Indian Economy
Table of Contents
1. Introduction to Indian Economy
Nature of Indian Economy
India is a mixed economy combining features of capitalism (private sector, market forces, profit motive) and socialism (public sector, state intervention, welfare orientation, planned development). Since independence in 1947, India has evolved from a primarily agrarian economy with state-led centralised planning to a .15 trillion (nominal GDP, 2026) market economy with growing private sector dominance. Key structural features include: (i) a large informal sector (~45% of GDP, ~90% of employment), (ii) dualistic economic structure (modern industrial/services coexisting with traditional agriculture), (iii) high dependence on domestic consumption (~60% of GDP), (iv) median age of 28 years offering a demographic dividend, (v) sharp regional disparities (Goa's GSDP per capita ~,000 vs Bihar's ~,000), and (vi) low per capita income (~,813 nominal).
Economic Systems Compared
Economies are classified by the degree of state intervention: Capitalist (Market) Economy — private ownership, price determined by market forces, minimal government intervention (USA, UK); Socialist (Command) Economy — state ownership, central planning determines production (China pre-1978, USSR, Cuba, North Korea); Mixed Economy — co-existence of private and public sectors, market forces and state planning. India adopted the mixed economy model with the Industrial Policy Resolution, 1948, influenced by the Soviet model but adapted to Indian conditions.
Economic Sectors: Primary, Secondary, Tertiary
The Indian economy is classified into three broad sectors based on economic activity. Since 2015, the Gross Value Added (GVA) at Basic Prices framework is used for sectoral measurement, replacing GDP at Factor Cost as the headline output indicator.
| Sector | Share of GVA (2025-26) | Employment Share | Key Components |
|---|---|---|---|
| Agriculture & Allied | ~17.7% | ~45% | Farming (crops), livestock, forestry, logging, fishing |
| Industry | ~27.6% | ~24% | Manufacturing, mining & quarrying, construction, electricity, gas & water supply |
| Services (Tertiary) | ~54.7% | ~31% | Trade, hotels, transport, communication, financial services, real estate, public administration, defence, professional services |
India's structural transformation is unique — it has skipped the manufacturing-led phase and jumped directly to services-led growth, unlike East Asian economies (South Korea, Taiwan, China) where manufacturing absorbed surplus agricultural labour. This "jobless growth" in the formal sector is a key policy challenge, as services contribute 55% of GVA but employ only 31% of workers. Manufacturing has stagnated at ~17% of GVA for two decades, while agriculture employs 45% of workers but contributes only 18% of GVA, indicating severe underemployment and low productivity.
Economic Planning in India
Planning Commission (1950-2014)
The Planning Commission was established on 15 March 1950 by a Cabinet resolution with Jawaharlal Nehru as the first Chairman. It was a non-constitutional, non-statutory body that formulated and implemented Twelve Five-Year Plans (1951-2017). The planning model followed the Nehru-Mahalanobis model (named after economist Prasanta Chandra Mahalanobis), emphasising heavy industries and import substitution industrialisation (ISI). The Commission allocated resources through a technocratic top-down approach, with states receiving plan assistance based on the Gadgil Formula (1969).
Five-Year Plans — Detailed Overview
| Plan | Period | Focus | Target | Actual | Key Events |
|---|---|---|---|---|---|
| 1st | 1951-56 | Agriculture, irrigation, power (Harrod-Domar model) | 2.1% | 3.6% | Community Development Programme launched |
| 2nd | 1956-61 | Heavy industry, Mahalanobis model, steel plants | 4.5% | 4.3% | Industrial Policy Resolution 1956, import substitution |
| 3rd | 1961-66 | Agriculture + Defence (1962 war, 1965 drought) | 5.6% | 2.4% | Indo-China war, Indo-Pak war, severe drought |
| Annual | 1966-69 | Plan holiday — drought, war, rupee devaluation | — | — | Devaluation (1966), Green Revolution initiation |
| 4th | 1969-74 | Growth with stability, Green Revolution, bank nationalisation | 5.6% | 3.3% | 14 banks nationalised, Gadgil formula |
| 5th | 1974-78 | Employment, poverty alleviation, self-reliance, MNP | 4.4% | 4.8% | Oil crisis, coal nationalisation, FERA |
| 6th | 1980-85 | Early liberalisation, NABARD established | 5.2% | 5.7% | IMF loan (SDR 5B), partial liberalisation |
| 7th | 1985-90 | Technology upgradation, productivity, Rajiv Gandhi era | 5.0% | 6.0% | Computer policy, telecom reforms |
| 8th | 1992-97 | LPG reforms, opening of economy, WTO membership | 5.6% | 6.8% | SEBI established, industrial licensing abolished |
| 9th | 1997-02 | Growth with social justice, Vajpayee era | 7.0% | 5.5% | Asian Financial Crisis (1997), Kargil War |
| 10th | 2002-07 | 8% GDP growth, poverty reduction by 5% | 8.1% | 7.7% | FRBM Act (2003), Golden Quadrilateral, NREGA |
| 11th | 2007-12 | Rapid and inclusive growth, Manmohan Singh era | 9.0% | 8.0% | Global Financial Crisis (2008), RTE Act |
| 12th | 2012-17 | Faster, more inclusive, sustainable growth | 8.0% | ~6.8% | End of Planning Commission, replaced by NITI Aayog |
NITI Aayog (2015-present)
The National Institution for Transforming India (NITI Aayog) replaced the Planning Commission on 1 January 2015 via a Cabinet resolution. It is a think tank promoting cooperative federalism through bottom-up policy formulation. Key differences from the Planning Commission: (i) not a statutory body — created by executive resolution; (ii) states are equal partners via the Governing Council (all Chief Ministers); (iii) no power to allocate funds — the Finance Commission handles resource allocation; (iv) focus on long-term strategic vision rather than fixed five-year plans.
Structure: Chairperson (Prime Minister), Vice-Chairperson (currently Suman Bery), CEO (senior IAS officer), full-time and part-time members, ex-officio members (Union Ministers). The Governing Council meets annually. Regional Councils address specific regional issues.
Key initiatives: (i) Aspirational Districts Programme (2018) — transforming 112 most backward districts; (ii) SDG India Index — tracks states' SDG progress; (iii) Atal Innovation Mission (AIM) — Tinkering Labs, incubation centres; (iv) Women Entrepreneurship Platform; (v) National Data and Analytics Platform; (vi) India Innovation Index; (vii) Export Preparedness Index; (viii) 15-Year Vision Document, 7-Year Strategy, and 3-Year Action Agenda.
1. It is a statutory body created by an Act of Parliament.
2. The Prime Minister is the Chairperson.
3. The Governing Council includes all state Chief Ministers and Lieutenant Governors of Union Territories.
Which of the above is/are correct?
Solution: Statement 1 is incorrect (it was created by Cabinet resolution, not an Act of Parliament). Statements 2 and 3 are correct. Answer: 2 and 3 only
India's Demographic Dividend
Demographic dividend is the economic growth potential from a shift in age structure when the working-age population (15-64) exceeds the dependent population. India's median age is ~28 years (vs China 38, Japan 48, USA 38). The working-age population is ~68% of total population. The dividend is expected to peak around 2041. However, challenges remain: India needs 8-10 million new jobs annually, only ~5% of the workforce has formal vocational training, and female LFPR is only ~25%. IMF estimates that changing demographics contributed ~2% per annum to India's per capita GDP growth in the 2000s.
2. National Income Accounting
Gross Domestic Product (GDP)
GDP is the total monetary value of all final goods and services produced within India's geographical boundaries during a given period (financial year: April-March). Concept first developed by Simon Kuznets (1934). In India, the Central Statistics Office (CSO) under MoSPI compiles national accounts. GDP at Market Prices includes net indirect taxes; GDP at Factor Cost measures factor incomes. India shifted from Factor Cost to Market Prices as primary measure in January 2015 (aligning with UN SNA 2008).
Net Indirect Taxes = Indirect Taxes - Subsidies
GNP = GDP + NFIA (Net Factor Income from Abroad)
NNP = GNP - Depreciation
National Income = NNP at Factor Cost
NDP = GDP - Depreciation
Gross Value Added (GVA) — India's Headline Measure
Since January 2015, GVA at Basic Prices is the primary measure of economic output at the sectoral level. GVA = Value of Output - Intermediate Consumption. GDP = Sum of GVA of all sectors + Product Taxes - Product Subsidies. The difference between GVA at Basic Prices and GDP at Market Prices is net taxes on products.
| GVA Component | Share of GVA (2025-26) |
|---|---|
| Agriculture, Forestry & Fishing | ~17.7% |
| Mining & Quarrying | ~2.5% |
| Manufacturing | ~17.2% |
| Electricity, Gas & Water Supply | ~2.8% |
| Construction | ~8.2% |
| Trade, Hotels, Transport & Communication | ~20.5% |
| Financial, Real Estate & Professional Services | ~22.5% |
| Public Administration, Defence & Other Services | ~8.6% |
Three Methods of GDP Measurement
Product (Output) Method: Sum of value added across all sectors. India uses this for manufacturing (ASI + MCA21 database) and income method for services.
