INDIAN ECONOMY – UNIT 1

Introduction
India has emerged as the fastest growing major economy in the world and is expected to be
one of the top three economic powers of the world over the next 10-15 years, backed by its
strong democracy and partnerships.

Market size
India’s GDP is estimated to have increased 7.2 per cent in 2017-18 and 7 per cent in 2018-19.
India has retained its position as the third largest start up base in the world with over 4,750
technology start-ups.
India's labour force is expected to touch 160-170 million by 2020, based on rate of population
growth, increased labour force participation, and higher education enrolment, among other
factors, according to a study by ASSOCHAM and Thought Arbitrage Research Institute.

India's foreign exchange reserves were US$ 405.64 billion in the week up to March 15, 2019,
according to data from the RBI.

Some features of Indian economy are given below:

1. Low per Capita Income: India’s per capita income is very less as compare to developed
countries.  As per the estimates of the Central Statistics Office (CSO), the per capita net
national income of the country at current prices for the year 2015-16 is estimated to attain the
level of Rs. 93231/-. The per capita net national income at constant prices (2011-12) for the
year 2015-16 is estimated to attain the level of Rs. 77, 431/-. As per the CSO’s estimates, the
per capital net national income at current prices is  
2012-13 ……Rs. 71050/-
2013-14 …… Rs. 79412/
2014-15 …….Rs. 86,879/- 
The per capita net national income at constant prices (base year 2011-12)
2012-13……. Rs. 65,664/-
2013-14……. Rs. 68867/-
2014-15. ……Rs. 72889/-
2018-19- …..Rs 1,26,406 / year

Per capita income of an Indian resident is lower than most countries in the world.

2. Agriculture Based Economy: One of the fundamental characteristics of India as a developing

economy is that it is majorly primary producing. What this means is that a majority of the
population is engaged in agriculture (52 percent aaprox). Agriculture is a low income earning
sector. Also, productivity per person engaged in agriculture is very low. (Services sector accounts
for 54.40% of total India's GVA of 169.61 lakh crore Indian rupees. With GVA of Rs. 50.43 lakh
crore, Industry sector contributes 29.73%. While, Agriculture and allied sector shares 15.87%.)

3. Over population: It is 1.36 billion – the population of India as on January 17, 2019, 21:30
hours. We are the second most populated country in the world and our population is
equivalent to around 17.74% of the total world population.
In India, the high levels of illiteracy lead to a high level of birth rates. Further, improvement
in medical facilities has increased the average life of an Indian citizen and led to a decline in
the death rates too.  India to cross China's population by 2027: United Nations

4. Income Disparities: A report released by Credit Suisse revealed that the richest 1% Indians
owned 53% of the country’s wealth, while the share of the top 10% was 76.30%. To put it
differently, in a manner that conveys the political economy of this stunning statistic, 90% of
India owns less than a quarter of the country’s wealth.

Russia is ‘most unequal’ country in the world. India second unequal country in the world:
Wealth Report. Unequal asset distribution is the primary cause of inequality in income
distribution in rural areas. This inequality also highlights the fact that the resource base of 50
percent of households in India is weak. It is so weak that it can barely provide them with
anything above the subsistence level of income.

5. Chronic Unemployment and Under-Employment in India- Due to the deficiency of capital

in India, it is difficult to engage the entire population in gainful employment. Therefore, a
cheap labor force is available in abundance. As a result, there is chronic unemployment and
under-employment in our country. (A worker may be considered underemployed if they hold
a part-time job instead of a full-time one, or if they are overqualified and have education,
experience, and skills that exceed the requirements of the job.)

6. Poor Human Capital Quality

It is a simple equation. Underdeveloped countries have millions of illiterate citizens. Also,

illiteracy retards growth since an individual needs a minimum level of education to acquire
skills and/or understand social issues.

7. Use of Outdated Technology: It is very clear that Indian production technique is more
labour oriented in nature. So it increases the cost of production of the products made in these
countries. Low-levels of Technology: India is a country of eclectic mixes. One one side, a
company uses one of the most modern technologies while another company from the same
industry uses the most primitive one.

