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CHARACTERISTICS OF INDIAN ECONOMY

Dr. James Manalel, Professor, SMS

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CHARACTERISTICS OF INDIAN ECONOMY

Underdeveloped economy —26% BPL – Features of a Developing Economy.--5% in China

Rural 27.1

Urban 23.6

Combined 26.1

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Rich country inhabited by poor people

India has 17% of world Population, but only 1.7% of world GNP (2003)

China 20.5% of population and 4.1 % of GNP

India is the 4th largest economy in the world, after US, China, and Japan (GDP,ppp)

Accounts for 5.9% of World GDP (in 2005).

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Rich country inhabited by poor people…

India is 28th largest exporter and17th largest importer of merchandise

10th largest exporter of commercial services and 13th importer.(2006)

Has 6 Fortune 500 companies, whereas US has 170. (2006)

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GROSS NATIONAL INCOME:

in 2008 ($ bn)India 1,216 Times larger than India China 3,899 3.2Germany 3,486 2.9 Japan 4,879 4.0 Switzerland 499 0.41 USA 14,466 11.9 World 57,638 India = 2.11%

( as per WDR , 2010)

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GROSS NATIONAL INCOME : at PPP ($bn)

India 3,375 Times larger than India China 7,984 2.4 Germany 2,952 0.62 (62.2%) Japan 4,498 1.0 Switzerland 355 0.07 (7.2%) USA 14,283 3.1 World 69,309 India = 6.33%

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Low Per Capita Income:PCI in selected countries (2008)

Country PCI ($) Times larger than India

India 1,070

Norway 87,070 81.4

Switzerland 65,330 61.1

Germany 42,440 39.7

USA 47,580 44.5

Japan 38,210 35.7

China 2,940 2.7

World 8,613 8.0

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PCI in 1999 = $450 only – one of the lowest. (as per WDR, 2000-01).

In 2003 = $ 530 ( as per WDR, 2005)

In 2005 = $820(WDR,2008)

Annual Growth rate in PCI: average for 1990-91 (2002-03)

India = 6.1% (6.4) USA = 3.4%(2%)

Japan= 1.4% (2.7) Switzerland =0.5%(-1.2%) China= 10.7%(8.4)

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PCI in terms of PPP: INDIA = $2149 (1999) = $2960 (2008)

Country PCI (PPP$) Times higher than India

Norway 58,500 19.8

USA 46,970 15.9

Switzerland 46,460 15.7

Japan 35,220 11.9

Germany 35,940 12.1

China 6,020 2.0

World 10,357 3.5

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India’s Per Capita Income

2006-2007

Only Rs.29,382 (i.e. about Rs 2500 p.m and if we adjust for inflation it would be around Rs.1873 only).

Yet, India has the largest number of Billionaires in Asia (36) ( $100 cr asset)

These 36 account for Rs.8.6 lakh cr assets.

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1.         OCCUPATIONAL PATTERN--primary producing

= typical of underdeveloped economies--a high share in NI and Employment

in 1998:INDIA: 61% of working population in agri and contributed 25% to NIIn 2001: 58% and 27% respectively2004-05: 56.5% & 20.2%Whereas, in USA and UK only 2% of population in agriculture (data for 1998)

In Japan 5% In China 69%In India 61%

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But the share of agri in GDP(NI): 2003

Germany, UK, Japan, USA, < 2%

China 15 %

India 23 %

World 04 %

Share of Services in GDP:USA 75% Germany 69% Netherlands 71%

Japan 68%+ China 32%

INDIA 52% World 68%

At the same time, the productivity per person employed in agri is very low in India.

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VALUE ADDED BY AGRICULTURAL WORKERS

($) 2000-02 2002-04

India 401 382

China 338 373

Germany 33,686 23,616

USA 53,907 36,863

Denmark 63,131 37,443

Netherlands 59,476 39,358

WORLD 1,051 863

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HEAVY POPULATION PRESSURE:

High level of birth rates and falling death rates.

