Chapter 2

Economic Environment
• The economic environment consists of external factors in a business
market and the broader economy that can influence a business.
• The economic environment into the microeconomic environment,
which affects business decision making - such as individual actions of
firms and consumers - and the macroeconomic environment, which
affects an entire economy and all of its participants.
• Many economic factors act as external constraints on your business,
which means that you have little, if any, control over them.
Macroeconomic influences are broad economic factors that either directly or indirectly affect the entire
economy and all of its participants, including your business. These factors include such things as:

• Interest rates
• Taxes
• Inflation
• Currency exchange rates
• Consumer discretionary income
• Savings rates
• Consumer confidence levels
• Unemployment rate
• Recession
• Depression
[Link] Domestic Product (GDP): The total value of goods and services produced within a
country's borders during a specific period of time.
[Link]: The rate at which the general level of prices for goods and services is rising.
[Link]: The percentage of the total labor force that is unemployed but actively seeking
employment and willing to work.
[Link] rates: The cost of borrowing money, usually expressed as a percentage of the amount
borrowed.
[Link] of trade: The difference between a country's exports and imports.
[Link] spending: The amount of money spent by the government on goods and services.
[Link] policy: The use of government spending and taxation to influence the economy.
[Link] policy: The use of interest rates and other monetary tools to influence the economy.
[Link] confidence: The level of confidence that consumers have in the economy and their
willingness to spend money.
[Link] rates: The value of one currency relative to another currency.
These factors are closely monitored by economists, policymakers, and businesses to understand
the health and direction of the economy, and to make informed decisions.
Microeconomic factors influence how your business will make
decisions. Unlike macroeconomic factors, these factors are far
less broad in scope and do not necessarily affect the entire
economy as a whole. Microeconomic factors influencing a
business include:

• Market size
• Demand
• Supply
• Competitors
• Suppliers
• Distribution chain, such as retail stores
New Economic Policy
• New Economic Policy of India was launched in the year 1991 under the
leadership of P. V. Narasimha Rao.
• This policy opened the door of the India Economy for the global exposure for
the first time.
• In this New Economic Policy P. V. Narasimha Rao government reduced the
import duties, opened reserved sector for the private players, devalued the
Indian currency to increase the export.
• This is also known as the LPG Model of growth.
• New Economic Policy refers to economic liberalization or relaxation in the
import tariffs, deregulation of markets or opening the markets for private and
foreign players, and reduction of taxes to expand the economic wings of the
country.
• Former Prime Minister Manmohan Singh is considered to be the father of
New Economic Policy (NEP) of India. Manmohan Singh introduced the NEP
on July 24,1991.
Main Objectives of New Economic Policy –
1991, July 24
• The main objective was to plunge Indian Economy in to the arena of
‘Globalization and to give it a new thrust on market orientation.
• The NEP intended to bring down the rate of inflation
• It intended to move towards higher economic growth rate and to build sufficient
foreign exchange reserves.
• It wanted to achieve economic stabilization and to convert the economy into a
market economy by removing all kinds of un-necessary restrictions.
• It wanted to permit the international flow of goods, services, capital, human
resources and technology, without many restrictions.
• It wanted to increase the participation of private players in all sectors of the
economy. That is why the reserved numbers of sectors for government were
reduced. As of now this number is just 2.
• Beginning with mid-1991, the govt. has made some radical changes in
its policies related to foreign trade, Foreign Direct Investment,
exchange rate, industry, fiscal discipline etc. The various elements,
when put together, constitute an economic policy which marks a big
departure from what has gone before.
• The thrust of the New Economic Policy has been towards creating
a more competitive environment in the economy as a means
to improving the productivity and efficiency of the system. This was
to be achieved by removing the barriers to entry and the restrictions on
the growth of firms.
Main Measures Adopted in the New Economic
Policy
Liberalization

Removal of Industrial Licensing and Registration:

• Previously private sector had to obtain license from Govt. for starting a new
venture. In this policy private sector has been freed from licensing and other
restrictions.
Industries licensing is necessary for following industries:
• (i) Liquor
• (ii) Cigarette
• (iii) Defence equipment
• (iv) Industrial explosives
• (v) Drugs
• (vi) Hazardous chemicals
Following steps were taken under the Liberalization measure:

(i) Free determination of interest rate by the commercial Banks:

