Economics notes for ias

Important Topics

Basic Economic Indicators: (Statistical Data)

- National Income
- Production
- Price Index
- Foreign Trade
- Population
Features of Indian Economy
- Division of Economic activities
- Unemployment - Types
- Poverty - HDR - Measures to eliminate poverty
Population
- Population growth
- Population policy 2000
- Census - 2001
- Consumption Pattern - Energy Consumption - Sources of energy - various programmes
National Income
- Methods of National Income calculation
- Concepts of National Income
Agriculture
- Importance
- Crops and seasons
- Agricultural Credit agencies. NABARD, RRB. Etc.,
- Kisan Credit Schemes
- Land Reforms
- Agricultural Insurance, NAIS, Seed Crop Insurance
- Green, Yellow, White, Blue revolutions
- Irrigation projects - Drip irrigation
- Development measures
Industry
- Industrial Policies - 1948,1956,1991 - Initiatives taken
- Small Scale Industries
- Various key industries
- Various Committees and their recommendations
- Industrial sickness
- Dis investment - PSE Policy
- Industrial Finance
Money and Banking
- Aspects of money market
- Credit Control - Various Rates
- Commercial Banks, Co-operatives, NBFC.
- Committees and recommendations
- SEBI - Stock market developments
- Insurance Industry
- New Banking Sector reforms
- Inflation, Deflation
- Money supply measures
Foreign Trade
- Composition and direction
- Exim policy and other Acts
- Foreign Trade improvement measures taken
- WTO
- BOP

International Organisation
Development and employment Programmes
Planning
- Planning Commission
- Five Year Plans and imported features
Public Finance
- Finance Commission
- Various formulas for Plan assistance to states
- Taxation - Reforms
- Public spending and Debt.
- Deficit financing

Distribution of Questions

1. Indian Economy – majority of questions are asked from this area; there are usually
about 40-45 questions per year from this section.
2. Statistics- there are about 7- 10 questions every year.
3. Growth and Development - about 10 questions.
4. Micro and Macro Economics - about 35 – 40 questions every year.
5. International Economics - about 15-20 questions every year.
6. Money, Banking & Public Finance – about 10 –15 questions every year.

Reference / Sources
1. Indian Economy - Any one good book on Indian economy, it can either be Mishra-Puri
or Dutt-Sundaram. Pratiyogita Darpan special issue on economics,economic survey and
budget from news paper.
2. Statistics – class 11’th NCERT book is more than sufficient.
3. Growth andDevelopment- M L Jhingan and NCERT book of class 11’th.
4. International Economics - book by H.G.Mannur or Salvatoire.
5. Money, Banking & Public Finance - S.B.Gupta & Pratiyogita Darpan (Special issue)
for banking and H.L.Bhatia for Public Finance.
6. Micro Economics - NCERT & Koutsoyyiannis or Ahuja.
7. Macro Economics – NCERT & JHINGAN.
8. Solved 10 years paper and any one practise book(eg.IIMS Question bank) of any
publication.

Strategy
1. More emphasis should be on NCERT BOOKS .Do it properly and don’t underestimate
them because many questions are asked directly from them only.
2. Practise and revise diagrams regularly.
3. Concentrate mainly on Micro, Macro & Indian Economy because majority of questions
are asked from these areas.
4. Solve all the statistics questions from previous year papers.
5. Do read economic survey properly and pay special attention to the boxes of survey.
6. It is not necessary to cram all data and figures just memorize only important and
relevant ones.
7. Solve previous year papers and practise book(eg.IIMS Question bank) regularly

ECONOMIC GROWTH AND DEVELOPMENT

Introduction

Economies grow and develop, they expand and advance, and they progress and prosper.
There are phases when they decline too, and there are economies that experience
continuous decay. If one considers long stretches of human history, one knows that
economies (civilizations) disappeared altogether. We will not take into account such long
stretches of time. We shall not consider too distant a past either. We will leave them to
historians, may be, economic historians.
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Let us take a normal view. We shall then accept decline as an occasional, temporary
phenomenon. We shall, therefore, use positive terms only. Of the positive terms, which
have been used to describe changes as well as to prescribe changes, two have survived.
They are growth and development. Because we shall primarily look at nations and
countries as economies, and use terms such as ‘economic growth’ and ‘economic
development’. We shall often try to distinguish ‘economic’ from ‘noneconomic’ though
there are cases where it becomes difficult to do so.

In order to accommodate decline in level, we use phrase ‘negative growth’ and to

describe perverse tendencies, we may use words ‘de-development’ or ‘maldevelopment’
though, we will not have occasions to use them.

