Indian Economy And Various Sectors of the Economy

In the first five decades of the twentieth century, till we got our independence in 1947, the per capital GDP in India was stagnant. The trend growth in GDP during this period was 0.9% with population growing by about 0.8%.

The average growth rate of the Indian economy over period of 25 years since 1980-81 was about 6.0% - a significant improvement over the annual growth rate of the earlier three decades.

Various Sectors of the Economy

1.       Agriculture

2.       Industry

3.       Micro and Small Enterprises (MSEs)

4.       Services

Agriculture

Agriculture is one of the most important sectors of Indian economy. Agriculture (including allied activities) accounted for 17% of the GDP in 2008-09 as compared to 21.7% in 2003-04. The prosperity of the rural economy is also closely linked to agriculture and allied activities. Indian agriculture is heavily dependent on monsoons. It play a critical role in determining whether the harvest will be rich, average or poor.

Industry

Industry accounts for 19% of the GDP in 2008-09. About one-third of the industrial labor force is engaged in simple household manufacturing only.

Central Statistical Organization (CSO) classifies the industrial sectors into three segments-

a)      Mining and Quarrying

b)      Manufacturing and Electricity

c)       Gas and Water supply

Micro and Small Enterprises (MSEs)

Inclusion of MSE in priority sector with sub limit for the micro unit. Stipulation that collateral should not be taken for loan up to Rs. 5 lakh to MSE units. Providing credit guarantee for collateral free loans from the Credit Guarantee Trust Fund administered by SIDBI.

Micro, Small And Medium Enterprises Development (MSMED) Act, 2006 classifies enterprises broadly into two categories –

a)      Manufacturing enterprises

b)      Service enterprises

Services

The Service sector accounts for about two-third of India’s GDP i.e 64% in 2008-09. In the developed economies, the industrial and service sectors contribute a major share in GDP while agriculture accounts for a relatively lower share.

Structural Change in Indian Economy

Structural Changes in GDP (Growth Rate in %)
	1900-1950	1951-80	1980s	1990s	2000-09
Agriculture & allied activities	NA	2.1	4.4	3.2	2.8
Industry	NA	5.4	6.4	5.7	6.5
Service	NA	4.5	6.3	7.1	9.0
GDP	0.7	3.5	5.6	5.7	7.2

Structural Changes in GDP (Share in GDP) New series (Base : 1990-2000)
	1950-51	1960-61	1970-71	1980-81	1990-91	2008-09
Agriculture & allied activities	55	51	44	38	31	17
Industry	11	13	15	17	20	19
Service	34	36	41	45	49	64

Read More

Business Cycles

The term Business cycle or economic cycle refers to economy-wide fluctuations in production or economic activity over several months or years.

The cycles affect not only the economy in general, but each individual business firm.

Characteristics of Business Cycles

1.       A business cycle is synchronic.

      2.       A business cycle shows a wave like movement
      3.       Cyclical fluctuations are recurring in nature.
      4.       There can be no indefinite depression or eternal boom period.
      5.       Business cycle are pervasive in their effects.
      6.       The up and down movements are not symmetrical.

Phase of a Business Cycle

1. Boom

2. Recession
3. Depression
4. Recovery

BOOM

1.       During the boom phase production capacity is fully utilized and also products fetch an aove normal price which gives higher profit.

      2.       In Boom period, consumption will be decreased as prices are going up.
      3.       The Demand is more or less stagnant or it even decreases

RECESSION

1.       A downward tendency in demand is observed.

      2.       The supply exceeds demand
      3.       Desire for liquidity increases all around.
      4.       Producers are compelled to reduce price so that they can find money to meet their obligations.
      5.       This Phase of the business cycle is known as the Crisis.

DEPRESSION

1.       Underemployment of both men and materials is a characteristic of this phase.

      2.       General Demand falls faster than production.
      3.       Volume of Production will be reduced.
      4.       The demand for the bank credit is at its lowest which results in idle funds.
      5.       The interest rates are decline regime.

RECOVERY

1.       Depression phase done not continue indefinitely.

      2.       The idle workers now come forward to work at low wages.
      3.       Prices are at the lowest, the consumers, who postponed their consumption expecting a still further                   fall in price, now start consuming.
      4.       As demand increases, the stocks of goods become insufficient

Read More

Theories Of Interest

Ø  Interest is a payment made by a borrower for the use of a sum of money for a period of time.

Ø  It is one of the four types of income, the other being Rent, Wages & profit.
Ø  Three elements can be distinguished in interest:

1.  Payment for the risk involved in making the loan
2. Payment for the trouble involved
3. Pure interest, i.e. a payment for the use of money

M Keynes in his book “The General Theory of Employment, Interest & money” view that “The rate of interest is a purely monetary phenomenon & is determined by demand for money & supply of money.
This theory also known as Liquidity Preference theory
Keynes assumed that there are two- assets –
    1.       Money in the form of currency & current deposit
    2.       Long term bond

Rate of interest & Bond price are inversely related & vice-versa Higher the level of nominal income in two-asset economy, more people would want to hold in their portfolio balance i.e. in the form of cash / bank deposits.
Higher the nominal rate of interest, the lower the demand for money or more in the form of bonds.

Money demand Curve –

Quantity of money demand increase with the fall in rate of interest or with the increase in level of nominal income. So at the level of nominal income, money demand curve will be downward slopping.

According to J M Keynes – The rate of interest is determined by demand for money (liquidity preference) & supply of money.
Position of money demand curve, depend upon two factors –
   1.       Level of nominal income
   2.       Expectation about changes in bond price in the future  (which implies change in rate of interest)

IS and LM curves Theory promulgated by Sir Hon Richard Hicks and Alvin Hansen.
The IS curve and the LM curve relate the two variables -
   1.       Income
   2.       The rate of interest.
The intersection point of the two curves is the equilibrium rate of interest.
LM= Liquidity preference and Money supply equilibrium, derived from Keynes Liquidity preference theory of interest.
IS = Classical Theory

Read More