Indian Economics

ECONOMICS

Economics is the social science that analyses the production, distribution and consumption of goods and services. The origin of term 'Economics' is from the greek word 'Oikonomia', which has the meaning 'Home Administration'. The study of economics is known as 'Aphnology/Plutology'. It has the meaning of 'The Science of Wealth'. Adam Smith is the father of Modern Economics. He laid the clear foundation of Modern Economics. He is the pioneer of political economy. He wrote the first modern book on economics - 'Wealth of Nations'. Economics has two branches - Micro Economics and Macro Economics.

Micro Economics - Micro Economics is the branch of economics that deals with the personal decisions of consumers and entrepreneurs. It is also known as Price Theory. It is developed by Marshal, Ricardo and Pigou. Example - Income/ Expenditure/ Employment of a Person.

Macro Economics - Macro Economics deals with the larger aspects of nation's economy such as sectors of agriculture, industry and service. It is also known as General Theory or Income Theory. It is developed by J.M.Keynes. Example - The Total Income (National Income/ Gross Expenditure/ Gross Employment) of a Country. 

Division of World Nations

Based on Economics, World Nations are divided into three - Developed Nations, Developing Nations and Least Developed Nations.

Developed Nations - Developed Nation is a country which has a highly developed economy and advanced technological infrastructure relative to other less developed nations. USA, Canada, France, England, Germany etc are considered as developed nations. Continent with highest number of developed nations is Europe. Singapore, Japan, South Korea are the developed nations in Asia.

Developing Nations - A Developing Nation is a nation with a low living standard, undeveloped industrial base and low human development Index (HDI) relative to developed countries. Economically backward states are known as developing nations. 'Third World Countries' is another term for developing countries. BRICS Countries are the fastest growing economies in the world.

Least Developed Countries - Least Developed countries exhibits the lowest indicators of socio economic development with the lowest Human Development Index ratings of all countries in the world. They are under developed economies in Asia, Africa and Latin America. They have very low GDP, Low Per Capita Income, High rate of Population and Unemployment. Example - countries like Ethyopia and Somalia.

Economist and their Contributions

■ Alfred Marshall - Marginal Utility Theory, Welfare definition of economics, Principles of Economics, Law of Demand

■ Thomas Malthus - Population Theory

■ Adam Smith - Laissez Faire

■ Marshall - Quasi rent

■ Lionel Robins - Scarcity/Human Behaviour Theory

■ Karl Marx - Capital, Labour Theory of value

■ Samuelson - Modern utility theory, Growth Definition

■ Amartya Sen - Welfare Economics and Human Development Theory

■ Daniel Kahneman (USA) - Behavioural Economics, Prospect Theory

■ Edward C. Prescott (USA) - Quantitative general equilibrium business cycle theory

■ Edmund S. Phelps (USA) - Micro foundations of Macro Economics

■ Joseph E. Stiglitz (USA) - Screening

■ James Tobin (USA) - Portfolio theory, Keynesian Economics

■ James J Heckman (USA) - Statistical analysis of individual behaviour

Micro Economics

Economics is mainly divided into two as Micro Economics and Macro Economics. The term micro and macro is coined by the norwegian economist 'Ragnar Frisch'. Micro Economics is the branch of economics that deals with the personal decisions of consumers and entrepreneurs. It is also known as Price Theory. It is developed by Marshal, Ricardo and Pigou. Micro Economics is the study of individual units of an economy. Micro Economics focuses on personal or any individual who takes decisions on demand and supply. In order to get maximum profit, producers make articles in less expenditure and sale it in the market for maximum price. At the same time, these people try to expand their profit, and also try to increase their satisfaction and welfare. The supply and demand in different market of an economy becomes balanced only in balance stage so that the micro economics to become identitical with Macro Economics.

Example - Income/Expenditure/Employment of a Person.

Macro Economics

Macro Economics deals with the larger aspects of nation's economy such as sectors of agriculture, industry and Service. It is also known as General Theory or Income Theory. It is developed by J.M.Keynes. The Term Macro is derived from the greek word 'Macros' which has the meaning 'Large'. The analysis of total production and resource management is how connected with price, Interest rate, salary and profit is called as Macro Economics. Macro Economics is the total study of economy. It is also called as Aggregate Economics. The aggregate information handled on Macro Economics are Aggregate Demand, Aggregate Expenditure and Full Employment. 

Example - The Total Income (National Income/ Gross Expenditure/ Gross Employment) of a Country.

The study area of Macro Economics

1. The Methods of measuring National Income

2. Employment, Unemployment, Labour Rules

3. Supply and Demand of Money, Monetary Policy

4. Fiscal Policy

5. International Trade

6. The Theories of Economic Growth

Macro Economics has two main Features

1. Make up of decisions of Macro Economics. Example - In India Government, RBI, SEBI and other same offices take decisions 

2. The decisions taken by Offices on Macro Economics. Example - The more effective management of economic resources for attaining general aims, aims on general welfare of nation.

Emergence of Macro Economics

Classical Economics is the most popular thought of economics before the emergence of Macro Economics. All who are willing to work will get employment and all firms will work at full efficiency. This thought is known as Classical Economics. It was in 1929, the great depression happened. The Great Depression was a severe worldwide economic depression. It was the longest, deepest and most widespread depression of the 20th century. It started in 1929 and lasted 1933. The depression originated in the United States, after the fall in stock prices that began around September 4, 1929. It became worldwide news with the stock market crash of October 29, 1929. The day is known as Black Tuesday. During great depression, the production and employment in Europe and North America is declined. As a result, the market demand of goods decreased, factories stopped functioning and employers lost their work. The unemployment existed in economy needs new theories for overcoming the situation. The book of J.M.Keynes is mainly focused on this direction. Global Recession in 2008 is the worst financial crisis since the Great Depression of the 1930s.

Sectors handled by Macro Economics

The Sectors handled by Macro Economics can be mainly divided into four - Firms, Household, Government and External Sector.

1. Firms Sector - The most important sector of Economy is Firms Sector. It is the sector where products and services are produced and distributed in Market. It is the government sector where not only creating the job opportunities but also responsible for paying taxes.

2. Household Sector - It is the second important sector of economy. It is also called as Consumption Sector. It is the economic sector that consists of a person or organisation of persons. This sector's income is mainly used for consumption, earnings and paying taxes to Government.

3. Government Sector - In a Capitalist Economy, the involvement of government is less. The Government will create infrastructure for economic growth and also performs as a motivating force for economic growth. Imposing Taxes, the development of social and economic basic sectors like education and health, the purchasing of products and services from firms, giving subsidy for the development of Agriculture and Industry etc.. are the duties of Government.

4. External Sector - The Sector that does not comes under domestic border of a country is known as External Sector. All Modern Economies are exactly the Open Economy. The import and export of products and services are common in this sector. There are two types of International trade - Export and Import. If a country sells product maked from domestic economy to other nations, it is called as Export. If a country buys products from other countries that are needed for domestic economy, it is called as Import. The capital from foreign countries to domestic economy and domestic economy to foreign countries is flowing. It is called as Capital flow.

Economic Agents

The financial decisions taken by persons or companies are mainly called as Economic Agents or Economic Units. They may be producers or consumers. These agents also take decisions on how many money should Government, Corporation, Banks etc. should spent. Also there are companies which are working as Economic Agents. They take decisions on how many interest should be imposed, how many tax to collect etc.

Open Economy and Closed Economy

Open Economy

Economy which has financial relation with other countries are called as Open Economy. In this economy, products, services, financial assets etc. has relation with other countries. The relation of a country with foreign countries is mainly through three ways - Output Market, Financial Market and Labour Market.

Output Market - In this method, trade of products and services between countries is allowed. Here one can think and act whether to use domestic products or buy foreign products. Producers and Consumers has the choice to decide.

Financial Market - Here the persons and companies of an economy can buy financial assets from other countries. Financial Market give opportunities to depositers for depositing in domestic assets and foreign assets.

Labour Market - Here the labourer can decide where to work (domestic or aboard) in an economy. The independent move of labourer between countries is controlled by various immigration rules.

Open Market is the buying and selling of goods and financial deposit between other countries. The product and service trade between different countries is termed as International Trade. The Liberalisation of new economic reforms is related to International Trade. The gross demand of india influences International Trade in two ways - Import from foreign countries and export from India to foreign countries. Through Import, the money from the nation goes to foreign countries (Leakage). This will decrease the demand of domestic products. The income from Export will increase the money flow to nation (Injection). This will increase the demand of domestic products. In an Open Economy, the imports and exports influence the gross demand. Imports decreases the gross demand and exports increases the gross demand. Money is necessary for the smooth conduction of import and export. For this purpose, there is no currency printed by a bank at international level approved by all countries. Inorder to get international approval for a currency, its value should be permanent. That is, the currency should maintain a Permanent Purchasing Power. The exchange value between currencies is known as Exchange Rate.

Closed Economy

Economy which does not get into financial relations between other countries are called as Closed Economy. There are no exports, no imports and no capital flows in Closed Economy. International trade is minimal or non - existent. The country produces the consumer goods and services domestically.

Balance of Payment

It is the concise documentation of all goods and service assets exchange and Financial transactions in an year by a country between other countries. BoP is the documentation of visible and invisible export and import of a country between rest of the world in a financial year. There are two methods to measure Balance of Payment - Current Account and Capital Account.

1. CURRENT ACCOUNT

The combination of value difference (difference between Export and Import) and transfer fee of trade on goods and services is called as Current Account. Import and Export is included in Service trade. Besides the price of goods and services, the income gets for free is called as transfer fee. Examples for transfer fee are Gift, Money from aboard, grants etc.. Through the purchasing of a foreign product, the import of objects can increase and also can decrease the demand of domestic products. Through the export of goods, the coming of foreign money will increase and this will increase the domestic demand.

Balance Current Account 

According to Current Account, Balance Current Account is the situation when the value of import and export becomes equal. The income from current account transactions are called as current incomes. The payment on current account transactions are called as current payments.

Current Account Surplus - When the current account income exceeds the expenditure, it is termed as current account surplus. It is also called as current account balance positive. The meaning of current account surplus is that we are giving debt to other countries.

Current Account Surplus = Income > Expenditure

Current Account Deficit - When the current account expenditure exceeds the income, it is termed as Current Account Deficit. It is also called as current account balance negative. The meaning of current account deficit is that we are borrowing debt.

Current Account Deficit = Income < Expenditure

Equal Current Account - When the current account income becomes equal to current account expenditure, it is termed as Equal Current Account.

Equal Current Account = Income = Expenditure

Balance Current Account has two factors - Balance of Trade and Invisible Balance of Trade.

