Study Material 4

BCOG-172
INDIAN ECONOMY
School of Management Studies

Indira Gandhi National Open University
Economic Development:
PROGRAMME
Concept and Measurement DESIGN COMMITTEE B.COM (CBCS)
Prof. Madhu Tyagi Prof. D.P.S. Verma (Retd.) Prof. R. K. Grover (Retd.)
Director, SOMS, IGNOU Department of Commerce School of Management Studies
University of Delhi, Delhi IGNOU
Prof. R.P. Hooda
Former Vice-Chancellor Prof. K.V. Bhanumurthy (Retd.) Faculty Members SOMS, IGNOU
MD University, Rohtak Department of Commerce
Prof. N V Narasimham
University of Delhi, Delhi
Prof. B. R. Ananthan
Prof. Nawal Kishor
Former Vice-Chancellor Prof. Kavita Sharma
Rani Chennamma University Department of Commerce Prof. M.S.S. Raju
Belgaon, Karnataka University of Delhi, Delhi
Prof.. Sunil Kumar
Prof. I. V. Trivedi Prof. Khurshid Ahmad Batt
Dr. Subodh Kesharwani
Former Vice-Chancellor Dean, Faculty of Commerce &
M. L. Sukhadia University, Management Dr. Rashmi Bansal
Udaipur University of Kashmir, Srinagar
Dr. Madhulika P Sarkar
Prof. Purushotham Rao (Retd.) Prof. Debabrata Mitra
Department of Commerce Department of Commerce Dr. Anupriya Pandey
Osmania University, Hyderabad University of North Bengal
Darjeeling
COURSE DESIGN COMMITTEE AND PREPARATION TEAM

Prof. Madhu Tyagi Dr Kamaljeet Singh Faculty Members SOMS, IGNOU
Director, SOMS, IGNOU Department of Economics,
Prof. N V Narasimham
KRM DAV College,
Prof. Raj Agrawal,
Jalandhar Prof. Nawal Kishor
AIMA, New Delhi
(Units 8, 9)
Prof. Madhu Tyagi
Prof. K Barik
Prof S K Singh (Retd)
SOSS,IGNOU, New Delhi Prof. M.S.S. Raju
SOSS,IGNOU, New Delhi
Editor (Blocks 2 and 3)
(Units 10 ,15, 18, 19, and 20) Prof. Sunil Kumar
Dr. Sugato Sen
Prof. S. V. Satyanarayana Dr. Subodh Kesharwani
SOSS,IGNOU, New Delhi
Deptt. of Commerce
Osmania University, Hyderabad Dr. Rashmi Bansal
Mr C M Negi
Department of Economics South (Units 16 and 17) Dr. Madhulika P Sarkar
Campus, Delhi University
Ms. Gurleen Kaur Dr. Anupriya Pandey
(Units 11, 12 and 13)
Assistant Professor
Dr Gurbandini Kaur SGGS, College of Commerce Course Coordinators
Associate Professor, AIMA University of Delhi Prof. Nawal Kishor
(Units 1, 2 and 3) (Unit 21)
Dr Rashmi Bansal
Prof I C Dhingra (Retd) Prof Prashant Ghosh
University of Delhi, Delhi Department of Economics Dr N Rajendera Parasad
(Units 4, 5, 6 and 22) University of Allahabad, SOMS, IGNOU, New Delhi
Allahabad
Dr Hastimal Sagara,
(Unit 23)
Assistant Professor,
Deptt. of Economics,
GLS University, Ahmedabad
(Units7 and 14)
MATERIAL PRODUCTION
Mr. Tilak Raj
Assistant Registrar
MPDD, IGNOU, New Delhi
June, 2022
 Indira Gandhi National Open University, 2022
ISBN : 978-93-5568-224-6
All rights reserved. No part of this work may be reproduced in any form, by mimeograph or any other means, without
permission in writing from the Indira Gandhi National Open University.
Further information on the Indira Gandhi National Open University courses may be obtained from the University's office
at Maidan Garhi, New Delhi.
Printed and published on behalf of the Indira Gandhi National Open University, New Delhi by the Registrar, MPDD,
IGNOU, New Delhi.
Laser Typeset by Dee Kay Printers, 5/37 A, Kirti Nagar Industrial Area, New Delhi-110 015
2 Printed at: Dee Kay Printers, 5/37 A, Kirti Nagar Industrial Area, New Delhi-110 015
Economic Development
Contents
Pages
BCOG-172 INDIAN ECONOMY
Block 1 : ECONOMIC DEVELOPMENT: CONCEPT AND MEASUREMENT 5
UNIT 1: Economic Development 7

UNIT 2: Features of Indian Economy: An Emerging Economy 21
UNIT 3: Growth: Pre & Post Reforms 38
Block 2 : DETERMINANTS OF GROWTH 59
UNIT 4: Economic Infrastructure 61

UNIT 5: Social Infrastructure 84
UNIT 6: Human Resources Infrastructure 99
Block 3 : ISSUES IN INDIAN ECONOMY 115
UNIT 7: Poverty and Inequality 117

UNIT 8: Unemployment in India 132
UNIT 9: Inequalities in Income Distribution 145
UNIT 10: Balanced Regional Growth 156
Block 4 : SECTORAL DEVELOPMENT-I: AGRICULTURE SECTOR IN INDIA 171
UNIT 11: Impotance of Agriculture 173

UNIT 12: Problem of Productivity 185
UNIT 13: Growth Pattern in India's Agriculture 199
Block 5 : SECTORAL DEVELOPMENT-II: INDUSTRIAL AND SERVICES 215
UNIT 14: Industrial Policy 217

UNIT 15: Public and Private Sector 233
UNIT 16: Micro, Small and Medium Enterprises 250
UNIT 17: Service Sector (ICT & Communication) 271
Block 6 : EXTERNAL SECTOR OF INDIAN ECONOMY 287
UNIT 18: Structure of India's Foreign Trade 289

UNIT 19: Balance of Payments (BOP) and Exchange Rate 305
UNIT 20: World Trade Organization (WTO) 324
Block 7 : FISCAL & MONETARY POLICY 341
UNIT 21: Monetary Policy 343

UNIT 22: Fiscal Policy 356
UNIT 23: Fiscal Federalization in India 378
3
Concept and Measurement
4
BLOCK I
ECONOMIC DEVELOPMENT: CONCEPT AND
MEASUREMENT
5
Concept and Measurement BLOCK 1 : ECONOMIC DEVELOPMENT: CONCEPT
AND MEASUREMENT
The Economic system decides the development prospects of a country. There are
economic systems like capitalism, socialism and mixed economy prevailing in
different parts of the world. These economic systems are based on the historical
legacies of the country but objective of these systems is to attain growth and
development. It was increasingly being felt that majority of the population in
most of the developing world did not benefit much from the growth process.
Therefore development is more comprehensive, which includes promoting the
standard of living and economic condition of a country. Such efforts can involve
development of human capital, critical infrastructure, regional competitiveness,
environmental sustainability, social inclusion, health, safety, literacy, and other
initiatives.
Economic development is a comprehensive term that generally refers to the

sustained, concerted endeavour of policymakers and community to promote the
standard of living and economic condition in a country. Economic development
can involve efforts in multiple areas such as development of human capital,
critical infrastructure, regional competitiveness, environmental sustainability,
social inclusion, health, safety, literacy, and other initiatives. It should be noted
that economic development is different from economic growth. Economic
development is a policy intervention endeavour which aims to increase economic
as well as social well-being of people. The Indian economy, like every other
economy, performs three vital functions, viz. production, consumption and
growth. It produces different types of goods and services; it enables its people
to buy and consume them. While USA, Sweden, West Germany, Japan, etc.
are developed economies with technologically advanced agriculture, industry,
transport and communication system, etc. The Indian economy has been struggling
to become a developed economy.
You will learn all these aspects of Indian Economy in detail in this course. This
block has three units.
Unit 1: Economic Development: explains how does an economy work. The

concept of economic development, difference between development and
underdevelopment, measurement of economic development and determinants
of economic development have been elaborated.
Unit 2: Features of Indian Economy: An Emerging Economy: highlights the

success story of the Indian economy. India has emerged as the fastest growing
major economy in the world after economic reforms of 1991 and is expected to be
one of the top three economic powers in the world over the next 10-15 years. India
is also backed by its robust democracy and strong partnership. The institutional
changes embarked after economic reforms have been eloquently explained.
Unit 3: Growth: Pre and Post Reforms: explains the process of planning after
India achieved independence. A detailed account of each Five-Year Plan starting
from the first Five-Year Plan in 1951 including its targets, achievements and
failures is given. An Assessment of Indian Economy before Economic Reforms
and post reforms has been presented.

UNIT 1 ECONOMIC DEVELOPMENT
Structure
1.0 Objectives
1.1 Introduction
1.2 How Does an Economy Work
1.2.1 Capitalism
1.2.2 Socialism
1.2.3 Mixed Economy
1.3 Concept of Economic Development

1.4 Measurement of Economic Development
1.5 Determinants of Economic Development
1.6 Role of Government in Development
1.7 Let Us Sum Up
1.8 Key Words
1.9 Answers to Check Your Progress
1.10 Terminal Questions
1.0 OBJECTIVES
After reading this unit, you will be able to:
• Discuss the working of an Economy in different Economic Systems;
• State the concepts of economic development, under development and
developing Economy;
• Describe the various development related concepts;
• Explain the determinants of economic development; and
• Discuss the Role of Government in Development.
1.1 INTRODUCTION
The Economic system also decides the development prospects of a country. There
are economic systems like capitalism, socialism and mixed economy prevailing in
different parts of the world. These economic systems are based on the historical
legacies of the country but objective of these systems is to attain growth and
development. It was increasingly being felt that majority of the population in
most of the developing world did not benefit much from the growth process.
Therefore development is more comprehensive, which includes promoting the
standard of living and economic condition of a country. Such efforts can involve
development of human capital, critical infrastructure, regional competitiveness,
environmental sustainability, social inclusion, health, safety, literacy, and other
initiatives. In this Unit, you will learn the concept measurment and deternimants
fo the economic development.
1.2 HOW DOES AN ECONOMY WORK

The economic system and the historical context of a country also decide the
development prospects to a great extent. The policy of leissez faire (i.e. leave 7
Economic Development: free) was favoured by the classical economists. Capitalist system, Sentrally
planned economic system and Mixed system with efficient market and rational
interventionist role of the state restrictive and liberalization policy are also shaped
in the process of evolution.
Economic system of country provides its broadest process of working of major
economic activities. There are three kinds of economic systems:
• Capitalism
• Socialism
• Mixed Economy
Let us learn them in detail.
1.2.1 Capitalism
In a capitalist economic system, activities of a business firm are market
determined. In a capitalist economy, neither an individual nor any institution
takes decisions in a centralised or planned manner concerning its day-to-day
functioning of economic activities. However, the people of capitalist countries
know that in spite of all this the producers generally produce those commodities
which are effectively demanded in the market. The producers also find it
necessary to demand services of factors of production like land, labour, capital
and organization. There is payment by producers for these services, which is in
the form of rent, wages, salaries, interest and profit. This is also known as income
in lieu of rendering services to the producer. It is only by spending this income
that the people can buy goods and services of their choice.
In a free market economy, the invisible behaviour of the consumers and producers
based on their needs develop a system of price mechanism. This system decides
‘What to produce’, ‘How to produce’ and ‘For Whom to produce’. This system
not only solves the central problems of working of the economy but also helps
in reaching the state of equilibrium. This can be understood with the help of the
following Figure.
Figure 1- Working of the Price Mechanism

8
It is clear from the figure that the choice and preferences of the individuals Economic Development
for consumption goods and their income which they wish to spend on buying
these will together determine the demand for various goods in the market. The
production function and the quantity and proportion in which labour, capital,
land and other factors are used in the productive process determine the supply
of the products in the market. It is these conditions of demand and supply in the
commodity market which determine the prices of all products which enter it.
The other factors, such as wage, rate, rent, etc. are determined in more or less
the same manner.
In free market or in the capitalist countries, it is through the working of this price
mechanism that the free enterprise economy takes decisions regarding the three
central problems, viz. what to produce, how to produce and for whom to produce
in favour of maximum social welfare.
This price mechanism works efficiently under the conditions of perfectly
competitive market structure and equitable distribution of income and wealth. But
major challenge in most of the capitalist countries today is neither the equitable
distribution of income nor the perfect competition. Therefore, a number of
weaknesses can be noted in the way in which the price mechanism regulates the
economy. It is very often seen in capitalist countries that on the one hand, there
is scarcity of necessities like wheat and milk, while on the other hand, liquor,
motor car, television and other luxuries are freely available. Moreover, the children
of the poor fail to get basic necessities like food and clothing due to very low
income, rich have all luxuries of life because of high income.
1.2.2 Socialism
Socialism is an economic system where private sector does not have any kind
of control over price fixation by market forces. The production, distribution and
consumption resulting from all major economic activities are centralised. By
centralization means, it is controlled by the state or state-established agencies.
This kind of system is also known as command economy.
According to Paul M. Sweezy, “Socialism is a complete social system which
differs from capitalism not only in the absence of private ownership of the means
of production but also in its basic structure and mode of functioning.”
Market system or market determined prices have no role to play in the working
of a socialist economy. China and Russia are examples of Socialist Economy. In
these economies, generally the planning commission or central decision making
agencies, are required to solve the basic central problems, i.e. what to produce,
how to produce, and for whom to produce. In order to do this, the Planning
Commission or central agencies have to, on the one hand, make an estimate
of the available economic, human and natural resources at its command, while
on the other hand, it has to determine the requirements of the nation for various
goods and services. This process can also be termed as Command Economy.
To put it more clearly, the Commission has to decide upon the various commodities
which the economy should produce with the available resources. There can be
many different ways of achieving the output targets. The Planning Commission
in a socialist country takes into consideration the social welfare aspect and
the development related goals of the nation while choosing the technique of
production to be used. In this system, disposable income of people are given by
state in an equitable way by taking into consideration the poorest section of the
society also. The price mechanism in a capitalist economy operates in such a way
9
Economic Development: that production takes place only to meet the demands of all those people who
have considerable amount of disposable income. Under this system, not much
attention is generally paid to the production of those commodities which belong
to the poor man’s basket. In a socialist economy, however, income inequalities
are drastically reduced so that everyone has an adequate amount of disposable
income. While determining the pattern and size of the output, the Planning
Commission has to see to it that its decisions in this regard are such that they
ensure the availability of commodities for all in the market.
Economists view socialist planning as equivalent to planning for economic
development. Therefore, every economic plan of the nation which determines its
economy’s pace and pattern of development should necessarily incorporate two
elements: first, the way in which national income is to be distributed between
consumption and accumulation, and second, the manner in which investment is
to be allocated among the different sectors of the economy.
1.2.3 Mixed Economy
A mixed economy represents a mixture of features of the two types of economies,
capitalism and socialism. Under this form of economic system, the production
is partly in the hands of private individuals and partly owned by the State. The
public authority usually owns public utility services like supply of water and
electricity, roadways and railways, shipping and air services. The Government
tries to remove disparities and inequalities in the income distribution by various
measures, such as taxes and their levies and through public expenditure.
According to Samuelson, a mixed economy is characterized by the existence
of both public and private institutions exercising economic controls. In this
economy, price mechanism and partial planning both play an important role.
Indian is perhaps the best example of such an economy and can legitimately be
called a mixed economy.
A mixed economy contains the good features of both socialism and capitalism.
Every possible effort is made to make the best possible use of available economic
resources. The price mechanism and the profit motive and all kinds of freedoms
result in the efficient allocation and utilisation of the available resources. As a
result, shortages and surpluses are easily avoided and business fluctuations are
eliminated.
Check Your Progress: A
1. Define public sector.
2. Write two characteristics of capitalism.
3. Write two characteristics of socialism.
4. Define the mixed economy.
5. State whether the following statements are True or False.
i) In a capitalist economic system, activities of a business firm are market
determined.
ii) Market system or market determined prices have no role to play in the
working of a socialist economy.
iii) In socialist system, workers are motivated to work hard.
iv) A mixed economy is characterized by the existence of both public and
private institutions exercising economic controls.
10
v) A mixed economy contains the good features of both socialism and Economic Development
capitalism.
1.3 CONCEPT OF ECONOMIC DEVELOPMENT