• Under the policy of liberalization interest rate of the banking system will
not be determined by RBI rather all commercial Banks are independent to
determine the rate of interest.
(ii) Increase in the investment limit for the Small Scale Industries (SSIs):
• Investment limit of the small scale industries has been raised to Rs. 1 crore.
So these companies can upgrade their machinery and improve their
efficiency.
(iii) Freedom to import capital goods:
• Indian industries will be free to buy machines and raw materials from
foreign countries to do their holistic development.
(v) Freedom for expansion and production to Industries:
• In this new liberalized era now the Industries are free to diversify their
production capacities and reduce the cost of production. Earlier
government used to fix the maximum limit of production capacity. No
industry could produce beyond that limit. Now the industries are free
to decide their production by their own on the basis of the requirement
of the markets.
(vi) Abolition of Restrictive Trade Practices:
• According to Monopolies and Restrictive Trade Practices (MRTP)
Act 1969, all those companies having assets worth Rs. 100 crore or
more were called MRTP firms and were subjected to several
restrictions. Now these firms have not to obtain prior approval of the
Govt. for taking investment decision. Now MRTP Act is replaced by
the competition Act, 2002.
Privatization:

• Privatization means permitting the private sector to set up industries

which were previously reserved for the public sector.
• Under this policy many PSU’s were sold to private sector. Literally
speaking, privatization is the process of involving the private sector-in
the ownership of Public Sector Units (PSU’s).
• The main reason for privatization was in currency of PSU’s are running
in losses due to political interference.
• The managers cannot work independently.
• Production capacity remained under-utilized.
• To increase competition and efficiency privatization of PSUs was
inevitable.
Step taken for Privatization:
The following steps are taken for privatization:
1. Sale of shares of PSUs:
• Indian Govt. started selling shares of PSU’s to public and financial institution e.g. Govt. sold
shares of Maruti Udyog Ltd. Now the private sector will acquire ownership of these PSU’s. The
share of private sector has increased from 45% to 55%.
2. Disinvestment in PSU’s:
• The Govt. has started the process of disinvestment in those PSU’s which had been running into
loss. It means that Govt. has been selling out these industries to private sector. Govt. has sold
enterprises worth Rs. 30,000 crores to the private sector.
3. Minimization of Public Sector:
• Previously Public sector was given the importance with a view to help in industrialization and
removal of poverty. But these PSU’s could not able to achieve this objective and policy of
contraction of PSU’s was followed under new economic reforms. Number of industries
reserved for public sector was reduces from 17 to 3.
• (a) Railway operations
• (b) Atomic energy (c) Defense
 Globalization:

• Globalization means to make Global or worldwide, otherwise taking

into consideration the whole world.
• Broadly speaking, Globalization means the interaction of the domestic
economy with the rest of the world with regard to foreign investment,
trade, production and financial matters.
Steps taken for Globalization:

Following steps are taken for Globalization:

(i) Reduction in tariffs:
• Custom duties and tariffs imposed on imports and exports are reduced
gradually just to make India economy attractive to the global investors.
(ii) Long term Trade Policy:
• Forcing trade policy was enforced for longer duration.
Main features of the policy are:
• (a) Liberal policy
• (b) All controls on foreign trade have been removed
• (c) Open competition has been encouraged.
(iii) Partial Convertibility of Indian currency:
• Currencies such as the South Korean won and Chinese Yuan are known as partially convertible
currencies. A partially convertible currency is the legal tender of a country that is traded in low
volumes in the global foreign exchange market. The governments of these countries place
capital controls that limit the amount of currency that can exit or enter the country.
This convertibility stood valid for following transaction:
• (a) Remittances to meet family expenses
• (b) Payment of interest
• (c) Import and export of goods and services.

(iv) Increase in Equity Limit of Foreign Investment:

• Equity limit of foreign capital investment has been raised from 40% to 100% percent. In 47 high
priority industries foreign direct investment (FDI) to the extent of 100% will be allowed without
any restriction. In this regard Foreign Exchange Management Act (FEMA) will be enforced.
• If the Indian economy is shining at the world map currently, its sole attribution goes to the
implementation of the New Economic Policy in 1991.
Second generation reforms
• In India, the second generation reform started from 1996 to 2007.
During this period, 2 five year plans were included. The second
generation of economic reforms in the country gave special stress
on fiscal reforms, financial reforms, structural reforms, labor law
reforms, etc
• In his budget speech 2000-01, the then Finance Minister Yashwant
Sinha clearly stated that the Government wants to carry forward the
process of introducing and implementing the Second Generation
Reforms at the earliest.
• It is agreed by everybody that the “First Generation Reforms” initiated
in 1991 were mostly crisis- driven. After continuing such reforms for a
decade, people and experts are now advocating to bring certain
changes in its strategy and are taking about the introduction of
“Second Generation Reforms”.
• The budget for the year 2001-02 had laid out a comprehensive agenda
for the Second Generation of Economic Reforms.
Broad strategies which the second generation
reforms focused on
• Speed up agricultural sector reforms and better management of food
economy.
• Intensify infrastructure investment, continued reform of the financial
sector and capital markets and deepening of structural reforms through
removal of remaining tiresome control constraining economic activity.
• Attain human development through better educational opportunities and
programmes of social security.
• Impose stringent expenditure control on non-productive expenditure,
rationalization of subsidies and improvement in the quality of Government
expenditure.
• Accelerate privatization process and restructuring of public enterprises.
• Enhance revenue through widening of tax base and administration of a fair
and equitable tax regime.
• During the first decade of our economic reforms, the country has
experienced a moderately higher growth rate ranging between 6 to 7
per cent, build up a foreign exchange reserves to the extent of $ 51.05
billion in 2001-02; managed its external debt to the tune of US $ 100.4
billion in 2001, improved its export-import ratio to 87 per cent,
contained the wholesale price index to the tune of 3.5 per cent and
finally could marginally reduce the fiscal deficit from 6.6’per cent of
GDP in 1990-91 to 5.7 per cent in 2001-02.
Thus the economic reforms have been able to stabilize the fundamentals
of the economy and could shift the gear of the economy from crisis-
driven economic reforms to development-driven one.
Second Generation Reforms
• Reduction of Poverty
• Social Sector
• Financial Sector Reforms
• Labour Law Reforms
• Pension Reforms:
• Other Reforms: trade and foreign investment
Reduction of Poverty

• The First Generation of Reforms has not become successful on the

front of reduction of poverty from which the country is suffering
extensively.
• Dr. S.P Gupta, member, Planning Commission has established an
inverse relation between poverty and GDP growth and thereby pointed
out that the percentage of below poverty line (BPL) population has
increased from 35.07 per cent in 1993-94 to 37.23 per cent in 1997
although during this period the GDP growth rate was nearly 6.9
per cent per annum.
Second Generation Reforms should incorporate following
strategy for reduction of poverty:

(a) To enhance income earning opportunities for removing income

poverty;
(b) Empowerment of the poor by introducing various schemes;
(c) To implement the poverty eradication programmes in a proper
manner so as to assure that the benefits of the programmes reach the
target groups; and
(d) Providing security so as to overcome risks arising out of ill health,
epidemics, natural disasters and violence.
• World Development Report, 1990 pointed out the following two
pronged strategy for reduction of poverty Countries that have been
most successful in attacking poverty have encouraged a pattern of
growth that makes efficient use of labor and have invested in human
capital for the poor.
• Both elements are essential.
• The first provides the poor with opportunities to use their most
abundant asset labor.
• The second improves their immediate well being and increases their
capacity to take advantage of the newly created possibilities. Together,
they can improve the lives of most of the world’s poor.
Social Sector
• The concept of social sector has become very much important. The
Government is allocating a major amount of its expenditure on social sector,
i.e., on education, health and family welfare, water supply, sanitation, housing,
rural development, nutrition, minimum basic services and social welfare.
• During the first phase of economic reforms, the Government made an attempt
to contain fiscal deficit and thereby undertook measures for reduction of public
expenditure. Such reduction in Government expenditure is being made in those
areas where the Government get less resistance from pressure groups. As for
example, the Government failed to reduce fertilizer and other subsidies as a
result of powerful farm lobbies.
• Therefore, the Government has identified the soft sectors like social sectors for
bearing the brunt of the expenditure reduction policy. Even within the social
sector, certain items of expenditure which are benefitting the less privileged
sections are curtailed first.
In order to attain zero-revenue deficit, the Government should undertake the
following steps:

(i) Controlling administrative expenditure,

(ii) Reduce non-merit subsidies,
(iii) Follow disinvestment in loss- incurring enterprises,
(iv) Improving cost recovery of services provided by the Government,
(v) To improve the working of SEBs and state road transport undertakings,
(vi) Reducing the burden of public debt,
(vii) Widen the tax base by enlarging the tax net towards agricultural taxation and
service tax,
(viii) Check evasion of taxes by tightening tax administration,
(ix) mobilize additional resources and
(x) Raise the productivity of public sector undertakings.
Financial Sector Reforms:

• In near future, the financial sector of the country will have to be

tackled at four different levels simultaneously.
• The first level relates to public regulation of these companies, the
second is related to its organizational structure, the third is related to
the technological up gradation of these companies and the fourth is
related to the required changes of the psyche of the employees of
those companies related to banks and insurance so as to change their
attitudes towards their customers for surviving in this mighty
competitive environment
Labour Law Reforms
• Under the Second Generation of Reforms, Labor law reforms also
received considerable significance.
• The Government constituted the Second Labor Commission in 1999
with Sri Ravinder Verma as its Chairman so as to suggest
rationalization of existing labor laws relating to labor in the organized
sector and to suggest an umbrella legislation for ensuring a minimum
protection to the workers engaged in the unorganized sector.
• The commission had also taken care they need to ensure minimum
leave, protection and welfare to labor and many other issues relating to
health security of the laborers in general.
• The Commission has also proposed to reduce government holidays and also
suggested that both the Centre and State governments should follow an
uniform policy of holidays. The Commission argued to follow rigid attitude
towards hours of work. Accordingly, total number of hours should not be
more than nine hours and per week load should not exceed 48 hours.
• But within this stipulated period there may be flexibility and there may be
compensation for overtime work.
• The Commission also recommended that contract labor shall not be engaged
for maintaining core production or services but the same can be utilized for
subsidiary sector only, which are many in number.
• Thus the Commission recommended amendment of Industrial Disputes Act
and Contract Labor Act, increase in working hours, reduction in number of
holidays, fresh norms for functioning of trade unions and also for
streamlining the labor laws by enacting in umbrella of seven new labour
laws
The proposed changes in the labor law reforms draft include
the following clauses:
1. Organization having less than 1,000 employees can close the unit without
seeking government clearance.
2. Employees working in public utility services will have to give 45 days
notice and at other places 30 days.
3. An employer can lay off 2 per cent staff per year linking it with his
productivity.
4. In case of retrenchment the employers will have to give compensation of
45 days salary for each completed year as different from the earlier 15 days.
5. Employers can now be jailed for six months with a fine of Rs 2,000 for
violating provisions of IR Act.
Industrial Policy Resolution 1948
• On April 30, 1948, the Government of India passed a policy resolution
– The Industrial Policy Resolution, 1948 (IPR, 1948).

• Industrial Policy Resolutions 1948 tells about the broad contours of

the policy, which outlined the role played by the state in industrial
development both as an entrepreneur and authority.

• It led to the development of India as a mixed economic model.

What is an Industrial Policy?

• Industrial Policy is a formal declaration undertaken by the

Government that outlines the government’s general policies for
industries.

• It is characterized by actions and policies of the government which

impact the industrial development of a country.

• The Industrial Policy Resolution of 1948 outlined the broad policy

roles of the state in industrial development both as an entrepreneur
and authority.
Features of Industrial Policy Resolutions
1948
• It led to the classification of large industries into four categories
as Strategic Industries, Basic / Key industries, Important
Industries, and other industries which were called Public Sector;
Public-cum-Private Sector; Controlled Private Sector, and Private
& Cooperative sector.
• This policy was also known as the socialization of vacuum because it
pictured that the state would invest resources only in those sectors of
the economy which were unoccupied (partially or fully) by the
private sector.
These categories of industries have been discussed below:
1. Strategic Industries (Public Sector)
• This category consisted of three industries where the central government
had a monopoly. These included Arms and ammunition; Atomic
energy and Rail transport.

2. Basic / Key Industries (Public-cum-Private Sector)

• This included six industries such as coal, iron, and steel, aircraft
manufacturing, ship-building, manufacture of telephone, telegraph
and wireless apparatus, and mineral oil.
• These industries were called key or basic industries. Setting up new
industries in these categories would only be under the domain of the
central government. Existing industries in the private sector were
allowed to continue.
3. Important Industries (Controlled Private Sector)
• In this category, 18 industries were included. These included heavy
chemicals, sugar, cotton textile, woolen industry, cement, paper,
salt, machine tools, etc.
• These industries continued to remain under the private sector but the
central government, in consultation with the state government, could
have general control over them.

