Commerce ePathshala NOTES
(IGNOU)
Important Questions & Answers
IGNOU
: BCOM
BCOG
172 – INDIAN ECONOMY
Q – Describe the Following Terms
1. Capitalism
2. Socialism
3. Sustainable Development
Ans.
1. Cpaitalism
In a capitalist economic
system, activities of a business firm are market determined. In a capitalist
economy, neither an individual nor any institution takes decisions in a
centralised or planned manner concerning its day-to-day functioning of economic
activities. However, the people of capitalist countries know that in spite of
all this the producers generally produce those commodities which are
effectively demanded in the market. The producers also find it necessary to
demand services of factors of production like land, labour, capital and
organization. There is payment by producers for these services, which is in the
form of rent, wages, salaries, interest and profit. This is also known as
income in lieu of rendering services to the producer. It is only by spending
this income that the people can buy goods and services of their choice.
2. Socialism
Socialism is an economic
system where private sector does not have any kind of control over price
fixation by market forces. The production, distribution and consumption
resulting from all major economic activities are centralised. By centralization
means, it is controlled by the state or state-established agencies. This kind
of system is also known as command economy.
According to Paul M.
Sweezy, “Socialism is a complete social system which differs from capitalism
not only in the absence of private ownership of the means of production but
also in its basic structure and mode of functioning.”
Market system or market
determined prices have no role to play in the working of a socialist economy.
China and Russia are examples of Socialist Economy. In these economies,
generally the planning commission or central decision making agencies, are
required to solve the basic central problems, i.e. what to produce, how to
produce, and for whom to produce. In order to do this, the Planning Commission
or central agencies have to, on the one hand, make an estimate of the available
economic, human and natural resources at its command, while on the other hand,
it has to determine the requirements of the nation for various goods and
services. This process can also be termed as Command Economy.
3. Sustainable Development
Sustainable Development It
is the process of development that "meets the needs of the present without
compromising the ability of future generations to meet their own needs"
(the Brundtland Report, 1987). While the central issue of sustainable
development is the reduction/prevention of environmental degradation, but it
must be done without unduly forgoing the needs of economic development, social
equality and justice.
Q – State the Features of Underdeveloped Economy.
Ans. Features of a Underdeveloped Economy
1.
Low Per Capita Income: Per capita income refers to the
average income of people of a country. It is calculated by dividing national
income by total population of the country. Per capita income is also often used
to measure a country's standard of living. You must be aware that the national
income of an under developed country is low and the population is high. As a
result, the under developed countries have low per capita income.
2.
Inequitable Distribution of Income and Wealth:
Disparity of incomes among different population segments is known as
disparities in income. Growing inequality in the distribution of wealth and
poverty has become a major problem all-over the world. The inequality affects
the economic development of the under developed countries. Disparities in
wealth is one of the important reasons for inequitable distribution of income.
3.
Heavy Dependence on Agriculture: A large proportion of
population is dependent on agriculture in underdeveloped countries. The natural
calamities adversely affect the agriculture. As a result, the farmers get less
output from agriculture. These days, the contribution of agriculture to the GDP
of underdeveloped countries has been rapidly declining.
4.
Heavy Population Pressure: Growth of population in
underdeveloped countries is very high as compared to the developed nations. The
public investments in education and health have been very meagre. Therefore,
the human resources of underdeveloped countries are not properly harnessed. The
majority population has to depend on informal employment.
5.
Unemployment and Underemployment: A situation of
unemployment arises when the people seeking jobs do not find opportunities to
work. Underemployment is a condition in which people in a labour force are
employed on part-time or gig jobs or at jobs inadequate with respect to their
training/skills or economic needs. Many people in underdeveloped countries are
either unemployed or underemployed.
6.
Capital Scarcity and Low Rate of Capital Formation:
One of the important problems of underdeveloped countries is scarcity of
capital. Capital formation refers to addition of capital goods, such as
equipment, tools, transportation assets, and electricity. Countries need
capital goods to replace the older ones that are used to produce goods and
services. If a country cannot replace capital goods due to lack of resources,
the production starts declining. Generally, the higher the capital formation of
an economy, the faster an economy can grow its aggregate income. Underdeveloped
countries face the problem of shortage of capital due to low levels of income
of people and savings.
7.
Use of Primitive Technologies: Technological development
is very low in underdeveloped countries as compared to the developed countries.
Most of the technologies used in underdeveloped countries are out dated and
primitive. Therefore, the cost of production becomes very high. The products
are not able to compete in the international markets. The domestic industry may
not be able to compete with imported goods.
8.
Disparities in Rural Urban Living Standards: There has been
wide variation between rural and urban people in the underdeveloped economy.
The disparities are measured in terms of income, consumption and other
non-monetary aspects of standard of life such as access to education, health,
transport, protected water, sanitation etc.
Q – Describe inequality in Income Distribution. State It’s Causes
Ans.
Income inequality is a significant disparity in the distribution of income
between individuals, social groups, populations, or countries. It is a major
factor of social stratification and social class. Other elements included in
inequalities are wealth, political power, and social status. Income is a major
determinant of quality of life, affecting the health and well-being of
individuals and families, and varies by social factors such as sex, age, and
race or ethnicity. As per the 'World Inequality Report 2022', India is among
the most unequal countries in the world, with rising poverty and an 'affluent
elite.' The report highlights that the top 10% and top 1% in India hold 57% and
22% of the total national income respectively while the bottom 50% share has
gone down to 13%.
The average national income of the Indian adult
population is Rs 2,04,200. Here, the bottom 50% earns Rs 53,610 while the top
10% earns Rs 11,66,520, over 20 times more.
Causes
of Inequalities:
Major causes of the inequalities are te following:
(i)
Inheritance: It plays a significant role in
inequality. The persons born in rich family have a significant advantage. If
they are prudent enough, they maintain the lead. On the other hand, people born
in poor families are at disadvantage in this respect.
(ii)
Difference in natural traits: Different
people have different talents and initiatives. The people gifted with natural
traits and entrepreneurship multiply their prosperity as compared the people
who lack these qualities.
(iii)
Opportunities of higher education and skill
development: Some people get opportunities of better education and skill
development. With this background, they succeed in getting jobs of higher
emoluments.
(iv)
Family influence: It is often found that
family influence plays important role in getting one a lucrative job.
Q – State the Measures to remove inequality in income distribution.
Ans.
Measures to Reduce Inequalities: As discussed above,
inequalities in income distribution cause many social and political problems.
In view of this, the government endeavours to reduce inequalities by following
appropriate policy matters. The important measures followed for reducing
inequalities are as follows.
