UNIT I

ECONOMIC GROWTH AND DEVELOPMENT

Although this course is about economic development in India it is important

that you understand a few concepts that are used in the realm of
developmental issues in general and to have an idea so that you can follow
the debates about our economy and the rest of the world.
Four basic concepts, which we shall discuss in Chapter 1, are:
(i) Economic Growth, (ii) Economic Development, (iii) Sustainable
Development, and (iv) Quality of Life. These concepts have some historical
evolution. We shall try to follow this historical evolution of concepts. If
there are important digressions to the text, we shall put them in boxes. We
also suggest you some activities so that you learn things by doing them.
In Chapter 2, we shall discuss alternative indices for measuring level of
development reached by a country in a particular year, We shall specifically
deal with Per Capita Income, Physical Quality of Life Index and Human
Development Index.
 CHAPTER 1
Concepts in Development
Introduction
Economies grow and develop, they
expand and advance, and they progress
and prosper. There are phases when they
decline too, and there are economies that
experience continuous decay. If one
considers long stretches of human
history, one knows that economies
(civilizations) disappeared altogether. We
will not take into account such long
stretches of time. We shall not consider
too distant a past either. We will leave
them to historians, may be, economic
historians.
Let us take a normal view. We shall
then accept decline as an occasional,
temporary phenomenon. We shall,
therefore, use positive terms only. Of the
positive terms, which have been used to
describe changes as well as to prescribe
changes, two have survived. They are
growth and development. Because we
shall primarily look at nations and
countries as economies, and use terms
such as ‘economic growth’ and ‘economic
development’. We shall often try to
distinguish ‘economic’ from ‘non-
economic’ though there are cases where
it becomes difficult to do so.
In order to accommodate decline in
level, we use phrase ‘negative growth’
and to describe perverse tendencies, we
may use words ‘de-development’ or ‘mal-
development’ though, we will not have
occasions to use them.
You may find that, sometimes in
many scientific treatises and very often
in colloquy, words ‘growth’ and
‘development’ are used in inter-
changeable fashion. But, normally a
distinction is made between the two,
particularly in economics literature. It
is maintained along the following lines.
You might have noticed that the
word ‘growth’ is used to describe increase
in stature or size. It is used to describe
a uni-dimensional change, as in the
case of stature of a child or a uniform
expansion in all directions, as in the case
of size of a balloon. Even when we refer
to development of a child, we refer to
various dimensions of its personality.
When we do not refer to dimensional
aspects we use the word ‘growth’. Even
schools and institutes, colleges and
universities, hotels and hospitals grow.
But, we are often quick to point out
certain features that are not captured
by word ‘growth’. It is rare, if ever, that
growth takes place without development
or development takes place without
growth. In most cases, they would
accompany each other. There may be
cases when one is dominant and the
other is dormant. In such cases, people
4 INDIAN ECONOMIC DEVELOPMENT
talk of growth without development or
development without growth. It is,
therefore, good to make an analytical
distinction between the two.
Economic Growth
Let us take here a comprehensive view
of the economy, taking all activities
together, and call its growth as economic
growth.
GROWTH
One can talk of growth of labour force or
of export or of agriculture or of industry.
One can talk of growth of consumption
expenditure or investment expenditure.
One can also talk of growth of banking,
insurance or information technology
sector. We are, however, restricting
ourselves here to the growth of whole
economy.
Let us look at it from the view point
of production. The total quantum of
goods and services produced in an
economy in a given year is referred to
as Gross Domestic Product. Let us
measure it at factor cost and write it in
its abbreviated form GDPFC. The GDPFC
in 2000-01 was around Rs 17,00,000
crore. This is a flow of goods and services
produced during the year 2000-01,
measured in value terms. We may be
interested in knowing whether the flow
this year is larger than the flow last year.
If so, we should know the measure of
the flow last year. In order to see that
we measure the ‘real’ change in flow,
we should compute the magnitude of
flows in both the years in the same
prices. The prices may belong to
2000-01 or 1999-2000 or to 1993-94;
the point is that the prices should relate
to only one common year so that we
measure only the change in flow of
output, not a mix of change in output
and change in prices. Such GDPs are
said to be measured at constant prices.
Suppose you look into a recent issue
of the National Accounts Statistics
published by the Central Statistical
Organisation and find that at 1993-94
prices, the GDPFC for 1999-2000 and
2000-01 are Rs.10,00,000 crore and
Rs.10,60,000 crore respectively. The
growth in flow called GDPFC in absolute
terms is Rs.60,000 crore. In relative
terms it is 6 per cent and it is called
growth rate. If we prepare a whole series
for 10, 20 or 50 years then we often add
words ‘per annum’ or ‘per year’ to growth
rate. The growth rate is often expressed
in terms of per cent per annum. This is
a positive change; there could be a
negative change also.
Suppose, we look at a twenty-year
period and use yearly figures for flow of
output of goods, which is measured in
terms of GDPFC at constant prices. The
growth rates calculated on yearly basis
would differ from year to year. Shall we
use nineteen year-to-year figures of
growth rate, some of which may be
negative, to describe the change? Or,
should we just compare the initial figure
with the final figure? If we adopt the
former, how to summarise the nineteen
figures? If we adopt the latter, it is
possible that one of these (initial or final)
figures is just ‘abnormal’ as it does not
fall in line. Would it not be a good idea
to speak of general tendency and ignore
abnormal fluctuations around the
general tendency of increase? Economic
