Economics Compendium For RBI Grade B by Brajesh Mohan

ECONOMICS COMPENDIUM - RBI/NABARD ~BRAJESH MOHAN
Economics & Social Issue Compendium – RBI Grade B/NABARD

Welcome, aspiring RBI Grade B Officer! This compendium is designed to be your comprehensive guide to
the Economics and Social Issue syllabus of RBI Grade B, NABARD Grade A Exam, a crucial subject for
success in your upcoming exam.
Understanding the intricate workings of our economic system is not just essential for the exam, but also
equips you with a foundational knowledge for a rewarding career at the Reserve Bank of India. Cracking
the RBI Grade B, NABARD Grade A exam require a deep understanding of the Indian economy, particularly
its macroeconomic dimensions. This book is designed to be your one-stop guide for mastering this crucial
aspect of the exam. This book delves deep into the various components that make up the Indian Economic
System, providing you with a clear and concise explanation of each element.
Many aspiring RBI Grade B officers struggle with complex economic concepts and their application to the
Indian context. This book bridges that gap by presenting macroeconomic theory in a clear, concise, and
exam-oriented manner.
What's Inside?
• Comprehensive Coverage: We delve into core macroeconomic concepts like national income
accounting, inflation, unemployment, monetary policy, and fiscal policy. Each topic is explained with
real-world examples specific to the Indian economy, making it easier to grasp and retain
information.
• Exam Focus: This book is meticulously aligned with the RBI Grade B syllabus, ensuring you are well-
prepared for the specific topics tested. We provide focused discussions on relevant government
policies and their impact on the Indian economy.
• Up-to-date Information: This book incorporates the latest economic data and trends relevant to
India. Additionally, you'll find references to key economic surveys and reports from the Reserve Bank
of India (RBI) and other International Organization.
We'll begin by exploring the fundamental concepts and significance of various economic concepts. We'll
then delve into the other key areas of Economics and Social Issue Syllabus:
1. Growth and Development, Measurement of growth: National Income and per capita income
2. Poverty Alleviation and Employment Generation in India
3. Sustainable Development and Environmental issues
4. Industrial and Labour Policy
5. Monetary and Fiscal Policy
6. Role of Economic Planning, Economic Reforms in India since Independence
7. Balance of Payments
8. Globalization, Liberalization and Privatization: Opening up of the Indian Economy, Export-Import
Policy
9. International Economic Institutions: IMF and World Bank, WTO, Regional Economic Co-operation
10. Social Structure in India: Multiculturalism, Demographic Trends, Urbanization and
Migration, Gender Issues
11. Social Justice: Positive Discrimination in Favor of the underprivileged, Social Movements
The knowledge you gain from this book goes beyond clearing the RBI Grade B exam. It equips you with a
sound understanding of the Indian economy, empowering you to analyse economic issues critically and
confidently contribute to policy decisions in your future career.
So, let's embark on this journey together and unlock the complexities of the Indian Economy!
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Copyright:
© The Study Materials and its content shared part of this course are the copyright of Brajesh Mohan,
EduGrade Learning.
© All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or
transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning,
or otherwise, except as permitted under Section 52 of the Copyright Act, 1957 of India, without prior
written permission of Brajesh Mohan, EduGrade Learning.
No notes could be perfect or completely error, although tried best to keep it error but if you find error
or have feel something has been missed then Feel free to Contact me through Email or Telegram.
Index of Indian Economy

Ch - 1. Basics of Economics Ch - 5. Environmental Issue and Various
Programs for Environmental Protection
• What is Economics?
• Why do we study Economics? • Environmental Issues
• Branches of Economic - Micro and Macro • Earth Summit- 1992 or UNCED
• Economic System - Capitalism, Socialism • Agenda 21
and Mixed Economy • Convention on Biological Diversity
• Sectors of Economy - Primary, Secondary • Framework Convention on Climate
and Tertiary - External Sector - Foreign Change (UNFCCC) & CoP
Reserve • Climate Change Performance Index (CCPI)
• Nature of Indian Economy • Coalition for Disaster Resilient
Infrastructure (CDRI)
Ch - 2. Economic Growth, National Income
• International Solar Alliance (ISA)
Accounting and Human Development
• Environmental Movements
• What is Economic Growth • Various Programs for Environmental
• Circular Flow Income Protection
• Methods of Calculating National Income
Ch - 6. Sustainable Development Goals and
• National Income Accounting - GDP, GNP,
India
NDP, NNP
• Personal Income & Disposable • What is Sustainable Development
• Human Development - HDI, GDI & GII • UN Sustainable Development Goals
• SDG India Index
Ch - 3. Poverty, Inequality and Unemployment
• Programs launched by Govt for SDG
• What is Poverty and Its Types
Ch - 7. Monetary Policy and Its Tools
• Various Poverty Estimation Committee
• Multi-Dimensional Poverty Index (MPI) • Monetary Policy Framework in India
• Inequality In India - Causes and Measures • How RBI Controls Aggregate Demand &
• Gini Coefficient and Lorentz Curve Maintain Price Stability
• Unemployment and Its Types • Tools of Monetary Policy - Quantitative
and Qualitative
Ch - 4. Poverty Alleviation and Employment
• Monetary Policy Committee (MPC)
Generation Programs
• Inflation and Its types - CPI, WPI & IIP
• Poverty Alleviation Programs • Philip Curve - Unemployment and Inflation
• Employment Generation Programs • Types of Money, Money Multiplier
• National Social Assistance Program
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Ch - 8. Fiscal Policy and FRBM Act ✓ Current Status and Future

Prospects
• Fiscal Policy and Its Objective
• Public Finance (Not Covered)
• Tools of Fiscal Policy - Taxation and Public
• Political Economy (Not Covered)
Expenditure
• Goods and Service Tax (GST) Ch - 12. Opening Up of Indian Economy
• Various Budgetary Terms
• Globalization and Its Significance
• Budgetary Deficit - Fiscal, Revenue and
• Balance of Payment Crisis, 1991
Primary
• Economic Reforms of 1991 – LPG
• Fiscal Responsibility and Budget
• Foreign Direct Investment
Management (FRBM)
• New Disinvestment Policy
Ch – 9. Economic History of India
Ch - 13. Balance of Payment and Its
• Pre-British Era and Colonial Impact Application
• Economy at the Eve of Independence
• Concepts of Balance of Payment
• Economic Condition Under British Colonial
• Current, Capital and Financial Account
Period (1858-1947)
• Current Account Deficit & Trade Deficit
• Economic Development (1947 – 1991)
• Impact and Causes of Trade Deficit
• Economic Development (Since 1991)
• Currency Devaluation and Depreciation
• Planning in India: 5 Years Plans of India
• Current & Capital Account Convertibility
• NITI Aayog
• Internationalization of Rupee
Ch - 10. Changes in Industrial and Labour • Liberalized Remittance Scheme (LRS)
Policy • Foreign Trade Policy 2023
• Evolution of India's Industrial Policy Ch - 14. International Finance Institution

• Industrial Policy, 1991
• Breton Woods Conference
• Special Economic Zones (SEZs) & Its
• World Bank Group
Benefits
• International Monetary Fund
• MSME sector in India
• World Trade Organization
• PLI Scheme
• Regional Economic Co-operation
• Startup Ecosystem in India
✓ BRICS
Ch - 11. Indian Economy and Its Linkage ✓ SAARC
✓ BIMSTEC
• Indian Money and Financial Markets:
✓ G20
Linkages with the economy
✓ ASEAN
• Role of Indian banks and Reserve Bank in
✓ QUAD
the development process
✓ SCO
• Indian Agriculture
• Trade Agreements - FTA
✓ From Dependence to Self-
Sufficiency Ch - 15. Social Structure in India
✓ Characteristics/ Issues with
• Multiculturalism
Agriculture in India
• Demographic Trends
✓ Steps Taken to Increase Agricultural
• Urbanization and Migration
Production in India
• Gender Issues
• Services sector in India
• Social Justice: Positive Discrimination in
✓ Role And Significance of Service
Favor of the under privileged
Sector on Economy
*********
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Chapter - I. Basics of Economics

