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Challenges Of Liberalisation, Privatisation And Globalisation

Liberalisation, Privatisation And Globalisation are the three most important phenomena in the history of the Indian subcontinent. However, all of it did not happen overnight and there are different challenges of liberalization privatisation globalisation in public administration. Here is an article discussing various problems of LPG in India, the impact of liberalisation, privatisation, globalisation on Indian Economy and the conclusion of LPG.

The last few decades have seen encompassing and far-reaching changes all over the world. What is distinctive of the phenomenal change unfolding is that the elements driving it or from which it emerges have affected almost all countries in all sectors affecting entire masses in one manner or the other. The dynamism of the processes of change and particulars of the phenomenon is explained by three related concepts of Liberalization, Privatization and Globalization.

Public policies are directly linked with these phenomenal changes as they define and underline the various ways the state and government have been affected by and in turn, changed the functioning of the system. State as the governing authority, its capability and capacity, its apparatus and environment of functioning and the very course of governing have underørina radical transformation due to the onslaught of globalization and its related concepts.

Liberalisation

Liberalisation, in general, refers to “weakening or total rejection of the state control over all types of economic activities and commercial parameters such as the freeing of trade, investment and capital flows between countries, opening up of markets to competition, relaxation of government restrictions, usually in areas of ‘social or economic policy) In the arena of social policy, it may refer to a relaxation of laws restricting, for example, divorcé, abortion, homosexuality or drugs? Most often, the term is used to refer to economic liberalization especially traded liberalization or capital market liberalization, policies often referred to as neoliberalism. Neoliberalism is associated with the contemporary era of globalization, the seeds of which were planted after the Second World War. The term neoliberalism is used to describe a political-economic philosophy that de-emphasises or rejects positive government intervention in the economy.

It focuses on free-market methods, fewer restrictions on business operations, and property rights and the opening of foreign markets by political means, using economic pressure, diplomacy and or military intervention. Opening of markets refers to free trade and an international division of labour. Neo-liberalism generally favours multilateral political pressure through international organizations or treaty devices such as the WTO and World Bank.) It promotes reducing the role of national governments to a minimum and favours laissez-fáire over direct government intervention and measures success in overall economic gain.

The slow and quantitative development of neo-liberalism after World War II became more rapid in the 1970s which culminated with the Reagan government in the United States and that of Margaret Thatcher in Britain- along with the fall of the Soviet Union and the fading of social democracy and new liberalism as counterbalances or alternatives to unbridled capitalism. The Reagan and Thatcher governments not only shifted their own countries policies toward laissez-faire but used their influence’ to impose their policies on the rest of the world.

In effect then, due to the efforts of the national governments and market processes, markets integrated to such an extent that the various national markets of products and financial services had become almost one single market. The same process within the developing countries took place much later.

Privatisation

Privatisation as a concept defining the economic and political style of functioning of both politics and markets did not gain wide circulation until the late 1970s and early 1980s. However, post-1990 privatisation as liberalization and globalisation has become a worldwide phenomenon. The terms ‘private’ and ‘public’ have generally been used to identify the commercial and governmental styles of approaching specific tasks. It was the rethinking of the style of functioning of the public sector that had become big, unwisely, inefficient, unaccountable and difficult to manage, led to the incorporation of efficient, commercial and business-like private sector management techniques by the public sector that redefined boundaries set within the two sectors.

Privatisation is also defined as the act of reducing the role of government or increasing the role of the private sector, in an activity or the ownership of assets. The spread of the privatization movement is grounded in the fundamental belief that market’ competition in the private sector is a more efficient way of providing these services and allows for greater citizen choice. In practice, however, concerns about service quality, social equity and employment conditions raise scepticism of privatization. Although empirical studies do not provide clear evidence on the costs and benefits of privatization, public perception and pressure for improved government efficiency kept privatization on the government agenda all over the globe.

Reasons For Privatization

Privatisation was the domestic incorporation of the neo-liberals fundamental belief that market competition in the private sector is a more efficient way of providing services. The private sector allowed to provide some of the services that were ordinarily provided by governments emerged as the accepted solution to basic lacuna plaguing governments that had become big, inefficient and seeking to reduce costs and overheads. ( Governments around the world commonly share three objectives in their privatization programs:

• To promote efficiency by exposing business and services to the greatest possible competition, to the benefit of the consumer.
• To spread share ownership as widely as possible among the population, and
• To obtain the best value for each industry or service the government sells.

Types And Techniques Of Privatization

Some of the commonly accepted techniques used for privatization can be listed as follows:

Contracting Out (also called outsourcing)

The government competitively contracts with a private organization, to provide a service or part of a service. It is one of the most frequently used options by governments to augment their service delivery mechanisms and make the service accountable and responsive to market pressures.

Management Contracts

The operation of a facility is contracted out to a private company. Facilities, where the management is frequently contracted out, include airports. wastewater plants, arena and convention centres.

Public-Private Competition

Public-Private competition is also called ‘managed competition’, or market testing. When public services are opened up to competition, in house public organizations are allowed to participate in the bidding process.

Franchise

A private firm is given the exclusive right to provide a service within a certain geographical area.

Internal Markets

Departments are allowed to purchase support services such as printing, maintenance, computer repair and training from in-house providers or outside suppliers. In-house providers of support services are required to operate as independent business units competing against outside contractors for the department’s business. Under such a system, market forces are brought to bear within an organization. Internal customers can reject the offerings of internal service providers if they don’t like their quality or if they cost too much.

Vouchers

The government pays for the service, however, individuals are given redeemable certificates to purchase the service in the open market. These subsidise the consumer of the service, but services are provided by the private sector. In addition to providing greater freedom of choice, vouchers bring consumer pressure to bear, creating incentives for consumers to shop around for services and for service providers to supply high-quality, low-cost services.

Commercialisation

Commercialisation is also referred to as service shedding. Government stops providing services and lets the private sector assume the function.

Self-Help

Self Help is also referred to as transfer to the non-profit organizations, community groups and neighbourhood organisations take over a service or government asset such as a local park. The new providers of the service, also are directly benefiting from the service. Governments increasingly are discovering that by turning some non-core services such as ‘zoos’, ‘museums’, ‘fairs’, ‘parks’ and some recreational programs over to non-profit organizations, they can ensure that these institutions don’t drain the budget.

Volunteers

Volunteers are used to providing all or part of government service. Volunteer’ activities are conducted through a government volunteer program or a non-profit organization.

Corporation

Government organizations are reorganized along business lines. Typically they are required to pay taxes, raise capital on the market (with no government backing – explicit or implicit ), and operate according to commercial principles. Government corporations focus on maximising profits and achieving a favourable return on investment. They are freed from government procurement, personnel and budget systems.

Asset Sale Or Long-term Lease

The government sells or enters into long-term leases for assets such as airports, gas utilities or real estate to private firms, thus turning physical capital into financial capital. In a sale-leaseback arrangement, the government sells the asset to a private sector entity and then leases it back. Another asset sale technique is the employee buyout. Existing public managers and employees take the public unit private, typically purchasing the company through an Employee StockOwnership Plan (ESOP).

