Unit – I

Structure of the Indian Economy

1.1 Structure of the Indian Economy

Introduction:

Indian economy is a developing economy in which agriculture is the backbone of Indian economy. About 30 % of India's population is on the below poverty line. Mineral resources are not fully utilized. Majority of the people of India are poor. Indian economy is affected by it. Countries which are on the part of progress and which have their potential for development are called developing economies. So, India is termed as a developing economy by modern schools. India is of mixed economy, both public and private sectors coexist. Industries in India are broadly divided into two categories: those that are run by the public sector and those that are licensed to be established and run by the private sector. 

In this unit, we will study the characteristics of the Indian Economy as a developing economy, features of Indian Economy as a mixed economy as well as structural changes in Indian Economy. Besides this, we will study Indian Economy and Inclusive growth. India is among the most potential developing economies in the world. Unemployment and underemployment is another important feature of Indian economy. In underdeveloped countries labour is an abundant factor. It is not possible to provide gainful employment to the entire population. 

2.     Characteristics of the Indian Economy as a Developing Economy :

Indian economy has been attaining praiseworthy progress in its different fields since the adoption of economic planning. In order to achieve the goal of rapid economic development, the Government of India under the able leadership of the then Late Prime Minister Jawaharlal Nehru, has successfully adopted the path of economic planning. Till now, India has completed eleven five-year plans. Due to the implementation of these five-year plans, Indian economy has achieved considerable improvement over the past. Therefore, considering the level of development, Indian economy can be termed as a planned developing economy. India has its following basic features as a developing economy. 

1. National Income:

The national income in India has been increasing at a slow but steady pace. It can be seen that the national income of India at 1993-94 price has increased from Rs1,32,367 crore in 1950- 51 to Rs 11,15,157 crore in 2001-02 registering a growth rate of 842.5 percent during the last 51years.

2. Composition of National Income:

The sectoral contribution of national income is a significant indicator of the degree of development attained in the economy. The contribution of primary sector which is composed of agriculture, forest, fishery and mining has declined from 56.4per cent of GDP in 1950- 51 to 45.5 per cent in 1970-71, to 13.5 per cent in 2012-13.

3.     Low per Capita Income:

Developing economies are marked by the existence of low per capita income. The per capita income of India in 2010 was $1270. Barring a few countries, the per capita income of the Indian people is the lowest in the world. During 1960-80, development economies grew at faster rate than the Indian economy, but during 1990-2010, Indian economy has grown at a faster rate than the developed economies.

4. Capital Formation:

Capital formation is playing an imperative role in accelerating the pace of economic

growth of the country. Capital formation is possible with high rate of savings in the

economy. It would be of high interest to look into the estimates of gross domestic

saving in India since the inception of planning. During the first four decades of planning, the rate of gross domestic savings has increased considerably.

5. Agricultural Development:

In India, the agriculture sector has attained a considerable level of development during the seven decades of planning. Besides, agriculture is occupying a pivotal position in respect of overall economic growth by contributing towards supplies of food, raw materials and exports. The total agricultural output has increased. The total production of food grains has increased from 55.0 million tons in1950-51 to 212.0 million tons in 2001-02 and to 259 .0 million tons in 2012-13.

6. Modernization and Structural Change in Agriculture:

The primitive technology of cultivation, outdated land tenure system and lack of infrastructure for raising productivity were formidable barriers to agricultural advancement at the start of the planning period. In free India, good luck to planners that Zamindari and other intermediary land tenure systems have been eliminated.

7. Industrial Development:

The industrial sector of the country has achieved tremendous progress. During the  planning period, the industrial production in the country has also increased significantly. Production of machine tools industry marked the increased output by more than 600 tones. The total volume of electricity generated has also raised from 5.1 billion kwh in 1950-51 to 545.6 billion in 2003-04. In this way, the industrial sector has attained a considerable progress and has also become successful to diversify in its structure.

8. Changes in Industrial Organization:

The industrial organization has also recorded a considerable development. The public sector investment has also attained considerable production in industry and has sustained the industrial transformation. Simultaneously, the private sector and joint sector have also grown considerably in respect of its industrial organization and diversified its activities for large extent.

9. Expansion of Infrastructure facilities:

The infrastructural facility has also expanded to a significant extent. These facilities

include development like transportation and communication facilities generation of

electricity, irrigation facilities etc. The rail and road system dominates over the entire system of the country. Being the Asia’s largest and world’s second largest organization in the terms of route length, Indian Railway has expanded, its total route length of rail line has also increased from 53600 kms, in 1950-51 to 67000 kms in 2003-04. Total length of national highways has increased to 39.1 lakh kms in 2000-01 against 4 lakh km in 1950-51.

10. Development of Financial Institutions:

After independence, India has made remarkable progress of banking, non-financial

institutions and insurance sector. The commercial bank of the country has attained significant progress since its nationalization in 1969. The share of the priority sectors

has enhanced. Agriculture, small scale industries and transportation and the total bank credit has increased from 12 percent in June 1969 to 46.7 per cent in Dec. 2000.

