BLS LLB 5 Years Sem 1 Economics 2022-23 Question Paper with Solutions

Normative economics is the branch of economics that deals with what ought to be. It expresses value judgments about what is desirable and prescribes policy, rather than merely describing what exists.

Its features:

1. It is prescriptive, not descriptive.
2. It rests on value judgments, ethical, political or social.
3. Its statements cannot be tested as true or false against evidence.
4. It is also called welfare economics or policy economics.

Examples: "The government should raise the minimum wage." "Income inequality in India is too high." "The poor ought to receive free healthcare."

The test: if a statement contains should, ought, must, good, bad, fair or unjust, it is normative.

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.

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.

Stock is potential supply; supply is that part of the stock actually brought to market at a given price. Therefore Supply ≤ Stock.

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.

Its classification:

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.

It is also classified as developmental (education, health, irrigation) and non-developmental (defence, administration, interest).

NITI Aayog, the National Institution for Transforming India, was constituted on 1 January 2015 by a Cabinet resolution, replacing the Planning Commission (1950 to 2014). The Prime Minister is its Chairperson, and it has a Vice Chairperson, a Chief Executive Officer, full-time and part-time members, and a Governing Council consisting of the Chief Ministers of all States and the Lieutenant Governors of Union Territories.

Two of its functions:

1. To act as the think tank of the Government of India, providing strategic and technical advice on policy, and designing long-term policy and programme frameworks such as the Strategy for New India @ 75 and the SDG India Index.
2. To foster cooperative federalism. It works through the Governing Council so that States are partners in framing national policy rather than recipients of it, and it promotes competitive federalism by ranking States on health, education, water and innovation.

Two further functions: monitoring and evaluating the implementation of programmes; and acting as a knowledge and innovation hub, hosting the Atal Innovation Mission.

A direct tax is a tax whose impact and incidence fall on the same person: the person who pays it to the government is the person who bears the burden, and it cannot be shifted to anyone else.

Two examples:

1. Income tax, levied on the income of individuals and of Hindu Undivided Families under the Income Tax Act, 1961, at progressive slab rates, so that a larger income bears a larger proportion.
2. Corporate tax, levied on the profits of companies under the same Act, at a flat rate that differs for domestic and foreign companies.

Two further examples: capital gains tax, on the profit made on the sale of a capital asset; and securities transaction tax. Wealth tax was a direct tax until it was abolished in 2015.

Meaning

The terms were introduced by the Norwegian economist Ragnar Frisch in 1933. They come from the Greek mikros, small, and makros, large.

Microeconomics studies the economic behaviour of individual units: a consumer, a firm, a household, a single industry, the market for one commodity.

Macroeconomics studies the economy as a whole: national income, total employment, the general price level, aggregate demand and supply.

Points of distinction

Interdependence

The two are not rivals but complements. Macroeconomic aggregates are built up from microeconomic units, and microeconomic decisions are taken within a macroeconomic environment: a firm's investment decision depends on the interest rate, which is a macro variable. Paul Samuelson compared them to two blades of a pair of scissors, neither of which cuts alone.

• Ey = 1: unitary. Demand rises exactly in proportion to income.
• 0 < Ey < 1: necessities. Demand rises less than proportionately. Examples: food grains, salt, basic clothing.

2. Zero income elasticity (Ey = 0): neutral goods. Demand does not change with income. Examples: common salt, matchboxes.

3. Negative income elasticity (Ey < 0): inferior goods. Demand falls as income rises, because the consumer switches to a better substitute. Examples: coarse cereals such as bajra and jowar, second-hand clothing, low-grade rice.

Worked example

If a household's income rises from ₹40,000 to ₹50,000 (a rise of 25%) and its demand for restaurant meals rises from 4 to 6 a month (a rise of 50%), then:

Ey = 50 ÷ 25 = 2

Since Ey > 1, restaurant meals are a luxury for that household.

Importance

Meaning

Monopoly comes from the Greek monos, single, and polein, to sell. It is a market in which there is a single seller of a commodity that has no close substitutes, and in which entry by new firms is blocked.

Features

1. A single seller and a large number of buyers. One firm constitutes the whole industry, so the distinction between the firm and the industry disappears and the firm's demand curve is the industry's demand curve.

2. No close substitutes. The product has no substitute a buyer would readily switch to, so the cross elasticity of demand for it is very low. This is the test that distinguishes monopoly from other markets.

3. Strong barriers to entry. This is the feature that keeps a monopoly alive. Barriers arise from:

• A patent or copyright held by the firm
• A licence or statutory monopoly granted by the State
• Exclusive control of a raw material or of a technique

7. Price discrimination is possible. Because the monopolist controls supply, it can charge different prices to different buyers for the same good where the markets can be kept separate and their elasticities differ. Railway fare classes and different tariffs for domestic and industrial electricity are examples.