Balance of Trade (BoT)

The difference between the total income value and total export value of a country in one year is termed as Balance of Trade. Balance of Trade is also a part of Balance of Payment. The export of goods is the income to the Balance of Trade and the import of goods is the expenditure to the Balance of Trade. So it is termed as Balance of Trade. If the value of export and import become equal. It is called as Balance of Trade Equilibrium. If the export value is less than import value, the Balance of Trade will be deficit. Only visible items are included in the Balance of Trade. There is no services in Balance of Trade.

Invisible Balance of Trade

The gross invisible current account is the total of the difference between a country's exports and imports of services and transfer payments. The combination of both incoming and outgoing of various services and money exchange between the countries are termed as Invisible Balance of Trade. Factor Income and Non Factor Income is included in the trade of services. Factor income means the income generated from production factors (Land, Employment, Capital, Entrepreneurship). Non Factor Income means the income and expenditure from Tourism, Software Service etc.

2. CAPITAL ACCOUNT

The account related to Capital is known as Capital Account. Capital Account mainly comprises of international short term - long term loans, international capital deposits, international portfolio deposits etc. It is related to buying and selling of assets at international level. Assets are conditions of protecting wealth. Examples of Assets are money, share, debenture, government debt etc. Assets purchased from Capital Account should be calculated as money expenditure. The capital loan taken by india from International Monetary Fund is documented in Balance of Payment Capital Account.

Balance of Capital Account - Whenever the value of capital assets which is flowing inside and outside the country becomes equal, the capital account becomes balanced. If the Capital flow from foreign countries to the country is more than the capital flow from the country to other countries, then it is called as Capital Account Surplus. The money flow to foreign countries is less than the money flow to the country, then the capital account should be surplus. If the capital flow from the foreign countries to the country is less than the capital flow from the country to other countries, then it is called as capital account deficit. If the money flow to foreign countries is more than the money flow to the country, then the capital account should be deficit. The ways of money flow from foreign countries to the country are international loan, foreigners, buying shares by indian companies etc. Debt Payment, buying assets of foreign countries are the ways of flow of money from the country to foreign countries.

Surplus and Deficit of Balance of Payment

When a country comes to Balance of Payment equilibrium, its current account deficit is completely fill up through international loans. That is, a country want to use its foreign reserve to fill up current account deficit. If the country face foreign currency deficit, Reserve bank will sale foreign currency from its reserve. It is termed as official reserve sale. In order to fill up international deficit, the country will sell assets domestically or will borrow debt from other countries. Any deficit on current account is fill up from income and surplus of capital account. Any fluctuations on payment deposit and ultimate give and take of money is fill up by Central Monetary institutions of each countries respectively. 

The Items in Balance of Payment are Autonomous Transactions and Accommodating Transaction. The financial transactions aimed on more consumption, make more profit etc are called as Autonomous Transaction. The impact made by Autonomous Transaction is the base of Accommodating Transaction.

Note : RBI modified the structure of accounts following the Balance of Payments and International position manual introduced by International Monetary Fund (IMF). According to new classification, transactions are divided into three as Current Account, Financial Account and Capital Account. The trade of financial assets such as Shares, Debenture and other transactions were included in the Financial Account is the major change. Currently RBI is publishing accounts (Current Account and Capital Account respectively) in same old method.

Exchange Rate Management

Foreign Exchange Market

The market of exchanging foreign currencies is called as Foreign Exchange Market. Commercial banks, Foreign Exchange brokers, other approved businessmen, monetary officers were the major dealers of foreign exchange market. Foreign exchange rate is the rate of exchange of currencies between different countries. Foreign exchange rate will connect currencies of different countries and helps to compare the expenditure and price on international basis.

Determination of Exchange Rate 

Every nation has a distinct methodology to decide it's currency's exchange rate. In an open economy, the determination of exchange rate is done mainly through three methods - Flexible Exchange Rate, Fixed Exchange Rate and Managed Floating Exchange Rate.

1. Flexible Exchange Rate

Flexible Exchange Rate is also known as Floating or Floating Exchange Rate. The exchange rate is determined based on supply and demand forces of market. The Central bank does not deal with determination of Flexible Exchange Rate. The rise of rate of foreign currency compared to domestic currency is termed as depreciation of domestic currency. Depreciation happens only when the exchange rate increases. In the system of Flexible Exchange Rate, if the rate of domestic currency is increased when compared to foreign currency, then it is termed as Appreciation of domestic currency. The other important factor that determine the exchange rate of market is Speculation. Buying foreign currency in the expectation of increase of currency value in future is called as Speculation. Speculation involves trading a financial instrument involving high risk, in expectation of significant returns. The motive is to take maximum advantage from fluctuations of exchange rate. The major factor that determines the short term exchange rate is flexible interest rate.

Purchasing Power Parity is the theory used for the long term prediction of flexible exchange rate condition. Purchasing Power Parity (PPP) is an economic theory of exchange rate determination. Purchasing Power Parity states that the exchange rates of two countries for long term will reflect the difference of price standards of both countries.

Merits of Flexible Exchange Rate

a. This system gives more flexibility to government.

b. There is no need of storing the foreign exchange reserve currency in large quantity.

c. The changes in exchange rate voluntarily solve the unbalanced state (deficit, surplus) of Balance of Payment.

d. It gives the freedom to government for implementing the financial policy.

2. Fixed Exchange Rate

In Fixed Exchange Rate System, government determine the exchange rate in a special level. Fixed Exchange Rate System is also known as Pegged Exchange Rate System. Fixed Exchange Rate is determined by the central bank of a country (In India, RBI is the Central Bank). If there is any change in exchange rate, then central bank will get involved in Market and bring it to early determined exchange rate. If the exchange rate of a country's currency is determined by the financial authority of that country, then it is called as Fixed Exchange Rate. If the government get involved in the Fixed Exchange Rate and increase the exchange rate (that is, decreasing the value of domestic currency), then it is called as devaluation. Also if the government decrease the exchange rate (that is, increasing the value of domestic currency), then it is called as revaluation.

Merits of Fixed Exchange Rate

a. Government can maintain the exchange rate at a fixed level.

b. If there is any deficit in Balance of Payment, government can fill up it by using the official reserve currency.

3. Managed Floating Exchange Rate

The combined activities of both Fixed Exchange Rate and Flexible Exchange Rate is called as Managed Floating Exchange Rate. This system is not working under the base of any official international understanding. In this system, both flexible rate and fixed rate will work at same time. Managed Floating Exchange rate is also called as Dirty Floating Rate. Here the exchange rate is controlled by the market and central bank together. When the need arises, central government can get involve and can buy or sale foreign currency. So that the official foreign currency reserve does not disappear.

Exchange Rate Management  : International Experience

Gold Standard

Gold Standard is the oldest monetary system where one unit of currency equals a specific amount of Gold. Gold Standard is the exchange system existed from 1870 to 1914 (till the start of first world war) in the majority countries of world. Gold Standard is the most important method of Fixed Exchange Rate. In the Gold Standard System, the value of all currencies is calculated based on Gold. It's exchange rate is determined according to the quantity of gold used to make each currency and fixed price. Every countries in the world accepted to change their currency to gold at fixed rate. It is because the currency can be independently converted to Gold. This simply and easily helped to change one currency to another currency. After the failure of Gold Standard, Gold Exchange Standard came into existence. According to Gold Exchange Standard, the security of currency can be measured to any currency based on gold. 

Example of Gold Standard : 30 dollars = 1 Ounce of Gold

That is, Trader A trades a $300 business with Trader B and Trader B gives 10 ounce of gold to Trader A.

Bretton Woods System

Bretton Woods Conference is the biggest turning point in the history of determining Exchange Rate. The Bretton woods conference was held in America in July 1944. Bretton woods conference formed two international organisations - International Monetary Fund (IMF) and World Bank. Both IMF and world bank are together called as Bretton Woods twins. IMF is established in 1945 to promote international financial co-operation. It starts its operation on March 1, 1947. It's headquarters is at Washington. World Bank is established on December 27, 1945 to help reconstruction and development of member countries. It starts its operation on June 25, 1946. It's headquarters is also at Washington. 

Bretton Woods Conference becomes the reason for carry out the fixed exchange rate system again. This system begin two tier convertibility arrangement in currency change. The Indians participated in Bretton Woods Conference were RK Shanmukham Chetty, CD Deshmukh and BK.Madan. The Bretton woods Agreement established a system through which a fixed currency exchange rate could be created using gold as the universal standard. But the short term liability of american dollar increased. As a result, bretton woods system failed to return 35 dollar for one ounce of gold. Then the central banks of member countries decided to change their reserve dollar to gold. As a result, system failed to keep the word. Among the critics of Bretton wood system, Robert Triffin pointed out the condition like this. So this condition is known in the name of Triffin Dilemman. The opinion of Triffin is that IMF should be changed to deposit bank of alternate central banks. He also said that under the control of IMF, a reserve asset should be started. Following this, the radical change in the working of IMF happened. 

A new currency called Special Drawing Rights instead of Gold is implemented. It was in 1967, the new reserve currency called SDR is formed instead of gold. SDR  is also known as Paper Gold. SDR is not an original currency. It is an accounting unit used for international money transactions. Earlier the value of SDR is determined according to the value of gold. But later it is dropped. Currently the value of SDR is calculated based on the total value of dollar, euro, pound and yen (four currencies). All countries agreed to accept SDR as Research Currency. During the end of 1960s, Bretton Woods system collapsed (abandoned in 1971) and following this, Floating Exchange Rate System becomes active. Advanced countries adopted Managed Floating Exchange Rate System. In 1999, the major countries of European Union accepted to receive a general currency. As a result, Euro Currency came into existence.

International Monetary Fund (IMF)

The major duty of International Monetary Fund is to maintain the stability of foreign currency exchage rate. The organisation deal with the problems on balance of payments of member countries. IMF is the one of the organisation formed after Bretton woods conference, the other being World Bank. IMF is established in 1945 July to promote International Financial Co-operation. It starts its operation on March 1, 1947. It's headquarters is at Washington. Currently, IMF has 191 member countries. Managing Director is the head of International Monetary Fund and he always will be an European. The exchange currency of IMF is Special Drawing Rights (SDR). It was in 1969, IMF formed the new reserve currency called Special Drawing Rights instead of Gold. Special Drawing Rights is also known as Paper Gold. Special Drawing Rights is not an original currency. It is an accounting unit used for international money transactions. 

