Economics Notes

By
Aman Srivastava -II

Type of Economics System

A. Capitalism :- It is a market based economy.

Resources are owned by private owners not by the state.
Countries like Australia, Hong Kong, Singapore, Canada are
Capitalist countries.

B. Socialism :- It is an economic system where the state owns the

resources and utilises it for public good.
China is the best example of Socialism country.

C. Communism :- It is an economic system which opposes capitalism

and advocates equal distribution of resources by state.
Theoretically many countries are there who claim that They are
following communism but no country in the present global scenario is
pursuing Communism in real sense .
 D. Mixed Economy :- It is a blend of government planning and market
economy.
:- It comprises both the public and private sector.
:- India, Indonesia, France etc are examples of
mixed economies.
:- France was the 1st country to implement the
concept of mixed economy.
:- “John Mayhard Keyhes” is called the father of
mixed economy.

Sectors in an economy :

A. Organised sector & unorganised sector.

Learn it by example of conventional shops in locality and an MNC

Department Shops like ‘Big Bazaar’ or Reliance.

:- Both have staff / labourers.

:- Both sell more or less the same goods and services.

But a staff in an individual shop in the market is said to be working in an

unorganised sector while a salesman in an MNC shop is said to be working
in an organised sector.

B. Public sector (Owned by state) and Private sector (owned by an

individual or a group of shareholders).

For Ex.: Tata steel is a Private sector.

But SAIL is in the public sector.
Indian Economy :

➪ India is a developing country.

➪ In India mixed economic system is followed.

➪ In terms of GDP, India is 4th largest in the world after USA, China and

Japan.

➪ India is also the 2nd fastest growing major economy in the world after

China.

➪ India is likely to become the 3rd largest economy in the world with a

GDP worth $15 trillion, by 2030.

Sectors in Indian Economy :

A. Primary Sector :- A sector which includes activities of extraction or

production of raw materials
:- Production in this sector is done by exploitation of natural resources.
:- Ex:- Agriculture, fishing, mining, animal husbandry.

States of Agriculture in Indian Economy.

➪ In terms of farm output, India ranks 2nd worldwise.

➪ India is the largest exporter, producer and consumer of spices.

➪ India is the second largest fruit producer in the world.

➪ It ranks third in farm and agriculture outputs.

➪ India is the largest producer of milk, accounting for 18.5% of total world
production.
➪ India is 2nd largest producer of sugar, and accounts for 14% of the

global output. Also it is the 6th largest exporter of sugar.

➪ The most ironical situation is that “Agriculture provide livelihood to about

55-60% of total population but contribute only 17% to GDP.

B. Secondary sector :
➪ In this sector produce of Primary sector is used as raw materials.

➪ All the natural products are changed to manufacture different

commodities.

➪ It is also called the industry sector, because the transformation of or we

can say value additional in raw material is done in industries.

For Ex.: Agriculture product cotton is woven into fabric.
:- Processing of sugarcane juice for sugar production etc.

Role & status of manufacturing sector in India.:

➪ Manufacturing has emerged as one of the high growth sectors.

➪ This sector employs 22% of workforce of country and accounts for 26%

of GDP.

➪ According to estimates, India’s manufacturing sector has potential to

touch $ 1 trillion by 2025. And also to create upto 90 million domestic jobs
by 2025.
➪ This sector has also potential to account for more than 30% of GDP in

near future.
 C. Tertiary Sector :
:- This sector is also known as the service sector.
:- This sector includes services like transport, finance, Public
Administration, Communication, Banking, Software Companies, Call
Centres etc.
:- This sector doesn’t produce goods but aid for the production
process.
:- Like the secondary sector. It is also a value addition providing
sector.

Role and status of tertiary sector in India.

➪ This sector contributes about 64-66% of India’s GDP, and grows

annually at the rate of 8-10%.

➪ This sector attracts FDI inflows and is an important net foreign exchange

earner. Also It provides large scale employment and promotes exports.

➪ India is the eighth largest exporter of services in the world.

Salient Feature of Indian Economy

➪ Low per capita income.