Economic development is a comprehensive term that generally refers to the
sustained, concerted endeavour of policymakers and community to promote the
standard of living and economic condition in a country. Economic development
can involve efforts in multiple areas such as development of human capital,
critical infrastructure, regional competitiveness, environmental sustainability,
social inclusion, health, safety, literacy, and other initiatives. It should be noted
that economic development is different from economic growth. Economic
development is a policy intervention endeavour which aims to increase economic
as well as social well-being of people,
Development and Underdevelopment
The Indian economy, like every other economy, performs three vital functions,
viz. production, consumption and growth; it produces different types of goods and
services; it enables its people to buy and consume them. While USA, Sweden,
West Germany, Japan, etc. are developed economies with technologically
advanced agriculture, industry, transport and communication system, etc. the
Indian economy has been struggling to become a developed economy.
Economists world over have indicated certain features of underdevelopment.
Economic development may be defined as the process by which a traditional
society employing primitive techniques and capable of sustaining only a low
level of income is transformed into a modern, high technology, high-income
economy. Such a developed economy uses capital, skilled labour and scientific
knowledge to produce wide variety of products for the market. Capital goods
and human capital and relevant scientific knowledge play a major role for the
development of an economy.
The underdeveloped countries face poverty, rising burden of unemployment,
growing disparities in income distribution, low and stagnant agricultural
productivity, sizeable gap between urban and rural levels of living, lack of
adequate education, health and housing facilities, dependence on foreign and
often inappropriate technologies and more or less stagnant occupational structure.
Some of the features of the underdeveloped economy are as follows:
1. Low Per Capita Income: Per capita income refers to the average income
of people of a country. It is calculated by dividing national income by total
population of the country. Per capita income is also often used to measure a
country's standard of living. You must be aware that the national income of
an under developed country is low and the population is high. As a result,
the under developed countries have low per capita income.
2. Inequitable Distribution of Income and Wealth: Disparity of incomes
among different population segments is known as disparities in income.
Growing inequality in the distribution of wealth and poverty has become
a major problem all-over the world. The inequality affects the economic
development of the under developed countries. Disparities in wealth is one
of the important reasons for inequitable distribution of income.
3. Heavy Dependence on Agriculture: A large proportion of population is
dependent on agriculture in underdeveloped countries. The natural calamities
adversely affect the agriculture. As a result, the farmers get less output from 11
Economic Development: agriculture. These days, the contribution of agriculture to the GDP of under-
developed countries has been rapidly declining.
4. Heavy Population Pressure: Growth of population in underdeveloped
countries is very high as compared to the developed nations. The public
investments in education and health have been very meagre. Therefore, the
human resources of underdeveloped countries are not properly harnessed.
The majority population has to depend on informal employment.
5. Unemployment and Underemployment: A situation of unemployment
arises when the people seeking jobs do not find opportunities to work.
Underemployment is a condition in which people in a labour force are
employed on part-time or gig jobs or at jobs inadequate with respect to their
training/skills or economic needs. Many people in underdeveloped countries
are either unemployed or underemployed.
6. Capital Scarcity and Low Rate of Capital Formation: One of the important
problems of underdeveloped countries is scarcity of capital. Capital formation
refers to addition of capital goods, such as equipment, tools, transportation
assets, and electricity. Countries need capital goods to replace the older ones
that are used to produce goods and services. If a country cannot replace capital
goods due to lack of resources, the production starts declining. Generally,
the higher the capital formation of an economy, the faster an economy can
grow its aggregate income. Underdeveloped countries face the problem of
shortage of capital due to low levels of income of people and savings.
7. Use of Primitive Technologies: Technological development is very low in
underdeveloped countries as compared to the developed countries. Most of
the technologies used in underdeveloped countries are outdated and primitive.
Therefore, the cost of production becomes very high. The products are not
able to compete in the international markets. The domestic industry may not
be able to compete with imported goods.
8. Disparities in Rural Urban Living Standards: There has been wide
variation between rural and urban people in the underdeveloped economy.
The disparities are measured in terms of income, consumption and other
non-monetary aspects of standard of life such as access to education, health,
transport, protected water, sanitation etc.
9. Low Financial Inclusion Rate: The lower strata of the society, particularly in
rural areas is less financially inclusive in underdeveloped countries. Financial
inclusion means access of people to useful and affordable financial products,
such as banking services, insurance, etc. The less financial inclusion rate
reduces the number of opportunities for growth.
A Developing Economy
After Independence, the government took keen interest in the economy which
was given a big push through the sector enterprises in the core sectors. As a
result, per capita income has been rising, although not steadily. The dominance of
agriculture is gradually reducing; the secondary and tertiary sectors (services) are
slowly expanding. In the last seventy years, the Indian economy has developed
a large number of basic industries that produce capital equipment and useful
raw materials. India is now in a position to maintain the growth of most of her
industries by the domestic production of capital goods, supplemented with only
marginal imports. India has also built a large number of canals and storage works,
12 hydro and thermal power generation and largely electrified railway system,
expanding post and telecommunication system covering most of the countries Economic Development
and linking its important business centres with other countries, expanding system
of banking and finance and so on.
Economic Growth
The basic aim of economic policy of the Government of India has been to remove
poverty and create means for better standard of living of the people. This aim can
be achieved through rapid economic growth. Economic growth can be defined
as the process whereby an economy’s real national income increases over a long
period of time. Economic growth is an increase (or decrease) in the value of goods
and services that a geographic area produces and sells in comparison to an earlier
time. If the value of an area's goods and services is higher in one year than the
year before, it experiences positive growth, usually known as "economic growth”
However, as economist Amartya Sen points out: “economic growth is only one
aspect of the process of economic development.”
"Big Push" Approach
It is the measure of help to the developing countries trapped in the vicious circle
of poverty trap, by injecting large sums of financial supports, so as to break the
cycle and improve the local living standards based on industrial development
and investment.
Poverty Trap
Poverty trap is a self-perpetuating condition where an economy suffers from
persistent underdevelopment where poverty breeds or perpetuates poverty. Poverty
trap has to be distinguished from (possibly temporary) bad market outcomes,
such as recessions and financial crises.
UN Development Decade
The UN General Assembly declared each decade of the 1960s, 1970s, 1980s
and 1990s, as the first, second, third, and fourth UN Development Decade,
respectively. The first Development Decade was announced by President John.
F. Kennedy of the United States in 1962. Each decade put forth specific sets
of development goals. No announcement of the development decade was made
for the first decade of the 21st century; however, the Millennium Development
Goals (covering the period up to 2015) were adopted at the UN Millennium
Summit in 2000.
Sustainable Development
It is the process of development that "meets the needs of the present without
compromising the ability of future generations to meet their own needs" (the
Brundtland Report, 1987). While the central issue of sustainable development
is the reduction/prevention of environmental degradation, but it must be done
without unduly forgoing the needs of economic development, social equality
and justice.
Millennium Development Goals (MDGs)
The eight goals covering a wide range of social and economic development that
the UN member states have agreed to strive for with the year 2015 as the target
time-limit. The MDGs were adopted on the occasion of the 2000 UN Millennium
Summit. Since then, the UN system has been mobilized to their achievement,
and many NGO have rallied around the UN campaign. The MDGs specifically 13
Economic Development: concern the eradication of extreme hunger and poverty; achieve universal primary
education; promote gender equality and empower women; reduce child mortality;
improve maternal health; combat HIV/AIDS, malaria, and other diseases; ensure
environmental sustainability; develop a global partnership for development.
1.4 MEASUREMENT OF ECONOMIC

DEVELOPMENT
Economic development refers to the total quality of life of a population. It includes
the standard of its education, medical care and diet. The greater a country’s
economic development, the better the living standard of people should be.
A major goal of poor countries is economic development or economic growth.
The two terms are not identical. Growth may be necessary but not sufficient for
development. Economic growth refers to increases in a country's production or
income per capita Production is usually measured by Gross National Product
(GNP) or Gross National Income (GNI), used interchangeably, an economy's
total output of goods and services.
Economic development is accompanied by changes in output distribution and
economic structure. These changes may include an improvement in the material
well-being of the poorer half of the population; a decline in agriculture's share of
GNP and a corresponding increase in the GNP share of industry and services; an
increase in the education and skills of the labour force; and substantial technical
advances originating within the country. As with children, growth involves a stress
on quantitative measures (height or GNP), whereas development draws attention
to changes in capacities (such as physical coordination and learning ability, or
the economy's ability to adapt to shifts in tastes and technology). Currently
measurement of development are:-
• GNP per capita
• Population Growth
• Occupational Structure of the Labour Force
• Human Development Index (HDI)
Let us discuss them one by one.
GNP Per Capita
GNP is the total market value of all final goods and services produced by a country
in one year. It is a measure of economic activity, or how much is produced in a
country. The more that country produces per person, the more "developed" it is
assumed to be.
GNP is measured in US dollars, so that comparisons can be made with other
currencies in the world. For example, in India US$1 will buy far more than in
the USA. This is called Purchasing Power Parity (PPP). This converts a national
income to its equivalent in the USA
Gross Domestic Product (GDP) is closely linked with GNP. It is the value of the
goods and services produced in the country only. It includes all goods and services
produced by foreign owned companies. GDP excludes all goods and services
produced outside the country. The average GDP per person can be calculated by
dividing the GDP by the total population of the country
14
Population Growth Economic Development
In general, poorer countries have higher rate of population growth. Many of

the world's countries, including many in Sub-Saharan Africa, the Middle East,
South Asia and South East Asia, have seen a sharp rise in population in the last
few years. The fear is that high population numbers may put further strain on
the natural resources, food supplies, fuel supplies, employment, housing, etc. in
underdeveloped and developing countries. It has been seen that in underdeveloped
and developing countries, rapid growth of population is an important hindrance
to the economic growth. Higher population means less resources per capita.
Since economic growth is measured in terms of an increase in per capita income,
a part of the increase in national income is utilised to maintain the additional
population. In other words, in terms of per capita income, on account of a rise in
population, the country is left with small potential of spreading benefits of growth
across its population. This highlights the need for a large and active programme
of family planning so that the benefits of the massive developmental efforts do
not get dissipated.
But it may be emphasized that it would not be proper to isolate the population
factor because history has shown that birth rate only falls significantly when the
standard of living rises significantly for the majority of the population. Hence
economic development and population are interconnected. Whereas population
hinders economic development, the latter, as it gathers momentum, leads to the
creation of more appropriate conditions to control population.
Occupational Structure of the Labour Force
Economic activities of any country are broadly classified into primary activities,
secondary activities, and tertiary activities. Primary activities are known as
primary because they directly remove resources from the earth, for examples,
agriculture, mining, fishing, and lumbering.
Secondary activities involve converting primary resources into finished products
by further adding values. These are classified as manufacturing activities.
Tertiary activities comprise the service sector of the economy. These facilitate
further adding values to the primary and manufacturing activities. The tertiary
activities include retailing, transportation, education, banking, etc.
As countries develop, the occupational structure of the labour force changes.
It has been observed by developmental economists that in underdeveloped or
developing countries, most people are engaged in the primary activities. In
developed countries like the United States, U.K., France, Japan and South Korea
most people are involved with the tertiary sector. Experience from all over the
world suggests that in the process of development, transfer of workforce from
primary to secondary and then secondary to tertiary sector of the economy has
invariably taken place. For instance between 1870 and 1930, the proportion of
work force engaged in agriculture declined from 54 to 23 percent in U.S.A., from
43to 25 percent in France, and from 80 to 48 percent in Japan. Currently we are
witnessing in countries like China, India and newly industrialised countries,
persons employed in territory sectors are proportionately increasing. The process
of shift in the occupational structure implies the shift of work force from low
productivity of primary sector to the high productivity secondary and tertiary
sectors. Therefore, it is essential that as economic development proceeds, there
is an optimum distribution of the work force in different occupations. This will
not only improve the utilisation of labour but will also boost the overall level of
15
productivity of the economy.
Economic Development: Human Development Index
Human Development Index developed by the United Nations Development
Program (UNDP) computes a Human Development Index for each country
each year. Currently, this has been considered a very effective indicator of
development. It takes into consideration social conditions including GNP per
capita. Although it is the most used indicator of development, yet there are some
significant problems with it.
The human development index (HDI), is composed of three indicators, namely
life expectancy, education (adult literacy and combined secondary and tertiary
school enrolment) and real GNP per capita.
Check your progress B
1. Define economic development.
2. Write any four characteristics of underdevelopment.
3. What is the per capita income?
4. Write three indicators of human development index.
5. State which of the following statements are True or False.
i) Economic development refers to the total quality of life of population
ii) Production is usually measured by Gross National Product (GNP) or
Gross National Income (GNI).
iii) United Nations Development Programme (UNDP) computes Human
Development Index for each country.
iv) The average GDP per person can be calculated by dividing the GDP by
the total population of the country.
v) Economic growth refers to decrease in country’s production or income
per capita.
1.5 DETERMINANTS OF ECONOMIC

