UNIT - IV

NATIONAL INCOME
OBJECTIVES

National income is an important macro-economic aggregate. With certain qualifications,

it can be taken as an indicator of economic growth, economic development and economic
welfare. In view of its importance, a wrong or a biased estimation of national income can
have far reaching consequences. Therefore, we will devote a major part of this unit
discussing the methods to measure national income of an economy.
National income can be defined as the monetary aggregate of the current achievements of
an economy, without any double counting. It is estimated, usually for one year. Therefore, it
is net monetary value of all the goods and services produced by the constituents of a
national economy over a period of one year.
Methods to Measure National Income
There are three methods to measure national income of an economy. These are:
1)production method or value added method,
2)income method, and
3)expenditure method.
Each of these methods corresponds to a flow taking place in the economy. These three
methods are, in fact, three ways of looking at the same variable, national income. The
statistical data and tools to measure national income by each of the three methods may be
different but conceptually each of these will give the same result. If the different methods
do not give us the same estimate of national income, it will be primarily because of lack of
relevant statistical data required to measure national income.
Production Method
Basically, three steps are involved in applying the production method to compute the
national income of an economy. These steps are:
1)to identify the producing enterprises and to classify them into industrial sectors according
to their activities
2)to estimate net value added at factor cost of each producing enterprise within the domestic
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territory of an economy and to add up net value added by all the sectors to arrive at net
domestic product at factor cost
3) to estimate net factor income from abroad, which has to be added to net domestic
product at factor cost to arrive at net national product at factor cost/ national income of an
economy.
Classification of Industrial sectors
Broadly speaking, the industrial sectors are divided into three categories:
a)Primary Sector,
b)Secondary Sector, and
c)Tertiary or Services Sector.
Primary Sector: It includes agriculture and allied activities of forestry, fishing, mining and
quarrying. This sector produces commodities by exploiting natural resources like coal, iron
ore and other minerals. In India the primary sector is divided into: (i) agriculture, (ii)
forestry and logging, (iii) fishing, and (iv) mining and quarrying.
Secondary Sector: It consists of the manufacturing sector. In India, the secondary sector is
divided into: (i) registered manufacturing, (ii) unregistered manufacturing,
(iii) construction, (iv) electricity, gas and water supply.
Tertiary Sector: It consists of the services. In India this sector comprises: (i) railways, (ii)
transport by other means and storage, (iii) communications, (iv) trade, hotels and
restaurants, (v) banking and insurance, (vi) real estate, ownership of dwellings and business
services, (vii) public administration and defence and (viii) other services.
Income Method
Net value added at factor cost of a producing unit is identical to the sum of factor incomes -
compensation of employees and operating surplus or mixed income of the self-employed
entrepreneurs. So, we can sum up compensation of employees and operating surplus or
mixed income of the self-employed to estimate national increase. If factor incomes
generated by all the producing units within the domestic territory of an economy are added
up, net domestic product at factor cost is arrived at. Further, if net factor income from
abroad is added to net domestic product at factor cost of an economy, net national product

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at factor cost or national income of an economy can be estimated.
Given net national product at factor cost if the depreciation provision is added to it, gross
national product at factor cost is arrived at. If net indirect taxes are added to gross national
product at factor cost, gross national product at market price can be calculated.
The main steps involved in estimating national income by the income method are:
1)to identify the producing enterprises, which use services of the factors of production
2)to classify various types of factor payments
3)to estimate various components of factor payments
4) to estimate net factor income from abroad, which has to be added to net domestic
product at factor cost to arrive at net national product at factor cost or national income of an
economy.
Expenditure Method
Income generated in the process of production is received by factors of production. Such
income can be divided into two parts viz., (a) income from work and (b) income from
ownership of capital and entrepreneurship. Incomes from work are enjoyed by the workers
while those of ownership of entrepreneurship are enjoyed by their owners. The income
earned by factors of production is either saving. Savings generated, in turn, are used for
adding to the capital stock or what is called investment. If the final consumption and gross
investment expenditure of all economic agents including the rest of the world are added up,
this gives us the gross domestic product at market price for an economy. From the GDP at
market price, we deduct depreciation provision and net indirect taxes to get net domestic
product at factor cost. Add net factor income from abroad to net domestic product at factor
cost to get net national product at factor cost (or national income) of an economy.
Measurement of National Income
There are three methods to measure national income:

Methods to Measure National Income

S.No Measurement Method
1. Income Method

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2. Production (Value-Added) Method
3. Expenditure Method
Measurement of National Income – Income Method
Estimated by adding all the factors of production (rent, wages, interest, profit) and the
mixed-income of self-employed.

