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TEST-8 EXPLANATION PDF

October 6th, 2019

Lesson 2
Growth & Development
Measurement of Growth ......................................... 4 GDP in the Phase of Distribution or Income
Different Types of Goods ..................................... 4 Method............................................................ 14

What are ‘Goods’? ............................................ 4 Important Macroeconomic Identities ................ 14

Classification of Goods ..................................... 4 Gross National Product ................................... 14

Economic Goods and Free Goods ................. 4 Net National Product ...................................... 14

Consumer Goods and Producer Goods......... 4 Distinction between Net National Product at
Market Price and Net National Product at
Single Use and Durable Use Goods ............... 4 Factor Cost ...................................................... 15
Private goods and public goods .................... 4 Personal Income and Personal Disposable
Intermediate Goods ...................................... 5 Income............................................................. 16
Distinction between Goods and Services ......... 5 Nominal GDP and Real GDP ............................... 17
Circular Flow of Income in a Simple Economy ..... 5 Nominal GDP ................................................... 17
Revisiting the ‘Two Sector Model’ .................... 5 Real GDP .......................................................... 17
Product or Value Added Method of Calculating Why is Calculating Real GDP Important? ........ 17
National Income ................................................... 7
Difference Between Nominal GDP and Real
Concept of Value Added ................................... 7 GDP.................................................................. 18
Concept of Depreciation, Gross Investment And Meaning....................................................... 18
Net Investment ................................................. 8
Calculation ................................................... 18
Concept of Depreciation, Gross Value Added
Price Change Effect...................................... 18
and Net Value Added........................................ 9
Value ............................................................ 18
Concept of Gross Value Added And Gross
Domestic Product ........................................... 10 Usage ........................................................... 18
Expenditure Method of Calculating National Complexity ................................................... 18
Income ............................................................... 11 Analysis of Economic Growth ...................... 18
Revisiting the Farmer-Baker Two-Sector Model Comparison across countries ...................... 18
........................................................................ 11
GDP Deflator, Consumer Price Index, Wholesale
Expenditure Method – Salient Points ............. 11 Price Index .......................................................... 18
Consumption by households ...................... 11 GDP Deflator ................................................... 18
Investment by businesses ........................... 11 Consumer Price Index ..................................... 19
Government spending on goods and services Wholesale Price Index ..................................... 19
..................................................................... 11
Difference Between CPI and GDP Deflator ..... 20
Income Method of Calculating National Income13
GDP & Welfare ................................................... 20
Comparison of The Three Methods of Estimating
Limitations of GDP .......................................... 20
GDP – Product Method, Expenditure Method and
Income Method ................................................. 13 Quality of Life .............................................. 20
GDP in the Phase of Production or the Value Non-market transactions ............................ 20
Added Method ................................................ 13 Income Inequality ........................................ 20
GDP in the Phase of Disposition or the Sustainability ............................................... 20
Expenditure Method....................................... 13
Economic Bads............................................. 20
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 Depreciation of Capital ............................... 20 Is a New Paradigm of Services-led Growth
Real GDP per capita .................................... 20 Emerging Globally?...................................... 40

Other Important Indicators ............................ 21 Way Forward ............................................... 40

The Human Development Index (HDI) ........ 21 Analysis of Development in India ....................... 41
What is Human Development? ....................... 41
The Genuine Progress Indicator (GPI)......... 21
Status of Human Development in India .......... 42
The Happy Planet Index (HPI) ..................... 21
Reasons for low Human Development in India
Factor Cost, Basic Prices and Market Prices ...... 22
......................................................................... 42
Indian Economy – A Wide Angled Perspective .. 23
How to ensure Human Development in India?
Development in a Dual Economy ................... 23
......................................................................... 43
A Successful Developmental Strategy ............ 23
Social Protection.......................................... 44
Why has India failed to follow the East Asian
School Education ......................................... 44
script? ............................................................. 25
Higher Education ......................................... 45
Investment Slowdown in India ....................... 26
Skill Development........................................ 46
Financing Infrastructure ................................. 28
Healthcare ................................................... 46
Low Overall Demand in the Economy ............ 29
Sustainable Development Goals ........................ 47
The Way Forward ........................................... 29
Outline the Goals ............................................ 47
Rural-led Strategy ....................................... 30
Present Scenario ............................................. 48
Analysis of Overall and Sectoral Trend of Growth
in India................................................................ 31 India’s Green Initiative ................................ 48
Indian Economy .............................................. 31 Roadmap Ahead .............................................. 51
Size of the Economy .................................... 31 How to bring about Economic growth and Human
development simultaneously in India? .............. 52
GVA & GDP Growth..................................... 32
How to Unlock India’s Potential Growth Rate?
Growth in Agriculture ..................................... 32 ......................................................................... 52
Trend ........................................................... 32 What Kind of Reforms are Required? ......... 52
Crisis in Indian Agriculture .......................... 32 Second Generation Reforms ....................... 53
How to Achieve the Potential? ................... 35 Summary............................................................. 55
Growth in Industry.......................................... 36 Gross Domestic Product at Market Prices
Trend ........................................................... 36 (GDPMP) ........................................................ 55
How to Achieve the Potential? ................... 36 GDP at Factor Cost (GDPFC) ......................... 55
Growth in Services .......................................... 37 Net Domestic Product at Market Prices
Trend ........................................................... 38 (NDPMP) ........................................................ 55

Doubts over Services-led Growth in India .. 38 NDP at Factor Cost (NDPFC) ......................... 55

High Growth – Low Employment Paradox of Gross National Product at Market Prices
India’s Services Sector................................. 38 (GNPMP) ........................................................ 55

Justification for Services-led Growth .......... 39 GNP at Factor Cost (GNPFC) ......................... 55

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 Net National Product at Market Prices
(NNPMP) ....................................................... 55
NNP at Factor Cost (NNPFC) OR National
Income (NI).................................................. 55
MCQs for Practice .................................................. 56

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 SINGLE USE AND DURABLE USE GOODS
MEASUREMENT OF
SINGLE USE GOODS
GROWTH ▪ Single use goods are those goods, which can be
used only once. They are finished in one use
DIFFERENT TYPES OF GOODS itself.
▪ Example: bread, butter, egg, milk etc are the
WHAT ARE ‘GOODS’? single use consumer goods as they are
consumed immediately and once and for all.
A commodity, or a physical, tangible item that ▪ Similarly, single use producer goods are
satisfies some human want or need, or something exhausted in one production process. Example:
that people find useful or desirable and make an coal, raw material, seeds, manure etc.
effort to acquire it.
DURABLE USE GOODS
CLASSIFICATION OF GOODS ▪ Durable use goods are those goods, which can be
used again and again for a long period of time.
ECONOMIC GOODS AND FREE GOODS There are durable use consumer goods as well as
ECONOMIC GOODS durable use producer goods.
▪ Economic goods are those goods (manmade or ▪ Durable use consumer goods are cloth,
free gifts of nature) whose demand is more than furniture, television, scooter etc. that can be
supply (i.e. they are scarce). They command a used by consumer again and again.
price and they can be bought in the market. ▪ Durable use producer goods are used in
▪ Example: toothpaste, soap, shaving cream, production again and again for example,
footwear, bread, machines, buses, table, chair, machines, tools, tractors and implements etc.
books, fans, television etc. This does not mean that repeated use of these
goods does not make any difference to them.
FREE GOODS
▪ We can define free goods as goods which ▪ In fact, the value of these goods gets depreciated
possess utility but which are not scarce. after continuous use.
▪ Free goods are free gifts of nature. They are PRIVATE GOODS AND PUBLIC GOODS
available in abundance i.e. in unlimited quantity
and the supply is much more than the demand. PRIVATE GOODS
▪ All goods that are privately owned and are
▪ Example: Sand, clean air, water etc.
exclusively enjoyed by individuals are called
CONSUMER GOODS AND PRODUCER GOODS private goods. For example, all the goods owned
by you are private goods.
CONSUMER GOODS
▪ Consumer goods are those goods, which satisfy ▪ Examples: watch, pen, scooter, books, table,
the want of consumers directly. They are goods, chair, bed, clothes etc. If you own a factory then
which are used for consumption. its building, machinery; tools etc are your private
▪ Example: bread, fruits, milk, clothes etc. goods.

PRODUCER GOODS PUBLIC GOODS:

▪ Producer goods are those goods, which satisfy ▪ Public goods are those goods, which are owned
the want of consumers indirectly. As they help and enjoyed by the society as a whole. They are
in producing other goods, they are known as available to all people in a society without any
producer goods. discrimination, i.e. no one is denied from the
▪ Example: machinery, tools, raw materials, seeds, consumption of public goods.
manure and tractor etc are all example of
producer goods.
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▪ Both government and private entrepreneurs ▪ If a consumer buys a bag of sugar to use at
may produce public goods, but it is usually the home, it is a consumer good (final good). But if a
former. manufacturer purchases sugar to use during the
▪ Example: roads, bridges, park, town hall etc. are production of another product, it becomes an
all collectively owned. intermediate good.
▪ Economists refer to public goods as "non- ▪ Capital goods, on the other hand, are assets that
rivalrous" and "non-excludable," and most such are used in the production of consumer goods.
goods are both. Key thing to note about capital goods is that they
▪ Their non-rivalry refers to the fact that the goods don’t transform, or change shape in the
don't dwindle in supply as people consume production process.
them; a country's defenses, for example, do not
run out or diminish as its population grows. DISTINCTION BETWEEN GOODS AND
▪ Non-excludability means just that; the good is SERVICES
available to all and cannot be withheld, even ▪ Goods are tangible in nature i.e. they can be
from people who do not contribute to its public seen and touched. Services are non-tangible in
funding. nature i.e. they can neither be seen nor be
▪ That characteristic, in turn, leads to what is called touched.
the free-rider problem with public goods. Since ▪ There is a time gap between production and
you need not contribute to the provision of a consumption of goods as they are produced first
public good to benefit from it, some people will and consumed later. There is no time gap
inevitably choose to use the good and yet shirk between the production and consumption of
the public responsibility to help pay for it. services. That is why they are produced and
INTERMEDIATE GOODS consumed simultaneously.
Intermediate Goods – What are they? How are they ▪ Goods can be stored and utilized when required.
different from Consumer Goods and Capital Goods? Services cannot be stored.
Are they factored in calculating Gross Domestic ▪ Goods can be transferred from one place to
Product? another. Transfer of service is not possible.

WHAT ARE INTERMEDIATE GOODS?

▪ An intermediate good is a product used to
produce a final good or finished product—also
referred to as a consumer good.
▪ Intermediate goods are vital to the production
process, which is why they are also called
producer goods. Industries sell these goods to
each other for resale or to produce other goods.
▪ These goods are also called semi-finished
products because they are used as inputs to
become part of the finished product. When they
are used in the production process, they are
transformed into another state.
CIRCULAR FLOW OF INCOME IN A
INTERMEDIATE GOODS VERSUS CONSUMER
AND CAPITAL GOODS SIMPLE ECONOMY
▪ Intermediate goods can be used in production,
but they can also be consumer goods. How it is REVISITING THE ‘TWO SECTOR
classified depends on who buys it. MODEL’

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Let us revisit the ‘Two Sector Model’ that we had economy, therefore, comes back to the producers
discussed in the previous lesson. in the form of sales revenue.

The aggregate consumption by the households of

the economy is equal to the aggregate expenditure
on goods and services produced by the firms in the
economy.

In the next period the firms will once again produce

goods and services and pay remunerations to the
factors of production. These remunerations will once
again be used to buy the goods and services. Hence
year after year we can imagine the aggregate
income of the economy going through the two
sectors, firms and households, in a circular way.

Since the value of expenditure must be equal to the

value of goods and services, we can equivalently
In the above model, households receive their measure the aggregate income by “calculating the
payments from firms for productive activities they aggregate value of goods and services produced by
perform for the latter. As we have mentioned the firms”. When the aggregate revenue received by
before, there may fundamentally be four kinds of the firms is paid out to the factors of production it
contributions that can be made by households takes the form of aggregate income.
during the production of goods and services:
Since the same amount of money, representing the
(a) Contribution of human labour, remuneration for aggregate value of goods and services, is moving in a
which is called wage. circular way, if we want to estimate the aggregate
(b) Contribution of capital, remuneration for which value of goods and services produced during a year
is called interest. (which is nothing but Gross Domestic Product) we
(c) Contribution of entrepreneurship, remuneration can measure the annual value of the flows at any of
for which is profit. the dotted lines indicated in the diagram.
(d) Contribution of fixed natural resources (called
‘land’), remuneration for which is called rent. We can measure the uppermost flow (at point A) by
measuring the aggregate value of spending that the
In this simplified economy, there is only one way in firms receive for the final goods and services which
which the households may dispose off their earnings they produce. This method will be called the
– by spending their entire income on the goods and expenditure method.
services produced by the domestic firms.
If we measure the flow at point B by measuring the
The other channels of disposing their income are aggregate value of final goods and services
closed: we have assumed that the households do produced by all the firms, it will be called product
not save, they do not pay taxes to the government method.
– since there is no government, and neither do they
buy imported goods since there is no external trade At point C, measuring the sum total of all factor
in this simple economy. payments will be called income method.

In other words, factors of production use their KEY DEFINITION:

remunerations to buy the goods and services which
they assisted in producing. The entire income of the

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 Gross Domestic Product (GDP): GDP is the total measuring the aggregate value of production
monetary or market value of all the finished goods taking place in an economy over a period of time.
and services produced within a country's borders
in a specific time period. GDP provides an
economic snapshot of a country, used to estimate CONCEPT OF VALUE ADDED
the size of an economy and growth rate. It can be
calculated in three ways, using expenditures, In product method we calculate the aggregate
production, or incomes. annual value of goods and services produced (if a
year is the unit of time).
Simplified
GDP is the total value of all finished goods Let us suppose that there are only two kinds of
produced in the country in one financial year. It producers in the economy. They are the wheat
doesn't matter if it is produced by citizens or producers (or the farmers) and the bread makers
foreigners. If they are located within the country's (the bakers). The wheat producers grow wheat and
boundaries, their production is included in GDP. they do not need any input other than human
To avoid double-counting, GDP includes the final labour. They sell a part of the wheat to the bakers.
value of the product, but not the parts (or The bakers do not need any other raw materials
intermediate goods) that go into it. For example, besides wheat to produce bread.
an Indian footwear manufacturer uses laces and
other materials made in India. Only the value of Let us suppose that in a year the total value of wheat
the shoe gets counted; the shoelace does not. that the farmers have produced is Rs 100. Out of this
they have sold Rs 50 worth of wheat to the bakers.
Gross National Income (GNI): GNI is the total The bakers have used this amount of wheat
amount of money earned by a nation's people and completely during the year and have produced Rs
businesses. It is used to measure and track a 200 worth of bread. What is the value of total
nation's wealth from year to year. The number production in the economy? If we follow the simple
includes the nation's gross domestic product plus way of aggregating the values of production of the
the income it receives from overseas sources. sectors, we would add Rs 200 (value of production
of the bakers) to Rs 100 (value of production of
farmers). The result will be Rs 300.

A little reflection will tell us that the value of

aggregate production is not Rs 300. The farmers had
produced Rs 100 worth of wheat for which it did not
need assistance of any inputs. Therefore the entire
Rs 100 is rightfully the contribution of the farmers.
But the same is not true for the bakers. The bakers
PRODUCT OR VALUE ADDED had to buy Rs 50 worth of wheat to produce their
bread. The Rs 200 worth of bread that they have
METHOD OF CALCULATING produced is not entirely their own contribution. To
NATIONAL INCOME calculate the net contribution of the bakers, we
need to subtract the value of the wheat that they
KEY DEFINITION: have bought from the farmers. If we do not do this
we shall commit the mistake of ‘double counting’.
Value added: Net contribution made by a firm in This is because Rs 50 worth of wheat will be counted
the process of production. It is defined as, Value of twice. First it will be counted as part of the output
production – Value of intermediate goods used. produced by the farmers. Second time, it will be
counted as the imputed value of wheat in the bread
Product method of calculating national income: produced by the bakers.
Method of calculating the national income by

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Therefore, the net contribution made by the bakers ▪ Thought 4: Using the wheat purchased from
is, Rs 200 – Rs 50 = Rs 150. Hence, aggregate value farmer as input, baker produces bread worth Rs
of goods produced by this simple economy is Rs 100 200. Therefore,
(net contribution by the farmers) + Rs 150 (net a. value of baker’s production = Rs 200
contribution by the bakers) = Rs 250. b. value of intermediate goods (inputs; in this
case wheat) used by baker = Rs 50
The term that is used to denote the net contribution c. value added by baker = a – b = Rs 200 – 50 =
made by a firm is called its value added. We have Rs 150
seen that the raw materials that a firm buys from ▪ Though 5: Total value added in this ‘two
another firm which are completely used up in the economic agent model’ = value added by farmer
process of production are called ‘intermediate + value added by baker = Rs 100 + Rs 150 = Rs 250
goods’. Therefore, the value added of a firm is, value ▪ Thought 6: It is very important to subtract the
of production of the firm – value of intermediate value of intermediate goods used from the final
goods used by the firm. value of goods produced while calculating ‘value
added’.
The value added of a firm is distributed among its o Value of Wheat in BUNDLE 2 has been
four factors of production, namely, labour, capital, incorporated as value added by farmer.
entrepreneurship and land. Therefore wages, o Same wheat in BUNDLE 2 is intermediate
interest, profits and rents paid out by the firm must goods (input) for baker.
add up to the value added of the firm. o Value of wheat BUNDLE 2 must be counted
only once and that is why it was important to
Table summarising above explanation (all values in subtract Rs 50 from Rs 200 in Thought 4.
Rupees)
Farmer Baker
Total 100 200
Production
Intermediate 0 50
Goods Used
Value Added 100 200-50 = 150

Let us de-jargonise (simplify) Product or Value CONCEPT OF DEPRECIATION, GROSS

INVESTMENT AND NET INVESTMENT
Added Method of Calculating National Income:
▪ Thought 1: There are two economic agents – a KEY DEFINITIONS:
farmer and a baker. Farmer produces wheat and
baker bakes bread. Final goods: Those goods which do not undergo
▪ Thought 2: Farmer grows wheat worth Rs 100. any further transformation in the production
Assume that farmer uses no input. Therefore, process.
a. value of farmer’s production = Rs 100
b. value of intermediate goods (inputs) used by Capital goods: Goods which are bought not for
farmer = 0 meeting immediate need of the consumer but for
c. value added by farmer = a – b = 100 – 0 = Rs producing other goods.
100
▪ Thought 3: Farmer consumes wheat worth Rs 50 Depreciation: Wear and tear or depletion which
himself (let us call this BUNDLE 1) and sells capital stock undergoes over a period of time.
remaining wheat worth Rs 50 to the baker (let us
call this BUNDLE 2). Gross investment: Addition to the stock of capital
which also includes replacement for the wear and

