BECE 145 Solved Guess Paper for Indian Economy I, IGNOU Bachelor of Arts (General) BAG

Infrastructure and its role in development

Question: How is infrastructure defined? State the nine constituents of infrastructure as categorised by Prof. V.K.R.V. Rao. Distinguish between physical and social infrastructure. In what respects does infrastructure determine the course of development of a country?

Meaning of infrastructure

Infrastructure covers those supporting services that help the growth of productive activities like agriculture and industry.

A precise and generally accepted definition is still elusive. Even so, good quality and efficient infrastructure services are needed for an economy to reach its full growth potential.

Nine constituents of infrastructure: Prof. V.K.R.V. Rao

1. Transport: roads, railways, shipping ports and harbours, airports, transport equipment.
2. Communications: posts, telegraphs, telephones, radio, TV, cinema.
3. Energy: coal, electricity (hydro, thermal, nuclear), wind, solar, oil, gas, biogas.
4. Intermediate goods output: minerals, steel, basic chemicals, fertilisers and pesticides, machinery and machine tools.
5. Productivity of natural resources: land reclamation, irrigation, drainage, contour bunding, consolidation of holdings, afforestation.
6. Science and technology: teaching, basic and applied research, national laboratories, liaison with production units.
7. Information system: mass media, libraries and museums, fairs and exhibitions, books and journals.
8. Finance and banking: savings institutions, credit and lending institutions, the capital market.
9. Human resource development: drinking water, disease eradication, public hygiene, family planning, medical facilities and education at all levels.

Physical infrastructure and social infrastructure

The difference lies only in content, not in importance. Both are needed for economic activity to run efficiently. Hard infrastructure means roads and bridges; soft infrastructure means human capital and the institutions that keep economic and social standards in place.

How infrastructure sets the course of development

1. Raises productivity: physical infrastructure lets human capital work to its potential and makes daily life safer.
2. Shapes the path of development: through diversified production and trade, control of population growth, poverty alleviation and protection of the environment.
3. Direct link with output: a 1 percent rise in the stock of infrastructure is associated with a 1 percent rise in GDP.
4. Builds a skilled workforce: education and health reduce poverty and sustain high growth over long periods.
5. Supplies credit: money and capital markets provide short, medium and long-term finance to every sector.

Conclusion: physical infrastructure builds material capital and social infrastructure builds human capital. Because infrastructure decides trade, poverty, population and environmental outcomes, it directly sets the course of a country's development.

Poverty: concepts, measurement and the Indian approach

Question: Distinguish between absolute and relative poverty. Explain the different methods of measurement of poverty. What are the major factors taken into account in the approaches to estimate poverty in India?

Absolute and relative poverty

Poverty is the state of a person lacking a minimum amount of material possessions or money.

Absolute poverty is the lack of means to meet basic needs such as food, clothing and shelter. It is a fixed minimum standard, and no comparison with others is made.

Relative poverty looks at a person's social and economic position compared with the rest of society. Since no income measure alone captures every dimension, a multidimensional view is also needed. In India, poverty is estimated through the poverty line, using the income approach and the consumption approach.

Methods of measuring poverty

1. Head count ratio (H = q/n): the share of the population that is poor. Simple to compute, but it cannot tell how poor the poor are.
2. Poverty gap index: the mean distance below the poverty line, showing depth as well as incidence. It violates Dalton's transfer principle because all gaps are weighed equally.
3. Squared poverty gap index: also called the poverty severity index. Weights rise with the size of the gap, so it is sensitive to inequality among the poor.
4. Sen's index (1976): combines the number of poor, the depth of poverty and its distribution within the group.
5. Watts index (1964): a distribution-sensitive measure that satisfies many theoretical properties but is rarely used in practice.

Factors used in estimating poverty in India

1. Calorie norm: the Sixth Plan used 2400 kcal in rural areas and 2100 kcal in urban areas, giving lines of ₹49 rural and ₹57 urban per capita per month at 1973-74 prices.
2. Non-food items added: from 2004-05, clothing, footwear, durable goods, education and institutional medical expenses were included.
3. Recall period changed: the uniform 30-day recall gave way to a mixed recall period, with 365 days for non-food items.
4. Tendulkar method (2009): ₹27 per capita per day rural and ₹33 urban, with one common poverty line basket.
5. Rangarajan report (2014): ₹32 rural and ₹47 urban per day, placing 29.5 percent below the line in 2011-12 (30.9 rural, 26.4 urban).

