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 IGNOU ASSIGNMENT GURU (2017-2018)
M.E.C.-105
Indian Economic Policy
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denied. Any Omission or Error is highly regretted though every care has been taken while preparing these Sample
Answers/Solutions. Please consult your own Teacher/Tutor before you prepare a Particular Answer and for up-to-date

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and exact information, data and solution. Student should must read and refer the official study material provided by the

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university.

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Note: Answer all the questions. While questions in Section A carry 20 marks each (to be answered in

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about 700 words each) those in Section B carry 12 marks each (to be answered in about 500 words each).
SECTION-A

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1. Distinguish between ‘economic growth’ and economic development. What policy initiatives would

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you suggest to make India emerge as the fastest growing emerging economy in the world?

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Ans. Economic growth is increase in a country’s real GDP or per capita income over a long period of time. It
does not mean erratic increase in income but a sustained increase over a long period of time. Economic growth is
increase in total capital stock of the country so that country's productive capacity increases over time. It deals with

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material welfare and concentrates on increase in total availability of goods and services in an economy over a period
of time. It is a process whereby an economy is capable to increase the size of its cake but does not ensure that the

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cake will be distributed equally amongst different members of the economy.

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(a) Economic growth is Quantitative while economic development is a qualitative concept.

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(b) Economic Growth is Quantitative while economic development is qualitative.

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(c) Economic growth is comparatively a narrow concept and Development is much more comprehensive.
(d) Economic Growth refers to increase in the total output of final goods and services in a country over a long

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period of time. In contrast, Economic Development refers to progressive change in the socio-economic
structure of the country. It includes gender equality, change in composition of output, shift of labour force
from agriculture to other sectors.
(e) Economic growth is easy to realize as only monetary aspect is involved. But, it is very difficult to attain the
goal of development as it involves many socio-economic-political aspects.
(f) Economic Growth can easily be estimated by real GDP or Real Per Capita income. But it is very difficult to
measure development as it has some aspects that can’t be quantified. Economic Development however is
indicated by Human Development index.
(g) Economic Growth can take place without Economic Development; however, Economic Development can’t
take place without economic growth.
Following major changes in the structure of the economy as an economy develops:
(a) As a percentage of GDP, savings increase, food consumption decrease, non-food consumption increase,
relative output of industry and tertiary sector increase and that of agriculture decrease with development.
(b) Share of workers employed in primary sector decrease and that of industry and tertiary sector increase.
(c) Exports account for larger proportion of incomes and composition of exports shifts from raw material to
finished goods, primary products to industrial products and services. BOT will come in balance.

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 India’s economy has made great strides in the years since independence. In 1947, the country was poor and
shattered by the violence and economic and physical disruption involved in the partition from Pakistan. The economy
had stagnated since the late nineteenth century and industrial development had been restrained to preserve the area
as a market for British manufacturers. In Fiscal Year (FY) 1950, agriculture, forestry and fishing accounted for 58.9
per cent of the Gross Domestic Product (GDP) and for a much larger proportion of employment. Manufacturing,
which was dominated by the jute and cotton textile industries, accounted for only 10.3 per cent of GDP at that time.
Beginning in the late 1970s, successive Indian Governments sought to reduce state control of the economy.
Progress toward that goal was slow but steady, and many analysts attributed the stronger growth of the 1980s to
those efforts. In the late 1980s, however, India relied on foreign borrowing to finance development plans to a greater
extent than before. As a result, when the price of oil rose sharply in August 1990, the nation faced a balance of
payments crisis. The need for emergency loans led the government to make a greater commitment to economic
liberalization than it had up to this time. In the early 1990s, India’s post- independence development pattern of strong
centralized planning, regulation and control of private enterprise, state ownership of many large units of production,
trade protectionism, and strict limits on foreign capital was increasingly questioned not only by policy-makers but also

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by most of the intelligentsia.

