Indian Economy

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The economy of India is currently the worlds fourth largest in terms of real GDP (purchasing power parity)
after the USA, China and Japan and the second fastest growing major economy in the world after China.
India is a developing country and our economy is a mixed economy.
In a mixed economy the public sector co-exists with the private sector.
Dadabhai Naoroji is known as the Father of Indian Politics and Economics. He is also called the Grand Old
Man of India. In his book Poverty and Un-British Rule in India he describes his theory, i.e. the
economic exploitation of India by the British. His theory is popularly called the Economic Drain Theory.
Basic Features of Indian Economy
Low per capita income.
Inequalities in income distribution.
Predominance of agriculture. (More than 2/3rd of Indias working population is engaged in agriculture. But in
USA only 2% of the working population is engaged in agriculture.)
Rapidly growing population.
Chronic unemployment (A person is considered employed if he / she works for 273 days of a year for eight
hours every day.)
Low rate of capital formation.
Dualistic Nature of Economy (features of a modern economy, as well as traditional).
Mixed Economy
Follows Labour Intensive Techniques.
National Income:
The national income is the sum total of the value of all the final goods produced and services of the residents
of the country in an accounting year.
For comparison purposes the national income is measured at constant prices with a base year. The base year
at present is now 2004-05 and current prices are converted to the prices of the base year (Base year was
originally 1960-61 but later periodically revised.)
CSO: Central Statistical Organization is under the Department of Statistics. Govt. of India is responsible for
estimating the national income.
CSO was founded by Prof. Mahalanobis.
CSO is assisted by the National Sample Survey Organization (NSSO) in estimating National Income.
Dadabhai Naoroji was the first to calculate the national income of India.
Gross Domestic Product (GDP) is the money value of final goods and services produced in the domestic
territory of a country during the accounting year.
In India Gross Domestic Product (GDP) is larger than national income because net factor income from abroad
is negative, i.e. foreign payment is larger than the foreign receipt.
Net National Product (NNP) at market prices = Gross National Product at Market Prices - Depreciation

Depreciation is the losses raised due to wear and tear and technological obsolescence.
Net National Product at factor cost NNP (fc) = NNP at market prices - Net Indirect taxes.
Net National Product at factor cost is the actual National income.

Sectors of Indian Economy:

1. Primary Sector: When the economic activity depends mainly on exploitation of natural resources then
that activity comes under the primary sector. Agriculture and agriculture related
activities are the primary sectors of economy.
2. Secondary Sector: When the main activity involves manufacturing then it is the secondary sector. All
industrial production where physical goods are produced come under the secondary
sector.
3. Tertiary Sector: When the activity involves providing intangible goods like services then this is part of
the tertiary sector. Financial services, management consultancy, telephony and IT
are good examples of service sector
Other Classifications of Economy
1. Organized Sector: The sector which carries out all activity through a system and follows the law of the
land is called organized sector. Moreover, labour rights are given due respect and
wages are as per the norms of the country and those of the industry. Labour working organized sector get the
benefit of social security net as framed by the Government. Certain benefits like provident fund, leave
entitlement, medical benefits and insurance are provided to workers in the organized sector. These security
provisions are necessary to provide source of sustenance in case of disability or death of the main
breadwinner of the family. Otherwise the dependents will face a bleak future.
2. Unorganized Sector: The sectors which evade most of the laws and dont follow the system come under
unorganized sector. Small shopkeepers, some small scale manufacturing units keep
all their attention on profit making and ignore their workers basic rights. Workers dont get adequate salary
and other benefits like leave, health benefits and insurance are beyond the imagination of people working in
unorganized sectors.
3. Public Sector: Companies which are run and financed by the Government comprises the public sector.
After independence India was a very poor country. India needed huge amount of money to set up
manufacturing plants for basic items like iron and steel, aluminium, fertilizers and cements. Additionally
infrastructure like roads, railways, ports and airports also require huge investment. In those days Indian
entrepreneur was not cash rich so government had to start creating big public sector enterprises like SAIL
(Steel Authority of India Limited), ONGC(Oil & Natural Gas Commission).
4. Private Sector: Companies which are run and financed by private people comprise the private sector.
Companies like Hero Honda, Tata are from private sectors.

