INDIAN ECONOMY

Unit 1

Prepared and Presented By:

Pooja Tripathi
Assistant Professor
DME Management School
Economic Growth

UNIT-I
Introduction
S.No. Topic
1.1 The need for economic development

1.1 a Definition & meaning of economic development

1.1 b Need for economic development

1.1 c Opportunity cost & production possibility curves

1.2 Causes of under development

1.3 Determinants of development

1.3 a Economic determinants

1.3 b Non economic determinants

1.4 National income of india-estimates

1.5 Inter-regional variations of national income

 Suggested Readings
• Ruddar Dutt & Kpm sundharam, 72 e,
• chapter 1: India as a developing economy
• Sub chapter 1.1: meaning of an under
developed economy
• Reference: table: per capita income of all
countries of the world
 Some basic terminologies

• Economy
• Economics
• Micro-economics
• Macro -Economics
 Economy
• Economy is the study of how society use scare
resources to produce valuable commodities and
distribute them among different people.
• Economy studies how individuals, firms,
government, and the other organizations within
our society make choices and how choices
determine a society’s use of its resources.
• “Economy is the science which studies human
behaviour as a relationship between ends and
scarce means which have alternative uses.”
Concept of economic
Development
 Classification of countries
World’s bank has divided economies of world
into:
Threshold GNI/Capita (current US$)
Low-income <996
Lower-middle income 996 - 3,895
Upper-middle income 3,896 - 12,055
High-income > 12,055
 Important Terminologies
• Gross domestic product(GDP) 5.8%
• Gross National Income (GNI)Rs.188.17 L Cr
• Per capita GDP 2041.092USD
• Per Capita GNI 330.20 USD
• Per Capita Income Rs.10533.83
• Economic Growth 6.4%
• Economic Development
 GDP /GNI Insufficient as measure
of economic growth
• No guarantee of greater supply of goods and
services
• Population
• Price effect
• Non reporting of self consumption
• Production through malpractices
• Type of products
• Uneven distribution of wealth
 Economic Growth vs. Economic Development
• Economic Growth
Economic Growth is the
increase in the real output of
the country in a particular
span of time.
Narrow concept
Single dimension
Short Term
Calculated in term of GDP
hence only quantitative
Its an automatic process
• Economic Development
Economic Development is
the increase in the level of
production in an economy
along enrichment of living
standards and the
advancement of technology.
Broader concept
Multiple dimension
Long term
Calculated in terms of human
development hence both
quantitative and qualitative
It requires proper planning
 Economic Development
• Economic Growth vs. Economic Development:
Economic growth means more production, but
economic development includes more production as
well as those technical and institutional changes
which make more production possible.
• Economic development includes only those changes
which gather momentum and continuously lead the
whole country to higher level of economic activity.
• It is an increase in living standards, improvement in
self-esteem needs and freedom from oppression as
well as a greater choice.
 How to measure economic
development
• The Physical Quality of Life Index (PQLI):
proposed by Morris in year1970 and included
infant mortality rate, life expectancy and
basic literacy rate
• Human Development Index (HDI) it was given
by Mahbub ul Haq and Amartya Sen and
included Life Expectancy Index, Education
Index and GNI Index.
 Cont….
• Inequality-adjusted HDI (IHDI) The Inequality-
adjusted Human Development Index (IHDI) adjusts
the Human Development Index (HDI) for inequality
in distribution of each dimension across the
population.
• Gender related Development Index (GDI) The
Gender related Development Index (GDI) measures
gender inequalities in achievement in three basic
dimension
• Multidimensional Poverty Index (MPI): It includes
health, education and standard of living.
 1.1 Need for Economic Development
• Increase in goods availability for consumption
• Job Creation
• Industry Diversification
• Business retention and expansion
• Economy fortification
• Increased Tax Revenue
• Improved quality of life
• Redistribution of wealth
• Welfare
 1.2 Cause of Underdevelopment
• Low per capita income
• Occupational pattern
• Population Pressure
• Steadily improving rate of capital formation
• Maldistribution of wealth
 Continued…
• Poor quality of Human Population
• Prevalence of low level of technology
• Low level of living of average Indian
• Demographic Characteristics of an
underdeveloped country
• The Socioeconomic indicators of
consumption are Characteristics of
