The Indian Economy

412 Pages·2020·5.03 MB·english

by  Sanjiv Verma

CONTENTS
PART A DOMESTIC ECONOMY
1. Output of an Economy 3
1.1 Concept of Output 3
1.2 Concept of Depreciation 5
1.3 GDP—as a Measure of Growth 6
1.4 GDP/National Accounts Revised Series With 2017-18 As Base Year 8
1.5 Gross Happiness Index (GHI) 11
2. Towards Inclusive Growth 13
2.1 Growth Rate of Indian Economy 13
2.2 Development—Inclusive Growth 14
2.3 Growth With Equity. 18
3. Sustainable Development and Climate Change 20
3.1 Sustainable Development 20
3.2 Sustainable Development and Climate Change 21
3.3 Sustainable Development Goals (SDGs) 23
3.4 Green GDP 23
3.5 Climate Financing. 24
4. Poverty and Social Sector 25
4.1 What is Meant by Poverty in India? 25
4.2 Social Sector 25
4.3 Micro Finance 34
4.4 Pradhan Mantri Mudra Yojana (PMMY) 35
4.5 Spreading Jam Across Indian Economy 35
4.6 Universal Basic Income 37
5. Food Security 41
5.1 Food Security 41
5.2 Challenges Before India in Achieving Food Security. 46
6. Agriculture Sector 48
6.1 'Why' is Agriculture Sector Important for India? 48
6.2 Pink Revolution 51
6.3 New Agricultural Policy 2000 53
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6.4 Agriculture Export Policy, 2018 53

6.5 Rainbow Revolution 54
6.6 Minimum Support Price (MSP) 55
6.7 Indian Agriculture—Ten New Thoughts 55
6.8 Second Green Revolution 57

6.9 National Mission For Sustainable Agriculture 57
6.10 Food Processing Industry—An Overview, Opportunities and Challenges 57
6.11 Agriculture Policy: Vision 2020 66
7. Land Reforms—Another Perspective 70
7.1 Land Reforms—Aspects 70
7.2 Land Acquisition Act 71
71
7.3 NationalL and UseP olicy—Efficiency in theU seo fL and
7.4 Leasing ofA griculturalL and 72
7.5 Moving FromP resumptiveT o ConclusiveT itle 72
72
7.6 Computerization ofL and Records
7.7 Beyond Land and Land Rights 73
7.8 HurdlesI n Land Reformsi n India. 73
8. Salient Features—‘New India 76
8.1 New India 76
8.2 New Philosophies 77
8.3 India’s Economy-A Stellar Performance 81
83
8.4 Eight Interesting Facts About India
9. Industrial Sector And Liberalization 87
9.1 Role of Industry in an Economy 87
9.2 Public Sector in India 88
9.3 Industrial Policies 89
90
9.4 New Economic Policy 1991

