Unit 4

Growth, Development and Structural Change

Q1) Explain the experience of growth and development in Indian Economy.

A1) The two words ‘growth’ and ‘development’ were often used interchangeably in economic discussion.

As soon as ‘development eco­nomics’ emerged as a distinct field of study after the World War II, it ‘had the appearance of being a bastard child of growth economics’ and, in fact, this child did not differ from what could be expected from a genuine ‘son of growth economics. But, technically speak­ing, they are not the same.

To a layman, these two terms appear to be synonymous. How­ever, in the 1950s and 1960s, economists drew a line of demarcation between economic growth and economic development. True enough, the concept of economic development is broader than economic growth. Develop­ment is taken to mean ‘growth plus change’, whereas economic growth means growth only quantitative expansion of an economy. Economic growth is, thus, a quantitative con­cept, while economic development is a quali­tative concept. C. P. Kindle Berger says that growth involves focusing on height or weight while development focuses on the change in functional capacity.

Economic growth is defined in positive terms. It is measured by the sustained increase in real, national or per capita income of a nation over time. Economic growth is usually measured in terms of an increase in real GNP or GDP over time or an increase in income per head over time. Growth is desirable as it ena­bles a society to consume more goods and services.

That is why growth is considered to be the basis of advancing real living standards or human welfare. At the same time, it is also true that growth does not necessarily lead to an increase in human welfare. Economic de­velopment is more fundamental than eco­nomic growth.

Q2) Why economic growth figure does not give us correct assessment of an economy?

A2) Economic growth figure does not give us correct assessment of an economy for the following reasons:

First, economic growth is associated with an increase in GNP/GDP per capita. But per head GNP does not, by itself, constitute or measure welfare or success in development. This is because per capita income does not give any information about income distribution. It is observed that despite high rate of growth, some of the countries experience high inci­dence of poverty and unemployment.

Secondly, economic growth does not talk about the quality of life. In poor developing countries, people end themselves at low level of literacy, low standards of health and nutri­tion, etc. Miseries arising from lack of food and shelter do not get reflected in the concept of economic growth.

Thirdly, economic growth does not deal with environmental issues. In the process of achieving higher economic growth, environ­mental considerations like depletion of renew­able natural resources, air pollution, etc., are given little weightage. These aspects have an important bearing on the economic develop­ment of a country in the long run. Desire for higher and higher economic growth is associ­ated with environmental damages. It is eco­nomic development that cares for environ­mental issues.

It is, thus, obvious that economic develop­ment involves something more than economic growth. In fact, there are certain qualitative dimensions in the process of development that are conspicuous by their absence in the growth or expansion of an economy. Economic devel­opment implies both more output and changes in the technical, institutional arrangements by which it is produced, and a change in attitudes and values.

Q3) Explain the structural changes in economy.

A3) Econometricians have attempted to measure structural changes in economies as development proceeds. Much of the pioneering work was done by Prof. Simon Kuznets on the basis of historical data, and the analysis has been extended and 9 refined using current data, notably under the leadership of Hollis Chenery. Such studies seek to reveal how key economic parameters change as countries develop. We may note the following as important changes: i) Constituents of GDP Change More generally, in terms of percentage shares, saving rates increase as income grows; government revenues (and expenditure) increase, food consumption drops and non-food consumption increases, relative output of services – and, of course, also industry – increases, while agriculture falls. Ii) Employment Changes Employment changes reflect the shift in output and changes in productivity. Labour in the primary sector of the economy does not fall as rapidly as its share in output; the reverse is true for employment in industry where increase in labour productivity is more easily secured. Iii) Shift in the Composition of Exports As development proceeds and the economy increasingly gets opened to the rest of the world, exports will account for a larger proportion of incomes and there will have been a marked shift in the composition of exports, so that the value of export of manufactures rises relative to that of primary products. Imports will also have risen and earnings and payments will be roughly balanced. Iv) Rate of Increase in Population As incomes increase, the rate of increase in population may be expected to fall, as the birth rate declines along with a fall in the death rate. The population would still be increasing, but gradually the rate of growth will tend to peter out. v) Distribution of Income would at first become more unequally distributed and then this trend would be reversed. Equity influences development in two ways: inequalities of power and wealth result in waste and inefficient use of productive resources, and impair institutional development. Unequal power also impedes innovation and risk taking.

