Test: Class 11 Economy NCERT Based - 3 - UPSC MCQ

• In order to protect domestic industries, India was following a regime of quantitative restrictions on imports. This was encouraged through tight control over imports and by keeping the tariffs very high.

• These policies reduced efficiency and competitiveness which led to slow growth of the manufacturing sector. The trade policy reforms aimed at

  (i) dismantling of quantitative restrictions on imports and exports

  (ii) reduction of tariff rates and

  (iii) removal of licensing procedures for imports. Import licensing was abolished except in case of hazardous and environmentally sensitive industries.

• Quantitative restrictions on imports of manufactured consumer goods and agricultural products were also fully removed from April 2001.

• The Central Public Sector Enterprises are designated with different status. A few examples of public enterprises with their status are as follows:

  (i) Maharatnas – (a) Indian Oil Corporation Limited, and (b) Steel Authority of India Limited,

  (ii) Navratnas – (a) Hindustan Aeronautics Limited, (b) Mahanagar Telephone Nigam Limited; and

  (iii) Miniratnas – (a) Bharat Sanchar Nigam Limited; (b) Airport Authority of India and (c) Indian Railway Catering and Tourism Corporation Limited.

• Many of these profitable PSEs were originally formed during the 1950s and 1960s when self-reliance was an important element of public policy.

• They were set up with the intention of providing infrastructure and direct employment to the public so that quality end-product reaches the masses at a nominal cost and the companies themselves were made accountable to all stakeholders.

• The granting of status resulted in better performance of these companies. Scholars allege that instead of facilitating public enterprises in their expansion and enabling them to become global players, the government partly privatised them through disinvestment.

• Outsourcing: This is one of the important outcomes of the globalisation process. In outsourcing, a company hires regular service from external sources, mostly from other countries, which was previously provided internally or from within the country (like legal advice, computer service, advertisement, security — each provided by respective departments of the company).

• As a form of economic activity, outsourcing has intensified, in recent times, because of the growth of fast modes of communication, particularly the growth of Information Technology (IT).

• Many of the services such as voice-based business processes (popularly known as BPO or call centres), record keeping, accountancy, banking services, music recording, film editing, book transcription, clinical advice or even teaching are being outsourced by companies in developed countries to India.

• World Trade Organisation (WTO): The WTO was founded in 1995 as the successor organisation to the General Agreement on Trade and Tariff (GATT).

• WTO is expected to establish a rule-based trading regime in which nations cannot place arbitrary restrictions on trade.

• In addition, its purpose is also to enlarge production and trade of services, to ensure optimum utilisation of world resources and to protect the environment. The WTO agreements cover trade in goods as well as services to facilitate international trade (bilateral and multilateral) through removal of tariff as well as non-tariff barriers and providing greater market access to all member countries.

• As an important member of WTO, India has been in the forefront of framing fair global rules, regulations and safeguards and advocating the interests of the developing world. India has kept its commitments towards liberalisation of trade, made in the WTO, by removing quantitative restrictions on imports and reducing tariff rates.

• Reforms in Agriculture: Reforms have not been able to benefit agriculture, where the growth rate has been decelerating.

• Public investment in the agriculture sector especially in infrastructure, which includes irrigation, power, roads, market linkages and research and extension (which played a crucial role in the Green Revolution), has fallen in the reform period.

• Further, the removal of fertiliser subsidy has led to increase in the cost of production, which has severely affected the small and marginal farmers.

• Moreover, because of export- oriented policy strategies in agriculture, there has been a shift from production for the domestic market towards production for the export market focusing on cash crops in lieu of production of food grains. This puts pressure on prices of food grains.

• We know that the total money value of all such goods and services produced in a country in a year is called its gross domestic product for that year.

• When we also consider what we pay for our imports and get from our exports we find that there is a net earning for the country which may be positive (if we have exported more in value terms than imported) or negative (if imports exceed exports in value terms) or zero (if exports and imports were of the same value).

• When we add this earning (plus or minus) from foreign transactions, what we get is called the country’s gross national product for that year.

• Worker-population ratio is an indicator which is used for analysing the employment situation in the country. This ratio is useful in knowing the proportion of population that is actively contributing to the production of goods and services of a country.

• If the ratio is higher, it means that the engagement of people is greater; if the ratio for a country is medium, or low, it means that a very high proportion of its population is not involved directly in economic activities.

