UNIT II STRUCTURE OF THE INDIAN ECONOMY

SECTION A: CHANGING STATE OF THE INDIAN ECONOMY

We have discussed the essentials of development and underdevelopment in the preceding

chapter. In this chapter we shall analyze the salient characteristics of the Indian economy
and structural changes therein. Indian economy was an underdeveloped economy at the
time of independence primarily due to the colonial exploitation policy of the British rule.
Since independence lot of progressive structural changes have taken place in the
economy but it still possesses almost all the features of an underdeveloped economy.
In 1951 government initiated the planning process to push the economy out of
two centuries old stagnation and put it on the path of development. The economic
reforms provided the market orientation to the economy to improve efficiency and
productivity. Currently, the Indian economy is passing through the phase of transition
from an underdeveloped economy to a developed economy. Some of the basic features of
Indian economy are as follows.

I. UNDERDEVELOPED ECONOMY
The current status of the Indian economy is a result of its evolution over the years.
The British rule extending for almost two centuries had the most deterministic impact.
The exploitive economic policies of the colonial government brought about a
fundamental change in the structure of the economy. Thus India is still an
underdeveloped economy despite significant progressive changes over the six decades
since independence. The underdeveloped nature of the economy is reflected by following
features.

1. Low per capita income:—According to the World Development Indicators database

of the World Bank, the GNP per capita of India is one of the lowest in the world. It stood
at $950 in 2007 as per the World Bank data released on 24th April 2009 as against $860
for Pakistan, $2,370 for China, $46,040 for USA and 7,995 for the world average.
India's per capita income calculated on Purchasing Power Parity (PPP) terms was $2,740
as compared to $2,540 for Pakistan, $5,420 for China, $45,840 for USA and $9,947 as
the world average. This low per capita income results in low purchasing power, low
savings, low investment and hence low levels of economic development.

2. Inequalities in Income distribution :— The distribution of income and wealth in India

is inequitable. Private ownership of means of production inevitably leads to
concentration of wealth in a few hands. Economic policy makers were although aware of
this but in the early years of planning they believed that the benefits of growth will
percolate down to the masses but were proved wrong. Although many laws were enacted
to check the concentration of wealth in few hands but they did not generate desired result.
The Gini coefficient for India was 0.368 as per the World Development Report 2008 and
it was higher for urban areas. According to the WDR 2007, lower 40% of the population
made 19.7% of aggregate household expenditure in India while the top 20% made 46%
of the aggregate household expenditure.
3. High incidence of Poverty :—The problem of poverty is a corollary to income
inequalities. In 1993-94, 35% of the population was living below the poverty line and this
declined to 26.1% in 1999-2000 and to 21.8% in 2004-5. According to WDR-2007, 24.3% of the
population of India lived on less than $1 a day, 41.6% lived on less than $1.25 a day (revised
international poverty line) while 75.6% lived on less than $2 per day.

4. Chronic Unemployment :— As per the 61th round of survey on employment conducted by

NSSO, unemployment rate on Current Daily Status (CDS) was 8.3% in 2004-05 as compared to
7.3% in 1999-2000. In absolute terms, number of people unemployed (UPS) increased from 1.05
crore million to 1.31 crore during this period.
The nature of unemployment in India is different from that in the developed countries, where
most of the unemployment is cyclical and frictional in nature. In India it is chronic and structural
in nature because the productive capacity is inadequate to create sufficient number of jobs. There
exists widespread open, disguised as well as educated unemployment. It exists mainly due to
backwardness of agriculture sector, high population growth, inappropriate technology,
deficiencies of educational system, slow economic growth etc.

5. Predominance of Agriculture :— The significance of agriculture and allied, activities to the

Indian economy, though has declined since independence, is still ample. Agriculture and allied
sector contributed 14% to the GDP in 2008-09 and about 52% of the working population was
engaged in this sector. In developed countries like USA and UK agriculture employs only 3-4%
of the working population and its contribution to GDP is merely 1-2%.
Apart from this predominance of agriculture, India faces various other problems like low
productivity, uneconomic size of holdings, inadequate irrigation facilities, outmoded
technologies, disguised unemployment etc.