What is Economics, Its meaning and Definitions?
Economics is the science that deals with production, exchange and consumption of various commodities in
economic systems. It shows how scarce resources can be used to increase wealth and human welfare. The
central focus of economics is on the scarcity of resources and choices among their alternative uses.
In the meaning of economics, the term ‘Economics’ owes its origin to the Greek word ‘Oikonomia’, which
can be divided into two parts: oikos means home and nomos means management.
• Thus, in earlier times, economics was referred to as home management where the head of a family
managed the needs of family members from his limited income.
Till the 19th century, Economics was known as ‘Political Economy.’ The book named ‘An Inquiry into the
Nature and Causes of the Wealth of Nations’ (1776) usually abbreviated as ‘The Wealth of Nations’, by
Adam Smith is considered as the first modern work of Economics.
Economics Definition
Defining economics has always been a controversial issue since time immemorial. Definition of economics
by different economists have different viewpoints. Some economists had a viewpoint that economics deals
with problems, such as inflation and unemployment while others believed that economics is a study of
money,
Therefore, a simple definition of economics is defined by taking four definitions
I. Wealth Definition of Economics
This is a classical definition of economics by Adam Smith, who is also considered as the father of modern
economics.
• "Economics is the study of the nature and causes of nations’ wealth or simply as the study of
wealth."
o Key Features of Wealth economics definition
▪ The main objective of Economics is to gain maximum wealth as possible
▪ The core of economic activity: are production, distribution and consumption.
▪ It deals with the causes of the creation of wealth in an economy.
▪ The term ‘wealth’ used in this definition referred to material wealth.
• Criticism: Smith defined economics only in terms of wealth and not in terms of human welfare.
Ruskin and Carlyle condemned economics as a ‘dismal science’, as it taught selfishness which was
against ethics. However, now, wealth is considered only to be a mean to end, the end being the
human welfare. Hence, wealth definition was rejected and the emphasis was shifted from ‘wealth’ to
‘welfare’.
II. Welfare Definition of Economics
It is a neo-classical definition of economics by Alfred Marshall.
• "It is the study of mankind in the ordinary business of life. It enquires how he gets his income and
how he uses it. In one view, it is a study of wealth and on other hand it is part of study of man."
o Key features of Welfare economics definition
▪ It defines Economics as the study of activities related to a human being and their
material welfare.
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▪ Marshall clarified that Economics is related to incomes of individuals and its uses for
creating material welfare.
▪ Collectively incomes of a group of individuals form the wealth of a nation and
ultimate goal is to increase welfare of individual by their routine activities.
• Criticism:
o Marshall considered only material things. But immaterial things, such as the services of a
doctor, a teacher and so on, also promote welfare of the people.
o Marshall makes a distinction between (i) those things that are capable of promoting welfare
of people and (ii) those things that are not capable of promoting welfare of people. But
anything, (E.g.) liquor, that is not capable of promoting welfare but commands a price,
comes under the purview of economics.
o Marshall’s definition is based on the concept of welfare. But there is no clear-cut definition of
welfare. The meaning of welfare varies from person to person, country to country and one
period to another. However, generally, welfare means happiness or comfortable living
conditions of an individual or group of people. The welfare of an individual or nation is
dependent not only on the stock of wealth possessed but also on political, social and cultural
activities of the nation.
III. Scarcity Definition of Economics
• It is a pre-Keynesian definition of economics by robbins in his book ‘Essays on the Nature and
Significance of the Economic Science’ (1932).
• "Economics is a science which studies human behaviour as a relationship between ends and scarce
means which have alternative uses."
o Key features of Scarcity economics definition
▪ It recognized that Economics is a science deal with the economic behaviours of a
human being.
▪ It also focuses on optimum utilisation of scarce resources.
▪ It provides three basic features of human existence, which are unlimited wants,
limited resources, and alternative uses of limited resources
▪ There is a need for efficient use of scarce resources, and the primary objective of
Economics is to ensure efficiency in the use of resources with a purpose to satisfy
human wants.
• Criticism: In economics, we not only study the micro economic aspects like how resources are
allocated and how price is determined, but we also study the macroeconomic aspect like how
national income is generated. But Robbins has reduced economics merely to theory of resource
allocation. Robbins definition does not cover the theory of economic growth and development.
III. Growth Definition of Economics
This is the modern perspective definition of economics by Paul Samuelson. He provided the growth-
oriented definition of economics.
• "Economics is the study of how man and society choose with or without the use of money to
employ the scarce productive resources, which have alternative uses, to produce various
commodities over time and distributing them for consumption, how or in the future among various
person or groups in society."
o Key features of Growth economics definition
▪ It deals with the allocation of scarce resource to be used in productive purposes.
▪ The selection of the most efficient use of the resources from alternative ways.
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▪ The growth of economies will depend upon the consumption and production in the
economy.
▪ This definition also points towards Economics as a study of an economic system.
• Of all the definitions discussed above, the ‘growth’ definition stated by Samuelson appears to be the
most satisfactory. However, in modern economics, the subject matter of economics is divided into
main parts, viz., i) Micro Economics and ii) Macro Economics.
Economics is, therefore, rightly considered as the study of allocation of scarce resources (in relation to
unlimited ends) and of determinants of income, output, employment and economic growth.
UNLIMITED WANTS AND LIMITED MEANS
The starting point of economics is human wants, needs and desires. Human beings living in any society at
any stage of historical development of that society have wants and needs. Some of these needs like the
need for food, clothing, shelter are biological in character, needed to sustain life in this universe. The origin
of needs is, therefore, biological. However, the majority of human needs arise from the fact that people live
together in a society. It is the existence of human society, which accounts for a large chunk of our needs.
Such needs are determined by a complex set of factors called the culture of a given society. Even biological
needs (like food) are also influenced by the culture of the society at any particular stage of historical
development of that society. Hence, we find that the origin of needs is the biological necessity of sustaining
life, while the existence of human society would determine its form, nature, and structure. One important
characteristic of human wants is that they keep on occurring again and again. For instance, eating
something may satisfy one’s hunger for the moment but after some time, one has to eat again.
Now people would like to see their needs, wants, desires, aspirations to be realised and it is towards this
realisation that human activities are directed. Economics is concerned with human (individual, collective)
goals, objectives, ends to be achieved and realised through the use of certain means or resources at their
disposal. For instance, if you want to have a cold drink, you have to have purchased power to buy it. To
produce wheat, you must have a piece of land, seeds, fertiliser and irrigation water. To build a house you
need bricks, cement and steel, glasses, woods etc.
In these examples can you identify the objectives (ends) and the means (resources)? Consider another
example: you might drive your car with the objective of getting to work; you might go to work with the
objective of earning money (purchasing power); and you might earn money because you have the objective
of buying a new car. From these it is clear that to realise goals, objectives, ends, one requires means or
resources.
SCARCITIES AND CHOICE
Recall that Robbins’ definition stresses the fact that means which human beings use to satisfy their wants or
fulfil their needs are scarce. But then one can ask what is so important about scarcity? In economics scarcity
has to be understood in the relative sense, the scarcity of means in relation to ends. It is the imbalance
between ends and means (whether to an individual or to a society) that gives rise to scarcity and hence an
economic problem. Here we must point out another aspect of Robbins’ definition. The means that one uses
to satisfy needs are not specific to any particular end. The means have alternative uses. They may be
employed (at least potentially) to attain any one of a number of ends.
For instance, while writing this piece, I have so far used up about one hour of my precious time. Time
represents a general means and each one of us is allocated only a fixed amount (24 hours a day or 60 years
of life on an average). If I was not writing this unit, I might have used my time in some other ways - I might
have gone to the library to read a new book on Micro-Economics, or I might have gone to a book shop to
scan the latest arrivals, or I might have just watched television in the hope of being entertained and
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educated on the latest trend in the movie world. Well, the alternative use of time (means) is endless. One
can go on expanding the list. However, the point is clear, any scarce means have more than one-way of
using them. Hence, a meaningful choice exists. Once you have committed your resources to one use
(towards achieving a particular end) you deny yourself the benefits, which you could have got, if you had
used the same resources to achieve some other end. Economics not only deals with scarcity but also helps
us to exercise meaningful choices, since scarce means can be put to alternative uses. For instance, if you
spend your income on bread and butter, you forfeit the opportunity to spend your income on fruits and ice
creams; if the economy uses oil to energise power plants, the same oil cannot be used to run locomotives; if
you use your time to study economics, you cannot at the same time doing a job and earning an income.
“Herein lies the essence of economics. Economics exists when the resources of an individual or group are
insufficient to meet all the demands, objectives of that individual or group at the same time. Economics is
concerned with the choices that people make about how best to employ a scarce resource - if scarcity does
not exist than neither does economics. Note too, that it is not necessary, as sometimes thought, to assume
that human wants are `unlimited’ or `infinite’. Possibly they are; the question of whether this is true could
make an interesting research topic. All that is required for an economic problem to exist is for scarcity to
exist - that is for ends to exceed means”.
Nature of Economics
Similar to the economics definition, there are a number of controversial issues related to its nature of
economics. Some economists consider economics as a science, or economics as a social science while
others have a believe economics as an art.
• Economics as a Science
• Economics as an Art
• Economics as a social science
I. Economics as a Science
A subject is considered science if:
• It is a study of the relationship between cause and effect.

• It is capable of measurable and based on facts.
• It has its own methodological apparatus.
• It should have the ability to forecast.
After being analysed, economics has all the features of science.
• Like science, it has a cause-and-effect relationship between economic phenomena.

• For instance, Law of demand explains the cause-and-effect relationship between price and quantity
demanded a commodity.
• Similarly, the outcomes are measurable in terms of money.
• It has its own methodology of study (induction and deduction).
• It forecasts the future market condition with the help of various statistical and non-statistical tools.
o Thus, a majority of economic laws are of this type and therefore, economics as a
science.
Critics: Economics as a science but not a perfect science like physical science. The fact is that we cannot rely
upon the accuracy of the economic laws. The predictions made on the basis of economic laws can easily go
wrong. In other words, the subject matter of economics is the economic behaviour of man which is highly
unpredictable.
II. Economics as an Art
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Chapter - 2. Economic Growth, National Income Accounting and

Human Development
What is Economic Growth?
• Economic growth can be defined as an increase in the value of goods and services produced in an
economy over a period of time. This value calculation is done in terms of % increase in GDP or Gross
Domestic Product.
o Process of economic growth is essentially a dynamic concept and refers to a continuous
expansion in level of output, i.e. it refers to forces that generate a positive rate of change
over time and not the forces that lead to discrete (or one shot) change from a lower to
higher level of output which are temporary and short lived.
Factors influencing Economic Growth
• Human resources – this is a major factor that is responsible for boosting the economic growth of a
country. The rate of increase in the skills and capabilities of a workforce ultimately increases the
economic growth of a country.
• Infrastructure development- Improvements and increased investment in physical capital such as
roadways, machinery, and factories will increase the efficiency of economic output by reducing the
cost.
• Planned utilization of natural resources – Proper use of available natural resources like mineral
deposits helps boost the productivity of the economy.
• Population growth – An increase in the growth of the population will result in the availability of
more human resources which in turn will increase the output in terms of quantity. This is also an
important factor that influences economic growth.
• Advancement in technology – Improvement in technology will affect the economic growth of a
country positively. The application of advanced technology will result in increased productivity of
labor and economic growth will advance at a lower cost.
Benefits of Economic Growth
• Higher Standards of Living: Economic growth leads to increased income levels, improved living
standards, and better access to goods and services for the population, although not uniform.
• Job Creation: Growing economies create more job opportunities, reducing unemployment rates.
• Reduced Poverty: Expanding the economy usually results in a reduction in poverty levels, driven by
greater job prospects and enhanced income distribution.
• Funding Public Services: Economic growth leads to greater tax revenue, which can be directed
toward financing vital public services like healthcare, education, and infrastructure development.
Challenges Associated with Economic Growth
• Environmental Impact: Rapid growth can strain natural resources, contribute to pollution, and
harm the environment.
• Income Inequality: While overall wealth increases, disparities between rich and poor may widen if
not addressed through appropriate policies.
• Inflation: High growth rates can lead to inflation if not managed properly by central banks.
• Resource Depletion: Over Reliance on finite resources can be unsustainable in the long term.
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What is Economic Development?
• Development is any improvement in the standard of living of people in a specific country. Social and
economic indicators are used to measure a country’s level of development. Economic development
is the growth of the standard of living of a nation's people from a low-income (poor) economy to a
high-income (rich) economy.
o Economic development is a combination of market productivity and the welfare values of the
nation.
o Economic Development = Economic Growth + Increased Standard of Living
Factors Affecting Economic development
• Infrastructural improvement – Development in the infrastructure improves the quality of life of

people. Therefore, an increase in the rate of infrastructural development will result in the economic
development of a nation.
• Education – Improvement in literacy and technical knowledge will result in a better understanding of
the usage of different equipment. This will increase labor productivity and in turn, will result in the
economic development of a nation.
• Increase in the capital – Increase in capital formation will result in more productive output in an
economy and this will affect the economic development positively.
Various Aspects of Development
There are various aspects that root out from development. Some of them are discussed here.
I. Social Development
• Social development is about putting people at the centre of development. This means a
commitment that development processes need to benefit people. The way people interact in groups
and society, and the norms that facilitate such interaction, shape development processes. Social
development, thus implies the change in social institutions.
• Formal institutional reform – for example, the provision of legally enshrined rights, better law
enforcement, or more participatory governance – are part of the process by which institutional
change is achieved. The indices of social development focus on measuring the informal social
institutions, how they compare across countries, and how these change over time. They are:
o Civic activism
o Interpersonal safety and trust
o Clubs and associations
o Gender equality
o Inter-group cohesion
• The World Bank supports social development by listening to the poor people and promoting their
voices in the development process; understanding and addressing their needs, priorities and
aspirations, and building formal and informal institutions.
II. Economic Development
Economic development is the process whereby simple, low-income national economies are transformed
into modern industrial economies. Economic Development creates the conditions for economic growth and
improved quality of life by expanding the capacity of individuals, firms, and communities to maximize the
use of their talents and skills to support innovation, lower transaction costs, and responsibly produce and
trade valuable goods and services.
III. Human Development
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• The human development approach, developed by the economist Mahbub ul Haq, is anchored in
Amartya Sen’s work on human capabilities, often framed in terms of whether people are able to “be”
and “do” desirable things in life. Examples include:
o Beings: Well fed, sheltered, healthy
o Doings: Work, education, voting, participating in community life.
o Freedom of Choice is Central: Someone choosing to be hungry (during a religious fast say) is
quite different to someone who is hungry because they cannot afford to buy food.
• These ideas helped pave the way for the human development approach, which is about expanding
the richness of human life, rather than simply the richness of the economy in which human beings
live. It is an approach that is focused on creating fair opportunities and choices for all people.
• Three foundations of human development are:
o To live a healthy and creative life,
o To be knowledgeable,
o To have access to the resources needed for a decent standard of living
• Specific Measures
o Human Development Index (HDI): Combines life expectancy, mean years of schooling, and
gross national income (GNI) at PPP.
o Inequality-adjusted HDI (IHDI) - The Inequality-adjusted HDI adjusts the Human
Development Index (HDI) for inequality in the distribution of each dimension across the
population.
o Gender Development Index (GDI) - Introduced in Human Development Report 1995, Gender
related Development Index or the GDI measures gender gaps in human development
achievements by accounting for disparities between women and men in the same
dimensions and using the same indicators as the HDI.
o Note: We will study measurement of Human Development in the end of this chapter.
Growth vs. Development
• The terms Growth and Development are often used interchangeably in various aspects of life.
However, there are several significant differences between the two. Following are some of the few
key differences:
o Growth simply refers to ‘expansion’ or ‘getting bigger’, whereas development is
‘improvement’.
o Growth is termed as a physical change, whereas development is said to be physical as well as
social and psychological change.
o While growth is related to quantitative improvement, development is related to quantitative
as well as qualitative improvement.
o Growth can be perceived and can be measured accurately, whereas development cannot
necessarily be perceived on average and cannot be measured accurately.
o Economic Growth can be measured by an increase in a country’s GDP. The most accurate
method of measuring development is the Human Development Index, which takes into
account the literacy rates, life expectancy and per capita income.
Parameter Economic Growth Economic Development

