IMTS Civil Eng. (Engineering economics)

I ns t i t ut eofMa na ge me nt &Te c hni c a lSt udi e s ENGI NEERI NGECONMI CS

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IMTS (ISO 9001-2008 Internationally Certified) ENGINEERING ECONOMICS

ENGINEERING ECONOMICS

ENGINEERING ECONOMICS CONTENTS UNIT NO.

TITLE

PAGE NO.

1

INTRODUCTION – MEANING AND OBJECTIVES OF BUSINESS ECONOMICS

1-8

2

DEMAND ANALYSIS

9-30

3

PRODUCTION ANALYSIS

31-66

4

MARKET STRUCTURE

67-82

5

INFLATION AND TRADE CYCLES

83-95

6

UNDERDEVELOPMENT AND GROWTH

96-103

7

HUMAN RESOURCES

104-112

8

NATIONAL INCOME

113-117

9

AGRICULTURE

118-142

10

INDUSTRIALISATION

143-161

11

INDUSTRIAL LABOUR AND INDUSTRIAL RELATIONS

162-166

12

INDUSTRIAL POLICY

167-175

13

ECONOMIC PLANNING

176-187

14

INDIA’S FOREIGN PAYMENTS

TRADE

15

GATT, WTO AND INDIA

AND

BALANCE

OF

188-192 193-198

ENGINEERING ECONOMICS

1

UNIT – I INTRODUCTION – MEANING AND OBJECTIVES OF BUSINESS ECONOMICS OBJECTIVES After going through this chapter, you should be able to 

Understand the meaning, nature and scope of Business Economics



Know the objectives and importance of Business Economics



Understand the role and responsibilities of a Business Economist

STRUCTURE 1.1

MEANING OF BUSINESS ECONOMICS

1.2

CHARACTERISTICS OF BUSINESS ECONOMICS

1.3

NATURE AND SCOPE OF BUSINESS ECONOMICS

1.4

OBJECTIVES OF BUSINESS ECONOMICS

1.5

IMPORTANCE OF BUSINESS

1.6

1.5.1

THEORETICAL SIGNIFICANCE

1.5.2

PRACTICAL SIGNIFICANCE

ROLE AND RESPONSIBILITIES OF A BUSINESS ECONOMIST

UNIT QUESTIONS 1.1 MEANING OF BUSINESS ECONOMICS Business Economics is the latest terminology used in business organisation. It denotes the application of economic theories to the business conditions and decision making in business.

It involves a coordination process linking business methods with the formation of future plans and making decisions in business. To say in brief Business Economics is an applied science in the sphere of business organisation.

MC IVAIR AND MERIAM “Business Economics consists of the use of economic modes of thought to analyse business problems”.

SPENCER AND SIEGELMAN “Business Economics is the integration of economic theory with business practice for the purpose of facilitating decision making and forward planning by management”.

Joel Dean Business Economics is the use of economic analysis in formulating policies.

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1.2

CHARACTERISTICS OF BUSINESS ECONOMICS

1.

Micro Economic Nature: Business Economics is micro economic in its nature because it deals with matters of a particular business firm only.

2.

Use of Economic Theories: Business Economics uses all economic theories relating to the profits, distribution of income etc.

3.

Realistic One: Business Economics is a realistic science. It studies all matters concerning business organisation by considering the real conditions existing in the business field.

4.

Normative Science: Business Economics is a normative science. It studies the matters concerning the aims and objectives of a business firm. It determines the methods to be adopted for achieving such objectives. It also makes enquiry into the good and bad in decision making. Hence it is a normative science.

5.

Macro-Economic Uses: Even though Business Economics has the nature of MicroEconomics, it also uses Macro-Economic approaches frequently. Certain matters in Macro-Economics like Business Cycles, National Income, Public Finance, Foreign trade etc. are essential for Business Economics. So, Business Economics uses the macroeconomic phenomenon for taking business decisions.

1.3

NATURE AND SCOPE OF BUSINESS ECONOMICS The scope of Business Economics consists of the following:

1.

Demand Forecasting: Demand forecasting is an important topic studied in Business Economics. Every business firm initiates and continues its production process on the basis of the anticipation of more demand for its goods in the future. It makes research and conducts market survey with a view to know the tastes and fashions of the consumers. It pools up the resources and starts production for meeting the future demand. Business Economics analyses the demand behaviour and forecasts the quantity demanded by the consumers.

2.

Cost Analysis: Business Economics deals with the analysis of different costs incurred by the business firms. Every firm desires to minimise its costs and increase its output by securing several economies of scale. But it does not know in advance about the exact costs involved in production process. Business Economics deals with the cost estimates and acquaints the entrepreneurs with the cost analysis of their firm.

3.

Profit Analysis: Every business firm aims to secure maximum profits. But at the same time it faces uncertainty and risk in getting profits. It has to make innovations in production and marketing of its goods. Business Economics deals with the matters relating to profit analysis like profit techniques, policies and break-even analysis.

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4.

Capital Management : Capital management is another topic dealt in Business Economics. It denotes planning and control of capital expenditure in business organisation. It studies matters like cost of capital, rate of return, selection of best project etc.

Thus, Business Economics deals with several matters relating to the business

management like demand, costs, profits and capital. All these elements are variable. So enterpreneurs face risk, bear uncertainty and innovate for boosting up the demand, sales, production and profits of their goods. Business Economics analyses and applies the economic laws to the business problems faced by the entrepreneurs. It provides remedies for overcoming such problems in business.

1.4

OBJECTIVES OF BUSINESS ECONOMICS Business Economics deals with issues connected with selection of resources available to

a firm, method of production and effective management of business firms.

Making decisions is a fundamental process of any organisation, whether big or small.

Business organisations have to take decisions to fulfil organisational goals. These goals are, converting inputs into desirable output and to make the organisation viable. Decision-taking in business also helps in reducing risk and uncertainty. The survival of the organisation depends upon good forecasting. It is difficult to predict the future accurately. Yet it is very important. It is necessary to forecast as accurately as possible, the demand conditions, raw-material supplies, technological advances, political changes and the like, in order to be in a position to meet the future with confidence. Business economics aims at solving various risks.

Business Economics aims at helping the organisation in planning process. It is a subject which deals with utilisation of limited resources to achieve the goals. Forecasting, planning and decision making are the important fields of business economics.

Decision-making involves choice. The problem of decision making arises because resources available to a firm are limited and they can be put to alternative uses. Thus decisionmaking function becomes one of making choices that will provide the most efficient means of attaining a desired goal, say for example, profit maximisation. Once the decision is taken about a particular goal to be achieved, plans regarding production, pricing, capital, raw materials, labour etc are prepared. Forward planning goes hand in hand with decision-making.

1.5

IMPORTANCE OF BUSINESS ECONOMICS Business Economics is a useful subject. In fact it is the most significant of all social

sciences, Its study is highly useful for analysing and understanding the various economic problems. Its study brings utility to all sections of the people. Business Economics became the intellectual religion of the day. Business Economics is described as both light giving and fruit

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bearing science. It enriches our knowledge (light) and brings results (fruits). The theoretical and practical utility or significance of Business Economics is explained from the following points: 1.5.1

THEORETICAL SIGNIFICANCE

1. Understanding Economic Behaviour The study of Business Economics helps us to understand the economic behaviour of human beings.

2. Working of the Economic System Business Economics explains the conditions which influence the progress of the economy. It makes suggestions for overcoming the complicated problems faced by the people and the government in various economic systems. Hence it has great significance for understanding the working of the economic system.

3. Intellectual Value The study of Business Economics sharpens the intellectual calibres of individuals. It imparts certain qualities like rational behaviour, proper allocation of resources etc.

4. Economic Tools Mrs. Joan Robinson described Economics as a box of economic tools. It provides a good knowledge regarding the nature, causes and effects of various economic phenomena.

5. Economic Growth Business Economics suggests various ways and means for maintaining the growth rates in the developed economies. It also analyses the factors obstructing the economic growth of these countries.

6. Economic Development Developing countries aim at achieving economic development within a short span of time. Business Economics enables us to understand the nature and conditions necessary for the successful organisation of business firm.

7. Performance of the Economy Business Economics helps us to assess the performance of the economy. We can judge the position, progress and future of an economy through several theories and models of Business Economics.

8. Economic Planning Economic planning is an important branch of economics. Economics provides a good knowledge and information regarding the techniques of Economic Planning. It sharpens our mental abilities by clearly explaining the types, aims and objective of economic plans.

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9. Prediction Business Economics serves as the best means for predicting the economic events. It helps us to predict the consequence of various economic phenomena.

10. Ethical Value Business Economics inculcate certain ethical norms like honesty, responsibility and adjustability etc. It upholds the moral and cultural values of individuals. It makes them honest and dignified citizens.

1.5.2

PRACTICAL SIGNIFICANCE

1. Useful to the Finance Minister The study of Business EcĂ nomics is highly useful to the Finance Minister and the personnel working in the finance department. It provides a good knowledge about public revenue, public debt and public expenditure. It helps them in forming a sound financial policy and result oriented budget.

2. Useful to the Minister for Planning The study of Business Economics is also useful to the Minister for planning and his personnel. It furnishes a good knowledge about the various types of plans, mobilisation, plan implementation, capital output ratio, investment strategy etc.

3. Useful to the Bankers Business Economics is also useful to the bankers. It enables them to understand the nature, purpose and implications of different economic policies implemented by the business firms.

4. Trade Union Leaders Knowledge of Business Economics is also significant for the trade union leaders. The study of Business Economics helps the trade union leaders to understand the nature and causes of industrial disputes, wage problem etc.

5. Businessmen Business Economics is also useful to the businessmen. Businessmen, with the help of Business Economics, can study the fluctuations in business, prices, production and employment.

They can adopt a proper strategy for producing goods and services according to the changes in demand.

6. Statesmen Statesmen will also get benefit by studying Business Economics. It enables them to understand the nature and causes of economic problems. It helps them to solve the economic problems like unemployment, inflation, scarcity of goods etc.

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7. International Economic Problems International Economics is an important branch of Economics. It deals with matters like terms of trade, balance of payments, export and import regulations etc. Its knowledge enables the international agencies to determine the foreign exchange value of various national currencies.

Thus, Business Economics has both theoretical and practical significance. Its study is useful to all sections of the people.

1.6 ROLE AND RESPONSIBILITIES OF A BUSINESS ECONOMIST A business economist is an economic adviser to a businessman. He helps the management in using specilized skills and sophisticated techniques which are required to solve difficult problems. An entrepreneur, in the course of his business operations, has to take a number of decisions which are very important for the survival and growth of business, such as: 1.

Kind of product to be produced.

2.

The quality and quantity in which it has to be produced.

3.

The cost of the product and its selling price.

4.

Diversification and modernisation of business.

A business economist is expected to be an expert in all those areas which require proper planning. He assumes certain important roles and responsibilities which may briefly be explained as follows: 1. Technological Developments A business economist must be aware of changing developments in technology. Changed technology may give rise to a new substitute which may affect the business of a firm adversely.

2. Business Forecasting The fundamental activity of a business economist is forecasting. He should be in a position to forecast future changes, both in the national and international front. Most management decisions necessarily concern the future which is rather uncertain. It is therefore, absolutely essential for a business economist to recognize his responsibility in making successful forecasts. By doing so, he should aim at minimising, if not completely eliminating the risks involved in business.

3. Costs A business economist should identify ways and means of economizing the use of scarce resources and thereby minimizing the costs of production.

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4. Finance It is the responsibility of a business economist to advise a businessman regarding the availability of alternative sources of finance. He must help the businessman in securing cheap, adequate and timely finance.

5. Government Policies A business economist should analyse the impact of government policies on a particular firm because we know that every business firm has to work within the framework of general economic factors and government policies have their impact on business conditions.

6. Profits A business economist should guide a businessman in such a way that he gets a fair return on the capital that he has invested in the business. In this regard a business economist has to advise the businessman in the three different areas viz, capital budgeting, budgeting controls, project planning.

7. Investment It is the responsibility of the business economist to help the businessman in making the right choice of investment by assessing returns on different forms of investment through the costbenefit analysis.

8. Location A business economist must be able to suggest to the businessman the most economically suitable place for locating the firm. He has to take into consideration the availability of raw materials, existence of infra-structural facilities like transport, communication and other relevant factors before suggesting the location for establising the firm.

9. Objectives All business firms have both short-term and long-term objectives Sometimes the achievement of short-run objectives may come in the way of long-run objectives. The business economist must help the businessman in reconciling the conflicting objectives.

10. Relevant data A business economist should establish and maintain contacts with persons and sources of data in order to collect relevant information which could be valuable in the field of business. A business economist applies several quantitative and qualitative techniques to the practical problems faced by a firm. In order to do this a business economist undertakes the estimation of demand conditions, elasticity of demand in relation to price and income of the consumer, cost conditions nature and extent of competition and so on.

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Thus, a business economist is a friend and an adviser to a businessman. It has now become inevitable to a businessman, to employ the services of a business economist.

UNIT QUESTIONS 1.

Explain the characteristics of Business Economics.

2.

Examine the nature and scope of Business Economics.

3.

Analyse the importance of Business Economics.

4.

Describe the role and responsibilities of business economist.

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9

UNIT – 2 DEMAND ANALYSIS OBJECTIVES After going through this chapter, you should be able to 

Understand the Meaning of Demand



Understand the Law of Demand



Know the determinants of Demand



Know the concept of elasticity of demand, its types, measurement and importance.



understand the meaning and methods of demand forecasting.

STRUCTURE 2.1.

MEANING OF DEMAND

2.2

LAW OF DEMAND 2.2.1

ASSUMPTIONS OF THE LAW OF DEMAND

2.2.2

DEMAND SCHEDULE

2.2.3

WHY DEMAND CURVE SLOPES DOWNWARDS?

2.2.4

EXCEPTIONS TO THE LAW OF DEMAND

2.3.

DETERMINANTS OF DEMAND

2.4.

ELASTICITY OF DEMAND

2.5.

2.4.1

ELASTICITY AND ITS KINDS

2.4.2

MEASUREMENT OF ELASTICITY

2.4.3

IMPORTANCE OF ELASTICITY

MEANING OF DEMAND FORECASTING 2.5.1

METHODS OF FORECASTING DEMAND

UNIT QUESTIONS

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2.1.

MEANING OF DEMAND Demand is an important concept in Economics. In ordinary usage, demand means desire

of individuals to buy a commodity. But in Economics it has a special meaning. Mere desire for a commodity is not considered demand in Economics. A commodity is said to be demanded when the individuals have desire or willingness to buy and ability to buy the commodities. Broadly speaking, the term ‘demand’ implies three elements. (a) desire for the commodity, (b) willingness to purchase the commodity, and (c) ability to purchase the commodity. Hence the desire backed by purchasing power of money is known as demand in Economics.

Demand always refers to a particular (a) price, (b) place, (c) time. Demand has no meaning when the price of a commodity, place of its purchase and time are not mentioned. The reason is that demand changes with a change in price, place and time. Hence demand has a special meaning and usage in Economics.

2.2.

LAW OF DEMAND The Law of Demand denotes the quantitative relationship between the quantity

demanded of a commodity and its price. It explains the inverse relationship between quantity of a commodity and its price. In the words of Marshall, “The amount demanded increases with a fall in price and diminishes with a rise in price, other things remaining constant”.

The law is based on an important assumption namely ‘Other conditions remaining constant”. That means this law assumes other conditions like availability of substitutes or complementaries, consumers tastes and fashions, income, price etc., remain constant. If these conditions change, this law does not hold good.

2.2.1

ASSUMPTIONS OF THE LAW OF DEMAND

1. Tastes and Preferences The Law of Demand assumes that consumer’s tastes and preferences remain the same.

If consumer’s tastes and preferences change, quantity demanded of commodity by the consumers also change.

2. Population Constancy in population is another assumption of the law of demand. In fact population and demand are directly related to each other. Demand for a commodity will be great, when population of a country increases. Similarly when the size of population is low, demand for commodities also remains less.

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11

3. Discovery of Substitutes Discovery of substitutes influence the quantity demanded of a commodity. Demand changes whenever a new substitute product is discovered. The law assumes that no new substitutes are discovered in the market.

4. Income Demand and income are directly related to one another. Consumers purchase more quantity of a commodity with a rise in their income. Similarly they reduce their demand for a commodity when their income falls. The law assumes constancy in income.

5. Weather Conditions Change in weather and seasons also affect the demand for a commodity. For example people demand cool drinks during summer season and hot drinks in winter season. The law assumes contancy in weather conditions.

6. Prices of other Goods Demand for a good also depends on the prices of other goods. These goods may be substitutes or complementaries. Tea and coffee are examples of substitutes. If price of tea increases, the demand for coffee rises even though the price of the latter remains unchanged.

Similarly car and petrol are considered complementaries. When price of cars decreases, the demand for petrol increases as new consumers buy cars and demand petrol for running their vehicles. A change in the price of other goods affects the demand of a good. This law assumes that prices of related goods do not change.

2.2.2

DEMAND SCHEDULE Demand schedule denotes the relationship between quantity demanded of a commodity

and its price. Demand schedule is shown below: DEMAND SCHEDULE Price (Rs.)

Demand (in Quantity)

5

10

4

20

3

30

2

40

1

50

The above Demand schedule denotes that more quantity of coffee is purchased when price is low.

The above demand schedule can be represented in the following figure.

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y

Price

D

D 0

X Quantity

In the diagram quantity demanded of a commodity is shown along OX axis and price on ‘OY’ axis. DD is the demand curve. It slopes downwards from left to right. It denotes that a consumer purchases more of a commodity at lower prices and less at higher prices.

2.2.3

WHY DEMAND CURVE SLOPES DOWNWARDS? The demand curve always slopes downwards from left to right. This is due to the fact

that demand increases when price falls and decreases when price rises. Besides this reason, there are several other reasons or causes for the downward slope of the demand curve. They are mentioned as follows:

1.

New Buyers: When price is high, only a few people can buy a commodity. When price falls, people who could not buy upto now can also buy the commodity. The fall in the price of a commodity encourages new persons to buy it. As a result, demand for it increases.

2.

Income Effect: Demand curve slopes downwards due to the income effect. When the price of a commodity falls, the consumers get that commodity by paying less amount of money. Their money is saved to some extent. As a result, they can get more units of the same commodity with the same amount. This is known as income effect.

3.

Substitution Effect: Substitution effect is another cause for the downward slope of the demand curve. Let us suppose that coffee and tea are close substitutes. When the price of coffee rises, the demand for tea increases. People reduce their demand for coffee and buy tea as tea became relatively cheaper. They substitute tea for coffee.

4.

Different Uses: Demand curve slopes downwards because of the different uses of commodity. Certain commodities like electricity, sugar, wheat etc. have different uses.

For instance, electricity can be used for domestic lighting, for running business enterprises or for street-lighting purposes. When the price of electricity is high, people use it for limited purposes only. When its price decreases, they use it for even minor

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purposes like heating water, cooking food etc. As a result, the demand for electricity increases to a great extent.

5.

Demand curve slopes downwards to the right because the law of demand is based on the law of diminishing marginal utility. As the consumer buys more and more of a commodity, the marginal utility of the additional unit falls. Therefore, the consumer is willing to pay lower prices for additional units. That is why the demand curve slopes downwards.

6.

The demand curve slopes downwards because of the operation of the principle of equimarginal utility. The consumers will arrange their purchases in such a way that marginal utility is equal in all his purchases. Suppose if it is not equal, they will alter their purchases till the marginal utility is equal. When the price of one commodity falls, they will buy more, thus reaching a new equilibrium, at which marginal utilities are equal.

7.

The law of demand operates because of people having different desires. People have different taste. For example, some people are fond of movies; others enjoy in a moderate scale; some find it monotonous. The first category is willing to pay any price. The second category will be willing to pay a lesser price and the third category still lower price.

8.

Different income levels of the consumers is also responsible for the downward sloping demand curve. If the supply of the commodity is less, it can be sold to the rich people for a higher price, If the supply is more it can be sold to the poor people at a low price.

9.

Psychologically people buy more of a commodity when its price falls. Hence the demand curve slopes downwards.

2.2.4

EXCEPTIONS TO THE LAW OF DEMAND The Law of Demand is not applicable under certain conditions. It has the following

exceptions: 1. Prestige Goods The Law of Demand is not applicable in the case of prestige goods. Rich persons buy these goods for maintaining their prestige, status and dignity in society. Diamonds, pearls, gold etc. are some examples of prestige goods. Even though these goods do not possess use-value they carry prestige value. The demand for these goods increases when their price rises and decreases when their price falls. Rich persons buy more quantity of these goods at higher prices. They hesitate to buy them at lower prices, because they feel that everybody can buy these goods at lower prices. So, this is against the Law of Demand.

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2. Giffen Paradox This exception to the Law of Demand was explained by Sir Robert Giffen. He explained this paradox on the basis of the consumption behaviour of the British people. He stated that people demand more quantity of inferior goods when their price increases. He described this paradox with the help of two essential commodities used by the British people. The two commodities are potatoes and meat. He considered that the British people spent a major portion of their income on potatoes and a less portion on meat. When the price of potatoes increases, they buy less quantity of meat by spending less amount of money. They spend this amount for buying more quantity of potatoes. So the demand for potatoes increases. This is against the Law of Demand.

3. Speculation The Law of Demand is not applicable in the case of speculative activities and speculative goods. Businessmen consider it profitable to buy more quantity of goods even though the prices increase. They speculate further rise in prices in the immediate future. Similarly if they expect any fall in the prices of goods, they like to reduce the demand for various goods as it is not profitable to buy more quantity of goods at failing prices. Such a tendency of business people in speculative activities is an exception to the Law of Demand.

Ignorance Sometimes, the quality of the commodity is judged by it’s price. Consumers think that the product is superior if the price is high. As such they buy more at a higher price.

Fear of Shortage During times of emergency or war, people may expect shortage of a commodity. At that time, they may buy more at a higher price to keep stocks for the future.

Necessaries In the case of necessaries like rice, vegetables, etc., people buy more even at a higher price.

2.3.

DETERMINANTS OF DEMAND The demand for a commodity is determined or influenced by several factors.

1. Price The demand for a commodity is mainly determined by its price. The demand will be greater at lower price. Similarly the demand will be less at higher price.

2. Population Size of population and changes in population act as a great determinant of demand. The demand for goods varies with the size of population. The demand will be greater when the population is high. It will be less when the population is less. Besides the size of population, composition of population also influences the demand.

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3. Income Demand also depends on the income of the people. The demand and income are directly related to each other. People buy more commodities when their income increases.

Similarly they buy less commodities when their income is low.

4. Tastes and Fashions Changes in tastes and fashions also determine the volume of demand for commodities.

If people are well developed, they demand more commodities. For example, at present, people consider the purchase of polyster and terene clothes as fashion. Similarly the purchase of pocket- size and small size cell phones, DVD players etc. is considered as a fashion.

5. Discovery of Substitutes Demand for commodities also depends on the discovery of substitutes. The discovery of new substitutes results in the fall in demand for the old commodities. For example, the discovery of plastic and hindaliam led to the decrease in demand for iron and copper utensils. Similarly the demand for jute bags was reduced due to the discovery of paper bags.

6. Prices of Substitutes and Complementaries The demand for a commodity also depends on the price of its substitutes and complementaries. For example, tea and coffee are close substitutes. If the price of coffee falls, the demand for tea falls as people consider it profitable to buy more quantity of coffee. They also consider that the price of coffee is relatively cheaper when compared to tea. The demand for a commodity is also determined by the prices of complementary goods. Let us suppose that car and petrol are good complementaries. If price of cars decreases the demand for petrol increases.

The reason is that more people will buy cars and more quantity of petrol is used by them.

7. Seasons Change in seasons also determine the quantity demanded of a commodity. Demand changes with a charge in seasons. For example, people demand cool drinks during summer, umbrellas and hot drinks during rainy season. They demand woollen clothes during winter.

8. Distribution of Income The nature of distribution of income between different sections of people also affects the demand for a commodity. If Government takes steps for distribution of income from the rich to the poor sections, then the income of the poor people will increase. As a result, demand for those commodities used by the poor people will increase.

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16

9. Business Conditions Business conditions are another determinant of demand for a commodity. Demand will be high during economic prosperity. It will be less during depression.

10. Savings The level of savings determine the quantity demanded of a commodity. Level of savings and demand are inversely related to one another. If people save more, then the money income available at their disposal will be less. As a result they buy only a less quantity of commodities. If, on the other hand, they save a small portion of their income, they will be able to buy more quantity of commodities. Hence the more the level of savings, the less will be the demand for goods and vice-versa.

2.4.

ELASTICITY OF DEMAND The Law of Demand explains that demand for a commodity increases with a fall in price

and decreases with a rise in price. But it does not explain the exact change in the demand for commodities due to the changes in their prices. Due to a change in price, the demand for some commodities may increase to a great extent Demand may change slightly in the case of other commodities. Hence changes in demand for all commodities due to change in prices are not same. The proportionate change in demand for a commodity due to a proportionate change in its price is known as elasticity of demand. Elasticity of demand expresses the quantitative relationship between two variables, demand and price.

Elastic and Inelastic Demand In the words of Marshall, “The elasticity of demand in a market is great or small, according as the amount demanded increases much or little for a given fall in price, and diminishes much or little for a given rise in price�. This implies that when a small change in price (a slight rise or fall in price) leads to a great change in demand, the demand is said to be elastic.

On the contrary, if a great change in price (a great rise or fall in price) leads to a small change in demand, the demand is inelastic.

Elastic or More Elastic Demand In this case the demand expands greatly for a small fall in price and contracts greatly for a small rise in price. It is shown in the Table. In this table as the price of the cake rises and falls by 5 paise, the demand has halved and doubled. The demand is therefore more elastic.

Price of Cake in paise

Amount of Cakes demanded

50

100

45

200

55

50

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Inelastic or Less Elastic Demand The demand that expands little for a great fall in price and contracts little for a great rise in price is inelastic demand.

Price

Quantity

6

30

3

31

9

29

Here a large change in price leads to a small change in quantity demanded. Hence demand is inelastic.

2.4.1

ELASTICITY AND ITS KINDS Generally elasticity of demand refers to price elasticity. Marshall was the first to define

price elasticity of demand. Modern economists define it in a mathematical manner. According to Lipsey, “Elasticity of demand may by defined as the ratio of percentage change in quantity demanded to a proportionate change in price”. Mrs. Joan Robinson’s definition is more clear.

“The elasticity of demand at any price or at any output is the proportional change of a amount purchased in response to small change in price divided by the proportional change of price”.

Thus the price elasticity of demand is the ratio of percentage of change in amount demanded to a percentage change in price. It may be stated as

Marshall has given three kinds of price elasticity: Unity, greater than unity and less than unity and modem economists have added infinite and zero elasticity. Thus there are five kinds of price elasticity. They may be explained as follows: 1.

Perfectly or Infinitely Elastic Demand: When an infinitesimal small change in price

leads to an infinitely large change in the amount demanded, there will be perfectly or infinitely elastic demand. It may be stated as

EP 

  .

0

It is illustrated in figure.

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18

In this figure, at OD price the quantity demanded continues to increase infinitely. It is infinite elasticity of demand.

2.

Perfectly Inelastic or Zero Elastic Demand: It is one in which whatever the change in

price, there is absolutely no change in demand.

In this case

EP =

10% =0 10%

It is exhibited in the figure.

In the Figure, for all changes in prices the demand does not change at all Hence it is perfectly inelastic demand.

3.

Unitary Elastic Demand: When the change in demand is exactly proportionate to the

change in price, price elasticity of demand is unity.

It may be expressed as

EP =

20% = 1.

20%

It is shown in the Figure.

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D

Price

OP1

OP2 D1 0

M1

M2

Quantity Demanded

In the Figure as price falls from OP1 to 0P2, the demand has proportionately increased from OM1 to OM2. So the price elasticity of demand is unity.

4.

Relatively Elastic Demand : It is one which the demand changes more than

proportionately to the change in price, It is stated as

EP =

20% = 2.

10%

Elasticity of demand is

thus greater than unity or 1. It is illustrated in the Figure.

In the Figure the demand has changed more than proportionately from OM to 0M1 for the change of price ON to ON1. Elasticity of demand is therefore greater than 1.

5.

Relatively Inelastic Demand: If the change in demand is less than proportionate to the

change in price, price elasticity of demand is less than unity. It is stated as

EP =

20% = 0.5.

40%

It is illustrated in the Figure.

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In the Fig. the changes in prices are comparatively greater than the changes in demand.

Hence price elasticity of demand is less than 1.

Income Elasticity of Demand Income elasticity of demand expresses the relationship between the proportionate change in quantity demanded of a commodity due to a proportionate change in income of the consumer. Income elasticity of demand is measured by the following equation:

Income elasticity is of three types. it is equal to one, if the percentage change in demand and percentage change in income are equal. It is less than 1, if a great percentage change in income brings a smaller percentage in change in demand. It is more than one, if a small percentage change in income brings about a great change in demand, In the case of superior goods, income elasticity of demand is positive. But it is negative in the case of inferior goods.

When income increases, people demand more quantity of superior goods. They buy less quantity of inferior goods, with a rise in their income.

Cross Elasticity of Demand Cross elasticity of demand indicates the relationship between percentage change in the demand for a commodity and percentage change in the price of a related commodity. The related commodities are either substitutes or complementaries. This type of elasticity of demand is measured by the following equation:

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21

In the case of substitutes the cross elasticity of demand is positive. For example, if the price of tea increases, demand for coffee increases as it is relatively cheaper.

The cross elasticity of demand is greater than one, if a percentage change in the price of ‘Y’ leads to a more percentage change in the quantity demanded of ‘X’. The cross elasticity of demand is less than one if the percentage change in price of ‘Y’ leads to a less percentage change in the quantity of ‘X’. Lastly the cross elasticity of demand is unitary or equal to 1, if the percentage change in the price of ‘Y’ and the percentage change in the quantity demanded of X’ are equal. If two commodities are perfect substitutes, the cross elasticity of demand will be infinite.

2.4.2

MEASUREMENT OF ELASTICITY

1. Percentage Method The comparison between the percentage change in price and percentage change in quantity demanded of a commodity is known as percentage method. Elasticity of demand, according to this method, is measured through the following formula:

If the co-efficient is one, it is called unitary elasticity. If the co-efficient is less than one, it is called inelastic demand. If the co-efficient is more than one, it is called elastic demand.

Total Outlay Method This method was given by Alfred Marshall. In this method, we consider the change in expenditure on commodities due to a change in price. If a given change in price does not cause any change in the total amount of money spent on commodity, then elasticity of demand is equal to unity.

Price in Rs.

Quantity Demanded

Total outlay or expenditure (Rs.)

4.50

4

Rs. 18

4.00

4½

Rs. 18

3.00

6

Rs. 18

Demand Schedule Showing Unit Elasticity

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As price falls, quantity demanded increases; but the total outlay remains constant at Rs. 18. Hence elasticity of demand is equal to unity.

If the total expenditure increases due to a fall in price, elasticity of demand is greater than unity.

Price in Rs.

Quantity Demanded

Total outlay in Rs.

4.50

6

Rs. 27

4.00

7

Rs. 28

3.00

10

Rs. 30

Demand Schedule Showing Elasticity Greater than Unity When price falls, the total outlay increases. Therefore elasticity of demand is greater than unity.

If a given change in price results in a fall in the amount spent, then elasticity of demand is less than unity.

Price in Rs.

Quantity Demanded

Total outlay in Rs.

4.50

4

Rs. 18

4.00

4Âź

Rs. 17

3.00

5

Rs. 15

Demand Schedule Showing Elasticity Less than Unity Here the total outlay is declining even though quantity demanded is increasing. Hence demand is said to be inelastic and elasticity coefficient is less than one.

The relationship between total outlay and elasticity of demand may be shown diagrammatically.

Total outlay or expenditure is measured in X axis and price is shown in Y axis. When price falls from P1 to P2, total expenditure remains the same. Therefore, elasticity is equal to one.

When price falls to P4 total expenditure decreases from E2 to E4. Hence elasticity is less than one. When price decreases from P3 to P1 total outlay increases from E3 to E2. In this case, elasticity is greater than one.

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This method which is also known as total revenue method simply classifies demand into three types. It does not help us to measure eisticity in numerical terms. Therefore, to find out the exact numerical value, point method is suggested.

Arc Elasticity This method is used to measure elasticity between two points on a demand curve. Any two points on a demand curve make an arc. The following equation is used for measuring elasticity under this method.

If the quotient is one, elasticity of demand is unitary or equal to one. If the quotient is greater than one, elasticity of demand is relatively elastic. If the quotient is less than one, elasticity of demand is relatively inelastic. Arc elasticity of demand may be explained from the following example: Price

Demand

Rs. 20/-

4,000 units

Rs. 4/-

20,000 units

In the above example change in price is Rs. 16/- (Rs. 20/-, Rs. 4/-). Initial price is Rs. 20/- and present price is Rs. 4/-. Initial demand is 4,000 units. Present demand is 20,000 units.

Change in demand 16,000/- units. According to the above equation, elasticity of demand is:

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16,000 16 ÷ 24,000 24 16,000 24 x =1 24,000 16 Hence elasticity is equal to one.

Geometric Method or Point Method The measurement of elasticity at any point on the demand curve is known as geometric method or point method. This method is diagramatically explained as follows:

Demand and price are represented along OX and QY axis respectively. AB is the demand curve. It represents the different points of elasticity between A and B. Elasticity of demand is different at different points on the demand curve AB. ‘P’ and ‘P1’are the two points on AB. If we want to measure elasticity at point P. We have to use the following equation:

Point =

Distance from the lower segment Distance from the upper segment

Accordingly elasticity of demand at point P is

PB where PB denotes lower segment AP

and PA upper segment. If the quotient is one, elasticity of demand is equal to one or unitary. If, on the other hand, the quotient is greater than one, elasticity of demand is relatively elastic. If it is less than one, elasticity of demand is relatively inelastic.

If the demand curve is not a straight line, we have to draw a tangent where elasticity of demand is to be known. This is shown from the following diagram :

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In the diagram, DD is the demand curve. For knowing elasticity, at point ‘P’, a tangential line is drawn. AB is the tangent line, it is tangential to the demand curve at point P. At point P the elasticity of demand s equal to

2.4.3

PB .

AP

IMPORTANCE OF ELASTICITY OF DEMAND The concept of elasticity of demand is of much practical importance.

Price Fixation Each seller under monopoly and imperfect competition has to take into account elasticity of demand while fixing the price for his product. If the demand for the product is inelastic, he can fix a higher price.

Production Producers generally decide their production level on the basis of demand for the product.

Hence elasticity of demand helps the producers to take correct decision regarding the level of output to be produced.

Distribution Elasticity of demand also helps in the determination of rewards for factors of production.

For example, if the demand for labour is inelastic, trade unions will be successful in raising wages. Same is applicable to other factors of production.

International Trade Elasticity of demand helps in finding out the terms of trade between two countries. Terms of trade refers to the rate at which domestic commodity is exchanged for foreign commodities.

Terms of trade depends upon the elasticity of demand of the two countries for each other’s goods.

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26

Public Finance Elasticity of demand helps the government in formulating tax policies. For example, for imposing tax on a commodity, the Finance Minister has to take into account the elasticity of demand.

Nationalisation The concept of elasticity of demand enables the government to decide about nationalisation of industries.

DEMAND FORECASTING 2.5.

MEANING OF DEMAND FORECASTING Forecast is an estimation of future conditions. Demand forecasting refers to an estimate

of future demand for the product.

2.5.1

METHODS OF FORECASTING DEMAND Broadly the techniques of forecasting demand can be classified into 1.

Opinion polling method

a)

Consumer survey method

Complete enumeration survey Sample survey and test marketing End-use

2.

b)

Sales force opinion method

c)

Experts’ opinion method

Statistical methods a)

Trend projection method

Fitting trend by observation Least square method Least square linear regression Time series analysis Moving average and annual difference Exponential smoothing

b)

Barometric technique

Leading; lagging and coincident indicators Diffusion indices

c)

Regression method

d)

Simultaneous equation method

1. Opinion polling method This method depends on the mobilisation of the consumer’s opinion and then based on that to forecast the demand. This method is adopted in different ways to obtain the required information from the consumers so as to make the demand forecasting reliable.

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a) Consumer Survey Method i) Complete Enumeration Survey In this method every consumer is contacted to obtain their opinion about the product, as well as their future purchase plans. This method has the advantage of obtaining the opinion from every consumer so that based on the information provided, any forecast is bound to be accurate.

But the main difficulty is that at times this method may become unwieldy that it may not be possible to cover all the consumers as the time and financial resources required will be very high.

II) Sample Survey and test marketing In this method, careful selection of a few elements from the population is made. Then the opinion is collected from the sample consumers. This is used as the base for obtaining the aggregate opinion of the population. If the sample elements are properly selected, then the conclusions and policies arrived at on the basis of the sample, will be applicable to the population. Considering the requirement of time and finance under the Complete Enumeration Survey Method, Sample Survey Method is preferable. Usually the marketing firms adopt a slightly variant method of this Sample Survey method called the Test Marketing. Under Test Marketing the firm would select carefully a few segments in a market and then the product is introduced to those segments among the consumers and their response is carefully analysed.

This would help them to arrive at a conclusion about the product and consumers’ opinion.

Ill) End- use Method In this method the sale of the product to be forecast is on the basis of demand survey of the industries using this product as an intermediate product But it should be carefully noted that the intermediate products may have several end-uses and the intermediate product may have domestic as we as international demand Hence, while forecasting the demand for such products the above points should be taken into account to make the forecasting accurate. b) Sales Force Opinion Method In this method, the first hand information about the consumers is collected from the persons who are very close to the consumers. Usually the ,sales representatives have the close contact with the consumers and so their opinion about the consumers’ reaction to the product is obtained. Their opinion is taken as the base for estimating the demand for the product. When the sales force opinion is aggregated, the firm would be able to obtain the accurate information to forecast the demand for the product The main advantages of this method are that it is very cheap and the first-hand information about the consumers’ opinion is collected. At the same time, salesmen are not free from optimism or pessimism, which may influence their report. Further salesmen may not be fully equipped to observe and study the changes in the environment which will have far reaching effect on the demand for the product.

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ENGINEERING ECONOMICS c) Expert’s Opinion Method In this method, the firm may approach the experts in a field connected with the particular product dealt with by the firm. Their opinion will be unbiased and give a clear cut picture about the prospects of a product. The experts normally consider various changes in the environment and then arrive at their opinion Hence, their view about the demand for the product is bound to be closer to reality. Usually while adopting the method, the firm would enlist a panel of members from whom the opinion is collected. The panel members are suggested to maintain anonymity.

But their opinion will be aggregated and in case of consensus, all of them will be informed about it. In case of any dissent, the reason for dissent will be asked for. Hence, in this method; the experts’ opinion is collected and used as the base for demand projection.

2. Statistical Methods The Statistical Method of demand projection includes various techniques. But the basic requirement under this method is that reliable quantitative information about the past should be available. This will then be analysed in various ways to obtain the forecast. The various statistical techniques are explained hereunder. a) Trend Projection Method i)

Fitting trend by observation: Under this technique the actual sales data for the product is obtained for the past. This is plotted on a graph sheet. Based on the pattern emerging, a trend is fitted using observation technique. This is extended to understand the future pattern of demand for the product

ii).

Trend through least square method: In this method a statistical formula is used to obtain the trend equation. The fundamental assumption under this method is that the rate of change in the sale will be constant. The formula used under this method is: Y = a + bX. In this linear equation, ‘a’ refers to the average sales over a period and ‘b’ refers to the rate at which the sales changes.

iii)

Trend through least square linear regression: This is a slightly modified version of the least square method. In this method the time and the sales are taken as the independent variables and their relationship is explained through the linear regression equation of Y = a + bX.

iv)

Time series analysis: In this method the statisticians study the different components of time series viz., trend, seasonal variation, cyclical fluctuations and the irregular fluctuations. By quantitatively measuring each one of these components, the statisticians will be able to exactly predict the extent to which each component will affect the original data. Based on this time series analysis, a more accurate prediction of demand is possible.

v)

Moving average and annual difference method: In this method, the projection is based on the moving average of the sales in the past and not the simple average. The advantage of moving average is that it clearly reflects the changes that take place every

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time in the short period. In this method no excessive importance is given to any one particular period or data Hence, this method of predicting the demand is considered to be better than going by the simple average method. vi)

Exponential smoothing method: This is an improvement over the moving average method. Under the moving average method equal importance or weight is given to all the data but under the exponential method the weight is more for the latest data and it is less for the past data. By resorting to this differential weights the changes in the data are smoothened to a large extent thereby making the prediction more reliable.

b) Barometric Techniques The Barometric techniques are based on the assumption that the study of the past events can lend certain indicators which when used can yield a more accurate prediction for the future. The trend method on the other hand is based on the assumption that the past would continue in the future also. Under the barometric techniques, the lead indicators are used for projecting the future demand for a product. For example, suppose we want to predict the demand for sweaters, then we should find out the rate at which the population grows over a period. Based on this it should be easy to obtain an estimate of growth of demand for sweaters Sometimes the coincident indicators are also used along with the lagging indicators to predict the demand. The former refers to the indicators which change according to the changes in the economic variables.

For example, the economic development or growth is measured in terms of the changes in the national product, An increase in national product implies that the economy is growing at a higher rate. Then this could be used as base to estimate the demand for a product. An increase in national product means increase in income and other macro - aggregates which together forecast an increase in demand for the product. Similarly using the depletion in the stock level of the producers, predictions can be made about the demand. Such indicators are called lagging indicators.

Sometimes diffusion indices are also used which more clearly reflect the reliability of the lead and lagging indicators.

c) Regression Method: In this statistical method, quantitative relationship is established between the variables under consideration. This method can deal with two or more variables which can determine the demand for a commodity. However, all the regression models are based on the assumption that the predicted changes based on the past data will hold good for the future. With increased use of computers, the predictions through regression method are found to be more accurate. d) Simultaneous Equation Method In this method, depending upon the number of variables, required number of equations are constructed and solved to obtain the effect of the various variables on the demand for a

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commodity. This method is supposed to be comprising the whole system in terms of various variables and equations. But this method is highly complex that its use is not widely found.

