MINOR COURSE: MN 1B

INDIAN ECONOMY

UNIT 1: INDIAN ECONOMY AND ITS PROBLEMS

Nature of the Indian Economy- India as a Developing Economy

According to the U.N. Classification the 'underdeveloped countries' is taken in relative term.
In general, those countries which have real per capita incomes less than a quarter of the per
capita income of the United States are underdeveloped countries. More recently, instead of
referring to these economies as underdeveloped, the UN publications prefer to describe them
as 'developing economies'. The term 'developing economies' signifies that though still
underdeveloped, the process of development has been initiated in these countries.

Countries are divided into:

(i) Low income countries with 2011 GNI per capita of $ 936 and below; and
(ii) Middle income countries with GNI per capita ranging between $ 936 and $
11,455.
(iii) High incomes Countries which are mostly members of the Organisation for
Economic Co-operation and Development (OECD) and some others have GNI per
capita of $ 11,456 or more.

 Two sub-categories of middle income countries are

- Lower middle income with per capita income in the range of $ 936 to $ 3,705
and
- Upper middle income countries with per capita income $ 3,706 to $ 11,455.

In 2014 low income countries comprise 8.6 per cent of the world population (622 million),
but account for only 0.5 per cent of total world GNI.

The middle income countries, which are less developed than the highly developed countries,
but comparatively speaking, more developed than the low income countries comprise 72.2
per cent of world population but account for 31.2 per cent of world GNI. Taking these two
groups which are popularly described as developing economies, it may be stated that they
comprise about 80.8 per cent of the world population but account for about 31.7 per cent of
the world GNI. Most countries of Asia, Africa, Latin America and some countries of Europe
are included in them.

BASIC CHARACTERISTICS OF THE INDIAN ECONOMY AS A DEVELOPING

ECONOMY

India is a low income developing economy. There is no doubt that nearly one-fourth of its
population lives in conditions of misery. Poverty is not only acute but is also a chronic
malady in India. At the same time, there exist unutilised natural resources. It is, therefore,
quite important to understand the basic characteristics of the Indian economy, treating it as
one of the poor but developing economies of the world.

(1) Low Per Capita Income. Developing economies are marked by the existence of low per
capita income. The per capita income of an Indian in 2014 was $ 1570. Barring a few
countries, the per capita income of the Indian people is the lowest in the world. During 1960-
80, developed economies grew at a faster rate than the Indian economy, but during 1990-
2014, Indian economy has grown at a faster rate than the developed economies. Even then the
difference in per capita income between India and the developed economies is quite large. It
may be noted that in 2014 the average per capita GNI of USA at official exchange rates was
35 times that of India, while at the purchasing power parity rates, it was 10 times only. In
other words, per capita income at official exchange rates exaggerated the disparities, while
the purchasing power parity figures corrected the position. Even after this adjustment, though
the per capita income differences got narrowed down, still the difference between the level of
living of an average American and an Indian was quite large and significant.

(2) Occupational Pattern: Primary Producing- One of the basic characteristics of an

underdeveloped economy is that it is primary producing. A very high proportion of working
population is engaged in agriculture, which contributes a very large share in the national
income. In India, in 2014, about 47 per cent of the working population was engaged in
agriculture and its contribution to national income was 17 per cent, according to data
published by World Bank. In Asia, Africa and Middle East countries from two-thirds to more
than four-fifths of the population earn their livelihood from agriculture, and in most Latin
American countries from two-thirds to three-fourths of population are dependent on
agriculture. From Table 4 it is evident that the proportion of population engaged in
agriculture in developed countries is much less than the proportion of population engaged in
agriculture in underdeveloped countries From the point of view of occupational pattern, the
Indian economy is primary producing because agriculture contributes 17 per cent of national
income while 47 per cent of the labour force is engaged in agriculture. Yet one cannot easily
escape the conclusion that agriculture continues to be a depressed industry as the productivity
per person engaged in it is very low.

(3) Heavy Population Pressure. The main problem in India is the high level of birth rates
coupled with a falling level of death rates. The rate of growth of population which was about
1.31 per cent per annum during 1941-50 has risen to 1.93 per cent during 1991-2001. The
annual average rate of growth of population during 2001-11 has further declined to 1.64
percent. The chief cause of this rapid spurt to population growth is the steep fall in death rate
from 49 per thousand during 1911-20 to 7.4 per thousand in 2008 as compared to this, the
birth rate has declined from about 49 per thousand during 1911-20 to 22.1 per thousand in
2010. The fast rate of growth of population necessitates a higher rate of economic growth in
order to maintain the same standard of living of the population. To maintain a rapidly
growing population, the requirements of food, clothing, shelter, medicine, schooling, etc. all
rise. Thus, a rising population imposes greater economic burdens and, consequently, society
has to make a much greater effort to initiate the process of growth. Moreover, a rising
population leads to an increase in the labour force. According to the Tenth Plan, between
2002 and 2007 alone, labour force is expected to increase by about 35 million i.e., at an
annual average rate of 1.8 per cent. This rapid growth of labour force creates a higher supply
of labour than its demand leading to unemployment.

