UNIT 2 TREND AND STRUCTURE OF NATIONAL INCOME

Structure 2.0 2.1 2.2 2.3 Objectives Introduction Estimation of National Income in India Trends of National Income in India
2.3.1 Explanation of the Break in Trend 2.3.2 Fluctuations in Growth Rates

2.4

Evaluation of the Performance

2.4.1 Comparison with Our Targets 2.4.2 Comparison with Our Needs 2.4.3 Comparison with Other Countries

2.5 2.6 2.7

Causes of Slow Growth Measures to Promote Growth Structure of National Income

2.7.1 Policy Implications 2.7.2 Limitations of the Services Sector

2.8 2.9 2.10 2.11 2.12

Let Us Sum Up Exercises Key Words Some Useful Books Answers or Hints to Check Your Progress Exercises

2.0

OBJECTIVES

After going through this unit, you shall be able to: state the meaning and significance of national income estimates; identify the long-term trends in Indias national income and per capita income; assess Indias economic growth since 1950-51; find out the causes of relatively slow growth in India; make out a pen-picture of the structure of the Indian economy and how it has been changing all these years; and explain the implications of the changing structure of the economy.

2.1

INTRODUCTION

Each sector of the economy employs natural, human and material resources and contributes to the aggregate flow of goods and services during a given time period which may normally be specified as a year. The aggregate flow of goods and services represents the aggregate income earned by factors of production employed during the year, and is termed as national income or national product. The rate of growth of national income when compared with the rate of growth of population indicates whether the economy is declining, stagnant or developing. It is only when the national income grows at a rate faster than the rate of growth of population that the per capita income depicts a rising trend; the community is able to improve its living standards and add to

17

Framework of Indian Economy

its stock of capital and the economy moves on the path of a rising level of activity and productivity.

2.2

ESTIMATION OF NATIONAL INCOME IN INDIA

In India, the first attempt to estimate national income and per capita income was made in the year 1867-68 by Shri Dadabhai Naoroji. This was followed by several intermittent efforts by individuals, officials as well as non-officials. Immediately after independence, the Government set up the National Income Committee in August, 1949 to prepare a report on national income and related estimates to suggest improvements in the collection of data, and to recommend guidelines for research in the field of national income. The First Report of the Committee was published in 1951, and the Final Report in 1954. The task of preparing national income estimates has been assigned to the Central Statistical Organisation (CSO). The CSO has been producing annual official estimates of national income of India since 1955 and publishing the same in its annual report National Accounts Statistics. It is with the help of these data that we shall try to establish the trend in Indias national income over the last fifty-five years.

2.3 TRENDS OF NATIONAL INCOME IN INDIA

Estimates relating to Indias national income and per capita income are available to us for each of the years beginning 1950-51. These estimates are available to us both at current prices for each of the years, and at constant prices (Base 1993-94) also for each of the years. For the purpose of comparison over a period of time, we generally concentrate on estimates at constant prices. The whole time-series data is given in Table 2.1 below. Table 2.1: Net National Product and Per Capita Income
Net National Product at Factor Cost (Rs. Crore) At Current Prices 2 9142 9634 9474 10341 9628 9776 11706 11928 13299 13916 15204 15960 17029 19491 22814 At 1993-94 Prices 3 132367 135551 139379 148159 154184 158001 166793 163902 176483 179592 192235 197514 200895 210946 226640 Per Capita Net National Product (Rs.) At Current Prices 4 254.7 263.9 254.7 272.8 249.4 248.8 291.9 291.6 318.2 326.7 350.3 359.5 375.1 420.1 481.3 At 1993-94 Prices 5 3687.1 3713.7 3746.8 3909.2 3994.4 4020.4 4159.4 4007.4 4222.1 4215.8 4429.4 4448.5 4425.0 4546.2 4781.4

Year

1 1950-51 1951-52 1952-53 1953-54 1954-55 1955-56 1956-57 1957-58 1958-59 1959-60 1960-61 1961-62 1962-63 1963-64

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1964-65

1965-66 1966-67 1967-68 1968-69 1969-70 1970-71 1971-72 1972-73 1973-74 1974-75 1975-76 1976-77 1977-78 1978-79 1979-80 1980-81 1981-82 1982-83 1983-84 1984-85 1985-86 1986-87 1987-88 1988-89 1989-90 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 (P) 2003-04 (Q)

