Prelims 2017

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Day 37

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CALCULATION OF NATIONAL INCOME

National Income is the total value of all final goods and services produced by the country in certain year.
The growth of National Income helps to know the progress of the country.
In other words, the total amount of income accruing to a country from economic activities in a years time
is known as national income. It includes payments made to all resources in the form of wages, interest,
rent and profits.
From the modern point of view, national income is defined as the net output of commodities and
services flowing during the year from the countrys productive system in the hands of the ultimate
consumers.

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OR
SC
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National Income Accounting (NIA)

National Income Accounting is a method or technique used to measure the economic activity in the national
economy as a whole.
NIA is mainly done for:
Policy Formulation: It helps in comparing the estimates of the past from the future and also forecast the
growth rates in future. For example, if a country has a GDP of Rs. 103 Lakh which is 3 Lakh rupees
higher than the last year, it has a growth rate of 3 per cent.
Effective Decision Making: To estimate the contribution of each of the sectors of the economy. It helps
the business to plan for production.
International Economic Comparison: It helps in comparing the level of development of countries and
provides useful insight into how well an economy is functioning, and where money is being generated and
spent. One can compare the standard of living of different nations and its growth rate.
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There are various terms associated with measuring of National Income.

A. GDP (GROSS DOMESTIC PRODUCT)

Here the catch word is Domestic which refers to Geographical Area
The total value of all final goods and services produced within the boundary of the country during a given
period of time (generally one year) is called as GDP.
In this case, the final produce of resident citizens as well as foreign nationals who reside within that
geographical boundary is considered.
GDP = Q-P
Q = total quantity of final goods and services produced in the country (both by Indians and foreigners

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residing within Indian boundary).
P = price of the final goods and services.
OR
Types of GDP: Real GDP and Nominal GDP
Real GDP: Refers to the current year production of goods and services valued at base year prices. Such
base year prices are Constant Prices.
Nominal GDP: Refers to current year production of final goods and services valued at current year prices.
SC

Which one is a better measure?

Real GDP is a better measure to calculate the GDP because in a particular year GDP may be inflated
because of high rate of inflation in the economy.
Real GDP therefore allows us to determine if production increased or decreased, regardless of changes
in the inflation and purchasing power of the currency.
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Concept of Base Year: It is the year used as the beginning or the reference year for constructing an index,
and which is usually assigned an arbitrary value of 100.
The base year is also known as Rebasing as by every 10 years there is change which will be minimum 4%
rise in price of items which requires changing the base year.
Economists use a Price Index to find the real GNP/GDP to make the calculation of GNP/GDP easier. A
Price index is a number showing the changes in the overall level of prices. It shows a change in the general
price level of an economy.
Recently the Indian Government changed the base year for calculating GDP to 2011-12 from 2004-2005.
Base Year selection is made on the basis of:
Stability of macroeconomic parameters. It has to be a normal year without large fluctuations in
production, trade and prices of goods and services.
Data availability: Data available for the year should be reliable.
Comparability- so that same parameters should be in use both the years. Therefore it should be a
recent year and not go long back into history.
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B. GROSS NATIONAL PRODUCT (GNP)

Here the catch word is 'National' which refers to all the citizens of a country.

GNP is the total value of the total production or final goods and services produced by the nationals of
a country during a given period of time (generally one year).

In this case, the income of all the resident and non-resident citizens (who resides in abroad) of a country
in included whereas, the income of foreigners who reside within India is excluded.

The GNP contains the income earned by Indian Nationals (both in Indian Territory and Abroad) only.

GNP = GDP + (X-M) X = Export, M = Import

X-M is called the Net Factor Income from Abroad (NFIA)

So, GNP = GDP + Net Factor Income from Abroad

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GDP and GNP are measured on the basis of Market Price and Factor Cost.

a) Market Price

OR
It refers to the actual transacted price which includes indirect taxes such as custom duty, excise duty, sales tax,
service tax etc. (impending Goods and Services Tax). These taxes tend to raise the prices of the goods in an
economy.

b) Factor Cost
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It is the cost of factors of production i.e. rent for land interest for capital, wages for labour and profit for
entrepreneurship. This is equal to revenue price of the final goods and services sold by the producers.