Each one of the methods of forecasting has its own merits and limitations. Hence, the producers select from among these available methods depending upon the task on hand.

UNIT QUESTIONS 1.

State and explain the Law of Demand

2.

Why does the demand curve slope downwards? Are there any exceptions?

3.

Explain the determinants of demand.

4.

Define elasticity of demand and explain its types.

5.

Examine the methods of measuring elasticity of demand.

6.

Bring out the importance of the concept of elasticity of demand.

7.

What is meant by demand forecasting?

8.

Describe the various techniques of demand forecasting.

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UNIT – 3 PRODUCTION ANALYSIS OBJECTIVES After going through this chapter, you should be able to 

Understand the meaning of production and production function



Differentiate between economies and diseconomies of scale



Know the meaning of supply and its determinants



Understand the various cost and revenue concepts



Know the meaning and determination of Break-even point

STRUCTURE 3.1.

Meaning of production

3.2.

Meaning, importance, assumptions and uses of production function

3.3.

Short run and Long run production function 3.3.1

Law of Variable Proportions

3.3.2

Assumptions and Importance

3.3.3

Law of Returns to Scale

3.4.

Economies and Diseconomies of scale

3.5.

Supply and it’s determinants

3.6.

Cost Concepts

3.7.

Concepts of Revenue

3.8.

3.7.1

Revenue curves under Perfect Competition

3.7.2

Revenue curves under Imperfect Competition

Break-even analysis – Determination and Uses of Break-even Point

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3. 1.

32

MEANING OF PRODUCTION In economics, production refers to the creation of utilities and not the creation of matter.

Broadly speaking, it includes the commercial services of distribution like transport, whole sale and retail services which help in making the goods available to the final consumer.

3.2.

MEANING, IMPORTANCE, ASSUMPTIONS AND USES OF

PRODUCTION

FUNCTION The production function expresses a functional relationship between physical inputs and physical outputs of a firm at any particular time period. The output is thus a function of inputs.

Mathematically production function can be written as Q = f (A, B, C, D) where Q stands for the quantity of output and A, B, C, D) are the various input factors such as land, labour, capital and organisation. Here output is the function of inputs. Hence output becomes the dependent variable and inputs are the independent variables.

Importance (1)

When inputs are specified in physical units, production function helps to estimate the

level of production. (2) It becomes isoquants when different combinations of inputs yield the same level of output. (3) It indicates the manner in which the firm can substitute one input for another without altering the total output. (4) When price is taken into consideration, the production function helps to select the least combination of inputs for the desired output. (5) It considers the two types of input-output relationships namely law of variable proportions and laws of returns to scale.

Production function may be of fixed proportion production function and variable proportion production function. In a fixed proportion production function, each level of output requires a unique combination of inputs. On the other hand a variable proportion production function is one in which the same level of output may he produced by two or more combinations of inputs. Again the production function explains the maximum quantity of output which can be produced from any chosen quantities of various inputs or the minimum quantities of various inputs that are required to produce a given quantity of output. The concept of production function can be explained through a schedule.

Production Function Output a per unit of time

Input of Capital

6

688

892

1188

1764

1530

1668

5

628

888

1284

1248

1390

1530

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4

560

792

968

1112

1248

1764

3

486

688

834

968

1284

1188

2

396

556

688

792

888

892

1

278

396

486

560

628

688

1

2

3

4

5

6

Input of Labour In the above two-way table, output is produced with some combination of the two inputs labour and capital. Along the left hand side, the varying amounts of capital are listed. It is rising from 1 unit to 6 units. Along the bottom are shown the amount of labour from 1 unit to 6 units.

The intersections of’ columns and rows may be called ‘cells’. Each cell reveals the output when certain combination of labour and capital is made. It is clear from the table that when 2 units of labour and 2 units of capital are combined, the output will be 556. At 5 units of labour and 5 units of capital, output will be 1390. Thus output varies when the input combination is varied. In practice, all factors will not be changed. For instance the combination of 6 units of labour and one unit of capital (output 688) gives the same output as that of the combination of 3 units of labour and 2 units of capital or 6 units of capital and one unit of labour. The producer has to make decision about these three combinations giving the same result. In such calculation the producer needs data on the prices of inputs used. The producer has to take into account the availability and productivity of the factors and select the least cost combination of inputs for getting the desired output. Thus the production function gives input-output relationship.

Assumptions 1.

The production function is related to a particular period of time.

2.

There is no change in technology

3.

The producer is using the best technique available.

4.

The factors of production are divisible.

5.

Production function can be fitted to a short run or to a long run.

Production function has immense utility to the producers and executives in decisionmaking at the firm level. It has important economic implications for the firm. It aids in two ways namely, (1) how to obtain the maximum output from a given combination of inputs, (2) how to attain a given output from the minimum combined cost of various inputs. With the help of production function the producer can say whether additional employment of a variable input factor promises to be profitable or unprofitable. Additional employment of the variable input is desirable so long as the marginal revenue productivity of a variable factor exceeds its price.

When marginal revenue productivity is equal to its price, it is wise for the producer to stop employing additional variable factor input. The production function where all factors are variable

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is highly useful in making long run decisions. When some factors are fixed and some factors are variable it helps in making short run decisions. When the firm experiences the increasing returns to scale, production function guides the producer to increase the output. Production function is therefore a statement of technical facts which the producer uses to obtain the least cost combination of inputs to produce an output.

3.3.

SHORT RUN AND LONG RUN PRODUCTION FUNCTION Production function is very much concerned with the law of variable proportions and law

of returns to scale. Law of variable proportions also known as the law of diminishing returns is the analysis of production in agriculture used in the traditional economic theory. This law examines the production function with one factor variable, keeping the quantities of other factors fixed. The concept of variable proportion is a short run phenomenon as in this period fixed factors cannot be changed and all factors cannot be changed. The law of variable proportions has been stated by various economists in the following manner. “When total output or production of a commodity is increased by adding units of variable input while the quantities of other inputs are held constant, the increases in total production become, after some point, smaller and smaller.”

On the other hand, the law of returns to scale describes the relationship between output and the scale of inputs in the long run when all the inputs are increased/decreased in the same proportion. According to this law, all the inputs of production are variable and nothing is fixed. In other words, in the returns to scale, we analyse the effect of doubling, trebling, quadrupling and so on of all the inputs of productive resources on the output of the product. Again when all factor units are increased, total product generally increases at an increasing rate, later at a constant rate and finally at a diminishing rate and these three tendencies have come to be known as increasing returns to scale, constant returns to scale and diminishing returns to scale.

Thus returns to scale may clearly be distinguished from the law of variable proportions.

In returns to scale all the necessary factors of production are increased or decreased to the same extent so that whatever the scale of production, the proportion among the factors remains the same. On the other hand if one input is variable and all inputs are fixed the firms production function exhibits the law of variable proportions.

3.3.1

LAW OF VARIABLE PROPORTIONS This is the fundamental law of production which consists of three phases, namely the

increasing returns, diminishing returns and negative returns stages of production. This law explains how the amount of output changes as the amount of one of the inputs is varied, keeping other inputs as fixed.

Marshall wrote “An increase in the capital and labour applied in the cultivation of land causes in general a less than proportionate increase in the amount of the produce raised unless it happens to coincide with an improvement in the art of agriculture.”

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35

Stigler likes to refer to the law as “if equal increments of one input are added, the inputs of other production services being held constant, beyond a certain point the resulting increments of product will decrease, i.e., the marginal product will diminish.”

In this way Benham states that “as the proportion of one factor in a combination of factors is increased, after a point, first the marginal and then the average product of that factor will diminish.”

3.3.2

ASSUMPTIONS

(1)

The state of technology remains constant. (2) Only one factor of input is variable and

other factors are kept constant. (3) All units of the variable factor are homogeneous. (4) It is possible to change the proportion of the factors of production. (5) It assumes a short-run situation, for in the long- run all productive services arc variable. (6) The product is measured in physical units.

The law of variable proportions can be explained with the help of Table and a diagram.

Output of Ragi in physical units from five acre land No. of Workers

Total Product

Average

Marginal

Product

Product

1

100

100

100

2

220

110

120

3

270

90

50

4

300

75

30

5

320

64

20

6

330

55

10

7

330

47

0

8

320

40

-10

Stage – I

Stage – II

Stage – III

In Table, if the farmer employs only 4 labourers, his total product would be 300 units. As the number of labourers increased from 4 to 5, total product increases to 320 and so on. 3rd column shows average product per worker on the farm and is obtained by dividing column 2nd st

th

by the column 1 . 4

column contains marginal product and is obtained by finding out the

difference in the total product when one unit more or less is produced. In the above table, marginal product of 3rd worker would he 270-220 50 units. It is clear from the table that both average product and marginal product increase in the beginning and then decline. Of the two, marginal product drops off faster than average product. Total product is maximum when the farmer employs 6th worker; nothing is produced by the 7th worker and hence the marginal productivity of 7th worker is zero. Marginal product of 8th worker is -10; i.e., by just creating

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crowd, 8th worker not only fails to make a positive contribution but leads to a fall in the total output. The behaviour of the marginal product shows clearly three stages; first it increases; second, it continues to fall; and the third, it becomes negative.

The law of variable proportions is presented in Figure

Stage I: In this stage, total product rises from zero, at an increasing rate up to point A. Beyond A, total product continues to rise at a decreasing rate, as the marginal product falls but is positive. The point ‘A’, where the total product stops increasing at an increasing rate and starts increasing at a diminishing rate is called the point of inflexion. At this point the marginal product is at the maximum. The maximum point on the AP curve is ‘e’ where it coincides with the MP curve. Thus stage I refers to the increasing stage where the total product, the marginal product and average product are increasing. It is the increasing returns stage.

Stage II: In the second stage, the total product continues to increase, but at a diminishing rate until it reaches the point ‘C’ where it completely stops to increase any further. At this the second stage ends. Moreover the second stage shows decreasing average product and marginal product of labour, but they are positive. When total product achieves its highest level at C, marginal product falls to zero. The second stage is the stage o diminishing returns.

Stage III : In this stage the total product declines and therefore the TP curve slopes downwards. The average product decreases still further. Marginal product falls faster than average product. The marginal product becomes negative cutting the X-axis. This stage is called the negative returns stage.

Why Increasing Returns (Stage I)?

In stage I the efficiency of the fixed factor increases as additional units of the variable factors are added to it. This causes the production to increase at a rapid rate. Moreover

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increasing returns are reaped due to indivisibility of factors like machinery, management and finance and these fixed factors are made to work to their full capacity. To maximise the profit, the producer can continue to increase variable factor as long as the average productivity is increasing. Still another cause of increasing returns comes from higher degree of specialisation.

When there is sufficient quantity of the variable factor, it becomes possible to introduce the division of labour which leads to higher productivity and more production.

Why Diminishing Returns (Stage II)?

In stage II fixed factor becomes more and more scarce in relation to the variable factor.

Hence any further increase in variable factor beyond the point of optimum level will result in diminishing returns per unit of variable factor. That is the marginal and average products of the variable factor decline during this stage. According to Mrs. Joan Robinson, the factors of production cannot be substituted to any extent. It is the scarcity of factors of production that makes the returns diminish after a point. Just as the average product of the variable factor increases in the first stage when better and fuller use of the fixed indivisible factor is being made, so the average product of the variable factor diminishes in the second stage when the fixed indivisible factor is being worked too hard.

Why Negative Returns (Stage III)?

Negative returns take place due to the fact that amount of variable factor becomes too excessive in relation to the fixed factor with the result that fixed and variable factors get in each other’s way and cause total output to fall instead of rising. As in the stage 1, the marginal product of the fixed factor is negative due to its abundance in relation to variable factor, in stage III the marginal product of variable factor becomes negative due to its abundance in relation to fixed factor.

The Best Stage of Production Now the question arises in which stage a rational producer will seek to produce. A rational producer will not choose to produce in stage I where he marginal product of the fixed factor is negative. So Stage I is irrational. In the stage I, though the producer is faced with increasing returns, yet the producer can increase his profit by switching to Stage II in which the total product is still rising. Similarly Stage III is irrational. In this stage producer will be incurring greater costs as he is utilising more variable factor, but is simultaneously receiving less return because each additional unit of variable input results in the a decline in total output. Labourer works to reduce revenue. This is irrational. We thus conclude that for a profit maximising producer, stage II is the best stage of production. Regardless of factor cost and product price, the chosen level of input application should be somewhere in the range between maximum AP and zero MP. It should however he noted that the small-scale producer often can only maintain

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production in stage I if he is to produce at all since he does not have enough resources to expand production into stage II.

Importance: The law of variable proportions is of paramount economic importance. The law has become an accepted truth in economic science. It has universal applicability. This law applies as much to industries as to agriculture. The occurrence of diminishing marginal physical returns after a point has been confirmed by the overwhelming empirical evidence. The law demonstrates the limitation of physical substitutability of the various factors of production. It also explains how the variation of one factor does not bring the same returns in all stages. That is why the law is called the law of non-proportional returns. Since production is basic to every type of economic activity, the law .has profound implications for the population problem, low standard of living, relative prices paid to factors of production, nature and methods of production. The law of variable proportions can be used to analyse the economic problems of the present underdeveloped countries. A fundamental problem of development of these countries is to search out methods of production that suit their factor endowments. They are well advised to evolve and follow labour intensive production process rather than adopting the capital intensive technology. The problem facing developed countries is otherwise. These countries suffer from low average and marginal product of capital relative to labour. The law is helpful to suggest the best choice of production technique for an underdeveloped or a developed economy.

3.3.3

THE LAW OF RETURNS TO SCALE Returns to scale describes what happens to the output of an enterprise when all inputs

vary in proportion. The way total output behaves to a change in all the factors of production in same proportion is known as the law of returns to scale. When all inputs are increased in unchanged proportions and scale of production is expanded, producer can experience three types of situations. According to this law, when all factor units are increased, total product generally increases at an increasing rate, later at a constant rate and finally at a diminishing ratethese three tendencies have come to be known as “increasing returns to scale”, “constant returns to scale” and “diminishing returns to scale”.

Assumption The law assumes that 1.

All factors are variable and whatever the scale of production the proportion among the factors remains the same.

2.

A worker works with given tools and implements.

3.

There is no change in technology.

4.

There is perfect competition.

5.

The product is measured in physical units.

The laws of returns to scale is illustrated in the following table.

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39

Returns to scale in physical units S.No

Scale

Total Product in quintals

Marginal Product in quintals

1.

1 worker + 2 acres of land

4

4

2.

2 workers + 4 acres of land

10

6

Stage I

3.

3 workers + 6 acres of land

18

8

Increasing returns

4.

4 workers + 8 acres of land

28

10

5.

5 workers + 10 acres of land

38

10

Stage II

6.

6 workers + 12 acres of land

48

10

Constant returns

7.

7 workers + 14 acres of land

56

8

Stage III

8.

8 workers + 16 acres of land

62

6

Decreasing returns

9.

9 workers + 18 acres of land

66

4

In Table, when one worker is employed on 2 acres of land, the total product is 4 quintals.

Now to increase output, we double the scale, but the total product increases to more than double (to 10 quintals instead of 8 quintals) and when the scale is trebled, the increase in total product is more than treble (to 18 quintals instead of 12 quintals). When 4 labourers are employed on 8 acres of land, the total product reaches 28 quintals. In other words in stage I, the increase in total product is more than proportional to the increase in all inputs.

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Hence in this stage we have increasing returns. If the scale of production is further increased, the total product increases at a constant rate up to a certain point and beyond it the total product increases at a diminishing rate. Accordingly we get three stages in the laws of returns to scale.

In the Figure returns to scale increases from A to B, remains constant from B to C and diminishes from C to D.

Increasing Returns to Scale Increasing returns to scale means that output increases in a greater proportion than the increase in inputs. If all inputs are increased by 20 per cent and output increases by 50 per cent, then the increasing returns to scale is said to be operating. This can be illustrated in Figure.

0

With two factors, labour on X-axis and capital on Y-axis the scale line OP is drawn passing through origin on the iso-product map. This scale line OP represents different levels of input where the proportion between labour and capital remains constant. The distance between AB; BC; CD; DE and EF are decreasing showing the operation of increasing returns to scale.

That is the increase in input (scale) is small as we go up the scale and the output is larger. The output increases more proportionately than the increase in input.

When output is raised from a small level to a larger one, indivisible factors are better utilized and therefore increasing returns are obtained. Returns to scale also increases because of greater possibilities of specialization of labour and machinery. But it comes to an end when the internal and external economies of the firm are counterbalanced by internal and external diseconomies.

Constant Returns to Scale If a doubling or trebling of all factors causes a doubling or trebling of outputs, returns to scale are constant. Increase in the scale or the amounts of all factors leads to a proportionate

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increase in output. If all inputs are increased by 20 per cent and output increases by 20 per cent, then constant returns to scale is said to be operating. The constant returns to scale can be explained with the help of the scale line and iso-product map.

It will be seen from Figure that successive equal product curves are equidistant from each other along the scale line OP. When AB = BC = CD = DE, we can understand that a change in the amount of the factors in a certain proporation causes a change in the output in the same proportion. This concept of constant returns to scale refers to a linear and homogeneous production function of the first degree and is important in explaining Euler’s Theorem in the theory of distribution.

Economists are of the view that production function must exhibit constant returns to scale if the factors of production are not scarce and are perfectly divisible. In case of perfect divisibility, factors could be divided by appropriate amounts and any amount of output can be produced with optimum proportion of factors. As a result economies and diseconomies of scale would be non-existent and we would get constant returns to scale.

Decreasing Returns to Scale Decreasing returns to scale means output increases in a smaller proportion than the increase in inputs, if all inputs are increased by 20 per cent and output increases by 10 per cent, then the decreasing returns to scale is said to be in operation. This can he illustrated in Figure.

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In the Figure, the larger gaps between successive iso-product curves indicate the operation of the law of diminishing returns to scale. The distance between AB; BC; CD; DE and EF are increasing showing that the scale has to be increased in larger and larger quantities in order to get the same increase in output, i.e., 100 units. The increase in input is large as we go up the scale and output increases less proportionately than the increase in input.

Diseconomies, both internal and external account for the diminishing returns to scale.

Diseconomies of scale are usually explained by the limits to decision-making. When the size of the firm expands it is difficult to coordinate all the activities of the firm. This reduces productivity; output per unit of input falls. Some economists are of the view that diminishing returns to scale is a special case of the law of variable proportions because varying quantities of all inputs are combined with a fixed entrepreneur. In the real world, possibilities of output increasing by more than, equal to or less than proportionately can exist depending upon the nature and stage of variation.

3.4.

ECONOMIES AND DISECONOMIES OF SCALE

ECONOMIES OF SCALE The scale of production has an important bearing on the cost of production. Larger the scale of production lower is the average cost of production. The entrepreneur is tempted to increase his scale of production to benefit from economies of scale. These economies are of two types: internal and external economies.

Internal Economies Internal economies refer to those economies secured by a firm due to an increase in its size of production. These economies are enjoyed by the concerned firms only. The larger the expansion of the size of production of firms, the greater will the internal economies secured by a firm. Internal economies are of several types.

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1. Technical Economies These economies arise with the introduction of technical reforms in the organisation of a firm. When the firm is growing, it can install upto date and latest machinery. It can improve its methods of production. New machines can be installed in the place of old machines.

Mechanisation leads to decrease in costs and increase in production.

2. Managerial Economies A large firm can employ meritorious and skilled labourers in all branches of production. It can introduce division of labour and specialisation in the day-to-day organisation of the firm. As a result it can reap the benefits of division of labour and specialisation. Quality and quantity of output per worker can be increased. Cost of production can be minimised. Energy and time of workers can be saved.

3. Economy of Material A large firm can utilise its by products in an economical manner. For example a sugar mill can use its waste product molasses for manufacturing Alcohol by starting a separate mill for that purpose. Similarly a diary unit can utilise the spoilt milk for preparing sweets and biscuits. A paper firm can utilise its waste products for preparing inferior quality paper.

4. Economy of Integration A large firm can integrate or link the different stages of production. In doing so it secures considerable profits. For example, a pharmaceutical firm producing drugs and tonics can transport and distribute its product by buying a van. Similarly a sugar mill owner can produce the necessary sugar cane by himself. So integration of production, marketing and distribution stages will bring huge profits.

5. Economy of Marketing A large firm can also secure economies of marketing. It can buy the required raw materials at cheaper prices. It can also raise the demand for its output through proper publicity, advertisement and salesmanship. But improving the quality of its products, it can get huge profits.

6. Financial Economies A large firm can secure credit without any difficulty. It can get loans from banks and other institutions at cheaper rates of interest. Similarly it can sell shares and debentures in the open market. It can also plough back a portion of its profits for investment purposes. It can overcome any financial crisis by using the reserve funds.

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7. Risk-Taking Economies Generally a large firm can take risk and bear uncertainty in business affairs. By adopting product differentiation, it can dispose of its products in the market. It produces different types of commodities and supplies them to different markets. It can recover any loss in one market with the gains coming from other markets. It can secure domestic as well as foreign markets for its products. Diversification of production and marketing increases the ability of the firm to withstand losses. It enjoys financial stability.

8. Economy of Research A large firm can spend considerable amount on research and experimentation. It can establish its own laboratory and employ well trained research experts. It can invest new methods of production and new products. This is possible due to the expansion of the size of production of a firm.

9. Economy of Increased Dimensions It is a known fact that the cost of operating large machines is less than that of operating small machines. Increase of dimensions of certain machines brings economies. For example, the construction of a double-decker bus requires less expenditure when compared to that of constructing two single buses. Thus, a large firm can get economies due to increased dimensions.

10. Welfare Economies A large firm can adopt more welfare schemes for promoting the interest of its workers.

This makes the workers to show more interest in their work.

11. Economy of Indivisibilities Some factors of production are indivisible. Their size can’t be reduced after a minimum size. Machinery, marketing and finance are examples of some indivisible factors. A large firm can utilise the optimum capacity of its machinery. When the demand for its product increases, the same machinery can be used for producing more output. This leads to decreases in cost of production. Similarly, expenses incurred on marketing. advertisement, propaganda and publicity can also be minimised by a large firm. Hence, a large firm will able to secure the economies of indivisibility.

12. Economy of Fixed Costs A large firm can secure the economy of fixed costs. In the case of buildings, machinery, insurance etc., fixed costs remain the same even though level of production was increased. As a result the advantage fixed costs of large firm will decrease.

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External Economies Economies accrued due to the expansion of industry are described a external economies. These economies arise due to the concentration of industries at a particular place.

Generally expansion in the size of firms leads to the expansion of the industry and creation of external economies. External Economies are of different types. These are mentioned as follows:

1. Economies of Concentration When the industry grows in size, all the firms in the industry get the following economies : (a)

Supplementary industries are established in an area.

(b)

Transport facilities are developed and cost of transport decreases.

(c)

Credit facilities are available due to the establishment of banks and other financial institutions.

(d)

Labourers are available without difficulty since skilled labourers migrate to that area.

(e)

Electricity is provided at cheaper rates.

(f)

Demand for machinery will increase as large sized machines are used by the firms.

(g)

Communication facilities will also develop.

2. Economies of Information External economies also include economies of information. Research laboratories can be started and experiments can be initiated on common problems faced by the firms. New methods of production can be invented and informed to the producers. Trade journals can be published and circulated among the businessmen. Information regarding the availability of raw materials, marketing prospects, export possibilities etc. can be informed through the trade journals. Special meetings and conferences can be organised and solutions to various problems can be known.

3. Economies of Specialisation Various firms can introduce division of labour and specialisation. They can produce variety of products. Specialisation  vertical and lateral lines brings several advantages to the industry, For example, the textile mills in Mumbai, Surat and Baroda are producing different varieties of cloth. This leads to improvement in quality and decrease in cost of production.

DISECONOMIES OF SCALE 1. Financial Diseconomies A firm finds it difficult to secure financial facilities after the optimum size.

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2. Marketing Diseconomies The expansion of a firm beyond the optimum size brings losses. It becomes a problem to transport and distribute its products beyond limit. The cost of transport and distribution may overweigh its marketing economies.

3. Technical Diseconomies It is not possible for a firm to maintain and utilise upto date machinery and latest tools due to the difficulties of finance and marketing. There will be underutilisation of installed capacity.

4. Risk Taking Diseconomies Several risks have to be faced by the firm when a firm expands its size of output beyond the optimum level.

5. External Diseconomies Concentration of industry at a particular place has several disadvantages. it becomes a target for enemies in times of war.

6. Managerial Diseconomies It is very difficult for a firm to manage and supervise its various productive affairs when its size expands beyond a limit. It may lead to disintegration.

3.5.

SUPPLY AND IT’S DETERMINANTS Supply is one of the forces that determines the value of goods in the market. Supply is

defined as “how much of goods will be offered for sale at a given time”. Supply, thus means the quantity of goods offered for sale in the market. Just like demand, supply is always at a price for a definite quantity in a given period of time. But there is a difference between supply and stock.

Stock is the amount of produce which is stored for future use. But supply is only that part of the stock or production which is offered for sale in the market. The production and the stock are the sources of supply and therefore, they constitute the potential supply. But they are not the actual supply in the market.

The Law of Supply is stated thus ‘Other things remaining the same. as the price of the commodity rises, its supply is extended and as the price falls its supply is contracted”. This simply means that as price rises supply increases and as price falls supply decreases in the market. The usual tendency among the producer is to offer more when the price is high and less when the price is less. Thus supply varies directly with the price, in other words the relationship between supply and price is direct. Hence higher the price, larger is the supply, lower the price, smaller is the supply.

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47

Price (in Rs.)

Quantity supplied in Kgs.

10

200

8

175

6

150

4

105

2

90 Supply Schedule

The supply schedule shows the various amounts of a product which a producer is willing and able to produce and make available for sales in the market at each specific price in a set of possible prices during some given period. Hence the price and quantity supplied are directly related. As a result of this direct relationship between supply and price the supply curve will slope upwards as shown in the Figure.

In the figure, SS’ is the supply curve. It is positive and it slopes upward showing increase in supply for every increase in price.

EXCEPTIONS Like other laws, the Law of Supply has certain exceptions.

(1)

This law is not true of antique goods like goods used by great people like Gandhiji. Since their supply is fixed, they cannot be changed to changing price in the market.

(2)

The law does not supply to speculators especially ‘bears’ who sell more at a falling price.

(3)

Changes in habits, tastes, fashions, weather conditions and national and international disturbance, affect the supply of goods, irrespective of price changes.

(4)

The changes in cost over a long period influence supply, irrespective of price changes.

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(5)

48

Sometimes the rise in wage will not increase the supply in labour. The Figure illustrate the backward sloping curve of labour.

In the figure supply curve SS’ is backward sloping. At WN wage rate, the supply of labour is ON. But when wage has increased from WN to W 1N1 the supply of labour is reduced to ON1. This is because when the workers feels satisfied, they will work less than before in order to have more leisure.

Determinants of Supply The supply schedule and the curve are prepared and drawn on certain assumptions. The factors which are likely to “change” the supply should be kept constant. The determinants of supply, except the price factor, have been kept constant. What are the other factors influencing supply? (i)

Number of Firms or Sellers : Supply in a market depends on the number of firms or sellers producing and selling in the market. When the sellers are few, the supply will be small. If they are in large numbers, the supply will also be large.

(ii)

State of Technology : It is assumed that the level of technology of production remains constant. Generally any improvement in technology will reduce the cost of production and consequently there will be an increase in supply. Similarly any obstacles to existing technology will increase the cost of production and consequently the supply will get decreased.

(iii)

Cost of Production : The cost of production is an important item affecting the supply and so this is assumed to remain constant. Wages, rate of interest, price of machinery and equipment, raw materials, etc., remain unchanged. If the cost of production gets reduced, the supply curve will shift down

(iv)

Prices of related goods : It is assumed that supply of a commodity depends purely on its price and not on the prices of other commodities related to it. If prices of related

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products fall, the firm producing many goods may increase the supply of a particular product even though its price has not gone up. (v)

Price Expectations : It is assumed that the seller sells the commodity or supplies the commodity on the basis of the prevailing prices and he does not expect any change in prices of that commodity. If he feels that future prices will be higher, he will reduce the present supply of the product. If he feels that future prices may fall, he will be tempted to sell more at the current price.

(vi)

Natural factors : It is assumed that there is no change in natural factors, as the supply is governed by natural factors like rain, drought, etc. This is more so in agro-industries.

Further, monsoon failure may result in the reduction in power generation and it may eventually lead to curtailment of production.

(vii)

Labour trouble : It is assumed that there is no labour trouble and consequent strike or lock out reducing the quantity of supply. The productive units are supposed to be working smoothly without any interruption, according to schedule.

(viii)

Change in Government Policy : Any change in government policy will affect the supply.

A fresh tax or levy of excise duty on a commodity will affect the price of the commodity and as a result the supply will get affected. An increase in tax will reduce the supply and granting of subsidy will increase the supply.

As the above stated factors affect the supply conditions, it is likely that the supply curve may be either pushed up or pushed down. Hence, in order to study the supply in relation to price only, we keep all the above stated factors constant. In that case more will be supplied at higher prices and the law of supply will hold good.

6.

COST CONCEPTS Inputs to the production process have prices and firms incur costs in acquiring them. The

total cost of production equal the prices of various inputs multiplied by the quantities of inputs used. Costs rise or fall as more or fewer units are used. Economists put forth different concepts of cost of production.

Money Cost Money costs refer to the total money expenses incurred by -a firm in the production of a commodity. Money costs include so many elements such as cost of raw materials, wages of labourers, expenses on machines, rent on buildings, interest on borrowed capital. expenses on fuel and power, expenses on transportation and advertisement, insurance charges and all types of taxes, All these expenses can also be called as the total cost of production.

Real Cost The real cost of a product would be the efforts and sacrifices undergone by the producer in producing that product According to Marshall “The exertions of all the different kinds of labour that are directly or indirectly involved in making it; together with the obstinances or rather the

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waiting required, for saving the capital used in making it; all these efforts and sacrifices together will be called the real cost of production of the commodity.”

Social Costs and Private Costs Social costs are the costs which are incurred by the society in producing goods and services. Private cost is the cost of producing a commodity by an individual producer. For instance consider a paper mill that disposes of its wastes in a river. Since the river is not owned by anybody, water use does not cost the paper mill a penny. However fishermen suffer losses which are not reflected in the total cost. Total cost incurred by the paper mill includes both the private cost incurred by using resources such as labour and capital and the damage suffered by fishermen.

Opportunity Cost It is a cost of ‘displaced alternatives’. It represents only sacrificed alternatives and hence is not recorded in any financial account. It depends on the sacrifice of alternative product that could have been produced. This means that the “cost of using something in a particular venture is the benefit foregone (or opportunity lost) by not using it in its best alternative use. In short the opportunity cost of any commodity is the next best alternative commodity that is sacrificed”.

For example, a farmer who is producing paddy, can also produce sugarcane with the same inputs. Therefore the opportunity cost of a quintal of paddy is the amount of output of sugarcane given up. Benham defines the opportunity cost thus: “The opportunity-cost of anything is the next best alternative that could be produced instead by the same factors or by an equivalent group of factors, costing the same amount of money.”

Short-run and Long-run Costs It has been traditional in economics to make a distinction between the short-run and the long-run. These terms are used in order to denote the length of time over which a firm has a chance to alter its decisions and they are useful terms for studying market responses to changed conditions.

The short-run is a period of time in which only variable factor can be varied, while fixed factors remain the same. In the short-run the firm can vary its output by varying only labour and raw materials. Fixed factors like capital, equipment can-not be varied. If the firm wants to increase output, it can do so only by overworking the existing plant, by hiring more workers and buying more raw materials. Hence in the short-run the firm cannot enlarge the size of the plant or build a new plant of a larger size.

Long-run refers to a period of time which is long enough to bring about possible variations in all inputs. All fixed factors will be converted into variable factors. Output can be

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51

increased by increasing capital equipment or by increasing the size of the existing plant or by building a new plant of a greater productive capacity.

On this basis, cost functions are classified as short-run costs and long- run costs. The short-run costs are divided into short-run fixed cost and short-run variable costs.

Short-run Fixed and Variable Costs Fixed costs do not vary with the changes in output. Fixed cost arises because certain factors of production are indivisible and they have to be engaged for technical reasons in a certain size. When once engaged, these factors can be used over a period of time. For instance inputs like land, buildings, equipment, machinery, permanent staff of the firm can be employed over a period of time for producing more than one batch of goods. The costs incurred in these are called fixed costs. Therefore fixed cost includes rent on land or buildings, interest on capital, salaries of the permanent staff, certain taxes, depreciation and insurance premia. Fixed costs are independent of output and these costs have to be incurred even if the plant is at a standstill.

Fixed costs must be incurred by the firm in the short-run whether the output is small or large.

Fixed costs are also known as constant costs or supplementary costs or overhead expenses.

Variable costs vary with the changes in output. If there is no output, variable costs are nil. Variable costs are incurred only when the firm is at work. Since variable costs are function of output, total variable costs increase with the level of output. These variable costs include the cost of raw materials, cost of causal or daily labour, fuel and power cost, cost on hired machines and equipments, cost on current repairs and other services. Variable costs play an important role since they help producer decide how much should be produced or whether he should produce at all. Variable costs are also known as prime costs or direct costs.

The concepts of fixed cost and variable cost are shown in the following figures.

Y

Y

Fig. 1

X

Fig. 2

X

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Short run fixed cost curves

Y

52

Short run variable cost curve

Fig. 3

X Short run total cost curve The curve in Figure-1 shows that fixed costs do not vary in the short- run. The curve in Figure-2 shows that variable costs do change as the output increases. The shape shown in Figure-3 assumes that initially labour exhibits an increasing marginal productivity but that, after some point, the marginal productivity of labour diminishes, thus causing short- run costs to rise rapidly.

In the short-run total costs of a business is the sum of its total variable costs and total fixed costs. Thus TC = TFC + TVC. Because one component ie the total variable cost (TVC) varies with the change in output. The total cost will also respond to changes in the level of output.

Therefore the total cost increases as the level of output rises.

The curve in Figure-3 simply represents the summation of the two curves shown in Figure-1 and Figure-2 Short-run fixed costs determine the zero-output intercept for the curve, whereas the short-run variable cost curve determines the total cost curve’s shape.

Short-run Average and Marginal Cost Curves Average cost is the unit cost of production. It is the cost per unit of output. In the shortrun average total cost (ATC) is the sum of average fixed cost (AFC) and the average variable cost (AVC). The per unit fixed costs are known as the average fixed cost and is defined as AFC =

TFC q

where TFC q

-

total fixed cost

-

number of units of output produced.

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Average variable cost (AVC) refers to the variable cost per unit of output. It is the total variable cost divided by the number of units of output produced. Average variable cost is defined as AVC =

TVC q

where

TVC

-

total variable cost

q

-

number of units of output produced.

The average total cost is simply called average cost (AC) which is the total cost divided by the number of units of output produced.

ATC =

i.e.

TC q

where

TC

-

total cost

q

-

number of units of output produced.

ATC

=

TFC + TVC q

ATC

=

TFC TVC  q q

ATC

=

AFC + AVC

(TC = TFC +TVC)

The following figures show the shape of AFC, AVC and ATC in short period.

The behaviour of ATC or AC curve depends upon the behaviour of AVC and AFC curves. In the beginning both AFC and AVC fall. So, ATC curve also falls. When AVC curve begins rising, but AFC curve is falling steeply, the ATC curve continues to fall because during this stage the fall in AFC is heavier than the rise in AVC. But as output increases further there is a sharp rise in AVC. In this stage the rise in AVC is heavier than the fall in AFC. Therefore the ATC curve rises after a point. The ATC curve like AVC curve falls first, reaches the minimum value and then rises. Hence AC curve has taken a ‘U’ shape.

Y

0

Y

X

0

Y

X

0

X

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Marginal Cost Marginal cost is defined as the addition made to the total cost by producing an extra unit of output.

The Marginal cost curve is given in the figure-5 Y

MC

MC

O

X Output per Period

e

The shape of the marginal cost curve is determined by the law of variable proportion. If increasing returns is in operation, the MC curve will be declining as the cost will fall with the increase in output. When the diminishing returns is in operation, the MC curve will be increasing as it is the situation of increasing cost. The marginal cost will remain constant with the constant returns. Hence the shape of the curve will be a ‘U’ one, showing that marginal cost declines first, remains constant and afterwards increases.

Long run Costs Long run decisions focus on the scale of operations. Long-run cost curves are subject to the laws of returns to scale as against the short run cost curves which are subject to the laws of variable proportions. In the long-run all factors are variable and there is nothing like fixed cost of production. The scale of production undergoes a change when all costs are variable. Individual factors become divisible in the long-run and therefore, they can be used more economically.

It should be remembered that the long-run total cost is the same as that of long-run total variable cost. There is no long-run fixed cost curve, either total or average, because in the longrun all costs are variable. There is no need to distinguish between long run average variable cost and average cost. They are one and the same. The long-run average and marginal costs are derived from the long run total costs.

Long-run average total cost (LATC) =

LTC q

where LTC – Long-run total cost : q – output

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Long-run marginal cost (LMC) = where

55  LTC q

 LTC - Change in long-run total cost q

- Change in output.

The long-run total cost curve is an envelope of the set of short-run total cost curves.

Y

X

Figure - 7

The LAC curve depicts the lowest possible average cost of production at different levels of output. It is flattened ‘U’ shaped. This type of curve could exist only when the state of technology remains constant. But the empirical evidence shows that the state of technology is subject to change in the long-run. That is why modern firms face ‘L-shaped’ average cost curve in the long-run.

3.7.

CONCEPTS OF REVENUE In modern days, every firm, whether large or small produces commodities and services

with the purpose of selling them in the market in the minimum time possible and profit thereby.

The amount of money which the firm receives by the sale of its output in the market is known as its revenue, The concepts of revenue most commonly used in economics are those of’ total revenue, average revenue and the marginal revenue.

Total revenue refers to the total amount of money that the firm receives from the sale of its products. It is the gross revenue realized by the firm in selling the output. This total revenue will vary with the firm’s output and sales. The total revenue can be calculated by multiplying the quantity of output by the price per unit over a period of time.

Mathematically TR = q.p where TR refers total revenue; q refers to quantity and p is the price per unit of the commodity.

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Average Revenue Average revenue is total revenue divided by the number of units sold, so as to give the average revenue per unit sold. Obviously the average revenue is the price of the commodity. The price paid by the consumer is the revenue realized by the producer. Supposing a seller sells 100 units of a product and obtains Rs. 1,200 from the sale, his total revenue is Rs. 1,200 and the average revenue is Rs. 12. This is the revenue realized per unit of output. The revenue realized from selling one unit is its price. Hence we may write:

AR =

TR TR P= and So AR = P. q q

It follows from this that the curve which denotes average revenue in relation to output is identical with the demand curve that relates price to output.

Now the question is whether the average revenue is equal to price always or is it different from price. If the seller sells the various units of the product at the same price, then AR would mean only the price. But when he sells different units at different prices, then the AR will not be equal to price. But in actual life, the different units of product will be sold at the same price and so, the average revenue equals price. In economics we use AR and price as synonyms except in the context of price discrimination by the seller. Since buyer’s demand curve represents the quantities purchased or demanded at various prices of the commodity, it also refers to the average revenue at which the various amounts of the commodity are sold by the seller.

Marginal Revenue Marginal Revenue is the change in total revenue resulting from an increase in sale by an additional unit of the product in a particular time. It is the increase in total revenue by selling one more unit of the commodity. It can also be expressed that the marginal revenue is the addition made to the total revenue by selling ‘n’ units of a product instead of n-I where ‘n’ is any given number. Here the selling of n units and n-I units is not at different points of time. It does not mean that n-1 units are sold at some time and an extra unit is sold at some time later. The concept of marginal revenue is matter of alternative sales policies at the same period of time. To find out the MR of the hundredth unit, we compare the TR resulting when hundred units are sold over some period of time with the TR that would have resulted if 99 units had been sold over the same period of time.

We may write : MRn = TRn – TRn-1 Let us take a numerical example. Suppose a producer sells ten units of a product at price Rs. 15 per unit. The total revenue he will be getting equals 10 x Rs. 15. Rs. 150. Supposing he increases sales to eleven units and consequently the price falls to Rs. 14, he will obtain a total

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revenue of Rs. 154 in selling eleven units. The marginal revenue is Rs. 4. That is, selling of eleventh unit has added only Rs. 4. Why is it that the revenue is not equal to the, price? The reason is this. Consequent on increasing the sale by one unit, the price has come down from Rs. 15 to Rs. 14 and all the eleven units are sold at Rs. 14 only. Formerly the ten units were sold at Rs. 15 and now each unit of the ten has lost one rupee and so those 10 units have lost rupees ten. This loss of Rs. 10 is due to the additional unit sold which by itself has earned Rs. 14.

Deducting the loss of Rs. 10 from the price of the eleventh unit, the net addition caused by the eleventh unit is only Rs. 4 (14-10). Hence the Marginal Revenue is Rs. 4 and it is less than the price at which the additional unit is sold.

From this analysis we can infer that the Marginal Revenue can be found out in two ways thus: (i)

Directly by finding out the difference between the total revenue before and after selling the additional unit; or

(ii)

We can subtract the loss in revenue on the previous units due to the fall in price on account of the additional unit sold.

If there is no fall in price due to the addition of the unit sold, then there is no loss and the Marginal Revenue will be equal to the price as in the case of perfect competition.

3.7.1

REVENUE CURVES OF THE FIRM UNDER PERFECT COMPETITION In perfect competition, the individual firm cannot influence the market price and whatever

quantity is produced and sold, it will be for the prevailing market price. Hence the total revenue of the firm would increase proportionately with the output offered for sale. When the total revenue increases in direct proportion to the sale of output, the average revenue would remain constant.

Since the market price is constant without any variation due to the changes in units sold by the individual firm, the extra output would fetch the proportionate revenue. So the MR and AR will be equal and constant. This will be equal to the price. In such a case the marginal revenue curve will be a straight line parallel to X axis. The same curve denotes average revenue and it represents the price of the unit sold.

