MEC - 005

2014 - 2015
Section-A
Q.1. Distinguish between "economic growth" and "economic development". How is economic
development a better measure of economic welfare?
Ans- Economic growth has been defined as "an increase in real terms of the output of goods and
services that is sustained over a long period of time, measured in terms of value added."
The concept of economic development emphasises the achievement of the following three objectives:
1) To increase the availability and widen the distribution of basic life sustaining goods such as food,
shelter and protection. This, however, would be possible with a fast increase in real per capita
income.
2) To raise levels of living including, in addition to higher incomes, the provision of more goods,
better education and greater attention to cultural and humanistic values, all of which will serve not
only to enhance material well-being but also to generate individual and national self-esteem.
3) To expand the range of economic and social choice to individuals and nations by freeing them
from servitude and dependence not only in relation to other people and nation-states, but also to the
forces of ignorance and human misery. Economic development is to be assessed ultimately by the
enhancement of the "positive freedom". In view of the above three objectives, the quality of life is
regarded as an important index of development. Several factors are involved in the measurement of
such quality'; such as education and literacy rates, life expectancy, the level of nutrition,
consumption of energy per head, etc. Some of these factors are non-monetary', while others can be
measured as monetary'. There is a need to set up a synthetic index of these different factors to
measure economic development and the quality of life. Some attempts, undoubtedly, have been made
in this direction. We will refer, at least, to two most important among these, viz., (1) Human
Development Index, and (2) Economic Development Index.
Human Development Index
Human Development Index (HDI) is being prepared annually by the United Nations Development
Programme. Human development has been defined as a process of enlarging people's choices. In
principle, these choices can be infinite and change over time. But at all levels of development the
three essential ones are for people to lead a long and healthy life, to acquire knowledge and to have
access to resources needed for decent standard of living. If these choices are not available, many
other opportunities remain inaccessible.
Computation of HDI
The HDI is based on three indicators: (i) longevity, as measured by life expectancy at birth; (ii)
educational attainment, as measured by a combination of adult literacy (two-thirds weight) and
combined primary, secondary and tertiary enrolment ratios (one-third weight); and (iii) standard of
living, as measured by real GDP per capita (PPP$).
For the construction of the index, fixed minimum and maximum values have been established for
each of these indicators:
" Life expectancy at birth: 25 years and 85 years
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i) Improved Transparency: Investors can see with their own eyes the prices that are currently being
quoted in the market, and choose to trade or not.
ii) The electronic trading platform makes trading completely anonymous. Traditionally, lack of
anonymity in trading in the floor-based system gave rise to cartels (of brokers) and made price
manipulation easy. NSE was a break from this tradition as well and removed much of the scope for
price manipulation.
iii) NSE throws open the business of stock broking to all and everyone (subject to fulfillment of
certain criteria). In contrast, BSE restricted new entry into the brokerage business until NSE came
into picture. More than a thousand brokers entered the market with the NSE leading to steep increase
in competition and the consequent fall in the brokerages by a very substantial amount. This led to a
drastic fall in transaction costs.
iv) Automation of the trading system eliminated all the problems associated with manual trading (e.g.
, bad delivery) and allowed NSE to set a high standard of operational efficiency.
v) Investors from all over the country have got access to an exchange on same terms and conditions
as investors within Mumbai for the first time. Earlier, Bombay stock exchange was the pre-dominant
one in the country, but investors outside the city found it extremely difficult and costly to do
business in the exchange. Thus, true to its name, NSE turned out to be the first national stock
exchange. This benefited the investors from outside Mumbai more than perhaps the investors within
the city.
Institution-building from the late 1993 onwards - the Securities and Exchanges Board of India (SEBI)
(although it was set up in 1988, it was given statutory status in 1992, and started to function
effectively in 1993). The National Stock Exchange (NSE) with its wide network across the country
has become the premier stock exchange in the country. The National Securities Clearing Corporation
(NSCC) and the National Securities Depository Limited (NSDL) are other securities market
institutions.
SEBI has gradually adopted many important roles in the area of policy formulation, regulation,
enforcement and market development. Although the stock exchanges were legally under the control
of the Ministry of Finance, they practically functioned like brokers' clubs in an independent and
unaccountable manner. They were brought under regulation for the first time under the regulatory
purview of SEBI. NSE was a new exchange promoted and owned by public sector financial
institutions (like IDBI, UTI, LIC, GIC, IFCI, etc.) and banks. Establishment of NSE as a
professionally-managed (as opposed to the other exchanges that are managed by brokers or members
still today) marked a radical break with the past. However, the counter-party risk is now borne
entirely by NSCCL. To protect itself from the counter-party risk, NSCCL has adopted a two-pronged
strategy. First, it has reduced the possibility of default itself through a variety of means. NSCCL has
an uninterrupted track record of implementing every settlement on time since inception. It marks an
important milestone in the institutional development of India's financial system.

