UPSC Mains Answer PYQ 2022: Economics Optional Paper 2 (Part- 1) | Economics Optional Notes for UPSC PDF Download

Q1(a): Outline the factors that caused decline of handicrafts during British rule in India. 
Ans: India was well known for her other artistic handicraft industries. In the 19th century, India witnessed the destruction of traditional handicrafts industries.

Factors leading to decline of handicrafts

1. Industrial Revolution in England made goods cheaper. It created tough competition for Indian handicrafts industries.
2. British rule led to loss of royal patronage to Indian handicraft industries.
3. British free trade policies opened Indian industries to unregulated competition.
4. Morris D Morris also suggested some structural factors like
   • India didn’t have the market for mass goods. Per capital income was low and purchasing power was in the hands of only a few people
   • Indians avoided technology change. Exchange of knowledge was also very little.
   • They accorded low social status to manufacturers.
5. British one way free trade starved Indian handicraft industries for raw material

Thus, it can be seen that British policies led to decline of Indian handicraft industries.

Q1(b): Discuss the features of targeted Public Distribution System in India and point out the obstacles in its implementation.
Ans: The Indian government introduced the Targeted Public Distribution System (TPDS) with a specific focus on the disadvantaged section.
Features of TPDS

1. TPDS is administered under the Public Distribution System (Control) Order notified under the Essential Commodities Act, 1955 (ECA).
2. State governments are responsible for identifying BPL households on the basis of inclusion and exclusion criteria developed by MRD (Ministry of rural development).
3. Food grains to BPL were sold at half the economic cost, while for APL it was available at economic cost.
4. fixed  entitlement  of food  grains  per  month  consisting  of  rice  and  wheat/atta  for  BPL
5. Meet the prescribed minimum buffer stock norms for food security

Obstacles in its implementation

1. FCI is dependent on procurement machineries of states like Haryana, Punjab, MP, Chhattisgarh. The states charge high fee and taxes on procurement by center
2. High food subsidy bill: It is estimated to be around Rs. 1.25 lakh crore or 1.5% of GDP.
3. Inclusion-Exclusion errors : According to CAG report only 51% of the eligible beneficiaries are identified.
4. Most of the transport was through Railways. Overburdened Railway network leads to dealy
5. Inadequate storage facilities with FCI for central stock pool. In 2012, stock was around 80mT and whereas storage capacity is around 40mT.

TPDS was later replaced by NFSA. Recently, NITI Aayog have further suggested some changes in it to reduce leakages.

Q1(c): Point out the contribution of C. N. Vakil to Indian Economic Planning.     
Ans: Vakil along with the Brahmanand gave alternate plan of development for Mahalnobis plan. It is also called as wage goods strategy.

Features of Vakil plan 

1. Development of the Indian economy, with large-scale disguised unemployment, the bottleneck good is wage goods and not capital goods as envisaged by Mahalnobis.
2. They explained the unemployment in underdeveloped countries as a result of wage goods gap. Wage goods are the typical consumer goods necessary for subsistence and work.
3. Only those capital goods should be encouraged which help in wage goods. It makes plan non inflationary. Mahalonobis plan was inflationary since capital goods investments have long gestation period. So while demand increases but supply doesn’t.
4. It focuses on reducing unemployment which was not focus of Mahalnobis Plan.

From above discussion it can be seen that Vakil gave relevant importance to small industries and private ventures which were ignored by Mahalnobis plan.

Q1(d): Describe the direct and indirect effects on women empowerment through 73rd and 74th Constitutional amendments.  
Ans: 73rd and 74th amendment gave consitutional status to local governments. It had various provisions regarding woman empowerement.

Direct Effect on Women Empowerment

1. The Act provides for the reservation of not less than one-third of the total number of seats for women (including the number of seats reserved for the SCs and STs)
2. Further not less than one-third of the total number of offices of chairpersons in the Panchayats at each level shall be reserved for women
3. It has helped in rise of women Sarapanch like Chhavi Rajawat

Indirect Effect on Women Empowerement 

1. Increased participation in decentralized planning through grampanchayat
2. Women are actively participating in rural development as per their capacity right from labourers to policy-makers.
3. Panachayt led SHG have helped in employment generation for women.
4. Panchyats through PHC and schools are working on women health and education.

Despite of this, sarpanch pati syndrome in harming real empowerement of women. We have to tackle it to increase share of woman in decentralized planning

Q1(e): Examine the impact of land tenure system during British India on Indian agriculture.
Ans: British land revenue system had long-lasting socio-economic impact on India.

