23rd May 2022 |  Structure and growth of Indian economy – Sectoral trends in National Income of India | Laex Secure

Syllabus- Structure and growth of Indian economy – Sectoral trends in National Income of India.

Number of questions- 

Mains: 02, Prelims – 10 Mains Questions of the day- 

Q1. Explain the structure of Indian Economy on the eve of Independence.

Introduction:

Write briefly about the structure Indian Economy during British Rule.

Body:

Mention the structure of Indian Economy on the eve of Independence.

Conclusion:

Impact of this was felt even after years of economic developments in the independent India. 

Content:

• The structure of India economy has its roots under British rule which ruled for almost two centuries. 
• The sole purpose of the British rule was to reduce the country to being a raw material supplier for Britain’s rapidly expanding modern industrial base. 
• The impact of British rule was on all the aspects of the Indian economy. 
• The agricultural sector was with surplus labour and extremely low productivity. 
• The industrial sector was lack for modernisation, diversification, capacity building and increased public investment.
• Foreign trade was to feed the Industrial Revolution in Britain. 
• Infrastructure facilities, including railway network, needed upgradation, expansion and public orientation. 
• Prevalence of poverty and unemployment required welfare orientation of public economic policy. 
• Overall, the social and economic challenges before the country were enormous.

LOW LEVEL OF ECONOMIC DEVELOPMENT UNDER THE COLONIAL RULE:

• India had an independent economy before the advent of the British rule. 
• Though agriculture was the main source of livelihood, yet the country’s economy was characterised by various kinds of manufacturing activities. 
• India was well known for its handicraft industries in the fields of cotton and silk textiles, metal and precious stone works etc. 
• These products enjoyed a worldwide market for their fine quality of material used and the high standards of craftsmanship.
• The economic policies pursued by the colonial government in India were protection and promotion of the economic interests of their home country. 
• Such policies brought about a fundamental change in the structure of the Indian economy — transforming the country into supplier of raw materials and consumer of finished industrial products. 
• The country’s growth of aggregate real output during the first half of the twentieth century was less than 2%. 

AGRICULTURAL SECTOR:

• India’s economy under colonial rule was agrarian — about 85% of the country’s population lived in villages and derived livelihood from agriculture. 
• Despite being the occupation of such a large population, the agricultural

sector continued to stagnate and unusual deterioration. 

• Agricultural productivity became low. 
• This stagnation in the agricultural sector was caused mainly because of the various systems of land settlement that were introduced by the Colonial Government. 
• Under the zamindari system, the profit of the agriculture sector went to the zamindars instead of the cultivators, did nothing to improve the condition of agriculture. 
• Besides this, low levels of technology, lack of irrigation facilities and negligible use of fertilisers, all contributed to the low level of agricultural productivity. 

INDUSTRIAL SECTOR:

• India could not develop an industrial base under the colonial rule. 
• The country’s world famous handicraft industries declined. 
• The primary motive of the colonial government behind this policy of systematically de-industrialising 
• India was two-fold. 

• The intention was to reduce India to exporter of raw materials for the industries in Britain and 
• To turn India into a market for their finished products. 

• The decline of handicraft industries created unemployment. 
• During the second half of the nineteenth century, modern industry began in India but its progress remained very slow. 
• Initially, this development was to setting up of cotton and jute textile mills. 
• Subsequently, the iron and steel industries began. 
• The Tata Iron and Steel Company (TISCO) was incorporated in 1907. 
• A few other industries in the fields of sugar, cement, paper etc. came up after the Second World War. 
• However, there was no capital goods industry to help promote further industrialisation in India. 
• Capital goods industry means industries which can produce machine tools which are in turn, used for producing articles for current consumption. 
• The growth rate of the new industrial sector and its contribution to the Gross Domestic Product (GDP) or Gross Value Added remained very small. 
• The limited area of operation in public sector. This sector remained confined only to the railways, power generation, communications, ports and some other departmental undertakings. 

