Unit 1

Indian Economy – Its structure

• ECONOMIC GROWTH

Economic growth is defined as the rate of expansion that can move

an underdeveloped country from near subsistence mode of living to
substantially higher level over a long period of time.

• It is the increase in output or production.

• It’s a process of sustained increase in the real national income over a

long period of time

• It is an increase in aggregate output of goods and services in a country

during a given period of time.
• ECONOMIC DEVELOPMENT
Economic development is a normative concept i.e. it applies in
context of people’s sense of morality (right and wrong ; good and
bad) . It is defined as increase in living standards, improvement in self
esteem needs and freedom from oppression as well as a greater
choice.

• It means both more output or production and changes in the technical

and institutional arrangements by which factors of production are
produced and distributed.

• Economic development includes only those changes which gather

momentum and continuously lead the hole country to higher levels
of economic activity.
 INDICATORS OF ECONOMIC GROWTH

• Real National Income National income is the sum total of values of all
final goods and services produced in a country during one year,
calculated after making necessary adjustments. National Income at
constant prices is called real national income.

• Real Per Capita Income Per Capita Income is defined as the income per
head of population in an economy. It is estimated by dividing national
income with the total population. Per Capita Income calculated at
constant prices is called Real Per Capita Income.

Real Per Capita Income = National income at constant prices

-------------------------------------------

Mid- Year population

 INDICATORS OF ECONOMIC DEVELOPMENT

HUMAN DEVELOPMENT INDEX

• Mahbub-Ul-Haq created the HDI which was further adopted by the
UNDP
• India’s rank in HDI for 2020 is 131 out of 189 countries in HDR 2020.
• The Human Development Index (HDI) is a statistic developed and
compiled by the United Nations to measure and various countries'
levels of social and economic development. It is composed of four
principal areas of interest: mean years of schooling expected years of
schooling, life expectancy at birth, and gross national income per
capita. 
• The UNDP classifies each country into one of three development
groups:
 Low human development for HDI scores between 0.0 and 0.5,
 Medium human development for HDI scores between 0.5 and 0.8
 High human development for HDI scores between 0.8 and 1.0.
 INDICATORS OF ECONOMIC DEVELOPMENT

Three indicators of HDI are

1. Life expectancy at birth : it is measured in terms of years. The first
component of the HDI – a long and healthy life – is measured by life
expectancy.

• http://hdr.undp.org/en/data
• https://ourworldindata.org/human-development-index
Knowledge or educational attainment
2. Knowledge or educational attainment : The second
component – access to education – is measured
by expected years of schooling of children at school-entry
age and mean years of schooling of the adult population.
• Mean years of schooling estimates the average number of
years of total schooling adults aged 25 years and older
have received. 
• Expected years of schooling measures the number of years
of schooling that a child of school entrance age can expect
to receive if the current age-specific enrollment rates
persist throughout the child’s life by country.
 Standard of living

3. Standard of living : The architects of the HDI

have decided to add a third dimension – a
decent standard of living – and to measure it
by Gross National Income per capita.
HDR 2020
HDR 2020
• FACTORS/ DETERMINANTS IN ECONOMIC DEVELOPMENT
• FACTORS /DETERMINANTS IN ECONOMIC DEVELOPMENT
 BASIC CHARACTERISTICS OF THE INDIAN ECONOMY AS DEVELOPING
ECONOMY/ CAUSES OF UNDER DEVELOPMENT
/NEED FOR DEVELOPMENT IN INIDA

