THE INDIAN ECONOMY

SECOND EDITION

Sanjiv Verma

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Price : ` 235.00ISBN : 978-81-8357-765-6Code : 8.26.1

First Impression

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This revised version of the book Indian Domestic Economy is based on the new pattern and syllabus of the UPSC (Main) 2013. A notable feature of the new syllabus is that papers have become multidisciplinary, with different aspects of the same topic spread across different papers. This book attempts to cover all the topics which relate to economics, irrespective of the paper in which it is covered. The aim of the book is not to provide a fact sheet of the Indian economy, but give a conceptual clarity, flag issues and provide remedial measures.

The book has now been structured into different sections and further they have been divided into chapters based on the new pattern of the UPSC syllabus. Certain chapters have been re-written to cover the topics in the revised syllabus.

Following are the new chapters/topics that have been covered in this revised edition:

1. Land reforms—A New Perspective2. Investment Models

The following sections have been inserted in the new edition:

1. Food Processing Industries—Industry of the future2. Ports in India—An Economic Perspective3. Railways—Life Line of the Nation4. Globalization—Its Impact on the Society5. Overview of Recent Crises Since 2008

The following chapters have been re-written to provide extensive coverage of the topics:

1. Food Security2. Banking

Also, I would like to thank the readers for the overwhelming response to the first edition. I am also grateful for the feedback that we have been receiving for the book.

Those interested in getting regular updates on economic issues, can refer to sanjivverma.nowfloats.com and mails can be sent to sanjiv.verma@ymail.com.

Sanjiv Verma

PREFACE

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FOREWORD

Economics has always intrigued those who have no background in economics and it intrigues them even more who do have a background in economics! There are new paradigms coming up everyday and the theories get revisited by their own proponents. Two books, one from a former Treasury Secretary of US Robert E Rubin In an Uncertain World, and another from the great economist Niall Fergusson The Ascent of Money have highlighted the dynamic nature of economics. Niall traces back the concept of money, banks and insurance to early part of 16th century and captures the dynamics of ‘money’ as it has traversed through time. Robert’s book outlines his grappling with the South East Asian economy meltdown of 1997 as US Treasury Secretary and how he along with others tried to bring the completely derailed financial system back on track. I am waiting for a book by the present US Treasury Secretary on the great mayhem of 2008.

The good thing about the 2008 mayhem was that it made a lot of people interested in economics. Unfortunately, economics does not lend itself to being easily understandable. The esoteric sounding concepts and definitions have successfully kept most of the interested people at a safe distance. But, the fact is that we need basic understanding of the subject even to run our own household. One need not have the expertise to write a paper on modern world economics but one definitely needs to know the fundamentals to make intelligent decisions for investing one’s hard earned money.

There is another purpose for which the understanding of economics is essential and that is for competing in the open public examinations for the recruitment to the civil services. No civil servant in the world can function effectively if he or she does not have the understanding of the fundamentals of economics. As a serving civil servant, I have to deal with issues regularly which require a good understanding of the economics. When I was preparing for the civil services almost a decade ago, I realized that a serious bottleneck for, we engineers was economics. Having virtually taught myself everything required for civil services curriculum, I thought economics cannot be that difficult—and that too for an IITian (with a clear touch of misplaced academic arrogance on my part). As I dived into economics with a mission to master the subject, I soon realized that it is much easier to follow the Einstein’s theory of relativity than to have a running duel with economic concepts.

It was frustrating! Then came the rescuer—the author of this book—Mr Sanjiv Verma. He came down all the way from Delhi, stayed with us for two days at IIT Kanpur, and

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FOREWORD v

we had two marathon sessions on economics. This was the longest lecture I and about 50 of my colleague IAS aspirants ever took. In two days, we covered the entire syllabus of economics for civil services. The lectures started at 8 in the morning and went on till 8 in the evening with a short lunch break in the middle and two tea breaks of 15 minutes each. It was challenging for us to sit for such long hours. Imagine how much more difficult it would be for a lecturer to constantly stand, lecture and keep the subject in focus. But Sanjivji was superb!

He was able to deliver the complex concepts in simple terms. He was able to engage all of us and kept the subject moving, as if by magic. After the session, the feedback from the entire group was so encouraging that I requested him that if he could pen all this down in form of a book form for the benefit of the lakhs of aspirants and students like us. I told him that there is no book available in the market which can take a non-economy background student through the concepts of economics.

