THE INDIAN ECONOMY

SECOND EDITION

Sanjiv Verma

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Price : `235.00
ISBN : 978-81-8357-765-6
Code : 8.26.1
First Impression

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PREFACE

This revised version of the book Indian Domestic Economy is based on the new pattern and
syllabus of the UPSC (Main) 2013. A notable feature of the new syllabus is that papers
have become multidisciplinary, with different aspects of the same topic spread across
different papers. This book attempts to cover all the topics which relate to economics,
irrespective of the paper in which it is covered. The aim of the book is not to provide a fact
sheet of the Indian economy, but give a conceptual clarity, flag issues and provide remedial
measures.
The book has now been structured into different sections and further they have been
divided into chapters based on the new pattern of the UPSC syllabus. Certain chapters
have been re-written to cover the topics in the revised syllabus.
Following are the new chapters/topics that have been covered in this revised edition:
1. Land reformsA New Perspective
2. Investment Models
The following sections have been inserted in the new edition:
1.
2.
3.
4.
5.

Food Processing IndustriesIndustry of the future

Ports in IndiaAn Economic Perspective
RailwaysLife Line of the Nation
GlobalizationIts Impact on the Society
Overview of Recent Crises Since 2008

The following chapters have been re-written to provide extensive coverage of the topics:
1. Food Security
2. Banking
Also, I would like to thank the readers for the overwhelming response to the first edition.
I am also grateful for the feedback that we have been receiving for the book.
Those interested in getting regular updates on economic issues, can refer to sanjivverma.
nowfloats.com and mails can be sent to sanjiv.verma@ymail.com.
Sanjiv Verma

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FOREWORD

Economics has always intrigued those who have no background in economics and
it intrigues them even more who do have a background in economics! There are new
paradigms coming up everyday and the theories get revisited by their own proponents.
Two books, one from a former Treasury Secretary of US Robert E Rubin In an Uncertain
World, and another from the great economist Niall Fergusson The Ascent of Money have
highlighted the dynamic nature of economics. Niall traces back the concept of money,
banks and insurance to early part of 16th century and captures the dynamics of money
as it has traversed through time. Roberts book outlines his grappling with the South East
Asian economy meltdown of 1997 as US Treasury Secretary and how he along with others
tried to bring the completely derailed financial system back on track. I am waiting for a
book by the present US Treasury Secretary on the great mayhem of 2008.
The good thing about the 2008 mayhem was that it made a lot of people interested in
economics. Unfortunately, economics does not lend itself to being easily understandable.
The esoteric sounding concepts and definitions have successfully kept most of the interested
people at a safe distance. But, the fact is that we need basic understanding of the subject
even to run our own household. One need not have the expertise to write a paper on modern
world economics but one definitely needs to know the fundamentals to make intelligent
decisions for investing ones hard earned money.
There is another purpose for which the understanding of economics is essential and
that is for competing in the open public examinations for the recruitment to the civil
services. No civil servant in the world can function effectively if he or she does not have
the understanding of the fundamentals of economics. As a serving civil servant, I have to
deal with issues regularly which require a good understanding of the economics. When I
was preparing for the civil services almost a decade ago, I realized that a serious bottleneck
for, we engineers was economics. Having virtually taught myself everything required for
civil services curriculum, I thought economics cannot be that difficultand that too for
an IITian (with a clear touch of misplaced academic arrogance on my part). As I dived
into economics with a mission to master the subject, I soon realized that it is much easier
to follow the Einsteins theory of relativity than to have a running duel with economic
concepts.
It was frustrating! Then came the rescuerthe author of this bookMr Sanjiv Verma.
He came down all the way from Delhi, stayed with us for two days at IIT Kanpur, and

