Chapter 1: Basics of Economy

Background
 Chandrapur, a peaceful town, was about to undergo a transformation that introduced Anika to
the basics of economics. Anika's father, Raj, had always provided for their family by growing rice,
which he would sell in the bustling bazaar. One day, Anika and her father visited the bazaar,
where they observed the colorful array of goods on display. Raj explained that the town thrives
on trade, where people specialize in what they do best and bring their goods to the bazaar.
Anika's curiosity grew as she observed people haggle and negotiate prices, learning that prices
were determined by supply and demand. As they walked home, Anika realized that economics
was about making choices, trading, and the laws of supply and demand.
 Over the years, Anika grew up and became a successful merchant herself, trading handmade
pottery in the Chandrapur bazaar. She remembered the lessons from that fateful day with her
father and taught them to her own children. Chandrapur prospered, thanks to the basics of
economics, and it continued to be a place where trade and specialization brought prosperity to
all. Now let’s dig deeper into the concepts of economics and its principles.

Economics
 Economics is the social science that studies the production, distribution, and consumption of
goods and services. It examines how individuals, businesses, governments, and nations make
decisions about allocating scarce resources. Economics is a broad discipline that encompasses
many different topics, including:
o Microeconomics: Microeconomics is the study of individual decision-making and how
markets work. Microeconomists study topics such as supply and demand, market
structure, and consumer behavior.
o Macroeconomics: Macroeconomics is the study of the economy as a whole.
Macroeconomists study topics such as economic growth, inflation, and unemployment.
o International economics: International economics is the study of how economies
interact with each other. International economists study topics such as trade,
investment, and foreign exchange rates.
 Economics is a complex and ever-changing field, but it is essential for understanding the world
around us. Economics can help us to make better decisions about our personal finances, to
understand the global economy, and to make informed decisions about public policy.
 Here are some examples of how economics is used in the real world:
o Businesses use economics to make decisions about pricing their products, setting
production levels, and hiring workers.
o Governments use economics to make decisions about tax policy, spending, and
regulation.
o Consumers use economics to make decisions about how to spend their money and save
for the future.

Important Economic Theories

Economic Theories Description
Classical economics Classical economics is a school of economic thought that developed
in the late 18th and early 19th centuries. Classical economists such
 as Adam Smith and David Ricardo believed in the importance of free
markets and laissez-faire economics. They argued that the free
market is the most efficient way to allocate resources and produce
goods and services.
Keynesian economics Keynesian economics is a school of economic thought that
developed in the early 20th century. Keynesian economists such as
John Maynard Keynes believed that the government should play a
role in managing the economy. They argued that the government
can use fiscal and monetary policy to stimulate economic growth
and reduce unemployment.
Monetarism Monetarism is a school of economic thought that developed in the
mid-20th century. Monetarists such as Milton Friedman believed
that the money supply is the most important factor in determining
inflation and economic growth. They argued that the government
should focus on controlling the money supply in order to achieve
economic stability.
New classical economics New classical economics is a school of economic thought that
developed in the late 20th century. New classical economists such
as Robert Lucas Jr. believe that free markets are efficient and that
the government should play a limited role in the economy. They
argue that government intervention is often ineffective and can
even be harmful.
Behavioral economics Behavioral economics is a school of economic thought that
developed in the late 20th century. Behavioral economists such as
Daniel Kahneman and Amos Tversky study how psychology affects
economic decision-making. They argue that people are not always
rational actors and that their decisions are often influenced by
factors such as emotions, heuristics, and biases.

Fundamentals of Economics
 The fundamentals of economics are the basic concepts and principles that underlie the study of
economics. These concepts and principles can be used to understand how the economy works,
how individuals and businesses make decisions, and how governments can influence the
economy.
 Some of the most important fundamentals of economics include:
o Scarcity: Scarcity is the fundamental economic problem of having limited resources to
meet unlimited wants and needs. This means that we must make choices about how to
allocate our resources in the most efficient way possible.
o Supply and demand: Supply and demand are the two forces that determine the price
and quantity of goods and services in a market economy. Supply refers to the amount of
a good or service that producers are willing and able to sell at a given price. Demand
refers to the amount of a good or service that consumers are willing and able to buy at a
given price.
 o Costs and benefits: Costs and benefits are the two sides of every economic decision.
Costs are the resources that we give up in order to get something. Benefits are the
benefits that we receive from making a decision.
o Incentives: Incentives are the rewards or punishments that motivate people to take
certain actions. Incentives can be financial, social, or psychological.
o Trade: Trade is the voluntary exchange of goods and services between two or more
parties. Trade allows us to specialize in the production of goods and services that we are
good at producing and to consume goods and services that we are not good at
producing.
o Economic systems: An economic system is the way that a society organizes the
production, distribution, and consumption of goods and services. There are three main
types of economic systems: capitalism, socialism, and communism.
 The fundamentals of economics can be used to understand a wide range of economic
phenomena, from the behavior of individual consumers to the performance of the global
economy. They are essential for making informed economic decisions, both at the individual and
the societal level.

Real World Example Of The Application Of Fundamentals Of Economics

Here are some examples of how the fundamentals of economics can be applied in the real
world:
 A business may decide to raise the price of its product if demand for the product
increases.
 A government may decide to increase taxes in order to reduce the budget deficit.
 A consumer may decide to buy a car instead of a bus pass if the cost of the car is
lower than the cost of the bus pass over the long term.
 A country may decide to trade with another country if it can produce goods and
services more efficiently than the other country.

Types of Economics
Type of
Economics Description Examples
Microeconomics The study of individual A microeconomist might study how the
decision-making and how introduction of a new product affects the
markets work. market for existing products, or how the price of
a good affects the quantity demanded.

Macroeconomics The study of the economy as A macroeconomist might study the impact of a
a whole. government stimulus package on economic
growth, or the relationship between inflation
and unemployment.
International The study of how economies An international economist might study the
Economics interact with each other. effects of a trade war between two countries, or
the impact of foreign investment on economic
growth.

Development The study of the economic A development economist might study how to
Economics problems facing developing reduce poverty in a developing country, or how
countries. to promote economic growth in a developing
country.

Behavioral The study of how psychology A behavioral economist might study how to
Economics affects economic decision- design interventions to help people make better
making. financial decisions, or how to increase voter
turnout.

Public Economics The study of the role of A public economist might study how to design a
government in the economy. tax system that is both efficient and equitable,
or how to design welfare programs that are
effective and efficient.

Environmental The study of the relationship An environmental economist might study how
Economics between the economy and to reduce pollution from factories, or how to
the environment. mitigate the effects of climate change.
The study of the labor
Labor Economics market. A labor economist might study the impact of a
minimum wage increase on employment, or the
relationship between education and wages.
Industrial The study of the structure An industrial economist might study how to
Economics and behavior of industries. promote competition in a particular industry, or
the impact of regulation on industry
performance.
Agricultural The study of the agricultural An agricultural economist might study how to
Economics sector. improve food security in a developing country,
or the impact of climate change on agricultural
productivity.

Economy
 An economy is a system for the production, distribution, and consumption of goods and
services. It is a complex system that involves many different actors, including individuals,
businesses, governments, and international organizations.
 Economies can be classified into different types, such as:
 o Traditional economies: Traditional economies are based on custom and tradition.
Production is typically for subsistence, meaning that people produce what they need to
consume themselves.
o Command economies:
Command economies are
controlled by the Types of
government. The
Economies
government decides what
is produced, how it is Traditional Command Market Mixed
produced, and how it is
distributed.
o Market economies:
Market economies are based on supply and demand. Businesses produce goods and
services that they believe people will want to buy, and consumers decide which goods
and services to buy with their money.
o Mixed economies: Mixed economies are a combination of command and market
economies. The government plays some role in the economy, but businesses are also
free to make their own decisions.
 The global economy is a complex system that is interconnected. Countries trade with each
other, and investment flows freely between countries. This interconnectedness means that
economic events in one country can have a ripple effect on other countries.
 Economies are important because they provide the goods and services that people need to live
and thrive. A healthy economy is one that is growing and that provides opportunities for people
to improve their lives.
 Here are some of the key benefits of a strong economy:
o Higher living standards: A strong economy can lead to higher living standards for
people. This is because a strong economy produces more goods and services, which
means that there is more for people to consume.
o Lower poverty rates: A strong economy can also lead to lower poverty rates. This is
because a strong economy creates more jobs, which gives people more opportunities to
earn an income.
o Improved health and education outcomes: A strong economy can also lead to improved
health and education outcomes. This is because a strong economy can generate more
revenue that can be used to invest in public health and education programs.
o Greater economic stability: A strong economy is also more stable, which means that it is
less likely to experience recessions and other economic downturns. This is important
because recessions can have a devastating impact on people's lives.
Sectors of Economy
 The sectors of the economy can be broadly classified into three categories: primary, secondary,
and tertiary.
 Primary sector: The primary sector is the sector of the economy that extracts raw materials
from the earth. This includes industries such as agriculture, mining, and fishing.
 Secondary sector: The secondary sector is the sector of the economy that transforms raw
materials into finished goods. This includes industries such as manufacturing, construction, and
energy production.
 Tertiary sector: The tertiary sector is the sector of the economy that provides services to
consumers and businesses. This includes industries such as retail, hospitality, healthcare, and
finance.

India’s Economic Sector At a Glance

Contribution to GDP (at
Sector current prices) Workforce share
Primary sector (agriculture,
forestry, fishing, mining, and
quarrying) 21.82% 43.96%
Secondary sector
(manufacturing, electricity,
gas, water supply, and other
utility services, and
construction) 24.29% 22.24%
Tertiary sector (services) 53.89% 33.80%
The tertiary sector is the largest sector of the Indian economy in terms of both GDP and
employment. The primary sector is the second largest sector in terms of employment, but it is
the smallest sector in terms of GDP. The secondary sector is the smallest sector in terms of
both GDP and employment.

Difference between economics and economy

Aspect Economics Economy
Definition The study of how individuals and societies The entire system or structure where economic
make choices about resource allocation to activities occur, encompassing production,
satisfy needs and wants. distribution, and consumption of goods and
services.
Focus Analytical and theoretical examination of Real-world functioning of markets, industries,
economic principles, behaviors, and decision- businesses, government policies, and economic
making processes. conditions within a specific area.
Secondary
Scope Encompasses microeconomics (individual and Includes various sectors (e.g., agriculture,
firm-level decisions) and macroeconomics manufacturing, services), employment levels,
Primary Tertiary
(aggregate economic phenomena, policies, and GDP, inflation rates, trade, fiscal policies, and the
trends). overall economic state.
Sectors
Purpose To understand and explain economic Represents theof practical manifestation of
phenomena, make predictions, and inform economic activities Economywithin a region or nation;
policy decisions. provides the context for economic analysis.
Market forces of demand and supply
 Market forces of demand and supply are the two main forces that determine the price of goods
and services in a market economy. Demand is the willingness and ability of consumers to
purchase a good or service at a given price. Supply is the amount of a good or service that
producers are willing and able to sell at a given price.
 The law of demand states that the quantity demanded of a good or service is inversely
proportional to its price. This means
that as the price of a good or service
increases, the quantity demanded
decreases. Conversely, as the price of a
good or service decreases, the quantity
demanded increases.
 The law of supply states that the
quantity supplied of a good or service is
directly proportional to its price. This
means that as the price of a good or
service increases, the quantity supplied
increases. Conversely, as the price of a
good or service decreases, the quantity
supplied decreases.
 The market equilibrium price is the price at which the quantity demanded of a good or service
equals the quantity supplied. This is the price at which the market is balanced and there is no
shortage or surplus of the good or service.
 Market forces of demand and supply can be affected by a number of factors, including:
o Consumer income: If consumer income increases, the demand for goods and services
will increase. Conversely, if consumer income decreases, the demand for goods and
services will decrease.
o Consumer preferences: If consumer preferences change, the demand for goods and
services will change. For example, if consumers become more health-conscious, the
demand for healthy food products will increase.
o Cost of production: If the cost of production of a good or service increases, the supply of
that good or service will decrease. Conversely, if the cost of production of a good or
service decreases, the supply of that good or service will increase.
o Government intervention: The government can intervene in the market to affect the
price of goods and services. For example, the government can impose taxes on goods or
services to reduce demand, or it can provide subsidies to producers to increase supply.
 Market forces of demand and supply are essential for the efficient operation of a market
economy. They help to ensure that goods and services are produced and distributed in a way
that meets the needs of consumers.

For example, let's say that the demand for milk is high and the supply of milk is low. This will lead
to a shortage of milk. In order to eliminate the shortage, the price of milk will need to increase. As
the price of milk increases, the quantity demanded of milk will decrease and the quantity supplied
 of milk will increase. This will eventually lead to a balance between supply and demand.

Factor and Non-Factor Income

 Factor income is the income that is earned from the ownership of factors of production. The
four factors of production are land, labor, capital, and entrepreneurship.
o Land: Land is the natural resources that are used to produce goods and services. Land
can include things like farmland, forests, and mineral deposits. Landowners earn rent in
exchange for allowing their land to be used to produce goods and services.
o Labor: Labor is the physical and mental effort that is used to produce goods and
services. Workers earn wages and salaries in exchange for their labor.
o Capital: Capital is the goods and services that are used to produce other goods and
services. This can include things like machinery, equipment, and buildings. Capital
owners earn interest and profits in exchange for their capital.
o Entrepreneurship: Entrepreneurship is the ability to organize and manage the factors of
production to produce goods and services. Entrepreneurs earn profits in exchange for
their entrepreneurial skills.
o Example of Factor income are such as wages and salaries, rent, interest and profits.
 Non-factor income is the income that is earned without owning factors of production. Non-
factor income can include things like government transfers, such as welfare benefits and Social
Security payments. It can also include things like gifts and inheritances.
Non-factor income is income that is received without providing any factor of production in
return. Some examples of non-factor income in India include:
Transfer payments: Transfer payments are payments made by the government to individuals
or households without any expectation of future repayment. Some examples of transfer
payments in India include:
 Old-age pension
 Disability pension
 Widow pension
 Maternity benefits
Gifts and inheritances: Gifts and inheritances are transfers of wealth from one person to
another without any expectation of future repayment.
Profits from capital gains: Capital gains are profits that are made from the sale of assets, such
 as stocks, bonds, and real estate.
Interest income: Interest income is income that is received from lending money to others.

 Factor income is the most important type of income in the economy. It is the income that is
earned by individuals and businesses through their productive efforts. Non-factor income is also
important, but it does not represent productive activity in the same way that factor income
does.
 The distinction between factor income and non-factor income is important for a number of
reasons. For example, it is used to calculate the national income and gross domestic product of a
country. It is also used to develop economic policies that promote economic growth and
development.

Concept of Circular Flow of Income

 The circular flow of income and expenditure is a simplified model of the economy that shows
how money flows between households and businesses. It is also known as the circular flow of
economic activity.
 The circular flow model has two main sectors: households and businesses. Households are the
consumers of goods and services, and
businesses are the producers of goods
and services.
 Households own the factors of
production, which are land, labor,
capital, and entrepreneurship.
Businesses rent these factors of
production from households in order to
produce goods and services.
 Businesses sell goods and services to
households, and households use their
income to purchase goods and services
from businesses. This creates a
continuous flow of money and goods
and services between households and
businesses.
 The circular flow of income and expenditure can be divided into two parts:
o The income side: This shows how households earn income from businesses. Households
earn income by selling their labor and other factors of production to businesses.
o The expenditure side: This shows how households spend their income on goods and
services produced by businesses.
 The two sides of the circular flow of income and expenditure must be equal in order for the
economy to be in balance. This means that the total income earned by households must equal
the total expenditure by households.
 The circular flow of income and expenditure can be used to explain a number of economic
concepts, such as aggregate demand, aggregate supply, and economic growth.
 Example of the circular flow of income and expenditure:
o Imagine a simple economy with two sectors: households and businesses. Households
own the factors of production, and businesses rent these factors of production to
produce goods and services.
 o Business A produces apples and sells them to households. Business B produces bread
and sells it to households.
o Households use their income to purchase apples from Business A and bread from
Business B.
o This creates a continuous flow of money and goods and services between households
and businesses.
 The importance of the circular flow of income and expenditure:
o The circular flow of income and expenditure is an important economic concept because
it helps us to understand how the economy works. It also helps us to understand the
factors that affect economic growth and development.
o The circular flow of income and expenditure is a simplified model of the economy, but it
is a useful tool for understanding the basic economic relationships between households
and businesses.

Conclusion
 As we move forward in our exploration of economics, keep in mind that these fundamental
concepts will serve as the building blocks for more advanced topics. Whether you're a student, a
business professional, or simply someone curious about the world around you, a strong grasp of
the basics of economics is invaluable. It empowers you to analyze and navigate the complex
economic forces that shape our society and the global economy. In the chapters to come, we
will delve deeper into specific aspects of economics, providing a richer understanding of this
dynamic and ever-evolving field.

Chapter 2: National Income

Introduction
 Imagine a village where everyone works together to produce goods and services. The villagers
are all self-sufficient, and they do not trade with the outside world. At the end of each day, the
villagers gather together to share their produce. They count up the total amount of goods and
services that have been produced, and they divide this amount equally among all of the
villagers. This is a simple example of national income. National income is the total amount of
goods and services produced in an economy in a given period of time. It is a measure of the
overall size and health of an economy. In the real world, economies are much more complex
than the village in our example. People specialize in different tasks, and they trade goods and
services with each other. This makes it more difficult to measure national income. Let’s
understand the concept of national income and other related variable in depth.

National Income
 National income is the total value of all final goods and services produced within a country's
borders in a given period of time, usually a year. It is a measure of the overall size and health of
the economy.
 National income is calculated using a variety of methods, but the most common method is the
expenditure approach. The expenditure approach measures national income by adding up the
total spending on goods and services in the economy. This includes spending by households,
businesses, governments, and foreign buyers.
  National income can also be calculated using the income approach. The income approach
measures national income by adding up the total income earned by all factors of production in
the economy. This includes income earned by workers, landowners, capital owners, and
entrepreneurs.
 National income is an important economic statistic because it provides a measure of the overall
size and health of the economy. It is also used to calculate other important economic statistics,
such as the gross domestic product (GDP) and the unemployment rate.
Significance of National Income
 Measures the overall size and health of the economy: National income is a good measure of
the overall size and health of the economy because it includes all final goods and services
produced in the country. This means that it captures all of the economic activity that is taking
place in the country.
 Tracks economic growth: National income can be used to track economic growth over time. This
is because national income is always increasing as the economy grows.
 Provides information about the distribution of income: National income can be used to study
the distribution of income in a country. This is because national income includes income earned
by all factors of production in the economy.
 Helps to develop economic policies: National income is used by governments and other
organizations to develop economic policies. For example, governments use national income
data to set tax rates and to determine how much to spend on public goods.
Limitations of National Income
 Measuring the value of non-market goods and services: National income includes the value of
all final goods and services produced in the country. However, it can be difficult to measure the
value of non-market goods and services, such as the value of household production and the
value of volunteer work.
 Adjusting for inflation: National income is calculated in current prices. This means that it does
not take into account inflation. In order to get a more accurate measure of economic growth,
national income is often adjusted for inflation.
 Accounting for international trade: National income is calculated for a specific country.
However, many countries engage in international trade. This means that some of the goods and
services that are produced in a country are consumed in other countries. In order to get an
accurate measure of national income, it is important to account for international trade.

Changes Done in National Income Calculations in 2015

 In 2015, the Central Statistics Office (CSO) of India made a number of changes to the way that
national income is calculated. These changes were made to bring India's national income
calculations more in line with international standards and to improve the accuracy of the data.
 The following are some of the key changes that were made in 2015:
o Change of base year: The base year for national income calculations was changed from
2004-05 to 2011-12. This was done to reflect the structural changes that have taken
place in the Indian economy since 2004-05.
o Switch to market prices: National income was previously calculated at factor cost. This
means that it did not include taxes and subsidies. In 2015, national income was switched
to market prices. This means that it now includes taxes and subsidies.
o Improved coverage of informal sector: The informal sector is a large and growing part
of the Indian economy. However, it was previously under-represented in national
 income calculations. In 2015, the CSO made some improvements to the coverage of the
informal sector in national income calculations.
o Improved estimation methods: The CSO also made some improvements to the
estimation methods used to calculate national income. These improvements are
expected to make the data more accurate.
 The changes that were made in 2015 have resulted in a number of revisions to India's national
income data. For example, the revised data shows that India's GDP growth rate was higher in
the past than previously thought.
 The changes to India's national income calculations are a positive development. They will help to
improve the accuracy of the data and make it more useful for policymakers and researchers.
India’s National Income Overview
 India's national income is the total value of all final goods and services produced in India in a
given year. It is a measure of the size of the Indian economy.
 National income can be measured in current or constant prices. Current prices reflect the
current prices of goods and services, while constant prices are adjusted for inflation.
 India's national income in current prices was ₹272.04 lakh crore in 2022-23, according to the
National Statistical Office (NSO). This means that the total value of all final goods and services
produced in India in 2022-23 was ₹272.04 lakh crore.
 India's national income in constant (2011-12) prices was ₹159.71 lakh crore in 2022-23,
according to the NSO. This means that the total value of all final goods and services produced
in India in 2022-23, adjusted for inflation, was ₹159.71 lakh crore.
 India's national income has been growing steadily in recent years. This growth is being driven
by a number of factors, including the growth of the economy, the expansion of the workforce,
and the rising productivity of workers.
 The growth of India's national income is having a positive impact on the lives of Indians. It is
leading to higher living standards, increased consumption, and investment in education and
healthcare.
 It is important to note that India's national income is still relatively low compared to other
countries. However, the rapid growth of the Indian economy is expected to lead to significant
increases in national income in the coming years.

Concept of Factor Cost and Market Price

 Factor cost is the price that producers receive for their inputs, such as labor, capital, and land. It
is the price that producers receive before any taxes or subsidies are applied.
 Market price is the price that consumers pay for goods and services. It is the price that
consumers pay after taxes and subsidies are applied.
 The difference between factor cost and market price is the amount of taxes and subsidies that
are applied to goods and services.
 Example
o A company in India produces a car. The factor cost of the car is the price that the
company receives for the car before any taxes or subsidies are applied. The market price
of the car is the price that consumers pay for the car after taxes and subsidies are
applied.
o Suppose that the factor cost of the car is ₹10 lakh. The government then imposes a tax
of ₹1 lakh on cars. This means that the market price of the car will increase to ₹11 lakh.
 o The company still receives ₹10 lakh for the car, but the consumer pays ₹11 lakh. The
difference between the factor cost and the market price is the amount of tax that is
applied to the car.
 Factor cost and market price are two important concepts in economics. Factor cost is used to
calculate national income, while market price is the price that consumers pay for goods and
services.
Concept of Flow and Stock
Flow is a measure of something that happens over a period of time. It is typically measured in units
per unit of time, such as dollars per year or cars per month.
Stock is a measure of something that exists at a given point in time. It is typically measured in units,
such as dollars, cars, or people.
The difference between flow and stock is that flow is a rate of change, while stock is an accumulation.
Here are some examples of flow and stock variables:
Flow Stock
Income Wealth
Consumption Capital
Investment Population
Government spending Unemployment
Exports Inflation
Imports

Flow and stock variables are used by economists to study the economy. Flow variables are used to
track changes in the economy over time, while stock variables are used to assess the current state of
the economy. Here is a simple example to help you understand the difference between flow and
stock:

Suppose that you have a savings account with ₹100,000 in it. This is your stock of savings. If you
deposit ₹10,000 into your savings account each month, then your savings flow is ₹10,000 per month.
Your stock of savings is increasing by ₹10,000 each month because of your savings flow. Flow and
stock are two important concepts in economics. Flow variables are used to track changes in the
economy over time, while stock variables are used to assess the current state of the economy.

Concept of Current and Constant Price

 Current price is the price of a good or service at a given point in time. It is affected by a number
of factors, including supply and demand, inflation, and government policies.
 Constant price is the price of a good or service at a specific base year, adjusted for inflation. It is
used to compare the prices of goods and services over time and to track changes in the cost of
living.
 The difference between current price and constant price is the amount of inflation that has
occurred since the base year. For example, if the price of a gallon of milk is ₹100 in the current
year and ₹50 in the base year, then the constant price of milk in the current year would be ₹25.
 Current and constant prices are used by businesses and consumers to make informed decisions.
Businesses use current prices to set their prices and to track their costs. Consumers use constant
prices to compare the prices of goods and services over time and to make informed purchases.
 Here is a simple example to help you understand the difference between current price and
constant price:
  Suppose that you bought a loaf of bread for ₹50 in 2022. In 2023, the price of bread has
increased to ₹60. The current price of bread is ₹60, but the constant price of bread in 2023 is
₹50.
 This is because the constant price of bread is adjusted for inflation. Since inflation has increased
the price of bread by 20% since 2022, the constant price of bread remains at ₹50.

