Economics Class 01

 Economics Class 01

Books/ documents to follow

• Terminology handbook 
• PYQs related to the topics already completed + Syllabus of the UPSC
• Indian economic development NCERT
• Prelims- Indian economy by Shankar Ganesh
• For terminology in news- Investopedia [* Not below 1 paragraph]
• For Mains- Mishra & Puri
• Newspaper- Indian Express- Explained column
• Class notes + Vision IAS material 
• Budget and Economic Survey
• Macroeconomics NCERT book 

Relevance of Economics in UPSC

• Prelims- India economy - 17-22 questions are asked. 
• Mains- GS 3- Indian economy + Agriculture- 9- 11 questions 
• Essay- Can capitalism be made inclusive, 2015 + Poverty anywhere is a threat to prosperity everywhere 

Economic Terminology

Capitalism 

• With less government control, Hard work is rewarded, Thus striving to become more efficient
• Government control will be limited- Government will not regulate the price, nor fix the production
• Capitalism believes in the principle of Efficiency- with a minimum amount of resources we need to generate a maximum amount of output
• Why it survived over Socialism & Communism?
• Capitalism is very close to innate nature i.e. Selfishness. Capitalism runs on the logic of Selfishness. Also, it has a PROFIT motive
• Capitalism is a scientific approach [* UPSC essay- History is the series of victories won by the scientific Man over the Romantic Man] 
• Any firm which has to stand requires 4 factors of production- Land, Labor, Capital, and Entrepreneurship 
• Factor Payment- Why one will give land?- Because it will generate RENT, similarly Labor will get WAGES, Capital will generate INTEREST and Entrepreneurship will generate PROFIT. 
• So everyone is working for the selfish interest
• The market will decide what one will produce and also the price will be decided by the Market
• Market- Where buyers and sellers meet. The market runs on the concept of Demand and supply
• Demand- Willingness to buy+ Ability to Pay
• [* Today Government organizations are also working on Efficiency ]
• PM Nehru did not adopt the Principle of capitalism despite being western educated. Why?
• The historical experience was very bad. 
• Our private sector was not ready to take the load. 
• Positives of capitalism 
• Efficiency- Steve Jobs, Elon Musk, etc all are from capitalism.
• It has more scope for innovation
• They are able to handle poverty better than the developing nation
• Voting process/ pattern- In the poor country it is motivated by emotion (Caste, religion, Freebies) whereas in capitalistic countries the voting pattern is motivated by Logic/ rational
• It leads to Wealth creation and it is required [* In Arthashastra, Kautilya talked about wealth creation and expansion]
• Gandhiji did not believe in Capitalism - The world has enough for everyone's needs, but not everyone's greed. Gandhi ji did not believe in pure socialism also. He believed in the trusteeship model 
• It creates more scope for Job Creation
• Negatives of capitalism
• Inequality will increase. [* Concentration of wealth]
• The market runs on demand and supply, But those who do not have the ability to pay and are outside the market also will suffer. 
• The market will address WANTS and may not address the NEEDS
• Needs can not be left to market
• Monopoly with respect to Capitalism is a risk
• Excessive profit will lead to exploitation
• [* From the book, Difficulty of Being Good- " If greed is the sin of capitalism, envy is the sin of socialism".]
• Dictation- Capitalism
• Government control is less 
• The market is the invisible hand that drives capitalism 
• Capitalism runs on the logic of Profit motive and self-interest
• Capitalism believes in efficiency
• Market
• A market is a place where buyers and sellers meet 
• The market runs on the concept of Demand and supply 
• Demand is just not the willingness to Buy but also the ability to pay
• Factors of Production 
• There are 4 factors of production- Land, Labour, Capital, Entrepreneurship
• Factor payments- Land- Rent, Labor- wages, Capital- Interest, and for entrepreneurship it is Profit

Socialism

• India believed in a milder version of socialism
• Poverty, education, unemployment, health issue, and life expectancy can not be left to the Private sector. Thus government wanted to be Front Runner in these areas
• PSUs will drive these sectors- PSU-led-development
• Our socialism was different from the erstwhile USSR and that is why we used the word "Mixed Economy"
• Mixed economy= Combination of the both- Socialism + Capitalism= Both Private and public sectors moving hand-in-hand. But our policies were more inclined towards favouring the public sector
• Dictation- Socialism
• Economy fundamentals are regulated by Government (High government control)
• Socialism focuses on Reducing inequalities and handling developmental problems like poverty, health, education, etc
• India adopted a PSU-led growth model 
• Mixed Economy
• Both public and private sectors moving hand-in-hand

Is capitalism a panacea to all the problems? 