8. No supply curve. A monopolist does not have a supply curve in the ordinary sense, since price and quantity are decided together from the demand curve rather than read off a schedule.

Kinds of monopoly

Natural, legal, technological, State and simple monopoly, distinguished by the source of the barrier.

Examples

Indian Railways in long-distance rail transport; a patented medicine during the life of the patent; municipal water supply.

4. To secure a share of world trade growth for developing and least-developed countries.
5. To establish an integrated, more viable and durable trading system.

Functions

1. Administering the WTO trade agreements, chiefly GATT (goods), GATS (services) and TRIPS (intellectual property).
2. Acting as a forum for trade negotiations between members.
3. Settling trade disputes through its Dispute Settlement Body.
4. Monitoring national trade policies by the Trade Policy Review Mechanism.
5. Technical assistance and training for developing countries.
6. Cooperating with the IMF and the World Bank for coherence in global economic policymaking.

Criticism

That it favours developed countries; that TRIPS raises the price of medicines and technology for poor countries; that agricultural subsidies in the developed world remain very large while developing countries are pressed to open their markets; and that the Doha Round, begun in 2001, has never concluded.

The question

The question asks whether liberalisation, the opening of the economy begun in 1991, has helped Indian agriculture. It requires a discussion, so both sides must be argued before a conclusion is reached.

Arguments that liberal policy has helped

1. Access to world markets and higher prices. Removing export restrictions allows farmers to sell at world prices when those are higher than domestic ones. India has become a significant exporter of rice, spices, marine products, cotton and tea, and is the world's largest exporter of rice.

2. Better inputs and technology. Liberalisation permitted the import of improved seeds, machinery, drip and sprinkler irrigation systems and modern agro-chemicals, and allowed foreign firms to bring agricultural technology into India.

2. Competition from subsidised foreign produce. Developed countries subsidise their farmers heavily, so imports can undercut Indian produce even where Indian costs are genuinely lower.

3. The benefits are unequally distributed. Export markets, cold chains and contract farming reach large and irrigated farms; the marginal farmer with about one hectare, who is the typical Indian cultivator, is largely untouched.

4. Neglect of public investment. The reforms were industrial and financial in focus. Public investment in irrigation, research and extension slowed, and subsidies substituted for it.

5. Input costs rose with the reduction of subsidies on fertiliser and power in some periods, squeezing margins.

6. Rural distress. Indebtedness and farmer suicides persisted through the liberalisation decades, which is the strongest single argument that liberalisation alone did not solve the sector's problems.

The context

India is the world's most populous country, with more than 140 crore people. Population control has been a policy objective since 1952, when India became the first country in the world to adopt an official family planning programme. Law supports that objective, though, as explained below, it does not compel it.

The laws and their importance

1. Constitutional provisions.

• Entry 20A of the Concurrent List, inserted by the 42nd Constitutional Amendment, 1976, expressly covers "population control and family planning", so both Parliament and the State legislatures may legislate on it. Its importance is that it settled the legislative competence question.
• Article 47 directs the State to raise the level of nutrition and public health.
• Article 21A, the right to education, and Article 21, the right to life, support the measures that reduce fertility indirectly.

5. The Right of Children to Free and Compulsory Education Act, 2009. Its importance: female education is the single strongest predictor of lower fertility, operating through later marriage, better knowledge and availability of contraception, greater autonomy in household decisions, and a higher opportunity cost of a woman's time.

6. Policy instruments with legal effect. The National Population Policy, 2000, which set the goal of a stable population by 2045; and two-child norms adopted by several States as a qualification for contesting local body elections or receiving certain benefits.

⚠️ The limit of the legal answer

There is no central law compelling any citizen to limit family size. Coercive sterilisation during the Emergency (1975 to 1977) produced a lasting public backlash and set the programme back by years. India's approach since has been deliberately based on incentive, education and voluntary choice, and any answer on this subject should say so, because the absence of a compulsory law is itself the most significant fact about it.

Context

Small scale industries, now classified as Micro, Small and Medium Enterprises (MSMEs) under the MSMED Act, 2006, contribute roughly 30% of India's GDP, about 45% of its exports and employ on the order of 11 crore people. The nationwide lockdown from March 2020 hit them harder than any other part of the organised economy, because they had the thinnest reserves.

The three principal problems

1. Collapse of demand and of cash flow. This was the central problem. Markets closed overnight, orders were cancelled and receivables stopped coming in, while fixed costs, rent, wages, interest, electricity, continued. A small unit typically holds cash for a few weeks, not months, so a lockdown of that length exhausted working capital and left firms unable to restart even when restrictions lifted. Delayed payments, already the sector's chronic problem, worsened as large buyers and government departments held back.

