ECONOMICS

5th Semester.-Economic Development and

Policy in India.

Unit - two

Economics Discussion
Main Features of India’s Population
By demographic features we mean the characteristics of population like, size,
composition, diversity, growth and quality of population etc.

To have basic understanding of the population problem of a specific country, one

should have a complete knowledge regarding the basic features of population of
that country.

The following are features of India’s population:

1. Large Size and Fast Growth:

The first main feature of Indian population is its large size and rapid growth.
According to 2001 census, the population of India is 102.87 crore. In terms of
size, it is the second largest population in the world, next only to China whose
population was 127 crore in 2001. India’s population was 23.6 crore in 1901 and
it increased to 102.7 crore in 2001.

In addition to its size, the rate of growth of population has been alarming since

creative efforts.

New ideas may be excludable. Patent laws seek to give the 1951. At present, India’s
population is growing at a rate of 1.9 percent per annum; 21 million people are
added every year which is more than the population of Australia. This situation is
called population explosion and this is the result of high birth rate and declining
death rate.
2. Second Stage of Demographic Transition:

According to the theory of demographic transition, the population growth of a

country passes through three different stages as development proceeds. The first
stage is characterised by high birth rate and high death rate. So in this stage the
net growth of population is zero. Till 1921, India was in the 1st stage of
demographic transition.

The second stage is featured by high birth rate and declining death rate leading
to the rapid growth of population. India entered the second stage of demographic
transition after 1921. In 1921-30 India entered the 2nd stage, the birth rate was
464 per thousand and death rate was 363 per thousand.

In 2000-01, birth rate was 25.8 and death rate declined to 85. This led to rapid
growth of population. India is now passing through the second stage of
demographic transition. While developed countries are in 3rd stage.

3. Rapidly Rising Density:

Another feature of India’s population is its rapidly rising density. Density of

population means to the average number of people living per square kilometer.
The density of population in India was 117 per square km. in 1951 which
increased to 324 in 2001. This makes India one of the most densely populated
countries of the world. This adversely affects the land-man ratio.

India occupies 2.4 per-cent of the total land area of the world but supports 16.7
per-cent of the total world population. Moreover, there is no causal relationship
between density of population and economic development of a country. For
example, Japan & England having higher density can be rich and Afghanistan &
Myanmar having lower density can be poor. However in an underdeveloped
country like India with its low capital and technology, the rapidly rising density is
too heavy a burden for the country to bear.

4. Sex Ratio Composition Unfavourable to Female:

Sex ratio refers to the number of females per thousand males. India’s position is
quite different than other countries. For example the number of female per
thousand males was 1170 in Russia, 1060 in U.K., 1050 in U.S.A. whereas it is
927 in India according to 1991 census.
The sex ratio in India as 972 per thousand in 1901 which declined to 953 in 1921
and to 950 in 1931. Again, in 1951, sex ratio further declined to 946. In 1981, sex
ratio reduced to 934 against 930 per thousand in 1971. During 1991, sex ratio was
recorded 927 per thousand.

The sex ratio is 933 per thousand in 2001. State wise Kerala has more females
than males. There are 1040 females per thousand males. The lowest female ratio
was recorded in Sikkim being 832. Among the union territories Andaman and
Nicobar Islands has the lowest sex ratio i.e. 760. Therefore, we can conclude that
sex ratio composition is totally unfavourable to female.

5. Bottom heavy Age Structure:

The age composition of Indian population is bottom heavy. It implies that ratio
of persons in age group 0-14 is relatively high. According to 2001 census,
children below 14 years were 35.6%. This figure is lower than the figures of
previous year. High birth rate is mainly responsible for large number of
dependent children per adult. In developed countries the population of 0-14 age
group is between 20 to 25%. To reduce the percentage of this age group, it is
essential to slow down the birth rate.

6. Predominance of Rural Population:

Another feature of Indian population is the dominance of rural population. In
1951, rural population was 82.7% and urban population was 17.3%. In 1991 rural
population was 74.3% and urban population was 257. In 2001, the rural
population was 72.2% and urban population was 27.8. The ratio of rural urban
population of a country is an index of the level of industrialisation of that
country. So process of urbanisation slow and India continues to be land of
villages.

7. Low Quality Population:

The quality of population can be judged from life expectancy, the level of literacy
and level of training of people. Keeping these parameters in mind, quality of
population in India is low.

(a) Low Literacy Level:

Literacy Level in India is low. Literacy level in 1991 was 52.2% while male-female
literacy ratio was 64.1 and 39.3 percent. In 2001, the literacy rate improved to
65.4 percent out of which made literacy was 75.8 and female literacy was 52.1
percent. There are 35 crore people in our country who are still illiterate.

(b) Low level of Education and Training:

The level of education and training is very low in India. So quality of population
is poor. The number of persons enrolled for higher education as percentage of
population in age group 20-25 was a percent in 1982. It is only one fourth of the
developed countries. The number of doctors and engineers per million of
population are 13 and 16 respectively. It is quite less as compared to advanced
countries.

(c) Low Life Expectancy:

By life expectancy we mean the average number of years a person is expected to

live. Life expectancy in India was 33 years. It was increased to 59 in 1991 and in
2001, life expectancy increased to 63.9. Decline in death rate, decline in infant
mortality rate and general improvement in medical facilities etc. have improved
the life expectancy. However life expectancy is lower in India as compared to life
expectancy of the developed nations. Life expectancy is 80 year in Japan and 78
years in Norway.

8. Low Work Participation Rate:

Low proportion of labour force in total population is a striking feature of India’s
population. In India, Labour force means that portion of population which
belongs to the age group of 15-59. In other words, the ratio of working
population to the total is referred to as work participation rate.

This rate is very low in India in comparison to the developed countries of the
world. Total working population was 43% in 1961 which declined to 37.6% in
1991. This position improved slightly to 39.2% in 2001. That means total non-
working population was 623 million (60.8 percent) and working population was
402 million (39.2%). Similarly low rate of female employment and bottom-heavy
age structure are mainly responsible for low work participation in India.

9. Symptoms of Over-population:
The concept of over-population is essentially a quantitative concept. When the
population size of the country exceeds the ideal size, we call it over-population.
According to T.R. Malthus, the father of demography, when the population of a
country exceeds the means of substance available, the country faces the problem
of over-population.

No doubt, food production has increased substantially to 212 million tonnes but
problems like poverty, hunger, malnutrition are still acute. Agriculture is
overcrowded in rural areas of the country which is characterised by diminishing
returns. This fact leads to the conclusion that India has symptoms of over-
population. Indian low per capita income, low standard of living, wide spread
unemployment and under-employment etc. indicate that our population size has
crossed the optimum limit.

Population Growth and Economic Development: A Close

View
Different Views on the Role of Population
Growth:
Population growth plays a conflicting role in the development process of a
country. It helps economic development and it retards economic development.

To the Greek philosophers, about 2,500 years ago, population growth was
undesirable as it adversely affects economic development. Plato (427-347 B.C.)
suggested that the member of citizens of a country should be kept fixed at 5,040
on the ground that this number is divisible by any number from 1 to 12 except

He desired that the country’s population must not exceed beyond certain level.
Sir William Petty presented an optimistic outlook on population growth. Adam
Smith also regarded the growth of population as the basis of wealth. But the
classical economists, Especially T.R. Malithus, sounded an alarm bell of rising
population growth in a country.

However, Mlthus ‘ argument came under severe attack at the hands of Karl Marx
and F. Engles.

Relationship between Population Growth and

Economic Development:
The relationship between population growth and economic development may be
summarised in the words of Robert McNamara—the past president of the World
Bank. He described it as ‘the most delicate and difficult issue of our era… It is
overlaid with emotion. It is controversial. It is subtle. Above all, it is
immeasurably complex.

Mao Zedong once remarked that “A country’s greatest wealth is its people.

On the some vein, the then Prime Minister Mr. Pitt of

England declared in the 18th century:
“A man could enrich his country by producing a number of children, even if the
whole family were paupers.” All these suggest that not only there is no conflict
between population growth and economic development but also an increase in
population is necessary for increase in wealth and development. But, antithesis
to this is the Malthusian version which regards population growth as the number
one barrier to economic development. Neo-Malthusians attribute all of the
world’s modem problems of underdevelopment to massive population growth.

Thus, there is a conflicting role between population growth and economic

development. It can act both as a stimulus and as an impediment to growth and
development. Such conflicting roles suggest that the relationship between
population and economic development is intricate, complex and interesting.

Benefits of Population Growth:

Population growth helps the process of development in
the following ways:

First, an increasing population means an increase in the number of working

population who can function as active participants in the process of economic
growth and development.

It is to be noted that labour, assisted by necessary tools and implements, was

always and still is the greatest productive asset of nations. A growing population
leads to an increase in total output. The sheer arithmetical increase in population
creates work as well as incentives for production that impacts upon output and
productivity quite favourably. Indeed, this argument is empirically important in
addition to theoretical reasoning.

Secondly, a growing population means a growing market for most goods and
services and we know that division of labour is limited by the extent of the
market. A potentially expanding market may stimulate entrepreneurs to invest
more and more in capital goods and machinery. Business activity will be spurred
as a consequence. And more income and employment will be created in the
process. Moreover, it will provide an outlet for the products of efficient, large
scale, mass- production industries. The net effect may be favourable to the
country.

Of course the size of the domestic market of country does not only depend on the
number, but also on the per capita income level. But given the same low level of
income per head, a country India offers a more favourable environment setting
up heavy capital goods industries which depends so much on the economies of
scale their success. In contrast, a thickly populated country with a small
population base such as Sri Lanka seems to be especially handicapped by the all
size of its domestic market.

Population growth has been a favourable factor in stimulating growth in many a

country in; last two centuries, when vast areas remained largely unsettled. Even
in the USA, in the 1930s, was apprehended that a slowing down of the rate
population growth would lead to long run secular) stagnation. The vast secular
boom in the post-industrial revolution England had been largely induced by the
unparalleled rise in population’.

Thirdly, an arithmetic increase in population permits in reaping economies of

scale in production, greater division of labour, extension of the market, etc.

The World Bank in its 1984 World Development Report

argues:
“…there is little doubt that the key to economic growth is people, and through
people the advance of human knowledge. Per capita measures of income should
not be used to imply that the denominator, people, contributes nothing to the
numerator, total income. Nor is population growth in itself the main cause of
natural resource problems—air pollution, soil degradation, even food
availability.”

Costs of Population Growth:

But Malthusians and neo-Malthusians think otherwise. First, they argue that
population growth negatively affects economic development. Their argument is
based on the law of diminishing returns in agriculture. Population growth acts as
a barrier to economic development since the growth of population grows never in
commensurate with the growth of food supply.
Actually speaking, as the rate of growth of population exceeds the rate of
production, economic development is hampered. A growing population, within a
limited geographical area, usually puts heavy pressure on the existing factor
endowments, especially natural resources of the country. Moreover, if the society
has a limited stock of capital, labour may have to be substituted for capital, in
which case the production function will exhibit the law of diminishing returns.
Diminishing returns may become a serious problem if population growth is
rapid.

However, empirical evidence suggests that technological change—or the so-

called green revolution in agriculture in different LDCs—has greatly offset the
effects of diminishing returns in agriculture and the spectre of food problem and
its aftermath (huger, famine, etc.,) in most of these countries has virtually
vanished. So, one must not view that population growth badly affects economic
development.

Secondly, based on the Indian experience, Ansle Coale and E. M. Hoover drew
attention to the likely adverse effects of population growth on savings and capital
formation through the following effects: the age-dependency effect, the capital-
swallowing effect, and the investment diversion effect.

It is said that a rapid population growth causes an increase in dependency ratio—

a high ratio of non-working population to working wage people or active
population. When the number of dependents or the ratio of consumers (non-
producers) to producers increase, there occurs a diversion of income from
savings to consumption and a fall in per capita income. But anti-Mathusians talk
in a different vein.

They argue that many young children contribute directly to parents’ income by
working in farms and off-farm sectors. Further, additional mouths in the low
income families tend to encourage people to work more. In this way, children
themselves contribute to household and saving. Anyway, the impact .on
household saving can be negative, negligible or positive—the issue needs to be
settled by empirical investigation.

The capital-shallowing effect states that a rapid population growth lowers the
ratio of capital to labour or workforce thus works with less capital and
consequently the poor rate of savings. This then reduces productivity of labour.
As children remain engaged in productive works, the family may experience an
increase in saving. Under the circumstance, the capital-shallowing effect may
remain inoperative. High economic growth is accompanied with overall high
savings ratio in many developing countries.

The investment-diversion effect states that, because of rapid population growth a

country’s scarce resources get diverted away to the so-called unproductive
sectors of health, education and social services from the more productive growth-
oriented sectors. This logic assumes that the expenditures on human capital are
unproductive. Educated and healthy people are viewed as one of the essential
ingredients of economic development. Indeed, there are high returns to
investment in human capital.

Anyway, empirical research does not confirm the Coale-Hoover thesis.

Thirdly, Mathusians are convinced that population growth badly affects food
supplies. To them, the chronic food problem experienced by many poor
developing economies is often attributed to rapid population. It is because of
‘natural limits’ in agriculture population growth would overtake food supply
output, thereby leading to famine, hunger, malnutrition, etc.

But the evidence tells a different story. Because of the introduction of green
revolution technology in agriculture, yields have increased to such an extent that
many countries, including India, have now been exporting food-grains.
Unfortunately, the present global world is highly unequal. We see an abnormally
high level of malnourished children; starvation and famines occasionally visit in
many countries.

However, this must not be attributed to a mismatch between a high population

growth and food supply. This can be referred to as the unequal distribution of
purchasing power among different groups of population. Hunger and famine,
according to A. Sen, is due to ‘entitlement failure’ and not the food availabilities
as such.

Fourthly, the question of unemployment and underemployment has assumed

serious proportion, particularly in LDCs, because of rapid population growth.
But whether population growth is responsible for unemployment problem
cannot be said definitively since no such statistical strict correlation is observed.
In fact, it is the technology that determines the absorption of unemployed labour
force. The experiences of Korea and Taiwan tell that economic development in
these countries proceeded successfully despite high population growth.

In recent years, as agriculture is becoming more and more unprofitable, the issue
of engaging surplus labour has become a concern to the Government of India.
Agriculture’s contribution towards GDP growth is not only falling but the
absorptive capacity of agriculture is also falling. This development, consequent
upon Mathusian pressure, has been forcing many farm people to migrate to
towns and urban areas in search of employment.

However, this argument is a faulty one. Economic development is associated

with declining importance of agriculture. Thus, the migration of the productive
farm workers in other sectors needs to be attributed to the policy failure and not
to the population pressure.

Finally, neo-Malthusians argue that excessive population growth and massive

poverty in LDCs have greatly damaged the ecological balance by deforestation
and land degradation. Consequently, these countries suffer badly from a variety
of environmental hazards. Such canard is made by developed countries who are
to be condemned outright for destroying ecological balance.

But today the debate has shifted from population pressure to climate change and
environment—perceived as a great threat to humanity. The current ecological
crisis is caused by human economic activity or anthropogenic. The way an
economy is organised is rather ‘inherently suicidal’.

The whole world is burning fossil fuels to drive the growth economy. Carbon
dioxide emission is at its highest level. All these may be linked to a developed
rich economy addicted to growth. The US economist Kenneth Boulding made the
following statement: “Anyone who believes that exponential
growth can go on forever in a finite world is either a
madman or an economist.”
Conclusion:
Considering the above-mentioned plus and minus points, economists conclude
that hindrances to economic development in LDCs are not to be attributed to
population growth. The greatest and real obstacle to development is
underdevelopment. Potentialities for development are adequate. By designing
their development programmes, LDCs can raise their levels of income and living
standards.

Further, they argue that there is no population bomb in these countries. The
myth of over-population causing underdevelopment should be given up in any
analysis of economic development. It is not to be accepted that a slowing down of
population increase might contribute substantially to our development
prospects. So what is sauce for a goose may not be the sauce for a gander!

The moot point is that population growth may be either favourable or

unfavourable to economic development, depending on where, when, and how it
takes place.

Today, an international consensus has been reached. A country may strike a

higher growth and development if population increases slowly. No one should
exaggerate either the beneficial or the unfavourable effects of population growth
on economic development. However, it is to be kept in mind three important
issues.

First, all problems of levels of living, inequality and poverty are not to be
necessarily linked with high population growth. Secondly, population growth
must involve the quality of life, and not the quantity perse. Thirdly, but truly,
rapid population growth makes prospect for development rather remote. All
these then demand an appropriate economic and social policy so as to improve
the well-being of the future world populations in a sustainable way.

How does Demographic Dividend impact on the

India’s economic growth?

Generally in contemporary world, 'Demographic Dividend' has become a hot topic

for the policy makers, economist and experts from the various sectors around the
world. Many countries are on the crossover of this potential— with a proportionately
large young and working-age population. But much more must be done to enable the
dividend: increase the empowerment of girls and women, ensure universal and high
quality education that is tailored to new economic opportunities, and expand secure
employment.
What is Demographic Dividend?
According to the United Nations Population Fund (UNFPA), the Demographic
Dividend refers to “the economic growth potential that can result from shifts in a
population’s age structure, mainly when the share of the working-age population
(15 to 64) is larger than the non-working-age share of the population (14 and
younger, and 65 and older).” It can only come into existence, when countries invest
in the empowerment, education and employment including good governance.
Composition of Indian population
What is relationship between Demographic Dividend and Economic
Growth?
There is a great influence of demographic dividend on the economic growth because
the demographic dividend is the economic benefit that can arise when a population
has a relatively large proportion of working age people, and effectively invests in
their empowerment, education and employment.

According to the Malthus, increase in food production would not be able to keep up
with an increase in population because while population grew geometrically, food
production only increased arithmetically. He stressed that societies which have high
fertility rates would have lower income levels and those with lower fertility rates will
have higher incomes. The reasoning behind this inverse relationship is that high
population levels would drive down the price of labour and increase the price of food.
Hence, he believed that nature had its own checks to balance the world’s population.
Therefore, on the basis of the above argument of Malthus, the economic growth can
be defined as ‘a long term rise in capacity to supply diverse economic goods to its
population, this growing capacity based on advancing technology and the institutional
and ideological adjustments that it demands’.
Regional Distribution of Tribes in India
According to the International Labour Organisation (ILO), the 21st century can
belong to India as it has three assets that no country has: ‘democracy’, ‘demand’
and ‘demographic dividend’. But did we wonder why the ILO states that, this is
 because the greater the share of the population in the working-age group; the more
will be the savings and investments in the economy.
The economy can be driven by a fast growth track with other macroeconomic
variables like employment, per capita income, saving and investment putting a
positive impact on the economic growth of the country only when demographic
dividend is taken care of.

Hence, the human resources can only transform into asset through proper
recruitment, selection, training, appraising performance, compensating, maintaining
relationships, and welfare, health and safety measures of employees in compliance
with labour laws of the land.
Therefore, it is of utmost importance that the youth needs to be absorbed
meaningfully into the workforce to make it productive enough so that this
demographic dividend does not turn into a demographic nightmar

Urbanization in India

In this essay we will discuss about Urbanization in

India. After reading this essay you will learn about: 1.
Meaning of Urbanisation 2. Trends of Urbanisation in
India 3. Degree 4. Causes 5. Consequences 6. Role in
Economic Development of India.
Contents:
1. Essay on the Meaning of Urbanisation
2. Essay on the Trends of Urbanisation in India
3. Essay on the Degree of Urbanisation in India
4. Essay on the Causes of Rapid Urbanisation in India
5. Essay on the Consequences of Rapid Urbanisation
6. Essay on the Role of Urbanisation in Economic
Development of India

1. Meaning of Urbanisation:
Urbanisation is one of the common characteristics of economic development.
With the gradual growth of the economy, the process of urbanisation depends on
the shift of surplus population from rural to urban areas along-with the growth
of some industrialised urban centres.

Due to social and economic pressures, people from backward villages started to
move towards urbanised centres in search of job, where newly established
industries and ancillary activities continuously offer job opportunities to those
people migrating to cities.

The pace of urbanisation is fast if the industrial growth is fast. The pace of
urbanisation gradually declines only when the proportion of urban population to
total population of the country becomes too high.

Essay # 2. Trends of Urbanisation of India:

In India, an increasing trend towards urbanisation has been recorded from the
very beginning of this present century. The census data on the rural-urban
composition reveal a continuous rise in the rate of urbanisation in India and
more particularly during the second half of the present 21st century.

The proportion of urban population to total population which was only 11 per
cent in 1911 slowly increased to 11.3 per cent in 1921 and then gradually rose to 14
per cent in 1941.

With a liberal definition of urban area adopted in 1951, the proportion of urban
population suddenly rose to 17.6 per cent. But with a slightly strict definition, the
proportion of urban population recorded a small increase to 18.3 per cent in
1961. In the 1971 census, a new definition of an urban unit was adopted and that
definition was continued in 1981 census.

This definition was as follows:

(a) All places with a municipality, corporation, cantonment board or notified
town area committee etc.

(b) All other places which satisfy the following criteri

(i) Minimum population of 5,000;
(ii) At least 75 per cent of male working population engaged in non-agricultural
pursuits; and

(iii) A density of population of at least 400 persons per sq km (1,000 persons per sq
mile).

The definition of an urban unit in 1961 census was also similar to the above mentioned
definition. Thus the data on rural-urban distribution during the last three censuses are
comparable. The proportion of urban population to total population of India as per this
new definition was estimated at 20.2 per cent in 1971 census and then marginally rose
to 23.7 per cent in 1981.

Again in 2001, the total size of urban population in India increased to 285 million as
compared to that of 217 million in 1991. This shows that the proportion of urban
population to total population of India has increased from 25.8 per cent in 1991 to 27.8
per cent in 2001.

The provisional figure of total urban population of India in 2011 is estimated at 377
million which is estimated at 31.16 per cent of the total population of the country.
Moreover, the total number of towns in India which was only 1627, gradually rose to
3060 in 1951, 3126 in 1971, 4029 in 1981 and then to 5166 in 2001. Table 6.7 reveals the
detailed picture of this trend in urbanisation.

Moreover, urbanisation has an increasing impact on the concentration of

population towards relatively higher income categories. Therefore, urban areas
have higher percentage of lower middle income, middle income, upper middle
income and higher income group of people than that of rural areas. Table 6.8
clarifies this point.
Thus it is found from Table 6.8 that the percentage of households in the lower
middle income category was 34.75 per cent in urban areas as compared to that of
23.88 per cent in the rural areas.

Similarly, the percentage of households in the middle income and the upper middle
income categories were 17.89 per cent and 6.46 per cent in the urban areas as compared
to that of only 7.06 per cent and 1.16 per cent in the rural areas. Again, the percentage of
households in the higher income category was 3.75 per cent in the urban areas in
comparison to that of only 0.56 per cent in the rural areas.

The size of total urban population increased from about 26 million in 1901 to 62 million
in 1951, showing an increase of 36 million in just 50 years.

But during the next three decades (1951-81), the absolute increase was to the extent of
94 million and this shows that the population absorption capacity in urban areas has
increased substantially due to industrialisation in the country. The census data shows
that the annual growth rate of urban population which was 3.26 per cent during 1961-
71, gradually increased to 3.86 per cent during 1971-81.

Essay # 3. Degree of Urbanisation in India:

Measurement of the degree of urbanisation in a country like India is considered very

important. Various measures are being used for the purpose. As per the first simple
method we observed that the total urban population in India in 1981 was a little less
than one fourth of the total population in comparison to that of one-ninth in 1921 and
one-sixth in 1951.
The second method, i.e., the urban-rural growth differential (URGD) method also
revealed that the growth rates of both rural and urban population are very close to each
other at present.

Third method showing the growth of urban population reveals that as the total
population of the country rose by about three times since 1921 but the total urban
population of the country increased by about six-times. Thus all the methods observed
more or less same results.

If we compare degree of urbanisation in India with that of developed countries then we

can find that India is lagging far behind the high-income countries. In 1985, the
proportion of urban population to total population was 92 per cent in U.K., 86 per cent
in Australia, 76 per cent in Japan, and 74 per cent in U.S.A. as against only 25 per cent
in India.

In India, towns are classified into six different classes. From the census data, it has been
observed that in Class I town (having a population more than 1 lakh) the proportion of
urban population concentration has increased from 25.7 per cent in 1901 to 60.4 per
cent in 1981. Thus there is an increasing trend towards huge concentration of
population in the bigger towns.

In Class II and Class III towns together, the proportion of urban population remained
almost constant at the level of 26 to 28 per cent during the period 1901-81. But in the
remaining Class IV, Class V and Class VI towns together, the relative proportion of
urban population concentration declined sharply from 47.2 per cent in 1901 to only 13.6
per cent in 1981.

Besides continuation of urbanisation process, a number of Class II towns have been

transformed into a Class I town and the number of Class I towns has thus increased
from 74 in 1951 to 216 in 1981.

Accordingly, the total population of Class I towns also increased from 273 lakhs in 1951
to 943 lakh in 1981 showing an increase of nearly 245 per cent. During the same period,
the number of Class II towns has increased from 95 to 270 and that of Class III towns
increased from 330 to 739 in 1981

Total population of Class II and Class III towns increased from 330 to 739 in 1981. Total
population of Class II and Class III towns increased by 130 per cent, i.e., from 97 lakh in
1951 to 224 lakh in 1981. While the number of class IV towns has increased from 85
lakh to 149 lakh, the number of Class V and class VI towns and their total population
declined sharply during the same period.

