Unit IV : National Indicators

Subject code : AMC 151_Managerial

Economics
Faculty Name: Ms. Muskaan Kapoor
 • Understand key National Income Aggregates
Learning and their measurement

Objectives • Explain the nature and causes of inflation

• Explore the role of Fiscal Policy in managing
the economy
• Apply concepts through real-world case
studies and data
 Learning Objective:
Icebreaker To help students critically interpret GDP data,
Activity: “The understand how GDP is measured, and
connect macroeconomic indicators to
managerial decisions.
GDP Race”
“Which country had the fastest GDP growth
rate last year — India, China, or the US?”
Reveal IMF 2024 GDP Data
Country Real GDP Growth (2024) Source

IMF World Economic Outlook,

🇮🇳 India 6.5%
April 2025

🇨🇳 China 5.0% IMF WEO

🇺🇸 USA 2.8% IMF WEO

Source:
[Link]
USA/EU?year=2024
 • Younger population, rising consumption-India’s
economy grows faster because millions of young
people are entering the workforce and spending
money.
• Strong service sector, IT exports- The service and
Why do you think tech sector keeps India’s economy strong even
when manufacturing or agriculture slows down.
India outpaced
China and the • Post-pandemic rebound-Part of India’s high
growth rate is a recovery effect — growth looks
US?” strong because it’s coming after a low base.
• Government investment in infrastructure-Public
investment is fueling private activity, keeping
India’s GDP growth robust.

• Slowing Chinese real estate and export markets-

China’s main growth engines — real estate and
exports — are struggling, slowing overall GDP
growth.
 Does higher GDP growth always mean people are better
off? Let’s unpack what GDP actually measures.”
1. GDP measures output, not welfare
GDP tells us the total value of goods and services produced in a country.
It shows economic activity, not whether people are happy, healthy, or equal

2. Real vs Nominal GDP

Nominal GDP = includes inflation (looks bigger)
Real GDP = removes inflation (shows real progress)

[Link] per Capita

GDP per capita = GDP ÷ population.
It shows average income per person, a better indicator of living standards. Even if India’s total GDP is catching
up, the average Indian still earns much less. Big GDP ≠ rich people — it depends on how many people share it.

4. PPP (Purchasing Power Parity)

PPP adjusts for differences in price levels between countries.
It tells you how much goods and services you can actually buy with local income.
PPP says, “Let’s compare what money can actually buy, not just exchange rates.”
 Forecasting demand and sales (e.g., FMCG firms
depend on disposable income growth)-forecast
demandproduction & marketing budgets

Why does GDP

Investment and expansion decisions (growth in
growth matter infrastructure → new opportunities)-when to
expandwhen to hold back
for business
leaders and
Hiring and wage planning-HR budgetspricing
managers?” strategiesemployee morale

Financial markets’ reaction (GDP data → investor

sentiment)-investor confidence
National Income Aggregates
• National income aggregates are measures of a country's economic performance, with key aggregates including
• 1. Gross Domestic Product (GDP)GDP is the total money value of all goods and services produced within a
country’s borders during one year.
• It doesn’t matter who owns the company — if it’s produced in India, it’s counted in India’s GDP.
• Formula:
• GDP = 𝐶 + 𝐼 + 𝐺 + 𝑋 − 𝑀
• Where:
• C = Consumption (spending by households)
• I = Investment (by businesses)
• G = Government spending
• X - M = Net exports (exports minus imports)
• Example:
• If Indians spend ₹100 on goods, companies invest ₹50, government spends ₹30, and exports exceed imports by
₹20,
then
→ GDP = 100 + 50 + 30 + 20 = ₹200.
GDP tells us what’s produced inside the country.
2. Gross National Product (GNP)
• Meaning:GNP measures the total income earned by a country’s citizens, whether they’re in
the country or abroad.
It adds income earned by Indians abroad and subtracts income earned by foreigners in India.
• Formula:
• GNP = GDP + ሺIncome earned by citizens abroad − Income earned by foreigners in the
countryሻ
• Example:
If India’s GDP = ₹200,
Indians working abroad earn ₹20,
and foreigners in India earn ₹10,
then
→ GNP = 200 + (20 - 10) = ₹210.
• Simple idea:
GNP tells us what our people earn, anywhere in the world.
3. Net National Product (NNP)

• Meaning:Machines, tools, and buildings wear out over time — that’s called depreciation.
NNP is what’s left after subtracting depreciation from GNP.
• Formula:
• NNP = GNP − Depreciation
• Example:
If GNP = ₹210 and depreciation = ₹10,
then
→ NNP = 210 - 10 = ₹200.
• Simple idea:
NNP shows the net production after accounting for wear and tear.
4. National Income (NI)

• Meaning:National Income is the total income earned by all citizens of a country for their productive efforts — wages, rent, interest, and
profit.
• It’s basically NNP at Factor Cost — i.e., NNP after removing taxes and adding subsidies.
• Formula:
• National Income (NI) = NNP at Market Price − Indirect Taxes + Subsidies
• Example:
If NNP at market price = ₹200,
Indirect taxes = ₹30,
Subsidies = ₹10,
then
→ NI = 200 - 30 + 10 = ₹180.
• Simple idea: NI is what people actually earn after removing taxes and adding subsidies.
. Personal Income (PI)

• Meaning:This is the total income received by individuals (not necessarily earned) in a country.
It includes things like pensions, interest, dividends, and transfer payments.
• Formula:
• PI = NI − Corporate Taxes − Undistributed Profits + Transfer Payments
• Example:
If NI = ₹180,
Corporate taxes = ₹20,
Undistributed profits = ₹10,
Transfer payments = ₹15,
then
→ PI = 180 - 20 - 10 + 15 = ₹165.
• Simple idea:
PI = What people actually get in their hands before paying personal taxes.
6. Disposable Income (DI)

• Meaning:This is the income people have after paying personal taxes — it’s what they can actually spend
or save.
• Formula:
• DI = Personal Income − Personal Taxes
• Example:
If PI = ₹165 and personal taxes = ₹25,
then
→ DI = 165 - 25 = ₹140.
• Simple idea:
Disposable income = “Money in your pocket” after taxes.
 Summary