23752 26918 31745 33421 36742 38968 41340 45392 55896 65432 69005 74242 85151 91094 98631 118236 137388 151716 178121 198794 221401 246064 279400 334302 385729 450145 514607 587064 685912 805981 941861 1093962 1224946 1415093 1564048 1686995 1848229 2008770 2252070

216244 217427 235418 241234 257359 270597 272252 270061 283061 286417 313643 316358 340751 359732 338124 363417 384392 393274 423265 440119 459185 477158 493312 545572 582518 614206 617372 648182 685912 734358 787809 852084 891086 948580 1008114 1050338 1115171 1161902 1266005

489.7 543.8 627.4 645.2 694.6 720.3 746.2 800.6 963.7 1103.4 1136.8 1197.4 1343.1 1405.8 1485.4 1741.3 1985.4 2142.9 2463.6 2690.0 2932.5 3191.5 3545.7 4152.8 4692.6 5365.3 6011.8 6732.4 7689.6 8856.9 10149.4 11564.1 12706.9 14395.7 15624.9 16555.4 17822.8 19040.5 20988.5

4458.6 4392.5 4652.5 4657.0 4865.0 5001.8 4914.3 4763.0 4880.4 4830.0 5167.1 5102.5 5374.6 5551.4 5092.2 5352.2 5554.8 5554.7 5854.3 5955.6 6081.9 6188.8 6260.3 6777.3 7086.6 7320.7 7212.3 7433.3 7689.6 8069.9 8489.3 9007.2 9243.6 9649.8 10071.1 10307.5 10753.8 11013.3 11798.7

Trend and Structure of National Income

P: Provisional estimates. Q: Quick estimates. Source: Central Statistical Organisation.

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Framework of Indian Economy

It would be seen from Table 2.1 that Indias national income (at constant prices) has got multiplied by about 10 times during the period beginning with 1950-51. During the same period, per capita income has been increasing, from Rs. 3,687.1 in 1950-51 to Rs. 11,798.7, i.e., by about 3.5 times. The difference in the growth between the national income and the per capita income is accounted for by the growth in population. However, the fact that the per capita income in the economy has been increasing proves that the rate of growth of national income has been more than the rate of growth of population. Let us work out the rates of growth of national income and per capita income for each of the years beginning 1950-51. The Table 2.2 below shows the rates of growth of Indias national income and per capita income since 1950-51.
Table 2.2: Annual Growth Rate of Net National Product and Per Capita Income Net National Product at Factor Cost At Current Prices 2 5.4 -1.7 9.1 -6.9 1.5 19.7 1.9 11.5 4.6 9.3 5.0 6.7 14.5 17.0 4.1 13.3 17.9 5.3 9.9 6.1 6.1 9.8 23.1 17.1 5.5 7.6 14.7 At 1993-94 Prices 3 2.4 2.8 6.3 4.1 2.5 5.6 -1.7 7.7 1.8 7.0 2.7 1.7 5.0 7.4 -4.6 0.5 8.3 2.5 6.7 5.1 0.6 -0.8 4.8 1.2 9.5 0.9 7.7 Per Capita Net National Product At Current Prices 4 3.6 -3.5 7.1 -8.6 -0.3 17.4 -0.1 9.1 2.7 7.2 2.6 4.4 12.0 14.6 1.8 11.0 15.4 2.8 7.7 3.7 3.6 7.3 20.4 14.5 3.0 5.3 12.2 At 1993-94 Prices 5 0.7 0.9 4.3 2.2 0.7 3.5 -3.7 5.4 -0.1 5.1 0.4 -0.5 2.7 5.2 -6.8 -1.5 5.9 0.1 4.5 2.8 -1.7 -3.1 2.5 -1.0 7.0 -1.2 5.3

Year

1 1951-52 1952-53 1953-54 1954-55 1955-56 1956-57 1957-58 1958-59 1959-60 1960-61 1961-62 1962-63 1963-64 1964-65 1965-66 1966-67 1967-68 1968-69 1969-70 1970-71 1971-72 1972-73 1973-74 1974-75 1975-76 1976-77

20

1977-78

1978-79 1979-80 1980-81 1981-82 1982-83 1983-84 1984-85 1985-86 1986-87 1987-88 1988-89 1989-90 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 (P) 2003-04(Q)