In India, one-third of people are self-employed.

This is the ‘domestic’ income, related to the production within the borders of the country
Measurement of National Income – Production Method
Estimated by adding the value added by all the firms.

Value-added = Value of Output – Value of (non-factor) inputs

This gives GDP at Market Price (MP) – because it includes depreciation (therefore ‘gross’)
and taxes (therefore ‘market price’)
To reach National Income (that is, NNP at FC)
Add Net Factor Income from Abroad: GNP at MP = GDP at MP + NFIA
Subtract Depreciation: NNP at MP = GNP at MP – Dep
Subtract Net Indirect Taxes: NNP at FC = NNP at MP – NIT
Measurement of National Income – Expenditure Method
The expenditure method to measure national income can be understood by the equation
given below:

Y = C + I + G + (X-M),

where Y = GDP at MP, C = Private Sector’s Expenditure on final consumer goods, G =

Govt’s expenditure on final consumer goods, I = Investment or Capital Formation, X =
Exports, I = Imports, X-M = Net Exports

Any of these methods can be used in any of the sectors – the choice of the method depends

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on the convenience of using that method in a particular sector.
Economic Indicators:
An economic indicator is a metric used to assess, measure, and evaluate the overall state of
health of the macroeconomy. Economic indicators are often collected by a government
agency or private business intelligence organization in the form of a census or survey,
which is then analyzed further to generate an economic indicator.
Which is the Primary Economic Indicator?
Gross Domestic Product (GDP)
The Gross Domestic Product (GDP) is widely accepted as the primary indicator of
macroeconomic performance. The GDP, as an absolute value, shows the overall size of an
economy, while changes in the GDP, often measured as real growth in GDP, show the
overall health of the economy.
The GDP consists of four components, namely:
Consumption
Investment
Government Expenditure
Net Exports
So far, the only country to not use GDP as an economic measure is the Kingdom of Bhutan,
which uses the Gross National Happiness index as an alternative.
What are Other Economic Indicators?
Purchasing Manager’s Index (PMI)
In the US, one of the most followed economic indicators is the Institute of Supply
Management’s Purchasing Manager’s Index or PMI for short. The ISM’s PMI is a survey
sent to businesses that span across all North American Industry Classification System
(NAICS) categories to collect information on production levels, new orders, inventories,
deliveries, backlog, and employment. The information collected can be used to forecast the
overall business confidence within the economy and helps determine if it shows an
expansionary or contractionary outlook.
One of the reasons why PMI is one of the most followed economic indicators is because of

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its strong correlation with GDP while being one of the first economic indicators to be
released monthly. The component GDP that the PMI most closely relates to is the
Investment component.
Business Cycle?

A business cycle is a cycle of fluctuations in the Gross Domestic Product (GDP) around its
long-term natural growth rate. It explains the expansion and contraction in economic
activity that an economy experiences over time.A business cycle is completed when it goes
through a single boom and a single contraction in sequence. The time period to complete
this sequence is called the length of the business cycle.

A boom is characterized by a period of rapid economic growth, whereas a period of

relatively stagnated economic growth is a recession. These are measured in terms of the
growth of the real GDP, which is inflation-adjusted.

Stages of the Business Cycle

In the diagram above, the straight line in the middle is the steady growth line. The business
cycle moves about the line. Below is a more detailed description of each stage in the
business cycle:

1. Expansion

The first stage in the business cycle is expansion. In this stage, there is an increase in
positive economic indicators such as employment, income, output, wages, profits, demand,
and supply of goods and services. Debtors are generally paying their debts on time, the
velocity of the money supply is high, and investment is high. This process continues as long
as economic conditions are favorable for expansion.

