Economy

The concept

GDP is the market value of all final goods and services produced within the domestic territory of a country in a year, whoever produces them. Only final goods are counted (or, equivalently, only the value added at each stage) to avoid double counting the sugarcane inside the sugar. It can be measured three ways that must agree: the production (value-added) method, the income method (wages + rent + interest + profit + mixed income) and the expenditure method, GDP = C + I + G + (X − M). Transfer payments (pensions, scholarships), purely financial transactions (buying shares) and sales of second-hand goods are not production and are excluded, though a broker’s commission on them is a service and is included. Imputed rent of owner-occupied houses and the value of grain a farmer grows and keeps for his own family are included.

GNP shifts the focus from territory to residents: GNP = GDP + net factor income from abroad (factor income earned by residents abroad minus factor income earned by non-residents in India). For India, NFIA has long been negative because interest, dividends and profits paid to foreign investors exceed the factor income Indians earn abroad, so India’s GNP (gross national income) is slightly smaller than its GDP. Most remittances sent by Indians settled abroad are current transfers, recorded in the balance of payments, not factor income. Subtracting depreciation gives the net aggregates (NDP, NNP). NNP at factor cost is called National Income.

Market prices vs factor cost. Market prices include indirect taxes and are lowered by subsidies; factor cost is what the factors of production actually receive. So: Factor cost = Market price − indirect taxes + subsidies = Market price − net indirect taxes. India’s official accounts use an intermediate concept: GVA at basic prices (factor cost + production taxes − production subsidies), and GDP = GVA at basic prices + product taxes − product subsidies.

Real vs nominal. Nominal GDP values output at current prices; real GDP values it at the prices of a chosen base year, so it moves only when quantities move. The GDP deflator = (Nominal GDP ÷ Real GDP) × 100 is the broadest price index, since it covers every good and service produced. Approximately, real growth ≈ nominal growth − inflation. On 27 February 2026 the National Statistics Office (MoSPI) released a new GDP series with base year 2022-23, replacing the 2011-12 series.

The concept

Inflation is a sustained rise in the general price level, which means a fall in the purchasing power of money. It is measured as the percentage change in a price index: inflation = (Index_now − Index_earlier) ÷ Index_earlier × 100. A single costly item (onions) is not inflation by itself; it matters when it feeds into the general index. Demand-pull inflation arises when aggregate demand exceeds what the economy can supply (easy credit, large government spending, higher incomes). Cost-push inflation arises from higher input costs: crude oil, wages, a weak rupee raising import costs, or supply shocks. The two call for different medicine: monetary tightening cools demand-pull, but it cannot make it rain, so food and fuel shocks are tackled with supply-side steps (imports, buffer stock releases, export curbs).

Measurement in India. The Consumer Price Index (CPI) measures retail prices of a basket of goods and services bought by households. CPI (Rural, Urban, Combined) is compiled by the National Statistics Office, MoSPI; its base year was revised from 2012 to 2024 with the series released on 12 February 2026. CPI-IW (industrial workers), CPI-AL (agricultural labourers) and CPI-RL (rural labourers) are compiled by the Labour Bureau. The Wholesale Price Index (WPI) tracks prices at the wholesale/producer level, covers goods only (no services) and is compiled by the Office of the Economic Adviser, DPIIT (Ministry of Commerce and Industry); its base year was revised from 2011-12 to 2022-23 on 15 June 2026. Since 2014 (Urjit Patel Committee) and formally since 2016, the RBI targets CPI (Combined) inflation, because CPI reflects what households actually pay.

Related terms. Headline inflation is the full index; core inflation excludes volatile food and fuel. Disinflation is a fall in the rate of inflation (prices still rising); deflation is a negative rate; reflation is deliberately pushing prices back up after deflation; stagflation combines high inflation with stagnation and unemployment (the 1970s oil shocks). The Phillips curve describes the short-run trade-off between inflation and unemployment, which stagflation breaks. The base effect: a low index in the same month last year makes this year’s inflation look high, even if prices are steady now.

Who gains, who loses? Unanticipated inflation redistributes from creditors to debtors (loans are repaid in cheaper rupees), and from fixed-income earners and pensioners to holders of real assets. It acts as a hidden tax on cash holdings. Mild, stable inflation encourages producers; high inflation erodes savings and exports.