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F O R E WO R D

we had two marathon sessions on economics. This was the longest lecture I and about 50
of my colleague IAS aspirants ever took. In two days, we covered the entire syllabus of
economics for civil services. The lectures started at 8 in the morning and went on till 8
in the evening with a short lunch break in the middle and two tea breaks of 15 minutes
each. It was challenging for us to sit for such long hours. Imagine how much more difficult
it would be for a lecturer to constantly stand, lecture and keep the subject in focus. But
Sanjivji was superb!
He was able to deliver the complex concepts in simple terms. He was able to engage
all of us and kept the subject moving, as if by magic. After the session, the feedback from
the entire group was so encouraging that I requested him that if he could pen all this
down in form of a book form for the benefit of the lakhs of aspirants and students like us.
I told him that there is no book available in the market which can take a non-economy
background student through the concepts of economics.
He said, he will think about it and then it was left at that. Life went on, I joined the
IAS that year with all India 2nd rank, after getting a whopping 365/600 marks in the
GS, where the contribution from the economics paper (GS paper II) was an unbelievable
188/300 and as all of you would have guessed it, the credit squarely lies with Mr Verma
and his two-day economics capsule he delivered at the IIT Kanpur in the summer of 1999.
That was over a decade ago. When I got a call from him last week saying that he has
written a book on economics, I had requested him, I was thrilled. I went through his book
in one flat sitting. It has everything which a student or a professional looks for. In his
hallmark style, the book is easy to read, requires no prior knowledge of economics and, I
claim without hesitation, is the best book on basic economics, I have ever come across. It
is nothing less than a boon for civil service aspirants, for professionals trying to understand
economics for improving their job profile, and even for those who just want to read and
understand Economic Times. I feel honoured in writing this foreword. I am sure, millions
of students and professionals will benefit from the hard work of Mr Sanjiv Verma.
Best Wishes.
Santosh K Misra, IAS
25.12.2010

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RANDOM THOUGHTS

During my academic pursuit to a bachelor degree in economics, I had found the subject
interesting but complicated which required a considerable application of mind and
patience to understand the concepts.
I remember in one of my classes on Indian economy, a student had echoed similar
sentiments of economics as difficult to understand. I cannot be in greater agreement.
Concepts have changed since our times with increasing degree of complexities and range of
issues. Old has given way to the new with diverse definitions and conflicting implications.
A large number books have not been able to capture the latest terminologies related
to the subject resulting in greater confusion among the minds of the readers. Further
the economic developmentsboth domestically and globallyare so fast paced, that
the traditional and conventional thinkingradically changing which the old school of
thoughtsfind it difficult to accept the change.
This is an attempt to ink down the economic issues not in the traditional mould but with
greater conceptual clarity, easy to comprehend manner, and bring in the application part and
its relevance to the present times. It is an attempt to make new generation students understand
economy in the right perspective without the need for any formal degree in the subject.
This should be helpful for all kind of students preparing for competitive examinations.
It should interest every student as economic issues affect all of us and today it is not
possible to say that one does not understand economic issues like growth, inflation etc as
one has never studied economics.
Today, economics is more of general awareness and has to be understood and not
studied as it has implications for everyone.
My own assessment is that economics has always been presumed to be complex and
overrated as a difficult subject, and here an attempt is being made to demystify the notion
about the subject.
Yes, economies today are evolving and would require continuous reorientation as one
goes into the future.
The dynamic and growing complexities in the global economy place all of us
continuously on the learning curve, leaving no masters of the subject.
Sanjiv Verma
October 2, 2013

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ACKNOWLEDGEMENTS

At the outset, this book is dedicated to the lakhs of civil services aspirants to make them
understand the subject and also as a facilitator to their success.
I am grateful to Shri Santosh Mishra, IAS from Tamil Nadu cadre for the Foreword to
this book, who incidentally has been instrumental in giving a practical shape to the book.
Thanks are due to Shri Santosh Taneja, the pillar behind Samkalp. He is always a
source of inspiration, and is full of energy. He has provided considerable guidance in
writing this book.
I am grateful to Rajib, Ankesh, and Ratnesh from Samkalp for their encouragement
and extended support.
Sincere thanks are due to my familymy wife Vandana, my daughter Surabhi, and
my son Aditya, for their understanding and support without which this book would not
have been possible.
Thanks are also due to Unique Publishers who have consented to publish the book.
Special thanks are due to Rajesh, his full team and also Amrit for pre and post production
of this book.