2. Peak

The economy then reaches a saturation point, or peak, which is the second stage of the
business cycle. The maximum limit of growth is attained. The economic indicators do not
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grow further and are at their highest. Prices are at their peak. This stage marks the reversal
point in the trend of economic growth. Consumers tend to restructure their budgets at this
point.

3. Recession

The recession is the stage that follows the peak phase. The demand for goods and services
starts declining rapidly and steadily in this phase. Producers do not notice the decrease in
demand instantly and go on producing, which creates a situation of excess supply in the
market. Prices tend to fall. All positive economic indicators such as income, output, wages,
etc., consequently start to fall.

4. Depression

There is a commensurate rise in unemployment. The growth in the economy continues to

decline, and as this falls below the steady growth line, the stage is called a depression.

5. Trough

In the depression stage, the economy’s growth rate becomes negative. There is further
decline until the prices of factors, as well as the demand and supply of goods and
services, contract to reach their lowest point. The economy eventually reaches the trough. It
is the negative saturation point for an economy. There is extensive depletion of national
income and expenditure.

6. Recovery

After the trough, the economy moves to the stage of recovery. In this phase, there is a
turnaround in the economy, and it begins to recover from the negative growth rate. Demand
starts to pick up due to low prices and, consequently, supply begins to increase. The
population develops a positive attitude towards investment and employment and production
starts increasing.

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Employment begins to rise and, due to accumulated cash balances with the bankers, lending
also shows positive signals. In this phase, depreciated capital is replaced, leading to new
investments in the production process. Recovery continues until the economy returns to
steady growth levels.

This completes one full business cycle of boom and contraction. The extreme points are the
peak and the trough.

Explanations by Economists

John Keynes explains the occurrence of business cycles is a result of fluctuations in

aggregate demand, which bring the economy to short-term equilibriums that are different
from a full-employment equilibrium.
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Keynesian models do not necessarily indicate periodic business cycles but imply cyclical
responses to shocks via multipliers. The extent of these fluctuations depends on the levels
of investment, for that determines the level of aggregate output.

In contrast, economists like Finn E. Kydland and Edward C. Prescott, who are associated
with the Chicago School of Economics, challenge the Keynesian theories. They consider
the fluctuations in the growth of an economy not to be a result of monetary shocks, but a
result of technology shocks, such as innovation.

What is Unemployment?

Unemployment is a situation when a person actively searches for a job and is unable to find
work. Unemployment indicates the health of the economy. The unemployment rate is the
most frequent measure of unemployment. The unemployment rate is the number of people
unemployed divided by the working population or people working under labour force.

Unemployment rate = (Unemployed Workers / Total labour force) × 100

National Sample Survey Organization (NSSO) defines employment and unemployment on

the following activity statuses of an individual. NSSO, an organization under MoSPI –
Ministry of Statistics and Programme Implementation measures India’s unemployment on
three approaches:

Daily Status Approach: unemployment status of a person under this approach is measured
for each day in a reference week. A person having no gainful work even for one hour in a
day is described as unemployed for that day.

Weekly Status Approach: This approach highlights the record of those persons who did not
have gainful work or were unemployed even for an hour on any day of the week preceding
the date of the survey.

Usual Status Approach: This gives the estimates of those persons who were unemployed or
had no gainful work for a major time during the 365 days.
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Types of Unemployment in India

In India, there are seven types of unemployment. The types of unemployment are discussed
below:

Disguised Unemployment: This is a type of unemployment where people employed are

more than actually needed. Disguised unemployment is generally traced in unorganised
sectors or the agricultural sectors.

Structural Unemployment: This unemployment arises when there is a mismatch between

the worker’s skills and availability of jobs in the market. Many people in India do not get
job matching to their skills or due to lack of required skills they do not get jobs and because
of poor education level, it becomes important to provide them related training.

Seasonal Unemployment: That situation of unemployment when people do not have work
during certain seasons of the year such as labourers in India rarely have occupation
throughout the year.

Vulnerable Unemployment: People are deemed unemployed under this unemployment.