Revenue Price (or Factor Cost) = Market Price - Net Indirect Taxes

Net Indirect Taxes = Indirect Taxes - Subsidies

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Hence, Factor Cost = Market Price - Indirect Taxes + Subsidies

C. Net National Product (NNP): NNP = GNP - Depreciation

It is calculated by subtracting Depreciation from Gross National Product.

Depreciation - Wear and Tear of goods produced.

This deduction is done because a part of current produce goes to replace the depreciated parts of the
products already produced. This part does not add value to current year's total produce. It is used to keep
the products already produced intact and hence it is deducted.

D. Net Domestic Product (NDP): NDP = GDP - Depreciation

It is the calculated GDP after adjusting the value of depreciation. This is basically, Net form of GDP, i.e.
GDP - total value of wear and tear.

NDP of an economy is always lower than its GDP, since their depreciation can never be reduced to zero.
The concept of NDP and NNP are not used to compare different economies because the method of
calculating depreciation varies from country to country.
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The difference between Net Domestic Product and Net National Product:
"Domestic" means that it includes everything produced within country (domestically) and it doesn't
matter who have produced it - foreigners or residents.
"National" means that it includes everything that are produced by residents only (or by capital belonging
to residents) - and it doesn't matter if it is produced domestically or internationally (for instance if one
goes to work into another country then my work should be included in national but not in domestic
product).
"Net" means that depreciation used in production capital (consumed capital) is deducted from Gross
(for both domestic and national).
E. National Income at Factor Cost (NIFC):
It is the sum of all factors of income earned by the residents of a country (Indian) both from within the
country as well as abroad.
National Income at Factor Cost = NNP at Market Price - Indirect Taxes + Subsidies

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In India, and many developing countries across the world, National Income is measured at factor cost
instead of market prices. Some of the reasons for the same are lack of uniformity in taxes, goods not
OR
being printed with their prices, etc.
F. Transfer Payments
A payment made by the government to individuals for whom there is no economic activity is produced
in return. For example: Old Age Pensions, Scholarship etc.
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G. Personal Income
It refers to all of the income collectively received by all of the individuals or households in a country.
It includes compensation from a number of sources including salaries, wages and bonuses received from
employment or self employment; dividends and distributions received from investments; rental receipt
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from real estate investments and profit sharing from businesses.

In National Income Accounting, some income is attributed to individuals, which they do not actually
receive. For Example: Undistributed Profits, Employees' contribution for social security, corporate income
taxes etc. which needs to be deducted from National Income to estimate the Personal Income.
PI = NI + Transfer Payments - Corporate Retained Earnings, Income Taxes, Social Security Taxes.
H. Disposable Personal Income
It is the amount left with the individuals after paying Personal Taxes such as Income Tax, Property Tax,
and Professional Tax etc. to spend as they like.
DPI = PI - Taxes (Income Tax i.e. Personal Taxes)
DPI results into Savings and Expenditure i.e. (Spend and Save). This concept is very useful for studying
and understanding the consumption and saving behaviour of the individuals.
WHAT ARE THE FACTORS THAT AFFECT NATIONAL INCOME?
Several factors affect the national income of a country. Some of them have been listed below:
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1. Factors of Production
Normally, the more efficient and richer the resources, higher will be the level of National Income or GNP
(a) Land
Resources like coal, iron and timber are essential for heavy industries so that they must be available and
accessible. In other words, the geographical location of these natural resources affects the level of GNP.
(b) Capital
Capital is generally determined by investment. Investment in turn depends on other factors like profitability,
political stability etc.
(c) Labour
The quality or productivity of human resources is more important than quantity. Manpower planning and
education affect the productivity and production capacity of an economy.

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(d) Entrepreneur
(e) Technology

OR
This factor is more important for Nations with fewer natural resources. The development in technology is
affected by the level of invention and innovation in production.
(f) Government
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Government can help to provide a favourable business environment for investment. It provides law and order,
regulations.
(g) Political Stability
A stable economy and political system helps in appropriate allocation of resources. Wars, strikes and social
unrests will discourage investment and business activities.
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Methods of National Income Calculation

