8 PARAMETERS (INDICATORS

CHAPTER
OF DEVELOPMENT

8.1 INTRODUCTION 8.2 PER CAPITA INCOME INDEX

We have defined economic development in the
previous hapter. We now take up the issue of how
Traditionally, the most widely used index of
development is increase in real per capita income
to indicate or measure economic development. It is
difficult enough to define economic long period of time. Increase of gross national
over a
development. product (GNP) or GDP is obviously of paramount
Measuring economic development is an even
more demanding task. This is because of the fact interest. It is a measure of level of economic
that economic development is a multidimensional activity and the economic size of a country. Since
process. It involves major changes in the level and our interest in development arises from our desire

distribution of income, composition of output, to improve the standard of living or welfare of

social structure, attitudes, institutions, eradication the population, we think of output
naturally
of illiteracy and poverty, etc. In fact, economic per head of population. From the viewpoint of
development involves the whole gamut of changes economic development what is important is not
in the society. It follows from this that no
simple simply an increase in the economy's real national
measurement of economic development can income but increase in income, which is corrected
completely describe the multidimensional nature for population change, i.e., per capita income.
of economic development.
Growth of real per capita GNP (or GDP) takes
Several indicators have been used in recent
into account the ability of a nation to
years to indicate economic development. However, expand
its output at a faster rate than the growth rate
the main indicators of economic development are
of population. In view of this, rate of
classified into two categories, viz.: growth of
real per capita GNP (or GDP) is typically used to
1. Income-based measure of development,
which consists of mainly per capita income. measure, in a broad sense, the overall economic
well-being of the population.
2. Those indicators of economic development,
which measure economic development
in terms of the quality of life, such as
8.2.1 Limitations of Per Capita Income
of Life Index (PQL), Basic Index
Physical Quality
Needs Index, and Human Development Though per capita irncome has been traditionally
Index (HDI). used as an important index of development, it suffers
We shall explain here two most important from various limitations. In view of these limitations,
ndicators of economic development, which are per capita real income cannot be considered as the
as follows perfect index of economic development. At best,
1. Per Capita Income Index per capita real income is only a partial index of
2. Human Development Index economic development and economic welfare.
 development because increase in
Some of the limitations of Per Capita Income
Index are: income can involve costs such as moro
1. The first limitation of the per capita income work, depletion of natural resources
index is that it does not consider the increased environmental pollution, etc.
Per capita income is not a perfect index
composition of output. From the viewpoint
of development and economic welfare of economic development becauseit
what is important is not only more does not make allowance for these
cost elements. For example, it is quite
output (per capita) but also what is the
possible that in order to raise output and
composition of output. lf increase in
the total output (national income) has income, natural resources may have been
resulted from increase in the production ruthlessly exploited or labourers might
ot non-civilian have to work harder in an unhygienic
goods like armaments,
this should not be taken as an index of environment. From the viewpoint of
economic development and economic economic development, what is important
to know is not only the amount of
welfare. output
2. The second limitation of Per and its composition but also how that
Capita output has been attained.
Income is that it does not take into account
5. Another shortcoming of the Per Capita
distribution of income that accompanies
increase in income. Per
Income Index is that many goods and
capita income services not passjng through the market
may increase because of a large increase
in the income of a handful of rich
are excluded from GNP estimates.
people, National income
while the majority of
population may largely includes those
remain poor. It is goods and services for which payment
possible
that with
along is made in money form. There are
increase in incomes, the rich may become many
services for which no cash payment is
richer and the poor may become
poorer. made. One of these services is the services
From the point of view of economic
of housewives in their own homes such
development what is important is not only
the size of the cake(national income) but
as
cooking, looking after the household,
taking care of children, etc. Similarly,
how that cake is distributed (distribution
menfolk do many services for themselves
of national income). We cannot
say for or for the
family members such as
sure that economic welfare of the
people shaving, gardening, and teaching their
has increased even if there is increase in
own children. No
per capita income unless there is reduction payment is made for
these services and, therefore,
in the
inequality in the distribution of they are not
included in national income. It is difficult
income to compute the value of these services
3. Per capita income does not address the because these services are
problem of poverty. Despite increase in out of love, affection,
performed
regard, etc., which
per capita income, average standard of make their valuation
living the masses
of impossible. But
may not improve economic welfare or
well-being of the
because of the fact that the number of
people depends, like paid services, on
people below the poverty line may have the services of housewives and other
increased. This is what has
happened in similar services.
many of the developing countries in the 6. Numerous
recent past. problems arise when we
4. An increase in income is
try to use PerCapita Income Index for
not a sufficient
comparing the standard of living, level of
condition for increase in
welfare and economic welfare, and rates of growth of

