Notes on Economic development and Planning-National Income

Syllabus:  Economic development and Planning v  Concepts of National Income & Product (P-1) v  Central Banking Principles, Functions of Central Banks(P-9) v  Monetary Policy Vs Fiscal Policy, Balance of Payments, Determinants of economic growth, v  Government Measures to Promote Economic Development, Regulatory Bodies established by laws, v  Provision of Economic and Social Overheads, v  Provision of Financial Facilities, Institutional Changes, v  Direct Participation, Indirect Measures, v  Forms of Planning : Planning by inducement and planning by v  Direction, Centralized planning vs. Decentralized Planning Pre-requisites of a Successful Planning.

v  CONCEPT OF NATIONAL INCOME

The important concepts of national income are:

1. Gross Domestic Product (GDP)

2. Gross National Product (GNP)

3. Net National Product (NNP) at Market Prices

4. Net National Product (NNP) at Factor Cost or National Income

5. Personal Income

6. Disposable Income

Let us explain these concepts of National Income in detail.

1. Gross Domestic Product (GDP): Gross Domestic Product (GDP) is the total market value of all final goods and services currently produced within the domestic territory of a country in a year.

Four things must be noted regarding this definition.

First, it measures the market value of annual output of goods and services currently produced. This implies that GDP is a monetary measure.

Secondly, for calculating GDP accurately, all goods and services produced in any given year must be counted only once so as to avoid double counting. So, GDP should include the value of only final goods and services and ignores the transactions involving intermediate goods.

Thirdly, GDP includes only currently produced goods and services in a year. Market transactions involving goods produced in the previous periods such as old houses, old cars, factories built earlier are not included in GDP of the current year.

Lastly, GDP refers to the value of goods and services produced within the domestic territory of a country by nationals or non-nationals.

2. Gross National Product (GNP): Gross National Product is the total market value of all final goods and services produced in a year. GNP includes net factor income from abroad whereas GDP does not. Therefore,

GNP = GDP + Net factor income from abroad.

Net factor income from abroad = factor income received by Indian nationals from abroad – factor income paid to foreign nationals working in India.

3. Net National Product (NNP) at Market Price: NNP is the market value of all final goods and services after providing for depreciation. That is, when charges for depreciation are deducted from the GNP we get NNP at market price. Therefore’

NNP = GNP – Depreciation

Depreciation is the consumption of fixed capital or fall in the value of fixed capital due to wear and tear.

4.Net National Product (NNP) at Factor Cost (National Income): NNP at factor cost or National Income is the sum of wages, rent, interest and profits paid to factors for their contribution to the production of goods and services in a year. It may be noted that:

NNP at Factor Cost = NNP at Market Price – Indirect Taxes + Subsidies.

5. Personal Income: Personal income is the sum of all incomes actually received by all individuals or households during a given year. In National Income there are some income, which is earned but not actually received by households such as Social Security contributions, corporate income taxes and undistributed profits. On the other hand there are income (transfer payment), which is received but not currently earned such as old age pensions, unemployment dues, relief payments, etc. Thus, in moving from national income to personal income we must subtract the incomes earned but not received and add incomes received but not currently earned. Therefore,

Personal Income = National Income – Social Security contributions – corporate income taxes – undistributed corporate profits + transfer payments.

Disposable Income: From personal income if we deduct personal taxes like income taxes, personal property taxes etc. what remains is called disposable income. Thus,

Disposable Income = Personal income – personal taxes.

Disposable Income can either be consumed or saved. Therefore,

Disposable Income = consumption + saving.

MEASUREMENT OF NATIONAL INCOME

Production generate incomes which are again spent on goods and services produced. Therefore, national income can be measured by three methods:

1. Output or Production method

2. Income method, and

3. Expenditure method.

Let us discuss these methods in detail.

 1. Output or Production Method: This method is also called the value-added method. This method approaches national income from the output side. Under this method, the economy is divided into different sectors such as agriculture, fishing, mining, construction, manufacturing, trade and commerce, transport, communication and other services. Then, the gross product is found out by adding up the net values of all the production that has taken place in these sectors during a given year.

In order to arrive at the net value of production of a given industry, intermediate goods purchase by the producers of this industry are deducted from the gross value of production of that industry. The aggregate or net values of production of all the industry and sectors of the economy plus the net factor income from abroad will give us the GNP. If we deduct depreciation from the GNP we get NNP at market price. NNP at market price – indirect taxes + subsidies will give us NNP at factor cost or National Income.

The output method can be used where there exists a census of production for the year. The advantage of this method is that it reveals the contributions and relative importance and of the different sectors of the economy.

2. Income Method: This method approaches national income from the distribution side. According to this method, national income is obtained by summing up of the incomes of all individuals in the country. Thus, national income is calculated by adding up the rent of land, wages and salaries of employees, interest on capital, profits of entrepreneurs and income of self-employed people.

This method of estimating national income has the great advantage of indicating the distribution of national income among different income groups such as landlords, capitalists, workers, etc.

3. Expenditure Method: This method arrives at national income by adding up all the expenditure made on goods and services during a year. Thus, the national income is found by adding up the following types of expenditure by households, private business enterprises and the government: -

(a) Expenditure on consumer goods and services by individuals and households denoted by C. This is called personal consumption expenditure denoted by C.

(b) Expenditure by private business enterprises on capital goods and on making additions to inventories or stocks in a year. This is called gross domestic private investment denoted by I.

(c) Government’s expenditure on goods and services i.e. government purchases denoted by G.

(d) Expenditure made by foreigners on goods and services of the national economy over and above what this economy spends on the output of the foreign countries i.e. exports – imports denoted by (X – M). Thus

GDP = C + I + G + (X – M).

C= consumer goods and services by individuals I= business enterprises on capital goods G=Government expenditure X=Exports M=Imports

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Difficulties in the Measurement of National Income

There are many difficulties in measuring national income of a country accurately. The difficulties involved are both conceptual and statistical in nature. Some of these difficulties or problems are discuss below:

1. The first problem relates to the treatment of non-monetary transactions such as the services of housewives and farm (grains & vegetables) output consumed at home. On this point, the general agreement seems to be to exclude the services of housewives while including the value of farm output consumed at home in the estimates of national income.

2. The second difficulty arises with regard to administrative functions of the government like justice, administrative and defense. Contribution of general government activities will be equal to the amount of wages and salaries paid by the government. Capital formation by the government is treated as the same as capital formation by any other enterprise.

3. The third major problem arises with regard to the treatment of income arising out of the foreign firm in a country. On this point, the IMF viewpoint is that production and income arising from an enterprise should be credited to the territory in which production takes place. However, profits earned by foreign companies are credited to the parent company.

 Special Difficulties of Measuring National Income in Under-developed Countries

In under-developed countries like India, we face some special difficulties in estimating national income. Some of these difficulties are:

1. The first difficulty arises because of non-monetized transactions whereby considerable part of the output does not come into the market at all.

2. Because of illiteracy, most producers have no idea of the quantity and value of their output and do not keep regular accounts. This makes the task of getting reliable information very difficult.

3. Because of under-development, occupational specialization is still incomplete, so that there is lack of differentiation in economic functioning. An individual may receive income partly from farm ownership, partly from manual work in industry in the slack season, etc. This makes the task of estimating national income very difficult.

4. In India, agriculture, household craft, and indigenous banking are the unorganized and scattered sectors. An assessment of output produced by self-employed agriculturist, small producers and owners of household enterprises in the unorganized sectors requires an element of guesswork, which makes the figure of national income unreliable.

5. In under-developed countries there is a general lack of adequate statistical data. Inadequacy, non-availability and unreliability of statistics are a great handicap in measuring national income in these countries.

There are various concepts of National Income. The main concepts of NI are: GDP, GNP, NNP, NI, PI, DI, and PCI. These different concepts explain about the phenomenon of economic activities of the various sectors of the various sectors of the economy.

Gross Domestic Product (GDP)

The most important concept of national income is Gross Domestic Product. Gross domestic product is the money value of all final goods and services produced within the domestic territory of a country during a year.

Algebraic expression under product method is,

GDP=(P*Q)

where, GDP=Gross Domestic Product P=Price of goods and service Q=Quantity of goods and service denotes the summation of all values.

According to expenditure approach, GDP is the sum of consumption, investment, government expenditure, net foreign exports of a country during a year.

Algebraic expression under expenditure approach is,

GDP=C+I+G+(X-M)

Where, C=Consumption I=Investment G=Government expenditure (X-M)=Export minus import

GDP includes the following types of final goods and services. They are:

·       Consumer goods and services.

·       Gross private domestic investment in capital goods.

·       Government expenditure.

·       Exports and imports.

·       Gross National Product (GNP)

Gross National Product is the total market value of all final goods and services produced annually in a country plus net factor income from abroad. Thus, GNP is the total measure of the flow of goods and services at market value resulting from current production during a year in a country including net factor income from abroad. The GNP can be expressed as the following equation:

GNP=GDP+NFIA (Net Factor Income from Abroad) or, GNP=C+I+G+(X-M) +NFIA

Hence, GNP includes the following:

·       Consumer goods and services.

·       Gross private domestic investment in capital goods.

·       Government expenditure.

·       Net exports (exports-imports).

·       Net factor income from abroad.

·       Net National Product (NNP)

Net National Product is the market value of all final goods and services after allowing for depreciation. It is also called National Income at market price. When charges for depreciation are deducted from the gross national product, we get it. Thus,

NNP=GNP-Depreciation or, NNP=C+I+G+(X-M)+NFIA-Depreciation

National Income (NI)

National Income is also known as National Income at factor cost. National income at factor cost means the sum of all incomes earned by resources suppliers for their contribution of land, labor, capital and organizational ability which go into the years net production. Hence, the sum of the income received by factors of production in the form of rent, wages, interest and profit is called National Income. Symbolically,

NI=NNP + Subsidies-Interest Taxes

Or, GNP-Depreciation + Subsidies-Indirect Taxes

or, NI=C+G+I+(X-M)+NFIA-Depreciation-Indirect Taxes + Subsidies

Personal Income (PI)

Personal Income i s the total money income received by individuals and households of a country from all possible sources before direct taxes. Therefore, personal income can be expressed as follows:

PI=NI-Corporate Income Taxes-Undistributed Corporate Profits-Social Security Contribution+Transfer Payments

Disposable Income (DI)

The income left after the payment of direct taxes from personal income is called Disposable Income. Disposable income means actual income which can be spent on consumption by individuals and families. Thus, it can be expressed as:

DI=PI-Direct Taxes

From consumption approach,

DI=Consumption Expenditure + Savings

Per Capita Income (PCI)

Per Capita Income of a country is derived by dividing the national income of the country by the total population of a country. Thus,

PCI=Total National Income/Total National Population

v 2. Functions of Central Bank – Explained!

The main function of a central bank is to act as governor of the machinery of credit in order to secure stability of prices.

It regulates the volume of credit and currency, pumping in more money when market is dry of cash, and pumping out money when there is excess of credit.

In India RBI have two departments, namely; Issue department and Banking department.

We discuss below its main functions:

1. Issue of Currency:

The central bank is given the sole monopoly of issuing currency in order to secure control over volume of currency and credit. These notes circulate throughout the country as legal tender money. It has to keep a reserve in the form of gold and foreign securities as per statutory rules against the notes issued by it.

It may be noted that RBI issues all currency notes in India except one rupee note. Again, it is under the directions of RBI that one rupee notes and small coins are issued by government mints. Remember, the central government of a country is usually authorized to borrow money from the central bank.

When the central government expenditure exceeds government revenue and the government is unable to reduce its expenditure, then it borrows from the RBI. This is done by selling security bills to RBI which creates new currency notes for the purpose. This is called monetization of budget deficit or deficit financing. The government spends new currency and puts it into circulation to meet its expenditure.

2. Banker to Government:

Central bank functions as a banker to the government—both central and state governments. It carries out all banking business of the government. Government keeps their cash balances in the current account with the central bank. Similarly, central bank accepts receipts and makes payment on behalf of the governments.

Also, central bank carries out exchange, remittance and other banking operations on behalf of the government. Central bank gives loans and advances to governments for temporary periods, as and when necessary and it also manages the public debt of the country. Remember, the central government can borrow any amount of money from RBI by selling its rupees securities to the latter.

3. Banker’s Bank and Supervisor:

There are usually hundreds of banks in a country. There should be some agency to regulate and supervise their proper functioning. This duty is discharged by the central bank.

Central bank acts as banker’s bank in three capacities:

(i) It is the custodian of their cash reserves. Banks of the country are required to keep a certain percentage of their deposits with the central bank; and in this way the central bank is the ultimate holder of the cash reserves of commercial banks,

(ii) Central bank is lender of funds to banks. Whenever banks are short of funds, they can take loans from the central bank and get their trade bills discounted. The central bank is a source of great strength to the banking system,

(iii) It acts as a bank of central clearance, settlements and transfers. Its moral persuasion is usually very effective so far as commercial banks are concerned.

4. Controller of Credit and Money Supply:

Central bank controls credit and money supply through its monetary policy which consists of two parts—currency and credit. Central bank has monopoly of issuing notes (except one-rupee notes, one-rupee coins and the small coins issued by the government) and thereby can control the volume of currency.