Conclusion: absolute poverty tracks bare minimum needs, while relative poverty compares a person with society. The head count ratio is simple but weak; the gap indices capture depth and severity. India has moved from pure calorie norms to consumption baskets that include non-food items.

Balance of Payment and the current account deficit

Question: What do you understand by the term 'balance of payment'? Discuss its various accounts. What is meant by 'current account deficit' and what does a widening CAD imply?

Balance of payment is a systematic record of all economic transactions between the residents of a country and the rest of the world.

Accounts of the balance of payment

1. Current account: records the year's flows of goods and services. Goods trade forms the balance of trade; services and other invisibles form the balance of services.
2. Capital account: records capital receipts and payments, including foreign investment, external loans and borrowings.
3. Reserve assets account: the government's official reserves of gold, convertible foreign currencies and SDRs, used to settle current and capital account deficits.

Current account deficit and what a widening CAD means

A current account deficit arises when the value of a country's imports is greater than the value of its exports. It can be financed through foreign investment, debt or borrowing from bodies like the IMF. If the country cannot repay, it faces a BoP crisis.

1. Weaker currency: more demand for foreign currency pushes the domestic currency down.
2. Cost-push inflation: prices rise, especially where the consumption basket has many imported goods.
3. Job losses: a rising trade deficit can signal that domestic firms cannot compete with cheaper imports.

Conclusion: the balance of payment is the complete record of a country's dealings with the world. A high CAD is not always harmful, but it must be matched by steady capital inflows.

Human capital, human development and the financing of education

Question: How is human capital defined? How is human development different from human capital? Give the rationale for public funding of education in India.

Human capital is the body of knowledge possessed by the population and its capacity to use that knowledge effectively.

It covers skills, talent, experience, training, judgement and wisdom, held individually and collectively. Prof. Theodore W. Schultz is credited with recognising its importance.

Human development, developed by Mahbub ul Haq, is the wider process of enlarging people's freedoms and opportunities. Human capital treats people as a productive input; human development treats them as ends in themselves.

Why education needs public funding

1. Positive externalities: once spill-overs are counted, the social return to schooling exceeds the private return, so the state's role becomes crucial.
2. Consumer ignorance: families often do not see benefits like better health and lower poverty that education brings.
3. Equality of opportunity: without subsidies, only those who can pay would enrol. Loans do not fix this, since human capital cannot serve as collateral.
4. Merit good: the government does not want education under-consumed just because it depends on ability to pay.

Conclusion: human capital is the stock of knowledge a population holds, while human development is the process of widening freedoms. Large externalities and an imperfect capital market keep public funding of education necessary.

Health expenditure and the public healthcare system

Question: What are the various 'demand and supply factors' in the context of expenditure on health? What is the estimated share of private healthcare expenditure in India and what factors have contributed to it?

OECD spending on medical care rose from 5.1 percent of GDP in 1979 to 8.9 percent in 2006. India's rose only marginally, from 1.1 percent of GDP in 1995 to 1.4 percent in 2014.

Demand factors

1. Population ageing: as the average age rises, so does demand for medical care.
2. Income: per capita GDP growth and health spending move closely together.
3. Spread of insurance: insurance covers the risk of rising costs, which lifts demand.

Supply factors

1. Supplier-induced demand: providers sometimes create demand through new technology or treatment not tied to the patient's condition.
2. General economic growth: better living standards and access to improved medical technology draw out more demand.

Private share of healthcare in India

Private spending makes up nearly 74 percent of total healthcare expenditure in India. Six factors drive it: rising incomes, a growing elderly population, changing disease patterns, medical tourism, better awareness and preventive care. Public care is held back by thin resources, regional gaps, weak primary care and fragmented responsibility.

Conclusion: health spending grows on the demand side through ageing, income and insurance, and on the supply side through induced demand and growth. With nearly three-fourths of spending private, the system stays regressive.