Concept It is the positive change in the indicators It is the quantitative and qualitative change in
of economy. an economy.
Factors Growth relates to a gradual increase in Development relates to growth of human
one of the components of Gross capital, decrease in inequality figures, and
Domestic Product: consumption, structural changes that improve the quality of
life of the population.
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government spending, investment, net

Exports.
Impact It refers to the increment in amount of It refers to the reduction and elimination of
goods and services produced by an poverty, unemployment and inequality with
economy. the context of growing economy.
Focus This focuses on production of goods and This focuses on distribution of resources.
services.
Measurement Economic Growth is measured by The qualitative measures such as HDI, gender-
quantitative factors such as increase in related index, Human poverty index (HPI),
real GDP or per capita income. infant mortality, literacy rate etc. are used to
measure economic development.
Relevance It reflects the growth of national or per It reflects progress in the quality of life in a
capita income country.
Time Frame It is for short term/short period. It is It is a continuous and long-term process.
measured in certain time frame/period. Economic development does not have specific
time period to measure.
Interaction Economic growth is an automatic Economic development requires intervention
process that may or may not require from the government as all the developmental
intervention from the government policies are formed by the government
Expectations It is not concerned with happiness of It is concerned with happiness of public life.
public life
Application Economic growth is more relevant metric More relevant to measure progress and
for assessing progress in developed quality of life in developing countries.
countries.
WHY STUDY THE PROCESS OF ECONOMIC GROWTH?
o What is it about the economic growth that we need to spend so much time in studying the
economic growth process in details? There could be various reasons for doing so. Some of the
important ones are as follows:
o It enables us to gain a better understanding of an important historical process. For instance, we may
want to understand
o Why Britain was the first country to industrialise? Or
o Why even after having the head start Britain has fallen behind the United States, Germany
and Japan and, more recently, to many other west European countries?
o Why economic growth has been concentrated in the relatively small part of the world
economy of Western Europe, North America and parts of Asia?
o What were the reasons for rapid economic growth of the East and South East Asian
economies for almost three decades and what about China in last two decades – that seems
to have outshined all previous growth experiences and showing no signs of slow down?
▪ Economic theory of growth is essential for answering all these questions though it
may not be sufficient. This is because the growth theory has not developed
adequately to explain some important phenomenon like technical progress or the
welfare consequences of growth.
o It may also be because the historical experience of each of the economy has some unique
characteristics which involve forces some of which may not be possible to duplicate in another
economy. Economic theory, in these circumstances, can suggest some hypotheses while rejecting
the others, as to why growth occurs at different rates at different times across countries.
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• National income figures support governments in preparation, policy making, preparation of budgets
and estimating the level of economic activity.
• Formulation of Economic Policies: National income statistics are valued instruments of economic
analysis and a controller to economic strategies to be followed. It is more useful in context of
planning and formulation of accurate plans.
• Studying Economic Structure: It gives an idea of the structure of the economy. It benefits to make
inter-sectoral contrasts and to study the rate of development of the economy. The development of
national income is a key of the growth of the creative capacity of an economy.
• Inter-sectoral Comparisons: It supports to study inter-sectoral growth. Such associations are useful.
Share of numerous sectors can be calculated to find out structural defects and faults of the
economy.
• Indicator of Economic Welfare: It enables us to study per capita income or per capita drinking
which are overall displays of economic growth. But it is not co-operative in revealing distribution of
income in the society.
• Making International Comparisons: National income approximations allow us to mark
international comparisons and standard of living of people.
• Contribution to International Institutions: It displays the capability of a republic to bear certain
common weight of global institutions like the U.N.O.
Factor Cost
• Factor cost refers to the total cost incurred in the production of goods and services. It includes the
actual costs of production, such as wages, rent, interest, and raw materials. Factor cost excludes
indirect taxes (such as sales tax or value-added tax) and includes subsidies.
Market Price
• Market price refers to the price at which goods and services are actually bought and sold in the
market. It includes the cost of production as well as any applicable taxes and subsidies. Market
price reflects the value of the final goods and services when they are purchased by consumers.
MEASUREMENT AND INDICATORS OF ECONOMIC GROWTH AND DEVELOPMENT
I. Gross Domestic Product (GDP): It is the market value of all the final goods and services produced within
a domestic territory in a financial year by a normal resident.
• Simon Kuznets, an economist at the National Bureau of Economic Research, initially proposed the
concept of GDP in a report to the United States Congress in response to the Great Depression.
• Domestic Territory = Political frontiers of the country including its territorial waters+
Embassies/Consulates + Military Establishments of the country abroad + Ships/Aircrafts/Fishing
Vessels/Oil Rigs belonging to the residents of the country
• GDP does not include:
o Capital goods (e.g. machinery) are included in GDP, but intermediate goods (e.g. raw
materials) are not. Intermediate goods and services are not included to avoid double
counting. Same good can be final (you consuming milk ) or intermediate (milk in the
restaurant) depending on the usage.
GDP at Factor Cost = Market Value of Final Goods and Services – Indirect Taxes + Subsidies
GDP at Market Price = GDP at Factor Cost + Indirect Taxes – Subsidies
Gross Domestic Product and Gross Value Added (GVA): According to the RBI, the GVA of a sector is
defined as the value of output minus the value of its intermediary inputs. This “value added” is shared
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among the primary factors of production, labour and capital. GVA calculates the national income from the
supply side.
GDP = GVA + (Net Taxes Earned by the Government) — (Net Subsidies provided by the Government)
Significance of GDP:
• Important Metric: GDP is often recognized as the most essential of the metrics used by economists
throughout the globe to determine an economy's growth.
• Performance Indicator: It is a crucial criterion for assessing an economy's performance and a vital
determinant in influencing the economy's development.
• Investment Indicator: GDP and GDP growth rate is an important indicator used by investors
throughout the world, while making investment decisions.
• Policy Making: GDP data is used by governments and central banks in policy making.
Limitations of GDP
• Inclusivity: Non-market transactions are not included in GDP. It is unable to determine if a country's
growth is sustainable.
• Environmental Factors: It ignores the influence on human health and the environment that may
develop as a result of the output's creation or use as externalities.
• Other Aspects: It cannot measure normative aspects like social justice, happiness, political freedom
etc.
• Wealth Distribution: GDP gives information about overall economic activity but it fails to record the
distribution of wealth/income in the economy.
GDP CALCULATION IN INDIA

• The government switched to a new base year of 2011-12 for national accounts in January 2015,
replacing the previous base year of 2004-05.
• The then Central Statistics Office (CSO) (now National Statistical Office) discontinued GDP at factor
cost and embraced the worldwide practice of GDP at market price and the Gross Value Addition
(GVA) measure.
• The new database is also much more comprehensive, covering financial institutions as well as
regulatory bodies like SEBI, PFRDA, and IRDA.
• The newer system uses data from MCA 21 (MCA 21 is a Ministry of Corporate Affairs e-
governance initiative that was launched in 2006 and allows firms/companies to electronically file
their financial results).
ALTERNATIVES TO GDP CALCULATION:

• Various Indices: Indicators like the human poverty index, the Infant Mortality Rate, the Maternal
Mortality Rate, the Happiness Index, and so on, can be used to measure Economic Development.
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• Economic Development: In contrast to economic growth, economic development looks at both

the quality and size of changes in the economy.
• The following are ways to measure the Development of the Economy:
• Green GDP:
o Green GDP - also known as Environmentally adjusted domestic Product is with regards to
the environmental damage in calculation of GDP.
o It is calculated by accounting for net natural capital consumption (includes environmental
degradation; depletion of resources and protection initiatives) in the national income.
o It helps find a sustainable GDP.
• Challenges of Green GDP:
o Possibility that calculations may rely on speculation or hypothetical assumptions.
o Particular difficulty in cases where the environmental asset does not exist in a traditional
market and is therefore non-tradable.
o Some of the natural resources exist beyond the national boundaries (e.g. High seas) -
accounting for the same is difficult.
o The calculation of Green GDP resulted in a figure lower than conventional GDP, which
resulted in resistance from local governments e.g. China discontinued focussing on Green
GDP in 2004, after resistance from local and regional governments.
• Human Capital Index: The Human Capital Index tries to be a tool that helps people understand
how complicated education, jobs, and the workforce are so that they can make better choices
II. NDP (Net Domestic Product)
NDP is derived from GDP by subtracting the value of depreciation or the wear and tear of capital goods
(such as machinery, buildings, and equipment) during the production process. NDP provides a measure of
the net value added by the economy after accounting for the replacement or renewal of depreciated
capital.
• NDP at Factor Cost = GDP at Factor Cost – Depreciation

• NDP at Market Price = GDP at Market Price – Depreciation
III. GNP (Gross National Product)
GNP measures the total value of all final goods and services produced by the residents of a country,
regardless of their location, within a specific time period. It includes the domestic production of goods and
services as well as the net income earned from abroad by residents of the country, such as profits, wages,
and salaries generated by overseas investments.
• GNP at Factor Cost = GDP at Factor Cost + Net Income from Abroad – Depreciation
• GNP at Market Price = GNP at Factor Cost + Indirect Taxes – Subsidies
IV. NNP (Net National Product)
NNP is derived from GNP by subtracting the value of depreciation. Similar to NDP, NNP represents the net
value added by the economy after accounting for the depreciation of capital goods. It provides a measure
of the nation’s net income and output.
• NNP at Factor Cost = GNP at Factor Cost – Depreciation