underdeveloped economy of India.
1.3 Determinants of economic
development
 Conclusion
• Economic Development is not determined
by any single factor
• Economics Development depends on
Economic, Social, Political and Religious
factors.
• By proper coordination of BOTH these
factors Economic and Non-Economic and
aspiration of the people and the
government for development that the rate
of Economic growth can be accelerated.
 1.4 National Income of India -
Estimates
• A national income estimate measures the volume of
commodities and services turned out during in given
period, counted without duplication”
• National income is the flow not the stock.
• National wealth takes into account even the stock
• National income is an estimate of potential a
country having in producing and satisfying needs of
its population.
• National income measures the total value of goods
and services produced within the economy over a
period of time.
 Pre-Independence period
Estimates
• No central authority or government
organization in India before independence to
prepare National Income Estimates.
• Certain important citizens and economists
made some estimates of national income at
their personal level.
• Pre-independence: Value of output of agricultural
sector + Certain percentage of Non agricultural
sector.
Limitation: No scientific basis
• Dr. V.K.R.V= Census output & Census income
method.
Divided economy in two parts:
❖ Agriculture
❖ Industry
• To these above sectors subtotal, income from house-
property and other items were added while goods
and services consumed in the process of production
was subtracted. To this foreign income was added.
Limitation: next slide
• No Government Agency:
– All estimates were prepared at personal level.
• Incomplete and unreliable data
• Different methods
– Choice of methods depended upon the
preference of the person concerned.
• Different geographical areas
– The income of the country was estimated on the
basis of data collected from different
geographical areas.
• Based on the current prices
Historical perspective
 Post-Independence period
Estimates
• Formation of National Income Committee in 1949 later on carried by
Central Statistical Organisation.
• Committee consisted of professor P.C. Mahalanobis ( Chairman),
professor D.R. Gadgil and professor V.K.R.V Rao
• Final report appeared in year 1954
• Acc.to first report of this committee, National Income of India was Rs.
8,710 Crore and Per Capita income was Rs.225 in 1948-49.
• Features of report:
During 1950-51, agriculture (Animal husbandry, forestry and fisheries ) Contributed half of the
National Income(NI).
Mining, manufacturing and hand trade contributed 1/6% to NI.
Commerce, transport, and communication accounted for a 1/6% + to NI
Other services (Professions, liberal art, administrative services, domestic services, house
property) accounted for 15% of NI.
Commodity production accounted 2/3 rd of NI
Services accounted 1/3rd
Government sector in net domestic prod. 7.6% while expenditure 8.2%
Margin error 10%
 Estimates of National Income by Central
Statistical Organization (CSO)
• CSO has prepared 6 series of National Income estimates relating to
different base years:
1. Conventional Series:
• Between 1952-1967, same methods of national income estimates were
adopted as recommended by National Income committee.
• 1948-49 was taken as base year
• After 1966, CSO discontinued the publication of conventional series
• Net output method & net Income Method
2. First Revised Series
• In 1967, certain major changes introduced by CSO.
• 1960-61 was taken as base year instead of 1948-49
• Economic activities were classified into three different sectors, viz.,
Primary, Secondary and Tertiary Sector
• 3. Second Revised Series
– CSO introduced this series in 1978
– 1970-71 taken as base year instead of 1960-61
• 4. Third Revised Series
– CSO introduced this series in 1988
– 1980-81 taken as base year instead of 1970-71
• 5. Fourth Revised Series
– Introduced in 1999, 1993-94 taken as base year
– Important methodological changes were introduced
• 6. Fifth Revised Series
– Adopted in 2004-05
– Base year was 1999-2000
– This series incorporated improvements in terms of coverage and recommendation of
UNSNA( United Nation Systems of National Accounts(1993)
• 7. New Series
– Adopted in 2009-10
– Base year was 2004-05
 National Income:
Concept and Measurement
• Production of goods and service generates income and income
give rise to demand for goods and service, demand give rise to
expenditure, and expenditure give further rise to production
of goods and service. there is a circular flow of production,
income and expenditure.

