Module 3 Economics of Development

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By: Monica M

Economic Development
An economy is a system in which productive units use limited resources to produce a variety of marketable products. Economic growth is defined as process in, which the real national output of a country increases over a period of time
Economic growth is the increase in the amount of the Goods and services produced by an economy over time

Economic development implies progressive changes in the socio-economic structure of the country.
(The level of economic growth, level of education, level of health service, degree of modernization, status of women, level of nutrition, quality of infrastructure, distribution of goods & Services and access to communication)

 Economic growth can be shown graphically by shifting the production possibilities curve outward.

Distance of shift represents an increase in productive capacity

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How Do We Define Economic Growth?

Observation

India has a real GDP more than fifteen times as large as that of Denmark.
Indias population is about 200 times greater than that of Denmark. India is relatively poor and Denmark is relatively rich. Economic Growth Increase in per capita real GDP measured by its rate of change per year.
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INDIA BASIC FACTS

5,000 year old ancient civilization 325 languages spoken 1,652 dialects 18 official languages 29 states, 5 union territories 3.28 million sq. kilometers - Area 7,516 kilometers - Coastline Parliamentary form of Government Worlds largest democracy. Worlds 4th largest economy. recognition in IT, bio-technology and space. Largest English speaking nation in the world. 3rd largest standing army force, over 1.5Million strong. 2nd largest pool of scientists and engineers in the World.

World-class

THINK INDIA, THINK TIMES

Economic Indicators - India

Population(2011) 1.21 billion

GDP at market prices (2010-11)

GDP Rate 2011 GDP at PPP Per Capita Income (2010-11)

US $ 1.01 trillion
8.6% US $ 4.16 trillion

Rs. 53,331

GDP per capita growth % (2010 - 11)

Inflation Rate(2010) Inflation rate (consumer prices): FDI Inflows into India Stock Market Capitalisation

16.9%
8.8% 6.8% (2011 est.) US$ 19 billion US$ 1 Trillion

Source : The Economic Times Intelligence Group.

THINK INDIA, THINK TIMES

India As a Developing Economy

GDP: $4.06 Trillion as on 2010-11
Central Statistics Office, Department Of Economic Affairs

Year
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Gross domestic product

5.83 3.885 4.558 6.852 7.591 9.033 9.53 9.991 6.186 6.771 10.094 8.6 9- Estimated
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What Does Gross Domestic Product - GDP Mean?

The monetary value of all the finished goods and services produced within a country's borders in a specific time period, though GDP is usually calculated on an annual basis. It includes all of private and public consumption, government outlays, investments and exports less imports that occur within a defined territory. GDP = C + G + I + NX where: "C" is equal to all private consumption, or consumer spending, in a nation's economy "G" is the sum of government spending "I" is the sum of all the country's businesses spending on capital "NX" is the nation's total net exports, calculated as total exports minus total imports. (NX = Exports - Imports)

Costs and Benefits of Economic Growth

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Economic Growth

Features of Indian Economy

Indian Economy is developing economy and primarily an agriculture economy as more than 60% of the population is engaged in agriculture and allied activities. Indian economy is evolved as mixed economy economy in the sense that both private sector and public sector coexist and participate in the production process. There has been remarkable improvement in social sectors such as education, health, housing, water supply, civic amenities etc. The economy has low per capita income and low capital accumulation. Although two-thirds of the Indian workforce still earn their livelihood directly or indirectly through agriculture, services are a growing sector and are playing an increasingly important role of India's economy.

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Cont.
India is a major exporter of highly-skilled workers in software and financial services, and software engineering It is characterized by high population density and population growth. About one-third of the population live below poverty line. There is high level of unemployment rate and illiteracy rate The level of technology used in production process is low in many sectors. Modern technology has not been adopted in all sectors of the economy. There is a shortage of physical and economic infrastructure, transportation (Roads, railways, airlines), power (electricity, gas), and communication (telephone, Internet) have not reached all parts of the country. Even some parts of the country do not have provisions for schools, colleges, hospitals, and safe drinking-water supply

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Determinants of Economic Development

Economic Factors

Non Economic Factors

Capital Formation Natural Resources Marketable surplus of agriculture Conditions in Foreign Trade Economic system

Human Resources Technology Political Freedom Social Organization: E.g. Akshayapatra Corruption Will to develop