➪ Disparities in Income distribution.

➪ Heavy population pressure on Agriculture.

➪ Chronic unemployment and Under-Employment :

➪Under-utilisation of natural resources.

➪ Lack of Infrastructure:

➪ Poor quality of human Capital:

Concept of National Income

➪ Gross Domestic Product (GDP)

:- It is the value of all goods and services produced within the country,
not including the earnings of Indians who are earning their livelihood in
foreign.

➪ Gross National Product (GNP)

:- It is defined as the total market value of all final goods and services
produced by the nationals of a country, both inside and outside the
country’s territory in a year or a specified time.

:- To assess changes in total output, GNP is adjusted for price

change by comparing it with the base year. For e.g. The base has been
changed to 2011-12 from 2004-05

:- In the phrase “Final goods and services,” “Final” implies that value
has to be counted only once and not twice.
For ex.: Wheat → Flour → Biscuit
 ↓
Value of this state will be considered.
:- GNP = Income by nationals inside (GDP) + Income by nationals
outside - Income earned by foreign nationals inside.
:- In calculation of GNP non-production financial transactions like
Pension, unemployment assistance, scholarship etc. are excluded.
Also the transactions related to existing shares or second-hand shares are
not included.

➪ Net National Product (NNP) or National Income at Market Price.

:- NNP = GNP - Depreciation

:- Here Depreciation → wear & tear cost at production state.

➪ National Income

:- National Income is the sum total of the value of all the final goods
and services produced in an accounting year.

It is also defined as NNP at factor cost.

Let us take an example to understand “Factor Cost”.

:- Let Sugar be sold for Rs.20 per kg in the market.

Before coming to market Sugar was charged Rs.1 as excise and Rs.1
as sales tax per kg. So, the production cost for sugar was only Rs.18.
This is called factor cost.
Further, the government provides a subsidy of Rs.3 per kg for sugar. It
means customers pay only Rs.17 but factors of production will receive
Rs.20.

So Price (Factor Cost) = Price - tax + subsidy.

Similarly,
NI = NNP (Factor cost)
= NNP (Market Cost) - Taxes + Subsidies.

➪ Per Capita Income :- It is calculated by dividing national income by

population.

➪ Personal Income :- It is income of all individuals of a country collectively.

:- There is a minor difference between PI & NI.

PI ➪ Sum of all incomes actually received by an individual or household,

that varies sector by sector.

NI ➪ It is aggregate of value of all final goods and services produced in a

country.

➪ Disposable Income

= Personal Income - Taxes

i.e. money in hand to spend.

➪ Measurement of National Income

There are three methods to calculate National Income:

1. Income Method
2. Product/ Value Added Method
3. Expenditure Method

INCOME METHOD

In this National Income is measured as flow of income.

We can calculate NI as:
NET NATIONAL INCOME = Compensation of Employees Operating
surplus mixed (w +R +P +I) + Net income + Net factor income from abroad.
Where,
W = Wages and salaries
R = Rental Income
P = Profit
I = Mixed Income

Product/ Value Added Method

In this, National Income is measured as the flow of goods and services.

We can calculate NI as:
NATIONAL INCOME = G.N.P – COST OF CAPITAL – DEPRECIATION –
INDIRECT TAXES

Expenditure Method

In this National Income is measured as flow of expenditure.

We can calculate NI through Expenditure method as:
Y = C + I + G + (X-M),
where Y = GDP at Market Price,
C = Private Sector’s Expenditure on final consumer goods,
G = Govt’s expenditure on final consumer goods,
I = Investment or Capital Formation,
X = Exports,
I = Imports,
X-M = Net Exports
National Income=National Product=National Expenditure.

Economic planning of India

Joseph Stalin, president of the then USSR, implemented the first Five-Year Plan in the
late 1920s. India too followed the Socialist path.

➪ Historical Background [Time-Line]

➠ 1938 :- The Indian National Congress set up “National Planning

Committee” under the chairmanship of Jawaharlal Nehru. However its

recommendation was not implemented due to the beginning of 2nd world

war.