(4) Prevalence of Chronic Unemployment and Underemployment. In India labour is an

abundant factor and, consequently, it is very difficult to provide gainful employment to the
entire working population. In developed countries, unemployment is of a cyclical nature and
occurs due to lack of effective demand. In India unemployment is structural and is the result
of a deficiency of capital. The Indian economy does not find sufficient capital to expand its
industries to such an extent that the entire labour force is absorbed. Moreover, in the
agricultural sector of the Indian economy, a much larger number of labourers are engaged in
production than are really needed. Accordingly, the marginal product of labour in agriculture
is often negligible; it may be zero or may even be negative. Thus, there exists 'disguised' or
'concealed' unemployment in agriculture. Even if the surplus population is siphoned off, the
total output from agriculture will not fall because those persons who were working below
capacity, begin to be utilised to the full. Disguised unemployment in rural areas is the result
of heavy pressure of population on land and the absence of alternative employment
opportunities in our villages. Though there is no doubt that unemployment exists in a greater
degree in the urban areas, the rural areas to suffer from the problem of unemployment and
underemployment. On this point the Third Five-Year Plan stated: "In the rural areas both
unemployment and underemployment exist side by side; the distinction between them is by
no means sharp. In the villages unemployment ordinarily takes the form of
underemployment. Urban and rural unemployment in fact constitute an indivisible problem."
The Planning Commission on the basis of the NSS data has estimated that during 2004-05,
the rate of unemployment has risen to 8.36% as against 7.32% in 1999-00. The Eleventh Plan
(2007-12) will have a backlog of 37 million unemployed. The revised estimates of the
Planning Commission reveal that 45 million are likely to be the new entrants to the labour
force during the Eleventh Plan. Thus, the total job requirements of the 11th Plan workout to
be 82 million (37 million backlog plus 45 million new entrants) Thus, the provision of
employment to those suffering from open unemployment and under-employment becomes a
major task of the planning process in India.

(5) Steadily Improving Rate of Capital Formation. During the fifties and the sixties of the
20th century, basic characteristic of the Indian economy was the existence of capital
deficiency which is reflected in two ways—firstly, the amount of capital per head available
was low; and secondly, the rate of capital formation was also low. An important indicator of
low capital per head available in underdeveloped countries is the consumption of energy.
Figures given in Table 5 clearly indicate that per capita consumption of energy in India is
extremely low as compared to the advanced countries Table 6 reveals that rate of gross
capital formation in India is higher than that of developed countries. Professor Colin Clark
has estimated that in order to maintain the same level of living a country requires an
additional investment of 4 per cent per annum, if its population increases at the rate of 1 per
cent per annum. In a country like India where the rate of population growth is 1.6 per cent
(during 2000-05), about 6.4 per cent investment is needed to offset the additional burdens
imposed by a rising population. Thus, India requires as high as 14 per cent level of gross
capital formation so that she may cover depreciation and maintain the same level of living. A
higher rate of gross capital formation alone can pave the way for economic growth to
improve living standard of the population. It is gratifying to note that India had reached a
saving rate of 22 per cent in 2003 which is sufficiently high. More recently, Gross Domestic
Saving in 2014 has reached a high level of 29.0 per cent and Gross capital formation was
high at 31.4 per cent. This is a welcome development.

(6) Mal-distribution of Wealth/Assets - RBI Survey of assets of rural and urban households
for the period July 1991 to June 1992 brings out the existence of sharp inequalities in asset
distribution. In rural areas 27 per cent of households owning less than 20,000 worth of assets
accounted for 2.4 per cent of total assets. Similarly, about 24 per cent of households in the
asset range of ` 20,000 - 50,000 owned barely 7.5 per cent of total assets. This implies that
nearly 51 per cent of the bottom households owned just 10 per cent of the total assets. As
against it, 9.6 per cent of the rich households owning assets worth 2.5 lakh and above
accounted for nearly 49 per cent of total assets. However, the situation in urban areas was
much worse. 50.7 per cent of the urban households owning less than ` 50,000 worth of assets
accounted for barely 5.3 per cent of total assets. As against them, nearly 66 per cent of the
total assets of all urban households were held by 14.2 per cent of the households, each
owning ` 2.5 lakh of above. This implies that urban households indicated much worse asset
distribution than rural households. Inequality in asset distribution is the principal cause of
unequal distribution of income in the rural areas. It also signifies that the resource base of 50
per cent of the households is so weak that it can hardly provide them anything above the
subsistence level of income. This finding of the Reserve Bank is also supported by the
National Sample Survey which reveals that 60 per cent of the poor rural households owned
only 9.3 per cent of area operated, they had only 14 per cent of cattle heads and just 10 per
cent of wooden ploughs.

