SAARC.
• 29th SAARC foreign ministers meeting held in New Delhi on 7-8th
• India, Maldives, Pakistan, Bangladesh, Sri Lanka, Bhutan, Nepal and
• SAARC declared the 2005 year as Year of South Asia Tourism and 2008
as Year of Good Governance.
• SAARC 14th Summit held at New Delhi in India on January 2007.
• SAARC 15th Summit held on Maldives in 2008.
South Asia Free Trade Area (SAFTA)
• 12th SAARC summit held in January 4-6 2004 at Islamabad. In this
summit SAARC members countries signed for SAFTA
• India, Pakistan, Bangladesh, Bhutan, Maldives, Nepal and Sri Lank have
agreed upon to create a South Asia Free Trade Area (SAFTA).
• SAFTA has come into force since January 1st, 2006.
Association of South East Asian Nations (ASEAN)
• It started on August 8th, 1967.
• Indonesia, Philippines, Malaysia, Singapore and Thailand are the
members of ASEAN.
• Brunei (1984), Vietnam (1995), Laos (1997), Myanmar (1997), Cambodia
(1999) became the membership in ASEAN.
• It head quarter is at Jakarta.
Organization of the Petroleum Exporting Countries (OPEC)
• It is started at Bagdad in 1960.
• Iran, Iraq, Kuwait, Saudi Arabia and Venezuela were its founder
• Qatar, Libya, Indonesia, Ecuador, UAE, Algeria, Nigeria and Angola
countries are joined later
• Present there 13 members in OPEC.
• OPEC head quarter is at Vienna in Austria.
• OPEC countries are producing total 75% of the petroleum.
• In 1975 November USA, UK, West Germany, France, and Japan held
meting at Rambonilet in Paris.
• Later in 1976 Canada and Italy also joined this is called G-7.
• All these G-7 countries are non-socialistic and highly industrialized
• After adopting free market policies in the economy Russia also became
member of G-7 in 1997. So G-7 is calling as G-8.
• G-8 account for 49% of global exports, 51% of industrial outputs exports
from these countries.
• G-8 countries having 49% asset in IMF.
• 33rd G-8 summit held at Helligendomm Germany in 2007.
• 34th G-8 summit held at Japan in 2008 and 35th G-8 summit will be held
at Italy in 2009.
• It is established in 1989 in NAM summit AT Belgrade, The Secretariat of
G-15 is at Geneva, Head quarter is rotated to the country belonging to
the Chairman of the group, Mexico, Jamaica, Venezuela, Peru, Brazil,
Chile, Argentina, Senegal, Algeria, Nigeria, Zimbabwe, Egypt, Iran, India,
Malaysia, Indonesia, Kenya and Sri Lanka are the members of G-15.
IORARC (Indian Ocean Rim Association for Regional Co-
• it was established on March 5th, 1997 at Port Louis of Mauritius for
promoting economic co-operation among the countries in coastal regions
of Indian Ocean. India, Australia and South Africa had been making all
efforts for this co-operation for last 2 years. In this organization total 14
countries are there.
Asian Pacific Economic Co-operation (APEC):
• it is started in November 1989; Present 21 countries are the members In
• It is a commercial union of Belgium, Netherland and Luxemburg. It is
started in 1958. Its head quarter is in Brussels in Belgium.
• it was started in 1948 in the name of Organization of European Economic
Co-operation (OEEC), it head quarter is in Paris, it was renamed as
Organization for Economic Co-operation and Development (OECD) in
September 30th, 1961. 29 members are there in OECD.
• G-77: it’s started in 1964 under the banner of UNO it includes 130
members which were third world countries.
Unit – 3
Geographical conditions of India:
• Total India’s geographical area is 3.287 millions Sqkm (32,
• India is the 7th largest country in the world after Russia (1), Canada
(2), USA (3), Brazil (4), china(5), Australia (6).
• India’s geographical share is 2.4% in the world.
• India is the second largest populated country in the world, after China.
• India’s population share in the world is 16.7%.
• India’s East to West length is 2933 KM.
• India’s North to South length is 3214 km.
• Total 9 Indian states have the coastal line i.e. Gujarat (1),
Maharashtra (2), Goa (3), Karnataka (4), Kerala (5), Tamilnadu (6),
Andhra Pradesh (7), Orissa (8) and West Bengal (9).
• Among the states highest coastal have to Gujarat state and after
Gujarat Andhra Pradesh have highest coastal line but east side highest
coastal line having to Andhra Pradesh.
• Lowest coastal line has to Goa state.
• Indian peninsular coastal line is 6100KM.
• India’s peninsular and Andaman Nicobar Islands coastal line is 7516
• Total India’s territorial boundary is 15, 200 KM.
• 23 ½ ̊ Karkata Curve is going middle of India.
• In India 23 ½ ̊ Karkata Curve passing through Gujarat, Chhattisgarh,
Madhya Pradesh, Orissa, Andhra Pradesh
• 82 ½ ̊eastern Longitude is considering as Indian standard curve or
Indian time line.
• 82 ½ ̊eastern Longitude is passing through Uttar Pradesh,
Chhattisgarh, Madhya Pradesh, Orissa, Andhra Pradesh states in India.
• 82 ½ ̊eastern Longitude curve is passing through Allahabad town in
Uttar Pradesh and Kakinada town in Andhra Pradesh.
• Indian standard time is 5 ½ faster than the Greenwich curve or
international standard time.
• India’s special economic zone is 320 KM.
• India’s pradeshika water is 12 Nautical miles.
• India’s territorial boundaries are
West – Pakistan
North west (vayuvyamu)- Afghanistan
East – Bangladesh, Myanmar
North – China, Tibet, Nepal and Bhutan
• India’s Boundaries are
West – Arabian sea, Pakistan
North west (vayuvyamu)- Afghanistan
East – Bangladesh, Myanmar and Bay of Bengal
North – China, Tibet, Nepal and Bhutan
South – Indian Oceans
• India having territorial boundaries with 8 countries
• In south India and Srilanka is separated by Palk Strait and Gulf of
• West Bengal, Assam, Meghalaya, Tripura and Mizoram having the
territorial boundary with Bangladesh with 4096 KMs.
• Jammu and Kashmir, Himachal Pradesh, Uttaranchal, Arunachal Pradesh
and Sikkim having territorial boundary with China with 3917 KMs.
• Rajasthan, Gujarat, Punjab and Jammu and Kashmir have the territorial
boundary with Pakistan with 3310 KMs. Among them Rajasthan having
highest territorial boundary with Pakistan.
• Sikkim, West Bengal, Bihar, Uttar Pradesh and Uttaranchal having the
territorial boundary with Nepal with 1752 KMs.
• Arunachal Pradesh, Nagaland, Manipur and Mizoram having the territorial
boundary with Myanmar with 1458 KMs.
• Sikkim, West Bengal, Assam, Arunachal Pradesh having the territorial
boundary with Bhutan with 587KMs.
• Jammu and Kashmir having the territorial boundary with Afghanistan with
• Sikkim and Arunachal Pradesh having the territorial boundary with Tibet.
• There is RadCliph curve between India and Pakistan.
• There is Mechohan Curve between India and China
• There is Durand curve between India and Afghanistan
• Indian Southern most point is Indira point. This is also called pigmolian
• Indian Northern most point is Kilik davas pass in Jammu and Kashmir.
• In 1956 total 14 states and 6 Union territories had in India.
• In 1961 Goa and Daman and Diu got from Portuguese and made as Union
• In 1987 Goa made as state as 25th state.
• In 2000 Chhattisgarh made from Madhya Pradesh as 26th state.
• In 2000 Uttaranchal made as 27th state from Uttar Pradesh.
• In 2000 Jharkhand made as 28th state from Bihar.
• At present total 28states and 7 Union Territories are there in India.
• Largest state in India is Rajasthan (1, Madhya Pradesh (2), Maharashtra
(3), Andhra Pradesh (4).
• Smallest state in India is Goa.
• Largest populated states are Uttar Pradesh (1), Maharashtra (2), Bihar
(3) and West Bengal (4) and Andhra Pradesh (5).
• Smallest Populated state is Sikkim.
• Second lowest populated state is Mizoram.
• Madhya Pradesh, Jharkhand, Chhattisgarh states are called Land locked
states (Bhuparivestita Rastralu).
• Uttar Pradesh state having the highest boundaries with another states,
total 8 states have the boundary with Uttar Pradesh.
• Total 247 islands have to India, among them 204 islands are there in Bay
Physical Features of India:
• Indian physical features can divided into four main regions.
1. Great Mountain Zone: this is almost Himalayan regions with
2400 KMs length and 240KMs to 320 KMs width.
2. Ganga and Indus Plains.
3. Desert region
4. Southern Peninsular.
• Indian climate of India may be broadly described as tropical monsoon
type. These are four seasons.
1. Winter – January to February.
2. Hot Weather Summer – March to May.
3. Rainy or South-Western Monsoon – June to September.
4. Post-Monsoon or North – East Monsoon – October to December.
• India’s climate affected by two seasonal winds..
1. North – East Monsoon (Eesanya) it is known as winter monsoons
blows from land to sea..
2. South – West Monsoon (Nyruthi), it is known as Summer
Monsoon blows from sea to land.
• The availability of minerals determines the peace of economic
development of a country to great extent.
• Minerals are basically natural resources.
• India having ample deposits of coal, iron, barites, bauxite, mica,
manganese, gypsum, chromites, dolomite and limestone etc.
Bauxite: India stands 5th in the world. Orissa is having highest resources
after Andhra Pradesh is second place.
Barytes: Andhra Pradesh is having highest resources. Managampet of
Kadapa district having highest resources in Andhra Pradesh.
Coal: India is 3rd place in the world. West Bengal, Orissa Jharkhand, and MP.
Bulk of the coal production comes from Bengal – Jharkhand coal fields. They
contribute 60 to 65% of the total production.
Lignites: Tamilnadu having highest resources.
Cromites: highest available in Orissa late Andhra Pradesh.
Copper: Rajasthan, Madhya Pradesh, Jharkhand.
Diamond: The main diamond bearing areas in India are Panna belt in
Madhya Pradesh, Munimadugu – Banaganpalle conglomerate in Kurnool
ditrict, Wajrakarur in Anantapur and Kimberlite at Raichur in Karnataka.
Dolomite: Orissa, Mandhya Pradesh, Andhra Pradesh.
Gold: there are three important gold fields in India. One is Kolar Gold fields
in Kolar district in Karnataka, second is Hutti Gold fields in Raichur district in
Karnataka and third is Ramgiri Gold fields in Anantapur district in Andhra
Gypsum: Rajasthan and Jammu & Khasmir.
Iron ore: Jharkhand, Orissa, Chhattisgarh, Karnataka.
Lead and Zinc: Rajasthan, Gujarat, Bihar, Mandya Pradesh.
Limestone: Mandhya Pradesh, Tamilnadu, Andhra Pradesh.
Manganese: Karnataka, Orissa, Maharastra.
Mica: Andhra Pradesh, Jharkhand, Bihar, Rajasthan.
Magnesite: Tamilnadu and Uttarakhand.
Crude Oil: At present oil is being explorated in India at many places of
Assam and Gujarat.
Government of India had announced a New Mineral Policy on March 5th,
1993. which included the fallowing salient features.
• Permitting foreign companies to share mineral extraction.
• Extension of private sector
• Use of foreign modern technology for exploration and extraction.
• Stress on environment protection
Indian Economy Before independence:
• Indo Greeks issued first time gold coins in India.
• Kushans and guptas issued gold coins in large scale.
• In 1542 Shersha issued silver rupee coins
• 1882 paper currency issued in India by britishers
• Since 1935 Indian rupee became independent because RBI was
established in 1935
• The pre-independence period was a period of near stagnation of the
• At the time of independence, the Indian economy was caught up in a
vicious circle of poverty
• Like low income – low level of saving – low capital formation – low
investment – low employment – low level of income.
• May 17th 1498. Portuguese enter to India
• December 31, 1600 British east India company established
• In 1602 Dutch east India company any British east India company
entered to India
• In 1664 French east India company entered to India
ECONOMIC IMPACT OF THE BRITISH RULE
• After the battle of plassy and bauxar, the Indian economy was
transformed from a surplus and self-sufficient economy into a colonial
Land Systems During British Period
1. ZAMINDARI SYSTEM: in 173 Karan walis introduce this system
as permanent settlement. Zamindari power given to hereditary
Bengal , Bihar and Orissa this system was there
2. Mahalwari system: in 1800 Sir mekanji recommended this
system, ayodhya, goa, central India it was there
3. Rytwari system: it was introduced in 1802. Madras and Mumbai
it was there, it introduced by Thomas Munro as a collector of
British colonial exploitation in India can be broadly divided into 3 stages or
1. First stage or the period of mercantilist phase.
• This period is between 1757 and 1813.
• During this period EIC completely monopolized trade and began the
direct plunder of Indian wealth the company used its political power to
dictate terms to the weavers of Bengal who were forced to sell their
products at a low prices.
• The basic aim of British administration in India was to transform
Indian sub-continent as a consumer market for British finished goods.
2. The second stage: 1813 to 1858.
• The Indian handi craft fell after 1813, when the Indians traders last
foreign markets and domestic markets.
• This stage was called industrial phase, which was lead to the drain
of Indian wealth for the interest of British industry
• The industrial revolution in British has completely transformed
Britons economy and its economic relationship with India.
• During this period British imported raw materials from India and
brought back manufactured goods to India.
• The doors of India were open to foreign trade but the Indian
products had to compete with British products with heavy import
duties on entry into Briton.
• During this period Indian sugar had to pay on entry into Briton 3
times of price. some time it was 400% more high.
• So India was forced to export raw materials instead of exporting
• India exported only raw cotton, jute, silk, oilseeds, wheat, indigo
3. The third stage:
• This stage is also called finance colonialism
• It was started after 1860
• The 1857 revolution was basic factor to change the nature of
• The Britishers constructed roads, railways, post offices and
telegraph, banking to meet their social and commercial needs.
• British capitalist invested money on various activities
• As a result the Indian public debt increased to British so India
became a real colony to British.
Commercialization of Agriculture:
• Before Britishers entered to India, India was a self sufficient of food
grains but during the British period Famines occurred due to
commercialization of agriculture.
• Indigo: two types of indigo cultivators
I. nij: Directly under the supervision of British investors.
II.Zirat or Raiyyati: where the farmers were forced to grow it.
• Tinka tiya system: where the peasants were forced to grow indigo on
3/20 per bigha.
• The industrial revolution in Briton transformed the position of the
industries in India.
• In 1813, monopoly abolished on trade and started Lassies Faire
• There was no tariff to protect the Indian industries
• But there were high tariffs in Briton to Indian goods.
• It was one side free trade
• Indian exports reduced rapidly due to their policy
• According to Amiya Bagahi the % of the people depends on industries
reduced from 18.5% in 1809-13 to 8% in 1901.
• Due decline of handi crafts, the dependence of agriculture increased
from 55% in 1931 to 72% in 1951
• Due to de-industrialization the artisans were forced to migrate to
villages as landless laborers.
• Lord Dalhousie initiated a programme of wide railway construction in
• In his famous mint on railways, he defined the economic reason
behind the railway construction
• In 1853 Bombay to thane started the first railway line
• By 1905 nearly 45,000 Kms of railways had been built
• Nearly 350 cores invested by British capitalist with very high rate of
• During the 1850 Land revenue was – 50%
• Income or license tax -0.3%
• Public expenditure increased around 41.9% in 1881-82
• During Curzon period it was increased by 51.9%
• Civil administration including legislative, judiciary, pensions etc
accounted for about 25% of the total public expenditure.
• Between 1875-76 to 1898-99 the home charges amounted to 16% of
the current revenue and it was increased to 33% in 1933.
The drain off wealth
• The drain of wealth explained by dadabai Naroji, R.C.Dutt, R.P.Dutt
and Bipin Chandra.
• Dadabai Naouroji brought it to light in his book titled poverty and un
British rule in India.
• R.C.Dutt – economic history of India
• R.P.Dutt – India to day
• Industrial evolution of India- D.R.Gadgil
• Famines in India – B.M.Bhatia
• Colonialism and metrolisem- bipin Chandra
• After plassy was drain was started
• But after 1858 the drain of wealth increased more
• Drain of wealth took place through various forms, like
I. Home charges after 1857 this was constituted 24% of the total
revenue in India
II. Civil and military charges
III. Interests on foreign capital investments
• According dadabai naouroji30% to 40% drain per annum
• According Prof. C.N.Venkil- the drain of wealth was rs.591 million from
1834 to 1924.
• During 1757-65 company officials expenditure was £6 million
Characteristics of Indian Population:
• India is a rich in flora
• India is the 10th position in the world in case of flora (plant diversity)
• India is the 4th position in Asia in case of flora in plant diversity
• Botanical survey of India Kolkata described around, 46,000 species of
plants after surveying 70% of geographical area.
