CONTENTS

Preface. .........................................................................................................................................................23

SECTION – I

Basic Issues in Economic Development

1. Economic Development and Under Development ...............................................27

- Introduction
- What does Development Mean
- Economic Growth and Economic Development
- The New View of Economic Development
 Development as a Multi – dimensional Process
 Three core Values of Development
- Development , Freedom and Opportunities
- Human Development
 Sustainable Human Development
 What Makes Development Unsustainable?
 Policy for Sustainable Development
- Human Development Index
- Progress and Setbacks in Human Development
 Advances in Human Development – A Global Snapshot
 The limits to Human Development
 The End of Convergence?
 India – A Globalisation Success Story with a Mixed Record on Human
Development
- National Human Development Reports – 2001
 indicators
- State of Human Development in India
 State Level

2. The Environment and Development ....................................................................46

- Introduction
- The basic Issues
 Sustainable Development and Environmental Accounting
 Population, Resources, and the Environment
 Poverty and Environment
 Growth versus the Environment
 Rural Development and the Environment
 Urban Development and the Environment
 The Global Environment
- Consequences of Environmental Damage
- The Indian Case
 Consequences of Environmental Plunder
- Public Policy
 Indian Economy: Performance and Politics

SECTION – II

Indian Economy at Independence

3. India’s Economy at Independence.........................................................................57

- Introduction
- The Relative Importance of Various Industrial Activities
 Composition of National Income
- The Working Force
- The Agrarian Force
 Stagnating Agriculture
 Causes
- India’s Industrial Production and its Structure
 India’s Industrial Resources
 The decline of Traditional Industry and the Development of Modern Industry
 Some other Economic Indicators of Economic Backwardness
- Some Positive Features

SECTION – III
Policy Regimes

4. Planning in India: Development Strategy and Role of State.................................70

- Evolution of Planning
- Structural Constraints and the Development Strategy
- Role of the State as Visualised in the Fifties
- Evolution of Strategy and Priorities
- Changing Perceptions
- The Role of Planning
 Redefining the Role of State
- The Government, the State and the Market
- Cooperative Action

5. Economic Reform and Liberalisation....................................................................88

- Debate on Liberalisation
- Economic Reform
 The Background
 The Macroeconomic Crisis
 Rationale for the Reforms
 Structural Reforms
- Implementation of the Agenda
- Removal of QRs
- National Structural Adjustment Programme
- Safety Net
 Macroeconomic Impact of Reforms
 Fiscal Adjustment and Stabilisation
 Political Resistance to Reform
 Concerns Regarding Social and Political Implications of Reform
 Impact of the New Economic Policy on the Vulnerable Sections
 Conclusion
- The Next Round of Reforms
 Indian Economy: Performance and Politics

...contd...

SECTION – IV

Growth, Development and Structural Change

6. India’s Growth Experience..................................................................................115

- The Performance
- Two Phases of Growth
- Assessment of Performance
- Casual Factors
- What Next?
- Sectoral Composition of Real GDP
- Inter-regional Disparities in Growth and Development
 Implications of Inter-state Inequality
 Sectoral Compostion of Grwoth
 Casual Factors
- Investment
o Planning and Public Investment
o Private Investment
- Technical Change
- Institutions and Governance
- The Way Ahead
- Conclusion
7. Institutional Reforms for Agricultural Growth....................................................137
- Land Systems at the Time of Independence
 Feudal Agrarian Structure
- Policies for Restructuring in Favour of Land Reform
 Economic Arguments in Favour of Land Reform
 Abolition of Intermediaries
 Ceiling on Land Holdings
 Tenancy Reforms
 Consolidation of Holdings
 Co-operative Farming
- Impact of Structural Reorganisations
- Emerging Perspectives and Policy Issues
- Land Reforms: Approach Paper to the Eleventh Plan