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 tear which the previously installed capital stock CONCEPT OF DEPRECIATION, GROSS
undergoes. VALUE ADDED AND NET VALUE
ADDED
Net investment: Addition to capital stock; unlike
gross investment, it does not include the We have discussed the concept of value addition. In
replacement for the depletion of capital stock. the process of making consumer goods (for
example, bread), value addition can be observed
(remember the farmer-baker model?).
That part of our final output that comprises of
capital goods constitutes gross investment of an
Similarly, in the process of making producer goods
economy. These may be machines, tools and
or capital goods, value addition can be observed. For
implements; buildings, office spaces, storehouses or
example, a producer of machinery (that may be used
infrastructure like roads, bridges, airports or jetties.
by baker for example) also undertakes value
addition: he may be starting with steel as an input
But all the capital goods produced in a year do not
and producing the machinery as a final output.
constitute an addition to the capital stock already
existing.
Since the capital good which is used to carry out
production undergoes wear and tear, the producer
A significant part of current output of capital goods
has to undertake replacement investments to keep
goes in maintaining or replacing part of the existing
the value of capital constant. The replacement
stock of capital goods. This is because the already
investment is same as depreciation of capital.
existing capital stock suffers wear and tear and
needs maintenance and replacement.
If we include depreciation in value added then the
measure of value added that we obtain is called
A part of the capital goods produced this year goes
Gross Value Added.
for replacement of existing capital goods and is not
an addition to the stock of capital goods already
If we deduct the value of depreciation from gross
existing and its value needs to be subtracted from
value added we obtain Net Value Added. Unlike
gross investment for arriving at the measure for net
gross value added, net value added does not include
investment. This deletion, which is made from the
wear and tear that capital has undergone.
value of gross investment in order to accommodate
regular wear and tear of capital, is called
For example, let us say a firm produces Rs 100 worth
depreciation.
of goods per year, Rs 20 is the value of intermediate
goods used by it during the year and Rs 10 is the
So new addition to capital stock in an economy is
value of capital consumption (depreciation).
measured by net investment or new capital
formation, which is expressed as
The gross value added of the firm will be, Rs 100 – Rs
20 = Rs 80 per year. The net value added will be, Rs
Net Investment = Gross investment – Depreciation
100 – Rs 20 – Rs 10 = Rs 70 per year.
Net value added of the firm i = Gross value added
KEY DEFINITION
by the firm i (GVAi ) – Depreciation of the firm i (Di)
Stocks: Those variables which are defined at a
Let us de-jargonise (simplify) the concept of
point of time. (Example: Number of machines that
depreciation:
a baker has at a given point of time)
• Thought 1: Do you remember the Farmer-Baker
model? In that model, let us introduce a third
Flows: Variables which are defined over a period
economic agent – an Engineer. So now we have a
of time. (Example: Bread production per annum)
Farmer-Baker-Engineer model.
• Thought 2: Farmer does value addition by way of
producing wheat. Baker does value addition by
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 way of producing bread. And Engineer does value
addition by making machines for the baker. GDP = GVA1 + GVA2 + ..... + GVAN
• Thought 3: Assume that baker has 5 machines.
On 1st January, 2020, the Baker decides to scrap Therefore,
an old, underperforming machine and replace it
with a new one. Taking into consideration the GDP = ∑ GVAi
increased demand for his bread, the baker
decides to add a sixth machine to his stock of KEY DEFINITION:
machines.
• Thought 4: Baker places an order for two new Gross Domestic Product (GDP): Aggregate value
machines with the Engineer. The two new of goods and services produced within the
machines that the Engineer supplies to the baker domestic territory of a country. It includes the
appear to be value addition by Engineer in the replacement investment of the depreciation of
economy. capital stock.
• Thought 5: But one machine is used to replace an
old machine that has been scrapped and only one
additional machine has been added to the
Baker’s stock of machines.
• Thought 6: Therefore, Baker’s stock of machines
was depleted as one old, underperforming
machine was scrapped (depreciation). Baker
undertook ‘replacement investment’ to replenish
his stock of machines.
• Thought 7: From Engineer’s perspective, his total
(or gross) value addition was that of two
machines. But one half of his value addition,
equivalent to one machine, went into covering up
depreciation, and only one half was new (net)
addition to the stock of machines.
• Thought 8: From Baker’s perspective, his total (or
gross) investment was the cost he must have paid
to the Engineer for two machines. Can you tell
what was the ‘net investment’ made by the
Baker?

CONCEPT OF GROSS VALUE ADDED

AND GROSS DOMESTIC PRODUCT

If we sum the gross value added of all the firms of

the economy in a year, we get a measure of the value
of aggregate amount of goods and services
produced in the economy in a year (just as we had
done in the wheat-bread example). Such an estimate
is called Gross Domestic Product (GDP). Thus,

GDP = Sum total of gross value added of all the firms

in the economy.

If there are N firms in the economy, each assigned

with a serial number from 1 to N, then
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 The expenditure method is a system for calculating
EXPENDITURE METHOD OF gross domestic product (GDP) that combines
CALCULATING NATIONAL INCOME consumption, investment, government spending,
and net exports.
KEY DEFINITION
It is the most common way to estimate GDP. It says
everything that the private sector, including
Expenditure method of calculating national
consumers and private firms, and government
income: Method of calculating the national
spend within the borders of a particular country,
income by measuring the aggregate value of final
must add up to the total value of all finished goods
expenditure for the goods and services produced
and services produced over a certain period of time.
in an economy over a period of time.
The GDP under this method is calculated by
summing up all of the expenditures made on final
An alternative way to calculate the GDP is by looking
goods and services.
at the demand side of the products. This method is
referred to as the expenditure method.
There are four main aggregate expenditures that go
REVISITING THE FARMER-BAKER into calculating GDP:
TWO-SECTOR MODEL CONSUMPTION BY HOUSEHOLDS
▪ Let C be the aggregate final consumption
In the Farmer-Baker example that we have described
expenditure of the entire economy.
before, the aggregate value of the output in the
▪ Notice that a part of C is spent on imports of
economy by expenditure method will be calculated
consumption goods.
in the following way.
▪ Let Cm denote expenditure on the imports of
• In this method we add the final expenditures
consumption goods.
that each firm makes. Final expenditure is that
▪ Therefore C – Cm denotes that part of aggregate
part of expenditure which is undertaken not for
final consumption expenditure that is spent on
intermediate purposes.
the domestic firms.
• The Rs 50 worth of wheat that the Farmer
consumed will be counted as the final INVESTMENT BY BUSINESSES
expenditure received by him. (Assume that ▪ Let I be the aggregate final investment
Farmer’s family pays Rs 50 to the Farmer for the expenditure of the entire economy.
wheat that they consume.) ▪ Notice that a part of I is spent on imports of
• The Rs 50 worth of wheat which the Baker buys investment goods.
from the Farmer counts as intermediate goods, ▪ Let Im denote expenditure on the imports of
hence it does not fall under the category of final investment goods.
expenditure. ▪ Therefore I-Im denotes that part of aggregate
• The Rs 200 worth of bread that Baker sells to his final investment expenditure that is spent on
customers will be counted as the final the domestic firms.
expenditure received by him (i.e. final ▪ Capital formation is a term used to describe the
expenditure incurred by households in buying net capital accumulation during an accounting
the bread from Baker). period for a particular country. The term refers
• Therefore, the aggregate value of output of the to additions of capital goods, such as
economy is Rs 200 (final expenditure received equipment, tools, transportation assets, and
by the baker) + Rs 50 (final expenditure received electricity. It is the result of investment activities
by the farmer) = Rs 250 per year. undertaken by firms and government.

GOVERNMENT SPENDING ON GOODS AND

EXPENDITURE METHOD – SALIENT SERVICES
POINTS
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▪ Similarly, G – Gm stands for that part of (a) Y = C + I + G + X
aggregate final government expenditure that is (b) Y = I + G –X + M
spent on the domestic firms, where G is the (c) Y = C + I + G + (X – M)
aggregate expenditure of the government of the (d) Y = C – G + I + (X – M)
economy and Gm is the part of G which is spent Answer: C
on imports.
▪ Exports (X), which is nothing but spending by the
external sector on purchasing goods and
QUESTION 2
services produced by the domestic sector.
Q. Economic growth in country X will necessarily
The formula for GDP is: have to occur if [2013]
(a) there is technical progress in the world
GDP = (C – Cm) + (I – Im) + (G – Gm) + X economy
(b) there is population growth in X
It can also be written as: (c) there is capital formation of X
(d) the volume of trade grows in the world
GDP = C + I + G + (X – Cm – Im – Gm) economy
Answer: C
GDP = C + I + G + (X – (Cm + Im + Gm))

GDP = C + I + G + (X – M)

Where, M = Cm + Im + Gm (i.e. M = total imports)

Let us de-jargonise (simplify) the expenditure

method of calculating the GDP:
• Thought 1: We know that GDP is nothing but the
aggregate value of goods and services produced
within the domestic territory of a country.
• Thought 2: All the final goods that are being
produced – be they consumer goods or producer
goods – are being purchased by economic agents
– households, firm, government and the foreign
buyer.
• Thought 3: So the total expenditure incurred by
economic agents on purchasing final goods and
services should be the same as the total value of
final goods and services produced within the
domestic territory of a country (i.e. the GDP).

QUESTION 1
Q. In an open economy, the Gross Domestic
Product (Y) of the economy is: (C, I, G, X, M stand
for Consumption, Investment, Govt. Expenditure,
total exports and total imports respectively.)
[2000]
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 INCOME METHOD OF COMPARISON OF THE THREE
CALCULATING NATIONAL INCOME METHODS OF ESTIMATING GDP –
PRODUCT METHOD, EXPENDITURE
KEY DEFINITION: METHOD AND INCOME METHOD
Income method of calculating national income:
Method of calculating national income by
measuring the aggregate value of final factor
payments (= income) made in an economy over a
period of time.

The income approach to measuring gross domestic

product is based on the accounting reality that all
expenditures in an economy should equal the total
revenue generated by the production and sale of all
economic goods and services.
Let us look at a numerical example to see how all the
It also assumes that there are four major factors of three methods of estimating GDP give us the same
production in an economy and that all revenues answer.
must go to one of these four sources. That is,
revenues earned by all the firms put together must Example: There are two firms, A and B. Suppose A
be distributed among the factors of production as uses no raw material and produces cotton worth Rs.
salaries, wages, profits, interest earnings and rents. 50. A sells its cotton to firm B, who uses it to produce
cloth. B sells the cloth produced to consumers for Rs.
Therefore, by adding all of the sources of income 200.
together, a quick estimate can be made of the total
productive value of economic activity over a period. GDP IN THE PHASE OF PRODUCTION
OR THE VALUE ADDED METHOD
The formula for GDP is: Value Added (VA) = Sales – Intermediate Goods

GDP = W + P + In + R, where Thus,

VAA = 50 - 0 = 50
W = Total wages and salaries received by all factors VAB = 200 - 50 = 150
of production
Thus,
P = Total profits received by all factors of production GDP = VAA + VAB = 200

In = Total interest received by all factors of GDP IN THE PHASE OF DISPOSITION

production OR THE EXPENDITURE METHOD

R = Total rent received by all factors of production. GDP = Sum of final expenditure or expenditures on
goods and services for end use

In the above case, final expenditure is expenditure

by consumers on cloth. Therefore, GDP = 200.

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 GDP IN THE PHASE OF DISTRIBUTION GNP is commonly calculated by taking the sum of
OR INCOME METHOD personal consumption expenditures, private
domestic investment, government expenditure,
Let us look at the firms A and B again. net exports and any income earned by residents
from overseas investments, minus income earned
Now, of this 50 received by A, the firm gives Rs. 20 to within the domestic economy by foreign residents.
the workers as wages, and keeps the remaining 30 as Net exports represent the difference between what
its profits. a country exports minus any imports of goods and
services.
Similarly, B gives 60 as wages and keeps 90 as profits
(recall that 50 has been paid by B to A for cotton). The formula for GNP is:

Recall that GDP by income method = sum total of GNP = GDP + (Factor income earned by the
factor incomes, which is equal to total wages domestic factors of production employed in the
received (workers of A and B) and total profits rest of the world – Factor income earned by the
earned (by A and B), which is equal to 80 + 120 = factors of production of the rest of the world
200. employed in the domestic economy)

Hence, GNP = GDP + Net factor income from abroad

IMPORTANT MACROECONOMIC
IDENTITIES (Net factor income from abroad = Factor income
earned by the domestic factors of production
GROSS NATIONAL PRODUCT employed in the rest of the world – Factor income
earned by the factors of production of the rest of
GNP and GDP are very closely related concepts, and the world employed in the domestic economy).
the main differences between them comes from the
fact that there may be companies owned by foreign
residents that produce goods in India, and
companies owned by Indians that produce goods
for the rest of the world and revert earned income
to domestic residents in India.

For example, there are a number of foreign

companies that produce goods and services in India
(all figures in Billions of USD; source: Investopedia)
and transfer any income earned to their foreign
residents. Likewise, many Indian corporations NET NATIONAL PRODUCT
produce goods and services outside of Indian
borders and earn profits for India’s residents. We have already noted that a part of the capital gets
consumed during the year due to wear and tear.
Where GDP looks at the value of goods and services This wear and tear is called depreciation.
produced within a country's borders, GNP is the
market value of goods and services produced by all If we deduct depreciation from GNP the measure of
citizens of a country—both domestically and aggregate income that we obtain is called Net
abroad. National Product (NNP).

Thus, GNP is an estimate of total value of all the The formula for NNP is:
final products and services turned out in a given
period by the means of production owned by a NNP = GNP – Depreciation
country's citizens.

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 DISTINCTION BETWEEN NET
NATIONAL PRODUCT AT MARKET KEY DEFINITION:
PRICE AND NET NATIONAL PRODUCT
AT FACTOR COST Gross National Product (GNP): GDP + Net Factor
Income from Abroad. In other words GNP includes
It is to be noted that all the variables discussed so
the aggregate income made by all citizens of the
far are evaluated at market prices.
country, whereas GDP includes incomes by
foreigners within the domestic economy and
But market price includes indirect taxes. When
excludes incomes earned by the citizens in a
indirect taxes are imposed on goods and services,
foreign economy.
their prices go up. Indirect taxes accrue to the
government. We have to deduct them from NNP
Net National Product (NNP) (at market price):
evaluated at market prices in order to calculate that
GNP – depreciation.
part of NNP which actually accrues to the factors of
production.
NNP (at factor cost) or National Income (NI): NNP
at market price – (Indirect taxes – Subsidies).
Similarly, there may be subsidies granted by the
government on the prices of some commodities. So
we need to add subsidies to the NNP evaluated at QUESTION 3
market prices. Q. National Income is: [1997]
(a) Net National Product at market price
Example: Market price of commodity X should be Rs (b) Net National Product at factor cost
100 per unit; since government wants to reduce (c) Net Domestic Product at market price
price of commodity X for the end user, it decides to (d) Net Domestic Product at factor cost
give a subsidy of Rs 20 per unit to the manufacturer Answer: B
and asks the manufacturer to sell commodity X at Rs
80 per unit; so essentially, manufacturer is still
getting Rs 100 per unit for commodity X; it is this Rs
QUESTION 4
100 that gets distributed amongst various factors of
production. That is why we need to add subsidy to Q. The most appropriate measure of economic
market price to arrive at factor cost. growth is its: [2001]
(a) Gross Domestic Product of a country
The measure that we obtain by doing so (reducing (b) Net Domestic Product
indirect taxes and adding subsidies to NNP at (c) Net National Product
market prices) is called Net National Product at (d) Per Capita Real Income
factor cost or National Income. Answer: D

The formula for NNP at factor cost (which is also

referred to as National Income):

NNP at factor cost = National Income (NI) = NNP at

market prices – Indirect taxes + Subsidies QUESTION 5
Q. The term National Income represents: [2001]
NNP at factor cost = National Income (NI) = NNP at (a) gross national product at market prices minus
market prices – (Indirect taxes – Subsidies) depreciation
NNP at factor cost = National Income (NI) = NNP at (b) gross national product at market prices minus
market prices – Net indirect taxes depreciation plus net factor income from
abroad
Where, Net indirect taxes = Indirect taxes – (c) gross national product at market prices minus
Subsidies. depreciation and indirect taxes plus subsidies
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 (d) gross national product at market prices minus prizes, for example) which have to be added to
net factor income from abroad calculate the Personal Income of the households.
Answer: C
The formula for Personal Income (PI):

QUESTION 6
Personal Income (PI) = NI – Undistributed profits –
Q. The national income of a country for a given Net interest payments made by households –
period is equal to the [2013] Corporate tax + Transfer payments to the
(a) total value of goods and services produced by households from the government and firms.
the nationals
(b) sum of total consumption and investment However, even PI is not the income over which the
expenditure households have complete say. They have to pay
(c) sum of personal income of all individuals taxes from PI.
(d) money value of final goods and services
produced If we deduct the Personal Tax Payments (income
Answer: D tax, for example) and Non-tax Payments (such as
fines) from PI, we obtain what is known as the
Personal Disposable Income.
PERSONAL INCOME AND PERSONAL
DISPOSABLE INCOME
The formula for Personal Disposable Income (PDI):
We can further subdivide the National Income into
smaller categories. Let us try to find the expression Personal Disposable Income (PDI) = PI – Personal
for the part of NI which is received by households. tax payments – Non-tax payments.
We shall call this Personal Income (PI).
Personal Disposable Income is the part of the
First, let us note that out of NI, which is earned by aggregate income which belongs to the households.
the firms and government enterprises, a part of They may decide to consume a part of it, and save
profit is not distributed among the factors of the rest.
production. This is called Undistributed Profits (UP).

We have to deduct UP from NI to arrive at PI, since

UP does not accrue to the households.

Similarly, Corporate Tax, which is imposed on the

earnings made by the firms, will also have to be
deducted from the NI, since it does not accrue to
the households.
KEY DEFINITION
On the other hand, the households do receive
interest payments from private firms or the Undistributed profits: That part of profits earned
government on past loans advanced by them. And by the private and government owned firms which
households may have to pay interests to the firms are not distributed among the factors of
and the government as well, in case they had production.
borrowed money from either. So, we have to deduct
the net interests paid by the households to the firms Corporate tax: Taxes imposed on the income
and government. made by the corporations (or private sector firms).

The households receive transfer payments from Net interest payments made by households:
government and firms (pensions, scholarship, Interest payment made by the households to the

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 firms – interest payments received by the Nominal GDP, or nominal gross domestic product, is
households. a measure of the value of all final goods and
services produced within a country’s borders at
Transfer payments to households from the current market prices.
government and firms: Transfer payments are
payments which are made without any In calculating nominal GDP, we only use current
counterpart of services received by the payer. For quantities at current year prices.
examples, gifts, scholarships, pensions.
If, for instance, India produced only three products—
Personal Income: National Income – coffee, tea, and rubber, let’s say—nominal GDP
Undistributed profits – Net interest payments would be calculated by first multiplying the
made by households – Corporate tax + Transfer quantity of each product produced by its current
payments to the households from the government market price, and then adding the three results
and firms. together. In order to calculate it, we first need to
know the quantity of each product produced and the
Personal tax payments: Taxes which are imposed up-to-date average price for that product.
on individuals, such as income tax.
Therefore, (coffee quantity x coffee’s current market
Non-tax payments: Payments made by price) + (tea quantity x tea’s current market price) +
households to the firms or the government as (rubber quantity x rubber’s current market price) =
non-tax obligations such as fines. Nominal GDP

Personal Disposable Income (PDI): PI – Personal It can then be further reduced to the nominal GDP
tax payments – Non-tax payments. per capita by dividing the nominal GDP by the
country’s population.

REAL GDP

Real GDP is GDP evaluated at the market prices of

some base year.

Base year is the year whose prices are being used to

calculate the real GDP.