• According Zoological survey of India (Kolkata), India has great variety
of fauna numbering over 89,000 species
• Out of 89,000 species
• 2577 are protista
• 5070 are Mollusca
• 68,389 are Arthropod
• 209 are Amphibians
• 390 are Mammalian
• 456 are Reptilian
• 119 are Protochardata
• 2546 are Pisces
• 1232 are Aves
• 8329 are others
• In 1830 -1 billion (100 cores) total world population
• In 1930 – 2 billion total world population (in 100 years 1 billion
• In 1960 – 3 billion total world population (in 30 years 1 billion
• In 1975 – 4 billion total world population (in 15 years 1 billion
• In 1987 July 11 – 5 billion total world population (in 12 years 1 billion
• In 1999 October 12 – 6 billion total world population (in 12 years 1
billion population increased)
• July 11th is called world population day
• October 12th is called a 6th billion day
• Year -population (cores)
• 1901 -23.83
• 1921 -25.13
• 1951 -36.1
• 1961 -43.9
• 1971 -54.8
• 1981 -68.33
• 1991 -84.64 (84, 64, 21, 039)
• 2001 -102.87 (102, 87, 37, 436)
Population (in annual
S.NO YEAR growth rate
1 1901 23.83 -- --
2 1911 25.20 5.75 0.56
3 1921 25.13 -0.31 -0.03
4 1931 27.89 11.00 1.04
5 1941 31.86 14.22 1.33
6 1951 36.10 13.31 1.25
7 1961 43.92 21.64 1.96
8 1971 54.81 24.80 2.22
9 1981 68.33 24.66 2.20
10 1991 23.87 2.14
11 2001 21.54 1.95
Indian population and different stages:
• 1801-1921 periods is called first stage, it is called stagnation in
• 1921-1951 period is called second stage, it is called steady but low
growth rate in population.
• 1951-1981 period is called third stage, it is called rapid growth rate in
• 1981-2001 period is called fourth stage, it is called decreasing growth
rate in population
• In First stage high birth rate and death rate also very high
• In second stage birth rate decreased from 49% to 39.9% & death rate
decreased from 49% to 27%
• In third stage birth rate decreased from 40% to 37% and death rate
decreased from 27% to 15%. In this stage there is population
• In 1971 there was highest growth rate in population (24.80% for
• In fourth stage population growth rate started to reduce.
• During 1981-91 16.31 cores population increased
• During 1921-2001 18.23 cores population increased
• During 1981-91 annual growth rate was 2.11%
• During 1991-2001 annual growth rate was 1.93%
• Great divide year in India population is 1921. Because I this year there
was negative growth rate in population.
• Small dive year was 1951 because population decreased less
• Divide year was 1981 because from this year population started to
Most populated states:
• Uttar Pradesh 16.16% (16, 61, 97,921) in total population of
• Maharashtra 9.42% (9,68,78,627)
• Bihar 8.07% (8,29,98,509)
• West Bengal 7.79% (8,01,76,197)
• Andhra Pradesh 7.4% (7,62,10,007)
Lowest Populates states:
• Lowest populated state was Sikkim with 0.05% (5,40,851)
• Second lowest populated state was Mizoram with 0.09% (8,88,573)
Highest Union territory population UTs is Delhi with 1.35% (1, 38, 50, 507)
Second highest populated UTs is Pondicherry with 0.09% (9, 74,345)
Lowest populated UTs is Lakshadweep with 0.01% (60, 650)
Second lowest populated UTs is Daman and Diu with 0.02% (1, 58.204)
Highest growth rate states:
• Nagaland 64.53%
• Dadranagar Haveli 59.22%
• Daman and Diu 55.73%
• Chandigarh 40.28%
Lowest Populated states:
• Kerala 9.43%
• Tamilnadu 11.72%
• Andhra Pradesh 14.59%
There are six type of town are there in India
• Class-I Towns – above 1,00,000
• Class-II towns – between 50,000 to 99,999
• Class –III towns -between 20,000 to 49,999
• Class -IV towns -between 10,000 to 19,999
• Class –V towns –between 5,000 to 9,999
• Class- VI towns –less than 5000.
• In 1951 there was class –I, population was 44.4%
• In 2001 there was class-I , population was 62.3%
• According 2001 census there are 35 million cities. (More than
• From Andhra Pradesh Hyderabad and Vizag.
• Highest population growth city was Jaipur.
Rural and urban population
Population (in %)
S.NO YEAR million)
Rural Urban Rural Urban
1 1901 213 26 89.2 10.8
2 1921 223 28 88.8 11.2
3 1951 299 62 82.7 17.3
4 1981 524 159 76.7 23.3
5 1991 629 218 74.3 25.7
6 2001 743 286 72.2 27.8
• According 2001 census total S.C Population 16, 66, 36,000
• Total S.C population 5 16.20%
• highest % of S.C population state was Punjab with 28.85%
• second position Himachal Pradesh with 24.72%
• third position was West Bengal with 23.02%
• Fourth position was Uttar Pradesh with 21.15% but population wide
this is the first state with 3, 51, 48, 000.
• According 2001 census total STs Population India was 8,43,26,000
• STs % in total population is 8.20%
• STs Population highest state is Madhya Pradesh with 1, 22, 33,000.
• STs population % states
1. First Lakshadweep 94.51%
2. Mizoram 94.46%
3. Nagaland 89.15%
4. Meghalaya 85.94%
• Highest Town populated state first is Maharashtra and second is Uttar
• Lowest town populated states are first is Sikkim and second lowest is
• More town population % state is Goa with 49.8% and second is
Mizoram with 49.6%
• Lowest town % populated states is Himachal Pradesh with 9.8% and
second lowest Bihar with 10.2%
• Highest town populated UTs is Delhi
• Lowest Town populated UTs is Lakshadweep
• It is defined as the number of persons lived per Square Kilometer.
• Year population density
• 1951 117
• 1961 142
• 1971 177
• 1981 216
• 1991 267
• 2001 324
• Highest density states
• S.NO STATE 2001 1991
• First west Bengal 903 767 (1)
• Second Bihar 881 685 (3)
• Third Kerala 819 749(2)
• Fourth Uttar Pradesh 690 548(4)
• Fifth Punjab 484 403(5)
• Andhra Pradesh population density was 277 in 2001 and 242 in 1991.
• Lowest density states
• Arunachal Pradesh with 13 in 2001 and 10 in 1991.
• Second lowest density states are Mizoram with 42 in 2001 and 33 in
• Highest population density UTs is Delhi with 9340 in 2001 and 6352 in
• Second highest population density UTs is Chandigarh with 7900 in
2001 and 5632 in 1991.
• Lowest population density UTs is Andaman Nicobar Islands with 43 in
2001 and 34 in 1991.
• Second lowest population density UTs is Dadranagar Haveli with 449 in
2001 and 282 in 1991.
• It is defined as the number of female population pre thousand male
• The sex ratio in the our country had always remained unfavorable to
• At the time of beginning of 20th century sex ratio was 972:1000, but
later it was declined
• Year sex ratio
• 1901 972:1000
• 1911 964:1000
• 1921 955:1000
• 1931 950:1000
• 1941 945:1000
• 1951 946:1000
• 1961 941:1000
• 1971 930:1000
• 1981 934:1000
• 1991 926:1000
• 2001 933:1000
• Highest sex ratio states are
• First Kerala with 1058:1000
• Second Chhattisgarh with 989:1000
• Third Tamilnadu with 987:1000
• Fourth Andhra Pradesh with 978:1000
• Lowest sex ratio among the state is Haryana with 861:1000
• Second lowest sex ratio state among the states is Sikkim with
• Highest sex ratio among the UTs is Pondicherry with 1001:1000
• Second highest sex ratio among the UTs is Lakshadweep with
• Lowest sex ratio among the UTs is Daman and Diu with 710:1000
• Second lowest sex ratio among the UTs is Chandigarh with 777:1000
• Highest sex ratio among the states and UTs is Kerala with 1058:1000
• Lowest sex ratio among the states and UTs is Daman and Diu with
• A person aged seven and seven, who can both read and write with
understanding in any official language is treated as a literate
• A person, who can only read but cannot write is not a literate
• But before 1991 census means up to 1981 census children five years
of age necessary treated as illiterates.
Year Total literacy Male Female
rate (male + literacy literacy
female) rate rate
1951 18.33% 27.16% 8.86%
1961 28.3% 40.40% 15.35%
1971 34.45% 45.96% 21.97%
1981 43.57% 56.38% 29.76%
1991 52.21% 64.13% 39.29%
2001 64.84% 75.26% 53.67%
Highest literary states:
rank State Total male Female
first Kerala 90.86% 94.24% 87.72%
second Mizoram 88.80% 90.72% 86.75%
third Goa 82.01% 88.42% 75.37%
fourth Maharashtra 76.88% 85.97% 67.03%
fifth Himachal 76.48% 85.35% 67.42%
Lowest Literacy state:
rank State Total male Female
Lowest Bihar 47% 59.68% 33.12%
Second Jharkhand 53.56% 63.83% 43.53%
Third Arunachal 54.34% 63.83% 43.53%
UTs literacy rate:
Rank UTs Total male female
First Lakshadweep 86.66% 92.53% 80.47%
Second Chandigarh 81.94% 86.14% 76.47%
Third Delhi 81.67% 87.33% 74.71%
Fourth Andaman 81.30% 86.33% 75.24%
Fifth Pondicherry 81.24% 88.62% 73.90%
Sixth Daman and 78.18% 86.76% 65.61%
Seventh Dadranagar 57.63% 71.18% 40.23%
• The age between 0to 14 years and above 60 years is called
unproductive population India.
• The age group between 15 years to 60 years is called the working
population in India.
Different age group composition in different years
Year 0-14 years 15-60 More than 60
age group years age years age
1911 38.8% 60.2% 1.0%
1991 36.5% 57.1% 6.4%
2001 34.3% 58.7% 7.0%
Productive and un-productive population in India in different
Year Productive Un-productive
1911 60.2% 39.8%
1991 57.1% 42.9%
2001 58.7% 41.3%
• If there is more population between 0-14 years, we describe that there
is a high population growth rate in the country.
• If there is more population more than 60 years. we can describe that
life expectancy and standard of living of the people is increasing.
• Productive population can help for the development of economy.
Religion wide population India based on the 2001 census.
Religion % of the Sex ratio Literacy Female
population rate literacy
Hindu 80.5% 931:1000 65.1% 53.2%
Muslim 13.4% 936:1000 59.1% 50.1%
Christians 2.33% 1009:1000 80.3% 76.2%
Sikhs 1.84% 893:1000 69.4% 63.1%
Buddhists 0.8% 953:1000 72.7% 61.7%
Jain 0.4% 940:1000 94.1% 90.6%
Others 0.73% -- 47.0% 33.2%
Highlights of 2001 population census:
• Total Population 102.87 millions
• Male population – 53.22 millions
• Female population – 49.65%
• Life expectancy is 63.2 years
• Male life expectancy is 62.3%
• Female life expectancy is 63.9 years
• In 2006 there is IMR (Infant Mortality Rate) is 57 per 1000 births
• In 2006 there is male IMR (Infant Mortality Rate) is 56 per 1000 births
• In 2006 there is female IMR (Infant Mortality Rate) is 59 per 1000
• In 2006 there is birth rate in India is 23.5% per 1000.
• In 2006 there is death rate in India is 7.5% per 1000.
First time national population policy announced by government in
• Compulsory Family planning system implemented in India
• Girls marriage age increased from 15years to 18 years
• Men marriage age increased from 18 years to 21 years.
• In 1977-78 Janata Government Voluntary Family Planning system
• They changed Family planning control department name changed as
family planning and welfare department.
National Population policy 2000:
• Based on the recommendation of M.S Swaminathan (1994) NDA
government announced National population policy on February 15,
• The main objective of this policy is to encourage two children and to
stabilize the population by 2046 A.D.
The main features of 2000 population:
1. 42nd constitutional amendment act decided the Lokh Sabha seats
based on the 1971 population census up to 2001. But 2000
population policy extended from 2001 to 2026.
2. IMR should be reducing to below 30 per 1000 live births.
3. MMR should be reduce below 1000 per 1,00,000 lives
4. Universal immunization against TB, Polio, Diphtheria, whooping
cough etc should be taking.
5. Achieving 80% deliveries in regular dispensaries, hospitals and
medical institutions with trained staff.
6. Access to information including information of AIDS and prevention
of communicable deceases.
7. Incentive to adopt two-child small family norm and increasing
facilities for safe abortions.
8. Strict enforcement of child marriage restraint Act and pre-Natal
Diagnostic technologies Act.
9. Raising the marriage of girls from 18 years to 20 years preferably
10. Special rewards for girls marriage after 21 years and opting
terminal method of contraception after the second child
11. Health insurance coverage to those below the poverty line who
undergo sterilization after having two children
12. The appointment of a national commission on population to be
headed by the Prime Minister to monitor the implementation of
• Indian population crossed the 10 cores on May 11, 2000 and same day
Government constituted national population commission under the
chairman ship of Prime Minister.
• Vice chairman of this national population commission is deputy
planning commission chairman.
• Government started Janasankhya Sthirata Kosh (JSK) with Rs.100
cores on June, 2003 to stabilize the population by 2046.
• National Rural Health Mission (NHRM) Started by the government on
April 12, 2005 to increase the village quality by providing health
• The technical group of National population commission projected that
India population will be like the fallowing after 20 years i.e. by 2026.
1. Total India population will be 140 cores.
2. Sex ratio will be 930:1000.
3. Population density will be 426 per Sqkm
4. Population growth rate during 2001-2006 would be 36%
5. Highest population growth rate during 2001-2006 will be Delhi with
6. Lowest population growth during 2001-06 will be Tamilnadu with
15% and Kerala with 17%
7. By the end 2006 Uttar Pradesh population will be 24.9 Cores.
8. Age group composition would be like in the fallowing, according
technical national population commission.
Age group 2001 2026
0-14 years 34.3 years 23.4 years
15 to 60 58.7 years 64.3 years
Above60 7.0 years 12.4 years
The exchange of goods is called Barter System
Barter means in which goods or services are directly exchanged for other
goods and/or services, without the use of money.
Barter system was existed when money was not in a circulation, there was a
less economic activities and less desires of the people.
The barter system of exchange had many problems such as lack of double
coincidence of wants, difficulty in establishing exchange rates among
commodities to be exchanged, difficulty in the fine divisibility of goods and
storing of goods for future use. In order to eliminate these problems money
The word MONEY derived from Latin word MANETA (may be this word used
because coins printed at Maneta goddess temple).
1. Money is what money does —WAKER
2. Money is one that possesses general acceptability -- SELIGMAN
3. Anything that is generally acceptable as a means of exchange and the
same time acts as a measure of value – CROWTHER
4. Anything which is widely accepted in payment for goods or in
discharge of other kinds of business of obligations —ROBERTSON
5. Money that delivery of which debt-contracts and prices contracts are
discharged and in the shape of which a store of general purchasing
power is held —J.M.KEYENS
6. Money is a temporary purchasing power of the house – Milton
Different types of Money:
1. Commodity Money: Food grins, animals, cowries, cows and skin of
2. Metallic Money: If the metal used for as a currency is called metallic
money. Ex: Copper, silver, iron and gold are called metallic money.
This type of money again divided into 3 types.
• Full body or Standard money: If the metal internal and face
value is equal that is called full bodied money in India between
1835 and 1893 this type of was in a circulation.
• Token Money: Internal value is more than the face value.
• Denominators money: To use the small transactions.
3 Paper currency: Paper currency again divided into different types
• Representative paper currency: This currency has 100%
metallic value. If we want it can convert into paper currency into
metal. Ex; Gold.
• Convertible paper currency: If we want convert paper
currency into metal we can change it. So we have to maintain
the existence of metal.
• Inconvertible paper currency: in case of this paper currency,
currency will issue without any relation with metal. Currency
cannot change into metal. So this type of paper currency is not
necessary to maintain metal value ratio. This paper currency
again divided into two types.
1. Fiat Money: Currency which is legally decreed as valid
means of financing transactions. This type of money may
issued by the govt in emergency period.
2. Credit money: it is also called bank money. Cheques,
drafts etc. are called credit money.
1. Acceptability Criterion: Based on the acceptability money divided
into 2 types first is Legal Tender Money and Optional Money.
a. Legal Tender Money: Legal tender money, which is legally
made acceptable as a medium of exchange is called legal tender
money. The state and the people accept it as means of payment
to discharge their debts. All currency notes and coins issued by
the central government or central bank are legal tender money.
Cheques are not legal tender money because it may or may not
be accepted by the public. Legal tender money again divided
into unlimited legal money and Limited legal tender
money. In case of unlimited tender money people have to
accept all type notes, Rupee coins and ½ Rupee coins for the
repayments of debts. In case of limited legal tender money there
is some restrictions in case of repayments the loans. Ex; creditor
may not accept if 4000 25 Paise pays to repay Rs.1000 by the
debtor. 25 Paise can pay up to Rs.25 only. But present 25 Paise
is not in a use in India.
b. Optional Money: This type of money will not issued by central
bank or government. It doesn’t have any legal tender.
Debentures, securities, Certificates issued by post-offices,
Insurance papers, Cheques, Drafts etc. bank money are known
as optional money.
• Near money: The financial assets which do not come under the
definition of money but which can be readily convertible into
medium of exchange are called Near Money. Ex; Bonds,
Cheques, Shares, Drafts etc.
• Hot money: Funds which flow into a country to take advantage
of favorable rates of interest in that country. This is also called
Head money. Because of Hot money country will get financial
• Cheap Money: In which loans and advances are made available
on low interest rates.
• Dear Money: In which loans and advances are made available
on high interest rates. It will help to control inflation in the
economy. It is also called tight money.
