Dr.

SNS Rajalakshmi College of Arts and Science (Autonomous)

Coimbatore
Department of Commerce with Information Technology
Indian Economy – Syllabus
Unit – I: Introduction
Indian economy – Characteristics of Indian economy – Economic factors and non-
economic factors – Determinants of economic development.

Unit – II: Population policy and National Income

Human recourse - Population policy – national income – Concept – Measurement –
Limitations – recent trends in national income – India foreign trade and balance of payment –
Role of GATT, WTO in Indian economy.

Unit – III: Agricultural Credit

Source of agricultural credit – Co-operative banks and commercial bank – NABARD _
Land Development bank – Regional and rural banks – Agricultural refinance.

Unit – IV: Industralization

Role of Industrialization in Indian economy – Industrial policies- Small scale and cottage
industries – Industrial sickness – Public sector – Private sector – Joint sector.

Unit – V: Poverty and Unemployment

Poverty – Causes- Effects – Estimates of unemployment in India – Measure to reduce
unemployment – Financial inclusion.

Text Book:
1. S.Sankaran, “Indian Economy” – Margham Publications, Chennai, 2013

Reference Books:
1.Ishwar c Dhingra, “The Indian Economy”, Sultan Chand and Sons, 2006
2.Sanjay Kataria and Dhingra – “Insight into the Indian Economy”, Priority Publishers,
New Delhi 2014
 Dr.SNS Rajalakshmi College of Arts and Science (Autonomous)
Coimbatore
Department of Commerce with Information Technology
Indian Economy – Syllabus
Unit – I: Introduction
Indian economy – Characteristics of Indian economy – Economic factors and non-
economic factors – Determinants of economic development.

INTRODUCTION:
Indian economy is an under developed economy in which Agriculture is the back bone of
Indian economic. 60% of India’s population are on the below poverty line. Mineral resources are
not fully utilized. We are selling iron ore by trucks and getting blades by packets. Majority of the
people of India are leading a poverty line. Indian economic is affected by it. Countries which are
on the part of progress and which have their potential for development are called developing
economic. So India is termed as developing economic by modern views.

MEANING
Indian economy consists of three major segments like agriculture, industry and tertiary.
Agriculture consists of farming and allied activities like fishery, dairy, horticulture etc which
meet our food requirement. About 70% of our people depend on agriculture. They live in
villages. Various industries like textile, steel and mines, coal, automobiles, food processing etc is
the other important segment. Industrialists and workers are engaged here and mostly work in
urban and semi-urban areas.

The service sector is the new area which is rapidly growing in India. People who are
serving in government or private in different areas like schools and colleges, computers,
telecommunications, government offices, transport services, irrigation projects, infrastructure
like housing, roads and buildings, banking and insurance sector all belong to service sector.
Economy provides employment opportunity to the people who contribute to the national income
through their activities. From birth to death people are engaged in certain activities which are
part of economy of the country. Indian economy consists of three major segments like
agriculture, industry. Agriculture consists of farming and allied activities like fishery, dairy,
horticulture etc which meet our food requirement. About 70% of our people depend on
agriculture.

Characteristics or features of Indian economy:

1. Low per capita income:
Under developed economy is characterized by low per capital income. India per capital
income is very low as compared to the advanced countries. This trend of difference of per capita
income between under developed and advanced countries is gradually increasing in present
times. India not only the per capita income is low but also the income is unequally distributed.
This mal-distribution of income and wealth makes the problem of poverty in ore critical and
acute and stands an obstacle in the process of economic progress
2. Heavy Population Pressure:
The Indian economy is facing the problem population explosion. It is the second highest
populated country China being the first. India’s population has reached 110 cores. All the under
developed countries are characterized by high birth rate which stimulates the growth of
population; the fast rate of growth of population necessitates a higher rate of economic growth to
maintain the same standard of living. The failure to sustain the living standard makes the poor
and under developed countries poor and under developed.

