Nature of Indian Economy - Introduction, Indian Economy | Indian Economy - B Com PDF Download

Introduction

• India is a country that is still developing and has a mixed economy.
• Some main features of a developing economy include:
  • Overpopulation leading to many people living below the poverty line.
  • Poor infrastructure that affects daily life and economic activities.
  • An agriculture-based economy that relies heavily on farming.
  • A slow rate of capital growth which limits investment and development.
  • Low per capita income, meaning individuals earn less on average.
• Since gaining independence, India has been making progress in various economic areas.
• Despite being in a developing stage, the Indian economy is expected to gradually become a developed nation.
• Important changes in the Indian economy occurred in 1991.

Features of Indian Economy

1) Low per capita income:

• A country is considered underdeveloped if its national and per capita income levels are low.
• According to World Bank data, India’s per capita income in 2005 was just $720, which is quite low compared to many other countries.
• For instance, in 2005, per capita income in Switzerland was almost 76 times higher than in India, while in the United States it was about 61 times higher, in Germany around 48 times higher, and in Japan roughly 54 times higher.
• This large disparity shows that the standard of living for people in India has historically been very low when compared to those in developed nations.
• Over the last forty years, from 1960 to 2005, the gap between India’s per capita income and that of developed countries has increased.
• Although using purchasing power parity (PPP) figures has slightly reduced this gap, it is still significant.
• For example, in 2005, when adjusted for PPP, the per capita Gross National Product (GNP) of the United States was 12 times that of India, whereas at official exchange rates, it was 68 times higher.
• Despite these adjustments, the differences in per capita income remain large and noteworthy.

2) Excessive dependence of agriculture and primary producing

• Indian economy is characterised by too much dependence on agriculture and thus it is primary producing. 
•  Out of the total working population of our country, a very high proportion of it is engaged in agriculture and allied activities, which contributed a large share in the national income of our country. 
•  In 2004, nearly 58 per cent of the total working population of our country was engaged in agriculture and allied activities and was contributing about 21.0 per cent of the total national income. 
•  In most of the countries of Asia, Middle East and Africa, from two-thirds to four-fifths of their total population are solely dependent on agriculture. 
•  In most of the developed countries like U.K., U.S.A. and Japan, the percentage of active population engaged in agriculture ranges between 1 to 5 per cent. 
•  Table 1.4 reveals that in India 58 per cent of its active population is engaged in agriculture but agriculture contributes only about 21 per cent of the national income of our country. 
•  Moreover, low agricultural productivity, lack of modernisation and lack of diversification in its output are some of the basic problems from which our agricultural sector is suffering. 
•  Thus our agricultural sector is overburdened as the majority of our active population is depending on agriculture. 

3. High Rate of Population Growth

• India has been experiencing a very high rate of population growth since 1950. This has created immense pressure due to the large population. The rapid population increase is due to a high birth rate combined with a declining death rate.
• Over the years, the rate of population growth in India has risen from 1.31% annually during 1941-50 to 2.5% annually during 1971-81, then 2.11% annually during 1981-91, and finally to 1.77% during 2001-2011.
• The main reason for this rapid population growth is the significant decline in the death rate, which fell from 49 per thousand during 1911-20 to 7.1 per thousand in 2011. Meanwhile, the birth rate has decreased from 49 per thousand during 1911-20 to 21.8 per thousand in 2011.
• However, the development achieved in the country is being outpaced by the increasing population. The high rate of population growth requires an even higher rate of economic growth just to maintain the same standard of living. This places a greater economic burden on the country, as the rapidly growing population needs more food, clothing, housing, education, and healthcare. Additionally, this fast population growth is also responsible for a rapid increase in the labor force.

