Indian Economy Class 1

Date: 09 March 2014

Adam Smith Father of Economics. Author of The Wealth of Nations Laissez faire An economy in which goods and services are traded and the price being determined by demand and supply (without any govt interference). It is also called as Free Market Economy. There is no central coordinator guiding it. 3 Sector Hypotheses 1. Primary Sector (Extracting Raw Mtls) 2. Secondary Sector (Manufacturing) 3. Tertiary Sector (Service) Closed Economy: Closed economy is an economy, which does not have any economic relation with rest of the world. In a closed economy the government restricts private organizations and allows only public sector enterprises (Planned Economy). A closed economy does not enter into any one of the following activities: (i) It neither exports nor imports from the foreign countries. (ii) It neither buys shares, bonds etc. from foreign countries nor sells shares, bonds etc. to foreign countries. (iii) It neither borrows from the foreign countries nor lends to the foreign countries. Due to all these reasons, Gross Domestic Product and Gross National Product are the same in a closed economy. Open Economy: An open economy is not only involved in production within its domestic territory but also can participate in production anywhere in the rest of the world. An open economy allows private organizations to participate in the economy and it is also known as Market Economy. An open economy involves itself in the following activities: (i) It buys shares, debentures, bonds etc. from foreign countries and sells shares, debentures, bonds etc. to foreign countries. (ii) It borrows from foreign countries and lends to foreign countries Due to these reasons, GDP and GNP are not same in an open economy. It is to be noted that at present all economies of the world are open economies. Mixed Economy: In Mixed economies all the activities related to production and other activities are carried out by participation of both government and private enterprises. At present almost all the countries in the world are Mixed economies. GDP Total market value (money value) of all final goods and services produced within a country in a given period of time. GNP Total market value of all final goods and services produced by the citizens of a country (both within & outside the nation) NDP = GDP Depreciation NNP = GNP - Depreciation Market Price It refers to the actual transacted price and it includes indirect taxes (custom duty, sales tax excise duty etc) Factor Cost It refers to the actual production cost (land, labor, capital etc) & it includes govt subsidies but excludes indirect taxes. National Income = NNP (factor cost) Base Year It is a specific year from which the economic growth is measured. It is used to measure GDP without inflation prices. GDP Deflator = Nominal GDP = Based on current prices Real GDP = Based on constant prices (Base year) GDP Deflator is used to measure Inflation Business Cycle -----> Expansion Growth Slowdown Recession Planned Economy: In this type the state owns (partly or wholly) the production side and directs the economy. Ex., USSR till 1990 Market Economy: The state doesnt control the economy. It is based on the demand & supply of the market (Laissez faire) Ex.USA Note: Indicative Plan - It is a mixed economy with state and market playing significant roles. It comes under planned economy.

Planning in India:
Visvesvarayya Plan (1934) His book Planned Economy for India outlined a model plan for India to eradicate poverty. Bombay Plan (1944) Formulated by 8 leading businessmen. It was based on expansion of textile and consumer industries. Gandhian Plan (1944) Formulated by SN Agarwal focused on agricultural development, cottage industries, decentralization etc Peoples Plan (1945) Formulated by MN Roy | Sarvodaya Plan (1950) - Formulated by JP Narayanan

Planning Commission: It is a non statutory body constituted in 1950. It works under the overall guidance of NDC. The planning commission consults the Central & State govts while formulating the 5YPs and Annual Plans. PM is the chairman and there will be one deputy chairman. The tenure of the PCs members and deputy chairman is not fixed. It is an advisory body to the GOI. National Development Council: All plans made by the PC have to be approved by the NDC. NDC prescribes guidelines for the formulation of the national plan and reviews its progress. PM is the chairman. Other members are Union Cabinet ministers, CMs & Finance ministers of all states, Lt governors of UTs and Governors of centrally ruled states. First plan (1951 - 1956) Harod Domar Model Focussed on Agriculture due to the large scale imports of food grains. (Successful plan) Second Plan (1956 - 1961) Nehru - Mahalanobis Model Establishment of Heavy Industries since agricultural growth was achieved in the previous plan Third Plan (1961 - 1966) Tried to balance Industry & Agriculture and the aim was to establish self sustaining economy (Plan failed due to wars, drought etc) Annual Plans Due to economic crisis caused by the 2 wars fourth plan couldnt be started from 1966. There were 3 annual plans till 1969 (1966-67, 1967-68, 1968-69) Fourth Plan (1969 - 1974) Gadgil Strategy Objective is growth with stability & self reliance and special emphasis on under-privileged & weaker sections. Fifth Plan (1974 - 1979) D.D. Dhar Model Main objective was growth for Social Justice The plan was terminated in 1978 when Janata govt came to power. Sixth Plan (1980 - 1985) Objective was removal of Poverty (Direct attack on Poverty) and it gave importance for infrastructure development. Seventh Plan (1985 - 1990) Focused on food grains production & increasing employment opportunities. This plan saw the beginnings of Liberalization Eighth Plan (1992 - 1997) Rao Manmohan Model The plan was formulated keeping in view the process of economic reforms and restructuring the economy. (LPG) The main aims were 1. Stabilize the BoP scenario 2. Improving trade & current account deficit 3. Improving Human Development From this plan the Indian economy managed to change from a centrally planned economy to market economy. Ninth Plan (1997 - 2002) Main Objectives: 1. Improving Quality of Life Employment 3. Self Reliance

2. Generating

Tenth Plan (2002 - 2007) Attain growth rate of 8% (GDP), access to primary education, Reducing IMR & MMR, Increasing literacy rate etc.. Eleventh Plan (2007 - 2012) Our economy was much stronger at the start of the 11th plan. The growth rate was nearly 8%. Due to the economic crisis the eleventh plan couldnt achieve the targets. Twelfth plan (2012 - 2017) Targeted growth rate 8%. Aims to reduce poverty by 10% achieving a growth of 4 percent in agriculture

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FDI: An investment made by a company based in one country into another country. Companies making direct investments have a control over the company into which the investment is made. The investing company may make its overseas investment in a number of ways either by setting up a subsidiary or associate company in the foreign country (e.g., Coca Cola plant in Nellai), by acquiring shares of an overseas company (e.g., Vodafone acquired shares of Hutchison), or through a merger or joint venture. (e.g., TVS Suzuki Joint Venture). FII: Foreign Institutional Investor means an institution outside India which makes investment in India in Indian Stock Market India opened its stock market to Foreign Institutional Investors (FII) in September 1992. Since 1993, India received portfolio investment from foreigners in the form of Foreign Institutional Investment (FII). All Foreign Institutional Investors (FII) must register with the Securities and Exchange Board of India (SEBI). SEBI is the regulator for the securities market (stock market) in India. FIIs are a type of investors who bring FPIs. FPI: Foreign Portfolio Investment represents holdings of securities such as foreign stocks, bonds, or other financial assets, none of which requires active management or control of the securities issued by the investor. It is very easy to sell off the securities and pull out the portfolio investment. Hence, FPI can be much more unstable than FDI.