16 % of world pop growth is from India (largest by 2050)

Population Growth rate (India):

1941-50 = 1.3% 1981-98 = 2%

Between 1990-2003: Population Growth rate

  India 1.7%

China 1.0%

World 1.4%

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Steep fall in death rate:

1911-20           = 49 per thousand

2001-02 = 8.1 per thousand

Birth rate:

1911-20           = 49 per thousand

2001-02 = 25 per thousandHence, higher growth rate in economy needed to maintain the same std of living. (growing demands of food, clothing, shelter, medicine, schooling etc.)

--Rising population = rising labour force leading to unemployment = wastage.

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Prevalence of Chronic Unemployment and Underemployment:

Here it is chronic and structural due to scarcity of CapitalIndustrial sector unable to expand fast to absorb the labour force

But in developed economies: it is cyclical.Agriculture: = disguised unemployment --no non-farm employment in rural areas.

More than 2% of labourforce=open unemployment 8.43% = underemployment.

Hence, total unemployment = 10.45% of labour force. (more recent figures put it at 8.28%) about 34.74 million.

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LOW RATE OF CAPITAL FORMATION: Amount of capital per head is low: evidence:

2 indicators of this: Consumption of crude steel and energy

Source: WDR (00-01)

Per capita consumption of Country Crude steel ( kg) (1987) Energy (kgs of oil

equivalent (1997) USA 417 21 times higher 8076 17 times UK 259 13 3863 8 Japan 582 29 4084 8.5 China 64 3.2 907 1.9 India 20 479

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Per capita consumption of Steel

2005 in Kgs.India 38China 250Developed world 400World average 200 India is poised to be 2nd largest producer of steel in the world by 2015-16, next only to China.

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GROSS DOMESTIC CAPITAL FORMATION:The current rate of capital formation is also low

Gross Domestic Investment & Saving (as % of GDP) Gross domestic investment Gross domestic saving Country 1990 1999 2003 1990 1999

Japan 32 29 26 33 30 USA 17 19 18 15 17 UK 19 16 16 17 15 India 25 24 24 22 20

India’s domestic savings rate: 2006-07 = 34.3% & gross domestic investment 35% of GDP (06-07). Gross cap formation as % of GDP (2005) = 23%, while China = 39%

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According to Prof. Colin Clark: in order to maintain the same std. of living, a country requires an additional investment of 4% p.a., if its population increases @ 1% p.a.

Hence, in a country like India, where the population grows @ 2% p.a. we need an additional investment of 8% just to offset the population growth.

And India will require a 14% level of gross cap formation in order to also cover the depreciation and maintain the same level of living.

( so, higher if it is to grow).--Though the 20% savings rate is good, it is not adequate to maintain the growing population.

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GDP GROWTH RATE

9.4% in 2006-07.9% in 05-06.The highest growth rate during the last 18 yearsBut agriculture sector grew by only 2.7% (against a target of 4%).Targeted growth rate for GDP for 11th Plan = 9%.

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INEQUITABLE DISTRIBUTION OF WEALTH/ASSETS:

As per RBI All India Debt and Investment Survey—1991-92 (RBI Bulletin, May,1999)

In rural areas: 

Nearly 51% of the bottom households owned just 10% of the total assets; whereas, 9.6% of the rich households (owning assets worth Rs.2.5 lakhs and above) accounted for nearly 49% of total assets.

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In urban areas: it was worse. 50.7% of urban households (owning less than

Rs.50,000 worth of assets) accounted for barely 5.3% of total assets;

whereas, nearly 66% of total assets of all urban households were held by 14.2% of households (each owning Rs.2.5 lakhs and above).

The resource base of 50% of households is so weak that it can hardly provide them anything above the subsistence level of income.

Despite Planning: concentration of wealth has increased: condition of the bottom 20% of population has deteriorated, while for the next 20% it has remained stagnant.