World Bank

World Bank is one of the organisation formed after Bretton woods Conference. It is established on December 27, 1945 to help reconstruction and development of member countries. It starts its operation on June 25, 1946. Its headquarters is at Washington dc. It is the biggest bank in the world. World Bank is the combination of Five Agencies. International Bank for Reconstruction and Development (IBRD), International Financial Corporation (IFC), International Development Association (IDA), Multilateral Investment Guarantee Agency (MIGA) and International Centre for Settlement of Investment Disputes (ICSID) were the agencies of World Bank. IBRD provides economic assist for the reconstruction and development of basic sectors of member countries. The insurance arm of the world bank is known as Multilateral Investment Guarantee Agency (MIGA). Currently there are 189 member countries are there in the World Bank. Nauru is the 189th member of World Bank. The term 'Third Window' is related to World Bank. The 'Third Window Financing' is approved by World Bank in 1975. The Third Window Financing provides development assistance to eligible countries on terms between those of the IBRD and International Development Association (IDA). 'We exist to create a world free of poverty on a livable planet' is the motto of World Bank. France is the first country which brought debt from world bank.

Exchange Rate Management in India

Even after the independence, the Indian rupee was related to the british currency 'Pound Sterling'. The indian rupee was devalued by 36.5% in 1966. The indian rupee was delinked from the pound sterling in 1975. In 1991, India was plunged into a serious balance of payment crisis. The rupee was devalued by 19% in two phases on July 1 and July 3, 1991. In 1992, India accepted Liberalised Exchange Rate Management System (LERMS). LERMS is a dual exchange rate scheme. LERMS consists of Fixed Exchange Rate and Market Exchange Rate. Under 'LERMS', exporters are required to remit 40% of their export earnings to the Reserve Bank of India at the exchange rate determined by the RBI. The remaining 60% will be at the Market determined Exchange Rate.

Types of Economic System

■ Capitalist Economy

The main characteristics is the existence of private enterprise in the main sphere of production. USA, Britain, France etc are the countries having Capitalist Economy. Adam Smith is the father of Capitalist Economy. A capitalist economy is an economy in which the means of production are privately owned and operate for profit. A capitalist economy is a type of economy that produces consumer goods that are sold profitably in the domestic or foreign markets. In a Capitalist Society, the distribution of goods produced among the people is based on purchasing power (the ability to purchase goods and services).

The economic system in which production and distribution were controlled by private individuals for the purpose of profit was known as Capitalism. In such an economy, the market would coordinate all economic activities. Therefore, they are also called as Market economies. In such economies, the price system or market system solves basic economic problems. Capitalism tends to concentrate money in the hands of a few individuals.

Characteristics of Capitalist Economy

1. Freedom for entrepreneurs to produce any products.

2. Private Property rights

3. Profit Oriented Activity

4. Inheritance Wealth Transfer Method

5. A free market without Price Controls

6. Competition among entrepreneurs to sell products.

Advantages of Capitalism

1. Efficient Resource Allocation

2. Social Mobility

3. Technological Progress

4. Global Economic Growth

5. Quality Improvement

6. Adaptability and Flexibilty

Disadvantages of Capitalism

1. Income Inequality

2. Environmental Degradation

3. Unfair Economic or Competitive Advantage

4. Lack of Social Safety Nets

5. Monopoly behaviour

6. Short term Focus

7. Economic Inequality

8. Greed

9. Exploitation of Labour

■ Socialist Economy

The main characteristics is the existence of public enterprise or state ownership of capital in all the important spheres of productive activity. Karl Marx is the father of socialist economy. Economic equality is the hallmark of socialism. Socialism organises society in such a way that all means of production and distribution are brought under public ownership. The term socialism primarily refers to theories that promote economic equality.

A socialist economy is an economy in which the means of production are publicly owned and operates based on centralized planning. The price system is not important in a socialist economy. Cuba, China etc. are examples for Socialist Economy. In a socialist economy, the government decides which goods to produce according to the needs of society. The government decides how goods are produced and how they are distributed. In socialism, distribution is based on people's needs, not what they can afford. Unlike Capitalism, a socialist country provides free healthcare to its citizens.

Characteristics of Socialist Economy

1. Work aimed at public welfare

2. Lack of private entrepreneurs

3. Lack of private property rights and Inheritance wealth transfer method

4. Economic Equality

■ Communist Economy

It is a classless economy and in which people work according to the principle from each according to his ability, to each according to his needs. China, Cuba, Vietnam, North Korea are the countries having communist economy. The constrution and related ownership are common to a community and are not shared to private individuals or anyone else. Due to this, wealth is not confined to the hands of private individuals, but is transferred to all in society according to their needs. This is the basic principle of communism. The word communism is derived from the latin word 'Communis'. Karl Marx was the first to scientifically think about the creation of a communist system. His theories and the later additions to them are known as Marxism.

■ Mixed Economy

An economy with a mixture of state and private enterprises is called as Mixed Economy. Most actual economies are mixed. The economy existed in India is Mixed Economy. Adam Smith is the father of mixed economy. A mixed economy is an economy that combines some features of a capitalist economy and a socialist economy. In a mixed economy, the market will provide the goods and services that can be produced and the government will produce and distribute the necessities that the market cannot provide. Most countries today have mixed economy, where the government and the market work together to find answers to the questions of what to produce, how to produce it, and how to distribute what is produced. Industrial economy existed in India during British rule.

Characteristics of Mixed Economy

1. The public sector and the private sector co-exist

2. Working according to Economic Planning

3. Government protection of labour

4. Giving importance to welfare activities

5. Freedom of private property rights and economic control coexist

6. Consumers Sovereignty protected

7. Role of price system and government directives

8. Government regulation and control over private sector

9. Reduction of Economic inequalities

Advantages of Mixed Economy

1. Proper allocation of resources

2. Competitive innovation

3. Education and healthcare facilities

4. Collaborative working

Disadvantages of Mixed Economy

1. Policy Shifts

2. Inefficiency in services

3. Corruption risk

4. Complex decision-making

Indian Economy before Independence

The main objective of the colonial rule in India was to transform India into a country that could provide raw materials without any hindrance to the modern industries of Britain that were growing during the British rule. Dadabhai Naoroji, William Digby, Findlay Shirras, V.K.R.V Rao, and R.C Desai were the prominent economists who conducted studies on determining the national income and per capita income of India before independence. According to the conclusion of such economic studies conducted before independence, the country's Aggregate Real Output growth rate was less than 2% and the Per-capita Output growth rate was just less than half a percent until the first half of the twentieth century.

1. Agricultural Sector

During the colonial period, the Indian economy was mainly dependent on agriculture. During the colonial period, 85% of the Indian population directly or indirectly depended on agriculture for their livelihood. Low Agricultural Productivity was the main cause of stuttering during the colonial period. The main reason for low agricultural productivity was the land tenure system implemented by the British government. The commercialization of agriculture attracted farmers from food crops to cash crops.

Zamindari System - The Zamindari System was a land tenure system implemented by the British government in the province of Bengal. The profits from agriculture went to the middlemen, not the farmers. However, neither the Zamindar nor the colonial government did anything for the development of the agricultural sector. The Zamindar focused only on collecting huge rent from the farmers. The increased rent burden made the life of the farmers difficult. According to this system, the Zamindar had to pay taxes to the British government on time. Otherwise, the Zamindar would lose his rights over the land. The Zamindar never considered the economic condition of the farmers. The lack of new technologies, lack of irrigation facilities, and low use of chemical fertilizers became the cause of stagnation of the agricultural sector.

2. Industrial Sector

The main objectives of Britain's industrial policies, which contributed to the decline of Indian industries, were

- To make India an exporter of raw materials required for the modern industries that grew up in Britain.

- To make India a large market for industrial products produced in Britain.

The decline of handicraft industries exacerbated unemployment in India and eliminated the availability of local products in the consumer market. The colonial administration skillfully utilized the increase in demand by importing cheap goods produced in Britain. Modern industries took root in India from the second half of the 19th century. The cotton industries under the control of the Indians mainly started in Gujarat and Maharashtra. The jute industries under the control of the British were concentrated in Bengal. The iron and steel industry started operating in India at the beginning of the 20th century. TISCO Tata Iron and Steel Company was established in 1907. After World War II, industries like sugar, cement, and paper started in India. Capital Goods Industry refers to industries that manufacture machinery needed for production.

3. Foreign Trade

The policies implemented by the colonial administration in the areas of production, trade and customs adversely affected the structure, components and volume of Indian foreign trade. Raw materials such as silk, cotton, wool, sugar, indigo and jute were exported from India during colonial rule. Machinery manufactured in British factories, cotton, silk and woolen clothes were imported to India during colonial rule. Britain maintained a monopoly over India's imports and exports with vested interests and as a result, more than half of India's foreign trade was forced to be conducted with Britain and the remaining part with countries such as China, Ceylon (Sri Lanka) and Persia (Iran). With the opening of the Suez Canal, Britain began to tighten control over Indian foreign trade. The specific objective of foreign trade during British rule was to create a high export surplus. This trade surplus did not increase the flow of gold and silver to India. But these were used to finance the British's administrative and war expenses, as well as the import of various services. All this facilitated the flow of Indian wealth to Britain.

4. Demographics

The first official census was conducted in India in 1881. Censuses are conducted every 10 years. The period before 1921 is known as the first phase of India's demographic transition. The period after 1921, is known as the second phase of India's demographic transition. The literacy rate of India during colonial rule was less than 16%. The female literacy rate of India during colonial rule was less than 7%. The reason for the high overall mortality rate of India during colonial rule was - Public health facilities were not available to a large section of the population. The existing ones were completely inadequate. Therefore, air and water-borne diseases became widespread and many people died due to these. The lack of public health facilities, frequent natural disasters, and famines were the reasons for the bankruptcy of the Indian population and the high mortality rate of Indians.

Indian Economy after Independence

The first industrial policy in independent India was formulated in 1948. The National Income Committee was formed on 4 August 1949. The National Income Committee submitted its report in 1951. P.C. Mahalanobis led the formation of the National Income Committee. D.R. Gadgil and V.K.R.V. Rao are the other members of the National Income Committee. 

The leaders of independent India sought alternatives to the extreme forms of capitalism and socialism. An economy with only the features of socialism and without its limitations was devised in India. India is a developing country and our economy is a mixed economy. In a mixed economy, the public sector co-exists with the private sector. India is the fifth largest economies and the third largest economies on the basis of Exchange rate and PPP mode respectively. 

Sectors of Indian Economy

■ Primary Sector - Deals with the obtaining and refining of raw materials. Eg - Agricultural Sector

■ Secondary Sector - Processing of raw materials into finished goods. Eg - Industrial Sector

■ Tertiary Sector - Deals with the services to businesses and consumers. Eg - Banking, Insurance etc.

■ Quaternary Sector - This service sector includes workers in office buildings, elementary schools, university classrooms, hospitals, doctors' offices, theaters, and accounting brokerage firms.

■ Quinary Sector - The Quinary Sector refers to the activities of decision-makers and policymakers at the highest levels. The Quinary Sector includes senior business executives, government officials, research scientists, and financial and legal advisors with specialized job skills that are highly paid.