(i)
Fixing minimum wages: Guaranteeing a
minimum wage consistent with a minimum standard of living is an important
step.. In India, the Minimum Wages Act was passed in 1948 in pursuance of which
minimum wages are fixed for agricultural labour and labour in what are called
the ‘sweated trades’. The minimum wage is revised from time to time in accordance
with the price index. Depending on the local conditions, minimum wages may be
different in different States. For example, according to the Delhi minimum wage
notification (Oct. 2021), the minimum wages for the unskilled, semi-skilled and
skilled labour were Rs. 618/-, 681/- and 749/- respectively.
(ii)
Social security: The government must ensure
adequate social security schemes which must include provision of free
education, free medical and maternity aid, old-age pension, liberal
unemployment benefits, sickness and accident compensation, provident fund and
schemes of social insurance, etc. As an example, recently, the State and
Central governments provided compensation to the kin of the persons died due to
Covid.
(iii)
(iii) Need to promote labour-intensive
manufacturing: There is need to promote labour-intensive manufacturing like;
Construction, Textile, Clothing, Footwear etc. to reduce rising inequalities.
The Labour-intensive manufacturing has the potential to absorb millions of
people who are leaving farming.
(iv)
Skill development: The development of
advanced skills among the youth is a prerequisite if India wants to make use of
its demographic dividend. The skilling of youth by increasing investment in
education is the only way we can reduce inequality. India needs to become a
Skill-led economy.
(v)
Progressive Taxation: Progressive
Taxation on the rich and the luxuries will help reduce income inequalities.
Other direct taxes like the super tax, excess profits tax, and capital gains
tax and limitation of dividends, etc., may also be imposed.
(vi)
High Taxes on Luxuries: There should
be heavy taxation on the consumption of luxuries. This will take away from the
rich the power to display their wealth. This will also take away the incentive
to amassing wealth for exclusive private enjoyment. Expenditure tax in India
sought the same objective. (This tax has, however, been abolished.
(vii) Ceilings
on Agricultural Holdings and Urban Property: Ceilings on agricultural land
holdings can be imposed to reduce inequality between big and small farmers.
This has been done in India and recently the ceilings have been lowered to
10-18 standard acres. The main purpose of land ceilings is to bring about a
wider and equal ownership and use of land.
Similarly, a ceiling on
urban property can be imposed so that inequalities in urban areas can also be
toned down. More radical socioeconomic reforms seem to be in the offing in
India.
There is also need of
policies and some sort of machinery by the Government, which may provide equal
opportunities to all rich and poor in getting employment or getting a start in
trade and industry. In other words, something may be done to eliminate the
family influence in the matter of choice of a profession. For example, the
government may institute a system of liberal stipends and scholarships, so that
even the poorest in the land can acquire the highest education and technical
skill.
Q – Describe the Following Terms -
1.
Liberalization
2.
Privatization
3.
Globalisation
Ans.
1. Liberalization
Liberalization of economy
was a key component of the New Economic Policy (NEP). Prior to 1991, there were
several types of controls on private business enterprises imposed by the
government. Some of these controls were: seeking licensing from the government,
price control, import license, foreign exchange control, monopoly restrictions,
etc. As a result of these controls there were several hindrances in the
economic growth. These included corruption, delays, inefficiency. In the NEP
the emphasis was placed on market forces, namely supply and demand.
Liberalization steps can be broadly grouped into two categories: industrial
sector reforms and financial sector reforms.
2. Privatization
Privatisation is the process of involving the private
sector-in the ownership of Public Sector Units (PSU’s). The main reason for
privatisation was in currency of PSU’s are running in losses due to political
interference. The managers cannot work independently. Production capacity
remained under-utilized. To increase competition and efficiency privatisation
of PSUs was inevitable. The following steps were taken for privatisation:
· Sale
of shares of PSUs: Indian Govt. started selling shares of PSU’s to public and
financial institution e.g. Govt. sold shares of Maruti Udyog Ltd. Now the
private sector will acquire ownership of these PSU’s. The share of private
sector has increased from 45% to 55%.
· Disinvestment
in PSU’s: The Govt. has started the process of disinvestment in those PSU’s
which had been running into loss. It means that Govt. has been selling out
these industries to private sector
· Minimisation
of Public Sector: Previously Public sector was given the importance with a view
to help in industrialisation and removal of poverty. But these PSU’s could not
able to achieve this objective and policy of contraction of PSU’s was followed
under new economic reforms. Number of industries reserved for public sector was
reduces from 17 to 2.
3. Globalization
Globalization
Globalisation means the interaction of the domestic economy with the rest of
the world with regard to foreign investment, trade, production and financial
matters. Following steps are taken for Globalisation:
· Reduction
in tariffs: Custom duties and tariffs imposed on imports and exports are
reduced gradually just to make India economy attractive to the global
investors.
· Long
term Trade Policy: - Liberal policy
-
All controls on foreign trade have been removed
-
Open competition has been encouraged
-
Partial Convertibility of Indian currency:
Partial convertibility can be defined as to convert Indian
currency (up to specific extent) in the currency of other countries. So that
the flow of foreign investment in terms of Foreign Institutional Investment
(FII) and foreign Direct Investment (FDI).
This convertibility stood valid for following transaction:
(a)
Remittances to meet family expenses
(b)
Payment of interest
(c)
Import and export of goods and services.
-
Increase in Equity Limit of Foreign Investment:
Equity limit of foreign capital investment has been
raised from 40% to 100% percent. In 47 high priority industries foreign direct
investment (FDI) to the extent of 100% will be allowed without any restriction.
In this regard Foreign Exchange Management Act (FEMA) will be enforced. If the
Indian economy is shining at the world map currently, its sole attribution goes
to the implementation of the New Economic Policy in 1991.
Q – State the needs & Perquisites of Privatization &
Commercialization of Infrastructure.
Ans.
PRIVATISATION AND COMMERCIALISATION OF INFRASTRUCTURE
Private participation in infrastructure development
depends upon its capability to commercialise the infrastructure services.
Need
for Privatisation and Commercialisation
The different factors that call for immediate
privatisation and commercialisation of infrastructure can be identified as
follows:
(i)
Massive
Investment Needs: Infrastructure development requires
massive investments and it is not possible for the state to meet all the
investment needs.
(ii)
Managerial
Constraints in the Public Sector: While the infrastructure
business is becoming more complex, public sector has not been able to meet the
managerial challenges and as a result the supply could not grow at the desired
pace. The fiscal stringency has also created a demand for accountability for
public spending. Therefore, a demand has arisen for commercialisation and
greater privatisation of infrastructure sector in order to inject greater
efficiency.
(iii)
Changes
in Technology: The possibility of marginal pricing and
exclusion provides greater scope for commercialisation. Technological changes
have made it possible to unbundle the infrastructure service thereby
introducing the elements of competition. The use of new technology enables the
charging of the marginal user.
(iv)
Globalisation:
The availability, quality, cost and reliability of infrastructure services are
key factors in attracting foreign investment. Globalisation has been aided
significantly by advances in transport, telecommunication and storage
technology. Such advances in infrastructure enable better management of
logistics by combination of purchasing, production and marketing function.
