UNIT 17 FEATURES OF THE INDIAN

ECONOMY
Structure
17.0 Objectives
17.1 Introduction
17.2 Features of the Indian Economy
17.3 Growth and Development
17.4 Mixed Economy
17.5 Demographic Transition
17.6 Sectoral Composition of GDP
17.7 Employment Structure
17.8 Inter-GovernmentalFiscal Relations
17.9 Let Us Sum Up
17.10 Key Words
17.1 1 Answers to Check Your Progress Exercises
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17.0 OBJECTIVES
After going through this unit, you will be able to:
identifythe important features of the Indian economy;
distinguish between economic growth and economic development;
explain the pattern of demographic transition in India;
explain the sectoralcomposition of the Indian economy; and
explain the pattern of employment in India.

17.1 INTRODUCTION
Let us begin with the word 'economy'. It denotes the operations and management
of the economic system - the activities related to production of goads and services,
consumption, investment, exchange of g d and services within the geogmphical
territory, and exports and imports with rest of the world. You may have observed
that production of goods and services requires inputs such as labour, capital
(machineries, buildings, etc.) and raw materials. The inputs are available in limited
quantity, i.e., there is a shortage of inputs. When these inputs are used in the
production process, they need to be paid some reward. For example, if you want
to employ a unit of labour you have to pay some wage to himher. Similarly,
building can be hired by paying some rent or money can be borrowed by paying
some interest.Ultimately utilization of inputs involvessome costs. Thus the objective
before the economy is to utilize the scarce resources efficiently so that production
of goods and services is maximized and cost is minimized.

Economic Development

Now let us try to explain the structure of the Indian economy. The word structure,
as you know, implies the way in which something is organised or put together.
Thus we should look into the way the Indian economy is organised. AmrdinglyY
we will find out the major segments or sectors of the Indian economy and the
manner in which'these sectors interact with one another. In order to keep our
discussion brief we will focus on the developments in the Indian economy d u k g
the post-independence period, particularly the period since five-year plans started
in India. To begin with, we find out the important features of the Indian economy.

17.2 FEATURES OF THE INDLAN ECONOMY

At the time of Independence the Indian economy was stagnant and highly
underdeveloped. Agriculture was the backbone of the economy but agricultural
activities were undertaken through obsolete technology. Industrial sector c o n t r i i
very little to gross domestic product (GDP). In order to give a direction to the
economy the government initiated economic panning in the form of Five Year
Plans in.1951. Over the years the economy has witnessed increase in GDP, the
composition qf GDP has changed, standard of living of people has improved, and
there has been ypgradation in level of technology. The important features of the
Indian economy are as follows :
1) The Indian economy is a developingeconomy. It has not yet reachedthe level of
economic development seen in America and Europe.

2) The 1ndideconomy is a mixed economy in the sense that both private sector
and public sector coexist and participate in the production process.
3) It is c-zed

by high population density and population growth.

4) About one-third of the population live below poverty line. 'Vicious cycle of
poverty' operates in many sectors of the economy.
5 ) Thereis high levelof unemploymentand underanployment In addition, thereis
'disguised unemployment' inthe agriculturalsector.
6) The level of technology used in production process is low in many sectors.
Modern technology has not been adopted in all sectors ofthe economy.

7) ~ h aisea shortageofphysicaland economic inhstmcture.~ransporhti&n

(mak,
railways, airlines), power (electricity, gas), and communication (telephone,
Internet)have not reached all parts of the country. Even some parts of the country
do not have provisionsfor schools, colleges, hospitals,and safe drinking-water
supplyLet us discuss some of the above issues in detail.

17.3 GROWTH AND DEVELOPMENT

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1
4
I

Economic development is a broader term than economic growth Economic growth

usually means the growth in production of an economy. On the other hand,
economic development includes other fsctorssuch as litemcyyhealth, child mortality
rate, equality, regional balance, infbtmchrre, etc.

