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Thursday, October 8, 2009

Chapter 5 Planning for Development

PLANNING FOR DEVELOPMENT

Planning: Definitions

Hayek - “The direction of productive activity by central authority.”

Dalton “Planning is the deliberate direction by persons in charge of large resources of economic activity towards chosen ends.”

Features of planning –

1. Conscious efforts – in an unplanned economy various decisions regarding what to produce, how to produce and when to produce are all decided y mechanism. Planning means a conscious effort by the government to take various economic decisions. So that the economy is directed in and in some areas controlled in a particular direction.

2. Economic variables – Planning involves influencing various economic variables like consumption, saving, investment, etc. There are the variables at macro level i.e. for the whole economy. E.g. the total income of the country is Rs. 80000 crores of which the savings is 10%. Supposing this savings is to be increased by 2% then certain policy decisions will have to be taken by the government and this will be done through planning process.

3. Country of region – The planning process may be carried out for the whole country or for a particular region. E.g. In India planning is carried out by the central government for the whole country. State government, city corporations, municipalities, etc also carry it out.

4. Time schedule – The planning is for a particular time period. It may e for 5 years or 10 years or some times it is for 15 years. In India the time frame adopted is five-year plan and within this the annual plans are prepared.

Need for Planning

1. Inadequacy of the market mechanism – Markets in the LDCs are faced with imperfections and structural shortcomings in commodity markets, factor market and capital and money markets. They have various deficiencies. So planning is made necessary in LDCs.

2. Elimination of instability – Market economies are unstable and suffer from wide fluctuations. Progress is not possible under such circumstances. The objective therefore is usually expressed as steady progress, which means progress without fluctuations. This is made possible by the way of planning.

3. Resource mobilization and allocation – LDCs are under a severe resource constraint. They have very limited financial as well as skilled manpower resource. They cannot afford to waste those resources. To avoid the wastage planning is necessary.

4. Equitable distribution of income – Some of the LDCs have high-income inequalities. Planning can be used as an instrument of equalizing opportunities, wealth and income.

5. Harmonizing wage-relations – Price mechanism can ensure a harmony of wage relations only under conditions of perfect competition and full employment. Planning can ensure the utilization of labour in such a way as to create more demand for the labour of the disadvantaged sections.

6. Coping with major economic changes – Natural calamities, political instability, eruption of violence, etc. are some of the changes that cannot be foreseen. These non-economic changes generate economic changes. The planning authority with the all the resources in materials, men and money at its command can however cope up with such changes.

7. Wastes of competition and duplication of services – When competition is not perfect, it breeds several wastes like cutthroat competition, price wars, wasteful sales promotion, etc. All these wastes can be avoided with judicious planning.

8. Externalities – Damage to excessive use of non-restorable resources, health-hazards caused by productive activities to the workers are some of the externalities. In planned economy, social costs and social benefits are given due consideration.

9. Creating a climate – Preparation of a plan incorporating a detailed statement of national economic goals and social objectives create a climate for a change. It can give a purpose to the actions of the people. A plan of national campaign against poverty, ignorance and disease may create the climate to fight for the common cause.

10. Trade and aid – In foreign trade, plan serves a useful purpose. Once the whole plan is ready the magnitude of trade becomes clear. The govt. can enter into bilateral trade agreements with other countries.

Formulation or preparation of plan / Steps in planning

Usually the different countries may adopt different ways of planning. There will be diversity in planning. However there are few steps, which are more or less common in the planning process. Usually formulation of plan includes the following steps.

1. Central planning authority – Each country has to set up machinery, which will formulate and implement the planning process. In India we have a planning commission which is headed by a prime minister and which is responsible for the various aspects of planning. This planning commission includes various experts like economists, financial experts, politicians, and other government officers.

2. Survey of the Economy – A plan has to be based on a proper survey of the economy. Including the strengths and the weaknesses of the economy, availability of resources and its utilization, etc. Usually this survey is carried out on an annual basis. In India we have CSO (Central Statistical Organization) in different states, which is responsible for carrying out the survey.

3. Setting objectives – The planning process should have certain objectives, which are to be fulfilled or achieved. These objectives are laid down in relations to future development of the economy. Thus objectives can be to increase the employment or reduce unemployment, to decrease poverty, etc. these objectives must be realistic and flexible so that if required necessary changes can be carried out in the objectives.

4. Priorities and targets –Once the objectives are decided the priorities and the targets have to be laid down. E.g. the objectives may be to increase the employment level. Within this the priority may be to increase the employment for rural people or to increase the employment for women. The target gives a definite number for achieving the objectives.

5. Strategy- The word strategy is a military word. Indicating the technique of reaching a particular point. In the planning process different strategies would be required for achieving different objectives. These strategies are to be planned, implemented and properly discussed. A proper strategy will help in achieving the target.

6. Internal consistency and balance – The strategies which are decided should be internally consistent and properly balanced otherwise it may lead to shortages and surpluses. The balance in planning process includes the physical and financial balance. The physical balance will try to ensure that the outputs of various sectors of the economy are properly balanced. Otherwise it will lead to a situation of non-availability of raw material, manpower, etc. the financial balance refers to balancing of income and savings to the supply of goods and services.

7. Mobilization of resources – In order to implement the plan various resources are required. The sources of finance include taxation provident fund, deficit financing, etc. the planning process has to ensure how much amount will be collected from each of these sources. A planning process also has to consider how the private sector will be able to mobilize the different resources.

8. Choice of planning a model – For implementing the plan for the economy various planning models are available. The right type of planning model will have to be selected which includes – a) Aggregate Growth Model – In this model the aggregate Growth of the whole economy is considered. B) Sectorial projection model – In this model the whole of the economy is divided into sectors and planning is carried out respectively for the sector. E.g. agricultural sector, industrial sector, etc. c) Comprehensive inter industry model – This is the most sophisticated model in which activities of all productive sectors of the economy are inter related. Each industry is considered a producer of output and at the same time a user and input from other industry. Depending upon the level of development of a country a country may se more sophisticated model. India makes use of this sophisticated model.

9. Plan period – The planning process is for a particular time period. It may be for 5 years, 10 years or 15 years. In India the time frame adopted is 5 year plan in which the annual plan can also be there in order to ascertain whether the targets are being achieved or not.

10. Efficient administration- A plan may be prepared but if it is not implemented n a right and efficient manner then the targets and objectives will not be achieved. Proper implementation of plan requires strong, efficient and non-corrupt administration.