6. Scarcity of capital:— Of all the determinants of economic development, capital is

said to be the most important. In fact, it is accumulation of capital that alone can help a country in
its attempt to overcome its economic backwardness. Kuznets remarked "that low capital
formation proportion means low rates of growth of national product, unless capital-output ratio
declines."
In India, the rates of saving and investment have increased significantly since 2002-03
but they are still much lower in comparision of the south east Asian countries. The saving rate of
37.7% of GDP in 2008-09 is much lower than 49.9% in Singapore, 47% in Malaysia and 39% in
China. Similarly, the rate of capital formation (investment) was 39.1% of GDP in 2008-09 is
much lower than in some of the East-Asian countries, where the rate of capital formation has
been over 35% of GDP for the past decade or so.

7. Over-Population and high dependency ratio :—According to census 2001, the total
population of India was 102.7 crore , which is 16.7% of the world's total population. To maintain
this 16.7% of the world population, India holds only 2.42% of the total land area of the world.
Over the years, population of India has increased at the rate of over 2% per annum although it has
declined to 1.93% in 1991-2001. The country is presently passing through the second stage of
demographic transition which is characterised by a falling death rate without a corresponding
decline in birth rate, thus resulting in population explosion.
The rapid growth of population has also resulted in a high dependency ratio i.e.
percentage of population dependent on the working population. In 1999, percentage of working
population (15-64 age group) to total population was 61.1% as compared to 66.9% in developed
countries. This is in spite of the fact that life expectancy in India is about 65 years, much less than
77 years in the developed countries.
Besides these, other features of the Indian economy, which are incidental or supplementary to
these include technical backwardness, existence of traditional society, lack of entrepreneurship,
market imperfections, low level of human development etc.

II. DUALISTIC ECONOMY

The Indian economy is dualistic in nature. It has characteristics of a modern economy as

well as a traditional economy. The traditional rural sector in India possesses the following
characterstics. A large number of people engaged in the peasant agriculture, handicrafts and
small-scale industries. It has variable technical coefficient of production i.e. commodities can be
produced with a wide range of techniques and alternative combinations of labour and capital.
Techniques of production are labour intensive. The modern sector has the following
characterstics. It consists of large scale industries, mines, plantations etc.It has relatively fixed
technical coefficients. The processes are relatively capital intensive. The existence of such
dualism has aggravated the problem of structural or technological unemployment in the industrial
sector and disguised unemployment in the rural sector.
In India, dualism pervades in all the sectors of the economy. India has the world’s largest
number of poor people with significant people in the world’s richest list. It is the home to the
world’s largest number of illiterate people as well as the largest number of qualified information
technology professionals. Social dualism is reflected by the coexistence of dating and dowry
deaths in the same society, conservative organizations involving in social policing and the gay
marriages.
The economic planning process and especially the economic reforms has created two
diametrically opposite societies in the country i.e. India and the Bharat. India represents the
modern sector of the economy consisting of the sophisticated industries, information technology,
nuclear research, space technology, prosperity and the pop culture. While Bharat represents the
traditional rural sector engrossed in poverty, hunger, illetracy, disease and deprivations.

III. MIXED ECONOMY

The mixed economy allows the existence of private enterprise along with the public enterprise. It
possesses the features of capitalist economy as well as that of the socialist economy. The public sector
seeks to achieve social objectives such as reduction of inequalities, provision of basic amenities to the
people, development of infrastructure, defense etc. The private sector operates on the profit motive.
The resources are allocated on the basis of the modified market mechanism i.e. market forces of
demand and supply are subjected to selective government intervention. It seeks to incorporate
advantages of both capitalism and socialism.
Indian economy is a mixed economy. The mixed economy principle finds expression on the first
Industrial Policy Resolution of 1948. In short, following are the features of mixed Indian economy.
 Presence of large public sector along with free (private) enterprise.
 Private ownership of the means of production and profit induced production.
 Predominance of market mechanism though not completely free from state control.
 An economic planning which is liberal from the one followed in the socialists economies.
 The government intervention is largely confined to those areas where the interest of the
weaker sections is at stake.
IV. REFORM OF THE ECONOMY

In 1991, government initiated large scale economic reforms programme. It altered the basic
framework of the economic policy. It transformed the economy from a highly regulated to a
liberalized economy. Such reforms were based on the philosophy of liberalization, privatization and
globalization. The prime objective of the reforms is to improve efficiency and productivity.

