INDIANECONOMY— ITS DEVELOPMENT EXPERIENCE

INDIANECONOMY— ITS DEVELOPMENT EXPERIENCE

V.K. Puri S.K. Misra (Late)Shyam Lal College, Hindu College,University of Delhi, University of Delhi,

Delhi. Delhi.

MUMBAI NEW DELHI NAGPUR BENGALURU HYDERABAD CHENNAI PUNE LUCKNOW AHMEDABAD ERNAKULAM BHUBANESWAR INDORE KOLKATA GUWAHATI

Thirty Third Revised & Updated Edition : 2015

First Edition : 1983Thirty Third Revised and Updated Edition : 2015

© V.K. Puri

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The CSO has recently released a new series of national accounts with base year 2011-12. This series presents aconsiderably improved performance of the economy during the years 2012-13 and 2013-14 vis-a-vis the earlier serieswith base year 2004-05. However, many economists have criticised the methodology adopted by the CSO in arrivingat the new estimates while some others have argued that the overall macroeconomic overview of the economy duringthese years does not justify the optimistic results arrived at by the CSO. In any case, the new series gives data for onlythree years and thus cannot be used for a comparative long-run study over a period of time. Till such series becomesavailable, one has no option but to continue to use the series with base year 2004-05. This is what we do in the presentedition although results based on the new series are also presented at relevant places.

As in the case of the earlier editions, in this edition also we critically analyse the performance of the Indianeconomy over the years, discuss the problems confronting the different sectors, and carry out a threadbare evaluationof the different programmes being undertaken by the government in considerable detail. We also examine the challengesand opportunities facing the Indian economy in the new emerging global environment. The organisation, structure andcontents of the present edition are as follows:

Part I of the book ‘Economic Development: A Theoretical Background’ is divided into three chapters. It discussesthe concepts of economic growth and development, common characteristics of underdeveloped countries, the role ofeconomic and non-economic factors in economic development, the concept of human development, human developmentindex, gender inequality index, multidimensional poverty index, etc., and issues concerning the relationship betweenenvironment and development.

Part II discusses the ‘Structure of the Indian Economy’ and consists of thirteen chapters. It is devoted to thediscussion of various issues relating to the nature of the Indian economy including the natural resources and ecologicalissues, infrastructural development, population problem, poverty and unemployment, income growth and inequalities,etc.

Part III of the book ‘Basic Issues in Agriculture’ consists of nine chapters. It starts with a discussion of the role,nature and cropping pattern of Indian agriculture and then takes up for discussion the issues in Indian agriculturalpolicy (including a review of the new global opportunities and challenges facing Indian agriculture in the wake of thevarious agreements concluded under WTO). We then proceed to a discussion of agricultural production and productivitytrends, progress and failures in the field of land reform, green revolution and its impact on the rural economy of thecountry, agricultural finance and marketing, agricultural prices and agricultural price policy, the food security systemin India, and agricultural labour.

Part IV on ‘The Industrial Sector and Services in Indian Economy’ consists of ten chapters. It starts with adiscussion of industrial development during the period of planning and then proceeds to discuss some major industriesof India. This is followed by a discussion of small-scale industries, industrial policy, role and performance of publicsector enterprises, the issue of privatisation in public sector enterprises, role of private sector in the Indian economy,CSR (corporate social responsibility), the problem of industrial sickness, and various issues relating to industriallabour (including exit policy). The last chapter in this part (Chapter 35) discusses the growth of the services sectorand related issues.

Part V of the book concerns ‘Foreign Trade and Foreign Capital.’ Consisting of eight chapters, it starts with adiscussion of the changes in the composition and direction of India’s foreign trade, and then proceeds to a discussion

PREFACE TO THE THIRTY THIRD EDITION

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of India’s balance of payments, trade policy, policy relating to foreign capital, exchange rate and capital accountconvertibility, MNCs (including a discussion on FERA and FEMA), etc. The last two chapters of this part discuss indetail the opportunities and challenges that the Indian economy faces in the new global environment. We criticallyexamine the overall working of the WTO and also take up for discussion India’s new product patent regime.

Part VI on ‘Money and Banking’ consists of six chapters. It starts with a discussion of the problem of inflation inIndia and then takes up the discussion of Indian money market, expansion and progress of commercial banking inIndia, Reserve Bank of India and a critical appraisal of its monetary policy, development of capital market in India andsteps taken to strengthen this market in recent years (including steps taken by SEBI) and institutional financing.

Part VII on ‘Public Finance’ contains five chapters. In this part, we start with a discussion of the Indian taxstructure. This is followed by a discussion of public expenditure and public debt in India. The chapter on ‘India’sFiscal Policy’ in addition to discussing the various aspects of fiscal policy as is being implemented in India, examinesthe issue of fiscal responsibility in detail. The last chapter of this part focuses on the issues related to federal financein India. It also discusses the report of the Fourteenth Finance Commission in detail.

Part VIII which is the last part of the book is on ‘Economic Planning and Policy.’ It contains nine chapters.Starting from a discussion of the rationale, features and objectives of planning, we proceed to discuss the strategy ofdevelopment as envisaged in the various five year plans. This is followed by a discussion of the financing pattern ofIndia’s five year plans, sectoral allocation of resources, regional planning in India, the problem of black money, andassessment of planning in India (including a detailed discussion of the post-economic reform period). The last chapterof the book (Chapter 63) considers the Twelfth Five Year Plan in detail.

We take this opportunity to thank the large body of students, candidates appearing in different competitiveexaminations, researchers and teachers in various universities and colleges spread all over the country for continuouslypatronising our book all through these years and making it a standard textbook in its field. We are overwhelmed by thetremendous response to our efforts which has been an incentive for us to work hard to constantly revise and updateour analysis and incorporate all new issues on Indian Economy in all their dimensions over the years. We also thankDr. Divya Misra of Lady Shri Ram College, Delhi University, and Mrs. Kiran Puri for their help and support in preparingthis edition. We also place on record our deep sense of gratitude to our publishers M/s. Himalaya Publishing House fortheir wholehearted cooperation all through the process of production of this new edition.

V.K. Puri

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The present book discusses the development issues facing the Indian economy. It is the experience of the authorsthat the traditional textbooks carry ample description and heaps of data but little analytical framework. The study ofIndian economy is, therefore, reduced to a study of ‘descriptions’ and cramming of data. The student feels bored andloses interest in the subject. From a long-term point of view, this tendency is harmful for the development of thesubject itself. Undoubtedly, some brilliant studies have been conducted by different scholars on some specific issuesfacing the economy but these studies are spread over a number of journals and research papers. The student hasneither the time nor the patience to go through all of them. Their treatment is also highly technical and they are noteasily accessible to the students. The authors have for long felt the need of a book that integrates the main results ofthese studies in the main text and supplies the ‘missing links of information’ to the student while strictly maintainingthe overall textbook structure.

Out of this conviction the present book is born. It is divided into 46 chapters dealing practically with all issuesconfronting the Indian economy. The treatment is exhaustive like other competing books but it differs from them inthat particular attention has been paid to ‘analysis’ rather than mere ‘description’ of facts. This should enhance theutility of the book from the point of view of the students and teachers. Within the framework of a textbook, thechapters on ‘population problem’, ‘strategy of development’, ‘capital, technology and institutions’, and a number ofother chapters raise a number of issues that are generally glossed over in the traditional textbooks on Indian economy.

Some issues have emerged recently as serious issues of debate. These include the question of inter-sectoral termsof trade between agriculture and industry, farm size and productivity, underutilisation of capacity in Indian industries,the paradox of rising saving and investment rate but slow economic growth, etc. These questions are not even raised,let alone discussed, in traditional textbooks. The authors of the present book have given the respect that is due to thesetopics by discussing them in detail.

Conceived thus, the present book should be of immense value to the students of Indian Economics appearing invarious University examinations and competitive examinations. It fills an important gap in the area.

In writing this book, we have benefited immensely from the studies of a number of scholars spread over variousjournals and magazines. We are grateful to all of them. We also express our deep sense of gratitude to Miss DivyaMisra, Lecturer in Economics, Lady Shri Ram College, Delhi and Shri Shashi Prakash Sharma, Lecturer in Economics,Shyam Lal College (Evening), Delhi, for rendering assistance in various forms in preparing the manuscript of thisbook. Thanks are also due to Vijay Batra for typing the manuscript with patience and efficiency. We are deeplyindebted to the publisher for bringing out this book in a record time. Suggestions for improving the book are welcomefrom all quarters and will be gratefully acknowledged.

V.K. Puri and S.K. Misra

PREFACE TO THE FIRST EDITION

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FIGURES/UNITS USED IN THE BOOK

One lakh 1,00,000One million 10 lakhOne crore 10 millionOne billion 1,000 million/100 croreOne trillion 1,000 billion/1,00,000 crore

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PART - IECONOMIC DEVELOPMENT: A THEORETICAL BACKGROUND 1 – 52

Part - I : Summary Statistics 2

1. Economic Growth, Development and Underdevelopment 3 – 14The Concept of Economic Growth 3The Concept of Economic Development 4Growth and Development: A Contrast in Concepts 6Underdevelopment: Meaning and Indicators 7Common Characteristics of Underdeveloped/Developing Countries 8

2. Economic and Human Development 15 – 28Role of Natural Resources in Economic Development 15Role of Economic Factors in Economic Development 16Non-Economic Factors in Economic Development 17Human Development 19Why Human Development? 19Essential Components of Human Development 20The Human Development Index 21Gender Inequality Index 24Multidimensional Poverty Index 25Links between Economic Growth and Human Development 26Recasting Planning in Terms of Human Development 27

3. The Environment and Development 29 – 51Environmental Protection and Sustainable Development 29Growth and Environmental Degradation 30Population-Environment Linkage 34Environment as a Necessity and Luxury 36Environment Policy in India 38The Global Concerns 44

Select Readings for Issues Discussed in Part I 52

PART - IISTRUCTURE OF THE INDIAN ECONOMY 53 – 225

Part - II : Summary Statistics 54

4. Colonialism and Underdevelopment of the Indian Economy 55 – 63Meaning of Colonialism 55British Rule and the Exploitation of India 55The British Rule and India’s Underdevelopment 58State Policies and Economic Underdevelopment 60

CONTENTS

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5. Nature of the Indian Economy 64 – 72India — An Underdeveloped Economy 64India — A Developing Economy 69

6. Natural Resources 73– 84Natural Resources and Economic Development 73Land Resources 74Soil Erosion 76Water Resources 77Forest Resources 78Mineral Resources 81

7. Infrastructure 85 – 106Sources and Demand for Energy 85Power or Electricity 86Coal 89Oil and Gas 90Atomic Energy 91Non-Conventional Energy Sources 91Energy Crisis 92The Energy Strategy 92Transport System in India 95Railways 96Road Transport 98Water Transport 101Air Transport 103Communications 104

8. The Population Growth and Economic Development 107 – 124The Three Stages of Demographic Transition 107India’s Population: Size and Growth Trends 108India’s Population: The Future 110Causes of the Rapid Growth of Population 111Population and Economic Development 113Remedies for Population Explosion 116Population Policy 119

9. Some Demographic Issues 125 – 138The Sex Composition of Population and the Missing Women 125Age Structure of Population and its Demographic Dividend 128Urbanisation and the Development Process 131Migration of Rural Population to Urban Areas in India 136

10. Human Resource Development 139 – 151Indicators of Human Resource Development 139Importance of Human Resource Development 140Education in India and Development of Human Resources 141Education Policy in India 142Health and Nutrition 147

11. Labour Force Growth and Occupational Pattern 152 – 161Labour Force Growth in India 152Occupational Structure and Economic Development 155Occupational Distribution of Labour Force in India 157

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12. Employment and Unemployment in India 162 – 182Employment Trends 162Structure of Employment 164Nature and Estimates of Unemployment in India 168Unemployment in Urban Areas 171Agricultural Unemployment 172Causes of Unemployment 173Government Policy for Removing Unemployment 174Major Employment Programmes 177Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS) 178

13. Capital Formation in India 183 – 192India’s Capital Requirements for Economic Growth 183Domestic Saving 184Domestic Capital Formation 189

14. National Income of India: Macroeconomic Overview 193 – 201The National Income (NNP) Trends 193Per Capita National Income 197Services Led Growth 198National Product by Industry of Origin 199