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" Adult literacy: 0% and 100%

" Combined gross enrolment ratio: 0% and 100%
" Real GDP per capita (PPP$): $100 and $40,000 (PPP$)
For any component of the HDI, individual indices can be computed according to the general formula:

The HDI is a simple average of the life expectancy index, educational attainment index and adjusted
real GDP per capita (PPP$) index, and so is derived by dividing the sum of these three indices by 3.
The Human Development Report, 2004 presented HDI values for 177 countries arranged in a
descending order of the value of HDI. India ranked 127 in this group.
Economic Development Index (EDI)
New Delhi based National Council of Applied Economic Research (NCAER) has developed a new
measure, called EDI. The EDI develops further on the HDI. EDI is based on three components: (i)
the health attainment index, (ii) the education attainment index, and (iii) per capita GDP.
i) The health attainment index is a function of the infant mortality rate, the total fertility rate and
crude birth rate.
ii) The education attainment index is an equal weighted index of gross enrolment in middle or upper
primary schools and total university enrolment in graduate courses. EDI has been estimated for India
for different periods. The results are summarised in Table below.
Table: Average Annual Growth Rate (%)

NCAER's findings are not a one-time affair. The model can analyse policy changes in Government
expenditure on health and education and changes in public investment and tax rates on macro-economic
variables like output, prices and the current account balance as well as on human development.
Q.2. What are the constituents of financial system? Critically evaluate the impact of reforms
introduced in the equity and foreign exchange market.
OR

Give an account of major changes that have taken place in Indian economy over the last six
decades. What are the implications of expansion in the services sector for employment and
poverty?
Ans - Comparison with Our Targets
An important test to evaluate our performance is in terms of a comparison with the targets of growth
rates fixed in our different plans. It must be remembered that ours is a planned economy in which all
targets of growth are fixed after making "an assessment of the material, capital and human resources
of the country." If the actual achievements fall short of the targets, it would mean that our
performance has been less than satisfactory. Let us have a look at the data in Table 2.5.

It would be seen from Table 2.5 that the rate of increase in national income had always been very
slow, much less than what we had targeted for. It is only in the Fifth Five Year Plan and subsequent
plans that the rate of growth picked up, and moved ahead of the targets. In any case, growth targets
decided upon have been rather conservative and on lower side.
Comparison with Our Needs
We can further test our performance by juxtaposing it with our requirements. Admittedly, it is very
difficult to determine needed' rate of growth which would involve several non-economic, social and
psychological variables such as people's hopes, desires and rising expectations. Some estimates
nevertheless, have been made to determine needed rate of growth to meet specific commitments. For
example, using estimates on such variables as the labour force growth, employment potential
actually realized and the employment-investment-ratio, Subramaniam Swami estimated that ensuring
full employment within 10 years would require a 10 per cent annual rate of growth. A similar rate of
growth in investment income will be required to "guarantee acceptable minimum level of
consumption within the foreseeable future".
An alternative simple way is to find if the increase in national income has made any dent on poverty
that we inherited from the Britishers in 1947. We know poverty in India is still widespread.
According to a recent estimate made by the Planning Commission using norms of calorie
consumption, the percentage of population below the poverty line in 1999-2000 may be projected at
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27.09 per cent in rural areas and 23.62 per cent in urban areas; although the exact estimates are
debatable, there can be no doubt of the order or magnitude of the problem of poverty.
Comparison with Other Countries
The basic purpose of this type of comparison is that: (i) it helps us to know the potentials of growth
that can be built up in an economy, and (ii) it helps us in a more meaningful evaluation of our
performance. For this purpose, we make use of the comparable data prepared by the World Bank as
given in Table 2.6.