4. Other Industries (Private and Cooperative Sector)

• All other industries mentioned in the above three categories were left
open for the private sector.
• However, the government could impose controls on these industries
also if any one of them was not found working satisfactorily.
Other features of Industrial Policy 1948
• It is also intended to provide protection to cottage & small-scale
industries by giving them priority status.
• It also focused on developing cordial industrial relations through
initiatives such as giving high priority to fair wage rates; social
security to workers and their participation in management.
• It acknowledged the importance of foreign capital for the
industrialization of the country, however, the control was to remain
within Indian hands.
• The basic premise was to keep the strategic and core industries under
the exclusive ownership/control of the Government.
Significance of Industrial Policy Resolution 1948
• It was a departure from the British Era policy of laissez-faire or free economy
model. The British policy advocated that the Government was not qualified enough to
advance industrial development and such matters should be left in the domain of the
private enterprise.
• It was brought in when there was neither constitution nor any proper legal
framework around industrial development. The constitution was being framed by the
constituent assembly.
• The Industrial Policy Resolution 1948 was not entirely socialistic in nature, for it
provided opportunities for both the private as well as public sectors.
• It did not wish to discontinue the existing private units but rather advocated that new
industries in this category will henceforth only be set up by the central government.
• Thus, it can be rightly said that the Industrial Policy of 1948 was a compromise
between political and economic elites; trying to achieve a balance between
the “radicalism of state ownership” and “resistance against this policy” by
conservative elements.
Industrial Resolution Policy 1956

• The Industrial Resolution Policy 1956 was developed due to the

changes that occurred due to the economic and political
developments in different spheres that called for changes in
industrial policy in a short period of operation of the 1948 Industrial
Policy. At the same time, a program of planned economic
development with the first five-year plan was also launched. The
1956 policy divided the industries into 3 categories based on
management.
Industrial Resolution Policy 1956: Evolution

• It was based upon the Mahalanobis Model of growth which

advocated that emphasis should be laid on the heavy industries, which
can increase the economic output of the country. Mahalanobis model
suggested the dominance of the heavy industries.

• It laid the foundation for India’s second five-year plan and Industrial
policy Resolution 1956, which paved the way for the development of
the Public Sector and license raj.
Features of Industrial Resolution Policy 1956
Industries were classified under three categories:
Schedule A Industries
• It consisted of 17 industrial areas which were under the Central
Government.
• Such companies were known as CPSE (Central Public Sector
Undertakings) that consisted of industries such as
• defense equipment; atomic energy;
• iron and steel and heavy plants/machinery required for iron and steel
production, heavy power plants;
• coal and lignite;
• mining and processing of key minerals etc.
Schedule B Industries
• It consisted of 12 industries that were left to the state government to follow
up with the private sector that including compulsory licensing provisions.
• The industries had to be state-owned but the private sector was also
expected to supplement the efforts of the State.
• States were expected to facilitate the development of these industries in
the private sector, with respect to the programs formulated under the Five
Year Plans.
• The schedule B industries consisted of
• machine tools;
• ferroalloys, steel tools;
• the raw material needed for the manufacturing of drugs, dyes, and plastics;
• essential drugs and antibiotics;
• fertilizers; synthetic rubber;
• chemical pulp, road, and sea transport.
Schedule C Industries
• It consisted of those industries which were left out of Schedule A and
B and were with the private sectors and subject to licensing and
regulation under the IDR Act.
 Various Focus Areas of Industrial Resolution Policy 1956

• It laid emphasis on integrated infrastructure development as a prerequisite to private

investment and therefore gave priority to power, transport, and financial
institutions.
• It gave recognition to small-scale industries such as cottage industries with respect
to balanced regional growth and also gave tax concessions and subsidies.
• It gave impetus to industrial development in far-off of the country to increase
economic growth.
• It considered FDI as complementary to domestic growth provided a major share in
control and management was to be given to Indian hands.
• It laid emphasis on the promotion of technical and managerial skills for industrial
growth, thereby proposing the establishment of ITIs and introducing business
management courses in universities.
• It focused on increased decentralization of the management of PSUs.
Impact of Industrial Resolution Policy 1956
• It increased the participation of the public sector in the Indian
economy.
• The government’s aim to push for a socialistic pattern of growth was
pushed further.
• For the first time, a transparent and simplified classification of
Industries was taken up in India.
• Industries under government control included those related to
strategic and basic domains.
• The compulsory licensing provision was further strengthened.
• It led to the development of the public sector in India
Limitations of Industrial Resolution Policy 1956

• It led to the government favoring big businesses that were in a better

position to raise a greater amount of capital and had better
management skills to run the industry.
• Such corporate houses were easily able to secure financial
assistance from development and finance institutions.
• There was the absence of a proper system for allocation of licenses
in place; pre-empting of licensing by authorities to select people or
groups happened due to an array of reasons.
• Restrictions regarding the freedom of entry into the industry were
increased due to licensing and this resulted in the concentration of
economic power in few individuals which led to inequality.
Conclusion
• The industrial resolution policy 1956 increased the employment
generation potential in small and cottage industries however, these
industries were sidelined practically either in want of institutional
finance or due to competition. Most of the institutional capital was
grabbed by large-scale industries leaving little for the smaller ones
to flourish and contribute to the economy.
New Industrial Policy 1991

