Module 1: An Introduction to Indian Economy


  • India’s share in world population is 17.8 per cent, but India accounts for only 2.6% of world Gross National Income on exchange rate basis.
  • When ranked according to the Gross National Income (GNI), India falls to a category of lower middle income economies.
  • In 2018, India has become the world’s sixth-biggest economy pushing France into seventh place.


  • According to Angus Maddison, British economic historian and the author of the famous book ‘Contours of the World Economy, 1-2030 AD’, in 1000 AD, China and India together contributed 50.5% of world GDP.
  • By 1600, that share had gone up to 51.4%, with China accounting for 29% and India 22.4% of world GDP. A hundred years later, China’s GDP had fallen but India’s went up to 24.4% of world output.
  • By 1820, however, India’s share had fallen to 16.1%. By 1870, it went down to 12.2%. The gross domestic product of India in 1850 dropped to 5-10% and was estimated at about 40 per cent that of China.
  • In 1876, Dadabhai Naoroji prepared estimates of national income and per capita income for the year 1867-68. Dadabhai Naoroji estimated national income at Rs 340 crore and per capita income of Rs 20. He also formulated the drain of wealth theory, in which he accused British of draining the wealth out of India without proper material returns.
  • William Digby calculated the Per Capita National Income of India as Rs. 18 for the year 1899.
  • British never accepted this calculation. Lord Ripon’s finance secretary calculated Per Capita Income as Rs. 27, while Lord Curzon calculated it to be Rs. 30 in 1901.
  • By 1900, under the British Empire, India’s share of manufacturing declined to 2% of global industrial output.
  • Indian economy during British rule witnessed many changes such as commercialization of agriculture, rise of intermediaries in agriculture, recurring famines and food shortage, decline of cottage industries and de-industrialization etc.
  • The British made India a source of raw materials and destination of finished goods.

Indian economy after Independence

  • In 1947, India attained freedom from British in 1947. Independence also involved the partition of India to create East and West Pakistan.
  • Partition caused many economic problems for India. Many major centres of jute production and centres of wheat and cotton production were located in Pakistan. But India retained the majority share of cotton and jute mills.
  • India lost one-third of its irrigated land to Pakistan.
  • India’s share in the world economy was just 4.2% of World GDP in 1950.
  • The immediate task of Indian leaders was to rebuild India, increase the production, reduce poverty and inequalities and march towards a just society.
  • India adopted the system of Planning, which proved successful in Soviet Union.
  • The Government set up Planning Commission in 1950 with Gulsarilal Nanda as Deputy Chairperson.
  • The first Five-year Plan was launched in 1951 to 1956 with emphasis on agriculture and irrigation.
  • The second Five-year Plan was launched in 1956 based on Mahalanobis Model. It was especially aimed at development, focusing on the development of key and basic industries.
  • It was believed that rapid industrialization driven by the state was the most effective way to abolish mass poverty.
  • During Private sector was given a major role in the development of India.
  • The early phase of Indian economic planning, led by Jawaharlal Nehru was moderately successful in raising growth.
  • Government followed a restrictive economic policy, which gave private players little space to grow.
  • But the license-permit raj gained in strength, leading to corruption, and cramping economic growth.


The phrase Hindu rate of growth was coined by economist Raj Krishna. He used it to describe India’s unsatisfactory growth trend, from 1950 to 1980, which was stuck at 3.5 to 4% per year. The word “Hindu” in the term was used by some early economists to imply that the Hindu outlook of fatalism and contentedness was responsible for the slow growth.

New Economic Policy

  • India faced a severe economic crisis in 1991 and foreign exchange reserves were insufficient to meet imports for more than two weeks. Also inflation reached double digits.
  • In order to bail out of this crisis, India approached IMF and World Bank for 7 billion dollar loan.
  • India under rook a series of structural reforms outlined by IMF in exchange for this loan. P.V.Narasimha Rao was the Prime Minister and Manmohan Singh was the Finance Minister during that time.
  • India deviated from 40 year old Nehruvian economic model which gave emphasis on public sector and centralised planning to a neo-liberal economic model.
  • The economy policy adopted by Government of India since 1991 is termed as New Economic Policy. These reforms are also known as Rao-Manmohan Reforms.
  • In 1991 July, Rupee was devalued twice. It was followed by many other reforms in various sectors.
  • These reforms included opening for foreign capital, trade and investment, deregulation of industrial sector, initiation of privatization and tax reforms.
  • New Industrial Policy was adopted as a part of these reforms in 1991.
  • IPR 1991 deserved 9 industries out of 16 which were earlier reserved for public sector. The number of industries that required compulsory license reduced to 6.
  • The interest rate ceilings were removed and trade and FDI regimes were also liberalized.
  • Government also initiated disinvestment policy as a part of New Economic Policy of 1991.
  • The Objectives of NEP were:
    • Release industrial sector from unnecessary bureaucratic control.
    • Integrate India with world economy by deregulating exports and imports
    • Encourage foreign investment
    • Reduce fiscal deficit
    • Encourage foreign trade
    • Control inflation
    • Reduction in poverty and inequality
    • Improve employment opportunities
  • The economic policy reforms have yielded very satisfactory results. According to IMF, India’s economy is $9.448 trillion in 2017 and accounts for a 7.45% share of world GDP.
Year GDP (In crore ) Growth rate (%)
















  • Economic activities are generally divided into three sectors:
    • Primary Sector: When we produce a good by exploiting natural resources, it is an activity of the primary sector. It is called so because it forms the base for all other products that we subsequently make. Primary sector includes agriculture and allied activities, Fisheries, Forestry etc.
    • Secondary Sector: The secondary sector covers activities in which natural products are changed into other forms through ways of manufacturing that we associate with industrial activity. It is also called Industrial sector.
    • Tertiary Sector: The activities that help in the development of the primary and secondary sectors are included in tertiary sector. These activities, by themselves, do not produce a good but they are an aid or a support for the production process. Transport, storage, communication, banking, trade etc. are included in this sector. Service sector also includes some essential services that may not directly help in the production of goods. Eg. Education, Public Administration, Real estate, IT-Related services, tourism, health etc. It is also called service sector.
  • All these sectors contribute towards generation and growth of national income, creation of employment opportunities, supply of goods and services and creating infrastructure.
  • The interdependence of these sectors is helpful in attaining economic progress.
  • Currently the service sector contributes more share to GDP than the other two sectors and it is the backbone of the Indian economy.
  • It is evident from the table below that the share of primary sector in the total national income is reducing and the tertiary sector is rising.


SECTOR 1950-51 1970-71 1990-91 2011-2012
Primary 53 43 32 15
Secondary 14 20 24 31
Tertiary 33 37 44 54


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