The concept

Functions of money are usually grouped as primary (medium of exchange, measure of value or unit of account) and secondary (store of value, standard of deferred payment, transfer of value). Modern money is fiat money: paper and coins are legal tender because the law says so, not because they contain gold. In India the RBI issues all currency notes except the ₹1 note, which, like all coins, is issued by the Government of India (Ministry of Finance); coins are put into circulation through the RBI.

Money supply measures (RBI). M0 (reserve money / high-powered money) = currency in circulation + bankers’ deposits with the RBI + other deposits with the RBI. M1 (narrow money) = currency with the public + demand deposits with banks + other deposits with the RBI. M2 = M1 + savings deposits with post office savings banks. M3 (broad money) = M1 + net time deposits with banks. M4 = M3 + total post office deposits (excluding National Savings Certificates). Liquidity falls from M1 to M4. M3 is the most commonly used measure of money supply.

Credit creation. Because banks keep only a fraction of deposits as reserves, each loan becomes a new deposit somewhere in the system. In the simple textbook model, total deposits = initial deposit × money multiplier, where money multiplier = 1 ÷ reserve ratio. With a 10% ratio, ₹1,000 supports ₹10,000 of deposits, of which ₹9,000 is new credit. In reality the multiplier (M3 ÷ M0) is smaller because people hold some cash and banks hold excess reserves. A higher CRR shrinks the multiplier, which is exactly how the RBI uses it to drain liquidity.

Types of banks. Central bank: the RBI (set up 1 April 1935 under the RBI Act 1934 on the Hilton Young Commission’s recommendation; nationalised 1 January 1949). Scheduled commercial banks (listed in the Second Schedule of the RBI Act): public sector (14 banks nationalised on 19 July 1969 and 6 more on 15 April 1980; SBI formed in 1955 from the Imperial Bank), private, foreign. Regional Rural Banks (set up from 2 October 1975, RRB Act 1976; owned by Centre 50%, sponsor bank 35%, State 15%). Cooperative banks (rural three-tier: State Cooperative Bank, District Central Cooperative Bank, Primary Agricultural Credit Society; plus urban cooperative banks; brought more fully under RBI regulation by the Banking Regulation (Amendment) Act 2020, which does not cover PACS). Small finance banks serve small borrowers; payments banks take deposits (up to ₹2 lakh per customer) and make payments but cannot lend.

The concept

Monetary policy is the RBI’s management of the cost and availability of money to achieve price stability while keeping growth in mind. Its quantitative (general) tools affect overall liquidity: policy repo rate, Standing Deposit Facility (SDF), reverse repo, Marginal Standing Facility (MSF), bank rate, CRR, SLR and open market operations (OMOs). Qualitative (selective) tools steer credit to or away from particular sectors: margin requirements, credit rationing, moral suasion, direct action.

The rates and the corridor. Under the Liquidity Adjustment Facility (LAF), the repo rate is the rate at which the RBI lends overnight to banks against government securities; it is the policy rate that signals the stance. The SDF (introduced April 2022, needing no collateral) is the floor of the corridor at repo − 25 basis points, and the MSF (banks can borrow even by dipping into their SLR holdings) is the ceiling at repo + 25 basis points. The bank rate is the rate for rediscounting bills (RBI Act, Section 49) and is aligned with the MSF rate. CRR is the share of net demand and time liabilities (NDTL) a bank must keep as cash with the RBI (Section 42, RBI Act; earns no interest). SLR is the share of NDTL a bank must keep with itself in cash, gold or approved securities (Section 24, Banking Regulation Act 1949; maximum 40%). OMOs: the RBI buys government securities to inject liquidity and sells them to absorb it.

Direction of effects is what MPSC tests. To fight inflation (tight or dear money): raise repo, raise CRR or SLR, sell securities in OMOs. To boost growth (easy or cheap money): cut repo, cut CRR/SLR, buy securities. A repo hike raises banks’ cost of funds, lending rates rise, borrowing and spending fall, and demand-pull inflation eases; the rupee also tends to strengthen as returns rise for foreign investors.

