CHAPTER-V

NATURE OF INDIAN ECONOMY Meaning of economic growth and development:

Meaning of economic growth:
Economic growth may be defined as an increase in real terms of the output of goods and services that is sustained over a long period of time, measured in terms of value added. Economic growth is a dynamic concept and refers to a continued increase in output. Economic growth depends upon the following important factors: 1. Human resources (labour supply, education, discipline, motivation), 2. Nation resources (land, minerals, fuels, environmental quality); 3. Capital formation (machines, factories, roads); and 4. Technology (science, engineering, management, entrepreneurship).

Meaning of economic development:

Economic development may be defined as the processing of increasing the degree of utilisation and improving the productivity of the available resources of a country which leads to increase of economic welfare of the community by stimulating the growth of national income. Thus, economic development encompasses economic growth. Economic development implies the following: 1. Increasing the availability and widening the distribution of basic life-sustaining goods such food, shelter and protection. This, however, would be possible with a fast increase in real per capita income. 2. Raising the levels of standard of living in addition to higher incomes. 3. Provision of more goods, better education and greater attention to cultural and humanistic values, all of which will serve as basis in enhancing material well-being of individuals and society. 4. Expansion of range of economic and social choice to individuals and nations by freeing them from servitude and dependence not only in relation to other people and nationstates, but also to the forces of ignorance and human misery. 5. Economic development is the assessment of positive freedom of the individuals in the economy.

Economic Growth
1. Economic growth indicates the quantitative improvement in the economic progress of the county. 2. It shows growth in national income and per capita income overtime.

Economic Development

Economic growth indicates the qualitative improvement in the economic progress of the county. It shows not only a sustained increase in national and per capita income but also qualitative changes which lead higher standard of living. 3. It is a narrow concept. A country It is a broader concept. Economic development may grow but there may not be any includes the notion of economic growth. development in the economy.

General Economics

5.1

Indian Economy

Economic development on the basis of income classification and human development index classification: A. Income classification:
The World Bank has classified the world economies according to 2008 Gross National Income (GNI) per capita, calculated using the World Bank atlas method. The groups are:

Income
Low income Lower middle income Upper middle income High income

GNI per capita

$975 or less $976-$3855 $3856-$11905 $11906 or more

B. Human Development Index (HDI) classification: All the countries included in the Human Development Index are classified into three clusters by achievement in the human development: Level of Human development Human development index(HDI) points High human development 0.800 or above. Medium human development 0.500 0.799 Low human development Less than 0.500

An Undeveloped Economy:
An economy is said to be undeveloped or underdeveloped economy, if it has the following characteristics: 1. Agriculture is the main occupation of the people. 2. Low Gross National product per capita. 3. Poverty is widespread, so savings and investments are also quite low. 4. Population grows at a high rate (about 2% per annum) 5. The standard of living of people is low. 6. Low ability to save and therefore scarcity of capital. 7. High percentage of dependent population. 8. The productivity of labour is considerably low. 9. The production techniques are obsolete and backward. 10. Investment in research and development is quite low. 11. The incidence of unemployment and underemployment is quite high. 12. The level of human well-being measured in terms of real income, health and education is generally low. 13. Income inequalities are widespread. 14. Low participation in export, import and foreign trade. 15. Social life is traditional; people are generally orthodox in their outlook and they seldom make any changes in their socio-economic relations.

Indias case:
Sometimes Indian economy is also considered undeveloped due to the following reasons: 1. Agriculture is the main occupation: Agriculture is the main occupation of the people in India. Around 70% of population was engaged in agriculture. In 2001, nearly 60% of the population was dependent on agriculture. There has been increase in the absolute number of people in agricultural activities in India but it has decreased in terms percentage of GDP over the years.

General Economics

5.2

Indian Economy

2. High rate of poverty: In India, the poverty is very high. Every third poor person in the world is an Indian. That means one third of the worlds poor live in India. According to the National Sample Survey Organization (NSSO) survey in 2004-05 nearly 22% and in 2006-07 around 19.3% of the population was below poverty line. 3. High rate of population Growth: Indian population has grown at a fast rate of more than 2%. India is facing the problem of population explosion as the death rate is falling but there is no corresponding fall in the birth rate. The dependency rate i.e., Non-working age (below 15 and above 64 years of age) group ratio is nearly 40% and thus working group ratio is 60%. 4. Low per capita income: Indias per capita income is low not only compared to developed countries like USA, UK, Germany but also developing countries like China, Sri Lanka, Indonesia etc. Because of low level of per capita income the standard of living is quite low. 5. Low rate of saving and Investment: In India, because of low per capita income and low saving rates, the gross capital formation rates also is very low. Gross domestic capital formation was below 20% during the planning period. In 2004-05 gross domestic capital formation rate was 30%. In 2008-09 it was . 6. Backward techniques: Techniques of production are still backward in the agriculture sector and industrial sector as compared to advanced countries. 7. Unemployment is quite high: The incidence of unemployment in India is quite high. During the planning period 35.39 million persons were unemployed in India and the Tenth Plan, 34.85 million people were unemployed. So we have had to create jobs, for 70.14 (34.85+35.29) million-person years. Thus, we find that there are a large number of unemployed people in India. Not only this, the unemployment rate over the years has increased. In India, there is very high rate of open unemployment and disguised unemployment. Disguised unemployment means apparently people are employed but their marginal productivity is nil or negative. Disguised unemployment is more common in the agricultural sector. 8. Human well-being: In India, the level of human well-being is also quite low. For measuring human well-being, Human Development Index (HDI) constructed by the United Nations Development Programme (UNDP) is used. The HDI is a composite of three basic indicators. 1. Longevity is measured in terms of life expectancy at birth 2. Knowledge in terms of education 3. Standard of living in terms of real GDP per capita According UNDP report, in 2005, Indias rank was 127th among 177 countries for three years in a row. In 2008, The HDI for India is 0.609, which gives the country a rank of 132nd out of 179 countries with data. 9. Unequal distribution of income and wealth: The distribution of income and wealth in India is not equitable. The Gini index is used to measure the inequality in the pattern of distribution of income and wealth in the country. Gini index measures the extent to which distribution of income/consumption among individuals
General Economics

5.3

Indian Economy

or households within an economy deviates from a perfectly equal distribution. It is a measure of relative poverty. The Gini coefficient lies between 0 and 1. The interpretation is as under: Gini index Interpretation Zero (0) Perfect equality in distribution of income and wealth Close to zero Relative equality in distribution of income and wealth Close to one Relative inequality in distribution of income and wealth One (1) Perfect inequality in distribution of income and wealth According to the World Development Report2006, the Gini index for India in 1994 was 0.297 and in 1999-00 was 0.33. Thus, it indicates that the inequalities in distribution of income and wealth have increased.

India- A developing economy:

In fact India is not undeveloped country. It is an underdeveloped country. It is a developing country. The following facts highlight that India is a developing country. 1. Rise in National Income:

Indias national income has increased by 15 times during the planning period. Average NNP has increased at a rate of less than 5% per annum. National income was Rs.1,32,367 Crores in 1950-51, which rose as follows: Year National income (NNPFc) 1999-00 prices 2003-04 1963544 2004-05 2141776 2005-06 2306894 2006-07 2530494 2007-08 2750646 2008-09 2009-10 Thus we can say that India is growing at low rate in comparison to developed countries 2. Rise in Per Capita Income: Per capita income in India has increased by more than 4 times during the planning period. Average per capita income has increased at a rate of 2.2% per capita income in India was Rs.3,687 in 1950-51 (at constant prices). It rose as follows: year Per capita income 1999-00 prices 2003-04 18317 2004-05 19469 2005-06 20858 2006-07 22553 2007-08 24132 2008-09 2009-10 3. Significant changes in occupational distribution of population: Occupational structure can be divided into three groups. 1. Primary sector: Primary sector includes agriculture and allied activities such as animal husbandry, forestry, poultry farming etc., 2. Secondary Sector: It includes all types of manufacturing and construction activities. 3. Tertiary sector: It includes services like trade, transport, communication, banking, insurance and other such services.
General Economics

5.4

Indian Economy

Indian economy has developed rapidly. So there is a shift of labour force from primary (agricultural) sector to secondary and tertiary (non-agricultural) sector. The following table shows the occupation structure in India. Occupational Distribution of Working Population in India Occupation 1951 2001 2007 2008 2009 Primary sector 72.1 59.3 52 Secondary sector 10.6 18.2 20 Tertiary sector 17.3 22.5 28 Total 100 100 100 4. Important changes in sectorial distribution of Gross Domestic Product (GDP): The share of agricultural sector in Indias national income has decreased over the years and shares of secondary (industrial) and tertiary (services) sectors have improved in the GDP. Composition of GDP Occupation 1951 2001 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 Primary sector 56.1 23 20.2 19.5 18.5 17.8 17.1 Secondary sector 11.7 23.8 19.6 26.4 26.7 26.5 25.9 Tertiary sector 32.7 53.2 60.2 54.1 54.8 55.7 57.0 Total 100 100 100 100 100 100 100 100 5. Growing capital base of the economy: After independence, in the Second Plan a high priority was given to establishing basic and capital goods industries. These include, iron and steel, heavy chemicals, nitrogenous fertilizers, heavy engineering, machine tools, locomotives, heavy chemicals, heavy electrical equipment, petroleum products and many more. 6. Improvements in social overhead capital: Social overhead capital includes transport, facilities, irrigation facilities, energy, education system, health and medical facilities and in India these facilities have improved. It can be seen from the following points. 1. Indian railways are Asias largest and worlds fourth largest railway system. It is also the worlds second largest rail network under a single management. The railways route length has increased steadily over the years. Diesel and electrical locomotives have replaced steam engines. 2. The Indian road network has become the second largest in the world aggregating 3.32 million kilometres. 3. Although the country is still facing energy crisis, there has been an impressive increase in eh installed capacity. In 2008-09, the installed capacity was .In 2004-05, the installed electricity generating capacity was 1,37,500 MW (Mega Watt) against 2.300 MW in 1950-51 and 74,700 MW in 1990-91. 4. Irrigation facilities have increased raising the land under irrigation from 22.6 million hectares in 1950-51 to 84.7 million-hectares in 2003-04. 85 million-hectares in 2008-09. 5. The literacy ratio has increased from 18.33 % in 1951 to 65.38 % in 2001. 6. In the fields of medicine and health, some development has taken place. The number of doctors has increased by more than 9 times increasing from 61.8 thousand in 1950-51 to 625.1 thousand in 2003-04. 7. Development in the banking and financial sector:
General Economics

5.5

Indian Economy

After the nationalization of 14 banks in 1969 and 6 banks in 1980 and nationalization RBI, in 1949, the important developments have taken place in the banking and financial sector. Agricultural sector, small-scale industries and other sectors have been getting banks funds on a priority basis and at confessional rates of interest from NABARD and RRBs. Thus, we can say, India is on the road of development.