Besides facilitating suppliers to respond to the consumer demands promptly a
significant cost saving is achieved in investment and working capital.
Prerequisites
for Private Investment
Entry of private capital in infrastructure sector is
not merely a matter of simple policy initiatives. A few other important and
critical areas would have to be identified and a suitable environment created.
(i)
Commercialisation
of Infrastructure: Infrastructure services should not be
treated as public goods. In this regard, the possibility of commercialisation
will depend on the ability to segregate payers and non-payers and prevention of
any incidence of ‘free riding’. Thus, the excludability is a key factor in
commercialisation.
(ii)
Pricing
Policy: The role of private sector is not restricted to that
of provider of funds. It has to play the role of efficient and accountable
operator of the facility. The issue of pricing of infrastructure services
becomes critical here. In this sphere the long track record of uneconomic
pricing and prevalence of subsidies will be major obstacles.
(iii)
Demand
Orientation of Services: The existing procedure of financing
infrastructure facilities is based on plan allocation and is mainly
supplyoriented. Insufficient stress on the existing and the anticipated demand
has resulted in deviations in different countries and consequently a large part
of such investments are not providing sufficient returns. Privatisation will
necessitate a demand-oriented approach.
(iv)
The challenge for policy is to find
appropriate market signals which indicate the future trend of infrastructure
demand and to coordinate the supply of such facilities in such a manner that
investment in infrastructure provides appropriate returns.
(v)
Allocation
of Risk: Allocation of risk is of key importance in
commercialisation of infrastructure. The risk should be appropriately demarcated
and allocated to different stakeholders. This is important for two reasons:
(a) There is a tendency
among the private shareholders to shift the risk to the government.
(b) There is also a
tendency among the shareholders to shift the risk on each other.
(vi)
Direct
Participation by the Government: While the existence of
elements of monopoly in infrastructure will necessitate regulation by the
government, constraints in financing and user charging will render the direct
participation by the government necessary. Therefore, a transparent framework
for promotion of synergistic firmness of public-private partnership in
infrastructure is required.
Q – State the Weaknesses of Education Sector in India.
Ans.
WEAKNESSES OF THE EDUCATION SECTOR
The education sector of the economy has demonstrated a
number of weaknesses, among which the more important are as follows:
1. Narrow Coverage
Tertiary education has a very narrow coverage of the
population. Only 2.5 per cent of the Indian population in the relevant age
group attend colleges and universities, compared with 66 per cent in the US and
Canada, 47 per cent in the OECD countries, 37.7 per cent in South Korea and
over 20 per cent in countries such as Cuba, Costa Rica and Venezuela. Moreover,
there is a very high dropout rate in India. Of 100 children entering class I,
only 60 make it to the end of primary school (class V). In contrast, 68 per
cent of world’s children complete primary education. Further, less than 3 per
cent children complete class XII. The poor retention rate at the primary level
has been traced to the general neglect of the education sector. There has been
a significant improvement in retention rate during the past few decades. The
dropout ratio in primary schools has decreased sharply from 70 per cent in
1950s to 40 per cent at present.
2. Low Access to Education
Access to education has been highly skewed. Some
segments of society do not have access to quality education. A recent World
Bank study on the subject has established that 10 per cent of the best educated
Indians received 61 per cent of the total resources, as against 36 per cent
across Asia, reflecting a very high degree of inequality in the system. The
Gini coefficient for India (on a scale of 0 to 1 representing a progressive
inequity) is 0.66, against the regional average of 0.43.
3. High Cost of Education
The cost of education, particularly higher education,
has been relatively high. Unit cost, defined as the percentage of per capita
GNP spent on each pupil, ranges from 6 for primary education to 231 for higher
education. Though it is obvious that higher education would have much larger
unit costs, cross country comparisons show that India’s outlays on higher
education is much above the average. Spending on higher education is 1.55 times
the Asian average; whereas it is only 0.61 times for primary education. An
implication of the above is that given the overall adequacy of funds invested
in the education sector, expenditure on higher education has left very little
resources for primary and secondary education.
4. Low Quality
Education Notwithstanding the presence of regulatory
bodies such as UGC, AICTE, NCTE, etc., the quality of higher education in India
is fairly low. As per Quacquarelli Symonds (QS) World University Ranking 2022,
only three institutions from India find a place in the top 200 universities in
the world. The low quality of education has more recently been confirmed in an
international test, PISA-2013 (Programme for International Student Assessment,
conducted by OECD annually to evaluate education systems world-wide) in which
India ranked second-last in a group of 73 countries, beating only Kyrgyzstan.
The educational system suffers from what has been called ‘diploma disease’,
i.e., it does not aim at conveying knowledge and skills at all, but is more
concerned with certification. As such, its contribution to the growth of human
capital is minimal; it is unable to meet the emerging demand for skilled
professionals.
5. Gender Bias
Spread of education has been biased more towards boys
than girls. The dropout rate is higher in the case of girls compared to boys.
Girls’ education is accorded lower priority in traditional households in India.
Girls are required to assist other women in the family in household work. Boys
on the other hand, are encouraged to study. Such traditional view however is
fast changing in India. The performance of girls in senior secondary education
is much better compared to that of boys. Even in higher education institutions,
there are more girls than boys in many educational programmes.
Q – State the Suggestions to promote employment in Urban areas.
Ans.
Suggestions to Promote Employment in Urban Areas
(a) Reform of the educational system to make it
vocational at the school stage, further give it a vocational bias at the
undergraduate stage, and restrict admissions to really highly qualified persons
at the postgraduate stages.
(b) Deliberate promotion of low capital intensity in
industrial production except in areas where technological considerations make
it impossible to avoid high capital intensity. Fiscal incentives and technological
facilities will have to be provided for encouraging low capital intensive
methods of production that will still be modern and viable in costs
(c) The vast infrastructure of research and development
that we have built up in the public sector is now not being used for the
promotion of intermediate technology and low capital intensive choice of
techniques. The present policy must be changed and deliberate attempts should
be made to identify and develop techniques of production that can be undertaken
with low capital-intensity
(d) In planning investment, whether in the private or
public sector, long gestation period should be avoided except where they are
technologically inescapable. Deliberate attempt should be made to promote
investments that involve a quick turnover of capital. This will ensure larger
and more continuous employment with a given volume of capital.
(e) In order to diminish the concentration of
employment in the metropolitan centres action will have to be taken to promote decentralisation
and dispersal of industrial activity. Mere policy declarations will not do;
they have to be accompanied by follow-up action. .
(f) The new policy directives given to the nationalised
banks to promote MSME sector and encourage self-employment should be vigorously
followed up.
Q – State the Suggestions to promote employment in Rural areas.
Ans.
