Module 1

Economic Growth and Economic Development

Till the 1960s, the term 'economic development' was often used as a synonym of economic
growth, the measure for the latter being the Rise in per capita GNP in real terms. According
to Kindleberger,"Whereas economic growth merely refers to a rise in output, economic
development implies changes in technological and institutional organization of production as
well as distributive pattern of income." Thus, economic development is a broader concept
than economic growth. Compared to the objective of development, economic growth may be
easy to realize. By larger mobilization of resources and raising their productivity, output
levels can be raised. The process of development is far more extensive. Apart from the rise
in output, it involves changes in the composition of output as well as a shift in the allocation
of productive resources to ensure social justice.

While there can be growth without development, development without growth is

unconceivable. A substantial rise in a country's GNP is required before it can hope to
expand its industres and the services sectors. Nowhere in the world has the occupational
distribution of population changed in the absence of growth.

The New View of Economic Development

During the 1950s and 1960s, while many of the Third World nations did realise the economic
growth targets, the respective levels of living of the masses remained unchanged.

Thus, in the 1970s economic development came to be redefined within the context of a
growing economy. 'Redistribution from growth' became a common slogan.

Seers posed three basic questions about the meaning of development:

What has been happening to poverty?
What has been happening to unemployment?
What has been happening to inequality?
If all three of these have declined from high levels, then beyond doubt this has been a period
of development for the country concerned.
If one or two of these central problems have been growing worse, especially if all three have,
it would be strange to call the result 'development' even if per capita income doubled.

Three Core Values of Development

Sustenance: The life-sustaining basic human needs include food, shelter, health and
protection. When any one of these is absent or in critically short supply, a condition of
absolute 'underdevelopment exists.

Self-esteem: A second universal component of good life is self-esteem--a sense of worth

and self-respect-of not being used as a tool by others for their own ends,
Freedom from Servitude_To be Able to Choose: Wealth can enable a person to gain
greater control over nature and his physical environment than they would have if they
remained poor. It also gives them the freedom to choose greater leisure. The concept of
human freedom should encompass various components of political freedom, freedom of
expression, political participation and equality of opportunity.

Human Development Index

Humán Development
The first Human Development Report (HDR) published by the United Nations Development
Programme (UNDP) focused on the new paradigm of development that puts people at the
centre of development.

The concept, developed by Mahbub ul Haq and Amartya Sen, is defined as 'the process of
enlarging people's choices,' emphasizing the freedom to be healthy, to be educated and to
enjoy a decent standard of living.

But it also stressed that human development and well-being went far beyond these
dimensions to encompass a much broader range of capabilities, including political freedoms
and human rights.'

Human Development Index

The Human Development Index (HDI) is a summary measure of average achievement in key
dimensions of human development: a long and healthy life, being knowledgeable and having
a decent standard of living. The HDI is the geometric mean of normalized indices for each of
the three dimensions.

The health dimension is assessed by life expectancy at birth, the education dimension is
measured by mean of years of schooling for adults aged 25 years and more and expected
years of schooling for children of school entering age. The standard of living dimension is
measured by gross national income per capita. The scores for the three HDI dimension
indices are then aggregated into a composite index using geometric mean. The HDI
simplifies and captures only part of what human development entails. It does not reflect on
inequalities, poverty, human security, empowerment.

HDI Dimensions and Indicators

Steps to calculate Human Development Index values

Step 1. Creating the dimension indices Minimum and maximum values (goalposts) are set in
order to transform the indicators expressed in different units into indices between 0 and 1.
These goalposts act as “the natural zeros” and “aspirational targets”, respectively

Step 2. Aggregating the dimensional indices The HDI is the geometric mean of the three
dimensional indices.
Note: Example only for reference. Dont do it for exam. Just remember the formula.

