ECONOMIC ENVIRONMENT

MODULE - 3

INDIAN ECONOMY

ECONOMICS OF DEVELOPMENT

We need to realize that economic prosperity for a

nation is not about Economics alone. A nation cannot be run like a department store with the only motive of profit maximization. Economic prosperity encompasses social development which is crucial to the soul of nation
Arindam Chaudhari

ECONOMICS OF DEVELOPMENT

An economy or economic system refers in which the various economic activities relating to production, distribution, exchange and consumption of goods and services are organized in a country and the way in which the people of a country earn their living.
It comprises the factories, firms, mines, shops, banks, schools, offices, transport systems, theatres, hospitals, public administration, defense etc., which help in the production and distribution of goods and services in the country.
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DIFFERENCE BETWEEN ECONOMIC GROWTH & DEVELOPMENT

Economic growth- refers to increases over time in a countrys real output of goods and service or more appropriately product per capita.
The term Eco.development refers to the progressive changes in the socio-economic structure of a country. It involves a steady decline in agriculture share in GDP & a corresponding increase in the share of industries, banking, trade, construction, services. This change in economic structure is invariably accompanies by a shift in the occupational structure of the labor force.

DIFFERENCE BETWEEN ECONOMIC GROWTH & DEVELOPMENT

Economic growth- merely refers to raise in output.

While Eco.development implies changes in technological & institutional organization of production as well as in distributive pattern in income

CHARACTERISTICS OF INDIAN ECONOMY

An economy of a country consists of three sectors:

1. Primary sector includes agriculture, mining, fishing etc., and it is generally called agricultural sector. 2. The Secondary sector includes all kinds of industries both large as well as small and it is generally called industrial sector. 3. Tertiary sector includes services like transport, banking, insurance Public administration, defense etc., and it is called as service sector. Indian economy is presently characterized as an under developed & developing economy.
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CHARACTERISTICS OF INDIAN ECONOMY Important features of Indian Economy are: Rapid growth of population: Over the 50 years, rate of population Growth was over 2.0 percent per annum This demographic situation is major constraint on the growth of business. Predominance of Agriculture: About 64.9% of the working population depend on agriculture for their livelihood. It is still primitive and is gamble in the monsoons and it is still underdeveloped. Though we have adopted planning for about five Decades we have not achieved much in agriculture.

 Poor quality of Indian working population: compared to advanced

countries the poor quality of Indian labor is due to the reason that the laborers of India are poor and under fed.

CHARACTERISTICS OF INDIAN ECONOMY

Low level of technology: technical backwardness in all the fields of

production, techniques of production are mostly old and obsolete. Also lack of quality education and technical training to absorb modern technology.

Inadequate Transport and Communication systems: Even today

many of our rural areas are not provided with well developed roadways and power facilities.
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CHARACTERISTICS OF INDIAN ECONOMY

Existence of Dualistic or Dual sector: In India both ancient and
modern sectors exist side by side. We find ancient wooden ploughs as well as the modern tractors. Similarly in industries old and obsolete machines and modern sophisticated machines.

Under utilization of resources: though India is rich in natural

resources like land, minerals, forests, wild life, power, fisheries etc., but they are not properly utilized due to shortage of capital, low level of technology and technological skill.

MAJOR ISSUES OF DEVELOPMENT

India is an underdeveloped though a developing economy. Bulk of the population lives in conditions of misery.
Poverty is not only acute but also chronic. At the same time , there exist un utilised natural resources. The co-existence of the vicious circle of poverty with the vicious circle of affluence perpetuates misery and foils all attempts at removal of poverty. It is in this context that an understanding of the major issues of development should be made.
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MAJOR ISSUES OF DEVELOPMENT

The following are the major development issues in India.

1. 2. Low percapita income High proportion of people below the poverty line.

3.
4. 5.

Low level of productive efficiency due to inadequate nutrition and malnutrition.

Imbalance between population size, resources and capital. Problem of unemployment

6.

Instability of output of agriculture and related sectors.

7. Imbalance in distribution and growing inequalities.

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MAJOR ISSUES OF DEVELOPMENT

The following are the major development issues in India.

Low percapita Income: The annual income per head of the population in India is very low: after independence government wanted to give a big push to the standstill economy. With the efforts of the government some development has indeed taken place during the five decades of planning. But India still remains one of the most underdeveloped countries in terms of per capita income. Low standard of living: Due to low percapita income the standard of living is very low. 39% of the total population of the country live below poverty line and there is mass chronic poverty.
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MAJOR ISSUES OF DEVELOPMENT

The following are the major development issues in India.