15. Poverty in India 202 – 214The Concept of Poverty Line 202Incidence of Poverty in India 202Multidimensional Poverty 207Safety Nets for Poor — Poverty Alleviation Programmes 209Strategy of Poverty Alleviation 210Conclusion 213

16. Income Distribution in India 215 – 223The Pattern of Income Distribution in India 215Disequalising Growth During the Economic Reform Period 217Causes of Income Inequalities in India 218Government Policy and Measures 220

Select Readings for Issues Discussed in Part II 223 – 225

PART - IIIBASIC ISSUES IN AGRICULTURE 227 – 349

Part - III : Summary Statistics 228

17. Indian Agriculture: Role, Nature and Cropping Pattern 229 – 235Role of Agriculture in Indian Economy 229Nature of India’s Agriculture 231Cropping Pattern in India 233

18. Issues in Indian Agricultural Policy and Rural Development 236 – 251Policies for Agricultural and Rural Development: An Overview 236Agriculture: Trends in Investment 240National Agricultural Policy 243WTO and Indian Agriculture: Challenges and Priorities in the Global Economy 244Agriculture Growth Concerns 250

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19. Agricultural Production and Productivity Trends 252 – 259Trends in Agricultural Production and Productivity 252Low Levels of Productivity 254Causes of Low Productivity 256Measures to Increase Production and Productivity 257

20. Land Reforms 260 – 273Systems of Land Tenure in Pre-Independent India 260Objectives of Land Reforms 261Abolition of Intermediaries 262Tenancy Reforms 263Ceilings on Agricultural Holdings 265Agricultural Holdings in India 267Consolidation of Holdings 269Cooperative Farming 270Evaluation of Land Reforms in India 271

21. Agricultural Inputs and Green Revolution 274 – 292Irrigation 274Fertilizers 277High Yielding Varieties of Seeds 278Pesticides 280Green Revolution 281Impact of Green Revolution 282

22. Agricultural Finance and Marketing 293 – 312Need for Agricultural Finance 293Sources of Agricultural Finance and their Relative Importance 294Cooperative Credit Societies 296Commercial Banks and Rural Credit 298Regional Rural Banks 300National Bank for Agriculture and Rural Development (NABARD) 302Financial Inclusion 304Agricultural Marketing in India 306Government Measures to Improve the System of Agricultural Marketing 307Cooperative Marketing 310

23. Agricultural Prices and Agricultural Price Policy 313 – 320Trends in Agricultural Prices 313Need for Agricultural Prices Policy 314Agricultural Price Policy in India 314Evaluation of Government’s Agricultural Price Policy 315Terms of Trade between Agriculture and Industry 318

24. Agricultural Subsidies and Food Security in India 321 – 339Agricultural Subsidies 321Subsidies on Agricultural Inputs 321The Problem of Food Security 325Public Distribution System in India 326Targeted Public Distribution System (TPDS) 329National Food Security Act, 2013 332ICDS and Mid-Day Meal Scheme 334

25. Agricultural Labour 340 – 347Definition of Agricultural Labour 340Causes of Growth in the Number of Agricultural Labourers 341

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Conditions and Problems of Agricultural Labourers 342Measures Adopted by the Government 344Measures for Improvement 346

Select Readings for Issues Discussed in Part III 347 – 349

PART - IVTHE INDUSTRIAL SECTOR AND SERVICES IN INDIAN ECONOMY 351 – 468

Part - IV : Summary Statistics 352

26. Industrial Development During the Planning Period 353 – 364Programmes of Industrial Development under the Plans 353Trends in Industrial Production 355Changes in the Industrial Pattern During the Plans: A Brief Resume 361Some Problems of Industrial Development in India 362

27. Some Major Industries of India 365 – 375Iron and Steel 365Jute Industry 368Textile Industry 369Sugar Industry 371Cement Industry 373

28. Small-Scale and Cottage Industries 376 – 388Definition of Small-Scale Industries Sector 376The Role and Performance of Cottage and Small-Scale Industries in Indian Economy 377Small-Scale and Cottage Industries During the Plans — The Government Policy 380Problems of Small-Scale and Cottage Industries 385

29. Industrial Policy 389 – 400Industrial Policy Prior to 1991 389Review of Pre-1991 Industrial Policy and Liberalisation Trends 391New Industrial Policy, 1991 394Appraisal of New Industrial Policy 396National Manufacturing Policy 398

30. Public Sector in the Indian Economy 401 – 410Division of the Economy into Public and Private Sectors 401Role of Public Sector in the Indian Economy 401Performance of the Public Sector 403Problems of Public Sector Enterprises 405Policy Towards Public Sector Since 1991 409

31. Privatisation of Public Sector Enterprises:The Disinvestment Programme in India 411 – 420Meaning and Rationale of Privatisation 411Methods of Privatisation 412Evolution of Privatisation Policy in India 414Proceeds from Disinvestment and Methodologies Adopted 417A Critique of Privatisation and Disinvestment 417

32. Private Sector in the Indian Economy 421 – 436Role of the Private Sector 422Private Sector in the Post Liberalisation Phase 422Problems of the Private Sector 425

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Appendix I — India’s Antitrust Law: MRTP Act and Competition Act, 2002 427 – 431Appendix II — Corporate Social Responsibility 431 – 436

33. Industrial Sickness in India 437 – 443Definition of Industrial Sickness 437Magnitude of Sickness 438Causes of Industrial Sickness 438Consequences of Industrial Sickness 439Remedial Measures 440Provisions of Companies Act, 2013 for Revival and Rehabilitation of Sick Units 442

34. Labour Relations, Social Security and Exit Policy 444 – 451Magnitude of Industrial Disputes 444Causes of Industrial Disputes 444Industrial Relations: Policy of the Government 445Social Security in India 447Social Security Legislations in India 447A Critical Review of Social Security Measures in India 449Exit Policy 450

35. Services Sector in Indian Economy 452 – 466Growth and Contribution of Services Sector in India 452Which Services have Grown Rapidly? 454What Explains Rapid Services Growth? 456Share of Services in Employment 457Information and Communications Technology 458India’s IT and ITES Industry 459Foreign Trade in Services 462Services Led Growth: How Sustainable? 463

Select Readings for Issues Discussed in Part IV 466 – 468

PART - VFOREIGN TRADE AND FOREIGN CAPITAL 469 – 579

Part - V : Summary Statistics 470

36. India’s Foreign Trade: Value, Composition and Direction 471 – 484Value of Exports and Imports in the Planning Period 471Composition of Foreign Trade 473Direction of Trade 478Growth and Structure of India’s Foreign Trade Since 1991 481

37. India’s Balance of Payments 485 – 498Meaning of Balance of Payments 485India’s Balance of Payments: The Pre-1991 Period 486Balance of Payments Situation Since 1991 489The Management of Balance of Payments 494Challenges and Outlook 497

38. Trade Policy of the Government of India 499 – 518Import Policy: The Pre-Reform Period 499Export Policy: The Pre-Reform Period 503New Trade Policy: The Reform Period 507Foreign Trade Policy (2009-14) 510Foreign Trade Policy (2015-2020) 510

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Appendix to Chapter 38: Special Economic Zones 513 – 517Concept and History of SEZs 513Special Economic Zones in India 514Benefits of SEZs 515Arguments Against SEZs 515EGOM Decision on SEZs 516SEZs: A Dream Gone Sour 517

39. Foreign Capital and Aid 519 – 535Components of Foreign Capital 519Need for Foreign Capital 519Indian Government’s Policy Towards Foreign Capital 520Foreign Investment Inflows 525Foreign Investment Inflows since 1991: A Critical Appraisal 527Foreign Aid to India 529External Commercial Borrowings 531Non-Resident Deposits 532India’s External Debt 534

40. India’s Exchange Rate Policy, Foreign Exchange Reservesand Capital Account Convertibility 536 – 546Choice of Exchange Rate Regime 536Exchange Rate Management in India 537The Management of Foreign Exchange Reserves 540The Issue of Capital Account Convertibility 542

41. Multinational Corporations, FERA and FEMA 547 – 553Reasons for the Growth of MNCs 547Foreign Collaboration and MNCs 548A Critical Appraisal of MNC Operations in Indian Economy 549Control Over Multinational Corporations 549Foreign Exchange Regulation Act (FERA), 1973 550Foreign Exchange Management Act (FEMA), 1999 551FEMA: A Major Departure from FERA 553

42. Globalisation and its Impact on the Indian Economy 554 – 560Meaning of Globalisation 554Globalisation in India 555Steps towards Globalisation 556Effects of Globalisation 557

43. WTO and India 561 – 577GATT and Multilateral Trade Negotiations 561Functions and Organisation of WTO 562WTO Agreements 562India’s Commitments to WTO 564Benefits Proclaimed for India 564A Critical Review of the Working of WTO 565Singapore Issues and Doha Declaration 570Hong Kong Ministerial Conference 572Developments Post Hong Kong Ministerial 574India’s New Patent Regime 582

Select Readings for Issues Discussed in Part V 577 – 579

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PART -VIMONEY AND BANKING 581 – 660

Part - VI : Summary Statistics 582

44. Price Trends and Inflation 583 – 594Price Movements during the Planning Period 583Factors on the Demand Side Affecting Prices 586Factors on the Supply Side Affecting Prices 587Consequences of the Inflationary Price Rise 589Anti-Inflationary Policy of the Government 590Inflation Targeting: Urjit Patel Committee Report 592

45. Indian Money Market 595 – 604The Indian Money Market 595Unorganised Sector of the Indian Money Market 595Organised Sector of the Indian Money Market 597Characteristics of the Indian Money Market 601Reform Measures to Strengthen the Indian Money Market 602

46. Commercial Banking in India 605 – 618Banking Developments: 1949-69 605Nationalisation of Banks 605Banking Structure in India 606Expansion of Branches during the Post-Nationalisation Phase 608Deposit Mobilisation 609Bank Lending 610Evaluation of Banking Since Nationalisation 612Banking Sector Reforms 613Indian Banking: Concerns and Challenges for Future 617

47. The Reserve Bank of India 619 – 631Main Functions of the Reserve Bank of India 619Monetary Policy of the Reserve Bank of India 622Control of Currency by the Reserve Bank of India 623The Reserve Money (RM) 623Control of Credit by the Reserve Bank of India 624Short-Term Liquidity Management 627Banking Laws (Amendments) Act, 2012 629

48. Capital Market in India 632 – 647Capital Market 632Structure of the Capital Market 632Role of Capital Market in India’s Industrial Growth 634Growth of Capital Market in India 634Factors Contributing to the Growth of Capital Market in India 638Problems of Indian Capital Market: The Pre-Reform Phase 639Strengthening the Capital Market: The Post-Reform Phase 641SEBI and Capital Market Development 643Conclusion 647

49. Institutional Financing 648 – 658Evolution of Institutional Financing in India 648Classification of Financial Institutions in India 649All India Development Financial Institutions 650

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Investment Institutions 654Specialised Financial Institutions 655State Level Institutions 656A Critical Appraisal of the Industrial Financing Institutions 657

Select Readings for Issues Discussed in Part VI 658 – 660

PART - VIIPUBLIC FINANCE 661 – 726

Part - VII : Summary Statistics 662

50. The Indian Tax Structure 663 – 676Tax Burden in India 663Tax Revenue of the Central Government 664Tax Revenue of the State Governments 665Taxes on Income and Wealth 665Indirect Taxation 668Evaluation of Indian Tax Structure 672The Tax Reforms Since 1991 674

51. Public Expenditure in India: Trends and Issues 677 – 685Expansion in Government Activity after Independence 677Growth of the Public Expenditure 678Composition of the Government Expenditure 679Causes of the Rise in Public Expenditure 681Public Expenditure Management 683

52. Public Debt in India 686 – 692Debt Obligations of the Central Government 686Debt Obligations of the State Governments 687The Role of Debt Finance 689Public Debt — Problems and Issues 690Liquidation of Public Debt 692

53. India’s Fiscal Policy 693 – 703Objectives of Fiscal Policy in India 693The Fiscal Imbalance and Deficit Finance 695The Fiscal Imbalance and the New Fiscal Approach 697Fiscal Responsibility in India 699