Unfortunately, according to modern scientific standards, the majority of products are made
with the help of inferior technologies. If you take a simple look at the productivity of a
developed and underdeveloped nation, then the developed nation has better productivity since
it uses superior technologies.
8. Lack of Capital Formation: The capital formation actually signifies a very important aspect
of economic development. This means making and increasing of more capital goods, such as
machines, tools, factories, buildings, raw materials, fuels, etc., which are to be further used in
producing more goods. Capital formation implies the creation of real assets. Gross capital
formation includes fixed capital formation, change in stock and valuables.

Rate of capital formation India, 31 percent – ACCORDING TO WORLD BANK.

Rate of capital formation is low because of lower level of income.  Gross domestic capital
formation was 23.3% in 1993-94 increased upto the level of 38.1% in 2007-08 but declined
upto 34.8% in 2012-13.
Rate of Capital Formation = (Investments /GDP) X 100
9. Backwardness of Infrastructural Development: Lack of infrastructural facilities is one of
the serious problems from which the Indian economy has been suffering till today. These
infrastructural facilities include transportation and communication facilities, electricity
generation and distribution, banking and credit facilities, economic organisation, health and
educational institutes etc.
The two most vital sectors, i.e. agriculture and industry could not make much headway in the
absence of proper infrastructural facilities in the country. Moreover, due to the absence of
proper infrastructural facilities, development potential of different regions of the country
largely remains under-utilised.
Around USD 4.5 trillion worth of investments are required by India till 2040 to develop
infrastructure to improve economic growth and community well being- the Survey tabled by
Finance Minister Arun Jaitley in Parliament in 2018 out of which India could meet around
USD 3.9 trillion infrastructure investment.

10. Market Imperfections: Indian economy doesn’t have good mobility from one place to
other which hinders the optimum utilization of resources. These market imperfections create
the fluctuations in the price of commodities every year.

11. Economy is Trapped in the Vicious Circle of Poverty: 

In India, 21.9% of the population lives below the national poverty line in 2011. Less than 50
million Indians may be living on less than $1.9. “World Data –current poverty in India 50
million people, which will come down to 40 million by end of 2019, (a poverty rate of below
3%).

12. Traditional Set Up of Society: Indian societies are trapped in the menace like casteism,
communalist, male dominated society, superstitions, lack of entrepreneurship, and ‘chalta hai
attitude’ of the peoples. These all factors hindered the growth of the country as a whole.

Economic Growth Definition

 Economic growth can be defined as a positive change in the level of goods and
services produced by a country over a certain period of time.

 An important characteristic of economic growth is that it is never uniform or same in

all sectors of an economy For example, in a particular year, the telecommunication
sector of a country has marked a significant contribution in economic growth whereas
the mining sector has not performed well as far as the economic growth of the
country- is concerned.

 Economic growth is directly related to percentage increase in GNP of a country. In

real sense, economic growth is related to increase in per capita national output
or net national product of a country that remain constant or sustained for many
years.

 Economic growth can be achieved when the rate of increase in total output is
greater than the rate of increase in population of a country.
  For example, in 2005-2006, the rate of increase in India’s GNP was 9.1%, while its
population growth rate was 1.7%.In such a case, per capita increase in GNP would be
7.4% (=9.1-1.7). On the other hand, if the rate of increase in GNP and population is
same then the actual growth of GNP would be zero, which implies that there is a
decrease in per capita income. As a result, there would be no economic growth.
Therefore, in such a case, standard of living of people would not improve even when
there is an increase in the total output of a country. However, such a growth is better
than the stagnation of an economy.

 We define economic growth in an economy by an outward shift in its Production

Possibility Curve (PPC).

 Economic growth is measured by the increase in a country’s total output or real Gross

Domestic Product (GDP) or Gross National Product (GNP).

 The Gross Domestic Product (GDP) of a country is the total value of all final goods
and services produced within a country over a period of time. Therefore an increase in
GDP is the increase in a country’s production.
 Growth doesn’t occur in isolation. Events in one country and region can have a
significant effect on growth prospects in another. For example, if there’s a ban on
outsourcing work in the United States, this could have a massive impact on India’s
GDP, which has a robust IT sector dependent on outsourcing.
 The economic growth of a country is the increase in the market value of the goods and
services produced by an economy over time.