Basic Features of Indian Economy

1. Low per Capita Income

ii. Low Industrial Growth

iii. Dominance of Agriculture

iv. Rapidly growing Population

v. Chronic unemployment

vi. Lack of Capital

vii. Unbalanced Economic Development

viii. Under utilization of resources

ix. Poor technology

x. Existence of Traditional Society

Economic Planning

Economic Planning is the process in which the limited natural resources are used skilfully so as to achieve the desired goals. The concept of Economic Planning in India is derived from Russia (the then USSR). Planning Commission was established in 1950 as part of Economic Planning. Planning Commission implemented Five-Year Plans of India , which was a series of national development programmes by the Government of India from 1951 to 2017. NITI Aayog (National Institution for Transforming India) replaced Planning Commission in January 1, 2015.

Planning Commission 

The Planning Commission was constituted in India in 1950. It was a non constitutional and advisory body. Jawaharlal Nehru was the first chairman and Gulsarilal Nanda was the first deputy chairman of the Planning Commission. It is headquartered at Yojana Bhavan. The planning commission is only an advisory body according to the 39th article of the constitution. Cabinet Ministers with certain important portfolios acts as part-time members of the commission, while the full-time members are experts of various fields like Economics, Industry, Science and General Administration. The basic aim of economic planning in India is Rapid economic growth through development of agriculture, industry, power, transport and communications and all other sectors. The Planning Commission formulates India's Five Year Plans, among other functions. The Five-Year Plans of India were a series of national development programmes implemented by the Government of India from 1951 to 2017. The format of First Five Year Plan was prepared in 1951 and the last (Twelfth) Five-Year Plan was implemented in 2012–2017.

NITI Aayog

NITI Aayog (National Institution for Transforming India) was set up replacing Planning Commission on January 1, 2015. The Prime Minister will head the NITI Aayog. NITI Aayog is tasked with the role of formulating policies and direction for the government. Its governing council will comprise of the Chief Minister and the Lieutenant Governers of Union Territories. The Prime Minister will appoint the Vice Chairperson and Chief Executive Officer of NITI Aayog. The Aayog will recommend a national agenda including strategic and technical advice on elements of policy and economic matters. It will also develop mechanisms for village level plans and aggregate these progressively at higher levels of government.

History of Economic Thought in India

1. The theory of Economic Drain of India during British Imperialism

The theory of economic drain of India during British Imperialism was propounded by Dadabhai Naoroji. The Economic Drain Theory is the theory of Dadabhai Naoroji that the British rule drained India's wealth and led to poverty and economic collapse. i.e., the economic exploitation of india by British. His book 'Poverty and Un-British Rule' is considered one of the best books on the Indian economy. In this book, he described the theory of Economic Drain of India during British Imperialism. According to this theory, the main reasons for the Indian economic drain are:

1. Paying high salaries to British officials working in India.

2. Collecting raw materials at low prices and selling the products made from them at high prices in the Indian market.

3. Looting Indian wealth for the development of British imperialism.

4. Making indian workers, work like slaves and exporting agricultural and industrial products to Britain.

2. Trusteeship Idea of ​​Mahatma Gandhi

After Dadabhai Naoroji, Mahatma Gandhi made a unique contribution to Indian economics. He gave importance to the rural economy and moral values. Gandhiji is the originator of the idea of ​​Trusteeship. Gandhiji aimed at an economy based on truth and non-violence through Trusteeship.

The main content of Mahatma Gandhi's idea of ​​Trusteeship is the capitalist should renounce his exclusive ownership and declare that he is holding wealth as a trustee of the people. A trustee has no heirs other than the public. The nature of production is determined not by the will or greed of individuals, but by the needs of society. Just as it is suggested to fix a minimum wage that is sufficient for a decent life, there should also be a limit to the maximum wage that can be allowed to any individual in society.

Evolution of Economic Planning in India

Economic Planning is the process in which the limited natural resources are used skilfully so as to achieve the desired goals. The concept of Economic Planning in India is derived from Russia (the then USSR). It is mainly focused on the welfare of citizens of india through the allocation of resources. The Constitution of India makes the provision of socio economic planning in the Concurrent list. The economic planning idea was first coined by Dadabhai Naoroji in his book ‘Poverty of India’ (1878).

Visvesvaraya Plan

M. Visvesvaraya is known as the 'Father of Indian Planning'. He is also known as the father of Indian Engineering. The era of economic planning in India started with Visvesvaraya’s ten-year Plan. In his book "Planned Economy in India," published in 1934, Sir M. Visvesvaraya proposed a plan to double the national income within ten years. In order to promote democratic capitalism (like that of the USA) with a focus on industrialization, he suggested moving labor from the agrarian set up to the industries. Although the British government did not implement this plan, it was successful in igniting the nation's educated citizens' desire for national planning.

National Planning Committee

National Planning Committee was the first attempt to develop a national plan for India. In 1938, the Indian National Congress formed the National Planning Committee. Its chairman was Jawaharlal Nehru and the general editor was K.T. Shah. Although the committee started functioning in 1938, the chairman Nehru was arrested by the British. However, the committee continued with its activities. The committee gave importance to the areas of agriculture, industry, employment and population, trade and finance, transport and communication, health and housing, education, etc. The National Planning Committee prepared a plan for the overall development of India. The papers finally came out after independence in 1948-49. In March 1950, the government appointed a Planning Commission. Nehru was its chairman. The Planning Commission prepares the Five Year Plans.

Gandhian Plan

In 1944, S.N.Agarwal formulated the Gandhian Plan. S.N.Agarwal is known as the father of Gandhian planning. The Gandhian Plan was formulated on the basis of Gandhian ideals. The plan aimed at economic decentralization and rural development through the promotion of cottage industries. Narayan Agarwal served as the Principal of Wardha College. The introduction to Gandhian Planning was written by Mahatma Gandhi. J.C.Kumarappa was one of the main proponents of Gandhian economics.

Bombay Plan

The Bombay Plan was a plan formulated and prepared in 1944 by 8 prominent industrialists of Bombay. J. R. D. Tata, Ghanshyam Das Birla, Ardeshir Dalal, Lala Shri Ram, Kasturbhai Lalbhai, Ardeshir Darabshaw Shroff, Sir Purshottamdas Thakurdas and John Mathai formulated the Bombay Plan. The original name of this plan was “A Brief Memorandum Outlining a Plan of Economic Development of India”. Ardeshir Dalal led this plan. Ardeshir Dalal was the chairman of the Planning and Development Department formed by the British Government of India in 1944. John Mathai was a Keralite who worked behind the Bombay Plan.

People’s Plan

The People’s Plan was formulated by M.N. Roy. This plan gave first priority to agriculture. It was based on ‘Marxist Socialism’. People’s plan was advocated by M.N Roy on behalf of the Post War Re-Construction Committee of the Indian Labour Federation in 1944. M.N. Roy brought the People’s plan in 1945. People’s plan is also known as the ‘Radical Plan’.

Sarvodaya Plan

The Sarvodaya Plan of 1950 was proposed by Jayaprakash Narayan. This plan was inspired by the Gandhian Plan and some of the ideas of Vinobha Bhava. It gave importance to agriculture as well as small scale and cotton industries.

Perspective Plan

In addition to the specific goals to be achieved in five years, India’s plan documents also specify what we need to achieve in 20 years. This long-term plan is called the Perspective Plan.

Planning Commission 

The Planning Commission of India came into existence on 15 March 1950. It is not a constitutional body. The Commission has the status of an advisory body. The Directive Principles are the constitutional part that led to the formation of the Planning Commission. The draft of the five-year plans prepared by the Planning Commission was finally approved by the National Development Council (established in August 1952). The Prime Minister of India is the chairman of the Planning Commission and the National Development Council. The National Development Council is the highest body authorized to take policy decisions after the Parliament. The Vice-Chairman and members of the Planning Commission were appointed by the Union Cabinet. The poverty line in India was determined by the Planning Commission. The Planning Commission submitted the draft of the Five-Year Plan to the Union Cabinet. The Commission was abolished in August 2014. The Planning Commission prepared plans worth 200 lakh crores during its 65-year period. Twelve Five-Year Plans were planned. The first Chairman of the Planning Commission was Jawaharlal Nehru. Gulzarilal Nanda was the first Vice-Chairman. Montek Singh Ahluwalia was the last Vice-Chairman. The Chief Minister is the Chairman of the State Planning Commission. NITI Aayog came into existence on January 1, 2015, replacing the Planning Commission.

National Development Council

The National Development Council (NDC) was constituted by the central government on 6th August 1952 to give final approval to the decisions of the Five Year Plan. It is a constitutional body. The Prime Minister of India is the Ex-officio Chairman and Secretary of Planning Commission is the Ex-officio Secretary of the National Development Council. Members of National Development Council are Chief Ministers of all the states and the members of Planning Commission. Its aim is to make co-operative environment for economic planning between states and Planning Commission. The National Development Council is the highest policy-making body after Parliament.

NITI Aayog

NITI Aayog (National Institution for Transforming India) is an institution that replaced the 65-year-old Planning Commission. It came into existence on 1 January 2015. The Prime Minister will head the NITI Aayog. Its objective is to promote a development model that emphasizes federal ideas. NITI Aayog is tasked with the role of formulating policies and direction for the government. Its governing council will comprise of the Chief Minister and the Lieutenant Governers of Union Territories. The Prime Minister will appoint the Vice Chairperson and Chief Executive Officer of NITI Aayog. The Aayog will recommend a national agenda including strategic and technical advice on elements of policy and economic matters. It will also develop mechanisms for village level plans and aggregate these progressively at higher levels of government.

Five Year Plans of India

The Planning Commission was constituted in India in 1950. It was a non constitutional and advisory body. Jawaharlal Nehru was the first chairman and Gulsarilal Nanda was the first deputy chairman of the Planning Commission. It is headquartered at Yojana Bhavan. The Planning Commission formulates India's Five Year Plans, among other functions. The Five Year Plans of India were a series of national economic programmes conducted by the Indian Government from 1951 to 2017. The format of First Five Year Plan was implemented in 1951–1956 and the last Five-Year Plan was implemented in 2012–2017.

First Five Year Plan (1951–56)

The First Five Year Plan in India was a period from 1951 to 1956. The plan was presented in Parliament by Jawaharlal Nehru. The plan, which was launched on 1 April 1951, focused on agriculture, irrigation, electrification and family planning. The First Five Year Plan is also known as the 'Agricultural Plan' and the 'Harrod-Domar Model'. The Social Development Plan was launched on 2 October 1952. The aim of the plan was the all-round development of the physical and human resources of the villages. The University Grants Commission (UGC), five IITs, major irrigation projects in India, and the Thottapally Spillway in Kerala (1955) were established during the First Five Year Plan. Major irrigation projects such as Bhakranangal, Hirakud and Damodar Valley were started during the First Five Year Plan. The first plan targeted a growth rate of 2.1 percent but achieved a growth rate of 3.1 percent.