He said, ‘he will think about it’ and then it was left at that. Life went on, I joined the IAS that year with all India 2nd rank, after getting a whopping 365/600 marks in the GS, where the contribution from the economics paper (GS paper II) was an unbelievable 188/300 and as all of you would have guessed it, the credit squarely lies with Mr Verma and his two-day economics capsule he delivered at the IIT Kanpur in the summer of 1999.

That was over a decade ago. When I got a call from him last week saying that he has written a book on economics, I had requested him, I was thrilled. I went through his book in one flat sitting. It has everything which a student or a professional looks for. In his hallmark style, the book is easy to read, requires no prior knowledge of economics and, I claim without hesitation, is the best book on basic economics, I have ever come across. It is nothing less than a boon for civil service aspirants, for professionals trying to understand economics for improving their job profile, and even for those who just want to read and understand Economic Times. I feel honoured in writing this foreword. I am sure, millions of students and professionals will benefit from the hard work of Mr Sanjiv Verma.

Best Wishes.Santosh K Misra, IAS

25.12.2010

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RANDOM THOUGHTS

During my academic pursuit to a bachelor degree in economics, I had found the subject interesting but complicated which required a considerable application of mind and patience to understand the concepts.

I remember in one of my classes on Indian economy, a student had echoed similar sentiments of economics as difficult to understand. I cannot be in greater agreement. Concepts have changed since our times with increasing degree of complexities and range of issues. Old has given way to the new with diverse definitions and conflicting implications.

A large number books have not been able to capture the latest terminologies related to the subject resulting in greater confusion among the minds of the readers. Further the economic developments—both domestically and globally—are so fast paced, that the traditional and conventional thinking—radically changing which the old school of thoughts—find it difficult to accept the change.

This is an attempt to ink down the economic issues not in the traditional mould but with greater conceptual clarity, easy to comprehend manner, and bring in the application part and its relevance to the present times. It is an attempt to make new generation students understand economy in the right perspective without the need for any formal degree in the subject.

This should be helpful for all kind of students preparing for competitive examinations. It should interest every student as economic issues affect all of us and today it is not possible to say that one does not understand economic issues like growth, inflation etc as one has never studied economics.

Today, economics is more of general awareness and has to be ‘understood’ and not studied as it has implications for everyone.

My own assessment is that economics has always been presumed to be complex and overrated as a difficult subject, and here an attempt is being made to demystify the notion about the subject.

Yes, economies today are evolving and would require continuous reorientation as one goes into the future.

The dynamic and growing complexities in the global economy place all of us continuously on the learning curve, leaving no masters of the subject.

Sanjiv Verma October 2, 2013

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ACKNOWLEDGEMENTS

At the outset, this book is dedicated to the lakhs of civil services aspirants to make them understand the subject and also as a facilitator to their success.

I am grateful to Shri Santosh Mishra, IAS from Tamil Nadu cadre for the ‘Foreword’ to this book, who incidentally has been instrumental in giving a practical shape to the book.

Thanks are due to Shri Santosh Taneja, the pillar behind ‘Samkalp’. He is always a source of inspiration, and is full of energy. He has provided considerable guidance in writing this book.

I am grateful to Rajib, Ankesh, and Ratnesh from Samkalp for their encouragement and extended support.

Sincere thanks are due to my family—my wife Vandana, my daughter Surabhi, and my son Aditya, for their understanding and support without which this book would not have been possible.

Thanks are also due to Unique Publishers who have consented to publish the book. Special thanks are due to Rajesh, his full team and also Amrit for pre and post production of this book.

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THE INDIAN ECONOMY—AN OUTLINE

This book is divided into 4 broad segments as mentioned here:

Part A Domestic Economy covering elements of the domestic sector and all related issues, like features of the economy, poverty, social sector, agriculture, public sector, infrastructure etc. The focus is on bringing out the underlying ‘current’ issues, governmental efforts, economic reforms, present policies and likely direction in the future.

Part B The next is External Sector—Looking Outwards, which gives India’s global perspective and steps taken by the government for an outward orientation towards globalization.

Part C The third segment is the Global Economy and Outlook, which gives an overview of the world economy, and the recent global crisis and its impact on India. It also covers the changing global outlook in recent times and the way going forward.