11. Evaluation – A plan prepared and implemented must be periodically evaluated. It may become necessary to change the targets in certain situations. The reasons of not achieving the targets will have to be discussed and this reasons will to be considered into future planning.

Limitations of Planning:

In spite of several arguments in favour of planning many economist like Killick say that “It is doubtful whether plans have generated more useful signals for the future than would otherwise have been forthcoming.” In other words, the experiment of planning in most of the LDCs over the past few decades has not fulfilled the expectations of the people. Here are the limitations of planning.

1. Deficiencies in plans and their implementation – Plans are over-ambitious. They look like election manifestoes, promising too many things within a short span of the plan period. There arises a gap between plan formulation and implementation.

2. Insufficient and unreliable data – The quality and reliability of the data decides what will happen to the plan. The situation becomes worse if trained economists and statisticians are not available.

3. Unanticipated economic disturbances – LDCs are greatly dependent upon external variables like inter-national price changes, trade fluctuations, import-export policies of developed countries, etc. Beside that uncertainties arising out of calamities like wars, floods, droughts and so on. All these factors render even short-run forecasting difficult.

4. Institutional weaknesses - The planning process of the LDCs suffer from several institutional weakness like separation of the planning agency from the implementers, the lack of continuous dialogue among planners, administrators and political leaders. In addition, there are weaknesses like incompetent and corrupt administration, red-tapism, resistance to innovation and change, inter-departmental rivalries, etc.

5. Lack of political will – The ultimate cause of plan failures is largely attributed to a lack of commitment and political will on the part many Third world leaders and high level civil servants. A political will requires unusual ability and political courage to challenge the various vested groups and to persuade them for the planning and completion of the plan.

6. Reduction in lines of control – Planning in India is only indicative. It gives guidelines. Several institutes, firms and individuals implement the plan. The success of such a plan can be ensured through various lines of control wherein, the decisions like what to produce, how to produce, how much to produce, fro whom to produce are taken by private individuals. With the adoption of economic reforms and the policy of liberalization, all these lines of control have considerably weakened and some of which have actually be discarded.

7. Socio-cultural Barriers – In an open economy working in close co-operation with other countries of the world existing at various levels of development, the social-cultural aspects achieve great importance. The competitiveness of an economy depends upon the quality of population not only in terms of education and health but also in terms of motivation, work culture and work ethic. In absence of these Indian planning is bound to face hurdles at every step.

8. The hazard of population growth – A rapidly growing population forces several limitations upon planning. The growing numbers for satisfying their minimum needs takes away the additional income resulting from growth. This adversely affects the rates of saving and investment. The growing dependency burden also dampens the efforts of development. Finally the planning collapse.

9. Inherent drawbacks of public sector – Public sector and government departments have to go by rules. Public accountability demands this. But this fact entails red-tapism, delays, and misuse of power and increases corruption.

10. Allocating real resources – How to allocate men, machines, land, electricity, steel and imported goods is not decided properly. Only allocation of money is not the real resource. All the above mentions should be allocated properly. But this is not possible for want of control.

Chapter 4 Capital Constraints

Capital Constraints

Capital formation is one of the important factors in economic development. The vicious circle of poverty in underdeveloped countries can be broken through formation.

Importance of Capital formation –

The countries, which could attain high rates of capital formation, were the countries, which could record high rates of economic development. The capital formation is thus very important.

1. Productivity – Economic growth is possible either by increasing the quantity of inputs i.e. agricultural land or by raising the productivity i.e. production per hectare. Increase in the inputs can grow the GNP but the other increase the per capita income. For the less developed countries (LDC) it is important that they should accept the first alternative i.e. increase in the quantity of inputs because it increases the capital formation.

2. Toil and har

dship – Machines and equipments are the substitutes to land and labour. More often they are invented for the same purpose. More use of machines and equipment needs capital formation.

3. Social overheads – There are man large social projects, which form the precondition for economic development. This type of capital is known as the social overhead capital. It is in the form of roads, railways, irrigation projects, immunization programme, etc. Many of these overheads are useful to the private sector firms.

4. Investment in Human Capital – Expenditure on health, education, training research

and social security is the investment in human capital. But such investment needs a large amount of capital.

5. Development of Science and Technology – Science and technology is always helpful to the economic development. The first steam engine invented is the milestone of economic development. But such scientific and technological inventions and application need lot of capital investment. E.g. satellite communication needs huge capital.

6. Employment – Capital investment generates employment opportunities. Technological progress and capital formation together create more jobs helping large-scale production.

7. Expans

ion of Market –Industrial and economic development were followed by commercial revolution and a revolution in transport. Modernization of transport and commercial and trade practices have led to a widening of the markets. Expansion of market creates a growth in demands and intends increase in production. But this is possible by advanced means of communication, which needs large amount of capital.

8. An Answer to Balance of Payment Problems – Less developed countries are importin

g finished goods and exporting primary products. LDCs always face the deficit in their balance of payments (BOP). The solutions to such problem are either to diversify the industrial structure of the country or import substitution. But both these require capital investment.

9. Coping with Growing Population – Rapidly growing population is the main characteristic of LDCs. That create two problems a) the capital-labour ratio goes on falling. b) Fall in average saving rate, which affects the rate of capital formation. To avoid these downfalls the country requires high rate of capital formation.

10. Self-re

liance – LDCs are more depended on foreign countries. A high rate of capital formation can gradually make the foreign aid and it’s subsequent problems less and makes the country self-reliable by reducing foreign debts.

11. Containing Inflation –LDCs face the price rise problem at the beginning of economic development leading the inflation. Because on the one hand investment level is increased followed by rise in the money income but on the other hand, the supply of goods and services in the market does not increase immediately. The solution to this problem is to raise the rate of saving so that increased income are diverted to capital formatio

n rather than going to the market.

12. Breaking the vicious Circle of Poverty – According to Prof. Nurske, the vicious circle of poverty can be broken through capital formation. Capital formation increases the physical supply of capital goods like machines, tools and equipments, helps a better utilization of available resources, and increases the national output. Such increase is useful to break the vicious circle of poverty.

Reasons for the low rate of Capital Formation

There are three steps in capital formation. They are a) saving b) mobilization (collection) of savings c) investments of these savings. These steps show two sides of capital for

mation i.e. the supply side and the demand side. The reasons of the low rate of capital formation can be discussed in the view of these two sides.

