Indian Economy

1. Indian Economy

2. Growth and Development of the Economic Firmament

3. Define GDP Gross Domestic Product - GDP : The monetary value of all the finished goods and services produced within a country's borders in a specific time period, though GDP is usually calculated on an annual basis. It includes all of private and public consumption, government outlays, investments and exports less imports that occur within a defined territory. GDP = C + G + I + NXwhere:"C" is equal to all private consumption, or consumer spending, in a nation's economy"G" is the sum of government spending"I" is the sum of all the country's businesses spending on capital"NX" is the nation's total net exports, calculated as total exports minus total imports. (NX = Exports - Imports)

4. Define GNP Gross national product (GNP), in economics, a quantitative measure of a nation's total economic activity, generally assessed yearly or quarterly. The GNP equals the gross domestic product plus income earned by domestic residents through foreign investments minus the income earned by foreign investors in the domestic market. Gross domestic product, often confused with GNP, is calculated from the total value of goods and services produced in an economy over a specified period. Since World War II, GNP has been generally regarded as the most important indicator of the status of an economy. In the United States, the economy is considered to be in recession if there are two consecutive quarters of decrease in GNP. Despite the fact that GNP does not allow for inflation, overall value of production, and other factors, it is nevertheless a significant measurement of economic health. In 1995 the International Bank for Reconstruction and Development (World Bank) created a new system for measuring national wealth, based on the value of natural and mineral resources. Bibliography

5. Define Growth : Economic growth may be defined as a rate of expansion that can move an underdeveloped country from a near subsistence mode of living to substantially higher levels in the comparatively short period of time ie :, in decades rather than centuries.

6. Define Economic Development Economic development implies progressive changes in the socio-economic structure of a country . Economic development involves a steady decline in agriculture’s share in GNP and a corresponding increase in the share of industries, trade, banking, construction and services.

7. ADAM SMITH • Amongst the early classical economists, Adam Smith had first formulated a cogent and comprehensive theory of economic growth. • Smith established what is called the link theory of growth. • He established a cause-consequence relationship between population growth, accumulation of capital, and (What he called) “ propensity to truck, barter or exchange” on one side, and economic specialization, invention, technology transfer, use of machinery and development of skill and expertise on the other. • Smith felt that saving was Sine qua non for development. • He stated eve: “ every increase or diminution of capital, therefore, naturally tends to increase or diminish the real quantity of industry, the number of productive hands and, consequently, the exchangeable value of the annual produce of the land and labour of country, the real wealth and revenue of all its inhabitants…. Smith continued : Capital is increased by parsimony and diminished by prodigality and misconduct. • Adam Smith had felt that these factors were the forerunners amongst accepted growth impulses.

8. Contd >>>>>> • Added free trade and international marketability of products, the phenomena of economic growth would gather momentum and produce increasing gross national investible surplus, leading to further phases of development. There were however, three kinds of criticism about Adam Smith’s theory: • Free trade : It was Frederich List of Germany who said that free trade of the kind Smith had visualized would perpetuate economic differences between nations, already marked by unequal developments and dissimilar growth rates. • Innovations : Referring to Adam Smith’s emphasis on the role of machinery and skill (technology) some economists suggested that Smith had accounted for adaptive innovations but no autonomous innovations. • Institutional changes : some economists felt that Smith perhaps had thought too much of the role immutability of central economic-sociological forces leading to development as a process of evolution. As a consequence, they had felt that he had not perhaps adequately explained the phenomenon of changing institutions.

9. DAVID RICARDO • Then came Ricardo. Agriculture, according to him, should be the principle spectrum of economic growth. • Capitalists, labourers and big and small landholders are the three performing economic groups in the scenario. • Their proportionate respective shares in gross revenue would determine the growth rate. • From gross and net revenues, Ricardo finally deduced the concept of economic surplus necessary for further economic growth, which is however, available in deferring proportions as between countries and sectors respectively. • The Ricardian concept on economic development, as also Marxian materialism, had both somewhat lacked an appreciation of the role of innovations. • Contrarily, these theories became too much involved with the respective roles played by the reactions by economic phenomena of value, marginal return, consumers surplus and such other value-concepts. • These theories, however, had served their purpose in their own ways in that these brought out the reaction between the forces exerted by the different factors of production on the growth process.

