UNIT 5

INDIAN ECONOMY
The Indian economy refers to the system of
production, consumption, investment, and trade in
India, which is one of the largest and fastest-growing
economies in the world.

What type of economy is India?

India is a mixed economy:
• Private sector + Public sector both play significant
roles.
• It combines elements of capitalism (free markets)
and socialism (government involvement in key
sectors).

Key sectors of the Indian economy:

1. Agriculture (Primary Sector)
o Employs a large portion of the population
o Contributes less to GDP (around 15-18%)
2. Industry (Secondary Sector)
o Includes manufacturing, construction, mining
 o Big sectors: Steel, cement, textile, automotive
3. Services (Tertiary Sector)
o Largest contributor to GDP (over 50%)
o Includes IT, finance, telecom, tourism, etc.

Some key facts (as of recent years):

• GDP size: India is the 5th largest economy in
nominal GDP.
• Growth rate: One of the fastest-growing major
economies.
• Population: Over 1.4 billion – huge domestic
market.
• Youth population: Large percentage under 35
years – major demographic advantage.

Major challenges:
• Unemployment
• Inflation
• Poverty and inequality
• Infrastructure gaps
• Environmental issues
 Global role:
India plays a big role in the global economy, especially
in:
• IT services & outsourcing
• Pharmaceuticals
• Space technology
• Textiles and garments
• Startups and innovation

❖Features of the Indian Economy

1. Mixed Economy
• Combines private enterprise (like startups and big
companies) with government involvement (like
public sector banks, railways).
• Both capitalism and socialism influence the
system.

2. Agriculture-Dependent (Still)
• A large part of the population is involved in
agriculture, though its share in GDP is decreasing.
 • Many people still depend on farming for their
livelihood.

3. Fast-Growing Service Sector

• The services sector (IT, finance, education, health,
tourism) is the largest contributor to India’s GDP.
• India is a global hub for software and IT services.

4. Demographic Dividend
• India has a young population – over 65% are
under 35.
• Huge potential for growth if this youth is educated
and employed properly.

5. Low Per Capita Income

• While total GDP is high, average income per
person is still low compared to developed
countries.
• Shows the income gap and poverty levels.

6. Inequality and Poverty

 • Significant economic and social inequality
between rich and poor, urban and rural, educated
and uneducated.
• Poverty is reducing but still a major challenge.

7. Underemployment and Informal Sector

• Many people are not fully employed (they work
less than they want to or in low-paying jobs).
• A large number work in the informal sector
(without contracts, social security, etc.).

8. Diverse Economy
• Includes modern industries (like tech, pharma,
space), traditional crafts, and agriculture.
• Wide range of economic activities across states.

9. Global Integration
• India is connected to the global economy through
exports, imports, foreign investment, and trade.
• Member of WTO, G20, BRICS, etc.

10. Government Initiatives

 • Programs like Make in India, Digital India, Startup
India, and Skill India aim to boost growth, jobs,
and innovation.

❖Fiscal Policy
➤ What is it?
Fiscal policy is the government's policy related to
spending and taxation. It is managed by the Ministry
of Finance.
Main Tools:
• Government Spending (on roads, schools, health,
etc.)
• Taxes (like income tax, GST)
Objectives:
• Boost economic growth
• Control inflation or deflation
• Reduce poverty and inequality
• Create jobs
Who Controls It?
The Government of India (through the annual Union
Budget)
 ❖2. Monetary Policy
➤ What is it?
Monetary policy controls the money supply and
interest rates in the economy. It is managed by the
Reserve Bank of India (RBI).
Main Tools:
• Repo Rate (rate at which RBI lends to banks)
• Reverse Repo Rate (rate at which banks park
money with RBI)
• Cash Reserve Ratio (CRR)
• Open Market Operations (buying/selling govt.
bonds)
Objectives:
• Control inflation
• Stabilize the currency
• Ensure liquidity in the economy
• Support economic growth
Who Controls It?
The Reserve Bank of India (RBI) — India's central bank
 Difference Between Fiscal and Monetary Policy:
Feature Fiscal Policy Monetary Policy
Managed Government (Finance
RBI (Central Bank)
by Ministry)
Government income & Money supply,
Focus
expenditure interest rates
Repo rate, CRR,
Tools Taxation, Spending
Open Market Ops
Growth, equality, Inflation control,
Aim
employment price stability

❖LPG: Liberalisation, Privatisation, Globalisation

These were major economic reforms launched in 1991
by the Indian government to revive the economy and
promote growth.