3. Pre-dominance of Agriculture:
Occupational distribution of population in India clearly reflects the backwardness of the
economy. One of the basis characteristics of an under developed economy is that agriculture
contributes a very large portion in the national income and a very high proportion of working
population is engaged in agriculture

4. Unemployment:
Here is larger unemployed and under employment is another important feature of Indian
economy. In under developed countries labor is an abundant factor. It is not possible to provide
gainful employment the entire population. Lack of job opportunities disguised unemployed is
created in the agriculture fields. There deficiency of capital formation.

5. Low Rate of Capital Formation:

In backward economics like India, the rate of capital formation is also low. capital
formation mainly depends on the ability and willingness of the people save since the per capita
income is low and there is mal-distribution of income and wealth the ability of the people to save
is very low in under developed countries for which capital formation is very low .

6. Poor Technology:
The lever of technology is a common factor in under developed economy. India economy
also suffers from this typical feature of technological backwardness. The techniques applied in
agriculture industries milling and other economic fields are primitive in nature.

7. Backward Institutional and social frame work:

The social and institutional frame work in under developed countries like India is
hopelessly backward, which is a strong obstacle to any change in the form of production.
Moreover religious institutions such as caste system, joint family universal marriage affects the
economic life of the people.

8. Under utilization of Resources:

India is a poor land. So our people remain economically backwards for the lack of
utilization of resources of the country.

9. Price instability:
Price instability is also a basis feature of Indian economy. In almost all the
underdeveloped countries like India there is continuous price instability. Shortage of essential
commodities and gap between consumption aid productions increase the price persistently.
Rising trend of price creates a problem to maintain standard of living of the common people.
10. Capital Deficiency:
Capital occupies a strategic role in production and economic development of a nation.
Underdeveloped countries would suffer from capital deficiency.

11. Foreign trade orientation:

Most of the underdeveloped countries depend upon the export of a few traditional
commodities, consisting mainly of raw material and minerals. They will be improving consumer
goods and machinery. The ratio of export production to total output will be normally high.

Determinants of economic development:

1.  Economic Factors

1. Natural Resource: The principal factor affecting the development of an economy is

the availability of natural resources. The existence of natural resources in abundance is essential
for development. A country deficient in natural resources may not be in a position to develop
rapidly. But a country like Japan lacking natural resources imports them and achieve faster rate
of economic development with the help of technology. India with larger resources is poor.

2. Capital Formation: Capital formation is the main key to economic growth. Capital

formation refers to the net addition to the existing stock of capital goods which are either
tangible like plants and machinery or intangible like health, education and research. Capital
formation helps to increase productivity of labour and thereby production and income. It
facilitates adoption of advanced techniques of production. It leads to better utilization of natural
resources, industrialization and expansion of markets which are essential for economic progress.
 3. Size of the Market: Large size of the market would stimulate production, increase
employment and raise the National per capita income. That is why developed countries expand
their market to other countries through WTO.

4. Structural Change: Structural change refers to change in the occupational structure of

the economy. Any economy of the country is generally divided into three basic sectors: Primary
sector such as agricultural, animal husbandry, forestry, etc; Secondary sector such as industrial
production, constructions and Tertiary sector such as trade, banking and commerce. Any
economy which is predominantly agricultural tends to remain backward.

5. Financial System: Financial system implies the existence of an efficient and

organized banking system in the country. There should be an organized money market to
facilitate easy availability of capital.

6. Marketable Surplus: Marketable surplus refers to the total amount of farm output

cultivated by farmers over and above their family consumption needs. This is a surplus that can
be sold in the market for earning income. It raises the purchasing power, employment and output
in other sectors of the economy. The country as a result will develop because of increase in
national income.

7. Foreign Trade: The country which enjoys favorable balance of trade and terms of

trade is always developed. It has huge forex reserves and stable exchange rate.

8. Economic System: The countries which adopt free market mechanism (laissez faire)

enjoy better growth rate compared to controlled economies. It may be true for some countries,
but not for every country.

 2.  Non- Economic Factors

‘Economic Development has much to do with human endowments, social attitudes,

political conditions and historical accidents. Capital is a necessary but not a sufficient condition
of progress. – Ragnar Nurkse.