India- A Mixed Economy:

India is a mixed economy because it contains public and private sectors both. 1. Private ownership of means of production: Agriculture and most of the industrial and services sectors are in the private hands. 2. Important role of market mechanism: Market forces of demand and supply have free role in determining prices in various markets. Government regulations and control over period of time have reduced a lot. 3. Growth of monopoly houses : Over a period of time, many big business houses have come into being and have been growing such as Tata Birla, Reliance, Infosys etc., 4. Co-existence of public sector and private sector: After Independence, the government recognized the need to provide infrastructure for the growth of the private sector. Also, it could not hand over strategic sector like arms and ammunition, atomic energy, air transport etc., to the private sector. So public sector was developed on a large scale. 5. Economic planning: The Planning Commission lays down overall targets for the public sector and private sector. The government tries to achieve the objective of economic welfare by providing incentives to these sectors. Thus economic planning is necessary to realize overall economic goals. From the above characteristics, we conclude that Indian economy is a mixed economy.

Five year plans in India:

To understand Indian economy better, it is necessary to understand the planning period, their objectives and achievements. The Indian economy has seen so far Eleven Five Year Plans and Six Annual Plans.

Planning commission In the political independent India during March 1950, The Indian planning commission was established under the chairmanship of Jawaharlal Nehru. The Prime minister will be the chairman of the planning commission. The commission consists of eight members namely: 1. Prime Minister (Chairman), 2. Four full time members (Including Deputy Chairman), 3. Minister of planning 4. Minister of finance and 5. Minister of defence.

Functions of planning commission

The important functions of the planning commission are: 1. Identifying the resources 2. Formulating the plan 3. Setting the plan priority
General Economics

5.6

Indian Economy

4. 5. 6. 7.

Demarking the stages of plan Determining the plan machinery Making periodic assessment Making ancillary recommendation, if any, after periodic assessment.

Objectives of five year plans in India:

The broad objective of the Five year Plans in Indian are: 1. To attain economic growth 2. To attain self-reliance 3. To removal of very and unemployment, reduction of inequality 4. To control of population growth

National Development Council (NDC)

In order to establish coordination between the Planning Commission and the states of Indian union, the National Development Council was established by the Government of India on 6th August 1952. The National Development Council is composed of the following members. 1. Prime Minister of India (Chairman) 2. Chief Ministers of all the states. 3. Members of the planning Commission.

Functions of National Development Council:

The important functions of National Development Council are: 1. To make periodical review of the Five year Plan at different phases and time. 2. To consider important question related to Social and Economic policy affecting national development. 3. To recommend various measures for achieving aims and targets set out in our national plan 4. To take a final decision regarding the allocation of central assistance for planning among different states. 5. To approve the draft plan prepared by the planning commission of our country.

Period and Priority of Five year plans in India: Five year plans Period Priority
I II III

Agriculture & Reconstruction of Economy Industry Self- reliance, Agriculture 1966-67,67-68,68-69 Three Annual Plans (plan holiday) IV 1969-74 Growth with social justice and equity V 1974-79 Removal of poverty and self-reliance Annual plan 1979-80 (Plan holiday) VI 1980-85 Direct attack on poverty VII 1985-90 Increase employment and productivity Annual plan 1990-92 (Plan holiday) VIII 1992-97 Energy and power IX 1997-02 Growth with social justice and equity X 2002-07 Eliminate poverty and improving infrastructure XI 2007-12 Inclusive growth

1951-56 1956-61 1961-66

Assessment of Five year plans in India:

General Economics

5.7

Indian Economy

First plan (1951-1956):

The first plan accorded highest priority to agriculture, irrigation, transport and power. A monsoon was favourable and hence there was good agriculture production. Difficulties 1. The planning Commission didnt have a reliable data start with. 2. The economy was to be built, bur with little resources and technology in its kitty. Assessment The national income of the country increased by 18% (3.6% p.a.) against the target of 11% (2.1% p.a.) and the rate of investment increased by 7.4% of national income. The net output of agriculture and allied sectors with by 14.7% the output. Hence, the first five year plan is a highly successful plan.

Second plan (1956-1961):

The second plan gave major stress to the development of basic industries. The basis of this was Mahalanobis Model. The aim was to give Big Push to the economy through industrialization. The other aims were a repaid increase in national income generation of greater employment opportunities and reduction in inequalities of income and wealth. Difficulties: 1. Suez Crisis. 2. Failure of monsoons 3. Inflationary trends and curtailment of foreign exchange reserves. 4. Agriculture and small scale industries remained sluggish. Assessment The plan had a target to increase national by 4.5% but in increased only by 4.2%. The total production of good grains increased from 65.8 million tonnes to 76.0 million tonnes. Huge steel plants, heavy engineering and chemical industries cement and fertilizer industries, cement and fertilizer industries were established. Hence, this plan can be regarded as moderately successful.

Third plan (1961-1966):

The basic aim of the third plan was to make the economy self-reliant and self generating economy. It also laid greater importance to raise agriculture output which led to greater allocation for agriculture. Difficulties 1. Chinese Aggression (1962) 2. Indo-Pak Conflict (1965). The production priorities became defence oriented. 3. There were poor monsoons every year of the five year except in 1964-65. 4. The growing trade deficit and mounting debt obligation led to more and more borrowings from the International Monetary Fund. 5. The rupee was devalued in June 1966 to little success. Assessment: The third plan had aimed at securing an increase national income of 5.6% per annum. But the national income rose only 2.7%. The agriculture production increased only by 2.8% against the target of 5% even the industrial production increased by 7.8% as against the target. Of 11%, hence the third plan was a dismal filature. 5.8 Indian Economy

General Economics

Interim Plan (1966-1969):

The miserable failure of the third plan forced the government to declare plan holiday, three annual plans were drawn in this intervening period.

Fourth plan (1969-1974):

The fourth plan was officially launched on 1st April 1969. The major objective of this plan was growth with stability. The emphasis was also given to social justice and equality, to create more employment and to provide basic facilities for people. Difficulties: 1. Bottle neck in the field of energy and transport. 2. Indo-Pak war in 1971. 3. Bangladesh refugees in India worsened the situation. Assessment: The plan target was to increase 5.7% in national income per annum, but it was able to attain only 2.1% per annum. The per capita income grew by 1.2% per annum. The food production was 104.7 million tonnes during 1973-74 against the target of 129 million tonnes. It was again a miserable failure.

Fifth plan 1974-1979):

The Fifth draft as originally drawn up was part of long-term perspective plan covering a period 10 years from 1974-75 to 1985-86. The two principle objectives of the fifth plan were, Removal of Poverty and Attainment of Self-reliance. In order to realize these objectives the plan aimed at 5.5% growth rate. Difficulties: 1. Erratic growth and fluctuations throughout plan period, especially in agriculture production. 2. Bottlenecks prevailed throughout the plan period. Assessment The target in first draft was 5.5%, but was later on revised it to 4.4% in the final plan. During 1974-79 the growth was 4.8% per annum. The annual rate of industrial growth was 6% against the target of 8.2%. During the plan 7928 MW of power was added against the target of 12500 MW. The plan failed to create any solid foundation on the basis of which subsequent growth process could be sustained.

Rolling Plan (1978-80):

The Janatha Government which came to power terminated the fifth plan in 1978 and started the rolling plan, where the performance of annual plan was to be assessed and a new plan based on the assessment would be made in subsequent year. But by 1979-80 the economy suffered a major setback and GDP declined by 5.2%.

Sixth plan (1980-85):

The basic objective of the sixth plan was removal of poverty. The plan aimed at achieving economic and technological self-reliance., reducing poverty, generating employment, and improving the quality of life of the poorest through the minimum needs programmed, etc. Difficulties: 1. Household savings did not increase as anticipated 2. Public sector Units did not generate surplus
General Economics

5.9

Indian Economy

3. Serious drought in majority of the states in the country during 1984-85. Assessment: Despite the difficulties the target of 5.2% growth in GDP per annum was attained successful and the GDP growth was 5.5% per annum. The percentage of population living Below Poverty Line declined from 48.3% in 1977-78 to 35% in 1984-85. There was an all round economic growth and hence was termed as a major successful plan.

Seventh Plan (1985-90):

The seventh plan aimed at increasing the employment, productivity, energy creation and slowing down the population growth. Difficulties 1. High fiscal deficit. 2. Adverse balance of payment 3. Increase in inflation 4. Inefficient utilization of resources. Assessment: Though the targeted growth was 5% per annum, the economy due to bumper harvest in last 2 years of plan period recorded an impressive 6% of GDP growth for the whole of the plan period. The annual growth rate of food grain production was 3.9% during the plan as against the target of 5% growth rate. Industrial sector grew at 7.8% during seventh plan against the target of 7.9%. But unfortunately, it did not help the economy to register a steady rate of growth during the plan period.

Annual Plans (1990-91, 1991-92):

The years 1990-91 were moderate in terms of growth where 5.4% growth in GDP was attained. But the crisis seeds that germinated in 1990 got momentum and ended up in 1991 economic crisis. During 1991-92 the rate of growth of GDP touched the rock bottom of 0.8% and both industrial and agricultural sectors registered negative growth rate of 2.8% and 0.1% respectively.

Eighth plan (1992-97):

The eighth plan recognized the need for re-orientation of planning in keeping with the process of economic reforms, which were taken up in 1991 for reconstructing the economy. The role of planning commission was redefined from a highly centralized planning system to indicative planning. Eighth plan emphasized upon 1. Human resource development as main focus of planning 2. A large economic space for private sector 3. Development of infrastructure 4. Greater role for the market to infuse economic efficiency even in the public sector. Difficulties 1. Controlling the inflation and recession of 1991. 2. Setting right the pessimism tendencies created in 1991 economic crisis.

Assessment:
The target for eighth plan was 5.6% per annum. But the growth attained was an impressive 6.7% per annum GDP growth. Eighth plan was path breaking effort. The state directed
General Economics

5.10

Indian Economy

system of planning was replaced by indicative planning. Greater role had been accorded to the private sector in all sectors of the economy, including social sector. There was decentralization of planning activities, in industrial development greater emphasis was placed on manufacturing activities.

Ninth plan (1997-2002):

Planning commission released the draft of Ninth plan document on March 1 1998, the focus of the plan was Growth with Social justice & equity the important objectives of the plan are given below. 1. Priority to agriculture and rural development with a view to generating adequate productive employment and eradication of poverty. 2. Accelerating the growth rate of the economy with stable prices. 3. Providing the basic minimum services of the safe drinking water, primary death care facilities, universal primary education, shelter and connectivity to tall in a time bound manner. 4. Containing the growth of population 5. Ensuring the environmental sustainability of the development process through social mobilization and participation levels. 6. Empowerment of women and socially less privileged groups such as scheduled castes scheduled tribes and other backward classes and minorities as agents of socioeconomic change and development. Difficulties: 1. Low agriculture growth during the first three years. 2. Reduced demand for industrial goods. 3. Recession tendencies in the world economy. Assessment: The target for Ninth plan was 6.5% per annum of the GDP growth, but the realized growth was 5.5% in constant prices. The per capita grew at 3.5% p.a. in constant prices. The country experienced a slowdown in the growth path in initial period of ninth plan, but it has been able to reverse the situation in the later part of the plan. Hence, the ninth plan can be termed as nominal moderate successful plan.

