Economy

Introduction of Economics

The term economics comes from the ancient Greek word oikonomia mean management of a household. The term economic process refers to those activities, through which goods and services aimed at satisfying human needs, are produced, distributed and used. Economics includes the study of labour, land and investments of capital, income and production and taxes and government expenditures. Adam Smith, regarded as the Father of Economics, defines Economics as, ‘‘The science relating to the laws of production, distribution and exchange.’’

Branches of Economics

The two chief branches are as follow:
Micro Economics
It examine the behaviour of basic elements in the economy, including individual agents (such as households and firms or as buyers and sellers) and market and their interaction.
Macro Economics
It studies the economy as a whole and its features like national income, unemployment, poverty, balance of payments and inflation. It deals with formulation of models explaining relationship between factors such as consumption, inflation, savings, investment, national income and finance.

Economy

It represents production, distribution or trade and consumption of goods and services in a given geographical area by different agents, which can be individuals, businesses, organisation or governments. The study of economy of any country helps us to find out the financial condition of the population as well as the different working sectors of the economy. The modern economy is a complex machine. Its job is to allocate limited resources and distribute output among a large number of agents mainly individuals, firms and governments allowing for the possibility that each agent’s action can directly (or indirectly) affect other agent’s actions. There are two major type of economies.

Open Economy

It refers to a market-economy, which is generally free fromtrade barriers and where exports and imports forma large percentage of the GDP. No economy is totally open or closed in terms of trade restriction and all governments have varying degrees of control over movements of capital and labour. Degree of openness of an economy determines a government’s freedom to pursue economic policies of its choice and the susceptibility of the country to the international economic cycles.

Closed Economy

An economy in which no activity is conducted with outside economies. A closed economy is self-sufficient, meaning that no imports are brought in and no exports are sent out. The goal of such economy is to provide consumers with everything that they need from within the economy’s borders. The degree of openness of an economy is decided by their respective governments by using policy controls like tariffs, import and export quotas, and exchange rate limits. In India, since independence, the government has played a major role in planning economic activities.

Present Status of Indian Economy

▸ Indian economy is world’s 6th largest economy or nominal GDP basis and the 3rd largest by Purchasing Power Party (PPP) in 2017.
▸ According to CSO-The growth in GDP during 2017-18 is estimated at 6.5% as compared to the growth rate of 7.1% in 2016-17.
▸ During each of the previous two year, 2014-15 and 2015-16, India’s Gross Domestic Product (GDP) (Base year 2011-12) grew by 7.2% and 7.6% respectively per annum.
▸ From 1951 until 2013, India GDP Annual Growth rate averaged 5.8% reaching an all time high of 10.2%in December of 1988 and a record low of 5.2% in December of 1979.
▸ On a per capita income basis, India ranked 141th by nominal GDP and 126th by GDP (PPP) in 2017, according to the IMF.
▸ Purchasing Power Parity (PPP) is a theory, which states that exchanges rates between currencies are balanced, when their purchasing power is the same in each of the two countries.

Broad Sectors of Indian Economy

Primary Sector
The primary sector include production of raw material and includes agriculture, forestry and fishing.
Secondary Sector
Mining manufacturing, electricity, gas and water supply, construction. (also called manufacturing sector)
Tertiary Sector
Business, transport, telecommunication, banking, insurance, real estate, community and personnel services. (also called service sector)

Nature of Indian Economy

Mixed Economy It is an economy, where both public and private sector co-exist. The nature of Indian economy is a mixed economy. The term Mixed economy was coined by JM Keynes.
Developing Economy Following features shows that Indian economy is a developing economy (a) Low per capita income. (b) Occupational pattern is primary sector dominated. (c) Heavy population pressure. (d) Prevalence of chronic unemployment and underemployment. (e) Steadily improving rate of capital formation. (f) Low capital per head. (g) Unequal distribution of wealth/ assets.
Agrarian Economy An agrarian economy is a type of economy that relies primarily on agricultural industry including livestock farming or corp production. It is form of economy whose major factor of production in the agricultural land.