4) Presence of Chronic Unemployment and Underemployment:

• The rapid population growth in India, along with the insufficient expansion of secondary and tertiary sectors, has led to chronic unemployment and underemployment.
• Unlike developed countries where unemployment is cyclical, India faces structural unemployment.
• This structural unemployment arises from a lack of capital; Indian industries do not have the necessary capital for expansion to absorb the surplus labor force.
• Additionally, there is an excess of labor in the agricultural sector, where the marginal product of labor has diminished to negligible, zero, or even negative levels.
• This situation has resulted in disguised unemployment within the agricultural sector, caused by the over-reliance on land and the lack of alternative employment opportunities in rural areas.
• In urban areas, the issue of educated unemployment has also become severe.
• Both rural and urban areas in India are grappling with significant unemployment and underemployment issues.
• The Third Five Year Plan highlighted that “Urban and Rural unemployment in fact constitute an indivisible problem.”
• Based on National Sample Survey (NSS) data, the Planning Commission estimated a backlog of around 28 million unemployed individuals by the end of the Seventh Plan in 1990.
• During the period of 1990-95, new entrants to the labor force were estimated to be around 37 million, leading to a total unemployment burden of approximately 65 million during the Eighth Plan, which is a serious concern for the Indian economy.
• The incidence of unemployment, measured on a Current Daily Status (CDS) basis, increased from 7.31 percent of the labor force in 1999-2000 to 8.28 percent in 2004-05.

5. Poor Capital Formation Rate

• Capital deficiency is a key characteristic of the Indian economy.
• Both the per capita capital available and the current rate of capital formation in India are very low.
• Consumption of crude steel and energy are two important indicators of low capital per head in underdeveloped countries like India.
• In 1987, India’s per capita consumption of steel was only 20 kg compared to 582 kg in Japan, 417 kg in the USA, 259 kg in the UK, and 64 kg in China.
• Similarly, in 2003, India’s per capita consumption of electricity was only 594 kWh compared to 14,057 kWh in the USA, 5,943 kWh in the UK, 8,212 kWh in Japan, and 1,440 kWh in China.
• The low level of capital formation in India is also due to the weak inducement to invest and the low propensity and capacity to save.
• According to Colin Clark, India needs at least a 14 percent rate of gross capital formation to maintain its standard of living.
• To achieve higher economic growth and improve living standards, an even higher rate of capital formation is necessary.
• In India, the rate of saving as a percentage of GDP has increased from 14.2 percent in 1965-66 to 30.6 percent in 2013-14, which is relatively high compared to 30 percent in Japan, 23 percent in Germany, 15 percent in the UK, and 17 percent in the USA.
• However, considering the heavy population pressure and the need for self-sustained growth, the current rate of saving is inadequate.
• Therefore, enhancing the rate of capital formation is crucial for India’s economic development.

6. Inequality in the Distribution of Wealth

A significant characteristic of the Indian economy is the unequal distribution of wealth. According to a report by the Reserve Bank of India:

• 20 per cent of households with less than Rs 1000 worth of assets own only 0.7 per cent of the total assets.
• 51 per cent of households with less than Rs 5000 worth of assets possess barely 8 per cent of the total assets.
• The top four per cent of households with assets worth more than Rs 50,000 hold over 31 per cent of the total assets.

This unequal distribution of income stems from the disparity in asset distribution in rural areas. In contrast, the industrial sector experiences a high concentration of assets in the hands of a few large business conglomerates. This indicates a significant concentration of assets among a small number of powerful business houses in the country.

7) Low Level of Technology

• A significant characteristic of a developing economy like India is the prevalence of low-level technology.
• The Indian economy suffers from technological backwardness, with obsolete production techniques being widely used in both the agricultural and industrial sectors.
• The adoption of sophisticated modern technology is limited due to its high cost and the challenges of implementing it in the Indian productive system, which is characterized by untrained and unskilled labor.
• As a result of relying on outdated technology and lower skill levels, productivity in both the agricultural and industrial sectors is very low.
• This low productivity leads to inefficient and insufficient production, contributing to widespread poverty in the country.

8. Under-utilisation of Natural Resources

• India is blessed with abundant natural resources, including land, water, minerals, forests, and power resources. However, these resources are not being used to their full potential due to several challenges. 
•  The country faces issues such as inaccessible regions, primitive extraction techniques, a shortage of capital, and a limited market size, which hinder the effective utilization of these resources. 
•  As a result, a significant quantity of mineral and forest resources remains unexplored and underdeveloped. For instance, until recently, India was only able to harness a small fraction of its hydropower potential. 
•  This under-utilisation reflects the gap between the country’s rich natural endowments and the capacity to exploit them effectively. 