Again the number of big cities with million plus population has increased from 12 in
1981 to 27 in 2001 and their total population also increased from 42.1 million in 1981 to
73.0 million in 2001. As per 2001 census the size of population of four-cities of India
are 11.9 million for Mumbai, 4.58 million for Kolkata, 9.8 million for Delhi and 4.2
million in Chennai.

Essay # 4. Causes of Rapid Urbanisation in India:

Rapid urbanisation is taking place in different parts of the country in and around some
big cities and towns of the country. The growing trend of urbanisation as reflected in
growing concentration of major proportion of urban population in some big cities.
The factors which are largely responsible for such rapid urbanisations are
mentioned below:
(i) Natural Increase in Population:
Rapid unbanisation is taking place as a result of high rate of natural increase in
population. Natural increase is taking place when the birth rate in urban areas exceeds
the death rate. The natural growth rate of urban population is higher than that of rural
due to higher net survival rate arising out of better health and medical facilities.

Improvement in health and medical facilities, drinking water supply and sanitation
facilities have reduced the incidence of water-borne diseases, communicable diseases
etc.

Accordingly, the birth rate in urban areas in 1971 was estimated at 30.1 per thousand as
compared to the death rate of 9.7 per thousand which subsequently reduced to 24.3 and
7.1 per thousand in 1991. Thus the natural growth rate is stated too high because of
large difference between birth and death rates.

The death rate in urban areas declined considerably due to better availability of medical
and health service, safe drinking water supply and improved sanitation facilities.

This natural increase in population is largely responsible for phenomenal growth of

population in urban areas i.e. 46 per cent in 1971-81 and 36 per cent in 1980-91 decade
as compared to that of 19 per cent and 20 per cent growth rate attained in rural areas of
India during these two decades.
(ii) Migrations:
Rural-urban migration is considered another important factor responsible for rapid
urbanisation in India. The rural to urban migrations have been resulted due to many
factors during the post independence period. Creation of many activities of
manufacturing and trading as a result of industrial development has resulted migration
of rural people to urban areas for seeking jobs and higher incomes as well.

After the partition of the country in 1947 rural uprooted people started to settle down in
urban areas. Poor living conditions and negligible arrangement in respect of education
and health have also attracted large number of rural people to migrate and settle in
urban areas in search of good education, health facilities, better living conditions and
securities of life.

As a result of heavy public investments in industry and mining, huge industrial

development and sustained agricultural development urbanisation takes place. Thus
due to these “pull factors”, large number of rural people migrate to urban areas.

However there are certain “push factors” where due to worse economic conditions a
number of rural people are pushed out of villages due to economic compulsions. Thus in
the current phase of urbanisation both the “pull factor” and “push factor” are very
much operational.
(iii) Expansion of Industry and Trade:
In recent years, urbanisation takes place with the growing expansion of industry and
trade in a particular state of region. Growth of an industry with its ancillaries along with
localisation of industry would always create a favourable situation for the growth of an
urban set up.

Similarly, growth of business and trade along with establishment of an active market
always provides adequate support toward growing urbanisation in those places related
to the development of industry and trade.

(iv) Boundary Changes of Towns:

With the extension of the boundaries of cities and towns, more and more rural areas are
gradually being included in rural areas. Although life in these newly extended areas
remains rural initially but the inclusion of these areas into these towns and cities
necessarily increases the number of urban population.

5. Consequences of Rapid Urbanisation:

The rapid urbanisation is subjected to both healthy and unhealthy consequences and
aspects.
(i) Healthy Aspects:
Rapid industrialisation results the development and setting up of many industrial cities.
Along with manufacturing units, ancillaries and service sector started to grow in those
urban areas. Secondly, new and additional employment opportunities are created in the
urban areas in its newly expanding manufacturing and service sector units.

This would result rural-urban migration and “industrialisation- urbanisation

process” to set in. Thirdly, growth of cities can give rise to external economies so as to
reap the benefit of economies of scale for various services and activities.
Finally, urbanisation results changes in attitudes and mind set of the urban people
resulting modernisation in behaviour and proper motivation which indirectly helps the
country to attain faster economic development.

(ii) Unhealthy Aspects:

Although development of the economy are very much associated with urbanisaition but
it has resulted some serious problems. Firstly, growing urbanisation is largely
responsible for increasing congestion in the urban areas. Too much congestion has
resulted problems like traffic jams, too much concentration of population, the
management of which is gradually becoming very difficult and costly.

Secondly, too much of population is another unhealthy aspect of urbanisation which

creates urban chaos related to housing, education, medical facilities, growth of slums,
unemployment, violence, overcrowding etc. All these would result in deterioration in
the quality of human life.

Finally, as a result of urbanisation, large scale migration takes place from rural to urban
areas. Such large scale migration of active population from rural areas would result loss
of productivity in rural areas, leading to poor conditions in village economy. Thus
urbanisation, beyond a certain point, would result in unhealthy consequences.

(iii) Urban Policy Measures:

Considering unhealthy consequences of rapid urbanisation, it is quite important to
formulate an urban policy which can provide urban development with minimum
undesirable effects.

The measures which can be largely followed include:

(i) Integrating urbanisation process with the development plans of the country for
developing non-agricultural activities like manufacturing services and infrastructure
leading to attainment of external economies,

(ii) Making arrangement for selective urban development so as to minimise the

disadvantages of these large sized towns,

(iii) To develop rural districts, by developing towns in highly rural districts,

(iv) To develop satellite townships in and around large cities; and

(v) Relieving pressure on large urban centres by developing urban amenities in

adequate quantities so as to make urban living peaceful.

Role of Urbanisation in Economic Development of India:

Urbanisation and economic development are closely associated. Economic development

of a country indicates increase in the level of per capita income and standard of living
along-with the enlargement of employment opportunities for its growing population.
With the attainment of economic development and growing industrialisation, the
process of urbanisation starts at a rapid scale.

Some areas emerge as a large urbanised centre with large scale industrial and trading
activities. These areas started to offer increasing number of employment opportunities
leading to a shift of population from rural areas to these urbanized centres. Thus
economic development of a country assists in its process of urbanization.

Growing industrialisation raises the rate of economic development along-with the pace
of urbanization in the country. Increase in the rate of economic development raises the
level of per capita income and standard of living of the people which in turn enlarges
the demand for various goods and services.

This increase in aggregate demand expands the production system leading to a large
scale production of various goods and services.

All these lead to increase in the pace of urbanization in the country. Thus there is a good
correlation between the level of per capita income and the pace of urbanization. In
India, the coefficient of correlation between the proportion of urban population to total
population and the level of per capita income is estimated at 0.5, which is significant.
Moreover, economic development paves way for growth of cities and towns. Thus with
the increase in the number of cities and towns the proportion of urban population to
total population is also increasing.

But higher degree of urbanisation cannot reduce the degree of unemployment in India
significantly through the absorption of increasing number of surplus labour force from
rural areas as the scope for raising urban employment is also limited. In India there is
an insignificant positive correlation (0.18) between the proportion of urban population
and the rate of daily status of unemployment.

Moreover, there is a mild negative correlation, i.e., 0.22, between the proportion of
urban population and the percentage of population below the poverty line in India.

Factors which are responsible for this typical situation are:

(a) neglect of urban slums in our planning coverage;

(b) growing exploitation of unorganised sectors by capitalists, contractors, landlords

etc. and

(c) increasing application of capital intensive techniques in urban areas.

Thus in comparison to the degree of urbanisation achieved in India, the absorptive

capacity of the urban centres is very low. This shows the reason why urbanised centres
in India could not make much headway in reducing the degree of unemployment in the
country.

Thus, in conclusions, it can be observed that the attainment of high rate of economic
development paves the way for growing urbanization along-with the increase in the
level of per capita income and the development of various urbanized infra-structural
facilities like transportation and communication, housing, education, health, trade,
banking etc.

But this growing urbanisation has also led to huge concentration of population in urban
areas, resulting in various evils side by side such as growth of slums, increasing
congestion and pollution, problems of transportation, housing, water supply, health
services, unemployment and poverty.

Understanding Poverty and Inequality in Urban India since Reforms

Bringing Quantitative and Qualitative Approaches Together
Vamsi Vakulabharanam, Sripad Motiram

Having grown considerably in the past two decades, Indian cities have become highly
unequal spaces – economically, spatially, socially and culturally. Both quantitative
approaches and qualitative methods have been used to study and measure the rising levels
of inequality and the extent of poverty of the cities. While both have their problems, this
paper claims that notwithstanding their respective limitations, these two approaches have
captured different dimensions of the complex Indian urban process, even if they have rarely
made an effort to speak to each other. The authors offer their own perspective on how
these approaches can learn from each other and move forward.

For their comments on a previous version, we thank an anonymous referee, Anant

Maringanti and Ashima Sood.
Vamsi Vakulabharanam (vamsi.vakul@gmail.com) is at the department of economics,
University of Hyderabad and Sripad Motiram (sripad. motiram@gmail.com) is at the Indira
Gandhi Institute of Development Research, Mumbai.

Introduction
he urban process1 in India is fundamentally constitutive of the high growth that India has
T been witnessing since the 1980s. This process has received major impetus from the infl ux
of agrarian capital into the cities from the 1980s onwards, the consolidation and growth of
old and new urban capital, as well as the entry of foreign capital since the 1990s
(Damodaran 2008; RBI 2012 and various issues). State investments of a facilitating kind (for
example, urban infrastructure, as opposed to state-owned enterprises) have increased, too.
Cities have witnessed signifi cant in-migrations of working populations from agricultural
hinterlands since colonial times (Chandravarkar 2006), and this process has intensified
further in recent decades (Shrivastava 2011). City spaces have also undergone rapid reconfi
gurations over the last two or three decades with the emergence of wealthy enclaves and
new towns (Bhattacharya and Sanyal 2011), which have tended to be located away from
older parts of the cities, viewed as congested, mixed (for example, in terms of income) and
largely unplanned (or not amenable to modern planning). Across Indian cities, there has
also been a significant growth in slums and pockets of poor neighbourhoods that house the
poorer recent migrants and the older urban poor.
All the above processes have coalesced in such a way that Indian cities have become highly
unequal over the last two decades – economically, spatially, socially and culturally (Motiram
and Vakulabharanam 2012; Vakulabharanam 2012; Zacharias and Vakulabharanam 2011).
Quantitative approaches,2 using large macro surveys and measures, which have been
relatively more popular with economists, do refl ect these rising urban inequality levels. By
all anecdotal accounts, Indian cities are also characterised by high levels of poverty, and
what has been achieved (if at all) on the front of poverty reduction is modest. However,
there is no consensus on the question of poverty.
It is important to understand at the outset that there are several problems with the
quantitative approaches. On the question of poverty (urban or rural) in India, there is
considerable controversy and disagreement on basic questions such as: How many poor are
out there? What is the trend/rate of changes in poverty? On the question of inequality, too,
there are strong reasons to believe that there is serious underestimation of both the levels
and increases in inequality (Jayadev et al 2007). In december 1, 2012 vol xlviI nos 47 & 48
general, scholars using quantitative approaches have tended to focus on macro databases
that come with a claim of an
“objective” representation of reality, when it is not at all clear if such a strong claim can be
justifi ed. There could be problems concerning how representative these data samples are
of the whole population; whether the questions in the surveys are equally comprehensible
to all respondents; whether these questions adequately refl ect the agency of the
respondents; and whether the mechanisms involved in social dynamics can be unearthed
through these questions. Also, similar looking macro/statistical outcomes of poverty or
inequality may hide the varied mechanisms that produce these outcomes. Therefore,
quantitative approaches alone are not adequate to make sense of these deeper
phenomena, which require an appreciation of the structural and historical context in which
the present-day urban centre is located.
In our reading, the qualitative literature (for example, from geography, anthropology,
sociology or political science),3 which has mostly relied on research methods such as ethnog
raphy, participant observation and spatial mapping, has been very insightful in
contextualising the changes that we are witnessing in urban India, and in engaging with the
actual processes and mechanisms, and with the diversity and heterogeneity that
characterises the urban. However, these approaches are rooted in particular traditions, with
their own blind spots. Although there are notable exceptions, these studies have tended to
focus on micro contexts (for example, particular slums) without investing adequate effort
into theorising the relations between these micro contexts and the larger macro context.
We also perceive a contradictory set of tendencies among these studies. On the one hand,
there is a strong belief that it is epistemologically unfeasible to go beyond the subjective,
and the micro contexts. On the other, there is also a tendency to theorise the entire social
totality from a micro-study, which may produce a whole range of confl icting claims that are
somewhat impossible to resolve rigorously or satisfactorily. As a r esult, this literature is
characterised by a deep fragmentation, from which a coherent picture of the larger s ocial
reality is somewhat hard to construct.
In this paper, which is intended for a broad audience of social scientists and policymakers,
one of our claims is that notwithstanding their respective limitations, these two (that is,
quantitative and qualitative) approaches have captured different dimensions of the
complex Indian urban process, even if they have rarely made an effort to speak to each
other. We present below (Sections 2 and 3) both the insights provided by an analysis of the
larger macro databases, as well as the insights from various qualitative and conceptual
appro aches to produce a richer account of the questions of equity and justice in the Indian
urban context. We also offer our own perspective (in Section 4) on how these approaches
can learn from each other and move forward.

Quantitative Approaches
Our focus in this section is on studies that have used large, nationally representative
databases (National Sample Surveys (NSS), Census, and National Family Health Surveys
(NFHS)) to understand urban poverty and inequality in India. There is an abundance of such
studies, so given the restrictions of space, we survey this literature selectively. We focus on
more recent studies (that have appeared since the late 1990s) and present the latest
available evidence on the extent, trends and determinants of poverty, and the mechanisms
through which it persists.

Do We Know Anything Definitive about Urban Poverty?

We fi rst look at the studies that have tried to estimate the number of urban poor, the
rate/extent of urban poverty and their trends. In the moneymetric or unidimensional appr
oach, which is by far the dominant one and on which controversies have centred, 4 a poverty
line in monetary terms is postulated and various measures (for example, the percen tage of
people below the poverty line, viz, the head count r atio (HCR)) are computed, based upon
this. At the outset, we should acknowledge that any discussion of this approach has to be
conducted in the shadow of the recent controversy on o ffi cial poverty lines (that is, the
recommendations of the T endulkar Commi ttee). There has been a series of critiques (for
example, Subramanian 2011; Suryanarayana 2011; Swaminathan 2010), and there is near
consensus now that the methodology adopted by this committee is shown to be fl awed –
essentially, there is no consistent norm that one can discern, beyond an attempt to fi nd a
poverty line that would result in a poverty rate perceived as reasonable, that is, neither too
high nor too low. In a way, the government itself has recognised these problems, since it
has recently appointed a new committee (chaired by Rangarajan) to set a new poverty line.
In a lucid and comprehensive account, Subramanian (2011) has shown how this is but the
latest chapter in a long saga of problems and inconsistencies that have plagued the setting
of Indian offi cial poverty lines since Independence. There are several details (which i
nterested readers can refer to in Subramanian 2011), but in the interests of space, we skip
these and illustrate one i mportant controversy. The method suggested by the 1993 expert
group involved rural and urban poverty lines for a “base year” (1973-74), and the updating
of these lines regularly based upon the prevailing prices. The poverty lines for the base year
were set (based upon results from the NSS consumption e xpenditure survey for 1973-74)
so that they corresponded to a minimum calorie requirement (2,100 and 2,400 kcal for
urban and rural areas, respectively), although the correspondence of these lines with these
requirements was rough (at best). The problem with this approach is that if one agrees with
it, one is equally justifi ed in taking any year (and not just 1973-74) as the base year and
using this procedure of updating. Put simply, for the year that one is interested in, one
could just examine the proportion of people who fail to meet the calorie requirement to
obtain the HCR. This is problematic since, depending upon the base year chosen, the trends
and extent of poverty differ.
Choosing an official base year (1973-74) provides the comforting trend of a secular decline
in urban poverty using NSS consumption expenditure surveys. This is what many scholars
(including us; for example, Sen and Himanshu 2004a, 2004b; Himashu 2006) have found
using offi cial poverty lines and NSS surveys on monthly consumption expenditure. The all-I
ndia urban HCR has declined from about 42-44% (various estimates) in 1983 to about 26%
in 2004-05. However, Patnaik (2007: Table 2) uses the same data and takes a direct
approach by looking at the proportion of people in urban areas who fall short of the
nutrition norm of 2,100 kcal. She fi nds that this proportion has declined from 58.5% in 1983
to 57% in 1993-94, but then increased to 64.5% in 2004-05. From the above discussion, it is
clear that one could claim that the offi cial method ology is consistent with both these
trends (and several o thers).
Other estimates are available for this period (based upon the NSS Employment and
Unemployment Surveys) from the National Commission for Enterprises in the Unorganised
Sector (NCEUS). The NCEUS was constituted in 2004 by the then United Progressive Alliance
(UPA) government to investigate and report on the conditions of the informal sector. It
estimates that in 2004-05, the unorganised sector5 contributed about half of the GDP
(NCEUS 2008: Table 2), and that unorganised workers6 comprised 92% of the total
workforce
(NCEUS 2007: 1). It uses a consumption threshold of Rs 20 per person per day and estimates
that in 2004-05, as high as about
77% of India (rural and urban, NCEUS 2007: Table 1.2 and p 1) fell below this threshold. The
number of these “poor and vulnerable” has actually steadily increased: 732 million in 1993-
94, 811 million in 1999-2000, and 836 million in 2004-05, although their proportion in the
population has steadily declined. It is worth pointing out here that the number of poor (and
not just the percentage of poor) is relevant if we want to budget for and target the poor;
therefore, an increase in the number of poor has important implications.
The Planning Commission (2012: Tables 2, 3), using the Tendulkar Committee’s poverty
lines, documents that the urban HCR declined from 25.4% (814.1 million people) in 2004-05
to 20.9% (764.7 million people) in 2009-10, but no one takes these estimates seriously.
Essentially, we will have to wait for the recommendations of the latest committee for a
consensus to emerge on the extent of urban poverty and the number of urban poor.
However, the above controversies do not distract from some basic trends, correlates and
mechanisms; we discuss these below. One can use the distribution of consumption
expenditure for various socio-economic groups and experiment with various poverty lines
to examine which of these groups has a higher prevalence of poverty. Motiram and
Naraparaju (2012) do so7 using data from the 61st (2004-05) and 66th (2009-10) rounds of
the NSS consumption expenditure survey, and fi nd a clear pattern for caste and
occupational groups. Among caste groups in urban areas, poverty is highest among the
scheduled castes (SCs), followed by the Other Backward Classes (OBCs), scheduled tribes
(STs), and others. Among occupational groups, urban poverty is highest among those
involved in casual labour, followed by the self-employed. Apart from caste and occupation,
other interesting dimensions have also been explored, for example, the size of the city and
migrant status. Dubey et al (2001) use NSS data to show that for all o ccupational groups,
the incidence of poverty declines with city size, that is, the larger the city or town, the lower
is the incidence of poverty (a fi nding also supported by Hashim 2009 and Kundu and
Sarangi 2007). They argue that this could be due to better economic and social
infrastructure in larger c ities – while the former contributes through better opportunities,
the latter does so through transfers. Migration status has also been found to be negatively
associated with urban poverty. U sing NSS data, Kundu and Sarangi (2007) show that
migrants have a lower likelihood of being poor as compared to the non-poor, although
there are differences among migrants, with rural- urban migrants displaying a higher
likelihood compared to urban-urban migrants.
No discussion of urban poverty and urbanisation is complete without a reference to slums.
Data from slums are present in the census, NSS and NFHS. Gupta et al (2009) use NFHS data
for 2005-06 to examine eight large cities.8 They defi ne the poor in relative terms, as those
falling in the lowest quartile of a wealth index. Defi ned this way, poverty varies from 7% in
Mumbai to 20% in Nagpur. They fi nd that the percentage of slum-dwellers varies across
cities and depends upon the defi nition of a slum – whether it is designated a slum in the
2001
Census, or by the NFHS enumerator. Using the census definition, the variation is from 56.9%
in Mumbai to 17.4% in Hyderabad, whereas using the NFHS, it varies from 57.4% in Mumbai
to 2.8% in Indore. As expected, the prevalence of poor is much higher in slums as compared
to non-slums (except in Indore) by both the above defi nitions; for example, according to
the census, 41.7% of slum-dwellers in Delhi are poor, whereas the corresponding figure for
non-slum-dwellers is 5%. However, there is a substantial percentage of poor in non-slum
areas, too, for example, 14.7% in Nagpur.

Urban Inequality after Economic Reforms

A discussion of poverty is not complete without referring to inequality or relative
deprivation, broadly speaking. In the literature on inequality, a distinction has been made
between two different kinds of inequality – interpersonal (or vertical) inequality and
horizontal inequality (among subgroups of the population). Motiram and Vakulabharanam
(2012) present an overview of the relevant literature and changes in both vertical and
horizontal inequality in nominal consumption expenditure since the 1990s, based upon the
50th (1993-94), 61st (2004-05) and 66th (2009-10) rounds of the NSS consumption
expenditure survey. They show that interpersonal inequality has displayed a steadily rising
trend in urban areas – the urban Gini index has increased from 34.4% in 1993-94 to 37.6% in
2004-05, and then to 39.3% in 2009-10. This is also true for most of the states – they have
witnessed an increase in urban inequality (as measured by the Gini index) during the period
1993-94 to 2009-10.
When it comes to horizontal inequality, there are several subgroups that can be considered,
for example, caste, class, state/region and sector – rural/urban. One way to understand
changes in horizontal inequality is to decompose the overall inequality into “between” and
“within” components using an inequality measure that belongs to the single-parameter
entropy family of inequality measures (for example, Theil). An increase in the share
contributed by the between component can be interpreted as an increase in inequality
among subgroups. Motiram and Vakulabharanam (2012) show that at the all-India level,
rural-urban inequality and inequality among states have increased since 1993-94.
Vakulabharanam (2012) decomposes the Gini index using the Yitzhaki (1994) methodology
(which yields an overlapping component in addition to the between and within
components) to show that class-based inequality (that is, inequality among classes) has
increased since the 1980s. While the Indian growth experience in the 1980s was not
inequality inducing, it has become sharply inequality inducing since the 1990s.
The story of the divergence of urban elites (owners, managers and professionals) from
urban workers as well as the rural population comes across clearly from the 1980s itself. In
fact, the urban elite, constituting about 10-15% of the total population in the country, has
monopolised almost the entire relative gains after the economic reforms. Using the NSS All-
India Debt and Investment Survey, Jayadev et al (2011) show that during 1991-2002, the
median wealth of the urban elite was much higher and grew faster compared to that of the
middle classes and manual workers. All this brings out the story of an emerging urban
enclave in class terms, which indicates an extremely skewed and unequal growth. On caste,
using the same survey, Z acharias and Vakulabharanam (2011) show that urban SCs are at
the bottom of the urban wealth ladder, with urban STs having a marginally higher median
wealth, followed by the OBCs and non-Hindus. The so-called “forward caste” Hindus are
almost like an urban wealth enclave too, and overlap l ittle with the other caste groups.
Starting from a low wealth base, the urban SCs have registered a higher growth rate in
median wealth compared to the other groups
(especially the urban STs).
While studies using the statistical approaches discussed above have been insightful in
providing broad and nationally representative trends, these insights come with certain
limitations. They have scarcely provided clues as to why urban poverty persists and
why/how people in urban areas move in and out of poverty (more on this below).
Moreover, they have been somewhat silent on the larger structural and historical forces
that help us understand and locate urban poverty, inequality and exclusionary processes.
Studies that have used qualitative approaches have been more illuminating in this regard,
and we turn to them next.

Qualitative and Conceptual Approaches

It is hard to provide a synthesis of the qualitative and conceptual approaches because of the
presence of considerable heterogeneity. Examining the myriad studies that defi ne this
literature, we can discern disciplinary differences, differences in epistemology, and in scope.
Given this, what we aim to do below is select representative studies that provide insights
into the living and working conditions of the urban poor, and the processes of exclusion
operating in Indian cities.

How Do the Urban Poor Live and Work?

From the above discussion, it is clear that the urban poor are disproportionately
concentrated in casual labour and among the self-employed. Most of these are in the
“informal sector”, a term coined by anthropologist Keith Hart in his 1973 study of Ghana to
describe a variety of occupations taken up by people in cities in developing countries. Since
its fi rst use, this term has been deployed widely and this sector studied extensively. In a
series of works based upon an intensive study of the state of Gujarat over a long period of
time, Jan Breman (1996, 1999, 2010, particularly Chapter 1) provides several insights into
the functioning of the informal sector in urban India. We draw upon these works below.
He argues that there is a considerable number and proportion of labourers who “circulate”
between rural and urban areas, working when they are employed in the informal sector and
returning to their villages otherwise. The extent of this phenomenon, which can be
described as “footloose” or “nomadic” labour, is seriously underestimated in national
surveys (for example, the NSS), which have provided a fi xity of residence for the
respondents.9 These labourers are drawn from backward communities and lack land,
education, or social networks. Poverty persists among them because they cannot fi nd
sustainable livelihoods in the agrarian economy, and their temporary status does not allow
them to fi nd a foothold in the urban economy. Interestingly, the process of circulation is
not completely a function of demand and supply, and is sometimes a deliberate strategy on
the part of employers to gain access to a pliable workforce, which also serves the purpose
of disciplining the local labour. Since the conditions of this group (for example, the costs
that they incur) are not adequately captured, one consequence of the above is that poverty
may be underestimated using the NSS surveys.

