Indian Economics

CONTENTS

F O R E W O R D iii

UNIT I : DEVELOPMENT POLICIES AND EXPERIENCE (1947-1990) 1-35

CHAPTER 1: INDIAN ECONOMY ON THE EVE OF INDEPENDENCE 3

– LOW LEVEL OF ECONOMIC DEVELOPMENT UNDER THE COLONIAL RULE 4

– AGRICULTURAL SECTOR 5

– INDUSTRIAL SECTOR 7

– FOREIGN TRADE 8

– DEMOGRAPHIC CONDITION 9

– OCCUPATIONAL STRUCTURE 10

– INFRASTRUCTURE 11

CHAPTER 2 : INDIAN ECONOMY 1950-1990 16

– THE GOALS OF FIVE YEAR PLANS 19

– AGRICULTURE 22

– INDUSTRY AND TRADE 27

– TRADE POLICY: IMPORT SUBSTITUTION 30

UNIT II : ECONOMIC REFORMS SINCE 1991 36-56

CHAPTER 3 : LIBERALISATION, PRIVATISATION AND GLOBALISATION : AN APPRAISAL 38

– BACKGROUND 39

– LIBERALISATION 41

– PRIVATISATION 44

– GLOBALISATION 45

– INDIAN ECONOMY DURING REFORMS: AN ASSESSMENT 48

UNIT III: CURRENT CHALLENGES FACING THE INDIAN ECONOMY 57-178

CHAPTER 4 : POVERTY 59

– WHO ARE THE POOR? 60

– HOW ARE POOR PEOPLE IDENTIFIED? 63

– THE NUMBER OF POOR IN INDIA 66

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– WHAT CAUSES POVERTY? 68

– POLICIES AND PROGRAMMES TOWARDS POVERTY ALLEVIATION 72

– POVERTY ALLEVIATION PROGRAMMES — A CRITICAL ASSESSMENT 75

CHAPTER 5 : HUMAN CAPITAL FORMATION IN INDIA 82

– WHAT IS HUMAN CAPITAL? 84

– SOURCES OF HUMAN CAPITAL 84

– HUMAN CAPITAL AND HUMAN DEVELOPMENT 90

– HUMAN CAPITAL FORMATION IN INDIA: GREAT PROSPECTS 91

– EDUCATION SECTOR IN INDIA 92

– FUTURE PROSPECTS 94

CHAPTER 6 : RURAL DEVELOPMENT 99

– WHAT IS RURAL DEVELOPMENT? 100

– CREDIT AND MARKETING IN RURAL AREAS 101

– AGRICULTURAL MARKET SYSTEM 104

– DIVERSIFICATION INTO PRODUCTIVE ACTIVITIES 106

– SUSTAINABLE DEVELOPMENT AND ORGANIC FARMING 110

CHAPTER 7 : EMPLOYMENT: GROWTH, INFORMALISATION AND OTHER ISSUES 116

– WORKERS AND EMPLOYMENT 118

– PARTICIPATION OF PEOPLE IN EMPLOYMENT 119

– SELF-EMPLOYED AND HIRED WORKERS 120

– EMPLOYMENT IN FIRMS, FACTORIES AND OFFICES 123

– GROWTH AND CHANGING STRUCTURE OF EMPLOYMENT 124

– INFORMALISATION OF INDIAN WORKFORCE 127

– UNEMPLOYMENT 130

– GOVERNMENT AND EMPLOYMENT GENERATION 132

CHAPTER 8 : INFRASTRUCTURE 139

– WHAT IS INFRASTRUCTURE? 140

– RELEVANCE OF INFRASTRUCTURE 141

– THE STATE OF INFRASTRUCTURE IN INDIA 141

– ENERGY 144

– HEALTH 149

xii






CHAPTER 9 : ENVIRONMENT AND SUSTAINABLE DEVELOPMENT 162

– ENVIRONMENT — DEFINITION AND FUNCTIONS 163

– STATE OF INDIA’S ENVIRONMENT 167

– SUSTAINABLE DEVELOPMENT 171

– STRATEGIES FOR SUSTAINABLE DEVELOPMENT 172

UNIT IV : DEVELOPMENT EXPERIENCES OF INDIA : A COMPARISON 179-197WITH NEIGHBOURS

CHAPTER 10 : COMPARATIVE DEVELOPMENT EXPERIENCES OF 181 INDIA AND ITS NEIGHBOURS

– DEVELOPMENTAL PATH — A SNAPSHOT VIEW 182

– DEMOGRAPHIC INDICATORS 185

– GROSS DOMESTIC PRODUCT AND SECTORS 186

– INDICATORS OF HUMAN DEVELOPMENT 189

– DEVELOPMENT STRATEGIES — AN APPRAISAL 190

GLOSSARY 198-206

xiii



DEVELOPMENT POLICIES AND EXPERIENCE (1947-90)

UNIT

IIIUNIT

I

The two chapters in this unit give us an overviewof the state of the Indian economy as it was at theeve of independence till after four decades ofplanned development, which was a path that Indiachose. This meant that the Government of Indiahad to take a series of steps such as theestablishment of the Planning Commission andannouncement of five year plans. An overview ofthe goals of five year plans and a critical appraisalof the merits and limitations of planned developmenthas been covered in this unit.

After studying this chapter, the learners will

• become familiar with the state of the Indian economy in 1947, the year of India’s Independence

• understand the factors that led to the underdevelopment andstagnation of the Indian economy.

INDIAN ECONOMYON THE

EVE OF INDEPENDENCE

1

4 INDIAN ECONOMIC DEVELOPMENT

1.1 INTRODUCTION

The primary objective of this book,Indian Economic Development, is tofamiliarise you with the basic featuresof the Indian economy, and itsdevelopment, as it is today, in theaftermath of Independence. However, itis equally important to know somethingabout the country’s economic past evenas you learn about its present state andfuture prospects. So, let us first look atthe state of India’s economy prior to thecountry’s independence and form anidea of the various considerations thatshaped India’s post-independencedevelopment strategy.

The structure of India’s present-day economy is not just of currentmaking; it has its roots steeped inhistory, particularly in the period whenIndia was under British rule whichlasted for almost two centuries beforeIndia finally won its independence on15 August 1947. The sole purpose ofthe British colonial rule in India wasto reduce the country to being a feedereconomy for Great Britain’s own

rapidly expanding modern industrialbase. An understanding of theexploitative nature of this relationshipis essential for any assessment of thekind and level of development whichthe Indian economy has been able toattain over the last six decades. 1.2

1.2 LOW LEVEL OF ECONOMICDEVELOPMENT UNDER THE

COLONIAL RULE

India had an independent economybefore the advent of the British rule.Though agriculture was the mainsource of livelihood for most people,yet, the country’s economy wascharacterised by various kinds ofmanufacturing activities. India wasparticularly well known for itshandicraft industries in the fields ofcotton and silk textiles, metal andprecious stone works etc. Theseproducts enjoyed a worldwide marketbased on the reputation of the finequality of material used and the highstandards of craftsmanship seen in allimports from India.

Box 1.1: Textile Industry in Bengal

Muslin is a type of cotton textile which had its origin in Bengal, particularly,places in and around Dhaka (spelled during the pre-independence period asDacca), now the capital city of Bangladesh. ‘Daccai Muslin’ had gained worldwidefame as an exquisite type of cotton textile. The finest variety of muslin wascalled malmal. Sometimes, foreign travellers also used to refer to it as malmalshahi or malmal khas implying that it was worn by, or fit for, the royalty.

“India is the pivot of our Empire... If the Empire loses any other part of itsDominion we can survive, but if we lose India, the sun of our Empire will haveset.”

Victor Alexander Vruce, the Viceroy of British India in 1894

5INDIAN ECONOMY ON THE EVE OF INDEPENDENCE

The economic policies pursued bythe colonial government in India wereconcerned more with the protectionand promotion of the economicinterests of their home country thanwith the development of the Indianeconomy. Such policies brought abouta fundamental change in the structureof the Indian economy — transformingthe country into a net supplier of rawmaterials and consumer of finishedindustrial products from Britain.Obviously, the colonial governmentnever made any sincere attempt toestimate India’s national and percapita income. Some individualattempts which were made to measuresuch incomes yielded conflicting andinconsistent results. Among thenotable estimators — DadabhaiNaoroji, William Digby, Findlay Shirras,V.K.R.V. Rao and R.C. Desai — it was

Rao whose estimates of the nationaland per capita incomes during thecolonial period were considered verysignificant. However, most studies didfind that the country’s growth ofaggregate real output during the firsthalf of the twentieth century was lessthan two per cent coupled with ameagre half per cent growth in percapita output per year.

1.3 AGRICULTURAL SECTOR

India’s economy under the Britishcolonial rule remained fundamentallyagrarian — about 85 per cent of thecountry’s population lived mostly invillages and derived livelihood directlyor indirectly from agriculture. However,despite being the occupation of sucha large population, the agriculturalsector continued to experience

Fig. 1.1 India’s agricultural stagnationunder the British colonial rule

Box 1.2: Agriculture DuringPre-British India

The French traveller, Bernier, describedseventeenth century Bengal in thefollowing way: “The knowledge I haveacquired of Bengal in two visits inclinesme to believe that it is richer than Egypt.It exports, in abundance, cottons andsilks, rice, sugar and butter. It producesamply — for its own consumption —wheat, vegetables, grains, fowls, ducksand geese. It has immense herds of pigsand flocks of sheep and goats. Fish ofevery kind it has in profusion. Fromrajmahal to the sea is an endlessnumber of canals, cut in bygone agesfrom the Ganges by immense labour fornavigation and irrigation.”

Take note of the agricultural prosperity in our country in the seventeenth century. Contrast itwith agricultural stagnation around the time when the British left India, around 200 years later.


stagnation and, not infrequently,unusual deterioration. Agriculturalproductivity became incrementallylow though, in absolute terms, thesector experienced some growth dueto the expansion of the aggregate areaunder cultivation. This stagnation inthe agricultural sector was causedmainly because of the varioussystems of land settlement thatwere introduced by the colonialgovernment. Particularly, under thezamindari system which wasimplemented in the then BengalPresidency comprising parts of India’spresent-day eastern states, the profitaccruing out of the agriculture sectorwent to the zamindars instead of thecultivators. However, a considerablenumber of zamindars, and not justthe colonial government, did nothingto improve the condition ofagriculture. The main interest of thezamindars was only to collect rent

regardless of the economic conditionof the cultivators; this causedimmense misery and social tensionamong the latter. To a very greatextent, the terms of the revenuesettlement were also responsible forthe zamindars adopting such anattitude; dates for depositing specifiedsums of revenue were fixed, failingwhich the zamindars were to lose theirrights. Besides this, low levels oftechnology, lack of irrigation facilitiesand negligible use of fertilisers, alladded up to aggravate the plight ofthe farmers and contributed tothe dismal level of agriculturalproductivity. There was, of course,some evidence of a relatively higheryield of cash crops in certain areas ofthe country due to commercialisationof agriculture. But this could hardlyhelp farmers in improving theireconomic condition as, instead ofproducing food crops, now they were

Work These Out

Compare the map of British India with that of independent India and find

out the areas that became parts of Pakistan. Why were those parts soimportant to India from the economic point of view? (Refer, to youradvantage, Dr Rajendra Prasad’s book, India Divided).

What were the various forms of revenue settlement adopted by the Britishin India? Where did they implement them and to what effect? How far doyou think those settlements have a bearing on the current agriculturalscenario in India? (In your attempt to find answers to these questions, youmay refer to Ramesh Chandra Dutt’s Economic History of India, which comesin three volumes, and B.H. Baden-Powell’s The Land Systems of BritishIndia, also in two volumes. For better comprehension of the subject, youcan also try and develop an illustrated agrarian map of British India eitherby hand or with the help of your school computer. Remember, nothinghelps better than an illustrated map to understand the subject at hand).


producing cash crops which were tobe ultimately used by Britishindustries back home. India’sagricultural production received afurther set back due to the country’spartition at the time of independence.A sizeable portion of the undividedcountry’s highly irrigated and fertileland went to Pakistan; this had anadverse impact upon India’s outputfrom the agriculture sector.Particularly affected was India’s juteindustry since almost the whole of thejute producing area became part ofEast Pakistan (now Bangladesh).India’s jute goods industry (in whichthe country had enjoyed a worldmonopoly so far), thus, sufferedheavily for lack of raw material.

1.4 INDUSTRIAL SECTOR

As in the case of agriculture, so alsoin manufacturing, India could notdevelop a sound industrial base underthe colonial rule. Even as the country’sworld famous handicraft industriesdeclined, no corresponding modernindustrial base was allowed to comeup to take pride of place so longenjoyed by the former. The primarymotive of the colonial governmentbehind this policy of systematically de-industrialising India was two-fold. Theintention was, first, to reduce India tothe status of a mere exporter ofimportant raw materials for theupcoming modern industries inBritain and, second, to turn India intoa sprawling market for the finishedproducts of those industries so thattheir continued expansion could be

ensured to the maximum advantage oftheir home country — Britain. In theunfolding economic scenario, thedecline of the indigenous handicraftindustries created not only massiveunemployment in India but also a newdemand in the Indian consumermarket, which was now deprived of thesupply of locally made goods. Thisdemand was profitably met by theincreasing imports of cheapmanufactured goods from Britain.

During the second half of thenineteenth century, modern industrybegan to take root in India but itsprogress remained very slow. Initially,this development was confined to thesetting up of cotton and jute textilemills. The cotton textile mills, mainlydominated by Indians, were located inthe western parts of the country,namely, Maharashtra and Gujarat,while the jute mills dominated by theforeigners were mainly concentrated inBengal. Subsequently, the iron andsteel industries began coming up inthe beginning of the twentieth century.The Tata Iron and Steel Company(TISCO) was incorporated in 1907. Afew other industries in the fields ofsugar, cement, paper etc. came up afterthe Second World War.

However, there was hardly anycapital goods industry to helppromote further industrialisation inIndia. Capital goods industry meansindustries which can produce machinetools which are, in turn, used forproducing articles for currentconsumption. The establishment of afew manufacturing units here and


there was no substitute to the nearwholesale displacement of thecountry’s traditional handicraftindustries. Furthermore, the growthrate of the new industrial sector andits contribution to the Gross DomesticProduct (GDP) remained very small.Another significant drawback of thenew industrial sector was the verylimited area of operation of the publicsector. This sector remained confinedonly to the railways, power generation,communications, ports and someother departmental undertakings.

1.5 FOREIGN TRADE

India has been an important tradingnation since ancient times. But therestrictive policies of commodityproduction, trade and tariff pursuedby the colonial government adverselyaffected the structure, composition andvolume of India’s foreign trade.Consequently, India became an

exporter of primary products such asraw silk, cotton, wool, sugar, indigo,jute etc. and an importer of finishedconsumer goods like cotton, silk andwoollen clothes and capital goods likelight machinery produced in thefactories of Britain. For all practicalpurposes, Britain maintained amonopoly control over India’s exportsand imports. As a result, more thanhalf of India’s foreign trade wasrestricted to Britain while the rest wasallowed with a few other countries likeChina, Ceylon (Sri Lanka) and Persia(Iran). The opening of the Suez Canalfurther intensified British control overIndia’s foreign trade (see Box 1.3).

The most important characteristicof India’s foreign trade throughout thecolonial period was the generation ofa large export surplus. But thissurplus came at a huge cost to thecountry’s economy. Several essentialcommodities—food grains, clothes,

Work These Out

Prepare a list showing where and when other modern industries of Indiawere first set up. Can you also find out what the basic requirements are forsetting up any modern industry? What, for example, might have been thereasons for the setting up of the Tata Iron and Steel Company at Jamshedpur,which is now in the state of Jharkhand?

How many iron and steel factories are there in India at present? Are theseiron and steel factories among the best in the world or do you think thatthese factories need restructuring and upgradation? If yes, how can this bedone? There is an argument that industries which are not strategic in natureshould not continue to be in the public sector. What is your view?

On a map of India, mark the cotton textiles, jute mills and textile mills thatexisted at the time of independence.


kerosene etc. — became conspicuousby their acute scarcity in the domesticmarket. Furthermore, this exportsurplus did not result in any flow ofgold or silver into India. Rather, this wasused to make payments for theexpenses incurred by an office set upby the colonial government in Britain,expenses on war, again fought by theBritish government, and the import of

invisible items, all of which led to thedrain of Indian wealth.

1.6 DEMOGRAPHIC CONDITION

Various details about the populationof British India were first collectedthrough a census in 1881. Thoughsuffering from certain limitations, itrevealed the unevenness in India’spopulation growth. Subsequently,

Fig.1.2 Suez Canal: Used as highwaybetween India and Britain

Box 1.3: Trade Through the SuezCanal

Suez Canal is an artificial waterwayrunning from north to south across theIsthmus of Suez in north-easternEgypt. It connects Port Said on theMediterranean Sea with the Gulf ofSuez, an arm of the Red Sea. The canalprovides a direct trade route for shipsoperating between European orAmerican ports and ports located inSouth Asia, East Africa and Oceania bydoing away with the need to sail aroundAfrica. Strategically and economically,it is one of the most importantwaterways in the world. Its opening in1869 reduced the cost of transportationand made access to the Indian marketeasier.

Not to scale

Work These Out

Prepare a list of items that were exported from and imported into India duringthe British rule.

Collect information from the Economic Survey for various years publishedby the Ministry of Finance, Government of India, on various items of exportfrom India and its imports. Compare these with imports and exports fromthe pre-independence era. Also find out the names of prominent ports whichnow handle the bulk of India’s foreign trade.

Not to scale

1 0 INDIAN ECONOMIC DEVELOPMENT

every ten years such census operationswere carried out. Before 1921, Indiawas in the first stage of demographictransition. The second stage oftransition began after 1921. However,neither the total population of India northe rate of population growth at thisstage was very high.

The various social developmentindicators were also not quiteencouraging. The overall literacy levelwas less than 16 per cent. Out of this,the female literacy level was at anegligible low of about seven percent. Public health facilities wereeither unavailable to large chunks ofpopulation or, when available, werehighly inadequate. Consequently,water and air-borne diseases wererampant and took a huge toll onlife. No wonder, the overall mortalityrate was very high and in that,

particularly, the infant mortalityrate was quite alarming—about 218per thousand in contrast to thepresent infant mortality rate of 63 perthousand. Life expectancy was alsovery low—32 years in contrast to thepresent 63 years. In the absence ofreliable data, it is difficult to specify theextent of poverty at that time but thereis no doubt that extensive povertyprevailed in India during the colonialperiod which contributed to theworsening profile of India’s populationof the time.

1.7 OCCUPATIONAL STRUCTURE

During the colonial period, theoccupational structure of India, i.e.,distribution of working persons acrossdifferent industries and sectors,showed little sign of change. Theagricultural sector accounted for the

Fig. 1.3 Poverty, malnutrition and poor health facilities also cause the population to grow slowly

1 1INDIAN ECONOMY ON THE EVE OF INDEPENDENCE

largest share of workforce, whichusually remained at a high of 70-75per cent while the manufacturing andthe services sectors accounted for only10 and 15-20 per cent respectively.Another striking aspect was thegrowing regional variation. Parts of thethen Madras Presidency (comprisingareas of the present-day states of TamilNadu, Andhra Pradesh, Kerala andKarnataka), Maharashtra and WestBengal witnessed a decline inthe dependence of the workforce onthe agricultural sector with acommensurate increase in themanufacturing and the servicessectors. However, there had been anincrease in the share of workforce inagriculture during the same time instates such as Orissa, Rajasthan andPunjab.

1.8 INFRASTRUCTURE

Under the colonial regime, basicinfrastructure such as railways, ports,water transport, posts and telegraphsdid develop. However, the real motive

behind this development was not toprovide basic amenities to the peoplebut to subserve various colonialinterests. Roads constructed in Indiaprior to the advent of the British rulewere not fit for modern transport. Thecolonial administration also could notaccomplish much on this front due toa paucity of funds. The roads that werebuilt primarily served the purposes ofmobilising the army within India anddrawing out raw materials from thecountryside to the nearest railwaystation or the port to send these to faraway England or other lucrativeforeign destinations. There alwaysremained an acute shortage of all-weather roads to reach out to the ruralareas during the rainy season.Naturally, therefore, people mostlyliving in these areas sufferedgrievously during natural calamitiesand famines.

