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chapter 1 development 1 what are the different questions that arise when we think about development of countries the different questions that arise when we think about development of countries are the following i what are the essential things that we require ii can life be better for all iii how should people live together iv can there be more equality 2 what would be the development goals or aspirations of the land less rural labourers i landless labourers wanted more days of work and better wages ii they wanted that local school should provide quality education to their children iii they wanted to become leaders in the village they do not want any social discrimination 3 prove by giving examples that developmental aspirations are some times conflicting each other i industrialists wanted more dams to get more electricity on the other hand tribal people do not want more dams which submerge their land and disrupt their life ii a girl expects as much freedom and opportunity as her brother but the brother may not like it 4 state any two concepts of development goals i different persons can have different developmental goals ii what may be the development for one may not be the development for the other 5 what are the two types of development goals what are the attributes that we consider when we look at individual aspirations and goals i money or material things people wanted regular work better wages and decent prices for their crops and thus wanted more income ii non material things people wanted equal treatment freedom security and respect of others 6 why do people have different notions of development life situation of people are different they are born and brought up in different situations their educational and spiritual thoughts will be different their concept of life is different so their notions of development will be different 7 give two examples where factors other than income are important aspects of our lives i people wanted equal treatment freedom security and respect of others ii a job with low income but offer regular employment will be more preferred than a job with high pay with no job security iii people desire friend ship it plays an important role in their life style 8 why is greater income to be considered as one of the important national goal of development i countries with higher income are more developed than others with less income ii more income means more of all things that human beings need what ever people like and should have they will be able to get with greater income 9 what is per capita income isb 133

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i it is the average income of a citizen it is calculated by dividing the total income of the country by the population ii the per capita income of an indian is rs 28000 in 2004 10 how did world bank classify countries what criterion did they use what are its limitations i the world bank classified countries in to high income countries medium income countries and low-income countries ii countries with per capita income above rs 4 53,000 is considered high income countries iii countries with per capita income between rs 4 53,000 and 37 000 is considered medium income countries iv countries with per capita income less than rs.37000 is considered low income countries v they used per capita income as the criterion to classify countries limitations of this criterion are the following a per capita income alone can t bring development b even though per capita income of many countries is very high it is noticed that the standard of living of the people remained low 11 give three examples where an average is used for comparing situations or why do we use averages what are the limitations to their use i the per capita income or the average income is used to compare economic development of countries ii we use averages to identify and analyze performance level in different areas iii it is used to compare different situations and to find out the strong and weak points iv we use averages to make calculations easier and averages reveal general performance level there are limitations to their use averages will not represent the actual performance when we take the average of similar performance or similar amount it is meaningful however when we calculate two extremes or a number of very low performances and a very high performance the average will not tell the exact situation 12 why do you think average income is an important criterion for development explain i average income represents the total income of a country keeping in view of the total population if the average income is adequate to meet the basic requirement and other facilities that country is considered developed ii more income means more of all things that human beings need what ever people like and should have they will be able to get with greater income 13 besides size of per capita income what other property of income is important in comparing two or more societies i equal distribution of income is important in comparing two or more societies ii utilization effect what for you use of income is also important 14 prove by giving examples that income itself is not a completely adequate indicator of material goods and services that citizens were able to use i the per capita income of panjab and kerala is rs 26000 and 22800 by the year 2002 ii though the per capita income of punjab is much higher than kerala their infant mortality rate is 49 and it is higher than 11 in kerala and literacy rate is 70 in punjab and 91 in kerala isb 134

