SECTORS OF ECONOMY

 Economics – dismal & poor science => lots of things in the economy don’t follow the theories eg. 2008 economic
crisis

 Micro talks about individual units of economy – producers, consumers; Macro talks about the larger group –
national & international level phenomenon

 Sectors in the Economy:

1. Primary – produc tion of inputs – eg. agriculture, fuels, fishing, forestry, metals, minerals => blue / red collar
jobs => hands on or manual work (collar gets dirty or coloured due to job)
2. Secondary – production of final goods – eg. manufacturing, production, refining, food processing => blue
collared jobs
3. Tertiary – Service sector, transportation, communication(BPOs) etc => white collar jobs (collar doesn’t get cold)
4. Quaternary – it is a part of tertiary sector only but requires more skills –eg. banking, IT, education, knowledge
service (KPOs – knowledge process outsourcing) etc => white collar jobs
5. Quinary – R&D, CEOs, Scientist, Bureaucracy etc => gold collar jobs (shonay badhano jibon)

 Rostow (1960) said that the economy develops through these stages – from primary to quinary sectors

 In India, agriculture contributes for about 16% of the GDP,

Industry contributes for about 31% of the GDP,
Service sector contributes for about 54% of the GDP – maxm growth comes from this sector

Any sector that contributes more than 50% to the GDP of a country is its dominating sector. Thus, India is a tertiary
sector economy.

 India directly went from primary to tertiary - in 1950s – agri contributed 55%, now service sector dominates =>
Rostow’s rule was violated

MIXED ECONOMIES ARE BEST

Capitalist Economy Socialist Economy

private ownership of resources, freedom to idea of Marx

produce & consume anything as per ability,
limited intervention of govt, profit motive of
individual units
incentive to work & grow but creates
inequality – rich becomes richer & poor
poorer
socialist economy started with Bolshevik Revolution in USSR in 1917-18
again in China in 1949-50
 ownership of resources is under the state
 pvt ownership is limited
 planned & control production by govt
 central planning by state for distn of goods & services
 inequality falls but no incentive to work hard;
too much power to bureaucracy

Note: Communism is one step further from socialism. It advocates ownership of resources by the society (joutho
khamar) and no pvt ownership at all. This solves state exploitation. Marx said that socialism is the means & communism
is the end. Socialism says that people will earn according to their ability. Communism says irrespective of ability,
everyone will earn a basic level of income. Communism has remained a dream & no country has ever formed a
communist state.

 1930s – great depression – capitalism, socialism – nothing worked. Keynes suggested for a mixed economy –
combination of socialism & capitalism, pvt industries will invest in profitable stuff, govt will give essential services &
spend in times of depression to boost dd & ss => both public & private goods exist
 France in 1944 was the 1st country to adopt mixed economy

 The term market socialism was given by Oscar Lange.

=>core value is socialism but markets are allowed to flourish => industries grow rapidly & govt intervention is
minimum

 Gorbachev introduced reforms in USSR after failure of socialism and tried to move towards privatization

 Deng Xiaoping in China opted for ‘Open Door Policy’ – first experiment towards market socialism => huge success

 East Asian Miracle – Between the early 1960s and 1990s – for 3 decades, some E. asian countries like Japan, South
Korea, Taiwan, Hong Kong, Singapore, Thailand, Malaysia, and Indonesia underwent rapid growth. All these
countries were mixed economies – i.e. both market & govt intervention prevailed.

 While mixed economies are better than capitalist or socialist but even these have problems – govt becomes too
authoritative & controls pvt sector too much – PSUs become inefficient due to no profit motive & hence no growth
incentive

 Looking at the rest of the world, India opted for a mixed economy after independence

INDIA’S PRIORITISATION OF INDUSTRY OVER AGRICULTURE

 India planned for a mixed economy in its 1st FYP

 World Dev Report by WB in 1999 said that mixed economies (i.e., hybrid models) are best for development &
progress
 Post independence, India had to choose whether to make agriculture or industry its prime moving force – i.e.,
growth boosting sector. India chose industry because after 2nd WW, it was felt that industry meant modernization &
development. The World Bank & IMF also encouraged industrialization. (China opted for agriculture.) There is still a
debate regarding this. Many say that India should have opted for agri as it already had a large popln employed in it,
it didn’t require much skill, land was available, minm investment would do.