NOMINAL GDP AND REAL GDP For example, if 2012 were chosen as the base year,
then real GDP for 2019 is calculated by taking the
KEY DEFINITION quantities of all goods and services purchased in
2019 and multiplying them by their 2012 prices.
Real GDP: GDP evaluated at a set of constant
prices. WHY IS CALCULATING REAL GDP
IMPORTANT?
Nominal GDP: GDP evaluated at current market
Consider the following statements:
prices.
▪ For example, suppose a country only produces
bread.
Base year: The year whose prices are used to
▪ In the year 2000 it had produced 100 units of
calculate the real GDP.
bread, and price of bread in year 2000 was Rs 10
per bread. GDP at current price was Rs 1,000.
(This is the nominal GDP of year 2000)
NOMINAL GDP
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▪ In 2001 the same country produced 110 units of ▪ Real GDP: Excluded
bread at price Rs 15 per bread. Therefore,
nominal GDP in 2001 was Rs 1,650 (=110 × Rs VALUE
15). ▪ Nominal GDP: Usually higher due to inflation.
▪ If one were to only compare nominal GDP of ▪ Real GDP: Usually lower than nominal GDP.
year 2001 with that of year 2000, without paying USAGE
attention towards the prevailing price levels, one ▪ Nominal GDP: Used for comparison across
may conclude that since there is a 65% increase different quarters of output in a year for same
in nominal GDP (from Rs 1,000 to Rs 1,650), country.
there may be a 65% increase in bread ▪ Real GDP: More appropriate for comparison
production. across years and across countries.
▪ But is there a 65% increase in bread production?
No! There is only a 10% increase in bread COMPLEXITY
production (from 100 units to 110 units), ▪ Nominal GDP: Comparatively easier to calculate.
whereas there is a 50% increase in the price level ▪ Real GDP: More difficult to calculate.
(from Rs 10 to Rs 15 per bread)!
ANALYSIS OF ECONOMIC GROWTH
▪ This is where Real GDP helps us. It helps us in ▪ Nominal GDP: Cannot segregate between
cancelling out the effect of price change and volume growth and growth due to price changes.
correctly measure the changes in production ▪ Real GDP: Concentrates on volume growth only,
levels. hence economic growth can be more
▪ Real GDP in 2001 calculated at the price of the appropriately analysed.
year 2000 (2000 will be called the base year) will
be 110 × Rs 10 = Rs 1,100. COMPARISON ACROSS COUNTRIES
▪ When we compare real GDP of year 2001 with ▪ Nominal GDP: Not appropriate to compare
nominal GDP of year 2000 (which is also the real nominal GDP across countries with different
GDP since base year is 2000 itself), we notice an inflation rates.
increase of 10% (from Rs 1000 to Rs 1100), which ▪ Real GDP: Better index for measuring long-term
is the same as the increase in bread production. economic performance and comparison across
▪ If production in year 2002 increases to 120 countries.
breads, real GDP in 2002 (assuming 2000 as the
base year) will be 120 X Rs 10 = Rs 1200. This
indicates a 20% increase over 2000, which is also GDP DEFLATOR, CONSUMER PRICE
the same as the increase in bread production INDEX, WHOLESALE PRICE INDEX
between 2000 and 2002.
GDP DEFLATOR
DIFFERENCE BETWEEN NOMINAL
GDP AND REAL GDP KEY DEFINITION
MEANING
▪ Nominal GDP: Total economic output produced GDP Deflator: Ratio of nominal to real GDP.
valued at a current market price.
▪ Real GDP: Total economic output produced
valued at a constant market price. Let us revisit an example that we have studied
before.
CALCULATION
▪ Nominal GDP: Based on current market price. For example, suppose a country only produces
▪ Real GDP: Based on pre-determined base year bread. In the year 2000 it had produced 100 units of
market price. bread, price was Rs 10 per bread. GDP at current
price was Rs 1,000. In 2001 the same country
PRICE CHANGE EFFECT
produced 110 units of bread at price Rs 15 per bread.
▪ Nominal GDP: Included
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Therefore, nominal GDP in 2001 was Rs 1,650 (=110 CPI is generally expressed in percentage terms.
× Rs 15). Real GDP in 2001 calculated at the price of
the year 2000 (2000 will be called the base year) will We have two years under consideration – one is the
be 110 × Rs 10 = Rs 1,100. base year, the other is the current year. We calculate
the cost of purchase of a given basket of
Notice that the ratio of nominal GDP to real GDP commodities in the base year. We also calculate the
gives us an idea of how the prices have moved from cost of purchase of the same basket in the current
the base year (the year whose prices are being used year. Then we express the latter as a percentage of
to calculate the real GDP) to the current year. the former. This gives us the Consumer Price Index
of the current year vis-´a-vis the base year.
In the calculation of real and nominal GDP of the
current year, the volume of production is fixed. For example let us take an economy which produces
Therefore, if these measures differ it is only due to two goods, rice and cloth. A representative
change in the price level between the base year and consumer buys 90 kg of rice and 5 pieces of cloth in
the current year. a year.

The ratio of nominal to real GDP is a well-known Suppose in the year 2000 the price of a kg of rice was
index of prices. This is called GDP Deflator. Thus, if Rs 10 and a piece of cloth was Rs 100. So the
GDP stands for nominal GDP and gdp stands for real consumer had to spend a total sum of Rs 10 × 90 =
GDP then, GDP deflator = GDP/gdp. Rs 900 on rice in 2000. Similarly, she spent Rs 100 ×
5 = Rs 500 per year on cloth. Summation of the two
In the previous example, the GDP deflator is items is, Rs 900 + Rs 500 = Rs 1,400.
1,650/1,100 = 1.50 (in percentage terms this is 150
per cent). This implies that the price of bread Now suppose the prices of a kg of rice and a piece of
produced in 2001 was 1.5 times the price in 2000. cloth has gone up to Rs 15 and Rs 120 in the year
Which is true because price of bread has indeed 2005. To buy the same quantity of rice and clothes
gone up from Rs 10 to Rs 15. Like GDP deflator, we the representative will have to spend Rs 1,350 and
can have GNP deflator as well. Rs 600 respectively (calculated in a similar way as
before). Their sum will be, Rs 1,350 + Rs 600 = Rs
1,950.
CONSUMER PRICE INDEX
The CPI therefore will be (1,950/1,400) × 100 =
KEY DEFINITION 139.29 (approximately).
Consumer Price Index (CPI): Percentage change in WHOLESALE PRICE INDEX
the weighted average price level. We take the
prices of a given basket of consumption goods. It is worth noting that many commodities have two
sets of prices.
Wholesale Price Index (WPI): Percentage change
in the weighted average price level. We take the One is the retail price which the consumer actually
prices of a given basket of goods which is traded in pays. The other is the wholesale price, the price at
bulk. which goods are traded in bulk.

These two may differ in value because of the margin

There is another way to measure change of prices in kept by traders. Goods which are traded in bulk
an economy which is known as the Consumer Price (such as raw materials or semi-finished goods) are
Index (CPI). This is the index of prices of a given not purchased by ordinary consumers. Like CPI, the
basket of commodities which are bought by the index for wholesale prices is called Wholesale Price
representative consumer. Index (WPI).

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 DIFFERENCE BETWEEN CPI AND GDP ▪ Because of this, the output and income
DEFLATOR generated through non-market transactions is
not included in the calculation of a nation’s GDP.
1. The goods purchased by consumers (which the
CPI includes) do not represent all the goods INCOME INEQUALITY
which are produced in a country. GDP deflator ▪ What it means? when a disproportionate share
takes into account all such goods and services. of a nation’s income is earned by a small
2. CPI includes prices of goods consumed by the minority of households; for example, when the
representative consumer, hence it includes top 10% of households earn 80% of the total
prices of imported goods. GDP deflator does not income in a country, there is a high degree of
include prices of imported goods. income inequality;
3. The weights are constant in CPI – but they differ ▪ GDP does not account for income distribution in
according to production level of each good in any way.
GDP deflator.
SUSTAINABILITY
▪ What it means? The ability of a system to endure
GDP & WELFARE indefinitely into the future;
▪ An increase in GDP will only be sustainable as
long as it does not deplete natural resources too
Can the GDP of a country be taken as an index of rapidly nor exploit the environment in a way that
the welfare of the people of that country? If a diminishes the quality of life of the nation’s
person has more income, he or she can buy more households over time.
goods and services and his or her material well-being
ECONOMIC BADS
improves. So it may seem reasonable to treat his or
▪ What it means? Any outcome from economic
her income level as his or her level of well-being.
activity that creates negative value for society,
GDP is the sum total of value of goods and services
such as air pollution from cars that harms human
created within the geographical boundary of a
health and the environment;
country in a particular year. It gets distributed
▪ Unsustainable economic growth may diminish
among the people as incomes (except for retained
the quality of life of a nation’s people.
earnings). So we may be tempted to treat higher
level of GDP of a country as an index of greater well- DEPRECIATION OF CAPITAL
being of the people of that country. But there are ▪ What it means? The decrease in the value of a
many reasons why this may not be correct. nation’s capital stock over time;
▪ GDP accounts for investment in new capital but
LIMITATIONS OF GDP does not subtract the lost value of depreciated
QUALITY OF LIFE
capital. Because of this, GDP may overstate the
▪ What it means? Sometimes called “well-being”; amount of economic activity in nations with
the standard of health, happiness, security, and rapidly depreciating capital stocks.
material comfort of an individual, a group of REAL GDP PER CAPITA
people, or a nation. ▪ What it means? The real gross domestic product
▪ GDP gives no idea about Quality of Life. of a nation, divided by the nation’s population;
NON-MARKET TRANSACTIONS
this measure is an indication of the average
▪ What it means? Economic activity that takes income of a nation’s people.
place in the informal sector (from babysitting, to
lawn mowing, to illegal drug sales), sometimes
called the grey market or the black market QUESTION 7
economy; Q. Increase in absolute and per capita real GNP
▪ Non-market transactions are not recorded, do not connote a higher level of economic
taxed, or officially monitored by the government. development, if [2018]

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 (a) industrial output fails to keep pace with such as life expectancy, literacy rates, environmental
agricultural output. indicators, measures of inequality and so on. By
(b) agricultural output fails to keep pace with including these variables, they provide a measure of
industrial output. life quality that goes beyond the narrowness of a
(c) poverty and unemployment increase. nation’s GDP value.
(d) imports grow faster than exports.
Answer: C

OTHER IMPORTANT INDICATORS

Alternative indicators have been developed to

provide a more well-rounded measure of a nation’s
quality of life by different national and international
organizations. These include:

THE HUMAN DEVELOPMENT INDEX (HDI)

A composite measure of nation’s social and
economic development developed by the United
Nations that includes measures of health, wealth,
and education.

THE GENUINE PROGRESS INDICATOR (GPI)

A measure of a nation’s quality of life that includes
the income and output measured by gross domestic
product. This measure subtracts out the costs of
negative effects related to economic growth such as
crime, environmental degradation, resource
depletion, and the costs of climate change. GPI nets
the positives and negatives of economic activity to
provide a more accurate measure of a nation’s
quality of life than GDP alone.

THE HAPPY PLANET INDEX (HPI)

A measure of a nation’s quality of life that includes
survey results on happiness, life expectancy at birth,
the degree of inequality across society, and the
ecological footprint.

Each of these indexes is a composite measure

weighing both income and non-income variables
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 product taxes (less product subsidies) to the basic
FACTOR COST, BASIC PRICES AND prices.
MARKET PRICES
As stated above, now the CSO releases GVA at basic
In India, the most highlighted measure of national
prices. Thus, it includes the net production taxes but
income has been the GDP at factor cost. The Central
not net product taxes.
Statistics Office (CSO) of the Government of India
has been reporting the GDP at factor cost and at
In order to arrive at the GDP (at market prices) we
market prices.
need to add net product taxes to GVA at basic
prices.
In its revision in January 2015 the CSO replaced GDP
at factor cost with the GVA at basic prices, and the
The formula for GVA at basic prices:
GDP at market prices, which is now called only GDP,
is now the most highlighted measure.
GVA at factor costs + Net production taxes = GVA at
basic prices
The idea of GVA has already been discussed: it is the
value of total output produced in the economy less
The formula for GVA at market prices:
the value of intermediate consumption (the output
which is used in production of output further, and
GVA at basic prices + Net product taxes = GVA at
not used in final consumption).
market prices
Here we discuss the concept of basic prices.

The distinction between factor cost, basic prices and

market prices is based on the distinction between
net production taxes (production taxes less
production subsidies) and net product taxes
(product taxes less product subsidies).

Production taxes and subsidies are paid or received

in relation to production and are independent of
the volume of production such as land revenues,
stamp and registration fee.

Product taxes and subsidies, on the other hand, are

paid or received per unit or product, e.g., excise tax,
service tax, export and import duties etc.

Factor cost includes only the payment to factors of

production, it does not include any tax.

In order to arrive at the market prices, we have to

add to the factor cost the total indirect taxes less
total subsidies.

The basic prices lie in between: they include the

production taxes (less production subsidies) but not
product taxes (less product subsidies). Therefore, in
order to arrive at market prices, we have to add

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 sectors like industry than in an informal sector like
INDIAN ECONOMY – A WIDE small-scale agriculture. Faster industrial growth
ANGLED PERSPECTIVE would allow agricultural labour to move to higher
productivity jobs in industry, and this can be a
significant contributor to the overall growth
The Indian economy has had the distinction of being
propelled by productivity growth in each sector.
one of the fastest growing in the world over the last
When there are fewer farmers left tilling the same
three decades. Yet, today there is a sense of
amount of land, they too see an increase in their
economic malaise in the air. The young are feeling
incomes. There can be a further increase in
frustrated as there are too few good jobs on the
agricultural incomes through productivity gains in
horizon for them. Rural areas are in distress as farm
agriculture. When rural incomes rise, they also
incomes have stagnated. Corporate investment has
result in an increased demand for industrial goods
declined. Banks burdened with bad loans are finding
thus producing a virtuous cycle of growth.
it difficult to lend. Exports have declined. There are
tell-tale signs of the onset of a further slowdown.
This is what happened in successful Asian countries.
Not only did they grow fast, but they also managed
Before we start putting together an explanation for
to drastically reduce poverty in a generation. All
the present state of affairs, we should understand
developed countries have gone through this
the structure of the Indian economy.
process. Even large agricultural exporting countries
DEVELOPMENT IN A DUAL ECONOMY like the US, Canada, Australia have a miniscule
percentage of their labour living off agriculture
Let us start by defining the terms ‘formal’ and now.
‘informal’. The ‘formal’ sector consists of all the
registered firms (that is, firms employing 10 or more The two oft repeated questions: ‘Why is the
employees) plus the government sector. The economy not creating enough good jobs?’, and
‘informal’ sector consists of the rest. Typically, ‘Why is there such rural distress?’ have a common
formal sector jobs are better jobs in which the answer. India has not succeeded in producing
workers get some basic benefits like provident fund enough high productivity jobs to draw labour away
and pensions etc., whereas the informal sector from agriculture. Of course, there are further
workers do not. Agriculture – the sector that reasons for the present distress in rural areas,
employees the largest part of Indian labour force demonetisation being an important one. We will
(over 40%) – is informal. Much of the rural economy discuss these later.
is informal, and so is a part of urban economy.
Eighty per cent of India’s population makes their If developed countries underwent this process and
living in the informal sector and produces half of so did many other Asian countries, why is India
India’s GDP (gross domestic product). Almost all the taking so long to do this? To understand this let us
poor toil in the informal sector. first understand the strategy employed by the
successful Asian countries in the next part of this
Consider India as a dual economy made up of two series.
free trading regions – ‘urban’ and ‘rural’. Urban is
more developed and hence the average incomes are A SUCCESSFUL DEVELOPMENTAL
higher there. This is so because typically urban STRATEGY
growth is based on productivity growth in the
Except for the city-states like Hong Kong and
formal sector while rural growth is based much
Singapore, all the successful Asian countries were
more on productivity growth in the informal sector
primarily agrarian before they industrialised. What
(agriculture).
they accomplished within 20 years was a total
transformation of their economies.
Typically, labour productivity, and also the potential
for productivity growth tends to be higher in formal

23 | P a g e W W W . E D U T A P . C O . I N QUERY? [email protected] / 8146207241

Initially, the policymakers concentrated on First, when firms can see that there is a potential
increasing productivity in agriculture. This directly market for their products they are inclined to make
increased the incomes of the rural population, and, investments.
in addition, allowed a higher level of agricultural
exports that would, in turn, enable imports of Second, to be able to accumulate capital, a country
machinery and technology. needs to have a high savings rate; but high savings
imply low domestic consumption and hence low
Late-developing countries have the advantage that domestic demand. However, when a country
they can rapidly improve their productivity by produces for foreign markets, the trade-off
transferring technology from developed countries between savings and consumption becomes
rather than having to invent it themselves. Some of irrelevant. It can afford to have a high savings rate
the technology transfer is done through foreign domestically. With access to export markets, it can
investment and the rest through direct purchase or have both high domestic savings and high demand
copying. However, in order to absorb the transferred coming from consumption abroad. In addition,
technology they need a well-trained labour force there is a much greater choice in what to produce
and supporting infrastructure. Moreover, in order as the world demand is bound to be more diverse
to sustain a high rate of capital formation, they than domestic demand.
needed to have a high rate of domestic savings. All
the Asian success stories paid due diligence to these The manufacturing sector, especially labour-
essential aspects of development. intensive manufacturing, does not require years of
university education to acquire the requisite skills. A
When a country industrialises in a transformative high-school graduate or less with some on the job
way, it needs to undertake some major structural training is often adequate for most of the jobs in
reforms. In order to facilitate a movement of land manufacturing. Surplus labour from the informal
and labour to their more productive use, laws sector, including agriculture, can move into labour-
pertaining to land and labour may have to be intensive manufacturing with minimum additional
reformed. In order to facilitate savings by training, as long as they have basic skills like literacy
households, the financial system needs to be and numeracy. This is what happened in Taiwan,
modernised. The financial system should be easily South Korea, Thailand, Indonesia and China. Lately,
accessible for people no matter where they live, and even Vietnam and Bangladesh have followed course.
should also be able to inspire trust. Foreign investors Most importantly, as their industrial sector
should be assured of legal protection of their expanded, they absorbed more and more labour
intellectual property rights. The success of these from agriculture – a sector with markedly lower
Asian countries was based on these basic productivity. Poverty declined as labour moved to a
preliminaries. more productive sector, and the productivity of the
remaining agricultural labour also increased. The
Another crucial aspect of their development strategy growth was fast and also inclusive.
was to start by focusing on producing labour-
intensive goods (textiles, footwear, toys, etc.) for It is important to mention that their respective
the markets in developed countries. They could governments actively aided this effort to develop a
thus take advantage of their cheap labour and then manufacturing sector in selected areas with an eye
produce these goods in quantities far in excess of to export markets. This was done through an
what they could have sold domestically. Thus, industrial policy that included low interest loans,
domestic demand was never a constraint for them land grants, tax holidays and requisite
in expanding their industries producing goods in infrastructure like power, container ports and other
which they had a comparative advantage. transportation networks. Albeit, it is easier to do it
in countries where the democratic norms are rather
There is a certain logic behind this export-led flexible.
strategy for fast growth.