8. Policies for Regulating Pattern of Investment and Concentration of Economic

Power in Industy..................................................................................................147
- Evolution of Industrial Control Regime
- Performance of the Industrial Licensing System
- New Economic Policy

9. India’s Economic Performance and Challenges..................................................156

- Towards Faster and More Inclusive Growth
- Strengths of the Economy
- Some Major Challenges
 Regaining Agricultural Dynamism
 Changing Employment Patterns
 Providing Essential Public Services for the Poor
 Indian Economy: Performance and Policies
...contd...
 Increasing Manufacturing Competitiveness
 Developing Human Resources
 Protecting the Environment
 Improving Rehabilitation and Resettlement Practices
 Improving Governance
 Disparities and Divides

10. Unemployment and Employment Perspective....................................................169

- Population and Labour Force Projections
- Concepts and Measurement
- Measurement of Employment and Unemployment
- Recent Trends in Employment and Unemployment Situation
 Employment and Unemployment (6oth Round of NSSO)
 Results of 61st Round of NSSO Survey
- Indian Labour Laws and Labour Markets
- Strategies and Policies for Employment Generation
 Eleventh Plan Approach Paper on Employment
 Promoting Employment Generation
o Changing Employment Patterns
o Employment Generating Sectors
o National Rural Employment Gurantee
Programme(NREGP)
o Self-Employment Programmes

11. Poverty in India....................................................................................................190

- Magnitude and Determinants
 The Selection of Poverty Lines
- State Level Poverty Ratios
- Basic Minimum Services
- Policy
 Flaws in Policies and Programmes
- Targeting
- Accountability
- Role of NGOs and Voluntary Organisations
- Growth and Poverty

12. Demographic Constraint: Interaction between Population Change and Economic

Development........................................................................................................212
- Economic Development and Population Growth
 The Theory of Demographic Transition
 The Micro Economic Theory of Fertility
 How does Population Growth Affect Economic Development
- Population and Labour Force Projections
- The Ongoing Demographic Transition: Challenges and Opportunities
- Demographic Trends in India
 Period of Low Population Growth
 Period of Rapid Growth and Population Explosion
 Period of Some Decline in Rate of Growth 1981 Onwards
- Trends in Birth and Death Rates
 Causes of High Birth Rate
o Social Factors
 o Economic Factors
 Fertility Rate
 Causes of Decline in Death Rate
o Control of Epidemics
o Control of Famines
o Improved Medical Facilities
o Spread of Maternity Homes
o Impact of Economic Development
 Measure to Reduce Birth Rate
- Family Planning/Family Welfare Programmes
- Progress of Health and Family Welfare Programmes
- India and World Population
 Possible Pathways to a Faster Welfare Programmes
o Urbanisation
o Literacy
o The Status of Indian Women
- Age Distribution of the Indian Population
 Policy Shift Essential to Check Population Growth
o System of Incentives and Disincentives
 National Population Policy 2000
- Implications of Mortality Decline for the Future

SECTION – V

Sectoral Trends and Issues

13. Agriculture: The Problem of Productivity..........................................................251

- Importance of Agriculture in National Economy
 Agriculture as a Source of Employment
 Linkage between Agriculture and Other Sectors
- Productivity in Indian Agriculture
 Low Levels of Productivity
 Causes of Low Productivity
o General Causes
o Institutional Causes
o Technological Causes

14. Agricultural Growth, Performance and Policies.................................................256

- The Institutional Context
- The New Technology
- Characteristics of New Technology
 Better Agricultural Practices
- Green Revolution
 First Phase: Increase in Public Investment in Agriculture
 Second Phase of Green Revolution
- Periodisation of Growth Rate
- Productivity
 The Role of Technology in Indian Agriculture
- Small Size of Farms
 Instability in Output
 Regional Disparities and Intrapersonal Disparities
 New Technology and Environmental Degradation
- Limits to Growth: Some Tentative Evidence
  Deceleration in Agriculture Growth
 Major Factors Affecting the Growth Potential
o Lack of Long-term Policy Perspective
o Neglect of Capital Formation
o Lagging Research and Development Efforts
o Rising Soil Degradation and Over-Exploitation of
Groundwater
- Farm Subsidies versus Investment
 Rationalising Subsidies and Strengthening Input and Support
Services
- The National Agriculture Policy 2000
- Policies for Accelerating Agricultural Growth(Approach Paper to the
11th Plan)
 Demand Side Intervention
 Supply Side Strategy
 Agricultural Research
 Water Management and Irrigation
 Animal Husbandry and Fishery