Impact of land tenure system during British India

1. landlord now had property rights over the lands in his jurisdiction. It led to the exploitation of tenants.
2. Taxes were collected in money form. It increased money lending activities and exploitation of tenants.
3. Money lenders used land mortgages as measures of coercion to exercise substantial control over agricultural produce, charge usurious rents, and exercise market control.
4. Many level of intermediaries were created, which further increased the rents to be paid
5. It increased absentee landlordism and decline in investment in agriculture.
6. It led to forced commercialisation of Indian agriculture.
7. Given high rents, many farmers moved from growing food crops to cash crops like cotton and sugarcane, leading to famines.
8. Declining Productivity – Per capita food grain production declined by 1.14% p.a. between 1911 – 1941 while non food grain production increased by 0.57% p.a. In the same period Total Per capita production declined by 0.72% p.a. (Blyn).

Thus it is evident that land system during the British period was responsible for sustained poverty in India and stagnant growth of Indian agriculture.

Q2(a): Highlight the major features of National Income trend and its sectoral composition during the last five decades.
Ans: 
1951 – 1965
After independence India adapted strategy of planned economy. During this period focus was on setting up capital industries. PSU were given role of commanding heights. In this period agricultural share goes down and capital industries share increased in GDP. In this period GDP growth rate was at around 4%.

1965-1980
This phase in known for inward orientation and industrial stagnation. During this period India realized importance of agriculture. Policy of green revolution was launched during this period. It made India self sufficient.
However policies like MRTP, FERA, reservation for small scale industries, etc created inefficiencies. It stagnated industrial growth. This led to stagnation in GDP growth rate at 3.5%.
Graph of National Income Trend

Graph of Sectoral Composition of National Income

1980-1990
During this period growth started exceeding 5% mark. According to Subramaniam pro business attitude change and reforms like MRTP relaxation, decrease in tax law helped economy to grow. Panagaria called it most significant structural change. During this phase service sector started dominating national income.

1990-2015
During this period  there was rapid growth in service sector. However agriculture was growing at just 3%. It led to fall in share of agriculture and increase in share of manufacturing. Overall growth rate crossed 7% mark after 2005.

Q2(b): Describe in brief the factors that led to the establishment of Reserve Bank of India (RBI) in the country.
Ans: The Reserve Bank of India was set up on the basis of the recommendations of the Hilton Young Commission.
Between 1900-1935 Indian monetary system was destabilized. RBI was founded to respond these economic troubles.
Partial failure of monsoons in 1907 led to a decline in Indian exports. This caused the Indian exchange to become very weak.  In stabilizing Indian rupee practically the entire stock of gold was exhausted. It was pointed out that the sale of Council Bills by the Secretary of State in excess of his needs on account of Home charges prevented the export of gold from England that was really needed in India. This destabilized Indian moentary system.
1917-27 government Announced 2S. gold ratio. Speculators remitted their money to England in the hope of bringing it back after the exchange fell sufficiently. Govt. tried to maintain 2S. gold. The attempt having failed, from October 1920, the Govt. did not leave the exchange to look after itself but directed its efforts to prevent a fall below 1S. 4d.
Also, there was a need felt to have a body to regulate the growing banking sector in India. Apart from this world wars put pressure on public finances. RBI had a mandate for managing public debts.
The Bank began its operations by taking over from the Government the functions so far being performed by the Controller of Currency and from the Imperial Bank of India, the management of Government accounts and public debt. This helped in better management of the Indian monetary system.

Q2(c): Discuss, how the green revolution has affected the indigenous crops in India ? What measures have been initiated by the Government in the later years to improve the productivity ?
Ans: The Green Revolution was a period that began in the 1960s during which agriculture in India was converted into a modern industrial system by the adoption of technology, such as the use of high yielding variety (HYV) seeds, mechanised farm tools, irrigation facilities, pesticides and fertilizers.

Green Revolution and Indian Crops
Post-Green Revolution, the production of wheat and rice doubled due to initiatives of the government, but the production of other food crops such as indigenous rice varieties and millets declined. This led to the loss of distinct indigenous crops from cultivation and also caused extinction.
The major problem with indigenous seeds was not the fact that they were not high yielding, but their inherent inability to withstand the chemical fertilizers used.  According to Usha Antony et. al. India has lost more than 1 lakh varieties of indigenous rice after the 1970s that took several thousand years to evolve.

Measures Initiated by Government to Improve Productivity

1. In order to ensure availability of native seeds and improve their usage by farmers., Indian Council of Agricultural Research is developing high yielding and multi stress tolerant varieties of different crop including cereals, millet, pulses, oilseeds and fruits
2. The government approved a dedicated Rs5,000 crore fund to bring more land area under micro-irrigation as part of its objective to boost agriculture production and farmers income.
3. The Soil Health Cards provide information to farmers on nutrient status of their soil along with recommendation on appropriate dosage of nutrients to be applied for improving soil health and its fertility.
4. Rainfed Area Development Programme (RADP) was initiated to Increase agricultural productivity of rainfed areas in a sustainable manner by adopting appropriate farming system based approaches
5. National Mission on Sustainable Agriculture (NMSA) has been formulated to make agriculture more productive, sustainable, remunerative and climate resilient by promoting location specific integrated/Composite Farming System
6. Nim coated Urea was invented to reduce fertilizer misuse.

