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Indian Economy

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Indian Economy


Economy is a framework, within which economic activities like investment, production and consumption are carried out.

The economy of India is the 7th largest in the world by nominal GDP and the 3rd largest by Purchasing Power Parity (PPP). On a per capita income basis, India ranked 140th by nominal GDP and 122nd by GDP (PPP) in 2015, according to the IMF. India is the 19th largest exporter and the 13th largest importer in the world.



An economy consists of the production, trade of distribution and consumption of limited goods and services by different agents in a given geographical location. The economic agents can be individual, businesses, organisations or governments.


Types of Economy

Following are the types of economy


Capitalist Economy

In this type of economy, the central problems of economy is that there is no interference by the government and price mechanism operate through the forces of demand and supply. In the United States of America, the role of the government is minimal and thus, it is the best example of market economy.


Socialist Economy

All important decisions regarding production, exchange and consumption of goods and services are made by the government. The closest example of a centrally planned economy is the Soviet Union in the 20th century.


Mixed Economy

This type of economy consists of a combination of public sector and private sector units. A mixed economic system is an economic system that features characteristics of both capitalism and socialism. It basically incorporates governmental involvement in market based economy.


Some other types of economy are

(i) Welfare Economy It analyses the total good or welfare i.e. achieves at a current state as well as how it is distributed. Amartya Sen received the Nobel Prize in economic science in 1998 for his work in welfare economics.

(ii) Green Economy Green economy is an economy or economic development model based on sustainable development and a knowledge of ecological economics.


Sectors of Economy

Traditionally, economies are divided into three sectors


Primary Sector

This sector is involved in the extraction or harvesting of products from the Earth. It includes the production of raw materials and basic foods. Some of the activities included in this sector are as follows

  • Agriculture
  • Mining (metals, minerals and ores mining)
  • Forestry
  • Fishing, etc.


Secondary Sector

The secondary sector of the economy is involved in the production of finished goods. All manufacturing processing and construction activities lie in this sector.

Some of the activities included in this sector are as follow

  • Manufacturing e.g. building
  • Production e.g. cloth and bread
  • Electricity, gas and water etc., related works.


Tertiary Sector

The tertiary sector of the economy is also called the service sector. Some of the activities, which are part of this sector are as follows

  • Retail
  • Banking
  • Tourism
  • Transport and communication
  • Entertainment
  • Trade, etc.


Core Sector

The core sector consists of eight core industries in the economy having a weightage of 37.90% in the Index of Industrial Production (IIP). These eight sectors are coal, crude oil, natural gas, petroleum refinery products, fertilizers, steel, cement and electricity.


Countries Classification by Income Level

The World Development Report by World Bank as of July, 2016 classified the different countries on the basis of their per capita income. Categories are


GNI Per Capita (US $)

Low Income Countries

US $1025 and less

Lower Middle Income Countries

US $1026-US$ 4035

Upper Middle Income Countries

US $ 4035-US$ 12475

High-income Countries.

US $ 12476 and above


Least Developed Countries (LDCs)

These are countries, which exhibit the lowest levels of socio-economic indicators. According to United Nations, to be classified as an LDC, a country should meet the following criteria

(i) Low Income Last 3 yr, average GDP per capita should be less than US $ 999, which should exceed US $ 1190 to leave the list.

(ii) Human Resource Weakness It is based on indicators of nutrition, health, education and adult literacy.

(iii) Economic Vulnerability It is based on instability of agricultural production, instability of exports of goods and services and percentage of population displaced by natural disasters.


Economic Growth

Economic growth is conventionally measured as a percentage increase in GDP or GNP or per capita NDP during 1 yr. Per capita NDP is the most appropriate measure of economic growth.


Economic Development

Economic development is the development of economic wealth of countries, regions or communities for the well-being of their inhabitants. In general, economic development is usually the focus of federal, state, and local governments to improve our standard of living through the creation of jobs, the support of innovation and new ideas, the creation of higher wealth, and the creation of an overall better quality of life.