DEVELOPMENT
The process of development depends on a host of factors like natural resources,
physical and human capital, technology, socio-politico-economic structure of
the country. Determinants of development are broadly classified into economic
factors and non-economic factors.
Economic determinants of the economic development are as follow:
Capital Formation
Growth rate of the national income in the developed nations’ high capital
formation has contributed to higher economic growth. A higher rate of capital
formation leads to productive capacity of a nation, which results into higher
production of goods and services and higher national income.
Capital includes the stock of machines, tools and equipment (which produce
consumer goods as well as machines) and improvements in skill formation of its
work force, which has enhancing effect on the process of growth. Any increment to
this stock year to year are called Capital Formation. Investment is also generally
known as amount of capital formation.
16
It is therefore very essential for developing and underdeveloped countries to Economic Development
increase the stock of Capital formation for accelerating the economic development
and growth. Along with capital, it is also important for these countries to focus
on skill formation so that the machines and equipment created can be utilized
efficiently to achieve a rising level of production.
In underdeveloped countries, the level of income is low and due to this, saving
ratio is also low. Low saving results into low investment and lower level of capital
formation. Therefore, increase in income leads to more capital formation. To
make optimum use of the natural wealth, necessary amount of capital is needed
so that they can be used to their fullest. If the level of income is low, the savings
will also be low. In such a case, a country may use foreign capital. The actual
requirement of capital depends upon growth target and capital output ratio.
Capital-Output Ratio
Capital-output ratio is one of the most important determinants of development.
The ‘capital-output ratio' may be defined as ‘number of units of capital required
to produce one unit of output’. In other words, capital-output ratio measures the
productivity of capital that is employed in various sectors of the economy at a
point of time. Also in a developing country like India where there is shortage
of capital, it becomes all the more important to conserve its use by utilizing it
efficiently. But the capital-output ratio is different for different industries. In
capital intensive industries, capital output ratio is higher as compared to the labour
intensive industries. The Capital output ratio therefore varies across different
economies and also over a period of time.
"There is no unique capital-output ratio applicable to all countries at all times.
Much depends on the stage of economic development reached but also on the
precise form of further expansion." (First Five-Year Plan).
Natural Resources
Natural resources include both renewable and non-renewable resources. It has
been observed that availability of natural resources in abundance is an important
but not an essential factor in a country’s economic development. Some developed
countries like the USA, Canada, Australia, New Zealand, etc. have abundance of
natural resources but Japan lacks natural resources as compared to these countries
but it is a developed country. Therefore, it does not mean that all these countries
that have natural resources in abundance, are among the developed nations. The
countries which are in their process of economic growth must direct their efforts
to make fuller use of their existing resources. Renewable and non-renewable
resources increase income, Per Capita Employment, Income and Efficiency.
Non-economic Factors in Economic Development
Human Resources – Optimum level of population can be a boon as well, as the
increasing population provides opportunity for expanding market base in terms
of demand and supply of goods and services, and more work force for producing
such output. Over population can be a problem. Optimum level of population
also provides working age population, educated and skilled manpower, health
and nutrition, demographic dividend of human capital.
Human capital is one of the most important factor of economic development.
Japan is a developed nation because of creation of capabilities and capacities
in people to work efficiently and competently in various economic activities.
17
Economic Development: It has been realised that investment on human beings in the form of education,
training and health facilities contributes to increased productivity which is very
significant for development.
In developed nations, the health and education levels are much higher as compared
to the underdeveloped countries. Developed countries with better health and
education produce larger output and higher incomes. The role of human capital
formation in economic development can be stated in terms of increase in output,
in productive capacity, improved quality of life and increase in inventions and
innovations.
Technical Know-how: Technology and technical know-how are also very
significant factors in the process of economic development. More sophisticated
techniques of production always facilitate in increasing the level of production
and productivity levels. As the scientific and technological knowledge advances,
there is more sophistication in the level of technology. Information technology
and digitization are bringing more and more sophistication in the techniques
of production. To incorporate new technology in the production process or in
order to modify the existing plants, a larger investment to procure or produce
new equipment is required. Hence a higher rate of capital formation is necessary
to support technological progress. Since technology has now become highly
sophisticated, still greater attention has to be given to Research and Development
for further advancement.
Institutional Factors Affecting Development
There are a number of non-economic factors that act as catalyst in the process of
economic development. These institutional factors are organisations, structures,
rules, education and educational institutes, healthcare infrastructure and political
stability. Other institutional factors that have impact on the process of development
are legal system, financial system, credit and micro finance, taxation, the use of
appropriate technology and the empowerment of women.
1.6 ROLE OF GOVERNMENT IN DEVELOPMENT

If the economy depends solely on the price mechanism to solve its central
problems, then given the income and wealth inequalities, there is a possibility
that a large number of people die of starvation while a handful possess the good
things of life very much in excess of what is required by them. Here intervention
of government to facilitate inclusive and sustainable development is required. Any
enlightened government finds it necessary to curb inhuman traits in the working
of the price mechanism.
It has been seen that price mechanism due to the individualistic orientation of
human behaviour cannot adequately allocate resources for education, medical
facilities and other social services. Government must allocate resources for
education, medical facilities and other social services by keeping in mind that in
a country like India, there is sizable population living in poverty and they lack
resources to buy these services. Other services of immense national importance,
like transportation, communications, water and electricity, defence, space are
also very important for development. The Government cannot solely depend on
private sector or by the price mechanism alone. Because then it is likely to result
in a very short supply of each one of them. Therefore, it becomes imperative for
the government to participate directly in the production of these services.
18
1.7 LET US SUM UP
The economic system and the historical context of a country also decide the
development prospectus to a great extent. Economic system of country provides
its broadest process of working of major economic activities, namely Capitalism,
Socialism and Mixed Economy.
In a capitalist economic system, activities of a business firm are market
determined. In a capitalist economy neither an individual nor any institution
takes decisions in a centralized or planned manner concerning its day-to-day
functioning of economic activities. Socialism is an economic system where private
sector does not have any kind of control over price fixation by market forces.
The production, distribution and consumption resulting from all major economic
activities are centralized. By centralization means, it is controlled by the State
or State-established agencies. This kind of system is also known as command
economy. A mixed economy represents a mixture of features of the two types of
economies, capitalism and socialism. Under this form of economic system, the
ownership of means of production is partly in the hands of private individuals
and partly owned by the State. Economic development is a comprehensive
term that generally refers to the sustained, concerted endeavor of policymakers
and community to promote the standard of living and economic condition in a
country. Economic development refers to the total quality of life of the population.
It includes the standard of its education, medical care, the diet, etc. The greater
a country’s economic development, the better the living standard of people is.
Currently, measurement of development are:
• GNP per capita
• Population Growth
• Occupational Structure of the Labour Force
• Human Development Index (HDI)
There are a number of non-economic factors that act as catalyst in the process of
economic development. These institutional factors are organisations, structures,
rules, education and educational institutes, healthcare infrastructure and political
stability. If the economy depends solely on the price mechanism to solve its central
problems, then given the income and wealth inequalities, there is a possibility
that a large number of people die of starvation while a handful possess the good
things of life very much in excess of what is required by them. Here intervention
of government to facilitate inclusive and sustainable development is required.
1.8 KEY WORDS

Capitalism: The economic system in which business are owned and run for profit
by individuals and not by the state.
Socialism: The political idea that is based on the belief that all people are equal
and that money and property should be equally divided.
Mixed economy: A economy system combination with private and state
enterprise.
Development: Underdevelopment The process of becoming bigger, stronger
better etc. or of making somebody something do this.
19
Economic Development: Underdevelopment: Is low level of development characterized by low real per
capita income wide-spread poverty, lower level of literacy, low life expectancy
and underutilization.
Economic growth: An increase in the amount of goods and services produced
per head of the population over a period of time.
Sustainable Development: Economic development that is conducted without
depletion of natural resources.
Gross National Product (GNP): Total market value of the final goods and
services produced by a nation’s economy during a specific period of time a year
computed before allowance is made for the depreciation or consumption of capital
used in the process of production.
Gross Domestic Product (GDP): GDP is the most commonly used measured
for the site of an economy.
1.9 ANSWERS TO CHECK YOUR PROGRESS

(A) 5 i) True ii) True iii) False iv) True v) True
(B) 5 i) True ii) True iii) True iv) True v) False
1.10 TERMINAL QUESTIONS

1. Discuss in detail about the working of an economy in capitalism, socialism
and mixed economy.
2. What is the difference between underdevelopment and development? Explain
with appropriate examples.
3. What are major determinants of development? Discuss.
4. Discuss the role of non-economic factors in economic development.
5. What are the millennium goals? Discuss in detail.
20
Features of Indian Economy:
UNIT 2 FEATURES OF INDIAN ECONOMY: An Emerging Economy
AN EMERGING ECONOMY
Structure
2.0 Objectives
2.1 Introduction
2.2 India an Emerging Economy
2.3 India in Transition
2.4 Institutional Changes
2.5 Liberalization
2.6 Privatisation
2.7 Globalization
2.8 Structural Changes
2.9 Major Issues and Challenges of Indian Economy
2.9.1 Poverty
2.9.2 Unemployment
2.9.3 Inequalities in Income Distribution
2.9.4 Regional Disparities
2.10 Let Us Sum Up

2.11 Key Words
2.0 OBJECTIVES
After reading this unit, you will be able to:
• Discuss the evolutionary process of Indian Economy;
• State the concepts of Liberalization, Privatisation and Globalization;
• Describe the various economic challenges which India is facing; and
• Explain Major Issues of Indian Economy highlighting the issues relating
to poverty, unemployment, inequalities in income distribution and regional
disparities.
2.1 INTRODUCTION
Theodore Roosevelt remarked, “A peep in the past prepares you better for the
future”. Thus for understanding the present state of the Indian economy and
its future prospects a brief comment on its past will be appropriate. The Indian
economy, before the British came around the middle of the nineteenth century,
was quite sound. According to an estimate, the Gross Domestic Product (GDP) of
India in the sixteenth century was about 25% of the world economy, the second
largest in the world. However, after the arrival of the colonial rule the Indian
economy faced disaster; from being an exporter of processed goods it changed
to being an exporter of raw materials and a buyer of manufactured goods. As per 21
Economic Development: British economist, Angus Maddison, India’s share of the world income went from
27% in 1700 A.D. (compared to Europe share of 23%) to 3% in 1950.
After India got independence in 1947, the process of rebuilding the economy
started. However, it was mostly centralized and the period from 1947 to 1991
was termed as the licence raj, because the successive governments followed
protectionist economic policies. This trend led to a balance of payments crisis in
the year 1990. The year 1991 turned out to be watershed in the Indian economy
when the government of India in June 1991 announced major liberalization
policies in Indian economy. The emergence of India as a major economic power in
the world happens to be one such idea. Since then Indian economy has progressed
immensely with GDP progressing at the rate of 6 to 8% per annum and is expected
to be one of the top three economic powers in the world over the next 10-15 years.
India is also backed by its robust democracy and strong partnerships. India has
finally arrived in the category of fast emerging economies. It is fast entering the
league of high growth nations. The future seems to have much more in store. But
a lot depends on how the grey areas are tackled.
We have finally been able to unshackle ourselves from the stigma of being a
low growth economy and have infused dynamism into our economic system.
Not only is India achieving higher growth rates year after year, the rate at which
it is moving towards higher growth targets is also higher. In this Unit, you will
learn the featurs of Indian economy including liberalization, privatisation and
globalization. You will also learn major issues of Indian economy.
2.2 INDIA AN EMERGING ECONOMY

India's economy over the last three decades is a success story; after a major
economic crisis in 1991, followed by Economic reforms, the economy has
experienced a high and sustainable economic growth rate, attracted large amount
foreign investment, and a boom in the information technology sector and pharma
sector. These characteristics are good enough to classify India as an emerging
economy. Since the start of the 21st century, annual average GDP growth 6% to
7% and from 2013-2018 India was the world’s fastest growing major economy.
It was the robustness of Indian economy that unlike US and Europe India was
not affected by global financial crisis in the year 2008.
India's key growth factors are a young and rapidly growing working-age
population, rising education and engineering skill levels, accentuating growth
in the manufacturing sector, a rapidly growing middle-class, implementing a
sustained growth of the consumer market.
Among all the emerging markets, it is India’s robust growth in manufacturing,
business friendly reforms, infrastructural development and political stability that
makes the country the most prominent emerging market to invest in for investors.
According to the IMF World Economic Outlook, April 2016, India ranks fourth
among the list of the world’s fastest growing economies with a growth projection
of 7.2 percent for the fiscal year 2017 and 7.7 percent for the fiscal year 2018,
surpassing China.
2.3 INDIA IN TRANSITION

• Emerging or ‘frontier’ markets are economies which are in a transition
phase, Indian economy is an emerging economy and currently India is in
transition. It is characterised as emerging because financial and regulatory
22 infrastructure are less mature compared to developed economies. Though
characterised by low per capita income, Indian Economy is growing at an Features of Indian Economy:
An Emerging Economy
unprecedented rate.
• Economic reforms that began 25 years ago have transformed India. What
used to be a poor, slow growing country now has the third largest gross
domestic product (GDP) in the world with regard to purchasing power parity
and is projected to be the fastest growing major economy in the world in
2016 (with 7.6 percent growth in GDP).The Indian GDP rose from $266
billion in 1991 (inflation adjusted) to $3 trillion in 2019 (1100% increase)
while its purchasing power parity rose from $1 trillion in 1991 to $12 trillion
in 2019 (1100% increase).
• The growth in India's economy has fostered the emergence of a sizeable
middle class after Economic Reforms. It was pointed out that much of the
market potential in India lies in its consumer market, which is seen to have
immense potential. It is accepted that India's middle class will determine
the consumer potential for India. At this stage of Indian development, the
middle class is predominantly rural and it is argued that this market potential
has scarcely been tapped. It was suggested that although consumption of
some trade items has increased rapidly, a large gap exists between actual
and potential consumption. Statistics reveal a high level of aspiration, a
fast changing pattern of consumption, and a higher level of penetration at
these lower income levels than would be expected. India is currently in the
throes of a boom for consumer products. It is leading to the emergence of
new values in consumption and in new aspirations.
• The external sector of Indian Economy is also performing well under the
new economic policy. Exports, which had been treated as a residual category
before economic reforms have now received a place of prominence in our
economic strategy. Various promotional steps have been taken to increase
the rate of growth of our exports which has been around 10% in the entire
post-liberalisation period. Imports, on the other hand, were deliberately
compressed in 1991-92, but have been growing since then owing to the
renewal of economic activity. But during the entire period, between 1990-
91 and 1995-96, the rate of growth of imports has been lower than that of
exports and this has led to an improvement in our balance of trade. But,
since 1993-94, the high saving-investment gap has led to an increase in the
trade and current account deficit.
• The high rate of capital inflows since 1991 have been another positive feature
of our balance of payments situation. Furthermore, these inflows have been
preponderantly of the non-debt creating variety, with net foreign borrowings
constituting only about 20% of the total capital inflows during 1993-95.
Capital inflows are mainly taking the form of foreign investment which has
grown by around 85% from 1990-91 to 1995-96.
2.4 INSTITUTIONAL CHANGES