The Government has also set up a variety of financial and other institutions so as to assist the agriculture and industrial sectors in respect of provision of raw materials

credit supply, marketing, storage, research, technology and infrastructure facilities

though financial arrangements.

11. Human Resource Development:

As far as human resource is concerned, India has achieved a moderate rate of success. The major component of human resource development included expansion

of social infrastructure for making adequate provision for education, health care, water supply, sanitation and social security. The average life expectancy at birth in India has gradually increased from 41.2 years in 1951-61 to 67 years in 2000-1. The infant mortality rate has declined from 146 to74 per thousand live births during the same period. Moreover, a massive programmer for providing sanitation facilities has been developed and by March 1996, about 4.64 per cent of rural population and 50 percent of the urban population has been covered with sanitation facilities.

12. Export Increased:

The volume of export in India has also recorded a considerable increase since

1950-51. The total value of exports in India has increased from a mere Rs. 947 crore to 117 525 crore during 1950-51 to 1996-97. With the gradual diversification and growth of the industrial sector. India started to export various types of non-traditional products. Accordingly, the share of jute, tea and cotton textiles in the total export earning of the country gradually declined from 60 per cent to 10.9 per cent during 1950-51 to 2001-02. But, the share of machinery and engineering goods in India’s total exports has increased gradually from 2.1 per cent to 13.71 per cent during 1960-61 to 2002-03.

13. Employment Generation:

With the gradual development of various sectors of the economy, the country has started to generate employment opportunities for the people of the country. The continuation of the strategy during the ninth plan is expected to generate 47.5 million additional employment during the period 1997 to 2002.

14. Poverty:

 The incidence of poverty in India has also been declined in recent years. According to Planning Commission estimates, poverty shows that the proportion of total population lying below the poverty line has declined from 54.1 per cent in 1972-73 to 37.4 per cent in 1987-88 and then to 24.4 percent in 2000-01. This is a significant achievement of our country.

15. Primary Producing:

One of the basic characteristics of developing economy is that it is primary producing. A very high proportion of working population is engaged in agriculture which contributes a very large share in the national income. In 2010, about 58 per cent of the working population was engaged in agriculture and its contribution to national income was 18.9 per cent.

Features of Indian Economy as a Mixed Economy:

 A mixed economy is an economic system that incorporates aspects of more than one economic system. This usually means an economy that contains both privately owned and state-owned enterprises or that combines elements of capitalism and socialism, or a mix of market economy and planned economy characteristics. This system overcomes the disadvantages of both the market as well as planned economic systems.

Meaning of Mixed Economy:

In a mixed economy, private and public sector go side by side. The government directs economic activity in some socially important areas of the economy, the rest being left to the price mechanism to operate. The public and private sectors co-operate each other to achieve the social objectives. The private sector is considered to be an important instrument of economic growth. Even since independence India's economic development has been guided by two aims to build up democratic means rapidly expanding and technologically progressive economy and social order based on justice and offering equal opportunity to every citizen of the country.

Planning with a Mixed Economy:

It is through planning in a mixed economy that the merits of a socialist economy are imported and defects of capitalism are sought to be removed. Planning providers provides all the freedom of capitalism such as production, consumption, ownership of factor of production etc. At the same time the state regulates the working of the private sector through measures like taxes, subsiding, and power, credit, etc. in keeping with the nations interest. Moreover, planning also seeks to prevent activities such as hoarding and black marketing and even resorts to rationing in case of shortages. The main challenge for planning in a mixed economy is ensuring the cooperation of both the private and public sector to achieve the targets of the plan. Moreover, there is also a need today to divert the attention of the private sector into playing a more active social role for overall development of the economy.

Types of Mixed Economy:

Even in the mixed economy model, our leaders had to choose between two

alternatives-the mixed capitalist system, as envisaged by Samuelson and Hansen and followed with some modifications by USA, UK and France and the mixed enterprise system, followed in several developing countries where governments interfered in the day-to-day working of the economy through a control and regulation mechanism and also participated actively in their economic activities. In the first model, the means of production are owned by private entrepreneurs while governments control and regulate the working of the economy through its economic policies, especially the monetary and the fiscal policies. In such a mixed enterprise system, the government follows a number of activities. 

Features of Indian Economy as a Mixed Economy: 

1. Planned Development:

 After independence, India had a slender industrial base. A long period of economic stagnation against the background of increasing pressure of population followed by the burdens millions of people and dislocated economic life. The promise of freedom could only be redeemed if the other fundamental rights. It has also provided Directive Principles of State Policy for more liberty. Thus, it was essential to rebuild the rural economy, to lay the foundations of industrial and scientific progress and to expand education and other social services. As a result, planning on a national scale, comprising all aspects of economic and social life has been adopted since 1951. 

2. Plan Objectives:

 Indian has the beginning of planned development with the start of the first five year plan in April 1951. The central purpose of planning according to the first plan was identified as that of initiating a process of development which will raise living standards and open out to the people new opportunities for a richer and more varied life. In a broad sense, the basic objectives of planning in India can be grouped under four heads; growth, modernization, self-reliance and social justice. 