Supplementing Breman’s work, Gidwani and Sivaramakrishnan (2003) argue that the
standard marginalist (used in neoclassical economics) and Marxian narratives of migration
are reductionist and economistic. The authors bring in larger concerns of space, culture,
politics and labour mobility to argue that the logic of circulation or circular migration is
governed also (and sometimes mainly) by non-economic considerations, which can arise out
of counter-hegemonic politics as well. They emphasise the role of agency and the
subjectivity of the migrants, who may use consumption or labour deployment as ways of
countering certain oppressive cultural or political processes in their places of origin.
The informalisation and circulation of labour have to be understood in the context of a
larger intellectual discourse (for example, on the part of the World Bank) supporting these
processes, and viewing labour mobility in a positive light. The diffi cult living conditions of
informal workers are a result of certain major failures on the part of the Indian state, which,
unlike states in the west, did not provide adequate (cooperative) housing for the workers
(Breman 2010: Chapter 1). Since the early waves of migration induced by industrialisation
(particularly in cities like Mumbai) began in the colonial period, this has to also be located in
the context of the particular regime of colonialism that India witnessed, and the relationship
between the colonial state and its “subjects”.10
Other features of the informal sector, which are not wellknown, have also been highlighted
in the works of Breman and in some other studies. The informal sector is not homogeneous,
but differentiated by the presence of a hierarchy of jobs. Moreover, contrary to received
wisdom, the purpose of the informal sector is not a temporary one, providing respite to
migrants who could use it to move to better jobs in the formal sector. It also does not have
an infi nite absorptive capacity and is actually characterised by unemployment and
underemployment, phenomena that are not well understood. The informal and formal
sectors are actually locked together and interact with each other in complex ways (also see
Guha-Khasnabis et al 2006); therefore, the dualistic framework which has hitherto been the
dominant paradigm informing both policymakers and scholars is simplistic.
The complexity and internal differentiation of the informal sector is confi rmed by several fi
eld-based studies, which have focused on particular occupations and sectors. These have
also provided valuable insights into the conditions under which informal workers live and
work. We focus on two of these occupations – scrap/waste picking and street vending.
There is extensive literature on the former, for example Furedy (1984), Chikarmane and
Narayan (2000) and Chikarmane (2010). Chikarmane and Narayan (2000) document the
different layers that characterise this industry – waste pickers, itinerant buyers and scrap
dealers, with the waste pickers at the bottom of the hierarchy. While the waste pickers are
mostly female, the itinerant buyers are mostly male. There are particular caste groups that
enter this trade, and given this, a patronal but exploitative arrangement is formed between
the traders and itinerant buyers/waste pickers. This industry also illustrates the fact that for
the people involved in low-skilled occupations, there may be hardly any mobility and escape
from poverty. Most people involved in waste picking spend their whole lives in this activity –
starting as children and continuing till they become physically incapacitated.
Unlike waste picking, street vending has not received much scholarly attention (Sood 2011),
despite being the ubiquitous and prominent face of the informal sector and providing
livelihood to more than a crore individuals (EPW 2007). However, there are some recent
scholarly studies that one can draw upon, for example Anjaria (2006); Kalhan (2007); and
Bhowmik (2010). A study of street vending provides a good illustration of the relationship of
the informal sector vis-à-vis the state and the urban elite/middle classes. The state tries to
regulate street vending and views it as a source of revenue, while on the ground, it is
predatory and rent-seeking (extracting bribes). The affluent urban elite view street vendors
as a nuisance and an eyesore, obstacles in the path of Indian cities moving on to “world
class” status. The less affluent middle classes take an ambivalent view, seeing vendors as a
source of cheap bargains while at the same time sharing the above attitudes. The
withdrawal of the state and the wave of decentralisation in recent times have created a
space for elite non-governmental organisations (NGOs) and residential welfare associations,
which have been able to promote the above ideas and attitudes with some success – Bhan
(2009) is another example in this regard. He shows how “slum clearance” and “slum
evictions” have increased dramatically in Delhi since the turn of the (21st) century. One of
the important differences between these evictions and those of the past is that the former
have been carried out at the behest of courts, which have themselves ruled in favour of
non-poor resident welfare and trade associations.
It is well known that many people in the urban informal sector, particularly the migrants,
live in slums. In his path-breaking work, Davis (2006) provides further insights into the
process of slum formation, the growth of the informal sector, and the growth of cities in
general. A few fi ndings from his study are worth pointing out. In India, in contrast to China,
it is the medium-sized – and not the larger – cities that have seen enormous growth.
Moreover, in larger cities (for example Mumbai) growth has proceeded concomitantly with
deindustrialisation. Across the developing world (including India), an important contributor
to this growth is migration from the countryside; however, the countryside is itself
becoming urbanised while sending migrants to the cities. Several fi eld-based studies have
also provided further insights into slum conditions and the question of how poor
households, particularly in slums, could get trapped in poverty. Banerjee (2000), based on a
study from Delhi and Mumbai, argues that many slum children are not in school due to the
inadequacies of the schooling system, rather than the economic backgrounds of their
families. Kumar and Agarwal (2003), based on evidence from Delhi, documents the
surprising finding of considerable inequality within slums, for example between men and
women, and among migrants from various states.

Urban Growth, Rising Inequality and Processes of Exclusion

Sanyal (2007) makes a few general arguments about postcolonial capitalism that are
applicable to the urban development in India as well. His main argument is that postcolonial
capitalism operates on a twin trajectory of creating a space of capital that functions on the
one hand with the dynamics of capitalism (as thinkers like Marx have described it), and on
the other, creates a “need economy” for all those not incorporated into the domain of
capital. The relation between these two is not one of annihilation, but one of exclusion,
primitive accumulation, and at the same time a reversal of primitive accumulation through
what Sanyal refers to as “developmental governmentality”. Applied to the urban, the fast-
growing urban formal sector can coexist with a large informal sector that c aters to the need
economy of the majority of the workforce (“the dispossessed and the outcasts”). In this
process, the formal/ capitalist sector could dispossess the informal continuously at the same
time as it transfers some of its surpluses to renew the informal/need economy. This
complex interaction precludes a larger narrative of historical transition in favour of an
understanding that shows how capital itself constantly r einforces a non-capitalist space to
ensure its own continued survival. While Sanyal’s description of the urban process as one
that simultaneously includes a select minority and excludes the large majority is insightful, it
simplifi es the relations between the two into one that is only mediated through
developmentalist welfarism and dispossession. In reality, the so-called excluded are on the
fringes of the formal economy – subsidising it and feeding various cheap inputs to it, while
being periodically dispossessed by it. Sanyal’s insights, along with the logic of circular
migration (described above), which shows how the informal workers participate and leave
the circuits of capital using their agency (or due to structural factors), may provide a better
framework to explain how the urban process is unfolding in India. Also, if we take the
insights offered by the work on “waste” and its circulation in Indian cities, the solid
boundary that Sanyal draws between the world of capital and the world of
need/subsistence becomes far more porous. Despite this, Sanyal’s arguments throw
considerable light on the inequality inducing growth processes that have characterised
urban development in India over the last two decades.
Other studies, too, have provided insights into the complex processes of exclusion and
inclusion occurring in India today. For example, Gooptu (2011) focuses on the process of
reimagining cities as entrepreneurial and dynamic, and as keys to the future growth of
India. This results in a contradictory set of tendencies. On the one hand, it leads to elite and
middle class revolt against the poor and to their distrust of politics (particularly electoral
politics), which they see as disruptive of the developmental process and one that allows the
poor to be “vote banks”. On the other hand, there is also a realisation that the poor have to
be “included” in the growth process, which is done in two ways – as entrepreneurs and as
stakeholders. The former is accomplished through NGO, international donor and state-
sponsored schemes like self-help groups, microfinance, and so forth. The latter has gone
along with decentralisation (the 74th amendment, which empowers local bodies), and the
poor have been incorporated through local institutions and projects, for example, Ward
Committees, Slum Works Maintenance Committees. The net effect of these contradictory
tendencies has been that while inequality has grown and the poor are still vulnerable, their
dissent is muted, lacking overt political mobilisation.
Harriss (2006) examines a different source of exclusion in modern India by focusing on “civil
society” activism, which has grown in recent times. He draws upon survey-based and
ethnographic evidence from Delhi, Mumbai and Chennai to throw light on the tensions and
confl icts between the middle classes and the informal working classes. The middle classes
dominate civil society activism, and those belonging to the informal sector are largely
excluded from it. To the extent that participation in civil society organisations contributes to
political participation, this is a mechanism through which political inequality is accentuated.
The one exception to this trend is struggles over women’s rights, livelihoods and housing. In
these movements, women belonging to informal, working-class households are also active.
However, housing and livelihood are issues over which the middle classes and working
classes come into confl ict. Middle-class apathy has also been used to explain why the
sanitary conditions under which many of the urban poor in Indian cities live are appalling.
Chaplin (1999) argues that the Indian middle classes (having monop olised the basic services
provided by the state) have little incentive to support moves to improve sanitary conditions
in general, since compared to the poor, they are largely protected from ill health resulting
from poor sanitation. Moreover, there is inadequate pressure “from below”, in contrast to
mid-19th century Britain, where there was considerable organised trade union pressure. 11
While we have discussed exclusionary processes occurring on the basis of class and caste,
some studies have focused on religion, particularly on the status of Muslims. In a recent
study combining statistical data with ethnography (Jaffrelot and Gaynor 2012), 12 several
scholars studied the conditions of Muslims in 10 Indian cities.13 Muslims (along with Parsis
and Jews) are the most urbanised community in India, although more than half of them live
in seven states. Their urban poverty levels are much higher than their rural poverty levels,
and are also higher than the urban poverty levels of the Hindus. As pointed out by the
Sachar Committee, compared to the national average, urban Muslims are substantially
under- represented in the formal sector. The marginalisation of Muslims can be located in a
historical context – with the advent of British colonialism, partition, and the loss of the
princely states. In recent times, an important contributing factor has been the rise of Hindu
nationalism and the concomitant rise in communal violence. Repeated bouts of communal
violence have resulted in ghettoisation in some cities (for example, Ahmedabad), and spatial
segregation. Ghettoisation has taken a particular form, wherein despite other differences
(for example class and caste), Muslims have begun to stay in the same locality, insulated
from the rest of the city, a locality where the state services (schools, roads, etc) are very
poor. Paradoxically, given that Muslims belonging to different socio-economic strata are
resident in the same locality, the poor in these ghettos are better off compared to poor
Muslims living in cities (Mumbai, for instance) where the Muslim elite and middle classes do
not interact with them. Muslims are better off in the south and the east, compared to their
compatriots in the west and the north.

Discussion and Conclusions

What is the composite picture of distributional changes in urban India that we get from the
quantitative and qualitative approaches? First, on the question of urban poverty (along any
single dimension like consumption or income), the evidence from quantitative approaches
is not adequate to come to any consensus in answering even simple questions, like: How
many people are poor in urban settlements in India? What has been the trend/rate of
poverty? What is the pace of poverty reduction over time? To a large extent, the blame can
be laid on the Planning Commission and successive committees, which have been unable
and/or unwilling to adopt a set of coherent and defensible norms in fi xing the poverty line.
The Indian situation is not unique in this regard; the World Bank has created considerable
controversy and confusion through its international poverty lines ($1 per day, $2 per day,
etc; see the contributions in UNDP 2004).
This is not the place to go into details, but one good way out of this mess is to adopt a
capability-based approach (although it is diffi cult to implement) by fi xing the threshold
(that is, poverty line) at a level such that people above this threshold can afford some basic
capabilities (for example, housing, shelter, food) – a proposal conceptually similar to the
one made by Reddy (2004; also see Pogge and Reddy 2003) in the debate on international
poverty lines. We suspect that if such an approach is adopted, the poverty levels in India will
be much higher than what the offi cial fi gures have hitherto told us (since the offi cial
poverty lines have been kept artificially low). We also expect this approach to result in rates
of poverty reduction that are lower than the corresponding offi cial rates. Also, although
there are some conceptual and operational issues that need resolution, it may be worth
moving beyond analyses of urban poverty along a single dimension (for instance,
consumption) and strengthening the tradition of multidimensional analyses in the Indian
context.14
Due to a paucity of nationally representative panel data, it has not been possible to
rigorously understand how/why people move in and out of poverty, and the mechanisms
through which urban poverty persists and is reproduced.15 However, we have some
evidence showing that access to credit, education and family characteristics 16 play an
important role.
Second, the evidence on inequality is much clearer from quantitative approaches (although
there is an understatement of the levels of inequality). Since the advent of economic
reforms, the fast-paced growth in India has become intertwined with rising inequality,
primarily driven by the increasing urban inequality and rising gap between urban and rural
areas. Within urban spaces, there has been a rapid increase in the gap between urban elites
and urban workers (formal and informal), and this rise in class inequality is the basis for the
increasing urban inequality. In the past two decades, as Indian growth has become centrally
constituted by the Indian urban process, the rural populations (particularly agricultural
populations, who have been unevenly affected by a nationwide agrarian crisis since the late
1990s) have been left behind, giving rise to the growing urban-rural gap.
The qualitative approaches on urban poverty and inequality add valuable insights to this
picture, by showing how the specifi cally urban dynamics that Indian growth has unleashed
have affected the livelihoods of the urban poor and their inclusion in the growth process. By
focusing both on the nature of working groups and their dynamics, these approaches point
to the need for a correction in our understanding, sourced from the estimates of large-scale
surveys. It is clear that urban poverty levels probably run much deeper and are chronic by
nature, given the kind of occupational continuities and the low valuation of the labour that
the working poor in cities (especially in the informal sector) are forced to perform. It is also
probably true that the poor perceive their condition in myriad ways, some of which are
different from those of “experts” and policymakers.17 The qualitative and conceptual work
on inequality has delineated the deeper processes at stake, such as postcolonial capitalist
dynamics, or the nature of the entrepreneurial and neo-liberal city, or the nature of middle
class civil society activism, or exclusion and segregation based on caste or religion, which
have shaped urbanisation and its iniquitous tendencies in the recent Indian experience.
Studies that have combined quantitative and qualitative approaches in a nalysing poverty
have provided richer and counter-intuitive insights. For example, Baud et al (2008) combine
census data with geographic information systems techniques to map multidimensional
urban poverty at the ward level for the city of Delhi. They explore the spatial c oncentration
of poverty and the association between voting patterns and poverty levels. An interesting fi
nding from their study is that areas of serious concerns (“hotspots”) are not concentrated in
slums – this is in contrast to the fi ndings from NFHS that we described above.
Way Forward
In this paper, we have attempted to collate the various insights into urban poverty and
inequality in India from separate quantitative and qualitative studies, and a few composite
works. We strongly believe that combining these approaches in a more organic manner will
produce better insights. There have been earlier attempts to bring these approaches
together. An early attempt to do so produced inconclusive conversations between
economists and anthropologists (Bardhan 1989).18 Another consistent effort has been by
the “Q-Squared” group (see, for example, the special issue of World Development (2007; 35,
2; and Addison et al 2009). This expression refers to the combining of quantitative and
qualitative methods (hence the “squared”) in the understanding of poverty, carried out by a
group of scholars from various social sciences (economics, sociol ogy, anthropology, etc).
They have achieved modest success while working through the serious tensions that
conversations between these approaches generate. Some scholars associated with this
group (Kanbur and Shaffer 2007) have argued that these tensions could arise at a very
fundamental level, such as on the epistemological plane or at the level of normative theory
in analysing poverty. Beall et al (2012) argue for a multidisciplinary approach in
understanding urbanisation, on the basis that economists have tended to focus more on
density (agglomeration effects) and dynamics (migration), while the other social scientists
have focused more on diversity and heterogeneity in discussing politics, culture, social
relations, change, and so forth.
While some progress has been made through these initiatives, the common problem facing
all these efforts is that the disciplinary divide is really powerful and disabling where
conversations are concerned. Future efforts will have to move from multidisciplinary efforts
to interdisciplinary initiatives, a distinction emphasised by Harriss (2002), which we fi nd
insightful.19 It is important to proceed with composite concepts, categories and approaches
at the point of analysing the fi eld, rather than trying to set up conversations at a later
stage.
Given the strong infl uence of positivism in quantitative approaches, and the multiple and
fragmented epistemological approaches that populate critical qualitative studies, the best
that a post facto conversation can achieve is the small concessions that the two sides of this
divide will make for each o ther.20 Instead, it should be admitted at the outset that both
quantitative and qualitative methodologies ought to be integrated (indeed, it is apparent
that both are needed in any meaningful research) in studies on urban (or rural) poverty and
inequality. Apart from the descriptions and characterisations that defi ne this fi eld
currently, there should be an attempt to examine causal structures that blend various levels
of being – the spatio-temporal nature of global capitalist dynamics, national political and
economic regimes, and the local aspects of political economy and culture.
We believe that this will invariably produce a multiplicity of such conceptualisations (which
also combine quantitative and qualitative methodologies) and there can then be a debate
between these composite approaches, rather than going ahead with the current
unproductive divide between quantitative and qualitative approaches. Quantitative scholars
will have to move out of their comfort zone of observing/analysing the world through large
databases, to analysing the fi eld through an expanded conceptual apparatus that grapples
with the logic of power structures on the ground, and their role in producing different
regimes and dynamics of poverty and inequality. Qualitative scholars should better attempt
to integrate analyses of microcontexts with the larger structures in which they are located.
Quantitative forays by these scholars towards understanding micro or macro structures
(without attaching any necessary “objectivity” to numbers considered absent in other kinds
of material by traditional quantitative scholars) may help reduce the intense fragmentation
characterising their discussions. Movements of the above kind, coupled with a willingness to
start from a set of composite research practices on the part of both may produce better
conversations in the future. This might also go a long way in making sense of the
mechanisms through which constructions of just and equitable urban spaces are being
thwarted in India, and elsewhere

OR

Urbanization and Economic Development in India

Introduction
In developing countries of the world the focus of attention remains in the rural sector
but the haphazard growth of cities has brought in its train several problems like
deterioration in housing and public health facilities, not to speak of the growing crime rate.
Urbanization is a process of population increase in urban area following some non-
agricultural activities. The percentage of urban population to the total population of a
country reveals the level of urban population growth. Higher is this percentage; greater is
the level of urbanization and vice versa. Similarly, the per capita income is a clear indicator
of the level of economic development achieved by a nation. A country which is highly
developed therefore enjoys a very high per capita income and this brings a high standard of
living for its people. The economic development of a region always leads to greater
urbanization. A high standard of living always leads to greater demand for goods and
services. The need for greater production results in mechanization, division of labour,
specialization of jobs and large scaled production. In short, economic development induces
further urbanization through industrial development. It can even"be stated that the extent
of industrialization acts as a common indicator in understanding the level of economic
development and urban growth achieved by the economy. In this way, urbanization
becomes a part and parcel of economic development.
 This should be understood from the fact that in recent times, with the
development of our economy, there has also been an increase in the number of
people living in urban areas from 2.58 crores in 1901 to 10.90 crores in 1971, 22
crores in 1991, 28.36 crores in 2001 and 37.70 crores in 2011 for India as a
whole. Only 30 percent of India’s population lives in urban areas. Level of
urbanization increased from 27.81% in 2001 census to 31.16% in 2011 census.

Data Base and Research Methodology

The present research is based on secondary collected through various secondary data
sources. The necessary secondary data has been collected from the sources relative
reference books, journals and other information regarding to the study was collected from
economic survey of India and socio economic survey of India. Objective of the Study

This paper endeavours to illuminate on the process of urbanization in India

with emphasis on level, tempo of urbanization and urban morphology using
Indian Census data. In this paper researcher has tried to trace pattern of
urbanization, urban problems and related policy issues.

Urbanization and Economic Development

The effect of economic development on urbanization is always positive
in the sense that it always results in greater urbanization, the reverse is not
always true in the case of India. This Chapter tries to analyze the positive and
negative impact of urbanization on the economic development of our country.
The growth of small and medium sized urban centres always leads to expansion
of existing facilities. This is reflected in the improvement in transport,
communication, housing, education, employment facilities, trade and
commerce, civic amenities, etc. These improvements induce the 'pull factors' in
attracting immigrants towards these regions. The population shows an upward
trend. Correspondingly the demand for goods and services increases. The need
for a greater supply of commodities and services to meet the increasing
demand encourages investment activity in the economy. The multiplier effect
becomes significant. This result in more opportunities for greater investment
and the pull factors become dominant and the region continues to attract more
and more immigrants. In such a situation, urbanization acts as a stimulant in
furthering economic growth.
However, such a situation cannot continue for ever. After a particular stage,
which one may call the optimum, the negative effect of urbanization on
economic development starts operating. The optimum level can be stated to be
that level where the burden on civic finance as a result of huge inflow of
immigrants just equalizes the beneficial results of urbanization. The optimum,
in a way, shows that the civic finance can do only that much and no more with
regard to the provision of all the necessary amenities to the public up to the
level of optimum. Though the burden on the civic finances for providing the
basic amenities to the public increases. Undoubtedly, this happens due to
immigration. The greater burden under such circumstances is confidently met
by the administrative machinery because of high level of industrialization and
greater taxable capacity of the people. At this stage, urbanization does not
contribute to further economic development.

Effect of Urbanization
This situation only serves as a warning signal for the negative effect of
urbanization. Sooner or later, the downward trend starts exhibiting all the evils
of over-urbanization. With the gaining momentum of full factors, the
administrative machinery finds it burdensome to maintain the quality and
quantity of public utilities and other amenities to the people. As the inflow of
people towards these regions increases, the administrative machinery becomes
less capable of meeting the additional requirements of the people and to
maintain the desirable standard in the case of all civic amenities. This is the
situation one comes across in big metropolitan cities like Calcutta in India.
Over-urbanization in such a metropolitan cities reflects all the evils like housing
problem, water scarcity, lack of medical aid, employment problem, spread of
slums, increase in the number of beggars, lot of pavement dwellers, higher
crime rate, atmospheric pollution and so on. This affects the economic
development in two ways. Firstly, the rural migrant who comes to the
metropolitan city with the hope of getting a decent job is disillusioned once he
realizes the situation there. Having left his village in search of a job, he does not
like to go back with a feeling of defeat. He struggles hard to find a job.
Sometimes, he fails in his attempt and becomes one among the jobless and
houseless poor. Even when he gets a job, it may not be to his satisfaction and
may not be equivalent to his qualification. Poverty, lack of job satisfaction,
under-employment, lack of proper accommodation and other minimum
comforts of life become the root cause of frustration. With this anticipation
about the outcome of over urbanization, the administrative machinery is
compelled to change the pattern of expenditure. The primary concern of the
administration becomes the provision of basic civic amenities and other
requirements to the people and the multiplier starts working in the reverse
direction. Urbanization, beyond optimum level, acts as an impediment for
further economic development. The optimum level of urbanization depends
upon the capacity of the region in providing all the amenities to the public in a
fair manner. Grater capacity always raises the level of optimum and a lower of
optimum is an indication of lesser monetary fiscal, administrative and other
capacities of the administrative machinery. The following factors are
responsible for this trend. The first factor relates to the attitude of the migrant.
The migrant in most cases desires to move towards a big metropolitan city,
ignoring all small and medium-sized towns and cities, because of the desire to
live in a well known metropolitan city. The natural outcome is the over
crowding in these big cities. This is evident from the data available. It can even
be pointed out that urban growth in India has been mostly due to the
urbanization of very few big cities. For example, Calcutta, has a population of
108 lakhs as on 1991 and has reached 132.17 lakh in 2001. The corresponding
figure for the year 1991 was 108 lakhs. This is followed by Greater Mumbai,
Delhi, Chennai, Bangalore, Hyderabad, Ahmedabad, Kanpur, Pune, Nagpur,
Lucknow and Jaipur. In 2001 Mumbai has reached a population of 196 lakhs
which is the primate city of India.