Private Infrastructure Development and Operation

The private sector builds finances and operates public infrastructure such as roads and airports costs through user charges. Several techniques commonly are used for privately building and operating infrastructure. Some of the popular techniques are used for privately building and operating infrastructure. Some of the popular techniques are:

• In the Build-Operate-Transfer (BOT) arrangements, the private sector finances to build and operate the facility over the life of the contract. of this period, ownership reverts to the government.
• A variation of this is the Build-Transfer-Operate (BTO) model, under which transfers to the government at the time construction is completed.
• Finally, with Build-Own-Operate (B00) arrangements, the private sector retains permanent ownership and operates the family on contract.

These techniques or a combination of one or more of these techniques of functioning is supposed to lead to greater efficiency and productivity of enterprises.

Liberalisation and Privatization are in fact levers that are augmenting the globalization process that has gained currency and varied connotations providing explanations and used as a source, cause, catalyst, motivation and structure of the changes and the changing world that we have encountered in the past fifteen years.

Globalisation

The term globalization is used to explain this accelerated exchange of ideas and commodities and the various manifestations of interconnectedness in the world that is affecting people and places. The term came into common usage since the 1980s, reflecting technological advances that made it easier and quicker to complete international transactions – manifest in the extremely intricate interconnectedness of human life across the planet.

Globalization consists of processes that lead toward global interdependence and the increasing rapidity of exchange across vast distances. It is regarded as a historical process the result and culmination of human innovation and technological progress. In economic terms, globalization refers to the increasing integration of economies around the world, particularly through trade and financial flows. The term also refers to the movement of people (labour) and knowledge ( technology) across international borders. There are also broader cultural, political and environmental dimensions of globalization. It refers to an extension beyond national borders of the same market forces that have operated for centuries at all levels of human economic activity – village markets, urban industries, or financial centres.

Globalisation is understood as the process of increasing interdependence among countries and their citizens, is understood differently by different people. For the economist, globalization is essentially the emergence of global markets. For the historian, it is an epoch dominated by global capitalism. For the sociologist, globalization at once underscores the celebration of diversity as well as the convergence of social preferences in matters of lifestyle and social values. While for political scientists it is a phenomenon that ‘is gradually eroding state sovereignty.

The technological and financial advances had a direct impact on the state and its functioning radically transforming its capacities and capabilities. The emergence of global issues such as nuclear proliferation, environmental concerns, human rights, transnational crimes, peace, weapons, health concerns drugs, illegal immigration requires the state to coordinate policy-making at levels beyond the nation-state. Moreover, liberalization and privatization have incorporated radical changes that require varied and different forms of regulation.

Regional and international institutions and organizations addressing almost all aspects of socio-economic and political issues are redefining how the state functions. The interaction pattern between states has also transformed with communications and interactions increasing at the individual, association, group and institutional level. Increasing linkages between international actors such as multinational corporations, non-governmental organizations, sub-national groups and the recent penchant for strengthening local level governance encouraged both supra and sub-national decision making that impinged directly on the original role that the state enjoyed both within and outside its boundaries. In essence, the state is no longer the sole governing or decision-making authority as several alternative centres of power have emerged to take up the role and share the responsibilities.

Globalisation has set in motion a process of far-reaching change that is affecting everyone, New technology, supported by more open policies, has created a world more interconnected than ever before. (This spans not only growing interdependence in economic relations- trade, investment, finance and the organization of production globally but also social and political interaction among organizations and individuals across the world. The potential for good is immense. The growing interconnectivity among people across the world is nurturing the realization that we are all part of a global community.

Check out public administration notes in detail.

The Reserve Bank of India

The Reserve Bank of India (RBI) was established as a shareholder’s bank on April 1, 1935. It retained this character for about fourteen years. Over this period important developments took place in India. The country got freedom on August 15, 1947, and the nationalist government decided to initiate the process of planned economic development. It was felt that a State-owned central bank was better suited to the requirements of the country. Hence, the RBI was nationalised on January 1, 1949.

Check out Economic development notes in detail. 

Main Functions Of The Reserve Bank

The RBI, like any other central bank, performs almost all traditional central banking functions. But, due to the specific nature of the country’s underdeveloped economy, it has undertaken some developmental and promotional functions also.

Since the RBI was established on the model of the Bank of England, its general central banking functions are very much similar to the Bank of England. These functions are as follows :

Issue of Currency Notes

Like any other central bank, the RBI has the sole right to issue currency notes. Under the original Act, there was a provision for issuing currency notes according to the proportional reserve system. This system is relatively less elastic was not suited to the I requirements of development planning. Thus the original Act was amended and the proportional reserve system of note issue was replaced by the minimum reserve system. According to the RBI (Amendment) Act, 1956 a minimum reserve of Rs. 515 crore – Rs. 115 crore in gold coin and bullion “and Rs. 400 crore in foreign securities was to be kept. The provisions regarding the maintenance of reserves were again amended on October 31, 1957, by the Reserve bank of India (Amendment) Ordinance, 1957, subsequently substituted by the RBI (Second Amendment). The new Amendment Act reduced the amount of gold (coin and bullion) and foreign Sexchange reserve to Rs. 200 crores; of this, the value of gold was not to be at any time less than Rs. 115 crore. This provision released a large amount of foreign exchange which was earlier kept as part of the reserve. Following the policy of other central banks the RBI (Second Amendment) Act, 1957, empowered the RBI to dispense with the entire holding of foreign securities with the prior sanction of the Central Government.

Banker to the Government

The RBI renders useful service to the government in the capacity of its banker, agent and adviser. Before the establishment of the RBI, important. current financial transactions of the government were handled by the Imperial Bank of India, which was a leading commercial bank of that period. When the RBI has established in 1935 both these aspects of government finance were centralised in it. The RBI now has the obligation to transact the banking business of the Central and State governments. Thus, it accepts money on account of these governments, makes payments on their behalf and carries out other banking operations such as their exchange and remittances. The RBI has intimate knowledge of the financial markets and thus offers useful advice to the government on the quantum and terms of new loans. Since the treasury bill market is very narrow, selling treasury bills on behalf of the government is relatively a less important function of the RBI. The RBI is authorised to make ways advances to the government. These short term loans are repayable within 90 days from the date of advance. Since the discharge of this function involves receipts and payments on behalf of both Central and the State governments not only in the capital cities but also in many other towns.

Banker’s Bank

The RBI has been vested with extensive powers to control the commercial banking systems under the Reserve Bank of India Act, 1934 and the Banking Regulation Act, 1949. According to the Banking Regulation Act, 1949, all banking companies included in the Second Schedule of the RBI are called scheduled banks. For inclusion in the Second Schedule, a bank must satisfy the RBI that its affairs are not conducted in a manner detrimental to the interests of its depositors.

All scheduled banks are under a statutory obligation to maintain a certain minimum of cash reserve (to be decided by the RBI) with the RBI against their demand and time liabilities. An amendment of 1962 to the Banking Regulation Act, has empowered the RBI to 1 determine the Cash Reserve Ratio (CRR) between 3 per cent and 15 per cent of aggregate demand – and time liabilities.