The British introduced therailways in India in 1850 and it isconsidered as one of their mostimportant contributions. The railwaysaffected the structure of the Indianeconomy in two important ways. Onthe one hand it enabled people toundertake long distance travel andthereby break geographical andcultural barriers while, on the otherhand, it fostered commercialisation ofIndian agriculture which adverselyaffected the comparative self-sufficiency of the village economies inIndia. The volume of India’s exporttrade undoubtedly expanded but itsbenefits rarely accrued to the Indianpeople. The social benefits, which the

Work These Out

Can you find out thereasons behind frequentoccurrence of famines inIndia before independence?You may read from NobelLaureate Amartya Sen’sbook, Poverty and Famines.

Prepare a pie chart forthe occupational structurein India at the time ofindependence.


Indian people gained owing to theintroduction of the railways, were thusoutweighed by the country’s hugeeconomic loss.

Along with the development ofroads and railways, the colonialdispensation also took measures fordeveloping the inland trade and sealanes. However, these measures werefar from satisfactory. The inlandwaterways, at times, also proveduneconomical as in the case of theCoast Canal on the Orissa coast.Though the canal was built at a huge

cost to the government exchequer, yet,it failed to compete with the railways,which soon traversed the regionrunning parallel to the canal, and hadto be ultimately abandoned. Theintroduction of the expensive systemof electric telegraph in India, similarly,served the purpose of maintaining lawand order. The postal services, on theother hand, despite serving a usefulpublic purpose, remained all through

Fig.1.5 Tata Airlines, a division of Tata andSons, was established in 1932inaugurating the aviation sector in India

Fig. 1.4 First Railway Bridge linking Bombay with Thane, 1854

Work This Out

There is a perception stillgoing around that inmany ways the Britishadministration in Indiawas quite beneficial. Thisperception needs aninformed debate. Howwould you look at thisperception? Argue thisout in your class—‘Wasthe British Raj good forIndia’?


inadequate. You will learn more aboutthe present status of variousinfrastructure in Chapter 8.

1.9 CONCLUSION

By the time India won its independence,the impact of the two-century longBritish colonial rule was alreadyshowing on all aspects of the Indianeconomy. The agricultural sector wasalready saddled with surplus labourand extremely low productivity. Theindustrial sector was crying for

modernisation, diversification, capacitybuilding and increased publicinvestment. Foreign trade was orientedto feed the Industrial Revolution inBritain. Infrastructure facilities,including the famed railway network,needed upgradation, expansion andpublic orientation. Prevalence oframpant poverty and unemploymentrequired welfare orientation of publiceconomic policy. In a nutshell, thesocial and economic challenges beforethe country were enormous.

Recap

An understanding of the economy before independence is necessary toknow and appreciate the level of development achieved during the post-independence period.

Under the colonial dispensation, the economic policies of the governmentwere concerned more with the protection and promotion of Britisheconomic interests than with the need to develop the economic conditionof the colonised country and its people.

The agricultural sector continued to experience stagnation andincremental deterioration despite the fact that the largest section of Indianpopulation depended on it for sustenance.

Systematic policies pursued by the British-India government led to thecollapse of India’s world famous handicraft industries withoutcontributing, in any significant manner, to its replacement by a modernindustrial base.

Lack of adequate public health facilities, occurrence of frequent naturalcalamities and famines pauperised the hapless Indian people and resultedin engendering high mortality rates.

Some efforts were made by the colonial regime to improve infrastructurefacilities but these efforts were spiced with selfish motives though, in thelong run, the independent Indian government built on this base thecountry’s future economic and social development plan.


1. What was the focus of the economic policies pursued by the colonialgovernment in India? What were the impacts of these policies?

2. Name some notable economists who estimated India’s per capitaincome during the colonial period.

3. What were the main causes of India’s agricultural stagnation duringthe colonial period?

4. Name some modern industries which were in operation in our countryat the time of independence.

5. What was the two-fold motive behind the systematic de-industrialisation effected by the British in pre-independent India?

6. The traditional handicrafts industries were ruined under the Britishrule. Do you agree with this view? Give reasons in support of youranswer.

7. What objectives did the British intend to achieve through theirpolicies of infrastructure development in India?

8. Critically appraise some of the shortfalls of the industrial policypursued by the British colonial administration.

9. What do you understand by the drain of Indian wealth during thecolonial period?

10. Which is regarded as the defining year to mark the demographictransition from its first to the second decisive stage?

11. Give a quantitative appraisal of India’s demographic profile duringthe colonial period.

12. Highlight the salient features of India’s pre-independence occupationalstructure.

13. Underscore some of India’s most crucial economic challenges at thetime of independence.

14. When was India’s first official census operation undertaken?

15. Indicate the volume and direction of trade at the time ofindependence.

16. Were there any positive contributions made by the British in India?Discuss.

EXERCISES


REFERENCES

SUGGESTED ADDITIONAL ACTIVITIES

1. Prepare a list of goods and services that were available to people inpre-independence India in rural and urban areas. Compare it withthe consumption pattern of such goods and services by the peopletoday. Highlight the perceptible difference in the people’s standardof living.

2. Find pictures of towns/villages, in your vicinity, of the pre-independence period and compare these with their present scenario.What changes can you mark? Are such changes for better or forworse? Discuss.

3. Rally around your teacher and organise a group discussion on ‘Hasthe zamindari system really been abolished in India’? If theconsensus is negative, then what measures would you think shouldbe taken to banish it and why?

4. Identify the major occupations followed by the people of our countryat the time of independence. What major occupations do the peoplefollow today? In the light of reform policies, how would you visualisethe occupational scenario in India 15 years from now—say, 2020?

BADEN-POWELL, B.H. 1892. The Land Systems of British India, Vols I, II and III.Oxford Clarendon Press, Oxford.

BUCHANAN, D.H. 1966. Development of Capitalist Enterprise in India. FrankCass and Co, London.

CHANDRA, BIPAN. 1993. ‘The Colonial Legacy’ in Bimal Jalan (ed.), The IndianEconomy: Problems and Prospects. Penguin Books, New Delhi.

DUTT, R.C. 1963. Economic History of India, Vols. I and II. Ministry ofInformation and Broadcasting, Government of India, New Delhi.

KUMAR, D. AND MEGHNAD DESAI (Eds.). 1983. Cambridge Economic History ofIndia. Cambridge University Press, Cambridge.

MILL, JAMES.1972. History of British India. Associated Publishing House, NewDelhi.

PRASAD, RAJENDRA. 1946. India Divided. Hind Kitabs, Bombay.

SEN, AMARTYA. 1999. Poverty and Famines. Oxford University Press, New Delhi.


• come to know the goals of India’s five year plans

• know about the development policies in different sectors such asagriculture and industry from 1950-1990

• learn to think about the merits and limitations of a regulated economy.

Indian Economy1950-1990

2

17INDIAN ECONOMY 1950-1990

2.1 INTRODUCTION

On 15 August 1947, India woke to anew dawn of freedom: finally we weremasters of our own destiny aftersome two hundred years of Britishrule; the job of nation building wasnow in our own hands. The leadersof independent India had to decide,among other things, the type ofeconomic system most suitable forour nation, a system which wouldpromote the welfare of all rather thana few. There are different types ofeconomic systems (see Box 2.1) andamong them, socialism appealed toJawaharlal Nehru the most. However,he was not in favour of the kind ofsocialism established in the formerSoviet Union where all the means ofproduction, i.e., all the factories andfarms in the country, were owned bythe government. There was no privateproperty. It is not possible in ademocracy l ike India for thegovernment to change the ownershippattern of land and other propertiesof its citizens in the way that it wasdone in the former Soviet Union.

Nehru, and many other leaders andthinkers of the newly independentIndia, sought an alternative to theextreme versions of capitalism andsocialism. Basically sympathising withthe socialist outlook, they found the

answer in an economic system which,in their view, combined the bestfeatures of socialism without itsdrawbacks. In this view, India wouldbe a ‘socialist’ society with a strongpublic sector but also with privateproperty and democracy; the governmentwould ‘plan’ (see Box 2.2) for the

The central objective of Planning in India... is to initiate a process ofdevelopment which will raise the living standards and open out to the peoplenew opportunities for a richer and more varied life.

First Five Year Plan

Work These Out

Prepare a chart on thedifferent types of economicsystems prevalent in theworld. List out the countriesas capitalist, socialist andmixed economy.

Plan a class trip to anagriculture farm. Divide theclass into seven groups witheach group to plan a specificgoal, for example, thepurpose of the visit, moneyexpenditure involved, timetaken, resources, peopleaccompanying the groupand who need to becontacted, possible placesof visit, possible questionsto be asked etc. Now, withthe help of your teacher,compile these specific goalsand compare with long-termgoals of successful visit toan agricultural farm.


Box 2.1: Types of Economic Systems

Every society has to answer three questionsWhat goods and services should be produced in the country?

How should the goods and services be produced? Should producers usemore human labour or more capital (machines) for producing things?How should the goods and services be distributed among people?

One answer to these questions is to depend on the market forces ofsupply and demand. In a market economy, also called capitalism, only thoseconsumer goods will be produced that are in demand, i.e., goods that canbe sold profitably either in the domestic or in the foreign markets. If carsare in demand, cars will be produced and if bicycles are in demand, bicycleswill be produced. If labour is cheaper than capital, more labour-intensivemethods of production will be used and vice-versa. In a capitalist societythe goods produced are distributed among people not on the basis of whatpeople need but on the basis of what people can afford and are willing topurchase. This means that a sick person will be able to use the requiredmedicine only if he/she can afford to buy it; if they cannot afford the medicinethey will not be able to use it even if they need it urgently. Such a societydid not appeal to Jawaharlal Nehru, our first prime minister, for it meantthat the great majority of people of the country would be left behind withoutthe chance to improve their quality of life.

A socialist society answers the three questions in a totally differentmanner. In a socialist society the government decides what goods are to beproduced in accordance with the needs of society. It is assumed that thegovernment knows what is good for the people of the country and so thedesires of individual consumers are not given much importance. Thegovernment decides how goods are to be produced and how they should bedistributed. In principle, distribution under socialism is supposed to be basedon what people need and not on what they can afford to purchase. Unlikeunder capitalism, for example, a socialist nation provides free health careto the citizens who need it. Strictly, a socialist society has no private propertysince everything is owned by the state. With the collapse of the Soviet systemin the last decades of the twentieth century, socialist economies in the formerSoviet Union and the socialist states in Eastern Europe ceased to exist.

Most economies are mixed economies, i.e., the government and themarket together answer the three questions of what to produce, how toproduce and how to distribute what is produced. In a mixed economy, themarket will provide whatever goods and services it can produce well, andthe government will provide essential goods and services which the marketfails to do.


economy with the private sector beingencouraged to be part of the plan effort.The ‘Industrial Policy Resolution’ of1948 and the Directive Principles ofthe Indian Constitution reflectedthis outlook. In 1950, the PlanningCommission was set up with thePrime Minister as its Chairperson. Theera of five year plans had begun.

2.2 THE GOALS OF FIVE YEAR PLANS

A plan should have some clearlyspecified goals. The goals of the fiveyear plans are: growth, modernisation,self-reliance and equity. This does notmean that all the plans have givenequal importance to all these goals.Due to limited resources, a choice hasto be made in each plan about which

of the goals is to be given primaryimportance. Nevertheless, the plannershave to ensure that, as far as possible,the policies of the plans do notcontradict these four goals. Let us nowlearn about the goals of planning insome detail.

Growth: It refers to increase in thecountry’s capacity to produce theoutput of goods and services withinthe country. It implies either alarger stock of productive capital,or a larger s ize of support ingserv i ces l ike t ranspor t andbanking, or an increase in theefficiency of productive capital andservices. A good indicator ofeconomic growth, in the language of

Box 2.2: What is a Plan?

A plan spells out how the resources of a nation should be put to use. Itshould have some general goals as well as specific objectives which are tobe achieved within a specified period of time; in India plans are of five yearsduration and are called five year plans (we borrowed this from the formerSoviet Union, the pioneer in national planning). Our plan documents notonly specify the objectives to be attained in the five years of a plan but alsowhat is to be achieved over a period of twenty years. This long-term plan iscalled ‘perspective plan’. The five year plans are supposed to provide thebasis for the perspective plan.

It will be unrealistic to expect all the goals of a plan to be given equalimportance in all the plans. In fact the goals may actually be in conflict. Forexample, the goal of introducing modern technology may be in conflict withthe goal of increasing employment if the technology reduces the need forlabour. The planners have to balance the goals, a very difficult job indeed.We find different goals being emphasised in different plans in India.

Our five year plans do not spell out how much of each and every goodand service is to be produced. This is neither possible nor necessary (theformer Soviet Union tried to do this and failed). It is enough if the plan isspecific about the sectors where it plays a commanding role, for instance,power generation and irrigation, while leaving the rest to the market.


Box 2.3: Mahalanobis: the Architect of Indian Planning

Many distinguished thinkers contributed to the formulation of our five yearplans. Among them, the name of the statistician, Prasanta ChandraMahalanobis, stands out.

Planning, in the real sense of the term, began with the Second Five YearPlan. The Second Plan, a landmark contribution to development planningin general, laid down the basic ideas regardinggoals of Indian planning; this plan was basedon the ideas of Mahalanobis. In that sense, hecan be regarded as the architect of Indianplanning.

Mahalanobis was born in 1893 in Calcutta.He was educated at the Presidency College inCalcutta and at Cambridge University inEngland. His contributions to the subject ofstatistics brought him international fame. In1946 he was made a Fellow (member) ofBritain’s Royal Society, one of the mostprestigious organisations of scientists; only themost outstanding scientists are mademembers of this Society.

Mahalanobis established the IndianStatistical Institute (ISI) in Calcutta andstarted a journal, Sankhya, which still servesas a respected forum for statisticians todiscuss their ideas. Both, the ISI and Sankhya, are highly regarded bystatisticians and economists all over the world to this day.

During the second plan period, Mahalanobis invited manydistinguished economists from India and abroad to advise him on India’seconomic development. Some of these economists became Nobel Prize winnerslater, which shows that he could identify individuals with talent. Amongthe economists invited by Mahalanobis were those who were very critical ofthe socialist principles of the second plan. In other words, he was willing tolisten to what his critics had to say, the mark of a great scholar.

Many economists today reject the approach to planning formulated byMahalanobis but he will always be remembered for playing a vital role inputting India on the road to economic progress, and statisticians continueto profit from his contribution to statistical theory.

Source: Sukhamoy Chakravarty, ‘Mahalanobis, Prasanta Chandra’ in JohnEatwell et.al, (Eds.) The New Palgrave Dictionary: EconomicDevelopment, W.W. Norton, New York and London.


economics, is steady increase in theGross Domestic Product (GDP). TheGDP is the market value of all thegoods and services produced in thecountry during a year. You can thinkof the GDP as a cake: growth isincrease in the size of the cake. If thecake is larger, more people can enjoyit. It is necessary to produce moregoods and services if the people ofIndia are to enjoy (in the words of theFirst Five Year Plan) a more rich andvaried life.

The GDP of a country is derivedfrom the different sector’s of theeconomy, namely the agriculturalsector, the industrial sector and theservice sector. The contributionmade by each of these sectors makesup the structural composition ofthe economy. In some countries,growth in agriculture contributesmore to the GDP growth, while insome countries the growth in theservice sector contributes more toGDP growth (see Box 2.4).

Modernisation: To increase theproduction of goods and services

the producers have to adopt newtechnology. For example, a farmer canincrease the output on the farm byusing new seed varieties instead ofusing the old ones. Similarly, a factorycan increase output by using a newtype of machine. Adoption of newtechnology is called modernisation.

However, modernisation does notrefer only to the use of new technologybut also to changes in social outlooksuch as the recognition that womenshould have the same rights as men.In a traditional society, women aresupposed to remain at home whilemen work. A modern society makesuse of the talents of women in thework place — in banks, factories,schools etc. — and such a society willbe more civilised and prosperous.

Self-reliance: A nation can promoteeconomic growth and modernisationby using its own resources or byusing resources imported from othernations. The first seven five year plansgave importance to self-reliancewhich means avoiding importsof those goods which could be

Box 2.4: The Service Sector

As a country develops, it undergoes ‘structural change’. In the case of India,the structural change is peculiar. Usually, with development, the share ofagriculture declines and the share of industry becomes dominant. At higherlevels of development, the service sector contributes more to the GDP than theother two sectors. In India, the share of agriculture in the GDP was more than50 per cent—as we would expect for a poor country. But by 1990 the share ofthe service sector was 40.59 per cent, more than that of agriculture or industry,like what we find in developed nations. This phenomenon of growing share ofthe service sector was accelerated in the post 1991 period (this marked theonset of globalisation in the country which will be discussed in a subsequentchapter).


produced in India itself. This policywas considered a necessity in orderto reduce our dependence on foreigncountries, especially for food. It isunderstandable that people whowere recently freed from foreigndomination should give importanceto self-reliance. Further, it was fearedthat dependence on imported foodsupplies, foreign technology andforeign capital may make India’ssovereignty vulnerable to foreigninterference in our policies.

Equity: Now growth, modernisationand self-reliance, by themselves, maynot improve the kind of life whichpeople are living. A country can havehigh growth, the most moderntechnology developed in the countryitself, and also have most of its peopleliving in poverty. It is important toensure that the benefits of economicprosperity reach the poor sections aswell instead of being enjoyed only bythe rich. So, in addition to growth,modernisation and self-reliance,equity is also important: every Indianshould be able to meet his or her basic

needs such as food, a decent house,education and health care andinequality in the distribution of wealthshould be reduced.

Let us now see how the first sevenfive year plans, covering the period1950-1990, attempted to attain thesefour goals and the extent to whichthey succeeded in doing so, withreference to agriculture, industryand trade. You will study the policiesand developmental issues taken upafter 1991 in Chapter 3.

2.3 AGRICULTURE

You have learnt in Chapter 1 thatduring the colonial rule there wasneither growth nor equity in theagricultural sector. The policy makersof independent India had to addressthese issues which they did throughland reforms and promoting the useof ‘miracle seeds’ which ushered in arevolution in Indian agriculture.

Land Reforms: At the time ofindependence, the land tenure systemwas characterised by intermediaries

Work These Out

Discuss in your class the changes in technology used for(a) Production of food grains(b) Packaging of products(c) Mass communication.

Find out and prepare a list of items that India used to import and exportduring 1950-51 and 1990-91.

(a) Observe the difference(b) Do you see the impact of self-reliance? Discuss.

For getting these details you may refer to Economic Survey of the latest year.


(variously called zamindars, jagirdarsetc.) who merely collected rent from theactual tillers of the soil withoutcontributing towards improvementson the farm. The low productivity ofthe agricultural sector forced India toimport food from the United States ofAmerica (U.S.A.). Equity in agriculturecalled for land reforms which primarilyrefer to change in the ownership oflandholdings. Just a year afterindependence, steps were taken toabolish intermediaries and to make thetillers the owners of land. The ideabehind this move was that ownershipof land would give incentives (see Box2.5) to the tillers to invest in makingimprovements provided sufficientcapital was made available to them.

Land ceiling was another policy topromote equity in the agriculturalsector. This means fixing the maximumsize of land which could be owned byan individual. The purpose of landceiling was to reduce the concentrationof land ownership in a few hands.

The abolition of intermediariesmeant that some 200 lakh tenantscame into direct contact with thegovernment — they were thusfreed from being exploited by thezamindars. The ownership conferredon tenants gave them the incentive toincrease output and this contributedto growth in agriculture. However, thegoal of equity was not fully servedby abolition of intermediaries. Insome areas the former zamindars

Box 2.5: Ownership and Incentives

The policy of ‘land to the tiller’ is based on the idea that the cultivators willtake more interest — they will have more incentive — in increasing output ifthey are the owners of the land. This is because ownership of land enables thetiller to make profit from the increased output. Tenants do not have the incentiveto make improvements on land since it is the landowner who would benefitmore from higher output. The importance of ownership in providing incentivesis well illustrated by the carelessness with which farmers in the former SovietUnion used to pack fruits for sale. It was not uncommon to see farmers packingrotten fruits along with fresh fruits in the same box. Now, every farmer knowsthat the rotten fruits will spoil the fresh fruits if they are packed together. Thiswill be a loss to the farmer since the fruits cannot be sold. So why did theSoviet farmers do something which would so obviously result in loss for them?The answer lies in the incentives facing the farmers. Since farmers in theformer Soviet Union did not own any land, they neither enjoyed the profits norsuffered the losses. In the absence of ownership, there was no incentive onthe part of farmers to be efficient, which also explains the poor performance ofthe agricultural sector in the Soviet Union despite availability of vast areas ofhighly fertile land.