• On the basis of these flows, national income can be analysed as

1. as a flow of goods and services
2. as a flow of incomes
3. as a flow of expenditure on goods and services.
Figure: Measuring National Product and National Income
Methods to calculated NI
 A. Product Method

(a) Final product approach

• The final product approach involves estimation of the market value of

final goods and services produced in the economy in a given period.
Steps in Final Product Approach:

(i) The market value of all final goods and service produced within
the country gives the estimate of Gross Domestic Product at
Market Price (GDP at MP)

(ii) The addition of net factor income from abroad in GDP at

MP gives Gross National Product at Market Price
(GNP at MP).

(iii) The deduction of depreciation from Gross National

Product at market price (GNP at MP) MP provides
Net National Product at market Price (NNP at MP).

(iv) The deduction of net indirect taxes from NNP at MP give

Net National Product at Factor Cost (NNP at FC)
 Problem of Double Counting

The calculation of national income through final product approach

considers the market value of final goods and services.

The value of intermediate goods is not included. If the value of

intermediate goods are considered, it will involve the problem of
double counting.

• Double counting means, consideration of certain item more than once

which leads to over estimation of national income.
 B. Income Method

• It is the sum of all income derived from providing the factors of

production.

• It includes wages and salaries, rent, interest and profits within a

country in a given year.
 Steps in Income Method:

1. Obtain Net Domestic Product at Factor cost (NDP at FC) by summing

up factors payment paid in form of wages & salary, rent, interest and
profit by all production units of all sectors in the country.

2. Add Net factor income from abroad in Net Domestic Product at Factor
Cost to obtain Net National Product at Factor Cost (NNP at FC) or
national income.
C. Expenditure Method

3. Expenditure Method: This method arrives at national income by adding up all the
expenditure made on goods and services during a year. Thus, the national income is found by
adding up the following types of expenditure by households, private business enterprises and
the government: -
(a) Expenditure on consumer goods and services by individuals and households denoted by C.
This is called personal consumption expenditure denoted by C.
(b) Expenditure by private business enterprises on capital goods and on making additions to
inventories or stocks in a year. This is called gross domestic private investment denoted by I.
(c) Government’s expenditure on goods and services i.e. government purchases denoted by G.
(d) Expenditure made by foreigners on goods and services of the national economy over and
above what this economy spends on the output of the foreign countries i.e. exports – imports
denoted by
(X – M). Thus,
GDP = C + I + G + (X – M).
Factors to be taken care:

1. Expenditure on second hand goods should be excluded It is because

such expenditure on the goods is not considered to be expenditure
on currently produced goods.

2. Expenditure on the purchase of new or old shares and bonds should

be excluded because they are not payments for goods and services.

3. Government expenditure in the form of transfer payments should be

excluded because these payments do not make any contribution to
the flow of goods and services.

4. Expenditure on intermediate goods and services should be excluded,

otherwise this will lead to the problem of double counting.
 Is the measurement of NI is an easy
task?
• There are challenges of measuring NI, some of
them are as follows:
1. Simon Kuznet’s difficulties (Definition of the term
Nation, Method to be used, Stage of economic
activity, Types of goods and services)
2. Problem of double counting
3. Transfer payments
4. Income generated by foreign firms
5. Calculation of depreciation.
What are the uses of national income
statistics?
• Formulation of economic policies
• Studying economic structure
• Inter- sectoral comparisons
• Indicator of economic welfare
• Making international comparisons
Inter region variation in National
Income
 Trends for Interstate Variation in
National Income and GDP
There is vast variation amongst the Indian states w.r.t per
capita
income and their contribution to national income.
4. CONTRIBUTION OF STATES IN INDIA’S NDP
High Income States % share
in NDP
MAHARASHTRA 13.3 %
UTTAR PRADESH 8.0 %
ANDHRA PRADESH 7.7 %
WEST BENGAL 7.2 %
GUJARAT 6.8 %
Low income states % share in NDP

JHARKHAND 1.6
ASSAM 1.7
CHATTISGARH 1.8
ORISSA 2.4
BIHAR 2.7

Per capita income of different states

High income states Per capita income Low income states Per capita
(Rs p.a) income (Rs p .a)
GOA 1,05,582 BIHAR 11,135
HARYANA 58,531 UTTAR PRADESH 16,060
MAHARASHTRA 47,051 MADHYA PRADESH 18,051
GUJARAT 45, 773 JHARKHAND 19,928
PUNJAB 44,923 ORISSA 23,403
 GSDP per capita
Rank State / Union territory
(₹_nominal)