The following Table and the curves show the AR and MR under perfect competition.

Number of units

Price or Average

Total Revenue (Rs.)

Marginal Revenue

sold

Revenue (Rs.)

1

5

5

5

2

5

10

5

3

5

15

5

4

5

20

5

5

5

25

5

6

5

30

5

(Rs.)

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In the Table, Col. 2 shows the price and AR which are equal and constant. The total revenue proportionately varies with the output. The marginal revenue is equal to average revenue and price. This is the case under perfect competition. The AR and MR curves are depicted below:

OP is the price which is equal to AR and MR 3.7.2

REVENUE CURVES OF THE FIRM UNDER IMPERFECT COMPETITION But in the case of imperfect competition, be it monopoly, monopolistic competition or

oligopoly, the AR curve of an individual firm will slope downwards, Under imperfect competitions, a firm can sell larger quantities only when it reduces the price. When the output is increased for selling, the average revenue or the price will be declining. So the AR curve will be a declining curve. It will decline in the same fashion as the demand curve.

The following Table gives the Total revenue, Average revenue and Marginal revenue under imperfect competition: Number of units sold 1

Total Revenue (Rs.) 10

Average Revenue or Price (Rs.) 10

Marginal Revenue (Addition made to TR) (Rs.) 10

2

18

9

8

3

24

8

6

4

28

7

4

5

30

6

2

6 30 5 0 In the Table, Col. 3 indicates the average revenue or price. As the output is increased from I to 2, 3, 4, etc., the price has to be reduced to get adequate demand and consequently the AR is continuously falling from 10 to 9, 8, 7, etc. When the price comes down, the total revenue realized is increasing at a diminishing rate and after the 5th unit the total revenue does not change. Consequently the marginal revenue diminishes with increase in output. At the sixth unit the MR comes to Zero. If seventh unit is produced and sold, it wifl result in negative marginal revenue.

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Based on the Table, the AR and MR curves arc given below

The curves show that AR is declining and MR is also declining. The MR curve lies below the AR curve when AR is 1 MR is also falling and it is falling very steeply.

The AR and MR curves need not be a straight line. They may be either convex or concave to origin. But in all cases the MR curve will always lie below the AR curve as shown above in Figure.

3.8.

BREAK-EVEN ANALYSIS – DETERMINATION AND USES OF BREAK-EVEN POINT

What is Break-Even Analysis?

Break-even analysis is a study of costs, revenues and sales of a firm and finding out the volume of sales where the firm’s costs and revenues will be equal. The Break-even point is that level of sales where the net income is equal to zero. The break-even point is the zone of no-profit and no-loss as the costs equal revenues. The object of break-even analysis is not merely to spot the Break-even point, but to create an understanding about the relationship between costs,

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revenues and output that could be sold within the competence of the firm. This analysis is an important bridge between business behaviour and the theory of the firm.

Determination of Break-Even Point (BEP) The BEP of a firm can be found out in two ways. It may be approached in terms of physical units, i.e., volume of output or it may be approached in terms of money value, i.e., the value of sales.

(i) BEP in Terms of Physical Units This method is convenient for a firm producing a single product. The BEP is the number of units of the commodity that should be sold to earn enough revenue just to cover all the expenses of production. The revenue realised covers all costs, variable as well as fixed. The firm does not earn any profit, nor does it incur any loss. It is the meeting point of total revenue and total cost curve of the firm.

The Break-even point is illustrated below by means of a schedule and a graph.

Output in

Total Revenue Price Rs.

Total Fixed

Total variable

Total cost

units

4/- per unit

cost (Rs.)

cost (Rs.)

(Rs.)

0

0

300

0

300

100

400

300

300

600

200

800

300

300

600

300

1200

300

900

1200

400

1600

300

1200

1500

500

2000

300

1500

1800

600

2400

300

1800

2100

TOTAL REVENUE, TOTAL COST AND BEP (Selling price : Rs. 4/- per unit)

Some assumptions are made in illustrating the BEP. The price of the commodity is kept constant at Rs.4/-per unit. That is, perfect competition is assumed. Therefore, the total revenue is increasing proportionately to the output. All the units of output are sold out. The total fixed cost is kept constant at Rs.300/- at all levels of output. The total variable cost is assumed to be increasing by a given amount throughout.

From the table, it is clear that when the output is zero the firm incurs only fixed cost under

total

cost.

When

the

output

is

100

the

total

cost

is

Rs.600

(TFC + TVC). The total revenue at that level of output is Rs.400. The firm incurs a loss of

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Rs.200.

Similarly,

when

the

61

output

is

200

the

firm

incurs

a

loss

of

Rs. 100 as the difference between TR and TC is Rs. 100. At the level of output of 300 units, total revenue is equal to total cost (Rs.1,200). At this level, the firm is working at a point where there is no profit or loss. This is the Break-even point. From the level of 400 units of output, the firm is making profit. This is illustrated in the Figure.

In the Break-even chart, TFC is total fixed cost; TR is total revenue and TC is total cost.

Since TFC is constant at all levels of output, it is parallel to X axis. From the figure, we can see that the Break-even point lies at 300 units of output. Up to 300 units of output the firm will be incurring loss in all units of output as TC is at a higher level, than TR. This is called Loss Zone.

Beyond 300 units of output, the firm is realizing profit as TR exceeds TC. At 300 units of output the firm is neither incurring loss nor realizing any profit. It is the Break-even point (BEP) or noprofit, no-loss point of production.

Alternative Method There is another method of finding out BEP in terms of physical units of output. This is by means of a formula. In this case, we adopt Average Revenue and Average Cost instead of TR and TC. The break-even point is that level of output at which the price of the product (i.e., Average Revenue) covers the average cost. The price should be sufficient to cover not only the average variable cost but also some portion of average fixed cost. The excess of selling price over average variable cost goes towards meeting some portion of the fixed cost. This excess is called contribution margin, i.e., the contribution towards meeting the fixed cost. So, the BEP will

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be at a point where the total contribution margin is equal to the total fixed cost. The formula is as follows: BEP

=

Total Fixed Cost ———————————— Contribution margin per unit

Contribution margin per unit can be found out by deducting the Average Variable Cost from the Selling Price. So the formula will be: BEP

=

Total Fixed Cost ———————————— Selling Price - AVC

BEP

=

300 (TFC) —————— 4–3

BEP

=

300

The Break-even point on the basis of formula comes to 300 units of output.

(iii) BEP in Terms of Sales Value The BEP in terms of physical output is suitable only in the case of single product firm. If the firm is producing many products, the BEP can he approached only in terms of money value or total sale value or total revenue. Here also the principle of total contribution margin is made equal to total fixed cost; but the contribution margin is expressed as a ratio to sales.

Total Revenue minus-Total Variable Cost The contribution margin =

———————————— Total Revenue

In our numerical example on the basis of the schedule, the contribution ratio is 0.25. This is arrived at on the basis of the above formula.

The Break-Even Point

=

Total Fixed Cost ———————————— Contribution Ratio =

Rs. 300 ———— 0.25

=

Rs. 1200/-

The firm in our illustration attains its BEP when its sales are Rs.1,200/-. We can check up the result by finding out total variable and fixed costs where the total revenue is Rs. 1,200/Total Revenue

-

Rs. 1,200

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Total Fixed Cost Rs.300 Total Variable Cost Rs.900 Total Cost

-

Net Profit/Loss -

Rs. 1,200

Nil

Assumptions of Break-Even Analysis The break-even analysis is studied with certain assumptions: (i) the volume of production and the volume of sales are equal. That is to say the firm is able to sell all the units of the commodity produced and there is no change in the closing inventory; (ii) the price is assumed to be constant. (III) all revenue is perfectly variable with the physical volume of output and (iv) all costs are either perfectly variable or absolutely fixed over the entire range of volume of production.

In practice, these assumptions may not hold good. The firm may not be able to sell all the stock produced. The firm may charge lower prices for large sales and the costs may not be perfectly variable. Even the fixed cost need not be fixed for the entire range of production.

Usefulness of Break-Even Analysis The break-even analysis presents a microscopic picture of the business and it enables the management to find out the profitability region. It highlights the areas of economic strength and weakness of the firm. It guides the management in bringing about increase in profits and to take effective decisions in the context of changes in government policies of taxation and subsidies.

The Break-Even Analysis can be used for the following purposes: (1) Safety Margin : The Break-even chart will help the management to find at a glance the profit generated at various levels of output. By this the management can take decisions regarding the ‘safety margin’ associated with the proposed volume of output and sales. The safety margin refers to the extent to which the firm can afford a decline in sales before it starts incurring losses.

If the firm is working at loss, the safety margin tells the minimum increase in sales to reach BEP and avoid losses. The safety margin can be found out by the following formula: Safety Margin

=

(Sales – BEP) ————————— x 100 Sales

Let us take the numerical example from the schedule given in our illustration. According to the schedule at the level of 500 units of output and sales, the firm is earning profit. How much the firm can afford a decline in sales before it starts incurring losses? In other words, what is the safety margin? Applying the formula

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Safety Margin

=

64

(500 – 300) —————— x 100 500 =

40%

This means that the firm which is now selling 500 units of the commodity can afford a decline in sales up to 40 per cent, i.e., a decline in sales up to 200 units and keep the level of sales at 300 before incurring any loss. The margin of safety may be negative as well, if the firm is incurring any loss. In that case, the percentage tells the extent of sales that should be increased in order to reach the point where there will be no loss.

(2) Target profit : The Break-even analysis will help the management in finding out the level of output and sales in order to reach the target of profit fixed. When a firm fixes some target in profit, this analysis will help in finding out the extent of increase in sales by using the following formula.

Fixed Cost + Target Profit Target sales volume = ———————————— Contribution Margin Percent By way of illustration, we can take the schedule given. Suppose the firm wants to fix the profit at Rs.200. From the schedule and graph we can find out that the volume of output and sales should be 500 units, as only at that level the profit reaches Rs.200. If the above formula is applied the answer will be the same, i.e., 500 units.

(3) Change in price : Frequently, in the competitive world, the firm will be faced with problems of taking decisions regarding reduction of prices for the commodity. The management has to consider many points in reducing the price. A reduction of price will result in the reduction of contribution margin. This means that the level of output has to be increased even to get the previous level of profit. Reduction in price need not necessarily result in increased sales, as it depends on the elasticity of demand of the commodity produced by the firm. The firm may not have correct and full information regarding the elasticity of demand for the product. Assuming that it remains constant, the management has to take decision regarding the increase of volume of output in order to maintain the profit level in the context of reduction in price. The formula for determining the new volume of sales, to maintain the same profit with given reduction in price will be as follows: New Sales Volume

=

Total Fixed Cost + Total Profit —————————————————— New Selling Price — Average Variable Cost

Suppose a firm has a total fixed cost of Rs.8,000 and the profit target is Rs.20,000. If the sales price is Rs.8 and the average variable cost is Rs.4/-, then the total volume of sales should be 7,000 units on the basis of the formula given under ‘Target Profit’. Suppose the firm decides

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to reduce the selling price from Rs.8 to Rs.7, the new sales volume on the basis of the above formula should be: New Sales Volume

=

8000 + 20,000 ———————— = 9,333 7-4

By reducing the price from Rs.8 to Rs.7, the firm has to increase the sales from Rs.7,000 to Rs. 9,333 if it wants to maintain the target profit of Rs.20,000. In the same manner, the management can calculate the new volume of sales if it increases the price.

Limitations of Break-Even Analysis The break-even analysis has certain limitations as the entire data collected rest on the cost and revenue functions. (i) It is static in character : In the break-even analysis we keep everything constant.

The selling price is assumed to be constant and the cost function is linear. In practice it will not be so. Larger volume of output cannot be sold at the same price. In the case of bulky sales, some reduction in price has to be given. Similarly, the cost function will not remain constant at different levels of output.

(ii) Projection of future with the past is not correct : In the break-even analysis, since we keeps the functions ‘constant, we project the future with the help of the past functions. This is not correct. Cost in a particular period may not be caused entirely by the output in the period. For example, maintenance expenses may be the result of past output or preparation for a future output. Further, the relationship between output and selling expense is unstable over the period.

(iii) The assumption that cost-revenue-output relationship is linear is true only over a small range of output. It is not an effective tool for long range use. It is better to restrict the breakeven analysis to the budget period of the firm, i.e., a year. (iv) The profits are a function of not only output but also other factors like technological change, improved management, etc., which have been over-looked in the analysis.

In spite of its drawbacks, the Break-even analysis is a useful tool for the management to take decisions. The chart is only a guide giving a rough indication of the possibilities. It is not a judge giving perfect verdicts based on commonsense.

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UNIT QUESTIONS 1.

Explain production function.

2.

Describe the Law of Variables Proportions.

3.

Discuss the Law of Returns to Scale.

4.

Give an account of economies and diseconomies of scale.

5.

Explain the Law of Supply.

6.

Explain the various concepts of costs.

7.

What do you mean by Break-even Point?

8.

What are the different methods of finding Break-even Point?

9.

Point out the uses and limitations of Break-even point.

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UNIT – 4 MARKET STRUCTURE OBJECTIVES After going through this chapter, you should be able to 

Understand the meaning and features of perfect competition, monopoly and monopolistic competition.



Understand price – output determination under perfect competition, monopoly and monopolistic competition.



Know the meaning of price discrimination.



Know price determination under price discrimination.

STRUCTURE 4.1.

4.2.

4.3.

Meaning of Perfect competition 4.1.1

Features of Perfect Competition

4.1.2

Equilibrium of the Firm and Industry under Perfect Competition

4.1.3

Equilibrium in the Short-run

4.1.4

Equilibrium in the Long-run

Monopoly 4.2.1

Features of Monopoly

4.2.2

Short-run Equilibrium under Monopoly

4.2.3

Long-run Equilibrium under Monopoly

4.2.4

Price Discrimination under Monopoly

4.2.5

Degrees of Price Discrimination

Monopolistic Competition 4.3.1

Features

4.3.2

Price determination under Monopolistic Competition.

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4.1.

MEANING OF PERFECT COMPETITION Perfect competition is the name given to an industry or to a market characterised by a

large number of buyers and sellers all engaged in the purchase and sale of a homogeneous commodity with perfect knowledge of market prices and quantities, no discrimination and perfect mobility of resources.

4.1.1

FEATURES OF THE PERFECT COMPETITION Large Number of Buyers and Sellers The first condition of perfect competition is that there are a large number of buyers and

sellers in the market. No single firm is in a position to affect the market price by varying its own output. The output of a single firm is only a small portion of the total output in the industry and the demand of any single buyer is only a small portion of the total demand. The individual seller is a price taker and not a price maker. The buyer cannot influence the market price by changing his demand for the product.

Homogeneous Product The products produced by all firms in the industry are fully homogeneous and identical so that buyers do not distinguish between products supplied by the various firms.. That is to say that the product of each firm is regarded as a perfect substitute for the product of other firms.

Hence no firm can gain any competitive advantage over the other firms.

Perfect Knowledge of the Market Both the buyers and sellers are fully aware of the going price in the market. Because all buyers know fully the current price of the products in the market, sellers cannot charge more than the going price. If any seller tries to charge a price higher than the prevailing price in the market, then the buyers will shift to some other sellers and buy the products at prevailing price. Similarly, all the sellers are aware of the prevailing price in the market and hence no seller will charge less price than this since his objective is to maximise profits.

Free Entry and Exist There should be no restrictions, legal or otherwise on the firms’ entry into or exit from the industry. In this situation, all the firms will earn normal profit. If the profit is more than normal, new firms will enter and if on the other hand, profit is less than normal, some firms will quit from the industry.

Absence of Transport Costs In this market situation the prevailing market price is accepted and acted upon by all the dealers. If the same price is to rule in a market, it is necessary that no cost of transport has to be

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incurred. If there is transport cost, then the prices must differ to that extent in different sectors in the market.

Indifference No buyer has a preference to buy from a particular seller and no seller has a preference to sell the products to a particular buyer.

Absence of Collusion There should not be any kind of agreement between the sellers nor between the buyers so that each seller or buyer acts independently. The firms in the industry enjoy the freedom of independent decisions.

Perfect Mobility of Resources For a market to be perfectly competitive there should be perfect mobility of resources.

Factors of production must be in a position to move freely into or out of industry and from one firm to the other. If the demand exceeds the supply, factors will move into the industry and in the opposite case move out.

4.1.2

EQUILIBRIUM OF THE FIRM AND INDUSTRY UNDER PERFECT COMPETITION A firm or an industry is said to be in equilibrium when there is no tendency for its output

to increase or decrease. Under perfect competition firm will adjust its output at the point where its marginal cost is equal to marginal revenue or price and marginal cost curve cuts the marginal revenue curve from below. The demand curve or the average revenue curve facing a firm under perfect competition is a horizontal straight line parallel to x axis.

Conditions of equilibrium under perfect competition In the Figure the average revenue curve and marginal revenue curve coincide with each other at the ruling price OP. Given OP price, the firm will fix its output only at OM, This is so

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because at output OM, MR = MC and MC curve cuts MR curve from below. At point R, profits would be maximum and the firm would be in equilibrium.

4.1.3

Equilibrium in the Short-run

If OP is the ruling price in the perfectly competitive market situation, firm A will be in equilibrium at E and will be producing OM output, firm B will be in equilibrium at L with ON output and firm C will be in equilibrium at K with OT output. The cost in firm A is less than firm B and the cost in firm B is less than firm C. That is why firm A is making super normal profits, firm B is earning only normal profits and firm C is making losses. The firm’s equilibrium is the same as that of industry’s equilibrium only in the second category.

4.1.4

EQUILIBRIUM IN THE LONG-RUN In the long-run, a firm or an industry is in equilibrium only when the following two

conditions are satisfied.

1. Price = MC of all firms 2. Price = Minimum AC of the marginal firm. Under conditions of different costs and in long-run equilibrium, some firms may be earning super-normal profits and some may be making only normal profits. This is shown in Figure.

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In Figure the long-run price is OP which is equal to the marginal cost of firm A, B and C. Besides, price OP is also equal to average cost of the marginal firm C. The marginal firm is the highest-cost firm which earns only normal profits. (Fig. iii). If price falls below OP,then the marginal firm will leave the industry as with the fall in price its profits will sink below normal.

In firm A and firm B, the price OP is greater than average cost and therefore they make super normal profits. Firm A’s super normal profit is more than firm B because of the differential cost conditions. Firms having lower cost than firm C will enter in the industry and hence super normal profits will be converted into normal profits. Full equilibrium in the long- run is achieved when price is equal to marginal cost of all firms and minimum AC of the marginal firm. Working at optimum size in the long-run, the firm will enable the consumers to get the products at the lowest possible price.

2.2.

MONOPOLY Monopoly is a market situation in which one firm is the sole producer or seller of a

product which has no close substitutes. Mono means one, poly means seller. Thus monopoly means one seller or one producer.

4.2.1

FEATURES OF MONOPOLY

1.

Under monopoly there is a single seller or producer. The single seller may be an individual or group of individuals or a company.

2.

In monopoly, there is no difference between firm and industry. The firm itself is the industry.

3.

Under monopoly as there is only one firm producing a product, it has not close substitutes.

4.

As the monopolist is the sole producer or seller, he has the power to control price or output. But he cannot control both. The control over price is the unique feature of monopoly.

5.

There exists strong barriers to entry in monopoly.

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4.2.2

SHORT RUN EQUILIBRIUM UNDER MONOPOLY In the short run, the monopolist has to work with a given plant. He can increase or

decrease his output only by changing variable factors. The equilibrium of a monopolist in the short run is illustrated in Fig.

Monopolist is in equilibrium at E where marginal revenue is equal to marginal cost. Price is OP and his profit is equal to TRQP. It is generally thought that monopolists always earn profits. But it is not so. In the short run he can make losses also. It is shown in Figure.

The monopolist is in equilibrium at level of OS output at OP price. Since price is lower than average cost, he is making losses equal to PQGH. However as price is higher than average variable cost he will continue his production.

4.2.3

LONG-RUN EQUILIBRIUM UNDER MONOPOLY In the long run, monopolist can adjust his size of the plant. In the short- run, the

monopolist adjusts the level of output with a given plant. His profit maximising output in the short run will be at a point where short-run marginal cost curve is equal to marginal revenue curve. But in the long-run he can further increase his profits by adjusting the size of the plant. So in the long run he will be in equilibrium at the level of output where the marginal revenue curve cuts the long-run marginal cost curve. The long run equilibrium of the monopolist is portrayed in Figure.

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73

L

The monopolist is in equilibrium at OL output where LMC cuts MR. He will fix the price equal to OP and will be making profits equal to THQP.

4.2.4

PRICE DISCRIMINATION UNDER MONOPOLY Price discrimination can be defined as the act of selling the same article (a good or

service) produced under single control (that is by a single firm) at different prices to different buyers. Usually this is possible only in monopoly as there is the sole seller controlling the entire supply. Thus price discrimination cannot prevail in perfect competition. This practice of charging different prices to different consumers or discriminating among the buyers in the prices to be paid by them is also referred to as discriminating monopoly.

Price discrimination is of different types. It is personal discrimination if a monopolist charges different prices for different individuals. For example, professionals like doctors, lawyers or tax consultants may collect more fees from the rich patients than from a poor one. Firms also sell the same product under two name brands, one at a higher and the other at a lower price to increase sales among rich and poor buyers. Secondly, there can be local discrimination. This involves different prices being charged over different localities. Thus the monoplist may charge a higher price from the domestic consumers and a lower price from the foreign consumers just to capture the foreign market. Universities in USA charge higher tuition fees from foreign students only. The third type is trade discrimination. Here the monopolist charges different prices from different trades or occupations. Firms offer lower prices for whole sale or bulk purchasers and higher prices from retailers. Similarly publishers of journals charge lower prices from individual members and higher prices from institutions.

2.5

DEGREES OF PRICE DISCRIMINATION The extent to which a seller can divide the market to charge different prices is known as

the degree of price discrimination. Professor A.C. Pigou has explained three degrees of price discrimination.

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First Degree Price Discrimination Price discrimination of the first degree occurs when the monopolist is able to sell each separate unit of the output at a different price. Entire consumers surplus is shifted to the seller as shown in Figure.

When the monopolist knows the price each consumer is willing to pay, he can charge the same price and take away the entire consumer’s surplus as shown by the shaded area. The monopolist first sells the product at the highest price to those who are willing to buy at that price.

The consumer’s surplus becomes nil. Then he lowers the price for the second set of consumers who also will not have any consumers’ surplus. This is possible for instance in the case of doctors who charge differently according to the financial ability of the patients. Mrs. Joan Robinson describes this as perfect discrimination.

Second degree price discrimination Second Degree Price Discrimination In the second degree price discrimination a monopolist takes away only a portion of the consumers’ surplus and not the whole of it. This is possible only when the number of consumers is large and price rationing can be done. It is also assumed that the demand curve for all the consumers is identical.

Figure shows that the monopolist practising price discrimination charges OP price which is the lowest demand price for OM quantity. For the next lot of MM the price charged is OP 1 which is again the- lowest demand price for that lot. The consumers enjoy a limited consumer’s surplus as shown by the shaded area for each level of output. By adopting such a block pricing method, the monopolist gets the maximum revenue.

TR = OPAM + OP1 BM1 + OP2 CM2

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Second degree price discrimination If the monopolist does not adopt price discrimination but adopts any one of these prices as the single price, his total revenue will be much less.

Third Degree Price Discrimination A monopolist is said to practice third degree price discrimination when he charges different price in different markets which have different elasticity of demand. The price charged in each sub-market depends upon the output sold in the submarket and the demand conditions in that submarket. He has to make two decisions (1) How much total output should he produced by him. (2) In what way will the total output be divided between the two markets to get the maximum profits. A uniform price cannot be set for all the markets without losing profits if the elasticities are different. The monopolist has to decide the price-quantity combination which will maximise his revenue in each market and thus maximise his total revenue. In terms of marginal cost pricing, he should equalise marginal cost and marginal revenue in each market and fix the price in each market.

In Figure the monopolist faces a very elastic demand curve (DA) in market A and inelastic demand curve (DB) in market B. The curve AD in figure C, shows the summation of the demand in both the markets. The equilibrium output for the monopolist is OM where his marginal cost interests the marginal revenue.

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Y

76

Y

X

O

O

Y

X

O

X

The total output OM will be divided and sold in the two submarkets in such a way that the marginal revenue ME will be equal to the marginal cost in each submarket. Thus he will sell OM 2 in market B at a high price of P2 M2 since the demand is inelastic and will sell OM 1 in market A at a price of P1 since the demand is elastic. Price in market A is lesser than in market B. The monopolist makes the maximum profit as shown by the shaded area in figure C. Thus for equilibrium to be determined for a discriminating monopolist two conditions must be satisfied (1) marginal revenue in two markets should be the same (2) they should also be equal to the marginal cost of the whole output, i.e., (1) Aggregate marginal revenue = Marginal cost of total output (2) MRa = MRb = MC. On the whole there is every reason to believe that output under discriminating monopoly will be larger than under simple monopoly.

4.3.

MONOPOLISTIC COMPETITION The concept of monopolistic competition was put forth by Prof. Chamberlin. It is a

blending of competition and monopoly and therefore it is more realistic than pure competition or monopoly. Chamberlin argues that monopoly is unreal as absence of competition, absence of substitutes and control over price are not found in the market situation. Similarly it is rare to find perfect competition because it is impossible to fulfill the conditions of perfect competition such as uniform price, homogeneity of products, absence of transport cost etc. Monopolistic competition refers to competition among large number of sellers producing close but not perfect substitutes.

4.3.1

FEATURES

1.

The number of sellers under monoplistic competition is larger. Each firm has very limited control over the price of the product.

2.

The distinguishing feature of monopolistic competition is product differentiation. The products of various firms are heterogeneous. Product differentiation does not mean that the products of various firms are completely different. They are slightly different and serve as close substitutes. Products may be differentiated on the basis of the characteristics of the product itself such as trade marks, peculiarities of packages or wrappers, or differences in quality, design, colour or style. The differentiation may be due

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to the conditions surrounding the sale of the product. This implies the difference in the services rendered by the sellers. Products are differentiated to promote sales by influencing the demand for the products. This is done through advertisement.

3.

The firms under monoplistic competition have freedom to enter or leave the industry.

Product differentiation increases the entry of new firms because each firm produces a different product.

4.

Selling cost is another important features of monopolistic competition. As competition is very keen, the firms have to advertise to sell more of their products. Thus selling cost influences the determination of price under monopolistic competition.

5.

Chamberlin has used the word group instead of industry. Industry refers to a collection of firms producing homogeneous products But Chamberlin’s concept of group refers to collection of firms producing closely related but not identical products.

6.

The demand curve of a firm under monopolistic competition slopes downwards. This is because a reduction in price will lead to increase in sales and vice versa. Further the demand curve is highly elastic because the firm has some control over price due to product differentiation.

4.3.2

PRICE DETERMINATION UNDER MONOPOLISTIC COMPETITION Equilibrium of a firm under monopolistic competition involves three variables viz., price,

product and selling outlay. Therefore equilibrium is explained with respect to each of these variables, keeping the other two variables given and constant. Further equilibrium under monopolistic competition involves individual equilibrium of the firms as well as group equilibrium.

INDIVIDUAL EQUILIBRIUM AND PRICE VARIATION In individual equilibrium, the product and selling outlay are held constant and the only variable is price with respect to which equilibrium adjustment is made. The individual equilibrium under monopolistic competition is graphically shown in the Figure.

DD is the demand curve which is also the average revenue curve of the firm. AC is the average cost and MC is the marginal cost of the firm. The equilibrium level of output is OM for at

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78

OM output MC is equal to MR. The equilibrium price is OP. The firm makes maximum profits equal to RSQ P. A firm in the short run may incur losses also, which is shown in the Figure.

The firm is in equilibrium by producing ON level of output and the equilibrium price is 0T. The firm incurs losses equal to TKHG.

GROUP EQUILIBRIUM AND PRICE VARIATION Due to differences in cost and demand curves of various firms, it is difficult to describe the group equilibrium. Hence to overcome this difficulty, Chamberlin makes uniformity assumption, It implies that both demand and cost curves of all the products are uniform through out the group. Added to this, Chamberlin introduces another assumption namely “symmetry assumption�. It means that the individuals action regarding price and output will have negligible effect on the competitors as the number of firms under monopolistic competition is large. Based on these assumptions, group equilibrium can be explained with the help of a Figure.

D

(D)

DD is the demand curve and AC is the average cost curve. Each firm will set the price at OP at which MC is equal to MR and profits are maximum.

Attracted by the abnormal profits, new firms will enter. As a result the market would be shared by more firms and abnormal profits will be completely wiped out as shown in the Figure.

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The firm is in long run equilibrium by producing OL quantity of output and fixing the price at OK. As average revenue curve is tangent to average cost curve, the firm will be making only normal profits. There is no tendency for the competitors to enter the field as the firms are earning only normal profits.

PRODUCT VARIATION Under product variation, price of the product is assumed to be constant. Therefore, the firm has to choose among the various possible quantities and attributes of the product. A special characteristic of product variation is that it alter the cost curve and demand for the product. Yet another feature is that product variation is quantitative and therefore quantitative measurement is not possible.

INDIVIDUAL EQUILIBRIUM AND PRODUCT VARIATION The equilibrium of the firm under monopolis tic competition with respect to product variation is shown in the Figure.

In the figure, two cost curves have been drawn representing two varieties of the product, A and B. AA is the average cost curve of the product A and BB is the average cost curve of the product B. If the price of the product is OP, the quantity demanded of product A is OM. The total cost is OMRs, and the total profits is SRQP. If the quantity demanded of product B is ON, then the total cost is ONFG and profit is GFEP. Since product B yields greater profits than A, the entrepreneur will choose the product B.

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Group Equilibrium and Product Variation It is assumed that the demand is uniform and the possibility of product variation is also uniform. The equilibrium adjustment of the product is shown in Figure.

CC is the average cost curve, If the quantity demanded is OM then the total cost is OMHG. The firm earns supernormal profits equal to GHQP. This supernormal profits should be wiped away to achieve group equilibrium. Attracted by the supernormal profits, new competitors may enter the group. The quantity demanded will come down to 0T. Price will cover only cost of product. Besides the adjustment in the number of firms, product improvement may also take place. When alt entrepreneurs improve their products, cost will increase as shown by DD and becomes equal to the price at point S.

Group equilibrium must satisfy the following conditions: 1.

The average cost must be equal to price.

2.

It is not possible for any one to increase his profits by making further adjustment or improvement in his product.

Selling Cost and Price Determination Selling cost is another important factor which influnece pricing under monoplistic competition. Selling costs are costs incurred on advertising, publicity, salesmanship, free sampling, free service, door to door canvassing and so on. Selling costs are ‘the costs necessary to persuade a buyer to buy one product rather than another or to buy from one seller rather than another”.

Under perfect competition, there is no need for advertising as the product is homogeneous. Similarly under monopoly also, selling costs are not needed as there are no rivals. But under conditions of monopolistic competition as the products are differentiated, selling costs are essential to increase sales. Chamberlin defines selling cost, “as costs incurred in order to alter the position or shape of the demand curve for a product”.

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Advertisement may be classified into two types; informative and competitive. Informative advertisement enables the buyers to know about the existence and uses of the product. It also helps to increase sales of all firms in the group. Competitive advertisement refers to the expenses incurred to increase the sales of the product of a particular firm as against other products.

Production Cost versus Selling Cost Watson feels that it is difficult to differentiate selling cost from cost of production.

However Chamberlin states that these two costs are basically different from one another.

Production costs include all expenses incurred in producing a product and transporting it to its destination for consumers. Selling costs are incurred to change the preferences of a consumer for a particular product. Prof. Chamberlin distinguishes between the two in these words: “The former (Production) costs create utilities in order that demands may be satisfied, the latter create and shift the demand curves themselves”. Those which alter the demand curve for a product are selling costs and those which do not are production costs. In other words. ‘those made to adapt the product to the demand are production costs and those made to adapt the demand to the product are selling costs”. The production cost affects the supply but selling cost affects the demand. While the production cost influences the volume of production, the selling cost influences the volume of sales. ‘

Individual Equilibrium and Selling Cost Here it is assumed that the seller adjusts his selling cost keeping the price and product constant. It is also assumed that one seller alone advertises, while all others do not. As a result he attracts new buyers, sells more and makes profit. This is illustrated in Figure.

PC is the production cost curve. CC is the combined production and selling cost curve.

MC is the marginal cost curve. If the seller sells OQ level of output at OP price, he has no profit.

His cost of production is equal to price. Therefore, he advertises his product which increases his cost. His production cost is equal to 0Q S R His selling cost is R S SR. He earns an abnormal profit equal to PRST.

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Group Equilibrium and Selling Cost The abnormal profit earned by the firm makes all other firms in the group advertise.

When all firms advertise total cost of all will increase. Price will be equal to cost. There is no abnormal profit. All firms earn only normal profit. This is shown in Figure.

PC is the production cost curve. TC is the total cost curve of the single firm. Due to competition from others, the cost is equal to price. CC is the total cost curve of all the firms in the group. As it is tangent to the price line there is no abnormal profit.

Questions 1.

State the features of perfect competition.

2.

Discuss the equilibrium of a firm under perfect competition.

3.

How is price determined under monopoly?

4.

What is price discrimination? Explain its various degrees.

5.

Describe equilibrium under discriminating monopoly.

6.

Describe the features of monopolistic competition.

7.

Analyse price output determination under monopolistic competition.

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83

UNIT – 5 INFLATION AND TRADE CYCLES OBJECTIVES After going through this chapter, you should be able to 

Understand the meaning causes and effects of inflation



Know the methods of controlling inflation



Understand the definition, features and phases of trade cycle



Know the measures to control trade cyclical fluctuations.

Structure 5.1

Inflation – Introduction

5.2

Definition

5.3

Causes of Inflation

5.4

Effects of Inflation 5.4.1

Effects on Production

5.4.2

Effects on Distribution

5.5

Anti – inflationary policy

5.6

Trade cycle – Definition 5.6.1

Features of Trade Cycle

5.6.2.

Phases of Trade Cycle

5.6.3

Control of Trade Cycle

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5.1 INFLATION INTRODUCTION Inflation is a global phenomenon in present-day times. There is hardly any country in the capitalist world today which is not affected by inflation. It is on account of this that the phenomenon of inflation has widely attracted the attention of the economists all the world over, but despite that there is no generally accepted definition of the term inflation’. Different economists have offered different definition of inflation.

5.2 DEFINITION Prof. Crowther has defined inflation ‘as a state in which the value of money is falling, i.e., prices are rising”.

Prof. Hawtrey defines inflation as the “issue of too much currency”.

Prof. Coulbourn says, “Inflation is too much money chasing too few goods”.

5.3 CAUSES OF INFLATION Inflation can be attributed to two main factors: 1. Increase in the demand for goods and services, and 2. Decrease in the supply of goods.

Factors Causing an Increase in Demand 1.

Increase in Public Expenditure: An increase in public expenditure consequent upon the outbreak of war or developmental planning invariably causes an increase in the demand for goods and services in the economy In fact, this is an important cause giving rise to the emergence of excess demand in the country.

2.

Increase in Private Expenditure: An increase in private expenditure, both consumption expenditure as well as investment expenditure, is an important cause of the emergence of excess demand in the economy. When business conditions are good, private entrepreneurs start investing more and more funds in new business enterprises, giving rise to an increase in the demand for the services of factors of production. This results in an increase in factor-prices. When factor incomes increase, there is more and more of expenditure on consumption goods. The ultimate effect of an increase in private expenditure is to push up the demand for commodities as well as factors of production.

3.

Increase in Exports: An increase in the foreign demand for the country’s exports reduces the stock of commodities available for home consumption. It is evident that when more and more of commodities are exported to foreign countries. It naturally creates a situation of shortages in the economy, giving rise to inflationary pressures.

4.

Reduction in Taxation: The reduction in taxation offered by the government can also be an important cause for the emergence of excess demand in the economy. When the government reduces taxes, it results in an increase in purchasing power in the hands of

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the public. With increased purchasing power, the people are in a position to buy more and more of goods and services for private consumption.

5.

Repayment of Past Internal Debt: When the Government repays its past debts to the public it results in an increase of purchasing power which the latter uses for buying goods and services for consumption purposes. This naturally leads to an increase in aggregate demand in the economy.

FACTORS CAUSING A DECREASE IN SUPPLY 1.

Shortage of Supplies of Factors of Production: The economy of a country may be confronted with shortages of factors vinz., labour, capital equipment, raw materials, etc.

These shortages are bound to reduce the production of goods and services for consumption purposes. In fact, the shortage of productive factors is a serious obstacle to any effort to increase production in the country.

2.

Hoarding by Traders: At a time of shortages and rising prices, there is a tendency on the part of traders and merchants to hoard essential commodities for profiteering purposes. The stocks of essential goods during a period of inflation and rising prices, causes further scarcity of these goods in the market.

3.

Hoarding by Consumers: It is not only the traders and the merchants who resort to hoarding at a time for inflation. The individual consumers also hoard essential commodities to avoid payment of higher prices in future. They also hoard essential commodities to ensure their uninterrupted availability for private consumption.

5.4

EFFECTS OF INFLATION A period of prolonged, persistent and continuous inflation results in the economic,

political, social and moral disruption of society. The effects of inflation can be discussed under two sub-heads (i) effects on production, and (ii) Effects on distribution.

5.4.1

EFFECT ON PRODUCTION

1.

Hyper-infiation discourages savings on the part of the public. With reduced savings, the process of capital accumulation suffers a serious set-back.

2.

If the value of money undergoes considerable depreciation, this may even drive out the foreign capital already invested in the country.

3.

With reduced capital accumulation, the investment will suffer a serious set-back which may have an adverse effect on the volume of production in the country.

4.

Inflation may result in the diversion of productive resources from the essential goods industries to the luxury goods industries, creating further shortages of consumer goods for the common man.

5.

It may lead to a serious deterioration in the quality of goods produced in the economy.

6.

Inflation also leads to a serious hoarding of essential goods both by the traders as well as the consumers. The traders hoard stocks of essential commodities with a view to

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making higher profits. The consumers also resort to hoarding of essential goods for fear of paying higher prices in the future.

7.

It gives stimulus to speculative activities on account of the uncertainty generated by a continually rising price-level.

8.

It disrupts the smooth working of the price mechanism, thereby creating an all-round confusion in the economy.

5.4.2

EFFECTS ON DISTRIBUTION Inflation has bad effects on distribution too. It produces deep impact on the distribution of

income and wealth in society. Inflation results in redistribution of income and wealth in favour of businessmen, merchants, and traders. The fixed income-groups such as workers, salaried employees, teachers, pensioners, etc., are always the losers on account of the inflationary rise in prices. Since the price rise and rise may not be uniform in all sections of the economy, there will be distortions and imbalances causing bottlenecks in distribution. For instance, the price of industrial goods go up rapidly during inflation and prices of farm products are not so flexible. The returns for farmers dwindle and their economic conditions worsen due to mounting cost of industrial and consumer products which they have to buy. Again there is always a time-lag between the rise in production costs as the rise in the price-level. This time-. lag brings rich profits to the business classes. The resources get diverted to the production of those commodities which rise up, as the entrepreneurs will be lured by windfall profits. The net result will be that while some classes of people enjoy the benefits of inflation, some other section of the society suffer. The concrete effects of inflation on various sections of the society are as follows: On Debtors and Creditors During inflation, debtors are the gainers while the creditors are the losers. Debtors while repaying their debts return less purchasing power to the creditors than what they had actually borrowed. Since creditors receive less in real terms, they are the losers during this period.

On Wage and Salary Earners This group consists of workers, clerks, government servants, and teachers. The wages and salaries of this group generally do not rise in the same proportion in which the cost of living rises. Even if the wages and salaries are linked up with the cost of living index, still the wage and salary earners are adversely affected because there is often a lag between the rise in prices and the rise in wages and salaries. It is said that prices go up by lift, while wages go up by steps.

Hence if workers and salary earners are organised into powerful trade unions, they may not suffer much during inflation.

On Fixed Income Groups The fixed groups are the worst hit during inflation because their incomes being fixed do not bear any relationship with the rising cost of living. Persons who live in past savings,

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pensioners, interest and rent receivers suffer most during inflation as their incomes remain fixed and there is non existence of unions among them to react quickly to the changes in the cost of living.

On Investors Investors are of two types 1. Investors in equities and 2. Investors in fixed interestyielding bonds and debentures. The equity holders stand to gain because the return on equities varies with the rising prices. More and more dividends become available to them with a rise in the price level. Income from bonds and debentures, however, remain fixed and as much investors in fixed interest bonds and debentures have much to lose during inflation. They find their saving largely wiped out as a result of the depreciation in the value of money. Keynes points out that “inflation has not only diminished the capacity of the investing class to save but has destroyed the atmosphere of confidence which is a condition of willingness to save�.

On Farmers Farmers are divided into three broad categories: 1.

non-cultivating landlords

2.

peasant properties and

3.

farm labourers.

So far as landlords are concerned, they are the losers during inflation since the rents are fixed by contracts over a long period of time. The peasant proprietors gain substantially because they bring considerable surplus to the market when prices move in the upward direction. The farm labourers are very badly affected by the rise in prices since these people receive very low fixed income and there is absence of trade unions among them. These small farmers may gain to some extent when wage- payments are made in terms of farm products. The debtors in farming community are generally benefited by inflation.

Social, Moral and Political Effects : Inflation is socially unjust and inequitable for society because it redistributes income and wealth in favour of the affluent and well-off. This naturally leads to social conflict in society. The general morality of the people in the country also suffers a serious decline with the resulting all-round corruption in the country. The evils of gambling, hoarding, black market earning, smuggling, speculation, tax evasion, thefts and violence raise their ugly heads. This leads to general discontentment in the public which may result in loss of faith in the government. The political agitations and protests are launched by the public. Many governments fail altogether to withstand the public resentment and collapse down.

Thus inflation prepares the ground for social, moral and political up-heavels.

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5.5

Anti-inflation are Policy There are three lines of action to check and control an inflationary boom, namely, 1.