• NNP at Market Price = NNP at Factor Cost + Indirect Taxes – Subsidies.
Difference between GNP and NNP
Aspect GNP (Gross National Product) NNP (Net National Product)
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Definition Total value of goods and services Net value added by residents after
produced by residents, regardless of their accounting for depreciation, both
location. domestically and from abroad.
Components Domestic production and net income Domestic production and net income
earned from abroad. earned from abroad.
Depreciation Not explicitly accounted for. Deducted to calculate the net value added.
Indirect Taxes Excludes indirect taxes. May include indirect taxes.
Subsidies May exclude subsidies. May include subsidies.
Perspective Measures income generated by a Measures net value added by a country’s
country’s residents. residents.
Economic Reflects the economic activities of Reflects the net income and value added
Focus residents regardless of where they are by residents, accounting for depreciation.
located.
Some Other Useful Terms
Domestic Income:
• Income generated (or earned) by factors of production within the country from its own resources is
called domestic income or domestic product.
• Domestic income includes:
o Wages and salaries, (ii) rents, including imputed house rents, (iii) interest, (iv) dividends, (v)
undistributed corporate profits, including surpluses of public undertakings, (vi) mixed
incomes consisting of profits of unincorporated firms, self- employed persons, partnerships,
etc., and (vii) direct taxes.
• Since domestic income does not include income earned from abroad, it can also be shown as:
o Domestic Income = National Income-Net income earned from abroad. Thus, the difference
between domestic income f and national income is the net income earned from abroad. If
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we add net income from abroad to domestic income, we get national income, i.e., National
Income = Domestic Income + Net income earned from abroad.
• But the net national income earned from abroad may be positive or negative. If exports exceed
import, net income earned from abroad is positive. In this case, national income is greater than
domestic income. On the other hand, when imports exceed exports, net income earned from abroad
is negative and domestic income is greater than national income.
Private Income:
• Private income is income obtained by private individuals from any source, productive or otherwise,
and the retained income of corporations. It can be arrived at from NNP at Factor Cost by making
certain additions and deductions.
• The additions include transfer payments such as pensions, unemployment allowances, sickness and
other social security benefits, gifts and remittances from abroad, windfall gains from lotteries or
from horse racing, and interest on public debt. The deductions include income from government
departments as well as surpluses from public undertakings, and employees’ contribution to social
security schemes like provident funds, life insurance, etc.
o Thus, Private Income = National Income (or NNP at Factor Cost) + Transfer Payments +
Interest on Public Debt — Social Security — Profits and Surpluses of Public Undertakings.
Personal Income:
• Personal income is the total income received by the individuals of a country from all sources before
payment of direct taxes in one year. Personal income is never equal to the national income, because
the former includes the transfer payments whereas they are not included in national income.
• Personal income is derived from national income by deducting undistributed corporate profits,
profit taxes, and employees’ contributions to social security schemes. These three components are
excluded from national income because they do reach individuals.
• But business and government transfer payments, and transfer payments from abroad in the form of
gifts and remittances, windfall gains, and interest on public debt which are a source of income for
individuals are added to national income.
o Thus, Personal Income = National Income – Undistributed Corporate Profits – Profit Taxes –
Social Security Contribution + Transfer Payments + Interest on Public Debt.
• Personal income differs from private income in that it is less than the latter because it excludes
undistributed corporate profits.
o Thus, Personal Income = Private Income – Undistributed Corporate Profits – Profit Taxes.
Disposable Income:
• Disposable income or personal disposable income means the actual income which can be spent on
consumption by individuals and families. The whole of the personal income cannot be spent on
consumption, because it is the income that accrues before direct taxes have actually been paid.
Therefore, in order to obtain disposable income, direct taxes are deducted from personal income.
o Thus, Disposable Income=Personal Income – Direct Taxes.
• But the whole of disposable income is not spent on consumption and a part of it is saved. Therefore,
disposable income is divided into consumption expenditure and savings.
o Thus, Disposable Income = Consumption Expenditure + Savings.
• If disposable income is to be deduced from national income, we deduct indirect taxes plus subsidies,
direct taxes on personal and on business, social security payments, undistributed corporate profits
or business savings from it and add transfer payments and net income from abroad to it.
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o Thus, Disposable Income = National Income – Business Savings – Indirect Taxes + Subsidies –
Direct Taxes on Persons – Direct Taxes on Business – Social Security Payments + Transfer
Payments + Net Income from abroad.
Real Income:
• Real income is national income expressed in terms of a general level of prices of a particular year
taken as base. National income is the value of goods and services produced as expressed in terms of
money at current prices. But it does not indicate the real state of the economy.
• It is possible that the net national product of goods and services this year might have been less than
that of the last year, but owing to an increase in prices, NNP might be higher this year. On the
contrary, it is also possible that NNP might have increased but the price level might have fallen, as a
result national income would appear to be less than that of the last year. In both the situations, the
national income does not depict the real state of the country. To rectify such a mistake, the concept
of real income has been evolved.
• In order to find out the real income of a country, a particular year is taken as the base year when the
general price level is neither too high nor too low and the price level for that year is assumed to be
100. Now the general level of prices of the given year for which the national income (real) is to be
determined is assessed in accordance with the prices of the base year. For this purpose the following
formula is employed.
o Real NNP = NNP for the Current Year x Base Year Index (=100) / Current Year Index
▪ Suppose 1990-91 is the base year and the national income for 1999-2000 is Rs.
20,000 crores and the index number for this year is 250. Hence, Real National Income
for 1999-2000 will be = 20000 x 100/250 = Rs. 8000 crores. This is also known as
national income at constant prices.
Per Capita Income:
• The average income of the people of a country in a particular year is called Per Capita Income for
that year. This concept also refers to the measurement of income at current prices and at constant
prices. For instance, in order to find out the per capita income for 2001, at current prices, the
national income of a country is divided by the population of the country in that year.
o
• Similarly, for the purpose of arriving at the Real Per Capita Income, this very formula is used.
o
o This concept enables us to know the average income and the standard of living of the
people. But it is not very reliable, because in every country due to unequal distribution of
national income, a major portion of it goes to the richer sections of the society and thus
income received by the common man is lower than the per capita income.
Nominal and Real GDP:
• When GDP is measured on the basis of current price, it is called GDP at current prices or nominal
GDP. On the other hand, when GDP is calculated on the basis of fixed prices in some year, it is called
GDP at constant prices or real GDP.
• Nominal GDP is the value of goods and services produced in a year and measured in terms of
rupees (money) at current (market) prices. In comparing one year with another, we are faced with
the problem that the rupee is not a stable measure of purchasing power. GDP may rise a great deal
in a year, not because the economy has been growing rapidly but because of rise in prices (or
inflation).
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• On the contrary, GDP may increase as a result of fall in prices in a year but actually it may be less as
compared to the last year. In both 5 cases, GDP does not show the real state of the economy. To
rectify the underestimation and overestimation of GDP, we need a measure that adjusts for rising
and falling prices.
• This can be done by measuring GDP at constant prices which is called real GDP. To find out the real
GDP, a base year is chosen when the general price level is normal, i.e., it is neither too high nor too
low. The prices are set to 100 (or 1) in the base year.
GDP Deflator:
• GDP deflator is an index of price changes of goods and services included in GDP. It is a price index
which is calculated by dividing the nominal GDP in a given year by the real GDP for the same year
and multiplying it by 100. Thus,
What is the potential GDP?
The potential Gross Domestic Product (GDP) refers to the highest level of output (goods and services) that
an economy can produce without generating inflation.
It is a theoretical concept that represents the maximum level of output that an economy can achieve in the
long run, given its available resources, technology, and potential for growth.
The potential Gross Domestic Product (GDP) is determined by several key factors, including:
• Labor force: The size and quality of the labor force is one of the most important determinants of
potential GDP. A growing and well-educated labor force can increase the economy's potential for
growth and productivity, while a declining labor force can limit the economy's potential for growth.
• Capital stock: The amount of physical capital, such as buildings, machines, and equipment, in an
economy affects the economy's potential for growth. The accumulation of capital can increase the
potential for productivity and output, while a lack of investment in capital can limit the economy's
potential for growth.
• Technological progress: Technological advancements can increase the potential for growth and
productivity by improving the efficiency of production processes, increasing the quality of goods
and services, and reducing the cost of production.
• Natural Resources: The availability of natural resources, such as land, minerals, and energy, can
impact the economy's potential for growth. If these resources are abundant and easily accessible,
the economy's potential for growth can increase, while a lack of resources can limit the potential for
growth.
• Economic Structure: The composition of an economy's industries and the distribution of economic
activity can impact the economy's potential for growth. For example, if an economy has a strong
manufacturing sector, it may have a higher potential for growth than an economy that relies heavily
on agriculture or services.
• Policy environment: Government policies, such as tax and regulatory policies, can also impact the
economy's potential for growth. Policies that support investment and innovation can increase the
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potential for growth, while policies that stifle investment and innovation can limit the potential for
growth.
• Demographic factors: Demographic factors, such as population growth, aging, and migration, can
also impact the economy's potential for growth. For example, a rapidly aging population can limit
the potential for growth by reducing the size of the labor force, while a growing and youthful
population can increase the potential for growth.
There are several factors that have constrained India in achieving its potential Gross Domestic
Product (GDP) growth:
• Lack of Infrastructure: India faces significant infrastructure challenges, including inadequate and
inefficient transportation systems, energy shortages, and limited access to modern communication
and technology. These constraints limit the country’s ability to attract investment, increase
productivity, and stimulate economic growth.
• Regulatory Environment: India’s complex and bureaucratic regulatory environment has been a major
constraint to the country’s economic growth. Corruption remains a persistent challenge in India,
affecting the delivery of public services, the business environment, and economic growth.
• Low investment: India has a low savings rate, which has contributed to low levels of investment and
has hindered the growth of the capital stock.
• Agricultural productivity: Despite being one of the world’s largest agricultural producers, India’s
agricultural sector is characterized by low productivity, outdated technology, and poor
infrastructure.
• Education, health and skill development: Though India enjoys a favourable demographic dividend,
the population lacks skill and education necessary for the dividend to become an asset rather than a
liability. It has also led to a shortage of skilled workers and a mismatch between the skills of the
workforce and the needs of the economy.
What is Inclusive Growth?
Inclusive growth is economic growth that creates opportunity for all segments of the population and
distributes the dividends of increased prosperity, both in monetary and non-monetary terms, fairly across
society - OECD.
• 11th Five Year Plan (2007-12) laid special emphasis on Inclusive Growth for the first time. It was later
carried forward by the 12th Five Year Plan.
ELEMENTS OF INCLUSIVE GROWTH:
• Employment Generation: Generation of stable employment is a sign of political, economic and

