Indian Economy on the Eve of Independence

Indian Economy on the Eve of Independence

• British rule exploited all sectors of the Indian economy
• Agriculture was exploited through the zamindari system of land revenue
• Zamindars were declared landowners
• Zamindars paid a fixed revenue to the government, extracting what they could from farmers
• Farmers received minimal income & little surplus for investment
• Zamindars often spent revenue on luxury items, neglecting agricultural improvement

Colonial Exploitation of the Agricultural Sector

• Zamindari system: an intermediary between the colonial government and peasants
• Zamindars were middlemen, extracting revenue from farmers
• Limited investment in agricultural development and surplus for farmers
• Insufficient investment in agricultural improvement by zamindars
• This system led to the exploitation of Indian agriculture

Macroeconomics Concepts

• Macroeconomics: Study of the whole economy
• Consumption goods: Goods for direct use
• Capital goods: Goods used to produce other goods
• Final goods: Goods not used in the production of other goods
• Intermediate goods: Goods used in the production of other goods
• Stocks: Quantities at a specific point in time
• Flows: Quantities over a period of time
• Gross investment: Total investment
• Depreciation: Decline in capital value
• Circular flow of income: Model showing money movement in the economy
• National Income Calculation Methods: (a) Value Added, (b) Expenditure, (c) Income
• National Income Aggregates: GNP, NNP, GDP, NDP (at market price, at factor cost)
• Real GDP: GDP adjusted for inflation
• Nominal GDP: GDP not adjusted for inflation
• GDP and Welfare: Relation between GDP and overall well-being

Money and Banking

• Money: Medium of exchange
• Money supply: Total amount of money in circulation
• Currency: Physical money
• Net demand deposits: Monetary holdings in accounts
• Money creation by Commercial Banks: Process by which banks create money
• Central Bank: Regulates the monetary system (e.g., Reserve Bank of India)
• Central Bank Functions:
  • Issuer of currency
  • Government's banker
  • Banker's bank
  • Credit control (Bank Rate, CRR, SLR, Repo Rate, Reverse Repo Rate, Open Market Operations, Margin requirement)

Income and Employment Determination

• Aggregate demand: Total demand in the economy
• Components of Aggregate Demand: Spending by households, businesses, government, and foreign sector (exports-imports)
• Propensity to consume: Proportion of income spent on consumption
• Propensity to save: Proportion of income saved
• Short-run equilibrium output Economy's production level at a given time
• Investment multiplier: Change in equilibrium output caused by a change in investment
• Full employment: All available labor is utilized
• Involuntary unemployment: Unemployment for those willing and able to work
• Excess demand: Demand surpasses supply; possible inflation
• Deficient demand: Insufficient demand; possible recession
• Measures to correct economic imbalances: Government changes in spending, taxes, and money supply

Government Budget and the Economy

• Government budget: Plan for government revenue and expenditure
• Receipts: Income earned by government
  • Revenue receipts (taxes, fees)
  • Capital receipts (borrowing, sale of assets)
• Expenditure: Government spending
  • Revenue expenditure (salaries, maintenance)
  • Capital expenditure (infrastructure projects)
• Budgetary Deficits:
  • Revenue Deficit
  • Fiscal Deficit
  • Primary Deficit (meaning of each deficit stated)