Suggestions to Promote Employment in Rural Areas
In rural areas, economists are unanimous in their view
that there is no other remedy than a massive programme of investment in rural
development. This also requires upgradation of technology in production process
in rural areas. The measures for rural development can be listed as follows:
(i)
Creation of local assets, particularly
projects suitable for a quick increase in agricultural production, such as
small and medium irrigation 117 Human Resources Infrastructure and drainage
works, the construction of storage facilities and feeder roads and the
development of local transport;
(ii)
Land development and settlement;
(iii)
Expansion of animal husbandry and
diversification of agricultural production;
(iv)
Development of other productive
activities such as forestry and fishing;
(v)
Promotion of rural social activities
such as education, housing and health services;
(vi)
Development of viable small-scale
industries and handicrafts in rural areas, such as the local processing of
agricultural products and the manufacture of simple consumer and producer goods
needed in the areas;
(vii) Promotion and rapid spread of rural
electrification;
As already noted, development by itself may not bring
about employment. Some measures will have to be taken to increase employment
potential of development. This will require a frontal attack on the low
productivity and the low income status of large mass of the rural population
like the marginal farmers and small farmers. This goal can be achieved by:
(a) land reforms with ceiling on holdings and
redistribution of surplus land in such a manner as to increase the number of
owner-cultivated holdings,
(b) paying special and differential attention to the
needs of marginal and small farmers in terms of availability of credit, lower
rates of interest and facilities for obtaining easily technically-improved
agricultural inputs, and
(c) concerted efforts to find viable and year round
employment in the rural areas by an appropriate policy of rural
industrialisation.
Q – State the Causes of poverty.
Ans.
Several factors are responsible for the prevalence of poverty and inequality in
India. We discuss some of these factors below.
(i)
Weak
Asset Base
An individual in India is poor because he has a weak
asset base. He is born in a family that hardly owns an ancestral profitable
farm land and a big house or possesses previous metals or a professional
degree. The poor in India inherit poverty and debt. Exactly in the same way,
wealth of a family is passed on from one generation to another. The
disadvantaged groups receive very limited assets in inheritance. Therefore, we
observe rampant poverty among the disadvantaged groups.
(ii)
Social
Factors
Indian society is hierarchical in nature. It is
dominated by caste system, discriminatory inheritance laws, and rigid
traditions have directly or indirectly aggravated the problem of poverty in the
country. Caste-based occupational reservation in India has discouraged people
from learning skill sets and venture into the labour market on the basis of
efficiency. There is discrimination against women in Indian society. Education
of girl child is an important factor in this context. Further, there is a need
to change our mindset, as certain families do not allow women to work outside.
(iii)
High
Population Growth As per the Population Census of India,
population in India was around 36 crores in 1951 but increased to around 121
crores in 2011. India is the second most populous country in the world after
China. Population in India has increased over two per cent per annum during the
last half a decade. On an average, about 17 million people are added every year
to the population of the country. In 2011, population of India at 1210.8
millions, was almost equal to combined population of the United States,
Indonesia, Brazil, Pakistan, Bangladesh and Japan put together. The population
of India increased by more than 181 million during the decade 2001-11. The
estimated population of India in 2022 is 135 crores.
(iv)
Low
Level Literacy
Illiteracy is a major
cause of poverty. According to the United Nations Children’s Fund (UNICEF),
“About 25 per cent of children in India have no access to education”. According
to a study in the medical journal The Lancet, “44.5 per cent of girls are still
married in India before they are of legal age”. The illiterate people – for not
possessing relevant skill and education – are trapped in a vicious cycle of
poverty. The illiterate people end up with petty jobs, usually employed in
informal sector, and are paid poorly. As per Census 2011, literacy rate at all
India level was 72.98 per cent. There is a wide gap in the literacy rate for
females (64.63 per cent) and males (80.9 per cent). Education of the girl child
again is the need of the hour.
(v)
Inflationary
Pressure
High rate of inflation adversely affect the purchasing
power of people. The annual inflation rate in India has remained over 5 per
cent. The lower economic stratum of people is hit hard when prices of food
grains, fuel and edible oil exceed the rise in income levels. They find it
difficult to get their minimum needs fulfilled. For example, India, after Green
Revolution, has become self-sufficient and self-reliant in food grain
production. The increase in food production however has not increased the food
availability for the poor in the country.
(vi)
Unemployment
Indian economy has structural bottlenecks that hinder
economic development. This results in structural unemployment, seasonal
unemployment as well as disguised unemployment. Half of India’s population
still depend on agriculture and allied activities for livelihood. Employment
opportunities are limited in urban areas as well. Non-agricultural sector
(industries and services) has not been able to absorb the unemployed people.
(vii) Lack of Investment
India is a capital scare and labour abundant country.
Lack of capital reduces the extent of investment. During the early years after
independence, the Government used to invest heavily in key sectors including
minerals and metals, transport and communication, health and education, among
others. Unfortunately, Foreign Exchange Regulation Act (FERA), Monopolistic and
Restrictive Trade Practices (MRTP) Act, Industrial Licensing and high tax
regime kept the private sector from participating in the industrial development
of the country. So, whatever little investment was seen in the country, it
prioritized select industrial and/urban clusters. Restricted or limited
availability of credit/capital for investment in industries discouraged
entrepreneurship in the country. The shortage of supply of capital made it
difficult for production and reduced employment opportunities in the private
sector particularly for the poor.
(viii) Regional Imbalance
There is regional imbalance in distribution of income
and wealth in India. We observe disparities across states in per capita income
in India. Two major features are observed so far as regional disparities is
concerned. One, there is wide disparity across states in per capita income.
Sates such as Punjab, Haryana, Goa and Karnataka have very high per capita income
while states such as Bihar, Uttar Pradesh, Jharkhand, Manipur and Madhya
Pradesh have very low per capita income. Second, the gap between rich and poor
states is widening over time. While rich states are getting richer, poor states
are getting poorer.
Q – Explain the poverty Alleviation Strategy in India.
Ans.
POVERTY ALLEVIATION STRATEGY IN INDIA
The government of India has made concerted efforts to
reduce the extent of poverty. In this initiative, we observe certain policy
shifts over time. There have been at least three policy shifts in the past.
(i)
Trickle-Down
Theory: During the 1950s and 1960s it was believed that
economic growth will take care of poverty and inequality. When economic growth
takes place, the benefits percolate downwards. Income of people increase. Thus,
there will be an increase in the income of poor households also. With an
increase in income, poor households will be able to elevate themselves above
the poverty line. Thus the objective of the government was to achieve higher
economic growth.