(7) Poor Quality of Human Capital. A glaring feature of an underdeveloped economy is the
poor quality of human capital. Most of the underdeveloped countries suffer from mass
illiteracy. Illiteracy retards growth. A minimum level of education is necessary to acquire
skills as also to comprehend social problems. Rural areas where illiteracy is a rule are the
back-waters of civilization and the centres of superstition, social taboos and conservatism.
Fatalism and acceptance of misery as a part of life and belief in a pre-destined order are all
accompanied by mass illiteracy. But if we enlarge the definition of capital formation to
include the use of any resource that enhances productive capacity, then besides physical
capital the knowledge and training of the population will also form a part of capital. As a
result, the expenditure on education, skill formation, research and improvements in health are
included in human capital. The Indian public expenditure on primary to higher education and
research and development in 2002–04 was a 3.3 per cent of GDP. The corresponding figure
for the USA was 5.9 per cent of GDP. Public expenditure on health in India was miserably
low at 1.1% of GDP in 2007. Under the United Nations Development Programme (UNDP),
countries have been ranked on the basis of Human Development Index (HDI). This index is
based on life expectancy, adult literacy, combined enrolment ratio – first, second and third
level and real GDP per capita (Purchasing Power Parity basis) in US Dollars. It is very
distressing to note that India has been ranked at No. 136 on the basis of HDI in 2012 while
China stands at No. 101. Obviously, India has still to go a long way before it reaches the
levels of developed countries in terms of human development index.

(8) Prevalence of Low Level of Technology. In a developing economy like India, the most
modern technique exists side by side with the most primitive in the same industry, but there is
no gain saying the fact that the majority of the productive units and a major part of the output
is produced with the help of techniques which can be described as inferior judged by modern
scientific standards. The sharp differences in productivity between developed and
underdeveloped nations can be traced to a considerable degree to the application of superior
techniques by the former. Since new techniques are expensive and require a considerable
degree of skill for their application in production, the twin requirements for the absorption of
new technology are the availability of capital and training of an adequate number of
personnel. It is necessary to have a basic minimum level of education among the actual
producers in order that the economy can absorb new technology. Deficiency of capital
hinders the process of scrapping off the old techniques and the installation of the up-to-date
and modern techniques. Illiteracy and the absence of a skilled labour force are the other major
hurdles in the spread of technology in the economy. The Indian economy suffers from this
basic weakness. The low productivity per hectare in Indian agriculture and the low level of
productivity per worker in agriculture and industry are largely a consequence of technological
backwardness. In India, the vast majority of farmers are too poor to buy even the essential
inputs, such as improved seeds, fertilisers and insecticides, not to speak of affording the more
expensive producers' goods like harvesters, tractors, sowing machines, etc. In manufacture
also, the vast majority of the enterprises in India are run either on an individual or on a
partnership basis; and it is beyond the means of small enterprises to employ modern and more
productive techniques. However, with the liberalisation of the economy, new technology is
being adopted by a large number of enterprises for their survival.

(9) Low Level of Living of the Average Indian. Failure to secure a balanced diet manifests in
India in the low calorie intake and low level of consumption of protein. In 1999 the average
calorie intake of food is only 2,496 as compared to over 3,400 calories per day in most of the
developed countries. This is, slightly above the minimum intake for sustaining life estimated
at 2,100 calories. Since nearly 28 per cent of the population in India lived below the poverty
line in 2004-05, it is very doubtful whether the poor get a minimum intake of even 2,100
calories. Another factor that has an important bearing on the health of the people is that in
India cereals predominate, but in contrast the diet in the advanced countries is rich in content
because it includes fruits, fish, meat, butter and sugar. The protein intake is nearly less than
half of the level prevalent in advanced countries. According to World Development
Indicators, 46 per cent of the child population in India suffers from malnutrition. The average
protein content of the Indian diet is only 59 grams per day as against more than double the
level in developed countries. The per capita availability of milk which was 48 kgs in 1960
has gone up to 83 kgs in 2003-04, though it is still much lower than that in developed
countries per annum. Nearly 60 per cent of the mothers are malnourished. According to the
census of 2001, only 36 per cent of the households had access to safe drinking water,
implying tap water. This results in developing less strength to fight diseases and is also partly
responsible for the low level of efficiency of the Indian workers. The picture regarding
housing is equally bleak. According to the Census of India (2001), only about 52 per cent of
the households were living in permanent houses, about 30 per cent were living in semi-
permanent houses and 18 per cent were living in temporary houses. The condition in the rural
areas was much worse where only 41 per cent of the population lived in permanent houses
and 59 per cent lived in semi-permanent or temporary houses. Comparatively, the situation in
urban areas was much better where 79 per cent households resided in permanent houses, 15
per cent in semi permanent and only 5 per cent in temporary houses It is implies that 92
million houses need upgradation—81million in the rural areas and 11million in the urban
areas. The Working Group on Housing for the Tenth Plan has observed that around 90 per
cent of the housing shortage pertains to weaker sections. The Government should therefore,
come in a big way to make a programme for housing for the weaker sections. 34.8 million
households occupying temporary houses almost entirely belong to the weaker sections of the
society who require urgent attention by the Government. The Working Group of the Tenth
Plan on Housing has estimated a shortage of 22.44 million houses during the Tenth Plan
period, out of which 8.89 million is the shortage of urban housing and 13.55 million of rural
housing. This appears to be an under-estimate if we consider 34.8 million temporary houses,
especially 12.7 million temporary unserviceable houses to be built a fresh. Another very
revealing feature of the Census (2001) is that 34.5 per cent of household did not own any of
the specified assets, i.e., radio, transistor, television, telephone, bicycle, scooter, motor cycle
or moped.