Second Five Year Plan (1956–1961)

The period of the Second Five Year Plan in India was 1956–1961. The plan gave more importance to industrialization and transport development. This plan is known as the Industrial Plan and the Mahalanobis Model. The plan emphasized a mixed economy. The Second Plan also had the objective of "shaping a socialist society", which was adopted by the Congress in Avadi session in 1955. Reducing unemployment and increasing national income were the secondary objectives of the Second Plan. The Durgapur (West Bengal - British aid), Bhilai (Chhattisgarh - Russian aid), and Rourkela (Odisha - German aid) iron and steel plants were built during the Second Plan. The Second Plan, which had targeted a growth rate of 4.5%, achieved a growth rate of 4.3%.

Third Five Year Plan (1961 - 1966)

The period of the Third Five Year Plan in India was 1961 - 1966. The Third Five Year Plan emphasized the self-sufficiency of the economy. The National Dairy Development Board was established in 1965 during the Third Five Year Plan. The Third Plan emphasized For transport, communication, and food self-sufficiency. The Green Revolution began in India in 1965. Due to the India-China War of 1962 and the India-Pakistan War of 1965, and severe drought, the plan, which had a growth target of 5.6%, could only achieve a growth of 2.8%.

Plan Holiday (1966 - 1969)

The Plan Holiday is the three-year period from 1966 to 1969. There were three annual plans from 1966 to 1969. The Plan Holiday was announced when Indira Gandhi was the Prime Minister. The Green Revolution in India began during the annual plans of 1966-69. C. Subrahmanyam was the Union Agriculture Minister. The agricultural strategy devised by the government to deal with the food crisis in the 1960s paved the way for the Green Revolution.

Fourth Five Year Plan (1969 - 1974)

The period of the Fourth Five Year Plan in India was 1969 - 1974. The plan emphasized on sustainable growth, achieving self-reliance and upliftment of the weaker sections. The 'Gadgil Model' was implemented during the Fourth Five Year Plan. In 1969, India's first bank was nationalized and it was also during the Fourth Five Year Plan. In 1970, the National Dairy Development Board implemented 'Operation Flood'. The Indo-Pak war of 1971 and the influx of refugees from Bangladesh led to the failure of the plan. The plan was able to achieve only 3.3% growth against the target of 5.7%.

Fifth Five Year Plan (1974 - 1979)

The period of the Fifth Five Year Plan in India was 1974 - 1979. The plan focused on poverty alleviation and self-sufficiency. The Command Area Development Plan was launched in 1974-75 to boost agricultural production. The Twenty-Point Programme was launched in 1975 with the aim of eradicating poverty and improving the standard of living of the common man. Indira Gandhi's slogan 'Garibi Hatao' is associated with the Fifth Five Year Plan. The declaration of Emergency and subsequent political changes hindered the smooth implementation of the Fifth Plan. The Morarji Desai government ended the Fifth Plan a year early in 1978. The plan, which had a growth rate target of 4.4%, achieved a growth rate of 4.8%.

Rolling Plan

During the rule of Morarji Desai's Janata government, 'Rolling Plans' were implemented during the period 1978-80. This plan means "growth for social justice" instead of "growth with social justice". A rolling plan is a plan that varies over time. The concept of a 'rolling plan' was first introduced by economist Gunnar Myrdal. His famous work is Asian Drama.

Hindu Rate of Growth

The term Hindu Rate of Growth is used to refer to the very low growth rate of the Indian economy during the period 1950-1980. The average growth rate of the Indian economy during the period 1950 to 1980 was 3.5 percent. The term was coined by economist Raj Krishna.

Sixth Five Year Plan (1980-1985)

The period of the Sixth Five Year Plan in India was 1980-1985. The main objectives of the Sixth Five Year Plan were to increase national income, modernize existing technology, and eradicate poverty. The DWCRA project was launched during the Sixth Five Year Plan, which aimed at the development of women and children in rural areas. The plan, which had a target growth rate of 5.2%, achieved a growth rate of 5.7%.

Seventh Five Year Plan (1985 - 1990)

The period of the Seventh Five Year Plan in India was 1985-1990. The plan was launched with emphasis on increasing employment opportunities, increasing food grain production, modernization, self-sufficiency, and social justice. This plan enabled India to achieve great progress in the fields of communication and transport. This plan, which had a target of 5.0%, achieved a growth rate of 6.0%.

Annual Plans (1990 - 1992)

'Annual Plans' were implemented in India during the period 1990 - 92. Due to political uncertainty at the Centre, the plan was implemented from 1990 to 31 March 1992. In 1991, the New Economic Policy was implemented during the Annual Plan period. The New Economic Policy brought fundamental changes in India's economic policy.

Eighth Five Year Plan (1992 - 1997)

The period of the Eighth Five Year Plan in India was 1992 - 1997. The basic objectives of the Eighth Five Year Plan were human development and modernization of industries. The main components of the Human Development Plan were the expansion of primary education, clean water supply, more employment opportunities and population control. The National Stock Exchange (1992) and the Panchayati Raj system (April 24, 1993) came into being during the Eighth Five Year Plan. The Eighth Five Year Plan targeted a growth rate of 5.6%. However, it achieved a growth rate of 6.8%.

Ninth Five Year Plan (1997 - 2002)

The Ninth Five Year Plan in India was from 1997 to 2002. The Ninth Five Year Plan was a plan that gave importance to basic infrastructure such as housing assistance for the poor, providing nutrition to children, expanding primary health care, universalizing primary education, and connecting villages to the mainstream. Rural development and decentralized planning were the sub-objectives of the plan. POTA, which was passed by the Indian Parliament to prevent terrorism, came into effect during the Ninth Five Year Plan. The plan targeted a growth rate of 6.5% but achieved a growth of 5.4%.

Tenth Five Year Plan (2002 - 2007)

The Tenth Five Year Plan in India was for the period 2002 - 2007. The objectives of the plan were to reduce gender discrimination in education and employment, reduce maternal and infant mortality rates, increase literacy rates, provide clean drinking water, and improve water resources. The plan focused on achieving a GDP growth rate of 8% every year and creating high-quality jobs. The Tenth Five Year Plan targeted a growth rate of 8% but achieved a growth rate of 7.6%.

Eleventh Five Year Plan (2007 - 2012)

The Eleventh Five Year Plan in India was for the period 2007 - 2012. The Eleventh Five Year Plan was launched with the aim of inclusive growth. The plan prioritized food security.

Twelfth Five Year Plan (2012 - 2017)

The Twelfth Five Year Plan in India was for the period 2012 - 2017. The Twelfth Five Year Plan was launched with the aim of sustainable development, accelerated growth and inclusive growth. The draft of the Twelfth Five Year Plan had targeted a growth rate of 9 percent. However, the National Development Council meeting held in December 2012 reduced it to 8 percent.

Objectives and Achievements of Five Year Plans

The Planning Commission was constituted in India in 1950. It was a non constitutional and advisory body. Jawaharlal Nehru was the first chairman and Gulsarilal Nanda was the first deputy chairman of the Planning Commission. It is headquartered at Yojana Bhavan. The planning commission is only an advisory body according to the 39th article of the constitution. India has modeled its Five Year Plans on the former Soviet Union. The Objectives and Achievements of Five Year Plans are explained below.

Objectives of Five Year Plans

A plan explains how a nation's resources should be utilized. The plan should have some general and specific objectives to be achieved within a specified period. In India, plans were implemented for a period of five years. Hence, they are known as five year plans. Five year plans are centralized and comprehensive national economic programs. Five year plans were started in 1951. The objective of five year plans is to devise national plans that are planned and organized for a period of five years, which will help in economic growth and social development. The Planning Commission designs and implements five year plans. The important objectives of five year plans are Economic Growth, Modernisation, Self-reliance and Equity.

1. Economic Growth

Economic growth refers to the increase in the country's capacity to produce goods and services. It is measured by the size of the productive capital stock, the extent of the supporting infrastructure such as banking and transportation, or the efficiency of the productive capital and services. Gross Domestic Product (GDP) is the market value of all goods and services produced within a country in a year. A steady increase in GDP is a good indicator of economic growth. The GDP of an economy is derived from the agricultural sector, the industrial sector, and the service sector. The contribution of these three sectors shapes the structure of the economy. In some countries, the agricultural sector contributes more to the growth of the GDP, while in others, the service sector is dominant.

2. Modernisation

Modernisation is the adoption of new technology. In traditional societies, women were forced to stay at home while men worked. However, modern societies utilize women's skills in workplaces (banks, factories, schools, etc.).

3. Self-reliance

A country can achieve economic growth and modernization by using its own resources or by using resources imported from other countries. The first seven Indian five year plans emphasized the self-reliance approach by eliminating imports of goods that can be manufactured in India.

4. Equity

Equality means ensuring that the benefits of economic prosperity are shared by the poor, rather than just the wealthy few. All Indians should be able to meet their basic needs such as food, decent housing, education, and health, and this should be achieved by reducing inequality in the distribution of wealth.

Achievements of Five Year Plans

The period of the First Five Year Plan in India was 1951 - 1956. The plan focused on the agricultural sector. During the First Plan, the Family Planning Scheme was started in India in 1952. The National Extension Service and Community Development Programme were also started during the First Plan. The Second Five Year Plan of 1956 - 61 focused on the industrial sector. The Third Plan of 1961 - 66 focused on transport, communication, food self-sufficiency and economic self-sufficiency. The Green Revolution in India began in 1965. C. Subrahmanyam was the Union Agriculture Minister. 'Plan Holiday' was implemented in India during 1966 - 69. The Fourth Five Year Plan of 1969-74 focused on sustainable growth and self-reliance. The Fifth Five Year Plan of 1974-79 focused on poverty alleviation. During the Janata government's rule, 'Rolling Plans' were implemented during the period 1978-80. The Sixth Plan of 1980-85 focused on improving the infrastructure of the agricultural and industrial sectors. The Seventh Five Year Plan of 1985-1990 focused on the energy sector, modernization and increase in employment opportunities. 'Annual Plans' were implemented in India during the period 1990-92. The Eighth Five Year Plan of 1992-1997 focused on human resource development. The Ninth Plan announced the objectives of rural development, decentralized planning, and growth with social justice and equity. The Tenth Five Year Plan (2002–2007) emphasized on increasing capital investment. The annual growth rate targeted by the Tenth Five Year Plan was 8 percent. The economic growth during this period was 7.8 percent. The Eleventh Plan (2007–2012) targeted a 10 percent growth in Gross Domestic Product (GDP). The objectives of the Twelfth Five Year Plan (2012–2017) were sustainable development, accelerated growth, and inclusive growth. The Five Year Plan was discontinued with the establishment of NITI Aayog on 1 January 2015, replacing the Planning Commission.