FOREIGN TRADE: 

• The restrictive policies of commodity production, trade and tariff pursued by the colonial government adversely affected the structure, composition and volume of India’s foreign trade. 
• Consequently, India became an exporter of primary products such as raw silk, cotton, wool, sugar, indigo, jute etc. and an importer of finished consumer goods like cotton, silk and woollen clothes. 
• Britain maintained a monopoly control over India’s exports and imports. 
• The opening of the Suez Canal further intensified British control over India’s foreign trade. 
• Essential commodities—food grains, clothes, kerosene etc. — were scarcely available in the domestic market due to export surplus production to Britain. 

OCCUPATIONAL STRUCTURE: 

• The agricultural sector accounted for the largest share of workforce, which usually remained at a high of 70-75 per cent while the manufacturing and the services sectors accounted for only 10 and 15-20 per cent respectively. 
• There was growing regional variation. 
• Parts of the then Madras Presidency, Bombay and Bengal witnessed a decline in the dependence of the workforce on the agricultural sector at the same time an increase in the manufacturing and the services sectors. 
• However, there had been an increase in the share of workforce in agriculture during the same time in states such as Orissa, Rajasthan and Punjab. 

INFRASTRUCTURE: 

• Under the colonial regime, basic infrastructure such as railways, ports, water transport, posts and telegraphs did develop. 
• The roads that were built primarily served the purposes of:

• Mobilising the army within India and 
• Drawing out raw materials from the countryside to the nearest railway station or the port to send these to England. 

• There remained an acute shortage of all-weather roads to reach out to the rural areas during the rainy season. 
• The railways affected the structure of the Indian economy in two ways: 

• It enabled people to undertake long distance travel and thereby break geographical and cultural barriers 
• It commercialised the Indian agriculture which adversely affected the self-sufficiency of the village economies in India. 
• The volume of India’s exports undoubtedly expanded but its benefits rarely reached to the Indian people. 

• Along with the development of roads and railways, the colonial dispensation also took measures for developing the inland trade and sea lanes. 
• The inland waterways, at times, also proved uneconomical. 
• The introduction of the expensive system of electric telegraph in India. 
• Similarly, served the purpose of maintaining law and order. 
• The postal services serving a useful public purpose remained inadequate. 

Q2. Mention the structural changes that were brought by LPG Reforms to the Indian Economy. 

Introduction:

Write some background related to LPG reforms.

Body:

Mention the structural changes that LPG has brought to the Indian Economy.

Conclusion:

• The process of globalisation through liberalisation and privatisation policies has produced positive, as well as, negative results both for India and other countries. 

Content:

• In 1991, India met with an economic crisis relating to external debt:

• The government was not able to make repayments on its borrowings from abroad.
• Foreign exchange reserves, dropped (not even sufficient for fortnight payments).

LIBERALISATION 

• In the beginning, rules and laws which were aimed at regulating the economic activities became major hindrances in growth and development. 
• Liberalisation was introduced to put an end to these restrictions and open various sectors of the economy. 
• Though a few liberalisation measures were introduced in 1980s in areas of:

• industrial licensing 
• export-import policy 
• technology upgradation 
• fiscal policy and 
• foreign investment 

• Reform policies initiated in 1991 were more comprehensive. 
• Some areas received greater attention in reforms such as 

• Industrial sector 
• Financial sector 
• Tax reforms 
• Foreign exchange markets and 
• Trade and investment sectors

Deregulation of Industrial Sector: 

• The reform policies introduced after 1991 removed many of previous restrictions.
• Industrial licensing was abolished for almost all but product categories — alcohol, cigarettes, hazardous chemicals, industrial explosives, electronics, aerospace and drugs and pharmaceuticals. 
• The only industries which are now reserved for the public sector are atomic energy generation and railway. 
• Many goods produced by small-scale industries have now been de-reserved. 
• In most industries, the market has been allowed to determine the prices. 