growth should, therefore, be taken as
a long-term tendency reflected by
increase in flow of final goods and
services produced by the economy.
CONCEPTS IN DEVELOPMENT
GROWTH RATE
The growth rate for period t can be defined
in the following manner:
Q – Qt–1 Qt
gt = t = –1... (1)
Qt–1 Qt–1
where
gt = (relative) growth rate of GDP in
period t
Qt = GDPFC for period t
Qt–1 = GDPFC for period t–1
Suppose GDPFC for period 1999-2000 at
1993-94 prices is Rs 11,52,000 crore and
GDPFC for period 1998-99 at 1993-94 prices
is Rs 10,83,000. We can find out that
Rs 11,52,000–Rs 10,83,000
gt = = 1.0637–1 = 0.0637
Rs 10,83,000
The growth rate is therefore 0.0637.
However, numerically growth rate is
presented in terms of ‘per cent’. Growth rate
would therefore be written as 6.37 per cent.
Sometimes, people average such growth
rates for a number of periods (decade or
quinquennium) and call it as average
annual growth rate (AAGR).
If there is a general tendency of
growth but there are occurrences of
decline, the rates of growth will be
negative in certain years. Shall we then
say that, while the potential of economy
to produce is continuously increasing,
the potential is sometimes not realised?
There could be various reasons for
occasional decline. In economies
that depend to a large extent on external
trade conditions in other countries may
affect the realisation. Monsoon may
widely fail in certain years and economy
may get derailed for a while. Internal
demand may for a variety of reasons fail
to make full use of the potential. Some
economists put too much emphasis on
supply potential and ignore demand
5
conditions. They define economic
growth as long-term increase in
production potential of the economy.
Some economists feel that it is
growth of per capita GDPFC, not GDPFC,
that should be used to gauge the growth
of an economy. But the point to be noted
is that economic growth is a long-term
phenomenon about the change in total
economic activity of an economy.
Economic Development
Some economists hold a view that the
economic development is not much
different from economic growth. For
them, both are processes of long-term
increase in per capita income. Some
other economists believe that
development is distinctly different
process than growth and covers other
dimensions of change besides growth.
Still others hold that, development is
nothing but the level of per capita income
achieved in a particular year.
Whole human history may be
thought of as a succession of
developments or changes, largely in
positive direction. Looking from a
distance, we find that production
structure of the economy has changed:
from hunting-gathering to settled
agriculture, from agriculture to
manufacturing, from manufacturing to
automatic production, from production
of goods to production of services. It does
not mean services were not produced,
say thousand years ago; it only means
that its relative importance has changed
and that this might have occurred
with increase in all activities in a broad
sense.
However, economics takes most of its
lues from the economic history of the
6 INDIAN ECONOMIC DEVELOPMENT
West during the last two centuries or so.
During this period, a variety of sweeping
changes took place in Europe, which may
broadly be categorized as technological
and institutional. Early economists
working in the field of development
economics took notice of change in the
composition of output and deployment of
labour in activities. They called it
structural change. Structural change
meant relative increase in terms of
proportion of non-agriculture/non-
primary output and concomitant
changes in proportion of employment of
labour in non-agricultural activities (and
also in that of allocation of capital and
land). However, this structural change
has to take place along with increase in
output of all (or majority of) goods, not
with decrease. They defined economic
development as economic growth with
structural change in favour of non-
agricultural activities. And structural
change was understood in terms of
composition of GDP and industrial distri-
bution of labour. This was a reflection of
changing demand for goods and services
on the one hand and changing demand
for labour by production technology in
different sectors on the other.
Most of the mainstream economists
believed that all economies in the West
traversed the same path and believed
that other economies would also follow
the same path. When they did not find
it happening they pointed out that
institutional changes are equally impor-
tant. Institutional changes could mean
emergence of new institutions in
governance, as also in capital market and
money market. Some pointed out
necessity of attitudinal changes in people
– a leap from traditional value system to
modern value system. In order to
accommodate this thought, economic
development could be defined as
economic growth plus, that is, something
more than economic growth.
There were attempts to emphasize
technological dimension of development.
It was pointed out that economic growth
should be accompanied by rise in
productivity. Then, we could define
economic development as economic
growth accompanied by rise in
productivity.
Development is, however, just not
concerned with description of economic
history. It is to be pursued as a deliberate
mechanism of deliverance of the masses
from poverty and idleness in a relatively
short period of time. Developments in the
fifties and sixties did not perceptibly
change the scene in these crucial areas.
Many economists felt disillusioned and
started showing their anguish. One such
Western economist who had been dealing
with problems of development asserted
in a World Conference in Delhi: “The
questions to ask about a country’s
development are: What has been
happening to poverty? What has been
happening to unemployment? What has
been happening to inequality? If all three
of these have declined from high levels,
then beyond doubt this has been a period
of development for the country
concerned. If one or two of these central
problems have been growing worse,
especially if all the three, it would be
strange to call the result ‘development’
even if per capita income doubled.”
Indeed, here is a reference to
conscious attempts made to develop an
economy by adopting a strategy. If the
strategy brings in growth in capacity to
CONCEPTS IN DEVELOPMENT
produce more and in actual output,