High proportion of people below the poverty line & Low level of productive efficiency due to inadequate nutrition and malnutrition. : Defining poverty line on the basis of norms of nutritional requirements, i.e. 2,400 calories PPP- rural areas 2,100 calories PPP- urban areas. The percentage of population below the poverty line is quite high. Alarming situation from the point of view of the business even after 60 years of independence . More than 40 percent of Indias population neither has any capacity to contribute to capital accumulation nor to create any demand for industrial goods..
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MAJOR ISSUES OF DEVELOPMENT

Imbalance between population size, resources and capital. Rate of population Growth was over 2.1 percent per annum. the requirement of feeding additional numbers compels the use of resources in low return agriculture rather than higher return manufacturing This demographic situation is major constraint in accumulating capital on the growth of business.

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DETERMINANTS OF ECONOMIC DEVELOPMENT

Growth of population :Economic development and population are inter-connected. History has shown that birth rate only falls significantly when the standard of living rises significantly for the majority of people. Building Human capital: by focusing on education and health thereby increasing the productivity of the economy. Harmonization of the objective of expanding production with that of securing full employment is a logical necessity in India.

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MAJOR ISSUES OF ECONOMIC DEVELOPMENT

Predominance of Agriculture: About 64.9% of the working population depend on agriculture for their livelihood. It is still Primitive and is gamble in the monsoons still underdeveloped. Though we have adopted planning for about five decades we have not achieved much in agriculture. Problem of unemployment: Widespread unemployment is probably the most striking symptom of inadequate development in India. Employment situation did not improve in the period of liberalization. Economic growth was jobless. A large no. of workers lost jobs as a consequence of downsizing of industrial unit.

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MAJOR ISSUES OF ECONOMIC DEVELOPMENT

Inequalities of Income and wealth: Various studies and surveys have clearly indicated that even the small gains of development over the years have not been equitably distributed.

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DETERMINANTS OF ECONOMIC DEVELOPMENT

Economic development implies the process of securing levels of productivity in all sectors of economy.
Capital Formation Capital output Ration Curb the Growth of population Create Human capital

Capital formation to the full extent by domestic savings is of crucial importance in the process of economic Development. It is quite necessary to step up the rate of capital formation that the community accumulates a large stock of machine tools and equipment which can be geared into production. Technological framework implicit high rate of capital formation.

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DETERMINANTS OF ECONOMIC DEVELOPMENT

Capital output Ratio: refers to the number of units of capital that are required in order to produce one unit of output .
In certain sectors of the economy out put can be increased with comparatively small additions to capital. For instance, in Japan between 1885 and 1915 labour productivity in agriculture was doubled by a comparatively small quantum of investment in the form of better seeds, improvement in water supply, control of crop diseases and the use of fertilizers.

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INDIA AS A DEVELOPING ECONOMY

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INDIA AS A DEVELOPING ECONOMY Strategy and planning in India In 1951 economic planning was adopted as an instrument of development. Over the past 6 decades the country has completed 10th five year plans. National income has increased & also considerable improvement has taken in the various sectors.

An Approach to the 11th Five Year Plan (2007-2012) towards developing economy
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INDIA AS A DEVELOPING ECONOMY

SECTOR WISE ANALYSIS PRIMARY SECTOR SECONDARY SECTOR TERTIARY SECTOR

India started marching towards economic progress India as a developing country . During past 60 years, the country has made Progress in Agriculture, Industry, science & technology, health & education and various other fields.

1850-1950 Indian economy was stagnant for 100 years, but now the economy is progressing also with the recent LPG of Indian economy.
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CONTRIBUTION OF AGRICULTURE TO INDIAN ECONOMY

Agricultural sector - reached the stage of development and maturity. Share of agriculture in NI taken as an indicator of economic development. Continuous increase in agricultural production and productivity in India.. Total production of food grains has increased 1950 -51 50.8 million tones During seventh plan 187 million tones Eighth plan 209.8 million tonnes Considerable improvement in non food grains like oilseeds reached a recorded level of 24.7 million tonnes . During mid 1960s Green revolution due to the adoption of New agricultural strategy. 23

Contribution of secondary sector

The share of industrial sectors to NI has increased steadily. Several Industrial policy resolutions were introduced to develop industrial sector of our country. New Industrial policy of 1991 has enabled the industrial sector to develop to a greater extent 1951-1965 foundation for Industrial development in the country

Basic industries like iron and steel, heavy engineering and machine building industry registered significant increase in their growth.
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CONTRIBUTIONS OF SECONDARY SECTOR

sectors
Primary

1970-71
45.8%

1980-81
39.6% 24.4% 40%

2003-04
24.0% 25% 51.4%
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Secondary 22.3% tertiary 31.9%