54. Federal Finance in India — Centre-State Financial Relations 704 – 724Federalism and Federal Finance 704Transfer of Resources through the Finance Commissions: 1951-2000 705Transfer of Resources through the Finance Commissions: 2000-2010 708Thirteenth Finance Commission Award: Period 2010-15 714Fourteenth Finance Commission Award: Period 2015-2020 717Other Sources of Transfer 720Problems of Federal Finance in India 721Suggestions for Improvement 723

Select Readings for Issues Discussed in Part VII 724 – 725

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PART - VIIIECONOMIC PLANNING AND POLICY 727 – 834

Part - VIII : Summary Statistics 728

55. Economic Planning — Rationale, Features and Objectives 729 – 740The Rationale for Planning 729Important Features of Indian Plans 730Objectives of Economic Planning 730Evaluation of the Objectives of Economic Planning 738

56. The Strategy of Planning 741 – 751Strategy of India’s Development Plans: The Earlier Phase (Mahalanobis Strategy) 741Appraisal of the Mahalanobis Strategy of Development 744Failure of the Mahalanobis Strategy of Development 745Departures from the Mahalanobis Strategy of Development 745The Seventh Plan Development Strategy — Agricultural Development Led Growth Strategy 747The New Development Strategy 747The Tenth Plan Development Strategy 748The Eleventh Plan Development Strategy 749

57. Resource Allocation — Investment Pattern in Indian Plans 752 – 759Resource Allocation: 1951-85 Period 752Resource Allocation: 1985-2007 Period 756Sectoral Allocation of Resources in the Eleventh Plan 758Sectoral Allocation of Resources in Plans – An Overall View 759

58. Financing of Five Year Plans 760 – 772Financing of the First Seven Plans 760Financing of the Eighth Plan 765Financing of the Ninth Plan 766Financing Pattern of the Tenth Plan 767Financing Pattern of the Eleventh Plan 769Ways to Increase Revenue and Control Expenditure 771

59. Regional Planning in India 773 – 784Regional Planning Conceptualised 773Magnitude of Regional Imbalances in India 774Regional Planning Policy in India 779Lack of Genuine Regional Planning in India 783

60. Black Economy in India 785 – 796Definition of Black Economy 785Methods of Estimating Black Money 786Estimates of the Size of Black Economy 787Causes of Black Money 790Consequences of Black Money 792Government Measures to Curb Black Money 793Appendix to Chapter 60: Corruption Perception Index 795 – 796

61. Assessment of Indian Planning 797 – 808Targets and Achievements of Plans 797Accomplishments of Economic Planning 801An Appraisal of the Planning Process 802Establishment of NITI Aayog 806

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62. Economic Reforms and Liberalisation 809 – 821The Origin of Economic Crisis in the Early 1990s 809Economic Reforms in India 810Macroeconomic Stabilisation 810Structural Reforms 814An Appraisal of Economic Reforms 818

63. Twelfth Five Year Plan 822 – 832Vision and Strategy for the Twelfth Plan 822Macroeconomic Framework 824The Financing Pattern 825The Employment Perspective 827Sectoral Issues 828Select Readings for Issues Discussed in Part VIII 832 – 834Index 835 – 845

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1.1 GNP Per Capita and PPP Estimates of GNP Per Capita in US Dollars (2013) (Selected Regions/Countries) 91.2 Income Inequality in Selected Countries 111.3 Employment and Income in Agriculture in Some Selected Developing Countries 12

2.1 Goalposts for Calculating the HDI According to HDR 2014 23

4.1 Adjusted Per Capita Income 59

5.1 Gross Domestic Product by Industry of Origin in 2013 (Percentages) 665.2 HDI Value and Ranking of Selected Developed and Developing Countries, 2013 67

7.1 Primary Commercial Energy Requirement and Its Projections 86

8.1 Growth of India’s Population 1088.2 Crude Birth and Death Rates 1950-51 to 2013 109

9.1 Female-Male Ratio (FMR) in India 125 9.2 Sex Ratio (FMR) in Major States of India 126 9.3 Child Sex Ratio in India 127

9.4 Percentage Distribution of Population by Broad Age Groups, Major States (1961, 2001 and 2011) 129 9.5 Rural-Urban Distribution of India's Population, 1961-2011 133 9.6 Number of Cities and UAs with a Population of 1,00,000 and above and their Population Growth Rate,

India, 1951-2011 135

11.1 Growth of Labour Force (1971-2011) 15211.2 Growth Rates of Main Workers and Marginal Workers 15311.3 Growth Rates of Rural Workers and Urban Workers 15411.4 Growth Rates of Male Workers and Female Workers 15511.5 Population and Labour Force Projections 15511.6 Occupational Distribution of Working Population in India (Percentages) 158

12.1 Employment and Unemployment (by UPSS) 16312.2 Estimated Numbers of UPSS Workers Across Broad Industrial Categories: 1972-73 to 2011 16412.3 Employment in Public and Private Sectors 16612.4 Employment Status by Category of Employment, 1972-73 to 2011-12 16712.5 Unemployment Rates by Sex, Residence and Status (Per cent) 16912.6 Unemployment Rates (Per 1000) for 1993-94 and 2004-05 17012.7 All India Rural and Urban Unemployment Rates for 2009-10 17112.8 All-India Rural and Urban Unemployment Rates for 2011-12 171

13.1 Incremental Gross Capital-Output Ratio in the Indian Economy 18313.2 Gross Domestic Savings (As Per Cent of GDP at Current Market Prices) 18613.3 Gross Domestic Capital Formation (Investment) (As per cent of GDP at current market prices) 190

14.1 Net National Product at Factor Cost (i.e., National Income) 1950-51 to 2013-14 19614.2 Sectoral Composition of Growth 19914.3 Estimates of Gross Domestic Product by Industry of Origin — Percentage Distribution (at 2004-05 prices) 200

15.1 Estimates of Poverty in Rural India: 1967-68 (Per cent of Rural Population) 20215.2 Percentage of Population Below the Poverty Line 20315.3 Some Other Estimates of Poverty in India (Head Count Ratios) 20415.4 Poverty Estimates Based on the 55th NSS Round (Year 1999-2000) 20415.5 Poverty Estimates Based on the 61st NSS Round (Year 2004-05) 20515.6 Calculation of Multidimensional Poverty Index (MPI) 209

16.1 Planwise Average Gini-Lorenz Ratio 216 16.2 Percentage Share of Household Expenditure by Percentile Groups of Households 217 16.3 Percentage Share of Household Expenditure by Percentile Groups of Households 218

TABLES

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18.1 Gross Capital Formation in Agriculture 24118.2 Reduction Commitments under AoA 24518.3 Comparison of Green Box, Blue Box, Current Total AMS, and De Minimis Subsidies 247

19.1 Trends in Agricultural Production 1950-51 to 2013-14 25319.2 Yield Per Hectare of Major Crops 25519.3 Productivity of Land in Some Countries, 2012 25519.4 Potential and Actual Productivity 256

20.1 Number of Operational Holdings and Area Operated by Size Classes — All India (2000-01 and 2010-11) 267

21.1 All-India Compound Growth Rates of Production and Yield of Some Crops, 1949-50 to 2013-14 28321.2 State and Regionwise Growth Rate of Agricultural Output 287

22.1 Institutional Credit to Agriculture: Relative Share of Different Institutions 295

23.1 Index Number of Wholesale Prices of Agricultural Commodities Relative to Manufactured Products 31823.2 Index of Terms of Trade between Agricultural and Non-Agricultural Sectors 319

26.1 Annual Compound Growth Rates in Index Numbers of Industrial Production, 1951 to 1980 35626.2 Rate of Growth of Industrial Production (Use-Based) During Phase III (Base 1980-81) 35726.3 Average Annual Growth Rate of Industrial Production (Use Based) in Pre-Reform Decade and Post-Reform Period 359

28.1 Overall Performance of Micro, Small and Medium Enterprises (MSMEs) 377

30.1 Performance of Central Public Sector Enterprises 404

31.1 Disinvestment in PSUs and Methodologies Adopted, 1991-92 to 15.04.2015 416

32.1 Top Ten Private Sector Companies 2013-14 42332.2 Top Ten Private Sector Companies – Ranked on the Basis of Market Capitalisation 424

35.1 Sectoral Growth Rates During the Planning Period 45235.2 Sectoral Share of GDP in Per cent 45335.3 Contribution of Different Sectors to GDP Growth 45435.4 Growth Rates and Shares of Service Sub-Sectors in GDP 45535.5 Spread of ICT Across Countries 45935.6 Key Targets for the Twelfth Plan for the Electronics and IT-ITES Industry 46135.7 Imports of Services in India, 2002-03 to 2013-14 46335.8 Exports of Services from India, 2002-03 to 2013-14 464

36.1 Value of Exports and Imports in the Planning Period 47236.2 Composition of Imports 47536.3 Composition of Exports 47736.4 Direction of India’s Trade 479

37.1 India’s Balance of Payments Situation Since 1991: Some Indicators 48937.2 India’s Balance of Payments: 1993-94 to 2013-14 49037.3 Inflows on Capital Account (Net) since 1991 492

39.1 Foreign Investment Flows to India 52639.2 Foreign Aid to India: Authorisation and Utilisation 53039.3 Forms of Foreign Aid Received by India 53039.4 India’s External Debt 534

48.1 Bombay Stock Exchange and National Stock Exchange – Performance Indicators 638

50.1 Direct and Indirect Taxes of the Central Government 66451.1 Combined Public Expenditure of Union and State Governments and Union Territories during 1950-51 to 2013-14 679

51.2 Central Government's Expenditure to GDP Ratios: 1990-91 to 2013-14 68452.1 Outstanding Liabilities of the Central Government 68752.2 Outstanding Liabilities of the State Governments 68852.3 Combined Liabilities of the Centre and States 689

53.1 Central Government Deficit (Per Cent of GDP at Current Market Prices) 698

54.1 Share of States in Net Proceeds from Income Tax 705

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54.2 Criteria and Relative Weights for Determining inter se Share of States 71054.3 Inter se Share of States (Occupying First Four Places) in Central Tax Revenues under

Eleventh Finance Commission (EFC) and Twelfth Finance Commission (TFC) Award 71054.4 Per cent Share of Taxes and Grants-in-Aid in Total Transfers 71154.5 Total Resource Transfer to States (The Eleventh Finance Commission’s Award

for 2000-05 and the Twelfth Finance Commission’s Award for 2005-2010) 71454.6 Thirteenth Finance Commission: Criteria and Weight for Tax Devolution 71554.7 Grants-in-Aid to States 71654.8 Horizontal Devolution Formula in the Thirteenth and Fourteenth Finance Commissions 718

54.9 Transfers Recommended by Fourteenth Finance Commission 720

57.1 Sectoral Allocation of Resources under the First Six Five Year Plans 75457.2 Sectoral Allocation of Resources under Seventh to Tenth Plans 75757.3 Public Sector Outlay and Actual Expenditure by Major Heads of Development in Eleventh Plan (2007-12) 758

58.1 Financing of the First Seven Plans 76158.2 Projected vis-a-vis Realised Financing Pattern of the Public Sector Outlay in the Eighth Plan 76658.3 Financing of the Ninth Plan 76658.4 Projected and Realised Financing Pattern of the Plan Outlay of the Centre in Tenth Plan 76758.5 Core Tenth Plan Resources of States and UTs 76858.6 Projected and Realised Financing Pattern of the Plan Outlay of the Centre in Eleventh Plan 76958.7 Eleventh Plan Resources of States and UTs 770

59.1 Per Capita State Net Domestic Product in 15 Major States of India (At Current Prices) 77459.2 Comparative Growth Rates of Selected Low-Income States 77559.3 Disparity in PCI (Per Capita NSDP) at 2004-05 prices 77559.4 Percentage of People below the Poverty Line 77659.5 Disparities in Human Development Indicators 77759.6 Human Development Index for States (1999-2000 and 2007-08) 778

60.1 NIPFP Estimtes of Black Money in India, 1975-1983 78860.2 Corruption Perception Index, 2014 795

62.1 Growth Rates of GDP by Sector, at Constant Prices 818

63.1 Average Annual Growth Rate of GDP by Industry of Origin 82463.2 Macroeconomic Parameters 82463.3 Financing Pattern of the Twelfth Plan 82563.4 Public Sector Outlay by Major Heads of Development in Twelfth Plan (2012-17) 82663.5 Sectoral Employment (in million): Business-as-usual Scenario 82763.6 Sectoral Employment (in million): Twelfth Plan Scenario 828

