Growth and Structure of Indian Economy Notes
Objectives
Explain the concept of growth and its dimensions in development.
Discuss how economic development fundamentally changes the structure of an economy.
Bring out the relationship between development and the structure of an economy.
Appreciate the growing influence of manufacturing and the tertiary sector in the growth process.
Discuss changes witnessed in the occupational structure, distribution of national income, and composition of exports.
Introduction
The Indian economy has over six decades of development experience with significant changes indicating strong fundamentals.
Current savings and investment rates are high, positioning India among the world’s fast-growing economies.
The demographic dividend, with a rising working-age population, is expected to further increase savings rates over the next two decades.
The emergence of Indian corporations in the global market reflects a sophisticated corporate culture, contributing to an optimistic economic outlook.
A revival in investment and private consumption demand has been observed.
India's exports have shown impressive growth.
Infrastructure services, including railway transport, power, telecommunications, and civil aviation, have markedly improved.
Favorable capital market conditions, with improved capital flows and business sentiments, are encouraging as per the RBI’s business expectations survey.
The manufacturing sector has shown unprecedented buoyancy, with a substantial pick-up in corporate earnings and profit margins.
India has demonstrated resilience in the face of severe global economic recession.
Critical lessons from sixty years of development experience:
Macro-economic stability is essential for achieving growth needed for development.
Growth does not automatically benefit everyone; development must directly address human needs.
A comprehensive approach is needed, as no single policy can trigger development.
Institutions matter; sustained development should be socially inclusive and responsive to changing circumstances.
Meaning and Measurement of Economic Development
Development Distinguished from Growth
Traditional View: Economic development was synonymous with economic growth, defined as a sustained increase in the output of goods and services over a long period, measured in terms of value added.
Modern View: Modern economists question the identity between economic growth and economic development.
Growth involves changes in aggregates like height or weight, while development includes changes in functional capacities, physical coordination, leadership capacity, and adaptability.
Growth is an engine, not an end; development is the end.
The traditional view was based on the ‘trickle-down strategy’, assuming rising incomes and output would benefit the poor.
Modern economists reject this view, emphasizing strategies to directly meet the needs of the poor.
Economic development is redefined in terms of reducing or eliminating poverty, inequality, and unemployment within a growing economy.
Prof. Dudley Seers: Development should be assessed by changes in poverty, unemployment, and inequality.
If these decline from high levels, it indicates development.
If they worsen, it contradicts the notion of development, even with per capita income doubling.
Concept of Economic Development
Economic development is defined as the process of increasing utilization and improving the productivity of a country's available resources, leading to increased economic welfare through national income growth.
Economic Growth = Size of output (Quantitative aspect)
Economic Development = Size of Output + Economic Welfare (Qualitative aspect)
Progress of development is assessed by:
Indices of ‘production’ or ‘national income’ (growth aspect).
Economic welfare indicators, reflecting resource allocation and income distribution among different groups (equity and growth aspects).
Five types of growth processes to be avoided:
Jobless growth: Growth that does not create additional jobs or reduces job opportunities.
Ruthless growth: Growth that aggravates inequalities.
Futureless growth: Growth that creates non-sustainability through environmental degradation.
Voiceless growth: Growth that does not improve the income of deprived sections of society.
Rootless growth: Growth that destroys cultural roots and traditional lifestyles.
Quality of life is an important index of development, not adequately reflected in per capita income growth.
Factors include education and literacy rates, life expectancy, nutrition levels, and energy consumption per head.
Some factors are non-monetary, while others are monetary.
There is a need for a synthetic index to measure economic development and quality of life.
Attempts include an index of “effective” economic growth (product of real GDP growth rate and an index of inequality).
Individual researchers, multinational institutions, and social organizations are initiating similar efforts.
Until such an index is formulated, a rise in real per capita income is used to measure ‘growth’ and ‘development’ synonymously.
Economic Development and Structural Change
Econometricians measure structural changes in economies as development proceeds, with pioneering work by Prof. Simon Kuznets.
Studies reveal how key economic parameters change as countries develop.