9.5 Role of Public Sector in Future 95
9.6 National Manufacturing Policy, 2011 96
9.7 Emerging Role of Private Sector 100
9.8 Ease of Doing Business in India 104
106
9.9 Vision of a New India
10. Infrastructure 111
10.1 Infrastructure in Global Context 111
10.2 Issues in Indian Infrastructure 112
10.3 Recent Measures Taken by the Government 112
10.4 Infrastructure and Its Key Challenges 116
10.5 Environmental Issues and Infrastructure 117
10.6 Ports in India—An Economic Perspective 118
10.7 Indian Railways—A Carrier of the Nation 122
10.8 Regional Connectivity Through UDAN 128
10.9 Adarsh Railway Station Scheme 129
11. Investment Models 130
11.1 Traditional Models 130
11.2 Neo-Investment Models 132
11.3 Public Private Partnership Model (PPP) 135
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12. Integrated Energy Policy (2031-32) 138
12.1 Importance 138
12.2 The Policy 138
12.3 Government Initiatives 139
12.4 Structural Bottlenecks 141
13 Government Finances 143
13.1 Fiscal Policy in India 143
13.2 Public Expenditure of Government 143
13.3 Receipts by the Government 144
13.4 Ways and Means Advances 145
13.5 Nature of Government Budget 145
13.6 Nature of Deficits 146
13.7 Tax Reforms—Indirect Taxes 147
13.8 Tax Reforms—Direct Taxes 149
13.9 Goods and Services Tax: Progressive Tax Regime 150
13.10 Black Money 154
13.11 Views on Tax Compliance 157
13.12 Merger of Rail Budget With Union Budget 159
13.13 Some Other Forms of Budgeting 161
14. Reserve Bank of India and Monetary Policy Committee 163
14.1 Reserve Bank of India 163
14.2 Monetary Policy Committee 164
15. Banking 167
15.1 Banks in India 167
15.2 Banking Structure in India 167
15.3 Major Areas of Reform in the Banking Sector 170
15.4 Capital Adequacy (Basel Norms) 171
15.5 Liquidity Management By RBI 172
15.6 Directed Lending of RBI 174
15.7 Rural Infrastructure Development Fund (RIDF) 176
15.8 Overview and Outlook—Public Sector Banks 177
15.9 Financial Inclusion 178
15.10 Small Finance Bank 180
15.11 Payments Banks 181
15.12 Gold Investments Scheme 183
15.13 Banking Related Initiatives 184
15.14 Merger of SBI Associates with State Bank of India (SBI) 189
16. Inflation 190
16.1 Meaning and Measuring Inflation 190
17. Capital Market 196
17.1 Capital Market 196
17.2 Disintermediation 197
17.3 Stock Exchanges. 197
17.4 Various Indices of Stock Market. 197
17.5 Role of Securities Exchange Board of India (SEBI) 198
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17.6 Market Capitalization and Wealth 199
17.7 Mutual Funds and Unit-Linked Insurance Plans (ULIPS) 199
18. Planning In India 202
18.1 Genesis 202
18.2 Planning and Market Economy 202
18.3 India and Five-Year Plans 203
18.4 Inclusive Growth : Theme of 12th Plan 206
18.5 Challenges Before Twelfth Plan (2012-2013 To 2016—2017) 207
18.6 Niti Aayog: The Premier Policy Think Tank 208
18.7 Recent Initiatives of Niti Aayog. 211
PARTBE X TERNALSE CTOR—LOOKINGOU TWA RDS
TowardsGlo balizationand Be yond
19. Looking Outward—Towards Globalization 215
19.1 Need to Look Outward 215
19.2 Need for Imports and Exports 215
19.3 Flip Side to Trade 216
19.4 New Globalization Report: Three Mega-Trends. 217
20. Inward and Outward-Looking Economies’ Globalization 218
20.1 Closed Economies 218
20.2 What are these Facilitators? 218
20.3 Globalization Indicators 220
20.4 While Being Driven into the Global Village ,can have its Own Fallout Too 221
20.5 Globalization Would also Bring its Own Set ofCha llenges 221
20.6 Impact on Indian Society So Far 222
21. Going Forward—India and Globalization 226
21.1 Trade Strategies 226
21.2 Branding India Through Make In India 227
21.3 National IPR Policy, 2016 235
21.4 National IPR Policy- Achievements So Far. 236
22. Export-Led Growth Strategy—SEZs 238
22.1 Export Strategies 238
22.2 Special Economic Zone (SEZ) 238
22.3 Agri Export/Economic Zones (AEZs) 243
22.4 Technology Parks and EOUs 244
22.5 Report of SEZ Policy Review Committee. 245
23. Foreign Trade Policy 247
23.1 Foreign Trade Policy 2015-2020 247
23.2 Concessions Available to Exporters in DTA 250
23.3 India’s Major Trade Partners. 254
24. Balance of Payments of Economies (BOP) 255
24.1 Concept 255
24.2 BOP—Kinds of Accounts 255
24.3 Is Current Account Surplus (CAS) Better For Open Economies? 258
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25. Trade Reforms and Foreign Exchange Management Act (FEMA) 1999 259
25.1 Trade Reforms 259
25.2 Foreign Exchange Regulation Act (FERA) 259
25.3 Rupee Convertibility 260
25.4 External Commercial Borrowings 265
26. Foreign Investment in India 268
26.1 Changing Notions 268
26.2 Foreign Direct Investment (FDI) 269
26.3 Foreign Portfolio Investment (FPI) 273
26.4 FDI in Agriculture Sector 274
26.5 Differences Between FDI and FPI 274
27. Multilateral Financial Institutions 276
27.1 International Monetary Fund (IMF) 276
27.2 The World Bank Group 279
27.3 Asian Development Bank (ADB) 280
27.4 New Development Bank 281
27.5 Asian Infrastructure Investment Bank (AIIB) 282
28. External Debt of India 283
28.1 External Debt 283
28.2 India’s External Debt Highlights 284
29. Exchange Rate Determination 287
29.1 Exchange Rate 287
29.2 Exchange Rate in India 289
29.3 Depreciation of Indian Rupee-Reasons, Implications and Possible Solutions 295
30. Foreign Exchange Reserves 301
30.1 Foreign Exchange Reserves (FEX) of India 301
32. Regional Trading Blocs 305
31.1 Regional Trading 305
31.2 Preferential Trade Agreements 309
31.3 India’s Experience With Regional Trade Agreements 310
PART C GLOBAL ECONOMY AND OUTLOOK
Post-nC • risis a• nd• Beyoinn d... i
32. India and the Global Economy 313
32.1 Global Output 313
32.2 India and Human Development Index (2018) 316
33. Global Economy—A Transition 317
33.1 Global Transition 317
33.2 Global Village 318
34. Lessons From Crises in Open Economies 320
34.1 Genesis 320
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35. Global Financial Meltdown 322
35.1 De-Coupling Theory 322