Monetary measures, 2. Fiscal measures and 3. Other measures.

1.

Monetary Measures: These measures are adopted by the central bank of the country and include such steps as an increase in re discount rates, sale of government securities in the open market, an increase in reserve ratios and adjustments in selective controls to arrest an inflation.

(a)

Increased Re-discount Rates: To curb inflation, the central bank generally increases the re-discount rates. An increase in re-discount rates leads to an increase in bank rates tends to discourage borrowings by businessmen and consumers from banks resulting in a fall in the intensity of inflationary pressures in the economy. But the increase in rediscount rates as a weapon to check and inflationary boom has its limitation too. Firstly, if the bank rates do not rise pari passu with the re discount rates, there will be no decline in the business and consumer borrowing, and hence, the inflationary pressures will continue even though the re-discount rates have been raised. Secondly, the effectiveness of higher re-discount rates as an anti-inflationary weapon shall be considerably undermined if the commercial banks have an easy access to additional reserves. Thirdly, an increase of re-discount rates will fail to check inflation if nonbank holders of government securities were to convert their holdings into cash.

(b)

Sale of Government Securities in the Open Market: Another method to check the inflationary boom is to resort to sales of government securities to the public by the central bank. As the buying public purchases and pays for those government securities the commercial banks’ reserves with the central bank are correspondingly reduced and they are obliged to adopt a restrictionist credit policy in relation to business requirements.

This process helps in creating tight money conditions in the market, and thus arresting the further growth of the inflationary boom. But the sale of the government securities as an anti- inflationary weapon is also subject to limitations. Firstly, this policy may be rendered ineffective if the commercial banks are able to increase their reserves by selling their stocks of government securities to the central bank. Further, the non- bank holders of government securities may also, in the absence of other buyers, sell them to the central bank and deposit the proceeds with the commercial banks. The deposits and the reserves of the commercial banks are thus increased, neutralizing the effect of sale of government securities by the central bank. Secondly, this policy may also be offset by increased borrowings or by increased sales of treasury bills to the central bank by the commercial banks. Thirdly, the import of gold may also offset the anti-inflationary effect of this policy to a certain extent.

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(c)

Higher Reserve Requirements: An increase in reserve requirements of the memberbanks also serves as an anti- inflationary weapon during inflation. Higher reserve requirements as an anti-inflationary weapon is also subject to limitations. Firstly, if the commercial banks have very large excess reserves, even the raising of reserve requirements may not significantly curtail their power to create credit. Secondly, the ability of commercial banks to increase or replenish their reserves through sales of government securities may render higher requirements ineffective to check credit expansion. Thirdly, a large inflow of gold on account of the existence of an export surplus will also, offset the anti-inflationary effect of higher reserve requirement.

(d)

Consumer Credit Control: This is a device which is generally introduced during inflation to curb excessive spending on the part of consumers. Most of the durable consumer goods, such as. radios, television sets, washing machines, etc., are purchased by the consumers on instalment credit. During an inflationary boom, facilities for instalment buying are reduced to the minimum to curtail excessive spending on the part of consumers. This is done, (i) by raising the minimum initial payment on specified goods. (ii) by extending the application of consumer credit control to a large number of goods, and (iii) By decreasing the length of the payment period.

(e)

Higher Margin Requirements: The central bank may raise the margin requirements to higher levels. Every commercial bank before granting a loan to a businessman against collateral security keeps a certain specified margin, say, 20 per cent or 30 per cent. For example, if the value of security offered by the businessman is Rs.10,000 and the bank keeps a margin of 20 per cent, then it means that it will advance not more than Rs.8,000 to the businessman. Now, in order to discourage excessive credit on the part of memberbanks, the central bank may direct them to keep higher margins, say 50 per cent instead of 20 per cent. In that case, the member-bank shall not be able to lend more than Rs. 5,000 against a security of the value of Rs. 10,000. The higher the margin requirement, the lower the amount of the loan that the borrower can obtain from the bank.

2.

Fiscal Measures: Fiscal policy is now recognized as an important instrument to tackle an inflationary fiscal measure are the following:

(a)

Government Expenditure: During inflation, effective demand increases. To counteract increased private spending, the government should, at such a time, reduce its own expenditure to the minimum extent possible to help limit the aggregate demand. It is not so easy to reduce government expenditure particularly in the war period when any decrease in military expenditure is simply unthinkable. Secondly, any drastic cut in government expenditure to cure inflation may actually land the economy in a slump.

Thirdly, this policy of a cut in government spending may actually come into clash with a long-range public investment programme. So a policy of reduced government spending, howsoever important, has its limitations in actual practice. And yet this policy appears to be indispensable to curb inflationary boom.

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(b)

Taxation: The problem during inflation is to reduce the size of disposable income in the hands of the general public in view of the limited supply of goods and services in the market. It is, therefore, necessary to take away the excess purchasing power from the public in the form of taxes. The rates of existing taxes should be steeply increased while new taxes should be imposed on commodities and services.

(c)

Public Borrowing: Public borrowing is another anti-inflation ary weapon. The object of public borrowing is to take away from the public excess purchasing power. Public borrowing may be voluntary or compulsory. Ordinarily, public borrowing is voluntary. But voluntary borrowing has one disadvantage, and that is, it does not bring to the government sufficient amounts. It, thus, becomes essential in due course of time to resort to compulsory saving or compulsory borrowing from the public. According to this plan, a certain percentage of the wages or salaries is compulsorily deducted in exchange for savings bonds which become redeemable after a few years. Compulsory borrowing suffers from two limitations. Firstly, it involves the use of compulsion and it results in discontent.

(d)

Debt Management: The existing public debt should be managed in such a manner as to reduce the existing money supply and prevent further credit expansion.

(e)

Overvaluation: An overvaluation of domestic currency in terms of foreign currencies will also serve as an anti-inflationary measure in three ways. Firstly, it will discourage exports and thereby result in an increased availability of goods and services in the domestic market. Secondly, by encouraging imports from abroad, it will add to the domestic stock of goods and services and, thus, absorb the excessive purchasing power in the economy. Thirdly, by cheapening the prices of those foreign material which enter domestic production, it will help in checking an upward cost-price spiral. Overvaluation as an anti-inflationary weapon also suffers from limitations. For example, if other countries are also suffering from inflation, then the country concerned shall have to overvalue its currency considerably to neutralize the inflationary effect of the rising cost of imports.

3.

Other Measures: Among the other anti-inflationary measures may be included such things as (a) An expansion of output, (b) wage policy and (c) price-control and rationing.

They can be used to supplement the monetary-fiscal measures undertaken to contain inflationary pressures.

(a)

Expansion of Output: Increased production is the best anti dote to inflation. If it is not possible to increase output as a whole, steps should be taken to increase the output of those goods which seem to be extremely sensitive to inflationary pressures by shifting productive resources from the less inflation- sensitive goods. A more feasible suggestion would be to increase the output through encouraging technical innovations in industry. It

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is also essential at a time of inflation to maintain industrial peace in the country by reducing strikes and lockouts to the minimum. (b)

Wage Policy: During an inflationary boom, wage cannot be left free to chase prices upward. They have to be controlled so as to contain inflationary pressures in the economy. Wage increases may be allowed to workers only if their productivity increases.

(c)

Price-control and Rationing: The object of price control is to lay down the upper limit beyond which the price of a particular commodity would not be allowed to rise. To ensure the successful functioning of price-control, two conditions shall have to be satisfied.

Firstly, the government should have under its control adequate stock of the commodity concerned. Secondly, the demand for the concerned commodity should be controlled through rationing.

5.6.

TRADE CYCLE – DEFINITION An important feature of the working of a capitalist economy is the existence of alternating

periods of property and depression generally referred to as “business cycle”. In the words of W.C. Mitchell, “Business cycles are spices of fluctuations in the economic activities of organized communities”. According to Keynes, “A trade cycle is composed of period of good trade characterized by rising prices and low unemployment percentages, alternating with periods of bad trade characterized by falling prices and high unemployment percentages”. In the words of Frederic Benham, “A trade cycle may be defined as a period of prosperity followed by period of depression. It is not surprising economic process should be irregular, trade being good at some time and bad at others”.

5.6.1

Feature of Business Cycle

1.

A trade cycle is a wave like movement. It is characterized by alternation of expansion and contraction.

2.

A trade cycle is rhythmic and recurrent in nature. It means that it is repetitive. Prosperity is followed by depression and depression is again followed by prosperity.

3.

A trade cycle is synchronic which means that the cyclical fluctuations start in one sector and it spreads to other sectors.

4.

A trade cycle is cumulative and self-reinforcing in nature. It feeds on itself and creates further movement in the same direction.

5.

A trade cycle affects virtuaily every segment of the economy. When one part of the economy suffers depression this is transmitted to the other parts.

6.

The periodicity of trade cycle is different. Some trade cycles last for three or four years, while others last for six or seven or even more years.

7.

In a trade cycle the change from the upward to the downward movement is more sudden and violent than the change from downward to the upward movement. Hence the peak of the trade cycle is pointed while the trough is gently sloping.

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8.

Through international trade booms and depressions in one country are transmitted to other country; hence its effects may be felt throughout the world.

5.6.2.

Phases of Business Cycle A typical or standard business cycle is characterized by five different phases or stages

— depression, recovery (or revival), prosperity (or full employment), boom (or, overfull employment) and recession.

Depression This constitutes the first stage of a business cycle. It is characterized by a sharp reduction of production, mass unemployment, low employment, falling prices, falling profits, low wages, contraction of credit, a high rate of business failures and an atmosphere of all-round pessimism and despair. A decline in output or production is accompanied by a reduction in the volume of employment. All construction activities come to a more or less complete standstill during a depression. The consumer-goods industries, such as, food, clothing, etc., are not so much affected by unemployment as the basic capital goods industries. The prices of manufactured goods fall to low levels. Since the costs are “Sticky” and do not fall as rapidly as prices, the manufacturers suffer huge financial tosses. Many of these firms have to close down on an account of accumulated losses. The fall in prices distorts the relative price structure, The prices of agricultural commodities and raw materials fall to greater extent than the prices of finished manufactured goods. The agriculturists are hit more than the manufacturing class.

Recovery It implies an increase in business activity after the lowest point of the depression has been reached. During this phase, there is a slight improvement in economic activity, to start with.

The entrepreneurs begin to feel that the economic situation was, after all, not bad as it was in the preceding stage, This leads to further improvement in business activity. The industrial production picks up slowly and gradually. The volume of production steadily increases. There is a slow, but sure rise in prices, accompanied by a small rise in profits. Wages also rise, though they do not rise in the same proportion in which the prices rise. Attracted by rising profits, new investments take place in capital good industries. The banks expand credit. The business inventories also start rising slowly. The pessimism and despair of the preceeding period is replaced by an atmosphere of all- round hope.

Prosperity This stage is characterised by increased production, high capital investment in basic industries, expansion of bank credit, high prices, high profits, a high rate formation of new business enterprises and full employment. There is a general feeling of optimism among businessman and industrialists

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Boom It is the stage of rapid expansion in business activity to new high marks, resulting in high stock and commodity prices, high profits and over full employment.

The prosperity phase of the business cycle does not end up with a stable state of full employment; it leads to the emergence of boom. The continuance of Investment even after the stage of full employment result in a sharp inflationary rise of prices. This causes undue optimism among businessmen and industrialists who make additional investments in the various branches of the economy. This puts additional pressure on the factors of production which is already fully employed, causing a sharp rise in their prices. Soon a situation develops in which the number of jobs oxceeds the number workers available in the market. Such a situation is known as overfull employment. Profits touch a new height Attracted by the rising profits, the businessmen and industrialists further increase their capital investments. This adds fuel to the fire. Runaway inflation raises its head in its head in all its ugliness. Prices rise sky-high. The tempo of the boom reaches new heights. There is an atmosphere of over- optimism all around.

But the developing boom carries with it the seeds of self-destruction. Bottlenecks begin to appear in various sectors of the economy. Factors of production become scarce, causing further spurt in their prices. The cost calculations of the businessmen and the industrialists are completely upset. Some new hastily set-up firms collapse. This makes the businessmen overcautious. They now being to stay away from new projects and even stop the expansion of the existing units. This prepares the ground for the succeeding stage.

Recession The feeling of over-optimism of the earlier period is replaced now by pessimism. It is characterized by fear and hesitation on the part of the businessmen. The failure of some businesses creates panic among businessmen. The banks also get panicky and begin to withdraw loans from business enterprises. More business enterprises fail. Price collapse and confidence is rudely shaken. Building construction slows down and unemployment appears in basic, capital goods industries. This initial unemployment then spreads to other industries.

Unemployment leads to fall in income, expenditure, prices and profits. Once a recession starts, it goes on gathering momentum and finally assumes the shape of depression — the first phase of the business cycle is complete.

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94

M

The various phases of the business cycle can be illustrated by the Figure.

In the above diagram, PM is the full employment line. Above this line, we have two stages of the business cycle - a boom in the upswing and a recession in the downswing. Below this line, again, we have two stages of the business cycle-recovery in the upswing and depression in the downswing. The business cycle as shown in the diagram, passes through five stages. It starts with depression to be followed by recovery, prosperity, boom, recession and ultimately ends up again with depression.

5.6.3

Control of Trade Cycle

Since cyclical fluctuations affect the smooth functioning of the economy steps should be taken to control it. There are three ways by which a trade cycle can be controlled.

1. Monetary Policy.

2. Fiscal policy and 3. Automatic stabilisers.

1. Monetary Policy Monetary factors can cause permanent cyclical fluctuations. An increase in money supply lowers the rate of interest, which in its turn increases investment, and profits, thus creating an optimistic outlook. This leads to prosperity. On the contrary a decrease in money supply leads to pessimistic outlook and depression. Therefore, to avoid cyclical fluctuations, suitable monetary policy should be adopted. Central bank should use all its credit control weapons like bank rate, open market operations, reserve ratios, moralsuasion etc., to control trade cycles. For example, during a period of prosperity, bank rate should be increased; open

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95

market sale of securities should be undertaken reserve ratios should be increased. An increase in money supply should be controlled by adequate cover against note issue. On the contrary, during depression, these weapons should be used to ensure adequate expansion of credit. Thus, monetary policy has an important part to play in controlling cyclical fluctuations.

2. Fiscal Policy Monetary policy alone cannot check cyclical fluctuations. Therefore, economists like Keynes and Alvin Hansen suggested compensatory fiscal policy to stabilise business activity.

The three main instruments of fiscal policy are, taxation, spending and borrowing. During a period of depression, government should reduce the existing taxes; it should not levy new taxes; it should increase its spending to stimulate business activity. At the time of depression it should undertake public works programmes like construction of roads, canals, parks, hospitals etc. which will provide employment to unemployed workers. The government should follow deficit budgeting and deficit financing. It should also follow public borrowing. When the economy recovers, it should follow opposite policy. The government should raise the tax rates, levy new taxes, reduce spending on public works and follow surplus budgeting.

3. Automatic Stabilisers Automatic stabilisers are also called as built in stabilisers. It refers to a shock absorber which helps to smooth the cyclical fluctuations without government interference. An important built-in-stabiliser is progressive income tax. It helps in compensating cyclical fluctuations as it makes the people to pay more tax during upswing and pay less tax during depression.

Unemployment insurance is also another built-in-stabiliser. During periods of prosperity, the government does not pay unemployment allowance. During depression the government lowers

the taxes and pays unemployment allowance. During depression the government lowers the taxes and pays unemployment allowance.

Since fiscal and monetary policies involve delay, automatic stabilisers are superior as they go into action immediately. But the provide only a partial solution to the problem. Therefore automatic stabilisers should be supplemented with fiscal and monetary policies.

Unit questions 1.

Define inflation and explain the causes of inflation.

2.

Describe the methods of controlling inflation

3.

Define business cycles and examine its phases and features

4.

What are the ways by which trade cycles can be controlled.

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96

UNIT – 6 UNDERDEVELOPMENT AND GROWTH OBJECTIVES After going through this chapter, you should be able to



Understand the meaning and characteristics of underdevelopment



Know the determinants of underdevelopment



Understand the concepts of growth and development

STRUCTURE 6.1.

Meaning of underdevelopment 6.1.1

Characteristics of underdevelopment

6.1.2

Determinants of Economic Development 6.1.2.1 Economic Factors 6.1.2.2 Non-Economic factors

6.2.

Concepts of Growth and Development

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6.1.

97

MEANING OF UNDERDEVELOPMENT The Indian Planning Commission defined underdevelopment as one “which is

characterized by the co-existence, in greater or less degree, of unutilized and under-utilized man power, on the one hand, and of unexploited natural resources on the other. Eugene Staley defines underdevelopment as follows : “A country characterized by mass poverty which is chronic and not the result of some temporary misfortune, and by obsolete methods of production and social organization, ‘which means that the poverty is not entirely due to the poor natural resources and hence could presumably be lessened by methods already proved in other countries.”

6.1.1

CHARACTERISTICS OF UNDERDEVELOPMENT Harvey Leibenstein has classified the characteristics of underdevelopment under four

major

heads,

namely

(1)

Economic

;

(2) Demographic ; (3) Cultural and Political; and (4) Technological and Miscellaneous. The underdevelopment chart is given in Figure.

1. Preponderance of Agriculture: An underdeveloped country is exclusively a primary producing economy. It will mainly depend on the production of agricultural materials and minerals and the industries will be mainly agro—based. The share of the primary sector is larger in the national income of the underdeveloped country. India is predominantly an agricultural country where more than 70 per cent of the people are engaged in agriculture or in allied occupations.

The pressure of population on agriculture is very high. Nearly 40 per cent of the national income is derived from agriculture.

2. Population Pressure and Unemployment: Another feature of underdeveloped countries is that they are invariably over-populated. The size of the population in these countries is increasing at a faster rate than in advanced countries. The economic development in these countries is not capable of keeping pace with the increase in population. In India, the population is growing at an alarming rate with a birth-rate of about 40 per thousand. Alarming increase in population, excessive pressure on land and poor industrial development have created unemployment problems. The number of job seekers in India is rising day after day and the problem of unemployment is taking serious proportions.

3. Poor Income and Poor Savings: Another important feature of underdevelopment is the low per capita income of the people and the consequent little or no savings in the economy.

India is definitely an underdeveloped country. It has been estimated that per capita income of India is only 1/40 of that of U.S.A., 1/25 of Canada, 1/14 of Japan and 1/12 of Russia. India is one of the poorest countries of the world, if not the poorest, A natural outcome of poor income is little saving or no savings in the economy. The savings of an economy play a vital role in economic growth, as savings and investments are the two crucial determinants of economic

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growth. Savings as percentage of national income in India was only 5.7 per cent in 1950 Due to five decades of planning, it had reached around 20 per cent. But this is very small when compared to advanced countries of the world.

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4. Under-Utilization of Resources: The natural resources of the undeveloped economy are either unutilized or under-utilized. Generally, underdeveloped countries may not be deficient in natural resources like land, water, minerals, etc. The main problem would be that these resources are poorly used. Poor utilization may be due to various reasons like inaccessibility, lack of technical knowledge, shortage of capital and limited markets. India is a country of vast natural resources. Lofty mountains, perennial rivers, dense forests, abundant plains and minerals of various types, etc., offer large scope of utilization and development. But these have not been fully utilized.

5. Capital Deficiency: Capital occupies a strategic role in production and economic development of a nation. Underdeveloped countries would suffer from capital deficiency. Not only the stock of capital will be small, but also the rate at which it is being formed will be low. In the case of India, the process of capital formation is far from satisfactory. The basic defect of the backward economies would be lack of inducement to invest and the low propensity and capacity to save. Adding to this, there will be lack of dynamic entrepreneurship.

6. Low Level of Technology: In backward economies, there will be a terrible dearth of skilled personnel and as such the methods of production will be carried on under primitive methods. Consequently, the productivity either in agriculture or in industries will be very low Lack of technical know-how and poor scientific advancement and obsolete technique, combined with poor entrepreneurship would result in poor quality products.

7. Foreign Trade Orientation: Most of the underdeveloped countries depend upon the export of a few traditional commodities, consisting mainly of raw materials and minerals. They will be importing consumer goods and machinery. The ratio of export production to total output will be normally high. Any drastic change in the foreign demand for the products of poor economies will result in dislocation in the economy. Any reduction in foreign demand would depress the home market which would ultimately reduce the income and employment level.

8. Lack of Suitable Socio-economic Set Up: In underdeveloped countries, the prevailing socio-economic set up would be the greatest impediment to development. Mass poverty and illiteracy combined with caste systems, religious beliefs, etc., would adversely affect the course of economic development. In India, the caste system proved detrimental to economic progress, as it impeded the movement of capital and labour and dampened the spirit of enterprise.

9. A Dualistic Economy: Another important feature of underdevelopment is ‘Dualism’. Dualism is the presence of dualistic nature of economic activities and this is one of the important characteristic features of any backward economy on the way of development. Indian economy

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exhibits this dualistic features in full, as it is not fully developed. We have fast-moving electric trains and also slow-moving country-carts. We have capital markets and stock exchanges with many communication facilities like STD, ISD and Fax system in cities; while we have no proper roads in the rural areas and many villages are unconnected with the railway system. The barter system is still prevailing in many villages. This type of dualistic feature is not conducive to economic development. This dualism is almost an unique feature of all the underdeveloped economies in the process of development.

10. Mass poverty, Misery and Low-Standard of Living: Most of the people in underdeveloped countries are economically very backward, poor and leading a miserable life without any norms of standard of living. The backwardness, poverty and poor standard would result in low labour productivity, factor immobility, lack of entrepreneurship and poor specialization.

6.1.2.1 DETERMINANTS OF ECONOMIC DEVELOPMENT The process of economic development is determined by two sets of factors, economic and non-economic.

6.1.2.1 Economic Factors 1. Natural Resources: The main factor influencing economic development is the natural resources available in the country, particularly ‘Land’. ‘Land’ includes all nature resources, including fertility of land, its situation and composition and forest wealth, etc. Existence of natural resources alone cannot initiate economic development, unless the resources are properly harnessed. In the event of harnessing the natural resources for development, a country with abundant natural resources can be developed quickly and largely than the country with poor resources. In underdeveloped countries, the resources are either unutilized or under-utilized.

This is one of the reasons for their backwardness.

2. Transport and Communications: The means of transport and communications initiate economic development. More facilities of transport would reduce the cost of transport and thereby increase the external and internal trade of the country. In countries where road, rail, canals and rivers are interconnected with each other, economic growth is encouraged. Transport and communications ensure easy mobility of factors of production, raw materials, etc., help in breaking economic isolations and encourage educational development and intermingling of cultures. Above all, transport and communications are essential for urbanisation.

3. The Rate of Capital Formation: Capital Formation is the crux of the problem of economic development. The level of production and material well-being of the community depend largely on the stock of capital at its disposal. Capital formation can take place under

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private enterprise, or under public enterprise. But the core of the problem in underdeveloped countries is the lack of capital for investment and capital formation. These economies will be caught in the vicious circle of poverty and they will continue to remain poor simply because they are poor.

4. Capital output Ratio: Another determinant of economic development and growth is the capital output ratio. The term capital-output ratio refers to the requirements of capital for a definite output in units. For instance, if we establish a factory at a cost of Rs.5 crores which will help to produce annual output worth Rs. 1 crore, we can say that capital - output ratio is 5:1. A lower capital-output ratio tends to lead to a comparatively higher growth rate of output. Generally, in the underdeveloped countries, the capital.. output ratio is higher, i,e, more capital is required for lesser output due to wastage in the process of production, low level of technology and inefficiency of factors, and inadequate infrastructure.

5. Technological Progress: Technological changes are the most important factors in the process of economic growth. Technological changes are related to production, processing, marketing and distribution. Changes in technology lead to increase in productivity of labour, capital and other factors of production. The technological changes not only reduce the cost of production, but also increase the quality of the product.

6.1.2.2 Non-economic Factors Non-economic factors are much more powerful than economic factors in influencing the extent of economic development and growth. Non economic factors maybe social, cultural, political and climatic which would either accelerate or impede economic development and growth.

1. Social Factors: Social factors, have been responsible for economic development and growth. Western culture and education had led to the spirit of physical adventure and discoveries leading to the rise of new mercantile classes who were interested in savings and investments and in undertaking risks in order to earn lot of profits. This spirit was responsible for Industrial Revolution in European countries in 18th and 19th centuries. In underdeveloped countries, the activities of the people would be based on tradition religion and customs. The traditional values like morality, truthfulness, contentment, simple living and non-materialistic attitude, etc., would not be conducive to economic development. In such countries, the family would be the primary economic and social unit, and relationships would be personal and patriarchal; and decisions would be influenced by caste, creed and religion at the social level. The people would be inimical to economic development. If economic development is to take place, social attitudes, values and institutions will have to be changed.

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2. Human Factors: Rate of growth of population has an important factor in modern economic growth. Mere growth in the size of the population would not lead to economic development. It depends on the efficiency of the people. This phenomenal increase of population in European countries had resulted in increase in GNP. This is due to increased efficiency of labour force and this is called human capital formation. This could be achieved by good expenditure on health, education, sanitation and on social services and security measures. But in backward economies, increase in population is a great hindrance to economic development.

Hence, family planning and control of population should form part and parcel of economic development and planning in developing countries.

3. Political Factors: Political and administrative factors also help in modern economic growth. Enlightened electorates, educated politicians and morally straight administrators would ensure greater economic development and growth. Weak political structure, instability, corrupt politicians, officials, and inefficient administration would be a hindrance to economic development.

4. Climatic Factors: Among the non-economic factors, climatic conditions stand foremost in determining economic development. If we make a study of the geographical and climatic conditions of the countries of the world in relation to development, we may find that most of the countries in the North and South Temperate Zones of the world had succeeded in becoming rich or nearly rich with per capita GNP over £ 1,000 or ranging from £300 to 1,000, whereas most of the tropical countries were poor or very poor with per capita GNP under £ l00.

The climatic factors severely hamper development through their impact on man and agriculture.

CONCEPTS OF DEVELOPMENT AND GROWTH Meier and Baldwin, define economic development as “a process whereby an economy’s real national income increases over a long period of time.”

Features of economic development : (i) It is a process leading to certain positive results in the economy (ii) The process involves the working of certain forces which bring about a change in the economy. (iii) The development process results in increase in real national income and not mere money income. (iv) The increase in real national income (i.e. net national product) must be a sustained one for a prolonged period of time. (v) Temporary increase in national income due to boom in business cycle should not be considered as economic development.

Generally economic development means simply economic growth. More specifically, it is used to describe not quantitative measures of a growing economy (such as the rate of increase in real income per head) but the economic, social or other changes that led to growth. Growth is

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measurable and objective; it describes expansion in the labour force, in capital, in the volume of trade and consumption. And economic development can be used to describe the underlying determinants of economic growth, such as changes in techniques of production, social attitudes and institutions. Such changes may produce economic growth’.

UNIT QUESTIONS 1.

Define and explain the concept of ‘Underdevelopment’.

2.

Discuss the characteristic features of underdevelopment.

3.

What are the determinants of underdevelopment.

4.

Distinguish between economic development and economic growth.

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104

UNIT – 7 HUMAN RESOURCES OBJECTIVES After going through this chapter, you should be able to



Understand the size and growth of population



Know the beneficial effects of growth of population



Understand population growth as a retarding factor



Know the population policy

STRUCTURE 7.1

Size and Growth of Population 7.1.1

Beneficial Effects

7.1.2

Population Growth as a Retarding Factor

7.1.3

Population Policy

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7.1.

105

SIZE AND GROWTH OF POPULATION India today possesses about 2.4 per cent of the total land area of the world but she has

to support about 17 per cent of the world population. At the beginning of this century India’s population was 236 million and according to 2001 census, the population of India is 1.027 million.

A study of the growth rate of India’s population can be made from Table 1.

A Study of growth rate of India’s population falls into four phases: 1891-1921: Stagnant population 1921-1951: Steady Growth 1951-1981: Rapid high growth 1981-2001: High growth with definite signs of slowing down

During the first phase of 30 years (1891 to 1921). the population of India grew from 236 million in 1891 to 251 million in 1921 i.e. just by 15 million. The compound annual growth rate was negligible i.e. 0.19 per cent per annum for the period. The growth of population was held in check by the prevalence of a high death rate against a high birth rate. Birth and death rates were more or less equal during this period. India was in the first stage of demographic transition in this period marked by stagnant population.

TABLE - I Growth of Population in India (1901 – 2001) Census Year

Population in Millions

Increase or decrease (in Millions)

Percentage increase or decrease

1891

236

1901

236

0.0

0.0

1911

252

+16

+5.7

1921

251

-1

-0.3

+15

+0.19

(1891 – 1921) 1931

279

+28

+11.0

1941

319

+40

+14.2

1951

361

+42

+13.3

+110

+1.22

(1921 – 1951) 1961

439

+78

+21.5

1971

548

+109

+24.8

1981

683

+135

+24.7

+322

+2.14

(1951 – 1981)

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1991

844

+161

+23.5

2001

1,027

+183

+21.3

2004

1,087

+59

+5.8

During the second phase of 30 years (1921 to 1951). the population of India grew from 251 million in 1921 to 361 million in 1951 i.e., by 110 million. The compound growth rate of population was 1.22 per cent per annum which can be considered as moderate. The main reason for the increase in population growth rate was a decline in death rate from about 49 per thousand to 27 per thousand, but compared with this, there was a very small decrease in birth rate. The fall in death rate was largely due to the control of widespread epidemics like plague. small pox. cholera etc. which took a heavy tool of human lives. India had started its entry into the second phase of demographic transition during this period which marked a steady but low growth rate of population.

During the third phase of 30 years (1951 to 1981), the population of India grew from 361 million in 1951 to 683 million in 1981. In other words, there was a record growth of population by 322 million in a period of 30 years. This gives a compound annual growth rate of 2. 14 per cent which is nearly double the growth rate of the previous phase. With the advent of planning, the extension of hospitals and medical facilities was under taken on a big scale and these measures of death control resulted in a further and sharp decline of death rate to a level of 15 per thousand, but the birth rate fell from 40 to 37 per thousand during this period. As a consequence. there was a population explosion during this period.

During 1981 to 2001. India entered the fourth phase of high population growth with definite signs of slowing down. Total population increased from 683 million in 1981 to 1.027 million in 2001 indicating an increase of 50.4 per cent during the 20 year period. The annual average rate of growth of population during 198 1-2001 was of the order 2.05 per cent.

During 1981-91. the population of India grew from 683 million in 1981 to 844 million in 1991 indicating an increase of 161 million during the period. The rate of growth slightly declined to 2.11 per cent during 1981-91 decade. Subsequently, during the next decade (1991-2001). population grew from 844 million to 1.027 million an increase of 183 million. The annual average rate of growth registered a decline to 1.93 per cent. This is a welcome trend which should be strengthened.

7.1.1

BENEFICIAL EFFECTS Growth of population in developed countries is a boom to their economic development as

it is the main source of supplying cheap labour which in turn helps in producing large quantities of goods at low cost. It is usually said, “Manpower is the power of the Nation.� Manpower is

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‘Nations’s Wealth’. Population can accelerate economic development of a country in the following ways. In other words, the positive effects of population growth are as follows (1) Increase in Production. So long the size of population is small in relation to availability of capital, land and other natural resources, an increase in the number of people will bring about greater increase in production. As population increases, opportunities of division of labour result in large-scale production. The producers enjoy external and internal economies. As a result, cost of production falls, price per unit of the product also falls and the size of the market expands. Wide extent of the market means more demand and thereby more production. In this way, population growth makes a positive contribution to production.

(2) Source of Labour Supply. Population is the source of labour supply. Economic development depends upon many factors, such as, natural resources, manpower, capital formation, technology etc. Of these, the most important factor is the trained and efficient labour force. It is on the efficiency of the labour force that the optimum use of other factors depends. In this way, labour is the most important and dynamic factor in the process of economic growth.

According to Prof Meiers, “Capital, natural resources, foreign aid and international trade usually make more important contributions to economic development but none equals manpower.” Thus, as a source of labour supply, population growth is an essential factor for economic development and upto a particular point every increase in population would mean a larger quantity in output.

(3) Population Determines Capital Formation. As a matter of fact, disguised unemployment is found in underdeveloped countries because of large population. Disguised unemployment can be deployed in capital formation activities without adversely affecting agricultural production. In this way, if these persons are shifted from their villages to constructive sites and they continue to get their subsistence from their family sources, then the rate of capital formation can be substantially increased. According to Prof. Ragnar Nurkse, the surplus labour force implies at least to some extent a disguised saving potential. These potential savings in the shape of disguised unemployment can be mobilised for capital formation.

(4) As an Incentive for Development. Population is both a means as well as an end of economic activity. It is a source of production, it is also a source of consumption. As a consumer, rise in population means rise in demand. When demand increases, size of the market automatically expands, which in turn, encourages large-scale production and pattern of production diversifies. It provides more varied employment opportunities to the growing population and an incentive for economic development.

(5) Improvements in Techniques and Productivity. It is argued that population growth leads to improvements in techniques and productivity. Trained and efficient labour force is regarded as human capital. Improvement in the quality of manpower can be a major contribution to economic growth in a country. The quality of manpower can be improved through a process of

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increasing knowledge, skills and the capacities of the people. The trained and skilled labour force is a valuable asset which is responsible for improving techniques and productivity. According to Kendrick “a substantial part of. the rise in growth rate of America is the result of the increase in labour productivity there.” In this way, the improvement in techniques and labour productivity can be a key source of economic development.

(6) Adds to the Number of 1 etc. It is also argued that increased population adds to the number of producers, entrepreneurs, scientists, engineers, educationists, doctors, technologists etc. They can prove a boon to the economic development of a country. According to Simon Kuznets, “Growth of economic output is a function of growth of the stock of tested knowledge.”

According to E. Boserup, “The major stimulus to the ‘green revolution’ a classic case of new technology and a radical increase in crop yields, has originated from the large rise in the demand for food on account of the rapidly increasing population.”

7.1.2

POPULATION GROWTH AS A RETARDING FACTOR Growing population adversely affects the economic development of underdeveloped and

developing countries because their socio economic conditions are quite different. More than 230 years back in 1778, Malthus had opposed rise in population and suggested measures to prevent it. According to Prof. Villard and Prof H. W. Singer ‘Rise in population is an obstacle to economic development.” In support of his statement, Prof. Singer has given the following equation to represent the relationship between the rate of economic development, the rate of net savings, the productivity of investment and the rate of increase in population: Where D = SP - r D stands for rate of economic development.

S stands for rate of net savings.

P stands for productivity of new investment. r stands for rate of increase in population.

In the above equation, r appears as a negative factor with a minus sign It is a proof of the view that population is an obstacle to economic development.

That increase in population affects adversely the economic development of a country is evident from the following : (1) Reduces Per Capita Income. The rapid growth of population in underdeveloped countries reduces per capita income in three ways (i) by increasing the pressure of population on land because land is limited while the growth of population is unlimited; (ii) by increasing the cost of consumption goods because of the scarcity of the co-operant factors to increase their supplies; and (iii) by reducing the rate of capital accumulation because expenses increase with every increase in family members. The growth of population has more severe effects on per capita income when the percentage of children out of the total population is high. It is an

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important feature in underdeveloped countries of the world where the rapid growth of population has largely been effective in lowering the per capita income and a large number of children entails a heavy burden on the economy. Children consume more, but produce nothing and thus, they are liabilities on the economy.

(2) Population Growth Create Mass Unemployment. In under developed countries where the growth of population is very high, there is mass unemployment and disguised unemployment. As a matter of fact, in underdeveloped countries, the army of job seekers is expanding so fast that despite all efforts towards planned development, it has not been possible to provide jobs to all. Further, the high growth rate of population diminishes income, savings and capital formation and thus leads to reduction in job opportunities in the country. Consequently, the problem of unemployment gradually increases in underdeveloped and developing countries.

There is backlog of unemployment which gradually grows with a rapidly increasing population.

For example, in India the burning problem of the day is the mass unemployment causing hindrances in the economic development of the country.

(3) Population Reduce Capital Formation. Rapid population growth in underdeveloped countries retards capital formation. As population increases, per capita available income declines. People are required to feed more children with the same income. It means more expenditure on consumption and a further fall in savings and investments. Consequently, the rate of capital formation is bound to reduce considerably in underdeveloped countries.

(4) Reduces Standard of Living. The rising population in underdeveloped and developing countries reduces standard of living of the people. A rapidly increasing population leads to increased demand for food products, clothes, housing etc. But their supplies cannot be increased in the short run due to the lack of co-operant factors, like raw materials, skilled labour, capital etc. Further, the per capita income is also reduced proportionately. Consequently, the costs and the prices rise sharply which raises the cost of living of the masses. This brings down further the already low standard of living. Poverty breeds large number of children which increases poverty further and the vicious circle of poverty, the flow of more children and low standard of living continues.

(5) Population and Savings and Investment. Rapid growth of population in underdeveloped countries adversely affects the rate of savings and investment. On the contrary, higher rate of population growth requires more savings and investment in order to achieve a given rate of increase in per capita income and economic growth. As a matter of fact, on account of low per capita income in underdeveloped countries, the rate of savings and investment is quite low which adversely affects their economic development.

(6) Population and Farming. In underdeveloped countries, the majority of population lives in the countryside where agriculture is their mainstay. The growth of population is relatively

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very high in rural areas and it has disturbed the land-man ratio. Further, it has increased the problem of disguised unemployment and reduced per capita farm product in such economies, as the number of landless workers has largely increased followed by low rate of their wages. The low farm productivity has reduced the propensity to save and invest. Consequently, these economies suffer largely for want of improved farm techniques and ultimately become the victim of the ‘vicious circle of poverty’. Thus, the rapid growth of population in underdeveloped countries retards farming and the process of overall development as well.

(7) Population and Food Problem. Rapid growth of population in underdeveloped countries gives rise to food problem as there are more mouths to feed. As a matter of fact, rise in the rate of growth of population is much higher than the rise in the rate of increase in food production. Per capita availability of foodgrains goes on falling and the gap between demand for food and supply of food goes on increasing. Shortage of food hinders economic development in two ways: (i) On account of low per capita availability of food masses do not get sufficient nutritive diet. It tells upon their health and their productivity falls. (ii) In order to meet the food shortage, they are compelled to import foodgrains from abroad like U.SA., Canada, Australia and other countries. It places unnecessary strain on their meagre foreign exchange resources. As such, all development programmes remain confined to files only and, thus, the economic development of underdeveloped countries is hardly hit.

(8) Population and Environment. Rapid growth of population leads to environmental change. Scarcity of land due to increasing population pushes large number of people in ecologically sensitive areas such as hill sides and tropical forests. it leads to overgrazing and cutting of forests for cultivation leading to severe environmental damage. Further, rapid growing population leads to migration of large numbers to urban areas with industrialisation. This results in severe air, water, and noise pollution in cities.

(9) Population and Social Overhead Facilities. Rapid growth of population necessitates huge investment on providing social overhead facilities like housing, electricity, education, medical, roads, transport and water etc. In this way, lion’s share of the available capital is invested on these social overhead facilities. Resources become scarce for conducting other

development

programmes,

thereby

the

spread

of

economic

development

in

underdeveloped countries goes down.

(10) Population and Vicious Circle of Poverty. Rapid growth of population is largely responsible for the perpetuation of vicious circle of poverty in underdeveloped countries. On account of rapid growth of population people are required to spend a major part of their income on bringing up their children. As a result, savings and rate of capital formation remain low, fall in per capita income, rise in general price level leading to sharp rise in cost of living, no improvement in agricultural and industrial technology leading to a fall both in production and

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productivity, shortage of essential of essential commodities, low standard of living, mass unemployment etc. In this way, the entire economy of an underdeveloped country is surrounded by the vicious circle of poverty.

7.1.3

POPULATION POLICY The significance of the growth in population can be judged from the fact that during the

decade 1991-2001, there has been an increase of about 183 million reaching a level of 1,027 million in 2001. The alarming rate at which population is growing calls forth the need for a positive population policy to restrict this rapid growth of population.

In 1983, on the recommendation a Working Group on Population Policy set up by the Planning Commission, the National Health Policy (1983) set the goal of reducing the Net Reproduction Rate (NRR) to 1 by 2000 A.D. To achieve the family planning goals, the following measures were adopted by the Government: (i)

Motivation programme to spread the knowledge of family planning. All mass media-newspapers, radio, TV. films etc. were widely used to spread consciousness about family limitation.

(ii)

Supply of contraceptives to all sections of rural and urban population.

(iii)

Financial incentives for family planning in the form of cash awards for undergoing sterilisation.

(iv)

Extensive use of sterilisation of both males and females.

In India, the family planning programme did not concentrate on a single method but adopted what is generally described as “the cafeteria approach� i.e. making use of all the scientifically approved contraceptives. Apart from family planning, the Government relied upon-to some extent-education and economic progress to restrict the growth of our population. Raising the level of education of the people has a general salutary effect on fertility. This is particularly so if the female population is educated.

Besides this Population Policy has listed the following measures to achieve a stable population by 2046.

1.

Reduction of infant mortality rate below 30 per 1000 live births.

2.

Reduction of maternal mortality rate to below 100 per 1,00,000 live

3.

Universal immunisation

4.

To achieve 80 per cent deliveries in regular dispensaries, hospitals and medical

births.

institutions with trained staff.

5.

Access to information, containing AIDS, prevention and control of communicable diseases.

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6.

Incentive to adopt two-child small family norm.

7.

Facilities for safe abortions to be increased.

8.

Strict enforcement of Child Marriage Restraint Act and Pre-Natal Diagnostic Techniques Act.

9.

Raising the age of marriage of girls not earlier than 18 and preferably raising it to 20 years or more.

10.

A special reward for women who marry after 21 and opt for a terminal method of contraception after the second child.

11.

Health insurance cover for those below the poverty line who undergo sterilisation after having two children.

12.

The appointment of a National Commission on Population to be headed by the Prime Minister to monitor the implementation of population policy. This is being done to impress upon the nation the urgency of paying attention to the problems of control of population. Since India has already crossed the mark of 1.000 million, the effort of the National Population Policy is to limit it to 1.100 million by the year 2010 by intensifying family planning measures.