(a) Market orientation:- The economic reforms seeks to allocate the resources on the basis of the
market forces of demand and supply. The government relaxed most of the regulations and controls to
promote competition. The measures initiated to provide market orientation to the economy included
delicensing, deregulation, disinvestment, dereservation of the industries exclusively reserved for the
public sector, liberalization of the foreign trade and investment policy etc.

(b) Selective government intervention:- The scope of government intervention was largely confined
to the socially relevant areas. The government strengthened the institutional mechanism to facilitate
functioning of markets. The government provided various inducements to the private sector to align its
objectives with the national objectives through various economic policy measures like tax rebates,
subsidies etc.

(c) Indicative planning:- The government replaced the directive planning with the indicative planning
in the Eighth Plan (1992-97). Under the indicative planning there is no element of compulsion,
government uses persuasive economic policy measures to influence the activities of the private sector.
The government pursues market-friendly policies for the mobilization and allocation of resources.

V. PROGRESSIVE ECONOMY

The Indian economy has transformed significantly since independence. It has undergone various
permanent structural changes which have put it on a higher growth trajectory. These have the potential
of sustaining continuous improvement in the quality of life of the people. These progressive changes
are the pointer to the developing character of the economy.

(a) Uptrend in output growth :- The growth rate of the GDP has been accelerating since
independence especially since economic reforms. The economy grew at the rate of about seven per
cent per annum during the post reform era. India is the second fastest growing economy of the world,
next only to China in the recent years. As per the World Development Report - 2008 of the World
Bank, India is the fourth largest economy of the world in terms of GDP in $PPP.

(b) Improvement in productivity:- The productivity of the economy has improved significantly as a
result of technological improvements. The Incremental Capital-Output Ratio (ICOR) has been
reducing due to the increasing competition, liberalization and market orientation.

(c) Human capital formation: - There has been significant progress in the human resource
development. The investment in education, training, health care services etc. has been consistently
increasing which has resulted in the improvement in literacy rates, reduction in school drop-out rate,
increase in life expectancy, reduction in infant mortality rate etc. As per the World Bank India has the
third largest scientific and technical manpower in the world.

(d) Surging service sector:- The service sector has been growing at a fast pace in India. It accounts for
about 57 per cent of GDP. India is one of the leading country in the information technology and the
information technology enabled services (ITES) sector.
 As we have discussed above that Indian economy is still an underdeveloped economy despite
significant structural changes since independence. However, it is more appropriate to call it a
developing economy because of its progressive features. Though, the terms underdeveloped economy
and developing economy are used interchangeably in the economic literature. The future outlook of
the Indian economy is quite positive. The growth process is expected to sustain in future due to the
dynamic institutional, structural, technological, social and demographic changes. Such changes
include accelerating saving and investment rates, reducing incremental capital-output ratio, increase in
the working age population i.e. demographic dividend, increase in the scientific and technical
manpower, political stability, ongoing economic reforms, stable macroeconomic situation etc.
According to the report “Brazil, Russia, India and China - A Road in 2050” by Goldman
Sachs, India will surpass Japan as the third largest economy in the world by 2032. If trends continue,
India's economy may then surpass the US and be second only to China's by mid-century, the report by
investment bank Goldman Sachs says. The report says India's programme of reforms has brought
increased competition and efficiency.

Reality Bites

In the past two decades, India has been making sustained progress on a scale, size and pace that is
unprecedented in its own history. A low-income country with mass poverty at the time of Independence in
1947, India now has a diminishing pool of very poor people and is poised to cross the threshold to join the
ranks of the world’s middle-income countries. Over these past 62 years, the country has been successful on
a number of fronts:

• It has maintained electoral democracy.

• Reduced absolute poverty by more than half.

• Dramatically improved literacy.

• Vastly improved health conditions.