11 Tamil Nadu 184,210

12 Himachal Pradesh 182,359

13 Telangana 182,333

14 Uttara Khand 180,520

15 Mizoram 159,645

16 Punjab 151,624

17 Aruna Chal Pradesh 139,228

Andaman & Nicobar
18 Islands 138,858

19 Andhra Pradesh 137,000

 GSDP per capita
Rank State / Union territory
(₹_nominal)
India 112,432
20 Jammu & Kashmir 116,153
21 Chhattisgarh 111,538
22 Madhya Pradesh 102,083
23 Rajasthan 101,353
24 West Bengal 100,000
 GSDP per capita
Rank State / Union territory
(₹_nominal)
25 Meghalaya 98,556
26 Odisha 98,095
27 Nagaland 89,607
28 Assam 80,625
29 Tripura 77,351
30 Jharkhand 73,031
31 Manipur 58,442
32 Uttar Pradesh 72,300
33 Bihar 63,200
 Region
• Region is defined as a large area of land that
is different from other areas of land because
of some geographical, cultural or economic
characteristics.
• Following are three criteria for defining a
region:
• Homogeneity Criteria
• Nodality Criteria
• Administrative and political mission
 Issues with Inter Regional
variations
• Inflation
• Increase in Public cost
• Wastage of resources
• National Integration
• Social Justice
• Economic growth & devlopement
 Types of Disparity
• Disparity is divided into four type. They are:
Global Disparity
Interstate Disparity (Disparity between States)
Intrastate Disparity (Disparity within States)
Rural-Urban Disparity
 Disparity in India
• Income and wealth disparity
• Education disparity
• Regional Development disparity
• Sectorial development disparity
• Technological disparity
• Credit disparity
Causes for Inter Regional variations
• Historical Factors
• Political Factors
• Administrative factors
• Unequal distribution of natural resource
• Failure of economic planning
• Attitude and preferences
• Population
• Marginal effect of Green revolution
 NITI aayog
(National Institution for Transforming India)

niti.gov.in

1.6
 Overview of niti aayog
• The National Institution for Transforming India, also
called NITI Aayog, was formed via a resolution of the
Union Cabinet on January 1, 2015.
• NITI Aayog is the premier policy ‘Think Tank’ of the
Government of India, providing both directional and
policy inputs.
• While designing strategic and long term policies and
programs for the Government of India, NITI Aayog
also provides relevant technical advice to the Centre
and States.
 Overview (condt…)
• The Government of India, in keeping with its reform
agenda, constituted the NITI Aayog to replace the
Planning Commission instituted in 1950.
• This was done in order to better serve the needs
and aspirations of the people of India.
• An important evolutionary change from the past,
NITI Aayog acts as the quintessential platform of the
Government of India to bring States to act together
in national interest, and thereby fosters Cooperative
Federalism.
 Overview (condt…)
• At the core of NITI Aayog’s creation are two
hubs – Team India Hub and the Knowledge
and Innovation Hub.
• The Team India Hub leads the engagement of
states with the Central government, while the
Knowledge and Innovation Hub builds NITI’s
think-tank capabilities.
• These hubs reflect the two key tasks of the
Aayog.
 Overview (condt…)
• NITI Aayog is also developing itself as a State
of the Art Resource Centre, with the
necessary resources, knowledge and skills,
that will enable it to act with speed, promote
research and innovation, provide strategic
policy vision for the government, and deal
with contingent issues.
 NITI Aayog's Role
• NITI Aayog has been entrusted with the role to co-ordinate
‘Transforming our world: the 2030 Agenda for Sustainable
Development’ (called as SDGs). Moving ahead from the
Millennium Development Goals (MDGs), SDGs have been
evolved through a long inclusive process for achievement
during 2016-2030. The SDGs cover 17 goals and 169 related
targets resolved in the UN Summit meet 25-27 September
2015, in which India was represented at the level of Hon’ble
Prime Minister. These SDGs will stimulate, align and
accomplish action over the 15-year period in areas of critical
importance for the humanity and the planet
 Role (condt…)
• The task at hand for NITI Aayog is not merely
to periodically collect data on SDGs but to act
proactively fructify the goals and targets not
only quantitatively but also maintaining high
standards of quality. Ministry of Statistics and
Programme Implementation (MoSPI) has
already undertaken a parallel exercise of
interaction with the ministries to evolve
indicators reflecting the SDG goals and
targets.
 Role (condt…)
• To achieve these tasks, the draft mapping of the goals and
targets as an initial step on proposed Nodal and other
Ministries has been carried out in consultation with MoSPI.
Further, as an illustration, the Centrally Sponsored Schemes
(CSSs),including the ‘core of the core’, ‘core’ and ‘optional’
Schemes being implemented by the States have been
mapped alongwith some of the recent initiatives undertaken
by the Central Government. In addition, Ministries are
implementing Central Sector Schemes and States are also
implementing various State Schemes aligned with one or
more SDGs.
 Role (condt…)
• NITI Aayog, in collaboration with RIS is also
holding a Consultation on SDGs, during 9th
and 10th February 2016 with stakeholders
including States, Ministries, academia,
International organizations, NGOs etc. at New
Delhi.
 Sustainable Development Goals
1 No poverty
2 Zero hunger
3 Good health & well being
4 Quality well being
5 Gender equality
6 Clean water & sanitation
7 Affordable & clean energy
8 Decent work & economic growth
9 Industry innovation & infrastructure
 Sustainable Development Goals
10 Reduced inequalities
11 Sustainable cities & communities
12 Responsible consumption and production
13 Climate action
14 Life below water
15 Life on land
16 Peace, Justice & strong institutions
17 Partnerships for the goals
Thank you