There are three approaches and methods of measuring National Income:
A. Income Method
By this National Income is calculated compiling income of factors of production viz., land, labour, capital
and entrepreneur.
National Income = Total Wage + Total Rent + Total Interest + Total Profit
In Indian context, since 1993 as per the System of National Accounts (SNA), National Income is total
of the following:
GDP = Compensation of Employees + Consumption of Fixed Capital + (Other Taxes on Production
- Subsidies of Production) + Gross Operating Surplus
Compensation of employees: (Wage) salaries paid in cash and kind and other benefits provided to employees.
Consumption of Fixed Capital: wear and tear of machinery which are replaced by new parts.
Other Taxes on Production minus Subsidies: Net tax on production.
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There is a difference between tax on products and tax on production. Tax on products includes taxes like
sales tax and excise duty. Tax on production is tax imposed irrespective of production like license fees
and land tax.
Gross Operating Surplus: balance of value added after deducting the above three components. It goes to
pay rent of land and interest of capital.
B. Product Method (or Value Added Method, Output Method)
It is used by economists to calculate GDP at market prices, which are the total values of outputs produced
at different stages of production.
Some of the goods and services included in production are:
Goods and services actually sold in the market.
Goods and services not sold but supplied free of cost. (No Charge/Complementary)
Some of the goods and services not included in production are:
Second hand items and purchase and sale of the same. Sale and purchase of second cars, for example, are

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not a part of GDP calculation as no new production takes place in the economy.
Production due to unwarranted/ illegal activities.
OR
Non-economic goods or natural goods such as air and water.
Transfer Payments such as scholarships, pensions etc. are excluded as there is income received, but no
good or service is produced in return.
SC

Imputed rental for owner-occupied housing is also excluded.

Here the Gross Value of final goods and services produced in a country in certain year is calculated.
GDP is a concept of value added; it is the sum of gross value added of all resident producer units
(institutional sectors, or industries) plus that part of taxes (total) less subsidies, on products which is not
included in the valuation of output.
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Gross Value Added = Output of Final Goods and Services - Intermediate Consumption
National Income = Gross Value Added + Indirect Taxes - Subsidies
C. Expenditure Method
It measures all spending on currently-produced final goods and services only in an economy.
In an economy, there are three main agencies which buy goods and services: Households, Firms and the
Government.
This final expenditure is made up of the sum of 4 expenditure items, namely;
Consumption (C): Personal Consumption made by households, the payment of which is paid by households
directly to the firms which produced the goods and services desired by the households.
Investment Expenditure (I): Investment is an addition to capital stock of an economy in a given time
period. This includes investments by firms as well as governments sectors.
Government Expenditure (G): This category includes the value of goods and service purchased by
Government. Government expenditure on pension schemes, scholarships, unemployment allowances etc.
are not included in this as all of them come under transfer payments.
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Net Exports (X-IM): Expenditures on foreign made products (Imports) are expenditure that escapes the
system, and must be subtracted from total expenditures. In turn, goods produced by domestic firms which
are demanded by foreign economies involve expenditure by other economies on our production (Exports),
and are included in total expenditure. The combination of the two gives us Net Exports.
National Income = Consumption (C) + Investment Expenditure (I) + Government Expenditure (G) +
Net Exports (X-IM)
Calculating GDP (National Income) is extremely important as the performance of the economy is fixed
by means of this method. The results would help the country to forecast the economic progress, determine
the demand and supply, understand the buying power of the people, the per capita income, the position
of the economy in the global arena. The Indian GDP is calculated by the expenditure method.
NEW METHODOLOGY FOR CALCULATION OF GDP IN INDIA
Earlier domestic GDP was calculated at factor or basic cost, which took into account prices of products
received by producers.

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The new formula takes into account market prices paid by consumers. It is calculated by adding GDP at
factor price and indirect taxes (minus subsidies). It is in line with international practice and is expected to
better capture the changing structure of the Indian economy.

OR
The government has also changed the base year for estimating GDP from 2004-05 to 2011-12. This has been
done to incorporate the changing structure of the economy, especially rural India.
Data for the new GDP series will now be collected from 5 lakh companies (against 2,500 companies earlier.
SC
Under-represented and informal sectors as well as items such as smartphones and LED television sets will
now be taken into account to calculate the gross domestic product.
The revision in GDP does not alter the size of India's economy ($1.8 trillion) nor will it alter key ratios such
as fiscal deficit, CAD etc. (as percentage of GDP) for 2013-14.
The GDP at the aggregate and sector level has significantly changed. The average share of the industrial
sector has moved up by 5.6 percentage points from 26.1 per cent in the old series to 31.7 per cent under
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the new series, for 2011-12 to 2013-14.

