Chapter-V Indian Economy

7/28/2019 Chapter-V Indian Economy.

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General Economics 5.1 Indian Economy

CHAPTER-VNATURE OF INDIAN ECONOMY

Meaning of economic growth and development:

Meaning of economic growth:

Economic growth may be defined as an increase in real terms of the output of goods andservices that is sustained over a long period of time, measured in terms of value added. Economic growth is a dynamic concept and refers to a continued increase in output.Economic growth depends upon the following important factors:1. Human resources (labour supply, education, discipline, motivation),2. Nation resources (land, minerals, fuels, environmental quality);3. Capital formation (machines, factories, roads); and4. Technology (science, engineering, management, entrepreneurship).Meaning of economic development:Economic development may be defined as the processing of increasing the degree of

utilisation and improving the productivity of the available resources of a country whichleads to increase of economic welfare of the community by stimulating the growth ofnational income.Thus, economic development encompasses economic growth.Economic development implies the following:1. Increasing the availability and widening the distribution of basic life-sustaining goods

such food, shelter and protection. This, however, would be possible with a fast increase inreal per capita income.

2. Raising the levels of standard of livingin addition to higher incomes.3. Provision of more goods, better education and greater attention to cultural and humanistic

values, all of which will serve as basis in enhancing material well-being of individualsand society.

4. Expansion of range of economic and social choice to individuals and nations by freeingthem from servitude and dependence not only in relation to other people and nation-states, but also to the forces of ignorance and human misery.

5. Economic development is the assessment of positive freedom of the individuals in theeconomy.

Economic Growth Economic Development

1.Economic growth indicates thequantitative improvement in theeconomic progress of the county.

Economic growth indicates the qualitativeimprovement in the economic progress of thecounty.

2. It shows growth in national incomeand per capita income overtime.

It shows not only a sustained increase in nationaland per capita income but also qualitative changeswhich lead higher standard of living.

3. It is a narrow concept. A countrymay grow but there may not be anydevelopment in the economy.

It is a broader concept. Economic developmentincludes the notion of economic growth.


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Economic development on the basis of income classification and humandevelopment index classification:A.Income classification:The World Bank has classified the world economies according to 2008 Gross National Income(GNI) per capita, calculated using the World Bank atlas method. The groups are:

Income GNI per capitaLow income $975 or lessLower middle income $976-$3855Upper middle income $3856-$11905High income $11906 or more

B. Human Development Index (HDI) classification:All the countries included in the Human Development Index are classified into three clustersby achievement in the human development:

Level of Human development Human development index(HDI) points

High human development 0.800 or above.Medium human development 0.500 0.799

Low human development Less than 0.500

An Undeveloped Economy:An economy is said to be undeveloped or underdeveloped economy, if it has the followingcharacteristics:1. Agriculture is the main occupation of the people.2. Low Gross National product per capita.3. Poverty is widespread, so savings and investments are also quite low.4. Population grows at a high rate (about 2% per annum)5. The standard of livingof people is low.6. Low ability to save and therefore scarcity of capital.7. High percentage of dependent population.8. The productivity of labour is considerably low.9. The production techniques are obsolete and backward.10.Investment in research and development is quite low.11.The incidence of unemployment and underemployment is quite high.12.The level of human well-beingmeasured in terms of real income, health and education is

generally low.13.Income inequalities are widespread.14.Low participation in export, import and foreign trade.15.Social life is traditional; people are generally orthodox in their outlook and they seldom

make any changes in their socio-economic relations.

Indias case:Sometimes Indian economy is also considered undeveloped due to the following reasons:1. Agriculture is the main occupation:Agriculture is the main occupation of the people in India. Around 70% of population wasengaged in agriculture. In 2001, nearly 60% of the population was dependent on agriculture.There has been increase in the absolute number of people in agricultural activities in India

but it has decreased in terms percentage of GDP over the years.


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2. High rate of poverty:In India, the poverty is very high. Every third poor person in the world is an Indian. Thatmeans one third of the worlds poor live in India. According to the National Sample SurveyOrganization (NSSO) survey in 2004-05 nearly 22% and in 2006-07 around 19.3% of thepopulation was below poverty line.

3. High rate of population Growth:Indian population has grown at a fast rate of more than 2%. India is facing the problem ofpopulation explosion as the death rate is falling but there is no corresponding fall in the birthrate. The dependency rate i.e., Non-working age (below 15 and above 64 years of age) groupratio is nearly 40% and thus working group ratio is 60%.

4. Low per capita income:Indias per capita income is low not only compared to developed countries like USA, UK,Germany but also developing countries like China, Sri Lanka, Indonesia etc. Because of lowlevel of per capita income the standard of living is quite low.

5. Low rate of saving and Investment:In India, because of low per capita income and low saving rates, the gross capital formationrates also is very low. Gross domestic capital formation was below 20% during the planningperiod. In 2004-05 gross domestic capital formation rate was 30%. In 2008-09 it was .

6. Backward techniques:Techniques of production are still backward in the agriculture sector and industrial sector ascompared to advanced countries.

7. Unemployment is quite high:The incidence of unemployment in India is quite high. During the planning period 35.39

million persons were unemployed in India and the Tenth Plan, 34.85 million people wereunemployed. So we have had to create jobs, for 70.14 (34.85+35.29) million-person years.Thus, we find that there are a large number of unemployed people in India. Not only this, theunemployment rate over the years has increased. In India, there is very high rate of openunemployment and disguised unemployment. Disguised unemployment means apparentlypeople are employed but their marginal productivity is nil or negative. Disguisedunemployment is more common in the agricultural sector.

8. Human well-being:In India, the level of human well-being is also quite low. For measuring human well-being,Human Development Index (HDI) constructed by the United Nations DevelopmentProgramme (UNDP) is used. The HDI is a composite of three basic indicators.1. Longevity is measured in terms of life expectancy at birth2. Knowledge in terms of education3. Standard of living in terms of real GDP per capitaAccording UNDP report, in 2005,Indias rank was127thamong 177 countries for three yearsin a row. In 2008, The HDI for India is 0.609, which gives the country a rank of 132nd out of179 countries with data.

9. Unequal distribution of income and wealth:The distribution of income and wealth in India is not equitable. The Gini index is used to

measure the inequality in the pattern of distribution of income and wealth in the country. Giniindex measures the extent to which distribution of income/consumption among individuals


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or households within an economy deviates from a perfectly equal distribution. It is a measureof relative poverty. The Gini coefficient lies between 0 and 1. The interpretation is as under:Gini index Interpretation

Zero (0) Perfectequality in distribution of income and wealthClose to zero Relative equality in distribution of income and wealth

Close to one Relative inequality in distribution of income and wealthOne (1) Perfect inequality in distribution of income and wealth

According to the World Development Report2006, the Gini index for India in 1994 was 0.297and in 1999-00 was 0.33. Thus, it indicates that the inequalities in distribution of income andwealth have increased.

India- A developing economy:In fact India is not undeveloped country. It is an underdeveloped country. It is a developing country.The following facts highlight that India is a developing country.

1. Rise in National Income:Indias national income has increased by 15 times during the planning period. Average NNPhas increased at a rate of less than 5% per annum. National income was Rs.1,32,367 Crores in1950-51, which rose as follows:Year National income (NNPFc) 1999-00 prices

2003-04 19635442004-05 2141776

2005-06 23068942006-07 25304942007-08 27506462008-09

2009-10Thus we can say that India is growing at low rate in comparison to developed countries

2. Rise in Per Capita Income:Per capita income in India has increased by more than 4 times during the planning period.Average per capita income has increased at a rate of 2.2% per capita income in India wasRs.3,687 in 1950-51 (at constant prices). It rose as follows:year Per capita income 1999-00 prices

2003-04 183172004-05 19469

2005-06 208582006-07 225532007-08 241322008-092009-10

3. Significant changes in occupational distribution of population:Occupational structure can be divided into three groups.1.Primary sector: Primary sector includes agriculture and allied activities such as animal

husbandry, forestry, poultry farming etc.,2.Secondary Sector: It includes all types of manufacturing and construction activities.3.Tertiary sector: It includes services like trade, transport, communication, banking,

insurance and other such services.


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Indian economy has developed rapidly. So there is a shift of labour force from primary(agricultural) sector to secondary and tertiary (non-agricultural) sector.The following table shows the occupation structure in India.Occupational Distribution of Working Population in India

Occupation 1951 2001 2007 2008 2009

Primary sector 72.1 59.3 52Secondary sector 10.6 18.2 20Tertiary sector 17.3 22.5 28Total 100 100 100

4. Important changes in sectorial distribution of Gross Domestic Product (GDP):The share of agricultural sector in Indias national income has decreased over the years andshares of secondary (industrial) and tertiary (services) sectors have improved in the GDP.