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Major issues of development India as a developing economy

1. Low per capita Income: Per capita income in the country rose to over Rs 53,331 in 2010-11 from Rs 18,450 in 2001-02 United States Per Capita Income in the year 2011 is $41,663 - High Per Capita Income Per capita income is estimated to have risen 16.9% to Rs 53,331 compared to Rs 46,117 in the previous year. annual average growth rate An economy where the per capita real income is less than $1000 a year is considered an under-developed economy. Per capita Income = National Income / Total Population
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2. Disparities in Income distribution

High degree of disparity in Income distribution. Income Disparity is more intensive in urban area as compared with rural area. Day to Day basis worker has remained more stable.

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3. Poverty Line In India

As per the findings of Tendulkar Committee on Poverty , Indias poverty rate is estimated at 37.2% of the total population. Indias poverty rate is expected to fall to 22% by 2015 from 51% in 1990, which forecast Indias poverty rate to drop to 24% by that year. The poverty rate is measured by assessing the number of people who live below $1.25 a day, a threshold set by the World Bank.

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Poverty Rate

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4. Low level of productive efficiency due to inadequate nutrition and Malnutrition The Level of mal nutrition was higher in the urban areas than in the rural areas. Malnutrition(Starvation) leads to death or disease that in turn reduces productivity Improving nutrition increases productivity and economic growth - World Health Organization (WHO) The National Sample Survey has estimated that about 56% of urban population & 49% of rural population suffer from inadequate nutrition (2,400 Calories/Day)

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5. Over population
India's population rises to 1.21 billion: Census of India 2011:
The population of India, at 1210.2 million, is almost equal to the combined population of U.S.A., Indonesia, Brazil, Pakistan, Bangladesh &Japan put together (1214.3 million)

Cont.

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6. Imbalance between Population size, Resources and Capital

Due to over population, available land and other resources are affected which creates the imbalance in the Indian Economy. With rising population, per capita availability of land and other such resources declines.

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7. Problem of Unemployment
The unemployment rate which had increased from 6.06% in 199394 to 7.31% in 19992000 and further to 8.28% in 200405, came down to 6.60% in 200910. (Twelfth Five Year Plan) The Indian unemployment rate in 2011 has also remained a cause of concern among the people. The latest reports indicate that the unemployment rate of the country is at 9.8% this year which is quite high.

number unemployed unemployment rate = 100 labor force

Cont..

Unemployment rate: 9.8% (2011 est.) country comparison to the world: 109 10% (2010 est.)
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8. Lack of Entrepreneurs
In the theory of growth, entrepreneurs plays a vital role in the economy. The society possess people who are gifted with entrepreneurial skills, it is bound to grow rapidly.

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9. Lack of capital
Savings are low in India due to low national income but high expenditure. The Gross domestic savings (% of GDP) in India was 31.26 in 2009 Capital accumulation is necessary to have economic growth.

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10. Lack of Industrialization

India lacks in large industrialization based on modern and advanced technology. Average growth of industrial sector was 8.5% in India The Growth Rate of the Industrial Sector finally came to 9.8% in 20062007 Indias Index of Industrial Production was 6.80 percent in the month of January 2012 on a year-on-year basis, as compared 7.52 percent growth in January 2011.

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Different sectors
Economy mainly divided into three sectors: 1. Primary (18.1%): The primary sector includes the production of raw material and basic foods.
Basically Comprises of
Agriculture Forestry Fishing Mining 12.3% 1.4% 0.7% 3.7%

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Indias position in world Agriculture

Rank

Total Area Irrigated Area Population Economically Active population Total Cereals Wheat Rice Coarse grains Total Pulses Oil Seeds Fruits and Vegetables Implements (Tractors) Milk Live Stock (castles, Buffaloes)

Seventh First Second Second Third Second Second Fourth First Second Second Third First First

Contribution of different sector to GDP

GDP Rate FIGURES AS ON 2011
GDP FIGURES 55.6

26.3

18.1

Primary

Secondary

Tertiary

Primary Sector in India

Agriculture - products: rice, wheat, oilseed, cotton, jute, tea, sugarcane, lentils, onions, potatoes; dairy products, sheep, goats, poultry; fish

Major Crop Production (1999-2000)

Rice 89.5 million tonnes Wheat 75.6 million tonnes Common Cereals 30.5 million tonnes Pulses 13.4 million tonnes Oilseeds 20.9 million tonnes Sugarcane 29.9 million tonnes
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Cont.