➠ 1944 :- Eight leading industrialist of Bombay presented “Bombay

plan”.

➠ 1944 :- Shriman Narayan Agarwal gave “Gandhian Plan”.

➠ 1945 :-MN Roy gave the “People’s plan”.

➠ 1950 :- JP Narayan gave the Sarvodaya Plan”.

➠ 15th March 1950 :- The Planning Commission was established

with PM Jawaharlal Nehru as Chairman

➠ 1st Jan, 2014 :- PM Narendra Modi replaced Planning commission

with NITI Aayog.

➠ National Development Council:

➪ It is an extra-constitutional body responsible for building co-operation

between planning commission and states of India.

➠ All plans proposed by the Planning commission have to be

approved by it.

➠ It was established on 6th August, 1952.

➠ Prime Minister of India is ex-officio chairman of NDC.

➠ Since the inception of NITI Aayog. NDC has had no work

assignment but it is not published till now.

➠ Five Year Plans :

First Plan (1951-56)

➠ It was based on Harrod-Domar Model.

➠ Focuses on price stability, agriculture, power and transport.

➠ The plan became a success because of good harvest in 1955 and 1956.

Second Plan (1956-61)

➠ It is also called Mahalanobis Plan, named after the well-known

statistician Prasanta Chandra Mahalanobis.

➠ Advocated huge imports through foreign loans and focused on rapid

industrialisation.

➠ The basic emphasis was shifted from agriculture to industry.

Third Plan (1961-66)

➠It mainly focused on the improvement in the production of wheat, and

agriculture; but the brief Sino Indian war of 1962 exposed defence

weaknesses and shifted the focus towards the Indian army and the defence

industry.

➠The plan failed miserably in reaching targets due to unforeseen events,

such as Chinese aggression(1962), Indo-Pak war (1965), severe drought

(1965-66).

Three Annual Plans (1966-69)

➠The emphasis on agriculture during the Annual Plans was due to serious

food shortages and the prevailing crisis in agriculture.

➠The shocks generated in the Third plan were absorbed during the Annual

Plans.

Fourth Plan (1969-74)

➠In order to enable other sectors to move forth, the main emphasis was on

the growth rate of agriculture.

➠An important issue was the influx of Bangladeshi refugees before and

after the 1971 Indo-Pak war.

Fifth Plan (1974-79)
➠Two main objectives of the plan were removal of poverty (garibi hatao)

and attainment of self-reliance.

➠ The plan was terminated in 1978, When the Janata Party government

rose to power, the plan was terminated in 1978 instead of 1979.

Rolling Plan (1978-80)

➠A plan by the Janata government was put forth for 1978-1983, but the

government lasted for two years only. In 1980, when Congress returned to

power, it launched a different plan.

Sixth Plan (1980-85)

➠ Emphasis was laid on increasing national income, ensuring continuous

decrease in poverty and unemployment, and population control through

family planning, technological advancement and modernisation, etc.

Seventh Plan (1985-90)

➠ It focused on increasing employment opportunities, productivity within

the framework of basic tenets of planning, and increase in the production of

food grains.

➠As against the targeted five per cent, the economy witnessed a growth

rate of six per cent. The Plan was a success.

Eighth Plan (1992-97)
➠The Eighth Plan was postponed by two years. Due to political uncertainty

at the centre.

➠To undertake an average growth of 5.6 percent annually and to combat

the bad economic situation, the plan undertook drastic policy measures.

Ninth Plan (1997-2002)

➠ Four essential dimensions of the plan were self-reliance, quality of life,

generation of productive employment, and regional balance.

Tenth Plan (2002-2007)

➠ Primarily focused on achieving GDP growth rate of 8 per cent and to

reduce the poverty ratio by 5 per cent by 2007. and universal access to
primary education by 2007.

