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Unit VIII:
Economic Environment: The Indian economic system, nature of economy, development
strategy; economic policies; fiscal policy and tax system; monetary and credit policy.

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1. The Indian economic system:

India is a vast country with a population of over 1.3 billion people, making it the
second most populated country in the world after China. The Indian economy is the
sixth-largest in the world by nominal GDP and the third-largest by purchasing power
parity. The Indian economic system is a mixed economy that combines features of
capitalism and socialism. The country's economic policies seek to balance the needs
ofpublic welfare and economic growth.

India has a diversified economy with agriculture, industries, and services being the
main sectors contributing to its GDP. Agriculture is the largest sector in terms of
employment, but it accounts for only around 18% of the GDP. The manufacturing
sector contributes around 25% of the GDP and is dominated by the textile, chemical,
and engineering industries. The services sector, which includes IT, financial
services, healthcare, and education, is the fastest-growing sector, accounting for
around 57% of the GDP..

The Indian government has implemented various economic reforms to liberalize and
boost the economy. The liberalization of the 1990s opened up the country to foreign
investment, reduced trade barriers, and privatized many state-owned enterprises.
This led to an influx offoreign investment and an improved business environment.

The Indian government has also implemented several social programs to reduce
poverty and inequality. The National Rural Employment Guarantee Act (NREGA),
launched in 2005, provides a minimum of 100 days of employment to rural
households, and the Mahatma Gandhi National Rural Employment Guarantee
Scheme (MGNREGS) was launched in 2006 to eradicatepoverty and create basic
infrastructure in villages across India..
India faces various challenges in its economic development. Income inequality
remains a significant concern, with a large part of the population still living in poverty.
Another significant challenge is the inadequate infrastructure, including roads,
railways, and ports. Additionally, corruption and bureaucratic red tape hinder the
ease of doing business in the country.

In conclusion, the Indian economic system is a mixed economy that seeks to strike a
balance between public welfare and economic growth. The country's economic
policies have contributed to its rapid economic growth, but various challenges
continue to confront it. However, with its large population and growing middle class,
India remains an attractive destination for foreign investment and a vital player in the
global economy.  

2. Nature of Indian Economy:

The Indian economy is a complex and diverse system that is constantly evolving.
The country is the world’s seventh-largest economy by nominal GDP and the third-
largest by purchasing power parity. Its economy is characterized by a mix of
traditional agriculture and modern industries. The nature of the Indian economy can
be understood by analysing its major features.

1. Agriculture-based economy – Agriculture is the backbone of the Indian economy,

contributing around 18% of its GDP. Indian agriculture includes diversified crops
ranging from food grains to cash crops. The country is known for the production of
rice, wheat, sugarcane, cotton, fruits, and vegetables.

2. Service Sector Dominance – The service sector contributes over 55% of India’s
GDP. It includes various services such as information technology, hospitality,
healthcare, financial services, and real-estate.

3. Diverse Industrial Sectors – India has a mix of traditional and modern industries.
The traditional industries include textiles, handicrafts, and handlooms, while the
modern industries include electronics, pharmaceuticals, automobiles, and machinery.
4. Demographic advantage – India has a young population, with nearly 65% of the
population below 35 years of age. This demographic dividend provides ample human
resources and a huge consumer base.

5. Export-oriented economy – The country is a major exporter of goods and services,

with its major exports being IT services, textiles, gems and jewellery, and
engineering goods. It has a favorable trade policy to encourage exports to other
countries.

6. Regulatory Challenges – India still faces challenges in terms of bureaucratic

hurdles, corruption, and weak infrastructure. Several reforms have been taken to
address these challenges and improve the investment climate.

In conclusion, the Indian economy is a mix of traditional and modern industries with
agriculture as its backbone. Its diverse industrial sectors, service sector dominance,
and demographic dividend have made it a force to reckon with globally. However, the
country needs to address the regulatory challenges and improve its infrastructure to
maintain the growth momentum.

3. Modernization of the Indian economic system:

Since the early 1990s, the Indian economy has been undergoing a process of
liberalization and globalization. The government has implemented a number of
reforms in order to make the economy more open and market-oriented. These
reforms have helped to accelerate economic growth and development in India.

One of the most important reforms was the liberalization of the foreign trade regime.
Prior to this, the Indian economy was highly protected with high tariffs and other
barriers to trade. The liberalization of trade has led to an increase in imports, exports
and investments. This has helped to boost economic growth and create jobs.
Another reform that has been undertaken is the privatization of state-owned
enterprises. A number of public sector companies have been sold off to private
investors. This has helped to improve efficiency and competitiveness in these
industries. .
The government has also implemented labor market reforms. These have made it
easier for businesses to hire and fire workers, which has led to increased
employment opportunities. Overall, these reforms have helped to modernize the
Indian economy and make it more competitive in the global marketplace.

