EDI Unit 1- Economic Development since Independence

INDIAN ECONOMY AT INDEPENDENCE 

What was the overall state of the Indian economy at the time of Independence?

At independence in 1947 India inherited an underdeveloped, stagnant, and structurally distorted economy for nearly two centuries under British rule. It had been systematically exploited to serve British interests, India was transformed into a subordinate economy, supplying cheap raw materials and consuming British manufactured goods, leaving behind widespread poverty, unemployment, low productivity, and a crippled industrial and agricultural base.

What were the main features of British colonial exploitation in India?

The British used India as a three-fold instrument of their economic expansion.

1. Supplier of raw materials: India was turned into a vast source of agricultural and mineral raw materials such as cotton, jute, indigo, and iron. These were exported cheaply to feed British industries.

2. Captive market for British goods: At the same time, India became a guaranteed market for expensive, machine-made British goods. Heavy import duties were placed on Indian goods, while British imports entered India freely, destroying local industries.

3. Source of wealth drain: The so-called “Drain of Wealth,” highlighted by Dadabhai Naoroji, described how profits, pensions, and administrative costs were regularly transferred to Britain. This continuous outflow of resources left little capital for India’s own development. Even when India had a trade surplus, the earnings were used to pay these external obligations rather than reinvested domestically. This meant that India’s economic surplus was financing British growth, not India’s. The drain severely restricted domestic capital formation, leaving India starved of investment and trapped in poverty.

How did colonial rule affect the agricultural sector?

Agriculture was the backbone of the colonial economy but also the most neglected and exploited sector. Over 70% of India’s population depended on farming, yet its productivity was among the lowest in the world. The British introduced exploitative land tenure systems—the Zamindari, Ryotwari, and Mahalwari systems—which prioritized revenue collection over agricultural development.

In the Zamindari system, landlords acted as intermediaries between the cultivators and the British government, extracting excessive rents without investing in land improvement. The Ryotwari and Mahalwari systems also burdened farmers with heavy taxes, often half of their produce. To make matters worse, farmers were forced to grow cash crops like indigo and cotton instead of food grains, leading to frequent famines and food shortages. Neither the colonial state nor landlords invested in irrigation, technology, or soil improvement, which kept yields stagnant.

By independence, Indian agriculture was trapped in low productivity, indebtedness, and poverty, leaving the country vulnerable to food crises.

What was the impact of Partition (1947) on Indian agriculture and economy?

The Partition of India in 1947 caused major economic dislocation. India lost some of its most fertile and irrigated lands, especially those in West Punjab and East Bengal, which went to Pakistan. These regions were major producers of wheat, rice, and jute. As a result, India faced a shortage of food grains and a raw material crisis for industries like jute manufacturing. This deepened food scarcity and worsened the agrarian situation during the initial years of independence.

How did colonialism affect India’s industrial development?

Before British rule, India was a leading industrial and artisanal power, famous for textiles, handicrafts, and metalwork. The British systematically destroyed these industries through discriminatory trade policies. Indian goods faced high import duties in Britain, while British goods entered India duty-free. The influx of cheap, machine-made products wiped out Indian handicrafts, leading to massive unemployment among artisans.There was almost no capital goods industry.

What was the condition of infrastructure under British rule?

Although the British built railways, ports, and telegraph lines, these were primarily tools of colonial exploitation rather than development. Railways were designed to move raw materials from the interior to ports for export and to distribute imported British goods within India. The “guarantee system” ensured profits for British investors while Indian taxpayers bore the costs.

Infrastructure did little to integrate India’s economy or promote industrial linkages within the country. Roads and communication networks were limited and primarily served administrative and military purposes. Hence, the infrastructure legacy at independence was uneven, externally oriented, and economically unproductive for national development.

What were the demographic and social conditions in 1947?

Literacy was only 16%, with female literacy around 8%.

Life expectancy stood at about 32 years, reflecting poor health, malnutrition, and lack of medical facilities.

The infant mortality rate was extremely high—218 deaths per 1,000 live births.

Poverty was widespread.

Inequalities based on caste, class, and gender.

Public health systems were underdeveloped, with frequent problems like cholera and plague.

Growth and Development

What is the difference between economic growth and economic development?

Economic growth refers to the quantitative increase in a country’s output or income — typically measured by the rise in Gross Domestic Product (GDP) or national income over time. It captures how much more goods and services a country produces, but it is value-neutral — meaning it says nothing about the quality of life, inequality, or environmental sustainability.