In this way, Indian government is trying to improve agriculture productivity. India have set target to double farmer’s income.

Q3(a): Do you think that Multi Dimensional Poverty Index (MPI) is a better measure of poverty ? Give reasons in support of your answer. What is the position of India in respect of MPI ?
Ans: Poverty is a complex economic concept. Traditionally it is measured in terms of income. Poverty is about not having enough money to meet basic needs including food, clothing and shelter.
The income dimension of poverty only dealt with a person’s income. It does not cover the following dimensions.

1. Relative deprivation
2. Standard of living
3. Access to health, education and social goods

MPI
Multi dimensional poverty measures acute poverty in the country.

Indicators of MDP

Identifying Poor
The population is assess for deprivation in following indicators. The deprivation of each person is weighted by the indicator’s weight.
Ci = L1*W1 + L2*W2 + … + Ln*Wn
Where W1 is weight of the indicator and Li = 1 if the person is deprived in that indicator.
If Ci > 33% then the person is considered as multidimensionally poor.

Why MPI is better than income dimension of poverty measurement?
The income dimension is not a complete measurement of poverty. When an indicator is wrongly measured it will lead to incorrect policy application. MPI will comprehensively cover various non-income dimensions. It will help India to frame better policies to alleviate poverty

India’s Position
Niti Aayog has started using multi dimensional poverty index to calculate poverty. India witnessed 13.5 crore people moving out of multidimensional poverty between 2015-16 and 2019-21 with fastest reduction in Uttar Pradesh, Bihar, Madhya Pradesh, Odisha and Rajasthan.
India has registered a significant decline of 9.89 percentage points in number of India’s multidimensionally poor from 24.85% in 2015-16 to 14.96% in 2019-21. Rural areas witnessed the fastest decline in poverty from 32.59% to 19.28%, while the urban areas saw a reduction in poverty from 8.65% to 5.27%.

Q3(b): Discuss the development of Jute industry during pre-independent India. What were the main problems faced by this industry ?
Ans: The jute industry was one of the important industries during the pre-independence era. It was dominated in the eastern part of India

Phase 1 : Till 1860
Before British rule India was self sufficient in jute products. After advent of British till 1860 India saw decline in jute textile industry. Beginning from a factory being established in 1835, Dundee soon monopolized the world market for jute sacks.

Problems faced

• Jute textile industry lost royal patronage.
• India had jute handlooms in Bengal , but due to colonialization of economy, they were killed and raw jute was exported instead

Phase 2 : 1860 to World war 1
In 19th late century jute industry started growing. Due to rising cost of labor, British lost their comparative advantage and mills came up in Bengal. Between 1880 and 1900 there was a considerable expansion, the number of looms rising from about 5,000 in 1881 to about 15,000 by 1900 & number of mills increased from 20 in 1885 to 60 in 1910. After the 1870s, Indian jute industry held the virtual monopoly in the world.

Problems faced

• In 1893 currency reforms were introduced. It ended benefits that Indian cotton industry was getting due to devaluation.
• Gradually, jute mills found a ready market for their products, but the difficulties of financing and obtaining the required equipment prevented a rapid growth of India’s jute manufacturing industry
• Unlike the Bombay cotton mills, the Calcutta jute mills had practically no Indian owners or even managers

Phase 4 : World war 1 till independence 
This period was crisis period for jute industries. In this period Indian jute industry grow at slow rate.

Problems faced

• During the war and interwar periods, world trade declined, and so did the demand for jute. To counter this, the Indian industry unsuccessfully tried forming a cartel, but this only promoted entry of new firms, which were easily willing to undercut the existing firms. The result was excess production, unstable profits, and increased competition.
• Delayed technological improvement due to wars.
• Competition from synthetic fibers.

Over the time Jute industry lost its importance. Gradually textile industry was dominated by the cotton industry.