➠It also aimed at increasing literacy rate to 72 percent within the plan, and

to increase it to 80 per cent by 2012;

➠ Other objectives of the plan included increasing the forest and tree cover

to 25 per cent by 2007 and 33 per cent by 2012

Eleventh Plan (2007-2012)

➠ The Plan laid emphasis on increasing GDP growth from 8 per cent to 10

per cent, and increasing agricultural GDP growth rate to 4 per cent per

year.
➠ The objective of the Plan was reducing educated unemployment to less

than 5 per cent, and to create 70 million new work opportunities.

➠ It also aimed at lowering gender gap in literacy to 10 percentage point

➠ The Plan also aimed at attaining WHO standards of air quality in all

major cities by 2011-2012, and provision of clean drinking water for all by

2009.

Twelfth Plan (2012-2017)

The Twelfth Five Year Plan (2012-17), as per the draft document released
by the Planning Commission, aims at a growth rate of 8 per cent,

Its focuses on growth- growth which is

• Faster
• Inclusive
• Sustainable

Economic Growth
• Real GDP growth at 8 percent
• Agriculture growth at 4 percent
• Manufacturing growth at 10 per cent

Poverty and Employment

Reduction of poverty rate by 10 per cent, in comparison with the rate at the
end of the Eleventh Plan.

Education
• Increase in the mean years of schooling to 7 years.
Health
• Increase the child sex ratio to 950.
• Reduce Total Fertility Rate to 2.1

Infrastructure
• Investment in infrastructure at 9 percent of GDP.
• Increasing the gross irrigated area to 103 million hectares from 90 million
hectares.
• Connect villages with All Weather Roads.
• Complete Eastern and Western Dedicated Freight Corridors.

Environment and Sustainability

• Increasing green cover by 1 million hectares every year.

Service Delivery
• Providing banking services to 90 per cent of the Indian households.
Subsidies and welfare-related payment to be routed through aadhaar-
based Direct Cash Transfer Scheme.

NITI Aayog
❖ National Institution for Transforming India (NITI) Aayog
❖ NITI Aayog was established on 1st January 2015, which was a
replacement of the Planning Commission.
❖ It serves as an advisory body or a “Think Tank” of the government of
India to advise on social and economic issues.
❖ Composition : The full-time organizational framework is :
➢ Prime Minister of India as the Chairperson (At present : PM
Narendra Modi)
➢ Vice-Chairperson to be appointed by the Prime Minister ( At
Present : Rajiv Kumar)
➢ Full-time members
➢ Maximum of 2 part-time members from leading universities
research organizations
 ➢ Maximum of 4 members of the Union Council of Ministers
nominated by the Prime Minister
➢ Chief Executive Officer to be appointed by the Prime Minister,
who is of the rank of Secretary to the Government of India.
➢ It also has Governing Council comprising the Chief Ministers of
all the States and Lt. Governors of Union Territories

Banking Sector in India.

➠ History :

➪ 1770 :- Bank of Hindustan was established.

➪ 1786 : “General Bank of India” was established.

➪ 1809 : Bank of Bengal by East India Company.

➪ 1840 : Bank of Bombay by East India Company.

➪ 1843 : Bank of Madras by East India Company.

: These three banks were known as the Presidency Bank.

➪ 1865 : Allahabad bank was established.

: Oldest existing Public Sector Bank.
➪ 1894 : Punjab National Bank was established.
: It was the first Indian bank to have been started solely with
Indian capital investments.

➪ 1906-1913 :- Canara Bank / Bank of India / Central Bank / Bank of

Baroda / Indian Bank were established.

➪ 1921 :- Three Presidency Banks were merged to form “Imperial

Bank of India” which was run by European shareholders.

 ➪ 1935 : RBI was established.

➪ 1955 : Imperial Bank was converted as state Bank of India (SBI)

➠ Classification of Banks

1. Scheduled Commercial Banks

:- Banks which have been incorporated in the 2nd schedule of RBI

Act 1934.
:- These banks classified into
<A> Private Banks
Eg.- ICICI Bank, Axis Bank, Kotak Mahindra Bank etc.

<B> Public Banks (PSBs)

Eg.: SBI, PNB, etc.

<C> Foreign Bank Eg.: HSBC, Citi Bank, Deutsche Bank, Bank
Bahrain & Kuwait .

