Features of the Indian Economy

UNIT 17 FEATURES OF THE INDIAN ECONOMY Structure 1 7. 0 Objectives 17. 1 Introduction 17. 2 Features of the Indian Economy 17. 3 Growth and Development 1 7. 4 Mixed Economy 1 7. 5 Demographic Transition 1 7. 6 Sectoral Composition of GDP 1 7. 7 Employment Structure 1 7. 8 Inter-Governmental Fiscal Relations 17. 9 Let Us Sum Up 17. 10 Key Words 1 7. 1 1 Answers to Check Your Progress Exercises - - 17. 0 OBJECTIVES After going through this unit, you will be able to: identify the important features of the Indian economy; distinguish between economic growth and economic development; explain the pattern of demographic transition in India; xplain the sectoral composition of the Indian economy; and explain the pattern of employment in India. 17. 1 INTRODUCTION Let us begin with the word 'economy'. It denotes the operations and management of the economic system - the activities related to production of goads and services, consumption, investment, exchange of g d and services within the geogmphical territory, and exports and imports with rest of the world. You may have observed that production of goods and services requires inputs such as labour, capital (machineries, buildings, etc. ) and raw materials.

The inputs are available in limited quantity, i. e. , there is a shortage of inputs. When these inputs are used in the production process, they need to be paid some reward. For example, if you want to employ a unit of labour you have to pay some wage to himher. Similarly, building can be hired by paying some rent or money can be borrowed by paying some interest. Ultimately utilization of inputs involves some costs. Thus the objective before the economy is to utilize the scarce resources efficiently so that production of goods and services is maximized and cost is minimized.

Economic Development Now let us try to explain the structure of the Indian economy. The word structure, as you know, implies the way in which something is organised or put together. Thus we should look into the way the Indian economy is organised. AmrdinglyY we will find out the major segments or sectors of the Indian economy and the manner in which'these sectors interact with one another. In order to keep our discussion brief we will focus on the developments in the Indian economy dukg the post-independence period, particularly the period since five-year plans started in India.

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To begin with, we find out the important features of the Indian economy. 17. 2 FEATURES OF THE INDLAN ECONOMY At the time of Independence the Indian economy was stagnant and highly underdeveloped. Agriculture was the backbone of the economy but agricultural activities were undertaken through obsolete technology. Industrial sector c o n t r i i very little to gross domestic product (GDP). In order to give a direction to the economy the government initiated economic panning in the form of Five Year Plans in. 195 1.

Over the years the economy has witnessed increase in GDP, the composition qf GDP has changed, standard of living of people has improved, and there has been ypgradation in level of technology. The important features of the Indian economy are as follows : 1) The Indian economy is a developing economy. It has not yet reached the level of economic development seen in America and Europe. - 2) The 1ndid economy is a mixed economy in the sense that both private sector and public sector coexist and participate in the production process. 3) It is c-zed by high population density and population growth. ) About one-third of the population live below poverty line. 'Vicious cycle of poverty' operates in many sectors of the economy. 5) There is high level of unemployment and underanployment In addition, there is 'disguised unemployment' in the agricultural sector. 6) The level of technology used in production process is low in many sectors. Modern technology has not been adopted in all sectors ofthe economy. 7) ~ h aise a shortage ofphysical and economic inhstmcture. ~ransporhti&(nm ak, railways, airlines), power (electricity, gas), and communication (telephone, Internet) have not reached all parts of the country.

Even some parts of the country ' do not have provisions for schools, colleges, hospitals, and safe drinking-water supply- Let us discuss some of the above issues in detail. 17. 3 GROWTH AND DEVELOPMENT Economic development is a broader term than economic growth Economic growth usually means the growth in production of an economy. On the other hand, economic development includes other fsctors such as litemcyy health, child mortality rate, equality, regional balance, infbtmchrre, etc. Country GDP Per Capita GDP Per Capita (PPP US$) (annual growth rate) 1999 (1 990-99)

United States 3 1,872 2. 0 United Kingdom 22,093 2. 1 France 22,897 1. 1 Mexico - 8,297 1. 0 l3mil 7,037 1. 5 China 3,617 9. 5 * India 2,242 4. 1 - -- - Bangladesh 1,483 3. 1 Sri Lanka 3,279 4. 0 Nigeria 853 -0. 5 Tanzania 501 -0. 1 * The difference between economic growth and economic development is a subtle Features of the one. Let us take the example of a child. As a child grows her weight and height increases. Simultaneously, her capacity to leam, recognize and distinguish between objects develops. Thus growth is not sufficient; we need development also.