A] Reasons from the supply side

1. Low levels of income – Capital formation takes place out of savings and saving is the function of income. Less income is the characteristic of LDCs. There can be many reasons for low level of income such as population, etc.

2. Low pr

oductivity – Productivity is the source of income for all factors of production. When productivity itself is low it causes low rate of saving and low capital formation. In LDCs low productivity is the result of under utilization of natural resources, labour inefficiencies, limited technological skill, etc.

3. Income inequalities – Rate of savings increases due to income inequalities. But there are two reasons why income inequa

lities in the LDCs do not have the effect. a) Per capita income is less. So the rate of savings could be 3 to 5 per cent. b) The group at the top of the income pyramid consists of landowners and traders who tend to invest in more land, real estate rather than long term industrial investments. This causes the low rate of capital formation.

4. Demographic (population) reasons – The rate of high population is also somehow affects the low capital formation in the LDCs. A country has to spend much amount of entire income on bringing up the growing numbers of people. The high dependency ratio raises the tendency of low rate of savings, which leads to low rate of capital formation.

5. Bu

dgetary policy of the government –Governments in the most LDCs tempt to use deficit budgets as an important source of capital formation, but when deficit financing crosses the safe limits, it becomes inflationary. The high prices due to inflation tend people to spend on their current needs rather than savings.

6. Inadequacies of financial markets – Inadequacies of the money and the capital markets also causes the low rate of capital formation in India.

B] Reas

ons from the demand side -

1. Lack of enterprise – It is the entrepreneurs who come forward with promises of attractive rates of return on capital which encourage the people to save. But due to social, cultural and economic factors the supply of entrepreneurship is very limited in India.

2. Undeveloped capital goods industries – A high level of demand for funds to be invested presupposes a well-developed capital goods industry. Such a developed industry has the capacity to propel the demand of machinery and instruments. For this purpose they will borrow the savings collected by the financial institutes. But in LDCS such industry is undeveloped, it can’t propel the demand of capital.

3. Limited market – In LDCs the market is limited due to the limited purchasing power. The capacity of such market is very limited to absorb the additional supplies of commodities. The investors have no incentives to save and to invest more for catering to the

needs of an uncertain and limited market.

4. Factor supply inelasticity – There are many obstacles in the way of mobility of labour such as illiteracy, extended relationship, inability to adopt to new circumstances, etc. Capital and enterprise also lacks mobility. This keeps the factor cost high and disperses away the potential investors.

5. Infra structural gaps – New productive activities have to depend upon the availability of infrastructure and basic amenities like railways, roads, water and the power supply and other facilities. An absence of these facilities can have adverse effect on investors.

6. Econ

omic backwardness – General economic backwardness causes the low rate of capital formation. Low efficiency of labour, low levels of skill formation, prevalence of traditional values all these tend to keep the demand for new capital formation low.

7. Technological backwardness – Technological backwardness acts as a double-edged weapon. On the one hand large traditional sector is using outdated techniques of production, which does not need the modern capital equipment. So the demand remains low. On the other hand these outdated techniques cannot generate high levels of production and causes low rate of income. So the rate of savings remains low.


Vicious

Circle of Poverty

One of the very important reasons for low capital formation is the vicious circle of poverty. Prof. Ragnar Nurrkse says, “It implies a circular constellation (group) of forces tending to act and react upon one another in such a way as to keep a poor country in the state of poverty.” E.g. A poor man may not have enough to eat, being unified, his health may be week. Physical weakness results in low working capacity, which means that he is poor, nor have enough to eat. In other words ‘a country is poor because it is poor.’

The basis of vicious circle is that in LDCs total productivity is low due to deficiency of capital, imperfect market, economic backwardness and under develop

ment. The vicious circle operates both on the demand side and on the supply side.

On demand side: The low level of demand leads to low rate of investment and results in low investment. Hence back to deficiency of capital, low productivity and low income.

On supply side: Low productivity is reflected in low real income. This means there is a low savings lead to low investment and deficiency of capital. This in turn leads to low level of productivity and low income.

The third vicious circle is underdeveloped human and natural resources. Development of natural resources depends

on the productive capacity of the people in the country. If people are backward, illiterate, having lack of technical skill and knowledge, then the natural resources remain unutilized or misutilized which keeps again the people backward.

Thus a country is poor because it is underdeveloped. Because the country is underdeveloped are poor and remains underdeveloped, as it does not have necessary resources for promoting development.


Population Constraint

Theory of Demographic Transition

Population in a country is responsible for providing human resource. The various types of skilled, unskilled, supervisors, managers, etc. are all provided from the population of a country. These are Human resources which are required by every businesses and firms. The population also provides the consumers for various goods and services. It is important to study the composition of population which includes the age structure and population, educational background of the population, income level of the population, etc.

One important theory in the study of population is the theory of Demographic Transition. It tries to explain the relationship between the death rate, birth rate. It tries to explain the effect the economic growth on death rate and birth rate.

The rate of population in a country is influenced by death and birth rate. If both these rates are equal, there would be no population growth. But the birth rate is more than the death rate which leads to increase in population. This effect is explained through this theory.

According to this theory there are three stages related to death rate and birth rate.

First Stage - In the first stage, the population of a country is more or less stable. In this stage both death and birth rates are at a high level. This stage indicates economic backwardness having much low income level. Most of the people are engaged in the primary sector such as agricultural activities. In this stage there is inadequacy of health facilities and lack of education. Due to this the death rate is high at the same time the birth rate is also high because of ignorance and other social factor.

Second Stage – In the second stage there is an improvement in the public health and other facilities. The number of dispensaries and hospitals are more and there is an improvement in the standard of living. Due to this there is a sharp fall in the death rate. However the attitude and social factors of the people donot change to a great extent. So the birth rate continues to be at a high level. As the time goes by the gap between the birth and death rate keep on increasing ultimately leading to population explosion.

Third Stage – In the third stage the birth rate also reduces and matches the low death rate. This is the stage of economic development and industrialization and urbanization. In this stage the spread of education leads to a change in the attitude of the people and this helps to decrease the birth rate. Both death and birth rates are at low level and the rate of growth of population reaches at a zero level. So this stage is known as ‘Zero Population Growth Stage’ which indicates an advanced, mature and developed economy.

