Assignment Code: MEC-105/TMA/2022-23

Course Code: MEC-105

Assignment Name: Indian Economic Policy

Year: 2022-2023

Verification Status: Verified by Professor

Answer all the questions.

Section A

Answer the following questions in about 700 words each. (20x2)

Q1) “The sequence of growth process in India is different from what other countries faced during the transition from developing to a developed nation.” Examine this statement and give an account for the causes of rapid growth of the tertiary sector in India.

Ans) Compared to the commodity sector, the tertiary, or non-commodity, sector has been expanding far more quickly. This essentially indicates that income produced through circulation increased considerably more quickly than income produced directly, leading to a growth in the percentage of the non-commodity sector. There are several causes for this trend, however the following are the most crucial ones:

1. The development of information technology and the knowledge economy has been a key factor. This has helped the high productivity sector of the services industry flourish as well as a number of low productivity service activities that serve a sizable population.

2. Infrastructure including banking, insurance, finance, transportation, and communication, as well as social and community services like educational and medical facilities, make up a sizable portion of the service sector. The proper expansion of infrastructure to meet the needs of other economic sectors and the extension of social and community services for the benefit of the populace are essential development needs.

3. Where national governments play a substantial role in planning and production in the economy as a whole, public services expand more quickly. In actuality, the development of quick economic and social infrastructures is the focus of modern governments, as evidenced by government programmes and the patterns of national and international authority expansion during the past few decades.

4. Another significant aspect is the operation of the demonstration effect as a result of the increased mobility brought on by the expansion of international trade, tourism, and cultural and educational tours.

5. Another factor contributing to the expansion of the service sector in the economy may be rising urbanisation. In actuality, a rise in the need for infrastructure services like communications, public utilities, and distribution services is intimately related to urbanisation. With rising urbanisation, the economy's private consumption pattern has undergone a significant transformation. Numerous new products and services are added to the consumer basket.

6. As information is disseminated via television and the Internet, tourism is becoming more and more global, and modern technology has greatly improved the comfort of both plane travel and hotel accommodations. All kinds of services have been encouraged as a result of tourism.

7. Manufacturing industries have evolved to be more service oriented as a result of the growing complexity of modern industrial organisation. The expansion of accounting, finance, legal services, marketing, public relations, and other related operations is evidence of this. These services are increasingly being outsourced due to the current labour laws; hence industry development is actually being counted as service growth.

Slow development in the sector that produces commodities can also be linked to an increase in the GDP proportion of non-commodity sectors, in addition to the considerations mentioned above. While some of this can be attributed to the challenges involved in achieving a rapid rate of growth in the primary sector, a significant portion of it is unquestionably attributable to the secondary sector's and its main sectors of manufacturing and construction failing to expand at the much faster rate required to give the commodity sector a comparable status with the non-commodity sector in terms of growth rate.

Q2) How are the inequalities of income measured in an economy? Examine the policy implications of income inequalities for widespread poverty in India. Do you think that social protection can play important role in this regard?

Ans) Lack of evenness, social discrepancy, disparity in distribution, or being uneven are all definitions of inequality. It examines the relative degrees of access that various groups have to benefits and chances for development. Disparity also grows when inequality does. Physical characteristics, individual preferences, social processes, and governmental regulations all contribute to the inequality.

Inequality Measurement

The Income Measure

Range: The difference between the highest and lowest observation is known as the range. If there are four observations, 115, 78, 45, and 220, the range will be (220-45)=175 in this case. This approach is quite straightforward, simple to calculate, and first provides us a sense of inequity. However, this method's major flaw is that it only considers two additional observations. Skewed outliers have a significant impact on the outcome.

Range Ratio: Range ratio is calculated by dividing the income/expenditure of predetermined highest and lowest per centile. For example, if the income of 15 persons are 45, 48, 78, 87, 98, 120, 200, 221, 238, 250, 252, 267, 287, 322, 327 respectively and if we choose the 95th and 5th per centile than the range ratio will be 95th Per centile {(95/100×15)=14th person’s income} 322/ 5th per centile {(5/100×15)= 1st Person’s income}45=7.16

This method is easy to understand and calculate and also minimise to some extent the heavy out layer. Like range method, the range ratio also has taken into account only two observations and this does not weigh other observations.

