BLS LLB 5 Years Sem 1 Economics 2023-24 Question Paper with Solutions

The scarcity definition was given by Lionel Robbins in An Essay on the Nature and Significance of Economic Science (1932):

"Economics is the science which studies human behaviour as a relationship between ends and scarce means which have alternative uses."

Two criticisms:

1. It makes economics neutral between ends, and so removes welfare from the subject. Robbins deliberately excluded value judgments, so economics on his definition studies the allocation of means to any ends, without asking whether the ends are worth pursuing. Critics, above all Alfred Marshall and later welfare economists, object that economics exists to promote human welfare, and a definition that cannot distinguish the production of medicine from the production of narcotics has abandoned its purpose.

The circular flow of income is the continuous, unbroken movement of income, output and expenditure between the sectors of an economy. It shows that one person's spending is another person's income, so the total value of production, income and expenditure in an economy must be equal.

In the simplest two-sector model (households and firms) there are two flows moving in opposite directions:

1. Real flow: households supply factor services (land, labour, capital, enterprise) to firms, and firms supply goods and services to households.
2. Money flow: firms pay factor incomes (rent, wages, interest, profit) to households, and households pay for goods and services.

The model is extended to a three-sector economy by adding the government (taxes and public expenditure) and to a four-sector economy by adding the foreign sector (imports and exports).

The South Asian Association for Regional Cooperation (SAARC) was founded on 8 December 1985 at Dhaka, with its Secretariat at Kathmandu. It has eight members:

1. Afghanistan (joined 2007)
2. Bangladesh
3. Bhutan
4. India
5. Maldives
6. Nepal
7. Pakistan
8. Sri Lanka

The first seven were the founding members in 1985; Afghanistan joined as the eighth at the Dhaka summit in 2007.

SAARC also has nine observers, including China, Japan, the United States, the European Union, Iran, South Korea, Australia, Myanmar and Mauritius.

Public revenue is the income of the government from all sources, used to finance public expenditure. Its two broad sources are:

1. Tax revenue. A tax is a compulsory contribution to the government for which the payer receives no direct or proportionate benefit in return. Article 265 of the Constitution provides that no tax shall be levied or collected except by authority of law. It is of two kinds:

• Direct taxes, where the burden cannot be shifted: income tax, corporation tax, capital gains tax.
• Indirect taxes, where the burden is shifted to the consumer: GST, customs duty, excise duty on petroleum and alcohol.

2. Non-tax revenue. Income from sources other than taxation: fees charged for a definite service such as court fees and passport fees; fines and penalties; special assessment on property owners for a local improvement; profits and dividends of public sector undertakings and the surplus transferred by the Reserve Bank of India; grants and gifts; and escheat, property passing to the State when a person dies without an heir.

Example: if a country produces goods worth ₹300 lakh crore in a year and machinery worth ₹30 lakh crore wears out in producing them, GDP is ₹300 lakh crore and NDP is ₹270 lakh crore.

Other objectives worth naming: economic cooperation among members in trade, investment and technology; a collective voice for the Global South on climate finance, food security and health; and a multipolar international order respecting sovereignty and non-interference.

Meaning of stock

Stock is the total quantity of a commodity available with the seller at a given point of time, whether or not it is offered for sale. It is the maximum quantity that could be offered.

Stock is a point-of-time concept. It exists only for goods that can be stored, so there is no stock of perishable goods such as fresh milk or of services such as a haircut.

Meaning of supply

Supply is the quantity of a commodity that a seller is willing and able to offer for sale at a given price during a given period of time.

Supply is a period-of-time concept, and it has three essential elements: a quantity, a price, and a period. A statement of supply without a price is meaningless.

Example

A wheat trader holds 1,000 quintals in a godown. That is the stock. At ₹2,000 a quintal he offers 300 quintals for sale; at ₹2,500 he offers 700. Those quantities are the supply at each price. The stock has not changed; what has changed is how much of it he is willing to release.

5. Chief Executive Officer, of the rank of Secretary to the Government of India.
6. Regional Councils, formed to address issues affecting more than one State.