Aggregate Formula Simple Meaning Example

GDP C + I + G + (X–M) Total value produced inside country ₹200
GDP + (Income from abroad – Income
GNP Total income of citizens, anywhere ₹210
to foreigners)
NNP GNP – Depreciation Net production after wear & tear ₹200
NI NNP – Indirect Taxes + Subsidies Total income earned by factors ₹180
NI – Corporate Tax – Undistributed
PI Income people receive ₹165
Profits + Transfers
DI PI – Personal Taxes Spendable income ₹140
Methods of Measuring National
Income
• National Income refers to the value of goods & services produced by a nation during a
particular financial year. Therefore, it is the net result of all the economic activities that take
place during a financial year and is valued in monetary terms.
• A country’s progress can be estimated by the growth of its national income.
• National income (NY) can be computed using any of the three below-stated methods:
• Value added method or Product method
• Income method
• Expenditure method
 Value Added Method/ Product Method

• Value Added is a method of calculating the National Income of an economy in different

production phases in a circular flow. The production process of a good or service involves
different production units. The value added method shows the value added or contribution
of such units.
• Every enterprise of industry adds some value to a final product, and for its production, it
purchases some intermediate goods from other firms. To calculate the National Income of
an economy, the value added by each of these individual firms to the final product is
summed up. Other names of Value Added Method are Product Method, Inventory Method,
Commodity Service Method, Industrial Origin Method and Net Output Method
Formula : Value Added Method/ Product
Method

• GDPMP = ∑GVAMP
• OR
• GDPMP = GVAMP of Primary Sector + GVAMP of Secondary Sector + GVAMP of Tertiary
Sector
• The formula for calculating National Income through Value Added Method is,
• National Income or NNPFC = GDPMP - Depreciation - Net Indirect Taxes + NFIA
Example :Determine the following with the help of the given information:
i) Value of Output
ii) Net Value Added at Factor Cost

• Solution:
• i) Value of Output = Sales + Increase in Unsold
Stock
• Value of Output = 12,800 + 1,000
• Value of Output = ₹13,800 Crores
• ii) Net Value Added at Factor Cost (NVAFC) = Sales
+ Increase in Unsold Stock - Purchase of Raw
Materials - Depreciation - (Indirect Tax - Subsidies)
• NVAFC = 12,800 + 1,000 - 3,400 - 400 - (900 - 200)
• Net Value Added at Factor Cost (NVAFC) = ₹9,300
Crores
2. Income Method

• The Income Method calculates the National Income of an economy based on the
idea that whatever the firm earns in exchange for goods and services is used to
make the factor payments. In other words, to calculate the national income of an
economy through the Income Method, the incomes received by residents of a
country for the productive services provided by them during a year are added
together. The incomes for the productive services or factors of production are
received by the residents in the form of profits, wages, interest, rent, etc. Other
names for Income Method are Distributive Share Method and Factor Payment
Method.
Formula: Income Method

• National Income or NNPFC = NDPFC or Domestic Income (Compensation of

Employees + Rent and Royalty + Interest + Profit + Mixed Income) + NFIA
Example: Calculate National Income with the help of the following data:

• Solution:
• National Income (NNPFC) = Compensation of Employees
+ Operating Surplus + Mixed Income of Self-Employed + Net
Factor Income from Abroad
• NNPFC = 14,000 + 4,500 + 17,200 + 400
• National Income (NNPFC) = ₹36,100 Crores
• Note:
• 1. Wages in Kind are already included in the
Compensation of Employees; therefore, it is not added to
National Income.
• 2. Gross Domestic Fixed Capital Formation is also not
included in the National Income as it is a part of the
Expenditure Method.
 Expenditure Method

• The Expenditure Method of calculating National Income takes the final

expenditures of an economy into consideration. The factor income earned by
different factors of production is spent by the different sectors of an
economy in the form of expenditure on the purchase of goods and services
manufactured by the firms. Under this method, all these final expenditures
incurred on the purchase of goods and services by the government,
households, foreigners, and business firms are added together. Another
name for the Expenditure Method is Income Disposable Method.
Formula:

• GDPMP = ∑Final Expenditure

• OR
• GDPMP = Private Final Consumption Expenditure (PFCE) + Government Final
Consumption Expenditure (GFCE) + Gross Domestic Capital Formation (GDCF) or
Domestic Investment + Net Exports (X - M)
• The formula for calculating National Income through Expenditure Method is,
• National Income or NNPFC = GDPMP - Depreciation - Net Indirect Taxes + NFIA
Example: Calculate GDP at MP with the help of the following data:

• GDPMP = Private Final Consumption

Expenditure + Government Final
Consumption Expenditure + Gross Fixed
Capital Formation + Change in Stock +
(Exports - Imports)
• GDPMP = 1,450 + 400 + 500 + 300 + (800
- 700)
• GDPMP = ₹2,750 Crores
 • National income (like GDP, GNP, etc.) is not easy to
calculate — it involves millions of people,
thousands of industries, and a lot of informal or
unrecorded activity.
Even the best economists admit GDP is an
estimate, not an exact number.
1. The Informal (Unorganised) Economy

A large part of the economy operates outside official

records — street vendors, small shopkeepers, gig
Challenges in workers, domestic helpers, farmers selling in local
markets, etc.
Measuring • Their production and income are real, but they are
National Income not recorded in national accounts because they
don’t file taxes or keep formal books.
• Why it matters:
• India has a massive informal economy — estimates
suggest nearly 45–50% of GDP and 80–85% of
jobs are in the informal sector (NITI Aayog,
Economic Survey).
• That means a big chunk of real economic activity is
missing from official GDP.
 • Non-Monetary Transactions
• What it means:
Not all goods and services are bought with
money.
In rural and traditional economies, people
often exchange goods or services directly
Non-Monetary (barter system) or produce for self-
consumption.
Transactions • Why it matters:
Such activities don’t pass through the market,
so they are difficult to measure in monetary
terms.
• GDP underestimates true production because
these non-market activities aren’t counted.
 • What it means:
If we count both intermediate goods (used to
make other goods) and final goods, GDP will
be overstated — because the same value is
counted twice.
• Example:
A farmer sells wheat to a miller → the miller
sells flour to a baker → the baker sells bread to
customers.
Double Counting • If we add up all sales (₹10 + ₹20 + ₹30 = ₹60),
we’re double counting.
The correct GDP contribution is just the final
good (bread) worth ₹30 — or the value
added at each stage (₹10 + ₹10 + ₹10 = ₹30).
• Impact:
Overstates the GDP number.
That’s why we use the value-added method
— to count only the net contribution at each
stage.
• Price Changes and Inflation
If prices rise (inflation), the total money value
of goods and services increases even if the
quantity produced hasn’t changed.
So GDP may look higher just because things
got costlier — not because more was
produced.
• Unrecorded Digital & Online Transactions
With the rise of online platforms, UPI,
cryptocurrencies, and gig work, many
transactions move fast and often go
unrecorded or partially recorded.