In recent times here are a few countries which have gone beyond this point where the birth rate is much low than the death rate leading to negative population growth. E.g. Japan, Germany, etc. On the other hand LDCs like India is visualizing the adverse picture with its high population.

Reasons for fall in death rate

The death rate in India upto 1921 was quite high because of various reasons. But after this year the death rate started declining. The reasons are :

1. Medical facilities – Medical facilities have recorded considerable progress durig the post-independence period. Epidemics like malaria, small-pox, plague, cholera, etc have either been eradicated or controlled to a great extent. Deceases like tuberculosis and leprosy which were observed as a curse, are under control with the modern drugs. In 1997-98 there were 22400 primary health centers and community health centers and rural hospital were 2600 and 15100 respectively. Medical facilities available for the pregnant women and at the time of labour have made the infant mortality rate low.

2. The Spread of Education – The educatin facilities have spread to a great extent. Schools, libraries have been opened in the rural areas. Due to education, people have become more aware of the importance of clean drinking water, sanitation, etc. Medical advice and aid have replaced superstitions and witchcraft. As a result, the death rate has declined.

3. Improvement in the means of transportation – Improved and fast means of transport has made the quick medical facility for the serious and dying patients. Developed roads have brought the cities close to each other so that the doctors and other medical facilities could be made available in time. At the same time aviation has also been improved which has proved its usefulness in saving the people in natural calamities.

4. Control of famine – Famine was one of the reasons for the mass mortality in the history of India. Now a days famine relief measures are applied properly. The famous ‘Green Revolution’ has made India self supportive to eradicate the glimpses of famine and the developed means of transportation have made it easy to supply the food grain to the draught prone areas in time.

Reasons for high birth rate

Various cause lead the decline in death rates at the same time it is observed that th birth rate is showing a surprising inflation. In 1997, the birth rate per thousand of Germany was 10, UK 12, USA 15, Canada 12. At the same time India was having the birth rate of 25. it is amazing that developed countries are trying to increase their birth rate and India is trying to control and reduce the birth rate. The reasons of India’s high birth rate are follows –

Poverty – Comparing to other developed nations India remained a poor country. Average Indian citizens are poor. The standard of living is low. Even if Indian families bare more children, and it leads them to more poverty, they least bother about it because they are already poor. On the contrary number of children is useful for the families as a helping hand and earning source. Further these children are the support for their old age. Also as Indians are poor they cannot afford medical facilities which are at high cost. In such circumstance there is a fear of losing their children because of sickness. Hence they prefer having more children so that at least some of them would survive.

Early marriages – The census of 1991 shows the average age of a man and a woman at the time of marriage 22.2 and 18.3 years. But in the developed countries i.e. Norway 28 and 24; Germany 27 & 24 is really low. Average Indian marriage age which is on an average is below 20 give more fertile period to these young couple and helps producing more children.

Universality of Marriage – According to Indian customs and traditions it is not fare that one should be bachelor or spinster for whole life. One more thing is that unmarried person is the subject for gossip and teased. So parents are in a hurry to get their son or daughter married.

Illiteracy and ignorance – There is a close relation between education and Planned Parenthood. More is the education less is the number of children. But in India literacy rate in women is quite high. 57 % women of the Indian population are illiterate so they are having more child birth.

Socio-religious factors – Indian society if full of beliefs and rituals. To peform some sacred rituals a person must be married and that too have children. Otherwise he is banned by the community and kept away from such religious practices. Particularly women are expelled out of the community if she is childless. One can not claim ‘moksha’ if he remains childless. They believe that such man’s forefather also would not be benefited in the heavens. More are the children, more blessed is the father and mother. Such outraged society tends to produce more children.

Effects of growing population on Indian Economy

Growing population affects the development of economy by following ways.

1. Per Capita Income – A rapidly growing population tends to bring down growth of income. Such rapid growth puts a pressure on land and tends a decline in capital accumulation and raises cost of production. All these results in a very slow growth of per capita income.

2. Standard of living - Per capita income is a major determinant of the standard of living of the people. Naturally, the factors affecting per capita income also affect the standard of living. Growing numbers of people need increasingly larger quantities of necessaries of life.

3. Agriculture development – Agriculture being the source of livelihood for majority of Indian population, the growth of population increases the absolute number of people depending on agriculture. The growing population disturbs the land-man ratio because the land is limited. That results in smaller size of holdings. Such small farms cannot produce large quantity of crops to fulfill the need of the nation.

4. Burden of unproductive consumers – Two third of the population of India is dependent. People who are in between 15- 64 years of age may not be actually working. Most of the women do not offer their labour for productive work because they are uneducated and are busy in nurturing children.

5. Unemployment Growing population increased the unemployment and underemployment. The unemployment in India is of a chronic type with its roots in underdevelopment of the economy. It only increases the labour capacity but not the production, because the economy requires is a skilled manpower.

6. Pressure on social infra-structure – A rapidly growing population puts a pressure on social overheads. Moreover an increasing investment in social overheads constitutes a diversion of scarce resources from directly productive assets to less and long run productive human assets.

7. Capital formation – A growing population created the obstacles in capital formation. It raises the propensity to consume and reduces the tendency to save. It also increases the demand for capital because the consumption goods in larger quantities would require more capital. It also causes the diversion of funds to social overheads. So the capital formation is less.

8. Reduction of resources – Growing population creates imbalances between nature and man. Growing human needs are to be fulfilled by using more and more of the natural resources. This creates a threat of collapse of many mineral and other rare resources.

9. Damage of environment – Adverse land-man ratio caused by overcrowding of men pushes men to ecologically sensitive areas like hillsides and tropical forests. They domicile over there and cause the damage of environment.

10. International economic relations – The rapidly growing population leads the country towards the poor country. Emigration and brain drain go against India because growing population makes the india’s demand for imports inelastic.

Chapter 3 Industrial Development in India

Industrial Development in India

Explain the role of industrialization in economic development of India.

Industry is the backbone of the economy. Modern countries are known for their industrial development. India being LDC has less developed industry. Industrialization plays an important role in the economic development of a country. This is as follows.

1. Increase in income and betterment of living standard – Industrialization is the result of human efforts. It leads to an improvement of the standard of living, because it is always possible to use most modern techniques of production. The process of improvements in the techniques of production is a continuous and cyclical process. This accelerates the rate of capital formation, which in turn increases the level of production. All this ultimately increases the standard of living of the people. There is a close relationship between the economic development and industrialization. Countries like US, Canada, france and Belgium have made tremendous economic progress during the last hundred and fifty years. This is because the share of the industrial output in the national income of these countries in 1999 is 26%, 33%, 26% and 28% respectively. In case of India it was 15% in 1971, which rose to 25% in 1999.