Conclusion

The Indian economic system is a complex and diverse one that has evolved over the
centuries. It has been shaped by various forces such as politics, geography, culture,
and religion. Its complexity is further complicated by an array of regional variants that
reflect the social peculiarities of different parts of India.

Despite these challenges, the Indian economy continues to be among the fastest
growing in the world and has made strides towards becoming a global player in
terms of its impact on world economics. Ultimately, it remains to be seen how this
dynamic economic system will continue to evolve in response to changing external
influences and domestic developments.

4. The development strategy of the Indian economy

The development strategy of the Indian economy has gone through various phases
since the country gained independence in 1947. Initially, the Indian government
adopted a mixed economy approach, which included socialist policies such as
nationalizations, import substitution, and public sector planning. However, in the
1990s, the government began to implement economic liberalization and globalization
policies to open up the economy to international trade and investment.

The first phase of India's development strategy focused on building a strong

industrial base through the establishment of a public sector, import substitution
policies, and the Green Revolution in agriculture. This strategy aimed to create a
self-sufficient economy that could generate employment and reduce dependence on
foreign aid. The second phase involved economic liberalization policies, which led to
increased foreign direct investment, privatization of public sector enterprises, and a
shift towards a market-oriented economy.

The current development strategy of the Indian economy focuses on inclusive growth
and sustainable development. The government aims to increase economic growth
while reducing poverty and inequality. The strategy includes policies to increase
infrastructure development, enhance agricultural productivity, promote small and
medium enterprises, and develop human resources.

To achieve its development goals, the Indian government has implemented a

number of initiatives such as Make in India, Digital India, Skill India, and Start-up
India. These initiatives aim to promote entrepreneurship, innovation, and the
development of a skilled workforce.

Moreover, the Indian government has focused on enhancing its relations with
countries around the world through trade and investment agreements to promote
exports and attract foreign investment. The government has also made significant
investments in renewables, especially solar energy, aiming to achieve the target of
175 GW of installed renewable energy capacity by 2022.

Overall, the development strategy of the Indian economy has evolved over time, with
a changing focus on building a self-sufficient economy, a market-oriented economy,
and now an inclusive and sustainable economy. The government's initiatives and
ongoingreforms indicate India's commitment to achieving its development goals and
becoming a major global economic power.

5. India's Fiscal Policy and Tax System

India's fiscal policy and tax system have undergone significant changes in recent
years. In the Union Budget 2023, the Hon'ble Finance Minister, Nirmala Sitharaman,
proposed a number of tax and policy amendments that are expected to have a major
impact on individuals and employers. These include changes to the income tax
rates, the introduction of the new Direct Tax Vivad Se Vishwas scheme, and the
reduction of the corporate tax rate for companies with a turnover of up to Rs 400
crore.

Additionally, the budget proposed measures to incentivize production, such as the

Production Linked Incentive (PLI) scheme, and to create infrastructure through
government projects to increase demand and crowd in private investments. The
government has also taken steps to reduce the compliance burden for taxpayers,
such as the introduction of the Faceless Assessment Scheme and the Faceless
Appeal Scheme.
Overall, the Union Budget 2023 is expected to bring about significant changes to
India's fiscal policy and tax system, with the aim of promoting economic growth and
development.

6. The monetary and credit policy of India:

It is formulated by the Reserve Bank of India (RBI). The primary objective of the
policy is to maintain price stability while promoting economic growth. The RBI uses a
variety of tools to influence the supply of money in the economy and control inflation.
One of the primary tools used by the RBI is the repo rate. This is the rate at which
commercial banks borrow funds from the central bank. When the repo rate is
increased, banks are encouraged to borrow less, which reduces the amount of
money in circulation in the economy. Similarly, when the repo rate is decreased,
banks are encouraged to borrow more, which increases the amount of money in
circulation.

The RBI also uses other tools like statutory liquidity ratio (SLR), cash reserve ratio
(CRR), and open market operations (OMO) to control the money supply in the
economy. SLR is a requirement that mandates the banks to maintain a certain
portion of their net demand and time liabilities in the form of liquid assets like cash or
government securities. CRR is the percentage of deposits that banks are required to
keep with the RBI. OMO refers to the purchase or sale of government securities in
the openmarket to influence the liquidity in the economy.

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The credit policy of the RBI is also aimed at promoting economic growth while
maintaining financial stability. The central bank controls the credit flow in the
economy by regulating the interest rates on loans and investments. The RBI has set
the rules and regulations for all banks and financial institutions to follow in order to
maintain financialstability in the country.

In recent years, the RBI has taken several measures to promote credit growth in
priority sectors like agriculture, small and medium enterprises, and affordable
housing. Additionally, the RBI has also simplified the lending norms for small
businesses and introduced credit guarantee schemes to encourage lending to these
sectors. .
In conclusion, the monetary and credit policy of India is a crucial aspect of the
country's economic development. By balancing the goals of price stability and
economic growth, the RBI ensures that the country's financial system remains stable
while promoting the overall well-being of its citizens