The McLoone Index: The McLoone Index divides the summation of all observations below the median, by the median multiplied by number of observation below median. In the above example median value is 221. Hence the sum of below median value is =45+48+78+87+98+120+200=676

Hence McLoone Index=676/(221×7)=0.44

This approach provides thorough information on the bottom half and is simple to interpret. The above median observation is not taken into consideration, which is a shortcoming of this index.

Coefficient of Variation: The standard deviation of a distribution is equal to its mean divided by the coefficient of variation.

Lorenz Curve

The Lorenz Curve is a diagram that shows how a distribution's proportionality. It reflects a probability distribution of statistical variables and is frequently used in analyses of inequality as well as calculations involving income distribution. Households are used to represent the Lorenz curve's population, which is shown on the x axis from 0% to 100%. On the y axis, income is also shown and ranges from 0% to 100%.

This can be plotted by a graph. In the graph shown below OX axis represents per centage of population and OY axis represents per centage of income. If income distribution were perfectly equal then the cumulative per centage population will be exactly equal to cumulative per centage of income. The perfect equality line forms an angle of 45 degrees with a slope of 100/N. The Gini coefficient is derived from the Lorenz curve.

Section B

Answer the following questions in about 400 words each. 12x5

Q1) Critically evaluate the impact of economic reforms on the external sector.

Ans)

Positive Aspects of External Sector

It is encouraging to note that during the past 20 years, the management of the external sector has been distinguished by a thoughtful balancing act of "outward orientation," investment liberalisation, and monitoring in the area of rupee convertibility. The main outcome was that India was largely spared from the devastation caused by the significant bouts of volatility that rocked currency markets throughout the world. The following are a few more gains that can be included.

1. A notable improvement in our export performance has confirmed the idea that the "Made in India" concept is steadily but unmistakably taking hold. According to the data, manufactured exports per unit of sales in the private corporate sector increased from 13.37 percent in 1998–1999 to 24.23 percent in 2008–2009, nearly doubling.

2. Our exports' product mix is changing gradually but decisively in favour of high-value, technologically advanced products. This is demonstrated by a sharp increase in vehicle exports, which in the most recent ten years have even outpaced software exports. India's entry into "upmarket" and "niche" locations is now possible as a result of this.

3. Today, more than 5,000 businesses hold themselves to the highest levels of quality through ISO 9000 certification, up from less than 5 just seven years ago.

4. India has been chosen by the IMF to participate in its Financial Transactions Plan, which helps struggling nations. Therefore, rather than being IMF loans, we are now IMF creditors.

Negative Aspects of External Sector

According to some, the economy's weakness on the international front is becoming more obvious. One argument makes the comparison between the integration of a mouse into an elephant herd and the globalisation of the Indian economy.

1. India's external liabilities have significantly increased in the years after the reforms. The significant growth in foreign exchange reserves seen over the past ten years might not ultimately prove sufficient.

2. Due in large part to management aptitude, FDI is typically seen as an investment that produces tangible goods and is connected to some level of stability.

3. Similar to the above, investments made to increase or buy already existing foreign holdings in Indian enterprises are categorised as FDI even when they do not result in the production of new physical assets.

4. FIIs investing on their own behalf are typically long-term holders of capital who have little to no desire for managerial responsibility.

5. Up to one-third of the overall money that has accrued to the services industry in the post-globalization era has come from the wages of foreigners. Reversely, our ability to partake in global revenue has been proportionately lot less successful.

Q2) Discuss the nature of crises in Indian agriculture. Which steps would you like to suggest to meet these crises?

Ans) It has been emphasised by Srijit Mishra and D. Narasimha Reddy that agriculture must be viewed in a broader framework where producers are just as significant as producers in terms of importance. Both are in a crisis right now. The current agrarian and agricultural crises in Indian agriculture have two distinct aspects.

The former is a developmental crisis caused by the sector's neglect as a result of bad programme design and insufficient resource allocation. The latter is a crisis of livelihood that jeopardises the very existence of the great majority of people who depend on agriculture. The two aspects are connected in that the issue facing the individual farmer and the issue at play in the larger structural framework are intertwined.

Agriculture's state has a direct impact on rural poverty. Suicide is a sign of a bigger crisis; its absence in no way implies that there isn't a crisis. The agrarian crisis is symptomatic of the rising rate of farmer suicides, which is also a sign of the agricultural catastrophe. It suggests that there are hundreds of thousands more people in trouble for every farmer that commits suicide.