24 | P a g e W W W . E D U T A P . C O . I N QUERY? [email protected] / 8146207241

 QUESTION India’s fast growth episode was propelled by
Among several factors for India's potential exports of IT services. It was indeed an export-led
growth, savings rate is the most effective one. Do growth. However, unlike China’s or South Korea’s
you agree? What are the other factors available growth through manufactured exports that
for growth potential? [150 words; 10 marks; UPSC absorbed low skilled labour in vast numbers, India’s
CSE 2017] growth episode was led by a high skilled service
sector that failed to adequately absorb unskilled
labour from agriculture.
WHY HAS INDIA FAILED TO FOLLOW
THE EAST ASIAN SCRIPT? In the early 1990s, India could have also developed
its manufacturing exports like China and South
Unlike the East and Southeast Asian governments, Korea did. But there were several major obstacles:
the Indian government did not direct the course of restrictive labour laws that created incentives for
the post-1991 growth. Liberalisation certainly keeping the scale small; an outdated land
helped unleash market forces but the course of acquisition law that made the process of acquiring
development was determined more or less through land extremely messy; weak infrastructure limiting
serendipity (unplanned fortunate discovery). access to power, ports, and roads; and, most
importantly, a badly educated labour force.
When the Licence Raj ended in 1991, a few Successive governments have found it challenging to
significant aspects of the reforms determined the address – let alone overcome – these obstacles.
subsequent course of the Indian growth story. In
1992, the government monopoly on the India has some unique problems that make any
communication sector officially ended. The years progress on this front difficult. First, any laws
between 1994 and 1999 saw a great deal of churning pertaining to agriculture and land are in the State
in this sector. Gradually, cell phones became List of the Constitution. This means that each state
pervasive. This was an opportune time for
makes its own laws. The Centre can only over-ride
communication technology to take off in India. them if and only if they are repugnant to a law
passed by Parliament. Land is also designated by
Due to excessive emphasis on public sector whether it is agricultural land or not. In order to
investments since 1960s in high-end technical and locate a large industrial project on any land
managerial institutions like the IITs (Indian designated as agricultural land, the state
Institutes of Technology) and IIMs (Indian Institutes government needs to buy it from the farmers and
of Management), there was a surplus of highly sell it to the industrial house, or change the land-use
trained manpower available. classification of the concerned area. In most states,
this is a source of massive corruption, and creates
At the same time, there was a sudden surge of incentives for state politicians to block any attempt
demand all over the world for IT professionals as by the Centre to change these laws.
the Internet was appearing on the world stage.
Indian engineers who were over-skilled for the Labour laws are in the Concurrent List of the
Indian market had been migrating to the US since Constitution. This means that the residual powers
1960s where they had managed to establish quite a remain with the Centre, and the Central
reputation. All this turned out to be fortuitous for Government has greater degrees of freedom to
Indian firms like TCS, WIPRO, and Infosys to emerge change the laws. Yet, successive governments have
on the world stage. Communications and business found it politically difficult to do so. Rajasthan made
services grew to be India’s fastest growing sectors some changes under the Bharatiya Janata Party (BJP)
from 1993 to 2004 at 20.7% and 24.3% per annum, state government, but these changes were marginal.
respectively. Software exports grew at the
astronomical rate of 34% per annum over that The existing laws are set up so as to put more
period. restrictions on larger employers, especially with
regard to adjusting the work force in response to
25 | P a g e W W W . E D U T A P . C O . I N QUERY? [email protected] / 8146207241
changes in demand. This discourages attaining create jobs and wages by bringing in new technology
scales that would allow Indian manufacturers to as well as by adding more capital (machines). India’s
compete internationally. These laws can be endured investment rate has not been bad at all, compared
in situations where demand does not move to the other Asian countries, except China. But it has
cyclically, which was the case in India for many years faltered of late, particularly post the Global
in the past. However, international markets are Financial Crisis (GFC) of 2008.
notoriously cyclical, and firms need to adjust their
output with a fair degree of flexibility. More Why have the growth of domestic investment and
importantly, since the mid-1990s, the Indian consequently the rate of gross capital formation
economy too has been displaying distinct business slowed down during this decade?
cycle behaviour, which makes the impact of these
laws even more damaging. In fact, this could be an QUESTION
important factor driving the process of automation How would the recent phenomena of
and robotics in Indian industry. protectionism and currency manipulations in
world trade affect macroeconomic stability of
After China entered the World Trade Organization India? [250 words; 15 marks; UPSC CSE 2018]
(WTO) in 1999, it went on to occupy most of the
unfilled space in the developed countries’ markets
for manufactured goods. ‘Made in China’ became a INVESTMENT SLOWDOWN IN INDIA
universal brand. It became much more difficult for
countries like India to compete with China after To understand the present slowdown it is useful to
that. examine the ups and downs in the rate of domestic
investment or gross domestic capital formation
In addition, the climate for international trade has (GDCF) as a percentage of GDP between 2001 and
recently changed. Developed countries have 2018 as in Figure below:
witnessed a denuding of their manufacturing
sectors, and the widespread resentment due to it
has led to the election of right-wing nationalists like
Donald Trump. Countries such as the US are not so
receptive any more to importing cheaper goods
from low wage countries.

Moreover, Indian workers now have to compete not

just with Chinese and Vietnamese workers but also
with robots and artificial intelligence. Even in India,
firms have strong incentives to make production
more capital-intensive. This is not just because of
labour laws but also because long-term interest
rates are not that much higher than short-term Gross capital formation as a percent of GDP
interest rates.
It is easy to see that GDCF as a percentage of GDP
The long and short of this is that inclusive growth is grew impressively from 25.3% in 2002 to 30.7% in
a far more difficult prospect for India in 2020 than 2004, and then kept growing to 35.8% in 2007 (the
for China in 2000. The genesis of India’s present highest rate of investment reached so far). This was
problems of a lack of job creation and rural distress a high growth period for the Indian economy.
lies in these factors. However, it was also a period of high credit growth.
The investment spree was financed by heavy
It is important to note that the Asian success stories borrowing by the corporate sector. Corporate
including that of China were based on an extremely exuberance during the boom period of 2002-07
high rate of investment. You need investment to
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partly explains the present state of indebtedness of significant role in maintaining a high rate of
the corporate sector, but it is a necessary corollary investment during those years.
to a high investment/high growth development
process. This episode does offer a clue as to how a transfer
from the urban to rural sector suggests itself as an
There was a major slump in international demand antidote to the present slump in aggregate
after the GFC, and inevitably Indian exports demand.
slumped. There is no doubt that the slowdown in
the Indian growth rate as well as in domestic GDCF declined steadily from 34.31% to 28.73% in
investment should be attributed to this world-wide 2015, and has stayed stagnant thereafter. There are
phenomenon. two big reasons for this. First, by 2015, it had started
to become clear that the Indian corporate sector
In the aftermath of GFC, 2007-08, corporate was heavily indebted. As debt soared, investment
investment fell. The post-2011 period is a period of growth declined. Also, at the end of 2016, the Indian
decline in investment as massive corruption economy had to suffer the enormous shock of
scandals rocked the Indian economy, and the demonetisation that hit the informal sector
corporate sector faced a backlash from watchdogs especially hard. A decline in the demand from the
like the Comptroller and Auditor General (CAG) of informal sector also resulted in unsold inventories
India, and from investigation agencies like the of the corporate sector. In a 2017 report, Credit
Central Bureau of Investigation (CBI) etc. There is Suisse pointed out that 40% of corporate debt was
some recovery after 2014 but that was torpedoed held by firms that could not hope to earn enough to
by demonetisation at the end of 2016. even cover their interest costs. There was an
alarming growth in the corporate debt. It grew from
What is surprising is the fact that the GDCF rate does 34.2% of GDP in 2002 to 56.8% of GDP in 2018.
not decline that much and in fact recovers to 34.3% (Original Source: Bank of International Settlements.)
in 2011. A plausible explanation for this is that in
2008, international food prices rose due to many Why did corporates over-borrow? Was it just
extraneous reasons, including because following irrational exuberance? Or was it the result of the
high oil prices, large food producers in North and weakness of the Indian banking system?
South America shifted their land to cultivation of Unfortunately, it was both. After the heady days of
crops to produce crops for gasohol. This rise in world fast growth from 2002 onwards, faster growth was
prices pulled up domestic agricultural prices in anticipated despite the fact that world demand had
India. (Minimum support prices (MSPs) were slackened. Corporates invested heavily on the back
repeatedly raised during this period.) As a result, of bank credit. Infrastructural investments – clearly
the terms of trade shifted in favour of agriculture. essential for long-term development – also reached
This most likely brought about a significant a peak around 2012.
redistribution of income in favour of the rural
sector, which, in turn, gave a boost to the Much more importantly, there is systemic moral
investment in the informal sector. This hazard built into the Indian banking sector. Public
compensated to some extent a fall in corporate sector banks can always rely on public revenues to
investment. bail them out. As a consequence, they have never
bothered to develop a decent risk assessment
This hypothesis is supported by the fact that this was system. Moreover, politicians have often directed
also a period of rising rural wages and declining them to loan money to their pet projects. For
poverty numbers. Perhaps the introduction of the example, there is the present government’s MUDRA
Mahatma Gandhi National Rural Employment (Micro Units Development & Refinance Agency)
Guarantee Scheme (MNREGS) helped to some programme that obliges banks to give small loans to
extent. But the scheme took several years to get informal sector businesses without collateral. Or,
going in many parts of the country. We believe that periodic loan waivers to farmers. All this has made
a change in the terms of trade probably played a the Indian banking sector prone to moral hazard.
27 | P a g e W W W . E D U T A P . C O . I N QUERY? [email protected] / 8146207241
 gets stuck in legal wrangles for a few years, the
In addition to the above factors, there is growing horizon for getting returns from the project moves
unease among the corporate executives about away, while they are obliged to pay interest on their
harassment by tax authorities. This stems from a loans over a longer period. At some point, the
peculiar worldview held by the top level of the project becomes worthless and investors walk
government that all bad economic outcomes have at away or default.
their source bad or corrupt people. “If we use the
disciplinary organs of the state to go after everyone Roads and power stations can remain half-built and
who could be potentially corrupt, the system will be end up as non-performing assets on the balance
cleansed and the economy will start humming sheet of the lending agency. See the following figure
again.” This kind of thinking may win elections but to appreciate the rise in non-performing loans ratio
does little to perk up the economy. Demonetisation (defined as the ratio of ‘loans overdue by more than
and tax raids are a testament to this. But draconian 90 days (defined as NPA) to the total loans’) over the
and extra-judiciary measures ensnare the innocent last decade. Notice how steeply it goes up after
as well as the guilty, and make the country 2015.
inhospitable for business. This is an additional
reason for a slowdown of business investment over
the last few years.

FINANCING INFRASTRUCTURE

Infrastructural projects are typically long gestation

projects. They take a long time to complete and a
long time to start yielding financial returns. To
India’s non-performing loans ratio: 2007-2018
preclude the strain on public revenues, the
government resorted to public private partnerships
What happened in 2015? That was the year when
(PPPs). It was both, the public sector banks as well
RBI Governor Raghuram Rajan asked the banks to
as private banks that provided funding for these
clean up their bad balance sheets, and applied much
projects. Both types of lenders exhibited poor risk
greater scrutiny of their affairs. It would, therefore,
assessment. Non-bank financial corporations
be misleading to interpret this sharp rise in NPAs
(NBFCs) also joined in the lending spree, and faced
purely to imprudent lending in the recent past, as
even fewer obstacles in doing so as they were not
some of the current narratives would have us
constrained by even the kind of regulation that
believe. It should be noted that even in developed
commercial banks have to observe.
countries, gross NPAs are around 4%. There is no
reason to believe that India was consistently
There was a great deal of infrastructural building
superior on this count; indeed to the contrary.
during the years 2006 to 2012. Infrastructural
investment went from 4.7% of GDP in 2006 to 8.4%
Thus, there was a 10-year period from 2004 to 2014,
of GDP in 2012, and then declined to 5.1% in 2013. It
when NPAs in India were lower than the global
gradually rose very slightly to 5.6% of GDP by 2017.
norm. Not because of superior banking skills, but
because of pervasive ‘evergreening’ of bad loans.
Large-scale projects have to face many hurdles –
These chickens finally came home to roost in 2015.
acquiring land and then getting environmental
What is happening today is a stock effect that should
clearances being two of the most difficult ones. Even
gradually correct itself through a combination of
the most recent land acquisition legislation (2013)
write-offs and much lower levels of new NPAs.
makes acquiring land for industrial production a
complex and time-consuming process. You can now
But there are new problems looming before the
understand why private investors, especially those
banking sector – a potential melt-down in the
who had borrowed for infrastructural projects,
NBFCs triggered by the IL&FS crisis, and growing
ended up defaulting on their loans. If the project
defaults in MUDRA loans.
28 | P a g e W W W . E D U T A P . C O . I N QUERY? [email protected] / 8146207241
 of short-term deposits. Long-term bond markets are
When large NBFCs like IL&FS default, it also creates not yet well developed in India. Third, financial
NPAs on the balance sheets of the banks they institutions in India are poorly regulated.
borrow from. When corporates cannot complete
their projects, their own balance sheets as well as LOW OVERALL DEMAND IN THE
those of banks and NBFCs develop a large set of ECONOMY
NPAs. This is the ‘twin balance sheet’ problem that
The problems in the financial sector have now
the Indian economy is plagued with today. This is a
affected overall demand in the economy. Aggregate
serious problem for the economy as it results in
demand consists of private investment by domestic
corporates curtailing their investment and banks
producers (rural and urban), public investment,
curtailing their lending. As of January 2019, the
export demand, and consumption.
gross NPAs to total outstanding loans ratio stood at
over 10%, and it is disproportionately borne by
Demonetisation in 2016 was a serious negative
public sector banks.
shock to the rural economy that had already been
reeling under successive drought years since 2014.
The MUDRA loans are a different story altogether. In
Rural investment as well as consumption declined
the aftermath of demonetisation, when the
after demonetisation. Export demand was already
informal sector was faced with a serious liquidity
declining due to slow growth in developed countries.
crunch, MUDRA loans enabled a number of these
The indebtedness of corporations dampened
firms to stay afloat by repaying the outstanding
corporate investment. As inventories started piling
bank/NBFC loans. Unfortunately, things have not
up, the corporates started laying people off. Firms
improved sufficiently since then for the informal
invest when they see signs of rising demand for
sector and now they face the prospect of defaulting
their products. Presently, they see none. This in turn
on their MUDRA loans.
resulted in the slowdown of consumption growth.
This is why we are witnessing signs of the onset of a
One thing that is clear from the above account of
more serious slowdown today.
how we got here is that this sort of problem will
keep recurring until there are structural reforms in
In our story, the demand slowdown today is not just
land acquisition, banking regulation, labour etc.
a cyclical slowdown that can be cured by a monetary
One step was taken with the passage of the
measure like lowering interest rates or a fiscal
Insolvency and Bankruptcy Code (IBC) in 2016. It
measure like a tax cut. Instead, it is a combination of
allowed lenders to put a closure on bad loans that
having missed the express bus of export-led growth
were never going to be paid back. They could write
with manufactures through our tardiness in
off the bad loans but could get quick access to the
carrying out structural reforms, and then the shocks
borrowers’ collateral that they could then liquidate.
of demonetisation and messy implementation of
This will help in relieving the gridlock in the financial
the GST that flattened the informal sector of the
system, but not entirely. In the first place, NBFCs
economy. The challenge of structural reforms is a
have very few assets other than their loan
long-standing one. The rest of the factors are of a
portfolios, which may not be easy to unwind.
more recent vintage.
Second, MUDRA loans are non-collaterised, so
there is nothing to liquidate. THE WAY FORWARD

There are also a number of systemic problems with It is clear that fast, sustained, and transformative
India’s banking system that cannot be easily solved. growth that will create good jobs, relieve rural
First, public sector banks that hold three-fourths of distress, and take India to the ranks of a developed
the total deposits have been unabashedly used by country is not possible unless some structural
politicians and their management is very much problems are solved. These include vastly improving
subject to a serious moral hazard. Second, the public education and public health system to
commercial banks in India are ill-equipped to be improve India’s human capital, reforming labour
effective lenders for long-term projects on the basis
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and land laws, improving the financial system, and marginal propensity to consume will be higher for
changing the suspicious and punitive attitude lower income consumers.
toward business.
Rural consumers, on an average, are poorer than
Market forces operate through the animal spirits of urban consumers. A transfer of income from the
entrepreneurs, and there is little scope for these to urban to the rural areas would therefore tend to
manifest themselves unless the structural increase overall consumption demand. Some of this
bottlenecks are cleared. Governments of different will be for goods produced in the urban sector such
parties have come and gone and these structural as two-wheelers and other consumer durables.
problems have remained unresolved. Farmers in the upper strata may also be induced to
buy expensive items like cars, pick-up trucks and
Yet, it is not clear that even if the domestic obstacles tractors if they experience an income boost.
are overcome, India will succeed in charting the
East Asian course of development (through labour- It is also true that after repeated drought years,
intensive exports of manufactures) to the extent demonetisation, and GST, the rural population has
that China and other Asian countries did. As been in distress for several years. They are likely to
mentioned earlier, the times are different now. have a great deal of pent-up demand. Any transfers
Developed country markets are less receptive to to them are likely to spill onto a demand for
imports from low wage countries. Automation has durables as well as non-durables. All this suggests is
eroded the comparative advantage of cheaper that transfers to rural areas through different
Indian labour. What then is the way forward? government schemes such as the MNREGS, the
Public Distribution System (PDS), the Pradhan
RURAL-LED STRATEGY Mantri Awas Yojana (PMAY), and pensions, should
be regarded not just as poverty alleviation schemes
An approach worth trying is a rural-led growth. The but also as antidotes to the present slowdown.
idea of a rural-led strategy is predicated on the
notion that at this juncture in time it might be easier Most forms of urban to rural sector transfers would
to revive demand in rural India than in urban India. require the government to tax urban residents and
Growth driven by productivity growth in agriculture subsidise rural residents. However, the claims on
and the informal sector would be slower than the existing revenues are many and the
industry-led growth. But it would make more sense government’s capacity to garner more revenues is
given the state of affairs today. limited. Under the circumstances, one way for the
government to arrange for an urban to rural
Urban demand growth has slowed down due to the transfer is by increasing the terms of trade for
myriad reasons recounted earlier. The skewed agriculture through an increase in MSPs. Of course,
pattern of growth in India over the last several this would also mean an increase in food subsidy
decades implies that income growth has been through PDS to prevent an increase in the issue
concentrated in the same upper crust of the price. However, such an increase in government
population that benefitted from skill-biased expenditure would be a more effective stimulant
technology. Their demand for consumer durables since the entire burden of increasing demand
may have now reached a saturation point. If a would not fall on the treasury. Demand for food of
person who already owns a house gets richer, he is the urban consumers is inelastic. An increase in the
not likely to buy another house. If on the other MSP would result in a direct transfer of ready cash
hand, a person marginally below the income that income from urban to rural sector. It would no
makes house ownership affordable experiences an doubt increase the hardship of the urban poor who
income increase, he or she may be inclined to buy a are not protected by access to PDS. However, it
house. Here we are taking the ‘house’ just as an would help the urban residents by alleviating the
example of an urban product. But the principle is demand slowdown in their economy. The
valid for any consumer durable. In general, the government did increase the MSPs for several crops
in July 2019 but they could be raised higher.
30 | P a g e W W W . E D U T A P . C O . I N QUERY? [email protected] / 8146207241
 diverting some of the public investment from urban
Note that an increase in MSP is only the second best to rural areas. Even though in principle there is
option of bringing about an urban to rural transfer greater potential for productivity growth in urban
when fiscal constraints make other avenues of industry, the systemic obstacles to industrial
transfers infeasible. It may distort the crop choice development makes a rural-led strategy relatively
toward crops whose MSPs are raised. It may create more fruitful. The additional advantage this sort of
storage problems and frictions with WTO. Worse strategy would generate is that it would create a lot
still, it will create inflationary pressures making the more jobs for unskilled and semi-skilled labour.
measure politically difficult. Yet, we are suggesting it Consequently, growth would be much more
as an effective way to bring about transfers to the equitable and the trend towards widening
rural economy if all other avenues are blocked. We inequality would be thwarted.
find support for our idea in the events following
2008 when MSP increases prevented a growth We believe that it does not make sense to set
collapse, despite the crippling effect of a slowdown economic goals in terms of GDP (a US$5 trillion
in demand for software exports after the GFC. economy) for a country like India. Growth is just the
means to the end of poverty reduction. A high
Is this just short-term thinking? Do we not think of growth rate is desirable because it may lead to a
industrialisation as synonymous with development? faster poverty decline. But how much impact an
We would like to suggest that under the present increase in the growth rate would make on poverty
circumstances when the prospects for exporting to would depend on the pattern of growth. On the
developed countries are weak, structural reforms in basis of the 2017-18 Periodic Labour Force Survey
land and labour laws are not easy to implement, that despite the fact that the growth has exceeded
and reforming public health and education is taking 6% from 2015 to 2018, consumption expenditure
a very long period, it would make sense to explore per capita has declined at the rate of 4.4% per
the avenue of a rural-led strategy. annum in rural areas and by 4.8% in urban areas.
This is much more alarming news than the growth
Urban manufacturing requires a larger scale, and slowdown.
this is what is running smack into India’s hard-to-
reform land and labour laws. Large manufacturing A rural-led strategy will deliver slower overall
units also need environmental clearances, delays in growth but it will have a bigger impact on poverty
which are partly the reason for many projects being under the present circumstances that keep the East
stalled. Rural growth may steer clear of these Asian strategy out of India’s reach for now.
obstacles.