102
INDIAN ECONOMIC DEVELOPMENT
 different countries. We
may mention here
7, Per
three such problems: capita income is not an adequate
measure of development because it does
(a) The first problem relates to the not consider various issues related to
problem of
expressing
national social, human, and institutional dimensions
income of different countries in of the country.
terms of some common
currency. hus, per capita income is not a perfect index
Usually, national income of
every of economic
country is expressed in terms of
in per
development. Conventionally, increase
its own capita real income has been regarded as
currency. For
example, the best overall index of economic
national income of India is development.
However, in the recent past (1970s), attempts
expressed in terms of rupee, while were made to supplement per capita income as
it is expressed in terms of
pounds in an indicator of development with some additional
the United Kingdom. International indicators so as to overcome some of the above-
comparisons are usually made mentioned weaknesses. In terms of these attempts,
by converting national income of per capita real income is regarded as the main
different countries into US dollars indicator of development, but it is supplemented
at the existing rates of
exchange*. with some additional indicators such as reduction
This creates problems because rate in inequality of income and poverty.
of exchange keeps on changing and
it may not reflect the relative Limitations of Per Capita Incomne
price
levels of different countries. Index at a Glancee
(b) Different countries use different 1. It does not consider composition of
concepts of national income. In the output.
socialist countries, national income is 2. Distribution of income is ignored.
defined so as to include only material 3. It does not address the issue of poverty
goods; services are excluded from 4. Ignores cost elements like depletion of
the computation of national income. natural resources.
In most of the other countries, on 5. Services of housewives, etc. are excluded.
the other hand, both the material 6. Problems in intermational comparison:
goods and services are included in 0 Exchange rate
national income. This makes the task ( Different concepts of national
of comparison of national income of income
different countries difficult because we (ii) Difference in price levels
tend to compare dissimilar things 7. It ignores social, human, and institutional
(c) Another problem in using Per aspects.
Capita Income Index for making
comparisons of standard of
living of different countries is 8.3 QUALITY OF LIFE INDEX
difference in price levels prevailing
In view of the above-mentioned of shortcomings
in different countries. For instance,
the purchasing power of a dollar in Per Capita GNP Index, economists and policy-
makers at present are not satisfied with the
India is generally much more than
use of this index as an indicator of welfare or
that in the United States.

the number of rupees which are exchangerd tor 1 US dollar,

exchange between Lndian rupee and the American dollar expreses
like 68
rupees for 1 dollar.

103
ARAMETERS (INDICATORS) OF DEVELOPMENT
 intellectuals
development. As a result, many of the Amartya Sen and Mahabub-U-Haq-
the Visionaries of Human Development Index
and policy-makers have advocated discarding
income-based indicator of development. There have The United Nations Development
been numerous efforts to develop other composite Programme (UNDP) articulated

indicators that could serve as alternatives to the the concept

of human

traditional income-based Per Capita GNP Index. development in

its Human

The major attempt in this direction has been to Development Report (HDR)
evolve compositeindicators that could measure in 1990. This report began
in terms of the quality of life. to economic
development a new approach
Quality of life, as explained in the last chapter, is development,
which led to Amartya Sen
of Human
dependent on many factors such as availability the construction

of basic necessities of life (food, clothing, shelter, Index (HDI). HDI

Development
the two wel1
etc.), equity in the distribution of income and is the vision of
known economists-Mahabub-
wealth, literacy, healthcare, dean environment,
Pakistan and Nobel
and ávil
political etc.
rights, taking some of
By Ul-Haq of
India
these indicators of life, a number of
of quality laureate Amartya Sen of
other leading
attempts have been made in the
recent past working with
called thinkers. These Mahabub-Ul-Hag
to construct an index which may be development
index'. economists have become the pioneering
quality of life two

leaders of the human development approach.