7.0 8.3 19.9 16.2 10.4 17.4 11.6 11.4 11.1 13.5 19.6 15.4 16.7 14.3 14.1 16.8 17.5 16.9 16.1 12.0 15.5 10.5 7.9 9.6 8.7 12.1

5.6 -6.0 7.5 5.8 2.3 7.6 4.0 4.3 3.9 3.4 10.6 6.8 5.4 0.5 5.0 5.8 7.1 7.3 8.2 4.6 6.5 6.3 4.2 6.2 4.2 9.0

4.7 5.7 17.2 14.0 7.9 15.0 9.2 9.0 8.8 11.1 17.1 13.0 14.3 12.0 12.0 14.2 15.2 14.6 13.9 9.9 13.3 8.5 6.0 7.7 6.8 10.2

3.3 -8.3 5.1 3.8 0.0 5.4 1.7 2.1 1.8 1.2 8.3 4.6 3.3 -1.5 3.1 3.4 4.9 5.2 6.1 2.6 4.4 4.4 2.3 4.3 2.4 7.1

Trend and Structure of National Income

P: Provisional estimates. Q: Quick estimates. Source: Central Statistical Organisation.

A cursory glance at Table 2.2 brings out a mixed picture as far as the rate of growth of national income and per capita income are concerned. There have been years when the rate of growth was as high as 10.6 per cent (as in 198889) or 9.0 per cent (as in 2003-04) or 8.3 per cent (as in 1967-68); contrarywise, very many years have also recorded negative growth rates (e.g., -6.0 per cent in 1979-80, -4.6 per cent in 1965-66, -1.7 per cent in 1957-58, -0.8 per cent in 1972-73, etc.). In view of these annual fluctuations, it would be more useful to trace long-term trends, and analyse their features. For this purpose, we can extend our whole analysis to a small period-wise analysis. We can regroup the data given above in the form of plan-wise rate of growth as shown in Table 2.3 below.

21

Framework of Indian Economy

Table 2.3: Average Annual Growth Rates NNP (At Current Prices) First Plan (1951-56) Second Plan (1956-61) Third Plan (1961-66) Three Annual Plans (1966-69) Fourth Plan (1969-74) Fifth Plan (1974-79) Annual Plan (1979-80) Sixth Plan (1980-85) Seventh Plan (1985-90) Two Annual Plans (1990-92) Eighth Plan (1992-97) Ninth Plan (1997-2002) P: Provisional estimates. Q: Quick estimates. Source: Based on data in Table 2.1. 1.5 9.4 9.5 12.2 11.0 10.4 8.3 15.1 14.2 15.5 16.3 11.1 NNP (At 1993-94 Prices) 3.6 4.1 2.5 3.8 3.3 5.0 -6.0 5.4 5.8 3.0 6.7 5.5 PCY (At Current Prices) -0.3 7.3 7.1 9.8 8.5 7.9 5.7 12.7 11.8 13.2 14.0 9.1 PCY (At 1993-94 Prices) 1.8 2.0 0.2 1.5 1.0 2.7 -8.3 3.2 3.6 0.9 4.6 3.6

Data given in Table 2.3 above help us to reach the following conclusions relating to the trend of growth of national income and per capita income in India since 1950-51. 1) The real national income of India has increased at an annual average rate of a little over 4 per cent per annum since 1950-51. During this period, population has increased at an annual average rate of 2 per cent per annum. Therefore, the per capita income has increased only at a national annual average rate of 2.0 per cent. 2) The rate of growth initially decelerated over the years but has subsequently accelerated continuously. During the first decade of economic planning, real national income went up by 3.8 per cent per annum; subsequently this rate came down to 3.5 per cent in the 1960s, and 3.1 per cent in the 1970s. A reversal of trend occurred during the 1980s: the rate of growth was around 5.5 per cent per annum during the decade. The rate of growth further accelerated during the decade of 1990s to go up to about 6.0 per cent per annum. Presently, the economy is all set to grow at a still higher rate of 7.0 per cent which may go on to become and even exceed 8.0 per cent.

22

3) The rate of growth of per capita income, likewise, initially decelerated over the years but has subsequently accelerated continuously. The per capita income went up by 1.8 per cent during the 1950s, 1.2 per cent during the 1960s and 1.1 per cent during the 1970s. Reversing the trend, it went up by about 3.6 per cent per annum during the 1980s and 4.1 per cent per annum during the 1990s. Presently, per capita income is rising at about 5.2 per cent per annum, and is expected to accelerate further to 6.3 per cent in next couple of years.