social progress.
• Poverty Alleviation: To be inclusive of all sections of society, the most vulnerable, poverty-stricken
individuals have to be brought above the poverty line.
• Skill Development: Skill development enables an individual to increase his or her choices in life
such as educational scope or career development.
• Agriculture and Industrial Development: Around 50-55% of people in India have agriculture-
related employment but its contribution to the Indian GDP is only 16.5% which leads to widespread
poverty.
• Good Governance: Measured by the eight factors of Participation, Rule of Law, Transparency,
Responsiveness, Consensus Oriented, Equity and Inclusiveness, Effectiveness and Efficiency, and
Accountability helps in inclusive growth of the economy.
• Access to Essential Services: Such as basic health, education, defense services, sanitation etc.
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• Economic Growth: The target of becoming a $ 5 trillion economy by 2026-27 can allow India to
reduce inequality, increase social expenditure and provide employment to all.
• Social Development: It means the empowerment of all marginalised sections of the population like
SC/ST/OBC/Minorities, women and transgenders.
• Financial Inclusion: Financial inclusion is necessary for inclusive growth as it leads to the culture of
saving, which initiates a virtuous cycle of economic development.
• Energy Security: According to the International Energy Agency (IEA), energy security means
uninterrupted availability of energy sources at an affordable price. It is important to ensure the
availability, affordability and accessibility of energy.
• Access to Justice for All: Access to justice for all means the ability of people to seek and obtain a
remedy through formal or informal institutions of justice for grievances. Here justice should not only
be legally available, but it should also be financially accessible.
NEED FOR INCLUSIVE GROWTH IN INDIA:
• Industrial Development: To improve the situation of Stunted Industrial Development of the Indian
industrial sector.
• Mass Poverty and Low Per Capita Income: These are prevalent scenarios in India that need to be
addressed.
• High and Broad-based Population: High Population puts extra pressure on limited resources of
the country that needs to be rationalised. India accounts for about 18% of the world's population
with lots of diversity within the nation. India recently surpassed China as the world's most populous
nation (UN DESA Policy Brief No. 153).
• Literacy: Low Level of Literacy is still prevalent in India. The literacy rate in the country is 74.04%,
with females having 65.46% literacy rate according to the 2011 decadal census.
• Infrastructural Issues: Lack of infrastructure is hindering economic growth, there is fear amongst
economists that due to such issues India might be stuck in the middle-income trap.
• Poverty Reduction: Despite lifting a record 271 million people out of poverty between 2005-06 and
2015-16, India has the largest number of poor people worldwide at 22.8 crore (Multidimensional
Poverty Index 2022). Therefore, inclusive growth can ensure adequate flow of benefits to the poor
and the most marginalised.
• To Ensure Group Equality: The poor are certainly one target group, but inclusiveness must also
embrace the concern of other groups such as the SCs, STs, OBCs, Minorities, women, the differently
abled and other marginalised groups.
• To Ensure Regional Balance: This aspect of inclusiveness relates to whether all States, and indeed
all regions, are seen to benefit from the growth process, for instance:
o The per-capita GSDP of Western and Southern states having more than 50% of the national
average while the Empowered Action Group (EAG) States (erstwhile BIMARU) having less
than 50% of the national average.
o The regional disparity in development causes challenges like violent conflicts, unplanned and
haphazard migration. E.g. Insurgency in North-east and Left wing extremism in large parts of
central and eastern states of India.
• To Ensure Even Growth across Sectors and Locations: For instance, agriculture has been lagging
behind and some regions have advanced faster than others. Policies are also relatively ignored in the
agriculture sector.
• Agricultural Backwardness: More than 50% of the workforce in India is occupied in agriculture but
the contribution of agricultural and related sectors in GDP is only around 14%. Agriculture sector is
marred by poor investment, research, labour productivity, high income vulnerability and regional
disparity.
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• To address Unemployment: Periodic Labour Force Survey (2020-2021) of NSSO puts India’s total
• unemployment at 4.2% (6.7% for urban and 3.3% for rural). The COVID-19 Pandemic has adversely
impacted the above number.
• To Counter Poor Nutrition Levels: India ranks 107th out of 121st in Global Hunger Index with
chronic undernutrition, stunting and wasting.
MEASURE TAKEN TO ENSURE INCLUSIVE GROWTH:
• Land Reforms: Land is considered an important resource in any society. In India the ownership of
land is also seen as a symbol of social status. When India got independence, there was significant
inequality in land ownership. To deal with this, following steps were taken:
o Prevailing land tenure systems like mahalwari, zamindari and ryotwari were abolished.
o Tenancy reforms like regulations of rent, security of tenure and ownership rights to tenants
were undertaken.
o Ceiling laws were promulgated for redistribution and consolidations of land.
• Planning: The major focus of Planning right like the 11th to 12th plans was Inclusive Growth, for
Instance - The theme for 11th FYP was “more inclusive and rapid growth”. The 12th FYP had "Faster,
More Inclusive and Sustainable Growth" as its theme.
• Legislative Measures:
o 86th amendment, 2002 made free and compulsory Education to the Children of 6-14 years
age group, a Fundamental Right.
o Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) 2005 to provide
Right to work to people of rural areas.
o National Food Security Act to ensure people's food and nutritional security by assuring
access to enough high-quality food at reasonable prices.
• Self Help Groups (SHGs): SHGs is an informal association of 10 to 25 persons who come together
as a community to address their common concerns. It plays an important role in ensuring Financial
inclusion, Poverty alleviation, women empowerment, and overall social development.
o The Government targets to have 10 crore SHGs members by 2024.
o Recently, an agreement was signed by the Ministry of Rural Development and Panchayati Raj
with Meesho (e-commerce) platform for the marketing of products produced by SHGs under
the Deendayal Antyodaya Yojana- National Rural Livelihood Mission (DAY-NRLM).
SCHEMES TO ENSURE INCLUSIVE GROWTH:
• Pradhan Mantri Awas Yojana-Gramin: It was launched to provide pucca houses to the houseless
living in dilapidated houses in rural areas by 2022.
• Prime Minister’s Employment Generation Programme (PMEGP): It is for generation of
employment opportunities through establishment of micro enterprises in rural as well as urban
areas.
• Ayushman Bharat Mission: World’s largest government funded healthcare program targeting more
than 50 crore beneficiaries. It aims to bring inclusivity in the field of healthcare services, by reducing
out of pocket hospitalisation expenses, fulfilling unmet needs and improving access of identified
families to quality inpatient care and day care surgeries.
• Mudra Yojna: It was launched in 2015 for providing loans up to Rs. 10 lakh to the non-corporate,
non-farm small/micro-enterprises.
• PM Jan Dhan Yojna (PMJDY): It was introduced for Financial Inclusion to ensure access to financial
services, namely, basic savings & deposit accounts, remittance, credit, insurance, pension in an
affordable manner.
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• Digital India: Digital India was launched in 2015 is the flagship initiative of the Ministry of
Electronics and Information Technology and aims to digitally empower the citizens of India.
o According to the Prime Minister, Digital Technologies and Direct Benefit Transfer have saved
2.23 lakh crores from the middlemen in India.
• Budget: Inclusive Development has always been an agenda of the budget in India. For e.g. In the
2023 budget, inclusive development is one of the components of SAPTARISHI.
CHALLENGES IN ACHIEVING INCLUSIVE GROWTH:
• Economic Challenges:
o Poor Industrial Base: As compared to China and Asian ‘Tiger economies’, Indian
manufacturing lags far behind. Despite rapid growth, the manufacturing sector is still short
of the 25% of GDP, a target set up under the National Manufacturing Policy
o Poor Resources: States in the Northern plains are devoid of a strong mineral resources base
which hampers their industrial growth.
o Agricultural Backwardness: Poor land & water productivity, vagaries of monsoon and markets
along with poor infrastructure base and processing ecosystem means that there is a
structural imbalance between the labour force employed and the GDP contribution by
Agriculture.
• Social Challenges:
o Social Divisions: It is based on caste, class, religion, language, ethnicity, etc hampers the
social capital necessary for inclusive growth and promotes parochial loyalties.
o Lack of Women Participation: Poor Labour Force Participation Rate (LFPR) among women
(under 25% as per NSSO) along with poor nutritional indicators (e.g. at least 50% women are
anaemic) combined with numerous restrictions due to patriarchal society is cause of the
underperformance of the economy
o Urban-Rural Divide: The rural-urban divide has led to the emergence of two opposite poles -
India and Bharat.
o The rate of poverty reduction in urban areas is higher than that of rural areas. 70% of the
population living in rural areas has 20% of the hospitals.
• Administrative Challenges:
o Corruption: India ranks an abysmal 85th out of 180 countries on Corruption Perception
Index, 2022 by Transparency International.
o Red Tape and Unfriendly Business Environment: Despite massive gains in recent years,
India is still lagging significantly in sectors such as Enforcement of Contracts.
o Inadequate Social Welfare Expenditure: India’s total spending on sectors such as Health
(target 2.5% of GDP) and Education (target 6% of GDP) is far from being achieved. This is due
to the impact of neo-liberal policies and budget constraints.
o Environmental Destruction and Disasters: It has a disproportionate impact on the already
marginalised sections such as Tribals, Slum dwellers, Farmers etc. This is compounded by
alienation of land from these sections for mega projects.
o Regional Disparities: Some areas of the country lag behind on major developmental
indicators while others are leading far ahead. Kerala is the most literate state in the country,
with a literacy rate of 93.1 percent, while literacy rate in Bihar is only 63.82 percent.
o Intergenerational Inequality: India ranked 44th in terms of “intergenerational equity and
sustainability,” in WEF’s Inclusive Development Report.
Way Forward:
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• Ensure last-mile-delivery of Welfare Schemes such as PM Awas Yojana, PM KISAN, PM Jan Arogya
Yojana.
• Earnest implementation of National Education Policy directives such as vocational training,
vernacular learning, accessible school complex etc.
• Boost social welfare expenditure by tapping into resources of Disinvestment proceeds and
encouraging Civil Society and Corporate sector involvement.
• Leverage Technology to ensure E-Learning, E-Governance and Tele-Medicine reaches the remote
corners of the country.
• Systemic reforms in a consensual democratic manner in sectors of Labour laws, Agriculture and Land
acquisition.
• Encourage innovation and research by creating a conducive environment for start-up ecosystems
and word-class research facilities to promote disruptive solutions.
NITI Aayog's Strategy for New India @75: Inclusive Growth
• To have a rapid growth, which reaches 9-10% by 2022-23, which is inclusive, clean, sustained and
formalised.
• To Leverage technology for inclusive, sustainable and participatory development by 2022-23.
• To have an inclusive development in the cities to ensure that urban poor and slum dwellers
including recent migrants can avail city services.
• To make schools more inclusive by addressing the barriers related to the physical environment (e.g.
accessible toilets), admission procedures as well as curriculum design.
• To make higher education more inclusive for the most vulnerable groups.
• To provide quality ambulatory services for an inclusive package of diagnostic, curative, rehabilitative
and palliative care, close to the people.
World Economic Forum’s three suggestions to boost social inclusion as well as economic growth:
• Countries should increase public and private investment in their citizens’ capabilities, which is the
most important way they can durably lift their rate of productivity growth.
• Governments, together with employers’ and workers’ organisations, should upgrade national rules
and institutions relating to work.
• Countries should increase public and private investment in labour-intensive economic sectors that
generate wider benefits for society. These include sustainable water, energy, digital, and transport
infrastructure, care sectors, the rural economy, and education and training.
Measuring Development
I. Human Development Index (HDI)
• In 1990, two economists – Prof. Mehbub Al Haque of Pakistan and Prof. Amartya Sen of India
introduced the concept of Human Development Index (HDI). Since 1993, it has been used by the
United Nations Development Programme (UNDP) each year to calculate the Human Development
Index (HDI), and publish it as a report which is known as Human Development Report (HDR).
• The first report was published in 1990. Its goal was to place people at the centre of the development
process in terms of economic debate, policy and advocacy. “People are the real wealth of a nation,”
was the opening line of the first report in 1990. This report ranks countries on the basis of the
Human Development Index.
• The rationale behind the development of Human Development Index (HDI) was to do away with the
inherent weakness of the use of GDP as a measure of development.
• The HDI is the geometric mean of normalized indices for each of the three dimensions such as long
and healthy life, knowledge and a decent standard of living.
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• The health dimension is assessed by life expectancy at birth, the education dimension is measured
by means of years of schooling for adults aged 25 years and more, and expected years of schooling
for children of school entering age. The standard of living dimension is measured by gross national
income per capita.
• The above-mentioned dimensions are measured by the following indicators:
o Life Expectancy Index (LEI): Calculated from Life expectancy at birth.
o Education Index (EI): Calculated from Mean years of schooling and Expected years of
schooling
o Income Index (II): Calculated from GNI per capita (PPP US$)
Countries fall into four broad human

development categories based on HDI index:
• Very High Human Development,

• High Human Development,
• Medium Human Development, and
• Low Human Development.
II. Inequality-adjusted HDI (IHDI)
• The Inequality-adjusted HDI adjusts the Human Development Index (HDI) for inequality in the
distribution of each dimension across the population. The IHDI accounts for inequalities in HDI
dimensions by “discounting” each dimension’s average value according to its level of inequality.
• If there is no inequality across people, HDI is equal to IHDI. However, in the case of inequalities, the
value of IHDI is always less than HDI.
• This implies that the IHDI is the actual level of human development (accounting for this inequality),
while the HDI can be viewed as an index of “potential” human development (or the maximum level
of HDI) that could be achieved if there was no inequality.
• The “loss” in potential human development due to inequality is given by the difference between the
HDI and the IHDI and can be expressed as a percentage.
• Thus, the IHDI is distribution-sensitive average level of Human Development.
• Two countries with different distributions of achievements can have the same average HDI value.
• Under perfect equality the IHDI is equal to the HDI, but falls below the HDI when inequality rises.
• For example, India’s HDI value in the 2018 report is 0.640 but when inequality is taken into account
the IHDI value of India comes down to 0.468.
III. Gender Development Index (GDI)
• Introduced in Human Development Report 1995, Gender related Development Index or the GDI
measures gender gaps in human development achievements by accounting for disparities between
women and men in the same dimensions and using the same indicators as the HDI.
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• Simply put, it is the ratio of the HDIs calculated separately for females and males using the same
methodology as in the HDI.
• It is a direct measure of gender gap showing the female HDI as a percentage of the male HDI.
• It is simply the HDI adjusted downward for gender inequality. The greater the gender disparity in
basic human development, the lower is a country’s GDI relative to its HDI.
• The Gender related Development Index (GDI) measures gender inequalities in achievement in three
basic dimensions of human development as follows:
o Health, which is measured by female and male life expectancy at birth;
o Education, which is measured by female and male expected years of schooling;
o Command over economic resources, measured by female and male estimated earned
income.
• The GDI value ranges from ranges from 0, which indicates that women and men fare equally, to 1,
which indicates that women fare as poorly in comparison to their male counterparts as possible in
all measured dimensions.
• For example, GDI value for India in the 2018 report is 0.841, indicating gaps between females and
males.
• In order to address shortcomings of the GDI, a new index Gender Inequality Index (GII) was
proposed. This index measures three dimensions viz., Reproductive Health, Empowerment, and
Labour Market Participation.
III. Gender Inequality Index (GII)
• The GII is an inequality index.