3.     Role of Public Sectors :

 Public sector has played a key role in the economic development of the country. It has helped in accelerating the rate of growth of the national economy and reducing disparities in income and wealth. The changes in the distribution of outlay in the public sector, the changes in emphasis for different heads of development during the successive plans has highlighted the core aspect of our mixed economy.

4.     Private Sector :

 Along with the public sector, proper care has been taken for the private sector. It includes not only organized industry but agriculture, small industry, trade and great deal of activity in housing and construction and other fields. The share of the private sector in agriculture that is little over one-third of our national income is contributed in the economy. It provides employment to three fourths of our manpower. Therefore, a mixed economy network of institutions has been established to regulate its activities. The measures have been reviewed from time to time and appropriate inputs, raw materials, marketing and technology facilities were provided especially to the small sector of economy. In view of the fast changing needs of a diversified industrial economy, the government has recently announced a series of measures to further liberalize the industrial policy and procedures.

5. Relation between Public and Private Sector:

With the rapid expansion of the economy, wider opportunities of growth arise for both the public and the private sectors. The second plan had pointed out that the two

sectors have to function in union. As a whole, the plan can go through only on the basis of simultaneous and balanced development of the two sectors. The impact of public investment on the overall pace of expansion is profounding. In fact, a high level of public investment in infrastructure and key industries is a pre-conditioning for development in the private sector.

The co-existence of large public sector along with free enterprises under private sector has transformed the economy into a mixed one. Some strategic basic industries are being run under the public sector while a good number of industries are being managed in private sector. Thus, many private enterprises depend on the orders which flow public activity and their growth and profitability depend directly on the expansion in public activity and their growth and profitability depend directly on the expansion in public sector investment.

6. Role of Market Mechanism:

Market mechanism has been playing a predominant role in India. Prices of various commodities are determined by market forces, future expectations etc. But the market mechanism in India is again not completely free from state control. Besides, the central government has introduced certain controls and incentive measures for influencing the market decision. These include-budgetary measures, import controls, establishment of fair price shops for the distribution of essential commodities at reasonable prices, purchase of agriculture commodities by the government at minimum support prices.

7. Reduction of Economic Inequalities:

 Economic inequalities are the features of capitalistic economy. Inequalities in the distribution of income and wealth of the extreme degree are economically harmful, socially unjust and politically undesirable. Extreme inequalities reduce social welfare and generate class-conflicts inequalities in the distribution of income and wealth. In this direction, the Government has imposed direct taxes at progressive rates through income tax, tax on capital gains, wealth tax, death duties, gift tax etc.

Again, in order to provide necessary support to the poorer section of the society, the Government has undertaken various welfare measures like free medical facilities, free education, old age pensions, and widow pensions along with other poverty alleviation programmes in rural and urban areas of the country. But in spite of all these, mixed economic framework in India has accentuated economic inequalities. 

Key Takeaways-

2.     Indian economy has been attaining praiseworthy progress in its different fields since the adoption of economic planning. In order to achieve the goal of rapid economic development, the Government of India under the able leadership of the then Late Prime Minister Jawaharlal Nehru, has successfully adopted the path of economic planning

3.     The national income in India has been increasing at a slow but steady pace. It can be seen that the national income of India at 1993-94 price has increased from Rs1,32,367 crore in 1950- 51 to Rs 11,15,157 crore in 2001-02 registering a growth rate of 842.5 percent during the last 51years.

4.     Developing economies are marked by the existence of low per capita income. The per capita income of India in 2010 was $1270.

5.     In India, the agriculture sector has attained a considerable level of development during the seven decades of planning.

6.     The volume of export in India has also recorded a considerable increase since 1950-51. The total value of exports in India has increased from a mere Rs. 947 crore to 117 525 crore during 1950-51 to 1996-97.

7.     The incidence of poverty in India has also been declined in recent years. According to Planning Commission estimates, poverty shows that the proportion of total population lying below the poverty line has declined from 54.1 per cent in 1972-73 to 37.4 per cent in 1987-88 and then to 24.4 percent in 2000-01.

1.2 Impact of Overpopulation on India's Growth

Overpopulation is a serious threat to our own existence. The whole world needs to address this issue and not just a few countries. The world's population is increasing mainly due to medical advancements and increases in agricultural productivity. Countries like Brazil, China and India add more to their woes by neglecting substantial increases in their populations.

India is now the home to 1.3 billion. Furthermore, India's population is expected to grow to 1.8 billion before stabilizing around the middle of this century, if sufficient measures are taken. Today India is stretched to its limit due to overpopulation. 57 billionaires control 70 percent of India’s wealth. This economic inequality leads to poverty, lack of free medical assistance, lack of social security and bad living conditions. The issues are even more critical due to the advancements in Artificial Intelligence and Automation. Automation threatens 69 percent job losses with millions of job losses already occurring in the IT and production sectors. E-commerce has failed to pick up so far due to job cuts and prices that are not as competitive as in the local marketplace.

Excessive population leads to dysfunctionality and makes all plans to improve a country's infrastructure, medical assistance facilities and social welfare initiatives ineffective. This includes the Indian Government which has struggled to enact reforms over the past 69 years since independence.