Tenth plan (2202-2007):

The Tenth plan aimed at ambitious 8% of growth with the main stress on raising government investment on infrastructure and social area, giving more stress on increased working capacity, in respect of allocation of resources. It was also decided to have investment friendly atmosphere. The tenth plan also stressed on reforms in the six areas namely, 1. Disinvestment. 2. Labour reforms 3. Tax reforms 4. Abolition of curbs and obstruction on the sale of agricultural commodities. 5. To bring balance between revenue and expenditure of the government 6. To bring the gender equality The Tenth plan envisaged creation of 50% million jobs during the plan period and the target of FDI flow of 7.5% billion dollars annual and also to mobilize Rs. 78,000 Crores through disinvestment.
General Economics

5.11

Indian Economy

Drawbacks: 1. Disinvestment target became a distant reality 2. FDI through increased was never near the target, except in last two years 3. Government failed inc creation of jobs in relation to their target. 4. The first year (2002) had a disappointing growth of 3.8% Assessment: In 2002, the growth was 3.8%. But in the subsequent 4 years the growth surged to 8.6%, making it an annual; average of 7.6% against the target of 8%. But the plan was fairly successful.

Eleventh plan (2007-2012):

The eleventh five year plan draft was approved with the ambitious growth rate of 9% with a major focus on inclusive growth, the important objectives are: 1. To attain 9% growth 2. To increase the income of the masses 3. To generate resources to improve services 4. To double the per capita income in 10 years 5. To increase the agriculture GDP by 4% per annum 6. To decrease the educated unemployment below 5% 7. To increase the real wage rate of unskilled workers by 20% 8. To reduce poverty to less than 10%.

Targets
Education 1. To reduce drop outs rates to 20% in elementary school 2. To develop minimum standard of education 3. To lower gender gap in literacy by 10 points Health 1. To decrease infant mortality rate to 28% and maternal mortality rate to 1 per 1000 live birth 2. To reduce total fertility rate to 2.1 3. To provide clean drinking water to all by 2009 4. To reduce anaemia among women by 50%. Women and children: 1. To raise the sex ratio for age group of 0-6 to 935 by 2011-12 and 950 by 2016 2. To ensure that, at least 33% of the beneficiaries of government schemes to women and girl children Infrastructure: 1. To provide electricity connection to all the villages and Below Poverty Line households by 2009 2. To ensure all weather road connection to all habitation with 1000 and above population and 500 and above population in hilly and tribal areas 3. To connect every village with telephone by November 2007 4. To provide board connectivity to all villages by 2012. 5. To generate 60000 ZMW electricity in eleventh plan.

General Economics

5.12

Indian Economy

Environment: 1. To increase forest and tree cover by 5% 2. To attain WHO standard of air quality in all major cities by 2011-12 3. To treat all the urban waste by 2011-12 and to clean river water. 4. To give boost to SC/ST education 5. To eliminate the abhorrent practice of manual scavenging within middle of eleventh plan 6. To eradicate the bonded labour completely with special target on SC/ST population 7. To implement special connect plan for SC and tribal sub pan (TSP) strategic policy imitative to remove socioeconomic regional disparities 8. Rehabilitation of tribal groups who have suffered from the brunt of mega projects.

Roles of Different Sectors in India:

Agriculture, industry and services are the major producing sectors of an economy. In this unit, we will study about these sectors in some details.

Role of Agriculture in India:

Agriculture plays a very important role in Indias economic development. It contributes nearly 1/4th of GDP and engages around 60% of the population of the country. Its role is discussed in the following points. 1. Providing employment: Agriculture provides employment to a large number of people in India. At the time of Independence, around 72% of the population was engaged in agriculture and allied activities. As economy developed, industry and service sector also developed and the percentage of people in agriculture sector came down. In India, agriculture engaged around 60% of the population in 2004-05 and 52% in 2007-08. It is to be noted that in absolute terms, number of people engaged in agricultural activities over the planning period have been increased. 2. Share in national income: Agriculture contributes a major portion of GDP i.e., 23% (nearly 1/4th) in 2004-05 and 17.1% in 2008-09.The agriculture sectors share in GDP continues to reduce because as non agricultural sectors are growing. 3. Supporting industries: Agriculture has a big role in the development of the agro-based industries such as textiles, sugar, tea, paper and other cottage industries etc.. Similarly, agriculture needs industrial products as its inputs e.g. fertilizers, pesticides, insecticides machinery and electricity. Agriculture also provides inputs to the market. 4. Supplier of food and fodder: Agriculture meets almost the entire food-needs of the people. In India, people spend a very large proportion of their incomes on food and food products. Thus, agricultural prosperity also affects the cost of living of people. If food I costly; the cost of living of the people also gets affected to a great deal. Agriculture also provides fodder to sustain livestock comprising of cattle, buffaloes, sheep and poultry etc.,

5. Share in foreign trade: The countrys foreign trade especially in the export of jute, tea, tobacco and coffee depends on the supplies of the agricultural sector. Only in case of crop failures that India becomes a net
General Economics

5.13

Indian Economy

importer of food grains, otherwise India has not been a big importer of food grains especially since 1990s. Therefore, the balance of trade in the country is affected by the agricultural sector. An economy developed, the share of agricultural exports in total exports fell down. Year Agricultural exports Agricultural imports (as % of Total exports) (as % of Total exports) 2004-05 10.5 3.4 2005-06 10.2 2.5 2006-07 10.3 2.9 2007-08 9.4 2.2 2008-09 2009-10 India now has become self-sufficient in the agro-products and need to import them only when there are severe shortages resulting from unfriendly weather conditions like droughts and floods. 6. Savings of capital: Agriculture has low capital output ratio: Agriculture requires lesser capital per unit of output produced compared with the industries. A capital poor economy like India can make efforts to develop this sector, which along with increase in production, could increase employment opportunity in the rural areas and could help in solving problems of urban congestion and pollution in the cities. 7. Contributions to Governments revenue: The government revenues also depend on agricultural prosperity. The direct contribution of agricultural taxes to the Govt., revenues is not significant but indirectly agriculture has a considerable influence on the government revenues. At present, income tax revenue from agricultural sector is negligible. 8. Solving problems of urban congestion and brain drain: Migration from rural areas to urban areas has created so many problems like urban congestion and rural brain drain. If agriculture is on the road to prosperity and is in a position to absorb fruitfully the growing talent in rural areas, the problem of urban congestion and rural brain drain will be solved. Growth of Agriculture during planning period: The following points indicate that agriculture sector has developed in India over the years. 1. Increases in production and productivity: Over the last five and half decades, agriculture production like food grains, pulses, sugarcane, oilseeds, cotton, jute and maize increased by more than thrice. The strategy of Green Revolution in 1966 has made possible increment in production and productivity. This strategy stressed upon the use of high-yielding varieties of seeds, proper irrigation facilities, extensive use of fertilizers, pesticides and insecticides often termed as High Yielding Varieties Programmes (HYVP). HYPV was restricted to five crops Wheat, Rice, Bajra, Jowar and Maize. But production of wheat increased by 5 /12 times. On account of this, the green revolution is also known as wheat revolution. 2. Diversified agriculture: Indian agriculture has become diversified in different areas like: 1. The share of non-crop sectors like fishery, forestry and animal husbandry is increasing

General Economics

5.14

Indian Economy

2. Area under commercial crop like Sugar, Cotton, Oilseeds, etc. is increasing 3. Within food grains, area under superior cereals (rice and wheat) is increasing and inferior cereals are declining. 3. Modern agriculture: Agriculture has been modernized in the following ways 1. Since 1966, when Green Revolution was started, the use of HYV of seeds, chemical fertilizers, pesticides, irrigation facilities, threshing machine is rising. 2. Farmers are increasingly resorting to intensive cultivation, multiple cropping, and scientific water management. 3. Farmers are ready to accept new and scientific techniques of production. 4. Agricultural capacity has improved a lot. 5. A number of institutions as such NABARD and 196 RRBs have facilitated growth of agriculture. 4. Improved agrarian system: The land tenure systems have been improved. The zamindari system has been suspended, because the system of collecting land revenue, from the tenant or the actual tiller of the land was exploited by the landowners. More than 25% of the produce was taken away by the zamindar in the form of rent. Land reforms: In order to stop the exploitation of the actual tillers of the soil and to pass on the ownership of land to them, land reforms were introduced. Three measures were contemplated to achieve these objectives: Measures 1. Abolition of Intermediaries Legislations were passed to abolish zamindari system. As a result, around 173 million acres of land was acquired from the intermediaries and two Crore tenants were brought in direct contact with the state. 2. a. b. c. Tenancy reforms includes Regulation of rent Security of tenure Ownership right on tenants

For regulation of rent, the legislations were passed to fix rents between 25-50 % for different states. Security of tenure has also been provided by these states by passing legislations, which disallow ejectments of the tenants except in accordance with the provision of the law. Many States have also conferred ownership rights on the tenants. To provide ownership rights on tenants, ceiling on land holding was also imposed on agriculture. That limits were imposed on the amount of land which a family could hold. Accordingly, a family could hold 18 acres of wet land or 54 acres of unirrigated land. 3. Reorganization of agriculture In order to solve the problem of fragmentation of holdings, the land was reorganized in the following two ways. 1. Consolidation of holding 2. Cooperative farming Accordingly, it was decided to consolidate holdings by giving to the farmer one equal to the total of the land in different scattered plots under his possession. Cooperative farming was
General Economics

5.15

Indian Economy

also started but it did not succeed much. Thus, we see that since Independence, we have a much-improved agrarian system, which has resulted due to the land reforms undertaken by the government. 5. Other development: Apart from the above, the following developments have also taken place: 1. Increment the use of agriculture inputs at subsidized rates. 2. Agricultural credit at low rates of interest 3. Minimum support price has been fixed by the Government. 4. Minimum wage law has been introduced 5. Special Programmes such as Integrated Rural Development Programme (IRDP), Jawahar Rozgar Yojana (JRY) etc., have been started to provide employment of the rural people.