Measurement of Economic Development

Various models to measure economic development and comparative situation of different countries are

  • Purchasing power parity method
  • Human development index
  • Green GNP
  • Net economic welfare
  • Poverty Index
  • Basic necessities
  • Physical quality of life index
  • National prosperity index
  • Gender based development index


National Income

It measures the net value of goods and services produced in a country during a year and it also includes net factor income from abroad, i.e. National Income (N1) measures the productive power of an economy in a given period to turn out goods and services for final consumption. In India, National Income estimates are related with the financial year (1st April to 31st March).


Estimates of National Income in India

  • In 1868, the first attempt was made by Dadabhai Naoroji in his book 'Poverty and UN-British Rule in India'. He estimated the per capita annual income to be `
  • The first scientific attempt to measure national income in India was made by Prof. VKRV Rao in 1931-32. He divided the Indian economy into 13 sectors.
  • In 1949, National Income Committee under the Chairmanship of Prof. PC Mahalanobis was constituted. The other members being Prof. VKRV Rao and Prof. DR Gadgil.
  • National Statistical Commission (NSC) was setup on 1st June, 2005, for promoting' statistical network in the country on the recommendation of C. Rangarajan Commission.


Concepts of National Income

National Income can be measured by GND, GDP, GNI, NNP, NNI and per capita income. GNP and per capita income, are considered as the most standard measure of economic development.

Concepts of national income are as follows


Gross Domestic Product (GDP)

It is the money value of all final goods and services produced in the domestic territory of a country during the given time (a year). In GDP, income generated by foreigners in a country is included but income generated by nationals of a country, outside the country is not included.

GDP = Consumption (C) + Investment (J) + Consumption Expenses (G)


Gross Value Added (GVA)

It is a measure of the value of goods and services produced in an area, industry or sector of an economy. In national accounts, GVA is output minus intermediate consumption, it is a balancing item of the national accounts' production account.


Gross National Product (GNP)

It is a monetary value of all final goods and services produced by the residents of a country in a year.

GNP = GDP + Income generated by nationals of country outside the country (X) – Income generated by foreigners in a country (M).


Net National Product (NNP)

It is the value of GNP after deducting depreciation of plant and machinery.

NNP = GNP - Depreciation


Personal Income (PI)

It is the part of National Income, which is received by the persons including households. Therefore, to calculate personal income, some adjustments are to be made for those incomes, which are included in the national income but not actually received by the persons and there may be some income which is not included in national income but they are actually received by the persons.


Disposable Personal Income (DPI)

The persons will have to pay the personal tax on personal income. Any income remaining out of personal income after the payment of personal tax and some other fines is termed as DPI.

DPI = Personal income - Personal tax (Income tax) + Subsidies


Real National Income (RNI)

It is the actual quantity of goods and services produced. Standard of living depends very much on the qualities of goods and services produced.

NNP = GNP - Consumption of capital stock


Market Price and Factor Cost

(i) Market Price: It refers to the actual transacted price and it includes indirect, direct taxes such as excise duty, VAT, Service Tax, Custom duty etc., but it excludes government subsidies.

(ii) Factor Cost: It means the total cost of all factors of production consumed or used in producing goods or services. It includes government grants and subsidies but it excludes indirect tax.


Methods of Measuring National Income

National income can be calculated by three methods which are as follows


Production Method

Net value of final goods and services produced in a country during a year is obtained, which is called total final product. It emphasising a calculation of the net contribution at every stage of production/ manufacturing. This is referred to as a value addition concept.


Income Method

In this method, a total of net income earned by working people in different sectors and commercial enterprises is obtained. Incomes of both categories of people- paying taxes and not paying taxes are added to obtain national income. By income method, National Income is obtained by adding receipts as total rent, total wages, total interest and total profit.


Purchasing Power Parity (PPP)

It refers to the adjustment to be made in the value of money in a country so that identical goods cost identical money in a particular currency across all countries. Per capita income should be measured in PPP terms to reflect the actual standard of living in a country.


Consumption Method

It is also called expenditure method. Income is either spent on consumption or saved. Hence, National Income is the addition of total consumption and total savings. In India, a combination of production method and income method is used for estimating National Income.