Composition of GDPOccupation 1951 2001 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10

Primary sector 56.1 23 20.2 19.5 18.5 17.8 17.1Secondary sector 11.7 23.8 19.6 26.4 26.7 26.5 25.9Tertiary sector 32.7 53.2 60.2 54.1 54.8 55.7 57.0Total 100 100 100 100 100 100 100 100

5. Growing capital base of the economy:After independence, in the Second Plan a high priority was given to establishing basic andcapital goods industries. These include, iron and steel, heavy chemicals, nitrogenousfertilizers, heavy engineering, machine tools, locomotives, heavy chemicals, heavy electricalequipment, petroleum products and many more.

6. Improvements in social overhead capital:Social overhead capital includes transport, facilities, irrigation facilities, energy, educationsystem, health and medical facilities and in India these facilities have improved. It can be seenfrom the following points.1. Indian railways are Asias largest and worlds fourth largest railway system. It is also

the worlds second largest rail network under a single management.The railways routelength has increased steadily over the years. Diesel and electrical locomotives havereplaced steam engines.

2. The Indian road network has become the second largest in the world aggregating 3.32million kilometres.

3. Although the country is still facing energy crisis, there has been an impressive increase ineh installed capacity. In 2008-09, the installed capacity was .In 2004-05, theinstalled electricity generating capacity was 1,37,500 MW (Mega Watt) against 2.300 MWin 1950-51 and 74,700 MW in 1990-91.

4. Irrigation facilities have increased raising the land under irrigation from 22.6 millionhectares in 1950-51 to 84.7 million-hectares in 2003-04. 85 million-hectares in 2008-09.

5. The literacy ratio has increased from 18.33 % in 1951 to 65.38 % in 2001.6. In the fields of medicine and health, some development has taken place. The number of

doctors has increased by more than 9 times increasing from 61.8 thousand in 1950-51 to625.1 thousand in 2003-04.7. Development in the banking and financial sector:


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After the nationalization of 14 banks in 1969 and 6 banks in 1980 and nationalization RBI, in1949, the important developments have taken place in the banking and financial sector.Agricultural sector, small-scale industries and other sectors have been getting banks funds ona priority basis and at confessional rates of interest from NABARD and RRBs.Thus, we can say, India is on the road of development.

India- A Mixed Economy:India is a mixed economy because it contains public and private sectors both.1. Private ownership of means of production:Agriculture and most of the industrial and services sectors are in the private hands.

2. Important role of market mechanism:Market forces of demand and supply have free role in determining prices in various markets.Government regulations and control over period of time have reduced a lot.

3. Growth of monopoly houses :Over a period of time, many big business houses have come into being and have been

growing such as Tata Birla, Reliance, Infosys etc.,4. Co-existence of public sector and private sector:After Independence, the government recognized the need to provide infrastructure for thegrowth of the private sector. Also, it could not hand over strategic sector like arms andammunition, atomic energy, air transport etc., to the private sector. So public sector wasdeveloped on a large scale.

5. Economic planning:The Planning Commission lays down overall targets for the public sector and private sector.The government tries to achieve the objective of economic welfare by providing incentives tothese sectors. Thus economic planning is necessary to realize overall economic goals. From the

above characteristics, we conclude that Indian economy is a mixed economy.

Five year plans in India:To understand Indian economy better, it is necessary to understand the planning period, theirobjectives and achievements. The Indian economy has seen so far Eleven Five Year Plans and SixAnnual Plans.

Planning commissionIn the political independent India during March 1950, The Indian planning commission wasestablished under the chairmanship of Jawaharlal Nehru. The Prime minister will be thechairman of the planning commission.

The commission consists of eight members namely:1. Prime Minister (Chairman),2. Four full time members (Including Deputy Chairman),3. Minister of planning4. Minister of finance and5. Minister of defence.Functions of planning commissionThe important functions of the planning commission are:1. Identifying the resources2. Formulating the plan3. Setting the plan priority


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4. Demarking the stages of plan5. Determining the plan machinery6. Making periodic assessment7. Making ancillary recommendation, if any, after periodic assessment.Objectives of five year plans in India:

The broad objective of the Five year Plans in Indian are:1. To attain economic growth2. To attain self-reliance3. To removal of very and unemployment, reduction of inequality4. To control of population growthNational Development Council (NDC)In order to establish coordination between the Planning Commission and the states ofIndian union, the National Development Council was established by the Government ofIndia on 6th August 1952.

The National Development Council is composed of the following members.1. Prime Minister of India (Chairman)2. Chief Ministers of all the states.3. Members of the planning Commission.Functions of National Development Council:The important functions of National Development Council are:1.To make periodical review of the Five year Plan at different phases and time.2.To consider important question related to Social and Economic policy affecting national

development.

3.To recommend various measures for achieving aims and targets set out in our national plan4.To take a final decision regarding the allocation of central assistance for planning amongdifferent states.

5.To approve the draft plan prepared by the planning commission of our country.Period and Priority of Five year plans in India:

Five year plans Period PriorityI 1951-56 Agriculture & Reconstruction of EconomyII 1956-61 IndustryIII 1961-66 Self- reliance, AgricultureThree Annual Plans 1966-67,67-68,68-69 (plan holiday)IV 1969-74 Growth with social justice and equityV 1974-79 Removal of poverty and self-relianceAnnual plan 1979-80 (Plan holiday)VI 1980-85 Direct attack on povertyVII 1985-90 Increase employment and productivityAnnual plan 1990-92 (Plan holiday)VIII 1992-97 Energy and powerIX 1997-02 Growth with social justice and equityX 2002-07 Eliminate poverty and improving infrastructureXI 2007-12

Inclusive growthAssessment of Five year plans in India:


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First plan (1951-1956):The first plan accorded highest priority to agriculture, irrigation, transport and power. Amonsoon was favourable and hence there was good agriculture production.

Difficulties1. The planning Commission didnt have a reliable data start with.2. The economy was to be built, bur with little resources and technology in its kitty.AssessmentThe national income of the country increased by 18% (3.6% p.a.) against the target of 11%(2.1% p.a.) and the rate of investment increased by 7.4% of national income. The net output ofagriculture and allied sectors with by 14.7% the output. Hence, the first five year plan is ahighly successful plan.

Second plan (1956-1961):The second plan gave major stress to the development of basic industries. The basis of thiswas Mahalanobis Model. The aim was to give Big Push to the economy through

industrialization. The other aims were a repaid increase in national income generation ofgreater employment opportunities and reduction in inequalities of income and wealth.

Difficulties:1. Suez Crisis.2. Failure of monsoons3. Inflationary trends and curtailment of foreign exchange reserves.4. Agriculture and small scale industries remained sluggish.AssessmentThe plan had a target to increase national by 4.5% but in increased only by 4.2%. The total

production of good grains increased from 65.8 million tonnes to 76.0 million tonnes. Hugesteel plants, heavy engineering and chemical industries cement and fertilizer industries,cement and fertilizer industries were established. Hence, this plan can be regarded asmoderately successful.

Third plan (1961-1966):The basic aim of the third plan was to make the economy self-reliant and self generatingeconomy. It also laid greater importance to raise agriculture output which led to greaterallocation for agriculture.

Difficulties

1. Chinese Aggression (1962)2. Indo-Pak Conflict (1965). The production priorities became defence oriented.3. There were poor monsoons every year of the five year except in 1964-65.4. The growing trade deficit and mounting debt obligation led to more and more borrowings

from the International Monetary Fund.5. The rupee was devalued in June 1966 to little success.Assessment:The third plan had aimed at securing an increase national income of 5.6% per annum. Butthe national income rose only 2.7%. The agriculture production increased only by 2.8%

against the target of 5% even the industrial production increased by 7.8% as against the target.Of 11%, hence the third plan was a dismal filature.


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Interim Plan (1966-1969):The miserable failure of the third plan forced the government to declare plan holiday, threeannual plans were drawn in this intervening period.

Fourth plan (1969-1974):The fourth plan was officially launched on 1 st April 1969. The major objective of this planwas growth with stability. The emphasis was also given to social justice and equality, tocreate more employment and to provide basic facilities for people.

Difficulties:1.Bottle neck in the field of energy and transport.2. Indo-Pak war in 1971.3.Bangladesh refugees in India worsened the situation.Assessment:The plan target was to increase 5.7% in national income per annum, but it was able to attainonly 2.1% per annum. The per capita income grew by 1.2% per annum. The food production

was 104.7 million tonnes during 1973-74 against the target of 129 million tonnes. It wasagain a miserable failure.