• High Powered Money: The money which is under the control
of RBI is called High Powered Money.
• Call Money: This money will repay within 14 days. Commercial
banks which are having deficit money reserves will take loans
from others banks which are having more money reserves.
• Account Money: J.M.Keynes divided money into Account money
and actual money. Avarja money (Account money) it is money
using for to maintain the account. Ex: rupee, found, $. Actual
Money: (Vyavaharika money) Present circulation money is
called actual money.
• Fiduciary Money: (Viswasam) present in India currency
printing based on the minimum reserve ratio. If the currency will
print based on the belief on Govt, central bank.
The characteristics of good money:
1. Cognoscibility it has to identify easily
2. Acceptability by all
3. Portability it mean easy transportable.
4. Divisibility it has to divide into various types
5. Utility or Value because of this only gold and silver used as currency
6. Durability if there is no durability money can’t reserve for long time.
7. Stability money value will not change in short period
Functions of money
Money plays a vital role in modern exchange of economy. A modern
economy is rightly known as monetary economy because of the crucial
position money occupies in this economy. Today it is impossible to think of
any economic activity without the intervention of money. Money occupies a
key position by virtue of its functions.
The functions of money is divided into three types
• Primary Functions
• Secondary Functions
• Subsidiary Functions
(1).Primary Functions: Primary money does two types of functions (a)
Medium of Exchange (b) Measure of Value
(a) Medium of Exchange: The most important function of money is to
serve as medium of exchange. The importance of this function is better
understood if we focus on the problems of barter system. In a barter system
all exchanges are made in physical term which means that goods are
exchanged for goods. For an example to take place barter economy needs
what is known as double coincidence of wants. A possessor of good must
have information about the existence of a seller who would offer him the
goods that he desires and is ready to accept his good in exchange. Where as
in a money economy a person can easily transfer goods and services for
money and then exchange money for goods and services that he needs.
(b) Measure of Value: Money serves as a yardstick for measuring the
value of goods and services. Just as we use yards to measure length,
kilograms to measure weight, money is used to measure the value of goods
and services. It is possible to compare the relative value of different goods in
a money economy. When the values of goods and services are expressed in
terms of money, they become prices. A money economy is more efficient
than a barter economy because the former has a standard value.
(2).Secondary Functions: Along with the above the primary functions
money does these functions called secondary functions. These are (a) Store
of Value (b) Standard for deferred Payments & Transfer of Value.
(a) Store of Value: Money as a measure of value provides a liquid store of
value. Money has general purchasing power over all goods and services. So
people prefer to keep their assts in the form of money. In a barter system it
is difficult to store wealth for future use. Most of the goods like paddy, wheat
gets spoiled and the value of most of the commodities diminish with the
passage of time. But the value of money can be kept stable for a long time.
It is also provides assurance that future buying opportunities can be
exploited. Money would perform the store of value function more effectively
if its value remains stable.
(b) Standard for deferred Payments & Transfer of Value: Money
serves as a measure of deferred payments. Deferred payments refer to
future payments. As much money is helpful not only in current transactions
but also in conducting future transactions. Thus money acts as a bridge from
the present to the future i.e. an efficient store of value. Often people engage
in exchange that involve payments over some period of time. There will be
an inherent inconvenience in the receipt of payments at a later date because
people prefer liquidity in shorter time over liquidity in a longer time. To
measure this inconvenience and pay for their waiting time money is useful.
By providing a unit for measuring debts, money facilitates lending,
borrowing and hires purchasing of transactions. If money is to serve as a fair
and correct standard of deferred payments, its value must remain stable.
(3) Subsidiary Functions: According the Prof. Kinley, Money does the
following subsidiary functions along with the primary and secondary
• Money will provide Liquidity
• It creates credit
• It will measure the National Income
• Money will distribute the NI among the factors of productions
• Money will determine the value of goods
• Money will act as a major role in daily transactions for
According Paul N Jing the functions of money are divided into two types (1)
Static Functions, in which medium of exchange, Measure of Value, store of
value and standard for deferred payments. Due to these functions only price
mechanism will constitute in economy but due to static functions economy of
any country will not develop. (2) Dynamic functions, in which price level,
productions, consumption and distributions are influence the economy.
Money supply means “Total stock of money held by public in spendable
Classical definition: according this definition the function of money will
confined to only medium of exchange.
• MS= C + DD
Chicago economist definition: “Money is any thing that serves the
function of providing a temporary house of purchasing power”
• MS= C + DD + +TD.
Gurley & Shah:
• MS = C + DD + TD + Loans and advances which are made by other
than the banks + saving deposits + bonds.
Rad Cliph: “money supply covers the whole liquidity position that is relevant
to spending decisions” (costs nirnayalaku sambandhinchina total liquidity
stithini money supply antaru) so this method is also called liquidity method.
According Radcliph and Gurley & Shah it is a part of total liquidity. C+ DD +
TD+ Loans and advances & bonds,which are made by other than the banks
known as intermediaries.
Money supply in India:
Before 1967-68 money supply scope was very less. It was used only C +
In 1967-68 the scope of money supply increased in India. MS = C + DD +
TD. The word aggregate monetary resources used in money supply.
In 1977 RBI introduced 4 type of money supply in India.
M1 = Money with public (currency notes and coins) + Demand deposits of
banks (current and saving deposits of all banks) + other deposits with RBI.
(C + DD + OD)
• M1 is called narrow money
• M1 having highest liquidity
• M1 is equal to classical definition of money supply.
M2 = M1 + saving deposits with Post- offices.
M3 = M1 + Time deposits with banks (fixed or time deposits). (C + DD + OD
• M3 is called broad money
• It is equal to Chicago economists definition of money supply
M4 = M3 + all deposits of post- offices
M1 measures the most liquid form of money among 4 money stock measures
and it is known as NARROW MONEY. M4 possesses the lowest liquidity among
these 4. And M3 is the most important component among all money stock
measures which is generally termed as BROAD MONEY.
The working group under the chairmanship of Dr. Y.V. Reddy, Deputy
Governor of RBI, has suggested major changes in money stock measures.
This working group was constituted in December 1997, which submitted its
recommendations to RBI on June 23, 1998. The group suggested four new
money measures (M0, M1, M2, and M3) and three liquidity measures (L1, L2,
L3). Besides the group also recommended the publishing of financial sector
survey after every three months to capture the dynamic linkages between
banks and rest of the organized financial sector.
M0 = Currency in circulation + Bankers deposits with RBI + other deposits
with RBI. It is equal to old M1.
M1 = Currency with public + Demand or Current Deposits with banks + other
deposits with RBI (Currency with the public + Current deposits with the
banking system + demand liabilities portion of Saving deposits with the
banking system + other deposits with the RBI)
M2 = M1 + Time liabilities portion of savings deposits with the banking
system + Certificates of deposit issued by banks + Certificates of deposit
issued by banks + Term deposits maturing within one year.
M3 = M2 + Term deposits of residents with a contractual maturity of over
one year with banks + Call borrowing from Non- Depositary Financial
Corporations by the banking system.
L1 = New M3 + all deposits of post- office savings banks excluding National
L2 = L1 + Term deposits with term lending institutions and refinancing
institutions + Term borrowing by financial institutions + Certificates of
deposit issued by financial institutions.
L3 = L2 + Public deposits of Non- Banking Financial Companies.
Determinants of Money supply:
1. Monetary base or high powered money (it is under the control of
RBI). It is also called Primary Money. (C+ DD + TD + OD + CR)
2. money multiplier (MS = RM x Money multiplier)
3. Reserve ratio (Which is reserved in the RBI in the name of CRR)
4. Currency ratio (cash which are there in the banks SLR)
5. Belief on bank money
6. time deposits ratio
7. Economic growth (EG increases MS also increases)
8. Money value (If the money value is high MS also increases)
9. Real income (If real income increase MS also increases)
10. Interest rates
11. Monetary policy
12. Economic position (Prosperity and depression)
In any economy there are so many factors to determine Money supply.
Among them Reserve Money is most important factor.
Money Multiplier means “the amount by which a change in the monetary
base is multiplied to determine the resulting change”
Money multiplier explains that the money supply is how many times more
than the RM. That means it will explain the ratio between the money supply
RM means the money which is reserved in the RBI.
M = M/RM
RM = C + DD + CR.(Cash reserves)
For M1 (Narrow money) m = M1/RM
For M3 (Broad money) m = M3/RM
If CR increases RM will increase,
If RM will increase m will decrease
If m will decrease MS will decrease.
In the following table showed money multiplier for selected years.
Year M3 (Rs.in RM (Rs.in Multiplier
crore) crore) (m3)
1980-81 55,770 19,450 2.88
1990-91 265830 87780 (33%) 3.0
2000-01 1313220 303370 4.3
2005-06 2729530 573060 4.76
2006-07 3310278 652687 5.07
Velocity of money: It means the speed at which money is transferred from
one person to anther person or circulating through the economy in a
particular period of time.
The velocity of money supply will determined by
1. money supply or quantity of money
2. credit institutions
3. cash transactions
4. Consumption propensity: according Keynes velocity of money will
increase if the consumption will increase.
5. Economic position: during inflation velocity of money supply will
6. Distribution of income: if money has held with rich person velocity of
money will be low.
Quantity Theories of Money:
1. According economists opinion in economy always quantity of money is
equal to quantity of goods.
2. First time quantity of theory of money was explained by Davan Jatti,
Italian economist in 1588.
3. Father of quantity theory money is Jean Bodin, A French Economist.
Quantity theory of money can be discuss in four stages.
1. Classical or Fisher quantity theory of money.
2. Neo-classical quantity theory of money or Cambridge quantity theory
3. Keynes quantity theory of money
4. Friedman quantity theory of money
1.Fisher theory of money: American economist called Irving Fisher
explained his quantity theory of money in his book called Purchasing Power
of Money, 1911.
MV = PQ + P1Q1 + P2Q2 + - - - PnQn.
MV = ∑PQ or MV = PT
In the above formula MV is related for money.
PT is related for goods.
Fisher formula = MV= PT
M= Money supply which is in circulation
V= Velocity of Circulation of Money
P= Price level
M x V = Money supply
P x T = Money demand
MV (Money supply) = PT (Demand for money)
P = MV/T
After changing fisher theory the formula formulated as
MV + M1V1 = PT or
P = MV + M1V1/T
M1= credit money
V1= credit money velocity.
• According him price level or money value is always depending on
• Because according him in any economy prices will increase when
quantity of money will increase without increasing commodity.
• Fisher theory of money will also know as classical theory of money.
• Fisher theory will tell the relation between the money supply and
• There is positive relation between Quantity of money or money supply
and price level.
• According him demand for money is depending on T, P, and V.
• According his theory quantity of money increase double prices also
increases double. If quantity of money will decrease double price level
also decreases double.
• If Money supply (M) multiplies with velocity of money (V) we get
aggregate money supply.
• If price level (P) multiply with transaction (T) we get the aggregate
• So aggregate demand is equal to aggregate supply
• According him money supply determined by central bank so T is
depending on his income. So Y increases T increase if Y decrees T also
• But in an economy full employment is there according classical
economists so y is fixed.
• According his theory money value is depending on money supply and
demand for money
2. Cambridge quantity theories of Money:
• Cambridge students, Marshal, Pigou, Robertson, Keynes etc. and their
theories are called Cambridge theories of quantity theory of money.
• They developed their theories based on the cash reserves.
• So this theory is also called Cash Balances Quantity theory of money
• According them the value of money will depend on Money supply and
demand for money.
• Cambridge economists said that where the money supply and demand
for money will be equal the value of money will determine.
• According Fisher people will demand money for business transactions.
• But according Cambridge economists’ people will demand money for
expected and unexpected future requirement for transactions and
• According this theory there is negative relation ship between the
quantity of money and value of money.
• there is positive relations ship between prices and quantity of money.
(a) Marshal Formula = M=Ky
• M= Money supply
• Y= Real National Income
• K= the portion money which is reserved by people out the total real
• From Marshal Formula we can know the Purchasing power of the
money or value of money.
• P = Ky/M
• P= Purchasing power of money.
• According Marshal the value of Money is depending not only on Money
supply (M) but also K.
• K is more impacting the Purchasing power of money (P)
• Marshal gave more important to K than the M to determine the money
(b) A.C. Pigou Formula:
• P = KR/M
• P = Purchasing power of money or Money value.
• R = Aggregate real income.
• K = the portion money which is reserved by people out the total real
• M = total cash reserves of society or people or money supply.
• According Pigou If MS increase the purchasing power of Money is
decreases, MS decrease purchasing power of money increases.
• There is opposite relationship between money supply and purchasing
• We are explaining the P as purchasing power of the money. If we show
the P as prices then we have to write P = M/KR.
• Pigou gave more important to K.
• If prices reduce K will increase.
• If prices increase K is going to reduce.
(c) Robertson Formula:
• P = M/KT
• P = Price level
• M= money supply
• T= Total goods services within one year.
• K = the portion of money which is reserved out of T.
• According him there is a positive relationship between P and M,
• because prices will increases when money supply increase
• and prices will come down when money supply will decrease.
• At the same time the is a negative relationship between P and K or T
• Robertson formula is close to fisher formula.
(d) Keynes Formula:
• Before 1936, means before publishing the general theory we
considered as neo - classical economists.
• N = PK or
• P = N/K
• N= Total money supply
• P= consumer goods prices.
• K= the portion money to reserve out of income.
• There is positive relation between N and P
• Keynes theory of money is also known as income theory and saving
• According Keynes the cause to change aggregate demand is income
not Money supply.
• So the value of money (price level) in fact is the consequence of the
aggregate income rather than the supply of money.
• According him income is two types (1) money income (2) real income
• According him people will spend money on two commodities (1)
Consumers goods (2) Capital Goods.
• It means Aggregate Income = Aggregate expenditure
• So that S=T
• According Keynes Investment Is More Than The Saving, Then
Productivity, Production And Income Increases Result Is Saving Also
• So Saving Increase Equal To Investment
• Keynesian income quantity theory of money is related to short-run
(3) M. Friedman Theory:
• Friedman belongs to Chicago University
• His theory is called theory of demand for money.
• In 1956 “The quantity theory of money – restatement” book he
explained the quantity theory of money.
• According him demand for money depending on 4 things.
1. General Price level.
2. Real income
3. Current rate of interest.
4. Increasing rate of general prices.
• According Friedman there is positive and equal relation ship between
prices and demand for money. Ex 10 % p increases demand for also
• According him there is a positive relation ship between real income
and demand for money.
• Negative relationship is between rate of interest and demand for
• There also negative relation between demand for money and general
price increase rate.
• According Friedman income and price changes are not changing the
• According to him income of individual and firms’ income may not be
equal to their income.
• There must be an Inventory (stock) or demand of cash in hand
• The firms and individuals always try to minimize the cost of holding
money for their transaction purpose.
• These costs are called opportunity cost or withdrawal costs.
• The opportunity cost is represented by current rate of interest (I)
• The problem of transaction demand for money is, then the problem of
determining the optimal amount of cash the individual will hold.
• In order to solve that problem of optimum balances of money to be
held at minimal cost.
• He evolve the formula to determine the size of cash withdrawals
(conversions of bonds to money), which would minimize the total cost
of keeping an inventory of optimal cash balances large enough to meet
• Formula is C = 2bt/i
• C= optimal withdrawal of cash, t= is the total transaction in the given
period, b= is the cost associated with conversion of earning assets into
cash, i= is the rate of interest.
• Optimum level of transaction of cash varies inversely with the level of
Tobin’s model of portfolio Balance (Asset Choice):
• His demand analysis of the demand for money shows that the real
demand for money will vary inversely with the rate of interest
• And the real demand for money positively with the level of output.
Continuously increasing general prices is called inflation. Inflation is a
situation in which general price level rises or it is the same thing as saying
that the value of money falls. Continuously rise in prices caused by an
increase in the money supply. It is the situation where amount of money in
the country in an excess of the volume of goods available.
Definitions of Inflation:
• Issue of too much currency is inflation – Prof.Hawtrey.
• Too much money is chasing too few goods is called inflation – Dalton.
• Persistent and appreciable rise in the general or average of price is
called inflation – Gardner Ackley
• Inflation occurs when the volume of money increases faster than the
available supply of goods – Irving Fisher.
• Inflation is a phenomenon which is always and every where a
monetary phenomenon – M. Friedman
• It is a state in which the value of money is falling i.e. prices are rising
is called inflation – Crowther.
Types of inflation:
• Creeping inflation: It is known as mildest inflation. According to Kent
in this inflation prices will not increase more than the 3% a year.
• Walking Inflation: Here the rise in the price level is 4% to 5%.
• Running Inflation: Price level increases around 10%
• Hyper or Galloping Inflation: When price rise rapidly we call it as hyper
inflation. Price level increase more than the 10% and there is no upper
• Suppressed Inflation: If the inflation is suppressed by the government
controls and rationing price will decrease. When controls are lifted
prices rise again.
• Stagflation: in case of stagflation economic activity will come down,
but wage and price continue to rise. This is also called inflationary
Inflation + Stagnation = Stagflation.
• Reflation: In a situation where there are large number of unemployed
men and unutilized resources, the level of employment in the economy
can be increased by raising the level of aggregate demand.