Why is the rural economy poor and stagnant? If ANALYSIS OF OVERALL AND
they just produce to satisfy their own demand, SECTORAL TREND OF GROWTH IN
there is no point in raising productivity. If they
increase the output of food, prices will fall as their
INDIA
own demand for food will not be elastic enough.
They would ideally like to export to the urban INDIAN ECONOMY
economy and perhaps also to the rest of the world. SIZE OF THE ECONOMY
To accomplish this they must diversify into fruits,
vegetables, flowers, dairy, poultry etc., for which International Monetary Fund’s World Economic
urban consumers will have a relatively elastic Outlook of October 2019 has estimated India’s
demand. They need infrastructural facilities like economy to become the fifth largest in the world, as
refrigerated storage, suitable transport, even agro- measured using GDP at current US$ prices, moving
processing industry. past United Kingdom and France. The size of the
economy is estimated at US$ 2.9 trillion in 2019.
A rural-led strategy should prioritise this type of
investment. A rural-led strategy would imply
31 | P a g e W W W . E D U T A P . C O . I N QUERY? [email protected] / 8146207241
In July 2019, the Union Budget 2019-20 had Electricity, Gas, Water
articulated the vision of the Hon’ble Prime Minister supply & other utility 2.4 2.6 2.8
to make India a US$ 5 trillion economy by 2024-25. services
Construction 9.2 8.0 8.0
Services 49.4 52.9 54.3
Trade, Hotel, Transport,
Storage, Communication
17.5 18.3 18.3
and services related to
broadcasting
Financial, Real estate &
19.2 20.9 21.3
Professional services
Public Administration,
Increasing size of the Indian economy (GDP at current US$) Defence and other 12.7 13.7 14.7
services
GVA & GDP GROWTH
GROWTH IN AGRICULTURE
Since 2011-12, India recorded its lowest quarterly
GDP growth in Q4 of 2012-13. After 13 quarters, the TREND
economy achieved its highest quarterly growth of
9.4 per cent in Q1 of 2016-17. Again after 13 Share of agriculture and allied sectors in the total
quarters, the economy has recorded a low growth of GVA of the country has declined from 2009-14 to
4.5 per cent in Q2 of 2019-20. 2014-19 mainly on account of relatively higher
growth performance of tertiary sectors. This is a
natural outcome of the development process that
leads to faster growth of non-agricultural sectors.

The growth of GVA of agriculture and allied sectors

has witnessed a fluctuating trend.

Agriculture sector – Key indicators of Growth at

constant (2011-12) prices (in per cent)
Quarter wise growth of real GDP
Growth of GVA of
QUESTION Growth of GVA of
Year Agriculture &
Total Economy
Do you agree with the view that steady GDP Allied Sectors
growth and low inflation have left the Indian 2013-14 6.1 5.6
economy in good shape? Give reasons in support 2014-15 7.2 -0.2
of your arguments. [150 words; 10 marks; UPSC 2015-16 8.0 0.6
CSE 2019] 2016-17 7.9 6.3
2017-18 6.9 5.0
2018-19 6.6 2.9
Sectoral shares in GVA (per cent) 2019-20 4.9 2.8
2009-10 2014-15
to to 2018-19
2013-14 2018-19

Agriculture, forestry & CRISIS IN INDIAN AGRICULTURE

18.3 17.4 16.1
fishing
Industry 32.3 29.6 29.6 The crisis in agriculture is deep-rooted and is a result
of an accumulation of distress over the last decade
Mining & Quarrying 3.2 2.4 2.4
or so. There are a number of reasons why the
Manufacturing 17.5 16.6 16.4
predicament agriculture now finds itself in is
32 | P a g e W W W . E D U T A P . C O . I N QUERY? [email protected] / 8146207241
unprecedented compared to previous instances of • The rise in petroleum prices had led to an
distress. increase in irrigation costs.
• Following the introduction of the Nutrient
Apart from the impact of a sharp decline in the Based Subsidy (NBS) scheme for fertilisers in
prices of agricultural produce since August 2014, 2010, fertiliser prices had also risen. Fertiliser
the recent episode of severe adversity is the result consumption that had increased from 16.7
more of a larger neglect of the agricultural sector million tonnes in 2000-01 to 28.1 million tonnes
since 2012-13. in 2010-11 started declining after the
introduction of the NBS scheme, falling
BUILDING UP TO A CRISIS: 2014-2016
sharply to 26 million tonnes by 2016-17. It also
led to a worsening of the fertiliser mix.
• The non-farm sector in rural India, which has
• The twin droughts of 2014 and 2015 occurred
lately been an equally important part of the
against this background of rising input costs
rural economy, has been under stress with
and a squeeze on farm incomes. Adverse
most of the rural activities witnessing lower
weather conditions then led to a decline in
growth than during the period 2004-05 to
agricultural output.
2013-14.
• But farmers also suffered from two associated
• Along with farmers (cultivators) whose
factors. The first was the decline in agricultural
incomes have declined in real terms (that is,
commodity prices following a sharp collapse of
after adjusting for inflation), the wages of
international prices coinciding with the fall in
casual workers have been growing much more
petroleum prices. The decline in crop output
slowly than earlier. The real wages of labourers
prices took place first in cash crops, when they
in agriculture as well as the non-farm rural
witnessed a sharp collapse in domestic prices
sector have even stagnated in the last five
following that of international prices, and soon
years. Taken together, casual workers and
spread to all commodities as well.
cultivators account for almost two-thirds of all
workers in the rural economy. So a decline in
These were further aggravated by the response of
their real incomes has contributed in recent
the government that contributed to a build-up to a
years to an extreme episode of demand
full-blown crisis.
deflation (that is, a decline in demand, as
opposed to an increase in inflation).
• The first was the sharp cuts in agricultural
• As against a growth rate of farmer incomes at
expenditure with major declines in spending on
5.52% per annum between 2004-05 and 2011-
agriculture-related schemes. The first full
12, the incomes of all farmers actually declined
budget of the NDA government in 2015-16 saw a
at 1.36% per annum between 2011-12 and
decline in the agriculture budget by almost one-
2015-16.
fourth in nominal terms compared to the 2013-
• The crop sector has seen a sharp deceleration
14 budget. Although it improved in 2016-17, it
in the growth of real gross value added (GVA)
still remained lower than the allocation in the
with growth in real terms at only 0.5% per
agriculture budget of 2013-14.
annum. What makes it significant is the size of
• Second, the fall in petroleum prices was not
the crop sector which accounts for as much as
passed on to the consumers, leaving them with
two-thirds of agricultural sector GDP and is the
an unchanged input bill. The government chose
source of livelihood for the huge number of
to raise taxes and was the beneficiary of a large
farmers dependent on it.
windfall of tax revenues.
• The sharp rise in real casual wages at more
• The third factor was the decline in real
than 6% per annum during 2008-13 along with
investment in agriculture. Public investment in
rising fuel and input costs had already begun to
the agricultural sector declined sharply with real
squeeze the profit margin of farmers from
investment declining at 1% per annum during the
2011-12 onwards.

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 four years of the NDA government for which data that except in 2016-17, in none of the years
is available. has the actual expenditure been close to the
• The deceleration in real wage growth and budget allocation.
stagnation in real wages was reversed in July • While the government continued to reduce
2016, which was a normal monsoon year after public investment in agriculture alongside the
two years of drought. However, real wages again marginal increases in overall agricultural
stagnated after May 2017, most likely as a result budgets, the cut in some of the vital schemes
of demonetisation in November 2016, which such as Rashtriya Krishi Vikas Yojana (RKVY)
disrupted agricultural activities as well as the also had adverse effects on the farm sector.
rural non-farm sector.
LINK BETWEEN FARM CRISIS AND ECONOMIC
• Finally, the decline in agricultural exports too
REFORMS OF 1991
contributed to the worsening situation in
agriculture. The fall in international commodity
Genesis of crisis in agriculture lies in the broader
prices affected the demand for Indian
policies that the Indian economy has followed in the
agricultural products in global markets where the
last three decades since the economic reforms of
collapse in prices along with the relatively
1991. It is embedded in the larger political economy
negligible decline in domestic prices made Indian
architecture following structural adjustment
agricultural exports uncompetitive.
policies, which make low inflation the objective of
INTENSIFICATION OF AGRARIAN CRISIS: 2016-2018 fiscal and monetary policies.
• Farmers who had harvested a bumper crop in
Kharif 2016 found themselves unable to sell Since food and agricultural commodities constitute
once demonetisation was announced on 8 a significant part of the consumption basket, the
November 2016, which thus caused acute objective of low inflation also implies keeping food
misery. Most of the trade in agriculture is cash inflation low. The objective of keeping food inflation
based, and the absence of cash led to huge low militates against the idea of increasing farmers’
losses for most farmers. It also affected the incomes.
non-farm sector, which was showing signs of
revival following the normal monsoon of 2016. The second component of the structural
The net result was a continuation of the profit- adjustment policies that seek to keep the fiscal
realisation crisis of farmers alongside job deficit under control also emphasises a reduction in
losses. subsidies and revenue expenditure on agriculture
• While demonetisation adversely affected the and rural development.
agricultural sector and the non-agricultural
sector, the hasty introduction of the Goods If there is one message from the analysis here, it is
and Services Tax (GST) added to the woes of that the genesis of the current crisis lies in the faulty
the informal non-farm sector. The combined and ad-hoc export–import policy, lack of
impact of demonetisation and GST was a infrastructure, low investment, and cartelisation
further slowdown in the rural non-farm sector. and collusion in agricultural markets, which have
• While the budget allocations did show a jump prevented farmers from realising market prices for
in 2017-18 and 2018-19, much of this was due their produce. It is the combination of these factors
to smart accounting where the amount spent along with the twin droughts of 2014 and 2015
on interest subsidy, which was earlier reflected which created the current crisis in the first place. It is
in the budget of the finance ministry was also true that the situation worsened due to the
brought into the budget of the agriculture sudden shocks of demonetisation and the hasty
ministry. Excluding the interest subsidy implementation of GST, which affected the rural
component, the overall budget for agriculture economy adversely. Further, it is a crisis which is as
increased by 26% per annum during the UPA much agricultural as it is caused by the failure of the
years but by only 8.7% per annum under the non-farm sector in creating enough jobs as is
NDA government. It is also important to note
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evident from the deceleration in real wages in rural 2. Encouraging contract farming through the State
areas. Governments by promulgating of Model
Contract Farming Act
What are needed are larger investments in 3. Up-gradation of Gramin Haats to work as
improving access to better technology, extension centers of aggregation and for direct purchase of
programmes to enable farmers to take advantage agricultural commodities from the farmers
of new technology, market infrastructure, storage 4. e-NAM to provide farmers an electronic online
and warehousing infrastructure, and easy and trading platform
assured supply of credit. 5. Distribution of Soil health Cards to farmers so
that the use of fertilizers can be rationalized
HOW TO ACHIEVE THE POTENTIAL? 6. Increase water efficiency through - “Per drop
more crop”
The agriculture sector in India is experiencing 7. Better insurance coverage to crops for risk
structural changes which are opening up new mitigation under Pradhan Mantri Fasal Bima
challenges and opportunities. The Government has Yojana (PMFBY)
initiated reforms in the field of agricultural 8. Providing total interest subvention up to 5 per
marketing, given a big push to the use of technology cent (inclusive of 3 per cent prompt repayment
in agriculture, and also adopted Direct Benefit incentive) on short-term crop loans up to Rs 3
Transfer (DBT) mode for timely delivery of lakh, thus making loan available to farmers at a
extension services, credit and other inputs to small reduced rate of 4 per cent per annum
and marginal farmers. 9. Extended the facility of Kisan Credit Card (KCC)
for animal husbandry and fisheries related
Though the share of agriculture and allied sector in activities as well as Interest Subvention facilities
GVA is on the decline, in the quest for inclusive to such categories of farmers.
economic development in India, agriculture sector 10. Giving a major boost for the farmers’ income, the
will remain an engine of broad based growth which Government has approved the increase in the
will reduce inequalities and provide food security. Minimum Support Price (MSPs) for all Kharif &
Rabi crops for 2018-19 season at a level of at
The Government has set a target of doubling of least one and half times of the cost of
farmers’ income by the year 2022. For the said production.
purpose, the Government had constituted an Inter- 11. Further, with a view to provide social security net
Ministerial Committee to examine issues relating to for small and marginal farmers as they have
Doubling of Farmers’ Income (DFI) and recommend minimal or no savings to provide for old age and
strategies. The Committee has identified seven to support them in the event of consequent loss
sources of income growth viz, of livelihood, the Government has decided to
1. improvement in crop productivity implement a new Central Sector Scheme for
2. improvement in livestock productivity providing old age pension of Rs 3000/- to the
3. resource use efficiency or savings in the cost of eligible small and marginal farmers, subject to
production certain exclusion clauses, on attaining the age of
4. increase in the cropping intensity 60 years.
5. diversification towards high value crops
6. improvement in real prices received by farmers The realisation of the objective of doubling farmers’
7. shift from farm to non-farm occupations. income necessitate addressal of some of the basic
challenges of agriculture and allied sector. Going
Several initiatives have already been rolled out on forward, these are the areas on which progressive
the recommendations of DFI Committee which inter- actions are required:
alia include: 1. Coverage of food processing sector needs to be
1. advocating progressive market reforms through scaled up to create an additional source of
the State Governments market for agricultural commodities.

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2. As the proportion of small and marginal holdings Manufacturing 10.8 7.9 5.9 6.9
is significantly large, land reform measures like Electricity,
freeing up land markets can help farmers in gas, water
improving their income. supply 5.0 7.2 8.6 7.0
3. Small holdings of India can be better harnessed & other utility
through appropriate use of farm mechanisation services
as the degree of farm mechanisation is low as Construction 5.0 1.7 5.6 8.7
compared to the other major developing
countries like Brazil and China.
4. There is a need to give increased focus on HOW TO ACHIEVE THE POTENTIAL?
exploring global markets for agricultural
commodities to give an additional source of Key initiatives taken by the Government to boost
market for the surplus of agricultural produce industrial performance:
India currently has. MAKE IN INDIA
5. Though, the structural transformations involved
a falling share of agriculture sector and rising The ‘Make in India’ programme has been launched
share of services sector jobs, more needs to be globally on 25th September 2014 which aims at
done to create manufacturing jobs to absorb the making India a global hub for manufacturing,
large pool of workers. research & innovation and integral part of the
6. The dissemination of scale neutral technology global supply chain. This initiative is based on four
suited to small scale farming and use of IT is pillars of New Processes, New Infrastructure, New
necessary to improve the productivity of small Sectors and New Mindset.
farm holdings which dominate the Indian
agriculture sector. The Government has identified ten ‘Champions
7. The controversies on the adoption of HYV and sectors’ that have potential to become global
GM seeds need to be resolved and extended to champion, drive double digit growth in
all crops, not just mustard. manufacturing and generate significant
employment opportunities. The sectors have been
The progress needs to be evaluated in terms of identified for renewed focus under the Make in
outcomes such as catching up with global yields as India version 2.0 including Capital goods, Auto and
a means to increase income of farmers. Auto Components, Defence & Aerospace,
Biotechnology, Pharmaceuticals and Medical
GROWTH IN INDUSTRY
Devices, Chemicals, Electronic System Design &
TREND Manufacturing (ESDM), Leather & Footwear,
Textiles & Apparels, Food Processing, Gems &
The contribution of industrial activities to GVA has Jewellery, New & Renewable Energy, Construction,
declined from 2009-14 to 2014-19. Manufacturing Shipping and Railways.
sector, which contributes more than 50 per cent of
industrial GVA, has driven the decline while the
STARTUP INDIA
share of construction sector has also moderated.
Startup India is a flagship initiative of the
Gross Value-Added Growth Rate at Constant Prices
Government of India, intended to build a strong
(per cent) 2011-12
eco-system for nurturing innovation and Startups
2015- 2016- 2017- 2018-
16 17 18 19 in the country that will drive sustainable economic
Industry 8.8 5.6 5.9 6.9 growth and generate large scale employment
of which opportunities. The Government through this
Mining & initiative aims to empower Startups to grow
10.5 1.8 5.1 1.3 through innovation and design.
quarrying

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 The initiative aims to create an ecosystem that is The Government has taken up a series of measures
conducive to growth of Startups. An Action Plan for to improve Ease of Doing Business. The emphasis
Startup India comprising 19 action points was has been on simplification and rationalization of
unveiled on 16th January, 2016. Government has the existing rules and introduction of information
acknowledged the need to reduce the regulatory technology to make governance more efficient and
burden on Startups and have allowed them to self- effective.
certify compliance under 3 labour laws and 6
environment laws. The initiative allows Startups to The improvement in the business environment as a
focus on their core business and keep compliance result of these reforms is reflected in India’s
cost low. considerably improved ranking to 63rd position
among the 190 countries in the World Bank’s
Startup India hub has been developed as a single Doing Business 2020 Report. This is a jump of 14
point of contact for the entire Startup ecosystem ranks over its previous rank of 77. The ranking is
and enables knowledge exchange along with based on 10 indicators which span the life-cycle of
access to funding. In order to provide support, a a business. India has improved its rank in 7 out of
Fund of Funds for Startups (FFS) with a corpus of 10 indicators and has moved closer to international
Rs 10,000 crores has been created and is being best practices.
managed by SIDBI.

Several steps have also been taken to promote

Industry-Academia Partnership and Incubation.
With an aim to foster and facilitate Bio-
entrepreneurship, Bio-clusters, Bio-Incubators,
Technology Transfer Offices (TTOs) and Bio-
Connect, offices are being established in research
institutes and universities across India. Seed Fund
and Equity Funding support is also provided to bio-
tech Startups under the initiative. India’s ranking in World Bank Ease of Doing Business Reports

INTELLECTUAL PROPERTY RIGHTS (IPR) POLICY

As on January 8, 2020, 27,084 startups were
recognized across 551 districts, 55 per cent of
which are from Tier I cities, 45 per cent from Tier II In May, 2016, Government for the first time
and Tier III cities. 43 per cent of recognized startups adopted a comprehensive National Intellectual
have at least one woman director. Steps are taken Property Rights (IPR) policy to lay future roadmap
for easing regulations such as exemption from for intellectual property. This aims to improve
Income tax on investments raised by Start-ups, 32 Indian intellectual property ecosystem, hopes to
regulatory reforms implemented to improve Ease create an innovation movement in the country and
of Doing Business for Start-ups, Self-certification aspires towards “Creative India; Innovative India”.
regime for six labour laws and three environmental GROWTH IN SERVICES
laws, Start-up India Hub as ‘One Stop Shop’ for the
start-up ecosystem in which 3,67,773 users have Services contribute more than manufacturing to
availed free Startup India Learning Program to India’s output growth, productivity growth and job
build business plans, 647 Start-ups supported growth. Given the relatively large size of the service
through dedicated facilitation services, 1,262 sector compared to manufacturing, India’s growth
startups connected to mentors, etc. pattern resembles that of the US. This raises big
questions. Can services be as dynamic as
manufacturing? Can services contribute more than
EASE OF DOING BUSINESS
manufacturing to output growth, productivity
growth and job growth?