The consequences of population growth are a problem that the whole world will soon face sooner or later. Drinking water, sewage treatment, inadequate rainfall, rapid depletion of natural resources, extinction of many plant and animal species due to deforestation and loss of ecosystems, increased level of life-threatening air and water pollution, high infant and child mortality rate and hunger due to extreme poverty are some of the results of over-population.

Many people are already aware of the social and environmental problems due to overpopulation, but only a few are aware of its adverse effects on health. Most Indian cities are badly polluted and have little fresh air. This leads to countless airborne diseases and skin infections.

It’s not just India's struggle, Brazil and China are also coping with the ramifications of overpopulation. It’s time for all global forums to provide effective solutions in order to resolve this problem. Overpopulation can only be solved by spreading awareness of and implementing measures like birth control and access to birth control devices. Let us help the world prepare for a better tomorrow.

Population policy:

Population Policies formulated to address the unmet needs for contraception, health care infrastructure, and health personnel, and to provide integrated service delivery for basic reproductive and child health care. The main objective is to achieve a stable population at a level consistent with the requirements of sustainable economic growth, social development, and environmental protection. Several policies have been formulated in different Five-Year Plans by the Government of India for population control. 

Five-Year Plans by the Government of India for population control

First Five-Year Plan: India is the first country in the world to begin a population control programme in 1952. It emphasized the use of natural devices for family planning.

Second Five-Year Plan: Work was done in the direction of education and research and the clinical approach was encouraged. 

Third Five-Year Plan: In 1965, the sterilization technique for both men and women was adopted under this plan. The technique of copper- T was also adopted. An independent department called the Family Planning Department was set up.

Fourth Five-Year Plan: All kinds of birth control methods (conventional and modern) were encouraged.

Fifth Five Year Plan: Under this plan the National Population Policy was announced on 16 April, 1976. In this policy, the minimum age for marriage determined by the Sharda Act, 1929 was increased. It increased the age for boys from 18 to 21 years and for girls from 14 to 18 years. The number of MPs and MLAs was fixed till the year 2001 on the basis of the census 1971. Under this Plan, forced sterilization was permitted which was later on given up. In 1977, the Janata Party government changed the name of Family Planning Department to Family Welfare Department.

In the Sixth, Seventh and Eighth Plans, efforts were done to control population by determining long-term demographic aims.

Ninth Five-Year Plan: In 1993, the government had established an expert group under the chairmanship of M.S. Swaminathan for formulating national population policy. Though this group had prepared the draft of the new population policy in 1994, it was reviewed in 1999 by the Family Welfare Department and was passed by the Parliament in 2000. The Central Government formulated the 'new national population policy' in February 2000. This policy has three main objectives:

Objectives of Ninth Five Year Plan -

1. Temporary objective: The easy supply of birth control devices was included in it. Besides, the development of health protection framework and recruitment of health workers were also made a part of it.

2. Middle-term objective: Under it, the total fertility rate (TFR) had to bring down to the replacement level of 2.1 by 2010.

3. Long-term objective: Under it, the Objective of population stabilization by 2045 is to be achieved.

The population has to be stabilised at that level which must be harmonious from the points of view of economic and social development and environmental protection.

It has been announced in the new population policy to keep the composition of the Lok Sabha unchanged by 2026 so that the states could co-operate without any fear. Under current provisions, the number of MPs in different states by 2001 has been determined on the basis of the census 1971. It was to be changed in 2001 on the basis of the new census report (2001). But it might be harmful to those states which had taken part in the population control programme with great fervour. Those states which had not laid proper attention on population control could get more shares in the Lok Sabha resulting in wrong effect on the population control programme. So, the Lok Sabha would not have more than 553 elected seats till 2026 and the number of Lok Sabha seats of each state would remain the same as it is at present. While announcing this new policy, the Central Health Minister said that the people living below poverty line would be rewarded properly if they would marry after 21 years, adopt the standard of two children and undergo sterilisation after two children.

The following major Objectives had been set in the National Population Policy till the year 2010:

1. The 'total fertility rate' to be reduced to 2.1.

2. The high-class birth control services had to be made available publically so that the standard of two children could be adopted.

3. The infant mortality rate had to be reduced to 30 per thousand.

4. The mother mortality rate had also to be reduced to below 100 per one lakh.

5. The late marriage of girls had to be encouraged.

A high level 100-membered National Population Commission has been set up under the chairmanship of the Prime Minister on 11 May 2000 to supervise and analyse the implementation of this new population policy.

Key Takeaways-

1.3 TRANSPORT INFRASTRUCTURE

India's transport infrastructure is inadequate to meet current needs, and the needs of 2035 will be much greater. It has a corresponding appetite for investment and services to improve the sector. The Indian Government is prioritising regulatory reforms to attract more foreign investment.

India's population growth and economic development requires improved transport infrastructure, including through investments in roads, railways, and aviation, shipping and inland waterways.

Capital is the key to advancing India's transport infrastructure-

In some parts of India, developers are also employing user charges and value capture mechanisms such as taxes and betterment levies to finance infrastructure projects.

A breakdown of the scale of the infrastructure capacity and demand for segments of transport infrastructure follows.