In contrast, economic development is a qualitative and multidimensional process. It includes growth but also emphasizes structural changes in society — such as better living standards, equitable income distribution, improved education and health, and expansion of human capabilities. According to development economist Michael Todaro, development involves “major changes in social structures, popular attitudes, and national institutions, as well as the acceleration of economic growth, the reduction of inequality, and the eradication of absolute poverty.”

Thus, while growth is necessary for development, it is not sufficient. A nation can grow economically without true development — for example, if wealth remains concentrated among a few or if growth leads to environmental degradation. Development, therefore, is about people-centered progress, not just the expansion of output.

Why is economic development more comprehensive than economic growth?

Economic development encompasses not just income growth but improvements in social welfare, equality, and human potential. Growth alone can coexist with inequality, unemployment, and social backwardness — development aims to remove these. It considers how the benefits of growth are distributed among different sections of society and whether all individuals experience rising living standards.

For example, an increase in GDP due to heavy industrialization might raise national income but could still leave large rural populations in poverty. Development ensures that growth translates into better health, literacy, employment, and opportunities for all. Therefore, economic development is a transformational process, changing both economic structures and human conditions.

What is the vicious cycle of poverty? How does it affect developing economies like India?

The vicious cycle of poverty, a concept developed by Ragnar Nurkse, explains why poverty tends to perpetuate itself in developing countries. It operates on both supply and demand sides of the economy.

On the supply side, low income leads to low savings, which results in low investment and, consequently, low productivity — keeping income low again. This cycle traps economies in a self-reinforcing loop of underdevelopment.
Supply-side chain: Low Income → Low Savings → Low Investment → Low Productivity → Low Income.

On the demand side, low income means low purchasing power, leading to a small market size. Entrepreneurs thus have little incentive to invest, resulting in low capital formation and low productivity.
Demand-side chain: Low Income → Low Demand → Low Inducement to Invest → Low Productivity → Low Income.

At independence, India was deeply caught in this cycle due to low capital accumulation, high population growth, and lack of industrial infrastructure. Breaking this vicious cycle became the central aim of India’s post-independence development strategy, which relied heavily on state-led investment and planning.

Why is GDP an inadequate measure of economic development?

While GDP per capita is a convenient measure of a country’s income, it has major limitations when used to assess development.

1. Ignores income distribution: GDP is an average and does not show how income is shared. A country could have a high GDP per capita yet suffer from extreme inequality.

2. Excludes non-market activities: Many productive activities, such as unpaid domestic work and subsistence farming, are not included in GDP, though they contribute to welfare — especially in countries like India.

3. Ignores environmental and social costs: GDP growth may occur alongside pollution, deforestation, and resource depletion, which reduce long-term well-being.

4. Exchange rate distortions: Using market exchange rates to compare GDP across countries can be misleading since they don’t reflect real purchasing power.

Hence, GDP alone gives a narrow and incomplete picture. It must be supplemented with broader indicators that capture human welfare, equity, and sustainability.

What are some alternative measures of development?

Physical Quality of Life Index (PQLI): t combined three indicators — literacy rate, infant mortality, and life expectancy at age one. It directly measured social well-being but ignored income distribution.

Human Development Index (HDI): Introduced by the UNDP in 1990. HDI measures three dimensions — a long and healthy life (life expectancy), knowledge (education levels), and a decent standard of living (GNI per capita, adjusted for purchasing power).

Gender Development Index (GDI): It compares HDI values for men and women to reveal gender gaps.

Multidimensional Poverty Index (MPI): Introduced in 2010, it examines deprivations in health (nutrition, child mortality), education (schooling, attendance), and living standards (sanitation, electricity, housing, etc.). A person deprived in over one-third of these indicators is considered multidimensionally poor.

What does the Human Development Index (HDI) signify, and how is it calculated?

The HDI represents an aggregate measure of human progress that combines economic and social dimensions of development. It is calculated as the geometric mean of three normalized indices:

1. Health: measured by life expectancy at birth.

2. Education: measured by mean years of schooling (average education level of adults) and expected years of schooling (for children).

3. Income: measured by GNI per capita, adjusted for purchasing power parity (PPP).

The HDI value ranges from 0 to 1, where higher values indicate better human development. It shifts focus from mere income growth to people-centered progress, emphasizing opportunities and choices available to individuals. This aligns with Amartya Sen’s “capabilities approach,” which defines development as expanding people’s freedoms to live the lives they value.

Different Policy Regimes

Why did India adopt a mixed economy and centralized planning after independence?