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iii money cannot buy all the goods and services that we need to live well it can not buy a pollution free environment or ensure that we get unadulterated medicine 15 in what respects is the criterion used by the undp for measuring development different from the one used by the world bank i united nations development programe used three criteria life expectancyhealth status literacy rate and per capita income as the criteria to measure human development where as world bank used per capita income only as the criterion to classify countries ii the world bank considered the economic aspect ie the average income only whereas undp considered over all achievement in different aspects like health status educational achievements and average income to measure human development 16 what are the three components of human development index or what are attributes of regional or national developmental aspirations or goals i per capita income or the average income of a citizen per capita income is calculated in dollars for all countries so that it can be compared it is also done in a way so that every dollar would buy the same amount of goods and services in any country ii life expectancy at birth denotes as the name suggests average expected length of life of a person at the time of birth infant mortality rate or the number of children dying before the age of one year per thousand births iii gross enrolment ratio or literacy rate for three levels means enrolment ratio for primary school secondary school and higher education beyond secondary school 17 find out the present source of energy used by the people in india what could be the possibilities fifty years from now i at present we use conventional source of energy mostly like coal and petroleum as the major source of energy ii since it is an exhaustible and non renewable source of energy it may not be available after fifty years iii we use non conventional source of energy like solar energy wind energy and hydel energy to a small extent after 50 years we have to depend on non conventional sources of energy only or we have to develop a new source of energy 18 why is the issue of sustainability important for development i it is important because future generations should not suffer due to the development programmes of the present generation ii issue of sustainability consider judicious use of resources adopt measures to prevent environmental pollution and to avoid wastages 19 why has kerala a low infant mortality rate and a high literacy rate even though the per capita income is comparatively low i kerala has a low infant mortality rate because it has adequate provision of basic health and educational facilities the government spent a fair amount of money in the field of health and education ii the public distribution system functions properly in kerala and essential goods are supplied at a lower price than the market prices therefore the health and nutritional status of the people is very high 20 how do public facilities stand as a clear indicator of development i money cannot protect you from diseases unless the whole community takes preventive steps ii you can not get good education if the provision is not available to all or no one else other than you is interested in education isb 135

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iii kerala has a low infant mortality rate because it has adequate provision of basic health and educational facilities the government spent a fair amount of money in the field of health and education iv the public distribution system functions properly in kerala and essential goods are supplied at a lower price than the market prices therefore the health and nutritional status of the people is very high 21 why have the scientists of the 2nd half of the 20th century been warning that the present type and levels of development are not sustainable i it is because the present type and levels of development is not eco friendly it creates a lot of problems like ozone layer depletion global warming and environmental pollution ii the present type and levels of development is not judicious-there is too much over exploitation of resources causing depletion of resources by which the future generation would suffer 22 list a few examples of environmental degradation that you may have observed around you i large areas of forests are destroyed in different parts of india ii industrial effluents are disposed and discharged with out proper treatment causing land and water pollution 23 what should india do to achieve to become a developed country i per capita income of india should be increased by achieving rapid industrial development and increasing national income and by reducing the population to the size of the resources available in the country ii life expectancy of the people of india should be increased by improving the health status of the people through awareness and immunization programmes maternal and child health care and improving overall medical facilities in india iii literacy rate and gross enrolment ratio should be increased by effective implementation of the constitutional provision to provide free and compulsory education to all children up to the age of 14 and by launching various education programmes 24 give two examples to show that collective provision of goods and services is cheaper than individual provision i collective security for the whole locality is cheaper than individual security to each house ii a pond or a playground for all people will be cheaper than individual ones 25 why is per capita income calculated in u.s dollars per capita income is calculated in u.s dollars for all the countries so that it can be compared it is an internationally accepted currency it is also done in a way so that every dollar would buy the same amount of goods and services in any country 26 `the earth has the resources to meet the needs of all but not enough to satisfy the greed of one person how is this statement relevant to the discussion of development i the statement warns against the modern technology of production which leads to over exploitation of resources and further leads to environmental pollution and wastages of resources ii it is due to the greed of human beings that the resources are over exploited and the environment is polluted it is not sustainable sustainable development takes care the needs of the present generation as well as the future generation isb 136

