Economy and Finance

A note on figures. GDP size, growth and rankings change every year. The values here are indicative for the period shown; use the latest Economic Survey and the Ministry of Statistics (MoSPI) releases for exact numbers.

What is economics?

Economics is the study of how individuals, businesses and governments use scarce resources to satisfy unlimited wants. Its central problem is scarcity and choice. Adam Smith (The Wealth of Nations, 1776) is the "father of economics"; Alfred Marshall defined it as the study of man in the ordinary business of life; Lionel Robbins as the science of scarcity; J. M. Keynes (General Theory, 1936) founded modern macroeconomics; Paul Samuelson wrote a famous textbook.

• Microeconomics studies individual units — consumers, firms, markets, prices. Macroeconomics studies the economy as a whole — national income, inflation, employment, growth.
• Factors of production: land (rent), labour (wages), capital (interest), entrepreneurship/organisation (profit).
• Basic economic problems of every society: what to produce, how to produce and for whom to produce.
• Production Possibility Frontier (PPF) shows the maximum combinations of two goods possible with given resources; the opportunity cost is the value of the next-best alternative given up.

Economic sectors

• Public sector (owned by the government), private sector, joint sector, and the cooperative sector. Organised (registered, regulated) vs unorganised (informal) sector — the unorganised sector employs the large majority of workers.
• Structure of the Indian economy: the services sector contributes over half of the Gross Value Added (GVA) (about 55 %), industry about 25–30 % and agriculture about 15–18 %, while agriculture still employs the largest share of the workforce. (Approximate; check the latest figures.)

Types of economic systems

India adopted a mixed economy with planning after independence (Industrial Policy Resolution 1948 and 1956 — the "Economic Constitution of India"), with the public sector on the "commanding heights", and moved towards a market-oriented model after 1991.

National income concepts

National income is the total value of all final goods and services produced by a country in a year.

• Gross = including depreciation; Net = excluding it. Domestic = within the territory; National = by the nationals.
• At market prices includes indirect taxes less subsidies; at factor cost excludes them. Since 2015 India measures growth by GDP at market prices (and GVA at basic prices).
• Nominal (current-price) GDP is measured at the prices of the current year; real (constant-price) GDP at base-year prices, removing the effect of inflation. GDP deflator = (nominal GDP ÷ real GDP) × 100.
• Base year: the current series has the base 2011–12 (introduced in 2015); a new series with base year 2022–23 was to be released by MoSPI in 2026 (check the current status).
• Statistical bodies: MoSPI and the National Statistical Office (NSO), which release the National Accounts (quarterly and annual GDP estimates), the Index of Industrial Production (IIP) and Consumer Price Index (CPI); the Central Statistics Office merged into the NSO in 2019; the National Statistical Commission (2006).

Methods of measuring national income

1. Product (value-added) method: sum of the value added in each sector. Avoids double counting.
2. Income method: sum of factor incomes — wages, rent, interest, profit and mixed income.
3. Expenditure method: $\text{GDP}=C+I+G+(X-M)$ — consumption, investment, government spending, and net exports.

In India, the product method is used for agriculture, industry, and the income method for services; the expenditure method is used to cross-check.

Size of the Indian economy (indicative)

India is the fifth-largest economy by nominal GDP in recent years (about 3.5–4 trillion US dollars, having passed the UK in 2022 and then approaching Japan and Germany) and the third-largest by purchasing power parity (PPP). It has been one of the fastest-growing major economies (growth of about 6–8 % in recent years). Per capita income remains in the lower-middle income category. The government's goal is "Viksit Bharat" by 2047 (a developed nation) and a 5 trillion US dollar economy. (Check the latest rank and value.)

A note on figures. Policy rates (repo, CRR, SLR) and inflation targets are revised by the RBI from time to time. Use the latest Monetary Policy Statement for current values.

Money

Money is anything generally accepted as a medium of exchange, a measure of value, a store of value and a standard of deferred payment. Barter suffers from the double coincidence of wants.

• Forms: commodity money (gold, silver), fiat money (currency notes and coins declared legal tender), bank money (deposits, cheques), digital money (UPI, cards, wallets, CBDC).
• Legal tender: unlimited for notes; limited for coins (e.g., coins up to certain limits). ₹1 notes and coins are issued by the Government of India (Ministry of Finance); all other notes (₹2 to ₹500) are issued by the RBI (the Governor's signature is on the note; the Finance Secretary's signature on the ₹1 note). Minimum Reserve System (1956) for the note issue: the RBI must hold gold and foreign securities worth ₹200 crore, of which gold at least ₹115 crore.
• Security Printing: notes are printed at Nashik, Dewas, Mysuru, Salboni (Note Printing Presses); coins are minted at Mumbai, Hyderabad, Kolkata, Noida.
• Demonetisation (8 November 2016) withdrew ₹500 and ₹1000 notes; a new ₹2000 note was introduced (withdrawn from circulation in 2023).

Money supply

The RBI publishes four measures:

Money multiplier = M3 / M0.