The difference between economic growth and economic development is a subtle

one. Let us take the example of a child. As a child grows her weight and height
increases. Simultaneously, her capacity to leam, recognize and distinguish between
objects develops. Thus growth is not sufficient; we need development also.
Similarly, in the case of the Indian economy economic growth is not enough; we
need economic development. We need better health of people, education for all,
reduction in inequality among sections of people and regions, reduction in infant
mortality rate (IMR), access to drinking water for all, etc. The government has
to devise policies and allocate government expenditure so that these facilities are
available to all. Thus the additional income generated in the economy reaches the
backward regions and the poorer sections of society. To achieve economic
development we need economic growth. In a stagnant economy, where there is
no economic growth, realization of economic development is dificult.
Table 17.1
India in the World Ecaoomy
-

Country

GDP Per Capita

(PPP US$)
1999

GDP Per Capita

(annual growth rate)
(1990-99)

United States

31,872

2.0

United Kingdom

22,093

2.1

France

22,897

1.1

8,297

1.0

l3mil

7,037

1.5

China

3,617

9.5

India

2,242

Mexico

4.1
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- -

Bangladesh

1,483

3.1

Sri Lanka

3,279

4.0

Nigeria

853

-0.5

Tanzania

501

-0.1

Source: .World Development Report

Measurement of the level of economic development is dificult, because it does

not depend upon a single factor. There are a number of indicators of economic
development. These indicators could be quite varied and too many. In Table 17.1
we have given the per capita GDP along with annual growth rates of some of the
economies. In order to make comparison possible we have given these figures in
a comparable form (in purchasing power parity US$). You can see that Indian
economy is not comparable to developed economies. The per capita GDP in
India is much lower than in developed countries. However, it has a higher growth
rate compared to others. Note that some of the countries have very low GDP per
capita and have experienced decline in it over time (see, Nigeria and Tanzania,

Features of the

Economic Development

Apart fiom low per capita income India is far below the developed economies
in terms of development indicators. Some of these indicators are consumption of
electricity, literacy rate, access to safe drinking water, empowerment of women,
etc. United Nations Development Programme (UNDP) brings out a 'human
development index' by combining several indicators of development such as life
expectancy, education, per capita income, and empowerment of women. According
to Human Development Report 2001, India ranks 115 out of 162 countries in
terms of human development index
A positive feature of the Indian economy is that it is not stagnant; it is developing.
It is one of the fastest growing economies in the world. There have been improvements in life expectancy, literacy, and availability of infrastructure.

17.4 MIXED ECONOMY

As mentioned earlier the Indian economy is a mixed economy where private
sector and public sector coexist and contribute to the production process. Some
of the activities such as law and order, justice and defence have to be performed
by the government. However, the government enters directly into production of
goods and services which the private sector can also produce. The extent to
which the government should involve itself in the production activities is a
controversial issue. During the decades of 1960s and 1970s the Indian government
produced whatever it could and intervened in the production decisions (what to
prodae, where to produce, what technology to use) of the private sector through
a rigorous licensing policy. We will discuss about the economic policy changes in
India later in this block.
Let us look into the reasons for undertaking production activities by the government.
A producer in the private sector (usually motivated by higher profits) takes the
risk of setting up an industry, purchases inputs, produces output and sells the
output in the market for a price. Imagine a situation where a producer produces
a commodity or service but cannot sell it for a price because consumers cannot
be excluded fiom its consumption. You may have observed that in certain cases
the benefit derived by you is in no way going to obstruct others from deriving its
benefit. An example of the above could be the provision of streetlight by the local
government. Thus, if your neighbour puts a light in h n t of her house, you enjoy
the benefit that the front of your house also gets lighted; and you do not have to
pay for it. In this case there is a market failure in the sense that your neighbour
cannot charge you for the benefit you derive. Thus she does not have any incentive
to put a bulb in front of her house. On similar logic you also do not put a bulb
in h n t of your house, which requires street lighting by the government. Secondly,
inbtructure such as road, ports, dams, etc., require huge investment but the rate
of return is very low in the short run. Thus no private entrepreneur would be
interested in providing roads, which prompts the government to come forward.
Thirdly, there are natural monopolies such as electricity generation, railways, etc.,
where a single producer can serve the entire market. Fourthly, there are certain
production activities which have so much social benefits that the govemment
should produce these goods and services (e.g., schools and colleges, hospitals,
banks, etc.). Fifthly, the government may enter into production activities to fblfil
some other social objectives instead ifprofit motive. These objectives could be
employment generatiorl, regional balrncc, and social i~pliftof the downtrodden.
Thus there is a strong case for public sector production and Indian planners

recognized it f b m the very beginning. We observe the presence of public sector

in construction, hotels and restaurants, transport and communication, railways,
banks and other services.