Apart from this statutory control over the commercial banks, the RBI can also direct the scheduled banks to maintain 100 per cent cash reserve against all deposits received after à specified date. Further, the scheduled banks are required to submit weekly statements of their transactions to the RBI. The Banking Regulation Act, 1949, and the various amendments made therein define the RBI’S * regulatory functions relating to banks. These functions are quite extensive and cover such areas. – as the licensing of banks, branch expansion, liquidity of the assets of commercial banks, their management and methods of working, amalgamation, reconstruction and liquidation.

Exchange Management and Control

The RBF is required to stabilise the external value of the rupee. For this purpose, it functions as the custodian of the nation’s foreign exchange reserves. It is obligatory for the RBI to buy and sell the currents of all the members of the IMF. Stability in the external value of a currency is normally achieved by employing various monetary and fiscal tools. However, these instruments were found inadequate during World War II? tackling balance of payments problems. In the abnormal conditions of the War as no other remedy was available, India (facing balance of payments problems) resorted to direct methods of exchange control, which have now become a permanent instrument of economic management. Retro Prior to February 1947, exchange controls were exercised under the Defence of India Act. In 1947, the Foreign Exchange Regulation Act (FERA) was passed and with it, foreign exchange management and control became a distinct function of the RBI. The Act empowered the RBI to exercise control over foreign securities, foreign payments and transfer of currency, bullion and securities to foreign nationals. This Act has been substituted by the Foreign Exchange Regulation Act, 1973, which came into force on January 1, 1974.

Credit Control

Credit Control is generally considered to be the principal function of a central bank. In fact, it is this function that enables a central bank to realise both exchange stability and price stability. The RBI, like any other central bank, now possesses the power to use almost all quantitative and qualitative methods of credit control. Now FERA has been replaced by Foreign Exchange Management Act (FEMA).

Agricultural Finance

Although the RBI was established on the model of the Bank of England, yet it had a unique feature in its character. The Agricultural Credit Department of the RBI clearly distinguished it from the central banks of developed countries. For enabling the RBI to fulfil this role, the RBI Act was laid down for the setting up of a special Agricultural Credit Department. With the setting up of the National Bank for Agricultural and Rural Development (NABARD) on July 12, 1982, the major functions of the Agricultural Credit Department of the RBI were taken over by the former.

Collection and Publication of Data

The RBI has been entrusted with the task of collecting and compilation of statistical information relating to banking and other financial sectors of the economy. Out of various publications of the RBI two are relatively more important. The RBI: Bulletin is a monthly publication. It presents not only statistical and other information in summary form, but also provides results of important studies and investigations conducted by the RBI. The Report on Currency and Finance is an annual publication. It provides a comprehensive review of various developments of economic and financial importance.

Developmental and Promotional Functions

Now the RBI performs many developmental and promotional functions. These functions were earlier considered outside the purview of the Central Banks. In other words, the RBI’s functions are now not confined merely to the exercise of restrictive controls over the money market. Now it attempts to mobilise savings through banks and other financial institutions.

The RBI with the objective of providing security to depositors took initiative to establish the Deposit Insurance Corporation of India in 1962. In order to mobilise savings, the RBI played an active role in the establishment of the Unit Trust of India (UTI) in 1964. To small investors, the UTI offers the advantages of reduced risk, steady income, liquidity and expert management. Development of the institutional agricultural credit has been a major function of the RBI from its very inception. It not only assisted the development of short-term cooperative credit for agriculture but also participated in the establishment of the Agricultural Refinance and Development Corporation (ARDC) in 1963. The National Bank for Agriculture and Rural Development (NABARD) was set up on July 12, 1982. Half of its share capital (Rs. 100 crores) has been provided by the RBI. The NABARD has taken over the entire undertaking of ARDC..!!! The RBI, besides being a controller of credit, is also an advisor to the government. The significance of the RBI’s advisory function has considerably increased in the context of the government’s attempts to accelerate the development process in the country. Now the Central government asks for its advice not only on financial matters but also on general economic problems. As such, it now plays a useful role in the planning process of the country.

Check out these notes for Control Of Credit By The Reserve Bank Of India.

Five Year Plans In India

From 1947 to 2018 in India, the economic system was governed by planning. This was accomplished in the plan for a period of five years. Planning Commission (1951-2014) and Niti Ayog (2016) completed the twelfth Plan’s first three terms in March 2017. The BJP Government announced the Dissolution of Planning Commission which has been replaced by the Thought Tank under his leadership. The Planning Commission has a deputy chairman that holds cabinet office. Ajmal Singh Ahluwalia served for a month until retiring. Check out 11th five year plan in India here.

Eleventh Five Year Plan India

The Eleventh Five Year Plan duration that started on April 1, 2007, and covers the five year period 2007-12. The Eleventh plan document starts on an optimistic note pointing to the robust economic growth registered in the Tenth Plan which was 7.8 per cent per annum ( higher than the rate of growth registered in any other Plan). In fact, the last four years of the Tenth Plan recorded a rate of growth of as high as 8.6 per cent per annum making India one of the fastest-growing economies of the world. However, according to the Plan, “a major weakness in the economy is that the growth is not perceived as being sufficiently inclusive for many groups, especially SCs and STs, and minorities. Gender inequality also remains a pervasive problem and some of the structural changes taking place harm women. The lack of inclusiveness is -borne out by data on several dimensions of performance”.

On account of the above reasons, the Eleventh Plan emphasizes faster and more inclusive growth. According to the plan, its strategy for inclusive growth is not just a conventional strategy to which some elements aimed at inclusion have been added. On the contrary, it is a strategy that aims at achieving a particular type of growth process which will meet the objectives of inclusiveness and sustainability. This strategy must be based on sound macroeconomic policies which establish the macro-economic pre-conditions for rapid growth and support key drivers to this growth. It must also include sector-specific policies which ensure that the structure of growth that is generated, and the institutional environment in which it occurs, achieve the objectives of inclusiveness in all its many dimensions.

Monitorable targets of the eleventh five year plan Achievements and failures

With its strategy of faster and inclusive growth, the Eleventh plan identifies 27 monitorable targets at the national level of which 13 can be disaggregated at the level of individual states. Justifying the adoption of these highly ambitious targets, the plan document states “These targets are ambitious but it is better to aim high and fail than to aim low”.

The 27 monitorable targets at the national level have been divided into 6 main categories:

1. Income and Poverty
2. Education,
3. Health
4. Women and Children
5. Infrastructure
6. Environment

The targets in each of these categories are given below:

1. Income and Poverty:

• The average GDP growth rate of 9 percent per year in the Eleventh plan period
• Agricultural GDP growth rate at 4 percent per year on an average
• General of 58 million new work opportunities
• Reduction of unemployment among the educated to less than 5 percent
• 27 percent rise in the real wage rate of unskilled workers,
• Reduction in the head-count ratio of consumption poverty by 10 percentage points.

2. Education

• Reduction in the drop-out rates of children at the elementary level from 52.2 percent in 2002-03 to 20 percent by 2011-12
• Developing minimum standards of educational attainment in elementary schools, – to ensure quality education
• Increasing the literacy rate for persons of age 7 years or more to 85 percent by 201112
• Reducing the gender gap in literacy to 10 percentage points by 2011-12
• Increasing the percentage of each cohort going to higher education from the present 10 percent to 15 percent by 2011-12.