At independence, India faced a shattered economy — with widespread poverty, stagnant agriculture, weak industries, and almost no capital goods base. The leadership under Jawaharlal Nehru and other planners believed that leaving economic reconstruction entirely to the private sector (as in capitalism) would widen inequality, while adopting full socialism (as in the Soviet model) would restrict democracy and individual freedom.

Hence, India chose a middle path — the mixed economy. In this system, both the public and private sectors coexisted but with the state playing a dominant, directive role. The public sector was assigned the responsibility for developing the “commanding heights” of the economy — heavy industry, power, transport, and infrastructure — areas requiring massive investment and long gestation periods.

To guide and coordinate this process, India adopted centralized planning. The Planning Commission, set up in 1950, became the key body for framing Five-Year Plans, allocating resources, and setting developmental priorities. This structure reflected the belief that only the state had the capacity and vision to lift India out of its colonial stagnation.

What were the theoretical foundations of India’s development strategy during the planning era?

India’s early development thinking was shaped by several influential economic theories that supported state-led investment to break the cycle of poverty:

1. The Big Push Theory (Rosenstein-Rodan): Suggested that small, isolated investments would not work in poor economies. Instead, a large, coordinated “big push” across multiple industries and infrastructure was needed to create markets, scale, and productivity simultaneously.

2. Balanced Growth Theory (Nurkse and Lewis): Argued that different sectors (agriculture, industry, services) must grow together to ensure balanced demand and avoid bottlenecks. Development should be broad-based rather than limited to one sector.

3. Unbalanced Growth Theory (Hirschman): Proposed the opposite — that deliberate investment in key sectors can create linkages (backward and forward) that stimulate growth in others. This was useful where resources were limited.

4. Critical Minimum Effort Thesis (Leibenstein): Claimed that escaping poverty required a large initial push in investment — small efforts would be neutralized by population growth and other “drag” forces.

What was the main focus and achievement of the First Five-Year Plan (1951–1956)?

The First Five-Year Plan, launched in 1951 and based on the Harrod-Domar growth model, focused primarily on agriculture, irrigation, and power. The immediate challenges were food shortages due to partition, refugee rehabilitation, and inflation control. The plan emphasized increasing food production, building infrastructure (like dams), and stabilizing prices.

Major multi-purpose projects such as the Bhakra-Nangal and Hirakud dams were initiated. Due to favorable monsoons, agricultural output increased significantly. The national income grew at 3.6% per annum, exceeding the 2.1% target.

The plan’s success gave confidence to policymakers to pursue more ambitious goals in subsequent plans. It demonstrated that planned public investment could indeed revive economic activity in a developing nation.

What was the Mahalanobis Model and how did it shape the Second Five-Year Plan (1956–1961)?

The Second Five-Year Plan marked a strategic shift toward rapid industrialization, inspired by the Mahalanobis Model proposed by statistician and planner Prof. P.C. Mahalanobis. The model emphasized building a capital goods sector — industries that produce machinery and equipment — as the foundation for long-term, self-sustaining growth.

The logic was that by investing in industries that produce machines, India could eventually manufacture its own tools and technology rather than depend on imports. The plan prioritized the development of heavy industries, steel plants (like Bhilai, Rourkela, and Durgapur), machine tools, and engineering goods.

While this strategy laid the foundation for India’s industrial base and “socialistic pattern of society,” it also had drawbacks — neglect of agriculture led to food shortages in the 1960s, and heavy industry was capital-intensive, generating few jobs. Nonetheless, it established India’s identity as a self-reliant industrializing nation.

What were the objectives and outcomes of the Third Five-Year Plan (1961–1966)?

The Third Five-Year Plan sought to make India’s economy self-sufficient in both food and industry and was described as the “take-off stage.” It aimed to consolidate industrial progress and strengthen the agricultural base simultaneously.

However, it faced severe disruptions — the Sino-Indian War (1962), the Indo-Pak War (1965), and two consecutive droughts. These crises diverted resources to defense and famine relief. Consequently, the plan failed to meet its growth target of 5.6%, achieving only 2.4% growth.

Its failure forced the government to declare a “Plan Holiday” from 1966 to 1969, during which annual plans replaced five-year planning. Despite its failure, the period laid groundwork for later agricultural reforms such as the Green Revolution.

What was the Green Revolution, and what were its outcomes?

The Green Revolution, initiated in the late 1960s, was a direct response to India’s recurring food crises. It involved the large-scale introduction of High-Yielding Variety (HYV) seeds, chemical fertilizers, pesticides, and improved irrigation. The strategy was first implemented in regions like Punjab, Haryana, and Western Uttar Pradesh.