Share of Public and PrivateSector in GDP

Year

Share of Public Sector

Share of Private Sector

1960-61

9.9

90.1

1970-71

13.7

86.3

1980-81

19.5

80.5

1990-91

25.1

74.9

1998-99

25.1

74.1

Let us look into the share of public sector in the GDP of M a (see Table 17.2).
In the financial year 1960-61 about 10 per cent of GDP originated fiom the
public sector. In the Five Year Plans @e government expanded the role of the
government through more and mo@investment in various activities. As a result,.
the share of public sector in GDBincreased to nearly 14 per cent in 1970-7 1,
about 20 per cent in 1980-81 and 25 per cent in 1990-91. However, many
restrictions on private sector have been removed during the decade of the 1990s.
As a result, the private sector has increased rapidly and the share of public sector
has remained around 25 per cent.
Check Your Progress 1
Note:

Use the space given below for your answers.

ni Check your answers with those given at the end of the Unit.

1) Bring out the important fbtures of the Indian economy.

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2) Distinguish between growth and development.

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Features of the
Indian ~conomy

Economic Development

3) What are the reasons for the government to enter into production activities?

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17.5 DEMOGRAPHIC TRANSITION

India accounts for 2.4 per cent of the world surface area but it has 16.7 per cent
of the world population. As per the 2001 census the population of India in 2001
was 102 crore. Thus India is the second country in the world to cross 1 billion
mark, the first one being China. However, keeping in view the fact that China has
a much lower population growth rate (1.4 per cent per year) compared to India's
1.93 per cent per year, India is likely to overtake China within a few decades.
Change in the size of population takes place through three demographic events:
birth, death and migration. In the Indian economy migration has played a negligible
role in population growth. Thus population growth is largely due to higher birth
rate than death rate.
In an economy there is a pattern in which demographic transition takes place.
Such transition can be divided into three stages. It has been observed that when
the level of development is low in an economy both birth rate and death rate are
high. As a result population growth rate is not that high. This is the first stage of
demographic transition. When economic development takes place the economy
moves on to the second stage - death rate declines due to availability of health
facilities and medicines but birth rate continues to remain high. This is the stage
when there is a wide gap between birth rate and death rate, and population
increases sharply. With M e r economic development, the economy moves on to
the third stage -both birth rate and death rate are low. Consequently, population
growth rate is again low in the third stage. All the developed economies are in
the third stage of demographic transition.
Table 173
I

DemographicTransitionin India

Year.

Population Birth Rate Death Rate Population

Life
(in crore) (per 1000) (per 1000) Growth Rate Expectancy
(% per annurn) (in years)

1950-51

36.1

39.9

27.4

1.25

32.1

1960-61

43.9

41.7

22.8

1.%

41.3

1970-71

54.8

36.9

14.9

2.20

45.6

1980-81

68.3

33.9

12.5

2.22

50.4

1990-91

84.6

29.5

9.8

2.14

58.7

2000-01

102.7

25.8

8.5

1.93

62.5

--

In the case of India during the pre-independenceperiod both birth rate and death
rate were quite high. As a result, population grew at a lower rate. As you can
see from Table 17.3 population growth rate during 1950-51 was only 1.25 per
cent per m u m . However, population growth rate accelerated afterwards and
reached a peak during 1980-81. A positive sign is that in the recent census the
annual population growth rate has come down below 2 per cent. Some of the
states such as Kerala, Tamilnadu and Punjab have reached a reasonably lower
birth rate. However, in some of the major states such as Uttar Pradesh, Bihar,
Rajasthan and Madhya Pradesh population growth rate is very high.