Problems of Agricultural sector in India:

1. Slow and uneven growth: 1. The growth of agricultural sector is not sufficient to meet the rising demands of fast growing population 2. Certain crops ( wheat) are growing at a higher rate than other crops like maize, jowar etc.,) 3. There are regional imbalances in the spread of growth. The growth has remained confined to certain areas like Punjab, Haryana and Western Uttar Pradesh. 4. Development of agricultural crops and animal husbandry, fisheries and forestry were not given much attention. 2. Not so modern agriculture: 1. The HYVP was initiated in just 42% of the gross cropped area 2. In many large areas and for a number of crops old methods of ploughing, sowing and harvesting etc., are still used. As a result, productivity in such areas and crops are very low. 3. About two third areas is rain fed and there are no appropriate dry-farming techniques. 4. Only 40 % of the gross cropped are has irrigation facilities and the area under irrigation has increased over the years in India. 3. Flaws in Land reforms: 1. The legislation measures have not been completed in all the states 2. There are snags in legislation like definitions of personal cultivation and tenants. 4. Inadequate finance: Before independence, main source of agricultural credit was the moneylender. Moneylenders provide 71.6% of the rural credit. Moneylenders charge very high rates of interest ranging from 18 to 50%. They often manipulated accounts and cheated the poor uneducated farmers. Therefore, after Independence, to expand institutional credit to agriculture 1. 14 banks were nationalized in 1969 and 2. 6 banks were nationalized in 1980 3. In 1975, Regional Rural Bank (RRBs) were established and 4. In 1982, (NABARD) National Bank far Agriculture and Rural Development is the apex Bank for agricultural credit. With an objective of providing credit to the rural and other priority sectors and to meet the requirements of the agricultural and rural credit, Cooperative credit societies were also established to finance rural projects at lower rates of interest. As a result of all these efforts the
General Economics

5.16

Indian Economy

share of moneylenders has reduced to about 17% new and that of institution credit has increased. Although the following problems have emerged in agricultural credit: 1. Agricultural loans are concentrated in certain regions and states. For example, nearly half of the agricultural bank credit is concentrated in Southern States. 2. The proportion of bad debts has been increasing. Nearly 40% of the amount financed does not come back to the society. 3. The major beneficiaries of the agricultural credit have been the large and medium farmers. 4. There is a lack of experienced and skilled staff in these institutions. 5. Problems relating to warehousing and marketing 1. Inadequate storage facility: The storage facilities are not adequate so 10-15% of agriculture produce gets spoiled. Government agencies like Food Corporation of India (FCI) provide storage facilities but these are inadequate. 2. Lack of organization among farmers: There is a lack of organization among farmers so they do not get a fair price from the buyers who are generally well organized. 3. No. of commission agents: There are a large number of agents between the producers and the consumers. They charge a heavy amount of commission. As a result, the farmers do not get a fair share in the total product price charged. 4. Heavy indebtedness: Because of heavy indebtedness, the farmers are many times forced to sell their produces at low prices. 5. Lack of proper transport facilities: There is lack of property transport facilities in the market, so farmers are unable to get the fair price of his produce. 6. Subsistence farming: A Large number of farmers live just for subsistence farming. Their marketable surplus is very low or almost nil. 7. Unorganized markets: Several malpractices exist in unorganized agricultural markets such as under weighing, levying of a number of unauthorized fees, deductions and taxes etc. 8. Lack of Market information: The farmers are many a time not well-informed about the prevailing market conditions including prices prevailing in the markets. 9. Lack of market information: Grading and standardization are at a very low level. Often inferior quality gets mixed up with superior one, killing the motivation of farmers to produce superior quality products.

10. Inadequate ration shops and fair price shops: In order to meet the needs of poor people in the country, the government runs a network of ration shops and fair price shops which provide food grains and other essential commodities
General Economics

5.17

Indian Economy

at very low prices to consumers. But it has been seen that these shops, the total requirements of food grains of all vulnerable sectors are not met.

Industry
Role of Industry in India:
In any economy, industries have an important role to play. It has been noticed that countries which are industrially well developed (example USA) have higher per capita income than those countries where industries are not well developed.

1. Modernizing agriculture: It modernizes agriculture and improves productivity in it. It provides agriculture with the latest tools and equipments, which enhance the efficiency. 2. Providing employment: Population of India is very high and increasing at an alarming rate. Indian economy needs sectors, which absorb ever-increasing labour-force. Industries can play an important role here. It is the establishment of industries along that can generate employment opportunities. 3. Share in the GDP: Over the years, the value-added by industrial sector in the GDP has improved from 12% in 1950-51 to 26 % in 2008-09. 4. Contribution to exports: Indian industries contribute a major portion to the export earnings of India. In fact, manufactured goods along contribute around 77 % of exports earnings of India. 5. Raising incomes of the people: Industries generally help in raising the incomes of the people of a country. By putting in more efforts, capital and improved technology industrial output and production can be raised. In fact, in this sector, the benefits of large-scale production can be reaped. 6. Enhancing further the economic growth: As industrialization grows the role of capital goods vis--vis consumer goods gains strength, this helps in enhancing further the economic growth. 7. Meeting high-income demand: Beyond certain limits, the demand of the people for agricultural products falls and for industrial products rises. Industries help in meeting these ever increasing demands. 8. Strengthening the economy: Industries help strengthen the economy in a number of ways: 1. The growth of industries producing capital goods i.e., machines, equipments etc. lets a country to produce a number of goods in large quantities and at low cost. 2. It makes possible the production of economic infrastructure 3. Agriculture gets improved farm implements, chemical fertilizers and transport and storage facilities 4. Dependence on foreign sources for defence materials is a risky matter. Industrialization helps a country to become self-reliant in defence materials. Growth of Industrial Sector in India: All the industries of a country can be grouped in two major ways: 1. On the basis of size of industries: It can be divided into: (a) Large-scale industries includes mining, manufacturing and electricity (b) Medium-scale industries and (c) Small-scale industries (SSI)
General Economics

5.18

Indian Economy

2. On the basis of end-use: 1. Basic goods industries: like Minerals, Fertilizers, Cement, Iron and Steel, Non-ferrous metals, electricity etc.,
2. Capital goods industries : like Machinery, Machine tools, railroad equipments etc., 3. Intermediate goods :like chemicals, rubber, plastic, coal and petroleum products 4. Consumer goods :consumer durable and non-durables (like man-made fibres, beverages, watches, cosmetics, perfumes etc.,)

Pattern of Industrial Development: Before Independence

1. Lop-sided pattern of development: Industries were either too large or too small in size with very few medium size units. There was high concentration of employment in small and large industries 2. Low capital employed and low per capita income: Capital employed per worker in industry was very low. 3. Dominance of consumer goods industries: Consumer goods industries were well established. The country had to largely depend on import for capital goods.

After Independence: Main developments are:

1. Industrial Growth: The pattern of industrial growth experienced as. 1. Ups and downs during the period 1951-2005 2. A significant decline was experienced for 15 years from 1965-1980, annual rate of industries fell down to 4.1% 3. At the time of 2005-2006 industrial growth was 7.8% (nearly 8%) The industrial sector faced the process of retrogression and deceleration during the period 1965-80. The reasons were: 1. Unsatisfactory performance of agriculture 2. Slackening of real investment especially in public sector 3. Slow down in import substitution 4. Regulation and control over private sectors 5. Narrow market for industrial goods, especially rural area. 2. Development of Basic and Capital goods Industries: The structure of industry has shifted in favour of basic and capital goods and intermediate goods sector during the planning period. In Second Plan (1956-65), Mahalanobis plan emphasized upon the establishment of capital and basic goods industries. Three steel plants were set up in the public sector at Bhilai, Rourkela and Durgapur in the second plan. 3. Growth of consumer goods industries: There has been a remarkable growth of consumer goods industries. Since 1991, important changes have occurred in the industrial structure. Intermediate and consumer goods have got more importance than basic and capital goods. 4. Modernization: Industrial sector has become broad-based and modernized. The role of traditional industries like textiles has reduced and role of non-traditional industries like engineering goods, chemical goods and electrical goods has improved tremendously. 5. Increase in the size and diversification of public sector:

General Economics

5.19

Indian Economy

There has been a massive increase in the size and diversification of public sector. In the first plan, the number of public sector units was just 5 but in March 2002, it increased to 240 like ONGC, IOC, SAIL, BHEL, HMT, HAL, BEL, NTPC etc., 6. Dominance of large and monopoly business houses: The dominance of large and monopoly business houses has increased several times. Now big business houses have increased enormously to about 80. These are Tata, Birla, Reliance, Thapars, Mafatlals, Goenka and Chhabria, and so on. 7. Expansion of infrastructure facilities: A remarkable expansion took place in infrastructure facilities since 1951. In such respects as power generation, development of energy sources, railway transport, telecommunication, roads and road transport and the like which are basic pre-requisites for industrial development. Industrial finance was supported heavily by public financial institutions (LIC, IDBI, and ICICI) and commercial banks. Port facilities for imports and exports have been substantially expanded. 8. Progress in the science and technology: The country could be proud of achieving remarkable progress in the science and technology front. Several Research laboratories were set up. Technological know-how was extensively imported through foreign technical collaboration arrangements. Science, Engineering, Management and other professional educational institutions have been established on a large scale. 9. Growth of small scale industrial units: One of the notable features of the planning era since 1951 has been the substantial growth of smallscale industrial (SSI) units.

Small-Scale Industries:
Meaning of SSI units: A sick industrial unit in one unable to perform its normal function and activities of production of goods and services at a reasonable profit on a sustained basis. The present industrial policy of the Government of India has defined a SSI unit as a unit having investment up to Rs.1 crores in plants and machinery. In the case of an ancillary industrial unit, the limit is also Rs.1 crore. A tiny unit is one, which has investment of 5 lakhs in plant and machinery. Performance and contribution of SSI: Since Independence there has been an all-round development of small-scale and cottage industries in India. This will be clear from the following points: 1. High Growth rate: The growth rate of SSI @9% per annum in terms of production has been far faster than that of largescale sector since. It is estimated that they contribute about 40% of the gross value of output in the manufacturing sector. 2. Large Numbers: The number of registered and unregistered small-scale units, which stood at 16,000 units in 1950 increased to and 118.59 lakhs in 2004.05 3. Employment generation: The SSI is labour intensive and hence they employed 283 lakhs persons in 2004-05. This represents about 60% of the total industrial employment. 4. Export potential: It contributes 45% of the manufacturing exports and 35% of the total exports. Exports from SSI sector increased to 95,000 Crores in 2004-05. 5. Produce a very wide producer and consumer goods: They include simple and sophisticated engineering products, electrical, electronics, chemicals, plastics, steel, cement, textiles, paper, and matches; readymade garments and so on. 6. Support to large scale industries:

General Economics

5.20

Indian Economy

They support to large industries by meeting their requirements of inputs of raw materials, intermediate goods, spare part etc, 7. Non-inflationary force price stability: A large number of small-scale industries are engaged in the manufacture of consumer goods of mass consumption, thereby making them available in plenty which serve as a non-inflationary force. 8. Higher output capital ratio: SSI produces higher output at lower capital so higher output capital ratio found here. The employment generating capacity per unit of capital of small and cottage industries was found to be at least eight times greater than that of large industries.

Problems of Industrial Development in India:

The following are the main problems of the industrial development in India: 1. Failure to achieve targets of production: Except in First FYP, the industrial sector has failed to achieve the target of production. The average industrial growth rate achieved 6.2% relative to the target of 8% per annum. These are the following causes which has resulted in failure to achieve target of industrial production 1. Poor planning 2. Power, finance and labour problems 3. Technical complications 2. Under utilization of capacity: A large number of industries suffer from substantial under utilization of capacity. The average under utilization being in the region of 40% to 50%, Main factors responsible for under-utilization of capacity are: 1. Indiscriminate grabbing and creation of capacities by private enterprise 2. Demand short-falls 3. Over-optimistic demand projections 4. Supply bottle-necks, 5. Labour problems and

Deliberate under-utilisation to create shortages

3. Increasing capital output ratio (ICOR): Incremental capital output ratio means more capital required for per unit of output. It increases the capital costs of new industrial units. 4. High cost industrial economy The cost and prices of manufactured goods and services in India are generally much higher than international costs and prices. 5. Inadequate employment generation: One of the most serious deficiencies of industrial development over the decades since independence is its inadequate employment generation, in relation to investment made. Factory employment absorbed only 2% of the labour force in 1980. 6. Poor performance of Public Sector: A large number of public sector units are loss leaders in the industrial sphere while the rate of profitability of others in law. 7. Sectorial Imbalances: In India, industrial development on an over-all basis suffered several setbacks because of inadequate support from agriculture and infrastructure. But in real practice, several sectorial imbalances at a point of time and over a period of time plague the industrial economy of India. 8. Regional Imbalances:

General Economics

5.21

Indian Economy

Industrial development continues to be lopsided, region-wise, large-scale industries are concentrated in a very few states like Maharashtra, West Bengal, Tamil nadu and Gujarat. These four States account for 44% of the total factories and 48% of Productive capital. 9. Industrial Sickness: Industrial sickness has become a serious problem affecting small, medium and large units. In March, 2003, there were 1.71lakh sick units out of which more than 98 % were small units. The causes of sickness are financial mismanagement, demand recession, labour unrest, and working capital shortage, and cost escalations, shortage of raw material, uneconomic size, out-dated machinery and equipment and so on.