Important changes:
Constituents of GDP Change: Saving rates and government revenues/expenditures increase, food consumption decreases while non-food consumption increases, and relative output of services and industry increases, while agriculture decreases.
Employment Changes: Labor in the primary sector decreases less rapidly than its share in output, while the reverse is true for employment in industry due to higher labor productivity.
Shift in the Composition of Exports: Exports account for a larger proportion of incomes, with a shift from primary products to manufactured goods. Imports rise, and earnings/payments balance.
Rate of Increase in Population: Population growth may fall, as birth rates decline along with death rates, gradually petering out the rate of growth.
Distribution of Income: Income becomes more unequally distributed initially but then reverses.
Equity influences development: inequalities in power/wealth waste resources and impair institutional development. Unequal power also impedes innovation and risk-taking.
Structural Changes in Indian Economy
National income data is used to study structural changes in the Indian economy over the last six decades.
The process of growth began with the First Five Year Plan on April 1, 1951, aimed to restore stability.
A well-formulated growth strategy was launched in the Second Five Year Plan.
Earlier plans focused on building production capacity rather than rapid growth.
During the 1980s, changes occurred in strategy, rate, and composition of growth.
A new growth strategy was adopted in the 1990s.
Growth rates accelerated from 3.5% (1951-1975) to 5.5% (1975-1990), 6.5% (1990-2005), and about 7% (2005-2012).
Composition of Gross Domestic Product
The composition of GDP explains the significance of different producing sectors.
In underdeveloped countries, the primary sector (agriculture) contributes the most to national income.
As a country develops, industry and services sectors increase their contribution.
Reasons for this shift:
Low-income elasticity of demand for agricultural products: as income rises, demand for industrial goods increases more.
Agriculture faces limits on growth due to fixed land and diminishing returns.
Industry and services sectors offer more scope for capital and technology use.
Over time, the primary sector’s share has fallen by 40%, while secondary and tertiary sectors have increased.
This trend is projected to continue due to:
Reduced restrictions on private sector involvement in areas like software development and information services.
Technological advances and lower fixed capital requirements.
Composition of Gross Domestic Product
The rate of growth of the secondary and tertiary sectors has more than doubled that of the primary sector.
In the 1980s, all three sectors grew faster, with the secondary sector leading.
Subsequently, the tertiary sector has grown the fastest.
The growth of the service sector may be overstated due to outsourcing of non-core activities by manufacturing firms and inclusion of household/cottage sector production.
The service sector has become the growth-driver in the Indian economy.
Currently, about two-thirds of the incremental growth in the Indian economy can be attributed to the tertiary sector.
This pattern deviates from the development pattern of Western and South East Asian economies, which experienced a shift from primary to secondary sector first.
In India, the secondary sector has not expanded enough to absorb the growing labor force.
The sharp increase in the share of the tertiary sector in GDP in India has occurred at a much lower level of per capita income than that in the developed countries.
This pattern underlines the link between growing poverty/unemployment and inadequate growth of manufacturing and building activity.
Causes of Rapid Increase in Tertiary Sector
The non-commodity sector grows faster than the commodity sector, meaning income generated in circulation grows faster than in direct production.
Factors contributing to this trend:
The advent of information technology and the knowledge economy.
Expansion of infrastructure like banking, insurance, finance, transport, communication, education, and medical facilities.
Public services grow more rapidly with the significant role of national governments in planning and production, reflected in government policies and expansion patterns.
Operation of the demonstration effect as a consequence of growing mobility due to expanding foreign trade, tourism, and cultural and educational tours.
Increasing urbanization raises demands for infrastructure services such as communication, public utilities, and distribution services.
Tourism promotes all types of services.
Manufacturing industries have become service-oriented with increasing functions of accounting, finance, legal services, advertisement, marketing, and public relations, which are increasingly outsourced.
The favorable international environment has opened up immense possibilities for the exports of India’s service sector, especially in IT and entertainment.
Slower growth in the commodity-producing sector also contributes to the increase in the share of the non-commodity sector.
Difficulties in bringing about a fast rate of growth in the primary sector, failure of the secondary sector to grow at a much faster rate was necessary to give the commodity sector a comparable status with the non-commodity sector in the growth rate.