National Income of India

▸ National Income (NI) is the net value of all the final goods and services produced by its nationals during a financial year. It is a flow concept. In India, the financial year is from 1st April to 31st March. The national income is calculated annually.
▸ According to National Income Committee (1949). “A national income estimate measures the volume of commodities and service turned out during a given period counted without duplication”.
▸ NI = C + G + I + (X –M) + (R – P) – Depreciation – Indirect tax + Subsidies. C = Total Consumption Expenditure I = Total Investment Expenditure G = Total Government Expenditure X = Export M = Import (R-P) = Net Faction Income from abroad.
▸ When the National Income is measured at the base year price, it is called national income at constant price.
▸ When the national income is measured at the current year price, it is called national income at current year price.
▸ When NNP is calculated at Factor Cost (FC) it is called National Income. This measure is calculated by deducting indirect taxes and adding subsidies in NNP at Market Price (MP).
▸ NNPFC = NNPMP – Indirect Taxes + Subsidies + Government surplus = National Income.
▸ NI = NNP + Subsidies – Indirect taxes
▸ GNP – Depreciation – Indirect taxes + Subsidies.
▸ The CSO released the ‘New series’ of national accounts with base year 2011-12 instead of the base year 2004-05. The revisions happen every 5 years.
▸ National Income is the measurement of the production power of an economic system in a given time period.
▸ National Wealth is the measurement of the present assets available at a given time.

Methods of Measuring National Income

ProductMethod
In this method, net value of final goods and services produced in a country during a year is obtained, which is called total final product. This represents Gross Domestic Product (GDP). Net income earned in foreign boundaries by nationals is added and depreciation is subtracted from GDP.
IncomeMethod
In this method, a total of net income earned by working people in different sectors and commercial enterprises is obtained. Incomes of both categories of people — paying taxes and not paying taxes are added to obtain national income. By income method, national income is obtained by adding receipts as total rent, total wages, total interest and total profit.
ConsumptionMethod
It is also called expendituremethod. Income is either spent on consumption or saved. Hence, national income is the addition of total consumption and total savings. In India, a combination of production method and income method is used for estimating national income.

Estimates of National Income in India

▸ In 1868, the first attempt was made by Dadabhai Naoroji in his book ‘Poverty and Un-British Rule in India’. He estimated the per capita annual income to be ` 20.
▸ The first scientific attempt to measure national income in India was made by professor VKRV Rao in 1931-32. He divided the Indian economy into 13 sectors.
▸ In 1949, National Income Committee under the Chairmanship of professor PC Mahalanobis was constituted. The other members were professor VKRV Rao and professor DR Gadgil.
▸ The Government of India appointed a National Income Committee under the Chairmanship of Dr PC Mahalanobis. This committee gave its first report in 1951 and final report New Series in 1954.

National Income Aggregates

Gross Domestic Product (GDP)

It is the total money value of all final goods and services produced within the geographical boundaries of the country during a given period of time. GDP = C + G + I Where, C = Consumption expenditure G = Government expenditure I = Investment expenditure But in closed economy, (R – P) = 0, then GDP = GNP where, (R – P) = Net factor income from abroad.

GDP At Market Price (GDPMP)

▸ It refers to the total value of all the goods and services at market price produced during a year within the geographical boundaries of the country.
▸ Market price refers to the actual transacted price and it includes indirect taxes such as Excise Duty, VAT, Service Tax, Customs Duty etc but it excludes government subsidies.

GDP at Factor Cost (GDPFC)

▸ GDP can be calculated at factor cost. This measure more accurately reveals the income paid to factors of production.
▸ The factor cost means the total cost of all factors of production consumed or used in producing a good or service. It includes government grants and subsidies, but it excludes Indirect Taxes.
▸ The difference between Market Price (MP) and Cost Price (CP) is because of the Indirect Taxes and Subsidies.
▸ GDP FC = GDPMP – Indirect Taxes + Subsidies
▸ In terms of value addition, the Gross Domestic Product of the economy is the sum total of the net value added and depreciation of all the firms of the economy.