2. Increase in the International Trade – When the goods are exchanged between different countries it is known as International Trade. Diversified finished products can open the new horizons for exporting. It ensures all the advantages of the division of labour and also makes the commodities available in any country. Formerly people believed that the countries engaged in primary production should produce and export only primary products and import manufactured products. But experience has proved that this is harmful to the development of international trade of countries. The demand for primary products is more or less fixed and does not increase rapidly. This makes impossible for the countries to expand their exports. The earnings from exports in terms of foreign currency can be utilized for increasing the standard of living of the people. So international trade is always beneficial to all the countries.

3. Satisfaction of Additional Demand – The internal demand for primary products continues to increase up to a certain point. Once the level is reached the further expansion seems impossible. The demand for comforts and luxuries goes on increasing after the basic necessaries are satisfied and it becomes necessary to increase the industrial output in the country. In other words to satisfy the luxurious demands industrialization is necessary.

4. The diversification of production – Every economy has to face several economic, natural or manmade calamities. It is difficult to face such calamities. If the production in the economy is diversified then it becomes easier to face such calamities. With the globalization, diversification has become still more important. It has become necessary to find out new areas of industrialization, which would be advantageous to us.

5. Increase in employment opportunities – The problem of unemployment has become very crucial. On one hand, it is necessary to provide employment to an ever-increasing population and on the other hand it is necessary to reduce the dependence of the population on agriculture. Agriculture and other primary fields of productions have proven the law of diminishing returns. It is industry, which keeps the returns constant. This makes it possible to provide greater employment opportunities by starting large and small-scale units at large.

6. Development of agriculture and other primary producing sectors – Industrialization also helps in agricultural development and other related activities. It increases the income of the people. This additional demand increases the demand of finished goods including agricultural commodities. Industrialization also provides modern machines and techniques to agricultural sector. Thus industrialization indirectly helps development of agriculture.

7. Strength and stability of the economy - Following are the ways industrialization gives strength and stability to economy. Following are the ways industrialization gives strength and stability to economy.
a) Industrialization makes it possible to undertake the research. Hence there is progress in techniques of production. This makes to construct roads, dams and railways profitable by using latest technology. Such infrastructure is the base for industrialization. b) Industrialization makes the economy more balanced and stable. c) The ability to stand in the competition is increase and optimum utilization of economic resources is possible. d) Industrialization makes it possible to supply the raw material required by the transport and communication and other sector of the economy and also provides demand for their products.

8. The sovereignty of the Nation – In order to maintain the sovereignty of the nation, it must not depend on other countries to meet its requirement of arms and ammunition. Again imports of weapons entirely depend on the international relations and conditions. Even dependence on imports for capital goods, machinery damages the sovereignty of the country. So to maintain the sovereignty of the nation, it is necessary to have industrialization.

9. Welfare functions of the state – The ability or capacity of the industries to create surplus is large. Similarly, the industrial section is always better organized. It is possible for the government to charge and collect the taxes from the industries and use the money for the welfare function of the state.

10. Social Change – Industrialization changes the society by raising the level of income, standard of living. It also leads the economy towards the aggression. The industrial society is time scheduled. They work together. This always increases the new values and ethics in the society. The society leads towards more cultured and civilized.

Explain the importance and problems of Small Scale Industries in India.

The terms, ‘small scale industries’, village industries’ and ‘cottage industries’ are used as one and the same. But for the sake of economic analysis there is difference in them. In various ways these terms can differentiate with each other. Broadly these all are the small industries having low capital investment. Cottage industries have a special phenomenon, this kind of industry belongs to a family, and in which commodities are produced without the help of machinery.

The importance and problems SSI face can be described as follows.

1. Contribution to National income – The SSI and Cottage Industries contribute to the nation income of India on a very large scale. In the year 1998-99, the total national income was Rs. 1597416 crores and out of this Rs. 527515 crores was the contribution of SSI and Cottage Industries. In other words, SSI contributed 1/3rd of the national income. This would not be possible without the special efforts taken by the government encouraging the SSI.

2. The Employment Potential – Most of the SSI and Cottage Industries are labour intensive. The large-scale modern industries make use of more capital than the labour. The extravagant problem of unemployment in India can be reduced with turning up the unemployed labour force into SSI. So it is essential to start SSI in large number as they have large employment potential. Out of every five persons employed in industry four are employed in small scale or cottage industries.

3. Low Capital Input and Cost of Production – The capital required for the SSI and cottage industries is comparatively small. As the capital is a scarce resource in India, it is essential to economize its use and its distribution. A large network of small scale and cottage industries created in India is therefore most welcomed. This also stabilizes the base of industry in India. Large-scale industries have per worker capital of Rs. 3-4 lacks, where as SSI needs Rs. 25 – 30 thousands.

4. Skill required – In the large-scale units a high level of technical and managerial skills are required. Where the production in the SSI is on small scale and even unskilled workers can be absorbed in it. Mostly the technical knowledge is handed over traditionally. But now a day it has become necessary to support the traditional knowledge with the modern techniques of production.

5. Marginal dispense on Imports – Large-scale industries have often to depend on imports for machinery, technical skill, raw materials, etc. The SSI has not to depend on imports. Most of the requirements of the SSI are fulfilled locally and these industries may even help to increase exports and thus serve to earn foreign exchange.

6. Decentralized nature and quick results –There is no large time-gap between the beginning of the investment and getting returns out of it. The gestation (growth) period is less in SSI. The large-scale industries are centralized in metro-cities. They develop those regions. While SSI is scattered all over the country and help in developing backward area.

7. Social Justice – As SSI is spread all over the country, there is not a concentration of wealth and economic power in any specific region. During last 100 years specific areas like Mumbai, Kolkata, and Chennai. Backward areas have a chance to develop themselves because of SSI.

8. Complementary to Large Scale Industries – Large-scale industries are always in a need of small components and subsidiaries. These are manufactured and supplied by SSI. Similarly these SSI can provide supplementary employment to the people engaged in agriculture and may also supply tools and implements required by the farmers.