• Quality and Informal Data Issues

Collecting accurate data in a country with 1.4
billion people is tough.
Many businesses are small, rural areas are
under-surveyed, and people underreport
income to avoid taxes.
 News: India Continues to Be the Fastest-Growing
Major Economy
According to the World Bank (June 2025),
India’s GDP is projected to grow 6.3% in FY26,
making it the fastest-growing major economy
in the world.
In comparison, global growth is expected to be
only 2.3%, China around 4.6%, and the US
2.3%.”

GDP Growth(2025-26)

🇮🇳 India
2.30%
🇨🇳 China Source: [Link]
2.30% 6.30%
🇺🇸 USA business/india-projected-to-maintain-fastest-growth-rate-world-bank-
Global holds-fy26-growth-at-6-3-global-growth-rate-forecast-cut-to-2-
4.60% 3/articleshow/[Link]?utm_source=[Link]
Why Is India Growing Fast?
Strong services sector (IT, finance, telecom)
Domestic consumption and middle-class spending rising
Government investment in infrastructure (roads, housing, digital)
Large young workforce driving demand and innovation
Less dependent on exports, hence less affected by global slowdown
What Are the Challenges?
Unemployment and income inequality still high
Inflation pressures could reduce purchasing power
Fiscal deficit (government spending > revenue) remains a risk
Private investment is still not picking up as expected
Inflation — Nature, Definition, and Types
• What is Inflation
• Inflation means prices of goods and services keep rising over time —
so the same money buys fewer things than before.
• Inflation = When money’s value goes down, prices go up.
• Inflation doesn’t mean only one price rises — it means most prices
across the economy rise consistently.
• It’s not a one-time increase — it’s a sustained or continuous rise in
the general price level.
Why Inflation Happens
• Demand-Pull Inflation: Prices rise because demand is greater than
supply — too much money chasing too few goods.
• Demand-Pull Inflation occurs when: AD>AS
• (Where AD = Aggregate Demand, AS = Aggregate Supply)
• Causes:
• People have more money (rising incomes, tax cuts)
• Government spends more
• Low interest rates (cheap loans → more buying)
• Exports rise → more foreign demand
• Cost-Push Inflation:Prices rise because production costs increase — even if demand
stays the same.
• Causes:
• Higher wages (labour cost)
• Costlier raw materials (oil, steel)
• High import costs (due to weak rupee)
• Supply chain disruptions (e.g., war, droughts)

• Structural Inflation:Prices rise because of long-term issues in the economy — not just
sudden demand or cost changes.
• This happens when rural supply, logistics, or energy systems can’t keep up with
demand — especially in food and fuel.
Effects of Inflation
• On Consumers:
• Money loses value — you buy less for the same salary.
• Savings lose purchasing power.
• People shift money from savings to assets like gold or property.
• On Businesses:
• Cost of production rises → smaller profits.
• Uncertainty → harder to plan pricing or investment.
• On Government:
• Tax revenue rises automatically (nominal income increases).
• But high inflation creates pressure to control prices via monetary/fiscal
tools.
Causes of Inflation
• “Inflation means a continuous rise in the overall price level of goods and services
— or, in other words, the purchasing power of money falls.”
[Link]-Pull Factors — “Too much money chasing too few goods”
• Causes:
• Fiscal deficit: Government spends more (on subsidies, infrastructure, welfare)
without matching tax revenue → pumps extra money into the economy.
• Increase in money supply: If the RBI prints more money or keeps interest rates
low, borrowing and spending rise.
• High consumer confidence: People feel rich → spend more on cars, homes,
travel, etc.
• Export boom: Foreign buyers demand more goods → domestic supply shrinks,
local prices rise.
[Link]-Side (Cost-Push) Factors — “Rising cost of making goods”
• When the cost of production increases, companies raise prices to maintain
profit margins.
• Major Causes:
• Rising input costs: Higher prices of oil, gas, coal, electricity, metals, fertilizers,
etc.
• Wage hikes: Labour unions or minimum wage increases raise costs for
businesses.
• Natural disasters or poor harvests: Less supply → higher food prices.
• Logistics or supply chain disruptions: Shortage of containers, blocked ports,
wars.
[Link] Bottlenecks — “Long-term inefficiencies in the economy”
• When an economy has deep-rooted weaknesses — like poor infrastructure, low productivity, and
dependency on monsoons — prices rise even if demand is not excessive.
• Causes:
• Agricultural dependence on monsoon: Poor rains → lower crop yield → food price inflation.
• Storage and transport issues: Wastage of food due to lack of cold chains or warehouses.
• Skill or labour mismatch: Labour shortages in one sector while surplus in another → production
delays.
• Power shortages or logistic bottlenecks: Interrupt supply of goods.
[Link] Rate Depreciation — “Imported goods become costlier”
When a country’s currency loses value compared to the dollar or other foreign currencies, it has to
pay more for imports.
5. Imported Inflation — “When price rises come from abroad”
Sometimes inflation is imported — even if local demand or supply are stable — because global
prices rise for commodities you depend on.
• Fiscal & Monetary Policy Factors
• Fiscal Policy (Government):
• High fiscal deficit = government spends more than it earns →
borrows or prints money → adds to demand and inflation.
• Large subsidies or transfers can also increase money supply without
increasing production.
• Monetary Policy (Central Bank):
• Low interest rates → cheaper loans → more spending → inflation
risk.
• High money supply growth → “too much cash in the system.”
 Case: India’s Inflation Surge Post-2020

• Timeline Summary:
• 2020: COVID lockdowns disrupted supply →
Year CPI Inflation WPI Inflation Main Drivers food, fuel shortages.
2020 6.2% 1.3% Supply bottlenecks, food prices • 2021: Global logistics crisis; shipping costs
up 5–6×.
2021 5.1% 7.9% Global supply recovery • 2022: Russia–Ukraine war → oil, gas,
fertilizer, wheat prices surged.
Oil & commodity shock (Ukraine
2022 6.7% 12.9% • 2023: Monsoon irregularities → food
war)
inflation, especially tomatoes & onions.
2023 5.5% 3.5% Food, vegetables, cereals
• 2024: Inflation cooled due to good harvest,
stable crude prices, and RBI policy
2024 2.6% 1.8% Prices stabilize post-monsoon tightening.