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Poor Quality of Human Capital:

  illiteracy; conservatism and superstition and fatalism

  HDI rankings: India(.612) = 134th (2007) (China (0.772)=92, Norway=1st, (0.971) USA=8th, JAPAN=10th), Australia = 2nd

as per HDR,2009), (out of 182 countries)

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LOW LEVEL OF TECHNOLOGY:

--In an LDC usually most modern techniques exist side by side with primitive techs.but as compared to Developed countries their technological stds are inferior generally—affects their productivity.basic conditions required for absorption of new and superior technology like: basic edn.levels, trained/skilled manpower, and adequate capital.

 The low productivity per hectare in agri and low labour productivity in agri + industry = due to technological backwardness.

 The poor farmers do not have the means to buy improved inputs, tools, not to speak of more expensive machines like tractors, sowing machines etc.

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Low Standard of Living of

average Indian:    Low calorie intake and low intake of protein

In 1996: The average calories intake of food was only 2,415 whereas in most developed countries it was 3,400 calories (minimum required for sustaining life is = 2,100 cal ).

  The average protein content of the Indian diet is only 44 grams/day while for developed world, it is double this.

 In India cereals predominate (whereas in developed countries, it is rich with intake of meat, fish, butter, sugar and fruits)--Our cereal consumption is 470 calories/day against the requirement of 400 cal/day per adult.

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Roughly 25 to 40% of population suffers from malnutrition

--the average protein content of Indian diet (at 44gms/day) is only ½ of that in developed countries.

--per capita availability of milk is also lower.

--nearly 60% of the mothers are malnourished.

--46% of child pop in India suffers from malnutrition

-- in 1996, only about 85% of population had access to safe drinking water. (90-91: only 81%; W Europe = 99%+more; China =90%

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Poor Quality of Population

In 2004-05:

About 40% adults suffered from chronic energy deficiency

35% of workers were illiterate

20% of workers were in the households below poverty line.

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Housing:

--about 31% of population in Indian cities (with pop >1mn) are slum dwellers.

--it is estimated that every fifth(1/5) house in India is unfit for living.

--there were 23.3 lakhs “houseless” people in 1981.

--in 1991, there was a shortage of 31 million housing units; and now there is a backlog of 41 million housing units.

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DEMOGRAPHIC CHARACTERISTICS:

UNDERDEVELOPED ECONOMY: =--high density of population--large % of population in the age group of 0-15 and lower in the working age group of 15-60.--low average life expectancy ratio + high infant mortality rates.India: Density =358 per sq.KM (2003) For the world as a whole = 48 per sq.Km. USA = 32; Japan = 4390; Germany = 237; Canada and Australia = 3China = 138; Bangladesh = 1061.2001 Census: 33.5% of pop in age group of 0-14 only 61.5% in working age group (15-64)So, high dependency load.

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SOCIO-ECONOMIC INDICATORS OF CONSUMPTION:

--in terms of calorie, proteins etc., --population per T.V., telephone line etc.-- population/physician etc.

Per capita daily intake (1997)Country fats Proteins calories

gms gms India 45 59 2496 China 71 78 2897

USA 143 112 3699 Japan 83 96 2932

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POOR ECONOMIC ORGANISATION:

--Fin institutions, Capital Mkt, Forex Mkt., Managemente.g.: institutions for mobilizing savings esp.rural savings--also for industrial, and production loans (agri/business/industry)--existence of moneylenders (exploitation)--institutional bottlenecks--dishonest, corrupt and inefficient administration/civil service.OF COURSE, IN MANY RESPECTS WE HAVE IMPROVED.

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INDIA’S RELATIVE SHARE AND RANK IN THE WORLD % share Rank

Area 2.47 7

Population 16.67 2

GDP 1.52 12

Electricity generation 3.62 8

Exports (goods & services) 0.7 30

Agriculture & allied

Arable land 11.25 2

Irrigated area 21.3 1

Production

Rice (paddy) 21.67 2

Wheat 11.2 2

Tobacco 8.45 3 Tea 30.0 1 Milk ( cow & buffalo) 12.41 2 Butter & Ghee 22.4 1 Sugar 11.45 2

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Share

(Percentage)