Fifth plan 1974-1979):The Fifth draft as originally drawn up was part of long-term perspective plan covering aperiod 10 years from 1974-75 to 1985-86. The two principle objectives of the fifth plan were,Removal of Poverty and Attainment of Self-reliance. In order to realize these objectives theplan aimed at 5.5% growth rate.

Difficulties:1. Erratic growth and fluctuations throughout plan period, especially in agriculture

production.2. Bottlenecks prevailed throughout the plan period.AssessmentThe target in first draft was 5.5%, but was later on revised it to 4.4% in the final plan. During1974-79 the growth was 4.8% per annum. The annual rate of industrial growth was 6%against the target of 8.2%. During the plan 7928 MW of power was added against the target of12500 MW. The plan failed to create any solid foundation on the basis of which subsequentgrowth process could be sustained.

Rolling Plan (1978-80):The Janatha Government which came to power terminated the fifth plan in 1978 and startedthe rolling plan, where the performance of annual plan was to be assessed and a new planbased on the assessment would be made in subsequent year. But by 1979-80 the economysuffered a major setback and GDP declined by 5.2%.

Sixth plan (1980-85):The basic objective of the sixth plan was removal of poverty. The plan aimed at achievingeconomic and technological self-reliance., reducing poverty, generating employment, andimproving the quality of life of the poorest through the minimum needs programmed, etc.Difficulties:1. Household savings did not increase as anticipated2. Public sector Units did not generate surplus


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3. Serious drought in majority of the states in the country during 1984-85.Assessment:Despite the difficulties the target of 5.2% growth in GDP per annum was attained successfuland the GDP growth was 5.5% per annum. The percentage of population living BelowPoverty Line declined from 48.3% in 1977-78 to 35% in 1984-85. There was an all round

economic growth and hence was termed as a major successful plan.

Seventh Plan (1985-90):The seventh plan aimed at increasing the employment, productivity, energy creation andslowing down the population growth.

Difficulties1. High fiscal deficit.2. Adverse balance of payment3. Increase in inflation4. Inefficient utilization of resources.Assessment:Though the targeted growth was 5% per annum, the economy due to bumper harvest in last2 years of plan period recorded an impressive 6% of GDP growth for the whole of the planperiod. The annual growth rate of food grain production was 3.9% during the plan as againstthe target of 5% growth rate. Industrial sector grew at 7.8% during seventh plan against thetarget of 7.9%. But unfortunately, it did not help the economy to register a steady rate ofgrowth during the plan period.

Annual Plans (1990-91, 1991-92):

The years 1990-91 were moderate in terms of growth where 5.4% growth in GDP wasattained. But the crisis seeds that germinated in 1990 got momentum and ended up in 1991economic crisis. During 1991-92 the rate of growth of GDP touched the rock bottom of 0.8%and both industrial and agricultural sectors registered negative growth rate of 2.8% and 0.1% respectively.

Eighth plan (1992-97):The eighth plan recognized the need for re-orientation of planning in keeping with theprocess of economic reforms, which were taken up in 1991 for reconstructing the economy.The role of planning commission was redefined from a highly centralized planning system toindicative planning.

Eighth plan emphasized upon1. Human resource development as main focus of planning2. A large economic space for private sector3. Development of infrastructure4. Greater role for the market to infuse economic efficiency even in the public sector.Difficulties1. Controlling the inflation and recession of 1991.2. Setting right the pessimism tendencies created in 1991 economic crisis.Assessment:The target for eighth plan was 5.6% per annum. But the growth attained was an impressive6.7% per annum GDP growth. Eighth plan was path breaking effort. The state directed


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system of planning was replaced by indicative planning. Greater role had been accorded tothe private sector in all sectors of the economy, including social sector. There wasdecentralization of planning activities, in industrial development greater emphasis wasplaced on manufacturing activities.

Ninth plan (1997-2002):Planning commission released the draft of Ninth plan document on March 1 1998, the focusof the plan was Growth with Social justice &equity the important objectives of the plan aregiven below.1. Priority to agriculture and rural development with a view to generating adequate

productive employment and eradication of poverty.2. Acceleratingthe growth rate of the economy with stable prices.3. Providing the basic minimum services of the safe drinking water, primary death care

facilities, universal primary education, shelter and connectivity to tall in a time boundmanner.

4. Containing the growth of population5. Ensuring the environmental sustainability of the development process through social

mobilization and participation levels.6. Empowerment of women and socially less privileged groups such as scheduled castes

scheduled tribes and other backward classes and minorities as agents of socioeconomicchange and development.

Difficulties:1. Low agriculture growth during the first three years.2. Reduced demand for industrial goods.3. Recession tendencies in the world economy.Assessment:The target for Ninth plan was 6.5% per annum of the GDP growth, but the realized growthwas 5.5% in constant prices. The per capita grew at 3.5% p.a. in constant prices. The countryexperienced a slowdown in the growth path in initial period of ninth plan, but it has been ableto reverse the situation in the later part of the plan. Hence, the ninth plan can be termed asnominal moderate successful plan.

Tenth plan (2202-2007):The Tenth plan aimed at ambitious 8% of growth with the main stress on raising governmentinvestment on infrastructure and social area, giving more stress on increased working

capacity, in respect of allocation of resources. It was also decided to have investmentfriendly atmosphere.

The tenth plan also stressed on reforms in the six areas namely,1. Disinvestment.2. Labour reforms3. Tax reforms4. Abolition of curbs and obstruction on the sale of agricultural commodities.5. To bring balance between revenue and expenditure of the government6. To bring the gender equalityThe Tenth plan envisaged creation of 50% million jobs during the plan period and the target

of FDI flow of 7.5% billion dollars annual and also to mobilize Rs. 78,000 Crores throughdisinvestment.


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Drawbacks:1. Disinvestment target became a distant reality2. FDI through increased was never near the target, except in last two years3. Government failed inc creation of jobs in relation to their target.4. The first year (2002) had a disappointing growth of 3.8%Assessment:In 2002, the growth was 3.8%. But in the subsequent 4 years the growth surged to 8.6%,making it an annual; average of 7.6% against the target of 8%. But the plan was fairlysuccessful.

Eleventh plan (2007-2012):The eleventh five year plan draft was approved with the ambitious growth rate of 9% with amajor focus on inclusive growth, the important objectives are:1. To attain 9% growth2. To increase the income of the masses3. To generate resources to improve services4. To double the per capita income in 10 years5. To increase the agriculture GDP by 4% per annum6. To decrease the educated unemployment below 5%7. To increase the real wage rate of unskilled workers by 20%8. To reduce poverty to less than 10%.TargetsEducation1. To reduce drop outs rates to 20% in elementary school2. To develop minimum standard of education3. To lower gender gap in literacy by 10 pointsHealth1. To decrease infant mortality rate to 28% and maternal mortality rate to 1 per 1000 live

birth2. To reduce total fertility rate to 2.13. To provide clean drinking water to all by 20094. To reduce anaemia among women by 50%.

Women and children:

1.

To raise the sex ratio for age group of 0-6 to 935 by 2011-12 and 950 by 20162. To ensure that, at least 33% of the beneficiaries of government schemes to women and girlchildren

Infrastructure:1. To provide electricity connection to all the villages and Below Poverty Line households

by 20092. To ensure all weather road connection to all habitation with 1000 and above population

and 500 and above population in hilly and tribal areas3. To connect every village with telephone by November 20074. To provide board connectivity to all villages by 2012.5. To generate 60000 ZMW electricity in eleventh plan.


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Environment:1. To increase forest and tree cover by 5%2. To attain WHO standard of air quality in all major cities by 2011-123. To treat all the urban waste by 2011-12 and to clean river water.4. To give boost to SC/ST education5. To eliminate the abhorrent practice of manual scavenging within middle of eleventh plan6. To eradicate the bonded labour completely with special target on SC/ST population7. To implement special connect plan for SC and tribal sub pan (TSP) strategic policy

imitative to remove socioeconomic regional disparities8. Rehabilitation of tribal groups who have suffered from the brunt of mega projects.Roles of Different Sectors in India:Agriculture, industry and services are the major producing sectors of an economy. In thisunit, we will study about these sectors in some details.

Role of Agriculture in India:

Agriculture plays a very important role in Indias economic development. It contributesnearly 1/4th of GDP and engages around 60% of the population of the country. Its role isdiscussed in the following points.

1. Providing employment:Agriculture provides employment to a large number of people in India. At the time ofIndependence, around 72% of the population was engaged in agriculture and allied activities.As economy developed, industry and service sector also developed and the percentage ofpeople in agriculture sector came down. In India, agriculture engaged around 60% of thepopulation in 2004-05 and 52% in 2007-08. It is to be noted that in absolute terms, number ofpeople engaged in agricultural activities over the planning period have been increased.