Banking structure in India

• History: the first Indian bank was the Bank of Hindustan (1770); the Presidency Banks (Bengal, Bombay, Madras) merged into the Imperial Bank of India (1921), which became the State Bank of India (1955). Punjab National Bank (1894), the first Indian bank with Indian management; Swadeshi movement gave rise to several banks. Nationalisation: 19 July 1969 (14 banks with deposits above ₹50 crore — Indira Gandhi) and 15 April 1980 (6 more).
• Banking Regulation Act 1949 (now the Banking Laws Amendment); the RBI Act 1934.
• Deposit insurance: DICGC (a subsidiary of the RBI) insures deposits up to ₹5 lakh per depositor per bank.
• Priority Sector Lending (PSL): 40 % of adjusted net bank credit — agriculture, MSMEs, education, housing, weaker sections. Lead Bank Scheme (district level); Kisan Credit Card (1998); Jan Dhan Yojana (2014) for financial inclusion.

The Reserve Bank of India

• Established on 1 April 1935 under the RBI Act 1934, on the recommendation of the Hilton Young Commission (1926); headquartered in Mumbai (initially Kolkata; moved in 1937); nationalised on 1 January 1949. First Governor: Sir Osborne Smith; the first Indian Governor — C. D. Deshmukh. The Governors in recent years: Raghuram Rajan (2013–16), Urjit Patel (2016–18), Shaktikanta Das (2018–24), Sanjay Malhotra (from December 2024) (check the current Governor). The RBI's emblem shows a tiger and a palm tree.
• Central Board with the Governor and up to four Deputy Governors; offices in Mumbai, Delhi, Chennai, Kolkata (regional).
• Functions:
  1. Monopoly of note issue (except ₹1 notes and coins).
  2. Banker to the government (Union and states); manager of public debt.
  3. Banker's bank and lender of last resort.
  4. Custodian of the foreign exchange reserves; manages the exchange rate (FEMA 1999, the successor of FERA).
  5. Regulator and supervisor of banks and NBFCs; licensing; controller of credit — through the monetary policy.
  6. Development role (NABARD; financial inclusion), financial stability, and payments system regulation (Payment and Settlement Systems Act 2007).

A note on figures. Tax rates, slabs, deficit targets and budget totals change with every Union Budget. The concepts and the constitutional provisions below are stable; use the latest Union Budget documents for numbers.

Public finance

Public finance deals with the income and expenditure of the government and their effects on the economy. Musgrave described three functions of the government's fiscal role: allocation (providing public goods), distribution (reducing inequality) and stabilisation (controlling inflation and unemployment).

• Fiscal policy = the government's use of taxation, spending and borrowing to influence the economy. Expansionary fiscal policy (raise spending, cut taxes) in a slowdown; contractionary to control inflation. Counter-cyclical policy. Keynes advocated government spending to raise demand.
• Public goods (defence, roads, street lights — non-rival and non-excludable), merit goods (education, health), private goods.

The Union Budget

• Article 112: the Annual Financial Statement (AFS) — the "Budget" is not mentioned by that word in the Constitution — is a statement of the estimated receipts and expenditure of the Government for a financial year (1 April to 31 March).
• Presented by the Union Finance Minister in the Lok Sabha; since 2017 on 1 February (earlier the last working day of February); the Railway Budget was merged with the General Budget in 2017 (the tradition of a separate Railway Budget, in existence since 1924, ended). The first Budget of independent India (1947) was presented by R. K. Shanmukham Chetty; Morarji Desai presented the most budgets (10), including on his birthday; Nirmala Sitharaman (the first full-time woman Finance Minister since 2019) presented the first paperless budget (2021) and has presented several consecutive budgets; Indira Gandhi presented the budget for 1970–71 as PM.
• Parts: Revenue Budget (revenue receipts and revenue expenditure) and Capital Budget (capital receipts and capital expenditure). The Budget documents also include the Finance Bill, Appropriation Bill, Demands for Grants, the Expenditure Budget, the Receipts Budget, the Medium Term Fiscal Policy Statement, the Fiscal Policy Strategy Statement, the Macro-economic Framework Statement, Outcome Budget, and the Gender and Child Budget statements. The Economic Survey (by the Chief Economic Adviser in the Department of Economic Affairs; a day before the Budget; first published in 1950–51) is not a part of the Budget.

The three funds

Receipts

Expenditure

Major items of expenditure: interest payments, states' share of taxes (devolution), defence, subsidies (food, fertiliser, petroleum), central schemes, pensions.

Deficits

• Deficit financing: through borrowing (market borrowings, treasury bills) or printing money (the RBI's monetisation — stopped in 1997 with the ad hoc treasury bills abolished; the FRBM Act bars the RBI from subscribing to primary issues, except in special circumstances).
• Fiscal deficit as a percentage of GDP is the standard indicator; the Union Government has been reducing it after the COVID-19 spike (over 9 % in 2020–21) — the Government targets below 4.5 % of GDP by 2025–26, and now a debt-to-GDP anchor (check the current targets).

FRBM Act, 2003

The Fiscal Responsibility and Budget Management Act (2003; in force 2004) aims at fiscal discipline: the revenue deficit to be eliminated and the fiscal deficit limited to 3 % of GDP (the target was repeatedly deferred; the N. K. Singh Committee (2016) recommended a debt-to-GDP ratio as the anchor — 60 % for the general government, 40 % for the Centre and 20 % for states — and a Fiscal Council). The escape clause was used for the pandemic (2020–21). States have their own FRBM Acts.