Sources: RBI, MOSPI, Economic Survey 2024–25, World Bank

summary
Cause Description Example (India / Global) Type
Post-COVID spending
Demand-Pull Too much demand Internal
surge
Cost-Push Higher production costs Oil & wage increase Internal
Structural Long-term inefficiencies Poor transport, monsoon Internal
Exchange Rate Weak rupee → imports
₹84 per dollar External
Depreciation costlier
Global oil/wheat prices
Imported Inflation Russia–Ukraine war External
rise
Fiscal Deficit / Money Excess spending or
COVID stimulus Policy-driven
Supply liquidity
What Is “Measuring Inflation”?
• flation is measured by tracking how prices change over time — using
a “basket” of goods and services that people or businesses commonly
buy.
• These baskets differ for:
• Consumers (like you and me)
• Wholesalers (business and production level)
• The entire economy (GDP level)- GDP Deflator.
• That’s why we have 3 main measures — CPI, WPI, and GDP Deflator.
Consumer Price Index (CPI)
• CPI shows how much the cost of living for an average person has changed — by tracking retail prices of
goods and services consumers buy.

• Basket Includes:
• Food & beverages
• Housing & rent
• Clothing
• Transport (fuel, public transport)
• Healthcare, education, recreation, etc.
• 📍 In India:
• CPI is the official measure of inflation used by the RBI for monetary policy.
• Base year: 2012 = 100
• Data released by: Ministry of Statistics (MOSPI)
Recent Data (India’s CPI Inflation):

Year CPI Inflation Main Reason

2020 6.2% COVID supply shocks
2021 5.1% Recovery, food prices
2022 6.7% Oil & commodity prices • Source: MOSPI, RBI, Economic
2023 5.5% Vegetable inflation Survey 2024–25
Prices stabilized after
2024 2.6%
monsoon
2025 (proj.) 4.2% Near RBI target
Wholesale Price Index (WPI)
• WPI tracks the price of goods at the wholesale level — before they reach the retail consumer.

• Basket Includes:
• Manufactured goods (64%)
• Fuel & power (13%)
• Primary articles – food, minerals (23%)
• 📍 In India:
• Published by the Department for Promotion of Industry and Internal Trade (DPIIT).
• Base year: 2011–12 = 100
Data Snapshot (India’s WPI Inflation):

Year WPI Inflation Reason

2020 1.3% Low demand, lockdown
2021 7.9% Industrial recovery
2022 12.9% High oil & metals prices
2023 3.5% Cooling after global moderation
2024 1.8% Stable wholesale prices
WPI vs CPI

Feature WPI CPI

Measures Wholesale prices Retail consumer prices

Includes Commodities, raw materials Food, rent, transport, education

Used by Industries, producers RBI, consumers

Base 2011–12 2012

Reflects Supply-side Demand-side

 GDP Deflator
• GDP Deflator shows the overall price change of all goods and services included in the
country’s GDP.
It is a broadest measure of inflation — covers everything produced domestically.

Why it matters:
• Captures both consumer and producer prices.
• Useful for macroeconomic analysis, not day-to-day policy.
• In India:
• Reported by the Central Statistics Office (CSO).
• Typically lower than CPI because it includes sectors where prices don’t rise as fast (like
tech exports).
Ideal Inflation Rate
• Why “Zero Inflation” is NOT Ideal: “If prices stop rising, life will be cheaper,
right?”
• Sounds nice, but in reality, 0% inflation or deflation (falling prices) can harm the
economy.
• Reasons:
•When prices don’t rise (or fall), people delay spending —
“I’ll buy that car later, it might get cheaper.”
This reduces demand → companies sell less → they cut jobs → incomes fall
→ economy slows down.
•Wages also tend to stagnate — if inflation is zero, there’s no pressure for
salary increases.
So people’s incomes stay the same while businesses stop expanding.
•Deflation (negative inflation) can trap an economy in a slowdown spiral —
like what happened in Japan for over 20 years (called the “lost decades”).
• Low or Very Low Inflation Countries (Below Ideal — <2%)
• These are usually developed economies where growth is slow and
inflation is hard to raise.
Average Inflation (2024–
Country What’s Happening Lesson
2025)
Prices barely rise;
Too low inflation = slow
demand is weak, people
🇯🇵 Japan ~1.8% growth. The economy
save more than they
becomes “stuck.”
spend.
Strong currency &
Low inflation = good
productivity keep prices
🇨🇭 Switzerland ~1.3% stability but limited
stable, but growth
excitement in business.
remains modest.
Inflation near target, but Low inflation is
🇰🇷 South Korea ~2.0% population aging slows comfortable, but not
spending. exciting for growth.
 Why Moderate •A moderate level of inflation — around 4% — actually helps
the economy grow.
Inflation Is Healthy

Benefit Explanation Example

If prices rise slowly, people prefer You buy a car today because you
Encourages Spending
to spend now rather than wait. expect it to cost more next year.

Businesses earn more revenue as A factory invests in new machines

Boosts Investment
prices rise moderately. because it expects future profits.

Companies increase salaries to Employees get annual raises that

Supports Wage Growth
match price rises. keep up with inflation.
Borrowers repay loans with If inflation is 4%, your fixed home
Reduces Debt Burden
“cheaper” money over time. loan EMI becomes easier to pay.
 Inflation Rate
Country Policy Target Situation
(2024–25)
Price stability with
~4.2% (2025
🇮🇳 India RBI target = 4% ± 2% steady growth — a
average)
“sweet spot.”