10. Contd >>>>>>. • But in carrying out a pragmatic concept of economic growth which could also interpret the role of all-important catalyst factors, this was not adequate enough. • The need for a full-blooded concept was evident.

11. SCHUMPETER AND INNOVATIONS • Then came Schumpeter; with his overwhelming emphasis on change or innovation. • Schumpeter was the first economist to seriously and precisely lay his finger on this fundamental factor catalytic to development. • The central figure in Schumpeter’s analysis is the entrepreneur . • He is the innovator, the one who undertakes new combinations of the factors of production. • Innovations may occur in the following forms : • Introduction of a new product • Use of a new method of production • Conquest of a new source of supply of raw material • Opening of a new market • Reorganization of an industry

12. KEYNES AND THEREAFTER • Keynesian theory of employment and income, which eventually led to the concept of secular stagnation, has important bearings on the concept of economic development. • This is so as it emphasizes the role of the statecraft in playing upon the force of marginal efficiency of capital and propensity to consume in a well-activised programme of economic development. • The objectives behind the developmental plans and programmes are that these should lead the economy to annually yield a net investible surplus, generate capital and wealth for further investment, produce higher ranges of national product and income and eventually achieve accelerated economic development. • Economic development, in effect is antipodal to economic stagnation. • Keynes General Theory revolutionized the theory of business fluctuations, it was confined to short-period analysis. • Keynes assumed the following elements as given and constant : “ existing skill and quantity of available labour, existing techniques, the degree of competition, the tastes and habits of the consumer…”

13. Contd >>>>>>.. • The frame of analysis in the Keynesian formulation in this context was more static than dynamic, and is in more senses than one related more to short-range issues than long-range phenomena which were the concern of his earlier compeers. • It would appear that the post- keynesian economists, Hansen et al, have developed the Keynesian short-range concepts as sockets or sequences of a long- range macro level phenomenon. • These economists have been able to extend the Keynesian system into a more comprehensive long- period theory of output and employment which analyses short- term fluctuations as being embedded in a long- range setting of economic growth. • Keynes, however, continues to remain the focus of interpretation of economic development for the last few decades to date.

14. A SYNOPTIC VIEW Economic growth in the context of the developing countries of the Third World : • Is a function of optimum utilization of available and procurable resources; • At the least possible resource-cost to the economy • Deriving eventually the maximum feasible national product or income; • On the strength of a period- programme of resource- mobilization; • To produce the maximum range of capital and consumption- goods; • With optimization of employment and income per capita for the multitude; • So as to leave for the economy an adequate measure of both investible and exportable surplus.

15. Development, Underdevelopment and the Growth Divide

16. The Three worlds • The countries of the world are ranged on the two sides of Mahbub Ul Haq called the poverty curtain. • On the one side are industrialized developed countries like the USA, Canada, Russia, the France, Germany and the other countries of Europe, Australia and Newzealand, Japan, and the oil-rich OPEC countries, all of which the agencies now rate as countries in the high-income strata. • Ranged of the other are the rest of the world : South and South East Asia, New Africa and Latin America. • The second cluster of countries are lately being called the Third World, Third World economies is a new and developing subject, and a part of the fast-growing discourse on economic growth. • Economically advanced capitalist (First World) and Socialist (Second World) countries. • The term Third World has become widely accepted and is generally used by economically poor nations in the context of critical international trade, foreign aid, depletion of natural resources, and dwindling food supplies.

17. UNDERDEVELOPMENT The UN agencies and some economists called these countries as underdeveloped, generally signifying their poverty and backwardness. What they meant by underdevelopment : • The United Nations interpreted an “underdeveloped economy” as an economy “in which per capita income was low when compared with the per capita real income of the USA, Canada, Australia and Western Europe.” • It was further explained that : • An economically underdeveloped country was one which could afford its inhabitants consumption and material well-being appreciably inferior to that provided by the developed countries to theirs. • To designate a country as underdeveloped also would imply that its present economic performance could be improved by known and determined logistics. • Eugene Staley stated that an underdeveloped economy was characterized by chronic mass poverty. Staley believed that poverty in these countries was not endemic and could be substantially reduced by methods already proved in other countries.