Trend and Structure of National Income

2.3.1

Explanation of the Break in Trend

An economy can grow in three different ways or all three ways may work simultaneously: 1) Horizontally, i.e., it may go on producing more of the same goods and services by either adding to the capacity of the same firms or by adding new firms. 2) Qualitatively, i.e., by improving the quality of goods and services it produces. 3) Vertically, i.e., by producing more of the same things by making its workers more productive. The break in trend in growth rate can be seen as vertical growth; the 1980s saw predominantly productivity led growth. Labour productivity steadily increased. Changes in productivity could be caused either by an increase in workers and managers skills or better machines. Most of the productivity improvement could be attributed to the employment of better quality imported machines by the firms.

2.3.2

Fluctuations in Growth Rates

Fluctuations in year-to-year growth rates in early stages were very marked, which indicated that the economy had failed to create conditions conducive to stable economic growth. We depended on chance factors, like monsoon. Such impressive growth rates as were witnessed in the past were due to chance elements rather than due to planned efforts. Recent growth has been more robust; it has been less vulnerable to agricultural performance and to vagaries of the monsoon. In the initial stage, there was a tendency towards an increase in the element of fluctuations over successive decades. But it seems to have been subdued now, as can be seen from Table 2.4 below.
Table 2.4: Variance in GDP Growth Rate

Period 1951-52 to 1959-60 1960-61 to 1969-70 1970-71 to 1979-80 1980-81 to 1989-90 1991-92 to 2003-04

Variance 6.15 12.15 15.76 4.59 2.93

An examination of the annual rates of change observed by the three sectors of the economy, primary, secondary and tertiary further shows that the annual variations are not specific to any one sector. Fluctuations are observable in all the sectors, although their order of magnitude is higher in the 23

Framework of Indian Economy

primary sector, followed by the secondary sector and the tertiary sector in that order. Check Your Progress 1 Note: i) Space is given below each question for your answer. ii) Check your answer(s) with those given at the end of the unit. 1) What do you mean by national income? How is it estimated? What is the use of national income estimates? 2) How is national income estimated in India? Examine the major trends in national income in India. 3) Account for (i) the recent break in past trends in growth rates, and (ii) fluctuations in growth rates.

2.4 EVALUATION OF THE PERFORMANCE

A proper objective assessment of our performance can be carried out only when we juxtapose our current achievements with: (i) planned or targeted rates of growth, (ii) desired rates of growth, and (iii) rates of growth currently achieved by other countries.

2.4.1 Comparison with Our Targets

An important test to evaluate our performance is in terms of a comparison with the targets of growth rates fixed in our different plans. It must be remembered that ours is a planned economy in which all targets of growth are fixed after making an assessement of the material, capital and human resources of the country. If the actual achievements fall short of the targets, it would mean that our performance has been less than satisfactory. Let us have a look at the data in Table 2.5. 24

Table 2.5: Target and Actual Increase in National Income during Five Year Plans (Annual Percentage) Plan I II III IV V VI VII VIII IX X Target Rate 2.1 4.5 5.6 5.7 4.4 5.2 5.0 5.6 6.5 8.0 Actual Rate 3.6 4.1 2.5 3.3 5.0 5.4 5.8 6.7 5.4 6.0*

Trend and Structure of National Income

* Relates to 2002-05. It would be seen from Table 2.5 that the rate of increase in national income had always been very slow, much less than what we had targeted for. It is only in the Fifth Five Year Plan and subsequent plans that the rate of growth picked up, and moved ahead of the targets. In any case, growth targets decided upon have been rather conservative and on lower side.

2.4.2

Comparison with Our Needs

We can further test our performance by juxtaposing it with our requirements. Admittedly, it is very difficult to determine needed rate of growth which would involve several non-economic, social and psychological variables such as peoples hopes, desires and rising expectations. Some estimates nevertheless, have been made to determine needed rate of growth to meet specific commitments. For example, using estimates on such variables as the labour force growth, employment potential actually realised and the employment-investment-ratio, Subramaniam Swamy estimated that ensuring full employment within 10 years would require a 10 per cent annual rate of growth. A similar rate of growth in investment income will be required to guarantee acceptable minimum level of consumption within the foreseeable future. Taking cue from the Newly Industrialising CountriesJapan, Hong Kong, Taiwan, South Korea, Singaporewe can be reasonably sure that a 10 per cent annual growth in national product can produce at least the first phase of economic transformation. To obtain a 10 per cent economic growth rate, the investment rate must be some 35 to 40 per cent. Against this, our best achievement has been only about 27 per cent or so. An alternative simple way is to find if the increase in national income has made any dent on poverty that we inherited from the Britishers in 1947. We know poverty in India is still widespread. According to a recent estimate made by the Planning Commission using norms of calorie consumption, the percentage of population below the poverty line in 1999-2000 may be projected at 27.09 per cent in rural areas and 23.62 per cent in urban areas; although the exact estimates are debatable, there can be no doubt of the order or magnitude of the problem of poverty. 25