Financial Sector Reforms: 

• Financial sector includes financial institutions such as:

• Commercial banks
• Investment banks 
• Stock exchange operations and 
• Foreign exchange market. 

• The financial sector is regulated by the Reserve Bank of India (RBI). 
• The main aim of financial sector reforms is to reduce the role of RBI from regulator to facilitator of financial sector. 
• This means that the financial sector may be allowed to take decisions on many matters without consulting the RBI 
• The reform policies led to the establishment of private sector banks, Indian as well as foreign. 
• Foreign investment limit in banks was raised to around 74%. 
• Those banks which fulfil certain conditions have been given freedom to set up new branches without the approval of the RBI and rationalise their existing branch networks.
• Though banks have been given permission to generate resources from India and abroad, certain managerial aspects have been retained with the RBI to safeguard the interests of the people and the nation. 
• Foreign Institutional Investors (FII) such as merchant bankers, mutual funds and pension funds are now allowed to invest in Indian financial markets. 

Tax Reforms: 

• The fiscal policy reforms of the government such as:

• Taxation and 
• Public expenditure policies. 
• There are two types of taxes: 

• Direct and 
• Indirect. 

• Since 1991, there has been a continuous reduction in the taxes on individual incomes to reduce the tax evasion. 
• The moderate rates of income tax encourage savings and voluntary disclosure of income. 
• The rate of corporation tax has been gradually reduced.
• Efforts made to reform the indirect taxes such as establishment of a common national market for goods and commodities. 
• This is expected to generate additional revenue for the government, reduce tax evasion and create ‘one nation, one tax and one market’. 

Foreign Exchange Reforms: 

• In 1991, as an immediate measure to resolve the balance of payments crisis, the rupee was devalued against foreign currencies. 
• This led to an increase in the inflow of foreign exchange. 
• Now, Markets determine exchange rates based on the demand and supply of foreign exchange. 

Trade and Investment Policy Reforms: 

• Liberalisation of trade and investment regime was initiated to:

• Increase international competitiveness and 
• Foreign investments and technology into the economy. 

• The aim was also to promote the efficiency of local industries and adoption of modern technologies. 
• The trade policy reforms aimed at:

• dismantling of quantitative restrictions on imports and exports 
• reduction of tariff rates and 
• removal of licensing procedures for imports. 

PRIVATISATION 

• Transferring of the ownership or management of a government to private companies in two ways:

• By withdrawal of the government from ownership and management of public sector companies or 
• By sale of public sector companies. 

• Privatisation of the public sector enterprises by selling off part of the equity to the public is known as disinvestment. 
• The purpose was to improve financial discipline and facilitate modernisation. 
• It could be improved the performance of the PSUs. 
• It could provide the inflow of FDI. 
• The government has made attempts to improve the efficiency of PSUs by giving them autonomy in taking managerial decisions. 

GLOBALISATION 

• Globalisation mean integration of the economy of the country with the world economy. 
• Outsourcing is one of the important outcomes of the Globalisation process.
• The low wage rates and availability of skilled manpower in India have made it a destination for global outsourcing in the post-reform period. 
• The globalisation should be seen as an opportunity in terms of greater access to global markets, high technology and increased possibility of large industries of developing countries to become important players in the international arena. 
• On the contrary, the globalisation is a strategy of the developed countries to expand their markets in other countries. It has compromised the welfare and identity of people belonging to poor countries. 

Prelims Questions of the day:

1.Which of the following statements describes the Indian economy on the eve of independence?

1. India was a net exporter of capital goods
2. India was a net exporter of primary products
3. India was a net exporter of industrial products
4. India was a net exporter of agricultural goods

Answer: B

Explanation:

The sole purpose of the British rule was to reduce the country to being a raw material supplier for Britain’s rapidly expanding modern industrial base. 

2.Which of the following is the present the institution for planning in India?