• Let us take three workers from the construction industry — a cement shop owner, a construction worker and a civil engineer of a construction company.

• Since the status of each one of them is different from another, they are also called differently. Workers who own and operate an enterprise to earn their livelihood are known as self-employed.

• Thus the cement shop owner is self-employed. About 52 per cent of the workforce in India belongs to this category. The construction workers are known as casual wage labourers; they account for 30 per cent of India’s workforce.

• Such labourers are casually engaged in others’ farms and, in return, get a remuneration for the work done. Workers like the civil engineer working in the construction company account for 18 percent of India’s workforce.

When a worker is engaged by someone or an enterprise and pays his or her wages on a regular basis, they are known as regular salaried employees.

• There are commercial and non-commercial sources of energy. Commercial sources are coal, petroleum and electricity as they are bought and sold. Noncommercial sources of energy are firewood, agricultural waste and dried dung.

• These are non- commercial as they are found in nature/forests. While commercial sources of energy are generally exhaustible (with the exception of hydropower), non- commercial sources are generally renewable.

• More than 60 per cent of Indian households depend on traditional sources of energy for meeting their regular cooking and heating needs. Note: This Data might have changed due to the introduction of Pradhan Mantri Ujjwala Yojana.

• Non-conventional Sources of Energy: Both commercial and non-commercial sources of energy are known as conventional sources of energy. There are three other sources of energy which are commonly termed as non-conventional sources - solar energy, wind energy and tidal power.

• Being a tropical country, India has almost unlimited potential for producing all three types of energy if some appropriate cost effective technologies that are already available are used. Even cheaper technologies can be developed.

• Power/Electricity: The most visible form of energy, which is often identified with progress in modern civilisation, is power, commonly called electricity. It is a critical component of infrastructure that determines the economic development of a country.

• The growth rate of demand for power is generally higher than the GDP growth rate. Studies point out that in order to have 8 per cent GDP growth per annum, power supply needs to grow around 12 per cent annually.

• Some Challenges in the Power Sector: Electricity generated by various power stations is not consumed entirely by ultimate consumers; a part is consumed by power station auxiliaries. Also, while transmitting power, a portion is lost in transmission.

• What we get in our houses, offices and factories is the net availability. Some of the challenges that India’s power sector faces today are —

  (i) India’s installed capacity to generate electricity is not sufficient to feed an annual economic growth of 7–8 per cent. In order to meet the growing demand for electricity, India’s energy supply needs to grow at about 7 per cent. Even the installed capacity is under-utilized because plants are not run properly

  (ii) State Electricity Boards (SEBs), which distribute electricity, incur losses which exceed Rs 500 billion.

• According to the Bureau of Energy Efficiency (BEE), CFLs consume 80 percent less power as compared to ordinary bulbs. As put by a CFL manufacturer, Indo-Asian, replacement of one million 100-watt bulbs with 20 watt CFLs can save 80 megawatt in power generation. This amounts to saving Rs 400 crore.

• These days LED (Light Emitting Diode) lamps are promoted throughout the country to save energy. The LED bulb uses one-tenth energy as an incandescent bulb and half as much as a CFL to produce the same amount of light.

• According to the Energy Efficiency Services Ltd, the UJALA scheme that aims to replace incandescent bulbs with LEDs could save 5,905 MW in power generation. This translates to an annual savings of Rs. 4,000 for an average family due to efficiency gains and lower replacement costs.

• A farmer producing cotton sells it to a spinning mill where the raw cotton undergoes transformation to yarn; the yarn is, in turn, sold to a textile mill where, through the productive process, it is transformed into cloth; the cloth is, in turn, transformed through another productive process into an article of clothing which is then ready to be sold finally to the consumers for final use.

• Such an item that is meant for final use and will not pass through any more stages of production or transformations is called a final good. Because once it has been sold it passes out of the active economic flow. It will not undergo any further transformation at the hands of any producer.

• It may, however, undergo transformation by the action of the ultimate purchaser. In fact many such final goods are transformed during their consumption. Thus the tea leaves purchased by the consumer are not consumed in that form – they are used to make drinkable tea, which is consumed. Similarly most of the items that enter our kitchen are transformed through the process of cooking.

• Of the final goods, we can distinguish between consumption goods and capital goods. Goods like food and clothing, and services like recreation that are consumed when purchased by their ultimate consumers are called consumption goods or consumer goods.

• Then there are other goods that are of durable character which are used in the production process. These are tools, implements and machines. While they make production of other commodities feasible, they themselves don’t get transformed in the production process.