Inflation cooling after

Federal Reserve
🇺🇸 United States ~3.4% pandemic; wages
target = 2%
• Moderate Inflation Countries rising moderately.
(Ideal Range — 2%–6%)
• These are economies where Bank of Canada
Controlled inflation
growth and inflation are balanced 🇨🇦 Canada ~2.6% with moderate
target = 2%
— considered healthy and ideal. economic expansion.

Gradually returning to
🇦🇺 Australia ~3.5% Target range = 2–3% normal inflation after
pandemic shocks.

Healthy growth;
central bank
🇮🇩 Indonesia ~3.0% Target range = 2–4%
maintaining price
stability.
Why High Inflation Is Dangerous
• Once inflation goes above 6% or 7%, it starts to hurt more than help.
• Here’s what happens:
• Prices rise faster than incomes.
• Savings lose value.
• Poor households suffer most because they spend most of their
income on food and essentials.
• Businesses face higher costs and uncertainty.
• The government may lose control of fiscal stability.
• High Inflation Countries (Above Ideal — >6%)
• These countries face rising prices that outpace income growth —
people’s purchasing power falls quickly.
Country Inflation (2024–25) Reason Impact
Money loses value fast,
Currency collapse, heavy
🇦🇷 Argentina ~120% people buy goods before
government debt
prices rise again.
Currency depreciation, Imports become costly;
🇹🇷 Turkey ~60%
expansionary policies salaries can’t keep up.

Food & fuel shocks, Essentials like bread and

🇪🇬 Egypt ~35%
currency devaluation oil become unaffordable.

Food shortages, weak Living costs surge, middle

🇳🇬 Nigeria ~28%
currency class squeezed.

Import restrictions, Real incomes fall, people

🇵🇰 Pakistan ~23%
energy prices cut down on spending.
RBI’s Inflation Targeting in India
• RBI’s Official Target
• Under the Monetary Policy Framework (2016), the RBI (Reserve
Bank of India) and Government of India agreed that:
• Target Inflation Rate = 4% ± 2%
• That means acceptable inflation = between 2% and 6%.
• The Consumer Price Index (CPI) is used to measure inflation.
How RBI Controls Inflation
RBI Tool What It Does
Interest rate at which banks borrow from
Repo Rate
RBI
Interest banks earn by parking money
Reverse Repo Rate
with RBI
CRR / SLR Reserve requirements for banks
Open Market Operations RBI buys/sells government bonds
Impact of Inflation
Target on Everyone

Group Effect of Moderate Inflation Effect of High Inflation

Spend normally, manageable price Suffer as prices rise faster than
Consumers
rise income
Businesses Can plan production, expand Face uncertainty, higher costs
Lose confidence, move to gold or
Investors Expect stable returns
property
Easy fiscal planning, better tax Public anger, pressure on subsidies
Government
revenue and control
Banks & RBI Stable interest rates Must intervene aggressively
Impact of Inflation
1. On Purchasing Power: When prices rise, the value of money falls
your ₹100 can buy fewer things than before.
[Link] Investment Decisions
• How inflation affects investors:
• Interest rates rise → borrowing costs go up → fewer new projects.
• Stock market: Mild inflation helps earnings; high inflation causes
uncertainty and volatility.
• Real estate often seen as hedge against inflation.
Gold demand increases — people shift savings to “safe” assets.
[Link] Income Distribution
• Inflation doesn’t hurt everyone equally.
Group Effect Why
Salaried employees Lose Fixed income doesn’t rise quickly
Business owners Mixed Can raise prices, maintain margins
Borrowers Benefit Pay back loans in “cheaper” money
Savers Lose Real value of savings falls
Farmers/traders Gain short-term Sell goods at higher prices

[Link] Exports and Imports

•If domestic inflation is high, Indian goods become expensive abroad → exports fall.
•Imports become cheaper (if inflation abroad is lower), worsening trade balance.
•But mild inflation can help if the rupee remains competitive.
Fiscal Policy: Meaning and Purpose

• What Is Fiscal Policy?

• Fiscal Policy is the way the government manages its income and
expenses — through taxation, spending, and borrowing — to keep
the economy healthy.
•Revenue (Income): Taxes, fees, dividends from PSUs
•Expenditure: Salaries, defense, welfare, infrastructure
•Borrowing: When spending > income → fiscal deficit
Objectives of Fiscal Policy

Objective Explanation Example

Control inflation or deflation by Reduce taxes to boost demand, or
1. Price Stability
adjusting taxes/spending raise taxes to cool it down
Create jobs through public works & PMAY, highway construction, skill
2. Full Employment
investment schemes
Budget 2024 focused on capital
3. Economic Growth Stimulate business & infrastructure
expenditure
Reduce inequality through
4. Income Redistribution Higher tax on rich, welfare for poor
progressive taxes & subsidies
5. Fiscal Stability Keep borrowing under control Maintain fiscal deficit around 5–6%
Government Revenue (Taxes, Fees, Borrowing)

Government Spending (Infrastructure, Health, Education)

Economic Activity (Jobs, Demand, Growth)

Price & Employment Stability

India’s Fiscal Policy in Action:Budget 2024–25 Highlights (Government of
India):

• “India’s fiscal policy today is pro-growth

Area Initiative Impact and moderately expansionary — focusing
Capital ₹11.11 lakh crore Boost infrastructure, on infrastructure while keeping debt in
Expenditure (up 17%) jobs check.

₹3.8 lakh crore Protect consumers

Subsidies
(food, fertilizer, fuel) from inflation

Gradual fiscal
Deficit Target 5.1% of GDP
discipline

Strong GST and

Tax Revenue ₹26 lakh crore
income tax collection
Components of Fiscal Policy- axes – The Main Source
of Revenue
• (A) Direct Taxes
Tax Type Who Pays Example • Paid directly by individuals or firms
Tax deducted from
based on income or profits.
Income Tax Individuals
salary (TDS)
Paid on business
Corporate Tax Companies
profits
Tax on sale of
Capital Gains Tax Investors
property or shares
High net worth
Wealth Tax individuals (earlier, N/A
now abolished)
Why it matters:

•
→ Higher direct tax collection = more funds for
public services.
→ Progressive system: rich pay more → helps
reduce inequality.
• Data Insight (India FY 2024–25):
• Direct tax collection: ₹19.45 lakh crore
• Share in total tax revenue: ~54%
(Source: Union Budget 2024–25)
(B) Indirect Taxes
• Taxes included in the price of goods and services.
Tax Type Example Paid By
GST (Goods and Services Tax) 18% on most goods/services Consumers
Customs Duty Import duty on oil, cars, electronics Importers (passed to buyers)
Excise Duty On petroleum, alcohol Manufacturers/Retailers

Key Reform:
🟢 Goods and Services Tax (GST) – introduced July 2017
Before GST:
17+ different taxes — excise, VAT, service tax, octroi, etc.
After GST:
“One Nation, One Tax” – unified system with seamless credit.

