INDIAN ECONOMY —

PERFORMANCE AND
POLICIES
[For B.Com. (Hons.), Semester IV (Odisha)]

V.K. PURI (Retd.)

Shyam Lal College,
Delhi University,
Delhi.

First Edition: 2017

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© V.K. Puri
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 PREFACE

The present book has been prepared for students of B.Com. (Hons.), Fourth Semester of Sambalpur and
Utkal Universities (Odisha). In accordance with the requirements of the syllabus, the discussion is divided into
five units. The coverage, organisation and contents of these units are as follows:
Unit I on ‘Basic Issues in Economic Development’ consists of two chapters. The first chapter discusses
and distinguishes between the concepts of economic growth and development. It also defines underdevelopment
and highlights the indicators of underdevelopment. The second chapter discusses various issues related to
human development and explains the concept of human development index.
Unit II on ‘Basic Features of the Indian Economy at Independence’ has one chapter explaining the
composition of national income and occupational structure, the agrarian scene and the industrial structure at
the time of Independence.
Unit III on ‘Policy Regimes’ has two chapters. Chapter 4 discusses the evolution of planning in India
and import substituting industrialisation while Chapter 5 focuses on the process of economic reforms that was
initiated in 1991 and the liberalisation of economic policies that followed it. Discussion on monetary and fiscal
policies is taken up in Appendix I of the book (340-348).
Unit IV on ‘Growth, Development and Structural Change’ contains eleven chapters and takes up for
discussion various issues pertaining to the processes of economic growth and structural changes in India like
the trends in national income and per capita income, national income by industry of origin, regional inequalities,
institutional framework in agriculture, concentration of economic power in the industrial sector, changing role
of State, income inequalities in India, the problems of poverty and unemployment, human development,
environmental concerns, and demographic constraints.
Unit V on ‘Sectoral Trends and Issues’ contains thirteen chapters and is the largest unit. It starts with a
discussion of the agricultural sector spread over four chapters explaining the role of agriculture in the Indian
economy and production trends, green revolution, agricultural price policy and public distribution system. The
next three chapters are devoted to industrial sector. In these chapters, we focus on industrial production trends,
role and performance of the public sector, and the policy towards the small-scale sector. Chapter 24 of the book
considers in detail foreign investment trends in the Indian economy. Chapter 25 is focused on the financial
sector in the Indian economy. The last four chapters discuss foreign trade trends, structural changes in foreign
trade, the various aspects of India’s balance of payments position, India’s foreign trade policy, and the different
issues of WTO (especially those impacting the interests of developing countries like India).
Keeping in view the fact that the book is meant for undergraduate students, the language has been kept
simple and direct. Each chapter is followed by a summary for a quick comprehension of all issues raised in the
chapters and a list of questions for the practice of students.
We take this opportunity to thank Mrs. Kiran Puri and our publishers M/s. Himalaya Publishing House
Pvt. Ltd. for their wholehearted support and cooperation in preparing the book. Suggestions for improvement
are welcome from all quarters.
— V.K. Puri
 SYLLABUS

Paper BCH 4.4: Indian Economy — Performance and Policies

B.Com. (Hons.): Semester – IV (Utkal and Sambalpur)
Objective: This course seeks to enable the student to grasp the major economic problems in India and
their solution.

Unit 1: Basic Issues in Economic Development

Concept and Measures of Development and Underdevelopment; Human Development.

Unit 2: Basic Features of the Indian Economy at Independence

Composition of national income and occupational structure, the agrarian scene and industrial structure.

Unit 3: Policy Regimes

(a) The evolution of planning and import substituting industrialisation.
(b) Economic Reforms since 1991.
(c) Monetary and Fiscal Policies with their implications on economy.

Unit 4: Growth, Development and Structural Changes

(a) The experience of Growth, Development and Structural Change in different phases of growth and
policy regimes across sectors and regions.
(b) The Institutional Framework: Patterns of assets ownership in agriculture and industry; Policies for
restructuring agrarian relations and for regulating concentration of economic power.
(c) Changes in policy perspectives on the role of institutional framework after 1991.
(d) Growth and Distribution; Unemployment and Poverty; Human Development; Environmental concerns.
(e) Demographic Constraints: Interaction between population change and economic development.

Unit 5: Sectoral Trends and Issues

(a) Agriculture Sector: Agrarian growth and performance in different phases of policy regimes, i.e., pre-
green revolution and the two phases of green revolution; Factors influencing productivity and growth;
the role of technology and institutions; price policy, the public distribution system and food security.
(b) Industry and Services Sector: Phases of Industrialisation – the rate and pattern of industrial growth
across alternative policy regimes; Public sector – its role, performance and reforms; The small-scale
sector; Role of Foreign capital.
(c) Financial Sector: Structure, Performance and Reforms.
(d) Foreign Trade and Balance of Payments: Structural Changes and Performance of India’s Foreign
Trade and Balance of Payments; Trade Policy debate; Export policies and performance; Macroeconomic
Stabilisation and Structural Adjustment; India and the WTO.
 CONTENTS

UNIT I: BASIC ISSUES IN ECONOMIC DEVELOPMENT

1. CONCEPT AND MEASURES OF DEVELOPMENT AND 3 – 12

UNDERDEVELOPMENT
Concept of Economic Growth and Development 3
Distinction between Growth and Development 4
Measures of Economic Growth 6
Measures of Economic Development 7
Underdevelopment: Meaning and Indicators 9
Summary 11
Questions 12
2. HUMAN DEVELOPMENT 13 – 22
What is Human Development? 13
Why Human Development? 14
Essential Components of Human Development 15
The Human Development Index 16
Links between Economic Growth and Human Development 19
Recasting Planning in Terms of Human Development 20
Summary 21
Questions 22