You may find that, sometimes in many scientific treatises and very often in colloquy,
words ‘growth’ and ‘development’ are used in interchangeable fashion. But, normally a
distinction is made between the two, particularly in economics literature. It is maintained
along the following lines. You might have noticed that the word ‘growth’ is used to
describe increase in stature or size. It is used to describe a uni-dimensional change, as in
the case of stature of a child or a uniform expansion in all directions, as in the case of size
of a balloon. Even when we refer to development of a child, we refer to various
dimensions of its personality. When we do not refer to dimensional aspects we use the
word ‘growth’. Even schools and institutes, colleges and universities, hotels and hospitals
grow. But, we are often quick to point out certain features that are not captured by word
‘growth’. It is rare, if ever, that growth takes place without development or development
takes place without growth. In most cases, they would accompany each other. There may
be cases when one is dominant and the other is dormant. In such cases, people talk of
growth without development or development without growth. It is, therefore, good to
make an analytical distinction between the two.

Economic Growth

Let us take here a comprehensive view of the economy, taking all activities together, and
call its growth as economic growth.

Let us look at it from the view point of production. The total quantum of goods and
services produced in an economy in a given year is referred to as Gross Domestic
Product. Let us measure it at factor cost and write it in its abbreviated form GDPFC. The
GDPFC in 2000-01 was around Rs 17,00,000 crore. This is a flow of goods and services
produced during the year 2000-01, measured in value terms. We may be interested in
knowing whether the flow this year is larger than the flow last year. If so, we should
know the measure of the flow last year. In order to see that we measure the ‘real’ change
in flow, we should compute the magnitude of flows in both the years in the same prices.
The prices may belong to 2000-01 or 1999-2000 or to 1993-94; the point is that the prices
should relate to only one common year so that we measure only the change in flow of
output, not a mix of change in output and change in prices. Such GDPs are said to be
measured at constant prices. Suppose you look into a recent issue of the National
Accounts Statistics published by the Central Statistical Organisation and find that at
1993-94 prices, the GDPFC for 1999-2000 and 2000-01 are Rs.10,00,000 crore and
Rs.10,60,000 crore respectively. The growth in flow called GDPFC in absolute terms is
Rs.60,000 crore. In relative terms it is 6 per cent and it is called growth rate. If we
prepare a whole series for 10, 20 or 50 years then we often add words ‘per annum’ or ‘per
year’ to growth rate. The growth rate is often expressed in terms of per cent per annum.
This is a positive change; there could be a negative change also.

Suppose, we look at a twenty-year period and use yearly figures for flow of output of
goods, which is measured in terms of GDPFC at constant prices. The growth rates
calculated on yearly basis would differ from year to year. Shall we use nineteen year-to-
year figures of growth rate, some of which may be negative, to describe the change? Or,
should we just compare the initial figure with the final figure? If we adopt the former,
how to summarise the nineteen figures? If we adopt the latter, it is possible that one of
these (initial or final) figures is just ‘abnormal’ as it does not fall in line. Would it not be
a good idea to speak of general tendency and ignore abnormal fluctuations around the
general tendency of increase? Economic growth should, therefore, be taken as a long-
term tendency reflected by increase in flow of final goods and services produced by the
economy.

If there is a general tendency of growth but there are occurrences of decline, the rates of
growth will be negative in certain years. Shall we then say that, while the potential of
economy to produce is continuously increasing, the potential is sometimes not realised?
There could be various reasons for occasional decline. In economies that depend to a
large extent on external trade conditions in other countries may affect the realisation.
Monsoon may widely fail in certain years and economy may get derailed for a while.
Internal demand may for a variety of reasons fail to make full use of the potential. Some
economists put too much emphasis on supply potential and ignore demand conditions.
They define economic growth as long-term increase in production potential of the
economy. Some economists feel that it is growth of per capita GDPFC, not GDPFC, that
should be used to gauge the growth of an economy. But the point to be noted is that
economic growth is a long-term phenomenon about the change in total economic activity
of an economy.

Indicators of Development

Introduction

You may recall that we have defined economic development as a process but also
referred to it as a level.
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In this subunit, our attention would be focussed on the level of development achieved at a
given point of time (given year). In fact, in this conception, you may note that growth is a
quantitative change between two levels of development or levels of development at two
points of time. Growth is basically an inter-temporal comparison. For comparison
between two economies, which we often resort to, there exists no such term. But such a
comparison is often made. Most people would agree that development is a process and
the process is multi-dimensional. When any process is conceived as multi-dimensional, it
becomes difficult to adequately capture its character through any index. However, some
attempts have been made to measure the level. We shall discuss four alternatives to
measure the level of development: Per Capita Income, Physical Quality of Life Index,
Human Development Index and Quality of Life Index.