• Deflation: it is a state of falling prices on account of insufficient of
• Disinflation: Without effecting production and employment prices will
• True Inflation: If the price will increase after full employment level is
called true inflation
• Inflationary Gap = Net Disposable income – Real goods services of
Demand (in crore) Supply (in crore)
Total money income NI
Taxes Expenditure on wars -
Disposable income Availability of production for
Net disposable income
Inflationary Gap = 200 – 180 =20
Causes for inflation:
• Demand push inflation: price increases when aggregate demand is
more than the aggregate supply. This type of inflation will occur in the
country when there is full employment equilibrium.
• Cost-push inflation: It arises due to an increase in cost of production.
Such type of inflation is caused by four factors. 1. An increase in
wages, 2. An increase in the profit margin 3. Imposition of heavy
taxation and 4. A rise in raw material price.
• Mixed inflation:
• If the Government expenditure increase on unproductively activities
like war, production not increase but money supply increase. So
demand for goods increases the price increases.
• When the country increases exports domestic goods circulation
decreases because of scarcity of goods prices rises.
• Traders reserve the goods in ware houses.
From demand side:
1. Increasing govt expenditure
2. increasing population
3. deficit budgeting
4. people consumption increasing
5. increasing exports
6. internal debt repaying
7. money supply increasing
From Supply side:
1. Natural calamity
2. scarcity of factors of production supply
3. if the traders store the goods
4. high rate of wages
5. high rate of taxes
6. if the organizers take the more profits
Effects of Inflation:
Out put: The effect of inflation on output depends on whether it is moderate
or very rapid. Creeping inflation has favorable effect on production
particularly when there are unemployed resources in the country. Once full
employment is reached, further increase in prices will not increase output
and employment. When inflation is rapid it creates business uncertainty and
adversely affects production.
Debtors Get benefits and Creditors get Lose
Salaried class: Lose
Fixed Income Class: Lose
Producers get benefit
Traders get benefit and consumers get losses
Investors: Share market investors (share holders) get gain and fixed
investors are lose
Farmers: Landlord those are given land for rent loses during rising prices
because they get fixed rents. But own cultivating land lords and tenants gets
BOP: During inflation BOP is unfavorable to country because this time prices
domestic goods prices will increase so imports will increase and exports will
Phillips curve: The A.W Phillips (British economist in 1958) curves examine
the relationship between Inflation and Unemployment. In any economy to
get price stability without inflation there must be more unemployment rate.
This curve tell that the relationship between the money wages and rate of
unemployment. According him if money wages increase unemployment rate
will decrease, and money wages decrease unemployment rate will increase.
So there is inverse or opposite relationship between money wages and rate
of unemployment. Because, if there is a high rate of unemployment, people
want more employment they will not demand high wages. According
M.Friedman but this is related to short run period.
Measures of Inflation:
WPI: It is also known as the producer Price index (PPI). It is similar to CPI
In construction. It measures the prices of some over 2000 commodities at
level of their first transactions. To measure inflation based on the WPI base
year is (1993-94) 2000-01 from April 1, 2006. To measure inflation through
WPI primary goods, energy, fuel, lubricants goods and manufacturing goods
are taking. 63.75% weighting is giving for manufacturing goods.
CPI: This index is designed to reflect changes in the prices of a Market
basket of consumer goods and services purchased by all urban
consumers.2001 (1982 is previous base year) is base year to measure
inflation with CPI. A single index is calculated for all the goods and services
in the basket as well as separate indices for groups of items like food,
Items Weighting for CPI 2001 is base
Pan, tobacco, and intoxicants 2.27
Fuel and Light 6.43
Clothing, Bedding and Footwear 6.58
GNP Implicit Price Deflator: It is implicit because it is not measured directly
as CPI & WPI. It is calculated by dividing current GNP by constant GNP.
Consumer Expenditure implicit Price Deflator: It is an index of price
change for all of the goods and services including in the personal
consumption expenditure (PCE) component of the GNP, and is derived as is
the implicit price deflator for GNP as a whole.
Inflation in India:
1st five year plan WPI reduced 17.0% and CPI reduced from 101 to 96%
2nd five year plan WPI increased from 92.5% to 124.9% CPI Annual inflation
rate was 5.3%
3rd five year plan 125.1 to 165.1 WPI,
Annual plans Annual inflation rate was 7.8% and WPI increased from
165.1% to 172%
4th plan Annual inflation rate was 40.0% and WPI increased from 172 to
5th plan congress government period inflation was 6.4% and during Janata
government period 21.0%
6th plan annual inflation rate was 10.0%
7th plan Annual inflation rate was 7%
Year Inflation rate (%)
2005 August 3.3
2007 May 5.27
2008 March 8 5.92
2008 April 19 7.57
2008 July 12 11.89
2009 March 7 0.26
Control of Inflation in India:
The various measures that can be adopted to check inflation can be
classified in three groups
(1) Monetary measures: Monetary measures aim at regulating the supply of
money in an economy. More important among the monetary measure are
Bank rate policy, CRR, SLR and Open Market Operations and qualitative
controls like margins.
(2) Fiscal Measures: Fiscal measures are the part of the budgetary
operations of government in terms of Public Expenditure, Taxation and
(3) Other Measures: Output adjustment, Wage policy and Price control and
During 2007-08 government of India took some of the anti-
• Public sectors agencies are importing wheat to increase the availability
of wheat during 2007-08
• To maximize procurement of wheat and paddy the government
increased the bonus
• To maintain price stability, the central issue price for rice and wheat hs
not revised since July 2002.
• There has been continuous reduction in the import duty on edible oils.
• The word bank derived from Germen word called banc
• In German, the word Banc means Joint stock company
• 1157- Bank of Venis oldest bank in the world.
• 1401- Bank of Barcelona
• 1407- bank of Geneva
• Bank of Geneva and Bank of Venis continued till 18th century.
• 1609- Bank of Amsterdam and Bank of Hamburg
• 1656- Rigs bank in Sweden was oldest central bank but
• 1694- Bank of England it is called first central bank
• 1800- The Bank of France
• 1914- Central Bank in America
Banks in India:
• 1688- Bank established in Madras province and in 1724 Inko Bank in
Bombay and these two banks are called Agency Houses. These two
banks closed during 1929-32.
• 1770- Bank of Hindustan -1791 closed
• 1786- Bengal bank – 1791 closed
• 1806- Bank of Bengal
• 1840 – Bank of Bombay
• 1843- Bank of Madras
• 1881- Oudh Bank first Indian bank
• 1894- PNB- present oldest bank in India
• 1901- Peoples Bank
• 1906- Bank of India
• 1909- Bank of Baroda
• 1911- Central Bank of India
• 1921- Imperial Bank of India. It was Nationalized on July 1, 1955 and
named as SBI
• According SBI Act 1959 8 SBI allied banks established and later SB OF
Bikaner and SB of Jaipur merged and recently SB of Sowrastra merged
with SBI on 2007 Jun. So present only 6 SBI allied banks are there.
1. SB Of Bikaner and Jaipur
2. SB Hyderabad
3. SB of Indore
4. SB of Mysore
5. SB of Patiala
6. SB of Travancore.
On July 19, 1969 14 banks nationalized which are having more than Rs.50
1. Central Bank of India
2. Bank of India
3. Allahabad Bank
4. Dena Bank
5. Syndicate Bank
6. Canara Bank
7. United Commercial Bank
9. United Bank of INDIA
10. Union Bank of INDIA
11. Indian Overseas Bank
12. Bank of Maharastra
13. Bank of Baroda and 14. Indian Bank
On April15, 1980, 6 banks nationalized which are having more than Rs.200
1. Andhra Bank
2. Punjab & Sind Bank
3. Vijaya Bank
4. Uco Bank
5. Corporation Bank
6. Oriental Bank of Commerce
September 4, 1993, new Bank of India merged with PNB so present there
are only 19+1+6=26 Public sector Nationalized banks are there.
Private sector banks (21+13)
1. Axis Bank (formerly UTI Bank)
2. Bank of Rajasthan
3. Bharath Overseas Bank
4. Catholic Syrian Bank
5. City Union Bank
6. Development Credit Bank
7. Dhanalakshmi Bank
8. Federal Bank
9. Kumfu Blade Bank
10. Ganesh Bank of Kurundwad
11. HDFC Bank
12. ICICI Bank
13. IDBI Bank
14. IndusInd Bank
15. ING Vysya Bank
16. Jammu & Kashmir Bank
17. Karnataka Bank Limited.
18. Karur Vysya Bank
19. Kotak Mahindra Bank
20. Lakshmi Vilas Bank
21. Lord Krishna Bank ( now Centurion Bank of Punjab)
22. National Bank
23. Ratnakar Bank
24. Rupee Bank
25. Saraswati Bank
26. SBI Commercial and International Bank
27. South Indian Bank
28. Tamilnadu Mercantile Bank Ltd.
29. Thane Janata Sahakari Bank
30. Bassein Catholic Bank
31. YES Bank
1. ABN AMRO Bank N.V.
2. Abu Dhabi Commercial Bank Ltd
3. American Express Bank
4. Antwerp Diamond Bank
5. Arab Bangladesh Bank
6. Bank International Indonesia
7. Bank of America
8. Bank of Bahrain & Kuwait
9. Bank of Ceylon
10. Bank of Nova Scotia
11. Bank of Tokyo Mitsubishi UFJ
12. Barclays Bank
13. BNP Paribas
14. Calyon Bank
15. China Trust Commercial Bank
16. Cho Hung Bank
18. DBS Bank
19. Deutsche Bank
20. HSBC (Hong Kong & Shanghai Banking Corporation)
21. JPMorgan Chase Bank
22. Krung Thai Bank
23. Mashreq Bank
24. Mizuho Corporate Bank
25. Oman International Bank
26. Société Générale
27. Standard Chartered Bank
28. State Bank of Mauritius
30. Taib Bank
Initially General Bank of Bengal and Bihar (1773) had the characters of
Central Bank but it was worked for short period. Since this time government
identified the necessary of Central Bank
According Royal Commission (1926) suggestion government introduced a bill
in legislative assembly. But it was not passed.
Again in 1931 Central Banking Enquiry Committee suggested the necessary
of Central Bank. Based on this committee recommendation new bill
introduced on September 8, 1933 and made 1934 RBI act and as a result on
April 1, 1935 RBI established.
RBI established based on the J.M. Keynes plan. Bank of England is the
model of our RBI
According RBI Act 1934, RBI established on April 1, 1935 with RS.5 crore
RBI nationalized on January 1, 1949.
RBI head quarter is in Mumbai
RBI having 4 Regional Head offices in Kolkata, Chennai, Mumabi and New
Delhi and 22 regional offices
One Governor, 4 deputy governors and 20 Board of Directors run the RBI
functions. When governor is on leave, governor will appoint one nominee
among deputy governor
RBI, First Governor- Sir Osborne Arkal Smith.
RBI first Indian Governor- C.D.Deshmukh
RBI, present Governor Dr. D Subba Rao.
List of governors:
1. Sir Osborne Smith -1935-1937
2. Sir James Taylor -1937-43
3. C.D.Deshmukh -1943-49
4. Bengal Rama Rao -1949-57
5. K.G.Ambegaonkar -1957
6. H.V.R.Iyengar -1957-62
7. P.C.Bhattacharya -1962-67
8. L.K.Jha -1967-70
9. B.N.Adarkar -1970
10. S. Jagannathan -1970-75
11. N.C.Sen Gupta -1975
12. K.R.Puri -1975-77
13. M.Narasimhan -1977
14. Dr.I.G.Patel -1977-1982
15. Dr. Manmohan Singh -1982-85
16. A. Gosh -1985
17. R.N.Malhotra- 1985-90
18. S. Venkataramana – 1990-92
19. Dr.C.Rangarajan -1992097
20. Dr. Bimal Jalan -1997-2003
21. Dr.Y.V.Reddy 2003-2008
22. Dr .D. Subba Rao since 2008 continuing
Functions of RBI:
RBI function divided into two types
1. Traditional Functions
2. Development Functions
I. Traditional Functions:
1. Currency issuing: Currency or note issue is the monopoly power of
the central bank in a country and its notes are full of legal tenders.
Except one rupee all type of currency is issuing by RBI. One rupee
currency issuing by the Indian finance department.
2. Banker to the Government: As the government’s banker, RBI keeps
the banking accounts of government departments, board and
enterprises and performs the same functions as a commercial bank
performs for its customers.
3. Banker to Banker and Lender of last source: By granting
accommodation in the form of re-discount and collateral (security)
advances to commercial banks, and other financial institutions, RBI
acts as the lender of the last source. Thus RBI as lender of the last
source is a big source of cash and also influences prices and market
rates. And controls the whole system of banking in the country.
4. Maintenances of Clearing Houses: Each and every bank every day
will get so many Cheques, but it is not possible to collect by their staff,
to facilitate this availability RBI established clearing houses in Mumbai,
Chennai, Kolkata, Bangalore, Hyderabad, Kanpur, Nagpur, Patna and
5. Protection of Foreign Reserves: It has become the custodian
(guardian) of the country’s reserves of international currencies.
6. Maintenance of Exchange rate: It maintains the stability of the
exchange rate of the currency, besides enforcing exchange control
7. Control of Credit: To achieve price stability or to control the inflation,
to control the trade cycles to get full employment RBI implement the
credit policy through quantitative and qualitative methods such as
Bank rate, CRR, SLR, OMO and changing Margins.
II. Development Functions:
1. To Development of banking system RBI established Banking
Transaction Department. RBI is encouraging to establish banks in rural
areas like in bank less villages.
2. NABARD is established under the control of RBI to Promote the
3. To promote the Industrial Credit RBI taking so many measures and it
helped to start IFCI, IDBI and SFCs. RBI started Credit Guarantee
Scheme to provide credit facilities to small scale industries.
4. It will act as representative of the country in IMF
5. It will sell and buy the government securities in open market
6. It will establish training college to provide training for bank employers.
7. It will publish books related RBI Bulletin, reports of currency and
banking and Statistical Tables relating to Banks in India.
The objective of credit policy is to stabilize Prices, to prevent the inflationary
and deflationary, to stabilize Foreign Exchange rate, to control trade cycle
and full Employment. RBI adopted two types of credit control methods 1.
Quantitative credit controls. 2. Qualitative credit controls
I. Quantitative Credit Controls:
a. Bank Rate: It is a rate prescribed by the RBI. It is the rate of interest at
which the RBI lends money to other banking institutions. During inflation
Bank rate will increase by RBI. and decrease during deflation. Present Bank
Rate is 6%.
b. CRR: The commercial banks are required to keep a certain amount of
cash reserves at RBI. This percent of amount is called CRR. During inflation
period CRR rate will increase and decrease during deflation. Present CRR
rate is 5%. RBI can change CRR between 3% and 15%.
c. SLR: The commercial banks under banking regulations have to maintain
a certain specified proportion of their total deposits of various categories in
liquid assets is called SLR. Present SLR rate is 24%
Credit quantity is depending on cash reserves (CRR & SLR).
Credit quantity = Primary deposits X 1/ Cash reserves.
Ex: Primary deposit is Rs.10,000 and cash reserves are 10%
Credit quantity = 10000 X 1/10/100
= 10000 X 100/10
So here credit increasing 10 times.
d. Open Market Operations: This method refers to sale and purchase of
securities, bill, and bonds of government. During the inflation to reduce the
volume of money RBI will sell the securities and if RBI wants to increase the
volume of money RBI will buy the bonds.
II. Qualitative Credit control methods: These methods also called
selective credit control methods.
1. Rationing of credit – RBI will direct to banks to provide advances and
2. Prescribing Margin Requirement
3. Consumer Credit Regulation – RBI can increase in down payments to
reduce the transaction.
4. Moral Suasion – RBI advices to banks in terms of informal request.
5. Direct Action – this action may not used against all banks but against
go wrong banks
Monetary Policy was known as the credit policy statements till 1992. As a
part of economic reforms this policy renamed as Monetary and credit policy.
Both they concerned with the supply of money and as also of credit to the
economy. This statement will announce twice in a year till 1998-1999 (for
October to March in October announces and in April, April to September
announces). With decline in the share of agricultural credit and rise in that of
industrial credit, RBI started making the annual policy statement in April,
with review of the same in October. Since 1999-2000 RBI is announcing
annual policy. RBI monetary policy influences the money supply, interest
rates, and inflation to stabiles the price. It is also lays down norms for
financial institutions governed by RBI.
Two sets of objectives have been pursued for long.
1. Controlled expansion of money- It is to achieve full need of production
and trade and at the same time moderating the growth of money
supply to contain the inflationary pressures in the economy. For this
purpose RBI Changing Bank rate, CRR, SLR and Open Market
2. Sectoral deployment (consumption) of funds – Depending upon the
priorities laid down in the plans, the RBI has determined the allocation
of funds, as also the interest rates among different sectors. These
sectors which have received special attention are core industries (iron,
steel, coal, and engineering goods) food grains (rice, wheat), priority
sector (agriculture and small scale industries) and weaker section of
the people. Various Measures have also been adopted by the RBI to
achieve the objective of Sectoral deployment of credit. For this
purpose a certain amount is allocated. EX; 40% of total net bank
credit has been earmarked to the priority sectors. Similarly structure
of interest rates has been so used to provide low-interest loans to
certain sectors like agriculture and export and weaker section of the
Under the RBI 1934 Act, banks were classified as scheduled banks and non-
scheduled banks. The scheduled banks are those which are entered in the
second schedule of RBI Act, 1934. All commercial banks Indian and Foreign,
regional rural banks and State co-operatives banks are scheduled banks. SBI
had got 466 branches in 1955. SBI and allied banks expanded from 2462
branches in Jun 30, 1969 to 13684 in Jun 2005. Total number of branches of
the 19 nationalized banks was 32963 as on Jun 30, 2004.
