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.

Module 3 and Module 4a)

Evolution of planning

Planning Commission- setup in 1950

To make an assessment of the material , capital and
human resources of the country
Formulate a plan for effective and balanced utilization of
the country’s resources

The Initiation of the plans

● First Five Year Plan – April 1951 initiated a process

of development aimed at raising the standards of
living
● Five year plans as a model of planning borrowed
from then USSR
● Opening out new opportunities for richer and more
varied life
● The Nehruvian view- Fabian Socialism
● Emphasis on rapid development led by state
economic activity and planning
● The chief barrier to accelerated growth then was-
Low savings rate

Role of state as visualized in the 50’s

● Pre industrial economy –rural in character with

faulty land tenure systems could only be
 corrected by State intervention
● Maintenance of Law and order, elementary
education basic health care, safe drinking
water
● Infrastructure projects
● Increased Public expenditure will mobilize idle
labour for creating productive assets esp.
roads, irrigation, land improvement, schools,
hospitals
● Social Justice

Commanding Heights of the Economy given to

Public Sector
1. The economic model of India gave a pivotal
role to public sector which came to be known
as Commanding heights of public sector
2. Extension of public ownership on the means of
production
3. Scale of investment efforts in certain key heavy
industries was been entrusted to the public
sector like steel, coal, heavy machinery.
4. Public sector through appropriate price policy
for its output will generate investible surplus for
further investment
5. Public sector to assume the role of a model
employer and its employment and wage
policies will have a moderating influence on
policies of private sector
6. The planners and policy makers suggested the
need for using a wide variety of instruments
like state allocation of investment, licensing
and other regulatory controls to steer Indian
industrial development on a closed economy
basis.

Periodization of Indian Growth experience

Period I: Foundational Years (1951-65)

1. Post war reconstruction programmes and
development programme was undertaken just
after independence
2. Community development and rural credit
cooperatives, Industrial development banks,
IITs and many research establishments
3. Heavy industry oriented strategy was put in
 place which was also called as Import
substitution based Industrialization strategy -
PC Mahalanobis Plan
4. Large investments in public sector
5. Industrial Licensing prevalent- Permit License
raj
6. Public sector was given commanding heights
in the economy

2nd Five Year Plan (1956-61): PC Mahalanobis Plan

1. He prepared a growth model with which he showed
that to achieve a rapid long- term rate of growth it
would be essential to devote a major part of the
investment outlay to building of basic heavy
industries.
2. PC Mahalanobis called for an import substitution
based strategy.
3. It is a closed economy based model with 2 sectors,
one which produced consumer goods and other
investment goods
4. Mahalanobis identifies the rate of growth of
investment in the economy not with the rate of
growth of savings but with the rate of growth of
output in the capital goods sector within the
economy.
5. According to Mahalanobis, the rate of economic
growth depends upon the capital formation or real
investment. The greater the rate of capital
formation, the greater the rate of economic growth.
6. The fundamental insight of this model was that the
greater the proportion of investment devoted to
increasing the capacity of the investment-goods
sector, the faster the long-run growth in
consumption and investment. In the strategy based
on this model, rapid long-run growth was to be
achieved without much sacrifice of short-run
consumption by concentrating scarce investment in
expanding capital goods-producing (and
intermediate goods-producing) heavy industry.
7. Current consumption demand was to be met by
employing abundant labour resources to
manufacture consumer goods using labour-
intensive methods that required little capital.
 Period 2: Crisis years (1965-66 TO 1969-70)

● Sino-Indian War of 1962 exposed weaknesses

in the economy and shifted the focus towards
the defence industry and the Indian Army. In
1965–1966, India fought a War with Pakistan.
● There was also a severe drought in 1965, 1966
● The war led to inflation and the priority was shifted to price stabilisation.
● The main reasons for plan holidays were the war, lack of resources and increase in
inflation.

Other important events during this phase were:

● Focus on agricultural development- Green Revolution

● Continuous investment in heavy industries
● Banking system nationalized in 1969. 14 major banks were nationalised.
● For the first time India resorted to borrowing from IMF. Rupee value devalued for the
first time in 1966.

Period 3: Turbulent years (1970-71 TO 1979-80)

● Fourth Plan mainly focussed on Food security to end the dependence on PL-480 program.
● The slogan of ‘Garibi Hatao’ brought poverty alleviation to centre-stage in Indian politics.
● Middle years between 1965-66 and 1979-80 were the ones when Indian development
performance was at its worst

● Low growth rates despite high levels of investment

● Foreign exchange shortages because of increased prices of oil due to the 1973 oil shock
(Yom Kippur War).
● Political instability- National Emergency declared from 1975-77
● Poorly managed public investment programme
● By 1970-71, Green Revolution had stabilized.