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chapter 2 sectors of the indian economy 1 what are the different sectors of an economy or how are economic activities classified on the basis of the nature of the activity i primary sector when we produce a good by exploiting natural resources it is an activity of primary sector it forms the base for all other products that we subsequently make e.g farming fishing forestry mining etc ii secondary sector the secondary sector covers activities in which natural products are changed into other forms through ways of manufacturing that we associate with industrial activity it is the next step after primary activity using sugarcane as a raw material we make sugar or gur we convert earth into bricks and use bricks to make houses and buildings since this sector gradually became associated with the different kinds of industries that came up it is also called as industrial sector iii tertiary sector these activities help in the development of the primary and secondary sectors these activities by themselves do not produce a good but they are an aid or a support for the production process transport storage communication banking trade are some examples of tertiary activities since these activities generate services rather than goods the tertiary sector is also called the service sector what is the secondary sector in an economy why do we call it industrial sector write points ii above 2 why is agriculture called a primary activity in primary sector i it is the oldest occupation it forms the base for all other products that we subsequently make ii it is dependent mainly on natural factors like land rain fall sunshine and climate 3 how is tertiary sector different from other sectors illustrate with a few examples i tertiary activities by themselves do not produce goods but primary and secondary sectors produce goods ii tertiary sector is the largest producing sector in india in 2003 which shares 52 in the g.d.p where as primary and secondary sectors contribute 22 and 26 respectively iii development of primary and secondary activities leads to the development of tertiary activities like transport trade storage etc iv cultivation of wheat is a primary activity and producing bread is a secondary activity transportation storing and selling bread are tertiary activities 4 what precaution should we take when we add the value of goods and services to calculate the g.d.p i not every good or service that is produced and sold needs to be counted it makes sense only to include the final goods and services ii take for instance a farmer who sells wheat to a flour mill for rs 8 per kg the mill grinds the wheat and sells the flour to a biscuit company for rs 10 per kg the biscuit company uses the flour and things such as sugar and oil to make four packets of biscuits it sells biscuits in the market to the consumers for rs 60 rs 15 per packet biscuits are the final goods i.e goods that reach the consumers iii to count the value of the flour and wheat separately is therefore not correct because then we would be counting the value of the same things a number of times isb 137

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5 what are intermediary goods why is its value not added to the g.d.p i intermediate goods are the goods used in the production of a final product we use wheat then its flour to produce bread these are intermediary goods ii the value of final goods already includes the value of all the intermediate goods that are used in making the final good hence value of all other intermediate goods would have been included to count the value of the flour and wheat separately is therefore not correct because then we would be counting the value of the same things a number of times 6 what is g.d.p how do we count the various goods and services for calculating gdp explain with examples i it is the value of all final goods and services produced within a country during a particular year the value of final goods and services produced in primary secondary and tertiary sectors during a particular year provides the gross domestic product gdp of a country ii the great task of measuring gdp is undertaken by a central government ministry this ministry with the help of various government departments of all the indian states and union territories collects information relating to total volume of goods and services and their prices and then estimates the gdp iii continue answer 4 above 7 describe the transition of different sectors in the path of development of countries or what are the historical changes in the different sectors in the course of development or what is the general pattern of shift in the importance of sectors observed in developed countries i generally it has been noted from the histories of many developed countries that at the initial stages of development primary sector was the most important sector of economic activity ii as the methods of farming changed and agriculture sector began to prosper it produced much more food than before many people could now take up other activities there were increasing number of craft persons and traders iii over a long time and especially because new methods of manufacturing were introduced factories came up and started expanding those people who had earlier worked on farms now began to work in factories in large numbers iv people began to use many more goods that were produced in factories at cheap rates secondary sector gradually became the most important in total production and employment hence over time a shift had taken place this means that the importance of the sectors had changed v in the past 100 years there has been a further shift from secondary to tertiary sector in developed countries buying and selling activities increased many times besides there were also transporters administrators army etc vi however at this stage most of the goods produced were natural products from the primary sector and most people were employed in this sector the service sector has become the most important in terms of total production most of the working people are also employed in the service sector this is the general pattern observed in developed countries how did secondary sector become important in the growth of economies answer points iii and iv above isb 138