Agriculture in India:
Agriculture is the life blood of Indian Economy.
Agriculture sector in India employs about 64% of the work force, contributes 20% of GDP and accounts for
about 18% share of the value of the countrys export.
Green Revolution means sudden increase of agricultural output, especially wheat in India.
The Father of Green Revolution Norman Borlaug.
In India the Borlaug Award is given to agricultural scientists.
Borlaug Award is given to the best agricultural scientist in India.
M.S. Swami Nathan is the world renowned Indian agricultural scientist. He is known as the Father of Indian
Green Revolution.
CACP is Commission of Agricultural Costs and Prices
Prices of agricultural products are fixed on the recommendation of CACP which was established in 1965.
ICAR is Indian Council of Agricultural Research
REC is Rural Electrification Corporation. It was set up in 1969
Khadi and Village Industries Commission (K & VIC) was set up in 1957.
Irrigation potential of the country increased from 22.6 million hectors in 1950 to 89.56 million hectors in
1997.
Horticulture, floriculture, fishery, poultry and animal husbandry accounts for 30% of production in
agriculture and allied sector.
Indias irrigational potential has increased from 22.6 million hectares in 1950-51 to 86.26 in 1996-97 and to
93.95 million hectare in 2001-2002 and is expected to increase 190 million hectare in 2014-15.
Approximately 33% of the irrigated area in India are watered by canals 54% area are watered by wells and
6.2% irrigated by tanks.
Rural Infrastructure Development Fund (RIDF) was launched in 1995-96 by NABARD.
Industries in India:
The cotton textile industry is the oldest industry in India.
The largest number of workers is employed in this industry.
Most of the cotton textile factories are in Maharashtra.
The industrially developed states in India include Maharashtra, Gujarat, Tamil Nadu, and West Bengal.
Industrially backward states are Rajasthan, Kerala, Orissa, and Himachal Pradesh.
To remove poverty and to achieve full employment faster industrialization and greater productivity are vital.
Industrialization means setting up of small scale, medium scale & large scale industries.
In industrialization equal opportunities are to be given to public, private and joint sectors.
The investment limits being considered for a small scale unit is Rs. 3 crore for plant and machinery
Industry accounts for 26% of GDP and employs 22% of the total workforce.
India is 11th in the world in terms of nominal factory output according to data compiled through CIA World
Fact book figures.

The Indian industrial sector underwent significant changes as a result of the economic liberalization in India
economic reforms of 1991, which removed import restrictions, brought in foreign competition, led to the
privatization of certain public sector industries, liberalized the FDI regime, improved infrastructure and led
to an expansion in the production of fast moving consumer goods.
Industrial sector is the second highest employment provider in India, contributing almost 28% to the total
GDP of the nation.
Service Sector in Indian Economy:
Service Sector, contributing almost 55% to the countrys GDP, is the highest contributor to the economy of
India.
This sector employs only 14% of the countrys total work-force.
Under Service Sector, Information Technology & BPO (Business Process Outsourcing) are the two fastest
growing segments which alone account for almost one-fourth of Indias total export.
Today, India ranks 13th in terms of the services output according to latest international statistics.
Important facts
Establishment of Various Financial Institutions
No.

Financial Institutions

Establishment Year

Reserve Bank of India

1934

Industrial Finance Corporation of India

1948

ICICI

1955

SBI (nationalized)

1955

Life Insurance Corporation (LIC)

1956

Industrial Development Bank of India (IDBI)

1964

Unit Trust of India (UTI)

1964

HUDCO

1970

General Insurance Corporation (GIC)

1972

10

NABARD

1982

11

SEBI (Replaced Controller of Capital Issue)

1988 functional in 1992

12

Small Industries Development Bank of India (SIDBI)

1990

13

IRDA

1999

Various Acts & their Enactment Years

No.

Acts

Enactment Years

Banking Regulation Act

1949

Industries (Development & Regulation) Act

1951

MRTP Act

1969

FERA

1973

Negotiable Instrument Act

1981

FEMA

2000

Competition Act

2002

Company act

1956

New company bill

2013

FDI Upper Limit in Various Sectors

No.