Q3(c): 'The small and cottage industries promote indigenous entrepreneurship’. Comment on the statement with respect to India.
Ans: Small-scale industries are projects or firms started with low budget for a small group of people.
Economic survey 2020 showed that medium industries has more job potential than the small industries. It has also suggested that policies to promote small and cottage industries have affected the growth of industries in India (Due to nonincentives to grow). There are also arguments that small and cottage industries do not encourage innovation and thus large-scale entrepreneurship.
However, in India, exceptions are evident to this argument. As per the National Sample Survey (NSS) 73rd round, there (2015-16) are a total of 633.88 lakh unincorporated non-agriculture MSMEs in the country engaged in different economic activities. These all are indigenous entrepreneurship units.
India has also witnessed a growth of brands like Lizzat Papad, Amul, etc. which were earlier small industries. It shows that small and cottage industries also have growth potential. These cottage industries are also showing entrepreneurship spirit in backward and tribal areas. Various tribal arts and artifacts are sold through these small and cottage industries. They are also using e-market for the same.
Indian government has been focusing on farmer-producer organizations. Most of them are of small category. These are very important ondigenous entrepreneurship units in agriculture sector. They are also focusing on the export of agri produce.
Thus. it can be seen that the common notion about small and cottage industries is not correct. The small and cottage industries are an integral part of promoting indigenous entrepreneurship. Apart from that they are also producing income and employment in the economy.

Q4(a): Do you subscribe to the view that private sector is a key driver to economic development of India ? Give reasons in support of your answer.
Ans: GDP can be analysed by considering the breakup of aggregate demand into its four major components, namely, private final consumption expenditure (PFCE), Gross Fixed Capital Formation (GFCF), government final consumption expenditure (GFCE), and net exports.
Private final consumption expenditure is a major component of national income. It contributes around 60%. Thus it can be seen that private sector is playing dominating role in the growth.
According to economic survey 2019, Investment, especially private investment, is the “key driver” that drives demand, creates capacity, increases labour productivity, introduces new technology, allows creative destruction and generates job.
The service sector is largely dominated by the private sector. Service sector is the engine of Indian agricultural growth. Since last two decades it has shown growth of 8-10%. Also in agriculture private sector dominates. Private sector contributes around 70% of gross capital formation in agriculture.
Even in manufacturing and industries government monopoly has reduced. Private enterprises are dominating industrial growth.
However, in the crisis period, it has been seen that the government is playing a key role to boost economic growth. During COVID time government spending was helping to boost the economic growth rate.
Thus, it can be concluded that private sector is largely a key driver to economic development of India. However, government also plays significant role whenever private sector fails.

Q4(b): The economic growth has caused deterioration in income distribution in India during liberalisation period. Comment.
Ans: During 1950 to 1970 Indian economy was showing growth. At the same time the share of the top 1% of the population‘s income decreased from 10% to 4%. After 1991 reforms growth in India increased significantly. Hhowever at the same time inequalities increased significantly. Currently, the share of top 1% of the population‘s income has increased to 13%.
Similar analysis is shown by Himanshu. According to Himanshu, Gini coefficient was 0.4 in 1991 which increased to 05 by 2011. This shows that there was a deterioration of income distribution in India.
The service sector was rapidly growing after 1991. Wages in the service sector were much higher than in the agriculture and industries. However, the service sector has employment inelasticities. This led to jobless growth and inequal distribution of income.
According to Oxfam’s report, most of the benefits of growth went to the richer class. The richer class was getting benefitted by investing more and more in lucrative sectors.
Economics Survey 2020 suggests that crony capitalism is the main cause of inequalities. CAG report also suggested that crony capitalism was seen in the privatization of PSU. This benefitted few at the cost of society.
Also, after the 1991 reforms urbanization increased rapidly. It increased economic opportunities in urban areas. There was also a backwash effect of this on rural areas. This led to a deterioration of income distribution among rural and urban areas.
There was already inequality. 1991 reforms had little focus on the distribution of growth.  Thus, income distribution in India further deteriorated with the reforms.

Q4(c): Discuss the rationale for continuance of power and irrigation subsidy in the agriculture sector in India.
Ans: Power and irrigation subsidies are one of the major subsidies in the Indian agriculture sector. Power subsidy is granted on power that is used to draw on groundwater while Irrigation subsidy is the subsidy provided on the usage of government provided canal water. Power subsides are around 15% of total subsidies.

Rationale for continuance of power and irrigation subsidy
Water is one of the critical inputs in agriculture. According to WTO data more than 60% of irrigated agriculture land in India is dependent on groundwater. Ground water extraction is power incentive.
As per the NSO Situational Assessment survey around 89% of farmers are small and marginal. They do not have enough resources to fund power bills to extract ground water. Thus, the government prefers power and irrigation subsidies as an option to reduce input cost.
Indian farmers are facing an issue of indebtedness. There are issues in easy access of formal credit. Most of them are dependent on informal credit system which is costlier. Added to this agriculture income and output is very volatile. It depends on lots of factors like market rate, weather, natural calamities, etc.
These conditions have also led to farmer suicides in certain parts of India. Subsidies are used as a tool to reduce financial burden on the farmers.
In India agriculture subsidies have also become one of the major political issues. Any changes in subsidies especially MSP, power and irrigation subsidies leads to protests. Because of this reason also the government is resistant to discard power and irrigation subsidies.