The revolution dramatically increased wheat and rice production, making India self-sufficient in food grains by the 1970s. However, its benefits were unevenly distributed — richer farmers with better access to credit and irrigation benefited the most, while poorer and rain-fed regions lagged behind.

Thus, while the Green Revolution ended chronic food shortages and reduced dependence on imports, it also deepened regional and income inequalities, marking a dual legacy of success and imbalance.

What was Import Substitution Industrialization (ISI), and why did India adopt it?

Import Substitution Industrialization (ISI) was the core industrial policy of India between the 1950s and 1980s. The idea was to replace imported goods with domestically produced ones to achieve self-reliance and reduce dependence on foreign countries.

To implement this, the government used two main tools:

1. High tariffs and import quotas, making imported goods expensive and scarce.

2. Industrial licensing, which controlled who could produce what, where, and how much.

This approach successfully created a diversified industrial base, producing goods India previously imported. However, it also led to inefficiency, high costs, and poor-quality products because domestic firms were sheltered from competition. Exports were neglected, causing persistent foreign exchange shortages.

What was the License-Permit-Quota Raj

The License-Permit-Quota Raj refers to the elaborate system of bureaucratic controls that governed India’s industrial and trade activities during the planning era. Under this regime, private entrepreneurs needed multiple government approvals — or “licenses” — for almost every decision, including starting new factories, expanding production, or changing product lines.

What were the major achievements and failures of the planning era (1950–1990)?

Achievements:

• Breaking colonial stagnation: India moved from near-zero growth under British rule to an average of 3.5% annually (“Hindu Rate of Growth”).

• Industrial diversification: A strong industrial base, including heavy industries and capital goods, was created.

• Agricultural self-sufficiency: The Green Revolution transformed India from a food-deficit to a food-surplus nation.

• Scientific and technical capacity: Establishment of IITs, research institutions, and a large pool of skilled professionals.

Failures:

• Slow growth and inefficiency: Protectionism and state dominance led to low productivity.

• Neglect of exports: The inward focus caused chronic foreign exchange shortages.

• Persistent poverty and unemployment: Benefits of planning did not reach all sections, and inequality persisted.

• License Raj inefficiencies: Excessive regulation discouraged innovation and entrepreneurship.

Goals and Constraints

What were the main goals of India’s economic development after independence?

At independence, India’s leaders set clear national goals for economic development that reflected both moral and practical priorities. The foremost goals were:

1. Rapid Economic Growth: To raise national income and industrial capacity after centuries of stagnation.

2. Self-Reliance: To reduce dependence on foreign countries by building a strong industrial base and achieving food security. The experience of colonial rule convinced Indian policymakers that political independence without economic independence would be incomplete. During British rule, India had been a supplier of raw materials and a market for British goods — a classic dependent economy.

   Therefore, self-reliance became a cornerstone of post-independence policy. It had two dimensions:

   • Industrial self-reliance: Developing a strong capital goods and heavy industrial sector (through the Mahalanobis strategy) so that India could produce its own machinery and technology rather than import them.

   • External self-reliance: Reducing dependence on foreign aid and imports through import substitution, foreign exchange conservation, and domestic production.

   Achieving self-reliance was not just an economic aim but a symbol of national dignity and sovereignty. It guided India’s emphasis on planning, public sector dominance, and technological development in the first four decades after independence.

3. Social Justice and Equality: To eliminate poverty, reduce inequality, and uplift the marginalized sections of society.

4. Employment Generation: To provide productive work to the rapidly growing population and utilize human resources efficiently.

5. Balanced Regional Development: To reduce economic disparities between urban and rural areas and across states.

How did the goal of poverty alleviation influence India’s policy framework?

Eliminating poverty was one of the most persistent challenges facing independent India. The early Five-Year Plans sought to achieve poverty reduction indirectly through growth and industrialization. However, it soon became clear that growth alone was insufficient.

From the Fourth Plan (1969–74) onwards, the government explicitly adopted “Garibi Hatao” (Remove Poverty) as a central slogan. Special programs were introduced to improve rural employment, land reforms, and credit access. Later plans included Integrated Rural Development Programme (IRDP) and National Rural Employment Programme (NREP).

However, due to population growth, low productivity, and inequality, poverty remained widespread. The persistence of poverty despite planning highlighted India’s structural constraints, such as unequal land ownership, low education, and limited job creation in the formal sector.