Similarly, in the case of the Indian economy economic growth is not enough; we need economic development. We need better health of people, education for all, reduction in inequality among sections of people and regions, reduction in infant mortality rate (IMR), access to drinking water for all, etc. The government has to devise policies and allocate government expenditure so that these facilities are available to all. Thus the additional income generated in the economy reaches the backward regions and the poorer sections of society.

To achieve economic development we need economic growth. In a stagnant economy, where there is no economic growth, realization of economic development is dificult. Table 17. 1 India in the World Ecaoomy - - - - Source: . World Development Report Measurement of the level of economic development is dificult, because it does not depend upon a single factor. There are a number of indicators of economic development. These indicators could be quite varied and too many. In Table 17. 1 we have given the per capita GDP along with annual growth rates of some of the economies.

In order to make comparison possible we have given these figures in a comparable form (in purchasing power parity US$). You can see that Indian economy is not comparable to developed economies. The per capita GDP in India is much lower than in developed countries. However, it has a higher growth rate compared to others. Note that some of the countries have very low GDP per capita and have experienced decline in it over time (see, Nigeria and Tanzania, Economic Development Apart fiom low per capita income India is far below the developed economies in terms of development indicators.

Some of these indicators are consumption of electricity, literacy rate, access to safe drinking water, empowerment of women, etc. United Nations Development Programme (UNDP) brings out a 'human development index' by combining several indicators of development such as life expectancy, education, per capita income, and empowerment of women. According to Human Development Report 2001, India ranks 1 15 out of 162 countries in terms of human development index A positive feature of the Indian economy is that it is not stagnant; it is developing. It is one of the fastest growing economies in the world.

There have been improvements in life expectancy, literacy, and availability of infrastructure. 17. 4 MIXED ECONOMY As mentioned earlier the Indian economy is a mixed economy where private sector and public sector coexist and contribute to the production process. Some of the activities such as law and order, justice and defence have to be performed by the government. However, the government enters directly into production of goods and services which the private sector can also produce. The extent to which the government should involve itself in the production activities is a controversial issue.

During the decades of 1960s and 1 970s the Indian government produced whatever it could and intervened in the production decisions (what to prodae, where to produce, what technology to use) of the private sector through a rigorous licensing policy. We will discuss about the economic policy changes in India later in this block. Let us look into the reasons for undertaking production activities by the government. A producer in the private sector (usually motivated by higher profits) takes the risk of setting up an industry, purchases inputs, produces output and sells the output in the market for a price.

Imagine a situation where a producer produces a commodity or service but cannot sell it for a price because consumers cannot be excluded fiom its consumption. You may have observed that in certain cases the benefit derived by you is in no way going to obstruct others from deriving its benefit. An example of the above could be the provision of streetlight by the local government. Thus, if your neighbour puts a light in h n t of her house, you enjoy the benefit that the front of your house also gets lighted; and you do not have to pay for it.

In this case there is a market failure in the sense that your neighbour cannot charge you for the benefit you derive. Thus she does not have any incentive to put a bulb in front of her house. On similar logic you also do not put a bulb in h n t of your house, which requires street lighting by the government. Secondly, inbtructure such as road, ports, dams, etc. , require huge investment but the rate of return is very low in the short run. Thus no private entrepreneur would be interested in providing roads, which prompts the government to come forward.