The main objective of credit control function of central bank is price stability along with full employment (level of output). It controls credit and money supply by adopting quantitative and qualitative measures as discussed in Section 8.25. Following three quantitative measures of credit control by RBI are recalled for ready reference.

Instruments of money policy:

(i) Bank Rate (02009, 10C):

This is the rate of interest at which the central bank lends to commercial banks. It is, in a way, cost of borrowing is less/cheap investment promotes and when cost of borrowing is more investment is discourages it. In a situation of excess demand and inflationary pressure, central bank increases the bank rate. High bank rate forces the commercial banks to raise rate of interest which makes loans costly. As a result, demand for loans and other purposes falls.

Thus, increase in bank rate by the central bank adversely affects credit creation by commercial banks. A decrease in bank rate will have the opposite effect. At present (Feb., 2013), bank rate (also called repo rate, i.e. the rate at which banks borrow from RBI) is 7.75% and Reverse Repo Rate (rate at which banks park their surplus funds with RBI) is 7.0%.

(ii) Open Market Operations:

These refer to buying and selling of government securities by central bank to public and banks. This is done to influence money supply in the country; Sale of government securities to commercial banks means flow of money into the central bank which reduces cash reserves. Consequently, credit availability of commercial banks is curtailed / controlled. When central bank buys securities, it increases cash reserves of the banks and their ability to give credit.

(iii) Cash Reserve Ratio (CRR):

Commercial banks are required under the law to keep a certain percentage of their total deposits with the central bank in the form of cash reserves. This is called CRR. It is a powerful instrument to control credit and lending capacity of the banks. Presently (Feb., 2013), CRR is 4.0%.

To curtail the credit giving capacity of the banks, central bank raises the CRR but when it wants to enhance the credit giving powers of the bank, it reduces the CRR. Similarly, there is another measure called Legal Reserve Ratio (A2012)—LRR which has two components—CRR and SLR. According to Statutory Liquidity Ratio or SLR, every bank is required to keep a fixed percentage (ratio) of its assets in cash called SLR ratio. SLR is raised to reduce the ability of the banks to give credit. But SLR is reduced when the situation in the economy demands expansion of credit.

5. Exchange Control:

Another duty of a central bank is to see that the external value of currency is maintained. For instance, in India, the Reserve Bank of India takes steps to ensure external value of a rupee. It adopts suitable measures to attain this object. The exchange control system is one such measure.

Under exchange control system, every citizen of India has to deposit with the Reserve Bank of India all foreign currency or exchange that he receives. And whatever foreign exchange he might need has to be secured from the Reserve Bank by making an application in the prescribed form.

6. Lender of Last Resort:

When commercial banks have exhausted all resources to supplement their funds at times of liquidity crisis, they approach central bank as a last resort. As lender of last resort, central bank guarantees solvency and provides financial accommodation to commercial banks (i) by rediscounting their eligible securities and bills of exchange and (ii) by providing loans against their securities. This saves banks from possible failure and banking system from a possible breakdown. On the other hand, central bank, by providing temporary financial accommodation, saves the financial structure of the country from collapse.

7. Custodian of Foreign Exchange or Balances:

It has been mentioned above that a central bank is the custodian of foreign exchange reserves and nation’s gold. It keeps a close watch on external value of its currency and undertakes exchange management control. All the foreign currency received by the citizens has to be deposited with the central bank; and if citizens want to make payment in foreign currency, they have to apply to the central bank. Central bank also keeps gold and bullion reserves.

8. Clearing House Function:

Banks receive cheques drawn on the other banks from their customers which they have to realise from drawee banks. Similarly, cheques on a particular bank are drawn and passed into the hands of other banks which have to realise them from the drawee banks. Independent and separate realisation to each cheque would take a lot of time and, therefore, central bank provides clearing facilities, i.e., facilities for banks to come together every day and set off their cheques claims.

9. Collection and Publication of Data:

It has also been entrusted with the task of collection and compilation of statistical information relating to banking and other financial sectors of the economy.

3. What is the difference between monetary policy and fiscal policy?

Both of these are used to influence the economy of a country, but while the monetary policy is decided by the central bank or RBI in India’s case, the fiscal policy is decided by the government.

Monetary Policy

Monetary policy is carried out by RBI and manifests itself by setting interest rates like the Repo and Reverse Repo as well as determining levels of CRR and SLR which influence money supply and credit flow in the economy.

The main aim of RBI’s monetary policy is to keep a check on inflation and maintain an optimum level of GDP growth at the same time. If they raise the interest rates too high then that might help in checking inflation but at the same time deter economic activity and slow down GDP growth, and if they keep the rates too low then that will promote economic activity but it will also spur inflation.

They have to keep a balance between both so one is not sacrificed for the sake of the other.

Fiscal Policy

Fiscal policy is the policy that determines how the government spends money, and taxes people to pay for those expenses. Taxes are the main form of earnings for the government although there are other forms as well like 3G auctions or PSU disinvestments. When the government is not able to come up with enough earnings to pay for their expenses they incur a fiscal deficit and this deficit is financed by borrowings.

The purpose of the fiscal policy is to promote economic growth. During recession when government increases its spending or cuts taxes – that’s termed as a fiscal stimulus package because you are using the instruments of fiscal policy to boost the economy. India has had three fiscal stimulus packages during the last recession.

Balance of Payments of India

Introduction:

In the modern world, there is hardly any country which is self-sufficient in the sense that it produces all the goods and services it needs.

Every country imports from other countries the goods that cannot be produced at all in the country or can be produced only at very high cost as compared to the foreign supplies.

Similarly, a country exports to other countries the commodities which those countries prefer to buy from abroad rather than producing at home. Besides, trade of goods and services, there are flows of capital. Foreign capital flows are in the form of portfolio investment by foreign institutional investors or in the form of foreign direct investment. The balance of payments is a systematic record of all economic transactions of residents of a country with the rest of the world during a given period of time.

This record is so prepared as to measure the various components of a country’s external economic transactions. Thus, the aim is to present an account of all receipts and payments on account of goods exported, services rendered and capital received by the residents of a country, and goods imported, services received and capital transferred by residents of the country. The main purpose of keeping these records is to know the international economic position of a country which helps the Government in making decisions on monetary and fiscal policies on the one hand, and trade and payments policies on the other.

Balance of Trade and Balance of Payments:

Balance of trade and balance of payments are two related terms but they should be carefully distinguished from each other because they do not have exactly the same meaning. Balance of trade refers to the difference in values of imports and exports of commodities only, i.e., visible items only. Movement of goods between countries is known as visible trade because the movement of goods is open and visible and can be verified by the custom officials.

During a given period of time, the exports and imports may be exactly equal, in which case the balance of trade is said to be in balance. But this is not necessary because those who export and import are not necessarily the same persons. If the value of exports exceeds the value of imports, the country is said to have an export surplus. On the other hand, if the value of its imports exceeds the value of its exports, the country is said to have a deficit balance of trade.

Distinction between Current Account and Capital Account:

The distinction between the current account and capital account of the balance of payment may be noted. The current account deals with payment for currently produced goods and services. It includes also interest earned or paid on claims and also gifts and donations.

The capital account, on the other hand, deals with capital receipts and payments of debts and claims. The current account of the balance of payments affects the level of national income directly. For instance, when India sells its currently produced goods and services to foreign countries, the producers of those goods get income from abroad.

In other words, current account receipts have the effect of increasing the flow of income in the country. On the other hand, when India imports goods and services from foreign countries and pays them money which would have been used to demand goods and services within the country money flows out to foreign countries.

Thus, current account payments to foreigners involve reduction of the flow of income within the country and constitute a leakage. Thus, the current account of the balance of payments has a direct effect on the level of income in a country. The capital account, however, does not have such a direct effect on the level of income; it influences the volume of assets which a country holds.

Balance of Payments on Current Account:

Two types of Balance of Payments are distinguished:

(1) Balance of Payments on Current Account, and

(2) Balance of Payments on Capital Account.

We first explain the meaning and components of balance of payments on current account.

Balance of payments on current account is more comprehensive in scope than balance of trade. It includes not only imports and exports of goods which are visible items but also invisible items such as foreign travel, transportation (shipping, air transport etc.), insurance, tourism, investment income (e.g. interest on investments), transfer payments i.e. donations, gifts, etc.

A country, say India, has to make payments to the other countries not only for its imports of merchandise but also for tourists travelling abroad, insurance and shipping services rendered by other countries. Further, it has to pay the royalties to foreign firms, expenditure of Indians in foreign countries, interest on foreign investment in India. These are debit items for India, since the transactions involve payments made to the rest of the world. In the same way, foreign countries import goods from India, make use of Indian films and so on, for all of which they make payments to India.

An important item which has recently emerged as an item of invisible exports is software exports which has become good foreign exchange earner. These are the credit items for India as the latter receives payments. Balance of payments thus gives a comprehensive picture of all such transactions including imports and exports of goods and services concerned.

The Table 2.4 (given below) gives the position of India’s balance of payments on current account for the years 2007-08 to 2011-12. In this table balance of payments the visible as well as invisible items of trade are given. The visible items are export-import of goods and the invisible items of balance of payments on current account are travel, transportation and insurance, interest on loans given and other investment income on private and official transfers.

Both visible and invisible items together make up the current account. Interest on loans, tourist expenditure, banking and insurance charges, software services etc., are similar to visible trade since receipts from selling such services to the foreigners are very similar in their effects to the receipts from sales of goods; both provide income to the people who produce the goods or services.

It will be noted from Table 2.4 above that the most important item in the balance of payments on current account is balance of trade which refers to imports and exports of goods. In Table 2.4 balance of trade does not balance and shows a deficit in all the seven years. In the years 2011-12 and 2012-13 trade deficit has substantially increased. Trade deficit was over 10 per cent of GDP in both these years.

In fact, it is huge trade deficit in these two years that has caused huge current account deficit of over 4% of GDP in these two years. Economic slowdown in advanced countries and its spillover effects in Emerging Market Economies coupled with high crude oil and gold prices were responsible for sharp increase in trade deficit.

Due to surplus in invisibles account, there was a surplus on current account during 2001-2002, 2002-03 and 2003-04. In India’s balance of payments on current account from 2004-05 onwards there has been a deficit. Contrary to popular perception, deficit on current account is not always bad provided it is within reasonable limits and can be easily met by non-debt capital receipts. In fact, deficit on current account represents the extent of absorption of capital inflows in India during a year.

It may be noted that when there is deficit on the current account, it is financed either by using foreign exchange reserves held by Reserve Bank of India or by capital flows that come into the country in the form of foreign direct investment (FDI) and portfolio investment by FIIs, external commercial borrowing (ECB) from abroad and by NRI deposits in foreign exchange account in our banks.

However, due to global financial crisis in 2008-09, there was first slowdown and then decrease in exports. As a result, there was a large deficit of 2.4 of per cent of GDP on current account which could not be met by capital inflows as they were quite meagre ($ 8.6 billion) as a result of global financial crisis. Therefore, to finance the deficit on current account in 2008-09 we had to withdraw US $ 20 billion from our foreign exchange reserves. Again, in the two years 2011-12 and 2012-13 the current account deficit (CAD) had been quite high.

It may be noted that high current deficit tends to weaken the rupee by raising the demand for US dollars. In 2011- 12, the current account deficit tended to weaken the rupee by raising the demand for US dollars. In 2011-12, the current account deficit was 4.2 per cent of GDP. Since capital inflows in this year were not adequate to finance the current account deficit, RBI had to withdraw 12.8 billion US dollars from its foreign exchange reserves to meet the demand for US dollars.

In the year 2012-13 the current account deficit has been estimated to be even higher at 4.8 per cent of GDP, capital inflows through portfolio investment by FIIs had picked up in the latter half of 2012-13 but capital inflows through FDI had fallen. However, we managed to meet such large account deficit through capital inflows. In fact we added to our foreign exchange reserves by $3.8 billion in 2012-13.

Thus current account deficit poses serious challenge to macroeconomic management of the economy. The dependence on volatile capital inflows through FIIs to meet the current account deficit is unsustainable as these capital flows go back when global situation worsens and thereby cause sharp depreciation in exchange rate of rupee and crash in stock market prices.

Since in the recent years, 2011-12 and 2012-13 current account deficit has widened, this has increased the balance of payments vulnerability to sudden reversal of capital flows, especially when sizable flows comprise debt and volatile portfolio investment by FIIs. The priority has therefore been to reduce current account deficit (CAD) through improving trade balance. Efforts have been made to promote exports by diversifying the export commodity basket and export destinations.

One way to limit imports is to bring domestic prices up to the international level so that users bear the full cost. Accordingly, petrol has been decontrolled and diesel prices have been revised upward in Jan. 2013 to curtail subsidy on it. To discourage the imports of gold which has played a significant role in causing trade deficit, customs duty on its import was raised from 6% to 8% and further to 10% in July 2013.

Further, to improve the current account deficit emphasis has been on facilitating remittances and encouraging software exports that have been responsible for surplus on the invisible account. In recent years this surplus has lowered the impact of widening trade deficit on current account deficit (CAD) significantly.

The two components together met nearly two-thirds of the trade deficit that was more than 10 per cent of GDP in 2011-12. Remittances particularly are known to exhibit resistance when the country is hit by external shock as was evident during the global crisis of2008.