❖Liberalisation
➤ What it means:
• Reducing government control over the economy
• Allowing freedom for businesses to operate
 Key changes:
• Removed license raj (need for multiple approvals)
• Reduced import tariffs and taxes
• Allowed foreign investment in many sectors
• Decontrolled industries (less government
interference)

❖Privatisation
➤ What it means:
• Transferring ownership of public sector companies
to the private sector
Key changes:
• Selling shares of PSUs (Public Sector
Undertakings) to private players
• Encouraging private companies to enter areas
earlier dominated by the government
• Increasing efficiency and competitiveness
 ❖Globalisation
➤ What it means:
• Integrating India’s economy with the global
market
Key changes:
• Encouraged exports and imports
• Allowed foreign companies to set up in India
• Opened doors for Foreign Direct Investment (FDI)
• Greater participation in WTO, global trade and
technology

Objectives of LPG Reforms:

• Control the economic crisis of 1991 (foreign
exchange reserves were very low)
• Promote growth, development, and global
competitiveness
• Improve efficiency and reduce fiscal deficit
 Impact of LPG on Indian Economy:
Positive Impact Challenges/Concerns
Fast GDP growth Rich-poor gap widened
Boom in IT and service Small industries struggled to
sectors compete
Rise in foreign investment Over-dependence on global
(FDI & FII) markets
Growth of private sector Some PSUs became sick or
& entrepreneurship were shut down
Cultural & economic
Greater global integration
dependence concerns

❖What is Inflation?
Inflation means a general rise in prices of goods
and services over time.
As inflation increases, the purchasing power of
money decreases — you need more money to buy
the same things.
 Types of Inflation (India-relevant):
Type Meaning

Demand-Pull Prices rise because demand >

Inflation supply
Prices rise due to higher
Cost-Push production costs (e.g., fuel,
Inflation wages)
Expectation of inflation leads to
Built-in higher wages, which then
Inflation increase costs

Core Inflation minus food and fuel

Inflation (shows long-term trend)

Measurement of Inflation in India:

Measures Prices Published
Index Used By
Of...
CPI Everyday NSO (Govt.
(Consumer goods/services of India)
Price Index) for consumers
WPI Bulk goods Office of
(Wholesale traded among Economic
Price Index) businesses Adviser
• CPI is the most widely used to track retail inflation
(what affects common people).
• The RBI uses CPI to frame monetary policy.

Causes of Inflation in India:

• Rising fuel prices (India imports oil)
• High demand during festivals/seasons
• Supply chain disruptions (weather, war, COVID,
etc.)
• Fiscal deficit (when govt. spends more than it
earns)
• Global factors (like crude oil, USD rate, imports)

Impact of Inflation:
Positive Side Negative Side
Reduces value of
Encourages production money (hurts
(more profit motive) savings)
Signals growing Increases cost of
economy (moderate living
inflation)
Helps reduce real Affects poor and
burden of public debt middle class more
 How is Inflation Controlled in India?
1. Monetary Policy (RBI):
• Increases repo rate to reduce money supply
• Controls credit flow
• Maintains inflation target (usually 4% ± 2%)
2. Fiscal Policy (Govt):
• Reduces spending or increases taxes
• Subsidies to reduce prices (like LPG, fertilizers)

Recent Trends (as of 2024-25):

• Inflation has been fluctuating due to global oil
prices, climate effects on crops, and geopolitical
tensions.
• RBI tries to keep it in the 2–6% target band.

❖Banking in the Indian Economy

What is Banking?
Banking refers to accepting deposits from the
public and lending money to individuals,
businesses, and the government.
In short:
People save money in banks.
Banks lend that money to others who need it
(loans, businesses, etc.).
 They help circulate money and boost
economic activity.

Functions of Banks in India:

Function Description
From individuals,
Accepting Deposits businesses, etc.