• The Government of India announced its new industrial policy

1991 on July 24, 1991, with the goal of correcting the distortions and
weaknesses in the country's industrial structure that had developed
over four decades, raising industrial efficiency to international levels,
and accelerating industrial growth.
What is New Industrial Policy 1991
• A set of standards and measures undertaken by the Government to understand
the progress of the manufacturing sector that leads to an increase in economic
growth and development of the country constitutes the industrial policy.
• The New Industrial Policy, of 1991 had the main objective of providing facilities
to market forces and increasing efficiency.
• The government undertook it to take measures to improve the competitiveness
and capabilities of various industries.
• The government undertook various measures to boost the growth of
industries such as it allowed domestic firms to import better technology to
improve efficiency and to have access to better technology.
• The Foreign Direct Investment ceiling was increased from 40% to 51% in
specific sectors.
Features of New Industrial Policy 1991
• Government monopoly was reduced by decreasing the number of
industries reserved for the public sector from 17 (as per 1956 policy) to
8 industries such as arms and ammunition, atomic energy, coal, mineral oil,
mining of iron ore, manganese ore, gold, silver, mining of copper, lead, etc.
• The Industrial Licensing Policy abolished the industrial licensing given to all
industries except for the 18 industries, which was further reduced to 6
industries in 1999. These included drugs and pharmaceuticals, hazardous
chemicals, explosives such as gunpowder and detonating fuses, etc.
• It allowed foreign companies to have a majority stake in India. For
example, in 47 high-priority industries, up to 51% of FDI was allowed.
• Non-Resident Indians (NRIs) were allowed 100% equity investments on a
non-repatriation basis in all activities except the negative list.
• Various international agreements were made pertaining to foreign
technologies. For example, giving permission in high-priority industries up
to a lump sum payment of Rs. 1 crore, with 5% royalty for domestic sales
and 8% for exports.
• Restructuring the portfolio of public sector investments, for example, the
PSUs which were unlikely to be turned around were to be referred to the
Board for Industrial and Financial Reconstruction (BIFR).
• To remove the requirement of prior approval of the Central Government
for the establishment of new undertakings, expansion of undertakings,
merger, amalgamation, etc MRTP act was to be amended.
• The criteria for a tiny unit was changed to a unit having an investment limit
of Less than Rs. 5 Lakh.
• As per this policy, the government announced the establishment of
a National Renewal Fund (NRF) to ensure a social safety net for labor.
Impact of New Industrial Policy 1991
• It removed the restrictions experienced during the license, permit, and quota raj. It
intended to liberalize the economy by removing bureaucratic restrictions on
industrial growth.
• The role of the public sector was decreased and two sectors were reserved for the
public. The process of disinvestment was started in PSUs.
• By removing restrictions it enabled the entry of multinational
companies, privatization, removal of asset limits on MRTP companies, liberal
licensing policy, etc.
• Domestic as well as foreign investment increased in almost every sector of the
economy.
• Increased efforts were undertaken to increase exports such as Export Oriented
Units (EOU), Export Processing Zones (EPZ), Agri-Export Zones (AEZ), etc emerged.
• To better resolve the issues of MSMEs in 2006 a new act and separate ministry was
established.
Conclusion
• Various steps undertaken by the New Industrial Policy 1991 led to the
abolition of industrial licensing, dismantling of price controls, dilution
of reservations for small-scale industries and the virtual abolition of
the monopolies law, relaxation of restrictions on foreign investment,
etc. All such steps helped in the removal of restrictions and benefitted
in economic growth and development of the country.
Sectors of Indian Economy
Economic Sectors
• Economic activities produce commodities and services, whereas sectors are groups of economic
activity classified according to certain characteristics.
• On the basis of ownership, labor conditions, and the nature of the operations, the Indian economy can
be divided into numerous sectors.
• When we produce a good by utilizing natural resources, we are engaged in primary sector activity.
• The secondary sector encompasses activities in which natural products are transformed into other
forms via manufacturing methods associated with industrial activity.
• Following the primary and secondary sectors, there is a third category of activities that falls under
the tertiary sector and is distinct from the first two. These are activities that contribute to the growth
of the primary and secondary sectors.
• During the early stages of civilization, the primary sector accounted for all economic activity. People's
demand for other items grew as a result of the surplus food production, resulting in the growth of the