• It measures gender inequalities in three important aspects of human development:
o Reproductive Health, measured by the maternal mortality ratio and adolescent birth rates;
o Empowerment, measured by proportion of parliamentary seats occupied by females and
proportion of Indian Economy adult females and males aged 25 years and older with at least
some secondary education; and
o Economic Status expressed as labour market participation and measured by the labour force
participation rate of female and male populations aged 15 years and older.
• The higher the GII value more the disparities between females and males and the more loss to
human development.
• India ranks 127 out of 160 countries in Gender Inequality Index with GII value of 0.524 whereas
Switzerland being on top with a GII value of 0.039.
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Practice Questions for Answer Writing:
1. Explain the term national income. How is the national income of India calculated?
2. Explain the interrelationship between human development and economic development.
3. Discuss the role, Importance and Features of infrastructure sector in India.
4. Define potential GDP and explain its determinants. What are the factors that have been inhibiting
India from realising its potential GDP?
5. The nature of economic growth in India is described as jobless growth. Do you agree with this view?
Give arguments in favour of your answer.
6. What are the salient features of ‘inclusive growth’? Has India been experiencing such a growth
process? Analyse and suggest measures for inclusive growth.
**********
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Chapter - III. Poverty, Inequality and Unemployment

Human beings have always endeavoured to improve their quality of life. The advancements made in the
field of science and technology, particularly during past two centuries have impacted human life in the most
unusually way. This has helped societies achieve stupendous economic progress categorically in the
countries of the North America and Europe among others. Lately, economies in Asia and Africa have also
experienced economic growth and development benefitting their people in multiple ways.
However, the economic progress has not been quite equitable. Certain sections of society, mainly due to
social hierarchy, have been able to reap greater benefits than others, eventually leading to economic
inequalities. People, relatively less equipped with good education, appropriate training and relevant skill
have not been able to contribute quantitatively and/or qualitatively, and therefore, have remained
economically poor. Historical exploitation of certain sections of the society by the dominant and privileged
people has widened the gap between haves and have-nots and thrown the less privileged into absolute
poverty. M. K. Gandhi once said, “Poverty is the worst form of violence.”
In India, the problems of unemployment and poverty have always been majors obstacles in the way of
economic development of a country. Besides these problems, the problem of inequality which is a
responsible factor for causing regional disparity is also crucial in this context.
CONCEPT OF POVERTY
An individual, for a healthy living, needs certain basic goods such as food, water and shelter. Expansion of
the existing cities and continuous increase in population has made it difficult for some sections of society to
fulfil their fundamental needs of life. Poverty is a state or a condition in which an individual, a family or a
community fails to possess the required material wealth. People living in such situation are called poor.
Poverty can be defined as a condition in which an individual or household lacks the financial resources to
afford certain minimum standard of living.
World Bank provides an international definition of poverty – for the year 2023 it refers to an income of
$1.90 dollar per day (in PPP terms) (In September 2023, the world bank updated it to be $2.15 per day).
It means those individuals, whose income is more than $1.90 per day are said to be living above poverty
line and those who earn less than one dollar a day are said to be living below poverty line. According to the
UNDP, “The way people experience poverty goes beyond living on less than $1.90 a day. Poverty is not only
about lacking the means to make ends meet or pay the bills for basic services on time. Poverty is
multidimensional and encompasses much more than income.”
In recent years, there is a shift in the definition of poverty. The emphasis now is on monitoring and
addressing deficits in several dimensions; not just income. These dimensions could be housing, education,
health, environment and communication. There is an increasing perception that poverty is
multidimensional, although there is a tendency to focus on human development outcomes such as health,
education, and nutrition when looking beyond income measures. Thus, the prime concern with the material
dimensions of poverty alone has expanded to encompass a more holistic model of the components of well-
being, including various non-material, psycho-social and environmental dimensions.
Absolute Poverty
Any person not in a position to fulfil his basic needs of life is said to be living in absolute poverty. It is a
condition of extreme poverty for an individual person or a family. Absolute poverty is poverty below a set
line of what is required to access minimum needs for survival. This type of poverty is usually inherited by
children from their poor parents so it can be chronic by nature. Households living in poverty experience
problems such as malnutrition, child labour, lack of education, child marriage and disease. Poor people are
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Chapter – VII: Monetary Policy

What is Monetary Policy?
Monetary policy is the macroeconomic policy laid down by the central bank of an economy. The policy
involves an operational framework which uses certain instruments and targeting mechanisms to achieve
macroeconomic objectives like price stability, reviving consumption, growth and liquidity.
The Reserve Bank of India (RBI) is vested with the responsibility of conducting monetary policy in India. This
responsibility is explicitly mandated under the Reserve Bank of India Act, 1934. Monetary policy thus
involves the use of monetary instruments under the control of the central bank to regulate magnitudes
such as interest rates, money supply and availability of credit with a view to achieve certain objectives of
economic policy
The monetary policy response depends on the economic state of affairs of the economy. Based on which,
the monetary policy may be categorized in one of two ways: expansionary monetary policy or
contractionary monetary policy
Expansionary Monetary Policy: This is known as loose monetary policy; expansionary policy increases
the supply of money and credit to generate economic growth. A central bank may deploy an
expansionist monetary policy to reduce unemployment and boost growth and investment during hard
economic times. The overall goal of any expansionary policy is to encourage spending and borrowing.
This is done by reducing the interest rate, subsequently providing easier and cheaper loans to the
borrowers. According to economic theory, more money available to individuals and businesses at lower cost
will result in the increased purchase of goods and services, thus stimulating growth.
• Lowering key interest rates and enhancing market liquidity are used to implement an expansionary
monetary policy.
• This is generally used when the economy is undergoing recession to boost the money supply and
increase consumption and generate demand.
• It is also called as Dovish Monetary Policy.
Contractionary Monetary Policy: Tight or contractionary monetary policy is used to prevent inflation due
to economy growing too fast (over-heating). It aims at reducing the money supply, raising the interest rates
and therefore, discouraging borrowing in the economy. Business investment will decline because it is less
attractive for firms to borrow money. In addition, higher interest rates will also discourage consumer
borrowing for big-ticket items like houses and cars.
• Increases in key interest rates, which reduce market liquidity, are used to achieve a contractionary
monetary policy.
• This is generally used when the economy is undergoing inflation to reduce the money supply and
decrease consumption and reduce demand.
• It is also called as Hawkish Monetary Policy.
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Figure 1. The Pathways of Monetary Policy.
(a) In expansionary monetary policy the central bank causes the supply of money (M) and loanable funds to
increase, which lowers the interest rate (r), stimulating additional borrowing for investment (I) and
consumption (C), and shifting aggregate demand right. The result is a higher price level and, at least in
the short run, higher real GDP.
(b) In contractionary monetary policy, the central bank causes the supply of money and credit in the
economy to decrease, which raises the interest rate, discouraging borrowing for investment and
consumption, and shifting aggregate demand left. The result is a lower price level and, at least in the
short run, lower real GDP.
Difference between Expansionary and Contractionary Monetary Policy
Particulars Expansionary Monetary Policy Contractionary Monetary Policy
Purposes To increase economic growth by To slow down economic growth by

lowering interest rates and increasing interest rates and
increasing the money supply. decreasing money supply.
Impact on Employment Can reduce unemployment. May lead to higher unemployment.
Impact on Inflation It may increase inflationary It may reduce inflationary pressure.

pressure.
Government Securities It involves buying government It involves selling government
securities on the open market. securities on the open market.
Monetary Policy and Aggregate Demand
Monetary policy is a set of tools used by a central bank to influence the economy, primarily by
affecting aggregate demand. Aggregate demand is calculated as the aggregated demand for all the
produced and finished goods and services per year. It is the total revenue generated after these finished
goods and services are consumed at a given time period. Aggregate demand includes all types of goods:
capital goods, governmental spending, exports, imports, and consumer goods. The aggregate demand is
determined by factors such as consumer spending and investment, employment and household income,
and others.
• How Monetary Policy Affects Aggregate Demand

• Monetary policy primarily works by influencing interest rates and the money supply.
o Interest Rates: Central banks can raise or lower interest rates. Lower interest rates make
borrowing cheaper, encouraging businesses to invest and consumers to spend more. This
increases aggregate demand. Conversely, higher interest rates have the opposite effect.
o Money Supply: Central banks can also influence the money supply through open market
operations. By buying government bonds, they inject money into the economy, lowering
interest rates and boosting aggregate demand. Conversely, selling bonds reduces the money
supply, raising interest rates.
• Here's an example: Imagine an economy experiencing a recession with high unemployment and
low output. The central bank may implement expansionary policy by lowering interest rates. This
makes it cheaper for businesses to borrow money to invest in new equipment and hire more
workers. Consumers may also be more likely to borrow and spend on big-ticket items like cars and
houses. This increase in spending and investment leads to higher aggregate demand, which can
help the economy recover.
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• It's important to note that monetary policy works with a time lag, and its effects can take months
or even years to be fully realized in the economy. Additionally, monetary policy is just one tool
used by government and central bank to influence the economy, and it often works in conjunction
with fiscal policy (government spending and taxation).
Goals of Monetary Policy
Goals refer to the final policy objectives of the monetary policy. These may include: price stability, economic
growth and financial stability.
• Price Stability: The primary objective of monetary policy is to maintain price stability while keeping in
mind the objective of growth. Price stability is a necessary precondition to sustainable growth.In
May 2016, the Reserve Bank of India (RBI) Act, 1934 was amended to provide a statutory basis for
the implementation of the flexible inflation targeting framework.
• Economic Growth: One of the most important objectives of monetary policy in recent years has been
the rapid economic growth of an economy. The RBI, by keeping the prices steady and maintaining
overall financial stability, has the ability to promote economic growth, leading to prosperity over
time.
• Financial Stability: Financial system stability means the effective functioning of the financial system
(financial institutions and markets) and the absence of banking, currency, balance of payments and
exchange rate crisis. By forestalling or mitigating the consequences of financial instability for the
economy, the central banks help alleviate liquidity pressures and boost public confidence.
Formulating appropriate financial regulations, implementing effective bank supervision, and
operating or overseeing efficient payment systems are few ways through which central banks help
to offset the risks of financial instability.
The choice of a dominant objective arises essentially because of the multiplicity of objectives and the
inherent conflict among such objectives. The fundamental reason to adopt price stability as the dominant
objective is that inflation is economically and socially costly. It is also important to observe that the
objective of control of inflation is not independent of the objective of growth. For example, the
amendment Act of 2016 relating to RBI says (GoI, 2016) “Whereas the primary objective of monetary
policy is to maintain price stability while keeping in mind the objective of growth”.
To maintain price stability, inflation needs to be controlled. The government of India sets an inflation
target for every five years. RBI has an important role in the consultation process regarding inflation
targeting. The current inflation targeting framework in India is flexible in nature.
Flexible Inflation Targeting Framework (FITF)
• The recommendations for moving towards a flexible inflation targeting regime were made in the
Urjit Patel Committee Report (UPCR) in January, 2014.
• The Flexible Inflation Target (FIT) was adopted in 2016. The Reserve Bank of India Act, 1934 was
amended to provide a statutory basis for a FTI framework.
• The amended Act provides for the inflation target to be set by the Government, in consultation with
the RBI, once every five years.
• India adopted a flexible inflation targeting mandate of 4 (+/-2) percent and headline
consumer price inflation was chosen as a key indicator.
• On March 31, 2021, the Central Government retained the inflation target and the tolerance
band for the next 5-year period – April 1, 2021 to March 31, 2026.
• Under the provisions of Section 45ZN of the RBI Act, 1934, in case the RBI fails to meet the
inflation target, it has to present a report to the government explaining the reasons for the failure.
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o Failure to Maintain Inflation Target: The Central Government has notified the following as
the factors that constitute failure to achieve the inflation target: (a) the average inflation is
more than the upper tolerance level of the inflation target for any three consecutive quarters;
or (b) the average inflation is less than the lower tolerance level for any three consecutive
quarters.
o Where the Bank fails to meet the inflation target, it shall set out in a report to the
Central Government:
▪ the reasons for failure to achieve the inflation target;
▪ remedial actions proposed to be taken by the Bank; and
▪ an estimate of the time-period within which the inflation target shall be achieved
pursuant to timely implementation of proposed remedial actions.
• Note: Inflation targeting regime was first started in New Zealand in 1990.
What is multiple indicator approach of RBI?