I
t

Life expectancy indicates the number of years a newborn child is expected to

swvive. It has increased from about 32 years in 1950-51 to more than 60 years
at present. As a result, the percentage of the aged people in India has increased.
On the other hand, a decline in birth rate has resulted in a decline in the percentage
of children in the country.
4

17.6 SECTORAL COMPOSITION OF GDP

Let us look intothe composition of GDP in India and the changes in it over h e .
The composition of GDP in India has undergone substantial changes since 195051. The share of agriculture has declined while that of industrial and service
sectors has increased.
Economic activities can be divided into three categories: primary activities,
secondary activitiesand tertiary activities. Primary activities include i) agriculture,
ii) fore&y and logging, and iii) fishing. Secondary activities include i) mining and
q u q & ii) d t u r i n g , iii) electricity, gas and water supply, and iv) construction
Tertiary activitiesinclude i) trade, ii) hotels and restaurant, iii) transport (railways,
road, air, waterways), iv) storage, v) communication, vi) banking and imurance,
vii) real estate, and viii) public administration and defence. The tertiary activities
are also called senrice activities. ,
Table 17.4
Sectoral Compositionof GDP

Source: National Accounts Statistics of India

Features of the
Indian Economy
4

. .

Economic Development

On the basis of Table 17.4 we make the following observations:

Agriculture and allied activities (p*
the GDP in 1950-51.

sector) contributedmorethan half of

The share of agriculture and allied activities has continuously declined over the
years and contributed only 24.2 per cent in the year 2000-01. Of this,
agriculture contributed 22.2 per cent while forestry and logging, and fishing
contributed about 1 per cent each.
The share of services sector has increased from 28 per cent in 1950-51 to
48.5 per cent in 2000-01. For the year 2005-06 the share of services sector
is estimated to be 54 per$ent of GDP. Thus services sector contributes more
than half of the GDP at present.
The share of secondary sector has increased fiom 14.3 per cent in 1950-51
to 27.3 per cent in 2000-01. Subsequently it declined to 26.1 per cent in
2005-06.
The decline in the share of the primary sector in GDP has taken place as the
secondary and tertiary sectors have registered higher growth rate than the primary
sector. In fact, the government has attempted to promote the secondary and
tertiary sectors. If we look into the sectoral composition of GDP of the developed
economies, we find that primary sector contributes less than 5 per cent of GDP.
Most of the GDP comes fiom the service sector (about 70-80 per cent). So the
developments in the Indian economy can be considered to be a positive aspect.
A problem area, however, is the composition of employment, as we will see in
the next Section.

It is worth mentioning that of the 27.3 per cent share in 2000-01 manufacturing
sector contributes 17.2 per cent to the GDP. The remaining 10.1 per cent comes
tiom mining and quarrying (2.3 per cent), electricity, gas and water supply (2.5
per cent) and construction (5.3 per cent). Remember that manufacturing, and
electricity, gas and water supply constitute the industrial sector. In the industrial
sector we have both private sector and public sector on the basis of ownership.
Very often another distinction is made: organised sector and unorganized sector.
In fact, as per the Industrial Act 1951 all the industries employing more than 10
workers if production is through use of power (20 workers if production takes
place without use ofpower)are ~lequired
to register with the RegisErar of Indu&ies.
These industrial units tidl under the category registered-sectoror organized-sector.
The remainingindustrial units,mostly small scale, are termed unorganized sector.
In the year 2000-01 the unorganized sector contributed 6 per cent to GDP
compared to 11.2 per cent by the organised sector. In the year 1950-51 both
organized and unorganized sectors contributed almost equally to GDP at 4.5 per
cent each.

Features of the

Table 175

. Indian Eeonomy

Annual Growth Rntes

(per cent per m u m , 1993-94 prices)

Period

National
Income

Per Capita
Income

First Five Year Plan (1951-56)

3.6

1.8

Second Five Year Plan (1956-61)

4.1

2.0

Third Five Year Plan (1961-66)

2.5

0.2

Fourth Five Year Plan (1969-74)

3.3

1 .O

Fifth Five Year Plan (1974-79)

5.0

2.7

Sixth Five Year Plan 1980-85)

5.4

3.2

Seventh Five Year Plan (1985-90)

5.8

3.6

Eighth Five Year Plan (1992-97)

6.7

4.6

Ninth Five Year Plan (1997-2002)

5.4

3.5

Source: Economic Survey 2001-02

From Table 17.5 we observe that for the period 1950-75 the average annual
growth rate of national income was quite low (around 3.5 per cent). On the other
hand, during thi period 1975-2000 the average annual growth rate has been
around 5.5 per cent.
A similar trend is observed in the per capita income of India Per capita income
is defined as national income divided by total population of the country. It is
obtained by subtrachg population growth rate h m growth rate of national income.
We should mention that before 1975 growth rate in national income was relatively
lower while population growth rate was higher. As a result, per capita income
increased at a very low rate (a little over 1 per cent per annum). On the other
hand, after 1975 growth rate in national income was higher while population
growth started slowing down. Consequently, per capita income increased at a
relatively higher rate.During the period 1W-2002 per capita income h2ls i n d
at around 4 per cent per m u m .