Flexible inflation targeting. The RBI Act was amended by the Finance Act 2016 (on the Urjit Patel Committee’s recommendation) to give a statutory framework. Under Section 45ZA the Central Government, in consultation with the RBI, sets the target every five years: CPI (Combined) inflation of 4% with a tolerance band of 2% to 6%. It applied from August 2016, was renewed for April 2021 to March 2026, and on 25 March 2026 was notified again for 1 April 2026 to 31 March 2031. Failure means average inflation above 6% or below 2% for three consecutive quarters; the RBI must then report the reasons and remedial steps to the Government. The Monetary Policy Committee (Section 45ZB) has six members: the Governor (chair), the Deputy Governor in charge of monetary policy, one RBI officer nominated by the Central Board, and three external members appointed by the Central Government for four years. It meets at least four times a year; decisions are by majority, and the Governor has a second or casting vote in a tie.

The concept

The Budget. Article 112 requires the President to lay an Annual Financial Statement before Parliament every year. All revenues and loans go into the Consolidated Fund of India (Art. 266), from which no money can be withdrawn without an Appropriation Act (Art. 114). The Contingency Fund (Art. 267) is at the President’s disposal for unforeseen spending. No tax can be levied except by authority of law (Art. 265). A vote on account (Art. 116) lets the government spend for part of the year until the full Budget passes. Since 2017 the Budget is presented on 1 February and the Railway Budget is merged into it.

Revenue vs capital. A revenue receipt neither creates a liability nor reduces an asset: taxes, and non-tax revenue such as interest received, dividends and profits of PSUs, fees and fines. A capital receipt either creates a liability (market borrowings, small savings, external loans) or reduces an asset (recovery of loans given earlier, disinvestment). Revenue expenditure creates no asset: salaries, pensions, interest payments, subsidies, and grants to states even if the states use them to build assets. Capital expenditure creates assets or reduces liabilities: roads, railways, defence equipment, loans given to states, repayment of loans.

Deficits. Revenue deficit = revenue expenditure − revenue receipts. Effective revenue deficit = revenue deficit − grants for creation of capital assets. Fiscal deficit = total expenditure − (revenue receipts + non-debt capital receipts), which equals the government’s total borrowing requirement. Primary deficit = fiscal deficit − interest payments. A large revenue deficit means borrowed money is being consumed rather than invested; a primary deficit near zero means new borrowing is only servicing old debt. Fiscal policy is the use of taxes and spending to influence the economy: expansionary (higher spending, lower taxes) in a slowdown, contractionary to cool inflation.

FRBM Act, 2003. It aimed to eliminate the revenue deficit and bring the fiscal deficit to 3% of GDP. After the N.K. Singh Committee review, the Finance Act 2018 amended it: fiscal deficit 3% of GDP by 31 March 2021, central government debt 40% of GDP (general government 60%) by 2024-25, the revenue-deficit target dropped, and an escape clause allowing deviation in a national calamity, war or sharp fall in output. The targets slipped after COVID-19. From 2026-27 the Centre uses the debt-to-GDP ratio as its main fiscal anchor, aiming for central government debt of about 50 ± 1% of GDP by 31 March 2031; the fiscal deficit becomes the operational target (Budget 2026-27: 4.3% of GDP, against 4.4% in revised estimates for 2025-26).

The concept

Direct vs indirect. In a direct tax the person on whom it is imposed also bears it (impact and incidence fall on the same person): personal income tax, corporation tax, the former wealth tax. In an indirect tax the burden can be shifted to someone else, usually the consumer: GST, customs duty, excise duty on items outside GST. Direct taxes are generally progressive; indirect taxes tend to be regressive because rich and poor pay the same rate on the same purchase, so the poor lose a larger share of income. The Income-tax Act, 2025 replaced the Income-tax Act, 1961 from 1 April 2026, replacing the “previous year / assessment year” pair with a single “tax year”, without changing rates.

Progressive, proportional, regressive. Progressive: the tax rate rises as income rises (slab-based income tax). Proportional: the same rate at all incomes (a flat tax). Regressive: the share of income taken falls as income rises (a flat amount per person, or a uniform tax on necessities). The Laffer curve suggests that beyond some point, higher tax rates reduce total revenue.