Cont.

Source: Ministry of Agriculture, Government of India

Exports and Imports - Agriculture

Indias agricultural exports amounted to US $ 23.2 billion with a 1.7 per cent share of world trade in agriculture in 2010. On the other hand, Indias agricultural imports amounted to US $ 17.5 billion with a 1.2 per cent share of world trade in agriculture in 2010.

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The agriculture sector

1. Food Grain Production:
206.4 million tones in 2004-05 244.78 million tones in 2010-11 Target 250.48 million tones in 2011-12.

2. Plantation crops: Largest producer and consumer of Tea. 27% World production, 13% world trade. Tea production in India during the year 2010-11 has been estimated at 0.97 million tonnes as against 0.99 million tonnes in 2009-10. India is the sixth largest producer of coffee The production of Natural Rubber in 2011-12 is projected at 9.02 lakh tonnes

3. Live stock, poultry & Fisheries:

6 6.5% Countries GDP, Agriculture by-products. This sector contributed
121.84 million tonnes of milk, 63.02 billion eggs, 42.99 million kg wool, 4.83 million tonnes of meat.

India ranks first in the world in milk production, which went up from 17 million tonnes in 1950-51 to 121.84 million tonnes in 2010-11 India is the 3rd largest fish producer in the world and Contribute $4.4 Billion to the national Income which is about 1.4% of total GDP
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Cont
4. Agriculture Credit: The Government had announced a target of 3,75,000 crore for flow of agricultural credit in 2010-11 RBI, Commercial banks, NABARD

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Cont.
5. Irrigation:
Sources:
Canals Wells and tube wells Tanks Other Sources.

Rashtriya Krishi Vikas Yojana (RKVY): The RKVY was launched in 2007-08 with an outlay of ` 25,000 crore in the Eleventh Plan for incentivizing states to enhance public investment to achieve 4 per cent growth rate in agriculture

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Mile Stones in Agricultural Development

Green Revolution (1968) Ever-Green Revolution (1996) Blue Revolution (water, fish) White Revolution (Milk) Yellow Revolution (flower, edible) Bio-Technology Revolution (Tissue culture, Genetic engg)

Technologies for Sustainable Agricultural Development

Biotechnology Pre & post harvesting technology Energy saving technology Environment protection technology Information and Communication technology GIS & RS technology Internet/Intranet Technology

Cont

Pressure of the Population on Land Land Degradation Water Balance Low level of mechanization Low Fertilizer Consumption

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2. Secondary (Industry):
The secondary sector of the economy manufactures finished goods. All of manufacturing, processing, and construction lies within the secondary sector. Activities associated with the secondary sector include metal working and smelting, automobile production, textile production, chemical and engineering industries

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Contribution of secondary sector

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Secondary Sector
Industries: Textiles, chemicals, food processing, steel, transportation equipment, cement, petroleum, machinery, software, pharmaceuticals etc. Contribution of secondary sector to GDP is 26.3 Industrial production growth rate: 6.7% (2011 est.) country comparison to the world: 41
India Economy 2012 http://www.theodora.com/wfbcurrent/india/india_economy.html

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Industries in India
Employment in Industry Sector
64.6 million people 1999-2000 100.7 million people 2009-10

Automobile Industry Gems and jewelers Textile Industry Steel Industry. Food processing industry Chemical Industry.

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1. Automobile Industry
1. Passenger Vehicles: Growth Rate 2.9% 2. Commercial Vehicles: higher by 25.9% The Indian auto exports will be up to $5.62 billion in the year ending March 2011 and the same will grow to $17.64 billion in 2015-16. Technological demands in automobile industry
Fuel Efficiency Cost effectiveness Innovative Features Safety and Durability

Decrease in the Excise Duty and tariff Increase in the credit Facility.
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Type of Vehicle