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As India moved into the mid-1990s, the economic outlook was mixed. Most analysts believed that economic
liberalization would continue, although there was disagreement about the speed and scale of the measures that would

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be implemented. It seemed likely that India would come close to or equal the relatively impressive rate of economic
growth attained in the 1980s, but that the poorest sections of the population might not benefit.

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Q. 2. “It is necessary to take steps to move towards good governance to ensure sustainable human

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development”. Comment.
Ans. No development can take place without good governance. Policy may be the best on paper but it is good

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governance that brings it into practice. Human development calls for a better quality of life for all and inclusive

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growth. But a man by nature is selfish and thinks of his own profits and interests first. Therefore, anyone who is given

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the duty of disbursement of funds or benefits to the needy section is bound to be attracted by the personal interests.
Therefore, it is good governance that can ensure sustainable human development.
Good Governance

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1. Participatory,

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2. Consensus oriented,

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3. Accountable,

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4. Transparent,
5. Responsive,

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6. Equitable and Inclusive,

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7. Effective and Efficient and
8. Follows the Rule of Law.

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UNESCAP claims “good governance assures that corruption is minimized, that the views of the minorities are
taken into account and that the views of the most vulnerable in society are heard in decision-making. It is also
responsive to the current and future needs of society”.
(1) Good Governance is Participatory: In good governance people participate irrespective of class, creed or
gender, in electing government at different levels. It is the first and important mode of participation in governance.
Second step is their participation in decision-making and formulation of policy and implementation of policy. It is
possible only if participation is well informed and organized. It is possible when there is freedom of expression,
association and peaceful assembly, building up of capabilities for constructive participation and an organized civil
society. A civil society means a group or groups of those who have an interest in decision-making and implementation
(stakeholders) other than government and the armed forces.
(2) Good Governance is Consensus-oriented: Good governance considers the interests of all stake holders
and reaches at a conclusion with a consensus.
It mediates between the different interests involved to arrive at a broad consensus on what is in the best interest
of the society and develops suitable mechanisms to facilitate such a process.
(3) Good Governance is Accountable: It is very important feature of good governance. Government has to be
accountable to the public, private corporate entities and firms and civil society organizations and institutional stakeholders,

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like shareholders, directors in the company’s Board and whoever is affected by the decisions and actions of the
organizations/entities concerned. Accountability needs to be transparent and governed by suitable laws enacted for
the purpose. For example, there are many entities where government needs to answer to prove its accountability like
Comptroller Auditor General in India and its report on the audit is discussed in Parliament and its committees (Public
Accounts Committee of the Indian Parliament). There are two issues relating to accountability of governance.
(A) Right to Information: According to RTI, 2005, information sought by the citizen (or the stakeholder) has to be
made available to him/her. It is one-way flow of information answering the question ‘what’.
(B) It involves not just ‘what’ but also ‘why’. It facilitates a two-way flow of information with citizens providing
a feedback on the work of government functionaries. For example, Citizen’s Charters, service delivery surveys,
social audits, citizens’ report card and outcome surveys. It helps in reducing corruption.
(4) Good Governance is Transparent: Transparency implies its decision-making process and its functioning
methodology are open to the scrutiny of the public/stakeholders and the media and to public discussion. Information
on these issues should be accessible to all stakeholders.
Methods of communication selected must consider levels of literacy and education and the digital divide in the
population and the reach of the media and should also steer clear of possible distortions of the communication by

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vested interests acting against the objective of transparency or the policy in question. Transparency will reduce
corruption and ensure efficient functioning of democracy.
(5) Good Governance is Responsive: Responsive of the government can be interpreted in two ways.
(a) All entities making up the governance system should be concerned to current and emerging needs of the stakeholders

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and their aspirations and formulate plans and policies well in advance to tackle such needs. To attain this goal,

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agencies need to develop empathy for the problems, difficulties and aspirations of the community they serve. (b)
Attending to the problems, grievances and issues that are brought to their notice or those that come to their notice

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within a reasonable timeframe. For example, if a person has applied for a job in employment exchange, he must

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know within how many days, he will get suitable job. Such responsiveness will enhance the trust of communities and

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/ or the stakeholders in the governing agency and also reduce corruption in governance.