Thirdly, there are natural monopolies such as electricity generation, railways, etc. , where a single producer can serve the entire market. Fourthly, there are certain production activities which have so much social benefits that the govemment should produce these goods and services (e. g. , schools and colleges, hospitals, banks, etc. ). Fifthly, the government may enter into production activities to fblfil some other social objectives instead ifprofit motive. These objectives could be employment generatiorl, regional balrncc, and social i~plifot f the downtrodden.

Thus there is a strong case for public sector production and Indian planners Year Share of Public Sector Share of Private Sector 1 960-61 9. 9 90. 1 1970-71 13. 7 86. 3 1980-8 1 19. 5 80. 5 1990-9 1 25. 1 74. 9 1998-99 25. 1 74. 1 recognized it fbm the very beginning. We observe the presence of public sector Features of the in construction, hotels and restaurants, transport and communication, railways, . Indian ~conomy banks and other services. Share of Public and Private Sector in GDP Let us look into the share of public sector in the GDP of M a (s ee Table 17. 2).

In the financial year 1960-6 1 about 10 per cent of GDP originated fiom the public sector. In the Five Year Plans @e government expanded the role of the . government through more and mo@ investment in various activities. As a result,. the share of public sector in GDB increased to nearly 14 per cent in 1970-7 1, about 20 per cent in 1980-8 1 and 25 per cent in 1990-91. However, many restrictions on private sector have been removed during the decade of the 1990s. As a result, the private sector has increased rapidly and the share of public sector has remained around 25 per cent.

Check Your Progress 1 Note: 3 Use the space given below for your answers. ni Check your answers with those given at the end of the Unit. 1) Bring out the important fbtures of the Indian economy. .................................................................................................................... .................................................................................................................... .................................................................................................................... ................................................................................................................... .................................................................................................................... 2) Distinguish between growth and development. .................................................................................................................... .................................................................................................................... .................................................................................................................... ................................................................................................................... ........................................................................................ 5.... .. ........................ Economic Development 3) What are the reasons for the government to enter into production activities? .................................................................................................................... .................................................................................................................... ................................................................................................................... .................................................................................................................... .................................................................................................................... ............................................................................. ....................................... 17. 5 DEMOGRAPHIC TRANSITION India accounts for 2. 4 per cent of the world surface area but it has 16. per cent of the world population. As per the 2001 census the population of India in 2001 was 102 crore. Thus India is the second country in the world to cross 1 billion mark, the first one being China. However, keeping in view the fact that China has a much lower population growth rate (1. 4 per cent per year) compared to India's 1. 93 per cent per year, India is likely to overtake China within a few decades. Change in the size of population takes place through three demographic events: birth, death and migration. In the Indian economy migration has played a negligible role in population growth.

Thus population growth is largely due to higher birth rate than death rate. In an economy there is a pattern in which demographic transition takes place. Such transition can be divided into three stages. It has been observed that when the level of development is low in an economy both birth rate and death rate are high. As a result population growth rate is not that high. This is the first stage of demographic transition. When economic development takes place the economy moves on to the second stage - death rate declines due to availability of health facilities and medicines but birth rate continues to remain high.

This is the stage when there is a wide gap between birth rate and death rate, and population increases sharply. With M e r economic development, the economy moves on to the third stage -both birth rate and death rate are low. Consequently, population growth rate is again low in the third stage. All the developed economies are in the third stage of demographic transition. Table 173 I Demographic Transition in India Year. Population Birth Rate Death Rate Population Life (in crore) (per 1000) (per 1000) Growth Rate Expectancy (% per annurn) (in years) 1950-51 36. 1 39. 9 27. 4 1. 5 32. 1 1960-61 43. 9 41. 7 22. 8 1 . % 41. 3 1970-71 54. 8 36. 9 14. 9 2. 20 45. 6 1980-81 68. 3 33. 9 12. 5 2. 22 50. 4 1990-91 84. 6 29. 5 9. 8 2. 14 58. 7 2000-01 102. 7 25. 8 8. 5 1. 93 62. 5 - - In the case of India during the pre-independence period both birth rate and death Features of the rate were quite high. As a result, population grew at a lower rate. As you can Indian Economy see from Table 17. 3 population growth rate during 1950-5 1 was only 1. 25 per cent per mum. However, population growth rate accelerated afterwards and 4 i reached a peak during 1980-81.