secondary sector.
• During the nineteenth century's industrial revolution, the secondary sector expanded its significance.
• To facilitate industrial activities, a support system was required. Certain industries, such as
transportation and finance, were critical in sustaining industrial activity.
Primary Sector
• Activities in the primary sector of the economy are carried out by utilizing natural
resources directly. Agriculture, mining, fishing, forestry, dairy, and other industries
fall into this category.
• It is thus named because it serves as the foundation for all other items.
• About 45.6 percent of the total workforce in the country is still engaged in
agricultural and allied sector activities as on 2019-20, which accounts for
approximately 18.29 percent of the country’s Gross Value Added (GVA) for the
year 2019-20 (at current prices).
• It is also known as the Agriculture and Allied Sector since agriculture, dairy,
forestry, and fishing provide the majority of the natural items we consume.
• Due to the nature of their profession, people who engage in primary activities are
referred to as red-collar employees.
• While the difficulties created by COVID-induced lockdowns adversely affected the
performance of the non-agricultural sectors, the agriculture sector came up with a
robust growth rate of 3.4 percent at constant prices during 2020-21.
 Gross value added is defined as output( at basic prices) minus intermediate consumption( at purchaser prices).
 GVA provides a dollar value for the amount of goods and services that have been produced in a country, minus the cost of
all inputs and raw materials that are directly attributable to that production.
Secondary Sector
• It covers industries that manufacture finished goods from natural materials harvested in
the primary sector.
• This sector includes operations such as industrial production, cotton fabric manufacture,
sugar cane production, and so on.
• As a result, rather than producing raw materials, it is the sector of a country's economy that
manufactures goods.
• This sector is often known as the industrial sector because it is involved with various types of
industries.
• Blue-collar employees are those who engage in secondary activities
• As per the latest estimates on Gross Value Added (GVA), the industrial sector is expected to
record a growth of -9.6 percent with an overall contribution in GVA of 25.8 percent in 2020-
21 (FY21).
• The contribution of the industrial sector has been constantly declining since 2011-12.
• The fall in share is across the board except in the case of ‘Electricity, gas, water supply &
other utility services’ whose share in GVA has increased from 2.3 percent in FY12 to 2.7
percent in FY21.
Tertiary Sector/Service Sector
• The services sector’s significance in the Indian economy has been steady, with the sector now accounting
for over 54 percent of the economy and almost four-fifths of total FDI inflows.
• The activities of this sector contribute to the growth of the primary and secondary sectors.
• Economic activities in the tertiary sector do not produce things on their own, but they do help or assist
production.
• The sector includes goods transported by trucks or trains, as well as banking, insurance, and finance.
• It adds value to a product in the same way that the secondary sector does.
• These sector jobs are called white-collar jobs.
• The first half of FY 2020-21 saw services sector contract by almost 16 percent YoY.
• This decline was led by a sharp contraction in all sub-sectors particularly ‘Trade, hotels, transport,
communication & services related to broadcasting, which contracted by 31.5 percent in H1 FY 2020-
21.
• As per the first advance estimates, the Gross Value Added (GVA) of the services sector is estimated
to contract by 8.8 percent in 2020-21, whereas it grew by 5.5 percent in 2019-20.
• Interestingly, in spite of the global disruptions, FDI inflows into the services sector increased by 34
percent YoY during April-September 2020 to reach US$ 23.61 billion
 Why did India shift from the primary sector to the
services sector and not the secondary sector?
• A country's normal economic path is from agrarian to industrial to a service economy,
but India has jumped ahead of the curve from agrarian to service economy.
• Diversification towards services has been a notable element of India's recent prosperity,
with the services sector accounting for the majority of GDP.
• India has become a prominent services exporter thanks to its success in software and
IT-enabled services (ITeS), with its share of global services exports rising from 0.6
percent in 1990 to 3.3 percent in 2013.
• Other factors for the country's quick expansion in the service industry include well-
educated and vast human resources, fluency in English, and the availability of cheap
labor.
• On the other hand, low growth in the Secondary sector can be attributed to:
• The license Raj
• Restrictions on foreign investment
• Lack of measures to promote private industry
 • Stringent labour laws
• Lack of skilled labour
• Delays in Land Acquisition and environmental clearances
• Import of cheap manufactured goods etc.