 1990s – WB & IMF said agri growth is also imp for dev of a nation; during 2002, India in its 10 th Five Year Plan
focused on agri growth & called agri its prime moving force

 Reasons for failure of India’s agri -

 Improving agri first => bottom up growth. India opted for top down growth & thought it would trickle down

 China – Mao-Deng approach => Mao Tse Tung (same as Mao Zedong) focused on agri for the first 25 years & Deng
Xiaoping focused on industry for the next 25 years

 Gandhian socialism => villages need to develop first & this will develop the rest of the economy gradually –
trusteeship in villages => use only what you need and leave the rest for others => eg. well water

MIXED ECONOMY => GOVT INTERVENTION => TOO MUCH PROTECTION => WEAK INDUSTRIES => HENCE THE NEED TO
OPEN UP => LPG POLICIES

 India overspent in developing public sector because it knew pvt sector would never work in developing railways,
power because these are not profitable very soon => These are core industries => these involve social overhead
capital (social => available to all; overhead => overall benefit to all but not directly related to any particular
production)

 Now the govt suffers huge loss from its PSUs and considers selling off its shares to pvt companies => disinvestment
(Disinvestment – govt selling less than 50% of shares of its assets & PSUs;
Strategic Disinvestment – govt selling more than 50% of shares of its assets & PSUs => giving away control)

 Washington Consensus (termed by John Williamson in 1989)

advocated neoliberalism – it said Latin American countries were underdeveloped because of their socialist policies
=> they should open up to capitalism
 minm govt intervention
 minm govt borrowing & fiscal deficit
 reduce subsidies & opt for long term development
 bring tax reforms – increase tax base & not tax rate => hence service tax was introduces
 free trade policies
 free floating currency (unlike what RBI does)
  rekax rules on FDIs => induce investment
 privatise PSUs (started from 2015)
 state is just a police state – collects taxes only

 1990s onwards, Indian economy started opening up – LPG reforms [what China had started in 1980s under
Xiaoping]
 Liberalisation => removal of licences – anyone can do business; removal of trade barriers;

The single-window system or single-window concept is a trade facilitation concept which allows
an international (cross-border) trader to submit information to a single agency, rather than having to deal with
multiple agencies in multiple locations to obtain the necessary papers, permits, and clearances to complete their
import or export processes.

There is an obvious time saving benefit to the single window system. Also it is more liberal & less restrictive.

The concept is recognised by organisations such as the United Nations Economic Commission for Europe (UNECE)
and its Centre for Trade Facilitation and Electronic Business (UN/CEFACT), World Customs Organization (WCO), the
United Nations Network of Experts for Paperless Trade and Transport in Asia and the Pacific (UNNExT),[2] and the
Association of Southeast Asian Nations (ASEAN).

 Privatisation – withdrawal of govt ownership over PSUs – selling of shares

 Globalisation – interconnected world in terms of exchange of goods, services, information etc

 Critiques have however termed the Washington Consensus as nothing but neoliberalism & neocolonisation
It focused on market fundamentalism => unshakable belief that market is everything – govt should not conduct even
welfare schemes
Washington Consensus also promoted globalization
 Margaret Thatcher, Ronald Reagan (US) were strong advocates of neoliberalism [ Reaganomics ]

 Criticism: Govt needs to carry out welfare activities in poor countries; social overhead capital requires govt to invest;

 Joseph Stiglitz said that the 2008 Subprime Crisis marked the end of neoliberalism
 Krugman (2009 Nobel Prize) suggested the idea of ‘interventionist state’

