(a) What is the sectoral composition of India's national income? Mention the most important source of national income in India…

(a) Sectoral composition of national income

India's national income is best read through gross value added (GVA), which excludes net indirect taxes, whereas GDP adds them; both show a services-led economy. On a GVA basis, agriculture and allied activities—farming, forestry and fishing—contribute a declining share of about 17–18%, industry, including manufacturing and construction, about 25–28%, and services, the largest sector, about 54–55%. In GDP terms, agriculture is somewhat lower, around 15–16%, because of taxes on goods and services. The most important source of national income is therefore the services sector, especially IT-BPM, financial services, trade and logistics, professional and business services, and transport. This matches the Fisher-Clark and Kuznets pattern of labour and value added moving from primary to secondary and then tertiary activities as income rises. Yet India shows a structural transformation paradox: services have a high income share but low employment elasticity, while agriculture still absorbs a large share of labour. Manufacturing has not expanded enough to provide mass employment, so the economy is income-rich in services but employment-weak in the sectors that could absorb surplus rural labour.

(b) Convertibility of the rupee

Full rupee convertibility means removing restrictions on both current and capital account transactions; India already has current-account convertibility for legitimate current transactions, but the capital account remains selective. Its advantages are efficient cross-border capital allocation, lower transaction costs, deeper integration with global markets, and reduced black-market premia. It can also improve credibility and lower borrowing costs by reducing risk premia. The disadvantages are greater exchange-rate volatility, vulnerability to speculative attacks and sudden stops, and possible pressure on monetary policy. The impossible-trinity argument must be stated carefully: loss of monetary autonomy is strongest under a fixed or heavily pegged rate; under a managed float, some autonomy remains, though capital flows can still constrain policy, especially when domestic rates differ sharply from global rates. Feasibility of capital account convertibility should be judged against the Tarapore Committee I (1997) and II (2006) preconditions: fiscal consolidation, a mandated inflation rate averaging 3–5% over 1997-2000, lower NPAs (Tarapore I set a signpost of cutting public sector banks' gross NPAs from 13.7% to 5% by 2000), and adequate forex reserves. India has made progress on fiscal deficits, reserves and financial stability, but banking asset quality, external vulnerabilities and domestic rate differentials remain. Hence full convertibility is not yet appropriate; a calibrated approach—FPI and FDI access, ECB relaxations with safeguards, and selective liberalisation—is more feasible.

(c) RBI's exchange-rate management

The RBI manages the rupee under a managed float, intervening to curb excessive volatility rather than to target a specific level. This reflects a move from more active management of the level to volatility management. It builds forex reserves as a precautionary buffer and treats financial stability as the overriding objective, while allowing market forces to determine the rate. Recent changes reflect greater flexibility after the 2013 taper tantrum, when the rupee was allowed to adjust more freely and the RBI focused on volatility rather than defending a level. The adoption of the inflation-targeting framework in 2016 anchored expectations and helped separate exchange-rate management from price stability. India's inclusion in global bond indices (JP Morgan from June 2024, followed by Bloomberg and FTSE in 2025) increased foreign portfolio flows and made the rupee more sensitive to global liquidity. At the same time, the RBI has supported rupee internationalisation through trade settlement, currency swaps and deeper market development, while retaining controls to manage volatility. Since late 2024 the RBI has allowed greater two-way flexibility, letting the rupee weaken beyond ₹88 per US dollar in 2025, and has used its forward book and foreign-exchange buy/sell swaps both to smooth volatility and to manage rupee liquidity.