The Action Plan drawn for the next 10 crucial years includes the following: a)

Self-help groups at village panchayat levels comprising mostly of housewives will interact with healthcare workers and gram panchayats.

b)

Elementary education to be made free and compulsory.

c)

Registration of marriage, pregnancy to be made compulsory along with births and deaths.

The policy provides incentives only to women to accept terminal methods of

contraception after the second child, it would have been far better, had the policy also provided similar incentives for “men� for sterilisation after the second child.

UNIT QUESTIONS 1.

Trace the growth of population India.

2.

Give an account of the beneficial effects of population.

3.

Do you consider population growth as a retarding factor to economic development.

4.

Critically evaluate Population Policy of India.

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UNIT – 8 NATIONAL INCOME OBJECTIVES After going through this chapter, you should be able to



Understand the concept of National Income



Know the methods of measuring national income



Know the difficulties in calculating national income

STRUCTURE 8.1.

Definition of National Income 8.1.1

Methods of measuring National Income

8.1.2

Difficulties in calculating National Income

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8.1.

NATIONAL INCOME-DEFINITION The concept of national income occupies and important place in economic theory.

National income is the flow of goods and services produced in an economy over a period of one year.

Marshal has defined national income as “The labour and capital of a country acting upon its natural resources, produce annually a certain net aggregate of commodities material and immaterial including services of all kinds�.

8.1.1

METHODS OF MEASURING NATIONAL INCOME

Census of Production Method This method is popular in U.S.A. and is called as Total Product Method or Goods Flow Method. In India, it is known as Inventory or Product Method. In this method, the economy is classified into three sectors-the industrial sector, direct services sector and foreign transaction sector where international payments are considered. Industrial sector includes all productive activities. It includes the flow of goods in different fields like agriculture, mining, transport and public utilities.

In order to avoid double counting, value added method can be followed. In

following value added method, any commodity which is a raw material for another industry should not be included. Only the value added at each stage of production should be considered.

For example, in farming operations, the cost of seeds, fertilisers etc., are to be deducted. Thus the product census gives GNP from which if depreciation is deducted, NNP can be obtained.

In the direct services sector, the value of services which directly serve the consumers is taken into account. Dramatists, professors, doctors come under this category. All types of salary payments are included. Pensions are transfer payments and they are excluded. Houses render a service. Hence rental values have to be included.

In the international transaction sector, value of exports and imports, payments from abroad and payments to other countries are taken into account.

When the incomes from all these sectors are added, national income at market price is obtained. The National Income Committee of India adopted Census of Production Method along with Income Method to estimate national income. This method helps to have a comparative idea of the importance of various activities like agriculture, manufacturing, transport and trade in generating national income. However, in an advanced country like U.S.A., this method may be successful as it is very easy to get data from records. But in under developed countries like India, this method may give rise to many problems like imputation of money values to large nonmonetised sector.

Income Method : GNP consists of the sum of factor earnings, wages, salaries, rent, interest earnings, dividends earned by the shareholders. Profits which are not distributed by companies, taxes on

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individuals, corporations and other businesses are also included in GNP. Income from indirect taxes like excise duties and sales tax, depreciation allowance made by corporations are also added in GNP. The difference between exports and imports is also added.

GNP=Wages and Salaries + Rents + Interest + Dividends + Undistributed Corporate Profits + Mixed Incomes + Direct Taxes + Indirect Taxes + Depreciation + Net Income from abroad.

Expenditure Method : Prof. Samuelson calls this as ‘Flow of Product Approach’. In India, it is known as Outlay Method. GNP is the sum of expenditure incurred on goods and services during one year in a country.

In includes personal consumption expenditure of

individuals on durable goods, consumer goods and expenditure on services. It also includes expenditure on new investment, on replacement of old capital and inventory or raw materials, manufactured and semi-manufactured goods.

The government expenditure on goods and services is also a part of GNP. Central, State and Local governments spend lot of money on their employees, police, army and on government enterprises. The difference between exports and imports should also be included in GNP. GNP= Private Consumption Expenditure (C) + Private Investment Expenditure (I) + Government

Expenditure

(G)

+

Net

Foreign

Investment

(X-M) C+I+G+(M-M) Value Added Method : In order to avoid double counting value added at each stage of production should be calculated to arrive at GNP. The difference between the value of output and input at each stage of production is called the value added. By summing such value added for all industries in the economy, GNP can be found out.

Whatever may be the method used, the result should be more or less the same. All the three methods can be used to cross check the reliability of estimates. But, no country has perfected national income accounting to such an extent to get exactly similar figures. They make use of two or three methods to give more accuracy.

8.1.2

DIFFICULTIES IN CALCULATING NATIONAL INCOME The presentation of national income accounts appears to be simple. But there are certain

practical difficulties-conceptual and statistical. But they are not insurmountable.

1.

Simon Kuznets mentions some theoretical difficulties in the estimation of the term

‘nation’ in national income. National income is not limited to the territorial boundaries of country.

We must include income of all the residents of a country even if they are abroad. Therefore,

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income produced within a country and any income earned abroad have to be included in national income.

2.

The second difficulty is to decide about the nature of goods and services to be included

in national income. It is now accepted that the value of final goods and services should be taken into account. In order to avoid double counting, value added method can be used. Similarly, if there is non-monetised sector, money value has to be imputed for goods and services.

3.

Income earned through illegal activities is not included in national incomes. This results

in a diminution of national income.

4.

Services rendered free of charge are not included in GNP. By leaving out these

services., national income will work out to be less.

5.

Transfer payments are not included in national income as they do not contribute to

national product.

6.

Capital gains and losses are not included in GNP as they are not the result of current

economic activities.

7.

Changes in price level also make the calculation of national income difficult. National

income figures show an increase when the price level rises, even though the production might have fallen. On the contrary, with a fall in price level, the national income shows a decline even though production might have gone up. Therefore, national income cannot be calculated accurately due to price changes.

8.

In the calculation of national income, leisure foregone in the process of production is not

included. For example, incomes of two individuals may be same but the hours of work may be different.

Similarly, working conditions may be poor. Therefore, while calculating national

income, these have to be considered.

9.

Another difficulty arises with regard to public services rendered by the government. In

the days of war, the military forces are active but during peace they take rest. In this case, value of the services rendered by military forces cannot be estimated. Similarly, it is difficult to estimate the value of administrative services, justices etc., that are performed by the government.

In underdeveloped countries, there are some special difficulties in estimating national income.

1.

A very great difficulty in estimating national income in underdeveloped countries is the

prevalence of non-monetised sector. A considerable portion of the output does not come to the market. Agriculture is still in a state of subsistance farming and therefore a major part of the

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output is consumed in the farm itself or exchanged for other commodities. This gives rise to the problem of imputation of money values.

2.

In underdeveloped countries, due to illiteracy, most producers do not keep regular

accounts. They do not have any idea about the expenditures incurred in production. In the urban areas too, educated people also hesitate to disclose their accounts. Hence, it is difficult to estimate national income.

3.

Further, it becomes difficult to know income by origin because there is lack of

occupational specialisation. An agricultural labourer works as a coolie or riksha puller during offseason. Therefore, due to overlaping of occupations it is difficult to estimate national income.

4.

Another difficulty in the estimation of national income in underdeveloped countries arises

due to scattered and unorganised productive activities. It is also difficult to find out the output produced be self-employed agriculturists, small producers and owners of household enterprises in unorganised sector.

5.

The greatest difficulty in the measurement of national income in underdeveloped

countries is lack of adequate statistical data. Inadequacy, non-availability and unrealiability of statistical data is a great handicap in measuring national income in these countries. Statistical information regarding agriculture and allied occupations, and household enterprises is not available. Even the statistical information regarding the enterprises in the organised sector is unreliable. There is no accurate information available regarding consumption, investment expenditure and savings of either rural or urban population.

UNIT QUESTIONS 1.

Define national Income and explain the methods of measuring national

Income.

2.

Give an account of the difficulties involved in the measurement of national income.

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UNIT – 9 AGRICULTURE OBJECTIVES After going through this chapter, you should be able to 

Understand the meaning and role of industrialisation



Know the growth and problems of Iron and Steel Industry, Cotton Textile Industry and Sugar Industry.



Understand the role and problems of small scale industries.



Know the measures of government to develop small scale industries.



To know the meaning, causes and remedies for industrial sickness.

STRUCTURE 9.1. ROLE OF AGRICULTURE 9.1.1. Agricultural Productivity 9.1.2

Land Reforms

9.1.3

Food Problem

9.1.4

Green Revolution

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9.1 ROLE OF AGRICULTURE Development of agriculture, in the broad sense, is the core of all strategies of planned economic development of underdeveloped and developing countries of the world. It can be taken as the base of economic development of a country because industrialisation is basically made possible by agcultural development. Despite their urge for industrialisation, almost all backward. underdeveloped and even many developing countries of the world still continue to be heavily dependent on agriculture.

The role of agriculture in the economic development of a country is evident from the following: (1) Source of Food Supply: Agriculture is the main source of food supply of all the countries of the world-whether underdeveloped, developing or even developed. Due to heavy pressure of population in underdeveloped and developing countries and its rapid increase, the demand for food increases at a fast rate. If agriculture fails to meet the rising demand of food products, it is found to affect adversely the growth rate of the economy. Raising supply of food by agricultural sector has, therefore, great importance for economic growth of a country. Increase in demand for food in an economy is determined by the following equation: D = P + 2g Here, D stands for Annual Rate of Growth in demand for food.

P stands for Population Growth Rate. g stands for Rate of Increase in per capita income.

2 stands for Income Elasticity of Demand for Agricultural Products.

When an agricultural underdeveloped country passes through a process of economic growth, its demand for food rises due to several factors, such as: (i) Growth rate of population in most of the underdeveloped countries of the world ranges between 1.5% to 3%. As a result, the demand for food in these countries is also very high. (ii) As compared to developed countries, income elasticity of demand of underdeveloped and developing countries for food products is quite high. Hence, with increase in the rate of per capita income in underdeveloped and developing countries demand for food products increases at a much faster rate as compared to developed countries. (iii) Population of underdeveloped and developing countries is increasing rapidly and thereby the demand for food is also increasing rapidly.

(iv) In most of the underdeveloped and developing countries, demand for food products has been rising at the rate of 3%. As such, growth rate of agriculture should be more than 3%. In

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order to stabilise the growth rate of the economy, it is essential that the growth rate of agricultural sector should be quite high.

If the agricultural sector fails to increase the supply of food products in accordance with the demand, it will have the following adverse affect on economic development: (i) Prices of food products will begin to rise. Consequently, wage-rate will have to be raised adversely affecting rate of profit, investment and economic growth. (ii) In order to meet the domestic shortage of food products, the same will have to be imported from abroad. For example, after the partition of the country, India imported large quantities of food products from America and other friendly countries. (iii) Imports of food products will lead to payment crisis causing a serious problem of the shortage of foreign exchange. (iv) On account of the foreign exchange shortage problem, countries importing food products at times were compelled to cut down heavily the imports of capital goods and machinery, adversely affecting the process of industrial development. (v) Further, the imports of food products which the underdeveloped and developing countries have been forced to undertake have made them vulnerable to political pressures from the developed (donor) countries. For example, India used to import large quantities of food products (foodgrains) from the U. S. A. under the P. L. 480 programme, This food aid was used by the U. S. A. as ‘political weapon’ for pressurising India to toe the line on a number of International political issues like U. S. A.’s aggression on Vietnam. When India refused, the P. L. 480 programme was withdrawn. (vi) Undue dependence on food products (foodgrains) imports weakens the incentives for agricultural programme in the country. The governments too adopts a complacent attitude towards agricultural development because they are sure of easy availability of food products from abroad.

In short, agricultural sector by increasing supply of food products in the countries according to its requirements can contribute to the economic development of underdeveloped and developing countries. Valuable foreign exchange can also be saved which can be used for importing machinery and raw materials so badly needed for industrialisation and economic development.

(2) Supply of Industrial Raw Material. Agriculture provides raw materials to various industries of national importance and thereby assists economic development of underdeveloped and developing countries. Consumer goods industries like sugar, tea, jute, paper, cotton textiles,

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vegetable oils, oilseeds etc. get their raw material from ‘agriculture. The entire range of food processing industries is similarly dependent on agriculture. If agriculture does not provide these industries with adequate supply of raw materials, then their progress will slow down and growth rate will remain sluggish. By making adequate supply of necessary raw materials available to industries, agricultural sector makes valuable contribution to economic development.

(3) Contribution to Capital Formation. Underdeveloped and developing countries need huge amount of capital for economic development. In the initial stages of economic development, it is agriculture that constitutes an important source of capital formation. Agriculture sector provides funds for capital formation in many ways, such as, (i) agricultural taxation, (ii) export of agricultural products (iii) collection of agricultural products at low prices by the government and selling it at higher prices. This method is adopted by Russia and China, (iv) disguised unemployment, largely confined to agriculture, is viewed as a source of investible surplus, (v) transfer labour and capital from farm to non-farm activities etc.

(4) Ensuring Supply of Labour to Industry. Agriculture promotes industrial development by ensuring the supply of labour. Development of industry and all other expanding sectors of the economy depend crucially on the availability of labour from the agricultural sector because there is practically no other source of supply. There is a large potential of increasing agricultural productivity in developing countries merely by adopting a right mix of policies. As agricultural productivity increases, the number of persons required to feed the total population of the country declines. This enables the ‘extra’ labour to migrate to cities and work in the industrial sector. The migration of labour from villages to cities helps in raising the overall marginal productivity labour and leads to a more efficient distribution of labour resources the economy.

(5) Source of Foreign Exchange Earnings for the Country. Most of the developing countries of the world are exporters of primary products and these products contribute 60 to 70 per cent of their total export earning. Therefore, the capacity to import capital goods and machinery for industrial development depends crucially on the export earning of the agriculture sector. if exports of agricultural goods fail to increase at a sufficiently high rate, these countries are forced to incur heavy deficit in the balance of payments resulting in a serious foreign exchange problem. However, primary goods face declining prices in international market and the prospects of increasing export earnings through them are limited. It is on account of this reason that large developing countries like India are trying to diversify their production structure and a promote the exports of manufactured goods even though this requires the adoption of protective measures in the initial period of planning.

6) Employment Opportunity for Rural People. Agriculture as is proved, provides employment opportunities for rural people on a large scale in underdeveloped and developing countries It is an “important source of livelihood there. Mostly, landless workers and marginal farmers are engaged in jobs like handicrafts, furniture, textiles, leather, metal work, processing

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industries, and in other service sectors. These rural units fulfil merely local demands. In India about 70.6% of total labour force depends upon agriculture. According to World Development Report, the corresponding percentage stood at 3 in the U. K., 4 in the U. S. A., and 20 in Russia.

(7) Improving Rural Welfare. As a matter of fact the rural Teconomy depends on agriculture and allied occupations in an underdeveloped country. The rising agriculture surplus caused by increasing agriculture production and productivity tends to improve social welfare, Particularly in rural areas. The living standard of rural masses rises and they start consuming nutritious diet including eggs, milk, ghee, and fruits. They lead a comfortable life having all modern amenities - a better house, motor cycle, radio, television and use of better clothes.

(8) Extension of Market for Industrial Output. As a result of progress, there will be extension of market for industrial products. As a matter of fact, increase in agricultural productivity leads to increase in the income of rural population which in turn leads to more demand for industrial products Consequently there is development of industrial sector paving the way for accelerating the pace of economic growth. In this way, agricultural sector helps to promote economic growth by serving as a supplement to industrial sector.

(9) Agricultural Expansion as Part of Economic Development. Agriculture can play a key role in the development of an economy. However, for the maximum performance of this role, as also for its own sake, it is highly desirable that agriculture should itself develop. Its development can supply larger quantities of food and raw materials and thereby support a greater Industrial labour force and provide larger Inputs. The rise in agricultural income, which the development insures, will provide larger stimulus to industrial development. Further, with increase in agricultural productivity, more labour can be released for works and the larger investible resources made available for capital accumulation. All this amounts to agriculture contributing to economic development directly and indirectly. It has now been accepted by almost all economists that besides industrial development, agricultural development is also essential for economic development of a country.

(10) Dominating Share in National income. In the early stages of economic development of a country agriculture commands a dominating share in national income. For example, between 1950-51 to 1960-61, the share of agriculture in the national income of India has been in the range of 52% to 55%. Later on, the process of industrialisation gathered momentum, the share of agriculture indicated a decline and reached a level of 26.4% in 1997-98.

As a matter of fact, agriculture still occupies a dominating share in national income of underdeveloped and developing countries of the world. On the contrary, agriculture occupies a smaller share in the national income of developed countries. For example, in U. K. agriculture contributes only 2% of the national income, in U. S. A. it is 3%, in Canada it is 4%, in Australia it is 5%, and so on. The more developed a country, the smaller is the share of agriculture in

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national income. Agricultural development is a must for the economic development of a country whether it is underdeveloped or a developing country. Even developed countries lay emphasis on agricultural development.

9.1.1

Agricultural Productivity The term, “agricultural Productivity” can be variously defined. Productivity expresses the

varying relationship between agricultural output and inputs like land or labour or capital, other complementary factors remaining the same. In India, productivity is low owing to the poor quality, insufficient quantity or inefficiency of the complementary factors.

The problem of low agricultural productivity in India is a very complex problem and it cannot be attributed to any single cause. On the other hand, it is the result of the operation of a number of causes operating singly or in combination

Vicious Circle of Poverty The vicious circle of poverty is largely responsible for the poor performance of Indian agriculture. This vicious circle takes this form in agriculture: Low production—low marketable surplus—low income—low savings—low investment and it ends in low agricultural production The crucial deficiencies in Indian agriculture relate to land, capital, management and organisation. These deficiencies account for low productivity.

The factors that retard the growth of agricultural production in India can be discussed under three broad heads: (a) Natural Factors; (b) Techno-economic Factors; and (c) Socio-economic Factors.

Natural Factors Agriculture in India is dominated by nature, specially rainfall. It is said to be a gamble in the monsoon. The rains may be insufficient or unevenly distributed; they are uncertain and sometime we have too much of rain resulting in floods causing widespread damage and destruction. There may be other natural calamities befalling Indian agriculture, e.g., hailstorm, frost or attack by pests and insects. These inclemencies of weather seriously handicap the Indian farmer in stepping up agricultural output.

Techno-economic Factors Superfluous Manpower. ‘Too many cooks spoil the broth’ is a proverb which applies to Indian agriculture. Agricultural productivity is in inverse proportion to the number of people engaged in it. There is excessive pressure of population on land resulting in small, uneconomic and fragmented holdings. The area sown per capita works out to about 0.86 acres only.

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It has been estimated that about 25 per cent of the working force in Indian agriculture is surplus and is therefore in disguised unemployment. The surplus labour constitutes unproductive dependants who reduce agricultural incomes which would have been otherwise saved and invested. Lack of investment is responsible for the continuance of primitive techniques, insufficient use of essential inputs like fertilizers and irrigation of land. This inevitably results in low agricultural productivity.

Lack of improved Seeds, Manures and Plant Protection. The Indian farmer selects his seeds indiscriminately and often hastens to buy them from the grocer’s shop when the sowing season is on him. Poor quality of seeds must yield poor quantity of crop. Dr. Burns is of the opinion that the average outturn of paddy could be increased by 38 per cent, viz., 5 per cent by using improved seeds, 28 per cent by improved manuring and 5 per cent by protection from pests. The adoption of modern technology in recent years consisting of HYV seeds, fertilizers, irrigation facilities has clearly demonstrated the vast scope for improving yields.

Out-of-date Implements. The Indian farmers, by and large, use centuries-old implements which are incapable of efficient agricultural operations. The Indian plough cannot break the soil effectively; it can only scratch the surface. Output is bound to be low.

Lack of Irrigation Facilities or Their Non-utilisation or Under utilisation. Nearly onefifth of the total sown area has the benefit of assured irrigation, the rest has to depend on the vagaries of the monsoons. Even when irrigation facilities are available, they are not fully utilised.

For instance, 9.2 million hectares had irrigation available, but actually 7.7 million hectares were irrigated.

Lack of Adequate Finance. Financial facilities are utterly inadequate so that the farmer has to depend on the village money-lender, who charges exorbitant rates. More than 90 per cent of the total agricultural credit is advanced by the money-lenders. The institutional credit covers barely 6.4 per cent of it. “The vicious circle resulting in poverty, debt and high interest rates holds the small cultivator in a tight grip”.

Absence of Productive investment. Investment in jewellery, trade and money-lending seems to be more attractive. Investment in land is not found to be so remunerative. In the absence of investment, production cannot expand.

Lack of Marketing Facilities and Price-incentive. The Indian farmer does not get a due reward from the sale of his produce owing to defective marketing organisation and

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procedure. A large portion of his profit is taken away by middlemen. Unless farmers are guaranteed fair and remunerative prices, agricultural output cannot increase.

Land Policy and Land Legislation. The piecemeal character of land legislation and its excessive reliance on the machinery of revenue administration have adversely affected agricultural development in the country. Delay in implementation and uncertainty about the rights on land have checked investment in improvements in land and in agricultural inputs.

Neglect of Agricultural Research. Expenditure on agricultural research is ridiculously small and is not at all commensurate with requirements of Indian agriculture. There is also little co-ordination between the laboratory and the farm.

Socio-Economic Factors Low agricultural productivity in India is no less due to the operation of the socioeconomic factors. Among them mention may be made about the conservative outlook of the farmer, his fatalism, ignorance and illiteracy. They stand in tile way of tile adoption of modern techniques.

Another socio-economic factor responsible for low agricultural yield is the antiquated organisation of agriculture run by illiterate, ignorant and ill-equipped individuals. The corporate entrepreneur is altogether absent. Hence, progressive agriculture is out of the question.

Remedies Ample irrigation facilities must be provided through the extension of major and minor irrigation works. Extensive flood control measures should be adopted to prevent havoc and devastation caused by the ever-recurring floods. Liberal supplies of insecticides and pesticides should be distributed to the farmers free or at very cheap rates.

Agricultural techniques must be improved; fertilizers and manures should be made available in ample quantity all over the country side. The possibility of the land lying fallow should be minimised by means of scientific rotation of crops and careful crop planning. Improved varieties of seeds should be supplied in adequate quantities at the village stores. Anti-soil erosion measures should be adopted. Active steps should be taken to reclaim land which has gone under water-logging. Cheap modern tools and equipment should be designed and manufactured on a large scale. Research work should be intensified and the results of research made available to the farmers. Extension workers and farmers should be brought in close contact with research stations.

Economic factors affecting agricultural productivity must be made more favourable so that agriculture becomes more remunerative. Farm organisation and land management must be

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improved. Surplus labour must be withdrawn from agriculture and absorbed in the non agricultural sector. The vicious circle of poverty affecting agriculture must be broken at the end of low output. Adequate credit facilities at a reasonable cheap rate must be provided so that the farmer does not fall into the clutches of the money-lender; integrated scheme of rural credit must be implemented. Marketing facilities must be improved and regulated markets set up all over the country; price support policy must be adopted and minimum prices guaranteed to the farmers.

Structural and institutional reforms are also called for, if productivity is to be increased.

Uneconomic small farms should be enlarged and fragmented ones grouped together through consolidation and co-operatives.

The quality of man behind the plough should be improved through education, general and technical. Adequate public health measures should be adopted to save him from the ravages of epidemics and other diseases. The farmer’s attitude should become more rational. He should become more responsive to new ideas and shed off his fatalism and develop self-confidence.

Above all, administrative set up connected with agriculture should be stream lined and purged of corrupt elements.

Thus, a very comprehensive set of measures is called for to raise agricultural productivity in India calculated to improve all the factors employed in agriculture, viz., land, labour, capital, and enterprise.

9.1.2 Land Reforms Land reform is a means to an end, the end being maximization of total welfare consistently with its egalitarian distribution. The underlying purpose of land reform is both social and economic. From the social point of view, it is essential that there should be equal access to the agricultural occupation and the various interests involved in cultivation should have a fair treatment. There should be no exploitation of one interest by another and each interest should get a fair and reasonable reward for its labour and investment. From the economic point of view, the purpose of land reforms is to bring about such organizational changes so as to maximize agricultural output. There should be no waste of resources. For maximizing output, the land system must offer appropriate incentives.

Thus land reforms in a developing economy have to achieve the twin objectives of raising agricultural productivity and introducing a measure of social justice. They must therefore include redistribution of land ownership in favour of the tillers of the soil so that they have a sense of participation in the life of the rural community. They must bring into existence holdings of economic size, provide security of tenure and fair rent to the tenants. It is in this sense that land reforms have a special significance in a developing economy.

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127

Scope of Land Reforms The scope of land reforms, therefore, entails (a) tenure

abolition of intermediaries; (b) tenancy reforms, i.e., regulation of rent, security of for

tenants

and

conferment

of

ownership

on

them;

(c) ceiling and floors on land holdings; (d) agrarian reorganisation including consolidation of holdings and prevention of sub-division and fragmentation; and (e) organisation of cooperative farms.

It is customary to classify the various categories of land tenure systems before independence into three broad heads : Zamindari, Mahalwari and Ryotwari. (i)

Zamindari Tenure. Under the Zamindari System, which was introduced by Lord Cornwallis in 1793 in Bengal, land was held by one person or at the most by a few joint owners who were responsible for the payment of land revenue. The revenue collectors were raised to the status of land owners. Earlier they were responsible for collecting land revenue for which they received a commission. The Zamindari settlements made them owners of land, thereby creating a permanent interest in land. The Zamindari settlements were of two types-permanent settlement and temporary settlement.

The permanent

settlement fixed land revenue in perpetuity. Under temporary settlement land revenue was assessed for a period ranging between 20 and 70 years in various states. Land revenue, therefore, was subject to revision.

(ii)

Mahalwari Tenure. Under the Mahalwri tenure, the village lands were held jointly by the village communities, the members of which were jointly and severally responsible for the payment of land revenue. The system was first introduced in Agra and Oudh and later on in Punjab. Under the system, the village common or Shamlat is the property of the village community as a whole. Similarly, the waste lands also belong to the village community and it is free to rent it out and divide the rents among the members of the community or partition it to bring it under cultivation.

(iii)

Ryotwari Tenure. Under the Ryotwari tenure, land may be held in single independent holdings. The individual holders were directly responsible to the state for the payment of land revenue. The ryot is at liberty to sub-let his land and enjoys a permanent right of tenancy so long as he pays the assessment of land revenue. Thus, on the eve of independence, on the one extreme, there were landless labourers and tenantsat-will and on the other, were big landlords owning huge estates. But a very disquieting feature of the situation was the absence of the proper revenue records which made the task of abolition of intermediaries more difficult.

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Abolition of Intermediaries Although steps were taken earlier the actual abolition of intermediaries started in 1948 with the enactment of legislation in Madras. While the aim was to abolish intermediaries between the ‘tiller and the State’, in actual practice the legislative enactments equated intermediaries with zamindars and consequently, the legislation left a class of rent-receivers and absentee landlords under ryotwari untouched.

Abolition of intermediaries was not done in India without compensation. The rates of compensation, the ceiling limit of compensation and even the principles determining compensation were revised and the landlords were quite successful in getting equitable and in some cases more than equitable compensation. The compensation was, however, to be paid in cash or in bonds. These bonds were to be redeemed in equal instalments spread over a long period ranging between 10 to 30 years in various states. The ex-intermediaries were given compensation amounting to Rs.670 crores in cash and in bonds.

TENANCY REFORMS Under the Zamindari and Ryotwari systems, tenancy cultivation had been quite common in India. Tenancy cultivation may be done by small proprietors who find that they have an insufficient quanitity of land or it may be carried on by landless labourers. Sometimes, the tenants holding land from an intermediary may sublet it for cultivation. Broadly speaking, tenants are divided into three categories (i) Occupancy or permanent tenants, (ii) Tenants-at-will or temporary tenants, and (iii) Sub-tenants. The rights of tenancy of the occupancy tenants are permanent and heritable.

According to 1961 census, 77 per cent of the total cultivating households were in the nature

of

ownership

holdings,

8

per

cent

on

pure

tenancy

and

15

per cent in mixed tenancy. Besides this open tenancy, there is a considerable amount of land leased out on the basis of oral or hidden tenancy which accounts for anything between 35-40 per cent of total cultivated area. agricultural societies.

Informal tenancy has been a common feature of traditional

Although attempts have been made to provide security of tenure,

redistribution of land and fixation of fair rents, yet informal or oral tenancy has continued to exist even to this day. The term ‘informal tenancy’, loosely referred to as oral tenancy, refers to tenancy without legal sanction and permission, or without any written agreement.

The principal purpose of shifting to informal tenancy is to extract higher land rents from tenants. This is more so in view of the high-yielding varieties programme which has brought a realisation among landlords that land is a very valuable asset and promises high rate of return.

In a country marked by land hunger, it is possible to take advantage of the situation by charging

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high rents. Secondly, informal tenancy arrangements are a convenient device with the landlords for modifying tenancy reforms.

Measures of Tenancy Reform Measures of tenancy reform pertain to (i) regulation or rent; (ii) security of tenure; and (iii) conferment of ownership on tenants.

Regulation of rents During the pre-Independence period, rents were fixed either by custom or were the result of the market forces of demand and supply. Supply of land being fixed, the demand for land growing with an increasing population, there has been a continuous tendency for rents to rise.

The decay of handicrafts increased the dependence on land further and thus pushed up rents.

The rates of rent prevalent were one-half of the produce or more. Historically, rents have been paid in kind in India but in view of the fact that the peasants have to make a good many payments in money, while purchasing seeds, fertilizers, implements and other necessaries of life, it would be desirable to switch over to cash payment of rents.

This is in fitness with the

requirements of a rural economy changing rapidly from barter to money exchange.

Security of Tenure The personal interest of a cultivator in land with rights of temporary tenancy is very thin.

Tenants, therefore, take much less care in preparing land, sinking capital in the form of wells or tubewells on land, or putting up a permanent fence etc. The fear of loss of tenancy right saps all initiative to make improvements on land, reclaim waste-land or make long-term schemes of preserving soil fertility. While framing legislation pertaining to security of tenure, three essential aims have to be kept in mind-firstly, that large-scale ejectments of tenants do not take place; secondly, that resumption of land may be taken by the owner for personal cultivation only; and thirdly, that in the event or resumption, a prescribed minimum area is left with the tenant.

Ownership Rights During the Second Plan, states framed provisions for resumptions broadly on the following three different patterns : i)

All tenants have been given full security of tenure, without giving the owners the right of personal cultivation.

ii)

Owners have been given the right to resume a limited area (not more than a family holding in any case) subject, however, to the condition that a minimum area is left with the tenant.

iii)

A limit has been placed on the extent of land which a land-owner may resume, but the tenant is not entitled to retain minimum area for cultivation in all cases.

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Legal Protection to Tenants Unable to bring about redistribution of ownership of land, the legislation attempted to provide security of tenure to tenants, to fix land rents and conditions of tenancy. Besides this, legislation aimed to provide security to a minority of tenants who paid fixed rentals.

Ceiling on Land Holdings Land reforms in India had envisaged that beyond a certain specified limits, all lands belonging to the landlords would be taken over by the state and allotted to small proprietors to make their holdings economic or to landless labourers to meet their demand for land. The case for pursuing a policy of imposition of land ceiling rests on the following grounds.

In the rural sector, land is the principal source of income. The best course of bringing a reduction in inequalities of income is to bring about a reduction in inequalities of land-ownership.

A policy of application of capital-intensive methods in Indian agriculture will lead to unemployment on a massive scale. Consequently, the Indian government would like to create a large number of small peasant proprietors. Legislation for ceiling on existing holdings and unit of application has been enacted in two phases. During the first phase which lasted up to 1972, ceiling legislation largely treated land holder as the unit of application. After 1972, it was decided to have family as the basis of holding. Further, the ceiling limit was also reduced to bring about a more equitable distribution of this scarce assets. The legislation pertaining to ceiling on holdings led to a large number of mala fide transfers. These transfers are principally of three types : (a) transfers among the members of the family, (b) benami transfers and other transfers which have not been made for valuable consideration and through a registered documents, and (c) transfers made for valuable consideration through a registered document.

Ceiling legislation aims at obtaining surplus lands above a specified limit and then passing it on to small holders, evicted tenants or landless persons against the payment of a purchase price. Thus, this problem has two aspects – (i) compensation that may be paid to the landowners for the acquisition of surplus land; and (ii) the price that may be recovered from the allottees of surplus lands.

With regard to the price to be recovered from the allottees, it has been suggested that the purchase price should be so fixed that the annual burden falling on the allottee on account of instalments of compensation and interest payable thereon, if any, and the land revenue should not exceed the fair rent i.e., one fourth, or one-fifth of the gross produce. The total amount payable as compensation should be recovered from the allottees so that there is no net liability on the state.

In the allotment of surplus lands those tenants who have been displaced as a result of resumption for personal cultivation should be given preference. Along with the case of farmers

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with uneconomic holdings, landless labourers, particularly those belonging to scheduled castes and scheduled tribes, should be kept in the priority list.

According to the Annual Report (2004-05) of the Ministry of Rural Development, since st

the inception of ceiling laws on agricultural holdings, upto 31 March, 2004, total quantum of land declared surplus in the entire country was 73.36 lakh acres, out of which about 64.97 lakh acres have been taken possession of and a total area of 54.03 lakh acres has been distributed to 54.84 lakhs beneficiaries, of whom around 36% belong to the Scheduled Castes and around 15% to the Scheduled Tribes. But as facts stand, the progress of distribution of surplus land was slow.

Between March 1990 and March, 2004 a span of 14 years, only 7.36 laksh acres could be distributed. In addition to the distribution of 54.03 lakh acres of ceiling surplus land, an area of 147.5 lakh acres of Government wasteland has also been distributed among the landless and the poor.

Land Ceiling : A Failure The purpose of ceiling legislation, logically speaking, was to ration out land-the most scarce yet the most basic asset in Indian rural life-among those who were actual tillers, viz., landless labourers, share-croppers or small holders. This could be done by imposing a limit on the possession of land by big holders. Apart from the objection by landlord classes against ceiling legislation, a very large number of loopholes were left in the ceiling legislation.

Consequently, evasion was possible even within the legal provision. The natural result of this was that very little surplus could be acquired after the imposition of ceiling. The intentions of land reform and the provision of ceiling were thus watered down in the process of implementation.

Secondly, law provided a number of exemptions for sugarcane farms, orchards, mango groves, grazing lands, lands for charitable and religious trusts, cattle breeding farms, All these provisions of exemption were used by the vested interests to evade ceiling on holdings.

Thirdly, the judgement of the Supreme Court that compensation should be paid at market value added another dimension to the problem in favour of vested interests. On 26 th

th

th

August 1974, the Parliament, passed unanimously the 34 amendment to 9 Schedule of the Constitution and thus took and land ceiling law away from judicial review.

Fourthly, even when ceiling has been imposed on a family basis, the definition of family includes husband, wife and 3 minor children. For instance, if a ceiling of 15 acres has been provided for a family and there are two major children, then the total land that can be held by the family is 45 acres-15 acres for the family and 15 acres for each of the two major children. This is obviously unjust. A better course would be to treat major children as part of the family and give an additional 3 acres of land to each member of the family, subject to maximum of twice the ceiling. For instance, if there are 7 members of the family, including 2 major children, the total land made available to them would be 7 x 3 = 21 acres and not 45 acres as at present. This has

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not been accepted as a guideline in national policy. This course can restrict the ration of land to the owning classes so that more surpluses emerge for distribution among the landless labourers and small farmers. The ceiling of land holdings was never implemented properly.

An appraisal of land reforms Land reforms programmes were started with a thunderous enthusiasm, but soon the vitality of this enthusiasm was lost and the implementation of land reforms became very poor.

The principal reasons for poor implementation of land reforms are lack of political will; absence of pressure from below because the poor peasants and agricultural workers are passive, unorganized and inarticulate; lukewarm and often apathetic attitude of the bureaucracy, absence of up-to-date land records, and legal hurdles in the way of implementation of land reforms.

Suggestions i)

Excess land taken over from big landholders should be distributed expeditiously and to assist the land reform beneficiaries, there is a strong need to link them for timely supply of inputs and investment to Jawahar Rozagar Yjana / Prime Minister’s Rozgar Yojana.

ii)

Priority should be given to preparation, maintenance and computerization of land records. All tenants including share croppers should be identified and their rights should be recorded.

iii)

Special attention should be paid to tribals. Loopholes in laws applicable to them need to be plugged and administrative machinery need to be strengthened.

iv)

The definition of personal cultivation should lay stress on the following ingredients : (a) the person claiming to be in cultivation of the land must bear the entire cost of cultivation; (b) He must cultivate his own land by his own labour or by the labour of any member of his family; (c) He or member of his family should reside for the greater part of the year in the locality where the land is located; and (d) cultivation should be the main source of his income.

v)

No transfer of agricultural land should be permitted to a non-agriculturist.

vi)

Resumptions of land by landowners from tenants for self cultivation should not be allowed except in case of physically handicapped or serving army personnel.

vii)

In case of dispute between the landowner and the persons claiming to be tenants / share-croppers, the onus of proof should be shifted to the landowner. The tenant / share-cropper should be allowed to deposit the share of the produce of the land owner with the nearest authority.

viii)

Recognised Peasant Organisation / Agricultural Labour Organisations

or

acknowledged voluntary organizations should be associated with the identification of informal tenants / share-croppers and permitted to file claims for conferment of occupancy right / ownership right to the concerned person before an appropriate authority.

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ix)

Political will should be created. For this land-less, small and marginal farmers representatives should be given representation in local panchayat bodies and ministries so that they are associated at each decision making level.The poor peasants may be provided legal aid upto the level of the Supreme Court. The Lok Adalats should be empowered to dispose of land reform litigations along with prompt disposal of cases by rural courts i.e. Nyaya Panchayat / rural Nyayalaya.

9.1.3

Food Problem One of the most serious economic problems which the country has had to contend since

independence has been the food problem. Its nature is not simple. Primarily it consists of a shortage of food- grains grown in the country relatively to the people’s demand for them; but it has other aspects too.

The most obvious aspect of the food problem has been the quantitative aspect, i.e., deficiency of food in the country in relation to demand for it. The extent of the shortage has varied from year to year depending largely upon the weather.

Another aspect of our food problem is the qualitative aspect. it is not merely an increase in quantity which will solve the problem; we have to improve the quality too. Our food is unbalanced. It consists mostly of cereals and is lacking in protective foods like eggs, fish, meat and fruit.

Then, there is the administrative aspect. The food problem in India has often been aggravated by the inefficient and corrupt administration. That is why even in the years of record agricultural output the food problem persisted, The Government of India has often been unable to enforce procurement schemes, check hoarding and profiteering and to ensure fair distribution:

Finally, there is the economic aspect. The Indian food problem is due to the poverty of the people. They lack the necessary purchasing power. It is poverty which accounts for both the insufficient quantity of food and its poor quality.

Causes of Food Shortage Food shortage is a matter of demand and supply. When demand for food exceeds the supply, food shortage is inevitable. Several factors have been operating in India which have increased the demand for food and several others have either curtailed the supply or at any rate hindered the expansion of supply in proportion to demand. The combined effect of these two sets of factors has been the persistence of a food gap which assumed serious proportions in years of drought and other natural calamities.

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Factors Affecting Demand increase in Population. The most important and obvious cause of increase in demand for food is the rapidly growing population of the country which is increasing at an alarming rate.

Mounting investment Outlays. Under the Five-Year Plans, the investment outlays have been growing progressively. When every year such large amounts of money are being injected into the economy, the money incomes of the people go up, raising their purchasing power and intensifying demand for all goods including food articles.

Increase in income Elasticity of Demand for Food. It is the experience of all developing countries, including India, that when incomes increase, the people spend higher proportions of their increased incomes on food. This is due to the fact that people are generally under-fed and when they feel a little better off, owing to a rise in their income, they would like to consume more food than before. India’s food shortage is not the result of crop failures and declining per capita output, but of the increased capacity of its people to buy food.

Higher Self-consumption by Growers. Rise in agricultural prices, in recent years, has made the farmers much better off than before. Consequently, they now consume their own produce to a much greater extent than they could afford before. Thus, to the already existing demand for foodgrains is added this new demand for sell-consumption. by the growers themselves, increasing the aggregate demand for food.

Factors Affecting Supply There are several factors which adversely affect the supply of foodgrains, thus aggravating the food shortage in the country. These factors are: Low Agricultural Productivity. The basic cause of the insufficiency of food supply in India is the extremely low agricultural output. This in turn is due to a number of factors including primitive agricultural practices, lack of irrigation facilities, lack of capital, poor equipment in the form of primitive implements and poor quality of livestock, inequitable land system, and so on.

Substitution of Cash Crops for Food Crops. Before the beginning of the HYV programme, growing of cash crops being relatively more profitable, the cultivators took to growing such crops. Naturally, the supply of foodgrains was adversely affected. Even now this is so, where for one reason or the other the HYV programme has not spread.

Man-made or Artificial Shortage. In years of every good harvest, an artificial shortage is created by large- scale hoarding on the part of consumers, traders and growers. This results in appreciable reduction in marketed surplus. The marketed surplus has also been reduced, because the growers’ need for cash to meet their commitments can be met with reduced sales on account of the prevailing higher prices. Increase in self-consumption has also decreased the marketed surplus.

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Inadequate Transport. Sometime the supply is adversely affected by transport bottlenecks. Foodgrains may be available at home or abroad, but the shipping or the railway capacity may not be able to cope with increased traffic.

Government Food Policy. The Government policy regarding procurement and price control has also been a very important factor affecting the supply of foodgrains. For instance, price-control, inefficiently administered, may send stocks underground.

Faster Economic Development The rise in food prices in recent years is basically the consequence of the rate of economic development and the mode of financing it. The high level of investment expenditure in public and private sectors accompanied by deficit financing and large-scale credit expansion led to a general increase in the demand for foodgrains.