Source: Thomas Sowell, Basic Economics: A Citizen’s Guide to the Economy,New York: Basic Books, 2004, Second Edition.


continued to own large areas of landby making use of some loopholes inthe legislation; there were cases wheretenants were evicted and thelandowners claimed to be self-cultivators (the actual tillers), claimingownership of the land; and even whenthe tillers got ownership of land, thepoorest of the agricultural labourers(such as sharecroppers and landlesslabourers) did not benefit from landreforms.

The land ceiling legislation alsofaced hurdles. The big landlordschallenged the legislation in thecourts, delaying its implementation.They used this delay to register theirlands in the name of close relatives,thereby escaping from the legislation.The legislation also had a lot ofloopholes which were exploited bythe big landholders to retain theirland. Land reforms were successfulin Kerala and West Bengal becausethese states had governmentscommitted to the policy of land to thetiller. Unfortunately other states didnot have the same level ofcommitment and vast inequality inlandholding continues to this day.

The Green Revolution: At independence,about 75 per cent of the country’spopulation was dependent onagriculture. Productivity in theagricultural sector was very lowbecause of the use of old technologyand the absence of requiredinfrastructure for the vast majority offarmers. India’s agriculture vitallydepends on the monsoon and if themonsoon fell short the farmers were

in trouble unless they had access toirrigation facilities which very fewhad. The stagnation in agricultureduring the colonial rule waspermanently broken by the greenrevolution: this refers to the largeincrease in production of food grainsresulting from the use of highyielding variety (HYV) seedsespecially for wheat and rice. The useof these seeds required the use offertiliser and pesticide in the correctquantities as well as regular supplyof water; the need for these inputs incorrect proportions is vital. Thefarmers who could benefit from HYVseeds required reliable irrigationfacilities as well as the financialresources to purchase fertiliser andpesticide. As a result, in the first phaseof the green revolution (approximatelymid 1960s upto mid 1970s), the useof HYV seeds was restricted to themore affluent states such as Punjab,Andhra Pradesh and Tamil Nadu.Further, the use of HYV seedsprimarily benefited the wheat-growing regions only. In the secondphase of the green revolution(mid-1970s to mid-1980s), the HYVtechnology spread to a larger numberof states and benefited more varietyof crops. The spread of greenrevolution technology enabled Indiato achieve self-sufficiency in foodgrains; we no longer had to be at themercy of America, or any other nation,for meeting our nation’s foodrequirements.

Growth in agricultural output isimportant but it is not enough: if alarge proportion of this increase is


consumed by the farmers themselvesinstead of being sold in the market,the higher output will not makemuch of a difference to the economyas a whole. If, on the other hand, asubstantial amount of agriculturalproduce is sold in the market by thefarmers, the higher output can makea difference to the economy. Theportion of agricultural producewhich is sold in the market by thefarmers is called marketed surplus.Fortunately, as pointed out by thefamous economist C.H. HanumanthaRao, a good proportion of the riceand wheat produced during thegreen revolution period (available asmarketed surplus) was sold by thefarmers in the market. As a result,the price of food grains declinedrelative to other items of consumption.The low-income groups, who spend a

large percentage of their income onfood, benefited from this decline inrelative prices. The green revolutionenabled the government to procuresufficient amount of food grains tobuild a stock which could be usedin times of food shortage.

While the nation had immenselybenefited from the green revolution,the technology involved was not freefrom risks. One such risk was thepossibility that it would increase thedisparities between small and bigfarmers — since only the big farmerscould afford the required inputs,thereby reaping most of the benefitsof the green revolution. Moreover,the HYV crops were also more proneto attack by pests and the smallfarmers who adopted th istechnology could lose everything ina pest attack.


Fortunately, these fears did notcome true because of the steps takenby the government. The governmentprovided loans at a low interest rateto small farmers and subsidisedfertilisers so that small farmers couldalso have access to the neededinputs. Since the small farmers couldobtain the required inputs, theoutput on small farms equalled theoutput on large farms in the courseof time. As a result, the greenrevolution benefited the small as wellas rich farmers. The risk of the smallfarmers being ruined when pestsattack their crops was considerablyreduced by the services rendered byresearch institutes established by thegovernment. You should note thatthe green revolution would havefavoured the rich farmers only if thestate did not play an extensive rolein ensuring that the small farmer alsogains from the new technology.

The Debate Over Subsidies: Theeconomic justification of subsidies inagriculture is, at present, a hotlydebated question. It is generallyagreed that it was necessary to usesubsidies to provide an incentive foradoption of the new HYV technologyby farmers in general and smallfarmers in particular. Any newtechnology will be looked upon asbeing risky by farmers. Subsidieswere, therefore, needed to encouragefarmers to test the new technology.Some economists believe that oncethe technology is found profitableand is widely adopted, subsidies

should be phased out since theirpurpose has been served. Further,subsidies are meant to benefit thefarmers but a substantial amount offertiliser subsidy also benefits thefert i l iser industry; and amongfarmers, the subsidy largely benefitsthe farmers in the more prosperousregions. Therefore, it is argued thatthere is no case for continuing withfertiliser subsidies; it does not benefitthe target group and it is a hugeburden on the government’s finances(see also Box 2.6).

On the other hand, some believethat the government should continuewith agricultural subsidies becausefarming in India continues to be arisky business. Most farmers are verypoor and they will not be able toafford the required inputs withoutsubsidies. Eliminating subsidies willincrease the inequality between richand poor farmers and violate the goalof equity. These experts argue that ifsubsidies are largely benefiting thefertiliser industry and big farmers,the correct policy is not to abolishsubsidies but to take steps to ensurethat only the poor farmers enjoy thebenefits.

Thus, by the late 1960s, Indianagricultural productivity had increasedsufficiently to enable the country to beself-sufficient in food grains. This is anachievement to be proud of. On thenegative side, some 65 per cent of thecountry’s population continued to beemployed in agriculture even as late as1990. Economists have found that as


a nation becomes more prosperous, theproportion of GDP contributed byagriculture as well as the proportion ofpopulation working in the sectordeclines considerably. In India,between 1950 and 1990, theproportion of GDP contributed byagriculture declined significantly butnot the population depending on it(67.5 per cent in 1950 to 64.9 per centby 1990). Why was such a largeproportion of the population engagedin agriculture although agriculturaloutput could have grown with muchless people working in the sector? Theanswer is that the industrial sector andthe service sector did not absorb thepeople working in the agricultural

sector. Many economists call this animportant failure of our policiesfollowed during 1950-1990.

2.4 INDUSTRY AND TRADE

Economists have found that poornations can progress only if they havea good industrial sector. Industryprovides employment which is morestable than the employment inagriculture; it promotes modernisationand overall prosperity. It is for thisreason that the five year plans placea lot of emphasis on industrialdevelopment. You might havestudied in the previous chapter that,at the time of independence, thevariety of industries was very narrow

Box 2.6: Prices as Signals

You would have learnt in an earlier class about how prices of goods aredetermined in the market. It is important to understand that prices are signalsabout the availability of goods. If a good becomes scarce, its price will rise andthose who use this good will have the incentive to make efficient decisionsabout its use based on the price. If the price of water goes up because of lowersupply, people will have the incentive to use it with greater care; for example,they may stop watering the garden to conserve water. We complain wheneverthe price of petrol increases and blame it on the government. But the increasein petrol price reflects greater scarcity and the price rise is a signal that lesspetrol is available—this provides an incentive to use less petrol or look foralternate fuels.

Some economists point out that subsidies do not allow prices to indicatethe supply of a good. When electricity and water are provided at a subsidisedrate or free, they will be used wastefully without any concern for their scarcity.Farmers will cultivate water intensive crops if water is supplied free, althoughthe water resources in that region may be scarce and such crops will furtherdeplete the already scarce resources. If water is priced to reflect scarcity,farmers will cultivate crops suitable to the region. Fertiliser and pesticidesubsidies result in overuse of resources which can be harmful to theenvironment. Subsidies provide an incentive for wasteful use of resources.Think about subsidies in terms of incentives and ask yourself whether it iswise from the economic viewpoint to provide free electricity to farmers.


— largely confined to cotton textilesand jute. There were two well-managed iron and steel firms — onein Jamshedpur and the other inKolkata — but, obviously, we neededto expand the industrial base with avariety of industries if the economywas to grow.

Market and State in IndianIndustrial Development: The bigquestion facing the policy makers was— what should be the role of thegovernment and the private sector inindustrial development? At the time ofindependence, Indian industrialists didnot have the capital to undertake

Work These Out

A group of students may visit an agricultural farm, prepare a case study onthe method of farming used, that is, types of seeds, fertilisers, machines,means of irrigation, cost involved, marketable surplus and income earned.It will be beneficial if the changes in cultivation methods could be collectedfrom an elderly member of the farming family

(a) Discuss the findings in your class.

(b) The different groups can then prepare a chart showing variations incost of production, productivity, use of seeds, fertilisers, means ofirrigation, time taken, marketable surplus and income of the family.

Collect newspaper cuttings related to the World Bank, InternationalMonetary Fund, World Trade Organisation (and meets of G7, G8, G10countries). Discuss the views shared by the developed and developingcountries on farm subsidies.

Prepare pie charts on the occupational structure of the Indian economyavailable in the following table.

Sector 1950–51 1990–91Agriculture 72.1 66.8Industry 10.7 12.7Services 17.2 20.5

Study the arguments for and against agricultural subsidies. What is yourview on this issue?Some economists argue that farmers in other countries, particularlydeveloped countries, are provided with high amount of subsidies and areencouraged to export their produce to other countries. Do you think ourfarmers will be able to compete with farmers from developed countries?Discuss.


investment in industrial venturesrequired for the development of oureconomy; nor was the market bigenough to encourage industrialists toundertake major projects even if theyhad the capital to do so. It is principallyfor these reasons that the state had toplay an extensive role in promoting theindustrial sector. In addition, thedecision to develop the Indian economyon socialist lines led to the policy of thestate controlling the commandingheights of the economy, as the SecondFive Year plan put it. This meant thatthe state would have complete controlof those industries that were vital forthe economy. The policies of the privatesector would have to be complimentaryto those of the public sector, with thepublic sector leading the way.

Industrial Policy Resolution 1956(IPR 1956): In accordance with thegoal of the state controlling thecommanding heights of the economy,the Industrial Policy Resolution of1956 was adopted. This resolutionformed the basis of the Second FiveYear Plan, the plan which tried tobuild the basis for a socialist patternof society. This resolution classifiedindustries into three categories. Thefirst category comprised industrieswhich would be exclusively owned bythe state; the second categoryconsisted of industries in which theprivate sector could supplement theefforts of the state sector, with thestate taking the sole responsibility forstarting new units; the third categoryconsisted of the remaining industrieswhich were to be in the private sector.

Although there was a category ofindustries left to the private sector,the sector was kept under statecontrol through a system of licenses.No new industry was allowed unlessa license was obtained from thegovernment. This policy was used forpromoting industry in backwardregions; it was easier to obtain alicense if the industrial unit wasestablished in an economicallybackward area. In addition, suchunits were given certain concessionssuch as tax benefits and electricityat a lower tariff. The purpose of thispolicy was to promote regionalequality.

Even an existing industry had toobtain a l icense for expandingoutput or for diversifying production(producing a new variety of goods).This was meant to ensure that thequantity of goods produced was notmore than what the economyrequired. L icense to expandproduction was given only if thegovernment was convinced that theeconomy required the largerquantity of goods.

Small-scale Industry: In 1955, theVillage and Small-scale IndustriesCommittee, also called the KarveCommittee, noted the possibility ofusing small-scale industries forpromoting rural development. A‘small-scale industry’ is defined withreference to the maximum invest-ment allowed on the assets of a unit.This limit has changed over a periodof time. In 1950 a small-scaleindustrial unit was one which invested


a maximum of rupees five lakh; atpresent the maximum investmentallowed is rupees one crore.

It was believed that small-scaleindustries are more ‘labour intensive’i.e., they use more labour than thelarge-scale industries and, therefore,generate more employment. But theseindustries cannot compete with thebig industrial firms; it is obvious thatdevelopment of small-scale industryrequires them to be shielded from thelarge firms. For this purpose, theproduction of a number of productswas reserved for the small-scaleindustry; the criterion of reservationbeing the ability of these units tomanufacture the goods. They werealso given concessions such as lowerexcise duty and bank loans at lowerinterest rates.

2.5 TRADE POLICY: IMPORT SUBSTITUTION

The industrial policy that we adoptedwas closely related to the tradepolicy. In the first seven plans,trade was characterised by whatis commonly called an inwardlooking trade strategy. Technically,this strategy is cal led importsubstitution. This policy aimed atreplacing or substituting importswith domestic production. Forexample, instead of importingvehicles made in a foreign country,industries would be encouraged toproduce them in India itself. In thispolicy the government protected thedomestic industries from foreigncompetition. Protection from importstook two forms: tariffs and quotas.

Tariffs are a tax on imported goods;they make imported goods moreexpensive and discourage their use.Quotas specify the quantity of goodswhich can be imported. The effect oftariffs and quotas is that they restrictimports and, therefore, protect thedomestic f irms from foreigncompetition.

The policy of protection is basedon the notion that industries ofdeveloping countries are not in aposition to compete against thegoods produced by more developedeconomies. It is assumed that if thedomestic industries are protectedthey will learn to compete in thecourse of time. Our planners alsofeared the possibility of foreignexchange being spent on import ofluxury goods if no restrictions wereplaced on imports. Nor was anyserious thought given to promoteexports until the mid-1980s.

Effect of Policies on IndustrialDevelopment: The achievements ofIndia’s industrial sector during thefirst seven plans are impressiveindeed. The proport ion of GDPcontr ibuted by the industr ia lsector increased in the period from11.8 per cent in 1950-51 to 24.6 percent in 1990-91. The rise in theindustry ’s share of GDP is animportant indicator of development.The six per cent annual growth rateof the industrial sector during theperiod is commendable. No longerwas Indian industry restricted largelyto cotton textiles and jute; in fact, theindustrial sector became well


diversified by 1990, largely due tothe public sector. The promotionof small-scale industries gaveopportunities to those people who didnot have the capital to start largefirms to get into business. Protectionfrom foreign competition enabled thedevelopment of indigenous industriesin the areas of electronics andautomobile sectors which otherwisecould not have developed.

In spite of the contribution madeby the public sector to the growth ofthe Indian economy, some economistsare critical of the performance ofmany public sector enterprises. Itwas proposed at the beginning of this

chapter that initially public sectorwas required in a big way. It is nowwidely held that state enterprisescontinued to produce certain goodsand services (often monopolisingthem) although this was no longerrequired. An example is the provisionof telecommunication service. Thegovernment had the monopoly of thisservice even after private sector firmscould also provide it. Due to theabsence of competition, even till thelate 1990s, one had to wait for a longtime to get a telephone connection.Another instance could be theestablishment of Modern Bread, abread-manufacturing firm, as if the

Work These Out

Construct a pie chart for the following table on sectoral contribution to GDPand discuss the difference in the contribution of the sectors in the light ofeffects of development during 1950-91.

Sector 1950-51 1990-91

Agriculture 59.0 34.9

Industry 13.0 24.6

Services 28.0 40.5

Conduct a debate in your classroom on the usefulness of Public SectorUndertakings (PSUs) by dividing the class into two groups. One group mayspeak in favour of PSUs and the other group against the motion (involve asmany students as possible and encourage them to give examples).


private sector could not manufacturebread! In 2001 this firm was sold tothe private sector. The point is thatno distinction was made between (i)what the public sector alone can doand (ii) what the private sector canalso do. For example, even now onlythe public sector can supply nationaldefense and free medical treatmentfor poor patients. And even thoughthe private sector can manage hotelswell, yet, the government also runshotels. This has led some scholars toargue that the state should get outof areas which the private sector canmanage and the government mayconcentrate its resources onimportant services which the privatesector cannot provide.

Many public sector firms incurredhuge losses but continued tofunction because it is very difficult,almost impossible, to close agovernment undertaking even if it isa drain on the nation’s limitedresources. This does not mean thatprivate firms are always profitable(indeed, quite a few of the publicsector firms were originally privatefirms which were on the verge ofclosure due to losses; they were thennationalised to protect the jobs of theworkers). However, a loss-makingprivate firm will not waste resourcesby being kept running despite thelosses.

The need to obtain a license to startan industry was misused byindustrial houses; a big industrialistwould get a license not for starting anew firm but to prevent competitorsfrom starting new firms. The excessive

regulation of what came to be calledthe permit license raj preventedcertain firms from becoming moreefficient. More time was spent byindustrialists in trying to obtain alicense or lobby with the concernedministries rather than on thinkingabout how to improve their products.

The protection from foreigncompetition is also being criticised onthe ground that it continued evenafter it proved to do more harm thangood. Due to restrictions on imports,the Indian consumers had topurchase whatever the Indianproducers produced. The producerswere aware that they had a captivemarket; so they had no incentive toimprove the quality of their goods.Why should they think of improvingquality when they could sell lowquality i tems at a high price?Competition from imports forces ourproducers to be more efficient.

Nevertheless, scholars point outthat the public sector is not meantfor earning profits but to promote thewelfare of the nation. The publicsector firms, on this view, should beevaluated on the basis of the extentto which they contribute to the welfareof people and not on the profits theyearn. Regarding protection, someeconomists hold that we shouldprotect our producers from foreigncompetition as long as the richnations continue to do so. Owing toall these conflicts, economists calledfor a change in our policy. This,alongwith other problems, led thegovernment to introduce a neweconomic policy in 1991.


2.6 CONCLUSION

The progress of the Indian economyduring the first seven plans wasimpressive indeed. Our industriesbecame far more diversified comparedto the situation at independence.India became self- sufficient in foodproduction thanks to the greenrevolution. Land reforms resulted inabolition of the hated zamindarisystem. However, many economistsbecame dissatisfied with theperformance of many public sectorenterprises. Excessive governmentregulation prevented growth of

entrepreneurship. In the name of self-reliance, our producers wereprotected against foreign competitionand this did not give them theincentive to improve the quality ofgoods that they produced. Ourpolicies were ‘inward oriented’ and sowe failed to develop a strong exportsector. The need for reform ofeconomic policy was widely felt in thecontext of changing global economicscenario, and the new economic policywas initiated in 1991 to make oureconomy more efficient. This is thesubject of the next chapter.

Recap

After independence, India envisaged an economic system which combinesthe best features of socialism and capitalism—this culminated in the mixedeconomy model.

All the economic planning has been formulated through five year plans.

Common goals of five year plans are growth, modernisation, self-sufficiencyand equity.

The major policy initiatives in agriculture sector were land reforms andgreen revolution. These initiatives helped India to become self-sufficient infood grains production.

The proportion of people depending on agriculture did not decline as expected.

Policy initiatives in the industrial sector raised its contribution to GDP.

One of the major drawbacks in the industrial sector was the inefficientfunctioning of the public sector as it started incurring losses leading todrain on the nation’s limited resources.


1. Define a plan.

2. Why did India opt for planning?

3. Why should plans have goals?

4. What are miracle seeds?

5. What is marketable surplus?

6. Explain the need and type of land reforms implemented in theagriculture sector.

7. What is Green Revolution? Why was it implemented and how didit benefit the farmers? Explain in brief.

8. Explain ‘growth with equity’ as a planning objective.

9. Does modernisation as a planning objective create contradictionin the light of employment generation? Explain.

10. Why was it necessary for a developing country like India to followself-reliance as a planning objective?

11. What is sectoral composition of an economy? Is it necessary thatthe service sector should contribute maximum to GDP of aneconomy? Comment.

12. Why was public sector given a leading role in industrialdevelopment during the planning period?

13. Explain the statement that green revolution enabled thegovernment to procure sufficient food grains to build its stocksthat could be used during times of shortage.