A positive sign is that in the recent census the annual population growth rate has come down below 2 per cent. Some of the states such as Kerala, Tamilnadu and Punjab have reached a reasonably lower birth rate. However, in some of the major states such as Uttar Pradesh, Bihar, Rajasthan and Madhya Pradesh population growth rate is very high. Life expectancy indicates the number of years a newborn child is expected to . . swvive. It has increased from about 32 years in 1950-5 1 to more than 60 years at present. As a result, the percentage of the aged people in India has increased.

On the other hand, a decline in birth rate has resulted in a decline in the percentage of children in the country. 4 17. 6 SECTORAL COMPOSITION OF GDP Let us look into the composition of GDP in India and the changes in it over h e . The composition of GDP in India has undergone substantial changes since 1950- 51. The share of agriculture has declined while that of industrial and service sectors has increased. Economic activities can be divided into three categories: primary activities, secondary activities and tertiary activities.

Primary activities include i) agriculture, ii) fore and logging, and iii) fishing. Secondary activities include i) mining and quq& ii) d t u r i n g , iii) electricity, gas and water supply, and iv) construction Tertiary activities include i) trade, ii) hotels and restaurant, iii) transport (railways, road, air, waterways), iv) storage, v) communication, vi) banking and imurance, vii) real estate, and viii) public administration and defence. The tertiary activities are also called senrice activities. , Table 17. 4 Sectoral Composition of GDP Source: National Accounts Statistics of India

Economic Development On the basis of Table 17. 4 we make the following observations: Agriculture and allied activities (p* sector) contributedmore than half of the GDP in 1950-5 1. The share of agriculture and allied activities has continuously declined over the years and contributed only 24. 2 per cent in the year 2000-01. Of this, agriculture contributed 22. 2 per cent while forestry and logging, and fishing contributed about 1 per cent each. The share of services sector has increased from 28 per cent in 1950-5 1 to 48. 5 per cent in 2000-01.

For the year 2005-06 the share of services sector is estimated to be 54 per$ent of GDP. Thus services sector contributes more than half of the GDP at present. The share of secondary sector has increased fiom 14. 3 per cent in 1950-51 to 27. 3 per cent in 2000-01. Subsequently it declined to 26. 1 per cent in 2005-06. The decline in the share of the primary sector in GDP has taken place as the secondary and tertiary sectors have registered higher growth rate than the primary sector. In fact, the government has attempted to promote the secondary and tertiary sectors.

If we look into the sectoral composition of GDP of the developed economies, we find that primary sector contributes less than 5 per cent of GDP. Most of the GDP comes fiom the service sector (about 70-80 per cent). So the developments in the Indian economy can be considered to be a positive aspect. A problem area, however, is the composition of employment, as we will see in the next Section. It is worth mentioning that of the 27. 3 per cent share in 2000-01 manufacturing sector contributes 17. 2 per cent to the GDP. The remaining 10. 1 per cent comes tiom mining and quarrying (2. per cent), electricity, gas and water supply (2. 5 per cent) and construction (5. 3 per cent). Remember that manufacturing, and electricity, gas and water supply constitute the industrial sector. In the industrial sector we have both private sector and public sector on the basis of ownership. Very often another distinction is made: organised sector and unorganized sector. In fact, as per the Industrial Act 195 1 all the industries employing more than 10 workers if production is through use of power (20 workers if production takes place without use ofpower) are ~lequiredto register with the RegisErar of Indu.

