LESSON 1

MEANING OF UNDERDEVELOPMENT
--Neha Gupta
The term underdevelopment refers to that state of an economy where levels of living of
masses are extremely low due to very low levels of per capita income resulting from low levels
of productivity and high growth rates of population. Underdeveloped countries are now known
as ‘developing countries’ signifying that such nations are capable of and are indeed making
serious efforts to overcome their problems of poverty and low income.

U.N. Classification
According to the United Nations definition, an underdeveloped country is one which has a real
per capita income that is lower in relation to the real per capita income of the USA, Canada,
Australia and Western Europe. Emphasis here is on the low income level relative to the advanced
countries and lack of any perceptible success in making substantial improvements in quality of
life of the masses. In simple words, underdeveloped country is just another name by which a
poor backward country is known.

Basic Characteristics of the Indian Economy as Developing Economy

India is a low income developing economy. There is no doubt that one-fourth of its population
lives in pathetic condition. It is important to understand the basic characteristics of the Indian
economy, considering it as one of the poor but developing economics of the world.
1. Low per capita income.
The level of income as measured by per capita real GNP is very low in underdeveloped
countries. The per capita income of India in 2005 was $ 720 except for few countries; the per
capita income of the Indian people is the lowest in the world. During 1990-2005, Indian
economy has grown at a faster rate than the developed economics. Even then the difference in
per capita income between India and the developed economy is quite large. For example in year
2002, per capita GNP as measured in us dollars was $ 480 in India as compared to $35060 for
USA, $ 25250 for UK.

2005
Exchange Purchasing power
rate base parity basis
Switzerland 54,930 37,080
USA 43,740 41,950
Japan 38,980 31,410
Germany 34,580 29,210
U.K. 37,600 32,690
India 720 3,460
China 1,740 6,600
Source: Complied from World development report(2007)

Low income results in lower living standards, poor diet, malnutrition, inadequate housing
and virtual absence of health facilities leading to high incidence of disease, high infant mortality,

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poor health, widespread illiteracy, and low expectancy of life. In brief, quality of life is
extremely poor in less developed countries as compared to the developed nations.
2. Low level of living
Since about three-fourth of world population lives in underdeveloped countries which
have less than one-fifth share in world income, it is obvious that a vast majority of people in
these countries must be living under conditions of poverty, malnutrition, disease, squalor,
illiteracy, etc. even basic necessities of subsistence such as minimum food, clothing and shelter
are not easily accessible to the poor masses. In 1999 the average calorie intake of food is only
2,496 as compared to over 3,400 calories per day in most developed countries. Nearly, 28
percent of the population of India lives below the poverty line in 2004-2005.
According to world developing indicators, 46 percent of the child population in
India suffers from malnutrition. The average protein content of the Indian diet is only 59 grams
per day as against more than double the level in developing countries. According to censes of
2001, only 36 per cent of the household had access to safe drinking water, implying tap water. It
is one of the reasons for the low level of efficiency of the Indian workers.
Conditions of housing facility are equally bad. According to census report of 2002, only
about 52 per cent of the household were living in the permanent houses, about 30 per cent living
in semi-permanent house and 18 per cent were living in temporary houses. The condition of
housing is much worse in rural areas than the housing facility in urban areas. The working group
on housing for the tenth plan has observed that around 90 percent of the housing shortage
pertains to weaker sections. The government should take big step to make a programme for
housing for the weaker sections. Another very revealing fact of the census (2001(is that 34.5 per
cent of household did not own any of the specified assets, i.e., radio, Transistor, television,
telephone, bicycle, scooter. The reasons for this mass poverty and low living standards in India
are found in their slow growing economics and rapidly growing population.
3. High rate of population growth
Low productivity combined with high growth rates of population is largely responsible
for low income and poor living standards. High growth rate of population means more people to
be fed, clothed and provided other necessary goods year after year. In India rate of growth of
population which was about 1.31 per cent per annum during 1941-50 has risen to 1.93 per cent
during 1991-2001. The annual average rate of growth of population during 2000-05 has further
decline to 1.5 per cent. The chief cause of this change is due to declined in birth rate from 49 per
thousand during 1911-20 to 24.8 per thousand in 2005.
The fast rate of growth of population necessitates a higher rate of economic growth in
order to maintain the same standard of living of the population. The requirements of food,
clothing, shelter, medicine, schooling etc. all has to rise. However, a rising population leads to an
increase in the labour force. The rapid growth of labour force creates a higher supply of labour
than its demand leading to unemployment.
4. High levels of unemployment and underemployment
Unemployment levels are high in the underdeveloped countries. Due to lack of capital
and low level of development in various economic sectors. Thus, countries have not been able to
make fuller use of their labour force. On the other hand, rapidly increasing population leads to a
sharp rise in labour force, and low level of economic activity fails to absorb this addition to

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labour supply. In India labour is an abundant factor which is difficult to provide gainful
employment to the entire working population.
Moreover, in the agriculture sector of the Indian economy, a much larger number of
labourers are engaged in production than are really needed. The marginal product of labour in
agriculture is almost negligible; it may be Zero or might be negative. Thus there exists
‘disguised’ unemployment in agriculture sector. Disguised unemployment in rural areas is the
result of heavy pressure of population on land and the absence of alternative employment
opportunities in our villages.
The planning commission on the basis of the NSS data has estimated that at the
beginning of the tenth plan is 2001-02, on the current daily basis, 35 million persons were
unemployed. The unemployed and under-employed together, they account for 9.21 per cent of
the labour force. Moreover, 35 million persons will be added to the labour force during 2002-
2007. Thus, the provision of employment to those suffering from open unemployment and
under- employment becomes a major task of the planning process in India.
5. Predominance of agriculture in the economy
Since majority of people (around 80 per cent of total population) live in rural areas and
work in agriculture, this is the biggest source of employment and biggest contributor to national
income. In India, in 2004 about 58 per cent of the working population was engaged in agriculture
and its contribution to national income was 21 per cent. It means that two-thirds to more than
four-fifths of the population earn their livelihood from agriculture but in Latin American
countries from two-thirds to three- fourth of population depends on the agriculture. This can be
explain better in figures which are as follows:
Percent of active population engaged in
agriculture and industrial origin of GDP in 2004
Country Active Industrial origin of GDP
population percentage distribution
engaged in
agriculture
agri. Industry services

U.K. 1 1 26 73
U.S.A. 4 1 22 77
Japan 5 1 31 68
Thailand 45 10 44 46
Pakistan 52 22 25 53
China 47 13 46 41
India 58 21 27 52

The reason of predominance of agriculture in the developing countries is that the low
income people spend a larger part of their income on food and other agriculture products which
are the most basic necessities. Not much income is left for spending on non-agricultural goods.
From the point of view of occupational pattern, the Indian economy is primary producing
because agriculture contributes 21 percent of national income while 58 per cent of the labour
force is engaged in agriculture.

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6. Low rate of capital formation
Another one of the basic characteristic of the Indian economy is the existence of capital
deficiency. Capital deficiency is an important characteristic of underdeveloped economy. Capital
formation or investment is low in India, low capital formation leads low productivity which leads
to low incomes and the low income leads to low saving, and then low saving leads to low rate of
capital formation. Thus it forms the vicious circle of poverty.
Table shown below reveals that gross capital formation in India was less than that of
developed countries. India needs to keep its gross capital formation as high as possible in order
to cover depreciation and maintain the same level of living.
Gross capital formation and gross
domestic saving as per cent of gross domestic product
Country Gross capital Gross domestic
Formation Saving
1990 2003 1990 2003
U.S.A. 18 18 16 14
U.K. 20 16 18 13
Japan 33 24 34 26
Germany 24 18 24 22
China 35 44 38 47
India 24 24 23 22

7. Maldistribution of wealth/Assets
RBI survey of assets of rural and urban households for the period July 1991 to June 1992
brings out the existence of sharp inequalities in asset distribution. In rural areas 27 per cent of
households owing less than Rs. 20,000 worth of assets accounted for 2.4 per cent of total assets.
This implies that nearly 51 per cent of the bottom households owned just 10 per cent of total
assets. As against it, 9.6 per cent of the total assets worth Rs. 2.5 lakhs and above accounted for
nearly 49 per cent of total assets.

Percentage distribution of households and assets in India (1991-1992)

Rural (%) urban (%)
Asset Group households assets households assets

Less than Rs. 20000 27.0 2.4 33.5 1.4

Rs 20,000- Rs 50,000 23.8 7.5 17.2 3.9
Rs 50,000- Rs 1,00,000 20.9 14.0 16.0 8.0
Rs 1,00,000-Rs 2,50,000 18.8 27.3 19.0 20.8
Rs 2,50,000 & above 9.6 48.8 14.2 65.8

All Classes 100.0 100.0 100.0 100.0

Inequality in asset distribution is the principal cause of unequal distribution of income in

the rural areas. It also signifies that the resource base of 50 per cent of the households is so week
that it can hardly provide them anything above the subsistence level of income. This finding of

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the reserve bank is also supported by the National Sample survey which reveals that 60 per cent
of the poor rural households owned only 9.3 per cent of area.
8. The socio-economic indicators of consumption are characteristic of underdeveloped
economy in India
Underdevelopment also finds expression through several socio-economic indicators, such
as per capita intake of calories, fats and protein, population per TV set and physician. In the table
below for selected countries indicate that India is far behind the developed countries so far as
these indicators of standard of living are concerned. Illiteracy rate is also very high in India- 35%
in 2001, as against less than 5 per cent in developed countries.

Socio-economic indicators of standard of living (1999)

Country Per capita daily intake Per 1000 persons
Fats Protein calories TV Physician
(gms) (gms) sets (1998)
India 45 59 2,496 69 0.4
China 71 77 2,897 272 2.0
Japan 83 96 2,932 707 7.3
USA 143 112 3,699 847 2.5
UK 141 93 3,276 645 1.5

As a developing economy, during the last over five decades of development, India
has been able to improve its GDP growth rate which was only 3.5 per cent during 1950-51 to
1970-71 to a level of nearly 7 percent during 2000-01 to 2004-05. However, human
development report (2005), India ranks at No. 127 in the world. Its record in terms of
removing malnutrition is poor, as 46 per cent of the child population suffers from it.
According to 2001 census, only 52 per cent of the population has access to safe drinking
water. Although poverty has been reduced to a level of 26 per cent, but still 260 million
persons are still poor and the burden of poverty is quite massive. The rate of unemployment
at a level of 9.2 per cent in 2001-02 is very high. To sum up, Indian economy has made
commendable progress on many fronts, but it has miles to go to remove poverty, malnutrition
and providing shelter and drinking water to its entire population.

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 LESSON 2 UNIT III: POPULATION

‘POPULATION AND ECONOMIC DEVELOPMENT’

- Dr. Anupama Rajput

Studying this chapter should enable you to understand:

 Theory of Demographic Transition

 Demographic Profile of India
 Population Growth and Economic Development
 Population Policy of India

Introduction
The size and composition of a country’s population can exert a powerful influence on a
country’s development. The population size, composition, and distribution influence the range of
industries a country can support and the pool of talent that are available in the country. In size of
population, India is the second largest country in the world after China, constitutes 2.4 per cent
of the world’s land area and supports 16.25 per cent of the world’s population. The population
growth in India has proved to be more an obstacle to its development efforts rather than a
contributory factor in economic growth.

Theory of Demographic Transition

The theory of demographic transition states the impact of economic development on the
population growth of a country. The earliest systematic discussion on the theory of population
growth is provided by Malthus in 1798. Malthus stated that population growth always exceeds
the growth of means of subsistence and warned that the uncontrolled population had to be
corrected by nature which would be very painful. Economists however, argued that the
population growth is a transitory phenomenon that is explained by the theory of Demographic
transition. According to this theory there are three distinct stages of population growth:

First Stage: High Birth-Rate and High Death-Rate

In the first stage of population growth, the birth rate and death rate are high. This keeps
population growth as low. The economy during this stage is underdeveloped with low level of
income. The high birth-rate occurs due to traditional religious beliefs, agrarian economic
structure, wide spread illiteracy, absence of awareness about family techniques, early age of
marriage, attitude towards children and family size etc. The large size of family is expected to
provide economic advantage as children contribute at an early age and considered as traditional
source of security in the old age of parents. The death rate on the other hand is also high mainly
due to ill nourished diet, lack of sanitation and medical facilities. The famines and epidemics
also caused high death rates. During this stage the population remains low; however the potential
for the population rise is very large due to high birth rate.

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Second Stage: Falling Death Rate and High Birth Rate
At this stage the death rates start falling rapidly but birth rate remains stable. The rapid
decline in death rate occurs due to improved economic development that result in the availability
of better food, adequate clothing, housing, improved medical and public health facilities, greater
awareness about health and hygiene. The birth rate in this stage remains at high levels mainly
because of factors such as better education, change in attitude towards family size and increasing
level of urbanization take time to show results. In fact, the high growth potential of the first stage
is realized in the high actual growth. The high birth rate and falling death rate contributes to the
rapid population growth. The second stage is also termed as the stage of “Population Explosion”.

Third Stage: Low Birth-Rate and Low Death Rate

During this stage, the economic development process transforms the country from
agrarian to industrialized economy accompanied by the fast urbanization. The birth rate witness a
fall as problems of urbanization such as housing problem, increased cot of living etc., compel
people to follow small family norms. Further, the expansion of education causes attitudinal
changes and the advantage of small family is recognized. Since death rate remained quite low
and birth rate falls steadily this stage is characterized by slow population growth rate.

The theory of demographic transition explains the transformation of traditional high birth
and death rate economy into low birth and death rate economy.

Population and Economic Development

According to the neo-classical growth model, population is beneficial to an economy due

to the fact that population growth is correlated to technological advancement. Rising population
promotes the need for some sort of technological changes in order to meet the rising demand for
certain goods and services. The shortage in goods and services caused by the high demand for
products and services, force up prices for the natural resources. The increased prices will trigger
a search for new ways to satisfy the increasing demand in order to meet expectations. Sooner or
later new sources and innovative substitutes will be found. The new discoveries lead to cheaper
natural resources that existed before the increase in population and the demand for new goods
and services begin. Further, with the increased populace, economies are blessed with a large
labor force, making it cheaper . An increase in labor availability and a low cost for labor results
in a huge rise in employment as businesses are more inclined to the cheap labor. Low labor costs
results in a shift of money usage from wages into advancement through technology. According
to this model, the technological advancement that accompanies the growth of population and the
expansion of population, allows for even more population to survive due to the rise in overall
outputs by the business and the nation as a whole. Thus, it generates demands for goods and
results in improved economic growth.

Other economists oppose the theory that population growth has a positive effect on
economic growth. Basic theory surrounding population growth in less developed countries states
that the growth of a populace may eventually lead to overpopulation, which results into
problems relating to food, education, health, housing, and employment. The more heads there are
in a nation means there are more mouths to feed. This begins with Malthus’ theory of
diminishing returns when it comes to resources and food. Malthus states that either people

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practice continence or they breed themselves into starvation. Population is said to be negative
once productivity and output are less than demand. The negative impact of over-population on
the economic development can be studied as under:

Population Growth and Saving Effects

The population growth reduces saving rate as the dependency burden increases. The high
birth rate and low death rate causes the increase of the proportion of non-working population
relative to the working population. This results into an increase of consumption without
corresponding increase of output and fall in saving rates. Even if productivity rises the saving
rate is likely to be lower had the population growth is lower.

Population Growth and Composition of Investment Effects

The increased population growth requires an increased amount of investible resources to be
devoted towards creation of unproductive social or population sensitive facilities such as
education, housing health and other civic amenities. Robert Cassen raised doubts on the validity
of the saving and investment effects and argued that saving in the developing nations mainly
come from the rich wealthy class whose fertility is low. The cost of additional children in the
poor family is met out of the consumption expenditure rather than savings. In other words the
saving cost of additional children is very low in the poor countries. According to Cassen, food
production in fact is the least postponable expenditure of all population related output needs. An
increase in population increases the focus on agriculture especially food production. If the food
production can be increased by labour using means then the population increase will feed itself.
However, a point is reached where required increases in agricultural output necessitated the
additional capital resources (like improved technology, irrigation facilities, scientific methods,
seeds etc) to increase output as there is a limit to which land acreage can be increased. In that
case the increasing share of investible surplus will be taken up by food needs of growing
population. The increased amount of welfare and agriculture investment thus reduces the
resources available for productive infrastructure required for increasing output. The composition
of investment effect thus suggests that the more capital and resources would have been available
for increasing output if population growth is lower because of reduced welfare and agriculture
expenditure.

Population Growth and Capital Constraints

The rising population accompanied by a rise in the labor force brings to fore the capital
constraint in raising the labor productivity. The capital requirement of equipping labor force is
very large. The low saving rate puts capital constraints for technological advancements and
modernization resulting into reduction in the labor productivity. In other words, there exist
diminishing returns to labor as the stock of capital, including land, does not increase in the same
proportion as does labor.

Population Growth and Unemployment

The rising population resulted into large scale of unemployment because of failure of the
secondary and tertiary sectors to expand the enough employment opportunities. The labor
expansion also puts pressure on the land which is important natural resource in the agrarian
economy and leads to underemployment and disguised unemployment.

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Population Growth and Environmental Degradation
The rapid increase in population causes increased and unscientific exploitation of
resources. This type of exploitation of resources creates obstacles in sustainable development.
The problems of slums and insanitation develop due to increase in urbanization. Pollution of
environment also causes different types of communicable diseases. This has placed a heavy
financial commitment on the primary healthcare scenario for the government and the economy.
If population is controlled properly, these funds can be utilized for other productive
developmental activities.

In short, population growth has to be checked so as to face the challenges raised by

population explosion in the economic field.

Demographic Profile of India

1. Size and Growth rate of Population:

India, currently the second most populous country in the world, has around 17 percent of
world’s population in less than three percent of earth’s land area. India began the 20th century
with the population about 238 million and by 2000 it ended up with 1 billion. While the global
population has increased threefold during the last century, from 2 billion to 6 billion, India has
increased its population nearly five times during the same period. India’s population is expected
to exceed that of China before 2030 to become the most populous country in the world. Table1
indicate that the population growth in India has not been uniform. The trends are as follows:

 Till 1921, the population growth was irregular and slow. The population grew
continuously and rapidly afterwards.
 Since 1951, India is passing through a period of population explosion. The improved
economic development process has brought in a sharp decline in death rate. Better
healthcare facilities, improved nutritional standards, control over epidemics, etc., have all
contributed to sharp decline in death rate while birth rate has not shown a similar
corresponding decline.
 The 1991 census of population showed that the growth rate had witnessed slight decline
from 24.66 percent in the decade 1981-91 and further to 21.34 percent in 1991-2001.
This decadal growth (i.e. of 21.34 percent) is the sharpest decline in population growth
rate witnessed since independence.