Prospects and Opportunities
Domestic Factors
As real per capita GDP grows, demand for services increases more than proportionately, reinforcing GDP growth itself.
Demand for producer and government services have strong multipliers impacting on real GDP.
The growth of dynamic service activities generates employment opportunities on a rising scale.
Economic growth leads to the emergence/expansion of new services, providing essential service inputs to other sectors.
Efficient delivery of services increases productivity of both labor and capital, making services a catalytic agent of growth.
International Factors
The rapid expansion of knowledge-based services provides opportunities for substantial growth.
India has advantages in the supply of such services due to a developed technological and educational structure and lower labor costs.
Progress in IT is making it increasingly possible to unbundle the production and consumption of information-intensive service activities.
World prices of transport and communication services have fallen dramatically.
India’s geographical distance from important industrial markets is no longer significant in the cost-structure of skill-based activities.
India does not have to be a low-cost producer of certain goods before becoming an efficient supplier of services.
The decline in manufacturing in rich countries implies a relative decline in their demand for industrial raw materials and fuels.
The aging of the population in the developed world implies that the demand for services will continue to grow.
Implications
The expansion in the services sector has implications for population, employment, and trade prospects.
Growing share of the services sector points to the need for policy initiatives towards introducing greater competition and efficiency.
Gains in productivity in agricultural/industrial sectors will shift employment away from non-service sector to services sector.
The services sector constitutes a tax-base with vast unexploited potential.
Limitations
The service sector suffers from low productivity and quality despite large technology investments.
The sector faces challenges for sustained growth.
Services where India enjoys comparative advantages lack clear policy thrust.
Many services are either predominantly associated with the Government or are not liberalised enough.
Services like professional, legal, postal, accountancy, and insurance need further liberalization to harness their potential.
Without sustained efforts, increasing the importance of services in wake of structural adjustment and liberalization in the economy, we may encounter:
Economic and social position of workers in the service sector will steadily go down.
Workers in this sector will use their numerical strength to get wages higher than their economic contribution justified.
Need for an Integrated Policy
To make services-led growth more widespread and sustainable, it is important to remove constraints.
A coherent integrated services policy needs to be developed.
Reforms in services in India have evolved in an ad hoc manner.
The depth and pace of reforms lack uniformity across sectors.
Given the strong interlinkages between different services, opening a particular services sector may not yield results if not backed by corresponding reforms is other complementary services.
Such an integrated services policy should also define the sequence as well as the pace of reforms to be undertaken simultaneously in different services.
Liberalisation should be followed in a phased manner accompanied by social policies in sectors that have surplus labour so as to avoid creating unemployment and social unrest.
Distribution of GDP Between Agricultural and Non-Agricultural Income
Per capita GDP in agriculture has increased barely by 37.5% in 60 years, while in the non-agricultural sector, it increased by over 580%.
The ratio of per capita GDP in non-agriculture to agriculture was 0.68 in 1950-51, increasing to 3.60 in 2010-11.
Reasons for the growing disparity:
The growth rate of the agricultural sector is smaller than that of the non-agricultural sector, 2.38% in agriculture and 4.83% in non-agriculture from 1950-51 to 2010-11.
Population movement from agriculture to non-agriculture is restricted.
The non-agricultural sector is partially an organised sector, restricting entry.
Agriculture acts as a parking lot for the poor.
Implications:
Scarce public resources for boosting output in agriculture will generate limited growth dividends.
Raising per capita incomes requires facilitating the redeployment of additions to the rural labor force away from agriculture.
Redeployment into industry and the service sector raises overall GDP growth.
Higher rural incomes and higher overall incomes would result in a rapid reduction in poverty.
Urbanization needs to be facilitated.
Share of the Rural and Urban Sectors
Classification between rural and urban areas provides insights into organizational setup, activities, and lifestyles.
The rural economy has grown faster (7.5% per annum) than urban (5.6%) due to strong growth in the rural non-farm sector.
In 1980-81, the rural sector accounted for 41% of GDP; in 2010-11, it was estimated at 51%.