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OTHER CONCEPTS ASSOCIATED WITH

NATIONAL INCOME
A. Per Capita Income
Per Capita Income is obtained by dividing the total number of population from the National Income i.e.
the GDP of a country.
PCI = National Income / Population of country
Earlier Human Development (HDI) was measured on the basis of Per Capita Income (PCI) as PCI helps
to fulfill all basic needs of human. In this context, if the PCI is high the HDI is also high and vice versa.
The above context treats rich and poor on the same ground which brings faulty measurement in HDI.
B. Human Development Index (HDI)

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The Human Development Index (HDI) is a summary measure of average achievement in key dimensions
OR
of human development: a long and healthy life, being knowledgeable and have a decent standard of living.
The HDI is the geometric mean of normalized indices for each of the three dimensions.
It measures the average achievements in a country in three basic dimensions of human development:
1. A long and healthy life
SC

2. Access to knowledge
3. Decent standard of living
The index was developed by Mahbub-ul-Haque along with Amartya Sen which is used by the United
Nations Development Programme (UNDP) in their annual report since 1990. This method was followed
till 2009 and by 2010 new method (20th anniversary edition) is adopted with a slight change in it by
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introducing three new indices viz, Gender Inequality Index, Multi-dimensional Poverty Index and Inequality
adjusted HDI.
Its goal was to place people at the centre of the development process in terms of economic debate, policy
and advocacy. "People are the real wealth of a nation," was the opening line of the first report in 1990.
This report ranks the countries on the basis of the Human Development Index.

C. Green GDP
An index of economic growth with the environmental consequences of that growth factored in. From the
final value of goods and services produced, the cost of ecological degradation is deducted to arrive at
Green GDP.
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Green GDP calculations have been developed for countries as diverse as Australia, Canada, China, Costa
Rica, Indonesia, Mexico, Papua New Guinea, and the US, although none of these efforts have resulted
in regular reporting of the results.
D. Gross National Happiness: 'Happiness matters, not Money'
With many of the world's countries about as unhappy as they can get because of their dwindling GDP
figures, the tiny nation of Bhutan has gone in the opposite direction. Officials in Bhutan came up with
a different indicator, called gross national happiness (GNH).
The country's beloved former king, Jigme Singye Wangchuck, envisaged the concept of gross national
happiness since 1972, and the country adopted it as a formal economic indicator in 2008.
Beginning in November 2008, all the economic factors started measuring gross domestic product analyzed
for their impact on Bhutan's residents' happiness.
The factors of production are still there such as unemployment, agriculture, retail sales but GNH represents
a paradigm shift in what's most valued by Bhutanese society compared to the rest of the world.

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Following parameters are used in the GNH:
1.
2.
3.
Higher real per capita income
Good Governance
Environmental Protection
OR
4. Cultural Promotion
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E. Human Poverty Index (HPI)

It is developed by UN which focuses solely on amount of poverty in a country.
Deprivations in longevity are measured by the probability at birth of not surviving to age 40;
Deprivations in knowledge are measured by the percentage of adults who are illiterate;
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Deprivations in a decent standard of living are measured by two variables:

The percentage of people not having sustainable access to an improved water source and
The percentage of children below the age of five who are underweight.
HPI focuses attention on the most deprived people and deprivations in basic human capabilities in a
country, not on average national achievement.
The human poverty indices focus directly on the number of people living in deprivation presenting a very
different picture from average national achievement. It also moves the focus of poverty debates away from
concern about income poverty alone.
F. Genuine Progress Indicator (GPI)
While GDP is a measure of current income, GPI is designed to measure the sustainability of that income.
GPI uses the same personal consumption data as GDP but makes deduction to account for income
inequality and costs of crime, environmental degradation, and loss of leisure and additions to account for
the services from consumer durables and public infrastructure as well as the benefits of volunteering and
housework.
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By differentiating between economic activity that diminishes both natural and social capital and activity
that enhances such capital, the GPI and its variants are designed to measure sustainable economic welfare
rather than economic activity alone.
Proponents of the GPI see it as a better measure of the sustainability of an economy when compared
to the GDP measure. Since 1995 the GPI indicator has grown in stature and is used in Canada and the
United States.
G. GDP Deflator - (Implicit price deflator for GDP)
It is a measure of the level of prices of all domestically produced final goods and services in an economy
in a year. This is calculated to find the overall rise in the level of price.
GDP Deflator = Nominal GDP/Real GDP 100
GDP deflator is published on a quarterly basis since 1996 with a lag of two months. It is because of this
very reason that economists prefer the use of WPI or CPI for deflating nominal price estimates to derive
real price estimates
Unlike the WPI and the CPI, GDP deflator is not based on a fixed basket of goods and services, it covers