Two observations as follows can be made from Table 2.6:

1) The growth rate in India has been among the lowest in the group of fast developing countries
included here.
2) An encouraging feature is that whereas in other countries, the growth rates tended to slow down
during the 1980s and the 1990s as compared to that during the 1970s, the growth rate in India, as in
neighbouring Pakistan and China, accelerated during the period.
Jagdish Bhagwati rightly puts it as: "It is now clear that India's economic performance, while a
definite improvement over that in the pre-independence period, is less than satisfactory when one
takes the capitalistic' index of growth rates or the socialist' indices of eradication of poverty and
reduction of income inequality."
The expansion of the services sector has wider implications for population, employment, and trade
prospects of the economy, some of which are as follows:
1) The growing share of the services sector points to the need for policy initiatives towards
introducing greater competition and efficiency in this sector so as to ensure its sustained contribution
to exports (especially software) and to higher long-term growth.
2) The gains in productivity in the agricultural and industrial sectors resulting from technological
progress and innovation will have the effect of shifting employment away from the non-service
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sector to the services sector. This may also indicate a shift in real expenditures from commodities to
value added services.
3) The services sector constitutes a tax-base with vast but unexploited potential, and, therefore, its
growth has long-term implications for the fiscal policy.
Section-B
Q.3. "More people mean more resources". Comment on the above statement.
Ans- Engagement of a person in any economic activity is central to the concept of identifying a
worker. A worker is one who participates in any economic activity. His or her human capital
endowment is utilised by the society (or the economy) and in the process, he or she earns a living.
All workers constitute the workforce or the employed.
Those who are not workers are called non-workers. Some among the non-workers may be seeking or
looking for work or are available for work. Such persons constitute the unemployed. The workforce
and the unemployed together make up the labour force. The entire population of any area, region or
country is, thus, made up of three components; the workforce (the employed), the unemployed and
the non-workers. The third component is also referred to, for obvious reasons, as the population
which is not a part of the labour force. The first is engaged in economic activity and produces the
national product, the second is available for being engaged in such activity but the economy is
unable to utilise it and the third is not available for utilization in economic activity. Schematically,
workforce can be illustrated as follows:
Let us discuss about the sources of data in India on workers. In India, two main organisations which
generate and compile data on workers are the National Sample Survey Organisation (NSSO) and
Office of the Registrar General of Census. These two organisations generate quite a substantial data
on the workers, employment and unemployment etc. on regular intervals for the entire country.
Within these two sources, NSSO provides more data on employment and unemployment.
Human resources play a significant role in generating aggregate flow of goods and services. The
difference in the growth of national income and the per capita income is explained by the growth in
population. Hence, in this unit, we will discuss demographic features and indicators of development.
Human resources have a two-pronged relationship with economic growth. As a resource, people are
available as factors of production to work in combination with other factors of production like land,
capital and enterprise. As consumers, human beings make demand on the national product of the
economy. The size of population, therefore, is a crucial determinant of economic growth. A large
population may not necessarily contribute to economic growth; in fact, a large fast-rising population
may find itself in a situation described by economists as over-population'.
Another important objective of development is to reduce regional disparities. Government has been
helping the backward states with higher allocations so that regional disparities could be reduced.
But the reform process has been emphasising the use of market forces to attract investments.
Experience reveals that the relatively developed regions are able to attract more resources - both
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economic and social - if markets are given a free play. The question of reducing regional disparities
is sidelined. It would, therefore, be advisable to understand the impact of economic reforms on
regional disparities among the states.