Growth in per capita income in rural India has been almost double compared to urban India, though on a much lower base.
The rural economy is no more predominantly agrarian. In 1970-71, 73.8% of rural GDP was generated in the farm sector; in 2010-11, it was 41.6%, with about 60% generated in the non-farm sector.
Rural India has been more resilient in the face of economic turnaround.
Reasons:
Government spending includes funds transferred to beneficiaries, giving them the freedom to spend the money and mitigate leakages.
Agriculture has benefited from positive imperatives.
MSPs were raised for common paddy by 40% and for wheat by 80% between 2004-05 and 2011-12, while inflation rose by around 24%.
The global commodities boom has ensured new agricultural export markets.
Farmers have hardly seen an increase in input costs, with the exception of higher wages for laborers in the recent past.
Rural areas are now more connected due to mobile phones and road networks.
Farmers benefited from a record Rs. 65,318 crore farm loan waiver.
Share of the Organised and Unorganised Sectors
The organizational pattern of the economy is divided into organised and unorganised sectors.
The organised sector is identified with a modern market economy, while the unorganised sector includes all unincorporated enterprises and household industries that do not maintain annual accounts and balance sheets.
The organised sector has been growing faster than the unorganised sector due to policies like reduction in excise duties and tariffs.
The unorganised sector continues to dominate the economy with two-thirds of the NDP.
Share of the Public and Private Sectors in the GDP
The public sector's share in the economy has practically doubled, with a growth rate of 6.0% per year compared to the private sector's 2.8%.
The private sector still dominates with 75% of the GDP due to the importance of agriculture.
Factor Shares
The functional distribution of national income indicates the elasticities of aggregate output with respect to each factor of production.
Factors of production are land, labor, capital, and enterprise, with shares as rent, wages/salaries, interest, and profits.
In the Indian economy, there is also ‘self-employed’ with ‘mixed income’.
Conclusions from analyzing factor shares:
Mixed income of the self-employed constitutes about 40% of the NDP, indicating a large segment run by self-employed persons.
The primary sector holds the predominant position among the sectoral mixed incomes, although its share has registered a significant decline over the years.
The share of the sector comprising transport, communications and trade, which emerges as the second important sector, has increased over the years, whereas the share of the secondary sector has remained almost unchanged over the years.
Indian agriculture is becoming more capitalist with less self-employed labor.
Transport, communications, and trade are becoming less capitalistic with more self-employed labor.
In the current decade, the share of mixed income has shown a declining trend.
Another 40% of the GDP generates in the form of “employee compensation”, which has been rising over the years.
During the period 2000-01 to 2004-05, the share of employee’ compensation came down marginally. This included both workers’ wages, which came down quite sharply, and remuneration of salaried employees, which went up.
The share of the primary sector in total of employee compensation generated in the economy has gone down indicating growing mechanisation.
The share of the secondary sector has been stationary which indicates the lack of employment orientation on the part of the industrial growth.
The share of the tertiary sector has been rising. It is this sector which seems to be most employment-oriented.
The large role of employee compensation in the NDP accelerates inflation because of DA’s neutralisation.
The share of operating surplus of companies, includes both private and public enterprises, has been increasing.
It increased from about 12 per cent of GDP in 2000-01 to about 15.9 per cent in 2011-12.
This jump has been driven primarily by an increase in corporate profitability.
The sharp rise in profitability can be explained by the combination of the low interest rates and numerous tax concessions and implicit subsidies that have significantly increased retained profits over this period.
Remittances account for 3% of India’s GDP.
These can help in increasing overall income levels in a poor household.
These can help reduce poverty.
These can help household’s smooth consumption and can act as automatic stabilisers in a period of an economic shock.
Remittances can fuel household consumption or saving, which eventually increases a country’s aggregate consumption.
A huge rise in the number of Indians migrating abroad.
India has become one of the most attractive countries for investment in the world, thereby attracting more remittances.
Easing of the exchange rate, regulations and a gradual opening up of the capital account, etc.
An important structural change in the Indian economy has been the rising proportion of wages and salaries (employee compensation) in the NDP.