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the whole economy. One of the other advantages of GDP deflator is that changes in consumption patterns
or the introduction of new goods and services are automatically reflected in the deflator, such a feature
OR
is missing in WPI/CPI.
H. Universal Basic Income (UBI)
Also referred to as Guaranteed Income or the Basic Income Guarantee: "A simpler way to ensure that
everyone made enough to survive."
SC

In order to ensure that all citizens can afford to meet their basic needs, the government provides every
citizen with a set amount of money on a regular basis, enough to lift them above the poverty line.
This cash income would be universal and unconditional, meaning that every citizen would receive it no
matter what - no work requirements, no means-testing and no restrictions on how the money is used.
I. Purchasing Power Parity (PPP)
GS

Purchasing Power Parity (PPP) is an economic theory that compares different countries' currencies through a
market "basket of goods" approach. According to this concept, two currencies are in equilibrium or at par
when a market basket of goods (taking into account the exchange rate) is priced the same in both countries.
This is how the relative version of PPP is calculated:

P1
S
P2
"S" represents exchange rate of currency 1 to currency 2
"P1" represents the cost of good "x" in currency 1
"P2" represents the cost of good "x" in currency 2
J. Lorenz Curve
It is the graphical representation of wealth distribution developed by American economist Max Lorenz
in 1905. On the graph, a straight diagonal line represents perfect equality of wealth distribution; the
Lorenz curve lies beneath it, showing the reality of wealth distribution.
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The difference between the straight line and the curved line is the amount of inequality of wealth
distribution, a figure described by the Gini coefficient.

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OR
SC
K. Gini Coefficient
The Gini index is a measurement of the income distribution of a country's residents. This number, which
ranges between 0 and 1 and is based on residents' net income, helps define the gap between the rich and
the poor, with 0 representing perfect equality and 1 representing perfect inequality.
It is typically expressed as a percentage, referred to as the Gini coefficient.
GS
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L. Phillips Curve
It is an economic concept developed by A. W. Phillips showing that inflation and unemployment have a
stable and inverse relationship.
The theory states that with economic growth comes inflation, which in turn should lead to more jobs and
less unemployment.
However, the original concept has been somewhat disproven empirically due to the occurrence of stagflation
in the 1970s, when there were high levels of both inflation and unemployment.

E
OR
SC
GS
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THE ECONOMIC VISION FOR PRECOCIOUS,

2
CLEAVAGED INDIA

Context
With a paradigm shift in Economic model in 1990s, by which India transitioned
from protectionist inward oriented closed economy towards more free liberalized
economy (by facilitating freer trade, easy foreign capital flow, rationalizing
working of PSU and reinventing role of government as a facilitator). A vast and
diverse country, which started poor, was courageous enough to adopt a
democratic government and economic structure and in the course has achieved
spectacular socio-economic development. However the still persisting

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ambivalence towards private sector, inefficient state machinery which fails in
effective redistribution, must embrace the path of reform with a broader social
OR
shift in ideas and vision.

Technical Terms
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A. Trade to GDP ratio: Export plus import expressed as share of GDP. It is a marker of economic
liberty of an economy. The trade to GDP ratio of India significantly improved post 1990's reform.

B. Retrospective tax: A tax levied for transactions in the past (which was either taxed at lower rate or
was tax free owing to exemptions).e.g. Vodafone tax issue. A retrospective tax is considered to be
regressive and anti market as it erodes government's credibility and adds to policy uncertainty.
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C. Twin Balance sheet problem: It refers to the poor economic state of Public sector banks at one hand
(huge Non Performing Assets) and Corporate houses on other (due to low profitability and shortage
of loan).In case of India both these problems are interdependent as a majority share of NPA with
the banks are from the corporates and DISCOMS. This has created a vicious cycle whereby banks
avoid lending corporates and corporates fail to repay their debt owing to lack of capital and profitability.