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8 which is the largest producing sector in india what is the scope for employment opportunities in this sector i in the year 2003 the tertiary sector has emerged as the largest producing sector in india replacing the primary sector ii in any country several services such as hospitals educational institutions post and telegraph services police stations courts village administrative offices municipal corporations defence transport banks insurance companies etc are required these can be considered as basic services iii in a developing country the government has to take responsibility for the provision of these services and thus provide employment opportunities iv at one end there are a limited number of services that employ highly skilled and educated workers at the other end there are a very large number of workers engaged in services such as small shopkeepers repair persons transport persons etc 9 why is the tertiary sector becoming so important in india i in any country several services such as hospitals educational institutions post and telegraph services police stations courts village administrative offices municipal corporations defence transport banks insurance companies etc are required these can be considered as basic services in a developing country the government has to take responsibility for the provision of these services and thus provide employment opportunities ii the development of agriculture and industry leads to the development of services such as transport trade storage and the like greater the development of the primary and secondary sectors more would be the demand for tertiary services iii as income levels rise certain sections of people start demanding many more services like eating out tourism shopping private hospitals private schools professional training etc we can see this change quite sharply in cities especially in big cities iv over the past decade or so certain new services such as those based on information and communication technology have become important and essential the production of these services has been rising rapidly 10 how does the primary sector continue to be the largest employer in india while the tertiary sectors contribute the highest share in the g.d.p i it is because not enough jobs were created in the secondary and tertiary sectors even though industrial output or the production of goods went up by eight times during the period employment in the industry went up by only 2.5 times ii the same applies to tertiary sector as well while production in the service sector rose by 11 times employment in the service sector rose less than three times iii as a result more than half of the workers in the country are working in the primary sector mainly in agriculture producing only a quarter of the gdp in contrast to this the secondary and tertiary sectors produce three-fourth of the produce whereas they employ less than half the people iv it means that there are more people in agriculture than necessary so even if you move a few people out production will not be affected in other words workers in agricultural sector are underemployed isb 139

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11 what do you understand by under employment why is it called disguised unemployment explain with an example each from urban and rural areas i if more people are employed in an activity than required it is known as under employment in this situation of underemployment where people are apparently working but all of them are made to work less than their potential the production will not be affected even if the surplus workers are thrown out ii this kind of underemployment is hidden in contrast to someone who does not have a job and is clearly visible as unemployed hence it is also called disguised unemployment iii all members in a family work in a plot of land throughout the year in rural areas since they have nowhere else to go for work each one is doing some work but no one is fully employed this is the situation of underemployment iv there are thousands of casual workers in the service sector in urban areas who search for daily employment they are employed as painters plumbers repairpersons and others doing odd jobs many of them do not find work everyday similarly there are people on the street pushing a cart or selling something where they may spend the whole day but earn very little they are doing this work because they do not have better opportunities 12 distinguish between open unemployment and disguised unemployment i in open unemployment it is very visible that people are unemployed where as in disguised unemployment people appeared to be employed but are not ii disguised unemployment is seen mostly in agriculture or in family run activities where as open unemployment can be seen in all sectors and activities iii in disguised unemployment the effect of unemployment is not felt since they share the benefit with others where as in open unemployment it is felt deeply 13 service sector in india employs two different kinds of people who are these i at one end there are a limited number of services that employ highly skilled and educated workers they are normally high paid with all facilities ii at the other end there are a very large number of workers engaged in services such as small shopkeepers repair persons transport persons etc these people barely manage to earn a living and yet they perform these services because no alternative opportunities for work are available to them 14 suggest a few measures that can be adopted to tackle the problem of under employment i the government can spend some money or banks can give loans to improve the methods of cultivation and to absorb surplus workers in new areas ii construction of canals and dams can improve agricultural activities and create more employment opportunities iii if government invests some money in transportation and storage of crops or make better rural roads helps the farmers to sell their crops in the towns and create more job opportunities iv identify promote and locate industries in semi rural areas where a large number of people may be employed v adopt measures to bring all children to schools which require more buildings more teachers and other staff it can create 20 lakh job opportunities in india vi development of tourism can create additional employment to 35 lakh people every year vii improve health facilities in india which will provide a large number of employment opportunities isb 140