3. Health

• Infant mortality rate (IMR) to be reduced to 28 and maternal mortality rate (MMR) to 1 per 1000 live births by the end of the Eleventh Plan
• Total Fertility Kale to be reduced to 2.1 by the end of the Eleventh plan
• clean drinking water to be available for all by 2009, ensuring that there are no slip-backs by the end of the Eleventh Plan
• Malnutrition among children of age group 0-3 to be reduced to hand present level by the end of the Eleventh Plan
• Anaemia among women and girls to be reduced to half its present level by the end of the Eleventh Plan.

4. Women and children

• Sex ratio for age group 0-6 years to be raised to 933 Dy 2011 12 and 950 by 2016-17
• Ensuring that at least 33 per cent of the direct and indirect beneficiaries of all government schemes are women and girl children
• Ensuring that all children enjoy a safe childhood, without any compulsion to work

5. Infrastructure

• To ensure electricity connection to all villages and BPL households by 2009 and reliable power by the end of the plan
• To ensure all-weather road connection to all habitations with population 1000 and above ( 500 and above in hilly and tribal areas ) by 2009, and all significant habitations by 2015
• to connect every village by telephone and provide broadband connectivity to all villages by 2012
• To provide homestead sites to all by 2012 and step up the pace of house construction for rural poor to cover all the poor by 2016-17

6. Environment

• To increase forest and tree cover by 5 percentage points
• To attain WHO standards of air quality in all manor cities by 2011-12
• To treat all. urban wastewater by 2011-12 to clean river waters
• To increase energy efficiency by 20 percentage points by 2016-17. –

7. State Specific Targets

Thirteen of the 27 monitorable national targets have been disaggregated into appropriate targets for individual states. These are :

• GDP growth rate
• agricultural growth rate
• New work opportunities
• Poverty ratio
• Drop out in elementary schools
• Literacy rate
• Gender gap in literacy rate
• Infant mortality rate (IMR)
• Maternal Mortality Rate (MMR)
• Total Fertility Rate (TFR)
• Child malnutrition: Anaemia among women and children
• Sex-ratio.

In its last report Oxford poverty and human development initiative India ranked 62 on the global MPI 2020 ranking among 106 countries. The MPI-2021 will be released in July – the same month the index is released each year. This article discusses the important facts about the global index in general and the key findings of the MPI for the UPSC IAS Exam. The ranking of India is based on data for a 2020 Global Index and the 2021 MPI is available in the coming months.

Human Poverty Index UPSC

Human Development Report 1997 introduces a human poverty index in an attempt to bring together in a composite index the different features of deprivation in the quality of life to arrive at an aggregate judgement on the extent of poverty in a community. The Report acknowledges that human poverty is larger than any particular measure, including the human poverty index. It includes many aspects like lack of life of a community and threats to sustainability and intergenerational equity etc. which cannot be measured. However, given the fact that the issues of poverty in the developing countries involve hunger, illiteracy, epidemics and the lack of health services or safe water, the human poverty index constructed by the Human Development Report focuses on the deprivation in the following three elements of human life longevity, knowledge, and a decent standard of living.

The first deprivation relates to survival – the vulnerability to death at a relatively early age and is represented in the human poverty index by the percentage of people expected to die before age 40.

The second dimension relates to knowledge – being excluded from the world of reading and communication – and is measured by the percentage of adults who are illiterate. The third aspect relates to a decent standard of living, in particular, overall economic provisioning. This is represented by a composite of two variables – the percentage of the population not using improved water resources, and the percentage of children under five who are underweight. The Human Development Report 2009 calculated HPI for 135 countries. India’s rank in terms of this index was as low as 88. In absolute terms, the HPI is as high as 28.0% indicating that human poverty is widespread.

Human Development Report 2010 introduced the concept of Multidimensional Poverty Index (MPI) to replace HPI. The MPI is the product of the multidimensional poverty headcount (the share of multidimensionally poor people) and the average number of deprivations each multidimensionally poor household experiences (the intensity of their poverty). It has three dimensions mirroring the HDI viz health, education and living standards which are reflected in 10 indicators. According to Human Development Report, 2010, “the MPI is most appropriate for less developed countries. It captures the widespread deprivation in South Asia and Sub-Saharan Africa and the poorest Latin American countries. It reveals the magnitude of poverty beyond monetary measures – an important accomplishment”. According to this parameter, India with a poverty index of 0.296 per cent (national poverty line) is not favourably placed when compared with countries like China and Sri Lanka. The Human Development Report 2014 presents estimates of the multidimensional poverty index. The position of India is worrisome. This is clear from the fact that 55.3 per cent of the Indian’s population (i.e., more than 63.2 crore people) suffer from multidimensional poverty. As against this, in China, only 12.5 per cent of the population (i.e., 16.2 crore people) suffered from multidimensional poverty. Moreover, 27:8 per cent of the Indian’s population suffered from ‘severe poverty.

Class Base of the Poor

In an egalitarian society removal of poverty has to be accorded a high priority. But before any government decides its policy measures to solve the poverty problem, it must identify the poor. In India, unfortunately, no serious attempt has been made by the governments in this direction. Using the NSS data Minhas, Bardhan, Dandekar and Rath and a few others have attempted to identify the poor. According to their findings, a large bulk of the poor belongs to:

1. Agricultural labour households without landholdings form about 60 per cent of all agricultural labour households. –
2. Agricultural labour households with very small holdings constitute about 40 per cent of all agricultural labour households.
3. Non-agricultural rural labour households without landholdings including village artisans progressively losing their traditional employment; and 109 Small land operators, with cultivating holdings of less than 2 hectares, and particularly less than 1 hectare.

Dandekar and Rath state

The urban poor is only an overflow of the rural poor, into the urban area. Fundamentally, they belong to the same class as the rural poor. However, as they live long enough in urban poverty, they acquire characteristics of their own. Little is known of their life and labour in the growing cities. Human Poverty: Some development economists have argued in recent years that although income focuses on an important dimension of poverty, it gives only a partial picture of the many ways human lives can be blighted. As noted by the Human Development Report 1997, Someone can enjoy good health and live but be illiterate and thus cut off from learning, from communication and interactions with others. Another person may be literate and quite well educated but prone to premature death because of epidemiological characteristics or physical disposition. Yet a third way is excluded from participating in the important decision-making processes affecting his/ her life. As is clear, the deprivation of none of these people can be fully captured by the level of their income. To get a complete idea of poverty, one has thus to enlarge the canvas of study and talk in terms of deprivations and not merely income as it is in the deprivation of the lives that people can lead that poverty manifests itself. Poverty is thus a denial of choices and opportunities for living a tolerable life. This is the concept of human poverty. It means that opportunities and choices most basic to human development are denied – to lead a long, healthy, creative life and to enjoy a decent. standard of living, freedom, dignity, self-respect and the respect of others.

Present Poverty Scenario

India lacks appropriate and reliable data for direct estimation of the extent of poverty, as no attempt has been made so far in this country to collect statistical information in respect of income distribution. However, the NSS data on consumption expenditure provide such information that can be used for determining the incidence of poverty both in urban and rural sectors. For the study of poverty in Indią economists have particularly relied on this data.

Here are the notes for Poverty eradication and the Five Year Plans.

