Professional Documents
Culture Documents
MODULE - 3
INDIAN ECONOMY
ECONOMICS OF DEVELOPMENT
nation is not about Economics alone. A nation cannot be run like a department store with the only motive of profit maximization. Economic prosperity encompasses social development which is crucial to the soul of nation
Arindam Chaudhari
ECONOMICS OF DEVELOPMENT
An economy or economic system refers in which the various economic activities relating to production, distribution, exchange and consumption of goods and services are organized in a country and the way in which the people of a country earn their living.
It comprises the factories, firms, mines, shops, banks, schools, offices, transport systems, theatres, hospitals, public administration, defense etc., which help in the production and distribution of goods and services in the country.
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CHARACTERISTICS OF INDIAN ECONOMY Important features of Indian Economy are: Rapid growth of population: Over the 50 years, rate of population Growth was over 2.0 percent per annum This demographic situation is major constraint on the growth of business. Predominance of Agriculture: About 64.9% of the working population depend on agriculture for their livelihood. It is still primitive and is gamble in the monsoons and it is still underdeveloped. Though we have adopted planning for about five Decades we have not achieved much in agriculture.
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Imbalance between population size, resources and capital. Rate of population Growth was over 2.1 percent per annum. the requirement of feeding additional numbers compels the use of resources in low return agriculture rather than higher return manufacturing This demographic situation is major constraint in accumulating capital on the growth of business.
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Growth of population :Economic development and population are inter-connected. History has shown that birth rate only falls significantly when the standard of living rises significantly for the majority of people. Building Human capital: by focusing on education and health thereby increasing the productivity of the economy. Harmonization of the objective of expanding production with that of securing full employment is a logical necessity in India.
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Inequalities of Income and wealth: Various studies and surveys have clearly indicated that even the small gains of development over the years have not been equitably distributed.
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Economic development implies the process of securing levels of productivity in all sectors of economy.
Capital Formation Capital output Ration Curb the Growth of population Create Human capital
Capital formation to the full extent by domestic savings is of crucial importance in the process of economic Development. It is quite necessary to step up the rate of capital formation that the community accumulates a large stock of machine tools and equipment which can be geared into production. Technological framework implicit high rate of capital formation.
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Capital output Ratio: refers to the number of units of capital that are required in order to produce one unit of output .
In certain sectors of the economy out put can be increased with comparatively small additions to capital. For instance, in Japan between 1885 and 1915 labour productivity in agriculture was doubled by a comparatively small quantum of investment in the form of better seeds, improvement in water supply, control of crop diseases and the use of fertilizers.
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INDIA AS A DEVELOPING ECONOMY Strategy and planning in India In 1951 economic planning was adopted as an instrument of development. Over the past 6 decades the country has completed 10th five year plans. National income has increased & also considerable improvement has taken in the various sectors.
An Approach to the 11th Five Year Plan (2007-2012) towards developing economy
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India started marching towards economic progress India as a developing country . During past 60 years, the country has made Progress in Agriculture, Industry, science & technology, health & education and various other fields.
1850-1950 Indian economy was stagnant for 100 years, but now the economy is progressing also with the recent LPG of Indian economy.
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Agricultural sector - reached the stage of development and maturity. Share of agriculture in NI taken as an indicator of economic development. Continuous increase in agricultural production and productivity in India.. Total production of food grains has increased 1950 -51 50.8 million tones During seventh plan 187 million tones Eighth plan 209.8 million tonnes Considerable improvement in non food grains like oilseeds reached a recorded level of 24.7 million tonnes . During mid 1960s Green revolution due to the adoption of New agricultural strategy. 23
Basic industries like iron and steel, heavy engineering and machine building industry registered significant increase in their growth.
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sectors
Primary
1970-71
45.8%
1980-81
39.6% 24.4% 40%
2003-04
24.0% 25% 51.4%
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Year
2003-04
2004-05
2005-06
2006-07
Industry
Mfrg. Services
7.0
7.4 8.5
8.4
9.2 9.6
8.3
9.1 9.8
10.6
11.5 11.2
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INFLATION
Inflation refers to a situation when there is a general rise in prices and a corresponding fall in value of money.
Inflation occurs when the volume of money in circulation increases faster than the volume of goods and services.
Prof. Coulbourn defines inflation as too much of money chasing too few goods. Modern definition by Crowther Inflation is a state in which the value of money is falling, i.e prices are rising. Inflation is usually associated with rising activity and employment. Inflation - excess purchasing power in the hands of the people. 30
TYPES OF INFLATION
Creeping inflation Price Rise by 2% -PA not controlled in time prove disastrous economic & political stability of the economy
Walking inflation mild & tolerable > 10% PA moderate stable inflation- people expectations remain more or less stable. Running inflation rises rapidly < 10% ranges 10-20%-exceeds Galloping inflation. Causes economic distortions and disturbances in the economy. Hyper inflation: 1000% PA . Low purchasing power, real wages fall and inequalities increases serious distortions overall economic condition.