Services
Services: The Services sector or tertiary sector of an economy provides services to other business enterprises as well as to the consumers. Service sector includes: 1. Business services and professional services 2. Communication services. 3. Construction and related services 4. Distributive services 5. Education Services 6. Energy services 7. Environmental services 8. Financial services 9. Health and Social services 10. Tourism services 11. Transport services Role of Service Sector in India: The service sector in India is its largest sector and accounts for increasingly significant share of GDP. This sector is growing very fast. It is clear from the following points. 1. Increasing share in the GDP: Over the planning period, the share of tertiary or services sector has increased to more than half i.e., 54.1% in 2005-06. 2. Providing employment: In 2001, service sector occupied 22.5% of working population in India (nearly 23%). 3. Providing support to other sectors: It provides support to agriculture and industries by providing a number of services in the form of financial services, transport services, shortage services, distributive services, software services and communication services and so on. 4. Contribution to Export: Services exports from India comprise services such as travel, transportation, insurance, communication, construction, financial services, software, agency services, royalties, copyright and license fees and managements services. Services accounted for 35% of total exports in India (2004-05). In 2004, Indias share in worlds total services export was 1.9%. Indian services export grew by 75% in 2005-06. In the list of exporters of services (2004), India is ranked 21st. Growth of Service Sector during Planning Period: 1. The service sector now accounts for Indias GDP: 54.1% in 2005-06. 2. The share of primary sector in GDP falls and shares of secondary and tertiary sectors increases.

General Economics

5.22

Indian Economy

3. The Government of India has given special status to the services sector in the Export and Import Policy (2002-07). Services sector grew by 10% per annum in 2004-05 and 2005-06. 4. Within the services sector, the share of trade, hotels, transport and communication increased to 42.67 in 2004-05. 5. The tourism industry and financial services segment are growing very fast and has the potential for growing still faster. Share of financial sector has grown at 22.41%. 6. The share of other services such as community, social and personal services have improved to 24% in 2004-05. There has been an increase in the growth rate of these services also. 7. India has second largest scientific and technical manpower in the world. Indias consultancy professionals possess capability to provide expertise in sophisticated areas like information and technology, advanced financial and banking services etc., to developed countries like USA, UK, France, West Germany and Australia. 8. Indias health services, super-specialty hospitals specializing in both modern and traditional Indian medicine systems (like Ayurveda, Unani, and Nature care) supported by state of the art equipment, are attracting patients from across the world. 9. Education is also a foreign exchange earner by way NIRs, and foreign students enrolled in India. 10. Entertainment industry (including films, music, broadcast, television and live entertainment) is another service industry which has grown very fast after independence. 11. IT enable services, such as Business Process Outsourcing (BPO) have been growing rapidly (60-70%) in the recent past and will continue to grow. It is projected that in 2006 it will create employment opportunities for about a million people. Outsourcing has changed the image of India. Problems of service sector in India: It is facing lots of problems, important ones are: 1. Inadequate infrastructure: For the purpose of achieving rapid growth of the economy we require a very high quality of infrastructure. Unfortunately, our infrastructure is inadequate both in the rural areas and in the urban areas. 2. Inadequate economic reforms: Economic reforms undertaken in all the sectors are inadequate. In financial sector many controls and bottlenecks are still there. These need to be removed. 3. Lack of proper environment for tourists: India has great potential in the tourism sector. But there is a need to create proper environment for attracting tourists. Foreign tourists often get harassed and cheated in the hands of babus and officialdom, touts and conmen. 4. Lack of Training: Etiquettes and good behaviour are the hallmark of the service sector. Indian service providers whether they are in banks, in hotels and restaurants, in hospitals or in public administration, they need to be trained thoroughly in public dealing, etiquettes, and hospitality.

General Economics

5.23

Indian Economy

5. Lack of Cleanliness: The airports, railways etc., in India are not clean and well organized. They need to be organized. 6. Problem of visa: Our consular division also is not property. It takes many days to issue visas. This hampers the growth of tourism sector. 7. Lack of setup: Service trade also faces a number of problems. These include lack of setup like export promotion councils. 8. Unfair competition: In the telecom sector unfair competition and lack of internet infrastructure, monitoring and customer demand, mar the growth of e-commerce. 9. Slow growth in primary and secondary sector: Service sector cannot grow in isolation. It needs strong backing of other sector/primary and secondary. 10. Competition from other countries: Indian service providers (like BPOs and IT services providers) are facing stiff competition from other countries. They need to improve their quality and reduce their costs.

General Economics

5.24

Indian Economy

NATIONAL INCOME IN INDIA

Different Concepts of National Income and Output:

Meaning and Definition of National Income: National Income or National Product is defined as the money value of all final goods and services produced within the domestic territory of a country in an accounting year plus Net Factor Income from Abroad. According to Central Statistical Organisation (CSO) National Income is the sum total of factor incomes generated by the normal residents of a country in the form of wages, rent, interest and profit in an accounting year. National Income/Product is the value of production by the normal residents of a country (within or outside the domestic territory). (Domestic income or product is the value of production within the domestic territory of a country). There are many different concepts of national income. Each has a specific meaning, method of measurement and use.

Characteristics of national income:

1. National income reflects the value of final goods and services only. Intermediate goods are excluded to avoid the problem of double counting. 2. Different goods manufactured and services rendered are measured in different units (some in kilograms while others in litres, etc), therefore, it is not possible to find the aggregate value all those goods and services with different units. Hence, National income is always expressed in monetary terms. 3. a. b. c. Domestic territory includes the following: Territory lying within the political frontiers, including territorial waters of the country. Ships and aircrafts operated by the residents of India between two or more countries. Fishing vessels, oil and natural gas rigs, floating platforms operated by residents of India in international waters. d. Embassies, consulates and military establishments of the country located abroad.

4. National income is not the sum total of personal incomes. Personal incomes include transfer incomes. All transfer incomes are excluded from national income because they represent a redistribution of goods and services already produced in the economy and not any addition in goods and services. 5. National income is generally expressed for a period of one year.

Different concepts of national income:

1. Gross Domestic Product at Market Price (GDPMp) 2. Gross National Product at Market Price (GNPMp) 3. Net National Product at Market Price (NNPMp) 4. Net Domestic Product at Market (NDPMp) 5. Net Domestic Product at Factor Cost (NDPFc) 6. Gross Domestic Product at Factor Cost (GNPFC) 7. Gross National Product at Factor Cost (GNPFC) 8. Net National Product at Factor Cost (NNPFc)

1. Gross Domestic Product at Market Price (GDPMp)

General Economics

5.25

Indian Economy

Meaning and measurement of GDPMp The term gross means that GDPMp is gross of depreciation, in other words, it implies depreciation is yet to be deducted. Domestic means domestic territory or resident production units. Product means final products. Market Price means that GDP is calculated at prices inclusive of indirect taxes and exclusive of subsidies. GDPMp is a macro concept which is defined as the market value of final goods and services gross of depreciation produced within the domestic territory of a country during one year and valued at prices inclusive of net indirect taxes. The important points to remember about GDPMp are: 1. GDPMP is a flow concept, i.e. flow of goods and services produced during a year. It does not include goods produced in the previous year. 2. GDPMP is always GDPMP at current prices. In situations where price of base is taken, it is called GDPMP at constant prices. 3. GDPMP is not value of output because it excludes value of intermediate consumptions, i.e. GDPMP is sum total of value added by all producing units in domestic territory of a country. It includes value added by multinational companies in India. 4. GDPMP excludes transfer payments, capital gains, financial transactions and income generated through illegal means. 5. GDPMP is the market value of final goods and services. Market value= Price* Quantity of final goods and services. 6. To avoid double counting, GDPMP includes only final value of new goods and services. It excludes the value of second hand goods. 7. The term gross is inclusive of depreciation. 8. GDP is confined to domestic territory of a country and therefore, excludes Net Income From Abroad (NFIA). GDPMP measured by the formula: GDPMP = Value of Output in Domestic Territory-Value of Intermediate Consumption or GDPMP = Value added.

Important related concepts:

1) 2) 3) 4) 5) 6) Gross Domestic Product at current Price and Gross Domestic Product at constant Price. Concept of depreciation Concept of indirect taxes Factor cost Net factor income from abroad Concept of subsidies

1. Gross Domestic Product at current Prices and Gross Domestic Product at constant Prices: When gross domestic product is calculated on the basis of the prices of goods and services prevailing in the market, it is known as Gross Domestic Product at current Price. It is also known as nominal Gross Domestic product because increase in GDP due to increase in prices cannot be taken as real increase. On the other hand, when gross domestic product is calculated on the basis of some fixed prices i.e. base year prices, it is known as Gross Domestic Product at constant Price. Base year is an average standard previous year in which major economic changes have not taken place.
General Economics

5.26

Indian Economy

Gross Domestic Product at constant Price should be referred as real GDP because it eliminates the inflationary effects in the GDP in the form of prices changes of goods and services in the economy during different years. 2. Concept of depreciation or consumption of fixed capital: Wear and tear or loss in the value of the fixed assets due to its use is termed as consumption of fixed capital or depreciation. Depreciation represents the amount spent or incurred to generate the income in the economy. Therefore, depreciation is deducted from gross values to get the net income earned in the economy. 3. Concept of indirect taxes: Excise and customs duty paid by the firms to the government are added to the cost of production and practically charged to the customers. If indirect taxes would not have been paid, the same would have been the part of firms income and distributed among factors of production. It is, therefore, necessary that the payment made as indirect taxes must be added while calculating GNP at market prices. 4. Factor cost: Factor, here means factors of production. Production of goods is the result of effective combination of land, labour, capital and enterprise as factors of production. These factors are remunerated for their contribution in the production. Income received by these factors of production is known as factor income. 5. Concept of subsidies: Subsidies mean economic assistance given by the government to firms. The Subsidies will undoubtedly increase the income of the firm. The increased income must have been paid to factors of production. Income from subsidies is not operating income, earned from productive activities. It is therefore, not included in the national income. While calculating GNP at market prices value of subsidies are deducted. 6. Net factor income from abroad: Net factor income from abroad is the difference between the value of goods and services produced by foreign nationals in India and Indian nationals in abroad. It may be positive or negative. If the value of output produced by Indian nationals abroad exceeds the value of the goods and services produced by foreign nationals in India, net earnings will be positive. In order to calculate GNP, we should add (positive NFIA) to or subtract (negative NFIA) from Gross domestic product (GDP).