2. Share in national income:Agriculture contributes a major portion of GDP i.e., 23% (nearly 1/4th) in 2004-05 and 17.1%in 2008-09.The agriculture sectors share in GDP continues to reduce because as non -agricultural sectors are growing.

3. Supporting industries:Agriculture has a big role in the development of the agro-based industries such as textiles,sugar, tea, paper and other cottage industries etc.. Similarly, agriculture needs industrialproducts as its inputs e.g. fertilizers, pesticides, insecticides machinery and electricity.Agriculture also provides inputs to the market.

4. Supplier of food and fodder:Agriculture meets almost the entire food-needs of the people. In India, people spend a verylarge proportion of their incomes on food and food products. Thus, agricultural prosperityalso affects the cost of living of people. If food I costly; the cost of living of the people also getsaffected to a great deal. Agriculture also provides fodder to sustain livestock comprising ofcattle, buffaloes, sheep and poultry etc.,

5. Share in foreign trade:The countrys foreign trade especially in the export of jute, tea, tobacco and coffee depends onthe supplies of the agricultural sector. Only in case of crop failures that India becomes a net


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importer of food grains, otherwise India has not been a big importer of food grains especiallysince 1990s. Therefore, the balance of trade in the country is affected by the agricultural sector.An economy developed, the share of agricultural exports in total exports fell down.

Year Agricultural exports(as % of Total exports)

Agricultural imports(as % of Total exports)

2004-05 10.5 3.42005-06 10.2 2.52006-07 10.3 2.92007-08 9.4 2.22008-092009-10

India now has become self-sufficient in the agro-products and need to import them only whenthere are severe shortages resulting from unfriendly weather conditions like droughts andfloods.

6. Savings of capital: Agriculture has low capital output ratio:Agriculture requires lesser capital per unit of output produced compared with the industries.A capital poor economy like India can make efforts to develop this sector, which along withincrease in production, could increase employment opportunity in the rural areas and couldhelp in solving problems of urban congestion and pollution in the cities.

7. Contributions to Governments revenue:The government revenues also depend on agricultural prosperity. The direct contribution ofagricultural taxes to the Govt., revenues is not significant but indirectly agriculture has aconsiderable influence on the government revenues. At present, income tax revenue fromagricultural sector is negligible.

8. Solving problems of urban congestion and brain drain:Migration from rural areas to urban areas has created so many problems like urbancongestion and rural brain drain. If agriculture is on the road to prosperity and is in a positionto absorb fruitfully the growing talent in rural areas, the problem of urban congestion andrural brain drain will be solved.

Growth of Agriculture during planning period:The following points indicate that agriculture sector has developed in India over the years.1. Increases in production and productivity:Over the last five and half decades, agriculture production like food grains, pulses, sugarcane,oilseeds, cotton, jute and maize increased by more than thrice. The strategy of GreenRevolution in 1966 has made possible increment in production and productivity. Thisstrategy stressed upon the use of high-yielding varieties of seeds, proper irrigation facilities,extensive use of fertilizers, pesticides and insecticides often termed as High YieldingVarieties Programmes (HYVP).HYPV was restricted to five crops Wheat, Rice, Bajra, Jowar and Maize. But production ofwheat increased by 5 /12 times. On account of this, the green revolution is also known aswheat revolution.2. Diversified agriculture:Indian agriculture has become diversified in different areas like:1. The share of non-crop sectors like fishery, forestry and animal husbandry is increasing


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2. Area under commercial crop like Sugar, Cotton, Oilseeds, etc. is increasing3. Within food grains, area under superior cereals (rice and wheat) is increasing and inferior

cereals are declining.

3. Modern agriculture:Agriculture has been modernized in the following ways

1. Since 1966, when Green Revolution was started, the use of HYV of seeds, chemicalfertilizers, pesticides, irrigation facilities, threshing machine is rising.

2. Farmers are increasingly resorting to intensive cultivation, multiple cropping, andscientific water management.

3. Farmers are ready to accept new and scientific techniques of production.4. Agricultural capacity has improved a lot.5. A number of institutions as such NABARD and 196 RRBs have facilitated growth of

agriculture.

4. Improved agrarian system:The land tenure systems have been improved. The zamindari system has been suspended,because the system of collecting land revenue, from the tenant or the actual tiller of the landwas exploited by the landowners. More than 25% of the produce was taken away by thezamindar in the form of rent.

Land reforms:In order to stop the exploitation of the actual tillers of the soil and to pass on the ownership ofland to them, land reforms were introduced. Three measures were contemplated to achievethese objectives:Measures1. Abolition of IntermediariesLegislations were passed to abolish zamindari system. As a result, around 173 million acres ofland was acquired from the intermediaries and two Crore tenants were brought in directcontact with the state.

2. Tenancy reforms includesa. Regulation of rentb. Security of tenurec. Ownership right on tenantsFor regulation of rent, the legislations were passed to fix rents between 25-50 % for differentstates. Security of tenure has also been provided by these states by passing legislations, which

disallow ejectments of the tenants except in accordance with the provision of the law. ManyStates have also conferred ownership rights on the tenants. To provide ownership rights ontenants, ceiling on land holdingwas also imposed on agriculture. That limits were imposedon the amount of land which a family could hold. Accordingly, a family could hold 18 acresof wet land or 54 acres of unirrigated land.

3. Reorganization of agricultureIn order to solve the problem of fragmentation of holdings, the land was reorganized in thefollowing two ways.1. Consolidation of holding2. Cooperative farmingAccordingly, it was decided to consolidate holdings by giving to the farmer one equal to thetotal of the land in different scattered plots under his possession. Cooperative farmingwas


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also started but it did not succeed much. Thus, we see that since Independence, we have amuch-improved agrarian system, which has resulted due to the land reforms undertaken bythe government.

5. Other development:Apart from the above, the following developments have also taken place:

1. Increment the use of agriculture inputs at subsidized rates.2. Agricultural credit at low rates of interest3. Minimum support price has been fixed by the Government.4. Minimum wage law has been introduced5. Special Programmes such as Integrated Rural Development Programme(IRDP), Jawahar

Rozgar Yojana (JRY) etc., have been started to provide employment of the rural people.

Problems of Agricultural sector in India:1. Slow and uneven growth:1. The growth of agricultural sector is not sufficient to meet the rising demands of fast

growing population2. Certain crops ( wheat) are growing at a higher rate than other crops like maize, jowar etc.,)3. There are regional imbalances in the spread of growth. The growth has remained confined

to certain areas like Punjab, Haryana and Western Uttar Pradesh.4. Development of agricultural crops and animal husbandry, fisheries and forestry were not

given much attention.

2. Not so modern agriculture:1. The HYVP was initiated in just 42% of the gross cropped area2. In many large areas and for a number of crops old methods of ploughing, sowing and

harvesting etc., are still used. As a result, productivity in such areas and crops are very

low.3. About two third areas is rain fed and there are no appropriate dry-farming techniques.4. Only 40 % of the gross cropped are has irrigation facilities and the area under irrigation

has increased overthe years in India.

3. Flaws in Land reforms:1. The legislation measures have not been completed in all the states2. There are snagsin legislation like definitions of personal cultivation and tenants.4. Inadequate finance:

Before independence, main source of agricultural credit was the moneylender.

Moneylenders provide 71.6% of the rural credit. Moneylenders charge very high rates ofinterest ranging from 18 to 50%. They often manipulated accounts and cheated the pooruneducated farmers. Therefore, after Independence, to expand institutional credit toagriculture

1. 14 banks were nationalized in 1969 and2. 6 banks were nationalized in 19803. In 1975,Regional Rural Bank (RRBs) were established and4. In 1982, (NABARD) National Bank far Agriculture and Rural Development is the

apex Bank for agricultural credit.With an objective of providing credit to the rural and other priority sectors and to meet the

requirements of the agricultural and rural credit, Cooperative credit societies were alsoestablished to finance rural projects at lower rates of interest. As a result of all these efforts the


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share of moneylenders has reduced to about 17% new and that of institution credit hasincreased.

Although the following problems have emerged in agricultural credit:1.Agricultural loans are concentrated in certain regions and states. For example, nearly half

of the agricultural bank credit is concentrated in Southern States.

2.The proportion of bad debts has been increasing. Nearly 40% of the amount financed doesnot come back to the society.

3.The major beneficiaries of the agricultural credit have been the large and medium farmers.4.There is a lack of experienced and skilled staff in these institutions.5. Problems relating to warehousing and marketing1. Inadequate storage facility:The storage facilities are not adequate so 10-15% of agriculture produce gets spoiled.Government agencies like Food Corporation of India (FCI) provide storage facilities but theseare inadequate.

2. Lack of organization among farmers:There is a lack of organization among farmers so they do not get a fair price from the buyerswho are generally well organized.