not only over
Their concept of HDI has guíded
Human Development Reports,
25 years of Global
8.4 HUMAN DEVELOPMENT INDEX (HDI) National Development
but also more than 600
The latest and the most ambitious index of quality important is the fact that the
Reports. Equally
Index devised
of life is the Human Development human development approach has a profound
by the United Nations Development Programme effect on the entire generation of policy-makers
United Nations. around the world.
(UNDP), agency of the
an and development specialists
UNDP prepared the Human Development As a result, policy-makers, public
officials as
1990 in its first scientists now
Index for the first time in well as economists and social
Since then, the terms of overall
Human Development Report. view economic development in
UNDP has been publishing Development
Human
societal advancement rather than concentrating
every year.
These HumanDevelopment the traditional national income.
Report only on
approach to
have called for a n e w
Reports
that puts people
economic development-one 8.4.1 What Is Human Development?
The basic proposition of the new
at the centre.
nation should Before explain the Human Development Index,
is that development of a we
approach it would be useful to understand the concept of
only by national income, as
be measured not
but also
by various human development. The Human Development
had long been the practice,
other aspects of
human development such as life Report (1997) has defined human development
as
freedom, human as the process of widening people's choices
expectancy, literacy, political
rights, gender equality, etc. These reports have well asraising the level of well-being achieved
been considering
various aspects of human Traditionally, economic development has focusea
development. Besides, they have been ranking exclusively on the expansion of only one choice
various countries according to the level of income. But the concept of human development
Human Development
Index. The centrepiece of has gone far beyond the income and well
these reports
1s the construction of the Human being to cover all human choices-economi
Development Index. This measure has been social, cultural, and political. The purpose of
enlarged and retined over the years.
development is to enlarge human cholce

104 INDIAN ECcONOMIC DEVELOPMEN

Obtaining income
certainly one of the main
is
development-economic, social, cultural or
neans of expanding choices and well-beino
me
But the concept of human development goes far political. Human development embraces
the entire
society, not just the economy.
beyond the income choice and well-being. There 5. Human development is universal in
are many other choices such as education and
nature. It applies equally to less developed
literacy, health, physical environment, political as well as highly developed countries.
freedom like freedom of movement and speech,
vender-related developments, and political and 8.4.2 Construction of Human
economic rticipation in decision-making and
political power. Thes choices are as important
Development Index
as income choice. Human Development Index (HDI) is a strategic
element in the new approach to economic
Thus, the of human
concept development
covers all aspects of human development. It is development. Human development has been
broader approach to
an
evolving concept. Since 1990, various
a development compared Human Development Reports have
to traditional approach. It views economic presented
Human Development Index to
development with the purpose of improving the capture a number
of aspects of human
human conditions from all angles. The concept development
in one composite
index. The composite Human Development Index
of human development puts people at centre
is the measure of
stage. It is now almost universally accepted that average achievement of a country
in three basic dimensions of human
well-being of the individuals as well as a country's development
1. A long and healthy life.
success cannot be evaluated by income
only. 2. To
Income is, of course, crucial. But we must also acquire knowledge.
consider whether 3. To have decent standard of living.
people
have the opportunity a

to be educated and healthy. We now evaluate Thus, HDI attempts to measure at least some
development in terms of new indices such as more choices besides income. It is based on
three
reduction in poverty and inequality, gender choices or goals of development. To keep the
equity,
political freedom, and political power. index simple, only three variables have been
To up, the main propositions of the
sum chosen to represent these choices:
concept of human development are: 1. A long and healthy life is measured by
1. Human
development views people and life expectancy at birth, i.e. number of years
the quality of their life as the centre of a new born infant is expected to live.
development. People are not just the 2. The ability to acquire knowledge is
instruments for producing commodities, measured by a combination of two variables:
but they occupy the centre
stage. Putting (a) Mean years of schooling: Average
people at the centre of
development number of years of school education
means making progress equitable and
received by adults aged 25 and above.
broad-based, enabling people to be active (b) Expected years of schooling: Number
participants in the change.
of years of schooling that a child of
2. Human
development is the end of all school entrance age can expect to
activities, while economic growth is only receive.
a means to this end.
3. A decent standard of living is measured
3. The
purpose of economic development is
by
to widen all choices.
a
country's gross domestic product (GDP)
adjusted for Purchasing Power Parity in
4. Human development is concerned with terms of US dollars (i.e., PPP US $). For
Widening not merely income choices an international comparison of GDP, one
but
covering all aspects of human has to convert the values of different