• India is an underdeveloped economy. Almost all the characteristics of

an underdeveloped economy are found in the Indian economy. That’s
why Indian economy is classified as an underdeveloped economy.
However, since India has the capacity to develop its economy and is
making serious efforts in that direction, we may call it a developing
economy.
• Indian economy is a developing economy in which Agriculture is the
back bone of Indian economic. 22 % of India’s population are still
below poverty line. Mineral resources are not fully utilized. We are
selling iron ore by trucks and getting blades by packets. Majority of
the people of India are leading a poverty line. Indian economic is
affected by it. Countries which are on the part of progress and which
have their potential for development are called developing economic.
So India is termed as developing economic by modern views
 1. Low per capita income
• Developing economy is characterized by low per capital income. India per
capital income is very low as compared to the advanced countries. This
trend of difference of per capita income between developing and advanced
countries is gradually increasing in present times.
• In India not only the per capita income is low but also the income is
unequally distributed. This mal-distribution of income and wealth makes
the problem of poverty in critical and acute and stands an obstacle in the
process of economic progress
• India's per capita income (nominal) was $1838 in 2016, $1751 in 2017,
$1977 in 2018 March.
• Per Capita Income US - $66,080 (2019), Canada - $50,810 (2019)
2. Price instability
• Price instability is also a basis feature of Indian economy. In almost all the
developing countries like India there is continuous price instability. Shortage
of essential commodities and gap between consumption aid productions
increase the price persistently. Rising trend of price creates a problem to
maintain standard of living of the common people.
 3. Heavy Population Pressure
• The Indian economy is facing the problem population explosion. All the developing countries
are characterized by high birth rate which stimulates the growth of population; the fast rate of
growth of population necessitates a higher rate of economic growth to maintain the same
standard of living.
• In India, the rate of growth of population has been gradually increasing from 1.31 per cent
annually during 1941-50 to 2.5 per cent annually during 1971-81 to 1.11 % in 2017.
• Currently, India’s population is approx. 1.35 billion increasing at an annual rate of 1.11% which
is less than the past years.
• India population is equivalent to 18% of the total world population living on 2.4% of the total
world’s land area.
• India’s population density is 382/km2, Canada’s population density is 4/km2 , US’s population
density 35/km2 .

4. Pre-dominance of Agriculture
• Occupational distribution of population in India clearly reflects the backwardness of the
economy. One of the basis characteristics of an developing economy is that agriculture
contributes a very large portion in the national income and a very high proportion of working
population is engaged in agriculture.
• Agriculture and allied sector provides around 15% of Indian GDP while 46 % of total Indian
population is employed in agriculture sector.
• Approx. half of India's populations producing one- fourth of the GDP, shows a lot about India's
agriculture
5. Unemployment:
• There is larger unemployed and under employment is another important
feature of Indian economy. In developing countries labor is an abundant
factor. It is not possible to provide gainful employment the entire population.
Lack of job opportunities disguised unemployed is created’ in the agriculture
fields. There deficiency of capital formation.
• The incidence of unemployment on increased from 3.5 – 4 per cent of labour
force in 2018
• In 2011, the unemployment rate was around 9 %.
• In December 2020, the unemployment increased to 9%

6. Low Rate of Capital Formation

• In backward economics like India, the rate of capital formation is also low.
capital formation mainly depends on the ability and willingness of the
people save since the per capita income is low and there is mal-distribution
of income and wealth the ability of the people to save is very low in
developing countries for which capital formation is very low.
• To achieve a higher rate of economic growth and to improve the standard of
living, a still higher rate of capital formation is very much required in India.
7. Poor Technology
• The lever of technology is a common factor in developing economy. India
economy also suffers from this typical feature of technological
backwardness. The techniques applied in agriculture industries milling and
other economic fields are primitive in nature.
• Thus due to the application of poor technology and lower skills, the
productivity- in both the agricultural and industrial sectors of our country is
very low. This has resulted in inefficient and insufficient production leading
towards general poverty in our economy.

8. Back ward Institutional and social frame work

• The social and institutional frame work in developing countries like India is
hopelessly backward, which is a strong obstacle to any change in the form
of production. Moreover religious institutions such as caste system, joint
family universal marriage affects the economic life of the people.
• Social evils like- child marriage, dowry, sati practice, human trafficing etc
9. Under utilization of Resources
• In respect of natural endowments India is considered as a very rich country. Various
types of natural resources, viz., land, water, minerals, forest and power resources
are available in sufficient quantity in the various parts of the country.
• But due to its various inherent problems like inaccessible region, primitive
techniques, shortage of capital and small extent of the market such huge resources
remained largely under-utilised. A huge quantity of mineral and forest resources of
India still remains largely unexplored. Until recently, India was not in position to
develop even 5 per cent of total hydropower potential of the country.

