1. Basic Concepts of Economics

Economics studies how individuals, businesses and governments use limited resources to satisfy unlimited wants.

Important Terms

• Economy: A system through which goods and services are produced, distributed and consumed.
• Microeconomics: Study of individual consumers, firms and markets.
• Macroeconomics: Study of the economy as a whole, including national income, inflation and employment.
• Demand: Quantity of a good or service consumers are willing and able to buy at a given price.
• Supply: Quantity of a good or service producers are willing to sell at a given price.
• Opportunity Cost: Value of the next best alternative forgone.
• Capital: Produced resources used to create other goods and services.
• Scarcity: Limited availability of resources in relation to human wants.

2. Sectors of the Indian Economy

Organised and Unorganised Sectors

• Organised Sector: Generally follows formal rules relating to employment, wages and working conditions.
• Unorganised Sector: Often has limited formal regulation and fewer employment protections.

Public and Private Sectors

• Public Sector: Owned or controlled by the government.
• Private Sector: Owned and managed by private individuals or companies.
• Mixed Economy: An economy in which both public and private sectors operate.

3. National Income

National income measures the economic activity and income generated by a country over a specific period.

Important Concepts

• GDP: Market value of final goods and services produced within a country during a given period.
• GNP: GDP plus net factor income from abroad.
• NNP: GNP minus depreciation.
• Per Capita Income: Average income calculated by dividing national income by population.
• Nominal GDP: GDP measured at current prices.
• Real GDP: GDP adjusted for changes in prices.
• Fiscal Deficit: Excess of total government expenditure over total receipts excluding borrowings.
• Revenue Deficit: Excess of revenue expenditure over revenue receipts.

4. Economic Planning in India

• The Planning Commission was established in 1950.
• India’s First Five-Year Plan began in 1951.
• The First Five-Year Plan focused mainly on agriculture, irrigation and rehabilitation.
• The Second Five-Year Plan was based largely on the Mahalanobis model and emphasised heavy industries.
• The Planning Commission was replaced by NITI Aayog in 2015.
• NITI Aayog promotes cooperative and competitive federalism and provides policy advice.

Types of Planning

• Indicative Planning: Provides broad directions and targets rather than strict commands.
• Centralised Planning: Major economic decisions are made by a central authority.
• Decentralised Planning: Planning responsibilities are distributed among lower levels of government.

5. Economic Reforms of 1991

India introduced major economic reforms in 1991 in response to a serious balance of payments crisis.

Major Features

• Reduction in industrial licensing requirements in many sectors.
• Encouragement of private investment and competition.
• Greater openness to foreign trade and foreign investment.
• Financial-sector and tax reforms.
• Gradual movement toward a more market-oriented economy.

6. Money and Inflation

Functions of Money

• Medium of exchange.
• Measure of value.
• Store of value.
• Standard of deferred payments.

Types of Money

• Fiat Money: Money whose value is based mainly on government authority and public confidence.
• Legal Tender: Money that must be accepted for settling debts according to law.
• Digital Money: Monetary value transferred or stored electronically.

Inflation

Inflation is a sustained increase in the general price level of goods and services, reducing the purchasing power of money.

• Demand-Pull Inflation: Occurs when aggregate demand rises faster than supply.
• Cost-Push Inflation: Results from an increase in production costs.
• Deflation: A sustained decline in the general price level.
• Disinflation: A reduction in the rate of inflation.
• Stagflation: A situation involving high inflation and weak economic growth, often with high unemployment.

7. Banking System in India

Types of Banks

Important Banking Terms

• Deposit: Money placed in a bank account.
• Loan: Money provided by a lender that is generally repaid with interest.
• Non-Performing Asset: A loan or advance that has ceased to generate income for a bank according to regulatory criteria.
• Financial Inclusion: Access to affordable and useful financial services.
• Bank Rate: A rate associated with the central bank’s lending and monetary policy framework.

8. Reserve Bank of India and Monetary Policy

• The Reserve Bank of India was established in 1935.
• It was nationalised in 1949.
• The RBI is India’s central bank.
• It manages monetary policy and regulates important parts of the financial system.
• It issues and manages currency notes, subject to statutory arrangements.
• It acts as banker to the government and banker’s bank.
• It manages foreign exchange reserves and supports financial stability.