Models of Economic Development

Nehru Mahalanobis Model 

Nehru Mahalanobis Model of development was adopted during Second Plan. It has continued right up to the eighties. Its objective is the enlargement of opportunities for the less privileged sections of the society.

Gandhian Model of Growth 

The basic objective is to raise the material as well as the cultural level of the indian masses so as to provide a basic standard of life. It aims at the reform of agriculture.

LPG Model of Development 

The full form of LPG is Liberalisation, Privatisation and Globalisation. It was introduced in 1991 by the then Finance Minister, Dr.Manmohan Singh. This model was intended to charter a new strategy with emphasis on Liberalisation, Privatisation and Globalisation. It emphasis a bigger role for the private sector.

PURA Model of Development

The fullform of PURA is Provision of Urban Amenities in Rural Areas. The Union Cabinet on 20th January, 2004 accorded in principle approval for the execution of PURA. Its objective is to propel economic development without population transfers. It emphasize the enlargement of employment to make use of rural manpower in various development activities. Its concept is response to the need for creating social and economic infrastructure, which can create a conducive climate for investment by the private sector to invest in rural areas.

National Income

The national income is the sum total of the value of all the final goods produced and services of the residents of the country in an accounting year. National Income includes the contribution of three sectors of the economy - Primary sector, Secondary sector and Tertiary sector. National Income shows how the income is distributed between the wages, interest, profit and rents. Production is necessary for National Income. Production is achieved through the combination of land, labor, capital, and organization. A country produces many goods and services. When more is produced, the availability of goods and services increases. National income is the total amount (in monetary form) of goods and services produced in a country in a financial year. When production increases, national income increases. National income comes from the agricultural, industrial, and service sectors. The increase in national income is called economic growth. More production leads to economic growth. If national income reduces, the government will cut down the taxes so that citizens will have more income to spend. 

The national income is calculated in two ways.

1. Those based on current prices ie the price prevailing in the year to which the estimates is related.

2. National income is measured at constant prices with a base year.

Objectives of calculating national income:

■ To assess the contribution of various sectors in the economy.

■ To study the problems faced by the economy

■ To help the government in planning and implementing various projects

■ To find out the limitations and advantages of economic activities such as production, distribution, and consumption

Economic Sectors

The economy is mainly divided into three basic sectors - primary sector, secondary sector and tertiary sector. National income is related to the three sectors. The Central Statistical Office (CSO) categorizes economic activities into primary, secondary and tertiary sectors and calculates national income.

1. Primary sector: Activities that directly utilize natural resources are called primary sector. Agriculture is the foundation of the primary sector. In India, the primary sector is the sector that provides employment and produces the necessary food at all times. The primary sector is also known as the agricultural sector because of its importance to agriculture.

Example: Agriculture and allied activities, forestry, fishing, mining.

2. Secondary sector: The secondary sector is the sector where the production of new products is carried out using the products of the primary sector as raw materials. Industry is the foundation of the secondary sector. Because of its importance to industry, the secondary sector is known as the industrial sector.

Example: Industry, power generation, building construction.

3. Tertiary sector: The sector that procures and distributes the products of the primary and secondary sectors is known as the tertiary sector or service sector. The tertiary sector contributes the most to the Indian economy.

Example: Trade, transportation, hotels, communication, warehousing, banking, insurance, business, real estate, social service activities

National Income Calculation Methods

National income is the total value of goods and services produced in a country in a year. Three alternative methods are used to calculate national income - production method, income method, and expenditure method (consumption method).

Production Method: Production is the process of providing goods and services to satisfy various human needs. The ultimate goal of production is to fulfill human needs. The production method is a method of calculating national income by finding the total monetary value of goods and services produced in a country in the primary, secondary, and tertiary sectors in a year. The production method helps to assess the contribution of various agricultural, industrial, and service sectors to national income and which sector contributes more. The monetary value of goods and services can be counted more than once while passing through various stages of the production process (double counting).

Income Method: The labor, natural resources, and man-made objects used in the production of a good are called factors of production. Income is the reward received by the factors of production. Lease is the reward received by the land as a factor of production. Lease is received by the owner of the land. The reward received through labor is wages or salaries. Wages are received by the worker. Interest is the reward of capital. Interest is received by the individual or institution. Profit is the reward of the organization. Profit is received by the organizer. Income method is a method of calculating national income on the basis of rent, wages, interest, and profits received from the factors of production. Income method helps to identify the contribution of each factor of production to national income. 

Expenditure Method: Expenditure method is a method of calculating national income by finding the total amount spent by individuals, institutions, and the government in a year. In economics, investment is considered as an expense along with the cost of purchasing goods and services. Total expenditure is the sum of consumption expenditure, investment expenditure, and government expenditure.

In India, a combination of production method and income method is used for estimating national income. Factors determining national income are capital formation, natural resources, technical know-how and political stability. First scientific attempt to calculate National Income was done by Dr. VKRV. Rao. The first official attempt was made by Prof. PC. Mahalanobis in 1948-49. Today National Income is calculated and published by Central Statistical Organisation.

Central Statistical Organisation

The Central Statistical Organisation (CSO) is the government agency responsible for calculating the national income of India. It was established on 2 May 1951. The CSO is currently known as the Central Statistical Office. It is headquartered in Delhi. The CSO operates under the Ministry of Statistics. The CSO is mainly responsible for compiling national and per capita income statistics, conducting economic censuses and compiling consumer price indices.

Main functions of the Central Statistical Office

■ Compilation and analysis of statistical data.

■ Collection of statistical data in all sectors and their systematic use for planning purposes.

■ Estimation of national income using statistical data.

■ Conducting economic censuses

■ Preparing consumer price indices

Various concepts of National Income

Gross National Product (GNP): Gross National Product is the total monetary value of all final goods and services produced in a country in a year.

Gross Domestic Product (GDP): Gross Domestic Product is the total monetary value of all final goods and services currently produced within the domestic territory of a country during a given period. While calculating GDP in India, the income of those working abroad and the profits of Indian firms and enterprises operating abroad are excluded.

Net National Product (NNP) at Factor Cost (National Income):  Net National Product (NNP) at Factor Cost is known as national income. Net National Product (NNP) at Factor Cost is the sum of the wages, rent, interest and profits paid to factors for their contribution to the production of goods and services in a year.

Net national product = Gross national product - Consumption Expenditure

Net National Product (NNP) at Market Price : It is the money value of all final goods and services after providing for depreciation. Depreciation charges are the expenses required to replace the wear and tear of machinery and other goods due to their age. Net National Product is obtained when depreciation charges are deducted from the gross national product.

Personal Income : It is the sum of all incomes actually received by an individuals or households during a given year.

Disposable Income : From personal income if we deduct personal taxes like income taxes, personal property taxes etc what remains is called disposable income.

Per Capita Income : This concept measures the average income of the people of a country in a particular year.

Per Capita Income = National Income/Population

Central Statistics Office

Central Statistics Office coordinates the statistical activities of the country and develops their standards. The Central Statistics Office is the government agency responsible for calculating national income in India. The old name of the Central Statistics Office is Central Statistics Organisation. The Central Statistics Organisation was established on 2 May 1951. P.C. Mahalanobis was the prominent leader of formation of the Central Statistics Organisation. The Central Statistics Office conducts the census for the planning and development activities of the government. The CSO's national income census helps in understanding the status of the jobs and sectors in which the people are engaged. This institution is headed by a Director General with the assistance of five Additional Directors General. The official publication of the CSO, the White Paper, was first published in 1956. The headquarters of the CSO is in New Delhi. The Central Statistics Office functions under the Ministry of Statistics and Programme Implementation. The main functions of the CSO are to prepare national and per capita income statistics, conduct economic census, and prepare consumer price index.

Functions of the Central Statistics Office

■ To compile and analyze statistical data.

■ To collect and organize statistical data in all sectors for use in planning activities.

■ To use statistical data to determine national income.

■ To conduct economic census

■ To prepare consumer price index

National Statistical Office

The National Sample Survey Organization (NSSO) was established in 1950 to conduct large-scale sample surveys in India. The National Statistical Office (NSO) was established as a result of the merger of the CSO and the NSSO. According to the report of the Rangarajan Commission, the National Statistical Office came into existence in June 2005. The NSO will be headed by the Secretary, Ministry of Statistics and Programme Implementation (MoSPI). 

The NSO has four main components.

■ Survey Design and Research Division (SDRD)

■ Field Operations Division (FOD)

■ Data Processing Division (DPD)

■ Survey Coordination Division (SCD)

Economic Sectors of Production

The economy is mainly divided into three basic sectors - primary sector, secondary sector and tertiary sector. National income is related to the three sectors. The Central Statistical Office (CSO) categorizes economic activities into primary, secondary and tertiary sectors and calculates national income.

Primary Sector

The sector that involves the direct use of natural resources is known as Primary Sector. The foundation of Primary Sector is known as Agriculture. Since agriculture is more important, the primary sector is also known as the agricultural sector. The agricultural sector is the backbone of the Indian economy. The primary sector is the sector that provides the most employment opportunities in the primary, secondary and tertiary sectors. The classification of CSO based on activities in the primary sector - Agriculture and allied activities, forestry, fishing, mining, and production of raw materials.

Secondary Sector

The Secondary Sector is the sector where activities are carried out to make new products using the products of the primary sector as raw materials. The foundation of the Secondary Sector is industry. Secondary Sector is also known as Industrial Sector because of its importance to industry. Classification of CSO based on activities in Secondary Sector - Industry, Power Generation, Construction, Manufacturing.

Tertiary Sector

The tertiary sector is the sector that stores and distributes the products of the primary and secondary sectors. The tertiary sector contributes the most to the Indian economy. The tertiary sector is also known as the service sector. The service sector includes education, transport, banking, IT, etc. The tertiary sector is the sector that combines all service activities. The tertiary sector contributes the most to the national income. Classification of CSO based on activities in Tertiary Sector - Trade, Commerce, Transport, Hotels, Communication, Storage, Banking, Education, Insurance, Business, Real Estate, Social Service Activities.

Economic Activities

Economic activities are the income-generating activities of humans. Economic activities are divided into primary activities, secondary activities, tertiary activities, quaternary activities, and quinary activities.

Primary Activities

Primary activities are activities that are directly related to nature by utilizing natural resources such as land, water, plants, and minerals. Examples - hunting, gathering food, grazing, fishing, forestry, agriculture, mining, quarrying, etc. In the early stages of economic development, most of the people worked in the primary sector. People who were engaged in primary activities are called red-collar workers. Hunting and gathering is the oldest known economic activity.