People are employed but informally i.e. without proper job contracts and thus records of
their work are never maintained. It is one of the main types of unemployment in India.

Technological Unemployment: the situation when people lose their jobs due to
advancement in technologies. In 2016, the data of the World Bank predicted that the
proportion of jobs threatened by automation in India is 69% year-on-year.

Cyclical Unemployment: unemployment caused due to the business cycle, where the
number of unemployed heads rises during recessions and declines with the growth of the
economy. Cyclical unemployment figures in India are negligible.

Frictional Unemployment: this is a situation when people are unemployed for a short span
of time while searching for a new job or switching between jobs. Frictional Unemployment
also called Search Unemployment, is the time lag between the jobs. Frictional
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unemployment is considered as voluntary unemployment because the reason for
unemployment is not a shortage of jobs, but in fact, the workers themselves quit their jobs
in search of better opportunities.

Labour Sector in India – An Labour Reforms – Labour Codes PMEGP – P

Overview of Classification Explained Employment Genera

Pradhan Mantri Shram Yogi Deen Dayal Upadhyaya Grameen Pradhan Mantri
Maan Dhan (PM-SYM Kaushalya Yojana Yojana

Public Sector in India – Role of Inclusive Growth, Government Schemes World Employment
PSUs Report 2022

Poverty Alleviation- Economic Planning In India Mission Solar Chark

Programmes And Policies

National Pension Scheme (NPS) Economic Empowerment of Weaker Make in India

Sections

SANKALP and STRIVE Nai Roshni Scheme Lok Sabha passed

Schemes Employment Guaran

Causes of Unemployment

The major causes of unemployment in India are as mentioned below:

1. Large population.

2. Lack of vocational skills or low educational levels of the working population.

3. Labour-intensive sectors suffering from the slowdown in private investment particularly

after demonetisation

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4. The low productivity in the agriculture sector plus the lack of alternative opportunities
for agricultural workers that makes transition among the three sectors difficult.

5. Legal complexities, Inadequate state support, low infrastructural, financial and market
linkages to small businesses making such enterprises unviable with cost and compliance
overruns.

6. Inadequate growth of infrastructure and low investments in the manufacturing sector,

hence restricting the employment potential of the secondary sector.

7. The huge workforce of the country is associated with the informal sector because of a
lack of required education or skills, and this data is not captured in employment
statistics.

8. The main cause of structural unemployment is the education provided in schools and
colleges are not as per the current requirements of the industries.

9. Regressive social norms that deter women from taking/continuing employment.

INTRODUCTION
The total major countries of the world are 182 out of which only 34 are developed and
remaining 148 are under developed. Developing Country (DC) is a nation which, compare to
developed nations, lacks industrialization, infrastructure, developed agriculture developed
natural resources, and suffers from a low per capita income as a result.

Developed Country: A group of industrialized nations including Australia, Austria, Canada,

France, Germany, Italy, Japan, UK and USA. In some contexts such countries are collectively
called the North.

According to Kofi Annan, former Secretary General of the UN:"A developed country is one
that allows all its citizens to enjoy a free and healthy life in a safe environment."

Developing countries and developed countries are differentiating on the bases of self-esteem,
freedom of choice and influence of externals. A country where the average income of the

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people is much lower than that of developed countries, the economy depends upon a few export
crops and where farming is conducted by primary methods is called developing country. Rapid
population growth is causing the shortage of food in many developing countries.

Developing Country: Developing countries are also called under-developed nations (UDN) or
the South. Most of them are in Africa, Asia and Latin America.

According to United Nations Experts: “A developing country is that in which per capita
income is low when compared to the per capita incomes of USA, Canada, Australia and
Western Europe.”

According to Prof. R. Nurkse: “Under developed countries are those which when compared
with the advanced countries, are under-equipped with capital in relation to their population and
natural resources.”

According to Michal P. Tadaro: “The under developed country, is that which has low levels of
living (absolute poverty, poor health, poor education and other social services), low self-
esteem (low respect, honour, dignity) and limited freedom (freedom from external influence
and dominance, freedom of choice etc.).”