The growth of small and medium sized towns and cities

The growth of small and medium sized towns and cities is not quite
significant. In fact, there has been a degeneration of smaller towns. The period
from 1901 to 1991, there has been a decrease in the number of Class V and VI
towns. Partly, this may be due to the tendency of the smaller towns to go up to
the higher classes. Still, the fact remains that the smaller and medium sized
towns and cities are not given their due importance in our development
programmes. The other factors responsible for such a situation relates to the
lack of proper planning of the towns and cities in India. It is even said that many
cities and towns in India are nothing but overgrown villages. Further, the
investment decisions are biased by other considerations rather than favourable
economic factors. The third factor which is of no less importance relates to the
tremendous increase in population. The 1947 census shows that the population
of India has 350 million and in 2001 population has increased to 1.02 billion and
further 2011 population show that 1.21. billion. Though the percentage of
growth has been more or less steady, there has been an absolute increase in
the total population. This is mainly due to improved medical aid, lower death
rate, increased life expectancy, etc. The birth rate has actually declined from 29
per thousand in 1991 to 24.28 in 2001 and 20.97 in 2011. The death rate
however decreased from 13 per thousand in 1991 ,8.74 in 2001 and 7.48 in
2011. The life expectancy has increased from 62 years in 1991, 61.97 in 2001
and 64.8 in 2009. The density of population as a result of absolute increase in
population has risen to 274 in 1991 people per square kilometer, 324 people in
2001 and 382 people in 2011. All these have led to over crowding everywhere.
On the other hand, the supply of land cannot be enhanced; the additional
labour force in rural areas as a result of the population increase cannot be
absorbed in agriculture. The surplus labour force will have to engage in
occupations other than agriculture and in the absence of sufficient non-
agricultural occupations in the villages the villager has to turn towards the city
for a job. If urbanization has to induce further economic development, then the
present trend should be reversed and measures which will improve the
situation have to be undertaken. They include: (i) Rural development
programmes which reduce the rural-urban dichotomy and minimize the push
and pull factors leading to over-urbanization of a few cities. This will also lead
to balanced regional development which is necessary for achieving a high level
of economic development for any nation; (ii) Proper planning of towns and
cities, particularly relating to the land utilization pattern, industrial
development, educational development, cultural and civic amenities
development; (iii) Development of smaller and medium sized towns and cities
for diverting the attention of the migrant towards these places; and (iv)
Further efforts should be taken to reduce the birth rate in a significant manner
through various methods of family planning have been enforced.

Conclusion
The economic development of India requires economic growth. Cities
are engines of growth because there is a bi-directional link between
urbanization and growth. Great progress has been made in developing the
framework for reform linked investment in urban infrastructure. As per
population projection in 2026, level of urbanization will be different in various
states. India’s future urban strategy should recognize these differences and
plan accordingly. To improve urban governance and delivery of services there
should be constitutional amendments as well administrative actions. Most
importantly, inter-government transfers should have built-in incentives to
improve performance and capacity building should be an important component
of the future urban program.

Policy Implication:
Redirection of investment is recommended to develop strong economic
base for small and
Medium city neglected so far. Redirection of migration flows is required. Since
the mega cities have reached saturation level for employment generation and
to avoid over-crowding into the over congested slums of mega cities i.e
Bombay, Calcutta, Delhi, Madras etc it is required to build strong economic
sector (Kundu and Basu,1998) in the urban economy, growth efforts and
investments should be directed towards small cities which have been
neglected so far so that functional base of urban economy is strengthened.
Then redirection of migration to these desirable destinations will be possible.
Policy should also relate to proper urban planning where city planning
will consist of operational , developmental and restorative planning
.Operational planning should take care of improvement of urban infrastructure,
e.g roads, traffic, transport etc. Developmental planning should emphasize on
development of newly annexed urban areas. Various urban renewal processes
can be used. Restorative planning should aim to restore original status of old
building monuments which have historic value.
 In general urban planning must aim at :
a) Balanced regional and urban planning (Mukherji, 2001)
b) Development of strong economic base for urban economy
c)Integration of rural and urban ( Kundu, Sarangi and Dash, 2003 ) economy--
emphasis on Agro-based industry.
d) Raw material should be processed in rural economy and then transferred to
urban
economy.

e) Urban planning and housing for slum people with human face.

UNIT -3rd
Economics Discussion
Occupational Structure in India: An Overview
1. Economic Development of Occupational Structure
2. Occupational Distribution of Population
3. Factors Responsible for Failure.
Economic Development of Occupational
Structure:
Economic development creates various types of occupations in an economy.
All these various occupations can be broadly classified into three categories,
viz., primary, secondary and tertiary. The primary occupations include all
those essential activities such as agriculture and allied activities like animal
husbandry, forestry, fishery, poultry farming etc.

Secondary activities include manufacturing industries composed of both large

and small scale and mining. Tertiary activities include all other activities like
transport, communication, banking, insurance, trade etc. The occupational
structure indicated the distribution as well as absorption of population into
these various types of occupations.
In underdeveloped countries, majority of the population are still engaged in
agriculture and other primary activities. Even in some developed countries like
Japan, England, Norway fishing continues to be an important occupation,
providing employment to a substantial number of populations.

Development experience shows that with the gradual development of a

backward economy, the importance of primary occupations gradually declines
with the growth of industries and tertiary activities. In the secondary sector,
large scale industries, being more capital-intensive cannot provide much
employment opportunities.

But it is the development of small scale and cottage industries, mining

activities etc., being largely labour-intensive, can provide huge number of
employment opportunities.

Again the tertiary occupations are also considered very important as these
have a huge employment potential. In developed countries, the absorption
capacity of this sector is very high. According to World Development Report,
1983, whereas about 45 to 66 per cent of the work force of developed countries
was employed in the tertiary sector but India could absorb only 18 per cent of
total force in this sector.

Changes in occupational structure are very much associated with economic

development. The rate of economic development and the level of per capita
income increase as more and more work force shifts from primary sector to
secondary and tertiary sector.

As A.G.B. Fisher writes, “We

may say that in every progressive
economy there has been a steady shift of employment
and investment from the essential ‘Primary
activities’…………………………… to secondary activities
of all kinds and to a still greater extent into tertiary
production.”
While putting importance on the change in occupational structure, Colin Clark
observes, “A high average level of real income per head is
always associated with a high proportion of working
population engaged in tertiary industries low real
income per head is always associated with a low
proportion of the working population engaged in
tertiary production and a high percentage in primary
production.”
Thus to attain a high rate of economic development inter-sectoral transfer of
work force is very much necessary. This would be possible only when
productivity of agriculture increases due to introduction of improved
technology in it.

The increase in productivity in agriculture transfers surplus work force from

agriculture to other sectors. The extent and pace of inter-sectoral transfer of
work force depend very much on the rate of increase in productivity in the
primary sector in relation to other sectors.

Occupational Distribution of Population in

India:
Occupational distribution of population reflects on the degree
of development and the diversification achieved in an economy.
Let us now turn our discussion on the occupational structure of
India. The occupational structure of India clearly reflects a high
degree of backwardness prevailing in Indian economy.
Since the turn of the present century the occupational structure
in India was tilted towards the primary sector. Over the last 80
years (1901-1981), the proportion of working force engaged in
primary occupations remained very steady, i.e., around 70 per
cent and that in secondary and tertiary sector was ranging
between 28 to 30 per cent only.
Let us now make a detailed study on the occupation structure of
India during this long 100-years period.
Occupational Structure during 1901-1951:
During the first half of the present century, occupational distribution of
population in India did not report any appreciable change. Agriculture
occupied the dominant position and its absorption capacity had increased
marginally from 66.9 per cent in 1901 to 69.7 per cent in 1951.

The commercial policy of the British had paved the way for the introduction of
British machine-made goods in Indian market leading to destruction of
traditional Indian handicrafts. This forced the labourers of this household
industry to engage themselves in agricultural operations for earning their
livelihood.

All these led to a marked increase in the proportion of landless agricultural

labourers to total labour force from 17 per cent in 1901 to nearly 20 per cent in
1951. The percentage of population engaged in other allied activities like
forestry, livestock, fishery etc. declined from 4.3 per cent in 1901 to only 2.3
per cent of the total work force in 1951.

During this period, industrial activity was very much restricted to plantation
and textile industry and was also supported by imported machinery resulting
limited backward linkage effects and lack of diffusion of spread effect of
industrialisation. Thus this process of industrialisation had created a very little
impact on the generation of employment opportunities.

On this industrialisation issue, Priyatosh Maitra rightly observed, “In

Indian experience employment multiplier seems to be
small and, therefore, occupational structure remained
almost static……………………. Limited employment
horizons, resulting from a process of industrialisation
devoid of ‘built-in technological process’ effects,
strengthen the hold of production techniques with
built-in under employment.

Moreover,’ the depressed and overcrowded agriculture could not offer a

significant portion of marketable surplus which could raise the demand for
industrial goods and the tertiary sector could not increase its absorption
capacity significantly.

However, T. Krishnamurty wrote, “Between 1901 and 1951 factory

employment expanded partly at the expense of non-factory sectors, the
modern branches grew at the cost of a number of traditional ones; and
manufacturing output per head increased. While the share of transport,
storage and communications rose, for the other branches of services trends are
unclear.

Many services associated with modernisation under colonial rule expanded, in

particular, public, educational, medical and legal services.”
Occupational Structure during 1951-2000:
After independence and especially after the introduction of planning in India,
attempt was made by the planning to accelerate the process of
industrialisation and also to change the occupational structure by transferring
a section of working force from agriculture to secondary and tertiary sector

Accordingly, the Second Plan observed, “By 1975-76, the proportion of

agricultural labour force to the total should come down to 60 per cent or so.
But for this to happen something like a fourfold increase in the numbers
engaged in mining and factory establishment has to be brought about, and the
investment pattern in the plans has to be adjusted to these requirements.”

Just to fulfill these requirements it was necessary to increase the agricultural

productivity through adoption of modern technology for meeting food and raw
material requirements of the developing economy. It was also necessary to
reduce the dependence on agriculture by generating alternative employment
opportunities in the rural areas.

All these technological changes in agriculture along-with land reforms

measures were introduced in India in order to increase agricultural production
and productivity and to transfer surplus labour force from agricultural sector
to secondary and tertiary sector.

On the other hand, to change the occupational structure in India, importance

of designing a suitable employment policy was felt. With the introduction of
planning, a considerable increase in employment opportunities was expected.

The planned economic development anticipated a rapid progress in the

expansion of irrigation, power, basic industries, other manufacturing and
household industries and the expansion of tertiary activities in the service
sector like expansion of trade, banking, insurance, transportation and
communication etc. But after two decades of planning occupational structure
in India could not show any remarkable change.

Although both secondary and tertiary sector expanded and their absorption
capacity also increased substantially but the rate of increase in employment
opportunities fell far short of rate of increase in the labour force.

Moreover, another important condition for realising the change in

occupational structure, viz., a significant increase in agricultural productivity
could not be fulfilled. Again the allied activities of the primary sector and
development of village industries could not make much headway in engaging
the surplus population from the agricultural sector. All these led to growing
pressure of population on agricultural sector and resulted in widespread
disguised unemployment in rural areas.

Considering this situation, the Planning Commission in its Fifth Plan

document mentioned, “At the present pace of
industrialisation any mass-scale transfer of the labour
force from agriculture to non-agriculture sectors is
ruled out. The growing labour force in agriculture has
to be provided with fuller employment within
agriculture.”

Thus, Table 6.11 shows that during the period 1951-71, the proportion of work
force engaged in the primary sector remained constant at 72.1 per cent. In-
spite of heavy investment made on manufacturing and service sector during
these two decades of planning the absorption capacity of secondary and
tertiary sectors jointly remained the same at 28 per cent of the total work
force.

Again during the next 1971-2000 period, the proportion of work force engaged
in the primary sector declined marginally to 56.7 per cent. Another noticeable
change that was recorded was that the proportion of cultivators declined from
50 per cent in 1951 to 38.4 per cent in 1991 and that of agricultural labourers
increased horn 20 per cent to 26 per cent during the same period.
This shows the growing concentration of land in the hands of rich and well-to-
do farmers and the transformation of small and marginal farmers into landless
agricultural labourers. Moreover, the proportion of work force engaged in the
secondary sector increased marginally from 11.2 per cent to 17.5 per cent
during the 1971-2000 period and that of engaged in tertiary sector increased
slightly from 16.7 per cent to 25.8 per cent during the same period.

The absorption capacity of both the secondary and tertiary sector jointly
increased from 28 per cent to 43.3 per cent during this 1971-2000 period.

Again the World Development Report, 1995 shows that in 1993, the
percentages of work force, both wages and non-wages engaged in agriculture,
industry and services were to the extent of 63.2 per cent, 14.2 per cent and
22.6 per cent respectively.

Considering the earlier mentioned position we can conclude that there was
virtually no clear shift of working population from primary sector to secondary
and tertiary sectors. Thus the planning process in India has totally failed to
bring any change in its occupational structure.

Factors Responsible for Failure of Occupational

Structure:
1. Indian planners failed to make any serious attempt for the development of
rural economy for utilizing the vast idle labour force and also to raise the
productivity of labourers. Due to poor organisation, the programmes of
reducing unemployment and under-employment problem in the rural areas
failed miserably.

Moreover, planners did not make any serious attempt to enlarge the scope of
non-agricultural rural employment.

2. Land reforms in India failed miserably to realise its goal and to create small
owner holding. These reforms could not diffuse the ownership of land among a
large number of marginal cultivators.

3. Various other facilities provided by the Government such as cheaper credit,

marketing, subsidy on fertilizer price etc. only benefitted rich farmers and
poor and marginal farmers could not reap any benefit from these facilities
leading to a failure in raising their agricultural productivity.
4. Efforts of the planners to develop industries helped the large scale capital
goods sector and the plans could not create much response to the development
of small scale and cottage industries. This development of large scale highly
capital-intensive industries could not create much employment potential and
thus created no impact on the occupational structure of the country.

5. The high rate of growth of labour force is also an important factor which has
been creating serious drags on the path of changing the occupational structure
in India. This fast growing labour force without getting any subsidiary
occupation open to them in the rural areas stated to eke out their living from
agricultural sector alone.

This led to a huge dependence as well as a high degree of disguised

unemployment in the agricultural sectors.

Thus under this present situation occupational structure in India can be

amended suitable only when the country will start to develop its labour-
intensive sectors that include small scale and cottage industries, allied
activities in the primary sector such as animal husbandry, fishing, poultry
farming etc. and the service sectors as well as so to foster the growth of non-
agricultural employment side by side with modern large scale industrial
sector.

Development of this huge labour-intensive sector will raise the level of

employment and income both in the rural and urban areas leading to an
enlargement of aggregate demand for various goods and services produced by
large scale industries.

Thus the development of this labour intensive sector will be able to bring
changes in the occupational distribution of population from agricultural to
non-agricultural occupations and will also be able to support the large scale
manufacturing sector by enlarging the demand for their products and while
doing so they can save these large scale industries from recession.
Economics Discussion

Unemployment in India
In this essay we will discuss about Unemployment in
India. After reading this essay you will learn about: 1.
Meaning of Unemployment in India 2. Nature of
Unemployment Problem in India 3. Extent 4. Causes 5.
Remedial Measures 6. Characteristics 7. Employment
Policy and Schemes 8. Growth of Employment and
Others.
Unemployment in India Content:
1. Meaning of Unemployment in India
2. Nature of Unemployment Problem in India
3. Extent of Unemployment
4. Causes of Unemployment Problem in India
5. Remedial Measures to Solve Unemployment Problem in
India
6. Characteristics of Employment Problem Followed in India
– Its Critical Evaluation
7. Employment Policy and Schemes in India
8. Growth of Employment in India in Recent Years
9. Is the New Economic Policy promoting Jobless Growth ?
10. Global Economic Recession and its Impact on
Unemployment Problem in India

Essay # 1. Meaning of Unemployment in India:

Unemployment is a common economic malady faced by each and every
country of the world, irrespective of their economic system and the level of
development achieved. But the nature of unemployment prevailing in
underdeveloped or developing countries sharply differs to that of developed
countries of the world.

While the developed countries are facing unemployment, mostly of Keynesian

involuntary and frictional types but the underdeveloped or developing
countries like India are facing structural unemployment arising from high rate
of growth of population and slow economic growth.

Structural unemployment may be open or disguised type. But the most serious
type of unemployment from which those undeveloped countries like India are
suffering includes its huge underemployment or disguised unemployment in
the rural sector.

Unemployment is a serious problem. It indicates a situation where the total

number of job vacancies is much less than the total number of job seekers in
the country. It is a kind of situation where the unemployed persons do not find
any meaningful or gainful job in-spite of having willingness and capacity to
work. Thus unemployment leads to a huge wastage of manpower resources.

India is one of those ill-fated underdeveloped countries which is suffering

from a huge unemployment problem. But the unemployment problem in India
is not the result of deficiency of effective demand in Keynesian term but a
product of shortage of capital equipment’s and other complementary
resources accompanied by high rate of growth of population.

Essay # 2. Nature of Unemployment Problem in India:

Present unemployment problem in India is mostly structural in nature.

Unemployment problem of the country can now be

broadly classified into:
(a) Rural unemployment and

(b) Urban unemployment.

(a) Rural Unemployment:

In India the incidence of unemployment is more pronounced in the rural
areas.

Rural unemployment is again of two types:

(i) Seasonal unemployment and
(ii) Disguised or perennial unemployment.

(i) Seasonal Unemployment:

Agriculture, though a principal occupation in the rural areas of the country, is
seasonal in nature. It cannot provide work to the rural population of the
country throughout the year. In the absence of multiple cropping system and
subsidiary occupation in the rural areas, a large number of rural population
has to sit idle 5 to 7-months in a year.

Seasonal Unemployment is also prevalent in some agro- based industries viz.,

Tea Industry, Jute Mills, Sugar Mills, Oil Pressing Mills, Paddy Husking Mills
etc.

(ii) Disguised or Perennial Unemployment:

Indian agriculture is also suffering from disguised or perennial unemployment
due to excessive pressure of population. In disguised unemployment
apparently it seems that everyone is employed but in reality sufficient full time
work is not available for all.

In India, about 72 per cent of the working population is engaged in agriculture

and allied activities. In 1951 more than 100 million persons were engaged in
the agricultural and allied activities whereas in 1991 about 160 million persons
are found engaged in the same sector resulting in as many as 60 million
surplus population who are left with virtually no work in agriculture and allied
activities.

(b) Urban Unemployment:

Urban unemployment has two aspects:
(i) Industrial unemployment and

(ii) Educated or middle class unemployment.

(i) Industrial Unemployment:

In the urban areas of the country, industrial unemployment is gradually
becoming acute. With the increase in the size of urban population and with the
exodus of population in large number from rural to the urban industrial areas
to seek employment, industrialization because of slow growth could not
provide sufficient employment opportunities to the growing number of urban
population.
Thus the rate of growth of employment in the industrial sector could not keep
pace with the growth of urban industrial workers leading to a huge industrial
unemployment in the country.

(ii) Educated or middle-class Unemployment:

Another distinct type of unemployment which is mostly common in almost all
the urban areas of the country is known as educated unemployment. This
problem is very much acute among the middle class people. With rapid
expansion of general education in the country the number of out-turn of
educated people is increasing day by day

But due to slow growth of technical and vocational educational facilities, a

huge number of manpower is unnecessarily diverted towards general
education leading to a peculiar educated unemployment problem in the
country. The total number of educated unemployment increased from 5.9 lakh
in 1962 to 230.50 lakh in 1994.

Essay # 3. Extent of Unemployment:

In view of the growing problem of unemployment and under-employment
prevailing in the country it is very difficult to make an estimate of the total
number of unemployment in a country like India. As per the statement of the
then Labour and Employment Minister in the Parliament, there was about 35
million unemployed person’s in-spite of 42.5 million new jobs created during
1951 and 1969.

Various agencies like Planning Commission, CSO, NSS etc. could not provide
any dependable estimate about the magnitude of unemployment in India. As
per the estimates of unemployment made in the Five Year Plan the backlog of
unemployment which was 5.3 million at the end of First Plan gradually
increased to 7.1 million, 9.6 million and then to 23 million at the end of
Second, Third and Three Annual Plans respectively.

The number of unemployed as percentage of total labour force which was 2.9
per cent at the end of the First Plan gradually increased to 9.6 per cent at the
end of Annual Plans
The Committee of Experts on Unemployment under the Chairmanship of Mr.
B. Bhagawati observed in its report (1973) that total number of unemployed in
1971 was 18.7 million out of which 16.1 million unemployed were in rural areas
and the rest 2.6 million existed in urban areas. Moreover, unemployment as
percentage of total labour force was to the extent of 10.9 per cent in 1971 for
the whole country.

As per the Employment data, the number of registered job seekers in India
rose from 18.33 lakh in 1961 to 165.8 lakh in 1981 and then to 370.0 lakh at the
end of March 1994. Total number of educated job seekers has also increased
from 5.90 lakh in 1961 to 230.0 lakh in the end of March 1994, which
constituted nearly 62 per cent of the total job seekers of the country.

At the end of January 1996, total number of registered job seekers in India was
368.9 lakh. As on 1st April, 1997, total number of unemployed persons in India
was 7.5 million. The International Labour Organisation (ILO) report World
Employment 1995 observed that 22 per cent of all male workers in India are
underemployed or unemployed and the figure is rising.

The employment in the modern sector in India grew only by 1,6 per cent per
annum in 1980s, Underemployment in the rural areas also remained high.

The National Sample Survey Organisation (NSSO) developed three concepts of

unemployment since 1972-73.

These were:
(i) Usual Status Unemployment,

(ii) Weekly Status Unemployment and

(iii) Daily Status Unemployment.

The magnitude to usual status unemployment (chronic unemployment) rose

from 1.4 million in 1961 to 7.1 million in 1978.

The Planning Commission’s estimates of usual unemployment revealed that

the usual status unemployment at the age-group 5+ increased from 12.02
million in 1980 to 13.89 million in March, 1985. The total employment at the
beginning of 1992-93 was estimated to be 301.7 million on a “weekly status”
basis, and the labour force was estimated to be 319 million.
Again as per the NSS tentative estimates of unemployment for April 1990, the
usual status and daily status unemployment were 3.77 per cent and 6.09 per
cent respectively of the total work force in 1987-88. By adjusting these
estimates, Arun Ghosh estimated the backlog of unemployment in April 1990
as—13 million of usual status and 20 million of daily status.

At the end of each Five Year Plan, the backlog of unemployment in India has
been increasing as the volume of employment generated cannot match this
additional number of labour included in work force. As per document of the
Sixth Plan (1980-85), total number of unemployed was 20.7 million in 1980
which represents 7.74 per cent of the total labour force.

Ninth Plan (1997-2002) estimated the total backlog of unemployment as 36.8

million in 1996. Thus a huge portion of our national resources has been
constantly used for the generation of employment opportunities so as to clear
the backlog of unemployment arising from rapidly rising population.

By looking at a different angle, it is found that India’s population presently

stands at 104 crore and increasing by nearly 1.6 crore per year. It is generally
estimated that nearly 50 per cent of the total population of the country
requires employment although in many countries like China, Thailand etc. 55
per cent of total population is normally employed.

So, taking the employment ratio of 50 per cent, the employment requirement
of India is 52 crore which is again increasing by nearly 80 lakh per annum as
the population is growing by 1.6 crore annually. As per official estimate, total
employment in the country was 41 crore in 1999-2000 and it grew by at the
rate of 41 lakh annually, during the period 1994-2000.

This official employment figure is somewhat inflated as it included disguised

unemployment existing in rural areas of the country. But the level of
unemployment existing at present is around 10 crore and that unemployment
figure is again increasing by nearly 40 lakh per year due to our increasing size
of population.

In view of the centrality of the employment objective in the overall process of

socio-economic development as also to ensure availability of work
opportunities in sufficient numbers, a special group on targeting ten million
employment per year over the Tenth Plan period was constituted by Planning
Commission under the Chairmanship of Dr. S.P. Gupta, Member, Planning
Commission.

Considering the need for generating employment opportunities which are

gainful, the Special Group has recommended the use of Current Daily Status
(CDS) for measuring employment, as this measure of employment is net of the
varying degrees of underemployment experienced by those who are otherwise
classified employed on usual status basis.

The Special Group has made following estimate of employment and

unemployment in India on current daily status (CDS) basis.

Table 12.4 reveals that the Export Group estimates has shown a decline in the
rate of growth of population (from 2.0 to 1.95 per cent), labour force (from
2.43 to 1.31 per cent) and work force (from 2.70 to 1.07 per cent) during the
period 1983-94 to 1994-2000.

But unemployment rate in the country during the period 1993-94 to 1999-
2000 increased from 5.99 per cent to 7.32 per cent although the overall
growth performance of the economy has been better in recent times than the
previous decade (1983-94).

During the same period, the unemployment rate in rural areas of the country
increased from 5.61 per cent to 7.21 per cent and the same unemployment rate
in urban areas of the country also increased from 7.19 per cent to 7.65 per
cent.

Total number of unemployed also increased from 20.13 million in 1993-94 to

26.58 million in 1999- 2000 out of which the rural and urban number of
unemployed stood at 19.50 million and 7.11 million respectively in 1999-2000.
Finally, as per the data available from 939 employment exchanges in the
country, the number of job seekers registered with employment exchanges as
on September, 2002 (all of whom are not necessarily unemployed) was of the
order of 4.16 crore out of which approximately 70 per cent are educated (up to
10th standard and above).

The number of women job seekers registered was of the order of 1.08 crore (26
per cent of the total job seekers). The maximum number of job seekers
awaiting employment were in West Bengal (63.6 lakh), while the minimum
were in the UT of Dadra & Nagar Haveli (0.06 lakh) and in the state of
Arunachal Pradesh (0.2 lakh).

The placement was maximum in Gujarat whereas the registration was

maximum in U.P. The placement effected by the employment exchanges at all
India level during 2001 was of the order of 1.69 lakh as against 3.04 lakh
vacancies notified during this period.

The National Sample Survey Organisation (NSSO), as per one of its recent
surveys made in 2003 observed that the proportionate unemployment rate in
India at present stands at 2.0 per cent of the total population and around 3.0
per cent of the total work force of the country.
Findings of NSS Survey 61st Round (2004-05):
The latest and seventh quinquennial NSSO, Survey, namely 61st round
conducted during July 2004 to June 2005 constituted an important source of
information on employment and unemployment. The 6ist round of NSSO
survey revealed a faster increase in employment during 1999-2000 to 2004-
05 as compared to 1993- 94 to 1999-2000. Table 12.5 has clarified the position
in this regard.

