Indian Economy Basics

Memory chain: Start with GDP, adjust for FACTOR INCOME from abroad (NFIA) to get NATIONAL, subtract DEPRECIATION to get NET.

GDP (Gross Domestic Product) = value of final goods/services produced WITHIN domestic territory.
GNP = GDP + NFIA (Net Factor Income from Abroad). For India NFIA is usually NEGATIVE (we pay more abroad than we earn), so GNP < GDP.
NDP = GDP − Depreciation.
NNP = GNP − Depreciation.
NNP at Factor Cost = National Income (NI).

Shortcut: 'Domestic→National' means ADD NFIA; 'Gross→Net' means SUBTRACT depreciation. Market Price vs Factor Cost: FC = MP − Net Indirect Taxes (Indirect Taxes − Subsidies).

Three valuations of output:
Factor Cost (FC) = what producers actually receive (rewards to factors).
Basic Price = FC + Production taxes − Production subsidies.
Market Price (MP) = Basic Price + Product taxes − Product subsidies = FC + Net Indirect Taxes.

Formula: MP = FC + (Indirect Taxes − Subsidies).

Since 2015 India shifted the headline GDP to GDP at MARKET PRICES (and uses 2011-12 base year, GVA at basic prices). GVA (Gross Value Added) at basic prices + Product taxes − Product subsidies = GDP at MP.

Mnemonic: 'Add tax, subtract subsidy' when moving FC→MP; reverse when moving MP→FC.

Nominal GDP = output valued at CURRENT prices. Real GDP = output valued at CONSTANT (base-year) prices, stripping out inflation.

GDP Deflator = (Nominal GDP / Real GDP) × 100. It is the broadest measure of inflation because it covers ALL goods/services in GDP (unlike CPI/WPI which use fixed baskets).

Worked example: If Nominal GDP = 220 and Real GDP = 200, Deflator = (220/200)×100 = 110, implying 10% inflation since the base year.

Key point: Real GDP growth reflects genuine output change. India's base year for national accounts is currently 2011-12.

Three classical sectors:
PRIMARY: extracts natural resources — agriculture, forestry, fishing, mining.
SECONDARY: manufacturing/industry — converts raw materials into goods; includes construction, electricity.
TERTIARY (Services): trade, transport, banking, IT, education, health.

Newer sub-classifications: QUATERNARY (knowledge/R&D, IT, consultancy) and QUINARY (top decision-makers — CEOs, ministers, scientists).

India's structural shift: economy moved largely from primary → tertiary, BYPASSING a strong secondary (manufacturing) phase. Today the SERVICES sector contributes the largest share to GVA (50-55%), industry ~25-30%, agriculture ~16-18% — yet agriculture still employs the LARGEST share of the workforce (45%). Remember the 'GVA vs Employment mismatch'.

ORGANISED (formal) sector: registered enterprises, regular employment, social security, follows labour laws (e.g., Factories Act units with 10+/20+ workers).
UNORGANISED (informal) sector: unregistered, no job security, no benefits — employs the OVERWHELMING majority (~80-90%) of India's workforce.

PUBLIC sector: owned/run by government, motive is public welfare. PRIVATE sector: owned by individuals/companies, profit motive.

Exam trap: 'organised' is about registration/security, NOT ownership. A private company can be in the organised sector. Disguised unemployment and underemployment are concentrated in agriculture and the unorganised sector.

Classical development theory (Colin Clark, Fisher): as economies grow, workforce and output shift primary → secondary → tertiary.

India's anomaly: services leapfrogged ahead while manufacturing stayed weak ('premature deservicisation/services-led growth'). This is why 'Make in India' (2014) targets raising manufacturing's share toward 25% of GDP.

Quick recall of GVA shares (approx, recent): Services > Industry > Agriculture. Employment shares: Agriculture > Services > Industry.

Mnemonic for the mismatch: 'Agriculture feeds the most workers but earns the least share; Services earn the most share with fewer workers.'