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FACTORS INFLUENCING ECONOMIC GROWTH

1. Human resources: this is a major factor that is responsible for boosting the economic
growth of a country. The rate of increase in the skills and capabilities of a workforce
ultimately increases the economic growth of a country.

2. Infrastructure development: Improvements and increased investment in physical capital

such as roadways, machinery, and factories will increase the efficiency of economic output
by reducing the cost.

3. Planned utilization of natural resources: Proper use of available natural resources like
mineral deposits helps boost the productivity of the economy.

4. Population growth: An increase in the growth of the population will result in the
availability of more human resources which in turn will increase the output in terms of
quantity. This is also an important factor that influences economic growth.

5. Advancement in technology: Improvement in technology will affect the economic growth

of a country positively. The application of advanced technology will result in increased
productivity of labor and economic growth will advance at a lower cost.

ECONOMIC DEVELOPMENT
The term economic development can be explained as the process by which the economic well-
being and quality of life of a nation, community, or particular region are improved according to
predefined goals and objectives. Economic development is a combination of market
productivity and the welfare values of the nation.

FACTORS AFFECTING ECONOMIC DEVELOPMENT

1. Infrastructural improvement: Development in the infrastructure improves the quality of
life of people. Therefore, an increase in the rate of infrastructural development will result in
the economic development of a nation.
2. Education: Improvement in literacy and technical knowledge will result in a better
understanding of the usage of different equipment. This will increase labor productivity and
in turn, will result in the economic development of a nation.

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 3. Increase in the capital: Increase in capital formation will result in more productive output
in an economy and this will affect the economic development positively.

DEVELOPED COUNTRY: A group of industrialized nations including Australia, Austria,

Canada, France, Germany, Italy, Japan, UK and USA. In some contexts such countries are
collectively called the North.

DEVELOPING COUNTRY: Developing countries are also called under-developed nations

(UDN) or the South. Most of them are in Africa, Asia and Latin America.

The total major countries of the world are 182 out of which only 34 are developed and
remaining 148 are under developed.

The World Bank classifies countries into four groups, based on Gross National Income per
capita, re-set each year on July 1. In 2019, the four categories in US dollars were:

⚫ Low income countries: $1,035 or less.

⚫ Lower middle income countries: $1,036 to $4,045.

⚫ Upper middle income countries: $4,046 to $12,535.

⚫ High income countries: $12,535 or more

CHARACTERISTICS OR FEATURES OF THE INDIAN ECONOMY

(i) General Poverty and Low Living Standard : Poverty cannot be described, it can only be
felt. The most of the less developed countries (LDC) are facing the major problem of general
as well as absolute poverty and low standard of living. Most of the people in developing
nations are ill-fed, ill-housed, ill-clothed and illliterate. In LDCs almost 1/3 population is
much poor.
(ii) Burden of Internal and External Debts: Under developed countries (UDC) are loans
and grants receiving nations. Most of the developing countries of the world are depending on
foreign economic loans. An amount of foreign loans is increasing as the years pass. Their
foreign trade and political structure is also dependent on the guidance of foreigners.
(iii) Low Per Capita Income: Due to low national income and huge population growth rate,
per capita income in developing countries is very low.

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(iv) Over Dependence on Agriculture: Most of population is living in more than 50,000
villages. Backward agriculture is the major occupation of the population. Agriculture sector is
backward due to old and traditional methods of cultivation, in-efficient farmers, lack of credit
facilities; un-organized agriculture market etc.
(v) Backward Industrial Sector: Backward industrial sector is an additional feature of
under developed countries.
(vi) Unemployment: An outstanding problem of developing countries is their high rate of
un-employment, under- employment and disguised-unemployment.
(vii) Low level of Productivity: The productivity level is very low in under developed
countries as compared to developed countries. Low level of productivity is due to economic
backwardness of people, lack of skill, illiteracy and ill-training.
(viii) Deficit Balance of Payment: Third world countries have to import some finished and
capital goods to make economic development, on the other hand they have no products to
export but raw material.