Balance of Payments on Capital Account:

In the balance of payments on capital account given in Table 2.5 important items are borrowings from foreign countries and lending funds to other countries.

This takes two forms:

(i) External assistance which means borrowing from foreign countries under concessional rate of interest;

(ii) Commercial borrowing under which the Indian Government and the private sector borrow funds from world money market at higher market rate of interest.

Besides non-resident deposits are another important item in capital account. These are the deposits made by non-resident Indians (NRI) who keep their surplus funds with Indian Banks. Another important item in balance of payments on capital account is foreign investment by foreign companies in India. There are two types of foreign investment. First is portfolio investment under which foreign institutional investors (FIIs) purchase shares (equity) and bonds of Indian companies and Government.

The second is foreign direct investment (FDI) under which foreign companies set up plants and factories on their own or in collaboration with the Indian companies. Still another item in capital account is other capital flows in which the important source of funds is remittances from abroad sent by the Indian citizens working in foreign countries. Table 2.5 gives the position of India’s capital account for the years 2007-08 to 2012-13.

Capital inflows in the capital account can be classified into debt creating and non-debt creating. Foreign investment (both direct and portfolio) represents non-debt creating capital inflows, whereas external assistance (i.e. concessional loans taken from abroad), external commercial borrowing (ECB) and non-resident deposits are debt-creating capital inflows.

It will be seen from Table 2.5 that during 2007-08, there was net capital inflow of 43.3 billion US dollars on account of foreign investment (both direct and portfolio). Table 2.5 gives the position of India’s balance of payments in capital account for seven years, 2007-08,2008-09,2009-10,2010- 11, 2011-12 and 2012-13.

When all items of balance of payments on capital account are taken into account we had a surplus of 107.9 billion US dollars in 2007-08. Taking into current account deficit of $ 15.7 billion on current account in year 2007-08 there was accretion to our foreign exchange reserves by $ 92.2 billion in 2007-08.

Global financial crisis affected our capital account balance as there was reversal of capital flows after Sept. 2008 with the result that we used $ 20.1 billion of our foreign exchange reserves in 2008-09 resulting in decrease of our foreign exchange reserves. That is, because we used our foreign exchange reserves equal to $ 20.1 billion, there was decline in our foreign exchange reserves by $ 20 billion in 2008-09.

The situation improved in 2009-10 as foreign direct investment (FDI) and portfolio investment by FIIs picked up. As a result there was net capital account surplus of $ 53.4 billion in 2009-10 and after meeting the current account deficit of $ 38 billion there was addition to our foreign exchange reserves by $ 13.4 billion in 2009-10. In 2010-11 also there was surplus on capital account of $ 59.7 billion and after meeting current deficit we added $ 13.1 billion in our foreign exchange reserves in 2010.11.

However, in 2011 -2012 and 2012-13 the situation regarding capital flows changed significantly and capital flows were not sufficient to meet the large current account deficit (CAD). Consequently, in 2011-12 withdrawal from foreign exchange reserves of 12.8 million US dollars was made. Capital flows are driven by pull factors such as economic fundamentals of recipient countries and push factors such as policy stance of source countries.

The capital flows have implications for exchange rate management, overall macroeconomic and financial stability including liquidity conditions. Capital account management therefore needs to emphasize promoting foreign direct investment (FDI) and reducing dependence on volatile portfolio capital inflows.

This would ensure that to the extent current account defect is bridged through capital surplus it would be better if it is done through stable and growth-enhancing foreign direct investment flows. In the present international financial situation, reserves are the first line of defence against the volatile capital flows. However, the decline in reserves as a percentage of GDP is a source of concern.

When all items of balance of payments of capital account are taken into account we had a surplus of 6.8, 53.9 and 59.7 billion US dollars in 2008-09, 2009-10 and 2010-11. Small size surplus on capital account of 6.8 billion US dollars in 2008-09 was due to large portfolio capital outflows by FII, which occurred because of global financial crisis in 2008-09. As a result of this, capital flows fell short of current account deficit of 27.9 billion US dollars resulting in deficit of 20.1 billion US dollars in 2008-09.

As a consequence our foreign exchange reserves declined by $ 20.1 billion in 2008-09. However, in 2009-10 and 2010-11, there was enough capital account surplus so that after meeting current account deficit we added to our foreign exchange reserves by $ 13.4 and $ 13.1 billion in our foreign exchange reserves in 2009-10 and 2010-11.

Further, it is important to note that surplus on capital account is mainly due to foreign investment in India, external commercial borrowing and NRI deposits which do not belong to us. These investment funds, especially foreign institutional investment funds and Non-Resident Deposits, can flow out of India if situation in India is not favourable.

This in fact happened in the year 2008-09 when as a result of global financial crisis FIIs (Foreign Institutional Investors) sold corporate shares in the Indian stock market and capital outflow from India took place on a large scale.

Determinants of Balance of Payments:

It may be further noted that when there is a deficit in the current account, it has to be financed either by using foreign exchange reserves with Reserve of Bank, if any, or by capital inflows (in the form of foreign assurance, commercial borrowing from abroad, non-residential deposits).

There are several variables which determine the balance of payments position of a country, viz., national income at home and abroad, the prices of goods and factors, the supply of money, the rate of interest, etc. all of which determine exports, imports, and demand and supply of foreign currency.

At the back of these variables lie the supply factors, production function, the state of technology, tastes, distribution of income, economic conditions, the state of expectations, etc. If there is a change in any of these variables and there are no appropriate changes in other variables, disequilibrium will be the result.

The main cause of disequilibrium in the balance of payments arises from imbalance between exports and imports of goods and services that is, deficit or surplus in balance of payments. When for one reason or another exports of goods and services of a country are smaller than their imports, disequilibrium in the balance of payments is the likely result.

Exports may be small due to the lack of exportable surplus which in turn results from low production or the exports may be small because of the high costs and prices of exportable goods and severe competition in the world markets.

Important causes of small exports are the inflation or rising prices in the country or over-valued exchange rate. When the prices of goods are high in the country, its exports are discouraged and imports encouraged. If it is not matched by other items in the balance of payments, disequilibrium emerges.

Does Balance of Payments Must Always Balance?

It is often said that balance of payments must always balance. What does it mean? The individuals and business firms of an economy have to pay for the imports from abroad. If exports are not sufficient to pay for the imports, then how the balance of payments will be in balance.

For example, the balance of payments on current account of India has been in deficit for most of the years till 2000 01. Deficit on current account implies that the residents of a country are spending more on imports of goods and services than the incomes they are earning from exports of goods and services.

For the overall balance of payments to be in balance, this deficit in the current account of the balance of payments must be financed by selling capital assets of such as shares and bonds of companies or other assets such as gold or foreign exchange reserves of a country or by borrowing from abroad.

Both by selling assets or by borrowing from abroad, foreign capital flows into the country as has been happening in the last several years in India. These foreign capital inflows are shown in the capital account of the balance of payments which must be in surplus to finance the deficit in the current account.

Thus current account + capital account surplus = 0…. (i)

The above fact has an important lesson that must be borne in mind. If a country has no foreign currency reserves or it has no assets to sell to pay for the imports and if nobody is willing to lend to it, it will have to cut down its imports which will reduce productive activity in the economy and adversely affect economic growth of the country.

Such a crisis situation arose in India in 1991 when our foreign exchange reserves had fallen to a very low level and no one was willing to lend to us or give us aid. In fact, due to loss of confidence of foreign investors, capital outflows were taking place.

Therefore, in 1991 India had to mortgage gold to Bank of England and Central Bank of Japan to get the necessary foreign exchange to pay for the needed imports. We had to accept the pre-conditions of IMF for providing us assistance to tide over the crisis. It is interesting to note this was done under the guidance of Dr. Manmohan Singh who was then the Finance Minister.

Capital Flows and Globalization:

The globalization of the Indian economy has an important consequence with regard to capital flows into the economy. Suppose India faces given prices of its imports and a given demand for its exports of goods and services. Under these circumstances, if domestic rate of interest is higher as compared to what exists abroad, then given the mobility of capital, capital will flow into the Indian economy to a very large extent.

This principle can be expressed as follows:

BP = NX (Y_d Y_f, R) + CF (I_f – I_d) … (ii)

where BP = balance of payments, NX is net exports (i.e. exports-imports which is also called trade balance, CF stands for surplus in the capital account of the balance of payments, that is, capital flows.

The above equation reveals that trade balance (NX) is a function of level of domestic income (Y_d) and foreign income (Y_f) and real rate of exchange (R). An increase in the domestic income due to higher industrial growth or fall in real exchange rate of rupee will adversely affect the trade balance (NX) by increasing imports. l_f– I_d in equation (ii) measures net foreign investment, i.e. net capital inflows.

Further, the above equation shows that higher interest rate in India as compared to that in the foreign country such as the United States will cause large capital inflows into India. Such capital inflows actually took place in India 2009-10 and 2010-11. Due to large capital inflows into the Indian economy our foreign exchange reserves increase. However, when there are large capital outflows as occurred during 2008-09, our foreign exchange reserves decline.

Factors that Determine Economic Growth and Development of a Country

The process of economic growth is a highly complex phenomenon and is influenced by numerous and varied factors such as economic, political, social and cultural factors. It is believed by some economists that the capital is the only requirement for growth and therefore the greatest emphasis is laid on capital formation to bring about economic development. But this is wrong. As Professor Nurkse rightly remarks, “Economic development has much to do with human en­dowments, social attitudes, political conditions and historical accidents. Capital is a necessary but not a sufficient condition of progress.”

The following are various factors which determine economic growth and development:

(i) Supply of Natural Resources;

(ii) Capital form action which depends upon the rate of domestic saving and investment and inflow of foreign capital;

(iii) Growth of population;

(iv) Technological Progress; and We examine below each of these factors in turn.

(i) Supply of Natural Resources:

The quantity and quality of natural resources play a vital role in the economic development of a country. Important natural resources are land, minerals and oil resources, water, forests, climate, etc. The quality of natural resources available in a country puts a limit on the level of output of goods which can be attained.

Without a minimum of natural resources there is not much hope for economic development. It should, however, be noted that resource availability is not a necessary condition for economic growth. For instance, India, though rich in natural resources, has re­mained poor and under-developed.

This is because resources have not been fully utilised for productive purposes. Thus it is not only the availability of natural resources but also the ability to bring them into use which determines the growth of an economy. On the other hand, Japan has a relatively few natural resources but has shown a very high rate of economic growth and as a result has become one of the richest countries in the world.

How has Japan done this miracle? It is international trade that has made possible for Japan to achieve higher growth rate. Japan imports many of natural resources such as mineral oil it requires for production of manu­factured goods. It then exports manufactured goods to the countries that are rich in natural resources. Thus experience of Japan shows that abundant natural resources are not a necessary condition for economic growth.

Supplies of natural resources can be increased as a result of new discoveries of resources within a country or technological changes which facilitate discoveries or transform certain pre­viously useless materials into highly useful ones. It should also be noted that the scarcity of certain natural resources can be overcome by synthetic substitutes.

For example, the synthetic rubber is being increasingly used in the place of natural rubber in advanced countries. Further, nylon which is a synthetic substance is being largely used in place of silk which is a natural substance. The use of natural resources and the role they play in the economic growth depend, among other things, on the type of technology. The relationship of resources to the kind and level of technology is very intimate.

One does not have to go back very far in history to find when an item currently as valuable as petroleum was of little or no significance. It is only recently that the various radioactive elements have come to be regarded as valuable. In many developing economies there are, no doubt, deposits of many minerals that are not being used because of technological deficiencies.

(ii) Capital Formation:

Labour is combined with capital to produce goods and services. Workers need machines, tools and factories to work. In fact the use of capital makes workers more productive. Setting up of more factories equipped with machines and tools which raise the productive capacity of the economy.

Therefore, in the opinion of many economists, capital formation is the very core of economic development. Whatever the type of economic system, without capital accumulation the process of economic growth cannot be accelerated.

Levels of productivity in the United States of America are very high mainly because American people work with more and better type of capital goods built up over the last several years. Low productivity and poverty of developing countries is largely due to the scarcity or shortage of real physical capital in these countries.

Economic growth cannot be speeded up without accumulating various types of capital goods, that is, without building factories, machines, tools, dams, bridges, roads, railways, ports, ships, irrigation works, fertilizers, etc., much economic development is not possible.

But capital formation requires saving, that is, the sacrifice of some current consumption. An increase in supplies of capital goods can only result from investment, and investment in turn is only possible if a portion of current income is saved. Thus saving is essential to economic growth.

According to Professor Arthur Lewis, “The central problem in the theory of economic growth is to understand the process by which a community is converted from being a 5 per cent saver to a 12 per cent saver with all the changes in attitudes, in institutions and in techniques which accompany this conversion Underdeveloped economies generally save very little; not more than 5 per cent of their national income.

For instance, saving in India on the eve of independence was about 6 per cent of the national income. On the other hand, rich countries save from 15 to 30 per cent of their national income. In order to bring about economic growth, rate of savings must be stepped up to over 15 per cent of national income.

But in developing countries, the rate of saving is low because income of the people is low and that they are living at the level of subsistence. Thus, the lower the per capita income, the more difficult it is to forgo current consumption. It is difficult for people living at or near subsistence level to curtail current consumption. This in large part explains the low level of saving in the poor, underdeveloped countries.