37 | P a g e W W W . E D U T A P . C O . I N QUERY? [email protected] / 8146207241

 DOUBTS OVER SERVICES-LED GROWTH IN
India’s growth pattern contradicts an iron law of INDIA
development that has held true for 200 years, since
the start of the Industrial Revolution. This law has In spite of this stupendous performance, doubts
argued that industrialization is the only route to have been cast over the sustainability of India's
rapid economic development for developing services-led growth. There are reasons for the
countries. The potential for explosive growth was doubts.
seen only in the manufacturing sector.
First, unlike other developing countries, a decline in
TREND the share of agriculture sector in GDP has been
picked up by the services sector rather than the
The services sector has acted as an engine of growth manufacturing sector. The lack of corresponding
for India. The sector grew by almost 8 per cent a high growth in manufacturing sector means low
year in the decade of 1994-2004, which is way ahead demand for services. However, it has been observed
of the agriculture (which grew at an annual rate of 3 that growth in the services sector will create its own
per cent) and manufacturing sector (which grew at demand by improving the growth in the
5.2 per cent). manufacturing sector.

It now contributes more than 50 per cent of GDP. Second, this phenomenal growth in services sector
has not been followed by a corresponding high
Trade in services has played an important role in growth in employment in services sector. In 2001,
fuelling this growth. India’s exports of services services in India contributed around 25 per cent of
witnessed one of the fastest rates of growth in the total employment in contrast to 30 per cent in
world. India accounted for 65 per cent of the global middle-income countries and around 39 per cent in
market in offshore IT services and 46 per cent of the some of the developing countries like Indonesia. This
global BPO market in 2004-05. shows that while output generation has shifted to
services, employment generation in services has
Economic Survey 2013-14 noted that: "India had the lagged far behind. Lack of corresponding growth in
second fastest growing services sector with CAGR employment is an issue of major concern, which in a
(compound annual growth rate) at 9 per cent, just country like India may lead to huge social costs.
below China's 10.9 per cent, during the last 11-year
period from 2001 to 2012." A premature increase in the share of services would
be an aberration because services are
Services sector has moved ahead faster, distancing conventionally seen as activities characterised by
itself further from agriculture and industry. Financial, lower levels of productivity and lower rates of
real estate and professional services has driven the increase in productivity.
increase in the contribution of service sector followed
by public administration.
HIGH GROWTH – LOW EMPLOYMENT
Services Sector Performance in GVA PARADOX OF INDIA’S SERVICES SECTOR

A closer scrutiny of the disaggregated services sector

shows that one of the reasons for slow growth of
employment in the services sector is that the
services that are growing fast, like financial and
personal services, have experienced a fall in their
employment elasticities.

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On the other hand, services with a large some have argued that services growth is expanding
employment potential, like railways, transport and the knowledge economy, and reflects a new kind of
real estate are not growing fast enough. dynamism.

The employment elasticity in the services sector, as How true is this description? Definitionally,
a whole, declined from 0.41 to 0.15 in this period. knowledge and technology intensive services (KTI
This trend is, however, not surprising since growth services) are broken down into “market oriented”
in services sector in India has been largely services (such as financial services, business services
determined by growth in IT and IT-enabled services, and communication services) and “non-market
which have rising labour productivity and, therefore, oriented” services (education and health). A
have corresponding fall in employment elasticity. calculation based on the National Accounts Statistics
International trade, which has fuelled the growth indicates that the set of services sectors that could
process in services, has also concentrated on be identified as “modern services”—banking and
services with low employment potential, that is, insurance, education, computer related services,
travel, communication and software services. research and development, health, communication,
legal services and accounting—together accounted
Economic Survey 2013-14 noted, while at the global for only 16.6 per cent of GDP in 2012-13. Add on
level services accounted for 65.9 per cent of GDP public administration and defence and the railways
and as much as 44 per cent of employment in 2012, and the figure rises to 23.3 per cent. That still leaves
in India’s case the sector, with 56.3 per cent of GDP, well more than half of services GDP, amounting to
accounted for just 28.1 per cent of employment. 30 per cent of total GDP, unaccounted for. Trade,
This would imply that the relative per worker value dominated by the retail trade alone accounts for 16
added in services vis-à-vis the commodity producing per cent of GDP. This makes the argument that
sectors and construction, was higher in India than services are reflective of a new dynamism in India
elsewhere. that much less convincing.

JUSTIFICATION FOR SERVICES-LED According to the data, over the 15 years between
GROWTH
1997 and 2012 in India, the share of commercial or
“market-oriented” knowledge and technology
There are two kinds of reasons adduced to explain
intensive services in GDP rose from 9.9 to just 12.6
why India is experiencing this unusual (and
per cent. The share of Financial Services in GDP rose
supposedly virtuous) growth in service.
from just 5 to 5.6 percent and that of Business
Services from 3.6 to 5.7 per cent, while that of
The first is that it is modern services like financial
telecommunications services stagnated at 1.3 per
services, software and information technology
cent. In fact, data also indicate that the share of
enabled services, communications services, business
communication services in GDP in in 2011-12 was
services, education services and health services and
only 1 per cent.
productive services like transport, storage and
communications that account for the bulk of the
Thus, while modern services do play an important
services sector. This is seen as rendering the
role in the Indian economy, so do traditional
privileging of manufacturing over services
unorganized services, which are known to be
unwarranted in India’s case.
characterized by extremely low earnings, and which
grow because of the inadequate employment
Second, India’s success in software and IT-enables
opportunities in the primary and secondary sectors,
serviced (ITeS) exports, has made it a significant
especially those providing a reasonable wage and
services exporter with its share in world services
decent work conditions. Yet tertiary sector
exports rising from 0.6 per cent in 1990 to 3.3 per
employment in 2009-10 amounted to only 25 per
cent in 2013. Since this India’s services growth has
cent of the work force despite the fact that around
been led by software and IT-enabled services, seen
55 per cent of GDP came from this sector. This was
as knowledge and technology intensive services,
possibly because low wage employment in
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traditional services that contributed employment output, are still in their infancy. The long-held view
but little in terms of GDP growth combined with that services are non-transportable, non-tradable,
high productivity services that delivered and non-scalable no longer holds for a host of
substantially in terms of revenues but very little in services that can be digitized.
terms of employment.
The globalization of services provides new
opportunities for India to find niches beyond
IS A NEW PARADIGM OF SERVICES-LED manufacturing, where it can specialize, scale up,
GROWTH EMERGING GLOBALLY?
and achieve explosive growth. As the services
produced and traded across the world expand with
The new industrial revolution and digital
globalization, the possibilities to develop based on
technological changes have changed the growth
services will continue to expand. This pace of
drivers in developing and developed countries.
change will be rapid in line with the digital
These technological changes have enabled services
revolution. Global internet usage has grown
to be the new driver of growth. The digital
globally. But this growth is much faster in developing
revolution, by lowering transaction costs in services
countries. India alone adds one million new users
and overcoming problems of asymmetric
every month to a booming mobile phone market.
information, has made services more dynamic than
in the past. The emergence of e-commerce
Some policy experts have rightly argued that India is
platforms is an example of how digital revolution
on the “brink" of a techno-institutional revolution.
can lower transaction costs, increase productivity
Take the example of mobile technology and
as well as make it more inclusive. For many internet-
examine its role in banking. Banking is currently
based businesses or services, fixed up-front costs can
concentrated in the urban areas, but cities are
be high initially, but once the physical infrastructure
saturated with bank branches. On the other hand,
is in place, each additional customer, user, or
300 million rural people across 300 districts in India
transaction incurs very little extra cost.
have no access to banking. Expansion of digital
technology can play a big role in improving rural
There is mounting empirical evidence that
access to banking. Financial inclusion can be
developing countries are relying more on services
achieved through last-mile connectivity. Services are
and less on manufacturing as drivers of growth and
spatially more neutral compared to manufacturing.
job creation
So financial inclusion could in turn help medium-size
cities, small towns and villages to become new
Is services-led growth sustainable?
drivers of growth.
Drivers of structural transformation and growth,
India’s experience offers hope to other latecomers
either services-led growth or manufacturing-led
to development. The process of globalization in the
growth, are similar but also changing. These include
late 20th century led to a sharp divergence of
trade policy, urbanization, and investments in
incomes between those who industrialized and
physical and human infrastructure, and are country-
broke into global markets and the “bottom billion"
specific. But some global trends have started to
in some 60 low-income countries, where incomes
change.
stagnated. It seemed as if the “bottom billion"
would have to wait their turn for development, until
Global trade in goods has never fully recovered
giant industrializers like China became rich and
since the global financial crisis of 2007-08. But this is
uncompetitive in labour-intensive manufacturing.
not the case with global trade in services, which has
This is no longer the case.
exploded. These are structural and not cyclical
changes. WAY FORWARD

Globalization of services is the tip of the iceberg. There is now a need to make services growth more
Services, which account for more than 70% of global inclusive and less lopsided by identifying services
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that have a potential to trade and generate more Normally countries shift from agriculture to
direct and indirect employment. industry and then later to services, but India
shifted directly from agriculture to services. What
Trade in services is hindered not only by external are the reasons for the huge growth of services
constraints in terms of trade barriers (mainly in the vis-a-vis industry in the country? Can India
form of limits on foreign equity participation) but become a developed country without a strong
also by domestic constraints. To make services-led industrial base? [200 words; 12.5 marks; UPSC CSE
growth more widespread and sustainable, it is 2014]
important to systematically and simultaneously
remove these constraints.
ANALYSIS OF DEVELOPMENT IN
A coherent integrated services policy, in line with INDIA
the agricultural and industrial policies, needs to be
developed. WHAT IS HUMAN DEVELOPMENT?
Reforms in services in India have evolved in an ad “Human development is a process of enlarging the
hoc manner rather than as part of an overall range of people’s choices, increasing their
strategy. Consequently, the depth and pace of opportunities for education, health care, income
reforms lack uniformity across sectors. Given the and empowerment and covering the full range of
strong inter-linkages between different services, human choices from a sound physical environment
opening a particular service sector may not yield to economic, social and political freedom.”
results if not backed by corresponding reforms in
other complementary services. Such an integrated Thus, enlarging the range of people’s choices is the
services policy should also define the sequence as most significant aspect of human development.
well as the pace of reforms to be undertaken People’s choices may involve a host of other issues,
simultaneously in different services. Liberalisation but, living a long and healthy life, to be educated
should be followed in a phased manner and have access to resources needed for a decent
accompanied by social policies in sectors that have standard of living including political freedom,
surplus labour so as to avoid creating guaranteed human rights and personal self-respect,
unemployment and social unrest. This will go a long etc. are considered some of the non-negotiable
way in sustaining the dynamism of services-led aspects of the human development.
growth.
Apparently, it is believed that “Development is
Investments in both physical and human freedom” which is often associated with
infrastructure matter greatly for attracting new modernisation, leisure, comfort and affluence. In
enterprises in both manufacturing and service the present context, computerisation,
industries. But unlike in the manufacturing sector, industrialisation, efficient transport and
investments in human infrastructure, education communication network, large education system,
and skills, matter much more. Given its stage of advanced and modern medical facilities, safety and
development, India needs accelerated investments security of individuals, etc. are considered as the
in both physical and human infrastructure to support symbols of development. Every individual,
new drivers of growth and job creation. community and government measures its
performance or levels of development in relation to
A young population is generally more connected the availability and access to some of these things.
with technological changes. So, India’s But, this may be partial and one-sided view of
demographic dividend should be an asset for the development. It is often called the western or euro-
digital revolution and services-led growth. centric view of development.

QUESTION

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For a postcolonial country like India, colonisation, capita increased by about 262.9 percent between
marginalisation, social discrimination and regional 1990 and 2018.
disparity, etc. show the other face of development.
Inequality-adjusted Human Development Index
STATUS OF HUMAN DEVELOPMENT indicates percentage loss in HDI due to inequality.
IN INDIA India’s position worsened by one position to 130 (as
compared to the HDI Index 2019- 129) with a score
India’s rank in the Human Development Index (HDI)
of 0.477. Although, the IHDI score has improved
improved to 129 in 2018 from 130 in 2017, out of a
from 0.468 in 2018.
total of 189 countries. The value of HDI for India
reached to 0.647 in 2018.
Gender Development Index measures disparities on
the HDI by gender. India is only marginally better
Sri Lanka (71) and China (85) were higher up the
than the South Asian average on the Gender
rank scale. Bhutan (134), Bangladesh (135),
Development Index (0.829 vs 0.828).
Myanmar (145), Nepal (147), Pakistan (152) and
Afghanistan (170) were ranked lower on the list.
Gender Inequality Index presents a composite
measure of gender inequality using three
The Human Development Report published by
dimensions: 1. Reproductive health 2.
the United Nations Development Programme
Empowerment 3. Labour market. In GII, India is at
estimates the HDI in terms of three basic
122 out of 162 countries. Neighbours China (39), Sri
parameters: to live a long and healthy life, to be
Lanka (86), Bhutan (99), Myanmar (106) were placed
educated and knowledgeable, and to enjoy a
above India.
decent economic standard of living.
Multidimensional Poverty Index captures the
multiple deprivations that people in developing
With 1.34 per cent average annual HDI growth, countries face in their health, education and
India is among the fastest improving countries, and
standard of living. India accounts for 28% of the 1.3
ahead of China (0.95), South Africa (0.78), Russian billion multidimensional poor.
Fedreation (0.69) and Brazil (0.59).
The Subnational Human Development Index (SHDI)
for different States for the period 1990 and 2017,
released by UNDP show that all States have shown
significant improvement in levels of human
development. The minimum SHDI for year 2017 is
more than maximum SHDI for year 1990 across all
States

The 2017 HDI scores indicate that the States like

Kerala, Goa, Himachal Pradesh and Punjab occupy the
top four positions while the States like Bihar, UP and
MP are at the bottom of the rankings. The States which
Average annual HDI growth rate during 2010-2018 (per cent)
were the worst-performing ones in HDI during 1990s
are presently doing well in the social parameters. The
region-wise trend of HDI scores suggests that most
Between 1990 and 2018, India’s HDI value increased
Southern and Northern States have performed much
from 0.431 to 0.647, an increase of 50.0 percent.
better as compared to their Eastern counterparts who
have registered poor performance in SHDIs.
Between 1990 and 2018, India’s life expectancy at
birth increased by 11.6 years, mean years of REASONS FOR LOW HUMAN
schooling increased by 3.5 years and expected years DEVELOPMENT IN INDIA
of schooling increased by 4.7 years. India’s GNI per

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For India, development is a mixed bag of have higher value of HDI as compared to states like
opportunities as well as neglect and deprivations. Chhattisgarh, Bihar, Madhya Pradesh, etc.
There are several socio-political, economic and
historical reasons for such a state of affairs. Regional distortions and social disparities which
developed during the colonial period continue to
There are a few areas like the metropolitan centres play an important role in the Indian economy, polity
and other developed enclaves that have all the and society.
modern facilities available to a small section of its
population. At the other extreme of it, there are Based on the pre-tax income share of the top 10 per
large rural areas and the slums in the urban areas cent, income inequality in India has risen from 31
that do not have basic amenities like potable water, per cent in 1980 to 55 per cent in 2016. In India the
education and health infrastructure available to income growth of the bottom 40 per cent between
majority of this population. 2000 and 2018 (58 per cent) was significantly below
the average income growth for the entire
The situation is more alarming if one looks at the population (122 per cent). Such income inequalities
distribution of the development opportunities amplify failings on other HDI indices of human
among different sections of our society. It is a well- development. Intergenerational income mobility is
established fact that majority of the scheduled lower in countries with high income inequality: it
castes, scheduled tribes, landless agricultural manifests at birth, and determines access to quality
labourers, poor farmers and slums dwellers, etc. healthcare, education, and opportunities. The
are the most marginalised lot. cumulative impact of this spills over across
generations. The loss in human development due to
A large segment of female population is the worst regional inequality is expressed by the difference
sufferers among all. It is also equally true that the between the HDI and inequality adjusted HDI or
relative as well as absolute conditions of the IHDI. As inequality increases, loss to human
majority of these marginalised sections have development also increases.
worsened with the development happening over the
years. Consequently, vast majority of people are India has shown an improvement in overall life
compelled to live under abject poverty and expectancy by 10.4 years between 1990 and 2015
subhuman conditions. In a hugely patriarchal and there has been a modest gain in infant and
country like India, one cannot expect India to score under 5 mortality rate. But when the public health
high on gender equality. India Gender Development expenditure is as low at 1.4 per cent of the GDP, it
Index is not surprisingly lower than the average. is difficult to achieve the goal towards universal
High maternal mortality ratio, low income per capita healthcare.
for females and low labour force participation rate
are witnessed in India. The Government of India has made concerted efforts
to institutionalise the balanced development with its
Kerala is able to record the highest value in the HDI main focus on social distributive justice through
largely due to its impressive performance in planned development. It has made significant
achieving near hundred per cent literacy. In a achievements in most of the fields but, these are still
different scenario the states like Bihar, Madhya below the desired level.
Pradesh, Odisha, Assam and Uttar Pradesh have
very low literacy. States showing higher total
literacy rates have less gaps between the male and HOW TO ENSURE HUMAN
female literacy rates. DEVELOPMENT IN INDIA?