Human development categories

Reasons for India low HDI ranking:

India ranks 132 out of 191 countries in the Human Development Index (HDI)
2021

India’s low ranking reflects in how India does poorly in all the 3 HDI indicators: Some of the
reasons for low HDI ranking are:

1. Widespread unemployment is the biggest cause of India’s low GNI per capita. The
continuously expanding population of unemployed is another cause of poverty. Job
seekers are increasing in number at a higher rate than the expansion in employment
opportunities. This results in a never ending cycle of increasing unemployment.
2. India’s ineffective economic policies have contributed to the reduction of income
generation by the nation.
3. another cause of poor income generation in India is the unequal distribution of
income. Due to this economic inequality different people in India are receiving
different incomes even though they may be doing the same jobs as others who are
receiving a higher income. This income inequality has also meant that sometimes
individuals may receive no income at all in their respective markets.
4. one of the factors that affect India’s low levels of education includes lack of spending
on education. India has had a long and unwilling thought on spending their money on
education
5. another major cause of the insufficient levels of education in India is the lack of or
poor infrastructure facilities.
6. India’s lack of expenditure on health accounts greatly for poor health within the
nation. Only a minute 3.9% of India’s total GDP has been spent in the health sector.
7. Lack of safe drinking water in India also accounts for their poor levels of health.

Ways to improve India’s HDI ranking

1. Investment hurdles: Overcoming hurdles or limitations in the way of investment in the

social sector is of crucial importance. More investment is needed in areas such as
education, health, infrastructure etc. Along with this, streamlining traditional approach of
generating new sources of revenue generation, steps like rationalised targeting of subsidies,
judicious use of revenues meant for social sector development etc will probably go a long
way in meeting the challenges in this regard.
2. Performance evaluation: Effective performance evaluation of the projects and activities
engaged in the social sector development through innovative methods like outcome
budgeting, social auditing of the programmes and meaningful participation of community
members from the policy-making level to policy evaluation has been known to yield positive
results.

3. Reducing Inequality: Inequality in different forms - social, economic and political is the key
factor affecting the ranking in HDI. India, though, has made enormous efforts to remove all
kinds of inequalities but is yet to get desired results. In this regard, rampant corruption in the
delivery of services and lack of coordination between agencies has played a major role
which needs to be corrected on the urgent basis.

4. Governance reforms: Adoption of new managerial techniques along with adherence to the
principals of ‘Good Governance’ will bring about comprehensive reforms thus removing the
impediments afflicting the real development of the country.

5. Innovative solutions: A greater thrust on research and development essential to chalk out
innovative policies and programmes for dealing with new developmental challenges should
be the core area of concern for the government as the task of real growth and challenges
demand innovative and profound solutions.

Sen vs. Bhagwati

Amartya Sen Model:

Sen is a Nobel Prize winner in economics.

● He believes that India should invest more in its social infrastructure to boost the
productivity of its people and thereby raise growth.
● Investing in health and education to improve human capabilities is central to Sen’s
scheme of things. Without such investments, inequality will widen and the growth
process itself will falter.
● Sen said that both growth and welfare programs are needed, and not at the cost of
each other.
● Sen attacked Bhagwati’s arguments by saying that in an under-nourished country
such as India, it was very stupid to focus obsessively on growth.
● Sen had upheld what he calls the “Kerala experience” — high social spending
resulting in growth — as a role model for other states to follow.

Bhagwati Model:
Jagdish N. Bhagwati is a University Professor of Economics, Law, and International Relations at
Columbia University and former Adviser to the Director-General of GATT. In ‘Why Growth
Matters: How Economic Growth in India Reduced Poverty and the Lessons for Other Developing
Countries’, Bhagwati and Panagariya hold up growth as the panacea for all of India’s ills.
 ● Bhagwati argues that only a focus on growth can yield enough resources for investing in
social sector schemes.
● Bhagwati argues that growth may raise inequality initially but sustained growth will
eventually raise enough resources for the state to redistribute and mitigate the effects of
the initial inequality.
● Bhagwati argued that it is the reforms of 1991 that have made even the lowest social
classes greatly more prosperous today. Hence, those reforms must be strengthened.
Critiquing the critics of India’s growth experience, Bhagwati argued that a low rank on
the human development index (HDI) did not mean much.
● Bhagwati stands for what they called the Gujarat model of development, which he
reckoned was superior to the contrasting Kerala model of development.

Module 2

India’s Economy at Independence

The pre-Independence period was a period of near stagnation for the Indian economy. At
the time of Independence, Indian economy was caught up in a vicious circle of poverty
characterised by one of the lowest per capita consumption and income levels among the
countries of the world.

Low income levels resulted in low levels of saving and capital formation and therefore, low
productivity and low level of income and this vicious circle perpetuated poverty in the country

Further, the size of the market being limited because of low incomes, entrepreneurs had little
incentive for making investments in diversified fields, and therefore, the productivity in the
economy continued to be low thereby perpetuating low incomes and mass poverty.