2. Gross National Product at Market Price (GNPMp)

Meaning and Measurement of GNPMP: GNPMP is defined as the market value of final goods and services produced in the domestic territory of a country by normal residents during an accounting year including Net Factor Income from Abroad. GNPMP is measured by the formula GNPMP = GDPMP + Net Factor Income from Abroad Difference between GDPMP and GNPMP

Distinction between Gross Domestic Product and Gross National Product:

General Economics

5.27

Indian Economy

1.

2.

3. 4.

Gross Domestic Product (GDPMP) It refers to the money value of all final goods and services produced within the domestic Territory of a country. It includes the value of entire final production within the domestic territory whether undertaken by its residents or nonresidents. It is a narrow concept. It is a territorial concept as it is concerned with the domestic territory of a country.

1.

2.

3. 4.

5. GDP value of output in domestic territoryValue of intermediate consumption. 6. I we add Net Factor Income From Abroad to GDP, we get GNPMP. 7. If Net Factor Income From Abroad is negative then GDPMP > GDPMP.

5. 6. 7.

Gross National Product (GNPMP) It refers to the market value of all final goods and services by the normal residents of a country. It includes the value of final goods and services produced in any part of the world by the normal residents of a country. It is a broader concept It is a national concept because it is concerned with the normal residents of a country. GNP = GDP + Net Factor Income From Abroad. If we subtract net factor in come from abroad from it, we get GDPMP. If Net Factor Income From Abroad is positive then GDPMP > GDPMP.

3. Net National Product at Market Price (NNPMP) Meaning and Measurement of NNPMP: NNPMP is defined as the market value of output of final goods and services produced by normal residents of an economy in its domestic territory during an accounting year exclusive of depreciation and inclusive of Net Factor Income From Abroad. NNPMP can be calculated by the following formulae: NNPMP = GNPMP Depreciation NNPMP = NDPMP + NFIA NNPMP = GDPMP +NFIA - Depreciation Difference between NNPMP and GNPMP NNPMP 1. It excludes depreciation. 2. NNPMP = GNPMP - Depreciation GNPMP 1. It includes depreciation 2. GNPMp = NNPMP + Depreciation

4. Net Domestic Product at Market Price (NDPMP): Meaning and Measurement of NDPMP NDPMP is defined as the market value of final goods and services produced in the domestic territory of a country by its normal residents and non-residents during an accounting year less of depreciation. NDPMP can be calculated by the formula: NDPMP = GDPMP Depreciation NDPMP = NNPMP Net Factor Income From Abroad Difference between NDPMP and NNPMP NDPMP 1. It refers to the market value of all final goods and services produced by all the enterprises within the domestic territory in a year. 2. It is a domestic concept as it does not include NNPMP 1. It refers to the market value of final goods and services produced by the normal residents of a country. 2. It is a national concept as it includes

General Economics

5.28

Indian Economy

Net Factor Income From Abroad. 3. NDPMP = GDPMP Depreciation or NDPMP = NNPMP - NFIA

Net Factor Income From Abroad. 3. NNPMp = GNPMP Depreciation, or NNPMP= NDPMP + NFIA

5. Net Domestic Product at Factor Cost (NDPFC) Meaning and Measurement of NDPFC: NDPFC is alternatively known as Net Domestic Income. NDPFC is defined as the total factor incomes earned by the factors of production. In other words, NDPFC is the sum of domestic factor incomes. NDPFC can be measured by the formulae: NDPFC = Compensation of Employees+ Operating Surplus+ Mixed Income of the Selfemployed or NDPFC = NDPMP Indirect Taxes+ Subsidies or NDPFC =NDPMp Net Indirect Taxes Difference between NDPFC and NDPMP NDPMP NDPFC 1. It refers to the market value of all final goods 1. It refers to the market value of final and services produced both by residents and goods and services produced by the non-residents within the domestic territory of a normal residents of a country. country in an accounting year. 2. It is estimated at factor cost. 2. It is estimated at market price. 3. NDPFC=NDPMP-indirect taxes+ 3. NDPMP = NDPFC + Indirect taxes - Subsidies subsidies 6. Gross Domestic Product at Factor Cost (GDPFC) Meaning and measurement of GDPFC: GDP at factor cost is defined as the sum of net value added by all the producers in the domestic territory of a country inclusive of depreciation during an accounting year. GDPFC is measured by the following formulae: GDPFC=GDPMP -Indirect Taxes + Subsidies. GDPFC=NDPFC + Depreciation. GDPFC =Compensation of Employees + operating surplus+ Mixed income+ Depreciation. GDPFC = (Domestic Factor Income) +Depreciation. Difference between: (a) GDPFC and GDPMP. GDPFC= GDPMp-Indirect taxes+ Subsidies. GDPFC = GDPMp-Net Indirect Taxes. GDPMP = GDPFC + Indirect Taxes- Subsidies. (b) GDPFC and NDPFC. GDPFC= NDPFC +Depreciation. NDPFC=GDPFC- Depreciation. 7. Gross National Product at Factor Cost (GNPFC) Meaning and measurement of GNPFC: GNPFC is defined as the sum of gross value added at factor cost by the normal residents of a country during a year and Net Factor Income From Abroad. GNPFC is calculated by the formulae:
General Economics

5.29

Indian Economy

GNPFC =NNPFC + Depreciation. GNPFC =GNPMP Net Indirect Taxes. Difference between GNPFC and GNPMP GNPMP=GNPFC +Net Indirect Taxes. GNPFC= GNPMP Net Indirect Taxes. 8. Net National Product at Factor Cost (NNPFC) or National Income (NI) Meaning Features and Measurement of National Income or NNPFC: National Income is defined as the factor income accruing to the normal residents of the country (rent, interest, profit and wages) during a year. It is the sum of domestic factor income and Net Factor Income From Abroad. It is a monetary depression of current achievements of people of a country through their production activities. NNPFC is defined as the sum of net value added at factor cost by normal residents in the domestic territory of a country and Net Factor Income From Abroad in an accounting year. In other words, NI is the value of income generated within the country plus income from abroad. NNPFC or NI can be calculated by using the following formulae: NNPFC =NDPFC +Net Income from Abroad. NI = Domestic factor Income +NFIA NI = (Compensation of Employees+ Operating Surplus + Mixed Income)+NFIA NI =NNPMP Net Indirect Taxes. Difference between: (a) NNPFC and NNPMP NNPFC =NNPMP Net Indirect Taxes (b) Domestic factor income and NI Domestic Factor Income National Income 1. Domestic factor income= Rent+ wage+ 1. NI= Domestic factor income +NFIA. interest +profit+ Mixed income of self 2. NI is value of income generated by employed. normal residents of a country within 2. This income is generated by normal the domestic territory plus from residents and non-residents of country abroad. within the domestic territory of a country. 3. If NFIA is positive, then NI is greater 3. If NFIA is negative then Domestic factor than domestic factor income. income is more than NI. 9. Private income: Private income refers to the income earned by all the individuals of the country from all legal sources. Transfer payments are not included in national income, but they are the part of the private income. These payments include stipend, scholarship, pension, government grant and other social security payments. Private income= NDPFc + Transfer payments + NFIA + interest on national debt Income of the government surplus of non departmental undertaking.

10. Personal Income

General Economics

5.30

Indian Economy

Income received by individuals or households in a country during one year is known as Personal income. It should not be taken that the sum total of personal income will be national income. This is due to the fact that all income earned by firms are not distributed among factors. A part of income is retained as undistributed profits. Firms also pay corporate taxes. Factors also receive transfer income.

Personal income = Private income + Transfer payments (if not included in private
income) - corporate taxes- undistributed profit or Personal income = National income Amount not available for distribution + transfer payments. Note: 1. Amount not available for distribution: These are the deductions which are made out of national income before making any distribution. The whole of national income is not distributed. For Example, corporate income taxes, undistributed corporate profits, social security contribution such as employees contribution towards provident fund, pension fund etc. 2. Transfer payments: Government provides certain social security benefits to individuals such as old age pension, unemployment allowance, widow pension etc. 11. Disposable income Disposable income is defined as the income remaining with individuals after deduction of all taxes levied against their income and their property by the government. Disposable Income = Personal income- Direct personal tax- miscellaneous receipts of the government administrative department( fees, fines). or = Saving+ consumption.

Methods of Measuring National Income:

Production generates income; income gives rise to demand for goods and services; and demand in turn gives rise to expenditure. Expenditure leads to further production. The flow of production, income and expenditure represents three related phases namely Production, Distribution and disposition. They are interlined in a circular manner. Production phase leads to production of goods and services i an economy- Income or distribution phase leads to generation of factor incomes, i.e., rent wages +interest + profit. Expenditure or disposition phase relates to spending of income in terms of consumption of goods and services and investment expenditure. This expenditure leads to further production or flow of goods and services. The three processes go on simultaneously. Attempts have been made by various economists to measure national income in terms of production (value added), income and expenditure. National income is the sum of factor incomes accruing to the residents of a country from their participation in production activity within and outside domestic territories. There are three circular flows of creation, distribution and spending of income that are taking place simultaneously in an economy , i.e., income is created, then distributed, then spent and then created and so on.
General Economics

5.31

Indian Economy

Each way of looking at NI suggests a different method of calculation. In India m Central Statistical organisation (CSO) measures national income at these three points. The three methods of measuring national income are: 1. Income Method. 2. Value Added or Production Method. 3. Expenditure Method. The three methods give three different angles of looking at the income flow based on different types of data. Income method measures relative contribution of factor owners. Value added method measures the contribution of production units to total output of an economy. Expenditure method measures the relative flow of consumption and investment expenditures. 1. Income Method Meaning and Composition of National Income with Income Method: Production generates incomes. Production is created with the combined efforts of factors of production. That is way; owners of these factors have a claim on this income, which is distributed to them in the form of compensation of employees, rent interest and profit. According to income method, NI is measured in terms of payments made to primary factors of production. Net value added at factor cost (NVAFC) = Sum total of factor incomes paid out by a production unit. NDPFC = Sum total of factor incomes paid out by all production units located within the domestic territory of a country. It is shared by both residents and non-residents. NNPFC or NI= Sum total of factor incomes paid out of residents only. National Income of a country can be calculated either by taking the sum of incomes paid by producing units or by income received by factors. Income method is also called Factor Payment Method or Distributed Share Method. According to income method, the components of NI are given by the formula: NI (or NNPFC) = (a) Compensation of Employees + (b) Operating Surplus (rent+ interest+ profit) + (c) Mixed Income of Self-employed + (d) Net Factor Income from Abroad. NDPFC or Domestic Factor Income= a + b + c

Steps involved in calculating Factor NI by Income Method.