GST structure. Introduced by the Constitution (101st Amendment) Act, 2016 and launched on 1 July 2017. Art. 246A gives Parliament and state legislatures concurrent power to levy GST; Art. 269A provides for IGST on inter-state supplies, levied and collected by the Centre and shared with states; Art. 366(12A) defines GST. On an intra-state supply, CGST + SGST are levied (half each); on an inter-state supply and imports, IGST. GST subsumed central excise, service tax, VAT, entry tax, octroi and several others. Alcoholic liquor for human consumption is excluded by the Constitution itself; five petroleum products (crude oil, petrol, diesel, natural gas, aviation turbine fuel) are within GST’s constitutional scope but will be taxed only from a date the Council recommends. After the 56th Council meeting (3 September 2025), the main slabs were rationalised from 22 September 2025 to 5% and 18%, with 40% on sin and luxury goods (the 12% and 28% slabs were removed).

GST Council (Art. 279A). Members: Union Finance Minister (Chairperson), Union Minister of State for Finance or Revenue, and the Finance/Taxation Minister of each state (states here include Delhi, Puducherry and Jammu and Kashmir, the union territories with legislatures); the members choose a Vice-Chairperson from among the state ministers. Quorum: one-half of total members. Decisions need a majority of not less than three-fourths of the weighted votes of members present and voting, where the Centre’s vote carries one-third weight and all states together two-thirds. So the Centre cannot pass anything without most states, and the states cannot pass anything without the Centre. In Union of India v. Mohit Minerals (2022) the Supreme Court held that the Council’s recommendations are persuasive, not binding.

The concept

Before Independence: M. Visvesvaraya’s Planned Economy for India (1934); the Congress’s National Planning Committee under Nehru (1938); the Bombay Plan (1944, by industrialists), the Gandhian Plan (1944, S.N. Agarwal), the People’s Plan (1945, M.N. Roy) and the Sarvodaya Plan (1950, Jayaprakash Narayan). The Planning Commission was set up on 15 March 1950 by a Cabinet resolution, with the Prime Minister as chairman; it was neither constitutional nor statutory. The National Development Council (1952) brought the PM, Union ministers and Chief Ministers together to approve plans.

The plans. First (1951–56): agriculture, irrigation and power; based on the Harrod–Domar model; exceeded its growth target. Second (1956–61): rapid industrialisation with heavy industry, based on the P.C. Mahalanobis model. Third (1961–66): aimed at self-reliance but failed because of the 1962 and 1965 wars and the 1965-66 drought. Plan holiday (1966–69): three annual plans; the Green Revolution began. Fourth (1969–74): “growth with stability and progressive achievement of self-reliance”; D.R. Gadgil, the economist from Pune, was Deputy Chairman, and the Gadgil formula (1969) governed plan transfers to states. Fifth (1974–79): “Garibi Hatao” (removal of poverty); ended a year early in 1978 by the Janata government, which introduced the Rolling Plan (1978–80). Sixth (1980–85) and Seventh (1985–90); annual plans 1990–92. Eighth (1992–97): launched with the 1991 LPG reforms; planning became indicative rather than imperative. Ninth (1997–2002): growth with social justice and equity. Tenth (2002–07): monitorable targets. Eleventh (2007–12): “faster and more inclusive growth”. Twelfth (2012–17), the last: “faster, more inclusive and sustainable growth”.

NITI Aayog (National Institution for Transforming India) replaced the Planning Commission on 1 January 2015, again by a Cabinet resolution. Chairperson: the Prime Minister. Governing Council: the PM, Chief Ministers of all states and of union territories with legislatures, and Lieutenant Governors/Administrators of other UTs. It also has a Vice-Chairperson and a CEO appointed by the PM, full-time members, up to four Union ministers as ex-officio members, special invitees and Regional Councils for specific issues. Its approach is bottom-up and advisory: it does not allocate funds. Five-year plans were replaced by a framework of a long-term vision, a medium-term strategy and a three-year action agenda; NITI also runs indices that make states compete (SDG India Index, Export Preparedness Index) and the Aspirational Districts Programme.