Framework of Indian Economy

2.4.3 Comparison with Other Countries

The basic purpose of this type of comparison is that: (i) it helps us to know the potentials of growth that can be built up in an economy, and (ii) it helps us in a more meaningful evaluation of our performance. For this purpose, we make use of the comparable data prepared by the World Bank as given in Table 2.6.
Table 2.6: Average Annual Growth Rate of GDP in Selected Countries (Per cent)

Country India China Pakistan Indonesia Egypt Thailand Mauritius Brazil Mexico South Korea Hong Kong Singapore

1980-90 5.8 10.9 6.3 6.1 5.3 7.6 6.2 2.8 1.1 9.5 6.9 6.6

1990-2003 5.8 9.5 3.5 3.5 4.5 3.7 5.1 2.6 3.0 5.5 3.7 6.3

Two observations as follows can be made from Table 2.6: 1) The growth rate in India has been among the lowest in the group of fast developing countries included here. 2) An encouraging feature is that whereas in other countries, the growth rates tended to slow down during the 1980s and the 1990s as compared to that during the 1970s, the growth rate in India, as in neighbouring Pakistan and China, accelerated during the period. Thus, we reach the unhappy conclusion that the rate of growth of national income in India has been far from satisfactory. Further, it has not only been inadequate, but what is worse is that the incremental income accruing to the nation all these years has concentrated in a few hands. In consequence thereof, disparities in income have widened. Jagdish Bhagwati rightly puts it as: It is now clear that Indias economic performance, while a definite improvement over that in the pre-independence period, is less than satisfactory when one takes the capitalistic index of growth rates or the socialist indices of eradication of poverty and reduction of income inequality.

2.5

CAUSES OF SLOW GROWTH

A recent empirical study seeks to explain statistically the variations in intercountry growth rates. The global pattern of growth is shown to depend on four factors: (i) initial conditions, (ii) policy variable, (iii) demographic dynamics, and (iv) resources and geography. Table 2.7 below statistically measures the contribution of each of these factors in the variation of growth between India and that in East and South-East Asia. 26

Table 2.7: Contribution of Selected Factors to the Difference (per person, per year) and Growth in East and South-East Asia* (1965-90) Initial Conditions Initial GDP Per Person Schooling Policy Variables Government Saving Rate Openness Institutional Quality Demography Life Expectancy Growth in Working-age Population Growth in Total Population Resources and Geography Natural Resources Landlocked Tropics Ratio of Coastline Distance to Land area Predicted Difference in Growth Actual Difference 0.3 0.5 -0.2 -2.1 -0.4 -1.2 -0.5 -0.9 -0.5 -0.3 -0.2 0.2 0.1 0.0 0.5 -0.3 -2.5 -2.9 -2.9

Trend and Structure of National Income

It would be seen from Table 2.7 that whereas India scored positively over East and South-East Asia in terms of initial GDP per person, its growth has suffered because of the adverse conditions relating to the following: (i) schooling, (ii) Government saving rate, (iii) openness, (iv) institutional quality, (v) life expectance, (vi) growth in working age population, (vii) growth in total population, and (viii) ratio of coastline distance to land area.

2.6

MEASURES TO PROMOTE GROWTH

In view of the recent global experience, the following steps need be taken to accelerate the rate of growth. 1) Mastering and constantly improving process technology with just-in-time inventory systems, inter-active supplier relationships, total quality management (getting it right the first time to economise on inspection, reworking, retesting and warrantly claims), a production system driven by computer-aided design/manufacture, rapid retooling processes and delivering enhanced product value at the lowered costs which follow economies of scale. 2) Focussing on seven key sectors: microelectronics, biotech, polymers, telecom, robotics and smart machine tools, information technology and civil aviation. 3) Practising economic discipline with a high savings rate to generate capital.

