Indian Economy Study Guide

Indian Economy is a critical subject for competitive examinations, especially for banking, UPSC, SSC, and RBI Grade B aspirants. Understanding the structure, functioning, and challenges of the Indian economy is essential for both academic success and informed citizenship. India is currently the fifth-largest economy in the world by nominal GDP and the third-largest by purchasing power parity (PPP).

The Indian economy has undergone significant transformation since independence in 1947. From a predominantly agrarian economy, India has evolved into a service-driven economy with a growing manufacturing sector. The liberalization reforms of 1991 marked a turning point, opening up the economy to foreign investment and reducing government control over businesses.

Today, India is classified as a developing economy with a mixed economic system that combines elements of both capitalism and socialism. The government plays a significant role in key sectors while encouraging private enterprise. Understanding concepts like GDP, inflation, fiscal deficit, banking regulations, and international trade is crucial for competitive examinations.

2.1 Key Concepts

• Gross Domestic Product (GDP): Total value of all goods and services produced within a country's borders in a specific period. It's the most widely used measure of economic output.
• Gross National Product (GNP): GDP plus net income from abroad. GNP = GDP + Net Factor Income from Abroad (NFIA).
• Net Domestic Product (NDP): GDP minus depreciation. NDP = GDP - Depreciation.
• Net National Product (NNP): GNP minus depreciation, also called National Income at factor cost.
• Per Capita Income: National Income divided by population. Indicates average income per person.

2.2 Methods of Calculating National Income

2.3 Base Year and New Series

India currently uses 2011-12 as the base year for GDP calculation (since January 2015). The new methodology uses GVA (Gross Value Added) at basic prices instead of factor cost. The Central Statistics Office (CSO), now part of the National Statistical Office (NSO), calculates national income.

3.1 Evolution of Planning

Economic planning in India began with the establishment of the Planning Commission in 1950, with Prime Minister Jawaharlal Nehru as the Chairman. The planning process aimed at achieving economic growth with social justice. India followed the Soviet model of five-year plans.

3.2 NITI Aayog

The Planning Commission was replaced by NITI Aayog (National Institution for Transforming India) on January 1, 2015. Unlike the Planning Commission, NITI Aayog serves as a think tank rather than a fund-distributing body. It focuses on cooperative federalism, giving states a greater role in planning.

• Chairman: Prime Minister of India
• Vice Chairman: Appointed by PM (full-time)
• CEO: Appointed by Government
• Key Initiatives: Aspirational Districts Programme, Atal Innovation Mission, POSHAN Abhiyaan

3.3 1991 Economic Reforms (LPG)

Facing a severe balance of payments crisis in 1991, India undertook major economic reforms under PM Narasimha Rao and FM Manmohan Singh. The reforms are known as LPG:

• Liberalization: Removing industrial licensing, reducing import barriers, opening up sectors to private investment
• Privatization: Disinvestment of PSUs, greater role for private sector
• Globalization: Opening economy to foreign investment, reducing trade barriers, joining WTO

4.1 Reserve Bank of India (RBI)

The RBI is India's central bank, established on April 1, 1935, based on the recommendations of the Hilton Young Commission. Initially privately owned, it was nationalized in 1949. The RBI's headquarters are in Mumbai.

4.2 Structure of Indian Banking

• Scheduled Commercial Banks: Listed in Second Schedule of RBI Act
  • Public Sector Banks (12): SBI and nationalized banks
  • Private Sector Banks (21): HDFC, ICICI, Axis, Kotak, etc.
  • Foreign Banks (46): Citi, HSBC, Standard Chartered, etc.
  • Regional Rural Banks (43): Joint ventures of Centre, State, Sponsor bank
  • Small Finance Banks (12): Financial inclusion focus
  • Payments Banks (6): Limited banking services, no lending
• Cooperative Banks: State Cooperative Banks, District Central Cooperative Banks, Primary Agricultural Credit Societies
• Development Banks: NABARD, SIDBI, EXIM Bank, NHB

4.3 Important Banking Terms

4.4 Bank Nationalization

Bank nationalization was a landmark event in Indian banking history:

• 1969: 14 major banks nationalized (with deposits over Rs. 50 crores)
• 1980: 6 more banks nationalized (with deposits over Rs. 200 crores)
• Objective: Expand banking to rural areas, priority sector lending, reduce private monopoly

5.1 Understanding Fiscal Policy

Fiscal policy refers to the government's use of taxation and spending to influence the economy. It is determined by the Ministry of Finance and presented through the Union Budget annually. The key objectives include economic growth, price stability, employment generation, and reducing inequality.

5.2 Government Budget

5.3 Fiscal Deficit and Public Debt

• Revenue Deficit: Revenue Expenditure - Revenue Receipts
• Fiscal Deficit: Total Expenditure - Total Receipts (excluding borrowings). Indicates government's borrowing requirement.
• Primary Deficit: Fiscal Deficit - Interest Payments. Shows deficit excluding debt servicing.
• FRBM Act (2003): Fiscal Responsibility and Budget Management Act aims to reduce fiscal deficit to 3% of GDP.

5.4 Tax System

Monetary policy refers to RBI's actions to regulate money supply, credit, and interest rates to achieve macroeconomic objectives. The primary objective is price stability (inflation targeting) while keeping growth in mind.

6.1 Monetary Policy Committee (MPC)

The MPC was established in 2016 under the amended RBI Act. It has 6 members: 3 from RBI (including Governor as Chairman) and 3 external members appointed by Government. The MPC decides the policy repo rate to achieve the inflation target of 4% (+/- 2%).

6.2 Monetary Policy Tools

• Quantitative Tools: CRR, SLR, Open Market Operations (OMO), Bank Rate
• Qualitative Tools: Moral suasion, credit rationing, margin requirements

6.3 Inflation

• CPI (Consumer Price Index): Main measure of retail inflation, used for inflation targeting. Base year: 2012
• WPI (Wholesale Price Index): Measures wholesale price changes. Base year: 2011-12
• Types: Demand-pull inflation, cost-push inflation, stagflation
• Headline vs Core Inflation: Core excludes food and fuel prices

7.1 Agriculture

Agriculture employs about 42% of India's workforce but contributes only 18% to GDP. Key initiatives include MSP (Minimum Support Price), PM-KISAN, crop insurance (PMFBY), and e-NAM (National Agriculture Market).

7.2 Industry

The industrial sector contributes about 26% to GDP. Key policies include Make in India, PLI (Production Linked Incentive) schemes, and National Manufacturing Policy. India has emerged as a major hub for pharmaceuticals, automobiles, and IT hardware.

7.3 Services

The services sector is the largest contributor to GDP (54%) and the fastest-growing sector. IT-BPM, telecommunications, tourism, and financial services are key components. India is a global leader in IT services exports.

8.1 Balance of Payments

• Current Account: Trade balance (exports - imports), services, remittances, interest payments
• Capital Account: FDI, FPI, loans, banking capital
• CAD (Current Account Deficit): When imports exceed exports

8.2 Foreign Investment

• FDI (Foreign Direct Investment): Long-term investment in business. Routes: Automatic and Government approval
• FPI (Foreign Portfolio Investment): Investment in stocks and bonds
• ECB (External Commercial Borrowings): Loans from foreign lenders

8.3 International Organizations