 Beijing Consensus – anti Washington Consensus – China’s growth under Xiaoping

China witnessed double digit growth
But after 2010, even China suffered a recession

 Santiago Consensus – alternative to WC – inclusive growth is best

India adopted inclusive growth in 10th FYP
 Note: Capitalism => pro business => competitive market; Crony Capitalism =>monopolies due to favouritism from
govt => higher prices (crony => partiality)

National Income

 GDP = value of final goods & services produced within the geog limits of a country
 quantitative index of the total production of a country but not qualitative as in does not talk about equality,
happiness, inclusiveness, gender parity etc

 IMF measures income wrt PPP & not GDP. India’s rank in PPP wrt to US dollar is 3rd in the world

 GDP is taken as the measure of income and not NDP because NDP = GDP – depreciation & depreciation rates are
calculated differently in different countries (calculated by Ministry of Commerce & Industry)

 GDP = GNP + NFIA

Now, net factor income from abroad includes pvt remittances (gift money), grants, interests on govt loans.
The first 2 are credits, interests are debits. Also interests are higher than remittances & grants combined, for India.
Thus India always has a negative NFIA & hence GNP < GDP.

 NNP = GNP – depreciation => reflects purest number for the economy
NNP is known as National Income (NI)

 Per Capita Income = NNP / total population in India

 NI at factor cost

In Jan 2015, the CSO released new & revised data on national accounts. As per new guidelines, base year for
calculating inflation has been currently fixed at 2011-12.
This was done following the recommendations of the System of National Accounts – 2008, an international statistical
standard for the national accounts, adopted by the United Nations Statistical Commission

The govt has also approved the merging of NSSO & CSO under the Min of Stats & Prog Implementation.

India used to calculate NI at factor cost previously. But this didn’t give the govt any scope to measure the effect of
taxes on the economy (?).
Since Jan 2015, CSO has switched to calculate NI at market cost / market price.
Also, if NI is calculated at constant market price, it does not take inflation into account. But if it is calculated at
current prices, then it takes inflation into account.
 Initially growth rate in India used to be measured by growth rate in GDP at factor cost at constant prices (constant
prices => doesn’t consider effect of inflation, factor cost =>doesn’t consider effect of taxes).

Headline growth rate will now be measured by growth rate in GDP at constant market prices (constant prices =>
doesn’t consider effect of inflation, market prices => considers effect of taxes).

 Fixed Base Method – base year is fixed at say 2011-12 for calculating GDP of upcoming years; the base usually gets
revised every 5 years
 Chain Based Method – previous year is taken as base year => while calculating GDP for 2021, we take 2020 as base

 Real Income = Nominal Income – Rate of Inflation

 Economic growth is estimated on dd side as well as ss side.

On the supply side, the value added by various sectors in the economy (primary, secondary, tertiary) are added up to
derive the Gross Value Added (GVA)
Value Added = Value of Output – Intermediate Consumption
=> gives income generated by all economic agents across the country

On the demand side, GDP is calculated by adding up all expenditures done in the economy, i.e., expenditure on
(C + I + G +NX)

 GDP + GVA + (net taxes) -------> taxes - subsidies

Growth vs Development

 Growth has a quantitative aspect – can be measured in absolute & relative terms - growth is a linear concept =>
unidimensional – doesn’t include individual standard of living

 Development on the other hand has a qualitative aspect – gives holistic picture – multidimensional – talks about
quality of life of individuals

 High growth => productive assets – assets causing future gain => gradual development

 High growth high dev countries – Scandinavian countries, Norway

 High growth low dev countries – USA

 Low growth high dev countries – Bhutan, Cuba

 1st Human Development Report – published by UNDP – introduced HDI – given by Mahbub ul Haq & Inge Kaul –
reformed in 1990 by Amartya Sen - based on 3 criteria:
 Health (Life Expectancy at Birth);
 Education (i) Adult Literacy Rate (weight = 2/3) ii) Gross Enrollment Ratio (weight = 1/3))
 Standard of living (GNI per capita) – India’s current ranking in GNI per capita is 141

HDI is the GM of the 3 & its value lays b/w 0 & 1.