Per Capita Income

Gross domestic product is supposed to measure the level of output produced by the
economy during an accounting period. However, the command of people over goods is
somewhat different than GDP. We have our property outside our own national economy
and some of our nationals work in other countries. As a result, we earn wage income or
property income outside the country. Similarly, foreigners have property in our economy
and some foreigners do work here. Adjusting for these incomes, we get gross national
product (GNP). In the case of large countries and countries having little interaction with
other countries for factors of production, GDP and GNP are not very different. But, there
are economies where GNP and GDP are quite different. In our case, GNP is somewhat
less than GDP. It may be noted that GNP better represents the entitlement of the nationals
of a country (individuals and their collectivities) while GDP actually shows the output of
the activities carried out within the economic boundaries of the country.

Still further, we should take account of consumption of fixed capital in the process of
production. We should ensure that the capital stock is kept intact during the year;
otherwise, we shall, one day, eat away the whole of our fixed capital. So, we should
subtract that amount of capital, which we think has been consumed in the process of
production. Then, what we shall get is known as Net National Product (NNP). Net
national product is also known as the national income. We shall use a particular version
of net national product known as net national product at factor cost and designate as
NNPFC.

Now, if we want to compare the welfare of people at two points of time or of two
economies at the same point of time, it becomes necessary to find out the size of
population. From the view point of welfare or well-being of the people, for which
development is pursued, it is suggested that the NNPFC, valued at constant prices, should
be divided by the size of the population. NNPFC divided by population is popularly
known as per capita income. It helps us to compare the level of development of the
country in 2001 when we are 100 crore with that in 1961 when we were 43 crore only. In
order to render international comparisons meaningful, national incomes should be
divided by sizes of their respective populations. Otherwise a country like Canada, which
by all standards, is considered a rich country, could be found to be poorer than India. The
population of India may be 30 times that of Canada.

Such a division (deflation/normalisation) is needed even to assess the progress over time.
For example, our NNPFC has grown a little more than eight fold over the last fifty years
but the population has also almost trebled during this period. As a result, per capita
income has grown less than three times. Our living conditions can be expected to have
become better by a factor of three rather than by a factor eight.

With this in view, per capita national income has come to be increasingly used. In short,
it helps us to compare the development of India with that of the USA or with that of
Pakistan for any given year as also our own development over time. We may further note
that it is this indicator, which is often used to categorise countries as developed/
underdeveloped countries or high/ middle/low income countries. In the case of
international comparison, per capita incomes of different countries have to be brought to
a common currency.

However, it is very often pointed out that its scope is quite limited. Most of the
limitations arise from the numerator whatever it may be, namely, GDP, GNP or NNP.
These concepts do not account for the economic activities performed inside the
household, which are non-marketed. Bulk of women’s household work gets ignored,
while it is equally important from the point of view of well-being and welfare of people.
It does not adequately capture activities performed even outside household. As
production is valued in terms of market prices, activities for which there does not exist
market do not adequately get accounted for. It is also pointed out that economic welfare,
which it can measure, even though imperfectly, is not the total welfare that the people
look for.

Growth and Structural Change in the Indian Economy

Introduction

In this chapter you will study the growth of and structural change in the Indian economy
in the last fifty years since 1950-51 for which data on most of the macro aggregates are
available on an annual basis.
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We shall concentrate on the growth of gross domestic product at factor cost valued at
1993-94 prices. We shall consider the growth of per capita national income, also valued
at 1993-94 prices, which can be taken as the simplest indicator of the level of living or
development.

In an earlier chapter, one of the notions of development was posed in terms of structural
change along with growth. What do we mean by structure? Most people mean by it
production structure, that is, composition of output produced by the economy. Some
would like to find out how and where our labour is absorbed. Other factors such as land
and capital are not given equal importance. Some would also like to find out how the
production of output is divided between rural and urban areas of the country or between
public and private sectors of the economy or between organised and unorganised sectors.
We shall discuss all of them. But we can appreciate developments since Independence
better once we have a little hint about the scene on the eve of Independence.

Economy on the eve of Independence

We had inherited an economy, which was basically geared to the interest of our colonial
masters. The rate of growth of per capita income during the hundredyear period before
Independence, from whatever scanty information is available, was just 0.5 per cent per
annum. It has further been noted that there were long spells when the economy actually
stagnated or declined.