Part D The concluding section is The Indian Economy Revisited, Outlook and Challenges. This segment puts together all sectors of the economy and based on global developments dealt earlier, arrives at the outlook for India and also the challenges before the government, as India prepares to go into the future. This book has inter-related segments, sequential in nature and builds up segment-by-segment, to provide a complete overview and challenges before the ‘Indian Economy’.

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‘WHY’ OF ECONOMICS

As a child anyone will recall, will always ask ‘why’ for anything and everything. Why the sun rises in the east and sets in the west or why should one study, why we sleep at night and are awake in the day time, why not the other way around and so on…

If we go down the memory lane, surely there will be a number of such instances we can recall. Also, remember it is a major irritant for the parents to answer these questions more as they do not have answer to all of these. As we grow up, somewhere down the line we forget the ‘why’, and that is the first thing in economics, one should always ask the ‘why’.

Let me begin with a few basic why’s as far as the economics is concerned.

• Why people in the US rich and why Africa and India have poor people?• Why different currencies in the world?• Why so many people in villages?• Why cannot we provide employment to everyone?

The list goes on and on reflection one will realize realms of economics needs a deeper introspection.

So let us begin our journey into the subject economics or rather I would say developing an understanding of the commonly used concepts, terminologies, often loosely defined and the practical and application aspect from the Indian perspective of an economy.

We will go step-by-step building up section-by-section and I request you to please do not skip sections, as otherwise one can lose the link of the previous section.

Let us begin by developing a terminology being used by everyone which is ‘Growth.’ In recent times, there is a lot of discussion on growth slowing down and a major cause of concern for the economies. Or, even the fact that China today is the fastest growing economy. Why is growth important for an economy?

To answer this ‘why’, we need to understand what is meant by the output of an economy.

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CONTENTS xi

CONTENTS

PART A DOMESTIC ECONOMY

1. Output of an Economy 3–7

2. Towards Inclusive Growth (Growth and Development) 8–12

3. Sustainable Development and Green GDP 13–14

4. Poverty and Social Sector 15–20

5. Food Security 21–25

6. Agriculture Sector 26–38

7. Land Reforms—Another Perspective 39–43

8. Salient Features—‘New India’ 44–45

9. Industrial Sector and Liberalization 46–59

10. Infrastructure Development 60–72

11. Investment Models 73–78

12. Integrated Energy Policy (2031–32) 79–81

13. Government Finances 82–92

14. Bridging Deficits, Money and Government Borrowings 93–94

15. Banking 95–103

16. Inflation 104–106

17. Capital Market 107–110

18. Planning in India 111–116

PART B EXTERNAL SECTOR—LOOKING OUTWARDS

Towards Globalization and Beyond

19. Looking Outward—Towards Globalization 119–121

20. Inward and Outward-Looking Economies’ Globalization 122–129

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CONTENTSxii

21. Going Forward—India and Globalization 130–131

22. Export-Led Growth Strategy—SEZs 132–139

23. Foreign Trade Policy (2009–2014) 140–145

24. Balance of Payments of Economies (BOP) 146–150

25. Trade Reforms and Foreign Exchange Management Act (FEMA) 1999 151–158

26. Foreign Investment in India 159–165

27. Multilateral Financial Institutions 166–169

28. External Debt of India 170–172

29. Exchange Rate Determination 173–187

30. Foreign Exchange Reserves 188–191

31. Regional Trading Blocs 192–196

PART C GLOBAL ECONOMY AND OUTLOOK

Post-crisis and Beyond…

32. India and the Global Economy 199–202

33. Global Economy—A Transition 203–204

34. Global Integration 205–206

35. Lessons From Crises in Open Economies 207–208

36. Global Financial Meltdown 209–212

37. Global Crisis—Government Interventions 213–214

38. Overview of Recent Crises Since 2008 215–217

39. Global Consensus—Going Forward 218–219

40. Way Going Forward—Addressing Structural Issues 220

41. Global Unresolved Issues 221–222

42. Post-Crisis—Future of Globalization 223

43. World Trade Organization (WTO)—Issues and India 224–227

PART D INDIAN ECONOMY REVISITED, OUTLOOK AND CHALLENGES

44. Two Decades of Economic Reforms—India 231–236

45. Indian Economy—Outlook and Challenges 237–242

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