Basic Characteristics of Indian Economy

By: Anuj Aggarwal

 Low Per-capita Income

Poverty and backwardness has prolonged despite significant

progress being made on the social sector front.

According to World Bank report, India continues to be among

middle income economies. In 2016-17, India’s per-capita
income at current prices was estimated to be Rs.1,03,219
which is $6,490 in PPP terms i.e. 1/9th of US per capita.
 What is PPP?
 It refers to Purchasing Power Parity. For international comparisons, the per capita
incomes of all the countries are converted into PPP terms to compare economic
productivity and standards of living between countries.

 According to this concept, two currencies are in equilibrium, when a basket of goods
is priced the same in both countries, taking into account the exchange rates. It is
represented as S=P1/P2 where S is exchange ratio, P1/P2 is price ratio.

 For example it costs $10 to buy a shirt in the U.S., and it costs €8.00 to buy an
identical shirt in Germany. To make an apples-to-apples comparison, we must first
convert the €8.00 into U.S. dollars. If the exchange rate was such that the shirt in
Germany costs $15.00, the PPP would, therefore, be 15/10, or 1.5.

In other words, for every $1.00 spent on the shirt in the U.S., it takes $1.50 to obtain the
same shirt in Germany buying it with the euro.
 Inequitable Distribution of Income & Wealth

According to NSSO Survey Report, 2011-12 the poorest 20% in

India has only 7% aggregate income whereas top 20% has 45%
despite the fact that there has been more than ten-fold increase in
national income from 1950 to 2011.

According to Credit Suisse report, 2016 India’s richest 1% holds

58.5%, top 10 per cent holds 80% of total wealth, while bottom
50% own 2.1%. In US, according to Deutsche, 0.1% households
own as much as bottom 90%.
 High Incidence of Poverty

 Tendulkar Committee submitted its report to the planning commission in

2009 which estimated all-India poverty line for the year 2004-05 for rural
areas at Rs 446.68 per capita per month and for urban areas at Rs 578.86
per capita per month. On this basis 37.2% of the people were BPL. (41.8
R, 25.7 U).

 The Planning Commission’s Tendulkar’s Committee revised the formula

and submitted fresh report in 2012 for 2009-10 which estimated an all-
India poverty line for rural areas at Rs 672.80 per capita per month and for
urban areas at Rs 859.60 per capita per month. On this basis 29.8% of the
people were BPL. (33.8 R, 20.9 U).
 Recently, an all-India poverty line has been revised accepting the report of
Rangarajan expert panel which raised it to Rs 32 per capita in rural areas and Rs
47 per capita in urban areas. The panel's recommendation results in an increase
in the BPL population, which is estimated at 363 million in 2011-12, compared to
the 270 million estimate based on the Tendulkar’s formula — an increase of
almost 35%.

 This means 29.5% of the India population lives below the poverty line as defined
by the Rangarajan committee, as against 21.9% according to Tendulkar.

The deprivation levels in rural India are still far too high. The socio-economic
census data points to the main earner in 74.49 per cent of all rural
households drawing a monthly income below Rs 5,000.
 Predominance of Agriculture

In 1951, 72.1% of the working population was employed in

agriculture and allied activities. In 2009-10, 53.2% of the
workers are still dependent on agriculture and allied activities.

According to WDI, 2012 the GDP contribution of agriculture

is 19% in 2010, it fell by 5% in 2011-12. In USA and UK
agriculture contribution of GDP is less than 1%.
 Nature of Agrarian crisis

The agrarian crisis is skewed, big landholders (>10

hectares) earn nearly 10 times than those tilling upto a
hectare land while small and marginal farmers make up
75% of all agriculturists.

Large farmers have high marketable surplus which allows

them to bargain better for remunerative prices for their
produce. They also have access to credit, technology etc.
 Rapid Population Growth

India is the second largest populated country in the world with nearly
one sixth of the world population and only 2.4 % of the world area.

According to Census estimates, 2011 population of India from 1961

to 2011 has grown at the rate of 2.1% per annum.

India is going through a demographic transition which is

characterized by falling death rate without a corresponding decline in
birth rates.
 Low Level of Human Development

HDI constructed by UNDP measures the average

achievements in a country in three basic dimensions: a long
and healthy life (life expectancy), access to knowledge
(average years at schooling) and per capita income.

Developing Countries HDI: India is ranked at 130, HDI value

0.607, among the 'medium development' countries like
Egypt, South Africa, Philippines and Indonesia, according to
2018 HDR. India will be at 151 out of 188 if only women are
considered.
 Widespread Unemployment

In developed countries, unemployment is cyclical in nature

whereas in India unemployment is chronic as a result of
structural flaws in the economy.

The unemployment rate had been rising steadily since 2017-18

when it had averaged 4.6%. In 2018-19, it rose to 6.3% and to
7.6% in 2019-20.
 Scarcity of Capital

Kuznets once remarked “Low capital formation means low

rates of growth of national product unless capital-output
ratio declines i.e output per unit of capital”.

Average Gross saving rate in India was 23.5% during the

period of 1997-2003, it was measured at 30.1 % in Mar
2019, compared with 32.4 % in 2018.
 Technological Backwardness

There is a huge gap between the sophisticated production

techniques of developed countries and outdated technologies
available with India.

In large-scale industries, modern techniques have been

introduced but in agriculture, productivity continue to suffer
because of outmoded technologies.
 Weak Infrastructure

Post-independence, the government led a state-centric approach to

infrastructure development by building, owning, and managing
projects.

The government opened the sector to private investment as part of its

economic liberalization in the early 1990s.

India ranked 85 out of 148 for its infrastructure in the World Economic

Forum's most recent Global Competitiveness Report. Delhi and
Mumbai, its two largest cities, ranked far below other regional capitals
like Beijing and Bangkok for infrastructure in a UN report.