• Become one of the world’s fastest growing economies with average growth rates of 9% over the
past four years.

• Emerged as a global player in information technology, business process outsourcing,

telecommunications, and pharmaceuticals.

Source: World Bank

CAPITAL FORMATION

Capital formation refers to the increase in the physical stock of capital like
machinery, tools, plant, equipment etc. Capital formation is also called ‘investment’. It is
one of the most important determinants of economic growth as it increases production,
productivity and the future productive capacity of the economy. Capital formation, by
increasing productivity and income, helps in breaking the vicious circle of poverty in less
developed countries. In such countries the cause of low income is low productivity which
itself is a result of inadequacy of capital.

Relation between capital formation and economic growth

The relation between the investment (capital formation) and economic growth
was established by the Horrod-Domer hypothesis. It states that growth is directly related
with investment rate and inversely related with the Incremental Capital Output Ratio
(ICOR).

Investment Rate
GDP growth rate = ---------------------
ICOR

For example, the Eleventh Plan targeted the average rate of investment at 36.7% of GDP
and assumes an ICOR of 4.1, which is expected to yield the GDP growth rate of 9%
(8.95% to be precise).

Gross Domestic Capital Formation

As per CSO's estimates, gross domestic capital formation (investment) was just
8.7% of GDP at current market price in 1950-51. It gradually increased to 26.3% in 1990-
91, and to 26.9% in 1995-96 then it declined to 23.0% in 2001-02. Since the financial
year 2002-03 it has accelerated significantly. It stood at 39.1% of GDP in 2007-08. Much
of this increase is attributable to a rise in the rate of investment by the corporate sector.
Out of this, the private corporate sector accounted for 41% of the total investment,
household sector for 33% while the public sector accounted for 23% of GDP and
valuables (i.e. precious metals and stones) accounted for 3% of GDP. The rise in the rate
of investment has been on account of various factors, the most important being the
transformation in the investment climate, coupled with an optimistic outlook for the
growth prospects for the Indian economy.
The 1990s reforms transformed the investment climate, improved business
confidence and generated a wave of entrepreneurial optimism. This has led to a gradual
improvement in competitiveness of the entire corporate sector, resurgence in the
manufacturing sector and an acceleration in the rate of investment. The FRBMA
mandated fiscal correction path was also helpful in raising the credibility of the
Government with respect to fiscal deficits, in which India was at the bottom of global
rankings. This has improved perceptions about the long-term macroeconomic stability of
the economy. Moderate tax rates, coupled with buoyant sales growth, increased the
internal accruals of the corporate sector. The improved investment climate and strong
macro fundamentals also led to an upsurge in foreign direct investment. The combined
effect of these factors was reflected in an increase in the investment rate from 25.2 per
cent of GDP in the first year of the Tenth Five Year Plan to 35.9 per cent of GDP in the
last year. The higher investment was able to absorb the domestic savings and also
generated an appetite for absorption of capital inflows from abroad.

Gross Domestic Savings

Savings or gross domestic savings is defined as the excess of current income over current
expenditure. The gross domestic saving rate (as % of GDP at market price) was 8.9% in 1950-51.
It gradually increased to 23.1% in 1990-91, 29.8% in 2002-03 and 37.7% in 2007-08.. Private
sector savings dominated the total savings in 2007-08 and were at 33.2 per cent of GDP. Of this,
the household sector savings was 24.3 per cent of GDP while the private corporate sector
accounted for 8.8 per cent. Savings by the public sector was 4.5 per cent of GDP. The
composition of savings by sectors as percentage of the gross domestic saving is shown in the
following figure.