3. No. of commission agents:There are a large number of agents between the producers and the consumers. They charge aheavy amount of commission. As a result, the farmers do not get a fair share in the totalproduct price charged.

4. Heavy indebtedness:Because of heavy indebtedness, the farmers are many times forced to sell their produces at

low prices.5. Lack of proper transport facilities:There is lack of property transport facilities in the market, so farmers are unable to get the fairprice of his produce.

6. Subsistence farming:A Large number of farmers live just for subsistence farming. Their marketable surplus is verylow or almost nil.

7. Unorganized markets:Several malpractices exist in unorganized agricultural markets such as under weighing,levying of a number of unauthorized fees, deductions and taxes etc.

8. Lack of Market information:The farmers are many a time not well-informed about the prevailing market conditionsincluding prices prevailing in the markets.

9. Lack of market information:Grading and standardization are at a very low level. Often inferior quality gets mixed up withsuperior one, killing the motivation of farmers to produce superior quality products.

10.Inadequate ration shops and fair price shops:In order to meet the needs of poor people in the country, the government runs a network ofration shops and fair price shops which provide food grains and other essential commodities


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at very low prices to consumers. But it has been seen that these shops, the total requirementsof food grains of all vulnerable sectors are not met.

IndustryRole of Industry in India:In any economy, industries have an important role to play. It has been noticed that countries which are

industrially well developed (example USA) have higher per capita income than those countries whereindustries are not well developed.

1. Modernizing agriculture:It modernizes agriculture and improves productivity in it. It provides agriculture with thelatest tools and equipments, which enhance the efficiency.

2. Providing employment:Population of India is very high and increasing at an alarming rate. Indian economy needssectors, which absorb ever-increasing labour-force. Industries can play an important rolehere. It is the establishment of industries along that can generate employment opportunities.

3. Share in the GDP:Over the years, the value-added by industrial sector in the GDP has improved from 12% in1950-51 to 26 % in 2008-09.

4. Contribution to exports:Indian industries contribute a major portion to the export earnings of India. In fact,manufactured goods along contribute around 77 % of exports earnings of India.

5. Raising incomes of the people:Industries generally help in raising the incomes of the people of a country. By putting inmore efforts, capital and improved technology industrial output and production can beraised. In fact, in this sector, the benefits of large-scale production can be reaped.

6. Enhancing further the economic growth:As industrialization grows the role of capital goods vis--vis consumer goods gains strength,this helps in enhancing further the economic growth.

7. Meeting high-income demand:Beyond certain limits, the demand of the people for agricultural products falls and forindustrial products rises. Industries help in meeting these ever increasing demands.

8. Strengthening the economy:Industries help strengthen the economy in a number of ways:1. The growth of industries producing capital goods i.e., machines, equipments etc. lets a

country to produce a number of goods in large quantities and at low cost.2. It makes possible the production of economic infrastructure3. Agriculture gets improved farm implements, chemical fertilizers and transport and

storage facilities4. Dependence on foreign sources for defence materials is a risky matter. Industrialization

helps a country to become self-reliant in defence materials.

Growth of Industrial Sector in India:All the industries of a country can be grouped in two major ways:1. On the basis of size of industries:It can be divided into:(a)Large-scale industries includes mining, manufacturing and electricity(b)Medium-scale industries and(c)Small-scale industries (SSI)


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2. On the basis of end-use:1. Basic goods industries: like Minerals, Fertilizers, Cement, Iron and Steel, Non-ferrous

metals, electricity etc.,2. Capital goods industries : like Machinery, Machine tools, railroad equipments etc.,3. Intermediate goods :like chemicals, rubber, plastic, coal and petroleum products4. Consumer goods :consumer durable and non-durables (like man-made fibres, beverages, watches,cosmetics, perfumes etc.,)Pattern of Industrial Development: Before Independence1. Lop-sided pattern of development:Industries were either too large or too small in size with very few medium size units. There was high

concentration of employment in small and large industries

2. Low capital employed and low per capita income:Capital employed per worker in industry was very low.

3. Dominance of consumer goods industries:Consumer goods industries were well established. The country had to largely depend on import forcapital goods.

After Independence:Main developments are:1. Industrial Growth:The pattern of industrial growth experienced as.1. Ups and downs during the period 1951-20052. A significant decline was experienced for 15 years from 1965-1980, annual rate of industries fell

down to 4.1%3. At the time of 2005-2006 industrial growth was 7.8% (nearly 8%)The industrial sector faced the process of retrogression and deceleration during the period 1965-80.The reasons were:1. Unsatisfactory performance of agriculture2. Slackening of real investment especially in public sector3. Slow down in import substitution4. Regulation and control over private sectors5. Narrow market for industrial goods, especially rural area.2. Development of Basic and Capital goods Industries:The structure of industry has shifted in favour of basic and capital goods and intermediate goodssector during the planning period. In Second Plan (1956-65), Mahalanobis plan emphasized upon theestablishment of capital and basic goods industries. Three steel plants were set up in the public sectorat Bhilai, Rourkela and Durgapur in the second plan.

3. Growth of consumer goods industries:There has been a remarkable growth of consumer goods industries. Since 1991, important changeshave occurred in the industrial structure. Intermediate and consumer goods have got more importancethan basic and capital goods.

4. Modernization:Industrial sector has become broad-based and modernized. The role of traditional industries like

textiles has reduced and role of non-traditional industries like engineering goods, chemical goods andelectrical goods has improved tremendously.

5. Increase in the size and diversification of public sector:


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There has been a massive increase in the size and diversification of public sector. In the first plan, thenumber of public sector units was just 5 but in March 2002, it increased to 240 like ONGC, IOC, SAIL,BHEL, HMT, HAL, BEL, NTPC etc.,

6. Dominance of large and monopoly business houses:The dominance of large and monopoly business houses has increased several times. Now big businesshouses have increased enormously to about 80. These are Tata, Birla, Reliance, Thapars, Mafatlals,

Goenka and Chhabria, and so on.

7. Expansion of infrastructure facilities:A remarkable expansion took place in infrastructure facilities since 1951. In such respects as powergeneration, development of energy sources, railway transport, telecommunication, roads and roadtransport and the like which are basic pre-requisites for industrial development. Industrial finance wassupported heavily by public financial institutions (LIC, IDBI, and ICICI) and commercial banks. Portfacilities for imports and exports have been substantially expanded.

8. Progress in the science and technology:The country could be proud of achieving remarkable progress in the science and technology front.Several Research laboratories were set up. Technological know-how was extensively imported

through foreign technical collaboration arrangements. Science, Engineering, Management and otherprofessional educational institutions have been established on a large scale.

9. Growth of small scale industrial units:One of the notable features of the planning era since 1951 has been the substantial growth of small-scale industrial (SSI) units.

Small-Scale Industries:Meaning of SSI units:A sick industrial unit in one unable to perform its normal function and activities of production ofgoods and services at a reasonable profit on a sustained basis. The present industrial policy of theGovernment of India has defined a SSI unit as a unit having investment up to Rs.1 crores in plants

and machinery. In the case of an ancillary industrial unit, the limit is also Rs.1 crore. A tiny unit is one,which has investment of 5 lakhs in plant and machinery.Performance and contribution of SSI:Since Independence there has been an all-round development of small-scale and cottage industries inIndia. This will be clear from the following points:1. High Growth rate:The growth rate of SSI @9% per annum in terms of production has been far faster than that of large-

scale sector since. It is estimated that they contribute about 40% of the gross value of output in themanufacturing sector.

2. Large Numbers:The number of registered and unregistered small-scale units, which stood at 16,000 units in 1950increased to and 118.59 lakhs in 2004.05

3. Employment generation:The SSI is labour intensive and hence they employed 283 lakhs persons in 2004-05. This representsabout 60% of the total industrial employment.

4. Export potential:It contributes 45% of the manufacturing exports and 35% of the total exports. Exports from SSI sectorincreased to 95,000 Crores in 2004-05.

5. Produce a very wide producer and consumer goods:They include simple and sophisticated engineering products, electrical, electronics, chemicals, plastics,

steel, cement, textiles, paper, and matches; readymade garments and so on.6. Support to large scale industries:


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They support to large industries by meeting their requirements of inputs of raw materials,intermediate goods, spare part etc,

7. Non-inflationary force price stability:A large number of small-scale industries are engaged in the manufacture of consumer goods of massconsumption, thereby making them available in plenty which serve as a non-inflationary force.

8.

Higher output capital ratio:SSI produces higher output at lower capital so higher output capital ratio found here. The employmentgenerating capacity per unit of capital of small and cottage industries was found to be at least eighttimes greater than that of large industries.