D. Competitive federalism: It refers to a tendency among states to compete and outperform each other
in attracting more economic investment in their state e.g. newly formed state of Telangana and
Andhra Pradesh rank in the top of the "Ease of doing business" list.

E. Exclusion Error: Deserving candidates do not receive benefits.

F. Inclusion error: Non deserving receive benefits.

G. Leakage: Benefits siphoned off by corruption and inefficiency.

H. Exit issue: The obstacles faced by firms, wanting to wrap up their business. Exit issue in India is one
of the prominent reasons for its poor ranking in ease of doing business.
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Gist of Economic Survey Chapter

Introduction
Economic vision animating Indian policy can be divided into two phases, first socialism and then
'Washington consensus' phase starting after 1991 reforms.
During socialism phase,
The guiding principles were economic nationalism and protectionism.
Public sector occupied the commanding heights and
Government intruded into even the most micro-decisions of private firms: their investing, producing,
and trading.
This framework was rejected after 199 but what replaced it is still not clear. At one level one thinks that
India has replaced its erstwhile socialist vision with something resembling the "Washington Consensus":

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open trade, open capital, and reliance on the private sector. Reforms along these lines have carried by all
governments. In past few years reforms like:



Focus on improving Ease of Doing Business
Passage of GST Bill, Bankruptcy code
OR
Institutionalized a commitment to low inflation in the new monetary policy framework agreement
SC
Economic Transformation in past 25 years
As a result of these steps remarkable economic transformation has been achieved in last 25 years. This
transformation can be measured using four standard measures: openness to trade; openness to foreign
capital; the extent to which public sector enterprises dominate commercial activities; and the share of
government expenditure in overall spending.
A. Openness to trade (measured in Trade to GDP ratio):
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India's ratio has been rising sharply, particularly over the decade to 2012, when it doubled to 53 per
cent (India has Trade to GDP ratio of nearly 15% in 1991, 26% in 2002). As a result, India's ratio
now surpasses China.
India also trades more and has better trade to GDP ratio as compared to similar geographically sized
countries like US, Brazil and Russia. (Small countries trade more with outside world, whereas big
countries trade less with outside world because of large internal market).
B. Openness to foreign capital
Despite significant capital controls, India's net inflows are, in fact, quite normal compared with other
emerging economies. India's FDI has risen sharply over time. In fact, in the most recent year, FDI
is running at an annual rate of $75 billion, which is not far short of the amounts that China was
receiving at the height of its growth boom in the mid-2000s.
C. Size of PSUs:
Going against the popular perception, the share of PSUs in market has been coming down in wake
of liberalization and entry of private players in sectors like telecom, civil aviation, financial services
etc.
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These have all served to reduce the share of the public sector even if there has not been much exit
of the PSU enterprises themselves. In India PSUs sale constitute 17% of national sale whereas they
constitute around 27% in China.
D. Share of government expenditure in overall spending
If we consider government expenditure against per capita of GDP, India spends as much as can be
expected given its level of development.
In sum, the standard measures suggest that India is now a "normal" emerging market, pursuing the
standard Asian development path and has progressed well and has grown at about 4.5 percent per capita
for thirty seven years. This achievement has been remarkable because India has achieved this under a
fully democratic system. The only other countries that have grown as rapidly and been democratic for
a comparable proportion of the boom are Italy, Japan, Israel, and Ireland. Other countries that have grown
faster for as long have tended to be oil exporters, East Asian countries,
The Road To Be Traversed
Despite of these achievements there is a sense that India has not reached a desirable and optimal point,

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which can be explained as:
OR
There has been a hesitancy to embrace the private sector
State capacity has remained weak ,
And, redistribution has been simultaneously extensive and inefficient
A. Ambivalence about private sector and property rights
SC

All states, all societies, have some ambivalence toward the private sector because of conflicting objectives
of social concerns of state and profit maximization of private players. But the ambivalence in India
seems greater than elsewhere as was found in World Value Survey. The symptoms of this ambivalence
toward the private sector manifest in multiple ways, like:
Difficulty to privatize public enterprises even for sectors which belong to private players, for example
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Air India in civil aviation, banking, fertilizer sector.