<D> Regional Rural Bank

:- Indian Government set up RRB on 2nd October 1975.
:- These banks grant credit to the weaker section of rural areas
mainly small and marginal farmers, small entrepreneurs,
agriculture labourers.

:- These banks are sponsored by the central government, state

governments and a sponsor central bank collectively.

Central government holds 50% share

State governments holds 15% share
Sponsor Bank holds 35% share
 2. Non - Scheduled Commercial Bank / Cooperative Banks
:- It includes
[A] Urban cooperative bank
[B] Rural Cooperative Bank.

➠ What is Cooperative societies?

:- It is an autonomous association of people bound together to fulfill

common social, cultural and economical needs.
:- It is said that the system of cooperation is as old as human society.
:- These groups are sub-divided into two sub-groups.

[a] Agricultural societies.

:- Mostly found in rural areas.
[b] Non-Agricultural societies
:- Mostly found in urban Areas
:- Societies based on cottage industry are also found in rural
areas.

:- In order to support these societies, Indian government announced a

policy in 2002. The major objective of this policy were
<A> Provision of financial and infrastructural support
<B> Reduction in regional imbalance
<C> Strengthening of training human resource development and
cooperation education.

Nationalisation of Banks

In Order to get rid of the problem of non-availability of credit for poor rural
sections from the organised sector, the banks were nationalised under the
Banking Regulation Act, 1949.
Also the Reserve Bank of India was nationalised in 1949.
After the formation of the State Bank of India in 1955, several banks were
nationalized in the time period 1969-1991.
14 Banks nationalised in 1969:
 1. Allahabad Bank
2. Bank of India
3. Bank of Baroda
4. Bank of Maharashtra
5. Central Bank of India
6. Canara Bank
7. Dena Bank
8. Indian Overseas Bank
9. Indian Bank
10. Punjab National Bank
11. Syndicate Bank
12. Union Bank of India
13. United Bank
14. UCO Bank
In 1980, another 6 banks were nationalised
1. Andhra Bank
2. Corporation Bank
3. New Bank of India
4. Oriental Bank of Comm.
5. Punjab & Sind Bank
6. Vijaya Bank
⇒ A point to be noted in respect of SBI
In 1955, the Government of India and Reserve Bank of India jointly
established the State Bank Of India i.e. they both have joint ownership of
SBI.
In 2007, Reserve Bank’s share of SBI was transferred to the
government of India.
SBI is governed by a board of directors headed by a chairman. The
chairman and managing directors of the bank are appointed by the
government.
It is evident that the SBI works under the Government of India, but it
is also a fact that SBI is not called a nationalised bank.
➠Merger of Banks

The merger is the process by which two or more Public Sector Banks
(PSBs) are merged together.
Basically one or more financially weak PSBs are brought under a
financially strong bank in order to get rid of difficulties faced by the weaker
ones.

In the month of August 2019, the Finance Minister of India MS. Nirmala
Sitharaman has announced to merge 10 Public Sector Banks into four
entities. The basic logic behind this merger is to increase the global
competitiveness of the Indian banks. Now the total Public Sector Banks
have been reduced to 12 from 27 in 2017 in India.

➠Green Banking

Green Banking means promoting environmentally friendly practices and

reducing your carbon footprint from your banking activities. This comes in
many forms
1)Using online banking instead of branch banking
2)Paying bills online instead of mailing them.
3)Opening up accounts at online banks, instead of large multi-branch
banks.
4Give lending priority to environment friendly investments and industries.
➠Ombudsman

❖ This concept came from Sweden.

❖ It means an officer appointed by the Legislature to handle complaints
against a service or administrative authority.
❖ In India, the Government appoints an Ombudsman to resolve
grievances in the following sectors.
➢ Insurance Ombudsman
➢ Banking Ombudsman
➢ Income Tax Ombudsman

RBI :-
● The Reserve Bank of India is the apex bank of India which regulates
and controls all the monetary policies of India. Hence, it is called the
“Monetary Authority of India''.
● RBI was established in April, 1935.
● The affairs of RBI are governed by a central board of directors, which
are fourteen in number, including the governor and four deputy
governors.