Growth and Occupational Structure
Occupational structure: the distribution of the workforce in different occupations.
In an industrializing economy:
The percentage of the population dependent on agriculture should decline over time in the long run.
The percentage of the population dependent on industry – manufacturing – should increase over this period.
The increase in manufacturing employment should absorb at least a major part of the population released from agriculture.
Shift from household activities to non-household activities as the latter may be expected to be larger, and to use better technology.
Increase in the percentage of population dependent on services, the increase should be less than the increase in manufacturing.
Reasons:
With rise in incomes, the demand for agricultural goods does not rise proportionately.
Rise in incomes brings about a large increase in demand for industrial goods and services, resulting in increasing demand for labour in the manufacturing and services sector.
With economic development more capital and better techniques become available with agriculture, so that the productivity of land and labour goes up fast. As a result, there is less need for labour in agriculture.
In the industrial sector, although increase in capital and modern techniques makes it possible to bring about large increase in production per head, demand increases at a faster rate than the rise in per head productivity resulting in increasing demand for labour in the industrial and the services sectors.
Occupational Structure in India
Table 1.2: Occupational distribution of working population.
Sector | 1901 | 1921 | 1951 | 1971 | 1981 | 1991 | 99-00 | 04-05 | 09-10 |
|---|---|---|---|---|---|---|---|---|---|
Primary | 71.7 | 76.0 | 72.1 | 72.1 | 68.7 | 65.0 | 60.4 | 58.4 | 53.5 |
Secondary | 12.6 | 10.5 | 10.7 | 11.2 | 13.5 | 15.0 | 15.8 | 18.2 | 20.9 |
Tertiary | 15.7 | 13.5 | 17.2 | 16.7 | 17.8 | 20.0 | 23.8 | 23.4 | 25.6 |
The share of the agriculture sector in total work force may fall to less than 50% in another decade.
Observations:
The occupational structure of the Indian economy is lopsided.
Period from 1901 can be divided in two sub-periods, first lasting till 1971, the second covering the period since 1971.
Over the last four decades, some definite changes as evidenced on the celebrated Kuznets-Clark-Kaldorian path and as already experienced in other developed countries, have taken place.
Some significant developments in certain segments of the economy can be seen.
The number of workers in modern industries is on the increase.
There is an impressive expansion of job opportunities in services like education, health, science, railways, communications, etc.
Pace of modernisation is slow.
The share of cultivators has come down while that of agricultural labourers has gone up.
The share of cultivators came down to 29.7 per cent in 2004-05, while that of agricultural labourers has increased to 19.8 per cent in 1991.
The movement is away from workers depending substantially on their own resources.
The occupational structure in some of the States has undergone a marked change.
In Kerala, Tamil Nadu, Maharashtra and Bengal, the proportion of working population engaged in agriculture has declined and that engaged in industries and services has gone up.
In Rajasthan and Orissa, however, there has been an opposite development.
The level of per capita incomes of different States too seems to tell a familiar story about the occupational structure.
In States where the per capita income is about the same as the all-India level, the share of agriculture in the working population is low and that of industries and services high.
In States where the per capita income is less than all-India level, the share of agriculture in the working population is high and that of non-agricultural sector low.
The composition of the NDP has shown a marked change since 1950-51.
There has been a marked fall in the share of the primary sector in the NDP, whereas the share of the secondary and the tertiary sectors has increased.
The share of the tertiary sector has increased at a faster rate than that of the secondary sector.
Growth and Composition of Exports
Composition of Trade is indicative of the structure and level of development of an economy.
Most of the UDCs depend for their export earnings on a few Primary Commodities (PCs).
As an economy develops, its trade gets diversified.
Begins to export more of manufactured industrial goods and import industrial raw materials, capital equipment and technical know-how.
Manufactured exports create greater value addition than PCs as they go through more stages of processing.
The manufacturing sector has greater linkages with the rest of the economy.
Composition of India’s Foreign Trade
Classify the various exports in three groups:
Export-oriented manufactures, i.e., exports through industries which are significantly export-dependent.
Domestic-oriented manufactures, i.e., exports through industries which largely cater to domestic needs.