Objectives and functions

1. To foster cooperative federalism, through structured support to the States, treating them as partners rather than as recipients of a plan. This is its defining purpose.
2. To design strategic and long-term policy and programme frameworks, and to monitor their progress.
3. To act as a knowledge and innovation hub, conducting research and disseminating best practice between States.
4. To develop mechanisms for plans at the village level and aggregate them upwards.
5. To pay special attention to sections of society at risk of not benefiting adequately from economic progress.
6. To monitor and evaluate the implementation of programmes and to identify the resources needed.
7. To advise on national priorities and on the strategy for national security within economic policy.

Meaning

Public expenditure is the spending incurred by central, state and local governments to satisfy collective needs and to promote economic and social welfare. It is one of the four divisions of public finance, along with public revenue, public debt and financial administration.

Classification

A. Revenue and capital expenditure

1. Revenue expenditure: recurring, and creating no asset. Salaries, pensions, interest payments, subsidies, maintenance.
2. Capital expenditure: creating a durable asset or reducing a liability. Roads, bridges, schools, defence equipment, repayment of debt.

B. Developmental and non-developmental expenditure

1. Developmental: directly adding to productive capacity or welfare, such as education, health, irrigation and industry.

The two classic explanations are Wagner's Law of Increasing State Activity (1883), that State activity grows more than proportionately with national income, and the Wiseman-Peacock hypothesis (1961), that expenditure grows in steps rather than smoothly, because a crisis raises it and it never returns to the old level (the displacement effect).

Effects

Public expenditure raises production, employment and demand; redistributes income through transfers and welfare spending; and stabilises the economy, since spending in a downturn supports demand. Financed by borrowing, however, it produces a fiscal deficit, whose interest burden crowds out productive spending. The Fiscal Responsibility and Budget Management Act, 2003 was enacted to set limits on exactly that.

Canons of public expenditure

Findlay Shirras stated four: the canons of benefit, economy, sanction (no expenditure without proper authority) and surplus (avoiding deficits).

B. Capital and Financial Account records transactions changing foreign assets and liabilities:

1. Foreign direct investment and foreign portfolio investment.
2. External commercial borrowings and loans.
3. Banking capital and non-resident deposits.
4. Changes in foreign exchange reserves.

C. Errors and Omissions, a balancing item for unrecorded transactions.

Equilibrium and disequilibrium

In the accounting sense the BoP always balances. Disequilibrium refers to an imbalance in the autonomous transactions, those undertaken for their own sake, which must then be met by accommodating transactions such as drawing on reserves or official borrowing.

• Deficit (adverse): autonomous payments exceed receipts; reserves fall and the currency comes under pressure.
• Surplus (favourable): receipts exceed payments.

2. Reduce reliance on indirect taxes. GST and customs duty are regressive, taking a larger share of a poor household's income than of a rich one's. Shifting the balance of revenue towards direct taxation is itself a redistributive measure.

3. Land reform and asset redistribution. Ceiling laws, secure tenancy rights, distribution of surplus land and, above all, accurate land records, since a tenant without recorded rights can neither borrow against the land nor invest in it.

4. Employment guarantee and wage floors. MGNREGA, 2005 puts a floor under rural wages by giving every rural household a statutory right to 100 days of work, and the Code on Wages, 2019 provides for a statutory floor wage.

5. Universal education and skilling. Education is the most powerful long-run leveller, because it changes the distribution of earning capacity rather than merely transferring income. The Right to Education Act, 2009, the National Education Policy 2020 and the Skill India Mission are the instruments.

6. Public health. Out-of-pocket medical expenditure is a major cause of families falling into poverty. Ayushman Bharat PM-JAY, providing ₹5 lakh of hospitalisation cover a year, protects household assets from a single illness.

Constitutional foundation

The Directive Principles make this a constitutional obligation rather than a policy preference. Article 38(2) requires the State to minimise inequalities in income, status, facilities and opportunities; Article 39(b) and (c) require that material resources be distributed to subserve the common good and that wealth not be concentrated to the common detriment.