These industrial units tidl under the category registered-sector or organized-sector. The remaining industrial units, mostly small scale, are termed unorganized sector. In the year 2000-01 the unorganized sector contributed 6 per cent to GDP compared to 1 1. 2 per cent by the organised sector. In the year 1950-5 1 both organized and unorganized sectors contributed almost equally to GDP at 4. 5 per cent each. Period National Per Capita Income Income First Five Year Plan (1 95 1-56) 3. 6 1. 8 Second Five Year Plan (1956-61) 4. 1 2. 0 Third Five Year Plan (1 96 1-66) 2. 5 0. 2 Fourth Five Year Plan (1969-74) 3. 1 . O Fifth Five Year Plan (1974-79) 5. 0 2. 7 Sixth Five Year Plan 1980-85) 5. 4 3. 2 , Seventh Five Year Plan (1985-90) 5. 8 3. 6 Eighth Five Year Plan (1 992-97) 6. 7 4. 6 Ninth Five Year Plan (1997-2002) 5. 4 3. 5 Features of the . Indian Eeonomy Table 175 Annual Growth Rntes (per cent per mum, 1993-94 prices) Source: Economic Survey 2001-02 From Table 17. 5 we observe that for the period 1950-75 the average annual growth rate of national income was quite low (around 3. 5 per cent). On the other hand, during thi period 1975-2000 the average annual growth rate has been around 5. per cent. A similar trend is observed in the per capita income of India Per capita income is defined as national income divided by total population of the country. It is obtained by subtrachg population growth rate h m growth rate of national income. We should mention that before 1975 growth rate in national income was relatively lower while population growth rate was higher. As a result, per capita income increased at a very low rate (a little over 1 per cent per annum). On the other hand, after 1975 growth rate in national income was higher while population growth started slowing down.

Consequently, per capita income increased at a relatively higher rate. During the period 1W-2002 per capita income h2ls i n d at around 4 per cent per mum. 17. 7 EMPLOYMENT STRUCTURE India being the second largest country in tern of population, it has a large labour - force (people who are able to and willing to work). In the year 1999-2000 there were 39. 7 crore employed workers in the country, which is about 40 per cent of the total population. The remaining 60 per cent population in the country are dependents. Thus for every worker there is 1. dependents. These dependents constitute children, aged and the unemployed. Because of high population growth rate the percentage of children in India is higher than in developed'countries. 13 Economic Devebpmnt Table 17. 6 Sectoral s om pod ti on of~rnployment Sector 1983 1993-94 1999-2000 Primary Sector Secondary Sector Service Sector . Total Total Employment (in crore) Agriculture has been the main source of employment in India. During the period 1950-70 it provided employment opportunity to more than two-third of the labour force.

We mentioned earlier that the share of the primary sector (agriculture and allied activities) in GDP has declined over time in Indian economy. For the year 2000-01 primary sector contributed 24. 2 per cent of the GDP. Compare this with the employment share! In the year 1999-2000 nearly 60 per cent of the labour force were engaged in agriculture. We observe that the decline in GDP share of the primary sector is not accompanied by a corresponding decline in employment share. An implication is that workers employed in primary sector have a very low productivity than in secondary and tertiary sector.

In the developed economies less than five per cent of the labour force is engaged in agriculture. It has been made possible by using modem technology and mechanization of agriculture. In some parts of India modem technology is employed in agriculture. However, a majority of farmers in India continue to we obsolete technology. A second implication is that there are too many people engaged in agriculture. In fiwt, agriculture has been a way of life for the households engaged in the agri- - activities. Very few children look for employment outside agriculture.

And those who do not get employment anywhere else start working in the family owned land. As a result, often we see a feature termed 'disguised unemployment' in Indian agriculture. It is a situation where a person is engaged llly in agriculture but his contribution is zero. It implies that if we take away the worlcer agricultural output will not decline. Suppose five pemons &working in a field and the output is 10 tomes of wheat. If we reduce the number of workers to four, then also output will remain the same. Thus the fifth worker worked in the field, but he is as good as unemployed, because his contribution is zero.

It has been a policy of the government to shift the additional labour hxce in the ' agricultural sector to secondary and tertiary sectors. Recall that service sector contributes more than half of the GDP but provides employment to less than onefourth of the labour force. Thus the productivity of labour is higher in the service sector. 17. 8 INTER-GOVERNMENTAL FISCAL RELATIONS As you are aware India follows a democratic form of government, which is federal in nature. We have diffmt layem of govemment with specific powq and 14 Features of the Indian Economy esponsibilities defined by the Indian Constitution. Taking into account the amendments made so far the Constitution provides for three layers of government: Central, State and Local. In order to carry out its responsibilities the government at each level has been assigned powers to impose taxes on individuals and organizations based on criteria such as income, expenditure, production and certain economic transactions. The major source of revenue for the central government is income tax (on individuals and corporations), central excise, and custom duties (on imports of goods).