It may be noted that gross saving rate in India has now risen to 24 per cent of national income in 2001-02. However, for achieving 8 per cent rate of growth in GNP in the 10th plan period, it is estimated that 32 per cent rate of saving is needed if capital-output ratio remains constant at 4 which was actually obtained in the 9th plan period.

It must be emphasized, however, that savings in itself do not contribute to economic growth. It is only when savings are invested and used productively that they contribute to economic growth. If savings are hoarded in the form of gold or precious jewels, or if they are used for buying land, they do not result in an increase in supplies of capital goods and thus make no contribution to economic growth.

Studies conducted to examine the relationship between invest­ment and growth in terms of increase in GDP has found that there exists a strong correlation between the two though it is not perfect. Countries that allocate a larger fraction of their GDP to investment such as Japan and Singapore achieved high growth rates, and countries that allocate a small share of GDP to investment such as Bangladesh and Nepal have low growth rates.

Foreign Capital: Foreign Aid and Foreign Investment:

As domestic savings are not sufficient to make possible the necessary or desired accumu­lation of capital goods, borrowing from abroad may play an important role. Professor A.J. Brown rightly says that “Development demands that people somewhere should refrain from spending part of their incomes, thus allowing part of the world’s productive resources to be used for accumulation of capital goods. The people who can best afford to do this are generally those who live in countries of high average income. On the other hand, the countries where devel­opment is likely to alleviate suffering and promote welfare to the greatest extent are those where average incomes are low. There is a strong general case for the rich countries lending to the poor ones.”

Nearly every developed state obtained the foreign assistance to supplement its own small saving during the early stages of its development. England borrowed from Holland in the seventeenth and eighteenth centuries, and in turn came to lend to almost every other country in the world in the nineteenth and twentieth century’s.

The United States of America, now the richest country in the world, borrowed heavily in the nineteenth century, and has now emerged as the major lender country of the twentieth century which is assisting the poor countries in their attempts to bring about economic growth.

It should be noted that foreign capital does not flow into the developing countries in the form of aid alone (that is, loans at concessional rates of interest) but also through direct in­vestment by foreign companies. Foreign direct investment (FDI) is an important way for a country to accelerate its economic growth.

Though the foreign companies send back profits earned, their investments in factories increase the rate of capital accumulation in the developing countries leading to a higher rate of economic growth and higher productivity of labour. Besides, foreign direct investment enables the developing countries to learn the new advanced technolo­gies developed and used in the rich developed countries.

The importance of foreign capital is reinforced by the need of a developing country for foreign exchange to buy imports. A developing country has to import huge quantities of capital goods, technical know-how and essential raw-materials which are required for industrial growth and building up of infrastructure such as power projects, roads, irrigation facilities, ports and telecommunication.

For all these, foreign exchange is needed which can be obtained if foreign rich countries lend it to developing economies or if foreign companies make direct investment in the developing countries. If foreign assistance is not forthcoming in adequate quantity, then the developing countries will experience serious difficulties of balance of payments. In the ab­sence of sufficient borrowing from abroad, or direct foreign investment, rapid economic devel­opment of the developing countries will turn their balance of payments seriously adverse.

Furthermore, developing countries suffer not only from a shortage of savings but also from a lack of technical know-how, managerial ability, etc. Foreign capital when it comes in the form of private investment in developing countries by foreign companies, especially the multi­national corporations (MNCs) bring with it these complementary factors which are very essential for development.

Due to bad experience of the colonial rule in the past, the developing countries were generally against the foreign capital, especially against private foreign investment. However the fears of foreign investment and aid are now no longer there.

Further, now multilateral foreign aid is available through World Bank and International Monetary Fund (IMF) which provide loans at concessional rates to the developing countries for accelerating growth. As far as private foreign investment is concerned, the developing countries (including China and India) are com­peting with each other to attract private foreign investors.

In India, the Government has set the target of achieving annual inflow of $10 billion of foreign direct investment. It has now been realised that foreign investment will not only supplement domestic saving and thereby raise the rate of investment, bring better technology and managerial know-how but will also ease the problem of foreign exchange.

Through raising the rate of investment and providing foreign exchange resources, it will not only increase output but will also generate employment oppor­tunities. Besides, like the domestic investment, foreign investment also produces a multiplier effect on output, income and employment in the developing countries.

In the last fifteen years, China’s very high rate of economic growth which is generally described as “Chinese growth miracle” is due to higher inflow of foreign direct investment (FDI) as compared to India. Foreign direct investment flows to China grew from $3.5 billion from 1990 to $53 billion in 2002.

On the other hand, FDI flow to India was a low $0.4 billion in 1990 and rose to $5.5 billion in 2002. Further, FDI has contributed significantly to the rapid growth of China’s manufacturing exports. In India by contrast FDI has been much less important in driving India’s export growth, except in information technology.

For higher foreign direct investment flows to China World Investment Report 2003 mentions among other things that China has more business-oriented and FDI-friendly attitudes, its FDI procedures are easier and decisions are taken rapidly.

Besides, China has more flexible labour laws, a better labour climate and better entry and exit procedures for business. It is therefore not unexpected that China has emerged at the top in attracting FDI flows. Against this, at present (i.e. in 2002) India is 15th in the World’s FDI destination.

Human Capital: Education and Health:

Till recently economists have been considering physical capital as the most important factor determining economic growth and have been recommending that rate of physical capital forma­tion in developing countries must be increased to accelerate the process of economic growth and raise the living standards of the people.

But in the last three decades of economic research has revealed the importance of education as a crucial factor in economic development, Education refers to the development of human skills and knowledge of the labour force.

It is not only the quantitative expansion of educational opportunities but also the qualitative improvement of the education which is imparted to the labour force that holds the key to economic development. Because of its significant contribution to economic development, education has been called as human capital and expenditure on education of the people as investment in man or human capital.

Speaking of the importance of education or human capital. Prof. Harbison writes: “hu­man resources constitute the ultimate basis of production human beings are the active agents who accumulate capital, exploit natural resources, build social, economic and political organ­isations; and carry forward national development. Clearly, a country which is unable to develop the skills and knowledge of its people and to utilise them effectively in the national economy will be unable to develop anything else.”

Several empirical studies made in developed countries, especially the U.S.A. regarding the sources of growth or, in other words, contributions made by various factors such as physical capital, man-hours, (i.e., physical labour), education etc. have shown that education or the de­velopment of human capital is a significant source of economic growth.

Professor Solow who was one of the first economists to measure the contribution of human capital to economic growth estimated that for United States between 1909 and 1949, 57.5 per cent of growth in output per man hour could be attributed to the residual factor which represents the effect of technological change and of the improvement in the quality of labour mainly as a consequence of education.

Denision, another American economist made further refinement in estimating the contribu­tion to economic growth of various factors. Denision tried to separate and measure the contri­butions of various elements of ‘residual factor’.

Denson’s estimates for various sources of US growth during 1929-82 are given in Table-1 As will be seen from the Table-1 Gross Domestic Product in USA grew at the rate of 2.9 per cent per annum over this period. The factors determining growth in this period have been divided into two groups.

It will be seen from the table, the growth in the quantity of labour accounted for 32 per cent of growth in GDP of the USA over this period. The other group consists of various variables determining growth in labour productivity has been divided into five factors. It is noteworthy that education per worker contributed 14 per cent to growth in output during this period technological change contributed 28 per cent to the growth in output.

Thus, growth in education per worker and technological change together accounted for 42 per cent of growth in the output in the USA over this period whereas capital formation contributed 19 per cent to the growth rate. This shows the great importance of education and technological change as determinants of economic growth.

Another approach to measure the contribution of education is based upon the analysis of the relationship between expenditure on education and income. Using this approach Schultz studied the relationship between expenditure on education and individual income and also the relationship between expenditure on education and physical capital formation for the United States during the period 1900 to 1956.

He found that when measured in constant dollars, “the resources allocated to education rose about three and a half times (a) relative to consumer income in dollars, (b) relative to the gross formation of physical capital in dollars” This implies that the “income elasticity” of the demand for education was about 3.5 over the period or, in other words, education considered as an investment could be regarded as 3.5 times more attrac­tive than investment in physical capital. It may, however, be noted that these estimates of Schultz only indirectly reflect the contribution of education to economic growth.

In our above analysis we have explained that education is regarded as investment and like investment in physical capital, it raises productivity of labour and thus contributes to growth of national income. Some economists have argued that education is of crucial importance not only because education raises the productivity and therefore earnings of individual workers, but it creates positive externalities, that is, beneficial external effects.

A positive externality occurs when the activity of a person provides benefits to others. For example, an educated person might generate new ideas which may lead to the improvement in methods of producing goods. When these ideas become a part of society’s pool of knowledge (i.e. stock of human capital), everyone can use them and derive benefits from them.

These ideas are therefore external benefits of education. One problem facing the developing countries, especially India is of brain drain, that is, migration of a large number of highly educated persons (such as those trained by IIT, IIM and medical colleges) to the developed countries such as USA to make higher earnings there. If education has positive external effects, then this brain drain will deprive the Indian economy of the beneficial effects which these educated people would have created here.

(iii) Technological Progress and Economic Growth:

Another important factor in economic growth is progress in technology, Use of advanced techniques in production or progress in technology brings about a significant increase in per capita output. Technological advance refers to the discovery of new and better ways of doing things or an improvement in the old ways.

Sometimes technological advances result in an in­crease in available supplies of natural resources. But more generally technological advance re­sults in increasing the productivity or effectiveness with which natural resources, capital and labour are used and worked to produce goods. As a result of technological advance it becomes possible to produce more output with same resources or the same amount of product with less resource.

But the question arises as to how the technological progress takes place. The techno­logical progress takes place through inventions and innovations. The word invention is used for the new scientific discoveries, whereas the innovations are said to take place only when the new scientific discoveries are used for actual production processes or commercial purposes. Some inventions may not be economically profitable to be used for actual production.

It is quite well known that improvements in technology greatly increase the effectiveness with which natural resources are used. In United States, for instance, increased used of mecha­nized power-driven farm equipment on land has greatly raised the agricultural productivity of land per hectare.

It may also be noted that some technological improvements have resulted in the increased effectiveness with which capital goods are used. But, as stated above, technological change more generally results in higher productivity of resources.

Technological change raises the productivity of workers through the provision of better machines, better methods and superior skills. By bringing about increase in productivity of resources the progress in technology makes it possible to produce more output with the same resources or the same amount of output with less resource.

Technical progress manifests itself in the change in production function. So a simple meas­ure of the technical progress would be the comparison of the position of production function at two points of time. The technological change may operate upon the production function through improvements of various sorts such as superior equipment, an improved material, and superior organisational efficiency.

Also, the technological progress may express itself in making available new products. It is now widely accepted that technological change raises productivity and that a continuous technological change will enable the economy to escape from being driven to the stationary state or economic stagnation.

Classical economists like Ricardo and J.S. Mill expressed fear that the increase in the stock of capital will sooner or later, because of the operation of diminishing returns, land the economy into stationary state beyond which economic growth will come to an end.

Classical economists remained occupied with the idea of a sta­tionary state because they did not take into account technological progress that could postpone the occurrence of a stationary state and ensure continued economic growth. Indeed, if techno­logical progress continuously takes place, demon of stationary state can be put off indefinitely.

It may be noted that Adam Smith viewed technological progress as a rise in productivity of workers as a result of increase in division of labour and specialisation. The rise in productivity leads to the growth in national income. But it was J.A. Schumpeter who laid great stress on the role of technological innovations in bringing about economic growth. He laid stress on the introduction of technical innovations in bringing about economic progress.

It is the entrepreneur who carries out the innovations and organises the production structure more efficiently. As, according to Schumpeter, innovations occur in spurts rather than in a smooth flow, economic progress is not a smooth and an uninterrupted process. The pace of economic progress is punc­tuated by the pace of innovations. Prof. Rostow proposed five stages in the development of an economy.

These stages are:

(i) Traditional society;

(ii) Preconditions for takeoff;

(iii) Take-off into self-sustaining growth;

(iv) Drive to maturity and

(iv) Stage of high mass consumption.

It may be noted that the economic transformation of the society from one stage to another involves, along with other things, a change in the level and character of technology. In the present age of greater specialisation it is the technology factor that underlies all major aspects of the modern productive apparatus such as decision making, production programming, skill requirements and market strategy.

Productivity of worker depends upon the quantity and quality of capital tools with which the labourers work. For higher productivity the instruments of production have to be techno­logically more efficient and superior. The technological options open to an economy determine the input-mix of production. A commodity can be produced by various technologies.

The quantity and quality of capital, skills and other factors required for production is directly dependent on the efficiency of the technique of production being used. Also, the managerial and organisational expertise has to be in tune with the technological requirements of production. Viewed thus, technology in the present stage of economic development is an indispensable factor of produc­tion.

This is the age of technology. The developing countries are obsessed by the desire to make rapid progress in technology so as to catch up with the present-day developed countries. Strenu­ous efforts are being made to use improved technology in agriculture, industries, health, sani­tation, education and, in fact, in all walks of human life. Indeed, the newly emerging nations have come to regard technology as a bastion of national autonomy and as a status symbol in the international community.