18. CONTD >>>. • Earlier, Viner had explained that such an underdeveloped economy “had good prospects for using more capital or more labour or more available natural resources or all of these to support its present population on a higher level of living” and sometimes a large population. • Amlan Datta agreed that underdevelopment was not endemic and that an underdeveloped economy had inherent potential for development provided the correct impulses were generated in the economy and an adequate programme for development launched and progressed.

19. The Rationale The report of the Brandt Commission itself has been entitled North-South: A Programme for survival • The issues cannot be too simplified. The North would include two rich industrialized countries south of the equator, Australia and New Zealand. The south would range from a booming half-industrial nation like Brazil to poor landlocked or island countries such as Chad and Maldives. • Most of the South-North dialogue has been between the developing countries and the market-economy industrialized countries. This is how we would usually interpret the North and the South. • But many of our observations would also apply to industrialized Eastern Europe, which did not want to be lumped together with the west, or included in the South. These socialist developed countries are also sometimes called as mentioned by Torado, the second world. When we speak of the south, we also exclude china. • But we would attach great importance to the participation of the East European countries and China in the international economic system and institutions.

20. Define Under – Developed Economy : According to Professor Jacob Viner, an under-developed country is “a country which has good potential prospects for using more capital or more labour or more available natural resources, or all of these, to support its present population on a higher level of living or if its per capita income level is fairly high, to support a large population on a not lower level of living.

21. Characteristics of the Indian Economy as an Under-Developed Economy : • Low Per Capita Income 2003

22. Characteristics Contd>>>>>>>>. Occupational pattern : primary Producing : • Industrial origin of GDP Percentage Distribution

23. Characteristics contd ……….. • Heavy Population Pressure : The main problem in india is the high level of birth rates coupled with a falling level of death rates. • Low rate of capital formation : Another basic characteristic of the indian economy is the existence of capital deficiency which is reflected in two ways ie : • The amt of capital per head available is low • The current rate of capital formation is also low This can be explained with the help of table

24. Charactersitics contd………….

25. Chracteristics contd …………… • Maldistribution of wealth/assets : Rural (%) urban (%)

26. Characteristics Contd >>>>>>>. • Poor Quality of human capital :

27. Characteristics contd>>>>>>> • Prevalence of low level of technology • Low Level of living of the average Indian

28. Characteristics of underdeveloped countries: • Low GNP per capita GNP Per capita and ppp estimates of GNP per capita in dollars (2003)

29. Characteristics contd >>>>>>>>. • Scarcity of capital • Rapid population growth and high dependency burdens • Low levels of productivity • Technological backwardness • High levels of unemployment

30. Major issues of Development : • Low Per Capita income and low rate of economic growth • High proportion of people below the poverty line • Low level of productive efficiency due to inadequate nutrition and malnutrition. • Imbalance between population size, resources and capital • Problem of unemployment • Instability of output of agriculture and related sectors. • Imbalance between heavy industry and wage goods • Imbalance in distribution and growing inequalities.

31. The Characteristics of Economic Development : • Economic Factors : • Capital Formation • Marketable surplus of agriculture • Conditions in foreign trade • Economic system

32. Non-Economic Factors in Economic Development : • Human resources • Technical know-how and general education • Political freedom • Social organization • corruption • Desire to develop

33. Primary Economy The overall scene is still of a primary economy. This is because of certain important reasons: • The sale of primary goods, substantially to industrialized countries, renders trade subject to cyclical fluctuations. • Such trade would normally consist of the expert of raw material and agricultural product in exchange for finished products and manufacturers. • In international pricing manoeuvres, primary goods are always at a disadvantage to manufactured and finished goods. The primary produce of the Third World, therefore, normally receives a raw deal in international trade. • The average Third World worker shares little in prosperity, but he carries the full burden of depression in the developed world outside. • Ownership is highly concentrated in nature and a small percentage or group of people, generally not exceeding 10% of the population, control the economic apparatus. Pakistan and Bangladesh are a telltale example each. There is excessive situation also poses a rigid barrier to growth. • In fact, demographic pressure is too profound and deep seated. Even though the mortality rate is high, the birth rate is even higher and this overtakes the economy in an iron grip.