UNIT II: BASIC FEATURES OF THE INDIAN ECONOMY AT INDEPENDENCE

3. BASIC FEATURES OF INDIAN ECONOMY AT INDEPENDENCE 25 – 35

Composition of National Income and Occupational Structure 25
The Agrarian Scene 27
The Industrial Structure 30
Summary 35
Questions 35

UNIT III: POLICY REGIMES

4. EVOLUTION OF PLANNING AND IMPORT SUBSTITUTING 39 – 48

INDUSTRIALISATION
Evolution of Planning in India 39
Strategy of Economic Development: Focus on Import-Substituting Industrialisation 43
Summary 47
Questions 47
5. ECONOMIC REFORMS AND LIBERALISATION 49 – 62
The Origin of Economic Crisis in the Early 1990s 49
Economic Reforms in India 50
Macroeconomic Stabilisation 50
Structural Reforms 54
An Appraisal of Economic Reforms 58
Summary 60
Questions 61

UNIT IV: GROWTH, DEVELOPMENT AND STRUCTURAL CHANGE

6. GROWTH AND STRUCTURAL CHANGES SINCE PLANNING 65 – 72

The National Income (NNP) Trends 65
Per Capita National Income 68
Structural Changes: National Income by Industry of Origin 68
Summary 71
Questions 72
7. ECONOMIC GROWTH AND INTER-STATE DISPARITIES IN INDIA 73 – 81
Magnitude of Regional Imbalances 73
Implications for Policy 78
Summary 80
Questions 81
8. INSTITUTIONAL FRAMEWORK IN AGRICULTURE AND LAND REFORMS 82 – 94
Institutional Framework in Agriculture at Independence 82
Pattern of Asset Ownership in Agriculture 84
Policies for Restructuring Agrarian Relations: The Land Reforms 85
Abolition of Intermediaries 86
Tenancy Reforms 87
Reorganisation of Agriculture 89
Evaluation of Land Reforms 91
Summary 93
Questions 94
9. INDUSTRIAL SECTOR: CONCENTRATION OF ECONOMIC POWER 95 – 105
AND ITS REGULATION
Ownership of Assets: Trends of Industrial Concentration in India 95
Government Measures to Regulate Concentration of Economic Power 97
The MRTP Act 99
Competition Act, 2002 102
Summary 104
Questions 104
10. CHANGES IN INSTITUTIONAL FRAMEWORK SINCE 1991: 106 – 112
CHANGING ROLE OF STATE
The Institutional Framework in India in Pre-Reform Period 106
Changes in Policy Perspectives Since 1991 — Reducing State Intervention and Control 108
Consensus on Functions of the State 110
Summary 111
Questions 112
11. INCOME DISTRIBUTION IN INDIA 113 – 119
The Pattern of Income Distribution in India 113
Causes of Income Inequalities in India 115
Government Policy and Measures 116
Summary 118
Questions 118
12. POVERTY IN INDIA 120 – 126
The Concept of Poverty Line 120
Incidence of Poverty in India 121
Safety Nets for Poor — Poverty Alleviation Programmes 122
Strategy of Poverty Alleviation 123
Summary 125
Questions 126
13. THE PROBLEM OF UNEMPLOYMENT 127 – 137
Estimates of Unemployment in India 127
Causes of Unemployment 130
Government Policy for Removing Unemployment 131
Major Employment Programmes 133
Summary 136
Questions 137
14. HUMAN DEVELOPMENT IN INDIA 138 – 149
Education in India and Development of Human Resources 138
Education Policy in India 139
Health Policy 144
Summary 148
Questions 148
15. THE ENVIRONMENTAL CONCERNS 150 – 159
Growth and Environmental Degradation 150
Environment Policy in India 154
Summary 159
Questions 159
16. DEMOGRAPHIC CONSTRAINTS: POPULATION CHANGE AND 160 – 176
ECONOMIC DEVELOPMENT
Meaning of Population Explosion 160
Demographic Trends in India 161
Age Structure of Population and Its Demographic Dividend 163
Causes of the Rapid Growth of Population 164
Population and Economic Development 167
Population Policy 170
Summary 174
Questions 175