1. Human Resources: Human resource is named as human capital because of its power

to increase productivity and thereby national income. There is a circular relationship between
human development and economic growth. A healthy, educated and skilled labour force is the
most important productive asset. Human capital formation is the process of increasing
knowledge, skills and the productive capacity of people. It includes expenditure on health,
education and social services. If labour is efficient and skilled, its capacity to contribute to
growth will be high. For example Japan and China.
 2. Technical Know-how: As the scientific and technological knowledge advances, more
and more sophisticated techniques steadily raise the productivity levels in all sectors.
Schumpeter attributed the cause for economic development to innovation.

3. Political Freedom: The process of development is linked with the political freedom.

Dadabhai Naoroji explained in his classic work ‘Poverty and Un-British Rule in India’ that the
drain of wealth from India under the British rule was the major cause of the increase in poverty
in India.

4. Social Organization: People show interest in the development activity only when they

feel that the fruits of development will be fairly distributed. Mass participation in development
programs is a pre-condition for accelerating the development process. Whenever the defective
social organization allows some groups to appropriate the benefits of growth. majority of the
poor people do not participate in the process of development. This is called crony capitalism.

5. Corruption free administration: Corruption is a negative factor in the growth

process. Unless the countries root-out corruption in their administrative system, the crony
capitalists and traders will continue to exploit national resources. The tax evasion tends to breed
corruption and hamper economic progress.

6. Desire for development: The pace of economic growth in any country depends to a

great extent on people’s desire for development. If in some country, the level of consciousness is
low and the general mass of people has accepted poverty as its fate, then there will be little scope
for development.

7. Moral, ethical and social values: These determine the efficiency of the market,

according to Douglas C. North. If people are not honest, market cannot function.

8. Casino Capitalism: If People spend larger propotion of their income and time on
entertainment liquor and other illegal activities, productive activities may suffer, according to
Thomas Piketty.

9. Patrimonial Capitalism: If the assets are simply passed on to children from their

parents, the children would not work hard, because the children do not know the value of the
assets. Hence productivity will be low as per Thomas Piketty.

OBSTACLES OF ECONOMIC DEVELOPMENT

Vicious Circle of Poverty: The people in the less developed countries have low per capita
income. Having low income their rate of savings is low. When savings are small in a country,
investment will also be low. Low investment leads to low productivity. With low productivity
level, the income is bound to be low. People as such remain poor. In the way vicious circle of
poverty completes. Summing up, we can say that less developed countries are poor because they
do not have sufficient capital resources for investment. Capital has a central position for
economic development. A financially poor country is trapped in its own poverty. A country can
get rid off from poverty if its rate of capital formation increases than the rate of population
growth. So capital formation is the key to economic development by demand and supply of
capital.

Demand Side of Capital: The production of the poor country is low. The low production causes
low per capita income and low purchasing power. The low purchasing power reduces the
demand for products. Due to low demand, market will be limited. The small size of market
discourages the investment. The low production reduces the productivity per worker. When the
output per worker is low, the per capita income is bound to be low. So vicious circle of poverty
is complete on the demand side of capital formation.

On the demand side vicious circle of poverty operates in the following manner:

Supply Side of Capital:-

In the developed countries due to low production, per capita income is low. The low level of
income means the capacity to save is low. The low level of savings leads to low investment. The
low rate of investment reduces the productivity per worker. It leads to low per capita income.
The vicious circle is thus complete on the supply side of capital formation.

The vicious circle of supply can show by the following diagram:

Main Points of Vicious Circle of Poverty:-
1.Poverty
2.Lowproduction
3. Rapid population growth
4. Low per capita income
5. Low consumption
6. Limited market
7. Low savings
8. Lack of capital
9. Low investment
10. Low production
11. Poverty

If any country per capita income is high, then the rate of capital formation will be high as the
factors affecting the demand for and supply of capital formation are favorable to economic
growth.

A country is poor and remains poor because its human and natural resources remain not utilized.
In the less developed countries people are mostly unskilled and technologically backward. They
are illiterate and lack the entrepreneurial ability. So the natural resources are not used properly,
output remains low and poor country remains poor because it is poor.