2004-2005

2005-2006

2006-2007

2007-2008

2008-2009

Units

Passenger Vehicles

1,209,876

1,309,300

1,545,223

1,777,583

1,838,697

Number

Commercial Vehicles

353,703

391,083

519,982

549,006

417,126

Number

Three Wheelers

374,445

434,423

556,126

500,660

501,030

Number

Two Wheelers

6,529,829

7,608,697

8,466,666

8,026,681

8,418,626

Number

Total

8,467,853

9,743,503

11,087,997

10,853,930

11,175,479

Number

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2. Gems and Jewelers Industry

One of Indias leading foreign exchange earning sectors Gem & Jewellery sector accounted for 16.67% of Indias total Merchandise Exports Volume of exports pegged at US $ 43139.24 million as of March 2011 Gems and Jewelers industry includes:
Gems Gem Stones(Colored) Gold Jewelers Cut polished diamonds Costume jewelleries, Platinum

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3. Textile Industry
The Indian textile industry is one of the major sectors of Indian economy largely contributing towards the growth of the country's industrial sector. The Indian Textiles contributes about 14% to the industrial production, 4% to the Gross Domestic Product and 14% to the countries export earnings ($26.82 Billion 2010-11) The Indian textile industry can be divided into a number of segments such as
Cotton, Silk, Woollen, Readymade, Jute and handicraft.

Cont
The total cloth production registered during September 2010 was 10.2 per cent higher than that registered for September 2009. It provides direct employment to over 35 million people.

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4. Steel Industry
India ranked as the fourth largest producer of crude steel in the world during January-November 2011 after China, Japan, and the USASteel production reached 28.49 million tone (MT) in April-September 2009. About 50% of the steel produced in India is exported. India accounts for over 7% of the total steel produced globally India accounts for around 5 per cent of the global steel consumption Iron and steel is the backbone of all industries.

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Cont.
Huge Iron Ore reserves 23 bn. tones

Indian Steel Producers are increasingly looking for overseas acquisitions in steel as well as raw materials.
Positive overall growth in the production of crude steel

value-added steel used Automotive sector, heavy machinery, Physical infrastructure.

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Top Players In India

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5. Food Processes Industry

The food processing industry is one of the II largest industries in India. India is ranked 5th in terms of production, consumption and export. The Food Processing Industries are:
Dabur India Ltd. Haldiram Marketing Pvt. Ltd. MTR Foods Ltd. Parle Agro Pvt. Ltd. HUL Britannia Industries Ltd. ITC Nestle India Pvt. Ltd and Cadbury India Ltd..
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Food Processes Industry

Fruits & Vegetables, Fisheries, Milk & Milk Products, Meat & Poultry, Packaged/Convenience Foods, Alcoholic Beverages & Soft Drinks and Grains India's food processing sector covers fruit and vegetables; meat and poultry; milk and milk products, alcoholic beverages, fisheries, plantation, grain processing and other consumer product groups like confectionery, chocolates and cocoa products, Soyabased products, mineral water, high protein foods etc.

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6. Chemical Industry
Chemicals are also directly used by consumers in the form of pharmaceuticals, cosmetics, household products, paints, etc. Alkali chemicals, inorganic chemicals, and organic chemicals constitute the major segments of the chemicals industry. Production of chemicals in 2010-11 is 5196000 Metric Tonne.
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Construction
Construction sector contribute 7.9% to Indian GDP. 2009-10 Construction as a sector can broadly be divided into three major categories: CONSTRUCTION
Infrastructure Real Estate Industrial

Roads, Railways, Bridges, Ports, Airports, Power, Irrigation

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Commercial, Retail, Housing

Metal Refineries Fertilizers, Petrochemicals, Cement, Oil & Gas

3. Tertiary (Service):
The tertiary sector of the economy is the service industry. It is the largest and fastest growing sector India by contributing 55.6% of GDP. This sector provides services to the general population and to businesses. Activities associated with this sector include retail and wholesale sales, transportation and distribution, entertainment (movies, television, radio, music ,media, tourism, insurance, banking, healthcare, and law) and IT, TeleCommunication

Tertiary Sector
Main service industries are Business services Finance Transport Communications Utilities The share of services in Indias GDP at factor cost (at current prices) increased from 33.5% in 1950-1 to 55.6 per cent in 2010-11 and to 56.3% in 2011-12

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Share of different services categories in GDP

Service Sectors Trade, hotels, & restaurants Transport, storage, & communication Financing, insurance, real estate, & business services 16.9 7.8 Percentage

16.6

Community, social, & personal 14.3 services Total 55.6

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Importance of service sector in India

Contribution to National Income: More than 50% of national income is contributed Create employment : Many people are employed in service sector like Software, Aviation, entertainment, hospitals, tourism, retails etc. Helps primary & Secondary sector: Service sector is important for rapid development of primary & secondary sectors Increases in Exports: Software exports in 2011-12 are estimated at US$69 billion compared to US$59 billion in 2010-11. Improvement in Indians Images: Good performance in this sector improves the image of the India. Adds to comforts &leisure: Many services like hotels, resorts, entertainment and travel adds to comfort and leisure to the people.