Table 1: Population Size and Growth in India (1901-2008)

Census year Population Growth over
(000s) decade (Percent)

1901 238.397 -
1911 252.09 5.7
1921 251.32 -0.3
1931 278.98 11.0
1941 318.66 14.2
1951 361.08 13.3
1961 439.24 21.6

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 1971 548.16 24.8
1981 683.33 24.7
1991 846.42 23.9
2001 1,028.74 21.5
2008 1,149.33 -
Source: Census of India (Various Years) & World Population Data Sheet, 2008

2. Birth Rate and Death Rate:

India is in the middle of demographic transition. The death rate has declined sharply but
birth rate though falling is quite high thus causing a rapid population growth. At present the
annual growth rate of India’s population is 2.4 per cent. The analysis of Table 2 showing the
birth and death rates since 1951 clearly indicates that there has been some decline in the birth
rate. In the same period, the death rate has, however, declined significantly. Improved medical
facilities, epidemics control, better education facilities, reduction in poverty, fall in infant
mortality rates, maternal mortality rates have caused the fall in the death rates. The fall in birth
rate however has been moderate since the socio-economic conditions favor a larger family in
India. The fertility rate in India has declined substantially form 5.7 per woman in 60’s to 2.8 in
2008 (Table 4)

Table 2: Crude Birth and Death Rates (1951-2008)

Year Birth Rate Per 1,000 Death Rate Per 1,000
Persons Persons
1951 30.9 27.4
1961 40.9 22.8
1971 41.1 18.9
1981 33.9 12.5
1991 29.5 9.8
2001 25.8 8.5
2008 24 8
Source: Census of India (Various Years) & World Population Data Sheet, 2008

3. Age Composition of Population

Indian age distribution continues to be ‘young’ with children under age 15 and working
group together forming 73 percent (i.e. more than two-third) of the total population in 2001
(Table3).The young population virtually guarantees further growth, as these young people
produce their own families. But at the same time India has a big working group population
(around 63 percent). Economist refers this as ‘demographic dividend’. As outside of this age
group very few people work, it is reasonable to think of the remainder, as the "dependent
population". A nation's "dependency ratio" is the ratio of the dependent population to the
working-age population. In the case of India this turns out to be 0.6. It is predicted that this ratio
will witness a sharp decline. Since fertility is falling, the bulge of young people (population in
the age group of 0-14 years) would move into the working-age category. And, since, at that time,
the relative number of children will be small (thanks to the lowered fertility), India's dependency
ratio would be lower. It is expected that, in the year 2020, the average age of an Indian will be 29
years, compared to 37 for China and 48 for Japan; and, by 2030, India's dependency ratio should
be just over 0.4. The direct benefit of demographic dividend is that this would lead to a rise in

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the population engaged in productive activity. A more indirect but vital benefit for the economy
is the increase in savings as decline in the nation's dependency ratio is usually associated with a
rise in the average savings rate.

Table 3: Structure of India’s Population by Age Groups (1961-2008)

Age Group
Year 0-14 15-60 60 & above
1961 41.0 53.3 5.7
1971 41.4 53.4 5.2
1981 39.7 54.1 6.2
1991 36.5 57.1 6.4
2001 35.6 58.1 6.3
2008 32 63 5
Source: Census of India & World Population Data Sheet, 2008

4. Sex Composition of Population

One of the most striking features of India’s population profile is its abnormally low ratio
of females to males. This ratio has been consistently less than one. Further, the ratio has
registered a significant decline from 0.946 in 1951 to 0.933 in 2001 (Table 4).The basic reason
for adverse sex-ratio is that there is strong preference for sons in India due to socio-economic
reasons such as sons are regarded as a source of future income and old age security, certain
ritualistic rites on certain occasions that are expected to be performed by sons etc. The other
explanation is the abortion of female fetuses. While abortion has been legal in India since 1972,
sex-selective abortion has been illegal since 1994. However, the government has not effectively
enforced the ban. The practice has increased, especially in wealthier states, such as Haryana and
Punjab.

5. Qualitative Aspects of Demography in India:

The quality of population can be judged from the level of literacy and life expectancy of
people in the country. Literacy is an indispensable means for effective social and economic
participation, contributing to human development and poverty reduction.Notwithstanding the
revised definition during census of literacy the literacy rate has improved substantially from
28.3 percent in 1961 to 68 percent in 2008. Since 1961, the life expectancy at birth has increased
from 41.2 years to 65 years in 2008 mainly due to much better access to medicine and
healthcare.
Table 4: Vital Statistics in India
Year Life Literacy Total Infant Sex
Expectancy Rates Fertility Mortality Ratio
at Birth (in Rate Rate
(in years) percent) (per woman)
1961 41.2 28.3 5.8 146 941
1971 46.4 34.5 5.7 129 930
1981 54 41.4 4.5 110 934
1991 61 52.2 3.6 80 927
2001 63 65.4 3.1 58.5 933
2008 65 68 2.8 57 na

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NA: Not Available. Source: Census of India & World Population Data Sheet, 2008

6. Population Density:
Density of population is expressed as number of persons per unit of area. It helps in
getting a better understanding of the spatial distribution of population in relation to land. The
density of population in India (2001) is 313 persons per sq km and ranks third among the most
densely populated countries of Asia which has increased to 350 in 2008 (World Population Data
Sheet, 2008) There has been a steady increase of about 200 persons per sq km over the last 50
years with the density of population of 117 persons/ sq km in 1951.

Causes of the Rapid Growth of Population

In India there are two possible causes of an increase in the population:

(i) High Birth Rate and

(ii) Low Death/ Mortality Rate

Causes of High Birth Rate

The birth rate in India has not declined significantly due to the number of socio-economic
factors:
Economic Factors
The economic factors prominent amongst the determinants of population growth are discussed as
follows:
1. Poverty
The economic cost of bearing and upbringing an additional child is less than the expected
benefits for a poor family. An additional child in the family would mean more earning hands as
the children start earning at a very early age and prove to be an asset for the family. Further, the
high infant mortality rate among poors because of deficient diet, lack of medical facilities,
unhealthy living conditions, etc causes the low survival rate. In order to ensure that some
children survive, poor people tend to have large number of children.
2. Predominance of Agriculture
The agrarian country like India adopts primitive techniques of production which is mainly
family based. Thus an additional child in the family can always be absorbed on the family land.
3. Slow Urbanization Process
In India the process of urbanization has not been accompanied by the social change that
favors low birth rates. The social system and family structure of rural life seem to survive in the
city and towns.
Social Factors
The social factors have contributed significantly to the high birth rate in India. These
factors are discussed as follows:
1. Universality of Marriage
Marriage is both a religious and a social necessity in India especially among women. The
universal marriage among women directly leads to high birth rate.

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2. Early Marriage of Women
The marriage of girls take place in early years of youth, and sometimes even in childhood.
This causes an increase in the fertility rate as women tend to have greater reproductive time span
in case of early marriage.
3. Religious and Social Superstitions
Most Indians on account for religious and social attitudes prefer sons because of the belief
that certain rites can be performed only by him and none else. Son is also looked upon to provide
continuity to family lineage. This desire contributes to high birth rate.
4. Lack of Social Security
The social security schemes like old age pension, health insurance etc are not available to
the poor masses in India. The children are expected to look after parents in the old age. The
larger family is seen as a greater security for the parents.
5. Illiteracy and Ignorance
The widespread illiteracy among people in general and women in particular has caused
ignorance about benefits of small family size and the use of devices of birth-control among the
masses. People will not shed irrational ideas and religious superstitions like child is a god gift
unless there is a spread of education.
6. Joint Family System
Joint family system prevails in many parts of the country. In the joint family system the
resources are pooled up and expenses are shared. This system is a sort of security to the old, the
invalid and the unemployed as each member shares the responsibility of others. The children are
not burden on the parents individually and so pressure to limit the family size is not felt.

7. Limited use of family planning methods

The use of family planning methods continues to be restricted to urban areas. The
facilities for family planning are very limited in rural areas. The non-availability of birth control
devices has been an important contributory factor in keeping the birth rate high.

Thus high birth rate in India is the result of a whole lot of social, economic religious and
cultural factors. The social and cultural changes by spread of education and economic growth
can be expected to bring down the high birth rate in India.

Causes of Low Death/ Mortality Rate

The decline in death rate since 1951 has been progressively sharper. The factors that
contribute to the decline in death rate are as follows:

1. Control of Epidemics
In the early years of the 20th century, epidemics took a heavy toll of life in India. The
increased availability of effective medicines and improvement of healthcare facilities have
controlled the occurrence of epidemics like plague, small pox, malaria etc. This has contributed
to substantial reduction in the death rate.

13
2. Control of Famines
Famines were almost a regular occurrence in India in the early years of planning which
causes large number of starvation deaths. The improvement in the means of transport and
communication has effectively managed the spread of famines.

3. Improved Medical Facilities

The increased investment in health and medical care facilities and development of health
centers in the far-flung rural areas has prevented deaths due to timely availability of medical aid.

4. Impact of Economic Growth

Economic growth of the country has a significant impact on the fall in the death rate. The
improved incomes and living standards of people have improved their health and nutritional
levels. The improvement in personal hygiene and sanitary conditions has prevented the spread of
communicable diseases. The improved literacy level has created a awareness on preventive
measures for better health. The life expectancy of an average Indian has increased. The special
poverty alleviation and social welfare programmmes that aimed at providing basic needs such as
pure drinking water, healthcare facilities, and wage employments have contributed to better life
and lower death rate.

Population Policy in India

In 1952, India was the first country in the world to launch a national programme,
emphasizing family planning to the extent necessary for reducing birth rates "to stabilize the
population at a level consistent with the requirement of national economy”. The Government
while recognizing the long run role of development in reducing population growth lays emphasis
on deliberate efforts at reducing birth rate to achieve substantial results in the short run. The
population policies and national programmes of family planning implemented since
independence went through number of changes and can be conveniently classified into six
phases as follows:

1) Clinic Approach (1951-61)

In 1950, Government appointed population policy committee and created a family
planning cell in the ministry of Health. The clinical approach was adopted by Government
whereby a number of family planning clinics were opened throughout the country that performed
plethora of activities such a motivation, education, research and clinic services to control
population. It emphasized on the spread of contraceptive services among the couples to limit
family size.

2) Extension Approach (1962-69)

The clinic approach was replaced by the extension approach whereby the incentives were
offered to people that accepts family planning methods. The targets on the number of
contraceptive acceptors were fixed for the family planning workers. The demographic goals were
specified state by state, district by district for the programmes. During five year plans the goal of
incentives, targets and time frame or achievement of targets keep on changing at different period
of time.

14
3) High Intensity Approach during 70’s
During early 70’s it was felt that the birth rate was declining and high population growth
was considered to be one of the key factor responsible for retarding the economic development
of the country. The family control measures were emphasized even made compulsive among
couples to adopt them. Incentives both in cash and kind were offered in addition to those
officially sanctioned by Government.

4) Coercive Approach Emergency Period (1975-77)

During this period, the rights of individuals were largely suppressed with Government
assuming enormous authoritarian powers. The national population Policy (NPP) was formulated
in 1976. Till 1976, the family planning was entirely voluntary. The government role was
restricted to motivating the people to accept the family planning and to provide clinical facilities
to its acceptors. The NPP, 1976 inspired many State Governments to make family planning
compulsory for citizens to stop bearing children after three children. The coercive tactics were
adopted to control fertility level. The general public agitated due to these excesses.

5) Recovery Phase: Post Emergency Period (1977- 94)

The tremendous unrest among public at large especially on the insistence of target- based
approach caused Government to change the concept of “family planning” into “family welfare”.
The new approach tried to reduce targets for the adoption of family planning measures such as
sterilization. It emphasized on the demographic change through education and motivation. Thus
the new approach was educational and wholly voluntary. Government makes amendments in the
law raising the minimum age of marriage of girl to 18 years and of boys to 21 years.

During 1980, the family planning programme was restored with continued emphasis on the
sterilization. During VIth five year plan, 1980-85, population policy was set up by the planning
commission to formulate long-term policies, goal and programme targets for family welfare
programmes. The demographic goals were revised in lines of achieving Net Reproductive Rate
(NRR) to 1 by the year 1996 for the country as a whole on an average and by the year 2001 in all
the states. Thee goals are yet to be realized. These goals were translated into achieving a crude
birth rate of 21, a crude death rate of nine, infant mortality rate of 60, expectancy of life at birth
of 64 years and contraceptive prevalence rate of 60 percent among eligible couples by modern
methods of family planning to be achieved in all the states by the year 2000. However, during
Sixth plan period no significant achievement could be made with the crude birth rate did not
register any decline. However, crude birth rate marginally fell during 90’s to 29.1 per thousand.

6) Current Policies
The new strategy since the eighth plan stressed upon the decentralized planning and its
implementation. Currently, the National Population Policy (NPP) 2000 seems to be in operation
in the country that has direct impact on the population issues and availability of family planning
services. This is discussed as follows:

15
National Population Policy (NPP) 2000:

NPP, 2000 has laid down three objectives; immediate, medium and long term goal called
the national socio-demographic goals. The immediate objectives are to meet the needs of
contraception, health infrastructure, and health personnel and to provide integrated services for
basic reproductive and child health care. The medium term objective is to lower down the total
fertility rates to the replacement level (i.e. 2.1) by 2010. The long term objective is to achieve a
stable population by 2045. NPP 2000 has set the following broader goals for 2010:

 Universal access to quality contraceptive services in order to lower the total Fertility Rate
to 2.1 by adopting small family norm.
 To reduce Infant Mortality Rate to below 30 per thousand live births.
 Promote delayed marriage for girls, not earlier than age 18 and preferably after 20 years
of age.
 Reduction in Maternal Mortality Rate to less than 100 per one-lakh live births.
 Universalisation of primary education and reduction in the drop out rates at primary and
secondary levels.
 Universal immunizations of children against vaccine preventable diseases.
 Access to information/counseling and services for fertility regulation and contraception
with a wide basket of choices.
NPP, 2000 has laid down the emphasis on the decentralized planning and execution of
programmes and seek the role of NGOs and private sector to improve its implementation. The
National Commission on Population has been set up to improve the coordination of work
between the ground level machinery and Government. The commission will review the
implementation of NPP from time to time. The policy also involves the promotional and
motivational measures for popularizing the small family norms.

India's Demographic Achievement

Half a century after formulating the national family welfare programme, India has:

 Reduced crude birth rate (CBR) from 40.8 (1951) to 24 (2008);

 Reduced crude death rate from 27.4 in 1951 to 8 in 2008;
 The infant mortality rate (IMR) from 146 per 1000 live births (1951) to 58 per 1000 live
births (2008);
 Quadrupled the couple protection rate (CPR) from 10.4 percent (1971) to 44 percent
(1999);
 Added 28 years to life expectancy from 37 years to 65 years in 2008
 Achieved nearly universal awareness of the need for and methods of family planning,
and
 Reduced total fertility rate from 6.0 (1951) to 2.8 (2008)

Source: World Population Data Sheet, 2008

Appraisal of Population Policy:
A critical study of the population policies and programmes adopted in India since 1951
briefly outlined above reveals the following deficiencies:

16
1. Over-Emphasis on Contraceptives:
The program placed almost a total emphasis on sterilization and distribution of
contraceptives from primary health clinics. The quality of services offered in this regard was far
from satisfactory and has not improved over time. This has caused a small proportion of eligible
couples to use the population control measures.

2. Unmet needs of Contraception in Rural Areas:

There is a huge unmet need for contraception in the rural areas. Around 74 percent of the
population lives in rural areas, many with poor communications and transport facilities.
Reproductive health and basic health infrastructure and services often do not reach the villages,
and, accordingly, vast numbers of people cannot avail of these services.

3. Rigid Targets:
Though the target-free approach has come into vogue officially since 1995, the states are
continuing their old target-oriented approach. The strong implicit insistence of the government at
all levels on achieving the targets on sterilization, the delivery of maternal and child health
services have suffered over the years. It is rightly said that the approach has emphasized on
processes rather than outcomes.

4. Inadequacy of Health Systems:

The organizational adequacy, effectiveness and efficiency of health systems in different
states vary widely. In some states the family planning clinics and primary health centre are either
non-existent or inefficient that it fails to provide required services at the specified time. Further,
there is a shortage of trained personnel, inadequate motivation of the staff and improper
maintenance of infrastructural equipment that limits the success of family planning programme.

Measures to meet Population Challenges:

Population growth in India continues to be high on account of the large size of the
population in the reproductive age-group, higher fertility due to unmet need for contraception
and high wanted fertility due to the high infant mortality rate. Effective steps are required to be
devised and implemented to meet the growing population challenge. These are discussed as
follows:

1. Spread of Education:
The spread of education especially among females results in lower fertility. Education
changes the belief in fate, the irrational attitudes and permits the rational choices. Better educated
women are able to delay marriage and exercise more control over their reproductive lives
including decisions about child bearing

2. Empowering Women:
The improved status of women, gainful employment and education can go a long way to
effectively implement the family planning programmes. The improvement in the status of
women enhances their decision-making capacity at all levels in all spheres of life, especially in
the area of reproduction, improve maternal and child health, reduce fertility and child mortality,
thereby resulting in a gradual slowing of population growth.

17
3. Reduction of Infant Mortality Rates:
Repeated child births are seen as an insurance against multiple infant (and child) deaths and
accordingly, high infant mortality negates all efforts at reducing at total fertility rates. Inadequate
antenatal care and delivery services, low levels of immunization among children, substantial
proportion of high risk births, poor nutrition, health and sanitation conditions are some of the
reasons for the relatively high mortality of infants and children.

4. Provision of Social Security:

The provision of old age pensions and other forms of social security reduces the
dependence of parents on their children. This may motivate the people to adopt small family
norms.

5. Improved Links among various Welfare Programmes:

The welfare schemes like poverty alleviation programme, employment schemes have to be
integrated with population control programme in such a manner that the schemes favor the
people with smaller family. This will provide a motivation to people to adopt smaller family
norms.

