copy of indian economy – an overview
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Indian economy
An overview
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What is an economy?
An economy is a system of interrelated economicactivities and economic transactions. Basiceconomic activities include production, exchange
and consumption. The economic activities are carried out in an
integrated manner that creates a continuousprocess of economic transactions buying and
selling. Economic transactions generate two kinds of
flows: product of goods flow and money flow.
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Economic activities
Economic activities include all human activities whichcreate goods and services that can be valued at marketprice.
Economic activities include:
1.production by farmers, 2. production by firms in the industrial sector,
3. production of goods and services by the governmententerprises,
4. and services produced by business intermediaries(wholesalers and retailers), banks and other financialorganizations, universities, colleges and hospitals, andprofessionals like medical practitioners, lawyers,consultants etc.
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Non economic activities
These are those which produce goods and
services that do not have any market value.
Non-economic activities include:
spiritual,
psychological,
social and political services.
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The non-economic category of activities also
include:
hobbies, service to self,
service ofhousewives,
services of members of family to othermembers and
exchange of mutual services between
neigh
bours.
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Indian scenerio
Indias is/was a mixed economy. In fact, India
has a very complex mixed economic system.
Now The economy of India is the twelfthlargest economy in the world by market
exchange rates and the fourth largest by
purchasing power parity (PPP) basis.
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India was under social democratic-based
policies from 1947 to 1991.
Th
e economy was ch
aracterised by extensiveregulation, protectionism, and public
ownership, leading to pervasive corruption
and slow growth.
Since 1991, continuing economic liberalisation
has moved the economy towards a market-
based system.
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A revival of economic reforms and better
economic policy in 2000s accelerated India's
economic growth rate.
By 2009, India had prominently established
itself as the world's second-fastest growing
major economy
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Mixed economy
A simple mixed economic system is
characterised by the existence of private and
public sectors.
India has a multiplicity of sectors:
1. private,
2.public, 3joint,
4. co-operative,
5 workers sectors and also (6) tiny sectors.
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Mixed economy another
characteristic Secondly, a simple mixed economy is characterised by
complementarity between central planning and pricing.
India has a multiplicity of mechanisms at work:
five-year plans, annual plans during plan holidays,
pointed economic reform and reconstruction programmesduring and after plan vacations, ideas of rolling plans;
an elaborate system of controls and regulatory measures,
attempts towards streamlining and simplification ofprocedures,
private traders and public distributors for the same product(contd..)
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Contn
and hence a system of dual prices,
ceiling prices,
floor prices,
subsidised prices,
statutory prices, retention prices,
procurement prices, levy prices, and free market prices;
contractionary monetary policies and
expansionary fiscal policies etc.
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Mixed economy- 3rd characteristic
Finally, a simple mixed economy is expected to
reach a target level of social welfare, and
for th
is task, th
e profit policies are to bedesigned according to a social purpose.
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Evolution of policies
The present day mixed economy of India has evolvedthrough a series of policy formulations and legislations.
It started with the Industrial Policy Resolution of 1948.
This was followed by the Industries (Development andRegulation) Act 1951,
the Directive Principles of state Policy 1950,
the Industrial Policy Resolution 1956,
theMRTP Act 1969 and amendments,
the Industrial Licensing Policy, 1970, and amendmentsand
the FERA 1973 and amendments. (contd.)
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Contd.
These enactments and policy formulations
have been modified or supplemented from
time to time
by comprehensive five-year plans,
the 20-point Programme,
controls and regulations on price, output,production, distribution and trade,
various nationalisation schemes, anti-poverty
schemes, and finally the economic reforms
initiated in 1991.
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Need for change
It was felt that government controls and regulationshad put shackles on the growth of different segmentsof Indian Industry.
Lack of adequate competition resulted in inadequateemphasis on reduction of costs, upgradation oftechnology and improvement of quality standards.
It was to reorient and accelerate industrialdevelopment with emphasis on productivity, growthand quality improvement to achieve internationalcompetitiveness that the Industrial Policy of 1991 wasannounced.
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Industrial Policy of 1991
It renewed its commitment to the basic
objectives of IPR, 1956:
- rapid industrial development - rapid expansion of employment
- progressive reduction of social and economic
disparities - removal of poverty and attainment of social
justice.
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IP 1991 contd.
IP 1991 renewed its emphasis on removal of
poverty, attaining social and economic justice
and building a prosperous India.
Towards this end, the IP 1991, emphasised the
need to integrate the domestic economy with
the international economy.
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Objectives of IP 1991
1. to build on the gains already made.
2. to correct the distortions or weaknesses
th
ath
ave crept in. 3. to maintain a sustained growth in
productivity and unemployment, and
4. to attain international competitiveness.