Period 4: The transitional years (1980-81 to 1990-91)

○
● Relaxation of Industrial licensing
● Tax reductions
● Easing access to import capital inputs
● Liberalising capacity restrictions
● Pro-market vs. Pro-Business orientation
● Fiscal expansionism
● Expansionary macro economic policies
 ● Increase in public investment in infrastructure
● Trade liberalisation with some deregulation of industrial policies
Period 5: The reform years (1991-92 to 2002-03)

● No viable relationship with the international economy

● Industry highly protected
● Exports didn’t take off despite rupee devaluation
● CRISIS OF 1991
● Reforms introduced by the Rao government

` The economic crisis of 1991

● Large trade deficit

● Large Fiscal deficit
● The situation became so serious that the Indian foreign exchange reserves could barely
finance three weeks’ worth of imports while the government came close to defaulting on its
financial obligations

● Global credit rating agencies downgraded India’s credit rating

● No option left with the government except mortgaging the country’s gold

The Hindu rate of growth refers to the lower annual growth rate of the economy of India before the
economic reforms of 1991, which stagnated around 3.5% from 1950s to 1980s.

Causes of 1991 Macroeconomic Crisis in India

External Causes

1. Dissolution of Soviet Union

To earn foreign exchange, India needs to have sufficient exports to the global economy.
Since 1960s, India depended heavily on Soviet Union for exporting its goods due to failure in
developing good economic relations with the US and Europe.
However, in the late 1980s, Soviet Union started to break (dissolution of Soviet Union) and by 1991 it
was split into 15 nations (naming a few Russia, Kazakhstan, Ukraine).

2. Gulf War
Iraq and Kuwait were major suppliers of Oil.
The Gulf crisis began with the invasion of Kuwait by Iraq at the beginning of August 1990. Crude oil
prices rose rapidly thereafter–from USD 15 per barrel in July 1990 to USD 35 per barrel in October
1990.
The Gulf War made it necessary to buy oil from the spot market led to destruction of India’s oil imports
and prices were doubled (Oil Price Shock). A sharp rise in the imports of oil and petroleum products
accounted for rise in trade deficit.

3. Loss of Investors’ Confidence

The widening current account deficits and reserve losses contributed to low investor confidence,
which was further weakened by political uncertainty. This was aggravated by the downgrade of India’s
credit rating by credit rating agencies.

4. Slow Growth of Important Trading Partners

The deterioration of the current account was also induced by slow growth in economies of important
trading partners like USA.

Internal Causes

1. Fiscal Indiscipline:
The Economic Survey (1991-92) had categorically remarked that:
“Throughout the eighties, all the important indicators of fiscal imbalances were on the rise. Gross
fiscal deficit of the Central Government has been more than 8 percent of GDP since 1985 – 86, as
compared with 6 percent in the beginning of 1980s and 4 percent in the mid – 1970s.”

2. Political Uncertainty and Instability

In the late 1980s India’s political system was imploding. Within a span of one and half years there
were three coalition governments and three Prime Ministers. This led to delay in tackling the ongoing
balance of payment crisis, and also led to a loss of investor confidence.

3. Balance of Payments Crisis (Rise in External Debt)

In the second half of the 1980s, the current account deficit was showing a rising trend and was
becoming unsustainable. An important issue was the way in which this deficit was being financed.
The current account deficit was mainly financed with costly sources of external finance such as
external commercial borrowings, NRI deposits, etc.

Economic Reforms of 1991

Components of Economic reforms

1. Fiscal Stabilization
2. Internal Stabilization
3. Integration with World Economy

A. Macroeconomic Stabilization: Demand-side Management

Short-term and Medium-term measures
Intended to correct lapses and return the economy to
a. Low and stable inflation
b. Sustainable B.O.P.
c. Fiscal Discipline

Measures of Stabilization:
1. Fiscal Correction
a. Reduction in Govt’s non-planned expenditure
b. Reduction in Govt Grants
c. Reduction in Subsidies on many items
2. Reforms in the Tax Structure (Based on the recommendations of the Chelliah Committee following
reforms were implemented in the New Economic Policy)
a. Rationalization of the income tax structure and reducing the maximum income tax rate from 51% to
30%
b. Rationalization of Custom Duties and lowering the peak tariff rates to around 50% that prevailed in
most other countries
c. Reduction in Subsidies on food, fertilizer and exports (unpopular decision due to vote bank politics
and strong farmer lobby)
d. Reduction in corporate profit tax to attract more investments particularly FDI.
3. Improvement in B.O.P. Position
4. Control of Inflation

B. Structural Adjustment Programme: Supply-side Management

Long-term measures
Intended to remove bottlenecks of growth path of an economy such as
a. Abolishing controls
b. Eliminate Bureaucratic Hurdles and Red-tapism
c. Efficient and Transparent Decision-making process