The national income data can be employed to study important structural changes taking place in the Indian economy during the last six decades. The process of growth of the underdeveloped economy of India began in right earnest with the launch of the First Five Year Plan in April 1, 1951. The First Plan was a modest plan. It aimed largely to restore stability to the economy. Well formulated strategy of growth was launched in the Second Five Year Plan. The subsequent Plans primarily gave primacy to this strategy, although modifications were made in response to the changing needs of the economy. The earlier plans aimed largely to build up the production capacity of the economy, and not rapid growth. The strategy affected both the rate of growth and the composition of growth. During the 1980s, the strategy, the rate and composition of growth underwent a change. A new strategy of growth came to be adopted with the onset of the 1990s. The rate of growth accelerated from 3.5 per cent during 1951- 1975, to 5.5 per cent during 1975-1990, to 6.5 per cent during 1990-2005, to accelerate further to about 7 per cent during 2005-2012. The changes in strategy and the rate of growth of national income affected the structure of the economy

Q4) Explain the pattern of assets ownership in agriculture.

A4) Ownership of assets is important for poverty reduction, and women’s control of assets is associated with positive development outcomes at the household and individual levels. This research was undertaken to provide guidance for agricultural development programs on how to incorporate gender and assets in the design, implementation, and evaluation of interventions. It synthesizes the findings of eight mixed-method evaluations of the impacts of agricultural development projects on individual and household assets in seven countries in Africa and South Asia. The results show that assets both affect and are affected by projects, indicating that it is both feasible and important to consider assets in the design, implementation, and evaluation of projects. All projects were associated with increases in asset levels and other benefits at the household level; however, only four projects documented significant, positive impacts on women’s ownership or control of some types of assets relative to a control group, and of those only one project provided evidence of a reduction in the gender asset gap. The quantitative and qualitative findings suggest ways that greater attention to gender and assets by researchers and development implementers could improve outcomes for women in future projects.

Q5) Explain the pattern of assets ownership in industry.

A5) In the Indian context, the progress of industrialization since 1951 has been a striking feature of the economic development of the country.

This is evident in the commodity composition of India’s foreign trade. Over the years, the share of imports of manufactured goods have steadily declined.

On the other hand, industrial products like engineering goods have become a huge component of India’s exports.

Also, the growth of industrialization in India brought with itself a corresponding growth in technological and managerial skills.

These skills help in efficient operations of sophisticated industries and also planning, designing, and constructing such industries.

According to the Annual Survey of Industries, there are three categories in the ownership pattern of industries:

1. Non-Corporate Sector – which includes industrial units whose owners are individuals, proprietorships, partnerships, and Hindu Undivided Families (HUFs).
2. Corporate Sector – This is further sub-divided into two sectors:

Q6) What is Industrialization?

A6) Industrialization offers greater scope for both internal and external economies as compared to other sectors, especially agriculture.

Further, as industrialization grows, the economies of scale and inter-industrial linkages get more pronounced. Further, industrial producers receive an economic surplus which they can invest in the industry itself.

The industrial sector usually has an inclination to save and invest. As the sector continues high levels of investment, it leads to a rapid increase in the rate of income and industrial employment.

This, eventually, contributes to the achievement of a self-sustaining economy. Further, industrialization is associated with the development of mechanical knowledge, skills, and attitude of industrial work, and experience of industrial management.

These skills along with the other attributes of a modern society lead to the growth of productivity in agriculture, trade, distribution, and several other areas of the economy.

Therefore, any transfer of labour from agriculture to industries contributes to economic development.

Hence, industrialization is integral to substantial and sustained economic development as it is both a consequence of higher incomes and a means of higher productivity.

Q7) What are the policies for restructuring Agrarian relations?

A7) At the time of independence, India faced a major challenge of setting right the disturbed agrarian relations as promised during the independence struggle. The agrarian structure inherited from the British period varied from peasant-proprietorship in a small proportion of total cultivated land to landlord-owned domains in a relatively large area of land. The land distribution at the time of independence was so skewed that while just 7 percent of land owners held 53 percent of total land, 28 percent of small and marginal farmers (defined as owning less than 2.5 hectares or 1 acre of land) owned just 6 percent of total land. The tenurial (i.e., the period and the conditions under which a land is leased out to a tenant to cultivate on a share-cropping basis) and administrative practices varied significantly throughout the country. However, the system that prevailed could be classified under two heads viz. (i) the zamindari; and (ii) the ryotwari systems. While the zamindari system was characterised by many intermediaries (i.e., between the state and the actual land tiller), the ryotwari system was, at least in its design, marked for peasant-proprietorship. Nonetheless, the system not only reduced the holdings to such uneconomic proportion, but it also killed any incentive for investing resources to yield higher returns.

