INDIAN Economy

UNIT 1

Rama Mishra
Assistant Professor
 Economy

 The economy of India is currently the

world’s 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.

 MEANING OF AN
ECONOMY
 An economy is a man-made organization for the
satisfaction of human wants.
 According to A.J. Brown, “An economy is a system
by which people get living”. The way man
attempts to get a living differs in major respects
from time to time and from place to place.
 Here it is important to note that the way person earns
his/her living must be legal and fair. Unfair and illegal
means such as robbery, smuggling may earn income
for oneself but should not be taken into consideration
as gainful economic activity or a system of ‘get a
living’.
 It will therefore be appropriate to call that
economy is a framework where all economic
activities are carried out.
Some of the salient features of an
economy are as follows:
1. Economic institutions are man made. Thus an economy is
what we make it.
2. Economic institutions can be created, destroyed, replaced
or changed. For example the capitalism was replaced by
communism in 1917 in USSR and the communism was
destroyed in 1989 through a series of economic reforms by
former USSR. In India after independence in 1947 through
economic and social reforms we abolished Zamindari
system and introduced many land reform.
3. Levels of economic activities keep on changing.
4. Production, consumption and investment are the vital
processes of an economy.
5. In modern complex economies we use money as a
medium, of exchange.
6. Now-a-days the government intervention in the economy
is considered undesirable and the preference for free
functioning of prices and market forces is increasing in all
types of economic system.
 TYPES OF
ECONOMIES
On the Basis of Ownership and Control
over Means of Production or Resources
(A) CAPITALIST OR FREE ENTERPRISE ECONOMY
(B) SOCIALIST OR CENTRALLY PLANNED
ECONOMY
(C) MIXED ECONOMY.

(A) CAPITALIST ECONOMY

The capitalist or free enterprise economy
is the oldest form of economy. Earlier
economists supported the policy of
‘laissez fair’ meaning leave free. They
advocated minimum government
intervention in the economic activities.
economy