Current GST Data (2025):

Monthly GST collection: ₹1.78 lakh crore (record high)

GST contributes ~30% of total tax revenue

Transfer Payments –
Redistributive Tool
Type Example Impact

LPG subsidy, fertilizer Reduces cost of

Subsidies
subsidy, food subsidy essentials

• payments made by the government

without receiving any goods or services Social Welfare PM-Kisan, pensions, Boosts rural
in return. Schemes scholarships income

• Purpose:
Disaster relief, state
To help people, promote social welfare, Grants to States Regional equity
development aid
and reduce income gaps.
Unemployment MGNREGA (rural job Provides income
Benefits guarantee) security
India’s 2017 GST Reform
• Problem before 2017:
• Multiple taxes at state & central level
• Cascading tax (tax on tax)
• Logistics inefficiency
• Solution:
• Introduced GST on July 1, 2017
• One unified tax system with online filing (GSTN)
• Impact:
Simplified taxation
Reduced logistics costs (trucks spend 20% less time at checkpoints)
Boosted tax compliance through e-invoicing
Monthly collections rising steadily since 2022
Fiscal Deficit and Policy
Impact

• What is Fiscal Deficit?

• Fiscal deficit is the gap between what the
government spends and what it earns.
• Fiscal Deficit=Total Expenditure−(Revenue Rec
eipts + Non-debt Capital Receipts)
• If the government spends ₹100 and earns ₹80,
the deficit = ₹20 → financed by borrowing.
Relationship Between Fiscal Deficit, Inflation &
Growth

Scenario Effect on Economy Explanation

More govt borrowing →
High fiscal deficit May cause inflation more money → higher
demand & prices
Controlled spending keeps
Low fiscal deficit Price stability
inflation low
Encourages jobs &
Moderate deficit Balanced growth development without
overheating
 What Is Monetary Policy?

Monetary Policy is how the Reserve Bank of

MONETARY India (RBI) controls the money supply, interest
rates, and credit in the economy to maintain
POLICY price stability and growth.

Fiscal policy = Government’s money.

Monetary policy = RBI’s money.
 Objective Meaning Example
Role of Monetary Policy
in India Keep inflation RBI aims for 4% ±
1. Price Stability
The RBI’s role is to under control 2% CPI
maintain a balance Reduce interest
between growth and 2. Economic Ensure enough
rates to encourage
inflation. Growth credit for business
loans
3. Employment Support sectors Priority sector
Generation that create jobs lending
4. Financial Prevent banking Regulate banks &
Stability crises NBFCs
Monetary Policy Framework in India
• Target:
• Inflation target: 4% ± 2%
• Policy authority: RBI’s Monetary Policy Committee (MPC)
• Meetings: 6 times a year
• Focus: CPI (Consumer Price Index)
• Instruments of Monetary Control
• The RBI uses two types of instruments:
(A) Quantitative (affects overall money supply)
(B) Qualitative (controls specific credit uses)
 (A) Quantitative Instruments

Instrument Meaning Explanation Effect on Economy

Rate at which banks When repo rate ↑, loans
Repo Rate High rate → inflation ↓
borrow from RBI become costlier
Rate at which RBI RBI sucks out extra
Reverse Repo Rate Controls liquidity
borrows from banks money
% of deposits banks keep
Cash Reserve Ratio (CRR) Higher CRR = less lending Reduces money supply
with RBI
Statutory Liquidity Ratio % of deposits in
Ensures stability Reduces risky lending
(SLR) government securities
Open Market Operations Buying = adds money,
RBI buys/sells govt bonds Manages liquidity
(OMO) Selling = removes
Similar to repo but for
Bank Rate Long-term lending rate Influences loan pricing
longer term
 Tool Explanation Example

(B) Qualitative Margin Requirements Set % of borrower’s contribution Controls speculative loans

Instruments Credit Rationing Limit loans to certain sectors Restrict consumer credit

RBI advises banks to act E.g., not over-lend to risky

Moral Suasion
responsibly borrowers

Selective Credit Control Encourage productive lending More loans for agriculture/MSMEs

• Used to direct credit flow to certain sectors.

 Year Event RBI Action Outcome
Repo rate cut
COVID-19 Boosted
2020 from 5.15% →
shock cheap loans
4.0%
Inflation Controlled
Repo rate raised
Example 2022 surge (oil
to 6.5%
demand &
prices) inflation
Inflation
Maintained Sustained
2024 stabilized
rates steady growth
(2.6%)
 Basis Fiscal Policy Monetary Policy
Reserve Bank of
Managed by Government
India
Fiscal vs Tax, spending, Money supply,
Monetary Focus
borrowing interest rates

Policy — Key Tools

Budget, subsidies,
taxes
Repo, CRR, SLR,
OMO
Differences Slow (political Faster (MPC
Speed
approval) decisions)
Stability & inflation
Goal Growth & welfare
control
Union Budget RBI Policy Review
Example
2024–25 June 2024
 • 1. LIBERALIZATION: Liberalization means
reducing government rules and restrictions
on business and allowing companies to make
decisions more freely.
Liberalization, • Why India needed it (1991 crisis)
• In 1991, India had:
Privatization,
• very low foreign exchange
Globalization • high imports, low exports
(LPG) • high government debt
• slow growth (“Hindu Rate of Growth”)
• So India opened up the economy.
• What changed after liberalization?
• Use these simple lines in class:
• “Earlier, businesses needed many permissions → now fewer.”
• “Earlier, foreign companies could not invest → now they can.”
• “Earlier, Indian companies could not compete globally → now
they can.”
• “Earlier, tax rates were very high → now moderate.”
• Examples
• Before 1991 – Only Ambassador & Fiat cars.
• After liberalization – Hyundai, Honda, Ford, Suzuki entered
India.
• Before 1991 – Telephones had waiting list for 5 years.
• After – Mobile revolution (Airtel, Jio, Vodafone).
 • Privatization means giving more ownership, control, or
operations from the government to private companies.
• Types of Privatization
1. DISINVESTMENT (Selling Public Sector Companies)-
Disinvestment means the government sells its
ownership (shares) in a public sector company (PSU).
• Reason:
PRIVATIZATION The government wants to reduce its role in business and
focus on:
• health
• education
• infrastructure
• national security
 1. Minority Disinvestment
• Government sells less than 50% shares → Government still controls the company.
• Examples:
• Government selling small shares of ONGC, NTPC, GAIL on stock market.
• LIC IPO (government sold only partial stake).