17.7 EMPLOYMENT STRUCTURE

India being the second largest country in t e r n of population, it has a large labour

- force (people who are able to and willing to work). In the year 1999-2000 there
were 39.7 crore employed workers in the country, which is about 40 per cent
of the total population. The remaining 60 per cent population in the country are
dependents. Thus for every worker there is 1.5 dependents. These dependents
constitute children, aged and the unemployed. Because of high population growth
rate the percentage of children in India is higher than in developed'countries.
13

Economic Devebpmnt

Table 17.6
Sectorals om pod ti on of~rnployment

Sector

1983

1993-94

1999-2000

Primary Sector
Secondary Sector
Service Sector
. Total

Total Employment (in crore)

Agriculture has been the main source of employment in India. During the period
1950-70 it provided employment opportunity to more than two-third of the labour
force. We mentioned earlier that the share of the primary sector (agriculture and
allied activities) in GDP has declined over time in Indian economy. For the year
2000-01 primary sector contributed 24.2 per cent of the GDP. Compare this with
the employment share! In the year 1999-2000 nearly 60 per cent of the labour
force were engaged in agriculture. We observe that the decline in GDP share of
the primary sector is not accompanied by a corresponding decline in employment
share. An implication is that workers employed in primary sector have a very low
productivity than in secondary and tertiary sector. In the developed economies
less than five per cent of the labour force is engaged in agriculture. It has been
made possible by using modem technology and mechanization of agriculture. In
some parts of India modem technology is employed in agriculture. However, a
majority of farmers in India continue to w e obsolete technology.

A second implication is that there are too many people engaged in agriculture. In
fiwt, agriculture has been a way of life for the households engaged in the agriactivities. Very few children look for employment outside agriculture. And those
who do not get employment anywhere else start working in the family owned
land. As a result, often we see a feature termed 'disguised unemployment' in
Indian agriculture. It is a situation where a person is engaged l l l y in agriculture
but his contribution is zero. It implies that if we take away the worlcer agricultural
output will not decline. Suppose five pemons &working in a field andthe output
is 10 tomes of wheat. If we reduce the number of workers to four, then also
output will remain the same. Thus the fifth worker worked in the field, but he is
as good as unemployed, because his contribution is zero.
It has been a policy of the government to shift the additional labour hxce in the
agricultural sector to secondary and tertiary sectors. Recall that service sector
contributes more than half of the GDP but provides employment to less than onefourth of the labour force. Thus the productivity of labour is higher in the service
sector.

17.8 INTER-GOVERNMENTAL FISCAL

RELATIONS
As you are aware India follows a democratic form of government, which is
federal in nature. We have d i f f m t layem of govemment with specific powqand
14

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Features of the
Indian Economy