The concept

Measuring poverty. India’s official poverty lines were consumption-based. The Alagh Task Force (1979) defined the line by calories: 2,400 kcal per person per day in rural areas and 2,100 in urban areas. The Lakdawala Expert Group (1993) kept the calorie basis but made state-specific lines updated by CPI-AL and CPI-IW. The Tendulkar Committee (2009) moved away from calories to a broader basket including health and education, with a uniform basket for rural and urban areas; by its method poverty was 21.9% in 2011-12. The Rangarajan Committee (2014) estimated 29.5% for 2011-12; the Government did not formally adopt it. Multidimensional poverty counts deprivations rather than income: NITI Aayog’s National MPI (Alkire–Foster method) uses three dimensions (health, education, standard of living) and 12 indicators. Its January 2024 discussion paper estimated that multidimensional poverty fell from 29.17% in 2013-14 to 11.28% in 2022-23, with about 24.82 crore people escaping it.

Measuring unemployment. The Periodic Labour Force Survey (PLFS) of the National Statistics Office, started in 2017-18, is the main source. Labour force = employed + unemployed (those seeking or available for work). Unemployment rate = unemployed ÷ labour force × 100; Labour Force Participation Rate = labour force ÷ population × 100; Worker Population Ratio = employed ÷ population × 100. Statuses: usual status (reference period 365 days; principal + subsidiary), current weekly status (the last 7 days) and current daily status. Types: disguised (agriculture), seasonal, structural, frictional, cyclical, and educated unemployment.

Employment guarantee. Maharashtra’s Employment Guarantee Scheme, conceived by V.S. Page and begun during the 1972–73 drought, was made statutory by the Maharashtra Employment Guarantee Act, 1977, and became the model for the national law. The Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA), 2005, began on 2 February 2006 in 200 districts and guaranteed at least 100 days of unskilled manual wage work per rural household per year, with an unemployment allowance if work was not given within 15 days and one-third of beneficiaries to be women. It was replaced by the Viksit Bharat – Guarantee for Rozgar and Ajeevika Mission (Gramin) Act, 2025 (VB-G RAM G), passed by Parliament on 18 December 2025, which came into force on 1 July 2026, repealing MGNREGA. It raises the guarantee to 125 days, shares costs between Centre and states 60 : 40 (90 : 10 for north-eastern and Himalayan states) within a normative allocation fixed by the Centre, and lets states notify a pause of up to 60 days in peak sowing and harvesting seasons.

Other anti-poverty and jobs schemes MPSC asks about: Deendayal Antyodaya Yojana – National Rural Livelihoods Mission (2011, self-help groups), Pradhan Mantri Awas Yojana, Pradhan Mantri Kaushal Vikas Yojana (2015, skilling), PM-KISAN (2019, income support to farmers) and the National Food Security Act, 2013 (subsidised grain to about two-thirds of the population).

The concept

MSP is the price at which the government stands ready to buy a crop, to protect farmers from distress sales. It is announced by the Central Government (approved by the Cabinet Committee on Economic Affairs) for 22 mandated crops (14 kharif, 6 rabi and 2 commercial: jute and copra) on the recommendation of the Commission for Agricultural Costs and Prices (CACP), set up in 1965 as the Agricultural Prices Commission and renamed in 1985. MSP has no statutory backing. Since 2018-19 the Government has fixed MSPs at least 1.5 times the A2 + FL cost (paid-out costs plus the imputed value of family labour). For sugarcane, the Centre fixes a Fair and Remunerative Price (FRP) under the Sugarcane (Control) Order, 1966, which mills must pay; FRP replaced the Statutory Minimum Price from 2009-10. Effective procurement is concentrated in wheat and paddy, by the Food Corporation of India and state agencies.

Green Revolution. From the mid-1960s, high-yielding varieties (dwarf wheat developed by Norman Borlaug in Mexico, adapted in India under M.S. Swaminathan, with C. Subramaniam as Agriculture Minister) were spread together with chemical fertilisers, irrigation, pesticides, credit and MSP-backed procurement. Wheat output rose sharply, India became self-sufficient in food grains, and buffer stocks were built. Its limits: gains concentrated in wheat (later rice) and in Punjab, Haryana and western Uttar Pradesh; widened regional and inter-personal inequality; soil degradation, falling groundwater and pesticide overuse. Rain-fed regions like Marathwada and Vidarbha benefited far less.