UNIT V: SECTORAL TRENDS AND ISSUES

17. ROLE OF AGRICULTURE IN INDIAN ECONOMY AND 179 – 189

PRODUCTION TRENDS
Role of Agriculture in Indian Economy 179
Trends in Agricultural Production and Productivity 181
Causes of Low Productivity 184
Measures to Increase Production and Productivity 185
Summary 187
Questions 188
18. GREEN REVOLUTION AND ITS IMPACT 190 – 200
Changes in Agricultural Strategy: Shift from Institutional Reform to Technology 190
Green Revolution and Its Impact 192
Summary 199
Questions 200
19. AGRICULTURAL PRICES AND AGRICULTURAL PRICE POLICY 201 – 208
Trends in Agricultural Prices 201
Need for Agricultural Prices Policy 202
Agricultural Price Policy in India 203
Evaluation of Government’s Agricultural Price Policy 204
Summary 207
Questions 208
20. THE PUBLIC DISTRIBUTION SYSTEM AND FOOD SECURITY 209 – 218
The Problem of Food Security 209
Public Distribution System in India 210
Targeted Public Distribution System (TPDS) 212
National Food Security Act, 2013 213
ICDS and Mid-Day Meal Scheme 215
Summary 216
Questions 217
21. RATE AND PATTERN OF INDUSTRIAL GROWTH: THE VARIOUS 219 – 228
PHASES OF INDUSTRIALISATION
Industrial Policy: Alternative Policy Regimes 219
Trends in Industrial Growth Before 1990s: The Pre-Reform Period 222
Trends in Industrial Growth Since 1991: The Post-Reform Period 223
Changes in the Industrial Pattern During the Plans: A Brief Resume 225
Summary 227
Questions 228
22. PUBLIC SECTOR — ITS ROLE, PERFORMANCE AND REFORMS 229 – 237
Role of Public Sector in the Indian Economy 229
Performance of the Public Sector 231
Problems of Public Sector Enterprises 233
Public Sector Reforms in Post-1991 Period 234
Summary 236
Questions 237
23. THE SMALL SCALE SECTOR 238 – 250
Definition of Small-Scale Industries Sector 238
The Role and Performance of Cottage and Small-Scale Industries in Indian Economy 239
Small-Scale and Cottage Industries During the Plans — The Government Policy 241
Problems of Small-Scale and Cottage Industries 247
Summary 248
Questions 249
24. ROLE OF FOREIGN CAPITAL 251 – 263
Need for Foreign Capital 251
Indian Government’s Policy Towards Foreign Capital 252
Foreign Investment Inflows 256
Foreign Investment Inflows Since 1991: A Critical Appraisal 258
Foreign Aid to India 259
External Commercial Borrowings 260
Non-Resident Deposits 261
India’s External Debt 261
Summary 262
Questions 263
25. THE FINANCIAL SECTOR: STRUCTURE, PERFORMANCE AND 264 – 280
REFORMS
Structure of the Financial Sector 264
Performance of the Financial Sector 270
Reforms in the Financial Sector: The Period Since 1991 275
Summary 278
Questions 279
26. TRENDS IN FOREIGN TRADE AND STRUCTURAL CHANGES 281 – 295
Value of Exports and Imports in the Planning Period 281
Composition of Foreign Trade 282
Direction of Trade 287
Growth and Structure of India’s Foreign Trade Since 1991 290
Summary 294
Questions 294
27. INDIA’S BALANCE OF PAYMENTS 296 – 306
India’s Balance of Payments: The Pre-1991 Period 296
Balance of Payments Situation Since 1991 298
Reasons for Satisfactory Balance of Payments Situation in Post-Reform Period 300
The Management of Balance of Payments 302
Summary 305
Questions 306
28. TRADE POLICY OF THE GOVERNMENT OF INDIA 307 – 321
Import Policy: The Pre-Reform Period 307
Export Policy: The Pre-Reform Period 310
New Trade Policy: The Reform Period 313
Foreign Trade Policy (2015-2020) 317
Summary 319
Questions 320
29. WTO AND INDIA 322 – 339
Functions and Organisation of WTO 322
WTO Agreements 323
India’s Commitments to WTO 324
Benefits Proclaimed for India 325
A Critical Review of the Working of WTO 326
Singapore Issues and Doha Declaration 332
Hong Kong Ministerial Conference 334
Bali Package 335
Nairobi Ministerial Conference 336
Summary 337
Questions 338
Appendix I: India’s Fiscal and Monetary Policies 340 – 348
Appendi II: The Issue of Capital Account Convertibility 349 – 352
UNIT I: BASIC ISSUES IN ECONOMIC DEVELOPMENT

1. Concept and Measures of Development and

Underdevelopment
2. Human Development

1
 CHAPTER 1
CONCEPT AND MEASURES OF
DEVELOPMENT
AND UNDERDEVELOPMENT
In this chapter we propose to address the following issues:
 The concept of economic growth and development
 Distinction between growth and development
 Measures of economic growth
 Measures of economic development
 Meaning and indicators of underdevelopment

CONCEPT OF ECONOMIC GROWTH AND DEVELOPMENT

Economic Growth
Economic growth may be defined as a rate of expansion that can move an underdeveloped country
from a near subsistence mode of living to substantially higher levels in a comparatively short period of time
i.e., in decades rather than centuries. For nations already advanced economically, it will mean a continuation
of existing rates of growth. Historically, rapid economic growth has been accompanied by greater
industrialisation. But more accurately the process of economic growth can be described in terms of greater
commercialisation of economic activities. Though this concept of economic growth is correct in essence, it
lacks precision and makes its measurement difficult. However, there is nothing wrong if a change in industrial
structure is treated as an auxiliary index along with some better measuring yardstick of economic growth.
Economic Development
Till the 1960s the term ‘economic development’ was often used as a synonym of ‘economic growth’ in
economic literature. Now economic development is no longer considered identical with economic growth. It is
taken to mean growth plus progressive changes in certain crucial variables which determine the well-being of
the people. There are qualitative dimensions in the development process which may be missing in the growth
of an economy expressed in terms of an increase in the national product or the product per capita. Development
economists are no longer impressed by the growth performance of a country which gets reflected in the rise in
its GDP (or GNP); they now concentrate more directly on the development process. Mahbub ul Haq, a leading
Pakistani economist once remarked, “the problem of development must be defined as a selective attack on
the worst forms of poverty. Development goals must be defined in terms of progressive reduction and eventual
elimination of malnutrition, disease, illiteracy, squalor, unemployment, and inequalities. We were taught to
take care of our GNP because it would take care of poverty. Let us reverse this and take care of poverty because