(ii)
Public
Distribution System: The failure of the trickle-down approach
led the government to make special provisions for the poor households. During
the 1970s the ‘Public Distribution System (PDS)’ was strengthened. The PDS
served two purposes – it procured food grains from farmers during harvest
season. During the harvest season the price of agricultural commodities
decreases sharply due to excess supply. Government purchase of food grains
helped in maintaining remunerative prices in the market. This ben3efitted the
farmers. The procured food grains were sold to poor households at subsidized
prices. Thus poor households could obtain essential commodities such as rice,
wheat, sugar and oil at a cheaper price. Procurement of food grains continues these
days also.
(iii)
Direct
Attack on Poverty: During the 1980s the government extended
cheaper credit to poor households. Not only the rate of interest was very low
on the loans extended to poor households, there was a substantial amount of
subsidy on repayment of the principal amount. The objective of the programmes
was to provide self-employment to poor households. It was envisaged that poor
households would carry out small business, goat-rearing, milch cow, weaving,
etc. with the help of the credit given to them.
(iv)
Wage
Employment Programmes: With the failure of self-employment
programmes, the government continued with the employment generation schemes
during the 1990s. The focus was on creation of infrastructure and community
assets (such as road, houses, water reservoir, etc.) which would generate
additional wage employment for people. Many small projects were completed under
such schemes. There were doubts on the quality of the assets created under such
schemes. There were also complaints of workers not getting their wages.
(v)
Social
Security Measures: Apart from employment generation, the
government has made provisions of certain social security measures that
supplement the income of poor households. There is provision for subsidized
food, subsidized cooking gas, subsidized housing, pension for the aged and
widows, health insurance, etc. under various schemes.
Q – State the Causes of Unemployment.
Ans. CAUSES OF UNEMPLOYMENT
Now let us discuss the important causes of persisting
unemployment in India.
(i)
Rapid Growth of Population: Population of India has been growing
rapidly since 1951. Death rate declined due to availability of medicines and
healthcare but birth rate did not decline. Thus, population growth rate
accelerated after 1950. During the 1960-1990 population growth was more than 2
per cent per annum. While population growth rate has somewhat declined in
recent years, it continues to be very high some states of India. Accordingly,
size of the labour force is increasing while employment opportunities are not
increasing at the same pace. So unemployment is increasing over the years.
(ii)
Low Economic Growth: Up to the fourth Five Year Plan (1951-74),
growth rate of the Indian economy was very low. Low economic growth (see table
8.4) rate is mainly responsible for unemployment in India as job opportunities
did not expand adequately. In recent years, since 2015-16, economic growth rate
has slowed down.
(iii)
Failure of Planning: Planning started in 1951. There is no
doubt that India has made progress during the plan period, yet all sections of
society could not gain from it. The rich became richer while the poor became
poorer. Thus economic growth was accompanied by increasing inequality in the
country. This was a major weakness of our planning. In addition, not much
attention was paid towards the problem of unemployment in the beginning.
Planning could not create as many jobs as the number of job seekers.
(iv)
Neglect of Agriculture: Majority of population in India
depend on agriculture. However, agriculture was not paid much attention during
various five year plans. Comparatively less expenditure was made on this sector
(see Table 8.5), as a result of which agriculture could not develop fully.
Neglect of agriculture too is a cause of rural unemployment in India.
(v)
Neglect of Small and Cottage Industries: Small scale and cottage
industries are labour intensive. But these industries could not develop in
India appreciably. Technological upgradation and marketing became a major
problem for these industries. The five year plans laid more stress on
capital-intensive industries. Neglect of small scale industries is therefore
another cause of unemployment in India.
(vi)
Slow Industrial Growth: Industrial growth rate has been very
slow in India due to many problems such as industrial disputes, strikes,
lockouts, industrial sickness, etc. These problems have increased urban
unemployment.
(vii)
Shortage of Capital: Till recent time period, there has been a
shortage of capital in India. We know that the rate of capital formation
depends on the rate of saving. If saving rate is high, capital formation rate
will also be high. Without adequate capital formation, overall expansion of the
economy cannot take place. Thus capital inadequacy leads to slower growth of jobs.
(viii)
Defective Education System: Education system in India is not
based on employment. Every year millions of boys and girls come out of colleges
and universities but they are not absorbed in any suitable job. Emphasis is
laid on ‘general’ education rather than ‘vocational’ one. Our education system
has led to rapid increase in white collar unemployment.
(ix)
Lack of Mobility: Even these days, many Indians are
superstitious. Marginal farmers and laborers are so much attached to their land
and birth place that they do not want to leave it even if they do not have any
work to do. Similarly, many skilled labour and educated youth do not want to
migrate to other regions. There are of course differences in language and
culture across states, which discourage mobility.
(x)
Under-Utilization of Installed Capacity: Our productive capacity
is not utilized fully in many industries so there exists limited employment
opportunities. Various causes like lack of working capital, skilled labour, raw
material and infrastructural facilities inhibit full utilization of capacity.
(xi)
Modernization: In the modern time, many industries have
adopted capital intensive modern techniques. Consequently, unemployment has
increased as machines have replaced the labourers.
(xii)
Other Factors: Apart from the factors mentioned above,
there are several others which worsens unemployment situation in India.
Nonavailability of good quality infrastructure; shortage of essential inputs
such as electricity, raw materials, and credit; non-availability of skilled
labour and modern technology; etc.
Q – State the Policy Initiatives for employment Generation in India.
Ans.
POLICY INITIATIVES FOR EMPLOYMENT GENERATION IN INDIA
Various policy measures have been taken by the
government to reduce the problem of unemployment. Some of the efforts made by
the government in this regard are given below.
1.
Emphasis on Small Scale and Cottage Industries:
To reduce the problem of unemployment, emphasis has been laid on development of
small scale and village industries. Cottage and small scale industries are
labour intensive, which means that these employ large number of workers.
Government has given various incentives to set up these industries during five
year plans
2.
Check on Population Growth: Government has made efforts to check
the population growth. To achieve this objective, the government has emphasized
education of girl child, provision of health facilities, and creation of
awareness among people.
3.
Establishment of Employment Exchanges: The government has
established employment exchanges for registration of people seeking employment
and dissemination of information regarding available vacancies. These days, the
Internet has played an important role in recruitment process. Every employment
exchange these has its online portal. Besides, in order to give information
about the vacancies to the general public, ‘Employment News.’, a weekly paper,
is published in different languages.
4.
National Education Policy-2020: To tackle the problem of unemployment,
the National Education Policy-2020 has been formulated. Apart from other
issues, it emphasizes on vocational education.
5.
Rapid Economic Development: Economic development in different
sectors creates new opportunities of employment. The government is trying to
accelerate the pace of growth by developing the different sectors so that new
employment opportunities can be created.
e)
Rural Employment Guarantee Act: The Mahatma Gandhi
National Rural Employment Guarantee Act (MGNREGA) was launched in 2005. The Act
aims at providing at least 100 days of guaranteed wage employment in a
financial year to every rural household, with a stipulation of one-third
participation of women. In the process, the MGNREGA creates community assets so
that problems like chronic poverty, drought, deforestation, soil erosion, etc.
can be addressed. In budget 2019-20, Rs. 6000 crore were allocated for MGNREGA.