10. Lack of infrastructure:

• Lack of infrastructural facilities is one of the serious problems from which the
Indian economy has been suffering till today. These infrastructural facilities include
transportation and communication facilities, electricity generation and distribution,
banking and credit facilities, economic organisation, health and educational
institutes etc.
• The two most vital sectors, i.e. agriculture and industry could not make much
headway in the absence of proper infrastructural facilities in the country. 
11. Low level of living
• The standard of living of Indian people in general is considered as very low. 
• The low calorie intake in Indian diet is another characteristic of low level of living.
In 1996 the daily average calorie intake of food in India was only 2,415 in
comparison to that of 3,400 calories per day in various developed countries of the
world. The present calorie level in India is just above the minimum caloric level
required for sustaining life which is estimated at 2100 calories.
• Moreover, a small percentage of Indian populations have access to safe drinking
water and proper housing facilities.
• Almost 22% of population is still living below poverty line.

12. Inequality in income distribution

• There exists a huge economic disparity in the Indian economy.  There is a huge
difference in the distribution of income among the various categories of people on
the basis of income. This unequal distribution of income has created a huge gap
and economic disparity among the various categories of people in the Indian
economy.
• The top 1% of the population contributes almost 22% of the national income ,
which shows this huge gaps. (2017)
• The top 10% of the Indian population holds 77% of the total national wealth.
 Changes in structure of Indian Economy

Economic activities are classified into groups using some important criterion. These groups
are known as sectors of economy.

People around us are

engaged in different
activities to earn
livelihood, some may be
producing goods while
others may be delivering
services
 Changes in structure of Indian Economy

Classification
(on the basis of nature of activities)

Sectors of indian
economy

Primary Secondary Tertiary

 Changes in structure of Indian Economy
Primary Primary Sector

Primary Sector
Primary Sector
The economic activities which are connected with the extraction
and production of natural resources, for e.g., agriculture, fishing,
mining, etc., falls under primary sector. (agriculture + allied services)
 Changes in structure of Indian Economy
Secondary Sector

The economic activities which are related to the manufacturing

process, for e.g., manufacturing of steel, falls under secondary
sector.
 Changes in structure of Indian Economy
Tertiary Sector

The economic activities that are mostly based on

providing service to the society, like transportation,
banking, insurance, etc. falls under tertiary sector.
Changes in structure of Indian Economy

The 3 Sectors Are Dependent On Each Other

Secondar
Primary y

Tertiary
 Changes in structure of Indian Economy
Gross Domestic Product
(GDP)

The value ofGross Domestic

final goods Product
and services produced in each
(GDP)year provides the total
sector during a particular
production of the sector for that year. And the sum of
production in the three sectors gives the Gross Domestic
Product of a country. GDP shows how big the economy of
a country is.
INDIA’S GDP
Distribution of gross domestic product (GDP) across economic
sectors from 2009 to 2019
Sector wise GDP Contribution of India
% of workers in the three sectors in India
GDP GROWTH RATE primary secondary tertiary