Rank

Population (2002) 17 2

GNP (2002) 1.6 11

GNP measured at PPP (2002) 5.5 4

GNP per capita (1999) --- 162

GNP per capita measured at PPP (1999) --- 163

Human Development Index (2002) -- 127

Export of goods (2003) 0.8 31

Import of goods (2002) 0.9 24

Export of services (20003) 1.4 120

Import of services (2003) 1.1 23

Net Foreign Direct Investment Inflow (2002)

0.5 ---

Source: Compiled /computed from different sources

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INDIA’S RANK

Population 2 Area 7

Arable land 2 Irrigated area 1

Tractors in use 2 nitro fertiliser use 2

Rice prodn 2 Wheat prodn 2

Tobacco prod 2 Tea prodn 1

Milk prodn 1 Butter & ghee 1

Sugar prodn 2

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CLASSIFICATION OF COUNTRIESON THE BASIS OF PER CAPITA INCOME

LOW INCOME COUNTRIES: 3rd WORLD $ 765 or less (2003) – 61 countries

$975 or less (2008) as per WDR,2010

MIDDLE INCOME COUNTRIES: 2nd World >$ 766 but < $9,386 – 93 countries

$ 976 -- $11,906 (2008)LOWER MIDDLE INCOME ($766-3,036) 56 countries UPPER MIDDLE INCOME ($3,036-9,385) 37countries.

HIGH INCOME COUNTRIES: 1st World (NORTH) $ 9,386 or more – 55 countries.

$11,906 or more (2008)

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DEVELOPING & DEVELOPED ECONOMIES

LESS DEVELOPED & MORE DEVELOPED COUNTRIES (LDC & MDC)

LEAST DEVELOPED ECONOMIES:

55 Countries (as per HDR,2004).Very low GNP per capita; land locked and remote insularity; desertification and exposure to natural

disasters

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NEWLY INDUSTRIALISING ECONOMIES: Asian Tigers; China

TRANSITION ECONOMIES: from centralized ec.system to market economies

e.g.: former Soviet Union(CIS), East European countries

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CHARACTERISTICS OF DEVELOPED AND DEVELOPING

COUNTRIES

** Income is not the sole criterion for development

** ECONOMIC GROWTH and ECONOMIC DEVELOPMENT : not

the same

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   an increase in income = indication of economic growth

ECONOMIC DEVELOPMENT: means more than growth alone.

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Some qualitative dimensions also:

Distribution of income

Standard of living

Composition of output

Working conditions

Overall improvement in economic welfare

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Hence includes:

Improvement in material welfare

Growth in incomes esp.of lowest categories

Reduction in mass poverty, illiteracy, disease

Improvement in life expectancy

Degree of participation in decision-making and in Govt.(voicelessness)

Basic human rights

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According to Amartya Sen:

Development requires the removal of major sources of unfreedom:

i.e. poverty, social deprivation, intolerance, discrimination in opportunities etc…

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CHARACTERISTICS OF DEVELOPED ECONOMIES

Besides income and social dimensions, other common characteristics: general affluence.modern sophisticated technologycontinuous innovations, faster diffusion of new ideas and technologylow share of primary sector and dominance of tertiary and secondarymarket friendly economic policies open trade and investment policiesdemocratic rights, competition and consumer choice--Also marred by patches of poverty

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CHARACTERISTICS OF DEVELOPING ECONOMIES

Low income ( deprivation )

Inequality in distribution of income (high BPL population)

Low HDI (India = 0.612. She is ranked 134th in 2007, out of 182 countries)

HDI (2006) India = 0.604 (134th).

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Characteristics as per Harvey Leibenstein:

1.    ECONOMICA)    General:    i.    High proportion of population in agriculture    ii.   over population in agri. + disguised

employment    iii.  little capital per head; low income per head    iv.  savings mostly with land holding class    v.   major expenditure: food + necessities

    vi.  major exports : foodstuffs and Raw materials

    vii. agri output: mainly cereals, R.M., low protein foods

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   A)    General: (continued):

 viii.      low volume of trade per capita

  ix.      poor credit and marketing facilities

   x.      poor housing

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b) Basic Characteristics in Agriculture:

--uneconomic use of even the low capital due to small size of holdings--low technology, not modern tools & equipments--commercialisation of agriculture suffers due to transport bottlenecks and low level of local demand.--little effort at land improvements : soil depletion--high level of indebtedness of farmers : vulnerability--land hunger : subdivision and fragmentation.