Income Method: GDP = Compensation of Employees + Gross Operating Surplus + Gross Mixed Income + Net Taxes on Production and Imports. Captures distribution among factors (rent, wages, interest, profit).
Expenditure Method: GDP = C + I + G + (X - M). C = Private Final Consumption (~56.3% of GDP), I = Gross Fixed Capital Formation (~33.5%), G = Govt Final Consumption (~9.3%), Net Exports (negative for India).
GDP Deflator and Base Year
GDP Deflator = (Nominal GDP / Real GDP) x 100 — the broadest inflation measure covering all domestically produced goods and services. India's base year is 2011-12 (revised from 2004-05). Nominal GDP uses current prices; Real GDP uses constant base-year prices.
Personal, Private, and Disposable Income
Personal Income: Total income received by individuals (factor incomes + transfer payments - corporate retained earnings). Private Income: Factor income for private sector + NFIA + current transfers from government and abroad. Personal Disposable Income (PDI): Personal Income - Direct Taxes. National Disposable Income (NDI): NNP at market prices + Net Current Transfers from abroad. India's NDI exceeds NNP due to ~ annual inward remittances.
India's Global Economic Standing
| Rank | Country | Nominal GDP (2026 est.) | PPP GDP |
|---|---|---|---|
| 1 | United States | ~.2 trillion | ~.2T |
| 2 | China | ~.0 trillion | ~.5T |
| 3 | Germany | ~.7 trillion | ~.9T |
| 4 | Japan | ~.4 trillion | ~.3T |
| 5 | India | ~.15 trillion | ~.9T |
GDP per capita: ~,813 (nominal, rank 149th), ~,964 (PPP, rank 119th). Growth for FY2025-26: estimated ~7.6% (World Bank).
GDP Revisions and Measurement Challenges
The January 2015 revision shifted manufacturing estimates from ASI to MCA21 database, capturing more companies. This revised 2013-14 growth from 4.7% (old series) to 6.9% (new series), sparking controversy. Critics argue the new methodology overstates growth by including more formal sector data while inadequately capturing the informal sector (~45% of GDP, ~90% of employment).
Green GDP and Alternative Welfare Measures
Green GDP adjusts traditional GDP for environmental costs (resource depletion, degradation). The UN SEEA provides the framework. Other measures: HDI (India ranked 134th in 2024), MPI (India's MPI fell from 55% in 2005-06 to 25% in 2019-21, 415 million people exited multidimensional poverty), GPI (Genuine Progress Indicator), GNH (Bhutan's Gross National Happiness).
Limitations of GDP as a Welfare Measure
- Non-market transactions: Unpaid domestic work, volunteer services excluded. Women's unpaid care work estimated at ~15-20% of GDP.
- Environmental degradation: GDP counts pollution cleanup as positive output but does not deduct resource depletion costs.
- Quality of life: GDP does not measure leisure, health, education quality, or income distribution.
- Black economy: Illegal activities and unreported income not captured.
- Broken window fallacy: Disaster recovery spending adds to GDP without net welfare gain.
- Gini coefficient blind: GDP per capita can rise while majority sees no improvement.
Solution:
GDP Deflator = (340 / 280) x 100 = 121.4
Cumulative inflation = 121.4 - 100 = 21.4% since 2011-12.
3. Government Budget & Fiscal Policy
Union Budget — Structure and Components
The Union Budget (presented by the Finance Minister on 1 February) is a statement of the government's estimated receipts and expenditures for the financial year (April-March). The budget serves four functions: allocation of resources, redistribution of income, economic stabilisation, and public accountability. It is divided into Revenue Budget (current income and expenditure) and Capital Budget (assets and liabilities).
Revenue Budget
Revenue Receipts: Tax Revenue (income tax, corporate tax, GST, customs, excise) + Non-Tax Revenue (dividends from PSUs, RBI surplus, fees, licences, fines). These are recurring and do not create liabilities or reduce assets.
Revenue Expenditure: Salaries, subsidies, interest payments, defence revenue expenditure, grants to states — expenditure that does not create assets (consumption expenditure).
Capital Budget
Capital Receipts: Market borrowings, disinvestment proceeds, loan recoveries, small savings. These create liabilities or reduce assets.
Capital Expenditure: Infrastructure, machinery, investment in PSUs, loans to states and UTs — expenditure that creates assets (investment expenditure).
Key Deficits — Formulas and Significance
Indicates the gap covered by borrowing for consumption purposes. High revenue deficit suggests borrowing for current consumption rather than capital formation.
Fiscal Deficit = Total Expenditure - Total Receipts (excluding borrowings)
OR = Borrowings + Other Liabilities
This is the most watched fiscal indicator. It represents the total borrowing requirement of the government.
Primary Deficit = Fiscal Deficit - Net Interest Payments
Indicates borrowing excluding interest on past debt. A primary surplus means the government is reducing its debt burden.
Effective Revenue Deficit = Revenue Deficit - Grants for Creation of Capital Assets
Introduced in 2011-12 budget to capture the true consumption gap by excluding capital-creating grants.
| Deficit Type | Formula | Significance |
|---|---|---|
| Revenue Deficit | Rev Exp - Rev Rec | Consumption gap — borrowing for consumption |
| Fiscal Deficit | Total Exp - Non-borrowing Receipts | Total borrowing need — most watched |
| Primary Deficit | Fiscal Deficit - Interest Payments | Non-interest borrowing — debt reduction indicator |
| Effective Revenue Deficit | Rev Deficit - Capital Asset Grants | True consumption gap |
FRBM Act, 2003
The Fiscal Responsibility and Budget Management (FRBM) Act, 2003 was enacted to ensure fiscal discipline and inter-generational equity. Key provisions: (i) reduce fiscal deficit to 3% of GDP by 2008-09; (ii) eliminate revenue deficit by 2008-09; (iii) prohibit RBI from buying government bonds in primary market (ending automatic monetisation from April 2006); (iv) government must place Medium-Term Fiscal Policy Statement, Fiscal Policy Strategy Statement, and Macro-Economic Framework Statement before Parliament annually.
NK Singh Committee (2017)
The FRBM Review Committee under NK Singh recommended: (i) fiscal deficit target of 3% of GDP by FY20 and 2.5% by FY23; (ii) general government debt to 60% of GDP (Centre 40%, States 20%); (iii) escape clause allowing 0.5% deviation for national security, national calamity, or structural reforms; (iv) establishment of a Fiscal Council for independent oversight.
Government Accounts — Three Funds
Consolidated Fund of India (Article 266): All revenues, loans raised, and recoveries of loans. All government expenditure (except specific items) incurred from this fund. Parliamentary approval mandatory.
Contingency Fund of India (Article 267): Standing fund of 500 crore at the disposal of the President for unforeseen expenditure. Parliament approves subsequently via supplementary grant.
Public Account of India (Article 266): Funds where government is a banker — provident funds, small savings, security deposits. No parliamentary approval needed for withdrawal.
Taxation — Direct and Indirect
Direct Taxes
- Income Tax: Progressive structure under Income Tax Act, 1961. New tax regime (FY2020-21, default from FY2023-24) offers lower rates with fewer exemptions.
- Corporate Tax: Reduced from 30% to 22% (plus surcharge and cess) for existing companies, 15% for new manufacturing units (2019) — among the lowest in Asia.
- Capital Gains Tax: Short-term (held less than 24 months for shares, 36 months for other assets) taxed at ordinary rates; long-term at 10-20%.
- Securities Transaction Tax (STT): Levied on transactions in listed securities.
- Wealth Tax: Abolished in 2015, replaced by 2% surcharge on super-rich (income above 1 crore).
Indirect Taxes
- Customs Duty: Basic customs duty, countervailing duty, anti-dumping duty, safeguard duty under Customs Act, 1962.
- Excise Duty: Most subsumed under GST (except on petroleum, alcohol, tobacco).
- GST: Unified indirect tax — see detailed section below.
Cannons of Taxation (Adam Smith)
- Equity: Fair, based on ability to pay (progressive taxation)
- Certainty: Time, manner, and amount of payment clear and certain
- Convenience: Method and timing convenient for taxpayer
- Economy: Cost of collection low relative to yield
Goods and Services Tax (GST)
Introduced via 101st Constitutional Amendment Act, 2016, implemented on 1 July 2017. GST subsumed 17 central and state taxes into a unified destination-based consumption tax. Constitutional framework: Article 246A — concurrent power for GST; GST Council (Article 279A) — joint forum of Centre and States.