1. The Emergency Credit Line Guarantee Scheme (ECLGS), a ₹3 lakh crore fully guaranteed collateral-free credit line, later expanded, which was the principal response.
2. Moratorium on loan repayments granted by the RBI, and restructuring of stressed accounts.
3. Revised MSME classification from 1 July 2020, a composite criterion of investment and turnover with the manufacturing and service distinction abolished, so that units could grow without losing benefits.
4. Subordinate debt for stressed MSMEs and a Fund of Funds for equity infusion.
5. Clearing of government and PSU dues to MSMEs.
6. Free food grain under the Pradhan Mantri Garib Kalyan Anna Yojana, which supported the workforce directly.

The three principal features

1. A persistent and large merchandise trade deficit, offset by a surplus on services.

India's imports of goods have consistently exceeded its exports of goods, so the balance of trade has been adverse for almost the whole period since independence. The deficit is driven by three items: crude petroleum, the single largest; gold, bought as a store of value; and increasingly electronic goods.

The feature that makes this sustainable is the counterweight: India runs a large surplus on services, chiefly software and business services, together with the world's largest inflow of remittances. The current account deficit is therefore far smaller than the merchandise trade deficit, and judging India's external position from the trade figures alone is misleading.

2. A transformed composition of trade.

Two further features worth naming

4. Dominance of services in export growth, which is unusual: most developing economies industrialise before they move to services. 5. Import dependence on a few sources, notably on China for electronics and intermediate goods, which is a strategic exposure as well as an economic one.

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. A beggar's desire for a car is not demand.

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.

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 entire demand curve shifts, and what is being observed is not a test of the law at all.

Why the demand curve slopes downward

1. Law of diminishing marginal utility. Each successive unit yields less satisfaction, so a buyer takes more only at a lower price. This is the fundamental reason.
2. Income effect. A fall in price raises the consumer's real income, so more can be bought.
3. Substitution effect. A fall in the price of one good makes it cheaper relative to substitutes, so buyers switch to it.
4. New buyers enter the market at the lower price.
5. Multiple uses. A cheaper commodity is put to uses 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. A good that has gone out of fashion 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 decisions; for the government it underlies taxation, price control and public distribution, since a tax on an inelastic good raises revenue reliably while a tax on an elastic good drives demand away.

2. Heavy dependence on agriculture, with an occupational structure that has not changed. Agriculture contributes roughly 18% of Gross Value Added but supports about 45% of the workforce. That gap between the share of output and the share of employment is the defining structural distortion of the Indian economy and the direct cause of low labour productivity.

3. Unemployment and underemployment. The characteristic problem is not open unemployment but disguised unemployment in agriculture, where more people work the land than the land requires, together with seasonal unemployment and a very large informal sector offering no security.

4. Low rate of capital formation. Low incomes produce low savings, low savings produce low investment, and low investment perpetuates low incomes. This is Ragnar Nurkse's vicious circle of poverty, and it operates on both the demand and the supply side of capital.

5. Poverty and inequality. Poverty has fallen substantially, on the multidimensional measure from 24.85% in 2015-16 to 14.96% in 2019-21, but persists, and inequality of income and of assets, particularly land, remains high.

6. Low level of technology in large parts of the economy, coexisting with world-class capability in others.

C. Features of the post-1991 economy

13. Liberalisation, privatisation and globalisation (LPG). Licensing dismantled, tariffs cut, foreign investment welcomed, the rupee made convertible on the current account in 1994.

14. A services-led structure. Services contribute more than half of Gross Value Added, an unusually high share for a country at India's income level, since most economies industrialise before moving to services.

15. Growing external integration: trade at roughly three times its 1990 share of GDP, foreign exchange reserves above 700 billion US dollars in 2024, and the world's largest inflow of remittances.

16. A demographic dividend, a large and young working-age population, which is an advantage only if educated, healthy and employed, and whose window is generally estimated to run to around 2055.

17. Rapid digital and financial inclusion, through Jan Dhan, Aadhaar, mobile connectivity, UPI and Direct Benefit Transfer.

Introduction

Law and economics are concerned with the same underlying fact: resources are scarce, so rules are needed to decide who gets what. Economics explains how scarce resources are allocated and how people respond to incentives; law creates and enforces the rights that make an allocation binding. Neither is complete without the other, which is why economics is taught in the first semester of a five-year law course.

The points of relevance

1. Both subjects rest on scarcity and choice. Economics studies the allocation of scarce means among competing ends. The law of property decides who owns a scarce resource; the law of contract governs its voluntary transfer; the law of succession governs its transfer on death. These are allocation rules expressed in legal form.

2. Economic legislation cannot be applied without economics. Whole statutes are built on economic concepts:

4. Externalities, and the whole of environmental law. An externality is a cost or benefit falling on someone who is not party to a transaction. Pollution is the standard case. The polluter pays principle and the precautionary principle, both adopted by the Supreme Court of India, are economic ideas in legal dress: they internalise a cost that would otherwise be shifted to society. Much of nuisance, tort and planning law can be described the same way.