Contributions of secondary sector

Annual growth rate of Industrial Production

Year

2003-04

2004-05

2005-06

2006-07

Industry
Mfrg. Services

7.0
7.4 8.5

8.4
9.2 9.6

8.3
9.1 9.8

10.6
11.5 11.2

26 TOTAL GDP AT FACTOR COST

OBJECTIVE OF 11TH PLAN

The 11th Plan provides an opportunity to restructure policies to achieve a new vision based on faster, more broad-based and inclusive growth. It is designed to reduce poverty and focus on bridging the various divides that continue to fragment our society. The 11th Plan must aim at putting the economy on a sustainable growth with a growth rate of approximately 10per cent by the end of the Plan period. It will create productive employment at a faster pace than before, and target robust agriculture growth at 4% per year. It must seek to reduce disparities across
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CURRENT ECONOMIC SCENARIO

It was announced recently that India would be achieving a GDP growth of 9.2% against project figure of 8.5%,all members of ruling party at Delhi complemented each other. this was possible due to a very good performance of manufacturing, IT, pharmaceutical and service sector. 10% planned growth in the next 5 years of 11th five year plan.
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INFLATION
Inflation refers to a situation when there is a general rise in prices and a corresponding fall in value of money.

Inflation occurs when the volume of money in circulation increases faster than the volume of goods and services.
Prof. Coulbourn defines inflation as too much of money chasing too few goods. Modern definition by Crowther Inflation is a state in which the value of money is falling, i.e prices are rising. Inflation is usually associated with rising activity and employment. Inflation - excess purchasing power in the hands of the people. 30

TYPES OF INFLATION
Creeping inflation Price Rise by 2% -PA not controlled in time prove disastrous economic & political stability of the economy
Walking inflation mild & tolerable > 10% PA moderate stable inflation- people expectations remain more or less stable. Running inflation rises rapidly < 10% ranges 10-20%-exceeds Galloping inflation. Causes economic distortions and disturbances in the economy. Hyper inflation: 1000% PA . Low purchasing power, real wages fall and inequalities increases serious distortions overall economic condition.
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CAUSES OF INFLATION
The basic cause of inflation normally occurs, when aggregate demand for output tends to be excessive in relative to the supply of output.
1.CHANGES IN MONEY SUPPLY

2. Change in disposable income CAUSES OF INFLATIONS

3. Changes in business & consumer expenditure

4. Changes in foreign demand

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CAUSES OF INFLATION
1. Changes in money supply: (a) Deficit financing (b) Expansion of credit (c ) Increase in Govt Expenditure on large development project.

2. Disposable income: due to fall in the level of taxation, increase in national income, a fall in the savings ratio, rise in the income corresponding rise in savings.

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CAUSES OF INFLATION
3. Changes in Business and Consumer Expenditure : consumer spends more on goods & services the demand also increase business activity. Higher purchase & installment schemes. 4. Foreign demand: inflation may also be caused due to changes in supply of goods and services, when it does not keep pace with the increased demand for goods and service

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CAUSES OF INFLATION
Inflation may occur due to the following different causes:

Increase in the money circulation Increase in the disposable income Increase in community's aggregarate spending on consumption & investment or in goods. Excessive speculation and the tendency to hoarding & profiteering Increase in population as the widening gap between demand & supply. Drought, famine, earthquake , storm, volcano eruption and other natural calaminities adversely affecting agricultural production and output of other industries. Prolonged industrial unrest industry or industries, nationwide truck strike that would cause stagnation of goods that 35 would not ensure the match in demand and supply)

EFFECTS OF INFLATION
Effect on Production & Employment: motivates Cos to expand its production normally leads to generation of Employment opportunities. Effect on Distribution of national income Effect on producers Effect on wage and salary earners Effect on fixed income groups Effect on debtors (gain)and creditors suffer badly) Effect on farmers-benefit due to increase in prices of crops
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CONTROL ON INFLATION
1. DIRECT MEASURES control on prices and rationing of scarce goods. Ceiling on certain goods and should not allow to it to rise further. 2. FISCAL MEASURES: deployed to check inflationary pressures. An increase in Govts revenue and decrease in its expenditure can successfully check inflationary pressures. in the economy

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CONTROL ON INFLATION
3. MONETARY MEASURES: RBI Open market operations, & Bank rate
policy. . 4. WAGE CONTROL : money wage rate rises faster than the productivity of labor. However wage controls difficult to implement. 5. PRICE CONTROL: fixation of maximum prices at which commodities are to be sold. 6. OTHER MEASURES: diverting funds only towards production of necessary commodities, instead of luxury items. Exports can be increased and imports restrictions can be relaxed. Govt. try to restrict the growth rate of population increase production levels in the economy

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PRICE INDICES
The numerical value that summarizes price level is called price indices. The purpose Of PI helps in explaining the purchasing power or inflation/Deflation from one period to another.
Types of Price Indices: 1. Wholesale price Index (WPI) 2. Consumer Price Index (CPI)

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PRICE INDICES
1. Wholesale price Index (WPI): It is an indication of price movements in all wholesale markets other than the retail market. It is worked out for a whole country or for a very large area. Here the prices are collected from the wholesale dealers.
Consumer Price Index (CPI)-PI with special reference to a class or category for whom it is meant.