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(6) Good Governance is Equitable and Inclusive: Good governance is based on principle of equity and
inclusiveness. It ensures that all members of the community get an equal opportunities to improve and maintain his/

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her well being, develop his/her capabilities, earn his/her livelihood with dignity and shape the destiny of his/her community.

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But practically such equality does not exist mainly because of social prejudices. Laws do exist but in every street ad

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corner, no official can stand to ensure that these are followed.

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(7) Good Governance is Effective and Efficient: The process of development in using resources many times

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misuse or overuse them. It often harms ecology and the environment leading to loss of forest cover, land erosion,
pollution of the atmosphere.

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It can be prevented if project proposals are appraised with regard to their impact on the environment and such
impact is continuously monitored by the project authorities and the government agencies concerned.

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(8) Good Governance is Rule of Law: Good governance needs a unbiased legal framework, full protection of

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human rights and equality before law. It will need an incorruptible, efficient and impartial police force and judiciary
along with free access to the judiciary. It also requires that justice should also be quick.
(9) Good Governance Functions as a Trustee of the Governed: Good governance functions as a trustee of
the people of a country or the stakeholders in an entity or organization. Ultimately a country and its resources belong
to the people and government is not more than a trustee. A trustee must consider interests of his principal in all
decisions. The governed entrust their benefits in the ands of government: Be it the utilization of natural resources,
mobilization and utilization of financial resources, formulation and implementation of policies and programmes. Therefore
it is necessary that the state acts only as a guardian and a trustee of the people in ensuring that the ownership and
control of these resources are distributed keeping in mind welfare of the most. If governance qualifies these nine
attributes of governance detailed above we shall get a society free of corruption, inequity, injustice, negation of basic
rights, poverty and marginalization of the vulnerable sections of society.
SECTION-B
Q. 3. What is demonetization? Discuss usefulness of demonetization as an instrument to check
underground economy.
Ans. Demonetization means discontinuity of the particular currency from circulation and replacing it with a new
currency. In the current context it is the banning of the 500 and 1000 denomination currency notes as a legal tender.

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 The government's stated objective behind the demonetization policy are as follows; first, it is an attempt to make
India corruption free. Second it is done to curb black money, third to control escalating price rise, fourth to stop funds
flow to illegal activity, fifth to make people accountable for every rupee they possess and pay income tax return.
Finally, it is an attempt to make a cashless society and create a Digital India.
There is a background to the current decision of demonetization of 500 and 1000 rupee notes. The government
has taken few steps in this direction much before its November 8, 2016 announcement.
As a first step the government had urged people to create bank accounts under Jan DhanYojana. They were
asked to deposit all the money in their Jan Dhan accounts and do their future transaction through banking methods
only.
The second step that the government initiated was a tax declaration of the income and had given October 30,
2016 deadline for this purpose. Through this method, the government was able to mop up a huge amount of undeclared
income.
However, there were many who still hoarded the black money, and in order to tackle them; the government
announced the demonetization of 500 and 1000 currency notes.

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Usefulness of Demonetization: The demonetization policy will help India to become corruption free. Those

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indulging in taking bribe will refrain from corrupt practices as it will be hard for them to keep their unaccounted cash.
This move will help the government to track the black money. Those individuals who have unaccounted cash are

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now required to show income and submit PAN for any valid financial transactions. The government can get income
tax return for the income on which tax has not been paid.

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The move will stop funding to the unlawful activities that are thriving due to unaccounted cash flow. Banning

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high-value currency will rein in criminal activities like terrorism etc.
The ban on high value currency will also curb the menace of money laundering. Now such activity can easily be

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tracked and income tax department can catch such people who are in the business of money laundering.