Policies of Structural Reforms (LPG Programme):

1. LIBERALIZATION
Removing all unnecessary controls and restrictions such as permits, licenses, quantitative restrictions,
quotas, etc.
Reduction in government regulation and state intervention
Allowing unfettered operation of market forces in determining economic processes and resource
allocation

I. Industrial Sector Reforms (New Industrial Policy, 1991)

a. Abolition of Industrial Licencing for all projects except for 5 industries(Alcohol,Cigarettes,

Hazardous Chemicals, Electronic Aerospace and defence equipment, Industrial explosives).

b. Contraction of Public Sector and reduction of reservations reduces from 17 to 2 industries (defence
equipment, atomic energy generation).
c. Reforms in the small scale industries (SSI) with increase in the investment limit to 1 crore.

d. Relaxations in the MRTP Act with scrapping of threshold limit of assets and no requirement of prior
approval from the govt. for investment in delicensed industries.

II Trade reforms

A. Significant role for foreign investments and technology- Foreign investment limits in banks
raised to around 50%

B. Tariffs- Tariffs were as high as 80% before the reforms. In a phased manner the average
tariffs have been brought down to 9% by 2015.

C. Decanalization- "canalization" of imports, i.e. the exclusive importation of certain goods

through designated government agencies. Public sector undertakings were no longer a
“canal” or an intermediary for sourcing commodities from abroad. An importer could now
direct source steel/aluminium/ironore or any other commodities directly from foreign
producers.

III. Financial Sector Reforms ( Shift in the role of the RBI from a regulator to a facilitator of financial
sector- facilitate free play of market forces and allowing commercial banks to decide their interest rate
structure-competition prevailed with liberalization.)

a. Reduction in CRR from 15% to 3-5% and SLR from 38.5% to 25% to increase availability of funds
with commercial banks to advance more credit formation.

B. Deregulation of interest rates by RBI

c. FIIs such as merchant bankers, mutual funds and pension funds were allowed to invest in Indian
Financial markets.

d. Encouragement of Private Sector banks both Indian as well as foreign

E. Banking system was reconstituted - International ,National, Rural banks, Local Banks

III. Capital Market Reforms

1. Stock Market has been made a statutory body. SEBI that was established in 1992 had
defined responsibilities for regulating, developing and encouraging capital market operations.

2. Dematerialization of shares was introduced after the reforms.Dematerialisation is the process

by which a client can get physical certificates converted into electronic balances.

IV. Foreign Exchange Reforms

a. Devaluation of Indian rupee against foreign currencies increased foreign exchange inflow
b. Determination of exchange rates was free from government control, exchange rates were market
determined; Current Account Convertibility i.e. current account transactions without prior permission
from the RBI

2. PRIVATIZATION (Increasing role of the private sector with change in ownership resulting in a
change in management)
Disinvestment - sale of a part of equity holdings held by the government in any PSU to private
investor. This is done to provide fiscal support to the government and improve the efficiency of public
enterprise.

3. GLOBALIZATION (Integrating the domestic economy with the world economy, i.e. growing
economic interdependence among countries with regard to technology, capital, information, goods,
services, etc.)
EXIM Policy 1992 seeks to achieve globalization through:
a. Liberalization of Import licensing - most imports were put under the Open General License (OGL)
where automatic permission is granted to import goods.
b. Rationalization of Tariff structure - reduction in the tariff rates to increase India’s export
competitiveness.
c. Foreign exchange management reforms –
Rupee value was determined by market forces
Free convertibility of rupee was allowed in the current account of B.O.P.

Declining Relevance of Planning Commission

● In the post liberalization period, the concept of planning has undergone a shift
● Move towards the era of indicative planning
● Blend of private and public has tilted in favour of private sector
● Diminishing role of Public Sector however, critical role played in the infrastructure sector
● Requirement of a broad framework to address basic issues confronting the economy and
long-term issues.

● Holistic view required for policy formulation regarding issues of energy, transport, water,
environment.

● Faster rate of growth with equity demands serious considerations

Period 6: 2003-2008 The best phase in growth

1. Annual average growth stood at 8.5%
2. From 2003 onwards, India enjoyed a boom in growth till recession of 2008
3. Sharp rise in investment rate
4. Inflow of foreign private capital
5. Outsourcing industry boosted India’s service exports
6. Export led growth
7. Expansion of bank credit
8. Incremental output coming only from a few capital intensive industries like
automobiles
9. Marginal rise in infrastructure
10. Rise in domestic savings rate
11. Debt led growth – financed by bank credit
12. Rapid monetary expansion- inflationary pressures- exchange rate
appreciation- widening CAD
13. Growth in Corporate savings from 4% of GDP in 90’s to 8.8% of GDP in
2007-08
14. Investment increased from 16.5% to 28.1% of GDP by 2007-08

What are the Structural Constraints?