Technology and Institutional Alternatives

Poor returns to cultivation are one of the characteristics of the current agrarian crisis. A costly need for marginal and small farmers, technological interventions like the "green revolution" that were intended to increase production were resource-neutral in terms of output but not resource-neutral in terms of output. A number of financial products were also launched in recent years to handle uncertainties, but most frequently, instead of lowering risks, they ended up increasing them. Cost reduction is an urgent necessity. Instead of being product-centric, the technology is knowledge-centric.

Institutional frameworks are among the factors that are needed in order to successfully reproduce trials among the vast majority of marginal and small farms. Alternative technological and institutional frameworks are required to resuscitate farming as well as the farmer. It is necessary to abandon input-intensive agriculture in favour of knowledge-centric technology that is less expensive, builds on local resources, and reinforces already-existing social capital. The latter is made possible by mechanisms that give local farmers more control and unite them into federations so they can combine various things at various levels.

Q3) Critically evaluate the various steps taken by Government of India towards removal of regional disparities.

Ans) The following are the different initiatives taken to eliminate or lessen regional disparities:

Resource Transfers from the Centre to the States, Weighed in Favour of Backward States: The Planning Commission handles the majority of the resource transfers under the form of plan transfers, and the Finance Commission handles the non-plan transfers. The Planning Commission works with the appropriate government departments to decide the location of Central projects and Centrally supported programmes during the planning process.

Priority given to Programmes which spread over the entire Area within the Shortest Possible Time: The most comprehensive programmes include those related to agriculture, community development, irrigation and power, transportation and communications, and social services, with the goal of giving people in all regions access to the most fundamental infrastructure and services.

Provision of Facilities in Areas which Lag Behind Industrially: Many States' programmes include the river valley projects as a crucial element, and substantial sums of money have been allocated to projects with dual uses. The growth of the country's vast regions, some of which are underdeveloped or have shortages, unemployment, or both, is dependent on these and other initiatives.

Programmes for the Expansion of Village and Small Industries: Villages and small businesses can be found all throughout the nation, and programmes implemented by the Central and State Governments make various forms of aid available in the regions. Every State has established industrial estates, and they are rapidly being built in smaller towns and rural areas.

Diffusion of Industrial Activity: Wherever it was possible to do so without compromising crucial technical and economic requirements, the claims of relatively underdeveloped areas have been taken into consideration when deciding where to locate public sector initiatives. On the basis of expert analysis and economic factors, the locations of several significant projects have been chosen.

Schemes for Development of Backward Areas: A number of particular schemes are included in the current strategy for the development of underdeveloped areas, in addition to the monies allotted for regular sectoral programmes. The special schemes fall under the following categories:

1. Plans that concentrate on places with unique characteristics include the Command Area Development Programme, the Drought-Prone Area Programme, and the Desert Development Programme.

2. Target group-focused programmes include the Scheduled Castes special component plan and small farmer development organisations.

3. programmes offering rewards and discounts for specific activities in underdeveloped communities.

4. In 150 districts, the Rashtriya Sam Vikas Yojana has been introduced. A Backward States Grant Fund of Rs. 25,000 crore has been established; it will begin operating in 2005–2006 and last for five years.

Q4) Examine the role and significance of well-developed money market in the process of economic growth of a country.

Ans) Due to its ability to offer short-term money promptly and effectively, it is a significant source of finance for commerce and industry. The money market facilitates the growth of domestic and international trade and industry by financing short-term working capital needs through discounting operations and commercial papers. By giving governments, commercial banks, and other major institutions access to short-term liquidity, the money market helps a nation's economy grow and remain stable. Investors can earn interest by placing extra cash they don't need in the money market.

A country's ability to grow and function efficiently is greatly influenced by its financial market, which should be well-developed and well-run. It promotes the effective direct flow of savings and investments into the economy, facilitating the accumulation of capital and participation in the production of goods and services. By raising the savings rate, mobilising, and pooling funds, producing knowledge about investments, facilitating, and encouraging the inflows of foreign capital, and optimising capital allocation, it fosters economic growth through capital accumulation and technical advancement.

The money market serves the following primary purposes:

1. Financing Trade: Local and foreign traders that require quick access to funds can get it through the money market. It offers a provision for bills of exchange to be discounted, which enables quick financing for the purchase of goods and services.

2. Central Bank Policies: A nation's central bank is in charge of formulating the monetary policy and taking action to maintain a sound financial system. The central bank can effectively carry out its role in formulating policy thanks to the money market.