In 1991 India embarked on major reforms to liberalize its economy after three
decades of socialism and a fourth of creeping liberalization. Beginning with mid-
1991, the govt. has made some radical changes in its policies related to foreign
trade, Foreign direct investment, exchange rate, industry, fiscal discipline etc.
These were major elements of New Economic Policy. The New Economic Policy
has been towards creating a more competitive environment in the economy as a
means to improving the productivity and efficiency of the system. This was to 23
Economic Development: be achieved by removing the barriers to entry and the restrictions on the growth
of firms.
The measures adopted in the new economic policy can be grouped in the three
categories, namely Liberalization, Privatization and Globalization.
2.5 LIBERALIZATION
Liberalization of economy was a key component of the New Economic Policy
(NEP). Prior to 1991, there were several types of controls on private business
enterprises imposed by the government. Some of these controls were: seeking
licensing from the government, price control, import license, foreign exchange
control, monopoly restrictions, etc. As a result of these controls there were
several hindrances in the economic growth. These included corruption, delays,
inefficiency. In the NEP the emphasis was placed on market forces, namely supply
and demand. Liberalization steps can be broadly grouped into two categories:
industrial sector reforms and financial sector reforms.
Industrial Sector Reforms: These reforms included the following:
(i) Abolition of industrial licensing and registration except for the following
five industries namely
a) defence equipments
b) Industrial explosives
c) Cigarette
d) Alcoholic drinks
e) Dangerous chemicals
(ii) Diminished role of the public sector and establishment of disinvestment
ministry to withdraw from the public sector enterprises. It has been explained
later under privatisation.
(iii) De–reservation of production areas – Many production areas hitherto reserved
for small scale industries were de-reserved.
(iv) Abolition of Monopolies and Restrictive Trade Practices (MRTP) Act 1969
- All those companies having assets worth Rs. 100 crore or more were called
MRTP firms and were subjected to several restrictions. Now these firms have
not to obtain prior approval of the Govt. for taking investment decision. Now
MRTP Act is replaced by the competition Act.
(v) Freedom to import capital goods - The industries were given freedom to
import capital goods and new technology.
Financial Sector Reforms
It includes:
(i) Banking and non banking financial institutions.
(ii) Stock exchange market – The companies were given more freedom to sell
and purchase equity shares in the stock market.
(iii) Foreign exchange market i.e. FDIs. The companies were allowed to accept
FDIs.
(iv) The role of Reserve Bank of India was changed from “a regulator” to a
facilitator. It allowed foreign institutional investors to invest in Indian
financial markets such as mutual funds and pension funds.
24
Fiscal Reforms Features of Indian Economy:
An Emerging Economy
Tax reforms constitute as the principle component of fiscal reforms. Some of the
examples of fiscal reforms are: GST (Goods and Services Tax). Prior to this, tax
structure was quite complex and evasive.
Increase in the investment limit for the Small Scale Industries (SSIs):
(i)
The role of small and medium enterprises (SME) sector was recognized as an
important contributor to the Indian economy. It was for the first time defined
in terms of a separate act, governing, promotion and development of Micro,
Small and Medium Enterprises (MSME) Act, 2006. SME’s not only play
important role in providing employment opportunities at comparatively lower
capital cost but also usher in industrialization of the rural areas. This sector
consists of about 36 million units, as of now, and provides to employment
to over 80 million persons. Some of the advantages of SME’s include low
investment requirements, operational flexibility, low intensive imports,
appreciable export earnings, development of domestic technology, etc. For
upgrading machinery and improve their efficiency in SMIs, Investment limit
of the small scale industries was raised to Rs. 1 crore in 1991
(ii) Freedom for expansion and production to Industries: Industries are free
to diversify their production capacities and reduce the cost of production.
Earlier government used to fix the maximum limit of production capacity.
No industry could produce beyond that limit. Now the industries are free to
decide their production by their own on the basis of the requirement of the
markets.
2.6 PRIVATISATION
Privatisation is the process of involving the private sector-in the ownership of
Public Sector Units (PSU’s).
The main reason for privatisation was in currency of PSU’s are running in
losses due to political interference. The managers cannot work independently.
Production capacity remained under-utilized. To increase competition and
efficiency privatisation of PSUs was inevitable. The following steps were taken
for privatisation:
(i) Sale of shares of PSUs: Indian Government started selling shares of PSU’s
to public and financial institution e.g. Government sold shares of Maruti
Udyog Ltd. Now the private sector will acquire ownership of these PSU’s.
The share of private sector has increased from 45% to 55%.
(ii) Disinvestment in PSU’s: The Government has started the process of
disinvestment in those PSU’s which had been running into loss. It means
that Government has been selling out these industries to private sector
(iii) Minimisation of Public Sector: Previously Public sector was given the
importance with a view to help in industrialisation and removal of poverty.
But these PSU’s could not able to achieve this objective and policy of
contraction of PSU’s was followed under new economic reforms. Number
of industries reserved for public sector was reduced from 17 to 2.
2.7 GLOBALIZATION
Globalisation means the interaction of the domestic economy with the rest of the
world with regard to foreign investment, trade, production and financial matters.
Following steps are taken for Globalisation: 25
Economic Development: (i) Reduction in tariffs: Custom duties and tariffs imposed on imports and
exports are reduced gradually just to make India economy attractive to the
global investors.
(ii) Long term Trade Policy:
- Liberal policy
- All controls on foreign trade have been removed
- Open competition has been encouraged
- Partial Convertibility of Indian currency:
Partial convertibility can be defined as to convert Indian currency (up to specific
extent) in the currency of other countries. So that the flow of foreign investment
in terms of Foreign Institutional Investment (FII) and foreign Direct Investment
(FDI).
This convertibility stood valid for following transaction:
(a) Remittances to meet family expenses
(b) Payment of interest
(c) Import and export of goods and services.
(d) Increase in Equity Limit of Foreign Investment:
Equity limit of foreign capital investment has been raised from 40% to 100%
In 47 high priority industries foreign direct investment (FDI) to the extent of
100% will be allowed without any restriction. In this regard Foreign Exchange
Management Act (FEMA) will be enforced.
If the Indian economy is shining at the world map currently, its sole attribution
goes to the implementation of the New Economic Policy in 1991.
Check your Progress A
1. Which of the following statements are True or False?
(i) After British arrival in India Indian economy improved a lot.
(ii) India’s key growth factors include young and rapidly growing working
age population.
(iii) New economic policy abolished Indian licensing.
(iv) New economic policy assigned greater role to PSUs.
(v) Under NEP, the tariffs on imports of capital goods were increased.
2. Name the three sectors covered in liberalization of economy.
3. Name three regions why privatization of PSU became inevitable.
2.8 STRUCTURAL CHANGES

The 1991 balance of payments crisis led to India's 'plunge into structural reforms.
The strategy of reforms introduced in India in July 1991 presented a mixture of
macroeconomic stabilization and structural adjustment. It was guided by short-
term and long-term objectives. Besides this, structural reforms were initiated
in the field of trade, industry and the public sector. The purpose of economic
development is not only to increase the output, but also to change the composition
of output. As the community’s needs are satisfied, new wants inevitably appear
26 and these have to be met through supplies of new types of products. Moreover,
while some new demands are met through higher imports, some new supplies get Features of Indian Economy:
An Emerging Economy
diverted towards exports. Thus structural change in an economy consists of change
in the composition of output and there are four sources of the same. They are:
(viii) Change in Final Demand
(ix) Change in Exports
(x) Change in Import Structure
(xi) Change in Technology
During reforms structural adjustment programs and loans were arranged
through the International Monetary Fund (IMF) and the World Bank. The Indian
Government was to review its trade policies to allow more foreign investment and
reduce trade restrictions so that India's economy could be restored to its former
level. Import tariffs underwent significant reductions and import/export licensing
system procedures were simplified. The opening up of capital markets to include
more foreign participation has allowed multinationals companies entrance into
otherwise untapped markets.
The Indian economy has responded vigorously to a program of stabilisation and
reform measures started in 1992. The Indian Government took drastic action
including devaluation, the imposition of higher interest rates, fiscal and monetary
restraint and import compression. In succeeding budgets long term measures were
introduced which removed the protection for Indian industry and commerce from
international competition.
2.9 MAJOR ISSUES AND CHALLENGES OF

INDIAN ECONOMY
2.9.1 Poverty
Although there is no unanimity about the definition of poverty, it can be defined
in terms of the “deprivation of certain basic necessities of life”, but beyond that,
there is no unanimity as to what constitutes poverty. Poverty should be conceived
in terms of human needs which are considered essential by the society and are
capable of being measured objectively. A person may then be regarded as poor
if he is not in a position to meet out these needs. The concept of poverty which
implies non-fulfilment of the needs, considered essential for human beings, is
known as absolute poverty. In measurement, it involves stipulation of a minimum
level of per capita consumer expenditure which is adequate for purchasing the
goods and services needed for the purpose. People having expenditure less
than this are considered to be poor. Further in its application there are certain
problems about the inclusion of essential needs. While some writers confine
themselves to food alone, others include additional items like shelter, health and
education. Robert S. McNamara, for example, in the 1978 World Development
Report of the World Bank, regards poverty as a condition of life characterised by
malnutrition, illiteracy, disease, squalid surroundings, high infant mortality and
low life expectancy as to be beyond any reasonable definition of human decency.
The other concept of poverty is a relative one. Between two households or two
persons, one may be considered as poor while the other, on the basis of income
comparison, may not be considered poor. But the entire definition of poverty
will be diluted by this approach if both are satisfying the minimum basic needs
of society. In this connection, persons having standard of living below a certain
cut off point, fixed in the light of the income distribution of the population, are 27
Economic Development: viewed as poor. For instance, poverty level may be fixed at half the median point
of the distribution or it may be measured in terms of full dispersion between the
highest and lowest standards. In this connection it was pointed out by Prof. Peter
Townsend, “Poverty must be regarded as a general form of relative deprivation
due to the maldistribution of resources”. Through this definition of relative
poverty, the inequality in the distribution of income and assets can be measured.
Further, the problem of poverty can be linked “to the problem of unemployment,
disguised unemployment, under-employment, etc. Many of our marginal farmers,
landless labourers and rural artisans are below the poverty line even though they
are reported as employed. Therefore, it can be said that provision of employment
is not a sufficient condition for the removal of poverty.
Niti Aayog constituted a Task Force in March 2015. Following were the broad
issues before the Task Force:
• To measure poverty in India
• To assess the need of an official poverty line
• Combating poverty
• Employment-intensive sustained rapid growth,
• Making social programmes more effective and
• New approaches.
In 2005, the Government of India appointed the Tendulkar committee to take
a fresh look at the poverty lines. Reporting in 2009, the Tendulkar Committee
revised upward the rural poverty line. After the criticism of the Tendulkar
committee report, another committee, Rangarajan Committee was constituted
in 2012 which submitted its report in June 2014. The committee recommended
raising further both the rural and urban poverty lines. The percent population
below poverty line (2011-2012) according to the Tendulkar and Rangarajan
reports are shown in Figure 2.1.
Precent Population below Poverty Line (2011-12) at
Tendulkar and Rangarajan Lines
Figure 2.1. Percent population below poverty line.