India's road quality is generally low, despite India's roads carrying 90 per cent of passenger traffic and 65 per cent of freight

The Government of India has a range of projects to improve road infrastructure-

Air traffic is expected to experience double digit growth well beyond 2020, at which point India will become the world's third largest aviation market (behind China and the United States)

       around 97 per cent of tourists arrive in India by air.

India has unrealised potential in shipping, with 7,500 km of coastline and 14,500 km of navigable or potentially navigable waterways.

More than one billion tonnes of cargo were handled across over 200 ports in India in 2015 with maritime logistics accounting for 90 per cent of international trade by volume and 72 per cent by value.

Despite the cost-efficiency of coastal and inland water transportation, India's ports tend to be small, lack draft for larger vessels, and are inefficient

Port links to road and rail connections are poor

      The focus will be on enhanced connectivity through road, rail and inland waterways, and port development and modernisation.

India's railways play a major role in affordable transport of passengers and cargo across the country

The Ministry of Railways plans to improve and expand the rail network, renew the train fleet, and improve passenger safety. It plans to invest up to $170 billion over the next five years, with the largest proportion aimed at network expansion and decongestion, and safety.64 Investments are also planned for station redevelopment and the dedicated freight corridor between Delhi and Mumbai.

The Government of India is seeking greater private investment through:

MULTIMODAL LOGISTICS:

Intermodal freight planning and optimisation in the transport infrastructure sector is lagging and inefficient transport logistics constrain the competitiveness and productivity of the Indian economy

Key Takeaways-

1.4 Poverty in India

Two-thirds of people in India live in poverty: 68.8% of the Indian population lives on less than $2 a day. Over 30% even have less than $1.25 per day available - they are considered extremely poor. This makes the Indian subcontinent one of the poorest countries in the world; women and children, the weakest members of Indian society, suffer most.

India is the second most populous country after China with about 1.2 billion people and is the seventh largest country in the world with an area of ??3,287,000 km². The highly contrasted country has enjoyed growth rates of up to 10% over many years and is one of the largest economies in the world, with a gross domestic product (GDP) of 1,644 billion US dollars. But only a small percentage of the Indian population has benefited from this impressive economic boom so far, as the majority of people in India are still living in abject poverty.

Poverty in India: From the village to the slum:

More than 800 million people in India are considered poor. Most of them live in the countryside and keep afloat with odd jobs. The lack of employment which provides a livable wage in rural areas is driving many Indians into rapidly growing metropolitan areas such as Bombay, Delhi, Bangalore or Calcutta. There, most of them expect a life of poverty and despair in the mega-slums, made up of millions of corrugated ironworks, without sufficient drinking water supply, without garbage disposal and in many cases without electricity. The poor hygiene conditions are the cause of diseases such as cholera, typhus and dysentery, in which especially children suffer and die.

Poverty in India impacts children, families and individuals in a variety of different ways through:

     High infant mortality.

     Malnutrition.

     Child labour.

     Lack of education.

     Child marriage.

     HIV / AIDS.

The high infant mortality:

1.4 million children die each year in India before their fifth birthday. In addition to Nigeria, Pakistan, the Democratic Republic of the Congo and China, India is one of the countries with the highest child mortality rates. Pneumonia, malaria and diarrheal diseases as well as chronic malnutrition are the most frequent causes of death.

Malnutrition - not even a bowl of rice a day

India is one of the world's top countries when it comes to malnutrition: More than 200 million people don't have sufficient access to food, including 61 million children. 7.8 million infants were found to have a birth weight of less than 2.5 kilograms - alarming figures for a country commonly referred to as the emerging market.

Child labour - no time to play and learn

Although child labour for children under the age of 14 in India is prohibited by law, according to official figures, 12.5 million children between the ages of 5 and 14 are working. Aid agencies assume that in reality, there are many more estimating that 65 million children between 6 and 14 years do not go to school. Instead, in order to secure survival, it is believed that Indian children contribute to the livelihood of their families; they work in the field, in factories, in quarries, in private households and in prostitution.

Lack of education - no opportunities without education

According to UNICEF, about 25% of children in India have no access to education. The number of children excluded from school is higher among girls than boys. Although women and men are treated equally under Indian law, girls and women, especially in the lower social caste, are considered inferior and are oppressed by their fathers, brothers and husbands. Without education, the chance of finding a living wage from employment in India is virtually hopeless.

Child marriage - the early end of childhood

In spite of banning minors from marrying in 2006, it is still widespread in many regions of India. The main leaders in this practice are young girls, who are still children themselves and become mothers too early. Many of them die at birth. According to an investigation by the medical journal The Lancet, 44.5% of girls are still married in India before they are of legal age.

Due to poverty, many parents encourage early marriages for their daughters in hopes of better lives for them.

HIV / AIDS - a taboo in Indian society

2.7 million Indians are infected with the HIV virus; about 220,000 of them are children, with the tendency rising. The lack of education and the lack of condoms mean that the virus is spreading faster and faster and more and more people are dying of AIDS - especially in the slums of the growing cities. More and more children are living there as so-called AIDS orphans , often being infected with the virus as well.