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CAUSES OF INFLATION
The basic cause of inflation normally occurs, when aggregate demand for output tends to be excessive in relative to the supply of output.
1.CHANGES IN MONEY SUPPLY
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CAUSES OF INFLATION
1. Changes in money supply: (a) Deficit financing (b) Expansion of credit (c ) Increase in Govt Expenditure on large development project.
2. Disposable income: due to fall in the level of taxation, increase in national income, a fall in the savings ratio, rise in the income corresponding rise in savings.
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CAUSES OF INFLATION
3. Changes in Business and Consumer Expenditure : consumer spends more on goods & services the demand also increase business activity. Higher purchase & installment schemes. 4. Foreign demand: inflation may also be caused due to changes in supply of goods and services, when it does not keep pace with the increased demand for goods and service
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CAUSES OF INFLATION
Inflation may occur due to the following different causes:
Increase in the money circulation Increase in the disposable income Increase in community's aggregarate spending on consumption & investment or in goods. Excessive speculation and the tendency to hoarding & profiteering Increase in population as the widening gap between demand & supply. Drought, famine, earthquake , storm, volcano eruption and other natural calaminities adversely affecting agricultural production and output of other industries. Prolonged industrial unrest industry or industries, nationwide truck strike that would cause stagnation of goods that 35 would not ensure the match in demand and supply)
EFFECTS OF INFLATION
Effect on Production & Employment: motivates Cos to expand its production normally leads to generation of Employment opportunities. Effect on Distribution of national income Effect on producers Effect on wage and salary earners Effect on fixed income groups Effect on debtors (gain)and creditors suffer badly) Effect on farmers-benefit due to increase in prices of crops
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CONTROL ON INFLATION
1. DIRECT MEASURES control on prices and rationing of scarce goods. Ceiling on certain goods and should not allow to it to rise further. 2. FISCAL MEASURES: deployed to check inflationary pressures. An increase in Govts revenue and decrease in its expenditure can successfully check inflationary pressures. in the economy
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CONTROL ON INFLATION
3. MONETARY MEASURES: RBI Open market operations, & Bank rate
policy. . 4. WAGE CONTROL : money wage rate rises faster than the productivity of labor. However wage controls difficult to implement. 5. PRICE CONTROL: fixation of maximum prices at which commodities are to be sold. 6. OTHER MEASURES: diverting funds only towards production of necessary commodities, instead of luxury items. Exports can be increased and imports restrictions can be relaxed. Govt. try to restrict the growth rate of population increase production levels in the economy
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PRICE INDICES
The numerical value that summarizes price level is called price indices. The purpose Of PI helps in explaining the purchasing power or inflation/Deflation from one period to another.
Types of Price Indices: 1. Wholesale price Index (WPI) 2. Consumer Price Index (CPI)
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PRICE INDICES
1. Wholesale price Index (WPI): It is an indication of price movements in all wholesale markets other than the retail market. It is worked out for a whole country or for a very large area. Here the prices are collected from the wholesale dealers.
Consumer Price Index (CPI)-PI with special reference to a class or category for whom it is meant.
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Relationship between Price Indices & Inflation Inflation is estimated through Price Indices. Earlier it was estimated in terms of wholesale price. However from the point of view of consumers, retail prices are far more relevant and thus today inflation is measures in terms of CPI.
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BUSINESS CYCLE
A business cycle can be defined as wavelike fluctuations of business activity characterized by recurring phases of expansion and contraction in periods varying from three to four years.
Fluctuation rather than stability is the rule in every business record.
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Characteristic features of a depression are the reverse of prosperity Shrinkage in the volume of output, trade and transactions Rise in the level of unemployment Price deflation Fall in aggregate income of the community Fall in the structure of interest rates. Contraction of bank credit
Prosperity - economic activity will be at its peak Depression economic activity is at its trough.
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Improvement in demand for capital goods, new investment will be induced, such investment will cause rise in employment and income. Increased income in turn will lead to rise in consumption pushup demand rise in prices, profits further investment.
Thus during recovery, expansionary process will be self reinforcing. Revival or recovery phase slowly turns into prosperity and the cycle repeats itself.
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Gross Domestic Product Fixed Investment Net exports Unemployment rate Real earnings CPI
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Leading: are those indicators due to operation of which, changes in Business cycle happens. Change in leading indicators bring immediate change in the business cycle. E.g. The consumer confidence Index, Industrial new order, personnel consumption of Mfg. goods etc., Coincidental : are those indicators wherein the changes in indicators simultaneously bring changes in the business cycle : e.g. GDP Lagging: are those indicators wherein there is a time lag between indicators change and Business cycle change e.g. Unemployment as it increases after trough of the business & bottom after peak of the business cycle.
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