2019-20 15% 23% 61%

employment primary secondary tertiary

2019-20 42 % 25 % 32 %
Sector-wise contribution of GDP in India
 The International Monetary Fund (IMF) has predicted that the Indian
economy will be the fastest growing economy in the world and expected to
grow at the rate of 7.4% in the FY 2018.
Indian Economy is classified in three major sectors;
1. Agriculture & Allied Sector: This sector includes forestry and fishing also.
This sector is also known as the primary sector of the economy. At the time
of Indian independence this sector had biggest share in the Gross Domestic
Product of India. But year by year its contribution goes on declining and
currently it contributes only 17% of Indian GDP at current prices. It is worth
to mention that agriculture sector provides jobs to around 53% population
of India. (2016-17)
2. Industry Sector: This sector includes 'Mining & quarrying', Manufacturing
(Registered & Unregistered), Gas, Electricity, Construction and Water supply.
This is also known as the secondary sectors of the economy. Currently it is
contributing around 31% of the Indian GDP (at current prices).
3. Services Sector: Services sector includes 'Financial, real estate &
professional services, Public Administration, defence and other services,
trade, hotels, transport, communication and services related to
broadcasting. This sector is also known as tertiary sector of the economy.
Currently this sector is the backbone of the Indian economy and
contributing around 53% of the Indian GDP.
• In the past, Primary sector contributed maximum to India’s GDP and
employed the maximum workforce as well.
• We can see that there is a constant decrease in the Share of
agriculture sector in India’s GDP.
• Service sector is the backbone of the Indian economy; contributing
the most in Indian GDP followed by the industrial sector.
• But the declining percentage of the agriculture and allied sector in
the Indian GDP is the cause of concern for the policy makers because
this sector still provides livelihood to around 53% population of the
country but its contribution in the economy is declining year by year.
 Changes in structure of Indian Economy
Trends in national income
National income of India constitutes total amount of income earned by the whole
nation of our country and originated both within and outside its territory during a
particular year. The National Income Committee in its first report wrote, “A national
income estimate measures the volume of commodities and services turned out
during a given period, without duplication.”
• The estimates of national income depict a clear picture about the standard of living
of the community.
• The national income statistics diagnose the economic ills of the country and at the
same time suggest remedies.
• The rate of savings and investment in an economy also depends on the national
income of the country.
Per capita national income across India in financial year 2015 and 2017, with estimates until 2021
(in 1,000 Indian rupees)
 Changes in structure of Indian Economy
Trends in national income
Particulars Target growth rate Actual growth rate

First plan 2.1% 3.6%

Second plan 4.5% 4.2%

Third plan 5.6% 2.8%

Annual plan NA 3.9%

Fourth plan 5.7% 3.3%

Fifth plan 4.4% 4.7%

Annual plan NA -5.2%

Sixth plan 5.2% 5.7%

Seventh plan 5.0% 5.8%

Annual plan NA 3.4%

Eighth plan 5.6% 5.8%

Ninth plan 6.5% 5.5%

Tenth plan 8.1% 7.8%

Eleventh plan 8.1% (MYR) 7.9%

Twelfth plan(initial) 9-9.5 %(Approach paper) 8.0 %(plan document)

 Changes in structure of Indian Economy
Trends in national income

• The real national income of India has increased at an annual average rate of
4.9% during last 60 years of economic planning.
• There are two distinctive phases of economic growth in India since
independence i.e., 1950-80 and 1980-2010.
• During 1950-80, growth in GDP was 3.2% and during 1980-2010, the
growth in GDP was 6.6% p.a. If we consider the period between 1991-92
and 2009-10, GDP growth rate has increased to 7.3% p.a.
•   The reasons for very poor performance of the economy during 1950-80
are:
i. Colonial past
ii. Restrictive trade policy
iii. Licensing system
iv. Inward looking of foreign policies
v. Excessive stress on public sector and socialistic society
vi. Anti-market and anti-competition attitude of the state
 Changes in structure of Indian Economy
Trends in national income
• The real Income of India has grown at an annual average rate of 4.9%
during the last 60 years
• During 1950-80, the GDP growth rate was 3.2%
• Acceleration of the economic growth since 1980 was due to:
i. Well-developed social and legal framework
ii. Improvised higher education system
iii. Better infrastructural facilities
iv. Progress in science and technology
• Economic growth slowed down in 2008-09 to 6.7% due to the global
financial crisis and consequent economic recession in developed
economies. This was spread across almost all the sectors.
• The economy grew at 8.6% in 2009-10 and at 9.3% in 2010- 11
 Changes
NNP in
(NY) structure of Indian Economy
1st 5 Year 1951-1956 3.6% 2.1% Better performance of agriculture
Plan
Second plan 1956-61 4.2% 4.5% Shortage of forex and food, price rise)
Third plan 1961-66 2.8% 5% War with China & Pakistan, droughts
Annual plan 1966-69 3.7% NA Green revolution
Fourth plan 1969-74 3.2% 5.7% War with Pakistan and Bangladesh liberation
war
Fifth plan 1974-78 4.9% 4.4% Roadways, tourism
Annual plan 1978-80 -5.2% NA BJP fell down before its term and congress
came to power
Sixth plan 1980-85 5.4% 5.2% Good agriculture performance and services

Seventh 1985-90 5.5% 5.0% Production increased, foodgrains increased

plan
Annual plan 1990-92 2.8% NA Shortage of forex

Eighth plan 1992-97 6.7% 5.6% Positive effect of lpg, tariffs lowered
Ninth plan 1997-02 5.5% 6.5% East Asian crisis, drought in Gujarat, poor agri
performance
Tenth plan 2002-07 7.5% 8.1%
Eleventh 2007-12 Sovereign debt crisis, global financial crisis
What after the Twelfth Plan?