The Calculation of NI by income method is done in three steps. They are: Step 1: Identification and classification of producing enterprises which employs factor inputs: This is the first step in income method. It requires: (a) Identifying the producing enterprise which employs the factor inputs ; and (b) Classifying the producing enterprise. All producing enterprises can be classified under three heads. (i) Primary Sector: It is that sector which produces goods by exploiting natural resources like land, water, forests, mines, etc., This sector includes agricultural and allied activities. Fishing mining and quarrying. (ii) Secondary Sector:

General Economics

5.32

Indian Economy

It is also called manufacturing sector Enterprises in this sector transform one type of commodity; for example, leather goods from leather or flour wheat, etc., (iii) Tertiary Sector: It is also known as service sector. Enterprises in this sector produce services only. Examples are: transport, communications, trade and commerce etc. Step 2: Classification of factor income: Factor incomes or payments are classified into the following groups: (a) Compensation of employees (b) Operating surplus (c) Mixed income (d) Net Factor Income From Abroad. Step 3: Estimation of National Income The last step is to estimate or calculate national income. Precautions involved while using income method are: 1. Transfer payments are excluded e.g. old age pension. 2. Illegal income (e.g. theft, gambling) is excluded. 3. Income from sale of second hand goods is excluded. 4. Corporation tax, income tax are excluded. 5. Windfall gains are excluded. 6. Gift tax, death duty are excluded. 7. Production for self consumption is excluded. 2. Value Added Method or Product method Meaning and composition of National Income with value Added method Product method or value Added method is also called Industrial Origin method or Net Output Method. Product Method or value Added Method is defined as that method which measures national income by estimating the contribution of each producing enterprise to production in the domestic territory of the country in an accounting year. According to the value added method the composition of National income is as follows: NI by value added = sum total of net value added at factor cost across all producing units of the economy. Gross value added by primary sector within the domestic territory of a country + Gross value added by secondary sector within the domestic territory of a country + Gross value added by Tertiary sector within the domestic territory of a country Depreciation - Net Indirect Tax + NFIA. Steps involved in calculating National Income by Value Added Method. The calculation of NI by value added method is done in three steps: they are: Step 1: Identification and classification of producing Enterprises: This is the first step in value added method; producing enterprises are classified into three heads. (a)Primary Sector. (b) Secondary or manufacturing sector. (c) Tertiary or service sector. Step 2: Estimation of Gross value Added
General Economics

5.33

Indian Economy

Value added is the market value of final goods and services. Value of output is excess of value added over and above the value of intermediate consumption. Gross Value Added (GVA) = value of output- intermediate consumption = (Sale + change in stock) Intermediate consumption. If intermediate consumption is not subtracted from the value of output, it would lead to the problem of double counting. Step 3: Estimation National Income Difficultly involved in calculating NI by Value Added method -Double Counting: A very important error that all statistician often encounter while calculating national income is that of double counting. Efforts must be taken to include in national income, only final goods and services and not intermediate goods that go to make up the final goods. By strictly sticking to value added at each stage and taking care to subtract expenditure on intermediate goods, double counting can be avoided and wages, interest rent and profits can be recorded exactly one time. While talking of GNP and NNO it is important to know what production is and what it includes and excludes. Production stands for any activity which is directed to the satisfaction of wants of other people through exchange. Thus, since problem of double counting gives exaggerated figures regarding national income it should be avoided at any cost. In order to overcome problem of double counting either of the following steps should be taken into account. (a) Value of intermediate goods should not be counted. (b) Net value added should be calculated. 3. Expenditure Method: Meaning and Composition of National Income by expenditure method: The expenditure method of measuring National income is also called Income Disposal Method or Consumption and Investment method. Expenditure method is the method which measures the final expenditure on gross domestic product at market price during year. This total final expenditure is equal to the gross domestic product at price. According to expenditure method, NI is the aggregate of all final expenditure in an economy during a year i.e., According to the expenditure method, composition of National income is as follows: 1. Private final consumption expenditure 2. Government final consumption expenditure 3. GDFCF (Gross Domestic Fixed Capital Formation) 4. Change in stock (Closing stock-Opening stock) 5. Valuables 6. Net Exports (Exports-Imports). NI by Expenditure Method = 1+2+3+4+5+6 Step Involved in Calculating NI by Expenditure Method. The calculation of NI by expenditure method is done in three steps:

Step 1: Identification of economic units which incur final expenditure:

General Economics

5.34

Indian Economy

There are four categories of economic units incurring final expenditure within the domestic territory of a country. There are: (a) Household Sector (b) Producing Sector (c) Government Sector (d) Rest of the World Sector. Step 2: Classification of Final Expenditure: 1. Final Consumption is classified into the following three categories: (a) Private Final Consumption Expenditure : and (b) General Government Final Consumption Expenditure. 2. Gross Domestic Capital Formation: (a) Gross Domestic Fixed Capital Formation (b) Change in stock Inventory Investment and (c) Net Acquisition of Valuables. 3. Net Exports: Step 3: Estimation of Final Expenditure: To calculate the three components of final expenditure (mentioned above) , two types of data are needed : (a) Total Volume of sales in the market, and (b) Retail Prices. The measurement of three components is as follows: 1. Final Consumption Expenditure: It comprises of private final consumption expenditure and general government final consumption expenditure. (a) Private Final Consumption Expenditure: To measure private final consumption expenditure, the volume of final sales of durable goods, semi-durable goods and services to the consumer household and non-profit institutions serving households is multiplied by retail prices. The direct purchases of nonresident households in the domestic market are not accounted. The direct purchases of normal resident household made abroad are added. (b) General Government Final Consumption Expenditure: Government final consumption expenditure is estimated as the total expenditure incur by the government for producing various services (like health, education, defence) to satisfy collective needs. The value of government final consumption expenditure is the sum total to the following items: (a) Compensation of employees paid by the government. (b) Goods and services purchased by the government from domestic market (i.e. intermediate goods). (c) Purchases from abroad. 2. Gross Domestic Capital Formation: It includes expenditure on goods domestic fixed capital formation, change in stock and acquisition of valuables. (a) Gross Domestic Fixed Capital Formation: It involves the estimation of following items: (i) Expenditure on Construction:
General Economics

5.35

Indian Economy

To measure the expenditure on construction, the volume of material inputs like steel, cement bricks and labour is multiplied by the price paid by the builders. This is called, commodity flow approach. Expenditure on new construction also includes ownaccount production of fixed assets, purchase of new houses by household and work in progress of major repairs and alterations in old buildings. (ii) The final Expenditure on Machinery and Equipment: The expenditure on machinery and equipment is estimated in two ways: (1) The volume of their final sales in multiplied by the retail prices prevailing in the market, (2) The volume of machinery and equipment produced in the current year is found and it is multiplied by the prices paid by the purchasers. Both methods give same result. Own account production of machinery and equipment is added to it. (b) The Expenditure on Change in Stock: The expenditure on change in stock is measured by multiplying the volume of physical change in stock with the market prices of the stock. The change in stock is estimated by subtracting opening stock from closing stock, i.e. Change in Stock= Closing Stock Opening Stock. (c) Expenditure on the Acquisition of Valuables: Valuables may be defined as those goods which are of high value and acquired for store of value. They are not used for consumption. Examples: diamond, gold, silver antiques, paintings, sculptures or rare antiques. 3. Net Exports: Net exports are the difference between exports and imports of country during year. It can be positive or negative. It is a part domestic product.Net Export= Exports Imports. (i) Exports: They are defined as goods (like jute, tea etc.,) and non-factor services (like insurance, shipping, banking etc.,) sold by one country to the other. These are included in our domestic product. (ii) Imports: They are defined as purchase of goods and non-factor services from rest of the world. These are not included in our domestic product. Net Foreign Investment = Net Exports +NFIA = (Export Import) + NFIA. Why change base year? The base year of national accounts is changed periodically to take into account the structural changes which take place in an economy and to depict a true picture of an economy through macro aggregates like GDP, Consumption expenditure, capital formation, etc. At present it is 1999-00.

Estimation of National Income In India:

In any economy, there are three methods of estimating National income Value added method, Income Method and Expenditure method. In India, because of nature of its economy and lack of adequate, reliable statistical data, it is not possible to calculate National income by each of the three methods separately. For example, in agriculture, it is impossible to use income 5.36

General Economics

Indian Economy

method because reliable income data is not available. In the household enterprises, it is not possible to estimate income generated and final expenditure using all the three methods. Thus, different methods are used for different sectors or a mixture of methods is used. That is why; Indias method of measuring National income is also called Mixed Method a combination of product and income method. Problems in the Estimation of National Income In India The procedure of calculating national income is not easy. It is very difficult and complicated. Estimation becomes even more difficult in a developing country like India. Some of the difficulties in estimation of national income in India are: 1. Inadequate and Unreliable Data: There are no legal forces which will ensure that people record all transactions. For instance, a farmer will not people keep a record of his income, in an unorganised sector data is missing; rich people keep a lot of black money; all this makes National income difficult. 2. Difficult differentiation between Economic and Non-economic Activities. It is difficult to demarcate between economic activities which are included in National income calculation and non-economic activities which are excluded National income. 3. Conceptual Difficulties: Difficulty arises in interpreting new products like synthetic rubber or a new chemical fertiliser as they did not exist in the base year. Problem arises in estimating them at constant prices. 4. Double Counting: Sometimes, it is very difficult to differentiate between intermediate good and final good. For e.g., sugarcane is a final good if consumed domestically, but it is an intermediate good if sold to sugar industry. Sugar may be a final good if consumed domestically but an intermediate good if sold to bakery. It is very difficult to avoid double counting and get correct estimate of National Income. 5. Scattered and Unorganised Production: Statisticians make guesses on the income from those units whose production is scattered, unorganised and unrecorded. 6. Unreliable Data Collecting Agencies: The data collecting agencies are generally unqualified and incompetent. The personal bias of the enumerators and investigators affect the correctness of result. 7. No Data on Backward Areas: In backward areas, barter system prevails. There is no record of these transactions. Also, data on self-consumed goods is not available. This makes the estimate of National income incorrect. 8. Lack of Data on subsidiary Jobs: People are engaged in more than one occupation or Job. Lack of information on subsidiary jobs makes the estimation of National income incorrect.

Analysis Of Indian Economy As Seen From The National Income Data:

General Economics

5.37

Indian Economy

An analysis of National income statistics gives the following overview of the Indian economy; 1. There is low standard of living of the people because of rising population. 2. There is unequal distribution of income. Planning Commission estimates that 58% population get 82.5% of national income and 42% get 17.5% of national income. 3. There exists a large regional disparity. Some states have high per capita income and others have very low per capita income in the last 12 years, the rate of increase in per capita income has been 4.5% per annum. 4. There is growing significance of the share of tertiary sector in national income. 5. Growing importance of private sector in its contribution to national income which is 74.3% of the total. 6. Greater expenditure of food which is around 53.3% of income according to CSO estimates in 1999-2000. 7. Against the annual average target growth rate of 8% in the Tenth plan (2002-2007) acquired rate is 7% till 2005-2006.