(I) PRIVATE PROPERTY

In a capitalism system all the individuals have the right to
own property. An individual can acquire property and use it
for the benefit of his own family. There is no restriction on
the ownership of land, machines, mines, factories and to
earn profit and accumulate wealth.
(II) FREEDOM OF ENTERPRISE
In a capitalist economy the government does not
coordinate production decisions of the citizens. Individuals
are free to choose any occupation.
(III) CONSUMER’S SOVEREIGNTY
In a capitalist economy consumers are like a king. They
have the full freedom to spend their income on goods and
services that give them maximum satisfaction. This
freedom of consumers is called consumer’s sovereignty.
.
(IV) PROFIT MOTIVE
Self-interest is the guiding principle in capitalism. Entrepreneurs
know that they will own the profit or loss after the payment to
all other factors of production
(V) COMPETITION
There are no restrictions on the entry and exit of firms in a
capitalism system. Competition is the fundamental feature of
capitalist economy and essential to safeguard against
consumer’s exploitation.
(VI) ABSENCE OF GOVERNMENT INTERFERENCE
In a free enterprise or capitalist economy the price system plays
an important role of coordinating agent. Government
intervention and support is not required. The role of
government is to help in free and efficient functioning of the
markets.
CAPITALISM IN TODAY’S WORLD
Pure capitalism is not seen in the world now-a-days. The
economies of USA, UK, France, Netherland, Spain, Portugal,
Australia ect. are known as capitalistic countries with active role
of their respective government in economic development.
 Economy
In the socialist or centrally planned economies all the
productive resources are owned and controlled by the
government in the overall interest of the society. A central
planning authority takes the decisions.
THE SOCIALIST ECONOMY HAS THE FOLLOWING MAIN
FEATURES
(I) COLLECTIVE OWNERSHIP OF MEANS OF PRODUCTION
In a Socialist economy means of production are owned by the
government on behalf of the people. The institution of private
property is abolished and no individual is allowed to own any
production unit and accumulate wealth
(II) SOCIAL WELFARE OBJECTIVE
The decisions are taken by the government at macro level with the
objective of maximization of social welfare in mind rather than
maximization of individual profit.
(III) CENTRAL PLANNING
Economic planning is an essential feature of a socialist economy.
The Central Planning Authority keeping the national priorities and
availability or resources in mind allocates resources. Government
takes all economic decisions regarding production, consumption and
(IV) REDUCTION IN INEQUALITIES
The institutions of private property and inheritance are at the
root of inequalities of income and wealth in a capitalist
economy. By abolishing these twin institutions a socialist
economic system is able to reduce the inequalities of incomes.
(V) NO CLASS CONFLICT
In capitalist economy the interests of the workers and
management are different. Both of them want to maximize their
own individual profit or earnings. This results in class conflict in
capitalist economy. In socialism there is no competition among
classes. Every person is a worker so there is no class conflict. All
are co-workers.
SOCIALISM IN TODAY’S WORLD
Under developing and developing countries such as many
eastern European countries are said to be socialist countries.
But they are changing now and encouraging liberalisation in
their countries for their economic development.
 (C) MIXED ECONOMY
A mixed economy combines the best features of
capitalism and socialism.
Thus mixed economy has some elements of both free
enterprise or capitalist economy as well as a
government controlled socialist economy. The public
and private sectors co-exist in mixed economies.
THE MAIN CHARACTERISTICS OF A MIXED ECONOMY ARE AS
FOLLOWS:
(I) CO-EXISTENCE OF PUBLIC AND PRIVATE SECTORS.
The private sector consists of production units that are owned
privately and work on the basis of profit motive. The public
sector consists of production units owned by the government
and works on the basis of social welfare.
(II) INDIVIDUAL FREEDOM
Individuals take up economic activities to maximize their
personal income. They are free to choose any occupation and
consume as per their choice. But producers are not given the
freedom to exploit consumers and labourers. Government puts
some restrictions keeping in mind the welfare of the people.
(III) ECONOMIC PLANNING
The government prepares long-term plans and decides the roles to
be played by the private and public sectors in the development of
the economy. The public sector is under direct control of the
government as such production targets and plans are formulated
for them directly. The private sector is provided encouragement,
incentives, support and subsidies to work as per national priorities.
(IV) PRICE MECHANISM
Prices play a significant role in the allocation of resources. For some
sectors the policy of administered prices is adopted. Government
also provides price subsidies to help the target group. The aim of
the government is to maximize the welfare of the masses.
Thus in a mixed economy people at large enjoy individual
freedom and government support to protect the interests of
weaker sections of the society.
Indian economy is considered a mixed economy as it has
well defined areas for functioning of public and private
sectors and economic planning. Even countries such as USA,
UK, etc. which were known as capitalistic countries are also
called mixed economies now because of active role of their
government in economic development.
Types of Economics on the
Basis of Level of Development
On the basis of level of development economies can be
classified in two categories:
(I) DEVELOPED ECONOMY.
(II) DEVELOPING ECONOMY.
(III) UNDER DEVELOPED ECONOMY.
I) DEVELOPED ECONOMY.
The countries are labeled developed or rich and
developing or poor on the basis of real national and
per capita income and standard of living of its
population.
Developed countries have higher national and per-
capita income, high rate of capital formation i.e. high
savings and investment. They have highly educated
human resources, better civic facilities, health and
sanitation facilities, low birth rate, low death rate,
low infant mortality, developed industrial and social
infrastructures and a strong financial and capital
market. In short, developed countries have high
standard of living.
(II) DEVELOPING ECONOMY.
Developing countries are low on the ladder of development.
They are sometimes also called underdeveloped, backward
or poor countries. But economists prefer to call them
developing countries because it gives a sense of dynamism.
The national and per capita income is low in these
countries. They have backward agricultural and industrial
sectors with low savings, investment and capital formation.
Although these countries have export earnings but
generally they export primary agricultural products. In
short, they have low standard of living and poor health and
sanitation, high infant mortality, high birth and death rates
and poor infrastructure.
(III) UNDER DEVELOPED ECONOMY.
An underdeveloped economy is defined as an economy
which has got unexploited natural resources and unutilized
human resources. In other words, it is an economy, having
a potentiality to grow. In these economies, there is a lack
of infrastructural facilities like transport, banking, health,
power, education and information technology. People also
adopt an outdated technique of production which results in
low productivity.
 underdeveloped economy
1. Low Income:
India's per capita income (nominal) was $1670 in 2016, ranked at 112th out
of 164 countries by the World Bank, roughly one third of the population is
below the poverty line. On world scale, income inequalities between the
developed and underdeveloped countries arc very large.
2. Excessive dependence of agriculture and primary producing:
Indian economy is characterised by too much dependence on agriculture and
thus it is primary producing. Out of the total working population of our
country, a very high proportion of it is engaged in agriculture and allied
activities, which contributed a large share in the national income of our
country.
3. High rate of population growth:
India is maintaining a very high rate of growth of population since 1950.
Thus the pressure of population in our country is very heavy.
4. Existence of chronic unemployment and under-employment:
Rapid growth of population coupled with inadequate growth of secondary
and tertiary occupations are responsible for the occurrence of chronic
unemployment and under-employment problem in our country.
5. Inequality in the distribution of wealth:
Another important characteristic of the Indian economy is the mal-
distribution of wealth
6. Low level of technology:
Prevalence of low level of technology is one of the important characteristics
of an underdeveloped economy like India.
 Indian economy is MIXED
economy
In a mixed economy, private and public sectors go side
by side. The government directs economic activity in
some socially important areas of the economy, the rest
being left to the price mechanism to operate. Before
Independence, Indian economy was a ‘laissez faire’
(i.e. leave free) economy. But post-independence, she
adopted the mixed economy system. Thus, it is clear
from the following arguments that our economy is a
mixed economy.
(1) Coexistence of Public and Private Sectors:
The coexistence of large public sector with big private
sector has transformed the economy into a mixed one.
Industrial policies of 1948 and 1956 formulated by the
Indian government have made the provision of such
coexistence. Some basic and heavy industries are
being run under the public sector. However, with the
liberalisation of Indian economy, the scope of private
sector has further enhanced.
(ii) Planned Development:
India had a poor industrial base at the time of Independence. A long period of economic stagnation under British rule had weakened the Indian Economy. Hence 5-year plans have been adjusted along with the Directive Principles of State Policy to rebuild the rural economy and lay foundations of
industrial and scientific progress.
(iii) Plan Objectives:
In 1951, Five Year Plan was started in India and we are going with the eleventh Five Year Plan.
(iv) Role of Public Sector:
It has played an important role in the development of Indian economy. It increased the pace of economic growth and reduced disparities of income and wealth.
(v) Private Sector:
It includes not only organised industry, but agriculture, small industry, trade and great deal of activity in housing and construction. Private sector provides employment to three-fourths of| our manpower.
(vi) Combination between Public and Private Sector:

The second Five Year Plan and pointed out that both the sectors have to function jointly. In fact a high level of public investment it infrastructures and key industries is a1 precondition for development in the private sector.
BASIC CHARACTERISTICS OF INDIAN
ECONOMY

1. Mixed Economy
2. Pre-dominance of Agriculture.
3. High population.
4. Underutilized Natural resources.
5. Low Human development index.
6. Lack of infrastructure facility.
7. Capital deficiency.
8. Unemployment.
9. Technological backwardness.
10.Poor economic organizations.
11. Low per capita income.
12. Economic backwardness.
13. Poverty.
ECONOMIC GROWTH AND
DEVELOPMENT
(UNIT-1)
Economic growth
The concept of economic growths refers to quantitative
changes. It is a process of growth in the national and per
capita income. Two related aspects of economic growth are
commonly offered.
It refers to-
*increase in country's real national and per capita income.
*this increase is sustained over a long period of time.

Size of Output
Economic ( A quantitative
Growth Aspect)
Features of Economic growth
1) It implies a process of increase in national income :-
Indicates growth as a result of operation of certain forces like demand,
supply, production, distribution in an interconnected manner that
cause economy you move increasingly towards higher levels of
income.

2)Increase in per capita income:- it is estimated by dividing

national income by population. Increase in National Income in not a
sign of growth as population growth rate should be lower than the
growth of national income.

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. Thus,

PCI= Total National Income

Total National Population
3) Increase in real income should be over a long
period: As we know that a short run seasonal increase in
production of many goods resulting in an increase in income but
some increases are only temporary not permanent as production
may go back to previous levels as the season is over. E.G.-
agricultural output.