• The Five-Year Plans have been laid to rest by the Narendra Modi-led
NDA government. 
• The 12th Plan, the last of the Five-Year Plans ended on March 2017,
though it has been given an extension of six months to allow
ministries to complete their appraisals. 
• The decades-old Five-Year Plans will make way for a three-year
action plan, which will be part of a seven-year strategy paper and a
15-year vision document.
• The Niti Aayog, which has replaced the Planning Commission, is
launching a three-year action plan from April 1. 
• Niti Aayog has also been entrusted the work on the 15-year Vision
Document and a seven year strategy, which would guide the
government’s development works till 2030.
 Changes in structure of Indian Economy
Problems in estimation of national income in India

1. Problems of Definition (economic and non economic activities)

What should we include in the National Income? Ideally we should
include all goods and services produced in the course of the year, but
there are some services which are not calculated in terms of money, e.g.,
services of housewives.
2. Lack of Adequate Data:
The lack of adequate statistical data makes the task of estimation of
national income more acute and difficult.
3. Non-availability of Reliable Information:
The reason of illiteracy, most producers has no idea of the quantity and
value of their output and do not follow the practice of keeping regular
accounts.
4. Double Counting:
Double counting is also an important problem while calculating national
income. It is difficult to differentiate between intermediate goods and
final goods. For eg- Sugarcane is used as intermediate good if sold to
sugar industry otherwise can be used as a final good as well.
 Changes in structure of Indian Economy
5. The Underground Economy:
India has a vast underground economy. This economy consists of
transactions that are never reported to tax and other government
authorities. It includes transactions involving illegal goods and services, such
as trading in harmful drugs, gambling, smuggling and prostitution. These
illegal goods and services are final products that are not included in GDP.
6.  Self-Consumption:
A special problem arises in agriculture which is the most dominant sector in
less developed countries (LDCs) like India. Subsistence farmers who produce
food for themselves and their family members consume a major portion of
their own output every year. Since this portion is not sold through the
market, it is excluded from GDP.
7. Lack of Official Records:
Another problem arises due to lack of reliable data. The reason is that many
people in LDCs like India sell their output through the market no doubt but
they do not maintain any official accounts of their transactions. For
example, most road­side small traders, (retailers) as also many business
enterprises in the unorganised sectors (mainly sole proprietorship
organisations or single-owner firms) and self-employed persons do not keep
proper records of their incomes and expenses.
 Changes in structure of Indian Economy
Causes of slow progress of national income
• High Growth Rate of Population
• Excessive Dependence on Agriculture
• Low Level of Technology and its Poor Adoption
• Poor Industrial Development
• Poor Development of infrastructural Facilities
• Poor Rate of Saving and Investment
• Socio-Political Conditions (ike caste system, joint family system,
fatalism, illiteracy, unstable political scenario etc. )
• Illiteracy
• Inequality of wealth and income
• Lack of financial institutions ( esp. to help the poor)
 Changes in structure of Indian Economy
Suggestions to Raise national income in India
• Development of Industrial Sector
•  Raising the Rate of Savings and Investment
• Development of Infrastructure:
• Utilisation of Natural Resources
• Removal of Inequality and balanced growth
• Containing the Growth of Population
• Development of Banking
• Removal of illiteracy and Ignarance
• Providing opportunities for technical education and vocational
training
INTER REGIONAL VARIATION IN
INDIA
 INCOME
INEQUALITY
 Inter regional variation of income in India
Inequalities in distribution of income refers to a situation where small
privileged group is able to corner a very large chunk of total income
and a very large group is able to get a very small proportions of
income.
Nature and magnitude of inequalities of income in India
• Overall inequalities
• Inequalities of income in urban and rural sectors
• Inequalities of income among different states and regions

Overall Inequality

• The top 10% of the Indian population holds 77% of the total national
wealth.
 Rural- Urban inequalities
• Based on 68th round (2011-12), Average MPCE (Monthly
per capita expenditure) is Rs 1429.6 and Rs 2629.65
respectively for Rural and Urban India .