14. While subsidies encourage farmers to use new technology, they area huge burden on government finances. Discuss the usefulness ofsubsidies in the light of this fact.

15. Why, despite the implementation of green revolution, 65 per centof our population continued to be engaged in the agriculture sectortill 1990?

16. Though public sector is very essential for industries, many publicsector undertakings incur huge losses and are a drain on theeconomy’s resources. Discuss the usefulness of public sectorundertakings in the light of this fact.

EXERCISES


17. Explain how import substitution can protect domestic industry.

18. Why and how was private sector regulated under the IPR 1956?

19. Match the following:

1. Prime Minister A. Seeds that give large proportion of output

2. Gross Domestic B. Quantity of goods that can be imported

Product

3. Quota C. Chairperson of the planning commission

4. Land Reforms D. The money value of all the final goodsand services produced within the economyin one year

5. HYV Seeds E. Improvements in the field of agricultureto increase its productivity

6. Subsidy F. The monetary assistance given bygovernment for productionact iv i t ies .

BHAGWATI, J. 1993. India in T ransition: Freeing the Economy. OxfordUniversity Press, Delhi.

DANDEKAR, V.M. 2004. Forty Years After Independence, in Bimal Jalan,(Ed.). The Indian Economy: Problems and Prospects. Penguin, Delhi.

JOSHI, VIJAY. and I.M.D. LITTLE. 1996. India’s Economic Reforms 1991-2001.Oxford University Press, Delhi.

MOHAN, RAKESH. 2004. Industrial Policy and Controls, in Bimal Jalan(Ed.). The Indian Economy: Problems and Prospects. Penguin, Delhi.

RAO, C.H. HANUMANTHA. 2004. Agriculture: Policy and Performance, in BimalJalan, (Ed.). The Indian Economy: Problems and Prospects. Penguin,Delhi.

REFERENCES

UNIT

II

ECONOMIC REFORMS

SINCE 1991

UNIT

IIIUNIT

II

After forty years of planned development, Indiahas been able to achieve a strong industrial baseand became self-sufficient in the production of foodgrains. Nevertheless, a major segment of thepopulation continues to depend on agriculture forits livelihood. In 1991, a crisis in the balance ofpayments led to the introduction of economicreforms in the country. This unit is an appraisal ofthe reform process and its implications for India.


• understand the background of the reform policies introduced in Indiain 1991

• understand the mechanism through which reform policies wereintroduced

• comprehend the process of globalisation and its implications for India

• be aware of the impact of the reform process in various sectors.

LIBERALISATION, PRIVATISATION

AND

GLOBALISATION: AN APPRAISAL

3

39LIBERALISATION, PRIVATISATION AND GLOBALISATION: AN APPRAISAL

3.1 INTRODUCTION

You have studied in the previouschapter that, since independence,India followed the mixed economyframework by combining theadvantages of the market economicsystem with those of the plannedeconomic system. Some scholars arguethat, over the years, this policy resultedin the establishment of a variety ofrules and laws which were aimed atcontrolling and regulating theeconomy and instead ended uphampering the process of growth anddevelopment. Others state that India,which started its developmental pathfrom near stagnation, has since beenable to achieve growth in savings,developed a diversified industrialsector which produces a variety ofgoods and has experienced sustainedexpansion of agricultural outputwhich has ensured food security.

In 1991, India met with aneconomic crisis relating to its externaldebt — the government was notable to make repayments on itsborrowings from abroad; foreignexchange reserves , which wegenerally maintain to import petroland other important items, droppedto levels that were not sufficient foreven a fortnight. The crisis wasfurther compounded by rising pricesof essential goods. All these led thegovernment to introduce a new set of

policy measures which changed thedirection of our developmentalstrategies. In this chapter, we willlook at the background of the crisis,measures that the government hasadopted and their impact on varioussectors of the economy.

3.2 BACKGROUND

The origin of the financial crisis canbe traced from the ineff ic ientmanagement of the Indian economyin the 1980s. We know that forimplementing various policies andits general administration, thegovernment generates funds fromvarious sources such as taxation,running of public sector enterprisesetc. When expenditure is more thanincome, the government borrows tofinance the deficit from banks andalso from people within the countryand from international financialinstitutions. When we import goodslike petroleum, we pay in dollarswhich we earn from our exports.

Development policies required thateven though the revenues werevery low, the government hadto overshoot its revenue to meetproblems like unemployment, povertyand population explosion. Thecontinued spending on developmentprogrammes of the government didnot generate additional revenue.Moreover, the government was not

There is a consensus in the world today that economic development is not alland the GDP is not necessarily a measure of progress of a society.

K.R. Narayanan


able to generate sufficiently frominternal sources such as taxation.When the government was spendinga large share of its income on areaswhich do not provide immediatereturns such as the social sector anddefence, there was a need to utilise therest of its revenue in a highly efficientmanner. The income from publicsector undertakings was also not veryhigh to meet the growing expenditure.At times, our foreign exchange,borrowed from other countries andinternational financial institutions,was spent on meeting consumptionneeds. Neither was an attempt madeto reduce such profligate spendingnor sufficient attention was given toboost exports to pay for the growingimports.

In the late 1980s, governmentexpenditure began to exceed itsrevenue by such large margins thatit became unsustainable. Prices ofmany essential goods rose sharply.Imports grew at a very high ratewithout matching growth of exports.As pointed out earl ier, foreignexchange reserves declined to a levelthat was not adequate to financeimports for more than two weeks.There was also not sufficient foreignexchange to pay the interest thatneeds to be paid to internationallenders.

India approached the InternationalBank for Reconstruction andDevelopment (IBRD), popularlyknown as World Bank and theInternational Monetary Fund (IMF),and received $7 billion as loan to

manage the crisis. For availing theloan, these international agenciesexpected India to liberalise and openup the economy by removingrestrictions on the private sector,reduce the role of the government inmany areas and remove traderestrictions.

India agreed to the conditionalitiesof World Bank and IMF andannounced the New Economic Policy(NEP). The NEP consisted of wideranging economic reforms. Thethrust of the policies was towardscreating a more competit iveenvironment in the economy andremoving the barriers to entry andgrowth of firms. This set of policiescan broadly be classified into twogroups: the stabilisation measuresand the structural reform measures.Stabilisation measures are short-term measures, intended to correctsome of the weaknesses that havedeveloped in the balance ofpayments and to bring inflationunder control. In simple words, thismeans that there was a need tomaintain sufficient foreign exchangereserves and keep the rising pricesunder control. On the other hand,structural reform policies are long-termmeasures, aimed at improving theefficiency of the economy and increasingits international competitiveness byremoving the rigidities in varioussegments of the Indian economy. Thegovernment initiated a variety ofpolicies which fall under three headsviz., liberalisation, privatisation andglobalisation. The first two are policy


strategies and the last one is theoutcome of these strategies.

3.3 LIBERALISATION

As pointed out in the beginning,rules and laws which were aimed atregulating the economic activitiesbecame major hindrances in growthand development. Liberalisation wasintroduced to put an end to theserestrictions and open up varioussectors of the economy. Though a fewliberal isation measures wereintroduced in 1980s in areas ofindustrial licensing, export-importpolicy, technology upgradation,fiscal policy and foreign investment,reform policies initiated in 1991 weremore comprehensive. Let us studysome important areas such as theindustrial sector, financial sector, taxreforms, foreign exchange marketsand trade and investment sectorswhich received greater attention inand after 1991.

Deregulation of Industrial Sector: InIndia, regulatory mechanisms wereenforced in various ways (i) industriallicensing under which every entrepreneurhad to get permission from governmentofficials to start a firm, close a firmor to decide the amount of goodsthat could be produced (ii) privatesector was not allowed in manyindustries (iii) some goods could beproduced only in small scale industriesand (iv) controls on price fixation anddistribution of selected industrialproducts.

The reform policies introduced inand after 1991 removed many ofthese restrict ions. Industriallicensing was abolished for almost allbut product categories — alcohol,cigarettes, hazardous chemicalsindustrial explosives, electronics,aerospace and drugs and pharma-ceuticals. The only industries whichare now reserved for the public sectorare defence equipments, atomicenergy generation and rai lwaytransport. Many goods produced bysmall scale industries have now beendereserved. In many industries, themarket has been al lowed todetermine the prices.

Financial Sector Reforms:Financial sector includes financialinstitutions such as commercialbanks, investment banks, stockexchange operations and foreignexchange market. The financialsector in India is controlled by theReserve Bank of India (RBI). You maybe aware that all the banks and otherfinancial institutions in India arecontrolled through various normsand regulations of the RBI. The RBIdecides the amount of money thatthe banks can keep with themselves,fixes interest rates, nature of lendingto various sectors etc. One of themajor aims of financial sector reformsis to reduce the role of RBI fromregulator to facilitator of financialsector. This means that the financialsector may be al lowed to takedecisions on many matters withoutconsulting the RBI.


The reform policies led to theestablishment of private sectorbanks, Indian as well as foreign.Foreign investment limit in bankswas raised to around 50 per cent.Those banks which fulfil certainconditions have been given freedomto set up new branches without theapproval of the RBI and rationalisetheir existing branch networks.Though banks have been givenpermission to generate resourcesfrom India and abroad, certainaspects have been retained with theRBI to safeguard the interests of theaccount-holders and the nation.Foreign Institutional Investors(FII) such as merchant bankers,mutual funds and pension funds arenow allowed to invest in Indianfinancial markets.

Tax Reforms: Tax reforms areconcerned with the reforms ingovernment’s taxation and publicexpenditure policies which arecollectively known as its fiscalpolicy. There are two types of taxes:direct and indirect. Direct taxesconsist of taxes on incomes ofindividuals as well as profits ofbusiness enterprises. Since 1991,there has been a continuousreduction in the taxes on individualincomes as it was felt that high ratesof income tax were an importantreason for tax evasion. It is nowwidely accepted that moderate ratesof income tax encourage savings andvoluntary disclosure of income. Therate of corporation tax, which was

very high earlier, has been graduallyreduced. Efforts have also been madeto reform the indirect taxes, taxeslevied on commodities, in order tofacilitate the establishment of acommon national market forgoods and commodities. Anothercomponent of reforms in this area issimplification. In order to encouragebetter compliance on the part oftaxpayers many procedures havebeen simplified and the rates alsosubstantially lowered.

Foreign Exchange Reforms: Thefirst important reform in the externalsector was made in the foreignexchange market. In 1991, as animmediate measure to resolve thebalance of payments crisis, the rupeewas devalued against foreigncurrencies. This led to an increase inthe inflow of foreign exchange. It alsoset the tone to free the determinationof rupee value in the foreignexchange market from governmentcontrol. Now, more often than not,markets determine exchange ratesbased on the demand and supply offoreign exchange.

Trade and Investment PolicyReforms: Liberalisation of trade andinvestment regime was initiated toincrease international competitivenessof industrial production and alsoforeign investments and technologyinto the economy. The aim was alsoto promote the efficiency of the localindustries and the adoption ofmodern technologies.


Work These Out

Give an example each of nationalised bank, private bank, private foreignbank, FII and a mutual fund.

Visit a bank in your locality with your parents. Observe and find out thefunctions it performs. Discuss the same with your classmates and preparea chart on it.

Classify the following as direct and indirect taxes: sales tax, custom duties,property tax, death duties, VAT, income tax.

Find out from your parents if they pay taxes. If yes, why do they do so andhow?

Do you know that for a very long time countries used to keep silver and goldas reserves to make payments abroad? Find out in what form do we keepour foreign exchange reserves and find out from newspapers, magazinesand the Economic Survey how much foreign exchange reserves we havetoday. Also find the foreign currency of the following countries and its rupeeexchange rate

Country Currency Value of 1(one) unit of foreigncurrency in Indian rupee

U.S.A.U.K.JapanChinaKoreaSingaporeGermany

In order to protect domesticindustries, India was following aregime of quantitative restrictionson imports. This was encouragedthrough tight control over importsand by keeping the tariffs very high.These policies reduced efficiency andcompetitiveness which led to slowgrowth of the manufacturing sector.The trade policy reforms aimed at (i)dismantling of quantitative restrictionson imports and exports (ii) reduction

of tariff rates and (iii) removal oflicensing procedures for imports.Import licensing was abolishedexcept in case of hazardous andenvironmentally sensitive industries.Quantitative restrictions on imports ofmanufactured consumer goods andagricultural products were also fullyremoved from April 2001. Exportduties have been removed to increasethe competitive position of Indiangoods in the international markets.


3.4 PRIVATISATION

It implies shedding of the ownershipor management of a governmentowned enterprise . Governmentcompanies can be converted intoprivate companies in two ways (i) bywithdrawal of the government fromownership and management ofpublic sector companies and or (ii) byoutright sale of public sectorcompanies.

Privatisation of the public sectorundertakings by selling off part of theequity of PSUs to the public is knownas disinvestment. The purpose of thesale, according to the government, wasmainly to improve financial disciplineand facilitate modernisation. It was alsoenvisaged that private capital andmanagerial capabilities could beeffectively utilised to improve theperformance of the PSUs. The

Box 3.1: Navaratnas and Public Enterprise Policies

You must have read in your childhood about the famous Navaratnas or NineJewels in the Imperial Court of King Vikramaditya who were eminent personsof excellence in the fields of art, literature and knowledge. In 1996, in order toimprove efficiency, infuse professionalism and enable them to compete moreeffectively in the liberalised global environment, the government chose ninePSUs and declared them as navaratnas. They were given greater managerialand operational autonomy, in taking various decisions to run the companyefficiently and thus increase their profits. Greater operational, financial andmanagerial autonomy had also been granted to 97 other profit-makingenterprises referred to as mini ratnas.

The first set of navaratna companies included Indian Oil Corporation Ltd(IOC), Bharat Petroleum Corporation Ltd (BPCL), Hindustan PetroleumCorporation Ltd (HPCL), Oil and Natural Gas Corporation Ltd (ONGC), SteelAuthority of India Ltd (SAIL), Indian Petrochemicals Corporation Ltd (IPCL),Bharat Heavy Electricals Ltd (BHEL), National Thermal Power Corporation(NTPC) and Videsh Sanchar Nigam Ltd (VSNL). Later, two more PSUs —GasAuthority of India Limited (GAIL) and Mahanagar Telephone Nigam Ltd(MTNL)— were also given the same status.

Many of these profitable PSUs were originally formed during the 1950sand 1960s when self-reliance was an important element of public policy. Theywere set up with the intention of providing infrastructure and direct employmentto the public so that quality end-product reaches the masses at a nominalcost and the companies themselves were made accountable to all stakeholders.

The granting of navaratna status resulted in better performance of thesecompanies. Scholars state that instead of facilitating navaratnas in theirexpansion and enabling them to become global players, the government partlyprivatised them through disinvesment. Of late, the government has decidedto retain the navaratnas in the public sector and enable them to expandthemselves in the global markets and raise resources by themselves fromfinancial markets.


government envisaged that privatisationcould provide strong impetus to theinflow of FDI.

The government has also madeattempts to improve the efficiency ofPSUs by giving them autonomy intaking managerial decisions. Forinstance, some PSUs have beengranted special status as navaratnasand mini ratnas (see Box 3.1).

3.5 GLOBALISATION

Globalisation is the outcome of thepolicies of liberalisation and privati-sation. Although globalisation isgenerally understood to meanintegration of the economy of thecountry with the world economy, it is acomplex phenomenon. It is an outcomeof the set of various policies that areaimed at transforming the worldtowards greater interdependence andintegration. It involves creation ofnetworks and activities transcendingeconomic, social and geographicalboundaries. Globalisation attempts to

establish links in such a way that thehappenings in India can be influencedby events happening miles away. It isturning the world into one whole orcreating a borderless world.

Outsourcing: This is one of theimportant outcomes of theglobalisation process. In outsourcing,a company hires regular service fromexternal sources, mostly from othercountries, which was previouslyprovided internally or from within thecountry (like legal advice, computerservice, advertisement, security —each provided by respectivedepartments of the company). As aform of economic activity, outsourcinghas intensified, in recent times,because of the growth of fast modesof communication, particularly thegrowth of Information Technology(IT). Many of the services such asvoice-based business processes(popularly known as BPO orcall centres), record keeping,

Work These Out

Some scholars refer to disinvestment as the wave of privatisation spreadingall over the world to improve the performance of public sector enterpriseswhereas others call it as outright sale of public property to the vestedinterests. What do you think?

Prepare a poster which contains 10-15 news clippings which you consideras important and relating to navaratnas from newspapers. Also collect thelogos and advertisements of these PSUs. Put these on the notice board anddiscuss them in the classroom.

Do you think only loss making companies should be privatised? Why?

Losses incurred by public sector undertakings are to be met out of the publicbudget — do you agree with this statement? Discuss.


accountancy, banking services,music recording, film editing, booktranscription, clinical advice or eventeaching are being outsourced bycompanies in developed countries toIndia. With the help of moderntelecommunication links includingthe Internet, the text, voice and visualdata in respect of these services isdigitised and transmitted in real timeover continents and nationalboundaries. Most multinationalcorporations, and even smallcompanies, are outsourcing their

services to India where they can beavailed at a cheaper cost withreasonable degree of skil l andaccuracy. The low wage rates andavailability of skilled manpower inIndia have made it a destination forglobal outsourcing in the post-reformperiod.

World Trade Organisation (WTO):The WTO was founded in 1995 asthe successor organisation to theGeneral Agreement on Trade andTariff (GATT). GATT was established

in 1948 with 23 countriesas the global tradeorganisation to administerall multilateral tradeagreements by providingequal opportunities toall countries in theinternational market fortrading purposes. WTO isexpected to establish a rule-based trading regime inwhich nations cannot placearbitrary restrictions ontrade. In addition, itspurpose is also to enlarge

Box 3.2: Global Footprint!

Owing to globalisation, you might find many Indian companies expanding theirwings to many other countries. In 2000, Tata Tea surprised the world byacquiring the UK based Tetley, the inventor of the tea bag, for Rs 1,870 crore.In the year 2004, Tata steel bought the Singapore-based Nat steel for Rs 1,245crore and Tata Motors completed the buyout of Daewoo’s heavy commercialvehicle unit in South Korea for Rs 448 crore. Now VSNL is acquiring Tyco’sundersea cable network for Rs 572 crore, which will control over 60,000 kmundersea cable network across three continents. The Tatas also plan to investRs 8,800 crore in fertiliser, steel and power plants in Bangladesh.

Source: Business Today, 22 May 2005.

Fig. 3.1 Outsourcing: a new employment opportunity in big cities


production and trade of services, toensure optimum utilisation of worldresources and to protect theenvironment. The WTO agreementscover trade in goods as well as servicesto facilitate international trade(bilateral and multilateral) throughremoval of tariff as well as non-tariffbarriers and providing greater marketaccess to all member countries.

As an important member of WTO,India has been in the forefront offraming fair global rules, regulationsand safeguards and advocating theinterests of the developing world.India has kept its commitmentstowards liberalisation of trade, madein the WTO, by removing quantitativerestrictions on imports and reducingtariff rates.

Work These Out

Many scholars argue that globalisation is a threat as it reduces the role ofthe state in many sectors. Some counter argue that it is an opportunity asit opens up markets to compete in and capture. Debate in the classroom.

Prepare a chart consisting of a list of five companies that have BPO servicesin India, along with their turnover.

Read this excerpt of a news item from a daily newspaper describingsomething that is now becoming increasingly common.

“On a morning, a few minutes before 7 A.M., Greeshma sat in front ofher computer with her headset on and said in accented English ‘Hello,Daniella’. Seconds later, she gets the reply, ‘Hello, Greeshma’. The two chattedexcitedly before Greeshma said that ‘we will work on pronouns today’.Nothing unusual about this chat except that Greeshma, 22, was in Kochiand her student Daniella, 13, was at her home in Malibu, California. Usinga simulated whiteboard on their computers, connected by the Internet, anda copy of Daniella’s textbook in front of Greeshma, she guides the teenagerthrough the intricacies of nouns, adjectives and verbs. Greeshma, who grewup speaking Malayalam, was teaching Daniella English grammar,comprehension and writing.”

How has this become possible? Why can’t Daniella get lessons in herown country? Why is she getting English lessons from India, whereEnglish is not the mother tongue?India is benefiting from liberalisation and integration of world markets.Do you agree?

Is employment in call centres sustainable? What kinds of skills should peopleworking in call centres acquire to get a regular income?