34. CONTD >>> • Capital is reluctant and investment archaic. Reources have a tendency to slip into the folds of the parallel economy, manifest in hoarding and black-money storage, instead of the generation of investible surplus for production of wealth and income. Institutional finance also tends to be rather choosy, rigid and largely non-developmental. • The productivity of the average labourer is poor, in view of lack of skill, inferior or inadequate training, and due to his general upbringing, as also his background steeped in poverty, crowded surrounding, malnutrition and unhealthy living. Malcontent and militancy further detract their output. • The growth- rate is poor, and is sometimes even negative. The gross national product is also poor, the per capita income low, and the standard of living for the multitude sub –normal. What is worse there is enormous inequity in distribution. • Finally the government of the country generally devoid of sound perspective and runs the country generally by adhocism very often the atmosphere is vitiated by inefficiency, unrest, graft and corruption.

35. CONTD >.. • As a result, economic mismanagement combined with inept developmental effort do generate multiple impulses which feed the economy with an inflationary fever, combined with a poor or negative rate of economic growth. • There is a situation of low-key economic equilibrium which may sooner than later degenerate into the state of structural disequilibrium. With an unsatisfactory growth-rate, coupled with an atrophied situation of the balance of payments, the stagnation in the economy gradually tends to perpetuate itself .

36. Partners in development The commission on International Development came into being in the late sixties… It was at the initiative of George Woods, then President of the World Bank, that a grand assize was contemplated. • The idea was to set up a conclave of eminent persons who could, in the background of their appraisal of “twenty years of development assistance .” identify the false steps taken in the recent past, and develop a sound strategy for the future. • As a result the commission on International Development started functioning in the late 1968, with L.B Pearson, former Prime Minister of Canada as the chairman, and seven other distinguished persons from different parts of the world., taken in their individual capacity, as members of the commission.

37. Contd >>>>>> Perspective before the commission was as follows: • The widening gap between the developed and developing countries has become a central issue of our times. The efforts to reduce it has promoted the developing nations to organize internal resource mobilization and transfer of technology and resources from rich to poor countries. • The state of economic underdevelopment was susceptible of a change for the better by determined national Endeavour's, coupled with well-meaning external assistance. • Many of the developing countries have shown themselves capable of major development efforts. • Against this background, “ a strategy could be developed for a partnership in development” between the developed and developing countries. • The “development relationship”, which is at the heart of such participation, must be based on a clear division of responsibilities which meets the needs of both partners.

38. Contd >>>>>.. In their report, the commission outlined a strategy for development : • The recommendations for action are addressed to the developing countries, to the industrialized countries, and to international organizations. • The recommendations embody a strategy for the strengthening of international cooperation for development, in order to: • Create a framework for free and equitable international trade; • Promote mutually beneficial flow of foreign private investment; • Establish a better partnership, a clearer purpose and a greater coherence in development aid; • Increase the volume of aid; • Meet the problem of mounting debts; • Make administration of aid for development more effective; • Organize direct technical assistance; • Slow down the growth of population; • Revitalize aid to education and research; and • Strengthen the multilateral aid system.

39. Emerging Growth Philosophy Many of these recommendations have been instrumental to the shaping of the commission’s policy and programme of these institutions in the next two decades. In the years pursuant to the presentation of the Pearson Commission’s Report, there has been a clear step- forward on lines advocated by the commission. • A wide expansion of aid and investment-credit, together with technology and expertise, for development in the economies of the developing countries, at much liberal terms, by both the unitary and multilateral agencies. • Considerable research has been undertaken at both national and international levels. On issues and problems relating to socio-economic development, and narrowing the gap between the developed and developing countries. • Many changes and liberalizations in the policy and programmes of international agencies like the IMF and the World Bank have come about. • The patterns of county-assessments by donor countries and the UN Agencies have become more intimate and more liberal. • Many international covenants, conferences and committees have gone into many complex and involved issues and have deliberated on and explored into the same in an Endeavour to find appropriate solutions and work out a strategy for development, with varying degrees of success.

