INDEX

BASICS OF ECONOMY
Sr.

CHAPTERS

1.

Introduction

Definition

Why Should We Study Economics?

Economic Policy

Market Forces of Demand and Supply

2.

3.

4.

5.

6.

Page No.

Types of Market

19

Economic Planning

21

National Income and National Output

24

How to Calculate GDP/GNP?

25

Limitations of the GDP Concept

28

Other Growth Measures

28

Business Cycle

30

Economic Systems

30

Fiscal Policy

32

Introduction

32

Government in the Economy

33

Fiscal Policy

33

Goals of Fiscal Policy

35

Budget in India

36

Taxation

44

Brief History of Taxation

44

Basics of Taxation

46

Types of Taxes

48

Evolution of Banking

52

Evolution of a Central Bank

53

Microfinance

55

Monetary and Credit Policy

58

Evolution of Money

58

How Banks Create Money?

61

Supply of Money

62

Quantitative Measures

64

Qualitative Measures

66

Demand for Money

66

Monetary Policy

71

7.

8.

9.

10.

11.

12.

13.

Inflation

75

Causes of Inflation

76

Costs of Inflation

78

Measurement of Inflation

80

Other Indexes

82

Inflation Targeting

83

Measures to Address Inflation

83

Financial Markets

85

Money Market

87

Capital Markets

88

FDI vs. FII

94

Indias Money Market

95

Foreign Trade and Exchange Rate Market

98

Small History of Exchange Rates

100

Indias Exchange Rate Policy

106

IMF, World Bank and WTO

108

The Gold Standard and the Interwar Experience

108

Operation and Evolution of Bretton Woods System

111

WTO

116

Agriculture

118

Agricultural Production and Trends

118

Land Reforms and Their Performance

119

Food Processing Industry

126

Dairy Industry

127

Meat and Poultry Industry

130

Fish and Marine Industry

131

Industry

133

New Industrial Policy, 1991

135

National Manufacturing Policy

137

Small Scale and Cottage Industries

138

Human Development

141

Inequality

141

Poverty

142

Unemployment

145

CHAPTER 1
INTRODUCTION
DEFINITION
A book on Indian economy is incomplete without its first page defining the
meaning of the word economics. In the simplest words possible, economics can be
defined as the science of rational human beings
(a) with unlimited wants, and
(b) limited resources
These limited resources bring us to another two important terms i.e. scarcity and
choice. The limited or scarce resources available with an individual force him/her to
make a choice among its unlimited wants and choose the one he/she prioritizes the
most.
For example: A 10 year old boy goes to the market with Rs. 5 note in his pocket.
With this money he wishes to buy a pencil, eraser, pen, chocolate and candy. When he
reaches the shop, he realizes that all the above-mentioned items cost much more than
Rs. 5. Thus, now he has to make a choice about what to buy and what not to buy. Study
of these choices is economics.
A more formal definition of Economics is as follows:
Economics is the study of how individuals and societies choose to use the scarce
resources that nature and previous generations have provided. The key word in the
definition is choose. Economics is a behavioural, or social, science. In large measure it
is the study of how people make choices.
The government, political leaders, policy makers etc. in every country have to
make choices at every step for running the country, such as, in making the annual
budget, for designing and implementing policies - old and new etc. India is grappling with
various problems such as inadequate healthcare facilities, poor quality of education,
unemployment etc. Thus, the government has rolled out various schemes to address
these issues. Every year the government has to make the choice on how much funds
need to be allocated for each scheme and then, release its budget specifying the same.
Every issue/problem is important and there are unlimited numbers of them but the
resources available are limited and hence, arises the need to make choice.

In the recent Swaraj Budget of AAP Government in Delhi, education was given
the highest priority receiving maximum allocation whereas transport came at number
three in the list of priority, unlike the previous Government budget in Delhi, when
transport was given highest priority. Thus, it is all about choices. In newspapers, we
often read RBI choosing to control the inflation first instead of easing the interest rates
and boosting industrial growth. Thus, there is a trade off.
The decisions taken by Government have an additional component attached to
them apart from just the availability of resources i.e. welfare. A decision or a choice
made by Government is not limited to maximizing the efficiency and output of the
resources available to them but maximizing welfare as well. And maximizing welfare
often takes precedence over maximizing output eroding the resources in the process.
For example: In India, every year large amount of subsidies are given to farmers
in form of free water, electricity, low cost fertilizers, seeds etc. These subsidies are
against fiscal prudence and lead to high levels of fiscal deficit. However, the welfare of
farmers takes precedence over the objective of optimum utilization of resources.

WHY SHOULD WE STUDY ECONOMICS?

There are various reasons for studying economics but the most fundamental
aspect is the OPPORTUNITY COST.
As we saw in the previous section, every decision involves trade-off. The full
cost of making a specific choice includes what we give up by not making the alternative
choice. The best alternative that we forgo, or give up, when we make a choice or a
decision is called the opportunity cost of that decision. This concept applies to
individuals, businesses, and entire societies.
For example, Mr. A has three choices in front of him i.e. to start his own business,
join his family business or work with an MNC. The three choices are in his order of
preference. Thus, Mr. A starts his own business. The cost involved in making that choice
is not only the cost of setting the business, but also the cost of forgoing his family
business. This cost maybe calculated in terms of the salary received in family business.
Opportunity cost arises because resources are scarce i.e. limited.

ECONOMICS CAN BE MINDBOGGLING

Most students taking economics for the first time are surprised by the breadth of
what they study. Some think that economics will teach them about the stock market or
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