If the multinational companies outsource many services to countries likeIndia because of cheap manpower, what will happen to people living in thecountries where the companies are located? Discuss.


Some scholars question theusefulness of India being a memberof the WTO, as a major volume ofinternational trade occurs among thedeveloped nations. They also say thatwhile developed countries f i lecomplaints over agriculturalsubsidies given in their countries,developing countries feel cheated asthey are forced to open up theirmarkets for developed countries butare not allowed access to the marketsof developed countries. What do youthink?

3.6 INDIAN ECONOMY DURING

REFORMS: AN ASSESSMENT

The reform process has completedone and a half decades since itsintroduction. Let us now look at theperformance of the Indian economyduring this period. In economics,growth of an economy is measuredby the Gross Domestic Product. Lookat Table 3.1. The table shows thegrowth of GDP in different periods.The growth of GDP increased from5.6 per cent during 1980-91 to 6.4per cent during 1992-2001. Thisshows that there has been anincrease in the overall GDP growthin the reform period. During thereform period, the growth ofagriculture and industrial sectorshas declined whereas the growth ofservice sector has gone up. Thisindicates that the growth is mainlydriven by the growth in the servicesector. The Tenth Plan (2002-07) hasprojected the GDP growth rate at

8 per cent. In orderto achieve such ahigh growth rate, theagriculture, industrial andservice sectors have togrow at the rates of 4, 9.5and 9.1 percentage pointsrespectively. However,some scholars raiseapprehensions over theprojection of such highrates of growth asunsustainable. The opening up of theeconomy has led to rapidincrease in foreign direct

TABLE 3.1

Growth of GDP and Major Sectors (in %)Sector 1980-91 1992- 2002-07

2001 (Tenth PlanProjected)

Agriculture 3.6 3.3 4.0Industry 7.1 6.5 9.5Services 6.7 8.2 9.1GDP 5.6 6.4 8.0

Source: Tenth Five Year Plan

Fig. 3.2 IT Industry is seen as a major contributor to India’s exports


investment and foreign exchangereserves. The foreign investment, whichincludes foreign direct investmentand foreign institutional investment,has increased from about US $ 100million in 1990-91 to US $ 150 billionin 2003-04. There has been anincrease in the foreign exchangereserves from about US $ 6 billion in1990-91 to US $ 125 billion in2004-05. At present, India is the sixthlargest foreign exchange reserveholder in the world. India is seen as a successfulexporter of auto parts, engineeringgoods, IT software and textiles in the

reform period. Rising prices havealso been kept under control. On the other hand, the reformprocess has been widely criticisedfor not being able to address someof the basic problems facing oureconomy esepecially in the areas ofemployment, agriculture, industry,infrastructure development and fiscalmanagement.

Growth and Employment: Thoughthe GDP growth rate has increasedin the reform period, scholars pointout that the reform-led growth hasnot generated sufficient employment

Work These Out

In the previous chapter, you might have studied about subsidies in varioussectors including agriculture. Some scholars argue that subsidy inagriculture should be removed to make the sector internationally competitive.Do you agree? If so, how can it be done? Discuss in class.Read the following passage and discuss in class.

Groundnut is a major oilseed crop in Andhra Pradesh. Mahadeva, whowas a farmer in Anantpur district of Andhra Pradesh, used to spendRs 1,500 for growing groundnut on his plot of half an acre. The cost includedexpenditure on raw materials (seeds, fertilisers etc.), labour, bullock powerand machinery used. On an average, Mahadeva used to get two quintals ofgroundnut, and each quintal was sold for Rs 1,000. Mahadeva, thus, wasspending Rs 1,500 and getting an income of Rs 2,000, Anantpur district isa drought-prone area. As a result of economic reforms, the government didnot undertake any major irrigation project. Recently, groundnut crop inAnantpur is facing problems due to crop disease. Research and extensionwork has gone down due to lower government expenditure. Mahadeva andhis friends brought this matter repeatedly to the notice of the concernedauthorities, but failed. Subsidy was reduced on materials (seeds, fertilisers)which increased Mahadeva’s cost of cultivation. Moreover, the local marketswere flooded with cheap imported edible oils, which was a result of removalof restriction on imports. Mahadeva was not able to sell his groundnut inthe market as he was not getting the price to cover his cost.

Is a farmer like Mahadeva better off after reforms? Discuss in the class.


opportunities in the country. You willstudy the link between differentaspects of employment and growth inthe next unit.

Reforms in Agriculture: Reformshave not been able to benefitagriculture, where the growth ratehas been decelerating.

Public investment in agriculturesector especially in infrastructure,which includes irrigation, power, roads,market linkages and research andextension (which played a crucial rolein the Green Revolution), has beenreduced in the reform period. Further,the removal of fertiliser subsidy has ledto increase in the cost of production,which has severely affected the smalland marginal farmers. Moreover, sincethe commencement of WTO, this sectorhas been experiencing a number ofpolicy changes such as reduction inimport duties on agricultural products,removal of minimum support price andlifting of quantitative restrictions onagricultural products; these haveadversely affected Indian farmers asthey now have to face increasedinternational competition.

Moreover, because of export-oriented policy strategies in agriculture,there has been a shift from productionfor the domestic market towardsproduction for the export marketfocusing on cash crops in lieu ofproduction of food grains. This putspressure on prices of food grains.

Reforms in Industry: Industrialgrowth has also recorded a slowdown.

This is because of decreasing demandof industrial products due tovarious reasons such as cheaperimports, inadequate investment ininfrastructure etc. In a globalisedworld, developing countries arecompelled to open up their economiesto greater flow of goods and capitalfrom developed countries andrendering their industries vulnerable toimported goods. Cheaper importshave, thus, replaced the demandfor domestic goods. Domesticmanufacturers are facing competitionfrom imports. The infrastructurefacilities, including power supply, haveremained inadequate due to lack ofinvestment. Globalisation is, thus, oftenseen as creating conditions for the freemovement of goods and services fromforeign countries that adversely affectthe local industries and employmentopportunities in developing countries.

Moreover, a developing countrylike India still does not have theaccess to developed countries’markets because of high non-tariffbarriers. For example, although allquota restrictions on exports oftextiles and clothing have beenremoved from our side, U.S.A. hasnot removed their quota restrictionon import of textiles from India andChina!

Disinvestment: Every year, thegovernment f ixes a target fordisinvestment of PSUs. For instance,in 1991-92, it was targeted tomobilise Rs 2,500 crore throughdisinvestment. The government wasable to mobilise Rs 3,040 crore more


than the target. In 1998-99, thetarget was Rs 5,000 crore whereasthe achievement was Rs 5,400 crore.Critics point out that the assets ofPSUs have been undervalued andsold to the private sector. This meansthat there has been a substantial lossto the government. Moreover, theproceeds from disinvestment wereused to of fset the shortage ofgovernment revenues rather thanusing it for the development of PSUsand building social infrastructure inthe country.

Reforms and Fiscal Policies:Economic reforms have placed limitson the growth of public expenditureespecially in social sectors. The taxreductions in the reform period,aimed at yielding larger revenue andto curb tax evasion, have not resultedin increase in tax revenue for thegovernment. Also, the reform policies

involving tarif f reduction havecurtailed the scope for raisingrevenue through customs duties. Inorder to attract foreign investment,tax incentives were provided toforeign investors which furtherreduced the scope for raising taxrevenues. This has a negative impacton developmental and welfareexpenditures.

3.7 CONCLUSION

The process of globalisation throughliberalisation and privatisationpolicies has produced positive as wellas negative results both for India andother countries. Some scholars arguethat globalisation should be seen asan opportunity in terms of greateraccess to global markets, hightechnology and increased possibilityof large industries of developingcountries to become importantplayers in the international arena.

Box 3.3: Siricilla Tragedy!

As a part of liberalisation, privatisation and globalisation, the governmentstarted to reform the power sector. The most important impact of these reformshas been a steep hike in power tariff. Since the powerlooms, on which a largenumber of industrial workers in cottage and small-scale sector depend, aredriven by power energy, the impact of high tariff on them has been very serious.Further, while the power sector reforms have led to hike in tariffs, the powerproducers have failed in providing quality power to the powerloom industry.Since the wages of the powerloom workers are linked to the production ofcloth, power-cut means cut in wages of weavers who were already sufferingfrom hike in tariff. This led to a crisis in the livelihood of the weavers and fiftypowerloom workers committed suicide in a small town called ‘Siricilla’ in AndhraPradesh.

Do you think the power tariff should not be raised?What would be your suggestions to improve the profitability of electricityproducing companies?


On the contrary, the critics arguethat globalisation is a strategy of thedeveloped countries to expand theirmarkets in other countries. Accordingto them, it has compromised thewelfare and identity of peoplebelonging to poor countries. It hasfurther been pointed out thatmarket-driven globalisation haswidened the economic disparitiesamong nations and people.

Viewed from the Indian context,some studies have stated that thecrisis that erupted in the early 1990swas basically an outcome of thedeep-rooted inequalities in Indiansociety and the economic reform

policies initiated as a response to thecrisis by the government, withexternally advised policy package,further aggravated the inequalities.Further, it has increased the incomeand quality of consumption of onlyhigh-income groups and the growthhas been concentrated only insome select areas in the servicessector such as telecommunication,information technology, finance,entertainment, travel and hospitalityservices, real estate and trade,rather than vital sectors such asagriculture and industry whichprovide livelihoods to millions ofpeople in the country.

Recap

The economy was facing problems of declining foreign exchange, growingimports without matching rise in exports and high inflation. India changedits economic policies in 1991 due to a financial crisis and pressure frominternational organisations like the World Bank and IMF.In the domestic economy, major reforms were undertaken in the industrialand financial sectors. Major external sector reforms included foreignexchange deregulations and import liberalisation.With a view to improving the performance of the public sector, there was aconsensus on reducing its role and opening it up to the private sector. Thiswas done through disinvestment and liberalisation measures.Globalisation is the outcome of the policies of liberalisation and privatisation.It means an integration of the economy of the country with the worldeconomy.Outsourcing is an emerging business activity.The objective of the WTO is to establish a rule based trade regime to ensureoptimum utilisation of world resources.During the reforms, growth of agriculture and industry has gone down butthe service sector has registered growth.Reforms have not benefited the agriculture sector. There has also been adecline in public investment in this sector.Industrial sector growth has slowed down due to availability of cheaperimports and lower investment.


1. Why were reforms introduced in India?

2. How many countries are members of the WTO?

3. What is the most important function of RBI?

4. How was RBI controlling the commercial banks?

5. What do you understand by devaluation of rupee?

6. Distinguish between the following

(i) Strategic and Minority sale(ii) Bilateral and Multi-lateral trade(iii) Tariff and Non-tariff barriers.

7. Why are tariffs imposed?

8. What is the meaning of quantitative restrictions?

9. Those public sector undertakings which are making profitsshould be privatised. Do you agree with this view? Why?

10. Do you think outsourcing is good for India? Why are developedcountries opposing it?

11. India has certain advantages which makes it a favouriteoutsourcing destination. What are these advantages?

12. Do you think the navaratna policy of the government helps inimproving the performance of public sector undertakings in India?How?

13. What are the major factors responsible for the high growth of theservice sector?

14. Agriculture sector appears to be adversely affected by the reformprocess. Why?

15. Why has the industrial sector performed poorly in the reform pe-riod?

16. Discuss economic reforms in India in the light of social justiceand welfare.

EXERCISES


1. The table given below shows the GDP growth rate at 1993-94prices. You have studied about the techniques of presentationof data in your Statistics for Economics course. Draw a timeseries line graph based on the data given in the table and interpretthe same.

Year GDP Growth Rate (%)

1991-92 1.31992-93 5.11993-94 5.9

1994-95 7.3

1996-97 7.8

1997-98 4.8

1998-99 6.5

2000-01 4.4

2001-02 5.8

2002-03 4.0

2. Observe around you — you will find State Electricity Boards(SEBs), BSES and many public and private organisations sup-plying electricity in a city and states. There are private buses onroads along side the goverment bus services and so on

(i) What do you think about this dual system of the co-existenceof public and private sectors?

(ii) What are the merits and demerits of such a dual system?Discuss.

3. With the help of your parents and grandparents prepare a list ofmultinational companies that existed in India at the time ofindependence. Now put a ( ) mark against those which are stillgrowing and a (× ) against those which do not exist any more. Arethere any companies whose names have changed? Find out thenew names, the country of origin, nature of product, logo andprepare a chart for your class.



4. Give appropriate examples for the following

Nature of Product Name of a Foreign CompanyBiscuitsShoesComputersCarsTV and RefrigeratorsStationery

Now find out if these companies which are mentioned above existedin India before 1991 or came after the New Economic Policy. For this,take the help of your teacher, parents, grandparents and shopkeepers.

5. Collect a few relevant newspaper cuttings on meetings organisedby WTO. Discuss the issues debated in these meetings and findout how the organisation facilitates world trade.

6. Was it necessary for India to introduce economic reforms at thebehest of World Bank and International Monetary Fund? Was thereno alternative for the government to solve the balance of pay-ments crisis? Discuss in the classroom.

Books

ACHARYA, S. 2003. India’s Economy: Some Issues and Answers. AcademicFoundation, New Delhi.

ALTERNATIVE SURVEY GROUP. 2005. Alternative Economic Survey, India 2004–05,Diseqalising Growth. Daanish Books, Delhi.

AHLUWALIA, I.J. and I.M.D. LITTLE. 1998. India’s Economic Reforms andDevelopment. Oxford University Press, New Delhi.

BARDHAN, PRANAB. 1998. The Political Economy of Development in India.Oxford University Press, Delhi.

BHADURI, AMIT and DEEPAK NAYYAR. 1996. The Intelligent Person’s Guide toLiberalisation. Penguin, Delhi.

BHAGWATI, JAGDISH. 1992. India in Transition: Freeing the Economy. OxfordUniversity Press, Delhi.

REFERENCES


BYRES, TERENCE J. 1997. The State, Development Planning and Liberalisationin India. Oxford University Press, Delhi.

CHADHA, G.K. 1994. Policy Perspectives in Indian Economic Development.Har-Anand, Delhi.

CHELLIAH, RAJA J. 1996. Towards Sustainable Growth: Essays in Fiscal andFinancial Sector Reforms in India. Oxford University Press, Delhi.

DEBROY, B. and RAHUL MUKHERJI (Eds.). 2004. The Political Economy ofReforms. Bookwell Publication, New Delhi.

DREZE, JEAN and AMARTYA SEN. 1996. India: Economic Development and SocialOpportunity. Oxford University Press, Delhi.

DUTT, RUDDAR AND K.P.M. SUNDARAM. 2005. Indian Economy. S. Chand andCompany, New Delhi.

GUHA, ASHOK (Ed.) 1990. Economic Liberalisation, Industrial Structure andGrowth in India. Oxford University Press, Delhi.

JALAN, BIMAL. 1993. India’s Economic Crisis: The Way Ahead. OxfordUniversity Press, Delhi.

JALAN, BIMAL. 1996. India’s Economic Policy: Preparing for the Twenty FirstCentury. Viking, Delhi.

JOSHI,VIJAY and I.M.D. LITTLE. 1996. India’s Economic Reforms 1991-2001.Oxford University Press, Delhi,

KAPILA, Uma. 2005. Understanding the Problems of Indian Economy.Academic Foundation, New Delhi.

MAHAJAN, V.S. 1994. Indian Economy Towards 2000 A.D. Deep & Deep,Delhi.

PAREKH, KIRIT and RADHAKRISHNA, 2002, India Development Report 2001-02.Oxford University Press, New Delhi.

RAO, C.H. HANUMANTHA. and HANS LINNEMANN. 1996. Economic Reforms andPoverty Alleviation in India, Sage Publication, Delhi.

SACHS, JEFFREY D., ASHUTOSH VARSHNEY and NIRUPAM BAJPAI.1999. India in theEra of Economic Reforms. Oxford University Press, New Delhi.

Government Reports

Economic Survey 2005-06. Ministry of Finance, Government of India.

Tenth Five Year Plan 1997-2002. Vol. 1. Government of India, PlanningCommission, New Delhi.

CURRENT CHALLENGES FACING THE

INDIAN ECONOMY

UNIT

IIIUNIT

III

Some of the most challenging issues facing Indiatoday are poverty, development of rural India andbuilding infrastructure. We are a billion-strongcountry today and our human capital is the biggestasset; it needs investment in health and education.We also need to understand the concept ofemployment and the need for creating moreemployment in our country. We will also look atthe implications of development on our environmentand call for sustainable development. There is aneed to critically assess government initiatives intackling all these issues each of which has beentaken up separately in this unit.


• understand the various attributes of poverty

• comprehend the diverse dimensions relating to the concept of poverty

• critically appreciate the way poverty is estimated

• appreciate and be able to assess existing poverty alleviation programmes.

POVERTY

4


4.1 INTRODUCTION

In previous chapters, you havestudied the economic policies thatIndia has taken in the last five and ahalf decades and the outcome ofthese policies with relation to thevarious developmental indicators.Providing minimum basic needs tothe people and reduction of povertyhave been the major aims ofindependent India. The pattern ofdevelopment that the successive fiveyear plans envisaged laid emphasison the upliftment of the poorest ofthe poor (Antyodaya), integrating thepoor into the mainstream andachieving a minimum standard ofliving for all.

While addressing the ConstituentAssembly in 1947, Jawaharlal Nehruhad said, “This achievement(Independence) is but a step, anopening of opportunity, to the greattriumphs and achievements thatawait us… the ending of poverty andignorance and disease and inequalityof opportunity.”

However we need to know wherewe stand today. Poverty is not only achallenge for India, as more than one-fifth of the world’s poor live in Indiaalone; but also for the world, wheremore than 260 million people are notable to meet their basic needs.

Poverty has many faces, whichhave been changing from place to

place and across time, and has beendescribed in many ways. Most often,poverty is a situation that peoplewant to escape. So poverty is a callto action — for the poor and thewealthy alike — a call to change theworld so that many more may haveenough to eat, adequate shelter,access to education and health,protection from violence, and a voicein what happens in theircommunities.

To know what helps to reducepoverty, what works and what doesnot, what changes over time, povertyhas to be defined, measured andstudied — and even experienced. Aspoverty has many dimensions, it hasto be looked at through a variety ofindicators — levels of income andconsumption, social indicators, andindicators of vulnerability to risksand of socio/political access.

4.2 WHO ARE THE POOR?

You would have noticed that in alllocalities and neighbourhoods, bothin rural and urban areas, there aresome of us who are poor and somewho are rich. Read the story of Anuand Sudha. Their lives are examplesof the two extremes (see Box 4.1).There are also people who belong tothe many stages in between.

Push cart vendors, streetcobblers, women who string flowers,

No society can surely be flourishing and happy, of which the far greaterpart of the members are poor and miserable.

Adam Smith

61POVERTY

Box 4.1: Anu and Sudha

Anu and Sudha were both born on the same day. Anu’s mother and fatherwere construction labourers and Sudha’s father was a businessman and hermother a designer.

Anu’s mother worked by carrying head loads of bricks until she went intolabour. She then went behind the tool shed on the construction site anddelivered her baby alone. She fed her child and then wrapped her in an oldsari, made a cradle with a gunny sack, put little Anu in it and hung it from atree. She hurried back to work as she was afraid she would lose her job. Shehoped that Anu would sleep until evening.

Sudha was born in one of the best nursing homes in the city. She wasthoroughly checked by doctors, she was bathed and dressed in clean softclothes and placed in a crib next to her mother. Her mother fed her whenevershe was hungry, hugged and kissed her and sang her to sleep. Her familyand friends celebrated her arrival.

Anu and Sudha had very different childhoods. Anu learnt to look afterherself at a very early age. She knew what hunger and deprivation were. Shediscovered how to pick food from the dustbin, how to keep warm during thewinter, to find shelter in the monsoon and how to play with a piece of string,stones and twigs. Anu could not go to school as her parents were migrantworkers who kept moving from city to city in search of work.

Anu loved to dance. Whenever she heard music she would improvise. Shewas very beautiful and her movements were graceful and evocative. Her dreamwas to dance on a stage some day. Anu could have become a great dancerbut she had to begin work at the age of 12. She had to earn a living with hermother and father, building houses for the rich. Houses, she would never live in.