Inflation rate in India was 5.5% as of May 2019, as per the Indian Ministry of Statistics and Programme Implementation. This represents a modest reduction from the previous annual figure of 9.6% for June 2011. Inflation rates in India are usually quoted as changes in the Wholesale Price Index (WPI), for all commodities.

Many developing countries use changes in the consumer price index (CPI) as their central measure of inflation. In India, CPI (combined) is declared as the new standard for measuring inflation (April 2014).[1] CPI numbers are typically measured monthly, and with a significant lag, making them unsuitable for policy use. India uses changes in the CPI to measure its rate of inflation.

The WPI measures the price of a representative basket of wholesale goods. In India, this basket is composed of three groups: Primary Articles (22.62% of total weight), Fuel and Power (13.15%) and Manufactured Products (64.23%). Food Articles from the Primary Articles Group account for 15.26% of the total weight. The most important components of the Manufactured Products Group are, Food products (19.12%); Chemicals and Chemical products (12%); Basic Metals, Alloys and Metal Products (10.8%); Machinery and Machine Tools (8.9%); Textiles (7.3%) and Transport, Equipment and Parts (5.2%). WPI numbers were typically measured weekly by the Ministry of Commerce and Industry. This makes it more timely than the lagging and infrequent CPI statistic. However, since 2009 it has been measured monthly instead of weekly.

The challenges in developing economy are many, especially when in context of the monetary policy with the Central Bank, the inflation and price stability phenomenon. There has been a universal argument these days when monetary policy is determined to be a key element in depicting and controlling inflation. The Central Bank works on the objective to control and have a stable price for commodities. A good environment of price stability happens to create saving mobilisation and a sustained economic growth. The former Governor of RBI C. Rangarajan points out that there is a long-term trade-off between output and inflation. He adds on that short-term trade-off happens to only introduce uncertainty about the price level in future. There is an agreement that the central banks have aimed to introduce the target of price stability while an argument supports it for what that means in practice.

Optimal inflation rate

It arises as the basic theme in deciding an adequate monetary policy. There are two debatable proportions for an effective inflation, whether it should be in the range of 13 per cent as the inflation rate that persists in the industrialized economy or should it be in the range of 67 per cent. While deciding on the elaborate inflation rate certain problems occur regarding its measurement. The measurement bias has often calculated an inflation rate that is comparatively more than actual. Secondly, there often arises a problem when the quality improvements in the product are in need to be captured out, hence it affects the price index. The consumer preference for a cheaper goods affects the consumption basket at costs, for the increased expenditure on the cheaper goods takes time for the increased weight and measuring inflation. The Boskin Commission has measured 1.1 per cent of the increased inflation in USA every annum. The commission points out for the developed countries comprehensive study on inflation to be fairly low.

Money supply and inflation

The Good Quantitative Easing by the central banks with the effect of an increased money supply in an economy often helps to increase or moderate inflation targets. There is a puzzle formation between low-rate inflation and a high growth of money supply. When the current rate of inflation is low, a high worth of money supply warrants the tightening of liquidity and an increased interest rate for a moderate aggregate demand and the avoidance of any potential problems. Further, in case of a low output a tightened monetary policy would affect the production in a much more severe manner.

The supply shocks have known to play a dominant role in the regard of monetary policy. The bumper harvest in 199899 with a buffer yield in wheat, sugarcane, and pulses had led to an early supply condition further driving their prices from what they were in the last year. The increased import competition since 1991 with the trade liberalisation in place have widely contributed to the reduced manufacturing competition with cheaper agricultural raw materials and the fabric industry. These cost-saving-driven technologies have often helped to drive a low inflation rate. The normal growth cycles accompanied with the international price pressures has several times been characterized by domestic uncertainties.

Global trade

Inflation in India generally occurs as a consequence of global traded commodities and the several efforts made by the Reserve Bank of India (RBI) to weaken rupee against the dollar. This was done after the Pokhran Blasts in 1998.[3] This has been regarded as the root cause of inflation crisis rather than the domestic inflation. According to some experts the policy of RBI to absorb all dollars coming into the Indian economy contributes to the appreciation of the rupee.[4] When the U.S. dollar has shrieked by a margin of 30%, the RBI had made a massive injection of dollar in the economy make it highly liquid and this further triggered off inflation in non-traded goods. The RBI picture clearly portrays for subsidising exports with a weak dollar-exchange rate. All these account for a dangerous inflationary policy being followed by the central bank of the country.[5] Further, on account of cheap products being imported in the country which are made on a high technological and capital-intensive techniques happen to either increase the price of domestic raw materials in the global market or they are forced to sell at a cheaper price, hence fetching heavy losses.

Factors-

There are several factors which help to determine the inflationary impact in the country and further help in making a comparative analysis of the policies for the same. The major determinant of the inflation in regard to the employment generation and growth is depicted by the Phillips curve.

Demand factors

It basically occurs in a situation when the aggregate demand in the economy has exceeded the aggregate supply. It could further be described as a situation where too much money chases just few goods. A country has a capacity of producing just 5,500 units of a commodity but the actual demand in the country is 7,000 units. Hence, as a result of which due to scarcity in supply the prices of the commodity rises. This has generally been seen in India in context with the agrarian society where due to droughts and floods or inadequate methods for the storage of grains leads to lesser or deteriorated output hence increasing the prices for the commodities as the demand remains the same.