Components of National Income

Gross Domestic Product (GDP)
 Gross Domestic Product (GDP) is a fundamental economic indicator that measures the total
monetary value of all goods and services produced within a country's borders during a specific
time period, usually a year or a quarter.
 It serves as a key measure of a nation's economic performance, providing insights into the
overall size and health of the economy. GDP calculations consider the value added at each stage
of production, encompassing various economic activities.

Calculation of GDP
Production (Value-Added) Approach:
 The production (value-added) approach to GDP calculation is a method that measures the total
value of goods and services produced in an economy by adding up the value added at each stage
of production.
 Value added is the difference between the value of outputs and the value of intermediate inputs
used in the production process. It is a measure of the contribution that each stage of production
makes to the overall value of the final product.
 To calculate GDP using the production approach, the following steps are taken:
o Identify all of the industries in the economy.
o Calculate the value added at each stage of production for each industry.
o Add up the value added at each stage of production for all industries.
 The following is an example of how the production approach to GDP calculation can be used:
 Suppose there are two industries in the economy: agriculture and manufacturing. The
agriculture industry produces wheat, which is then used as an input in the manufacturing
industry to produce bread.
 The value added at each stage of production can be calculated as follows:
o Agriculture: The value added in agriculture is the difference between the price of wheat
and the cost of the inputs used to produce wheat.
o Manufacturing: The value added in manufacturing is the difference between the price
of bread and the cost of the inputs used to produce bread, including wheat.
 The GDP using the production approach can be calculated as follows:
GDP = Value added in agriculture + Value added in manufacturing
 GDP calculation using the production approach is a comprehensive method that captures all of
the value that is created in the economy. It is also a relatively straightforward method to
calculate.
 However, the production approach can be difficult to implement in practice because it requires
detailed data on the value added at each stage of production for all industries in the economy.
Income Approach
 The income approach calculates GDP by summing all incomes earned by individuals and
businesses in the economy. This includes wages, salaries, rents, interest, and profits.
 It provides a perspective on how income generated in production is distributed among different
factors of production.
 Advantages:
o The income approach captures all of the income that is generated in the economy.
o The income approach is relatively straightforward to calculate.
 Disadvantages:
o The income approach can be difficult to implement in practice because it requires
detailed data on the income earned by all factors of production in the economy.
o The income approach does not account for the value of non-market goods and services,
such as the value of household production and the value of volunteer work.

Expenditure Approach:

 The expenditure approach to GDP calculation is a method that measures the total value of
goods and services produced in an economy by adding up the total spending on goods and
services in the economy.
 The spending in the economy can be divided into four categories:
o Consumption: This is the spending by households on goods and services. It includes
expenditures on durable goods (cars, appliances), nondurable goods (food, clothing),
and services (healthcare, education).
o Investment: This is the spending by businesses on new capital goods and on inventory.
It reflects the addition of productive assets to the economy.
o Government spending: This is the spending by the government on goods and services. It
covers public services, infrastructure, defense, and public administration.
o Net exports: This is the difference between exports and imports.
 To calculate GDP using the expenditure approach, the following steps are taken:
o Calculate the spending on goods and services in each of the four categories.
o Add up the spending on goods and services in all four categories.
 The following is an example of how the expenditure approach to GDP calculation can be used:
 Suppose that consumers spend $100 billion on goods and services, businesses invest $50 billion
in new capital goods, the government spends $20 billion on goods and services, and exports are
$30 billion and imports are $20 billion.
 The GDP using the expenditure approach can be calculated as follows:
GDP = Consumption + Investment + Government spending + Net exports
 GDP = $100 billion + $50 billion + $20 billion + ($30 billion - $20 billion)
 GDP = $140 billion
 GDP calculation using the expenditure approach is a comprehensive method that captures all of
the spending on goods and services in the economy. It is also a relatively straightforward
method to calculate.
 However, the expenditure approach can be difficult to implement in practice because it requires
detailed data on spending in each of the four categories.
 Advantages:
o The expenditure approach captures all of the spending on goods and services in the
economy.
 o The expenditure approach is relatively straightforward to calculate.
 Disadvantages:
o The expenditure approach can be difficult to implement in practice because it requires
detailed data on spending in each of the four categories.
o The expenditure approach does not account for the value of non-market goods and
services, such as the value of household production and the value of volunteer work.
 Overall, the expenditure approach is a valuable tool for measuring the overall size and health of
the economy. However, it is important to be aware of its limitations.

Sector wise Contribution to India’s GDP

Agriculture:
 Contribution to GDP: Around 15-20%
 Description: The agriculture sector includes activities related to crop production, animal
husbandry, forestry, and fisheries. It has been a crucial sector for India, providing
employment to a significant portion of the population, especially in rural areas.
Industry:
 Contribution to GDP: Around 25-30%
 Description: The industry sector encompasses manufacturing, mining, construction, and
utilities. It plays a pivotal role in value addition, export earnings, and infrastructure
development.
Services:
 Contribution to GDP: Around 50-55%
 Description: The services sector is the largest contributor to India's GDP. It includes various
sub-sectors such as IT services, telecommunications, finance, trade, tourism, healthcare,
education, and more. The growth of services, especially IT and business process outsourcing
(BPO), has been a significant driver of economic expansion.

GDP Deflator
 The GDP deflator is a measure that reflects the overall level of inflation within an economy by
comparing the nominal Gross Domestic Product (GDP) to the real GDP. It is a comprehensive
indicator that takes into account changes in the prices of all goods and services produced in an
economy, offering insights into the inflationary pressures faced by the economy as a whole.
 The formula to calculate the GDP deflator is as follows:
o GDP Deflator = (Nominal GDP / Real GDP) * 100
 Where:
o Nominal GDP is the total value of all goods and services produced within an economy in
current prices.
o Real GDP is the total value of all goods and services produced within an economy,
adjusted for changes in price levels (in constant prices).
 Here is an example of GDP deflator:
o Suppose that in a given year, the price of a basket of goods and services that costs Rs.
1000 in the base year costs Rs. 1100 in the current year. The GDP deflator for the
current year would be 1100/1000 = 1.1.
o This means that the prices of goods and services have increased by 10% from the base
year to the current year.
 Facts About India’s GDP
 India's GDP in 2022-23 was ₹272.04 lakh crore (approximately US$3.39 trillion) at current
prices, according to the National Statistical Office (NSO). This represents a growth of 7.2%
over the previous year.
 India's GDP growth has been slowing in recent years, but it is still one of the fastest growing
economies in the world. The growth of the Indian economy is being driven by a number of
factors, including the growth of the services sector, the expansion of the workforce, and the
rising productivity of workers.
 The Indian government is committed to maintaining high economic growth. The government
has implemented a number of reforms to boost economic growth, including reducing taxes,
improving infrastructure, and making it easier to do business in India.
 The Indian economy is expected to continue to grow in the coming years. The World Bank
projects that India's GDP will grow at an average rate of 6.5% per year over the next five
years.

Gross Value Added(GVA)

 Gross value added (GVA) is a measure of the value of goods and services produced in an
economy. It is calculated as the difference between the value of outputs and the value of
intermediate inputs.
 GVA is a more accurate measure of economic output than gross domestic product (GDP)
because it takes into account the value of all goods and services produced, regardless of
whether they are sold or not. GDP only measures the value of goods and services that are sold,
which can lead to an overestimation of economic output.
 GVA is also a more useful measure of economic performance than GDP because it can be used
to track the performance of different industries and sectors of the economy. GVA is calculated
using the following formula:
GVA = Output - Intermediate inputs
 Output is the value of all goods and services produced by an economy. Intermediate inputs are
the value of goods and services that are used to produce other goods and services. GVA is a
useful tool for governments, businesses, and economists to track economic performance and
make informed decisions.
 Example:
o A company produces a car worth Rs. 100 lakh. The cost of producing the car is Rs. 80
lakh. The GVA of the company is Rs. 20 lakh.
o A farmer grows crops worth Rs. 50 lakh. The cost of growing the crops is Rs. 40 lakh. The
GVA of the farmer is Rs. 10 lakh.
 GVA is calculated by subtracting the cost of intermediate inputs from the value of output.
Intermediate inputs are goods and services that are used to produce other goods and services.
For example, the cost of raw materials, labor, and overhead are all intermediate inputs.
 GVA is a useful measure of economic activity because it takes into account the value of all goods
and services produced, regardless of whether they are sold or not. This makes it a more
accurate measure of economic well-being than GDP.
GVA in India
India's GVA has grown steadily in recent years. In the fiscal year 2022-23, India's GVA grew by
8.7%. This was the highest growth rate since the fiscal year 2010-11. It is calculated by the Central
Statistics Office (CSO).
The service sector is the largest contributor to India's GVA, accounting for over 50% of total GVA.
The manufacturing sector is the second largest contributor, accounting for about 25% of total
GVA. The agricultural sector is the third largest contributor, accounting for about 15% of total
GVA.
The following table shows the share of each sector in India's GVA in the fiscal year 2022-23:
Sector Share of GVA (%)
Service 50.4
Manufacturing 24.9
Agriculture 15
Construction 6.7
Mining and quarrying 2
Electricity, gas, water supply and other utility
services 1
Financial, insurance, real estate and
professional services 6

The GVA- GAP in India

The GVA-GDP gap in India is the difference between the value of goods and services produced in
the economy (GVA) and the value of goods and services sold in the economy (GDP). The gap is
caused by the fact that some goods and services are produced but not sold, such as intermediate
goods that are used to produce other goods and services.
The GVA-GDP gap in India has been increasing in recent years. In the fiscal year 2021-22, the GVA-
GDP gap was estimated to be 10%. This means that about 10% of the goods and services
produced in India were not sold.
There are a number of factors that contribute to the GVA-GDP gap in India. One factor is the
informal sector. The informal sector is a large part of the Indian economy, and it is estimated that
about 90% of workers in India are employed in the informal sector. Businesses in the informal
sector often do not produce goods and services for sale, and therefore their output is not
included in GDP.
Another factor that contributes to the GVA-GDP gap is the agricultural sector. The agricultural
sector is a major contributor to India's GVA, but it is also a sector where a lot of goods and
services are produced but not sold. For example, farmers often produce food for their own
consumption, and this output is not included in GDP.
The GVA-GDP gap is an important economic indicator. It provides insights into the structure of the
Indian economy and the performance of different sectors of the economy. The government can
use the GVA-GDP gap to identify areas where it can focus its efforts to promote economic growth
and development.
Here are some of the implications of the GVA-GDP gap in India:
 The GVA-GDP gap suggests that the Indian economy is not as productive as it could be.
 The GVA-GDP gap also suggests that there is a lot of potential for growth in the informal
sector and the agricultural sector.
 The government can use the GVA-GDP gap to identify areas where it can focus its efforts
to promote economic growth and development.
The government can take a number of steps to address the GVA-GDP gap. For example, the
government can invest in infrastructure and education to help businesses in the informal sector
become more productive. The government can also provide tax breaks and other incentives to
businesses in the agricultural sector to encourage them to sell more of their produce.
Environmental Kuznets Curve (EKC)
EKC argues that in initial phases of economic development, there seems to be a positive
relationship between pollution level and per capita income.
GVA Vs GDP
Aspect Gross Value Added (GVA) Gross Domestic Product (GDP)
Measures the value added by a specific Measures the total economic output of a
Definition sector or region to the production country or region, including all economic
process. activities.
Can be calculated at various levels Represents the entire economy, offering
Scope (sectoral, regional) providing a detailed a comprehensive view of overall
view. economic activity.
Double Avoids double counting of economic Can potentially include double counting
Counting activities within sectors or regions. due to the inclusion of intermediate
goods and services.
Sum of the value added by each sector or Calculated using various approaches
Calculation region. Often used for sector-specific (production, expenditure, income) to
analysis. assess overall economic health.
Used for sector-specific analysis and Widely used for assessing the overall
Interpretation policy formulation. economic health and size, often for
international comparisons.

Gross National Product (GNP)

 Gross national product (GNP) is the total value of all final goods and services produced by a
country's residents, regardless of where they are produced. It is a measure of the overall size
and health of a country's economy.
 GNP is calculated using the following formula:
GNP = GDP + Net factor income from abroad
where:
o GDP is gross domestic product, which is the total value of all final goods and services
produced within a country's borders.
o Net factor income from abroad is the difference between the income that residents of a
country earn abroad and the income that foreigners earn in the country.
  GNP is similar to GDP, but it has one important difference: GNP includes income that residents
of a country earn abroad, while GDP only includes income that is produced within a country's
borders.
 GNP is a useful tool for policymakers and researchers because it can be used to track the
performance of a country's economy over time and to compare the economy of one country to
the economies of other countries.
 Example:
o Suppose a country produces goods and services worth Rs. 100 trillion in a year. Of this,
Rs. 20 trillion is produced by foreign-owned companies and sold to foreign consumers.
The remaining Rs. 80 trillion is produced by domestic companies and sold to domestic
consumers.
o The GNP of the country is Rs. 80 trillion. This is because GNP measures the total value of
goods and services produced by domestic residents, regardless of whether they are sold
to domestic or foreign consumers.
Significance of GNP:
 GNP provides a more comprehensive measure of a country's economic performance by
considering the earnings of its citizens on a global scale.
 GNP reflects the international reach of a country's economic activities and the contributions of
its residents to both domestic and foreign economies.
 Changes in GNP can indicate shifts in a country's role in the global economy, such as increasing
foreign investments or a growing number of citizens working abroad.

Gross National Product vs. Gross Domestic Product:

Characteristic Gross National Product (GNP) Gross Domestic Product
(GDP)
The total value of all final goods and The total value of all final goods
Definition services produced by a country's and services produced within a
residents, regardless of where they country's borders.
are produced.
Inclusion of income
earned abroad Yes No
Inclusion of income
earned by foreigners No Yes
Common use Less common than GDP More common than GNP
The total value of all goods and The total value of all goods and
services produced by Indian citizens, services produced by Indian
regardless of whether they are companies and businesses,
Example
produced in India or abroad. regardless of whether they are
owned by Indian citizens or
foreigners.

Net National Product (NNP)

 Net national product (NNP) is a measure of the total value of all final goods and services
produced by a country's residents, minus the depreciation of capital goods. It is a measure of
the overall size and health of a country's economy, taking into account the impact of
depreciation.
 NNP is calculated using the following formula:
NNP = GNP - Depreciation
  where:
o GNP is gross national product, which is the total value of all final goods and services
produced by a country's residents, regardless of where they are produced.
o Depreciation is the decrease in the value of capital goods over time.
 NNP is similar to GNP, but it has one important difference: NNP takes into account the impact of
depreciation, while GNP does not.
 Depreciation is the decrease in the value of capital goods over time due to wear and tear. It is a
cost that businesses have to incur in order to maintain their productive capacity.
 Significance of NNP:
o NNP provides a clearer picture of the net economic output available for consumption
and investment, as it adjusts GNP for the consumption of capital goods.
o NNP indicates whether an economy is maintaining, increasing, or depleting its
productive capacity over time. Positive NNP suggests that the economy is replacing
capital and maintaining its productive potential.
o A declining or negative NNP can signal that an economy is not investing enough to
replace depreciated capital, potentially affecting long-term growth.
 According to the World Bank, in 2020, India's Gross National Income (equivalent to GNP) was
approximately $2.2 trillion, and its NNP was around $1.9 trillion. This indicates that after
accounting for depreciation, the net value added by India's residents was $1.9 trillion.

Personal Income and Disposable Income

 Personal income is the total income that individuals receive in a given period of time. It includes
wages and salaries, investment income, government transfers, and other sources of income.
Personal income includes all sources of income received by individuals, whether earned or
unearned. It is calculated as the sum of the following:
Personal Income=Wages and Salaries+Rental Income+Interest+Dividends+Transfer Pay
ments Other Sources of Income
 Disposable income is the amount of income that individuals have available to spend or save
after taxes and other mandatory payments have been deducted.
Disposable Income=Personal Income−Taxes
 Significance of Personal and Disposable Income:
o Personal income reflects the earnings of individuals from various sources and provides
insights into their economic well-being.
o Disposable income is crucial for evaluating individuals' purchasing power and their
capacity to contribute to economic activity through consumption, saving, and
investment.
o Changes in personal and disposable income can influence consumer spending patterns,
savings rates, and overall economic growth.
o Personal income and disposable income are essential indicators for assessing
individuals' financial health, consumer behavior, and the overall health of the economy.
By analyzing these measures, economists and policymakers can understand the
distribution of income, predict consumer spending trends, and design effective
economic policies.
National Disposable Income and Savings
 National disposable income and savings are important economic concepts that provide insights
into a country's overall economic health, the resources available for consumption and
investment, and the nation's capacity to finance future growth.
 These measures reflect the balance between what a country earns and what it spends. Let's
explore national disposable income and savings, including their calculation, components, and
significance:
 National Disposable Income (NDI)=National Income−Taxes on Income+Subsidies on Productio
n and ImportsNational Disposable Income (NDI)=National Income−Taxes on Income+Subsidies
on Production and Imports

Calculation of National Savings:

 National savings is the portion of national disposable income that is not consumed and is set
aside for investment. It can be calculated as:
 National Savings=National Disposable Income−Consumption ExpenditureNational Savings=Na
tional Disposable Income−Consumption Expenditure

Economic Survey 2022-23: A Comprehensive Analysis of India's Economic Landscape

The Economic Survey 2022-23, released by the Government of India in January 2023, provides a
comprehensive overview of the Indian economy in the past year and its outlook for the coming year.

The Survey estimates that India's GDP grew at 7.2% in real terms in 2022-23, making it one of the
fastest growing economies in the world. This growth was driven by a strong rebound in the services
sector, which accounts for over 50% of India's GDP. The industry sector also grew at a healthy pace,
while the agriculture sector was relatively subdued.

The Survey also estimates that India's NNP grew at 7.1% in 2022-23, while its GNP grew at 7.0%. NNP
is GDP minus depreciation, while GNP is NNP plus net factor income from abroad.

The Survey notes that India's economic growth in 2022-23 was supported by a number of factors,
including:
 A strong rebound in the services sector
 A healthy pace of growth in the industry sector
 Increased government spending on infrastructure and social programs
 A favorable global economic environment

The Survey also notes that India's economy faces a number of challenges, including:
 High inflation
 Rising unemployment
 A widening trade deficit
 A weak fiscal position

The Survey projects that India's GDP will grow at 6.5% in real terms in 2023-24. This growth is
expected to be driven by a continued recovery in the services sector and a pickup in investment.
However, the Survey cautions that the outlook for the Indian economy is subject to a number of risks,
including the ongoing war in Ukraine and the possibility of a global economic slowdown.
 Overall, the Economic Survey 2022-23 paints a mixed picture of the Indian economy. On the one
hand, the economy is growing at a healthy pace and is expected to continue to grow in the coming
year. On the other hand, the economy faces a number of challenges, including high inflation and a
weak fiscal position. The Survey emphasizes the need for the government to implement policies to
address these challenges and to sustain economic growth.

Important terms
Transfer Payments
 Transfer payments are payments made by the government to individuals or businesses without
any expectation of repayment. They are a type of government spending that is used to
redistribute income and provide social welfare benefits.
 Transfer payments can be classified into two main categories:
 Social insurance payments: These payments are made to individuals who have paid into social
insurance programs, such as Social Security and Medicare.
 Public assistance payments: These payments are made to individuals who are in need,
regardless of whether they have paid into social insurance programs.
 Some examples of transfer payments include:
o Social Security benefits
o Medicare benefits
o Unemployment benefits
o Welfare benefits
o Food stamps
o Housing assistance
o Pell grants
 Transfer payments are an important part of the social safety net. They help to provide a basic
level of income and support to individuals and families who are struggling.

Capital Output Ratio

 The capital output ratio (COR) is a measure of the amount of capital required to produce a unit
of output. It is calculated by dividing the total amount of capital stock by the total output of
goods and services produced in an economy.
 The COR is an important economic concept because it can be used to assess the efficiency of
production. A lower COR indicates that less capital is required to produce a unit of output, which
means that the economy is more efficient.
 The COR can also be used to forecast economic growth. A higher COR indicates that more capital
will be required to produce a unit of output, which means that economic growth will slow down.
 The COR is calculated using the following formula:
COR = Capital stock / Output
 where:
o Capital stock is the total value of all physical capital assets in the economy, such as
machinery, equipment, and buildings.
o Output is the total value of all goods and services produced in the economy.
 The COR can be measured at the aggregate level for the entire economy, or it can be measured
at the industry level or the firm level.
  The COR can vary over time and across different economies. It is generally higher in developing
countries than in developed countries. This is because developing countries need to invest
more in capital goods in order to grow their economies. It is used to assess the efficiency of
production and to forecast economic growth. Some of the key factors that can affect the COR:
o The level of technology: A higher level of technology can lead to a lower COR, because
it can allow businesses to produce more output with less capital.
o The cost of capital: A higher cost of capital can lead to a higher COR, because businesses
will be less likely to invest in new capital goods if the cost of doing so is high.
o The availability of capital: A shortage of capital can lead to a higher COR, because
businesses will have to pay a premium for capital if it is scarce.
o The productivity of capital: The productivity of capital is the amount of output that is
produced with each unit of capital. A higher productivity of capital can lead to a lower
COR, because businesses will need less capital to produce a given level of output.

Incremental Capital Output Raito(ICOR)

 The incremental capital output ratio (ICOR) is a measure of the amount of additional capital
required to produce an additional unit of output. It is calculated by dividing the change in capital
stock by the change in output.
 The ICOR is an important economic concept because it can be used to assess the efficiency of
investment. A lower ICOR indicates that less capital is required to produce an additional unit of
output, which means that the economy is more efficient.
 The ICOR can also be used to forecast economic growth. A higher ICOR indicates that more
capital will be required to produce an additional unit of output, which means that economic
growth will slow down. ICOR is calculated as follows:
ICOR = ΔC / ΔY
o Where:
o ΔC represents the change in capital investment.
o ΔY represents the change in GDP.
 Typically, ICOR is calculated over a specific period, often annually, to assess the effectiveness of
investment in that time frame.

Green GDP

 Green GDP is a measure of economic activity that takes into account the environmental impact
of production and consumption. It is calculated by subtracting the cost of environmental
damage from GDP.
 The goal of green GDP is to provide a more accurate measure of economic well-being. GDP does
not take into account the environmental costs of production and consumption, such as pollution
and climate change. This can lead to an overestimation of economic well-being.
 Green GDP is calculated using the following formula:
Green GDP = GDP - Cost of environmental damage
 The cost of environmental damage is estimated using a variety of methods, such as damage to
human health, damage to ecosystems, and damage to infrastructure.
 Green GDP is still a relatively new concept, and there is no single agreed-upon methodology for
calculating it. However, there is a growing interest in green GDP as a way to measure economic
well-being in a more sustainable way.
 Initiative taken by India to measure Green GDP
 The Ministry of Statistics and Programme Implementation has started compiling
environmental accounts under the Natural Capital Accounting and Valuation of Ecosystem
Services (NCAVES) project.
 The NCAVES project was launched in 2017 by the United Nations and the European Union to
improve our understanding of ecosystem accounting and develop better accounting methods.
 The Green Accounting for Indian States & Union Territories (GAISP) project is building a
framework for environmentally adjusted national income accounts.
 Uttarakhand is the first state in India to measure Gross Environment Product (GEP).
 GEP is a measure of economic activity that takes into account the environmental costs of
production and consumption.