HDI = 0 => worst; HDI = 1 => best

0 < HDI < 0.499 => low human dev; 0.5 < HDI < 0.799 => medium human dev; 0.8 < HDI < 1 => high human dev
India's HDI value = 0.645; rank = 131 out of 189

Planing

 M. Visveswaraya talked about the need for planning in India – advocated democratic capitalism – market oriented
industrialization – he felt income would double in 10 years following such plans

 Congress Plan – Subhas Bose – need for planning commission

National Planning Commission finally set up in 1938 under chairmanship of Nehru – extra constitutional, non
statutory body, advisory body, autonomous body, technocratic organisation

 Plans – see date chart excel sheet

 LPG reforms were insisted by WTO – India wouldn’t receive further loans without bringing these changes

Reforms

 The reforms of 1991 were obligatory and imposed by IMF

 IMF refused to give further loans to India unless it imposed LPG reforms
 India was also suffering from BOP crisis => exports <<< imports => no dollars to pay for imports
 IMF agreed to give external currency support to India to solve the BOP crisis

 IMF conditions were:

1. Devaluation of rupee by 22%
2. Drastic reduction in peak import tariff from 130% to 10%
3. Modernization of tax structure – increase in tax base & reduction in tax rate
4. Reduction of govt exp by 10% so that fiscal deficit could be reduced

 The reforms in India can be categorized into 4 generations:

 1. 1st Gen - 1991– i) Privatisation & disinvestment
ii) external sector reforms – devaluation of rupee & reduction of import tariff
iii) financial sector reforms – bank reforms
iv) tax reforms - increase in tax base & reduction in tax rate

2. 2nd Gen – 1998 – i) Factor market reforms

 J

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Inflation => rate at which price rises

 Too much money chasing 2 few goods => excess dd => prices rise => inflation => real value of money falls
 Quantitative index

 Rate of Inflation = (current cpi – base cpi) / current cpi . 100

 Types of Inflation:
1. Demand Pull Inflation – dd increases => prices rise eg. sanitizers’ prices rose hugely during covid
2. Cost Push Inflation – prices of raw materials rise => prices of final goods also rise eg. fuel price hike causes rise in
prices of vegetables, transportation costs etc.
3. Built in Inflation => wage inflation - eg. people start getting higher wages => more dd => prices rise
4. Imported Inflation => rise in price of imported goods – eg. devaluation
5. Decadal Inflation – Inflation in last 10 years
6. Headline Inflation – inflation considering all goods & services in the economy including fuel & food
7. Core Inflation – does not include including fuel & food

India is a developing country => fuel & food prices matter a lot. Hence we always report headline inflation. Core inf is
measured by developed countries as food & fuel prices are highly volatile.
 8. Structural Inflation / Bottleneck Inflation – part & parcel of developing countries – govt has to keep spending of
infrastructure & SOC => huge dd for capital goods & raw materials like cement, iron etc – however production is
not that developed in these countries => ss bottlenecks & excess dd => inflation but low growth => structure
itself is problematic

creeping inflation annual increase in prices < 3%

walking inflation annual increase in prices = 3 - 7%
running inflation annual increase in prices = 10 - 20%
galloping / hyper inflation annual increase in prices = 20 - 100%
disinflation lowering inflation rates => price rises but at a decreasing rate without
causing unemployment
deflation fall in prices
skewed inflation inflation in only some sectors of the economy
Okun's Law negative relation b/w output & unemployment
=> 2% rise in GDP causes 1% fall in unemployment.