15. Food Security, Public Distribution and Agricultural Price Policy.....................297

- Pre-green Revolution
- Green Revolution
- Post-reform Revolution
- Emergence of Foodgrain Surpluses
- Policy Framework for the Future
- Towards Elimination of Hunger and Malnutrition
 Hunger
 Calorie Deprivation
 Nutritional Security
 Economic Policies
- Programme Interventions
 Public Distribution System
- The Way Forward
 Availability
 Stability in Supplies
 Ensuring Access to Food
 Nutritional Security
- Agricultural Price Policy
- Procurement
- Buffer Stock
- Minimum Support Prices
- Economic Cost of Foodgrains
- Central Issue Price
- Food Subsidy
- Food Security
- Projections of 11th Outlays

16. Globalisation and Indian Agriculture.................................................................328

- Emerging Trends and Impact of Globalisation
- Major Issues in the Context of Globalisation

17. Industrial Growth and Policy...............................................................................335

- Extent and Pattern of Industrialisation during the British Rule
 - Industrial Control Regime
 Performance of the Industrial Licensing System
- The Policy Regime in the 1990s
- New Economic Policy
- Opening up to Foreign Investment
- Industrial Policy Reforms
- Public Sector Reforms, Privatisation and Infrastructure
- Industrial Growth
- Phases of Industrial Growth
 Industrial Growth in the 90s
 Comparative Growth Rates in the 80s and the 90s
o Relative Contribution of Sectors to Total Population
- Profile of Industrial Growth
 Fall in Potential as well as Actual Industrial Growth
 Shift in Favour of Registered Manufacturing
 Decline in Employment Growth in Organised Manufacturing
 The Stagnant Share of Manufacturing Sector
o The Manufacturing Slowdown
 Factors Causing the Industrial Slowdown: Some Hypotheses
o Infrastructure Constraints in the Industrial Sector
 Summing Up ( 1992-93 to 2001-02)
 Recovery in Industrial Growth Since 2002-03

18. Public Sector in the Indian Economy.................................................................367

- The Rationale
- Growth in Investment in Central Governments Enterprises
- Role of Public Sector
 Public Sector and Employment
 Share of the Public Sector in GDP
 Share of the Public Sector in Savings and Capital Formation
- Performance of Public Enterprises
- New Directions of Policy: 1991 Industrial Policy
 Highlights of CPSE Performance in 2005-06
 Disinvestment of Public Sector Shareholding
 Issue of Privatisation
 Issues in Disinvestment in India
 Disinvestment: Policy and Practice
 Disinvestment Strategies
 Welfare Gains from Privatisation of Profitable PSEs
- conclusion

19. Small-scale Industrialisation...............................................................................398

- Small Industry
 Rationale for Supporting Small-scale Enterprises
 Definition of Small-scale Industries
 Small-scale Reservation Policy
 Spatial Distribution of SSEs
 Impact of SSI Reservation on Exports
- New Small Enterprise Policy
 Small and Tiny Enterprises
 Village Industries
- Performance of Small-scale Industries