It would now be better to look at the current estimates of employment and

unemployment in the country made by Planning Commission. In the
meantime, the Eleventh Five year Flan has largely used the Current Daily
Status (CDS) basis of estimation of employment and unemployment in the
country.

It has also been observed that the estimates based on daily status are the most
inclusive rate of ‘unemployment’ giving the average level of unemployment on
a day during the survey year.

It captures the unemployed days of the chronically unemployed, the

unemployed days of usually employed who became intermittently unemployed
during the reference week and unemployed days of those classified as
employed according to the criterion of current weekly status. Table 12.5(a)
shows the estimates of employment and unemployment on CDS basis.

Table 12.5(a) reveals the trend in respect of population as well as labour force
and workforce since 1983 to 2004-05 and the resultant difference between
these two figures also shows the number of unemployed in different periods.
With the increase in the population of the country, the number of labour force
is increasing faster than the number of work force resulting growing number
of unemployment in the country.
In 1983, total number of labour force in India was 263.82 million, total
number of work force was 239.49 million and the resultant number of
unemployed was 24.33 million. In 2004-05, total labour force of the country
was 419.65 million and total work force was 384.91 million and as a result
total number of unemployed increased to 34.74 million in 2004-05.

However, the growth of labour force in per cent per annum increased from
2.28 per cent during the period 1983 to 1993-94 to 2.84 per cent during the
period 1999-00 to 2004-05. But the growth of work force in per cent per
annum increased from 2.61 per cent during the period 1983 to 1993-94 to 2.62
per cent during the period 1999-00 to 2004-05.

Moreover, the unemployment rate as a proportion of labour force decreased

from 9.22 per cent in 1983 to 6.06 per cent in 1993-94 and then gradually
increased to 8.28 per cent in 2004-05.

Estimates on employment and unemployment on CDS basis [Table 12.5(a)]

indicate that employment growth during 1999-2000 to 2004-05 has
accelerated significantly as compared to the growth witnessed during 1993-94
to 1999-2000. During 1999-2000 to 2004-05, about 47 million work
opportunities were created compared to only 24 million in the period between
1993-94 and 1999-00.

Employment growth accelerated from 1.25 per cent per annum to 2.62 per
cent per annum. However, since the labour force grew at a faster rate of 2.84
per cent than the workforce, unemployment rate also rose.

The incidence of unemployment on CDS basis increased from 7.31 per cent in
1999-00 to 8.28 per cent in 2004-05. It would also be better to look at the
sectoral employment shares by current daily status in the country. Table
12.5(b) will clarify the position in this respect.

Table 12.5(b) reveals the sectoral employment shares of different sector of the
country in recent years. The decline in overall growth of employment during
1993-94 to 1999-00 was largely due to the lower absorption in agriculture. The
share of agriculture in total employment dropped from 61 per cent to 57 per
cent.

This trend continued and the share of agriculture in total employment further
dropped to 52 per cent in 2004-05.
While the manufacturing sector’s share increased marginally during this
period, trade, hotel and restaurant sector contributed significantly higher to
the overall employment than in earlier years. The other important sectors
whose shares in employment have increased are transport, storage and
communications apart from financial, insurance, real estate, business and
community, social and personal services [Table 12.5.(b)].

Extent of Farm Unemployment:

A high degree of unemployment and underemployment prevails among the
agricultural workers of the country. This farm or agricultural unemployment is
prevailing in the form of seasonal unemployment, disguised unemployment
and chronic and usual status unemployment.

To measure the extent of unemployment and underemployment is really a

difficult task. As per the N.S.S. study the daily status rural unemployment rate
in India was 5.25 per cent in 1987-88.

The Agricultural Labour Enquiry Committee Report (First and Second)

revealed that in India agricultural labourers had 275 and 237 days of
employment in 1950-61 and 1956-57 respectively. Considering the fall in the
employment elasticity with reference to GDP for the agricultural sector during
the 1970s and 1980s it can be guessed that the seasonal unemployment might
have increased in recent years.

In respect of disguised unemployment various estimates have been made to

determine the extent of surplus labour in India by Shakuntala Mehera, J.P.
Bhattacharjee, Ashok Rudra, J.S. Uppal and others. Among these works,
Shakuntala Mehera’s work was quite well known.
She estimated that the extent of surplus work force in agriculture was 17.1 per
cent during 1960s. Again on the basis of 32nd Round of the NSS, the Usual
status of rural unemployment in March 1985 was estimated at 7.8 million and
such unemployment was highest in the age-group of 15-29.

Recently, a study to estimate the extent of farm unemployment was conducted

by Lucknow based Centre of Advanced Development Research (CADR). The
report submitted by this centre in September 1992 revealed that a very high
degree of unemployment or under-employment prevails among the 160
million Indians engaged in agriculture, either as cultivators or labourers.

It is found that these rural people do not get even the minimum work
opportunity of 270 days a year, the average being only 180 days. This indicates
that only 100 million people are sufficient to carry out the entire agricultural
operations, including those of animal husbandry. Thus as many as 60 million
people are at present left with virtually no work in agriculture and allied
activities.

The study also highlighted the inter-state variation in agricultural labour

absorption capacity. Among all the states, only in four states—Punjab,
Haryana, Himachal Pradesh and Kerala—-agriculture provides full work
opportunities of 270 days of eight-hour duration to every worker.

But in states like Andhra Pradesh, Bihar and Tamil Nadu, employment in
agriculture is available to less than 50 per cent of the workforce while
Karnataka, Maharashtra and Uttar Pradesh too have inadequate labour
absorption capacity in the rural areas.

The CADR estimated that the agricultural sector will be able to absorb only
120 million of the available 180 million people by the end of the present
century provided the rate of labour replacement by mechanization is not
accelerated.

The report revealed that most of the unemployed or underemployed people

are concentrated in the states of Uttar Pradesh (104 lakh), Bihar (100 lakh),
Andhra Pradesh (80 lakh) and Tamil Nadu (66 lakh).

Extent of Urban Unemployment:

In India urban unemployment has been recording a serious proportion from
the very beginning. The estimates of urban unemployment were made by the
Planning Commission, the Central Statistical Organisation (CSO), Ministry of
Labour and Employment and some individual economists like W. Malenbaum,
R.C. Bhardwaj at different times.

Although these estimates are not comparable due to differences in concepts

adopted, but these estimates provide some idea about the quantum of urban
unemployment.

These reports revealed that during the first decade of planning the quantum of
urban unemployment increased from 2.5 million in 1951 to 4.5 million in 1961,
i.e., about 11.4 to 15.5 per cent of the working population remained
unemployed. Again the extent of urban unemployment increased to 6.5
million in 1985 (as per NSS 32nd Round) and the rate of urban unemployment
was 9.7 per cent.

This urban unemployment is mostly of two types:

(a) Industrial unemployment and

(b) Educated unemployment.

In India due to growing industrial sickness in huge number of small scale

industrial units and in some large scale units, the quantum of industrial
unemployment has been increasing at an alarming rate. Moreover, the recent
structural adjustments in industrial sector will also add a good number of
unemployment to this category. However, the exact number of industrial
unemployment in India is not available in the absence of proper data.

Educated Unemployment:
Educated unemployment in India which is contributing a significant portion of
urban unemployment has been increasing at a very rapid scale. Total number
of educated unemployment in India increased from 2.4 lakh in 1951 to 5.9 lakh
in 1961 and then to 22.96 lakh in 1971.

Again the number of educated job seekers increased from 90.18 lakh in 1981 to
167.35 lakh in 1987 and then to 291.2 lakh in 2002 which constituted about 74
per cent of the total job seekers of the country.

Unemployment Rates by Level of Education:

NSSO data indicates that compared to 1993-94, unemployment rates for
persons of higher education level has declined in rural areas both for males
and females in 1999-2000 and it has further declined in 2004- 05 compared
to 1999-2000.

Unemployment rate of graduate and above female population is much higher

in rural areas than in urban areas which is indicative of lack of opportunities
in rural India combined with lack of mobility of this population segment.

Sluggish Employment Growth in Recent Times:

In recent times, .there is a slump in the rate of growth of employment. An
important cause of concern is the declaration in the annual compound growth
rate (CAGR) of employment during 2004-05 to 2011-12 to 0.5 per cent from
2.8 per cent during 1999-2000 to 2004-05 as against CAGRs of 2.9 per cent
and 0.4 per cent respectively in the labour force for the same periods. Table
12.5(c) will clarify this situation.

Table 12.5(c) reveals that as per the National Sample Survey Office (NSSO)
data during 1999-2000 to 2004-05, employment on usual states (US) basis
increased by 59.9 million persons from 398.0 million to 457.9 million as
against the increase in labour force by 62.0 million persons from 407.0 million
to 469.0 million.

After a period of slow progress during 2004-05 to 2009-10, employment

generation picked up during 2009-10 to 2011-12, adding 13.9 million persons
to the workforce, but not keeping pace with the increase in labour force (14.9
million persons) as shown in the table.

Again, based on current daily status (CDS), CAGR in employment was 1.2 per
cent and 2.6 per cent against 2.8 per cent and 0.8 per cent in the labour force
respectively for the same periods.
However, the country has been experiencing structural changes in its
employment pattern in recent times. Thus for the first time, the share of
primary sector in total employment of the country dipped below the half way
mark as its share declined from 58.5 per cent in 2004-05 to 48.9 per cent in
2011-12.

But the employment in the secondary and tertiary sectors increased to 24.3
per cent and 26.8 per cent respectively in 2011-12 as compared to 18.1 per cent
and 23.4 per cent respectively attained in 2004-05. Moreover, self-
employment continues to dominate by attaining 52.2 per cent share in total
employment in the year 2011-12. But what is critical is the significant share of
workers are engaged in low income generating activities.

Moreover, there are other issues of concern such as poor employment growth
in rural areas, especially among females. Though employment of rural males is
slightly better than that of females, long term trends indicate a low and
stagnant growth. Such trends call for diversification of livelihood in rural areas
from agricultural to non-agricultural activities.

Besides, a major impediment to the pace of quality employment generation in

India is the small share of manufacturing in total employment. However, the
data available, from 68th round of NSSO (2011-12) indicates a revival in
employment growth in manufacturing from 11 per cent in 2009-10 to 12.6 per
cent in 2011-12.

Moreover, the usual status (US) unemployment rate is generally regarded as

the measure of chronic open unemployment during the reference year while
the current daily status (CDS) is considered as a comprehensive measure of
unemployment, including both chronic and invisible unemployment. Thus,
while chronic open unemployment rate in India hovers around a low 2 per
cent, it is significant in absolute terms.

The number of unemployed people (under US) declined from 11.3 million
during 2004-05 to 9.8 million in 2009-10 but again increased to 10.8 million
in 2011.12. However, on the basis of CDS, the number of unemployed person
days declined from 34.3 million in 2004-05 to 28.0 million in 2009-10 and
further to 24.7 million in 2011- 12.

It is also observed [from Table 12.5(c)] that there has been a significant
reduction in chronic and invisible unemployment from 8.2 per cent in 2004-
05 to 5.6 per cent in 2011-12. Expert feels that despite only a marginal growth
in employment between 2009-10 and 2011-12, the main reason for the decline
in unemployment levels could be that an increasing proportion of the young
population opts for education rather than participating in the labour market.
This is reflected from the fact that there is a rise in enrolment growth in higher
education from 4.9 million in 1990-91 to 29.6 million in 2012-13.

Salient Features of the Trend of Unemployment Rates in

India in Recent Years:
Following are some of the salient features of the trend
of unemployment rates in India:
i. The unemployment rate went up between 1993-94 to 2004. On the basis of
the current daily status (Unemployed on an average in the reference week)
during the reference period unemployment rate for males increased from 5.6
per cent to 9.0 per cent in rural areas and from 6.7 per cent to 8.1 per cent in
urban areas.

ii. The unemployment rate for female increased from 5.6 per cent in 1993-94
to 9.4 per cent in 2004 in rural areas and from 10.5 per cent to 11.7 per cent in
urban areas.

iii. Furthermore, it is found that unemployment rates on the basis of current

daily status were much higher than those on the basis of usual status
(unemployed on an average in the reference year) implying a high degree of
intermittent unemployment. This could be mainly because of the absence of
regular employment for many workers.
iv. Urban unemployment rates (current daily status) were higher than rural
unemployment rates for both males and females in 1993-94. However, in
2004, rural unemployment rates for males were higher than that of urban
males.

v. Unemployment rates varied sharply across states. States, where wages are
higher than in higher growing ones because of strong bargain or social security
provisions; such as high minimum wage, had high incidence of unemployment
in general.

Essay # 4. Causes of Unemployment Problem in India:

Unemployment problem in India is the cumulative result of so many factors.

The broad causes of unemployment problem are as

follows:
(i) Population Explosion:
The most fundamental cause of large scale unemployment in India is the high
rate of population growth since the early 1950s and the consequent increase in
its labour force. It was estimated that with the 2.5 per cent annual rate of
population growth, nearly 4 million persons are added to the labour force
every year. To provide gainful employment to such a big number is really a
difficult task.

(ii) Underdevelopment:
Indian economy continues to be underdeveloped even as a vast quantity of
unutilized and under utilised natural resources are prevailing in the country.
The scale and volume of economic activities are still small. The non-
agricultural sector especially modern industrial sector which could generate
huge number of employment, is growing very slowly.

During the pre-independence period also, Indian economy experienced a slow

growth. British destroyed the indigenous small scale and cottage industries
instead of expanding and modernising them. During the post- independence
period also, the performance of the industrial sector has also been found far
below the plan targets and needs.
Moreover, the slow rate of capital formation is also responsible for the
hindrances in the path of realisation of growth potential in agriculture,
industry and infrastructure sector. Thus this underdevelopment is largely
responsible for slow expansion of employment opportunities.

(iii) Inadequate Employment Planning:

In the first phase economic planning in India, employment opportunities
could not be increased adequately and little has been done to utilise the
Nurksian variety of labour surplus existing in the rural areas. Moreover, weak
manpower planning is also another serious gap in Indian planning.

Less effort has been made for balancing the manpower needs and supplies in
various production sectors, indifferent regions of the country and also
indifferent skills.

This has resulted to large imbalances in the sphere of educated and trained
personnel like engineers, technicians, cost accountants, plain graduates and
port graduates, administrators etc. Thus huge amount of resources used for
developing manpower could not come into much help due to faulty manpower
planning.

(iv) Slow Rate of Growth:

In India the rate of growth of the economy is very poor and even the actual
growth rate lies far below the targeted rate. Thus the increased employment
opportunities created under the successive plans could not keep pace with the
additions to the labour force taking place in the country every year leading to a
huge and larger backlog of unemployment at the end of each plan.

(v) Backwardness of the Agriculture:

Heavy pressure of population on land and the primitive methods of
agricultural operations are responsible for colossal rural unemployment and
underemployment in the country.

(vi) Insufficient Industrial Development:

Industrial development in the country is not at all sufficient. Rather the
prospects of industrial development has never been completely realised. Due
to dearth of capital, lack of proper technology, scarcity of industrial raw
materials, shortage of electricity and lack of labour intensive investment
industrial sector could not gain its momentum and also could not generate
sufficient employment opportunities in the country.

(vii) Prevailing Education System:

The prevailing education system in India is full of defects as it fails to make
any provision for imparting technical and vocational education. Huge number
of matriculates, undergraduates and graduates are coming out every year
leading to a increasing gap between job opportunities and job seekers among
the educated middle class.

In the absence of vocational education and professional guidance, these huge

number of educated youths cannot avail the scope of self-employment leading
to growing frustration and discontent among the educated youths.

(viii) Slow Growth of Employment during Economic

Reforms:
Finally, the current phase of economic reforms introduced in India has
resulted jobless growth to some extent. Economic Reforms has resulted large
scale retrenchment of surplus workers in different industries and
administrative departments due to down-sizing of workers.

The annual growth rate of employment which was 2.40 per cent during the
period 1983- 94, but the same rate declined to a mere 0.98 per cent during the
period 1994-2000. As a result, the unemployment growth rates increased from
5.99 per cent in 1993-94 to 7.32 per cent in 1999-2000.

Essay # 5. Remedial Measures to Solve Unemployment

Problem In India:
Unemployment problem is a serious problem faced by a large populous
country like India. Thus it is quite appropriate to suggest some measures to
solve this problem. In order to suggest appropriate measures to solve this
problem, it is better to identify some measures separately for the problem of
rural unemployment and urban unemployment.

A. Remedies to Rural Unemployment Problem:

As the nature of rural unemployment is quite different, it is better to suggest
some special measures to solve this problem.
Following are some of these measures:
(i) Expanding Volume of Rural Works:
One of the most important remedial measures to solve the problem of
unemployment is to expand the opportunities for work especially in rural
areas. In order to clear the backlog of unemployment and also to provide jobs
to additional labor force joining the mainstream workers, this expansion in the
volume of works needs to be done rapidly and that too in the areas of both
wage employment and self-employment.

As large scale industries cannot provide adequate employment opportunities

thus more importance be given to the development of agriculture and the
allied sector along with development of small scale and cottage industries and
also the unorganised informal sector and the services sector.

(ii) Modernisation of Agriculture:

In order to eradicate the problem of rural unemployment, the agricultural
sector of the country is to be modernized in almost all the states. This would
derive considerable agricultural surplus which would ultimately boost the
rural economy and also expand employment opportunities in the rural areas.
Attempts should also be made for wasteland development and diversification
of agricultural activities.

(iii) Development of Allied Sector:

The problem of rural unemployment can be tackled adequately by developing
allied sector which includes activities like dairy farming, poultry farming, bee
keeping, fishery, horticulture, sericulture, agro processing etc. which are
having a huge potential for the generation of employment and self-
employment opportunities in the rural areas of the country.

(iv) Development of Rural Non-Farm Activities:

In order to generate employment opportunities in the rural areas,
development of rural non-farm activities, viz., rural industries, the
decentralised and cottage small scale sector of industry, agro-based industry,
rural informal sector and the services sector, expansion of rural infrastructure,
housing, health and educational services in the rural areas etc. should be
undertaken throughout the country with active government support. Since
Eighth Plan, the Government is following this strategy for the generation of
rural employment.
(v) Appropriate mix of Production Techniques:
Although Mahalanobis strategy of development argued in favour of capital
intensive techniques but in order to tackle the problem of rural unemployment
the government should adopt a appropriate mix of production techniques
where both the labour intensive and capital intensive methods, of production
should be adopted selectively in the new fields of production so as to attain
both growth in employment along with its efficiency.

(vi) Rural Development Schemes:

In order to eradicate the problem of rural unemployment, the Central as well
as the State Governments should work seriously for introducing and
implementing rural development schemes so that the benefit of such
development could reach the target groups of people in time.

(vii) Decentralisation:
In order to reduce the extent of the problem of rural unemployment it would
be quite important to spread the location of industries around the small towns
on the basis of local endowment position so that migration of people from
rural to urban areas can be checked.

(viii) Extension of Social Services:

It is also important to extend the social services in the rural areas in the sphere
of education, medical science and in other areas which will go a long way for
the empowerment of the rural people in general. Such a situation will
indirectly motivate the people towards self-employment.

(ix) Population Control:

Adequate stress should be laid on the control of growth of population through
family welfare programmes especially in the rural and backward areas of the
country. This would be conducive for solving the growing problem of rural
unemployment of the country as a whole.

(x) SHGs and Micro Finance:

Adequate steps be taken for promoting self help groups (SHGs) for generating
self employment opportunities. In this respect, micro finance flow through
NGOs towards SHGs can play a responsible role in solving the problem of
rural unemployment.
B. Remedies to Urban Unemployment Problem:
In order to solve the problem of urban unemployment the country should
follow certain important measures.

Following are some of these measures:

(i) Rapid Development of Industries:
In order to solve the problem of urban unemployment, immediate steps must
be taken for enhancing the industrial efficiency. In this regard, immediate
attempts must be made for expansion and modernisation of existing industries
in cost-effective manner and also for setting up of new industries.

Some basic and heavy industries which were already established in the field of
iron and steel, chemicals, defence goods, heavy machineries, power
generation, atomic energy etc. should be modernized and more such new
industries should also set up in the new and existing fields for generating huge
number of employment opportunities for the present and coming generations.

More new resource based and demand based industries should be set up for
generating employment opportunities.

(ii) Revamping Education System:

Indian education system still largely remains very much backward and fails to
meet the demand for present industries and administrative set up. Instead of
giving too much stress on general education, stress should be laid on
vocationalisation of education which would help the younger generation to
involve themselves in small scale and cottage industries and also in the
services sector.

(iii) Motivation for Self-Employment:

In order to change the mindset of younger generation, especially from urban
areas, attempts must be made by both government and non-government
agencies for motivating the young people to accept the path of self-
employment in the contest of squeezing scope of employment through carrier
counseling at the institutional level.

(iv) Development of SSIs:

Considering the huge number of unemployed, it is quite important to develop
a good number of small scale and cottage industries by adopting labour-
intensive approach. Developing such S.S.Is for the production of need-based
products would help a lot for generating huge employment opportunities in
urban and semi-urban areas.

(v) Development of Urban Informal Sector:

As a good number urban people are engaged in urban informal sector, thus
adequate steps must be taken for the improvement and modernisation of this
informal sector so as to expand the sector further and also to generate more
such employment opportunities for the growing number of urban unemployed
person.
(vi) Revamping the Role of Employment Exchange:
In order to utilise the huge governmental set up of Employment Exchange
throughout the country it is quite important to change the role of such
exchanges for motivating and guiding the younger generations for self-
employment in addition to its existing role for registration and placement.

(vii) Banking Support:

In order to solve the problem of urban unemployment, the scheduled
commercial banks should come forward with rational proposals for the
development of SSIs, various units in the services sector and also for the
development of urban informal sector with a sympathetic attitude.

(viii) Works of National Interest:

In order to solve the problem of urban unemployment it is quite necessary to
start the work of national interest which would generate adequate
employment opportunities in the urban areas.

(ix) Changing Pattern of Investment:

Attempt should also be made to change the pattern of investment into a viable
and productive one both from economic and social point of view so as to
generate employment opportunities.

(x) Government Support:

In order to tackle the problem of urban unemployment, the government
should come forward with viable urban employment generation schemes in
the line of PMRY, NRY etc. to assist the urban unemployed for self-
employment projects.

(xi) Growing Participation of FDI:

In order to tackle the problem of urban unemployment, the government
should follow a suitable policy in the line of China for promoting the smooth
flow of foreign direct investment (FDI) into our country for its growing
participation in various important industrial and infrastructural projects.

C. General Remedies to Unemployment Problems:

(i) Special Employment Programmes:
In order to meet the gap between the requirement and the actual generation of
employment opportunities, special employment programmes must be
undertaken as an interim measure till the economy could reach the maturity
level of securing jobs for everyone.

These kind of supplementary programmes are very important for the poor
people residing in both rural and urban areas and also residing in small 8
medium towns.

Seasonally unemployed can also be offered seasonal employment through

such special employment programmes. Moreover backward people like
landless agricultural labourers, marginal formers, rural artisans, tribal people
settled in remote and hilly areas can also be benefited from such progrmmes.

The programmes may be chalked out by providing direct wage employment as

on rural capital works or in the form of providing assets or providing inputs to
those people for self-employment. Currently, the steps taken by the
government for the implementation of NREGA is a right step in this direction.

(ii) Raising the Rate of Capital Formation:

In order to reduce the problem of unemployment, in general, it is quite
necessary to raise the rate of capital formation in the country. Raising the rate
of Capital formation is necessary to expand the volume of work.

Capital formation can directly generate employment in the capital goods

sector. Raising the capital formation helps the country to raise its capital-stock
and thereby can raise the productivity of workers by raising the volume of
capital available per workers.

(iii) Manpower Planning:

Management of human resources in a right and scientific manner is quite
important for solving the problem of unemployment. This is important for
ensuring promotion of employment scope as well as for realization of
development of the economy. All these call for proper manpower planning
which requires the following measures.

Firstly, going beyond the narrow domain of manpower planning simply

related to matching demand and supply of skilled personnel, it is quite
important to adopt effective remedies to cut down the growth rate of
population which in turn reduce the growth rate of labour supply after a gap of
period and thereby reducing the problem of unemployment.

Secondly, in order to attain effective use of skills it is essential to tailor the

supply of skilled labour as per the it’s requirement so that excess or shortages
in skills in different sectors are not faced.

Thirdly, while continuing with present strategy to promote high level skill
formation through education and Training confined to a small proportion of
labour force, it is also essential to improve the capabilities of large number of
general people for their development.

This calls for several inter-related measures like making provision for
adequate food and nutrition, elementary education, proper health facilities,
training for jobs etc.

Fourthly, while introducing special programmes for employment, it is quite

essential to ensure that the programmes rightly matches the characteristics
and abilities of targeted group and also match with the overall development
plans of various sectors. This will definitely make schemes quite useful and
meaningful.

Essay # 6. Characteristics of Employment Policy

Followed in India–Its Critical Evaluation:
Since the inception of planning, the Government of India has been pursuing
its employment policy for eliminating the problems of unemployment.