 Inflationary gap = gap between existing/actual GDP & potential full employment GDP
- Economy is expanding – people are earning high wages => excess dd => dd pull inflation
- Increased business activities & govt expenditure => actual GDP > potential GDP at full emp
Inflationary gap reduces value of money => causes fiscal deficit (?)

 Deflationary gap – caused due to lower actual GDP – prices are lower => causes fiscal surplus

 Seignorage – also called Inflation Tax – printing of money => money SS increases => dd for goods rises => prices rise
=> value of money falls
Hence inflation is being created as a kind of tax.

 Reflation – policy of increasing govt spending & giving more money to people to revive the economy from
depression => this obviously also causes inflation
 Stagflation => inflation but stagnant growth (unemployment) (eg. covid time)
 Inflation benefits borrowers, investors in assets that will pay higher return now
 Inflation increaseas shoe leather costs [cost of travelling to bank to deposit money as prices are high] & menu costs
[cost of changing to menu with new prices]

 Effects of Inflation on
Direct Tax – increases revenue as income rises
Indirect Tax – increases revenue as prices rise
But this is just a nominal increase. Govt expenditure also increases. Thus real revenue remains same. But, people
just move from a lower to a higher tax bracket because tax rates rise with higher (nominal) income – this is called
Bracket Creep.

 Effect on exports & imports??

 Measures to control inflation:

1. If inflation is dd side, govt imposes austerity drives => Austerity is a set of political-economic policies that aim to
reduce government budget deficits through reducing govt expenditure, increasing tax or a combination of both.
Also, the RBI can reduce money ss to control inflation.

2. If inflation is ss side, then ss bottlenecks are solved, prodn is increased etc.

Measures of Inflation

1. Wholesale Price Index (WPI): consists of transactions at first point of bulk sale in the domestic market
- widely used measure in India since 1942
- published by Office of Eco Adviser, Min of Commerce & Industry
- base year – 2011-12
- a typical basket for WPI consists of:
65% of mfg goods (textile, apparels, paper, chemicals, plastic, cement, metals, sugar, tobacco, anima & veg oil,
fat etc),
20% of primary articles (everyday necessities – food & non food articles)
& 15% of fuel & power (petrol, diesel & LPG).

But it does not give true picture of inflation as it talks about wholesale market price & not retail price ------
consumers buy retail goods

2. Consumer Price Index (CPI): talks about both goods & services – considers their retail price
- a typical basket for WPI consists of:
46% of food & beverages, 28% of transport & education, 10% of housing, 7% of clothing & footwear, 7% of fuel
& light, 2% of paan, tobacco etc.
- Food takes a large share coz India is a developing country.

 CPI-combined = CPI-rural +-CPI urban

 From 2015 onwards, on Urjit Patel committee’s recommendation, RBI has been calculating CPI-combined to track
inflation on a monthly basis
 Base year is 2012

 WPI covers 697 items in its basket, CPI covers 448 items in rural basket & 460 items in urban basket

 GDP Deflator is another measure of inflation. It considers all goods & services produced in an economy through GDP
instead of a representative consumer basket like CPI
 GDP deflator = (nominal GDP / real GDP) . 100
 Recently the govt has set up a group under Ramesh Chand of NITI Aayog to review WPI and replace it with PPI, i.e.,
Producer Price Index => it will look at prices at production level at factory cost => will give best understanding of
what is causing price rise

Year on year (YoY) inflation => comparing this month’s inflation with last year’s inflation for the same month
Month on month (MoM) inflation => comparing this month’s inflation with last month’s inflation

2021 November - Consumer Price Index (CPI) shows YoY inflation at the retail level rising to a 3 month high of 4.91%,
from 4.48% in October.

MOM inflation has risen by 0.73% from October to Nov with as many as 10 of the 12 constituents of the food and
beverages category witnessing month-on-month inflation. Food was in fact a major driver of the quickening in price
gains on an annual basis.

 Money Market => read Mrunal Notes