Poverty In India

India currently has 84 million people a year in extreme poverty and represents 6.8% of its population as of May 2021. India lifted 271 million people out of extreme poverty between 2005/06 and 2015/16. The frequency of multidimensional poverty has dramatically decreased from 51.7 percent in 2005 to 27.9 percent in 2015. In 2020 India can grow from 9.8 % in 2016 to 9.2 percent in 2020. By 2020 the government said 6.7% of the population is above its official poverty limit. A total of 1.2 lakh people living in poverty in India in 2012 had lived to be more than 2500 people, or 8.2 billion in. Here are the notes for Human Poverty Index.

Introduction To Poverty In India

What Is Poverty?

Poverty can be defined as a social phenomenon in which a section of the source is unable to fulfil even its necessities of life. When a substantial segment Ol society to deprived of the minimum level of living and continues at a bare subsistence level, that successor is said to be plagued with mass poverty. The countries of the third world exhibit invariably me existence of mass poverty, although pockets of poverty exist even in the developed countries.

In almost all underdeveloped countries where per capita income is very low, income inequality has resulted in a number of evils, of which poverty is certainly the most serious one. In India, even now in spite of all the development during the past five and a half decades, nearly forty per cent Ol the population is poor and for most of the time suffers from extreme destitution.

No one says that equitable distribution of present income in India will make everyone rich, but there must not be any doubt about the fact that it will ensure required minimum consumption to all. In India, the generally accepted definition of poverty emphasises a minimum level of living rather than a reasonable level of living. This attitude is borne out of a realization that it would not be possible to provide even a minimum quantum of basic needs for some decades and, therefore, talk about a reasonable level of living or good life may appear to be wishful thinking at the present stage.

Concept of Poverty

Two types of standards can be used to express the extent of poverty i) absolute standard; ii) relative standard. The absolute standard of poverty is calculated by first setting up certain minimum physical standards of living. This minimum standard is then converted into monetary terms. . The population whose level of income (or expenditure) is below this figure, is considered to be below the poverty line. bounties, o In the relative concept the distribution of income at different levels are calculated. A comparison of the top 5 to 10 per cent with the bottom 5 to 10 per cent of the population is supposed to reflect the relative standards of poverty. This kind of concept is not suitable for a country like ours. In India, it is more appropriate to determine the extent of poverty through absolute terms as the main concern for our country is the existence of mass poverty.

Poverty Line

The poverty line is based on the expenditure level at which a minimum calorie intake and indispensable non-food purchases are assured. The Sixth Five Year Plan defined the poverty line on the basis of an average intake of 2400 calories per person in rural and 2100 calories per person in urban areas. Given the updated State-specific poverty line the number of poor as a percentage of the total Tale population or the poverty ratio should be calculated separately for rural and urban areas.

The National Sample Survey (NSS) consumption surveys should be the basic source of information for estimating the proportion of the population below the poverty line and changes occurring in this regard. It is better to rely exclusively on the NSS for estimating the poverty ratio in rural and urban areas. Taking immediate steps by the Central Statistical Organisation to construct, the price indices representing changes in consumer prices of the poor at relevant disaggregate levels. To provide a complete picture of the state of well being of the population, we need supplementary estimates of the overall poverty ratio with the assessment. The composition of the poor population in terms of dominant characteristics. The nutritional status of the population.

The Poverty Gap Index

The poverty gap index is defined by the mean distance below the poverty line expressed as a proportion of that line (where the mean is formed over the entire population, counting the non-poor as having zero poverty gap). The poverty gap thus measures the transfer that would bring the income of every poor person exactly upto the poverty line, thereby eliminating poverty. In this way, the poverty gap reflects the depth of poverty, as well as its incidence. However, the poverty gap index is insensitive to the extent of inequality among the poor.

If income is transferred from a poor person to someone poorer, the poverty gap index will not change. This limitation notwithstanding, the poverty gap measure is definitely superior to a simple headcount index and it is this reason why of late it is in common use. Let us now consider estimates of poverty in terms of the poverty gap index. Ozler, Datt and Ravallion have compiled these estimates for the Poverty and Human Resources Division of the World Bank.

These estimates clearly indicate that from 1950-51 to 1973-74 there was no long term time trend but thereafter there was a steady decline in the poverty gap index till 1989-90. In the early 1990s, this trend was reversed and in July 1995 – December 1997, the poverty gap index was 8.21 for the rural population and 7.27 for the urban population.

The Squared Poverty Gap Index

The squared poverty gap index is defined as the mean of the squared proportionate poverty gaps. This measure reflects the severity of poverty as it is sensitive to inequality amongst the poor. In this sense, it is, without doubt, the most appropriate measure of income poverty. Estimates of the squared poverty gaps. provided by Ozlor, Datt and Ravallion clearly show that until 1973-74 the severity of poverty had not declined as compared to 1950-51. However, since 1973-74 there is a sharp decline in the squared poverty gap index for both urban and rural populations. For the rural population, the squared poverty gap index in 1997 was 2.76 against 7.13 in 1973-74. Similarly, for the urban population, the squared poverty index declined from 5.22 in 1973-74 to 2.73 in 1997.

Check out Economic development notes in detail. 

Characteristics Of The Indian Economy

 Low per capita income

India remains one of the most underdeveloped countries in terms of per capita income. In the year 2015, India’s, Purchasing Power Parity estimate of GNP per capita was as low as $6,030 it was around one-tenth of the U.S.A.’s purchasing power parity estimate of GNP per capita which stood at $57,540 in the year 2015.

Inequitable distribution of Income

The economic growth of the country has accentuated the disparities in income distribution. According to the World Development Indicators 2014, the share of the bottom 10% of the population in aggregate household expenditure was only (4% in 2010, while the share of the top 10% was as high as 29%. These figures clearly bring out the large inequalities in income and expenditure that exist in India.

Predominance of agriculture

In 1951 about 69.7 per cent of the country’s working population was dependent on agriculture, as against this in 2001 around 56.7% per cent of the working population was absorbed in agricultural operations. Another indicator of the predominance is the proportion of national income originating in this sector. In 2017, 18 Agriculture contributed 18 per cent of the Gross Domestic Product.

Rapid population growth

India’s population has been growing at a fast rate, from 439 million in 1961 to 1,210 million in 2011. The country at present is passing through the second stage of demographic transition which is characterised by a falling death rate without a corresponding decline in the birth rate. Population increase and the sluggish growth of the economy has increased the dependency ratio, especially in the agricultural sector. The decadal growth of population during the decade 2001 to 2011 was 17.64.

Low Level of Human Development

Human development is usually measured in terms of the Human Development Index (HDI) constructed by the United Nations Development Programme (UNDP). The HDI is a composite of three basic indicators of human development – longevity, knowledge and standard of living. India ranks a lowly 131 in terms of HDI (out of 188 countries) according to the Human Development Report 2016.

Unemployment

The failure of the Industrial sector to grow fast enough to absorb the growing urban population has led to urban unemployment but more striking is the disguised unemployment in rural India.