Economic Growth is not the same as Economic Development. 

 Development alleviates people from low standards of living into proper employment
with suitable shelter.
 Economic Growth does not take into account the depletion of natural resources which
might lead to pollution, congestion & disease.
 Development, however, is concerned with sustainability which means meeting the
needs of the present without compromising future needs.
 Economic Growth is the increase in the real output of the country in a particular span
of time. Whereas, Economic Development is the increase in the level of production in
an economy along enrichment of living standards and the advancement of technology.
 Economic Growth does not reflect the depletion of natural resources. Depletion of
resources such as pollution, congestion & disease. Governments are under pressure
due to the environmental issues, majorly the problem is due to Global warming.
However, Economic Development is concerned with Sustainability, which means
meeting the needs of the present without compromising.
 Economic growth is the subset of economic development.
 Economic growth indicates the expansion of the Gross Domestic Product (GDP) of
the country and the concept of Economic Growth is basically related to the developed
countries. Economic Development is a broader concept than the Economic Growth.
 They both Economic Growth vs Economic Development have different indicators for
their measurement. Economic Growth can be measured through an increase in the
GDP, per capita income, etc. However, Economic Development can be measured
 through Improvement in the life expectancy rate, infant mortality rate, literacy
rate, and poverty rates.

Growth Occurs when:

1. There is a discovery of new mineral/metal deposits.

2. There is an increase in the number of people in the workforce or the quality of the
workforce improves. For example, through training and education.
3. There is an increase in capital and machinery.
4. There is an improvement in technology.

Development occurs when:

1. An increase in real income per head – GDP per capita.

2. The increase in levels of literacy and education standards.
3. Improvement in the quality and availability of housing.
4. Improvement in levels of environmental standards.
5. Increased life expectancy.

Why Economic Growth is Important?

 Economic growth is one of the most important indicators of a healthy economy.

 One of the biggest impacts of long-term growth of a country is that it has a positive
impact on national income and the level of employment, which increases the standard
of living.
 As the country’s GDP is increasing, it is more productive which leads to more people
being employed. This increases the wealth of the country and its population.
 Higher economic growth also leads to extra tax income for government spending,
which the government can use to develop the economy. This expansion can also be
used to reduce the budget deficit.
 Economic growth also helps improve the standards of living and reduce poverty, but
these improvements cannot occur without economic development.

 Economic growth alone cannot eliminate poverty on its own.

The follow six causes of economic growth are key components in an economy.
Improving or increasing their quantity can lead to growth in the economy.

1. Natural Resources
 The discovery of more natural resources like oil, or mineral deposits may boost
economic growth as this shifts or increases the country’s Production Possibility
Curve. Other resources include land, water, forests and natural gas.
 Realistically, it is difficult, if not impossible, to increase the number of natural
resources in a country. Countries must take care to balance the supply and demand for
scarce natural resources to avoid depleting them. 
  Improved land management may improve the quality of land and contribute to
economic growth.

For example, Saudi Arabia’s economy has historically been dependent on its oil deposits.

2. Physical Capital or Infrastructure

 Increased investment in physical capital, such as factories, machinery, and roads, will
lower the cost of economic activity.
 Better factories and machinery are more productive than physical labor. This
higher productivity can increase output.
 In recent years, economic development in Central Africa has been improved due to
increased investment in roads, railways and seaports. Part of this investment has come
from Chinese companies who have a vested interest in transporting raw materials
from Africa to China.

For example, having a robust highway system can reduce inefficiencies in moving raw
materials or goods across the country, which can increase its GDP.

3. Population or Labour
 A growing population means there is an increase in the availability of workers or
employees, which means a higher workforce.
 One downside of having a large population is that it could lead to high
unemployment.

4. Human Capital
 An increase in investment in human capital can improve the quality of the labour
force. This increase in quality would result in an improvement of skills, abilities, and
training.
 A skilled labour force has a significant effect on growth since skilled workers are
more productive.

5. Technology
 Another influential factor is the improvement of technology.
 The technology could increase productivity with the same levels of labor, thus
accelerating growth and development. This increment means factories can be more
productive at lower costs.
 Technology is most likely to lead to sustained long-run growth.