The process of technological progress is inseparably linked with the process of capital formation. In fact, both go hand in hand. Technological progress is virtually impossible without capital formation. It is because the introduction of superior or more efficient techniques require building up of new capital equipment which incorporates new technology.

In other words, new and superior technology can contribute to national product and its growth if it is first embodied in the new capital equipment. The new capital investment has, therefore, been called the vehicle for the steady introduction of new technology into the economy.

The new inventions and innovations lead to new and more efficient techniques of produc­tion and new and better products. As is well known, it is the inventions and innovations in cotton textile industry that led to the industrial revolution in England. In the olden times in­ventions were the work of some individuals and innovations were introduced into the production process by the private entrepreneurs.

Keeping in view the importance of technological progress in the economic growth of a country, the governments of various countries are spending a lot of money on “research and development” (R & D), which is carried on in various laboratories and institutes to promote technological progress.

Developing countries are using the technology imported from the developed countries be­cause they have not yet made sufficient progress in technology, nor have they developed to adequate extent capital goods industries which produce capital goods, embodying advanced tech­nology.

But imitation and use of the technology of the advanced countries by these under-de­veloped countries has produced one unfavourable result. It is that the technology of the advanced countries is not in accordance with the factor endowments of these developing countries, since they have abundance of capital while the developing countries have surplus labour.

As a result of the use of the capital-intensive technology, enough employment opportunities have not been created by the large-scale industries using imported technology. As a result, unemployment in developing countries like India has been increasing despite the progress in industrialisation of the economy.

In view of this not so happy experience in regard to the creation of employment opportunities by industrial growth, an eminent English economist, Prof. Schumacher has recom­mended the use of intermediate technology or what is also known as appropriate technology by the developing countries like India.

By Intermediate or appropriate technology is meant the technology which is labour-intensive and yet highly productive so that with its use enough employment opportunities are created along with more production. But in order to find out this appropriate technology for several industries, a good deal of research and development (R & D) activity is required to be carried out.

(iv) The Growth of Population:

The growth of population is another factor which determines the rate of economic growth. The growing population increases the level of output by increasing the number of working population or labour force provided all are absorbed in productive employment.

We saw above that according to estimates of Denison, increase in the quantity of labour contributed to the extent of 32 per cent to economic growth of output in the USA during 1929-1982. Moreover, the increase in population leads to the increase in demand for goods.

Thus, growing population means growing market for goods which facilitates the process of growth. When market for goods is enlarged, they can be produced on a large scale and thus economies of large-scale production can be reaped. The economic history of USA and ‘European countries’  shows that population growth contributed greatly to the increase in their national output.

But what has been true of U.S.A. and European countries may not be true in case of the present-day developing countries. Whether or not the growth of population contributes to eco­nomic growth depends on the existing size of population; the available supplies of natural and capital resources, and the prevailing technology.

In the United States, where supplies of natural and capital resources are comparatively abundant, the growth in population raises national output by increasing the quantity of labour. In India where supplies of other economic resources especially capital equipment, are relatively scarce, increase in population hinders economic growth instead of promoting it.

Labour is combined with capital to produce goods and services. Therefore, increase in the quantity of labour force will contribute to economic growth when the cooperating factor capital is also increasing. In the modern times workers need machines, tools and factories to work. Since a developing country such as India has a lot of surplus labour but a small stock of capital, the workers cannot be productive if they are employed in some activities.

We thus see that a rapidly growing labour force by itself is no guarantee of economic growth. Increase in national output, that is, economic growth is possible only when the supplies of capital and other resources are increasing adequately along with the growth of labour force. If, on the other hand, when the supplies of capital and the other resources are meagre, the increase in the labour force (or population) will merely add to unemployment and will not bring about increase in national output.

As stated above, economic growth requires increasing supplies of capital goods. Increasing supplies of capital goods become possible only with higher rate of investment. And a higher rate of investment, in turn, is possible if rate of saving is high.

Now, increase in population by adding to number of mouths to be fed tends to raise consumption and, therefore, lowers both saving and investment. Thus rapid growth of population by causing lower rate of saving and investment tends to hold down the rate of economic growth in developing countries. Thus, under conditions like those in India population growth actually impedes economic development rather than facilitates it.

It is worth noting here that changes in total GDP which are used to measure rate of economic growth are not a good measure of economic well-being. For the purpose of evaluating changes in economic well being or living standards of the people of a country GDP per capita is more important for it tells us the amount of goods and services that is available for an individual in the economy.

But how does growth in population or labour force affect GDP per capita? The reason is that rapidly increasing labour forces the economy to spread more thinly the other cooperating factors, especially capital and land. As a result, capital or land per work declines causing decline in productivity of GDP per worker.

Further, rapid population growth nullifies out efforts to raise the living standards of our people. In other words, a high rate of increase in population swallows up a large part of the increase in national income so that per capita income or living standard of the people does not rise much.

This is precisely what has happened during the planning era in India. This while the aggregate national income of India went up by 17.5 per cent in the first plan period and 20 per cent in the second plan period, per capita income rose by only 8 per cent and 9 per cent respectively.

Over the period of the third plan, as against an increase of 11.5 per cent in national income, per capita income improved by only 0.5 per cent. The relatively slow rate of rise in per capita income has been due to rapid population growth. The annual rate of population growth which was no more than 1.86 per cent in the First Plan period went up to 2.15 per cent in the second plan period and further to 2.25 per cent in the third and fourth plans.

Harrod-Domar Growth Equation: Rate of Investment and Capital-Output Ratio as Determinants of Growth:

We have analysed above the various factors such as availability of natural resources, rate of saving and capital formation, foreign capital, technological progress, increase in population which determine economic growth in a country.

These determinants of economic growth affect (1) the rate of investment and (2) captia-output ratio. Therefore, the rate of economic growth, that is, increase in GNP depends upon the rate of investment and capital-output ratio. This fact is brought out by the growth models of Harrod and Domar.

According to Harrod-Domar growth models rate of economic growth is given by the following formula:

g= I/v

Where g stands for rate of growth (i.e., rate of increase in GNP)

I stands for rate of investment, and

v for capital-output ratio

The above equation can also be expressed in the following form:

Rate of Growth = Rate of Investment/Capital – output Ratio

If in an economy rate of investment is 30% of national income and capital-output ratio is equal to 4, then from the above formula, we can find out the rate of economic growth.

Rate of Growth = 30/4 = 7.5

Therefore, the rate of increase in GNP of national income will be 7.5 per cent per annum.

In the Tenth Five Year Plan (2002-07) it has been planned that the rate of investment will rise to 28 per cent of national income. Besides, through increase in efficiency capital-output ratio has been estimated to decline to 3.5.

With 28 per cent of national income as rate of investment and 3.5 as capital- output ratio, target rate of growth during the Tenth Plan period has therefore been fixed at 8 per cent per annum (Applying Harrod-Domar growth equation, namely, (g = 1/v = 28/3.5 = 8% ). The experience of the last four years shows that both these targets of average rate of investment of 28 per cent per annum during the 10th plan period and 3.5 as capital-output ratio will be achieved.

As a matter of fact, on the basis of this Harrod-Domar growth model, it was suggested by several economists that in order to achieve a higher rate of growth, the developing countries should get foreign aid and foreign direct Investment to supplement their domestic savings to raise the rate of investment to the desired level.

In follows from above that in addition to rate of investment capital-output ratio is an important factor that determines rate of economic growth in the country. Give the rate of investment, the lower the capital-output ratio the higher the rate of economic growth. Therefore, the study of capital-output ratio at some length is called for.

Role of the Government towards the Development of the Country

Role of the Government Can Broadly Be Divided Into Two Parts:

1. Direct Role:

The government is a social-welfare organisation. It works for the benefits of the common people without making any motive to maximise profit.

Hence, the main agenda of the government is welfare maximisation.

Government Measures to Promote Economic Development

The direct involvement of the government towards the country’s development is summarised below:

(a) Agricultural Growth:

India is an agro-based country. The main occupation of the Indians is agriculture and its allied activities like farming, poultry, cattle rearing, fishing, animal husbandry etc. According to recent statistics, about 67 per cent of the labour force in India is engaged in agriculture. They are producing about 22 per cent of the country’s GDP (Gross Domestic Product).

However, due to defective planning and improper implementation the productivity of Indian agriculture is very poor. Improper land tenure system, wrong landholding inadequate credit system, primitive technology and old system of ploughing and irrigation etc. are the main reasons behind low productivity of Indian agriculture. To overcome all these difficulties, government adopts several measures, including land reforms, new tenancy system, economic subsidy etc. for the growth of per hectare agricultural production.

 (b) Industrial Growth:

In the Second Five Year plan the Government of India had given huge emphasis on the development of basic and heavy industries like steel, iron, cement, power etc. Although consumer goods industries are growing up properly, but the capital goods industries have lost their momentum. Most of the industries have become sick and weak. To save these situations, in 1991 the Government of India adopted New Industrial Policy.

By the policy of privatisation, the government gives enough licence to the private sectors for developing consumer goods industries along with few heavy engineering goods. However, the core basic industries like defence, railway, power and energy etc. are still under the government hand. Proper credit facilities and adequate subsidies are also provided to the industrialists to increase their scale of production.

(c) Development of Socio-Economic Infrastructures:

In order to maintain a smooth functioning between agriculture and industrial sectors, a sound socio-economic infrastructure is necessary. Thus, government is investing huge amount money of for the development of overhead capitals like energy, power, transport, communications, education, health, housing etc. Moreover, the government is also giving stress on the development of other tertiary sectors like banking finance, insurance etc.

(d) Efficient Utilisation of Resources:

All the countries have different types of natural and economic resources for their own use. These resources are used optimally to satisfy maximum wants among the economy. This will enable the country to achieve the path of economic development. Hence, efficient utilisation of domestic resources is the main role of the government.

(e) Maintain Law and Order:

The government or the state plays an important role in maintaining peace law and order within the economy through effective administrative system. The state runs defence, police and court to maintain peace and order both externally and internally.

 (f) Social Distributive Justice:

To implement social distributive justice, i.e., to reduce inequalities between rich and poor, the government plays a vital role in an economy. The government takes several measures in this context, such as;

(i) Progressive Taxation:

Here rate of taxation increases along with the increase in income. For example, rich or high income earning people will give more taxes, while poor people will either pay low taxes or no taxes at all.

(ii) Economic Subsidy:

The state gives economic subsidies to the poor people for the consumption of necessary goods. Again, it also gives subsidies to the poor farmers for buying their seeds, fertilisers, pesticides etc. during the time of cultivation.

(g) Control of Monopoly:

The state adopts several controls to give benefits to the citizens. The Government of India took the policy of MRTP (Monopolies and Restrictive Trade Practices) Act to control the economy from the hand of few monopolists and also to stop consumers, exploitation. Moreover, the state also adopts social monopoly like Indian Railway, Post & Telegraph to give a bit of relief’ to the common mass.

(h) Active Participation:

The state actively participates into the economy on the following grounds:

(i) To maintain price stability or to control inflation;

(ii) To stop black marketing, by the policy of price ceiling;

(iii) Direct intervention during the time of political disorder or chaos;

(iv) Direct participation during financial or economic crisis,

(v) Sole intervention during the time of war emergency or natural disasters,

(vi) Regular supply of essential commodities to the weaker section of the society through effective Public Distribution System (PDS).

2. Indirect Role:

In spite of several direct roles, the government also plays different indirect roles for the rapid economic development of the country.

These indirect measures or roles are briefly given below:

(a) Fiscal Policy:

All the government policies related with public revenue and expenditures, i.e., taxes and subsidies, are related with fiscal policies. With the proper implementation of these policies the state tries to raise economic development of the country.

It helps to perform following functions:

(i) To control inflation,

(ii) To increase capital formation,

(iii) To maintain equalities of income and wealth;

(iv) To stabilize market.

(b) Monetary Policy:

The government along with the Central Bank with the help of this policy controls the money market. In India, Reserve Bank of India (RBI) along with all the commercial banks tries to control and regulate the money supply. During the time of inflation, i.e., excessive rise in price level, the government with the help of RBI checks the money supply and credit creation. On the other hand, during deflationary situation money supply increases.

(c) Price Measures:

The main objective of the state is to safeguard the common mass from the exploitation of private entrepreneurs. In this connection, the state sometimes adopts the price measures of essential commodities and services through the policies of price ceiling and price flooring.

(d) International Trade Policy:

According to Simon Kuznets, “Trade is the engine of economic growth.” The government controls and regulates the trade policies by imposing tariffs, quotas, duties etc. The main intention of the trade policies to regulate exports and imports for improving the Balance of Payment (BOP) situations and increasing the stock of foreign exchange reserves. All the above measures, i.e., both direct and indirect roles, are performed by the government to achieve economic development and to create the concept of Welfare State.

Understanding Financial Regulatory Bodies in India

40

In India, the financial system is regulated with the help of independent regulators, associated with the field of insurance, banking, commodity market, and capital market and also the field of pension funds. On the other hand, the Indian Government is also known for playing a significant role in controlling the field of financial security and also influencing the roles of such mentioned regulators. You must be aware of the regulatory bodies and their functions, before a final say. The most prominent of all is RBI or Reserve Bank of India. Let us look in detail about various Financial Regulatory Bodies in India.

RBI – Reserve Banks of India :

Reserve Bank of India : Reserve Bank of India is the apex monetary Institution of India. It is also called as the central bank of the country.