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1.1 The Concept of Economic Growth 41.2 The Concept of Economic Development 51.3 Economic Growth, Development and Underdevelopment 71.4 Underdeveloped/Developing Countries: Common Characteristics 13

2.1 Factors in Economic Development 162.2 Human Development 202.3 Measuring Human Development and Deprivations 26

3.1 Sustainable Development and Environmental Degradation 303.2 Population and Environment Linkage 353.3 Monitorable Targets for the Twelfth Plan 443.4 Lima Accord Highlights 49

4.1 British Rule and Exploitation of India 564.2 The British Rule and India’s Underdevelopment 60

5.1 India’s Underdeveloped Economy 655.2 Development and Structural Changes in India's Economy 70

7.1 The New Energy Strategy 93

8.1 India’s Population Growth and Selected Demographic Indicators 1098.2 Causes of Rapid Growth of Population in India 1118.3 Population Policy of the Government of India 122

14.1 Growth Performance in the Five Year Plans 195

18.1 India's Stand on Agricultural Issues in WTO 249

19.1 Region-Specific Factors Causing Low Productivity 257

29.1 National Investment and Manufacturing Zones 399

38.1 The SEZ Story 514

43.1 Key Outcomes and Timelines of Hong Kong Ministerial Declaration 573

45.1 Organised Sector of the Indian Money Market 597

46.1 Base Rate System of Interest Rates – Issues and Features 616

50.1 Salient Features of the VAT Design 672

53.1 Fiscal Imbalance and the New Fiscal Approach 700

55.1 Rationale, Features and Objectives of Planning in India 731

62.1 Economic Reforms in India 811

63.1 Twelfth Five Year Plan at a Glance 831-832

BOXES

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AAAY Antyodaya Anna YojanaACRC Agricultural Credit Review CommitteeADLG Agricultural Development-Led GrowthADLI Agricultural Development-Led IndustrialisationADRs American Depository ReceiptsAEZ Agri-Export ZonesAGMARK Agricultural MarketingAIBP Accelerated Irrigation Benefit ProgrammeAICTE All-India Council of Technical EducationAMC Asset Management CompanyAMS Aggregate Measure of SupportAoA Agreement on AgricultureAP L Above Poverty LineAPMC Agricultural Produce Marketing Committee ActASHA Accredited Social Health Activist

BBASIC Brazil, South Africa, India and ChinaBCR Balance from Current RevenuesBIFR Board for Industrial and Financial ReconstructionBOT Build-Operate-TransferBPL Below Poverty LineBPO Business Process OutsourcingBRGF Backward Regions Grant FundBRIC Brazil, Russia, India and ChinaBRICS Brazil, Russia, India, China and South AfricaBRPSE Bureau for Reconstruction of Public Sector EnterprisesBSE Bombay Stock Exchange

CCABE Central Advisory Board of EducationCAC Capital Account ConvertibilityCACP Commission for Agricultural Costs and PricesCAD Command Area DevelopmentCAG Comptroller and Auditor GeneralCAGR Compound Anuual Growth RateCARE Credit Analysis and Research LimitedCCI Competition Commission of IndiaCCS Cash Compensatory SupportCD Certificate of DepositCDL Central Depository Services (India) Ltd.CDS ‘Current Daily Status’ BasisCENVAT Central Value Added TaxCL Compulsory LicensingCLB Company Law BoardCMP Common Minimum Programme (of UPA Government)CP Commercial PaperCPI-AL Consumer Price Index (Agriculture Labourers)

ACRONYMS

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CPI-IW Consumer Price Index (Industrial Workers)CPI-RL Consumer Price Index (Rural Labour)CPI-UNME Consumer Price Index (Urban Non-Manual Employees)CRAR Capital to Risk-Weighted Asset RatioCRF Calamity Relief FundCRR Cash Reserve RatioCRISIL Credit Rating Information Services of India LimitedCSO Central Statistical OrganisationCSR Child Sex RatioCSRE Crash Scheme for Rural EmploymentCWS ‘Current Weekly Status’ basis

DDCRF Debt Consolidation and Relief FacilityDEPB Duty Entitlement Pass BookDFHI Discount and Finance House of IndiaDFIs Development Finance InstitutionsDGFT Director General of Foreign TradeDGTD Directorate General of Technical DevelopmentDPAP Drought Prone Areas ProgrammeDTA Domestic Tariff AreaDvP Delivery versus Payment

EEAS Employment Assurance SchemeECB External Commercial BorrowingECGC Export Credit and Guarantee CorporationEEFC Exchange Earners' Foreign Currency AccountEFF Extended Fund FacilityELG Strategy Export-Led Growth StrategyEMRs Exclusive Marketing RightsEOU Export-Oriented UnitEPC Export Promotion CouncilEPIP Export Promotion Industrial ParksEP Z Export Processing ZonesERM Extension, Renovation and ModernizationESI Act Employees’ State Insurance ActEU European UnionEXIM Bank Export-Import Bank

FFC (B&O) D Foreign Currency (Bank and Other) DepositsFCDs Fully Convertible DebenturesFCNRA (B) Foreign Currency Non-Resident (Banks) AccountsFDI Foreign Direct InvestmentFEMA Foreign Exchange Management ActFERA Foreign Exchange Regulation ActFIIs Foreign Institutional InvestorsFMR Female-Male RatioFRBM Fiscal Responsibility and Budget ManagementFWP Food for Work Programme

GGATS General Agreement on Trade in ServicesGATT General Agreement on Tariffs and TradeGBS Gross Budgetary Support

(xxvi)

GCF Gross Capital FormationGCFA Gross Capital Formation in AgricultureGDCF Gross Domestic Capital FormationGDI Gender-Related Development IndexGDP Gross Domestic ProductGDPD Gross Domestic Product DeflatorGDRs Global Depository ReceiptsGEM Gender Empowerment MeasureGER Gross Enrolment RatioGHG Greenhouse GasesGNP Gross National ProductGQ Golden QuadrilateralGRT Gross Registered TonnageGSP Generalised System of PreferencesGST Goods and Service TaxGT Gross Tonnage

HHDI Human Development IndexHP I Human Poverty IndexHDR Human Development ReportHYVP High-Yielding Varieties Programme

IIADP Intensive Area Development ProgrammeICAR Indian Council of Agricultural ResearchICDS Integrated Child Development ServicesICICI Industrial Credit and Investment Corporation of IndiaICOR Incremental Capital-Output RatioICRA Investment and Credit Rating AgencyICT Information and Communication TechnologyIDBI Industrial Development Bank of IndiaIEBR Internal and External Budgetary ResourcesIIBI Industrial Investment Bank of IndiaIIP Index of Industrial ProductionIMF International Monetary FundIP O Initial Public OfferingIPRs Intellectual Property RightsIRCI Industrial Reconstruction Corporation of IndiaIRDP Integrated Rural Development ProgrammeISP Internet Service ProvidersI T Information TechnologyITES Information Technology Enabled ServicesIWAI Inland Waterways Authority of IndiaIW T Inland Water Transport

JJGSY Jawahar Gram Samridhi YojanaJRY Jawahar Rozgar Yojana

KKCC Kisan Credit CardsKGBV Kasturba Gandhi Balika Vidyalaya

LLAF Liquidity Adjustment FacilityLDCs Less Developed Countries

(xxvii)

LERMS Liberalised Exchange Rate Management SystemLOI Letters of IntentLTFP Long-Term Fiscal Policy

MMAT Minimum Alternate TaxMDM Mid-day MealMFs Mutual FundsMFA Multi-Fibre ArrangementMFAL Marginal Farmers and Agricultural LabourersMFIs Microfinance InstitutionsMFN Most Favoured NationMGNREGS Mahatma Gandhi National Rural Employment Guarantee SchemeMMMFs Money Market Mutual FundsMMPs Mission Mode ProjectsMNCs Multinational CorporationsMODVAT Modified Value Added TaxMOFAs Majority Owned Foreign AffiliatesMOU Memorandum of UnderstandingMRTP Monopolies and Restrictive Trade PracticesMSE Medium and Small EnterprisesMSME Micro, Small and Medium EnterprisesMSP Minimum Support PriceMSS Market Stabilisation SchemeMTNs Multilateral Trade Negotiations

NNABARD National Bank for Agriculture and Rural DevelopmentNACIL National Aviation Company of India LimitedNAFB National Afforestation and Eco-Development BoardNAMA Non-Agricultural Market AccessNAS New Agricultural StrategyNAV Net Asset ValueNBFC Non-Banking Finance CompaniesNCAER National Council of Applied Economic ResearchNCDs Non-Convertible DebenturesNCLT National Company Law TribunalNCMP National Common Minimum ProgrammeNDC National Development CouncilNDP Net Domestic ProductNDS Negotiated Dealing SystemNEF National Equity FundNELP New Exploration Licensing PolicyNEP New Economic PolicyNER North-Eastern RegionNGO Non-Government OrganisationNHB National Housing BankNHM National Health MissionNHDP National Highways Development ProjectNITI National Institution for Transforming IndiaNNP Net National ProductNPAs Non-Performing AssetsNPEGEL National Programme for Education of Girls at Elementary LevelNPRE Non-Plan Revenue ExpenditureNREGA National Rural Employment Guarantee ActNREGS National Rural Employment Guarantee SchemeNREP National Rural Employment Programme

(xxviii)

NR(E) RA Non-Resident (External) Rupee AccountsNRF National Renewal FundNRHM National Rural Health MissionNRI Non-Resident IndianNR (NR) RD Non-Resident (Non-Repatriable) Rupee DepositsNRY Nehru Rozgar YojanaNSCC National Securities Clearing CorporationNSDL National Securities Depository LimitedNSE National Stock ExchangeNSSO National Sample Survey OrganisationNTBs Non-Tariff BarriersNT P National Telecom Policy

OOBCs Other Backward CastesOCB Overseas Corporate BodiesOECD Organisation for Economic Co-operation and DevelopmentOGL Open General LicenceONGC Oil and Natural Gas CorporationOPEC Oil and Petroleum Exporting CountriesOP P Oilseeds Production ProgrammeOTDS Overall Trade Distorting Support

PPACS Primary Agricultural Co-operative SocietiesPCARDBs Primary Co-operative Agricultural and Rural Development BanksPCDs Partly Convertible DebenturesPCO Public Call OfficePDS Public Distribution SystemPIN Postal Index NumberPMBJP Pradhan Mantri Bharat Jodo PariyojanaPMGSY Pradhan Mantri Gram Sadak YojanaPMJDY Pradhan Mantri Jan Dhan YojanaPMRY Prime Minister Rozgar YojanaPNDT Pre-Natal Diagnostic TechniquesPOL Petroleum Oil and LubricantsP P P Purchasing Power Parity (also Public-Private Partnership)PQLI Physical Quality of Life IndexPSE Public Sector EnterprisePSU Public Sector Undertaking

QQFI Qualified Financial InvestorsQMS Quick Mail ServicesQRs Quantitative Restrictions

RRBI Reserve Bank of IndiaRIDF Rural Infrastructure Development FundRKVY Rashtriya Krishi Vikas YojanaRLEGP Rural Landless Employment Guarantee ProgrammeRM Reserve MoneyRMSA Rashtriya Madhyamik Shiksha AbhiyanRPS Retention Price SchemeRRBs Regional Rural BanksRTAs Regional Trade AgreementsRTE Right to Education

(xxix)

RTI Right to InformationRWP Rural Works Programme

SSCARDBs State Co-operative Agricultural and Rural Development BanksS&DT provisions Special and Differential Treatment ProvisionsSDP State Domestic ProductSDRs Special Drawing RightsSEBI Securities and Exchange Board of IndiaSEZ Special Economic ZonesSFC State Financial CorporationSFDA Small Farmers' Development AgencySGL Subsidiary General LedgerSGRY Sampoorna Grameen Rozgar YojanaSGSY Swarnajayanti Gram Swarojgar YojanaSHG Self-Help GroupSICA Sick Industrial Companies (Special Provisions) ActSIDBI Small Industries Development Bank of IndiaSIDO Small Industries Development OrganisationSIL Special Import LicenceSJSRY Swarna Jayanti Shahri Rozgar YojanaSLR Statutory Liquidity RatioSME Small and Medium Scale EnterpriseSPM Suspended Particulate MatterSSA Sarva Shiksha AbhiyanStCBs State Co-operative Banks

TTFC Twelfth Finance CommissionTF P Total Factor ProductivityTFPG Total Factor Productivity GrowthTNC Transnational CorporationTPDS Targeted Public Distribution SystemTRAI Telecom Regulatory Authority of IndiaTRIMs Trade Related Investment MeasuresTRIPs Trade Related Intellectual Property RightsTRYSEM Training Rural Youth for Self-Employment

UUA Urban AgglomerationUNCTAD United Nations Conference on Trade and DevelopmentUNDP United Nations Development ProgrammeUNEP United Nations Environment ProgrammeUNFCCC United Nations Framework Convention on Climate ChangeUPSS Usual Principal and Subsidiary Status

VVAT Value Added TaxVGF Viability Gap FundingVRS Voluntary Retirement Scheme

WWADR Weighted Average Discount RateWP I Wholesale Price IndexWT O World Trade OrganisationWMA Ways and Means Advances

Economic Development: A Theoretical Background

1. Economic Growth, Development and Underdevelopment2. Economic and Human Development3. The Environment and Development

PART – I

I. GNP per capita in US dollars (2013)

– High income economies 39,820– Middle income economies 4,751– Low income economies 709– India 1,570– China 6,560

II. HDI, 2013 (HDI calculated for 187 countries)

– Norway (first rank) index value 0.944– Australia (second rank) index value 0.935– India (135th rank) index value 0.586– Niger (last rank) index value 0.337

III. GII, 2013 (GII calculated for 149 countries)

– Values of GII range from an average of 0.317 for Europe and Central Asia to 0.575 for Sub-Saharan Africa and from anaverage of 0.197 for the very high human development group to 0.586 for the low human development group.