9. Large source of supply of consumers goods – The SSI are most suited for producing consumers goods on a large-scale. It is comparatively easier to produce consumers goods in the small industries. As the capacity of the small-scale industries is small and so is the market, it is possible for them to cater to the needs of the consumers in a better manner.

10. Overall performance – It is observed that the overall performance of small-scale industries has continuously remained remarkable during the 90s. Not only the share of this sector in total national income is very high, but also the rate of growth has always remained in the range of 13% to 21%. The exports of this sector have also recorded a significantly high annual growth rate.

Explain the problems faced by SSI.

SSI has proven its important role in national development during the ages. It has helped in reducing the unemployment; increased exports and so on. The report of the second All India Census of Small Scale Industrial Units (1992) has identified some of the problems. They are as follows:

1. Financial Problems – The census of SSI units has found that almost 35%of the problems faced by the SSI in India is financial problems. The internal financial resources of the SSI are so insufficient that even in the time of minor strains they can’t depend upon such scanty resources. In such cases banks and other financial institutions are very cautious in lending to this sector. Considering the important role of SSI, commercial banks have included it into the priority sector. In 1998 bank finance to the SSI was Rs. 43958 crores. It was 16% of the total loans sanctioned by commercial banks. But still there are lots of problems in getting financial aid from banks. They are provision of security, timely payment of installments to the banks, withstanding the high interest costs, etc.

2. Marketing Problems – The census indicates the marketing problems faced by SSI are 14.4%. These are of various types. The traditional industries and crafts are facing the problem of absence of standardized products. Because of no standardization they find it difficult to compete with the machine-made products. Secondly the capacity of the individual SSI units is limited they can’t spend on sales promotion and advertising. Thirdly, these small firms cannot afford the network of distribution channel. Fourthly, the large-scale producers occupy the best means of transportation available; the SSI has to manage with whatever is available. Finally to attract the customers SSI can’t launch various sales schemes like large-scale industry.
The government has reserved quota for the products of small firm and it has taken several measures to ensure that the products of SSI units would get a preferential treatment. However, the problem continues.

3. The Problem of Raw materials – Many small firms find it difficult to secure raw material, whether imported or indigenous, in time and in adequate quantities. The international team studied this problem and recommended that the small-scale sector should be allotted a specific a quota of raw materials. However several difficulties continues to persist in this field. SSI can’t secure bulk quantities of raw materials. Secondly, importing raw materials involves a number of problems like arranging for foreign exchange, obtaining samples and searching for alternative source of raw materials.

4. The problem of Technical Excellence – The technology becomes outdated within 2 t 3 years. The small firms don’t have the capacity to rationalize the unit every 2 years. Secondly it is difficult to get technically trained workers. Thirdly, the government has established a network of technical education industries and the supply of trained technicians do not match. Fourthly, the supervisory staff also does not get the skill-upgradation opportunities. Finally, while adopting a particular technology the producers themselves commit mistakes in choosing between locally available technology, market oriented technology, cost effective technology an globally competitive technology.

5. Labour Problems – SSI are labour-intensive and they provide employment on a large scale. But at the same time, this causes the problem of maintaining industrial peace. Employer-employee relations are friendly when the unit is small. But the union rivalries and growing unrest among the workers causes many disputes. This may cause the stopping of the production, which SSI can’t bare.

6. Other Problems – Besides above problems, the SSI encounter a number of other problems. They are as follows:
a) Local & state governments’ control, constraints of power supply, regulations of factories laws, etc. may cause the difficulties.
b) Pleasing all the officials representing above said authorities becomes a difficult task.
c) Many of these units are scattered in vast areas and they have to face the problems of failures of several facilities and services such as power supply, water supply, communication, transport, etc.
d) Small scale units working as ancillaries to large units have special problems. They need to supply their product on credit, which delays in recovering from main units.
e) Borrowing from non-institutional has a very high cost.
f) The holding capacity is limited. So such small units are forced to sell out their products at whatever price is ruling at the market.

Explain the role of Public Sector.

In 1954, the Indian Parliament adopted the Resolution on the ‘Socialistic pattern of society’, which broaden the concept of mixed economy. Under mixed economy government will establish ownership of and control over means of production. The government’s entry into industrial sector was the result of mixed economy. Thus the public sector was emerged. The implications of mixed economy necessitated the expansion of the public sector and the establishment of a joint sector.

Up to the adoption of liberal economic policy in 90s, public sector has played an important role in Indian economy. It can be noted as follows.

1. Capital formation – Accumulation of capital is an important determinant of economic growth. During the time of first five-year plan; depending only upon the private sector for capital formation would be dangerous for Indian economy. This may lower the rate of economic growth. The public sector, therefore, is called upon to assist the capital formation. In the first plan (1951-56) gross capital formation from public sector was 3.5%, while form private sector was 7.2%.which grew to 9.2% and 12.4% respectively in the eighth plan (1992-97)

2. Volume of sales handled – The trade of public sector during last five decades is growing. Sales of industrial units owned by the Central Government have increased from Rs. 134 crores to Rs. 3320 crores during the period 1959-60 to 1970-71; further it increased to Rs. 304994 crores in 1998-99.

3. Creation of infrastructure – Infrastructure need heavy investment and the rate of return to these investment is very low. They require longer gestation period. That is why the private entrepreneurs never turn up in creating such infrastructure. So this becomes public sector’s responsibility to create these infrastructures. The public sector in India has performed a vital service in the field of railways, passenger road transport, electric supply, telecommunication, etc.

4. Regulation and control of the economy – Developing economy suffers from shortage of various consumer products. So the control and regulation of the economy is utmost important. The public sector in India has attained a position, which can be used for directing economic activities. By 1969-70 the public sector enjoyed monopoly in the production of lignite, crude oil and supply of electricity. Half of the steel, fertilizer and petroleum products were produced by public sector. So it became the price leader. At the same time because of its growing share in the industrial investment, the public sector can be in a position to control the overall industrial activities.

5. Social Transformation – Private sector is profit oriented while public sector does not give importance to profit. They are for the benefit of society. Transportation to the remote villages are never profitable. But still public sector is engaged in making available such facilities in spite of big losses.

6. Foundation for industrialization – Though public sector is always an issue of criticism, it’s a fact that during the first two decades after independence it has laid a sound foundation for the industrialization. Government has also accepted the responsibility of starting or expanding the basic and key industries in public sector and paved the way of industrial diversification and self-reliance.