• They are also final goods yet they are not final goods to be ultimately consumed. Unlike the final goods that we have considered above, they are the crucial backbone of any production process, in aiding and enabling the production to take place.

• These goods form a part of capital, one of the crucial factors of production in which a productive enterprise has invested, and they continue to enable the production process to go on for continuous cycles of production.

• Intermediate goods are crucial inputs to any production process and a significant part of our manpower and capital stock are engaged in production of these goods. However, since we are dealing with the value of output, we should realise that the value of the final goods already includes the value of the intermediate goods that have entered into their production as inputs.

• Counting them separately will lead to the error of double counting. Whereas considering intermediate goods may give a fuller description of total economic activity, counting them will highly exaggerate the final value of our economic activity

• Sometimes, when the context is familiar, we assume that the time period is known and therefore do not mention it. But inherent in all such statements is a definite period of time. Otherwise such statements are meaningless. Thus income, or output, or profits are concepts that make sense only when a time period is specified. These are called flows because they occur in a period of time. Therefore we need to delineate a time period to get a quantitative measure of these.

• Since a lot of accounting is done annually in an economy, many of these are expressed annually like annual profits or production. Flows are defined over a period of time. In contrast, capital goods or consumer durables once produced do not wear out or get consumed in a delineated time period.

• Stocks are defined at a particular point of time. However we can measure a change in stock over a specific period of time like how many machines were added this year.

• Part of our final output that comprises capital goods constitutes gross investment of an economy. These may be machines, tools and implements; buildings, office spaces, storehouses or infrastructure like roads, bridges, airports or jetties.

• But all the capital goods produced in a year do not constitute an addition to the capital stock already existing. A significant part of current output of capital goods goes in maintaining or replacing part of the existing stock of capital goods. This is because the already existing capital stock suffers wear and tear and needs maintenance and replacement.

• A part of the capital goods produced this year goes for replacement of existing capital goods and is not an addition to the stock of capital goods already existing and its value needs to be subtracted from gross investment for arriving at the measure for net investment.

• Depreciation is an annual allowance for wear and tear of a capital good. In other words it is the cost of the good divided by the number of years of its useful life.

• Notice here that depreciation is an accounting concept. No real expenditure may have actually been incurred each year yet depreciation is annually accounted for. In an economy with thousands of enterprises with widely varying periods of life of their equipment, in any particular year, some enterprises are actually making the bulk replacement spending.

• Thus, we can realistically assume that there will be a steady flow of actual replacement spending which will more or less match the amount of annual depreciation being accounted for in that economy.

• The consumer goods sustain the consumption of the entire population of the economy. Purchase of consumer goods depends on the capacity of the people to spend on these goods which, in turn, depends on their income. The other part of the final goods, the capital goods, are purchased by business enterprises.

• They are used either for maintenance of the capital stock because there is wear and tear of it, or they are used for addition to their capital stock. In a specific time period, say in a year, the total production of final goods can thus be either in the form of consumption or investment. This implies that there is a trade-off. If an economy produces more consumer goods, it is producing less capital goods and vice-versa.

• We have already discussed above that one’s ability to buy commodities come from the income one earns as labourer (earning wages), or as entrepreneur (earning profits), or as landlord (earning rents), or as owner of capital (earning interests).

• In short, the incomes that people earn as owners of factors of production are used by them to meet their demand for goods and services. So we can see a circular flow here which is facilitated through the market.

• Simply put, the firms’ demand for factors of production to run the production process creates payments to the public. In turn, the public’s demand for goods and services creates payments to the firms and enables the sale of the products they produce.

• When the income is being spent on the goods and services produced by the firms, it takes the form of aggregate expenditure received by the firms.

• Since the value of expenditure must be equal to the value of goods and services, we can equivalently measure the aggregate income by “calculating the aggregate value of goods and services produced by the firms”.

• When the aggregate revenue received by the firms is paid out to the factors of production it takes the form of aggregate income.

• In the product method we calculate the aggregate annual value of goods and services produced (if a year is the unit of time). The following example will help us to understand. Let us suppose that there are only two kinds of producers in the economy.

• They are the wheat producers (or the farmers) and the bread makers (the bakers). The wheat producers grow wheat and they do not need any input other than human labour. They sell a part of the wheat to the bakers. The bakers do not need any other raw materials besides wheat to produce bread.