• Despite its low per capita income, India's percentage of GDP from services
is approaching the worldwide norm. However, unlike the global average,
the contribution of services to employment was much lower.
• Because the manufacturing sector is labor-intensive, greater emphasis on
manufacturing through initiatives such as 'Make in India' would help to
remedy this anomaly and increase employment in line with GDP growth.
Major Service sector
states
•Karnataka
•Kerala
•Jammu and Kashmir
•Bihar
•Sikkim
•West Bengal
•Mizoram
•Manipur
Composition & Contribution of Service Sector in India

• India is among the top 10 service exporter countries in 2020 having a

4.1% share in world commercial service exports.
• The service sector consists of the soft parts of the economy such as
insurance, government, tourism, banking, retail, education, and social
services. Currently service sector is contributing near about 60 % of
Indian GDP. Service sector is also known as tertiary sector.
• In India, the national income classification given by Central Statistical
Organization is followed. In the National Income Accounting in India,
service sector includes the following:
1. Trade, hotels and restaurants:
• a. Trade
• b. Hotels and restaurants
2. Transport, storage and communication
• a. Railways
• b. Transport by other means
• c. Storage
• d. Communication
3. Financing, Insurance, Real Estate and Business Services
• a. Banking and Insurance
• b. Real Estate, Ownership of Dwellings and Business Services
4. Community, Social and Personal services
• a. Public Administration and Defense (PA & D)
• b. Other services
Importance of Service Sector
• Promotion of industrialisation The industrial sector depends heavily on the
tertiary sector. For example, to operate an industry, raw materials must be
transported from one place to another. Transportation comes under the
tertiary sector. Similarly, the finished products need to be distributed to
marketplaces which also requires transportation. Moreover, the health of
industry workers is kept in check by the healthcare industry. The industry’s
finances are handled by some financial institution, which again comes under
the service sector
• Increase in productivity – Both education and healthcare come under the
service sector. When an individual gets a good education and proper access
to healthcare, their productivity is more likely to increase than someone with
low levels of education and poor health. Hence, the service sector improves
the overall health of the economy by increasing workers’ productivity
• Good Quality of Life – The employees working in the tertiary sector
generally have a better quality of life. They earn more money and
work in less hazardous conditions. They can afford several luxuries,
which improve their quality of life
• Market Growth – The tertiary sector improves the quality of the
finished goods produced in industries. The process of making the
products is also improved, thanks to the service sector. This, in turn,
enables the growth of the market
Advantages of the Service Sector
The service sector has certain other advantages also. These are listed as
follows:
• No requirement of an inventory: This is one of the most significant
advantages from the business owner’s perspective. Since the service sector
relies on offering intangible products, there is no need for extra space to
store goods and raw materials. Here, skills and expertise are sold, which
do not require an inventory. This reduces the cost of production
• Easy to start: It is easier to start a business in the tertiary sector
because there is no compulsory need to set up a manufacturing plant
or procure raw materials. For example, any company offering IT-enabled
services only needs the internet and laptops to operate. The work can be
done from home too, so the need for a large office is also not there. This is
why most start-ups in India come under the purview of the service sector
• Working flexibility: Unlike in primary and secondary sector jobs, the
jobs in the tertiary sector provide flexibility to work. A worker can
work from anywhere based on his convenience and preference. It was
easiest for the service sector employees to work from home during the
COVID-19 pandemic

• High adaptability: Service sector companies are more dynamic, i.e.

they adjust better to changes
Marketing

• Marketing-as-a-Service is an agile, tailored solution that supports

your marketing functions by delivering on-demand, value-based
marketing services from strategy development to execution.
• Creative Marketing services.
• Designing Services :
• Promo Products or Personalized services :
• Digital Marketing Services
Financial Sector
Banking
Telecommunication
• The telecommunication sector is made up of companies that make communication
possible on a global scale, whether it is through the phone or the Internet, through
airwaves or cables, through wires or wirelessly.
• The telecommunications sector consists of three basic sub-sectors: telecom equipment
(the largest), telecom services (next largest), and wireless communication.
The major segments within these sub-sectors include the following:
• Wireless communications
• Communications equipment
• Processing systems and products
• Long-distance carriers
• Domestic telecom services
• Foreign telecom services
• Diversified communication services
Big Players in Telecommunications

• MTNL. ...
• Bharat Sanchar Nigam Ltd. ...
• Vodafone Idea Limited. ...
• Bharti Airtel Limited. ...
• Reliance Jio
Important Questions
• Key initiative under MAKE IN INDIA scheme, implications on Indian
economy.
• Key findings of the national commission on Farmers.
• Short note on service sector : healthcare, travel and tourism.
• National commission for farmers
• [Link]
Indian%20economy/Make%20in%20India_%20List%20of%20sectors,%
20Objectives%20and%20Budget%[Link]
• [Link]
%20Sem/Indian%20economy/20%20Important%20facts%20about
%20Indian%[Link]