Potential GDP
Potential Gross Domestic Product (GDP):
 Potential GDP is an estimate of the maximum level of output that an economy can sustain over
the long term without generating excessive inflation.
 It represents the economy's production capacity when all resources, including labor and capital,
are fully utilized but without causing inflationary pressures.
 Potential GDP assumes that an economy is operating at its natural or full employment level,
meaning that all available resources are being employed efficiently.
Union Budget 2023-24: Charting India's Economic Course Towards Growth and Consolidation

The Union Budget for 2023-24, which was presented to the Parliament on February 1, 2023, estimates
that India's GDP will grow at 6.5% in real terms in 2023-24. This growth is expected to be driven by a
continued recovery in the services sector and a pickup in investment. The budget also estimates that
India's NNP will grow at 6.4% in 2023-24, while its GNP will grow at 6.3%. NNP is GDP minus
depreciation, while GNP is NNP plus net factor income from abroad.
The budget highlights the importance of fiscal consolidation, and it sets a target of reducing the fiscal
deficit to 4.5% of GDP in 2023-24. The budget also proposes a number of measures to boost economic
growth, including:
 Increased spending on infrastructure and social programs
 Tax cuts for businesses and individuals
 Measures to promote investment and exports
The budget also announces a number of measures to address the challenges facing the Indian
economy, including:
 Steps to bring down inflation
 Measures to create jobs
 Policies to support vulnerable sections of society
Overall, the Union Budget for 2023-24 is a growth-oriented budget that aims to address the
challenges facing the Indian economy. The budget's focus on fiscal consolidation and economic
growth is likely to have a positive impact on India's GDP, NNP, and national income in the coming
years.
Chapter 3: Economy Growth and Development
Introduction
 Once upon a time, there was a small village. The villagers were poor and had very little. They
lived in simple huts and had to work hard to survive. One day, a wise old man came to the
village. He told the villagers that they could grow and develop if they worked together. He
taught them how to farm better, how to build better houses, and how to trade with other
villages. The villagers followed the wise old man's advice. They worked together to improve
their lives. They built better roads and bridges. They opened schools and hospitals. They started
businesses and created jobs.
Over time, the village grew and developed. The villagers became wealthier and more
prosperous. They had better food, better housing, and better healthcare.
 They were able to send their children to school and give them a better future. The wise old man
was proud of what the villagers had accomplished. He told them that they were an example to
other villages. He said that if they continued to work together, they could achieve even greater
things. The story of the village illustrates the concept of growth and development. Growth is the
process of becoming larger or more numerous. Development is the process of becoming more
advanced or sophisticated. After understanding in brief about growth and developments lets dig
deeper and understand other facets of growth and development in detail.
Economic Growth
 Economic growth is the increase in the output of goods and services in an economy over time. It
is typically measured as the percentage change in gross domestic product (GDP) from one year
to the next.
 For example, if GDP grows by 5% in one year, this means that the economy produced 5% more
goods and services in that year than it did in the previous year.
 Economic growth is important because it allows people to have better lives. When an economy
grows, people have more goods and services to consume. They also have more jobs and higher
wages. This can lead to a better
standard of living for everyone. Educati
 Here is a simple example to help you on
understand economic growth:
o Suppose that a country's GDP in
2022 is ₹100 trillion. In 2023,
GDP grows by 5% to ₹105 Factors
trillion. This means that the Driving Investm
Trade
economy produced 5% more Econoic ent
goods and services in 2023 than Growth
it did in 2022.

Factors Driving Economic Growth

 Investment: When businesses invest in Technol
new machinery and equipment, they ogy
are able to produce more goods and
services. This leads to economic
growth. Example: A company invests in a new factory that can produce more cars per hour. This
leads to an increase in output and economic growth.
  Technology: Technological innovation can also lead to economic growth. New technologies can
make businesses more productive and efficient. This can lead to lower costs and higher output.
Example: The development of the internet has led to the creation of new businesses and new
ways of doing business. This has led to increased output and economic growth.
 Education: A well-educated workforce is more productive than an uneducated workforce. This
can lead to economic growth. Example: A country with a high level of education may be able to
produce more skilled workers. This would lead to an increase in output and economic growth.
 Trade: Trade allows countries to specialize in the production of goods and services that they are
good at producing. This can lead to increased efficiency and economic growth. Example: A
country that is good at producing wheat may trade wheat with another country that is good at
producing cars. This would allow both countries to produce more goods and services than they
could if they were trying to produce everything themselves.
 Example of How These Factors Can Work Together to Drive Economic Growth
o Suppose that a country invests in education, which leads to a more skilled workforce.
This skilled workforce then uses new technologies to produce more goods and services.
The country also opens up trade with other countries, which allows it to specialize in the
production of goods and services that it is good at producing. This all leads to economic
growth.
o For example, a country may invest in education to train more engineers. These
engineers can then use their skills to develop new technologies that can be used to
produce more goods and services. The country may also open up trade with other
countries to sell these goods and services. This would lead to increased output and
economic growth.
Economic Development
 Economic development is a multidimensional concept that involves the sustained improvement
of various aspects of a nation's or region's well-being. It goes beyond mere economic growth,
which focuses on increasing the output of goods and services, to include broader indicators of
progress and quality of life. Key aspects of economic development include income growth,
poverty reduction, education, healthcare, infrastructure, industrialization and diversification,
income distribution, environmental sustainability, institutional and political stability, access to
financial services, innovation and technology, global trade and integration, and social inclusion
and gender equality.
 The primary goal of economic development is to reduce poverty by improving living standards
for the poorest segments of the population by providing better access to education, healthcare,
and economic opportunities. Economic development is a complex and ongoing process that
requires a combination of public policies, private sector initiatives, and international
cooperation. It aims to improve the overall quality of life for a society's residents by fostering
economic growth, reducing poverty, and addressing a wide range of social and environmental
challenges.
 Here is an example of economic development:
o Suppose that a country invests in education and healthcare. This leads to an increase in
the literacy rate and life expectancy of its citizens. The country also invests in
infrastructure, which improves the quality of roads, bridges, and other public services.
Finally, the country opens up trade with other countries, which leads to an increase in
exports and imports.
 o All of these factors contribute to economic development. The country's citizens now
have a higher standard of living, as they have more money to spend on goods and
services. They also have better access to education, healthcare, and other essential
services.

Difference between Economic Growth and Economic Development

Characteristic Economic Growth Economic Development
Definition The increase in the output of The process of improving the
goods and services in an well-being of people in an
economy over time. economy.
Measurement Income, poverty, education,
Gross domestic product (GDP) healthcare, infrastructure, etc.
Focus Quantity Quality
Relationship Economic growth is a necessary
condition for economic
development, but it is not
sufficient. Economic
development requires sustained
economic growth, as well as
investment in human capital,
infrastructure, and other social
goods.

Human Development Index

 The Human Development Index (HDI) is a composite index of life expectancy, education, and
income per capita indicators, which are used to rank countries into four tiers of human
development. The HDI was developed by the United Nations Development Programme (UNDP)
in 1990 and is currently used to track human development progress over time.
 The HDI is calculated as follows:
HDI = (L * 1/3) + (E * 1/3) + (I * 1/3)
 where:
o L is the life expectancy index, which is calculated as the average of life expectancy at
birth for men and women.
o E is the education index, which is calculated as the mean of two indices: one for mean
years of schooling and one for expected years of schooling.
o I is the income index, which is calculated as the natural logarithm of gross national
income per capita (GNI) converted to purchasing power parity (PPP).
 The HDI is a useful tool for measuring human development because it takes into account a
variety of factors, including life expectancy, education, and income. It is also a relatively simple
index to calculate, which makes it easy to use for tracking progress over time.
 The HDI is ranked on a scale of 0 to 1, with 1 being the highest possible score. Countries are
divided into four tiers of human development:
o Very high human development: HDI of 0.800 or higher
o High human development: HDI of 0.700 to 0.799
o Medium human development: HDI of 0.600 to 0.699
 o Low human development: HDI of 0.500 or lower
 The HDI is a valuable tool for understanding the challenges and opportunities facing countries
around the world. By tracking human development progress over time, we can better
understand what works and what does not in promoting human well-being.

Key Findings of Human Development Report

The key findings of the latest Human Development Report (HDR) for India are:
 India's HDI has increased from 0.52 in 1990 to 0.633 in 2021. This is a significant achievement,
but India still ranks 132 out of 189 countries on the HDI.
 India's HDI has grown faster than the global average over the past three decades. However,
the pace of progress has slowed in recent years.
 India's HDI gains have been unevenly distributed. Some groups, such as women, Scheduled
Castes, and Scheduled Tribes, have made faster progress than others.
 India's HDI is still below the level of other countries with similar levels of income. This
suggests that there are other factors, such as inequality and discrimination, that are holding
India back.
The HDR also identifies a number of challenges that India needs to address in order to promote
human development. These challenges include:
 Inequality: Inequality is a major obstacle to human development in India. The richest 10% of
Indians control more than 50% of the country's wealth.
 Gender inequality: Gender inequality is also a major obstacle to human development in India.
Women are more likely to be poor, less likely to be educated, and more likely to experience
violence than men.
 Discrimination: Discrimination against marginalized groups, such as Scheduled Castes and
Scheduled Tribes, is also a major obstacle to human development in India.
 Climate change: Climate change is a major threat to human development in India. India is one
of the countries most vulnerable to the effects of climate change.
The HDR concludes by calling for a renewed commitment to human development in India. The HDR
argues that human development is the best way to create a more just and equitable society.
Here are some specific recommendations from the HDR for India:
 Invest in education and healthcare. Education and healthcare are essential for human
development. Governments should invest in these sectors to ensure that everyone has access
to quality education and healthcare.
 Promote gender equality. Gender equality is essential for human development. Governments
should promote gender equality in all areas of society, including education, employment, and
politics.
 Protect the environment. Climate change is a major threat to human development.
Governments should take action to protect the environment and mitigate the effects of
climate change.
 Reduce inequality. Inequality is a major obstacle to human development. Governments
should implement policies to reduce inequality and promote shared prosperity.

Chapter 4: International Structural Reforms

Introduction
 Several economic policy frameworks reflecting various development and governance
philosophies have emerged in the context of the global economy. The Washington Consensus,
 the Beijing Consensus, and the Santiago Consensus are three prominent concepts. Each of these
paradigms reflects a unique set of economic principles and suggestions for public policy,
frequently linked to the areas or organizations that supported them.

Washington Consensus
 The Washington Consensus is a set of ten economic policy prescriptions considered to constitute
the "standard" reform package promoted for crisis-wracked developing countries by
Washington, D.C.-based institutions such as the International Monetary Fund (IMF), World Bank
and United States Department of the Treasury. The term was first used in 1989 by English
economist John Williamson.
 The ten policy prescriptions of the Washington Consensus are:
o Fiscal discipline: Governments should reduce budget deficits and government debt.
o Reorientation of public spending: Public spending should be shifted away from
subsidies and towards investment in health, education, and infrastructure.
o Tax reform: Tax systems should be reformed to broaden the tax base and reduce tax
rates.
o Liberalization of interest rates: Interest rates should be set by the market, not by the
government.
o A competitive exchange rate: The exchange rate should be set at a level that makes
exports competitive and imports expensive.
o Trade liberalization: Barriers to trade, such as tariffs and quotas, should be reduced or
eliminated.
o Foreign direct investment (FDI) liberalization: Restrictions on FDI should be reduced or
eliminated.
o Privatization: State-owned enterprises should be privatized.
o Deregulation: Barriers to entry and exit in markets should be reduced or eliminated.
o Secure property rights: Property rights should be protected.
 Example:
o A developing country that is facing a financial crisis may implement the Washington
Consensus reforms in order to obtain a loan from the IMF. The reforms may include
reducing government spending, raising taxes, liberalizing trade, and privatizing state-
owned enterprises.
o For example, the IMF may require the country to reduce its budget deficit by cutting
spending on subsidies. The country may also be required to raise taxes on businesses
and individuals. In addition, the IMF may require the country to liberalize trade by
reducing tariffs and quotas. Finally, the IMF may require the country to privatize state-
owned enterprises, such as telecommunications companies and airlines.
 The Washington Consensus reforms have been controversial. Some economists argue that the
reforms have led to economic growth and poverty reduction in developing countries. Others
argue that the reforms have benefited the rich at the expense of the poor and have led to
environmental damage.
 It is important to note that the Washington Consensus is not a one-size-fits-all solution. The
specific reforms that are needed will vary depending on the country's circumstances.
Beijing Consensus
 The Beijing Consensus is a term coined by Joshua Cooper Ramo in 2004 to describe China's
economic development model. It is often contrasted with the Washington Consensus, which is a
set of ten economic policy prescriptions promoted by the IMF, World Bank, and U.S. Treasury.
  The Beijing Consensus is not a formal set of policies, but rather a loose set of principles that
have guided China's economic development in recent decades. These principles include:
o State intervention: The state plays a key role in the economy, through ownership of
state-owned enterprises (SOEs), investment in infrastructure, and regulation of the
market.
o Gradualism: China has implemented economic reforms gradually, rather than all at
once. This has helped to avoid disruptions and instability.
o Innovation: China has placed a strong emphasis on innovation, both in the public and
private sectors. This has helped to drive economic growth and competitiveness.
o Self-determination: China has rejected the idea that there is a single best way to
develop an economy. Instead, China has pursued its own path to development, based
on its own unique circumstances.
 The Beijing Consensus has been successful in lifting millions of Chinese people out of poverty
and transforming China into a major economic power. However, it has also been criticized for its
authoritarian nature and its environmental impact.
 Here are some examples of how the Beijing Consensus has been applied in practice:
o The Chinese government has invested heavily in infrastructure, such as roads, railways,
and airports. This has helped to connect different parts of the country and to facilitate
trade and investment.
o The Chinese government has also supported the development of SOEs in key industries,
such as telecommunications, energy, and transportation. This has helped to create jobs
and to promote economic growth.
o The Chinese government has encouraged innovation in the private sector by providing
subsidies and tax breaks to high-tech companies. This has helped to create new
industries and to boost the economy.
 The Beijing Consensus has been influential in other developing countries, which have been
looking for alternative models to the Washington Consensus. However, it is important to note
that the Beijing Consensus is not a perfect model. It has its own challenges and limitations.
 Overall, the Beijing Consensus is a complex and evolving model. It is too early to say whether it
will be successful in other countries. However, it is clear that China's economic development
model has been a major success story.

Santiago Consensus
 The Santiago Consensus is a set of economic and social policy principles that were adopted in
1999 by the Economic Commission for Latin America and the Caribbean (ECLAC). It is often seen
as a response to the Washington Consensus, which is a set of ten economic policy prescriptions
promoted by the IMF, World Bank, and U.S. Treasury.
 The Santiago Consensus emphasizes the importance of social inclusion and sustainable
development. It calls for governments to invest in education, health, and social protection; to
promote economic growth that benefits all; and to protect the environment.
 The specific principles of the Santiago Consensus include:
o Investing in people: Governments should invest in education, health, and social
protection to improve the well-being of their citizens.
o Promoting equality: Governments should promote equality and social inclusion by
reducing poverty and inequality.
o Protecting the environment: Governments should protect the environment by
promoting sustainable development.
 o Open regionalism: Governments should promote open regionalism that benefits all
countries.
o Good governance: Governments should promote good governance by strengthening
institutions and promoting transparency and accountability.
 The Santiago Consensus has been influential in Latin America and other developing countries. It
has helped to shift the focus of economic policy away from growth alone and towards social
inclusion and sustainable development.
 Here are some examples of how the Santiago Consensus has been applied in practice:
o Governments in Latin America have increased investment in education and health in
recent years.
o Many countries have also introduced social protection programs, such as conditional
cash transfer programs, to help the poor and vulnerable.
o Governments have also taken steps to promote sustainable development, such as by
investing in renewable energy and reducing pollution.
o Latin American countries have also been active in promoting open regionalism through
trade agreements such as the Pacific Alliance and the Mercosur.
 The Santiago Consensus is a work in progress. It is still being debated and refined by
policymakers and academics. However, it has already had a significant impact on economic and
social policy in Latin America and other developing countries.
 Overall, the Santiago Consensus is a more inclusive and sustainable approach to economic
development than the Washington Consensus. It has helped to improve the lives of millions of
people in Latin America and other developing countries.

Difference between Washington Consensus, Beijing Consensus, and

Santiago Consensus
Framework Economic Principles Policy Recommendations Associated Associated
Region(s) Institution(s)
Washington Market-oriented Reduce government spending, Latin America IMF, World Bank,
Consensus reforms, including raise taxes, liberalize trade, and and other U.S. Treasury
fiscal discipline, privatize state-owned developing
privatization, enterprises countries
deregulation, and
trade liberalization
Beijing State intervention, Invest in infrastructure, support China and None, but often
Consensus gradualism, state-owned enterprises, other associated with
innovation, and self- encourage innovation, and developing China
determination pursue an independent countries
development path
Economic
Santiago Social inclusion and Invest in education, health, and Latin America Commission for
Consensus sustainable social protection; promote and other Latin America
development equality and social inclusion; developing and the
protect the environment; countries Caribbean
promote open regionalism; and (ECLAC)
promote good governance
Conclusion
 The Washington Consensus, Beijing Consensus, and Santiago Consensus represent different
approaches to economic development and governance. The Washington Consensus is a market-
oriented approach that has been criticized for its focus on growth at the expense of social
inclusion and sustainability. The Beijing Consensus is a state-led approach that has been
criticized for its authoritarian nature and environmental impact. The Santiago Consensus is a
more inclusive and sustainable approach that has been praised for its focus on social inclusion
and sustainable development.
 It is important to note that these are just three of many economic policy frameworks that have
been developed over time. There is no one-size-fits-all approach to economic development, and
the best approach for a particular country will depend on its specific circumstances.

Chapter 5: Evolution of Indian Economy

Introduction
 The Indian economy, an energetic tapestry woven with historical threads and modern
aspirations, holds a prominent role in the global economic scene. India's economic journey is
characterised by resilience and transformation as it navigates the difficulties of income
inequality, infrastructure gaps, and sustainability issues. The nation of India is dedicated to
innovation and inclusivity, as seen by programmes like "Make in India" and "Digital India."
 The nation's influence in international trade and alliances is expanding as a result of its use of
the demographic dividend and technical superiority. The expansion of the Indian economy is a
reflection of the country's steadfast pursuit of global sustainable development, technical
improvement, and fair growth.

Salient features of Indian Economy

 The Indian economy is the seventh largest in the world by nominal GDP and the third largest by
purchasing power parity (PPP). It is a mixed economy, with a large public sector and a growing
private sector.
 Some of the salient features of the Indian economy include:
o Rapid growth: The Indian economy has been growing at a rapid pace in recent years.
GDP growth averaged 7.5% per year between 2000 and 2019.
o Services sector dominance: The services sector is the largest sector of the Indian
economy, accounting for over 60% of GDP. The manufacturing sector is the second
largest sector, accounting for about 25% of GDP.
o High youth population: India has a young population, with over 60% of the population
under the age of 35. This demographic dividend is expected to boost economic growth
in the coming years.
o Low labor costs: India has relatively low labor costs compared to other developed
countries. This makes the country an attractive destination for foreign investment.
o Growing middle class: The Indian middle class is growing rapidly. This is expected to
boost demand for goods and services and drive economic growth.
 Here are some specific data points on the salient features of the Indian economy:
o GDP growth rate: GDP growth averaged 7.5% per year between 2000 and 2019.
o Services sector share of GDP: The services sector accounts for over 60% of GDP.
 o Manufacturing sector share of GDP: The manufacturing sector accounts for about 25%
of GDP.
o Youth population: Over 60% of the population is under the age of 35.
o Labor costs: India's labor costs are relatively low compared to other developed
countries.
o Middle class: The Indian middle class is growing rapidly.
 The Indian economy is facing some challenges, such as high levels of inequality and
unemployment. However, the economy is expected to continue to grow in the coming years,
driven by factors such as the young population, low labor costs, and growing middle class.
 The Indian government is also taking steps to address the challenges facing the economy. For
example, the government is investing in education and healthcare to improve the skills of the
workforce and reduce poverty. The government is also working to create a more conducive
environment for businesses to operate.

The Indian Economy before Independence

 The Indian economy before independence was predominantly agrarian. About 80% of the
population was employed in agriculture, and agriculture accounted for about 60% of GDP. The
industrial sector was small and underdeveloped.
 The Indian economy was also very poor. The average Indian lived on less than $1 a day. Poverty
was widespread, and illiteracy was high.
 The Indian economy was also very unequal. A small elite owned most of the wealth, while the
majority of the population lived in poverty.
 There were a number of factors that contributed to the poor state of the Indian economy before
independence. These factors included:
o Colonial rule: The British colonial government exploited India's resources and economy
for its own benefit. This led to a decline in India's industrial and agricultural production.
o Lack of investment: There was a lack of investment in India's economy before
independence. This was due to a number of factors, including the colonial government's
policies, the lack of infrastructure, and the high risk of doing business in India.
o Poor infrastructure: India's infrastructure was very poor before independence. This
made it difficult to transport goods and services, and it also made it difficult for
businesses to operate.
o Lack of education: The literacy rate in India was very low before independence. This
limited the skills of the workforce and made it difficult for businesses to operate
efficiently.
 Despite the challenges, the Indian economy did make some progress before independence. For
example, there was some growth in the industrial sector, and there was also some improvement
in the literacy rate.
 However, the overall state of the Indian economy before independence was very poor. The
majority of the population lived in poverty, and there was a high level of inequality.
Status of India's economy at the time of independence
GDP per capita: $150 (PPP)
Agriculture as a share of GDP: 60%
Industry as a share of GDP: 15%
Services as a share of GDP: 25%
Poverty rate: 90%
Literacy rate: 15%
 Life expectancy: 32 years
These data show that the Indian economy at the time of independence was very poor. The
majority of the population was employed in agriculture, and the country was heavily reliant on
imports. Poverty was widespread, and illiteracy was high.

Measures taken Post-Independence: From Reconstruction to Global

Integration
 India's post-independence economic policies have traversed a complex trajectory, adapting to
changing domestic and global dynamics. These policies have aimed to navigate challenges,
stimulate growth, and foster inclusive development. Here is a comprehensive exploration of the
key economic policy phases:
 Planned Development Era (1950s-1980s): India's economic development was guided by Five-
Year Plans, focusing on diverse sectors to achieve balanced growth. The government established
public sector enterprises to promote industrialization, reduce foreign dependency, and ensure
equitable resource distribution. India aimed to build a self-reliant industrial base to reduce
dependence on imports and create employment. The License Raj introduced stringent industrial
licensing and controls to regulate production and protect domestic industries. The Green
Revolution of the 1960s and 1970s introduced high-yield crop varieties, modern farming
techniques, and irrigation systems, revolutionizing agricultural productivity and making India
self-sufficient in food production.
 Economic Liberalization and Globalization (1991-Present): India's economic reforms in the
1990s, led by Dr. Manmohan Singh, focused on liberalization, privatization, and globalization.
Trade and investment liberalization reduced trade barriers, lowered import tariffs, and
promoted exports. Privatization and deregulation reduced government ownership in public
sector enterprises, promoting efficiency and market-driven growth. The IT boom in the late
1990s and early 2000s transformed India into a global services hub, contributing significantly to
GDP growth and job creation. The services sector, particularly IT, software services, and business
process outsourcing, became a key driver of economic growth and international
competitiveness.
 Inclusive Growth and Social Programs: The government implemented targeted programs to
tackle poverty, healthcare, education, and rural development, such as the Mahatma Gandhi
National Rural Employment Guarantee Act (MGNREGA), aiming to improve rural livelihoods and
provide employment opportunities. Additionally, programs like the Pradhan Mantri Jan Dhan
Yojana promoted financial inclusion and empowerment.
 Recent Trends and Challenges: The 21st century has seen rapid economic growth in India,
driven by domestic consumption, investment, and external demand. The country's youthful
population offers a competitive workforce and potential consumer market, but effective skill
development and job creation are crucial. Despite economic growth, challenges like income
inequality, poverty, inadequate healthcare, and environmental degradation persist, requiring
policy initiatives like Pradhan Mantri Jan Dhan Yojana, Ayushman Bharat, and Swachh Bharat
Abhiyan.
 Policy Initiatives: The Goods and Services Tax (GST) was introduced in 2017 to simplify business
operations, reduce tax evasion, and establish a single national market. The Digital India
program, launched in 2015, focuses on technology adoption, digital literacy, and e-governance
to bridge the digital divide and improve public service delivery efficiency.
 Sustainable Development and Climate Action: India is prioritizing sustainable growth and
climate commitments, integrating environmental considerations into policies to balance
 economic growth with ecological preservation, and focusing on renewable energy adoption,
afforestation, and carbon emission reduction.
 Following independence, the Indian economy underwent a transition away from planned
growth and towards liberalisation and globalisation. Opportunities and difficulties have come
with the transition, and the country is working to achieve sustainable growth, solve social
inequalities, and strike a balance between economic expansion and environmental preservation.
India's economic development is proof of its tenacity, flexibility, and desire for a wealthy future
as it navigates this difficult route.