6. Propagation of Small Family Norms:

The massive publicity has to be launched to educate people about the need of small
family. Information, education and communication of family welfare messages must be clear,
focused and disseminated everywhere, including the remote corners of the country, and in local
languages.

Self-Check Questions
“The relationship between population and economic development is two-sided
relationship.” Explain this statement in the light of India’s experience since 1951.

Discuss the main causes of rapid growth of population in India and What measures have
been taken by Government of India to control population growth in India.

Write a short note on “Theory of Demographic Transition”

18
 LESSON 3 UNIT I: Population

URBANIZATION AND OCCUPATIONAL STRUCTURE IN INDIA

- Dr. Anupama Rajput

Studying this chapter should enable you to understand:

 Meaning of Urbanization in India.
 Major trends and Pattern of Urbanization in India.
 Factors of Urban growth and problems of over-urbanization.
 Measures to improve agriculture productivity in India.
 Trends and Pattern of Occupational Structure in India.

Meaning of Urbanization:
Urbanization refers to as the movement of people from villages to the town/city where economic
activities are centered around non-agricultural occupations such as trade, manufacturing industry
and management. It is a phenomenon which is closely related with industrial revolution and
associated economic development. An area is classified as rural and urban depending upon
various criteria such as population size, density, occupational composition and civic status. In the
recent census of India, town is defined as follows:

a) Statutory towns: All places with a municipality, corporation, Cantonment board or notified
town area committee, etc. so declared by state law.
b) Census towns: Places which satisfy following criteria:-
i) a minimum population of 5000 ;
ii) at least 75% of male working population engaged in non agricultural pursuits; and
iii) a density of population of at least 400 persons per sq km

World Urbanization:
The share of world's population living in urban centers has increased from 39 percent in 1980 to
48 percent in 2000. The developed countries have higher urbanization level (76 percent in 2000)
compared with developing countries (40 percent in 2000). The urbanization level has almost
stabilized in developed countries.

Volume and Trend of Urbanization in India

The urban population in India at the beginning of 20th century was only 25.8 million constituting
10.8 per cent of total population in 1901, which increased to 286.1 million comprising 27.8 per
cent of total population in 2001. There is a gradual decrease of rural population from 89 percent
to 72 percent over this period. This process of urbanization in India is shown in Table 1.It
reflects a gradual increasing trend of urbanization. The urban population like total population did
not grow much until 1921 and the level of urbanization even showed decline in 1911 owing to
epidemic of 1911, which spread mainly in the urban areas and brought exodus of urban
population to rural areas. After 1921, the level of urbanization grew consistently and very fast
during the decade 1941-51 when the decennial urban growth rate was recorded as high as 41.4
per cent due to partition of the country in 1947. The decline in the growth rate during 1951-61
was due to the change in definition of urban was done in 1961 census. The peak in urban growth

19
was observed during 1971-81 when the decennial growth rate reached up to 46.1 per cent- the
highest ever during the last century. After that it has slowed down but was never less than 30 per
cent till 2001 census. While India is still a low urbanized country, the pace of urbanization has
slowed down during the last two decades. However, the absolute increase in urban population
kept on rising.

It may be further noted that from 1921 to 2001, when total population grew by 4 times, the urban
population increased by 10 times. Compared to the change in urban population, the number of
towns only got doubled during the same period. Urbanization in India has been relatively slow
compared to the world urbanization.
Table 1: Trends in Urbanization, India, 1901 to 2001

Source: Census of India of different periods

According to a study by Kundu1 the pattern of urbanization in India is characterized by

continuous concentration of population and activities in large cities. On the contrary the
concentration of population in medium and small town either fluctuated or declined. The
following table 2 shows number of towns and percentage of urban population by size class of
city during 1901- 2001. It is clear that a high percentage of urban population being concentrated
in class I cities (having population size of 1, 00,000 or more) and its population has
systematically gone up over the decades in the last century. As per 1901 census percentage of
population in class I cities was 26 percent which went to 65 percent and 69 percent in 1991 and
2001 census respectively. The percentage share of small cities on the other hand, has gone down
drastically from 47 percent to 10 percent only.
1 Kundu, A. (2003) “Urbanization and Urban Governance: Search for a Perspective beyond neo-Liberalism” Economic and
Political Weekly, July 19, pp. 3079-3087.

20
 Table 2: Percentage Distribution of Urban Population by Size Class

Source: Census of India of different periods

Factors of Urban Growth in India

Urban growth in India can be attributed to mainly three components 1) Natural increase, 2) Net
migration, 3) Area reclassification. The natural increase in urban areas remained constant since
1970 till 1990 mainly due to the fact that the urban birth rate and death rates have declined in the
same magnitude. Since 1990’s the urban natural increase has declined as the urban birth rate
declined faster during the 1990s compared to a small decline in urban death rate. In future, urban
growth is further likely to slow down because there is much scope for the urban birth rate of
about 22 per 1000 observed during the decade 1990-2000 to further decline, whereas urban death
rate observed on average 7 during the same period may not decline any more. The natural
increase in urban areas of the initial population is the largest contributor to the urban
growth although it share has declined recently.

As far as the contribution of migration is concerned, it remained unaffected in the 1980s and
there remains stability in the contribution of migration in urban growth over the last three
decades. The migration to cities occurs primarily due to rural push than urban pull factors. The
increase of unemployment in the rural areas, surplus rural labor force gets pushed to urban
centers with the hope of getting employment. The urban pull factors include the expectation of a
variety of glamorous jobs, good housing, medical, educational and communication facilities. If
we analyze the trend of reclassification of areas then it is clear that there is a slowing down of
reclassification of areas as towns. So, Urbanization is mainly a product of demographic
explosion i.e. natural increase and poverty induced rural - urban migration.

Urbanization Trend: An Interstate Analysis

The regional variations in the distribution of urban population are significant. A large proportion
is concentrated in six most developed states, namely Maharashtra, Gujarat, Tamil Nadu,
Karnataka, Punjab, and West Bengal, accounting for about half of the country’s urban
population. By the 2001 Census,
they report percentage of urban population much above the national average of 27.78, whereas
the less developed states report significantly low figures. Indeed, the levels of urbanization are
high in the states with high per capita income
and vice versa

21
Basic Features and Pattern of India's Urbanization:
The basic features of urbanization in India can be highlighted as:
1. There exists lopsided urbanization that has led to the concentration of population of in the
class I cities;
2. Urbanization has occurred without industrialization and strong economic base;
3. Urbanization is mainly a product of demographic explosion and poverty induced rural- urban
migration. It has occurred more due to rural push and not due to urban-pull;
4. Over- urbanization in major cities has led to the massive growth of slum followed by misery,
poverty, unemployment, exploitation, inequalities, degradation in the quality of urban life.

Problems of Over-Urbanization:
As mentioned above the number of towns has not grown as fast as the urban population so
India's urbanization is followed by some basic problems in the field of: a) housing, b) slums, c)
transport d) water supply and sanitation, e) water pollution and air pollution, f) inadequate
provision for social infrastructure (school, hospital, etc). In fact the urbanization in India has
resulted in a concentration of population in a few large cities without a corresponding increase in
their economic base. Large cities are structurally weak instead of being functional entities
because of inadequate economic base. The cities are subject to extreme filthy slum and very cruel
mega city denying shelter, drinking water, electricity, sanitation to the extreme poor and rural
migrants. The urban cities fail to absorb the increasing labor force due to poor infrastructural
facilities. Further, rural poor lack the necessary skills for the jobs in urban areas. In other words,
Poverty led migration has induced very poor quality of urbanization followed by misery,
poverty, unemployment, exploitation, rapid growth of slum, inequalities, degradation in the
quality of urban life. Thus there is transfer of rural poverty to urban poverty. This has also
resulted into the social and economic inequalities which warrant social conflicts, crimes and anti-
social activities.

Policy Implications
The following policy initiatives may be recommended to overcome the problems of urbanization
in India:

i) The strong economic base for small and medium cities which are neglected so far has to be
developed. Since the mega cities have reached saturation level. Thus the redirection of migration
flows would occur to small cities for employment generation and avoid over-crowding and over
congested slums of mega cities.
ii) The emphasis should be placed on the proper urban planning that involves the improvement
of urban infrastructure, e.g roads, traffic, transport etc. Developmental planning should further
involve the development of newly annexed urban areas so that the burden of main big cities can
be relieved.

(iii) The integration of rural and urban economy should be strengthened that develops the agro-
based industry. The raw material should be processed in the rural economy and then transferred
to urban economy (Kundu, Sarangi and Dash, 2003).

22
 Occupational Structure in India

Occupational structure of a country refers to the distribution or division of the population

according to different occupation. Occupations are generally classified as primary, secondary,
and tertiary. Primary activities include agriculture, animal husbandry, forestry, fishing, mining
and quarrying etc. Secondary activities include manufacturing industry, building and
construction work etc. Tertiary activities include transport, communications, commerce,
administration and other services. There is a close relationship between occupational structure
and the economic development of the country. The high level of economic development is
generally associated with a relative increase of employment away from the agricultural sector
and the higher level of population engaged in the tertiary sector. In other words the economic
progress leads to the steady shift of employment and investment from the primary activities to
secondary and then to the tertiary sector.

Trends in the Occupational Structure in India

The changing profile of the occupational structure during 1972-73 to 2004-05 is given in table3.
The data revealed that the share of workforce deployed in agriculture declined from 74 percent in
1972-73 to about 61 percent in 2001-02 that further declined to 56.5 percent in 2004-05. The
share of employment in the industry has increased from 11.2 percent to 17.1 percent which was
decreased to 12.2 percent in 2004-05. The service sector has grown from 14.6 percent to 24.8
percent during the same period.

Table 3: Distribution of Workforce by Industrial Division (figures in %)

Year Primary Secondary Tertiary

1972-73 74 11.2 14.6
1983 68.1 13.9 18.2
1993-94 63.9 14.9 21.2
2001-02 60.8 17.1 22.1
2004-05 58.5 12.2 24.8

Source: Government of India, Economic Survey of different years

It may be noted that the share of agriculture in total GDP has declined tremendously but the
corresponding decline in the employment share has not taken place in India in the primary sector.
Agriculture’s share of GDP has nearly halved in the past two decades (see Chart 1); but its share
of the workforce has fallen much more slowly. Its share of the workforce is now 2.7 times its
share of the GDP. The manufacturing sector’s share of GDP has hardly increased in the last two
decades (see Chart 2). Similarly, its share of employment has risen only slightly, by 1.5
percentage points. Indeed, its share of employment has hardly changed over the last century. The
historical shift in GDP and occupational structure has bypassed manufacturing. This only
indicates that the process of industrialization has failed to absorb excess labor in the agriculture.
Further, the manufacturing sector in India consists of a small number of medium and large
industries in which value added is high, surrounded by a very large number of small industries in
which value addition is low. The share of the services sector in GDP has grown dramatically, by

23
14.4 percentage points, and fast resembles the share of the services sector in a developed
economy. Nevertheless the share of services in employment has only inched up 7.2 percentage
points over the same period.

Source: National Sample Survey Reports

24
The growth in services’ share of GDP and the growth in its share of employment are two
separate processes. This sector is marked by an extreme dualism: on the one hand, a low-income
high-employment segment (e.g., petty retail trade), which contributes most of the growth in the
sector’s employment; and on the other hand a high-income low-employment segment (e.g., the
information technology, ITES, financial and real estate services and media sectors), which
contributes most of the growth in the sector’s income.

The most striking feature of the occupational structure in India the overwhelming majority of
India’s workforce remains in the unorganized sector. In fact the organized sector is able to draw
on the unorganized sector as a method of exploiting workers. Since the 1990s within the
organized sector, the number of organized workers (i.e., those who enjoy legal rights such as
security of employment, minimum wages, sick leave, compensation for work-related injuries,
right to organize, etc) has fallen and that of unorganized/informal workers has risen during 1999-
2005. The effect of these changes is to reduce the organized sector’s wage bill and increase its
profits. Employers have adopted a policy of replacing permanent staff with contract or temporary
workers and so have created conditions that generate a large unorganized pool of workers.
Despite the fact that the unorganized sector – and within this the tiny/household sector –
continues to employ the bulk of the non-agricultural workforce it has failed to show
improvements in the productivity levels. So the ‘employment growth’ in the unorganized sector
is deceptive: it is largely a form of under-employment.

In nutshell it can be concluded that the relationship between the agriculture and the
manufacturing sectors is disappearing and the tertiary sector has emerged significantly even
before the economy became highly industrialized is noted in Indian context. This is in sharp
contrast to the development experience visualized in the developed countries

Self-Check Questions
 What do you mean by urbanization? Examine the urbanization trends in India.
 What do you mean by the occupational structure?
 Discuss the occupational distribution of labor force in India. What changes in the
occupational distribution have occurred during the period of planning?

25
 LESSON-4
MEANING OF UNEMPLOYMENT
--Neha Gupta
Unemployment refers to a situation in which the workers who are capable of working and
willing to work do not get employment. In other words, unemployment is a situation where the
persons who are able to work and willing to work, fail to secure work or activity which gives
them income or means of livelihood.

Unemployment rate
Unemployment is the ratio of the unemployed persons to the total labour force and is
expected in percentage terms. Thus
Rate of unemployment = No. of unemployed persons X 100
Total labour force

Causes of Unemployment
The unemployment problem in India has assumed alarming dimensions since independence.
Among the many factors that have contributed to this, some are discussed below:
1. High Population growth
The galloping increase in population of our country during the last decade has further
aggravated the unemployment problem in the country. Due to rapidly increasing population of
the country, a dangerous situation has arisen in which the magnitude of unemployment goes on
increasing during each plan period. While the rate of economic growth in India has been slow to
moderate, the population growth rate has been very high. Thus, in spite of half a century of
economic development, unemployment problem remains alarming.
2. Insufficient Rate of Economic Progress
Although India is a developing country, the rate of growth is inadequate to absorb the
entire labour force in the country. The opportunities of employment are not sufficient to absorb
the additions in the labour force of the country, which are taking place as result of the rapidly
increasing population in India.
3. Absence of employment opportunities in activities other than agriculture
As enough other employment opportunities are not available, agriculture is the principal
area of employment in our country. A major cause of rural unemployment is the extremely low
rate of growth of agriculture. Thus, pressure on land is high, as about 2/3 of the labour force is
engaged in agriculture. Land is thus overcrowded and a large part of the work force is
underemployed and suffer from disguised unemployment.
4. Seasonal Employment
Agriculture in India offers seasonal employment; thus agricultural labour remains idle
during the off-season.
5. Joint Family System
Existence of joint family system in India promotes disguised unemployment. Usually the
members of a family work on their family farms or do family business. There are more workers
on a family farm than what would be needed on them.

26
6. Increasing turnout of students from Indian Universities
During the last decade, educated unemployment has increased due to rapid turnout of
graduates by the Indian universities. Moreover, in the Indian educational system, more emphasis
is placed on engineering and other Technical subjects rather than on Arts subjects. But there is
unemployment amongst technical graduates as well. There is a lack of proper vocational
education in the country.
7. Slow Developing of Industries
Industrialization is not rapid in our country and industrial labour finds few job
opportunities. The agricultural surplus labour force is not absorbed by the industrial sector. This
leads to disguised unemployment in agriculture.
9. Inappropriate technology
An important cause of unemployment in the urban industrial sector is the use of
inappropriate technology. Instead of using technology suited to our requirement of utilizing
abundant labour supply available in the country, we have gone in for western modern highly
capital intensive technology which minimizes use of lobour. Clearly such technology is not
appropriate for India as it creates more unemployment rather than absorbing more labour.
Employment in organized and unorganized sector in India
The organized sector usually refers to employment in the public sector and in private
sector establishments employing 10 or more persons. It is commonly believed that wages in the
organized sector are much higher than in the unorganized sector. Moreover, the organized sector
being regulated also provides greater job security and other benefits. Within the organized sector,
jobs in the public sector receive much higher wages and accompanying benefits than those in the
private sector for similar skills. Besides this, public sector offers greater job security.
Employment in the organized sector has been hardly 8.34 per cent, of which the public sector
accounts for 5.77 per cent and private sector only for 2.57 percent in the total employment
generated during 1999-2000.

The unorganized sectors constitute around four-fifths of the total non farm workforce
even in totally industrial advanced states. This will be shown in following table.
Table 1: Share of Unorganized Sector Workers in Indian States:
1999-2000
(In per cent)

States All Workers Non-Farm Workers

Organized Unorganized Organized Unorganized
Andhra Pradesh 7.07 92.93 18.69 81.31
Arunachal Pradesh 12.98 87.02 48.97 51.03
Assam 22.04 77.96 22.12 77.88
Bihar 5.08 94.92 17.72 82.28
Delhi 26.36 73.64 27.18 72.82
Goa 24.64 75.36 30.50 69.50
Gujarat 8.03 91.97 20.76 79.24

27
 Haryana 10.40 89.60 23.48 76.52
Himachal Pradesh 8.72 91.28 29.67 70.33
Jammu and Kashmir 11.16 88.84 32.39 67.61
Karnataka 11.05 88.95 21.03 78.97
Kerala 27.69 72.31 18.15 81.85
Madhya Pradesh 5.48 94.52 20.92 79.08
Maharashtra 11.98 88.02 28.25 71.75
Manipur 11.22 88.78 30.73 69.27
Meghalaya 7.56 92.44 32.24 67.76
Mizoram 14.46 85.54 43.07 56.93
Nagaland 26.32 73.68 70.78 29.22
Orissa 5.71 94.29 18.00 82.00
Punjab 10.09 89.91 21.52 78.48
Rajasthan 5.60 94.90 16.46 83.54
Sikkim 20.04 79.96 47.84 52.16
Tamil Nadu 10.46 89.54 19.08 80.92
Tripura 17.87 82.13 22.14 77.86
Uttar Pradesh 5.48 94.52 14.86 85.14
West Bengal 10.36 89.64 16.77 83.23
Total 9.13 90.87 20.12 79.88
Source: Computed from unit level records of Employment-Unemployment
Survey, 55th round of NSS, 1999-2000.