Problems of Industrial Development in India:The following are the main problems of the industrial development in India:1. Failure to achieve targets of production:Except in First FYP, the industrial sector has failed to achieve the target of production. The averageindustrial growth rate achieved 6.2% relative to the target of 8% per annum. These are the followingcauses which has resulted in failure to achieve target of industrial production1. Poor planning2. Power, finance and labour problems3. Technical complications2. Under utilization of capacity:A large number of industries suffer from substantial under utilization of capacity. The average underutilization being in the region of 40% to 50%, Main factors responsible for under-utilization of capacityare:1. Indiscriminate grabbing and creation of capacities by private enterprise2. Demand short-falls3. Over-optimistic demand projections4. Supply bottle-necks,5. Labour problems andDeliberate under-utilisation to create shortages

3. Increasing capital output ratio (ICOR):Incremental capital output ratio means more capital required for per unit of output. It increases thecapital costs of new industrial units.

4. High cost industrial economyThe cost and prices of manufactured goods and services in India are generally much higher thaninternational costs and prices.

5. Inadequate employment generation:One of the most serious deficiencies of industrial development over the decades since independence isits inadequate employment generation, in relation to investment made. Factory employment absorbedonly 2% of the labour force in 1980.

6. Poor performance of Public Sector:A large number of public sector units are loss leaders in the industrial sphere while the rate ofprofitability of others in law.

7. Sectorial Imbalances:In India, industrial development on an over-all basis suffered several setbacks because of inadequatesupport from agriculture and infrastructure. But in real practice, several sectorial imbalances at a pointof time and over a period of time plague the industrial economy of India.

8. Regional Imbalances:


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Industrial development continues to be lopsided, region-wise, large-scale industries are concentratedin a very few states like Maharashtra, West Bengal,Tamil nadu and Gujarat. These four States accountfor 44% of the total factories and 48% of Productive capital.

9. Industrial Sickness:Industrial sickness has become a serious problem affecting small, medium and large units. In March,

2003, there were 1.71lakh sick units out of which more than 98 % were small units. The causes ofsickness are financial mismanagement, demand recession, labour unrest, and working capitalshortage, and cost escalations, shortage of raw material, uneconomic size, out-dated machinery andequipment and so on.

ServicesServices:The Services sector or tertiary sector of an economy provides services to other businessenterprises as well as to the consumers. Service sector includes:1. Business services and professional services2. Communication services.3.

Construction and related services4. Distributive services

5. Education Services6. Energy services7. Environmental services8. Financial services9. Health and Social services10.Tourism services11.Transport servicesRole of Service Sector in India:The service sector in India is its largest sector and accounts for increasingly significant shareof GDP. This sector is growing very fast. It is clear from the following points.1. Increasing share in the GDP: Over the planning period, the share of tertiary or services

sector has increased to more than half i.e., 54.1% in 2005-06.2. Providing employment: In 2001, service sector occupied 22.5% of working population in

India (nearly 23%).3. Providing support to other sectors: It provides support to agriculture and industries by

providing a number of services in the form of financial services, transport services,shortage services, distributive services, software services and communication services and

so on.4. Contribution to Export: Services exports from India comprise services such as travel,

transportation, insurance, communication, construction, financial services, software,agency services, royalties, copyright and license fees and managements services. Servicesaccounted for 35% of total exports in India (2004-05). In 2004, Indias share in worlds totalservices export was 1.9%. Indian services export grew by 75% in 2005-06. In the list ofexporters of services (2004), India is ranked 21st.

Growth of Service Sector during Planning Period:1. The service sector now accounts for Indias GDP: 54.1% in 2005-06.2.

The share of primary sector in GDP falls and shares of secondary and tertiary sectors increases.


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3. The Government of India has given special status to the services sector in the Export andImport Policy (2002-07). Services sector grew by 10% per annum in 2004-05 and 2005-06.

4. Within the services sector, the share of trade, hotels, transport and communicationincreased to 42.67 in 2004-05.

5.

The tourism industry and financial services segment are growing very fast and has thepotential for growing still faster. Share of financial sector has grown at 22.41%.

6. The share of other services such as community, social and personal services haveimproved to 24% in 2004-05. There has been an increase in the growth rate of theseservices also.

7. India has second largest scientific and technical manpower in the world. Indiasconsultancy professionals possess capability to provide expertise in sophisticated areaslike information and technology, advanced financial and banking services etc., todeveloped countries like USA, UK, France, West Germany and Australia.

8. Indias health services, super-specialty hospitals specializing in both modern andtraditional Indian medicine systems (like Ayurveda, Unani, and Nature care) supportedby state of the art equipment, are attracting patients from across the world.

9. Education is also a foreign exchange earner by way NIRs, and foreign students enrolled inIndia.

10.Entertainment industry (including films, music, broadcast, television and liveentertainment) is another service industry which has grown very fast after independence.

11.IT enable services, such as Business Process Outsourcing (BPO) have been growingrapidly (60-70%) in the recent past and will continue to grow. It is projected that in 2006 itwill create employment opportunities for about a million people. Outsourcing haschanged the image of India.

Problems of service sector in India:It is facing lots of problems, important ones are:

1. Inadequate infrastructure: For the purpose of achieving rapid growth of the economywe require a very high quality of infrastructure. Unfortunately, our infrastructure isinadequate both in the rural areas and in the urban areas.

2. Inadequate economic reforms: Economic reforms undertaken in all the sectors areinadequate. In financial sector many controls and bottlenecks are still there. These needto be removed.

3. Lack of proper environment for tourists: India has great potential in the tourism sector.But there is a need to create proper environment for attracting tourists. Foreign touristsoften get harassed and cheated in the hands of babus and officialdom, touts and conmen.

4. Lack of Training: Etiquettes and good behaviour are the hallmark of the service sector.Indian service providers whether they are in banks, in hotels and restaurants, inhospitals or in public administration, they need to be trained thoroughly in publicdealing, etiquettes, and hospitality.


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5. Lack of Cleanliness: The airports, railways etc., in India are not clean and wellorganized. They need to be organized.

6. Problem of visa: Our consular division also is not property. It takes many days to issuevisas. This hampers the growth of tourism sector.

7. Lack of setup: Service trade also faces a number of problems. These include lack of setuplike export promotion councils.

8. Unfair competition: In the telecom sector unfair competition and lack of internetinfrastructure, monitoring and customer demand, mar the growth of e-commerce.

9. Slow growth in primary and secondary sector: Service sector cannot grow in isolation.It needs strong backing of other sector/primary and secondary.

10.Competition from other countries: Indian service providers (like BPOs and IT servicesproviders) are facing stiff competition from other countries. They need to improve theirquality and reduce their costs.


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NATIONAL INCOME IN INDIA

Different Concepts of National Income and Output:Meaning and Definition of National Income:National Income or National Product is defined as the money value of all final goods andservices produced within the domestic territory of a country in an accounting year plus NetFactor Income from Abroad. According to Central Statistical Organisation (CSO) NationalIncome is the sum total of factor incomes generated by the normal residents of a country inthe form of wages, rent, interest and profit in an accounting year. NationalIncome/Product is the value of production by the normal residents of a country (within oroutside the domestic territory). (Domestic income or product is the value of productionwithin the domestic territory of a country). There are many different concepts of nationalincome. Each has a specific meaning, method of measurement and use.

Characteristics of national income:1. National income reflects the value of final goods and services only. Intermediate goods

are excluded to avoid the problem of double counting.

2. Different goods manufactured and services rendered are measured in different units(some in kilograms while others in litres, etc), therefore, it is not possible to find theaggregate value all those goods and services with different units. Hence, National incomeis always expressed in monetary terms.

3. Domestic territory includes the following:a.Territory lying within the political frontiers, including territorial waters of the country.b.Ships and aircrafts operated by the residents of India between two or more countries.c. Fishing vessels, oil and natural gas rigs, floating platforms operated by residents of India

in international waters.

d.Embassies, consulates and military establishments of the country located abroad.

4. National income is not the sum total of personal incomes. Personal incomes includetransfer incomes. All transfer incomes are excluded from national income because theyrepresent a redistribution of goods and services already produced in the economy andnot any addition in goods and services.

5. National income is generally expressed for a period of one year.Different concepts of national income:

1. Gross Domestic Product at Market Price (GDPMp)2. Gross National Product at Market Price (GNPMp)3. Net National Product at Market Price (NNPMp)4. Net Domestic Product at Market (NDPMp)5. Net Domestic Product at Factor Cost (NDPFc)6. Gross Domestic Product at Factor Cost (GNPFC)7. Gross National Product at Factor Cost (GNPFC)8. Net National Product at Factor Cost (NNPFc)

1.Gross Domestic Product at Market Price (GDPMp)


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Meaning and measurement of GDPMpThe term gross means that GDPMp is gross of depreciation, in other words, it impliesdepreciation is yet to be deducted. Domestic means domestic territory or resident productionunits. Product means final products. Market Price means that GDP is calculated at pricesinclusive of indirect taxes and exclusive of subsidies. GDPMp is a macro concept which isdefined as the market value of final goods and services gross of depreciation producedwithin the domestic territory of a country during one year and valued at prices inclusive ofnet indirect taxes.