The number of beneficiaries under this programme was 7.8 crores in 2019.
f)
National Rural Livelihood Mission (NRLM): The NRLM is also
called Ajeevika. It was started in 2013-14 with an objective of organizing all
rural poor households and nurturing them till they emerge out of poverty. Now,
NRLM is renamed as Deendayal Antayodaya Yojana. It provides opportunities to
poor households to have gainful self-employment and skilled wage employment.
Self-Help Groups (SHG) formed by women has been successful in many cases to
provide livelihood to households and raise their income.
g)
Micro Unit Development Refinance Agency Bank (MUDRA Bank):
The Government has set up the MUDRA Bank in April 2015. It meets credit
requirements of micro-enterprises and self-employed persons. In order to
increase output and employment, entrepreneurs can avail loan up to Rs.10 lakh
at lower rate of interest.
Q – State the Policy measures to reduce Inequality.
Ans. POLICY MEASURES TO REDUCE INEQUALITY
Removal of poverty and reduction of income inequalities
are major problems of India. Unless we are in a position to provide the
necessities of life to all, our political freedom is useless and any
development is meaningless. As we have seen, a multitude of factors – economic,
social and political – are responsible for it. The government has taken several
policy measures to reduce inequality in the country.
(i)
Direct
taxation: The government imposes income tax on individuals and
corporate sector. Taxes as you know are one-way transfer from the tax payer to
the government; there is no quid-pro-quo. The government in its budget
presentation every year announces the exemption limit, tax rates, and income
slabs on which income tax is imposed. As you would have noticed, the income tax
rate is progressive such that an individual with higher income pays taxes at a
higher rate. There is an exemption limit so that persons with income below that
limit do not have to pay income tax. Similarly, income tax is imposed on retained
profits of the corporate houses.
(ii)
Restrictions
on monopoly practices: Monopoly power has a tendency to
restrict competition in the economy. Existence of monopoly power can also
restrict entry of new firms and set the prices at a higher level. Thus the
Competition Commission of India has set guidelines for fair trade practices and
investigates into cases where unfairness is suspected.
(iii)
Land
reforms: The government has taken several measures to regulate
the ownership, operation, leasing, sales and inheritance of landed property.
Land is not just an input for production, it is held as an asset which
appreciates in value over time. The objective of land reforms has been to
reduce inequality in land ownership and associated problems.
(iv)
Social
security measures: The government has taken several steps to
provide a safety net to the poor. For the poor households there are pension
schemes, insurance benefits, bank account, etc. Also subsidized food, housing,
electricity, cooking gas, drinking water, etc. are provided to persons below
the poverty line.
(v)
Employment
generation: Provision of productive employment to a
person is the surest way of increasing his/her income. The government has taken
several measures to generate employment, transfer the workforce from agricultural
to non-agricultural sector, and provide a secondary source of income to poor
households. The government has launched the MGNREGS to provide wage employment
in rural India. There are policy measures to impart skill to educated youth and
workers so that they can be employed. There is emphasis on MSME sector, which
is labour-intensive in production process.
Q – State the Challenges of Indian Agriculture.
Ans.
The shrinking land size: India has 198 million hectares (ha)
gross cropped area which is relatively larger than China where it is 166
million hectares. The average size of the land is decreasing consistently ever
since the agriculture census in this country has been started. The average size
of landholding in India has come down from 2.28 hectares in 1970-71 to 1.08
hectares in 2015-16 and would shrink further in near future. So, one of the
challenges before the country is to raise the production and productivity from
the small size farms where it is difficult to adopt the good quality seeds,
capital and technology. It is not so that small size farming is not efficient
or can not be viable. An example from the Chinese economy makes the case clear.
China has an average size of land just 0.7 ha which was 0.46 ha at the time of
economic reforms, and still China produces three times more than what India
produces. The message is clear that if correct incentives are put in the place
and right investment is made on infrastructure and agriculture research and
development (R&D), India can make the small farms viable and sustainable.
B.
Changing Climatic Patterns: Climate change is a reality.
Agriculture is the sector most vulnerable to climate change due to its high
dependence on climate and weather. The people involved in agriculture are
poorer compared with urban residents. Agriculture is part of the problem and
part of the solution. As we know, India has 198 million hectares of gross
cropped area and about 49 per cent of that is irrigated. The rest, more than
half of the cropped area depends on the rains, mainly monsoon rains to irrigate
the land. In the last 18 years (2000–01 to 2018–19), India faced droughts in
five years (2002, 2004, 2009, 2014 and 2015) and in all of those, India’s agricultural
GDP growth rate and food grain production fell. The sharpest fall in food grain
production was in the year 2002–03 when the rainfall inadequacy was 19.2% and
the annual food grain production fell by more than 38 MMTs. In 2009–10, which
was the worst drought year in recent years, the fall in food grain production
was lower compared to 2002–03 at 16.4 MMTs even though the rainfall inadequacy
was higher at 21.8%. It has been witnessed that rainfall pattern has undergone
a dynamic change in recent years in India. The variability and intensity of
rainfall in India have recorded major change resulting in droughts in one part
of the country while floods and excess rainfall in other parts of the country.
C.
India’s population is second largest in the world and very
soon it is going to overtake the population of China. The population pyramid of
the country is such that it is dominated by the young population. The country
is the youngest country in the world wherein the median age of Indians was 29
years in 2019. The urbanization is also increasing at the fastest rate ever
since independence. Thus, the demand for higher value crops, especially
vegetables, fruits, eggs, milk and chicken/mutton will increase in future owing
to increase in income and urbanization. Hence, the challenge before the country
is not only to feed the growing population, but also to supply the nutrients
and high value commercial crops to its bulging middle to high income and urban
population. India’s obsession with wheat, rice crop culture has damaged the
north western part of the country. There is an urgent need to shift from the
wheat - rice mono crop culture and to high value low water intensive crops.
Q – State the difference between Public & Private Sector.
Ans.
Difference between Public & Private Sector
There are some structural and operational differences
between public and private sector Jean Murray (2021) has explained the main
differences between public and private sector in the following way:
(i)
Profit
Incentive. Private firms have a profit incentive to cut costs and
develop products demanded by consumers. Whereas in the public sector, this
profit motive is often absent. Therefore, government bodies have a greater
tendency to be overstaffed and inefficient. 13
(ii)
Ownership:
Individuals own private-sector businesses. Governmental agencies arenot owned
by individuals; they are owned by and operate on behalf of the public through
officials.
(iii)
In the private sector working
environment is quite competitive which is missing in the public sector because
they are not established to meet commercial objectives. The employees of the
public sector have the security of the job along with that they are given the
benefits of allowances, perquisites, and retirement benefits like gratuity,
pension, etc. which are generally not available in the case of the private
sector.