RBI measures money supply at varying liquidity:
M0 (Reserve/High-Powered Money) = Currency in circulation + Bankers' deposits with RBI + Other deposits with RBI. (Most liquid base.)
M1 (Narrow Money) = Currency with public + Demand deposits + Other deposits with RBI.
M2 = M1 + Savings deposits with post office savings banks.
M3 (Broad Money) = M1 + Time deposits with banks. (Most watched aggregate.)
M4 = M3 + All post office deposits (excluding NSCs).

Liquidity order: M1 > M2 > M3 > M4 (M1 most liquid). M3 is the broad money used for monetary policy. Mnemonic: 'M0 is the base RBI prints; M3 is the broad picture banks create.'

WPI (Wholesale Price Index): measures wholesale/bulk prices; base 2011-12; compiled by Office of Economic Adviser (DPIIT); does NOT include services; weights: Manufactured products > Primary articles > Fuel & power.

CPI (Consumer Price Index): retail prices paid by consumers; INCLUDES services; food has the highest weight; compiled by NSO/MoSPI; base 2012. CPI (Combined) is the headline inflation measure used by RBI for its inflation target.

Key: RBI's monetary policy targets CPI inflation at 4% (+/- 2%) under the flexible inflation targeting framework. WPI lacks services and consumer perspective. Mnemonic: 'CPI = Consumer + serviCes Included; WPI = Wholesale, no services.'

Demand-pull inflation: too much money chasing too few goods (excess demand).
Cost-push inflation: rising input costs (wages, fuel) push prices up.
Stagflation: stagnant growth + high unemployment + high inflation simultaneously.
Deflation: sustained FALL in general price level (dangerous, can cause recession).
Disinflation: a DECLINE in the RATE of inflation (prices still rise, but slower).
Reflation: deliberate policy to revive demand and raise prices from deflation.

Core inflation = headline inflation MINUS volatile food and fuel components.

Trap: Disinflation ≠ Deflation. Disinflation = falling inflation rate; Deflation = negative inflation (prices actually drop).

Economic GROWTH = quantitative increase in real national output/income (GDP) over time — a narrow, value-neutral concept.
Economic DEVELOPMENT = growth PLUS qualitative improvements: health, education, equity, living standards, reduced poverty. Development is broader and value-based.

Human Development Index (HDI): published by UNDP in the Human Development Report (first 1990, conceived by Mahbub ul Haq & Amartya Sen). Three dimensions:

1. Health → Life expectancy at birth.
2. Education → Mean years + Expected years of schooling.
3. Standard of living → GNI per capita (PPP $).
   HDI ranges 0–1; computed as the GEOMETRIC mean of the three dimension indices. Categories: Low, Medium, High, Very High.

GDP per capita: GDP / population — a basic welfare proxy but ignores distribution.
PPP (Purchasing Power Parity): compares currencies by what they can buy; India is the 3rd largest economy by PPP GDP (after China, USA).
GINI Coefficient: measures income/wealth INEQUALITY (0 = perfect equality, 1 = perfect inequality); derived from the Lorenz curve.
MPI (Multidimensional Poverty Index): UNDP & OPHI; captures deprivations in health, education, living standards.
Green GDP / Genuine Progress: adjusts GDP for environmental costs.

Mnemonic: 'GINI = inequality; HDI = development; PPP = real buying comparison.'

GDP fails to capture true well-being because it:

1. Ignores income DISTRIBUTION/inequality.
2. Excludes NON-MARKET activities (household/unpaid work, subsistence farming).
3. Counts the informal economy poorly.
4. Ignores environmental degradation and resource depletion (no 'green' adjustment).
5. Says nothing about composition (guns vs hospitals) or sustainability.
6. Excludes leisure and quality of life.

This is why complementary measures (HDI, MPI, Gini, Green GDP, Gross National Happiness in Bhutan) exist. Exam angle: GDP measures output, NOT welfare; higher GDP need not mean better quality of life.