Diagram of Commercial banks in India:
• The number of total branches of all commercial banks has gone up
from 8252 as in Jun, 1969, to 68500 as on Jun 30, 2005.
• The branches of Public sector banks have gone up from 7051 as on
Jun 30, 1969 to 62045 as on Jun 30, 2005.
• The branch offices of Foreign Banks have gone up from 130 in 1969 to
251 as on Jun 30, 2005.
• The average population served per bank office which was around
65000 in 1969 has come down to 16000 in 2004.
• As against 22.4% bank offices located in rural areas in Jun 1969, there
were 48.8% bank offices in these areas as on Jun 30, 2004.
• As on 30 Jun 2005, 13 Indian banks (8public+5private) had operations
overseas, which have their presence in 42 countries with a net work of
99 branches. Bank of Baroda had highest concentration, with 38
• SBI is 2nd position with 24 branches
• Bank of India 3rd position with 19 branches.
Functions of Commercial Banks: Commercial banks ply a very important
role in the economic growth of a country. Banks attract savings from the
people and encourage investment in industry, trade and commerce. Banks
are paying less interest rate for the people’s deposits and hey are collecting
high interest rate for the loans advances. The difference between these two
interest rates constitutes the profit for banks.
Commercial banks functions can divide into two types. 1. Primary Functions
2. Subsidiary Functions.
I. Primary Functions: Primary Functions are again divided into two types.
1. Receiving deposits: Commercial banks receive deposits from the
public. The banks collect cash from the customers in the form of
Primary deposits and use it for purchasing various types of financial
assets. Primary deposits are two types.
• Demand Deposits: These deposits include saving deposits and
current deposits. These deposits must be returned to the
depositor on demand without insisting prior notice. Banks will
pay low rate of interest for demand deposits. And demand
deposits are part of money supply.
• Time Deposits: Time deposits are also called term deposits.
Time deposits consist of fixed deposits and recurring deposits.
Fixed deposits are made for specified period ranging from 15
days to 5 years. Or more. The rate of interest differs from period
to period. Recurring Deposits are also called fixed deposits but
the deposit money is paid not in lumpsum but every month or
various periods ranging from 12 to 120 monthly. The bankers
allow compound interests on recurring deposits. Time deposits
are made by the customers for a specified period and they can
not be withdrawn before the specified period.
2. Lending Loans: the banks collect cash from the public in the form of
Primary deposits. With help of these primary deposits banks buys
various assets like Shares, securities and lend in the form of cash
credit to the businessmen. While buying these assets or lending money
to the business people cash is not given to them but demand deposits
are opened. These deposits are called Secondary Or Derivative
deposits. This is called credit money. Generally banks lend in four
• Over Draft: Over draft is permissible on Current account only.
The current holders are given facility of over draft by which they
are allowed to draw an amount above their balances.
• Cash Credit: Banks give cash credit to business firms and
industries against current assets such as shares, stocks, bonds.
• Discounting Bills Of Exchange: In business, the transactions
are either on cash or on credit. When the buyer of goods is
unable to pay the amount immediately, the seller may demand
written undertaking from the buyer to pay the amount after a
specified period. These written undertakings are bills of
Exchange. The banks facilitate trade and commerce by
discounting these bills of exchange.
• Loans: A loan is granted against the securities of assets or the
personal security of the borrower. Bank loans and advances
carry a high rate of interest. Banks grant call loans and also
grant consumer credit for buying durable goods like Television
sets, Vehicles etc.
II. Subsidiary Functions:
1. Banks act as agents and representatives of their customers. Banks
collect and Cheques, drafts, bills etc.
2. Bank provides locker facility for the safe custody of Jewelers,
documents and valuable goods.
3. Banks issue letters of credit to help the traders and business men to
obtain credit at different places.
4. Now a day’s banks are issuing ATM cards for easy withdrawal of
Credit creation is one of most important functions of modern bank. Modern
bank is also called a factory for the manufacturing of credit. Credit creation
is the process by which a group of deposit-taking and lending institutions.
“Credit means obtaining purchasing power with a promise to repay it some
time in future.” “Credit is an exchange which is completed after the expiry of
a certain period of time after transactions”. “Credit creation means to
increase deposits in several times”.
• Demand deposits of banks are considering as equal to money supply.
• Money supply is depending on deposits.
• The effects of volume of lending money by deposits demand deposits
this process is called credit creation.
• From credit creation process deposits creates equal to bank lending
• If loans increase deposits also increases.
• Every day in the banks some people deposits Cheques and some
people takes money through Cheques.
• Credit creation is depending on deposits of banks.
• So when the banks are giving credit then deposits will create.
• So credit is causes for deposits at the same time deposits are cause
• Credit creation is also depending upon Cash Reserves.
Suppose there four banks namely A, B, C, D. and Cash Reserves is 20%.
Suppose the person say X is depositing Rs.1000 in bank A. Now Rs.1000 is
primary deposit of bank A. After this deposit banks balance sheet will
become like following
Bank A is now increase 1000 extra cash. It has to keep only 20% of reserve
in the form of cash. Then it has Rs.800 extra cash which it lends to Mr. X
and after the loan has been made the balance sheet of bank A will be as
Now one Creditor Mr. X deposits Rs.800 with bank B. Then the balance sheet
of bank B will be as follows.
Liabilities (B bank) Assets
Now B begins its operations and lends RS 640 (800-160) then the balance
sheet of B banks.
We assume that those persons who have taken loans from bank B and
deposit them with bank C and its balance sheet will be
Now bank C will give loan to another person is Rs.512 After keeping 20% of
Rs.640 (128) as cash reserve. The balance sheet of C will be
Additional Aggregates deposits = primary deposit X 1/cash reserves.
Additional Aggregates deposits = 1000 X 1/20%
Additional Aggregates deposits = 1000 X 1/20/100
Additional Aggregates deposits = 1000 X 1X1/5
Additional Aggregates deposits = 1000 X 5
Additional Aggregates deposits = 5000
Limitations to Credit creation:
1. Amount of Cash: When money s plentiful, banks make it more
2. Ratio of Cash Reserves: If there is less % of cash reserves the more
credit will create and if there is more % of cash reserves less credit
will creates by banks.
3. Liquidity preference of the people: If people are ready to deposit
money in the banks then credit will increase. But because of liquidity
preference people may reserves money with in terms of cash credit
creation will decrease.
4. Monetary policy: Monetary policy of RBI sets certain limits to credit
creating capacity of commercial banks.
5. Trade cycles: Boom period credit creation will increase because of
more transaction. During Depression credit creation will decrease
because of less transaction.
6. People belief on banks: If people believe that deposit money is safe
in the banks people will deposit due to these deposits credit creation
Money market in India
Money markets can divided into two types 1 is organized money sector 2 is
unorganized money sector. Organized sector can divided into two types 1 is
2. Sub- money markets:
• Call money market: These are short term loans considering for 1 to 14
days. The interest rates which are paying for these loans are called call
money rates. These markets are concentrating in Mumbai, Kolkata,
Chennai, Delhi and Ahemmadabad.
• Bill market: Bills markets are two types 1 is Treasury bills markets 2
is Commercial bills markets. Generally treasury bills having 91
days period. These bills send to RBI by the Govt. Commercial bills
means One particular firm will issue bill on the name of another firm
for the purpose of trade. These commercial bills are traditionally called
• 364 bill market: This is started in 1992.This bill will not discount by
RBI. Banks, other financial institutions will get short term investments
from this bill. Every 15 days once will bid by RBI.
• Certificates of Deposits: According to Waghal Working group
committee recommendations certificates of demands started on Jun,
1989. Certificates of demand mean it is a certificate issued by banks to
persons and firms deposits.
• Commercial paper: These papers introduce by RBI in March 1989
based on the recommendations of Waghal committee report.
Un-organized Money Markets: Under this markets unregulated non-banking
financial institutions (Finance companies, Chit Fund companies, Nidhi),
Indigenous banks (Some private firms they will collect deposits from peoples
and provides loans Ex Chettis, Marvaries), and Money lenders are will come.
Capital Market in India
1. Gild-edged markets: This is also called Government securities.
Because in this markets, securities will sell and buys which are agreed
2. Industrial securities markets: Private securities are called industrial
securities markets or corporate securities markets.
3. Development Finance institutions: IFCI ( 1948), ICICI (1955), IDBI
(1964), IIBI (1985 IRBI and its renamed as IIBI in 1997), UTI (1964),
4. Intermediary Financial institutions:
• Merchants Banks: The main function of Merchant banks are will market
the Corporate Securities.
• Mutual Funds: The main objective of the Mutual Funds is its will attract
the savings from the people and invests in the stock Markets. Mutual
Funds will works under the control of SEBI.
• Venture Capital Funds: It is a Capital Accumulation for new investors
and small investors with the purpose of new technology and to start
new projects. The following financial institutions are started venture
1. ICICI: Technology Development and Investment Corporation of
India in 1986.
2. IFCI: Risk Capital & Technology Finance Corporation, Ltd in
3. UTI: Technology Development & Information Company of India
Ltd in 1989 with cooperation of ICICI.
4. RCTC: Risk Capital Technology Corporation
5. Grindles Bank: India Investment Fund
6. SBI: SBI Capital Markets Ltd
Selling and Buying of Trade and Industrials Shares, Debenture,
Governments Bonds, and Securities are called Stock Exchanges.
First Indian stock exchange is BSE in 1875
1939 there are 7 stock exchanges.
1945 there are 21 stock exchanges
At present there are 23 listed stock exchanges. Among them BSE is
important. Among 23 Stock Exchanges 2 are the National level NSE & OTCEI
(Over the Counter Exchange of India Limited)
NSE is established in 1992 in the national level at Mumbai.
On the recommendation of Phervani committee, SEBI is established April 12,
1988 as a non-statutory body. SEBI is given the statutory statues on
January 30, 1992.
Main Share Price Index in Famous Share
Market of the World
NSE S & PCNX
New York DOW JONES
Frankfurt MID DAX
(Germany) HANG SENG
Hong Kong SIMEX
Singapore STRAITS TIMES
Bulls: At current prices will buy the securities and will sell in future at high
prices because the will assumes that prices increase in future.
Bears: If they may think that prices will decrease in future they will
December 11, 2007 first time in India 20000 SENSEX closed. (Actually first
time October 29, 2007 crossed 20000 above not closed)
December 11, 2007 First time NIFTY crossed 6000 points.
SENSEX it is related to BSE 30 firms listed in BSE in 1986 it is established
INDONEXT: This is a place where small companies are trades
National Index: this is also related to BSE 50 companies listed in this.
BSE-200: 200 Companies listed in this.
DOLLEX: bse-200 $ value is called DOLLEX.
NIFTY AND FIFTY: this is related to NSE. 50 Companies are listed in this now
this name changed as S&PCNX
Public issue: If the capital accumulation is by selling shares to people is
called public issue.
Currency Future: It is a contract to exchange the currency in future for a
Special Economic Institutions: EXIM Bank, Tourism finance of India,
Infrastructure Development Finance Company (IDFC), etc. are called special
economic finances companies.
Investment financial institutions: LIC, UTI, GIC
Refinance Corporations: NABARD, NHB (national housing bank)
1818- Oriental Life Insurance Company at Kolkata.
1823- Bombay Life Insurance Company at Mumbai
1829- Madras Equitable Life Insurance Society at Madras.
First time in India in 1871 Bombay Mutual Life Assurance Society Life
Insurance Premium accepted from Indians.
1912- Indian Insurance Company Act in 1928 another act for insurance.
1938 New Insurance Act
September 1, 1956 total 284 India and foreign insurance nationalized. And
same day LIC of India started with head quarter at Mumbai based on the
In 1907 in Mumbai, Indian Mercantile Insurance Company Ltd established
In 1950 Tritan General Insurance Company Ltd started in Kolkata.
In 1972 Central Government started General Insurance Corporation of India
started. Present there are 4 Companies are working under this company
1. National Insurance Company Limited- Kolkata.
2. New India Assurance Company Limited- Mumbai
3. Oriental Insurance Company Limited-New Delhi
4. United India Insurance Company Limited- Chennai
Above 4 companies except Air Insurance and Crop Insurance all type of
Insurance are doing by these companies. These Insurance are doing by GIC
December 20, 2002 AICIL (Agriculture Insurance Company of India Limited).
This company is maintained by GIC, above 4 Companies and NABARD.
In 1999 Government made Insurance Regulatory Development Authority and
according this act April 19, 2000 Insurance Regularity Development started
(IRDA) With Head quarter in Hyderabad.
February 13, 2001 LIC started Bima Plus. According this People will get
investment benefits and life insurance and Life Threat insurance.
Jun, 2003 SBI and Allied Banks started SBI Life Insurance Company to enter
in insurance sector.
MALHOTRA Committee: To study and to give suggestion for improvement
of Insurance sector Government of India constituted Malhotra Committee in
1993 and this committee submitted its report to finance minister on January
1. Private companies are allowed to insurance with Rs.100 crore paid up
2. Foreign companies are allowed to insurance with joint venture by
3. LIC has to privatize.
Reforms in Banking Sector:
1985 Chkravarti Committee was gave some suggestions regarding reforms
in banking. But Government did not concentrate.
Recommendations of Goiporia Committee:
RBI constituted a committee under the chairman ship of M.N.Goiporia, The
then present of SBI in September 1990. This committee submitted to its
report on December 5, 1991.
1. Extension of banking hours for all works excluding cash payments.
2. Increase in bank interest rates on saving accounts.
3. Providing Tax benefit on bank deposit Amounts.
As a part of the economic reforms to reform in banking sector Government
appointed one committee to give the suggestion for reforms in August 1991
and this committee submitted report on December 17, 1991 under the
chairman ship of M.Narasimhan (This is called 1st Narasimhan Committee.).
Again in 1996 constituted one committee under the chairman ship of
M.Narasimhan and submitted report on April 23, 1998 this was called 2nd
1st Narasimhan Committee Recommendations: The main
recommendations of committee are follows
1. 4-tier banking system should be introduced in the country
• I tier 3 to 4 International banks
• II tier 8 to 10 National Level banks
• III tier Regional banks
• IV tier rural banks
2. Branch licensing system for opening new bank branches should be
3. A liberal view should be adopted for allowing foreign banks in the
4. SLR for banks should be reduced to the level of 25% within 5 years.
5. CRR should also be reduced in various phases.
6. Banks should be given more autonomy.
7. Computerization in banks should be promoted.
8. RBI’s representative should not be included in the management boards
of banks. Only Government representative should be there.
9. Private Banks should be allowed.
10. RBI is having power to regulate the banking system.
1. SLR reduced from 38.5% to 27% in March 1997 and again reduced to
25% in October 1997.
2. CRR also reduced in various phases CRR reduced from 15% to 13% in
1996 and 6.5% in 2007. But it is again increased to 7.5% in October
2007 and 8.25% in April 2008.
3. 10 new private banks established
2nd Narasimhan Committee Recommendations:
Again in 1996 constituted one committee under the chairman ship of
M.Narasimhan and this committee submitted report on April 23, 1998 this
was called 2nd Narasimhan Committee.
1. Profits banks should be merged but weak banks should not merge with
2. Un-renewable banks should be closed.
3. Banks divided into 3 types
• International level (2 or3)
• National level (8 to 10)
• Local level
4. More autonomous should be give for public sector banks.
5. Interest rates determined according market
6. Non performing assets have to reduce.
7. In state level or for some districts small and local banks should be
Recommendations of Janikiraman committee: RBI set up a high level
enquiry committee on April 30, 1992 under the chairman ship of
R.Janakiraman and this committee submitted its report on May 7, 1993. This
committee was identified several types of irregularities in securities
Joint Parliamentary Committee: A30 members Joint Parliamentary
committee set up under the chairman ship of Ram Niwas Mirdha (20 + 10
=30) on August 10, 1992 to study scam in securities and shares.
Chandrasekhar Committee: SEBI constituted a committee under
Chandrasekhar as Chairman for improving the process of share and this
committee report on April 1997.
Banking Ombudsman Scheme:
RBI introduced a Banking Ombudsman Scheme in the country on Jun 14,
1995 for giving a solution for customer’s complaints. 11 Ombudsman
appointed for different regions (New Delhi, Bhopal, Bangalore, Chandigarh,
Hyderabad, Mumbai, Patna, Jaipur, Kanpur, Guwahati and Bhuvaneswar).
Except RRBs, all Commercial Banks and All Primary Co-operative Banks have
been brought under the Ombudsman Scheme. Within one month customer
should be reported to Ombudsman.
• Rs.1000 note issued by RBI since October 9, 2000. It was banned in
1978. (22 Y)
• India Millennium Deposit (IMD) Scheme was launched by SBI on
October 21, 2000 for non resident Indians. Maturity period is 5 years.
• FDI limited in Private sector banks rose to 74%.
The Basel Norms
Basel Norms beginning in 1974
The committee was formed in response to the bankruptcy (ruin) of a
troubled Cologne (Germany) based bank in 1974.