1. Difficulties in taking quick decisions on project proposals have affected the ease of
doing business. This has resulted in considerable project delays and insufficient
complementary investments.
2. Ill-targeted subsidies cramp the fiscal space for public investment and distort
allocation of resources.
3. Low manufacturing base especially of capital goods a d low value addition in
manufacturing. Manufacturing growth and exports in India suffer from complex
procedures, difficulty in accessing credit, and escalated transaction cost.
4. Presence of a large informal sector and inadequate labour absorption in the formal
sector. This is due to absence of requisite skills.
5. Sustaining high economic growth is difficult without robust agricultural growth. Low
agricultural productivity is hampering this.
6. Structural factors engendering continued high inflation. Issues related to
significant
Presence of intermediaries in different tiers of marketing
Shortage of storage and processing infrastructure
Inter-state movement of agricultural produce

Reasons for slowdown of Indian economy post 2013

1. The implementation of goods and services tax (GST) was said to have
severely disrupted small-scale businesses as they struggled to comply with
the requirements of data that it imposed
2. Demonetisation of 500 and 1000 rupee notes in 2016 had caused GDP to fall
by 2 percentage points in one quarter
3. A third reason put forward for the slowdown is the reluctance of the
government to embrace major reforms in its first term. These include labour
reforms, privatisation, administrative and judicial reforms.
4. The trigger for the slowdown was the collapse of ILFS in September 2018.
Which prompted that there were serious issues in the NBFCs in India.
5. Onset of COVID-19 pandemic since 2020
6. Russia Ukraine conflict and rise in global commodity prices.

Demand and Supply shocks during COVID 19

A demand shock is a sudden unexpected event that dramatically increases or

decreases demand for a product or service, usually temporarily. A positive demand
shock is a sudden increase in demand, while a negative demand shock is a
decrease in demand. Either shock will have an effect on the prices of the product or
service.
1. Increase in demand of sanitizers, masks, PPE kits is a positive demand
shock.
2. Increased demand of OTT and gaming platforms, laptops, computers,
headphones and mics for video conferences is a positive demand shock
3. Negative demand shock is decrease in purchases of durables like cars,
jewllery, luxury goods

A supply shock is anything that reduces the economy's capacity to produce goods
and services, at given prices.
1. Lockdown measures preventing workers from doing their jobs can be seen as
a negative supply shock.
2. Non essential goods and services like garments, electronic items, stationery,
gyms, restaurants werent allowed to operate leading to negative supply
shock.
3. Positive supply shock is increase in home delivery services of food,
essentials, medicines and other goods.
4. Online education platforms is a positive supply shock
Difference between Niti Aayog and Planning Commission

Planning Commission was an advisory body, and so is Niti Aayog.

Difference between them are as follows:

1. The Planning Commission had powers to allocate funds to ministries and states; this function
will be now of finance ministry. Niti Aayog is essentially a think tank and a truly advisory body.

2. The role of states in the planning commission era was limited. The states annually needed to
interact with the planning commission to get their annual plan approved. They had some
limited function in the National Development Council. Since Niti Aayog has all chief ministers
of states and administrators of UT in its Governing Council, it is obvious that states are
expected to have greater role and say in planning/ implementation of policies.

3. The top down approach is reversed in Niti Aayog. It will develop mechanisms to formulate
credible plans to the village level and aggregate these progressively at higher levels of
government.
4. Cooperative/Competitive Federalism ,also called marble cake federalism, is an important
feature of Niti Aayog which was not the approach of Planning commission.
5. While the planning commission formed Central Plans, Niti Aayog will not formulate them
anymore. It has been vested with the responsibility of evaluating the implementation of
programmes. In this way, while Niti Aayog retains the advisory and monitoring functions of the
Planning commission, the function of framing Plans and allocating funds for Plan assisted
schemes has been taken away.

Inter- regional disparities in growth and development

● Before 1980- Growth rate of states mediocre but uniform

● Variation in performance of states in the post reform period
● In 90s, Gujarat grew by 7.6% and Bihar by 1.6%
● Low growth rates in- Bihar , UP, Odisha
● Acceleration of growth in – Gujarat, Maharashtra, West Bengal, Tamil Nadu, Madhya Pradesh
Gujarat and Maharashtra as miracle growth economies because of the following reasons:
•Pre existing capabilities
•Liberalization
•Decentralization of economic power

1. What was this pre-existing capability? It turns out that this capability was something more
than a state's level of development or educational level or geography. It is best captured by
how diversified a state's manufacturing base was. This diversified base is probably a proxy for
some generalized capability_-human capital, entrepreneurial spirit, organisational capital that
could exploit a favorable economic environment.
2. Greater economic decentralization meant states could differentiate themselves, not least in
their ability to attract private-sector investment.