The organized sector is dominated by the public sector which accounts for 70 per cent of
the total employment in this sector. This is mainly in the areas of (i) mining, (ii) electricity and
water, and (iii) community and social services. These three collectively constitute nearly 60 per
cent of the public sector employment figures and unfortunately, all of them show negative
employment elasticity. This only underlines the fact that the public sector contributed to a very
small extent in total employment generation during 1993-94 to 1999-2000. Further, in future a
large part of this sector’s potential may be negated by the impending downsizing policy (often
called as right-sizing) of the government, which affects the former significantly.

The main source of employment generation is the unorganized sector of the economy
including self employment and small business wherein the present contribution is as high as 92
percent of the total employed labour force. Its main employment generating activities are: (a)
agriculture and allied activities; (b) trade, restaurants and hotels including tourism; (c) some
social sectors like education and health; (d) small and medium enterprises(SMEs) mainly in the
rural non-farm sector; and (e) transport and construction.

28
 Table 2: Growth Rate of Organized and Unorganized Sector Employment
(In per cent)
Year Organized Unorganized All
1983 ~ 1987-88 1.25 2.05 1.99
1987-88 ~ 1993-94 1.26 2.43 2.34
1983 ~ 1993-94 1.26 2.27 2.19
1993-94 ~ 1999-00 0.34 1.25 1.19

Per cent of growth rate of employment is decreased in unorganized sector is more than the
decline in organized sector as shown in above table.
Trends in Industry-wise Employment
In Table 3 the size of the workforce employed in different sub-sectors is presented. One
can observe that over the last two decades, agriculture, hunting, forestry and fishing absorbed an
overwhelming proportion of workforce in the Indian economy, a continuation of trends
witnessed during previous decades. Moreover, most prominent has been the unorganized pattern
of cultivation. The size of the unorganized segment
Of the workforce in this category was 203.8 million in 1983, 209.9 million in 1987-88,
238.3 million in 1993-94 and 238.6 million in 1999-2000 respectively.

Table 3: Industry-wise Employment in Organised and Unorganised Sector

(In million)
Industry 1987-88 1993-94 1999-2000
Organised Unorganised All Organised Unorganised All Organised Unorganised All

Agriculture, hunting,
forestry and fishing 1.4 209.9 211.3 1.4 238.3 239.7 1.4 238.6 240.0
Mining and quarrying 1.0 1.3 2.3 1.1 1.6 2.7 1.0 1.3 2.3
Manufacturing 6.3 29.9 36.2 6.4 33.4 39.8 6.5 37.2 43.7
Electricity, gas
and water 0.8 0.3 1.2 1.0 0.4 1.4 1.0 0.3 1.3
Construction 1.2 11.0 12.2 1.2 11.0 12.2 1.1 16.4 17.5
Trade, hotels and
Restaurants 0.4 22.8 23.2 0.5 28.0 28.5 0.5 40.1 40.6
Transport, storage
and communication 3.0 5.7 8.7 3.1 7.4 10.6 3.1 11.4 14.5
Services 11.2 19.2 30.4 12.6 27.2 39.9 13.2 24.7 37.8

The special group report concludes its analysis of the employment situation by
claiming.”To sum up, with some changes in the inter and intra sectrol composition and by
adopting appropriate labour- intensive technology, growth in the unorganized sector can be
significantly raised. The appropriate organized sector, especially its public sector component, has
a rather low employment generating potential, being handicapped as it is by negative
employment elasticity with the exception of the financial sectors and potentiality in certain parts
of the social sector like education, health, etc. but these two sectors has long weightage of 3.3
percent to the total employment. Given the tenth plan target on education, literacy and health
standards, the scope of its growth and potential employment generation is very high.

29
Unemployment in India
Unemployment
India as a nation is faced with massive problem of unemployment. Unemployment can be
defined as a state of workless ness for a man fit and willing to work. It is a condition of
involuntary and not voluntary idleness. Some features of unemployment have been identified as
follows:

1. The incidence of unemployment is much higher in urban areas than in rural areas.
2. Unemployment rates for women are higher than those for men.
3. The incidence of unemployment among the educated is much higher than the overall
unemployment.
4. There is greater unemployment in agricultural sector than in industrial and other major
sectors.
5. India is an under-developed though a developing economy. The nature of
unemployment, therefore, sharply differs from the one that prevails in industrially
advanced countries.

Rural unemployment
India is a country of villages as around three fourth of its population lives in rural areas. For
rural workers, agriculture is virtually the sole occupation. However, agriculture is not able to
provide gainful employment to all those who seek it. So there is unemployment in rural areas
which takes three broad forms, viz,
i. Open and chronic unemployment,
ii. Seasonal unemployment, and
iii. Disguised unemployment.

(i) Open and Chronic Unemployment: In the agricultural sector we have a large group of
landless labourers who seek wage employment on farms. There are also cultivators
who seek additional income by working as labourers in their spare time. But due to
heavy pressure of population on India’s still underdeveloped agricultural sector, many
people fail to get employment and hence remain chronically unemployed. Since they
openly search for employment and hence their unemployment is not hidden, this is
called open unemployment.
(ii) Seasonal Unemployment: Agriculture, which is the major economic activity in
villages, is a seasonal phenomenon. There are seasons like sowing and harvesting of
crops when all are busy and employment is high. But there are also slack seasons
such as the period between sowing of crops and their harvesting when most people
have nothing much to do and are thus unemployed. Many rural industries such as
sugar mills, rice shellers, cotton ginning units, are based on processing of agricultural
produce. So they too provide only seasonal employment. Hence the rural economy
largely has seasonal employment alternated with periods of seasonal unemployment.
(iii) Disguised Unemployment: This is a type of unemployment which is not open in the
sense that the persons do not feel that they are unemployed though technically they
are unemployed. Employment has two aspects, viz, (a) quantitative, i.e., how many

30
 people are employed and (b) qualitative, i.e., how much the employed persons
produce which means the productivity of employment. In India, as the population
pressure on land increases, the productivity per persons declines. A situation has
arisen where the marginal productivity of a large number of workers is zero, i.e., their
work does not make any addition to production. Even if they are removed from
agriculture, but whose productivity is zero, are called disguisedly unemployed.
Mounting pressure of population in rural areas with no alternative employment
available is the major cause of disguised unemployment.

Urban Unemployment
Urban areas suffer from large scale unemployment which comprises mainly of the following:
(i) Unemployment among the industrial workers,
(ii) Unemployment among urban educated people,
(iii) Technological unemployment, and
(iv) Unemployment among the youth, which is common t both urban and rural areas.

i. Unemployment among the industrial workers: The process of industrial development has
not been fast enough to absorb all those who have added to the industrial labour force
mostly as a result of migration from rural areas. The pattern of industrial expansion
which is now largely based on sophisticated modern technology in labour saving in
nature. Thus industrial output may expand at a rapid pace, but job opportunities do not
increase. Therefore, most of the people who come to the urban industrial centres from
rural areas in search of jobs fail to get employment thereby adding to unemployment
among the industrial workers.
ii. Unemployment among urban educated people: Expansion of educational facilities in the
urban areas, both at the school and the university levels, and growing consciousness
about the social esteem that education brings with it the enrolment in educational
institutions has increased rapidly. The universities are turning out lakhs of graduates each
year who enter the job market. But the pattern of education is not job oriented. Hence
education does not promote job worthiness of a person. Consequently many fail to find
employment and add to the category of unemployed.
iii. Technological Unemployment: Technological changes are taking place rapidly in all
spheres of activity. With the application of modern technology in industry, transport and
other sectors, many people who have been working with old techniques become unfit for
jobs and thus rendered unemployed. For example motorized transport rendered those
engaged in manually driven hand crafts, tongas, etc., unemployed. Computerization of
most activities has rendered surplus many workers who have no knowledge of this
technology. This problem is being solved to some extent by retraining of technologically
unemployed workers.
iv. Unemployment Among the youth: Among the various age groups of labour force,
unemployment has the highest incidence among the youth aged between 15-35 years.
This unemployment occurs both in the rural as well as urban areas. Unemployed youth
can contribute a lot to national income if given jobs. They can also cause tremendous
amount of social tension if they remain perpetually unemployed. Hence this problem
needs to be given added attention.

31
 The above explanation of urban unemployment and rural unemployment is further
explains with the help of estimates. In the rural sector, among those who reported some
unemployment during the reference week, 67% reported a spell of less than a whole week and
50% a spell of less than ½ a week (Table 4). Among rural labor households, 73% of those who
experience some unemployment report spell of less than a whole week and 55% report spell of
less than ½ a week. None of these would be counted as unemployed even under the weekly
status. Therefore, from the point of view of designing poverty alleviation programs that target the
unemployed, the daily status measure would seem to provide the best estimate of unemployment.
Table 5 presents the all India unemployment rates for 1983, 1993-94 and 1999- 00. The data is
also broken down by gender and by location (rural/urban). Two facts emerge from the tabulation.
Unemployment rates in the urban sector are higher than in the rural sector. While urban rates are
in the range 8-9.5%, rural rates are about one percentage point lower fluctuating in the range 7-
8%. The second feature is that female unemployment rates are markedly higher than that for
males in urban areas while they match that for males in the rural sector. Urban female
unemployment rates have ranged between 9.5-11% as compared to the 7-9% range for males. In
the rural sector, while the unemployment rate for women in 1983 was higher than that of males
by more than one percentage point, the rates became similar in later years. While there is not
much variation in the unemployment rate across sectors in 1999-00, there is considerable
variation across states.
Table 6 shows significant unemployment among poor and labour households with rates
approaching 12% for labour households in both urban and rural areas. These rates are higher than
for the overall population (in Table 5). As the NSS surveys households throughout the year, we
can also compute the distribution of the unemployment rate across different quarters for rural and
casual labour households (Table 7). As one might expect, there is no particular seasonal pattern
in the urban sector, while rural unemployment displays clear seasonality. The unemployment rate
at 15% is highest in the monsoon months from July to September when not much work can be
done in the fields. Thus while agriculture driven seasonality is part of the explanation for high
unemployment rates among rural labour households, it cannot be the complete story as the
unemployment in the busy kharif period (October to December) is as high as 10%.
The overall all India picture masks significant inter-state variation in the incidence of
unemployment among labour households (Table 8). Kerala, Tamil Nadu and West Bengal are
striking for unemployment rates of 20% and more.

Table 4: Multiple Activities in the Rural Sector, 1999/00

% of individuals who had some unemployment

Unemployment All Rural Labor

spell of Rural Households

<= ½ week 50 55
< full week 67 73
= full week 33 27

32
 Table 5: All India Unemployment Rate (%)
1999-00 1993-94 1983

All 7.24 6.03 8.28

Rural Urban Rural Urban Rural Urban
All 7.08 7.79 5.61 7.43 7.93 9.53
Males 7.09 7.45 5.64 6.72 7.51 9.22
Females 7.03 9.42 5.55 10.52 8.98 11.01

Table 6: Unemployment among the Poor, 1999/00

Rural Urban
Poor households 9.19 9.38
Labour
households 11.74 11.61

Table 7: Seasonality in Unemployment, 1999/00

Quarter Rural * Urban**

July-September 14.95 12.10
October-December 10.10 10.70
January-March 10.64 10.79
April-June 11.20 13.02
 Rural labour households; ** Urban casual labour households

Table 8: Unemployment rates across 15 major states

Sl. State 50th round 55th round

No. Rural Urban Rural Urban
1 Andhra Pradesh 6.3 8.0 8.1 7.6
2 Assam 7.8 9.4 7.4 11.9
3 Bihar 6.0 8.7 7.0 9.3
4 Gujarat 5.6 6.0 4.8 4.2
5 Haryana 6.6 6.6 4.7 4.5
6 Karnataka 4.4 6.3 4.3 5.4
7 Kerala 14.7 17.7 21.7 19.1
8 Madhya Pradesh 2.6 6.8 3.8 7.0
9 Maharastra 4.3 6.3 6.5 8.1
10 Orissa 6.9 9.8 7.1 9.5
11 Punjab 2.7 4.1 3.7 4.9
12 Rajasthan 1.1 2.4 2.8 4.5

33
 13 Tamil Nadu 12.2 9.7 13.5 8.9
14 Uttar Pradesh 3.1 4.8 3.6 6.2
15 West Bengal 9.1 12.1 17.0 10.6
All India 5.6 7.4 7.1 7.7
Source: Documents of respective rounds of NSS.
Estimates of unemployment in India
A person working 8 hours a day for 73 days of the year is regarded as employed on a
standard person year basis. On the basis of the recommendation of the committee of experts on
unemployment estimates set up by the planning commission, three estimates of unemployment
generated in the 27th round of NSS (National Sample Survey).
1. Usual Principal Status unemployment
It is measured as number of persons who remained unemployed for a major part of the
year. This measure is more appropriate to those in search of regular employment e.g., educated
and skilled persons who may not accept casual work. This is also referred to as ‘open
unemployment’.
2. Weekly Status unemployment
It refers to the number of persons who did not find even an hour of work during the
survey week.
3. Daily Status unemployment
It refers to the number of persons who did not find work on a day or some days during
the survey week.

Detailed information with table of above estimates of unemployment is as follows. Like

for poverty, the latest and seventh quinquennial NSS survey, namely the 61st round conducted
during July 2004-June 2005, constitutes an important source of information on employment and
unemployment. The 61st round of the NSSO survey reveals a faster increase in employment
during 1999-2000 to 2004-05 as compared to 1993-94 to 1999- 2000 (Table9).

Table 9 Employment and unemployment (by Usual Principal Status)

1983 1993-94 1999-2000 2004-05 1983 to 1993-94 to 1999-2000

1993-94 1999-2000 to 2004-05
In million Growth in per cent per annum

Labour Force 277.34 343.56 377.88 428.37 2.06 1.60 2.54

Workforce 269.36 334.54 367.37 415.27 2.09 1.57 2.48
Number of
Unemployed 7.98 9.02 10.51 13.10 … … …
As a proportion of labour force in per cent
Unemployment
Rate 2.88 2.62 2.78 3.06 … … …

Source : Various rounds of NSSO Survey on employment and unemployment.

The Tenth Five Year Plan (2002-07) aimed at provision of gainful and high quality

34
Employment in excess of addition to the labour force to reduce the number of unemployed
significantly by the end of the Plan. The Tenth Plan advocated the need to increase the
employment content of growth by promoting sectors and activities, which employ more labour
per unit of output. On the whole, the Tenth Plan aimed at the creation of approximately 50
million employment opportunities – 30 million from the normal process of growth and additional
20 million from special initiatives – during a period of five years. The results of the 61st NSSO
round show that above 47 million persons were provided employment during 2000 to 2005. Net
annual addition to employment on Usual Principal Status (UPS) basis went up from 5.47 million
during 1993-94 to 1999-2000 to 9.58 million during 1999-2000 to 2004-05. Simultaneously,
however, according to the 61st round estimates, during 1999-2000 to 2004-05, labour force grew
even faster at an annual 2.54 per cent compared to annual employment growth of 2.48 per cent.
As a result, despite the faster growth of employment, unemployment (on UPS basis) was higher
at 3.06 per cent of the labour force in 2004-05 compared to 2.78 in 1999-2000. Incidence of
unemployment had come down from 2.88 per cent in 1983 (38th round) to 2.62 per cent in 1993-
94 (50th round).

Table 10: Unemployment rates for 55th round (1999-2000)

and 61st round (2004-05) of the NSSO (all-India)

Rural

Males Females

Round Usual CWS CDS Usual CWS CDS

55th (1999-2000) 2.1 3.9 7.2 1.5 3.7 7.0
61st (2004-05) 2.1 3.8 8.0 3.1 4.2 8.7

Urban

Males Females

Round Usual CWS CDS Usual CWS CDS

55th (1999-2000) 4.8 5.6 7.3 7.1 7.3 9.4
61st (2004-05) 4.4 5.2 7.5 9.1 9.0 11.6
Usual: Usual Principal Status, CWS: Current Weekly Status, CDS: Current Daily Status

Source: NSSO’s 61st Round Survey on Employment and Unemployment conducted during July 2004 - June
2005.

As shown in above table that increase in unemployment between the 55th and 61st rounds
of NSSO was primarily because of an increase in such unemployment incidence for females,
both in the rural and urban areas (Table.10). Furthermore, while unemployment among males
declined in terms of UPS and current weekly status (CWS), it increased by the current daily
status (CDS) both in rural and urban areas. There are analytical differences (for example, chronic
unemployment versus that of the intermittent and disguised variety) in the nature of
unemployment according to the UPS, CWS and CDS status. More expert analysis of the recently
released data from the 61st NSSO round will reveal the root causes as well as the probable
remedies.

35
 The reversal of the declining trend in employment growth – from an annual 2.1 per cent
in the ten years ending in 1993-94 to 1.6 per cent in the five years ending in 1999-2000 to 2.5 per
cent in the five years ending in 2004- 05 is an encouraging development. Nevertheless, there is
need for faster employment growth for not only absorbing the addition to the labour force,
particularly with the ongoing demographic changes, but reducing the unemployment rate. The
share of agriculture in total employment has come down from 61.67 per cent in 1993-94 to 58.54
per cent in 1999-2000, and further to 54.19 per cent in 2004-05. With the declining share of
agriculture in GDP, the scope for absorbing substantial additional labour force in agriculture
appears limited. While construction and services particularly transport, storage &
communication, contributed in maintaining employment growth in the economy, employment
growth in manufacturing fell short of its potential.

Anti Poverty and Unemployment Programmes

Generation of more employment opportunities continuously over time is the solution to

remove poverty and unemployment in India. The government has a major and important role to
play here. The Economic Survey 2006-07 of government of India lists the following major anti
poverty and employment generation and basic services programmes (box 10.2, page 208-10).