– India with GII value of 0.563 in 2013 ranks 127th.

IV. Multidimensional Poverty Index (MPI)

– In most of the countries falling in the medium and low human development category, more than one-third of the populationsuffers from multidimensional poverty. In fact, in countries falling in low human development category, more than half ofthe population suffers from multidimensional poverty.

– In India, 55.3 per cent of the population, i.e., as many as 63.2 crore people suffer from multidimensional poverty. Not onlythis, 27.8 per cent of the population lives under conditions of severe poverty.

V. Growth and Environmental Degradation

– According to a World Bank Report published in June 2013, the total cost of environmental degradation in India is about ` 3.75trillion annually, equivalent to 5.7 per cent of GDP in 2009.

– According to the same Report, over the period 1953-2009, damages from natural disasters stood at ` 150 billion a year onaverage (at constant 2009 prices).

– Of the cumulative 1,169.1 billion metric tonnes of carbon dioxide emissions in the world over the period 1850 to 2005, highincome countries accounted for as much as 750 billion metric tonnes (i.e., 64.2 per cent) while the share of low income countrieswas just 24.0 billion metric tonnes (2.1 per cent) and the share of middle income countries was 395.1 billion metric tonnes(34.0 per cent).

Part - I: Summary Statistics

Today, economic growth is everybody’s concern andin such a milieu, growth theory has received particularattention of economists. Yet surprisingly, there is noconsensus on the definition of the term. Different economistshave used the term ‘economic growth’ to convey differentmeanings. In some cases the concepts differ in essence,whereas in others only in emphasis. Some other economistsare of the view that the term ‘economic growth’ is verymuch obvious and there is no need to frame a precisedefinition of it. Thus, quite often no distinction is madebetween ‘economic growth’ and ‘economic development’and the two terms are used interchangeably. Others feel thatclear and unambiguous definitions are a prerequisite to anyprecise analysis. Underlying the difficulties which mostsocial scientists face in the absence of precise definitions,Ronald A. Shearer stated, “The literature of social sciencesis a testimony to the errors; unnecessary confusions andprolonged debates which can result from an ambiguity onthe level of basic conceptualisation.”1 There is certainlyweight in Shearer’s observations. We also feel that to avoidambiguity, it is better to identify economic growth in termsof some measurable criteria.

In this chapter, we propose to address the followingissues:

l The concept of economic growthl The concept of economic developmentl Growth and development: A contrast in conceptsl Meaning and indicators of underdevelopmentl Common characteristics of underdeveloped/

developing countries.

THE CONCEPT OF ECONOMIC GROWTH

Economic growth may be defined as a rate of expansionthat can move an underdeveloped country from a nearsubsistence mode of living to substantially higher levels ina comparatively short period of time, i.e., in decades ratherthan centuries. For nations already advanced economically,it will mean a continuation of existing rates of growth.Historically, rapid economic growth has been accompaniedby greater industrialisation. But more accurately the process

ECONOMIC GROWTH,DEVELOPMENT AND

UNDERDEVELOPMENT

1Chapter

of economic growth can be described in terms of greatercommercialisation of economic activities. Though thisconcept of economic growth is correct in essence, it lacksprecision and makes its measurement difficult. However,there is nothing wrong if a change in industrial structure istreated as an auxiliary index along with some better measuringyardstick of economic growth.

Rise in gross domestic product. According to someeconomists, economic growth is a process whereby aneconomy’s gross domestic product (GDP) increases over along period of time.2 In this context, it is necessary todistinguish between gross national product (GNP) and grossdomestic product (GDP). In a closed economy, no distinctionis to be made between gross national product and grossdomestic product (GDP), whereas in an economy open toforeign trade, national product may be greater or less thandomestic product depending upon the net inflow or outflowof income. A country may record an increase in its GNP ifits people have invested massive capital outside the countryand earn big profits therefrom. But this does not mean thatthe economy has developed. Therefore, the only rationalapproach to the problem will be to differentiate the termGDP from the term GNP in the context of economic growth.Obviously, of the two variables, GDP will a more accuratepicture of economic growth as compared to GNP. In thiscontext, it is pertinent to mention that the increase in GDPmust be steady and prolonged. A short period increase, asoccurs within the boom period of a trade cycle, cannot beaccepted as growth.

However, it is not correct to define economic growthin the above manner. The reason is that if the population ina country grows faster than GDP, product per capita (orincome per capita) will decline. Obviously, this cannot betermed economic growth. Accordingly, Simon Kuznets hasargued that economic growth is a situation where a sustainedincrease in population is accompanied by sustained increasein per capita product (or income).3

Rise in per capita product. Many economists havedefined economic growth as sustained increase in per capitaproduct (or income). However, economic growth is a complexprocess and it is not proper to limit it to mere increases inper capita product. A large number of changes continue to

4 Indian Economy

take place during the process of economic growth. Thedirections of these changes could be different. For example,GDP or GNP may rise, while per capita product may decline,or productivity per labour unit may rise, while per capitaconsumption may go down. Therefore, it is necessary toexercise extreme caution while selecting a variable that maybe used as an index of economic growth.

If the objective is to study changes in the standard ofliving of the people, improvement in per capita consumptionwould be the most appropriate indicator of the growthperformance of an economy. However, this cannot beregarded as the best indicator of economic growth becauseduring the process of economic development, manyunderdeveloped countries intentionally keep the level ofconsumption low in a bid to increase savings and investment.In fact, it is only by increasing investment and capitalformation that economic growth can be increased. Suchefforts would push up investment, expand the productioncapacity and increase the national income but levels ofconsumption will not increase. Yet, this indeed would be asituation of economic growth.

Equitable distribution of wealth. Jacob Viner hasassociated the concept of economic growth with equitabledistribution of wealth. He insists that the reduction of masspoverty be made the crucial test of economic growth.4 In hisopinion, an increase in per capita product is undoubtedly animportant index of economic progress, but it cannot bewholly depended upon to gauge economic growth unless itis also followed by a reduction in the existing inequalities inthe distribution of national wealth. As such, economic growthmay be interpreted to mean a sustained increase in percapita output accompanied by a reduction in the existingeconomic inequalities and an economic betterment ofmasses. Though this concept of economic growth soundsgood, it is not wholly correct. It is quite possible that with

every increase in GNP (or GDP) accompanied by a rise inper capita product, greater inequality in the distribution ofwealth and income may crop up.

Thus, after considering alternative definitions of theterm ‘economic growth’, we feel that the most appropriateapproach to measure economic growth is in terms of a risein per capita product. In this study of India’s problems ofgrowth, maximum reliance has been placed on this crucialindex. However, care should be taken to note structuralchanges which this country has undergone over the years,because in many cases these changes are of greater importancethan some increase in per capita product. Charles Bettleheimhas pertinently argued that, in planning for economic growth,"the aim should be not quantitative change (large production)only, but qualitative change too (i.e., higher productivity oflabour). Only on the basis of such qualitative change can aneconomy as a whole rise to higher level.”5

THE CONCEPT OF ECONOMICDEVELOPMENT

Till the 1960s, the term ‘economic development’ wasoften used as a synonym of ‘economic growth’ in economicliterature. Now, economic development is no longerconsidered identical with economic growth. It is taken tomean growth plus progressive changes in certain crucialvariables which determine the well-being of the people.There are qualitative dimensions in the development processwhich may be missing in the growth of an economy expressedin terms of an increase in the national product or the productper capita. Development economists are no longer impressedby the growth performance of a country which gets reflectedin the rise in its GDP (or GNP); they now concentrate moredirectly on the development process. Mahbub ul Haq, aleading Pakistani economist has remarked, “the problem of

Box 1.1

The Concept of Economic Growth

Historically, economic growth is accompanied by:l Greater industrialisationl Greater commercialisationTheoretically, economic growth is conceptualised in any one of the following ways:l A rise in gross domestic product (GDP)l A rise in gross national product (GNP)l A rise in per capita gross domestic productl A rise in per capita gross national productl A rise in per capita net domestic productl A rise in per capita net national productl A rise in per capita output accompanied by a reduction in economic inequalitiesThe most appropriate approach to measure economic growth is in terms of a rise in per capita net domestic product.

Economic Growth, Development and Underdevelopment 5

development must be defined as a selective attack on theworst forms of poverty. Development goals must be definedin terms of progressive reduction and eventual eliminationof malnutrition, disease, illiteracy, squalor, unemploymentand inequalities. We were taught to take care of our GNPbecause it would take care of poverty. Let us reverse thisand take care of poverty because it will take care of theGNP. In other words, let us worry about the content of GNPeven more than its rates of increase.”6

The Traditional ApproachIn the present-day development economics, one finds

broadly two main approaches to the concept of economicdevelopment. The first one often known to be the traditionalapproach, defines development strictly in economic terms.For the exponents of traditional approach economicdevelopment implies a sustained annual increase in GNP(or GDP) at rates varying from 5 to 7 per cent or moretogether with such alteration in the structure of productionand employment that the share of agriculture declines inboth, whereas that of the manufacturing and tertiary sectorsincreases. The policy measures thus suggested are the oneswhich induce industrialisation at the expense of agriculturaldevelopment. Objectives of poverty elimination, economicinequalities reduction and employment generation arementioned in passing reference only and in most cases, it isassumed that rapid gains in overall growth in GNP or percapita national (or domestic) product would trickle down topeople in one form or the other. This is known as the'trickle down' effect of economic growth.