Against this background, establishing the twin objectives of achieving social equity and ensuring economic growth were the priority for the new Indian government. The agrarian structure at the time of independence could thus be summarised to have been characterised by: (i) large number of parasitic, rent-seeking intermediaries; (ii) different land revenue/ownership systems prevailing across states; (iii) small number of land lords holding a large share of land, leasing out land on exploitative share-cropping basis; and (iv) a large number of actual tenant cultivators working under insecure tenancy conditions with exploitative production relations. The policy makers had, therefore, to contend with the two critical issues of: (i) eliminating the intermediaries by effecting new tenancy contracts that would motivate the farmers to adopt better production methods/practices; and (ii) re-establish the land records which were in extremely bad shape giving rise to a mass of litigation. To set right the distorted situation, the Indian constitution under Article 39 provisioned that ‘the ownership and control of the material resources of the country (primarily land) should be re-distributed so as to serve the common good’. With this as the goal, a national ‘Planning Commission’ was established to lay down policy guidelines through a series of Five-Year Plans. Instituting a new ‘land policy’ was to be one of the important components to be incorporated in all its plans. The plans prepared and implemented, therefore, broadly aimed at: (i) reducing disparities in income and wealth; (ii) eliminating exploitation by providing security to tenants; and thereby (iii) achieve social transformation through equality of status by providing opportunities for different sections of the population to participate in development initiatives.

Q8) What is Poverty according to Amartya Sen?

A8) Poverty, according to Amartya Sen, is a kind of ‘capability deprivation’. Sen says that economic development should be interpreted as a process of expansion of the freedoms that people enjoy. Important areas of unfreedom that people face is famine and undernourish­ment, mass illiteracy, poor state of health of people, lack of shelter and other basic needs, economic insecurity, denial of basic civil and political liberty, etc.

Q9) Explain Development in Indian economy.

A9) “Development concerns not only man’s material needs but also improvement of the social conditions of his life. Develop­ment is, therefore, not only economic growth but growth plus change—social, cultural and institutional as well as economic. Develop­ment is, thus, not purely an economic phe­nomenon; it has to be conceived of as a multi­dimensional process.”

Naturally, economic development is a value-based concept. It should include not only the acceleration of economic growth but also the reduction of inequality and eradication of poverty, increase in employment opportunities and welfare of the masses, etc.

However, economic development may mean more. Economic development must en­compass human development. Amartya Sen defines economic development in terms of ‘en­titlement’ and ‘capability’.

Q10) What is Entitlement in economic development?

A10) Entitlement refers to the set of alternative commodity bundles that an individual can command through the totality of rights and obligations that he or she faces.

Thus, entitlements of people generate ‘capabilities. Entitlements of people do not only depend on their incomes but also on a host of power relations in a society, the spa­tial distribution of resources in a society (like facilities of health care and schooling) and what individuals can accumulate from such supplied by the state. ‘Capability’ represents a person’s freedom to achieve various func­tioning combinations. Thus, the notion of capability is essentially one of freedom the range of options a person has in deciding what kind of life he or she wants to pursue.

Q11) How Amartya Sen emphasised on development economics?

A11) Amartya Sen, thus, emphasises that, in­stead of concentrating on GNP or GDP, development economics should take into ac­count both entitlements and capability expan­sion. He argues that income does not neces­sarily address the nature of entitlement. Tak­ing a cue from the Chinese famine (1958-1961) as well as the Bengal famine (1943), he em­phatically demonstrated that famines, in gen­eral, were to be attributed to the entitlement failure rather than the shortage of food. De­spite abundant supplies in food, people had to suffer miserably from hunger and famine in Bengal due to entitlement failure in collect­ing food from the market. Famine is one source of unfreedom.