2. Majority Disinvestment (Strategic Sale)

• Government sells more than 50% shares → Control goes to private company.
• Examples:

Types of •
•
Air India (100% privatized) → Tata Group
VSNL sold to Tata
Disinvestment • BALCO sold to Vedanta

3. Complete Privatisation
• Government sells 100% of its stake.
• Examples:
• Air India
• Hindustan Zinc (majority stake sold)
Why Government Disinvests
• To reduce losses (many PSUs are loss-making)
• To improve efficiency (private sector performs better)
• To get money for development
• To reduce government’s business burden
• To bring modern technology
•

Latest Disinvestment News (2024–25)

• Government preparing to privatize Shipping Corporation of
India
• BSNL & MTNL merger proposal under consideration
• LIC IPO raised ₹21,000+ crore (2022)
• Source: DIPAM, 2024
 • Air India was once India’s national pride but became a huge
financial burden due to years of losses, old aircraft, poor
service quality, overstaffing, and slow government decision-
making. By 2021, the airline had accumulated more than
Case Study: Air ₹70,000 crore in debt and was losing almost ₹20 crore every
India Privatization day. To stop these losses, the government decided to privatize
the airline, and in 2022 Tata Group—Air India’s original
(2022)-One of founder—won the bid by offering ₹18,000 crore. After taking
India’s biggest over, Tata began a large turnaround plan: ordering 470 new
aircraft, improving in-flight service, upgrading interiors,
and most revamping branding, hiring global aviation experts, and
important merging Vistara and AirAsia India with Air India to build a
stronger unified airline. The privatization reduced the
privatization government’s financial burden and allowed Air India to begin
improving customer experience, on-time performance, and
stories international expansion. The case shows how privatization can
revive a loss-making public company when a capable private
player brings in capital, technology, and professional
management.
 • private companies are allowed to enter sectors that were earlier con
• Examples of Sectors Where Private Participation Was Allowed
• Telecom Sector
• Earlier → BSNL & MTNL
Now → Jio, Airtel, Vodafone
Result → Better internet, lower prices
• Aviation Sector

2. PRIVATE • Earlier → Air India monopoly

Now → IndiGo, Vistara, SpiceJet
Result → Better service, cheaper flights
PARTICIPATION • Banking Sector
IN SECTORS • Earlier → Only government banks
Now → HDFC, ICICI, Axis, Kotak
Result → Faster service, better digital banking
• Education & Health
• Private universities, private hospitals (Fortis, Apollo) improved quality significantly.
• Energy & Power
• Private players in solar & wind energy like Adani Green, Tata Power.
• trolled only by the government.
• Benefits of Private Participation

• Better quality & customer service

• Faster innovation

• Advanced technology

• More employment

• Higher competition → lower prices

• Less burden on government

[Link] – PUBLIC–PRIVATE PARTNERSHIPS

• PPP means the government and private company work together to build or manage a project.

• Government + Private = PPP

• Government gives:

• land

• support

• permissions

• Private company gives:

• money

• Technology

Types of PPP Models

1. BOT (Build–Operate–Transfer)

• Private company builds, runs it for 20–30 years, then transfers to the government.

• Example:

• Many national highways (NH-44, Mumbai-Pune Expressway)

• 2. BOOT (Build–Own–Operate–Transfer)
• Private company owns it during contract period.
• 3. DBFOT (Design–Build–Finance–Operate–Transfer)
• Used in modern airport projects.
• 4. Management Contract
• Government owns the asset; private company manages it.
• Example:
• Private company managing metro stations or hospitals.
• Examples of PPP Projects in India
• Airports
• Delhi Airport → GMR Group
• Mumbai Airport → Adani
• Bengaluru Airport → GVK
• Roads
• National Highways under NHAI
• Toll plazas across India
Metro Rail
• Hyderabad Metro (PPP with L&T)
• Delhi Metro has partial PPP sections
 • Globalization means free flow of goods,
services, technology, and people across
borders.
GLOBALIZATION • Signs of Globalization in India
— “Connecting • Netflix, Amazon, McDonald's, Zara
India with the • Apple & Samsung manufacturing in India
World” • Indian IT firms working globally
• UPI expanding to Singapore, UAE, France
 • FDI Inflows
• 1991: $133 million
• 2023–24: $70 billion (DPIIT)
• Foreign Trade
• India’s total trade (2023–24):
Data-Based • $1.6 trillion
Evidence (Ministry of Commerce)
• India’s Services Export
• 2023: $344 billion
• India = World’s 5th largest services exporter
(WTO Report 2024)
 • What is FDI?
• FDI means when a foreign company invests
money in India to start a business, expand a
business, or buy an Indian company.
FOREIGN • Example:
DIRECT • Apple opening manufacturing plants in India
INVESTMENT • Walmart buying Flipkart
• Amazon opening warehouses
(FDI) • IKEA opening stores in India
• FDI involves ownership, control, and long-term
interest.
 Why do countries like India WANT FDI?