3
 4 INDIAN ECONOMY — PERFORMANCE AND POLICIES

it will take care of the GNP. In other words, let us worry about the content of GNP even more than its rates of
increase.”1
Traditional Approach. In the present day development economics, one finds broadly two main approaches
to the concept of economic development. The first one often known to be the traditional approach defines
development strictly in economic terms. For the exponents of traditional approach economic development
implies a sustained annual increase in GNP (or GDP) at rates varying from 5 to 7 per cent or more together
with such alteration in the structure of production and employment that the share of agriculture declines in
both, whereas that of the manufacturing and tertiary sectors increases. The policy measures thus suggested
are the ones which induce industrialisation at the expense of agricultural development. Objectives of poverty
elimination, economic inequalities reduction and employment generation are mentioned in passing reference
only, and in most cases it is assumed that rapid gains in overall growth in GNP or per capita national
(or domestic) product would trickle down to people in one form or the other.
The New Economic View of Development. Having realised that about 40 per cent of the developing
world’s population had not benefited at all from economic growth during the 1950s and 1960s, an increasing
number of economists called for the rejection of the narrow definition of economic development. During the
1970s they redefined the concept of economic development in terms of the reduction or elimination of
poverty, inequality and unemployment in the context of a growing economy. In this phase “Redistribution
with Growth” became the popular slogan. Talking in this framework, Charles P. Kindleberger and Bruce Herrick
argued, “Economic development is generally defined to include improvements in material welfare, especially
for persons with the lowest incomes, the eradication of mass poverty with its correlates of illiteracy, disease
and early death, changes in the composition of inputs and outputs that generally include shifts in the underlying
structure of production away from agricultural towards industrial activities, the organisation of the economy in
such a way that productive employment is general among the working age population rather than the situation
of a privileged minority; and the correspondingly greater participation of broadly based groups in making
decisions about the directions, economic and otherwise, in which they should move to improve their welfare.”2
Dudley Seers posed the basic questions about the meaning of development in the right perspective when
he asserted, “The questions to ask about a country’s development are therefore: What has been happening
to poverty? What has been happening to unemployment? What has been happening to inequality? If all
three of these have declined from high levels, then beyond doubt this has been a period of development for
the country concerned. If one or two of these central problems have been growing worse, especially if all
three have, it would be strange to call the result ‘development’ even if per capita income doubled.”3
Economic development is thus a process with noble ideals and backward countries without exception are
endeavouring to make it successful. This characterisation of development with lofty goals is certainly very
attractive; at the same time realisation of these objectives has been found to be a really difficult task. For about
five decades in Latin America, Africa and Asia many less developed countries have been relentlessly trying for
social and economic transformation, but the progress made in this direction is not very encouraging. In some
cases mistakes, failures and setbacks are so glaring that the future development prospects also appear to be
rather bleak.

DISTINCTION BETWEEN GROWTH AND DEVELOPMENT

In recent literature the term economic growth refers to increases over time in a country’s real output of
goods and services—or more appropriately product per capita. Output is generally measured by gross or net
1. Mahbub ul Haq, “Employment and Income Distribution in the 1970s: A New Perspective,” Pakistan Economic and Social Review,
June-December 1971, p. 6.
2. Charles P. Kindleberger and Bruce Herrick, Economic Development (New York, 1977), p. 1.
3. Dudley Seers, “The Meaning of Development”, Eleventh World Conference of the Society for International Development (New
Delhi, 1969), p. 3.
 CONCEPT AND MEASURES OF DEVELOPMENT AND UNDERDEVELOPMENT 5

national product, though other measures could also be employed. The term economic development, in contrast,
is more comprehensive. It implies progressive changes in the socio-economic structure of a country. Viewed in
this way, economic development involves a steady decline in agriculture’s share in GNP and a corresponding
increase in the share of industries, trade, banking, construction and services. This transformation in economic
structure is invariably accompanied by a shift in the occupational structure of the labour force and an improvement
in its skill and productivity. Charles P. Kindleberger rightly asserts that whereas economic growth merely refers
to a rise in output, economic development implies changes in technological and institutional organisation of
production as well as in distributive pattern of income. Compared to the objective of development, economic
growth is easy to realise. By mobilising larger resources and raising their productivity, output level can be
raised. The process of development is far more extensive. Apart from a rise in output, it involves changes in the
composition of output as well as a shift in the allocation of productive resources so as to ensure social justice.
In some of the underdeveloped countries the process of economic growth has been accompanied by
economic development. This, however, is not necessary. It is quite probable that a country produces more of
the same type of goods and services to keep up with a growing population, while basic structure of the economy
remains intact. In a well-known book on Liberia, Robert Clower had observed that in spite of the fact that the
various concessions to foreign firms induced exports in a big way and resulted in a considerable increase in
gross national product, there was virtually no complementary development in other sectors of the economy.
The institutional set-up of the country essentially remained unaltered in this phase of growth. Further, the
benefits of this growth went almost exclusively to a privileged few, while the vast majority of the country’s
people remained completely unaffected. Clower thus calls it “growth without development.”4 Hence Singer
asserts, “for developing countries it is not difficult to demonstrate from numerical models, given their high
rates of population increase, increasingly capital intensive technology, the technological monopoly of the
industrialised countries, and their limited resources, that widespread ‘trickle down’, let alone the creation of
social welfare states, is most unlikely in the normal context of purely economic growth.”5
Development without growth is inconceivable. A substantial rise in a country’s GNP is required before
it can hope to expand its industries, financial institutions, trade, public utilities, and government
administration. Nowhere in the world has the occupational distribution of population changed in the absence
of growth. But in some of the Latin American countries, where GNP per capita is already high, development
can take place even if the output level does not rise for some years. For example, countries like Argentina,
Brazil, Chile, Venezuela and Mexico can wipe out poverty completely at their existing levels of national income.
They can ensure employment and reasonably high living standard to all, in case they choose to pursue egalitarian
policies. This is possible also in other newly industrialising countries. To sum up, from the welfare viewpoint
of the people one is inevitably led to the conclusion that economic growth alone is not enough for
underdeveloped countries; it must be accompanied by development.
Modern growth processes leave large segments of the population completely untouched. Former World
Bank President Robert McNamara had estimated that about 40 per cent of the developing world’s population
did not benefit at all from the economic growth during the 1950s and 1960s.6 This experience was rather
frustrating to multitudes of population. It also led to the adoption of an alternative conception of economic
development. This viewpoint is generally referred to as the ‘basic needs’ approach. A distinctive feature of this
approach is that “policies must be implemented to ensure a rising and properly distributed supply of goods,
both private and public, if basic needs are to be met.”7
4. Robert Clower, et al., Growth Without Development: An Economic Survey of Liberia (Evansten, III, 1966).
5. H.W. Singer, “Poverty, Income Distribution and Levels of Living: Thirty Years of Changing Thought on Development Problems”,
in C.H. Hanumantha Rao and P.C. Joshi (eds.), Reflections on Economic Development and Social Change — Essays in Honour of
Professor V.K.R.V. Rao (Bombay, 1979), p. 32.
6. Robert S. McNamara, One Hundred Countries, Two Billion People: The Dimensions of Development (New York, 1973), p. 11.
7. Paul Streeten, et al., First Things First: Meeting Basic Human Needs in Developing Countries (New York, 1981), p. 108.
 6 INDIAN ECONOMY — PERFORMANCE AND POLICIES