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Growth of service in India

Increasing share in GDP: Contribution of service sector to GDP was 52.9% in 2006-07 and consequently increase to 55.6% in 2010-11 Increasing share in employment: Rural-147 and Urban582 people are employed out of 1000 employed people Increasing share in Export: trade is at 37.5 per cent in 2010-11 compared to 21.2 per cent in 1997-8

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Growth of service in India

Growth of new type of services: Service sector expanded t medical tourism, consultancy, courier service, interior designing etc. Increase in number of service providers: E.g. Telecommunication sectors:
Airtel BSNL Reliance Vodafone TATA

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Growth in tertiary sector in recent year

Transport logistics: The sales of the transport logistics services industry are estimated to have grown by a healthy 7.2 per cent during 2009-10. In 2010-11 as a whole, the sales of this sector are expected to grow by 13 per cent and Profit after Tax (PAT) is expected to grow by 11 per cent. Shipping: The shipping sectors sales are expected to fall by 3 per cent in 2010-11. Freight rates are likely to remain weak during the second half of the year. After two consecutive years of decline, the sales growth is likely to pick up in 2011-12 at 3.2 per cent with a slow recovery in cargo volumes and an improvement in freight rates. Aviation: Oil marketing companies hiked aviation turbine fuel (ATF) prices for the fortnight beginning 1 January 2011. The ATF price ex-Mumbai rose by 5.9 per cent as compared to the corresponding fortnight a month ago, to Rs.48,059 per kilolitre. This was 16.6 per cent higher than the average ATF price in January 2010. In 2010-11 as a whole.

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Cont.
Retail sector: Retail sector is expected to record healthy sales in 2010-11 and grow by 10.2 per cent in 2011-12. The sectors PAT margin is expected to expand over the next three years on account of a faster rise in income vis-a-vis expense. Health Services: The health services sectors sales are expected to grow by a healthy 25.6 per cent in 2010-11 and 19.8 percent in 2011-12 driven by a healthy rise in sales. Hotel: After falling in 2009-10, the hotel sectors sales are likely to grow in 2010-11 by 18.1 per cent due to both, higher occupancies and Average Room Rate (ARRs). Telecom: After rising by just 2.2 per cent during 2009-10, sales growth of the telecom industry witnessed a recovery and improved during the first half of 2010-11. This recovery in sales growth is expected to continue. During 2010-11 and 2011-12, sales are expected to rise by 11.4 per cent and 14.6 per cent respectively driven by an increase in the subscriber base and a deceleration in the fall of both, average revenue per user (ARPU) and the minutes of usage per user (MOU). Software: The Indian software industry is mainly export-oriented. The industry garners around 60-70 per cent of the total revenue from its two largest markets, namely the US and Europe. The economic slowdown in these major export destinations led to a deceleration in growth of sales of the Indian software industry to 5.9 per cent. However, sales are expected to grow at 16.9 per cent and 17.8 per cent, respectively during 2010-11 and 2011-12 due to higher client additions and an uptick in billing rates.

Business Cycle
A Business cycle can be defined as wave like fluctuations of business activity characterized by recurring phases of expansion and contraction in periods varying from three to four years. Business Cycle are a types of fluctuations found in the economic activity of the nations that organizes their work mainly in business enterprises. A cycle consist of expansion and contractions. The business cycle is the periodic but irregular up-anddown movements in economic activity, measured by fluctuations in Real GDP and other macroeconomic variables.
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Phases of Business Cycle: According To Joseph

Peak

Trough

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The Phases of the Business Cycle

It represents the increase or decrease in the total output of the economy

Expansion Peak
Total Output

Recession

Expansion

Trough

Secular growth trend

Jan.- Apr.- July- Oct.- Jan.- Apr.- July- Oct.- Jan.- Apr.Mar June Sept. Dec. Mar June Sept. Dec. Mar June

Prosperity Phase
The Prosperity phase begins from an equilibrium position under the stimulus of forces which create expectations of rising profits , increases scope of activities of the entrepreneur. Payment and expenses of wages increases rapidly Demand for the consumption of goods also grows rapidly. In this phase, High capital investment and expansion of the bank credit, high prices, high profit and full employment. Boom in the normal expansion of economic activity in an economy.