(10) Demographic Characteristics of an Underdeveloped Country. Among the demographic

characteristics associated with underdevelopment is high density of population. Besides this,
the average expectation of life is low and infant mortality rates are high. It would be proper to
examine these characteristics. The density of population in India in 2006 was 373 per sq. km.
As compared with this the average density of population in the world is 50 per sq. km. in
2005. However, in U.S.A., the density of population is 33, in Canada and Australia; it is
barely 3-4 per sq. km. Even in China, density is 141 per sq. km. Obviously, a higher density
imposes greater burdens on land and other natural resources. According to 2001 census, 33.5
per cent of the total population is in the age group 0-14, 61.5 per cent is in the working age
group, i.e., 15-64 and only 5.0 per cent in the age group 65 and above. In other words, the
proportion of children is higher in India than in the advanced countries. Obviously, this
situation increases the dependency load, because the proportion and size of the non-
productive population is higher. Such a situation persists during a period of high population
growth rate but will alter in favour of productive population as the rate of population growth
slows down. The existence of a greater proportion of the population in the lower age group
acts against production, but favours a higher level of consumption. The higher dependency
load of the population is a typical characteristic of underdevelopment. However,
demographic change is taking place in India. The percentage of children (Below 15 years)
which was 35.5% of in 2001 has declined to 32.1% in 2006 and is likely to decline further to
23.3% by 2026. Consequently, the population in the working age group (15 to 64 years) is
expected to increase from about 63% in 2006 to 68.4% by 2026. Demographers expect a
decline in the dependency load of the population. As a consequence of the likely increase in
the working age group, India will experience a demographic dividend during the next three
decade. The major problem for India is to harness the growing working age population in
emerging areas of the economy, both in industry and services. This will require the
development of new skills among the youth to enable them to take part in occupations
requiring better skills and training. This referred to as the challenge of demographic dividend
facing the Indian economy.

(11) The Socioeconomic Indicators of Consumption are Characteristic of Underdeveloped

Economy in India. Underdevelopment also finds expression through several socioeconomic
indicators, such as per capita intake of calories, fats and proteins, population per TV set and
physician. In Table 10, figures for a few selected countries indicate that India is far behind
the developed countries so far as these indicators of standard of living are concerned.
Illiteracy rate is also very high in India—35% in 2001, as against less than 5 per cent in
developed countries As a developing economy, during the last over five decades of
development, India has been able to improve its GDP growth rate which was only 3.5 per
cent during 1950-51 to 1970-71 to a level of nearly 7 per cent during 2000-01 to 2004-05. It
has been able to reduce poverty from a level of about 54 per cent in 1960-61 to a level of
26per [Link] to improve literacy from a level of 17 per cent in 1951 to
about 65 per cent in [Link] has been able to raise the rate of capital formation from about 10
per cent of GDP in 1960-61 to 30 per cent in 2004-05. Its life expectancy has improved from
32 years in 1951 to 63.3 years in 2003. However, there are glaring failures on many fronts.
According to Human Development Report (2005), India ranks at No. 127 in the world. Its
record in terms of removing malnutrition is poor, as 46 per cent of the child population
suffers from it. According to 2001 census, only 52 per cent of the population has permanent
houses and only 36 per cent population has access to safe drinking water. Although poverty
has been reduced to a level of 26 per cent, but still 260 million persons are still poor and the
burden of poverty is quite massive. The rate of unemployment at a level of 9.2 per cent in
2001-02 is very high. To sum up, Indian economy has made commendable progress on many
fronts, but it has miles to go to remove poverty, malnutrition and providing shelter and
drinking water to its entire population.