20. Role of Foreign Capital.......................................................................................414

 - Introduction
- Foreign Capital versus Export-led Growth
- The Debate on the Role of Foreign Capital
 Foreign Direct Investment
 Portfolio Capital
 External Aid
 Commercial Debt Capital
- Capital Flows and Growth in India: The Recent Experience
 FDI Policy: A Historical Perspective
- First phase 1950-1967
- Second Phase 1967 – 198
- Third Phase 1980- 1990
- Fourth Phase – 1991 Onwards
- Trends in FDI – In the 1990s
- Changes in Sectoral Composition
- Changes in the Sources of FDI
- Pattern of FDI by Type of Approvals
- Comparative Performance of India and China
- Impact of FDI
 Impact of FDI: Performance of FDI – Companies in India
- Towards a Realistic FDI Policy
- Summary and Conclusion

21. Services in the Indian Growth Process...............................................................443

- Growth and Sect5oral Shares, Cross Country Evidence and Indian Experience
 Share of Services in GDP
 Share of Services in Employment
- Which Services Have Grown Rapidly?
 Fast Growers
 Trend Growers
 Contribution of Fast and Trend Growers to Services Growth
- Factors Underlying the Services Growth
 External Demand for Services
- Structure of India’s Services Exports
 Services Trade
- Summing Up

22. The Financial Sector: Structure, Performance and Reforms..............................461

- Financial Sector Development in India
 Institutional Structure
 Capital Markets
 Strategy of Development
- Directions of Reforms
 Administered Structure of Interest Rate
 Autonomy, Prudential Regulations and Supervision
 1991 and After: The Reform Years
 Role of Competition
 Capital Adequacy and Government Ownership in the Banking Sector
- Some Perspective for the Future of the Indian Financial System
- Lessons from the Indian Experience
- Conclusion

23. Foreign Trade......................................................................................................483

- Constraints Arising From Foreign Trade and Import Substitution based Policies
 - Inward Substitution Strategy
- Broad Trends: Exports and Imports
 Exports
- Factors for Export Growth since 2002-03
 Imports
- Factors for Imports Growth
- Changing Structure of India’s Foreign Trade
 Comparison between 90’s and 80’s
- Trade GDP Ratio
- Trade Deficit-GDP Ration
- Structural Change in Exports
 Changes in Terms of Broad Categories
 Commodity Composition: Exports
 Move Towards Value-addition
 Moving Away from Traditional Exports Towards New Manufactured Products
- India’s Share in Global Exports: Compositional Change
- Commodity Composition of Imports
- Direction of Foreign Trade
 Direction of Exports
 Direction of Imports
- Summing Up
- Balance of Trade
 India’s Balance of Trade
 Causes of Unfavourable Balance of Trade
- Large Increase in Imports
- Modest Growth in Exports
o External Factors
o Internal Factors
- Measures to Correct Deficit in Balance of Trade
o Restrictions on Imports
o Export Promotion

24.Balance of Payments and Trade Policy...............................................................521

- Concepts
- Trade Policy: An Overview
- The Political Economy of the Foreign Exchange Regimes
- Trade Policy since 1991
- India’s Balance of Payment Trends 1950-2000
 The Decades of Fifties and Sixties
 Balance of Payments in the Seventies
o A Decade of Comfort
 Balance of Payments up to 1981-82
o The Period of Difficulties
 Balance of Payments during 1982-83 to 1984-85
o Easing of Pressure
 Balance of payments during 1985- 1990
o The Build-up to the Crisis
o The Crisis: 1990-1992
 Balance of payments during 1993-94 to 2005-06
o Invisibles
- Capital Account, External Debt and Exchange Rate
 Approach, Developments and Issues
- Foreign Investment
 Magnitude
  Foreign Portfolio Investment (FPI)
 NRI Deposits
- External Commercial Borrowings
- Decline in Foreign Aid
- Impact of Reforms on BoP
- External Debt Management
- Exchange Rate Management
 Transition to Market Determined Exchange Rate System
- Foreign Exchange Reserve Approach, Developments and Issues
- Summing Up

25. India and the WTO.............................................................................................563

- World Trade Organization
- India and the WTO
- India at WTO Meetings
 Singapore WTO Conference (December 2005)
- And After (July 24, 2006)