(iv)
Employment:
Employment differs between the public and private sectors. In the public
sector, civil service employees work for central, state, or local government
agencies. They receive pay and benefits under different systems than private
employees. In the private sector, employers have more flexibility. Each
employer can set its own employment rules, as long as they abide by central and
state employment laws.
(v)
Efficiency
and Productivity: Because private-sector businesses are
focused on making a profit, they are often considered more productive and
competitive. Public-sector organizations, on the other hand, are de facto
monopolies. As there is no incentive to make a profit, public organizations
tend to be less efficient and less productive. Still, public-sector
organizations have an important role in the economy by providing public goods,
reducing unemployment, and stabilizing the economy.
(vi)
Bureaucracy.
For political reasons, it is sometimes more difficult to get rid of surplus
workers in the public sector than the private sector. Private businessmen donot
have to worry about political popularity and so it is easier to retrench more
employees if it helps efficiency and profit. The public sector, on the other
hand, is more likely to employ surplus workers in unproductive jobs.
In general public sector uses seniority for promoting
employees, however, merit cum seniority is also taken as a base for promoting
employees. Unlike private sector, where performance is everything, and so merit
is considered as a parameter to promote them.
Q – State the features of Public-Private Partnership (PPP).
Ans.
Features of PPP: The main features of PPP are:
(i)
PPP describes a range of possible
relationships among public and private entities in the context of development,
infrastructure and other services (ADB, 2008).
(ii)
The purpose is to make use of private
sector’s expertise in commerce, management, operations, and innovation to run
the business efficiently.
(iii)
Governments contract with private
organizations takes place through three types of contracts: a. Service
contracts. Contracts with a private firm to provide a specific service for a
specified period of time. b. Management Contracts. Contracts to provide
services more efficiently while maintaining ownership control. c. Lease
Contracts. Used extensively for both public services and commercial operations.
(iv)
Co-ownership or co-financing of
projects,
(v)
Build operate-transfer (BOT)
arrangements,
(vi)
Governments around the world use
turnkey projects with consortia of private companies to build
telecommunications, transport, shipping, airport, utility, and water and
sewerage infrastructure. .
(vii) There
are benefits for both citizens and governments in PPP arrangement. PPPs
facilitate to the generation of resources and knowledge transfer.
Q – State the Features o MSMEs.
Ans.
Features of MSMEs
MSMEs exhibit special features which are distinct from
large enterprises. Some such features are discussed in this section.
(i)
Limited
Investment: In MSMEs, particularly micro and small
enterprises, capital is supplied by an individual or a small group of
individuals. As per a census of small scale units in India, micro and small
business enterprises are run mostly as sole- proprietorship or partnership
model.
(ii)
Personal
Character/Owner-Management: A micro and small businesses are
identified with its owners; who themselves act as managers. Managers as such
have maximum motivation to work; as they themselves happen to be the owners
also.
(iii)
Labour-Intensive:
Micro and small enterprises are fairly labour intensive with comparatively
smaller capital investment than the larger units. With any given investment,
employment possibilities would be greater in comparison with corresponding
factory system.
(iv)
Unorganized
Labour: Micro and small business enterprises employ less
number of workers as compared to big business enterprises. Workers of these
units do not form labour unions and remain unprotected.
(v)
Local
Area of Operations: The area of operations of micro and small
enterprises is generally local as they have less capital and less marketing
facilities at their disposal. There is a local touch between employer and
employees and between employer and customers. These days products of some small
scale enterprises are also exported to many countries of the world.
(vi)
Flexibility:
MSMEs are more adaptable to the changing business environment. So in case of
amendments or unexpected developments, they are flexible enough to adapt and
carry on, unlike large industries. (vii) Use of Local Resources: Micro and
small business units use indigenous resource. As a result they can be located
anywhere subject to the availability of these resources like raw materials,
labour etc.
(vii)
Gestation
Period: Compared to large units, a micro industrial unit has a
lesser gestation period, i.e. the period after which the return on investment
starts.
(viii)
Sustainable
Development Goals (SDGs): MSMEs are best suited as compared to
large enterprises for achieving the SDGs such as creation of employment to lift
people out of poverty.
Q – Define BOP Disequilibrium. State It’s causes.
Ans.
A
disequilibrium in the balance of payment implies a state of surplus or deficit.
A surplus in the BOP occurs when Total Receipts exceed Total Payments
(CREDIT>DEBIT). A Deficit in the BOP occurs when Total Payments exceed Total
Receipts (DEBIT>CREDIT).
In an equilibrium situation of BOP, there are neither
surpluses nor deficits. When a country’s current account is in a deficit or
surplus, its balance of payments (BOP) is said to be in disequilibrium. A
significant deficit on the current account where imports are greater than
exports would result in a disequilibrium. Likewise, when exports are greater
than imports, creating a current account surplus, there is a disequilibrium.
Causes
of Disequilibrium
Disequilibrium is caused by economic and non-economic
factors. They are as under:
a) When there is an imbalance between domestic savings
and domestic investments. A deficit in the current account balance will result
if domestic investments are higher than domestic savings, since the excess
investments will be financed with capital from foreign sources.
b) When the trade agreement between two countries
affects the level of import or export activities, a balance of payments
disequilibrium will surface.
c) Changes in an exchange rate when a country’s
currency is revalued or devalued; it can cause disequilibrium.
d) Other factors, such as inflation or deflation,
changes in the foreign exchange reserves, population growth, increase in
developmental expenditure, political instability, etc. may result in
disequilibrium.
Q – Define Purchasing Power Parity.
Ans.
Purchasing power parity (PPP) is an economic theory
that allows the comparison of the purchasing power of various world currencies
to one another. It is a theoretical exchange rate that allows to buy the same
amount of goods and services in every country. The theory aims to determine the
adjustments needed to be made in the exchange rates of two currencies to make
them at par with the purchasing power of each other. In other words, the
expenditure on a similar commodity must be same in both currencies when
accounted for exchange rate. The purchasing power of each currency is
determined in the process. As for example, let us say that a pair of shoes
costs Rs.2500 in India. Then it should cost $50 in America when the exchange
rate is $1= Rs.50 between the dollar and the rupee. Another example is if the
price of a Coca Cola can in India is Rs.50, and it is $2 in the US, then the
Rupee/USD exchange rate should be $2 (the US price divided by the India’s)
according to the PPP theory. This means that goods in each country will cost
the same once the currencies have been exchanged.
Q – State the Distinction between GATT & WTO.
Ans.
Distinction between GATT and WTO
The WTO differs in a number of important respects from
the GATT. The differences are as follows:
(i)
The WTO is a forum for international
cooperation on trade-related policies–the creation of codes of conduct for
member governments.