Structure: CGST (intra-state, central component), SGST (intra-state, state component), IGST (inter-state supplies, collected by Centre, apportioned to destination state).
| Rate | Examples | Items Share |
|---|---|---|
| 0% (Nil) | Food grains, fresh vegetables, milk, eggs, education, healthcare, books, stamps | ~7% |
| 5% | Packaged food, medicines, coal, fertilisers, tea, coffee, sugar, edible oils | ~14% |
| 12% | Processed food, computers, mobile phones, furniture, ayurvedic medicines | ~17% |
| 18% | Most goods and all services — toothpaste, soaps, electronics, telecom, restaurants | ~44% |
| 28% + Cess | Luxury cars, SUVs, tobacco, aerated drinks, cigarettes, sin goods | ~18% |
GST Compensation Cess: Levied on luxury and sin goods to compensate states for revenue loss (guaranteed 14% annual growth from 2015-16 base). Originally 5 years (2017-2022), extended through March 2026 via special borrowing mechanism (Centre borrowed 2.69 lakh crore).
GST Network (GSTN): Non-government company (51% Centre + States, 49% financial institutions). Processes ~1 crore returns per month. E-invoicing (2020) for businesses with turnover above 5 crore enables real-time reporting.
Tax Buoyancy and Tax-to-GDP Ratio
India's tax-to-GDP ratio (~11-12%) is low compared to OECD average (~34%) and developing country average (~18%). Only ~6-7% of population pays income tax. Tax buoyancy (>1 implies revenue grows faster than GDP) improved post-GST (~1.2-1.3). The corporate tax cut in 2019 reduced the corporate tax-to-GDP ratio temporarily but aims to boost investment and long-term revenue (Laffer curve logic).
Budget Process and Documents
- September-October: Budget circular issued to ministries by DEA
- October-November: Receipts estimates by CBDT and CBIC
- November-December: Pre-budget consultations with stakeholders
- January: Finalisation of estimates by Budget Division
- 31 January: Economic Survey tabled (prepared by Chief Economic Adviser)
- 1 February: Finance Minister presents Budget in Lok Sabha at 11 AM
- February-March: Parliamentary discussions, voting on Demands for Grants
- 31 March: Appropriation Bill and Finance Bill passed — budget enacted
Types of Grants
- Supplementary Grant: Additional expenditure beyond budgeted amount
- Excess Grant: Expenditure already incurred in excess of amount granted (regularised by Parliament)
- Additional Grant: New services not in original budget
- Vote on Account: Interim approval when budget is delayed (before general elections)
- Token Grant: When demand is lump-sum, token amount voted
Key Budget Documents
- Annual Financial Statement (Article 112): Shows estimated receipts and expenditure
- Demands for Grants: Ministry-wise expenditure proposals; voted by Lok Sabha
- Finance Bill: Contains tax proposals (Money Bill under Article 110)
- Appropriation Bill: Authorises withdrawal from Consolidated Fund
- Macro-Economic Framework Statement: Explains prospects and outlook
- Fiscal Policy Strategy Statement: Explains fiscal stance and rationale
- Medium-Term Expenditure Framework Statement: 3-year rolling expenditure plan
- Outcome Budget: Tracks physical outcomes of budget schemes
Solution:
Revenue Deficit = 40 - 30 = 10 lakh crore
Total Expenditure = 40 + 12 = 52 lakh crore
Non-borrowing receipts = 30 lakh crore
Fiscal Deficit = 52 - 30 = 22 lakh crore
Primary Deficit = 22 - 8 = 14 lakh crore
4. Banking & Financial System
Reserve Bank of India (RBI) — History and Establishment
The Reserve Bank of India was established on 1 April 1935 under the RBI Act, 1934, based on the Hilton Young Commission (1926) recommendations. Originally a privately-owned shareholders' bank (paid-up capital 5 crore), it was nationalised on 1 January 1949. Dr. B.R. Ambedkar's book "The Problem of the Rupee" (1923) influenced its establishment. Current Governor: Sanjay Malhotra, IAS (appointed December 2024). Previous governors include Shaktikanta Das (2018-24), Urjit Patel (2016-18), Raghuram Rajan (2013-16), Duvvuri Subbarao (2008-13), and Y. Venugopal Reddy (2003-08).
Functions of the RBI
- Monetary Authority: Formulates monetary policy for price stability with growth (amended RBI Act, 1934)
- Regulator of Banking System: Under Banking Regulation Act, 1949 — prescribes capital adequacy (BASEL III), conducts CAMELS inspections, enforces prudential norms
- Issuer of Currency: Sole right under Section 22, RBI Act. Follows Minimum Reserve System — minimum reserve of 200 crore (115 crore in gold + 85 crore in foreign securities) against total currency issued
- Banker to Government: Manages accounts, floats loans, provides Ways and Means Advances (WMA)
- Lender of Last Resort: Emergency advances to scheduled banks against government securities during liquidity shortages
- Foreign Exchange Management: Under FEMA, 1999 — manages forex reserves, intervenes to prevent rupee volatility
- Developmental Role: Promotes financial inclusion, digital payments, priority sector lending. Established NABARD, NHB, SIDBI, DFHI
Monetary Policy Instruments
| Instrument | Current Rate | Purpose |
|---|---|---|
| Repo Rate | 6.00% | Short-term lending to banks against govt securities — key policy rate |
| Reverse Repo | 3.35% | Short-term borrowing from banks — absorption rate, floor of LAF corridor |
| MSF | 6.25% | Emergency overnight borrowing (25 bps above repo, up to 2% of NDTL) |
| Bank Rate | 6.25% | Long-term lending to banks; penal rate for CRR/SLR default |
| CRR | 4.0% | Portion of NDTL held as cash with RBI (no interest since 2007) |
| SLR | 18.0% | Portion of NDTL held as liquid assets (gold, cash, govt securities) |
Liquidity Adjustment Facility (LAF)
The LAF manages day-to-day liquidity through repo (injection) and reverse repo (absorption) auctions. The LAF corridor: MSF (6.25% upper bound) — Repo (6.00% centre) — Reverse Repo (3.35% lower bound). The Weighted Average Call Rate (WACR) is the operating target, kept close to the repo rate.
Open Market Operations (OMO)
Buying and selling of government securities by RBI in the open market for permanent liquidity management. Market Stabilisation Scheme (MSS): Issued additional government securities to absorb excess liquidity (especially from forex inflows) without affecting the government's borrowing programme.
Monetary Policy Committee (MPC)
Constituted in 2016 by amending the RBI Act, 1934. Six members: Governor, Deputy Governor (monetary policy), Executive Director (monetary policy) + 3 external members appointed by government. Meets bi-monthly. Decisions by majority; Governor has casting vote. Target: 4% CPI inflation +/- 2% (valid until 31 March 2026). If inflation exceeds 6% or falls below 2% for three consecutive quarters, RBI must submit a report to the government.
Money Supply Measures
| Measure | Components | Description |
|---|---|---|
| M0 (Reserve Money) | Currency in circulation + Bankers' deposits with RBI + Other deposits with RBI | Monetary base; RBI has direct control |
| M1 (Narrow Money) | Currency with public + Demand deposits + Other deposits with RBI | Most liquid form of money |
| M2 | M1 + Savings deposits with Post Office Savings Banks | Includes post office savings |
| M3 (Broad Money) | M1 + Time deposits with banks | Main indicator of money supply |
| M4 | M3 + All deposits with Post Office (excluding NSCs) | Broadest measure |
With CRR at 4%, the theoretical multiplier is 1/0.04 = 25. In practice, it is lower (4-5) due to currency leakages (people holding cash) and excess reserves. Actual multiplier = M3 / Reserve Money.
Commercial Banks in India
History of Banking
Modern banking began with Bank of Hindustan (1770, dissolved 1832). The three Presidency Banks — Bank of Bengal (1809), Bank of Bombay (1840), Bank of Madras (1843) — were amalgamated in 1921 to form Imperial Bank of India, nationalised in 1955 to become SBI. The Swadeshi Movement (1905-1911) led to many Indian-owned banks (Bank of India, Central Bank of India, Canara Bank, Bank of Baroda). Nationalisation of 14 banks (1969) and 6 more (1980) brought ~91% of banking under government control. Post-1991 reforms (Narasimham Committees I and II) deregulated interest rates, reduced SLR/CRR, allowed private banks (HDFC Bank, ICICI Bank, Axis Bank), and introduced BASEL prudential norms.