Supply factors

The supply side inflation is a key ingredient for the rising inflation in India. The agricultural scarcity or the damage in transit creates a scarcity causing high inflationary pressures. Similarly, the high cost of labor eventually increases the production cost and leads to a high price for the commodity. The energies issues regarding the cost of production often increases the value of the final output produced. These supply driven factors have basically have a fiscal tool for regulation and moderation. Further, the global level impacts of price rise often impact inflation from the supply side of the economy.

Consensus on the prime reason for the sticky and stubbornly high Consumer Price Index, that is retail inflation of India, is due to supply side constraints; and still where interest rate remains the only tool with the Reserve Bank of India.[6] Higher inflation rate also constraints India's manufacturing environment.

Domestic factors

Developing economies like India have generally a lesser developed financial market which creates a weak bonding between the interest rates and the aggregate demand. This accounts for the real money gap that could be determined as the potential determinant for the price rise and inflation in India. There is a gap in India for both the output and the real money gap. The supply of money grows rapidly while the supply of goods takes due time which causes increased inflation. Similarly, hoarding has been a problem of major concern in India where onion prices have shot high. There are several other stances for the gold and silver commodities and their price hike.

External factors

The exchange rate determination is an important component for the inflationary pressures that arises in India. The liberal economic perspective in India affects the domestic markets. As the prices in United States rises it impacts India where the commodities are now imported at a higher price impacting the price rise. Hence, the nominal exchange rate and the import inflation are measures that depict competitiveness and challenges for the economy.

Value-

The inflation rate in India was recorded at 6.2% (WPI) in August 2013. Historically, from 1969 until 2013, the inflation rate in India averaged 7.7% reaching an all-time high of 34.7% in October 1974 and a record low of -11.3% in May 1976.

The inflation rate for Primary Articles is currently at 9.8% (as of 2012). This breaks down into a rate 7.3% for Food, 9.6% for Non-Food Agricultural, and 26.6% for Mining Products. The inflation rate for Fuel and Power is at 14.0%. Finally, the inflation rate for Manufactured Articles is currently at 7.3%.

Index-

Given below is a comparison of average consumer price inflation, cost (for filing tax returns) inflation, gold, silver and house inflation indices in India (collated from IMF, CBDT, RBI and multiple sources). Price index is useful in gauging income and profit of sellers, cost index is useful in gauging expenditure and loss of buyers while the gold index helps measure wealth. The gold index is in vogue for three centuries.

Key takeaways-

1.5 What are the effects of unemployment on our society? (India)

Effects of Unemployment:

1. Loss of Human Resources:

The problem of unemployment causes loss of human resources. Labourers waste their maximum time in search of employment.

2. Increase in Poverty:

Unemployment deprives a man of all sources of income. As a result he grows poor. Therefore, unemployment generates poverty.

3. Social Problems:

Unemployment breeds many social problems consisting of dishonesty, gambling, bribery, theft etc. As a result of unemployment social security is jeopardized.

4. Political Instability:

Unemployment gives birth to political instability in the country. Unemployed persons can easily be enticed by antisocial elements. They lose all faith in democratic values and peaceful means. They consider that the Government is worthless which fails to provide them work.

5. Exploitation of Labour:

In the state of unemployment, labourers are exploited to the maximum possible extent. Those labourers who get work have to work under adverse conditions of low wages. All this tells upon the efficiency of labourers greatly influence the pattern of employment opportunities in the country. Being poor, a person does not make any gainful use of existing resources.

6. More Emphasis on Capital Intensive Techniques:

In India, capital is scarce and labour is available in surplus quantity. Under these circumstances, the country should adopt labour intensive techniques of production. But it has been observed that not in the industrial sector, also in the agriculture sector; there is a substantial increase of capital than labour. In the case of Western countries, where capital is in abundant supply, use of automatic machines and other sophisticated equipment are justified while in our country abundant labour, results in a large number of unemployment.

7. Defective Education System:

The education system in our country too has failed to respond to the existing inter-generation gap. It simply imparts general and literary education devoid of any practical content. India's education policy merely produces clerks and lower cadre executives for the government and private concerns. The open-door policy at the secondary and university level has increased manifold unemployment among the educated that are fit only for white collar jobs.

8. Slow Growth of Tertiary Sector:

The expansion of tertiary sector comprising commerce, trade transportation etc. is limited which could not provide employment even to the existing labour force, what to think about new entrants. As a result of this, there is a wide scale of unemployment among engineers, doctors, technically trained persons and other technocrats.

9. Decay of Cottage and Small Scale Industries:

The traditional handicraft has a glorious past and was the main source of employment especially to the village crafts-men, artisans as well as non-agricultural workers. Unfortunately, most of rural traditional crafts have been ruined or faded partly due to the unfavourable policy of the foreign rulers and partly due to tough competition from the machine-made goods. Consequently, these laborers were out of job. Most of them turned as landless laborers.