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This move will stop the circulation of fake currency. Most of the fake currency put in circulation is of the high

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value notes and the banning of 500 and 1000 notes will eliminate the circulation of fake currency.
This move has generated interest among those people who had opened Jan Dhan accounts under the Prime
Minister's Jan DhanYojana. They can now deposit their cash under this scheme and this money can be used for the

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developmental activity of the country.

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The demonetization policy will force people to pay income tax returns. Most of the people who have been hiding

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their income are now forced to come forward to declare their income and pay tax on the same.

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Even though deposits up to Rs 2.5 lakh will not come under Income tax scrutiny, individuals are required to submit
PAN for any deposit of above Rs 50,000 in cash. This will help the income tax department to track individuals with

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high denominations currency.

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The ultimate objective is to make India a cashless society. All the monetary transaction has to be through the
banking methods and individuals have to be accountable for each penny they possess. It is a giant step towards the

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dream of making a digital India. If these are the merits, there are demerits of this policy as well.
Q. 4. Discuss the transmission mechanism and lags in Monetary Policy framework.
Ans. Transmission Mechanism of Monetary Policy: It is argued by the economists that monetary policy is
more effective in controlling inflation and stabilizing output because Fiscal policy has lost its significance due to
concern over persistently large budget deficits, and political system cannot make tax and spending decisions in a
timely way to achieve desirable stabilization outcomes.
The effectiveness of monetary policy essentially depends on the institutional framework available for transmitting
impulses released by the central bank. The inter-relationship between money, output and prices lies at the core of
monetary theory. Transmission channels are neither static nor uniform over time. These channels need to undergo
changes possibly making the earlier channels relatively less effective compared to the new ones. It includes the
various channels through which the policy operates like quantum channel, credit rate channel such as interest rate
channel, exchange rate channel and asset prices channel.
Transmission Mechanism is the process through which monetary policy decisions affect the economy in general
and the price level in particular. The transmission mechanism is characterized by long, variable and uncertain time
lags. Thus it is difficult to predict the precise effect of monetary policy actions on the economy and price level. Time
lags that occur between the onset of an economic problem and the full impact of the policy intended to correct the

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problem. Policy lags come in two broad categories-inside lag (getting the policy activated) and outside lag (the
subsequent impact of the policy). The three specific inside lags are recognition lag, decision lag, and implementation
lag. The one specific outside lag is termed impact lag. Policy lags can reduce the effectiveness of business-cycle
stabilization policies and can even destabilize the economy. Policy lags, especially inside lags, are often different for
monetary policy than for fiscal policy.
Q. 5. Critically examine the major institutional obstacles coming in the way of improving the conditions
of Indian agriculture.
Ans. Creating new institutional arrangements with the hope that it will deliver results is quite common in the
context of Indian agriculture. But as we have seen such arrangements often fail to create any tangible impact. Even
though these arrangements are good conceptually, making them work is a big challenge for the Indian government.
ATMA as an initiative is yet to show any productive result. It has not been able to demonstrate a success story even
though it is conceptually very sound. However, there has been some success with respect to the transfer of technology
using the Krishi Vigyana Kendra (KVK). It has been observed that such schemes are more successful when they are
run by NGOs.
The problem lies primarily in our culture. It is said that ten Indians are equal to one Japanese when it comes to

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executing plans. We have a democratic set-up which allows a lot of bureaucracy creeping into the system. Moreover,
it has been observed that we are inefficient especially when it comes to collective effort. We do not work well in
teams and this is a major problem not just in agricultural initiatives but in other areas as well. The way our Parliament
is run and the problems with the SMEs are a few examples. It is a general perception that co-operatives do not work

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well in capitalist nations, but we have seen a number of cooperatives work efficiently in America. In contrast, Anand's

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milk co-operative is the only successful co-operative in our country. The solution probably lies in education. The
benefits of working collectively should be taught to Indians right from their childhood.