Poverty is a great curse. It is the biggest hurdle in the way of economic development.
Ranger Nurkse in ''Problems of Capital Formation in Underdeveloped Countries'' describes
'vicious circle of poverty as the basic cause of under-development of poor countries. According
to him, a country is poor because it is poor. Being poor, a country has little ability or incentive to
save. The low of saving leads to low level of investment and to deficiency of capital. The low of
investment leads to low level of productivity. When the productivity per worker is low, the real
income will obviously be low and so there poverty and vicious circle is complete.
On the side of demand when people have low real income the demand for goods is bound to be
small. In the small size of market, there is no incentive of invest in real or human capital. When
the rate of investment is low, the productivity of the factors of production is bound to be low.
Low productivity leads to low per capital income which is rapidly absorbed by the rising
population growth. The country, therefore, remained poor.

OBSTACLES OF ECONOMIC DEVELOPMENT

Vicious Circle of Poverty :-
The people in the less developed countries have low per capita income. Having low income their
rate of savings is low. When savings are small in a country, investment will also be low. Low
investment leads to low productivity. With low productivity level, the income is bound to be low.
People as such remain poor. In the way vicious circle of poverty completes. Summing up, we can
say that less developed countries are poor because they do not have sufficient capital resources
for investment. Capital has a central position for economic development. A financially poor
country is trapped in its own poverty. A country can get rid off from poverty if its rate of capital
formation increases than the rate of population growth. So capital formation is the key to
economic development by demand and supply of capital.
Demand Side of Capital :-
The production of the poor country is low. The low production causes low per capita income and
low purchasing power. The low purchasing power reduces the demand for products. Due to low
demand, market will be limited. The small size of market discourages the investment. The low
production reduces the productivity per worker. When the out put per worker is low, the per
capita income is bound to be low. So vicious circle of poverty is complete on the demand side of
capital formation.

On the demand side vicious circle of poverty operates in the following manner :

Supply Side of Capital :-

In the developed countries due to low production, per capita income is low. The low level of
income means the capacity to save is low. The low level of savings leads to low investment. The
low rate of investment reduces the productivity per worker. It leads to low per capita income.
The vicious circle is thus complete on the supply side of capital formation.

The vicious circle of supply can shown by the following diagram :

Main Points of Vicious Circle of Poverty :-

1. Poverty
2. Low production
3. Rapid population growth
4. Low per capita income
5. Low consumption
6. Limited market
7. Low savings
8. Lack of capital
9. Low investment
10. Low production
11. Poverty

If any country per capita income is high, then the rate of capital formation will be high as the
factors affecting the demand for and supply of capital formation are favorable to economic
growth.

A country is poor and remains poor because its human and natural resources remain not utilized.
In the less developed countries people are mostly unskilled and technologically backward. They
are illiterate and lack the entrepreneurial ability. So the natural resources are not used properly,
out put remains low and poor country remains poor because it is poor.
poverty is a great curse. It is the biggest hurdle in the way of economic development. Ranger
Nurkse in ''Problems of Capital Formation in Underdeveloped Countries'' describes 'vicious
circle of poverty as the basic cause of under-development of poor countries. According to him, a
country is poor because it is poor. Being poor, a country has little ability or incentive to save.
The low of saving leads to low level of investment and to deficiency of capital. The low of
investment leads to low level of productivity. When the productivity per worker is low, the real
income will obviously be low and so there poverty and vicious circle is complete.
On the side of demand when people have low real income the demand for goods is bound to be
small. In the small size of market, there is no incentive of invest in real or human capital. When
the rate of investment is low, the productivity of the factors of production is bound to be low.
Low productivity leads to low per capital income which is rapidly absorbed by the rising
population growth. The country, therefore, remained poor.

The vicious circle of underdevelopment

Lower per capita incomes make it extremely difficult for poor nations to save and invest, a
condition that perpetuates low productivity and low incomes. Furthermore, rapid population
growth may quickly absorb increases in per capita real income and thereby may negate the
possibility of breaking out of the underdevelopment circle.

Lower per capita incomes make it extremely difficult for poor nations to save and invest, a
condition that perpetuates low productivity and low incomes. Furthermore, rapid population
growth may quickly absorb increases in per capita real income and thereby may negate the
possibility of breaking out of the underdevelopment circle.