Public Sector Banks (PSBs)
After mega-mergers in 2019-20, PSBs reduced from 27 to 12. Major mergers: PNB + Oriental Bank of Commerce + United Bank of India; Canara Bank + Syndicate Bank; Union Bank + Andhra Bank + Corporation Bank; Indian Bank + Allahabad Bank; Bank of Baroda + Dena Bank + Vijaya Bank; SBI + 5 associate banks + Bharatiya Mahila Bank. Remaining PSBs: Bank of Maharashtra, Indian Overseas Bank, UCO Bank, Punjab & Sind Bank, IDBI Bank (now classified as private after LIC majority stake).
Private Sector Banks
HDFC Bank (merged with HDFC Ltd in 2023 — now largest by market cap), ICICI Bank, Axis Bank, Kotak Mahindra Bank, Yes Bank (rescued by RBI via SBI-led consortium in 2020), IDFC First Bank, IndusInd Bank, Federal Bank, South Indian Bank, Bandhan Bank, DCB Bank.
Regional Rural Banks (RRBs)
Established under RRB Act, 1976. Jointly owned by Centre (50%), State (15%), sponsor bank (35%). 43 RRBs as of 2024, providing rural credit.
Co-operative Banks
Urban Co-operative Banks (UCBs): Regulated by RBI. Rural Co-operative Banks: Three-tier structure — StCBs (state), DCCBs (district), PACS (village). Under dual regulation (RBI + State Governments). After PMC Bank crisis (2019, 4,355 crore fraud), Banking Regulation Act amended in 2020 to bring all co-operative banks under RBI's direct supervision.
Payment Banks and Small Finance Banks
Payment Banks: Conceptualised in 2014. Accept deposits up to 2 lakh per customer, offer savings/current accounts and debit cards, but cannot lend or issue credit cards. Operating: Airtel Payments Bank, India Post Payments Bank, Fino Payments Bank, Jio Payments Bank.
Small Finance Banks (SFBs): Licensed 2016. Must open 25% of branches in unbanked rural areas, 75% of net credit in priority sector, 50% of loans below 25 lakh. Examples: AU SFB, Equitas SFB, Ujjivan SFB, ESAF SFB, Suryoday SFB, Utkarsh SFB. AU SFB received in-principle approval for universal bank status in 2025.
Non-Banking Financial Companies (NBFCs)
NBFCs are registered under the Companies Act, 1956/2013. They cannot accept demand deposits, are not part of the payment and settlement system, and DICGC does not apply. Types: Asset Finance Companies (Shriram Transport Finance), Investment Companies, Loan Companies (Bajaj Finance, Muthoot Finance), Infrastructure Finance Companies (PFC, REC), Housing Finance Companies (LIC Housing Finance, Piramal Capital), Microfinance Institutions.
BASEL Norms
| BASEL | Year | Key Features |
|---|---|---|
| BASEL I | 1988 | Credit risk focus; minimum CRAR of 8%; simple risk-weighting of assets |
| BASEL II | 2004 | Three Pillars: Minimum Capital (credit, market, operational risk), Supervisory Review, Market Discipline |
| BASEL III | 2010 | CET1, Capital Conservation Buffer (2.5%), Countercyclical Buffer, Leverage Ratio, LCR, NSFR |
India adopted BASEL III from 1 April 2019 (fully phased in by 2022). Current requirements: CRAR 9% (higher than BASEL's 8%), CCB 2.5%, Total CRAR+CCB 11.5%, CET1 5.5% (+ 2.5% CCB = 8%), Leverage Ratio 4%, LCR 100%, NSFR 100%.
NPA Crisis — Causes and Resolution
An NPA is a loan overdue for 90 days. Classification: Substandard (up to 12 months), Doubtful (12+ months), Loss (uncollectible). GNPA ratio peaked at 11.2% (March 2018) — the "twin balance sheet problem." Causes: aggressive lending during 2009-14 credit boom, project delays, policy paralysis, willful defaults, inadequate risk assessment. Resolution: IBC (2016), PSB recapitalisation (3.5 lakh crore under Indradhanush and recap bonds), Prompt Corrective Action (PCA) framework, NARCL (Bad Bank, 2021). GNPA ratio declined to ~3% (March 2024). PCR improved to over 75%.
Insolvency and Bankruptcy Code (IBC), 2016
The IBC consolidated fragmented insolvency laws into a time-bound resolution framework. Key features: 330-day maximum for CIRP; NCLT (companies) / DRT (individuals) as adjudicating authorities; Committee of Creditors (66% approval for resolution plans); Resolution Professional manages corporate debtor; moratorium bars suits and asset transfers; IBBI as regulator. The liquidation waterfall: (1) insolvency resolution costs, (2) secured creditors, (3) employee dues, (4) unsecured creditors, (5) government dues, (6) shareholders.
Bhushan Steel (2018): First of 12 major NPA accounts; acquired by Tata Steel for 36,400 crore.
DHFL (2021): First HFC referred to IBC by RBI; acquired by Piramal Group for 34,250 crore.
DICGC
Deposit Insurance and Credit Guarantee Corporation. Cover increased from 1 lakh to 5 lakh per depositor per bank in 2020, covering 98% of accounts. Applies to all commercial banks, RRBs, local area banks, and co-operative banks (since 2020 amendments).
Financial Inclusion
Pradhan Mantri Jan Dhan Yojana (PMJDY)
Launched 28 August 2014. Over 50 crore accounts opened; deposits exceed 2 lakh crore. RuPay debit cards with in-built accident insurance of 2 lakh. Overdraft of 10,000 after 6 months. JAM Trinity: Jan Dhan + Aadhaar + Mobile — enables Direct Benefit Transfer, saving over 3.48 lakh crore by 2023.
Other Inclusion Schemes
- PM Mudra Yojana (2015): Loans up to 10 lakh: Shishu (50K), Kishor (5L), Tarun (10L). 25+ lakh crore sanctioned since 2015.
- PM SVANidhi (2020): Working capital up to 10,000 to street vendors
- Stand-Up India (2016): Loans from 10L to 1Cr to SC/ST and women entrepreneurs
- Insurance/Pension Schemes: PM Suraksha Bima Yojana (2L cover, 20/year), PM Jeevan Jyoti Bima Yojana (2L cover, 436/year), Atal Pension Yojana (guaranteed pension 1,000-5,000/month)
Digital Payments Revolution
UPI (Unified Payments Interface): Launched April 2016 by NPCI. Open-source API-based instant payment system. Monthly transactions exceed 11 billion (2024). India accounts for ~50% of the world's digital transactions. Leading apps: PhonePe, Google Pay, Paytm, BHIM, CRED. UPI 2.0 (2018) introduced overdraft and AutoPay. UPI 123PAY (2022) for feature phone users. UPI Lite for offline small-value transactions. UPI Circle (2024) for delegated payments.
RuPay: India's domestic card payment network by NPCI. CBDC (e-Rupee): Launched December 2022. Two variants: e-W (wholesale) and e-R (retail). Piloted across 26 cities, 5M+ retail users.
Payment Systems: NEFT (24x7, half-hourly batches), RTGS (real-time, 24x7 since 2020, no upper limit), IMPS (instant 24x7), NACH (bulk DBT), AePS (Aadhaar-enabled banking).
Capital Markets
SEBI: Established 1988, statutory status 1992 (SEBI Act). Regulates BSE, NSE, merchant bankers, mutual funds, portfolio managers, depositories. The NSE is the largest stock exchange in India and 4th largest globally by market cap (~). The BSE (est. 1875) is Asia's oldest. Key instruments: equities, bonds, derivatives, mutual funds, REITs, InvITs.
5. Inflation & Price Indices
Definition and Types of Inflation
Inflation is a sustained increase in the general price level of goods and services over time, eroding the real purchasing power of money. In India, inflation is measured primarily through CPI and WPI.
By Rate
- Creeping/Walking Inflation: 2-4% per year — mild, considered healthy for growth
- Galloping Inflation: 10-20% or higher — severe economic distortions, hurts savers
- Hyperinflation: >50% per month — complete loss of confidence in currency (Zimbabwe 2008, Germany 1923, Hungary 1945-46)
By Cause
- Demand-Pull: Excess aggregate demand — "too much money chasing too few goods"
- Cost-Push: Rising input costs (wages, raw materials, energy) passed on to consumers
- Structural: Supply-side bottlenecks, inadequate infrastructure, inefficient distribution
- Imported: Rise in prices of imported goods due to global prices or rupee depreciation
Wholesale Price Index (WPI)
Measures price changes at the wholesale level. Compiled by the Office of the Economic Adviser, Ministry of Commerce and Industry. Base year: 2011-12. Basket: 697 items. WPI does not capture services. Was the headline inflation measure until April 2014.
| Group | Weight in WPI |
|---|---|
| Primary Articles | 22.62% |
| — of which Food Articles | 15.26% |
| Fuel & Power | 13.15% |
| Manufactured Products | 64.23% |
Consumer Price Index (CPI)
Measures changes in prices of goods and services consumed by households. Compiled by CSO/MoSPI. Base year: 2012. Since April 2014, CPI (Combined) is the official measure for monetary policy. CPI basket: 448 items.