(a) Pardhan Mantri Gram Sadak Yojana (PMGSY)

Launched on December 25, 2000 as a 100 per cent Centrally sponsored Scheme (CSS),
the primary objective of PMGSY is to provide all-weather connectivity to all the eligible
unconnected habitations in the rural areas. Up to December 2006, with cumulative expenditure
of Rs. 18.281 crore about 107,569 works has been completed.
(b) Indira Awaas Yojana (IAY)
IAY is a CSS funded on cost- sharing basis between the centre and the states in the ratio
of 75:25. In the case of UTs, the entire funds are provided by Centre. The target groups of
housing under IAY are households below poverty line living in rural areas particularly those
belonging to SC/ST and freed bonded labourers. Up to December 2006, with cumulative
expenditure of Rs. 29,246.27 Crore, 1531 lakh houses have been constructed/upgraded.
(c) Swarnjayanti Gram Swarojgar Yojana (SGSY)
SGSY, a holistic self-employment generation programme, was launched from April
1,1999 by restructuring the earlier Integrated Rural Development Programme (IRDP) and allied
programmes. The emphasis of SGSY is on a focused approach to poverty alleviation,
capitalizing advantages of group lending and overcoming the problems associated with a
multiplicity of programmes. SGSY is funded on the same sharing basis as IAY. Up to December
31, 2006, 24.38 lakh self- help groups (HSGs) have been formed and 73.25 lakh swarojgaries
have been assisted with a total outiay of Rs. 16,443.66 crore.
(d) Sampoorn Grameen Rozgar Yojana (SGRY)
SGRY, launched on September 25,2001 to provide additional wage employment in the
rural areas, has a cash and food grains component. The cash-component of SGRY is funded on
the same sharing basis as IAY and SGSY, while food grains are provided free of cost to the
states and Uts. In 2005-06 , 82. 18 Crore person-days of employment were generated with the
centre releasing Rs. 5497.43 Crore as cash component and about 37.30 lakh tones of food grains

36
to the States/UTs. Besides, under the special component of the SGRY, with the states /UTs
meeting the cash components, Centre celeased 15.64 lakh tones of food grains to the 11 calamity
affected states. In 2006-07 up to October 31, 2006 the number of person-days of employment
generated under SGRY was 18.41 crore while the Centre’s contributions in terms of cash and
food grains component up to December 31,2006 were Rs. 2,762 crore and 16.67 lakh tones,
respectively. Under the special component, about 4.44 lakh tones of food grains have been
released to calamity-hit states in the current year up to December 2006.
(e) DPAP, DDP and IWDP
Drought Prone Areas programme (DPAP) was launched in 1973-74 to tackle to special problems
faced by areas constantly affected by severe drought conditions. While Desert Development
Programame (DDP) was launched in 1997-78 to mitigate the adverse effects of desertification,
the Integrated Wasteland Development Progrmame (IWDP) has been under implantation since
1989-90 for the development of wastelands/degraded lands. The basis of implemnation of all
three programmes has been shifted from sectoral to watershed basis from April 1995. So far, in
2006-07 up to January 31, 2007, 3, 076 new projects covering 15.38 lakh ha, 2,270 new projects
covering 11.35 lakh ha and 463 new projects covering 21.08 lakh ha have been sanctioned under
DPAP, DDP and IWDP, respectively.
(f) Swarna Jayanti Shahari Rozgar Yojana (SJSRY)
In December 1997 , the Urban self-Employment programme (USEP) and the Urban Wage
Employment programme (UWEP) which are the two special components of the SJSRY,
substituted for various programmes operated earlier for urban poverty aleviation. The SJSRY is
funded on the same sharing basis as IAY and SGSY. The number of urban poor assisted for
setting up micro/group enterprises in 2005-06 was 0.98 lakh against a target of 0.8 lakh; while in
the current year, against a target of 1.20 lakh 0.53 lakh was achieved by December 31, 2006. The
number of urban poor imparted skill training in 2005-06 was 1.42 lakh against a target of 1 lakh.
In the current year, against against a target of 1.50 lakh, 072 lakh was achieved by December 31,
2006. Under UWEP, the mandays of employment generated was 43.48 lakh in 2005-06 and 1.78
lakh in the current year till now. Coverage of beneficiaries under the community structure
component was 337.4 lakh both in 2005-06 and the current year up to December 31,2006.
(g) Valmiki Ambedkar Awas Yojana (VAMBAY)
Vambay, launched in December 2001 facilitates construction and upgradaton of dwelling units
of slum dwellers, and provides a healthy and enabling environment through community toilets
under Nirmal Bharat Abhiyan, a component of the scheme. The Central Government provides a
subsidy of 50 per cent, with the balance provided by the state Governments/Union Territories.
Cumulatively, up to March 2006 Rs. 936.63 crore had bneen released as Central subsidy for the
construction/upgradation of 4,58,630 dwelling units and 65.331 toilets seats. For 2006-07 central
allocation of Rs. 75 Crore has been made for meeting the committed liabilities for on-going
projects. VAMBAY has been subsumed in Integrated Housing and Slum Development
Programme (IHSDP) launched along with Jawaharlal Nehru National Urban Renewal Mission
(JNNRUM) on December 3,2005
(h) Jawaharlal Nehru National Urban Renewal Mission (JNNURM)
JNNURM, which is for a seven year period from 2005-06 has two main components – Basic
Services to the Urban Poor (BSUP) programme and Integrated Housing and Slum Development

37
Programme (IHSDP) BSUP was launched to assist cities and towns in taking up housing and
infrastructural facilities for the urban poor in 63 selected cities in the country. IHSDP was
launched along with BSUP in December 2005 for taking up housing and slum upgradation
programmes in non-BSUP cities. The allocation for JNNURM in 2006-07 (BE) is Rs. 4,900
crore.
(i) National Rural Employment Guarantee Scheme (NREGS)
With the NREG Act being passed in September, 2005 the NREGS was implemented from
February 2, 2006 in 200 identified districts of the country with the objective of providing 100
days of guaranteed unskilled wage employment to each rural household opting for it. The
ongoing programmes of SGRY and National Food for Work Programme (NFFWP) have been
subsumed under NREGS in these districts. NREGS will cover all districts of the country within
five years . The NREGS, a demand-driven scheme, has its focus on works relating to water
conservation, drought proofing (including afforestation/tree plantation), land development,
flood-control/protection (including drainage in waterlogged areas) and rural connectivity in
terms of all-weather roads. Of the Rs. 11,300 crore allocated for NREGS in 2006-07 (BE), Rs.
6,714.98 crore was released up to January 31, 2007. Till January 31, 3.47 crore job cards have
been issued and of the 1.50 crore households who have demanded employment, 1.47 crore
households have been provided employment. Under the scheme up to December 2006, of the
53.65 crore person- days of employment generated. 21.13 crore were for women, and of about
5.81 lakh works taken up, 2.34 lakh were completed.

38
 LESSON 5

ISSUES IN INDIAN PLANNING

--Inder Sekhar Yadav

1. Introduction
India is a mixed economy where the public sector enterprises (government-owned) exist
along with the private sector to achieve a socialist pattern of society in a welfare state. To
achieve a socialist pattern of growth the government of India in March 1950, constituted a
statutory body with the Prime Minister of India as its Chairman-called the Planning
Commission. The National Development Council was established in 1951 to help the planning
commission in drafting and approving the five year plans. National Development Council
consists of Chief Ministers of the all the states, together with the members of the Planning
Commission. The Prime Minister of India presides over the Council. Further, to strengthen the
Indian planning commission National Planning Council was established in 1965. Basically, it
is an advisory body attached to the Planning Commission which includes experts representing
a cross-section of the Indian economy.
The development plans are drawn by the Planning Commission to establish India’s
economy on a socialistic pattern in successive phases of five year periods called the Five Year
Plans. In India the organization structure to formulate basic economic policies, draft plans and
watch its progress and implementation comprises of the Planning Commission, the National
Planning Council and the National Development Council and State Planning Commissions.
Since independence the Indian economy is based on planning through its five-year
plans, developed, executed and monitored by the Planning Commission. With the Prime
Minister as the ex officio Chairman, the commission has a nominated Deputy Chairman, who
has rank of a Cabinet minister. Currently, Montek Singh Ahluwalia is the Deputy Chairman of
the Commission. Mainly, the guiding principles of India’s five-year plans are provided by the
basic objectives of growth of the economy, provision of employment, self-reliance in terms of
food and other resources and provision of social justice to all.
2. A Brief Review of Indian Five-Year Plans
So far ten five-year plans have been completed and the eleventh five-year plan is
currently underway. The first five-year plan (1951-56), emphasized the rapid agricultural
development so as to achieve food self-sufficiency, control of inflation, and attempted a
process of all-round balanced development which could ensure a rising national income and a
steady improvement in the living standards of the people over a period of time. The total plan
budget of the plan was about Rs 206.8 billion which was allocated to sectors such as irrigation
and energy, agriculture and community development, transport and communications, industry,
social services, and land rehabilitation.
The second five-year plan (1956-61) mainly aimed at rapid industrialization mainly
focusing on the development and growth of basic and heavy industries such as iron and steel,
heavy chemicals, heavy engineering and machine building industry. Also, domestic production
of industrial products was encouraged, particularly in the development of the public sector.

39
 The third five-year plan (1961-66) emphasized the need of a self-reliant and self-
generating economy. To achieve this plan stressed the development and modernization of
agriculture along with giving adequate emphasis on the development of basic industries
necessary for the overall development of the Indian economy. The third five-year plan also
saw the Green Revolution which advanced Indian agriculture.
The fourth five-year plan (1969-74) gave importance to principal objectives of growth
with stability and progressive achievement of self-reliance. The average growth rate of
national income was set around 5.5 per cent. Provision of national minimum income for the
weaker sections of the economy was also one of the priorities of the fourth plan.
The fifth five-year plan (1974-79) stressed the generation of employment, eradication
of poverty, and growth with social justice. The plan also focused on self-reliance in
agricultural production and defense. Later, it was felt that the elimination of poverty could not
be attained simply by acceleration in the rate of growth of the economy alone but the strategy
should be to launch a direct attack on the problems of unemployment, under-employment and
to launch massive poverty alleviation programmes. However, the fifth plan was terminated by
the newly elected Janata Party at the end of the fourth year of the plan in March 1978.
The then Janata Party praised the achievements of the economy in terms of self-
reliance and modernization but widely criticized the Nehru model of growth. It held the
Nehruvian model responsible for growing unemployment, for concentration of economic
power, for widening inequality both in terms of income and wealth and for growing poverty.
Therefore, the Janata Party in Sixth Plan (1978-83) sought to reconcile the objectives of higher
production especially with those of higher employment. Mainly, the focus of the then Janata
Party was to enlarge the employment opportunities in potential sectors such as agriculture and
other allied activities. However, the Congress party defeated the Janata Party in 1980 which
rolled out a new sixth five year plan (1980-85) replacing and rejecting the earlier plan
formulated by Janata Party. The Congress party brought back the Nehru model of growth
emphasizing the importance of directly attacking the problem of poverty by creating conditions
of an expanding economy.
Seventh Plan (1985-90) laid stress on improving the productivity level of
industries by up gradation of technology. Also, it sought to emphasize policies and
programmes which would accelerate the growth of production in food grains, and generate
employment opportunities.
Due to instability of governments at the centre, the eighth five-year plan (1992-
97) was delayed. The eighth five-year plan was approved at a time the economy was going
through a severe economic crisis caused by a balance of payments crisis and fiscal crisis,
mounting inflation and recession of industries. The then P.V. Narasimha Rao government
initiated a series of economic and fiscal reforms in the economy with a view to provide a new
dynamism in the economy. The eighth five-year plan reflected these changes in its attempt to
accelerate economic growth and improve the standard of living of the common man.
The ninth plan (1997-2002) mainly focused on growth with social justice and equality. It
assigned priority to agriculture and rural development with an aim of generating gainful
employment and reducing the level of poverty. Also, accelerating growth rate of economy,
provision of food and nutritional security for all, containing growth rate of population,

40
empowerment of women and socially disadvantaged groups, backward classes and minorities
were some of the important goals of the ninth plan.
The Tenth Five Year Plan (2002-07) aimed at increasing the growth of labour force and
sought to address the issue of poverty and the unacceptably low levels of social indicators.
Also, the plan adopted a differential development strategy to equate national targets into
balanced regional in the economy. Further, the plan proposed to bring in major reforms for
agricultural sector making agriculture the core element of the plan.
The eleventh plan’s (2007-2012) main theme was directed towards faster and more
inclusive growth. According to the approach paper, some of the main goals of the plan were: to
achieve a growth rate of GDP around 10 per cent, to increase the growth of farm sector about 4
per cent, creation of seven crore job opportunities, provision of basic health facilities
especially to reduce infant mortality rates to 28 per 1000 births and to reduce maternal death
rates to 1 per 1000 births. It also aimed to provision of electricity connection to all villages and
broadband over power lines households by 2009.
3. Critical Evaluation of Indian Planning
Growth
The basic objective of the Indian five year plans is to increase national and per capita
income in the country. During the planning period, India’s national income as well as per
capita income rose, but not rapidly as the planners planned and anticipated. Table 1 shows
growth rates of India’s GDP, NDP and per capital NNP since planning begun. As can be
observed form the table the growth of economy’s GDP has not be constant through out and has
been fluctuating from period to period. For instance, during 1971-72, the economy’s GDP has
grown at a marginal rate of 1 per cent. Similarly, during the period 1991-92, the GDP
registered a growth of only 1.4 per cent. Again, during 2002-03 the growth fell to 3.8 per cent.
However, since 2004-05, the country’s national income has registered an impressive growth.
Also, growth of NNP per capita has shown huge fluctuation through out the planning
period. In periods, like 1971-72, and 1991-92, a negative growth of per capita income was
registered. Thus, it is clearly evident from Table 1 that the targets set by Planning Commission
in terms of its growth of GDP and per capita was not achieved successfully during the planning
period.
Table 1: Growth Rates of selected Macro-Economic Indicators
(At Constant Prices)
(Per cent)
Year GDP at factor cost NDP at factor cost Per Capita NNP
New Series (Base : 1999-2000)
1951-52 2.3 2 0.5
1961-62 3.1 2.8 0.4
1971-72 1 0.6 -1.8
1981-82 5.6 5.7 3.5
1991-92 1.4 0.9 -1.1
2001-02 5.8 5.6 3.9
2002-03 3.8 3.4 1.9
2003-04 8.5 8.6 7
2004-05 7.5 7.3 5.5
2005-06 P 9.4 9.4 7.9
2006-07 QE 9.6 9.6 8.1
2007-08 RE 9 9.1 7.8
Notes: P indicates Provisional, QE indicates Quick Estimates and
RE indicates Revised Estimates 41
Source : Central Statistical Organisation.
 If one examines the growth performance of national income at factor cost in the
specific periods of five year plans the picture gets clearer. Table 2 shows the growth
performance of India’s national income at 1993-94 prices. It is clear from the Table 2 that the
actual growth rates have been fluctuating up to the fourth plan between 2.8 to 4.3 per cent.
Besides, the actual growth rate was less than the target from the second plan onwards and
particularly during the third and fourth plans. However, from fifth plan, there has been a steady
improvement in GDP growth from 4.8 per cent per annum during the fifth plan to 6.8 per cent
during the eighth plan. However, GDP growth rate declined to 5.4 pre cent in the ninth plan.

Table 2: Growth of India's National Income in the Five Year Plans

(At 1993-94 prices)
(Per cent)
Five Year Plan Target Actual
1. First Plan 2.1 3.6
2. Second Plan 4.5 4.1
3. Third Plan 5.6 2.8
4. Fourth Plan 5.7 3.3
5. Fifth Plan 4.4 4.8
6. Sixth Plan 5.2 5.7
7. Seventh Plan 5 6
8. Eighth Plan 5.6 6.8
9. Ninth Plan 6.5 5.4
Notes: The growth targets of the first three plans were set with respect to
income. In the fourth plan, it was with NDP. In all the subsequent plans,
the GDP has been used.
Source: Planning Commission, Ninth Five Year Plan (1997-02, Vol I

Self-Reliance
Self-reliance implies that a country is capable of meeting all its requirements either from
domestic sources or has an ability to import them from abroad. Immediately, after independence
India like many other newly liberated countries, could not risk its freedom by opening up its
economy to the western world. Indian economy at that time was afflicted by severe problems like
shortage of food grains, underdevelopment of agricultural as well as industrial sector, scarcity of
capital and technological obsolescence.
Due to scarcity of capital and below average saving rate India had to depend on external
foreign aid for meeting its import requirements. Besides the low rate of saving, the other factor,
which compelled the government to seek foreign aid, was the persistent deficit in balance of
payments.
Therefore, the government, thus, accorded a top priority to the programmes of industrial
development as soon as planning process began in India. As a part of planned efforts, a number
of industries were setup in public sector. The second Five Year Plan was referred to as industrial
plan and number of basic and heavy industries, including iron and steel, non-ferrous metal, coal,
cement, heavy chemicals and others were set up.
Today, even though India has completed its Ten Five Year plans is not a completely
self-reliant economy, though its progress towards self-reliance in food grains, capital
equipment, science and technology and capital formation is quite significant. The balance of
payments situation right now is not precarious, but the country’s dependence on MNC’s for

42
setting up power projects and large oil imports raise serious doubts about India’s capability to
become completely self-reliant in near future.
Employment Generation
One of the basic failures of Planning Commission in India is its inability to reduce the
level of unemployment and under-employment which has been increasing plan after plan. In
spite of the implementation of ten five year plans, unemployment in India has been on the
raise. The backlog of unemployed persons has been increasing year after year. According to
Planning Commission, by the end of eight plan the backlog of unemployed persons was around
7.5 million. By the end of 1996-97, as per the estimates the combined incidence of
unemployment and underemployment was around 10.5 per cent of the labour force at the end
of 1996-97.
At the beginning of the Tenth five year plan, taking together both unemployed and
under-employed, around 9.21 per cent of the labour force or about 35 million persons were
unemployed. As per the opinion of experts unless and until India adopts an employment
oriented strategy and aims at 3 to 4 per cent annual increaser of employment at higher levels of
productivity, the chances of reaching the goal of full employment and alleviating under-
employment would challenge solution for the unemployment problem in India. The Planning
Commission’s emphasis on growth rather than on employment and the adoption of capital-
intensive production rather than about intensive production is widely held responsible for the
continuous increase of unemployment in India.
The employment and unemployment scenario is depicted in Table 3. The Table
indicates that employment growth during 1999-2000 to 2004-05 has 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 1999-00. 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 workforce, unemployment rate also rose. The incidence of
unemployment increased from 7.31 per cent in 1999-00 to 8.28 per cent in 2004-05.
Also, the Tenth plan targeted to reduce unemployment form a level of 9.11 per cent in
2001-02 to a level of 5.11 per cent in 2006-07. However, according to NSS this target was not
reached. The more distressing factor was noted to be increase in the level of female
unemployment as compared to the levels of male unemployment. Also, the growth of
employment in the organized sector was negative at the annual average of 0.38 per cent during
the period 1994-2004. The growth of public sector employment fell to 0.80 in 1994-2004 and
that of private sector employment slowly improved its annual average from 0.44 per cent
during 1983-1994 to 0.61 per cent during 1994-2004.
Therefore, a focused approach should be adopted by the Planning Commission for
provision of employment opportunities.