Economic Impact of Measures taken by India since Independence

Indicator 1947 2022
GDP per capita (PPP) $150 $2,400
Agriculture as a share of GDP 60% 15%
Industry as a share of GDP 15% 25%
Services as a share of GDP 25% 60%
Poverty rate 90% 20%
Literacy rate 15% 75%
Life expectancy 32 years 70 years

Timeline of Evolution of India’s Economy

Time Period Key Events and Phases
Pre-Independence Era
17th-18th Century Diverse agricultural, handicraft, and trade activities.
1858 India comes under direct British rule after the Indian Rebellion.
1860s-1870s Indigo Revolt and protests against exploitative policies.
Late 19th Century Early efforts towards modern industries.
Post-Independence Era
1950s-1980s Import Substitution Industrialization (ISI) Era
1951 First Five-Year Plan emphasizing heavy industries and agrarian reforms.
1960s Green Revolution increases agricultural productivity.
1970s Nationalization of banks and industries, government control.
1991-Present Liberalization and Globalization Era
1991 Economic reforms embracing liberalization, privatization, globalization.
1990s-2000s Emergence as a global IT and services hub.
High economic growth, infrastructure development, Make in India and
2000s-2010s Digital India initiatives.
2017 Implementation of Goods and Services Tax (GST).
Recent Trends and
Challenges
Navigating COVID-19 pandemic, focusing on healthcare, digital adoption,
2020s and recovery.
Commitment to ambitious climate goals, emphasis on renewable energy
Climate Action and conservation.
Conclusion
 The Indian economy, despite its youth, vibrant services sector, and rich culture, faces challenges
like income inequality, inadequate infrastructure, and environmental concerns. Despite these,
India has reshaped its role as a major player in trade, technology, and international diplomacy
through economic liberalization, technological advancements, and policy initiatives. The nation's
pursuit of sustainable development, inclusive growth, and social equity demonstrates its
commitment to a better future for its citizens. As India navigates globalization, urbanization, and
sustainability, its vision of a robust, equitable, and vibrant economy remains at the forefront.
The evolution of the Indian economy demonstrates resilience, adaptability, and the nation's
enduring spirit.

Chapter 6: Planning in India

Background
 In a small village A, Maya, a wise and resourceful chief, proposed an economic plan to improve
the village's economy. The plan included crop rotation, equitable resource allocation,
diversification of skills and products, and a communal savings fund. The villagers followed the
plan diligently, and the savings fund grew steadily. As the seasons passed, the village prospered,
with abundant harvests and a better standard of living. One day, neighboring village leader Raj
visited village A to understand the success of the plan. Maya explained that economic planning
was not about being the richest or the biggest, but about using resources wisely and ensuring no
one was left behind. Raj's village also began to flourish, and the concept of economic planning
spread to neighboring villages, demonstrating that with foresight, cooperation, and fairness,
even a small community could create a more stable and prosperous future.

Introduction
 The chapter on economic planning in India explores the historical evolution, objectives, and
impact of planning in the country since its independence. It covers various facets of economic
planning, including industrial and agricultural planning, fiscal and monetary policies, and the
government's role in fostering growth and development. Additionally, it highlights the
transformation from the Planning Commission to NITI Aayog and the evolving strategies for
inclusive and sustainable development. This chapter provides valuable insights into India's
economic planning journey, from the past to the present, offering a glimpse into its future
direction.

Objectives of Planning
 The objectives of economic planning are to:
o Achieve economic growth: Economic planning can help to achieve economic growth by
allocating resources efficiently and by investing in key sectors of the economy.
o Reduce poverty: Economic planning can help to reduce poverty by providing social
safety nets and by creating jobs.
o Promote equity: Economic planning can help to promote equity by redistributing wealth
and by providing opportunities for all members of society.
o Maintain stability: Economic planning can help to maintain stability by controlling
inflation and by managing the exchange rate.
 o Protect the environment: Economic planning can help to protect the environment by
promoting sustainable development and by investing in renewable energy.
 These objectives are interrelated. For example, achieving economic growth can help to reduce
poverty and promote equity. Maintaining stability can help to create a more conducive
environment for economic growth. Protecting the environment can help to ensure that future
generations have a sustainable economy.
 Economic planning can be used to achieve these objectives in a variety of ways. For example,
governments can use economic planning to:
o Invest in infrastructure, such as roads, railways, and airports.
o Invest in education and healthcare.
o Provide subsidies to businesses and individuals.
o Set prices for goods and services.
o Regulate the economy.
o Trade with other countries.
 It is important to note that economic planning is not without its challenges. For example, it can
be difficult to accurately forecast future economic conditions. Additionally, economic planning
can be bureaucratic and slow to change. However, the potential benefits of economic planning
can outweigh the challenges.
 Overall, economic planning is a tool that governments can use to achieve important economic
objectives. By carefully planning their economic activities, governments can help to create a
more prosperous and equitable society.

Historical Background

1934
M.Visvesvaraya 1938 National
1944 Bombay 1945 People's 1950 Sarvodaya
laid the Planning
Plan Plan Plan
foudation of Committee
India's Planning

The Visvesvaraya Plan

 The Visvesvaraya Plan, proposed by Sir Mokshagundam Visvesvaraya in 1934, was a blueprint
for India's economic development. It emphasized state intervention and planned development,
urging the government to invest heavily in infrastructure, education, healthcare, and social
welfare programs. The plan also aimed to promote industrialization and develop new industries
like steel, chemicals, and machinery. Although not fully implemented, some recommendations
were adopted by the Indian government post-independence.
 The Visvesvaraya Plan was a significant contribution to India's economic thought and was one of
the first to call for state intervention and planned development. It significantly impacted India's
infrastructure and industries. Despite criticisms, the plan remains an important landmark in
India's history.
  As India continues to face challenges like poverty, inequality, and environmental degradation,
the Visvesvaraya Plan's emphasis on state intervention and planned development can be used
to address these issues. The Visvesvaraya Plan serves as a reminder that the government can
play a role in promoting economic growth and social progress.

The National Planning Committee

 After the establishment of the National Planning Committee (NPC), several significant
developments occurred in Independent India. The government formed a Post-War
Reconstruction Committee to consider various economic reconstruction plans. A consultative
committee of economists advised the four post-war Reconstruction Committees on executing
national plans. The Planning and Development Department was created to organize and
coordinate economic planning. The Advisory Planning Board was appointed to review existing
planning and make recommendations for future planning. The Advisory Planning Board
recommended the creation of a single, authoritative organization to focus on development,
leading to the establishment of the Planning Commission in 1950.
 The board believed that the proper development of large-scale industries could only occur if
political units agreed on a common plan. This suggestion had a significant impact on the
planning process, aiming for a unifying nature in development planning. However, it also
induced centralization in Indian planning, causing tension between the center and states. The
Planning Commission played a crucial role in formulating and implementing Five-Year Plans,
which guided the country's economic development for decades.

The Bombay Plan

 The Bombay Plan was a set of economic proposals developed by Indian industrialists and
economists in 1944, aimed at addressing India's economic challenges and disparities after
gaining independence from British rule in 1947. The plan emphasized industrialization, capital
formation, infrastructure development, employment generation, social welfare measures, and a
mixed economy model.
 Key features included the establishment of heavy industries, machinery, chemicals, and
infrastructure development, mobilization of savings and capital accumulation, and the
promotion of a mixed economy model with public and private sectors. Although not fully
implemented, the Bombay Plan played a significant role in shaping post-independence India's
economic development discourse and contributed to a broader understanding of economic
growth challenges and strategies.

The Gandhian Plan

 The Gandhian Plan, formulated by Sriman Narayan Agarwal in 1944, was a distinctive economic
planning approach for India, emphasizing agriculture and village-level industries over heavy and
large industries. It advocated for a decentralized economic structure with self-contained villages,
contrasting the National Planning Committee and Bombay Plan, which supported a state-led role
in the economy and heavy industries.
 The plan emphasized self-reliance, aimed for the welfare of all, and emphasized trusteeship of
property. Although not adopted by the Indian government after independence, the plan's
emphasis on decentralization, sustainability, and social justice continues to inspire policymakers
and activists. The Gandhian Plan was a significant contribution to Indian economic thought,
emphasizing the importance of people and the planet over profits.
The People’s Plan
 M.N. Roy's People's Plan, formulated in 1945, was a radical economic development plan for
India, based on Marxist socialism. It emphasized state intervention in the economy, social
justice, industrialization, and agricultural development. Although not adopted by the Indian
government after independence, the plan's emphasis on social justice and industrialization
continues to influence Indian economic policy. The plan inspired the common minimum
programs of the United Front Government and the United Progressive Alliance, and the slogan
"economic reforms with the human face" still resonates today.

The Sarvodaya Plan

 The Sarvodaya Plan, formulated by Jai Prakash Narayan in 1950, was an economic development
plan for India based on Gandhian principles. It aimed for a decentralized economy, focusing on
agriculture and village industries, and emphasized self-reliance and social justice. The plan
proposed a network of village councils to govern local affairs, focusing on education, healthcare,
and other social services. It also called for the development of cottage industries, renewable
energy sources, and sustainable agriculture. The plan was a visionary document that anticipated
challenges India would face in the post-independence era, and its emphasis on decentralization
and social justice remains relevant today.

The Five Year Plans

 The Indian Five-Year Plans have used different development strategies to achieve the two goals
of rapid economic growth and equitable distribution of wealth. Because India has a mixed
economy, the government has had to play a positive role in the economy. However, the
democratic political system has limited the government's ability to make radical decisions about
production and distribution. This has been a major challenge for developing a development
strategy.
 The state has had to play a vital role in the economy, and it has done so through the public
sector. The development strategy has been designed to meet the needs of an underdeveloped
mixed economy. The development strategies have changed over time to address the many
challenges that India has faced.
 In other words, the Indian Five-Year Plans have tried to balance the need for economic growth
with the need to reduce inequality. The government has played a key role in the economy, but
the democratic political system has limited the government's ability to make radical changes.
The development strategy has evolved over time to meet the changing needs of India.

Phase 1
 The main objective of the first five-year plan based on the Harrod-Domar model was to correct
the economic imbalances caused by World War II (1937-1945) and the partition of the country
in 1947. The result was a severe food crisis in the divided regions of the country, which led to
the decision in the first five-year plan to direct the bulk of public sector investment to
agriculture and irrigation facilities.
 The Second Five Year Plan was a turning point in the history of India's industrialization. The
focus of the plan was on heavy industry and capital goods industries. The second five-year
planning model is also known as the Mahalnobis model. The basic idea was that economic
development was generally associated with industrial expansion, as was clearly the case in
Western industrialized countries. The Maharnobis model aimed to correct the imbalances in the
 industrial structure that arose during the British rule. Since the need for large investments to
support heavy industry and capital goods industries could only be met by the government, the
public sector was given the responsibility of putting the country on the path to industrialization.
o Maharnobis introduced an import-substitution growth pattern and an inward-looking
development model that envisaged domestic production of goods as a substitute for
imports. The goals of self-reliance and inclusive development required not only huge
investments, but also the development of policies that supported high quotas, tariffs,
and tariffs (protectionism). Therefore, a well-protected non-competitive environment
has been created to enable productivity, efficiency and even time and cost savings to
gain a position in the world market.
 The Third Five Year Plan continued the Maharnobis model of achieving growth through
industrialization. The first three of his five-year plans envisaged strong annual growth of 8-10
percent in the industrial sector. The rate of industrial growth was important for newly
independent countries devastated by years of colonial rule. Huge steel mills, power plants,
dams, and large-scale power stations were built during this period. Plans based on the
Maharnobis model undoubtedly brought high growth rates and rapid industrial development to
the country, but they were not sufficient to address the major problems of poverty,
unemployment, and inequality. It ignored the potential for export-led growth. Further setbacks
came in the form of two consecutive droughts in 1966 and his 1967 and his two wars in 1962
and his 1965. The country faced major challenges and a subsequent decline in her GDP growth
rate. However, India learned lessons from this crisis and recognized the weaknesses in its
existing development strategy: neglect of agriculture and over-reliance on foreign aid. As a
result, the planning strategy was revised and subsequent plans placed greater emphasis on
agricultural technological development and the need for self-reliance (reducing dependence on
outsiders).
 The goal of self-reliance was emphasized in the fourth five-year plan, which also marked the
beginning of the "GREEN REVOLUTION" and a new period in Indian agriculture history. Although
there were three-year Annual Plans from 1966 to 1969, the fourth plan (1969–1974) attempted
to strengthen the position on the food front by setting the groundwork for prospective future
exports. A major change from the previous approach of "only growth" to "growth with social
justice" or "growth with redistribution" was made in the fifth five-year plan (1974–1979).
 The first three programmes were centred on "GROWTH," with the idea that an increase in
growth rate will eventually benefit even the poorest of the impoverished. However, after years
of preparation, nothing of the type ever materialized, necessitating a new strategy. To attain the
goal of eradicating poverty, several anti-poverty measures have been implemented.
 The years 1979 and 1980 saw the return of annual plans. The sixth plan was supposed to begin
in 1979 but was unable to since the Janata administration was ousted. Following Mrs. Indira
Gandhi's establishment of the new administration, the sixth plan was established in 1980. The
sixth plan kept its emphasis on eradicating poverty.
 After the nation had seen a GDP growth rate of 5.4 percent under the sixth plan, the seventh
plan (1985–1990) was established. The seventh plan put a strong emphasis on energy efficiency
targets as well as productivity-boosting initiatives. The strategy placed a strong emphasis on
measures and initiatives that would boost productivity, employment possibilities, and food grain
production. Massive investments in new sectors were replaced by initiatives to boost
 productivity and efficiency in the already-existing ones. Numerous initiatives were started with
an emphasis on energy needs.

Assessment of Phase 1
 The first five-year plan of India's independence was successful due to favorable monsoons
and strategic policy making. The Mahalnobis investment strategy, formulated during the
second five-year plan, became the cornerstone of the five-year plans for many years. The
Nehru-Mahalnobis model was based on long-term development goals and was praised for
increasing saving and investment rates, setting up economic and physical infrastructure,
and expanding the capital goods sector. However, it faced criticism for inadequate
emphasis on agriculture, small-scale industries, growing unemployment, inequality,
frequent trade deficits, and rising prices.
 The third plan suffered due to severe famine and two wars, impacting the flow of foreign
aid. The fourth plan aimed for an economic growth rate of 5.5% and self-reliance, but
failed due to the India-Pakistan war 1971 and the international oil crisis 1973. The fifth
plan achieved a 5.5% GDP growth rate but faced economic crises such as high inflation
and escalating costs. The sixth plan was successful in terms of growth rate and overall
development, but severe famines during 1984-85 led to a fall in food grain production.
The seventh plan was a great success, with the Indian economy achieving a growth rate of
6.5%, compared to the average of 3.5% in previous plans.

Phase 2(Post LPG Reforms)

 The 8th plan (1992-97) was introduced in 1992 due to political changes and a severe BOP crisis
in the country. The Rao-Manmohan reforms initiated macro-economic reforms to tackle the
problems and move the economy towards high growth and stability. The 8th plan aimed for
economic growth and social justice, leading to a new era of high GDP and industrial resurgence.
The eighth five-year plan achieved a high GDP growth rate of 6.8%.
 The 1990s saw a shift in development strategy with the onset of the New Economic Policy (NEP),
which introduced liberalization, privatization, and globalization. The NEP was market-oriented
and provided a greater role for the private sector. This led to a change in the state's role and
planning instrument in economic development. The public sector shifted from a commanding
heights role to a coordinating private initiative role. The five-year plans are now more indicative,
focusing on growth with equity and social justice, with greater reliance on market mechanisms
and private sector. Foreign investments and trade are also stressed in accelerating economic
development.
 The United Front Government's 9th plan (1997-2002) aimed for growth with social justice and
equality, focusing on agriculture and rural development to generate employment and eradicate
poverty. However, it only achieved 5.3 % of GDP growth rate. The 10th plan (2002-07)
addressed growing poverty and inequality, redefining the government's role and providing an
encouraging role for the private sector. The plan identified areas where the state's role needs to
expand, such as social sectors and infrastructure development, where the private sector cannot
significantly contribute. The plan targeted a growth rate of 8% but could achieve 7.8%.
 The 11th plan (2007-2012) aimed for sustainable development and inclusive growth, aiming for
faster, broader-based growth and a GDP growth rate of 9% per annum. It planned to raise the
investment rate from 31.1% of GDP to 35.1% to achieve higher growth and social justice. The
 India's GDP growth rate of 9% was set to improve living standards and generate resources for
financial and social sector programs aimed at poverty reduction and inclusion. The economy
performed well, with an average of 8.2% growth for the first four years.
o The 11th plan, which paralleled the 10th plan, had modest growth rates despite external
challenges such as the American sub-prime crisis and the European crisis. The plan
aimed to decrease poverty by 2% per year, aiming to achieve the MDG target of 50%
reduction of poverty between 1990-2015. However, challenges such as inflation, rising
trade account deficits, and global economic uncertainties need to be addressed. The
plan allocated 30% of the plan outlay for social services, including education, health, and
welfare services, while 42% was allocated for energy, transport, and infrastructure. The
11th plan emphasized social sector, infrastructure, and rural development, aiming for
inclusive growth and sustainable development.
 Faster, more sustainable, and more inclusive growth are the main goals of the 12th plan (2012–
2017). This plan has to face the internal and external challenges. Despite the difficulties, the
GDP growth rate was remarkable. While there is a lot of anxiety about inflation, achieving
quicker, more sustainable, and more inclusive growth might help to counteract its negative
effects and disparities. India is performing better than many other nations.
Plan Name Period Planned Actual Focus and Objectives Key Targets and
Growth Rate Growth Rate Achievements
- Targeted
agriculture and
Objective: Balanced
irrigation
economic development. Key
First Five-Year 1951-1956 projects. -
Features: Agriculture and
Plan 2.10% 3.50% Achieved an
irrigation were the main
average annual
focus.
growth rate of
3.6% in GDP.
- Emphasized
heavy industries
and power
Objective: Industrialization
Second Five-Year 1956-1961 4.50% 3.80% generation. -
and reducing economic
Plan Recorded an
disparities.
average annual
GDP growth rate
of 4.1%.
- Focused on
agricultural
modernization
Objective: Self-sufficiency and food
Third Five-Year 1961-1966
5.60% 3.30% and the Green Revolution in production. -
Plan
agriculture. Achieved
significant growth
in food grain
output.
Fourth Five-Year 1969-1974 4.40% 3.80% Objective: Priority to - Gave priority to
Plan agriculture, employment employment
generation, and poverty programs and
alleviation. poverty
alleviation
schemes. -
Achieved an
average GDP
 growth of 3.3%.
- Increased
allocations for
4.40% 4.80% Objective: Addressing social sector
Fifth Five-Year 1974-1979
poverty and promoting development. -
Plan
social justice. Average annual
GDP growth rate
of 4.8%.
- Focused on
infrastructure
development and
Objective: Accelerated
Sixth Five-Year 1980-1985 5.20% 5.60% rural
growth, social justice, and
Plan development. -
poverty reduction.
Achieved an
average GDP
growth of 5.7%.
- Emphasized
human resource
5.00% 6.80% Objective: Infrastructure development and
Seventh Five-
1985-1990 development and technology
Year Plan
employment generation. adoption. - GDP
growth averaged
around 6%.
- Introduced
economic
Objective: Economic liberalization and
Eighth Five-Year 1992-1997 reforms, human structural
Plan 5.60% 6.80% development, and poverty reforms. -
reduction. Achieved an
average GDP
growth of 6.7%.
- Focused on
education,
healthcare, and
Objective: Sustainable
Ninth Five-Year 1997-2002 environmental
development and poverty
Plan 6.50% 5.40% sustainability. -
reduction.
Achieved an
average GDP
growth of 5.4%.
- Continued
economic reforms
Objective: Accelerated and rural
Tenth Five-Year 2002-2007 8% 7.50% growth, employment development
Plan generation, and rural programs. -
development. Recorded an
average GDP
growth of 7.7%.
- Increased
spending on
education,
Objective: Inclusive growth, healthcare, and
Eleventh Five- 2007-2012
infrastructure development, rural
Year Plan
and poverty reduction. infrastructure. -
9% 7.90% GDP growth
averaged around
7.9%.
Twelfth Five-Year 2012-2017 8% 7.30% Objective: Inclusive growth, - Prioritized
Plan sustainability, and social infrastructure,
 social welfare,
and sustainable
development. -
sector development.
GDP growth
averaged around
7.5%.

Planning Commission
 The Planning Commission of India was a government body responsible for formulating and
implementing India's Five-Year Plans. It was established in 1950 and dissolved in 2014.
 The Planning Commission's main functions included:
o Formulating the Five-Year Plans
o Advising the government on economic policy
o Monitoring and evaluating the implementation of the Five-Year Plans
o Providing financial assistance to states and other agencies for implementing the Five-
Year Plans
 The Planning Commission was chaired by the Prime Minister of India and had a number of
members from different government departments and other organizations. It also had a number
of advisory committees that provided input on specific areas of development.
 The Planning Commission played a significant role in India's economic development. It helped to
increase investment in infrastructure, industry, and agriculture. It also helped to reduce poverty
and improve social indicators such as literacy and life expectancy.
 However, the Planning Commission was also criticized for being too bureaucratic and for not
being responsive to the needs of the people. It was also criticized for not being transparent in its
decision-making process.

The National Institution for Transforming India (NITI Aayog)

 NITI Aayog (National Institution for Transforming India) is a policy planning body of the
Government of India. It was established in 2014 by the Narendra Modi government to replace
the Planning Commission.
 NITI Aayog is a smaller and more informal body than the Planning Commission. It is chaired by
the Prime Minister of India and has a smaller number of members, who are appointed by the
Prime Minister. NITI Aayog also has a smaller number of advisory committees.
 NITI Aayog's main functions include:
o Providing strategic and policy advice to the government
o Monitoring and evaluating the implementation of government policies
o Promoting innovation and entrepreneurship
o Facilitating cooperation between the central government, state governments, and the
private sector
 NITI Aayog has been criticized for being too close to the government and for not being
independent enough. However, it has also been praised for its focus on innovation and
entrepreneurship.
 NITI Aayog's role in India's economic development remains to be seen. However, it is clear that
the body is a significant departure from the Planning Commission and that it is likely to have a
major impact on India's economic policy.
  Overall, NITI Aayog is a more agile and responsive body than the Planning Commission. It is
designed to be more in touch with the needs of the people and to be more effective in
promoting economic development.
Feature NITI Aayog Planning Commission
Size Smaller Larger
Structure More informal More formal
Appointed by the Prime Elected by Parliament
Membership Minister
Strategic and policy advice, Planning, advising the
monitoring and evaluation, government, monitoring and
Functions innovation and evaluation, and providing
entrepreneurship, and financial assistance.
cooperation
Relationship with the Close More independent
government

Conclusion
 Indian economic planning has evolved significantly since independence. While it has achieved
notable successes and transformed India into one of the world's largest economies, it also faces
persistent challenges. The future of Indian economic planning will likely involve continued
reforms, investment in human capital and infrastructure, sustainable development, and efforts
to ensure that the benefits of growth are more evenly distributed among its diverse population.

Key Points from Economic Survey 2022-23 on India’s Economic Planning

 The Economic Survey of India 2022-23 highlights the following key points on India's
economic planning:
o India needs to adopt a more strategic approach to planning. This means that planning
needs to be based on a long-term vision of the country's economic goals, as well as be
more flexible and adaptable to changing circumstances.
 India should focus on the following areas in its planning efforts:
o Investing in human capital, including education, healthcare, and skill development.
o Promoting infrastructure development, including roads, railways, airports, and ports.
o Creating a more investor-friendly environment, including reducing regulatory burdens
and simplifying taxes.
o Reforming the public sector undertakings (PSUs), including disinvesting from loss-
making PSUs and restructuring the remaining PSUs.
 The Economic Survey also highlights the importance of the following for effective economic
planning:
o Data-driven planning: Planning should be based on a sound understanding of the
economy and the challenges and opportunities that it faces.
o Participatory planning: Planning should involve the participation of all stakeholders,
including the government, businesses, civil society, and the public.
o Monitoring and evaluation: Planning is an ongoing process and it is important to
monitor and evaluate the implementation of plans and make adjustments as needed.
 The Economic Survey concludes by stating that economic planning is essential for India to
achieve its economic goals. However, it is important to adopt a more strategic approach to
planning and to focus on the key areas of investment and reform.
Chapter 7: Economic Reforms
Introduction
 In the village of Anandgram, a wise elder named Ramesh proposed several key reforms to
improve the lives of the villagers. He suggested that instead of relying solely on one type of crop,
the villagers should diversify and experiment with new crops suitable for their soil and climate.
This would reduce the risk of crop failure and provide a variety of foods to eat and sell. Ramesh
advocated for the construction of a community well and a network of canals to ensure a
constant water supply for their crops, allowing them to cultivate crops throughout the year and
increase their overall yield. He also emphasized the importance of education, especially for the
younger generation, as they could innovate and improve their traditional industries.
 The idea of economic reform received mixed reactions from the villagers. Some were hesitant
about changing their age-old practices, fearing the unknown, while others, including the
younger generation, saw the potential for a better future and were eager to embrace the
reforms. Over the years, the villagers implemented Ramesh's reforms, such as diversified crops,
built an irrigation system, established a school, and constructed a road. As time passed,
Anandgram transformed into a prosperous and self-reliant community. Skilled artisans emerged,
producing high-quality crafts that found eager buyers in nearby towns. The road brought visitors
and traders, boosting the local economy. Ramesh's wisdom and the villagers' courage showed
that economic reform, like tending to a garden, could yield abundant fruits and lead to a
brighter tomorrow.