APMC. Agricultural markets are a state subject (State List Entry 28, “markets and fairs”). Maharashtra’s Agricultural Produce Marketing (Regulation) Act, 1963 set up APMC market yards where produce is sold by open auction through licensed commission agents, with a market fee. Lasalgaon (Nashik) is Asia’s largest onion market. Reform steps: the Model APMC Act 2003, the electronic national market e-NAM (14 April 2016) linking mandis online, the Model APLM Act 2017, and the three farm laws of 2020, which were repealed in 2021.

Cooperatives. India’s first cooperative law was the Cooperative Credit Societies Act, 1904; Maharashtra’s is the Maharashtra Co-operative Societies Act, 1960. Pravara Sahakari Sakhar Karkhana at Pravaranagar (Loni) in Ahilyanagar (formerly Ahmednagar) district, organised in 1948 and commissioned in 1950 under Vithalrao Vikhe Patil with economist D.R. Gadgil’s guidance, was Asia’s first cooperative sugar factory. Farmer-members supply cane and share profits, and the model spread across western Maharashtra. In dairy, the Anand pattern (Amul, 1946; Verghese Kurien; NDDB 1965; Operation Flood from 1970, the White Revolution) spread to Maharashtra through unions like Gokul (Kolhapur) and Warana. The 97th Amendment (2011) made forming cooperatives a fundamental right (Art. 19(1)(c)), added a Directive Principle (Art. 43B) and inserted Part IXB; in 2021 the Supreme Court held Part IXB operative only for multi-state cooperative societies, since state cooperatives are a state subject. A separate Union Ministry of Cooperation was created in July 2021.

The concept

Balance of payments (BoP) is the systematic record of all economic transactions between residents of a country and the rest of the world in a period. The current account records trade in goods (merchandise), and invisibles: services (software, travel, transport), primary income (interest, dividends, wages) and secondary income (current transfers such as remittances). India usually runs a large merchandise trade deficit, partly offset by a services surplus (IT services) and by remittances, India being the world’s largest recipient. The capital account (financial account) records FDI, portfolio investment, external commercial borrowings, external assistance, banking capital and NRI deposits. Current account + capital account + errors and omissions = change in foreign exchange reserves. In the accounting sense the BoP always balances; a “BoP deficit” means the reserves fell.

Exchange rates. Under a fixed rate the government sets the value; under a floating rate the market does; India follows a managed float, with the RBI intervening only to curb excessive volatility. When ₹/$ rises (say from ₹80 to ₹88), the rupee has depreciated (market-driven; “devaluation” is a deliberate cut under a fixed regime). Depreciation makes exports cheaper abroad and imports dearer at home, which tends to narrow the trade deficit but raises the cost of imported oil, feeding inflation. The rupee’s fall in that example is (1 − 80/88) × 100 ≈ 9.1%, while the dollar has risen 10%. History: devaluation in 1966 and July 1991; LERMS (dual exchange rate) from March 1992; a unified market-determined rate from March 1993; current account convertibility from August 1994 (IMF Article VIII); capital account only partially convertible (Tarapore Committees 1997, 2006). FEMA, 1999 replaced FERA, 1973.

FDI vs FPI. Following the Arvind Mayaram Committee (2014), investment of 10% or more of the post-issue paid-up equity of a listed company is treated as FDI, and below 10% as FPI. FDI brings management control, technology and stable long-term capital; it comes through the automatic route (no prior approval) or the government route. FPI is in shares and bonds, adds liquidity to markets but can exit quickly, causing volatility (hot money).

WTO. The World Trade Organization was set up on 1 January 1995 under the Marrakesh Agreement (April 1994), at the end of the Uruguay Round (1986–94), replacing the GATT (1947) as the institution. It is headquartered in Geneva; its highest body is the Ministerial Conference, which meets at least once every two years. India was a founder member of both GATT (1947) and the WTO (1995). Key agreements: Agreement on Agriculture (subsidies classified into amber, blue and green boxes), TRIPS (intellectual property), TRIMS (investment measures) and GATS (services). Its principles include most-favoured-nation treatment and national treatment.