Daily Quiz: UPSC Prelims Marathon – December 19

Capitalistic Economy:

The capitalistic form of economy has its origin in the famous work of Adam Smith—Wealth of Nations (1776). Adam Smith (1723–1790), the Scottish philosopher-economist professor at the University of Glasgow, whose writings formed the basis of classical economics, had stressed certain fine ideas which were to take fancy among some of the western countries and finally capitalism took birth. He raised his voice against the heavy-handed government regulation of commerce and industry of the time which did not allow the economy to tap its full economic worth and reach the level of wellbeing. Stressing ‘division of labour’ and an environment of ‘laissez faire’ (non-interference by the government), he proposed that the ‘invisible hand’ of ‘market forces’ (price mechanism) will bring a state of equilibrium in the economy and a general well-being for the countrymen. For such an economy to function for public well-being, he acknowledged the need of competition in the market.

Once the USA attained independence, the ideas of Adam Smith were made part of its public policy—just one year after the Wealth of Nations was published. From here, the idea spread to other parts of Euro-America—by 1800 the economic system called ‘capitalism’ was established which was later known by different names—Private Enterprise System, Free Enterprise System or Market Economy.

The decisions of what to produce, how much to produce and at what priceto sell are taken by the market, by the private enterprises in this system, with the state having no economic role.

Statements 1 and 3 are correct:

(i)It shows the per annum percentage change in it is the ‘growth rate’ of an economy. For example, if a country has a GDP of Rs. 107 which is 7 rupees higher than the last year, it has a growth rate of 7 per cent. When we use the term ‘a growing’ economy, it means that the economy is adding up its income, i.e., in quantitative terms.

(ii) It is used by the IMF/WB in the comaparative analyses of its member nations.

Statement 2 is incorrect:

(iii) It is a ‘quantitative’ concept and its volume/size indicates the ‘internal’ strength of the economy. But it does not say anything about the ‘qualitative’ aspects of the goods and services produced.

The political leadership selected industry as the leading force of the economy after Independence—this was already decided by the dominant group of the nationalist leaders way back in the mid-1930s when they felt the need for economic planning in India before setting up the National Planning Committee in 1938.

Given the available resource base it seems an illogical decision as India lacked all those pre-requisites which could suggest the declaration of industry as its prime mover:

(i) Almost no presence of infrastructure sector, i.e., power, transportation and communication.

(ii) Negligible presence of the infrastructure industries, i.e., iron and steel, cement, coal, crude oil, oil refining and electricity.

(iii) Lack of investible capital—either by the government or the private sector.

(iv) Absence of required technology to support the process of industrialisation and no research and development.

(v) Lack of skilled manpower.

(vi) Absence of entrepreneurship among the people.

(vii) Absence of a market for industrial goods.

(viii) Many other socio-psychological factors which acted as negative forces for the proper industrialisation of the economy.

The obvious choice for India would have been the agriculture sector as the prime moving force of the economy because:

(i) The country was having the natural resource of fertile land which was fit for cultivation.

(ii) Human capital did not require any kind of higher training.

After the reports of the NPC were published and the government was set to go for the five-year plans, a lone blueprint for the planned development of India was formulated by the famous socialist leader JayaprakashNarayan the Sarvodaya Plan published in January 1950.

The plan drew its major inspirations from the Gandhian techniques of constructive works by the community and trusteeship as well as the Sarvodaya concept of AcharyaVinobaBave, the eminent Gandhian constructive worker.

Major ideas of the plan were highly similar to the Gandhian Plan like emphasis on agriculture, agri-based small and cottage industries, self-reliance and almost no dependence on foreign capital and technology, land reforms, self-dependent villages and decentralised participatory form of planning and economic progress, to name the major ones. Some of the acceptable ideas of the plan got their due importance when the Government of India promoted five year plans.

First plan:The period for this plan was 1951–56. As the economy was facing the problem of large-scale foodgrains import (1951) and the pressure of price rise, the plan accorded the highest priority to agriculture including irrigation and power projects.

Second Plan:The plan period was 1956–61. The strategy of growth laid emphasis on rapid industrialisation with a focus on heavy industries and capital goods. The plan was developed by Professor Mahalanobis. Due to the assumption of a closed economy, shortages of food and capital were felt during this Plan.

Fifth Plan:The Plan (1974–79) has its focus on poverty alleviation and self-reliance.The popular rhetoric of poverty alleviation was sensationalised by the government to the extent of launching a fresh plan, i.e., the Twenty-point Programme (1975) with a marginal importance being given to the objective of ‘growth with stability’ (one of the major objectives of the Fourth Plan).

Seventh Plan:The Plan (1985–90) emphasised on rapid foodgrain production, increased employment creation and productivity in general. The basic tenets of planning, i.e., growth, modernisation, self-reliance and social justice remained as the guiding principles.

All the above pairs are correctly matched

• Galloping Inflation: This is a ‘very high inflation’ running in the range of double-digit or triple digit (i.e., 20 per cent, 100 per cent or 200 per cent in a year).14 In the decades of 1970s and 1980s, many Latin American countries such as Argentina, Chile and Brazil had such rates of inflation—in the range of 50 to 700 per cent. The Russian economy did show such inflation after the disintegration of the ex-USSR in the late 1980s.
• Bottleneck Inflation : This inflation takes place when the supply falls drastically and the demand remains at the same level. Such situations arise due to supply-side accidents, hazards or mismanagement which is also known as ‘structural inflation’. This could be put in the ‘demand-pull inflation’ category.

Core Inflation :This nomenclature is based on the inclusion or exclusion of the goods and services while calculating inflation. Popular in western economies, core inflation shows price rise in all goods and services excluding energy and food articles.

The government has taken various reforms to liberalizing and simplifying the FDI policy to provide ease of doing business climate in the country that will also lead to larger FDI inflows. A number of sectors have been liberalized, including defence, construction, broadcasting, civil aviation, plantation, trading, private sector banking, satellite establishment and operation and credit information companies. By early 2017, the government had taken the following policy steps to promote FDI in the economy:

(i) Up to 49 per cent FDI permitted in insurance and pension funds (26 per cent under automatic route) and defence sector.

(ii) 100 per cent FDI permitted in manufacturing of medical devices; the white label ATM and railway infrastructure.

(iii) 100 per cent FDI allowed in marketing of food products produced and manufactured in India (Union Budget 2016–17).

(iv) To undertake important banking sector reforms and public listing of general insurance companies undertake significant changes in FDI policy (Union Budget 2016–17).

(v) Reforms in FDI policy in the areas of Insurance and Pension, Asset Reconstruction Companies, Stock Exchanges (Union Budget 2016– 17).

(vi) A new policy for management of the PSUs, including strategic disinvestment—this is supposed to have liberal provisions for the FDI (Union Budget 2016–17).