1.Fundamentals of Economy

INTRODUCTION

What is an Economics ?

• Study of production, distribution and consumption of goods and services

What is Economy ?

• The framework within which economic activities of a country interacts.

What are the economic activities ?

1. Production - Production of goods and services using factors of production
2. Distribution of Income - Income(money) given to factors of production
3. Consumption - Money(income) is exchanged for produced goods and services to meet needs

What are the factors of production ?

1. Land - gets rent
2. Labour - gets wages
3. Capital(physical capital) - gets interest
   1. Fixed Capital - Tools, machines and building
   2. Working Capital - Cash in hand and raw material
4. Entrepreneurship(human capital) - gets profit

What are the sectors in Economy?

1. Primary Sector - Agriculture, mining - exploitation of natural resources
2. Secondary / Manufacturing Sector - Industries, construction - value addition to natural resources
3. Tertiary / Service Sector - IT, Tourism, trade, transportation - Production and exchange of intangible goods and services

Indian sectoral composition

What are the models of economic development ?

1. Capitalist Economic System
2. Socialist Economic System
3. Mixed Economic System

What is a Capitalist Economic System ?

• Means of production except labour is owned by private sectors - eg. USA

What are the benefits of capitalist economic system ?

1. Mobilisation of private capital and Technology
2. High competition so higher efficiency, higher quality and cheaper price - Indigo vs Air India

What are the demerits of capitalist economic system ?

1. Class Inequality - tech CEO makes more money in 10 minutes than domestic worker in one year
2. Labour Exploitation
3. Negatives of Demand-Supply Curve - Better air connectivity between metros and poor connectivity in NE
4. Disregard to environment - Sterlite Copper

What is a Socialist Economic System

• Means of production owned by state - eg. erstwhile USSR

What are the merits of Socialist Economic System ?

1. Classless society (all are labourers)
2. Egalitarian society - From each according to his ability to each as per his needs
3. No drawbacks of demand-supply curve - Rural health care facilities

What are the demerits of Socialist Economic System ?

1. Loss in efficiency - because same pay for hard workers and lazy workers
2. Low output - low efficiency so low production
3. High cost - Air India vs Indigo
4. Low quality - BSNL vs Jio

What is a Mixed Economy Model

• Co-existence of both private sector and public sector - e.g India

What are the merits of Mixed Economic Model

1. Complement and Supplement each other
2. Increase the merits and decrease the demerits of exclusive capitalistic or socialist economic model
3. Inclusive growth and development
4. Competition to PSE from pvt sectors

What are the demerits of Mixed Economic Model

1. No demerits I could think of when done properly

Indian mixed economic model

1. Coexistence of both public and private sector - but pvt sector mostly run by cronies, friends and families of politicians
2. Regulation over the private sector
   1. Licensing Raj - e.g exclusive license to produce cars to Maruti Motors ltd founded by Sanjay Gandhi
   2. Quota System
   3. Inspector Raj
   4. Reservation of sectors for public sector enterprises
      1. Nationalised banks
      2. Nationalised Air India
3. Closed Economy - Limited FDI
4. Planned Economy (JLN's Idea) to achieve following objectives
   1. Self-sufficiency - but PL-480 from USA
   2. Rapid economic growth - but 3.5% Hindu Rate of Growth till 1980's
   3. Full employment - but 9.65 in 2016 (Modinomics)
   4. Import substitution and Export Promotion - BS
   5. Reduction of Inequality - but top 1% own 52% wealth
   6. Poverty Reduction - but 28% of world's poor in India

Failures of Indian Mixed Economy Model of Growth

1. Failure of public sector enterprises
2. Stagnancy in Agriculture
3. Consumer Goods Industries were still not developed
4. Exports were low
5. Failure to control inequality
6. High unemployment
7. High poverty

Features of Indian Economy

1. Emerging economy status from developing economy
2. Young Economy
3. Knowledge Economy
4. Market determined economy from regulated economy

Negative Features of Indian Economy

1. Non inclusive growth
2. 90% workforce in unorganised sector (china 12%)
3. 60% population in agriculture contribute only 18% of GDP
4. Vocational employment is 5% vs Korea 90%
5. Low per capita income = Rs. 1,35,000 vs Rs.6 lakh+ china