28
The percent population below poverty line for the years 1993-94, 2004-05 and Features of Indian Economy:
An Emerging Economy
2011-12) according to the Tendulkar methodology are shown in Figure 2.2
Poverty: Rural and Urban (93-94 to 11-12)
(As per Tendulkar Methodology)
Figure 2.2. Rural and urban poverty percentages for the years 1993-94,
2004-05 and 2011-12.
The percentage of the poverty personnel according to the social groups are shown
in Figure 2.3.
Poverty by Social Groups (93-94 to 11-12)
(As per Tendulkar Methodology)
Figure 2.3. Poverty by social groups for the years 1993-94, 2004-05 and
2011-12
For combating poverty, it was realised that two-pronged strategy will have to
be followed:
1. Modernize agriculture and accelerate agricultural growth
2. Create job opportunities in industry and services.
29
Economic Development: 2.9.2 Unemployment
Indian economy is a developing economy and the problem of unemployment is
very grave in India. But here the nature of unemployment differs from most of
the developed western countries. In western countries, unemployment is due to
shortfall in demand. More or less it is a form of cyclical unemployment. It implies
that in such economies, machines become ideal and demand for labour falls
because the demand for the products of industry is no longer there. Thus, most
of Keynesian remedies concentrated on measures to keep the level of effective
demand sufficiently high so that the economic machine does not slacken the
production of goods and services.
But more serious than cyclical unemployment or frictional unemployment in an
undeveloped economy like India, is the existence of chronic under-employment
mainly in the rural sector and the existence of educated unemployment in the
urban areas. There is disguised unemployment by which a situation we mean
where the productivity of workers is almost zero or near zero. This contention of
zero productivity is a very controversial issue among the economists. But finally
it has been concluded that productivity of employed disguised worker is low.
Educational unemployment is due to the gap between manpower planning and
number of educated personnel and is mainly due to the structural inadequacy to
absorb all the educated persons in the system.
Therefore, it is quite clear that unemployment in underdeveloped economies like
India is not the result of deficiency of effective demand in the Keynesian sense but
a consequence of shortage of capital equipment or other complementary resources.
Poverty in India is also associated with unemployment, unlike in industrially
advanced countries. “The miseries of unemployment in India are sometimes partly
cushioned by the institution of joint family. Yet for a given family, the lack of
adequate employment opportunities for its adult members and a non-earner who
is dependent are among the common characteristics of poverty”.
It has been said that unemployment is mainly the result of emphasis on heavy
industry during the planning process. Early planners had almost a mystic faith
in the twin gods of technology and heavy industry which has turned out to be
misplaced. Western technology, which developed in the west in response to a
shortage of labour and the consequent need to replace men with machine, provides
no short cut to prosperity in countries with a large number of underemployed and
undernourished labour and an acute shortage of capital.
Planners and economists have often debated whether employment is a by-product
of development and economic growth or whether employment creating policy
should be a primary objective of the planning process. The primary objective
of such a policy has to be the maximisation of economic welfare of all. The
attainment of this objective would require structural changes in the development
process.
Thus, the problem of unemployment cannot be viewed as a residual one and
all measures and policies concerning economic affairs of the country have to
be directed in such a way that they aim at the elimination of various forms of
unemployment.
Manpower planning is a part of the entire labour force organisation which requires
policy and programmes for the development and effective utilisation of human
capital on its optimum basis. This process involves the available and future supply
30
of human capital, simultaneously, while keeping close watch on the demand Features of Indian Economy:
An Emerging Economy
pattern. Thus, manpower planning is an inter-disciplinary subject. It is intimately
connected with social and economic factors of demographic composition.
There is no formal report by the Niti Aayog about the unemployment data.
However according to the National Sample Survey (NSS) Office’s Periodic
Labour Force Survey, the country’s unemployment rate was at a 45-year-high
of 6.1 per cent in 2017-18. This reported generated much controversy and Niti
Aayog claimed that the data released by NSS were not verified.
2.9.3 Inequalities in Income Distribution
Income inequality is a significant disparity in the distribution of income between
individuals, social groups, populations, or countries. It is a major factor of social
stratification and social class. Other elements included in inequalities are wealth,
political power, and social status. Income is a major determinant of quality of
life, affecting the health and well-being of individuals and families, and varies
by social factors such as sex, age, and race or ethnicity.
As per the 'World Inequality Report 2022', India is among the most unequal
countries in the world, with rising poverty and an 'affluent elite.' The report
highlights that the top 10% and top 1% in India hold 57% and 22% of the total
national income respectively while the bottom 50% share has gone down to 13%.
According to another report by the Johannesburg-based company New World
Wealth, India is the second-most unequal country globally, with millionaires
controlling 54% of its wealth. In India, the richest 1% own 53% of the country’s
wealth, according to the latest data from Credit Suisse. The richest 5% own 68.6%,
while the top 10% have 76.3%.At the other end of the pyramid, the poorer half
held a mere 4.1% of national wealth. The Credit Suisse data shows that India’s
richest 1% owned just 36.8% of the country’s wealth in 2000, while the share of
the top 10% was 65.9%. Since then they have steadily increased their share of
the pie. The share of the top 1% now exceeds 50%.
The average national income of the Indian adult population is Rs 2,04,200.
Here, the bottom 50% earns Rs 53,610 while the top 10% earns Rs 11,66,520,
over 20 times more.
Causes of Inequalities
Major causes of the inequalities are te following:
(i) Inheritance: It plays a significant role in inequality. The persons born in
rich family have a significant advantage. If they are prudent enough, they
maintain the lead. On the other hand, people born in poor families are at
disadvantage in this respect.
(ii) Difference in natural traits: Different people have different talents and
initiatives. The people gifted with natural traits and entrepreneurship multiply
their prosperity as compared the people who lack these qualities.
(iii) Opportunities of higher education and skill development: Some people
get opportunities of better education and skill development. With this
background, they succeed in getting jobs of higher emoluments.
(iv) Family influence: It is often found that family influence plays important
role in getting one a lucrative job.
31
Economic Development: Consequences of Inequality
The consequences of inequality are summarised in diagram 1.
Source: Civilsdaily.com
(i) Social unrest: Inequality in society creates two classes: ‘haves’ and ‘have-
not’. The people who are deprived of essential requirements feel frustrated
and create unrest. The caste-based agitations demanding reservations in
jobs and other fields are the examples of the social unrest. Thus inequality
of incomes is an important cause of social and political instability.
(ii) Rise of economic populism: This word refers to irrational economic policies
followed by the government to gain populism. Waiving off farmers’ loans,
distribution of freebies during the elections are some of the examples of
economic populism.
(iii) Derailing of the economic reforms: It is related to the economic populism.
Under the pressure of ‘have-nots’ the government is not able to pursue
economic reforms which strengthen economy.
(iv) Distress migration: Millions of footloose and impoverished men, women
and children in India, migrate from the countryside each year to cities
– in crowded trains, buses, trucks and sometimes on foot – their modest
belongings bundled over their heads, in search of the opportunities and
means to survive. They themselves live under pathetic conditions and at the
same time, they create problems for the civic authorities of the cities.
(v) Rise in intergenerational inequality and poverty: Unfortunately, due to
various reasons, poverty of one generation percolates to the next generation
32 and it becomes perpetual.
(vi) Increase burden of subsidies on the government: It is related to economic Features of Indian Economy:
An Emerging Economy
populism and derailing of economic reforms. In democracy, the party in
power is compelled to give different types of subsidies to keep its vote-bank
intact. Overall, it harms economic growth.
(vii) Exploitation: There is exploitation of the poor. They are compelled to work
on lower wages. At the same time, they are not given fringe benefits, such
as paid-leave, healthcare, insurance in case of accident, etc.
Measures to Reduce Inequalities
As discussed above, inequalities in income distribution cause many social
and political problems. In view of this, the government endeavours to reduce
inequalities by following appropriate policy matters. The important measures
followed for reducing inequalities are as follows.
(i) Fixing minimum wages: Guaranteeing a minimum wage consistent with
a minimum standard of living is an important step.. In India, the Minimum
Wages Act was passed in 1948 in pursuance of which minimum wages
are fixed for agricultural labour and labour in what are called the ‘sweated
trades’. The minimum wage is revised from time to time in accordance with
the price index. Depending on the local conditions, minimum wages may be
different in different States. For example, according to the Delhi minimum
wage notification (Oct. 2021), the minimum wages for the unskilled, semi-
skilled and skilled labour were Rs. 618/-, 681/- and 749/- respectively.
(ii) Social security: The government must ensure adequate social security
schemes which must include provision of free education, free medical and
maternity aid, old-age pension, liberal unemployment benefits, sickness and
accident compensation, provident fund and schemes of social insurance,
etc. As an example, recently, the State and Central governments provided
compensation to the kin of the persons died due to Covid.
(iii) Need to promote labour-intensive manufacturing: There is need to
promote labour-intensive manufacturing like; Construction, Textile,
Clothing, Footwear etc. to reduce rising inequalities. The Labour-intensive
manufacturing has the potential to absorb millions of people who are leaving
farming.
(iv) Skill development: The development of advanced skills among the youth is
a prerequisite if India wants to make use of its demographic dividend. The
skilling of youth by increasing investment in education is the only way we
can reduce inequality. India needs to become a Skill-led economy.
(v) Progressive Taxation: Progressive Taxation on the rich and the luxuries will
help reduce income inequalities. Other direct taxes like the super tax, excess
profits tax, and capital gains tax and limitation of dividends, etc., may also
be imposed.
(vi) High Taxes on Luxuries: There should be heavy taxation on the consumption
of luxuries. This will take away from the rich the power to display their
wealth. This will also take away the incentive to amassing wealth for
exclusive private enjoyment. Expenditure tax in India sought the same
objective. (This tax has, however, been abolished.
33
Economic Development: (vii) Ceilings on Agricultural Holdings and Urban Property: Ceilings on
agricultural land holdings can be imposed to reduce inequality between big
and small farmers. This has been done in India and recently the ceilings have
been lowered to 10-18 standard acres. The main purpose of land ceilings is
to bring about a wider and equal ownership and use of land.
Similarly, a ceiling on urban property can be imposed so that inequalities in urban
areas can also be toned down. More radical socio¬economic reforms seem to be
in the offing in India.
There is also need of policies and some sort of machinery by the government,
which may provide equal opportunities to all rich and poor in getting employment
or getting a start in trade and industry. In other words, something may be done to
eliminate the family influence in the matter of choice of a profession. For example,
the government may institute a system of liberal stipends and scholarships, so that
even the poorest in the land can acquire the highest education and technical skill.
2.9.4 Regional Disparities
Regional imbalances or disparities means wide differences in per capita income,
growth rate, per capita consumption, investment rate, literacyrates, health and
education services, levels of industrialization. This is prevailing between different
regions in the country. Regions may be either States or regions within a State.
The regional disparities as per some important criteria are shown in the following
Table.
Source: https://www.yourarticlelibrary.com/india-2/regional-disparities-in-
34 india-top-8-indicators/63004
There are diverse geographical factors responsible for disparity among states. Features of Indian Economy:
An Emerging Economy
Among these, it has been seen that adverse climate and proneness to flood are
two factors responsible for poor rate of economic development of different
regions of the country. These are reflected by low agricultural productivity and
lack of industrialization. Thus these natural factors have resulted uneven growth
of different regions of India.
Historically British regime is also responsible for creating regional imbalances in
India. They developed only those earmarked regions of the country which as per
their own interest were possessing rich potential for prosperous manufacturing
and trading activities. They mostly preferred to concentrate their activities in
two states like West Bengal and Maharashtra and more particularly to three
metropolitan cities like Kolkata, Mumbai and Chennai. They concentrated all
their industries in and around these cities neglecting the rest of the country to
remain backward.
Locational advantages are playing an important role in determining the
development strategy of a region. Due to some locational advantages, some
regions are getting special favour in respect of site selections of various
developmental projects.
While determining the location of iron and steel projects or refineries or any heavy
industrial project, some technical factors included in the locational advantage
are getting special considerations. Thus regional imbalances arise due to such
locational advantages attached to some regions and the locational disadvantages
attached to some other backward regions.
The most important indicator of regional imbalance in India is per capita income.
Punjab, Haryana, Maharashtra, Gujarat and Tamil Nadu have more than average
per capita income of India. Bihar has the lowest per capita income. States of the
southern region of India are Tamil Nadu, Andhra Pradesh, Kerala etc.
To remove regional disparities, various five year plans aimed at the expansion of
power, transport, irrigation, education and training facilities and the development
of village and small industries. Some backward areas in different states were
given special considerations for location of industries
In our planning process from second five year plan onwards, balanced growth
was one of the major objectives of economic planning in India but regional
disparities increased due to lack of specific backward state development policies
rather, in the process of implementation , planning mechanisms has enlarged the
disparity between the developed states and less developed states of the country.
There was more allocation plan outlay relatively to developed states as compared
to less developed states. From First Plan to the Seventh Plan, Punjab and Haryana
have received the highest per capita plan outlay, all along. The other three
states like Gujarat, Maharashtra and Madhya Pradesh have also received larger
allocation of plan outlays in almost all the five year plans.
On the other hand, the backward states like Bihar, Assam, Orissa, Uttar Pradesh
and Rajasthan have been receiving the smallest allocation of per capita plan
outlay in almost all the plans. Due to such divergent trend, imbalance between
the different states in India has been continuously widening, inspite of framing
achievement of regional balance as one of the important objectives of economic
development in the country.
Inter-state economic and social disparities in India have been increasing in spite
of various governmental measures to develop backward areas. The increased 35
Economic Development: disparities is in terms of demographic indicators, female literacy, state domestic
product and poverty, development and non-development expenditure by
state government, shares in plan outlay, investments, banking activities and
infrastructure development.
Check Your Progress B

1) Name four factors covered under structural changes in the economy.
........................................................................................................................
........................................................................................................................
........................................................................................................................
2) Define poverty.
........................................................................................................................
........................................................................................................................
........................................................................................................................
i) The concept of poverty is a relative one.
ii) The early emphasis on nearly industry was one of the reasons of
unemployment.
iii) India is the second most unequal income distribution country globally.
iv) Income inequalities can be reduced by lowering the taxation on the rich
and luxuries.
v) The skilling of youth by increasing investment in education is the only
way to reduce inequality.
2.10 LET US SUM UP

After India got independence in 1947 the process of rebuilding the economy
started. However, it was mostly centralized and the period from 1947 – 1991
was termed as the licence raj because the successive governments followed
protectionists economic policies. This trend led to a balance of payments crisis in
the year 1990. The year 1991 turned out to be watershed in the Indian economy
when the government of India announced major liberalization policies in Indian
economy.
Under the new economic policy some radical changes related to foreign trade,
foreign direct investment, exchange rate, industry, fiscal discipline, etc were
made. The NEP has been towards creating a more competitive environment
in the economy as a means to improving the productivity and efficiency of the
system. Under NEP liberalization was a key component. It included industrial
sector reforms, financial sector reforms and fiscal reforms.
The second component of NEP was privatization which included sale of shares of
PSUs, disinvestment in PSUs and diminished role of PSUs. The third component
of NEP namely globalization included reduction in tariffs and long term trade
policy. Under the latter all controls on foreign trade have been removed; open
competition is encouraged and partial convertibility of Indian currency permitted.
The NEP presented a mixture of macro economic stabalization and structural
36
adjustment. The structural changes include change in final demand, change in Features of Indian Economy:
An Emerging Economy
exports, change in import structure and change in technology.
Inspite of the Indian economy responding vigorously and positively to the new
changes, it still suffers from certain issues. The major issues controlling Indian
economy comprise poverty, unemployment, inequalities in income distribution
and regional disparities.
2.11 KEY WORDS

Emerging economy – The economy that registers high growth.
Liberalization – The process of removing controls and giving more freedom to
do business.
Privatization - The process of transferring government owned enterprises to
the private parties.
Globalization – The integration of national economy with global economy.
Inequalities – Disparity in the distribution of income and other national assets
between individuals and social groups.
Labour intensive activities – The activities that employ more labour such as
construction, textile, clothing, footwear, etc.

A1 i) False ii) True iii) True iv) False v) False
B3 i) True ii) True iii) True iv) False v) True

1. “Indian economy is growing at an unprecedented rate”. Elaborate.
2. What do you mean by liberalization? Explain different types of liberalization
provided under the new economic policy.
3. Explain different steps taken for the globalization of the Indian economy.
4. “The concept of poverty is relative one”. Elaborate.
5. What is meant by inequalities in income distribution? How can it be
overcome?
6. What are the main causes of regional disparities? How can they be overcome?
37
Concept and Measurement UNIT 3 GROWTH: PRE & POST REFORMS
Structure
3.0 Objectives
3.1 Introduction
3.2 National Planning Committee
3.3 Growth of the Indian Economy during Plans : Early Phase
3.4 An Assessment of Indian Economy before Economic Reforms
3.5 Economic Reforms
3.6 Growth of Indian Economy in Post Planning Era
3.7 Let Us Sum Up
3.8 Key Words
3.0 OBJECTIVES
After going through this unit, you will be able to:
• Describe the growth of Indian Economy in Planning Era;
• Discuss the growth of Indian Economy before Reforms;
• Evaluate the progress of Indian Economy after reforms; and
• Explain growth of Indian Economy in Post Planning Era.
3.1 INTRODUCTION
During the struggle of India’s freedom, the leaders has committed that India would
after attainment of independence, launch a programme of planned development
of the country. In pursuance of this objective, the Indian National Congress, in
1938, appointed the National Planning Committee with Jawaharlal Nehru as the
chairman to draft a plan for the development of India. The Committee considered
all aspects of planning and produced a series of reports on various subjects related
with economic development. The Chairman of the Committee, Jawaharlal Nehru,
became the first Prime Minister of India. His ideas and the policies initiated
for the planned development of India reflected the consensus arrived at in the
deliberations of the National Planning Committee. The Committee rejected the
Soviet model of total ownership of the means of production by the state on the
one hand and the free capitalist enterprise model on the other hand. It opted for
mixed economy framework as the most suitable economic environment for India.
In this Unit, you will learn growth of Indian economy during plans period, before
and after economic reforms as well as during post planning era.
3.2 NATIONAL PLANNING COMMITEE

The Committee observed following:
a) The state should own or control all key industries and services, mineral
resources, railways, water ways, shipping and other public utilities and, in
38 fact all those large scale industries which were likely to become monopolistic
in character. In other words, the Committee specified the industries which Growth: Pre and Post
Reforms
were to be owned or controlled by the public sector;
b) The remaining industries were to be in the private sector, but could be called
upon to work in national interest. In case, the state at any stage felt that the
monopolistic activities of private businessmen worked against national
interest, it reserved the right to take over such industries;
c) The Committee strongly held the view that it was not possible to draw a
scheme of national planning without giving a primary place to agriculture;
and
d) The Committee aimed at doubling the standard of living of the people in 10
years.
The government, therefore, opted for mixed economy within the parameters
laid down in the Directive Principles of the Indian Constitution. The Directive
Principles stated:
“The State shall, in particular, direct its policy towards securing –
a) that citizens, men and women equally, have the right to an adequate means
of livelihood.
b) that the ownership and control of the resources of the community are so
distributed as best to subserve the common good.
c) that the operation of the economic system does not result in the concentration
of wealth and means of production to common detriment.
The distinguishing feature of the Indian mixed economy was that it aimed to
deliberately enlarge the sphere of the public sector so as to cover areas of defence,
heavy and basic industries, infrastructure – both economic and social- and public
utilities. For development of the economy, the primary role was given to the
public sector. It was, therefore, referred to as the engine of growth.
The mixed economy framework did permit the private sector to operate in
the remaining areas. However, the state emphasised that private sector should
reconcile the element of self-interest with social interest. In-case, the private sector
failed to subordinate its greed for profit maximisation and continued unbridled
exploitation of the working masses, the state possesses the right to take over the
control of such sector(s) of the economy. The private sector had, therefore, to
work within the limits of a regulatory system so that it did not seriously come
in conflict with social interest. The state, following the Directive Principles,
decided to limit ownership in areas where it felt that ownership came in conflict
with social interest.
In agriculture, for instance, zamindari system was abolished and the ownership
of surplus lands acquired by the state after payment of compensation were
transferred to small farmers and/ or landless labourers. The legislation provided
for ceiling on holdings. The purpose of the agrarian legislation was that land
being the principal source of livelihood in rural areas, its ownership should be
more evenly distributed.
In the sphere of small scale industries, private ownership was accepted. The
state decided to facilitate the growth of such industries by providing credit and
marketing facilities. These industries were considered important from the point
of view of providing employment to a very large number of persons.
39
Economic Development: To direct investment in the desired lines of production, the state decided to
nationalise banking and insurance. If it is left to the private sector, investment
would be driven by market forces based on profit motive. But the areas of profit
maximization may not be areas of maximising social welfare. For example, private
sector was not willing to invest in economic infrastructure such as multipurpose
hydro-electric projects, irrigation, roads and communication. Similarly, private
sector may not provide adequate investment in education and health facilities so
that access to education and health facilities becomes available to the poor and
deprived sections of the society.
The state, therefore, decided to undertake the development of economic
infrastructure energy, irrigation, transport and communication – in the public
sector. It also sought to provide social infrastructure in the form of education
and health so that the poor are enabled to acquire these facilities either free or
at a very low and affordable cost. The network of schools, colleges, technical
training centres, primary health centres, dispensaries, hospitals, etc., has to be
planned in the public sector.
It was considered necessary that the public sector should undertake investment
in defence, heavy and basic industries. Since these industries required lumpy
investment and has a long gestation period, the private enterprise was unwilling
to undertake investment in these areas. It sought investment in areas of short
gestation and maximum profit. The state, therefore, planned the development of
defence, heavy and basic industries in the public sector.
The mixed economy framework in India was particularly marked with the
deliberate development of the public sector in (a) defence, heavy and basic
industries, (b) the development of economic and social infrastructure and (c) in
controlling the commanding heights of the economy, viz., banking and insurance.
Thus, the environment provided by the mixed economy framework permitted the
co-existence of both the public and private sectors on an enduring basis. Both
had to work for the attainment of the socio-economic goals of planning.
In 1950, the Government of India set up the Planning Commission with the
objective of making an assessment of the resources of the country, both physical
and human and formulate a plan for the development of the country. The Planning
Commission laid down the long-term goals of planning. They were:
i) To increase production to the maximum possible extent so as to achieve
higher levels of national and per capita income;
ii) To achieve full employment;
iii) To promote industrialisation of the country with special emphasis on the
growth of heavy and basic industries so as to achieve self-reliance;
iv) To reduce inequality of income and wealth; and
v) To establish a socialist pattern of society based on equality and social justice
and absence of exploitation.
3.3 GROWTH OF THE INDIAN ECONOMY