Sector

Limit

Print Media

26 %

Defense Sector

26 %

Private Sector Banking, Radio (FM)

74 %

Insurance

26 %

Telecommunications

100 %

Trading

51 %

Power, Drugs & Pharmaceuticals, Road and highways, Ports

100 %

and harbours, Hotel & Tourism, Advertising, Films, Mass

Rapid Transport Systems, Pollution Control & Management,
Special Economic Zones, Petroleum Refining(Private Sector)
Construction Development, Non Banking Financial Companies.
8

Airports

49%

Domestic Airlines

100% for NRI & 49% for others

10

Agriculture (including plantation except tea), Atomic Energy,

Not allowed

Railways (except Mass Rapid transport system)

11

Tea Plantation

100 %

Organizations & Their Survey/Reports No.

Organizations

Survey/Reports

U. N

World Economic & Social Survey

UNCTAD

World Investment Report

World Economic Forum

Global Competitiveness Report

IMF

World Economic Outlook

World Economic Forum

Business Competitive Index

World Bank

Green Index

NCAER

Business Confidence Index

Planning Commission

Poverty Ratio

Ministry of Finance

Economic Survey

10

Ministry of Industry

Wholesale Price Index

11

CSO

National Account Statistics

12

World Bank

World Development Indicator

13

UNDP

Overcoming Human Poverty

14

World Bank

Global Development Report

Millennium Development Goals 1. Eradicate extreme poverty and hunger

2. Achieve universal primary education
3. Promote gender equality and empower women
4. Reduce child mortality
5. Improve maternal health
6. Combat HIV/AIDS, malaria, and other diseases
7. Ensure environmental sustainability
8. Develop a global partnership for development
Direct & Indirect Taxes
Direct Taxes

Indirect Taxes

Corporation Tax

Excise Duties

Income Tax

Service Tax

Interest Tax

Central Value Added Tax (Vat)

Expenditure Tax

Sales Tax

Wealth Tax

Property Tax

Gift Tax

Octroi

Estate Duty

Customs Duties

Land Revenue

Stamp Duties

GDP forecast by various Institutions

Institution

Forecast

Forecast

2013-14

2014-15

Asian Development bank

5.5%

Central Statistics Office (CSO)

4.9%

World Bank

4.8 %

5.7

IMF (world economic outlook)

4.4%

5.4%

Reserve Bank of India

4.7%

5.5 %

WTO (organization for economic

5.1%

The Economic Outlook Survey

5%

5.5%

Moody's

4.55

5.5%

Co-operation and development OECD )