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Strategy of Reforms In Agriculture

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While announcing any economic policy, we cannot ignore agriculture sector esp. for a country like India, because

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it determines the fortunes of a vast majority of farmers in India and also makes a dent in their poverty. But NEP 1991

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has neglected public investment in rural infrastructure, causes stagnation in the growth in this sector and increased
cost of farm production. Moreover, market driven liberalization process in agriculture is extremely biased towards

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rich farmers and prosperous regions. Policies must not ignore the interests of small farmers and ensure that

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disadvantaged regions are protected and they are also enabled to gain from trade liberalization.
India is blessed with all that it takes to be agricultural superpower: abundant sunshine, adequate rainfall, varied

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agro-climatic conditions and biodiversity.

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But due to confusing policy environment, uncertainty over adoption of agricultural biotechnology, lack of rural

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infrastructure and poor institutional set-up we are not becoming so. Some of such concerns are discussed below:

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Pricing Policy
Not only agriculture policies but also other macro-economic policy measures affect the sector to a great extent by

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altering the production as well as social relations.
The issue of pricing has gained momentum due to following reasons.
(i) There has been a rise in the political power of the formidable farm lobby.
(ii) There are strong macro-linkages of pricing policy which have a potential to significantly alter the result of the
stabilization-cum-structural reform package in vogue.
It is suggested that we should remove the present negative protection to the agriculture sector and let prices
correct themselves via demand and supply forces. It is possible through poverty alleviation and employment generation
programmes and by limiting Public Distribution System (PDS) to a narrowly targeted population.
Fiscal Policies
We need to evolve a politically sustainable policy like reducing input subsidies, especially on fertilizers and electricity.
Price of a commodity act as a signal of its scarcity and if water charges and electricity rates are not raised to
appropriate levels to recover cost from beneficiaries, it will not increase but deteriorate agricultural growth rates. We
cannot expect agriculture sector to grow without increase in public investment in this region. The fall in agriculture’s
share in investment is sharper than its share in government expenditure.
Input Supplies
Fertilizer use is concentrated in a few crops and few regions making the benefit of subsidies to farming community
highly skewed. The Government should reduce these subsidies in a phased manner and spend on increasing irrigation.

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 Improved technology is most important for the growth of output. Another important factor is the availability of
quality seeds. Most of the farmers do not distinguish between “seed and grain” and use common grain as seed. We
need to make efforts for adequate supply of quality seeds through research institutes and public expenditure.
Agricultural Credit
We need to revitalize credit for agricultural development as credit is crucial for any sector. We need to increase
formal credit facilities, make it easily available to small and marginal farmers and also need to give loans for personal
purposes during seasonal unemployment.
Agricultural Marketing
Indian agricultural markets are inefficient and even primitive to some extent. Price support operations are biased
in favour of wheat and rice crops. Commercializing Indian agriculture unduly benefit the endowment-rich regions.
Marketing structures in backward districts do not quite function commercially.
Food Stock Operations
Food Corporation of India (FCI) is facing a sharp increase in economic cost of food grains because of increasing
gap between economic cost and procurement prices. Therefore, we need to restrict PDS coverage to a narrowly

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targeted group. Another point to be considered is optimal level of stocks should be maintained so that stocks are not

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wasted. Before decision to restrict PDS to a narrower target group, we must complete the exercise of setting stock
norms.

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Technology and Sustainability
Technology and sustainability has several dimensions for agricultural growth.

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(a) Take up dissemination of dry land technology on a priority basis.

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(b) Priority to development of infrastructure
(c) Research and extension services and

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(d) Dissemination of dry land technology.

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Agro-Climatic Regional Planning (ACRP) provides a suitable framework for technology and sustainability. We

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also need to concentrate on the sustainability of irrigation system. We also need to be concerned for drought prone
areas.
Institutional Arrangements

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A renewed thrust on land reforms is the best solution for structural adjustment process.

