JAIIB Paper 1 Module A Chapter 1 - An overview of Indian Economy

What we will learn ?

India and China contributed 50.5 % of global GDP in 1000 AD (Angus Maddison database) 52 % By 1600 AD (India-23 % & China-29%)
By 1700 AD India’s contribution increase to 24.4 %
By 1820, India’s share had plummeted to 16.1% per cent. According to the International Monetary Fund (IMF), India’s contribution of global GDP reached 7.3 per cent in 2021.
However, in terms of GDP purchasing power parity (PPP), India is ranked 3rd in the world only after USA and China. Today, India is one of the world’s fastest growing major economies.

World Bank classifies economies considering per capita income. There are 4 categories namely Low Income; Lower Middle-Income; Upper Middle-Income and Higher Income. Indian economy falls under the category of – lower-middle income economy. Countries that have Per Capita Income (PCI) between $996 and $3895 fall in this classification
Indian economy in terms of Purchasing Power Parity (PPP) is the 3rd largest economy in the world but in terms of PCI, India ranked very low.
A number of factors influence the nature and characteristics of the Indian economy. Some of these factors include: (i) low per capita real income, (ii) rapid population growth, (iii) a high rate of unemployment, underemployment, and disguised unemployment, (iv) excessive reliance on the primary sector, (v) a vicious circle of poverty, and (vi) rising unemployment.

During British colonialism, India’s commerce, trade, and investment were hampered by the unilateral transfer of capital and raw materials to Britain.

India’s proportion of global GDP fell from 23 per cent in 1600 A.D. to 3 per cent in 1947. During the same time span, India’s proportion in global exports fell from 33 to 3 per cent.
The British impact on the Indian economy can be discussed in three different phases: Early British Period: from 1600–1757 A.D., from 1757–1857 AD, and British Crown Period: 1858 onward. The foundation of the East India Company in 1600 A.D. marks the beginning of the first phase. The company had two goals – procure raw materials for their factories and find a market for their completed goods. The second phase began with the Battle of Plassey, which marked a turning point in colonial control in India. This time was marked by blatant robbery by the East India Company, camouflaged as trade, exploitative land revenue policies, and dishonest and unscrupulous company officers accumulating vast fortunes. The third phase began in 1857, when the British quashed the Sepoy Mutiny. The British crown dissolved the company and assumed exclusive control of India. This period was marked by colonial exploitation through de-industrialisation, agricultural commercialisation, wealth drain, and Westernisation of Indian education systems.

1951–1980

India’s growth rate was slow during the first three decades after independence, 3.5 per cent from the 1950s to the 1980s, while per capita income growth averaged 1.3 per cent.

1980-90

This is widely regarded as the period of economic buoyancy and recovery. The liberalised import policies of the government, increased imports of capital goods and raw materials for manufacturing, boosting the production of luxury goods in the country.

1992 to 2008

This is popularly referred as the post-reform period. Following the 1991 economic crisis, the implementation of reforms and the adoption of LPG (Liberalisation – Privatisation – Globalisation) policies paved the way for positive economic outcomes and higher GDP growth rates.
From 2002–03 to 2006–07, India’s GDP grew at an 8.6 per cent annual rate, making it the world’s second fastest growing economy after China.

2008 to 2021

In the economy, revolutionary policies such as the Goods and Services Tax (GST), the Insolvency and Bankruptcy Code (IBC), corporate tax cuts, and demonetisation were implemented. Prior to the COVID-19 pandemic, the economy’s average annual growth rate between 2008-09 and 2019-20 were 6.5 per cent (at base year 2011-12 prices).
In 2019-20, the economy expanded by only 4.0 per cent.

Structural change refers to the fundamental changes that have occurred in the critical components of the Indian economy over time.
The primary sector’s contribution to GDP decreases over time, while the secondary and tertiary sectors increase. In the long run, the tertiary sector surpasses the secondary sector, as the major contributor to the economy.
In India, the services sector has largely replaced the industrial sector, and it now dominates the economy. The role of the primary sector declines as income rises, and India is no exception. Agriculture’s share of GDP has steadily declined from 26.9 per cent in 1990 to 21.6 per cent in 2000, and the decline has continued to 17.8 percent in 2010 and 17.7 per cent in 2019 owing to service-led growth in India.
The onset of the pandemic has increased the primary sector’s contribution to the economy as agriculture was the only sector allowed to function smoothly during the economic lockdown. In 2020-21, the services sector contributed 60.9 per cent of the economy, followed by the secondary sector (19.8 per cent) and the primary sector (20.1 per cent).
An empirical examination of the nature and causes of structural change in the Indian economy reveals that the services sector drives the industry and the overall economy, and the sector’s growth and dominance is influenced by external factors such as foreign direct investment.