The sharp increase in private corporate savings and the government savings were the prime
contributors to the surge in the saving rate in India since 2001-02. Private corporate savings
(consisting of depreciation provisions and retained earnings) more than doubled from 3.4 percent of
GDP in 2001-02 to 8.8 percent in 2007-08. It is, of course, consistent with the extraordinary growth in
corporate earnings that has been witnessed in recent years. Even more impressive has been the surge
in corporate investment from under 6 percent of GDP in 2001-02 to nearly 15.9 percent in 2007-08.
Indeed, it is very likely that surging corporate investment was a powerful driver of much higher
corporate savings.
 The biggest contributor to the savings explosion after 2001-02 has been the public sector.
Public savings went from minus 1.9 percent of GDP in 2001-02 to plus 4.5 percent in 2007-08.
Among the factors responsible for this very welcome improvement in government savings were: the
central fiscal responsibility law passed by Parliament in 2003; the proliferation of similar laws in state
governments, triggered largely by the debt relief inducements recommended by the Twelfth Finance
Commission; the buoyancy of state tax revenues resulting from the switch-over to VAT; and the
tremendous increase in central direct tax revenues spurred by the massive growth of corporate
earnings and fast-growing pay packets among the urban salaried.

Saving-Investment Gap

In a closed economy, domestic savings and investment must be equal. However in an open economy
the investment differs from savings to the extent of net capital inflow from abroad. The saving-
investment gap is precisely equal to the Current Account Deficit (CAD). During the financial
year 2007-08 the saving-investment gap was (-) 1.4% of GDP (i.e. 37.7 %– 39.1%).

Vicious Circle of Poverty

Ragner Nurkse defined the vicious circle of poverty as "a circular constellation of forces tending to act
and react upon one another in such a way as to keep a poor country in a state of poverty". It states that
poverty is self perpetuating as it is a cause and effect of itself. It is diagrammatically expressed as:

Scarcity of capital Low Productivity

Low Investment Low Income

Low Savings

Vicious Circle of Poverty

Closed Economy: — An economy which does not have any financial relations (trade,
investment etc.) with the rest of the world.
Open Economy: — An economy that permits financial transactions with the residents of foreign
countries. No economy is totally open or closed in absolute terms. Countries have varying
degrees of openness depending on the restrictions on economic transactions.

POVERTY
Poverty is a social phenomenon wherein a section of society is unable to fulfill even its
basic necessities of life. The UN Human Rights Council has defined poverty as “a human
condition characterized by the sustained or chronic deprivation of the resources, capabilities,
choices, security and power necessary for the enjoyment of an adequate standard of living and
other civil, cultural, economic, political and social rights".

Types of Poverty

The poverty has two aspects:- (l) Absolute poverty (2) Relative poverty.
1. Absolute Poverty :— It is a situation in which the consumption or income level of people is less
than some minimum level necessary to meet basic needs as per the national standards. It is expressed in
terms of a poverty line.
2,Relative Poverty :—It is expressed in the form of comparisons of the levels of income, nutrition
or consumption expenditure of the poor strata vis-à-vis rich strata of the society. It shows the
extent of inequality.

Measurement of poverty in India

In India, poverty is estimated by the Planning Commission on the basis of the data
collected by the National Sample Survey Organisation (NSSO). NSSO conducts large sample
surveys after the interval of five years. It conducted the latest large sample survey in 2004-05 as
the 61st round of survey. The Planning Commission estimates the incidence of poverty at the
national and state level using the methodology recommended by the 'Expert Group on Estimation
of Proportion and Number of Poor' (Lakdawala Committee).
Planning commission has defined the poverty line on the basis of the minimum
recommended (by Indian Council for Medical Research) nutritional requirement of 2400 calories
per person per day in rural areas and 2100 calories per person per day in rural areas. On this basis
poverty line is estimated at the monthly per capita expenditure level of Rs.328 for rural areas and
Rs.454 for urban areas at 1999-2000 prices.
The NSSO has released the result of the latest large sample survey data on household
consumer expenditure (NSS 61st Round), covering the period July 2004 to June 2005. From this
data, two different consumption distributions for the year 2004-05 have been obtained viz.
Uniform Recall Period (URP) and Mixed Recall Period (MRP). The Uniform Recall Period
(URP) is based on the consumption data collected using 30-day recall period (also known as
reference period) for all the items. The Mixed Recall Period (MRP) is obtained from the
consumer expenditure data collected using 365-day recall period for five infrequently purchased
non-food items, namely, clothing, footwear, durable goods, education and institutional medical
expenses and 30-day recall period for the remaining items. The Planning Commission has
estimated poverty in 2004-05 using both the distributions.
The URP-consumption distribution data of the 61st Round yields a poverty ratio of 28.3
percent in the rural areas, 25.7 percent in the urban areas and 27.5 percent for the country as a
whole in 2004-05. The corresponding figures obtained from the MRP-consumption distribution
data of the 61st Round are 21.8 percent in the rural areas, 21.7 percent in the urban areas and 21.8
percent for the country as a whole.
The poverty estimates in 2004-05 based on URP consumption distribution (27.5 percent)
is comparable with the poverty estimates of 1993-94, which was 36 percent. The poverty
estimates in 2004-05 based on MRP consumption (21.8 percent) is roughly (but not strictly)
comparable with the poverty estimates of 1999-2000, which was 26.1 percent.