Consumption Pattern Further, there has been a change in the pattern of food consumption of many sections of the people. People who used to live on roots like tapioca or sweet potatoes have been transferring their demands to millets or coarse rice and people who used to take millets or coarse rice formerly have gradually been shifting over to superior kinds of rice and wheat

Industrialisation and Urbanisation The increasing industriulisation and urbanisation have increased the demand for marketed surplus and also increased the demand for rice and wheat as against millets and minor foods

Shortages Persistent shortages in certain areas of the country, owing to failure of crops though unfavourable weather conditions, and reports of scarcity also exercise bullish effect in other areas as well and thus aggravate the rise in food prices.

Thus, increase in demand due to increase in population, mounting investment outlays, increase in money incomes, high income elasticity of demand for food, higher self-consumption by the growers, coupled with low agricultural productivity, shortage, psychology, attraction for cash crops, transport bottlenecks and government policy regarding price control operating on the supply side, all combined to create a state of chronic food shortage in the country. Frequent failure of rains and the prevalence of near famine conditions in some parts of the country created a panic and increased propensity to stock.

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Measures Adopted for Solution of the Food Problem The following are the measures that have been taken for the solution of the food problem: movement of foodgrains from one zone to another was restricted. The object was to ensure that movement of foodgrains out of a particular Zone may not create food shortage there.

Anti-hoarding and Profiteering Measures. Legislative measures have been adopted to punish anti-social elements in the business community and the growers for hoarding and profiteering. Action has been taken under the Essential Commodities Act and the Defence of India Rules.

Anti-Speculation Measures. The speculators are no less responsible for the serious food situation which existed till very recently. The Reserve Rank of India has been operating selective credit control to check speculation in foodgrains.

Increasing Production. The ultimate solution of the food problem is to increase domestic production. This has been done in our Five-Year Plans and it consisted of extension of irrigation facilities through major, medium and minor irrigation works, supply of fertilisers and improved seeds. extension of credit facilities, reclamation of waste lands, adoption of improved agricultural practices like the Japanese methods of cultivation, land reforms to ensure incentive to the cultivators, and so on.

Import of Food grains. Increasing food production sufficiently to meet the requirements of the growing population being a long- run problem, the people had in the meantime to be fed.

Hence imports have been essential. The Government has been making strenuous efforts to secure food supplies from friendly countries like the U.S.A., Australia, Canada, Burma and U.S.S.R. Thus, despite increased domestic production, our reliance on imported foodgrains has continued.

Compulsory Procurement. The Government has been increasingly taking upon itself the responsibility of feeding the people. For this purpose it cannot rely on the stocks with dealers which have behaved like ‘fair weather’ friends. The Government must build up buffer stocks of its own to serve as price supports and meet a food crisis. For this purpose the Government has been making purchases not only in the open market through ordinary trade channels hut has also resorted to compulsory procurement.

Fair Distribution. Increased food production and imports are of no avail if the food supply made so available is not equitably distributed. The danger of hoarding and profiteering is always present in countries facing chronic food shortage. In order to meet this danger the

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Government has opened a large number of fair price shops which supply foodgrains to the consumers at reasonable prices. Distribution is also arranged through co-operative stores.

Contributory Factors There are several factors responsible for ushering in the Green Revolution in the country. The pride of place, however, goes to agricultural research conducted by the Indian Council of Agricultural Research (I.C.A.R.) and the farm universities like the Agriculture University at Ludhiana (Punjab) and at Pant Nagar (U.P.). It is the development of high varieties of crops, especially the cereals and millets, which have brought about this revolution. But there are other contributory factors like inputs and incentives.

(i) Wonder Seeds. Agricultural revolution is primarily due to the miracle of new wonder seeds which have raised agricultural yields per acre to incredible heights. Among these we may mention the new dwarf varieties of wheat PV-18, Kalyan Sona 227, Sona Lika (S-308) for Bajra HB-1, hybrid maize Vijay; for rice IR-8, Jhona 351, for sugarcane Co-1148, Co-67-ll, Mungfali-l Cotton J-34, and so on. The use of improved seeds increased by no less than 40 percent in the Intensive Agricultural District Programme (I.A.D.P.) districts.

(ii) Fertilizers. The increasing use of fertilizers has played a key role in the breakthrough in Indian agriculture. Nitrogen use increased at 24 per cent nitrogen plus phosphate grew at in 27 percent per year.

(iii) Green Triangle. Thanks to new seeds maturing early, it has become possible to obtain three and even four crops instead of two from the same plot in a year. This is going to make a radical change in farm technology in India. Some dwarf varieties of wheat, e.g. Sonara 64, Sharbati Sanora, Sona Lika, Safed Lernza and NP. 839 are suitable for late sowing from MidDecember to Mid-January. After wheat is harvested in the end of April, the land can be sown with Moong which matures in 65-70 days and land could then be used for sowing a monsoon crop.

This completes the triangle.

(iv) Modern Equipment and Machinery. Modern machinery and implements like tractors, harvestors. pumping sets, tube wells. etc.. are being increasingly used and are replacing the bullocks wherever possible. Being time-saving, use of modern machinery in agriculture is conducive to multiple cropping. By extending and improving irrigation it has made possible the growing of high-yielding varieties.

(v) Price Incentives. The Government has taken care to offer support prices to the growers so that a minimum reasonable return for their labour and investment is assured to them.

The market arrivals were so heavy that unless the Government offered to lift the crop at

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procurement prices announced well in advance, the prices would have crashed and spelt ruin to the grower. ‘This would have put a stop to all agricultural progress. (vi) Extension of Irrigation. The irrigation system of the country ‘is being speedily extended to assure adequate water supply especially in areas where new agricultural strategy is being applied. During the last three-four years, there has occurred a, remarkable growth of tubewells, pumped in most cases by electricity.

(vii) Processing, Storage and Marketing Facilities. These facilities are being improved and extended -so that the increased agricultural production is put to profitable use.

(viii) Improved Credit Facilities. Farm finance is being given more attention so that the farmer is not handicapped in efficiently carrying on his operations. The share of institutional credit in meeting the credit requirements of the agricultural sector has of late been rising rapidly.

(ix) Good Monsoon. Successive years of good monsoons is another factor responsible for increase in agricultural production.

9.1.4

Green Revolution

ACHIEVEMENTS OF GREEN REVOLUTION: (i) Boost to the production cereals. The major achievement of the new strategy is to boost the production of major cereals, viz., wheat and rice. There has been an increase in rice production from 35 million tonnes in 1960-61 to 90 million tonnes in 1999-2000 (but declined in the succeeding years), signifying a break through in this major crop of India. The production of wheat which stood at 11 million tonnes in 1960-61 rose to 76 million tonnes in 1999-2000. Thus, the Green Revolution was confined only to High Yielding Varieties (HYV) cereals mainly rice, wheat, maize and jowar. (ii) Increase in the production of commercial crops. The Green Revolution was mainly directed to increase the production of foodgrains. It did not affect initially the production of commercial crops or cash crops such as sugarcane, cotton, jute, oilseeds and potatoes; these crops did not record any significant improvement.

However, significant improvement in the

output of sugarcane, took place Likewise, there was considerable improvement in the production of other cash crops such as oilseeds,, potatoes etc, but the improvement was not such as to be called a revolution.

(iii) Significant changes in crop pattern. As a result of the Green Revolution, the crop pattern in India has undergone two significant changes. Firstly, the output of cereals has risen at the rate of 3 to 4 per cent per annum but the output of pulses has remained stagnant or even declined. This has resulted in a decline in the importance of pulses in foodgrains output from l6

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per cent in 1950-51 and 1960-61 to 6 per cent in 2000-2001. Cereals, on the other hand, have risen in importance from 84 per cent to 94 per cent during the same period. The stagnant production of pulses and the consequent rise in prices of pulses has a disastrous effect on the health of the poor who have generally given up the use of pulses.

Secondly, among cereals, the proportion of rice in total cereals output has come down marginally from 50 per cent 46 per cent between 1950-51 and 2001-02. During the same period, however, the importance of wheat has more than doubled. i.e., from 15 per cent to 36 per cent. (iv) Boost to agricultural production and employment. The successful adoption of the new agricultural technology has led to continuous expansion in area under corps, increase in total production and rise in agricultural productivity. Impressive results have been achieved in wheat, rice, maize, potatoes, etc. The adoption of new technology has also given a boost to agricultural employment because of diverse job opportunities created by multiple cropping and shift towards hired workers. At the same time, there has been displacement of agricultural labour by the extensive use of agricultural machinery.

(v) Forward and backward linkages strengthened.

The new technology and

modernisation of agriculture have strengthened the linkages between agriculture, and industry.

Even under traditional agriculture, the forward linkage of agriculture with industry was always strong, since agriculture supplied many of the inputs of industry; but backward linkage of agriculture to industry – the former using the finished products of the latter was weak. Now, however, agricultural modernisation has created a larger demand for inputs produced and supplied by industries to agriculture and thus the backward linkage has also become quite strong. In this way, the linkage between agriculture and industry has got strengthened.

WEAKNESSES OF GREEN REVOLUTION : The new agricultural technology has made the farmer market-oriented. The farmers are largely dependent on the market for the supply of inputs and for the demand for their output. At the same time, the demand for agricultural credit has also increased as the new technology has increased the cash requirements of the farmer.

Besides, modern technology has definitely

proved its superiority over the traditional technology only in those areas where appropriate conditions prevail. But these conditions prevail only in certain selected areas and the rest of the country is not yet suitable for advanced technology. What is, therefore, wanted is the evolution of a low-cost technology which can be adopted by all small farmers and which can use and exploit the local resources.

(1) Indian Agriculture Still a Gamble in the Monsoons. When the new agricultural strategy was introduced in the early 1960’s, it was hoped that the trend of rising output of foodgrains would continue. The then record achievement of 108 million tonnes of foodgrains in 1970-71 was hailed that Green Revolution had materialised and imports were immediately

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stopped. The euphoria was cut short in 1972-73 when production of foodgrains slumped to 95 million tonnes. Sharp fluctuations in foodgrains output were observed in the later years. From a low level of about 100 million tonnes lin 1974-75, foodgrains output rose gradually to 132 million tonnes in 1978-79 . There was a steep decline in production in the next year due to adverse weather conditions; foodgrains output in that year was 109 million tonnes which was almost the same as 1970-71 output. After many fluctuations the output of foodgrains rose to 176 million tonnes in 1990-91 and 199 million tones in 1996-97 but fell to 194 millilon tonnes in 1997-98, Production of foodgrains then rose continuously and touched 212 million tonnes in 2001-02, (2) Growth of Capitalist Farming in Indian Agriculture. The new agricultural strategy consisting of IADP and HYVP necessitated heavy investment in seeds, fertilisers, pesticides and water. These heavy investments are beyond the capacity of small and medium farmers. In India, there are about 81 million farm households but only 6 per cent of the big farmers account for 40 per cent of the land; they alone are making heavy investment in the installation of tubewells, pumping sets, fertilisers and agricultural machinery required for the purpose.

Consequently, the new agricultural strategy has helped the growth of capitalist farming in India and has led to concentration of wealth in the hands of the top 10 per cent of the rural population.

The poor peasants have not directly benefited from Green Revolution.

(3) Side-tracking the Need for Institutional Reforms in Indian Agriculture. The new strategy does not recognise the need for institutional reforms in agriculture. The bulk of the peasant population does not enjoy ownership rights. Besides, we have failed to provide even fixity of tenure and large-scale evictions have already taken place. As a result, the tenants are being forced to accept the position of share-croppers.

(4) Widening Disparities in Income. Technological changes in agriculture have had adverse effects on the distribution of income in rural areas.

Technological changes have

contributed to widening the disparities in income between different regions, between small and large farms and between landowners on the one hand and landless labourers and tenants on the other. The gains from technological change have been shared by all sections. This is indicated by the rise in real wages and employment and in incomes of small farmers in regions experiencing technological change.

(5) New Strategy and Socio-economic Relations in Rural Areas.

Overwhelming

majority of the cultivators having uneconomic holdings of 2-3 acres have managed to increase per acre yield from the application of small doses of fertilisers, but aggregate gains in output have been insufficient to create capital surplus for investment in land development.

Often small and marginal farmers are forced to take some land on lease; in some cases, they are pure tenants. Rising rentals in recent years, and/or the tendency of landowner to resume land for personal cultivation has actually led to an absolute deterioration in the economic

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condition of the small owner-cum-tenant cultivator class. Only the small minority of cultivators with holdings of ten acres or more have been in a position to mobilise surplus capital for investment in land development. Farmers with twenty acres or more have made the greatest gains, partly by mechanising farm operations to take up double or multiple cropping, and partly by diversifying their cropping pattern to include more profitable commercial crops. The majority of farmers – probably as many as 75 per cent to 89 per cent in the rice belt-have experienced a relative decline in their economic position; and same proportion, representing unprotected tenants cultivating under oral lease, have suffered an absolute deterioration in their living standards.

UNITs from the Green Revolution 1.

The Green Revolution initiated by the new strategy is initially limited to wheat, maize and bajra only. The major crop of India, i.e., rice, responded to the impact of the high-yielding varieties much later. Progress in major commercial crops, viz., oilseeds, cotton and jute is very slow. In addition to all this, pulses which account for about 10 per cent of the total food production have not registered any increase in production.

2.

Spectacular rise in food grains production has taken place since the 1960s in Punjab, Haryana, Western U.P and in some selected districts of Andhra Pradesh, Maharashtra and Tamil Nadu. But these areas cannot claim to cover the bulk of India. The already better-off areas have made their economic position still better.

This has initiated a

process of unbalanced growth in India. The regions which have lagged behind have to catch up with those that have marched ahead. Unless all the major States enter the take-off stage, it would not be fair to speak of an agricultural revolution.

The spread of the new technology, depends upon the extent of information and this in turn depends upon the level of literacy. A programme of removal of illiteracy can, therefore, become the chief vehicle of the spread of green revolution.

In the present rural set-up of co-operative societies and rural banks, it is the big farmer who is able to secure a loan at low rate of interest. The small farmer who wields very little influence in the village has to borrow from the village money-lender at exorbitant rates of interest varying between 24 to 36 per cent. Whereas official agencies provide about 40 per cent of the total credit at cheaper rates and that, too, mostly to the big farmers, the tenant farmer and the small farmer who need credit at lower rates of interests, get the costliest credit. This introduces a difference in the real price of inputs to the large and the small farmers, obviously to the disadvantage of the latter.

The adoption of new technology depends upon control over water supply and ability of the farmer to regulate its timing. It requires lumpy investment in tubewells or diesel pumpsets. It

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has been observed that the ownership of tubewells was limited among farmers with ten acres or more. In order to accelerate the pace of new technology, availability of water should be ensured.

The new strategy has created three kinds of conflicts, namely, between large and small farmers, between owners and tenant farmers and between employers and employees on agricultural farms.

The holders of large farms are capable of making heavy investment in the form of fertilizers, pumpsets, tubewells and agricultural machinery. They are also able to procure credit from banks and cooperatives societies and also obtain fertilizers and better seeds. The small farmers are deprived of the much needed inputs. This has, therefore, widened the inequalities of income and fostered the growth of capitalist agriculture in the country.

In India quite a significant group of peasants have small size holdings and consequently, they hire land on tenancy from the large owners.

The part of land hired by the tenants is

provided with modern techniques and the small fragments of land owned by the tenants continue to be worked by traditional techniques. The conflict is the cause of social tension, more so, when the landlords demand exploitative rents on the land leased out by them.

The application of new technology in large farms has led to the substitution of human labour with mechanical processes. The greatest sufferers in the process of agricultural revolution are landless labourers. Unless alternative opportunities of employment are provided to this most vulnerable section of the rural community, agricultural revolution will be meaningless to the millions of landless peasants in this country.

UNIT QUESTIONS 1.

Examine the role of agriculture in Indian economy.

2.

Describe the causes for low agricultural productivity and suggest remedies.

3.

What are the various land reforms measures.

4.

Discuss the causes for food shortage. How will you overcome it?

5.

Explain the achievements and weaknesses of Green Revolution.

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UNIT – 10 INDUSTRIALISATION OBJECTIVES After going through this chapter, you should be able to 

Understand the meaning and role of industrialisation



Know the growth and problems of Iron and Steel Industry, Cotton Textile Industry and Sugar Industry.



Understand the role and problems of small scale industries.



Know the measures of government to develop small scale Industries.



To know the meaning, causes and remedies for industrial sickness.

STRUCTURE 10.1.

Meaning of Industrialisation 10.1.1 Role of Industrialisation

10.2.

Major Industries 10.2.1 Iron and Steel Industry 10. 2.1.1

Progress of Iron and Steel Industry

10.2.1.2

Steel Authority of India Limited

10.2.1.3

Problems of Iron and Steel Industry

10.2.2 Cotton Textile Industry 10.2.2.1

Growth of Cotton Textile Industry

10.2.2.2

Problem of Cotton Textile Industry

10.2.3 Sugar Industry

10.3.

10.2.3.1

Progress of Sugar Industry

10.2.3.2

Problems of Sugar Industry

Small scale and Cottage Industries 10.3.1 Definition of Small scale and Cottage Industries 10.3.2 Role of Small-scale and Cottage Industries 10.3.3 Problems of Small-scale Industries 10.3.4 Measures to Develop Small Industries

10.4.

Industrial Sickness 10.4.1 Definition of Industrial Sickness 10.4.2 Causes of Industrial Sickness 10.4.3 Measures to Prevent Sickness Unit Questions

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10.1.

MEANING OF INDUSTRIALISATION Industrialisation does not mean merely starting of a few industries for producing

consumption articles. Even before attainment of independence, India had Cotton-Textile industry, Jute Industry and Sugar Industry and also Iron and Steel industry. On this score, India could not be called an ‘industrialized’ country The development of net-work of infrastructure like transport, power, communication and starting of Key industries to produce capital goods for starting more industries in the economy constitute industrialisation.

10.1.1 ROLE OF INDUSTRIALIZATION Indian economy with large manpower and varied resources has to be industrialized. The arguments for industrialization are as follows: (a) Increasing the Income Substantially : Industrialisation of the country is the only means of raising the standard of living of people substantially and also permanently. Only industrial development could offer a secure base for rapid economic growth and income. Only in the sphere of industries, human efforts with improved technology would give rich dividends by means of large scale production of varied goods for consumption and export.

(b) Meeting High Income-elasticity of Demand: The income-elasticity of demand for agricultural products is low. Only in the initial stages of development the people will demand more of agricultural goods. Once agricultural production reaches a point where the demand for food is completely met in the economy the increased income will be utilised in demanding industrial products. In other words, the income- elasticity of demand for the manufactured goods is high and that of agricultural products low. To meet the increasing demands of manufactured industrial products, the economy has to produce more of industrial goods. For this, industrialization is essential.

(c) Earning Foreign Exchange and comfortable Balance of Payments position: Industrialization is essential for keeping the export trade vibrant and earning foreign exchange, so as to have comfortable balance of payments. It maybe argued that economy could produce more of agricultural goods for export and in turn import industrial goods without much industrialization. This argument is rather weak. There is no guarantee that the countries exporting primary agricultural goods may be able to do so regularly and permanently and earn foreign exchange in adequate quantities to import manufactured goods. In practice, agricultural countries face difficult situations due to vagaries of monsoon and natural calamities. Moreover, the demand for agricultural goods in advanced countries will be very low. On the other hand, demand for manufactured goods in the exporting agricultural country will be very high. That is to say, the income- elasticity of exportable agricultural goods will be low, while income-elasticity of

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imported manufactured goods will be very high. This disparity will lead to poor balance of payments position to the countries producing and exporting agricultural goods, as the terms of trade will not be favourable to them. So, it is imperative that countries producing and exporting agricultural goods should substitute manufactured goods also for export to have better balance of payments position. Industrialization is only a ‘rational consequence’ of low intensity of demand for agricultural commodities, after a certain stage, be it domestic consumption or export.

(d) Transferring Surplus Labour : Backward economies suffer much due to population pressure and excess of labour force in agriculture, leading to unemployment and underemployment. Further, with the technological improvement in agriculture, the existing superfluous labour force would become still more unnecessary, leading to disguised unemployment. Hence, it is essential to industrialize the economy, in order to absorb the excess labour force in agriculture, and transfer it to industries, By this, the unemployed and disguisedly employed agricultural labour force would become more productive in industries. Real industrialization lies in keeping the labour force in agriculture to the barest minimum.

(e) Providing Strength and Security to the Economy: The real strength of the economy lies in industrialisation, which would help in producing capital goods for industries and also goods for export. Further, it is only through industrialisation, the agricultural base could be strengthened and expanded by ensuring farm inputs like chemical fertilizer, implements and machines, storage and transport facilities, etc. Industrialisation envisages industrial environment, industrial culture and urbanisation, offering better economic security to the nation, when international crisis develops. Besides, in these days of war preparedness, only through industrial development, the national objective of self-reliance in defence could be achieved.

10. 2

MAJOR INDUSTRIES

10.2.1 IRON AND STEEL INDUSTRY The history of iron and steel in India dates back to 1000 B.C. India possesses some of the world’s largest reserves of iron ore, mainly haematities and magnetites, with iron content ranging between 65 to 70 per cent. The iron ore reserves of India are assessed at one-fourth of the total world reserves and proven resources of iron ore of high grade at 22,000 million tons, the second largest in the world. In addition to this, low grade ores are estimated at four times this quantity. Rich deposits are found in Singhbhum and Manbhum. Extensive iron fields are found in Orissa, Bihar, Madhya Pradesh and West Bengal forming the iron ring of North East India. It is also found in Mysore, Maharashtra and Tamil Nadu.

Iron and Steel industry forms the base of all industrial activity. The most important among the industries, directly dependent on iron and steel industry are engineering industry, wagon building industry and other transport equipment industries. The development of

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agriculture is dependent on steel both directly and indirectly in the manufacture of agricultural tools, tractors, tube wells and in the manufacture of machinery for fertilizers and pesticides industries.

Steel production has a multiplier effect on the development of all other industries.

Therefore, it has been rightly called a ‘Mother Industry’. This industry provides direct employment to thousands of workers. According to the Ministry of Labour and Employment, the industry provides livelihood for about 128.8 thousand people in private sector and 107.1 thousand people in the public sector, besides thousands of workers in ancillary industries.

The foundations of the modern iron and steel industry in India were laid in 1906 when rich deposits of high grade iron ore were discovered in Singhbhum, though the first attempts of iron and steel manufacture by modern methods were made in 1830 in South Arcot (Tamil Nadu).

In 1874, Barakar Iron Works started work in Tharia in Bihar. The works were acquired by the Bengal Iron and Steel Company in 1889. The real beginning of modem iron and steel production started with the establishment of Tata Iron and Steel Works in 1906 at Sakchi (Bihar) now called Jamshednagar. It started production of pig iron in 1911 and of steel in 1913 Then came Indian Iron and Steel Company in 1918 at Hirapur (Asansol. Bengal) and Mysore State Iron Works (now Mysore Iron and Steel Limited) at Bhadravati in 1923. In 1916, Tata Iron and Steel Plant was in full production. Railway lines, heavy structurals, such as beams, angles, channels, etc., were manufactured in large quantities and exported to countries like Egypt, Mesopotamia, etc.

Another enterprise in private sector to undertake the production of steel was started by a foreign company, Messrs. Burn & Co., in 1918, at Hirapur near Asansol, with a sister concern, an iron foundry, at Kulti. The two concerns were merged into one in 1952 and given the name of Indian Iron and Steel Company, Burnpur. A third concern, the Mysore State Iron Works now known as the Visveswaraya Iron and Steel Works, Ltd., was started by the Mysore Government at Bhadravati in 1923.

10.2.1.1

Progress of Iron and Steel Industry

During the Planning period, the steel industry has made a very remarkable progress.

Production of crude steel has increased from 1.5 million tonnes to 15 million tonnes. This rate of growth, though seems to be very impressive, cannot be considered as adequate, as India has to import steel from foreign countries. India is a leading importer of steel, on an average of Rs. 3000 crores per year.

Another important feature of the progress of steel industry in India is its growth in research and design and it is also self-reliant to set up new steel plants without depending on foreign countries. For instance, Bokaro steel plant was set up on its own without foreign hand.

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Another important aspect of the progress of the industry is that the Government gave licences to set up electric arc furnace units, popularly known as Mini Steel Plants, producing mild steel and alloy steel. There are 179 mini steel plants with a total capacity of 5.6 million tonnes.

Out of them 167 units were in operation and produced 2.7 million tonnes of steel.

The industry is performing well in recent years due to liberalisation measures, such as the abolition of Steel Development Fund, steady reduction of import tariff, the modernisation and upgradation of technology and a compulsory cost reduction through quality improvement.

The Government has liberalised the steel policy and issued a new set of guidelines from 1990 onwards. Under the new policy the private sector has been allowed to set up steel plants with a capacity of upto one million tonnes per annum and for this purpose, they are free to choose between the electric arc furnace and blast furnace processes. The Government abolished price and distribution controls on iron and steel items manufactured by integrated steel plants with effect from January 1992. The Freight Equalisation Scheme was also withdrawn. The iron and steel sector is now open entirely without any sectoral reservations, licensing, pricing, distribution and control.

This liberalisation is a radical departure for the industry which was experiencing near exclusive public sector monopoly and also canalised imports, protective import tariff and government regulated domestic prices.

The decontrol and liberalisation policy has led to sudden rise in steel prices of various items. Reduction in import duty on various items of steel has, now some moderating influence on the market price of steel.

10.2.1.2

Steel Authority of India Limited (SAIL)

To co-ordinate the development of the iron and steel industry both in public and private sectors, the Government of India set up the Steel Authority of India Ltd., (SAIL) in 1973.

Objectives (i)

Maximum utilisation of the installed capacity;

(ii)

More production to bring down prices and black marketing;

(iii)

to make India exporters of steel on a permanent basis; and

(iv)

to ensure co-ordination between steel industry and industries associated with it like coal, iron and manganese.

The Steel Authority of India Limited (SAIL) is now the largest industrial enterprise in India accounting for an investment of Rs.6,304 crore and a work force of over 2.5 lakhs persons. The steel producing units under the ownership and management of the SAIL are Bhilai, Durgapur, Rourkela and Bokaro steel plants and also the Indian Iron and Steel Company. The SAIL has

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also one Alloy Steel Plant at Durgapur under it. Salem Steel Plant in Tamil Nadu was the latest plant under the SAIL. Hindustan Steel works Construction Limited, Bharat Coking Coal Limited and National Mineral Development Corporation Limited are also under the control of SAIL.

10.2.1.3 1.

Problems of Iron and Steel Industry

Underutilisation of Capacity Throughout the period of planning, this industry was suffering from poor utilisation of its

capacity. During seventies, all the units were working far below the capacity. The average capacity utilisation during this decade was ranging between 64 per cent to 79 per cent only.

Bhilai and TISCO were performing fairly well with capacity utilisation around 85 per cent, while others were below 60 percent. During eighties, the average capacity utilisation of units was around 82 per cent. Only in recent years, there was some improvement in capacity utilisation.

The average has increased from 88 to 91 per cent. Capacity utilisation in TISCO reached the level of cent per cent and in 1994-95, it had reached to 107 per cent, while in SAIL plants, it reached to 92.5 per cent.

2. Gross Inefficiency Almost all public sector units of this industry exhibited gross inefficiency with units losing continuously and also heavily due to heavy investment on social overheads, poor labour relations, inefficient top management and also undenitilisation of capacity. The top management often comprises of non-specialised and non-technical people. Appointment of officials of I.A.S. cadre at the top management level who are unequal to the task of providing the requisite managerial competence, resulted in very poor management and heavy losses. Those who had the competence, could not deliver goods, as they had to work under severe constraints like undue political interference, labour disputes etc.

3. Obsolete Technology Some of the public sector steel plants are working with obsolete technology. In respect to blast furnace productivity, Indian blast furnaces are not even half efficient as that of steel plants in foreign countries. Many advanced countries, even some less advanced countries like Brazil have switched over to Oxygen Convertors, which is the best process, while India continues to use the old practices. Due to technological obsolescence, the energy consumption per tonne in India has been increasing, in addition to the increase in energy costs after oil crisis. Many developed countries have been successful in cutting down energy consumption drastically. It has been estimated that the energy consumption in Indian Iron and Steel company was around 16.8 gega calories per tonne of saleable steel, while it was less than 5 gega calories per tonne in Japan. Things have not improved.

4. Rise in Input Costs

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In steel industry, cost of raw materials accounts nearly 35 to 40 per cent of the total cost, as it is material intensive industry. As such, even a small increase in price of raw materials of the industry will have heavy impact on the total cost of production. Pig iron is the most important raw material for the steel industry and the prices of pig iron have risen considerably over the years.

Adding to this, the cost of coal and power has also increased leading to heavy increase in input costs As a result the steel units have to face difficulties.

5. Shortage of Raw Materials The modern giant balst furnace needs high grade iron ore and good metallurgical coal.

The industry is unable to get good quality coke and manganese-ore which are the principal raw materials next to iron-ore. Most of our manganese resources are of poor quality. Supply of adequate zinc for the continuous galvanizing line has also become a problem. Further, power shortages have affected the functioning of the steel plants adversely. For instance, inadequate power availability from Dainodar Valley Corporation has affected the performance of SAIL.

6. Problem of Administered Prices The Government had been following a system of administered prices, and controlled distribution of steel among consumers. In the face of heavy demand for various items of steel materials, price control and distribution had led to heavy black-marketing and acute shortage of steel. Only the private distributors stood to gain and the main producers were denied of the high prices paid by the consumers. The prices for controlled and decontrolled categories of steel are fixed by the Government through a Joint Committee in which the producers have very little say.

The Committee is fixing the steel prices, but at the same time, it is not regulating the prices of raw materials. With effect from 1973, a revised pricing policy called differential steel price policy for steel products were introduced. By this, the prices of certain items of products were increased by the Government, but the premium in the market due to enhanced price was not allowed to accrue to the producers. This amount was asked to be transferred to a fund called Steel Equalisalion Fund maintained by SAIL and withdrawals by the producers from it were permitted only in consultation of the Planning Commission and that too for purposes like plant rehabilitation and increasing production. This procedure was considered rather unjust by the producers. With the introduction of New Industrial Policy in 1991, the Government had announced the abolition of price control from January 1992 onwards. It abolished all price equalisation schemes.

7. Sickness of Mini-steel Plants: According to ‘Report on Currency and Finance’ of the Reserve Bank of India the ministeel plants were faced with sickness. According to the report, “The main problem faced by these units included short supply of inputs and sharp increase in prices of inputs like electrodes and scrap, inadequate power supply constraint of working capital and poor management.” In order to retrieve the mini-steel plants from sickness and make them viable, the Government provided the

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following facilities: (i) Liberal import of melting scrap and sponge iron without import duty; (ii) free diversification of production into all grades of carbon and alloy steels, including stainless steel; (iii) Installation of captive rolling mills; and addition of balancing facilities like continuous casting machines, heat treatment furnaces, etc. With the help, the mini-steel plants were rehabilitated and they are now working fairly well.

8. Problem of Metallurgical Coal Indian Steel Plants are frequently faced with the problems of getting adequate quantities of good quality of metallurgical coal. With the expansion of the industry, the demand for coking coal is on the increase. India’s supply of high grade coal for making coke for the smelting of iron is quite low. In addition to this, Indian coking coal has a high ash content because of the sedimentary nature of their origin. In fifties, the steel plants were designed for using coal with 17 per cent ash content. Over the years, as mining proceeded deeper and to lower seams, the ash content increased to 25 per cent. It has been estimated that every one per cent increase in ash content of coal brings down the production of blast furnaces by three per cent Consequently, the steel units have to import coal from foreign countries with lesser ash content, to keep the blend at 15 per cent, The share of imported coal is increasing.

10.2.2 COTTON TEXTILE INDUSTRY The cotton textile industry, the largest single industry in India, holds second place among the countries of the world in cloth production. With an invested capital of over Rs.3000 crores in 1,175 mills in India, the industry provides direct employment to nearly 20 million workers. It also provides indirect employment to many millions like the cotton growers, processors. handloom and powerloom weavers who are estimated to be over three million and innumerable cloth dealers and shopkeepers. The industry contributes in increasing measures to the Centre and State Governments by way of taxes and duties.

10.2.2.1

Growth of Cotton Textile Industry

The birth of this industry dates back to 1818 when the first cotton mill was established at Fort Gloster near Calcutta with English Capital. The real growth of the industry, however, started with the setting up of the Bombay Spinning and Weaving Mills in 1856 with Parsi Capital. The Swadeshi Movement and the First World War helped in the expansion of the industry to meet the growing demands of the local market. During 1920s and 1930s, the industry faced stiff competition from Japan. High cost of production on account of over capitalization, foreign competition and world wide depression put this industry into serious difficulties. After 1930, the situation improved as a result of bilateral trade agreements with Japan and preferential empire tariffs. When protection was granted in 1927, the Industry began to make rapid progress. Till the outbreak of the Second World War, only 10 per cent of the internal demand of cloth was being met from imports. The real spurt for the industry came from the Second World War. The War

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Period was a blessing in disguise. The competition from Japan ceased and the industry increased its productivity enormously to cater for war demands. At the same time the industry had to face difficulties like over work and excessive wear and tear of machines, lack of technological improvement and complacency of proprietors due to boom conditions. The postwar years and granting of Independence put the industry in doldrums. Because of the partition of the country, the supply position of raw cotton became very difficult.

Most of the mills are concentrated in four States, viz., Maharashtra, Gujarat, Tamil Nadu and west Bengal. Maharashtra and Gujarat alone account for 50 per cent of the total spindles installed and 70 per cent of total looms in the cotton textile industiy Reasons for the location are: (a) Availability of raw material (b) Cheap and developed transport facilities, including ports like Bombay and Kandla (c) Suitable climate (d) Availability of commercial and financial facilities; and enterprising capital.

In recent years, this industry has also spread to a number of other States as well, like Madhya Pradesh, Bihar, Kerala, Uttar Pradesh, Andhra Pradesh and Tamilnadu. The reasons for this decentralization are: (i) Cotton fibre could be shifted to long distances without increasing the cost structure too much; hence entrepreneurs preferred to locate their mills at market centre; (ii) Availability of raw materials in all these States; (iii) Development of transport and communication facilities in these States; and (iv) Government encouragement for decentralization.

There are three sectors in cotton textile industry; (i) The Mill Sector (ii) The Powerloom sector; and (iii) The Handloom sector. The latter two are jointly considered under the heading decentralised Sector. Since independence, over years, the Government has been granting several concessions and also incentives to the decentralised sector (i.e., powerloom and handloorn sectors). As a result of this, the share of the decentralised sector in total production has increased considerably. Of the two sub- sectors of the decentralised sector, the powerloom sector’has grown at a faster rate.

The reasons for the fast growth of powerloom sector are: (i) Government’s favourable policies on synthetic fabric industry; (ii) Ability of the sector to introduce flexibility in the product mix in line with the market situation; (iii) Low labour cost due to flexible use of labour, giving competitive strength; and (iv) Increase in exports from the powerloom sector.

10.2.2.2

Problems of Cotton Textile Industry

The cotton textile industry in India is facing many problems.

1.

Shortage of Cotton Supply: Shortage in the supply of raw cotton is a serious problem

of the industry. Of the land devoted to cotton production in the world, 25 per cent belongs to India but the total production of Indian cotton is not even one tenth of world production. Due to poor

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productivity and shortage in the supply, we have to import long-staple cotton from foreign countries. The Cotton Corporation of India, setup in September 1970, is entrusted with the work of import of cotton. The crash programme to increase cotton production and the high yielding “wonder Cotton” have not yet made any appreciable record of success. The trend of cotton production in India has been highly unstable and erratic. Production lags behind the country’s requirements.

2. Hike in Prices: Shortage in production of cotton has pushed up the cotton prices to new peaks which in turn has contributed to the upward trend in price levels in the country. The industry is suffering from cost inflation. Raw cotton accounts for about 40 per cent of the cost of cloth and 65 per cent of the cost of yarn. Wages are the most important item accounting for nearly 30 per cent of the total cost of producing cloth. In view of the persistent cost inflation and the heavy loss on controlled cloth, the finances of the cotton mills have deteriorated and the margin of profit has been very little and poor.

3. Modernization Problem: Almost the entire machinery in this industry is very old, worn-out, obsolete, requiring replacement and modernization. A large number of units still remain in a state of poor technology. Consequently, the productive efficiency has gone down considerably and the cost of production has increased, placing us in a poor position in the field of competition in the foreign market, Modernization of the industry requires more than Rs. 1,000 crores which is a problem of finance.

4. The Problem of Competition, Export and Substitution: Our export market in cotton cloth is declining year after year in the face of stiff competition from Japan, Pakistan, \Vest Germany, Italy, Spain and Netherlands. These countries have better competitive strength, as they use up modernized automatic machinery which can produce finer varieties to suit consumer’s taste. Further rapid strides in the field of science and technology resulting in a variety of synthetic materials are giving a stiff competition for cotton textiles. Emergence of substitutes like Nylon, Terylene and synthetic fibres has reduced the demand for pure cotton fibres.

5. Problem of Controlled Cloth and Competition from Decentralised Sector: The conditional stipulation by the mills to produce a certain quantity of coarse varieties of cloth is another formidable problem for the mills. In the production of controlled cloth, the industry is losing at a rate of 80 paise per square metre. The industry’s plea for increasing the price of the controlled cloth has not been looked into. The competition from decentralised sector has been increasing year after year making several mills sick. Being a small scale sector the Government allows lot of concessions and privileges to the decentralised sector.

6. Power Cut: Another important problem faced by the industry is the frequent power cuts which impede the progress of the industry. Adequate and unfailing supply of power has

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become the vital need for any industry and more so for this industry in which many units are financially very poor having lost their capital and reserve.

7. Heavy Taxation: The industry is also largely affected by steep increase in excise duties. These financial burdens inflate the cost of production considerably.

8. The Control Problems: The industry is subject to variety of controls. Price control, production control, quality control etc., hinder the progress of the industry.

9. Labour Problems: This industry has been faced with frequent labour problems. In 1982, the mills of Bombay were rocked by a labour strike which continued for nearly 8 months. In most of the cases, the cotton textile mills have become a testing ground for personal rivalries and political bickerings.

10.2.3 SUGAR INDUSTRY The Sugar Industry in India is the best agro-based industry occupying a pre-eminent position in the economy of the country. Next to textiles, it is the biggest industry employing about three lakh skilled and unskilled workers and 50 thousand technicians, besides providing employment to about 25 million cultivators. In addition to this, there are many thousands of people engaged in sugar trade, transport of sugar and cane and also in its byproducts such as alcohol, plastics, paper, synthetic rubber, fibre board, etc. The sugar industry in recent years has begun to export sugar, thus earning valuable foreign exchange. Besides, it provides Rs.3,000 crores in the form of taxes to the exchequer. With an invested capital of over Rs. 1,350 crores, sugar industry is one of the best organised industries in India which had a spectacular growth since 1930.

in India, almost all States enjoy the benefit of having sugar factories However, it is concentrated in large measure in the States of Maharashtra, Andhra Pradesh, Bihar, Karnataka, Uttar Pradesh and Tamil Nadu. Indian sugar is of three forms-jaggery, Khandasari and white sugar. The first two are prepared by indigenous methods while white sugar is directly produced in the factories.

10.2.3.1

Progress of Sugar Industry

The area under sugarcane has been nearly doubled during the planning period and production of sugarcane increased by three times, The productivity of cane in terms of yield of cane per acre has also doubled during the planning period.

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154

Number of Factories and Production of Sugar Year

Number of Factories in Operation

Total

Sugar

Produced

(Million

tonnes) 1951 – 52

140

1.40

1955 – 56

143

1.80

1960 – 61

174

3.00

1965 – 66

200

3.50

1970 – 71

215

3.70

1973 – 74

229

3.90

1980 – 81

315

5.10

1984 – 85

338

6.10

1990 – 91

341

11.9

1994 – 95

400

14.6

1997 – 98

420

12.7

10.2.3.2

Problems of Sugar Industry

The sugar industry in India faces many problems. The main problems are competition from gur production, low yield of sugarcane, short crushing season, low milling efficiency, defective structure of the industry, high cost and price of sugar, failure of the Government to follow a consistent policy, obsolete machinery, mounting losses and the problems of by-products.

1. Competition from Gur and Khandsari Units: Indian sugar is produced in three fonns, namely Gum (Jaggery), Khandsari and white sugar. The first two, i.e., Gur and Khandsari are prepared by indigenous methods with little capital and low overhead costs. White sugar is produced in the modern sugar factories with heavy capital investment and other overheads.

Since the cost of production of gur and Khandsari units are low, they are able to pay comparatively high prices to sugarcane and corner the supplies of sugarcane. Attracted by good prices received from gur and khand units, the farmers prefer selling their sugarcane to indigenous units, rather than factories. Thus, the sugarcane gets diverted from modern sugar mills to gur and Khand units.

2. Mounting losses and accumulation of arrears of sugarcane dues to the farmers: Sugarcane prices have been increasing year after year and the cost of production of sugar is mounting up, since 60 per cent of the cost of production of sugar is accounted by the raw material, i.e., sugarcane. However, the realisation from the sale of sugar is not rising adequately to meet the cost of paying increased prices to sugarcane and other incidentals, including overhead charges. This results in heavy losses to sugar mills.’ As a result of this, most of the

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sugar factories could not pay the sugarcane price to farmers and the arrears of sugarcane due to farmers are mounting up.

3. Low Yield of Sugar Cane: Sugar cane productivity is very low in India, perhaps lowest in the world with only 17.1 tons of cane per acre whereas in Hawaii it is 80.4 tons of sugar cane per acre. The climatic conditions of India cannot be the best suited to sugarcane. Unless adequate irrigational facilities, manning, and the proper variety are provided, the productivity will not be improved. This low yield of sugarcane has created problems of shortage of supply to the industries as there is keen competition from khandsari and gur manufacturing units.

4. Short Crushing Season: Another problem is the short crushing season of the industry which makes the mills remain idle for more than 200 days in a year. The crushing season starts as soon as the harvest of sugarcane commences and it lasts for about 100 days only. This is one of the reasons for high cost of production.