Sudha went to a very good play school where she learnt how to read,write and count. She went on excursions to the planetarium, museum andnational parks. She later went to a very good school. She loved painting andstarted getting private lessons from a famous artist. She later joined a designschool and became a well known painter.

rag pickers, vendors and beggars aresome examples of poor andvulnerable groups in urban areas.They possess few assets. They residein kutcha hutments with walls madeof baked mud and roofs made ofgrass, thatch, bamboo and wood. Thepoorest of them do not even havesuch dwellings. In rural areas manyof them are landless. Even if some ofthem possess land, it is only dry or

waste land. Many do not get to haveeven two meals a day. Starvation andhunger are the key features of thepoorest households. The poorlack basic literacy and skills andhence have very limited economicopportunities. Poor people also faceunstable employment.

Malnutrition is alarmingly highamong the poor. Ill health, disabilityor serious i l lness makes them


physically weak. Theyborrow from moneylenders who charge highrates of interest thatlead them into chronicindebtedness. The poorare highly vulnerable.They are not able tonegotiate their legalwages from employersand are exploited. Mostpoor households haveno access to electricity.Their primary cookingfuel is firewood and cowdung cake. A largesection of poor peopledo not even have access to safedrinking water. There is evidence ofextreme gender inequality in theparticipation of gainful employment,education and in decision-makingwithin the family. Poor women receiveless care on their way tomotherhood. Their children are lesslikely to survive or be born healthy.

Scholars identify the poor on thebasis of their occupation andownership of assets. They state thatthe rural poor work mainly aslandless agricultural labourers,cult ivators with very smalllandholdings, landless labourerswho are engaged in a variety ofnon-agricultural jobs and tenantcultivators with small land holdings.

The urban poor arelargely the overflowof the rural poorwho had migratedto urban areas insearch of alternativeemployment andlivelihood, labourerswho do a variety ofcasual jobs and theself-emloyed who sella variety of things onroadsides and areengaged in variousactivities.

Fig. 4.2 Many poor families live in kutcha houses

Fig. 4.1 Majority of agricultural labourers are poor

63POVERTY

4.3 HOW ARE POOR PEOPLE IDENTIFIED?

If India is to solve the problem ofpoverty, it has to find viable andsustainable strategies to address thecauses of poverty and design schemesto help the poor out of their situation.However, for these schemes to beimplemented, the government needsto be able to identify who the poor are.For this there is need to develop ascale to measure poverty, and thefactors that make up the criteria forthis measurement or mechanism needto be carefully chosen.

In pre-independent India,Dadabhai Naoroji was the first todiscuss the concept of a Poverty Line.He used the menu for a prisoner andused appropriate prevailing prices toarrive at what may be called ‘jail costof living’. However, only adults stayin jail whereas, in an actual society,there are children too. He, therefore,appropriately adjusted this cost ofliving to arrive at the poverty line.

For this adjustment, he assumedthat one-third population consistedof ch i ldren and hal f o f themconsumed very little while the otherhalf consumed half of the adultdiet. This is how he arrived at thefactor of three-fourths; (1/6)(Nil) +(1/6)(Half) + (2/3)(Full) = (3/4)(Full). The weighted average ofconsumption of the three segmentsgives the average poverty l ine,which comes out to be three-fourthof the adult jail cost of living.

In post-independent India, therehave been several attempts to workout a mechanism to identify thenumber of poor in the country. Forinstance, in 1962, the PlanningCommission formed a Study Group.In 1979, another body called the‘Task Force on Projections ofMinimum Needs and EffectiveConsumption Demand’ was formed.In 1989, an ‘Expert Group’ wasconstituted for the same purpose.

Box 4.2 : What is Poverty?

Two scholars, Shaheen Rafi Khan and Damian Killen, put the conditions ofthe poor in a nutshell: Poverty is hunger. Poverty is being sick and not beingable to see a doctor. Poverty is not being able to go to school and not knowinghow to read. Poverty is not having a job. Poverty is fear for the future, havingfood once in a day. Poverty is losing a child to illness, brought about by unclearwater. Poverty is powerlessness, lack of representation and freedom.

What do you think?

Chart 4.1: Poverty Line


Besides these bodies, manyindividual economists have alsoattempted to develop such amechanism.

For the purpose of definingpoverty we divide people into twocategories; the poor and the non-poorand the poverty line separates thetwo. However, there are many kindsof poor; the absolutely poor, the verypoor and the poor. Similarly there arevarious kinds of non-poor; themiddle class, the upper middle class,the rich, the very rich and theabsolutely rich. Think of this as a lineor continuum from the very poor tothe absolutely rich with the povertyline dividing the poor from the non-poor.

Categorising Poverty: There are manyways to categorise poverty. In one suchway people who are always poor andthose who are usually poor but whomay sometimes have a little moremoney (example: casual workers) aregrouped together as the chronic poor.Another group are the churning poorwho regularly move in and out of

poverty (example: small farmersand seasonal workers) and theoccasionally poor who are rich mostof the time but may sometimes have apatch of bad luck. They are called thetransient poor. And then there arethose who are never poor and they arethe non-poor (Chart 4.2).

The Poverty Line: Now let usexamine how to determine thepoverty line. There are many ways ofmeasuring poverty. One way is todetermine it by the monetary value(per capita expenditure) of theminimum calorie intake that wasestimated at 2,400 calories for a ruralperson and 2,100 for a person in theurban area. Based on this, in 1999-2000, the poverty line was definedfor rural areas as consumption worthRs 328 per person a month and forurban areas it was Rs 454.

Though the government usesMonthly Per Capita Expenditure (MPCE)as proxy for income of households toidentify the poor, do you think thismechanism satisfactorily identifies thepoor households in our country?

Chart 4.2: The Chronic Poor, Transient Poor and Non-Poor

65POVERTY

Scholars state that a majorproblem with this mechanism is thatit groups all the poor together anddoes not differentiate between thevery poor and the other poor. Thoughthis mechanism takes consumptionexpenditure on food and a few selectitems as proxy for income,economists question its basis. Thismechanism is helpful in identifyingthe poor as a group to be taken careof by the government, but it wouldbe difficult to identify who among thepoor need help the most.

There are many factors, otherthan income and assets, which areassociated with poverty; for instance,the accessibility to basic education,health care, drinking water andsanitation. The mechanism fordetermining the Poverty Line alsodoes not take into considerationsocial factors that trigger andperpetuate poverty such as illiteracy,ill health, lack of access to resources,discrimination or lack of civil andpolitical freedoms. The aim of povertyalleviation schemes should be toimprove human lives by expandingthe range of things that a personcould be and could do, such as to behealthy and well-nourished, to beknowledgeable and participate in thelife of a community. From this pointof view, development is aboutremoving the obstacles to the thingsthat a person can do in life, such asilliteracy, ill health, lack of access toresources, or lack of civil and politicalfreedoms.

Though the government claimsthat higher rate of growth, increase in

agricultural production, providingemployment in rural areas andeconomic reform packages introducedin the 1990s have resulted in adecline in poverty levels, economistsraise doubts about the government’sclaim. They point out that the way thedata are collected, items that areincluded in the consumption basket,methodology followed to estimate thepoverty line and the number of poorare manipulated to arrive at thereduced figures of the number of poorin India.

Due to various limitations in theofficial estimation of poverty, scholarshave attempted to find alternativemethods. For instance, Amartya Sen,noted Nobel Laureate, has developedan index known as Sen Index. Thereare other tools such as Poverty GapIndex and Squared Poverty Gap. Youwill learn about these tools in higherclasses.

Fig. 4.3 Safe drinking water and sanitation areessential for all


4.4 THE NUMBER OF POOR IN INDIA

When the number of poor isestimated as the proportion ofpeople below the poverty line, it isknown as ‘Head Count Ratio’.

You might be interested inknowing the total number of poorpersons residing in India. Where dothey reside and has their number orproportion declined over the years ornot? When such a comparativeanalysis of poor people is made

in terms of ratios and percentages,we will have an idea of differentlevels of poverty of people andtheir distribution; between states andover time.

The official data on poverty is madeavailable to the public by the PlanningCommission. It is estimated on thebasis of consumption expenditure datacollected by the National Sample SurveyOrganisation (NSSO). Chart 4.3 showsthe number of poor and their

Chart 4.3: Trends in Poverty in India, 1973–2000

Number of Poor (in millions) Head Count Ratio (%)

Work These Out

In Sections 4.2 and 4.3, you will notice that the poor are identified not onlywith income and expenditure related indicators but also with many otheritems such as access to land, housing, education, health, sanitation. Alsoto be considered is discriminatory practices. Discuss how an alternativepoverty line could be constructed in such a way that it includes all theother indicators.On the basis of the given definition for poverty line, find out whether peoplewho work as domestic help, dhobies and newspaper vendors etc. in yourlocality/neighbourhood are above the poverty line or not.

67POVERTY

proportion to the population in Indiafor the years 1973-2000. In 1973-74,more than 321 million people werebelow the poverty line. In 1999-2000, this number has come downto about 260 million. In terms ofproportion, in 1973-74, about 55per cent of the total population wasbelow the poverty line. In 1999-2000, it has fallen to 26 per cent. In1973-74, more than 80 per cent ofthe poor resided in rural areas andin 1999-2000, this has come downto about 75 per cent. This meansthat more than three-fourth of thepoor in India reside in villages. Alsopoverty, which was prevai l ingpredominantly in rural areas, hasshifted to urban areas.

In the 1990s, the absolutenumber of poor in rural areas haddeclined whereas the number of theirurban counterparts increasedmarginally. The poverty ratio declinedcontinuously for both urban andrural areas. From Chart 4.3, you willnotice that during 1973-2000, therehas been a decline in the number ofpoor and their proportion but thenature of decline in the twoparameters is not encouraging. Theratio is declining much slower thanthe absolute number of poor in thecountry. You will also notice thatthe gap between the absolutenumber of poor in rural and urbanareas did not narrow down until theearly 1990s whereas in the case of

Chart 4.4: Population Below Poverty Line in Some Large States, 1973-2000 (%)

Note: Uttar Pradesh includes the present Uttaranchal; Madhya Pradesh includesChhattisgarh and Bihar includes Jharkhand


problems, such as (i) low capitalformation (ii) lack of infrastructure(iii) lack of demand (iv) pressure ofpopulation (v) lack of social/welfarenets.

In Chapter 1 you have readabout the British rule in India.Although the final impact of theBritish rule on Indian l iv ingstandards is still being debated, thereis no doubt that there was asubstantial negative impact on theIndian economy and standard ofliving of the people. There wassubstantial de-industrialisation inIndia under the British rule. Importsof manufactured cotton cloth fromLancashire in England displacedmuch local production, and Indiareverted to being an exporter ofcotton yarn, not cloth.

As over 70 per cent of Indianswere engaged in agr icul turethroughout the British Raj period,the impact on that sector was moreimportant on living standards thananything else. Brit ish pol iciesinvolved sharply raising rural taxesthat enabled merchants andmoneylenders to become largelandowners. Under the British,India began to export food grainsand, as a result, as many as 26mill ion people died in faminesbetween 1875 and 1900.

Britain’s main goals from the Rajwere to provide a market for Britishexports, to have India service itsdebt payments to Britain, and forIndia to provide manpower for theBritish imperial armies.

ratio the gap has remained the sameuntil 1999-2000.

The state level trends in povertyare shown in Chart 4.4. It reveals thatfive states — Uttar Pradesh, Bihar,Madhya Pradesh, West Bengal andOrissa — account for about 70 percent of India’s poor. You will alsonotice that during 1973-74, abouthalf the population in most of theselarge states was living below thepoverty line. In 1999-2000, only twostates — Bihar and Orissa — were leftnear that same level. Though they alsoreduced their share of poor, comparedto other states, their success ismarginal. If we look at Gujarat, itreduced its people below the povertyline from 48 per cent to 15 per centduring 1973-2000. During thisperiod, West Bengal has been just assuccessful; from nearly two-third, i.e.63 per cent of the population belowthe poverty line the same was reducedto about 27 per cent.

4.5 WHAT CAUSES POVERTY?

Poverty is explained by individualcircumstances and/or charac-terist ics of poor people. Someexamples are ( i )low leve ls o feducation and skills (ii) infirmity, illhealth, sickness (iii) discrimination.These can be caused as a result of(i) social, economic and politicalinequality (ii) social exclusion (iii)unemployment (iv) indebtedness (v)unequal distribution of wealth.Aggregate poverty is just the sum ofindividual poverty. Poverty is alsoexplained by general, economy-wide

69POVERTY

The British Raj impoverishedmillions of people in India. Ournatural resources wereplundered, our industriesworked to produce goods atlow prices for the British andour food grains were exported.Many died due to famine andhunger. In 1857-58, anger atthe overthrow of many localleaders, extremely high taxesimposed on peasants, andother resentments boiled overin a revolt against British ruleby the sepoys, Indian troopscommanded by the British.

Even today agriculture isthe pr inc ip al means o flivelihood and land is the primaryasset of rural people; ownership ofland is an important determinant ofmaterial well-being and those whoown some land have a better chanceto improve their living conditions.

Since independence, the governmenthas attempted to redistribute land andhas taken land from those who havelarge amounts to distribute it to thosewho do not have any land, but workon the land as wage labourers.However, this move was successfulonly to a limited extent as largesections of agricultural workers werenot able to farm the small holdingsthat they now possessed as they didnot have either money (assets) orskills to make the land productiveand the land holdings were too smallto be viable.

A large section of the rural poorin India are the small farmers. The

land that they have is, in general,less fert i le and dependent onrains. Their survival depends onsubsistence crops and sometimes onlivestock. With the rapid growth ofpopulation and without alternativesources of employment, the per-headavailability of land for cultivationhas steadily declined leading tofragmentation of land holdings. Theincome from these smal l landholdings is not sufficient to meet thefamily’s basic requirements.

You must have heard aboutfarmers committing suicide due totheir inability to pay back the loansthat they have taken for cultivationand other domestic needs as theircrops have failed due to drought orother natural calamities (see Box 4.3).

The scheduled castes andscheduled tribes are not able toparticipate in the emerging employmentopportunities in different sectors of the

Fig. 4.4 Low quality self-employment sustains poverty


urban and rural economy as they do nothave the necessary knowledge and skillsto do so.

The urban poor in India arelargely the overflow of the rural poorwho migrate to urban areas in searchof employment and a livelihood.Industrialisation has not been able

to absorb all these people.Most of the urban poor areei ther unemployed orintermittently employed ascasual labourers. Casuallabourers are among the mostvulnerable in society as theyhave no job securi ty , noassets, limited skills, sparseopportunities and no surplusto sustain them.

Poverty is, therefore, alsoclosely related to nature ofemployment. Unemployment orunder employment and thecasual and intermittent nature

of work in both rural and urban areasthat compels indebtedness, in turn,reinforces poverty. Indebtedness isone of the significant factors ofpoverty.

A steep rise in the price of foodgrains and other essential goods, at

Work These Out

When you go to the market, or visit religious places and historical monumentsyou may often find women begging with their children. Spare a few momentsand speak to a few of them. Collect details about what made them to takeup this activity, where they live with their family members, number of mealsthey are able to consume in a day, whether they possess any physical assetsand why they could not take up a job. Discuss the details that you havecollected in the classroom.

You will notice many poor households as described above in your own localityor neighbourhood. Choose two or three such households and develop theirfamily profile which can include the details of occupation, literacy level,ownership of assets and other information. Discuss them in class.

List the activities of people in rural and urban areas separately. You mayalso list the activities of the non-poor. Compare the two and discuss in theclassroom why the poor are unable to take up such activities.

Fig. 4.5 Quality employment is still a dream for the poor

71POVERTY

Box 4.3: Distress Among Cotton Farmers

Many small land owning farmers and farming households and weavers are descendinginto poverty due to globalisation related shock and lack of perceived income earningopportunities in relatively well performing states in India. Where households havebeen able to sell assets, or borrow, or generate income from alternative employmentopportunities, the impact of such shocks maybe transient. However, if the household has noassets to sell or no access to credit, or is able toborrow only at exploitative rates of interest andgets into a severe debt trap, the shocks can havelong duration ramification in terms of pushinghouseholds below the poverty line. The worstform of this crisis is suicides. The count reached3,000 in Andhra Pradesh alone and is rising. InDecember 2005, the Maharashtra governmentadmitted that over 1,000 farmers have committedsuicides in the state since 2001.

India has the largest area under cottoncultivation in the world covering 8,300 hectaresin 2002–03. The low yield of 300 kg per hectarepushes it into third position in production. Highproduction costs, low and unstable yields,decline in world prices, global glut in productiondue to subsidies by the U.S.A. and othercountries, and opening up of the domesticmarket due to globalisation have increased theexposure of farmers and led to agrarian distressand suicides especially in the cotton belt of Andhra Pradesh and Maharashtra. Theissue is not one of profits and higher returns but that of the livelihood and survivalof millions of small and marginal farmers who are dependent on agriculture.

Scholars cite several factors that have led farmers to commit suicides (i) theshift from traditional farming to the farming of high yielding commercial crops withoutadequate technical support combined with withdrawal of the state in the area ofagricultural extension services in providing counselling on farm technologies,problems faced, immediate remedial steps and lack of timely advice to farmers (ii)decline in public investment in agriculture in the last two decades (iii) low rates ofgermination of seeds provided by large global firms, spurious seeds and pesticides byprivate agents (iv) crop failure, pest attack and drought (v) debt at very high interestrate of 36 per cent to 120 per cent from private money lenders (vi) cheap importsleading to decline in pricing and profits (vii) lack of access to water for crops whichforced the farmers to borrow money at exorbitant rates of interest to sink borewellsthat failed.Sources: Excerpted from A.K. Mehta and Sourabh Ghosh assited by Ritu Elwadhi,

“Globalisation, Loss of Livelihoods and Entry into Poverty,” Alternative EconomicSurvey, India 2004-2005, Alternative Survey Group, Daanish Books, Delhi 2005and P. Sainath, The swelling ‘Register of Deaths’, The Hindu, 29 December 2005.

Shantabai, wife of NeelakantaSitaram Khoke who committedsuicide in Yavatma, Maharashtra


a rate higher than the price of luxurygoods, further intensif ies thehardship and deprivation of lowerincome groups. The unequaldistribution of income and assets hasalso led to the persistence of povertyin India.

All this has created two distinctgroups in society: those who possesthe means of production and earngood incomes and those who haveonly their labour to trade for survival.Over the years, the gap between therich and the poor in India has widened.Poverty is a multi-dimensionalchallenge for India that needs to beaddressed on a war footing.

4.6 POLICIES AND PROGRAMMES

TOWARDS POVERTY ALLEVIATION

The Indian Constitution and fiveyear plans state social justice asthe primary objective of thedevelopmental strategies of thegovernment. To quote the First FiveYear Plan (1951-56), “the urge tobring economic and social changeunder present conditions comes fromthe fact of poverty and inequalities inincome, wealth and opportunity”.The Second Five Year Plan (1956-61)also pointed out that “the benefits ofeconomic development must accruemore and more to the relatively lessprivileged classes of society”. One canfind, in al l pol icy documents,emphasis being laid on povertyal leviation and that variousstrategies need to be adopted by thegovernment for the same.

The government’s approach topoverty reduction was of threedimensions. The first one is growth-oriented approach. It is based on theexpectation that the effects ofeconomic growth — rapid increase ingross domestic product and percapita income — would spread to allsections of society and will trickledown to the poor sections also. Thiswas the major focus of planningin the 1950s and early 1960s.It was felt that rapid industrialdevelopment and transformationof agriculture through greenrevolution in select regions wouldbenefit the underdeveloped regionsand the more backward sections ofthe community. You must have readin Chapters 2 and 3 that the overallgrowth and growth of agricultureand industry have not beenimpressive. Population growth hasresulted in a very low growth in percapita incomes. The gap betweenpoor and rich has actually widened.The Green Revolution exacerbated thedisparities regionally and betweenlarge and small farmers. There wasunwil l ingness and inabil i ty toredistribute land. Economists statethat the benefits of economic growthhave not trickled down to the poor.

While looking for alternatives tospecifically address the poor, policymakers started thinking thatincomes and employment for thepoor could be raised through thecreation of incremental assets and bymeans of work generation. Thiscould be achieved through specific

73POVERTY

poverty alleviation programmes.This second approach has beeninitiated from the Third Five YearPlan (1961-66) and progressivelyenlarged since then. One of the notedprogrammes initiated in the 1970swas Food for Work.