• Income Inequality in rural areas is the highest in Haryana

followed by Kerala, Maharashtra, Punjab and Tamil Nadu.
It is the lowest in rural areas in Bihar and Odisha.

• In urban areas, Income inequality is the highest in

Madhya Pradesh followed by West Bengal, Karnataka,
Kerala, Maharashtra.
 States according to per capita Income
• As per the report of the Ministry of Statistics and
Programme Implementation (released on 20 Aug 2015),
the state per capita income of Goa is highest in the
country followed by Delhi, Sikkim, Haryana, puducherry
respectively.

• While Bihar, Uttar Pradesh, Manipur, Assam, and

Jharkhand are top 5 poorest states in terms of per capita.

• Per capita income of Goa is 3.01 times more than India's

average and 7.18 times more than poorest state Bihar. 
 States according to % of gdp
• Maharashtra has highest GSDP (Gross State Domestic Product)
among Indian States and Union Territories.
• Maharashtra has the highest GSDP among 33 Indian States and
Union Territories. As of the FY 2018-19, Maharashtra contributes
13.88% of India's GDP at current prices,
• Followed by Tamil Nadu (8.59%) and the most populous state Uttar
Pradesh (8.35%).
• Other states in top 5 are Gujarat (7.92%) and Karnataka (7.87%).
• and West Bengal (6.75%) is at 6th position
List of Indian states and union territories by GDP per capita
List of Indian states and union territories by GDP per capita
Indian States By GDP
Indian States By GDP
Indian States By GDP
Maharashtra
Maharashtra, the richest state regarding GDP, has a diversified economy. It owes its
success to international trade, mass media (television, movies, video games, and
music), aerospace, technology, petroleum, fashion, apparel, and tourism. The state
leads in industrialization in India. Most major corporate and financial institutions in the
country have their headquarters in the state's capital city Mumbai, which also happens
to be the financial capital of India. The state of Maharashtra also has the largest
proportion of taxpayers in India. The state's share markets transact 70% of the
country's stocks. The service sector dominates the economy of Maharashtra.

Tamil Nadu
Tamil Nadu, the second richest state regarding GDP, is a leader in the production of
agricultural products in India. It is the fifth biggest producer of rice and produces 10%
of fruits and 6% of vegetables in the country. Its leading fruit crops are mango and
banana; they account for 87% of total fruit production. Its main vegetables are
tapioca, tomato, eggplant, and drumstick. Other economic sectors in Tamil Nadu
include textiles, automobiles, heavy industries and engineering, and electronics and
software. Chennai is the second leading software exporter in India. Companies like
Cognizant, Covansys, Xansa, Verizon, iSoft, Invensys, Schneider Electric, and many
others are Chennai-based.
Gujarat
• Gujarat is a leader in industrial sectors such as chemicals, petrochemicals, dairy, drugs
and pharmaceuticals, cement and ceramics, gems and jewellery, textiles and
engineering. The industrial sector comprises of over 800 large industries and 453,339
micro, small and medium enterprises.