transformation in structure of economy
in terms of composition of output of
goods and services or even in deployment
of labour force, emergence of institutions
in terms of variety of banks, and
technology making use of machines and
power instead of men and cattle, but
makes no significant dent on basic
problems of underdeveloped countries,
what use are the efforts or the strategy?
UNDERDEVELOPED ECONOMIES
The poor countries have been variously
described in literature on development
economics : as backward, underdeveloped,
developing, low income, and Third World
countries. Various terms have their origin
in objection to some other terms. We do
not feel good if someone calls our economy
backward as economy is often substituted
for country or nation; after all we are an
ancient living civilisation.
The choice of the word largely depends
on sensitivity of the audience and
sensibility of the analyst, said Jagdish
Bhagwati, a leading economist from India.
Third World was used to describe
countries, which were neither in capitalist
block nor in socialist block and members
of non-aligned movement. Some try to
classify countries as least developed
countries, non-oil exporting developing
countries and petroleum-rich OPEC
countries (OPEC stands for Organisation
of Petroleum Exporting Countries).
The term Fourth World is sometimes
used to describe the poor in the
underdeveloped countries and sometimes
to least developed countries.
This implies that development has
to be related to welfare of people. It was
suggested much earlier that welfare of
people depends on the size of the cake
7
as well as its distribution. One is entitled
to one’s wages when one is employed. One
should get adequate wages, if employed
or should get remunerative prices for
what one produces, if self-employed. Mass
poverty was one particular problem we
attributed to the colonial rule and wanted
to secure self-governance in order to
eradicate it. If that scourge still persists
on a large scale, we have a cause to worry
about. In short, the suggestion is that
the income should get redistributed in
favour of relatively worse-off. Keeping this
in view, some economists prefer to define
economic development as economic growth
with redistribution of resources in favour
of the relatively worse off. In this concept,
it is believed that reduction in inequality
will reduce poverty and will lead to
reduction in unemployment too.
Sustainable Development
In recent years an important issue has
arisen. The issue is whether the level of
development, even in a developing
country where it is fairly low, is
sustainable. In developed countries, the
major cause of worry about sustain-
ability of development is supposed to be
a wasteful consumption style and in
many developing countries, the cause of
such worry is said to be large and
increasing population.
In this context, there are two facts,
which are brought to our notice. One,
present production technology makes use
of non-renewable (exhaustible) natural
resources such as fossil fuels (coal, gas
and petroleum) or even of renewable
natural resources (such as forests,
animals and water) to such an extent that
their regeneration becomes difficult.
Two, present production technology
8 INDIAN ECONOMIC DEVELOPMENT
(along with disposal practices of waste)
pollutes atmosphere and water bodies
with garbage, litter, smoke and other
poisonous gases. The more goods you
produce, more non-renewable natural
resources get exhausted and our
environment become further polluted.
Nature has some assimilative capacity.
But, if pollution level is too high, the
nature may not be able to assimilate it.
Clean air and clean water may not be
available to us. There may not be
enough trees around us to clean our
atmosphere and we may have to suffer
from various health problems.
If non-renewable natural resources
deplete fast, future generations may not
have enough stock for its use. It means
that if we continue growing our
economies the way we do, there may
come a point when it may become
impossible to continue with the level of
development reached. Sustainable
development may, therefore, require the
preservation of stocks of resources,
including environmental resources and
exhaustible natural resources.
A study in 1972 had tried to show
that limits to growth on the planet will
be reached sometime in next hundred
years if present growth trends in world
population, industrialization, pollution,
food production and resource depletion
were to continue unchanged. There is
little reliance, in this view, on future
development of technology, which may
enhance productivity through efficiency.
Some do point out that there would then
be no mining and no industry. However,
it is always prudent to be cautious.
Before constraints loom large, it is not
a bad idea to apply restraint. The
message is that the pattern of growth
may have to be changed in certain
economies and in others, the level
reached may have to be maintained
rather than substantially enhanced.
Many analysts do not segregate
environment; they suggest that it does
not respect national boundaries.
Irrespective of where green house gases
are produced, global warming will take
place. If ozone layer withers, whole
humanity will suffer from its conse-
quences. Concerned with environmental
degradation, a world commission was set
up in the recent past, which produced a
report in 1987 under the title ‘Our
Common Future’. This report defines
sustainable development as that level
which takes care of the needs of the
present generation without compromising
the needs of the future generations. We
normally discussed development as
process not as level. The definition of
sustainable development can, therefore,
be modified as a path of development in
which options of future generations are
not compromised by the path taken by the
present generation.
It is indeed difficult to determine the
path that is sustainable or to find out
whether the path is unique. It simply
makes us cautious about our choice over
consumption style and efforts in
inventing technology and perhaps
restraining growth in population.
Quality of Life
One shred of quality of life is already
indicated in earlier section on
sustainable development. If quality of air,
quality of water and quality of sanitation
are not good, the quality of life also will
not be good. If our surroundings are
CONCEPTS IN DEVELOPMENT 9