Non-manufactures, i.e., products which are of a natural or agricultural sector.
The relative share of the three groups in total exports has been 64%, 19% and 17% respectively.
Manufactures have come to dominate our export basket.
There are two riders:
High technology exports constitute only 5% of total manufactured exports.
Our manufactured exports have increasingly got concentrated in a few items.
There exist both positive and negative consequences:
Given low wage rates, the country will continue to enjoy its natural competitive advantage in these labor-intensive manufactures and we should promote their exports with vigour.
The negative consequences of concentration are:
Lack of diversification has adversely affected the competitiveness of India’s exports.
There has emerged a mismatch in structures of world trade and India’s exports.
India’s export basket has to diversify, change towards higher-valued products and more importantly, to products which have higher technology content.
Growth and Population Change
Theory of Demographic Transition explain the growth of population through three different stages of economic development.
Figure 1.4
The first stage relates to the most backward stage of a country, birth rate and death rate are high in this stage.
The birth rate is high as a consequence of widespread illiteracy, early marriages, absence of knowledge of family planning methods, and the conventional belief about the big size of a family.
The death rate is also high during this stage on account of poverty, poor diet, primitive sanitation and absence of medical facilities.
High birth and death rates keep the growth of population either stagnant or very slow.
The second stage relates to a developing country, the birth rate continues to be high because social customs do not change overnight, death rate falls considerably, A high birth rate matched with a sharp decline in the death rate causes a rapid increase in population.
This stage is better known as the stage of ‘population explosion’.
The third stage relates to a developed country, Economic development advances further, The birth rate falls sharply on account of universal literacy, an extensive use of family planning devices, and a high standard of living, The death rate also falls, sometimes to unusually low levels because of the superfluity of young people in the population.
Eventually death rates rise somewhat as the age distribution becomes more normal.
The population of a country grows at a slow rate, if at all it rises.
The theory of demographic transition views economic growth as a sufficient condition for a decline in fertility.
Trends in Population
India is the second largest populated country in the world with a total population enumerated in the 2011 census at about 121.02 crore.
India’s population has grown over the years:
Year | Population | Year | Population |
|---|---|---|---|
1901 | 23.80 | 1971 | 54.81 |
1911 | 25.20 | 1981 | 68.33 |
1921 | 25.10 | 1991 | 84.63 |
1931 | 27.90 | 2001 | 102.70 |
1941 | 31.87 | 2011* | 121.02 |
1951 | 36.10 | 2016* | 126.89 |
1961 | 43.92 | 2026* | 139.98 |
The history of population growth in India divides itself into four natural phases.
1901-1921: Stagnant population
1921-1951: Steady growth
1951-1981: Rapid high growth
1981-2011: High growth with definite signs of slowing down.
Before 1921 the growth of population was very slow: as a matter of fact, India’s population had declined during the decade 1911-21.
The decline was caused by famines and epidemics.
The year 1921, therefore, is also known as the ‘Year of Great Divide’.
The upward trend in population growth rate maintained since 1951 got reversed during the decades 1981-2011.
India continues to grow in size, its pace of net addition is on the decrease.
Growth and Distribution of Income
The pattern of income distribution in the UDCs shows wide inequalities.
Figure 1.5
Economists generally agree on an asymmetrically U-shaped relationship between income distribution and economic growth
1 Inequalities in Distribution of Income in India
The extent and magnitude of inequalities of income in India can be studied on the basis of available data relating to:
income distribution,
wealth distribution,
consumption expenditure, and
distribution of savings in the country.
A conclusion common to all the studies is: the gross inequalities of income exist in India.
Inequalities are more wider in distribution of wealth.
Inequality of wealth has been consistently higher than even income inequality.
Distribution of savings originating in the household sector also brings out the fact of inequalities in income distribution.
Ginni index for India has been estimated as 32.5 (index value of 0 implies perfect equality and 100 implies an extreme of inequality).
There is no middle class in India.
Middle class includes people with an income above $10 day, but excluding the top 5 per cent of that country, in India, everyone at over $10 a day is in the top 5 per cent of the country.