Uttar Pradesh
• Uttar Pradesh ranks third in the list of Indian states by GDP, contributing 7.8% to India's
GDP. An agricultural state, Uttar Pradesh is the country's leading producer of sugar.
Sugarcane is the main cash crop and wheat being the main food crop. Uttar Pradesh is
also an industrialized economy, being home to some locomotive plants, and
manufacturing products such as electrical equipment, steel, leather, textiles, jewelry,
and automobiles. The state of Utter Pradesh in 2014-2015 recorded a GDP of US$150
billion.
Troubling Disparities In Wealth
• There are however troubling disparities in the standards of living in India, especially in
its rural areas. It has also been noted that there are sharp and growing regional
variations among India's states regarding GDP, per capita income, and availability of
infrastructure. The country implements five-year plans targeting infrastructure
development. These five-year plans encourage industrial development in the interior
states in the attempt to reduce the disparities between states like Maharashtra and the
less prosperous states.
 Causes of Inequality of Income/variation in income
• Private Ownership of Property ( Succession and inheritance)
India being a mixed economy, has guaranteed the right to private property to
its people Accordingly, tangible wealth like land, buildings, automobiles, white
goods etc. are owned by private individual. Besides, the means of production
such as factory sheds, machines, vehicles, mines, farm land, tractor etc. are also
owned by private companies and persons.
• Inequalities Arising Out of Concentrated Land Ownership and
Concentration of Tangible Wealth in the Rural Sector:
In India, since the British period, a huge concentration of landed property in
the hands of few is taking place as a result of the prevalence of the Zamindari
system. Even after independence, although this Zamindari system was
abolished but this concentration of land ownership remained almost unaltered.
• Inequalities in Professional Knowledge and Training:
Inequalities in personal income has also resulted from inequality in professional
competence, knowledge and training. The sort of inequalities has also its root
in the unequal distribution of wealth and private property. Children belonging
to higher or elite class of society have easy access to higher and professional
education which the children of lower strata of society cannot even dream.
• Prevalence of the Law of Inheritance:
In India, the prevalence of the law of inheritance perpetuates income inequalities
to a significant level. As per this law, the property of the father is usually inherited
by his sons and daughters and thus children of richer class automatically become
richer and the children of poorer class remain poor as they hardly inherit any
property and sometime even inherit debt obligations of their parents. 
• Growing Unemployment:
In India, the growing unemployment problem, arising out of higher population
growth and inadequate employment generation, has accentuated the existing
inequality in income both in the urban and rural areas.
• Inflationary Rise in Prices:
Another important factor responsible for growing income inequalities in India is
the continuous inflationary rise in prices. Since the Second Plan onwards, India has
been experiencing a continuous rise in its price level, leading to erosion in the
value of real income of the working class and a huge marketable surplus to the
industrialists, rich farmers, traders etc.
• Credit Policy of Banks and Financial Institutions:
Credit policies of commercial and development banks and other financial
institutions are silently favoring the big producers from the very beginning. 
• Growing Menace of Parallel Economy:
In India, the growing menace of parallel economy or black economy has
been resulting a huge concentration of unaccounted or unreported
income in the hands of a new class of “black rich” in a society.
• Growth Factor:
As development proceeds, the earnings of different groups rise
differently. The incomes of the upper-income and middle-income groups
rise more rapidly than those of the poor. This happens in the early
stages of growth through which India is passing at present
 Consequences of inequalities of Income

Pros of Inequality
• Incentive for productive efficiency
If someone works harder and as a consequence receives a higher wage then
this is not market failure. The promise of a higher wage is essential to
encourage extra effort. By rewarding hard work, there will be a boost to
productivity leading to a higher national output – so everyone can benefit.
• To encourage entrepreneurs
Inequality is necessary to encourage entrepreneurs to take risks and set up new
business. Without the prospect of substantial rewards, there would be little
incentive to take risks and invest in new business opportunities.
• Rewarding for attracting professional skills
Higher income is required as a reward to attract certain type of skills.
• Compensation for different nature of work
There is a difference in the nature of work involved in different jobs. Some
involve high risk, others not so much . Some require training and skills, others
don’t.
 CONS OF INEQUALITY
• Inequality arising from Monopoly power
If firms have monopoly power, they are in a position to set higher prices to
consumers. This leads to a redistribution of income from consumers to the
shareholders of monopolies. Here, the inequality is based on an unfair distribution
of power in society. Even Adam Smith argued the government needed to regulate
monopolies.
• Social Problems
Arguably inequality can lead to social friction. It can be a factor in precipitating riots
or higher crime levels. In this case all members of society lose out. This is more
pressing if the inequality is perceived to arise out of unfair allocation of
opportunities (e.g. inherited wealth, monopoly power)
• Wide difference in standard of living
Income inequality divides the society into 2 classes- “haves” and “have nots”. While
few rich people have all the luxuries, and vast majority of people are deprived of
even basic necessities of life.
• Misallocation of Resources
Rich people demand luxury goods. Thus resources are allocated in production of
luxuries . This leads to misallocation because more resources are diverted to
produce luxuries rather than necessities.
 Measures to reduce inequalities by govt.