Sen says; “Development requires the re­moval of major sources of unfreedom.” The basic condition for economic development is the freedoms from hunger and famine, malnu­trition, deficient schooling, poverty, poor health, economic insecurity, denial of civil and political rights, social inequalities, etc. These human goals of economic development as emphasised by Amartya Sen have brought about a change in development thinking at least since the 1970s.

Amartya Sen, carrying on his value-loaded development economics, talks on social jus­tice. He says that undernourishment of chil­dren, absence of opportunities of basic school­ing, lack of entitlement of basic medical at­tention, particularly to the underprivileged of our society, etc., are nothing but social injus­tices.

Since most of these facilities—meant for all Indians crowd out the underdogs through the dominant class or partners of the society. This kind of gross injustice is nothing but denial of development or ‘exclusive de­velopment’. Thus, in the development dis­course, social justice a more normative con­cept needs to be provided to all. And, that is development.

Q12) How the national income data can be employed to study important structural changes?

A12) The national income data can be employed to study important structural changes taking place in the Indian economy during the last six decades. The process of growth of the underdeveloped economy of India began in right earnest with the launch of the First Five Year Plan in April 1, 1951. The First Plan was a modest plan. It aimed largely to restore stability to the economy. Well formulated strategy of growth was launched in the Second Five Year Plan. The subsequent Plans primarily gave primacy to this strategy, although modifications were made in response to the changing needs of the economy. The earlier plans aimed largely to build up the production capacity of the economy, and not rapid growth. The strategy affected both the rate of growth and the composition of growth. During the 1980s, the strategy, the rate and composition of growth underwent a change. A new strategy of growth came to be adopted with the onset of the 1990s. The rate of growth accelerated from 3.5 per cent during 1951- 1975, to 5.5 per cent during 1975-1990, to 6.5 per cent during 1990-2005, to accelerate further to about 7 per cent during 2005-2012. The changes in strategy and the rate of growth of national income affected the structure of the economy.

Q13) According to the Annual Survey of Industries, how many categories are there in the ownership pattern of industries?

A13) According to the Annual Survey of Industries, there are three categories in the ownership pattern of industries:

1. Non-Corporate Sector – which includes industrial units whose owners are individuals, proprietorships, partnerships, and Hindu Undivided Families (HUFs).
2. Corporate Sector – This is further sub-divided into two sectors:

Q14) How the agrarian structure at the time of independence could be summarised?

A14) The agrarian structure at the time of independence could thus be summarised to have been characterised by: (i) large number of parasitic, rent-seeking intermediaries; (ii) different land revenue/ownership systems prevailing across states; (iii) small number of land lords holding a large share of land, leasing out land on exploitative share-cropping basis; and (iv) a large number of actual tenant cultivators working under insecure tenancy conditions with exploitative production relations.

Q15) How many critical issues, the policy makers had, therefore, to contend with?

A15) The policy makers had, therefore, to contend with the two critical issues of: (i) eliminating the intermediaries by effecting new tenancy contracts that would motivate the farmers to adopt better production methods/practices; and (ii) re-establish the land records which were in extremely bad shape giving rise to a mass of litigation.

Q16) How economic growth is defined in positive terms?

A16) Economic growth is defined in positive terms. It is measured by the sustained increase in real, national or per capita income of a nation over time. Economic growth is usually measured in terms of an increase in real GNP or GDP over time or an increase in income per head over time. Growth is desirable as it ena­bles a society to consume more goods and services.

That is why growth is considered to be the basis of advancing real living standards or human welfare. At the same time, it is also true that growth does not necessarily lead to an increase in human welfare. Economic de­velopment is more fundamental than eco­nomic growth

Q17) To a layman, which two terms appear to be synonymous?

A17) The two words ‘growth’ and ‘development’ were often used interchangeably in economic discussion.

To a layman, these two terms appear to be synonymous. How­ever, in the 1950s and 1960s, economists drew a line of demarcation between economic growth and economic development. True enough, the concept of economic development is broader than economic growth. Develop­ment is taken to mean ‘growth plus change’, whereas economic growth means growth only quantitative expansion of an economy. Economic growth is, thus, a quantitative con­cept, while economic development is a quali­tative concept. C. P. Kindle Berger says that growth involves focusing on height or weight while development focuses on the change in functional capacity.

Q18) Explain the institutional framework-pattern of assets ownership in agriculture and industry.