MEASURES OF ECONOMIC GROWTH

Economists have traditionally discussed two measures of economic growth: (i) Increase in Gross National
Product (GNP) or Gross Domestic Product (GDP); and (ii) Increase in per capita income (or, what is the same
thing, per capita product).
Rise in GNP or GDP
Some economists have defined economic growth in terms of national income aggregates. They often
asset that economic growth is a process whereby an economy’s gross national product (GNP) or gross
domestic product (GDP) increases over a long period of time. In this context, it must be mentioned that the
increase in GNP or GDP must be steady and prolonged. A short period increase, as occurs within the boom
period of trade cycles, cannot be accepted as growth.
Rise in Per Capita Product
A cross-section of economists believes that the essence of economic growth is an increase in product
per head of population. A mere rise in GDP or GNP is, however, a questionable criterion for assessing the
growth performance of an economy. For example, in a country where the population grows at a faster rate
than the rate of increase in GDP, product per capita will decline. Obviously, this cannot be treated as
economic growth. Therefore simply an increase in GDP does not imply growth. What is important is how the
per capita product (or per capita income) behaves.
Although increase in per capita income (or per capita product) is universally accepted as a measure of
economic growth, it suffers from some serious limitations as would be clear from the discussion below:
1. The per capita income figure indicates nothing about the types of goods and services produced in a
country. It also fails to measure the amount of welfare which people derive from the use of these goods and
services. Often an increase in per capita national income involves considerable social cost in the form of
environmental pollution, overcrowding in cities or overwork under tremendous stress. To use India as an
illustration, why should we include in the national income money spent on bus services in our major metropolitan
cities, as well as the money spent on automobiles which are being usually used by the people to get to and from
work? Any why should we include the money spent on cleaning the environmental pollution caused by the
industrial development? Some economists now rightly suggest that all such expenditures are to be treated as
costs and should be subtracted from the national income.
2. Many goods and services do not pass through the market and are thus not included in the national
income estimates. In no country, for example, unpaid housework and self-repairs are considered as production.
However, in less developed countries non-inclusion of goods and services which do not pass through the
market distorts national income estimates far more than in industrialised developed countries because of their
greater relative importance in the former. Even when a system is developed to estimate the value of certain non-
marketed production with a view to include it in the national income, there remains a bias in the estimates on
the downward side. Often the processes of monetisation and commercialisation cause overstatement of growth
rates in developing countries. According to Clarence Zuvekas, “What is recorded as increased output may
simply reflect a transfer of production from the household or barter economy to the market place, where it will
be recorded for the first time.”8
3. Estimates of national income and the rate of increase in it tell us nothing about the exploitation and
waste of natural resources. Natural resources of a country make an important contribution to its national
income. Minerals and forests are two important natural resources. While the forest wealth of a country is
renewable, mineral resources once destroyed cannot be renewed at any cost. When private companies owning
mineral resources in a country raise the output of minerals, the level of national income rises. Quite often these
8. Clarence Zuvekas, Economic Development — An Introduction (London: The Macmillan Press Ltd., 1979), p. 15.
 CONCEPT AND MEASURES OF DEVELOPMENT AND UNDERDEVELOPMENT 7