3. Liberalization: This was, of course, facilitated by the gradual dismantling of the industrial
licensing system that used regional equity as one of the primary criteria guiding industrial
investments. Further contributing to differentiation over this period was the rising trend in
private investment, as well as the falling trend in public investment, with private investment
likely to be more sensitive to differences in policies across states.

Module 4b): Poverty

Meaning and definition of Poverty: According to the World Bank, Poverty is pronounced deprivation in
well-being and comprises many dimensions. It includes low incomes and the inability to acquire the
basic goods and services necessary for survival with dignity.
Deprivation of the basic necessities of life such as food , clothing and housing

Inability of the people to attain a minimum standard of living

Acc. to World Bank, Poverty is multi dimensional

Gives rise to illiteracy, poor health, gender inequality, environmental degradation

Poverty Line: The conventional approach to measuring poverty is to specify a minimum expenditure
(or income) required to purchase a basket of goods and services necessary to satisfy basic human
needs and this minimum expenditure is called the poverty line.

Poverty Line Basket: The basket of goods and services necessary to satisfy basic human needs is the
Poverty Line Basket (PLB).

Poverty Ratio: The proportion of the population below the poverty line is called the poverty ratio or
headcount ratio (HCR).

Measurement of Poverty Line

Absolute Measurement of Poverty

Absolute Poverty: According to United Nations World Summit for Economic Development, absolute
poverty is a condition characterized by severe deprivation of basic human needs, including food, safe
drinking water, sanitation facilities, health, shelter, education and information.
It depends not only on income but also on access to social services.
Poverty Threshold: The poverty threshold in absolute measurement of poverty is set using the
monetary value of the basket of essential products (required for basic needs) and every household
whose income is less than this value will be classified as poor.
Limited Scope: Absolute measurements of poverty, used by the World Bank and developing countries
like India, rely on a poverty line which remains constant across geographies and over time.
Criticism: Absolute measurement of poverty overlooks deprivation within countries or the higher cost
of living in developed countries.

Relative Measurement of Poverty

Relative Poverty: It is present when a household income is lower than the median income in a
particular country and is used mainly by the developed countries.
Those who fall into the category of relative poverty are not necessarily deprived of all basic needs, but
may not experience the same standard of living as the majority of society or in other words, they are
relatively deprived.
Poverty Threshold: In this method certain percentage of economically bottom population is always
considered below the poverty line.
Criticism: This approach, though, ignores the importance of the absolute standard of living and
assumes that relative income is all that matters for welfare.

Consumption Versus Income Level: Poverty line estimation in India is based on the consumption
expenditure and not on the income levels because of the following reasons:

1. Variation in Income: Income of self-employed people, daily wage laborers etc. is highly
variable both temporally and spatially, while consumption pattern are comparatively much
stable.

2. Additional Income: Even in the case of regular wage earners, there are additional side
incomes in many cases, which is difficult to take into account.

3. Data Collection: In case of consumption based poverty line, sample based surveys use a
reference period (say 30 days) in which households are asked about their consumption of last
30 days and is taken as the representative of general consumption.
4. Whereas tracing the general pattern of income is not possible.
5. Reference Period: It is the duration/period during which the survey is conducted by NSSO
workers in which they ask certain questions to households.

Poverty Estimation Committees in India

Tendulkar Committee (2009)

Expert group constituted by the Planning Commission and, chaired by Suresh Tendulkar, was
constituted to review methodology for poverty estimation and to address the following shortcomings of
the previous methods:
Obsolete Consumption Pattern: Consumption patterns were linked to the 1973-74 poverty line
baskets (PLBs) of goods and services, whereas there were significant changes in the consumption
patterns of the poor since that time, which were not reflected in the poverty estimates.
Inflation Adjustment: There were issues with the adjustment of prices for inflation, both spatially
(across regions) and temporally (across time).
Health and Education Expenditure: Earlier poverty lines assumed that health and education would be
provided by the state and formulated poverty lines accordingly.
Recommendations
Shift from Calorie Consumption based Poverty Estimation: It based its calculations on the
consumption of the items like cereal, pulses, milk, edible oil, non-vegetarian items, vegetables, fresh
fruits, dry fruits, sugar, salt & spices, other food, intoxicants, fuel, clothing, footwear, education,
medical (non-institutional and institutional), entertainment, personal & toilet goods.
Uniform Poverty line Basket: Unlike Alagh committee (which relied on separate PLB for rural and
urban areas), Tendulkar Committee computed new poverty lines for rural and urban areas of each
state based on the uniform poverty line basket and found that all India poverty line (2004-05) was:
₹446.68 per capita per month in rural areas
₹578.80 per capita per month in urban areas
Private Expenditure: Incorporation of private expenditure on health and education while estimating
poverty.
Price Adjustment Procedure: The Committee also recommended a new method of updating poverty
lines, adjusting for changes in prices and patterns of consumption (to correct spatial and temporal
issues with price adjustment), using the consumption basket of people close to the poverty line.
Mixed Reference Period: The Committee recommended using Mixed Reference Period based
estimates, as opposed to Uniform Reference Period based estimates that were used in earlier
methods for estimating poverty.
Tendulkar committee computed poverty lines for 2004-05 at a level that was equivalent, in Purchasing
Power Parity (PPP) terms to Rs 33 per day.
Purchasing Power Parity: The PPP model refers to a method used to work out the money that would
be needed to purchase the same goods and services in two countries.