35.2 Global Crisis and India 324
35.3 Collective Intervention 325
35.4 Future of Globalization 326
36. Overview of Recent Crises Since 2008 328
36.1 US Crisis 2008 And 2011 328
36.2 Euro Zone Crisis 329
36.3 Cyprus Crisis 330
36.4 Greece Debt Crisis 330
36.5 Brexit 331
37. Global Consensus—Going Forward 332
37.1 Post Crisis 332
37.2 Structural Issues 333
38. Global Unresolved Issues 334
38.1 Unaddressed Issues 334
39. World Trade Organization (WTO)—Issues And India 336
39.1 GATT and WTO 336
PARTDINDIANECO NO MYRE VISITED,
OUTLOOKANDCHALLEN GES
40. India’s Efforts Towards Economic Reforms 343
40.1 Economic Reforms Encapsulated 343
40.2 First-and-Second Generation Reforms 343
40.3 Review of Economic Reforms in India 344
40.4 Unfinished Agenda of Economic Reforms 349
40.5 Big Bang Economic Reforms Centred at Economic Growth 349
41. Indian Economy—Outlook and Challenges 351
41.1 Global Perspective—India And China 351
41.2 Domestic Outlook 352
41.3 Outlook for Reserve Bank of India (RBI) 352
41.4 Indian Outlook—Challenges Ahead 353
41.5 India 2020: Top 7 Challenges. 355
The Igniters: Thought Provoking Questions 357
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PART
A
DOMESTIC ECONOMY
CHAPTER
1
OUTPUT OF AN
ECONOMY
CONCEPT OF OUTPUT
What would we understand if we were told that today the largest economy in the world is
the US? Surely, we would wonder about the parameter of such a—land area, population
or output!
In every economy, ‘goods’ are being produced, that is, raw materials are being converted
into finished goods, agricultural crops, forestry, livestock, steel, cement, cars, cycles, bread
etc. Similarly, services’ are also being rendered like banking, insurance, shipping etc. All
of these have a monetary value in the local currency like the USD in the US and the INR
in India.
Thus, output per se implies aggregation of monetary value of all the goods and services
produced in an economy in a given time period which may be a quarter (3 months), half-
a-year (6 months) or a year (12 months).
In other words, output’ includes all goods and services exchanged for money. For
example, a fisherman catching fishes, may use some of it for self-consumption and the
remaining may be used for selling in the market; thus, the monetary value of all the fishes
would be considered under the concept of output.
It sounds simple so far, but delving a little deeper output may as well comprise of
intermediate goods like steel and cement, which in turn are inputs for other goods referred
to as ‘final goods’. These final goods cannot be put to further use, except for use like cars,
buildings etc.
If we were to include both the intermediate and final goods in our definition of output,
then that would effectively mean counting the same thing twice and in the process inflate
the output of an economy. For example, production of wheat and its milling as flour
results in the making of bread; thus for output purposes, only the monetary value of bread
would be considered and not that of wheat and flour. Therefore, we can conclusively
derive that the output should have only final goods in order to avoid double counting.
But, what about a sale of second hand goods like say a second hand car? Should they
be reflected in the output of an economy? The answer is no, as they have already been
included once when manufactured and therefore does not amount to a fresh production.
Thus, output of an economy is the monetary value of the final goods and services in a
given time period.
4 THE INDIAN ECONOMY
The production of goods and rendering of services are referred to as economic activities;
but who are the producers of goods and services in an economy? They could either be
individuals, small and petty businesses, private companies like the Tatas, Birlas, Reliance
Industries etc., or even government like the public sector companies ONGC, SAIL etc.,
or even foreign companies like Nokia, Sony, Samsung etc.
If we were to take the monetary value of all the final goods and services produced
within the geographic boundary of a country, irrespective of who the producer of the
goods and services are, then it is called ‘domestic output’ of the economy.
Thus, in the Indian context, domestic output consists of the monetary value of all final
goods and services produced/rendered by individuals, private sector, public sector and
foreign companies.
Having looked into who are the producers in an economy, let us look now at how the
goods are produced. In order to produce goods, at first we need some place/infrastructure
where the goods can be produced. Thus we would need to have a some land (or building);
money as seed capital, in order to buy machines and raw material, invest in marketing,
arrange for transportation etc.; labour for production and then a person whom we call the
entrepreneur as the producer of goods. These are known as ‘factors of production’ in an
economy.
Thus, in a ‘production life cycle’, each factor of production will have an associated
cost—be it the seed capital for investment, rent for the place/infrastructure, or for
that matter the labour wages and salaries; as an entrepreneur, the profit that an
entrepreneur gains at the end of the day, is principally for the risk that he/she takes for
production.
It is important to note that profit is a cost for any economic activity; but then what
is cost is also income for factors of production. For example, rent is an income for land,
interest is the income for capital, wages and salaries are the income for workers and
supervisors and profit per se is the income for the risks taken by the entrepreneur. Let us
illustrate this example further with numbers. Following are the details of a manufacturing
company:
Land (rent) ₹ 10,000
Labour (Wages & Salaries) ₹ 1,000
Capital (Interest) ₹ 750
Entrepreneur (Profit) ₹ 500
Total ₹ 12,250
In this example, the totalc ost( allc osts in cluded)to an entrepreneur is ₹1 2 ,250;wh at ist he