Scarcity of Capital

Capital is considered the most important factor of economic development. The rates of saving and capital formation have been low and are enough only to realise a modest rate of growth. The gross domestic savings rate for 2004-05 has been estimated to be as high as 31.3 per cent by the CSO while the gross investment rate in this year has also been claimed to have risen to 31.5 per cent. In 2011, the rates of gross domestic savings and gross domestic capital formation continued to rise. This stood at 31 per cent and 36.1 per cent respectively. In most of the low-income underdeveloped economies, the saving rate continues to be very low (less than 20% of GDP)

Technological Backwardness

Agriculture in India today is still characterised by highly primitive techniques. The workforce of the country which is illiterate lacks skill and knowledge. This poses the problem of dealing with a poor quality of the employed workforce.

Lack of Entrepreneurs

Entrepreneurs play a vital role in development. The country even now does not seem to have innovating entrepreneurs. Industrialists in the private sector concentrate mainly on quick, speculative profits rather than on the long-term industrial 1 development of the country.

Lack of Basic Minimum Needs

Needs such as drinking water, education, and sanitation, medical facilities are yet to reach the deprived rural areas of the country. The government is making great efforts to first equip the masses with these basic requirements.

Demographics

India possesses about 2.4 per cent of the total land area but has to support about 17.5 per cent of the world population. According to 2011 census, the population of India was 1,21,01,93,422. The population of India, which at the turn of the 20th century was around. 238.4 million has increased more than 4 times in a period of one hundred and ten years to reach 1,210 million in 2011.

Causes for Rapid Growth of Population

Broadly speaking there are two major causes for the increase in the population of a country. i) a high birth rate; ii) a relatively lower death rate. The birth rate is high because of certain economic and social factors. The economic factors are concerned with the predominance of agriculture, the slow urbanisation process, and poverty.

The social factors are :

lower age at the time of marriage which is responsible for the high fertility rate. religious beliefs, social superstitions, joint family systems and lack of education. com The increase in population is also due to the decline in mortality rate (death rate). Since Independence, there has been an elimination of famines, control of epidemics and reduction in the incidence of diseases like tuberculosis and malaria. Steps towards better sanitation, supply of drinking water, better education and expanded medical facilities particularly immunisation have controlled the mortality rate.

Theory of Demographic Transition

The theory of demographic transition is based on the relationship between the birth rate and the death rate. This theory pinpoints the changes in these rates which occur as a consequence of economic development. According to this theory, there are three stages through which the growth rate of the population passes:

First stage

Here the birth rate is high and so is the death rate. Since the birth rate in this stage is only slightly higher than the death rate the growth of the population is minimal. India was in this stage till 1921.

Second stage

As the economy develops the death rate falls rapidly I more or less stable and widens the difference between the two. Hence this is also called the stage of “population-explosion”. India has been in this stage since 1921.

Third stage

This is characterised by not only a low death rate but also a low birth rate. Economic development, industrialisation and urbanisation highlight the need for a small family thus bringing about a stable growth of population.

Important Demographic Characteristics

Sex Composition

The sex ratio (females per thousand males) according to the 2011 census is 940. This is the highest sex ratio recorded since census 1971 and a shade lower than 1961. Kerala top the list with 1084 females per thousand males and Haryana stands at the bottom with 877 females per thousand males. Among the Union Territories Pondicherry tops the list with a sex ratio of 1038. and Daman and Diu stand at the bottom with a sex ratio of 618.

The Density of Population

The density of population (the number of persons per sq. km) as per the 2011 census is 382. According to the 2011 census the density of population is highest in Bihar (1102) and lowest in Arunachal Pradesh (17). The Union Territory having the highest density was Delhi ( 11297) and the Union Territory with the lowest density was the Andaman and Nicobar Islands (46).

Literacy Rate

As per the 2011 Census, the literacy rate in India (population aged 7 years and above who can both read and write with understanding in any language) was 74.04 per cent. In general, the literacy rate has shown marginal increases every decade.

The state with the highest literacy rate was Kerala ( 93.91) and the state with the lowest literacy rate was Bihar (63.82). Kerala also occupies the top spot in the country in female literacy with 91.98 per cent while Lakshadweep is top in male literacy with 96.11 per cent. On the contrary, Bihar has recorded the lowest literacy rates in the case of males (73.39 per cent ) and Rajasthan in the case of females(56.66 per cent )./

Here are some notes on National Population Policy 2010

Infrastructure And Government’s Colonial Policy

Even this argument does not hold water. Although there are no records of the population before the first census in 1871, one can summarise from later censuses that the population could not have been large and the rise in it even if big in percentage ( though it might not have been the case ) could not add much. In 1871 the population stood at 25.4 crores. According to Kingsley Davis, in the long period of 60 years between 1881 and 1941, the Indian population increased by only 55 per cent, while the population of Japan doubled during the same period. The population of England and Wales increased more than three times during the 19th century. So, compared to these countries during the period under review, India’s population increased at a slow pace. But what happened in those countries did not happen in India. Development, as indicated by a rise in national income, took place faster than the increase in population in those countries. In India, on the other hand, national income rose very slowly at about 0.5 per cent per year. So, despite a small rise in population, per capita income actually declined. This leads one to conclude that population rise in the past did not contribute to stagnation. It must be something else that obstructed a faster growth of national income.

Government’s Colonial Policy

It is argued and rightly so by eminent thinkers like Dababhại Naoroji and Romesh Dutt that the basic cause of India’s stagnation was the policy of the British Government. It was pointed out that while the British gave to India centralised administration, a new judicial system, a law and order agency, and thereby created a favourable framework for the country’s economic growth, development did not take place. The state apparatus was in fact used in the interest of British industry and against that of the Indian economy. –Administrative rules, procedures .and laws were made to protect · largely the interests of British traders, British shippers and British manufactures.

Britishers also developed roads, railways and ports. But these were used for the export of Indian raw materials to England for British industries and the import of British manufactured goods into the county. Even the establishment of railways was done with imported equipment, thereby positively preventing the growth of the iron and steel industry in the country. Industrial and commercial policies were so designed that not only the existing native manufacturing industries were destroyed, but also new industries were prevented from coming Heavy import duties on Indian goods entering Britain, high excise duties on goods manufactured in India, exemption from inland transit duties to British traders preference to British manufacturers under the government’s store purchase policies, etc. amounted to placing all sorts of blocks in the way of the growth of domestic industries, local entrepreneurs and native industrial culture. As if all this was not enough, British rulers imposed the free trade principle on the country, apparently to provide competitive conditions to British manufacturers against Indian manufacturers within India. Superficially, this provided equal status to British and Indian manufacturers. Behind this facade of equality, however, British manufacturers were in fact made more than equal under their political power.

The Indian manufacturers were denied facilities for the establishment of industries. Thus handicapped, competition from Indians was made non-existent. As has been aptly observed by H.H. Wilson, the British employed the arm of political injustice to keep down and ultimately strangle a competitor with whom they could not have contended on equal terms. It may, however, be mentioned that during the inter-war period, the government did pursue a policy of protection for Indian industries. But this “new economic policy, however, was a case of too little and too late”. This protection could be granted only to existing industries, which satisfied certain very stringent conditions. No provision was made for starting new industries such as chemicals or machine tools. Further, the shift in policy came at a time when home industries and native talent had already been destroyed, when such major works as construction of when after World War I the government’s demands for goods.