What were India’s major economic constraints in the early decades after independence?

India’s post-independence development faced several severe internal and external constraints:

1. Low Capital Formation: The economy suffered from low savings and low investment, trapping it in the vicious cycle of poverty.

2. Technological Backwardness: Outdated methods in agriculture and industry led to low productivity.

3. Population Growth: Rapid population growth outpaced income growth, diluting the benefits of development. Population growth was one of the biggest obstacles to India’s developmental progress. At independence, India’s population was about 340 million; by 1991, it had more than doubled. This rapid increase in population meant that economic growth had to run just to stay in place.

   Higher population growth led to increased dependency ratios — a smaller proportion of the population was working, while more were dependents. It also reduced per capita income growth, worsened unemployment, and increased pressure on food, housing, and health services.

   While India did launch family planning initiatives as early as the 1950s, social conservatism, illiteracy, and lack of awareness limited their effectiveness. Population growth therefore acted as a brake on development, absorbing much of the gains from economic expansion.

4. Balance of Payments Pressure: Dependence on imports for machinery and oil caused recurrent foreign exchange crises. India’s public sector–led development strategy required massive investment in infrastructure and industry. However, the domestic savings rate was low, so much of the investment was financed by deficit spending and external borrowing. Over time, this led to rising fiscal deficits and external debt.

   By the 1980s, government expenditure far exceeded revenue, while imports of oil and capital goods increased faster than exports. The result was a growing Balance of Payments (BoP) deficit and depletion of foreign exchange reserves.

   By 1991, India’s reserves were enough for barely two weeks of imports, forcing the government to pledge its gold reserves and seek IMF assistance. The BoP crisis exposed the unsustainability of the old model and became the immediate trigger for the New Economic Policy.

5. Administrative and Institutional Weakness: Bureaucratic inefficiency, corruption, and overregulation (License Raj) hampered efficiency.

6. Political and Social Constraints: Frequent political instability and social inequality limited effective implementation of reforms.

What was the 1991 Balance of Payments (BoP) crisis and what caused it?

The 1991 BoP crisis was one of the most severe economic emergencies in India’s history. It occurred when the country ran out of sufficient foreign currency to pay for imports or service its foreign debt.

Causes of the crisis:

• Unsustainable borrowing: The 1980s saw high growth financed through internal and external borrowing.

• High fiscal deficit: The government’s expenditure exceeded revenue by over 8% of GDP.

• External shocks: The Gulf War (1990–91) caused oil prices to soar and remittances to fall.

• Political instability: Frequent changes in government reduced investor confidence.

What was the New Economic Policy (NEP) of 1991 and what were its main components?

In response to the 1991 crisis, India introduced the New Economic Policy (NEP) under Prime Minister P.V. Narasimha Rao and Finance Minister Dr. Manmohan Singh. The NEP marked a paradigm shift from a state-controlled to a market-oriented economy. It was built around three pillars:

1. Liberalization: Dismantling of government controls and regulations — notably the abolition of the License Raj. Industrial licensing was ended for most sectors, financial markets were deregulated, and trade barriers were reduced.

2. Privatization: Reducing the role of the public sector by selling government shares in Public Sector Undertakings (PSUs) — known as disinvestment — to increase efficiency and competition.

3. Globalization: Integrating India with the global economy by encouraging Foreign Direct Investment (FDI), reducing import tariffs, and making the rupee convertible for current account transactions.

Institutions and Policy Framework

Why are institutions important for economic development and What types of institutions support development in India?

Institutions are the “rules of the game” in an economy — the formal and informal structures that govern human, business, and state interactions. They create a stable and predictable environment for economic activity by defining property rights, enforcing contracts, regulating markets, and ensuring social stability.

India’s institutional framework for development is vast and diverse, encompassing several types of organizations:

1. Property and Legal Institutions: These include the judiciary, contract laws, and systems ensuring property rights — essential for investment and entrepreneurship.

2. Regulatory Institutions: Bodies like the Competition Commission of India (CCI) and Securities and Exchange Board of India (SEBI) prevent monopolies and ensure fair markets.

3. Financial and Monetary Institutions: The Reserve Bank of India (RBI) manages money supply and credit; other institutions regulate banks, insurance, and capital markets.

4. Fiscal Institutions: These include the Ministry of Finance, Comptroller and Auditor General (CAG), and tax authorities that mobilize and allocate resources.

5. Social and Welfare Institutions: Organizations that deliver education, healthcare, and social protection to enhance human capital.

What was the Planning Commission and what role did it play in India’s development?