Meaning of Economic Reforms

 Economic reforms are systematic changes in a country's economic policies and structures aimed
at improving its overall economic performance and well-being. These reforms are typically
undertaken by governments or relevant authorities in response to various economic challenges
and opportunities. The goals of economic reforms can vary widely, but they often include
promoting economic growth, enhancing efficiency, reducing poverty, and increasing
competitiveness in the global marketplace.
 Key components of economic reforms include policy changes, market liberalization,
privatization, fiscal measures, monetary and financial reforms, infrastructure investment, social
welfare and human capital, and environmental sustainability.
o Policy Reform: Policy changes involve reducing trade barriers, taxation, restructuring
labor laws, and financial regulations.
o Market liberalization: Market liberalization involves opening markets for domestic and
international competition, leading to increased efficiency and innovation.
o Privatization: Privatization transfers ownership and management to the private sector,
aiming to reduce government involvement in economic activities, improve efficiency,
and promote competition.
o Financial reforms: Financial reforms often involve changes in taxation policies and
government spending, while monetary and financial reforms involve central banks
adjusting monetary policy to control inflation and stabilize the currency.
 o Infrastructure Investment: Infrastructure investment includes plans to invest in critical
infrastructure such as transportation, communication, and energy systems to support
economic growth and development.
o Social welfare and human capital reforms: Social welfare and human capital reforms
address social safety nets, healthcare, education, and skills development to reduce
poverty and enhance human capital.
o Environmental sustainability: Environmental sustainability reforms aim to promote
sustainability, reduce environmental degradation, and encourage cleaner economic
practices.
 The success of economic reforms depends on factors such as design, implementation, and the
broader economic and political context.

Background of India’s Economic Crisis

 India's 1991 economic reform was a response to a severe economic crisis that threatened the
stability and growth of its economy. Key factors leading up to this reform included the late
1980s economic crisis, high fiscal deficits, a balance of payments crisis, political instability,
globalization, pressure from international financial institutions like the IMF and World Bank, and
rising public awareness.
 The crisis was characterized by high inflation, balance of payments difficulties, and dwindling
foreign exchange reserves. India's inefficient policies, including import substitution
industrialization, high tariffs, and stringent licensing requirements, contributed to the crisis. The
country also faced a severe foreign exchange crisis due to dwindling reserves and an inability to
meet international payment obligations.
 Political instability in the late 1980s made it challenging to implement cohesive economic
policies and reforms. The global economic landscape was rapidly changing, with the fall of the
Berlin Wall, the end of the Cold War, and the opening up of global markets. India realized the
need to integrate into the global economy to tap into new opportunities.
 International financial institutions, such as the IMF and the World Bank, pressured India to
implement economic reforms and open up its economy in exchange for financial assistance.
Additionally, there was a growing realization among policymakers and the public that a more
market-oriented approach was necessary for sustainable growth.
 In July 1991, the Indian government initiated a series of economic reforms, known as the "New
Economic Policy" or "Liberalization," aimed at liberalizing trade and investment, deregulating
and privatizing sectors, stabilizing the economy, and modernizing the financial sector. These
reforms marked a turning point in India's economic trajectory, leading to higher economic
growth, increased foreign investment, and a more integrated global economy.

Role of IMF and WB in India’s Economic Reform

 The International Monetary Fund (IMF) and the World Bank (WB) played a significant role in
India's economic reform in the early 1990s.

 In 1991, India was facing a severe economic crisis. The country's foreign exchange reserves were
depleted, and the government was unable to meet its debt obligations. The rupee also
depreciated sharply.
  The IMF and the WB provided India with a financial bailout package of $1.8 billion. In exchange
for the bailout package, India agreed to implement a series of economic reforms. These reforms
included:
o Liberalization of the trade and investment regime: The government reduced tariffs and
other barriers to trade and investment.
o Deregulation of the economy: The government reduced government controls on the
economy.
o Privatization of state-owned enterprises: The government privatized a number of state-
owned enterprises.
 The IMF and the WB played a key role in persuading the Indian government to implement these
reforms. The IMF and the WB argued that these reforms were necessary to stabilize the Indian
economy and attract foreign investment.
 The economic reforms that were implemented in the wake of the 1991 crisis helped to
transform the Indian economy. GDP growth has averaged over 7% per year since 2000. Inflation
has been brought under control, and the rupee has stabilized. The Indian economy is now the
fifth largest in the world by nominal GDP and the third largest by purchasing power parity (PPP).
 However, the IMF and the WB have also been criticized for their role in India's economic reform.
Some critics argue that the IMF and the WB imposed harsh conditions on India in exchange for
the bailout package. These conditions, such as reducing government spending and raising
interest rates, led to hardship for many Indians.

Measures taken by India

 India took a series of significant steps during the 1991 financial crisis to stabilize its economy and
initiate economic reforms. The crisis was characterized by a severe balance of payments
problem, dwindling foreign exchange reserves, and a high fiscal deficit. Here are the key steps
taken by India during that period:
o Liberalization of Trade and Industrial Policies: India began to liberalize its trade and
industrial policies. This involved reducing import tariffs, eliminating or significantly
relaxing industrial licensing requirements, and opening up various sectors of the
economy to private and foreign investment. These changes aimed to promote economic
growth by making it easier to do business and attract foreign capital.
o Stabilization Measures: The government implemented stabilization measures to
address immediate macroeconomic concerns. These included fiscal austerity measures
to reduce the budget deficit, including reducing public expenditures and increasing
revenue collection. Monetary policy was also tightened to control inflation and stabilize
the currency.
o Devaluation of the Rupee: In July 1991, the Indian government devalued the Indian
Rupee to boost exports and improve the country's balance of payments. This move
made Indian goods more competitive in international markets and helped earn foreign
exchange.
o Financial Sector Reforms: The financial sector underwent significant reforms. The
government initiated measures to strengthen and liberalize the banking and financial
system. This included the establishment of new private sector banks and the reduction
of interest rate controls.
o Foreign Exchange Reserve Management: India received emergency financial assistance
from international institutions, including the International Monetary Fund (IMF) and the
 World Bank, to help stabilize its foreign exchange reserves. The assistance came with
conditions for economic reforms and policy adjustments.
o Industrial Deregulation: India initiated a process of industrial deregulation, which
included reducing the number of industries reserved for the public sector and allowing
greater private sector participation in various sectors.
o Privatization and Disinvestment: The government began the process of privatizing and
disinvesting in state-owned enterprises. This involved selling minority stakes in public
sector companies to private investors and gradually reducing government ownership.
o New Economic Policy (NEP): The 1991 crisis led to the formulation of the New Economic
Policy (NEP), which outlined the broader economic reforms and liberalization agenda.
The NEP aimed to create a more open and market-oriented economy.
o Shift Toward Globalization: India started to adopt a more globalized approach to its
economy. It actively sought foreign investment and participation in the global economy,
leading to increased foreign direct investment (FDI) and trade liberalization.
o Promotion of Export-Oriented Industries: To address the balance of payments crisis,
India focused on promoting export-oriented industries and establishing export-
processing zones to boost exports and earn foreign exchange.
 These steps taken by India during the 1991 financial crisis marked a significant turning point in
the country's economic history. They laid the foundation for the economic reforms and
liberalization that followed in the subsequent years, leading to higher economic growth,
increased foreign investment, and greater integration into the global economy.

Concept of LPG Reforms

Liberalization
 Liberalization in the context of India refers to the series of economic reforms and policy changes
initiated in 1991 to open up the Indian economy to greater market forces and reduce
government intervention. These reforms were a response to a severe balance of payments crisis
and aimed to stimulate economic growth, improve efficiency, and enhance India's
competitiveness on the global stage. Here are some key examples of liberalization in India:
o Trade Liberalization: India reduced import tariffs and eliminated or reduced
quantitative restrictions on imports. This allowed foreign goods to enter the Indian
market more easily. For example, before liberalization, the import of many consumer
goods was heavily restricted, but these restrictions were gradually lifted to promote
competition and consumer choice.
o Industrial Licensing: The Industrial Policy of 1991 reduced the number of industries
reserved exclusively for the public sector. Many industries that were previously under
strict government control were opened up to private investment. For example, the
automobile sector saw the entry of private players, leading to increased competition
and product diversity.
o Foreign Investment: India actively sought foreign direct investment (FDI) by liberalizing
the rules governing foreign investment. This included allowing higher levels of foreign
equity participation in various industries. For instance, sectors like telecommunications,
information technology, and retail gradually opened up to higher FDI limits, attracting
foreign companies and investment.
 o Banking and Financial Sector Reforms: The liberalization of the financial sector aimed to
make banking and finance more competitive and efficient. Private sector banks were
allowed to operate, and foreign banks gained more access to the Indian market. The
introduction of new financial products and services, such as mutual funds and insurance,
offered consumers greater choices.
o Privatization: The government initiated the privatization of state-owned enterprises in
various sectors, including telecommunications, airlines, and power generation. For
instance, Air India, a state-owned airline, was partially privatized, allowing private
investors to acquire stakes in the company.
o Information Technology and Software Services: The liberalization policies coincided
with the rise of India's information technology (IT) and software services industry. This
sector benefited from increased access to global markets, leading to substantial growth
in IT exports and the establishment of numerous IT companies.
o Infrastructure Development: Liberalization efforts included encouraging private sector
participation in infrastructure development, such as roads, ports, and power generation.
Public-private partnerships (PPPs) were promoted to attract private investment in
critical infrastructure projects.
o Stock Market Reforms: The stock market underwent significant reforms, including the
establishment of the National Stock Exchange (NSE) and the introduction of electronic
trading systems. These reforms aimed to make the Indian capital markets more
transparent and efficient.
o Globalization: Liberalization policies promoted greater integration with the global
economy. India entered into trade agreements and reduced trade barriers to facilitate
international trade. The IT and business process outsourcing (BPO) industries grew
significantly due to India's increased global connectivity.
 These examples illustrate how liberalization in India led to significant changes in various sectors
of the economy, fostering economic growth, enhancing competitiveness, and improving the
overall business environment. India's liberalization process continues to evolve, with ongoing
reforms aimed at further opening up the economy and addressing new challenges.

Privatization
 Privatization in India refers to the transfer of ownership and management of state-owned
enterprises or assets to the private sector. It is a key component of economic liberalization and
reform efforts aimed at increasing efficiency, reducing the fiscal burden on the government, and
promoting competition. Here are some examples of privatization in India:
o Telecommunications: One of the most prominent examples of privatization in India is the
telecommunications sector. Before liberalization, the Department of Telecommunications
(DoT) had a monopoly on telecommunications services. In 1994, the government introduced
privatization by inviting private players to enter the market. This led to the establishment of
private telecom companies such as Bharti Airtel, Vodafone (formerly Hutchison Essar), and
Idea Cellular (now merged with Vodafone).
 o Aviation: India's aviation sector witnessed privatization with the introduction of private
airlines. Before liberalization, Indian Airlines and Air India were the major carriers. However,
private airlines like Jet Airways and Kingfisher Airlines (now defunct) entered the market,
leading to increased competition and improved services.
o Power Generation and Distribution: India initiated reforms in the power sector, including
the privatization of power generation and distribution. States like Delhi privatized their
power distribution companies. Tata Power and Reliance Energy are examples of private
players in power generation.
o Banking: While not a full privatization, India allowed the entry of private sector banks to
compete with nationalized banks. Private banks like HDFC Bank, ICICI Bank, and Axis Bank
have become major players in the banking industry. These banks operate alongside
government-owned banks.
o Insurance: The insurance sector in India saw liberalization and privatization with the entry of
private insurance companies. For instance, companies like ICICI Prudential, HDFC Life, and
Max Life entered the life insurance market, and private players like Bajaj Allianz and
Reliance General entered the non-life insurance sector.
o Ports: India's ports sector has seen the development of private container terminals and port
operations. Private companies, such as Adani Ports, have invested in port infrastructure and
operations, leading to increased efficiency in cargo handling.
o Airports: The privatization of airports in India has led to modernization and better facilities.
Private companies like GMR Group and GVK Group have been involved in managing and
operating airports, including Delhi, Mumbai, and Hyderabad airports.
o Disinvestment in Public Sector Undertakings (PSUs): While not full privatization, India has
engaged in the disinvestment of shares in state-owned enterprises. The government has
reduced its ownership stakes in PSUs like Bharat Petroleum Corporation Limited (BPCL) and
Hindustan Petroleum Corporation Limited (HPCL).
 These examples illustrate how privatization in India has been a significant part of the economic
reform process, leading to increased competition, efficiency, and private sector participation in
various industries. It has also allowed the government to reduce its fiscal burden and focus on
regulatory and policy frameworks while promoting economic growth and development.

Globalization
 Globalization refers to the process of increased interconnectedness and interdependence
among countries, cultures, and economies around the world. It involves the flow of goods,
services, information, technology, capital, and people across national borders. India has
experienced significant effects of globalization in various aspects of its economy and society.
Here are some examples of globalization in India:
o Economic Globalization: India's economy has become increasingly integrated into the
global economy. The liberalization of the Indian economy in the early 1990s opened up
sectors like telecommunications, aviation, and retail to foreign investment and
competition. As a result, multinational corporations like Walmart, Amazon, and Apple
have established a strong presence in the Indian market.
o Outsourcing and IT Industry: India has emerged as a global hub for information
technology (IT) and business process outsourcing (BPO) services. Companies from
 around the world outsource their IT and customer support functions to Indian firms.
This has led to the growth of cities like Bangalore and Hyderabad as major IT hubs,
attracting talent and investment from across the globe
o Cultural Exchange: Globalization has facilitated cultural exchange in India. Western
movies, music, and fashion have influenced Indian pop culture. Indian cuisine, yoga, and
traditional practices like Ayurveda have gained popularity worldwide. This cultural
exchange has led to a more diverse and cosmopolitan society.
o Foreign Direct Investment (FDI): India has attracted significant FDI in various sectors,
including manufacturing, pharmaceuticals, and infrastructure. Foreign investors bring
capital and technology, which can lead to economic growth and job creation.
o Education and Research: Indian students travel abroad for higher education,
contributing to a global brain drain. At the same time, India has also become a
destination for international students seeking quality education, leading to cultural and
academic exchanges.
o Global Supply Chains: Many multinational companies have established manufacturing
facilities and supply chains in India. For instance, the automotive industry relies on India
for components and manufacturing, creating both local jobs and export opportunities.
o Environmental Impact: Globalization has had environmental consequences in India,
with increased consumption and industrialization leading to issues like air pollution,
deforestation, and resource depletion. However, it has also enabled the sharing of
knowledge and solutions to address environmental challenges.
o Social Media and Technology: Social media platforms like Facebook, Twitter, and
Instagram are widely used in India, connecting people and businesses globally. The rapid
spread of information and ideas through these platforms has had a significant impact on
Indian society and politics.
o Economic Inequality: While globalization has led to economic growth, it has also
exacerbated income inequality in India. The benefits of globalization have not been
evenly distributed, with some segments of the population experiencing significant
economic gains while others remain marginalized.

Impact of Economic Reforms

GDP growth: GDP growth has averaged over 7% per year since 2000. This is significantly higher than
the GDP growth rate in the decades before the LPG reforms were implemented.
Poverty reduction: The poverty rate has fallen from over 40% in the early 1990s to less than 20%
today. This is a significant achievement, and it is a direct result of the economic growth that has been
driven by the LPG reforms.
Foreign investment: Foreign direct investment (FDI) inflows into India have increased significantly
since the LPG reforms were implemented. FDI inflows have averaged over $10 billion per year since
2000.
Trade: India's trade volume has increased significantly since the LPG reforms were implemented.
India's exports have increased from $20 billion in 1991 to over $300 billion today.

Comparative Analysis of Indian Economy Pre and Post Reforms

Indicator Before 1991 After 1991
GDP growth rate 3-4% 6-8%
 Foreign direct investment $10 billion $50 billion
Export growth rate 5-6% 15-20%
Poverty rate 40% 20%

Chapter 8: Taxation System in India

Introduction
 Once upon a time, there was a village called "Malgudi". The villagers were happy and
prosperous. They had everything they needed: food, shelter, and clothing. One day, the villagers
decided to build a new school for their children. They wanted to provide their children with the
best possible education. However, the villagers did not have enough money to build the school.
The villagers held a meeting to discuss how to raise money for the school. They decided to
impose a tax on all the villagers. The tax would be used to build the new school. The villagers
were happy to pay the tax. They knew that the tax would be used to benefit their children. The
villagers worked together to build the new school. It was a beautiful school with classrooms, a
library, and a playground. The children were very happy with their new school.
 The tax that the villagers paid helped to build the new school. The school provided the children
with a good education, which helped them to become successful adults. The story of the
villagers of Malgudi illustrates the concept of taxes. Taxes are a way for governments to raise
money to provide public goods and services. Public goods and services are things that everyone
benefits from, such as roads, schools, and hospitals. Taxes are important because they help to
make our society more prosperous and equitable. Public goods and services make it possible for
everyone to live a better life.

Meaning of Tax
 A tax is a compulsory financial charge or levy imposed on a taxpayer by a government. Taxes are
used to fund public goods and services, such as roads, schools, and hospitals. Taxes are also
used to redistribute wealth and to promote economic growth.

Important terms
Terms Description
Incidence of Tax The incidence of tax refers to the event where tax appears to be imposed.
Impact of Tax The impact of tax refers to the post-effect of tax imposition, where the tax's
effect is felt.
Direct Tax A direct tax is one that is paid by an individual or group of individuals directly to
the body that levied it. Examples include personal property taxes, real estate
taxes, and income taxes.
Indirect Tax Indirect taxes are any taxes levied against a person or an organization that are
ultimately covered by another person. Indirect taxes include excise taxes on
goods like cigarettes, alcohol, and petrol.

Significance of the Taxes

Taxes are important for the government and the economy for a number of reasons.

For the government:

  Fund public goods and services: Taxes are the primary source of revenue for the government.
This revenue is used to fund public goods and services, such as roads, schools, hospitals, and
national defense. These goods and services are essential for a well-functioning society.
 Redistribute wealth: Taxes can be used to redistribute wealth from the wealthy to the poor.
This can help to reduce inequality and create a more just society. For example, the government
can use taxes to fund social welfare programs, such as food stamps and Medicaid.
 Promote economic growth: Taxes can be used to promote economic growth by investing in
infrastructure and education. For example, the government can use tax revenue to build roads
and bridges, or to fund research and development.
 Reduce inflation: Taxes can help to reduce inflation by reducing the amount of money in
circulation. When the government collects taxes, it takes money out of the economy. This can
help to lower prices and reduce inflation.

For the economy:

 Provide stability: Taxes can help to provide stability to the economy. When the government
collects taxes, it can use the revenue to smooth out fluctuations in the economy. For example,
the government can use tax revenue to fund unemployment benefits or to provide tax breaks to
businesses during a recession.
 Invest in infrastructure: Taxes can be used to invest in infrastructure, such as roads, bridges,
and airports. This can help to improve the efficiency of the economy and make it easier for
businesses to operate.
 Promote innovation: Taxes can be used to promote innovation by funding research and
development. This can help to create new products and services, which can boost economic
growth.

Taxation Methods
Progressive Taxation
 Progressive taxation is a tax system in which the tax rate increases as the taxpayer's income
increases. This means that people with higher incomes pay a higher percentage of their income
in taxes than people with lower incomes. Here are some of the benefits of progressive taxation:
o More equitable: Progressive taxation is more equitable than other tax systems because
it ensures that people with higher incomes pay a higher percentage of their income in
taxes. This helps to reduce the gap between the rich and the poor.
o Reduces inequality: Progressive taxation can help to reduce inequality by redistributing
wealth from the wealthy to the poor. This is done through social welfare programs that
are funded by tax revenue.
o Promotes economic growth: Progressive taxation can promote economic growth by
providing a safety net for the poor and the middle class. This allows people to take risks
and start businesses, which can lead to job creation and economic growth.