2. High-yielding and climate-resilient seeds, extending the Green Revolution package to crops and regions it bypassed, particularly pulses, oilseeds and coarse cereals in eastern and central India.
3. Balanced use of fertiliser, guided by Soil Health Cards, correcting the imbalance caused by a subsidy structure that has long favoured urea over other nutrients.
4. Mechanisation suited to small holdings, including custom hiring centres so that a small farmer can rent equipment they could never buy.
5. Integrated pest management and bio-pesticides, to reduce chemical intensity without losing output.

B. Institutional measures

1. Consolidation of holdings and secure tenancy rights, so that the cultivator has both the scale and the incentive to invest.
2. Institutional credit through the Kisan Credit Card, cooperative banks and regional rural banks, replacing the moneylender whose interest absorbs the surplus.

1. Move surplus labour out of agriculture. Output per worker cannot rise while the same output is divided among too many workers, so the ultimate remedy lies outside agriculture, in creating non-farm jobs.

In the 1950s and 1960s India imported food grains, notably under the American PL-480 programme, because it could not feed itself. Today it exports rice and is self-sufficient in food grains. Imports are now dominated by crude petroleum, gold, electronic goods, capital goods and raw materials.

The change is significant because importing capital goods indicates investment in productive capacity, whereas importing food indicated dependence. The same trade deficit therefore means something quite different now from what it meant then.

3. Change in the direction of trade, and growth in its volume.

Trade has reoriented from the United Kingdom and the erstwhile USSR and Eastern bloc, which dominated in the decades after independence, towards the United States, the United Arab Emirates, China and the European Union, with rapidly growing trade with East and South East Asia under the Look East and later Act East policies.

Why small scale industry mattered to policy

Small scale industry has been favoured in Indian policy since independence for four reasons: it is labour-intensive and therefore suited to a labour-surplus economy; it needs little capital, which was scarce; it can be dispersed across the country, reducing regional imbalance and checking migration to cities; and it distributes income more widely than large-scale industry.

Phase one: protection and reservation (1948 to 1991)

1. The Industrial Policy Resolutions of 1948 and 1956 gave small scale industry an explicit place in the plan.
2. The Karve Committee (1955) recommended promotion of small industry through protection and support.
3. Reservation of products for exclusive manufacture by the small scale sector, beginning in 1967 and eventually covering more than 800 items. A large firm was simply forbidden to make them.
4. Fiscal concessions: excise exemptions and tax holidays.

1. The Micro, Small and Medium Enterprises Development (MSMED) Act, 2006 replaced the old "small scale industry" framework with the three-fold micro, small and medium classification, brought services within it for the first time, and created a statutory remedy for delayed payments, requiring payment within 45 days with compound interest at three times the RBI rate.
2. The classification became a composite criterion of investment and turnover from 1 July 2020, and the limits were raised again in the Union Budget 2025-26 with effect from 1 April 2025.
3. Current instruments: Udyam Registration, CGTMSE credit guarantees, the Public Procurement Policy reserving 25% of government purchases for micro and small enterprises, TReDS for receivables, PMEGP, RAMP and PM Vishwakarma.

Assessment

Policy has moved from protecting small industry to enabling it, and the change was right in principle: reservation produced units that survived because competition was forbidden rather than because they were efficient. But the sector's central problems, finance and delayed payments, remain, and every benefit still flows to the registered minority while the informal majority is untouched.

Meaning of demand

Demand in economics is not merely a desire. It is the quantity of a commodity that a consumer is willing and able to buy at a given price during a given period of time. It therefore requires three things together: desire, ability to pay, and willingness to pay.

Statement of the law

The law was stated by Alfred Marshall in Principles of Economics (1890):

"The greater the amount to be sold, the smaller must be the price at which it is offered in order that it may find purchasers; or, in other words, the amount demanded increases with a fall in price and diminishes with a rise in price."

In short: other things remaining equal, the quantity demanded of a commodity varies inversely with its price.

Price ↑ → Demand ↓
Price ↓ → Demand ↑

Demand schedule

5. No change in the size and composition of the population.
6. No change in the distribution of income.
7. No change in climate or season.
8. The commodity is not a prestige or status good.

