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GDP AND THE INDIAN ECONOMY

The gross domestic product (GDP) is a measure of the amount of the economic production of
a particular territory in financial capital terms during a specific time period. It is one of the
measures of national income and output. It is often seen as an indicator of the standard of
living in a country.
A common equation for GDP is:

GDP = consumption + investment + exports - imports

Economists have preferred to split the general consumption term into two parts; private
consumption, and public sector spending.

Therefore the formula is expressed as:

GDP = private consumption + government + investment + net exports

(Or simply GDP = C + G + I + NX)

The economy of India is the fourth largest in the world, with a GDP of $3.363 trillion at PPP
(purchasing power parity), and is the tenth largest in the world, with a GDP of $691.9 billion at
2004 USD exchange rates and has a real GDP growth rate of 6.2% at PPP. However India's
huge population results in a relatively low per capita income which hovers at around $3,100.
The country's economy is diverse and encompasses agriculture, handicrafts, industries, and a
multitude of services. Services are the major source of economic growth in India today, though
two-thirds of Indian workforces earn their livelihood directly or indirectly through agriculture. In
recent times, India has also capitalized on its large number of highly-educated populace fluent
in the English language to become a major exporter of software services, financial services and
software engineers.

India's economic history can be broadly compartmentalized into three eras, beginning with the
pre-colonial period lasting up to the 17th century. The advent of British colonization of the
Indian subcontinent started the colonial period in the 17th century, which ended with the Indian
independence in 1947. The third period is the post-independence period after 1947.

Pre-colonial
The citizens of the Indus valley civilization, a permanent and predominantly urban settlement
that flourished between 2800 BC and 1800 BC practised agriculture, domesticated animals,
made tools and weapons and traded with other cities. Evidence of well planned streets, a
drainage system and water supply reveals their knowledge of urban planning and the existence
of some form of municipal government.

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Much of the population of the region constituting present-day India resided in villages, whose
economies was largely isolated and self-sustaining, with agriculture being the predominant
occupation of the populace. It satisfied the food requirements of the village and also provided
raw materials for hand-based industries like textile, food processing and crafts. Although many
kingdoms and rulers issued coins, barter was still widely prevalent. Villages paid a portion of
their agricultural produce as revenue, while its craftsmen received a part of the crops at harvest
time for their services.

Colonial
Akbar's Mughal Empire in 1600 had revenue of £17.5 million. In contrast, the entire treasury of
Great Britain in 1800 totaled to £ 16 million. The broader macroeconomic view of India during
this period reveals that there were segments of both growth and decline, resulting from
changes bought about by colonialism and a world that was moving towards industrialisation and
economic integration.

The colonial rule brought along a favourable institutional environment that guaranteed property
rights, ensured free trade, had fixed exchange rates, uniform currency system, uniform weights
and measures, open capital markets, well developed system of railways and telegraphs, a
bureaucracy free from political interferences and a modern legal system.

Post Independence
Indian economic policy after independence, influenced by the colonial experience, and by their
exposure to Fabian socialism, became protectionist in nature, implementing a policy of import
substitution, industrialization, state intervention in labour and financial markets, a large public
sector, overt regulation of business, and central planning. Jawaharlal Nehru, the first prime
minister of India, along with the statistician Prasanta Chandra Mahalanobis, formulated and
oversaw the economic policy of independent India. They expected favourable outcomes from
this strategy since it involved both the public and private sectors and was based on direct and
indirect state intervention instead of Soviet-style central command system. The policy of
concentrating simultaneously on capital and technology intensive heavy industry and
subsidising hand based and low-skilled cottage industries was criticised by economist Milton
Friedman, who thought it would not only waste both capital and labour, but also retard the
development of smaller manufacturers.

Mixed economy
India is a mixed economy combining features of both capitalist market economies and socialist
command economies. Thus, there is a private sector and a public sector controlled almost
entirely by the government. The public sector generally covers areas which are deemed too
important or not profitable enough to leave to the instability of capitalistic markets. Thus such
services as railways and postal system are carried out by the government.

Since independence, various phases have seen nationalization of such areas as banking, thus
bringing them into the public sector, on one hand, and privatisation of some of the Public Sector
Undertakings during the liberalisation period on the other.
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Exchange rates
Under the fixed exchange rate system, the value of the rupee was linked to the British pound
sterling till 1946 and after independence, 30% of India's foreign trade was to be determined in
pound sterling. In 1975, as per the Floating exchange rate system, the value of the rupee was
pegged to a basket of currencies and was tightly controlled by the Reserve Bank of India. In
recent years its value has depreciated with respect to most currencies with the exception of the
US dollar.

Since liberalisation, the rupee is fully convertible on trade and current account. The former has
enabled Indian businessmen and workers to convert their earnings abroad into rupee at market
rates, while the latter has removed all restrictions on foreign exchange for current business
transactions as well as travel, education, medical expenses, etc., India has committed to
gradually move towards full convertibility, albeit with some restrictions on capital accounts, in
order to encourage two-way flow of capital and investment.
The inflation rate as of July 2005 stands at 3.84%.

Currency: 1 Indian Rupee (INR) (₨) = 100 Paise = 0.0230415 US dollar = 0.0180005 Euro

Gross Domestic Product (GDP)

GDP at PPP $3,362,960 million(4th)

GDP at Exchange rate $679,674 million(10th)

GDP real growth rate

6.2% (43rd)
(at PPP)

GDP per Capita $3,100 (155th)

GDP by sector Agriculture (23.6%), industry (28.4%), services (48%)

Source: Wikipedia

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