5. Low Milling Efficiency: The milling efficiency and recovery of sugar is very poor in Indian mills. The average percentage recovery of Indian mills is only 10 producing only 1.8 tons of sugar out of sugarcane produced in one acre. In Indonesia the percentage recovery is 12.5 producing 4.4 tons of sugar out of the cane in one acre. The low milling capacity is due to obsolete and old machinery requiring replacement.

6. Defective Structure of the Industry: In the case of the sugar industry, there is a wide gap between the manufacturing unit and the production of sugarcane so to say, divorce between agriculture and manufacture. The manufacturing units do not have the plantations of their own, and as such do not have any control over the quantity and quality of the sugarcane grown by independent farmers. Hence there will not be any co-ordination between the farm and the factory to ensure adequate supplies and the proper quality of sugarcane.

7. High Cost and Price of Sugar: Inefficient and outmoded machinery, low productivity poor recovery in crushing, transport cost, high taxation have put the cost of production of sugar at a very high level and Indian sugar is sold at a very high price.

8. The Problems of By-products: The important by-products of sugar industry are ‘bagasse’ and ‘molasses’, which are not properly utilized. The Bagasse is utilized as fuel and molasses creates health hazards.

10.3.

SMALL SCALE AND COTTAGE INDUSTRIES

10.3.1 DEFINITION OF SMALL-SCALE AND COTTAGE INDUSTRIES According to the definition of the Fiscal Commission in 1950 “A cottage industry is one which is carried on wholly or primarily with the help of the members of the family, either as a

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whole or a part-time occupations. A small-scale industry, on the other hand, is one which is operated mainly with hired labour, usually 10 to 50 hands.�

10.3.2 THE ROLE OF SMALL-SCALE AND COTTAGE INDUSTRIES The small-scale and cottage industries of India have a decisive role to play in the economic development of the country. By and large, small enterprises have certain definite advantages.

1. Contribution to National Income and Larger Output: The small enterprises of India were contributing a larger share of National Income when India became independent. Out of the total national income of Rs.8,500 crores in the share of small industrial units was Rs.870 crores as against the share ofRs.610 crores by large industries. Although there has been considerable development of large scale industries during the period of planning, even now, India remains mainly a country of small-scale production. The growth and output of small-scale industries are very credit-worthy.

2. Employment Potential: The Small scale industries are labour intensive Labour investment ratio in their case is quite high. A given amount of capital invested in small scale industrial undertakings is likely to provide more employment, at least in the short run than the same amount of capital invested in large scale industries. This is a very important factor for a country like India where millions of people are unemployed and under employed. The handloom industry alone employs nearly 50 lakh people or nearly as many as employed in all organised industries. So it is a solution to the unemployment problem. The rapid growth of small-scale sector and its employment has great relevance in our national economic policies. The growth of the small- sector improves the production of the non-durable consumer goods of mass consumption. As such, it acts as an anti-inflationary force.

3. Capital Light: Small industries require only a smaller amount of capital than required by large scale industries. Where there is scarcity of capital and economising capital is essential.

Small scale industry is the only effective solution.

4. Skill Light: The large scale industries require high degree of skill and managerial talent of engineers, technicians, accountants and managers. In our country the supply of qualified personnel is very much limited and economising the services of these people is also essential. Small scale sector provides the training ground for industrial experience.

5. Import Light: Small scale industries require mostly indigenous machines and equipment and they need not depend too much on imported materials In the case of large industries, heavy engineering equipment, machines, technical skill and even raw materials have to be imported which would create problems of foreign exchange earnings. Small industries reduce the need for foreign capital or foreign exchange earnings.

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6. Quick Yielding and Decentralization: The time lag between investment and return in the case of small industries is very short and as such the project would give quick returns.

Further the small industries being distributed throughout the country there will be no regional imbalance.

7. Better Distribution of Wealth: The decentralization of industries in the small scale sector secures even distribution of income and wealth. Further, small scale industry will not create slums, housing problems, sanitation, disease and squalor as in the case of large scale industries.

8. Contribution to Exports: Growth of small-scale industries in the post-independent era has contributed a lot towards export earnings. Bulk of export earnings come from nontraditional items produced by small enterprises.

9. Less of Labour Unrest and Disputes: Generally, in small units production will not be hampered due to labour trouble and the labour relationship in small units will be comparatively good and amiable. In the small-sector, the labourers are not well organised like large-scale sector, and as such they could not express their resentment through strikes and other similar tools of intimidation.

10.3.3 PROBLEMS OF SMALL-SCALE INDUSTRIES The small-scale and cottage industries arc facing many problems and difficulties in connection with procurement of raw materials, effective techniques of manufacture, marketing facilities, finance etc.

1. Raw Materials: Most of the small-scale industries are plagued with the shortage of raw materials. They could not get neither sufficient quantity nor of requisite quality and that too at a very high cost. Being small purchasers, small units cannot have staff for liaison with government agencies to get their applications considered on a priority basis, to get adequate quota of scarce raw materials, particularly metals, chemicals and extractive raw materials.

2. Shortage of Power Supply: The problem of shortage of power is widespread throughout the country and the small units are hit hard by this. They cannot afford to have their own method of generating power like large-scale units. Periodical notified shut-downs and unscheduled shut downs by the Electricity Boards, low voltage transmission, poor maintenance of installations and consequent breakdown of power, etc., cause lot of hindrances in adhering to the production schedules of small-scale units. This leads to poor productivity of the units.

3. Low-level of Technology: Almost all units in small-scale sector carry on production with outdated and obsolete technology. They do not have the facilities of research and training to increase the output with modern technology. In advanced countries, modern technology has

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revolutionised the small-scale industries. There is little scope in India for transmitting better technology to the producers in the small-scale units, as there is no proper delivery mechanism of better technology.

4. Problem of Marketing: For small-scale and cottage industries products, marketing has become one of the biggest problems. These problems arise due to lack of standardisation of the product, competition from efficient units, insufficient holding capacity, poor demand and absence of market intelligence. Even in the available markets, the products do not get fair price.

5. Export Problems: India has an excellent potential in the export market of small-scale and ancillary industries. In spite of it, the small-scale sector faces the problem of poor support from the government. There are no organised linkage liaison of exporting small-scale unit’s products.

6. Problem of Finance: The crux of all problems is, however, the problem of finance.

Small-scale units require finance for the purchase and stocking of raw materials, finance for holding finished products till they are sold out and finance for paying wages. Small-scale producers are very poor who have very little to offer as security. Getting institutional finance by the small units is beset with many difficulties and problems. The credit will not commensurate with the needs of the unit for fixed and working capital; further the credit may not be forthcoming timely when required. Hence, the small-units have to depend on money-lenders for finance or they have to make ‘distress sales’ of their products. Lack of finance has been the principal reason for sickness in small units.

7. Underutilisation of Capacity and Other Problems: Another important problem facing small-enterprises is underutilisation of the installed capacities in most of the units. It has been pointed out that capacity utilisation, on an average, ranged about 50 per cent only during the last decade and early parts of this decade. More than half of the capacity in small-scale units is not utilised. Further, small units are plagued with the problems of inefficient management, nonavailability of cheap power, burden of local taxes etc., besides competition from large- scale industries.

10.3.4 MEASURES TO DEVELOP SMALL INDUSTRIES Cottage and small industries form an integral part of Indian Industrial Economy and their contribution to the economy is of vital importance. Considering the vast unemployment problem in our country, encouraging and expanding small-scale units of production will be the only answer to solve this problem. Hence, the Government, through its policy measures has given a unique position for small units in the economy of the country. We shall discuss briefly the measures adopted by the Government to develop small-scale units of production.

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Industries (Development and Regulation) Amendment Ordinance, 1984 One of the important policy measures adopted by the Government to improve the competitive strength of small-scale sector is to reserve specific items for exclusive production by the small scale industrial undertakings. Such reservation is being made since 1970.

Small Scale Development Organisation (SIDO) The Small Industries Development Organisation (SIDO) under the Central Ministry, headed by Development Commissioner (Small-Scale Industry) through its network of field offices, helps small-scale units by providing marketing counselling, consultancy services and conducting product oriented market survey. It had launched various technology support programmes for the small-scale units.

National Small Industries Corporation The National Small Industries Corporation another Central Agency, was established in 1955 with the view to assist, promote, develop and finance small-scale industries in the country.

The main functions of the Corporation are (a) to secure Government orders for the small industries, (b) to provide loans, (c) to provide technical assistance, (a) to secure co-ordination between small-scale and large-scale industries, so that the former produce goods required by the latter, and (e) to underwrite and guarantee loans from banks and other sources.

District Industries Centres (DICs) The District Industries Centres (DICs) programme was launched in 1978 with the objective of providing all the services and support facilities to small industries under one roof.

National Institute for Entrepreneurship and Small Business Development (NIESBUD) The NIESBIJD was established in July 1983 for organising and conducting training for entrepreneurs and for co-ordinating the activities of various institutes and agencies engaged in training programmes.

Awards for Small Scale Entrepreneurs In order to encourage the entrepreneurs and give them proper recognition in small-scale sector, a scheme for national award has been introduced since 1983-84. The awards carry a cash prize of Rs.25,000/ Rs,20,000/-, Rs. 15,000/-besides special awards of Rs. 10,000/-.

The Industrial Development Bank of India (1DBI) provides funds to the commercial banks and the State Finance Corporations (SFCs) through its scheme of refinancing. Another significant development has been the setting up of Small Industries Development Fund by the IDBI on May 20, 1986 with a fund of Rs.2,500 crores. The IDBI has taken a number of refinancing measures to small-scale units.

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Fiscal Incentives In order to promote the growth of small-scale industries, both the Central and State Governments have extended a number of fiscal incentives. They are: (a) Tax holiday for new industrial undertakings; (b) Capital subsidy to industries started in backward areas; (c) Investment allowance; (d) Exemption from excise duty; (e) A price preference of 15 per cent over medium and large industries.

10.4.

INDUSTRIAL SICKNESS

10.4.1 DEFINITION OF INDUSTRIAL SICKNESS An industrial unit is considered to be sick if the unit has (i) incurred a cash loss in the previous accounting year and was likely to continue with losses in the current year and erosions on account of cumulative cash losses to the extent of 50 per cent or more of its peak net worth during the last five years; and/or (ii) continuously defaulted in meeting four consecutive instalments of interest or two half-yearly instalments of principal on term loan and there were persistent irregularities in the operation of its credit limits with the bank. For tiny units it would suffice to satisfy either (i) or (ii).

10.4.2 CAUSES OF INDUSTRIAL SICKNESS There are diversified causes for industrial sickness. It may be managerial, technical, financial and political. The causes are generally classified as Internal Causes and External Causes.

Internal Causes: (a) Lack of experience of the promoters in the line of activity; (b) An improper choice of technology; unsuitability of product mix; wrong location of industry; and on of fixed assets, particularly machinery in the context of diversified manufacturing set up; (c) Improper demand estimation of the product; (d) Defective capital structure and inability to raise adequate financial resources to adjust operational losses; shortage of working capital; (e) Failure to purchase the raw material at the right time; (t) Under-utilisation of capacity due to labour problems; (g) Faulty control and financial planning and managerial inefficiency.

External Causes: (a) High cost of manufacture and low sales turnover, (b) High prices non-flexibility raw materials and non-availability of materials and other inputs; (c) Transport bottlenecks; marketing problems and poor supply of power, (c) Lack of demand for the product; general recession in business and change in government’s policy.

4.3

MEASURES TO PREVENT SICKNESS (i) The Reserve Bank should issue guidelines for the operation of small units and thus

make professional management expertise available for the guidance of small entrepreneurs. The management expertise should acquaint the small entrepreneur with the need for a better equity

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base, prescribe norms for allocation of their surplus to depreciation, retained profits and expansion programmes so as to build their internal financial strength. (ii) Since a majority of sick units die in the second or third year of their existence, a programme of monitoring and nursing them during infancy is very essential. In this way, the misuse of funds for purposes other than specified, and the factors leading to low capacity utilisation can be examined and quick remedial action taken. (iii) The Government can accord priority in allocation of scarce raw materials, extending marketing assistance and granting certain rebates and concessions to small units and more so to such units which show better record of performance. (iv) Sickness of small units should be treated at par with scarcity in agriculture and thus concessional rates of interest be charged at par with those loans, that are granted in scarcity, famine conditions in agriculture. The maximum rate of interest should be 7 per cent for small sick units to enable them to secure soft credit. (v) The Government should take penal action against the principals for non payment for the delivery of goods by small units.

UNIT QUESTIONS 1.

Analyse the role of industrialisation in Indian economy.

2.

What are the problems of Iron and Steel industry?

3.

Enumerate the problems of cotton textile industry.

4.

Discuss the main problems of sugar industry.

5.

Describe the role of small scale and cottage industries.

6.

Analyse the problems of small scale industries and discuss the measures taken by the government to develop small scale industries.

7.

Examine the causes of industrial sickness. Suggest remedies.

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162

UNIT – 11 INDUSTRIAL LABOUR AND INDUSTRIAL RELATIONS OBJECTIVES After going through this chapter, you should be able to 

Know the meaning and features of industrial labour



Understand the meaning and importance of industrial relations and also the machinery for industrial relations.

STRUCTURE 11.1.

Meaning of industrial labour 11.1.1 Features of Industrial Labour

11.2.

Meaning and importance of Industrial Relations 11.2.1 Machinery for Industrial Relations

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11.1.

MEANING OF INDUSTRIAL LABOUR Industrial labour refers to those workers who are employed in organised industries that

is, in those industrial establishments, which are covered by the Factories Act.

11.1.1 Features of Industrial Labour In a country like India which is suffering from a high pressure of population on land, there would be abundant supply of labour for industries. Though the overall supply of unskilled labour has generally been in excess of demand, there is however, a certain scarcity of skilled labour in India. The two important characteristics of Indian Industrial labour which have generally affected its supply are: (1) its migratory character, and (ii) its heterogeneous composition.

Most of the labourers in Industries are drawn from the villages and they are eager to go back to their homes especially during the busy agricultural seasons. Most of the factory workers in India are ‘driven’ to the industrial belts due to lack of employment in village and, even now, the majority of the labourers would prefer to move to the land if they could get a reasonable income from land or from occupations in villages. The migratory character of labour causes a constant change in labour turnover and leads to an aggregate loss of efficiency due to frequent changes of jobs and inflow of new persons not adequately acquainted with the work in the factory. In recent times, however, a change has been noticeable and the labour is slowly emerging into one that would live permanently in urban areas.

Secondly, industrial labour in India is not united, but is divided and sub divided on the basis of language, religion and caste. Only recently the differences among them are slowly disappearing and unity on the basis of economic considerations is taking place.

Thirdly, industrial labour is largely uneducated and they do not understand stand the problems confronting the economy in general and industries in particular. This is one of the reasons for the labourers being misled by political organizations which have a stronghold on the labour organisations.

Because of these factors, Industrial labour has not been organised on a solid and positive foundation. Absenteeism, frequent change, moving between the farm and the factory, indiscipline, unhealthy practices are quite common in Industrial labour in India.

11.2.

MEANING OF INDUSTRIAL RELATIONS Industrial relations refer to the contacts between the employer and the employee, in and

around the work. In a small-scale or cottage industries, the contacts between the master and workers would be frequent, almost daily and throughout the day, and as such, both can understand the problems of others and mutual interaction of personalities would minimise friction and misunderstanding. But, in large industries, it is very difficult to identify the master as such and the workers will have very little scope for exercising relationships with the masters or

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164

employers, except occasions like demanding more wages, bonus, etc. Consequently, the workers who are asked to work in a rigid jacket of ‘rules and regulations’ would very often come to have misunderstanding, leading to industrial unrest. Many flimsy and worthless causes would be championed by the trade unions due to lack of rapport between the employers and employees. Hence, industrial relations are very essential in maintaining industrial peace.

Importance of Industrial Relations Industrial relations are essential for maintaining peace which will be the key for industrial progress. To be very precise, healthy industrial relations are essential for the following:(a) Uninterrupted Production: Durable industrial peace ensures uninterrupted production in the economy, leading to continuous flow of goods and services to the nation for consumption and export. It also ensures continuous flow of income to the working classes who may not have any thing to fall back during the period of unemployment

(b) Creates Work-Ethos: Excellent industrial relations and the

consequent

healthy industrial atmosphere would promote work-ethos. Workers and management would recognise their responsibility in the productive process of the nation; and they would also feel that they are answerable to the society. All objectives will be subordinated to the national objective through work-ethos. This will result in self-cultivated discipline and the rewards would be automatically linked to productivity. The employers would also find it profitable to provide good working conditions. This would foster good understanding between employers and employees.

(c) Ensures Social Stability: Good industrial relationship would foster social stability and also help in the healthy growth of the society. As a matter of fact, the corporate sector with healthy relationship towards workers can influence the entire fabric of the society and make them culturally advanced.

11.2.1 MACHINERY FOR INDUSTRIAL RELATIONS The machinery for industrial relations aims at resolving disputes taking a serious turn; and this is partly compulsory and partly voluntary. The Indus trial Disputes Act of 1947 and its amendment in 1976; the Code of Discipline of 1958; and the Industrial Truce Resolution of 1962 are the principal legislative enactments to ensure industrial peace. In addition to these, there are Forums for workers’ involvement in negotiations and management of industries, such as Works Committees, Joint Management Councils, etc.

Negotiation, Conciliation and Adjudication The National Arbitration Promotion Board comprising of representatives of employers, workers, public undertakings and Central and State Governments set up by the Government of India in 1967 promotes voluntary arbitration as a means of settling industrial disputes, when mutual negotiations and conciliation fail.

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Code of Discipline The Code of Discipline was evolved at the Indian Labour Conference in 1958, by which it was decided that the employers and workers should not enter into direct action of strike or lockout without utilising the existing machinery for the settlement of disputes. The main features of Code of Discipline areas follows: (a) It prohibits strikes and lock-outs without prior notice.

Intimidation, victimisation and adoption of ‘go-slow’ tactics etc.., should be avoided. (b) Unilateral actions should not be taken by either party in any matter. (c) All disputes must be settled through the existing machinery set up by the Government for this purpose. (d) The employers will not increase workload without prior agreement with the workers. (e) The workers will not indulge in any trade union activities during the working hours, nor will they engage in any demonstration that is not peaceful. (I) The unions will discourage negligence of duty, careless operation, damage to property, disturbance of normal work and insubordination.

Industrial Truce Resolution During national emergency proclaimed in 1962, in the wake of Chinese aggression, a joint meeting of the Central Organisations of employers and workers adopted an Industrial Truce Resolution. Accordingly, it was decided that there would be no interruption or slowing down of production; on the other hand, production would be maximised and defence efforts promoted in all possible ways. Now, this has been merged with the Central Implementation and Evaluation Committee.

Workers’ participation and Joint Management Councils In addition to the ‘Code of Discipline’ and other methods, participation of workers in the management of industries is encouraged, in order to have better employer-employee relationship. By sharing the management responsibilities, better understanding could be built up, leading to more productivity and industrial peace. Workers are put in responsible position in decision making at some levels through schemes like Joint Management Councils introduced in 1958 on a voluntary basis in public and private sector establishment, where workers could be made to serve as Directors on the Boards of Management in nationalised banks and also participation in industry at the shop-floor and plant levels since October 1975.

Though the features and objectives of Joint Management Councils are very fair and reasonable, it has not made good strides in India. The initial enthusiasm slowly declined and in many industries the JMCs ceased to function The National Commission on Labour observed, while reviewing the progress of JMC scheme, that the scheme does not enjoy much support.

Even where the councils exists, they are very ineffective and their functioning unsatisfactory in many cases. The principal reasons for the tardy growth of JMCs are: (1) Poor living standard of workers; (ii) Lack of education to cope with the work of sharing responsibility; (iii) Inter-Union rivalries prevent participation in JMCs, (iv) The employers, as a class, are conservative and they

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do not relish the idea of sharing responsibilities by the workers, (v) Government’s enthusiasm is also declining Hence, this scheme of JMCs cannot be said a successful one in India.

UNIT QUESTIONS 1.

Analyse the features of Industrial Labour

2.

Discuss the importance of Industrial Relations and also the machinery available for creating industrial peace.

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167

UNIT – 12 INDUSTRIAL POLICY OBJECTIVES After going through this UNIT, you should be able to 

Understand the meaning of Industrial policy



Know the Provision of Industrial Policy of 1948, 1956, 1977, 1980 and 1991

STRUCTURE 12.1.

Meaning of Industrial Policy

12.2.

Industrial Policy Resolution of 1948

12.3.

12.2.1

Objectives

12.2.2

Classification of Industries

12.2.3

Features

12.2.4

Defects of the policy

Industrial Policy Resolution of 1956 12.3.1

Objectives

12.3.2

New classification of Industries

12.3.3

Criticisms

12.4.

Industrial Policy Resolution 1977

12.5.

Industrial Policy Statement of 1980

12.6.

New Industrial Policy 1991 Unit Questions

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12.1.

168

MEANING OF INDUSTRIAL POLICY The term ‘Industrial Policy’ refers to the Government’s policy towards the establishment

of industries, their working and management. It includes all those principles, regulations, rules, etc., which would influence the industrialisation of the country and also nationalisation of industries. The industrial development of a country largely depends on the industrial policy adopted by the Government During the British days, the Government followed a policy of laissezfaire in industrial development and it was only a spectator without actively participating as an entrepreneur. Only during war periods some measures were taken up by the Government which were nothing but adhoc measures to meet the exigency. The dawn of independence created new hopes and aspirations in the field of industry a the responsibility of industrialisation of the country devolved on the Indian Government which embarked upon a policy of actively promoting the much needed industrialisation of the country Industrial activity in the country since then is carried on the basis of policy statements made by the Government from time to time.

12.2.

INDUSTRIAL POLICY RESOLUTION OF 1948

12.2.1 OBJECTIVES The Industrial Policy was designed to achieve the following objectives

(i) the

establishment of a social order wherein justice and equality of opportunity shall be secured to all the people (ii) the promotion of standard of living of people by exploiting resources; (iii) increase in production-both agricultural and industrial; (iv) offering of opportunities to all for employment; (v) the need for careful planning and integration of efforts and the establishment of a National Planning Commission; (vi) the determination of state responsibility and private enterprise in industrialisation and (vii) the regulation of private enterprise.

12.2.2 CLASSIFICATION The Government classified the industries into four categories: (i) State monopolies; (ii) Basic and Key Industries; (ii/) Private industries controlled and regulated by State; and (iv) Completely private sector industries.

Defence, arms and ammunitions, atomic energy, strategic industries and railways were brought under the first category, viz., complete State control. Basic and key industries, viz., iron and steel, aircraft manufacture, ship building, telephone, telegraph and wireless apparatus, and mineral oils were brought under State control while starting new undertakings, and the existing units were allowed to continue in the private sector. The Government would consider nationalisation of basic and key industries in private sector after 10 years. Twenty important industries, such as cotton textiles, sugar, cement, paper, heavy chemicals, etc., were brought under the third category. These industries under private sector were subjected to state control and regulation. All other industries were brought under private sector without any state interference.

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Cottage and small industries were allowed to play their part in the economic development of the country through co-operatives.

12.2.3 FEATURES 1.

The first feature of the Industrial Policy Resolution, 1948 is the middle course it had taken between laissez-faire and collectivism. Indian industries saw the dawn of ‘mixed economy’ and the participation of the public and the private enterprises in specified fields of production.

2.

The policy underlined better labour-management relations and also fair deal to the labour.

3.

Policy regarding foreign capital was also clarified. As a rule, the major interest and ownership and control was to be in Indian hands.

4.

An assurance of a sound tariff policy designed to prevent unfair foreign competition was forthcoming.

12.2.4 DEFECTS OF THE POLICY (i) Damage to Private Enterprise: The Policy Resolution of 1948 did the greatest damage to private enterprise in our country. The State undertook responsibilities for a large part of the country’s industrial development; but it did not have necessary resources in finance, technical and managerial man-power.

The limit of 10 years prescribed to consider nationalisation in the policy is the biggest drawback which had seriously affected the growth of private enterprise. By giving enormous powers to the State, the security of private enterprise was unnecessarily reduced. (ii) Lack of Co-ordination: The Industrial Policy when put to actual practice exhibited lack of co-ordination between the Union Government and the State Governments. Poor experience, lack of technical know-how and inadequate integration between policy and procedure in public sector, the misdirected enthusiasm of nationalisation without proper climate and resources, the suspicion of the private sector, etc., all resulted in the slow and poor development of industries. (iii) Evils of Bureaucracy: The ‘mixed economy’ instead of taking the merits of socialism and capitalism, exhibited the evils of the two. The evils of nepotism, favouritism, redtape, bureaucratic top heavy administration, etc., percolated in all spheres of industrial undertaking of the State.

12.3.

INDUSTRIAL POLICY RESOLUTION OF 1956 The Industrial Policy was revised in 1956.

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12.3.1 OBJECTIVES The objectives and outlines of Industrial Policy Resolution of 1956 were: (1) Reduction of disparities in income and wealth; (ii) Prevention of monopolies and concentration of economic power; (iii) Building up a large and growing public sector; (iv) Developing heavy and machine making industries; and (v) to accelerate the rate of industrialisation and economic growth.

12.3.2 New Classification of Industries Under the revised policy of 1956, the industries were reclassified into three categories, viz, Schedule A, Schedule B, and the test of the industries.

Under Schedule A, seventeen industries were listed and made purely state-owned.

Though the existing private units were not disturbed, future development of these was the exclusive operation of the public sector. Twelve industries were brought under Schedule B. ‘These twelve were brought under mixed sector where the industries would be progressively owned by the State. and private enterprise would have the opportunity to develop singly or in participation with the States. All the remaining industries or residual industries were brought under the third category, viz., private sector. But the Government retained the right of starting its own unit at any time.

12.3.3 CRITICISM OF THE 1956 INDUSTRIAL POLICY The Industrial Policy of 1956 increased the scope of Government participation in industries and reduced the part of private enterprise. This was criticised as unfair. Eugene Black, President of the World Bank observed that it “could only result in imposing heavy additional burdens on the already over strained financial and administrative resources of the public sector.”

Dr. John Mathai criticised that the order of emphasis should be the reverse and free enterprise should be given greater scope, and State enterprises should confine to cases where they were absolutely indispensable. Dr.C.H. Bhaba went to the extent of saying that the “policy statement is a beginning which will ultimately lead to the extinction of entrepreneurial activities in our country.

12.4.

INDUSTRIAL POLICY RESOLUTION 1977 The main elements of the policy were ; 1. Development of Small Scale Sector : The Janata policy statement categorically

mentioned : “The emphasis on industrial policy so far has been mainly on large industries, neglecting cottage industries completely and relegating small industries to a minor role. The main thrust of the new industrial policy will be on effective promotion of cottage and small industries widely dispersed in rural areas and small towns. The small sector was classified into three categories. a)

Cottage and household industries which provide self-employment on a wide scale;

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b)

Tiny sector incorporating investment in industrial units in machinery and equipment up to Rs. 1 lakh.

c)

Small scale industries comprising industrial units with an investment up to Rs. 10 lakhs and in case of ancillaries with an investment in fixed capital upto Rs. 15 lakhs.

2. Areas for Large Scale Sector : According to the 1977 Industrial Policy Statement, the role of large-scale industry would be related to the programme for meeting the basic minimum needs of the population through wider dispersal of small-scale and village industries and to the strengthening of the agricultural sector. The Industrial Policy, therefore prescribed the following areas for large-scale sector. a)

Basic Industries

b)

Capital goods industries

c)

High technology industries

d)

Other industries which were outside the list of reserved items for the small-scale sector, and which were considered essential for the development of the economy.

3. Approach Towards Large Business Houses : To ensure that no unit of business group acquired a dominant or monopolistic position in the market, large industrial houses would have to rely on their own internally generated resources for financing new projects or expansion of the existing ones.

4. Expanding Role of Public Sector : The 1977 Industrial Policy Statement specified that the public sector would not only be the producer of important and strategic goods of basic nature, but it would also be used effectively as a stabilising force for maintaining essential supplies for the consumer.

5. Approach Towards Foreign Collaboration : The Policy statement further elucidated : “As a rule majority interest in ownership and effective control should be in Indian hands though the Government may make exceptions in highly export-oriented and / or sophisticated technology areas. In hundred per cent export-oriented cases the Government may consider even a fully owned foreign company.

7. Approach Towards Sick Units : The Policy Statement suggested a selective approach on the question of sick units. In mentioned: “While the Government cannot ignore the necessity of protecting existing employment the cost of maintaining such employment has also to be taken into account. In many cases, very large amounts of public funds have been pumped into the sick units which have been taken over but they continue to make losses which have to be financed by the public exchequer. This process cannot continue indefinitely”.

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12.5.

INDUSTRIAL POLICY STATEMENT OF 1980 In 1980, when the Congress (I) Government came back to power with Indira Gandhi as

Prime Minister, the Industrial Policy of the Government was restated on July 23, 1980. This new policy was in fact only an updated and refurbished version of the 1956 Industrial Policy Resolution. This policy statement of 1980 reiterated the basic Policy Resolution of 1956.

The objectives of the Policy Statement of 1980 were as follows: (a)

Facilitating an increase in industrial production through optimum utilization of installed capacity;

(b)

Rapid and balanced industrialisation of the country and increasing the availability of goods at reasonable prices;

(c)

Solving the problems of major industrial inputs like energy, transport and coal;

(d)

Correcting of regional imbalances through a preferential treatment to agro-based industries, and promoting optimum inter-sectoral relationship;

(e)

Promoting economic federalism through co-ordinated development of small, medium and large enterprises;

(f)

Promotion of export-oriented and import substitution industries; and

(g)

Higher employment generation.

In order to achieve these objectives, the policy statement reiterated its faith in public

sector. At the same time it emphasised the vital role of private sector in pursuing the goal of selfreliance and modernisation.

To generate more employment and also production, it was decided to permit and recognise additional capacities in industries over and above the originally endorsed capacities.

Further, stress was laid on the improvement of technology and allocation of funds for research and development.

Several steps were initiated to implement the Policy Statement of July 1980. In order to promote the growth of small-scale industries, investment limits for small-scale sector had been raised from Rs. 10 lakhs to Rs.20 lakhs. The investment limits for ancillary units had been increased from Rs. 15 lakhs to Rs.25 lakhs, Installed capacities in excess of licensed capacities in 34 selected industries had been regularised. These included basic industries and those producing mass consumption goods not reserved for the small sector, provided the firms were not units to which the Monopoly and Restrictive Trade Practices Act, 1969, or the Foreign Exchange Regulation Act, 1973 applied.

In order to encourage production for export, exemptions had been given in the locational policy and production for export had been excluded to computing licensed capacity.

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To encourage production of alternative sources of energy, the Government delicensed the manufacture of equipment for exploitation of such source of energy like solar insulation, wind power bio-mass including bio-gas, geo-thermal energy, tidal power and sea power. Thus the Industrial Policy Statement gave ample scope for the private sector to expand its activities and even set up industries in the sector reserved for the State in 1956 Resolution.

12.6.

NEW INDUSTRIAL POLICY 1991 The Government of India announced a New Industrial Policy (NIP) on July 24, 1991. The

main objective of the NIP are to build on the gains already made, correct the distortions and weaknesses that might have crept in, rejuvenate the dormant industrial sector, maintain a sustained growth in productivity and gainful employment and attain international competitiveness.

All sectors are expected to grow and operate in harmony with each other to realise the broad national objectives of industrial development.

The New Industrial Policy aims at bringing out radical changes in the following spheres: (a) Industrial Licensing (b) Foreign investment (c) Foreign Technology Agreements (d) Public Sector Management; and (e) Monopolies and Restrictive Trade Practices Act. (a) Industrial Licensing: The new policy had abolished industrial licensing for all projects except for a short list of industries related to core sector. According to the new policy: (i) No licences are required to set up new units, expand or diversify the existing line of manufacture except in certain industries related to security and strategic considerations, social reasons, hazardous chemicals and over-riding reasons from environmental angle and items of elite consumption (in all 34 industries). (ii) Areas where security and strategic concerns predominate will continue to be in the public sector. (iii) In projects where imported capital goods are not required, automatic clearance will be given. (iv) A flexible location policy will be followed. (v) The system of phased manufacturing programme is abolished. (vi) No licensing will be required for the broad banding facility. (vii) Mandatory convertibility clause will no longer be applicable to long term loans from the financial institutions for new projects. b) Foreign Investment: Regarding foreign investment, the following changes have been effected: (i) Approval will be given for direct foreign investment upto 51 per cent of foreign equity in high priority industries. (ii) The payment of dividends will continue to be monitored by the Reserve Bank of India to ensure that outflows and inflows are matched over a period of time. (iii) Foreign equity holdings need not necessarily be tied by foreign technology agreements. (iv) Majority foreign equity holding upto 51 per cent will be allowed for trading companies primarily engaged in export activities. (v) A Specially Empowered Board will be constituted to negotiate with the international firms and approve foreign investment in select areas.

(c) Foreign Technology Agreements: In the field of foreign technology agreements the following changes have been effected: (i) Automatic permission will be given for foreign

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174

technology agreements in high priority industries, upto a lump sum payment of Rs.one crore, 5 per cent of royalty for domestic sales and 8 per cent for exports, subject to a total payment of 8 per cent of sales over a ten year period from date of payment or 7 years from commencement of commercial production. (ii) For other industries other than those specified above, automatic permission will be given subject to the same guidelines as above, if no foreign exchange is required for any payments. (iii) No permission is necessary for hiring of foreign technicians or foreign testing of indigenously developed technologies. (d) Public Sector Management: One of the striking features of the new industrial policy is the substantive reduction in the role of the public sector in the future industrial development of the country. It may be recalled that the Industrial Policy Resolution of 1956 had accorded primacy to the public sector by reserving exclusively as many as 17 major industries, known as Schedule A industries. Further 12 other industries, known as Schedule B were identified for the entry of the public sector. It was also provided in the Policy Resolution of 1956, that the State will have an over-riding power to start any industry other than these 29 industries specified under Schedule A and Schedule B. Under the New Industrial Policy, the position and priority of Public Sector industries have been distinctly changed. The priority areas of the public sector industries have been confined to the following: (i) Essential infrastructural goods and services; (ii) exploration and exploitation of oil

and

mineral

resources;

(iii) technology development and building up of manufacturing capacities in crucial areas; and (iv) manufacturing of products, based on strategic considerations, such as defence equipment etc. (e) Monopolies and Restrictive: Trade Practices Act: With the introduction of liberalisation and expansion schemes under NIP, the government has suitably amended the MRTP Act. The government, on 27th September 1991 promulgated an Ordinance to amend the MRTP Act of 1969. According to the amendment, the following changes have been effected: (i) The requirement for large companies to seek prior approval of the Union Government for expansion, establishment of new undertakings, merger, amalgamations, takeover and appointment of Directors has been eliminated. (ii) At the same time, the provisions of the Act have been strengthened so as to give more powers to MRTP Commission with a view to taking effective steps to curb and regulate monopolistic, restrictive and unfair trade practices which are prejudicial to public interest and also to provide for deterrent punishment for contravention of the orders passed by the Commission and the Government. (iii) The amended Act has been made applicable to all undertakings and financial institutions except trade unions and associations of workmen. It means that now public sector units would also be covered under the Act, so far as the provisions of the restrictive trade practices are concerned. Accordingly, consumers now would be able to complain to the MRTP Commission, or the Commission might take notice of unfair and restrictive practices by Electricity and Water supply Authorities, Railways, Airlines, Banks including the financial institutions such as the IDBI and lFCl Chit Funds and Real Estate

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business. (iv) However, Government undertakings engaged in the production of Defence equipment, specified minerals, atomic energy, and Government mints will continue to be kept out of the purview of the Act from security point of view. (v) In order to cope with the new and enlarged task the MRTP Commission would be strengthened, both in terms of manpower and judicial provisions.

UNIT QUESTIONS 1.

State and analyse the Industrial Policy Resolution of 1948.

2.

State the main provision of Industrial Policy Resolution of 1956.

3.

Describe the New Industrial Policy of 1991.

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176

UNIT – 13 ECONOMIC PLANNING OBJECTIVES After going through this chapter, you should be able to 

Know the achievements and failures of five year plans.



Understand the approach to Tenth Plan.

STRUCTURE 13.1.

13.2.

Introduction 13.1.1

Approach to each plan

13.1.2

Achievement of planning in India

13.1.3

Failure of Planning

Tenth five year plan

Unit Questions

13.1.

INTRODUCTION Since 1951, India has completed nine five-year plans the guiding principles of India’s

Five-Year Plans are provided by the basic objectives of growth, employment, self-reliance and social justice. Apart from these basic objectives, each five-year plan takes into account the new constraints and possibilities faced during the period and attempts to make the necessary directional changes and emphasis.

13.1.1

APPROACH TO EACH PLAN At the time of the First Five Year Plan (1951-56) India was faced with three problems--

influx of refugees, severe food shortage and mounting inflation. India had also to correct the disequilibrium in the economy caused by the Second World War and the Partition of the country.

Accordingly, the First Plan emphasised, as its immediate objectives the rehabilitation of refugees, rapid agricultural development so as to achieve food self-sufficiency in the shortest possible time and control of inflation. Simultaneously, the First Plan attempted a process of all-round balanced development which could ensure a rising national income and a steady improvement in the living standards of the people over a period of time.

The Second Plan (1956-61) was conceived in an atmosphere of economic stability.

Agricultural targets fixed in the First Plan had been achieved. Price level had registered a fall and, consequently, it was felt that the Indian economy had reached a stage where agriculture could be assigned a lower priority and a forward thrust made in the development of heavy and basic industries of the economy for a more rapid advance in future. The basic philosophy of the

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Second Plan was, therefore, to give a big push to the economy so that it enters the take-off stage.

Besides, the Government announced its Industrial Policy in 1956 accepting the establishment of a socialistic pattern of society as the goal of economic policy. This necessitated the orientation of economic policy to conform to the national goal of “socialist economy”.

Accordingly, the Second Plan aimed at rapid intustrialisation with particular emphasis on the development of basic and heavy industries, such as iron and steel, heavy chemicals, including nitrogenous fertilisers, heavy engineering and machine building industry.

By the beginning of the Third Plan (196 1-66) the Indian planners felt that the Indian economy had entered the “Take off stage” and that the first two plans had generated an institutional structure needed for rapid economic development. Consequently, the Third Plan set as its goal the establishment of a self-reliant and self-generating economy. But the working of the Second Plan had also shown that the rate of growth of agricultural production was the main limiting factor in India’s economic development. The experience of the first two plans suggested that agriculture should be assigned top priority. The Third Plan accordingly gave top priority to agriculture but it also laid adequate emphasis on the development of basic industries, which were vitally necessary for rapid economic development of the country. However, because of India’s conflicts with China in 1962 and with Pakistan in 1965, the approach of the Third Plan was later shifted from development to defence and development.

The original draft outline of the Fourth Plan prepared in 1966 under the stewardship of Ashok Mehta had to be abandoned on account of the pressure exerted on the economy by two years of drought. devaluation of the rupee and the inflationary recession. Instead, three Annual Plans (1966-69) euphemistically described as “Plan Holiday” were implemented. India learnt a bitter UNIT during Indo-Pakistan war when its so-called allies refused to supply essential equipment and raw materials for its economic development. The Fourth Plan (1969-74) set before itself the two principal objectives of “growth with stability” and “progressive achievement of self reliance”. The Fourth Plan aimed at 5.5 per cent average rates of growth in the national income and the provision of national minimum for the weaker sections of the community--the latter came to be known as the objectives of ‘growth with justice’ and “Garibi Hatao” (Removal of poverty).

The Fifth Plan (1974-79) was introduced at the time when the country was reeling under a veritable economic crisis arising out of a run-away inflation, fueled by the hike in oil prices since September 1973 and failure of the Government take-over of the whole sale trade in wheat. But the Indian planners were concerned with the slogans of ‘Garibi Hatao’ (Removal of poverty) and the ”growth with social justice”. The original approach paper of the Fifth Plan prepared under C.

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Subramaniam in 1972 emphasised that “the main causes of abject poverty were open unemployment, under-employment and low resource base of very large number of producers in agriculture with service sectors.” The elimination of poverty could not be attained simply by acceleration in the rate of growth of the economy alone but the strategy should be to launch a direct attack on the problems of unemployment, under-employment and massive low-end poverty. But this approach was eventually abandoned and the final draft of the Fifth Plan prepared and launched by D.P. Dhar proposed to achieve the two main objectives, viz., removal of poverty and attainment of self-reliance, through promotion of higher rate of growth, better distribution of income and a very significant step-up in the domestic rate of saving. The Fifth Plan, however, was terminated by the Janata Party at the end of the fourth year of the Plan in March 1978.

There were two Sixth Plans. The Janata Party Sixth Plan (1978-83) openly praised the achievements of economy in terms of self-reliance and modernisation but held the Nehru model of growth responsible for growing unemployment, for the concentration of economic power in the hands of a few powerful business and industrial families, for the widening of inequalitie of income and wealth and for mounting poverty. The Janata Sixth Plan sought to reconcile the objectives of higher production with those of greater employment so that millions of people living below the poverty line could benefit there from. The focus of the Janata Sixth Plan was enlargement of the employment potential in agriculture and allied activities encouragement to household and small industries producing consumer goods for mass consumption and to raise the incomes of the lowest income classes through a minimum needs programme. After the defeat of the Janata Party, the congress came to power in 1980 and decided to have a new Sixth Plan. When the new Sixth Plan (1980-85) was introduced by the Congress, the Planners rejected the Janata approach and brought back Nehru Model of growth by aiming at a direct attack on the problem of poverty by creating conditions of an expanding economy.

The Seventh Five Year Plan (1985-90) was introduced in April 1985, after the country had enjoyed a reasonable rate of economic growth of the order of 5.4 per cent during the Sixth Plan. The Seventh plan sought to emphasis policies and programmes which would accelerate the growth in foodgrains production, increase employment opportunities and raise productivity-all these three immediate objectives were regarded central to the achievement of long-term goals determined as far back as the First Plan itself.