7. Export promotion – Right from the beginning public sector has a vision of export promotion. State Trading Corporation (STC) and Minerals and Metals Trading Corporation (MMTC) have helped in increasing the export trade of India. The foreign exchange earnings of the public sector enterprises stood at just Rs. 35 crores in 1955-56 increased to Rs. 18827 crores in 1998-99.

8. Import substitution – Many enterprises in the public sector have been started with the intension of producing goods, which India has to import. Drug companies like Hindustan Antibiotics Limited and many petroleum companies and BEL, BHEL are some of the examples. In recent years India has demonstrated her strength in import-substitution.

9. Raising internal resources – With the expansion of the public sector it was expected to generate resources not only for its won expansion but also for contributing something to the development of other priority sectors. By creating depreciation, development and reserve funds as well as through retained profits, the public sector was able to mobilize larger and larger quantities of internal resources in course of five-year plans. During eighth plan public sector undertakings generated internal resources of Rs. 101212 crores, which averages annually Rs. 20242.4 crores.

10. Contribution to the Central Exchequer – It is a matter of dispute that the public sector being facilitated by government may not increase the revenue. But the fact is public sector units are paying corporate taxes, excise duty, customs duty and other duties so as to agreement the tax revenue of the government. The total contribution made by the public sector in this way during the sixth plan was Rs. 27570 crores and in the year 1998-99 it was Rs. 44608 crores.

The above analysis shows that the public sector in India has grown to occupy a prominent place in the economy.

Drawbacks of the Public Sector

Acceptance of mixed economy gave importance to public sector. Public sector has played a very important role in the developing Indian economy. However, this sector demonstrated some drawbacks. They are as follows.

1. Delays and Red-tapism – Public sector have to go by rules and practices laid down for every purpose. This causes delays in implementation and procedural delays. This creates a number of problems in decision-making as well as timely action. This has been found commonly from Trombay Fertilizer Project to the Bokaro and Salem steel plants. Procedural delays and red-tapism result into loss of market, financial losses, etc. this can be avoid by adhering to proper planning and time scheduling and a degree of autonomy to the plant level management.

2. Political elements in economic decisions – One of the fall-outs of the democratic system as operated in India is the political consideration interfering with the national decision-making. The location or other decisions about public sector units are taken more upon the constituency of the ministers or political leaders instead of national gain. All these have resulted in rising costs, deteriorating the quality and an overall mismanagement.

3. Over capitalization – Many of the public sector units are said to be over-capitalized. The report of the Study Team on Public Sector Undertakings (1967) have criticized the public sector for over-capitalization and have blamed inadequate planning, delays in implementation, avoidable expenditures during construction, surplus machine capacity, tied aid leading to compulsory purchase of equipment without testing, bad location and liberal provision of facilities to the employees as cause of over-capitalization.

4. Over staffing – Public bodies like Public Accounts Committee have pointed out that most public enterprises have recruited manpower in excess of the actual requirement. At the same time this poor manpower planning reflected through inadequate training and refresher facilities for the workers. In fact, there are sever lacunas in personal management in the PSUs including lack of skill up-gradation programmes for technicians, want of incentives for research and development, poor management, labour relations, labour indiscipline, etc.

5. Under utilization of capacity – This is one of the notable drawbacks of public sector. Due to negligence on the part of management the PSUs have suffered form under utilization of capacity. Thus during 1998-99 about 51% of all the manufacturing PSUs recorded a capacity utilization of more than 75% while 20% operated at 50% to 75% of their capacity and the remaining 29% operated at below 50% of the capacity. This is highly unsatisfactory situation in view of the over-growing global competition.

6. Improper control mechanism – Public sector units are accountable to the public. Hence it has several controls such as finance ministry, the in charge ministry of the undertaking and the Parliament. It is a high time that the PSUs are given greater functional autonomy and their governance is left more to professional experts rather than to the political bosses.

7. Lack of professional management – IAS officers who are transferred from one posting to another head Most of the PSUs. Efficiency in business decisions requires prompt operational decisions. The PSUs therefore need some more autonomy and flexibility. Delegation of authority rather than the present practice of passing the buck of responsibility to higher authorities is the mantra of efficiency. Every officer should have a clear idea of his role in the mission of the unit; unfortunately responsibilities are neither clearly defined nor properly understood. These enterprises are criticized as colonies for bureaucrats.

8. Providing employment – Provision of employment was one of the intensions of public sector. But unfortunately it has given more importance rather than the productivity of the enterprise. Automation of the enterprise has been left aside wherever it would be possible. Many times it was suggested that wherever it is possible to atomize the production process with due employment it should be done. But public sector has ignored it.

9. Pricing Policies – There are different pricing principles, but public sector never follows them. Because these enterprises are non-profit oriented. Each PSU has its own objective and its own role in the overall economic development which can be variously termed as basic, key, vital, crucial, etc. Each one of them has a bearing on the pricing policy which pulls the price away from cost coverage and towards the direction of losses.

10. Mounting losses – Most of the public sector units are bearing losses. The performance of the central public sector is relatively much better, but most of the state government public enterprises have made continuous losses. The great loss-makers are the irrigation projects, State Electricity Board and State Road Transport.

The Causes of the Unbalanced Regional Industrial Development in India

Industrial development of India is unbalanced. According to RBI Report (1995-96) Maharashtra is advanced in industrial Development having 13.8% factories and 14.7% of industrial employment of India. Only six states i.e. Maharashtra, TN, Gujarat, W.Bengal, A.P. and Karnataka; have 62.7% factories, providing 57.7% employment and 59.9% output. Rests of the states are not having that much industrial development. This shows that India has unbalanced industrial development. The following are the main reasons responsible for the unbalanced regional development of India.

1. Geographical Factors – It is possible to overcome the geographical hurdles in the industrial development. Countries like Switzerland or Japan, in spite of hilly or uneven nature of the land they have succeeded in industrial development. But this needs a huge amount of capital investment. In case of India, it has not been possible to overcome this kind of geographical hurdles not only because of unavailability of funds but also lack of strong desire. One more reason is the availability of suitable land elsewhere in the rest of the country.

2. Historical Factors – Whatever industrialization found in India before independence was rooted by the British companies as a part of then government’s policies. Europeans had factories in Mumbai, Kolkata, Chennai, Hubli, Surat, etc; more over Europeans settled these cities. Naturally, these cities developed with industrial area and also the states having these cities came up as industrial states. Also British policy ruined the indigenous industries and concentrated some cities with modern industries.