If any assumption fails, the whole demand curve shifts, and the change is not a test of the law at all.

Why the demand curve slopes downward

1. Law of diminishing marginal utility. Each successive unit gives less satisfaction than the last, so a buyer will take more only at a lower price.
2. Income effect. A fall in price raises the buyer's real income, so more can be bought.
3. Substitution effect. A fall in the price of one good makes it cheaper relative to its substitutes, so buyers switch to it.
4. New buyers enter the market at a lower price.
5. Multiple uses. A cheaper commodity is put to uses that were not worth it at the higher price.

Exceptions to the law

7. Emergency and abnormal conditions: war, famine or panic buying, as in the early COVID-19 lockdown.
8. Change in fashion: an out-of-fashion good will not sell even at a reduced price.

Importance of the law

For the consumer, it explains buying behaviour; for the producer, it guides pricing and output; for the government, it underlies taxation and price policy, since a tax on an inelastic good raises revenue reliably.

2. The caste system and social stratification. Caste historically determined occupation, restricting mobility and preventing the allocation of labour by ability. It continues to affect access to land, credit, education and employment, which is why poverty in India is concentrated among Scheduled Castes and Scheduled Tribes. The Constitution responds through Articles 15, 16, 17 and 46 and through reservation, which is affirmative action addressing an inequality that is social rather than economic in origin.

3. The joint family system. It provides insurance and old-age security in the absence of formal social security, and pools resources. But it also dilutes individual incentive, since the cost of an additional child or an idle member is shared, and it contributes to disguised unemployment by absorbing surplus labour on the family holding.

4. Illiteracy and low educational attainment. Literacy has risen substantially but quality remains weak, and a workforce without skills is confined to low-paid casual work. Education is the single strongest determinant of mobility, which is why the Right to Education Act, 2009 and the National Education Policy 2020 are economic policies as much as social ones.

9. Health and nutrition. Malnutrition, anaemia and stunting reduce learning and earning capacity, creating a trap in which poverty causes ill health and ill health deepens poverty. Public health expenditure has long been around 2% of GDP against the National Health Policy 2017 target of 2.5%.

10. The unorganised sector and absence of social security. The overwhelming majority of Indian workers are informal, without written contracts, provident fund, insurance or pension. Their vulnerability was made visible by the reverse migration during the COVID-19 lockdown of 2020.

11. Child labour. Poverty pushes children into work and out of school, which reproduces low skills in the next generation. Prohibited and regulated by the Child Labour (Prohibition and Regulation) Act, 1986, as amended in 2016.

12. Social attitudes. Traditional attitudes, fatalism, resistance to change, preference for a male child, and expenditure on ceremonies beyond a household's means, affect saving, investment and family size.

Background

The New Industrial Policy was announced on 24 July 1991 by the government of Prime Minister P. V. Narasimha Rao, with Dr Manmohan Singh as Finance Minister, in the middle of a balance of payments crisis in which foreign exchange reserves had fallen to roughly two weeks of imports and gold had been pledged abroad.

It reversed the framework built by the Industrial Policy Resolution of 1956, under which the State occupied the "commanding heights" of the economy, industry was licensed, and large firms were restrained by the MRTP Act, 1969. That system, the "licence-permit raj", had produced slow growth, poor quality and shortage.

The main features of the policy

1. Abolition of industrial licensing. Licensing was abolished for all industries except a short list reserved on strategic, security, social and environmental grounds. A firm no longer needed government permission to start, expand or change its product. The reserved list has since shrunk further, to a handful of items.

7. Location policy relaxed, and industrial approvals for cities above a certain size simplified.

Comment: what the policy achieved

1. Growth of industry and of the economy. Removing entry barriers allowed firms to enter and expand at their own judgment, and India's growth rate rose markedly over the following two decades.
2. Competition, quality and consumer choice, most visible in automobiles, consumer durables, aviation and telecommunications, where shortage and waiting lists disappeared.
3. Foreign investment and technology flowed in, bringing capital and modern management.
4. New industries emerged: information technology, telecommunications, automobile components and pharmaceuticals, in which India became a significant exporter.
5. Access to imported inputs at lower tariffs made Indian manufacturing more competitive.
6. Entrepreneurship was released. The end of licensing meant a business idea no longer required a government file.