Glossary..........................................................................................................579

Select Bibliography.........................................................................................591
 Preface

THIS book is designed for use in courses on Indian Economy at the Undergraduate level, particularly the
restructured course of B.Com (Hons.) at6 the University of Delhi.
Although the contents of the book follow essentially the B. Com (Hons.) course content of Indian
economy paper XVIII the material is sufficiently broad in scope and rigorous in coverage to satisfy any
undergraduate and graduate requirements in the field of Indian economy. The thrust of the book is on the
performance and policies with a brief background of the colonial past.
The book is organised into five sections:

Section 1, covers the basic concepts and issues in economic development, and measures of
development and underdevelopment as well as human development. The environment and development is
also discussed in this section.

Section 2, looks at the basic features of the Indian economy at independence: composition of national
income and occupational structure, the agrarian scene and the industrial structure.

Section 3, discusses policy regimes: the evolution of planning, import-substitution industrialisation,

economic reform and liberalisation.

Section 4, deals with the experience of growth, development and structural changes in different
phases of growth, and policy regimes across sectors and regions. The institutional framework and changes in
policy perspective on the role of institutional framework after 1991, are also discussed. This section also
provides a wide coverage of the issues of unemployment and poverty, human development and also the
demographic constraints.

Section 5, is devoted to sectoral trends and issues:

Agriculture, Industry, Services, Financial sector and External sector.

The analyses and discussion, covering these five sections in the various chapters of this book, are
based on the readings recommended for this course. However, wherever required, we have supplemented
from other sources reference to which is given in the footnotes of the various chapters. A select bibliography
is given at the end of the book for reference to the authors cited in the text. A glossary of selected terms is
also given for the benefit of the students.

In writing this book, I have drawn liberally from the relevant articles/papers written by renowned
economists/experts in their respective fields. The analyses have been updated from the latest reports
available such as RBI report on Currency and Finance 2005-2006, Economic Survey 2006-07, Planning
Commission Mid-term Appraisal of the 10th Plan and Approach Paper to the 11th (December 2006).

I owe my deep sense of gratitude to C. H. Hanumantha Rao, C. Rangarajan, Jean Dreze, Amartya
Sen, Kaushik Basu, T. N. Srinivasan, S. D. Tendulkar, V. S. Vyas, K. L. Krishna, Deepak Nayyar, Rakesh
Mohan, Montek S. Ahluwalia, Jagdish Bhagwati, Pravin Visaria (late), Amaresh Bagchi, A. Vaidyanathan,
J. C. Sandesara, Mihir Rakshir, R. RAdhakrishna, Ishar Ahluwalia, T. C. A. Anant, Nagesh Kumar, S. K.
Ray, Ashok Gulati, R. NAgraj, Jim Gordon, Poonam Gupta, Rajesh Chadha and P. D. Jeromi, from whose
writings I have been able to draw to benefit the students.

I am equally grateful to my colleagues teaching in different colleges, who inspired me to write this
book and have been making suggestions from time-to-time to make this book more relevant and easy to
understand by the students.

I hope this thoroughly restructured book on Indian economy will prove handy and useful to students
and teachers on Indian economy.

July 2007 - Uma Kapila

 1

Economic Development and Under Development

Introduction
THE world today presents a picture of sharp contrasts between developed/advanced and
backward/underdeveloped/developing countries. At one extreme, there are countries like USA with per
capita GNI of $ 41400 (2004) and on the other extreme are countries like Ethiopia with per capita GNI of $
110.1
According to World Development Report (2006), 15.8 per cent of world population lives in countries
which are classified as high incvome developed countries like USA, Canada, Australia, countries of Western
Europe, New Zealand and some of the Asian countries such as Japan, Singapore, Hong Kong. On the other
hand 84.2 per cent of the populatiuoon lives in countries which are in the category of low income and
middle income developing countries.