The approach to the Eighth Five Year Plan (1990-95) was approved in September 1989 and the Eighth plan was to be introduced in April 1990. However, there were changes in Governments at the Centre, necessitating constant reconstitution of the Planning Commission and preparation of a series of versions of the “approach” to the Eighth Plan. Finally, the fourth version of the Eighth Plan (1992-97) was approved at a time the country was going through a

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severe economic crisis caused by a balance of payments crisis, a rising debt burden, everwidening budget deficits, mounting inflation and recession in industry. The Narasimha Rao Government initiated the process of fiscal reforms as also of economic reforms with a view to provide a new dynamism to the economy. The Eighth Plan (1992-97) reflected these changes in its attempt to accelerate economic growth and improve the quality of life of the common man.

The Ninth Plan prepared under the United Front government was released in March 1998. The same was modified and approved by the National Development Council in February 1999, nearly two years after its implementation from April 1, 1997. The focus of the Ninth Plan was on “Growth with Social Justice and equality “. It assigned priority to agriculture and rural development with a view to generating adequate productive employment and eradication of poverty. It aimed at achieving GDP growth of 7 per cent per annum, since during Eighth plan, already a GDP growth rate of 6.5 per cent had been achieved. Besides, it ensured food and nutritional security for all, particularly for the weaker sections of the society. However, the Plan failed to achieve the GDP growth target of 7 per cent and realized only 5.35 per cent average GDP growth.

It is, thus, clear that the short-term objectives of each plan--also called as the Approach to each Plan--reflect the current state of the economy and the economic thinking of the Party in power and of the planners in the Planning Commission.

13.1.2

ACHIEVEMENT OF PLANNING IN INDIA (i) Increase in National and Per capita Income: One of the basic objectives of

economic planning in our country is to increase national and per capita incomes. As the direct consequences of economic planning, India’s national income and per capita income rose, though not as rapidly as the planners planned and anticipated. National income rose from Rs.132,367 crores at the beginning of the First Plan to Rs.852,085 crores at the end of the Eighth Plan. On the other hand, the per capita income increased at a much lower rate Per capita income had risen from Rs.3,678 to Rs.9,007 between 1951 and 1997. (ii) Progress in Agriculture : During the last 55 years, the government had spent, on an average, 23 – 24 % of the plan outlay in each of the Five Years Plan on the development of agriculture and allied activities and irrigation. Foodgrains production had gone up from 51 million tonnes at the beginning of the First Plan to 213 million tonnes by the end of the Ninth Planincrease by over four times. Likewise, in every crop, production had increased by three or four times, Of course, the most spectacular increase was in wheat and potatoes. All this has been made possible because of the use of the new agricultural strategy.

(iii) Progress in Industry : During the last nine plans (1951 to 20021), the Government had invested heavily on the development of industries, on the expansion of transport and

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communications, generation and distribution of electricity etc. Between 53 to 55 per cent of all planned outlay of the Government in each Five Year Plan was on these sectors. As a result, there has been considerable progress in such industries as steel, aluminium, engineering goods, chemicals, fertilisers and petroleum products.

(iv) Development of Economic Infrastructure : Another achievement of great significance is the creation of economic infrastructure which provides the base for the programme of industrialisation. The expansion of roads and road transport has led to the enlargement of the market. Irrigation and hvdro-electric projects have given a big boost to agriculture and also provided energy for installing factories and other modern establishments in small towns and cities. The infrastructure has opened the possibilities of modernising semi-urban and rural areas.

(v) Diversification of Exports and Import Substitution : As a consequence of the policy of rapid industrialisation, India’s dependence on foreign countries for the import of capital goods has declined. Similarly, quite a good number of consumer goods imported earlier are being produced indigenously. This has led to import substitution. Consequently, the commodity composition of India’s exports has changed in favour of manufactures, mineral ores and engineering goods. (vi) Development of Science and Technology : Another achievement of significance is the growth of science and technology and the development of technical and managerial cadres to run the modem industrial structure. This has significantly reduced our dependence on foreign experts. Being relatively more advanced than some of the other underdeveloped and countries, India has started exporting technical experts to middle East and African countries. This is a matter of legitimate pride for the country.

(vii) Development of a huge educational system : One of the great achievements of Indian planning is the development of a huge educational system - the third largest in the world.

As against a total enrolment of 239 lakhs in 1950-51, enrolment at the end of the Eighth Plan (1996-97) was of the order of 1.827 lakhs. The enrolment of pupils at the primary level increased from 192 lakhs to 1,118 lakhs during this period. As a percentage of population in the age group 6 to 11, it improved from 31 per cent to 84 per cent between 1951 and 1997. At the middle level total enrolment improved from 31 lakhs to 4l0 lakhs between 1951 and 1997 and as a proportion of the population in the relevant age-group (11 to 14), it improved from 13 to 68 per cent.

Similarly, at the secondary level, total enrolment improved from 12 lakhs to 249 lakhs between 1951 and 1997 and as a proportion of the population in the age group (14 to 17) it improved from 5.3 per cent to 32.4 per cent. Total number of students enrolled in colleges and Universities increased from 3.6 lakhs to 75 lakhs between 1951 and 2001-02. Such a huge expansion of the educational system is a major achievement of the planning era.

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181

13.1.3 Failures of Planning In his Book “Development Planning-the Indian Experience” late Professor Sukhamoy Chakravarty points out to three major weaknesses and failures of Indian Planning. (a) A major defect is the gross inefficiency of production in many of the public sector enterprises. Thee are many areas of production where inefficiency is fairly widespread, as in the generation of power, transport, steel, fertilisers, let alone high cost consumer durables.

1. Failure to Eliminate Poverty : The basic objective of planning is the provision of a national minimum level of living. The “garibi hatao (Remove poverty) slogan of Mrs. Indira Gandhi could be provided a meaningful content only if measures were taken to remove poverty.

It was felt that growth rate would not be sufficient to remove poverty and, instead, it would be more desirable to undertake specific measures to remove poverty.

Thus, poverty removal

programmes were made an integral part of the Fifth Plan and subsequent plans. About 55 per cent of population was living below the poverty line and in 1987-88, this proportion had come down to 39 per cent.

In 1993-94, the total number of poor remained around 320 million. The

fact that even after 5 decades of planning, 36 per cent of population live under conditions of poverty is a sad commentary on our planning. According to the latest of estimate of poverty based on NSS data, 26% of the total population (260 million) was living below the poverty line.

In other words, all through, India had followed a blood transfusion approach which provided temporary relief.

It would have been much better if India had followed a blood generation

approach by emphasising sustainable employment creation.

2. Failure to Provide Employment to All Above Bodied Persons : Another basic failure of planning in India was the emphasis on growth rather than on employment and the adoption of capital-intensive production rather than labour intensive production. Despite the implementation five year plans, unemployment has been on the increase.

According to the

Planning Commission, the backlog of unemployed persons was 5.3 million at the end of the First Plan and 7.5 million at the end of the Eighth Plan. Taking unemployed and under-employed together, at the beginning of the Tenth Plan i.e 2001-02, 9.21 per cent of the labour force or 35 million persons were unemployed. Unless India adopts an employment-oriented strategy and aims at 3 to 4 per cent annual increase of employment at higher levels of productivity, the chances of reaching the total full employment and alleviating under-employed would defy solution.

3. Failure to Reduce Inequalities of Incomes and Wealth :

It is rather doubtful that

during the last five decades of planned economic development, redistribution of income in favour of the less privileged classes has taken place.

The condition of the bottom 20 per cent of the

population had definitely deteriorated and for the next higher 20 per cent of the population had remained more or less stagnant. There was thus evidence of increased concentration of income

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and wealth in the hands of the propertied class. Another method of judging social justice relates to the rise in prices and changes in price structure. Prices of foodstuffs and essential consumer goods rose at a much higher rate than the prices of luxuries and semi-luxuries. In a socialists economy, failure to control the prices of food and essential consumer goods is the denial of economic justice to the masses. The situation has been worsening over the years.

4. Failure to Check the Growth of Black Money: There is no doubt that speculative gains, illegitimate incomes of various forms through illicit gains of contractors, windfall profits from protected markets, semi-monopolistic conditions created by import restrictions and capital issues and corruption generated by licences and quota system in various fields of economic activity have all resulted in illicit income shifts in favour of upper income classes. Inflation, controls and the vast expansion of the public sector have bred corruption, tax evasion and illicit speculative gains. Thus, the fruits of economic progress instead of being shared by the masses flow into the pockets of the traders, businessmen and industrialists.

5. Failure to reduce concentration of economic power: One of the main tenets of socialism as accepted by our planners is the reduction of concentration of economic power. But actually, monopoly has increased in India during the last 55 years, even though Jawaharlal Nehru had stated categorically: “Monopoly is the enemy of socialism�. To reduce concentration of economic power and wealth in the hands of a few, the Government adopted fiscal and other measures regarding taxation, ownership of wealth and property, curtailment of luxurious consumption and provision of subsidies on necessaries. Although fiscal measures had a positive role to play, tax rate structure remained only on paper and became the source of black money.

Similarly, a system of heavy taxation on articles of luxurious consumption and provision of subsidies on necessaries was tried for many years as a part of a programme of social justice but without any result.

6. Failure to Implement Land Reforms : One of the basic policy decisions to transfer ownership of land to the peasantry, for which efforts were made for four decades, was not properly implemented.

Progress of land reforms had been rather slow and that the State

governments were not eager to implement them with a speed sufficient for a quick transition to progressive agriculture and socialism. To sum up, the planning process has been able to create social and economic infrastructure, provide an industrial base by fostering the development of heavy and basic industries and enlarge educational opportunities, it failed to provide employment to every able-bodies person, eliminate poverty and bring about institutional reforms leading to reduction in concentration of income and wealth. More-over, the benefits from economic development have accrued largely to the relatively affluent and those in urban areas. These fundamental failures of planning emphasize the need for a re-appraisal of the development strategy.

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13.2 Tenth Plan The Approach Paper on Tenth Plan proposes that the Tenth Plan should aim at an indicative target of 8 per cent GDP growth for 2002—2007. This is lower than the growth rate of 8.7 per cent needed to double the per capita income over the next ten years. But, it can be viewed as an intermediate target for the first half of the period. It is certainly an ambitious target, especially in view of the fact that GDP growth has decelerated to around 6 per cent at present.

Even if the declaration is viewed as a short term phenomenon, the medium term performance of the economy over the past several years suggests that the demonstrated growth potential over several years is only about 6.5 per cent. The proposed 8 per cent growth target therefore involves an increase of at least 1.5 percentage points over the recent medium term performance, which is very substantial.

Economic growth cannot be the only objective for national planning. Over years, development objectives are being defined in broader terms of enhancement of human well— being. This includes not only an adequate level of consumption (food and other types of consumer goods) but also access to basic social services especially education health, availability of drinking water and basic sanitation. It also includes the expansion of economic and social opportunities for all individuals and groups and greater participation in decision making. The Tenth Plan must set suitable targets in these areas to ensure significant progress towards improvement in the quality of life of all people.

Monitorable Key Targets To reflect the importance of the above said dimensions in development planning the Tenth Plan must establish specific and monitorable targets for a few key indicators of human development. It is proposed that in addition to the 8 per cent growth target, the targets given below should also be considered as being central to the attainment of the objectives of the Plan.

1.

Reduction of’ Poverty Ratio to 20 per cent by 2007 and to 10 per cent by 2012.

2.

Gainflul employment to the addition to the labour force over the Tenth Plan period.

3.

Universal access to primary education by 2007.

4.

Reduction in the decadal rate of population growth between 2001 and 2011 to 16.2 per cent.

5.

Increase in literacy to 72 per cent by 2007 and to 80 per cent b 2012.

6.

Reduction of Infant Mortality Rate (IMR) to 45 per 1000 live births by 2007 and to 28 per cent by 2012.

7.

Reduction of Maternal Mortality Ratio (MMR) to 20 per 1000 live births by 2007 and to 10 by 2012.

8.

Increase in forest and tree cover to 25 per cent by 2007 and 33 per cent by 2012.

9.

All villages to have access to potable drinking water by 2012.

10.

Cleaning of all major polluted rivers by 2007 and other notified stretches by 2012.

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The social targets mentioned above will require a substantial allocation of resources to the Social Sector and major improvements in governance to make effective use of these resources. It must also be recognised that achievements of these targets is not independent of the achievement of high growth. Indeed high growth rates will generate the flow of public resources needed to sustain improvements in social indicators.

Balanced Development In order to emphasis the importance of ensuring balanced development for all States, the Tenth Plan should include a State-wise breakdown of the broad developmental targets, including target for growth rates and social development These state-specific targets should take into account the potentialities and constraints present in each state and the scope for improvement in performance given these constraints. This will require careful consideration of the sectoral pattern of growth and its regional dispersion. It will also focus attention on the nature of reforms that will have to be implemented at the state level to achieve the growth targets set for the states.

Whether at the State level or at the aggregate level is the Centre, any acceleration in growth requires some combination of an increase in gross domestic fixed capital formation and an increase in efficiency of resource use. The latter requires policies that will increase the productivity of existing resources and also increase the efficiency of new investment.

The targeted growth-rate of 8 per cent though ambitious, is not unattainable if adequate measures are taken for improving the efficiency, both in public and private sectors. In our country there is large scope for realising improvements in efficiency. However, this can only be realised if policies ensure such improvement. The Tenth Plan must therefore give high priority to identify efficiency enhancing policies at macro and also at sector levels.

These will involve a radical break from past practices and even institutional arrangements. In many cases, they will involve policy decisions which can easily become controversial given the compulsions of competitive policies. The Tenth plan can only succeed in achieving 8 per cent growth, if sufficient political will is mobilised and a minimum consensus achieved that will enable significant progress to be made in critical areas.

Growth, Equity and Sustainability It is important to emphasis that the equity related objectives of the Plan which are extremely important are intimately linked to the growth objective and attainment of one may not be possible without the attainment of the other. For example. high rates of growth are essential if we want to provide a sufficient expansion of sustainable high quality employment opportunities to the expanding labour force and ensure a sufficient increase in incomes of the poor and the disadvantaged. However, the relationship is not just one way relationship.

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It is also true that sustained high growth rates may not be sustainable, if they are not accompanied by a dispersion of purchasing power that can provide the demand needed to support the increase in output without having to rely excessively on external markets. External markets are an extremely important source of demand and they need to be tapped much more aggressively for many sectors. However, given the size of the economy and the present relative size of experts much of the demand needed to support high growth will have to come from the domestic economy itself.

Although growth has strong direct poverty reducing effects, the frictions and rigidities in the Indian economy can make these processes less effective, and the Tenth Plan must therefore be formulated in a manner which explicitly addresses he need to ensure equity and social justice.

There are several ways in which this an be achieved: (i)

First of all, agricultural development must he viewed as a core element of the Plan, as growth in this sector is likely to lead to the widest spread of benefits especially to the rural poor. We know very well that in the earlier plans, agriculture was grossly neglected or treated in a half-hearted manner leading to failure of successive plans and their targets. This attitude must change in the Tenth plan.

(ii)

Secondly. the growth strategy of Tenth Plan ensures rapid growth of those sectors that are most likely to create high quality employment opportunities and deal with policy constraints which discourage growth of employment. The policy should encourage wide range of service sectors which have a large employment potential. These include sectors such as construction, tourism. transport, Small Scale industries and modern retailing, besides IT services.

(iii)

Thirdly, there should be continuous efforts to supplement the impact of growth process with special programmes for special target groups that may not benefit sufficiently from the normal growth process. Such programmes have long been part of our development strategy and they will have to continue in the Tenth Plan.

Poverty Alleviation Programmes Over the years. poverty alleviation programmes of various types have expanded in size and today there is a wide variety of such programmes which absorb a large volume of resources.

The Plan provision for rural development is Rs. 7.000 crores, for food subsidy Rs. 13.000 crores, and for kerosene and LPG subsidy about Rs. 12,000 crores, making a total of Rs. 32,000 crores.

Against this, the provision for irrigation is only Rs. 1,700 crores and for afforestation only Rs. 400 crores.

In this context, there is need to examine whether the resources used for poverty alleviation schemes and for various subsidies in the name of the poor are really effective in

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alleviating poverty in the rural areas. Several evaluation of the Integrated Rural Development Programme (IRDP) show that the projects undertaken under the programme suffer from numerous defects including sub-critical investment levels, unviable projects, lack of technological and institutional capabilities in designing and executing projects utilising local resources and expertise. In several cases, the beneficiaries happened to be illiterate and also unskilled with no experience in managing the enterprise, besides indifferent delivery of credit by banks (high transaction cost, complex procedure. corruption, one-time credit, poor recovery); over-crowding of lending in certain projects such as dairy, poor targeting and selection of non-poor; absence of linkage between different components of the IRDP; rising indebtedness etc.

Another disturbing feature of the lRDP in several states has been rising indebtedness of the beneficiaries. Besides, the programme for upgrading skills TRYSEM, was not dovetailed with IRDP. It has also been discovered non-existent training Centres and non-payment of stipend in some cases. However, the programme for women. DWCRA did well in some states, particularly, Andhra Pradesh, Kerala and Gujarat.

Evaluation of the programmes for wage employment also reveals serious weaknesses such as inadequate employment and thin spread of resources; violation of material-labour (60:40).norms; fudging of muster rolls; schemes implemented universally through contractors who sometimes hired outside labourers at lower wages. Central norms of earmarking 40 per cent of funds for watershed development and 20 per cent for minor irrigation, have not been followed.

According to norms laid down, at present, Rs. 60/- out of Rs. 100/- is reserved for wages in wage schemes. But, in reality only Rs. 10 to 15 goes to the poor worker; the balance is appropriated as illegal income for the bureaucracy, contractors and politicians.

The programme for rural housing, although quite popular, because of’ 100 per cent subsidy of Rs. 20.000 per beneficiary, has led in strengthening of dependence of the rural poor on the elite. Given the large number of potential beneficiaries awaiting the allotment of a free house and limited resources, a situation has been created wherein the poor are divided among themselves. There would also be pressure from the local MLAs and MPs to ensure that their followers are given a house on priority at the earliest possible. Thus, the scheme dis-empowers the poor collectively while providing then individually with a valuable asset. Instances of corruption to the tune of Rs. 5,000/- to 8,000/- out of the approved amount of Rs. 20,000/- also came to light.

Suggestions During the Tenth Plan, it is suggested as follows: (1)

Several IRDP schemes should be transformed into a micro-finance programme to be run by banks with no subsidy on the lines of Rashtriya Mahila Kosh (RMK).

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Rashtriaya Mahila Kosh (RMK) is an innovative venture to facilitate credit support microfinancing to poor and assetless women struggling in the informal sector, works through the medium of NGOs as its channalising agencies for identification of borrowers, delivery of credit support and also recovery. While the lending rate of RMK both for short and medium-term loans is 8 per cent per annum to NGOs, the ultimate borrowers or their Self Help Groups pay 12 per cent per annum. Till the end of the Eighth Plan in 1997, KMK has extended credit worth Rs.35.14 crores through 170 NGOs benefiting about I .91 lakh women all over the country. In addition, RMK also supports its NGO partners, to form Women’s Thrift and Credit Societies, which are popularly known as Self Help Groups.

(2)

Funds to Gram Sabhas should be extended only when the people contribute a substantial amount, say 25 per cent in normal blocks and 15 per cent in tribal or poor blocks.

(3)

Employment programmes should be replaced by Food for Work Programmes to be run only in areas of distress. In all areas, the focus should he on undertaking productive works and their maintenance, such as rural roads, watershed development, rejuvenation of tanks, afforestation and irrigation.

(4)

Rural development funds should also be used for enhancing the budgetary allocation of successful rural development schemes that are being run by State Governments, or for meeting the State contribution for donor assisted programmes for poverty alleviation.

(5)

Special efforts should be made to strengthen the economy of the marginal and small farmers, forest product gatherers, artisans and unskilled workers. The poor should not merely benefit from growth generated elsewhere, they should contribute to growth.

(6)

Special efforts must be made to encourage development of small industry and other industries suited for rural areas to provide non-farm employment in rural areas.

In conclusion, the realisation of Tenth Plan objectives of 8 per cent growth depends on hard and harsh decisions on the part of the States. Many of the policy decisions of the Planning Commission would be unpopular among States. Where politics predominates over economics, realisation of targets will be rather dim.

Unit Questions : 1.

Describe the approach to plans.

2.

Give an account of the achievements and failures of five decades of planning.

3.

Briefly explain Tenth Five Year Plan.

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188

UNIT – 14 INDIA’S FOREIGN TRADE AND BALANCE OF PAYMENTS OBJECTIVES After going through this chapter, you should be able to 

Understand the trend of Indian foreign trade during the plan period.



Know the position of Indian Balance of Payments during the plan period.

STRUCTURE 14.1.

Foreign Trade on the Eve of Planning 14.1.1 1951 – 52 to 1955 – 56 I Plan period 14.1.2 1956 – 57 to 1960 – 61 II Plan Period 14.1.3 1961 – 62 to 1965 – 66 III Plan Period 14.1.4 Devaluation of 1966 and upto 1973 – 74 14.1.5 1974 – 79 V Plan Period 14.1.6 1980 onwards VI and VII Plan Period 14.1.7 1989 – 90 and thereafter 14.1.8 VIII Plan 14.1.9 Ninth Plan

14.2

Indian’s Balance of Payment 14.2.1 The First Plan Period 14.2.2 The Second Plan Period 14.2.3 Third Plan and Annual Plan 14.2.4 The Fourth Plan Period 14.2.5 The Fifth Plan Period 14.2.6 The Sixth and Seventh Plan Period 14.2.7 1990 – 91 and Thereafter

Unit Questions

14.1.

FOREIGN TRADE ON THE EVE OF PLANNING On the eve of planning, the foreign trade of India showed an excess of imports over

exports. The rise in imports was largely due to (a) pent-up demand of the war and the post-war period as a consequence of various controls and restrictions, (b) the shortage of food and basic raw materials like jute and cotton as a result of partition, (c) the rise in the imports of machinery and equipment or capital goods – to meet the growing demand for hydro-electric and other projects started during the period.

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ENGINEERING ECONOMICS 14.1.1. 1951 – 52 to 1955 – 56 I Plan period The annual average value of imports during the First Plan period was Rs.730 crores and that of exports Rs.622 crores. In this way, the average annual trade deficit, worked out to be Rs.108 crores. Trade deficit was largely due to programmes of industrialisation which gathered momentum and pushed up the imports of capital goods. There was no improvement in exports.

14.1.2 1956 – 57 to 1960 – 61 II Plan Period During the Second Plan, a massive programme of industrialization was initiated. This included the setting up of the steel plants, heavy expansion and renovation of railways and modernisation of many industries, and as a result, the quantum of imports reached a very high level. Besides this, the maintenance imports required for a developing economy further increased our imports. Food grains imports had to be resorted to overcome internal shortages and rising prices. Consequently, the trade balance became heavily adverse to the tune of Rs.467 crores.

14.1.3 1961 – 62 to 1965 – 66 III Plan Period The record of exports during the Third Plan shows that average export earnings worked out to be Rs.747 crores. As against it, actual annual average imports worked out to be Rs.1,224 crores. The increase in the volume of imports during the Third Plan was due to three factors.

Firstly, rapid industrialisation necessitated larger imports of machinery, equipment, industrial raw material and technical know-how. Secondly, the defence needs had increased following aggression by China and Pakistan. Finally, large quantity of foodgrains was imported, partly because it was easily available and partly because of the extensive failure of crops in 1965 – 66.

14.1.4 Devaluation of 1966 and upto 1973 – 74 The balance of trade situation worsened during 1966 – 67 and 1967 – 68. However, with a better crop during 1968 – 69, foodgrain imports declined. Moreover, devaluation also produced its healthy effect in stimulating exports. Consequently, balance of trade which was unfavourable to the tune of Rs. 788 crores during 1967 – 68 declined significantly during the next three years.

As a consequence of the policies of import restriction and reduction in foodgrain imports coupled with vigorous measures of export promotion, during 1972-73, the country was able to have a favourable balance of trade for the first time since Independence.

14.1.5. 1974 – 79 V Plan Period The hike in oil prices which started in October 1973 seriously affected the pattern of trade throughout the world and India was no exception. The value of imports during the Fifth Plan period reached very high levels – largely the result of a sharp increase in the cost of India’s major imports viz., petroleum, fertilisers and foograins. Simultaneously, there was a significant improvement in India’s exports as they successively rose every year during the Fifth Plan period.

The rise was so fast that by 1976 – 77, exports at Rs.5,143 crores exceeded imports by Rs. 69 crores – balance of trade surplus emerged for the second time since 1951.

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14.1.6 1980 onwards VI and VII Plan Period The annual average imports during the Sixth Plan (1980 – 1981 to 1984 – 85) were of the order of Rs. 14,603 crores as against annual exports of the order of Rs. 8,987 crores.

Consequently, a huge annual average trade deficit of the order of about Rs. 5,716 crores was witnessed during the Sixth Plan. During the Seventh Plan period (1985 – 86 to 1989 – 90) on account of the policies of indiscriminate liberalisation followed by the Congress Government and later endorsed by the Janata Dal Government, the average annual imports shot up to Rs. 25,112 crores, but exports averaged Rs. 17,382 crores. Thus an unprecedented annual average trade deficit of the order of Rs.10841 crores emerged.

14.1.7. 1989 – 90 and thereafter During 1990 – 91, according to DGCI & S figures, there is no doubt that a push was given to our export effort and exports shot up to Rs.32,558 crores in 1990-91 indicating an increase of 17.7%, but as a consequence of the Gulf War, the Government failed to curb imports and they reached a record level of Rs.43,193 crores-an increase of 22.6 per cent. As a result of the sharp increase in imports, trade deficit shot upto a high figure of Rs.10, 635 crores.

During 1991-1992, exports in dollar terms showed a decline. Despite the fact that the Government introduced a number of measures in the new trade policy allowing exim scrips, abolishing cash compensatory support (CCS) schemes as also a two-step devaluation of the rupee, but these measures failed to boost up exports.

14.1.8. Foreign Trade During Eighth Plan During Eight Plan, export effort picked up in 1996-97 at a fast rate. But simultaneously, policies of liberalisation accompanied with reduction of custom duties resulted in increase of imports. Consequently, the trade deficit which was of the order of $ 1,545 million in 1991-92 increased to $ 5,662 million in 1996-97 it rose by over three times.

14.1.9 Foreign Trade during the Ninth Plan (1997-2002) and After As a result of the sharp deterioration in world economic environment in trade, the SouthEast Asian crisis, continued recession in Japan, severe economic crisis in Russia in 1998 and fall in world output by 2 per cent in 1997-98 leading to decline in world trade, all resulted in a slowdown in India’s foreign trade. Taking the entire 5-year period of the Ninth Plan (1997-98 to 2001-02), the annual average exports was of the order of $ 38,687 million and that of imports was $ 47,099 million. Consequently, trade deficit during the Ninth Plan averaged $ 8,412 million per year which was more than double the average trade deficit of the order of $3, 456 million during the Eighth Plan.

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14.2.

INDIAN BALANCE OF PAYMENT The balance of payments of a country is a systematic record of all economic transactions

between the ‘residents’ of a country and the rest of the world.

14.2.1. 1951 – 52 to 1955 – 56 The First Plan Period During the First Plan period, the balance of payments was affected by the Korean War boom, American recession of 1953 and favourable monsoon at home which helped to boost agricultural and industrial production. While India had been experiencing persistent trade deficit, she had generally a surplus in net invisibles ; accordingly India’s adverse balance of payment during the First Plan was only Rs. 42 crores. The overall picture during the First Plan was, however, quite satisfactory.

14.2.2. 1956 – 57 to 1960 – 61 The Second Plan Period An important feature of the Second Plan period was the heavy deficit in the balance of trade which aggregated to Rs. 2,339 crores. Earnings on account of invisibles and donations from friendly countries totalled Rs. 614 crores. Making an allowance for these, the unfavourableness in the balance of payments, during Second Plan period was of the order of Rs.1,725 crores. The highly unfavourable balance of payments in the Second Plan was the result of (a) heavy imports of capital goods to develop heavy and basic industries, (b) the failure of agricultural production to rise to meet the growing demand for food and raw materials from a rapidly growing population and expanding industry; (c) the inability of the economy to increase exports; and (d) the necessity of making minimum ‘maintenance imports’ for a developing economy. As a result, the foreign exchange reserves sharply declined and the country was left with no choice but to think of ways and means to restrict imports and expand exports.

14.2.3. Third Plan and Annual Plans The balance of payments was unfavourable during the Third Plan. This was mainly because (a) imports were exapnding faster under the impact of defence and development and to overcome domestic shortages and (b) exports were extremely sluggish and failed to match imports. The serious adverse balance of payments which started with the Second Plan continued relentlessly during the Third and the Annual Plans. The trade deficit during the Annual Plans was quite large. This was because of the heavy imports of foodgrains to overcome famine conditions and internal shortage of foodgrains on the one side and inadequate exports due to economic recession on the other. Besides, devaluation of the rupee was a failure and instead of reducing the trade balance deficit, it further aggravated it.

14.2.4 . 1969 – 70 to 1973 - 74 The Fourth Plan Period One of the objectives of the Fourth Plan was self-reliance – i.e., import substitution of certain critical commodities on the one side and export promotion so as to match the rising

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import bill, on the other. Accordingly, the Government managed to restrict imports and succeeded in expanding exports. On the import side, restriction of imports was made possible through good crops and consequent significant reduction of imports of foodgrains. On the export side, vigorous export promotion measures succeeded in boosting exports of traditional as well as non traditional items. The net result was a surplus in the balance of payments, for the first time, though the surplus was only a nominal amount of Rs. 100 crores.

14.2.5. 1975 – 76 to 1978 – 79 The Fifth Plan Period During the Fifth Plan, trade balance was affected by two factors: (a) the value of imports was rapidly mounting due to the hike in oil prices. and (b) the value of exports was also rising under the impact of promotional measures. These two factors explained the gradual decline in the deficit in the trade balance and the appearance of a surplus in the trade balance in 1976-77.

14.2.6. The Sixth and Seventh Plan Period There has been a sea change in the balance of payments position since 1979-80. As against the surplus balance of payments experienced by the country during the whole of the Fifth Plan, India started experiencing adverse balance of payments from 1979-80 onwards. For one thing, trade deficit began to widen from 197 8-79. The picture was due to the tremendous rate of growth of imports on the one side and a much lower rate of growth of exports since 1979-80. The current balance of payments became adverse to the tune of Rs.11,384 crores during the Sixth Plan. Apart from net external assistance. India had to meet this colossal deficit in the current account through withdrawals of SDRs and borrowing from IMF under the extended facility arrangement. Besides. India used part of its accumulated foreign exchange reserves to meet its deficit in the balance of payments.

14.2.7 1990 – 91 and Thereafter During the Eighth Plan (1992-93 to 1996-97), trade deficit has been mounting; By 199697, it has reached a record le\el of Rs. 52,561 crores from that of Rs. 16,934 crores in 1990-91 —a threefold increase.

Taking the entire Ninth Plan period 1997-98 to 2001-02), trade deficit was wiped out to the extent of 78 per cent in invisible account surplus. Consequently. the total deficit in current account balance was of the order of the Rs. 70,670 crores for the Ninth Plan.

UNIT QUESTIONS 1.

Trade the growth and development of Indian foreign trade during the plan periods.

2.

Give an account of India’s Balance of payments position over fifty five years of planning.

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193

UNIT – 15 GATT, WTO AND INDIA OBJECTIVES After going through this chapter, you should be able to 

Understand India’s commitments of WTO



Know the benefits and disadvantages to India

STRUCTURE 15.1

Introduction

15.2

India’s Commitments of WTO 15.2.1 Tariff Lines 15.2.2 Quantitative Restrictions 15.2.3 TRIPs 15.2.4 TRIMs 15.2.5 GATs 15.2.6 Customs Valuation Rules

15.3

Benefits to India

15.4

Disadvantages to India

Unit Questions

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ENGINEERING ECONOMICS

15.1

INTRODUCTION India was one of the original contracting parties (cps) in the GAIT. India also joined the

WTO at its very inception. Irrespective of political changes, since 1991, the Government of India has been implementing structural adjustment programmes according to the dictates of WTO, IMF and the World Bank.

15.2

INDIA’S COMMITMENTS OF WTO

15.2.1 Tariff Lines As a member of the WTO, India has bound about 67 percent of its tariff lines whereas prior to the Uruguay Round only 6 percent of the tariff lines were bound. For non-agricultural goods, with a few exceptions, ceiling bindings of 40 per cent ad valorem on finished goods and 25 per cent on intermediate goods, machinery and equipment have been undertaken. The phased reduction to these bound level is being undertaken over the period March 1995 to the year 2005. Under the Agreement on Agriculture, except for a few items, India’s bound rate ranges from 100 to 300 percent and no commitments have been made regarding market access, reduction of subsidies or tariffs.

15.2.2 Quantitative Restrictions (QRs) QRs on imports maintained on balance of payments grounds were notified to WTO in 1997 for 2,714 tariff lines at the eight-digit level. In view of the improvements in India’s balance of payments, the Committee on Balance of Payments Restrictions had asked India for a phase out for the QRs. Based on presentations before this committee and subsequent consultations with main trading partners, India reached an agreement with these countries, except USA, to phase out the QRs over a period of six years beginning 1997. The Disputes Settlement Panel and the Appellate Body ruled in favour of USA and against India. This means that India is now required to phase out QRs in a period of less than six years. In fact, an agreement between USA and India has already been reached which envisages the phasing out of all QRs by India by April 1,2001.

Prior to the announcement of the Exim Policy for the year 2000-01 on March 31,2000 there were 1,429 items on which QRs were present in India. This policy removed QRs on 714 items. QRs on the balance 715 items will go by April 1, 2001.

15.2.3 TRIPs The ruling of the two WTO Dispute Settlement Panels following the complaints made by the USA and the European Union that India had failed to meet its commitments under Article 70.8 (requiring the setting up of the Mail Box System) and Article 70.9 (granting of Exclusive Marketing Rights) made it obligatory for the Government of India to make appropriate amendments to the Patents Act, 1970 by April 1 9, 1999. The Patens (Amendment) Act, 1 999 was passed by the Parliament in March 1999 to provide for Exclusive Marketing Rights. In

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respect of plant varieties, a decision has been taken to put in place a suigeneris system as it is perceived to be in our national interest. A legislation to this effect tabled in the Parliament has been referred to a Joint Parliamentary Committee.

As far as copyrights and related rights are concerned, the Copyright Act 1957 as amended in 1994 takes care of our interest and meets the requirements of the TRIPs Agreement except in the case of terms of protection of performer’s rights. A Bill to increase this term to 50 years was passed by Parliament in December, 1999. As far as lay—out designs are concerned, a legislation giving protection to them was introduced in the Rajya Sabha on December 20,1999 by the Department of Electronics. In the field of trademarks, The Trade and Merchandise Marks Act (TMMA), 1958 is in its essential features, in accordance with international law. A Bill passed in Parliament in December, 1999 provides for protection to service marks. The Government of India decided to enact a new law on the subject to take advantage of the provisions of the TRIPs Agreement. A Bill in this regard was passed by the Parliament in December, 1999.

15.2.4 TRIMs Under the TRIMs Agreement, developing countries have a transition period of 5 years up to December 31,1999 during which they can continue to maintain measures inconsistent with the Agreement provided these are duly notified. The Government of India notified two TR Viz. that relating to local content requirements in the production of certain pharmaceutical products and dividend balancing requirement in the case of investment in 22 categories of consumer items.

15.2.5 GATS Under the General Agreement on Trade in Services (GATS), India has made commitments in 33 activities. Foreign service providers will be allowed to enter these activities.

According to the Government of India, the choice of the activities has been guided by considerations of national benefit (viz., the impact on capital inflows, technology and employment).

15.2.6 Customs Valuation Rules India’s legislation on Customs Valuation Rules, 1998, has been amended to bring it in conformity with the provisions of the WTO Agreement or implementation of Article VII of GATT 1994 and the Customs Valuation Agreement.

15.3.

BENEFITS TO INDIA 1. World Bank, OECD and the GATT Secretariat have estimated that the income effects

of the implementation of the Uruguay Round package will add between 213 and 274 billion U.S dollars annually to world income. The GATT Secretariat’s estimate of the overall trade impact is that the level of merchandise trade in goods will be higher by 745 billion U.S dollars in the year

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2005, than it would otherwise had been. The GATT Secretariat further projects that the largest increases will be in the areas of clothing (60 per cent), agriculture, forestry and fishery products (20 per cent) and processed food and beverage (19 percent).

2. The phasing out of the MFA (Multi-Fibre Arrangement) by 2005 will benefit India as the exports of textiles and clothings will increase. While the developed countries had demanded a 15 year period, the developing countries (including India) had insisted on a 10 year period.

Acceptance of the developing countries demand in the Uruguay Round has been enthusiastically received in these countries. However, the catch here is that the phasing out schedule favours the developed countries as a major proportion of quota regime to the extent of 49 per cent is going to be removed only during the tenth year, i.e., by 2005. Thus the Uruguay Round does not provide an immediate market access for the Third Word textile exports. By the time the MFA is completely phased out in 10 years, the developed countries could gear themselves to effect improvement !n quality, efficiency and competitiveness.

3. The third benefit that India expects relates to the improved prospects for agricultural exports as a result of likely increase in the prices of agricultural products due to reduction in domestic subsidies and barriers to trade. While on the one hand earnings from agricultural exports are likely to increase, on the other hand India has ensured that all major programmes for the development of agriculture will be exempted from the disciplines in the agricultural Agreement.

4. The Uruguay Round Agreement has strengthened multilateral rules and disciplines.

The most important of these relate to anti-dumping, subsidies and countervailing measures, safeguards and disputes settlement. This is likely to ensure greater security and predictability of the international trading system and thus create a more favourable environment for India in the new world economic order.

15.4

DISADVANTAGES TO INDIA The most serious disadvantages to India are likely to flow from the Agreements

pertaining to the TRIPs, TRIMs and services.

TRIPs: Protection of intellectual property rights-patents, copyrights, trademarks etc., has been made more stringent in the Uruguay Round. This has been done to protect the interest of multinational corporations and the developed countries as the Agreement on TRlPs is highly weighted in favour of patent holders. However, as correctly pointed out by Muchkund Dubey, IPRs (Intellectual Property Rights) protection is anti-competition and anti-liberalization and goes against the spirit of opening up the world economy and global integration. It amounts to “legalising” the “Monopoly” of MNCs. Thus protection of lPRs is, itself, a barrier to trade.

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1. The first point to be noted in this context is that the TRIPs Agreement goes against the Patent Act of India, 1970 in almost all important areas as would be clear from the discussion below; (i)

Under the Indian Patents Act only process patents can be granted in food, chemicals and medicines. TRIPs Agreement provides for granting product patents also in all these areas.

(ii)

Under the TRIPs Agreement methods of agriculture and horticulture and biotechnological process are patentable there can not be any exceptions as under the Indian Act.

(iii)

TRIPs Agreement provides that the general term of a patent shall be 20 years.

The Indian Patents Act provides for a general term of 14 years for both product as well as process patents.

(iv)

In India, there are reasonable and effective provisions for the compulsory licensing of patents and also for the revocation of patents in public interest.

Under TRIPs Agreement, there are no such provisions.

(v)

Under TRIPs no ceiling can be placed on royalty demanded on patents like in the Indian Patents Act.

(vi)

Importation will be treated as working of a patent in the TRIPs Agreement, contrary to the patent philosophy in India; and

(vii)

TRIPs also reverses the burden of proof.

2. Under the Patent Act of 1970 in India, only process patents are granted to drugs and medicines.

Once product patents are introduced, generics cannot come to the market until after the expiry of the patent. Thus the Introduction of product patents in India is certainly going to affect sections of the poor who will not have the generic option open. In addition, as more and more potential medicines of MNCs are prescribed by the doctors, many Indian drug companies will be forced to shutdown. Drug company profits will start flowing overseas more quickly and skilled labour may face unemployment as production moves over seas.

3. The extension of intellectual property rights to agriculture (Via the patenting of plant varieties) has serious consequences for India. In India, plant breeding and seed production are

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largely in the public domain. Plant breeding is undertaken by agricultural universities and units of ICAR (Indian Council of Agricultural Research), whereas seed multiplication is in the hands of the National and State Seed Corporations. This is due to the reason that India being a poor country where agriculture is the livelihood of the majority of the population, the government must bear the responsibility of ensuring the supply of adequate quantities of seeds at reasonable prices to the farmers. The aim is not to maximise profit as would be the case in the private sector, but to sustain the livelihood of the majority of the population on the one hand, and to achieve selfsufficiency in food grains on the other hand. Patenting of plant varieties will transfer all the gains to the multinational companies. Almost all new varieties will belong to MNCs simply by virtue of their massive financial resources.

4. Under TRIPs patenting has been extended not only to plant varieties but to the large area of micro organisms as well. Micro organisms refer to very small forms of life. In this category are included such living creatures as bacteria, virus, fungus, algae (the green scum that grows near water), small plants and animas, and even genes. As argued by Suman Sahai, there are vital economic sectors that are linked to micro organisms, the most important being agriculture, pharmaceuticals and industrial biotechnology.

In the field of agriculture, efforts are on world wide to develop bio-substitutes (which are based to a large extent on micro organisms) for chemical fertilizers and pesticides as the latter are not ecological:’, sustainable and will poison our land and water.

In the field of pharmaceuticals, several kinds of drugs are derived from micro organisms.

The patenting of life forms will strike at the very roots of indigenous manufacturing of such drugs.

As far as industrial biotechnology is concerned, it is estimated that in the coming two to three decades, 60 to 70 per cent of the global economy would rest on biotechnology because this is perhaps the most versatile of all the technologies that we have seen so far. Patents in all the three fields (agriculture, pharmaceuticals and industrial biotechnology) linked to micro organisms are either already with the multinational companies or are likely to be acquired at a much faster rate vis-a-vis the developing countries. Thus multinational companies belonging to the developed countries are likely to dominate the “global” economy that will emerge in the coming years.

UNIT QUESTIONS 1.

Explain India’s commitments of W.T.O.

2.

Describe the benefits and disadvantages to India.

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