Series of CPI in India
- CPI-IW (Industrial Workers): Base 2001 (revised 2016) — used for Dearness Allowance (DA) calculation
- CPI-AL (Agricultural Labourers): Base 1986-87
- CPI-RL (Rural Labourers): Base 1986-87
- CPI-C (Combined): Base 2012 — used for inflation targeting by MPC
CPI Basket Composition
| Category | CPI Combined | Rural | Urban |
|---|---|---|---|
| Food & Beverages | 45.86% | 54.18% | 36.29% |
| Pan, Tobacco & Intoxicants | 2.38% | 3.30% | 1.36% |
| Clothing & Footwear | 6.53% | 7.36% | 5.57% |
| Housing | 10.07% | — | 21.67% |
| Fuel & Light | 6.84% | 7.94% | 5.58% |
| Miscellaneous | 28.32% | 27.22% | 29.53% |
Core vs Headline Inflation
Headline Inflation includes all items in the CPI basket. Core Inflation excludes food and energy to capture the underlying trend. Food has ~46% weight in CPI, making headline inflation volatile due to monsoon shocks, MSP hikes, and supply disruptions.
GDP Deflator
The GDP Deflator is the broadest inflation measure — (Nominal GDP / Real GDP) x 100. Covers all domestically produced goods and services. The basket automatically changes as GDP composition changes. Available quarterly with a lag.
Inflation Targeting Framework
India adopted Flexible Inflation Targeting (FIT) in 2016 via amendment of the RBI Act, 1934. Target: 4% CPI inflation +/- 2% (i.e., 2% to 6%). MPC decides repo rate bi-monthly. If inflation exceeds 6% or falls below 2% for three consecutive quarters, RBI must submit a report to the government explaining reasons, remedial actions, and timeline. Framework valid until 31 March 2026.
Causes of Inflation in India
- Food Prices: Highest CPI weight; erratic monsoons, hoarding, supply chain issues, MSP hikes
- Crude Oil: India imports ~85% of oil needs; global crude shocks directly impact CPI and WPI
- Fiscal Deficit: Large deficits monetised increase money supply, fueling demand-pull inflation
- Money Supply: Excessive M3 growth relative to output is inflationary
- Supply Chain: Inadequate storage, transport, and logistics cause wastage and price spikes
Inflation Trends (2022-26)
CPI inflation peaked at 7.79% (April 2022), remaining above the 6% upper tolerance band for much of 2022-23. Moderated through 2023, averaging ~5.4% in FY24. WPI turned negative (disinflation) in mid-2023 while CPI remained sticky due to food prices. By March 2026, CPI eased to 3.48%. Food inflation remains volatile due to vegetable price spikes, cereal prices, and pulses.
Solution:
Inflation Rate = [(168 - 158) / 158] x 100 = 6.33%
6. Agriculture & Food Security
Agriculture in the Indian Economy
Agriculture contributes ~18% of GVA and employs ~45% of the workforce (down from 60% in 1990 but still high). India has the 2nd largest arable land globally (159.7 million hectares). Average land holding: 1.08 hectares (down from 2.3 ha in 1970-71). Small and marginal farmers (<2 ha) constitute 86% of operational holdings but own only ~47% of land.
Cropping Seasons
- Rabi (Winter): Sown October-December, harvested April-June. Crops: wheat, mustard, gram, barley, peas, linseed.
- Kharif (Monsoon): Sown June-July, harvested September-October. Crops: rice, cotton, sugarcane, jowar, bajra, maize, groundnut, soybean.
- Zaid (Summer): Sown April-May, harvested July-August. Crops: watermelons, muskmelons, cucumbers, vegetables, fodder.
Food Grain Production and Global Ranking
| Product | Production (2023-24) | Global Rank |
|---|---|---|
| Milk | ~230 MT | 1st (largest producer) |
| Pulses | ~27 MT | 1st |
| Spices | ~11 MT | 1st |
| Bananas | ~33 MT | 1st |
| Mangoes | ~21 MT | 1st |
| Rice | ~135 MT | 2nd (after China) |
| Wheat | ~110 MT | 2nd (after China) |
| Sugarcane | ~440 MT | 2nd (after Brazil) |
| Cotton | ~36M bales | 2nd (after China) |
| Fish | ~17.5 MT | 2nd (after China) |
Revolutions in Indian Agriculture
| Revolution | Sector | Period | Key Figures/Achievements |
|---|---|---|---|
| Green | Crops (wheat, rice) | 1960s-70s | Norman Borlaug, M.S. Swaminathan; HYV seeds; India achieved food self-sufficiency; wheat yield from 0.8 to 4.7 t/ha |
| White | Milk | 1970-96 | Verghese Kurien, NDDB; Operation Flood; Amul cooperative model; India became largest milk producer globally |
| Blue | Fisheries | 1990s onward | 2nd largest fish producer globally; aquaculture boom in Andhra Pradesh |
| Golden | Horticulture | 2000s onward | 2nd largest producer of fruits and vegetables; surpassed food grains in output value |
| Evergreen | Sustainable Ag. | 2000s | M.S. Swaminathan's concept of sustainable productivity growth |
Land Reforms
Four components: (i) Zamindari Abolition — elimination of intermediaries; (ii) Tenancy Reforms — rent regulation, security of tenure, ownership rights; (iii) Land Ceiling — maximum holding size, redistribution of surplus land; (iv) Consolidation of Holdings — reducing fragmentation. Implementation uneven — West Bengal (Operation Barga) and Kerala achieved more success.
Minimum Support Price (MSP)
Introduced in 1965 on CACP recommendations. MSP announced for 23 crops (14 kharif, 6 rabi, 3 commercial) before each sowing season. Since 2018, MSP is set at 1.5 times A2+FL cost (Swaminathan Commission formula). CACP recommends MSP based on A2+FL cost, demand-supply, price trends, input prices, and terms of trade.
Challenges with MSP
- Only 20-25% of farmers sell at MSP; procurement skewed towards wheat and rice in Punjab, Haryana
- Only 23% of farmers aware of MSP (NSSO 2013)
- Leads to overproduction of rice and wheat, groundwater depletion, stubble burning
- WTO dispute: India's MSP subsidies breach 10% de minimis limit (Peace Clause invoked 5 times)
- Fiscal burden: food + fertiliser subsidy ~1/8th of total government budget
Agricultural Credit and Insurance
- Kisan Credit Card (KCC): Introduced 1998; 7.5+ crore cards; interest subvention of 4% on prompt repayment
- Priority Sector Lending: 18% of ANBC to agriculture (8% to small and marginal farmers). NABARD is apex rural credit institution.
- PM Fasal Bima Yojana (2016): Uniform premium of 2% (kharif), 1.5% (rabi), 5% (commercial); covers prevented sowing, post-harvest losses, localised calamities; uses YES-TECH remote sensing for yield estimation
Key Government Schemes
- PM-KISAN (2019): 6,000/year to all farmer families in 3 instalments via DBT. 9.5+ crore beneficiaries. Budget: 75,000 crore/annum.
- Soil Health Card (2015): Soil testing every 3 years; 24+ crore cards issued
- PM Krishi Sinchai Yojana (2015): "Per Drop More Crop" — micro-irrigation focus
- Paramparagat Krishi Vikas Yojana: Organic farming clusters; 50,000/ha over 3 years
- PM Kisan Maan Dhan Yojana: Pension of 3,000/month after 60 years (contributory)
- National Food Security Act (2013): 5 kg/person/month at subsidised rates; 67% population coverage
Allied Activities
Livestock: Largest milk producer (~230 MT). Operation Flood (1970-96) under Verghese Kurien. Amul cooperative model with 3.6M farmer members. Livestock contributes ~4.5% of GDP.
Fisheries (Blue Revolution): 2nd largest fish producer (~17.5 MT). PM Matsya Sampada Yojana (2020, 20,050 crore) aims to enhance production to 22 MT.
Horticulture (Golden Revolution): 2nd largest producer of fruits and vegetables (~350 MT). Contributes ~33% of agricultural GVA, surpassing food grains in output value.
7. Industry, Services & Infrastructure
Industrial Sector — Structure and Policy
The industrial sector accounts for ~26% of GDP and employs ~24% of the workforce. Manufacturing contributes ~17% of GDP (stagnant for two decades, well below the 25% target). Other components: mining, construction, and electricity.