DURING PLANS: EARLY PHASE
To solve the immediate problems of shortage of food and control of inflation,
the First Five Year Plan (1951 – 56) adopted the strategy to achieve food self-
sufficiency and also control inflation. For this purpose, it was decided to increase
40
irrigation. The strategy worked and India was able to reduce her imports of food Growth: Pre and Post
Reforms
grains to just 0.5 million tonnes by the end of the year 1956. As a result of increase
in food grains production and utilisation of capacities in industry, shortages of
food grains and consumer goods were taken care of. This helped the country to
stabilise the price level and control inflation. Thus the country at the end of the
First Plan presented a picture of an economy which had overcome shortage of
food and brought about price stability. This provided a climate for adopting a
strategy for industrialisation of the economy.
The strategy emphasised the rapid development of heavy industry so as to build
an industrial base of the economy. The objective was to make the economy self-
reliant in terms of the capital –goods sector. Arguing for the acceptance of the
strategy, the Second Five Year Plan stated:
“In the long run, the rate of industrialisation and the growth of the national
economy would depend upon the increasing production of coal, electricity, iron
and steel, heavy machinery, heavy chemicals and heavy industries generally –
which would increase the capacity for capital formation. One important aim was
to make India independent as quickly as possible of growth of producer goods so
that the accumulation of capital would not be hampered by difficulties in securing
suppliers of essential producer goods from other countries. The heavy industry
must, therefore, be expanded with all possible speed.”
The main arguments which provided justification for heavy industry strategy were:
a) The British rule deliberately denied the development of heavy industry and
kept India, primarily an agrarian economy as an appendage of the British
colonial system.
b) Indian industrial structure had a narrow base, mainly dependent on consumer
goods industries. It was necessary to enlarge this base by the development
of heavy industries and infrastructure. A diversified industrial structure, it
was argued, could absorb a large proportion of labour force. This would also
reduce dependence of excessive population for its livelihood on agriculture.
c) Productivity of labour being higher in manufacturing than in agriculture, and
industrialised economy promised to bring about a rapid increase in national
and per capita income.
d) Rapid industrialisation was essential, not only for the development of
agriculture, but also for development of all other sectors of the economy.
Role of public and private sector - Since the private sector was not likely to
undertake investments in heavy industry sector which has a long gestation period,
but had low profitability, the government decided to give this responsibility to
the public sector. The government conceived of the public sector as the engine of
growth of heavy industries and infrastructural facilities. The role of the private
sector was complementary to the public sector in expanding the production of
consumer goods and such other areas in which public sector investment was
directed.
However it was realized that overemphasis on the heavy industry sector, would
not enlarge employment significantly, since such investments are capital intensive.
It would, therefore, be necessary that in order to encourage the production of
consumer goods and generate more employment, investment be made in small
industry.
41
Economic Development: However, there were certain shortcomings noticed in the process of implementation:
1. Although agriculture did progress, but with relatively small allocation for
agriculture, the progress could not be considered adequate. Development of
agriculture required greater investment in irrigation, electricity, fertilisers,
implements, pesticides etc.
2. Heavy industry strategy was heavily dependent on imports for capital
intensive goods. It, therefore, developed a capital – intensive pattern of
development. This resulted in a relative neglect of small industries and
industries producing consumer goods. Thus, heavy industry strategy created
balance of payments difficulties on the one hand and failed to absorb the
rapidly growing labour force, on the other. This resulted in a failure to enlarge
employment adequately.
3. The public sector expansion led to the emergence of high cost economy
with much less emphasis on efficiency. Both the undertakings of the Central
Government and those of the State Government like state electricity boards,
road transport undertakings and irrigation works etc. incurred losses year
after year and the state exchequer was required to pay these losses out of
the general tax revenues of the government.
4. Failure of exports to rise commensurate with the increase in imports
necessitated by the expansion of the capital goods sector, resulted in the
persistence of trade deficits and these deficits increased in magnitude with
every successive plan.
Achievements and Failures of Planning during 1951 – 1990
As a result of 40 years of planning, Indian economy recorded progress on various
fronts. It would, therefore, be desirable to list the major achievements of the
Indian economy:
1. Growth of national and per capita income: During the first 30 years (1950
– 51 to 1980-81), national income grew at an average rate of 3.4 per cent
per annum, but per capita income grew barely by 1.2 per cent per annum.
In terms of raising the level of living of the poor, this was not sufficient.
However, compared to the British period (1900-1950), when national income
increased merely at the rate of 0.5 per cent annually, the achievement in the
planning areas is significant.
Table 3.1: Growth of national and per capita income (At 1980-81 prices)
Compound Annual Net National Product Per Capita Income
Growth Rate
1950 – 51 to 1960-61 3.8 1.8
1960-61 to 1970-71 3.4 1.2
1970-71 to 1980-81 3.0 0.7
1950-51 to 1980-81 3.4 1.2
1980-81 to 1990-91 5.4 3.2
Source: CSO, National Accounts Statistics
The economy showed a much better performance during 1980-81 to 1990-91

and the national income grew at the rate of 5.4 per cent annually, and this helped
to push up the growth rate of per capita income of 3.2 percent per annual which
was quite significant. There is a need to not only maintain high growth rate of
national income, but also to raise it further, if serious impact on the level of living
42 has to be made.
2. Growth of savings in India : The rate of saving in India was just 10.4 per Growth: Pre and Post
Reforms
cent of gross domestic product in 1950-51 and as a result of 40 years of
planning, the rate of savings reached a fairly high level of 24.3 per cent in
1991-92. This is a matter of great satisfaction for the economic development
of the country.
3. Rise in per capita cereal consumption: The per capita cereal consumption
which was just 334 grams per day in 1951 increased to 471 grams in 1991 –
a rise by 41 per cent. This is a matter of satisfaction, but unfortunately, the
per capita availability of pulses declined from 61 grams to 40 grams per day.
However, the overall availability of food grains showed an improvement.
4. Improvement in the per capita consumption of several basic consumer
goods: During 1950-51 to 1990-91, per capita consumption of edible oils
and vanaspati increased from 3.1 kgs. to 6.4 kg. The per capita consumption
of mil improved form 47 kgs. In 1950-51 to 66.5 kgs. In 1990-91. The per
capita consumption of cloth increased from 11 meters in 1951 to 30 meters
in 1991. It may be noted that there was a much greater use of man-made
fabrics by the people which has greater durability.
Besides this, there was much greater use of the amenities of life by a large
proportion of the population. The use of bicycles, electric fans, sewing
machines, refrigerators, scooters and mopeds, passenger cars, dry cells,
radios and television etc. enriched the life of the people.
On the basis of the above analysis, it can be concluded that there has been
increase in the consumption of necessaries of life by the common man,
though it may not be equally spread over all regions and groups.
5. Impressive industrialization action of capital goods sector with the help
of the public sector: During the British period, capital goods sector was
not developed at all. Some consumer goods industries such as matches,
sugar, cotton textiles, paper jute etc. were permitted to grow under the
umbrella of protection. It was, therefore, essential that in a programme of
industrialisation of the economy, the capital goods sector be developed. For
this purpose, since private sector was not forthcoming to undertake heavy
investment in capital goods industries, the responsibility was given to the
public sector. As a consequence, heavy goods industries like steel, cement,
locomotives, engineering, machine goods, defence industries, air craft
manufacture, shipping were developed. Power and transport development
was also accelerated. As a consequence, with an impressive industrialisation
of the economy, India was able to provide an industrial base to its economy.
6. Development of economic infrastructure: Another important achievement
of vital significance is the creation of economic infrastructure in the form of
energy, transport and irrigation which provided the base for a programme of
industrialisation. In 1950-51, road length in India was 400 thousand kms.
and this increased to 1,770 thousand kms. by 1984-85 – a more than fourfold
increase.
Similarly, there has been a rapid increase in irrigation, In 1950-51, the total
irrigated area was only 22.6 million hectares and in 1991-92, this increased
to 72.8 million hectares. As a percentage of gross cropped areas , as against
16.7 per cent in 1950-51, irrigated area accounted for 31 per cent in 1991-
92. This sharp increase in irrigation potential gave a big boost to increase
production in agriculture.
43
Economic Development: There has been a tremendous increase in power generation and consumption
of energy. Electric energy generation was merely 6.6 billion kWh in 1950-51
and it increased to 269.4 billion kWh in 1990-91. This was a tremendous
achievement. Consequently, our production potential in agriculture, industry
and service sector was considerably enlarge. Per capita consumption of
electric energy has also risen from 13.2 kWh in 195-51 to 220 kWh in 1990-
91. This strengthened the infrastructure of the economy.
7. Achievement of self-sufficiency in food grains and raw materials: With the
development of irrigation facilities, it was possible to undertake application
of high yielding varieties (HYV) of seeds with chemical fertilizers. This
water-seeds-fertilizer technology in agriculture, popularly known as green
revolution helped to boost the production of food grains from 55 million
tonnes in 1950-51 to 176 million tonnes in 1990-91. As a consequence, India
became self-sufficient in food grains and stopped imports of food grains. Not
only that substantial increased in production of sugarcane, jute, cotton etc.
were also achieved. This helped to reduce our dependence for agricultural
raw materials on foreign countries and encouraged the production of our
agro-based industries.
8. Diversification of industrial structure: There has been a rapid diversification
of industrial infrastructure in India during the 40-year period. New industries
such as steel, cement, machine tools, petroleum refining, fertilizers, power
transformers, locomotives, tractors, commercial vehicles, diesel engines,
dry cells, drugs and chemicals have sprung up. These industries were either
in a state of infancy or had not been started in the pre-independence period.
This has meant a diversification of industrial structures. All these industries
required trained scientific and technical personnel to manger them. India has
developed a very large technical and managerial cadre to meet the needs of a
diversified industrial structure. It is claimed that India has the fourth largest
pool of technical manpower in the world. This has reduced our dependence
on foreign experts. Not only that, India has started exporting experts in
engineering and technology to Middle East and African countries. This is
matter of legitimate pride for our country.
9. Diversification of exports and import substitution: As a result of
industrialisation, India’s dependence on foreign countries for the import of
capital goods had declined. Similarly, a large number of consumer goods
imported earlier are being produced within the country. This has led to import
substitution. Consequently, the composition of our exports has changed in
favour of manufactures, mineral ores and engineering goods. The share of raw
materials has considerably declined. This is an index of the industrialisation
of our economy.
To conclude, it may be stated that India made significant achievements
during 40 years of planning. These included growth of national and per
capita income, a sharp increase in rate of saving, the development of
economic infrastructure in the form of energy, irrigation, transport and
power generation, attainment of near self-sufficiently in food grains and
agricultural raw materials, diversification of industrial structure, more
especially the capital goods sector, the achievement of a substantial degree
if import substitution in capital and consumer goods sector. Besides, it was
able to develop a large pool of technical manpower – the fourth largest in
the world to manage the diversified industrial structure developed in India.
44
Growth of Indian Economy during First Five Year Plan (1951-1956) Growth: Pre and Post
Reforms
The First Five-year Plan was launched in 1951 which mainly focused in the
development of the agriculture. The First Five-Year Plan was based on the
Harrod–Domar model.
The target growth rate in National Income was 2.1% annual gross domestic
product (GDP) growth; the achieved growth rate was 3.6%. The performance
was commendable by assessing growth before 1947. Many capital intensive
irrigation projects were initiated first time during this period in India. These were
the Bhakra, Hirakud, Mettur Dam and Damodar Valley dams. During this plan
foundation for five Indian Institutes of Technology (IITs) were also laid as major
technical institutions. The University Grants Commission (UGC) was set up in
1956. The objective of UGC was to take care of funding and take measures to
strengthen the higher education in the country. Contracts with foreign countries
were also signed to start five steel plants, which came into existence in the middle
of the Second Five-Year Plan. In first five year plan, foundation for economic
development was laid by initiated major irrigations and steel plants.
Growth of Indian Economy during Second Five Year Plan (1956-61)
The Second Plan was more ambitious as compared to first five year plan and
focused on the development of the public sector for "rapid Industrialisation".
The plan followed the Mahalanobis model. The target growth rate of National
Income in Second Plan was 4.5 per annum but plan was able to achieve 4 percent
Heavy capital investment was done in setting up hydroelectric power projects
and five steel plants at Bhilai, Durgapur, and Rourkela. These were established
with the help of Russia, Britain (the U.K) and West Germany respectively. Coal
production was increased. More railway lines were added in the north east.
The Tata Institute of Fundamental Research and Atomic Energy Commission of
India were established as research institutes. The foundation for developing capital
intensive public enterprises was laid during second five year plan. Second plan
was very ambitious plan and foundation of modern India through industrialization
was laid. In second plan industrial growth rate was 8 percent and major steel
plants with foreign collaboration were set up during this plan. These plants were
essential for sustained industrial development in the country.
Growth Rate in the Third Five Year Plan (1961-66)
The Third Five-year Plan focussed on agriculture and improvement in the
production of wheat, but the brief Sino-Indian War of 1962 exposed weaknesses
in the economy and shifted the focus towards the defence industry and the Indian
Army. In 1965–1966, India fought a war with Pakistan. During third plan, there
were not only two wars but there was also a severe drought in 1965. The war led
to inflation and the priority was shifted to price stabilisation. The construction
of dams continued. Many cement and fertilizer plants were also built. Focus on
capital intensive public enterprises continued in third plan also Punjab began
producing an abundance of wheat. This was due to focus on agriculture.
The target growth rate in National Income was 5.6%, but the actual growth rate
was 2.4%, which was very low against the target. Inflation rate was also very
high during the third plan, national income at 1960-61 prices rose by 20% in the
first four years and recorded a decline of 5.6% in the last year of the plan. As
compared to first and second five year, third plan was not able to achieve desired
results. Two wars and severe drought further forced up to think the need of self-
reliance approach by further shifting focus on agriculture. 45
Economic Development: Growth Rate in Plan Holiday (1966-1969)
Due to miserable failure of the Third Plan due to severe drop in agricultural
production and outbreak of 1962 and 1965 wars, it became imperative for the
government to declare "plan holidays" (from 1966 to 1967, 1967–68, and 1968–
69). Instead of five year plan, three annual plans were drawn by the government
during this period. The problem of drought continued during 1966–67 there was
again drought in the country. Equal priority was given to agriculture, its allied
activities, and industrial sector. The New Agricultural Strategy was adopted in
1966. The government of India also first time focussed on increasing exports
and "Devaluation of Rupee” was declared in 1966 to increase the exports of
the country. The main reasons for plan holidays were the war, lack of resources
and increase in inflation.
During the three year interruption between the Third plan end and finalisation
of the Fourth plan, which is between 1966-67 and 1968-69, national income
continued to follow uneven pattern. The growth rate in national income was
nominal at 0.9% only in 1966-67 in the wake of a severe drought, followed by
a magnificent growth of 9% induced by a record increase in agricultural output
in 1967-68 and only a modest increase of 1.8% in 1968-69.
Growth Rate in Fourth Five Year Plan (1969-74)
The Fourth plan, aims for higher economic growth. The fourth plan took long-term
view of fifteen years for economic growth. The long-view of economy was termed
as ‘Perspective Planning by the Planning Commission. The planned average rate
of growth was 5.7% for the Fourth plan period, 6.2% for the seven year period
1974-75 to 1980-81 and 6.5% thereafter. At the same time the rate of growth of
population was postulated to decline from the estimated 2.5% during the fourth
plan to 1.7% by 1980-81. This fall in the population growth rate was based on
the success of the family planning programme. As a result of this success, it was
thought that birth rate would decline from 14 per 1000 of population to 9 over
the same period.
The major objective of plan was on the removal of poverty. It was quite clear that
increase in domestic output will come mainly from agriculture and therefore, had
to be given top priority in the Fourth plan. “New Agriculture Strategy”, which was
adopted during 1966, to increase agricultural output continued in the Fourth Plan.
The annual economic growth rate during the fourth plan period (1969-1974)
was of the order of only 3.4% per annum, thus showing a substantial shortfall
in the targeted rate of growth 5.6%. This was due to the poor performance of
the agricultural economy. The growth rate in food-grains production which is
the important single determinant of economic growth rate. The sluggish growth
registered during the fourth plan was due to serious shortfalls in achievement of
the target for food grains and agricultural production and number of other crucial
industrial sectors.
Growth Rate in Fifth Five Year Plan (1974-78)
In the fifth five year plan (1974-79) the target for growth in national income
was 4.4 percent.This was lower than fourth five plan ( 5.6%) because of the oil
crisis and unprecedented inflation that occurred in subsequent year. The plan
was terminated in 1978 because of change in government. But plan was able to
achieve 5.2% growth rate.
46
Table -3.2 Details from First Five Year Plan to Fifth Five Year about targeted Growth: Pre and Post
Reforms
growth rate and actual rate of growth achieved during these plans
Table 3.2: Targeted and Actual Growth Rates
Plan Target Actuals Growth rate for
First Plan 2.1 3.6 National income
Second Plan 4.5 4.0 National income
Third Plan 5.6 2.2 National income
Fourth Plan 5.7 3.3 Net domestic product
Fifth Plan 4.4 5.2 Gross domestic product
Source: Draft Fifth Plan
The overall growth performance of the national economy under the various
plans is portrayed by the above table which shows that apart from first and fifth
plan, when the actual growth rates for national income far exceeded the targeted
rates, in all other plans, there was a wide gap between the two. Except for the
Third plan when the economic performance was hardly hit by drought, the rate
of growth has ranged between 3% and 5% which can be considered no mean an
achievement in itself, but is far less than what is desired.
Growth Rate in Rolling Plan (1978-80)
After the Janta party came in power in the year 1977 it terminated the 5th five
year plan before its completion and instead launched yearly plans for the period
1978 – 83 which were called “Rolling Plans”. It was called “Rolling Plan” because
it was decided to assess the performance of the plan every year and a new plan
will be launched next year with modification, if necessary.
The main advantage of the rolling plans was that they were flexible, and if
necessary, the targets, projections and allocations could be revised as per the
prevailing conditions.. Thus in contrast to the five year plans, in case of the rolling
plans the yearly reviews were made.
It was realized later that in case the targets being revised each year, it was difficult
to achieve targets which required longer periods. Furthermore, frequent revisions
made it difficult to maintain right balances in the economy which was absolutely
necessary for a balanced development. After the Janta party government, the new
government shelved the concept of rolling plans and resumed the customary five
year plans and the new 6th Five year plan was launched on April 1, 1980.
Growth Rate in Sixth Five Year Plan (1980-85)
The sixth five year plan was again taken long term perspective of fifteen years from
1980-81 to 1994-95.The plan was formulated by considering the achievements
and shortcomings of the earlier plans. This vision visualizes accelerated progress
towards the removal of poverty and generation of gainful employment.
A large number of social and economic indicators have been used in formulating
the perspective development strategy. These were conventional national income
aggregates like Gross Domestic Product (GDP) consumption, saving and
investment, employment, per capita income and consumption. Other social
welfare indicators were number of people below the poverty line, per capita
consumption basket, life expectancy, etc.
The sixth plan aimed at a growth in gross domestic product of 5.2% a year and
per capita income 3.3% per annum. By 1984-85 per capita income was expected
47
to reach Rs 1,744 at 1979-80 prices as compared with Rs 1,488 in the base year.
Economic Development: Table 3.3: Development Perspective 1979-80 to 1994-95: Selected Economic
and Social Indicators
S. Item 1979-80 1984-85 1994-95
No
1 GDP ( Rs Crore at 1979-80 prices) 97051 125050 213600