Resource Mobilization

Tax And Non Tax Revenues

Financing of the government is a matter of universal concern, for practically everyone anyone some advantage from the services of governments and also contributes to their support. The modern-day state is a welfare state and the state is looked upon as a protector, provider, entrepreneur, economic controller and arbiter. Such a wide range of functions requires massive funds. Where do these funds come from and how are they to be allocated? Answer to my question can be found in the realm of Public Finance.

Public Finance deals with the income and expenditure of public authorities. The word public is is used to signify the government’ or ‘State’. Public authorities include all sorts of governments. Hence it can be said that it deals with the finances of the governments Central, State and Local that are studied in the science of Public Finance. According to Prof. Dalton, Public Finance is concerned with the income and expenditure of public authorities and with the adjustment of one to another”.

Public Expenditure is necessary for the government to perform various functions for the welfare of the society, so it requires public revenue. Public revenue holds the same position in the study of public finance, which production holds in the study of economics. Just as production is the means of consumption, public revenue is the means for public expenditure. The income of the government through all sources is called public income or public revenue. Public revenue includes income from taxes, prices of goods and services supplied by public enterprises, revenue from administrative activities, such as fees, fines, etc., and gifts and grants.

Sources Of Public Revenue

The various forms of sources of Public revenue, i.e., taxes, commercial revenues, administrative revenues, grants and gifts.

Taxes:

Taxes are compulsory payments to governments without expectation of direct return or benefit to the taxpayer.

Commercial Revenues:

The revenues, which we call “commercial” are received in the form of prices paid for government-produced commodities and services, i.e., revenues, which are derived by the government from public enterprises by selling their goods and services, are called commercial revenues.

They are also known as prices because they come in the form of prices of goods and services provided by the government. They include payments for postage, tolls, interest on funds borrowed from the government credit corporations, prices paid for liquor in government stores, electricity distributed by the government, railway services and the like.

Check out public administration notes in detail.

Fiscal Policy And Economic Growth

Fiscal policy is also a potent weapon for the achievement of accelerated economic growth backward, underdeveloped economy. Without an appropriate fiscal policy, the process of economic growth in a country is bound to suffer. in achieving fast economic growing me government may have to deploy all the instruments of fiscal policy at its disposal, namely, taxation, public expenditure, public debt and deficit financing.

The problem in a backward underdeveloped economy is not one of lack of real resources, but that of shortage of financial resources. There is no shortage of real resources in the economy. Land, forests, water, minerals, labour etc. are all there in adequate quantities. What the country lacks is adequate finance to mobilise these real resources for development. So, all the instruments of fiscal policy may have to be used to raise adequate finance for economic growth.

Check out public administration notes in detail.

Taxation

It is an indispensable instrument for raising finances for economic development. For this purpose, the government may resort to both direct as well as indirect taxation, Direct taxes, such as income tax wealth tax, gift tax, capital gains tax and death duties may have to be levied to net adequate revenues for development purposes. The incidence of these taxes mostly falls on the richer classes. As such, they are quite justified from the point of equity.

The government may also impose steep excise duties and import taxes on luxury and semi-luxury goods that are consumed exclusively by the rich. To raise enough revenue for developmental purposes, it may also be necessary to levy excise taxes on articles of mass consumption, though the burden of such taxes is mostly borne by the poor and middle classes.

Public debt

Taxation taken alone may not yield adequate revenue for mobilising the real resources of the country. The government may, therefore, resort to public borrowings short-term as well as long-term, to add to its fund of investible resources. There may be opposition to heavy taxation, but no one opposes public borrowings, because the government pays interest on public loans.

While borrowing from the public, the government should ensure that the burden of interest charges does not turn to be unbearable for it. For this purpose, the government may adopt a cheap money policy to keep interest rates at a comparatively low level. Since the amount raised through international money market for raising the necessary funds for developmental purposes.

The government may even take loans from foreign countries on international lending agencies on suitable conditions and terms of repayment. While raising external loans, the government has to be alert enough to see that such loans do not compromise its economic and political sovereignty in any way.

Public Expenditure

The government of an underdeveloped country should devote quite a substantial portion of its expenditure to the building up of necessary infrastructural facilities for economic growth, such as roads, railways, communications, irrigation works, power mining general and technical education. These facilities will induce a rapid economy.

Along with that, a part of the public expenditure may also be allocated for the growth and development of basic industries which will provide the foundation of industrial growth in future. Agriculture which is generally the most important segment of an underdeveloped economy should receive the special attention of the government. Expenditure incurred by the government on the promotion of labour and social welfare also aids the rapid growth of the economy by improving the productivity of the labour force. 

Deficit Financing

It is still another important instrument of fiscal policy. It has proved to be a dependable means of financing the economic growth of an underdeveloped economy. . . Several developing countries have, in recent years, employed the technique of deficit financing as a means of financing economic development.

Limitations Of Fiscal Policy

Fiscal policy as an instrument of economic stability and economic growth suffers from certain limitations which may be set forth below.

1. Firstly, the difficulty of accurately forecasting the onset of depression robs fiscal policy of much of its utility and effectiveness as an anti-cyclical device. More often than not, a country finds itself already knee-deep in depressions before it moves about to take corrective action.
2. Secondly, the corrective action taken by the government does not produce immediate results, because there is often a prolonged time interval between the enforcement of fiscal measures and their final impact on the functioning of the economy.
3. Thirdly, fiscal steps taken by the government to curb unemployment may fail to yields results if the unemployment is due to causes other than the deficiency aggregate demand. Fiscal measures, for example, will fail to make any dent in unemployment if it is due to seasonal, frictional, structural or technological causes.
4. Fourthly, the increase in public expenditure may reduce the volume of private investment which would adversely affect the employment and economic development programmes.
5. Fifthly, a strong and powerful fiscal policy adopted to deal with mass unemployment may unduly inflate the size of the public debt which will impose an unbearable burden on posterity.
6. Sixthly, while dealing with hyper inflation’ and boom, the government may carry its fiscal measures to the other extreme, namely far too high taxation and cutback in public investment. which will pave the way for the forthcoming depression.
7. Lastly, fiscal measures ( such as increased taxation and increased borrowings ) taken to finance economic growth in an underdeveloped economy may not suffice unless and until recourse is taken to monetary devices such as deficit financing etc.

Check out these notes on Resource Mobilization.

Fiscal Policy During Inflation

 Fiscal Policy is now recognised as an important instrument to tackle an inflationary situation in the economy. The major anti-inflationary fiscal measures are the following:

1) Government Expenditure :

During inflation, as is well known, aggregate effective demand increases for too much due to unregulated private expenditure. The increased private expenditure presses heavily against the limited supply of goods and services available in the increased private spending, the government should, at such a time, reduce its own expenditure to the minimum extent possible to help limit the aggregate demand.

2) Taxation:

Taxation acquires added significance as an anti-inflationary weapon during an inflationary boom. The problem during inflation is to reduce the size of disposable income in the hands of the general public in view of the limited supply of goods and services in the market.