The Reserve Bank of India was established on April 1, 1935 in accordance with the provisions of the Reserve Bank of India Act, 1934. The Central Office of the Reserve Bank was initially established in Calcutta but was permanently moved to Mumbai in 1937. The Central Office is where the Governor sits and where policies are formulated. Though originally privately owned, since nationalization in 1949, the Reserve Bank is fully owned by the Government of India.

The Central Office is where the Governor sits and is where policies are formulated. Though originally privately owned, since nationalization in 1949, the Reserve Bank is fully owned by the Government of India.

SEBI – Securities and Exchange Board of India :

Apart from RBI, SEBI also forms a major part under the financial body of India. This is a regulator associated with the security markets in Indian Territory. Established in the year 1988, the SEBI Act came into power in the year 1992, 12th April. The board comprises of a Chairman, Whole time members, Joint secretary, member appointed, Deputy Governor of RBI, secretary of corporate affair ministry and also part time member. There are three groups, which fall under this category, and those are the investors, the security issuers and market intermediaries.

PFRDA – Pension Fund Regulatory and Development Authority :

Pension Fund regulatory is a pension related authority, which was established in the year 2003 by the Indian Government. It is authorized by the Finance Ministry, and it helps in promoting income security of old age by regulating and also developing pension funds. On the other hand, this group can also help in protecting the interest rate of the subscribers, associated with the schemes of pension money along with the related matters. PFRDA is also responsible for the appointment of different other intermediate agencies like Pension fund managers, CRA, NPS Trustee Bank and more.

FMC – Forward Markets Commission :

Other than the financial bodies mentioned above, FMC also plays a major role. It is the chief regulator of the commodity(MCX, NCDEX, NMCE, UCX etc) of the Indian futures market. As per the latest news feed, it has regulated the amount of Rs. 17 trillion, under the commodity trades. Headquarter is located in Mumbai, and the financial regulatory agency is working in collaboration with the Finance Ministry. The chairman of FMC works together with the Members of the same organization to meet the required ends. The main aim of this body is to advise the Central Government on matters of the Forwards Contracts Act, 1952.

IRDA – Insurance Regulatory and Development Authority :

Lastly, it is better to mention the name of IRDA or insurance regulatory and Development authority, as a major part of the financial body. This company is going to regulate the apex statutory body, which will regulate and at the same time, develop the insurance industry. It comprised of the Indian Parliamentary act and was passed duly by the Indian Government. Headquarter of this group is in Hyderabad, and it was shifted from Delhi to Hyderabad. These are some of the best-possible points, which you can try and focus at, while dealing with financial bodies of India.

 Development of Social Infrastructure | India | Economic Development

In this article we will discuss about the development of social infrastructure in India.

Economic development depends on the existence of an integrated infrastructure or social over­head capital which generates externalities. This is why, since 1956, serious attempts have been made to build heavy industries in the public sector.

In fact, one of the causes of expansion of the public sector in India has been infrastructure building. Heavy industries such as iron and steel, coal, power, petrochemicals, heavy engineering, automobiles, etc. are essentially input-supply­ing industries.

This is why, since its very inception, the World Bank has played a positive role in infrastructure financing. Economic development depends not only on economic infrastruc­ture like a well-developed transport and communication network or the extension of irrigation facilities in dry areas—but also on social infrastructure. In a broad sense, economic develop­ment depends on expansion of not only society’s production capacity but also on social and economic opportunities.

Therefore, not only economic infrastructure but also human capabili­ties play a central role in economic development. Human capabilities depend on basic educa­tion, health services, ownership patterns, social-stratifications, gender relations and the oppor­tunity of social cooperation.

Public Goods and Positive Externality:

Education and health are not only public goods, but merit goods as well. They generate positive externalities in the sense that marginal social benefit far exceeds private benefit. So these are undersupplied—actual output is less than the socially desirable level. This is an example of market failure and calls for optimal correction through grants and subsidies.

Structural Adjustment Programmes:

Since the 1990s, the IMF and the World Bank have imposed certain conditions on developing member countries for obtaining financial assistance. Such conditional loans are known as struc­tural adjustment loans. The purpose of structural adjustment lending and structural adjustment programmes is to improve growth potential of countries, with focus on key macro variables of GDP growth, savings, investment, exports and the balance of payments.

Of late the IMF and the World Bank have insisted that LDCs undertake programmes with focus on poverty alleviation. This demands building up of an integrated social infrastructure (SA). This is absolutely essential for achieving faster economic growth and higher standard of living through proper provision of social goods.

The Main Theme:

India’s main task ahead is the ending of poverty and ignorance and disease and inequality of opportunity, which expands our freedom to lead the lives we value. These ‘elementary capabilities’—a term coined by AmartyaSen-can and do contribute much to economic growth and make the growth process participatory. Moreover, human capabilities are among the chief means of economic success.

We must also recognise the intrinsic importance of human capabilities and effective freedom as the ends of social and political organisations .The first and the most importance task we face is the elimination of illiteracy, ill-health and other avoidable deprivations.

We have to recognise human capabilities as instruments for economic and social performance. Basic education, good health and other human attainments are not only directly valuable as constituent elements of our basic capabilities, these capabilities can also help in generating economic success in the sense of contributing to enhancing the quality of human life in other ways.

It is a mistake to see the development of education, health care and other basic achievements only or primarily as expansions of ‘human resources – the accumulation of ‘human capital’ as if people were just the means of production and not its ultimate end. AmartyaSen calls for structural adjustment with a human face. This will not be a reality in the absence of adequate and timely development of social infrastructure.

Structural Adjustment and Social Infrastructure:

Many of the developing countries of Asia, Africa and Latin America-which experienced slow economic growth or none at all in the 1980s-undertook programmes of ‘structural adjustment’ in cooperation with the IMF and the World Bank. These countries agreed to make major policy changes-correcting macroeconomic imbalances and reforming macro and sectoral policies in exchange for external assistance.

In 1990, the United Nations called for ‘adjustment with a human face’ which requires a set of policies that would permit growth to resume, raise the productivity of the poor, improve the equity and efficiency of social services, compensate the poor for deficits in nutrition and health services during adjustment periods of limited duration and improve monitoring of the conditions of affected low income groups particularly children.

While macroeconomic adjustment programmes undoubtedly can be carried out in ways that give more attention to the plight of the poor, a more funda­mental solution to the problem of poverty in Third World countries that have not been grow­ing is resumption of economic growth itself, combined with the provision of basic social services to the poor and policies that seek to increase their participation in the development process. It is against this backdrop that we evaluate India’s progress in sustaining reform and reducing poverty, with particular reference to development of social services and social in­frastructure.

India’s Performance in Developing Social Infrastructure:

India continues to make good progress in increasing incomes and improving living standards over the past decades. Since the adoption of economic reform programmes in July 1991 in the context of the structural adjustment programmes, poverty continues to decline and many social indicators—in particular literacy—continued to improve.

Assessing Development Outcomes:

While poverty and education indicators have improved, those for maternal and under-five mor­tality have not. Also, the new threat of HIV-AIDS is spreading quickly with more than a billion people and one-third of the world’s poor, India needs rapid growth to reduce poverty and create enough jobs to sustain income increases for its population This demands development of social infrastructure at an accelerated rate.

Improving Social Infrastructure (Health and Education for the Poor):

In LDCs like India, development of SI is vitally important for achieving faster economic growth and alleviating poverty. India’s Five Year Plans have failed to eliminate poverty for at least four reasons- malnutrition, poor health, a lack of learning opportunities, and limited choices Good education, health and nutrition and low fertility help reduce poverty by increasing opportunities to generate the right income. By the same token, an improved standard of living leads to gain in health and education, freeing people from the trap of ignorance and exposure to disease.

There are also positive connections between health and education. Education empowers people to use information better to make healthy behavioural choices; the healthy are more likely to attend school or go to work and can learn and work effectively.

But the sad truth is that costs of illness keep people in poverty and poor quality education limits their opportunities to escape poverty Progress in providing social infrastructure is both a vital yardstick of and a key element in the reduction of poverty.

In a broad sense, health includes physical conditions, sanitation, as also health-related areas such as sanitation and water supply. However, Indian economy is still characterised by low levels of literacy and school enrolments and high levels of infant mortal­ity, maternal mortality and malnutrition, relative to China and Indonesia and even other low- income countries. It will be difficult to reduce poverty substantially in the absence of major improvements in spending on and delivery of health and education services.

The delivery of public services in health and education is fraught with problems related to limited accountability for performance, low management and worker incentives, inadequate materials and equipment for effective health care and education, demands for payment for public services and poor targeting of services and subsides at the poor. As a result, private delivery of health and education is expanding rapidly-to the public in general and even to the poor.

Educational Outcomes:

In India as in other developing countries, greater coverage and more effective elementary edu­cation in grades 1-8 would be the education sector’s most significant contribution toward alleviating poverty.

No doubt—average educational attainment has improved in India. Yet India still lags behind other developing countries in average educational attainment—particularly among the poor. No doubt large benefits arrive from achieving a critical minimum level of education across the population.

It appears that mass expansion of primary education to raise India’s currently low educational participation levels (averaging two years) to four-five years of primary education per worker would have high economic and social pay-offs. The pay-offs would be particularly high for the poor, less than 20% of whom currently complete one to eight primary grades.

A major indication of India’s recent progress in education is the significant rise in literacy rates within a decade from 52%-64%. Progress is still slow but the number of illiterates (aged seven and above) which had actually risen from 1981 to 1991 declined from 1991 to 2002.

Among the States, some poorest—for example UP, Bihar and Rajasthan—registered signifi­cant improvements in literacy from low bases. In most of these States, female literacy rose even faster than overall literacy. Although India has raised literacy rates, it still has a long way to go. Even China and Indonesia have overtaken India in literacy rates.

Gross enrolment ratios have also improved reaching 90% at the primary stage in which girls’ enrolment being 73%. In spite of this, 33 million children in the age group 6-11 are still out of school. Moreover, 7.8% girls and 6.9% boys in the age group 6-11 are in the workforce, mostly in rural areas. Children of poor families are less likely to be enrolled in schools. This is a major factor behind the low enrolment rates. Moreover, primary-level learning achievement is low.

Health Outcomes:

These have also improved but have a long way to go, particularly among the poor. No doubt life expectancy at birth improved from 51 to 61 between 1973 and 2003 and the infant mortal­ity decreased from 137 to 74 per 1,000 live births. On the demographic front, fertility had declined to 3.6 births per woman in 2003 compared to 6 in 1951.

Nutrition is a particular problem area. India has a percentage of malnutrition and some segments of the population have among the highest levels of malnutrition in the world. Wean­ing children and women are particularly affected. There have been only modest declines in the levels of severe and moderate malnutrition in children in the last 20 years.

The poor suffer from health and poverty related problems – high infant mortality rate, high mortality rates, high fertility rate and high rates of child malnutrition. The reduction in infant mortality has slowed down during the 1990s.

The proximate reason is the slowdown in poverty reduction. Another reason is the impact of the stubbornly high levels of disease and malnutrition as also poor sanitation and water supply, particularly in the poorer States.

India’s health programmes need to improve their services for females. India’s ratio of fe­males to male is below one – 927 females to 1,000 males. This gender disparity suggests a need to make India’s health care, nutrition and social rights of women more equitable.

The relative neglect of women’s health is also reflected in poor reproductive health indicators: maternal mortality is over 430 deaths per 100,000 live births in India, compared to an average of 350 among low and middle-income countries. Health and education outcomes are inter-related. Educated people take more care about their health. And healthy workers are more efficient than workers with ill-health.

Major Challenges:

India’s social services are facing major challenges. A growing population, industrialisa­tion and a globalizing economy that places a premium on information and technology are stretching the capacity of India’s educational system to deliver relevant and effective serv­ices.

Yet enormous tasks remain: getting 33 million children from poor families into pri­mary schools, increasing the retention rates so that more children finish primary grades and upgrading the average quality of the schooling received. In health, the country is un­dergoing an epidemiological transition.

There continue to be high rates of communicable diseases, malnutrition and maternal; and parental illnesses, representing a large unfinished agenda that predominantly affects the poor. There are also growing rates of non-communi­cable diseases, while rapid urbanisation is creating new health problems. New diseases, notably AIDS, are placing great strains on society and the health of the poor in particular! Even though the social sectors are changing dramatically, the role played by the public sector has changed little.

Institutional Arrangements:

Elementary education in India has seen two positive developments in the past decades. First, it has been brought to the fore as a priority issue. Second, with a series of externally funded and centrally sponsored projects including the District Primary Education Programme, it has seen a great deal of innovation and experimentation aimed at qualitative improvement of the services offered by the system including partnerships with some NGOs. Although there are some exam­ples of successful programmes and practices, the larger system continues to raise challenges and concerns related to quality and management.

Joint Responsibility:

Education and health are joint responsibilities of the Central and State Governments, with funds provided by both levels of government and delivery of services, largely a State responsi­bility. There is need for planning and training to ensure effective financing and management at the decentralised levels. Public education and health involve enormous infrastructure and are thinly spread across the country. Day-to-day management of services of the size, not to speak of training and up­grading, is a major task, even at the state level.