• Before Flexible Inflation Targeting Framework (FITF), RBI was following multiple indicator
approach (MIA), lets learn what is MIA?
• In the wake of challenges posed by financial liberalization and increasing complexities of
monetary management, the Reserve Bank of India switched to a multiple indicator approach in
1998-1999. Under this approach Broad money (M3) continued to remain a primary variable;
however, focus was also placed on rate channels in monetary policy formulation. Many
macroeconomic variables like interest rate along with other indicators like credit flows, inflation
rate, exchange rate, foreign exchange reserves etc. were juxtaposed with output data for drawing
policy outlooks.
• Before MIA (Pre-1998): The RBI primarily focused on money supply to manage inflation.
However, with financial innovations and globalization, this approach became less effective.
• MIA Adoption (1998 Onwards): Recognizing the limitations, the RBI adopted the MIA in 1998.
This approach involves analysing a wider set of indicators, categorized into two main groups:
o Quantity Variables: These focus on the volume of economic activity:
▪ Money supply (currency and bank deposits)
▪ Credit growth by banks and financial institutions
▪ Output (Gross Domestic Product - GDP)
▪ Trade data (imports and exports)
▪ Capital flows (foreign investment)
▪ Fiscal indicators (government spending and revenue)
o Rate Variables: These reflect the cost and return on money:
▪ Interest rates in different markets
▪ Inflation rate
▪ Exchange rate
There have recently been many changes in the way India's monetary policy is formed, with the
introduction of the Monetary Policy Framework (MPF), Monetary Policy Committee (MPC), and
Monetary Policy Process (MPP).
Background of New Monetary Policy Framework
The Report of the Committee on Financial Sector Reforms, 2009 under the chairmanship of the then
Governor, Raghuram Rajan and headed by the then Deputy Governor Urjit Patel, proposed that RBI
can take care of the growth objective in the medium-run only if it focuses on controlling inflation.
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It would also help serve the purpose of inclusive growth since the poorer sections are least hedged
against inflation. Following this, an Expert Committee to Revise and Strengthen the Monetary Policy
Framework was appointed on September 12, 2013.
The main objectives of the Committee were:

i) to devise and redefine the objectives and conduct of monetary policy framework in an open
economy environment;
ii) to recommend an appropriate nominal anchor for conduct of monetary policy;
iii) iii) to review the operating framework and instruments of the monetary policy including the
multiple-indicator approach; and
iv) iv) to identify the impediments both fiscal and others in the smooth functioning of monetary
policy.
The main recommendations of this committee that submitted its report in January 2014 include
the following:
• The Choice of Nominal Anchor: Inflation should be the nominal anchor for the monetary policy
framework. This nominal anchor should be set by the RBI as its predominant objective of
monetary policy in its policy statements. The nominal anchor should be communicated without
ambiguity, so as to ensure a monetary policy regime shift away from the current approach to one
that is cantered around the nominal anchor. Subject to the establishment and achievement of the
nominal anchor, monetary policy conduct should be consistent with a sustainable growth
trajectory and financial stability.
• The Choice of Inflation Metric: The RBI should adopt the new CPI (combined) as the measure of
the nominal anchor for policy communication. The nominal anchor should be defined in terms of
headline CPI inflation, which closely reflects the cost of living and influences inflation expectations
relative to other available metrics.
• Numerical Target and Precision: The nominal anchor or the target for inflation should be set at 4
per cent with a band of +/- 2 per cent around this target should be set in the frame of a two-year
horizon.
• Institutional Requirements of the Monetary Policy Framework: Consistent with the Fiscal
Responsibility and Budget Management (Amendment) Rules, the Central Government needs to
ensure that its fiscal deficit as a ratio to GDP is brought down to 3.0 per cent by 2016-17.
The Expert Committee also recommended that decision-making should be Monetary Policy vested in a
Monetary Policy Committee (MPC). The above recommendations were accepted and from 2016 the
monetary authority shifted to flexible inflation targeting with repo rate as its instrument of control.
The Monetary Policy Framework
Under the Reserve Bank of India, Act,1934 (RBI Act,1934) (as amended in 2016), RBI is entrusted with the
responsibility of conducting monetary policy in India with the primary objective of maintaining price
stability while keeping in mind the objective of growth.
Section 45ZB of the amended RBI Act, 1934 provides for an empowered six-member monetary policy
committee (MPC) to be constituted by the Central Government by notification in the Official Gazette. The
first such MPC was constituted on September 29, 2016. The present MPC members, as notified by the
Central Government in the Official Gazette of October 5, 2020, are as under:
1. Governor of the Reserve Bank of India—Chairperson, ex officio;

2. Deputy Governor of the Reserve Bank of India, in charge of Monetary Policy—Member, ex officio;
3. One officer of the Reserve Bank of India to be nominated by the Central Board—Member, ex officio;
4. Prof. Ashima Goyal, Professor, Indira Gandhi Institute of Development Research —Member;
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For example, the Union Budget 2023-24 was presented towards the end of the fiscal year 2022-23 on 1st
February 2023. Thus, for the Union Budget 2023-24, the 2022-23 became the current fiscal year, 2021-22
became the previous fiscal year and 2023-24 became the upcoming fiscal year. Thus, the Union Budget
2023-24 contained these three categories of data:
• Budget Estimates of receipts and expenditures for the fiscal year 2023-24
• Revised Estimates of receipts and expenditures for the fiscal year 2022-23
• Provisional Actuals of receipts and expenditures for the fiscal year 2021-22
Key Facts about the Union Budget of India
• From the budget year 2017-18 and onwards, the Union Budget is presented by the Union
Finance Minister on February 1 of every year.
o Prior to the budget year 2017-18, the Budget was presented in the last week of February as
per the colonial practice.
• The Railway Budget was merged with the General Budget from the fiscal year 2017-18 based
on the recommendation of the Bibek Debroy Committee.
o The Railway Budget was separated from the General Budget by the British in 1924 on the
recommendations of the Acworth Committee.
• The nodal agency for the preparation of the Union Budget is the Budget Division of the
Department of Economic Affairs (Ministry of Finance).
Process of Government Budgeting in India
The process of government budgeting in India comprises four distinct phases:
• Budget Formulation: It involves preparation of estimates of expenditure and receipts for the
ensuing financial year.
• Budget Enactment: It involves approval of the proposed Budget by the Legislature through the
enactment of Finance Bill and Appropriation Bill
• Budget Execution: It involves enforcement of the provisions in the Finance Act and Appropriation
Act by the government. Roughly, it comprises of collection of receipts and making disbursements
for various services as approved by the legislature.
• Legislative Review: It refers to audits of government’s financial operations on behalf of the
legislature
Procedure for Budget Enactment
The enactment of the Union Budget forms the most crucial part of the government budgeting process. The
whole process of enactment of the Union Budget is described in chronological order as follows:
• President’s Recommendation: As per Rule 204 (1) of the Rules of Procedure and Conduct of
Business in the Lok Sabha, the Budget is presented to the Parliament on such date as is fixed by the
President. Thus, the recommendation of the President of India is taken for introduction and
consideration of the budget in the Lok Sabha.
• Presentation of the Budget: The Union Finance Minister presents the Union Budget in the Lok
Sabha with a speech known as Budget Speech.
o In the Budget Speech, the Union Finance Minister summarizes the key points of the budget
and explains the thinking behind the proposals.
o At the end of the Budget Speech, the budget is laid before the Rajya Sabha as well.
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• General Discussion on the Budget: A few days after the presentation, the general discussion on
the budget begins in both houses of the Parliament.
o During the general discussions, the House is at liberty to discuss the budget as a whole or
any question of principle involved therein, but no motion can be moved nor can the budget
be submitted to the vote of the House.
• Scrutiny by Departmental Committees: After the general discussion on the budget is over, the
Houses are adjourned for some period, during which the demands for grants are scrutinized
thoroughly by the Departmental Standing Committees. The committees, then, submit their reports
to the Parliament.
• Voting on Demands for Grants: In the light of the reports submitted by the departmental standing
committees, the Lok Sabha debates and votes on the demands for grants. Once duly voted upon
and passed by the Lok Sabha, a demand becomes a grant.
o The Rajya Sabha can discuss the budget but has no power to vote on the demands for
grants. This is the exclusive privilege of the LS.
• Cut Motion: During the stage of Voting on Demands for Grants, the MPs can move cut motions to
reduce any demand for grant.
o Cut Motions are of 3 types:
▪ Policy Cut Motion: it states that “the amount of the Demand be reduced to `1”. It
represents disapproval of the policy underlying the demand.
▪ Economy Cut Motion: It states that “the amount of the demand be reduced by a
specified amount”. Thus, it represents the economy that can be affected in the
proposed expenditure.
▪ Token Cut Motion: It states that “the amount of the demand be reduced by `100”. Its
purpose is to ventilate a specific grievance.
• Passing of Appropriation Bill: After the demands for grants are approved, the Appropriation Bill is
introduced, debated, and voted upon.
o After Presidential assent, the Appropriation Bill becomes the Appropriation Act and
authorizes withdrawals from the Consolidated Fund of India to meet the government’s
expenditure.
• Passing of Finance Bill: The Finance Bill, containing the government’s tax proposals, is introduced
immediately after the presentation of the Budget.
o The passing of the Finance Bill is mandatory to legalize the income side of the budget.
o With passing of the Finance Bills, the process of the enactment of the budget gets
completed.
What is the difference between Money Bills and Financial Bills?
The Constitution defines financial legislation into two categories: Money Bills and Financial Bills.
• Money Bills –Article 110
• Financial Bills (I)– Article 117 (1)
• Financial Bills (II)– Article 117 (3)
All Money bills are financial bills but all financial bills are not Money bills.
• The Speaker certifies a Bill as a Money Bill, and the Speaker’s decision is final.
• Only those financial bills are Money bills that contain exclusively those matters which are
mentioned in Article 110 of the Constitution.
• The two prerequisites for any financial Bill to become a Money Bill are that first, it must only
be introduced in the Lok Sabha and not the Rajya Sabha. Secondly, these bills can only be
introduced on the President’s recommendation.
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Article 110 defines a “Money Bill” as one containing provision dealing with taxes, regulation of the
government’s borrowing of money, and expenditure or receipt of money from the Consolidated Fund of
India, among others, whereas Article 109 delineates the procedure for the passage of such a Bill and
confers an overriding authority on the Lok Sabha in the passage of Money Bills.
A Financial Bill becomes a Money Bill when it exclusively falls under one of the seven heads listed under
Article 110(1), which defines Money Bills. Moreover, a Money Bill is a Financial Bill that is certified by the
Speaker.
• A major difference between Money and Financial Bills is that while the later (Financial) has the
provision of including the Rajya Sabha’s (Upper House) recommendations, the former (Money)
does not make their inclusion mandatory. The Lok Sabha has the right to reject the Rajya
Sabha’s recommendations when it comes to Money Bills.
• What differentiates a Money Bill from any ordinary Bill or Financial Bill is that while an ordinary Bill
can originate in either house, a Money Bill can only be introduced in the Lok Sabha, as laid
down in Article 117 (1). Additionally, no one can introduce or move Money Bills in the Lok
Sabha, except on the President’s recommendation.
• How are money and Financial Bills passed?
o The role of the Rajya Sabha in passing Money Bills is restricted. Such Bills can originate
only in the Lok Sabha. After being passed by the Lok Sabha, Money Bills are sent to the
Rajya Sabha for its recommendations. Within 14 days, the Upper House must submit the
Bill back to the Lower House with its non-binding recommendations. If the Lok Sabha
rejects the recommendations, the Bill is deemed to have passed by both Houses in the
form in which it was passed by the Lok Sabha without the recommendations of the Rajya
Sabha.
Types of Budgets:
The budget has been divided into three types 1) Balanced budget, 2) Surplus budget, and 3) Deficit budget.
Let’s look at them in detail:
• Balanced Budget: A balanced budget is one in which the revenues match its expenditure. It is a
balanced budget that the government seeks to come up with.
• Surplus Budget: If the estimated government receipt is more than the estimated expenditure for a
fiscal year, the budget is said to be surplus.
• Deficit Budget: A budget is a deficit budget if the estimated revenue is less than the expenses to be
made. India’s budget has mostly been a deficit budget, just like any other democracy in the world.
Objectives of Government Budget
• Reallocation of resources: The government aims at reallocating the resources of the country in a
more economically and socially beneficial manner, more profit and welfare-oriented. It is done
through the following tools:
o Tax concessions or subsidies: The government encourages investment, by giving tax
concessions, subsidies, etc. to the producers. For example, the use of ‘Khadi products’ is
encouraged by providing subsidies. On the contrary, the Government discourages the
production of harmful consumption goods (like liquor, cigarettes, etc.) through heavy taxes.
o Directly producing goods and services: If the private sector does not take an interest, the
government can directly undertake the production.
• Bridging income disparity: Through its fiscal policies, the government attempts to decrease such
income and wealth disparities in the country. This is done by imposing taxes on the wealthy and
spending more on the poor's welfare. It will lower the income of the wealthy while raising the
standard of life of the poor.
208
• Attainment of economic stability: The government budget is employed to prevent business