(ii)
The WTO contains a set of specific
legal obligations regulating trade policies of member states, and these are
embodied in the GATT, the GATS, and the TRIPS agreement. The WTO acts as an
umbrella organization that encompasses the GATT along with two new sister
bodies, one services and the other on intellectual property.
(iii)
The WTO’s GATS has taken the lead to
extending free trade agreements to services. In the same way, the TRIPS is an
attempt to narrow the gaps in the way intellectual property rights are
protected around the world and to bring them under common international rules.
(iv)
WTO has taken over responsibility for
arbitrating trade disputes and monitoring the trade policies of member
countries. Countries that have been found by the arbitration panel to violate
GATT rules may appeal to a permanent appellate body, but its verdict is
binding. Every stage of the procedure is subject to strict time limits. Thus,
the WTO has something that the GATT never had – teeth.
(v)
The clarification and strengthening of
GATT rules and the creation of the WTO also hold out the promise of more
effective policing and enforcement of GATT rules. The WTO is a distinctively as
well as qualitatively an improvement upon the GATT.
Q – What are the Instruments if Monetary Policy.
Ans.
Instruments of Monetary Policy
There are several direct and indirect instruments that
are used for implementing monetary policy.
1.
Bank Rate: It is the rate at which the Reserve Bank is ready to
buy or rediscount bills of exchange or other commercial papers.
2.
Cash Reserve Ratio (CRR): The average daily balance that a bank
is required to maintain with the Reserve Bank as a share of such per cent of
its Net demand and time liabilities (NDTL).The Reserve Bank may notify CRR from
time to time in the Gazette of India.
3.
Statutory Liquidity Ratio (SLR): The share of NDTL that a
bank is required to maintain in safe and liquid assets, such as, government
securities, cash and gold. Changes in SLR often influence the availability of
resources in the banking system for lending to the private sector.
4.
Open Market Operations (OMOs): These include both,
outright purchase and sale of government securities, for injection and
absorption of durable liquidity, respectively.
5.
Repo Rate: The (fixed) interest rate at which the Reserve Bank
provides overnight liquidity to banks against the collateral of government and
other approved securities under the liquidity adjustment facility (LAF).
6.
Reverse Repo Rate: The (fixed) interest rate at which the
Reserve Bank absorbs liquidity, on an overnight basis, from banks against the
collateral of eligible government securities under the LAF.
7.
Liquidity Adjustment Facility (LAF): The LAF consists of
overnight as well as term repo auctions. It is used to make temporary and swift
adjustments in liquidity within the banking system mainly using the repo and
reverse repo rates.
8.
Marginal Standing Facility (MSF): A facility under which
scheduled commercial banks can borrow additional amount of overnight money from
the Reserve Bank. This provides a safety valve against unanticipated liquidity
shocks to the banking system.
9.
Corridor: The MSF rate and reverse repo rate determine the corridor
for the daily movement in the weighted average call money rate.
10.
Market Stabilisation Scheme (MSS): This instrument for
monetary management was introduced in 2004. Surplus liquidity of a more
enduring nature arising from large capital inflows is absorbed through sale of
short-dated government securities and treasury bills.
Q – State the advantages & Disadvantages of Direct taxes.
Ans.
Advantages of Direct Taxes
Direct taxes are paid out of the income or wealth of
the person on whom the tax has been imposed. Direct taxes have certain merits.
These can be briefly identified as:
(i)
Equity: Burden
of taxation is distributed on different people and institutions in just or
equitable manner. The tax rates can be progressively raised as a level of
income go up.
(ii)
Certainty: Direct
taxes satisfy the principle of certainty. The taxpayer knows well in advance in
certain terms as to how much he is expected to pay.
(iii)
Elasticity: With
an increase in income and wealth of the people, the revenue from direct taxes also
increases. Similarly, a government can raise more revenue simply by raising the
tax rate.
(iv)
Civic
consciousness: The taxpayers are always aware of the fact
that a part of their income has been transferred to the government. They begin
to show more interest in the affairs of the government they work like
watchdogs.
(v)
Reducing
inequalities: Direct taxes are generally progressive in
nature. Higher incomes are taxed at higher rates.
(vi)
Simplicity: Direct
taxes are generally simple. They are normally understood clearly by ordinary
taxpayers.
Disadvantages
of Direct Taxes
(i)
Arbitrary: Direct
taxes tend to be arbitrary. It is indeed difficult to have objectively just on
the basis of ability. The tax rates are often dictated by political compulsions
of the government.
(ii)
Tax
evasion: Direct taxes tempt people to evade them by hiding
their income and wealth.
(iii)
Inconvenient: Taxpayers
have to file returns of their income, these returns are scrutinised by the tax
authorities. All these involved inconvenience and expenses besides time and
energy.
(iv)
High
cost of collection: Direct taxes are often regarded as
expensive to collect.
(v)
Adverse
effect on will to work and save: Taxpayers always do not
positively react to direct taxes. Taxes work as a disincentive to work more and
earn more income since a part of the additional income is to be surrendered to
the government.
Q – State the Advantages & Disadvantages of indirect taxes.
Ans. Advantages of Indirect Taxes The tax burden
of indirect taxes is expected to be shifted to others The major advantages of
indirect taxes can be summed up as :
(i)
Convenience: Indirect taxes are convenient to pay and
collect. The government finds it convenient to collect indirect taxes as they
are paid in lump sum by the producer.
(ii)
Difficult to evade: Indirect taxes are included in the price
of the commodity. Evasion of an indirect tax will mean giving up the
satisfaction of a given want.
(iii)
Elasticity: As the consumption level increases, tax
revenue mobilized by way of indirect taxes also increases.
(iv)
Ability: Indirect taxes can serve the principle of ability.
High rates of taxes may be 10 imposed on those goods and services which are
generally consumed by high income groups.
(v)
Social benefit: Indirect taxes enable everyone, even the
poorest citizen, to contribute something towards the expenses of the state.
(vi)
Equity: Indirect taxes can be made equitable by imposing heavy
taxes on luxury goods that are generally considered by the richer section of
the society. Consumption of lower income group may be exempted.
(vii)
Promote production and investment: Indirect taxes can be so
levied that the production of goods by high-priority industries is increased
and low priority Industries is discouraged.
Disadvantages
of Indirect Taxes
Indirect taxes has certain disadvantages also among
these the more important ones are :
(i)
Unjust
and inequitable: They fall alike on all the persons
irrespective of their ability to pay.
(ii)
Uncertain:
Neither the taxpayer nor the government can be sure about the amount of tax involved.
(iii)
Lack of social consciousness: Taxpayers fail to feel the pinch of tax
immediately. These tax fail to evoke social consciousness among the taxpayers.
(iv)
Inflationary impact: An indirect tax gets added up in the price
of a product. Prices of commodities go up and this may be registered by the
consumers.
No comments:
Post a Comment