• Adam Smith believed that Capitalism is the panacea to all the problems
• In 1930, there was an economic crisis and we observed that capitalism failed. Thus we need to depend on some principles of socialism
• The main reason for the crisis was the fall in demand in that country
• [* How to do business?- one way is to take a loan/ DEBT, another way is to sell the ownership/ EQUITY.  Shares are ownership of the company and they can be traded on the stock market i.e. Buying and selling]
• During 1930, when the economy was not performing well and US companies wanted to sell shares then the people did not show any interest. The private sector was finding it difficult to raise capital. The stock market collapsed. Private companies will produce less, Recruit less, and retrenching of labour was done. Purchasing power reduced. This also led to a fall in demand. Again Private players will produce less
• 
• This fall in prices is called DEFLATION
• INFLATION- Increase in prices
• DISINFLATION- Fall in inflation rate
• 
• Government interfering to break the deflation cycle- is socialism method/ interference by society
• How the government will handle this?
• The government will try to create demand- Government can give subsidies from its pocket, Government can come up with a reduction in tax rates (It will lead to an increase in purchasing power and this will increase the demand)- This policy is called FISCAL POLICY or government is using the BUDGET to break this cycle
• Example- Aatma Nirbhar Bharat package
• FISCAL Policy- Money that is moving into the government pocket (RECEIPTS) or the money that is moving out of the government pocket (EXPENDITURE)
• In 1930, capitalism failed, and then the US government used Fiscal policy (which is an element of socialism)

• Deflation- fall in prices
• Inflation- Increase in prices
• Disinflation- Fall in inflation rate
• 
• Stagflation- Stagnation + Inflation= People are losing jobs but prices are increasing. It is inflation along with unemployment
• Fiscal policy- It deals with receipts (Incoming money) and expenditures (outgoing money) of the government
• Fiscal stimulus- The government pumping money into the economy through its fiscal policy to revive the economy which is not doing well. Example- Reducing tax rate, Giving subsidies, etc 
• Explanation 
• India adopted principles of Mixed economy. Government control of industries was on the higher side. New entrepreneurs can not enter the market easily in the era of License Raj. 
• Prior to independence, Bureaucracy role- Land revenue + political stability
• After independence, Developmental functions were added to the function of Bureaucracy. 
• Bureaucracy role- To make government policies more effective, Government policies should be more effective. Also, bureaucracy needs to ensure EQUITY
• Effectiveness- The constructed dam is able to achieve the desired outcome is effectiveness. 
• Equity- How much proportion is held by the poor or given to the poor is equity
• India's socialism= PSU led growth+ license raj+ development role of Bureaucracy (Welfare, schemes) + Effectiveness and Equity

The irony of India's socialism 

• India on the other side was facing poverty, starvation, and death and on the other side, we adopted Socialism through a Five-year plan, despite having enough to distribute. 
• But India was not self-sufficient thus India started importing food under the PL-480 scheme of the USA. 
• Immediately in the second five-year plan, our focus shifted toward the heavy industry. 
• In the early 1960s, India witnessed drought and starvation, and people died. But the population was growing at a rate of 2.3% despite the less economic growth. 
• The challenge was to ensure FOOD SECURITY
• In 1965, India came up with FCI, and also came up with the buffer stock concept

Trade 

• Open economy and closed economy 
• India after independence was mostly a closed economy. Now, India is more of an open economy
• A closed economy means No trade. 
• Trade basically deals with Import and export 
• Import= Buying goods from another country 
• Export= Selling goods to another country

• 4 Es of Bureaucracy- Economy, Efficiency, Effectiveness, Equity
• Era of License Raj- India focused on stringent government control in the format of licenses for starting a new industry or increasing the production
• 1st Five-year plan focused on Agriculture
• PL 480 (Public 480) scheme through which India was importing cheap food grains from the USA 
• FCI (Food corporation of India)- It was established in 1965, to ensure food security. It can also be seen as the Institutionalization of PDS (Public distribution system)
• Closed economy- Where there is no trade
• Open economy- Where there is a trade
• Note- We do not have completely open or completely closed economies. India was more of a closed economy after independence and currently, India is more of an open economy.  

The Topic for the next class:- GDP Keyword (Gross domestic product).