The New View of Economic DevelopmentHaving realised that about 40 per cent of the

developing world’s population had not benefited at allfrom economic growth during the 1950s and 1960s, anincreasing number of economists called for the rejectionof the narrow definition of economic development. Duringthe 1970s, they redefined the concept of economic

development in terms of the reduction or elimination ofpoverty, inequality and unemployment in the context of agrowing economy. In this phase, “Redistribution withGrowth” became the popular slogan. Talking in thisframework, Charles P. Kindleberger and Bruce Herrickargued, “Economic development is generally defined toinclude improvements in material welfare, especially forpersons with the lowest incomes, the eradication of masspoverty with its correlates of illiteracy, disease and earlydeath, changes in the composition of inputs and outputs thatgenerally include shifts in the underlying structure ofproduction away from agricultural towards industrialactivities, the organisation of the economy in such a waythat productive employment is general among the workingage population rather than the situation of a privilegedminority; and the correspondingly greater participation ofbroadly based groups in making decisions about thedirections, economic and otherwise, in which they shouldmove to improve their welfare.”7

Dudley Seers posed the basic questions about themeaning of development in the right perspective when heasserted, “The questions to ask about a country’sdevelopment are therefore: What has been happening topoverty? What has been happening to unemployment?What has been happening to inequality? If all three ofthese have declined from high levels, then beyond doubtthis has been a period of development for the countryconcerned. If one or two of these central problems havebeen growing worse, especially if all three have, it wouldbe strange to call the result ‘development’ even if percapita income doubled.”8

In light of the environmental destruction that is takingplace all over the world presently in the pursuit of theobjective of growth, protection of environment is nowregarded as an integral part of development. As pointed outby Dreze and Sen, “In the broader perspective of seeingdevelopment in terms of promoting substantive human

Box 1.2

The Concept of Economic Development

l Till the 1960s, economic development was often used as a synonym of economic growth.l Once economic development was not conceptualised as economic growth, two different approaches developed.l The traditional approach stresses two aspects:

(i) Sustained annual increase in GDP at the rate of 5 to 7 per cent or more.(ii) Structural transformation of an agrarian economy into an industrialised economy.

l The new economic view of development has been defined to include improvements in material welfare, specially for persons withthe lowest incomes, the eradication of mass poverty with its correlates of illiteracy, disease and early death and finally alleviationof unemployment and income inequality.

l Protection of environment is now considered to be a part of the new concept of development.

6 Indian Economy

freedom, fighting poverty and being responsible about theenvironment cannot but be closely linked... Indeed, importantcomponents of human freedoms – and crucial ingredients ofour quality of life – are thoroughly dependent on the integrityof the environment, involving the air we breathe, the waterwe drink, and the epidemiological surroundings in whichwe live. The opportunity to live the kind of lives thatpeople value – and have reason to value – depends amongother things on the nature and robustness of theenvironment. In this sense, development has to beenvironment-inclusive….”9

GROWTH AND DEVELOPMENT:A CONTRAST IN CONCEPTS

As stated earlier, in recent literature the term economicgrowth refers to increases over time in a country’s realoutput of goods and services — or more appropriatelyproduct per capita. Output is generally measured by grossor net national product, though other measures could alsobe employed. The term economic development, in contrast,is more comprehensive. It implies progressive changes inthe socio-economic structure of a country. Viewed in thisway, economic development involves a steady decline inagriculture’s share in GNP and a corresponding increase inthe share of industries, trade, banking, construction andservices. This transformation in economic structure isinvariably accompanied by a shift in the occupational structureof the labour force and an improvement in its skill andproductivity. Charles P. Kindleberger rightly asserts thatwhereas economic growth merely refers to a rise in output,economic development implies changes in technologicaland institutional organisation of production as well as indistributive pattern of income. Compared to the objective ofdevelopment, economic growth is easy to realise. Bymobilising larger resources and raising their productivity,output level can be raised. The process of development isfar more extensive. Apart from a rise in output, it involveschanges in the composition of output as well as a shift in theallocation of productive resources so as to ensure socialjustice.

In some of the underdeveloped countries, the processof economic growth has been accompanied by economicdevelopment. This, however, is not necessary. It is quiteprobable that a country produces more of the same type ofgoods and services, to keep up with a growing population,while basic structure of the economy remains intact. In awell-known book on Liberia, Robert Clower had observedthat in spite of the fact that the various concessions toforeign firms induced exports in a big way and resulted ina considerable increase in gross national product, there was

virtually no complementary development in other sectors ofthe economy. The institutional set-up of the countryessentially remained unaltered in this phase of growth.Further, the benefits of this growth went almost exclusivelyto a privileged few, while the vast majority of the country’speople remained completely unaffected. Clower thus calls it“growth without development.”10 Hence, Singer asserts,“for developing countries it is not difficult to demonstratefrom numerical models, given their high rates of populationincrease, increasingly capital-intensive technology, thetechnological monopoly of the industrialised countries andtheir limited resources, that widespread ‘trickle down’, letalone the creation of social welfare states, is most unlikelyin the normal context of purely economic growth.”11

However, in this context, it must be remembered thatdevelopment without growth is inconceivable. A substantialrise in a country’s GNP is required before it can hope toexpand its industries, financial institutions, trade, publicutilities, and government administration. Nowhere in theworld has the occupational distribution of population changedin the absence of growth.

Emphasizing the importance of economic growth forachieving development, Jean Dreze and Amartya Sen havestated, “Economic growth is indeed important, not for itself,but for what it allows a country to do with the resources thatare generated, expanding both individual incomes and thepublic revenue that can be used to meet socialcommitments.”12

Most of the underdeveloped countries of today have acolonial past and their growth pattern is quite similar inmany respects. The essence of this pattern of growth isdualism. Dualism refers to coexistence of developed andunderdeveloped sectors in a country’s economy side-by-side. In such an economy, one sector or subsectorexperiences perceptible growth, while the rest of theeconomy does not. Income generated by this growth in thepast was shared by the representatives of the colonial powerand by a small segment of the native population. Dualisticgrowth in a great number of countries has completelybypassed those areas and people who contributed nothing tothe export economy.13 In the absence of any connectionwith the growing sectors of the economy, these self-sufficientsubsistence societies had suffered a long period of stagnation.

Political colonialism which could exclusively be blamedfor enclave growth in backward countries has nowdisappeared, but its imprints on the economies of Asian,African and Latin American countries are still visible. It isdistressing to note that even modern growth processesleave large segments of the population completelyuntouched. Former World Bank President RobertMcNamara had estimated that about 40 per cent of the

Economic Growth, Development and Underdevelopment 7

developing world’s population did not benefit at all fromthe economic growth during the 1950s and 1960s.14 Thisexperience was rather frustrating to multitudes of population.It also led to the adoption of an alternative conception ofeconomic development. This viewpoint is generally referredto as the basic needs approach. This approach emphasizesthat mere economic growth (even if accompanied by anequitable distribution of income) cannot meet the basicneeds of the people. Consequently, “policies must beimplemented to ensure a rising and properly distributedsupply of goods, both private and public, if basic needs areto be met.”15

UNDERDEVELOPMENT: MEANING ANDINDICATORS

Since the end of the World War II, economists in both;Western countries and the Third World have taken particularinterest in the problems of relatively backward economies,and yet there is no definition of underdevelopment whichwill be universally acceptable. It is also difficult to classifydifferent regions of the world into ‘developed’ and‘underdeveloped’. In fact, there are vast differences in thenatural and human resources of different countries. Levelsof capital formation, technological knowledge and economicorganisation also differ considerably. All these differencesare of such a magnitude that it does not seem possible toclassify countries into developed and underdeveloped ontheir basis. USA, UK and Germany are all richly endowedwith natural resources and all of them are classified asdeveloped countries. However, the countries in Latin Americaand the Middle East are classified as underdeveloped inspite of the presence of large mineral resources. Density ofpopulation is high in India, Bangladesh, Pakistan, Indonesia,etc., whereas it is distinctly less in Latin American andAfrican countries. However, all these countries are classifiedas underdeveloped. Therefore, density of population alsocannot be relied upon to assess the degree ofunderdevelopment.

Occupational Distribution and UnderdevelopmentIn debates on problems of economic underdevelopment,

occupational distribution of population is often mentionedas an objective criterion to divide countries betweendeveloped and underdeveloped. No doubt it is a usefulcriterion; at the same time from the point of view of analyticalrigour, it is not completely reliable. It is widely held that thecountries in which the primary sector (i.e., agriculture,forestry, animal husbandry, etc.), provides employment toa large proportion of labour force, are underdeveloped.This notion has certainly an objective basis. Most of thepoor countries are essentially agricultural and even if someindustries have been established in these countries, theirimpact is yet to be felt on the socio-economic life of thepeople. India, Nepal, Bangladesh, Pakistan and Tanzaniafall in this category. In contrast, Mexico, Chile, Brazil andArgentina, are not agrarian economies, yet these countriesare underdeveloped though the degree of underdevelopmentis not exactly the same as in essentially agrarian economies.The occupational distribution of population and the sectoraldistribution of national income are surely the indicators ofthe direction of economic change but they may not alwayscorrectly indicate the level of development achieved in aparticular country.

Low Per Capita Income as an Indicator ofUnderdevelopment

The UN experts have defined an underdevelopedcountry as the one in which per capita real income is lowwhen compared with the per capita real income of theUSA, Canada, Australia and Western Europe.16 Thisdefinition has focused its attention on the relatively lowerlevels of real income per capita in Afro-Asian and LatinAmerican countries.

Natural resources of a country act as a limiting factorin economic development. Man by his ingenuity can developproductive forces, but poor natural resources of a regionwill always prove to be a serious obstacle to widespread

Box 1.3

Economic Growth, Development and Underdevelopment

Economic Growth‘Economic growth’ refers to increase over time in a country’s real output of goods and services – or more appropriately product per capita.Economic Development‘Economic development’ implies progressive changes in the socio-economic structure of a country. Further, development goals are definedin terms of progressive reduction in unemployment, poverty and inequalities.Economic UnderdevelopmentAn underdeveloped country is characterised by a low level of per capita income. The Indian Planning Commission defines an underdevelopedcountry as one which is characterised by the coexistence of unutilised or underutilised manpower and of unexploited natural resources.

8 Indian Economy

industrial activity. Therefore, it is quite possible that acountry fails to reach the European level of affluence, thoughit has harnessed all of its productive resources. Real incomeper capita in such a country may be lower than in the WestEuropean countries, yet it cannot be characterised asunderdeveloped by any logic.

Moreover, we cannot treat a country as developedmerely because its per capita income is comparable to thatof the USA or Australia. Joan Robinson rightly asserts,“For several of the Arab States, GNP per capita suddenlyjumped to levels which exceed that of the richest WesternStates, yet in these countries are found some of the poorestand least developed communities in the world.”17 This clearlyindicates that underdevelopment or development of a countryor a region may not always be reflected in its per captianational product or the average living standard.

Poverty Based Concept of UnderdevelopmentModern development economists now define

development as a process involving elimination of poverty,income inequalities and unemployment. In this framework,underdevelopment is a situation characterised bythe worst kinds of deprivation. Todaro, while definingunderdevelopment in terms of poverty, goes beyond narroweconomic criteria when he states, “Underdevelopment is areal fact of life for more than 3 billion people in the world— a state of mind as much as a state of national poverty.”18

Denis Goulet provides a forceful portrayal ofunderdevelopment in terms of poverty. He states,“Underdevelopment is shocking: the squalor, disease,unnecessary deaths, and hopelessness of it all! No manunderstands if underdevelopment remains for him a merestatistics reflecting low income, poor housing, prematuremortality or underemployment. The most emphatic observercan speak objectively about underdevelopment only afterundergoing, personally or vicariously, the ‘shock ofunderdevelopment’. This unique culture shock comes toone as he is initiated to the emotions which prevail in the‘culture of poverty’. The reverse shock is felt by thoseliving in destitution when a new self-understanding revealsto them that their life is neither human nor inevitable... Theprevalent emotion of underdevelopment is a sense of personaland societal impotence in the face of disease and death, ofconfusion and ignorance as one gropes to understand change,of servility toward men whose decisions govern the courseof events, of hopelessness before hunger and naturalcatastrophe. Chronic poverty is a cruel kind of hell; and onecannot understand how cruel that hell is merely by gazingupon poverty as an object.”19

Development Potential and UnderdevelopmentAccording to Jacob Viner, development potential of a

country is a much better criterion to judge the extent of itsunderdevelopment. Therefore, he defines an underdevelopedcountry as the one “which has good potential prospects forusing more capital or more labour or more available naturalresources, or all of these, to support its population on ahigher level of living, or if its per capita income level isalready fairly high, to support a larger population on a notlower level of living.”20 Definition of an underdevelopedcountry given by the Indian Planning Commission in theFirst Five Year Plan is akin to the one given by Jacob Viner.The Indian Planning Commission defines anunderdeveloped country as “one which is characterised bythe coexistence, in greater or less degree, of unutilised orunderutilised manpower on the one hand, and ofunexploited natural resources on the other.”21

The definition of underdevelopment given by JacobViner and the Indian Planning Commission appears to bequite scientific and logical as it focuses its attention on abasic characteristic of underdeveloped countries – theirdevelopment potential.