2.

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TYPES OF CONSUMER PRICE INDEX

1. 2. 3. Consumer Price Index for Industrial Workers (CPI-IW) Consumer Price Index for Urban Non-manual Employees (CPIUNME) Consumer Price Index for agricultural laborers (CPI-AL)

Relationship between Price Indices & Inflation Inflation is estimated through Price Indices. Earlier it was estimated in terms of wholesale price. However from the point of view of consumers, retail prices are far more relevant and thus today inflation is measures in terms of CPI.
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BUSINESS CYCLE
A business cycle can be defined as wavelike fluctuations of business activity characterized by recurring phases of expansion and contraction in periods varying from three to four years.
Fluctuation rather than stability is the rule in every business record.

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FEATURES OF BUSINESS CYCLE 1. Recurring Fluctuations

2. Period of business cycle is longer than a year.

3. Presence of the alternating forces of expansion and contraction Prosperity & depression. 4. Phenomenon of the crisis: this implies that peak & trough are asymmetrical. Normally, the prosperity phase of business comes to an end abruptly, whereas, recovery after the depression is 43 gradual and slow.

PHASES OF BUSINESS CYCLES

Prosperity upswing, expansion phase.
Recession a turn from prosperity to depression Depression contraction or downswing

Recovery turn from depression to prosperity

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PHASES OF BUSINESS CYCLES

Prosperity phase Income level tends to raise Unemployment rate declines Industrial growth rate accelerates Actual output level exceeds the potential output level Investment increases Investors become more optimistic and more enthusiastic Consumer demand for goods and services in the market tend to increase, even at the rising prices Prices tend to raise and provide greater incentives for business expansion. Interest rates rise Money supply increases There is a risk of over heating of the economy The prosperity phase comes to an end when the forces favouring expansion become progressively weak.
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PHASES OF BUSINESS CYCLES

RECESSIONARY PHASE The prosperity comes to end when the forces favoring expansion become progressively weak. Bottlenecks begin to appear at the peak of prosperity. In fact profit inflation and over optimism which increase the tempo, carry with them the seeds of self destruction. In view of high profits and business optimism, entrepreneurs invest more and expand further. But scarcity of resources, particularly , shortage of raw materials and labor, causes bottlenecks and business calculations go wrong, Over optimism pave the way to over pessimism.

Thus, prosperity digs its own grave.

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PHASES OF BUSINESS CYCLES

DEPRESSIONARY PHASE

Characteristic features of a depression are the reverse of prosperity Shrinkage in the volume of output, trade and transactions Rise in the level of unemployment Price deflation Fall in aggregate income of the community Fall in the structure of interest rates. Contraction of bank credit

Prosperity - economic activity will be at its peak Depression economic activity is at its trough.
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PHASES OF BUSINESS CYCLES

RECOVERY /STAGFLATION PHASE However depression cant be permanent feature of an economy. The revival or recovery phase refers to the lower turning point undergoes change from depression to prosperity.

Improvement in demand for capital goods, new investment will be induced, such investment will cause rise in employment and income. Increased income in turn will lead to rise in consumption pushup demand rise in prices, profits further investment.
Thus during recovery, expansionary process will be self reinforcing. Revival or recovery phase slowly turns into prosperity and the cycle repeats itself.

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INDICATORS OF BUSINESS CYCLE

Gross Domestic Product Fixed Investment Net exports Unemployment rate Real earnings CPI
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TYPES OR TIMINGS OF INDICATORS

There are three timings in which these indicators lead to changes in the business cycle namely:

1.

2.
3.

Leading: are those indicators due to operation of which, changes in Business cycle happens. Change in leading indicators bring immediate change in the business cycle. E.g. The consumer confidence Index, Industrial new order, personnel consumption of Mfg. goods etc., Coincidental : are those indicators wherein the changes in indicators simultaneously bring changes in the business cycle : e.g. GDP Lagging: are those indicators wherein there is a time lag between indicators change and Business cycle change e.g. Unemployment as it increases after trough of the business & bottom after peak of the business cycle.
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