companies in their attempt to minimise the cost indulge in reckless exploitation of these resources. It is well
known that in Middle East natural gas in a massive quantity is burnt as oil companies find it uneconomical to
put it to some use. Such a policy of cost reduction may push up the national income of the country in the short
run, but it will definitely lower down the economic welfare of the country in the long run.
4. The rate of increase in national income fails to throw any light on the distribution of income in the
country. Distribution of income in a country greatly influences the level of economic welfare. In all those
countries where large income inequalities exist, a major part of national production is appropriated by a small
number of persons. If a part of the income of this class is transferred to those households which are below the
poverty line, the level of economic welfare will show great improvement. People below the poverty line subsist
under sub-human living conditions. Therefore, a small transfer of income from the rich to them will raise their
economic welfare considerably, while this will not cause any significant decline in the welfare of the former.
This implies that given a constant level of national income a more equitable distribution of income will raise
the level of economic welfare.
5. National income figures of different countries cannot always be legitimately used for comparing
their economic welfare. Difficulties arise in making comparisons of per capita national income of different
countries on account of conceptual differences, exchange rate problem and the great differences in domestic
relative price structures among countries.
For making comparisons of per capita national income of different countries national currency values are
converted to their equivalent in U.S. dollars. However, this involves a serious problem in a system of fixed
exchange rates. In this system some currencies will be undervalued or overvalued. For example, the Indian
rupee was overvalued for a considerable period of planning and therefore, calculating India’s per capita national
income on the basis of official exchange rate overstated its dollar equivalent. Even if exchange rates are allowed
to float, the problem is not completely solved because in choosing some exchange rate for a given year there
will remain an element of arbitrariness.
6. Relative price structures are not the same in all countries. This creates problem in making comparisons
of the per capita national income in different countries. In comparing China and the United States, for example,
the problem is that, should we accept the reported national income figures based on Chinese prices for Chinese
goods and U.S. prices for U.S. goods, or should we use prices which prevailed in China or the United States for
the output of both countries? The choice of method in this case will make great difference. Prices of essential
commodities which constitute a major part of the output are very low in China, and therefore, people in this
country easily manage comfortable living in small incomes. The same income in the United States will not
ensure even subsistence living because of relatively higher prices. It is this reason why the reported per capita
national income figures for China are misleadingly low. For China the World Bank reported that its GNP per
capita in 2014 was $ 7,400. As against this, China’s GNP per capita based on the purchasing power of its
currency is estimated at $ 13,170 in the same year.9

MEASURES OF ECONOMIC DEVELOPMENT

Composite Index of Development
We have explained above that it is not easy to determine the levels of income and rates of economic
growth. Measuring economic development is still more difficult. Modern economists relate the concept of
development to personal and community welfare which requires some kind of agreement on the various
dimensions of welfare. These would obviously include basic necessities of life, education, health, employment
and equity in the distribution of income and wealth. There is a broad agreement on these indicators of
development, but one can always think of some more indicators of welfare to make the list more comprehensive.

9. World Bank, World Development Indicators, 2015, Table 1.1.

 8 INDIAN ECONOMY — PERFORMANCE AND POLICIES

Further, each of these indicators is to be measured in a different way and any attempt to combine them in a
single index of development will involve at least some degree of arbitrariness. However, economists now
believe that in comparison to per capita national income the composite index of development despite all its
limitations is far more useful to measure the economic welfare of the people in a country.
In the past a number of attempts have been made by economists to prepare comprehensive indices of
development by assigning weights to various indicators. Everett E. Hagen has examined eleven indicators.
These are quite representative of social and personal welfare as they cover health and nutrition, education,
employment, use of basic industrial products, communications and other services, consumption of durable
goods, urbanisation and GNP per capita.10 The UNRISD index includes sixteen indicators. Indices of
development devised by Irma Adelman and Cynthia Taft Morris, and Harbinson, Maruhnic and Resnick are far
more comprehensive. In their attempt to measure development performance, Irma Adelman and Cynthia Taft
Morris have used forty-one indicators.11 Some of these indicators are of a social or political nature.12 In contrast,
Harbinson, Maruhnic and Resnick stress the importance of human resources development in the choice of their
indicators of development.13 These studies have indicated that at international level differences in the levels
of development are much less than those indicated by the difference in per capita national income.
Most economists agree that an index of development based on a good number of socio-economic
indicators provides a more accurate measure of social and personal welfare than per capita national income.
Some others however consider even this approach as unsatisfactory. They assert that in the first place, the
studies seeking to measure economic development in terms of socio-economic indicators of development by
their choice of indicators themselves have actually measured structural change rather than change in human
welfare. Secondly, as is clear from the choice of indicators in these studies, their implicit assumption is that
developing countries must develop along the lines of developed countries. This assumption, in itself, is
questionable. Thirdly, the choice of indicators suggests that usually the emphasis is on measuring inputs, such
as number of physicians or nurses per 1,000 population or enrollment rates in schools to measure health and
education, whereas the stress should have been on measuring outputs, such as life expectancy and literacy
rates. Finally, like the national income data statistical information for most of the indicators is both incomplete
and unreliable in a large number of countries. Some indicators suffer from conceptual problems also. For
example, often in the health statistics treatment by indigenous medicines is not considered. In fact, this approach
is questionable. Similarly, adjustments are not made in nutrition data for differences in the climate and age
structure of the population.
Measuring Economic Development in Terms of Quality of Life
Keeping in view these criticisms some economists have attempted to develop composite indicators that
measure economic development in terms of quality of life or meeting the basic needs of the mass of the
population. The most well-known study following this approach is by Morris D. Morris who used three indicators
— life expectancy at age one, infant mortality and literacy — to construct a simple composite index Physical
Quality of Life Index (PQLI).14 For each indicator, the performance of individual countries is rated on a scale
of 1 to 100, where one represents the worst case and 100 the best case.
Many economists regard PQLI as a reliable measure of development. There is general agreement that
improvements in life expectancy and literacy and reduction in infant mortality reflect overall development
10. Everett E. Hagen, “A Framework for Analysing Economic and Political Development”, in Robert E. Asher (ed.), Development of
Emerging Countries (Washington D.C. Brookings Institution, 1962), pp. 1-38.
11. United Nations Research Institute for Social Development, Contents and Measurement of Social Economic Development, Report
No. 70.10 (Geneva, 1970).
12. Irma Adelman and Cynthia Taft Morris, Society, Politics and Economic Development (Baltimore: The John Hopkins Press, 1967).
13. Fredrick H. Harbinson, Joan Maruhnic, and Jane R. Resnick, Quantitative Analysis of Modernisation and Development (Princeton,
N.J.: Industrial Relations Section, Department of Economics, Princeton University, 1970).
14. Morris D. Morris, Measuring the Condition of the World’s Poor: The Physical Quality of Life Index (London: Frank Class 1979).
 CONCEPT AND MEASURES OF DEVELOPMENT AND UNDERDEVELOPMENT 9