Regressive Taxation
  Regressive taxation is a tax system in which the tax rate decreases as the taxpayer's income
increases. This means that people with higher incomes pay a lower percentage of their income
in taxes than people with lower incomes. Regressive taxation is the opposite of progressive
taxation. Progressive taxation is designed to be more equitable, while regressive taxation is
designed to be less equitable.
Proportional Taxation
 Proportional taxation is a tax system in which the tax rate is the same for all taxpayers,
regardless of their income. This means that everyone pays the same percentage of their income
in taxes.
 Proportional taxation is the opposite of progressive taxation, in which the tax rate increases as
income increases. Proportional taxation is also the opposite of regressive taxation, in which the
tax rate decreases as income increases.
 Proportional taxation is used in some countries, but it is not as common as progressive taxation.
One example of a proportional tax is a flat tax. A flat tax is a tax system in which everyone pays
the same tax rate, regardless of their income
Good Taxation System
 The characteristics of a good tax system, as broadly agreed upon by economists and
policymakers, encompass five key principles:
o Equity: A good tax system should be equitable. This means that it should be fair and
should not burden low-income earners more than high-income earners. A good tax
system should use progressive taxation to ensure that people with higher incomes pay a
higher percentage of their income in taxes than people with lower incomes.
o Efficiency: A good tax system should be efficient. This means that it should be easy to
administer and collect. A good tax system should have a simple and transparent tax
code. It should also have a strong enforcement mechanism to ensure that taxpayers
comply with the tax laws.
o Effectiveness: A good tax system should be effective. This means that it should generate
enough revenue to fund the government's spending priorities. A good tax system should
have a broad tax base and should avoid tax loopholes.
o Simple: A good tax system should be simple to understand and comply with. This means
that the tax code should be clear and concise. It should also be easy to access
information about the tax laws.
o Transparent: A good tax system should be transparent. This means that taxpayers
should be able to see how their taxes are being used. The government should publish
detailed information about its tax revenue and spending.
o Accountable: A good tax system should be accountable. This means that the
government should be held accountable for how it collects and spends tax revenue.
Taxpayers should have the right to appeal tax assessments and to challenge the
government's spending decisions.
Goods and Service Tax(GST)
 The Indian government implemented the State VAT as a precursor to the proposed Goods and
Services Tax (GST), which aimed to consolidate indirect taxes from both Central and State
governments into a unified national tax system. The GST aimed to create a seamless, pan-India
market, benefiting businesses and industries. It was estimated to boost GDP by up to 2%. The
GST would inherit the benefits of the State VAT, including the VAT method, pan-India
uniformity, merging of taxes, and a single rate of 20%.
  The GST would replace the numerous central and state indirect taxes with a single standardized
rate, fostering economic growth and development. The GST was designed to eliminate
overlapping and multiplicity of taxes, creating a uniform tax environment that would foster
economic growth and development.
Features
 The Goods and Services Tax (GST) was introduced in India in 2006 after a review of Kelkar
Committee report. However, consensus issues between central and state governments led to
significant delays. Finally, after lot of deliberations the Constitution (101st Amendment) Bill was
passed in August 2016, paving the way for GST implementation. The GST Council (GSTC) was
established in September 2016 to make recommendations on GST-related issues.
 Implementation Date: The GST was enforced by the government on July 1, 2017.
 GST Structure:
 The GST is a destination-based tax. This means that the tax is paid where the goods or services
are consumed, not where they are produced. This helps to simplify the tax system and to reduce
tax evasion. GST is divided into several tax slabs to categorize goods and services based on their
nature and value. As of my last knowledge update in September 2021, the GST structure in India
consists of four main tax rates: 5%, 12%, 18%, and 28%, with a few exceptions for specific items.
Here's a simplified explanation of GST with an example:
 Example of GST in Action: Let's consider a simple example of a T-shirt to illustrate how GST
works at different stages of the supply chain:
 Manufacturer Stage:
o A textile manufacturer produces a T-shirt that costs them Rs. 100 to make.
o GST of 5% is applicable on this T-shirt (assuming a 5% GST rate for textiles).
Calculation:
o Cost of T-shirt: Rs. 100
o GST (5% of Rs. 100): Rs. 5
o Total Price to Wholesaler: Rs. 105 (Rs. 100 + Rs. 5 GST)
 Wholesaler Stage:
o The wholesaler buys the T-shirt from the manufacturer for Rs. 105.
o The wholesaler adds his margin and sells the T-shirt to a retailer for Rs. 150.
o GST of 5% is applicable to this sale.
Calculation
o Cost of T-shirt from Manufacturer: Rs. 105
o Wholesaler's Margin: Rs. 45
o Total Price to Retailer: Rs. 150 (Rs. 105 + Rs. 45)
o GST (5% of Rs. 150): Rs. 7.50
o Total Price to Retailer (including GST): Rs. 157.50 (Rs. 150 + Rs. 7.50 GST)
 Retailer Stage:
o The retailer buys the T-shirt for Rs. 157.50 from the wholesaler.
o The retailer adds his margin and sells the T-shirt to the end consumer for Rs. 200.
o GST of 5% is applicable to this sale.
Calculation:
o Cost of T-shirt from Wholesaler: Rs. 157.50
o Retailer's Margin: Rs. 42.50
o Total Price to End Consumer: Rs. 200 (Rs. 157.50 + Rs. 42.50)
o GST (5% of Rs. 200): Rs. 10
o Total Price to End Consumer (including GST): Rs. 210 (Rs. 200 + Rs. 10 GST)
  In this example, you can see that GST is applied at each stage of the supply chain, but it is
ultimately the end consumer who bears the final tax burden. The GST paid at each previous
stage becomes an input tax credit for the subsequent stage, allowing businesses to offset their
GST liability. This system eliminates the cascading effect of taxes, ensuring that taxes are only
levied on the value added at each stage of production and distribution.
GST Implementation and Performance
 In the fiscal year 2019-20, the Gross GST monthly collections in India exceeded ₹1 lakh
crore on five occasions within the first nine months of the year. These significant
milestones were reached, notably during the consecutive months of November and
December 2019. The Economic Survey of 2019-20 provided key details about GST
collections for the period April to November 2019:
 Gross GST Collections: The combined GST collections for both the central and state
governments totaled ₹8.05 lakh crore in the initial eight months of the fiscal year. This
represented a growth rate of 3.7% compared to the same period in the previous fiscal
year.
 Central Government's GST Collections: During the same eight-month period, the central
government's GST collections increased by 4.1% in comparison to the previous year.
 Negative Growth in Indirect Tax Receipts: Interestingly, while GST collections were on
the rise, the overall indirect tax receipts of the central government recorded a negative
growth rate of -0.9% during this period compared to the corresponding months in the
prior year.
 The government conducted an analysis to assess the impact of GST rationalization on GST
revenue collection. The findings indicated that when there was a positive shock to the
GST rationalization variable (such as increasing the number of goods covered by GST), it
resulted in a boost in GST collections during the first few months (one to three months)
after the change. However, over time, the impact of this change began to taper off.
 The increase in GST collections can be attributed to various efforts taken by the
government to enhance tax compliance. These efforts include:
o Extensive Automation: The automation of business processes to streamline tax
collection and reporting.
o E-way Bill: The implementation of an electronic waybill system (e-way bill) to
monitor the movement of goods.
o Compliance Verification: Targeted actions and measures to verify and enforce tax
compliance.
o Risk Assessment: Enforcement strategies based on risk assessment to identify
and address potential tax evasion.
o Electronic Invoice System: The proposed introduction of an electronic invoice
system to further improve tax transparency and compliance.
 These initiatives, combined with rationalization efforts and improved compliance
measures, contributed to the growth in GST collections during the fiscal year 2019-20.

Important Terms
Terms Description
Sin Goods Sin goods are goods and services that are considered to be harmful to
individuals or society. They are often taxed at a higher rate than other goods
 and services. Some examples of sin goods include: Alcohol, Tobacco,
Gambling, Junk food, Fast food, Soda, Energy drinks.
Circular Trading Circular trading is a type of tax evasion that involves trading goods and
services between related companies in order to reduce the amount of tax
that is paid. Circular trading can be done in a number of ways. For example, a
company might sell goods to a related company at a higher price than it
would sell them to an unrelated company. The related company would then
sell the goods back to the original company at a lower price. This would
create a false paper trail that would show that the company is making less
profit than it actually is.
Input tax credit (ITC) Input tax credit (ITC) is a tax mechanism that allows businesses to claim a
credit for the value-added tax (VAT) that they have paid on their purchases of
goods and services. This credit can then be used to offset the VAT that they
owe on their sales. ITC is a key feature of many VAT systems around the
world. It is designed to simplify the VAT system and to make it more efficient
for businesses.
Anti-Profiteering Anti-profiteering is a policy that aims to prevent businesses from making
excessive profits during times of economic distress. It is typically
implemented when there is a sudden increase in the price of essential goods
and services, such as food, fuel, and healthcare. Anti-profiteering laws
typically require businesses to pass on any savings from reduced costs or
increased efficiencies to consumers. They may also require businesses to
justify any price increases.
Recently, the Central Board of Indirect Taxes and Customs empowered
Competition Commission of India to decide on anti-profiteering issues.

Commodities Transaction Tax

 The Commodities Transaction Tax (CTT) is a tax on the buying and selling of commodities on
exchanges. It is a destination-based tax, which means that the tax is paid where the commodity
is consumed, not where it is produced.
 The CTT is levied on the purchase and sale of commodities on exchanges. The tax rate varies
depending on the type of commodity being traded. For example, the CTT rate on gold is higher
than the CTT rate on wheat.
 Here is a simple example of how the CTT works:
 Suppose a trader buys 100 kilograms of wheat on an exchange for ₹10,000. The trader will have
to pay ₹100 in CTT on the purchase of the wheat. The trader will then sell the wheat for
₹11,000. The trader will have to pay ₹110 in CTT on the sale of the wheat.
 Objective: The CTT is designed to reduce speculation in the commodities market. Speculation is
when people buy and sell commodities in the hope of making a profit, without actually taking
delivery of the commodities. The CTT makes it more expensive to speculate in commodities,
which can help to reduce volatility in the market. The CTT is also designed to generate revenue
for the government. It is expected to generate over ₹100 billion in revenue in 2023-24.
 Impact: The CTT has had a number of impacts on the commodities market. It has reduced
speculation in the market, increased revenue for the government, and promoted transparency.
 However, the CTT has also made it more expensive for small traders and farmers to buy and sell
commodities.
 Overall, the CTT is a complex tax with both positive and negative impacts. It is important to
carefully consider the pros and cons of the CTT before making any changes to it.

Security Transaction Tax

 Security Transaction Tax (STT) is a tax levied on the purchase and sale of securities on stock
exchanges. It is a destination-based tax, which means that the tax is paid where the security is
traded, not where it is issued.
 The STT is levied on a variety of securities, including shares, debentures, and mutual funds. The
tax rate varies depending on the type of security being traded. For example, the STT rate on
shares is higher than the STT rate on debentures.
 Here is a simple example of how the STT works:
o Suppose an investor buys 100 shares of a company on a stock exchange for ₹10,000. The
investor will have to pay ₹100 in STT on the purchase of the shares. The investor will
then sell the shares for ₹11,000. The investor will have to pay ₹110 in STT on the sale of
the shares.
 The STT is designed to generate revenue for the government. It is expected to generate over ₹1
trillion in revenue in 2023-24.

Capital Gain Tax

 This is a direct tax and applies on the sales of all ‘assets’ if a profit (gain) has been made by the
owner of the asset a tax on the ‘gains’ one gets by selling assets. The tax has been classified into
two:

Short Term Capital Gains (STCG):

 Applicability: STCG tax applies if an asset is sold within 36 months of acquiring it.
 Tax Rate: The tax rate for STCG is typically the same as the individual's normal income tax rate,
as per the applicable tax slab. However, for certain assets such as shares, mutual funds, units of
the UTI (Unit Trust of India), and zero coupon bonds, the tax rate is 15 percent. In other words,
there is a special, lower tax rate of 15 percent for short-term capital gains on these assets.
Long Term Capital Gains (LTCG):
 Applicability: LTCG tax applies if an asset is sold after holding it for 36 months or more.
 Tax Rate: The standard rate for LTCG tax is 20 percent. However, there was an exemption (zero
tax) on LTCG for certain assets such as shares, mutual funds, units of the UTI, and zero coupon
bonds. It should be noted that the information provided might be outdated, as you mentioned
that recently a LTCG tax of 10 percent (above ₹1 lakh of capital gains) was introduced by the
government for these previously exempted assets.

Minimum Alternate Tax

 Minimum Alternate Tax (MAT) is a tax that is levied on companies that do not pay enough
income tax. It is a tax on book profits, which are the profits that a company shows on its
financial statements.
 The MAT rate is higher than the income tax rate. This means that companies that do not pay
enough income tax will have to pay the MAT.
  The MAT is designed to ensure that companies pay a minimum amount of tax, even if they are
able to reduce their taxable income through various tax deductions and exemptions.
 Here is a simple example of how the MAT works:
o Suppose a company has a book profit of ₹100 million. The income tax rate for the
company is 25%. This means that the company's income tax liability is ₹25 million.
o However, the company is able to reduce its taxable income by ₹50 million through
various tax deductions and exemptions. This means that the company's taxable income
is ₹50 million.
o The company's income tax liability is ₹12.5 million (25% of ₹50 million). However, the
MAT rate is 18.5%. This means that the company's MAT liability is ₹18.5 million (18.5%
of ₹100 million).
o The company will have to pay the higher of the two amounts, which is ₹18.5 million.
o The MAT is a complex tax, but it is important to understand how it works. The MAT can
have a significant impact on the profits of companies.
Key Tax Revenue Statistics and Breakdown in India
 Tax revenue as a percentage of GDP: 10.2% (2021)
 Direct tax revenue as a percentage of GDP: 6.3% (2021)
 Indirect tax revenue as a percentage of GDP: 3.9% (2021)
 Total number of taxpayers: 13.31 crore (2021-22)
 Individual taxpayers: 12.92 crore (2021-22)
 Corporate taxpayers: 39.01 lakh (2021-22)
 Top 10% of taxpayers contribute: 84.5% of direct tax revenue (2021-22)

The top three direct taxes in India are:

 Income tax (40.4%)
 Corporate tax (26.5%)
 Securities transaction tax (8.1%)

The top three indirect taxes in India are:

 Goods and services tax (GST) (53.5%)
 Customs duty (19.2%)
 Central excise duty (12.7%)

Dividend Distribution Tax

 Dividend Distribution Tax (DDT) is a tax that is levied on companies that distribute dividends to
their shareholders. It is a tax on the profits of the company that is distributed to the
shareholders.
 The DDT rate is 15%. This means that companies have to pay 15% tax on the dividends that they
distribute to their shareholders.
 The DDT is designed to ensure that companies pay tax on the profits that they distribute to their
shareholders.
 Here is a simple example of how the DDT works:
o Imagine that you are a partner in a business. The business makes a profit of ₹100 million
and distributes ₹50 million of this profit to the partners as dividends.
 o You have to pay tax on the dividends that you receive. The income tax rate for dividends
is 20%. This means that you have to pay ₹10 million in income tax on the dividends that
you receive.
o However, the company has already paid ₹7.5 million in DDT on the dividends that it has
distributed. You can claim a tax credit for the DDT that the company has paid. This
means that you only have to pay ₹3 million in income tax on the dividends that you
receive.
o The DDT is like the tax credit that you can claim for the DDT that the company has paid.
It is a way to reduce the tax that you have to pay on the dividends that you receive.
Rationale for the Change:
 Reduced Tax Burden for Investors: The move to abolish DDT was aimed at reducing the tax
burden on investors who were already paying corporate income tax on their annual profits. DDT
often imposed a higher tax rate on dividend income than what shareholders would pay based on
their income tax slab.
 Attractiveness for Investors: The change was also intended to make the Indian equity market
more attractive to both domestic and foreign investors. It provides an opportunity for Indian
investors to participate in wealth creation through formal means and encourages investment in
the country.
 Foreign Investor Impact: For foreign investors, DDT had the disadvantage of not being available
as a credit in their home country, reducing their rate of return on equity capital invested in
India.
Digital TAX
The OECD's Digital Tax Concept is a set of proposals for taxing multinational enterprises (MNEs) with a
significant digital presence in a country, even if they do not have a physical presence there. The
concept is based on the idea that digital businesses are able to generate significant profits from users
in a country without having to pay a fair share of taxes in that country.
The OECD's Digital Tax Concept includes two pillars:
 Pillar One: This pillar would reallocate a portion of the profits of MNEs to the countries where
their users are located. The profits would be reallocated based on a formula that takes into
account the amount of revenue that the MNE generates from users in each country, as well
as the cost of doing business in each country.
 Pillar Two: This pillar would introduce a global minimum corporate tax rate of 15%. This
would help to ensure that MNEs pay a fair share of taxes in all of the countries where they
operate.
The OECD's Digital Tax Concept has been welcomed by many countries, but it has also been criticized
by some countries, such as the United States. The United States has argued that the concept would
unfairly target its companies.
The OECD's Digital Tax Concept is still under development, and it is not yet clear when it will be
implemented. However, the concept has the potential to revolutionize the way that MNEs are taxed.

Here are some of the potential benefits of the OECD's Digital Tax Concept:
 Increased tax revenue for countries: The concept is expected to increase tax revenue for
countries, especially developing countries. This could be used to fund essential public services
such as healthcare and education.
 Reduced tax avoidance: The concept is expected to reduce tax avoidance by MNEs. This is
because MNEs would no longer be able to shift profits to low-tax countries.
 More level playing field for businesses: The concept is expected to create a more level
 playing field for businesses by ensuring that all businesses pay a fair share of taxes, regardless
of their business model.
However, there are also some potential drawbacks to the OECD's Digital Tax Concept:
 Complexity: The concept is complex, and it could be difficult to implement and enforce.
 Double taxation: The concept could lead to double taxation of MNEs, if countries implement
it differently.
 Reduced investment: The concept could discourage MNEs from investing in certain countries,
if they believe that they will be taxed too heavily.
Overall, the OECD's Digital Tax Concept is a significant development in the international tax
landscape. It has the potential to address the challenges of taxing digital businesses and to create a
fairer and efficient international tax system. However, it is important to carefully consider the
potential drawbacks of the concept before implementing it.
Countervailing duty (CVD)
 Countervailing duty (CVD) is a tariff imposed on imported goods to offset subsidies that have
been provided to the producers or exporters of those goods by a foreign government. CVDs are
intended to level the playing field between domestic producers of a product and foreign
producers of the same product who can afford to sell it at a lower price because of the subsidy
they receive from their government.

Inverted Duty Structure

 The term "inverted duty structure" refers to a situation in a country's tax system, particularly in
customs and import tariffs, where the tax rate on inputs or raw materials is higher than the tax
rate on finished goods or products. This can lead to several economic challenges and distortions
within an economy. Here's a more detailed explanation of the concept:
 Key Characteristics and Effects of an Inverted Duty Structure:
o Higher Taxes on Inputs: In an inverted duty structure, the tax or tariff rates applied to
raw materials, components, or intermediate goods are higher compared to the rates
imposed on finished products. This means that manufacturers or producers pay more in
taxes for the materials they use in their production processes.
o Lower Taxes on Finished Goods: Conversely, the finished products or goods that are
produced using these inputs or raw materials face lower tax rates. This often happens
with the intention of promoting domestic production or certain industries.
o Impact on Domestic Industry: An inverted duty structure can provide an advantage to
domestic producers of finished goods, as they face lower production costs due to lower
taxes on inputs. This can discourage imports and protect domestic industries.
o Potential for Market Distortions: While an inverted duty structure may protect
domestic industries, it can lead to inefficiencies in resource allocation. Producers may
prioritize industries with lower input taxes, even if they are not the most economically
efficient or competitive sectors.
o Compliance and Administrative Challenges: Managing an inverted duty structure can
be administratively complex, as it requires precise tracking and calculation of taxes paid
at different stages of production. This can lead to compliance challenges for businesses
and government authorities.
o Negative Impact on Export Competitiveness: If the tax structure results in higher
production costs due to high taxes on inputs, it can make domestic products less
competitive in international markets, potentially hindering exports.
  Example of an Inverted Duty Structure:
o Let's consider an example related to the manufacturing of smartphones:
o Suppose a country imposes a 20% tariff on imported microchips (an essential input for
smartphone production) and a 10% tariff on finished smartphones.
o In this case, the duty structure is inverted because the tax rate on the input (microchips)
is higher (20%) than the tax rate on the finished product (smartphones) at 10%.
o As a result, domestic smartphone manufacturers may have a cost advantage over
foreign competitors because they pay lower taxes on their inputs, making it more
expensive for foreign companies to compete.

Tax Expenditure
 Tax expenditure is a term used to describe the revenue that the government forgoes by
providing tax breaks or exemptions. Tax expenditures can be used to achieve a variety of policy
goals, such as encouraging investment, stimulating economic growth, or supporting specific
industries or groups of taxpayers.
 Here are some examples of tax expenditures:
o Exemptions for home mortgage interest: Homeowners are able to deduct the interest
they pay on their mortgage from their taxable income. This exemption is designed to
make homeownership more affordable.
o Deduction for charitable contributions: Taxpayers are able to deduct the amount of
money they donate to charity from their taxable income. This exemption is designed to
encourage charitable giving.
o Exclusion for employer-sponsored health insurance: Employees are not taxed on the
value of the health insurance that their employer provides to them. This exemption is
designed to make health insurance more affordable for employees.
Tax Haven
 A tax haven is a country or jurisdiction that offers low or no taxes to individuals and businesses.
Tax havens are often used to avoid paying taxes in other countries.
 Tax havens can be used for a variety of purposes, including:
o Tax evasion: Tax evasion is the illegal practice of avoiding paying taxes. Individuals and
businesses can use tax havens to evade taxes by hiding their income or assets in tax
havens.
o Tax avoidance: Tax avoidance is the legal practice of reducing one's tax liability.
Individuals and businesses can use tax havens to avoid taxes by taking advantage of the
low or no taxes that are offered in tax havens.
o Money laundering: Money laundering is the process of making illegally obtained money
appear legal. Individuals and businesses can use tax havens to launder money by
transferring their illegally obtained money to tax havens and then transferring it back to
their home country.
 Here are some examples of tax havens:
o Cayman Islands: The Cayman Islands is a British Overseas Territory in the Caribbean Sea.
It is known for its low taxes and its secrecy laws.
o Panama: Panama is a country in Central America. It is known for its offshore banking
industry and its secrecy laws.
o Switzerland: Switzerland is a country in Western Europe. It is known for its banking
secrecy laws and its low taxes.
Base Erosion and Profit Shifting
 Base Erosion and Profit Shifting (BEPS) is a term used to describe tax planning strategies
employed by multinational corporations to artificially shift profits from high-tax jurisdictions to
low-tax or no-tax jurisdictions, thereby reducing their overall tax liability. BEPS strategies exploit
gaps and mismatches in tax rules between countries to minimize the tax they pay. BEPS has
been a major concern for governments and tax authorities worldwide, as it can result in
significant revenue losses for countries and undermine the fairness and integrity of the global
tax system.
 BEPS can occur through a variety of methods, including:
o Transfer pricing: Transfer pricing is the practice of setting prices for goods and services
that are traded between related entities within a MNC. MNCs can use transfer pricing to
shift profits to low-tax jurisdictions.
o Hybrid mismatch arrangements: Hybrid mismatch arrangements are complex financial
structures that are used to exploit differences in tax laws between different
jurisdictions.
o Treaty shopping: Treaty shopping is the practice of using tax treaties to avoid paying
taxes in a particular jurisdiction.
o Thin capitalization: Thin capitalization is the practice of using debt to finance a business
excessively. This can reduce the amount of taxable income that the business has.

Double Taxation Avoidance Agreement (DTAA)

 A double taxation avoidance agreement (DTAA) is an international agreement between two
countries that aims to prevent their taxpayers from being taxed twice on the same income.
DTAAs are typically negotiated between countries with strong economic ties.
 DTAAs work by allocating taxing rights between the two countries. For example, a DTAA may
state that a country has the primary taxing right on income from employment, while the other
country has the primary taxing right on income from investment.
 DTAAs also typically include provisions for preventing tax evasion and avoidance. For example, a
DTAA may require each country to exchange information about its taxpayers.
 DTAAs are important because they help to promote investment and trade between countries.
By avoiding double taxation, DTAAs make it more attractive for businesses to operate in multiple
countries.
 Here are some of the benefits of DTAAs:
o Reduced tax liability: DTAAs can help to reduce the tax liability of taxpayers who have
income in multiple countries. This is because DTAAs allocate taxing rights between the
countries, so that taxpayers are only taxed once on their income.
o Increased investment and trade: DTAAs can help to increase investment and trade
between countries. This is because they make it more attractive for businesses to
operate in multiple countries.
o Fairer taxation: DTAAs can help to ensure that taxpayers are taxed fairly. This is because
they prevent taxpayers from being taxed twice on the same income.
Place of Effective Management (PoEM)
 The place of effective management (PoEM) is a concept used in international tax law to
determine the tax residency of a company. The PoEM is the place where the key management
and commercial decisions that determine the company's business are made.
 The PoEM is important because it determines which country has the right to tax the company's
profits. If the PoEM is in a country with a lower tax rate than the company's country of
incorporation, the company may be able to reduce its tax liability by claiming that it is resident
in the country where the PoEM is located.

Tax Information Exchange Agreement (TIEA)

 A tax information exchange agreement (TIEA) is an international agreement between two
countries that allows them to exchange information about their taxpayers. TIEAs are typically
used to combat tax evasion and avoidance.
 TIEAs work by requiring each country to provide information about its taxpayers to the other
country. The information that is exchanged can include information about bank accounts,
investments, and income.
 TIEAs are important because they help to ensure that taxpayers are paying their fair share of
tax. By exchanging information, countries can crack down on tax evasion and avoidance.
 Benefits of TIEAs:
o Reduced tax evasion: TIEAs can help to reduce tax evasion by making it more difficult
for taxpayers to hide their income and assets.
o Increased tax revenue: TIEAs can help to increase tax revenue by ensuring that
taxpayers are paying their fair share of tax.
o Fairer taxation: TIEAs can help to ensure that taxpayers are taxed fairly. This is because
they make it more difficult for taxpayers to avoid paying tax in one country by shifting
their income to another country.

Advance Pricing Agreement (APA)

 An advance pricing agreement (APA) is a legally binding agreement between a taxpayer and a
tax authority that sets the prices for goods and services that will be traded between related
entities for a specified period of time. APAs are designed to reduce uncertainty and disputes
over transfer pricing.
 APAs are typically used by multinational corporations (MNCs) that trade goods and services
between related entities in different countries. MNCs can use APAs to reduce their tax liability
by setting prices that are arm's length.
 Arm's length prices are the prices that would be charged between unrelated parties in a
comparable transaction. APAs help to ensure that MNCs are charging arm's length prices for
their transactions with related entities.
 APAs can be either unilateral or bilateral. A unilateral APA is an agreement between a taxpayer
and a single tax authority. A bilateral APA is an agreement between a taxpayer and two or more
tax authorities. Bilateral APAs are more common than unilateral APAs. This is because bilateral
APAs can help to reduce the risk of double taxation.

Tobin Tax
 The Tobin Tax is a proposed tax on foreign exchange transactions, named after economist James
Tobin. Its main goal is to discourage speculative trading in the forex market and generate
 revenue for global public goods or development efforts. The tax is typically applied as a low
percentage tax on the value of currency transactions. It has been a subject of debate due to
concerns about its potential impact on market liquidity and the need for international
cooperation. While it aims to reduce currency speculation and promote long-term investment,
its implementation and effectiveness remain topics of ongoing discussion.