Calculation of GDP

▸ GDP in a country is usually calculated by the National Statistical Agency, which compiles the information from a large number of sources.
▸ In case of India, it is Central Statistics Office (CSO), which estimates GDP. However, most countries follow established international standards for calculating GDP of their country.
▸ The international standards for measuring GDP are contained in the System of National Accounts (SNA), 1993, compiled by the International Monetary Fund (IMF), the European Commission (EC), the Organisation for Economic Cooperation and Development (OECD), the United Nations (UN) and the World Bank.
Source Central Statistics Office PE = Provisional Estimates (CSO)
Nominal GDP and Real GDP
Nominal GDP
is evaluated at current market prices. Therefore, nominal GDP will include all of the changes in market prices that have occurred during the current year due to inflation or deflation. Real GDP is a better measurement of GDP, since it reflects the increase in quantity of goods and services by adjusting for any increase in prices. Real GDP is generally measured by using base year prices of goods and services.
Gross Value Added (GVA)
It is a measure of the value of goods and services produced in an area, industry or sector of an economy. It national accounts, GVA is outputminus intermediate consumption, it is a balancing item of the national accounts’ production account.
Gross National Product (GNP)
GNP refers to the money value of total output of production of final goods and services produced by the national residents of a country during a given period of time, generally a year. Symbolically GNP = GDP + (X –M) + (R – P) GNP = C + G + I + (X –M) + (R – P) X = Exports M = Imports (R–P) = Net factor income from abroad
Net National Product (NNP)
It is obtained by subtracting depreciation value (i.e. capital stock consumption) from GNP. Symbolically, NNP = GNP – Depreciation

Personal Income (PI)

It is that income, which is actually obtained by the individual or nationals. Symbolically, Personal Income = National Income – Undistributed profits of corporations –Payment for social security provisions – Corporate taxes + Transfer payments + Net interest paid by the government.

Personal Disposable Income (PDI)

When personal direct taxes are subtracted from personal income, the obtained value is called personal disposable income. Symbolically, PDI = PI – Direct taxes National Statistical Organisation (NSO) was set-up on 1st June, 2005, for promoting statistical network in the country. It was then headed by professor SD Tendulkar. Gross Value Added (GVA) is a measure in economics of the value of goods and services produced in an area, industry or sector of an economy. GVA = GDP + Subsidies – (direct, sales) taxes.

CSO and NSSO

▸ CSO (Central Statistical Organisation) was set-up in 1950, constituted to publish national income data.
▸ NSSO (National Sample Survey Organisation) was set-up in 1950, for conducting large scale sample survey to meet the data needs of the country for the estimation of national income and other aggregates.

Measurement of Growth and Development

Human Development Report
The Human Development Report (HDR), published by the UNDP since 1990, captures the essence of human development. Human development report rank countries based on their ranking on Human Development Index (HDI). HDI was devised by Pakistani economist Mahbub ul Haq along with Indian economist Amartya Sen. In 2015 HDR, India has been placed at 130th position with 0.609 score in medium human development category. Norway, Australia and Switzerland occupies first three positions.
Meaning of HDI Value (2016 Report)

Very high Human development = 0.800and above
High Human development = 0.701 and above
Medium Human development = 0.550 and above
Low Human development = 0.352 and above

Happy Planet Index (HPI)

HPI measures the ecological efficiency with which human well-being is delivered. It is calculated by multiplying indices of life satisfaction (estimated by compiling responses to international surveys) and life expectancy and dividing that product by ecological footprint.

Gross National Happiness (GNH)

The term Gross National Happiness was coined in 1972, by Bhutan’s then King Jigme Singye Wangchuck. GNH was designed in on attempt to define an indicator that measures quality of life or social progress in more holistic and psychological terms than the economic indicator of GDP.

Planning Commission

After independence in 1947, the Economic Programme Committee (EPC) was formed by All India Congress Committee with Nehru as its chairman. This committee was tomake a plan to balance private and public partnership and urban and rural economies. In 1948, this committee recommended forming of a Planning Commission. InMarch 1950, in pursuance of declared objectives of the government to promote a rapid rise in the standard of living of the people by efficient exploitation of the resources of the country, increasing production and offering opportunities to all for employment in the service of the community, the Planning Commission was set-up by a resolution of the Government of India as an advisory and specialised institution. Jawaharlal Nehru was the first Chairman of the Planning Commission. Planning Commission was an extra constitutional body, charged with the reponsibility of making assessment of all resources of the country, augmenting deficient resources, formulating plans for the most effective and balanced utilisation of resources and determining priorities. Now, it has been replaced by a new institution named NITI Aayog.