Rangarajan Committee
The committee was set up in the backdrop of national outrage over the Planning Commission’s
suggested poverty line of ₹22 a day for rural areas.

Objectives
To review international poverty estimation methods and indicate whether based on these, a particular
method for empirical poverty estimation can be developed in India.
To recommend how these estimates of poverty can be linked to eligibility and entitlements under the
various schemes of the Government of India.

Recommendations
Methodology Used: The Rangarajan committee estimation is based on an independent large survey
of households by Center for Monitoring Indian Economy (CMIE).
It has also used different methodology wherein a household is considered poor if it is unable to save.
Normative and Behavioural level: Poverty line should be based on:
Normative level of adequate nutrition: Ideal and desirable level of nutrition.
Behavioral determination of non-food expenses: What people use or consume as per general
behavior.
Nutritional Requirement: For normative levels of adequate nutrition – average requirements of
calories, proteins and fats based on Indian Council of Medical Research (ICMR) norms, differentiated
by age, gender and activity for all-India rural and urban regions is considered:
Calories: 2090 kcal in urban areas and 2155 Kcal in rural areas.
Protein: For rural areas 48 gm and for urban areas 50 gm.
Fat: For urban areas 28 gm and for rural areas 26 gm.
Poverty Threshold: Persons spending below ₹47 a day in cities and ₹32 in villages be considered
poor.
Based on this methodology, Rangarajan committee estimated that the number of poor were 19%
higher in rural areas and 41% more in urban areas than what was estimated using Tendulkar
committee formula.
Modified Mixed reference period: Instead of Mixed reference Period (MRP) it recommended Modified
Mixed Reference Period (MMRP) in which reference periods for different items were taken as:
365-days for clothing, footwear, education, institutional medical care, and durable goods.
7-days for edible oil, egg, fish and meat, vegetables, fruits, spices, beverages, refreshments,
processed food, pan, tobacco and intoxicants
30-days for the remaining food items, fuel and light, miscellaneous goods and services including non-
institutional medical; rents and taxes.

Criticism: Rangarajan committee missed the opportunity to go beyond the expenditure-based poverty
rates and examine the possibility of a wider multi-dimensional view of deprivation.

Major poverty alleviation programmes (Names of any 4)

Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGA) - 2004

Swarnajayanti Gram Swarozgar Yojana (SGSY) - 1999

Sampoorna Grameen Rozgar Yojna (SGRY)- 2001

Pradhan Mantri Gramodaya Yojana (PMGY) – 2001

Pradhan Mantri Gram Sadak Yojana (PMGSY)- 2000

Antyodaya Anna Yojana- 2000

Swarna Jayanti Shahari Rozgar Yojana (SJSRY)- 1997

Indira Awaas Yojana (IAY) – 1999-2000

 Annapurna -2000

Valmiki Ambedkar Awas Yojana (VAMBAY) - 2001

National Food for Works Programme (NFFWP)- 2004

Rural Employment Generation Programme (REGP)- 1995

Prime Minister’s Rozgar Yojana (PMRY)- 1993

Drought Prone Areas Programme (DPAP)- 1973-74

Desert Development Programme (DDP) 1977-78

Integrated Wastelands Development Programme (IWDP)- 1989-90

Public Distribution System

Module 4 c) Unemployment

⦿ Labour Force: Employed+ Unemployed

⦿ Unemployment rate: the percentage of the labor force that is unemployed
⦿ Working Force: refers to the number of persons actually working
⦿ Labour Force Participation rate: It is defined as the number of persons in the labour force per
1000 persons.

What is the Difference Between Organised and Unorganised Sector?

Organised sector or formal sector in India refers to licensed organisations, that is, those who are
registered and pay Goods and Service Tax.
These include the publicly traded companies, incorporated or formally registered entities,
corporations, factories and large businesses.