Public Sector Financing of Health and Education:

In education, Central and State Government expenditures in 1996-97 were 4% of GDP. In 1999-2000 budget the Central Government’s Plan Expenditure on education were 6.6% of its total Plan Expenditure and its overall expenditure on education was 2.5% of its overall expen­ditures. The Central Government’s share is still a small part of overall government spending on education.

In the distribution of general government expenditure among educational levels, elementary education (which most benefits the poor) receives per student a much smaller level of funding and subsidy compared to secondary and tertiary education.

Suggestions:

The need to broaden the coverage of elementary education among the poor and to improve its quality, including the targeted goal of universalizing it, means that more funding is needed. States have to provide most of this funding.

The Central Government will also need to expand its role in elementary education in view of the low level of resources that many State Governments devote to primary education and the large number of children not enrolled in schools. There is also a need to build, in States and districts, the capacity to plan and manage education more effectively and the need for research to identify more cost-effective strategies.

Moreover, due to the poor financial (budgetary) position of the States, there is need to reduce implicit and explicit subsidies on education.

Achievements so Far:

A. Health:

In health, India’s public spending is very low – only 1.2% of its GDP. Public spending on preventing and promotive primary care services has not kept up with the growth of demand for services, particularly for people below the poverty line.

India also lags in addressing the determinants of good health that lie outside the health system such as in water and sanita­tion, nutrition and education. For example, at 0.5% of GNP, India spends far less on nutri­tion programmes than what is needed to reduce the high rates of malnutrition.

B. The Private Sector’s Role in Education and Health:

In education, total private spending (excluding overseas education) is estimated at about one-third of education expenditure.

Private spending on elementary education is expanding rapidly because of:

(a) The inability of the public system to deliver; and

(b) Parental inability to pay.

Private schools are unlikely to improve the education of the poor directly, because they remain outside the reach of the vast majority of the poor. Other critical issues are the ab­sence of adequate information and regulations on private school quality, the possible shift of the more articulate/education oriented parents to private schools creating less pressure on the public system and the vast differences in the standards of schooling.

Although India’s public spending on health is low, overall health spending is high because of private spending. Private spending on health is four times public spending that is about 80 % of health spending in India. As a result, India’s overall expenditure on health is about 6% of GDP, one of the highest in developing countries.

There are large inter-State variations in private financing and provisions. For example, the lowest proportions of private hospital care are in rural Orissa and West Bengal (9% and 18% of hospitalizations, respectively), compared to over 75% in rural Andhra Pradesh and Bihar.

Despite the high levels of spending on health reflecting high private spending, India’s health indicators are relatively poor. The private health sector, as currently organised, is unlikely to improve the health and nutritional status of the poor substantially. Private spending and delivery neglect ‘public goods’ or inequality-reducing characteristics of key preventive and promotive health services.

The private sector remains virtually un­organised and has a widely variable quality of care. Moreover, much of the private sector is dominated by profit motives often resulting in over education, inappropriate use of technology and overcharging of patients. These problems are really serious for the poor who lack information on the quality of care and have a hard time paying for private care.

On the other hand, as in education, the failings of the public sector health services are leading to rising demand for private services. So the public sector has an important role to play in enhancing the effectiveness and access to individual health services, and in developing and implementing comprehensive policies addressing pri­vate financing and delivery.

Summary and Conclusion:

1. The poor are often not reaping benefits from public health and education services. In con­trast, education and health costs are enormous burdens for the poor.

2. Health care also absorbs a major portion of poor families’ incomes but often the spending and public health services do not yield much benefit. In such a situation, health gaps be­tween the rich and the poor are likely to increase.

3. Special attention is to be paid to the role of basic education in social transformation as well as economic expansion.

4. No doubt health and education services are a public responsibility. But the goal of reduc­ing poverty in India will remain elusive as long as the poor have low utilisation of preven­tive and curative health services, poor hygienic conditions, low school enrolment and at­tendance and poor quality schools and health services.

5. The rapid expansion of the private sector in health and education is partly a result of the public sector’s problem in providing quality services. But private sector activities in these areas are not effective in providing public goods and are beyond the reach of many of the poor.

6. Improvements in education must emerge from the community and at the school level. What is of paramount importance in reducing poverty is faster economic growth. This can be achieved by making more investment on human capital.

However, stress should be not on a crash programme of educational expansion beyond the capacity of a limited number of teachers but on purposive education to meet the changing needs of India’s new economy characterised by ongoing structural transformation. The focus should be on the quality of education which helps in raising total factor productivity.

7. The resources that are applied to improving primary education need to be targeted at those groups in the population that are most in need of support.

8. Public investments in health are critical for the sustainability of India’s development and poverty alleviation.

Three broad strategies for reforming the health sector are:

a. Using public information more strategically to empower consumers of health care and enable people to be better providers of their own health care

b. Rejuvenating the public sector to better deliver its core services, and

c. Engaging the private sector to better meet societal health goals.

The private sector needs to be engaged as an agent to meet the basic societal goals of good health, particularly for the poor. Private providers and government should develop forums to form a common agenda for action.

No doubt more spending on health and education is needed. But three most important steps are to be taken to improve education and health services that would not only help India to grow faster but would also contribute to reduction in poverty in all its dimensions:

a. Spend more effectively on elementary education and basic health systems, with better targeting to the poor and with more public funding.

b. Focus public education and health services on meeting consumer needs, which will help improve the quality of public spending.

c. Realign the role of the state with a focus on primary education and health (in view of interdependence between health and educational standards) and water and sanitation, while making efforts to upgrade private education and health services and to use them effectively.

What are the Important Types of Economic Planning?

 (1). Direction and Inducement Planning:

(i) Planning by Direction:

Planning by direction is an integral part of a socialist society. It assumes complete absence of laissez faire.

Therefore, it implies complete centralized planning with no features of a private economy. Under planning by direction, planning authority takes charge of the productive resources and use them in accordance with social priorities.

In other words, there is one central authority which plans, directs and orders the execution of the plan. Market forces are not allowed to operate freely. Both saving and investment are strictly controlled by the planning authority. The state holds the commanding posts in its hands by taking over entire private industrial and agricultural sectors and banking and transport. “Without such concentration, the state would lack the means to carry out the tasks of the plan. Provisions in the plan would be mere pious wishes without any guarantee of realization attached to them.”

Planning by direction is comprehensive and embraces the entire economic life of the country. Russia provides the best example of planning by direction. Under such planning, the targets for optimum planning can be realized. Full employment can be ensured. Oligopolistic and monopolistic tendencies can easily be eliminated.

Arguments against Planning by Direction:

1. It provides no consequence of actions:

Modern economic system is so complex that no planning authority can take quick and right decisions to tackle its old problems. Prof. Lewis says that, “in planning by direction, the result is always a shortage of something and a surplus of others.”

2. Imperfect Result:

It has also been noticed that planning by direction seems accurate and perfect at the time of formation but fulfillment may be upset due to some adverse circumstances, thus, it delivers imperfect and wrong results.

3. Inflexible:

In the case of direction planning, all schemes are finalized once for all and there is no scope for revision and modification. Thus, it becomes rigid. Prof. Lewis has rightly observed that “the price mechanism can adjust itself from day to day, the flow of money alters and prices and production respond, but the economy planned by direction is inflexible.”

4. Costly Affair:

Planning by direction requires the services of thousand of economists and an army of clerks for its implementation. In this way, it is costly affair to assign a large number of man power just for nothing while this job can simply be done by price mechanism.

5. Only Temptation for Higher Standardization:

No doubt, standardization is known engine of growth but, in fact, it is an enemy of happiness. It may be fatal in case of foreign trade as a country can maintain foreign trade only if it is pioneering new ideas, inventing new goods and further making adjustment in its production to consumer reaction.

6. No Place for Consumer’s Sovereignty:

In direction planning, there is no place for consumer’s sovereignty. Both consumer and labour markets are determined by the planning authority.

(ii) Planning by Inducement(encouragement):

Planning by inducement is consistent with democratic planning. It referred to the planning by manipulating the market. There is no compulsion and direction but only persuasion. Therefore, in planning by inducement, the state manipulates the market economy not by command but by providing inducement to secure its objectives.

The planning authority induces the people through monetary and fiscal measures and through appropriate price policies to act in certain desired ways. In case, planning authority wishes to raise the level of production, it can do so by granting subsidies. Similarly, price control and rationing, can be adopted in case of scarcity.

Furthermore, in order to increase the rate of capital formation, planning authority can undertake public investments or encourage private investment. In a real sense, quantitative methods of credit control can help in a long way in maintaining the price level while qualitative method of credit control can help in diverting investment into desired channels.

Difficulties:

Prof. Lewis has pointed out the following difficulties of planning by inducement:

1. Difficult to adjust Demand and Supply:

Shortage or surplus is a common phenomena in an economy. Price control and rationing may be essential until supply is augmented to meet the increased demand. Under these circumstances, the efficiency of planning is judged not by excellence of the system of rationing and price control. Shortages can be eliminated through price control. However if planning by inducement is not properly worked out, it merges into planning by direction.

2. Not Suitable to the Requirement of Underdeveloped Countries:

Another difficulty of inducement planning is that it is not conductive to the requirement of less developed countries. In fact, these countries need faster rate of increase in investment and must go into desired channels. Therefore, the state must actively direct investment into such activities where social gain is greater than the private gain.

3. Methods of Monetary and Fiscal Control are Weak:

The instruments of monetary and fiscal control are too weak and mild to bring desired changes in the economy especially in the backward countries as its problems are quite different from the problems of well advanced countries.

(2). Democratic and Totalitarian Planning:

(i) Democratic Planning:

Democratic Planning implies a system of economic order in which the authority that vests in the state is based on the support of common masses. The economists like Hayek and Lippman have pointed out that planning is incompatible with democracy. Hayek says that “What was promised to us as the road to freedom was in fact the high road to serfdom.” Therefore, in democratic planning, the state does not control all the means of production and does not regulate economic operations of the private economy directly.

Features:

The main characteristics of democratic planning are as follows:

(i) As a consequence of democratic planning, mixed economy comes into being. Public and Private Sectors operate side by side.

(ii) Central Planning Authority has direct control over Public Sector.

(iii) Private sector is indirectly controlled by the Central Planning Authority in the national interest through fiscal and monetary measures.

(iv) People enjoy economic, social and religious freedom. People have freedom to conduct such economic activities as consumption, production, exchange, investments etc. in the national interest and social welfare of the community as a whole.

(v) People’s co-operation is sought in the preparation of the plan. There is close relationship between welfare of the people and economic activities.

(vi) One of the aims of planning is to co-ordinate the activities of public and private sectors.

(vii) People’s co-operation is sought in achieving the targets of the plan by giving them proper incentives.

(viii) Economic activities are conducted both to earn profit and promote social welfare.

(ix) Under democratic planning there is importance both of price mechanism and government-decisions.

(x) Objectives of public sector and private sector are co-ordinated

(xi) It is quite a flexible planning. There is enough scope to modify-the targets of private sector. Targets of Public Sector are subject to change according to changed circumstances.

(xii) It has a tendency of decentralization.

(xiii) Its main objective is to raise the standard of living of the people quickly. As such, consumer goods industries are given as much importance as heavy industries.

In democratic planning, the philosophy of democratic government is accepted as the ideological basis. Under this type of planning, the decisions of the private sector are influenced by incentives and partial controls through monetary and fiscal policies. People are associated at every step in the formation and implementation of the plan. Unlike fascist planning, it is not based on force or coercion. In fact, democratic planning reconciles capitalism with government interference.

Since democratic planning is a planning by the people, for the people and of the people, the state comes into the picture as a representative of the people but not as a separate identity. The state government gives wide publicity to know the opinion of the people and tries its best to seek the cooperation and active support of the people in the country. It seeks to avoid all clashes and tries to harmonies different opinions for the sake or welfare of the poor lots.

Therefore, different agencies, voluntary groups and other associations are closely linked and play pioneer role in its execution. Furthermore, the plan is fully debated in the Parliament, state legislature and in the private forums. The plan prepared by the planning commission is not fully accepted but it can also be rejected or modified. Thus, the plan is not forced from the above on the people but in fact, it is planning from below.

(ii) Totalitarian (authoritarian) planning:

When planning is adopted under a planning, it is called totalitarian dictator. Under this planning, state fully controls the economic affairs, productive resources and economic decisions. The state is the final authority in allocating the productive resources and it determines in accordance with the directions of the central authority.

The profits or production instead of being pocketed by the private capitalists go to the state for ameliorating the problems of the poor lots in the country. Totalitarian planning shows the complete socialization of entire national economy. Under such planning, plans are formulated, controlled, financed and executed by the state and people have to do nothing in it. This type of authoritarian planning has found in the writing of Maurice Dobb.

Features:

Totalitarian Planning has the following features:

(i) Public sector alone functions in this type of planning. Government has full and direct control.

(ii) Central Planning Authority formulates a comprehensive plan for the entire economy.

(iii) There is no economic freedom and all economic decisions are taken by the government.

(iv) People’s welfare can be sacrificed at the altar of rapid economic development of the country. Minimum needs of the people alone are catered to.

(v) Means of production are controlled by the government that functions as an entrepreneur. Private enterprise has no place in it.

(vi) Economic decisions are not taken by the market forces or price mechanism but by the government.

(vii) There is no economic freedom. Government alone controls all economic activities.