The important points to remember about GDPMp are:1. GDPMP is a flow concept, i.e. flow of goods and services produced during a year. It does

not include goods produced in the previous year.

2. GDPMP is always GDPMP at current prices. In situations where price of base is taken, it iscalled GDPMP at constant prices.

3. GDPMP is not value of output because it excludes value of intermediate consumptions, i.e.GDPMP is sum total of value added by all producing units in domestic territory of acountry. It includes value added by multinational companies in India.

4. GDPMP excludes transfer payments, capital gains, financial transactions and incomegenerated through illegal means.

5. GDPMP is the market value of final goods and services. Market value= Price* Quantity offinal goods and services.

6. To avoid double counting, GDPMPincludes only final value of new goods and services. Itexcludes the value of second hand goods.

7. The term gross is inclusive of depreciation.8. GDP is confined to domestic territory of a country and therefore, excludes Net Income

From Abroad (NFIA).

GDPMP measured by the formula:

GDPMP = Value of Output in Domestic Territory-Value of Intermediate Consumptionor GDPMP = Value added.

Important related concepts:1) Gross Domestic Product at current Price and Gross Domestic Product at constant Price.2) Concept of depreciation3) Concept of indirect taxes4) Factor cost5) Net factor income from abroad6) Concept of subsidies1.Gross Domestic Product at current Prices and Gross Domestic Product at constant Prices:When gross domestic product is calculated on the basis of the prices of goods and servicesprevailing in the market, it is known as Gross Domestic Product at current Price. It is alsoknown as nominal Gross Domestic product because increase in GDP due to increase in pricescannot be taken as real increase.On the other hand, when gross domestic product is calculated on the basis of some fixedprices i.e. base year prices, it is known as Gross Domestic Product at constant Price. Base yearis an average standard previous year in which major economic changes have not taken place.


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Gross Domestic Product at constant Price should be referred as real GDP because it eliminatesthe inflationary effects in the GDP in the form of prices changes of goods and services in theeconomy during different years.

2. Concept of depreciation or consumption of fixed capital:Wear and tear or loss in the value of the fixed assets due to its use is termed as consumption

of fixed capital or depreciation. Depreciation represents the amount spent or incurred togenerate the income in the economy. Therefore, depreciation is deducted from gross values toget the net income earned in the economy.

3.Concept of indirect taxes:Excise and customs duty paid by the firms to the government are added to the cost ofproduction and practically charged to the customers. If indirect taxes would not have beenpaid, the same would have been the part of firms income and distributed among factors ofproduction. It is, therefore, necessary that the payment made as indirect taxes must be addedwhile calculating GNP at market prices.

4.Factor cost:Factor, here means factors of production. Production of goods is the result of effectivecombination of land, labour, capital and enterprise as factors of production. These factors areremunerated for their contribution in the production. Income received by these factors ofproduction is known as factor income.

5.Concept of subsidies:Subsidies mean economic assistance given by the government to firms. The Subsidies willundoubtedly increase the income of the firm. The increased income must have been paid tofactors of production. Income from subsidies is not operating income, earned from productive

activities. It is therefore, not included in the national income. While calculating GNP at marketprices value of subsidies are deducted.

6.Net factor income from abroad:Net factor income from abroad is the difference between the value of goods and servicesproduced by foreign nationals in India and Indian nationals in abroad. It may be positive ornegative. If the value of output produced by Indian nationals abroad exceeds the value of thegoods and services produced by foreign nationals in India, net earnings will be positive. Inorder to calculate GNP, we should add (positive NFIA) to or subtract (negative NFIA) fromGross domestic product (GDP).

2.Gross National Product at Market Price (GNPMp)Meaning and Measurement of GNPMP:GNPMP is defined as the market value of final goods and services produced in the domesticterritory of a country by normal residents during an accounting year including Net FactorIncome from Abroad.GNPMP is measured by the formulaGNPMP = GDPMP + Net Factor Income from AbroadDifference between GDPMP and GNPMP

Distinction between Gross Domestic Product and Gross National Product:


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Gross Domestic Product (GDPMP) Gross National Product (GNPMP)

1. It refers to the money value of all finalgoods and services produced within thedomestic Territory of a country.

2. It includes the value of entire finalproduction within the domestic territorywhether undertaken by its residents or non-residents.

3. It is a narrow concept.4. It is a territorial concept as it is concerned

with the domestic territory of a country.

1. It refers to the market value of all finalgoods and services by the normalresidents of a country.

2. It includes the value of final goods andservices produced in any part of theworld by the normal residents of acountry.

3. It is a broader concept4. It is a national concept because it is

concerned with the normal residents ofa country.

5. GDP value of output in domestic territory-Value of intermediate consumption.

6. I we add Net Factor Income From Abroadto GDP, we get GNPMP.7. If Net Factor Income From Abroad isnegative then GDPMP > GDPMP.

5.GNP = GDP + Net Factor Income FromAbroad.

6. If we subtract net factor in come fromabroad from it, we get GDPMP.7. If Net Factor Income From Abroad ispositive then GDPMP > GDPMP.

3. Net National Product at Market Price (NNPMP)Meaning and Measurement of NNPMP:NNPMP is defined as the market value of output of final goods and services produced bynormal residents of an economy in its domestic territory during an accounting yearexclusive of depreciation and inclusive of Net Factor Income From Abroad.NNPMP can be calculated by the following formulae:NNPMP = GNPMP Depreciation

NNPMP = NDPMP + NFIANNPMP = GDPMP +NFIA - Depreciation

Difference between NNPMP and GNPMP

NNPMP GNPMP

1. It excludes depreciation.2. NNPMP = GNPMP - Depreciation 1. It includes depreciation2. GNPMp = NNPMP + Depreciation

4. Net Domestic Product at Market Price (NDPMP):Meaning and Measurement of NDPMPNDPMP is defined as the market value of final goods and services produced in the domestic

territory of a country by its normal residents and non-residents during an accounting yearless of depreciation.NDPMP can be calculated by the formula:

NDPMP = GDPMP DepreciationNDPMP = NNPMP Net Factor Income From Abroad

Difference between NDPMP and NNPMPNDPMP NNPMP

1. It refers to the market value of all final goodsand services produced by all the enterprises

within the domestic territory in a year.2. It is a domestic concept as it does not include

1.It refers to the market value of finalgoods and services produced by the

normal residents of a country.2.It is a national concept as it includes


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Net Factor Income From Abroad.3.NDPMP = GDPMP Depreciation or NDPMP =

NNPMP - NFIA

Net Factor Income From Abroad.3.NNPMp = GNPMP Depreciation, or

NNPMP= NDPMP + NFIA

5. Net Domestic Product at Factor Cost (NDPFC)Meaning and Measurement of NDPFC:NDPFC is alternatively known as Net Domestic Income. NDPFC is defined as the totalfactor incomes earned by the factors of production. In other words, NDPFC is the sum ofdomestic factor incomes.NDPFC can be measured by the formulae:NDPFC = Compensation of Employees+ Operating Surplus+ Mixed Income of the Self-employed orNDPFC = NDPMP Indirect Taxes+ Subsidies or NDPFC =NDPMp Net Indirect Taxes

Difference between NDPFC and NDPMPNDPMP NDPFC

1. It refers to the market value of all final goodsand services produced both by residents andnon-residents within the domestic territory of acountry in an accounting year.

2. It is estimated at market price.3. NDPMP = NDPFC + Indirect taxes - Subsidies

1.It refers to the market value of finalgoods and services produced by thenormal residents of a country.

2.It is estimated at factor cost.3.NDPFC=NDPMP-indirect taxes+

subsidies

6. Gross Domestic Product at Factor Cost (GDPFC)Meaning and measurement of GDPFC:GDP at factor cost is defined as the sum of net value added by all the producers in the

domestic territory of a country inclusive of depreciation during an accounting year.

GDPFC is measured by the following formulae:GDPFC=GDPMP -Indirect Taxes + Subsidies.GDPFC=NDPFC + Depreciation.GDPFC =Compensation of Employees + operating surplus+ Mixed income+ Depreciation.GDPFC = (Domestic Factor Income) +Depreciation.

Difference between:(a)GDPFC and GDPMP.GDPFC= GDPMp-Indirect taxes+ Subsidies.

GDPFC = GDPMp-Net Indirect Taxes.GDPMP = GDPFC + Indirect Taxes- Subsidies.