6. Law
An institutional framework which regulates economic activity such as rules and laws. There
is no specific set of institutions that promote growth. Political stability and the protection of
private property was ranked as the most important factors for encouraging firms to invest in
developing economies. Any sign of instability increases the economic and personal risk of
investing in developing countries.
7.Education- Levels and standards of education have a significant influence on labour
productivity. Without basic literacy and numeracy, it is difficult for an economy to develop
from manual labour to new higher tech industries in the service sector. For example, good
levels of education in India have given opportunities for growth in service industries, such as
IT and call centres.

8. Levels of inward investment - Developing countries that can attract inward investment
can see significant growth in development due to higher levels of capital and benefits of
attracting multinational companies into. their economy. For newly industrialised countries
(NICs), inward investment has played a significant role in increasing economic development.
For example in 2011, inward investment in Brazil stood at $101bn.

9. Levels of savings/capital In growth models, levels of savings and capital are seen as a key
factor in determining economic growth. Higher savings enables a virtuous circle of increased
investment, higher growth, and therefore, higher savings.

COMPARISON INDIA CHINA PAKISTAN

PARAMETERS CHINA INDIA PAKISTAN

GDP (2018) – world bank $13.608 $2.726 trillion $312.57

trillion billion
POPULATION (2018)- world bank 1.393 1.353 billion .212 billion
billion
PER CAPITA INCOME $ 9776.375 $ 2041.091 $1480.876
(CEIC) - (CEIC)- 2019 (JUNE
2019 2018) CEIC
FOREIGN DEBT $1971.7 $ 543 Billion $106.3
Billion (CEIC) billion
(CEIC) (CEIC)
GOLD RESERVES $ 95.450 $ 25.505 billion $ 2.966
billion (CEIC) billion
(CEIC) (CEIC)
FOREIGN EXCHANGE $ 3107.2 $ 430. 57 billion $ 9.5 billion
RESERVES (2019) billion (business (CEIC)
(CEIC) standard)
FDI (2019) $78.8 $64.37 billion $1.6 billion
billion (hindubusinessline) USD
(china (Tribune)
daily)
HUMAN DEVELOPMENT 86 130 150
INDEX (Life Expectancy Index,
Education Index, GNI Index) – as
per 2018 UNDP report
(OUT OF 189 COUNTRIES)
GROWTH RATE (second quarter, 6.2 % 5% 3.3 %
June 2019)
UNEMPLOYMENT RATE 3.61% 7.91 (June 2019) 6.140
(JUNE business today (forecasted
2019) CEIC for
december
2019) CEIC

 Facts:

 As of 2019, GDP of India is around of 10 times greater than Pakistan. (world bank)

 India's economically largest states Maharashtra has GDP ($334 billion) greater than
Pakistan. (world bank)
 Growth in eight core sectors slows down to 2.1% in July from 7.3% last year
(September 2019, Business Today)

 According to Business Insider, July (2019)

 According to research institute Oxford Economics, all the top 10 fastest-growing

cities by GDP between 2019 and 2035 will be in India.
(Business insider, 2019)

 Based on annual gross domestic product (GDP) growth, cities in India are powering
ahead of other urban economies. (Business insider, 2019)
 The International Monetary Fund (IMF) in July projected a slower growth rate for
India in 2019 and 2020, a downward revision of 0.3 per cent for both the years, saying
its GDP will now grow respectively at the rate of 7 and 7.2 per cent reflecting a
weaker-than-expected outlook for domestic demand.
 However, India will still be the fastest-growing major economy of the world and
much ahead of China, the Washington-based global financial institution had said.
 India is also focusing on renewable sources to generate energy. It is planning to
achieve 40 per cent of its energy from non-fossil sources by 2030 which is currently
30 per cent and also have plans to increase its renewable energy capacity from to 175
GW by 2022.
 India's labour force is expected to touch 160-170 million by 2020, based on rate of
population growth, increased labour force participation, and higher education
enrolment, among other factors, according to a study by ASSOCHAM and Thought
Arbitrage Research Institute.