What does Development Mean

The term development may mean different things to different people. In strictly economic terms,
development has traditionally nmeant a sustained annual increase in GNP ( or GDP) at rates varying from 5
per cent to 7 per cent or more. 2

A common alternative economic index of development has been the rates of growth of per capita
GNP i.e., the ability of a nation to expand its output at a rate faster than the growth of population. Thus, per
capita GNP is eual to GNP divided by population. However, it is the real per capita GNP which measures the
overall economic well-being of a population.

Economic Growth and Economic Development

Till the 1960s, the term economic development was often used a synonym of economic growth, the
measure for the latter being the rise in per capita GNP in real terms. According to C. P. Kindleberger,3
“Whereas economic growth merely refers to a rise in output, economic development implies changes in
technological and institutional organisation of production as well as distributive pattern of income.” Thus
economic development is a broader concept than economic growth. Compared to the objective of
development, economic growth may be easy to realise. By larger mobilisation of resources and raising their
productivity, output levels can be raised. The process of development is far more extensive. Apart from the
rise in output, it involves changes in the composition of outpout as well as a shift in the allocation of
productive resources to ensure social justice.
In some of the underdeveloped countries, the process of economic growth has been accompanied by
economic development. But this may not be the case always. While there can be growth without
development, development without growth is unconceivable. A substanitial rise in a coubntry’s GNP is
required before it can hope to expand its industries and the services sectors. Nowhere in the world has the
occupational distributional of population changed in the absence of growth.

The New View of Economic Development

During the 1950s and 1960s while many of the Third World Nations did realise the economic growth
targets, the respective levels of living of the masses remained unchanged. This resulted in the rejection of the
narrow definition of economic development by an increasing number of ecomists who now clamoured for
the “dethronement of GNP” and advocated direct attack on whidespread absolute poverty, increasingly
inequitable income distribution and rising unemployment. Thus, in the 1970s economic development came
to be redefined within the context of a growing economy. “Redistribution from growth” became a common
slogan. In this context Kindleberger argued that “Economic development is generally defined to include
improvements in material welfare, especially for persons with the lowest incomes, the eradication of mass
poverty with its correlates ofilliteracy, diseases and early death, changes in the composition of inputs and
outputs that generally include shifts in the underlying structure of production away from agriculktural
growth towards industrial activities, the organisation of the conomy in such a way that productive
employment is general among the working age population rather than the situation of a privoilaged minority
and the correspondingly greater participation of broadly based groups in making decisions about the
directions, economic and otherwise , in which they should move to improve their welfare.”4

Dudley Seers5 posed three basic questions about the meaning of the development:

What has been happening to the poverty?

What has been happening to the unemployment?

What has been happening to the inequality?

If all three of these have declined from high levels then beyond doubt this has been a period of
development for the country concerened. If one or two of these central problems have been growing worse,
especially if all three have, it would be strange to call the result ‘development’ even if per capita income
doubled.”

This assertion was a hard reality for a number of developing countries which experienced relatively
high rates of growth of per capita income during the 1960s and the 1970s but showed little or no
improvement or even an actual decline in employment, equality and the real income of the bottom 40 per
cent of their population. By the earlier definition of ‘growth’, these countires were developing, but by the
new criteria of poverty, equality and employment, they were not. The situation in the 1980s worsened further
as GNP growth rates turned negative for many less developed countries and the governments, faced with
mounting foreign debt problems, were forced to cut back on their already limited social and economic
programmes.

While during the 1980s, the World Bank championed “economic growth” as the goal of
development, its World Development Report of 1991 asserted that “the challenge of development ... is to
improve the quality of life. For the world’s poor countries, a better quality of life generally calls for higher
income and it involves much more. It encompasses, as ends in themselves, better education, higher standards
of health and nutrition, less poverty, a cleaner environment, more quality of opportunity, greater individual
freedom, and a richer cultural life.”