progress because countries cannot achieve high values for life expectancy and literacy, and low value for infant
mortality unless majority of their populations are getting the benefits of progress in each of these areas. The
PQLI has however been criticised by some economists. Their contention is that it is a limited measure as it fails
to incorporate many other good indicators representing quality of life. Moreover, there is no rationale for
assigning equal weight to each of the indicators used in constructing the index, particularly when two indicators
— life expectancy and infant mortality — relate to the same phenomenon.
Human Development Index
It is necessary to emphasize here that the focus of the development economists in recent years has shifted
from economic development to human development. The latter is a much more comprehensive concept as
compared with the former. Human development is defined as the process of enlarging people’s choices. The
most critical ones are to lead a long and healthy life, to be educated and to enjoy a decent standard of living.
Human Development Report launched in 1990 by the United Nations Development Programme (UNDP) and
published every year since, has tried to capture the many dimensions of human development in the form of a
Human Development Index (HDI). This is an improvement over PQLI. The concept of human development
and HDI are discussed in detail in chapter 2.

UNDERDEVELOPMENT: MEANING AND INDICATORS

Since the end of the World War II, economists in both; Western countries and the Third World have taken
particular interest in the problems of relatively backward economies, and yet there is no definition of
underdevelopment which will be universally acceptable. It is also difficult to classify different regions of the
world into ‘developed’ and ‘underdeveloped’. In fact, there are vast differences in the natural and human
resources of different countries. Levels of capital formation, technological knowledge and economic organisation
also differ considerably. All these differences are of such a magnitude that it does not seem possible to classify
countries into developed and underdeveloped on their basis. USA, UK and Germany are all richly endowed
with natural resources and all of them are classified as developed countries. However, the countries in Latin
America and the Middle East are classified as underdeveloped in spite of the presence of large mineral resources.
Density of population is high in India, Bangladesh, Pakistan, Indonesia, etc., whereas it is distinctly less in
Latin American and African countries. However, all these countries are classified as underdeveloped. Therefore,
density of population also cannot be relied upon to assess the degree of underdevelopment.

Box 1.1: Economic Growth, Development and Underdevelopment

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

Occupational Distribution and Underdevelopment

In debates on problems of economic underdevelopment, occupational distribution of population is often
mentioned as an objective criterion to divide countries between developed and underdeveloped. No doubt it is
 10 INDIAN ECONOMY — PERFORMANCE AND POLICIES

a useful criterion; at the same time from the point of view of analytical rigour, it is not completely reliable. It is
widely held that the countries in which the primary sector (i.e., agriculture, forestry, animal husbandry,
etc.), provides employment to a large proportion of labour force, are underdeveloped. This notion has
certainly an objective basis. Most of the poor countries are essentially agricultural and even if some industries
have been established in these countries, their impact is yet to be felt on the socio-economic life of the people.
India, Nepal, Bangladesh, Pakistan and Tanzania fall in this category. In contrast, Mexico, Chile, Brazil and
Argentina, are not agrarian economies, yet these countries are underdeveloped though the degree of
underdevelopment is not exactly the same as in essentially agrarian economies. The occupational distribution
of population and the sectoral distribution of national income are surely the indicators of the direction of
economic change but they may not always correctly indicate the level of development achieved in a particular
country.
Low Per Capita Income as an Indicator of Underdevelopment
The UN experts have defined an underdeveloped country as the one in which per capita real income
is low when compared with the per capita real income of the USA, Canada, Australia and Western Europe.15
This definition has focused its attention on the relatively lower levels of real income per capita in Afro-Asian
and Latin American countries.
Natural resources of a country act as a limiting factor in economic development. Man by his ingenuity
can develop productive forces, but poor natural resources of a region will always prove to be a serious obstacle
to widespread industrial activity. Therefore, it is quite possible that a country fails to reach the European level
of affluence, though it has harnessed all of its productive resources. Real income per capita in such a country
may be lower than in the West European countries, yet it cannot be characterised as underdeveloped by any
logic.
Moreover, we cannot treat a country as developed merely because its per capita income is comparable to
that of the USA or Australia. Joan Robinson rightly asserts, “For several of the Arab States, GNP per capita
suddenly jumped to levels which exceed that of the richest Western States, yet in these countries are found
some of the poorest and least developed communities in the world.” 16 This clearly indicates that
underdevelopment or development of a country or a region may not always be reflected in its per captia
national product or the average living standard.
Poverty Based Concept of Underdevelopment
Modern development economists now define development as a process involving elimination of poverty,
income inequalities and unemployment. In this framework, underdevelopment is a situation characterised
by the worst kinds of deprivation. Todaro, while defining underdevelopment in terms of poverty, goes beyond
narrow economic criteria when he states, “Underdevelopment is a real fact of life for over 2 billion people of
the world — a state of mind as much as a state of national poverty.”17 Denis Goulet provides a forceful
portrayal of underdevelopment in terms of poverty. He states, “Underdevelopment is shocking : the squalor,
disease, unnecessary deaths, and hopelessness of it all! No man understands if underdevelopment remains for
him a mere statistics reflecting low income, poor housing, premature mortality or underemployment. The most
emphatic observer can speak objectively about underdevelopment only after undergoing, personally or
vicariously, the ‘shock of underdevelopment.’ This unique culture shock comes to one as he is initiated to the
emotions which prevail in the ‘culture of poverty’. The reverse shock is felt by those living in destitution when
a new self-understanding reveals to them that their life is neither human nor inevitable…The prevalent emotion
of underdevelopment is a sense of personal and societal impotence in the face of disease and death, of confusion
15. United Nations, Measures of Economic Development of Underdeveloped Countries (New York, 1951), p. 3.
16. Joan Robinson, Aspects of Development and Underdevelopment (New Delhi, 1980), p. 5.
17. Michael P. Todaro, Economic Development in the Third World (New York, 1987), p. 85.
 CONCEPT AND MEASURES OF DEVELOPMENT AND UNDERDEVELOPMENT 11