In agriculture sector the compulsory requirement to sell in authorized markets through certain
middleman under APMC (Agricultural Produce Market Committee) Act also reflects it.
Moreover, policy reform in the sector has been interventionist reflected in restrictions on pricing.
Ambivalence of past towards property rights, is visible in 'retrospective taxation' of present. This is
true in a number of recent cases, including Vodafone and Monsanto.
There is hesitation in taking decision for being seen as favoring the private sector, for example in debt
write-offs by banks.
B. State capacity:
Indian economic model is characterized by the weakness of state capacity, especially in delivering essential
services such as health and education. Indian state capacity has not increased as those of other emerging
countries. The Indian state has low capacity, with high levels of corruption, clientism, rules and red tape.
Though Indian competitive federalism has focused on attracting investment and competitive populism,
it has not focused much on issue of essential service delivery especially in health and education sector,
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except for few exception like PDS reform in Chhattisgarh, Kerosene free derive in Haryana and power
sector reforms in Gujarat. This weak state capacity has created various problems like:
It inhibits effective service delivery
Constrains policy making in certain areas, as state do not want to be seen as favoring particular
interests. It has further created problems like:
Strict adherence to rules that may not necessarily be optimal public policy. For example auctioning
cannot always be the optimal policy for selling all natural resources.
Abundant precaution in bureaucratic decision making because of fear of four Cs, CBI, CVC,
CAG and courts.
C. Inefficient distribution:
Indian state welfare spending suffers from considerable misallocation. This leads to: exclusion errors (the

E
deserving poor not receiving benefits), inclusion errors (the non-poor receiving a large share of benefits)
and leakages (with benefits being siphoned off due to corruption and inefficiency). Some plausible
explanations for it are:

OR
India has followed a unique pathway to economic success, what might be called "Precocious,
Cleavaged India" which explains these anomalies.
Indian economic progress was achieved simultaneous to political progress. Whereas in other countries
like developed economies, economic development preceded political development. Universal franchise
SC
and other political rights put extra demands on low economically developed Indian state, whereas
such demands were not present for authoritarian states or states which benefited from industrialization
of 19th century.
Along with this India was a highly cleavage society, with more cleavages than any other society:
language and scripts, religion, region, caste, gender, and class.
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This along with shining example of USSR created a intellectual zeal for 'socialism' and natural distrust
for private sector (especially because of failure of private sector under colonial rule in India and in other
countries).Under these circumstances India adopted mixed economic model, which resulted into
Strict controls over private sector.
India adopting for redistribution early in the development process, when its state capacity was
particularly weak.
Low investment in human capital - for instance, public spending on health was an unusually low 0.22
per cent of the GDP in 1950-51 - because of low resources.
Inefficient redistribution, using blunt and leaky instruments.
Though interventions began under compulsion, there is only partial explanation for failure to exit. Exit
is difficult everywhere but it can be especially difficult in a poor, cleavaged democracy dominated by
vested interests, weak institutions and an ideology that favors redistribution over investments
Normally states provide essential services (physical security, health, education, infrastructure, etc.) first
before they take on their redistribution role, because unless the middle class in society perceives that it
derives some benefits from the state, it will be unwilling to finance redistribution. Otherwise the middle
class will seek to exit from the state, which is reflected in lower number of taxpayers relative to voting
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Economic Survey (2016-17) 13

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age in India. This exit will further shrink the state, erodes its legitimacy, further reduces resources and
state will enter into a vicious cycle.

Conclusion
India has come a long way in terms of economic performance and reforms. But there is still a journey
ahead to achieve both dynamism and social justice. One tentative conclusion is that completing this
journey will require a further evolution in the underlying economic vision across the political spectrum
which should focus on improving state capacity, trusting private sector and improving redistribution
delivery.
Related questions
1) Which factors inhibit India from achieving its true potential in terms of economic growth? Assess
the requirement of third generation reforms in this regard.
2) Is democracy antithesis to economic development, especially for a poor state with high level of
cleavaged society? Critically examine.