1. NITI Aayog
2. President of India
3. National Development Council
4. Ministry of Finance

Answer: A

Explanation:

NITI Aayog is the premier policy think tank of the Government of India, providing directional and policy inputs. Apart from designing strategic and long-term policies and programmes for the Government of India, NITI Aayog also provides relevant technical advice to the Centre, States, and Union Territories.

3. Which of the following was the main objective of the first five-year plan of India?

1. Development of infrastructure
2. Development of ports
3. Development of the industries
4. Development of agriculture

Answer: D

Explanation:

• The first year plan was Harrod – Domar model of development economics. 
• FYP had a target of 2.1% PA growth in national income. 
• Top priority was given to the development of agricultural sector. 
• The idea was agricultural development would lead to higher rate of economic growth. 
• The performance of the plan was good due to a good harvest and the National income

4.Who is the chairman of NITI Aayog?

1. Prime Minister
2. Home Minister
3. President of India
4. Finance Minister

Answer: A

Explanation:

NITI Aayog: –

• Prime Minister of India is the Chairperson of the NITI Aayog.
• To foster cooperative federalism through structured support initiatives and mechanisms with the States on a continuous basis, recognizing that strong States make a strong nation.
• To develop mechanisms to formulate credible plans at the village level and aggregate these progressively at higher levels of government.
• To ensure, on areas that are specifically referred to it, that the interests of national security are incorporated in economic strategy and policy.

5. Which of the following was the main aim of the Eleventh Five Year Plan?

1. Eradication of regional imbalances
2. Food, Work and Productivity
3. Inclusive Growth in all sectors
4. Eradication of Poverty

Answer: C

Explanation:

• Eleventh Five Year Plan: Inclusive Growth. 
• The Eleventh Five Year Plan provides a comprehensive strategy for inclusive development. 
• Its ultimate objective is to achieve broad based improvement in the living standards of people making growth both faster and more inclusive.
• This will require faster and more equitable social and economic development of the state.

6.Which of the following industries were reserved exclusively for the public sector after the Economic Reforms of 1991?

1. Railways
2. Metro transport
3. Communication
4. None of the above

Answer: A

Explanation:

De-Reservation:

• There are many industrial sectors that were reserved for only the government agency. 
• Private sector was not allowed to invest or start a business in those sectors. 
• In 1991 most of the sectors were open for the private sector except for certain critical areas like atomic energy, space, railways, rare minerals, etc. 
• Nowadays, on the services side of railways, private sector is being partnered with.

7.What was the central theme of Economic Survey 2022?

A. Agile approach
B. COVID-19 warriors
C. Rural Development
D. Healthcare workers

Answer: A

Explanation: 

• The central theme of Economic Survey 2022 is the Agile Approach. 
• The “Agile approach” is based on feedback loops, real-time monitoring of actual outcomes, flexible responses, safety-net buffers and so on. 
• Planning is not done in the Agile approach as a deterministic prediction of the flow of events.

8. Which of the following is the projected GDP growth for FY2023 represented by the Economic Survey 2022?

A. 8-8.5%
B. 9-9.2%
C. 7.1-7.3%
D. 3.9-4.2%

Answer: A

Explanation: 

The Economic Survey has predicted 8 to 8.5% GDP growth in FY23. For the ongoing FY22, the GDP growth has been projected at 9.2%.

9.Which of the following is the estimated growth of Services sector in the FY 2022?

A. 9.1%
B. 9.2%
C. 3.9%
D. 8.2%

Answer: D

Explanation: 

The Services sector is estimated to grow by 8.2% in the ongoing financial year, according to the Economic Survey 2022. 

10.Who presented the first Union Budget of Independent India?

A. CD Deshmukh
B. RK Shanmukham Chetty
C. Moraji Desai
D. Jawaharlal Nehru

Answer: B

Explanation: 

RK Shanmukham Chetty presented Independent India’s first Budget on 26 November 1947.