Development as a Multi-dimensional Process

According to Todaro, “Development must, therefore, be conceived of as a multi-dimensional process

involving major changes in social structures, popular attitudes and national institutions, as well as the
acceleration of economic growth, the reduction of inequality and the education of absolute poverty.
Development, in its essence, must represent the whole gamut of change by which an entire social system,
tuned to the diverse basic needs and desires of individuals and social groups within that system, moves away
from a condition of life widely perceived as unsatisfactory, towards a situation or condition of life as
materially and spiritually better.” According to Prof. Goulet,7 at least three basic components as core values
should serve as a conceptual basis and practical guidelines for understanding the “inner” meaning of
development. These core values---sustenance, self-esteem and freedom---represent common goals sought by
all individuals and societies? They relate to fundamental human needs that find their expression in almost all
societies and cultures at all times.

Three Core Values of Development

Sustenance: The life-sustaining basic human needs include food, shelter, health and protection.
When any one of these is absent or in critically short supply, a condition of absolute “underdevelopment”
exists.

Self-esteem: A second universal component of good life is self-esteem---s sense of worth and self-
respect---of not being used as a tool by others for their own ends. Due to the significance attached to
material values in developed nations, worthiness and esteem are now-a-days increasingly conferred only on
countries that possess economic wealth and technological power---those that have developed.

Now-a-days the Third World seeks development in order to gain the esteem which is denied to
societies living in a state of disgraceful ‘underdevelopment’. ... Development is legitimized as a goal because
it is an important, perhaps even an indispensable, way of gaining esteem.8

Freedom from Servitude: To be Able to Chose: Arthur Lewis9 stressed the relationship between
economic growth and freedom from servitude when he concluded that “the advantage of economic growth is
not that wealth increases happiness, but that it increases the range of human choice.” Wealth can enable a
person to gain greater control over nature and his physical environment than they would have if they
remained poor. It also gives them the freedom to chose greater leisure. The concept of human freedom
should encompass various components of political freedom of expression, political participation and equality
of opportunity.

Development, Freedom and Opportunities

According to Dreze and Sen, “In recent years, development economics has been also taking a much
more inclusive view of the nature of economic development. One way of seeing development is in terms of
the expansion of the real freedoms that the citizens enjoy to pursue the objectives they have reason to value,
and in this sense the expansion of human capability can be, broadly, seen as the central feature of the process
of development.” 10

‘Capability’ refers to the alternative combinations of functionings from which a person can choose.
Thus, the notion of capability is essentially one of freedom—the range of options a person has in deciding
what kind of life to lead. Poverty, in this view, lies not merely in the impoverished state in which the person
actually lives, but also in the lack of real opportunity—given by social constraints as well as personal
circumstances—to choose other types of living.

The basic objective of development as the expansion of human capabilities was never completely
overlooked in the modern literature, but the focus has been mainly on the generation of economic growth, in
the sense of expanding gross national product and related variables.11 The expansion of human capabilities
can clearly be enhanced by economic growth (even in the limited sense of growth of real income per head),
but (1) there are many influences other than economic growth that work in that direction, and (2) the impact
of economic growth on human capabilities can be extremely variable, depending on the nature of that growth
(for example, how equitable and employment-intensive it is, and whether the economic gains from growth
are used to address the deprivations of the most needy).

What is crucial in all this is the need to judge the different policies, ultimately, by their impact on the
enhancement of the capabilities that the citizens enjoy (whether or not this comes about through the growth
of real incomes). This differs sharply from the more standard practice of judging economic policies by their
contribution to the growth of real incomes--- seen a merit in itself.