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Strategies IP 1991
To achieve the objectives, IP 1991 introduced
changes with respect to:
1. industrial licensing 2. foreign investment
3. foreign technology agreements
4. public sector policy, and 5.MRTP Act.
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Industrial licensing
In a dynamic global market, enterprises must
be enabled to swiftly respond to the fast
changing external conditions.
Entrepreneurs must be free to make
investment decisions on the basis of their own
commercial judgment.
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This will facilitate them to achieve
technological dynamism and international
competitiveness.
Therefore, Government should change its role
from exercising control and regulation to that
of facilitator and guide.
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Foreign investment
Along with industrial delicensing, IP 1991
brought significant changes in the foreign
investment policy.
These changes are designed to attract
enhanced capital inflows into India on a
sustained basis and to encourage technology
collaboration agreements between India andforeign firms.
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Today, India welcomes direct foreign
investment in virtually every sector of the
economy except those of strategic concern
such as defence, railway, transport and atomic
energy.
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The public sector policy
The public sector has been central to Indias
industrialisation within the mixed economy
frame work. The performance of public sector
enterprises has been far from satisfactory:
Insufficient growth in productivity
Poor project management.
Inadequate attention to R&D
Low rate of return on investment.
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As a result, many public enterprises became a
burden rather than an asset.
Hence th
e public sector would be confined tostrategic, high -tech industries and essential
infrastructure.
Chronically sick and unviable public sector
units would be referred to Board for Industrial
and Financial Reconstruction (BIFR).
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MRTP Act
The thrust of IP 1991 is more on controlling
unfair or restrictive business practices. The
provisions relating to merger, amalgamation
and take-over have been repealed.
MRTP Act was restructured, and pre-entry
restrictions were removed with respect to
new undertaking, expansion, amalgamation,merger, take over, registration etc.
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LPG Policy
The new Economy Policy of 1991 had three
aims :
1. Liberalisation 2. Privatisation and
3. Globalisation.
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liberalisation
The main aim of liberalisation was to
dismantle the excessive regulatory framework
which acted as a shackle on freedom of
enterprise.
Over the years, the country had developed a
system of license-permit raj.
The aim of the new policy was to save
entrepreneurs from unnecessary harassment
of seeking permission from bureaucracy to
start an undertaking.
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privatisation
Privatisation is the process of involving the
private sector in the ownership or operation
of a state owned or public sector undertaking.
(disinvestment).
It can take three forms:
(i) ownership measures,
(ii) organisational measures, and
(iii) Operational measures
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globalisation
Globalisation intends to integrate the Indian
Economy with the world economy. It has 4
parameters:
1. reduction of trade barriers so as to permit
the flow of goods and services across national
frontiers.
2.Creation of an environment in which free
flow of capital can take place. (contd)
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Globalisation (contn)
3. creation of an environment permitting free
flow of technology among nation-states.
4. creation of an environment in wh
ich
freemovement of labour can take place in
different countries of the world.
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Review of economic reforms
The reforms process has helped to accelerate
growth , but the benefits of growthhave not
percolated to the poor and weaker sections of
the society.
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Achievements of reforms
1. higher growth rate was achieved.
growth rate of GDP
1991-92------0.9%1992-93-----5.0%
1993-94-----4.5%
1994-95-----6.7%1995-96-----6.3%
1996-97-----6.8%
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Higher growth rate
The growth rate of the economy started
picking up since the reform process was
initiated.
The average growth rate of over 6% during the
period from 1992 to 1997 is an achievement
of the reform process.
This would result in an average 4% growth
rate of per capita GDP. This is an achievement
whichhas not been witnessed earlier during
the last 45 years of planning.
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Higher growth rate - contn
The Indian economy has registered an annual
growth rate of 8-9 per cent during the past 2
years. This is one of the highest in the world.
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Growth and development
growth and development are sometimes
used synonymously in economic discussion.
Though the two terms are used
interchangeably, they have different
connotations.
Economic growthmeans more output.
Economic development implies bothmore
output and changes in the technical and
institutional arrangements by which it is
produced and distributed.
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growth
Growthmay well involve not only more
output derived from greater amounts of
inputs but also greater efficiency, that is, an
increase in productivity or an increase in
output per unit of input.
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development
Development goes beyond this to imply
changes in the composition of output and in
the allocation of inputs by sectors.
As withhuman beings, to stress growth
involves focussing on height or weight (or
national income), while to emphasise
development draws attention to changes infunctional capacities in physical
coordination, for example, or learning capacity
(or ability of th
e economy to adapt).
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Achievements of reforms
2. Control of inflation
The record of the measures to control inflation
has been mixed.