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There is bias in state-intervention and inter-regional differences in agrarian reforms.

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We need to provide institutional credit to enhance lending for both production and long-term investment purposes.

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The crop insurance scheme coverage should be encouraged and include more remunerative cash crops. We also
need to improve marketing network for coarse cereals on a regional basis for distribution operations. Therefore, we

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need to treat NAFED at par with FCI for all practical purposes. We also need to ensure that agriculture labour is not

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exploited. Hence, we need to take institutional measures for an effective monitoring of minimum wage legislation and
for distributing surplus land among these labourers.

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Q. 6. Do you think that Planning in India has been successful? What is significant difference between
role and responsibilities of erstwhile Planning Commission and NITI Ayoga?
Ans. Government Failure: During the fifties and the early sixties drawing up of a five-year plan became the
norm for developing economies on the demand of world donors. There was a stagnation in seventies due to second
world was unable to maintain its pace of growth as planning faced difficulties in coming to grips with an intensive
phase of development which needed fine-tuning in many ways. Third world’s development also suffered in many
ways. These were treated as failures of planning and intervention and were termed as ‘government failure’.
Planning Commission was an advisory body and so is NitiAyog. But the key difference between them is that
while the former had powers to allocate funds to ministries and states; this function will be now of finance ministry.
NitiAyog is essentially a think tank and a truly advisory body. Other differences are as follows:
l The role of states in the planning commission era was limited. The states annually needed to interact with the
planning commission to get their annual plan approved. They had some limited function in the National
Development Council. Since Niti Ayog has all chief ministers of states and administrators of UT in its Governing
Council, it is obvious that states are expected to have greater role and say in planning/ implementation of
policies.

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 l The top down approach is reversed in Niti Ayog. It will develop mechanisms to formulate credible plans to the
village level and aggregate these progressively at higher levels of government.
l The provision of regional council is there in Niti Ayog to address local / regional development issues.
l One of the new functions of NitiAyog is to address the need of the National Security in the economic strategy.
How this is to be done - is yet to be watched.
l While the planning commission formed Central Plans, Niti Ayog will not formulate them anymore. It has been
vested with the responsibility of evaluating the implementation of programmes. In this way, while NitiAyog
retains the advisory and monitoring functions of the Planning commission, the function of framing Plans and
allocating funds for Plan assisted schemes has been taken away.
Q. 7. What do you mean by inequality? Examine the policy implications of wide spread poverty and
inequality in the Indian economy.
Ans. The concept of inequality is distinct from that of poverty and fairness. Income inequality metrics or income
distribution metrics are used by social scientists to measure the distribution of income, and economic inequality among
the participants in a particular economy, such as that of a specific country or of the world in general. While different

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theories may try to explain how income inequality comes about, income inequality metrics simply provide a system of

l Range

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l Range Ratio U
measurement used to determine the dispersion of incomes.
The Income Measure

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l The McLoone Index

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l Coefficient of Variation
l Lorenz Curve

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The Non-Income Measures

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The non-income aspect includes the access to safe drinking water, access to sanitation, access to education and

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health, employment opportunity.
l Inequality in distribution of consumption expenditure
l Inequality in social category

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It implies that we need to make growth for Indian economy inclusive. There is a need to follow a policy that pays

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attention on:

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Agricultural Development: Irrigation and water management, credit, research and extension, marketing, Land

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and water management, Development of agro based industries in rural areas.
Public Investment: Priority to public investment in physical and human infrastructure.

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Public Expenditure on Health and Education: Increase public expenditure on health and education with

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increased effectiveness of these expenditures. It will improve quality of human capital.
Social Protection: Many poverty alleviation programmes have been launched to address the issue of poverty

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and inequality. Public Distribution System (direct food subsidy), Indira Awas Yojana (Housing for poor) and direct
cash transfer through the programmes like old age pension scheme, widow pension scheme, disability pension scheme,
national family benefit schemes, etc.
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