The recent attempts, in India and elsewhere, to open up market opportunities without being thwarted
by bureaucratic barriers has been justified primarily in terms of the expected impact of this change on
economic explansion, enhancing outputs and incomes in the economy. To quote from the report by Bhagwati
and Srinivasan(1993), “These structural reforms were necessary because we had evidently failed to generate
adequate rates of growth of income and of per capital income” (p.2).12 This is indeed a significant direction
of casual analysis. On the other side, the justification for focusing on outputs and incomes lies ultimately in
the impact that their augmentation may have on the freedoms that people actually enjoy to lead the kind of
lives they have reason to value. The analysis of economic development must take note of both the casual
connections, and also of other policies and institutional changes that contribute to the enhancement of human
capabilities. The success of development programmes cannot be judged merely in terms of their effects of
incomes and outputs, and must, at a basic level, focus on the lives that people can lead. This applies as much
to the assessment of economic reforms and current economic policies in India today as it does to evaluation
of development programmes anywhere else in the world.
Human Development

The UNDP Human Development Report (1994) focuses on the new paradigm of development that
puts people at the centre of development, regards economic growth as a means and not an end, protects the
life opportunities of future generations as well as the present generations and respects the natural systems on
which all life depends.

Such a paradigm of development enables all individuals to enlarge their human capabilities to the full
and to put these capabilities to their best use in all fields—economic, social, cultural and political. It also
protects the options of the unborn generations. It does not run-down the natural resource base needed for
sustaining development in the future.

Sustainable Human Development

Sustainable human development addresses both inter-generational and intra-generational equity---

enabling all generations, present and future to make the best use of their potential capabilities. In the final
analysis, sustainable human development is pro-people, pro-jobs and pro-nature. It gives the highest priority
to poverty reduction, productive employment, social integration and environmental regeneration. It
accelerates economic growth and translates it into improvements in human lives, without destroying the
natural capotal needed to protect the opportunities of future generations.

The strongest argument for protecting the environment is the ethical need to guarantee the future
generations opportunities similar to the ones previous generations have enjoyed. This guarantee is the
foundation of ‘Sustainable Development’.

The principal goal of development policy is to create sustainable improvements in the quality of life
for all people. Sustainable development has many objectives. Insofar as raising per capital income improves
people’s living standards, it is one among many development objectives. The aim of lifting living standards
encompasses a number of more specific goals, bettering people’s s health and educational opportunities,
giving every one the change to participate in public life, helping to ensure a clean environment, promoting
inter-generational equity and much more.13

What Makes Development Unsustainable?

When increase in GNP is brought about through depletion of resources under unhealthy
environmental conditions by the present generation, the future generations will be left with much depleted
resource to produce output under polluted environmental conditions adversely affectingtheir health and
efficiency. Under such circumstances the rate of economic development in future is bound to fall. Thus,
when we are producing more at the cost of future generations the present level of development is not
sustainable i.e., we will not be able to maintain it in future.

Policy for Sustainable Development

Even if scarcity of natural resources increases, natural resources and environments can be adequately
preserved by investment in conservation and anti-pollution activities such as reforestation, soil erosion
prevention ( such as terracing), and purification of gas emission. In order to promote these activities,
institutional innovations are required, such as setting property rights where applicable, regulating and taxing
natural resource utilisation, and organising governmental and non-governmental bodies for environmental
monitoring.

Human Development Index

HDI is a quality of life index prepared by UNDP and published in Human Development Reports
since 1990. It takes into account the three most basic human capabilities.
 (i) Longevity measured by life expectancy at birth.
(ii) Educational attainment as measured by adult literacy rate and gross enrolment ratio
GER(primary, secondary and tertiary level combined)
(iii) Adjusted real GDP per capita---PPP stands for purchasing power parity, PPP GDP is
calculated after eliminating price differences among countries.

The HDI value indicated how far a country has gone to attain certain defined goals; an average life
span of 85 years, access to education for all and a decent standard of living. The maximum and
minimum values for each variable, which are fixed, are reduced to scale between 0 and 1.

Countries are classified into three groups:

(1) High human development countries---Countries with HDI values of 0.8000 and above.
(2) Medium human development countries---Countries with HDI values of 0.500 to 0.799
(3) Low human development countries---Countries with HDI values below 0.500

Human Development Report 2005 states, “Fifteen years after the launch of the first Human
Development Report