The programmes that are beingimplemented now are based on theperspective of the Tenth Five YearPlan (2002-2007) Expanding self-employment programmes and wageemployment programmes are beingconsidered as the major ways ofaddressing poverty. Examples of self-employment programmes are RuralEmployment Generation Programme(REGP), Prime Minister’s RozgarYojana (PMRY) and Swarna Jayanti

Shahari Rozgar Yojana (SJSRY). Thefirst programme aims at creating self-employment opportunities in rural areasand small towns. The Khadi and VillageIndustries Commission is implementing it.Under this programme, one can getfinancial assistance in the form of bankloans to set up small industries. Theeducated unemployed from low-income families in rural and urbanareas can get financial help to set upany kind of enterprise that generatesemployment under PMRY. SJSRYmainly aims at creating employmentoppor-tunities—both self-employmentand wage employment—in urban areas.

Earlier, under self-employmentprogrammes, financial assistance wasgiven to families or individuals. Since

Fig. 4.6 Wage employment under ‘food for work’ programme


the 1990s, this approach has beenchanged. Now those who wish tobenefit from these programmes areencouraged to form self-help groups.Initially they are encouraged to savesome money and lend amongthemselves as small loans. Later,through banks, the governmentprovides partial financial assistanceto SHGs which then decide whomthe loan is to be given to for self-employment activities. SwarnajayantiGram Swarozgar Yojana (SGSY) is onesuch programme.

The government has a variety ofprogrammes to generate wageemployment for the poor unskilledpeople living in rural areas. Some ofthem are National Food for WorkProgramme (NFWP) and SampoornaGrameen Rozgar Yojana (SGRY). InAugust 2005, the Parliament haspassed a new Act to provideguaranteed wage employment toevery household whose adultvolunteer is to do unskilled manualwork for a minimum of 100 days ina year. This Act is known as NationalRural Employment GuaranteeAct–2005. Under this Act all thoseamong the poor who are ready towork at the minimum wage canreport for work in areas where thisprogramme is implemented.

The third approach to addressingpoverty is to provide minimum basicamenities to the people. India wasamong the pioneers in the world toenvisage that through publicexpenditure on social consumptionneeds — provision of food grains atsubsidised rates, education, health,

water supply and sanitation—people’s living standard could beimproved. Programmes under thisapproach are expected to supplementthe consumption of the poor, createemployment opportunities and bringabout improvements in health andeducation. One can trace thisapproach from the Fifth Five Year Plan,“even with expanded employmentopportunities, the poor will not be ableto buy for themselves all the essentialgoods and services. They have to besupplemented up to at least certainminimum standards by socialconsumption and investment in theform of essential food grains,education, health, nutrition, drinkingwater, housing, communications andelectricity.” Three major programmesthat aim at improving the food andnutritional status of the poor arePublic Distribution System,Integrated Child Development Schemeand Midday Meal Scheme. PradhanMantri Gram Sadak Yojana, PradhanMantri Gramodaya Yojana, ValmikiAmbedkar Awas Yojana are alsoattempts in the same direction. It maybe essential to briefly state that Indiahas achieved satisfactory progress inmany aspects.

The government also has a varietyof other social security programmesto help a few specific groups. NationalSocial Assistance Programme is onesuch programme initiated by thecentral government. Under thisprogramme, elderly people who donot have anyone to take care of themare given pension to sustainthemselves. Poor women who are

75POVERTY

destitute and widows are alsocovered under this scheme.

4.7 POVERTY ALLEVIATION

PROGRAMMES — A CRITICAL

ASSESSMENT

Efforts at poverty alleviation have bornefruit in that for the first time sinceindependence, the percentage ofabsolute poor in some states is now wellbelow the national average. Despite avariety of approaches, programmesand schemes to alleviate poverty;hunger, malnourishment, illiteracyand lack of basic amenities continueto be a common feature in manyparts of India. Though the policytowards poverty alleviation hasevolved in a progressive manner,

over the last five and a half decades,it has not undergone any radicaltransformation. You can find changein nomenclature, integration ormutations of programmes. However,none resulted in any radical changein the ownership of assets, processof production and improvement ofbasic amenit ies to the needy.Scholars, while assessing theseprogrammes, state three major areasof concern which prevent theirsuccessful implementation. Due tounequal distribution of land andother assets, the benefits from directpoverty alleviation programmes havebeen appropriated by the non-poor.Compared to the magnitude ofpoverty, the amount of resources

Work These Out

Discuss and then develop a list of three employment opportunities that canarise in coastal areas, deserts, hilly tribal areas, tribal areas under :(i) Food for Work Programme and (ii) self-employment.

Many policy documents, five year plan documents, economic surveys are availa-ble in the website of Planning Commission (www.planningcommission.nic.in).Some of them could be available in your school or public library also. Inthese documents, the initiatives taken by the government and theirevaluation are available. Read a few of them and discuss in the classroom.

In your area or neighbourhood, you will find developmental works such aslaying of roads, construction of buildings in government hospitals,government schools etc. Visit such sites and prepare a two-three page reporton the nature of work, how many people are getting employed, wages paid tothe labourers etc.

You will also notice some poor women — widows, destitutes, elderly people— receiving social security assistance. Develop profiles of a few such persons.A profile can have their personal information, how they received assistance,the nature of assistance, whether it is sufficient or not and what are theactivities they undertake.


Box 4.4: Ramdas Korwa’s Road to Nowhere

Somehow, Ramdas Korwa of Rachketha village was not overjoyed to learnthat he was worth Rs l7.44 lakh to the government. Late in 1993, theauthorities decided to lay a three km road leading to Rachketha village in thename of tribal development by allocating Rs 17.44 lakh towards the project.

Tribals constitute a 55 per cent majority in Surguja, one of India’s poorestdistricts. And the Pahadi or Hill Korwas, who have been listed as a primitivetribe by the government, fall in the bottom 5 per cent. Special efforts areunderway for their development which often involves large sums of money.Just one centrally funded scheme, the Pahadi Korwa project, is worth Rs 42crores over a five-year period.

There are around 15,000 Pahadi Korwas, the largest number of these inSurguja. However, for political reasons, the main base of the project is inRaigad district. There was just one small problem about building the PahadiKorwa Marg in Rachketha—the village is almost completely devoid of PahadiKorwas. Ramdas’s family is the only real exception.

‘It doesn’t matter if these don’t benefit the Pahadi Korwas in the least andare completely useless. Out here, even if you put up a swimming pool and abungalow, you do it in the name of tribal development,’ says an NGO activist.‘Nobody bothered to check whether there were really any Pahadi Korwas livingin Rachketha village’ and ‘there was already a kutcha road here,’ saysRamavatar Korwa, son of Ramdas. ‘They just added lal mitti (red earth) to it.Even today, after spending Rs 17.44 lakh, it is not a pucca road.’

Ramdas’s own demands are touchingly simple. ‘All I want is a little water,’he says. ‘How can we have agriculture without water?’ When repeatedlypressed, he adds: ‘Instead of spending Rs 17.44 lakh on that road, if they hadspent a few thousand on improving that damaged well on my land, wouldn’tthat have been better? Some improvement in the land is also necessary, butlet them start by giving us a little water.’

Ramdas’s problems were ignored. The government’s problem was ‘fulfillinga target’. ‘If the money were simply put into bank fixed deposits, none of thesePahadi Korwa families would ever have to work again. The interest alone wouldmake them very well off by Surguja’s standards’, says an official mockingly.

Nobody thought of asking Ramdas what he really needed, what hisproblems were, or involving him in their solution. Instead, in his name, theybuilt a road he does not use, at a cost of Rs17.44 lakh. ‘Please do somethingabout my water problem, sir,’ says Ramdas Korwa as we set off across theplain, journeying two km to reach his road to nowhere.

Source: Excerpted from P. Sainath, 1996, Everybody Loves a Good Drought:Stories from India’s Poorest Districts, Penguin Books, New Delhi.

77POVERTY

allocated for these programmes is notsufficient. Moreover, these programmesdepend mainly on government andbank officials for their implementation.Since such officials are ill motivated,inadequately trained, corruption proneand vulnerable to pressure from avariety of local elites, the resources areinefficiently used and wasted. Thereis also non-participation of locallevel institutions in programmeimplementation.

Government policies have alsofailed to address the vast majority ofvulnerable people who are living on

or just above the poverty line. It alsoreveals that high growth alone is notsufficient to reduce poverty. Withoutthe active participation of the poor,successful implementation of anyprogramme is not possible. Povertycan effectively be eradicated onlywhen the poor start contributing togrowth by their active involvementin the growth process. This ispossible through a process of socialmobilisation, encouraging poorpeople to participate and get themempowered. This will also helpcreate employment opportunitieswhich may lead to increase in levelsof income, skill development, healthand literacy. Moreover, it is necessaryto identify poverty stricken areasand provide infrastructure such asschools, roads, power, telecom, ITservices, training institutions etc.

4.8 CONCLUSION

We have travelled about six decadessince independence. The objective ofall our policies had been stated aspromoting rapid and balancedeconomic development with equalityand social justice. Poverty alleviationhas always been accepted as one ofIndia’s main challenges by thepolicy makers, regardless of whichgovernment was in power. Theabsolute number of poor in the countryhas gone down and some states haveless proportion of poor than even thenational average. Yet, critics point outthat even though vast resourceshave been allocated and spent, weare still far from reaching the goal.

Fig. 4.7 Scrap collector: mismangament ofemployment planning forces people totake up very low paying jobs


There is improvement in terms of percapita income and average standardof living; some progress towardsmeeting the basic needs has beenmade. But when compared to theprogress made by many othercountries, our performance has notbeen impressive. Moreover, the fruitsof development have not reached all

sections of the population. Somesections of people, some sectors ofthe economy, some regions of thecountry can compete even withdeveloped countries in terms ofsocial and economic development,yet, there are many others who havenot been able to come out of thevicious circle of poverty.

Recap

Reducing poverty has been one of the major objectives of India’sdevelopmental strategies.

The per capita consumption expenditure level which meets the averageper capita daily requirement of 2,400 calories in rural areas and 2,100calories in urban areas, along with a minimum of non-food expenditure,is called poverty line or absolute poverty.

When the number of poor and their proportion is compared, we will havean idea of different levels of poverty of people and their distribution betweenstates and over time.

The number of poor in India and their proportion to total population hasdeclined substantially. For the first time in the 1990s, the absolutenumber of poor has declined.

Majority of poor are residing in rural areas and engage themselves incasual and unskilled jobs.

Income and expenditure oriented approaches do not take into accountmany other attributes of the poor people.

Over the years, the government has been following three approaches toreduce poverty in India: growth oriented development, specific povertyalleviation programmes and meeting the minimum needs of the poor.

Government initiatives are yet to transform the ownership of assets,processes of production and meet the basic amenities of the poor.

79POVERTY

1. Define poverty.

2. What is meant by ‘Food for Work’ programme?

3. State an example each of self employment in rural and urbanareas.

4. How can creation of income earning assets address the problemof poverty?

5. Briefly explain the three dimensional attack on poverty adoptedby the government.

6. What programmes has the government adopted to help theelderly people and poor and destitute women?

7. Is there any relationship between unemployment and poverty?Explain.

8. What is the difference between relative and absolute poverty?

9. Suppose you are from a poor family and you wish to get help fromthe government to set up a petty shop. Under which scheme willyou apply for assistance and why?

10. Illustrate the difference between rural and urban poverty. Is itcorrect to say that poverty has shifted from rural to urban areas?Use the trends in poverty ratio to support your answer.

11. Explain the concept of relative poverty with the help of thepopulation below poverty line in some states of India.

12. Suppose you are a resident of a village, suggest a few measuresto tackle the problem of poverty.

1. Collect data from 30 persons of your locality regarding their dailyconsumption of various commodities. Then rank the persons onthe basis of relatively better off and worse, to get the degree ofrelative poverty.

EXERCISES



2. Collect information and fill in the following table with the amount ofmoney spent in terms of rupees by four low income families onvarious commodities. Analyse the research and find out whichfamily is relatively poor in comparison to the other families. Alsofind out who are absolutely poor if the poverty line is fixed at anexpenditure of Rs 500 per month per person.

Commodities Family A Family B Family C Family D

Wheat/RiceVegetable OilSugarElectricity/LightingGheeClothesHouse Rent

2. The following table shows the average monthly expenditure perperson on items of consumption in India and Delhi slums in termsof percentage. ‘Rice and wheat’ in rural areas at 25 per centmeans that for every 100 rupees spent, Rs 25 goes towards thepurchase of rice and wheat alone. Read the table further andanswer the questions that follow.

Items Rural Urban Delhi SlumsRice and wheat 25.0 35.9 28.7Pulses and their products 5.7 6.1 9.9Milk and milk products 17.4 14.1 10.3Vegetables and fruits 15.1 12.7 19.6Meat, fish and eggs 6.3 5.3 13.1Sugar 3.3 3.8 4.0Salt and spices 10.8 10.8 8.1Other food items 16.5 11.3 6.4Total: All food 100 100 100Expenditure on food 62.9 72.2 72.8items as a % of all items

• Compare the percentage of expenditure on food items amongdifferent groups and their priorities.

• Do you think households in slums are depending more on cerealsand pulses?

• On which item do people living in different areas spend the least?Compare them.

• Do you think that slum dwellers have given more emphasis tomeat, fish and eggs?

81POVERTY

Books

DANDEKAR, V.M. and NILAKANTHA RATH. 1971. Poverty in India, Indian Schoolof Political Economy, Pune.

DREZE, JEAN. AMARTYA SEN & AKTHAR HUSAIN (Eds.). 1995. The Political Economyof Hunger. Clarendon Press, Oxford.

NAOROJI, DADABHAI. 1996. Poverty and Un-British Rule in India, PublicationsDivision, Ministry of Information and Broadcasting, Government ofIndia, Second Edition, New Delhi.

SAINATH, P. 1996. Everybody Loves a Good Drought: Stories from India’sPoorest Districts. Penguin Books, New Delhi.

SEN, AMARTYA. 1999. Poverty and Famines: An Essay on Entitlement andDeprivation. Oxford University Press, New Delhi.

SUBRAMANIAM, S. (Ed.). 2001. India’s Development Experience: SelectedWritings of S. Guhan. Oxford University Press, New Delhi.

Articles

KUMAR, NAVEEN and S.C. AGGARWAL. 2003. ‘Pattern of Consumption andPoverty in Delhi Slums.’ Economic and Political Weekly, December13, pp. 5294-5300.

MINHAS, B.S., L.R. JAIN and S.D. TENDULKAR. 1991. ‘Declining Incidence ofPoverty in the 1980s — Evidence versus Artefacts,’ Economic andPolitical Weekly, July 6-13.

Government Reports

Report of the Expert Group of the Estimation of Proportion and Number ofPoor, Perspective Planning Division, Planning Commission Governmentof India, New Delhi, 1993.

Economic Survey 2004-05. Ministry of Finance, Government of India.

Tenth Five Year Plan 2002-2007, Vol. II: Sectoral Policies and Programmes,Planning Commission, Government of India, New Delhi.

REFERENCES



• understand the concepts of Human Resources, Human CapitalFormation and Human Development

• have understood the links between investment in human capital,economic growth and human development

• have understood the need for government spending on education andhealth

• have learnt about the state of India’s educational attainment.

HUMAN CAPITAL

FORMATION IN INDIA

5

83HUMAN CAPITAL FORMATION IN INDIA

5.1 INTRODUCTION

Think of one factor that has made agreat difference in the evolution ofmankind. Perhaps it is man’s capacityto store and transmit knowledgewhich he has been doing throughconversation, through songs andthrough elaborate lectures. But mansoon found out that we need a gooddeal of training and skill to do thingsefficiently. We know that the labourskill of an educated person is morethan that of an uneducated personand hence the former is able to generate

more income than the latter and hiscontribution to economic growth is,consequently, more.

Education is sought not only as itconfers higher earning capacity onpeople but also for its other highlyvalued benefits: it gives one a bettersocial standing and pride; it enablesone to make better choices in life; itprovides knowledge to understand thechanges taking place in society; it alsostimulates innovations. Moreover,the availability of educated labourforce facilitates adaptation of new

“... the wisdom of expending public and private funds on education is not to bemeasured by its direct fruits alone. It will be profitable as a mere investment,to give the masses of people much greater opportunities than they can generallyavail themselves of. For by this means many, who would have died unknown,are enabled to get the start needed for bringing out their latent abilities”.

Alfred Marshall

Fig. 5.1 Adequate education and training to farmers can raise productivity in farms


technologies. Economists have stressedthe need for expanding educationalopportunities in a nation as itaccelerates the development process.

5.2 WHAT IS HUMAN CAPITAL?

Just as a country can turn physicalresources like land into physicalcapital like factories, similarly, it canalso turn human resources likestudents into human capital likeengineers and doctors. Societies needsufficient human capital in the firstplace — in the form of competentpeople who have themselves beeneducated and trained as professorsand other professionals. In otherwords, we need good human capitalto produce other human capital (say,doctors, engineers...). This means thatwe need investment in human capitalto produce more human capital out ofhuman resources.

Let us understand a little more ofwhat human capital means by posingthe following questions :

(i) What are the sources of humancapital?

(ii) Is there any relation betweenhuman capital and economicgrowth of a country?

(iii) Is the formation of humancapital linked to man’s all-rounddevelopment or, as it is now called,human development?

(iv) What role can the governmentplay in human capital formationin India?

5.3 SOURCES OF HUMAN CAPITAL

Investment in education is consideredas one of the main sources of humancapital. There are several other sourcesas well. Investments in health, on- the-job training, migration and informationare the other sources of human capitalformation.

Why do your parents spend moneyon education? Spending on education

by individuals is similar to spendingon capital goods by companies withthe objective of increasing futureprofits over a period of time. Likewise,individuals invest in education with theobjective of increasing their futureincome.

Like education, health is alsoconsidered as an important input forthe development of a nation as muchas it is important for the developmentof an individual.

Who can work better —a sickperson or a person with sound health?A sick labourer without access tomedical facilities is compelled toabstain from work and there is loss ofproductivity. Hence, expenditure onhealth is an important source ofhuman capital formation.

Work This Out

Take three families fromdifferent strata (i) very poor(ii) middle class and (iii)affluent. Study theexpenditure pattern of thefamilies on education ofmale and female children.


Preventive medicine(vaccination), curativemedicine (medicalintervention duringillness), social medi-cine (spread of healthliteracy) and provisionof clean drinking waterand good sanitation

are the various forms of healthexpenditures. Health expendituredirectly increases the supply of healthylabour force and is, thus, a source ofhuman capital formation.

Firms spend ongiving on-the-job-training totheir workers.This may takedifferent forms:one, the workersmay be trained

in the firm itself under the supervisionof a skilled worker; two, the workersmay be sent for off-campus training.In both these cases firms incur someexpenses. Firms will, thus, insist thatthe workers should work for a specificperiod of time, after their on-the-jobtraining, during which it can recoverthe benefits of the enhancedproductivity owing to the training.Expenditure regarding on-the-jobtraining is a source of human capitalformation as the return of suchexpenditure in the form of enhancedlabour productivity is more than thecost of it.

People migrate in search of jobsthat fetch them higher salaries thanwhat they may get in their native

places. Unemployment is the reasonfor the rural-urban migration in India.Technically qualified persons, likeengineers and doctors, migrate to othercountries because of higher salariesthat they may get in such countries.Migration in both these cases involvescost of transport, higher cost of livingin the migrated places and psychiccosts of living in a strange socio-cultural setup. The enhanced earningsin the new place outweigh the costs ofmigration; hence, expenditure onmigration is also a source of humancapital formation.

People spend to acquireinformation relating to the labourmarket and other markets likeeducation and health. For example,people want to know the level of salariesassociated with various types of jobs,whether the educational institutionsprovide the right type of employableskills and at what cost. This informationis necessary to make decisionsregarding investments in human capitalas well as for efficient utilisation of theacquired human capital stock.Expenditure incurred for acquiringinformation relating to the labourmarket and other markets is also asource of human capital formation.