43
 Table 3: Employment and Unemployment in million person years
Million Growth p.a (per cent)
1983 to 1993-94 to 1999-00 to
1983 1993-94 1999-00 2004-05
1993-94 1999-00 2004-05
Population 718.1 893.68 1005.05 1092.83 2.11 1.98 1.69
Labour Force 263.82 334.2 364.88 419.65 2.28 1.47 2.84
Workforce 239.49 313.93 338.19 384.91 2.61 1.25 2.62
Unemployment Rate (per cent) 9.22 6.06 7.31 8.28
No. of Unemployed 24.34 20.27 26.68 34.74
Source: Various rounds of NSSO survey on employment and unemployment/Planning Commission.

Inequality Reduction
One of the critical problems facing India's economy is the sharp and growing
inqualities among India's different states and territories in terms of per capita income, poverty,
availability of infrastructure and socio-economic development. The five-year plans have
attempted to reduce regional disparities by encouraging industrial development in the interior
regions, but industries still tend to concentrate around urban areas and port cities. Especially,
after liberalization, the more advanced states are better placed to benefit from them, with
infrastructure like well developed ports, urbanisation and an educated and skilled workforce
which attract manufacturing and service sectors.
Ever since India followed the path of planned economic development it is very difficult
to believe that a redistribution of income in favour of less and poor class of people and
reduction of concentration of power has actually taken place effectively. Between 1950-51 and
1973-74, per capita income rose by 1.5 per cent per annum. However, this small increase was
unequally distributed. In a study conducted by Dandekar and Neelkantha in 1971 concluded
that the condition of the bottom 20 per cent of the population had definitely deteriorated and
for the next higher 20 per cent of the population had remained more or less stagnant. This
clearly shows that the concentration of power in terms of income and wealth in the hands of
few has increased.
Also, the Tenth plan has not been able to bring about balanced regional development.
Several studies on this issue clearly have shown that interstate inequality has increased in the
nineties as only the better-off states were able to benefit form the economic plans and reforms.
In fact, the planning commission itself in its fourth plan has noted that the area where
its efforts so far had been weak and halting is in narrowing the disparities in incomes and
property ownership.
Poverty Removal
All Plans in India have had the reduction of poverty as one of their prime objectives,
and there have been substantial achievements. But as is noted above, despite food grains
surpluses, a major effort in primary education and basic health programmes, and an enormous
multitude of special targeted interventions, the incidence of poverty remains unacceptably
high.
Poverty is highest in the poorest states, as would be expected, although there are
exceptions such as Kerala which has a per capita income below the national average but has
high literacy and good access to infrastructure. Prominent amongst these are Bihar, Orissa,

44
Assam, Madhya Pradesh and, to a lesser extent, Uttar Pradesh. It was felt by the planning
commission that the growth of the economy would be insufficient to eradicate poverty.
Therefore, it was felt necessary to undertake specific measures to remove poverty. Thus,
poverty removal programmes were made an integral part of the five year plans.
In 1973-74, the Expert Group under Prof. Lakdawala, D. T estimated about 55 per cent
of population was living below the poverty line. However, this proposition came down to
about 39 per cent in 1987-88 estimates. The Planning Commission using slightly modified
methodology estimated about 36 per cent of the population living below poverty line in 1993-
94. If measured in absolute terms, the poor remained around 320 million during the two
decades i.e., 1973-74 to 1993-94.
Incidence of poverty is estimated by the Planning Commission on the basis of large
sample surveys on household consumer expenditure conducted by the National Sample Survey
Organization (NSSO). Poverty ratio is measured firstly, on the basis of Uniform Recall Period
(URP) where consumption data uses 30-day recall or reference period for all items of
consumption and secondly, on the basis of Mixed Recall Period (MRP) which uses 365-day
recall or reference period for five infrequently purchased non-food items, namely, clothing,
footwear, durable goods, education and institutional medical expenses and 30-day recall or
reference period for remaining items.
As per the latest URP consumption distribution data of NSS 61st Round yields a
poverty ratio of 28.3 per cent in rural areas, 25.7 per cent in urban areas and 27.5 per cent for
the country as a whole in 2004-05 where as the corresponding poverty ratios from the MRP
consumption distribution data are 21.8 per cent for rural areas, 21.7 per cent for urban areas
and 21.8 per cent for country as a whole.
Coming to the consumption pattern of people there are concerns about vulnerability of
people who have crossed the poverty line (PL) and are at present above it. The vulnerability of
consumption pattern can be measured by higher share of expenditure on food items, which is
the most basic of all basic needs. As per the latest estimates, the average per capita
consumption expenditure for rural and urban population as per 61st Round (2004-05) is Rs.
558.78 and Rs.1,052.36, respectively. The state wise number and percentage of population
living below poverty line and their consumption pattern is presented in the Table 4.
The Tenth plan had a target to reduce poverty ratio in 2006-07 to a level of 19.23 per
cent as against 26.1 per cent in 1999-00. however, it can be clearly observed from Table 4 still
around 27.5 per cent as per URP and 21.8 per cent as per MRP of India’s population is living
below poverty line. This implies during the 11 year period that is, from 1993-94 to 2004-05,
there was reduction of poverty by only 8.5 per cent. The average reduction of poverty seems to
be around 0.74 per cent during the whole period of 1993 to 2004. In absolute terms, around
300 million persons are still below poverty line in 2004-05.
Also, according to NSS, around 166 million poor i.e., 55.4 per cent of total were
concentrated in five states namely; utter Pradesh (59 million), Bihar (36.9 million),
Maharashtra (31.7 million), West Bengal (20.8 million) and Orissa (17.8 million). This clearly
shows that there is gross failure of five year plans in poverty reduction through out the country.
Therefore, the data presented in the table belwo clearly indicates that the five year
plans have not really shown their success in terms of reducing the poverty level in India.
Therefore, various anti-poverty, employment generation and basic services programmes are

45
being implemented at regular basis by the government of India. The ongoing reforms attach
great importance to removal of poverty and addressing specifically the wide variations across
States and the rural-urban divide.

Table 4 : Number and Percentage of Population below Poverty and their Consumption Pattern
Poverty Line: 2004-05 (Based on MRP) Consumption
State/Union Territory Rural Urban Combined
No. of % of Poverty No. of % of Poverty No. of % of
persons persons line persons persons line persons persons
(Lakh) (Rs.) (Lakh) (Rs.) (Lakh)
Andhra Pradesh 43.21 7.5 292.95 45.5 20.7 542.89 88.71 11.1
Arunachal Pradesh 1.47 17 387.64 0.07 2.4 378.84 1.54 13.4
Assam 41.46 17 387.64 0.93 2.4 378.84 42.39 15
Bihar 262.92 32.9 354.36 27.09 28.9 435 290.01 32.5
Chhattisgarh 54.72 31.2 322.41 16.39 34.7 560 71.11 32
Goa 0.13 1.9 362.25 1.62 20.9 665.9 1.74 12
Gujarat 46.25 13.9 353.93 21.18 10.1 541.16 67.43 12.5
Haryana 14.57 9.2 414.76 7.99 11.3 504.49 22.56 9.9
Himachal Pradesh 4.1 7.2 394.28 0.17 2.6 504.49 4.27 6.7
Jammu & Kashmir 2.2 2.7 391.26 2.34 8.5 553.77 4.54 4.2
Jharkhand 89.76 40.2 366.56 10.63 16.3 451.24 100.39 34.8
Karnataka 43.33 12 324.17 53.28 27.2 599.66 96.6 17.4
Kerala 23.59 9.6 430.12 13.92 16.4 559.39 37.51 11.4
Madhya Pradesh 141.99 29.8 327.78 66.97 39.3 570.15 210.97 32.4
Maharashtra 128.43 22.2 362.25 131.4 29 665.9 259.83 25.2
Manipur 2.86 17 387.64 0.14 2.4 378.84 3 13.2
Meghalaya 3.32 17 387.64 0.12 2.4 378.84 3.43 14.1
Mizoram 0.78 17 387.64 0.11 2.4 378.84 0.89 9.5
Nagaland 2.94 17 387.64 0.09 2.4 378.84 3.03 14.5
Orissa 129.29 39.8 325.79 24.3 40.3 528.49 153.59 39.9
Punjab 9.78 5.9 410.38 3.52 3.8 466.16 13.3 5.2
Rajasthan 66.69 14.3 374.57 40.5 28.1 559.63 107.18 17.5
Sikkim 0.85 17 387.64 0.02 2.4 378.84 0.87 15.2
Tamil Nadu 56.51 16.9 351.86 58.59 18.8 547.42 115.1 17.8
Tripura 4.7 17 387.64 0.14 2.4 378.84 4.85 14.4
Uttar Pradesh 357.68 25.3 365.84 100.47 26.3 483.26 458.15 25.5
Uttarakhand 21.11 31.7 478.02 7.75 32 637.67 28.86 31.8
West Bengal 146.59 24.2 382.82 26.64 11.2 449.32 173.23 20.6
Andaman & Nicobar 0.44 16.9 351.86 0.27 18.8 547.42 0.71 17.6
Islands
Chandigarh 0.04 3.8 410.38 0.36 3.8 466.16 0.4 3.8
Dadra & Nagar Haveli 0.62 36 362.25 0.16 19.2 665.9 0.77 30.6
Daman & Diu 0.03 1.9 362.25 0.14 20.8 665.9 0.16 8
Delhi 0.01 0.1 410.38 15.83 10.8 612.91 15.83 10.2
Lakshadweep 0.04 9.6 430.12 0.05 16.4 559.39 0.09 12.3
Puducherry 0.58 16.9 351.86 1.34 18.8 547.42 1.92 18.2
All India 1702.99 21.8 356.3 682 21.7 538.6 2384.99 21.8
Source : Planning Commission, Government of India.

46
Modernization and Competitiveness
Modernization and competitive market is the key to economic development.
Modernization and competition must, however, take place in manner so as to achieve a
common good of the maximum number of people. Since, there can be examples of products
where there can be almost monopoly of the seller some amount of regulation is required.
Before economic reform measures such as globalization and liberalization were
initiated the Indian economy was largely a regulated and controlled one thus curtailing healthy
competition and protecting the weaker. However, in order to modernize and increase the
domestic as well as international competition the government of India has been de-regulating
and de-controlling the Indian industries with regard to licensing, pricing, output etc especially
after 1991 economic reforms.
Most of the economic reforms carried out so far have been that of freeing the private
sector from the innumerable government controls that had existed for a long time. The
consequence of this widespread deregulation and introduction of competition in most segments
of the economic sphere has been the very visible unleashing of entrepreneurial energies at all
levels and in most parts of the country.
Keeping in view of the economic development of the country, the Competition Act,
2002 was enacted mainly to prevent practices having adverse effect on competition, to promote
and sustain competition in markets, to protect the interests of consumers and to ensure freedom
of trade carried on by other participants in markets.
Indian economy has been reasonably successful so far as per the targets set mainly with
the benefits of increased competition and efficiency manifesting them in the higher recorded
growth. However, this process itself still has some distance to go.
Economic Reforms
Before 1991 the Indian economy over a period of time through the 1950s, 1960s, and
1970s the economy had become over controlled and rigid and consequently entrepreneurship
was heavily constrained. The import substituting inward looking development strategy of
1950s and 1960s was no longer suitable in the modern globalizing world. Hence overall reform
was undertaken to lay down a new framework. Wide ranging macro reforms were undertaken
along with corresponding microeconomic and sectoral reforms. The macro reforms were
related to the areas like fiscal policy, monetary policy, trade policy, and exchange rate
management. The micro economic reforms were related to the areas like industrial and
agricultural sector, financial sector, and infrastructure sector.
Mainly, the economic liberalisation policies of 1991, initiated by the then Indian prime
minister P. V. Narasimha Rao and his finance minister Manmohan Singh in response to a
balance-of-payments crisis, did away with the Licence Raj (investment, industrial and import
licensing) and ended many public monopolies, allowing automatic approval of foreign direct
investment in many sectors.
Overall, no doubt the impact of economic reforms was positive on almost all the
sectors of the Indian economy. For instance, during the period of reforms i.e., especially after
1991, the economy has been growing at a higher growth rate, poverty has been reduced to an
extent, the external sector is more than comfortable; industrial growth has been restored and all
this has been achieved with financial stability in the country.

47
 One of the most disturbing features of the recent growth experience has been that of the
deceleration in agriculture growth (Table 5). With about 60 per cent of the population still
largely dependent on agriculture, this deceleration has clearly had a significant impact on
slower reduction in poverty levels than otherwise would have been the case. Moreover, for
aggregate annual GDP growth to exceed 8.5 per cent on a sustainable basis it will be difficult if
agricultural growth itself does not exceed 4 per cent annual growth. Thus, the low growth rates
registered in the agricultural sector (Table 5) clearly indicates that neither the five year plans
nor the economic reforms have improved the growth of agricultural sector.
Table 5: Growth in Agricultural Production and Value Added
(Per cent)
Year GDP in Agriculture Index of Agriculture Production
1950s 3 3.7
1960s 2.5 2.9
1970s 1.4 1.4
1980s 4.7 5.2
1990s 3.1 2.3
2000s $ 2 -1.6
Notes: $ indicates for 2000-01 to 2004-05
Source : Ministry of Agriculture, Govt of India

However, still the Indian economy has to over come many challenges in near future to
maintain a sustainable level of growth with equitable distribution of income and wealth. We
need to move to the next level of sustained growth so that per capita income growth can
exceed seven per cent per annum (or over 8.5 per cent per GDP growth per annum on a
sustained basis) and thereby see at least a doubling every decade.

48
 LESSON 6

SAVING AND INVESTMENT IN INDIA

--Inder Sekhar Yadav

1. Meaning of Capital Formation

In an economy, adequate availability of capital formation is considered as one of the
important factors for the overall growth and development of the economy. Inadequate
availability or lack of capital formation in the economy may lead to underdevelopment of the
economy. Therefore, capital formation is considered as one of the important drivers of growth in
the economy. Capital Formation is nothing but the transfer of savings from households and
governments to the business sector, resulting in increased output and economic expansion.
Capital formation increases the real capital in the economy which in turn increases the
productive capacity or potential of the society. The basic characteristic feature of capital is that it
helps to enlarge the productive potential of the economy mainly by adding to the existing stock
of capital goods such as machine, tools, plant and machinery, equipment, transport facilitates,
land and building, furniture and fixtures etc.
There exists a close and positive relationship between the process of capital formation
and economic growth of the economy. In theory, it has been emphasized that a high rate of
capital formation is usually accompanied by a rapid growth in productivity and income. Since
capital formation or capital accumulation is considered as essential in increasing the economy’s
growth and income it is important to determine the rate of capital formation and at the same time
it is necessary to understand the important determinants and process of capital formation in the
economy.
In an economy the process of physical capital formation can be expressed as a function of
following factors or variables: (1) an increase in the volume of real domestic savings so that the
resources that would have been used for consumption are released for investment, (2) the
creation of adequate banking and financial institutions to mobilize savings of the economy and
(3) the emergence of an entrepreneurial class which can utilize the economy’s saving into
productive channels of investment.
Therefore, the growth of output of any economy depends on capital accumulation, and
capital accumulation requires investment and an equivalent amount of saving to match it. Two of
the most important issues in developing economies are how to stimulate investment, and how to
bring about an increase in the level of saving to fund increased investment

2. Meaning of Saving and Investment

Saving is defined as personal disposable income minus personal consumption
expenditure. In other words, income that is not consumed by immediately buying goods and
services is saved. Other kinds of saving can occur, as with corporate retained earnings (profits
minus dividend and tax payments) and a government budget surplus.
Investment is the production per unit time of goods which are not consumed but are to be
used for future production. At any period of time the stock of capital includes all assets
associated with productive capacity such as factories, machinery, plant and equipment,
inventories. These assets represent postponed consumption that is; people invest in assets
because they expect these assets to deliver goods and services in the future. Therefore,
investment is the flow into this stock of capital goods and thus, investment is nothing but is the

49
addition, over some time period, to the real capital stock. In other words, capital is a stock which
is measured at a point in time where as investment is flow over a period of time which augment
the stock of capital and add to the overall productive capacity.

In measures of national income and output, gross investment (represented by the variable
I) is also a component of Gross domestic product (GDP), given by GDP = C + I + G + X, where
C is consumption, G is government spending, and X is exports. Thus investment is everything
that remains of production after consumption, government spending, and exports are subtracted.
Here both non-residential investment such as factories and residential investment such as new
houses combine to make up overall investment I. Net investment deducts depreciation from gross
investment. It is the value of the net increase in the capital stock per year.

3. Types and Determinants of Domestic Saving

There are basically three types of private domestic saving, each with their own different
determinants, namely: voluntary saving; involuntary saving and forced saving. Voluntary saving
relates to the voluntary abstinence from consumption by private individuals out of personal
disposable income and by companies out of profits.
Involuntary saving is saving brought about through involuntary reductions in
consumption. All forms of taxation and schemes for compulsory lending to governments
(including national insurance contributions) are forms of involuntary saving.
Forced saving is saving that comes about as a result of rising prices and the reduction in
real consumption that inflation involves if consumers cannot defend themselves. Rising prices
may reduce real consumption for a number of reasons. Firstly, people may suffer money illusion.
Secondly, they may want to keep constant the real value of their money balance holdings, so
they accumulate more money and spend less as prices rise. Thirdly, inflation may redistribute
income to those with a higher propensity to save, such as profit earners.
Savings in general depend on the capacity to save and the willingness to save. The
capacity to save depends on three main determinants: the level of per capita income; the growth
of income, and the distribution of income. The willingness to save depends, in turn, on: the rate
of interest; the existence of financial institutions; the range and availability of financial assets,
and the rate of inflation.

4. Trends of Savings and Capital Formation in India

The central statistical organization (CSO) has been preparing estimates of saving and
capital formation as part of National Accounts Statistics in India.
While preparing the estimates of capital formation, the economy is divided into three
sectors viz., the household sector which comprises productive economic units either run on an
individual basis or partnership or unincorporated business, the private or the corporate sector
which includes the joint stock companies and the public or the government sector which includes
the capital assets of the government as also the assets of the enterprises run under state control. If
we sum up the net change in the value of the assets in a given period in these sectors, we arrive at
a total of net domestic capital formation. To this if we add the net inflow of foreign capital we
arrive at an estimate of the net national capital formation for the economy.