PARAMETERS (INDICATORS) OF DEVELOPMENT 105

 currencies into standard currency. It
a development, viz. long and healthy life, to acoquire
is the standard practice to convert the knowledge and decent standard of living.
currencies of difterent countries into US in each of
Performance of a country
dollars for international comparison. indicators is expressed as a value between
nese
However, converting GDP of a country and 1. Each country would be at some point
to US dollar at market exchange rate in
the scale between 0 and 1 for each of the nree
for international comparison can give indicators. Equal importance is given to all th
misleading condusions. Purchasing power
three dimensions of human development. Takino
of each country's currency is different in the simple average of the three indices (LEI, FAT
view of difference in the cost of living in
and AGDPI), we can éstimate the HDI, which
different aountries. Currendes of developing would be between 0 and 1 for each country.
countries have higher purchasing power in
Thus, as a composite measure of health.
their domestic markets. PPP exchange rate
is the rate adjusted for difference in the cost
education, and income, the HDI assesses lee
and progress using a concept of development
of purchasing the same basket of goods
in terms of different currencies. GDP of a much broader than that allowed by income alone,.
country aonverted into US dollars is adjusted
for PPP to take acoount of differences in the 8.4.3 Evaluation of Human Development
cost of purchasing same basket of goods in Index
terms of the two currendes.
Human development and HDI have led to a new
These three indicators reflecting three basic
approach to the study of problems of economic
choices are used to prepare three basic indices
development. This new approach to economic
1. Life Expectancy Index (LE)
2 Education Attainment Index (EAI) development has had a profound impact on
economic thought and policy formulations.
3. Adjusted Gross Domestic Product Index
The concept of human development has been
(AGDPI)
incorporated in various annual Human Development
face
While preparing a composite HDI, we
Reports of UNDP. It has also led to the publication
the problem that there is no c o m m o n
measure of more than 600 National Human Development
of the three dimensions of human development.
Reports in various countries, including India. More
Life expectancy is measured in years, adult literacy
importantly, the human development approach
and real
and gross enroiment ratio in percentage, has profoundly affected an entire generation of
income is measured in PPP-adjusted dollars. In policy-makers in policy formulations relating to
indicators to a common
order to reduce these economic development.
each indicator
indicator, the actual progress in Human Development Index is widely
used
distance from a desirable
is measured as relative these days, particularly by international agencies
and minimum observed or
goal (maximum such as UNDP, to show the average achievement
each of the threeindicators).
expected values for of an economy in the economic and social
To construct the human development index, sectors. The main merits of HDI are as followS
been
fixed minimum and maximum values have of HDI is that
it
1. The major significance
established for each of the three indicators. Each has combined economic (GDP per capita
of the three components of HDI is computed
education)
and social (life expectancy and
according to the general formula: indicators. It is multidimensional in nature
Actual value -Minimum value 2. HDI is a more comprehensive measure
Index Maximum value - Minimum value
of than either the per capiu
development the
of
HDI is the geometric mean of normalized income. It is a broader indicator
indices of each of the three dimensions of human development performance of a country'

106 INDIAN ECONOMIC DEVELOPME

 3.HDI has greatly increased our Using the three indices-Life Expectancy Index,
understanding of what constitutes Educational Attainment Index, and Adjusted
development and which countries are GDP Per Capita composite HDI, it
Index-and

really experiencing development (as ranks countries on a scale of 0 (lowest human

human
indicated by rise in their HDI over time). development index) to 1 (highest
been
4. It focuses the attention of the poBlicy-makers development index). The UNDP has
ranking the countries into four groups:
on the ultimate objective of development.
Thus, they can focus their policies more 1. Very high human development index
directly on those areas which need (0.800 or more): Countries like Norway
Australia, Japan, New Zealand.
improvement. 2. High human development index (more
Merits of HDI at a Glance than 0.700 but less than 0.800): Countries
like China, Sri Lanka.
1. It combines economic and social
indicators. 3. Medium human development index
comprehensive of to 0.700 HDI): Countries like India,
(0.550
2. It is a measure

development. Indonesia, Egypt, South Africa.

