copy of indian economy – an overview

8/8/2019 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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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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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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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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