40. The Brandt Commission On 28 September 1977, Willy Brandt, a Nobel Laureate for peace, announced at a press conference in New York, that he was ready to launch and chair an Independent Commission on International Development Issues(ICIDI) . With a distinguished group of the world’s elite as its Commissioners, the Brandt Commission thus came into being, also with the supplementary function “to present recommendations which could improve the climate for further deliberations for North-South relations.” The commission took upon itself the following overwhelming cluster of responsibilities; • To study the grave global issues arising from the economic and social disparities of the world community. • To suggest ways of promoting adequate solutions to problems involved in development and in attacking absolute poverty. • To pay careful attention, in the above context, to the UN resolutions on development problems and other issues explored in international fora in the recent past. • To seek to identify desirable and realistic directions for international development policy.

41. Recommendations A summary of the fundamental recommendations of the Brandt Commission will be in order: • The poorest countries • An action-programme be launched comprising emergency and longer term measures, to assist the poverty-belts of Africa and Asia. • Such a programme would require substantial additional financial assistance. • Hunger and Food • There must be an end to mass hunger and malnutrition. • International food-security should be assured, inter alia through food financing facility. • Programmes be funded and launched on land irrigation, production, research, grain storage and other agrarian efforts. • Greater North-South cooperation be stabilized. • Population • Population control needs highest attention. • National population control programmes be launched and funded.

42. Contd >>> • Production • A broader package of policy improvements be programmed for agronomy. • Strengthening of overall indigenous technological capacity to the optimum. • Regional, sub-regional and international cooperation to be organized. • Commodity-trade and Development • The commodity-sector of developing countries should contribute more to economic development. • Tariffs and other trade-barriers against developing countries be relaxed and removed. • Common fund financing be instituted. • Energy • An emergency programme on energy development be launched and funded. • A global energy research centre under UN auspices be set up.

43. Contd >>>>.. • Industrialization and World Trade • For developing countries, both industrialization and world trade be facilitated as matters of international policy. • Protectionism against the developing countries be rolled back, and new trading rules and principles evolved. • Arrangements be rationalized for sharing of technology. • World Monetary Order • Reform in international monetary order be urgently under-taken • The exchange rate regime, the reserve system, the balance of payments adjustment-process, and the overall monetary management be rationalized. • Special drawing rights (SDRs) be worked out. The IMF be entrusted to monitor and liberalise financing facilities for developing economies.

44. Contd >>>>>> • New Approach to Development Finance • There should be wider functioning to the Third World to find food, fight hunger and poverty and develop physical resources. • Flow of official development finance be enlarged. • Lending through international financial institutions be improved. • A World Development Fund be set-up for the unmet needs of programme- lending. • Internationalization • Policies, agreements and institutions be guided by the principle of universality. • Summit meetings be considered to advance the cause of consensus and change.

45. Define Human Development : Human Development is a process of widening people’s choices as well as raising the level of well-being achieved.

46. Why Human Development • Human Development is the end while economic growth is only a means to this end. • Human Development I a means to higher productivity. • It helps in lowering the family size by slowing human production. • Human Development is good for physical environment. • Human Development and reduced poverty contributes to a healthy civil society, increased democracy and greater social stability.

47. Human Development Index : Human development index is a composite of three indicators: i.e. : longevity, educational attainment, and standard of living.

48. Changes in HDI Over Time : • The rate of progress in human development has not be uniform in various countries. Some countries such as Ireland, China and Egypt have made rapid advancement. • Some countries in Africa saw a reversal in human development during the period of 1990’s bcoz of decline in life expectancy due to HIV/AIDS. • HDI declined in six countries in Eastern Europe and the commonwealth of Independent States –Bulgaria, Estonia, Latvia, the Republic of Moldova, Romania and the Russian Federation in 1985-2002 becoz of transition from socialism to capitalism.

49. Some Development Options for the Third World

50. Some Development Options for the Third World • Developing countries should give importance to the development of GDP/GNP but the vital fact is that all development is basically human development. • Therefore, the aspects of human development which bring about multispectrum growth- education, healthcare, food & agriculture, employment, good governance should be given in any developmental efforts in these countries.