Unit 2 overview of Indian Economy, Characteristics

Macroeconomic Structure of Indian Economy

1. UNIT 2 O v e r v i e w o f T h e I n d i a n Economy

2. 2 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 powerhouse across Asia-Pacific and beyond. Economic Snapshot

3. 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 2 nd l arge s t pop u l at i o n b a s e – h o s ts, 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 o v er U S $8 , 5 pe r ann u m A Large English Speaking Population India has a large English speaking population, which is useful for business purposes in a globally connected world

4. 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

5. India : Gross domestic product (GDP) in current prices from 1987 to 2027

6. 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 .

7. 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. Characteristics of the Indian economy

8. 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).

9. 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.

10. 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

11. 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

12. 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. Objectives of Economic Planning in India

13. 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

14. 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 )

15. 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 NITI AAYOG ( NATIONAL INSTITUTION FOR TRANSFORMING INDIA )

16. 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.

17. NITI Aayog In NITI Aayog , State Governments have to play a more proactive role . Based on the requirements, there are part-time members appointed in NITI Aayog . The Governing Council of NITI Aayog has Lieutenant Governors of Union Territories and State Chief Ministers. Planning Commission State Governments did not have much role to play apart from taking part in the meetings. The State Government’s role was confined to the National Development Council . The Planning Commission did not have any provisions for the appointment of part-time members The National Development Council had Lieutenant Governors and State Chief Ministers. Planning Commission had to report to the National Development Commission Difference between NITI Aayog and Planning Commission

18. NITI Aayog Planning Commission Planning Commission secretaries were appointed through the usual process . The last Planning Commission had eight full-time members. The CEO of NITI Aayog is appointed by the Prime Minister. Secretaries are known as CEO The number of full-time members in NITI Aayog could be lesser than the numbers that the Planning Commission had. Difference between NITI Aayog and Planning Commission

19. 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.

20. 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

21. 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

22. 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

23. 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

24. 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. Gross Domestic Product

25. 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 = C + I + G + NX

26. Consumption (C) I s 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.

27. Investment (I) I s 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: “Investment” does not mean the purchase of financial assets like stocks and bonds.

28. 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 .

29. 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 = C + I + G + NX

30. 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

31. 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 .

32. 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.

33. GDP Growth Rate To calculate this growth rate, we use the formula: Growth of real GDP = Real GDP in current year Real GDP in previous year x 100 Real GDP in previous year – 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 real GDP = $8.4 trillion – $8.0 trillion $8.0 trillion x 100 = 5 percent. Growth of real GDP = Yc Yl x 100% Yl –

34. 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

35. 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.)

36. 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)…..

37. 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.

38. 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

39. 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.

40. Important Questions Indian economy supports free flow of goods and services . Summarize Explain the different characteristics of business . Explain Environmental factors affecting Business Identify the developments in the Indian economy during different plans. Explain the relevance of national income in a country’s economy. Difference between NITI Aayog and Planning Commission Explain the recent developments in India