Monetary Policy Tools

9. Union Budget and Public Finance

The Union Budget is the government’s annual statement of estimated receipts and expenditure.

Components of the Budget

• Revenue Receipts: Receipts that do not create liabilities or reduce government assets, such as taxes and many non-tax receipts.
• Capital Receipts: Receipts that create liabilities or reduce government assets, such as borrowings and disinvestment receipts.
• Revenue Expenditure: Expenditure that generally does not create assets or reduce liabilities directly.
• Capital Expenditure: Expenditure that generally creates assets or reduces liabilities.

Types of Deficits

Fiscal Policy

Fiscal policy refers to the government’s use of taxation, public expenditure and borrowing to influence economic activity.

10. Taxation in India

Direct and Indirect Taxes

Goods and Services Tax

• GST is a destination-based tax on the supply of goods and services, subject to constitutional and statutory provisions.
• The 101st Constitutional Amendment Act, 2016 created the constitutional framework for GST.
• The GST Council is a constitutional body under Article 279A.
• GST replaced several central and state indirect taxes.

Important Tax Terms

• Progressive Tax: Tax rate or burden rises as the tax base increases, according to the applicable structure.
• Proportional Tax: Tax rate remains constant across the tax base.
• Regressive Tax: Tax burden may fall relatively more heavily on lower-income groups.
• Tax Base: The income, transaction, property or activity on which a tax is calculated.

11. Agriculture and Allied Activities

• Agriculture provides livelihoods to a large part of India’s population and supports several industries.
• Important agricultural inputs include land, water, seeds, fertilisers, labour, machinery and credit.
• Crop insurance, irrigation, storage, transport and market access influence farm incomes.
• Allied activities include dairy farming, fisheries, poultry, beekeeping and horticulture.

Agricultural Revolutions

Minimum Support Price

Minimum Support Price is an announced price intended to provide a price-support mechanism for specified agricultural crops, subject to government policy and procurement arrangements.

12. Industry and Infrastructure

Industrial Sectors

• Core Industries: Important sectors such as coal, crude oil, natural gas, refinery products, fertilisers, steel, cement and electricity are included in the commonly used core-industry framework.
• Small and Medium Enterprises: Important contributors to employment, production, exports and regional development.
• Manufacturing: Converts raw materials into finished or semi-finished goods.
• Service Industry: Includes information technology, finance, tourism, education, healthcare and logistics.

Infrastructure

• Economic infrastructure includes transport, power, communication, irrigation and financial systems.
• Social infrastructure includes education, healthcare, sanitation and housing.
• Reliable infrastructure supports productivity, investment and inclusive development.

13. External Sector

Important Terms

• Balance of Payments: A systematic record of economic transactions between residents of a country and the rest of the world during a period.
• Current Account: Includes trade in goods and services, primary income and secondary income.
• Capital and Financial Account: Records relevant capital transfers and financial transactions according to the accounting framework.
• Trade Balance: Difference between the value of merchandise exports and imports.
• Exchange Rate: Price of one currency expressed in terms of another currency.
• Foreign Direct Investment: Investment involving a lasting interest and significant influence in an enterprise in another economy.
• Foreign Portfolio Investment: Investment in financial assets of another country without the same degree of controlling influence.

International Institutions

• IMF: Promotes international monetary cooperation and financial stability.
• World Bank: Provides development finance and technical assistance.
• WTO: Deals with rules governing international trade.
• Asian Development Bank: Supports economic and social development in Asia and the Pacific.

14. Poverty, Unemployment and Inclusive Growth

Poverty

Poverty refers to a condition in which people lack sufficient resources to meet basic needs and participate adequately in society.

Types of Unemployment

• Seasonal Unemployment: Employment is available only during certain seasons.
• Disguised Unemployment: More people are engaged in an activity than are actually required for the existing level of output.
• Structural Unemployment: A mismatch between workers’ skills and available jobs.
• Frictional Unemployment: Temporary unemployment during job search or transition.
• Cyclical Unemployment: Unemployment associated with fluctuations in economic activity.

Inclusive Growth

• Inclusive growth aims to ensure that the benefits of economic development reach different sections of society.
• It focuses on employment, education, healthcare, financial inclusion, social protection and equal opportunities.
• Sustainable development seeks to balance economic progress, social well-being and environmental protection.

15. Important Economic Institutions

Quick Revision: Important Indian Economy Facts