Organization Engaged in Related to NI

The Indian Organizations related to N1 are as follow


National Sample Survey Organization (NSSO)

It was setup in 1950 as a permanent survey organization to conduct national sample surveys to assist in socio-economic planning and policy-making.

It was recognized in 1970, by bringing together all aspects survey work under a single agency known as NSSO. It under takes the field work of annual survey of industries in the whole country, except Jammu and Kashmir.

Central Statistical Organization (CSO)

For coordination of statistical activities of the different Central Ministries and the State Governments and for promotion of statistical standards, the Central Statistical Organisation (CSO) was created in May, 1951.

CSO prepares national accounts, compiles and publishes industrial statistics and conducts economic census and surveys. It is one of the two wings of the NSO along with NSSO, responsible for coordination of statistical activities in the country and for evolving and maintaining statistical standards.



  • National Statistics Office (NSO) came into being in March, 1947,
  • Green index measures the nation's wealth according to provisions of control on greenhouse gases.
  • National Statistical Commission (NSC) was established on 1st June, 2005 and activities started on July, 2006 in the leadership of Prof. Suresh Tendulkar.


Important Growth Index/Indicators

Following are the indicators to measure the economic development and social –welfare


Human Development Index (HDI)

The United Nations Development Programme (UNDP) introduced the HDI in its first Human Development Report (HDR) prepared under the stewardship of Mahbur -ul-Haq and the Indian economist Amartya Sen in 1990.

It is a standard means of measuring wellbeing. HDI measures the average achievements in a country in three basic dimensions of the human developments, a long and healthy life, access to knowledge and a decent standard of living. HDI tanks countries in relation to each other on a scale of 0 to 1.

The Human Development Index is based on these three indices and that are as follow

(i) Life Expectancy Index (LEI) Because infant morality is not entering this index as a separate indicator, so it refers to life expectancy at birth, not at age one.

(ii) Educational Attainment Index (EAI) It is a combination of adult literacy rate and combined enrolment ratio. The weight assigned to Adult Literacy Rate (ALR) is two-third while that for Combined Enrolment Ratio (CER) is one-third.,

(iii) Standard of Living Index (SLI) It is represented here by a transformation of per capita income. Per capita income is converted into Purchasing Powered Parity (PPP). PPP is always measured in US dollars.


Other three Indexes of Human Development reports.

  • Inequality-adjusted Human Development Index (IHDI) It combines a country's average achievements in health, education income with how those achievements are distributed among country's population. IHDI equals HDI, when there is no inequality across people, but is less than HDI as inequality rises and can be expressed as a percentage.
  • Gender Inequality Index (GII) Gil is built on the same framework as the IHDI. The Gil measures gender inequalities in three important aspects of human development reproductive health, measured by maternal mortality ratio and adolescent birth rates, empowerment and economic status expressed as labour market participation.

It ranges from 0, which indicates that women and men fare equally to 1, which indicates that women fare as poorly as possible in all measured dimensions.

  • Multidimensional Poverty Index (MPI) The MPI was developed in 2010, by Oxford Poverty and Human Development Initiative and the UNDP to determine poverty beyond income based list. The index uses the same three dimensions as the human development index such as health, education and standard of living. These are measured using 10 indicators.


Indicators of MPI




Child mortality, Nutrition


Years of schooling, Children enrolled


Cooking fuel, Toilet, Water, Electricity,


Floor, Assets


Physical Quality of Life Index (PQLI)

These indicators reflected that economically less developed countries are simply underdeveloped versions of industrialized countries, three component indicators of PQLI are as follows

  • Life expectancy
  • Infant mortality rate and
  • Basic literacy


Gross National Happiness (GNH)

It attempts to measure quality of life in a more holistic manner than just an economic indicator like GDP. The four pillars of GNH are promotion of sustainable development, preservation and promotion of cultural values, conservation of natural environments and establishments of good governance.