(b) GDPFC and NDPFC.GDPFC= NDPFC +Depreciation.NDPFC=GDPFC- Depreciation.

7. Gross National Product at Factor Cost (GNPFC)Meaning and measurement of GNPFC:GNPFC is defined as the sum of gross value added at factor cost by the normal residents of acountry during a year and Net Factor Income From Abroad.

GNPFC is calculated by the formulae:


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GNPFC =NNPFC + Depreciation.GNPFC =GNPMP Net Indirect Taxes.

Difference between GNPFC and GNPMPGNPMP=GNPFC +Net Indirect Taxes.GNPFC= GNPMP Net Indirect Taxes.

8. Net National Product at Factor Cost (NNPFC) or National Income (NI)Meaning Features and Measurement of National Income or NNPFC:National Income is defined as the factor income accruing to the normal residents of thecountry (rent, interest, profit and wages) during a year. It is the sum of domestic factorincome and Net Factor Income From Abroad. It is a monetary depression of currentachievements of people of a country through their production activities.NNPFC is defined as the sum of net value added at factor cost by normal residents in thedomestic territory of a country and Net Factor Income From Abroad in an accounting year. Inother words, NI is the value of income generated within the country plus income from

abroad.NNPFC or NI can be calculated by using the following formulae:NNPFC =NDPFC +Net Income from Abroad.NI = Domestic factor Income +NFIANI = (Compensation of Employees+ Operating Surplus + Mixed Income)+NFIANI =NNPMP Net Indirect Taxes.

Difference between:(a) NNPFC and NNPMP

NNPFC =NNPMP Net Indirect Taxes(b) Domestic factor income and NI

Domestic Factor Income National Income

1. Domestic factor income= Rent+ wage+interest +profit+ Mixed income of selfemployed.

2. This income is generated by normalresidents and non-residents of countrywithin the domestic territory of a country.

3. If NFIA is negative then Domestic factorincome is more than NI.

1. NI= Domestic factor income +NFIA.2. NI is value of income generated by

normal residents of a country withinthe domestic territory plus fromabroad.

3. If NFIA is positive, then NI is greaterthan domestic factor income.

9. Private income:Private income refers to the income earned by all the individuals of the country from all legalsources. Transfer payments are not included in national income, but they are the part of theprivate income. These payments include stipend, scholarship, pension, government grant andother social security payments.

Private income= NDPFc + Transfer payments + NFIA + interest on national debt Incomeof the government surplus of non departmental undertaking.

10. Personal Income


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Income received by individuals or households in a country during one year is known asPersonal income. It should not be taken that the sum total of personal income will be nationalincome. This is due to the fact that all income earned by firms are not distributed amongfactors. A part of income is retained as undistributed profits. Firms also pay corporate taxes.Factors also receive transfer income.

Personal income = Private income + Transfer payments (if not included in privateincome) - corporate taxes- undistributed profit

orPersonal income = National income Amount not available for distribution + transferpayments.

Note:1.Amount not available for distribution:These are the deductions which are made out of national income before making anydistribution. The whole of national income is not distributed. For Example, corporate incometaxes, undistributed corporate profits, social security contribution such as employeescontribution towards provident fund, pension fund etc.

2.Transfer payments:Government provides certain social security benefits to individuals such as old age pension,unemployment allowance, widow pension etc.

11. Disposable incomeDisposable income is defined as the income remaining with individuals after deduction ofall taxes levied against their income and their property by the government.

Disposable Income = Personal income- Direct personal tax- miscellaneous receipts of the

government administrative department( fees, fines).or

= Saving+ consumption.

Methods of Measuring National Income:Production generates income; income gives rise to demand for goods and services; anddemand in turn gives rise to expenditure. Expenditure leads to further production. The flowof production, income and expenditure represents three related phases namely Production,Distribution and disposition. They are interlined in a circular manner.

Production phase leads to production of goods and services i an economy- Income ordistribution phase leads to generation of factor incomes, i.e., rent wages +interest + profit.Expenditure or disposition phase relates to spending of income in terms of consumption ofgoods and services and investment expenditure. This expenditure leads to further productionor flow of goods and services. The three processes go on simultaneously. Attempts have beenmade by various economists to measure national income in terms of production (valueadded), income and expenditure.

National income is the sum of factor incomes accruing to the residents of a country from theirparticipation in production activity within and outside domestic territories. There are threecircular flows of creation, distribution and spending of income that are taking place

simultaneously in an economy , i.e., income is created, then distributed, then spent and thencreated and so on.


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Each way of looking at NI suggests a different method of calculation. In India m CentralStatistical organisation (CSO) measures national income at these three points. The threemethods of measuring national income are:

1. Income Method.2. Value Added or Production Method.3. Expenditure Method.The three methods give three different angles of looking at the income flow based on differenttypes of data. Income method measures relative contribution of factor owners. Value addedmethod measures the contribution of production units to total output of an economy.Expenditure method measures the relative flow of consumption and investment expenditures.

1. Income MethodMeaning and Composition of National Income with Income Method:Production generates incomes. Production is created with the combined efforts of factors ofproduction. That is way; owners of these factors have a claim on this income, which isdistributed to them in the form of compensation of employees, rent interest and profit.According to income method, NI is measured in terms of payments made to primary factorsof production.Net value added at factor cost (NVAFC) = Sum total of factor incomes paid out by aproduction unit.

NDPFC = Sum total of factor incomes paid out by all production units located within thedomestic territory of a country. It is shared by both residents and non-residents.

NNPFC or NI= Sum total of factor incomes paid out of residents only.

National Income of a country can be calculated either by taking the sum of incomes paid by

producing units or by income received by factors.Income method is also called Factor Payment Method or Distributed Share Method.According to income method, the components of NI are given by the formula:

NI (or NNPFC) = (a) Compensation of Employees + (b) Operating Surplus (rent+ interest+profit) + (c) Mixed Income of Self-employed + (d) Net Factor Income from Abroad.NDPFC or Domestic Factor Income= a + b + c

Steps involved in calculating Factor NI by Income Method.The Calculation of NI by income method is done in three steps. They are:Step 1: Identification and classification of producing enterprises which employs factor

inputs:This is the first step in income method. It requires:(a)Identifying the producing enterprise which employs the factor inputs ; and(b)Classifying the producing enterprise. All producing enterprises can be classified under

three heads.(i) Primary Sector:It is that sector which produces goods by exploiting natural resources like land, water, forests,mines, etc., This sector includes agricultural and allied activities. Fishing mining andquarrying.

(ii)Secondary Sector:


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It is also called manufacturing sector Enterprises in this sector transform one type ofcommodity; for example, leather goods from leather or flour wheat, etc.,(iii) Tertiary Sector:It is also known as service sector. Enterprises in this sector produce services only. Examplesare: transport, communications, trade and commerce etc.

Step 2: Classification of factor income:Factor incomes or payments are classified into the following groups:(a) Compensation of employees(b) Operating surplus(c) Mixed income(d) Net Factor Income From Abroad.Step 3: Estimation of National IncomeThe last step is to estimate or calculate national income.Precautions involved while using income method are:1. Transfer payments are excluded e.g. old age pension.2. Illegal income (e.g. theft, gambling) is excluded.3. Income from sale of second hand goods is excluded.4. Corporation tax, income tax are excluded.5. Windfall gains are excluded.6. Gift tax, death duty are excluded.7. Production for self consumption is excluded.2. Value Added Method or Product methodMeaning and composition of National Income with value Added methodProduct method or value Added method is also called Industrial Origin method or Net

Output Method. Product Method or value Added Method is defined as that method whichmeasures national income by estimating the contribution of each producing enterprise toproduction in the domestic territory of the country in an accounting year.

According to the value added method the composition of National income is as follows:NI by value added = sum total of net value added at factor cost across all producing units ofthe economy.Gross value added by primary sector within the domestic territory of a country + Grossvalue added by secondary sector within the domestic territory of a country + Gross valueadded by Tertiary sector within the domestic territory of a country Depreciation - NetIndirect Tax + NFIA.

Steps involved in calculating National Income by Value Added Method.The calculation of NI by value added method is done in three steps: they are:

Step 1: Identification and classification of producing Enterprises:This is the first step in value added method; producing enterprises are classified into threeheads.(a)Primary Sector.(b) Secondary or manufacturing sector.(c)Tertiary or service sector.

Step 2: Estimation of Gross value Added


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Value added is the market value of final goods and services. Value of output is excess ofvalue added over and above the value of intermediate consumption.

Gross Value Added (GVA) = value of output- intermediate consumption= (Sale + change in stock) Intermediate consumption.

If intermediate consumption is not subtr

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Chapter-V Indian Economy