Box 5.1: Physical and Human Capital

Both the forms of capital formation are outcomes of conscious investment decisions.Decision regarding investment in physical capital is taken on the basis of one’s knowledgein this regard. The entrepreneur possesses knowledge to calculate the expected rates ofreturn to a range of investments and then rationally decides which one of theinvestments should be made. The ownership of physical capital is the outcome of theconscious decision of the owner — the physical capital formation is mainly an economicand technical process. A substantial part of the human capital formation takes placein one’s life when she/he is unable to decide whether it would maximise her/his earnings.Children are given different types of school education and health care facilities by theirparents and the society. The peers, educators and society influence the decisionsregarding human capital investments even at the tertiary level, that is, at the collegelevel. Moreover, the human capital formation at this stage is dependent upon the alreadyformed human capital at the school level. Human capital formation is partly a socialprocess and partly a conscious decision of the possessor of the human capital.

You know that the owner of a physical capital, says a bus, need not be present inthe place where it is used; whereas, a bus-driver, who possesses the knowledge andability to drive the bus, should be present when the bus is used for transportation ofmen and materials. Physical capital is tangible and can be easily sold in the marketlike any other commodity. Human capital is intangible; it is endogenously built in thebody and mind of its owner. Human capital is not sold in the market; only the servicesof human capital are sold and hence the necessity of the owner of the human capital tobe present in the place of production. The physical capital is separable from its owner,whereas, human capital is inseparable from its owner.

The two forms of capital differ in terms of mobility across space. Physical capital iscompletely mobile between countries except for some artificial trade restrictions. Humancapital is not perfectly mobile between countries as movement is restricted by nationalityand culture. Therefore, physical capital formation can be built even through imports,whereas human capital formation is to be done through conscious policy formulationsin consonance with the nature of the society and economy and expenditure by thestate and the individuals.

Both forms of capital depreciate with time but the nature of depreciation differsbetween the two. Continuous use of machine leads to depreciation and change oftechnology makes a machine obsolete. In the case of human capital, depreciation takesplace with ageing but can be reduced, to a large extent, through continuous investmentin education, health, etc. This investment also facilitates the human capital to copewith change in technology which is not the case with physical capital.

Nature of benefits flowing from human capital are different from that of physicalcapital. Human capital benefits not only the owner but also the society in general. Thisis called external benefit. An educated person can effectively take part in a democraticprocess and contribute to the socio-economic progress of a nation. A healthy person,by maintaining personal hygiene and sanitation, stops the spread of contagious diseasesand epidemics. Human capital creates both private and social benefits, whereas physicalcapital creates only private benefit. That is, benefits from a capital good flow to thosewho pay the price for the product and services produced by it.


The concept of physical capital isthe base for conceptualising humancapital. There are some similaritiesbetween the two forms of capital; thereare some striking dissimilarities aswell. See Box 5.1.

Human Capital and EconomicGrowth: Who contributes more tonational income — a worker in a factoryor a software professional? We knowthat the labour skill of an educatedperson is more than that of anuneducated person and that the formergenerates more income than the latter.Economic growth means the increasein real national income of a country;naturally, the contribution of theeducated person to economic growth ismore than that of an illiterate person. Ifa healthy person could provideuninterrupted labour supply for alonger period of time, then health is also

an important factor for economicgrowth. Thus, both education andhealth, along with many other factorslike on-the-job training, job marketinformation and migration, increase an

Work These Out

‘An educated personcontributes more to theincome stream’. Find out themonthly salary earned by

— a mason— watchman in your

apartment/school— maid servant/dhobi— teacher/clerk in an

office— professor— doctor/engineer/an

executive

Fig. 5.2 Creating human capital: a school being run in make shift premises in a village


individual’s income generatingcapacity.

This enhanced productivity ofhuman beings or human capitalcontributes substantially not onlytowards increasing labour productivitybut also stimulates innovationsand creates ability to absorb newtechnologies. Education providesknowledge to understand changes insociety and scientific advancements,thus, facilitate inventions andinnovations. Similarly, the availabilityof educated labour force facilitatesadaptation to new technologies.

Empirical evidence to prove thatincrease in human capital causeseconomic growth is rather nebulous.This may be because of measurementproblems. For example, educationmeasured in terms of years ofschooling, teacher-pupil ratio andenrolment rates may not reflect thequality of education; health servicesmeasured in monetary terms, lifeexpectancy and mortality rates maynot reflect the true health status of thepeople in a country. Using theindicators mentioned above, ananalysis of improvement in educationand health sectors and growth in realper capita income in both developingand developed countries shows thatthere is convergence in the measuresof human capital but no sign ofconvergence of per capita real income.In other words, the human capitalgrowth in developing countries hasbeen faster but the growth of per capitareal income has not been that fast.There are reasons to believe that the

causality between human capital andeconomic growth flows in eitherdirections. That is, higher incomecauses building of high level of humancapital and vice versa, that is, high levelof human capital causes growth ofincome.

India recognised the importance ofhuman capital in economic growthlong ago. The Seventh Five Year Plansays, “Human resources development(read human capital) has necessarilyto be assigned a key role in anydevelopment strategy, particularly ina country with a large population.Trained and educated on sound lines,a large population can itself becomean asset in accelerating economicgrowth and in ensuring social changein desired directions.”

It is difficult to establish a relationof cause and effect from the growth ofhuman capital (education and health)to economic growth but we can see in

Fig. 5.3 Scientific and technical manpower: a richingredient of human capital


Table 5.1 that these sectors have grownsimultaneously. Growth in each sectorprobably has reinforced the growth ofevery other sector.

Two independent reports on theIndian economy, in recent times, haveidentified that India would grow fasterdue to its strength in human capitalformation. Deutsche Bank, a Germanbank, in its report on ‘Global GrowthCentres’ (published on 1.7.05)identified that India will emerge as one

among four major growth centres inthe world by the year 2020. It furtherstates, “Our empirical investigationsupports the view that human capitalis the most important factor ofproduction in today’s economies.Increases in human capital are crucialto achieving increases in GDP.” Withreference to India it states, “Between2005 and 2020 we expect a 40 per centrise in the average years of educationin India, to just above 7 years...”

World Bank, in itsrecent report, ‘India andthe Knowledge Economy—Leveraging Strengthsand Opportunities’,states that India shouldmake a transition tothe knowledge economyand if it uses itsknowledge as much asIreland does (it isjudged that Ireland usesits knowledge economyvery effectively), then theper capita income ofIndia will increase froma little over US $1000 in

TABLE 5.1

Select Indicators of Development in Education and Health Sectors

Particulars 1951 1981 1991 2001

Real Per Capita Income (in Rs) 3,687 5,353 7,321 10,306

Crude Death 25.1 12.5 9.8 8.1Rate (Per 1,000 Population)

Infant Mortality Rate 146 110 80 63

Life Expectancy 37.2 54.1 59.7 63.9at Birth (in Years)

36.2 54.7 60.9 66.9

16.67 43.57 52.21 65.20

Female

Male

Literacy Rate (%)

Fig. 5.4 Job on hand: transforming India into a knowledge economy


2002 to US $ 3000 in 2020. It furtherstates that the Indian economy has allthe key ingredients for making thistransition, such as, a critical mass ofskilled workers, a well-functioningdemocracy and a diversified scienceand technology infrastructure. Thusthe two reports point out the fact thatfurther human capital formation inIndia will move its economy to a highergrowth trajectory.

5.4 HUMAN CAPITAL AND HUMAN

DEVELOPMENT

The two terms sound similar but thereis a clear distinction between them.Human capital considers education andhealth as a means to increase labourproductivity. Human development isbased on the idea that education andhealth are integral to human well-beingbecause only when people have theability to read and write and the abilityto lead a long and healthy life, theywill be able to make other choiceswhich they value. Human capitaltreats human beings as a means toan end; the end being the increasein productivity. In this view, any

investment in education and health isunproductive if it does not enhanceoutput of goods and services. In thehuman development perspective,human beings are ends in themselves.Human welfare should be increasedthrough investments in education andhealth even if such investments do notresult in higher labour productivity.Therefore, basic education and basichealth are important in themselves,irrespective of their contribution tolabour productivity. In such a view,

Box 5.2: India as a Knowledge Economy

The Indian software industry has been showing an impressive record over thepast decade. Entrepreneurs, bureaucrats and politicians are now advancingviews about how India can transform itself into a knowledge-based economyby using information technology (IT). There have been some instances of villagersusing e-mail which are cited as examples of such transformation. Likewise,e-governance is being projected as the way of the future. The value of IT dependsgreatly on the existing level of economic development. IT can make existingassets and processes more effective and efficient but, first of all, a basicinfrastructure needs to be developed.

Work This Out

If a construction worker,maid-servant, dhobi or apeon in school has absentedherself/himself for long dueto ill health, find out how ithas affected her/his

(i) job security

(ii) wage/salary

What could be the possiblereasons?


every individual has a right to get basiceducation and basic health care, thatis, every individual has a right to beliterate and lead a healthy life.

5.5 HUMAN CAPITAL FORMATION IN

INDIA: GREAT PROSPECTS

In this section we are going to analysehuman capital formation in India. Wehave already learnt that humancapital formation is the outcomeof investments in education, health,on-the-job training, migration andinformation: of these education andhealth are very important sources ofhuman capital formation. We knowthat ours is a federal country with aunion government, state governmentsand local governments (MunicipalCorporations, Municipalities andVillage Panchayats). The Constitutionof India mentions the functions tobe carried out by each level ofgovernment. Accordingly, expendi-tures on both education and health areto be carried out simultaneously by allthe three tiers of the government.Analysis of health sector is taken upin the Chapter on infrastructure;hence, we will analyse only theeducation sector here.

Do you know who takes care ofeducation and health in India? Beforewe take up the analysis of the educationsector in India, we will look into the needfor government intervention ineducation and health sectors. We dounderstand that education and healthcare services create both private andsocial benefits and this is the reason forthe existence of both private and public

institutions in the education and healthservice markets. Expenditures oneducation and health make substantiallong-term impact and they cannot beeasily reversed; hence, governmentintervention is essential. For instance,once a child is admitted to a school orhealth care centre where the requiredservices are not provided, before thedecision is taken to shift the child toanother institution, substantial amountof damage would have been done.Moreover, individual consumers of theseservices do not have completeinformation about the quality of servicesand their costs. In this situation, theproviders of education and healthservices acquire monopoly power andare involved in exploitation. The role ofgovernment in this situation is to ensurethat the private providers of theseservices adhere to the standardsstipulated by the government andcharge the correct price.

In India, the ministries ofeducation at the union and state level,departments of education and variousorganisations like National Council ofEducational Research and Training(NCERT), University Grants Commission(UGC) and All India Council ofTechnical Education (AICTE) regulatethe education sector. Similarly, theministries of health at the union andstate level, departments of health andvarious organisations like IndianCouncil for Medical Research (ICMR)regulate the health sector.

In a developing country like ours,with a large section of the populationliving below the poverty line, many of


us cannot afford to access basiceducation and health care facilities.Moreover, a substantial section of ourpeople cannot afford to reach superspecialty health care and highereducation. Furthermore, when basiceducation and health care isconsidered as a right of the citizens,then it is essential that the governmentshould provide education and healthservices free of cost for the deservingcitizens and those from the sociallyoppressed classes. Both, the union andstate governments, have been steppingup expenditures in the educationsector over the years in order to fulfilthe objective of attaining cent per centliteracy and considerably increase theaverage educational attainment ofIndians.

things before the government. Thepercentage of ‘education expenditureof GDP’ expresses how much ofour income is being committed tothe development of education inthe country. During 1952-2002,education expenditure as percentageof total government expenditureincreased from 7.92 to 13.17 and aspercentage of GDP increased from0.64 to 4.02. Throughout this periodthe increase in education expenditurehas not been uniform and there hasbeen irregular rise and fall. To this ifwe include the private expenditureincurred by individuals and byphilanthropic institutions, the totaleducation expenditure should bemuch higher.

Elementary education takes amajor share of total educationexpenditure and the share of thehigher/tertiary education (institutionsof higher learning like colleges,polytechnics and universities) is theleast. Though, on an average, thegovernment spends less on tertiaryeducation, ‘expenditure per student’ intertiary education is higher than thatof elementary. This does not mean thatfinancial resources should betransferred from tertiary education toelementary education. As we expandschool education, we need moreteachers who are trained in the highereducational institutions; therefore,expenditure on all levels of educationshould be increased.

The per capita education expenditurediffers considerably across states fromas high as Rs 3,440 in Lakshadweep

5.6 EDUCATION SECTOR IN INDIA

Growth in Government Expenditureon Education: Do you know howmuch the government spends oneducation? This expenditure by thegovernment is expressed in two ways(i) as a percentage of ‘total governmentexpenditure’ (ii) as a percentage ofGross Domestic Product (GDP).

The percentage of ‘educationexpenditure of total governmentexpenditure’ indicates the importanceof education in the scheme of

Work This Out

Identify the objectives andfunctions of NCERT, UGC,AICTE and ICMR.


to as low as Rs 386 in Bihar. Thisleads to differences in educationalopportunities and attainments acrossstates.

One can understand the inadequacyof the expenditure on educationif we compare it with the desiredlevel of education expenditureas recommended by the variouscommissions. More than 40 years ago,the Education Commission (1964–66)had recommended that at least 6 percent of GDP be spent on education soas to make a noticeable rate ofgrowth in educational achievements.

In December 2002, theGovernment of India, throughthe 86th Amendment ofthe Constitution of India,made free and compulsoryeducation a fundamentalright of all children inthe age group of 6-14years. The Tapas MajumdarCommittee, appointed by theGovernment of India in 1998,estimated an expenditure ofaround Rs 1.37 lakh croreover 10 years (1998-99 to

2006-07) to bring all Indian children inthe age group of 6-14 years under thepurview of school education. Comparedto this desired level of educationexpenditure of around 6 per cent ofGDP, the current level of a little over 4per cent has been quite inadequate. Inprinciple, a goal of 6 per cent needs tobe reached—this has been accepted asa must for the coming years.

In the Union Budget 2000-05, theGovernment of India levied a 2 per cent‘education cess’ on all union taxes. Thegovernment estimated to get a revenueof Rs 4,000-5,000 crore and the entire

Fig. 5.5 Investment in educational infrastructure is inevitable

Work These Out

Prepare case studies of dropouts at different levels of schooling, say

(i) Primary dropouts

(ii) Class VIII dropouts

(iii) Class X dropouts

Find out the causes and discuss in the class.

‘School dropouts are giving way to child labour’. Discuss how this is a lossto human capital.


TABLE 5.2

Educational Attainment in India

Sl.No. Particulars 1990 2000

1. Adult Literacy Rate (per cent of people aged 15+)

1.1 Male 61.9 68.41.2 Female 37.9 45.4

2. Primary completion rate (per cent of relevant age group)2.1 Male 78 852.2 Female 61 69

3. Youth literacy rate (per cent of people aged 15+ to 24)3.1 Male 76.6 79.73.2 Female 54.2 64.8

amount was earmarked for spendingon elementary education. In additionto this, the government sanctioned alarge outlay for the promotion of highereducation and new loan schemes forstudents to pursue higher education.

Educational Achievements in India:Generally, educational achievementsin a country are indicated in terms ofadult literacy level, primary education

completion rate and youth literacyrate. These statistics for the years 1990and 2000 are given above in Table 5.2.

5.7 FUTURE PROSPECTS

Education for All — Still a DistantDream: Though literacy rates for both— adults as well as youth — haveincreased, still the absolute number ofilliterates in India is as much as India’s

Fig. 5.6 School dropouts give way to child labour: a loss to human capital


population was at the time ofindependence. In 1950, when theConstitution of India was passed bythe Constituent Assembly, it was notedin the Directives of the Constitutionthat the government should providefree and compulsory educationfor all children up to the age of14 years within 10 years from thecommencement of the Constitution.Had we achieved this, we would havecent per cent literacy by now.

Gender Equity — Better than Before:The differences in literacy ratesbetween males and females arenarrowing signifying a positivedevelopment in gender equity; still theneed to promote education for womenin India is imminent for variousreasons such as improving economicindependence and social status ofwomen and also because womeneducation makes a favourable impacton fertility rate and health care ofwomen and children. Therefore, wecannot be complacent about the

upward movement in the literacy ratesand we have miles to go in achievingcent per cent adult literacy.

Higher Education — a Few Takers:The Indian education pyramid issteep indicating lesser and lessernumber of people reaching the highereducation level. Moreover, the level ofunemployment among educatedyouth is the highest. As per NSSO data,in 2000, the unemployment rate ofeducated youth (Secondary Educationand above) was 7.1 per cent andunemployment of people with up toprimary education was only 1.2 percent. Therefore, the government shouldincrease allocation for higher educationand also improve the standard ofhigher education institutions, so thatstudents are imparted employableskills in such institutions.

5.8 CONCLUSION

The economic and social benefits ofhuman capital formation and humandevelopment are well known. Theunion and state governments in Indiahave been earmarking substantialfinancial outlays for development ofeducation and health sectors. Thespread of education and healthservices across different sectors ofsociety should be ensured so as tosimultaneously attain economicgrowth and equity. India has a richstock of scientific and technicalmanpower in the world. The need ofthe hour is to better it qualitatively andprovide such conditions so that theyare utilised in our own country. Fig. 5.7 Higher Education: few takers


1. What are the two major sources of human capital in a country?

2. What are the indicators of educational achievement in a country?

3. Why do we observe regional differences in educational attainmentin India?

4. Bring out the differences between human capital and humandevelopment.

5. How is human development a broader term as compared to humancapital?

6. What factors contribute to human capital formation?

Recap

Investments in education convert human beings into human capital; humancapital represents enhanced labour productivity, which is an acquired abilityand an outcome of deliberate investment decisions with an expectation thatit will increase future income sources.

Investments in education, on-the-job training, health, migration andinformation are the sources of human capital formation.

The concept of physical capital is the base for conceptualising human capital.There are some similarities as well as dissimilarities between the two formsof capital formation.

Investment in human capital formation is considered as efficient and growthenhancing.

Human development is based on the idea that education and health areintegral to human well-being because only when people have the ability toread and write and the ability to lead a long and healthy life, will they beable to make other choices which they value.

The percentage of ‘education expenditure of total government expenditure’indicates the importance of education in the scheme of things before thegovernment.

EXERCISES


7. Mention two government organisations each that regulate the healthand education sectors.

8. Education is considered an important input for the development ofa nation. How?

9. Discuss the following as a sources of human capital formation

(i) Health infrastructure

(ii) Expenditure on migration.

10. Establish the need for acquiring information relating to health andeducation expenditure for the effective utilisation of humanresources.

11. How does investment in human capital contribute to growth?

12. ‘There is a downward trend in inequality world-wide with a rise inthe average education levels’. Comment.

13. Examine the role of education in the economic development of anation.

14. Explain how investment in education stimulates economic growth.

15. Bring out the need for on-the-job-training for a person.

16. Trace the relationship between human capital and economic growth.

17. Discuss the need for promoting women’s education in India.

18. Argue in favour of the need for different forms of governmentintervention in education and health sectors.

19. What are the main problems of human capital formation in India?

20. In your view, is it essential for the government to regulate the feestructure in education and health care institutions? If so, why?

1. Identify how Human Development Index is calculated. What is theposition of India in the World Human Development Index?

2. Is India going to be a knowledge based economy in the near future?Discuss in the classroom.

3. Interpret the data given in Table 5.2.

4. As an educated person, what will be your contribution to the causeof education? (Example ‘Each one — teach one’).



5. Enlist the various sources that provide information regardingeducation, health and labour.

6. Read the annual reports of Union Ministries of Human ResourceDevelopment and Health and make summaries. Read the chapteron social sector in the Economic Survey .

Books

BECKER, GARY S. 1964. Human Capital. 2nd Edition, Columbia UniversityPress, New York.

FREEMAN, RICHARD. 1976. The Overeducated American. Academic Press, NewYork.

Government Reports

Education in India, Ministry of Human Resource Development, Governmentof India (for recent years) for various years.

Annual Reports, Ministry of Human Resource Development, Governmentof India.

Websites

www.education.nic.inwww.cbse.nic.inwww.ugc.ac.inwww.aicte.ernet.inwww.ncert.nic.inwww.finmin.nic.in

REFERENCES

Indian Economics

Documents

Transcript of Indian Economics