(viii) All economic activities like foreign trade, foreign capital, investment and loan etc. are controlled by the government.

(ix) It is a rigid planning. People can be pressurized by the government for the achievements of the plan-targets.

(x) It is more comprehensive and efficient.

Regarding choice between democratic and totalitarian planning, some regard democratic planning as better because it gives complete freedom to consumers and producers. But this planning accelerates the pace of economic development slowly. Others regard democratic planning as imaginary since the interference by the government is indispensable. On the other hand, under totalitarian planning, there are big sacrifices by the public. But the pace of economic development is very fast. Prof. Myrdal has observed that ‘planning in any way has affected democracy’.

(3). Centralized and Decentralized Planning:

(i) Centralized planning:

The framing, adopting, executing supervising and controlling the plan is done by central planning authority. Planning authority determines targets and priorities. It is the duty of the planning authority to bring harmony in the planning process. This type of planning comes from the top to the bottom. This plan determines the equality and cohesion. The central planning authority which determines the basic policies in view of the regional and local needs.

All investment decisions are taken in accordance with goods and targets fixed by the central planning authority. All economic decisions like what to produce, how to produce, where to produce and to whom it is to be allocated are exclusively decided by the central authority. All aspects of the economy are controlled by the central authority. Again the prices and wages are also fixed by the planning authority.

Oscar Lange criticized centralized planning as it is not democratic in nature and character. The complete process of planning is regulated and controlled by authority. This planning is inflexible due to which it has less adaptability. There is no economic freedom at all. Further, the disequilibrium arising on account of centralized planning cannot be easily corrected.

(ii) Decentralized Planning:

Under this planning, responsibility lies with local and regional officials who take economic decisions about the plan. In other words, this planning starts from the grass roots. In other words, this type of planning is from bottom to top. Under this, plan is framed by the central planning authority by consulting different administrative units of the country.

The plan incorporates plans under central, state and local schemes. Also plans are prepared for different industries too. But individual firms are free to take their own decisions about investment and output. Prices are determined by market mechanism even though there are government controls.

There is complete economic freedom in consumption, production and exchange. The main defect of decentralized planning is that there is no uniformity and coordination among different sectors of the economy. This plan has been adopted in England and France.

Choice between Centralized and Decentralized Planning:

Decentralized planning is superior to centralized planning. It provides economic freedom and flexibility in the economy. Dependence on market mechanism results into shortages or surpluses in the production of goods and services. The adjustment can be made only through government. If there are shortages of goods, it will lead to inflationary pressures.

These inflationary pressures can be controlled through price controls and rationing. But these create more problems than what they solve. Also it is not possible to coordinate the decision of the planned and unplanned activities. This may lead to disequilibrium in the demand for and supply of goods and services. Again decentralized planning provides economic freedom and incentives to the market economy while centralized planning provides cohesiveness to the economy.

(4). Functional and Structural Planning:

(i) Functional planning:

Under functional planning, there is no need to build up new structure, rather the existing structure is corrected and modified. According to Zweig in his “The Planning of Free Societies’ has stated “Functional planning will only repair, not build a new, it will improve the wave of the existing order, but not supersede it. It is a conservative, or rather evolutionary type of planning which will not over turn the existing structure and moves only within its narrow border”. Thus functional planning brings no change in the economic and social set up.

(ii) Structural Planning:

In this type of planning the present social and economic structure is changed and a new structure emerges. In the developing countries, there is a structure planning. Big economic and social changes are brought about to usher into a new system.

For instance, shift from capitalist to socialist economy can be called a structural change. Structural planning can help in accelerating the pace of economic development. The Communist countries like Russia and China followed structural planning.

Choice between Structural and Financial Planning:

Indian planning is both structural and financial because under public sector, a new economic structure is built up where as under private sector, the existing structure is modified. There is not much difference in structural and financial planning. After sometimes structural planning turns into financial planning.

(5). General Planning and Partial Planning:

(i) General Planning:

It refers to planning of all activities in an economy. All sectors of the economy, namely, agriculture, industry, transport, irrigation, power, social services etc. are brought under its scope. The entire resources of the country are sought to be allocated among the different sectors.

(ii) Partial Planning:

It refers to the planning of a particular sector of the economy. If planning in a country is confined only to agricultural sector, it is called partial planning. Under it, only a part of the total investment is studied. It is a short- term method which is adopted to achieve a particular objective.

(B). On the basis of Time:

On the basis of time, planning can be classified into perspective and annual plans:

(6). Perspective and Annual Planning:

(i) Perspective Planning:

Perspective planning is a long run planning where targets are fixed for long period say 15 to 25 years. But a perspective plan cannot mean one plan for the complete period. In a true sense, broader objectives are to be achieved in a fixed period by dividing the perspective plan into short-run plans of 4 to 6 years.

The long-run objectives are so divided into short- run that one by one all the objectives are achieved in the long-run. In other words, short run plans pave way for the achievement of long run motives. For instance in India, under five years plans, the objectives of employment and national income have been determined on the basis of short and long-run.

According to J.Tinbergen, “The main purpose of a perspective plan is to provide a background to the shorter terms plans, so that the problems that have to be solved over a very long period can be taken into account in planning over short-terms”. The perspective plan has so many administrative difficulties due to which the fulfillment of the objectives becomes difficult.

(ii) Annual Planning or Prospective Planning:

Annual Planning or short term planning refers to 4 to 6 years plans which are further divided into annual plans so that each annual plan may fit in short-run plan and each short-run plan may ultimately fit in the long-run^ plan. Plans are further divided into regional and sectional plans. Regional plans are linked with regions, district and localities which are further divided into sectional plans for agriculture, industry, transport, foreign trade etc. The sectional plans are again divided for different branches like iron and steel, food-grains, exports etc.

(C) On the Basis of Finance:

On the basis of finance, planning is classified into physical and financial plans.

(7). Physical and Financial Planning:

(i) Physical Planning:

Physical planning is that where targets or objectives are fixed in terms of real physical resources. Plans are also formulated on the basis of real resources of the economy, i.e., the availability of natural, human, raw materials and capital resources. On the basis of these resources, the output targets are fixed. To quote second Five Year Plan, Physical planning, is an attempt to work out the implication of the development effort in terms of factor allocations and product yield so as to maximize incomes and employment. Financial planning is followed as a mean to achieve physical targets only. But the target under it, should be properly balanced. Further physical planning has to be viewed as an over all long-term planning rather than a short-term planning.

Draw backs:

Physical planning has the following drawbacks:

Lack of statistics:

In case of physical planning, there is lack of statistical data. The targets without adequate statisticscannot be achieved.

Inconsistencies:

It is difficult to balance different parts of the economy under physical planning. Due to structural difficulties, in the underdeveloped countries it is not possible to have internal consistencies.

Inflationary Pressures:

Shortages in physical targets lead to inflationary pressures which is really very harmful for developing countries. The rate of savings will be low which leads to low capital formation. Financial Planning Ignored. Physical planning cannot be successful without financial planning. In case of India, due to lack of, financial resources in the closing year of (he second plan, the size of the plan had to be reduced.

(ii) Financial Planning:

Financial planning helps in removing disequilibrium between demand and supply to avoid inflation and to bring about economic stability. Finance is the basic key to economic planning. Without financial resources, physical targets cannot be achieved. All objectives are fixed in terms of finance i.e, how much national income, savings and investments are to be increased.

Limitations:

Financial Planning has the following limitations:

(i) Mobilizing resources through taxation may badly affect the savings.

(ii) There are two sectors in underdeveloped countries i.e barter and monetary system. There is imbalance between the two sectors. It will lead to price-rise due to scarcities of supplies.

(iii) No doubt supplies can be raised through imports but this will lead to deficit in balance of payments.

(iv) Financial planning is not suitable for the developing countries.

(v) Financial planning can be successful only if there are no bottlenecks. That way, it is necessary to use sectorial planning rather than over all planning.

(D) Other Types:

Other types of plans are discussed as under:

(8). Indicative and Imperative Planning:

(i) Indicative Planning:

Indicative plan is not imperative but flexible. In socialistic countries, planning is comprehensive where planning authority decides about the investment in each sector. Planning authority fixes the prices of the products and factors. All it decides is what to produce and in what quantities to produce. As this planning is rigid, any deficiency in one sector would adversely affect the economy which cannot be corrected easily.

Indicative planning is peculiar to the mixed economy of France. But this is quite different from the type of planning which exists in other mixed economies. By mixed economy, we mean simultaneous working of public and private sector. It is the state which controlled the private sector in different ways, i.e. by quotas, price, licenses, etc. But under indicative planning, the private sector is not rigidly controlled to achieve the targets and priorities of the plan.

The state gives full assistance to private sector but does not control it. It, rather, directs the private sector in certain areas to implement the plan. This plan was used in France from 1947-50 as Monnet Plan. France’s experience shows that the firms do not play the game when development programme does not coincide with profit expectations.

Generally monopolistic firms do not bother about government policies and use their power for personal benefit. Same way under inflationary pressures, the government resorts to direct controls rather than maintaining prices mechanism through monetary and fiscal policies.

(ii) Imperative Planning:

It refers to that where all economic activities and resources of the country operate under the direction of the state. The resources are optimally used by the state in order to achieve the targets of the plan. Consumer’s sovereignty is sacrificed under this type of planning. The consumers get fixed quantities at fixed prices. The government policies are rigid which cannot be changed easily. Any change can adversely affect the economy.

(9)Rolling and Fixed Planning:

(i) Rolling Planning:

Rolling plan was advocated by Prof. Myrdal for the development of developing countries. India experienced it for the first time in April 1978 under Janta Party rule and continued up to April 1980.

In the rolling plan, every year, three new plans are made:

(i) There is a plan for the current year which includes annual budget and the foreign exchange budget,

(ii) There is a plan for numbers of years say 3 to 5. It is changed every year keeping in view the needs of the economy,

(iii) A perspective plan for 10 to 20 years or more is presented where broader goals are stated. The annual plan is fitted into same year’s new 3 to 5 years plan and both are framed in the light of perspective plan.

Rolling plan is framed with a view to remove rigidities. It considers the unforeseen changes like natural calamities or economic changes. Under this financial and physical targets are revised. In this way, the rolling plan gives the benefits of both perspective and flexible planning.

But under rolling plan, long-term subjective cannot be achieved since the targets are revised every year. Such changes cannot maintain proper balances in the economy so as to achieve balanced development. Moreover frequent revision of the plan leads to uncertainties between both the public and private sectors. Further revisions of the targets make the attitude non-committal. This plan has been successful in Poland and Japan, but it failed in Mexico and Burma.

(ii) Fixed Planning:

Fixed planning is for some fixed period, say four or five or six or seven years. A fixed plan fixes definite objectives which have to be achieved during the plan period. Physical targets and financial outlays do not change except under emergencies. Under this plan, targets are achieved which are laid down in the plan.

This plan helps in maintaining proper balance in the economy. Further, there is no uncertainty in this type of planning. Fixed plan, with given objectives, ensures public cooperation. This type of planning needs political will for its successful implementation.

(10). Socialistic and Capitalistic Planning:

In socialistic planning, the economy depends on economic planning. The central authority formulates a plan for the entire economy. Capitalistic planning is focused on the unplanned economic order which gains momentum from some invisible forces in the market. The main feature of this type of planning is the absence of a central economic plan.

(11). Flexible and Rigid Planning:

Flexible planning refers to the possibility of adjustment, readjustment in targets, output and resources. This type of planning is dynamic. Rigid planning deals with fixed targets which are not subject to change in any adverse circumstances of the country.

(12). Regional, National and International Planning:

Regional planning refers to the decentralized control exercised over the region of a particular country. When economic planning is applied for the nation as a whole, it is known as national planning. International planning is meant for a state of affairs in which the resources of more than one country are the property of the countries as a whole.

List of Regulatory Bodies (Financial & Others) and their Headquarters

Regulatory Body	Sector	Headquarter
RBI – Reserve Bank of India	Banking & Finance, Monetary Policy	Mumbai
SEBI – Securities and Exchange Board of India	Securities (Stock) & Capital Market	Mumbai
IRDAI – Insurance Regulatory and Development Authority	Insurance	Hyderabad
PFRDA – Pension Fund Regulatory & Development Authority	Pension	New Delhi
NABARD – National Bank for Agriculture and Rural Development	Financing Rural Development	Mumbai
SIDBI – Small Industries Development Bank of India	Financing Micro, Small and Medium-Scale Enterprises	Lucknow
NHB – National Housing Bank	Financing Housing	New Delhi
TRAI – Telecom Regulatory Authority of India	Telecommunication & Tariffs	New Delhi
CBFC – Central Board of Film Certification	Film/TV Certification & Censorship	Mumbai
BCCI – Board of Control for Cricket in India	Cricket	Mumbai
ASCI – Advertising Standards Council of India	Advertising	Mumbai
BIS – Bureau of Indian Standards	Standards & Certification	New Delhi
FSSAI – Food Safety and Standards Authority of India	Food	New Delhi
FSDC – Financial Stability and Development Council	Financial Sector Development	New Delhi
FIPB – Foreign Investment Promotion Board	Foreign Direct Investment	New Delhi
CDSCO- Central Drugs Standard Control Organization	Pharmaceuticals and Medical devices	New Delhi

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