Industrial Policy Evolution
- IPR 1948: Defined public/private sector roles; reserved defence, atomic energy, railways for public sector
- IPR 1956: Socialist pattern — 17 industries in Schedule A (exclusive state), Schedule B (state + private), Schedule C (private)
- IPR 1991: Abolished industrial licensing for all but 18 industries (now only 4); removed MRTP asset limits; opened most sectors to private investment; FDI up to 51% in priority sectors
- National Manufacturing Policy (2011): Target of 25% manufacturing GDP share; NIMZs creation
- Make in India (2014): 25 sectors identified; FDI liberalisation; "Zero Defect Zero Effect" slogan
- PLI Scheme (2020): 14 sectors, 1.97 lakh crore outlay
Production Linked Incentive (PLI) Schemes
| Sector | Outlay (Cr) | Key Achievements |
|---|---|---|
| Mobile & Electronics | 40,995 | Apple (Foxconn, Wistron, Pegatron), Samsung; India became 2nd largest mobile manufacturer |
| Pharmaceuticals | 15,000 | Bulk drugs, APIs; reducing import dependence |
| Automobiles & Components | 25,938 | EV promotion, advanced automotive tech |
| Telecom & Networking | 12,195 | Indigenous 5G equipment manufacturing |
| Textiles (MMF & Technical) | 10,683 | Global textile hub |
| Food Processing | 10,900 | Processed food exports; millet products |
| Solar PV Modules | 4,500 | Reduce dependence on Chinese solar imports |
| ACC Battery | 18,100 | Advanced Chemistry Cell for EVs |
| Semiconductors (ISM) | 76,000 | Fab & ATMP ecosystem ( outlay) |
| White Goods | 6,238 | ACs & LED components manufacturing |
Ease of Doing Business
India's rank improved from 142 (2014) to 63 (2019) in the World Bank's Ease of Doing Business Index — a jump of 79 places. Key reforms: GST, IBC 2016, corporate tax reduction, online single-window clearance, abolished 1,500+ obsolete laws. The World Bank discontinued the index in 2021. India now uses its own Business Reform Action Plan (BRAP) to rank states.
Industrial Corridors
Five major corridors: Delhi-Mumbai (DMIC) — 1,500 km, 24 nodes, funded by Japan and World Bank; Chennai-Bengaluru (CBIC) — 560 km; Vizag-Chennai (VCIC) — 800 km; Amritsar-Kolkata (AKIC) — 1,800 km; Bengaluru-Mumbai (BMIC) — 1,000 km.
MSME Sector
Contributes ~30% of GDP, ~45% of manufacturing output, ~48% of exports. Employs ~11 crore workers across 6.4 crore enterprises. Classification (revised 2020): Micro (investment upto 1 Cr, turnover upto 5 Cr), Small (upto 10 Cr, 50 Cr), Medium (upto 50 Cr, 250 Cr). Key challenges: credit access (~16% have formal credit), technology obsolescence, delayed payments.
Services Sector
Dominant pillar of Indian economy (~55% of GDP, growing 7-9% annually). IT-BPM: Revenues exceeding in FY24; India commands ~55% of global offshoring. Top firms: TCS, Infosys, Wipro, HCL Tech, Tech Mahindra. Startup Ecosystem: 3rd largest globally after US and China; 100+ unicorns; 100,000+ DPITT-recognised startups. Space Economy: ~-9B. ISRO achievements include Mangalyaan (2014), Chandrayaan-3 (2023), Aditya-L1 (2023). Indian Space Policy 2023 opened sector to private participation. Tourism: Direct + indirect contribution ~9% of GDP.
Infrastructure
National Infrastructure Pipeline (NIP) 2019-25
111 lakh crore (.4T) investment covering energy (24%), roads (18%), railways (12%), urban infrastructure (16%), irrigation (8%), social infrastructure (7%).
PM GatiShakti (2021)
GIS-based National Master Plan integrating 16 ministries. Targets reducing logistics costs from 14% to 8% of GDP.
National Monetisation Pipeline (NMP) 2022-25
Target of 6 lakh crore through asset monetisation: roads (TOT model), railways, power transmission, telecom, airports, pipelines.
Key Infrastructure Highlights
- Roads: NH length ~1.5 lakh km; Bharatmala Phase 1 — 34,800 km; key expressways (Delhi-Mumbai 1,350 km)
- Railways: Eastern DFC operational (1,856 km); Vande Bharat (80+ trains, 160 km/h); Kavach (indigenous ATP)
- Ports: 12 major ports; Sagarmala Programme; JNPT largest container port
- Airports: 140+ operational; UDAN-RCS connecting unserved airports
- Power: ~430 GW installed capacity (Thermal 240 GW, Renewables 180 GW, Nuclear 8 GW); 500 GW non-fossil target by 2030; near-universal electrification under Saubhagya
8. Foreign Trade & Balance of Payments
Balance of Payments (BoP) — Conceptual Framework
The BoP is a systematic record of all economic transactions between residents of India and the rest of the world. It follows double-entry bookkeeping and is divided into the Current Account and Capital Account (including Financial Account under IMF methodology). By accounting identity, the BoP always balances — surplus or deficit in one account is offset in the other, with changes in foreign exchange reserves acting as the balancing item.
Current Account Components
- Merchandise Trade: Exports ~, Imports ~ (FY25), Trade Deficit ~
- Services Trade: Exports ~, Imports ~, Surplus ~ (driven by IT-BPM)
- Primary Income: Investment income (interest, dividends, profits) — India runs a deficit due to foreign company profit repatriation
- Secondary Income: Largely remittances — world's largest recipient (~ in 2024)
Current Account Deficit (CAD)
India typically runs a CAD. Peaked at 4.8% of GDP in FY2013 (the "taper tantrum" period). Narrowed to ~0.7% in FY2021, widened to ~2% in FY2024. A CAD below 2.5-3% of GDP is considered sustainable if financed by stable capital flows (FDI rather than volatile FPI).
Foreign Exchange Reserves
| Component | Value (Sept 2024) |
|---|---|
| Foreign Currency Assets (FCA) | ~ B |
| Gold | ~.7 B (695+ tonnes) |
| Special Drawing Rights (SDRs) | ~.5 B |
| Reserve Tranche with IMF | ~.3 B |
| Total | ~ B (4th largest globally) |
Import cover: ~11 months (IMF norm: 3 months). Milestones: 1991 — .8B (2 weeks of imports); 2004 — ; June 2020 — ; September 2024 — all-time high.
Rupee Convertibility and Exchange Rate
- Current Account Convertibility: Achieved in 1994 (Article VIII of IMF)
- Capital Account Convertibility: Partial — Tarapore Committee (1997) recommended phased roadmap, but Asian Financial Crisis (1997) led to cautious approach. Second Tarapore Committee (2006) revisited but full convertibility not implemented.
- Exchange Rate Regime: Managed float since 1993 — market-determined with RBI intervention to prevent "disorderly conditions"
- NEER and REER: RBI publishes indices for 6 and 36 currency baskets. REER above 100 indicates overvaluation.
Rupee Depreciation Timeline
- 1947: 1 = (parity); 1966: 7.50 per USD (devaluation); 1991: 25 per USD (BoP crisis); 2000: 45 per USD; 2013: 68 per USD (taper tantrum); 2024: ~83-84 per USD
Foreign Direct Investment (FDI)
| Parameter | FDI | FPI |
|---|---|---|
| Nature | Stable, long-term investment | Speculative, short-term ("hot money") |
| Control | Seeks management control (>=5% voting) | No control; financial return only |
| Exit | Difficult, illiquid | Easy, highly liquid |
| Impact on BoP | Stable, non-debt creating | Volatile, can reverse quickly |
Sectoral FDI Caps
| Sector | FDI Cap | Route |
|---|---|---|
| Defence | 74% | Automatic up to 74%; Govt above |
| Insurance | 74% | Automatic |
| Telecom | 100% | Automatic |
| Single-Brand Retail | 100% | Automatic (30% local sourcing norm) |
| Multi-Brand Retail | 51% | Government |
| Pharmaceuticals (Greenfield) | 100% | Automatic |
| Broadcasting (News) | 26% | Government |
Record FDI inflows: + in FY23, ~ in FY24. Cumulative FDI (April 2000 – Sept 2024): ~ Trillion. Top sources: Mauritius (~25%), Singapore (~24%), USA (~10%).
Foreign Trade Policy (FTP) 2023-28
Targets trillion in exports by 2030 (goods + services). Key features: shift from incentive-based to process-driven approach; districts as export hubs; One District One Product (ODOP); streamlined e-commerce exports; MSME focus.