To sustain the momentum in growth of human

Apart from the educational attainment, the levels of
development and to further accelerate it, the role of
economic development too play significant impacts
public sector in delivery of social services such as
on HDI. Economically developed states like
education and health is critical.
Maharashtra, Tamil Nadu and Punjab and Haryana
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 schemes National Agricultural Insurance Scheme
Some observations from UNDP’s Human as well as the Modified NAIS.
Development Report (2016): 5. Pradhan Mantri Vaya Vandana Yojana, 2018:
• The report does offer kudos to the Indian Pension Scheme exclusively for the senior
government’s reservation policy for increasing citizens aged 60 years and above.
social inclusion. It says that though the 6. Atal Bimit Vyakti Kalyan Yojana, 2018: For
programme has not remedied caste based Insured Persons (IP) covered under the
exclusion, it has had positive effects. In 1965, Employees’ State Insurance Act, 1948. Relief
Dalits held fewer than 2 per cent senior service payable in cash in case of unemployment and
positions but the share went up to 11 per cent by while they search for new engagement.
2011. 7. Pradhan Mantri Rojgar Protsahan Yojana: 12
• The report notes that India’s social audits, in per cent of employer contribution to EPFO of the
which mechanisms and implementation new employees’ drawing salary upto Rs 15000
problems of social programmes are gathered and pm is given by government for the initial three
then presented for discussion in a public years.
meeting, are helping in bringing about 8. PM Shram-Yogi Mandhan Yojana, 2019: Offers
transparency. These have become popular every individual with a regular pension after they
thanks to the work of the Indian grassroots group attain 60 years. Beneficiaries in unorganized
Mazdoor Kisaan Shakti Sangathana. sector workers.
• The report praises NREG for creating work that 9. PM-KISAN, 2019: Offers income support of
can reduce poverty and also build physical assets `6000/- per annum in three equal instalments to
and infrastructure to protect the poor against all eligible farmers irrespective of land holdings.
shocks.
• It also praises India’s rights based approach to
SCHOOL EDUCATION
development since 2005 in which progressive
acts for the right to socio economic entitlement,
1. Samagra Shiksha: A comprehensive programme
including information, work, education, forest
subsuming Sarva Shiksha Abhiyan (SSA),
conservation, food and public service were
Rashtriya Madhyamik Shiksha Abhiyan (RMSA)
introduced. These are designed to introduce
and Teacher Education (TE). For first time, it also
innovative governance mechanisms that seek to
includes provisions for support at pre-school
enhance transparency, responsiveness and
level, library grants and grants for sports and
accountability of the state.
physical equipment. The vision of the Scheme is
to ensure inclusive and equitable quality
SOCIAL PROTECTION education from pre-school to senior secondary
stage in accordance with the Sustainable
1. Pradhan Mantri Suraksha Bima Yojana, 2015: Development Goal (SDG) for Education (SDG-4).
Accident insurance scheme, offers a one-year 2. Swayam platform offers 10 courses of Diploma
accidental death and disability cover. Annual in Elementary Education (D.El.Ed) and more than
premium is Rs 12. Available to people in the age 13 lakh unqualified teachers have enrolled for
group 18 to 70 years. this diploma.
2. Pradhan Mantri Jeevan Jyoti Bima Yojana, 2015: 3. UDISE+, an updated online real time version of
Government-backed life insurance scheme. UDISE (Unified District Information on School
Annual premium is Rs 330. Available to people Education) has been launched with three
between 18 and 50 years of age. additional features – GIS mapping, data
3. Atal Pension Yojana, 2015: Pension scheme verification through third-party mobile
targeted at the unorganized sector. application and data analytics.
4. Pradhan Mantri Fasal Bima Yojana, 2016: A Crop 4. PGI, Ministry of Human Resource Development
Insurance Scheme. Replaces the existing two has launched a 70-point Performance Grading
Index (PGI) to assess areas of deficiency in each
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 state’s school education system so that targeted 9. Promoting joyful learning through cultural
interventions can be made at every level from activities including art, music, dance and theatre
pedagogy to teacher training. is playing a very critical role in a student’s life and
5. ICT driven initiatives: Shaala Sidhi (to enable all school activities. The National Curriculum
schools to self-evaluate their performance), e- Framework emphasized the importance of such
Pathshala (providing digital resources such as activities and how they helped to enhance
textbooks, audio, video, periodicals etc.) and learning.
Saransh (an initiative of CBSE for schools to 10. Pradhan Mantri Innovative Learning Program
conduct self-review exercises). (DHRUV) was launched to identify and
6. To further focus on quality education, the Central encourage talented students to enrich their skills
RTE Rules have been amended to include and knowledge.
reference on class-wise and subject-wise 11. To broadbase technology aided teaching and
Learning Outcomes. The Learning Outcomes for learning, States and UTs are being actively
each class in Languages (Hindi, English and Urdu), involved to contribute and use the Digital
Mathematics, Environmental Studies, Science Infrastructure for Knowledge Sharing (DIKSHA)
and Social Science up to the elementary stage platform. Steps are also being taken to improve
have, accordingly, been finalized and shared with the quality and diversify the nature of e-content
all States/UTs. These would serve as a guidelines on DIKSHA. Other e-content sites like e-pathsala,
for States and UTs to ensure that all children National Repository of Open Educational
acquire appropriate learning level. The RTE Act, Resources (NROER) are also being integrated
2009 was amended in 2017 to ensure that all with DIKSHA to ensure easy access.
teachers acquire the minimum qualifications
prescribed under the Act by 31st March, 2019 to
reinforce the Government’s emphasis on HIGHER EDUCATION
improvement of quality of elementary
education. 1. The government launched Pandit Madan Mohan
7. The Navodaya Vidyalaya Scheme provides for Malaviya National Mission on Teachers and
opening of one Jawahar Navodaya Vidyalaya Teaching (PMMMNMTT) which aims at building
(JNV) in each district of the country to bring out a strong professional cadre of teachers by setting
the best of rural talent. Its significance lies in the performance standards and creating top class
selection of talented rural children as the target institutional facilities for innovative teaching and
group and aims to provide them quality professional development of teachers in higher
education comparable to the best in a residential education. Teachers of existing Central, State
school system. Universities/Educational Institutions including
8. A National Mission called NISHTHA – National private institutions can participate in capacity
Initiative for School Heads’ and Teachers’ building programmes as well as induction
Holistic Advancement under the Centrally training.
Sponsored Scheme of Samagra Shiksha in 2019- 2. Higher Education Financing Agency (HEFA) was
20 is being launched to improve learning established to provide sustainable financial
outcomes at the elementary level. The model for higher education institutions, Kendriya
Integrated Teacher Training Programme Vidyalayas, Navodaya Vidyalayas, AIIMS and
envisages to build the capacities of around 42 other educational institutions of the Ministry of
lakh teachers and head of schools, faculty Health with the objective to fund projects to the
members of SCERTs, DIETs, Block Resource tune of Rs 1 lakh crore by 2022.
Coordinators, and Cluster Resource 3. National Educational Alliance for Technology
Coordinators. The aim of this training is to (NEAT) announced a PPP Scheme for using
motivate and equip teachers to encourage and technology for better learning outcomes in
foster critical thinking in students, handle diverse Higher Education. The objective is to use Artificial
situations and act as first level counsellors. Intelligence to make learning more personalised
and customised as per the requirements of the
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 learner. This requires development of HEALTHCARE
technologies in Adaptive Learning to address the
diversity of learners. EdTech companies would 1. The introduction of National Health Policy, 2017
be responsible for developing solutions and for universal access to good quality health care
manage registration of learners through the services, and subsequent launch of Ayushman
NEAT portal. Bharat, with its two components: 1) Health &
4. The Department of Higher Education, in the Wellness Centres to provide comprehensive
Ministry of Human Resource Development has primary health care, and 2) Pradhan Mantri Jan
finalized and released a five-year vision plan ArogyaYojana (PMJAY) to provide health cover
named Education Quality Upgradation and to 10.74 crore poor & vulnerable families upto Rs
Inclusion Programme (EQUIP). EQUIP is a vision 5 lakh per family per year for secondary &
plan aiming at ushering transformation in India’s tertiary hospitalization, speaks about
higher education system by implementing Government’s efforts for a healthy India.
strategic interventions in the sector over the 2. To promote preventive healthcare, one and half
next five years (2019-2024). lakh Ayushman Bharat- Health & Wellness
5. SWAYAM 2.0 was launched to offer online Centres (AB-HWCs) are proposed to be set up by
degree programmes with enhanced features and 2022.
facilities by top ranking universities. 3. Under Mission Indradhanush, 3.39 crore
‘Deeksharambh’ a guide to student induction children and 87.18 lakh pregnant women in 680
programme and ‘PARAMARSH’ scheme is to districts across the country (including Gram
mentor institutions seeking National Assessment Swaraj Abhiyan [GSA] & extended GSA) have
and Accreditation Council accreditation are been vaccinated. New vaccines such as Measles-
some of the other major schemes of Department Rubella (MR), Pneumococcal Conjugate Vaccine
of Higher Education launched in 2019. (PCV), Rotavirus Vaccine (RVV) and Inactivated
Polio Vaccine (IPV) have been introduced.
SKILL DEVELOPMENT 4. Recognizing the need for addressing the social
determinants of health, the government has
1. Pradhan Mantri Kaushal Vikas Yojana (PMKVY) adopted a multi-sectoral approach and is
(1.0), 2015: Mobilize youth to take up industry increasingly synergizing its efforts with other
relevant skill training. Targets to train 1 crore Mission Mode initiatives of the Government such
youth by 2020. Recognizes and certifies prior as Eat Right & Eat Safe, Fit India, Anaemia Mukt
learning. Bharat, Poshan Abhiyan and Swacch Bharat
2. Pradhan Mantri Kaushal Vikas Yojana (2.0), Abhiyaan etc.
2016-20: PMKVY version 2 has mandatory 5. Recognising the threat of nicotine addiction
provisions for placement tracking. among youth and children through gateway
3. Pradhan Mantri Kaushal Kendra, 2015: products such as e-cigarettes, the government
Aspirational Model Training Centers to be recently banned all commercial operations in e-
opened in every district. cigarettes. Large pictorial warnings and quitline
4. National Apprenticeship Promotion Scheme, number on tobacco packs and the resulting
2016: To promote apprenticeship. Consists of increased call volumes from 20,000 to 2.50 lakh
Basic Training and On-the-Job Training/ Practical calls per month at the quitline services, indicate
Training at workplace. that government’s efforts to reduce tobacco use
5. SANKALP, 2017: Creating convergence among all are starting to bear fruit.
skill training activities, improving quality of skill 6. Under Free Drugs Service initiative, substantial
development programmes, Creating industry led funds have been given to States for provision of
and demand driven skill training capacity. free drugs. All States/UTs have notified policy to
6. STRIVE, 2017: Creating awareness through provide essential drugs free in health facilities.
industry clusters, integrating and enhancing 7. Free Diagnostics Service initiative was launched
delivery quality of ITIs. to address the high OoPE on diagnostics and
improve quality of healthcare services.
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8. Pradhan Mantri Bharatiya Jan Aushadi OUTLINE THE GOALS
Pariyojana (PMBJP) and Pradhan Mantri
National Dialysis Programme (PMNDP) are The Sustainable Development Goals (SDGs) or
some of the new initiatives that address the issue Global Goals are a collection of 17 interlinked goals
of high OoPE on account of drugs and hospital designed to be a "blueprint to achieve a better and
care. more sustainable future for all". The SDGs were set
9. The doctor-population ratio in India is 1:1456 in 2015 by the United Nations General Assembly
(population estimated to be 1.35 billion) against and are intended to be achieved by the year 2030.
the WHO recommendation of 1:1000. To They are included in a UN Resolution called the 2030
address the shortage of doctors, the government Agenda or what is colloquially known as Agenda
has embarked on an ambitious programme for 2030.
upgradation of district hospitals into medical
colleges. The SDGs are global goals, built upon the erstwhile
10. The norms for graduate and post graduate seats Millennium Development Goals. They are
in medical colleges have also been revised. The exhaustive, universal and integrated and emphasize
maximum intake capacity at MBBS level has on core areas of poverty and inequality, economic
been increased from 150 to 250, the norms for growth, innovation, sustainable consumption and
setting up of Medical colleges in terms of production, climate change, peace and justice and
requirement of land, faculty, staff bed strength partnerships.
etc have been rationalized. The Government
operates Centrally Sponsored Scheme– The 17 SDGs are: (1) No Poverty, (2) Zero Hunger,
establishment of New Medical Colleges (3) Good Health and Well-being, (4) Quality
attached with existing District/Referral Education, (5) Gender Equality, (6) Clean Water and
Hospitals’ with fund sharing between Centre Sanitation, (7) Affordable and Clean Energy, (8)
and States. As a result, the number MBBS and PG Decent Work and Economic Growth, (9) Industry,
seats have increased by 27,235 and 15,000 Innovation and Infrastructure, (10) Reducing
respectively. These efforts would go a long way Inequality, (11) Sustainable Cities and
in addressing the shortage of doctors. Communities, (12) Responsible Consumption and
11. The Pradhan Mantri Swasthya Suraksha Yojana Production, (13) Climate Action, (14) Life Below
(PMSSY) was launched to augment the tertiary Water, (15) Life On Land, (16) Peace, Justice, and
healthcare capacity in clinical care, medical Strong Institutions, (17) Partnerships for the Goals.
education and research in underserved areas of
the country, under which AIIMS like institutions In the pre-2020 period, India’s goal is to achieve the
are built and Government Medical Colleges are voluntary pledge of reducing the emissions
upgraded by setting-up Super Speciality Blocks. intensity of GDP by 20- 25 per cent over 2005 levels
12. National Medical Commission Act, 2019 was by 2020, which, it is on course to achieve.
promulgated to enable constitution of National
Medical Commission. For the post-2020 period, India’s Nationally
13. Government of India supports States in Health Determined Contribution (NDC) has outlined the
Systems Strengthening under the umbrella actions India intends to undertake. India’s NDC
programme of National Health Mission (NHM). targets:
This has resulted in striking improvements in • to lower the emissions intensity of GDP by 33-
health infrastructure of public health facilities in 35 per cent by 2030 from 2005 levels
States also. • to increase the share of non-fossil based
power generation capacity to 40 per cent of
installed electric power capacity (cumulative)
SUSTAINABLE DEVELOPMENT by 2030, and
GOALS • to create an additional carbon sink of 2.5-3 Gt
CO2e through additional forest and tree cover
by 2030.
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 PRESENT SCENARIO As per the SDG Index, Kerala, Himachal Pradesh,
Tamil Nadu, Andhra Pradesh, Telangana,
India is striving to combine the element of Karnataka, Goa, Sikkim, Chandigarh and
‘sustainability’ to economic development through Puducherry are the front runners. It is noteworthy
well-designed initiatives for inclusive development that none of the States/ UTs fall in the Aspirant
enshrined in its policies: electrify rural households, category in 2019.
augment the usage of renewable sources, eliminate
malnutrition, eradicate poverty, access to primary Overall, it is encouraging to note that the composite
education to all girls, provide sanitation and score for India has improved from 57 in 2018 to 60
housing for all, equip young people with skills to in 2019, indicating the impressive progress made by
compete in the global labour market, enable access the country in its journey towards achieving the
to finance and financial services. SDGs. This positive stride towards achieving the
target is largely driven by commendable country
India is among a few countries in the world where, wide performance in five goals - 6 (Clean Water and
despite ongoing developmental efforts, forest and Sanitation), 7 (Affordable and Clean Energy), 9
tree cover are increasing considerably. A (Industry, Innovation and Infrastructure), 15 (Life
comparison with some other emerging economies on Land) and 16 (Peace, Justice and Social
shows that India’s growth in forest cover has been Institutions) - where India has scored between 65
in positive territory. Simultaneously, India’s and 99.
sustained actions on addressing climate change have
helped her to achieve great strides which are Current flagship policies and programmes of
reflected in reduction in the emission intensity of Government of India such as Swachh Bharat Mission
India’s GDP by 21 per cent during 2005-2014. (SBM), Beti Bachao Beti Padhao (BBBP), Pradhan
Mantri Awas Yojana (PMAY), Pradhan Mantri Jan-
The country has been making substantial additions Dhan Yojana (PMJDY), Deen Dayal Upadhyay Gram
to its installation of renewable power capacity. Jyoti Yojana (DDUGJY) and Pradhan Mantri Ujjwala
Yojana (PMUY) have substantially contributed to
India follows a holistic approach for achieving the India’s progress in this regard.
SDGs by implementing a comprehensive array of
schemes. The progress towards SDGs has been The goals that demand special attention are – 2
assessed by SDG India Index 2019. While the first (Zero Hunger) and 5 (Gender Equality) – where the
edition measured progress of the States/Union overall country score is below 50.
Territories (UTs) on a set of 62 indicators across 13
goals, the 2019 Index is more comprehensive and The overall country score lies between 50 and 64,
highlights the progress being made by the indicates the scope for improvement in the coming
States/UTs on a wider set of 100 indicators spread years.
across 16 goals.