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15 what is the importance of national rural employment guarantee act 2005 a under nrega 2005 all those who are able to and are in need of work have been guaranteed 100 days of employment in a year by the government b if the government fails in its duty to provide employment it will give unemployment allowances to the people the types of work that would in future help to increase the production from land will be given preference under the act 16 how are activities in an economy classified based on employment conditions organized sector i organized sector covers those enterprises or places of work where the terms of employment are regular and therefore people have assured work ii they are registered by the government and have to follow its rules and regulations which are given in various laws such as the factories act minimum wages act payment of gratuity act shops and establishments act etc iii it is called organized because it has some formal processes and procedures workers in the organized sector enjoy security of employment they are expected to work only a fixed number of hours if they work more they have to be paid overtime by the employer they also get several other benefits from the employers iv they get paid leave payment during holidays provident fund gratuity etc they are supposed to get medical benefits and under the laws the factory manager has to ensure facilities like drinking water and a safe working environment when they retire these workers get pensions as well unorganized sector i the unorganized sector is characterized by small and scattered units which are largely outside the control of the government ii there are rules and regulations but these are not followed jobs here are lowpaid and often not regular iii there is no provision for overtime paid leave holidays leave due to sickness etc employment is not secure people can be asked to leave without any reason when there is less work such as during some seasons some people may be asked to leave job also depends on the whims of the employer iv this sector includes a large number of people who are employed on their own doing small jobs such as selling on the street or doing repair work similarly farmers work on their own and hire labourers as and when they require differentiate between organized and unorganized sectors or compare the employment conditions prevailing in the organized and unorganized sectors write points i to iv under organized sector and the corresponding opposite points to unorganized sector what are the advantages enjoyed by the workers of the organized sector write points i to iv under organized sector workers are exploited in the unorganized sector do you agree with this view give reasons in support of your answer write points i to iv under unorganized sector 17 who are the vulnerable people in the unorganized sector who need protection i in the rural areas the unorganized sector mostly comprises of landless agricultural labourers small and marginal farmers sharecroppers and artisans such as weavers blacksmiths carpenters and goldsmiths isb 141

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ii nearly 80 per cent of rural households in india are in small and marginal farmer category these farmers need to be supported through adequate facility for timely delivery of seeds agricultural inputs credit storage facilities and marketing outlets iii in the urban areas unorganized sector comprises mainly of workers in smallscale industry casual workers in construction trade and transport etc iv those who work as street vendors head load workers garment makers rag pickers etc need protection v the casual workers in both rural and urban areas need to be protected 8 why is protection and support necessary to the workers of the unorganized sector write points i to iv under unorganized sector and continue v the majority of workers from scheduled castes scheduled tribes and backward communities are in the unorganized sector besides getting the irregular and low paid work these workers also face social discrimination protection and support to the unorganized sector workers is thus necessary for both economic and social development 19 workers in the unorganized sector need protection on the following issues wages safety and health explain with examples i wages jobs in the unorganized sector are low-paid there is no provision for overtime paid leave holidays leave due to sickness etc those who work as street vendors head load workers garment makers rag pickers etc need protection in the urban areas unorganized sector comprises mainly of workers in small-scale industries casual workers in construction trade and transport etc ii safety there is no job security in this sector people can be asked to leave without any reason when there is less work such as during some seasons some people may be asked to leave job also depends on the whims of the employer accidents are common in those industries where adequate facilities and safety measures are not adopted iii health most of the workers are living in slums in unhealthy living conditions with out facilities for health and medical care it reduces their manpower potential and productivity 20 how are economic activities classified based on the ownership public sector public sector enterprises are owned and controlled by the government it is run for the benefit of the people in general companies such as steel authority of india limited indian oil corporation and delhi transport corporation are some examples of public sector enterprises railways and post offices are under public sector private sector the private sector enterprises are owned and controlled by individuals or a group of individuals with the aim of making profit all retail and wholesale shops companies farms that we see around are under private sector many large companies having thousands of workers are also part of the private sector tata iron and steel company tisco hindustan lever limited bajaj maruti udyog limited and reliance industries limited are examples of private sector enterprises isb 142