India's Trade Agreements
- In Force: SAFTA (2006), ASEAN-India FTA (2010), India-Japan CEPA (2011), India-Korea CEPA (2010), India-UAE CEPA (2022), India-Australia ECTA (2022), India-EFTA TEPA (2024)
- Under Negotiation: India-EU FTA, India-UK FTA, India-GCC FTA
9. Poverty, Inequality & Employment
Poverty Estimation in India
Tendulkar Committee (2009)
Poverty line: 27/day rural, 33/day urban (2011-12 prices). Poverty: 29.6% (2009-10), 21.9% (2011-12). Based on calorie norms (2,400 kcal rural, 2,100 kcal urban) plus non-food needs.
Rangarajan Committee (2014)
Revised to 32/day rural, 47/day urban. Poverty: 38.2% (2009-10), 29.5% (2011-12).
Multidimensional Poverty Index (MPI)
Developed by OPHI and UNDP. Uses 10 indicators across 3 dimensions (Health, Education, Standard of Living). India's MPI: 25.01% (2019-21), reduced from 55% (2005-06). Around 415 million people moved out of multidimensional poverty. Highest MPI states: Bihar, Jharkhand, Madhya Pradesh, Uttar Pradesh, Chhattisgarh. Lowest: Kerala, Goa, Punjab, Himachal Pradesh, Tamil Nadu.
Inequality
- Gini coefficient (consumption): ~0.49 (moderately high)
- Gini coefficient (wealth): ~0.82 (one of the highest globally)
- Oxfam: Top 10% owns 77% of national wealth; top 1% owns 73% of wealth generated in 2017
- World Inequality Report 2022: Top 1% income share is 21.7%
- Bottom 50% owns just 2-3% of wealth
Poverty Alleviation Programmes
MGNREGA (2005) and VB-G RAM G (2025)
MGNREGA guaranteed 100 days of wage employment per household per year. Key features: legal right to work; employment within 15 days of application; wages vary by state (149-374/day); at least 33% women participation (actual ~47%); 60:40 wage-to-material ratio. Repealed in December 2025 and replaced by VB-G RAM G (Viksit Bharat – Guarantee for Rozgar and Ajeevika Mission Gramin).
National Food Security Act (NFSA), 2013
- Entitlement: 5 kg of food grain per person per month at subsidised rates (3/kg rice, 2/kg wheat, 1/kg coarse grains)
- Covers 67% of population (75% rural, 50% urban)
- Antyodaya Anna Yojana (AAY): 35 kg per family per month at lower prices
- PMGKAY (free food grains during COVID-19) subsumed under NFSA for 5 years
Employment Structure and Challenges
Labour Codes, 2020
Four codes consolidated 29 central labour laws: (i) Code on Wages, 2019 — universal minimum wage; (ii) Industrial Relations Code, 2020 — standing orders, fixed-term employment; (iii) Social Security Code, 2020 — universal social security including gig/platform workers; (iv) Occupational Safety, Health and Working Conditions Code, 2020.
Employment Indicators
- Labour Force Participation Rate (LFPR): ~46% (global average ~60%)
- Unemployment Rate: ~6-7% (CMIE shows higher at ~8-9% for youth)
- Female LFPR: ~25% — among the lowest in South Asia
- Informal sector: ~90%+ of workers — no social security, no job security
- Gig economy: 7-8 million workers; projected 23.5M by 2029-30 (NITI Aayog)
- Youth challenge: 10-12 million new entrants annually vs limited formal job creation
Key Employment Schemes
- PM Rozgar Mela (2022): 10 lakh government jobs filled in mission mode
- DAY-NRLM: Self-help groups for rural women — 8+ crore women members
- PM Employment Generation Programme: Credit-linked subsidy for micro-enterprises
- National Career Service Portal: Online job matching platform
- Apprenticeship Act (amended 2014): Mandates apprenticeship training
10. Economic Reforms & Policy Updates
1991 Reforms: Crisis and Response
The BoP crisis of 1991 (forex reserves fell to .8B — barely 2 weeks of imports) triggered the most comprehensive economic reforms since independence. India's external debt was ; credit rating downgraded; NRIs withdrew deposits. Gold was pledged to BoE and BoJ for loans.
Reform Components
- Liberalisation: Abolished industrial licensing (except 18 industries); removed MRTP asset limits; de-reserved industries for private sector; allowed FDI
- Privatisation: Disinvestment of PSUs; memorandum of understanding system (Navratna, Miniratna status); reduced reservation for public sector from 17 to 3 sectors in 1991
- Globalisation: Rupee devaluation (20% in 1991); tariff reduction (peak from 400% to 65%); current account convertibility (1994); export subsidies
Second Generation Reforms
- Power Sector Reforms (2003): Electricity Act — de-licensing generation, open access in transmission, trading, power exchange
- Telecom Reforms (1999): NTP 1999 — revenue-sharing licensing; brought mobile teledensity from near-zero to 85% in two decades
- Capital Market Reforms: SEBI Act 1992 (statutory status); dematerialisation by NSDL/CDSL; rolling settlement (2001); T+1 settlement (2023); F&O trading; AIFs
- Fiscal Responsibility and Budget Management (FRBM) Act, 2003: Targets fiscal deficit (3% of GDP), revenue deficit elimination; escape clause allows deviation during wars, calamities, or severe economic shocks (used during COVID-19)
- Goods and Services Tax (GST), 2017: One Nation One Tax — subsumed 17+ indirect taxes; dual GST (CGST + SGST + IGST); 5, 12, 18, 28% slabs; GST Council (33-member); monthly filing with GSTR returns; ~ interstate e-way bill generation
- Insolvency and Bankruptcy Code (IBC), 2016: Time-bound resolution (330 days); NCLT adjudication; IRP management; Committee of Creditors vote; liquidation waterfall (sec govt dues below financial creditors)
- Corporate Tax Reforms (2019): Base rate reduced from 30% to 22%; new manufacturing companies at 15%; total tax revenue loss to government ~1.45 lakh crore/year
- Inflation Targeting (2016): Flexible Inflation Targeting Framework (FITF) — MPC with 6 members (3 RBI, 3 govt-appointed external). Governor casting vote. Target: 4% CPI ±2%. RBI mandated to report if inflation stays above/below band for 3 consecutive quarters.
| Reform | Year | Impact |
|---|---|---|
| 1991 Reforms | 1991 | GDP growth from 1.4% (1991) to 7.5% (1990s avg); FDI surged from to .5B by 2000 |
| GST | 2017 | Tax buoyancy improved; compliance base expanded 50%; GDP impact +1-2% estimated |
| IBC | 2016 | Rate of NPAs fell from 11.5% (2018) to ~2.5% (2024); 3,100+ cases resolved; recovery rate ~34% of admitted claims |
| Corporate Tax Cut | 2019 | Reversed economic slowdown; manufacturing competitiveness improved |
| Inflation Targeting | 2016 | CPI inflation reduced from double digits (2013) to 4-6% target range |
| FRBM Act | 2003 | Fiscal discipline institutionalised; escape clause used during COVID-19 |
Viksit Bharat @2047
Broad vision to transform India into a developed nation by 2047 (100th Independence Day). Key targets: GDP ~ trillion; per capita income ~,000; 0% poverty; 50% manufacturing GDP share; universal high-quality education and healthcare; net-zero emissions by 2070.
Amrit Kaal Budget Priorities
- Saptarshi (7 priorities): Inclusive development, reaching the last mile, infrastructure, unleashing potential, green growth, powering economy, innovation and R&D
- PM Awas Yojana (PMAY-U): 2 crore urban houses; PMAY-G: 3.12 crore rural houses
- Jal Jeevan Mission: 14.5 crore rural tap water connections (from 3.2 crore in 2019)
- Green initiatives: PM PRANAM (alternative fertilisers), GOBARdhan (biogas), PM-KUSUM (solar pumps)
11. International Economic Organisations & India
IMF (International Monetary Fund)
Established 1944 (Bretton Woods). Headquarters: Washington DC. Members: 190 countries. Purpose: maintain exchange rate stability, provide temporary balance of payments financing, oversee global monetary cooperation.
India & IMF
- India is a founding member (1944)
- Quota: 13.1 billion SDRs (~.7B) — 2.75% share. 7th largest quota holder
- IMF loans to India: 1981 (, Extended Fund Facility), 1991 (.2B, Standby Arrangement)
- India has not borrowed from IMF since 1993 — reflecting strong reserves
- India contributes to IMF resources: NAB (New Arrangements to Borrow), PRGT (Poverty Reduction and Growth Trust), RST (Resilience and Sustainability Trust)
- IMF governance reforms: Voice and quota reforms (2010) shifted 6% to EMDCs; 16th General Review completed in 2023
World Bank Group
Founded 1944 (Bretton Woods). 5 institutions: IBRD (middle-income lending), IDA (concessional lending to poorest countries), IFC (private sector), MIGA (guarantees), ICSID (dispute resolution).