Comparison of Poverty Estimates Based on

Mixed Recall Period
1999-2000 2004-05
1 Rural 27.1 21.8
2 Urban 23.6 21.7
3 Total 26.1 21.8

The trend of poverty in India has been presented in the following table.

Year No. of Poverty

Poors Ratio
(crore) (in
percentage)
1973-74 32.13 54.9
1977-78 32.89 51.3
1983 32.29 44.5
1987-88 30.71 38.9
1993-94 32.03 36.0
1999-2000 26.03 26.1
2004-05 23.85 21.8

Committee for the Estimation of BPL households in Rural areas

The committee constituted by the Ministry of Rural Development for suggesting a
methodology for estimation of BPL households in rural areas observed that the national
poverty line at Rs 356 per capita per month in rural areas and Rs 539 per capita per
month in urban areas at 2004-05 prices permitted
both rural and urban people to consume about 1,820 k calories as against the desired
norm of 2,400/2,100 k calories. Hence, a large number of the rural poor got left out of the
BPL status benefits as in order to consume the desired norm of 2,400/2,100 k calories, the
cut-off line for determining BPL status should have been around Rs 700 in rural areas
and Rs 1,000 in urban. The committee, therefore recommended that the percentage of
people entitled to BPL status should be revised upwards to at least
50 per cent though the calorie norm of 2,400 would require this to be 80 per cent. The
Committee, based
upon available studies, also observed, inter-alia, the following:
At any given point of time, the calorie intake of the poorest quartile continues to be 30
to 50 per cent less than the calorie intake of the top quartile of the population, despite it
needing more calories because of harder manual work.
 Calorie consumption of the bottom 50 per cent of the population has been consistently
decreasing since 1987, which is a matter of concern.
Thus the recommendations of both committees suggest an increase in BPL families
coverage. This in turn implies automatic expansion in the coverage of the public
distribution system (PDS) and other Government schemes where beneficiaries are
decided on BPL basis. The additional Government expenditure implications are also
apparent.

Measurement of poverty at the global level

The World Bank estimates the poverty at the global level. It estimates poverty
worldwide, by using a uniform reference poverty line which is expressed in a common unit across
countries. The new international poverty line of $1.25 a day at 2005 prices is the mean of the
national poverty lines for the 10-20 poorest countries of the world. Therefore, for the purpose of
global aggregation and comparison, the World Bank uses reference lines set at $1.25 and $2 per
day (2005 Purchasing Power Parity terms). Using improved price data from the latest (2005)
round of the International Comparison Program, new poverty estimates released in August 2008
show that about 1.4 billion people in the developing world (one in four) were living on less than
$1.25 a day in 2005, down from 1.9 billion (one in two) in 1981.
The survey, based on the new benchmark of poverty line of a daily income of $1.25,
claims that the number of poor people in India has gone up from 421 million in 1981 to 456
million in 2005. India, however, measures its poverty as per its national poverty line (based on
nutrition), which is $1.02 per day. Hence there is a difference between the two estimates. At the
rate of $1 a day (as per 2005 prices) poverty has reduced from 42 per cent in 1981 to 24 percent
in 2005. But, according to the World Bank report, percentage of people living below $1.25 a day
dwindled from 60 in 1981 to 42 in 2005.

Measures of Poverty
The extent of poverty is depicted by the following measures :

1. Head Count Ratio or Poverty Ratio : ;—It is calculated by dividing the number of people
below the poverty line by the total population. It measures the proportion of poor in the total
population.