Q.4. Explain the important issues which are crucial for promotion of Indian exports and hence
need to be addressed in India's trade policy.
Ans- 1) Strategic Planning for Enhancing Exports need to be undertaken at the national level. It is
necessary to undertake a separate and detailed exercise for exports with respect to resources required,
infrastructure development, technology upgradation and target products and customers. Such a plan
should aim for more ambitious targets and, more importantly, try and define ways and means of
achieving these.
2) Separate Administrative Set-up for Exports: It may be worth examining the setting up of Foreign
Trade Board, similar to what obtains in Japan (JETRO) and South Korea (KETRO). Further, a
Professional cadre for export may also be created as a part of the administrative services in the form
of an Indian Foreign Trade Service (IFTS). Candidates specialising in export services will need to be
trained in a whole range of professional skills such as international marketing, export incentives and
investment management, export administration and regulatory implications. There is a need to
develop synergy between large-scale sector and small-scale sector.
3) Building up a Stable and Viable Export Production Base: It is necessary to make a deliberate
production plan and to earmark a part of production for export even if there is a pressure of domestic
demand on export supplies. In this D.V. Kapur Committee suggested: (i) inducing domestic
producers through more incentives to export, (ii) building in an advantage in attaining economies of
scale, and (iii) further liberalisation of the licensing policies aimed at injecting intense competiton.
4) Export Entrepreneurship: This need be developed by providing necessary facilities and making
export an attractive and profitable business proposition. In this connection, it is necessary to adopt
what has been called the Olympic Approach', i.e., to pick the best of our producers and the best of
our exports-people who have made the grade-and give them all the facilities to improve their exports.
5) Use Appropriate Technology: It must be realised that a mere expansion of capacity for export
production is not enough; it must be based on appropriate technology to enable us produce 6-Sigma
quality products (6-Sigma indicates virtually zero defect products) so that products can stand
competition in international markets.
6) Supply of Basic Industrial Inputs: Allowing their duty-free imports by exporters would require an
elaborate machinery of customs and import licensing to ensure that the imports did not leak out into
the domestic economy. Even now the machinery which allows limited export-related imports does
not function very satisfactorily. To extend it to manage large-scale imports of basic goods is not
possible. Besides, there are inputs which cannot be imported.
7) Selective in Exports: There are many industries where India has an advantage because of
relatively lower costs of all forms of manpower-whether it is professional or factory labour. However,
while this can give an initial advantage, it should not be taken for an enduring advantage due to the
following reasons. One, as products become more sophisticated, labour as a cost factor becomes less
and less important. Two, the differences in costs are narrowed down through higher level of

automation. Three, in processes that require large number of cheap labour, the industry is bound to
shift its operation along the line of the ever-declining scale of poorer countries.
8) Continuity and Regularity: We should make it a point that once we have entered the market for a
particular commodity and have gained some foothold in it, we must strive to maintain this position,
Not withstanding constraints of domestic production in some future years. Switch-off and switch-on
systems do not work in trade. Continuity and regularity are hallmarks of success in international
markets.
9) Market Penetration: Indian entrepreneurs have to constantly bear in mind the fast changing trade
trends and re-orient their strategies to derive higher yields by way of larger shares in the markets and
better unit value realisation by means of higher levels of quality and value-added products.
10) Participation in Global System of Production: As national economies are getting more interlinked, the share of foreign components in most manufactured products is progressively increasing.
11) Warehousing Facilities: These should be expanded in important commercial centers abroad,
especially for fast-moving consumer goods.
12) Supply of Trade Information: A well-directed foreign trade policy should be based on accurate
trade information supported by reliable data. We have yet to conceive of a system by which this can
be done.
13) Reorganisation of Export Councils: India has a large number of export promotion councils,
commodity boards and other similar agencies, but their impact on India's foreign trade has been
minimal, if any. There is a need to reorganise these organisations in such a way that they become as
effective as similar agencies in Japan and South Korea.
Q.5. Explain the role of agricultural policy in raising public investment in agriculture.
Ans- The focus of the Government policy on agriculture has been gradually shifting to
diversification of agriculture, comprising high-value horticulture and livestock products and nonfood commercial crops, which cater to the requirements of the fast growing middle and upper middle
class households. Such a policy would doubtless bring about a diversification of farm sector and will
generate productive and remunerative employment in the farm sector and rural nonfarm sector such
as agro-processing and marketing. However, in the absence of an adequate marketing infrastructure
and institutional support, the farmers growing such products will be exposed to the vagaries of
violent price fluctuations. As the products of horticulture, poultry, and dairy are highly perishable in
nature, the farmers cannot hold on to the stocks of these products even when their prices are
unremunerative. As a result, the farmers suffer and may, therefore, not involve themselves with
diversification of their production.
Stabilisation and augmentation of agricultural yield is particularly important in view of the limited
scope for increasing area under cultivation of various crops. There has been also a decline in the size
of land holding, an increase in the cost of production and depletion of ground water. Increase in
production would, therefore, be possible mainly from improvements in productivity from the
existing cultivated area. Development of location specific high yielding varieties of seeds, balanced
fertiliser doses along with organic manures/biofertilisers, along with a sustained increase in irrigation
infrastructure can all add up to a sustained growth in agricultural productivity. One of the important