In the past, we were known for producing fine cotton fabric, handicrafts and other
merchandise. Even during the early British Raj, that is, before the onset of industrial
revolution in Britain, our economy was an industrial economy by the standards of those
days whereas the European economies had yet to usher in modern civilisation. Yet, by the
time we got Independence, our economy was primarily reduced to an agricultural
economy and we used to export mainly raw materials and minerals for the British
industries and even foodgrains while we might have been hungry ourselves.

In 1950-51, our per capita income was no more than Rs 3,700 at 1993-94 prices (while in
1999-2000, it is a little more than Rs 10,000). The contribution of agriculture sector
(including animal husbandry and livestock) to the GDP was around 54 per cent by current
prices and 50 per cent by constant prices of 1993- 94. If we include forestry and logging
and fishing in this sector, then the contribution turns out to be 57-58 per cent. And, if we
add mining and quarrying and call the combined sector as primary sector, the
contribution of primary sector is found to be about 60 per cent. Manufacturing
contributed only around 10 per cent. Contribution of the service sector was thus around
30 per cent. Most of the people were engaged in agriculture—as cultivators on their own
tiny holdings or as wage labourers on others’ fields.

Growth of GDP since 1950-51

Growth of an economy is reckoned with growth in its GDP at constant prices. We have
now a complete series of gross domestic product at 1993-94 prices from 1950-51
onwards but we give here the GDP series at five yearly interval (see above table).
However, in order to give you a feel about the general tendency of rise and occasional
decline in a few years in comparison to their respective preceding years, we give here a
graphical presentation of the whole series. We notice from the graph that there were
occasional drops in the GDP which we do not notice in the abridged Table presented
here. But, generally it has been rising. Over the period of last fifty years, it has increased
more than eight times. But we are and should be more interested to know whether growth
rate itself has risen over time.

We can also calculate rates of growth for different plan-periods or different decades or
for periods divided by significant events. All such breakups have been used by scholars.
We shall calculate growth rate per annum by decades only. We shall use two popular
methods of calculation of annual rate of growth for long periods, viz. average annual
growth and compound annual growth rate.

Economics Basics: Production Possibility Frontier,

Growth, Opportunity Cost and Trade

Production Possibility Frontier (PPF)

Under the field of macroeconomics, the production possibility frontier (PPF) represents
the point at which an economy is most efficiently producing its goods and services and,
therefore, allocating its resources in the best way possible.
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If the economy is not producing the quantities indicated by the PPF, resources are being
managed inefficiently and the production of society will dwindle. The production
possibility frontier shows there are limits to production, so an economy, to achieve
efficiency, must decide what combination of goods and services can be produced.

Let's turn to the chart below. Imagine an economy that can produce only wine and cotton.
According to the PPF, points A, B and C - all appearing on the curve - represent the most
efficient use of resources by the economy. Point X represents an inefficient use of
resources, while point Y represents the goals that the economy cannot attain with its
present levels of resources.
As we can see, in order for this economy to produce more wine, it must give up some
of the resources it uses to produce cotton (point A). If the economy starts producing more
cotton (represented by points B and C), it would have to divert resources from making
wine and, consequently, it will produce less wine than it is producing at point A. As the
chart shows, by moving production from point A to B, the economy must decrease wine
production by a small amount in comparison to the increase in cotton output. However, if
the economy moves from point B to C, wine output will be significantly reduced while
the increase in cotton will be quite small. Keep in mind that A, B, and C all represent the
most efficient allocation of resources for the economy; the nation must decide how to
achieve the PPF and which combination to use. If more wine is in demand, the cost of
increasing its output is proportional to the cost of decreasing cotton production.

Point X means that the country's resources are not being used efficiently or, more
specifically, that the country is not producing enough cotton or wine given the potential
of its resources. Point Y, as we mentioned above, represents an output level that is
currently unreachable by this economy. However, if there was a change in technology
while the level of land, labor and capital remained the same, the time required to pick
cotton and grapes would be reduced. Output would increase, and the PPF would be
pushed outwards. A new curve, on which Y would appear, would represent the new
efficient allocation of resources.
When the PPF shifts outwards, we know there is growth in an economy. Alternatively,
when the PPF shifts inwards it indicates that the economy is shrinking as a result of a
decline in its most efficient allocation of resources and optimal production capability. A
shrinking economy could be a result of a decrease in supplies or a deficiency in
technology.

An economy can be producing on the PPF curve only in theory. In reality, economies
constantly struggle to reach an optimal production capacity. And because scarcity forces
an economy to forgo one choice for another, the slope of the PPF will always be
negative; if production of product A increases then production of product B will have to
decrease accordingly.