The term GNH was coined in 1972, by Bhutan's King Jrgme Singye Wangchuck. GNH value is proposed to be an index function of the total average per capita of the following measures

  • Economic Wellness
  • Environmental Wellness
  • Physical Wellness
  • Mental Wellness
  • Workplace Wellness
  • Social Wellness
  • Political Wellness


Global Hunger Index (GHI)

It is a multidimensional statistical tool used to describe the state of country's hunger situation. The index was adopted and further developed by International Food Policy Research Institute (IFPRI) and was first published in 2006. The GHI combines four equally weighted indicators.

(i) The proportion of undernourished as a percentage of the population.

(ii) The proportion of children under the age of 5 suffering from wasting.

(iii) The proportion of children under the age of 5 suffering from stunting.

(iv) The mortality rate of children under the age of 5.


Human Poverty Index (HPI)

The UNDP introduced the Human Poverty Index. It is a combined measure using the dimensions of human life already considered in the HDI: life length, knowledge, a decent living standard. The index is calculated annually by the UNDP for all countries according to the availability of statistical data. It is prepared in two forms, depending on whether it is a developing (HPI-1) or an industrialized economy (HPI-2).


Gender Development Index (GDI)

It was introduced in 1995 in the Human Development Report written by the United Nations Development Pragramme (UNDP).

It highlights inequalities in the areas of long and healthy life, knowledge and a decent standard of living between men and women.


National Prosperity Index (NPI)

The Prosperity Index goes beyond GDP to measure countries' success against a broad set of metrics covering areas such as health, education, opportunity, social capital, personal freedom and more.

Hence, we have evolved what is called a National Prosperity Index (NPI) which is a summation of

  • Annual growth rate of GDP;
  • Improvement in quality of life of the people,
  • particularly those living below the poverty line;
  • The adoption of a value system derived from civilisational heritage in every walk of life is unique to India.


Five Year Plans in India

After independence, India launched a programme of Five Year Plans to make the optimum use of country's available resources and to achieve rapid economic development. In India, development plans were formulated and carried out within the frame work of the mixed economy.


National Development Council

It plays a vital role in the process of Indian planning and development. The National Development Council (NDC) was constituted on 6th Aug, 1952. The National Development Council held its first meeting in November, 1952.


NITI Aayog

NITI Aayog or National Institution for Transforming India Aayog came into existence on 1st Jan, 2015. It is a policy-making think-tank of the government that replaces planning commission and aims to involve states in economic policy-making which will be providing strategic and technical advice to the Central and the State Government.


Basic Structure of NITI Aayog



Prime Minister

Governing  Council           

Its members are Chief Minister and Administrators of the Union Territories

Special Invitees

Experts, Specialists and Practitioners with domain knowledge (nominated by Prime Minister)


Appointed by the Prime Minister

Full time Members

Their number is five.

Part time Members     

Two ex-officio members and university teacher.

Ex-officio Members

Four Central Ministers.


Secretary level officer from centre, who will be appointed for a fixed term.


15 Years Vision Document in Place of Five Year Plan

The first 15 year vision document will come into effect from 2017-18 after the end of the 12th Five Year Plan. It will be formulated with central objective of eradication of poverty. It will come along with a 7 year National Development Agenda which will lay down the programmes, schemes and strategies to achieve a long term vision. The long vision document (Perspective plan) will comprise of three year mass economic framework.


Population Census of India

Sequential census was started by Lord Rippon in the year, 1881. Since then, after every ten years. work of census is undertaken by Government of India. The year 1911-21 is a year of great divide in the demographic history of India when mortality started to decline leading to acceleration in the rate of population (Average Annual Exponential Growth Rate in 1921 was - 0.03%).


Census of India, 2011

Census is useful for formation of development policies, plan and demarcating constituencies of election. The Census of India has been conducted 15 times, as of 2011. Census 2011 was released in New Delhi on 31st March, 2011 by Union Home Secretary GK Pillai and Registrar General and Census Commissioner C Chandrmouli. The Census 2011, was the 15th National census of the country. The census has covered 28 states and 7 union territories, 640 districts, 5767 tehsils, 7933 towns and more than 6 lakh villages. The motto of Census 2011 was "Our census, Our future". Census 2011 took place before the creation of Telangana, thus census provides data for 28 states only. It may be noted that all the states and Union Territories have shown an increase in literacy rate during 2001-2011. India has the second largest population of older (60+) persons in the world.