(ix) Dualistic Economy: Dualistic economy refers to the existence of advanced & modern
sectors with traditional & backward sectors. Co-existence of modern and traditional methods
of production in urban and rural areas, Co-existence of wealthy, highly educated class with a
large number of illiterate poor classes and Co-existence of very high living standard with
very low living standard.

(x) Deficiency of Capital: Shortage of capital is another serious problem of poor nations.
Lack of capital leads to low per capita income, less saving and short investment.

(xi) In-appropriate Use of Natural Resources: Mostly there is shortage of natural resources
in developing nations and this is also a cause of their economic backwardness. Natural
resources are available in various poor countries but they remain un-utilized, under-utilized
or mis-utilized due to capital shortage, less efficiency of labour, lack of skill and knowledge,
backward state of technology, improper government actions and limited home market.

(xii) Market Imperfection: Market is imperfect in accordance with market conditions, rules
and regulations in the most of developing nations. There exist monopolies, mis-leading
information, immobility of factors; hoarding and smuggling etc. that cause the market to
remain imperfect.

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 (xiii) Limited Foreign Trade: Due to backwardness, developing countries have to export
raw material because the quality of their products is not according to international standard
ISO etc. Lower developing nations have to import finished and capital goods.

(xiv) Vicious Circle of Poverty: According to vicious circle of poverty, less developed
nations are trapped by their own poverty. Vicious circle of poverty is also applied in case of
Pakistani economy. Due to poverty, national income is low which causes low saving and low
investment. So, rate of capital formation is very low.

(xv) Inflation: High rate of inflation causes economic backwardness in poor nations. Due to
high level of price, purchasing power, value of money and saving of the consumers tend to
decrease.

INDICATOR/DETERMINANTS OF ECONOMIC DEVELOPMENT

A. Economic Factors:

1. Population and Manpower Resources: Population is considered as an important

determinant of economic growth. In this respect population is working both as a stimulant
and hurdles to economic growth. Firstly, population provides labour and entrepreneurship as
an important factor service.

2. Natural Resources and Its Utilization: Availability of natural resources and its proper
utilization are considered as an important determinant of economic development. If the
countries are rich in natural resources and adopted modern technology for its utilization, then
they can attain higher level of development at a quicker pace. Mere possession of natural
resources cannot work as a determinant of economic development.

3. Capital Formation and Capital Accumulation: Capital formation and capital

accumulation are playing an important role in the process of economic development of the
country. Here capital means the stock of physical reproducible factors required for
production. The increase in the volume of capital formation leads to capital accumulation.

4. Capital-Output Ratio: Capital-output ratio is also considered as an important determinant

of economic development in n country. By capital-output ratio we mean number of units of
capital required to produce per unit of output. It also refers to productivity of capital of
different sectors at a definite point of time. But the capital output ratio in a country is also

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determined by stage of economic development reached and the judicial mix of investment
pattern.

5. Favourable Investment Pattern: Favourable investment pattern is an important

determinant of economic development in a country. This requires proper selection of
industries as per investment priorities and choice of production techniques so as to realize a
low capital—output ratio and also for achieving maximum productivity.

6. Occupational Structure: Another determinant of economic development is the

occupational structure of the working population of the country. Too much dependence on
agricultural sector is not an encouraging situation for economic development.

7. Extent of the Market: Extent of the market is also considered as an important determinant
of economic development. Expansion of the scale of production and its diversification
depend very much on the size of the market prevailing in the country.

8. Technological Advancement: Technological advancement is considered as an important

determinant of economic environment. By technological advancement we mean improved
technical know-how and its broad-based applications.

9. Infrastructural Facilities: Development of infrastructural facilities is also an important

component of economic environment in a country like India.

10. Suitable Industrial Relations: Suitable industrial relations are also an important
determinant economic development in a country like India. Healthy trade union activities and
cordial relations between employer and employee promote such economic environment for
development.

B. Non-Economic Factors:
1. Urge for Development: It is the mental urge for development of the people in general that
is playing an important determinant for initiating and accelerating the process of economic
development. In order to attain economic progress, people must be ready to bear both the
sufferings and convenience. Experimental outlook, necessary for economic environment must
grow with the spread of education.
2. Spread of Education: Economic progress is very much associated with the spread of
education. Prof. Krause has observed that, “Education brings revolutions in ideas for
economic progress.”

