Q.(a) Explain the Keynesian Theory of Interest.

(a) In Keynes's liquidity-preference theory, interest is the price for giving up liquidity, fixed where the demand for money (three motives) equals the money supply. (b) Nehru shaped India's development through planning, heavy industry, the public sector, a mixed economy, self-reliance and scientific temper.

PART (a): Keynesian Theory of Interest (Liquidity Preference Theory)

J. M. Keynes explained the rate of interest as a monetary phenomenon, determined by the demand for and supply of money.

Interest as a reward for parting with liquidity: People prefer to hold wealth in the form of liquid cash. Interest is the reward paid to induce them to give up this liquidity (to lend or invest instead of holding cash).

Demand for money (Liquidity Preference) arises from three motives:

1. Transactions motive — cash held for day-to-day expenses.
2. Precautionary motive — cash held for unforeseen emergencies.
3. Speculative motive — cash held to profit from expected changes in bond prices / interest rates; this demand varies inversely with the rate of interest.

Supply of money is fixed by the monetary authority (central bank) and is largely independent of the interest rate.

Determination of interest: the equilibrium rate of interest is fixed at the point where the demand for money (liquidity preference) equals the supply of money. If liquidity preference rises (or money supply falls), the interest rate rises; if it falls (or money supply rises), the interest rate falls.

PART (b): Jawaharlal Nehru's contribution to Economic Development

Jawaharlal Nehru, India's first Prime Minister, laid the foundations of the country's development strategy:

1. Economic planning — he set up the Planning Commission in 1950 and launched the Five Year Plans to guide development.
2. Emphasis on heavy and basic industries — following the Mahalanobis strategy, he stressed steel, power and machine-making industries to build a strong industrial base.
3. Strong public sector — he built large public-sector enterprises to occupy the 'commanding heights' of the economy. …