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Productivity Increases: Economic Development

Savings

Investment

Capital Accumulation More Stuff Full Employment

Higher Productivity

Higher Living Standards

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Recession Phase
A Recession is a contraction phase of the business cycle A Recession is typically a drop in the stock market, Increase in the unemployment rate & Decline in domestic market. A drastic slowing down in economy where GDP has fallen in two consecutive quarters.

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Recession Period- Decrease in GDP Rate

Year
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Gross domestic product

5.83 3.885 4.558 6.852 7.591 9.033 9.53 9.991 6.186 6.771 10.094 8.6 9- Estimated

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Recession Phase
The Symptoms of recessions are:
Scarcity of labor, raw materials which increases the cost relative to prices. Rise in the rate of interest Failure of consumption due to rising prices

Recession are the result of reduction in the demand of products in the Global market.

Recession In US 2008- Impact on India

The United States entered 2008 during a housing market correction, a subprime mortgage crisis and a declining dollar value Major banks have landed in trouble after people could not pay back loans Sub-prime is a high risk debt offered to people with poor credit worthiness or unstable incomes. Result -Over consumption/ Extravagant spending by the consumer and thus for years the prices of homes in the U.S. kept rising. Since then 1. Loans became difficult to come by banks 2. Bank cut Credit card limits. Thus, U.S. consumer significantly reduce spending.
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Cont.
Reduced spending meant - reduced activity for most businesses and consumers. Businesses started to layoff workers (firing people as there was no work). Because of layoff, Unemployment started to rise (10.9%) which resulted in further reduction in spending by consumer. Dollar value Declined and Stock market crashed. All this slowed down the growth of economy. GDP growth rate fell to 2%. All this put together has driven the U.S. economy in recession.
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Impact of Global Recession On India

As a result India's export growth as turned negative and fall sharply. The sensex crashed by nearly 13% in the two trading seasons of January. The central bank rate of interest drastically increase 11.5% to 16%. The net profit of major player real estate decline as compare to pervious financial year. The textile, garment, and handicraft industry loose 4 million jobs by April 2009. The recession had no much impact on the Agricultural sector. The rupees has positive impact on import but have negative impact on export and FDIs.
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Cont.

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Cont.

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Depression / Trough
In this phase, there is sharp deduction of production, mass unemployment, falling prices, falling profits, low wages, high rate of business failures The fall in the purchasing power is fundamental background of the fall in prices There will be no hopes for the entrepreneurs to start up, investors to invest in stocks.

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Recovery
It implies increase in the business activity after the depression phase The industrial production picks up slowly and gradually. In this phase,
Slow rise in prices Small rise in profits Wages also rise New investment New projects Banks relaxes the credits facilities. Purchasing power of the buyers Increases the productivity.
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Characteristics/Features of Business Cycle

Recurring Fluctuations: Business cycle are Continuous: an expansion turns into a recession that is followed by a contraction and then a revival that in turn, begins the process all over Period of business cycle is longer than a year: 3 to 4 Years. Presence of alternative forces of expansion & contractions: Boom and Depression Phenomenon of the crisis: Expansion and Depression Synchronic: Affects all the Industry/sectors of an economy.

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Important Questions
1. How do you measure per capita income 2. India as a developing economy Comment 3. What is a business cycle? Explain the different phases of the business cycle 4. State the characteristic features of Indian economy 5. Explain the main features of a business cycle? 6. What are the major issues of development India as a developing economy 7. Explain Determinants of Economic Development. 8. Mention the major drivers of growth in Indian economy? 9. Short Note on the growth in tertiary sectors in recent years 10.Define Economic Development 11.What is the difference between economic growth & development? 12.Short Note on: 1. Primary Sector 2. Secondary sector 3. Tertiary Sector
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