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 3. Changes in Social and Institutional Factors: Conservative and rigid social and
institutional set up like joint family system, caste system, traditional values of life, irrational
behaviour etc. put severe obstacle on the path of economic development and also retards its
pace.
4. Proper Maintenance of Law and Order: Maintenance of law and order in a proper
manner also helps the country to attain economic development at a quicker pace. Stability,
peace, protection from external aggression and legal protection generally raises morality,
initiative and entrepreneurship. Formulation of proper monetary and fiscal policy by an
efficient government can provide necessary climate for increased investment and also can
stimulate capital formation in the country.
5. Administrative Efficiency: Economic development of a country also demands existence
of a strong, honest, efficient and competent administrative machinery for the successful
implementation of government policies and programmes for development. The existence of a
weak, corrupt and inefficient administrative machinery, leads the country into chaos and
disorder.
6. Cultural Set Up: Sound cultural set up also build up a better non-economic environment
which are conducive towards economic development. Cultural activities improve the mental
set up of the people in general and develop simultaneously a sense of bond-ness among
various sections of people living in the society.
7. Politico-Legal Environment: The politico-legal environment of the country is also an
important determinant of economic development. Political stability and legal support for
developmental activities creates a better environment for development. Reforms in the form
of industrial policy reforms, labour reforms etc. should be enacted through proper legislation.

DIFFERENCES BETWEEN ECONOMIC DEVELOPMENT AND GROWTH

The basis of Economic Development Economic Growth

Comparison

Concept Economic development is a much broader Economic Growth is a narrower

concept than economic growth. concept than economic
Economic development = Economic development.
Growth + Standard of Living

Scope Economic Development is considered as Economic Growth is considered

a Multidimensional phenomenon because as a single dimensional in nature
it focuses on the income of the people and as it only focuses on the income

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 on the improvement of the living of the people of the country.
standards of the people of the country.

Term Long-term process Short term process

Measurement Both Qualitative & Quantitative Terms: Quantitative Terms:

HDI (Human Development Index), Increases in real GDP.
gender-related index, Human poverty
index, infant mortality, literacy rate etc.

Related To Economic Development is related to Economic Growth is related to

Underdeveloped and developing countries developed countries of the world.
of the world.

Effect Qualitative and Quantitative Impact on Brings a quantitative impact on

the economy. Improvement in life the economy. Increase in the
expectancy rate, infant, literacy rate, indicators like per capita income
poverty rates, and mortality rate. and GDP, etc.

Process Tenor Continuous process In a certain period

POVERTY

Poverty: According to the World Bank, Poverty is pronounced deprivation in well-being

and comprises many dimensions. It includes low incomes and the inability to acquire the
basic goods and services necessary for survival with dignity.

Absolute poverty is when household income is below a certain level, which makes it
impossible for the person or family to meet basic needs of life including food, shelter, safe
drinking water, education, healthcare, etc.

In this state of poverty, even if the country is growing economically it has no effect on people
living below the poverty line. Absolute poverty compares households based on a set income
level and this level varies from country to country depending on its overall economic
conditions.

Relative poverty is when households receive 50% less than average household incomes, so
they do have some money but still not enough money to afford anything above the basics. This
type of poverty is, on the other hand, changeable depending on the economic growth of the
country.

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 Relative poverty is sometimes described as “relative deprivation” because the people falling
under this category are not living in total poverty, but they are not enjoying the same standard
of life as everyone else in the country. It can be TV, internet, clean clothes, a safe home (a
healthy environment, free from abuse or neglect), or even education.

Poverty Line: The conventional approach to measuring poverty is to specify a minimum

expenditure (or income) required to purchase a basket of goods and services necessary to
satisfy basic human needs and this minimum expenditure is called the poverty line.

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

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

Poor can be classified into four sub-groups:

(i) The destitute (who spent less than Rs. 137 a month at 1993-94 prices),

(ii) Extremely poor (who spent less than Rs. 161 a month),

(iii) Very poor (who spent less than Rs. 201 a month), and

(iv) The poor (who spent less than Rs. 246 a month).