Niti Aayog

NITI Aayog or National Institution for Transforming India Aayog came into existence on 1st January, 2015. It is policy-making think-tank of government that replaces Planning Commission and aims to involve states in economic policy-making. It will provide strategic and technical advice to the Central and the State Governments.

Various Index of Human Development

Human Development Index (HDI) 2016 Life expectancy at birth index. Education index comprises mean year of schooling and expected year of schooling. GNI Per Capita (PPPUS $) Index for decent standard of living. Norway Australia Switzerland
Inequality adjusted HDI (IHDI) 2016 Introduced in HDR-2010.Measures the average level of human development after adjusting for inequality.If perfect equality, HDI = IHDIIf, inequality, HDI< IHDI Greater the inequality in society, greater the divergence between HDI and IHDI. Norway Iceland Australia
Gender Inequity Index (GII) 2016 Introduced in HDR-2010Gil exposes differences in the distribution. It measures gender inequality based on three dimensions and five indicators. Indicators Maternal Mortality Ratio (MMR); Adolescent Fertility Rate (AFR); Educational attainment (secondary level and above); Parliamentary representation; and Labour force participation, Switzerland Denmark Netherland
Multidimensional Poverty Index (MPI) MPI launched by Oxford Poverty and Human Development Initiative (OPHI) and UNDP in July 2010. It is a measure of serious deprivation in the dimesnsion of health, education and living standards that combines the number of deprived and intensity of their deprivation. Indicators Nutrition + Child Mortality (Health); Years of Schooling + Children enrolled (Education); Cooking fuel + Water + Toilet + Floor + Electricity + Assets (Standard of living).

Basic Structure of NITI Aayog

Chairperson Prime Minister
Governing Council Its members are Chief Minister and Administrators of the Union Territories
Special Invitees Experts, Specialists and Practitioners with domain knowledge (nominated by Prime Minister)
Vice-President Appointed by the Prime Minister
Full time Members Their number is five.
Part time Members Two ex-offcio members and university teacher
Ex-officio Members Four Central Ministers
CEO Secretary level officer from centre, who will be appointed for a fixed term.

National Development Council (NDC)

The NDC was constituted on 6th August, 1952, with Prime Minister as the Ex-officio Chairman and the Secretary of the Planning Commission as the Ex-officio Secretary of the NDC. Chief Minister of all the states and themembers of the Planning Commission are the members of the NDC. It is an extra-constitutional and non-statutory body (not formed by Act of Parliament).

Strategies of Planning

Harrod-Domar Strategy

▸ First Five Year Plan was based on this strategy.
▸ This strategy emphasised the role of capital accumulation’s dual character, which on the one hand increases the national income (demand side role) and on the other hand increases the production capacity (supply side role).

Nehru-Mahalanobis Strategy

▸ Second Five Year Plan was based on this strategy.
▸ Based on Russian experience, this strategy is a two sector model, i.e. consumer good sector and capital good sector.
▸ The strategy emphasised investment in heavy industry to achieve industrialisation for rapid economic development.

Gandhian Strategy

▸ It was enunciated by Acharya SN Agarwal in his ‘Gandhian Plan’ in 1944. The basic objective of the Gandhian Model is to raise the material as well as cultural level of the masses so as to provide basic standard of life.

LPG Strategy

▸ Liberalisation, Privatisation and Globalisation (LPG) strategy of planning was introduced by the Finance Minister of that time, Dr Manmohan Singh under Narsimha Rao Government. The strategy ended the ‘license permit raj’ and opened the hitherto areas reserved for the public sector to private sector.

PURA Strategy

▸ PURA stands for providing Urban amenities in rural areas and was the brainchild of APJ Abdul Kalam.
▸ This strategy emphasises on three connectivities—physical, electronic, knowledge and thereby leading to economic connectivity to enhance the prosperity of cluster of villages in rural areas.