During 1992-93, wh
olesale price index (W
PI)(1981-82 = 100) rose by merely 7% as against
the price increase by 13.07% during 1991-92.
But the situation again took a turn for the
worse during 1993-94 and 1994-95 and the
WPI rose by 10.8% and 10.4% respectively.
It slowed down to 5 % during 1995-96
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Average inflation rates
WPI base 1993-94= 100
1991-199610.6%
1996-2001 5.1%
2001-2006 4.7% 2001-02------1.6
2002-03------6.5
2003-04------4.6 2004-05------5.1
2005-06------4.1
2006-07------6.1
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Achievements of reforms
3. Reform of the Public sector
The major aim of economic reforms is to
improve the public sector so that the rate of
return improve.
To remedy this situation, it was necessary that
overstaffing of the public sector undertakings
be reduced. The VRS and National Renewal
Fund for providing compensation were stepsin this direction.
Privatisation was another step.
A i t
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Ac ievements o re orms
4. Large dose of foreign capital to
help Indian Economy Due to the reforms, there was considerable
flow of foreign capital , with some constraints,
in the form of foreign direct investment (FDI)
and Foreign Institutional Investment(FII).
Foreign investment increased in India from $2
billion in 2000-01 to $4.7 billion in 2005-06.
FDI inflows into India reached a record $ 19.5
billion in fiscal year 2006-07.
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Achievements of reforms
5. Growth of foreign trade
Due to removal of restrictions on foreign
trade, world trade has expanded at a very high
rate in terms of both volume and direction of
trade.
6. Government was able to reduce the fiscal
deficit considerably.
7. Foreign exchange reserves started picking
up from $2.2 billion to $20.8 billion in 1994-
95.
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Since liberalization, the value of Indias
international trade has become more broad-
based and has risen to Rs. 63,080,109 crores
in 2003-04 from Rs 1,250 crores in 1950-51.
Indias major trading partners are China, USA,
UAE, UK, Japan and the EU.
The exports during April 2007 were $ 12.31billion up by 16% and import were $ 17.68
billion with an increase of 18.06% over the
previous year.
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conclusion
The reforms succeeded in controlling the
deteriorating situation in balance of
payments, building up foreign exchange
reserves, reducing fiscal deficit, controlling
inflation etc.
However the long-term goals of reducing
poverty, achievement of full-employment,self-reliance and growth with social justice
remain elusive.
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Corruption has been one of the pervasive
problems affecting India. The economic
reforms of 1991 reduced the red tape,
bureaucracy and the Licence Raj that had
strangled private enterprise and was blamed
for corruption and inefficiencies. But
corruption still persists.
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Purchasing power parity
This theory uses the long term equilibrium
exchange rate of 2 countries to equalize their
purchasing power. Developed by Gustav
Cassel in 1918, it is based on the law of one
price. The theory states that, an ideally,
identical goods should have only one price.
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Suppose that one US dollar is currently selling
for 10 Mexican pesos on the exchange rate
market. In the US, wooden baseball bats sell
for $40 while in Mexico they sell for 150
pesos. So we could buy the bats for $15 in
Mexico. So for the Americans there is an
advantage to buying the bat in Mexico.
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If US consumers go to Mexico, and buy
baseball bats from there, we should expect 3
things to happen:
1. American consumers desireMexican pesos
in order to buy base ball bats. So they go to an
exchange office and sell their American dollar
and buyMexican pesos. This will makeMexican pesos more valuable.
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2. the demand for baseball bats sold in US
decreases, so that the price goes down.
3. the demand for baseball bats sold in Mexico
increases, so that the price goes up in Mexico.
Eventually these 3 factors should cause the
exchange rates and the prices in the two
countries to change such that we havepurchasing power parity.
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If the US dollar declines in value to 1 USD = 8
pesos, the price of baseball bats in the US
goes down to $30 each and the price of bats
inMexico goes up to 240 pesos each, we will
have purchasing power parity.
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Merger and amalgamation
Very often the two expressions are taken as
synonymous. But there is, in fact, a difference.
Merger is restricted to a case where the assets
and liabilities of the companies get vested in
another company, the company which is
merged losing its identity and its shareholders
becoming the shareholders of the othercompany.
Eg. Centurian bank of Punjab merging with
HDFC bank.
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amalgamation
Amalgamation is an arrangement whereby
the assets and liabilities of two or more
companies become vested in another
company (which may or may not be one of the
original companies) and which would have as
its shareholders substantially, all the
shareholders of the amalgamated companies.
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amalgamation
Amalgamation signifies blending of two or
more existing companies into one company,
the blending companies losing their identities
and forming themselves into a separate legal
identity.
Eg. Nirma and Core Health Amalgamation.
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