Characteristics of Indian economy at Independence:

1. Indian economy at the time of Independence was overwhelmingly rural and

agricultural in character with nearly 85 per cent of the population living in villages and
deriving their livelihood from agricultural and related pursuits using traditional, low
productivity techniques.
2. The backwardness of Indian economy is reflected in its unbalanced occupational
structure with 70 per cent of working population engaged in agriculture. Even with
this large proportion of population engaged in agriculture, the country was not self-
sufficient in food and raw materials for industry.
3. Illiteracy was as high as 84 per cent; majority of children (60%) in the 6-11 age group
did not attend school.
4. Mass communicable diseases were widespread, and in the absence of a good public
health service, mortality rates were very high (27 per thousand).
 5. Thus, the economy was faced with the problems of mass poverty, ignorance and
diseases which were aggravated by the unequal distribution of resources between
groups and regions.

The India of 1947, under British rule, showed all the signs of what is today called an
underdeveloped country.

Agricultural Scenario at the time of Independence

Stagnating Agriculture

Colonialism became a fetter on India's agricultural and industrial development. Agriculture

stagnated and even deteriorated over the years, especially during the first half of the 21st
century when the full impact of colonialism began to be felt.

Causes

(i) Regressive Agrarian Structure

The stagnation in agriculture is basically explained by the fact that colonialism transformed
the agrarian structure in India and made it extremely regressive. As is well- know, the
zamindars failed to invest in land and relied on rack renting, while the peasant proprietors fell
into the clutches of the moneylenders and lost control over their lands. Sub infeudation,
tenancy, sharecropping increasingly dominated agriculture.

ii) Internal Drain of Capital

Agricultural surpluses were siphoned from agriculture without any quid pro quo, thereby
subjecting it to an internal drain of capital.
Throughout the 18' and 19 th centuries, high land revenue demand ate into the peasant's
surplus and even his subsistence. But the government spent very little on improving
agriculture as was done, for instance, in Japan. The landlords, old or new, took no interest in
agriculture beyond collecting rent. They found rack-rent and usury far more profitable than
making productive investment in land. The moneylenders and merchants used their
increasing share of agricultural surplus to intensify usury or to take possession of land to
become landlords.

iii) Poor Technology

Another reason for the stagnation of productivity in agriculture was the near absence of
change in its technological basis or its productive technique and inputs. the type of
equipment used changed very little till 1941. Modern machinery was conspicuous by its
absence.

India’s Industrial Production and its Structure

Another aspect of India's economic backwardness was the state of industry in spite of her
vast industrial resources.
India's Industrial Resources

The Decline of Traditional Industry and the Development of Modern Industry

1. India, still an exporter of manufactured products at the end of the 18th century,
becomes an importer.

2. The ruin of the traditional trades and crafts was the result of the British commercial
policy.

3. Restrictions were imposed upon Indians exporting to the West, while favours were
granted to British exporters, who flooded the Indian markets. India was buying one
quarter of Britain's cotton exports. All industrial products shared this fate.

4. During the 19 century, industrial development was confined to cotton and jute
textiles.

5. The iron and steel industry developed after 1907 while the sugar, cement and paper
industries and a few engineering firms came up in the 1930s. Still, as late as 1946,
cotton and jute textiles accounted for nearly 30 per cent of all workers employed in
factories.'

6. A very important feature of India's industrial structure was the virtual absence of
capital or producer's goods industry. Indian industries had to relv almost wholly on
imported machinery and machine tools.

7. In 1950, India met nearly 90 per cent of its need for machine tools through imports.

8. Similarly, modern banking and insurance were grossly underdeveloped.

Underdeveloped banking and insurance meant that the Indian entrepreneurs could
not mobilise the available capital. Also, British-controlled banks starved Indian
industry of funds and favoured British-owned and controlled enterprises.

9. It is important to keep in view, in this respect, that foreign investment rarely marked a
transfer of capital to India from abroad.

We may sum up India's economic profile at the time of Independence as: stagnating per
capita national income, abysmal standard of living: stunted industrial development and the
bulk of the population dependent on stagnating, low-productivity semi-feudal agriculture.!
The end result of colonial underdevelopment was the pauperism of the people especially the
peasantry and the small artisans.