Unorganised sector, also known as own account enterprises, refers to all unlicensed, self-employed
or unregistered economic activity such as owner manned general stores, handicrafts and handloom
workers, rural traders, farmers, etc

Dual Labour Market in India

Most of the debates and assertions made about

informality in the Indian labour market stops at the
dichotomy between unorganized and organized sector
workers. However, this fails to recognize that informality
is multi-faceted and heterogeneous, depending on
where the work takes place. The most concerning trend
is the rise of informal employment in the formal sector. If
this trend (as highlighted above) continues, workers will
continue to be excluded from accessing social security
though they work in larger enterprises. At the same
time, the majority of workers are still self-employed as
own-account and contributing family workers, which has
been quite a stable feature of the Indian labour market
for decades (stability is at the aggregate level – at the
individual level, there are transitions between self-
employment and casual employment; see, for example,
Karan and Selvaraj (2008)). Overall, there is
considerable uncertainty in India around the emergence
of more regular forms of wage and salaried
employment, particularly jobs that provide access to
social security and other employment benefits.
It is often said that informality in India is much higher
than other countries.

• The dualistic nature of the labour market in

developing countries and the dominance of small
firms is well documented. Micro enterprises typically
operate in the informal sector and are characterized
by lower productivity and lower wages.

• One key dimension of informalization in India today

is the growing prevalence of contract labour, which,
as noted above, has grown significantly in recent
years. According to the Annual Survey of Industries,
the share of contract workers in organized
manufacturing in India has risen drastically

• Due to the differences in productivity, there is an

imbalance between output and employment in the
Indian economy. In manufacturing: the organized
sector accounts for over 80 per cent of
manufacturing output, while the unorganized sector
engages 80 per cent of employment and represents
99 per cent of all establishments

• Declining female labour force participation rate in

India

Reasons for Declining Female Labour Force Participation rate

1. Increased enrolment in secondary schooling: In

terms of educational enrolment, there are two
effects: firstly, higher educational attainment will
automatically translate to a smaller labour force
(since education is classified as out-of-the-labour
force); and secondly, the level of education (and
skills) is both a key driver of labour force
participation for women who have exited full-time
 education and a determinant of the quality of
employment women will be able to access.
2. secondly, rising household incomes, which pulled
women out of the drudgery of agricultural labour:
since spousal income has increased (e.g. as a
result of the construction boom), poor women,
particularly those in rural areas, have withdrawn
from the drudgery of agricultural labour and menial
jobs.
3. thirdly, mismeasurement of women’s participation in
the labour force: women’s work is underreported.
women are engaged in certain activities but these
are not correctly captured as being economically
active
4. the lack of employment opportunities for women in
the non-farm sector.
5. Based on primary surveys, there is also some
preliminary evidence that the mechanization of
agriculture has contributed to the decline in demand
for agricultural labour.

Employment Elasticity

⦿ It is a measure of the percentage change in

employment associated with a 1% change in
economic growth.
⦿ It indicates the ability of an economy to generate
employment opportunities for its population as a per
cent of its growth process.
⦿ This implies that when employment generation is
commensurate with the economic growth, there is
positive employment elasticity.

Patterns of employment growth

⦿ Secondary sector- relatively high growth (1972-73

to 2011-12)
⦿ Overall employment stagnated but secondary
sector grew by 4.5%
⦿ Employment growth in tertiary sector has been
 relatively high but has been declining since 1972-73
⦿ Primary sector has the lowest growth

Primary Sector
⦿ Declining GDP of sector responsible for slow
employment growth
⦿ Negative employment elasticity
⦿ Non absorption of existing workers

Secondary sector
⦿ Relatively high and stable employment elasticity
⦿ Construction sector –high rate of employment
growth
⦿ Employment growth in manufacturing moderately
high

Tertiary sector

⦿ High GDP growth has not been accompanied by

high growth in employment
⦿ Steep decline in employment elasticity
⦿ Trade and transport show the best employment
performance
⦿ Financial services

Labour Market reforms

⦿ Labour reforms aim at regulating the market,
protecting employment and ensuring social security
of workers
⦿ Taking steps in increasing production, productivity
and employment opportunities in the economy in
such a manner that interests of workers are not
compromised

Labour Laws in India: Some of them are :

⦿ Trade Unions Act of 1926
⦿ Workmen’s Compensation Act , 1923
⦿ Payment of Wages Act, 1936
⦿ Industrial Disputes Act, 1947
⦿ Minimum wages Act, 1948
⦿ Industries Regulation and Development Act, 1951
⦿ Maternity Benefit act, 1961
⦿ Payment of Bonus Act, 1965

New Labour Codes

There have been several legislative and administrative
initiatives taken by the government to improve working
conditions and simplify labour laws. Most recent is the
consolidated sets of 4 labour codes which are yet to be
implemented.