4. Low human development index (less than
3. It increases the understanding of
0.550 HDI): Countries such as Nigeria,
development.
4. It focuses on the utimate objective Uganda, and Afghanistan.
The Human Development Report 2016, like its
of development.
earlier reports, has calculated HDI values for
However, HDI has captured only a few different countries, on uniform basis by using
dimensions of human development. It cannot be a particular methodology, at an interval of five
treated as a comprehensive index because it is years since 1980. Table 8.1 gives
information with
based on only three variables. Moreover, initially
regard to the values of HDI for India since 1980.
the HDI concentrated on the national HDI only.
It did not draw a comprehensive disaggregated Table 8.1: Values of Human Development
HDI by region, gender, race, or ethnic group. But Index for India
in recent years, UNDP has started constructing Years 1980 1990| 2000 2010 2014 2015
HDIs such as Human Poverty Index and the
Gender-related Development Index so as to
HDI 0.369 0.428| 0.494 0.580 0.615 0.624
reflect inequalities among different individuals Value
Source: UNDP-Human Development Report 2016, Table 2.
and between men and women with regard to
life expectancy, knowledge, and standard of We can draw the following inferences from
living. It has also started disaggregating the Table 8.1
country's overall HDI into separate components 1. HDI is improving continuously since 1980.
to distinguish between differernt social classes, It increased from 0.369 in 1980 to 0.428
different regions, and different ethnic groups. in 1990, and increased further to 0.494
Moreover, UNDP has also started taking in 2000 and 0.624 in 2015. The average
into consideration additional dimensions of
annual growth rate of HDI was 1.54 per
human development like political and economic
cent between 1980 and 2015.
participation in decision-making power.
2. India is in the category of medium human
8.4.4 Human Development Index and development index countries since 1990.
India 3. For the year 2015, out of 185 countries for
which UNDP has computed HDI, India
As pointed above, the UNDP has been compiling ranks 131. India climbed 4 rank points
HDI for a large number of countries for which it from 135 rank in 2013 to 131 rank in 2015.
1s able to gather the requisite data (185 countries 4. As compared to most of the developed
as
per Human Development Report, 2016). countries having HDI for 2015 ranging

PARAMETERS (INDICATORS) OF DEVELOPMENT 107

 between 0.880 and 0.949, India has a much 8.4.5 National Human Development
lower HDL ie, 0.624. However, India has Reports of India
performed much better than most of the The Planning Commission of India has
comparable countries in terms of average been attempting to map the state of human
annual HDI growth rate during the last development in India in recent years. India's
decade. first human development report, titled the
As compared to some of the other National Human Development Report 2001, was
developing countries, India ranks better. released by the Planning Commission in April
Pakistan Nepal, Bangladesh and Nigeria 2002. The second such report, titled India Human
have HDI lower than India, but a number Development Report (2011) was released in October
of other developing countries such as 2011. These reports have measured nearly 70

Thailand Brazil, Philippines, Sri Lanka, social indicators on various aspects of quality
China. South Africa and Indonesia have of life and well-being of the people. Some of the
HDI higher than India (Table 8.2). indicators covered are:
important social access
6. There has been improvement in all the to education, health, good housing, drinking
components of HDI, ie., increase in life water, sanitation, life expectancy, mortality,
expectancy, mean years of schooling by access to roads, child labour, unemployment,
adults and expected years of schooling management of ecology, accountability in
these indicators, the
and real GDP per capita. governance, etc. By using
National Human Development Report has estimated
7. However, India has a long way to improve
human deveiopment. The existing gap in three composite indices, namely the Human

health and education indicators Development Index, the 'Human Poverty Index', and
India and developed countries
between
and also the 'Gender Equality Index'. We are concerned here
the with Human Development Index.
many deveioping highlight
countries only
need for much faster and wider spread of Like the UNDP's HDI, National Human
taken three basic
basic health and education, as reflected by Development Reports have also
China and Sri Lanka dimensions of human development, namely
1. longevity
Tabie 8.2: India's Position in
2. education
Global HDI 2015
standard
3. the ability to enjoy a decent
HDI Human Development
living as indicated by command
over
Courtry of
rank Index (HDI resources.

