Indian Economy, 5th edition (6 page)

ii.
Per Capita Income
(PCI)
:
Approximately, Rs. 38,037 at Constant Prices and Rs. 61, 564 at Current Prices (1st Revised Estimates for the 2011-12).

Taxes & National Income

While accounting/calculating national income the taxes, direct taxes and indirect taxes collected by the governments, needs to be considered. In case of India, to the extent the
direct taxes
(individual income tax, corpoarate income tax i.e. the corporate tax, divident tax, interest tax, etc.) are concerned there is no need of adjustment whether the national income is accounted at factor cost or market cost. This is so because at both the ‘costs’ they have to be the same, besides these taxes are collected at the incomes of the concerned person or group.

But the amount of
indirect taxes
(cenvat, customs, central sales tax, sales tax/vat, state excise, etc.) needs to be taken care of if the national income is accounted at the ‘factor cost’ (which is the case with India). If the national income is calculated at the factor cost then the corpus of the total indirect taxes needs to be deducted from it. Why so? This is because, they have been added twice – once in the hands of the people/group who pay them (because they pay for it from their ‘disposable income’ while puchasing things!) and other in the hands of the governments (as their income receipts). Collection/source of the indirect taxes are the
‘disposable income’
(which individuals and companies have with them after paying their direct taxes
–
from which they do any purchasing and finally, the indirect taxes reach the various governments!). Thus, if the national income is calculated at the factor cost, the formula to seek it will be:

National Income at Factor Cost = NNP at Market Cost – Indirect Taxes

However, if the national income is being derived at the ‘market cost’ the indirect taxes do not need to be deducted from it. In this case, the governments need not add their income accruing from indirect taxes to the national income either. It means, that the confusion in the case of national income accounting at factor cost is only related with the indirect taxes.

Subsidies & National Income

Similar to the indirect taxes, the various subsidies which are forwarded by the governments need to be adjusted while calculating national income. They are added to the national income at market cost, in case of India
9
. Subsidies are added in the national income at the market cost to derive the national income at factor cost . This is because the price at which the subsidised goods and services are made available by the governments are not their real factor costs (subsidies are forwarded on the factor costs of the goods and services) otherwise we will have a distorted value (which will be less than its real value!). Thus the formula will be:

National Income at Factor Cost = NNP at Market Cost + Subsidies

If the national income is derived at the market cost and governments forward no subsidies there is no need to adjustments for the subsidies – but after all there is not a single economy in the world today which does not forward subsidies in one or the other form.

Putting ‘indirect taxes’ and the ‘subsidies’ both together India’s National Income will be derived with the following formula (as India does it at the factor cost):

National Income at Factor Cost = NNP at Market Cost – Indirect Taxes + Subsidies

Uniqueness of the Indian
Economy

Indian economy
did show some traits
10
which were unique:

(i)
The contribution of the primary sector in its GDP has fallen down regularly and today it stands at 14.1 per cent—which is sufficient to conclude that it is no more an agrarian economy.

(ii)
The share of its tertiary sector increased to over 67.5 per cent in its GDP by 2012–13. This proves India is a service economy.

(iii)
The dependency of population on the primary sector for its employment still remains at over 56.8 per cent—a symptom of an agrarian economy. The expansion of the industries was not sufficient to attract the labour force from the primary activities. India is still lagging on this front badly.

(iv)
The share of the secondary sector in its GDP is at 27 per cent and never crossed 40 per cent.

(v)
India has been basically the first case which directly had either over 50 per cent of its GDP coming from the primary sector or the tertiary sector—an agrarian economy shifting directly to the service economy (at least partially, if we forget the dependency ratio of the population on the sectors). It means India jumped the stage of being a fully-developed industrial economy!

Without fully realising the industrial and manufacturing potential and directly merging into a service economy, has created tougher macro and micro challenges for policy makers in India.

Progress

Progress is a general term frequently used by experts to denote betterment or improvement in anything. In economics, the term was used for a long period to show the positive movement in the lives of people and an economy. It had both quantitative and qualitative aspects to it. After a point of time, some economists started using all the three terms—progress, growth and development—interchangeably to mean almost the same thing. But it was only during the three decades of 1960s, 1970s and 1980s that the clear meanings we attach to these terms today, really evolved.
1
The term ‘progress’ became a general term with no specific meaning in economics or denoting both growth and development. But growth and development were allotted their clear-cut meanings.