The following are of its broad characteristics:

(i) Multi-Faceted:
As the unemployment problem in India is multi-dimensional thus the policy
followed by the government to tackle this problem is multi-faceted our which
constitutes many-sided approach. Thus the employment policy followed in
India constitutes many sub-policies to tackle various forms of unemployment
including under employment.

(ii) Emphasis on Self-Employment:

The employment policy of India has given due emphasis on self- employment
as a small proportion of our labour force is engaged through wage employment
and the majority (56 per cent) of the workforce is self-employed.

Thus the employment policy makes provision for training of skills, supply of
inputs, marketing of products, extending loan etc. so as to make them self-
employed in various activities, like agriculture and allied activities, village and
small industries, non-farm activities and also in informal sector.

(iii) Emphasis on Productive Employment and Asset

Creation:
Employment policy of our country lays stress on creation of productive
employment and also on creation of assets for the poor workers.

(iv) Employment Generation:

With the growth of various sectors, the employment policy gave due stress an
employment generation at a targeted growth rate fixed under different plans
through different employment generation programmes like NREP, RLEGP,
JRY etc.

(v) Special Employment Programmes:

Employment policy of India has incorporated different special employment
programmes both for rural and urban areas. These includes IRDP, TRYSEM,
DWCRA, JGSY, JRY, EAS, AGSY, etc. for rural areas and PMRY, SJSRU, NRY
etc. for urban areas.

(vi) Employment for the Educated:

Employment policy has made provision for tackling the educated
unemployment prevailing both in rural and urban areas through employment
schemes related to processing, banking, trading, marketing etc.

(vii) Manpower Planning:

The employment policy has taken certain measures for ensuring proper
development of human resources and also through right deployment. Stress is
given on attaining balancing of demand and supply of skilled manpower.
Critical Evaluation:
It is important to make critical evaluation of the employment policy followed
in India both in terms of achievements and failures. Undoubtedly some
increase in employment has taken place in all the sectors of the country since
1951, more specially in recent times.

The average growth rate of employment per annum from 2.7 per cent during
1983-94 to 1.0 per cent during 1994-2000. During 1998-99 and 1999-2000,
the overall growth rate of employment in the organised public and private
sector remained negative.

Moreover a significant portion of the employment generated has been able to

benefit the poor and weaker sections of the population and helped a number of
them to reach above the poverty line.

However, improvement that has taken place on the employment front can be
considered inadequate for the growing number of unemployed. The large
number of people still lying below the poverty line is a pointer to such
inadequacy. Even then it is quite important to point out some of the positive
and negative aspects of the policy of employment followed by the government.

Positive Aspects of the Policy:

Since the inception of planning, the broad perception of employment
generation followed in our country has been found largely correct. The
following four components of the employment policy usually favoured
employment generation on a major scale. Firstly, since the second plan, our
policy has been approaching to the long term perspective of full employment
at higher incomes.

Development of modern industries along with capital goods industries

including infrastructure would strengthen the economy and help reach high
income employment at a later stage.

Secondly, provision has been made for the promotion of labour intensive small
scale and cottage industries, Thirdly, considering the inadequate employment
growth achieved through industrial activities, the policy devised special
employment programmes for generating jobs work to rural and vulnerable
sections of population. Fourthly, employment policy pursued in the country
helped to attain self-employment of a faster rate than wage employment.
Weaknesses of the Policy:
However, the employment policy followed India is not free from faults. The
faults are mostly related to its unsatisfactory implementation and inadequate
employment orientation as discussed in the following manner.

Firstly, unsatisfactory implementation of the policy has been mostly related to

long term slow growth of the economy, widespread industrial sickness and
retrogression in growth in industrial sector since mid- sixties.

Moreover, it was also related to slow and poor execution of special

employment programmes. Secondly, the faults in the employment policy are
mostly related to inadequate attention to full employment except in the Ninth
and Tenth Plan, where measures like too much emphasis on capital intensive
investment and lesser emphasis on labour intensive investment, inadequate
steps to absorb labour surpluses and inadequate arrangement for manpower
planning educated and skilled personnel were taken.

Essay # 7. Employment Policy and Schemes in India:

Since the Third Five Year Plan, the Government of India launched certain
special programmes for removing unemployment problem in the country.
With that purpose, the Government of India, set up Bhagawati Committee to
suggest measures for solving growing unemployment problem in the country.

The Bhagawati Committee submitted its report in 1973 and suggested various
schemes like rural electrification, road building, rural housing and minor
irrigation works. Accordingly, the Government undertook various
programmes to generate employment opportunities and to alleviate under-
employment prevailing in the country.

These programmes were as follows:

(a) Rural Works Programmes:
This programme was undertaken to generate employment opportunities for
2.5 million persons and also for the construction of civil works of a permanent
nature. But this programme generated employment only to the extent of 4
lakh persons only.
(b) Marginal Farmers and Agricultural Labourers
Development Agencies (MFALDA):
During the Fourth Plan this scheme was introduced for marginal farmers and
agricultural labourers for assisting them with subsidized credit support for
agricultural and subsidiary occupations like horticulture, dairy, poultry,
fishery etc.

(c) Small Farmers’ Development Agencies (SFDA):

This scheme was also introduced during the Fourth Plan with the object to
provide small farmers credit so that they, could avail latest technology for
intensive agriculture and also could diversify their activities.

(d) Half-a million Job Programme:

To tackle the problem of educated unemployment, a special programme —
”Half a million job programme” was introduced. In 1973-74,
provision of Rs 100 crore was made and different states and Union Territories
were asked to formulate and implement this scheme for securing an
employment opportunities for definite number of persons.
(e) Job education for unemployed:
In 1972-73, another programme for educated unemployed and for highly
qualified engineers, technologists and scientists were prepared. Under this
scheme, a sum of Rs 9.81 crore was allotted to the states which created 45,000
job opportunities for the educated persons.

(f) Drought Area Programme:

This programme was introduced for the economic development of certain
vulnerable areas by organising productive and labour-intensive programmes
like medium and minor irrigation, soil conservation, afforestation and road
construction. During 1970-72, the government spent Rs 30.80 crore,
generating employment about 4.70 million man-days and in 1972-73 by
spending Rs 38.51 crore about 40 million man-days of employment was
generated.

(g) Crash programme for rural employment:

This scheme was introduced in 1971-72 for generating additional employment
through the introduction of various productive and labour-intensive rural
projects.
The main objectives of these programmes were to provide employment to 100
persons on an average to each block over the working seasons of 10 months in
every year and secondly to produce durable assets. But the various schemes
introduced during the Fourth Plan could not succeed in solving the problem of
rural unemployment and underemployment.

Employment Policy in the Fifth Plan:

The Fifth Plan document laid emphasis on the generation of employment in
rural areas and aimed at absorbing the increments in the labour force during
the plan period by stepping up rates of public investment.

(h) Food-For-Work-Scheme:
This scheme was introduced in April 1977 for benefitting the rural poor and
more particularly the landless agricultural labourers. Under this scheme, a
part of wages those workers engaged in rural works was paid in terms of food
grains. The Central Government supplied these food grains to the State
Government free of charge. In this way off-season employments were made
available to rural unemployed.

Employment Policy in the Sixth Plan:

The Sixth Plan in its Employment Policy admits, “In the field of employment
the picture has been far from satisfactory. The number of unemployed and
under-employed has risen significantly over the last decade. In the above
context therefore our employment policy should cover two major goals:
Reducing underemployment by increasing the rate of growth of the gainfully
employed and reducing unemployment on the basis of usual status commonly
known as open unemployment”.
(i) National Rural Employment Programme:
In October, 1980, the NREP replaced the Food-for- work programme. In this
programme State Governments received central assistance both in the form of
food grains and cash for undertaking productive works in the rural areas.

During the Sixth Plan, total expenditure incurred by both the Central and
State Government were of the order of Rs 1,837 crore and total food grains
utilisation was 20.57 lakh tonnes. Total employment generation under this
programme during the Sixth Plan was 1,775 million man-days.

During the Sixth Plan overall employment increased by 35.60 million standard
person year (SPY) as against the target of 34.28 million SPY. During the Sixth
Plan the growth rate of employment was 4.32 per cent per annum. During the
Sixth Plan other programmes like IRDP and RLEGP were introduced.

Employment Policy in the Seventh Plan:

During the Seventh Plan, the magnitude of employment requirement was
worked out at 47.58 million. Accordingly, the Seventh Plan document
mentioned: “It is expected that additional employment of the order of 40.36
million standard person years would be generated during the Seventh Plan
with an implied growth rate of 3.99 per cent per annum.

The special employment programmes of NREP and RLEGP would generate

2.26 million standard persons years of employment in 1989-90. The
employment generation of IRDP has been estimated as 3 million SPY mainly
concentrated in agriculture and other sectors”. Thus the Seventh Plan decided
to supplement the efforts of employment generation by direct employment
programmes like IRDP, NREP, RLEGP and TRYSEM.

(j) Integrated Rural Development Programme (IRDP):

The Sixth Plan proposed to integrate multiplicity of agencies for providing
rural employment like Employment Guarantee Scheme, SFDA, MFALDA,
Drought Prone Area Programme, Command Area Development Programme
etc. Accordingly, on 2nd October 1980, the Integrated Rural Development
Programme was introduced.

This programme was a multi-pronged attack on the problem of rural

development and was designed as an anti-poverty programme. During the
Sixth Plan this programme was initiated in all the 5,011 blocks of the country.
To implement this scheme one District Rural Development Agency was
established in every district.

During the Sixth Plan, a sum of Rs 1,661 crore was spent on this programme as
against the provision of Rs 1,500 crore and the total number of beneficiaries
covered during the plan period was 16.56 million as against the target of 15
million.

The Seventh Plan set a target to assist 20 million households under IRDP and
the total allocation under this programme was Rs 3,474 crore. During this plan
about 18.2 million families were assisted and about Rs 3,316 crore was
utilised.
(k) Rural Landless Employment Guarantee
Programme (RLEGP):
The Rural Landless Employment Guarantee Programme was introduced on
15th August, 1983 with the sole object of generating gainful employment
opportunities, to create productive assets in rural areas and for improving the
overall quality of rural life.

In this programme preference in employment is given to landless labourers,

women scheduled caste and scheduled tribes. This programme is funded fully
by the Central Government.

During the Seventh Plan, Rs 1,744 crore was provided by the central sector to
generate 1,013 million man-days of employment during the plan period. But
during the first three years of the plan Rs 1,743 crore was utilised and
generated employment to the extent of 858 million man-days only. Thus 85
per cent of the target was only realised.

NREP:
The Seventh Plan had earmarked a total outlay of Rs 2,487 crore for the
National Rural Employment Programme out of which centre sanctioned Rs
1,251 crore. The Seventh Plan sets a target to generate employment to the
extent of 1,445 million man-days. But during the first four years of the Seventh
Plan nearly Rs 2,940 crore were spent under NREP generating 1,447.7 million
man-days of employment which has fulfilled plan target.

Jawahar Rozgar Yojana (JRY):

Jawahar Rozgar Yojana was launched on 28th April, 1989 by the Prime
Minister Rajiv Gandhi. Under the programme, all the existing rural wage
employment programmes like National Rural Employment Programme and
Rural Employment Committee Programme were merged.

The programme (JRY) aims at reaching each and every panchayats of the
country. In this programme 80 per cent of resources would be funded by the
centre and the rest 20 per cent by the States. In the year 1989-90, the centre
made a provision of Rs 2,100 crore.

In this programme allocation of funds to the State is being made in proportion

to the size of their population below the poverty line. In this programme, on an
average a village panchayat with its population of 3,000 to 4,000 people will
receive between Rs 80,000 to Rs 1 lakh every year. It was also decided to
provide employment to at least one member in each poor family for at least 50
to 100 days in a year.

Besides this, the National Scheme of Training of Rural Youth for Self
Employment (TRYSEM) was also introduced in the country. This programme
was meant for generating self-employment opportunities by imparting
training to the rural youths in various trades and skills.

Thus considering all these programmes introduced in the employment policy

of the country under different plans, it can be concluded that these
programmes could not make much headway in solving both the rural and
urban unemployment in the country.

Employment Policy in the Eighth Plan:

Although various employment generation schemes were implemented till the
completion of the Seventh Plan, the problem of unemployment faced by the
country still remains grave. Total unemployment in the country totaled 23
million in the year 1992. In 1981-91, the country registered a 2.1 per cent
growth rate in population while the growth rate of the labour force was 2.5 per
cent per annum.

In 1991, the total population of the country was estimated at 837 million of
which the labour force constituted about 315 million. Thus the growth of the
labour force has been higher than the population growth but the growth rate of
employment, which remained only 2.2 per cent per annum during the period
1971-91, has remained lower than of labour force.

It has been estimated that the country will have 94 million unemployment by
the year 2002. Thus in Order to wipe out the projected unemployment in the
country completely by 2002, the country should achieve the required annual
employment growth rate between 2.6 to 2.8 per cent. As unemployment is a
major socio-economic problem it must be tackled on a priority basis.

At the outset of the Eighth Five Year Plan (1992-97), employment was
estimated to be about 301.7 million. The open unemployment was estimated at
17 million, of which the educated unemployment accounted for 7 million.
Severe under-employment was estimated as 6 million. Thus the backlog of
unemployment for planning purposes was thus reckoned at 23 million in April
1992.

As the net additions to labour force during the Eighth Plan and during the
period 1997-2002 were estimated at 35 million and 36 million respectively, in
order to reduce unemployment to negligible levels by 2002, the employment
should grow at the average annual rate of about 2.6 to 2.8 per cent over the ten
year period 1992-2002.

Considering the present unemployment scenario, the Eighth Five Year Plan
sought to achieve 2.6 per cent rate of growth of employment, corresponding to
an average annual growth rate of GDP of 5.6 per cent envisaged in the plan.

Thus the Eighth Plan emphasised the need for a high rate of economic growth,
combined with a faster growth of sectors, sub-sectors and areas which have
relatively high employment potential for enhancing the pace of employment
generation.

The plan sought to achieve the target by laying emphasis on a crop-wise and
geographic diversification of agricultural growth, wasteland development,
promotion of agro-based activities, rural non-farm activities including rural
industries, the decentralised and small scale sector of industry, the urban
informal sector and the services sector, expansion of rural infrastructure,
housing and health and educational services especially in rural areas,
revamping of the training system and streamlining of the special employment
programmes to integrate them with area development plans.

Thus all these above are considered as basic elements of the employment
oriented growth strategy envisaged in the plan. Additional employment
opportunities to the extent of 8 to 9 million per year, on an average, during the
Eighth Plan period and of the order of 9 to 10 million per year, on an average,
during 1997-2002 period are expected to be generated.

Thus the employment strategy as envisaged in the Eighth Plan generated

around 42.5 million additional employment during the period 1992-97. The
continuation of the strategy during the Ninth Plan period generated around
47.5 million additional employment during the period 1997-2002.
Thus the employment strategy wiped out the entire backlog of open
unemployment and a sizable part of the severe under-employment in the
country.

The Eighth Plan document has also identified various

problems as factor responsible for the lower growth of
employment in the country. These include:
i. Mismatch between skill requirement and employment opportunities;

ii. Low technology, low productivity and low wage;

iii. Occupational shifts from artisanal of unskilled employment in agriculture;

iv. Declining employment in agriculture; and

v. Under-employment due to seasonal factors and more labour supply than

demand.

Endorsement of New Employment Schemes by NDC and

its Subsequent Launching:
The 46th meeting of the National Development Council, held on 18th
September, 1993, unanimously endorsed three employment generating
schemes, covering the rural poor, educated unemployment and women.

Accordingly in 1993-94, two new programmes were launched in order to give a

fillip to employment generation. These two programme included: (i)
Employment Assurance Scheme (EAS), and (ii) Prime Minister’s Rozgar
Yojana (PMRY) for the Educated and Unemployed youth.

(i) Employment Assurance Scheme (EAS):

The Employment Assurance scheme was introduced on 2nd October, 1993 to
make provision for “assured employment” for the rural poor.

The highlights of the scheme are as follows:

(a) Aim:
The scheme (EAS) was implemented in the 3,175 backward blocks with an aim
to provide 100 days of unskilled manual work to all those who were eligible in
the age group of 18-60 years.

(b) Feature:
The scheme will provide unskilled manual work to rural poor with statutorily
fixed minimum wages linked to the quantum of work done. Its funding pattern
is 80: 20 by the Centre and the States respectively. The scheme is targeted at
the poor especially during the lean agricultural season in rural areas.

The works undertaken are run departmentally and no contractors are hired.
Part of the wages may be paid in terms of food grains. The collector of the
district is assigned to oversee the performance. Under this scheme, applicants
will be given a “family card” listing the number of days of employment under
different programmes.

The objective of the scheme (EAS) is to create economic infrastructure and

community assets for sustained employment and development. Specific
guidelines had been sent by the centre to various states so as to ensure that the
provision of employment under the scheme resulted in the creation of durable
assets in each block where the scheme had been launched. The implementing
agencies were made responsible for the payment of minimum wages according
to the standard of performance under the scheme.

A part of the wages were paid in the form of food grains not exceeding 50 per
cent of the wages in cost. However, the payment of wages in terms of food
grains has been made optional, depending upon the price of food grains in the
open market.

Achievement:
During the first year since introduction, i.e., during 1993-94 more than 49.5
million man- days of employment has been generated and nearly 1.7 million
have been registered under the newly launched Employment Assurance
Scheme (EAS).

The states where maximum number of man day of employment generated

include Andhra Pradesh followed by Madhya Pradesh, Orissa and West
Bengal. During the first eight months of 1994-95 about 115 million man-days
of employment was generated under the EAS scheme.

Among these states, about 2.9 million man-days of employment had been
generated in Andhra Pradesh while the figure touched about 2.3 million in
Madhya Pradesh. In Orissa, nearly 1.5 million man-days of employment was
generated and the figure was almost the same in the case of West Bengal.
In 2003-04, total man-days of employment generated under EAS was around
at 37.28 crore. At the end of 2003-2004. EAS had generated total employment
to the extent of 302.25 crore man-days, since its inception in October 1993.

(ii) Mahila Samridhi Yojana (MSY):

The Mahila Samridhi Yojana was also launched on 2nd October, 1993 in order
to benefit all rural adult women. This scheme entitles every adult women who
opens an MSY account with Rs 300 to get an incentive of Rs 75 for a year.

The MSY is aimed at empowering rural women with greater control over
household resources and savings. It is now implemented through post offices.
At the end of October 1995, a total of 1,25,423 accounts had been opened
under the scheme.

(iii) Prime Minister’s Rozgar Yojana (PMRY):

On 2nd October, 1993, the Government introduced another new employment
oriented scheme—Prime Minister’s Rozgar Yojana (PMRY) under the on-going
Eighth Plan. The scheme is specially designed for educated unemployed youth
which will provide employment to more than one million persons by setting
up seven lakh micro enterprises during the Eighth Five Year Plan in industry,
service and business.

The scheme initially covered urban areas only during the 1993-94,
subsequently covered both the urban and rural areas. The scheme but involved
an expenditure of ? 540 crore to meet the capital subsidy, training and
administrative cost during the remaining period of the Eighth Five Year Plan.

The scheme provided a loan, up to a ceiling of Rs 1 lakh in case of individuals.

If two or more eligible persons enter into a partnership, projects with higher
cost can be assisted provided the share of each person in the project cost did
not exceed Rs 1 lakh.

An entrepreneur is required to contribute 5 per cent of the project cost as

margin money in cash. Subsidy at the rate of 15 per cent of the project cost
subject to a ceiling of Rs 7,500 per entrepreneur was provided by Central
Government. All those who undertook Government sponsored technical
course for a minimum duration of six months besides matriculate and ITI
diploma holders were be eligible for the scheme.
Under the PMRY, unemployed educated youth between the 18-25 years age
group and of families with annual income up to Rs 24,000 along with certain
educational and other criteria were eligible for such assistance.

In 2003-04, total micro enterprises developed under PMRY was 1.2 lakh and
total employment generated was 1.8 lakh. At the end of 2003-2004 PMRY has
developed micro enterprises to the extent of 17.2 lakh and generated
employment to the extent of 24.82 lakh since its inception in October 1993.
Under PMRY, the Government assisted 20 lakh youth for self-employment
during the Tenth Plan.

(iv) JRY:
Moreover, the achievement of JRY in respect of employment generation was
782 million man- days in 1992-93 and 1,026 million man-days in 1993-94. The
1994-95 budget provide for Rs 70.1 billion and set a target of employment
generation at 980 million man-days, against which the achievement of JRY in
1994-95 was 952 million man-days.

In 1998-99, the target of employment generation under JRY is fixed at 396.6

million man-days but during 1998-99, the achievement was 375.2 million
man-days. Under JRY, about 50 per cent employment generation during
1998-99 came from SC/ST group.

(v) Nehru Rozgar Yojana (NRY):

Nehru Rozgar Yojana (NRY) contemplated by the Ministry of Urban Affairs
was designed to create employment opportunities for urban poor. This
programme was launched in October 1989 with the objective of providing
employment opportunities to the unemployed and under employed urban
poor.

The Yojana is applicable to household living below the poverty line in urban
slums and within this broad category, SC/ST and women constitute a special
target group.

Nehru Rozgar Yojana consists of three sub schemes:

(a) Scheme of Urban Micro enterprises. (SUME),

(b) Scheme of Urban Wage employment (SUWE) and

(c) Scheme of Housing and Shelter Upgradation (SHASU).

So far, 6.55 lakh beneficiaries have been assisted in setting up of micro
enterprises under SUME. About 541.52 lakh man-days of work have been
generated through the construction of economically and socially useful public
assets under SUWE and SHASU till 1994-95. Under NRY, total number of
families assisted was 2.37 lakh in 1992-93, 1.52 lakh in 1993-94, 1.25 lakh in
1994-95 and 0.6 lakh during 1997-98 as against the target of 1.2 lakh.

Total man-days of employment generated under NRY was 140.5 lakh in 1992-
93, 123.7 lakh in 1993-94, 92.9 lakh in 1995-96 and 44.6 lakh during 1997-98
as against target of 135.8 lakh. In December, 1997, this programme was
amalgamated with SJSRY.

(vi) Prime Minister’s Integrated Urban Poverty

Eradication Programme (PMIUPEP):
The Prime Minister’s Integrated Urban Poverty Eradication Programme
(PMIUPEP) was launched in 1995-96 with a specific objective of effective
achievement of social sector goals, community empowerment, employment
generation and skill upgradation, shelter upgradation and environmental
improvement with a multi-pronged and long-term strategy.

The Programme covered 5 million urban poor living in 345 class II Urban
Agglomerations (towns) with a population of 50,000 to 1,00,000 each. There
was a provision for Rs 800 crore as central share for the entire programme
period of 5 years. In 1995-96, Rs 100 crore were allocated for the programme.

The programme benefitted about 150 lakh urban poor in 1996-97. As on

October 1996, over 14,000 and 1,00,000 beneficiaries had been identified for
self-employment and shelter upgradation respectively. In December 1997, this
programme was amalgamated with SJSRY.

(vii) The Swarna Jayanti Shahari Rozgar Yojana

(SJSRY)/National Urban Livelihoods Mission
(NULM):
The Swarna Jayanti Shahari Rozgar Yojana (SJSRY) which subsumed the
earlier three urban poverty programme viz., Nehru Rozgar Yojana (NRY),
Urban Basic Services for the poor (UBSP) and Prime Minister’s Integrated
Urban Poverty Alleviation Programme (PMIUPEP) came into operation from
December 1997.
This programme sought to provide employment to the urban unemployed or
underemployed poor living below poverty line and educated up to XI standard
through encouraging the setting up of self-employment ventures or provision
of wage employment.

The scheme gives special impetus to empower as well as uplift the poor women
and launches a special programme, namely, Development of women and
children in Urban Areas (DWCUA) under which groups of urban poor women
setting up self-employment ventures are eligible for subsidy up to 50 per cent
of the project cost.

An allocation of Rs a 181.0 crore was provided in 1999-2000 (BE). In 1998-99,

the DWCUA scheme had assisted 0.01 lakh women related to their self-
employment schemes. During 2001-02, Rs 168 crore was allocated against
which’ Rs 45.50 crore was spent. In 2002-03, all allocation of Rs 105 crore was
provided against which Rs 74.0 crore was spent.

Two special schemes of SJSRY include—the Urban Self-Employment

Programme (USEP) and the Urban Wage Employment Programme (UWEP).
SJSRY is funded on a 75: 25 basis between Centre and States. During 1997-98,
1998-99 and 1999-2000, a sum of Rs 102.51 crore, Rs 162.28 crore and Rs
123.07 crore respectively were spent in the States and Union Territories under
different components of SJSRY.

About the performance of SJSRY, total number of beneficiaries under USEP

was 0.04 million in 1998-99 and 0.10 million in 2003-2004 and total number
of persons trained under USEP was 0.05 million in 1998- 99 and 0.12 million
in 2003-2004. Again, total man-days of employment generated under UWEP
was 6.60 million in 1998-99 and 10.14 million in 1999-2000 and 4.56 million
in 2003-04.

The number of urban poor assisted for setting up micro/group enterprises in

2005-06 was 0.9 lakh against a target of 0.80 lakh. The number of urban poor
imparted skill training in 2005-06 was 1.42 lakh against a target of 1.0 lakh.