Five Year Plans (At a Glance)

Plan Objectives Assessment
First Plan (1951-56) (Harrod
Domar
Model)
Highest priority accorded to agriculture in view of large import of foodgrains and inflation.
31 % of total plan outlay on agriculture followed by transport and communication, social services, power and industry.
Economist KN Raj was the architect.
Agriculture production increased dramatically.
National income went up by 18% and per capita income by 11%.
Target growth 2.1% and achieved 3.6%.
Second
Plan
(1956-61)
Rapid industrialisation with particular emphasis on the development of basic and heavy industry, also called Nehru Mahalanobis Plan.
To increase national income by 25%, expansion of employment and reduction of inequality.
To increase the rate of investment from 7% to 11 % of GDP.
Moderately successful, targeted growth rate was 4.5% but achieved 4.2%.
Durgapur (UK), Bhillai (USSR) and Rourkela (W Germany) steel plants set-up with foreign help. Atomic Energy Commission came into being in operation and TIFR was set-up.
Inflation and low agricultural production and Suez crisis.
Third Plan (1961-66) (Gadgil Yojana) Indian economy entered take off stage (WW Rostow). Self-reliant and self-generaling economy was the goal.
To increase the national income by 30% and per capita income by 17%.
Indo-China (1962) and Indo-Pakistan (1965) conflict diverted the resources from development to defence.
Targeted growth 5.6% achieved growth 2.72%.
The situation created by Indo-Pakistan Conflict (1965), two successive years of severe drought, devaluation of currency by 57%, general rise in prices and erosion of resources for plan delayed.
Annual
Plans
Due to the unfortunate failure of the third plan, the production in various sectors of the economy became stagnant. In 1966, the Government of India declared the devaluation of rupee, with a view to increase the exports of the country. So, the fourth plan was postponed and three annual plan were implemented. Some of the economists called this period i.e. from 1966 to 1969 as Plan Holiday.
Fourth
Plan
(1969-74)
Laid special emphasis on improving the condition of under privileged and weaker sections. First two years of the plan were successful with record foodgrain production on account of Green Revolution.
Targeted growth 5.7% however, achieved growth 3.3%.
The plan was failure on account of run way inflation (due to 1972 oil crisis or supply shock) huge influx of refugees from Bangladesh post 1972 Indo-Pak War.
Fifth Plan (1974-79) Original approach to plan prepared by C Subramaniam.However, final draft prepared by DP Dhar with objectives of removal of poverty (Garibi Hatao) and attainment of self-reliance.
Introduction of minimum needs programme.
Targeted growth 4.4% and achieved growth 4.8%.
Fifth Plan terminated one year before the plan period in March 1978.
Brought to the core problem associated with coalition government making a mockery of formulation of Five Year Plan.
Annual Plan Annual Plan (Gunar Myrdal) was brought out by Janata Party Government under Morarji Desai in 1978. The focus of the plan was enlargement of the employment potential in agriculture and allied activities to raise the income of the lowest income classes through minimum needs programme. Annual Plan period was 1979-80.
Sixth Plan
(1980-85)
Removal of poverty through strengthening of infrastructure for both agriculture and industry.The emphasis was laid on greater management, efficiency and monitoring of various schemes.
Involvement of people in formulating schemes of development at local level.
Indian economy made an all round progress and most of the targets fixed by the plan was achieved.
Targeted growth 5.2% and achieved growth 5.4%.
Seventh
Plan
(1985-90)
To accelerate foodgrains production
To increase employment opportunities.
To raise productivity.
Foodgrain production grew by 3.23% as compared to a long-term growth rate of 2.68% between 1967-68 and 1988-89.The Indian economy finally crossed the barrier of the Hindu rate of growth (professor Raj Krishna).
Average annual growth rate was 6.0% as against the targeted 5.0% and average of 3.5% in the previous plans.
Annual Plan The Eighth Plan could not take off due to fast changing political situations at the centre. Therefore, from 1990-1992, Annual Plans were formulated.
Eighth Plan
(1992-97)
Process of fiscal reforms and economic reforms initiated by Narsimhan Rao Government to prevent another major economic crisis.
To increase the average industrial growth rate to 7.5%.
To provide a new dynamism to the economy and improve the quality of life of the common man.
Also called as Rao-Manmohan Singh Model. First indicative plan.
Higher economic growth rate of 6.6% achieved as against the targeted 5.6%.
Improvement in current account deficit.
Significant reduction in fiscal deficit.Agriculture growth and industrial growth increased.
Unshackled private sector and foreign investment control was the prime reason for high growth.
Overall socio-economic development indicators low.
Ninth Plan
(1997-2002)
Growth with social justice and equality.
Emphasis on seven Basic Minimum Services (BMSs), which included safe drinking water, universalisation of primary education, streamlining PDS among others.
Pursued the policy of fiscal consolidation. Ensuring food and nutritional security to all. Empowerment of women, SC/STs/OBCs.
Global economic slow down and other factors led to revision of targeted growth rate from 7% to 6.5%, which too was not achieved. The economy grew at 5.4% only. Agriculture grew by 2.1% as against the target of 4.2% per annum.
Tenth Plan
(2002-2007)
The Tenth Plan aimed at achieving 8% GDP growth.
Assuming that ICOR (Incremental Capital Output Ratio will decline from 4.53% to 3.58%.
It aimed at increasing domestic saving rate from 23.52% to 29.4% of GDP and gross capital formation to 32.2% from 24.4% of GDP.
To improve the overall framework of governance. Agriculture was the core element.
Increase in GDP growth to 7.5% compared to 5.4% in the Ninth Plan. The lower than targeted growth rate of 8% was due to low growth of 3% in the first year of Tenth Plan Increase in gross domestic saving and investment.
Reduction in ICOR to 4.2% though higher than targeted but less than Ninth Plan’s ICOR of 4.53%.
Increase in foreign exchange reserves to US S 287 billion.
11th Plan
(2007-2012)
Average GDP growth of 8.1% per year.
Agricultural GDP growth of 4% per year. Generation of 58 million employment opportunities.
Sex ratio for age group 0-6 years to be raised to 935 by 2011-12 and to 950 by 2016-17.
The growth rate during the 11th plan period was about 7.9%, which is higher than the 7.5% growth rate achieved in the 10th plan.
As against the target of 4% growth in the agricultural sector, the plan could register a growth of only 3% during 2007-12 period.
The services sector continued to register a growth rate of more than 10%. However, the industrial growth rate showed at 7.9%.
12th Plan
(2012-2017)
Real GDP growth rate of 8.2%.
Agriculture growth rate of 4.0%.
Manufacturing growth rate of 10%.
The plan period was extended by six months.