5. Incentives and deterrence in criminal law. Penalties work by altering behaviour at the margin. Deterrence is marginal analysis: the expected cost of an offence, being the penalty multiplied by the probability of detection, must exceed its expected benefit. That is why raising the certainty of detection often deters better than raising the severity of punishment.

6. Damages are an economic calculation. What would the claimant's position have been but for the breach or the wrong? Loss of profits, loss of earning capacity, mitigation and the discounting of future losses to present value are all economics applied by courts every day.

11. Public finance and the constitutional division of taxing powers. The distinction between direct and indirect taxes, between impact and incidence, and the division of taxing powers under the Seventh Schedule and Article 265, are public finance applied constitutionally.

12. Judicial and legislative policy generally. Any law that ignores incentives will be evaded. Rent control that fixes rents below the market reduces the supply of rental housing; a licensing system creates a scarcity value and therefore corruption. Economics predicts the consequence a statute will actually produce, as against the one it intends.

Conclusion

Economics supplies the reasoning; law supplies the sanction. A rule that ignores incentives will not be obeyed, and a market without enforceable rights cannot function at all. The best commercial, constitutional and environmental lawyers are, in practice, applied economists, and the relevance of economics to law is therefore not decorative but operational.

3. Income: interest, profit and dividends received from and paid to abroad.
4. Unilateral transfers: remittances, gifts and grants, for which nothing is given in return. India is the world's largest recipient of remittances.

B. Capital and Financial Account, recording transactions that change foreign assets and liabilities:

1. Foreign direct investment (FDI) and foreign portfolio investment (FPI).
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

Since the accounts always balance arithmetically, disequilibrium means an imbalance in the autonomous transactions, those undertaken for their own sake and entered "above the line", which must then be met by accommodating transactions "below the line", such as drawing on reserves or official borrowing.

4. Demonstration effect: exposure to foreign consumption patterns raises demand for imported goods.
5. Natural calamities, requiring emergency imports of food or materials.

B. Causes on the export side

1. Slow growth of exports, from low competitiveness, poor quality or inadequate infrastructure.
2. Inflation at home, which raises domestic costs and makes exports dear abroad.
3. Recession in importing countries, reducing world demand.
4. Protectionism abroad: tariffs, quotas and technical barriers raised against Indian goods.
5. A narrow export basket, concentrated in a few commodities or markets, so a shock to one is a shock to the whole.

C. Causes on the capital account

1. Heavy debt servicing: interest and repayment on past external borrowings.
2. Repatriation of profits by foreign investors.

India's experience

The 1991 crisis is the classic case of a fundamental adverse BoP: reserves fell to roughly two weeks of imports, India pledged gold abroad to raise foreign exchange, and the response was devaluation, current account convertibility in 1994 and the liberalisation of the whole economy. Today reserves exceed 700 billion US dollars, and although the merchandise deficit persists, the services surplus and remittances keep the current account deficit modest.

The place of the three in India

India is a mixed economy, so all three coexist by design. The public sector was built after independence under the Industrial Policy Resolution, 1956, to give effect to Article 39(b) and (c) of the Constitution, which direct that material resources be distributed to subserve the common good and that wealth not become concentrated.

The balance shifted decisively with the New Industrial Policy, 1991: industries reserved for the public sector fell from 17 to a handful, licensing was abolished, foreign investment was welcomed, and disinvestment began, of which the sale of Air India to the Tata Group in January 2022 is the clearest example.

Part 2: Problems of small scale industry

Small scale industries, classified since the MSMED Act, 2006 as Micro, Small and Medium Enterprises (MSMEs), contribute roughly 30% of GDP and about 45% of exports, and employ on the order of 11 crore people, second only to agriculture.

1. Shortage of finance. The central problem. Banks demand collateral a small unit does not have, credit appraisal is designed for large borrowers, and the unit falls back on moneylenders at very high rates.

10. High compliance cost, since registrations, inspections and returns absorb the time of a proprietor who has no compliance department.

11. Sickness and closure, the combined effect of all of the above.

Measures

Priority sector lending and the CGTMSE collateral-free credit guarantee; the revised classification effective 1 July 2020, a composite criterion of investment and turnover; the Udyam registration portal; TReDS for discounting receivables; public procurement policy reserving a share of government purchases; the Samadhaan portal for delayed payments; and the Emergency Credit Line Guarantee Scheme during the pandemic.

Conclusion

The three sectors are distinguished by who owns, who decides and who bears the risk, and India keeps all three because no single form serves every purpose: the private sector supplies efficiency, the public sector supplies what the market will not, and the joint sector attempts both. Small scale industry sits mostly within the private sector, and its problems are the problems of the private sector at its smallest scale, where none of the advantages of size are available.