9) Lack of Infrastructure

The Indian economy continues to face serious challenges due to a lack of adequate infrastructural facilities. These facilities are crucial for the overall development and functioning of the economy and include:

• Transportation and Communication: Essential for the movement of goods and people, as well as for the dissemination of information.
• Electricity Generation and Distribution: Necessary for powering industries, businesses, and households.
• Banking and Credit Facilities: Important for financial transactions, savings, and investments.
• Economic Organisation: Refers to the systematic arrangement of economic activities and resources.
• Health and Educational Institutes: Vital for improving the quality of life and enhancing the skills and knowledge of the workforce.

The two critical sectors of the economy, agriculture and industry, have struggled to progress due to the absence of proper infrastructural support. Furthermore, the development potential of various regions in the country remains largely under-utilised because of inadequate infrastructure. This lack of facilities hampers economic growth and development across different areas.

10) Low Standard of Living

• The standard of living for most people in India is considered to be very low.
• A significant portion of the population, estimated between 25 to 40 percent, suffers from malnutrition.
• The average protein intake in India is only about 49 grams per day, which is less than half of what is common in developed countries.
• Additionally, the calorie intake in the Indian diet is also low. In 1996, the average daily calorie intake in India was 2,415 calories, compared to 3,400 calories in developed nations.
• Currently, India’s calorie level is just above the minimum required for survival, estimated at 2,100 calories.
• Access to safe drinking water and adequate housing was limited for a long time, with a significant housing shortage.
• According to the National Building Organisation (NBO), there was a shortage of 31 million housing units in India by the end of March 1991, which increased to around 41 million units by the turn of the century.

11) Poor Quality of Human Capital

• The Indian economy is grappling with the issue of poor-quality human capital.
• At the core of this problem is mass illiteracy, which is hindering the country’s economic growth.
• According to the 2001 census, only 65.3 per cent of India’s population is literate, while the remaining 34.7 per cent is still illiterate.
• In contrast, developed countries like the U.S.A., U.K., Canada, and Australia have illiteracy rates of less than 3 per cent.
• Additionally, the low standard of living in India contributes to the poor health of the general population, further exacerbating the issue of human capital.
• The combination of these factors has led to a significant deficit in the quality of human capital in the country.

12) Insufficient Development of Economic Organisation

• Poor economic organisation is a significant characteristic of the Indian economy.
• To achieve satisfactory economic development, certain institutions are essential.
• For instance, in rural areas, the mobilisation of savings and meeting other financial needs require the development of specific financial institutions.
• However, the development of financial institutions in rural India is still inadequate.
• There is an urgent need to establish credit agencies that can provide loans to small farmers on easy terms, as well as offer medium and long-term loans to industries.
• Additionally, to protect poor tenants from exploitative landlords, proper enforcement of tenancy legislation is necessary.
• All these efforts require the maintenance of an honest and efficient administrative system, which is currently lacking in India.

Quick Facts 

• India’s income is significantly lower than developed nations, with wealth concentrated in a small percentage of households.
• 58% of the workforce relies on agriculture, contributing only 21% to national income, leading to disguised unemployment.
• High population growth increases demand for resources, causing chronic unemployment and underemployment.
• Inadequate transport, electricity, banking, and outdated technology limit industrial and economic growth.
• Inefficient use of resources and high illiteracy (34.7% in 2001) weaken economic progress.

Conclusion

India exhibits characteristics of a developing economy, including low per capita income, high agricultural dependency, and rapid population growth. Challenges such as unemployment, poor infrastructure, and unequal wealth distribution hinder progress. Additionally, issues like low technological advancement and underutilization of natural resources further complicate economic development. To improve living standards, India must enhance human capital, infrastructure, and economic organization while addressing these persistent challenges.