responsibilities defined by the Indian Constitution. Taking into account the

amendments made so far the Constitution provides for three layers of government:
Central, State and Local. In order to carry out its responsibilities the government
at each level has been assigned powers to impose taxes on individuals and
organizations based on criteria such as income, expenditure, production and certain
economic transactions. The major source of revenue for the central government
is income tax (on individuals and corporations), central excise, and custom duties
(on imports of goods). On the other hand, there is a long list of taxes assigned
to the states (including taxes on alcoholic beverages, agricultural income, and
land) but the major source of tax revenue for the states is the sales tax. The tax
base of the local governments is limited to local services and production.
We have to keep certain things in mind while analyzing inter-govemmenth fiscal
relations. One, there should be no fiscal overlapping so that the same tax should
not be imposed by more than one layer of government. The Seventh Schedule of
the Indian Constitution specifies the manner in which taxes are to be imposed by
the central and state level govemments. Two, taxation power is assigned to a
particular level of government keeping in view the geographical area oh which the
impact of the tax is felt. Thus the tax categories assigned to the Centre are
generally broad-based and their impact is felt beyond state boundaries. Three, the
residual power with respect to taxation remains with the central government.
While exercising such power the Centre introduced 'service tax' during 1990s on
the provision of specific services. Recall fiom Section 17.7 of this unit that the
s
in GDP is more than half and its share is increasing over
share of s e ~ c esector
t h e . Service tax is slated to be an important source of revenue in times to come.
Four, imposition of taxes and hation of tax rates is a matter of political economy.
In order to fbrther political interests governments have many times in the past
waived taxes or excluded certain categories from taxation. A widely debated
issue in this context is imposition of taxes on agricultural income, which is a state
subject and state governments have invariably avoided taxation of rural rich. It has
given rise to widespread tax evasion as individuals take advantage of the concession
allowed to fanners and report non-agricultural income as agricultural income.
Five, there is a mismatch between the tax base and the responsibilities assigned
to different layers of govemments. The states have always complained about
inadequate revenue compared to their expenditure. Similarly, there is shortage of
funds at local government level compared to the expenditure they carry out. Six,
tax base is unevenly distributed across states. For example, rich states have a
relatively higher share of people who pay taxes. Similarly, relatively higher amount
of excise duties is collected fiom industrially better off areas.
In order to tackle the problems of inadequate tax revenue at the state level, the
Centre transfers h d to the states. Apart from meeting the gap between revenue
and expenditure the devolution of funds to subordinate layers of government has
the effect of bringing in regional balance in economic development over time.
There are three modes of transfer of h d s fiom the Centre to the states. First,
the centre collects certain taxes (particularly, personal income tax and excise
duties) and allocates a share of the tax proceeds to the states. In order to
streamline such allocation the constitution provides for setting up of a Finance
Commission every five years, which suggests criteria of such sharing between the
Centre and the states on the one hand, and amongst different states on the other.
So flir twelve Finance Commissions have been set up and each Finance commission

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Economic Development

while suggesting such formulae have been poverty, backwardness, tax effort,
fiscal discipline and population.
The second mode of transfer of f h d s h m the Centre to the states is the grants
and loans extended to states for implementing development plans. As you know,
while preparing the Five Year Plans the Centre sets targets and investments by
different sectors of the economy. Against this backdrop the states prepare their
annual plans which is approved by the Planning Commission. The states receive
grants and loans h m the Centre which supplement the revenue generated at the
state level. The Planning Commission allocates f h d s to states as per formula
devised by the National Development Council. For major states the ratio of
grants to loan is 30:70.
The third mode of transfer of h d s h m the Centre to the states is the grants
given by central ministries to their counterparts in different states for specified
projects. Such projects are wholly M e d by the Centre (under 'central schemes')
or the states are asked to contribute a proportion of the cost (in the case of
'centrally sponsored schemes').

The devolution of'fhds from the Centre to the states has been a matter of
political economy. The allocation of fundsacross states, particularly by the Planning
Commission and Central Ministries, is riddled with bargaining power of the state
government, presence of pressure groups, and political interestsrather than balanced
economic growth. The grants extended to local bodies by the states is mostly
discretionary and no set rule is formulated so far. The adoption of value added
tax (VAT) by states in lieu of sales tax has opened up fhxh debates on tax base
of the state governments.
Check Your Progress 2
Note: i) Space given below for your answers.
ii) Check your answers with those given at the end of the unit.
1) Explain the three stages of demographic transition.

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2) What are the changes.observedin the sectoralcomposition of GDP-inIndia?

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16

3) Explain the conceptof disguised unemployment.

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4) What are the modesof transfer of h d s h m the Centre to the States?

5) State whether the following statements are true or false.

a) Unorganisedsector is also called registered sector.
b) In developed economiesprimary sector contributes a large share in GDP.

c) Productivityof labour is higher in the tertiary sector than in the primary

sector.

17.9 LET US SUM UP

Indian economy is considered to be a developing economy. At the time of
Independence the agricultural sector contributed about 50 per cent of the GDP.
Over the years its share has decreased to about 22 per cent of GDP which means
that the share of industrial and service sectors is increasing. This is a positive
development. But agricultural sector employs about 60 per cent of the labour
force and this percentage is not declining which is a matter of concern. India is
the second largest in terms of population and it is still growing at a very high rate.
About one-third of the population in the country are poor. There is considerable
underemployment and unemployment in the economy also.