COMMON CHARACTERISTICS OFUNDERDEVELOPED/DEVELOPING

COUNTRIES

Notwithstanding differences in approaches to thequestion of underdevelopment, it is always possible to identifysome common characteristics of underdeveloped/developingcountries. Most underdeveloped countries, as alreadydiscussed, are poor and their present rate of capital formationis hardly adequate for sustained development efforts. Theireconomies are essentially agrarian and not muchindustrialisation has taken place in them, in response todemand for their products in export markets. In the followingpages, we shall now discuss common characteristics ofunderdeveloped countries in some detail:

1. Low GNP per capita. GNP per capita inunderdeveloped countries is appallingly low. Naturally, massof the population leads a wretched life under subhumanconditions. In India, for example, where GNP per capita hasbeen estimated to be $ 1,570 in 2013 at current prices,roughly one-third of the population is below the povertyline. On world scale, income inequalities between thedeveloped and underdeveloped countries are not only large,but the gap between them increases with every year thatpasses. According to the World Bank estimates, in 2013 theaverage GNP per capita of the high income economies was$ 39,820, whereas it was $ 709 in low income underdeveloped

Economic Growth, Development and Underdevelopment 9

countries. It is, however, pertinent to mention that all ThirdWorld countries are not equally underdeveloped in terms ofGNP per capita. Argentina, Brazil, Malaysia, Mexico, Turkeyand Venezuela are far more affluent than most of the Southand East Asian countries such as India, Nepal, Pakistan,Bangladesh, Myanmar, and Indonesia. Depending upon thedegree of underdevelopment, the development potentials inthese countries differ significantly.

The estimates of GNP per capita are usually calculatedby converting GNP to US dollars using exchange rates asconversion factors. These estimates, however, do not reflectappropriately the purchasing power of currencies due to thefact that relative prices of goods and services not traded oninternational markets vary substantially from one country toanother. The use of purchasing power parity (PPP) conversionfactors corrects for these differences and may, therefore,provide a better comparison of average income. If we usePPP estimates of GNP per capita, we find that incomeinequalities between the developed and under-developedcountries are somewhat lower than those we observe on thebasis of exchange rates as conversion factors. For instance,we can see from Table 1.1 that while GNP per capita inIndia was only $ 1,570 in 2013 as against $ 53,470 in USA,the PPP estimate of GNP per capita in India was $ 5,350against $ 53,750 in USA in 2013. Thus, India’s GNP percapita was about one-thirty fourth of USA’s GNP per capitain 2013 but one-tenth of USA’s PPP estimate of GNP percapita. Nevertheless, one cannot deny that there are substantialincome inequalities as among the developed and theunderdeveloped countries and within the underdevelopedcountries themselves as brought out clearly in Table 1.1.

2. Scarcity of capital. The rate of capital formationis relatively low in most of the low income less developedeconomies due to widespread poverty. When the absoluteincome is high, the ability to save is also high. This explainswhy the rate of capital formation is high in Japan, a highlydeveloped economy. In other developed countries, savingrates are modest because of the sway of consumerism. Thesaving rates are presently very high in some of the fastgrowing East Asian economies. For example, the savingrate in Malaysia, China and Singapore was 40 per cent ormore than 40 per cent of GDP, on an average, during 1997-2003.22 In most of the low income underdevelopedeconomies, the saving rate continues to be very low (lessthan 20 per cent of GDP in many cases). It has beenargued by Ragnar Nurkse that most of the underdevelopedcountries have been caught in the vicious circle of poverty,and thus their capacity to save is very low. On the demandside, the small size of the market acts as a disincentive andthe potential savers indulge in wasteful consumption whichthey might not do, if adequate investment opportunitiesare available.

3. Rapid population growth and high dependencyburden. Population has been increasing in underdevelopedcountries at the rate of 2 per cent per annum or more overthe past several decades. This demographic trend has beendetermined mainly by the fact that the medical facilitiesnow available in these countries have effectively broughtdown the mortality rates among all sections of the society,whereas the birth rate continues to be high due to widespreadpoverty, ignorance and religious orthodoxy. Fast growingpopulation in the Third World countries is both a causeand an effect of underdevelopment.

Table 1.1GNP Per Capita and PPP Estimates of GNP Per Capita in US Dollars (2013)

(Selected Regions/Countries)Developed Regions GNP PPP estimates Underdeveloped GNP PPP estimates

per capita of GNP regions per capita of GNPper capita per capita

Developed countries Underdeveloped countries

High Income Economies 39,820 40,790 Low Income Economies 709 1,903USA 53,470 53,750Germany 47,270 45,620 Middle Income Economies 4,751 9,561Japan 46,330 37,790 Brazil 11,690 14,750France 43,460 38,530 Malaysia 10,430 22,530UK 41,680 38,160 China 6,560 11,850Ita ly 35,860 35,540 Thailand 5,340 13,430Korea, Rep. of 25,920 33,440 Indonesia 3,580 9,270Greece 22,690 25,700 India 1,570 5,350

Pakistan 1,360 4,840Bangladesh 1,010 3,190Ethiopia 470 1,380

Note: Countries are arranged in order of GNP per capita.Source: World Bank, World Development Indicators, 2014, Table 1.1.

10 Indian Economy

Over the past six decades, the population in African,South Asian and Latin American countries has increased atan alarming rate making any significant improvement in theliving standards of the people rather difficult. Some of theagrarian economies in these regions have actually recordedsome decline in the living standards of the multitude ofpopulation in recent periods. Though this trend is unfortunate,it is not at all surprising. In any country where populationgrows roughly at a rate of 2 per cent per annum, for a stableper capita income the GNP must also record an annualincrease of 2 per cent. Assuming a capital-output ratio of4.0:1, which according to available statistical evidence isfairly reliable, an average 2 per cent annual increase in GNPwould require an investment rate of 8 per cent. Therefore,any country which plans for an annual 6 per cent rise in itsGNP per capita will have to mobilise roughly 32 per cent ofits GNP for investment purposes. This, under given socio-economic framework of underdeveloped countries, appearsto be rather difficult.

4. Low levels of productivity. Productivity of labourin underdeveloped countries is generally low. It is both acause and an effect of the low levels of living in thesecountries. According to Todaro, “low levels of living andlow productivity are self-reinforcing social and economicphenomena in Third World countries, and, as such, arethe principal manifestations of and contributors to theirunderdevelopment.”23 Obviously, at low levels ofproductivity the national income will be small and thus,apart from a microscopic minority, rest of the people in thecountry will have an appallingly low living standard. Hence,for raising the living standards of the mass of the presentlydeprived people, productivity of labour must riseconsiderably.

Labour productivity depends on a number of factors,such as, availability of other inputs which are combinedwith labour in production process, health and skill of workers,motivation for work and institutional set-up. The two inputs,viz., capital and managerial skill when combined with labourin the required quantity raise its productivity substantially.But in underdeveloped countries these inputs are in shortsupply. If these countries wish to raise the productivity oflabour, they will have to augment the supplies of thesestrategic inputs. Moreover, there are clear linkages betweenpoverty of the workers and their health and skill whichdetermine their productivity levels. Therefore, tackling ofpoverty in underdeveloped countries is required not merelybecause it involves a human problem, but it is quite importantfrom the point of view of growth as well.

5. Technological backwardness. In underdevelopedcountries over a wide range of industrial activity, productiontechniques are backward. Often, lack of Research and

Development (R&D) is blamed for the technologicalbackwardness in these countries. In certain cases, weakcommunication system between the research institutes andthe producers is believed to be the cause of sorry state ofaffairs in this regard. This, however, does not explain thewhole situation. In most cases, it is not the ignorance whichprevents producers from making use of most sophisticatedtechnology requiring extensive supply of capital. Manyunderdeveloped countries willingly opt for labour-intensivetechnology and their choice, though often dictated by theirrelative poverty, is not altogether irrational under the givencircumstances. In the absence of any social security againstunemployment, workers’ unions oppose introduction oflabour displacing technology in industries. This organisedattempt of workers is certainly a retrogressive act from thepoint of view of economic growth, but in order to check anincrease in unemployment, the State in underdevelopedcountries cannot permit unrestricted replacement of outmodedmachines by the most sophisticated ones.

6. High levels of unemployment and under-employment. Widespread unemployment particularly amongthe unskilled workers is an universal phenomenon in theThird World. Bulk of rural as well as urban unemploymentin underdeveloped countries is involuntary. Due to highlevels of poverty in these countries, markets for industrialproducts are small and provide little incentive to industrialiststo expand their activities. Faced with lack of effective demand,industries grow haltingly and offer too few new jobopportunities to the continuously increasing number ofworking population. The traditional agriculture characterisedby low productivity also suffers from lack of labour absorptioncapacity. Hence, with an increasing pressure of populationon land, disguised unemployment continues to grow. Peasantsare often aware of this phenomenon, but in the absence ofalternative employment opportunities, they stick to smallpieces of land which are not adequate even for subsistenceliving. Over a period of time, structural unemployment inunderdeveloped countries tends to grow worse. This is dueto the absence of any automatic mechanism that could becalled into play as unemployment rose. At present, thegravity of the situation can be followed from the fact that“almost 35 per cent of the combined urban and rurallabour forces in poor nations is unutilised.”24

7. Lower level of human well-being. Generally, threebroad kinds of indices are used in constructing a measure ofa person’s well-being: his current and prospective real income,his health and educational attainments. We have earlierstated in this chapter that in less developed countries, theGNP per capita is much lower than in developed countries.When we consider the two other indices, we find that thehuman well-being in less developed countries is far lower

Economic Growth, Development and Underdevelopment 11

than that in developed countries. Let us now consider thehealth indicator first. In most studies, experts have reliedon mortality indices and morbidity to judge the state ofhealth. On these indicators, less developed countries arefar behind the developed countries of the West. In 2011,life expectancy at birth for males was 60 years and forfemales 62 years in low income economies (as against this,life expectancy at birth for males was 76 years and forfemales 82 years in high income economies). Further, infantmortality rate in the low income economies was 56 per1,000 live births in contrast to 5 in the high income economiesin 2012. Quantitative measurement of morbidity is not easy.Yet, there is no doubt about the fact that the degree ofmorbidity is significantly higher in underdeveloped countriesthan in the developed countries.

The output of education is a durable good and thus itscontribution to human well-being is significant. Further,among different levels of education it is the primary levelthat has the highest productive value (a rate of return ofabout 26 per cent). However, less developed countries haveconsistently underinvested in primary education relativelyto education’s higher reaches.25 As a consequence of thisneglect of primary education, adult illiteracy rate was 39 percent in low income countries over the period 2005-10 whereasit was just 2 per cent in high income countries.

8. Wide income inequalities. Compared to developedcountries, income inequalities are larger in underdevelopedcountries. Data published in the World DevelopmentIndicators, 2014 suggest that income disparities are far

greater in many less developed countries than in the developedcountries. For example, if we compare the share of nationalincome accruing to the poorest 10 per cent of a country’spopulation with that of the richest 10 per cent as a roughmeasure of income inequalities, we note that a great numberof underdeveloped countries, e.g., Kenya, Namibia, Lesotho,Nigeria, Zambia, Colombia, Malaysia, Brazil, Mexico,Venezuela and Argentina have considerable degree of incomeinequality, while developed industrial market economiessuch as Finland, Denmark, Netherlands, Sweden, Germany,France and Japan have relatively less inequalities. (SeeTable 1.2 for data on income inequalities for some developedand developing countries).

World Development Report 2006 asserts that “Froman equity perspective, the estimation of opportunities mattersmore than the distribution of outcomes.”26 Unequalopportunities are large within many underdevelopedcountries. Inequalities in health and education in thesecountries often translate into unequal economic opportunities.

