TREND AND STRUCTURE OF NATIONAL INCOME

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

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 India’s national income over the last
fifty-five years.

Trends of National Income in India:

Estimates relating to India’s 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 1 below.

Net National Product (NNP) at factor cost is equal to the national income. The NET National Product (NNP) of any
economy is the Gross National Product (GNP), after subtracting the loss due to depreciation. Here is the formula
to find it, NNP = GDP + Income from Abroad – Depreciation or, NNP = GNP – Depreciation.

The depreciation that is calculated refers to the wear and tear of the capital assets and the depreciation of human
capital is observed when there is workforce turnover.

Table 1: Net National Product and Per Capita Income

It would be seen from Table 1 that India’s 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 below shows the rates of growth of India’s national income and per capita income since 1950-51.

Table 2: Annual Growth Rate of Net National Product and Per Capita Income
A cursory glance at Table 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 1988-89) 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 3 below.
Table 3: Average Annual Growth Rates

Data given in Table 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.

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.

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.

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 4 below.

Table 4: Variance in GDP Growth Rate

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 primary sector,
followed by the secondary sector and the tertiary sector in that order.

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.

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 assessment 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 5

Table 5: Target and Actual Increase in National Income during Five Year Plans

It would be seen from Table 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.

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 people’s 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 Countries⎯Japan, Hong Kong, Taiwan, South Korea, Singapore⎯we 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.

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 6.

Table 6: Average Annual Growth Rate of GDP in Selected Countries (Per cent)

Two observations as follows can be made from Table 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 India’s 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.”

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 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.

Table 7: Contribution of Selected Factors to the Difference (per person, per year) and Growth in East
and South-East Asia* (1965-90)

It would be seen from Table 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.

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 warranty 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.
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.

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:
• Reduced restrictions on involvement of private sector in areas like software development and
information services;
• Technological advances; and
• Lower fixed capital requirements.

Table 8 below shows sectoral shares in India’s national income and their growth rates during the era of planning.
Table 8: Composition of Gross Domestic Product and Growth Rates (At 1993-94 prices)

It would be seen as follows from Table 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 9: Per centage Contribution to Increase in 𝑮𝑫𝑷𝑭𝑪

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 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.

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.

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 down⎯ since 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 others⎯ reducing everyone’s 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.