In 1988, the Basel Committee proposed a set of minimal capital
requirements for banks this is known as Basel – I. Mostly this accord or
agreement is related to credit risk.
In January 1999, the Basel Committee proposed a new capital accord, which
is known as Basel – II. The finalized Basel II accord was released in June
Basel II uses three pillars concept.
1. Minimum capital requirements – it is to provide banks with guidelines to
measure the various types of risks the face such as credit, market,
operational risks and the capital required to cover these risks. 2. Supervisory
review. 3. Market Discipline: it is to promote greater stability in the financial
• The Indian banks with branches abroad (overseas) will have to
implement the norms by March 2008.
• To prepare banks for the implementation of BASEL- II norms, a three
track approach has been adopted by RBI. With regard to capital
• In the first track are commercial banks they have maintain capital for
credit risk and market risk as Basel-I framework.
• In the second track are the cooperative banks they are required to
maintain prescribed capital for credit risk as per Basel-I frame work
• RRBs are third track they have to maintain a minimum capital which
may not be on par with Basel-I rules.
• SBI, ICICI and HDFC reached target, Banks only local presences
(within India) have time till March 2009. PNB is the first bank initiated
to introduce B. norms.
Public Finance: Public Finance is the study of financial aspects of
governments. It is related to Revenue and Expenditure of the Government.
The study of the nature and Principles of state expenditure and state
revenue is called Public Finance – Adam Smith.
Public Finance deals with the income and expenditure of public authorities
and with the way which is used to one to another – Dalton
Public Finance deals with the revenue, expenditure, debt and fiscal system
of the government.
Public Revenue: Method of raising public revenue, taxation and other
related problems studied.
Public Expenditure: Public expenditure deals with the principles of public
expenditure on the production, distribution and individuals.
Plan Expenditure has been approximated at Rs.243,386 crore. Non-Plan
Expenditure figured out at Rs.507,499 crore.
Public Debt: Problems related to rising of loans and repayments of loans
are studied under Public Debt.
Fiscal Administration: Financial Administration relates to the mechanism
by which the activities of public expenditure and public debt are carried on.
The methods of administration, control and problems relating to the
preparation of budget are studied and analyzed in fiscal administration.
Difference between Public and Private Finances:
• Private finance is concerned with the satisfaction of personal wants
where as public finance is concerned with the satisfaction of social or
entire community wants.
• Both have receipts and expenditure
• Both should be borrowed when current income is less.
• Both have always faced the problem of adjustment of income and
• Individual adjust his expenditure to his income but Government will
adjust income according expenditure.
• Individual will try for surplus budget where as government are
following deficit budgeting.
• Individual maintain the secret of his budget where as government will
give more publicity about the budget.
• Government has more resources than the individual.
• Individuals sell the goods more than production cost where as
government sell equal to production cost.
• Individual may thing present but government will think future also.
Public Goods: A pure public good is defined as a good that one person’s
consumptions of the goods does not reduce the amount available to others
i.e. the consumption of a public good is non-rival. Ex: Duties of National
defense, police, judiciary, Public works, park.
Private Goods: Private goods yield utility only to the person consuming the
good. It is denied to others. Ex: who drinks a cup of coffee benefits from the
consumption of that cup of coffee.
Social Goods: Social wants are those wants which are satisfied by services
that must be consumed in equal amounts by all.
Merit Goods: Goods for which it is thought that consumption should be
encouraged are called merit goods.
Principle of Maximum Social Advantages:
This theory was developed by Hugh Dalton
A.C.Pigou called this as Maximum Aggregate Welfare theory
According classical economists like Adam smith, Ricardo, J.B.Say state
duties confined to only protection of state and maintenance of law and
According modern economists modern states are welfare states.
Public revenue and public expenditure are two important financial operations
of a state.
These two operations of the state must be governed by some fundamental
The principle says that the state should collect revenue and spend the
money so as to maximize the welfare of the people.
Conditions of maximum social advantage:
• Public expenditure carried for community benefit.
• The social benefit will be maximum where marginal utility of state
expenditure will be equal to marginal disutility of taxation.
Of sacrifice U e
• With every additional unit of tax raised, the burden of sacrifice will go
on increasing i.e. marginal sacrifice of taxation curve will be positively
• The amount of benefit derived by government expenditure will go on
decreasing i.e. marginal utility of expenditure will be negatively sloped
• Social Advantages will be Maximum where MS is equal to MU.
• This is the optimum limit of states public finance activity.
• According Hicks to maximize social advantage production has to
increase and distribute has to regulate for sound implementation.
Canons of Taxation:
Adam Smith in 1776 gave 4 more important canons
1. Canon of Equity: This canon tries to observe the objective of
economic justice. It indicates that the richer should pay more taxes
like progressive taxes. According ability to pay taxation theory.
2. Canon of certainty: The time of payment, the method of payment,
the quantity to be paid, ought all to be clear and plain to the
3. Canon of Convenience: The method and timings of tax payment
should be, so far as possible, convenient to taxpayer.
4. Canon of Economy: The cost of collection of taxes should be
minimum. Or the cost of collection of taxes should not be more the tax
Others proposed the canons.
5. Canon of Productivity: Taxes should have productivity according
Bastable and Gladstone.
6. Canon of Elasticity: Canon of elasticity stresses the fact that the
yield of the taxes can be easily increased or decreased according to
the needs of government.
7. Canon of Simplicity: A tax should easily understand by taxpayer. The
tax system should not be too complicated.
8. Canon of Diversity: State should not depend upon too few a source
of public revenue. Different type of taxes should be collected from
people then tax rate will decrease. How ever too much multiplicity of
taxes also to be avoided.
9. Canon of Acceptability:
Public revenue includes the different sources of government’s income.
Creation of income or revenue is to meet the public expenditure. The
following are the important sources of public revenue.
1. Taxes: A tax is a compulsory levy and those who are taxed have to
pay the sums irrespective of any corresponding return of services or
goods by the governments to meet the government expenditure.
There is no Quid Pro Quo system in the case of Taxes.
2. Development or special taxes: If the government collects the tax
for the development activities is called special taxes. In case of special
taxes those who get benefit development activity and those wealth will
increase they only pay the taxes. There is a Quid Pro Quo system in
the case of special taxes. Ex: Toll tax,
3. Fees: If the government collects the tax for the government services
is called Fees. In case of Fees those who get benefit from government
services they will pay the Fees. There is a Quid Pro Quo system in
the case of Fees. Ex: Court Fees, Registration Fees, Exam Fees.
4. Grants: Grant means one government will give to another
government without asking again. Ex: Central government is giving to
state governments. Generally Grants will give for special purpose it
may for to development educational facilities or to implement the
5. Gifts: These are called voluntary contributions. During wars, Natural
calamities like floods tsunami etc. gift also can give one govt to anther
govt; peoples can give to anther govt.
6. Forfeiture (Japtu): If the person’s failure to implement agreement
which is having with government then government will occupy the
individual property by the bidding.
7. Fines and Penalty: If the people violation the government laws the
government will impose the fine or penalty.
8. Escheats: If the person will die without any inheritance that proper
will taken by the government. It is called Escheats.
9. Income from government property ex; Income from government
lands, income from endowments. Income from public sectors, trade,
mines and forests.
10. Commercial Revenues: Govt is getting income by selling
products which are produced in public sector.
Financial relation between centre and state:
Article 264 to 293 explains the financial relation between centre and states
in 7th schedule of the constitution
1. Central levied, collected and appropriated: like income tax, (except
agricultural income), corporation tax, custom duties, excise tax,
estate tax (not Agri), news papers and advertisements and inter state
2. Centre levied and collected but assigned to related state: estate duty
(Agri), stock exchanges
3. Levied and collected by centre and share with states: Income tax,
union excise taxes.
4. Levied by centre and collected and appropriated by the states: stamp
duties, medical preparations containing alcohol.
5. Levied, collected and appropriated by the states: Land revenue, state
sales tax agricultural income, land and buildings, excise taxes on
drugs, electricity tax, tax on motor vehicle entertainment tax tolls.
Classifications of taxes:
1. Single tax and multiple taxes.
2. Direct and Indirect taxes.
3. Proportional Taxes: This is levied at the rate at all income levels.
4. Progressive when the rate of taxation increases as the tax payer
5. Regressive taxes. Tax rate decrease when the income is increasing
6. Digressive taxes if income increases rate of taxes increases with
Income Tax: 1798 in England, 1864 in America, 1860 in India for five years
only again in 1866 regularly income tax is imposing. This is imposing on
Union Budget 08-09 Highlights
Upto Rs. 1,50,000/- Nil
Rs. 1,50,001/- to Rs. 3,00,000/- 10 per cent
Rs. 3,00,001/- to Rs. 5,00,000 20 per cent
Above Rs. 5,00,000/- 30 per cent
Upto Rs. 1,80,000/- Nil
Rs. 1,80,001/- to Rs. 3,00,000/- 10 per cent
Rs. 3,00,001/- to Rs. 5,00,000 20 per cent
Above Rs. 5,00,000/- 30 per cent
For resident individual of 65 years or above
Upto Rs. 2,25,000/- Nil
Rs. 2,25,001/- to Rs. 3,00,000/- 10 per cent
Rs. 3,00,001/- to Rs. 5,00,000 20 per cent
Above Rs. 5,00,000/- 30 per cent
Corporation Tax: After First World War this tax was called as super tax (>
50,000). Before 1959 it was called surcharge. 1965-66 onwards Super tax
and companies income tax both mixed and named as Company income tax
or Corporation Tax.
Capital Gain tax: it is imposing on the capital income which difference
between buying value and selling value.
Tax on Property: All type of property mainly agriculture.
Wealth Tax: In 1955 Kaldor imposed on wealth. Here there is difference
between wealth and property. Except related agriculture land and crops
remaining property is called wealth.
Gift Tax: According Kaldor recommendation since 1958 this tax imposing on
transferring income or property.
Escheats duty: Since 1953 this tax is imposing on the property whose die
without having any inheritance that proper will taken by the government. It
is called Escheats.
Excise Tax or Production Tax: This tax is imposing on final goods before
going to consumer.
Sales Tax: Since 1937 this tax imposing on goods sale and purchase
Custom Duties: This tax is imposing on Exports and Imports. This tax is
also called export and import tax.
Terminal tax or Consignment Tax: This is entry tax. This tax is imposed
by Central Government on Rail, water and air ways.
Entry Tax: This is imposed by States on interstate transport
Entertainment Tax: First time in India in Bengal (1922), Mumbai (1923),
Punjab & Up (1937, Madras (1939) on entertainment.
Electricity Tax: First time this tax imposed in Mumbai in 1932 on
electricity. This type of tax imposed on supplies and suppliers collect tax
from people and pay t to the Government
Tax on Motor Vehicles: This tax is imposing on all types of Public and
Private Vehicles, buses, lorry cars and tractors
Advertisement Tax: Taxes on Advertisement.
Ad Valorem Tax: It is a kind of indirect tax which is expressed as
proportion of the price of a commodity. It is levied on the value of
VAT: It is a tax imposes on the value added at every stage of
manufacturing. In other words a tax levied on the value added to goods at
each stage of production is called VAT. It is equal to excise tax in central
level and sales tax in state level.
VAT introduced first time by France in 1954 in the place of Turn over tax.
Later it was introduced in UK in 1973. China in 1994, Switzerland in 1995
and at present total VAT is implementing in 140 countries. In India VAT
suggested by L.K. Jha committee in 1978.and implemented as MANVAT In
the place of excise tax.
MODVAT was implementing since March 1986 in the place of excise tax. It is
imposes on inputs or all stages.
In 1992 Raja Chelliah committee was recommended CENVAT. And it was
implemented in 2001-02 Budget with the introduction of single tax system
i.e. CENVAT with 16%. In the place of 3 tax rate system of Ad -volerm tax
with 9%, 16% and 24%.
VAT implementation committee established in July 2000 with All state
finance ministers to implement the VAT in the place of State Sales tax.
Since April 1, 2003 VAT is implementing in Haryana. it is the first state
VAT loss paid by Central Government 100% in 2005-06, 75% 06-07 50%
Central Government issued white paper on VAT. According that below
500,000 turnover no VAT.
Between 500000 to 4000000 turn over producers they may select VAT or
Turn over tax.
More than 4000000 turn over producers must follow VAT.
Under VAT total 550 goods are there
Among them 270 raw materials having 4% VAT
280 normal goods – 12.5%
Petrol Tobacco -20% (turn over tax)
Gold and Silver - 1% (special VAT)
Since 2005 April 1 total 20 states + Delhi, 3 Union territories implemented.
(5 BJP ruling states like MP, Chhattisgarh, Rajasthan, Gujarat, Jharkhand,
UP, Uttaranchal, TN, Pondicherry not implemented VAT).
2006 January 1 Uttaranchal implemented.
April 1, 2006 onwards 5 BJP ruling states implemented.
January 1, 2007 TN implementing.
January 1, 2008 UP is implementing VAT
Pondicherry, Andaman Nicobar and Lakshadweep Did not implementing VAT.
Service tax started in 1993-94 but implemented since 1994-95 with 5% was
imposed only on three items 1) telecom, 2) insurance and 3) is stock
In 2003-04 it increased to 8% on 50 items
In 2004-05 to 10% and 58 items
In 2005-06 same rate but on 81 items
In 2006-07 to 12% and 91 items
In 2007-08 same rate but 95 items.
In 2008-09 it was reduced to 10%
On total GDP service tax share is 1.1% and in National Income it share was
Tax ratio in GDP is 11.7%
Direct tax ration in GDP is 5.7%
Indirect tax ratio in GDP is 5.9%
Service tax ratio in GDP is 1.1%
Share of direct and indirect taxes is 48.8: 50.9 in 2007-08
Share of direct and indirect taxes is around 53.00:47.00 in 2008-09
Corporation tax was 30.7% in 2007-08.
It was 32.91% 2008-09 from tax revenue, But 24% from total receipts.
Committees on Direct taxes:
1. Kaldor 1952
2. Mahavir Tyagi 1958
3. Bhutalingam 1967
4. Wanchoo 1970
5. Chowcksy 1971
6. K.N.Raj 1972
7. Raja Chelliah 1991
8. Vijay Kelkar 2002
Committees on Indirect taxes:
1. L.K.Jha 1978
2. Rekhi 1992
3. Raja Chelliah 1993
4. Vijay Kelkar 2002
Finance Committees Chairman’s:
1. K. C. Niyogi 1952-57
2. K. Santanam 1957-62
3. A. K. Chanda 1962-66
4. P. V. Rajamannar 1966-69
5. Mahavir Tyagi 1969-74
6. K. Bramhanada Reddy 1974-79
7. J. M. Shelat 1979-84
8. Y. B. Chawan 1984-89
9. N.K.P. Salvey 1989-95
10. K. C. Pant 1995-2000
11. A.M.Khusrou 2000-05
12. C. Rangarajan 2005-10
13. Vijay Kelkar 2010-15.
Public Expenditure: Public expenditure deals with the principles of public
expenditure on the production, distribution and individuals.
• Public expenditure refers to the expenses of the public authorities
Central, State and local government either for protecting citizens or
promoting their social and economic welfare.
Causes for Public Expenditure: The fallowing factors are the main causes
for Public expenditure.
• Public expenditure is increasing because of the state activities are
increasing. This called according Wagner “Law of increases of state
• For defence P.E.increasing.
• S & T.
• Increasing population.
• Interest payments.
• Welfare activities.
• Democracy activities like elections, legislatives meetings.
Differences Between public and private expenditure:
• Private expenditure is determined by the income. But public
expenditure is determined the amount of necessary to meet that
• Private expenditure may be motivated by profit. But public expenditure
is motivated by welfare activities.
• The plans of private expenditure are made in relation to the near
future. But public expenditure generally planned with the objective of
long-term benefits rather than short term benefits.
Effects of public expenditure:
• Effects on production. It creates the effective demand and it create the
market push up.
• Effect on will to work and save. Public expenditure on education,
medical services, cheap housing facilities and transport and
communication etc will increase the ability of people to work. If the
people income increases the people can save the money.
• Effect on investment. If the public expenditure increases peoples
saving can increase due o higher saving investment also increases.
• Effect on distribution. If the public expenditure increases on welfare
activities equality increases.
• In developing countries has an active role to play in reducing regional
and personal disparities.
Unit – 5
GROWTH AND DEVELOPMENT
• Before 2nd world war economists used the terms economic growth for
developed countries mainly in European countries.
• But after 2nd world war economists look after developing countries in
Asian, Latin America and African continent.
• Schumpeter, Hicks explained the difference between growth and
1. Increasing of National Income or output is called growth.
2. Literal meaning of economic growth is an increase in the country’s
3. Economic growth means transformation of economy from agrarian to
highly industrialized society and this transformation is mainly reflected
in a sustained and steady rise in national and per capita income.
4. Over all development of the country is called development
5. Economic development means economic growth with structural
changes in economy.
6. Economic development means it is economic growth accompanied by
rise in productivity.
Sustainable Development: Sustainable development defined as that
level which takes care of the needs of the present generation without
compromising the needs of the future generation.
Difference between growth and Development:
• Economic growth refers to a rise in output but economic development
implies changes in distribution, technological and institutional changes
– according Kindle Berger.
• Economic development is a process where by an economy real per
capita income increases over a long period time – M .G. Meier and
Baldwin. That means growth is refers to short period and development
is refers to long period of time.