3) Public borrowings:

This is another anti-inflation weapon which is often utilised to contain inflationary pressures in the economy. The object of public borrowings is to take away from the public excess purchasing power which, if left free, would surely exert an upward pressures on the price level in view of the limited supplies of goods and services in the economy. Public borrowing may be voluntary or compulsory. Ordinarily, public borrowing is voluntary, left to the free will of individuals.

But voluntary borrowing has one disadvantage and that is it does not bring to the government sufficient amount to have a really effective impact on the inflationary pressures, It thus becomes essential in due course of time to resort to compulsory saving or compulsory borrowing from the public (also known as deferred pay). ·

According to this plan, a certain percentage of the wages or salaries of employees is compulsorily deducted in exchange for saving bonds which become redeemable after a few years. This has the effect of blocking purchasing power for a definite period so as to relieve pressure on the limited supplies of goods and services. It has also the added advantage of releasing blocked purchasing power as the first symptom of a recession in business activity.

Compulsory saving was resorted to in Great Britain during the Second World War at the instance of Lord Keynes to fight inflation. The scheme of compulsory saving was also introduced in India for the employees and income tax assesses in 1974 as a fiscal measure to hold the inflationary forces in check.

4) Debt management:

The existing public debt should be managed in such a manner as to reduce the existing money supply and prevent further credit expansion. Anti-inflation debt management usually requires the retirement or payment of bank-held debt out of a budget surplus. The idea is that the government securities held by commercial banks should be retired by the government out of a budgetary surplus. This would check the power of commercial banks to en cash their securities and add to their reserves for the purpose of credit expansion. There is, however, one snag here. At a time of inflation, despite its best efforts, the government may not succeed in having a budgetary surplus.

Due to the excessive increase in expenditure, the government may actually be faced with a deficit budget. In that case, the government can adopt another method to retire bank-held debt. It can retire this debt by the sale of bank-ineligible bonds to non-bank investors, like insurance companies, saving banks, individuals, etc. This will have the effect of taking away spendable money from the public, and thus, contribute to a lessening of pressure on limited stocks of goods and services available in the market.

But this method is also subject to limitations. It would be rendered ineffective if the non-bank investors were unwilling to give up their spendable money in exchange for government bonds. It would also prove futile if the non-bank investors utilised for purchasing government bonds idle funds which would not have been spent at all.

Here are the notes for Fiscal Policy And Economic Growth

Fiscal Policy

Fiscal policy may be defined As that part of government economic policy which un taxation, expenditure, borrowing and the management of public debt in an economy. According to Arthus Smithies, Fiscal policy is a policy under which the government Uses is expenditure and revenue programmes to produce desirable effects and avoid undesirable ejectors on the national income, production and employment. Fiscal policy in short refers to the budgetary policy. It is an indispensable instrument of modem public finance. The importance of fiscal policy has greatly increased in modern times, both in developed as well as the underdeveloped countries of the world. In developed countries, fiscal policy is being increasingly used as an instrument to achieve full employment and economic stability. On the contrary, in underdeveloped countries, fiscal policy is more and more being used as a means to step up the rate of economic growth.

The fiscal policy primarily concerns itself with the flow of funds in the economy. Taxation, as it were, diverts the funds from the private sector to the governmental sector. Public expenditure, on the contrary, diverts funds from the governmental sector back to the economy. Public borrowing, like taxation, also diverts funds from the private sector to the governmental sector, but the two diversions influence the private sector in different ways. Management of public debts includes functions, such as floating of governmental loans, payment of interest thereon and retirement of matured debts. Fiscal policy, thus, exerts a very powerful influence on the working of the national economy. It directly affects the volume of output, income and employment in the economy. The greater the percentage of national income and expenditure represented by the governmental budget, the greater would be the influence of fiscal policy on aggregate economic activity.

Check out public administration notes in detail.

Modern Concept Of Fiscal Policy

According to the modern concept of fiscal policy, Fiscal policy is a technique to attain and maintain full employment by manipulating public expenditure as well as revenue in such a way to keep an equilibrium between effective demand and supply of goods and services as needed at that time.

Objectives of Fiscal Policy In Developed Economy

The main objectives of fiscal policy in a developed economy are :

1. To raise the level of investments,
2. To check the fluctuations in the effective demand for money.
3. To control the automatic process of the market.
4. To give proper direction to government investments.
5. To determine a suitable taxation policy.

Objectives Of Fiscal Policy in an Underdeveloped Economy

The nature of the fiscal policy in an underdeveloped economy is bound to be different from that of a developed country. In a developed economy, (as the economy is already fully developed), the problem is that of achieving economic stability on account of business fluctuations caused by the operation of the trade. In an underdeveloped economy, the problem is that of promoting rapid economic growth in the country,

The following could be major objectives of fiscal policy in an underdeveloped country:

1. To maximize the level of aggregate savings.
2. To maximize the rate of capital formation.
3. To divert the capital resources from less productive to more productive and from social less desirable to socially more desirable uses.
4. To curb the inflationary forces in the economy.
5. To eliminate as far as possible, sectoral imbalances arising in the economy from time to time.
6. To provide incentives for encouraging those industries which have a high employment potential in the economy.
7. To eliminate as far as possible the glaring economic inequalities and to bring about equitable re-distribution of income and wealth in the society.

The Objectives Of Fiscal Policy in A Developing Country Like India

1. Promotion and acceleration of capital formation in the public and private sectors.
2. Mobilisation of real and financial resources for the public sector without hampering the expansion of resources for the private sector.
3. Removal of unemployment.
4. Promotion and maintenance of economic stability.
5. Redistribution of national income.
6. Promotion and maintenance of price stability.
7. Fiscal policy and capital formation.
8. Fiscal policy and mobilisation of resources.

Developing countries suffer from a very low rate of voluntary private saving. The propensity to consume there is high and the propensity to save is very low resulting in deficiency of resources, mainly financial resources. For the mobilisation of financial resources, the following fiscal means may be used:

i) taxation,

ii)public borrowings,

iii) deficit financing, and

iv) stimulating private savings.

v) Removal of unemployment

There must be a harmonious combination to accelerate economic progress without inflation. In developing countries, the problem of unemployment is slightly different from that in a developed countries. As such, the fiscal policy shall have to be suitably modified to meet the requirements of developing countries like India. A developing economy, as it is well known, has generally to face two types of unemployment, namely, cyclical and disguised unemployment.

The cyclical unemployment in a developing economy originates generally from external causes. A cyclical recession in the advanced countries is, at once, transmitted to the developing counties through a fall in the prices of primary goods exported to these developed countries. In this way, export industries which constitute an important sector of these developing economies get depressed, resulting in cyclical unemployment in these countries.

There is a tendency for the price to rise on account of the large development expenditure which is seldom accompanied by a corresponding increase in production. However, a certain degree of inflation is both unavoidable and perhaps desirable in a developing economy. But if inflation goes too far, it distorts the economy and retards economic development. An anti-inflationary fiscal policy has, therefore, an important role in a developing economy.

Such fiscal policy involves a reduction in public expenditure, increase in taxation and public borrowings. However, reduction in government expenditure cause spending in the economy to decline and this keeps down the total demand. This is, however, not possible when investing in the public sector must of necessity expand. Hence reduction should be effected in the unnecessary expenditure of the government.

Here are the notes for Fiscal Policy During Inflation