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DEMOGRAPHIC

--high fertility rates

--high mortality rates + low life expectancy

--inadequate nutrition and dietary deficiencies

--hygiene, public health and sanitation : rudimentary

--rural over-crowding.

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CULTURAL AND POLITICAL

        Rudimentary education and high illiteracy

        Child labour : extensive

        Middle class : absent or insignificant

        Women’s status: inferior

        Very tradition-bound population

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TECHNOLOGICAL AND MISCELLANEOUS

        Low yield per acre

        No/inadequate training facilities

        Transport & Communication & Infrastructure: inadequate

and crude

        Technology : crude

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HIGGINS says these countries are characterized by vicious circles of poverty

--the hen and egg nature of these make it difficult to separate the causes and effects.

Hence, perpetual Vicious Circles.

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UNCTADin its Human Development Report uses some composite indices to indicate the level of welfare or deprivation ( HDI; HPI; GDI)

HUMAN DEVELOPMENT INDEX

HUMAN POVERTY INDEX

GENDER RELATED DEVELOPMENT INDEX

 

   Possible that countries with similar HDI values may have different PCI levels

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HUMAN POVERTY vs INCOME POVERTY

(As per the Human Development Report)

INCOME POVERTY = deprivation in a single dimension, i.e. income.

--implies that the only real impoverishment = lack of income

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HUMAN POVERTY

= impoverishment of multiple dimensions

--so, income is not the only factor

DEPRIVATION of :

       Long and healthy life

       In knowledge

       Decent standard of living

       In participation

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HUMAN DEVELOPMENT INDEX

(HDI)

--average achievements in 3 dimensions

--composite index of 3 variables:

1.     Life expectancy at birth

2.     Educational attainment ( adult literacy, and combined gross primary,

secondary and tertiary enrolment ratio)

3.     GDP per capita ( at PPP US $ )

--income is therefore proxy for standard of living.

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HUMAN POVERTY INDEX ( HPI )     measures deprivation in human

development     While HDI measures overall progress in

achieving human development, HPI shows the distribution of progress and measures the backlog of deprivation that still exists.

        Two separate HPI constructed:HPI-1 for developing countriesHPI-2 for developed countries.BECAUSE: deprivation is relative to the social and economic conditions of the community.

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HPI-1

     Same variables as used for HDI

1.  % of people expected to die before 40

2.  % of adults who are illiterate3.  deprivation (economic) : reflected

by % of people without access to health services, safe water etc.

and % of underweight children.

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HPI-2      above 3 dimensions + 1, i.e. social

exclusion.

     % of population expected to die before 60

     % of people whose ability to read and write are not adequate to be functional

     % of people who are income poor ( i.e. disposable income ,50% of median disposable household income).

     % of long term unemployed ( 1 year or more)

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GENDER RELATED DEVELOPMENT INDEX ( GDI )

Same dimensions as HDI     but takes into account inequality in

achievement between women and men.

     Greater the gender disparity in basic human development, the lower the GDI compared with its HDI.

--GDI is therefore, HDI discounted or adjusted for gender inequality.

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GENDER EMPOWERMENT

MEASURE ( GEM )      measures whether women are able

to actively participate in economic and political life.

While GDI indicates gender inequality in basic capabilities, GEM measures inequalities in economic and political arenas.

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HDR,2009 (UNCTAD)

HDI RANK 2007(182 countries)

Norway 1

Australia 2

China 92

S Lanka 102

India 134

Pakistan 141

GDI RANK 2005(157 countries)

Norway 2

Australia 1

China 75

S Lanka 83

India 114

Pakistan 124