• Economic development is a multi-dimensions process and growth is a
uni-dimensional process – Michel P. Todaro
• Economic development means transmission of labour from agriculture
sector to industrial sector - J. B. Clark.
• Economic development is related to developing countries and
economic growth related to developed countries – Kindle Berger,
Schumpeter and J. R. Hicks.
• Economic development means reduction of poverty, unemployment
and economic in equality – Dudley Seers.
• Average production increasing by optimum utilization of resources of
the country is called economic development – S. K. Mukherjee.
• Transmission of economy from lower social position to upper position
is called development – Gunnar Myrdal.
• Rich countries national income increases is called growth and
developing countries or poor countries national income increases is
called economic development – Madison.
• “Growth without development” written by Robert Clover. In his book
he wrote that in Liberian country growth was there without
development but some peoples are only getting return of growth and
majority of the people are in poverty.
• We can take the example human growth to understand the difference
between the growth and development, only physical weight increases
it is called growth and along with physical weight his mind maturity,
knowledge and personal development is called development.
Determinants of Growth or Development
1. Natural Resources: W. J. Boumal and W.A. Lewis given more important
to natural resources to development of the any economy.
2. Human resources: Edwin canon and Ragner Nurkse given important
for human resources to development of any economy but Malthus did
not supported population.
3. Institutional Factors:
4. Availability of Capital: according W.A. Lewis capital is necessary for the
development of economy. In 1950-51 he suggested saving and
investment should be 5% to 12% for the development of economy.
But present economists are telling that saving and investment should
be there 25% to 30% for the development of economy.
5. Technological progress
6. Skilled labour
7. Foreign trade: D. H. Robertson described foreign trade as an Engine to
Growth is measuring based on the national income growth rate.
QT – QT-1
Growth rate (GT) = -------------
GT = growth rate
QT = current year quantity or national income
QT-1 = Previous year quantity
• According to Development economics poor countries are calling with
different names like backward countries, under development countries,
developing countries, low income countries and III world countries..
• 1st world countries are those are developed based on he capitalistic
• 2nd world countries are those countries are developed based on the
• 3rd world countries are those countries are trying to develop by
fallowing either capitalistic or socialistic or mixed economy.
• That means 1st and 2nd world countries are developed countries and 3rd
world countries are back ward countries.
• According World Bank development report classification in 2004 world
countries divided into 4 types based on the per capita income.
1. Low income countries: the countries having the less than or
equal to 735 $ (≤ 735 $).
2. Low middle income countries: the countries having the per
capita income between 736 $ to 2935 $.
3. Upper middle income countries: the countries having the per
capita income between 2936$ to 9075$.
4. High income countries: the countries having the per capita
income more than or equal to 9076 $ (≥ 9076 $)
• According World Bank development report classification in 2007 world
countries divided into 4 types based on the per capita income.
1. Low income countries: the countries having the less than or equal
to 875 $ (≤ 875 $).
2. Low middle income countries: the countries having the per capita
income between 876 $ to 3465 $.
3. Upper middle income countries: the countries having the per capita
income between 3466 $ to 10, 725$.
4. High income countries: the countries having the per capita income
more than or equal to 10, 726 $ (≥ 10, 726 $)
• According World Bank development report classification in 2008 world
countries divided into 3 types based on the per capita income.
1. Low income countries: the countries having the less than or equal
to 905 $ (≤ 905 $).
2. Middle income countries: the countries having the per capita
income between 906 $ to 11,115 $.
3. High income countries: the countries having the per capita income
more than or equal to 11, 115 $ (≥ 11, 115 $)
• According to World Bank report classification low income countries and
middle income countries both are called developing countries and high
income countries are called developed countries.
• According this report developing countries population is 84% and their
income in the world income is only 21%
• According this report India population is about 109 crores in 2005 and
per capita income is 720 $. India population is 17% in the world
population and 1.8% in the world income.
• According this report China population in the world is 20.3% and 5%
in the world income.
• According A. K. Cairon Cross developing countries are called slums of
the world economy.
• According UNO experts developing economies, which are having less
real per capita income compared to USA, Canada, Australia and
Western European countries.
• According Indian Planning commission “one side under utilization of
human resources and another side under exploitation of natural
resources countries are called developing economies”
Characteristics of Developing countries:
1. Scarcity of Capital: in developed countries saving and investment is
30% to 40% in their GDP. But in developing countries it is only 15% to
20% in GDP.
2. More dependence on Agriculture sector:
country % of the people Agriculture
depending on sector
agriculture sector contribution to
Briton 2% 1%
USA 2% 2%
Japan 5% 7%
India 56.7% 18%
3. More Income in equalities
4. Low per capita income
5. Mass poverty
6. More un employment
7. High population
8. More un skilled labour
9. Low standard of living of the peoples.
10. Under utilization of natural resources.
11. Lack of infrastructure facilities
12. Un- favorable foreign trade
13. Dualistic economy: according Heggins this countries having two
type of economies 1 is traditional sector and 2 is modern sector.
14. Lack of entrepreneurs.
Measurement or indexes of economic growth or development
1) National Income: according Prof. Kuznets, Meier and Baldwin
national income is a good measure to development of any economy.
But this is not going to explain about the distribution and consumption.
According them real national income is the most convenient method to
measure the economic development.
2) Per capita income: Per head income per year is called per capita
income. PCI gets by dividing the National Income with that country’s
population. Per capita income will decide the standard of living of the
people. National income may increase by increasing the some people
income. If national income increases faster than the population growth
rate, it is undoubtedly a mark of economic development. If national
income increases lower than population growth rate, then there may
be economic growth but there may not be economic development.
Hence per capita income is better measurement than the national
income measurement to development.
Real Per capita income = Real National Income ÷ population of
3) Lorenz curve: The concept of income inequality explained by Lorenz
and Gini. The economist called Lorenz draw the curve based on the
income which is received by people, so this curve is called Lorenz
curve. This curve will explain the income inequality among the people.
If the Lorenz curve is equal to equal distribution curve then there is an
inequality in the country. If Lorenz curve is far to equal distribution
curve then there is more in equality among the people. He given the
values between 0 to 1. If Lorenz curve is equal to equal distribution
curve then value is zero, means there is income inequality among the
people. If the Lorenz curve is equal to ox axis then value is 1, means
more inequality among the people.
• Based on the Lorenz curve Gini explained the inequality among
the people by taking the values from 0 to 100 on scale. This is
called Gini Index. According Gini the value is 0 then there is
inequality among the people. Is the value is 100 there are more
in equalities among the people. According Gini index India’s rank
in 2006 is 62nd.
4) PQLI: Physical Quality Life Index:
• This was first explained by John tin Bergen in 1976.
• But later in 1979 this was developed by David Morris.
• In PQLI 3 indexes are there
i. Life expectancy (LEI)
ii. Infant Mortality Rate (IMR)
iii. Literacy Rate (LRI)
• Based on the above 3 indexes Morris prepared Simple Compound
• Morris given rating from 1 to 100 on the scale.
• According Morris 1 is lowest position and 100 is highest position
in the above indexes.
• Morris given the lower limits and upper limits per each index.
According him upper limit is 100 and lower limit is 1. Upper limit
shows the better position and lower limit shows that lowest or
Indexes Upper Limit Lower Limit
Life 77 years 28 years
IMR 9 per 1000 229 per 1000
Literacy 100% 1%
• LEI + IMR + LRI
PQLI = -------------------------
Actual Value – Minimum
• To measure the each Index the formula is = ------------------
Maximum Value – Minimum
5) Net Economic Welfare: this concept was explained by William
Nordapus and James Tobin as Economic Welfare index to measure the
• Later it was developed by Paul Samuelson as Newt Economic
• According Paul Samuelson Net Economic Welfare Index = Real
GNP + taking rest + non- market activities + expenditure on
6) Composite Index of Development: this was developed by
• He taken the factors like health, nutrition food, education,
employment. Communication, industrial products consumption,
urbanization and per capita income etc.
• Composite index of development is measured by Donald
Newresky with 14 factors.
• This is measured by Irma Adelman and Sindhia Morris with 41
7) UNRISD: United Nations Research Institute for Social
Development: This institute was measured the economic development
with 16 factors. Among them 9 are social factors remaining 7 are
8) HDI: (Human Development Index): since 1990, the United
Nations Development Programme has been publishing every year a
Human Development Report.
1. This Human Development Report giving ranking for various
countries based on the Human Development Index.
2. The HDI is Equi - weighted average of three components
i. Life Expectancy Index (LEI)
ii. Educational Attainment Index (EAI)
iii. Standard Of Living Index or per capita in PPP with $
Based on the HDI value countries are divided into different countries.
1. Low human development countries: the value is from 0.0 to 0.50
2. Middle human development countries: the value is from 0.51 to 0.79
3. High human development countries: the value is from 0.80 to 1.00
According 2008 report based on 2006 data 26 countries are low human
development countries, 78 countries are middle human development
countries and 75 are high human development countries are there.
According 2008 report India’s HDI value is 0.609 and its rank is 132 out of
UNDP announced the 2008 report based on the 2006 data.
In report UNDP measured HDI for 179 countries.
Out of 179 countries
Country 2008 Report, 2007 Report,
based on 2006 based on 2005
HDI HDI HDI HDI
rank Value Rank Value
Iceland 1 0.968
Norway 2 0.968
Canada 3 0.967
Australia 4 0.965
Ireland 5 0.960
USA 15 0.950
Russia 73 0.806
China 94 0.762
Srilanka 104 0.742
India 132 0.609
Pakistan 139 0.562
Sierrolien 179 0.329
In 2008 report based on 2006 data life expectancy at birth in India is 64.1
In 2008 report based on 2006 data adult literacy rate is 65.2%
In 2008 report based on 2006 data comib9ne gross enrollment is 61.0%
In 2008 report based on 2006 data GNP per capita income 2489 $
The index HDI is an equal weighted average of life expectancy index (LEI),
Educational attainment Index (EAI) and GNP Per Capita Income.
(LEI + EAI +PCI)
HDI = -----------------------
Components of HDI
i. Life expectancy :
ii. Educational Attainment: it is a combination of adult literacy rate (ALR)
and combined enrolment ratio (CER). Here 2/3 part given weighted for
Adult Literacy Rate (ALR) and 1/3 part given to Combined Enrolment
Therefore educational attainment index may be given as EAI = 2/3
ALR + 1/3 CER.
iii. Standard of living is represented by per capita income. First per capita
income is converted into purchasing power parity in dollars.
Minimum and Maximum values for indexes.
S.NO Indicators Maximum Minimum
1 Life expectancy 85 years 25 years
2 Adult literacy 100 % 0%
rate in %
3 Combine gross 100 % 0%
4 GDP Per Capita 40,000 $ 100 $
(PPP$) in dollars
To calculate the HDI components index the fallowing formula is using.
Actual Value – Minimum Value
Dimension Index = ----------------------------------------------
Maximum Value – Minimum Value
• Gender Related Development Index: it is measuring since 1995.
• Gender Empowerment index: it is measuring since 995.
• Human Poverty index- I: it is measuring since 1997. But since 1998 it
is measures to only developing countries. Here also HDI factors are
taking but with little bit differences.
1. Life expectancy is taking only those who are dying below
2. Adult literacy rate
3. Standard of living of people. Here health services and safe
• Human Poverty index –II: It is measuring since 1998 based on 4
1. below 60 years death %
2. Adult illiteracy
3. People having less than 50% of the country average income.
4. Unemployment % in total one year.
• Technological Achievement Index: It is measuring since 2001.
1. Creation of technology
2. Provide of human skills to all
3. Expanding of Innovation
STAGES OF GROWTH
1. German’s Historians growth stages classified into 4 types
I. Village or rural stages
II. Agricultural stage
III. Agriculture and industrial stage
IV. Agriculture, industrial and trade stages
2. Brunei field: he divide growth stages into 3 type based on the
changes in currency
I. Barter exchange system stage
II. Money exchange system stage
III. Credit Exchange system stage
3. Karl Marks: He divided the growth stages into 5 types. He divided the
growth stages with historical perspective. These are fallows
I. Primitive society stage
II. Slave society stage
III. Land lord society stage
IV. Capitalist society stage
V. Communist or Socialist society stage
4. Simon Kuznets: According him total economy is depending on the
agriculture sector initially and due change in technology secondary
sector share increase and gradually primary sector share decrease.
Labour also transformed from primary sector to secondary sector and
finally they transformed to services sector.
• He wrote one book called “The stage of Economic growth” in
• This book also called Anon-communist Manifesto, because this
book is alternative for communist manifesto.
• He divided growth stages into 5 types. Fallowing are the 5
I. Traditional Society:
• This stage had up to Newton law was discovered
• After discover of Newton science and technology was
discovered this stage was changed
• This stage is also called Pre-industrial stage
• During this stage limited production function will be there due
to lack of Technology
• Around 75% of the people were depending on the agriculture
• Most of the people spend money for temples, customs, and
traditions, for their culture due lack of aware about the
II. Pre-take off stage: (PURVA PLAVANA DASHA)
• This Stage Is The Bridge Between Traditional stage and Take
– off stage
• Risk bearing entrepreneurs develop during this stage.
• To get the modern returns from traditional stage its will take
• Requirement conditions developed to get take off stage
during this stage
• Trade, investment and modern firms will develop during this
• Briton crossed first time this stage.
• To reach take off stage 3 conditions must be develop
1. Technology in agriculture must be develop
2. Imports – exports sectors should be develop. When
industrial sector developing initially the raw material
should be import.
3. Infrastructure should be developing.
III. Take off stage: (PLAVANA DASHA)
• According to Rostow this Is the Most Important Stage
• During this stage industrial sector and services sector
• Cities and towns developed during this stage
• Sufficient technology in agriculture developed. So Surplus
food grain production produces the countries during this stage
• Availability of Raw material increases to industrial sector Due
to surplus production in agriculture sector, So industrialization
start in the country
• During this stage link between agriculture and industrial
sector will developed
• Saving and Investment rate increased from 5% to 10%
• Due to the development of progressive sectors growth rate
• Briton reached in first time this stage during 1783-1860
• The fallowing countries reached to this stage during the
1. Briton -1783-1860
2. France -1830-60
3. USA -1843-60
4. Germany -1850-73
5. Sweden -1868-1899
6. Japan -1878-1900
7. Russia -1890-1914
8. India -1952
9. China -1952
IV. Maturity stage or Drive to maturity: (PARIPAKVA DASHA)
• This stage is also called stage of self-sustained growth
• This countries utilized modern technology
• Rostow described about this as “countries are consuming the
optimal resources, which are available in the country with
availability of technology”
• Investment rate in National Income increases more than 10%
• New progressive sectors will developed during this stage
• Services sector share will increases in the income
• The fallowing countries reached to this stage.
1. Briton -1850 (this country has reached to this stage
2. USA -1900
3. Germany -1910
4. Japan -1940
V. High Mass consumption stage: (SAMUHIKA VINIYOGA
• This stage is also called high income stage
• All people in the country will perishable consume consumption
goods and luxury goods
• Urban population increased during this stage
• All types of commodities available during this stage
• So community may not think about the production means
• Community concentration change from supply side to demand
• Community concentration change from production problem to
• During this stage the country command can increases in
• Labour welfare activities will increase during this stage
• New trade centers and new markets generate during this
• USA reached first time this stage in 1920
• Later Briton in 1930 and Russia in 1950 reached this stage.
Learning Curve: Any economy growth starts with slow later starts rapid
and finally slow growth stats this concept known as Learning curve. This is
also called Gampetdge growth rate.
1. Harrod and Domar strategy:
• During the first five year plan this strategy fallowed in India
• Harrod and Domar both gave more important for capital accumulation
• According then capital accumulation have double character. The capital
accumulation can increase income one side and anther side production
• They tried to increase full employment in the long-run period
• Harrod wrote one book called Towards a dynamic economics in 1959
• In the Harrod model 3 main concepts are there
4. Actual rate of growth (G)
5. Warranted rate of growth (GW)
6. Natural rate of growth (GN)
• According Harrod growth rate = S/COR
• S= Saving
• COR= Capital output Ratio
• Domar wrote the fallowing books
4. Capital expansion
5. Rate of growth and employment
6. Essays in the poverty of economic growth
• He gave more important dual investment character
• According him investment increases productivity and real income also
• According him full employment get equilibrium when aggregate
demand is equal to aggregate supply
2. Unlimited labor supply theory:
• This theory was developed by W.A. Lewis
• He wrote one book called Development with unlimited supply of
• According him economic systems are two types
1. Subsistence sector
2. Investment sector
• According him development can increases by transforming the
labors from subsistence sector to investment sector
3. Low level equilibrium trap:
• This theory was propounded by Nelson
• According him under development countries always have their per
capita income equal to their subsistence level.
• These countries have always saving and investment very low
• If they will try to increase the national income population also
increase along with national income, so again the per capita income
reach to equal to their subsistence level
4. Capital –turn over-criterion:
• This theory was propounded by J.J.Pollar, S.S.Bucknon and Chinary
• This theory also called minimum capital intensive or law of minimum
• This theory will tell that how much production increases per one unit of
• According this theory tells that how we get maximum production with
low capital in short run period and how we have invest on other
5. Robinson theory:
• Smt. Robinson wrote “the accumulation of capital” in 1956 and
“Essays in the theory of Economic growth” in 1963
• According her steady growth with full employment is called golden age
6. Critical Minimum Effort:
• This theory was propounded by Leibenstein in his book called
“Economic Backwardness and economic growth”
• According him to develop any economy we have to broke up Vicious
circles and per capita income should be increase
• According him Vicious circles and per capita income can change only
through this theory.