The federal nature of government in India requires interaction among different

layers of government according to set rules. It is also desirable to achieve
consistency between revenue generation and government expenditure to carry out
responsibilities at each layer of government. Keeping in view the shortage of funds
at the state level the Centre provides grants and loans to the states.

India has made radical changes in her economic policies since 1991. Economic
libedzation has resulted in setting up of more industries and the level of technology
has improved. The annual growth rate of GDP has increased to about 6 per cent
during the liberalization period. Its export potential also has improved and India

Features of the
IndinEconomy

Economic Development

has a strong fareign exchange reserve. We will discuss the changes in economic
policy, popularly termed 'economic reforms' in subsequent units.

17.10 KEY WORDS

Constant Prices

National income in money terms would increase

because of two factors: i) increase in quantity
produced, and ii) increase in price of commodities.
In order to neutralize the effect of price increase
national income is expressed in terms of prices of
a particular year, called 'base year'. When we
say that GDP is given in terms of 1993-94 prices,
GDP of all the years are adjusted for price changes
so that growthin GDP is due to increase in quantity

w.

Disguised Unemployment : A person is considered to be disguisedly

unemployed if hisher contribution to total output
is zero. Even if we withdraw the worker from
work, output will not decline.

FinancialYear

Let us take an example. For the year 2004,

calendar year is from January 1 to December 31.
On the other hand, financial year 2004-05 is h m
April 1,2004 to March 31, 2005.

Gross Domestic Product : It is the total amount of final goods and services
produced within the geographical tenitory of the
(GDP)
economy. It does not include intermediate goods
and service, i.e., goods and services that are not
consumed directly but used for M e r production.
Moreover, it does not include second hand sales
because it does not reflect production; rather it is
a change of ownership of goods produced earlier.
National Income

Per Capita Income

It is also called 'net national product'(NNP).It

is the total of final goods and services produced
by Indian nationals (both within the country and
residing abroad) minus the amount of dqmiation
during the production process. If we add the
amount of depreciation to NNP we get GNP.
Remember that GNP is different from GDP. In
GDP of India we include final goods and sexvices
produced within the geographical territory of India
(both by Indian and foreign nationals).
It is national income divided by total population of
the country. ,
.
-ha.

Public Sector

It includes the economic activities undertaken by

the government.

Vicious Circle of Poverty : It reflects a flow of inter-related economic activities

that keep an economy under-developed.

According to Ragnar Nurkse underdeveloped

economies have low rate of saving which gives
rise to low rate of investment. Due to low rate of
investment, low level technology is employed in
production activities. Because of low level of
technology, output produced is lower.
Consequently, saving is low and the cycle
continues.In order to break the cycle the economy
should increase investment so that modem
technology can be employed arid pduction will
be higher.

Tax

: The govement collects taxes h m individualsand

o ~ 0 1 lonsthe basis of criteria such as income,
expenditure, production or certain economic
transactions. In a market transaction you receive
some goods or service when you make payment.
In contrast, in the case of taxes, the taxpayer
individually does not receive anything in return for
the payment made to the government.

17.11 ANSWERS TO CHECK YOUR

PROGRESS EXERCISES
.CheekYour Progress 1
1) Go throughSection 17.2 and bring out the points mentioned there.

2) Developmentisa much broader term than growth. While gmwthimplies increase

in GDP, development includesother Mrsalso such as literacy, equality,health
and sanitation, etc.

3) The reasonsfor public sector to produce goods and servicesare: market failure,
low rate ofreturnin h
h
s
m
l c
wpreventionof naturalmonopolies, merit goads,
and social concemssuch asemployment generation.See section 17.4 for details.
Check Your Progress 2
b

1) The three stages are:

1) high birth rate and high death rate,

ii) high birth rate and low death rate, and

mi low birth rate and low death rate.

2) The important changes are decline in share of primary sector, increase in

share of secondary and tertiary sectors.

3) See Section 17.7 and answer.

4) See Section 17.8 and answer.
5 ) a) false, b) false, c) false.

Features of the
Indian Eeonomy