Norway 0949 On the basis of these three critical

dimensions

Australa 0.939 of HDI has been estimated since early

well-being,
Unuted States 10 0.920 1980s for the country (all-India level)
as well

SnLank 0.766 been estimated

as for the states. The HDI has
0.754
Brazi 0.740 separately for rural and urban areas.
Thasian Human
Main conclusions of the National
0.73
Chuna O.68 Development Reports are as follows:
Indones 113 1. At the national level, HDI has improved
Prilipp 16 0K2 1991,
from 0.302 in 1981 to 0.381 in
South Afrra 119 and further to 0.387 in 1999-2000.
HDI
131 O624
ndia increased to 0467 in 2007-08 as per
the
Barga 199 0579
epal 0556 National Human Development Report 201
HDI
that the country's
Pakta 0.550 This means
19H0
92 0527 inproved by 26 per cent during
and Dy
ham Regrt. / l ie., 2h per cent per annum)

MCAN ECONMIC DEVELOPME

 24 per cent during 1990s (i.e., 2.4 Pradesh,
end, states such Bihar, Uttar
a n o t h e

as
er cent per annum). India's HDI increased
by 21 per cent between 1999-2000 and
Madhya Pradesh, Rajasthan, Odisha,
Chhattisgarh, Jharkhand, and Assam
2007-08.
have lower HDI. However, inequality gap
is higher in urban areas between states has narrowed down over
2. HDI as
compared to rural areas. There has been the years.
improvement in HDI, both in rural as 4. In general, HDI is better for smaller states
well as in urban areas. Though the rural- and Union Territories.
urban gap continues to be significant, it 5. The relative positions of states have not
has declined during the decades of 1980s the early 1980s.
changed much since
and 1990s. 6. In general, the economically better-off
3. At the state level, there are wide disparities states are also the ones, which have given
in the levels of Human Development better performance in the HDI. On the
Index. States such as Kerala, Delhi, other hand, economically less developed
Goa, Punjab, Himachal Pradesh, Tamil states are also the states with low HDI
Nadu, Maharashtra, and Haryana have 7. Inequality across states on HDI is less than
better HDI. HDI, with a level of 0.790 in the income inequality, as indicated by the
2007-08, is highest in Kerala. At the other per capita income of diferent states.

SUMMARY
Per Capita Income Index: It is traditionally the most widely used index of economic
development. It is defined as GNP divided by population. Increase in per capita income
indicates increase in the overall economic well-being of the population.
Shortcomings of Per Capita Income Index: 1. It does not consider the composition
of output, 2. Distribution of income is not taken into account, 3. Problem of poverty is
not addressed, 4. It does not take into account cost elements such as depletion of natural
resources, environment pollution, 5. Services of housewives are excluded, 6. Problems arising
due to the use of this index for international
comparison such as change in exchange rates,
different concepts of national income, difference in price leveis, etc. 7. It does not consider
issues related to social and human dimensions.
*Human Development Index (HDI): Human development is the process of widening
people's choices as well as raising the level of well-being achieved. It covers not only income
choices, but also social, cultural, and political choices. Human development is concerned
With widening of choices, covering all aspects of human choices.
The HDI is based on three indicators:
1.
Longevity and healthy life as measured by life expectancy at birth, 2. Educational
attainment, as measured by combination of mean years of schooling by adults and expected
years of schooling by children, 3. Decent standard of
living, as measured by GDP per capita
adjusted for PPP US S.
Evaluation of HDI: HDI has the following strong points in its favour:
thas combined economic and social indicators, 2. It is a comprehensive measure of
development, 3. It has increased our understanding of development, 4. It focuses on the
ultimate objective of
D
development.
has been refined over the years by incorporating other indicators of development and
y
disaggregating the overall HDI by regions, gender, races, or ethnic groups.

PARAAE TERS
DICATORS) DF DEVELOPMENT 109