Census 2011

Total population           



623.7 million (51.54%)


586.46 million (48.46%)

Population of 0-6 age group

16,44,78,150 (13.58%)

Population density  (per sq km)       



73.0% (Male-80.9% and Female- 64.6%)

Decadal Growth Rate       

18,14,55,986 (17.7%)

Population Increase (2001-2011)

181 million

Sex Ratio                 




Employment and Skill Development Schemes

En Startup Standup India

(15th Aug, 2015)

·      "Startup India" is a revolutionary scheme that has been started to help the people who wish to start their own business.

·      Standup India Scheme Facilitates bank loans between ` 10 lakh and ` 1 crore to at least one Scheduled Caste (SC) or Scheduled Tribe (ST) borrower and at least one woman borrower per bank branch for setting up a greenfield enterprise.

Pradhan Mantri Kaushal Vikas Yojana (April, 2015

·      To provide encouragement to youth for development of employable skills by providing monetary rewards.

Pradhan Mantri Mudra Yojana (8th April, 2015)

·      Under the Micro Units Development and Refinance Agency (MUDRA) Bank is a new institution being setup by Government of India for development and refinancing activities relating to micro units.

·      Under the scheme, three categories-Shishu, Kishore and Tarun

Prime Minister's Employment Generation Programme (PMEGP) (2008)

·      To generate employment opportunities in rural as well as in urban areas through setting up of self-employment ventures/projects/micro enterprises.

Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS) (2nd Feb, 2006)

·      The scheme was notified throughout the country with effect from 1st April, 2008. Renamed as MGNREGS from 2nd Oct, 2009. SGRY and Food for Work Programme merged into it.

·      It aims at enhancing livelihood security to households in rural areas of the country by providing at least 100 days (150 days for rain hit areas) guaranteed wage employment in a financial year to every household, whose adult members volunteer to do unskilled manual work. It also mandates 33% participation for women. The primary objective of the scheme is to augment wage employment.

Financial Inclusion Related Schemes

Pradhan Mantri Jan Dhan Yojana (28th Aug, 2014)

·      National Mission for Financial Inclusion aims to ensure access to financial services, namely Banking Savings and Deposit Accounts, Remittance, Credit, Insurance, Pension in an affordable manner.

·      Aim of scheme to tie every Indian in the rural or urban sector to the mainstream banking system.

·      Scheme offers a life cover of ` 30000 and Accidental insurance of ` 200000.

·      100% financial inclusion.

Direct Benefit Transfer (DBT) (1st Jan,2013)

·      Direct Benefit transfer (DBT) is an attempt to change the mechanism of transferring subsidies launched by Government of India.

·      The program aims to transfer subsidies directly to the people through their bank accounts.


Social Security Schemes


Atal Pension Yojana (9th May, 2015)

·      This pension yojana is targeted at the unorganised sector in India.

·      It is available to people between 18 and 40yr of age with bank accounts.

·      The subscribers are required to opt for a monthly pension from ` 1000 to ` 5000.

Pradhan MantriJeevanJyoti Bima Yojana (9th May, 2015)

·      Life insurance of ` 2 lakh with a premium of ` 330 per year.

·      This yojana is available to people between 18 and 50 yr of age with bank account.

Pradhan Mantri Suraksha Bima Yojana (9th May, 2015)

·      It is available to people between 18 and 70 yr of age with bank accounts.

·      It has an annual premium of ` 12 for ` 2 lakh accidental and ` 1 lakh full disability.

pradhan Mantri Ujjwala Yojana (1st May, 2016)

·      Launched to provide free LPG connections to women from below poverty line   families.

Deen Dayal Upadhyaya Antyodaya Yojana (25th Sep, 2014)

·      Scheme for uplift of urban and rural poor through enhancement of livelihood opportunities through skill development and other means


Women and Child Development Schemes

Beti Bachao, Beti Padhao(22nd Jan, 2015)

·         Aims to generate awareness and improve the efficiency of welfare services meant for women.

