Indian Economic Environment

Roles of different Sectors

Service Sector

Date: 10/01/2012

What does it covers

1. Business & Professional Services 2. Communication Services 3. Real Estate and Related Services 4. Distributive Services 5. Education Services 6. Energy Services 7. Environmental Services 8. Financial Services

7. Financial Services 8. Health & Social Services 9. Tourism Services 10.Transport Services Increasing Share in GDP Providing Employment Providing Support To Other Services Contribution to Exports * Travel * Transportation * Insurance * Communication * Construction * Software * Agency Services * Management Services

Low levels of human well-being; is measured by HDI HDI- Human Development Index

Longevity; Knowledge and Standard of Living

India stand at 126th position among 177 countries

Problems faced by Agri sector till date: a. Slow and uneven growth and rain dependency b. Lack of modern techniques c. Flaws in land reforms d. Problems related to private money lenders e. Warehousing and Marketing facilities and knowledge

Theoretical Underpinning
The classical economic growth theorys main representatives are Adam Smith, Ricardo David and Allyn Young. Those theories mainly focus on analyzing determinant factors of economic growth. They stated that economic growth depends on how much surplus of production will be use on investment, and not all economic activities can provide surplus of production. Adam Smith (1776) divided labor into two categories, productive labor and unproductive labor. He also examined the role of division of labor in economic growth. He claimed two important factors for the growth of national wealth, the ratio of productive labor in total labor and the increase of labor productivity because of division of labor. International trade is a good example for explaining the benefit of labor division, especially when transaction cost and transport cost is very low. Adam Smith and some other scholars later emphasized that key factors for rapid economic growth are international trade, low transport cost and wellfunctioning market system.

What is Financial Development Theory ?

According to Joseph Schumpeter (1939), banking and entrepreneur are two key factors in economic growth process. Entrepreneur leads to technological innovation which can promote economic growth; banking can evaluate and financing for technological innovation made by entrepreneurs. Hence, Schumpeter (1939) pointed out financial intermediaries could affect marginal productivity of capital by emphasizing the importance of financial intermediaries on evaluation the investment.

Financial Development role in Indian economy

New growth theory emphasized that the main driver for economic growth in the long run is creativity instead of capital accumulation mentioned by previous theories. Paul Romer (1986) is the lead developer of new growth theory. He claimed that human capital (such as scientists and engineers) and institutions (such as patent law) drive technical renovation and improve living standard. Investment on knowledge will get a stable, even increasing return rate. Developing countries can achieve technology innovation by imitate existing developed technology in developed countries. However, Basu and Weil (1998) thought that low capital accumulation is an obstruction for developing countries to introduce advanced technology from developed countries. If developing countries can raise capital accumulation by increasing the amount of saving, they will experience a rapid economic growth period.

Mahalnobis Model
The Indian economy provides a revealing contrast between how individuals react under a government-controlled environment and how they respond to a market-based environment. Evidence suggests that recent market reforms that encouraged individual enterprise have led to higher economic growth in that country. Indias economic development strategy immediately after Independence was based primarily on the Mahalanobis model, which gave preference to the investment goods industries sector, with secondary importance accorded to the services and household goods sector (Nayar,2001).

Features of the model

a) Control of growth and the industrial composition of output and capacity, b) Control over foreign exchange utilisation, c) Control of monopoly and restrictive practices in trade and commerce, d) Control over investments in certain consumption goods industry to encourage small industrial units, e) Control over the location of the industry