4) No Increase in Poverty and Inequality: In accordance

with this definition, in a state of economic growth per capita real
income should increase in such a way that there should be no
increase in the number of people living below the poverty line.
Along with it, there should be no increase in the inequality in the
distribution of income.
Economic Development
Economic development refers to that process by which per
capita income and economic welfare of a country increase
over-time.
Economic development is necessary for under
developed countries because they can solve the
problems of general poverty, unemployment,
backwardness and low standard of living through it. On
the other hand, economic development is equally
significant to developed economies as it help them to
maintain their existing growth rate
Economic development is something more than economic
progress. Economic development means growth with change
and increase in welfare.
Economic development
 In simple words, it means attainment of idols of
modernization such as rise in productivity, social and
economic equalization, modern knowledge, improved
institutions and attitudes and a rationally coordinated system
of policy measures that can be remove the host of
undesirable conditions in society.
Economic growth vs. development

 In economic literature the term Economic growth and

Economic development are frequently used to donate
the progress of the economy.

 Even though they both are related to economic

progress : they are distinct and different in terms of their
contents and coverage.

 Economic Growth consists quantitative aspect

only(Output) and Development consists Qualitative
aspects along with the Size of output.
 Economic Growth is a narrower concept than
economic development.
 Economic development is a normative concept i.e. it
applies in the context of people's sense
of morality (right and wrong, good and bad).
 The most accurate method of measuring
development is the Human Development Index which
takes into account the literacy rates & life expectancy
which affect productivity and could lead to Economic
Growth
 Basis Economic Development Economic Growth
Implications: It implies changes in income and Economic growth refers to an
investment along with progressive increase in the real income of
changes in socio-economic structure the country.
of country (Social changes).

Factors: Development relates to growth of Growth relates to a gradual

human capital indexes, a decrease in increase in one of the
inequality and structural changes that components of Gross Domestic
improve the general population's Product: consumption, net
quality of life. exports.

Measuremen Qualitative.HDI (Human Development Quantitative. Increase in real

t: Index), gender- related index (GDI), GDP. Shown by Purchasing
Human poverty index (HPI), infant Power parity (PPP)
mortality, literacy rate etc.
Effect: Brings qualitative and quantitative Brings only quantitative
changes in the economy changes in the economy

Concept: Wider concept Narrower concept than

economic development
Relevance: It is more relevant to measure It is a more relevant metric for
progress and quality of life in progress in developing
developing nations. countries.
Factors in Economic
Development
Factors in Economic Development
 All the factors having strong bearing on economic
development are divided into two categories:

(A) Economic Factors: Economic factors play a very

important role in the development of a country. The
aggregate output/ income rises or falls mainly due to
changes to them. The main economic factors are
(1) Natural Resources
(2) Capital formation
(3) Human Resource
(4) Technological Development
(5) Foreign Capital
a) Natural Resources : Natural resources are the base for
habitation of Human being and development of any Industry. It
provides basic raw material to industries.
b) Capital formation: It means to invest in business and capital
goods. It leads to development of more and new enterprises in
the country.
c) Human Resource : It is the most important active factor of
production. Human resources work as labour and serves as
consumer also.
d) Technological Development: In the development of economy,
technical development and Innovation plays an important role. It
is related to production of existing goods at a lower cost with new
varieties and features.
e) Foreign Capital: Developing countries suffer from lack of
capital and thus have a low rate of development. Foreign capital
invested by the foreign investors and fulfills the demand of capital
& technology for new business development.
B) Non-Economic Factors: The non-
economic factors are as much important in
development as economic factors. These are
the following:

a)Social and Institutional Factors

b)Political Factors (Corruption)

c)Cultural Factors (Desire to Develop)

a) Social and Institutional Factors: (Desire to Develop)
Social atmosphere is important for the speedy
development of the country. People should have keen
desire to have better standard of living. Social behaviour
influence the social and economical development.
b) Political Factors (Corruption): Govt. Behavior is of vital
importance for economic development. No Nation can
develop and prosper without a sincere and stable
government.
c) Religious & Cultural Factors: In developing countries
cultural traditions create hindrance in the way of
development. It includes ignorance, pessimism, fear of
religion, illiteracy, inequality of men & women etc.
 It is clear that both Economic and Non
economic factors play important role in
economic development.
 It is most difficult to judge which factor is

most important.