3. Poverty Gap Index (PGI) :—It is the difference between the poverty line and the average
income of all households living below the poverty line (BPL) expressed as a percentage of
poverty line. It indicates the depth and severity of poverty.

Poverty Line - Average income of BPL

PGI = ---------------------------------------------
Poverty Line

4. Squared Poverty Gap Index :—It is the mean of the squared individual poverty gaps relative
to the poverty line. It indicates the severity of poverty as well as it is sensitive to inequality
among the poor.

5. Sen Index of Poverty:- It was developed by Prof. Amartya Sen. It is based on the
headcount ratio, poverty gap index and the gini coefficiect. It takes into account the
extent and severity of poverty as well as inequality. It is expressed as:

S=H[ I+(1–I)G]

Where, S is sen index of poverty, H is head count index, I is poverty gap index and G is
gini coefficient.

Human poverty—It is the condition of deprivation of opportunities and choices most basic
to human development to have a long, healthy, creative life and to enjoy a decent standard,
of living, freedom, dignity etc. It is a wider concept of poverty as it takes =into account
several .dimensions of deprivation like social, cultural, political etc, besides .economic
deprivation.
Poverty Ratio at the State level (2004-05)

(Highest) (Lowest)
I. Orissa (39.9%) 1. Chandigarh (3.8%)
2. Jharkhand (34.8%) 2. Jammu &Kashmir (4.4%)
3. Bihar (32.5) 3. Punjab (5.2%)
4. Madhya Pradesh (32.4%) 4. Himachal Pradesh (6.7%)

Causes of Poverty
The main factors responsible for rural poverty in India are fast rise in population, low
productivity in agriculture, indifferent attitude towards investment, unutilized resources,
slow growth of employment opportunities, illiteracy, lack of proper implementation of
public distribution system etc. The causes of urban poverty are migration of rural youth
to cities, lack of training in skills and vocational education, limited job opportunities in
cities, inequalities of income and wealth etc.

Strategy of Poverty alleviation

In the initial 'two decades of planning, government mainly relied on the trickle down
hypothesis for poverty alleviation. That is, the benefits of economic growth will percolate
down to the lowest strata of society and poverty will automatically be removed just by
accelerating the pace of economic growth. However, by early 1970s, it was well
established that trickle down effect had not taken place and poverty alleviation would
required proactive redistribution policies. Thus, -.poverty alleviation was adopted as the
focus of the fifth five-year plan.' Government launched direct attack on poverty by way
of poverty alleviation and employment generation programmes. These programmes are
discussed in the next section.

UNEMPLOYMENT
Unemployment refers to a situation when a person is able and willing to work at
the prevailing wage rate but does not get opportunity to work. The term unemployment is
directly related with the concept of labour force because the people who are not included
in labour force can not be regarded as unemployed. Labour force includes all people in
the working age group (15 – 59 years) who are able and willing to work. Labour force
equals the work force plus the number of unemployed people. So, unemployment refers
to only the involuntary unemployment.
Unemployment in under-developed countries is mainly of open and disguised form. Most
of the unemployment in India is structural in nature i.e. due to lack of capital. But
unemployment in developed countries in mostly Keynesian and frictional. J.K. Keynes
asserted that the major cause of unemployment in advanced countries is the deficiency of
effective demand. That is, machines become idle and demand for labour falls due to the
lack of demand for the products of the industry.