and ignorance as one gropes to understand change, of servility toward men whose decisions govern the course
of events, of hopelessness before hunger and natural catastrophe. Chronic poverty is a cruel kind of hell; and
one cannot understand how cruel that hell is merely by gazing upon poverty as an object.”18
Development Potential and Underdevelopment
According to Jacob Viner, development potential of a country is a much better criterion to judge the
extent of its underdevelopment. Therefore, he defines an underdeveloped country as the one “which has good
potential prospects for using more capital or more labour or more available natural resources, or all of these, to
support its population on a higher level of living, or if its per capita income level is already fairly high, to
support a larger population on a not lower level of living.”19 To a great number of economists, who believe that
underdevelopment is just lack of development, Jocob Viner’s approach is quite scientific and logical. Viner
focuses his attention on a basic characteristic of underdeveloped countries, i.e., their development potential.
This approach may be correct technically but it is doubtful that it would provide a correct framework to analyse
the problems of development in the Third World countries. Definition of an underdeveloped country given by
the Indian Planning Commission in the First Five Year Plan is akin to the one given by Jacob Viner. The Indian
Planning Commission defines an underdeveloped country as “one which is characterised by the co-existence,
in greater or less degree, of unutilised or underutilised manpower on the one hand, and of unexploited
natural resources on the other.”20
The definition of underdeveopment given by Jacob Viner and the Indian Planning Commission appears
to be quite scientific and logical as it focuses its attention on a basic charactristic of underdeveloped countries
— their development potential.

SUMMARY
Economic Growth
Economic growth may be defined as a rate of expansion that can move an underdeveloped country from a
near subsistence mode of living to substantially higher levels in a comparatively short period of time, i.e., in decades
rather than centuries.
Economic Development
Economic development means economic growth plus progressive changes in certain crucial variables which
determine the well-being of the people.
However, economic development without economic growth is inconceivable.
Measures of Economic Growth
1. Rise in GNP or GDP.
2. Rise in per capita product.
Measures of Economic Development
1. Composite Index of Development. Most economists agree that an index of development based on a good
number of socio-economic indicators provides a more accurate measure of social and personal welfare than per
capita national income.
2. Physical Quality of Life Index (PQLI). Some economists have attempted to develop composite indicators
that measure economic development in terms of quality of life. The most well-known study following this approach

18. Denis Goulet, The Cruel Choice: A New Concept in the Theory of Development (New York, 1971), p. 23.
19. Jacob Viner, “Economics of Development” in A.N. Agarwala and S.P. Singh, The Economics of Underdevelopment (New York,
1963), p. 12.
20. Government of India, Planning Commission, The First Five Year Plan (Delhi, 1952), p. 7.
 12 INDIAN ECONOMY — PERFORMANCE AND POLICIES

is by Morris D. Morris who used three indicators — life expectancy at age one, infant mortality and literacy — to
construct a simple composite index Physical Quality of Life Index (PQLI).
3. Human Development Index. United Nations Development Programme (UNDP) has tried to capture
the many dimensions of human development in the form of a Human Development Index (HDI). This is an
improvement over PQLI.
Underdevelopment: Meaning and Indicators
1. Occupational distribution and underdevelopment.
2. Low per capita income as an indicator of underdevelopment.
3. Poverty based concept of underdevelopment.
4. Development potential and underdevelopment.

QUESTIONS
I. Fill in the Blanks
1. Economic growth can be defined as a ________ that can move an underdeveloped country from a near
subsistence mode of living to substantially higher levels in a comparatively short period of time.
2. The problem of development must be defined as a selective attack on the worst forms of ________.
3. ________ is general measured by gross or net national product.
4. ________ without ________ is inconceivable.
5. In a country where the population grows at a faster rate than the rate of increase in GDP, product per
capital will ________.
6. The countries in which the primary sector provides employment to a large proportion of labour force, are
________.
(Ans. 1. rate of expansion; 2. poverty; 3. output; 4. Development, growth; 5. decline; 6. underdeveloped)

II. Short Answer Type Questions

1. What is economic growth?
2. What do you mean by development?
3. Explain the concept of PQLI (Physical Quality of Life Index)

III. Long Answer Type Questions

1. Define and distinguish between economic growth and economic development. How is economic
development measured?
2. Is per capita income an adequate measure of economic growth? Discuss critically.
3. Discuss the various measures of economic growth and economic development.
4. Distinguish between economic growth and economic development. Show that growth is necessary but
not a sufficient condition of development.
5. What do you mean by underdevelopment? What are the indicators of underdevelopment?

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