Providing Loans Personal loans, home

and Advances loans, business loans
Banks multiply the money
Credit Creation supply through lending

Remittance Fund transfers (NEFT,

Services RTGS, UPI, IMPS)
Banking for rural, poor,
Financial Inclusion and unbanked
populations

Supporting Managing public debt, tax

Government collection, etc.

Types of Banks in India:

1. Commercial Banks
• Public Sector Banks (e.g., SBI, PNB)
• Private Sector Banks (e.g., HDFC, ICICI)
• Foreign Banks (e.g., Citibank, HSBC)
2. Cooperative Banks
• Focus on rural credit, agriculture, small businesses
3. Regional Rural Banks (RRBs)
• Serve rural and small-town India
4. Development Banks
• Long-term finance for industries (e.g., NABARD,
SIDBI)
5. Payments Banks & Small Finance Banks
• New-age banks to promote financial inclusion
(e.g., Paytm Payments Bank, AU Small Finance
Bank)

Role of RBI (Reserve Bank of India)

The RBI is India’s central bank and it:
• Controls monetary policy
• Regulates and supervises all banks
• Manages currency and foreign exchange
• Acts as the lender of last resort

Recent Trends in Indian Banking:

• Digital Banking Boom – UPI, net banking,
mobile wallets
• Bank Mergers – To strengthen public sector
banks
• Financial Inclusion – Jan Dhan Yojana accounts
for the poor
• Bad Loans (NPAs) – A challenge for many
banks
• Green & Sustainable Banking – Focus on eco-
friendly investments

Importance of Banking in Indian Economy:

Contribution Impact
Encourages investment
Mobilizes savings and consumption
Helps businesses grow
Provides credit and create jobs
Reduces poverty and
Boosts financial supports rural
inclusion development
Supports Direct Benefit Transfer
government (DBT), PM Kisan, etc.
schemes
Enables digital Through UPI, RuPay,
economy mobile banking
 Major World Economic Bodies
1. International Monetary Fund (IMF)
• Headquarters: Washington, D.C., USA
• Main Role:
o Promotes global monetary cooperation

o Provides loans to countries in economic crisis

o Monitors global economy

• India is a founding member.

2. World Bank Group

• Headquarters: Washington, D.C., USA
• Main Role:
o Offers financial and technical assistance to

developing countries
o Works to reduce poverty and promote

development
• Includes institutions like IBRD and IDA.

3. World Trade Organization (WTO)

• Headquarters: Geneva, Switzerland
• Main Role:
o Regulates international trade rules

o Resolves trade disputes between countries

o Promotes free and fair trade

• India is an active member.

 4. Organisation for Economic Co-operation and
Development (OECD)
• Headquarters: Paris, France
• Main Role:
o Promotes economic growth, trade, and

development
o Conducts research and provides policy advice

• India is not a full member but engages actively

with OECD.

5. G20 (Group of Twenty)

• Members: 19 countries + EU (India is a member)
• Main Role:
o Discusses global financial stability

o Coordinates policies on economic issues,

climate, and development

o Hosts annual summits of world leaders

6. BRICS
• Members: Brazil, Russia, India, China, South Africa
• Main Role:
o Cooperation among emerging economies

o Works on alternative financial institutions

(like New Development Bank)

o Focuses on south-south cooperation
 7. Asian Development Bank (ADB)
• Headquarters: Manila, Philippines
• Main Role:
o Provides loans and grants for infrastructure

and development in Asia

o Supports poverty reduction, education, and

climate initiatives
• India is a founding member and major borrower.

8. United Nations Conference on Trade and

Development (UNCTAD)
• Headquarters: Geneva, Switzerland
• Main Role:
o Promotes inclusive trade and sustainable

development
o Supports developing countries in global trade

Why These Bodies Matter:

Purpose Impact on India & the World

Policy Helps manage global crises

coordination (like COVID-19, 2008)

Development Supports infrastructure,

aid health, and education
Purpose Impact on India & the World

Trade Ensures fair rules for

regulation imports/exports
Financial Loans to countries in need
assistance
Research & Helps governments make
data informed decisions