Secondary Activities

Secondary activities are activities related to production, processing, and manufacturing. Industries are geographically concentrated production units that are managed and maintain records and accounting books. Modern industries are concentrated and flourishing in less than 10 percent of the world's total area. 

Agglomeration economy - The proximity of a major industry and other industries to each other often benefits many industries. This is known as an agglomeration economy. The interconnectedness of industries/the accumulation of economies is known as an agglomeration economy. Investments are generated from the relationships that exist between different industries.

Tertiary Activities

The sectors that require professional skills are health, education, law, administration, and entertainment. The main component of the service sector is human power. The tertiary sector, where most workers in a developed economy work, includes production and exchange. Trade, transport, and communication are included in exchange. Services of teachers and doctors, and trade, transport, and communication services are various types of tertiary activities. Tourism is the largest tertiary economic activity in the world. International tourism combined with medical care is generally known as medical tourism. Knowledge-based sector is also falls under Tertiary Activity. A category related to knowledge in the service sector can be divided into two categories: Quaternary activities and Quinary activities.

Knowledge-based sector: The tertiary sector is the sector that effectively applies knowledge and technology to achieve economic growth. Education, application of advanced technologies, information and communication technology, etc. are the basis of the knowledge economy. Intellectual capital is the collective knowledge of the people in an enterprise or society. Intellectual capital is an intangible asset. Example: Technopark and Infopark started by the Kerala government are examples of knowledge-based sectors

Quaternary Activities

This service sector includes workers in office buildings, elementary schools, university classrooms, hospitals, doctors' offices, theaters, and accounting brokerage firms. Quaternary activities are those that can be outsourced. These activities are not influenced by the environment or determined by markets because they are not directly related to resources. Quaternary activities include the collection, production, and dissemination of information. Characteristics of quaternary activities - Quaternary activities are focused on research and development. These are highly advanced services that require specialized knowledge and technical expertise.

Quinary Activities 

The Quinary activities refer to the activities of decision-makers and policymakers at the highest levels. These are slightly different from knowledge-based industries. The services that focus on the formation, reorganization, analysis, and evaluation of existing and innovative ideas, and the use and evaluation of new technologies are concentrated in Quinary activities. These are known as Golden Collar Professions and are a subset of the tertiary sector. The Quinary Sector includes senior business executives, government officials, research scientists, and financial and legal advisors with specialized job skills that are highly paid. Knowledge Process Outsourcing - KPO and Home Shoring are new trends in Quinary sector services. Home shoring is an alternative to outsourcing. Outsourcing is the process of outsourcing work to an external agency to improve efficiency and reduce costs. Off shoring is the process of transferring outsourced work to a location outside the country. The Knowledge Process Outsourcing industry is quite different from the Business Process Outsourcing industry. Knowledge Process Outsourcing is information-based. Examples of Knowledge Process Outsourcing include research and development, e-learning, business research, intellectual property research, legal practice, and banking.

Factors of Production

Humans can survive only by consuming goods and services. But in order to consume these, they need to be produced. The production of goods and services is essential for human survival. Production is the process of providing goods and services to satisfy various human needs. The result of production is a product. The labor, natural resources, and man-made objects used to produce a thing are called factors of production. Factors of production are divided into four categories. Land (natural resources), Labor (physical and mental human labor), Capital (man-made objects), and Entrepreneurship (coordination of other factors of production).

Land

All natural resources used for the production of goods are included in the term land. All natural resources on the earth's surface, in the earth's atmosphere and in the earth's interior are considered to be the factor of production, land. Soil, water, forests, air, coal, etc. are natural resources that are included in the earth as a factor of production. Rent is the remuneration for land as a factor of production.

Labor

Labor is the use of physical, mental and intellectual labor by workers to produce goods and services. Wages/salaries are the remuneration for the labor provided by the worker.

Capital

Capital is man-made objects used for production that can be seen and touched. Capital includes machines, vehicles, computers, etc. that can be used in production activities. Interest is the remuneration for capital.

Entrepreneurship

Entrepreneurship is the combination of the factors of production, land, labor and capital. The organizer/entrepreneur is the person who organizes. Profit is the reward for the Entrepreneurship.

Types of Goods

A product goes through several stages of the production process. When a product becomes part of another production process, its characteristics change and another product is formed. The different types of goods are final goods and intermediate goods.

Final Goods

Goods and services that are used for final use are called final goods. Final goods are goods that do not enter the production process again. Once the final good is sold, it cannot become part of another production process. Thus, they go out of the active economic flow. It is not the nature of the product, but the nature of the economic process through which it passes that makes a product a final good. Final products do not undergo further transformation in the economic process. Final goods can be divided into two categories: consumer goods and capital goods.

Consumer Goods

Consumer goods are products that are purchased and used by the final consumer. Items that are used directly for consumption are known as consumer products. Consumer products are also called consumer goods.

Example - Goods and services such as food, clothing, entertainment, etc. are purchased and used by the final consumer.

Capital Goods

Once the producer buys such goods, they can be used continuously in the production process. Capital goods are final goods that are used to produce other goods. They last longer and, although they are not converted into another product, they can help in the production process of another product. Although they are final goods, they are not consumed in a single consumption. Products known as the backbone of the production process are capital goods. Once the producer buys them, they can be used continuously in the production process. Due to natural wear and tear, they need to be repaired or replaced over time.

Example - Buildings, machinery, equipment, etc.

Intermediate Goods

Some of the goods and services formed through the production process may not be final consumer goods or capital goods. Such products are used as raw materials by other producers. These are known as Intermediate Goods. Intermediate Goods are products that are used as raw materials for the production of other goods but are not final products. Intermediate goods are products that are used to produce final goods and are re-used in the production process.

Example - Steel sheets used to make vehicles, copper to make pots

Terms related to Types of Goods

Consumer Durables - Products that last a long time but need to be renewed and replaced like capital goods are called Consumer Durables.

Various Concepts of National Income

■ Gross Domestic Product (GDP) at Market Price

Gross Domestic Product is the total monetary value of all final goods and services currently produced within the domestic territory of a country during a given period. The value of production carried out by locals or foreigners is taken into account, regardless of whether it is owned by a foreign company or a local company. The value of everything is calculated at market price.

GDP_MP = C + I + G + X - M

■ Gross Domestic Product (GDP) at Factor Cost

Gross Domestic Product (GDP) at Factor Cost is the gross domestic product at Market Price minus net indirect taxes at market price. Market price is the price paid by consumers in the market. It includes taxes on products and subsidies. Factor cost is the price received by producers for the product. Therefore, factor cost is obtained by subtracting net indirect taxes from the market price. Gross Domestic Product (GDP) at Factor Cost shows the monetary value of the product produced by production units within the domestic borders of a country in a year.

GDP_FC = GDP_MP - NIT

■ Gross National Product (GNP) at Market Price

Gross National Product is the total monetary value of all final goods and services produced in a country in a year. It is the market value of all goods and services produced by a country's natural residents. It shows the total economic output produced by the country's citizens. It does not matter whether the citizens are in the domestic economy or abroad.

GNP_MP = GNP_MP + NFIA

■ Gross National Product (GNP) at Factor Cost

This is the value of the product produced by a country's productive forces in a year.

GNP_FC = GNP_MP - Net Product Taxes - Net Production Taxes

■ Net National Product (NNP) at Market Price

It is a measure of how much a country can spend in a given period of time. It is the money value of all final goods and services after providing for depreciation. Net National Product (NNP) at Market Price does not take into account where production takes place (production can be domestic or foreign). Depreciation charges are the expenses required to replace the wear and tear of machinery and other goods due to their age. Net National Product is obtained when depreciation charges are deducted from the gross national product.

NNP_MP = GNP_MP - Depreciation

NNP_MP = NDP_MP + NFIA

■ Net National Product (NNP) at Factor Cost (National Income)

Net National Product (NNP) at Factor Cost is known as national income. Net National Product (NNP) at Factor Cost is the sum of the wages, rent, interest and profits paid to factors for their contribution to the production of goods and services in a year. This is national product. It is not confined to national borders. It is obtained by adding net foreign factor income to net national factor income.

Net national product = Gross national product - Consumption Expenditure

■ Net Domestic Product (NDP) at Market Price

This is a measure that helps policymakers estimate how much a country needs to spend to maintain its current GDP. If a country is unable to make up for the capital loss caused by depreciation, GDP will decline.

NDP_MP = GDP_MP – Depreciation

■ Net Domestic Product (NDP) at Factor Cost

Net Domestic Product (NDP) at Factor Cost is the total amount received by the domestic economy as remuneration for the factors of production, such as wages, profits, rent, and interest.

■ Personal Income

It is the sum of all incomes actually received by an individuals or households during a given year.

Personal Income = National Income - Undistributed Profit - Corporate Tax - Net Interest Paid by the Household Sector + Transfer Payments

■ Personal Disposable Income

From personal income if we deduct personal taxes like income taxes, personal property taxes etc what remains is called disposable income. It is the income derived from personal income after deducting tax and non-tax payments.

Personal Disposable Income = Personal Income - (Personal Tax + Non-Tax Contributions)

■ Percapita Income

This concept measures the average income of the people of a country in a particular year. Percapita Income is the national income of a country divided by its population. This is an average income. Per capita income helps in comparing countries and understanding the economic status of countries. Per capita income increases only if the growth rate of national income is higher than the population growth rate. Per capita income is used to compare the economic growth of a country with that of previous years and to compare the economic growth of different countries. The growth rate of national income and the population growth rate are two important things to observe to find out whether a country has achieved economic development based on per capita income.

Per Capita Income = National Income/Population

■ Private Income

Private Income = Net income from net domestic product to the private sector + National debt interest rate + Net income from abroad + Current transfers from government + Other net transfers from abroad

Some Important Terms related to National Income

■ Depreciation - Depreciation is the loss of value of a capital good due to wear and tear over the years. Depreciation does not include loss of value due to accidents, natural disasters, and other unusual circumstances. Depreciation can also be called the consumption of fixed capital.

■ Net Factor Income from Abroad (NFIA) - It is the difference between the income sent to india by Indians working abroad and the income sent to their home country by foreigners in india.

■ Market Price, Factor Cost and Net Indirect Tax - The market price of a good includes factor cost and net indirect tax. Factor cost is the remuneration paid to the factors of production. To get net indirect tax, it is enough to deduct the subsidy from the indirect tax.

■ Double Counting - Double counting is the practice of adding the value of a good or service more than once when calculating national income.

■ Net Export - Net Export is the subtraction of imports from exports.

■ Export Value - Our export value is the expenditure made by people in foreign countries on our country's domestic production.

■ Import Value - Our import value is the expenditure made by people in our country on foreign goods. The difference between the export and import values ​​is part of our domestic expenditure.