10. Lack of Vocational Guidance and Training Facilities:

As already discussed, our education system is defective as it provides purely academic and bookish knowledge which is not job oriented. The need of the hour is that there must be sufficient number of technical training institutions and other job-oriented courses at village level. Most of the students in rural areas remain ignorant of possible venues of employment and choice of occupation.

11. Less Means for Self-Employment:

Another hurdle in generating more employment opportunities is that there are inappropriate means for self-employment in rural and semi-urban areas of the country. Like other developed countries, most of our engineers, technocrats and other well qualified persons do not possess ample means for self-employment. They go about in search of paid jobs.

India's economy is recovering but there are several macroeconomic issues that need urgent attention. One of them is the persistently high levels of retail inflation, especially when the country has officially entered a recession.

The retail inflation in October jumped to 7.61 per cent, the highest in the last six years. In September, it stood at 7.27 per cent. And in October 2019, retail inflation was 4.62 per cent. October was the second straight month when inflation remained above 7 per cent, well above the Reserve Bank of Indias acceptable target of 2-6 per cent. It may be noted that retail inflation has remained above RBI's target for over seven months now. A fresh Reuters poll expects inflation to remain above 7 per cent in November. While elevated inflation is a sign of higher economic activity, it could have a negative impact on purchasing demand besides limiting the central banks ability to act on key rates. Also Read | Manufactured products turn costlier as WPI inflation peaks 8-month high in October.

How high inflation affects you?

Retail inflation is based on the Consumer Price Index (CPI), which tracks changes in the retail price of goods and services purchased on a daily basis by households. Simply put, retail inflation is a measure of what households pay for everyday items including food, fuel, clothing and electricity.

While economists expect headline inflation to come down in the coming months, reasonable doubt remains with a sharp rise in prices of essential commodities like vegetables, fruits, meats and other food items. Energy prices - electricity and fuel also remain elevated.

As per the official data for October, the combined rural and urban food price inflation rose sharply by 11.07 per cent. Food inflation remains the biggest concern for poorer households as a majority of them have faced income loss during the pandemic.

It is worth mentioning that vegetable prices surged over 22.5 per cent in October after increasing over 20 per cent in September. Price of pulses, fish and meat also increased over 18 per cent. This means consumers are now paying more towards food items, which is the main source of expenditure for poor and middle-income groups.

Moving on to the other major categories. Fuel and electricity inflation rose modestly by over two per cent in both October and September, while costs towards healthcare climbed over five per cent. Core inflation, which excludes volatile items like food and energy, also remains high. October’s core inflation was in the range of 5.5 to 5.8 per cent.

Economic drag, lower savings:

Experts explain that persistently high levels of inflation could drag economic growth as rising prices for items make savings harder, forcing individuals to either cut down on expenses or find ways to increase income. But in a period of recession, when employment opportunities are limited, the prospect of increasing income is tricky.

Since employment opportunities are limited and many from the services sector are living on lower incomes, the high costs for food, energy and other essential goods and services could become a major threat for long-term growth. Lower household savings could create a demand void for non-food commodities, resulting in lower business in key sectors like real estate and consumer goods.

Double whammy-

Like many other countries, India is facing a peculiar economic problem: inflation during a period of recession due to the pandemic. During a recession, authorities are focused on loosening money supply while it is tightened to control inflation a reason why the RBI has neither been able to increase the key interest rates nor decrease them.

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The situation is such that a larger share of the responsibility to deal with the recession now lies with the government. Although it has introduced three dedicated stimulus packages, several economists believe that it should be ready to loosen its purse strings further in case inflation keeps rising during the period of recession.

A Bloomberg report recently said that the government is considering recommending a looser inflation target for the central bank, allowing it to focus more on economic growth despite growing price pressure.

But former RBI Governor Viral Acharya told news agency PTI that revising up inflation bands of the central bank will hurt the poor. He said the current target of four per cent (+/-2) as reasonable.

Explaining that revising the inflation target upward will severely impact the poor, Acharya said, those pitching for a 6 percent inflation should get into the poor man's shoes for a day to see how price rise pinches and finally impacts his consumption.

Acharya went on to add that the country has to devise ways of pushing up growth in a structural manner and not by pump-priming measures like easy credit and liquidity. I think India has got to find a way to drive up growth without allowing inflation to run away to such high levels. India has to invest in growth structurally, not through this pump-priming of the economy through easy credit and easy liquidity conditions.

Experts say that India’s recovery is going through a tricky phase as authorities would have to deal with both recession and rising inflation.

One of the measures that could come in handy is to reduce spending on projects that are not immediately required as that money can be diverted towards economic recovery. Another key measure that is required to tackle the situation is generating employment, as it would help poorer households increase income levels.

As the situation stands, India's economy does seem to be recovering quickly on the back of higher spending, but it may be difficult to sustain if inflation rises in a recessionary environment.

Reference:

1. Indian Economy (B.Com. - III) Paperback – 1 January 2014 by T R Jain (Author), Mukesh Trehan (Author), Ranju Trehan (Author).

2. Indian Economy Key Concepts (English, Paperback, Karuppiah Sankarganesh).