factors that has influenced the growth rate of yield per hectare is the slowdown of the rate of
investment in agriculture which has, in turn, slowed down the pace and pattern of technological change.
Deceleration in public sector investment in agriculture has adversely affected major irrigation
projects. It has also impeded adequate private sector investment in critical areas. The Committee on
Capital Formation in Agriculture (2003) [Chairman Prof. B.B. Bhattacharya] had pointed out that
lagging share of agriculture in aggregate capital formation relative to its share in GDP raises a strong
case for increasing the capital formation in agriculture commensurate with its share in GDP.
There may be several reasons for the declining share of public sector investment in agriculture. Some
of these are: (a) increase in the cost of maintenance of existing projects, (b) delays in completion of
projects and consequent cost over-runs, (c) diversion of resources from direct investment to subsidies
and (d) inadequate institutional credit support. In the post economic reform period, the declining
developmental role of the state has been an important factor contributing to dwindling public sector
investment in agriculture. As curtailing non-plan expenditure to reduce fiscal deficit was difficult for
the Government, it seems to have cut down its capital expenditure, especially in agriculture.
On the whole, it must be realised that even in this regime of liberalisation, the role of Government by
way of public policies, programmes and even investment is very important. The success of this role
has so far been a mixed bag because of lack of effective governance. The quality of programmes and
projects can improve considerably if there is a greater interaction at the grassroot level at the stage of
preparing the plan of action. Effective implementation of the plan of action can be achieved by
entrusting the task relating to its implementation to the Panchayati Raj Institutions. Major
initiatives are needed in the direction of devolution of powers to the Panchayats which should be
more responsive and accountable. In the genuine spirit of liberalisation, there is a need to shed the
bureaucratic controls if the grass-root institutions have to be made effective in the process of
implementation.
Q.6. Which changes would you like to make in trade and industrial policies to ensure rapid
growth of GDP while maintaining adequate macro-economic balance?
Ans-Liberalisation of the Economy
Removal of Industrial Licensing: All industrial licensing was abolished but for a shortlist of 18
industries related to security and strategic concerns, social reasons, hazardous chemicals and overriding environmental reasons and items of elitist consumption industries reserved for the small scale
sector which were to continue under the reservation list. Subsequently, all industries except for a
small group of five industries, industrial licensing requirements have been done away with.
Dereservation of SSI Items: Although initially the Government decided to continue reservation of
items under the SSI sector, but later, it gradually withdrew reservation in several SSI items every
year. For instance, in 2003-04 budget, the Union Finance Minister announced dereservation of 75
items of laboratory chemicals, leather and leather products, plastic products, chemicals and chemical
products and paper products. During 2005-06 budget, the Finance Minister announced dereservation
8

of 108 items from the SSI list, out which 30 items belonged to the category of "textile products,
including hosiery". Earlier the Government had announced dereservation of ready-made garments. In
other words, even the small-scale industry (SSI) has been forced to face both domestic and
international competition.
Withdrawing MRTP Restrictions: The restriction on the scrutiny of an investment proposal that it
does not violate the provisions of MRTP Act was withdrawn. This freed big business houses to
undertake expansion and establishment of new undertakings as well as to undertake mergers,
amalgamations and takeovers; they were also freed in the appointment of directors. The thrust of
policy in future, it was stated, would be more on controlling unfair or restrictive business practices.
All this provided a more liberal environment for expansion of existing undertakings and setting up of
new undertakings.
Privatisation of the Economy
Privatisation has to be viewed in two ways: In a narrow sense, it implies the induction of private
ownership in a public sector undertaking. In a broader sense, it implies the enlargement of the scope
of the private sector in the growth of the economy. In the initial phase of development planning in
India, more especially after the Industrial Policy of 1956, the socialisation of the economy was
measured by the size of the public sector in the national economy. The greater the share of the public
sector, the greater was the degree of socialisation of the economy.
Under economic reforms after 1991, the main thrust is that the private sector is considered as the
engine of growth. By placing restrictions on the public sector and by reducing its role in several
areas where it earlier enjoyed a monopolistic position, the new environment assigned an increasing
role for the private sector.
Globalisation is the process of integrating the various economies of the world without creating any
hindrances in the flow of goods and services, technology, capital and even labour or human capital.
This involves four components:
i) Reduction of trade barriers in the form of custom duties or quantitative restrictions or quotas so as
to permit free flow of goods and services among different economies;
ii) Creation of an environment in which free flow of capital (or investment) can take place between
nation-states;
iii) Creation of an environment for free flow of technology; and
iv) Last but not the least, from the point of view of developing countries, creation of an environment
in which free flow of labour or human resources can take place among different countries of the
world.
Q.7. Do you think that existing institutional structure in India has not led to good governance?
Give reasons in support of your answer.
Ans- No, I don't think that existing institutional structure in India has not led to good governance.
This almost immediately led to drastic improvement in at least five aspects: