Overview of

The Indian
UNIT 2
Economy
 Economic Snapshot
India’s vision to become a US$5 trillion economy by 2025, and to
achieve this goal India needs to shift its gears to accelerate and
sustain a real GDP growth rate of 8%. Such growth can only be
sustained by a “virtuous cycle” of savings, catalysing investment
and exports & supported by a favourable demographic phase.

Investment, especially private investment, drives demand, creates

capacity, increases labour productivity, introduces new technology,
allows creative destruction, and generates jobs.

Hence, the government continues to push for transformative

reforms to attract more investments and make India an economic
2

powerhouse across Asia-Pacific and beyond.

 Advantage India
•A Strong Demographic Dividend
➔By 2030: Average age of India’s workforce will be 32 years,
Window of demographic dividend opportunity available till 2055
longer than any other country, Large window can facilitate skilling
working age population which can power economic growth

•Vast Market Base

➔ 2nd largest population base – hosts, By 2030: One in two households
expected to be middle-class, Only 5% of India’s population will be
poor, 51% of Indian households will earn over US$8,500 per annum

•A Large English Speaking Population

India has a large English speaking population, which is useful for
business purposes in a globally connected world
 Advantage India
➔ A Rapidly Liberalizing Economy
➔ Several industries deregulated, state owned enterprises privatized and
government opened its doors to FDI, 2014 onwards: India’s FDI’s
policies have been progressively and steadily liberalised by GoI -- FDI
reforms made in defense, construction, single brand retail,
manufacturing, aviation, communications, financial sector and more

➔ A Growing Skilled Workforce

• Required to create 8.1 million jobs annually, India has steadily increased
budget allocation:
➔ In 2015: GoI launched Skill India to train 400 million by 2022,
➔ 2017-18 -- Budget allocation for Skilling India US$331.83m
➔ 2018-19: US$478.87m allocated for Skilling India
➔ By 2030: India projected to have a skilled labour of 245 million
workers -- in financial services, technology, media,
telecommunications and manufacturing
India: Gross domestic product (GDP) in
current prices from 1987 to 2027
 Characteristics of the Indian economy
• High dependence on the primary sector. In developed countries,
only 1–5% of the population is active in the primary sector as
compared to the 58% population in India which contributes to only
one-fifth of GDP. Lack of advanced technology and proper planning
has put the agriculture sector in India under tremendous pressure .

• Low per capita income. Lower per capita income is one of the
reasons why India is termed a developing country. The per capita
income of India is US$1927 (2020) according to the World Bank .

• Unemployment. Indian industries do not have sufficient capital to

expand the production facilities and absorb the exponentially
increasing labour force. In rural areas, a lot of people depend on
agriculture, and in urban areas, an educated workforce is facing a
shortage of job opportunities.
 Characteristics of the Indian economy
• Population. Due to a decrease in mortality rates after
independence, the population grew exponentially. Thus, whatever
development the country makes is absorbed by the demands of a
growing population. Economists believe that even if India surpasses
the US in GDP, it will not achieve the same level of economic
stability due to the exorbitant population.

• Unequal wealth distribution. In India, the top 4% of households

hold 31% of total assets. This concentration of wealth causes
misdistribution of income in rural areas.

• Lack of infrastructure. India has yet to build pro-infrastructure in

transport, communication, banking, energy, health, and education.
The lack of proper infrastructure is the reason that huge natural
resources in the country are underutilized.
 Planning Commission
• Independence came to India with the parti­tion of the country
on 15 August 1947. In 1948, an Industrial Policy Statement
was an­nounced.

• It suggested the setting up of a National Planning Commission

and framing the policy of a mixed economic system.

• On 26 January 1950, the Constitution came into force. As a

logical sequence, the Planning Commis­sion was set up on 15
March 1950 and the plan era started from 1 April 1951 with
the launch­ing of the First Five Year Plan (1951-56).
 Objective of Planning Commission
After in­dependence, the Planning Commission was set up by
the Government of India in March 1950. The Commission was
instructed to
• Make an assessment of the material capital and human resources of the
country, and formu­late a plan for the most effective and balanced
utilization of them;

• Determine priorities, de­fine the stages for carrying the plan and
pro­pose the allocation of resources for the due completion of each
stage;

• Identify the fac­tors which tend to retard economic develop­ment; and

• Determine the conditions which (in view of the then current socio-
political con­ditions) should be established for the execution of the plan.
Objectives of Economic Planning in India
• Economic Development: This is the main objective of planning in India.
Economic Development of India is measured by the increase in the Gross
Domestic Product (GDP) of India and Per Capita Income

• Increased Levels of Employment: An important aim of economic

planning in India is to better utilise the available human resources of the
country by increasing the employment levels.

• Self Sufficiency: India aims to be self-sufficient in major commodities and

also increase exports through economic planning. The Indian economy had
reached the take-off stage of development during the third five-year plan in
1961-66.

• Economic Stability: Economic planning in India also aims at stable market

conditions in addition to the economic growth of India. This means keeping
inflation low while also making sure that deflation in prices does not happen.
If the wholesale price index rises very high or very low, structural defects in
the economy are created and economic planning aims to avoid this.
 Objectives of Economic Planning in India
• Social Welfare and Provision of Efficient Social Services: The
objectives of all the five year plans as well as plans suggested by the
NITI Aayog aim to increase labour welfare, social welfare for all
sections of the society. Development of social services in India, such as
education, healthcare and emergency services have been part of planning
in India.

• Regional Development: Economic planning in India aims to reduce

regional disparities in development. For example, some states like
Punjab, Haryana, Gujarat, Maharashtra and Tamil Nadu are relatively
well developed economically while states like Uttar Pradesh, Bihar,
Orissa, Assam and Nagaland are economically backward. Others like
Karnataka and Andhra Pradesh have uneven development with world
class economic centres in cities and a relatively less developed
hinterland. Planning in India aims to study these disparities and suggest
strategies to reduce them.
Objectives of Economic Planning in India
• Comprehensive and Sustainable Development : Development of all
economic sectors such as agriculture, industry, and services is one of the
major objectives of economic planning.

• Reduction in Economic Inequality : Measures to reduce inequality

through progressive taxation, employment generation and reservation of jobs
has been a central objective of Indian economic planning since independence.

• Social Justice: This objective of planning is related to all the other

objectives and has been a central focus of planning in India. It aims to reduce
the population of people living below the poverty line and provide them
access to employment and social services.

• Increased Standard of Living: Increasing the standard of living by

increasing the per capita income and equal distribution of income is one of
the main aims of India’s economic planning.
 NITI AAYOG (NATIONAL INSTITUTION
FOR TRANSFORMING INDIA)
• To evolve a shared vision of national development priorities sectors
and strategies with the active involvement of States in the light of
national objectives
• To foster cooperative federalism through structured support initiatives
and mechanisms with the States on a continuous basis, recognizing
that strong States make a strong nation
• To develop mechanisms to formulate credible plans at the village level
and aggregate these progressively at higher levels of government
• To ensure, on areas that are specifically referred to it, that the interests
of national security are incorporated in economic strategy and policy
• To pay special attention to the sections of our society that may be at
risk of not benefiting adequately from economic progress.
• To create a knowledge, innovation and entrepreneurial support system
through a collaborative community of national and international
experts, practitioners and other partners
 NITI AAYOG (NATIONAL INSTITUTION
FOR TRANSFORMING INDIA)
• To design strategic and long term policy and programme
frameworks and initiatives, and monitor their progress and their
efficacy. The lessons learnt through monitoring and feedback will
be used for making innovative improvements, including
necessary mid-course corrections To provide advice and
encourage partnerships between key stakeholders and national
and international like-minded Think tanks, as well as educational
and policy research institutions.

• To offer a platform for resolution of inter-sectoral and inter­

departmental issues in order to accelerate the implementation of
the development agenda.
 NITI AAYOG (NATIONAL INSTITUTION
FOR TRANSFORMING INDIA)
• To maintain a state-of-the-art Resource Centre, be a repository
of research on good governance and best practices in
sustainable and equitable development as well as help their
dissemination to stake-holders

• To actively monitor and evaluate the implementation of

programmes and initiatives, including the identification of the
needed resources so as to strengthen the probability of success
and scope of delivery

• To focus on technology upgradation and capacity building for

implementation of programmes and initiatives
 Difference between
NITI Aayog and Planning Commission
NITI Aayog
• NITI Aayog has not been given the
mandate or powers to impose policies
on States. It is basically a think-tank
or an advisory body.
• The powers for the allocation of
funds have not been given to the
NITI Aayog. The powers are with the
Finance Ministry.
• The powers for the allocation of
funds have not been given to the
NITI Aayog. The powers are with the
Finance Ministry.
Planning Commission
• The PCOI had the power to impose
policies on States and for the projects
approved by the Planning Commission.
• The PCOI had the power to allocate
funds to the State Governments and
various Central Government Ministries
for various programmes and projects at
the National and State Levels.
• The PCOI had the power to allocate
funds to the State Governments and
various Central Government Ministries
for various programmes and projects at
the National and State Levels.
 Difference between
NITI Aayog and Planning Commission
NITI Aayog Planning Commission
• State Governments did not have much
• In NITI Aayog, State
role to play apart from taking part in
Governments have to play a
the meetings. The State Government’s
more proactive role.
role was confined to the National
Development Council.
• Based on the requirements,
there are part-time members • The Planning Commission did not have
appointed in NITI Aayog.
any provisions for the appointment of
part-time members
• The Governing Council of
NITI Aayog has Lieutenant • The National Development Council
Governors of Union Territories
had Lieutenant Governors and State
and State Chief Ministers.
Chief Ministers. Planning Commission
had to report to the National
Development Commission
 Difference between
NITI Aayog and Planning Commission

NITI Aayog Planning Commission

• The CEO of NITI Aayog is • Planning Commission secretaries
appointed by the Prime Minister. were appointed through the usual
Secretaries are known as CEO process.

• The number of full-time members • The last Planning Commission

in NITI Aayog could be lesser than had eight full-time members.
the numbers that the Planning
Commission had.
 What is an Economic Indicator?

• Economic Indicators are statistical measures which reflect the

overall health of the economy.
• Economic indicators are important because they suggest to
investors, politicians, citizens, etc., how well the economy is
doing at a given point in time.
• Based on this knowledge, important investing and public
policy decisions are made, which affect all of us as
stockholders, consumers, citizens, etc.
 What Are the Most Common
Economic Indicators?
• Gross Domestic Product (GDP)
• Stock market averages (e.g., DIJA, NASDAQ, S&P 500,
NIFTY, SENSEX, IIP etc.)
• Unemployment rate
• Inflation rate
 Gross Domestic Product
• GDP Defined
– GDP or gross domestic product is the market value of all
final goods and services produced in a country in a given
time period.
– This definition has four parts:
 Market value
 Final goods and services
 Produced within a country
 In a given time period
 Gross Domestic Product
– Market Value
– GDP is a market value—goods and services are valued at
their market prices.

– To add apples and oranges, computers and popcorn, we add

the market values so we have a total value of output in
dollars.
 Gross Domestic Product
– Final Goods and Services GDP is the value of the final goods
and services produced.

– A final good (or service) is an item bought by its final user during
a specified time period.

– A final good contrasts with an intermediate good, which is an

item that is produced by one firm, bought by another firm, and
used as a component of a final good or service.

– Excluding intermediate goods and services avoids double

counting.
 Gross Domestic Product
– Produced Within a Country
• GDP measures production within a country—domestic
production.

– In a Given Time Period

• GDP measures production during a specific time period,
normally a year or a quarter of a year.
 The Components of GDP

• Recall: GDP is total spending.

• Four components:

– Consumption (C)

– Investment (I)

– Government Purchases (G)

– Net Exports (NX)

• These components add up to GDP (denoted Y):

Y
Y == C
C ++ II ++ G
G ++ NX
NX
 Consumption (C)

• Is total spending by households on goods & services.

• Note on housing costs:

– For renters, consumption includes rent payments.

– For homeowners, consumption includes the imputed

rental value of the house, but not the purchase price or
mortgage payments.
 Investment (I)

• Is total spending on goods that will be used in

the future to produce more goods.
• includes spending on
– capital equipment (e.g., machines, tools)
– structures (factories, office buildings, houses)
– inventories (goods produced but not yet sold)

Note:
Note:“Investment”
“Investment”does
doesnot
notmean
meanthe
thepurchase
purchaseof
of
financial
financialassets
assetslike
likestocks
stocksand
andbonds.
bonds.
 Government Purchases (G)

• Is all spending on the goods & services purchased

by government at the federal, state, and local levels.

• G excludes transfer payments, such as

Social Security or unemployment insurance
benefits. These payments represent transfers of
income, not purchases of g&s.
 Net Exports (NX)
• NX = exports – imports
• Exports represent foreign spending on the
economy’s goods & services .
• Imports are the portions of C, I, and G
that are spent on goods & services produced abroad.

• Adding up all the components of GDP gives:

Y
Y == C
C ++ II ++ G
G ++ NX
NX
 Measuring GDP
• Expenditure Approach
– The expenditure approach measures GDP as the sum
of consumption expenditure, investment, government
expenditure on goods and services, and net exports.
– GDP = C + I + G + (X  M)

• Income Approach
• Product method or net product method
 Measuring GDP
• Income Approach - The income approach measures GDP by
summing the incomes that firms pay households for the factors
of production they hire.
– The National Income and Expenditure Accounts divide
incomes into five categories:
1. Compensation of employees
2. Net interest
3. Rental income
4. Corporate profits
5. Proprietors’ income

– These five income components sum to net domestic income at

factor cost.
 Measuring GDP

• Nominal GDP and Real GDP

– Real GDP is the value of final goods and services produced
in a given year when valued at the prices of a reference base
year.
– Currently, the reference base year is 2000 and we describe
real GDP as measured in 2000 dollars.
– Nominal GDP is the value of goods and services produced
during a given year valued at the prices that prevailed in that
same year.
– Nominal GDP is just a more precise name for GDP.
 GDP Growth Rate
– To calculate this growth rate, we use the formula:

Real GDP in Real GDP in

Growth of –
current year previous year x 100
real GDP =
Real GDP in previous year

Growth of Yc – Yl
real GDP = x 100%
Yl
For example, if real GDP in the current year is $8.4 trillion and if real GDP in
the previous year was $8.0 trillion, then the growth rate of real GDP is

Growth of $8.4 trillion – $8.0 trillion

real GDP = x 100 = 5 percent.
$8.0 trillion
NET DOMSTIC PRODUCT (NDP)
• NDP equals the gross domestic product minus depreciation on
a country's capital goods.

• NDP = GDP - Depreciation

• WHAT IS DEPRECIATION: A reduction in the value of an

asset over time
 WHAT IS GNP
• Gross national product (GNP) is an estimate of total value of all
the final products and services produced in a given period by the
means of production owned by a country's residents.
• Formulas of GNP:

GNP = C + I + G + X + Z.
C = Consumption I = Investment G = Govt
X = (net exports, or imports minus exports)
Z (NI earned by domestic residents from overseas investments – NI
earned by foreign residents from domestic investments.)
 EXAMPLES OF GNP
• GNP = Money value of every thing produced with in India +
incoming money from out side (India) – out going money to
abroad (foreigners)

• PV Sindhu goes to Singapore earn money send it to India

(will be added in our own GNP)….

• Priyanka Copra goes to America earn money send it to India

(will be add in our GNP)…..
 NET NATIONAL PRODUCT
• The total value of a nation's annual output of goods and services
minus the value of capital goods used up in the production of this
output.

• NNP = Gross National Product - Depreciation

• NNP is a measure of how much a country can consume in a given

period.
Personal Income (PI) & Disposable Income (DI)
• PI is the total money income received by individuals and
households of a country from all possible sources before direct
taxes. Therefore, personal income can be expressed as:

• PI = NI - Corporate Income Taxes - Undistributed Corporate

Profits - Social Security Contribution + Transfer Payments.

• Disposable Income (DI) - The income left after the payment of

direct taxes from personal income is called Disposable Income.
Disposable income means actual income which can be spent on
consumption by individuals and families. Thus, it can be
expressed as: DI=PI-Direct Taxes
• From consumption approach,
• DI=Consumption Expenditure + Savings
 Per Capita Income (PCI)
• Per Capita Income of a country is derived by dividing the
national income of the country by the total population of a
country.

• PCI=Total National Income / Total National Population.

 Important Questions
1. Indian economy supports free flow of goods and services.
Summarize
2. Explain the different characteristics of business.

3. Explain Environmental factors affecting Business

4. Identify the developments in the Indian economy during

different plans.
5. Explain the relevance of national income in a country’s
economy.
6. Difference between NITI Aayog and Planning Commission

7. Explain the recent developments in India