MAIN CAUSES/REASONS FOR POVERTY IN INDIA

1. Increase rate of rising population: In the last 45 years, the population has increased at
the whopping rate of 2.2% per annum. Averages of approx. 17 million people are added
every year to the population which raises the demand for consumption goods considerably.

2. Less productivity in agriculture: In agriculture, the productivity level is very low due to
subdivided and fragmented holdings, lack of capital, use of traditional methods of cultivation,
illiteracy etc. The very reason for poverty in the country is this factor only.

3. Less utilization of resources: Underemployment and veiled unemployment of human

resources and less utilization of resources have resulted in low production in the agricultural
sector. This brought a downfall in their standard of living.

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 4. A short rate of economic development: In India, the rate of economic development is
very low what is required for a good level. Therefore, there persists a gap between the level
of availability and requirements of goods and services. The net result is poverty.

5. Increasing price rise: Poor is becoming poorer because of continuous and steep price rise.
It has benefited a few people in the society and the persons in lower income group find it
difficult to get their minimum needs.

6. Unemployment: One of the mail causes of poverty is the continuous expanding army of
unemployed in our country. The job seeker is increasing in number at a higher rate than the
expansion in employment opportunities.

7. Shortage of capital and able entrepreneurship: The much-required capital and

sustainable entrepreneurship play a very important role in accelerating the growth. But these
are in short supply making it difficult to increase production significantly.

8. Social factors: Our country’s social set up is very much backward with the rest of the
world and not at all beneficial for faster development. The caste system, inheritance law,
rigid traditions and customs are putting hindrances in the way of faster development and have
aggravated the problem of poverty.

9. Political factors: We all know that the East India Company started lopsided development
in India and had reduced our economy to a colonial state. They exploited the natural
resources to suit their interests and weaken the industrial base of Indian economy. The
development plans have been guided by political interests from the very beginning of our
independence.

10. Unequal distribution of income: If you simply increase the production or do a checking
on population cannot help poverty in our country. We need to understand that inequality in
the distribution of income and concentration of wealth should be checked. The government
can reduce inequality of income and check the concentration of wealth by pursuing suitable
monetary and price policies.

INEQUALITY OF INCOME IN INDIA

Income inequality is the gap between rich and poor i.e. is the differences in the distribution of
economic assets (wealth) and income within or between populations or individuals. It is the
state of an economy in which the shares of total income earned by the rich and poor are highly
unequal.

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 Economic inequality varies between societies, historical periods, economic structures and systems (for example, capitalism or socialism),
ongoing and past wars, and between individuals' abilities to create wealth. It can refer to cross sectional descriptions of the income or wealth
at any particular period, and to the lifetime income and wealth over longer periods of time There are various numerical indices for measuring
economic inequality.

Causes of Income inequality in India

1. Growth factor: As development proceeds, the earnings of different groups rise differently. The incomes of the upper-income and
middle-income groups rise more rapidly than those of the poor, during the early stages of growth through which India is passing at present
shift of population from agriculture which is a slow growing sector to the modern large industrial sector which grows more rapidly.

2. Highly unequal assets distribution: Incomes are derived from two main sources, namely, assets like land, cattle, shares, etc., and labour.
In India a few own a large chunk of income – earning assets. Some others, who do not own, or own a part of the assets they operate,
organize finances through banks, cooperatives, etc, and acquire/hire productive assets. These inequalities enable the few to get incomes in
the form of rent, interest and profit.

3. Differential Regional Growth: Of the large many at the bottom rung of incomes, a very great proportion lives in the poor backward
states regions, and most of the few at the top live in the high- income states regions. This is the geographical facet of income inequalities for
the country as a whole. Within the states also there are inequalities, perhaps larger in the poorer states. Both these aspects are the outcome of
the different growth rates of the states, with a few having grown at a fast rate, and many having lagged behind.

4. Inadequate employment Generation: People at the bottom could raise their economic status and to an extent reduce the distance
separating them from those at the top, if they could get work. In other words, if they did not possess adequate earning assets, they could at
least earn from their labour.