China, Hong Kong, Indonesia, Malaysia, Papua New Guinea, Singapore, South Korea, Taiwan, Thailand.

27

Framework of Indian Economy

4) Forging a cooperative, not adversarial, relationship between the corporate world and Government with minimal bureaucratic obstruction. 5) Investing in education. 6) Practising an honest work ethic by the individual and a code of decent corporate ethic by industry. Check Your Progress 2 Note: i) Space is given below each question for your answer. ii) Check your answer(s) with those given at the end of the unit. 1) How would you prove that the rate of growth in the Indian economy has been relatively slow? 2) State reasons for the slow rate of growth of the Indian economy. 3) Suggest measures to accelerate the rate of growth in the Indian economy.

2.7 STRUCTURE OF NATIONAL INCOME

The structure or composition of national income of an economy explains the relative significance of the different producing sectors in an economy. When a country is in a state of underdevelopment, primary sector (agriculture and allied occupations) makes the largest contribution to the national income. As the country grows and gets developed, the contribution of the industrial and services sectors gradually increases. Therefore, on the basis of the composition of GDP, one can easily pronounce whether a country is developed or underdeveloped. Let us examine what has happened in India. In India, over the period 1951-2005, the share of the primary sector in national income has fallen by about 40 per cent while that of the secondary and tertiary sectors has increased. This trend is projected to accelerate further in wake of liberalisation of the economy. This may happen primarily because of the following factors: 28 Reduced restrictions on involvement of private sector in areas like software development and information services;

Technological advances; and Lower fixed capital requirements.

Trend and Structure of National Income

Table 2.8 below shows sectoral shares in Indias national income and their growth rates during the era of planning. Table 2.8: Composition of Gross Domestic Product and Growth Rates (At 1993-94 prices)
Primary Share 1950-51 to 1959-60 1960-61 to 1969-70 1970-71 to 1979-80 1980-81 to 1989-90 1990-91 to 2000-01 2001-02 2002-03 2003-04 2004-05 56.0 47.8 42.8 36.4 28.6 26.0 25.0 26.0 24.03 Growth Rate 2.3 2.5 1.3 4.4 2.9 6.5 -5.2 9.1 1.1 Secondary Share 16.0 21.1 22.8 25.0 27.1 21.1 22.5 21.4 24.54 Growth Rate 5.7 6.5 3.7 6.8 5.9 3.2 6.0 6.8 8.9 Tertiary Share 28.0 31.4 34.4 38.6 44.3 52.9 52.5 52.6 51.43 Growth Rate 4.1 4.9 4.5 6.6 7.6 6.5 7.1 7.6 7.0

It would be seen as follows from Table 2.8: 1) The rate of growth of the secondary and tertiary sectors has been more than double that of the primary sector, with the secondary sector having an edge over the tertiary sector during the first two decades. In the subsequent decade, the tertiary sector grew faster than either of the other two sectors. During the 1980s, when all the three sectors were growing at a faster rate, the secondary sector was the fastest. Subsequently, the tertiary sector has been growing the fastest. As a result, the service sector has become the growth-driver in the Indian economy. This becomes clear from the data given in Table 2.9 below:
Table 2.9: Per centage Contribution to Increase in GDPFC Sector Primary Secondary Tertiary Total 1951-52 to 1960-61 45.2 23.5 31.3 100.0 1961-62 to 1970-71 35.1 26.5 38.4 100.0 1971-72 to 1980-81 27.2 25.6 47.2 100.0 1981-82 to 1990-91 24.2 28.6 47.2 100.0 1992-93 to 1996-97 20.3 30.9 48.8 100.0 1997-98 to 2003-04 13.0 23.1 63.9 100.0

Presently, about two-thirds of the incremental growth in the Indian economy can be attributed to the tertiary sector. 2) The growth of services sector has imparted resilience to the economy, particularly in times of adverse agricultural shocks as also during cyclical downturns in industry. This pattern of structural change in Indian economy has deviated from the development pattern of the western economies. Those economies experienced 29

Framework of Indian Economy

first a shift from primary to secondary sector and only in their advanced stage did they experience a significant shift in favour of tertiary sector. That pattern of development enabled them to transfer growing labour force from primary sector to secondary sector. In India, this has not been possible because secondary sector has not expanded fast enough to absorb growing labour force. The unskilled and uneducated rural masses have continued to struggle in the primary sector and those who have been forced out by economic, social and political factors have joined the urban slum sector. This pattern of growth underlines the link between the growing poverty and unemployment and the inadequate growth of manufacturing and building activity in the country. If economic betterment of the masses of the people is our goal, there is an imperative need to promote manufacturing and allied supportive activities in the economy.