3. Location Factors – Location of the particular industry some times decided by the availability of raw material. As India had poor transportation facilities, industries like jute situated in West Bengal, Steel and coal in Bihar & Jharkhand, Fabric in Maharashtra & Gujarat and so on.

4. The Infrastructure - Other facilities like banking, insurance, power and water supply, communications also decide the location of the industrial area. At the same time this facilities should be easily available and cheap.

5. Unwise Policies during the Planning Period – After independence, it was expected that several efforts would take place to reduce this industrial imbalance. Since 1956, balanced industrial development is the main objective of industrial policies during planning period; was declared frequently. But unfortunately nothing could happen in this regard. What ever was the ‘productive investment’, made in already developed cities like Mumbai, Kolkata, Chennai, Banglore, etc. This investments made such areas more developed and the rest of the part of the country remained undeveloped. Central and state governments started many PSUs in backward areas in Punjab, Hariyana, and Gujarat, which helped developing those regions. But many of the PSUs in other parts of India failed to develop that region.

Explain the measures adopted by the Government to remove Regional imbalances.

One of the major problems in industrialization in India has been the large amount of regional imbalance. This imbalance had led to problems like over crowding, migration of people, and development of slum, etc. it is essential that there should be a balanced regional development.

The government has taken various steps to remove the regional imbalances. The government has been taking special efforts in the five-year plan. In the second five-year plan, it was mentioned that the balanced regional development of economy must be achieved and special efforts were adopted for this purpose. This includes programmes like decentralization of industries and programmes for rural development.

Under the third five-year plan development of SSI, construction of roads, providing electricity and establishment of industrial estates were undertaken.

Under the fourth five-year plan again special efforts were undertaken to remove regional imbalance this includes –

1. Special financial assistance to economically backward states. The amount of assistance to be given was based on population and backwardness of the state.

2. Various facilities and concessions were given to the entrepreneurs who wanted to start industries in the balanced areas. This incentive includes tax incentives and subsidies. The facilities given included fully developed plots of land with power, water facility at nominal rates.

3. The state governments also started their own industrial development corporations. Eg. The MIDC was started to develop industrial estes in the backward areas of Maharashtra.

During the sixth five-year plan a committee was formed known as ‘National Committee for Development of Backward Areas’, which made recommendations regarding how to solve this problem of regional imbalance. These recommendations were adopted in planning process.

The seventh and eighth five-year plans gave importance to agricultural development and human resource development (HRD) as instruments, which would help to remove the regional imbalance.

The ninth five-year plan gave importance to the development of infrastructure in the less developed states. The planning commission has also recommended the large transfer of funds from the Central Government to backward states. Special area development programmes and promotion of private investment in the backward areas has been recommended in order to remove the regional imbalance.

Although many measures have been adopted through the planning period in order to remove the regional imbalance, this has helped in the development of certain balanced areas. However the steps taken to remove regional imbalance are not sufficient as a result the regional imbalance continues to a great extent. Unless this problem of regional imbalance is solved effectively it is difficult for a country to have full industrialization.

Explain the Recent Policy Initiatives of Industrial Liberalization

The liberalization process in India started in 1991. New reforms have been introduced as a part of liberalization process. Introducing and adopting certain policy initiatives have carried out these reforms. Some of the recent policy initiatives are as follows.

1. Industrial Licensing – As a part of liberalization process the licensing system was abolished for all industries except a few important one. The removal of this system has made it easy for the private sector to enter into the market. It is expected that this will lead to more competition, which will be beneficial to the consumers.

2. Location Policy – The location policy has been framed in such a way that approval is not required. If the industrial location is not falling within 25 kms of the cities having a population of more than 10 lakhs it does not need any approval. If they are near the cities they are permitted to start their activity only if they located in specified areas.

3. Special Policy Package for North East Region – The North East Region of India was neglected for a long time and in order to remove imbalance a special package has been adopted in 1997-98for this region. Thee objective are to see that this region gets industrially and economically developed in comparison to other parts of the country.

4. Foreign Direct Investment Policy – This is one of areas where major policy reforms have taken place. This is to attract foreign capital, which will help in capital formation. The government has set up Foreign Invest Promotion Board (FIPB), which is headed by a minister to clear the application for FDI. The FDI is allowed in most of the areas except agricultural and real estate.

5. Infrastructure – The government has given high priority for the development of infrastructure. It has allowed private participation and competition in infrastructure sector. The infrastructure includes setting up of power projects, construction of roads, etc.

6. Housing Policy –Many changes have been undertaken in order to promote the housing sector in the country. Various tax incentives are given if loans are taken for housing constructions. E.g. the interest paid on housing loan is deductible item from the taxable income of a person. Due to such incentives more people have been attracted towards housing loans.

7. Small Scale Industries – Certain policy programmes have also been announced for SSI. One major problem for SSI has been early recovery of their money from large-scale industries that are the customers of SSI units. A rule has been passed that if there is such delay in the payment is has to be mentioned in the annual accounts and reports of the large-scale industries. It is expected that this will help the SSI units to receive early payments, which is required for their working capital needs. Also the limits of the SSI units for calculation of their working capital has been increased which will ensure that such units have adequate working capital. One of the important reasons for the failure of SSI units has been the shortage of working capital. It is expected that these policy changes will help to solve their problems.

8. Tiny Sector – The tiny sector is the part of SSI. Certain specific policy changes have been announced for the tiny sector. Enhancing or increasing the ceiling limit from Rs. 5 lakhs to Rs. 25 lakhs revises the definition of tiny sector. It is expected that the increase in the limit will help the tiny sector to modernize and to adopt new technology. Similarly the banks have been advised to transfer the 60% of the their SSI credits to tiny sector.

9. Industrial Policy – The budget of 1999-2000 has made various changes to improve the development of the country. It includes making changes in the excise structures, providing tax incentives for mergers and amalgamation, takeovers, positive change in the custom duty and providing further incentives to the infrastructure projects within the country. In the budget of the year 2001 further liberalization has been allowed. With this Indian companies are allowed to invest in abroad up to a particular limit.

Thus in the recent years the government has taken various policy initiatives in order to further liberalize the Indian economy and to ensure that the Indian economy is integrated with the global economy. Such integration will help in the economic development of the country.