The Planning Commission, established in 1950, was the central institution of India’s development strategy in the post-independence era. It was created under the leadership of Prime Minister Jawaharlal Nehru to design and implement the country’s Five-Year Plans.

Its main functions included:

• Assessing resources and setting national priorities.

• Allocating funds among sectors and states.

• Framing policies for balanced growth and poverty reduction.

The Commission functioned on the principle of centralized planning, directing resources from the top to achieve national goals like self-reliance and equity. While it was successful in laying the foundation for industrialization and infrastructure, it was often criticized for being bureaucratic and inflexible, especially as India’s economy diversified.

By the 1990s, with the shift to a market-oriented system, its role became less relevant — eventually leading to its replacement by NITI Aayog in 2015.

The replacement of the Planning Commission by NITI Aayog (National Institution for Transforming India) reflected the changing nature of India’s economy and governance. By 2015, India had moved from a centrally planned, state-controlled economy to a market-oriented and globally integrated one.

The Planning Commission’s top-down approach — in which it formulated Five-Year Plans and allocated funds — was no longer suitable in an economy driven by private investment, competition, and state-level initiatives. NITI Aayog was designed to promote cooperative federalism, where states participate as equal partners in development planning rather than as recipients of central directives.

Unlike the Commission, NITI Aayog does not allocate funds; instead, it acts as a policy think tank, offering strategic advice, performance monitoring, and innovation support. This marks a shift from imperative planning (command-based) to indicative planning (guidance-based), aligning with India’s new economic realities.

What are the key differences between the Planning Commission and NITI Aayog?

Feature	Planning Commission (1950–2014)	NITI Aayog (2015–present)
Nature	Centralized planning body	Policy think tank
Approach	Top-down, command planning	Bottom-up, cooperative federalism
Power	Allocated funds to states and ministries	Advisory role, no fund allocation
Role of States	Passive recipients	Active partners in policy formulation
Focus	Resource distribution and Five-Year Plans	Long-term strategy, innovation, and monitoring
Economic Model	State-controlled, socialist orientation	Market-oriented, participatory governance

How does fiscal policy serve as a tool for economic development in India?

Fiscal policy refers to the use of government taxation, expenditure, and borrowing to influence the economy. In India, fiscal policy has played a vital role in promoting both growth and social justice.

1. Mobilizing Resources: By collecting taxes and non-tax revenue, the government funds public investment in infrastructure, education, and health — sectors crucial for development.

2. Redistributing Income: Progressive taxation and social spending help reduce inequality.

3. Encouraging Investment: Fiscal incentives (like tax breaks) stimulate private sector growth.

4. Stabilizing the Economy: Government spending is used to counter cyclical fluctuations, boost employment, and control inflation.

What is deficit financing, and how has India used it for development?

Deficit financing means covering a government’s budget deficit by borrowing from the central bank — effectively printing new money. In developing countries like India, where capital formation is low, deficit financing has been used to fund public investment in industries and infrastructure.

In the early decades after independence, it helped kickstart economic activity by financing major projects and public enterprises. However, when used excessively, it led to inflationary pressures, reducing the real value of savings and hurting low-income groups.

What is monetary policy, and what role does it play in development?

Monetary policy refers to actions taken by the Reserve Bank of India (RBI) to control the money supply, interest rates, and availability of credit. Its goals are to maintain price stability, ensure economic growth, and promote financial stability.

Key instruments include:

• Bank Rate: The rate at which the RBI lends to commercial banks.

• Cash Reserve Ratio (CRR): The portion of deposits banks must keep with the RBI.

• Statutory Liquidity Ratio (SLR): Minimum percentage of deposits banks must hold in government securities.

• Open Market Operations (OMO): Buying and selling government securities to regulate liquidity.

Monetary policy contributes to development by ensuring adequate credit flow to productive sectors like agriculture, industry, and infrastructure, while keeping inflation under control. It also helps manage the Balance of Payments and supports inclusive growth through targeted credit schemes.

What are some of the key regulatory and policy institutions shaping India’s economy today?

Several institutions govern and support India’s market-oriented development model:

• RBI: Regulates the monetary system and ensures financial stability.

• SEBI (Securities and Exchange Board of India): Regulates stock markets and protects investors.

• Competition Commission of India (CCI): Prevents monopolies and promotes fair competition.

• FEMA (Foreign Exchange Management Act): Manages foreign exchange transactions and external sector stability.

• Ministry of Corporate Affairs: Oversees company regulation and corporate governance.