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joint sector when both the government and individuals enter into agreement to run enterprises on partnership basis they are referred to as joint sector enterprise reliance petro chemicals limited rpl brihan mumbai suburban electric supply bses and power trading corporation are some examples of joint enterprises in india 21 why is public sector enterprises necessary or explain how public sector contributes to the economic development of a nation or modern government spent explain i to build infrastructure that requires huge amount there are several things needed by the society as a whole but which the private sector cannot provide at a reasonable cost examples are construction of roads bridges railways harbours generating electricity providing irrigation through dams etc thus governments have to undertake such heavy spending and ensure that these facilities are available for everyone ii to support industrial development there are some activities which the government has to support the private sector may not continue their production or business unless government encourages it for example selling electricity at the cost of production itself is very high many industries cannot bear it therefore the government produces and supply electricity at rates which these industries can afford government has to bear part of the cost iii to protect the poor sections of the society the government in india buys wheat and rice from farmers at a `fair price these are stored in godowns and sold at a lower price to consumers through ration shops the government has to bear some of the cost in this way the government supports both farmers and consumers iv to provide basic facilities it is the responsibility of the government to provide health and education facilities for all running proper schools and providing quality education particularly elementary education is the duty of the government similarly government also needs to pay attention to aspects of human development such as availability of safe drinking water housing facilities and food and nutrition for the poor 22 explain the objectives of implementing the nrega 2005 i to guarantee 100 days of employment in a year by the government to those who are able to and are in need of work the types of work that would in future help to increase the production from land will be given preference under the national rural employment guarantee act 2005 ii if the government fails in its duty to provide employment it will give unemployment allowances to the people 23 give examples of public sector activities and explain why the government has taken them up a indian railways no private individual can set up railway lines through out the country it requires huge amount to invest so the government has taken it up b electricity the cost of production of electricity is very high no factory can function if the electricity charge is very high so the government has taken it up to supply electricity lower than the cost of production isb 143

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chapter 3 money and credit 1 why are transactions made in money i a person holding money can easily exchange it for any commodity or service that he or she might want thus everyone prefers to receive payments in money and then exchange the money for things that they want ii it eliminates the need for double coincidence of wants money is something that can act as a medium of exchange in transactions 2 what is double coincidence of wants how does money solve double coincidence of wants i it was a situation that existed in the barter system of exchange before the introduction of money what a person desires to sell and buy is exactly what the other wishes to buy and sell in this situation it is difficult to find a person who is willing to exchange two commodities each other ii where money is in use goods can be bought and sold to different people whatever one person wants to sell he can sell it to any one who wants it and get money he can use the money to buy some thing from a different person here money acts as a medium of exchange and double coincidence of wants is eliminated 3 why is money accepted as a medium of exchange i money is portable and easy to carry it solves the problems of double coincidence of wants ii it is accepted as a medium of exchange because the currency is authorized by the government of any country moreover the law legalizes the use of money as a medium of payment no individual in india can legally refuse a payment made in currency hence it is widely accepted as a medium of exchange 4 trace the stages in the growth and use of money i before the introduction of coins a variety of objects was used as money for example since the very early ages indians used grains and cattle as money in the barter system ii thereafter came the use of metallic coins gold silver copper coins a phase which continued well into the last century iii modern forms of money include currency paper notes and coins unlike the things that were used as money earlier modern currency is not made of precious metal such as gold silver and copper unlike grain and cattle they are neither of everyday use the modern currency is without any use of its own 5 how is modern currency different from early objects of transactions i modern currency is accepted as a medium of exchange because it is authorized by the government of the country there was no medium of exchange in barter system before when goods were exchanged for goods ii modern currency solves the problems of double coincidence of wants where as in barter system double coincidence of wants was essential iii modern currency is light and easy to carry where as objects were heavy and difficult to carry to distant places iv unlike the objects used like grain or cattle money does not have a use of its own 6 what are demand deposits what are its features i the money deposited in the bank accounts which can be withdrawn on demand is known as demand deposits it is eligible to get a small rate of interest the time of withdrawal is not specified in this account ii it shares the essential feature of money payments can be done by cheques instead of cash isb 144