Budget allocation for the SJSRY scheme for 2011-12 is Rs 813.0 crore of which
Rs 676.80 crore had been utilized till February 16, 2012. During 2009-10, as
reported by States/UTs, a total of 28,613 urban poor have been assisted in
setting up individual enterprises, 13,453 urban poor women have been
assisted in setting up group enterprises and 27,463 urban poor women have
been assisted through a revolving fund for thrift and credit activities and also
85,185 urban poor have been imparted skill training. A total of 3,63,794
beneficiaries have been assisted in the year 2011-12.

NULM:
SJSRY was replaced by the NULM in September 2013. It aims to provide
gainful employment to urban employed and under employed. The NULM will
focus on organizing urban poor in SHGs, creating opportunities for skill
development leading to market based employment, and helping them to set up
self- employment ventures by ensuring easy access to credit.

The NULM aims at providing shelter with basic amenities to urban homeless.
If also plans to address livelihood concerns of urban street vendors. During
2013-14, Rs 720.43 crore was released and the number of persons skill trained
and assisted for self-employment was 6,83,452 and 1,06,250 respectively.

(viii) The Swarnajayanti Gram Swarozgar Yojana

(SGSY) and NRLM:
SGSY was launched in April, 1999 and is the only self employment programme
currently being implemented. It aims at promoting micro enterprises and to
bring the assisted poor families (Swarozgaris) above the poverty line by
organizing them into Self Help Groups (SHGs) through the process of social
mobilization, training and capacity building and provision of income
generating assets through a mix of Bank credit and Government subsidy.

The scheme is being implemented on a cost-sharing ratio of 75: 25 between

the Centre and the States. Since inception of the Scheme up to December,
2012 a total allocation of Rs 42,16,842 crore was made available by the Centre
and the States which formed 42.05 lakh SHG’s and assisted 168.46 lakh
Swarojgaris. The SGRY restructured as National Rural Livelihood Mission
(NRLM).

The SGSY is restructured as National Rural Livelihood Mission (NRLM) and it

has been renamed as Ajeevika and now being implemented in mission mode
across the country since 2011.

The main features of Ajeevika are:

(a) One women member from each identified rural poor household to be
brought under the SHG network;

(b) Ensuring 50 per cent of the beneficiaries from SC/STs, 15 per cent from
minorities, and 3 per cent persons with disability while keeping in view the
ultimate target of 100 per cent coverage of BPL families;

(c) Training for capacity building and skill development;

(d) Ensuring revolving fund and capital subsidy;

(e) Financial inclusion;

(f) Provision of interest subsidy;

(g) Backward and forward linkages and

(h) Promoting innovations.

The objective of NRLM is to ensure that each family, once it is in the SHG
network for a period of 6- 8 years, it is able to achieve household food security
and have 3-4 stabilized livelihoods through a strong convergence with
panchayati raj institutions (PRIs).

The mission has covered 97,391 villages and mobilized around 20 lakh SHGs,
of which 3.8 lakh are new. During 2013-14, Rs 22,211.18 crore of SHG bank
credit has been disbursed. For 2014-15, Rs 3,560 crore has been allocated to
NRLM.

(ix) Sampoorna Grameen Rozgar Yojana (SGRY):

The Sampoorna Grameen Rozgar Yojana (SGRY) was launched in September
2001. The schemes of Jawahar Gram Samridhi Yojana (JGSY) and
Employment Assurance Scheme (EAS) have been fully integrated with SGRY.

The objective of the scheme is to provide additional wage employment along

with food security creation of durable community, social and economic assets
and infrastructure development in the rural areas. The scheme envisages
generation of 100 crore man-days of employment in a year. The cost of the
programme is to be shared between the Centre and the State on a cost sharing
ratio of 87.5 : 12.5 (including food grains component).
In 2005-06, 82.18 crore person-days of employment were generated with the
centre releasing Rs 5497.43 crore as cash component and about 37.30 lakh
tonnes of food grains to the states and UTs. Besides, under special component
of SGRY with the states/ UTs meeting the cash components, centre released
15.64 lakh tonnes of food grains to the 11 calamity affected states.

In 2007-08, up to December 31, 2007, the number of person days of

employment generated under SGRY was 11.60 crore while the centre’s
contribution in terms of cash and food grain component up to December 31,
2007 were Rs 1,142.27 crore and 9.55 lakh tonnes.

(x) Pradhan Mantri Gramodaya Yojana (PMGY):

PMGY was launched in 2000-2001 in all the States and the UTs in order to
achieve the objective of sustainable human development at the village level.
The PGMY envisages allocation of Additional Central Assistance to the States
and UTs for selected basic minimum services in order to focus on certain
priority areas of the Government.

PMGY initially had five components viz., Primary Health, Primary Education,
Rural Shelter, Rural Drinking Water and Nutrition. Rural Electrification has
been added as an additional component from 2001-02. The allocation for
PMGY in 2000-01 was Rs 2,500 crore. This was enhanced later on to Rs 2800
crore for 2001-02. For the year 2002-03, an amount of Rs 2,800 crore was
provided.

During the last two annual plans, the six sectoral programmes of PMGY were
managed by the concerned Central Administrative Departments. However,
from the current year, the Planning Commission is to directly implement this
programme. New guidelines on the implementation of the PMGY during
Annual Plan 2002- 03 have been issued to all the State Governments and UTs.

(xi) Pradhan Mantri Gramodaya Yojana (Gramin

Awas):
The scheme seeks to achieve the objective of sustainable habitat development
at the village level. Central allocation for rural shelter component of PMGY.
GA in 2001-02 was Rs 406.85 crore out of which an amount of Rs 291.51 crore
was released by Ministry of Finance.
(xii) Pradhan Mantri Gramodaya Yojana—Rural
Drinking Water Project:
Under this programme, a minimum 25 per cent of the-total allocation is to be
utilised by the respective States/UTs on projects/schemes for water
conservation, water harvesting, water recharge and sustainability of the
drinking water sources in respect of areas under Desert Development
Programme/Drought Prone Areas Programme.

(xiii) Pradhan Mantri Gram Sadak Yojana (PMGSY):

The PMGSY, which was launched on 25th December, 2000 is a programme to
provide road connectivity through good all-weather roads to 1.60 lakh
Unconnected Habitations with a population of 500 persons or more in the
rural areas by the end of the Tenth Plan period (2007) at an estimated cost of
Rs 60,000 crore.

The programme is being executed in all the States and Six Union Territories.
While the focus of the programme is on providing road connectivity to
Unconnected Habitations of stipulated population size, connectivity is being
provided to all Panachayat Headquarters and places of tourist interest under
the PMGSY irrespective of the population size.

Thus, the main objective of PMGSY is to provide all weather connectivity to all
eligible unconnected habitations in rural areas of the country having
population of 500 persons and above in plain areas and 250 persons and
above (as per 2001 census) in special category states, selected tribal and desert
areas.

It also permits upgradation of existing rural roads. In 2001-02, an amount of

Rs 2,500 crore was allocated for this scheme. Since inception, projects for
providing new connectivity to 1,44,717 habitations with a road, length of
5,44,462 km have been cleared at an estimated cost of Rs 1,82,560 crore
including upgradation cost.

A total of 3,99,979 km road length have been completed and new connectivity
have been provided to over 97,838 habitations up to March 2014. During
2013-14, about 25,316 km of all-weather road including new connectivity to
6,560 habitations has been completed at an expenditure of Rs 13,095 crore.
Upgradation on selected existing roads has been taken up.
The present source of funding for PMGSY is the diesel cess, 50 per cent of
which is earmarked for PMGSY. Efforts are underway to raise additional
resources for the programme with financial assistance from the World Bank
and the Asian Development Bank.

(xiv) Maharma Gandhi National Rural Employment

Guarantee Act Scheme (MGNREGA):
The National Rural Employment Guarantee Act Scheme (NREGS) was
formally launched on February 2, 2006 by Prime Minister Manmohan Singh
at Bahdlapalle Gram Panchayat of Anantpur district of Andhra Pradesh
marking an important milestone of the UPA Government’s efforts to provide
jobs to the rural poor.

The Act passed in August 2005 was launched in 200 districts and has been
expanded to 330 districts in the second phase and by next four years, i.e., by
2008-09 all the districts was covered under the Act.

This is for first time a job guarantee scheme has been introduced in the
country. Under this Act, one member of each of the country’s 150 million rural
households will have the legal guarantee to get at least 100 days of
employment at minimum wages of Rs 65 for one person in each household
irrespective of poverty levels they belong to.

Accordingly, rural household in selected districts will have the right to register
themselves with the local Gram Panchayats as persons who seek employment
under the Act. Thus this Act provides a social safety net for the vulnerable
groups of people of our society and thereby makes an attempt to attain growth
with equity.

The main features of this Act are:

(a) NREGA is not just a scheme but an Act providing legal guarantee to work.

(b) Any adult person in the notified are willing to do unskilled manual work,
can apply for registration with Gram Panchayat. The Panchayat will then issue
a job card to that person and the person will be entitled to apply for
employment.

(c) The registered persons will then have the legal right to demand
employment.
(d) The person will get the right to get employment within 15 days of their
demand.

(e) The person will get the right to receive unemployment allowance if the
employment is not given within 15 days.

(f) One third of the beneficiaries will be women.

(g) Employment will be given within 5 km. of the applicant’s residence, else
additional wags will be paid.

(h) Panchayati Raj Institutions ((PRIs) will have the principal role in planning,
monitoring and implementation.

(i) The beneficiary will get the right for statutory wages.

(j) The beneficiary will get the right to worksite facilities like drinking water,
sheds for children and first aid.

The Centre is bearing 80 per cent of the total cost of the programme and the
State Government will have to play a crucial role. The wage component of the
implementation of this Act will be borne by the centre and cost of materials
and other components of the work would be shared between the Centre and
the State Governments.

Thus this flagship programme of the government aims at enhancing livelihood

security of households in rural areas by providing at least one hundred days of
guaranteed wage employment in a financial year to every household whose
adult members volunteer to do unskilled manual work with the stipulation of
one-third participation of women.

The MGNREGA provides wage employment along with focusing on

strengthening natural resource management through works that address
causes of chronic poverty like drought, deforestation and soil erosion and
thereby encourage sustainable development. The two-pronged objective of the
Act are firstly to ensure food security through employment generation and
secondly, creation of permanent assets.

However, the successful implementation of NREGA

depends on two important factors, i.e:
(i) The efficient and regular functioning of Panchayati Raj institutions and

(ii) Proper use of the Right to Information Act.

However, the most striking feature of this Act, it is the first attempt of its kind
at the national level to work out an employment guarantee programme with
80 per cent central funding and with its legal force which makes it quite
different than that of other employment generation schemes introduced
earlier in the country.

The MGNREGA, being a demand driven scheme, has its definite focus on
works relating to water conservation, drought proofing, land development,
flood protection/control and rural connectivity in terms of all-weather roads.
Of the Rs11,300 crore allocated for NREGA in 2006-07 (BE) Rs 6,714.98 crore
was released up to January 31, 2007.

Till January 31, 2007, about 3.47 crore job cards have been issued and of the
1.50 crore households, who have demanded employment, 1.47 crore
households have been provided employment under the scheme. Under this
scheme, up to December, 2006 of the 53.56 crore person-days of employment
generated, 21.13 crore were for women, and of about 5.81 lakh work taken up,
2.34 lakh were completed.

As against the employment demanded by 2.61 crore rural households, 2.57

households have been provided wage employment during 2007-08. A budget
allocation of Rs 12,000 crore (including NER Component) was made for 2007-
08 and Rs 10,501.02 crore has been released till 30.01.2008. The Government
is now considering a proposal of raising the number of days of guaranteed jobs
from 100 days to 200 days.

In 2007-08, the IT-enabled network of India Post has been successfully

utilised for disbursement of wages to the beneficiaries of NREGA in 19
districts of Andhra Pradesh and in all 22 districts of Jharkhand. The scheme is
also operative in Karnataka, Madhya Pradesh, and West Bengal.

In 2008-09, the Government has stepped up the allocation for its flagship
programme of rural employment scheme NREGA by over 65 per cent to Rs
26,500 crore. The additional amount of Rs 10,500 crore has been provided to
meet the additional requirement of NREGA Scheme.
Under phase II, 130 additional districts were notified and brought under its
ambit with effect from April 1, 2007. Under the programme, so far 293.46 lakh
jobs have been provided to households. In 2008-09, the entire Sampoorna
Grameen Rozgar Yojana (SGRY) was subsumed in NREGA Scheme.

The coverage was extended to all the rural districts of the country in 2008-09.
At present, 619 districts are covered under NREGA. During the year 2008-09,
more than 4.51 crore households were provided employment under the
scheme. As against the budgeted outlay of Rs 33.000 crore for the year 2013-
14, an amount of Rs 25,894.03 crore has been released to the states/UTs till
January, 2014.

The number of households covered under the scheme increased considerably

from 3.39 crore in 2007-08 to 4.47 crore in 2008-09 and then to 4.78 crore in
2013-14 with an average wage employment of 46 person days.

Out of the 219.72 crore person days of employment created under the scheme
during 2013-14, 23 per cent and 17 per cent were created in favour of SC and
ST population respectively and 53 per cent were in favour of women. Thus
NREGA provides a social safety net for the vulnerable groups of people of our
society and thereby makes an attempt to attain growth with equity.

The MGNEGA is thus playing an important role in improving the livelihood

security as well as improving the resource base at the rural level. At national
level with the average wage paid under the MGNEGA increasing from Rs 65 in
2006-07 to Rs 115 in 2011-12, the bargaining power of agricultural labourer
has increased as even private sector wages have increased as shown in many
studies.

Improved economic outcomes, especially in watershed activities, and

reductions in distress migration are its other achievements. Wages under
MGNREGA are indexed to the consumer price index for agricultural labour
(CPI-AL). Recently the government has taken some initiatives under
MGNREGA to make it much more effective and transparent.

These are:
i. The basket of permissible activities has been expanded to make it more
meaningful.
ii. Electronic fund management system (eFMS) in all states has been initiated
in a phased manner to reduce delay in payment of wages.

iii. Additional employment over and above 100 days per household is notified
in drought-affected talukas or blocks is now permissible.

iv. Provision has been made for seeding in Aadhaar into the MGNREGA
workers records in order to prevent leakage.

v. Convergence of the MGNEREGA with the total Sanitation Campaign (TSC)

has been undertaken.

While commending the success of MGNREGA, Prime Minister Dr. Manmohan

Singh recently observed that “MGNREGA has brought
momentum in the financial inclusion of our rural
population. Besides direct financial benefit, the
scheme has given many indirect benefit to the people
and brought down the migration graph”.
Nothing that more than four crore accounts have been opened in banks
besides those in post offices, the Prime Minister observed that, “these bank
accounts will assist the government in reaching the incentives of the Direct
Benefit Transfer Scheme to the rural population. Moreover, the use of
information technology in MGNREGA at many levels has helped making
governance better and increase accountability and transparency in
government work. There are enough proofs that the scheme has helped to a
great extent in getting the small and very small farmers a better produce by
increasing land productivity and water conservation.”

Thus it can be observed that with better planning of project design, capacity
building of panchayati raj institutions (PRTs), skill up-gradation for enhanced
employability, and reduction of transaction costs, gaps in scheme
implementation could be plugged to a greater extent and the assets so created
could make a much larger contribution towards raising land productivity and
improvement of living conditions of rural people in general.

Employment Policy in the Ninth Plan:

The Draft Approach Paper of the Ninth Plan gave due recognition to the
problem of unemployment. With that purpose, the Approach Paper has
incorporated one of its Objectives as “Giving priority to agriculture and rural
development with a view to generate adequate productive employment and
eradication of poverty.”

The four dimensions of state policy as reflected in the strategy of the Ninth
Plan has incorporated “generation of productive
employment” as one of those dimensions. Accordingly the Ninth Plan
has incorporated a primary objective to generate greater productive
employment in the growth process of various sectors and by adopting labour
intensive technologies in the unemployment prone areas.
In order to enhance employment opportunities for the poor, the Ninth Plan
has Undertaken a National Employment Assistance Scheme, recognising the
high incidence of under-employment and increasing casualization of labour.

The Approach Paper of Ninth Plan also mentioned that “Improvements in

quality of employment can be achieved only in a situation of rapidly growing
productivity to which the labour can lay a just claim. However, it is not merely
enough to create the right kinds of employment opportunities, but also to
provide the people with the human capital by which they can take advantage of
these opportunities. Education and skill development are essential features of
such empowerment. Free and compulsory education of children supported by
an adequate midday meal programme in schools is the first step towards this
end. In addition, special programmes will have to be implemented to develop
skills, enhance technological levels and marketing channels for people
engaged in traditional occupations.”

“There is no simple or unique correlation in the short-

run either in theory or in Indian experience between
the rate of growth of output and the rate of growth of
employment.”
Under the present context, the growth process should be restructured in such
a way so that employment opportunities grow at an accelerated pace and the
country become successful to achieve the goal of full employment in the early
part of new millennium.

In this connection, the Planning Commission has

suggested the following measures to be adopted
during the Ninth Plan period:
(a) Attainment of economic growth would be mostly from those sectors which
have high employment potential.
(b) High priority would be accorded to attain growth and lines of production
with high employment intensity along with the maintenance of demand-
supply balance.

(c) Discouraging unnecessary and indiscriminate increase in capital intensity

and encouraging the adoption of production techniques with higher
employment potential per unit of capital.
(d) Lastly, reorienting public sector investment towards those sectors having
employment bias and influencing private investment decisions to adopt
technologies with high employment potential.

Again the draft Ninth Five Year Plan (1997-2002) approved by the National
Development Council (NDC) on 19th February, 1999 has given priority to
reduce the extent of unemployment and it has set a target to generate 50
million jobs during the Ninth Plan period.

Employment Policy in the Tenth Plan:

The Approach Paper to the Mid-Term Appraisal of the Tenth Plan has
reiterated that employment growth should exceed the growth of labour force
to reduce the backlog of unemployment.

Employment strategies advocated in the Approach

Paper include:
i. Special emphasis to promote public investment in rural areas for absorbing
unemployed labour force for asset creation.

ii. Identification of reforms in the financial sector to achieve investment

targets in the Small and Medium Enterprises (SME) sector.

iii. Large scale employment creation in the construction sector, especially for
the unskilled and semiskilled.

iv. Necessary support to services sector to fulfill their true growth and
employment potentials and greater focus on agro-processing and rural
services.

Thus the employment strategy in the Tenth Plan needs, therefore, to focus on
adequate employment growth and on the qualitative aspects of employment.
In order to enable the poor to access the opportunities and to ensure
consistency between the requirement and availability of skills, emphasis will
need to be placed on required skill development.

Thus the Tenth Plan document observed that the current backlog of
unemployment at around nine per cent, equivalent to 35 million persons, is
too high and every effort needs to be made to not only arrest the rising trend,
but to actually reduce it during the Tenth Plan period itself.

On the whole, the Tenth Plan aimed at the creation of approximately 50

million employment opportunities during a period of 5 years, of which 30
million will be created from normal process of growth and rest 20 million will
be created from special initiatives. The result of the 61st NSSO round show
that above 47 million persons were provided employment during 2000 to
2005.

Employment Policy of the Eleventh Plan:

Generation of employment opportunities for the growing number of
unemployed and new entrants to labour force is a great challenge. Doubling
the growth of agricultural GDP to 4 per cent per annum will improve
employment conditions in agriculture by raising real wages and reducing the
number of underemployed in agricultural sectors.

The Approach Paper to the Eleventh Plan targets generation of additional

employment opportunities in services and manufacturing, in particular, labour
intensive manufacturing sectors such as food processing, leather product,
footwear and textiles and in service sector such as tourism and construction.

It also calls for elimination of distorting fiscal incentives which foster capital
intensity, infrastructure investment, removal of distortions that hinder
competition, prevent entry and discourage graduation from unorganised to
organised status; and greater emphasis on vocational training and skill
development to improve employability of youth.

As Village and Small Scale Enterprises (VSE) will have to provide most of the
employment during the Eleventh Plan, the Approach Paper also calls for
redressing the problems faced by VSE units and home based workers,
especially women which include non availability of timely and adequate credit,
unrealizable or absence of power supply, requirement of permission from a
number of government agencies and burden of multiple inspections. However,
some direct employment will be available in the social sector, i.e., on health
and education. Besides the wage employment programme like NREGS will
also improve employment scenario considerably.

In this connection the Economic Survey, 2007-08 observed “the Eleventh Plan
envisages rapid growth in employment opportunities while ensuring
improvement in quality of employment. It recognises the need to increase the
share of regular employees in total employment and a corresponding
reduction in casual employment. The employment Generation strategy of the
Eleventh Plan is also predicted on the reduction of under employment and
movement of surplus labour in agricultural sector to higher wage and more
gainful employment in the non-agricultural sector. Agriculture sector is
projected to generate no increase in employment during the Eleventh Plan
period. Employment in manufacturing is expected to grow at 4 per cent while
construction and transport and communication are expected to grow at 8.2
per cent and 7.6 per cent respectively. The projected increase in total labour
force during the Eleventh Plan in 45 million. As against this, 58 million
employment opportunities would be created in the Eleventh Plan. This would
be greater than the projected increase in the labour force leading to a
reduction in the unemployment rate to below 5 per cent.”

But if we take into account the increasing participation of women, the total
projected increase in labour force during the Eleventh Plan will be nearly 65
million. If we add the present backlog of unemployment of 35 million at the
end of Tenth Plan then the total job requirements during the Eleventh Plan
would be around 100 million.

But as 58 million employment opportunities will be created in the Eleventh

Plan this would leave nearly 42 million workers to be absorbed in the non-
agricultural unorganised sector, which is, no doubt, a difficult proposition.

If we consider the performance of the last decade with a negative employment

growth in the organised sector, then the Eleventh Plan is too ambitious by
expecting generation of 15 million jobs from the organised sector and in total
generating 58 million employment opportunities during the Plan. Thus the
estimates made by the planners is found highly unrealistic and over-optimistic
considering the ground realities.
However, the projected increase in total labour force during the Eleventh Plan
is estimated at 45 million. It is also projected that 58 million employment
opportunities would be created during the Eleventh Plan.

This would be greater than the projected increase in labour force leading to a
reduction in the unemployment rate below 5 per cent by the terminal year of
the plan. It is expected that agriculture sector may not contribute towards any
increase in employment during the Eleventh Plan.

Hence, the employment generation strategy of the Eleventh Plan is based on

the reduction of underemployment and movement of surplus labor in
agriculture sector to higher wage and more gainful employment in non-
agricultural sector.

The Eleventh Plan has especially identified labour intensive manufacturing

and services sectors with employment potential like food processing, leather
products, footwear, textiles, wood and bamboo products, gems and jewellery,
handicrafts, handlooms, tourism and construction for this purpose.

Thus the key strategy for achieving inclusive growth in the Eleventh Plan has
been generation of productive and gainful employment, with decent working
conditions, on a sufficient scale to absorb the growing labour force. The
Eleventh Plan (2007-12) aims at generation of 58 million work opportunities
in twenty one high growth sectors so that unemployment rate falls to 4.83 per
cent by the end of the Plan.

The International Commission on Peace and Food, a non-government

organisation headed by Dr. M.S. Swaminathan, made a study on the
unemployment problem of the country. The Committee has come to the
conclusion that a minimum of 100 million new jobs are needed by the year
2000 in the unorganised sector to achieve full employment and to eradicate
poverty.

The findings of the team were in the form of a strategy statement which
emphasises that there is potential to increase employment with emphasis on
higher productivity, and income through extension of irrigation and green
revolution to areas not hitherto covered and having potential, waste land
development and diversification of agriculture to other productive activities
like horticulture, aquaculture, sericulture and agro-processing.
The Centre of Advanced Development Research (CADR) has also criticised
various employment generation programmes launched by the Government
which has touched only a fringe of the problem and has suggested measures
for labour-intensive, and land based programmes.

These include diversification of crop programme, which places high priority

on the needs of the poor and on the transformation of the crop pattern from
the present low-value to high-value and labour intensive programmes.

The Centre also suggests a jump in the production of milk and eggs, making
the best use of water and land resources and improving 175 million hectares of
degraded land which is about half of the total geographical area, mainly
through afforestation.

Taking all these factors into considerations, it can be said that the future
employment programmes of the country should be redressed in such a manner
so that it can meet requirements of the people with maximum utilisation of
scarce resources. Moreover, considering the depth of the problem it can be
safely said that the government alone cannot tackle this problem alone.

Thus private sector should be fully involved in the employment programme of

the country. Accordingly, the Planning Commission should chalk out
programme for the private sector in order to involve the sector into the
employment generation programme of the country.

Thus an appropriate joint strategy involving both the public sector and private
sector is to be taken in order to tackle both the rural as well as urban
unemployment of the country.

Essay # 8. Growth of Employment in India in Recent

Years:
It would be better to look at the growth rate of employment both in organised
and unorganised sectors in recent years. In an overpopulated country like
India with a high rate of growth of population, the rate of growth of population
should be consistently higher and steady.
But the rate of growth of employment prevailing in a country like India are not
very much conducive and encouraging. Table 12.6 reveals the growth rate of
employment during the period from 1972-73 to 1993-94.