E
3) The Washington Consensus was based on certain principles, which have been found incapable to deal
with crisis situations, as they cripple state capacity. Critically analyze in context of Asian currency
OR
crisis of 1997 and Global recession since 2008.
4) Critically discuss India's approach towards liberalization of economy. Suggest appropriate policy
measures to address the issues faced by India in this regard.
5) It is often argued that "a government should take on to redistribution only after earning legitimacy".
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Do you agree? Substantiate your argument with an example.

6) Discuss, what shall be the key principles for future growth and reforms strategy in wake of 2008
crisis?
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14 Economic Survey (2016-17)

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NATIONAL COMMITTEE ON
TRADE FACILITATION
The Union Cabinet has approved the Trade Facilitation Agreement (TFA) of WTO.
The Trade Facilitation Agreement contains provisions for expediting the movement, release and clearance of
goods, including goods in transit. It also sets out measures for effective cooperation between customs and other
appropriate authorities on trade facilitation and customs compliance issues. It further contains provisions for
technical assistance and capacity building in this area.
In tune to this India will require "legal changes" and that includes inward and outward processing to facilitate
re-import and re-export of goods for repair, reconditioning; and release of goods before payment of duty will

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have to be allowed on a guarantee/surety in all cases of imports where the duty is not determined prior to
or upon arrival, or as rapidly as possible after arrival.

OR
To facilitate both domestic coordination and implementation of the provisions of the Agreement, a National
Committee on Trade Facilitation would be set up under the Joint Chair of Secretary, Department of Revenue
and Secretary, Department of Commerce.
The committee has a three-tier structure with the main national committee as the pivot for monitoring the
implementation of the TFA.
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The composition of the NCTF is inclusive at the national committee level which will comprise of Secretaries
of all key Departments involved in trade issues like Revenue, Commerce, Agriculture, Home, Shipping, Health
etc. It will also have Chairman CBEC, Chairman Railway Board, and Director General Foreign Trade as
Members. Major trade associations like CII, FICCI, and FIEO etc are also its Members. Joint Secretary,
Customs, CBEC will be its Member Secretary. The total membership stands at 24 and the Committee can
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co-opt any representatives from the State Governments on relevant issues. The steering committee will be a
core group having 15 members from various Ministries and trade bodies.
Notes

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INDIA RANKING DIFFERENT INDEXES 2016

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OR
SC
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Notes

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OR
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Other Important Reports

Notes

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GST COUNCIL
As per Article 279A (1) of the amended Constitution, the GST Council has to be constituted by the President
within 60 days of the commencement of Article 279A.
As per Article 279A of the amended Constitution, the GST Council will be a joint forum of the Centre and
the States. This Council shall consist of the following members namely:
a) Union Finance Minister Chairperson
b) The Union Minister of State, in-charge of Revenue of finance Member
c) The Minister In-charge of finance or taxation or any other Minister nominated by each State Government

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Members.
As per Article 279A (4), the Council will make recommendations to the Union and the States on important
OR
issues related to GST, like the goods and services that may be subjected or exempted from GST, model GST
Laws, principles that govern Place of Supply, threshold limits, GST rates including the floor rates with bands,
special rates for raising additional resources during natural calamities/disasters, special provisions for certain
States, etc.
Functioning of GSTC
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Central Government has inter alia, taken the following decisions for smooth functioning of GST Council -
a. Creation of the GST Council Secretariat, with its office at New Delhi;
b. Appointment of the Secretary (Revenue) as the Ex-officio Secretary to the GST Council;
c. Inclusion of the Chairperson, Central Board of Excise and Customs (CBEC), as a permanent invitee
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(non-voting) to all proceedings of the GST Council;

d. Create one post of Additional Secretary to the GST Council in the GST Council Secretariat (at the level
of Additional Secretary to the Government of India), and four posts of Commissioner in the GST
Council Secretariat (at the level of Joint Secretary to the Government of India).
The Cabinet has also decided to provide for adequate funds for meeting the recurring and non recurring
expenses of the GST Council Secretariat, the entire cost for which shall be borne by the Central Government.
The GST Council Secretariat shall be manned by officers taken on deputation from both the Central and State
Governments.
While discharging the functions conferred by this article, the Goods and Services Tax Council shall be guided
by the need for a harmonised structure of goods and services tax and for the development of a harmonised
national market for goods and services. The Goods and Services Tax Council shall determine the procedure
in the performance of its functions.
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