Economic Growth

A term coming from the life sciences, ‘growth’ in economics means economic growth. An increase in the economic variables over a period of time is – economic growth. The term can be used in an individual case or in the case of an economy or for the whole world. The most important aspect of growth is its
quantifiability
i.e. one can measure it in absolute terms.
2
All the units of measurement may be applied to show it, depending upon the economic variable where the growth is being studied. We have a few examples:

(i)
An economy might have been able to see growth in its food production during a decade which could be measured in tonnes.

(ii)
Road network growth of an economy might be measured for a decade or any period in miles or kilometres.

(iii)
Similarly, the value of the total production of an economy might be measured in currency terms which means the economy is growing.

(iv)
Per capita income for an economy might be measured in monetary terms over a period.

We may say that
economic growth is a quantitative progress.

To calculate the
growth rate
of an economic variable the difference between the concerned period is converted into percentage form. For example, if a dairy farm owner produced 100 litres of milk last month and 105 litres in the following month, his dairy has a growth rate of 5 per cent. Similarly, we may calculate the growth rate of an economy for any given successive periods. Growth rate is an
annual concept
which may be used otherwise with the clear reference to the period for which it is used.

Though growth is a value neutral term i.e. it might be positive or negative for an economy for a period, we generally use it in the positive sense. If economists say an economy is growing it means the economy is having a positive growth otherwise they use the term ‘
negative growth
’.

Economic growth is a widely used term in economics which is useful in not only national level economic analyses and policy making but also highly useful in the study of comparative economics. International level financial and commercial institutions go for policy making and future financial planning on the basis of the growth rate data available for the economies of the world.

Economic Development

For a comparatively longer period of time after the birth of economics, economists remained focused on the aspects of expanding the quantity of production and income of a country’s economy. The main issue economists discussed was—how to increase the quantity of production and income of a kingdom or a nation-state. It was believed that once an economy is able to increase its production its income will also increase and there will be an automatic betterment (quality increase) in the lives of the people of the economy. There was no conscious discussion over the issue of quality expansion in the people’s lives. Economic growth was considered as a cause and effect for the betterment of lives of the people. This was the reason why economists till the 1950s failed to distinguish between growth and development though they knew the difference between these terms.

It was during 1960s and in the later decades that economists came across many countries where the growth was comparatively higher but the quality of life was comparatively lower. The time had come to define economic development differently from what the world meant by economic growth. For economists, development indicates the quality of life in the economy which might be seen in accordance with the availability of so many variables such as:

(i)
The level of nutrition.

(ii)
The expansion and the reach of healthcare facilities—hospitals, medicines, safe drinking water, vaccination, sanitation, etc.

(iii)
The level of education among the people.

(iv)
There might be many more variables on which the quality of life depends.

Here, one basic thing must be kept in mind that if the masses are to be guaranteed with a basic minimum level of quality–enhancing inputs (above-given variables such as food, health, education, etc.) in their life, a minimum level of income has to be guaranteed for them. Income is generated from productive activities. It means that before assuring development we need to assure growth. Higher economic development requires higher economic growth. But it does not mean that a higher economic growth automatically brings in higher economic development—a confusion the early economists failed to clear. We may cite an example to understand the confusion—two families having same levels of income but spending differing amounts of money on the developmental aspects. One might be giving little attention to health, education and going for saving and the other might not be saving but taking possible care of the issues of health and education. Here the latter necessarily will have higher development in comparison to the former. Thus, we may have some diverse cases of growth and development:

(i)
Higher growth and higher development

(ii)
Higher growth but lower development

(iii)
Lower growth but higher development.

Above-given combinations though, comparative in nature make one thing clear, that, just as for higher income and growth we need conscious efforts, same is true about the economic development and higher economic development. Without a conscious public policy, development has not been possible anywhere in the world. Similarly, we can say, that without growth there cannot be development either.

The first such instance of growth without development, which the economists saw, was in the Gulf countries. These economies, though they had far higher levels of income and growth, the levels of development there were not of comparable levels. Here then started the branch of economics which will be known as
‘development economics’
. After the arrival of the WB and the IMF, conscious economic policies were framed and prescribed for the growth and development of the less-developed economies.

We can say that
economic development is quantitative as well as qualitative progress
in an economy.
3
It means, when we use the term growth we mean quantitative progress and when we use the term development we mean quantitative as well as qualitative progress. If economic growth is suitably used for development, it comes back to accelerate the growth and ultimately greater and greater population brought under the arena of development. Similarly, high growth with low development and ill-cared development finally results into fall in growth. Thus, there is a circular relationship between growth and development. This circular relationship broke down when the Great Depression occurred. Once the concept of the
‘welfare state’
got established, development became a highly coveted and serious matter of concern for the governments of the world, policy makers and economists, alike. A whole new branch of economics—
welfare economics
has its origin in the concept of welfare state and the immediacy of development.