2. Saving as per cent of GDP at market prices 21.24 24.48 27.52
3. Investment as per cent of GDP at market prices 21.76 25.11 25.92
4. Population (millions) 654.1 712.2 843.0
5. Per Capita GDP Rs.p) 14.85 17.44 25.34
6. Per Capita monthly consumption (Rs) 95.62 109.67 151.98

(2.79) (3.32)
7. Percentage of people below poverty line 48.44 30.00 8.74

8. Employment (Millions, standard person years) 151 185 248
9. Monthly per capita consumption of food-grains (Kg.) 12.95 14.32 15.50

0.68 (2.03) (0.80)
10. Monthly per capita consumption of sugar (kg.) 0.85 0.79 1.15
(3.00) (3.82)
11. Monthly per capita consumption of clothing (metres) 14.27 0.92 1.41
(1.60) (4.36)
12. Monthly per capita consumption of electricity (Kwh) 20.32 22.19 39.05
(9.23) (5.81)
13. Value added in education per capita (Rs) 52.6 24.72 36.60
(4.00) (4.00)
14. Life expectancy (Year) M 51.6 55.1 60.1

F 54.3 59.8
Note: Figures in brackets represent annual compound growth rate.

Source: Draft Fourth Five Year Plan
Although the broad target of the growth rate, which was 5.2%, was achieved,
yet this was mainly due to higher output in agriculture which was 4.3% while
the target was 3.8%. It was also due to the rapid growth of the service sector.
Removal of poverty and unemployment were crucial components of the strategy
for growth with equity and they were unequivocal objectives of the Sixth plan.
Information on the incidence of poverty is available from quinquennial surveys
conducted by the National Sample Survey Organisation and the relevant estimates
based on the last two surveys are summarised in table 3.4.
Table 3.4: Trends in Percentage of People below Poverty line
Percentage of population 1977-78 1983-84 (Provisional)
below the poverty line
Rural 51.2 40.4
Urban 36.2 28.1
Total 48.3 37.4
Source: Draft Sixth Five Year Plan
Thus there has been a decline in the incidence of poverty in this period. The main
reasons for this welcome trend are the higher rates of economic growth and the
48 increases in agricultural production.
Seventh Five year Plan (1985-90) Growth: Pre and Post
Reforms
The objectives of Seventh Plan were set within the framework of, growth, equality
and social justice and the pursuit of self-reliance. The planned growth rate was
targeted to increase gross national industrial and agricultural output by 38 percent
within five years, or by an average annual rate of 6.7 percent, gross agricultural
output by 4 percent a year, and gross industrial output by 7.5 percent. To increase
gross national output by 44 percent within five years, or by an average annual
rate of 7.5 percent.
The employment creation was one of the major objective in the seventh plan.
This was linked with a significant reduction in poverty. These objectives would
have been achieved through agricultural and rural development and of larger
food production.
Poverty alleviation was continued to be one of the basic components of the seventh
plan strategy and aim was to reduce the percentage of the population below the
poverty line to 23%, i.e., a reduction by 14%. This was combined with long-term
perspective of reducing poverty to around 10% of the population by 1994-95.
Output value of the primary industry increased at an annual growth rate of 4.1
percent, the secondary industry at a rate of 17.3 percent, and the tertiary industry
at a rate of 9.5 percent. Output composition of the three sectors stood at 20.3:
47.7:32.0; it was 28.4:43.1:28.5 at the end of the 6th, and 27.1:41.6:31.3 at the
end of the 7th Five-Year Program periods respectively
Annual Plans
Eighth Five Year Plan could not take place due to the volatile political situation at
the centre. Two annual programmes were formed for the year 1990-91& 1991-92.
Check Your Progress A
1. Which sector was mainly emphasised on in the first five year plan?
2. What was the main drawback of overemphasis on heavy industries in the
second five year plan?
3. Which of the following statements are true or false?
a) After independence the government decided to follow the Soviet Model
of economy in total.
b) The planning committee felt that agriculture should be given the primary
place in planning.
c) After independence India followed mixed economy framework.
d) The public sector gave opportunity for healthy competition in the
production of consumer goods.
e) During 1951-1991 per capita cereal consumption increased.
3.4 AN ASSESSMENT OF INDIAN ECONOMY

BEFORE ECONOMIC REFORMS
As a result of the various five year plans, performance of the Indian economy
during the last four decades of planning has been significant. The major
achievement of our planning process has been that the country’s economy has
been freed from shackles of prolonged stagnation from 1900-1947 and launched
on the path of growth. The growth of GDP which was around 3.5% a year between
49
Economic Development: 1960-61 and 1977-78 moved to a much higher path of 5% during the sixth and
seventh plan period.
This was also reflected in the transformation of a traditional economy into an
industrial economy. There was a rapid and almost continuous growth in industrial
production during the first 15 years of the planning period. In the first decade of
planning, 1951-60, the rate of growth of industrial production was 7%. During
the next five years it increased to around 9%. Due to various factors the industrial
growth rate slide back in the subsequent period when the average annual growth
rate was 4% during 1965 to 1975. Subsequently there was notable recovery in
the rate of industrial growth and during the period 1979-80 to 1984-85 compound
growth rate of 5.5% was achieved. This has been sustained during the seventh
plan period. Thus a solid foundation for industrialisation and its diversification
of economy from traditional economy to modern economy has been laid. This
was a achievement keeping in mind that India has adopted democratic system.
The overall growth rate of the Indian economy has substantially improved since
the beginning of the eighth plan period. India was able to create considerable
level of infrastructure in agriculture. India almost achieved self-sufficiency in
industrial growth in addition each and every year, we were making investment in
heavy industry. This kind of investment was thought to be vital for the strategic
growth of the economy in recent years, the availability of consumer durable goods
has also substantially increased. For removal of poverty and social inclusiveness
in the matter of social justice, various steps have been taken under different
plans as a result of which the number of persons living below the poverty line
has substantially come down.
Although, it was felt that there are also some serious concern at the emerging
pattern of development in the country. These could be divided into structural and
some were immediate, which were requiring immediate attention. Some of the
major a concern are as follows:
i. Overall employment has grown at a slower rate than labour force. The
problem of unemployment, underemployment and disguised employment
was continuing
ii. The overall growth of agricultural production was concentrated in certain
parts of the country. There has also been growing awareness of the divide
between rural and urban areas and of disparities between different parts of
the country. This disparity was visible between different social groups, wage
labourers and property owners, workers in organised and unorganised sectors
and men and women in employment and sustainable development process.
iii. Public sector performance was disappointing and majority of the public
enterprises were incurring huge losses because of inefficient management.
iv. Balance of payment ( BOP) was also not favourable because of excessive
imports and less exports . Exports were less due to the low quality and high
prices of our goods as compared to that of the foreign goods
v. There was a decline in foreign exchange reserves. It was not sufficient enough
to maintain fifteen days imports. The government was not in a position to
repay its borrowings from abroad.
vi. Government debt also increased substantially and domestically government
expenditure increased in large proportion as compared to revenue. It
became essential for government to borrow money from banks, public and
50 international financial institutions like the IMF, etc. India received financial
help of $7 billion from the World Bank and the IMF on an agreement to Growth: Pre and Post
Reforms
announce its New Economic Policy or Economic Reforms
3.5 ECONOMIC REFORMS

It refers to the fundamental changes that were launched in 1991 with the plan
of liberalising the economy and quickening its rate of economic growth. The
essential features of the economic reforms are – Liberalisation, Privatisation,
and Globalisation, commonly known as LPG
The main characteristics of new Economic Policy 1991 are:
• Delicencing.
• Entry to Private Sector.
• Disinvestment.
• Liberalisation of Foreign Policy.
• Liberalisation in Technical Area.
• Setting up of Foreign Investment Promotion Board (FIPB).
• Setting up of Small Scale Industries.
The entire process, meaning and need for reforms also New Economic Policy
1991 have been summarized in diagram 1
ECONOMIC REFORMS
Meaning and Need New Economic

of Economic Reforms Policy (N.E.P.)
Eighth Five Year Pan (1992- 1997) Reform Phase