9. High incidence of poverty. The extent of absolutepoverty is an important dimension of the problem of incomedistribution in the developing countries. At relatively lowerlevels of GNP per capita, large income inequalities, as theyexist in the developing countries of Asia, Africa and LatinAmerica, have resulted in widespread poverty. The povertyproblem could perhaps be overcome in these countries witha more equitable income distribution. In near future, ifdeveloping countries wish to wipe out poverty they have nochoice except to improve the income distribution so as toensure a minimum standard of living in terms of calorie

Table 1.2Income Inequality in Selected Countries

Country Survey Share of income or expenditure Inequality measuresYear Poorest 10% Richest 10% Richest 10% Gini index*

to Poorest 10%Developed Countries

Denmark 2010 3 2 2 7.3 2 7France 2005 3 2 5 8.3 3 2Germany 2010 3 2 4 8.0 3 1Netherlands 2010 3 2 3 7.7 2 9Norway 2010 3 2 2 7.3 2 7Sweden 2005 4 2 1 5.2 2 6

Underdeveloped CountriesArgentina 2011 2 32 16.0 44Brazil 2012 1 42 42.0 53Colombia 2012 1 42 42.0 54India 2010 4 29 7.3 34Malaysia 2009 2 35 17.5 46Mexico 2012 2 39 19.5 48Nigeria 2010 2 33 16.5 43Zambia 2010 1 47 47.0 57

* The Gini index lies between 0 and 100. A value of 0 represents absolute equality and 100 absolute inequality.Source: World Bank, World Development Indicators 2014 (Washington DC, 2014), Table 2.9.

12 Indian Economy

intake and nutrition levels, clothing, sanitation, health,education and so on.

Poverty is, however, not easy to define and whateverbe the approach, there is bound to be an element ofarbitrariness in it. The World Bank uses a poverty line of$ 1.25 (2005 purchasing power parity $) a day a person tocompare poverty levels. According to this internationalpoverty line, 53.2 per cent of the people were below thepoverty line in South Asia in 1990 and 24.5 per cent in2011. In Sub-Saharan Africa, 56.6 per cent of the peoplewere below the poverty line in 1990 and 46.8 per cent in2011. The number of poor people in South Asia was 399million in 2011 while the number of poor people in Sub-Saharan Africa was 415.5 million in that year.27 Levels ofpoverty in other underdeveloped regions of the world arealso at comparable levels. Moreover, as pointed out byHuman Development Report 2014, sizeable portions of thepopulation of the developing countries are close to thepoverty threshold (the ‘near poor’) and any ‘shocks’ couldeasily push a large number of people back into poverty.28

Also, in addition to the fact of low levels of income onwhich the vast mass of the population has to subsist in thedeveloping countries, there is ample evidence of malnutrition,disease, ill-health and illiteracy in less developed countries.

10. Agrarian economy. According to HarveyLeibenstein, underdeveloped economies are essentiallyagrarian in their character.29 About 30 to 70 per cent of thepopulation depends on agriculture in these countries.Therefore, it is quite natural that a significant part of theGDP originates in this sector (See Table 1.3). The share ofincome in agriculture is, however, less than the share ofemployment in agriculture which clearly reflects the relativelylow productivity per labour unit in the agricultural sector.

Moreover, as J.K. Galbraith has stated, “a purely agriculturalcountry is likely to be unprogressive even in its agriculture”.In spite of transfer of agricultural technology from developedcountries to less developed countries, the situation has notsignificantly changed and Galbraith’s observations remainas much correct now, as they were a few decades ago.

In underdeveloped countries, technologicallyagriculture is far more backward than in developed countries.Application of chemical fertilisers to soil is rather small andhigh-yielding variety (HYV) seeds have not been developedfor all crops. In all those countries where per capita cultivableland is small due to high pressure of population, operationalholdings are both subdivided and fragmented. Survival offeudal relations of production in agriculture has made thesituation worse, as it has arrested development of agricultureon modern lines.

11. Lower participation in foreign trade. Someeconomists have asserted that most underdevelopedeconomies have foreign trade orientation. But this does notnecessarily suggest that their proportions of exports andimports to domestic product are much higher than those ofdeveloped countries. According to Simon Kuznets, the extentof participation of a country in foreign trade cannot bemeasured directly because the proportion of foreign trade tototal output is affected by the size of a country. He istherefore of the view that the effects of size should first bequantified and eliminated. “Once this adjustment is made, itbecomes clear that the extent of participation in foreigntrade by underdeveloped countries is distinctly lower thanthat of developed countries.”30 Underdevelopment of acountry cannot, by itself, induce large foreign trade. Theinadequate development of infrastructure for foreign trade,particularly transportation system, trade organisation and

Table 1.3Employment and Income in Agriculture in Some Selected Developing Countries

Country Agricultural Employment as Percentage of GDP OriginatingPercentage of Total Employment in Agriculture

2010-12 2012(1) (2) (3)

Albania 41.5 22Bhutan 62.2 17Cambodia 51.0 36China 34.8 10Egypt 29.2 14India 47.2 18Indonesia 35.1 15Philippines 32.2 12Sri Lanka 39.4 11Thailand 39.6 12Vietnam 47.4 20

Source: World Bank, World Development Indicators 2014, Table 3.2 and Table 4.2.

Economic Growth, Development and Underdevelopment 13

banks with overseas branches prevent growth of foreigntrade. In addition, backwardness of production technologyin underdeveloped countries is one such factor that wouldmake large exports and imports impossible.

12. Dependence . Since the process ofunderdevelopment began in Asia, Africa and Latin Americawith their colonial exploitation by the metropolitan countries,and their economies over time got conditioned by thedevelopment in advanced capitalist countries, even thoughthese countries have won political freedom, their dependencepersists on their former rulers. This phenomenon has beencaused by the integration of the economy of the colony withthat of the metropolitan country giving rise to an internationaldivision of labour which allows industrial development totake place only in the latter. The economies of colonies inthe process became subservient to metropolitan interestsand were forced to specialise in primary producing activities.The pattern and direction of their foreign trade is alsoconditioned by this basic development taking place in theirstructure. While most of the economy remains backward, a

few industries are sometimes established in response todemand in foreign markets.31 This explains why for a longperiod tea and jute contributed a major part of India’sexports. Similarly, Brazil’s great dependence on the exportsof coffee, Malaysia’s on rubber and Cuba’s on sugar reflectedthe backward nature of their economies.

Apart from the above-mentioned characteristics ofunderdeveloped economies, there are a few otherdistinguishing features of these economies. For example,social life in the Third World countries is traditional. Peopleare generally orthodox in their outlook and hardly make anyattempt to change outdated socio-economic relations. Theeconomic organisation thus remains retrogressive andproves to be a serious obstacle to development. Even thoughland reforms have been carried out in some underdevelopedcountries, their rural structure continues to remain medieval.In some of these countries, special institutions of agriculturalfinance have not been set up and thus the grip of moneylenderson agriculture is quite strong.

Box 1.4

Underdeveloped/Developing Countries: Common Characteristics

l Low GNP per capita — According to World Bank, low income economies and middle income economies are underdeveloped/developing economies.— GNP per capita in low income economies (2013) $ 709— GNP per capita in middle income economies (2013) $ 4,751— GNP per capita in India (2013) $ 1,570— GNP per capita in China (2013) $ 6,560

l Scarcity of capital — Most underdeveloped countries save less than 20 per cent of their GDP and they have smallerstock of capital.

l Rapid population growth — 2 per cent per annum or more.l Low levels of productivity — Low levels of productivity and low levels of living reinforce each other.l Technological backwardness

— Lack of R&D— Labour displacing technology is opposed by the workers.

l Unemployment and underemployment— Almost 30 per cent of labour remains unutilised or underutilised— Disguised unemployment in agriculture is widespread.

l Lower level of human well-being in low income economies— Adult illiteracy rate (2005-10): 39 per cent— Life expectancy at birth (2011): 60 years for males and 62 years for females— Infant mortality rate (2012): 56 per thousand.

l High incidence of poverty — 399 million people in South Asia below the poverty line in 2011 (24.5 per cent of total population).l Agrarian economy — 30-70 per cent of the workforce employed in agriculture.l Lower participation in foreign tradel Dependencel Less development of human capitall Developing economies are ‘Soft States’.

14 Indian Economy

As compared to developed countries, the humancapital is also far less developed in the Third Worldcountries. Whereas the adult literacy rate is as high as 98per cent in high income countries, it is as low as 62 per centin low income countries. Furthermore, the expenditure onresearch is pitiably low in underdeveloped countries.

Lastly, almost all underdeveloped countries are ‘softStates’. Their characterisation as soft States implies thatthey lack social discipline. The legal system is also defectiveand various legislative measures are generally scuttled atimplementation level. This happens because the bureaucracyoperates under the influence of those very people whoseactivities are to be regulated by the State. In Gunnar Myrdal’sopinion, this acts as a serious obstacle to development in theThird World countries.

NOTES

1. Ronald A. Shearer, “The Concept of Economic Growth”, Kyklos,Vol. XIV (1961), p. 499.

2. Gerald M. Meier and Robert E. Baldwin, Economic Development:Theory, History and Policy (New York, 1957), p. 2. Also C.N. Vakiland P. Brahmananda, Planning for an Expanding Economy (Bombay,1966), p. 1.

3. S. Kuznets, “Towards a Theory of Economic Growth”, inR. Lekachman (ed.), National Policy for Economic Welfare at Homeand Abroad, p. 16.

4. Jacob Viner, International Trade and Economic Development (Oxford,1953), p. 125.

5. Charles Bettelheim, Some Basic Planning Problems (Bombay, 1961),pp. 57-8.

6. Mahbub ul Haq, “Employment and Income Distribution in the 1970s:A New Perspective”, Pakistan Economic and Social Review, June-December 1971, p. 6.

7. Charles P. Kindleberger and Bruce Herrick, Economic Development(New York, 1971), p. 1.

8. Dudley Seers, “The Meaning of Development”, Eleventh WorldConference of the Society for International Development (NewDelhi, 1969), p. 3.

9. Jean Dreze and Amartya Sen, An Uncertain Glory: India and itsContradictions (Allen Lane, Penguin, 2013), p. 42 and pp. 43-4.

10. Robert Clower, et al., Growth Without Development: An EconomicSurvey of Liberia (Evansten, III, 1966).

11. H.W. Singer, “Poverty, Income Distribution and Levels of Living:Thirty Years of Changing Thought on Development Problems”, inC.H. Hanumantha Rao and P.C. Joshi (eds.), Reflections on EconomicDevelopment and Social Change — Essays in Honour of ProfessorV.K.R.V. Rao, (Bombay, 1979), p. 32.

12. Jean Dreze and Amartya Sen, op. cit., p.18.13. Hans Singer, "Dualism Revisited: A New Approach to the Problems

of Dual Society in Developing Countries", Journal of DevelopmentStudies VII. 1, (Oct. 1970), pp. 60-1.

14. Robert S. McNamara, One Hundred Countries, Two Billion People:The Dimensions of Development (New York, 1973), p. 11.

15. Paul Streeten, et al., First Things First: Meeting Basic HumanNeeds in Developing Countries (New York, 1981), p. 108.

16. United Nations, Measures of Economic Development ofUnderdeveloped Countries, (New York, 1951), p. 3.

17. Joan Robinson, Aspects of Development and Underdevelopment(New Delhi, 1980), p. 5.

18. Michael P. Todaro, Economic Development (Pearson EducationLtd., Seventh Edition, 2000), p. 15.

19. Denis Goulet, The Cruel Choice: A New Concept in the Theory ofDevelopment (New York, 1971), p. 23.

20. Jacob Viner, “Economics of Development”, in A.N. Agarwala andS.P. Singh (eds.), The Economics of Underdevelopment (New York,1963), p. 12.

21. Government of India, Planning Commission, The First Five YearPlan (Delhi, 1952), p. 7.

22. Rajesh Mehta and Manmohan Agarwal, “India: The State of itsEconomy”, in Sankar Kumar Bhaumik (ed.), Reforming Agriculture(New Delhi, 2008), Table 1.3, p. 10.

23. Michael P. Todaro, op. cit., p. 54.24. Ibid., p. 56.25. Parth Dasgupta, An Enquiry into Well-being and Destitution (New

York, 1993), pp. 98-9.26. World Bank, World Development Report 2006 (New York, 2005),

p. 4.27. World Bank, Global Monitoring Report 2014/15 (Washington DC,

2015), Table 1, p. 19.28. United Nations Development Programme, Human Development

Report, 2014 (New York, 2014), p. 19.29. Harvey Leibenstein, Economic Backwardness and Economic Growth

(New York, 1957), p. 40.30. Simon Kuznets, Economic Growth and Structure — Selected Essays,

op. cit., pp. 278-91.31. T. Dos Santos, “The Crisis of Development: Theory and the Problem

of Dependence in Latin America”, in Henry Bernstein (ed.),Underdevelopment and Development — The Third World Today(Harmondsworth Middlesex, 1976), pp. 72-9.

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