50
 For this purpose, the estimate is compiled by the type of capital goods i.e., construction
and machinery and equipment. This part of capital formation is called fixed capital formation.
Estimates of change of stock i.e., working capital are added to gross fixed capital to arrive at the
total of gross capital formation.
While preparing the estimates of saving, the economy has been divided into three broad
sectors viz., the public sector, the private corporate sector, and the household sector. The public
sector comprises public sector undertakings along with departmental enterprises. The private
corporate sector limits itself to the organized corporations run under company form of ownership
and management. The household sector is a residual sector comprising all economic units other
than the nits of public sector and private sector. Thus, the household sector includes besides
individuals, all non-government and non-corporate enterprises like sole proprietorships,
partnerships and non-profit institutions which furnish educational, health, cultural, recreational
and other social and community services to households.
The Gross and Net Domestic Capital Formation of India are presented in Table 1 and
Sector-Wise Gross Capital Formation is shown in Table 2. Gross Fixed Capital Formation
(GFCF) includes investments in fixed capital goods such as construction, machinery and
equipment, plant and machinery etc. The aggregate Gross Domestic Capital Formation (GDCF)
is estimated for the entire economy for each year by adding the GFCF and change in stocks.
From the total of GDCF estimated, the independently estimates for the gross capital formation
for the public sector and private sector are deducted to obtain the residual investment in the
household sector.

Table 1: Gross and Net Domestic Capital Formation in India

(Rupees crore)
Year GFCF Change in stocks GDCF NDCF
At current At At current At At current At At current At
Prices constant prices constant prices constant prices constant
prices prices prices prices

New Series (Base : 1999-2000)

1950-51 877 26897 160 3478 850 24643 695 20522
1960-61 2179 48377 333 5868 2433 52500 1737 38181
1970-71 6367 84706 844 8432 6965 89870 4271 57146
1980-81 26714 137835 250 1516 28975 149728 17038 91066
1990-91 131145 258420 6453 12287 148206 291611 94839 187532
2000-01 478317 457888 13140 12807 509972 488580 303677 290350
2001-02 525452 478587 3923 3037 521354 474885 288902 262520
2002-03 584366 520164 16356 15460 620495 553731 365728 326233
2003-04 687150 588088 22863 15051 775123 659375 490421 414227
2004-05 894674 705945 60215 41765 1013761 795642 684838 533276
2005-06 P 1109160 828986 86248 61702 1271953 950102 893149 663836
2006-07 QE 1346501 954350 96103 64091 1487786 1053323 1053319 738664
Notes:1.P indicates provisional and QE indicates quick estimates
Source : Central Statistical Organisation.

51
Gross Domestic Capital Formation by Industry-Wise

Table 2: Sector-wise Gross Capital Formation in India

(Rupees crore)
Year Household sector Private corporate Public sector Gross capital
At current At At current At At current At At current At
prices constant prices constant prices constant prices constant
pricess prices prices prices
New Series (Base : 1999-2000)
1950-51 516 . 227 . 294 . 1037 .
1960-61 680 . 572 . 1259 . 2512 .
1970-71 3000 . 1107 . 3104 . 7211 .
1980-81 10114 . 3855 . 12994 . 26964 .
1990-91 55149 . 25575 . 56874 . 137598 .
2000-01 226917 215975 119901 114481 144639 140239 506181 484951
2001-02 249482 225567 123349 111735 156544 144322 543562 495113
2002-03 305819 272847 145579 128669 149324 134108 614679 548554
2003-04 344067 297121 191349 160778 174597 145240 734585 624680
2004-05 406846 312549 331081 268172 216962 166989 995943 781583
2005-06 P 445916 322950 477490 364854 272002 202884 1236800 923828
2006-07 QE 517837 351714 603014 439419 321753 227308 1492313 1056532
Notes:1.P indicates provisional and QE indicates quick estimates
Source : Central Statistical Organisation.

The Sector-Wise Gross Domestic Savings of India is depicted in Table 3. Aggregate or the Gross
Domestic Savings is derived as the sum of the domestic savings of different individual sectors
plus foreign savings (i.e., net capital inflow from abroad).
Table 3: Sector-wise Domestic Savings in India
(At Current Prices)
(Rupees crore)
Year Household sector Private corporate Public Gross Net
sector Sector domestic domestic
savings savings
Financial Physical Total(2+3) (4+5+6)
savings Savings
1 2 3 4 5 6 7 8
New Series (Base : 1999-2000)
1950-51 62 516 578 93 200 871 716
1960-61 456 680 1136 281 535 1952 1256
1970-71 1371 3000 4371 672 1528 6571 3876
1980-81 8610 10114 18724 2339 5818 26881 14943
1990-91 49640 55149 104789 15164 10057 130010 76643
2000-01 215219 226917 442136 90143 -35061 497218 290923
2001-02 247476 249482 496958 85203 -46578 535583 303131
2002-03 253255 305819 559074 103965 -14057 648982 394215
2003-04 313260 344067 657327 131355 31822 820504 535802
2004-05 318264 406846 725110 206363 68951 1000424 671501
2005-06 P 420841 445915 866756 268329 92263 1227348 848544
2006-07 QE 467985 517837 985822 322242 133359 1441423 1006956
Notes: 1. P indicates provisional and QE indicates quick estimates.
Source: Central Statistical Organisation

52
Gross Domestic Savings as a percentage of GDP
Table 4 presents the Sector-Wise Gross Domestic Savings (GDS) as a percentage of GDP
in India. As can be observed form the table, that GDS as a percentage of GDP has increased from
8.9 per cent in 1950-51 to 14.6 per cent in 1970-71 to reach a level of 23.1 per cent in 1990-91.
By the end of 2004-05, the percentage of GDS to GDP was around 29.1 per cent.
Public sector savings which were 1.8 per cent of GDP in 1950-51 increase to 3.4 per cent
in 1980-81. However, thereafter it declined to 1.1 per cent in 1990-91 and became negative in
1998-99 and deteriorated further to -1.9 per cent in 2002-03. This is mainly due to dis-saving in
the government sector, as the public sector enterprises have shown a distinct improvement in
their performance during 1990-91 to 2002-03. The situation has improved and by the end of
2004-05 the savings accounted for 2.2 per cent of GDP.
The private corporate sector contributed 0.9 per cent pf GDP to GDS in 1950-51 and
subsequently its share improved to 2.7 per cent in 1990-91 and it has further shown an
improvement and contributed nearly 4.9 per cent to GDS by the end of 2004-05.

Table 4: Sector-Wise Gross Domestic Savings (GDS) as a percentage of GDP in

India
(As a percentage of GDP at market prices)
Year Household Private Corporate Public Sector Total
Sector Sector
1950-51 6.2 0.9 1.8 8.9
1960-61 7.3 1.6 2.6 11.6
1970-71 10.1 1.5 2.9 14.6
1980-81 13.8 1.6 3.4 18.9
1990-91 19.3 2.7 1.1 23.1
1995-96 18.2 4.9 2 25.1
2000-01 21.2 4.1 -1.8 23.5
2001-02 22 3.6 -2 23.6
2002-03 23.1 4.1 -0.7 26.5
2003-04 23.5 4.4 1 28.9
2004-05 22 4.9 2.2 29.1

Source: CSO, National Accounts Statistics, 2006

Note: 1. Ratios of individual sectors may not add to total because of rounding off.
The household sector contributed 6.2 per cent to GDS in 1950-51 and its share markedly
improved to 19.3 per cent of GDP in 1990-91 and it further reached a level of 22 per cent by the
end of 2004-05. Thus, from Table 4, it is clearly evident that out of the three sectors, the
contribution of household sector to total GDS of the Indian economy was significant.
Gross Domestic Capital Formation as a percentage of GDP
Gross domestic capital formation (GDCF) of India as a percentage of GDP is shown in
Table 5. The GDCF was 8.7 per cent of GDP in 1950-51, which increased to 20.3 per cent by
1980-81. Further, it increased to 26.3 per cent in 1990-91, and improved to 26.9 per cent in
1995-96 and thereafter, it increased further to 33.8 per cent in 2005-06.

53
 Table 5: Gross Domestic Capital Formation (GDCF) as a percentage of
GDP in India
(As a percentage of GDP at market prices)
Year Gross Domestic Capital Formation
1950-51 8.7
1960-61 14.4
1970-71 15.4
1980-81 20.3
1990-91 26.3
1995-96 26.9
2000-01 25.9
2003-04 28.0
2004-05 P 31.5
2005-06 QE 33.8
Source: CSO, National Accounts Statistics, and Economic
Survey (2006-07)
Note: 1. P indicates provisional and QE indicates quick estimates
Mobilization of the Domestic Saving
In order to achieve the desired savings and investment rates, there would be need to raise
large resources domestically. Today, India has a reasonably high and growing savings rate.
However, for meeting the financing requirements of a growing economy what is important is
mobilization of financial savings and this can be done by channeling the savings in the form of
both financial and physical savings.
In India, households undertake savings in the form of both financial as well as physical
savings. Financial savings include currency and bank deposits, shares and debentures, life
insurance, provident fund and pension funds, etc. Physical savings are mainly in the form of
construction of houses, and equipment possessions of households.
Table 6 shows the composition of financial and physical savings of the household sector
of India. In 1950-51, due to underdeveloped capital and money market in India the share of
financial savings in the total household savings was only 0.6 per cent of GDP and bulk of
savings were undertaken in the form of physical assets. However, the situation changed by 1980-
81, where the financial savings as a proportion of total savings accounted for 43.5 per cent of
total household savings. This was mainly due to the rapid expansion of banking sector in rural as
well as urban areas, nationalization of banks, and a large increased of employment in the
organized sector which started contributing towards provident funds and pension. The
mobilization of rural savings towards Life Insurance Corporation also added to the growth of
financial savings.
Table 6: Composition of Household Savings in India
(As a percentage of GDP at current prices)
Year Financial Savings Physical Savings Total
1950-51 0.6 5.5 6.2
1960-61 2.7 4.6 7.3
1970-71 3.0 7.1 10.1
1980-81 6.0 7.8 13.8

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 1990-91 8.7 10.6 19.3
2000-01 10.2 11.0 21.3
2004-05 10.3 11.7 22
Source: EPW Research Foundation (2002)
With the development of capital markets, especially, after financial liberalization, the
households began investment in shares and debentures and this further strengthened the share of
financial savings in total household savings. In 2004-05, out of the total household savings as a
per cent of GDP, the share of financial savings was around 10.3 and that of physical savings was
11.7 per cent.
In order to facilitate substitution of physical savings in favour of financial savings, there
would be need for innovative and attractive financial instruments. Appropriate instruments
should also be available for the generation of longer term savings that are needed for financing
infrastructure. Financial markets, therefore, would have a crucial role to play in mobilizing
resources of the required nature.

The economy is broadly classified into three sectors viz., Agricultural and Allied activities,
Industrial sector and Services sector. The composition of gross domestic capital formation by
industry-wise is shown in Table 7.

Table 7: Composition of Gross Domestic Capital Formation in India

(As a percentage of total GDCF at 1999-00 prices)

Industry 1950-51 2004-05

1. Agriculture, Forestry and Fishing 19.3 7.8
2. Mining and Quarrying 0.9 1.7
3. Manufacturing 19.2 34.8
4. Electricity, Gas and Water 2.2 8.1
5. Construction 0.6 2.0
6. Trade, Hotels and Restaurants 12.4 3.7
7. Transport, Storage and Communication 12.7 12.6
8. Finance, Insurance, Real estate and 21.3 13.8
Business Services
9. Community, Social and Personal 11.3 13.5
services
Source: EPW Research Foundation (2002)
As can be seen from the Table 7, that the percentage share of manufacturing sector in total
GDCF has increased to about 34.8 per cent by the end of 2004-05 from 19.2 per cent in 1950-51
where as the percentage share of agriculture, forestry and fishing in total GDCF has declined to
7.8 per cent in 2004-05 from 19.3 per cent in 1950-51. over the years, industries in services
sector such as trade, hotels and restaurants, transport, storage and communication, finance,
insurance, real estate and business services and community, social and personal services have
also contributed a major proportion of total GDCF in India.

55
 LESSON 7
CENTRE AND STATE FINANCIAL RELATIONS
--Inder Sekhar Yadav

1. Federal Form of Government

India is a federal state. The term ‘Federation’ is derived from the Latin word ‘Foedus’. It
means treaty or agreement. A Federal State comes into existence as a result of the Union of
States. Therefore, in a Federal State there exist two government bodies that is one at the Centre
and the other in the States. Both have independent powers divided by a written and rigid
constitution. If there exists only one government in a country it is called a Unitary State.
Countries like England and Sri Lanka are the examples of Unitary Governments. Essentially a
federal government has the following features: Firstly, the supremacy of the Constitution,
secondly, the division of powers between the Centre and the States, thirdly, the rigidity of the
Constitution and fourthly the existence of the Independent Judiciary.
Every federal government must necessarily have a written Constitution and the
supremacy of the constitution should be maintained. It must also be a rigid one. It cannot be
easily amended. Therefore, it is a rigid Constitution. The amendments to such constitutions are
effected by difficult processes. For example, every constitutional amendment may require the
approval of the people or the support of the absolute majority of the house or the parliament.
In a federal constitution there must be the division of powers between the Central
Government and the State Governments. Usually, the powers that are of national importance are
allocated to the Central Government. Those subjects which are of local importance are given to
the State Governments. The unspecified or residuary powers are left either with the Centre or
with the States. In the Indian Constitution the powers of the Central Government are mentioned
in the Union List. There are 97 subjects in this list. The State list consists of 66 subjects. There
are 47 subjects in the Common or Concurrent List. The unspecified or residuary powers rest with
the Central Government. Any change in these lists can be made only by an amendment to the
Constitution.
Also, a Federal State is characterized by the existence of an Independent Judiciary. The
Centre and the States in this system fulfill their constitutional obligations within the framework
of the constitution. However, conflicts may arise between them on one pretext or another. In
order to settle such conflicts judicial opinion is required. Therefore, an independent judiciary is a
must in a federal state to offer such opinion or interpret the constitution. The Centre as well as
the States have to abide by the decision taken by the Supreme Court.
As far as India is concerned the federal system, as mentioned in our Constitution, is not
similar to any federal system of the world. The relations between the Centre and the States in our
country occupy a great significance. Articles 235 to 263 of our Constitution, while distributing
powers between the Centre and States provide more powers to the Centre with a view to
safeguard and promote national unity, integrity, independence and sovereignty of the country.
In India, the federal system works on the principle of neither independence nor
dependence but of interdependence of both the Centre and the States. The relations between the
Centre and the States may be explained under: (1) Legislative Relations which explains the

56
subjects included in the Union list and State list. Union list consists subjects of national
importance where as State list consists of those subjects upon which the State Legislatures are
empowered to make laws. (2) Administrative Relations dealing with the jurisdiction of powers
over the administrative matters enjoyed by the state and centre and (3) Financial Relations
dealing with the distribution of the financial power between the Centre and the States. The
transfer of resources from central government to the states is an essential feature of the present
financial system of India.

2. The Centre-State Financial Relations under the Constitution of India

The constitution of India makes a clear division of fiscal powers between the union and
the state governments. In India the centre-state financial relations may be explained as follows:
Firstly, with regard to taxes (like income-tax) are levied and collected by the Central
Government. But proceeds of these taxes are shared among the Centre and the States. Secondly,
with regard to advancement of loans, the central government may, by the approval of Parliament,
provide loans to the States. It may also guarantee loans to the States.
Also, with regard to centre-state financial relations the President of India appoints the
Comptroller and Auditor General of India. He entrusts duties and confers him such powers in
relation to State accounts. The President of India also constitutes a Finance Commission for
every five years to review the allocation of certain tax proceeds and the principles of Grants-in-
aid to the States. Thus our Constitution distributes powers between the Centre and States. Both
the Centre and the States have been provided with authority to exercise their respective powers
independently.

Distribution of Taxes or Resources

The principle adopted for the division of fiscal powers between the centre and the state
governments is that taxes which have an interstate base are levied by the union, while those with
a local base are levied by the states. The residuary powers belong to the union. The union taxes
as laid in List I, Seventh schedule of the constitution of India are:
1. Taxes on income other than agricultural income, 2. Corporation tax, 3. Excise duties except on
alcoholic liqueurs and narcotics not contained in medical or toilet preparations, 4. Custom duties,
5. Estate and succession duties other than on agricultural land, 6. Taxes on the capital value of
assets, except agricultural land of individuals and companies, 7. Rates of stamp duties on
financial documents, 8. Taxes other than stamp duties on transaction in stock exchanges and
future markets, 9. Taxes on sale or purchase of newspapers and on advertisements, 10. Taxes on
railways freight ad fares, 11. Terminal taxes on goods or passenger carried by railways, sea, or
air and 12. Taxes on the sale or purchase of goods in the course of interstate trade.
Taxes within the jurisdiction of the states as given in the List 11 of the seventh schedule
of the constitution of India are: 1. Land revenue, 2. Taxes on the sale and purchase of goods,
except newspapers, 3. Taxes on agricultural income, 4. Taxes on land and building, 5.
Succession and estate duties on agricultural land, 6. Excise on alcoholic liquors and narcotics, 7.
Taxes on mineral rights, 8. Taxes on vehicles, animals and boats, 9. Stamp duties except those on
financial documents, 10. Taxes on goods and passengers carried y board or inland waterways,
11. Taxes on luxurious including entertainments, betting and gambling, 12. Tolls, 13. Taxes on

57
professions, trades, callings and employments, 14 Taxes on advertisements other than those
contained in newspapers, and 15 Capitation taxes.
The union and state governments have concurrent powers to fix the principles on which
taxes on motor vehicles shall be levied and to impose stamp duties on non-judicial stamps. The
property of the union is exempted from state taxation and the property and income of the state
are exempted from the union taxation. The parliament may however, pass legislation for taxation
by the union of any trading or business activities of a state which are not part of the ordinary
functions of the government. States may delegate part of their taxation power to the central
government as has happened in the case of agricultural land being included in the purview of the
Estate Duty Act in many states. Parliament has exclusive power to tax sales or purchase of goods
in the course of interstate trade.
The union government has exclusive power to impose taxes which are not specifically
mentioned in the state or concurrent list.