GNP And NNP As A Measure Of Welfare:

When an economy experiences an increase in national income (whether measured in terms of GNP or NNP) in real terms, it is said that economic growth has taken place and economy has become prosperous. When an economy experiences rise in welfare it implies social growth. The basic questions to be answered are: Is there a conflict between economic growth and social growth? Does economic growth imply welfare? Experts argue that growth implies inequality. In other words, a rise in GNP or NNP may not bring about welfare of an economy. This is so because economic welfare of the masses. Among other factors, depends upon (i) Composition of GNP and (ii) distribution of GNP among people. National income is an important but not a perfect measure of a countrys economic well being. It is important because a macro-look at the level of prosperity of a country is essential and it is imperfect because it is not sufficient. It is insufficient because it does not take into account the followings: 1. The national income figures give no indication of the population, skill and resources of the country. A country may be having a high national income but it may be consumed by the increasing population, so that the level of peoples well being (welfare) remains low. 2. Similarly, a high national income may be due to greater area of the country or due to the concentration of some resources. In one particular country. A typical example of the latter is the Arab states who have a high national income due to their oil resources but mass of people is one of the most backward in the world. 3. National income does not consider the level of prices in the country. People may be having high incomes but due to the high prices they might not be able to enjoy a high standard of living. 4. High national income of a country may be due to large contributions made by a few industrialists like Tatas and Birlas. While these exceptional few cases enjoy a high standard of living, the level of economic well being of the people may be indeed low. Thus, if a small section of the population owns a large share in the GNP leaving a smaller percentage of the GNP to be shared by a greater number of people, economic growth will not reach the poorest of the poor sections of an economy.
General Economics

5.38

Indian Economy

5. Another factor not taken into account by national income is the level of unemployment in the country. People cannot be said to be enjoying a high standard of living of the people will remain low unless unemployment is removed.
6. National income does not show the composition of output. If product mix has more of war

goods like explosives, guns, bombs, then destruction will increase and welfare will reduce. Similarly, increase in the national income may be purely due to an increase in the goods which are not socially desirable such as drugs like, smack, brown sugar, etc. This will, surely not enhance economic welfare of the people. Moreover, if the share of wage goods in total national product does not increase, economic growth will not lead to economic welfare of the masses. 7. With rise in national income or economic activity, there will be rise in industrialisation and urbanisation. This will raise pollution of air, water, and noise. There will be more accidents; shortage of water, housing problems, etc In other words, with rise in national income there will be ecological degradation which will reduce welfare of the people. Thus, it can be concluded that economic growth and economic welfare are not positively related. An increase in national income may not bring about a corresponding increase in the other. Trends in Indias National Income Growth and Structure: (1) Trends in NNP: - The net national income of India has increased at an annual average rate of 4.4% during the 54 years of economic planning. Against the annual average target growth rate of 8% during the Tenth Plan (2002-07), achievement rate is 7% in the first four years ending 2005-06. Plan wise study of growth of real income in India, Plan Growth Rate (in %) I 3.7 II 4.2 III 2.8 IV 3.9 V 5 VI 5.5 VII 5.8 VIII 6.8 IX 5.4 X 7.0
XI

Reasons

Serious drought in 1965-67

Sharp rise in prices. Short falls in the on account of lower utilization of capacity

Economic reforms and good harvest Dismal performance of the industry

Trends in Per Capita Income:

Indias per capita net national product has increased at an annual average rate of 2.2% during the 54 years of economic planning.

Plan I

Growth Rate (in %) 1.8

Reasons

General Economics

5.39

Indian Economy

II III IV

2.0 Zero 1.5

Serious drought in 1965-67

Sharp rise in prices. Short falls in the on account of lower utilization of capacity

V 2.7 VI 3.2 VII 3.6 VIII Economic reforms and good harvest IX Dismal performance of the industry X XI In India National Income in calculated by Central Statistical Organisation (CSO).

Basic Understanding of Tax System In India

Tax: A tax is a compulsory contribution imposed by the State without reference to some particular benefits to the tax payer in exchange for tax. Taxes are generally classified into and 1. Direct taxes 2. Indirect taxes. Direct Taxes: Direct tax is that tax when tax impact and tax incidence is on the same person, it cannot be shifted. Examples of direct taxes are income tax and wealth tax. Merits: 1. Equity: Direct taxes are imposed according to ability to pay of the taxpayer. 2. Elasticity: Revenue from direct taxes is elastic, i.e., as income rises, tax revenue rises in a greater proportion. 3. Civic consciousness: direct taxes create civic consciousness because person paying knows clearly how much he has paid. 4. Certainty: The amount of direct tax to be paid is clearly known to the taxpayer. 5. Social objective: Direct taxes collected from the rich may be spent for benefit of the poor. In this way, direct taxes help in reducing inequalities of income. 6. Progressive: They are in the nature of progressive nature and imposed according to ability to pay of the tax payer. Demerits: 1. Arbitrary: It is difficult to determine the ability to pay of the tax payer, only a rough idea can be formed. 2. Discourage work: Direct taxes are taxes on willingness to work hard since those who work more-earn more and pay more taxes. Thus, direct taxes discourage more work. 3. Tax evasion: It is possible to hide the real sources of income, i.e., there is possibility of tax evasion. This results in black money. 4. Limited Coverage: Direct taxes cover very small proportion of population in developing and underdeveloped countries. 5. Necessitate maintenance of accounts: It requires proper maintenance of accounts which some of the tax payers may not be able to do so. 6. Complicated and Inconvenient: The direct tax system is complicated. The calculation of direct tax requires expert assistance of tax advisers. Indirect taxes:

General Economics

5.40

Indian Economy

Indirect tax is that tax when tax impact is on the one person with tax incidence on the other person. Its burden can be shifted through a change in price. Examples of indirect taxes are sales tax, service tax, excise duty, custom duty and VAT etc. Merits: 1. Convenience: The most important merit of indirect taxes is convenience in their assessment. This is because generally they are assessed at flat rates and realized at appropriate points such as at factory site in the case of an excise duty on production or at point of entry in the case of imports. 2. Tax evasion is difficult: It is difficult to evade an indirect tax. In the case of excise duty, unless the producers resort to manipulation of accounts or smuggling, it is difficult to evade it. 3. Elasticity: There is a plenty of scope to raise the rate of indirect taxes more particularly in case of the necessities of life. 4. Large coverage: Both rich and poor alike have to pay indirect taxes, therefore, almost 100% individuals falls in the purview of these taxes. 5. Social cause: Indirect taxes on drinks, narcotics and tobacco, serve a social purpose by discouraging their consumption. 6. Higher for luxury items and lower for necessaries: The rates may also be different higher for luxury items and lower for necessaries; the latter are sometimes fully exempt. Demerits: 1. Regressive effect: Indirect taxes are often criticized for their regressive character. Tax on necessities of life may hurt poor people. 2. Do not create social consciousness: Because taxpayers do not feel them. 3. Uncertainty: Neither the Govt. nor the tax payers know precisely the quantum of tax likely to be realized or paid as the case may be. 4. Burden can be shifted: The burden of indirect taxes can be shifted forward or backward. In most of the cases the consumers have to bear the ultimate burden of indirect taxes. 5. Tax evasion: These taxes can be evaded by such methods as smuggling, falsification of accounts etc., Tax Structure in India: Direct Taxes: Under this mainly 1. Income tax, 2. Wealth tax and 3. Gift tax are included 1. Income Tax: Income tax is a tax on the income of an individual or an entity. Income tax is of two types viz., personal income tax and corporate income tax. (a) Personal Income Tax: In India has a progressive income tax because whole income is divided into different slabs and it is taxed on the basis of slab into which it falls. At present the marginal rate of income tax (i.e., tax for the highest slab) is 30%. (b) Corporate Tax is levied on the incomes of registered companies and corporations i.e., Pvt. Ltd and Ltd., Company @ flat rate of 30% for domestic and @40% for foreign companies. 2. Estate duty:
General Economics

5.41

Indian Economy

1. It was first introduced in India in 1953 and abolished in 1985. 2. It was levied on the total property passing to the heirs on the death of a person 3. It was a minor source of revenue. 3. Wealth tax 1. It was introduced in 1957 2. It was levied on the wealth such as land, bonds, shares etc. of the people. 4. Gift tax 1. A gift tax was first introduced in 1958 and abolished in 1998 2. It was leviable on all donations to recognized charitable institutions, gifts to women dependents and gifts to wife Indirect taxes: The main indirect taxes levied in India are as follows: 1. Custom Duties: 1. Custom duties are levied on exports and imports 2. Import duties are generally levied on the basis of ad valorem which means they are determined as a %age of the price of the commodity. 3. On some commodities, specific import duties i.e., per unit taxes on imports are levied. 4. Since 1991, the custom duty structure has been revised. The maximum rate of custom duty is now just 15%. 2. Excise Duties: 1. An excise duty is levied on production 2. Govt., introduced MODVAT (Modified Value Added Tax) in 1986-87 in order to remove the deficiencies of the indirect taxes namely cascading effects and regressiveness. 3. In the budget 2000-01, Govt, introduced CENVAT (Central Value Added Tax) 4. The basic excise duty rate is 16% applicable to all the excisable commodities. Special excise duty is in addition to CENVAT. 5. Merits: - Simple, transparent, account-based systems and reduces cascading effect. 6. Demerits: - cumbersome procedures, inadequate coverage and scope of tax-evasion. 3. Sales Tax: Sales tax is a tax on sale (business transactions). Sales tax is more in the case of luxury items and less or almost nil in the case of necessities. Under sales tax, the registered trading concerns are required to pay the sales tax to the government. These registered concerns shift the burden of sales tax to the customers. Sales tax regime suffers from many problems, main being, cascading effect, lack of transparency, narrow base, different procedures followed by different states and so on. 4. VAT: Value Added Tax is the tax on value added. Value added is the difference between sales and purchased items. For example input purchased Rs.10,000@4% input tax and output sold Rs.12,000 @10% output tax, then calculation of AVT = output tax Rs.1200 (10% on Rs.12000) Input tax Rs.400 (4% on Rs.10000) = Rs.800 VAT payable. VAT was introduced in 1999and was implemented in April, 2005 in some states (in Delhi) Features of Tax Structure in India: Following are the main features of tax structure of India:
General Economics

5.42

Indian Economy

1. High Tax revenue: Tax revenues form about 16% of the total national income of India. India is one of the highest taxed countries. There are three main reasons for high burden of tax as in India. 1. Rise in expenditure on defence and other non-developmental activities 2. Increase in expenditure on development planning 3. Violation of the canon of economy Tax revenue collected has increased from Rs.460 crores in 1951-52 to more than 6,75,000 crores in 2005-06. 2. Large share of indirect taxes: - Indian tax system has become more and more unjust. At present the ratio of direct tax and indirect tax is 34%: 66% in 2005-06. Thus there has been an increasing reliance on indirect taxes, which is not good. 3. Narrow population base: Only 2.5% of the population is liable to pay income tax in India. Thus Indian tax structure relies on a very narrow population base. 4. Inadequate tax revenue: The total tax revenue is highly insufficient to meet the expenditure requirements of the economy. Over time there has been an increasing reliance to internal and external debts. 5. Complicated and illogical Income tax structure: The Income tax structure is very complicated and illogical. However, recently steps have been taken to rationalize and simplify the whole system of taxation. 6. Structure of taxes has changed: Earlier income tax and corporate tax were important, now excise duty is one of the largest sources of tax revenue. 7. Direct taxes are progressive: Direct tax rates increase with increase in income and indirect tax rates are constant or sometimes higher for luxury items and lower for necessities. 8. The agriculture income is wholly exempt from the income tax: At present, income tax revenue from the agricultural sector is negligible. Evaluation of the Indian Tax System: 1. The Indian tax system do not largely conform to canon of equity 2. Indian tax is inflexible 3. Tax rates has been modified from time to time 4. Simplification of tax system has also been attempted 5. Indian tax collection system is costly now. It has increased to 2900 crore in 2004-05 6. Evasion and tax avoidance are very high. It has been estimated that black money is 50% of the countrys GDP 7. Indian tax system is unfair and unjust because burden of Indirect taxes in greater than direct taxes.
---

General Economics

5.43

Indian Economy