India & World Bank
- Largest client of IDA historically (~ cumulative); India graduated from IDA in 2015
- Current borrowing primarily through IBRD (~-5B/year)
- Largest IBRD portfolio: ~+ in projects
- Sectors: health (NHM), education (SSA), rural roads (PMGSY), water (JJM)
- Ease of Doing Business Index: World Bank discontinued in 2021 after data irregularities
- India requested independent review (resulted in Doing Business report being scrapped)
WTO (World Trade Organisation)
Established 1995 (replaced GATT 1947). Members: 164 countries. Principles: MFN (most-favoured nation, Art. I), National Treatment (Art. III), bound tariffs, prohibition of quantitative restrictions, special & differential treatment for developing countries.
India & WTO
- Founding member (1995) — India was a GATT contracting party since 1948
- Trade Policy Review (2022, 8th): India's average bound tariff ~50%; applied tariff ~18%
- Major disputes: Solar DCR case (US vs India — India lost at Appellate Body); Sugar export subsidies (Brazil/Australia/Guatemala vs India — India lost); ICT products (Japan/Taiwan vs India — India lost); Steel (Safeguard duties)
- Bali Package (2013): Trade Facilitation Agreement; India's public stockholding for food security secured with Peace Clause
- Nairobi MC10 (2015): Elimination of agricultural export subsidies agreed (India got 2023 deadline)
- Geneva MC12 (2022): COVID vaccine IP waiver, fisheries subsidies agreement, e-commerce moratorium extended
- Abu Dhabi MC13 (2024): Fisheries subsidies (Art. II), e-commerce moratorium disagreement, no consensus on public stockholding permanent solution
- Appellate Body crisis: US blocked appointments since 2019 — India part of MPIA (Multi-Party Interim Appeal Mechanism) along with EU, China, Australia
India's Key WTO Positions
- Public Stockholding: Seeks a permanent solution for food security programmes (currently under Peace Clause)
- Special Safeguard Mechanism (SSM): Protection against import surges for developing countries
- Fisheries Subsidies: Developing country exemptions for artisanal fishing up to 12 nautical miles
- E-commerce: Opposes moratorium extension; seeks policy space for digital industrialisation
- Agriculture: Protection in domestic support and market access
- Services: Mode 4 (temporary movement of natural persons) liberalisation
- Aadhaar: 138+ crore enrolments; world's largest biometric ID; legal backing Aadhaar Act 2016 (later Aadhaar & Other Laws Amendment Act 2019)
- UPI (Unified Payments Interface): 12+ billion monthly transactions (~ monthly); launched in 2016 by NPCI; dominant (75% of retail digital payments); international adoption in UAE, Singapore, France, Japan, UK
- Account Aggregator (AA): Financial data sharing framework; 1,000+ crore accounts covered; participating FIs including banks, mutual funds, insurance
- OCEN (Open Credit Enablement Network): Digital lending protocols for MSMEs
- ONDC (Open Network for Digital Commerce): Democratising e-commerce; interoperable protocol; 100+ cities; 50K+ sellers
- DigiLocker: 30+ crore users; 600+ crore documents issued; legally valid under IT Act
- e-Sanjeevani: National telemedicine service; 25+ crore consultations
- GeM (Government e-Marketplace): Public procurement platform; 60,000+ buyer entities; 6Mn+ products; + cumulative GMV
- NAFL-National Strategy for Financial Inclusion (2021-26): Target of 5 crore new PMJDY accounts; 1 account per adult
- National Pension System (NPS): Regulatory by PFRDA; Tier I (mandatory, 60% partial withdrawal) / Tier II (voluntary withdrawable); Atal Pension Yojana (APY): 1,000-5,000/month pension
- Monetary Compensation: Insurance: DICGC raised deposit insurance to 5 lakh (Feb 2020; from 1 lakh)
- National Action Plan on Climate Change (NAPCC, 2008): 8 national missions including Solar (JNNSM), Water, Energy Efficiency (PAT scheme), Sustainable Habitat, Green India
- National Green Hydrogen Mission (2023): 19,744 crore; 5 MMT green hydrogen capacity by 2030
- Perform, Achieve and Trade (PAT): Market-based energy efficiency scheme; 1,000+ DCs trading ESCerts
- Energy Conservation (Amendment) Act 2022: Carbon trading scheme; non-fossil energy obligations
- Anusandhan National Research Foundation (ANRF, 2023): 8,000 crore outlay; replacing SERB-NPDF; strengthen research ecosystem
- National Quantum Mission (2023): 6,003 crore (2023-31); mid-scale quantum computers (50-1000 qubits); satellite-based quantum communication
- PM SHRI (2022): 14,500 model PM Schools for Rising India — NEP-aligned pedagogy across K-12
- National Education Policy 2020: 5+3+3+4 structure; vocational integration; 50% GER by 2035; multiple entry/exit; mother tongue instruction; Academic Bank of Credits
G20
Founded 1999 (Finance track); upgraded to Leaders' Summit in 2008. Members: 19 countries + EU + AU (2023). Represents ~85% of global GDP, ~75% of global trade, ~67% of global population.
India's G20 Presidency (2023)
Theme: "Vasudhaiva Kutumbakam" (One Earth, One Family, One Future). Over 200 meetings across 60 cities. Key outcomes: African Union permanent membership; New Delhi Leaders' Declaration (NDLD) consensus on Ukraine paragraph; Green Development Pact; Global Biofuels Alliance; financial inclusion via DPI frameworks; SDG progress review.
BRICS
Founded 2009 (India hosted 1st summit). Members: Brazil, Russia, India, China, South Africa (+ 2024 expansion: Egypt, Ethiopia, Iran, Saudi Arabia, UAE). New Development Bank (NDB) established 2015. Contingent Reserve Arrangement (CRA): pool. Key focus areas: multilateralism reforms, local currency trade settlement, counter-terrorism.
ADB, AIIB, and NDB
| Bank | Founded | HQ | Capital | India's Role |
|---|---|---|---|---|
| ADB (Asian Development Bank) | 1966 | Manila | Founding member; 6.3% voting share; 4th largest shareholder; + cumulative lending to India | |
| AIIB (Asian Infrastructure Investment Bank) | 2016 | Beijing | 2nd largest shareholder (India); + projects in India | |
| NDB (New Development Bank) | 2015 | Shanghai | Equal founding member (20% share); + portfolio |
12. Major Government Schemes & Initiatives
Flagship Welfare Schemes
| Scheme | Year | Ministry | Key Feature |
|---|---|---|---|
| Ayushman Bharat PM-JAY | 2018 | Health & Family Welfare | 5 lakh/ family/ year health cover; 3rd party cashless; 10,000+ empanelled hospitals; 2.2 crore+ beneficiaries |
| Swachh Bharat Mission | 2014 | Jal Shakti (Rural) / Housing (Urban) | 10+ crore toilets built; open-defecation free declared (2019); ODF+ (Phase 2) focusing on waste management |
| PMAY (Pradhan Mantri Awas Yojana) | 2015 | Housing & Urban Affairs / Rural Development | 3.12 cr rural + 1.18 cr urban houses sanctioned (as of 2024); DBT linked to Aadhaar; 2.5 lakh subsidy for EWS/LIG |
| Ujjwala Yojana | 2016 | Petroleum & Natural Gas | Free LPG connections to BPL households; 9.6+ crore connections released; significantly reduced indoor air pollution |
| Saubhagya | 2017 | Power | Last-mile household electrification; 2.82 crore households connected; ~100% electrification achieved |
| Jal Jeevan Mission | 2019 | Jal Shakti | Functional household tap connections (FHTC); 14.5+ crore connections (from 3.2 cr in 2019); 5,14,000+ villages with 100% FHTC |
| PM Poshan (Mid-Day Meal) | 1995 (2021 renamed) | Education | Hot cooked meals to 12+ crore children in primary/upper-primary; revised nutritional norms; 100% DBT to school accounts |
| PM Jan Dhan Yojana | 2014 | Finance | 52+ crore bank accounts; zero-balance facility; RuPay card with 1 lakh accidental cover; overdraft up to 10,000 |
| PM Suraksha Bima Yojana | 2015 | Finance | Accidental insurance: 2 lakh (death/disability); 1 lakh (partial); premium: 12/year |
| PM Jeevan Jyoti Bima Yojana | 2015 | Finance | Life insurance: 2 lakh cover; premium: 330/year (18-50 years) |