A18) Ownership of assets is important for poverty reduction, and women’s control of assets is associated with positive development outcomes at the household and individual levels. This research was undertaken to provide guidance for agricultural development programs on how to incorporate gender and assets in the design, implementation, and evaluation of interventions. It synthesizes the findings of eight mixed-method evaluations of the impacts of agricultural development projects on individual and household assets in seven countries in Africa and South Asia. The results show that assets both affect and are affected by projects, indicating that it is both feasible and important to consider assets in the design, implementation, and evaluation of projects. All projects were associated with increases in asset levels and other benefits at the household level; however, only four projects documented significant, positive impacts on women’s ownership or control of some types of assets relative to a control group, and of those only one project provided evidence of a reduction in the gender asset gap. The quantitative and qualitative findings suggest ways that greater attention to gender and assets by researchers and development implementers could improve outcomes for women in future projects.

Industrialization offers greater scope for both internal and external economies as compared to other sectors, especially agriculture.

Further, as industrialization grows, the economies of scale and inter-industrial linkages get more pronounced. Further, industrial producers receive an economic surplus which they can invest in the industry itself.

The industrial sector usually has an inclination to save and invest. As the sector continues high levels of investment, it leads to a rapid increase in the rate of income and industrial employment.

This, eventually, contributes to the achievement of a self-sustaining economy. Further, industrialization is associated with the development of mechanical knowledge, skills, and attitude of industrial work, and experience of industrial management.

These skills along with the other attributes of a modern society lead to the growth of productivity in agriculture, trade, distribution, and several other areas of the economy.

Therefore, any transfer of labour from agriculture to industries contributes to economic development.

Hence, industrialization is integral to substantial and sustained economic development as it is both a consequence of higher incomes and a means of higher productivity.

Ownership Pattern of Industries

In the Indian context, the progress of industrialization since 1951 has been a striking feature of the economic development of the country.

This is evident in the commodity composition of India’s foreign trade. Over the years, the share of imports of manufactured goods have steadily declined.

On the other hand, industrial products like engineering goods have become a huge component of India’s exports.

Also, the growth of industrialization in India brought with itself a corresponding growth in technological and managerial skills.

These skills help in efficient operations of sophisticated industries and also planning, designing, and constructing such industries.

According to the Annual Survey of Industries, there are three categories in the ownership pattern of industries:

1. Non-Corporate Sector – which includes industrial units whose owners are individuals, proprietorships, partnerships, and Hindu Undivided Families (HUFs).
2. Corporate Sector – This is further sub-divided into two sectors:

Q19) How key economic parameters change as countries develop in structural changes?

A19) We may note the following as important changes: i) Constituents of GDP Change More generally, in terms of percentage shares, saving rates increase as income grows; government revenues (and expenditure) increase, food consumption drops and non-food consumption increases, relative output of services – and, of course, also industry – increases, while agriculture falls. Ii) Employment Changes Employment changes reflect the shift in output and changes in productivity. Labour in the primary sector of the economy does not fall as rapidly as its share in output; the reverse is true for employment in industry where increase in labour productivity is more easily secured. Iii) Shift in the Composition of Exports As development proceeds and the economy increasingly gets opened to the rest of the world, exports will account for a larger proportion of incomes and there will have been a marked shift in the composition of exports, so that the value of export of manufactures rises relative to that of primary products. Imports will also have risen and earnings and payments will be roughly balanced. Iv) Rate of Increase in Population As incomes increase, the rate of increase in population may be expected to fall, as the birth rate declines along with a fall in the death rate. The population would still be increasing, but gradually the rate of growth will tend to peter out. v) Distribution of Income would at first become more unequally distributed and then this trend would be reversed. Equity influences development in two ways: inequalities of power and wealth result in waste and inefficient use of productive resources, and impair institutional development. Unequal power also impedes innovation and risk taking.

Q20) What does Amartya Sen says regarding Development?

A20) Sen says; “Development requires the re­moval of major sources of unfreedom.” The basic condition for economic development is the freedoms from hunger and famine, malnu­trition, deficient schooling, poverty, poor health, economic insecurity, denial of civil and political rights, social inequalities, etc. These human goals of economic development as emphasised by Amartya Sen have brought about a change in development thinking at least since the 1970s.