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iii since demand deposits are accepted widely as a means of payment along with currency they constitute money in the modern economy how do demand deposits posses the essential features of money same above 7 what is a bank cheque i a cheque is a paper instructing the bank to pay a specific amount from the person s account to the person in whose name the cheque has been made 8 how do banks mediate between the depositors and borrowers or describe the mechanism at work in the banks or what do banks do with the public deposits a banks accept deposit from depositors by offering interest b a small percentage of all the deposits 15 will be kept as reserves in the banks to pay when depositors demand it hoping all depositors will not withdraw money at a time c banks use the major portion of the deposits to extend loans people take loan from banks for various purposes banks charge a higher interest rate on loans than what they offer on deposits the difference between what is charged from borrowers and what is paid to depositors is their main source of income for the banks 9 how is credit a boon and a curse to the borrower or what are the two different situations of credit a credit loan refers to an agreement in which the lender supplies the borrower with money goods or services in return for the promise of future payment b credit will be a boon to a borrower if the interest rate is very low and if he is able to pay back in time in this situation credit helps to increase earnings and therefore the person is better off than before c in different situation if a borrower is not able to pay back the loan because of high rate of interests or and an unexpected situation like a crop failure credit pushes the person into a debt trap and recovery from this situation is difficult to repay the loan he has to sell a portion of the land or other property in this situation the person is clearly much worse off than before what is meant by debt trap write point c above 10 what is collateral why do lenders ask collateral while lending i collateral is an asset that the borrower owns such as land building vehicle livestock deposits with banks and uses this as a guarantee to a lender until the loan is repaid ii if the borrower fails to repay the loan the lender has the right to sell the asset or collateral to obtain payment property such as land titles deposits with banks livestock are some common examples of collateral used for borrowing 11 what is credit explain the various terms of credit with examples credit loan refers to an agreement in which the lender supplies the borrower with money goods or services in return for the promise of future payment the terms of credit are the following i interest rate formal sector demands less rate of interest compared to informal sector at present they demand 8 to 12 interest rate ii collateral and documentation requirement it refers to the security against the loan demanded and kept by the lender until the loan is paid back it can be gold or documents of properties or other certificates attached with the application iii the mode of repayment the borrower should pay back the interest and the principal amount weekly or monthly by cash or cheques as decided at the time of making agreements isb 145

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12 what are the different sources of loan for agricultural farmers a formal sector commercial banks provide 25 and cooperatives provide 27 credit to rural households in india b informal sector a major part of credit requirement of the farmers is provided by moneylenders which constitute 30 of the credit traders provide 3 relatives and friends provide 7 land lords provide 1 and others provide 7 of credit in india 13 differentiate between formal and informal sectors of credit in india i formal sector of credit includes commercial banks grammeen banks cooperative societies etc who provide loan to farmers informal sector includes moneylenders traders employers relatives and friends who provide loans ii there is no organization which supervises the credit activities of lenders in the informal sector however reserve bank of india supervises the formal sector and issue guidelines iii compared to the formal lenders most of the informal lenders charge a much higher interest and put other terms on loans thus the cost to the borrower of informal loans is much higher this may push them in to debt trap iv informal lenders adopt unfair means to get their money back on the other hand banks follow only legal measures to recover loans in many cases they may even `write off agricultural loans v cheap and affordable credit is crucial for the country s development it is available in banks and cooperatives it reduces the dependence of rural households in the informal sector why should banks and cooperatives need to lend more write points ii to v above 14 why should credit at reasonable rate be available for all why do we need to expand formal sources of credit in india i to start and continue an economic activity activities like crop production requires considerable cost on seeds fertilizers pesticides water electricity repair of equipment transportation etc since most of the farmers are poor they require credit facilities ii to save from the debt trap most of the informal lenders charge a much higher interest and put other terms on loans thus the cost to the borrower of informal loans is much higher this may push them in to debt trap reasonable rate of interests in the formal sector may save them iii cheap and affordable credit is crucial for the country s development it is available in banks and cooperatives it reduces the dependence of rural households in the informal sector hence we should expand formal sources of credit in india 15 what is the general pattern of credit taken by the rural and urban households i majority of the rich urban and rural households depends on formal sector such as banks for their credit facilities ii majority of the poor urban and rural households depends on informal sources of credit like the moneylenders iii formal sector meets only about half of the credit requirements of the rural people the remaining credit needs are met from informal sources isb 146

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