On the other hand, there is a long list of taxes assigned to the states (including taxes on alcoholic beverages, agricultural income, and land) but the major source of tax revenue for the states is the sales tax. The tax base of the local governments is limited to local services and production. We have to keep certain things in mind while analyzing inter-govemmenth fiscal relations. One, there should be no fiscal overlapping so that the same tax should not be imposed by more than one layer of government.

The Seventh Schedule of the Indian Constitution specifies the manner in which taxes are to be imposed by the central and state level govemments. Two, taxation power is assigned to a particular level of government keeping in view the geographical area oh which the impact of the tax is felt. Thus the tax categories assigned to the Centre are generally broad-based and their impact is felt beyond state boundaries. Three, the residual power with respect to taxation remains with the central government. While exercising such power the Centre introduced 'service tax' during 1990s on the provision of specific services.

Recall fiom Section 17. 7 of this unit that the share of s e ~ c essec tor in GDP is more than half and its share is increasing over the. Service tax is slated to be an important source of revenue in times to come. Four, imposition of taxes and hation of tax rates is a matter of political economy. In order to fbrther political interests governments have many times in the past waived taxes or excluded certain categories from taxation. A widely debated issue in this context is imposition of taxes on agricultural income, which is a state subject and state governments have invariably avoided taxation of rural rich.

It has given rise to widespread tax evasion as individuals take advantage of the concession allowed to fanners and report non-agricultural income as agricultural income. Five, there is a mismatch between the tax base and the responsibilities assigned to different layers of govemments. The states have always complained about inadequate revenue compared to their expenditure. Similarly, there is shortage of funds at local government level compared to the expenditure they carry out. Six, tax base is unevenly distributed across states.

For example, rich states have a relatively higher share of people who pay taxes. Similarly, relatively higher amount of excise duties is collected fiom industrially better off areas. In order to tackle the problems of inadequate tax revenue at the state level, the Centre transfers h d to the states. Apart from meeting the gap between revenue and expenditure the devolution of funds to subordinate layers of government has the effect of bringing in regional balance in economic development over time. There are three modes of transfer of h d s fiom the Centre to the states.

First, the centre collects certain taxes (particularly, personal income tax and excise duties) and allocates a share of the tax proceeds to the states. In order to streamline such allocation the constitution provides for setting up of a Finance Commission every five years, which suggests criteria of such sharing between the ' Centre and the states on the one hand, and amongst different states on the other. So flir twelve Finance Commissions have been set up and each Finance commission Economic Development while suggesting such formulae have been poverty, backwardness, tax effort, fiscal discipline and population.

The second mode of transfer of fhds h m the Centre to the states is the grants and loans extended to states for implementing development plans. As you know, while preparing the Five Year Plans the Centre sets targets and investments by different sectors of the economy. Against this backdrop the states prepare their annual plans which is approved by the Planning Commission. The states receive grants and loans h m the Centre which supplement the revenue generated at the state level. The Planning Commission allocates fhds to states as per formula devised by the National Development Council.

For major states the ratio of grants to loan is 30:70. The third mode of transfer of h d s h m the Centre to the states is the grants given by central ministries to their counterparts in different states for specified projects. Such projects are wholly M e d by the Centre (under 'central schemes') or the states are asked to contribute a proportion of the cost (in the case of 1 'centrally sponsored schemes'). The devolution of'fhds from the Centre to the states has been a matter of political economy.