7. Social Marginal Productivity investment theory:
• This theory was propounded by A.E.Khan and H.B.Chinary.
• This theory tells that how the national income maximizes by investing
the limited resources on projects by changing their values as
8. Re-investment theory:
• This theory was propounded by Gallenson and Leibenstein. .
• This theory also called law of surplus rate or law of average marginal
• This theory will tell that per capita income should be increase in the
future not in the present.
• This theory telling that even capital scarcity countries also should be
use the capital intensive method.
• According them there is more part in profits in capital intensive
method, so this profits are use full for re-investment
9. Time series Criterion:
• This theory was propounded by A.K.Sen
• This theory will tells How To get maximum production in determining
• According him to produce the commodities two methods are there
1. Labour intensive method
2. Capital intensive method
• This theory explains that Among these two methods which is the best
method to get maximum production in particular period of time
• He proposed that capital intensive methods for less population and
more capital countries and labour intensive method for more populated
and less income countries.
• Initially losses which occurring from capital intensive method if we get
from labour intensive method that period is called recovery period.
10. Goutham Mathur Model:
• He developed steady growth model
• According him initially resources, planning targets, real wage rate,
technology and different people consumption propensity influence the
• He also supported heavy industrial strategy
• In heavy industry he supported labour intensive methods for
consumption goods and capital intensive methods for capital goods.
• He also supported that developing countries should be use capital
intensive methods after getting full employment
11. Karl Marks Surplus Value theory:
• According him production is in terms of Labour.
• According labour (srama) is production and production is labour.
• He observed economy in terms of historical perspective
• According him capitalist exploiting labour
• Because capitalist paying salaries for less hours but labours are
working more hours
• According him if labour get salary equal to his work he will work more
• So production increases and income increases for both labour and
• He suggested that capitalist should be give share to labour or capitalist
gave partnership for labours to development of any economy.
12. Adam Smith growth model:
• He is known as father of economics
• He wrote a book called “An enquiry into the nature and causes of
Wealth of Nations” in 1776
• He proposed division of labour in the production process for rapid
growth of any economy
• So he is known as father of division of labour.
• Division of labour lead to specialization
• Specialization can expand the markets and it can increase the
technology and quality of goods
• Due to the above activities countries goes from development to growth
13. Innovations theory:
• This theory was propounded by Schumpeter
• According him factors of productions are two types
1. Physical factors of production
2. Non physical factors of production
• According him land, labour, capital, organization are physical factors of
production and social factors are non physical factors of production
14. Gunnar Myrdal growth theory:
• Gunnar Myrdal wrote “Asian drama”
• In Asian drama he wrote the spread effects back wash effects.
• Back was effects: it means one area development effects gave a path
under development of another area. Development area attracts the
qualitative people and factor of productions and capital every this so
this area may not develop.
• In case of spread effects: in case of spread effects one area
development help to develop another area. F these area develop
another area which are producing raw materials are going to develop.
• According him spread effects and back wash effects are causes for
international inequalities and regional inequalities in the developing
• According him in developing countries has strong back wash effects
and week spread effects.
15. Big push Theory of growth:
• This theory was propounded by Paul. N. Rosenstein Rodan
• He wrote one book called Industrialization of eastern and south
Eastern Europe in 1943.
• High amount of investment is necessary to overcome the obstacles to
development in an developing economies
• W.A. Lewis and Ragner Nurkse supported this theory
• According him there is a indivisibility in production, indivisibility in
demand and indivisibility in the supply of savings
• Given these three indivisibilities and the external economies to which
they give rise a big push investment is required to overcome the
obstacles to development in developing countries.
16. Balanced growth theory:
• This theory was first propounded by Rosenstein Rodan
• Later it was developed by Ragner Nurkse
• Ragner Nurkse wrote one book called Problems of capital formation in
under developed countries in 1953.
• According Nurkse vicious circle of poverty are at work in developing
countries, which are obstacle to the development of economy
• According him vicious circles are operate both on supply side and
• The doctrine of balanced growth requires a balance between different
sectors of the economy during the process of economic growth
• Investment should be made equal in different sectors
• According Nurkse around 30% of disguised unemployment the in the
under developed countries
• This theory was criticized by Hirschman, Singer and Kurihara in the
1. Lack of resource
2. Disproportionate of factors of production
3. Cost aspect ignored.
17. Unbalanced growth theory:
• Prof. Hirschman developed this theory
• Kindleberger also supported this theory.
• According Prof. Hirschman “the best strategy of development is the
creation of imbalances in the economic since it is observed that efforts
to correct the existing disequilibrium constitute a major step for the
progress of the economy”.
• Under development countries are having low level of consumption,
production, saving and investment.
• According Prof. Hirschman the most effective way of breaking the
vicious circle is to deliberately plan for imbalance.
• According Hirschman investment can be two types
1. Convergent Series of Investment: This type investment can
consume more external economies then the creation.
2. Divergent Series of Investment: This type of investment can
crate more external economies then consumption.
• According Hirschman two types of sector are there to investment.
1. Social Overhead Capital (SOC), it is equal to Divergent series of
2. Directive Productive Activity (DPA), it is equal to Convergent
series of investment.
• Hirschman assumed that since under developed countries have limited
ability to utilize the resources. So SOC and DPA cannot expand
simultaneously. The problem of the planning is to determine sequence
of expansion that will maximize induced decision making. A country
can start either expanding SOC or expanding DPA. Either method of
unbalanced results in additional investment and output. Because of
incentives and pressures, the rate of growth is likely to be faster with
• Any particular investment project may have both; forward linkages
and backward linkages.
• The forward linkage encourages investment in subsequent stages of
production. Every activity that does not by its nature caters exclusively
to attempts find demands will induce to utilize to outputs and inputs in
some new activities. This is known as output utilization or forward
linkages effects. On other hand, the backward linkage encourages
investment in earlier stages of production. Every non- primary non-
economic activity will induce attempts to supply through domestic
production, the inputs needed in that activity. This is known as input
provision, derived demand or backward linkage effects.
• According Hirschman iron and steel industry having the greatest
Growth – Distribution or Welfare.
Welfare is a state of mind which reflects human happiness and satisfaction.
The increase in economic welfare results in the increase of total welfare and
Growth and welfare:
Economic growth increases the volume of national income, which leads to
increase in economic welfare. But this relationship depends on a number of
• If the change in national income were due to change in price, it would
be difficult to measure the real change in economic welfare.
• The economic welfare cannot be said to have increased, if the increase
in national is due to exploitation of labour.
• It is possible that with the increase in national income, the population
may increase at the same pace and thus the per capita income may
not increase at all. In such a situation, the increases in national
income will not result in increase in economic welfare.
• Even with the increase in national income and per capita income, the
economic welfare may decrease. This is the case when as a result of
the increase in national income, income of the richer sections of the
society increases and the poor do not gain at all from it. In this case
the total economic welfare decreases.
Amartya Sen’s Measure of Welfare:
• Prof. Amartya Sen has combined the dimensions of level and
distribution of income to produce the measure of welfare. In
W = µ (1 - G)
• Where W = welfare, G = measure of inequality.
• W will increase when µ grows and G dimensions. When one
remembers that µ is NNP divided by population, it is clear that NNP
should rise at higher rate than the population. The more the growth
rate of NNP relative to that of population, the better it is.
Sources of Growth:
Capital: Capital plays a vital role in promoting economic development in a
country. According the Nurkse, the vicious circle of poverty in an
underdeveloped economy can be broken only through capital formation. Due
to lack of adequate capital, income, investment and employment are
deficient and are at a very low level. It is the capital formation that leads to
the further utilization of resources. It helps in creating socio-economic
overhead. Thus, capital formation leads to increase in size of national
output, income and employment.
Capital is defined as a produced means of production. It is man- made and
its supply can be increased by human efforts. Capital stock of a country
consists of machinery tools, factory, buildings and all kinds of industrial
plant, raw material partly finished goods and means of transport.
Importance of capital formation:
• Economic growth is synonymous with the development of socio-
economic overhead capital. Without capital growth is not possible.
• Investment in capital equipment not only increases production but also
• Capital formation leads to expansion of the market.
• Capital formation makes development possible even with increasing
population. Countries with huge population always aim at high capital
labour ratio, since the capital labour ratio is very low in these
• A rapid rate of capital formation is necessary to disperse with foreign
• The inflationary pressure in an economy can be removed with the help
of adequate capital formation, since increasing capital formation leads
to increased production of manufactured and primary goods.
• An increase in the rate of capital formation raises the level of national
Sources of growth of capital formation:
The process of capital formation involves three steps:
1. Increase in the volume of real savings,
2. Mobilization of savings through financial and credit institutions, and
3. Investment of savings.
Capital formation can be divided into two categories. There are one is
domestic sources and second is external sources.
Domestic sources of capital formation:
1. Increase in national income
2. Savings drivers, like saving is a habit which can be included by
3. Establishments of financial institutions.
4. Increasing rural savings.
5. Perpetuation of income inequalities.
6. Increasing profit
8. Profits of public corporations.
9. Utilization of the disguised un- employment.
External sources of capital formation:
1. Foreign aid
2. Restriction of imports
3. Favourable terms of trade.
Capital formation is thus an important determinant of economic
development.iot would be, however, an over simplification to regard
economic development as a matter of capital formation alone, neglecting
political, social, cultural, technological and entrepreneurial factors.
The term human capital refers to the process of acquiring and increasing the
number of persons who have the skills, education and experience which are
critical for the economic and political development of a country. Thus human
capital formation is associated with investment in man and his development
as a creative and productive resource. According T.W. Schultz, there are 6
ways os developing human resources.
1. Health facilities and services.
2. On the job training including old type apprenticeships originated by
3. Formally organized education at the elementary secondary and higher
4. Study programmes fro adults.
5. Migration of individuals and families to adjust to changing job
6. The import of technical assistance expertise and consultants.
Thus, human capital means quality of the labour force or work force that is
used in the production of various goods and services. Human capital means
ability and skill of labour which can be brought in the field of production of
goods and services.
Human capital formation can be viewed at two levels, individuals and from
the angle of society. At the individual level, by investing on his education
and on improvement of technical skills, he can produce more, raise his
income and live a higher standard of living.
Human capital formation in Developing Countries are mainly on the fallowing
2. Health services
3. Health and Adequate Diet
Suggestions to improve human capital formation in developing county.
• Rigorous steps must be taken to effectively check rapid growth of
India’s population that is taking place. Success of all other policies and
steps in this direction would go waste, if rate of growth of population is
not effectively brought down.
• There should be planning of human resources
• There should be an attempt to radically change the traditional value
system into a new vale system that would give stress on the
importance of modern sciences and better living in this world rather
than living in heaven after death.
• There should be established a vast network of social and cultural
institutions in the country to train and increase efficiency of Indian
workforce. Society should make enough investment to raise the rate of
human capital formation.
Population growth and economic development:
The consequence of population growth on economic development has
attracted the attention of economists ever since Adam Smith wrote his
Wealth of Nations. And Adam Smith wrote, “The annual labour of every
nation is the fund which originally supplies it with all the necessaries and
conveniences of life”. It was only Malthus and Ricardo who created an alarm
about the effect of population growth on the economy.
But their fears have proved unfounded because the growth of population in
Western Europe has led to its rapid industrialization. Population growth has
helped the growth of such economies because they are wealthy have
abundant capital and scarcity of labour.
However, the consequence of population growth on the development of less
developed countries are not the same because the condition availing in these
countries are quite different from those of developed economies. Theses
economies are poor, capital and labour abundant. Thus it is felt that an
increasing population hampers the process of rapid economic development in
a number of ways.
Many economists have presented theories of population to explain the
behavior of the population. Among them various theories important one are:
Malthusian theory of population, Optimum theory of population and
Demographic transition theory.
Malthusian Theory of Population:
Malthus was the first economist to give the population problem a series
According to Malthus, population had a natural growth rate described by a
geometric progression; where as the natural resources necessary to support
the population grew at a rate similar to an arithmetic progression.
Malthus advocated moral restraint on the size of families. According to
Marshall, without preventive checks population would outstrip the available
means of subsistence and force the positive and drastic checks on the
population involving various forms of miseries.
Theory of Optimum Population:
Prof. Cannon formulated a theory of population in the beginning of the
twentieth century which has come to be known as theory of optimum
According this theory there is optimum point for every economy.
Optimum population is that level of population at which, gives existing
technical knowledge, capital equipment, natural resources and national
income per capita is maximum.
If the population of a country falls short of the optimum, it is considered to
be under-populated; on the other hand, if its population exceeds the
optimum, it is considered to be overpopulated. If a country is under-
populated, an increase in population would raise the level of per capita
income. On the other hand, if it is over populated, an increase in population
would lower the level of per capita income.
Theory of Demographic Transition:
Based on the demographic history of Western countries, the theory of
demographic transition states that every country passes through five
different states of population growth. According to C.P.Blacker, they are
1. High stationary stage: in this stage high birth rates and high death
rates with the results that the growth rate of population is low.
2. The early expanding stage: this stage marked by high birth rate and
high but declining death rate results high growth rate of population.
This acceleration in growth rate of population is known as population
3. The late expanding stage: the late expanding phase with declining in
birth rate but death rate declining more rapidly. As a results,
population grows, but at a diminishing rate.
4. The low stationary stage: in this stage low birth rate and low death
rate, giving a low rate of growth of population, as a results a decline in
the growth arte of population.
5. The declining stage: a continuing decline in birth rate when it is not
possible to lower death rate further, in the advanced countries leads to
a declining stage of population. The existence of this stage in any
developed country is a matter of speculation.
Growth and Foreign Trade and Foreign Aid:
In recent decades in interesting debate has been raised over the relative
virtue of trade and aid. Though both are means of acquiring external
resources in the form of foreign exchange, but there are significant
difference between the two. As we know that, foreign aid is frequently made
available in the form of Tied aid. Tied aid has a number of disadvantages for
the recipient country because it limits its freedom in a number of ways.
There choice of projects and the conditions of purchase of goods under the
aid programme are determined by the donor country. The type of
technology made available under this aid programme may at times, be
unsuitable to the factor endowments of the recipient country.
Aid exposes the recipient country to a number of risks. In the non-economic
field, the greatest risk is that of the political interference of the donor
country in the domestic affairs of the recipient country. In the economic field
the greatest risk is the burden of repayment. At times, the burden can soar
to seen high limits that the entire export earnings of the country is likely to
suffer a set back as the capacity to exports to goods, essential for economic
development, will dry up. The way out of this crisis is a substantial
expansion of recipient country. This brings us to trade. Thus even if a
country starts its planning process by giving more importance to aid it must
eventually turn its attention to trade. In fact, the very aim of the aid-
receiving country should be to ensure that its utilization results in the
creation of export capacity either directly or indirectly. Thus aid should
ultimately lead to more trade.
Finally we may state that from the points of view of the developing
countries, both aid and trade have important roles to play. Aid, provides
resources to the developing countries to implement programmes of
economic development which otherwise wouldn’t have been undertaken. It
also fills up the foreign exchange gap and technological gap. However, aid
must eventually lead to more export earnings for the developing countries
else they would not be able to repay their debts. Thus aid must be
accompanied by more trade. For this purpose the developed countries will
have to change their selfish narrow outlook and pull down heir trade barriers
to enable the developing countries to export earnings. The slogan “Aid or a
Trade” is a misnomer. The approach of both, the developed and the
developing countries should be “Aid and Trade”.
Importance of Foreign Trade:
• When a country specializes in the production of a few goods due to
division of labour and international trade, it exports those commodities
which it produces cheaper in exchange for what others can produce at
a lower cost.
• Small size of domestic market in under developed countries fails to
absorb sufficient volume of output. This leads to low inducement to
• Foreign trade also helps to transform the subsistence sector into the
monetized sector by providing markets for farm produce and raises the
income and standard of living.
Importance of foreign aid:
• Under development countries suffer from technological backwardness,
reflected in high average cost of production and low productivity of
labour and capital due to unskilled labour and obsolete capital
equipment and has high capital-output ratio.
• Foreign aid helps in building economic overhead capital like rails, road
and power projects which provide the necessary infrastructure for
• Foreign capital helps in industrializing the economy.
• With the help of foreign aid untapped natural resources can be
exploited, it opens up inaccessible areas helps in augmenting natural
• Importance of capital creates more employment opportunities.
• Foreign aid overcomes the balance of payments difficulties
experienced by under development countries.
Two Gap model of Foreign Aid:
• H.B.Chenery developed this model.
• According to two gap model, saving gap and foreign exchange gap are
two separate and independent constraints on the attainment of a
target rate of growth in developing countries.
• Chenery suggests foreign aid as a way of filling these two gaps in
order to achieve the target growth rate of the economy.
• According Chenery, due to low level of income saving is very low, so
there gap for investment. This is called domestic saving gap.
• Difference between saving and investment is cause to domestic
• According Chenery developing countries having the less export value
than the imports value. So the there is a gap for foreign exchange. So
this is called foreign exchange gap.
• Difference between imports and exports is cause to foreign