What is Meant by Economy and What is the Indian Economy?
An economy is defined as all activity in a given area that is related to the production, consumption, and trade of goods and services. These choices are made through a combination of market transactions and hierarchical or collaborative decision-making. This process involves everyone from individuals to entities such as families, corporations, and governments. The economy of a specific region or country is influenced by a variety of elements, including its culture, laws, history, and geography, among others, and it evolves as a result of the participants' choices and actions. As a result, no two economies are the same.
The Indian economy is a mixed economy. In terms of GDP, India is the world's sixth-largest economy. It possesses the world's third-largest purchasing power. When it comes to the global economy, India is one of the most rapidly developing nations. The economy has opened up and provided us with numerous opportunities to flourish since our liberalisation in 1991. Let's have a look at some of the key aspects of the Indian economy, sectors of the Indian economy and GDP, as well as some topics that are pertinent to bank exams.
Indian Economy: History
The Indian economy was in shambles on the verge of independence. As a colony, she was meeting the development needs of a foreign land rather than her own. The state, which should have been responsible for agricultural and industrial breakthroughs, refused to play even a minor role in this regard. On the other hand, during the half-century preceding India's independence, the world witnessed accelerated development and expansion in agriculture and industry, owing to the states' active role.
The British authorities never made any important adjustments to benefit the social sector, which impeded the economy's productive ability. India's literacy rate at the time of independence was barely 17 percent, with a life expectancy of 32.5 years. As a result, once India gained independence, the government had a significant difficulty in organising the economy. As the country rode on the promises and feelings of national enthusiasm, the requirement for delivering growth and development was in high demand in front of the political leadership. By 1956, India had made a number of significant and strategic decisions that are currently affecting the country's economic trajectory.
India is now the world's seventh-largest economy and the third-largest in terms of purchasing power parity (PPP). The Indian economy's GDP is estimated to be \[$\] 2.9 trillion. ‘We keep fluctuating between the fifth and sixth largest economies, depending on the dollar rate,' Finance Minister Arun Jaitley said at a press conference. Looking ahead to five years, we will be worth \[$\]5 trillion by 2024 and \[$\]10 trillion by 2030 or 2031.’
In 2017, India's GDP per capita was \[$\] 1963.55. From 1960 to 2017, India's GDP per capita averaged \[$\] 693.96, which is 16 percent more than the global average. In 2017, it hit an all-time high of \[$\] 1963.55.
Sectors of Indian Economy
The New Economic Policy, which was adopted in 1991, marked a watershed moment in the Indian economy, since it terminated the mixed economy model and the licence raj system, and opened the Indian economy to the rest of the world. The following is a list of the top-performing sectors of the Indian economy:
Agricultural Sector
Agriculture continues to be one of the most important industries of the Indian economy. Its share of the country's GDP has decreased, and it now stands at 14%. However, agriculture continues to be the primary source of income for more than half of the country's people. With this in mind, the Union Budget 2017-18 gives the agricultural sector a top priority, aiming to double farmers' incomes by 2022.
Government agricultural subsidies are at an all-time high.
Cropping patterns have also evolved in favour of cash crops like sugarcane and rubber.
Cooperative farming, such as e-choupal, is being introduced.
The emergence of SHGs like Lijjat Papad.
Agricultural land is being converted to industrial and commercial use, putting a strain on the remaining agricultural land.
Agricultural export sectors have expanded significantly.
Food processing is becoming a 'Sunrise Industry.'
Industry Sector
The industry sector is also an important part of the Indian economy. Changes such as the end of the "Permit Raj" and the opening up of the economy were met with great enthusiasm and optimism in the country. As a result of these changes, the economy's industrial potential has increased since 1991.
The spread of industries, ranging from traditional iron and steel to jute and automobiles.
Independence in production, marketing, and distribution.
Red tapism has been reduced.
Encouragement of both domestic and foreign direct investment (FDI).
Using technology and the benefits of research and development to benefit the economy.
The emergence of investment models such as joint ventures, public-private partnerships, and multinational corporations (MNCs).
Private players were given the opportunity to enter previously monopolised sectors.
Food Processing Sector
'Make in India' has identified food processing as a high-growth, high-profit sector. India is considered to be a significantly appealing market for the sector because of the abundance of raw materials, resources, favourable regulatory measures, and numerous incentives. Indien, with a population of 1.3 billion people and an average age of 29, has a vast customer base. Food and beverage consumption in India is anticipated to grow from \[$\]369 billion to \[$\]1.14 trillion by 2025.
According to estimates, the food processing sector's output (at market prices) is predicted to expand to $958 billion in the same time span. In terms of food grain production, India is second only to China. On account of the increasing population density and a desire for packaged and processed foods in the country, there is enormous potential for growth in this sector in India.
Service Sector
The services sector benefited the most from the New Economic Policy. Banking, finance, BPO, and, most importantly, information technology services have all grown by double digits.
Indian IT behemoths like Infosys, WIPRO, and TCS have made their mark on the global stage.
The services sector contributes 60% of GDP;
India, with its huge demographic dividend potential, has emerged as the world's IT hub.
New job opportunities are being created in this sector.