The States/UTs are ranked based on their aggregate INDIA’S GREEN INITIATIVE
performance across the 16 SDGs. The SDG score
varies from 0 to 100. 1. National Action Plan on Climate Change
• A score of 100 implies that the States/UTs have (NAPCC): The NAPCC, launched in June 2008,
achieved the targets set for 2030; which includes eight national missions:
• A score of 0 implies that the particular State/UT Jawaharlal Nehru National Solar Mission,
is at the bottom of the table. National Mission for Enhanced Energy
• States with scores equal to/greater than 65 are Efficiency, National Water Mission, National
considered as Front-Runners (in Green); as Mission for a Green India, National Mission on
Performers (in Yellow) in the range of 50-64 and Sustainable Habitat, National Mission for
as Aspirants (in Red) if the score is less than 50. Sustainable Agriculture, National Mission for
Sustaining the Himalayan Ecosystem and
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 National Mission on Strategic Knowledge for households to promote alternative energy
Climate Change. Each mission is anchored sources in project areas.
under a Ministry, which is responsible for its 7. National Mission on Sustainable Habitat is
implementation and lays down the budget being implemented through three
provisions and actionable priorities for it. programmes: Atal Mission on Rejuvenation
2. States/Union Territories have also State Action and Urban Transformation, Swachh Bharat
Plans on Climate Change (SAPCC) in line with Mission, and Smart Cities Mission. Energy
the NAPCC taking into account State’s specific Conservation Building Rules 2018 for
issues relating to climate change. commercial buildings having connected load of
3. The Perform, Achieve and Trade (PAT) scheme 100 KW or above has been made mandatory.
under National Mission for Enhanced Energy Mass Rapid Transit Systems are being
Efficiency (NMEEE) designed on the concept of implemented across the country and standards
reduction in Specific Energy Consumption. It is have been developed for six sub-sectors
envisaged that by 2020, about 20 Mtoe of namely, solid waste management, water and
energy savings will be achieved through the sanitation, storm water drainage, urban
implementation of this scheme. planning, energy efficiency and urban
4. National Solar Mission aims to increase the transport.
share of solar energy in the total energy mix. 8. National Mission for Sustainable Agriculture
The cumulative targets under the mission for aims at enhancing food security and protection
Grid Connected Solar Power Projects consists of of resources. Key targets include covering 3.5
40 GW Grid connected Rooftop projects and lakh hectare of area under organic farming,
60 GW large and medium size land based solar 3.70 under precision irrigation, 4.0 lakh
power projects. The combined target is now set hectare under System of Rice Intensification,
at 100 GW. 3.41 lakh hectare under diversification to less
5. National Water Mission focuses on monitoring water consuming crop, 3.09 lakh hectare
of ground water, aquifer mapping, capacity additional area under plantation in arable land
building, water quality monitoring and other and 7 bypass protein feed making. The mission
baseline studies. There are 1071 assessment has resulted in the formation of National
units categorized as over exploited as per 2011 Innovations on Climate Resilient Agriculture, a
assessment of Central Ground Water Authority network project.
(CGWA). Directions have been issued by CGWA 9. National Mission for Sustaining the Himalayan
under Section 5 of “The Environment Ecosystem aims to evolve suitable
Protection Act, 1986” for mandatory Rain management and policy measures for
Water Harvesting / Roof Top Rain Water sustaining and safeguarding the Himalayan
Harvesting for all target areas in the country Ecosystem.
including UTs. While granting ‘No Objection 10. National Mission on Strategic Knowledge for
Certificate’ for drawing ground water, CGWA Climate Change seeks to build a knowledge
insists for mandatory rain water harvesting as system that would inform and support national
per the guidelines issued. action for ecologically sustainable
6. National Mission for a Green India envisages a development.
holistic view of greening and focuses on 11. Central sector scheme called Climate Change
multiple ecosystem services along with carbon Action Programme (CCAP) has been launched
sequestration and emission reduction. The in 2014, with the objective to build and support
mission emphasized the landscape approach to capacity at central and state levels,
treat large contiguous areas of both forest and strengthening scientific and analytical
non-forest, public and private lands with a key capacity for climate change assessment,
role of the local communities in planning, establishing appropriate institutional
implementation and monitoring. Energy framework and implementing climate related
efficient devices have been provided to actions in the context of sustainable
development.
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 12. National Green Corridor Programme: To renewable energy segment, as per the
address the fluctuations/variability in the notification of the RBI in May 2016, bank loans
renewable power supply, Government in 2013 of up to Rs 15 crore for solar based power
announced a National Green Corridor generators, biomass-based power generators,
Programme (NGCP). The Power Grid wind mills, microhydel plants, etc. will be
Corporation of India is developing the inter- considered part of PSL.
state transmission corridor and the state 18. New Development Bank (NDB) is the first
transmission utilities are responsible for Multi-lateral Development Bank established by
setting up and strengthening the intra-state developing countries and emerging economies
transmission infrastructure. – Brazil, Russia, India, China and South Africa
13. R&D for Clean Coal Technologies: In 2016, R&D (BRICS) – in accordance with the agreement on
Project for “Development of Advanced Ultra New Development Bank signed on 15th July,
Supercritical (Adv. USC) Technology for 2014 in Fortaleza, Brazil. NDB’s objectives are
Thermal Power Plants” on a Mission Mode, at in line with the BRICS countries’ own
an estimated cost of Rs 1554 crore has been development goals, with an increased focus on
approved by the Cabinet Committee on sustainable development and hence NDCs.
Economic Affairs. 19. The Securities and Exchange Board of India
14. National Green Highways Mission: The (SEBI) has, in May 2017, put in place the
Ministry of Road Transport and Highways framework for issuance of green bonds and
(MoRTH), has promulgated Green Highways the listing requirements for such bonds, which
(Plantations, Transplantations, Beautification will help in raising funds from capital markets
and Maintenance) Policy – 2015 to develop for green projects.
green corridors along National Highways for 20. Large corporates integrating sustainability in
sustainable environment and inclusive growth. their core businesses are included in the
National Green Highways Mission (NGHM) Bombay Stock Exchange’s green indices, the
under National Highways Authority of India GREENEX and CARBONEX. GREENEX was
(NHAI) has been entrusted with the task of introduced in 2012 and comprises of 25 of
planning, implementation and monitoring India’s biggest companies. The S&P BSE
roadside plantations along one lakh km CARBONEX seeks to track the performance of
network of National Highways. the companies in the S&P BSE 100, based on
15. As part of the National Electric Mobility their commitment to mitigating risks arising
Mission Plan (NEMMP) 2020, Faster Adoption from climate change in the long run.
and Manufacturing of (Hybrid &) Electric 21. In order to scale up the environmentally
Vehicles in India (FAME India) scheme was sustainable investments, India joined the
formulated in 2015 to promote manufacturing International Platform on Sustainable Finance
and sustainable growth of electric and hybrid (IPSF) in October 2019. The Platform
vehicle technology. acknowledges the global nature of financial
16. National Adaptation Fund was created as a markets which has the potential to help
central scheme with a corpus of Rs 350 crores finance the transition to a green, low carbon
for the year 2015-16 and 2016-17. The overall and climate resilient economy by linking
aim of the Fund is to support concrete financing needs to the global sources of
adaptation activities which are not covered funding.
under ongoing activities through the schemes 22. Pradhan Mantri Krishi Sinchayee Yojana has
of National and State Governments that reduce been formulated with the vision of extending
the adverse impact of climate change facing the coverage of irrigation and improving water
community, sector and states. use efficiency.
17. In 2015, RBI included lending to social 23. Zero Effect, Zero Defect is a policy initiative to
infrastructure and small renewable energy enhance energy efficiency and resources
projects within the targets, thereby, giving a efficiency in Medium & Small Industries.
further fillip to green financing. In the
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 24. Second Phase of Science Express Climate Sustainable Development Goals (SDGs)."
Action Special train with the aim to create Comment on the progress made in India in this
awareness among various sections of society, regard. [150 words; 10 marks; UPSC CSE 2018]
especially students, on the science of climate
change, the observed and anticipated impacts,
and different possible responses as to how ROADMAP AHEAD
climate change can be combated.
25. The National Mission for Clean Ganga seeks to The Global Climate Risk Index 2018 has put India
rejuvenate the river along its length of more amongst the six most vulnerable countries in the
than 2,500 km. world. Given that a sizeable population under
26. In order to address the increasing air pollution poverty live in areas prone to climatic shifts and in
across the country in a comprehensive manner, occupations that are highly climate-sensitive,
MoEF&CC has launched NCAP in 2019 as a pan future climate change could have significant
India time bound national level strategy. implications for living standards. At the same time,
Overall objective of the NCAP is comprehensive the effect of climate change will vary significantly
management plan for prevention, control and depending on the level of exposure and the inherent
abatement of air pollution besides augmenting adaptive capacities of individuals, households, and
the air quality monitoring network across the communities. India’s efforts on sustainable
country. development and climate change have ensured
27. The National Bio-fuels Policy 2018 targets 20 several positive outcomes. There are immense
per cent blending of ethanol in petrol and 5 financial requirements to fulfil the commitments.
per cent blending of biodiesel in diesel by Yet, climate change has been given high importance
2030. in policy decisions. The Fifteenth Finance
28. International Solar Alliance: ISA is the first Commission Terms of Reference outlined climate
treaty based intergovernmental organization change as an important aspect for consideration.
headquartered in India. The ISA aims to pave
the way for future solar generation, storage The obligations of the provision of the long-term
and technologies for Member countries’ needs climate finance under the multilateral climate
by mobilizing over US$ 1000 billion by 2030. regime have not been fulfilled in any meaningful
Achievement of ISA’s objectives will also way. To allay such uncertainties on funding in the
strengthen the climate action in Member coming years, it is necessary for developed countries
countries, helping them fulfill the to be compliant on their commitments based on
commitments expressed in their NDCs. historical responsibilities and the principle of equity
29. Coalition for Disaster Resilient Infrastructure: and common but differentiated responsibilities.
India launched the Coalition for Disaster Acting upon their fair share of responsibilities by
Resilient Infrastructure (CDRI) on the sidelines each nation would provide the pathway of low
of UN Secretary General’s Climate Action carbon climate resilient development for our Planet.
Summit in September, 2019. This international The fulfillment of pledges by developed countries
partnership of national governments, UN through provision of ‘new and additional’ financial
agencies, multilateral development banks, resources is an important contingent factor.
private sector, and knowledge institutions will Technology development and transfer at affordable
promote the resilience of new and existing costs is also crucial for developing countries. Hence,
infrastructure systems to climate and disaster adequate provision of finance, technology transfer,
risks, thereby ensuring sustainable and capacity building to developing countries to
development. facilitate the effective implementation of the SDGs
and Paris Agreement on climate change are critical.
QUESTION
"Access to affordable, reliable, sustainable and India has been progressing rapidly towards
modern energy is the sine qua non to achieve achieving the SDGs. However, there has been a wide
variation in the way different states have
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performed. It is important that in the race towards Policy makers in India have to ensure that the above
SDGs no State is left behind. mentioned pillars of human development are
strengthened.

HOW TO BRING ABOUT

ECONOMIC GROWTH AND HOW TO UNLOCK INDIA’S POTENTIAL
GROWTH RATE?
HUMAN DEVELOPMENT
SIMULTANEOUSLY IN INDIA? WHAT KIND OF REFORMS ARE REQUIRED?
The Indian economy grew remarkably in the last
When we turn to the HDI, we find that India’s ranking three decades. The growth appears to be slowing
has not altered since 2014. India was ranked 130 in down. Right now, India is battling poverty and a huge
2014, and has remained in the same place out of population with limited opportunities to grow. A lot
185 countries in 2018. It is of relevance here that needs to be done in the reforms space to accelerate
India’s HDI ranking has not improved despite it being growth.
the world’s fastest growing major economy in
recent years, as the government often points out in Here are 5 key things to note:
its assessments. This despite income being a 1. Privatise public enterprises: Public sector
component of the index. What this reveals is that an enterprises (PSEs) fail to innovate, increase
economy can grow fast without much progress in productivity, and respond to consumer
human development. preferences. The profitability of central PSUs has
been declining consistently in the last 10 years.
There are six basic pillars of human development: Two-thirds of the 1,000 state PSEs make losses
equity, sustainability, productivity, empowerment, including power distribution companies. This
cooperation and security. affects our economy too. The losses of state and
central PSUs amount to 1% of India's Gross
• Equity is the idea of fairness for every person, Domestic Product (GDP). The Indian government
between men and women; we each have the should consider privatisation of PSE, especially
right to education and health care. those operating in the tradable sector.
• Sustainability is the view that we all have the Privatisation can lead to better utilisation of
right to earn a living that can sustain our lives and resources and higher productivity growth. The
have access to a more even distribution of goods. government can use the proceeds of developing
• Productivity states the full participation of rural roads and irrigation.
people in the process of income generation. This 2. Reform banks: The health of Indian public sector
also means that the government needs more banks (PSBs) deteriorated post the financial
efficient social programs for its people. crises compared to private and foreign banks
• Empowerment is the freedom of the people to operating in India. Non-performing assets (NPAs)
influence development and decisions that affect or bad loans as a percentage of all advances at
their lives. PSBs increased to 15.6% in 2017 from 3.5% in
• Cooperation stipulates participation and 2008. Private and foreign banks managed to
belonging to communities and groups as a means keep bad loans below 5% during the same
of mutual enrichment and a source of social period. The PSBs should be brought under the
meaning. Companies Act, while the Bank Nationalisation
• Security offers people development Act should be modified. It can help the
opportunities freely and safely with confidence government to privatize some viable banks,
that they will not disappear suddenly in the reform a few, and turn some banks into narrow
future. banks. While PSBs are poorly managed, private
banks can become reckless and delinquent. Their
regulation should improve to make them
accountable.
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3. Revive government machinery: A number of • Factor Market Reforms Considered as the
posts in various government departments ‘backbone’ for the success of the reform
remain vacant right from courts to police to process in India, it consists of dismantling of
school. Understaffing, lack of independence, and the Administered Price Mechanism (a
lack of expertise are affecting regulation across mechanism whereby government sets prices
many fields. Public-private partnerships and of goods rather than allowing the free play of
infrastructure services remain poorly monitored. market forces). We cannot say that the
The government machinery needs reform so that Factor Market Reforms (FMRs) are complete
public interest is served first. Hiring the right in India. It is still going on. Cutting down
candidate for a particular job can help the subsidies on essential goods is a socio-
government in fulfilling the objective. political question in India. Till market-based
4. Employment creation: India needs labour purchasing power is not delivered to all the
intensive enterprises that can create jobs for its consumers, it would not be possible to
young population. Automation is already setting complete the FMRs.
in and it can reduce jobs in the next few decades. • Public Sector Reforms The second generation
The labour laws in India need a revamp. The of reforms in the public sector especially
Industrial Disputes Act makes it difficult for emphasises on areas like greater functional
enterprises having more than 100 workers to cut autonomy, freer leverage to the capital
staff without government permission. Further, market, international tie-ups and greenfield
the Contract Labour Act incentivizes companies ventures, disinvestment (strategic), etc.
to minimise labour and invest less in labour- • Reforms in Government and Public
intensive businesses. Changing the laws can help Institutions This involves all those moves
to promote labour-intensive enterprises. which really go to convert the role of the
5. Price control and subsidies: Price control on government from the ‘controller’ to the
food, fuel, electricity, water, rail fares, and ‘facilitator’ or the administrative reform, as it
fertilizers discourage investments in the sector. may be called.
Price controls are achieved through subsidies, • Legal Sector Reforms Though reforms in the
which affects the fiscal math. In a few cases, the legal sector were started in the first
subsidies fail to meet their end purpose due to generation itself, now it was to be deepened
leakages. The central and state subsidies amount and newer areas were to be included, such
to 6% of India's GDP. Removing subsidies, as, abolishing outdated and contradictory
removing price controls and encouraging direct laws, reforms in the Indian Penal Code (IPC)
cash transfer can benefit the poor as well as the and Code of Criminal Procedure (CrPC),
government. It can lead to fiscal saving. Labour Laws, Company Laws and enacting
suitable legal provisions for new areas like
Cyber Law, etc.
SECOND GENERATION REFORMS
• Reforms in Critical Areas The second
The government launched the second generation of generation reforms also commit to suitable
reforms in 2000–01. Basically, the reforms India reforms in the infrastructure sector (i.e.,
launched in the early 1990s were not taking place as power, roads, especially as the telecom
desired and a need for another set of reforms was sector has been encouraging), agriculture,
felt by the government, which were initiated with agricultural extension, education and
the title of the Second Generation of economic healthcare, etc. These areas have been called
reforms. These reforms were not only deeper and by the government as ‘critical areas’.
delicate, but required a higher political will power Other than the above-given focus of this generation
from the governments. The major components of of reforms, some other important areas were also
the reform are as given below: emphasised:
• State’s Role in the Reform: For the first time,
an important role to the state was designed,

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 in the process of economic reforms. All new
steps of the reforms were now to be started
by the state with the centre playing a
supportive role.
• Fiscal Consolidation: The area of fiscal
consolidation, though it was a major co-
ordinate of reform in India since 1991 itself,
gets a constitutional commitment and
responsibility. The FRBM Act is passed by the
Centre and the Fiscal Responsibility Act
(FRAs) is followed by the states as an era of
new commitments to the fiscal prudence
starts in the country.
• Greater Tax Devolution to the States: Though
there was such a political tendency by the
mid-1990s itself, after the second generation
reforms started, we see a visible change in
the central policies favouring greater fiscal
leverage to the states.
• Focussing on the Social Sector: The social
sector (especially healthcare and education)
gets increased attention by the government
with manifold increases, in the budgetary
allocation, as well as show of a greater
compliance to the performance of the
development programmes.
We see mixed results of the second generation
reforms though the reforms still continue.

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 ▪ GNPMP is the value of all the final goods and
SUMMARY services that are produced by the normal
GROSS DOMESTIC PRODUCT AT MARKET residents of India and is measured at the market
PRICES (GDP MP ) prices, in a year.
▪ GDP is the market value of all final goods and ▪ GNP refers to all the economic output produced
services produced within a domestic territory of by a nation’s normal residents, whether they are
a country measured in a year. located within the national boundary or abroad.
▪ All production done by the national residents or ▪ To arrive at the value of GNP, Net Factor Income
the non-residents in a country gets included, from Abroad (NFIA) is added to GDP.
regardless of whether that production is owned ▪ Everything is valued at the market prices.
by a local company or a foreign entity. ▪ GNPMP = GDPMP + NFIA
▪ Everything is valued at market prices. GNP AT FACTOR COST (GNP FC )
▪ GDPMP = C + I + G + X – M ▪ GNP at factor cost measures value of output
GDP AT FACTOR COST (GDP FC ) received by the factors of production belonging
▪ GDP at factor cost is gross domestic product at to a country in a year.
market prices, less net product taxes. ▪ GNPFC = GNPMP – Net Product Taxes – Net
▪ Market prices are the prices as paid by the Production Taxes
consumers. Market prices also include product NET NATIONAL PRODUCT AT MARKET
taxes and subsides. PRICES (NNP MP )
▪ The term factor cost refers to the prices of ▪ This is a measure of how much a country can
products as received by the producers. consume in a given period of time.
▪ Thus, factor cost is equal to market prices, minus ▪ NNP measures output regardless of where that
net indirect taxes (NIT). production has taken place (in domestic
o NIT = Indirect Taxes – Subsidies territory or abroad).
▪ GDP at factor cost measures money value of ▪ NNPMP = GNPMP – Depreciation
output produced by the firms within the ▪ NNPMP = NDPMP + NFIA
domestic boundaries of a country in a year.
▪ GDPFC = GDPMP – Indirect Taxes + Subsidies NNP AT FACTOR COST (NNP FC ) OR
▪ GDPFC = GDPMP – NIT NATIONAL INCOME (NI)
▪ NNP at factor cost is the sum of income earned
NET DOMESTIC PRODUCT AT MARKET by all factors in the production in the form of
PRICES (NDP MP ) wages, profits, rent and interest, etc., belonging
▪ This measure allows policy-makers to estimate to a country during a year.
how much the country has to spend just to ▪ It is the National Product and is not bound by
maintain their current GDP. production in the national boundaries. It is the
▪ If the country is not able to replace the capital net domestic factor income added with the net
stock lost through depreciation, then GDP will factor income from abroad.
fall. ▪ NI = NNPMP – Net Product Taxes - Net Production
▪ NDPMP = GDPMP − Depreciation Taxes
NDP AT FACTOR COST (NDP FC )
▪ NNP = NDP + NFIA
▪ NDP at factor cost is the income earned by the
factors in the form of wages, profits, rent,
interest, etc., within the domestic territory of a
country.
▪ NDPFC = NDPMP – Net Product Taxes – Net
Production Taxes

GROSS NATIONAL PRODUCT AT MARKET

PRICES (GNP MP )
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 1. It is the total value of all finished goods and
MCQS FOR PRACTICE services produced in the country in one financial
year.
Q1. Which of the following statements is correct 2. It includes the value of finished goods and
with respect to ‘Public Goods’? services produced by foreigners within the
1. They are considered as non-rivalrous as they boundary of an economy.
don't dwindle in supply as people consume
them. Select the correct answer using the code given
2. They are considered non-excludable as they are below:
available to all and cannot be withheld even from (a) 1 only
people who do not contribute to its public (b) 2 only
funding. (c) Both 1 and 2
3. They are associated with free-rider problem. (d) Neither 1 nor 2
Select the correct answer using the code given Answers: D
below:
Explanation:
(a) 1 and 2 only About Gross Domestic Product:
(b) 2 and 3 only ▪ GDP is the total value of all finished goods
(c) 1 and 3 only produced in the country in one financial year.
(d) 1, 2 and 3 (Hence statement 1 is correct)
Answer: D ▪ To avoid double-counting, GDP includes the
final value of the product, but not the parts (or
Explanation: intermediate goods) that go into it. For example,
About Public Goods: an Indian footwear manufacturer uses laces and
▪ Economists refer to public goods as "non- other materials made in India. Only the value of
rivalrous" and "non-excludable," and most such the shoe gets counted; the shoelace does not.
goods are both. ▪ It doesn't matter if it is produced by citizens or
▪ Their non-rivalry refers to the fact that the goods foreigners. If they are located within the
don't dwindle in supply as people consume country's boundaries, their production is
them; a country's defenses, for example, do not included in GDP. (Hence statement 2 is correct)
run out or diminish as its population grows.
(Hence statement 1 is correct)
▪ Non-excludability means just that; the good is Q3. With reference to ‘capital goods’, consider the
available to all and cannot be withheld, even following statements:
from people who do not contribute to its public 1. They don’t transform, or change shape in the
funding. (Hence statement 2 is correct) production process.
▪ That characteristic, in turn, leads to what is called 2. They are bought for meeting immediate need of
the free-rider problem with public goods. Since the consumer.
you need not contribute to the provision of a Which of the statements given above is/are
public good to benefit from it, some people will correct?
inevitably choose to use the good and yet shirk (a) 1 only
the public responsibility to help pay for it. (b) 2 only
(Hence statement 3 is correct) (c) Both 1 and 2
(d) Neither 1 nor 2
Q2. With reference to ‘Gross Domestic Product’, Answer: A
which of the following statements is not correct?
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Explanation: (b) It is used for comparison across years and across
About Capital Goods: countries.
▪ Capital goods, on the other hand, are assets that (c) It concentrates on volume growth only and does
are used in the production of consumer goods. not include price growth.
Key thing to note about capital goods is that they (d) None of the above
don’t transform, or change shape in the Answer: D
production process. (Hence statement 1 is
correct) Explanation:
▪ They are goods which are bought not for About Nominal GDP:
meeting immediate need of the consumer but ▪ Total economic output produced valued at a
current market price. (Hence option A is not
for producing other goods. (Hence statement 2
correct)
is not correct)
▪ Based on current market price.
▪ Used for comparison across different quarters
Q4. The term Gross Domestic Product at Factor cost of output in a year for same country. (Hence
represents: option B is not correct)
(a) Gross domestic product at market prices minus ▪ Cannot segregate between volume growth and
depreciation. growth due to price changes. (Hence option C is
(b) Gross domestic product at market prices minus not correct)
depreciation plus net factor income from
abroad.
(c) Gross domestic product at market prices minus
indirect taxes plus subsidies.
(d) Gross domestic product at market prices minus
net factor income from abroad.
Answer: C

Explanation:
About Gross Domestic Product at Factor cost:
▪ GDP at factor cost is gross domestic product at
market prices, less net product taxes.
▪ Market prices are the prices as paid by the
consumers. Market prices also include product
taxes and subsides.
▪ The term factor cost refers to the prices of
products as received by the producers.
▪ Thus, factor cost is equal to market prices, minus
net indirect taxes (NIT).
o NIT = Indirect Taxes – Subsidies
▪ GDP at factor cost measures money value of
output produced by the firms within the
domestic boundaries of a country in a year.
▪ GDPFC = GDPMP – Indirect Taxes + Subsidies
• GDPFC = GDPMP – NIT
Q5. With reference to ‘Nominal GDP’, which of the
following statements is correct?
(a) It measures total economic output produced
valued at a constant market price.

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