Cyclic Flow of Income

The main economic activities in an economy are Production, Consumption and Distribution. Through these activities, income, expenditure and the economy are created. These activities also influence the relationship and interdependence of various sectors in the economy. The cyclical flow of income also explains the interrelationship of various sectors in a diagram. In a two-sector economy, there is a cyclical flow of production, income and expenditure.

Imagine that there are two sectors in the economy, namely the Household sector and firms. The household sector is the sector that provides the services of factors of production such as land, labor, capital and organization to the production sector. The production sector is the sector that produces with the help of factors of production. The household sector spends all its income on its consumption. The production sector sells all its products to the household sector.

It shows the redistribution of income in a circular manner between the production unit and households. There are basically four types of remuneration that are paid during the production of goods and services. These are land, labor, capital, and entrepreneurship

■ Rent - The remuneration for the contribution made by fixed natural resources (called land) is called rent.

■ Wage - The remuneration for the contribution made by a human worker (called labor) is called wage.

■ Interest - The remuneration for the contribution made by capital is called interest.

■ Profit - The remuneration for the contribution made by entrepreneurship is called profit.

Types of Cyclic Flow of Income

There are two types of cyclical flows.

1. Money Flow

The flow of money from firms to households and from households to firms is known as Money Flow.

2. Real Flow

The flow of factor services from households to firms and the flow of goods and services from firms to households is known as Real Flow.

When the income received by the factors of production is used to purchase goods and services, domestic consumption equals the total cost of production. The total consumption of households is equal to the total expenditure on goods and services produced by all the firms in the economy.

Circular Flow of Income in a Simple Economy

Explanation of Diagram

■ The diagram's outer loop illustrates the flow of factor services from businesses to households as well as the flow of factor services from households to businesses.

■ The inner loop illustrates how goods and services go from businesses to homes as well as how consumers spend their money on goods and services.

Flow and Stock

Flow - In economics, some variables are defined on the basis of a certain period of time. Those that can be measured and quantified over a certain period of time are called flows. Flows are those that occur within a certain time frame. Example - Income, production, profit, losses etc.

Stocks - Stocks are those that can be measured and quantified at a certain point in time. Example - A person's bank deposits, wealth, etc. on 01.01.2025, capital, population

Measurement of National Income

The main criterion for assessing the economic growth of an economy is the increase in national income in that economy. National income is equal to the net national product at factor cost. To calculate national income, depreciation and net indirect taxes are deducted from the gross national product. National income is calculated through three methods - product method, income method and expenditure method.

1. Product Method

The method of calculating the total annual value of goods and services is known as the product method. The product method is also known as the value added method. The product method is a method of calculating national income by finding the total monetary value of goods and services produced in the primary - secondary - tertiary sectors. The product method helps in assessing the extent of participation of various sectors in national income and which sector contributes more. The value added product or the value of final goods is calculated to calculate national income. There are three main components to calculating national income in the product method.

■ Identifying and classifying the production units in the economy.

■ Calculate the net value added within the domestic borders of an economy.

■ Calculate the net income from abroad and add it to the net value added.

In order to avoid double counting in the product method, the value of intermediate products should be discounted and only the total value of final goods and services should be calculated.

2. Income Method

In the income method, national income is calculated based on the remuneration received by the factors of production in the economy. Income is the remuneration received by the factors of production. The income method helps to identify the contribution of each factor of production to the national income. The income received by all production units is distributed among the factors of production as salaries, wages, profits, interest and rent. There are four main steps in calculating national income.

■ Classify the factors of production in the economy into three sectors: primary sector, secondary sector and tertiary sector.

■ Classify domestic factor income.

■ Determine domestic factor income.

■ Add net factor income from abroad

Domestic factor income can be mainly classified into three categories.

■ Compensation of employees - This includes wages received by employees and other benefits provided by employers to employees.

■ Operating surplus - Operating surplus includes rent, profits, interest and royalties.

■ Compensation of self-employed persons - It is not possible to separate the income of self-employed persons. It is a mixed income. It includes income from workers and capital income.

3. Expenditure Method (Consumption Method)

The Expenditure Method is a method of calculating national income based on final expenditure in the economy. The Expenditure Method is a method of calculating national income by finding the total amount spent by individuals, firms and the government in a year. In economics, investment is considered as expenditure along with the expenditure on purchasing goods and services.

Total expenditure = Consumption expenditure + Investment expenditure + Government expenditure

Total domestic expenditure in an economy can be divided into the following categories:

i. Private final Consumption Expenditure - C

ii. Gross domestic Capital Expenditure - I

iii. Government's final Consumption Expenditure - G

iv. Net Export - Export (X) - Import (M)

Total domestic expenditure = C + I + G + X - M

This is equal to the gross domestic product at market prices in an economy.

GDP_MP = C + I + G + X - M

Gross national product (GNP_MP) is obtained by adding net factor income from abroad to gross domestic product (GDP_MP).

GNP_MP = GDP_MP + NFIA

To find national income using the expenditure method, it is enough to subtract depreciation (D) and net indirect taxes (NIT) from the gross national product (GNP_MP).

National Income (NNP_FC) = GNP_FC - D - NIT

Gross Domestic Product and Welfare

Gross Domestic Product (GDP) is the monetary value of final goods produced within the domestic borders of a country in a year. GDP is considered a measure of a country's progress. If wealth accumulates in the hands of a certain group of people in the economy due to an increase in GDP, this can lead to inequality. Social costs such as air pollution and water pollution caused by an increase in GDP also negatively affect the welfare of the people.

Relationship Between GDP and Welfare

A high GDP of a country is considered an indicator of the high welfare of the people of that country. This assumption is not entirely correct. Some of the reasons for this are as follows.

■ Inequality in GDP distribution

As GDP increases, inequality may also increase. The increase in GDP is concentrated in the hands of some individuals or production units. The income of a small minority may increase significantly while the income of the majority may decrease.

■ Non-monetary transactions

Many activities that take place within an economy cannot be measured in monetary terms. Housewives' services and barter transactions (exchange transactions without using money) are non-monetary transactions that are not included in GDP. Therefore, GDP is not adequate to measure the real income or welfare in an economy. In a country like India with a large population and non-financial sectors, GDP is undervalued.

■ Externalities

Externalities are the effects of one producer or individual on another without any compensation. Externalities can be beneficial or harmful. Externalities are not something that can be bought or sold in a market.

Real GDP and Monetary GDP

It is not possible to rely on GDP measured at current market prices to compare GDP values ​​of different countries or to compare GDP values ​​of a country at different periods. Real GDP is used to help in such comparisons. Real GDP is obtained when GDP is calculated at Constant Prices. When GDP is calculated based on Constant Prices, the fluctuations in it depend entirely on production. Monetary GDP is calculated at Current Prices.

The ratio between monetary GDP and real GDP gives an idea of ​​the change in prices from the base year to the current year. Real GDP is calculated using the prices of the base year. The ratio between monetary GDP and real GDP is a well-known index of prices. This ratio is the GDP Deflator. If Monetary GDP is referred to as GDP and Real GDP as gdp,

GDP Deflator = GDP/gdp

In some cases, GDP Deflator is also stated as a percentage. When so indicated,

GDP Deflator = GDP/gdp x 100

Economic Growth and Development

Economic growth is the increase in the national income of a country. The increased production of goods and services leads to economic growth. In short, economic growth is the increase in the output of a country compared to the previous year. When economic growth is achieved, industrial production, agricultural production, and purchasing power increase, and the service sector grows. The economic growth rate is the rate of increase in national income in the current year compared to the previous year. Economic development occurs when the country achieves economic growth and the standard of living of all its people also increases.

Development Indices

On the basis of economic development, countries are classified as developed countries and developing countries. There are some generally accepted indices to measure and evaluate economic development. They are called development indices. The important development indices are given below.

■ Per capita income

■ Human Development Index (HDI)

■ Physical Quality of Life Index (PQLI)

■ Human Poverty Index (HPI)

■ Human Happiness Index (HHI)

1. Per capita income

Per capita income is the simplest index of development indices. Per capita income is a traditional development index. Per capita income is the average income of one person in a country in a year.

National income per capita = National income / Population

National income per capita is obtained by dividing national income by the country's population. Per capita income helps to compare countries and understand the economic status of countries. The per capita income index is obtained by dividing the growth rate of national income by the population growth rate. The per capita income index helps to determine whether a country has achieved economic growth in the current year compared to the previous year. Per capita income increases only if the growth rate of national income is higher than the population growth rate.

2. Human Development Index

The Human Development Index (HDI) is a measure of the overall progress of a person in relation to the economy of a country. The HDI was developed by economists Mehboob-ul-Haq and Amartya Sen. The United Nations Development Program (UNDP) prepares the Human Development Report based on the HDI. The Human Development Report was first released in 1990. Since then, the UNDP has been publishing the Human Development Report every year. Pakistani economist Mehboob-ul-Haq is known as the father of the 'Human Development Report'. The main human development indicators used to prepare the Human Development Report are life expectancy, education level (literacy and gross school enrolment rate), and standard of living (per capita income). The Human Development Index categorizes a country as developed, developing, or underdeveloped. Improved educational facilities, a better health care system, and more training are factors that enable human development. The Human Development Index value is recorded between zero and one. Based on the value of the index, countries of the world can be divided into four categories. Very high human development from 0.8 to 1.0, high human development from 0.7 to 0.799, medium human development from 0.550 to 0.699, and low human development below 0.550. The value zero indicates no development and one is the highest development.

3. Physical Quality of Life Index

The Physical Quality of Life Index (PQLI) is a better index than the per capita income index. The PQLI came into use in 1979. The PQLI was developed by Morris David Morris. The main factors indicated by the PQLI are life expectancy, infant mortality rate, and basic literacy.

4. Human Poverty Index

The Human Poverty Index (HPI) is an index developed by the United Nations to complement the Human Development Index. The criteria considered for preparing the HPI are a long and healthy life, knowledge, and quality of life. The first report of the Human Poverty Index was published in 1997.

5. Human Happiness Index

The Human Happiness Index was developed for Bhutan. The nine indicators considered to calculate the Human Happiness Index are health, quality of life, nature and biodiversity protection, social life and neighborliness, corruption-free governance, cultural diversity, education, effective use of time, and mental health. 

Sustainable Development

Sustainable Development is a development approach that does not harm the environment. The core of Sustainable Development is the view that natural resources are not for the utilization of one generation only, but also for future generations. Sustainable Development is based on the view of ensuring social justice in the use of natural resources. The three primary goals of Sustainable Development are - environmental goals, economic goals, and social goals.

The definition given by the Brundtland Commission appointed by the United Nations for sustainable development is - "Sustainable Development is an approach that meets the needs of the present without compromising the ability of future generations to meet their own needs".

 To be Continued.