Comment: the criticisms

Overall assessment

The New Industrial Policy 1991 was a necessary and largely successful correction. The system it replaced was demonstrably failing: shortage, poor quality and slow growth were its results, and the 1991 crisis made continuation impossible. The policy removed the obstacles, and growth followed.

But it should be judged as necessary rather than sufficient. It could release capability that already existed; it could not create capability that did not. The sectors that flourished were those where India already had an advantage, notably an English-speaking, technically trained workforce for software. The failure to generate manufacturing employment on an East Asian scale is the unfinished business of 1991, and it is what the Production Linked Incentive schemes and Make in India are attempting, three decades later, to address.

1. Arithmetic density: total population ÷ total area. The usual measure.
2. Physiological density: total population ÷ cultivable area. More meaningful for an agricultural economy, because it measures pressure on the land that actually produces food.
3. Agricultural density: agricultural population ÷ cultivable area.

Why density matters: high density raises pressure on land, water, housing and services; it reduces the average size of holdings, which is a direct cause of low agricultural productivity in India; and it contributes to congestion, slums and environmental degradation. But density is not by itself a measure of poverty: several prosperous countries are densely populated, and what matters is population relative to resources and productivity, not to area alone.

Part 2: Causes of population explosion in India

Population explosion is an unusually rapid growth of population, caused by a sharp fall in the death rate while the birth rate remains high. India's population has grown from about 36 crore in 1951 to more than 140 crore today.

5. Preference for a male child, which leads couples to continue until a son is born.
6. Religious and social beliefs treating children as a blessing and discouraging family planning.
7. The joint family system, which spreads the cost of an additional child so the parents do not bear it fully.
8. Lack of recreation and of awareness, particularly in rural areas.
9. Low status of women and limited say in household decisions.

B. Causes of a falling death rate

1. Control of epidemics: plague, cholera and malaria; smallpox declared eradicated in India in 1977 and polio in 2014.
2. Better medical facilities, immunisation and antibiotics.
3. Sharp fall in infant mortality, so far more of those born survive to adulthood.
4. Improved nutrition and food security, the Green Revolution and the public distribution system ending the famines that once checked population.

Measures

India was the first country in the world to adopt an official family planning programme, in 1952. It has been followed by the National Population Policy 2000, aiming at a stable population by 2045; education of girls; raising the age at marriage; incentives for small families; improved child health so that parents need fewer births to be confident of survivors; and the empowerment of women.

Features of the Indian money market:

1. Dichotomy between the organised and unorganised sectors. The organised sector comprises the RBI, banks and financial institutions; the unorganised sector comprises indigenous bankers, moneylenders, chit funds and nidhis, outside RBI control.
2. Absence of integration historically, so rates in one segment did not reflect another.
3. Diversity of interest rates, following from that.
4. Seasonal stringency of funds, demand rising sharply in the busy agricultural season from November to April.
5. Underdeveloped bill market, because of the preference for cash credit.
6. High liquidity and low risk, since instruments are short-dated and mostly government-backed.
7. No fixed physical location; transactions are by telephone and electronically.

Regulator: the Securities and Exchange Board of India, established 1988 and given statutory status by the SEBI Act, 1992.

Features of the Indian capital market:

1. Deals in long-term funds, of more than one year or of no fixed maturity at all.
2. Two distinct segments, primary and secondary, each performing a different function.
3. Higher risk and higher return than the money market, since prices fluctuate with company performance and sentiment.
4. Wide participation, including retail investors, which the money market lacks.
5. Highly regulated, by SEBI, the Companies Act 2013 and the listing regulations.
6. Fully dematerialised and electronic, with depositories (NSDL and CDSL) and screen-based trading.
7. Growing institutional participation by mutual funds, insurance companies and foreign portfolio investors.
8. Greater integration with world markets, and therefore greater sensitivity to global events.

The comparison