output!Itisthesameamountas₹12,250;and whatistheincomeofallthefactorsofproduction!

Itisagain thesameas₹12,250.Thisbasically meansthatoutput/costisincome forfactorsof

production.Thus,outputand theincomearetwo sidesofthesamecoin.Whetherwesay output

orincome,itimpliesthesamething.

At times, output is also referred as the product of an economy, (quantity multiplied

by factorcost)thusdomesticproductand domesticincomeofan economy arethesame.
OUTPUT OF AN ECONOMY 5
So far, we has discussed about the domestic output/product/income, but what about
the income of Indians staying abroad? For a more comprehensive analysis of the output, it
.$ necessary to look beyond the geographic boundaries that would include the income of
all the Indian nationals irrespective of the country they currently reside.
But if we include the income of Indian nationals outside the country, it will also be
logical to deduct the income of foreign nationals residing in our country. This is also
referred to as Net Factor Income From Abroad (NFIAD). Thus,
Domestic Product + Income of Indians Abroad - Income of Foreigners in India =
National Product
or
Domestic Product (+/-) NFIAD = National Product
Net factor income from abroad can be positive or negative depending up on which is more—
income of Indian nationals abroad or income of foreign nationals in India, that is, national
product is less than the domestic product, if the income of Indian nationals abroad is less
than the income of foreigners in India and vice versa.
An increased foreign currency denominated debt of a country or selling domestic assets
to foreign entities would tend to reduce the national product leaving domestic product
unchanged.
CONCEPT OF DEPRECIATION
The output of an economy also consists of production of machines/machineries which
are consumed every year, referred to as ‘depreciation and much of the output of such
machines could be replacement in nature and not signifying additions to machine or
capital stock in the economy.
Let us assume that cars are being produced in an economy and there is also depreciation
of cars , that is ,the car s would eventually ha ve to be replaced a fter t heir shell -life .For
example, a car is priced at ₹ 3,00,000 and ha s alif eof ,say 10 years .Then ,depreciation or

consumption ) of car is ₹ 30,000 a year.Thus,if the output of an economy ignores

consumption (ordepreciation)ofitsmachinestocks,itisreferred asa‘gross’conceptand

ifitisaccounted foritisknown as‘net’concept.

Accordingly, there is Gross National Product (GNP) and Gross Domestic Product
(GDP).
Hence,

GNP-Depreciation =NetNationalProduct(NNP)

GDP— Depreciation =NetDomesticProduct(NDP)

Thus, there are four concepts in the output of an economy—GNP, GDP, NNP and NDP.

Let us now try to understand which method is technically the best measure of growth.

Clearly,itistheNNPasitfirstcoversallthenationalsofacountry and isalso anet