3. Growth of Industries: Businesses can easily fund their short-term lending needs for working capital through the money market. Businesses may encounter cash constraints linked to purchasing raw goods, paying staff, or covering other immediate expenses as a result of the high frequency of transactions.

4. Commercial Banks Self-Sufficiency: Commercial banks have access to a ready market through the money market where they can invest their excess reserves, earn interest, and still preserve liquidity. Bills of exchange and other short-term investments can be quickly converted to cash to support consumer withdrawals.

Q5) Go through the website http://info.worldbankorg/governance/wgi of worldwide governance indicators Project and study the aggregate indicators for India. How has India fared in different dimensions of governance?

Ans) Each of the six aggregate WGI measures are constructed by averaging together data from the underlying sources that correspond to the concept of governance being measured. This is done in the three steps described below:

STEP 1: Assigning data from individual sources to the six aggregate indicators. Individual questions from the underlying data sources are assigned to each of the six aggregate indicators. For example, a firm survey question on the regulatory environment would be assigned to Regulatory Quality, or a measure of press freedom would be assigned to Voice and Accountability. A full description of the individual variables used in the WGI and how they are assigned to the six aggregate indicators, can be found by clicking on the names of the six aggregate indicators listed above. Note that not all of the data sources cover all countries, and so the aggregate governance scores are based on different sets of underlying data for different countries.

STEP 2: Rescaling of the individual source data to run from 0 to 1. The questions from the individual data sources are first rescaled to range from 0 to 1, with higher values corresponding to better outcomes. If, for example, a survey question asks for responses on a scale from a minimum of 1 to a maximum of 4, we rescale a score of 2 as (2-min)/(max-min)=(2-1)/3=0.33. When an individual data source provides more than one question relating to a particular dimension of governance, we average together the rescaled scores.

The 0-1 rescaled data from the individual sources are available interactively through the WGI website and in the data files for each individual source. Although nominally in the same 0-1 units, this rescaled data is not necessarily comparable across sources. For example, one data source might use a 0-10 scale but in practice most scores are clustered between 6 and 10, while another data source might also use a 0-10 scale but have responses spread out over the entire range. While the max-min rescaling above does not correct for this source of non-comparability, the procedure used to construct the aggregate indicators does.

STEP 3: Using an Unobserved Components Model to construct a weighted average of the individual indicators for each source. A statistical tool known as an Unobserved Components Model is used to make the 0-1 rescaled data comparable across sources, and then to construct a weighted average of the data from each source for each country. The UCM assumes that the observed data from each source are a linear function of the unobserved level of governance, plus an error term. This linear function is different for different data sources, and so corrects for the remaining non-comparability of units of the rescaled data noted above. The resulting estimates of governance are a weighted average of the data from each source, with weights reflecting the pattern of correlation among data sources.

The UCM assigns greater weight to data sources that tend to be more strongly correlated with each other. While this weighting improves the statistical precision of the aggregate indicators, it typically does not affect very much the ranking of countries on the aggregate indicators. The composite measures of governance generated by the UCM are in units of a standard normal distribution, with mean zero, standard deviation of one, and running from approximately -2.5 to 2.5, with higher values corresponding to better governance. We also report the data in percentile rank terms, ranging from 0 (lowest rank) to 100 (highest rank).

The Worldwide Governance Indicators report on six broad dimensions of governance for over 200 countries and territories over the period 1996-2021:

Voice and Accountability: Voice and accountability captures perceptions of the extent to which a country's citizens are able to participate in selecting their government, as well as freedom of expression, freedom of association, and a free media.

Political Stability and Absence of Violence/Terrorism: Political Stability and Absence of Violence/Terrorism measures perceptions of the likelihood of political instability and/or politically motivated violence, including terrorism.

Government Effectiveness: Government effectiveness captures perceptions of the quality of public services, the quality of the civil service and the degree of its independence from political pressures, the quality of policy formulation and implementation, and the credibility of the government's commitment to such policies.

Regulatory Quality: Regulatory quality captures perceptions of the ability of the government to formulate and implement sound policies and regulations that permit and promote private sector development.

Rule of Law: Rule of law captures perceptions of the extent to which agents have confidence in and abide by the rules of society, and in particular the quality of contract enforcement, property rights, the police, and the courts, as well as the likelihood of crime and violence.

Control of Corruption: Control of corruption captures perceptions of the extent to which public power is exercised for private gain, including both petty and grand forms of corruption, as well as "capture" of the state by elites and private interests.