Measuring Development

Although economists were able to articulate the differences between growth and development (Mahbub Ul Haq, a leading Pakistani economist had done it by early 1970s itself), it took some more time when the right method of measuring development could be developed. It was an established fact that the goal of progress goes beyond mere ‘income increase’. International bodies such as the UNO, IMF and WB all were concerned about the development of the comparatively under developed regions of the world. But any attempt in this direction was only possible once there was a tool to know and measure the developmental level of an economy and the determinants which could be considered the traits of development. The idea of developing a formula/method to measure the development was basically facing two kinds of difficulties:

(i)
At one level it was difficult to define as to what constitutes development. Factors which could show development might be many such as level of income/consumption, quality of consumption, healthcare, nutrition, safe drinking water, literacy and education, social security, peaceful community life, availability of social prestige, entertainment, pollution-free environment, etc. It has been a real difficult task to achieve consensus among the experts on these determinants of the development.

(ii)
At the second level it looked highly difficult to quantify a concept as development constitutes quantitative as well as qualitative aspects. It is easy to compare qualitative aspects such as beauty, taste, etc. but to measure them we don’t have any measuring scale.

Human Development Index

The dilemma was solved once the United Nations Development Programme (UNDP) published its first Human Development Report (HDR) in 1990. The report had a human development index (HDI) which was the first attempt to define and measure the levels of development. The ‘index’ was a product of selected team of leading scholars, development practioners and members of the Human Development Report office of the UNDP. The first such team which developed the HDI was led by
Mahbub
u
l Haq
and
Inge Kaul.
The term ‘human development’ is a corollary of ‘development’ in the index.

The HDI went on to select three broad parameters and allotted them an equal weightage on the scale of one and measured the development of the countries included in the report. The three parameters
4
are as given below:

(i)
Standard of living:
to be indicated by the real per capita income adjusted for the differing purchasing power parity (PPP).

(ii)
Knowledge:
to be measured by indicators related to the level of education:

(a)
educational attainment among the adults (given 2/3
rd
weightage).

(b)
school enrollment (given 1/3
rd
weightage).

(iii)
Life Expectancy:
to be calculated at the time of birth.

The UNDP ranked
5
the economies in accordance of their achievements on the above-given three parameters on the scale of one (i.e. 0.000–1.000). As per their achievements the countries were broadly classified into three categories with a range of points on the index:

(i)
High Human Development Countries: 0.800–1.000 points on the index.

(ii)
Medium Human Development Countries: 0.500–0.799 points on the index.

(iii)
Low Human Development Countries: 0.000–0.499 points on the index.

The Human Development Report, 2013 is discussed in Chapter 22. together with India’s relative position in the world.

The Debate Continues

Though the UNDP commissioned team had evolved a consensus as to what constitutes development, academicians and experts around the world have been debating this issue. By 1995 the economies around the world had officially accepted the concept of human development propounded by the UNDP. Basically, the UNDP designed HDR was used by the
w
orld Bank since 1990s to quantify the developmental efforts of the member countries and cheap developmental funds were allocated in accordance. Naturally, the member countries started emphasising on the parameters of income, education and life expectancy in their policy making and in this way the idea of HDI got obligatory or voluntary acceptance around the world.

For many years, experts and scholars came up with their own versions of defining development. They gave unequal weightage to the determinants defining development as well as selected some completely different parameters which could also denote development in a more suitable way according to them. Since quality is a matter of value judgement and a normative concept, such scopes were there. Most of such attempts were not prescriptions for an alternative development index but they were basically trying to show the incompleteness of the HDI, via intellectual satires. One such attempt was made by the economists and scholars of the London School of Economics in 1999 which concluded Bangladesh as the most developed country in the world with the USA, Norway, Sweden getting one of the lowest ranks in the index!

Basically, it is very much possible to come out with such an index. As for example, we may say that peace of mind is a necessary element of development and betterment in human life which depends heavily on the fact as to how much sleep we get everyday. Housetheft and burglary are major determinants of a good night sleep which in turn depends on the fact as how assured we go to sleep in our homes at night from burglars and thieves. It means we may try to know a good sleep by the data of thefts and burglaries in homes. Since minor housethefts and burglaries are under-reported in police stations, the surveyor, suppose tried to know such cases with data as how much ‘locks’ were sold in a country in a particular year! In this way a country where people hardly have anything to be stolen or no risk of being burgled might be considered having the best sleep in night, thus the best peace of mind and that is why this will be the most developed country!