15 Years Vision Document

The Ist 15 year vision document come into effect from 2017-18 after the end of the 12th five year plan. It will be formulated with centre objective of eradication of poverty. These will be framed keeping in mind the country’s social goals and the sustainable development agenda. According to NITI Aayog, the issue was discussed at length and a decision was taken at the highest level 15 year Vision Documents divided into two parts
7-years National Development Agenda The first 15-year vision document will start from 2017-18, along with a 7-year National Development Agenda which wll lay down the schemes, programmes and strategies to achieve the long-term vision.
3-years National Development Agenda The long vision documents will comprise of three year mass economic framework. National Development Agenda will be reviewed after a gap of every three years to ensure that it was aligned with financial needs and requirements. For the first Development Agenda the review would be done in 2019-20, in line with the termination year of the 14th Finance Commission.
▸ 2017-18 to 2032-33 Vision Document
▸ 2017-18 to 2024-25 National Development Agenda
▸ 2017-18 to 2019-20 Review of Development Agenda (to be repeated after every three years).

Sectorial Growth Rate in Different Five Year Plans

First Plan 2.1 2.71 5.54 4.17 3.6 Development of agriculture and Allied sectors and Community Development Programme
Second Plan 4.5 3.15 5.59 4.94 4.21 Basic industries, Health sector
Third Plan 5.6 – 0.73 6.28 5.26 2.72 Food and Agriculture
Fourth Plan 5.7 2.57 4.91 3.22 3.3% Agriculture and Irrigation, Self-reliance
Fifth Plan 4.4 3.28 6.55 5.66 4.83 Public health and Social welfare, Poverty elimination
Sixth Plan 5.2 2.25 5.32 5.41 5.4 Agriculture, Industry, Energy, Poverty Alleviation Programmes
Seventh Plan 5 3.47 6.77 7.19 6 Energy and Food
Eighth Plan 5.6 4.68 7.58 7.54 6.68 Human Resources Development
Ninth Plan 6.5 2.06 4.51 7.78 5.4 Social Justice, Human Development
Tenth Plan 8 2.34 8.9 9.4 7.5 Employment, Energy and Social reconstruction
Eleventh Plan 8.1 4 10.5 9.9 7.9 Rapid economic growth, Employment generation, Self-reliance and Education
Twelfth Plan 8 04 10.9 10 Faster, Sustainable and More inclusive growth

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