The development of transportation, tourism, and medical sectors has resulted in the expansion of service sector competencies.
The RBI has evolved from a regulator to a facilitator.
Financial investment product diversification.
Greater penetration of services such as insurance, banking, and the stock market, among others.
Significant increase in foreign exchange reserves.
Manufacturing Sector
After the services sector, the manufacturing sector is India's second-largest contributor to GDP. Various government initiatives such as Make in India, MUDRA, Sagarmala, Startup India, Freight Corridors, and a wholehearted contribution from states will increase the manufacturing sector's share in the near future.
However, if India wants to increase its manufacturing share of GDP to around 25%, the industry will need to significantly increase its R&D spending. The amount of value-added must be increased at all levels, and the government must provide attractive remuneration to entice people to work in the manufacturing sector.
Money and Banking: A Few Details
Money is a widely used medium of exchange. Barter exchanges are economic transactions that do not involve the exchange of money. Barter exchanges become extremely difficult in large economies due to the high costs people would have to incur in order to find suitable people with whom to exchange their surpluses. Money is also a useful unit of account. The monetary value of all goods and services can be expressed. Money is non-perishable, and its storage costs are significantly lower. It is also suitable for anyone at any time. As a result, money can serve as a store of value for individuals. Other than money, any asset can serve as a store of value. For example - Real estate, precious metals, livestock, and stock.
There are primarily two reasons why people want to keep the money. The following are the reasons:
Transaction motive
Speculative motive
Banking
Money in a modern economy consists of cash and bank deposits. There are a variety of money measures depending on which forms of bank deposits are included. These are produced by a system that consists of two sorts of institutions: the economy's central bank and the commercial banking sector.
Central Bank
In a modern economy, the central bank is a vital institution.
A central bank exists in almost every country. In 1935, India established its first central bank. It is known as the ‘Reserve Bank of India.' The central bank serves several important purposes. It is in charge of issuing the country's currency. It regulates the country's money supply through a variety of means, including bank rates, open market operations, and changes in reserve ratios. It serves as the government's banker. It is the keeper of the country's foreign exchange reserves.
Commercial Banks
Commercial banks are another type of institution that is a part of the economy's money-creation system. They accept public deposits and lend a portion of the funds to those who wish to borrow. The interest rate paid by banks to depositors is lower than the interest rate charged by borrowers. The spread, or difference between these two types of interest rates, is the profit appropriated by the bank. Commercial banks act as intermediaries between individuals or businesses with excess funds and those in need of funds. People with excess funds can keep their funds in the form of bank deposits, while those in need can borrow funds in the form of home loans, crop loans, and so on.
Supply of Money
Money supply refers to the total stock of money in circulation among the general public at any given time. The country's central bank is solely responsible for supplying money to the market (Reserve Bank of India in case of India). The RBI prints money and distributes it to the economy. The Ministry of Finance mints coins, but the RBI distributes them throughout the country.
According to the RBI, there are four different measures of money supply: M1, M2, M3, and M4.
M1 = CU + DD
where,
CU - the currency held by the public
DD - the net demand deposits held by commercial banks
M2 = M1 + Post Office Savings Deposits.
M3 = M1 + Time Deposits with commercial banks.
M4 = M3 + Total deposits with Post Office savings organisations (excluding the National Savings Certificates).
M3 is the most commonly used money supply measure. It's also referred to as aggregate monetary resources.
If the value of any of its components, such as CU, DD, or Time Deposits, changes, the money supply will change.
FAQs on Indian Economy
1. What do you mean by monetary policy?
Monetary policy refers to the credit-control measures implemented by a country's central bank. In the case of the Indian economy, the Reserve Bank of India (RBI) is the sole monetary authority that determines the supply of money in the economy.
2. Define Commercial Banks.
Commercial banks play an important role in the country's Financial Institution System. Commercial banks are profit-making institutions that accept deposits from the general public and lend money (loans) to individuals such as households, entrepreneurs, and businessmen. The primary goal of these banks is to make money through interest, commissions, and other means. The Reserve Bank of India, India's central bank and supreme financial authority, regulates the operations of all commercial banks. A commercial bank's main source of income is the difference between the two rates it charges borrowers and pays depositors. Examples of Commercial banks of India are the State Bank of India, the Central bank of India, the Axis Bank, ICICI Bank, HDFC Bank, the Punjab national bank etc.
3. How are commercial banks classified?
The commercial banks are classified as Scheduled and Non-scheduled banks.
Scheduled Banks: Banks listed in the Second Schedule to the RBI Act of 1934. They are further classified as follows:
1. Public Sector Banks: These are banks in which the government owns the majority of the stock. For example, SBI, PNB, Syndicate Bank, Union Bank of India, and so on.
2. Private Sector Banks: These are banks in which private individuals own the majority of the stock. ICICI Bank, IDBI Bank, HDFC Bank, and so on.
3. Foreign Banks: Foreign banks are those that have their headquarters outside of the country in which they are located. Citibank, Standard Chartered Bank, Bank of Tokyo Ltd., and so on.
Non - Scheduled Banks: Non-scheduled commercial banks are those that are not listed in the Second Schedule of the RBI Act of 1934.