volatility in inflation or deflation, thus attaining economic stability. For instance, surplus budget
policies during inflation and deficit budget policies during deflation help to keep prices stable
throughout the economy.
• Management of Public enterprises: The budget is devised also with the goal of establishing
various provisions for operating public sector industries and giving financial assistance. These
industries and businesses are run mostly for the public welfare.
• Economic Growth: A country's growth rate is determined by its savings and investment rates.
Budgetary policy tries to achieve this by mobilizing adequate resources for public sector investment.
As a result, the government includes several policies in the budget to boost the economy's overall
savings and investment rate.
• Reducing regional disparities: The government budget attempts to eliminate regional disparities
through taxing and spending policies that encourage the establishment of manufacturing units in
economically depressed areas.
Components of Government Budget
There are, broadly, two main components of the Government Budget – Revenue Budget and Capital Budget
I. Revenue Budget (Where the Government gets money from)
This component comprises the details of revenue receipts and expenditures for the upcoming fiscal year.
Thus, this, in turn, has 2 sub-components:
A. Revenue Receipts
This includes the income the government expects to receive within the fiscal year that is not to be paid back
by the government. Revenue Receipts are not reclaimed from the government, and hence they don’t impact
the liabilities and assets of the government.
Revenue Receipts are of 2 types: The two major components of revenue receipts are: Tax revenue and
Non-Tax Revenue, both of which are discussed in detail below.
• Tax Revenue
209
Chapter – IX. Economic History of India

What will be discussed?
• Pre-British Era and Colonial Impact

• Economic Condition Under British Colonial Period (1858-1947)
• Economic Development of India (1947 – 2000)
• Economic Development of India (2000 – Till Now)
• Planning in India: 5 Years Plans of India
• NITI Aayog
It is well known fact that the British rule of nearly one hundred and fifty years has adversely affected the
agriculture, industry, communication, trade and many other aspects of our life in India. There were positive
effects also of the British rule on these sectors, however, positive effects of the rule were very much less
than the negative effects. It not only affected us economically but our social, culture and institutions also
were greatly changed. To understand the economic consequences of the British rule, it important for us to
know how the initially trade-oriented Britishers have changed themselves into the Rulers of India later.
Initially, the East India Company acquired many concessions for trade in India from then rulers, which
allowed them to get control on the production and other activities and entry in the ruling of the country.
Pre-British Era and Colonial Impact
India had an independent economy before the advent of British rule. India was particularly well known for
its handicraft industries in the fields of cotton and silk textiles, metal and precious stone works, etc.
Its dependency on imports was minimal. The economy was largely rural but was independent and self-
sustained. Kings provided patronage to artists, sculptors and weavers. Modes of transportation were
limited. Hence, trade too was limited but every region had its own specialisation.
I. Agriculture
Agriculture formed the bedrock of the Indian economy, with a majority of the population engaged in
farming. Agricultural operations were carried on in India by subsistence farmers (a person who owns or
manages a farm on which they grow crops or raise livestock sufficient only for their own use, without any
surplus for trade) organised in small village communities. Crops like wheat, barley, rice, millets, pulses, and
oilseeds were cultivated.
• Village was more or less a self-sufficient economic unit and its business contacts with the outside
world were limited to payment of land revenue and the purchase of a few necessary things from the
town nearby. The barter system was prevalent, with goods exchanged directly. The farmer raised
only those crops which he needed for his own use and shared the same with the village artisan who
supplied him with simple manufacture that he needed for his domestic consumption.
• Means of communication were of a primitive type. Therefore, trade in agricultural produce, was
somewhat limited. The farmer usually raised enough produce to feed himself and the non-
agricultural members of the village community. If his crop yielded more than the consumption
needs, due to favourable climatic conditions, he stored that surplus for use in the lean years.
• Storage of food grains was a common practice among the pre-colonial agriculturists and
constituted, under these conditions, the only remedy against famines.
221
Chapter – X. Changes in Industrial and Labour Policy

What will be discussed?
• Evolution of India's Industrial Policy

• Industrial Policy, 1991
• Special Economic Zones (SEZs) & Its Benefits
• MSME sector in India
• PLI Scheme
• National Manufacturing Policy
• Make in India
• Start Up India
• Industrial Developments in India
Evolution of India's Industrial Policy
Industrial policy during the British period was motivated by the supreme consideration of using India as a
colony of the British Empire. With the installation of the national government in 1947, it was imperative that
the perspective should change in favour of industrial development in India. In the initial years, since the
Government of India was bogged down with the immediate problems of partition of the country leading to
rehabilitation of refugees, the integration of the states, the food problem, etc., the government did not
want to push forth an industrial policy which may lead to strong opposition either from the industrial
classes or from the labouring classes. The government, therefore, decided to go slow an adopted the
industrial policy of 1948 so as to bring economic stability in the industrial sector. It was only in 1956 that
the government thought of giving a big push to the development of basic and heavy industries.
Industrial Policy Resolution, 1948
After the attainment of Independence, Government of India was faced with problems of refugee
rehabilitation, interaction of the state in the Indian Union and shortages of food grains. On the industrial
front, labour leaders talked of a policy of nationalization of industries but the Indian capitalists (businesses)
were not in its favour. In this atmosphere of confusion and uncertainly, the government feared that
investment in industry would become a casualty. To clear the foggy atmosphere, the government
announced the industrial policy of 1948.
The Industrial Policy Resolution of April 1948 envisaged a mixed economy for India in which the coexistence
of the public sector and private sector was accepted as the hallmark of policy. The government classified
industries into four broad categories:
• Strategic Industries (Public Sector): It included three industries in which Central Government had
monopoly. These included Arms and ammunition, atomic energy and Rail transport.
• Basic/Key Industries (Public-cum-Private Sector): 6 industries viz. coal, iron & steel, aircraft
manufacturing, ship-building, manufacture of telephone, telegraph & wireless apparatus, and
mineral oil were designated as “Key Industries” or “Basic Industries”.
o New undertaking to be established by the State.
o However, the existing private sector enterprises were allowed to continue.
• Important Industries (Controlled Private Sector): It included 18 industries including heavy
chemicals, sugar, cotton textile & woollen industry, cement, paper, salt, machine tools, fertiliser,
rubber, air and sea transport, motor, tractor, electricity etc.
o These industries continue to remain under private sector however, the central government, in
consultation with the state government, had general control over them.
244

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ECONOMICS COMPENDIUM - RBI/NABARD ~BRAJESH MOHAN

Economics & Social Issue Compendium – RBI Grade B/NABARD

Index of Indian Economy

Ch - 8. Fiscal Policy and FRBM Act ✓ Current Status and Future

• Evolution of India's Industrial Policy Ch - 14. International Finance Institution

Chapter - I. Basics of Economics

Therefore, a simple definition of economics is defined by taking four definitions

I. Wealth Definition of Economics

II. Welfare Definition of Economics

It is a neo-classical definition of economics by Alfred Marshall.

III. Scarcity Definition of Economics

III. Growth Definition of Economics

UNLIMITED WANTS AND LIMITED MEANS

SCARCITIES AND CHOICE

A subject is considered science if:

• It is a study of the relationship between cause and effect.

After being analysed, economics has all the features of science.

• Like science, it has a cause-and-effect relationship between economic phenomena.

II. Economics as an Art

Chapter - 2. Economic Growth, National Income Accounting and

Factors influencing Economic Growth

Benefits of Economic Growth

Challenges Associated with Economic Growth

What is Economic Development?

Factors Affecting Economic development

• Infrastructural improvement – Development in the infrastructure improves the quality of life of

Various Aspects of Development

II. Economic Development

III. Human Development

Growth vs. Development

Parameter Economic Growth Economic Development

government spending, investment, net

WHY STUDY THE PROCESS OF ECONOMIC GROWTH?

MEASUREMENT AND INDICATORS OF ECONOMIC GROWTH AND DEVELOPMENT

GDP at Market Price = GDP at Factor Cost + Indirect Taxes – Subsidies

GDP CALCULATION IN INDIA

ALTERNATIVES TO GDP CALCULATION:

• Economic Development: In contrast to economic growth, economic development looks at both

II. NDP (Net Domestic Product)

• NDP at Factor Cost = GDP at Factor Cost – Depreciation

III. GNP (Gross National Product)

IV. NNP (Net National Product)

• NNP at Factor Cost = GNP at Factor Cost – Depreciation

Difference between GNP and NNP

Aspect GNP (Gross National Product) NNP (Net National Product)

Some Other Useful Terms

Per Capita Income:

Nominal and Real GDP:

What is the potential GDP?

What is Inclusive Growth?

ELEMENTS OF INCLUSIVE GROWTH:

• Employment Generation: Generation of stable employment is a sign of political, economic and

NEED FOR INCLUSIVE GROWTH IN INDIA:

MEASURE TAKEN TO ENSURE INCLUSIVE GROWTH:

SCHEMES TO ENSURE INCLUSIVE GROWTH:

CHALLENGES IN ACHIEVING INCLUSIVE GROWTH:

NITI Aayog's Strategy for New India @75: Inclusive Growth

I. Human Development Index (HDI)

Countries fall into four broad human

• Very High Human Development,

II. Inequality-adjusted HDI (IHDI)

III. Gender Development Index (GDI)

III. Gender Inequality Index (GII)