2.7.1 Policy Implications

The expansion of the services sector has wider implications for population, employment, and trade prospects of the economy, some of which are as follows: 1) The growing share of the services sector points to the need for policy initiatives towards introducing greater competition and efficiency in this sector so as to ensure its sustained contribution to exports (especially software) and to higher long-term growth. 2) The gains in productivity in the agricultural and industrial sectors resulting from technological progress and innovation will have the effect of shifting employment away from the non-service sector to the services sector. This may also indicate a shift in real expenditures from commodities to value added services. 3) The services sector constitutes a tax-base with vast but unexploited potential, and, therefore, its growth has long-term implications for the fiscal policy.

2.7.2 Limitations of the Services Sector

The services sector in India, as at present, suffers from low productivity and low quality in spite of fairly large investment in technology. Unless sustained efforts are put in to improve these, with the increasing importance of the services in wake of structural adjustment and liberalisation in the economy, we may get into two alternative scenarios. One, economic and social position of workers in the services sector will steadily go downsince real incomes cannot be higher than productivity for any extended length of time. This means economic stagnation and consequent social tensions. Two, the workers in this sector will use their numerical strength to get wages higher than their economic contribution justified. This will impoverish othersreducing everyones income and increasing unemployment, for example, personnel having technical skills. The knowledge, the workers have about their job, is the starting point for improving productivity, quality and performance. Partnership with other equally knowledgeable workers is the only way to ensure higher productivity and quality. 30

Check Your Progress 3 Note: i) Space is given below each question for your answer. ii) Check your answer(s) with those given at the end of the unit. 1) Examine the principal changes in the structure of Indias national income since 1950-51. Identify the factors responsible for these changes. 2) State the implications of the changes in the structure of Indias national income. 3) What are the limitations from which the service sector suffers presently?

Trend and Structure of National Income

2.8 LET US SUM UP

National income estimates are the most reliable macroeconomic indicators of an economy. Changes in national income measure the rate of growth of the economy; similarly, changes in the structure of national income of an economy reflect the changing significance of different sectors. In India, national income, as also per capita income, have been continuously increasing. In more recent years, the rate of growth of national income has accelerated. It indicates that the economy has been growing at a faster rate in recent years than in the past. Along with this, the structure of national income has also undergone a change; the tertiary sector has emerged as the dominant sector of the economy.

2.9

EXERCISES

1) Evaluate Indias growth performance during the era of economic planning on the basis of accepted yardsticks. Suggest measures to accelerate the rate of growth. 2) Indian economy is gradually emerging out to be a service-dominated economy. Examine the implications of these trends for widespread poverty and unemployment in India. What type of policy initiatives would you suggest? 31

Framework of Indian Economy

2.10 KEY WORDS

Closed Economy: An economy that does not maintain any economic relations with the rest of the world. Economic Goods: Those goods which are scarce in supply and, hence, command a price. Economic Growth: A sustained increase in real national income of a country. Nominal National Income: The money value of all the final goods and services produced in an economy during a year, estimated at current prices. Real National Income: The money value of all the final goods and services produced in an economy during a year, estimated at some fixed prices. Subsidy: It is the grant given on current account by the Government to the private industries and public corporations for selling certain goods at a price fixed by the Government.

2.11 SOME USEFUL BOOKS

Central Statistical Organisation (Government of India), National Accounts Statistics (Annual). Dhingra, Ishwar, C. (2005); The Indian Economy: Environment and Policy, Sultan Chand & Sons, New Delhi. Government of India, Economic Survey (Annual).

2.12

ANSWERS OR HINTS TO CHECK YOUR PROGRESS EXERCISES

Check Your Progress 1 1) See Section 2.1 2) See Section 2.2 & 2.3 3) See Sub-section 2.3.1 & 2.3.2 Check Your Progress 2 1) See Section 2.4 2) See Section 2.5 3) See Section 2.6 Check Your Progress 3 1) See Section 2.7 2) See Sub-section 2.7.1 3) See Sub-section 2.7.2

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