National Mission for Empowerment of Women (NMEW) (2010)

·         To achieve empowerment of women socially, economically and educationally by securing convergence of schemes.

Rajiv Gandhi Scheme for Empowerment of Adolescent Girls (RGSEAG) ‘Sabia' (19th Nov, 2010)

·         It aims at empowering adolescent girls of 11 to 18 yr by improving their nutritional and health status, upgradation of home skills, life skills and vocational skills.

Indira Gandhi Matritva  Sahyog Yojana (IGMSY) (2010)

·         To improve the health and nutrition status of pregnant, lactating women and infants.

Saakshar Bharat(8th Sep, 2009)

·         National literacy Mission has been recased as 'Saakshar Bharat'. The aim is to cover all adults, in the age group of 15 and above, with its primary focus on women.

Sarva Shiksha Abhiyan(SSA) (2001)

·         All children (6-14) complete 5 yr of primary schooling by 2007; all children complete 8 yr of elementary schooling by 2010; bridge all gender and social category gaps at primary stage by 2007 and at elementary education level by 2010; universal retention by 2010.

Dhan Laxmi (Mar, 2008)

·         Conditional cash transfer scheme for the girl child to encourage families to educate girl children and to prevent child marriage.

Mid-Day Meal Scheme(largest feeding school programme in the world)

·         Improving the nutritional status of children in Classes I-VII in government, local body and government aided schools and EGS and AIE centres with the end objective of enabling the disadvantaged and the poor children to attend school regularly.


Infrastructure and manufacture Development Schemes


Shyama Prasad Mukherjee Rurban Mission (21stFeb,2016)

·      The Mission aims at development of rural growth clusters which have latent potential for growth, in all States and UTs, which would trigger overall development in the region.

Deen Dayal Upadhyaya  Gram Jyoti Yojana (25th July, 2015)

·      The scheme will replace the existing Rajiv Gandhi Grameen Vidyutikaran Yojana.

·      Aim to provide electrification to all village.

Atal Mission for Rejuvenation and Urban Transformation (AMRUT) (25th June, 2015)

·      To enable better living and drive economic growth stressing on the need for people centric urban planning development.

Namami Gange Scheme (13th May, 2015)

·      Aim to clean and protect the Ganga River in a comprehensive manner.

Housing for ALL by 2022 (21st June,2015)

·      More than 2.9 crore homes would be built across all the urban locations in the next 7 yr.

Swachh Bharat Abhiyan (2nd Oct, 2014)

·      It is a national campaign by the government of India, covering 4041 statutory cities and towns, to clean the streets, roads and infrastructure of the country.

HRIDAY-Heritage City Development and Augmentation Yojana (21st Jan,2015)

·      The scheme seeks to preserve and rejuvenate the rich cultural heritage of the country.

Sansad Adarsh Gram Yojana (11th Oct. 2014)

·      It is a rural development programme broadly focusing upon the development in the villages which includes social development, cultural development and spread motivation among the people on social mobilisation of the village community.

Make in India (25thSep,2014)

·      It is an initiative launched by the Government of India to encourage multinational, as well as national companies to manufacture their products in India.

Pradhan Mantri Gramodya Yojana (PMGY) (2000)

·      Focuses on village level development in 5 critical areas, i.e. primary health, primary education, housing, rural roads and drinking water and nutrition with the overall objective of improving the quality of life of people in rural areas.


Agriculture Development Schemes

Pradhan Mantri Fasal Bima Yojana (18th Feb, 2016)

·      It is the new crop damage insurance scheme.

·      It will replace the existing two crop insurance schemes National Agricultural Insurance Scheme (NAIS) and Modified NAIS.

Pradhan Mantri Krishi Sinchai Yojana (2nd July, 2015)

·      The primary objectives of PMKSY are to attract investments in irrigation system at field level, develop and expand cultivable land in the country.

·      The primary objective is to enhance ranch water use in order to minimise wastage of water, enhance crop per drop by implementing water saving technologies and precision irrigation.



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