Types of Unemployment

1. Open Unemployment :—It is one in which a person is willing and able to work but there
are no job opportunities. It is involuntary unemployment.
2. Structural Unemployment :—It is caused due to the mismatch between the skills of a
person and the requirements of the jobs. For example, immobility of labour, change in
structure of the economy, deficiency of capital etc
3. Disguised Unemployment :—It is the situation in which more workers are employed in an
activity than actually required. Marginal productivity of such surplus workers is zero i.e.
production will not be adversely affected if such workers will be withdrawn. Such
unemployment is commonly found in the agricultural sector of the underdeveloped countries.
It is also called hidden unemployment.
4. Frictional Unemployment :—It is a temporary unemployment which exists during the
period of transfer of labour from one job to another. It arises due to imperfections of the
labour market like ignorance of labour about the job opportunities.
5. Seasonal Unemployment :—It appears due to a change in demand based on seasonal
variations. It usually arises during the lean season in the activities associated with agriculture.
6. Educated Unemployment :—It is the situation in which a person who is educated, trained
and skilled, fails to obtain a suitable job suited to his qualifications.
7. Technical Unemployment :—When adoption of new labour saving technology renders
some workers unemployed, it is called technical unemployment.
8. Cyclical Unemployment :-—Such kind of unemployment exists during the downswing of
the economic activity i.e. depression phase of the business cycle. It is periodically found in
the capitalist or market oriented developed economies.

Underemployment:—It is a situation in which a person is employed in a job which is not

commensurate with his/her qualification, skill and experience . Under this condition,
capabilities of the workers are not utilized to the optimum levels.

Measures of unemployment
The National Sample Survey Organization collects data on the characteristics of Labour
Force (Employed & Unemployed) through various rounds of the NSSO. Since 1972-73,
the survey on employment and unemployment has become a part of the quinquennial
programme of NSSO surveys. The persons surveyed are classified into various activity
categories on the basis of activities pursued during certain specified reference periods as
Usual Status, Current Weekly Status and Current Daily Status. These are defined as
under.
a) Usual Status:
A person is considered working or employed if the person was engaged for a relatively
longer period ( over 182 days) in any one or more work related (economic) activities
during the reference period of 365 days preceding the date of survey. Persons covered by
the survey are classified into those working and/or available for work in their principal
activity sector and subsidiary activity sector (sector other than their principal activity
sector). The Usual status (US) unemployment is regarded as a measure of chronic (long
term) and open unemployment during the reference year.
b) Current weekly status (CWS)— It is measured in number of persons. A person
is considered working or employed if the person was engaged for at least one hour
on any one day on any work related (economic) activity during the reference period of
seven days preceding the date of survey. The current weekly (CWS) unemployment rate
also measures chronic unemployment but with reduced reference period of a week.
3. Current daily status (CDS):—It is the time rate and measured in man-days. It
records the activity status of a person of each day of the preceding seven days. In
assigning the activity status on a day, a person was considered working for the whole day
if he had worked four hours or more during the day. If he had worked one hour or more
but less than four hours he was considered working or employed for half day. On the
other hand, if a person was not engaged in any work even for one hour on the day, he was
considered unemployed for the whole day.
The current daily status (CDS) is considered to be a comprehensive measure of
unemployment as it accounts for both chronic unemployment as well as under-
employment on a weekly basis.

Magnitude of unemployment

The employment on a current daily status (CDS) basis during 1999-2000 to 2004-05 had
accelerated significantly as compared to the growth witnessed during 1993-94 to 1999-
2000. During 1999-2000 to 2004-05, about 47 million work opportunities were created
compared to only 24 million in the period between 1993-94 and 1999-2000. Employment
Growth accelerated from 1.25 per cent per annum to 2.62 per cent per annum. However,
since the labour force grew at a faster rate of 2.84 per cent than the work force,
unemployment rate also rose. The incidence of unemployment on CDS basis increased
from 7.31 per cent in 1999-2000 to 8.28 per cent in 2004-05.
 NATIONAL INCOME

National Income — It is defined as the income of all the normal-residents of a country during an
accounting year The term National Income refers to Net National Product at factor cost. National
Income (NNP.0) is valued at both current prices as well as on constant prices. When it is valued at
constant (base year) prices it is called Real National Income

Domestic Income —The term Domestic Income’ refers to the Net Domestic Product at factor cost
i.e. DI=NDPFc

Personal Income —It is the sum of all incomes actually received by all individuals or households
during a given year. National Income is the earned income while Personal Income is the received
income.

Disposable Income —It is the income which is available to all individuals for consumption that part
of the Personal Income which is left with the individual after paying personal taxes like income tax,
property taxes etc.

Disposable Income = Personal Income — Personal taxes

Disposable income can either be consumed or saved. Hence,

Disposable Income = consumption + saving

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