Allocation and Distribution of Central Revenue

The Indian constitution provided for the distribution or devolution of financial resources
from the centre to the states as it felt that the allocation of financial resources did not correspond
with the assigned functions and that the resource gap in states might widen over the years.
Specifically for this purpose, Article 280 of the Indian constitution provides for the setting of a
finance commission by the president of India every five years or earlier.
The constitution apart from the taxes levied and collected by the states, had provided for
the revenues for certain taxes on the union list to be allocated, partly or wholly to the states.
These provisions fall into various groups. Firstly, certain duties which are levied by the union but
are collected and appropriated by the states. These mainly include stamp duties and excise duties
on medical preparations containing alcohol and narcotics.
Secondly, there are certain taxes which are levied and collected by the union but the
entire proceeds of which are assigned to the states, in proportion determined by the parliament.
These taxes include succession and estate duties, terminal taxes in goods and passengers, taxes
on railways freight and fares, taxes on transactions on stock exchanges and futures markets and
taxes on the sale and purchase of newspapers and advertisements.
Thirdly, central tax on income and union excise duties were levied and collected by the
union but were shared by it with the sates in a prescribed manner.

Grants-in-Aid
Since most of the important welfare and development programmes are entrusted to the
state governments, gaps between their expenditure and revenues usually takes place and these
gaps are corrected by the centre by providing enough resources through transference of resources
from centre to states. This is done partly by arrangements for tax sharing. But grants-in-aid by
the union for specific purpose or general aid have come to occupy an important place in centre-
state financial relations in India. The grants also serve the purpose of correcting inter-state
disparities in resources.

3. The Finance Commission Constitution, Functions and Recommendations

The Finance Commission of India came into existence in 1951. The Finance commission
is established under article 280 of the Indian Constitution of India by the President of India. The
Indian Finance Commission Act was passed to give a structured format to the Finance

58
Commission of India as per the world standard. The need for the Finance Commission was felt
for guiding the Finance of India. The Finance Commission is constituted to define financial
relations between the Center and the States. Under the provision of Article 280 of the
constitution, the President appoints a Finance Commission for the specific purpose of devolution
of non-plan revenue resources. The functions of the Commission are to make recommendation to
President in respect of the followings: 1. Basis of Distribution: The distribution of net proceeds
of taxes to be shared between the union and the states and the allocation of share of such
proceeds among the states, 2. Principle of Grant-in-Aid: The principles which should govern
the payment of grant-in-aid by the Center to States and 3. Financial Agreements: Any other
matter concerning financial relations between the Center and the States.
The appoinment of the Finance Commission is of great importance as it enables the
financial realtion between the cenbtree and t he states to be altered in accordance with changes in
need and economic situations. In the above context so far 13 Finance Commissions have been
appointed which are as follows:
Table 1: Finance Commissions Appointed by India

Finance Commission Year of Establishment Chairman Operational Duration

First 1951 K.C Neogy 1952-57

Second 1956 K.Santhanam 1957-62

Third 1960 A.K. Chanda 1962-66

Fourth 1964 P.V. Rajamannar 1966-69

Fifth 1968 Mahaveer Tyagi 1969-74

Sixth 1972 Brahmn Nand Reddy 1974-79

59
 Seventh 1977 J.M. Shellet 1979-84

Eighth 1983 Y.B. Chavan 1984-89

Ninth 1987 N.K.P.Salve 1989-95

Tenth 1992 K.C Pant 1995-2000

Eleventh 1998 A.M.Khusro 2000-2005

Twelfth 2003 C.Rangarajan 2005-2010

Thirteenth 2007 Vijay Kelkar 2010-2015

The Thirteenth Finance Commission has been set up under the Chairmanship of Dr. Vijay L.
Kelkar [former Union Finance Secretary and Advisor to the Finance Minister). The Finance
Commission is required to give its report by 31st October, 2009. Its recommendations will cover
the five year period commencing from 1st April, 2010.
The recommendations of the Finance Commissions can be grouped as under: 1. Division
and Distribution of income tax and central excise duty, additional excise duty in lieu of sales
taxes, 2. Grants-in Aid and 3. Centers’ loans to states.

Eleventh Finance Commission (2000-05)

Terms of Reference
The Eleventh Finance Commission was incorporated in July 1998 under th chairmanship
of A.M.Khusro. The commission was responsible for making recommendations on distribution
of taxes between the Union and the states along with the grants-in-aid to raise the income of the
states. The Eleventh Finance Commission of India has other responsibilities as well which
include reviewing the financial conditions of the states in terms of various developmental plans,
evaluating the resources provided by the government to the states and the usage of the same by
the states, it will consult the state finance commission for making recommendations, make

60
suggestions regarding the rules that govern the net proceeds of the additional excise duties on
various commodities as well as the financial assistance provided to the states to meet the taxes on
railway passenger fares, assess the debt position of the states, and review the financial condition
of the Union and the states and restructure it to ensure macro-economic stability.

The major recommendations of EFC accepted by the Government are summarized below:
 A lump sum provision of Rs. 11,000 crore in the Central Budget 2000-01 for revenue
deficit grants to States.
 For the period of five years commencing from April 1, 2000, the total share of the States
in the net proceeds of Union taxes and duties would be 29.5 per cent.
 Grants totaling to Rs.4,972.63 crore be given towards up gradation of standards of
administration and specific grants to certain States for special problems for the five years
commencing from April 1, 2000.
 Grants totaling Rs.10,000 crore for local bodies during 2000-05, to be utilized (except the
amount earmarked for maintenance of accounts and audit and for development of
database) for maintenance of civic services (excluding payment of salaries and wages).
Of this, Rs.1600 crore per annum is for rural local bodies and Rs.400 crore per annum is
for urban local bodies.
 Continuance of the existing scheme of Calamity Relief Funds in States with an aggregate
size of Rs.11007.59 crore during 2000-05. This includes the Centre’s share of Rs.8255.69
crore, and the States’ share of Rs.2751.90 crore. Discontinuation of the existing National
Fund for Calamity Relief. The Central assistance to the States in national calamities
should be financed by levy of a special surcharge on the cental taxes for a limited period
and to be kept in a separate fund, to be known as National Calamity Contingency Fund,
created in the Public Account of the Government of India.
 In deciding the total quantum of devolution of share in Central taxes/duties to States and
grants-in-aid to States, tax devolution and Plan/non-Plan grants from the Centre to the
States should not exceed 37.5 per cent of total Centre’s revenues, both tax and non-tax.
 Grants-in-Aid under Article 275 (1) of the Constitution, amounting to Rs.35359 crore
during 2000-2005 to be provided to such States which will have deficit non-plan revenue
account even after the devolution of central tax revenues, equal to the amount of deficits
assessed during the period 2000-2005.
 For the purpose of drawing up State-specific monitorable fiscal reforms programmes, a
monitorable fiscal reforms programme aimed at reduction of revenue deficit of the States
is envisaged.
 A group designated as Monitoring Agency may be constituted by the Government of
India for drawing up State-Specific monitorable fiscal reforms programmes for all States
in the context of the broad parameters suggested by the EFC and as accepted by
Government of India.
 Eighty five per cent of the revenue deficit grant recommended by the EFC and accepted
by the Government of India may be released to the relevant States without linking it to
performance under the monitorable fiscal reforms programme. Only 15 per cent of the
revenue deficit grant to which a State is entitled may be withheld and linked with the
progress in performance.
 The Monitorable programme should give equal weight to the raising of revenue and
control of expenditure.

61
  The incentive component is to be provided to all the States. The initial eligibility of the
States has been worked out on the basis of the population as per the 1971 Census. The
amount will be available to a State in proportion to the level of performance in the
implementation of the monitorable fiscal reforms programmes for each year.
 The withheld amount of grants releasable in 2004-05 may be released to the concerned
assessed State on the basis of a review of their performance. In case any amount remains
unreleased to a State, it would be added to the Fund and would be available to the
remaining States. The balance amount in the Fund at the end of 2005-06 will lapse to the
Central Government.
 In addition to the incentives for better performance, Central Government may also
consider the fiscal reforms programmes linked assistance by way of extended ways and
means advance and additional open market borrowings. The scope and dimension of such
facilities should be drawn up by the Central Government bearing in mind the Centre’s
fiscal position and the macro-economic implications of this facility. This facility should
also be extended to all State linked to monitorable fiscal reforms programme.
 The disbursements from the Incentive Fund as well as the progress in utilization of the
grants recommended by the EFC in the Main Report will be subject to review by the 12th
Finance Commission.

Twelfth Finance Commission (2005-10)

Terms of Reference
The Twelfth Finance Commission was appointed on November 1, 2002 under the
chairmanship of Dr C. Rangarajan by the president under article 280 of the Indian constitution
mainly to make the following recommendations:
(1) The distribution of net proceeds of shareable taxes between the Union and the States
(2) The principles which should govern the grants-in-aid of the revenues of States from the
Consolidated Fund of India and the measures needed to augment the Consolidated Fund
of a State to supplement the resources of local bodies in the State.
(3) To suggest a plan by which the Governments, collectively and severally, restore
budgetary balance, achieve macroeconomic stability and debt reduction along with
equitable growth.
(4) To suggest corrective measures for debt sustainability and to review the Fiscal Reform
Facility introduced by the Central Government.
The Commission submitted its report on November 30, 2004. The main recommendations of the
commission included firstly, a plan for restructuring of public finances of the Centre and the
States through improvement in revenue mobilization and bringing down debt levels, and through
enactment of fiscal responsibility legislation by States. Secondly, the commission recommended
debt relief to States linked to fiscal reforms, doing away with the present system of Central
assistance to State plans in the form of grants and loans and transfer of external assistance to
States on the same terms and conditions as attached to such assistance by external funding
agencies.

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Thirdly, the commission raised the share of States in shareable Central taxes from 29.5 per cent
to 30.5 per cent.

Fourthly, total transfers to States recommended by the commission amount to Rs.7,55,752 crore
over the five year period 2005-10. Of this, transfers by way of share in Central taxes and grants-
in-aid amount to Rs.6,13,112 crore and Rs.1,42,640 crore, respectively.

The following are the some of the recommendations of the Twelfth Finance Commission:
Restructuring public finances
 Centre and States to improve the combined tax-GDP ratio to 17.6 per cent by 2009-10.
 Combined debt-GDP ratio, with external debt measured at historical exchange rates, to be
brought down to 75 per cent by 2009-10.
 Fiscal deficit to GDP targets for the Centre and States to be fixed at 3 per cent.
 Revenue deficit of the Centre and States to be brought down to zero by 2008-09.
 Interest payments relative to revenue receipts to be brought down to 28 per cent and 15
per cent in the case of the

Centre and States, respectively.

 States to follow a recruitment policy in a manner so that the total salary bill, relative to
revenue expenditure, net of interest payments, does not exceed 35 per cent.
 Each State to enact a fiscal responsibility legislation providing for elimination of revenue
deficit by 2008-09 and reducing fiscal deficit to 3 per cent of State Domestic Product.
 The system of on-lending to be brought to an end over time. The long term goal should
be to bring down debt-GDP ratio to 28 per cent each for the Centre and the States.

Sharing of Union tax revenues

 The share of States in the net proceeds of shareable Central taxes fixed at 30.5 per cent,
treating additional excise duties in lieu of sales tax as part of the general pool of Central
taxes. Share of States to come down to 29.5 per cent, when States are allowed to levy
sales tax on sugar, textiles and tobacco.
 In case of any legislation enacted in respect of service tax, after the notification of the
eighty eighth amendment to the Constitution, revenue accruing to a State should not be
less than the share that would accrue to it, had the entire service tax proceeds been part of
the shareable pool.
 The indicative amount of overall transfers to States to be fixed at 38 per cent of the
Centre’s gross revenue receipts.

Local bodies
 A grant of Rs.20,000 crore for the Panchayati Raj institutions and Rs.5,000 crore for
urban local bodies to be given to States for the period 2005-10.
 Priority to be given to expenditure on operation and maintenance (O&M) costs of water
supply and sanitation, while utilizing the grants for the Panchayats. At least 50 per cent of
the grants recommended for urban local bodies to be earmarked for the scheme of solid
waste management through public-private partnership.

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Calamity relief
 The scheme of Calamity Relief Fund (CRF) to continue in its present form with
contributions from the Centre and States in the ratio of 75:25. The size of the Fund
worked out at Rs.21,333 crore for the period 2005-10.
 The outgo from the Fund to be replenished by way of collection of National Calamity
Contingent Duty and levy of special surcharges.
 The definition of natural calamity to include landslides, avalanches, cloud burst and pest
attacks.
 Provision for disaster preparedness and mitigation to be part of State Plans and not
calamity relief.

Grants-in-aid to States
 The present system of Central assistance for State Plans, comprising grant and loan
components, to be done away with, and the Centre should confine itself to extending plan
grants and leaving it to States to decide their borrowings.
 Non-plan revenue deficit grant of Rs.56,856 crore recommended to 15 States for the
period 2005-10. Grants amounting to Rs.10,172 crore recommended for the education
sector to eight States. Grants amounting to Rs.5,887 crore recommended for the health
sector for seven States. Grants to education and health sectors are additionalities over and
above the normal expenditure to be incurred by States.
 A grant of Rs.15,000 crore recommended for roads and bridges, which is in addition to
the normal expenditure of States.
 Grants recommended for maintenance of public buildings, forests, heritage conservation
and specific needs of States are Rs. 500 crore, Rs.1,000 crore, Rs.625 crore, and Rs.7,100
crore, respectively.

Fiscal reform facility

 With the recommended scheme of debt relief in place, fiscal reform facility not to
continue over the period 2005-10.

Debt relief and corrective measures

 Central loans to States contracted till March,2004 and outstanding on March 31, 2005
amounting to Rs.1,28,795 crore to be consolidated and rescheduled for a fresh term of 20
years, and an interest rate of 7.5 per cent to be charged on them. This is subject to
enactment of fiscal responsibility legislation by a State.
 A debt write-off scheme linked to reduction of revenue deficit of States to be introduced.
Under this scheme, repayments due from 2005-06 to 2009-10 on Central loans contracted
up to March 31,2004 will be eligible for writeoff.
 Central Government not to act as an intermediary for future lending to States, except in
the case of weak States, which are unable to raise funds from the market.
 External assistance to be transferred to States on the same terms and conditions as
attached to such assistance by external funding agencies.
 All the States to set up sinking funds for amortization of all loans.
 States to set up guarantee redemption funds through earmarked guarantee fees.

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Some other Recommendations
 The Centre should share ‘profit petroleum’ from New Exploration and Licensing Policy
(NELP) areas in the ratio of 50:50 with States where mineral oil and natural gas are
produced. No sharing of profits in respect of nomination fields and non-NELP blocks.
 Every State to set up a high level committee to monitor the utilization of grants
recommended by the TFC.
 Centre to gradually move towards accrual basis of accounting.

4. Conflicts between Centre-State Financial Relations

In India, the state of financial relations between the centre and the state governments has
become a matter of serious controversy. The states have often voiced their concern at their
increasing financial dependence on the centre. The centre, on the other hand, finds fault with the
states for their lack of a sense of responsibility and indifference to the basic tenets of financial
discipline and resource mobilization. Thus the centre-state financial relations have often been
marked by tensions and animosity.
The general complaint against the financial relations between the union and the states
concerns the division of resources. The states have a grievance that by and large the taxes with
the Union are quite elastic whereas those left with the states are inelastic and their tax base is
also narrow. Of the various taxes levied by them, only Sales Tax and to some extent the State
Excise Duties have shown a degree of elasticity. Land Revenue has lost its importance.
The states maintain that the Constitution has assigned to them the responsibility for
development works, rural and social uplift, and building of social overheads. Additionally, the
responsibility for the maintenance of law and order, the expenditure on general administration
has also gone up by leaps and bounds. Thus there are gaps between the revenue and expenditure.
It is also held that there is inadequate devolution of
taxes levied and collected by the central government, thereby reducing the finances available for
state activities, within their sphere of responsibility.
The heavy dependence of the states on the union for financial resources has resulted in
progressive erosion of the jurisdiction, authority and initiative of the states in their own
constitutionally defined spheres. The states have also to depend on the union for their share of
the enormous financial resources. These include the banking sector and other financial
institutions, foreign aid and in the last resort deficit financing supported by the Reserve Bank.
The states are obligated to submit their five year plans, including the items within
the sphere of their own responsibility to the Planning Commission created by the central
government -and there is interference and control by the letter over the plans of individual States.
There is also a gradual decline in the relative share of State's Plan outlay in the total, growing
outlay of the union on state subjects, and proliferation of centrally sponsored schemes. Thus, the
intrusive planning process along with inadequate and inelastic tax base leading to resource
constraints and dependence on the Union, constitute the bulk of the criticism by the states of
actual operation of fiscal federalism in India.
The basic indebtedness of States is also one of the major problem areas in Centre-
State financial relations pertains to the mounting central loans. The major cause for the rapid rise

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in state's indebtedness is due to investment under the plans, but more recently to the states resort
to cover part of revenue expenditure. As far as market borrowings are concerned, under each five
year plan, each state is allocated a share on a net basis, i.e. of repayments due in the year. The
states find that their repayment obligations to the centre are absorbing a large and ever-increasing
proportion of fresh loans. These cut into plan resources to a substantial extent.

Hence in the past there has been persistent demand for a comprehensive review of centre-
state financial relations. In this regard, to see the political and financial autonomy for the states
and drastic restriction of the power and financial resources of the centre, the central government
appointed the Sarkaria Commission and also some state governments constituted commissions
such as J.K Thavaraj Committee (Report of the Taxation Enquiry Committee Kerala
government), the Rajamannar Committee on the Centre-state relations appointed by government
of Tamil Nadu and the document on centre-state relations-1978 adopted by the West Bengal
government.
Mainly, the central government appointed the Sarkaria Commission, with comprehensive
terms of reference covering constitutional, legislative, financial and administrative aspects of
centre-state relations. The Sarkaria commission submitted its report to the government of India in
1988. According to the commission, it was necessary to preserve the unity and integrity of the
country and accordingly the commission rejected the various suggestions made before it either to
reduce the functions of the centre or modify them. The commission made several
recommendations with regard to its terms of reference. However, the central government did not
accept all the recommendations of the commission. In any case, the Sarkaria commissions’
recommendations are not the last word on the question of centre-state relations. The question is
still wide-open.

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