The allocation of funds across states, particularly by the Planning Commission and Central Ministries, is riddled with bargaining power of the state government, presence of pressure groups, and political interests rather than balanced economic growth. The grants extended to local bodies by the states is mostly discretionary and no set rule is formulated so far. The adoption of value added tax (VAT) by states in lieu of sales tax has opened up fhxh debates on tax base of the state governments. Check Your Progress 2 Note: i) Space given below for your answers. i) Check your answers with those given at the end of the unit. 1) Explain the three stages of demographic transition. .................................................................................................................... .................................................................................................................... .................................................................................................................... .................................................................................................................... ................................................................................................................... .................................................................................................................... 2) What are the changes. observed in the sectoral composition of GDP-in India? ' .................................................................................................................... .................................................................................................................... ................................................................................................................... .................................................................................................................... .................................................................................................................... 16 3) Explain the concept of disguised unemployment. Features of the IndinEconomy .................................................................................................................... ................................................................................................................... .................................................................................................................... .................................................................................................................... 4) What are the modes of transfer of h d s h mth e Centre to the States? 5) State whether the following statements are true or false. a) Unorganised sector is also called registered sector. b) In developed economies primary sector contributes a large share in GDP. ) Productivity of labour is higher in the tertiary sector than in the primary sector. 17. 9 LET US SUM UP Indian economy is considered to be a developing economy. At the time of Independence the agricultural sector contributed about 50 per cent of the GDP. Over the years its share has decreased to about 22 per cent of GDP which means that the share of industrial and service sectors is increasing. This is a positive development. But agricultural sector employs about 60 per cent of the labour force and this percentage is not declining which is a matter of concern.

India is the second largest in terms of population and it is still growing at a very high rate. About one-third of the population in the country are poor. There is considerable underemployment and unemployment in the economy also. The federal nature of government in India requires interaction among different layers of government according to set rules. It is also desirable to achieve consistency between revenue generation and government expenditure to carry out responsibilities at each layer of government. Keeping in view the shortage of funds at the state level the Centre provides grants and loans to the states.

India has made radical changes in her economic policies since 1991. Economic libedzation has resulted in setting up of more industries and the level of technology has improved. The annual growth rate of GDP has increased to about 6 per cent ; during the liberalization period. Its export potential also has improved and India Economic Development has a strong fareign exchange reserve. We will discuss the changes in economic policy, popularly termed 'economic reforms' in subsequent units. 17. 10 KEY WORDS Constant Prices Disguised Unemployment : Financial Year

Gross Domestic Product : (GDP) National Income Per Capita Income Public Sector National income in money terms would increase because of two factors: i) increase in quantity produced, and ii) increase in price of commodities. In order to neutralize the effect of price increase national income is expressed in terms of prices of a particular year, called 'base year'. When we say that GDP is given in terms of 1993-94 prices, GDP of all the years are adjusted for price changes so that growth in GDP is due to increase in quantity w. A person is considered to be disguisedly nemployed if hisher contribution to total output is zero. Even if we withdraw the worker from work, output will not decline. Let us take an example. For the year 2004, calendar year is from January 1 to December 3 1. On the other hand, financial year 2004-05 is h m April 1,2004 to March 3 1, 2005. It is the total amount of final goods and services produced within the geographical tenitory of the economy. It does not include intermediate goods and service, i. e. , goods and services that are not consumed directly but used for M e r production. Moreover, it does not include second hand sales ecause it does not reflect production; rather it is a change of ownership of goods produced earlier. It is also called 'net national product' (NNP). It is the total of final goods and services produced . by Indian nationals (both within the country and residing abroad) minus the amount of dqmiation during the production process. If we add the amount of depreciation to NNP we get GNP. Remember that GNP is different from GDP. In GDP of India we include final goods and sexvices produced within the geographical territory of India (both by Indian and foreign nationals).

It is national income divided by total population of the country. , -ha. . It includes the economic activities undertaken by the government. Vicious Circle of Poverty : It reflects a flow of inter-related economic activities that keep an economy under-developed. According to Ragnar Nurkse underdeveloped economies have low rate of saving which gives rise to low rate of investment. Due to low rate of investment, low level technology is employed in production activities. Because of low level of technology, output produced is lower. Consequently, saving is low and the cycle

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