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THE INDIAN ECONOMYAN

OUTLINE

This book is divided into 4 broad segments as mentioned here:

Part A Domestic Economy covering elements of the domestic sector and all related
issues, like features of the economy, poverty, social sector, agriculture, public
sector, infrastructure etc. The focus is on bringing out the underlying current
issues, governmental efforts, economic reforms, present policies and likely
direction in the future.
Part B The next is External SectorLooking Outwards, which gives Indias global
perspective and steps taken by the government for an outward orientation
towards globalization.
Part C The third segment is the Global Economy and Outlook, which gives an overview
of the world economy, and the recent global crisis and its impact on India. It also
covers the changing global outlook in recent times and the way going forward.
Part D 
The concluding section is The Indian Economy Revisited, Outlook and
Challenges. This segment puts together all sectors of the economy and based
on global developments dealt earlier, arrives at the outlook for India and also the
challenges before the government, as India prepares to go into the future. This
book has inter-related segments, sequential in nature and builds up segmentby-segment, to provide a complete overview and challenges before the Indian
Economy.

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WHY OF ECONOMICS

As a child anyone will recall, will always ask why for anything and everything. Why the
sun rises in the east and sets in the west or why should one study, why we sleep at night
and are awake in the day time, why not the other way around and so on
If we go down the memory lane, surely there will be a number of such instances we can
recall. Also, remember it is a major irritant for the parents to answer these questions more
as they do not have answer to all of these. As we grow up, somewhere down the line we
forget the why, and that is the first thing in economics, one should always ask the why.
Let me begin with a few basic whys as far as the economics is concerned.

Why people in the US rich and why Africa and India have poor people?
Why different currencies in the world?
Why so many people in villages?
Why cannot we provide employment to everyone?

The list goes on and on reflection one will realize realms of economics needs a deeper
introspection.
So let us begin our journey into the subject economics or rather I would say developing
an understanding of the commonly used concepts, terminologies, often loosely defined
and the practical and application aspect from the Indian perspective of an economy.
We will go step-by-step building up section-by-section and I request you to please do
not skip sections, as otherwise one can lose the link of the previous section.
Let us begin by developing a terminology being used by everyone which is Growth.
In recent times, there is a lot of discussion on growth slowing down and a major cause
of concern for the economies. Or, even the fact that China today is the fastest growing
economy. Why is growth important for an economy?
To answer this why, we need to understand what is meant by the output of an
economy.

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CONTENTS

xi

CONTENTS

PART A DOMESTIC ECONOMY

1. Output of an Economy
2. Towards Inclusive Growth (Growth and Development)

37
812

3. Sustainable Development and Green GDP

1314

4. Poverty and Social Sector

1520

5. Food Security

2125

6. Agriculture Sector

2638

7. Land ReformsAnother Perspective

3943

8. Salient FeaturesNew India

4445

9. Industrial Sector and Liberalization

4659

10. Infrastructure Development

6072

11. Investment Models

7378

12. Integrated Energy Policy (203132)

7981

13. Government Finances

8292

14. Bridging Deficits, Money and Government Borrowings

9394

15. Banking

95103

16. Inflation

104106

17. Capital Market

107110

18. Planning in India

111116

PART B EXTERNAL SECTORLOOKING OUTWARDS

Towards Globalization and Beyond

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19. Looking OutwardTowards Globalization

119121

20. Inward and Outward-Looking Economies Globalization

122129

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xii

CONTENTS

21. Going ForwardIndia and Globalization

130131

22. Export-Led Growth StrategySEZs

132139

23. Foreign Trade Policy (20092014)

140145

24. Balance of Payments of Economies (BOP)

146150

25. Trade Reforms and Foreign Exchange

Management Act (FEMA) 1999

151158

26. Foreign Investment in India

159165

27. Multilateral Financial Institutions

166169

28. External Debt of India

170172

29. Exchange Rate Determination

173187

30. Foreign Exchange Reserves

188191

31. Regional Trading Blocs

192196

PART C GLOBAL ECONOMY AND OUTLOOK

Post-crisis and Beyond
32. India and the Global Economy

199202

33. Global EconomyA Transition

203204

34. Global Integration

205206

35. Lessons From Crises in Open Economies

207208

36. Global Financial Meltdown

209212

37. Global CrisisGovernment Interventions

213214

38. Overview of Recent Crises Since 2008

215217

39. Global ConsensusGoing Forward

218219

40. Way Going ForwardAddressing Structural Issues

41. Global Unresolved Issues
42. Post-CrisisFuture of Globalization
43. World Trade Organization (WTO)Issues and India

220
221222
223
224227

PART D INDIAN ECONOMY REVISITED, OUTLOOK AND

CHALLENGES

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44. Two Decades of Economic ReformsIndia

231236

45. Indian EconomyOutlook and Challenges

237242

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