The eighth plan approach paper has projected a 5.6% per cent Gross Domestic
Product (GDP). It assumes a domestic saving rate of 21.6 per cent of GDP and a
foreign resource inflow of Rs 49,000 crore (1.4 per cent of GDP). Export growth
rate has been estimated at 13.6 per cent per year. The incremental capital output
ratio (ICOR) has been assumed as 4:1. (Approach paper of Eight Five Plan 1991).
51
Economic Development: Significant achievements were also made in the reform of the economic system.
The new financial system with tax decentralization at its core, and the new tax
system with value-added tax as its main component, were set up. Policy finance
and commercial finance were gradually separated. A macro regulating system
emerged, and the market started to play a more major role in resource allocation.
Also mapped out were the beginnings of a dominant public sector. The growth
rate in eight five year plan was 6.6 percent. This was higher than the projected
growth rate of 5.6%. There was a substantial growth in agriculture, industry and
services. The agricultural sector grew at the rate of 4.69 percent, manufacturing
at the rate of 7.58 percent and services 7.45 percent. Table 4
Ninth Five Year Plan ((1997-2002)
The rate of growth of GDP during the ninth plan dropped to 5.3 percent from
6.6. The rate of growth declined particularly in the agriculture and manufacturing
sectors, whereas in the services sector there was a marginal increase in the growth
rate.
The GDP from agriculture alone declined by 0.4 per cent in 2000-01 compared
with an increase of 1 per cent in 1999-2000. According to the quick estimates
of national income for 2000-01 provided by the Central Statistical Organisation
on January 31, 2002, the overall GDP growth rate decelerated significantly from
6.1 per cent in 1999-2000 to 4 per cent in 2000-01. The gross value added in
agriculture and allied sectors declined by 0.2 per cent in 2000-01 compared with
an increase of 1.3 per cent in 1999-2000.
Within the industry sector, there was marked improvement in the growth rates
of manufacturing (from 4.2 per cent in 1999-00 to 6.7 per cent in 2000-01) and
mining and quarrying (from 2 per cent to 3.3 per cent during the same period)
Growth rates of services sector decelerated significantly in 2000-01. In particular,
the growth rate of trade, hotels and restaurants reduced considerably from 7.3
per cent in 1999-2000 to 3.8 per cent in 2000-01, while the growth of transport
storage and communications remained almost unchanged at around 8.2 per cent
during 1999-00 and 2000-01.
Financial, real estate and business services performed poorly with growth rate
of only 2.9 per cent in 2000-01 compared with a growth rate of 10.6 per cent in
1999-00.
Table 3.4 provides a comparative growth of Indian Economy during Eighth and
Ninth Plans
Table 3.5: Growth of Indian Economy during Eighth and Ninth Plans:
(per cent Per annum)
Eighth Plan Ninth Plan
Agriculture 4.69 2.06
Manufacturing 7.58 4.51
Services 7.54 7.78
Total 6.68 5.35
Tenth Five Year Plan (2002-2007)
This plan aimed to double the Per Capita Income of India in the next 10 years.
It also aimed to reduce the poverty ratio to 15% by 2012 by reducing poverty
ratio by 5 percentage points by 2007. The target for growth rate was 8.1% GDP
52 growth per year.
The plan also focussed on providing gainful and high-quality employment at least Growth: Pre and Post
Reforms
to the addition to the labour force. The plan also aimed at reduction in gender
gaps in literacy and wage rates by at least 50% by 2007. The Tenth Plan was
expected to follow a regional approach rather than sectoral approach to bring
down regional inequalities. The plan was able to achieve the growth rate of 7.7
percent against the target growth of 8.1%.
The primary aim of the 10th Five Year Plan is to renovate the nation extensively,
making it competent enough with some of the fastest growing economies across
the globe. It also intends to initiate an Economic growth of 10% on an annual
basis. In fact, this decision was taken only after the nation recorded a consistent
7% GDP growth, throughout the past decade.
The 7% growth in the Indian GDP is considered to be considerably higher than the
average growth rate of GDP in the world. This enabled the Planning Commission
of India to extend the GDP limit further and set goals, which will drive India
to become one of the best industrial countries in the world, to be clubbed and
recognized with the world’s best industrialized nations.
Eleventh Five-Year Plan (2007–2012)
The aim of Eleventh Five-Year Plan was to accelerate GDP growth from 8%
to 10% and then maintain at 10% in the 12th Plan in order to double per capita
income by 2016–17 and to ensure higher growth rate plan also focus to increase
agricultural GDP growth rate to 4% per year to ensure a broader spread of benefits.
The target growth rate was 8.4 percent but actual growth achieved was 7.9 percent.
The Economic Survey 2012-13, reveals that the growth rate of GDP at 2004-
05 prices was 9.7 per cent in 2007-08, 6.5 per cent in 2008-09, 8.6 per cent in
2009-10, 8.8 per cent in 2010-11 and 6.4 per cent in 2011-12. GDP growth rate
is likely to average 8.0 per cent over Eleventh Plan.
Thus during last two years, the plan experienced a slow growth rate as a result
of global economic slowdown.
The Economic survey, 2009-10, observed in this connection, the fiscal year
2009-10 began as a difficult one. There was significant slowdown in the growth
rate in the second half of 2008-09, following the financial crisis that began in the
industrialized nations in 2007 and spread in the real economy across the world.
The growth rate of the gross domestic product (GDP) in 2008-09 was 6.7 per
cent, with growth in the last two quarters (2009-10) hovering around 6 per cent.
The continued recession in the developed world, for the better part of 2009-
10, meant a sluggish export recovery and a slowdown in financial flows into
the economy. Yet, over the span of the year, the economy posted a remarkable
recovery not only in terms of overall growth figures but, more importantly, in
terms of certain fundamentals, which justify optimism for the Indian economy
in the medium to long term.
On 24th March 2010, a meeting of the full Planning Commission conducted a
mid-term review of the Eleventh Five Year Plan and lowered Indian’s targeted
growth of 9 per cent per annum because of past performances and prevailing
situations.
The appraisal document which was placed in the meeting stated that “the average
rate of growth in the plan period could be a little over 8 per cent. The economy
would be well positioned for the transition to a growth rate higher than 9
per cent in the Twelfth Plan period.” 53
Economic Development: Thus at the end of the Eleventh Plan, it is stated that although the draft plan set
the target of attaining 9.0 per cent annual average growth rate of GDP but it could
manage to attain annual average growth rate of 7.7 per cent during the Eleventh
Plan under the prevailing global economic environment. While this is well behind
China’s average growth of 10.4 percent over the past decade
Twelfth Five-Year Plan (2012-2017)
The 12th five year plan (2012-17) document that seeks to achieve annual
average economic growth rate of 8.2 per cent, down from 9 per cent envisaged
earlier, in view of fragile global recovery. 12th five-year plan is guided by the
policy guidelines and principles to revive the following Indian economy, which
registered a growth rate of meagre 5.5 percent in the first quarter of the financial
year 2012-13.
The plan aims towards achieving a growth of 4 percent in agriculture and to
reduce poverty by 10 percentage points by 2017. The main aim of this plan is
to achieve Faster, More Inclusive and Sustainable Growth. In 2014, there was a
change in government and five year planning was suspended. 1 January 2015,
a Cabinet resolution was passed to replace the Planning Commission with the
newly formed NITI Aayog (National Institution for Transforming India).
3.6 GROWTH OF INDIAN ECONOMY IN POST

PLANNING ERA
The growth rate was 6.6 per cent in 2014 in the last year of terminated twelth
five year plan . This was lower than the targeted economic growth 8.2 percent.
During 2015, there was an increase in growth rate from 6.6 percent to 7.3
percent. The trend of increase in growth further continued and GDP growth rate
increased to the level of 8 percent in 2016. The growth rate was again declined
to 7.1 percent in 2017 and 6.7 percent in the financial year 2018. The economy
slowed in 2017, due to shocks of "demonetisation" in 2016 and the introduction
of the Goods and Services Tax in 2017.
In 2019-20 the Indian economy grew by 4.2 percent . Economic growth slowed to
an 11 –year low of 4.2 % in 2019-20. In last quarter of 2019-20, January-March ,
the growth rate of Gross- domestic Product (GDP) fell to 3.1 percent, reflecting the
impact of the first week of the COVID-19 lockdown which began on March 25 .
The impact of COVID -19 and lockdown was severe and this has impacted growth
rate badly. First time growth rate was in broad negative range. The provisional
estimates of national income released by the National Statistical Office (NSO) on
May 31, 2021 placed India's real gross domestic product (GDP) contraction at 7.3
per cent for 2020-21, with GDP growth in Q4 at 1.6 per cent year-on-year (y-o-y).
The measures of complete lockdown taken by the government to contain spread
of the Covid-19 pandemic have had negative impact on the economic activities.
The coronavirus pandemic is the largest public health crisis in living memory,
which has generated a major economic crisis unarguably for every sector of a
economy, with a halt in production, collapse in consumption and confidence. Hotel
industry, tourism sector and logistic have witnessed a sharp drop in business. The
cash –flow has affected the purchasing capacity also having a cascading effect
across the value chain.
Consumer goods, garments, footwear, utensils, automotive segments were directly
54 impacted by the crisis. Sectors, which were dependent on high imports of raw
materials were also impacted by the crisis.
Meanwhile, the third quarter GDP data released by the National Statistical office( Growth: Pre and Post
Reforms
NSO) showed that the Indian economy came out of the recession and expanded
by 0.4 per cent. The economy had contracted by a record 24.4 per cent in the first
quarter the current financial year due to the coronavirus pandemic and consequent
lockdowns. However, the contraction narrowed to 7.5 per cent in the second
quarter as economic activity picked up.
RBI estimated that Indian Economy will attain growth rate of 9.5 percent in
2021-22. Earlier this estimate was 10.5% but due to second wave again, RBI
revised estimate to 9.5%.
Domestic credit ratings agency Crisil has revised India's real GDP growth
projection for 2021-22 downwards to 9.5 per cent from 11 per cent estimated
earlier. The downward revision has been attributed to the decline in private
consumption and investments following the second wave of Covid-19.
Though the ride had been bumpy over the past two years after 2019, the Indian
economy managed to be labelled as the fastest growing economy of the world in
2018. The World Bank has forecasted that India’s economy is all set to grow at a
rapid pace than the other major economies of the world. Now India economy is
the third largest in Asia and the trends seen at present can move Indian economy to
the upper slots in the years to come. A significant recovery in private instruments
and a strong growth in the consumption of goods and services in the private
sector is expected to fuel the growth of Indian economy over the next few years.
The economy of India is now regarded from low income and developing economy
to a middle income developing market economy. Indian economy is now classified
as the world's sixth-largest economy by nominal GDP and the third-largest by
purchasing power parity (PPP) by International Monetary Funds and other credit
agencies .
The long-term growth perspective of the Indian economy remains positive due to
its young population and corresponding low dependency ratio, healthy savings,
and investment rates, increasing globalisation in India and integration into the
global economy.
Check Your Progress B
a) Before economic reforms, employment grew at a faster rate than the
labour force.
b) Public sector performance was disappointing.
c) Before the economic reforms, balance of payment situation was quite
favourable.
d) The emphasis of the economic reforms as on delicensing.
e) Under economic reforms the scope of the private sector was enlarged.
2. Name four important concerns of the Indian economy before economic
reforms.
3. Name four important priorities of the economic reforms.
3.7 LET US SUM UP

After independence, India followed mixed economy and accepted the coexistence
of the public and the private sector. The public sector covered areas of defence,
heavy and basic industries, economic and social infrastructure and public utilities. 55
Economic Development: National planning commission was set up in 1950 and was assigned the task of
formulating a plan for the economic development of India. The commission laid
down the long term goals of planning: a) to increase production (b) to achieve
full employment (C) to promote industrialization and (d) to reduce inequalities
of income and wealth. With these objectives the first five year plan was launched
in the year 1951. This process continued upto 1978 when 5th five year plan was
completed. However in the year 1978, the then government of India discontinued
5 year planning and instead launched yearly planning known as the rolling plans.
But in the year 1980 when the government changed at the centre the process of
5 year planning was resumed.
The year 1990-91 turned out to be very critical for the Indian economy. There
was a serious crisis of balance of payments. Furthermore, the foreign exchange
reserves dipped to a critically low level and it was not sufficient enough to
maintain 15 days imports. India received financial help of dollar 7 billion from
the World Bank and the IMF on the agreement to announce its new economic
policy known as economic reforms.
The new economic policy was launched in June 1991 with the plan of liberalizing
the economy and quickening its rate of economic growth. The essential features
of the economic reforms are: Liberalization, Privatization and Globalization,
commonly known as LPG. The economic reforms ushered in a new era of
economic growth, which was 6.6% in 2001. The next year it increased to 7.3%.
it reached 8% in 2016 but it declined to 7.1% in 2017 and 6.7% in 2018. During
2019-20 the economic growth slowed down due to Covid 19 lockdown.
The impact of Covid 19 and lockdown was severe and it impacted growth rate
badly. However, after May 2021 the economy is on the path of recovery.
3.8 KEY WORDS

Rolling Plan - the plan launched for short period that is one year with the
possibility of modifications.
Economic Infrastructure: indicates creation of infrastructure in the form of
irrigation, energy, transport and communications.
Globalization: refers to the process by which the economy of the country is
integrated with the world economy. It involves four parameters: (i) Reduction
of trade barriers so as to permit free flow of goods and services across national
frontiers; (ii) Creation of an environment in which free flow of capital can take
place among nation-stages; (iii) Creation of an environment permitting free flow
of technology; and (iv) Creation of an environment in which free movement of
labour can take place in different countries.
Plan Holiday: a term coined to describe the period in which the country
abandoned the formulation of the five year plans and shifted to a system of annual
plans. The period referred to was 1966-67 to 1968-69.
Privatisation: refers to transfer of ownership of a public sector undertaking to the
private sector – may be company, a workers’ cooperative or an individual. When
100 per cent ownership is transferred, it is a case of denationalisation. Transfer
of ownership can be partial as well. In such cases, the public sector undertaking
is transformed into a joint venture.
Public Distribution System: refers to the system of fair price shops to distribute
articles of essential consumption to the poor at reasonable prices. The government
56 takes the responsibility to procure and distribute essential commodities.
Social Infrastructure: indicated infrastructure in the form of schools, colleges, Growth: Pre and Post
Reforms
technical training institutes, primary health centres, hospitals, family planning
and welfare centres etc.

A3 i) False ii) True iii) True iv) False v) True
B1 i) False ii) True iii) False iv) True v) True

1. Discuss the main features of the mixed economy followed by India after
independence.
2. Explain the concept of public sector originally envisaged by India. What
were its short comings?
3. Assess the Indian economy before economic reforms briefly.
4. Describe the main critical features of the Indian economy before the economic
reforms.
5. Discuss salient features of the new economic policy.
57
58

Study Material 4

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Study Material 4

Uploaded by

Copyright:

Available Formats

BCOG-172

School of Management Studies

COURSE DESIGN COMMITTEE AND PREPARATION TEAM

BCOG-172 INDIAN ECONOMY

Block 1 : ECONOMIC DEVELOPMENT: CONCEPT AND MEASUREMENT 5

UNIT 1: Economic Development 7

Block 2 : DETERMINANTS OF GROWTH 59

UNIT 4: Economic Infrastructure 61

Block 3 : ISSUES IN INDIAN ECONOMY 115

UNIT 7: Poverty and Inequality 117

Block 4 : SECTORAL DEVELOPMENT-I: AGRICULTURE SECTOR IN INDIA 171

UNIT 11: Impotance of Agriculture 173

Block 5 : SECTORAL DEVELOPMENT-II: INDUSTRIAL AND SERVICES 215

UNIT 14: Industrial Policy 217

Block 6 : EXTERNAL SECTOR OF INDIAN ECONOMY 287

UNIT 18: Structure of India's Foreign Trade 289

Block 7 : FISCAL & MONETARY POLICY 341

UNIT 21: Monetary Policy 343

Economic development is a comprehensive term that generally refers to the

Unit 1: Economic Development: explains how does an economy work. The

Unit 2: Features of Indian Economy: An Emerging Economy: highlights the

1.3 Concept of Economic Development

1.2 HOW DOES AN ECONOMY WORK

Figure 1- Working of the Price Mechanism

1.3 CONCEPT OF ECONOMIC DEVELOPMENT

1.4 MEASUREMENT OF ECONOMIC

In general, poorer countries have higher rate of population growth. Many of

1.5 DETERMINANTS OF ECONOMIC

1.6 ROLE OF GOVERNMENT IN DEVELOPMENT

1.8 KEY WORDS

1.9 ANSWERS TO CHECK YOUR PROGRESS

1.10 TERMINAL QUESTIONS

2.9.4 Regional Disparities

2.10 Let Us Sum Up

2.2 INDIA AN EMERGING ECONOMY

2.3 INDIA IN TRANSITION

2.4 INSTITUTIONAL CHANGES

2.8 STRUCTURAL CHANGES

2.9 MAJOR ISSUES AND CHALLENGES OF

Figure 2.1. Percent population below poverty line.

Check Your Progress B

2.10 LET US SUM UP

2.11 KEY WORDS

2.12 ANSWERS TO CHECK YOUR PROGRESS

2.13 TERMINAL QUESTIONS

3.2 NATIONAL PLANNING COMMITEE

3.3 GROWTH OF THE INDIAN ECONOMY

The economy showed a much better performance during 1980-81 to 1990-91

1 GDP ( Rs Crore at 1979-80 prices) 97051 125050 213600

6. Per Capita monthly consumption (Rs) 95.62 109.67 151.98

7. Percentage of people below poverty line 48.44 30.00 8.74

9. Monthly per capita consumption of food-grains (Kg.) 12.95 14.32 15.50

14. Life expectancy (Year) M 51.6 55.1 60.1

Note: Figures in brackets represent annual compound growth rate.

3.4 AN ASSESSMENT OF INDIAN ECONOMY

3.5 ECONOMIC REFORMS

Meaning and Need New Economic

Eighth Five Year Pan (1992- 1997) Reform Phase

3.6 GROWTH OF INDIAN ECONOMY IN POST

3.7 LET US SUM UP

3.8 KEY WORDS

3.9 ANSWERS TO CHECK YOUR PROGRESS