Pigovian Tax
 A Pigovian tax is a levy imposed on activities that produce negative externalities, which are costs
incurred by society beyond the individuals or entities engaging in the activity. The main purpose
of such a tax is to internalize these external costs by making the activity more expensive,
thereby incentivizing individuals and businesses to reduce their negative impact on society.
Pigovian taxes are used to correct market failures where the market price of a good or service
does not reflect its full social cost. Examples include taxes on cigarettes to discourage smoking,
carbon taxes to combat climate change, and taxes on sugary beverages to address health
concerns. While their primary goal is behavior change, Pigovian taxes can also generate
government revenue, which may be used to offset externalities or fund public services.
Implementing these taxes requires careful consideration of tax rates, equity concerns, and
complementary policies to address externalities effectively.

Several Duties
Ad Valorem Tax Ad valorem is a Latin phrase that means "according to value." It is used to
describe a type of tax that is based on the value of an item. Ad valorem
taxes are typically levied on goods and services, but they can also be levied
on other things, such as property and income. Ad valorem taxes are one of
the most common types of taxes. They are used by governments at all
levels, from local governments to national governments. Example:
Property Tax, Sales Tax
Excise Duty An excise or excise tax (sometimes called an excise duty) is a type of tax
charged on goods produced within the country (as opposed to customs
duties, charged on goods from outside the country). It is a tax on the
production or sale of a good.
Custom Duty Customs duty is a type of tax that is levied on goods that are imported into
a country. It is an ad valorem tax, meaning that it is based on the value of
the goods. Customs duties are typically used to protect domestic
industries from foreign competition and to raise revenue for the
government. Customs duties are typically collected by customs authorities
at the border of a country. The importer of the goods is responsible for
paying the customs duty.
Tax Elasticity Tax revenue fluctuations in reaction to changes in tax rates are referred to
as tax elasticity. Tax elasticity measures how much a shift in the tax base
results from an increase in the tax rate.
Tax Buoyancy Tax buoyancy is a measure of how responsive tax revenue is to changes in
economic growth. It is calculated by dividing the percentage change in tax
revenue by the percentage change in GDP. Tax buoyancy can be positive,
negative, or zero. A positive tax buoyancy means that tax revenue
increases more than GDP increases. A negative tax buoyancy means that
tax revenue increases less than GDP increases. A zero tax buoyancy means
 that tax revenue increases at the same rate as GDP increases.

Broadening The Tax Base

 The tax reforms initiated by India in 1991 have been an essential part of its economic reforms
process. These reforms aimed to simplify the tax structure, reduce tax rates, improve tax
compliance, and broaden the tax base. However, despite these efforts, India still faces
challenges related to its tax base and fiscal capacity. To address these issues and enhance fiscal
capacity, several suggestions have been put forward by Economic Survey 2015–16:
 Spending Priorities: The government should prioritize spending on essential services that
benefit all citizens. This includes investments in public infrastructure, maintaining law and order,
reducing pollution and congestion, and ensuring access to critical services.
 Reducing Corruption: Fighting corruption should be a high priority, as it not only has economic
costs but also undermines the legitimacy of the state. Citizens are more willing to pay taxes
when they believe that public resources are used efficiently. Improving transparency through
efficient public asset auctions can help build legitimacy and strengthen fiscal capacity.
 Subsidy Rationalization: Subsidies that primarily benefit the well-off should be scaled back.
Currently, it is estimated that subsidies for the better-off segment amount to around ₹1 lakh
crore. Redirecting subsidies toward those in need is essential for strengthening legitimacy and
targeting assistance where it's most needed.
 Tax Exemptions: The existing regime of tax exemptions often benefits the richer private sector,
which can erode the legitimacy of the state in the eyes of poorer citizens. There is a need to
implement reasonable taxation provisions for the better-off sections of society, regardless of
their income source, such as industry, services, real estate, or agriculture.
 Property Taxation: Property taxation needs to be developed systematically in India. Property
taxes are progressive and difficult to evade because they are imposed on immovable assets.
With modern technologies, properties can be easily identified and taxed. Higher property tax
rates (with periodic value updates) can be a significant source of revenue for local governments,
allowing them to provide public goods and enhance democratic accountability.
 Exemption Thresholds: Avoid raising exemption thresholds for income tax and allow natural
income growth to increase the number of taxpayers. This approach prevents frequent changes
in exemption limits and encourages more individuals to become taxpayers.
 Corporate Tax Reform: Linking corporate tax cuts with the phase-out of exemption regimes for
companies can simplify the tax structure and reduce opportunities for tax evasion.

Challenges
 The tax landscape in India reveals several challenges, including a low tax-to-GDP ratio and an
imbalance between direct and indirect taxes. The data released by the government highlights
the disparity between tax collection and income and consumption patterns of the population:
 Corporate Tax:
o There are approximately 5.6 crore informal sector individual enterprises and small
businesses.
o Only 1.81 crore of them filed tax returns.
o Out of 13.94 lakh registered companies in India for the 2016–17 assessment year:
 2.76 lakh companies reported losses or zero income.
 2.85 lakh companies had profits of less than ₹1 crore.
 The profits of 28,667 companies fell between ₹1 crore to ₹10 crore.
 Only 7,781 companies reported profits exceeding ₹10 crores.
  Individual Income Tax:
o An estimated 4.2 crore people are engaged in organized sector employment.
o However, only 1.74 crore individuals filed tax returns for salary income.
o For the assessment year 2016–17, there were 3.7 crore individuals who filed income tax
returns, revealing the following income pattern:
 99 lakh individuals reported annual income below the ₹2.5 lakh exemption limit.
 1.95 crore individuals reported incomes between ₹2.5 lakh to ₹5 lakh.
 52 lakh individuals reported incomes between ₹5 lakh to ₹10 lakh.
 Only 24 lakh people reported incomes above ₹10 lakhs.
 76 lakh people declared incomes above ₹5 lakhs (with 56 lakh in the salaried
class).
 Only 1.72 lakh people reported incomes exceeding ₹50 lakhs.
 The demonetization process provided the government with data related to people's income.
Approximately 1.09 crore accounts had average deposits ranging from ₹2 to ₹80 lakhs, while
1.48 lakh accounts had deposits exceeding ₹80 lakhs, with an average deposit size of ₹3.31
crores. This data analysis is expected to assist the government in expanding the tax net and
increasing tax revenue in the future.
 Despite the large number of cars sold and the significant number of Indian citizens traveling
abroad for business or tourism, a considerable portion of the Indian population appears to be
non-compliant when it comes to paying taxes. The widespread use of cash in the economy
facilitates tax evasion, and this places a burden on those who are honest and compliant
taxpayers.
 The impact of demonetization and the implementation of the Goods and Services Tax (GST)
aimed to formalize the economy and increase the number of people within the income tax net.
Within 13 months of demonetization (from November 2016 to November 2017), 10.1 million
new income tax filers were added, surpassing the addition of 6.2 million new filers in the
previous six years. However, many of these new filers reported incomes close to the ₹2.5 lakh
per annum tax threshold. As their incomes grow and cross the threshold, government tax
revenue is expected to increase.

Ease of Paying Taxes

 In the World Bank's Ease of Doing Business report, one of the indicators is "Paying Taxes," which
assesses the ease and efficiency of tax payments in a country. This indicator considers various
factors, including the number of tax payments, time required for tax compliance, and the total
tax rate. Here's some data related to the "Paying Taxes" indicator for India up to 2021:
 Total Tax Rate: The total tax rate measures the amount of taxes and mandatory contributions
payable by a medium-sized business (with specific characteristics) as a percentage of its
commercial profit. In 2021, the total tax rate for India was approximately 50.3%, which includes
corporate income tax, labor taxes, and other taxes.
 Number of Tax Payments: India has been working to simplify tax compliance procedures. The
number of tax payments has reduced over the years. In 2021, a medium-sized company in India
had to make around 24 tax payments annually.
 Time Required for Tax Compliance: The time required for tax compliance has also improved due
to digitization and streamlining of processes. In 2021, it took an average of about 266 hours per
year for a medium-sized company to comply with its tax obligations.
  Electronic Filing and Payment: The Indian government has introduced various measures to
encourage electronic filing and payment of taxes. The GST (Goods and Services Tax) regime,
implemented in 2017, significantly digitized tax processes.
 Ease of Getting a VAT Refund: The ease of getting a VAT (Value Added Tax) refund is another
aspect considered in the ranking. Timely VAT refunds are essential for businesses. India has
made efforts to expedite VAT refunds.
 It's important to note that the Indian government has been taking steps to simplify tax
procedures and improve the ease of paying taxes for businesses. The implementation of the
Goods and Services Tax (GST) was a significant milestone in this direction, unifying various
indirect taxes into a single tax system.
Laffer Curve
The Laffer curve is a graphical representation of the
relationship between tax rates and tax revenue. It is
named after Arthur Laffer, an American economist
who developed the curve in the 1970s.
The Laffer curve is a U-shaped curve. It shows that
there is an optimal tax rate that maximizes tax
revenue. If tax rates are too low, the government will
not collect enough revenue. If tax rates are too high,
the government will discourage economic activity and
tax revenue will actually decline.
The Laffer curve is a theoretical concept, and it is difficult to know exactly where the optimal tax rate
is. However, the curve is a useful tool for thinking about the relationship between tax rates and tax
revenue.

Tax Reforms
 The Government of India introduced several major direct tax reforms in the financial year 2020–
21, with the goals of stimulating economic growth, simplifying the tax structure, enhancing
compliance, reducing litigation, and promoting investment. Here is a summary of the key
reforms implemented:
 Restructuring of Personal Income Tax Slabs: The personal income tax slabs were restructured
into seven slabs to simplify the tax structure and reduce the overall tax burden. This
restructuring includes lower tax rates for certain income brackets, making it more taxpayer-
friendly. Taxpayers have the option to choose between the old and new regimes based on their
preferences.
 Reduction in Exemptions and Deductions: Approximately 70 of the existing exemptions and
deductions were removed in the new tax regime. Taxpayers have the flexibility to opt for the old
regime and continue to enjoy these benefits. The new regime is expected to result in a revenue
loss of ₹40,000 crores per year.
 Pre-filling of Income Tax Returns: Initiatives were taken to pre-fill income tax returns for
individuals who opt for the new tax regime. This simplifies the tax filing process and reduces the
need for expert assistance.
 Taxpayers' Charter: A taxpayers' charter was introduced to enhance the efficiency of the income
tax department and build trust between taxpayers and tax authorities. The charter outlines the
rights and responsibilities of taxpayers.
 Removal of Dividend Distribution Tax (DDT): The Government eliminated the payment of DDT
at the company's end. Instead, dividend income will be taxed in the hands of recipients
 (shareholders) as part of their personal income. This change aims to attract more investment in
the stock market but results in an estimated revenue loss of ₹25,000 crores per year.
 Concessional Corporate Tax: Newly incorporated domestic electricity generating companies
were granted a concessional corporate tax rate of 15% (plus surcharge and cess), similar to the
rate for new manufacturing companies with an annual gross turnover below ₹400 crores.
 Sovereign Wealth Fund Exemption: The government provided a 100% exemption on interest,
dividend, and capital gains income made by sovereign wealth funds of foreign governments for
investments in priority sectors. This incentive is applicable until March 2024, with a minimum
lock-in period of 3 years.
 Tax on ESOP (Employee Stock Option Plan) Sales: Tax on the sale of ESOPs by employees was
deferred for 5 years or until employees leave the company or sell their shares, whichever occurs
earlier. This move aims to support the start-up ecosystem.
 Faceless Appeals: To minimize human interface in tax administration, the Government
introduced 'faceless appeals' in addition to 'faceless assessment.' This move enhances efficiency,
transparency, and accountability in the assessment process.
 'Vivad se Vishwas' Scheme: Modeled after the 'Sabka Vishwas Scheme' for indirect taxes, this
scheme was launched to reduce litigation in direct taxes. It allows taxpayers to settle disputed
taxes by paying only the principal amount, with a complete waiver of interest and penalties if
paid by March 2020.
 These reforms seek to improve the tax system, encourage compliance, reduce the burden on
taxpayers, and enhance transparency and efficiency in tax administration.
Impact
 The Government of India has implemented several significant reforms in the tax administration
in recent years. These reforms have had a notable impact on tax collections, tax base growth,
and the overall taxpaying experience. Here are some of the key impacts:
 Increase in Tax Collections: Tax collections have shown substantial growth, with collections
rising from ₹6.38 lakh crores in 2013–14 to nearly ₹12 lakh crores in 2018–19. This reflects
increased compliance and broader tax coverage.
 Tax Base Expansion: The tax base has expanded significantly, with a growth rate of 80%. In
2018–19, approximately 6.85 crore tax returns were filed, compared to 3.79 crore in 2013–14.
This demonstrates a wider participation of taxpayers in the formal tax system.
 Online Tax Department: The tax department now operates online, making it easier for
taxpayers to interact with tax authorities. This shift has simplified processes and made tax-
related activities more accessible to taxpayers.
 Faceless Tax Administration: The tax department has adopted a largely faceless approach,
reducing the need for in-person interactions between taxpayers and tax officers. This has
improved transparency and reduced the scope for discretion.
 Online Processing: Returns, assessments, refunds, and queries are now processed online. An
impressive 99.54% of income-tax returns filed in 2017–18 were accepted without manual
intervention.
 Future Reforms: The government has approved a technology-intensive project to further
enhance the tax department's efficiency. It aims to process all returns within 24 hours and issue
refunds simultaneously. By 2020–21, verification and assessment of returns selected for scrutiny
are expected to be done electronically without physical interactions.
Way forward
 Several recommendations have been proposed to improve India's taxation system. Firstly, there
should be a gradual withdrawal of deductions and exemptions enjoyed by taxpayers, with a
focus on reducing the base tax rate. Additionally, enhancing the ease of filing Goods and
Services Tax (GST) returns is crucial, as simplifying the process will make it more convenient for
taxpayers. Technical glitches in the GST filing system should be promptly addressed to reduce
harassment faced by tax filers. India can also learn from countries like China, Brazil, Indonesia,
and New Zealand to improve the ease of tax payment by adopting best practices. To encourage
tax compliance, especially in personal income tax, a policy framework should be established to
induce behavioral change in taxpayers, including broadening the tax base and phasing out
existing deductions and exemptions.
 Building trust between taxpayers and the tax department is essential for voluntary compliance,
achieved through an efficient and transparent tax administration with minimal human
interaction. Addressing taxpayers' fear and distrust towards the tax department is crucial for
long-term tax compliance improvement. Moreover, expeditiously resolving tax disputes can
prevent revenue losses and reduce the burden on the judicial system. These suggestions aim to
streamline the taxation system, enhance voluntary tax compliance, and foster trust between
taxpayers and tax authorities, ultimately contributing to the overall economic growth and
development of the nation.
Tax Reforms and Challenges: Insights from the Economic Survey 2022-23
The Economic Survey 2022-23 notes that the tax system in India has undergone significant reforms in
recent years, including the introduction of the Goods and Services Tax (GST) in 2017. The survey
states that these reforms have made the tax system simpler, more transparent, and more efficient.
The survey also notes that the tax burden in India is relatively low compared to other countries. For
example, the total tax revenue as a percentage of GDP in India is around 10%, while the average for
OECD countries is around 35%.
However, the survey also identifies a number of challenges that remain in the Indian tax system.
These include:
 Compliance costs: The survey notes that the compliance costs for taxpayers in India are
relatively high. This is due to a number of factors, including the complexity of the tax system
and the lack of adequate taxpayer support services.
 Tax evasion: The survey also notes that tax evasion is a significant problem in India. The
estimated tax gap in India is around 10% of GDP.
 Dispute resolution: The survey also notes that the dispute resolution process in India is slow
and inefficient. This can lead to significant delays and costs for taxpayers.
The survey recommends a number of measures to address these challenges. These include:
 Simplifying the tax system: The survey recommends that the government should continue to
simplify the tax system and reduce the compliance costs for taxpayers.
 Reducing tax evasion: The survey recommends that the government should take steps to
reduce tax evasion, such as improving the tax administration and increasing the use of
technology.
 Improving the dispute resolution process: The survey recommends that the government
should improve the dispute resolution process by making it more efficient and timely.
Overall, the Economic Survey 2022-23 paints a positive picture of the Indian tax system. The survey
notes that the tax system has undergone significant reforms in recent years and that the tax burden is
relatively low compared to other countries. However, the survey also identifies a number of
challenges that remain, such as high compliance costs, tax evasion, and a slow and inefficient dispute
resolution process. The survey recommends a number of measures to address these challenges, such
as simplifying the tax system, reducing tax evasion, and improving the dispute resolution process.

Key Points from Budget 2023-24

The Union Budget 2023-24 introduced a number of changes to the Indian tax system, including:
Income tax:
The basic exemption limit for individual taxpayers was increased from Rs. 2.5 lakh to Rs. 3 lakh.
The new income tax slabs for individuals under the new tax regime were revised as follows:
 Up to Rs. 3 lakh: No tax
 Rs. 3 lakh to Rs. 6 lakh: 5%
 Rs. 6 lakh to Rs. 9 lakh: 10%
 Rs. 9 lakh to Rs. 12 lakh: 15%
 Rs. 12 lakh to Rs. 15 lakh: 20%
 Above Rs. 15 lakh: 30%
The highest surcharge rate in personal income tax was reduced from 37% to 25% in the new tax
regime for income above Rs. 2 crore.
Corporate tax:
 The corporate tax rate for domestic companies was reduced from 25% to 22%.
 The corporate tax rate for new domestic manufacturing companies was reduced from 15% to
15%.
Indirect taxes:
 The GST rate for certain goods and services was reduced.
 The Customs Act was amended to exempt certain goods from customs duty.
The government also announced a number of measures to promote compliance and reduce tax
evasion, including:
 Faceless assessment: The government announced that it will implement faceless assessment
for all taxpayers.
 Pre-filled income tax returns: The government announced that it will pre-fill income tax
returns for all taxpayers.
 Taxpayer service centers: The government announced that it will set up taxpayer service
centers in all districts of the country.
 The changes introduced in the Union Budget 2023-24 are expected to boost the Indian
economy and make the tax system more efficient and taxpayer-friendly.

Previous Year Questions(Prelims)

1. The money multiplier in an economy increases with which one of the following? (2021)
(a) Increase in the Cash Reserve Ratio in the banks
(b) Increase in the Statutory Liquidity Ratio in the banks
(c) Increase in the banking habit of the people
(d) Increase in the population of the country

2. What is/are the most likely advantages of implementing 'Goods and Services Tax (GST)'? (2017)
1. It will replace multiple taxes collected by multiple authorities and will thus create a single market in
India.
2. It will drastically reduce the 'Current Account Deficit' of India and will enable it to increase its
foreign exchange reserves.
3. It will enormously increase the growth and size of the economy of India and will enable it to
overtake China in the near future.
Select the correct answer using the code given below:
(a) 1 only
(b) 2 and 3 only
(c) 1 and 3 only
(d) 1, 2 and 3

3. Under which of the following circumstances may 'capital gains' arise? (2012)
1. When there is an increase in sales of product
2. When there is a natural increase in the value of the property owned.
3. When you purchase a painting, there is a growth in its value due to an increase in its popularity.
Select the correct answer using the codes given below:
(a) 1 only
(b) 2 and 3 only
(c) 2 only
(d) 1, 2 and 3

4. Which one of the following is not a feature of "Value Added Tax"? (2011)
(a) It is a multi-point destination-based system of taxation
(b) It is a tax levied on value addition at each stage of transaction in the production distribution chain
(c) It is a tax on the final consumption of goods or services and must ultimately be borne by the
consumer
(d) It is basically subject of the Central Government and the State Governments are only a
facilitator for its successful implementation

Chapter: INFLATION
Background
 In a village, a young boy named Arjun enjoyed a delicious plate of spicy samosas from the local
snack vendor, Ram for years. However, one year, the prices of essential ingredients for samosas,
such as flour, potatoes, and cooking oil, rose. Ram tried to keep the prices of his samosas the
same, but as time went on, Arjun noticed that the same plate of samosas now cost him 15
rupees.
 Ram explained Arjun that inflation was causing the prices to rise, forcing him to charge more for
the ingredients needed to make samosas. With a newfound understanding, Arjun learned that
inflation was a natural part of an economy. When prices go up because the cost of making things
rises or because more people want those things, it can affect everyone's ability to buy what they
want. As a result, Arjun learned to pay closer attention to his pocket money and budget wisely in
the face of rising prices. Now let’s discuss inflation, its causes and impact in detail.

Introduction
 Inflation is the rate of increase in
prices over a given period of time.
Inflation is typically a broad
 measure, such as the overall increase in prices or the increase in the cost of living in a country.
Inflation can affect all aspects of our lives, from the food we eat to the transportation we use. It
can also make it more difficult to save money and plan for the future.
 Example: Suppose in 2022, a kilogram of rice cost ₹50. In 2023, the same kilogram of rice costs
₹60. This means that there has been inflation of ₹10, or 20%. Similarly, in 2022, a one-way ticket
on the Delhi Metro cost ₹20. In 2023, the same ticket costs ₹25. This means that there has been
inflation of ₹5, or 25%.
 Positive consequences of inflation:
o Inflation can encourage people to spend money now rather than later, which can boost
the economy.
o Inflation can make it easier for businesses to repay their debts.
o Inflation can make exports more competitive in the global market.
 Negative consequences of inflation:
o Inflation can erode the purchasing power of people on fixed incomes, such as retirees.
o Inflation can make it more difficult for businesses to plan for the future.
o Inflation can lead to social unrest and economic instability.

Types of Inflation
 There are mainly two types of inflation:
o Demand-pull inflation: This type of inflation occurs when there is too much money
chasing too few goods and services. This can happen when the economy is growing
rapidly and businesses are unable to produce enough goods to meet the demand.
Example: Imagine a small town with only one bakery, and suddenly, everyone starts
craving cupcakes. People line up at the bakery, and the baker raises the cupcake prices
because there's so much demand. This is like demand-pull inflation – too many people
want cupcakes, so the prices go up.
o Cost-push inflation: This type of inflation occurs when the cost of producing goods and
services increases. This can happen due to factors such as rising wages, higher raw
material costs, or supply chain disruptions. Example: Think of a pizza place that relies on
cheese to make pizzas. If the price of cheese suddenly goes way up because of a
shortage or increased production costs for cheese makers, the pizza place might have to
raise its pizza prices to cover the higher cheese cost. This is cost-push inflation – higher
production costs push prices higher.
 In addition to these two main types of inflation, there are also other types of inflation, such
as:

Terms Description
Galloping  Galloping inflation is a type of extreme inflation where prices rise
Inflation very rapidly, often by more than 50% per month. It is characterized
by a loss of confidence in the currency and a flight from cash.
 One example of galloping inflation occurred in Venezuela in 2018.
The annual inflation rate in Venezuela reached 1 million percent,
meaning that prices doubled every 19 days. This was caused by a
number of factors, including government mismanagement,
corruption, and economic sanctions.
 Hyperinflation  Hyperinflation is a type of extreme inflation where prices rise very
rapidly, often by more than 50% per month. It is characterized by a
loss of confidence in the currency and a flight from cash.
 One of the most extreme examples of hyperinflation in history
occurred in Zimbabwe in the 2000s. The annual inflation rate in
Zimbabwe reached 79.6 billion percent in November 2008. This
means that prices doubled every 24.7 hours.
Creeping Inflation  Creeping inflation is a type of mild inflation where prices rise slowly
but steadily over time. It is typically defined as an annual inflation
rate of between 1% and 3%.
 In the United States, the average annual inflation rate over the past
30 years has been around 3%. This means that prices have doubled
every 24 years.
Skewflation  Skewflation is a term used to describe a type of inflation where
prices rise unevenly across different sectors of the economy. In
other words, some goods and services become more expensive,
while others become less expensive or stay the same.
 One example of skewflation occurred in the United States in the
early 2010s. At the time, the overall inflation rate was relatively
low. However, the price of food and energy rose rapidly, while the
price of other goods and services remained relatively stable.
Disinflation  Disinflation is a decrease in the rate of inflation. It occurs when the
prices of goods and services are still rising, but at a slower pace
than before. Imagine that the inflation rate in a country is 5% in
2023. This means that the prices of goods and services are rising by
5% per year. In 2024, the inflation rate drops to 3%.
 This means that the prices of goods and services are still rising, but
at a slower pace than in 2023. This is disinflation.
Core Inflation  Core inflation is a measure of inflation that excludes food and
energy prices. This is because food and energy prices are often
volatile and can fluctuate wildly due to factors such as weather
conditions and geopolitical events.
 Core inflation is therefore considered to be a more reliable
indicator of underlying inflationary trends.
Headline Inflation  Headline inflation is the general increase in prices of all goods and
services in an economy, including food and energy prices. It is the
most widely reported measure of inflation and is typically
calculated as the annual percentage change in the Consumer Price
Index (CPI).