Jobs Technology Money Skills

Export
Better quality Competition Higher GDP
growth
 1: Greenfield FDI :When a foreign company
builds something new from scratch — a new
factory, plant, office, warehouse.
• Example
• Toyota building a new plant in Karnataka
Types of FDI • Foxconn building a new iPhone factory
• Amazon setting up new fulfillment centers
(VERY
• Why it’s good
• Creates more jobs
• Builds new infrastructure
• Long-term investment
• News-
• Samsung investing ₹4,000 crore to expand Noida plant (Source: The Hindu, 2024)
• 2: Brownfield FDI
• When a foreign company buys an existing Indian company or takes major
ownership.
• Examples
• Walmart bought 77% of Flipkart (2018)
• JB Chemicals bought by KKR
• Facebook invested in Jio Platforms
• Holcim sold Ambuja Cement & ACC to Adani
• Why governments allow this
• Immediate funds enter economy
• Helps sick or underperforming companies
• Improves technology

• News –
•Blackstone bought 51% of CARE Hospitals
•Abu Dhabi Investment Authority (ADIA) invests in Reliance Retail
 • 1. Horizontal FDI
• Foreign company does the same business in India that it does in its home country.
Example:
• McDonald’s entering India
• Starbucks in India
• 2. Vertical FDI
• Company invests in upstream or downstream activities of its supply chain.
Example:

Other Sub- • Apple investing in component manufacturers in India

• 3. Conglomerate FDI
Types of FDI • Entering a completely unrelated business.
Example:
• Warren Buffett’s Berkshire Hathaway investing in Paytm
• 4. Joint Venture FDI
• Foreign & Indian companies work together.
Example:
• Mahindra–Renault
• Bharti–Walmart (before the Flipkart acquisition)
 1. Automatic Route
• Foreign company does NOT need government permission.
• Sectors:
• Pharma
• Automobile
• Manufacturing
• Renewable energy
• Retail (single brand)
• IT
• 2. Government Route
• Requires approval from Government of India.

FDI Routes in •
•
Sectors:
Defence

India •
•
Telecom
Media
• Insurance
• Banking
• Multi-brand retail
FDI Limit (Sector-Wise) — Latest DPIIT
Rules 2024
Sector FDI Limit Route
Defence 74% Automatic
Defence (beyond 74%) 100% Govt approval
Insurance 74% Automatic
Banking (private) 74% Automatic
Telecom 100% Automatic
Pharma 100% Automatic
Retail (single brand) 100% Automatic
Retail (multi-brand) 51% Govt approval
Automatic (marketplace model
e-Commerce 100%
only)
 • FDI Inflow to India (2023–24)
• $70.9 Billion total FDI inflow
(Source: DPIIT 2024, Ministry of Commerce)
• Top 5 FDI Source Countries
FDI Data for • Singapore – $17.5B
India • Mauritius – $6B
• USA – $4.2B
• Netherlands – $3.8B
• Japan – $2.8B
• Top Sectors Receiving FDI
• Computer Software & Hardware – $22B
• Services (Finance, Banking, Consulting) – $7B
• Telecom – $3B
• Trading – $2.5B
• Construction – $2B
• ⭐ India’s Rank
• India is among the Top 5 FDI destinations
globally
(Source: UNCTAD World Investment Report
2024)
 • News 1: Apple shifts supply chain to India
• $14+ billion iPhone exports
• 1 lakh+ jobs
• Apple to make 25% of global iPhones in India by 2027
• Source: Financial Times, 2024

FDI in India • News 2: Tesla likely entering India

• Negotiating to set up EV plant

— Latest • Expected investment: $2–3 billion

• Source: Reuters, 2024

News •

• News 3: Google invests $1B in India’s digital ecosystem

• Focus on AI, cloud, and cybersecurity.
• Source: The Economic Times, 2024
•
• News 4: Saudi Arabia plans $5B investment in India
• In refinery, petrochemicals, and renewable energy.
• Source: Mint, 2024
• News 5: Vedanta–Foxconn semiconductor partnership
• To support chip manufacturing under Make in India.
❑Advantages of FDI
• Creates jobs
• Brings technology
• Improves export performance
• Increases competition → better quality, lower prices
• Helps build infrastructure
• Improves balance of payments
• Helps India grow faster
• Encourages global linkages
 • India has attracted several major FDI deals that transformed its digital, retail, and
manufacturing landscape. One of the biggest examples is the Walmart–Flipkart deal
of 2018, where Walmart invested $16 billion to acquire a majority stake in Flipkart,
making it the largest e-commerce acquisition in India and giving Flipkart access to
Walmart’s global supply chain, logistics expertise, and retail technology, while
giving Walmart a strong entry into India’s booming online retail market. Another
major FDI success is Apple’s manufacturing expansion in India between 2023–25,
driven by the government’s Production Linked Incentive (PLI) scheme. India now
FDI Case exports nearly $14 billion worth of iPhones annually, and close to 30% of global
iPhone production is happening in India, creating over 1 lakh manufacturing jobs
through suppliers like Foxconn, Wistron, and Pegatron. This shift shows India’s
Studies rising position in global electronics manufacturing. A third significant FDI example
is Jio Platforms, which in 2020 raised around $20 billion from global investors such
as Facebook, Google, KKR, Silver Lake, and others. This round of investments
boosted India’s digital ecosystem, accelerated the expansion of 4G/5G networks,
supported digital payments, and strengthened India’s position as one of the world’s
fastest-growing tech markets. Together, these three FDI cases demonstrate how
foreign investment can bring capital, technology, jobs, and global expertise,
contributing to India’s growth in retail, electronics manufacturing, and digital
infrastructure.
 • Foreign investment in shares can be TWO types:
• If the foreign investor buys LESS THAN 10% of shares → It is
NOT [Link] is called FPI
• FPI = Foreign Portfolio Investment
• This includes:
If a foreigner • Buying shares (minority stake)

buys SHARES • Buying bonds

• Buying financial instruments
in India — is • Short-term investment

it FDI? • FPI investors have no control over the company.

They only earn profit through:
• stock price increase
• dividends
• Simple Example:
• If the foreign investor buys 10% or MORE shares → It becomes FDI.
• FDI = Long-term ownership + control
• FDI gives:
• ownership
• influence in management
• long-term interest
• FDI usually brings:
• technology
• factories
• jobs
• operations in India
•Walmart buying 77% of Flipkart → FDI
•Facebook buying 10% of Jio Platforms → FDI
• In India, RBI rule is very clear:
• ✔️ Investment less than 10% in listed companies → FPI
• ✔️ Investment 10% or more → FDI
• Source:
RBI – Foreign Investment Regulations, 2019 & updated 2024
(SEBI & DPIIT follow the same rule)
BALANCE
OF
PAYMENTS
(BoP)