• Effective implementation of land reforms

• Progressive taxation ( increase in tax rate as income increases)
• Policy to control concentration of wealthy in few hands
• Policy of subsidies for poor
• Social security schemes (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)
• Setting up small scale and village industries
• Generating employment opportunities in govt. schemes and
programmes ( Given in poverty slides)
 NITI AAYOG
• Prime Minister Narendra Modi on Independence Day, the Union Government
established NITI Aayog (National Institution for Transforming India) on Jan. 1, 2015,
as replacement for the Planning Commission.
• Planning Commission: It was established was on March 15, 1950 as an advisory
institution to form five plans in the country on the line of USSR (former Soviet
Union).
• The functions of planning commission were – a) Estimate the physical, capital and
human resources of the country. b) To prepare plan for making effective and
balanced utilization of human resources. c) To determine various stages of planning
and to propose the allocation of resources on priority basis.
• NITI Aayog has been set up "to provide a critical directional and strategic input into
the development process". It will act as a "think-tank" and advise the Centre and
states on policy matters.
• The Aayog seeks to end "slow and tardy implementation of policy, by fostering
better Inter-Ministry coordination and better Centre-State coordination (co-
operative federalism).
• Prime minister is its ex-officio chairman and vice chairman is Shri Arvind Panagariya
while Chief Executive Officer is Shri Amitabh Kant.
The NITI Aayog will work towards the following objectives:
– To evolve a shared vision of national development priorities,
sectors and strategies with the active involvement of States in the
light of national objectives.   
– To develop mechanisms to formulate credible plans at the village
level and aggregate these progressively at higher levels of
government.
– To ensure, on areas that are specifically referred to it, that the
interests of national security are incorporated in economic
strategy and policy.
– To pay special attention to the sections of our society that may be
at risk of not benefitting adequately from economic progress. 
– monitoring and feedback will be used for making innovative
improvements, including necessary mid-course corrections.
– To focus on technology upgradation and capacity building for
implementation of programmes and initiatives.
 Functions of NITI Aayog
• To evolve a shared vision of national development priorities sectors and strategies
with the active involvement of States in the light of national objectives.
• To foster cooperative federalism through structured support initiatives and
mechanisms with the States on a continuous basis, recognizing that strong States
make a strong nation.
• To develop mechanisms to formulate credible plans at the village level and
aggregate these progressively at higher levels of government.
• To ensure, on areas that are specifically referred to it, that the interests of national
security are incorporated in economic strategy and policy.
• To pay special attention to the sections of our society that may be at risk of not
benefitting adequately from economic progress.
• To design strategic and long term policy and programme frameworks and
initiatives, and monitor their progress and their efficacy. The lessons learnt through
monitoring and feedback will be used for making innovative improvements,
including necessary mid-course corrections.
Parameter NITI Aayog Planning Commission
Financial body To be an advisory body, or a Enjoyed the powers to
think-tank. The powers to allocate funds to ministries
allocate funds might be and state governments
vested in the finance
ministry
Full-time members The number of full-time The last Commission had
members are fewer than eight full-time members
Planning Commission. There
are two new posts of CEO of
secretary rank, and Vice-
Chairperson. It has five full-time
members and two part-time
members. Four cabinet
ministers serves as ex-officio
members. CEO is appointed
directly by Prime Minister.
States' role State governments are States' role was limited to
expected to play a more the National Development
significant role than they did Council and annual
in the Planning Commission. interaction during Plan
It provides a platform for meetings. Planning
structured and regular commission met very few times
interaction with states. over the five years,
The NITI Aayog aims to enable India to better face complex challenges, through the
following:
• Leveraging of India's demographic dividend, and realization of the potential of
youth, men and women, through education, skill development, elimination of
gender bias, and employment.
• Elimination of poverty, and the chance for every Indian to live a life of dignity and
self-respect
• Redressal of inequalities based on gender bias, caste and economic disparities
• Integrate villages institutionally into the development process
• Policy support to more than 50 million small businesses, which are a major source
of employment creation
• Safeguarding of our environmental and ecological assets