Causes of Inflation
 There are a number of causes of inflation, but the two most common are demand-pull inflation
and cost-push inflation.
  Demand-pull inflation: This occurs when there is too much money chasing too few goods and
services. This can happen when the economy is growing rapidly and people have more money to
spend. It can also happen when
the government prints more
money or when interest rates
are low.
o Example of demand-
pull inflation is the
recent increase in the
price of oil. The global
demand for oil has
been increasing in
recent years, while the
supply of oil has
remained relatively
constant. This has led
to an increase in the price of oil.
 Cost-push inflation: This occurs when the cost of producing goods and services increases. This
can happen due to factors such as higher wages, higher energy prices, or supply chain
disruptions.
o Example of cost-push inflation is the recent increase in the price of food. The cost of
producing food has increased due to a number of factors, including higher energy prices,
higher wages, and supply chain disruptions. This has led to higher prices for consumers.
 Other factors that can contribute to inflation include:
o Government policies: Government policies, such as subsidies and tariffs, can also affect
inflation. For example, if the government subsidies a product, this can lower the price
for consumers. However, this can also lead to producers producing more of the product,
which can put upward pressure on prices in the long term.
o Exchange rates: Exchange rates can also affect inflation. If the value of the domestic
currency falls, this can make imports more expensive. This can lead to higher prices for
consumers.
o Natural disasters: Natural disasters, such as floods and droughts, can also lead to
inflation. This is because they can disrupt the supply of goods and services, which can
lead to higher prices.

Impact of Inflation
 Scenario: Consider a period in India where the annual inflation rate is 6%.
 Example 1: Reduced Purchasing Power:
o Situation: Rajesh, a software engineer in India, earns an annual salary of 8 lakh rupees
(₹800,000). At the beginning of the year, he could buy a high-end smartphone for
₹80,000.
o Impact: Due to an inflation rate of 6%, the prices of goods and services, including
smartphones, rise during the year.
o Outcome: By the end of the year, the same high-end smartphone now costs ₹84,800.
Rajesh's salary remained the same, so his purchasing power for this smartphone has
 decreased. He now needs to allocate a larger portion of his income to purchase the
same product.
 Example 2: Savings Erosion:
o Situation: Meena, a diligent saver in India, has ₹5,00,000 in a savings account that earns
an annual interest rate of 4%.
o Impact: With an inflation rate of 6%, the real value of money is decreasing.
o Outcome: Even though Meena's savings account earns interest, it's not keeping pace
with inflation. Over the year, her savings will grow to ₹5,20,000 due to interest, but the
real purchasing power of that money has diminished because prices have gone up. In
essence, her savings are eroding in terms of what they can buy.
 Example 3: Impact on Investments:
o Situation: Alok decides to invest ₹1,00,000 in a fixed deposit with an annual interest
rate of 5%.
o Impact: Inflation in India is at 6% during the year.
o Outcome: Alok's investment grows to ₹1,05,000 with the interest earned, but due to the
6% inflation rate, the real return on his investment is only 5% - 6% = -1%. In other
words, his investment is losing real value because it's not keeping up with inflation.
 Example 4: Impact on Businesses:
o Situation: A small manufacturing company in India faces rising costs of raw materials
and labor due to inflation.
o Impact: To maintain profitability, the company increases the prices of its products.
o Outcome: Consumers notice that prices have gone up, and some may reduce their
purchases or switch to cheaper alternatives. The business, however, faces the challenge
of higher production costs and may need to deal with reduced demand if customers are
price-sensitive.
 Example 5: Impact on Borrowers and Lenders:
o Situation: Priya took out a loan of ₹5,00,000 from a bank to buy a car. The loan has a
fixed interest rate of 8%.
o Impact: During the year, the inflation rate in India is 6%.
o Outcome: Priya has to pay back the loan with an 8% interest rate. While she agreed to
this interest rate when taking the loan, the real cost of borrowing is lower because the
rupee's value has decreased due to inflation. In other words, the "real" interest rate
(adjusted for inflation) is lower than 8%. This benefits borrowers like Priya but can be a
disadvantage for lenders.
 Example 6: Impact on Fixed-Income Retirees:
o Situation: Mr. and Mrs. Sharma are retired and rely on fixed monthly pensions for their
living expenses. They receive ₹30,000 per month.
o Impact: With an inflation rate of 6%, the cost of living is rising.
o Outcome: Over time, the Sharmas may find it increasingly difficult to cover their
expenses with their fixed pension income. As prices for everyday goods and services
increase, their purchasing power decreases, potentially leading to financial strain for
retirees on fixed incomes.
 Example 7: Impact on Government Finances:
 o Situation: The Indian government has a substantial amount of debt, and it must make
interest payments on that debt.
o Impact: If inflation is higher than expected, it can increase the government's interest
expenses.
o Outcome: Higher interest expenses can strain the government's budget and may lead to
cutbacks in other important areas like public services or infrastructure development.
Managing inflation is a critical consideration for government fiscal policies.
 Example 8: Impact on Exporters and Importers:
o Situation: India exports textiles to other countries and imports electronic components.
o Impact: If inflation in India is higher than in its trading partners, it can affect trade
balances.
o Outcome: A higher domestic inflation rate can make Indian goods more expensive for
foreign buyers, potentially reducing exports. On the other hand, it might make imported
electronic components costlier for Indian manufacturers, affecting the cost of producing
electronic goods domestically.
 These examples illustrate that inflation can affect various aspects of an economy, including
consumers, borrowers, lenders, retirees, government finances, and international trade.
Managing inflation is a key challenge for policymakers to ensure economic stability and the well-
being of citizens.

Phillips Curve

The Phillips curve shows the relationship between

inflation and unemployment. The curve is typically
downward-sloping, which means that higher inflation is
associated with lower unemployment, and vice versa.

Measuring Inflation in India

 Inflation in India is measured using two main indices: the Consumer Price Index (CPI) and the
Wholesale Price Index (WPI).
Consumer Price Index (CPI)
 The CPI is a measure of the average change over time in prices of goods and services consumed
by households. It is calculated by the National Statistical Office (NSO) of India on a monthly
basis.
 The CPI basket includes over 700 items, including food, beverages, clothing, housing,
transportation, and healthcare. The weights assigned to each item in the CPI basket are based
on a household consumption survey conducted by the NSO.
 It is divided into two main categories: CPI for Industrial Workers (CPI-IW) and CPI for Agricultural
Laborers (CPI-AL) for rural areas, and CPI for Urban Non-Manual Employees (CPI-UNME) and CPI
for Urban Manual Employees (CPI-UME) for urban areas.
  The CPI is used to calculate the inflation rate, which is the annual percentage change in the CPI.
The inflation rate is an important economic indicator because it measures the overall purchasing
power of consumers.
Wholesale Price Index (WPI)
 The WPI is a measure of the average change over time in prices of goods sold at the wholesale
level. It is calculated by the Ministry of Commerce and Industry on a weekly basis.
 The WPI includes three main groups: Primary Articles, Fuel and Power, and Manufactured
Products. These groups are further divided into various subgroups and items. The weights
assigned to each item in the WPI basket are based on the value of output of the item.
 The WPI is used to track inflation at the wholesale level. It is also used by the Reserve Bank of
India (RBI) to formulate its monetary policy.
How RBI control inflation in India?
The Reserve Bank of India (RBI) is responsible for controlling inflation in India. The RBI is the
central bank of India and is responsible for monetary policy. Monetary policy is the use of interest
rates and other tools to influence the money supply and overall credit conditions in an economy.
The RBI has a target inflation rate of 4% with a band of 2 percentage points on either side. This
means that the RBI aims to keep inflation between 2% and 6%.
The RBI uses a number of tools to control inflation, including:
 Interest rates: The RBI can raise or lower interest rates to influence the money supply and
demand. Raising interest rates makes it more expensive to borrow money, which can
discourage spending and investment. This can help to slow down economic growth and
reduce inflation. Lowering interest rates makes it cheaper to borrow money, which can
encourage spending and investment. This can help to boost economic growth and
increase inflation.
 Open market operations: The RBI can buy and sell government bonds to influence the
money supply. Buying government bonds injects money into the economy, which can
increase inflation. Selling government bonds withdraws money from the economy, which
can reduce inflation.
 Cash reserve ratio (CRR): The CRR is the minimum amount of money that banks must
hold in reserve with the RBI. Raising the CRR reduces the amount of money that banks
have available to lend, which can reduce inflation. Lowering the CRR increases the
amount of money that banks have available to lend, which can increase inflation.
The RBI also works with the government to control inflation. The government can use fiscal policy,
such as taxes and government spending, to influence the economy. For example, the government
can increase taxes to reduce the amount of money that people have to spend, which can reduce
inflation. The government can also reduce government spending to reduce the demand for goods
and services, which can also reduce inflation.

Consumer Food Price Index (CFPI)

 The Consumer Food Price Index (CFPI) is a measure of the change in retail prices of food items
consumed by a defined population group in a given area with reference to a base year. It is
calculated by the National Statistical Office (NSO) of India, and is released on a monthly basis.
 The CFPI covers a basket of 222 food items, which are selected based on their importance in the
Indian diet and their consumption pattern. The prices of these items are collected from a sample
of retail outlets across the country.
 The CFPI is used to track inflation in the food sector. It is also used by the government to
formulate policies to improve food security and to protect consumers from rising food prices.
  The following are some of the major food items that are included in the CFPI:
o Cereals
o Pulses
o Milk and milk products
o Eggs, meat, and fish
o Vegetables
o Fruits
o Sugar and confectionery
o Edible oils and fats
 The CFPI is calculated using a weighted average method. The weights are assigned to each food
item based on its consumption share in the Indian diet.
 The CFPI is expressed as a percentage of its value in the base year. For example, if the CFPI for
the current month is 120, it means that the prices of food items have increased by 20% since the
base year.
Which index is more important?
 The CPI is considered to be the more important index for measuring inflation in India because it
is a measure of inflation at the retail level, which is more relevant to consumers. The WPI is a
measure of inflation at the wholesale level, which is more relevant to producers.
Inflation Trend in India
 The inflation trend in India has been on the rise in recent months. In August 2023, India's
retail inflation, which is measured by the consumer price index (CPI), rose to 7.44%, the
highest since April 2022. This is up from 6.71% in July 2023 and 5.33% in June 2023.
 The Reserve Bank of India (RBI) has set a target inflation rate of 4% with a band of 2
percentage points on either side. However, inflation has been consistently above the target
range for the past several months.
 The rise in inflation in India has been driven by a number of factors, including:
o The war in Ukraine: The war in Ukraine has led to higher global energy and food
prices, which has had a knock-on effect on prices in India.
o The supply chain disruptions: The COVID-19 pandemic and the war in Ukraine have
led to supply chain disruptions, which have also contributed to higher prices.
o The domestic demand: Domestic demand in India has been picking up in recent
months, which has also put upward pressure on prices.
 The RBI is expected to take further steps to tighten monetary policy in order to bring inflation
under control. However, it is important to note that tightening monetary policy can also slow
down economic growth.

Measures to control inflation

 There are a number of measures that governments and central banks can take to control
inflation. These measures can be broadly divided into two categories: monetary policy and fiscal
policy.
 Monetary policy: Monetary policy is the use of interest rates and other tools to influence the
money supply and overall credit conditions in an economy. Central banks use monetary policy to
try to keep inflation low and stable.
 Some of the monetary policy tools that central banks can use to control inflation include:
 o Raising interest rates: Raising interest rates makes it more expensive to borrow money,
which can discourage spending and investment. This can help to slow down economic
growth and reduce inflation.
o Selling government bonds: When a central bank sells government bonds, it takes
money out of the economy. This can help to reduce the money supply and slow down
inflation.
o Increasing reserve requirements: Reserve requirements are the amount of money that
banks are required to hold in reserve. Increasing reserve requirements can reduce the
amount of money that banks have available to lend, which can help to slow down
inflation.
 Fiscal policy: Fiscal policy is the use of government spending and taxes to influence the
economy. Governments can use fiscal policy to try to control inflation by reducing spending and
increasing taxes.
 Some of the fiscal policy tools that governments can use to control inflation include:
o Reducing government spending: Reducing government spending can help to reduce the
amount of money in the economy and slow down inflation.
o Raising taxes: Raising taxes can help to reduce the amount of money that people have
to spend, which can also slow down inflation.
 The measures that governments and central banks take to control inflation will vary depending
on the specific circumstances of each country. However, the goal of all of these measures is to
keep inflation low and stable.
 In addition to monetary and fiscal policy, there are also a number of other measures that
governments can take to control inflation, such as:
o Price controls: Price controls are government-imposed limits on prices. Price controls
can be effective in controlling inflation in the short term, but they can also lead to
shortages of goods and services in the long term.
o Subsidies: Subsidies are government payments to businesses or consumers to help
them reduce their costs. Subsidies can be effective in reducing inflation, but they can
also be costly and inefficient.
o Import-export restrictions: Import-export restrictions are government-imposed limits
on imports and exports. Import-export restrictions can be effective in controlling
inflation, but they can also lead to higher prices for consumers and businesses.
 The best way to control inflation is to use a combination of monetary and fiscal policy.
Governments and central banks should also coordinate their efforts to ensure that their policies
are complementary.

Measures taken by the Government in Budget 2023-24

 The following are some of the key measures from the Indian Budget 2023-24 about inflation:
o The government's outlook for nominal GDP growth in 2023-24 is 10.5%, implying an
estimated inflation rate of 4%.
o An allocation of ₹35,000 crores has been made in the budget for the Pradhan Mantri
Garib Kalyan Anna Yojana (PMGKAY), a program providing free food grains to the
underprivileged. This initiative aims to control food price inflation.
o Additionally, the budget has set aside ₹1,95,000 crores for the One Nation One Ration
Card initiative, enabling ration card holders to purchase food grains from any authorized
 shop across the nation. This measure is anticipated to enhance the efficiency of the
public distribution system and mitigate food price inflation.
o The government has introduced several measures to stimulate the production and
supply of agricultural goods, with the goal of curbing food inflation over the medium to
long term.
o Furthermore, the government has unveiled various measures to promote the
manufacturing sector, which is expected to contribute to lowering inflation in the
medium to long term by augmenting the supply of goods and services.

Economic Survey 2022-23: Analysis and Outlook on Inflation in INDIA

 Inflation in India has been within the RBI's target range of 2-6% for most of the past decade.
 Inflation began to rise in 2021 due to a number of factors, including the global supply chain
disruptions caused by the COVID-19 pandemic, the war in Ukraine, and domestic factors
such as the increase in fuel and food prices.
 The RBI has responded to the rise in inflation by raising interest rates.
 Higher interest rates could slow down economic growth.
 The government and the RBI are committed to bringing inflation down to within the target
range.
 However, this may take some time, given the global and domestic challenges that the
economy is facing.
The Economic Survey is an important document that provides insights into the state of the Indian
economy. The Survey's findings on inflation are particularly important, given the impact that inflation
can have on businesses and individuals.

Is inflation always bad for economy?

 Inflation is not always bad for the economy; its impact depends on various factors, including the
rate and stability of inflation, as well as the overall economic context. Here are some key
considerations:
 Moderate Inflation Can Be Healthy: Many central banks and economists consider moderate
inflation to be a sign of a healthy economy. A low and stable inflation rate, typically targeted
around 2% in many developed countries, can have several benefits:
o Encouraging Spending: Mild inflation can encourage consumers to spend and invest
rather than hoarding cash because they know that the value of their money will
gradually decrease. This can stimulate economic activity.
o Supporting Borrowers: Borrowers benefit from moderate inflation because they repay
loans with money that is worth less in real terms, effectively reducing the cost of
borrowing.
o Fostering Investment: Businesses are more likely to invest in new equipment,
technology, and expansion when they expect a stable level of inflation.

Example
Situation: India experiences moderate inflation of 4% annually.
Impact: This moderate inflation rate can have several positive effects on the Indian economy.
Benefits:
 Encouraging Spending: With moderate inflation, consumers may be more inclined to
spend and invest their money rather than keeping it idle because they know that the
 value of their savings is gradually decreasing. This increased spending can stimulate
economic growth.
 Favorable for Borrowers: Borrowers, including individuals with home loans or
businesses with debt, benefit from moderate inflation. They repay loans with money
that has a lower real value, effectively reducing their debt burden.
 Investment and Economic Activity: Businesses may be more willing to invest in
expansion, new technologies, and job creation when they anticipate moderate
inflation. This can contribute to economic development and job opportunities.

 Deflation is a Concern: On the flip side, deflation, which is a persistent decrease in the general
price level, can be more detrimental to an economy. Deflation can lead to reduced consumer
spending, increased unemployment, and economic stagnation because people delay purchases
in anticipation of lower prices in the future.
 High or Hyperinflation is Harmful: High and unstable inflation, such as hyperinflation, is
generally harmful to an economy. Hyperinflation can erode savings, lead to uncertainty, and
disrupt economic activity. Countries experiencing hyperinflation often face severe economic and
social consequences.
 Inflation Heterogeneity: Inflation affects different groups within an economy differently. For
example, those with fixed incomes, like retirees, may struggle with rising prices, while
individuals with assets that appreciate with inflation, like real estate, may benefit.
 Managing Inflation: Central banks play a crucial role in managing inflation. They use tools like
interest rates and monetary policy to maintain price stability and keep inflation within a target
range.

Deflation
 Deflation is the general decrease in prices and increase in the purchasing power of money. It is
the opposite of inflation. Deflation can be caused by a number of factors, including:
o Decreased demand: This can happen when the economy is in a recession and people
are spending less money.
o Increased supply: This can happen when there is more of a good or service available
than there is demand for it.
o Technological innovation: This can lead to lower production costs and lower prices for
consumers.
 Deflation can have a number of negative consequences, including:
o Reduced investment: Businesses may be less likely to invest in new projects during
periods of deflation, as they expect the prices of their goods and services to fall in the
future.
o Increased unemployment: Businesses may be forced to lay off workers in order to
reduce costs during periods of deflation.
o Debt deflation: Deflation can make it more difficult for borrowers to repay their debts,
as the value of their money increases over time.

Concept of Deflationary Spiral

A deflationary spiral is a situation in which deflation, or a general decrease in prices, leads to lower
production, lower wages, reduced demand, and still lower prices. This can create a vicious cycle, as
 the lower prices lead to lower profits for businesses, which can lead to layoffs and lower wages for
workers. This can then lead to reduced demand for goods and services, which can lead to even lower
prices.

Deflationary spirals can be caused by a number of factors, including:

 Economic recessions: When the economy is in a recession, demand for goods and services
decreases. This can lead to lower prices, as businesses try to sell their products.
 Debt deflation: When the value of money increases over time, it can make it more difficult for
borrowers to repay their debts. This can lead to defaults, which can have a negative impact
on the economy.
 Disruptions to the supply chain: If there are disruptions to the supply chain, it can lead to
higher prices for goods and services. However, if these disruptions are persistent, it can
eventually lead to lower prices, as businesses are forced to reduce their prices in order to sell
their products.
Deflationary spirals can have a number of negative
consequences, including:
 Reduced economic growth: Deflation can
lead to reduced economic growth, as
businesses are less likely to invest and
consumers are less likely to spend when
prices are falling.
 Increased unemployment: Deflation can lead
to increased unemployment, as businesses
lay off workers in order to reduce costs.
 Social unrest: Deflation can lead to social
unrest, as people become frustrated with the
rising cost of living.
Governments and central banks use a variety of tools to try to prevent deflationary spirals. One
common tool is to lower interest rates. This makes it cheaper to borrow money, which can encourage
investment and spending. Governments can also try to increase the money supply. This can help to
boost demand and prevent prices from falling.

Here is an example of a deflationary spiral:

Suppose that there is a recession and demand for goods and services decreases. Businesses are
forced to lower their prices in order to sell their products. This leads to lower profits for businesses,
which can lead to layoffs and lower wages for workers. The lower wages lead to reduced demand for
goods and services, which leads to even lower prices. This cycle can continue until the government or
central bank takes action to stop it.

Deflation Vs Inflation
Aspect Inflation Deflation
A general increase in the prices of A general decrease in the prices of goods and
Definition goods and services over time. services over time.
Prices rise, and the value of money
Impact on Prices decreases. Prices fall, and the value of money increases.
 Aspect Inflation Deflation
Increased demand, higher production
costs, or an expansionary monetary Decreased demand, reduced production costs, or
Cause policy. a contractionary monetary policy.
Consumers may buy now to avoid
Consumer higher prices later (if they expect prices Consumers may delay purchases, expecting
Behavior to rise further). lower prices in the future.
Borrowers benefit because they repay
Borrowers vs. fixed-rate debts with money that's Lenders benefit because the real value of the
Lenders worth less. money they're paid back increases.
Businesses may invest more due to Businesses may cut back on investments due to
Investment rising demand. falling demand and uncertainty.
Lower unemployment due to increased Higher unemployment as businesses reduce
Unemployment demand for labor. production and lay off workers.
May lead to higher consumer confidence initially,
Consumer May lead to lower consumer but excessive deflation can also reduce
Confidence confidence if prices rise rapidly. confidence.
Central banks may raise interest rates Central banks may lower interest rates, engage
Government or reduce money supply to control in quantitative easing, or implement fiscal
Response inflation. stimulus to combat deflation.
Economic Mild inflation is generally seen as a sign Deflation can lead to economic stagnation and
Consequences of a healthy economy. recession if it persists.

Conclusion
 Inflation is a significant issue affecting individuals and businesses, with many Western nations
facing disinflation or deflation. India, however, faces challenges related to inflation, including
rising prices. Maintaining a low and stable inflation rate is crucial for sustained economic
growth. India has achieved remarkable economic growth in the past decade by embracing
globalization. To continue this trajectory and improve living standards, India should aim for
greater price stability, addressing inflationary pressures and ensuring consistent inflation rates.
This balance is essential for supporting India's rapid growth and improving citizens' well-being.

Previous Year Question(Prelims)

1. Which one of the following is likely to be the most inflationary in its effects? (2021)
(a) Repayment of public debt
(b) Borrowing from the public to finance a budget deficit
(c) Borrowing from the banks to finance a budget deficit
(d) Creation of new money to finance a budget deficit

2. Which of the following steps is most likely to be taken at the time of an economic recession?
(a) Cut in tax rates accompanied by an increase in interest rate
(b) Increase in expenditure on public projects
(c) Increase in tax rates accompanied by reduction of interest rate.
(d) Reduction of expenditure on public projects
3.With reference to the Indian economy, demand-pull inflation can be caused/increased by which
of the following? (2021)
1. Expansionary policies
2. Fiscal stimulus
3. Inflation-indexing wages
4. Higher purchasing power
5. Rising interest rates
Select the correct answer using the code given below.
(a) 1, 2 and 4 only
(b) 3, 4 and 5 only
(c) 1, 2, 3 and 5 only
(d) 1, 2, 3, 4 and 5

4. Consider the following statements: (2020)

1. The weightage of food in Consumer Price Index (CPI) is higher than that in Wholesale Price Index
(WPI).
2. The WPI does not capture changes in the prices of services, which CPI does.
3. The Reserve Bank of India has now adopted WPI as its key measure of inflation and to decide on
changing the key policy rates.
Which of the statements given above is/are correct?
(a) 1 and 2 only
(b) 2 only
(c) 3 only
(d) 1, 2 and 3

5. With reference to inflation in India, which of the following statements is correct? (2015)
(a) Controlling the inflation in India is the responsibility of the Government of India only
(b) The Reserve Bank of India has no role in controlling the inflation
(c) Decreased money circulation helps in controlling the inflation
(d) Increased money circulation helps in controlling the inflation

6. Consider the following statements: (2013)

1. Inflation benefits the debtors.
2. Inflation benefits the bond-holders.
Which of the statements given above is/are correct?
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2

7. Which one of the following is likely to be the most inflationary in its effect? (2013)
(a) Repayment of public debt
(b) Borrowing from the public to finance a budget deficit
(c) Borrowings from banks to finance a budget deficit
(d) Creating new money to finance a budget deficit

8.India has experienced persistent and high food inflation in the recent past. What could be the
reasons? (2011)
1. Due to a gradual switchover to the cultivation of commercial crops, the area Under cultivation of
food grains has steadily decreased in the last five years by about 30%.
2. As a consequence of increasing incomes, the consumption patterns of the people have undergone a
significant change.
3. The food supply chain has structural constraints.
Which of the statements given above are correct?
(a) 1 and 2 only
(b) 2 and 3 only
(c) 1 and 3 only
(d) 1, 2 and 3