● Functions of RBI
1. Monetary Management Authority
2. Regulation and Supervision of the Banking and Non-Banking
Financial Institutions.
3. Regulation of Foreign Exchange Market, Government
Securities Market and Money Market.
4. Management of Foreign Exchange Reserves.
5. Current Account and Capital Account Management.
6. Banker to Central and State governments
7. Debt Manager of Central and State Governments
8. Banker to Banks
9. Issuer of Currency
10. Oversight of Payment and Settlement Systems
 11. Developments Role
12. Policy Research and Data Dissemination

● The Security Printing and Minting Corporation of India Limited

(SPMCIL)
Printing Press :- Nasik (Maharashtra)
:- Dewas (Madhya Pradesh)
Mint :- Noida
:- Mumbai
:- Kolkata
:- Hyderabad

Monetary Policy
Monetary policy refers to the credit/money control measures adopted by
the central bank of a country.
In the case of Indian economy, the RBI is the sole monetary authority which
decides the supply of money in the economy.

The instruments of monetary policy are of two types:

1. Quantitative, general or indirect (CRR, SLR, Open Market Operations,

Bank Rate, Repo Rate, Reverse Repo Rate)
2. Qualitative, selective or direct (change in the margin money, direct
action, moral suasion)
Let’s have discuss of these instruments :
❖ Open Market Operations:
➢ An open market operation is an instrument which involves
buying/selling of securities like government bonds from or to the
public and banks.
➢ The RBI sells government securities to control the flow of credit
and buys government securities to increase credit flow.
❖ Cash Reserve Ratio (CRR):
 ➢ Cash Reserve Ratio is a specified amount of bank deposits
which banks are required to keep with the RBI in the form of
reserves or balances.
➢ The higher the CRR with the RBI, the lower will be the liquidity
in the system and vice versa.
❖ Statutory Liquidity Ratio (SLR):
➢ All financial institutions have to maintain a certain quantity of
liquid assets with themselves at any point in time of their total
time and demand liabilities. This is known as the Statutory
Liquidity Ratio.
➢ The assets are kept in non-cash forms such as precious
metals, bonds, etc.
❖ Bank Rate Policy:
➢ Also known as the discount rate, bank rates are interest
charged by the RBI for providing funds and loans to the banking
system.
➢ An increase in bank rate increases the cost of borrowing by
commercial banks which results in the reduction in credit
volume to the banks and hence the supply of money declines.
➢ An increase in the bank rate is the symbol of the tightening of
the RBI monetary policy.
❖ Credit Ceiling:
➢ With this instrument, RBI issues prior information or direction
that loans to the commercial bank will be given up to a certain
limit.
➢ In this case, a commercial bank will be tight in advancing loans
to the public.
➢ They will allocate loans to limited sectors.
➢ A few examples of credit ceiling are agriculture sector
advances and priority sector lending.
❖ Change in Margin Money:
➢ The result is that the borrowers are given less money in loans
against specified securities.
 ➢ For instance, raising the margin requirement to 70% means
that the pledger of securities of the value of Rs 10,000 will be
given 30% of their value, i.e. Rs 3,000 as loan.
➢ In case of recession in a particular sector, the central bank
encourages borrowing by lowering margin requirements.
➢ This is somehow the same as Credit Ceiling.
❖ Moral Suasion: Under this method RBI urges commercial banks to
help in controlling the supply of money in the economy.

Objective of Monetary Policy

❖ The main objective of monetary policy is to maintain price stability

while keeping in mind the objective of growth as price stability is a
necessary precondition for sustainable economic growth.
❖ In India, the RBI plays an important role in controlling inflation through
the consultation process regarding inflation targeting.
❖ The current inflation-targeting framework in India is flexible.
❖ The Government of India, in consultation with RBI, notified the
‘Inflation Target’ in the Gazette of India dated 5 August 2016 for the
period beginning from the date of publication of the notification and
ending on March 31, 2021, as 4%.

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