Important Facts
Functional employment occurs when people change from one job to another & there is an interval. This can
happen even in a situation of full employment. Structural employment happens when jobs exist for qualified
persons but the unemployed do not have the matching qualifications. It also occurs when labour is available,
but factors of production are missing. Cyclical unemployment arises out of cycles of recession. Disguised
unemployment is when people are employed but their marginal productivity is zero.
The CSO is responsible for estimating the national income. It is assisted by the National Sample Survey
Organization (NSSO) which conducts large scale surveys.
WPI is a weighted average of indices covering 477 commodities & is a measure of inflation on an economy
wide scale. Services do not figure in this. Base year is 1993-94. CPI is computed separately for three groups
viz industrial workers (260 commodities), urban non-manual employees (180 commodities) & agricultural
labourers (60 commodities).
The GDP deflator is arrived at by dividing the GDP at current prices by GDP at constant prices in terms of
base year prices (1993-94). This indicates how much growth in GDP is due to price rise & how much due to
increase in output.
In WTO terminology, subsidies in general are identified by boxes which are given the colours of traffic
lights: green (permitted), amber (slow down i.e. be reduced), red (forbidden). For agriculture, all domestic
support measures considered to distort production and trade (with some exceptions) fall into the amber box.
In order to qualify for the green box, a subsidy must not distort trade, or at most cause minimal distortion.
It includes amount spent on research, disease control, and infrastructure & food security. Blue box subsidies
are held to be trade distorting & include direct payment to farmers to limit production & certain government
assistance to encourage agriculture & rural development in developing countries.
Tobin tax is the suggested tax (within 0.1% to 0.25%) on all trade of currency across borders intended to put a
penalty on short-term speculation in currencies leading to crisis (Eg. Asian Crisis).
In 1972, 107 companies operating in the general insurance business were nationalized into four groups NIC,
United India Insurance Company, Oriental Insurance Company & New India Insurance Company with GIC
as the holding company. These companies can compete against each other in all areas except aviation & crop
insurance which are the monopoly of GIC.
IRDA act 1999 has ended the monopoly of LIC/GIC in the insurance sector.
The only two national stock exchanges of India are NSE & OTECI (Over the counter exchange of India). BSE
is a regional stock exchange.
At present the value of SDR is fixed in relation to a basket of five currencies US dollar, Euro, British pound
& Japanese yen.
Current Account Convertibility the holders of domestic currency have the right to convert the currency into
foreign exchange for any current account purpose such as travel, tourism, trade. Transactions like those in
assets are not permissible unless there is capital account convertibility.
Ceteris Paribus Other things remaining equal. Ad Valorem means as per value. Laffer curve hypothesis
that when the tax rate is raised the revenue realized tends to fall. Monopsony single buyer as opposite of
monopoly where there is a single seller. Lorenz curve shows graphical representation of income distribution.
The Phillips curve illustrates the relationship between inflation and unemployment.

Bretton Woods Agreement led to the establishment of World Bank & IMF. More developed a country greater
would be its dependence on direct tax.
MODVAT (modified value added tax) was introduced in India in 1986 (MODVAT was re-named as CENVAT
w.e.f. 1-4-2000).
Increase in RBI credit to the government during a year represents Monetized deficit.
A high fiscal deficit leads to adverse effects on Bop, rise in interest rates & a high cost economy.
The reverse repo rate is the rate at which banks park their short-term excess liquidity with the RBI, while
the repo rate is the rate at which the RBI pumps in short-term liquidity into the system
PNB is the oldest existing commercial bank in India.
Indias short term debt is less than 10 % of Indias total debt.
The title of World Development Report 2014 is Risk and OpportunityManaging Risk for Development.
Minimum Alternate Tax is a tax on zero tax companies.
Press Note 18 requires that a foreign company in a joint venture with an Indian company cannot get into
other wholly owned ventures without the domestic partners permission.
Domestic Commercial Banks contribute to the Rural Infrastructure Development fund to the extent of their
shortfall in their lending to the priority sector lendings.
Capital adequacy ratio affects assets of banks, its share capital & its investment.
International Finance Corporation essentially provides loans to boost private sector investment of member
countries.
Zero-based Budgeting requires that a program be justified from the ground up each fiscal year. ZBB is
especially encouraged for Government budgets because expenditures can easily run out of control if it is
automatically assumed what was not spent last year must be spent this year
The main source of revenue for the Union government in ascending order of importance is income tax, custom
duties, corporate tax & excise duties.
Prevention of Money Laundering act is applicable to drug trafficking, mafia, gun running etc.
Trade Related Investment measures (TRIMS) under WTO apply that no restrictions will be imposed on
foreign investment in any sector; all restrictions on foreign companies will be scrapped; Imports of raw
materials by foreign companies are to be allowed freely.
Participatory Notes (P-Notes) refers to investment in Indian securities by unregulated FIIs & Hedge funds.
NCLT (The National Company Law Tribunal) will replace the role of Company law board, BIFR & High
courts.
Fiduciary issue is the paper currency not backed by gold or silver.
Foreign Investment Promotion Board (FIPB) objective is to promote FDI into India by undertaking
investment promotion activities in India and abroad by facilitating investment in the country through
international companies, non-resident Indians and other foreign investors. It identifies sectors & countries in
which & from which more & more of foreign investment is required & can be channelized.
Tight Money or Dear Money - A situation in which money or loans are very difficult to obtain in a given
country. If you do have the opportunity to secure a loan, then interest rates are usually extremely high. Also
known as "dear money".