littered, if the air is polluted or if we do rights should also be included in this

not get safe drinking water, then we will
not have a good life, no matter how much
of many desirable goods we are able to
buy from market. One can add
availability of food, clothing, shelter,
education facilities, health care, legal aid
and security to the list of clean water,
clean air and clean surrounding in order
to define the quality of life.
However, there is another shred of
thinking which is not altogether
unrelated to it. Those who suggest the
other line, point out that the items listed
above are determinants of well-being.
We can think about quality of life in
terms of its constituents too. The items
listed above lead to better health, welfare,
freedom of choice, and basic liberties,
which are all indices of well-being.
One should also be interested in
distribution of well-being along gender,
caste, class or regional lines. Many
analysts hold that a society with
somewhat overall lower literacy rate but
equality between male and female
literacy rates is better than another that
has somewhat higher overall literacy rate
but has gross inequality between male
and female literacy rates.
Some people also think that certain
rights, which people enjoy in certain
societies, are denied in others. These
set of well-being indicators even though
they do not fall in the economic category.
This argument is acceptable in the
sense that life cannot be separated
into economic and non-economic
compartments. Most of us would not
prefer to be put in prison for any
considerable period even if food,
clothing, shelter and healthcare provided
in the prison is far superior to what we
normally get outside. Therefore, it is said
that, political rights and civil rights or
some indicators reflecting these rights
should be added to the quality of life.
With increasing concern for human
rights, it would be a good idea to
incorporate these indicators of well-being
and welfare. After all, the whole purpose
of consciously developing a society is to
raise the level of well-being and welfare
of its people.
The idea of ‘quality of life’ enriches
the concept of ‘standard of living’, which
is generally thought of in terms of rich
food, expensive clothing, luxuriant cars
and palatial houses, often manifestation
of high income. In societal terms, it is
captured through per capita income. But
the quality of life idea adds the
dimensions, which at times may not be
captured through monetary valuation.
EXERCISES

1. Explain the meaning of economic growth. Does it pertain to growth in short

term?
2. How do you differentiate two ideas of economic growth?
3. How do we normally measure economic growth?
4. Write about the basic ideas involved in various definitions of economic
development. Is growth an essential condition of development?
5. While concept of economic development in terms of ‘growth with structural
10 INDIAN ECONOMIC DEVELOPMENT

change’ is descriptive, whereas ‘growth with redistribution’ is prescriptive. Do

you agree or not? Explain your answer.
6. How much importance do you assign to institutional and technological factors
in development?
7. What do you mean by sustainable development? Is it a problem of pollution
affecting present generation or a problem of resource- depletion affecting future
generation?
8. What are the essential ingredients of quality of life? If standard of living is
understood in terms of level of consumption of goods, how would you
distinguish the ‘quality of life’ from the consumption of goods?
9. Match the following:
A. Economic Development A. GDP
B. Economic Growth B. Health
C. Sustainable Development C. Environment
D. Quality of Life D. Structural Change
10. Match the following:
A. Economic Development A. Long-term
B. Economic Growth B. Redistribution
C. Sustainable Development C. Future Generations
D. Quality of Life D. Structural Change
11. Match the following:
A. Economic Development A. Productivity
B. Economic Growth B. Increase in GDP
C. Sustainable Development C. Basic Liberties
D. Quality of Life D. Non-renewable resources
12. Discuss the evolution of four concepts outlined in this chapter.

ACTIVITIES
1. Prepare a table showing relevant series of GDP at current and constant prices.
Calculate growth rate for each year and average growth rate for each decade.
2. Write down things, places, activities and institutions, which are not economic.