Labour Codes: (Memorise the names of all 4 codes)

⦿ Code of Wages, 2019
⦿ Industrial Relations Code, 2020
⦿ Social Security Code, 2020
⦿ Occupational Safety, Health and Working
Conditions Code, 2020

The implementation process is delayed as states are yet

to finalise their rules under these codes.

What are the Benefits of Labour Codes?

1. Simplification of the Complex laws: The Labour

Codes simplify labour laws by consolidating 29
central laws that have been on the table for at least
17 years.
2. It will provide a big boost to industry & employment
and will reduce multiplicity of definition and authority
for businesses.
3. Easier Dispute Resolution: The codes simplify
archaic labour laws and revamp adjudication
processes, which will lead to quicker dispute
resolution.
4. Ease of Doing Business: Several economists and
industry experts say these reforms will boost
investment and make doing business easier.
5. They predict that these reforms will reduce internal
contradictions, increase flexibility, and modernise
safety and working conditions regulations.
6. Gender Parity: All sectors must allow women to
work at night, but employers must ensure that
security arrangements are made for them, and
women must consent before working at night.

Moule 4d) Demography and Development

Economic Development affecting Population growth

Theory of Demographic Transition

The demographic transition theory studies the

relationship between economic development and
population growth. It discusses about changes in birth
rate and death rate and consequently growth rate of
population in assonance with the process of growth and
development. It is also used to describe and predict the
future population of any area. The theory tells us that
population of any region changes from high births and
high deaths to low births and low deaths as society
progresses from rural agrarian and illiterate to urban
industrial and literate society. These changes occur in
stages which are collectively known as the demographic
cycle.

First Stage or Stage of High Birth Rate and High Death

Rate
In first stage, the country is at low level of economic
development. Agriculture is the main occupation of the
people. Standard of living of the people is low. Death
rate is high because of lack of medical facilities,
epidemics, famines and illiteracy. Birth rate is high
because of social and economic reasons.

Second Stage or Stage of High Birth Rate and Low

Death Rate or Stage of Population Explosion
In this stage, birth-rate is high but death rate is low. It
results in high growth rate of population. In this stage,
income begins to rise and economic activities expand.
On account of better health facilities and nourishing diet,
death rate falls rapidly. Birth rate remains high due to
social backwardness and limited access to
contraceptives. The key notable features of this stage
are as follows:

Third Stage or Stage of Declining Birth Rate and Low

Death Rate
In the third stage, a declining birth rate and low death
rate lead to low population growth. Along with economic
development of the country, structural changes in the
economy begin to take place. Large population begins
to reside in urban areas. People start considering large
families as liability. Consequently, birth rate begins to
fall. Death rate continues to be low. Growth rate of
population declines. India is passing through this stage
of demographic transition.

Fourth Stage or Stage of Low Birth Rate and Low Death

Rate
In the fourth stage, low birth rate and low death rate lead
to Population stabilisation. In this stage, because of
rapid economic development, standard of living of the
people becomes very high. Quality of life is given a
priority to the size of the family.

The microeconomic theory of fertility

• Parents weigh economic benefits against costs

• Benefits:
• Expected income from child labour
• Family support in old age
• Costs:
• The opportunity cost of mother’s time
• Cost of educating children

Population growth affecting economic development

• The “Saving effect”

• “Composition of investment effect”

Demographic Dividend

Demographic dividend refers to the growth in an economy that is the result of a change in the age
structure of a country’s population. The change in age structure is typically brought on by a decline in
fertility and mortality rates.

Total Fertility rate

The total fertility rate in a specific year is defined as the
total number of children that would be born to each
woman if she were to live to the end of her child-bearing
years and give birth to children in alignment with the
prevailing age-specific fertility rates.

Replacement level of fertility

Replacement level fertility is the level of fertility at which
a population exactly replaces itself from one generation
to the next.
Kerala Model of development
The Kerala model of development refers to the practices adopted in Kerala, which is characterized by
strong social indicators such as high literacy, improved access to healthcare, high life expectancy, low
infant mortality and low birth rate, often at levels comparable to developed countries despite having a
lower per capita income.

These achievements along with the factors responsible for such achievements have been considered
characteristic results of the Kerala model.

Reasons for Low fertility rates in Kerala

1. Women are being educated. In Kerala, 92 per cent of females are literate as opposed to 70
per cent for all of India's women. Better educated mothers keep their children healthier,
causing infant mortality (child deaths) rates to reduce. This leads to lower birth rates, as more
babies survive.

2. As educated young females begin to follow career paths, they marry later, and have children
later in life.

3. Contraception is more widely available in Kerala, and couples can plan when they have
children.