Table 12.6 shows that the average annual growth rate of overall employment
attained both in organised and unorganised sectors declined continuously
from 2.75 per cent during 1972-78 to 1.77 per cent in 1983- 88, but again
increased to 2.37 per cent in 1987-94.

The same growth rate again declined to 1.57 per cent during 1993-2000 and
then again increased to 2.48 per cent during 1999-2005. However, the annual
average growth rate of employment in organised sector maintained its
declining trend from 2.45 per cent during 1972- 78 to 1.38 per cent during
1983-88 and then to 1.05 per cent during 1987-94.

The growth rate of employment in the organised public and private sector has
declined from 2.99 per cent during 1977-83 to a mere 1.00 per cent during
1987-94. But the growth rate of organised employment in the private sector
has initially declined from 1.41 per cent during 1977-83 to 0.43 per cent during
1983-88 but the same rate again increased to 1.18 per cent during 1987-94.

For the first time, the growth rate of employment in the organised private
sector exceeded the employment growth rate in public sector. It would also be
better to look into the growth rates of employment in India during the post-
reform period. Table 12.7 will clarify the position.

Table 12.7 reveals the annual growth rates of employment in the organised
public and private sector during 1991 to 1999. It is observed that the growth
rate of employment in the public sector has declined from 1.52 per cent in 1991
to 0.60 per cent in 1993 and 0.11 per cent in 1995 and to even (-) 0.09 per cent
in 1998 and finally to (-) 0.90 per cent in 2001.
Again the growth rates of employment in the organised private sector
increased from 1.24 per cent in 1971 to 2.21 per cent in 1992 and after
maintaining a lean period reached the peak level of 5.62 per cent in 1996 and
then again maintained a moderate rate of 2.04 per cent in 1997 and then
declined to 0.1 per cent in 2001.

Thus the growth rate of employment in the organised sector remained

relatively stable i.e., from 1.44 per cent in 1991 to 0.55 per cent in 1995, 1.51
per cent in 1996 and then declined to only (-) 0.6 per cent in 2001. Thus it can
be observed that the private sector contributed pre-dominantly to the increase
in the organised sector employment in the reform period since 1991 except in
1993.

However, the employment growth in the organised sector, public and private
sector confined, declined during the nineties. Annual employment growth in
establishments covered by Employment Market Information System of
Ministry of Labour decelerated from 1.20 per cent during 1983-1994 to 0.05
per cent per annum during 1994-2008.

This deceleration happened in spite of an acceleration in annual employment

growth in the private sector from 0.44 per cent to 1.75 per cent during the
reference periods as these acceleration was not enough to make up for the
corresponding decline of employment in the public sector from 1.53 percent to
(-) 0.65 per cent during the reference period.

Considering the situation, the Government has decided to set up the Second
National Commission on Labour with a view to provide protection to millions
of workers. The main focus of the Commission would be to suggest
rationalisation of the existing labour laws in the organised sector and also to
suggest an umbrella legislation for ensuring a minimum level of protection to
the workers in the unorganised sector.

In recent years, employment in India has declined marginally in both the

urban and rural areas according to the results of the latest survey conducted
by the national Sample Survey Organisation (NSSO). The results of the 55th
round of NSSO survey revealed that in 1999-2000, employment in rural areas
among males was down by two percentage points, while it was lower by three
percentage points for females compared to 1993- 94 when the last NSSO
survey was conducted.

In urban areas, employment for females decreased by more than one

percentage point in 1999-2000, while it remained at the same level for males.
The survey brings out that the workforce participation rate during 1999-2000
is higher in rural areas than in urban areas and the participation is higher for
males than, females.

Moreover, employment levels among the states reveal that work participation
among males in rural areas is highest in Andhra Pradesh which has 605 males
employed per 1,000 males, followed by Karnataka and Tamil Nadu. The lowest
rates are reported by Haryana with 475 males employed per 1,000 males
followed by Uttar Pradesh and Bihar.

The 64th round (2004-08) of NSSO survey on employment-unemployment

indicates creation of 4 million work opportunities between 2004-05 and 2007-
08.

The employment situation of the country in recent years has been showing
marginal improvement. As highlighted in Economic Surveys of previous years
based on NSSO data, employment on a current daily status (CDS) basis during
1999-2000 to 2004-05 had accelerated significantly as compared to the
growth witnessed during 1993-94 to 1999-2000.

During 1999-2000 to 2004-05, about 47 million work opportunities were

created compared to only 24 million the period between 1993-94 and 1999-
2000 and employment growth accelerated from 1.25 per cent per annum to
2.62 per cent per annum.
However, since the labour force grow at a faster rate of 2.84 per cent than the
workforce, unemployment also rose the incidence of unemployment on CDS
basis increased from 7,31 per cent in 1999-2000 to 8.28 per cent in 2004-05.

In recent period, the country in facing sluggish employment growth as there is

a deceleration in the compound annual growth rate (CAGR) of employment
during 2004-05 to 2011-12 to 0.5 per cent from 2.8 per cent during 1999-2000
to 2004-05 period as against CAGRs of 2.9 per cent and 0.4 per cent
respectively in the labour force for the same periods.

After a period of slow progress during 2004-05 to 2009-10, employment

generation picked up during 2009-10 to 2011-12 adding 13.9 million persons
to the work force, but not keeping pace with the increase in labour force (14.9
persons). Based on current daily status (CDS), CAGR in employment was 1.2
per cent and 2.6 per cent against 2.8 per cent and 0.8 per cent in the labour
force respectively for the same periods.’

Employment scenario in India is likely to improve in recent years. Recently, a

study conducted by a industry group in December 2013 among more than
5,600 firms across 12 industry sectors. The survey report observed that the job
seekers can look forward to a prosperous new year (2014) as more than 8.5
lakh new jobs are expected to be created across various sectors, including
FMCG and healthcare.

Coming against the backdrop of uncertain economic conditions, the projected

number of new jobs in 2014 is 8.5 lakh which is higher than the estimated 7.9
lakh employment opportunities created in the year 2013. All the opportunities
have been projected in for the organised sector.

Besides FMCG, more jobs are expected in healthcare, IT, retail and hospitality
sectors. Banking and financial services (61,400), manufacturing and
engineering (51,500), education, training and consultancy (42,900), media
and entertainment (42,800) and real estate (38,700) are also expected to
create job opportunities.

According to the report of the Sixth Economic Census conducted by the

National Statistical Commission, the number of employed persons in the
country grew by 34.35 per cent to 12.77 crore in eight years period (2005-
2013). The growth rate in employment at 34 per cent in eight years period is a
good rate as it had grown at an annual rate of over 4 per cent when the
population is growing at around 2 per cent.

Employment in urban areas increased by 37.46 per cent to 6.14 crore in 2013
whereas in rural areas the growth was 31.59 per cent to 6.62 crore compared
to 2005. The proportion of women in total workforce rose to 25.56 per cent in
2013 from about 20 per cent in 2005.

Taking all these into considerations it can be said that the future employment
programmes of the country should be redressed in-such a manner so that it
can meet requirements of the people with maximum utilisation of scarce
resources. Moreover, considering the depth of the problem it can be safely said
that the government cannot tackle this problem alone. Thus private sector
should be fully involved in the employment programme of the country.

Accordingly, the Planning Commission should chalk out programme for the
private sector in order to involve the sector into the employment generation
programme of the country. Thus an appropriate joint strategy involving both
the public sector and private sector is to be taken in order to tackle both the
rural as well as urban unemployment of the country.

Essay # 9. Is the New Economic Policy Promoting

Jobless Growth?
It is a very pertinent question—whether the New Economic Policy is
promoting jobless growth in India. In the mean time, various studies have
been made in this direction. Some of these studies are pointing affirmative
answer to this question and again some other studies are pointing a different
answer to this question.

It would be better to start with the following observation of Dr. L.C. Jain,
former member, Planning Commission, “The gravest crisis Indian political,
economic and social order faces today is in the mounting unemployment.
Nothing exposes the barrenness of pure growth rate observed development
strategies than the empirical results of the past decade in India. GDP has shot
up from 3.5 to 5.3 in the period, but the employment growth rate has fallen
from 2.82 during 1973-78 to 1.55 during 1983 to 1987-88. In agriculture, the
employment growth rate declined from 1.8 to an insignificant 0.07 in the 15
years period ending 1988.”

Another study made by Mr. Sudipto Mundle of the National Institute of Public
Finance and Policy, New Delhi has simply shown the employment effects of
New Economic Policy under two different assumptions of a high and a low
growth situations.

The study revealed that by 1994, even with the achievement of high growth
rate, this stabilisation and structural adjustment programme will increase
“unemployment rate from less than 4 per cent in the current year (1991-92) to
about 5 per cent in 1992-93. This implies extra unemployment of about 4
million persons in 1992-93 and the year after as a net consequence of
stabilisation programme.”

In respect of high growth situation, Mr. Mundle has assumed growth rates of
3.9, 3.0 and 5.7 per cent for 1991- 92, 1992-93 and 1993-94 respectively. But
the CSO estimates of GDP growth rates for these three years were—1.1 per cent
for 1991-92, 4.0 per cent for 1992-93 and 3.8 per cent (advance estimates) for
1993-94.

Thus it is found that under structural adjustment programme, the actual

growth rates of GDP are even lower than the growth rates assumed by Mr.
Mundle. Accordingly, it can now be observed that the actual growth rates of
unemployment are much higher than the growth rates predicted by Mr.
Mundle.

With the introduction of New Economic Policy, the country has initiated the
programme of technological upgradation leading to promotion of capital
intensive technologies. This has resulted in fall in employment elasticities.

The study made by Mr. B.B. Bhattacharya and Arup Mitra on the employment
elasticities of various sectors of the economy, on the basis of the data obtained
from 1981 and 1991 censuses revealed that employment elasticity (as
measured by the ratio of employment growth rate to income growth rate) of
various sectors varied significantly.

Employment elasticity for the economy as a whole was estimated at 0.45 but
the employment elasticity of the various sectors were as follows: primary
sector—0.74, manufacturing sector— only 0.19, trade and commerce—0.37
and storage and communications-—0.34. But this employment elasticity
worked out by Mr. Bhattacharya and Mr. Mitra and the actual observed
growth rates of GDP, the probable additions to employment were estimated.

Table 12.8 reveals that the total number of unemployed persons increases
sharply from 11 million in 1990-91 to 17 million in 1991-92 and then to 19
million in 1992-93. Accordingly the rate of unemployment increased sharply
from 3.1 per cent in 1990-91 to 5.1 per cent in 1992-93. This is no doubt an
alarming situation.

Later on, as per NSSO survey it was revealed that the total number of
unemployed persons in the country increased from 9.0 million in 1993-94 to
10.5 million in 1999-2000 and then to 13.1 million in 2004- 05. Accordingly,
the rate of unemployment also gradually increased from 2.62 per cent in 1993-
94 to 2.78 per cent in 1999-2000 and then to 3.06 per cent in 2004-05.

Moreover, in India, the major portion of additional employment generation

has come from unorganised sector and the organised sector has a little
contribution in this regard. Unorganised sector provided employment at poor
wage rates and was also relatively insecure as compared to organised sector.

Besides, the structural adjustment programme introduced in the organised

sector has reduced its employment potential leading to retrenchment of
workers in the organised sector. This increased the burden of unemployment
through displacement of labour. Thus the structural adjustment programme
may result in “undue hardships” for the people if implemented
unimaginatively.
In India, faster economic growth would not be relevant unless it was job-
oriented. India was not for “jobless growth” as it was not conducive to
sustained economic development and might lead to social tensions.
The advocates of structural adjustment programme are of the opinion that due
to liberalisation, privatisation and globalisation of the economy, there will be
increase in the magnitude of unemployment in the short run but with the
growing flow of foreign direct investment as well as domestic private
investment, employment elasticity of different sectors will improve gradually
in recent years.

But with the gradual disinvestment of the public sector and increasing capital
intensity of the private corporate sector, chances of acceleration of growth of
employment is almost nil. In India, the contribution of the corporate sector in
employment generation is very poor.

In the mean time, although the GDP growth rate of the country are increasing
gradually from 3.8 per cent in 1993-94 to about 5.5 per cent in 1994-95 but the
rate of growth of employment achieved in the country is far from satisfactory.

As per one recent Government report, over 100 million job seekers will seek
employment in the country. Therefore, substantial amount of additional
employment opportunities per year will have to be generated in the remaining
period of the Eighth Five Year Plan to eventually meet the goal of reducing
unemployment to “negligible levels” by the year 2002.

But this is really a stupendous task and underscore the necessity of achieving a
higher average annual growth rate of the economy than targeted in the Eighth
Plan and vigorous pursuit of the employment strategies envisaged in different
sectors of the plan.

At the outset of the Eighth Plan in 1992-93, open unemployment was

estimated at 17 million, of which the educated accounted for seven million.
Severe underemployment was estimated at 6 million. Thus, the backlog of
unemployment for plan purposes was thus reckoned at 23 million in April,
1992.

The net additions to labour force during tile Eighth Plan (1992-97) and during
1997-2002 were estimated at 35 million and 36 million, respectively. Thus the
total number of people seeking employment will be 58 million during 1992- 97
and a little over 94 million over the 10 year period ending 2002.

At the end of March 1994, there were 37 million job seekers on the live register
of employment exchanges in different parts of the country. In order to reduce
this extent of unemployment to negligible levels by 2002 A.D., it implies that
the employment should grow at the average annual growth rate of 2.6 to 2.8
per cent over this period.

Expansion of employment opportunities is an important objective of the

Eighth Five Year Plan and the plan strategy lays emphasis on the faster growth
of sectors, sub sectors and areas having employment potential to accelerate
the employment growth.

Therefore, the Eighth Plan seeks to achieve 2.6 per cent rate of growth of
employment corresponding to an average annual growth of Gross Domestic
Product of 5.6 per cent as envisaged in the plan.

A relatively high rate of economic growth combined with a pattern of sectoral

growth yielding a higher aggregate employment elasticity will be necessary for
achieving the rate of employment growth envisaged. Raising employment in
aggregate will require faster growth of sectors, the sub-sectors and the areas
which have relatively high employment potential.

This is sought to be achieved by laying emphasis on crop-wise and geographic

diversification of agricultural growth, wasteland development for crop
cultivation and forestry, promotion of agro-based activities, rural non-farm
activities, including rural industries.

It will also include decentralization of the small-scale sector, the urban

informal sector and the services sector, expansion of rural infrastructure,
housing and health and educational services, especially in rural areas,
revamping of the training system and streamlining of the special employment
programmes to integrate them with area development plans.

All these sectors and areas are identified as basic elements of an employment
growth strategy.

Under the present circumstances, where the organised industry has created no
new jobs in the last decade, and budgetary constraints mean that government
service has little extra job potential, agriculture alone cannot hold the key to
additional job creation.

Rather, a growing body of evidence suggests that labour absorption in

agriculture is gradually falling in many areas. In fact, there has been a
veritable boom in non- farm employment of rural areas, i.e., in its
construction, transport, trade and manufacturing.

Therefore, the major future thrust in additional job creation should probably
be neither in agricultural sector nor in industry but in what Prof. R.P. Misra of
the Delhi School of Economics termed it “urbanisation”—that indicates the
urbanisation in rural areas. Historically, agriculture has resulted about 70 per
cent of all jobs.

But in the latest period, 1986-92, for which NSS data are readily available only
11.7 per cent of males and 0.3 per cent of females entering the work force got
farm jobs. Most of the remaining part of workforce went into construction,
trade and manufacturing.

In 1983-88, about 70 per cent of females entering into workforce in rural areas
found jobs in construction works. In the decade ending 1987-88, jobs in
farming activities rose by only 0.74 per cent annually, which is barely one-
third of the rate of growth of population of the country.

Prof. Shiela Bhalla of Jawaharlal Nehru University has come up with a

startling finding that in five states—Uttar Pradesh, Rajasthan, Madhya
Pradesh, Bihar and Tamil Nadu, farm employment has been actually falling
with the rise in their yield rates.

This type of finding negates the conventional ideas that employment goes on
rising with production. These five states account for nearly half of the
population of the country. Naturally, it is time for considerable rethinking on
agriculture as an avenue of employment.

Prof. Bhalla’s research shows that new technology is not the problem. In more
than 90 per cent of cases, farmers started to adopt economizing on labour
whenever real wages rose and this so happened whether or not the farmers
mechanised their farms.
The most important reason behind such rise in real wages in rural areas is that
non- farm jobs are paying much more wages in rural areas, and this has
simultaneously drawn labour away from farming and pushed up farm wages
significantly.

It is seen from the above observation that the main factor responsible for slow
growth of employment is the capital intensive method of production. It is also
expected that private participation would give a fillip to the growth of
employment in the medium term.

But it is known to everybody that the private investment from Indian

Corporate sector or foreign direct investment from multinationals is very
much capital-intensive.

Therefore, under such a capital-intensive strategy employment generation at a

quicker pace is impossible. Besides, the idea of “growth of
employment in the medium term” is also in vogue. Thus under
such a situation it is quite necessary to finalize the strategy of growth of
employment in the country concretely, otherwise the economy of the country
will proceed towards a jobless growth leading to social tensions.
Addressing the fifth conference of the Labour Ministers of non-aligned and
other developing countries on January 20, 1995, the then Finance Minister,
Dr. Manmohan Singh asserted that the economic reforms unleashed in 1991
had the support of the “broad mass” of population, particularly the
labour force, as the Government realised that mass support was the pre-
requisite for their success.
Observing that three odd years was too short a period to judge the success of
any economic reform programme in such a big and diverse country like India,
Dr. Singh said that the positive impact could be gauged from the fact that
India was not only able to pull out itself from serious imbalances on financial
and external sectors but had embarked on balanced growth on all fronts.

“All our
Dr. Manmohan Singh further observed, in this connection,
reforms aim at achieving a rapid and sustained growth
of output and employment. Liberalization is being
pursued keeping in view the comparative advantage
the country had in labour-intensive methods of
production.”
Therefore, economic reforms which would bring with them modernization,
upgradation and introduction of new technologies—might cause some job
losses on one hand. On the other, however, job opportunities would expand
because of the growth of the economy and fresh investments.

Moreover, higher outlays had been provided in the Eighth Plan in the
agriculture, rural development, village and small industries and environment
sectors with the aim of providing better job opportunities.

In the meantime, a sign of hope has been noticed. In 1991-92, total

employment grew by only 3 million but in 1992-93 and 1993-94 employment
increased twice as fast, i.e. 6 million new jobs added each year. The increase is
expected to be higher in 1994-95.

As per one recent estimate, new enterprises in India provided 17 million fresh
jobs in 2003, the second highest in the world after China where 84 million
employment opportunities were created in the new enterprises.

This estimate is made by Global entrepreneurship Monitor report of the

London School of Business. According to the report entrepreneurship in India
rose marginally in 2003 over the previous year. Nearly 18 per cent of India’s
population in the age group of 18 to 64 is engaged in some sort of
entrepreneurial activities.

However, downsizing of the government has also created a serious impact on

the employment scenario of the country.

As on December, 2003, the central government had identified about 55,000

posts for abolition in various ministries and departments in line with the
recommendations of the Expenditure Reforms Commission (ERC) and over
25,000 posts were abolished in different ministries and departments,
including Information and Broadcasting and Petroleum.

The ministries and departments concerned identified 24,000 posts for

immediate abolition.

Moreover, a wave of Voluntary Retirement Schemes (VRS) and closure of

industrial units led to shrink in jobs in the organised sector by over 4.2 lakh in
2001-02. Apart from this, the reduction in jobs in the organised sector has
been going on continuously for five years.
While presenting a grim picture of the job scenario in the organised sector, the
recent study made by the government says, the total employment in the public
sector as on March 31, 2001 was over 277.54 lakh which came down to 273.32
lakh on March 31,2002.

As per the latest quick estimates of employment available with the Directorate
General of Employment and Training of the Labour Ministry, though the
decline is to the extent of only 1.5 per cent during the prior under review, what
is of more concern is the fact that reduction in jobs in the organised sector has
been going on continuously five years.

In case of women, the employment in the States and Union Territories during
the said period under review fell by 35,000 from 50.71 lakh on March 31, 2001
to 50.36 lakh on March 31, 2002.

The report further observes that with a whopping 97 per cent of the country’s
total work force eking out a living in the unorganised sector, the organised
sector accounts for a meagre seven per cent of the overall employment in the
country.

The reasons cited for the decline in the organised sector jobs include closures
of industrial units and a wave of Voluntary Retirement Scheme in an effort
to “right size” PSUs. Public sector banks shed over 1.0 lakh jobs between
2000-01 and 2001-02 through VRS. Official figures show that nearly 90,000
employees in various PSUs took VRS in 1999-2000 and 2000-01.
It would be better to look into the estimates of employment generation in
India in recent years from the Table 12.9.

Table 12.9 reveals that the country experienced an increasing trend in

additional employment generation, i.e., from 3.00 million in 1990-91 to 7.18
million in 1994-95.
The annual percentage increase in total employment registered an increasing
trend from 1.00 per cent in 1991-92 to 2.18 per cent in 1992-93 and thereafter
registering a decline of 2.29 per cent in 1994-95, the rate of increase in
employment further increased to 2.47 per cent in 1996-97.

The Economic Survey, 1995-96 made the following observation in connection

with the employment generation during the post-reform era. “By according
the highest priority to labour intensive growth in its economic reform policies,
the additional employment increased from 3.00 million in 1991-92 to 7.18
million in 1994-95. Additional employment opportunities of the order of 18.48
million were generated during 1992-93 to 1994-95. This implied an average
rate of employment growth at 2.03 per cent per annum, which is higher than
the annual average rate of employment growth of 1.78 per cent during the
preceding seven years (1985-92). These trends are reassuring that the
employment content of growth has increased in the process of economic
reforms.”

In the mean time, various employment generating schemes have been

introduced in India during this period of economic reforms. Now it is to be
seen how far all these schemes are implemented properly and can provide
additional job opportunities practically.

If all these schemes failed to provide sufficient number of job opportunities

then it may lead to a situation similar to “jobless growth” which might lead to
social tensions.

Essay # 10. Global Economic Recession and its Impact

on Unemployment Problem in India:
After facing the brunt of the Great Depression of 1930, the world economy
again started to experience the current recessionary trend in its economic
activity since 2007 along with a serious degree of financial turmoil.

The current recession has once again shown its ugly need with a slump in
aggregate demand in most of the developed and developing countries of the
world especially in industries related to motor vehicles, electronics, consumer
durables, textiles, realty sector etc.

The first sign of recession was experienced in USA in December 2007 and that
has gradually deepened in US and other countries of the world under the
present regime of globalisation.

Indian economy has also started to face the brunt of global recession in 2008-
09. As a result, the growth rate attained by the industrial sector has come
down from 11.2 per cent in 2006-07 to mere 3.0 per cent in 2008-09. The
global recession has seriously affected some of our export oriented industries
leading to huge laying off of workers.

India’s export oriented leather industry employing 2.5 million workers would
be forced to lay off around 5.0 lakh workers with the worsening scenario in
USA and Europe. Similar threat is apprehended in vehicle industry, diamond
Jewellery industry, garments industry, readymade garments industry,
handicrafts industry etc.

Impact of the economic recession was also felt in terms of job losses in
different industries. Industry Department opined the impact of job losses to
the extent of over 10.0 lakh in the handicraft sector and another 10.0 lakh in
the textile sector in the years that followed.

The Labour Bureau of the Ministry of Labour and Employment conducted a

survey on the economic slowdown on employment in India. A sample size of
2581 units taken from eight major sectors, covering 20 centres across 11 states
were taken up for the survey.

The survey report reveals that the total employment in all these eight sectors
had come down from 16.2 million in September 2008 to 15.7 million by
December 2008 showing a total job losses of 5.0 lakh during this three month
period.

However, the scenario of lay-offs would be much more serious in the coming
months. According to the latest study made by Citigroup, the country does not
appear to have remain unscathed from the massive lay-offs witnessed
throughout the world and the extent of unemployment could rise further with
the home coming of migrant workers or declining remittances from abroad.
The report further stated that although there is a job loss of about 5.0 lakh
during the three month period (Oct—Dec. 2008), with export oriented sectors
such as genes and jewellery and textiles being most impacted but this statistics
only covers the organised sectors which comprises just 10 per cent of the
country’s work force close to 385 million.

Although India’s unemployment rate in officially stated at 8.2 per cent but the
extent of disguised unemployment prevailing especially in rural areas can
magnify the problem into serious proportion.

However, employment opportunities in 2009-10 were affected by the global

financial crisis and economic slowdown in India. While comprehensive
employment data for the year are not available, some sample surveys
conducted by the Labour Bureau, Ministry of Labour and Employment,
indicated employment losses in the wake of global financial crisis and
economic slowdown.

The Government was concerned about the possible impact of financial crisis
on the Indian economy, including employment and several measures, financial
and fiscal, were taken. Sample survey of the Labour Bureau indicated job gains
in the sectors covered.

Thus, even on the basis of this small sample, estimated employment in the
selected sectors had experienced a net addition of 1.51 lakh during the last one
year from October 2008 to September 2009. However, the situation has
improved in India in recent years due to stimulus packages provided by the
government and improvement in global scenario.

Government Employment Generation Schemes in india

Some of the flagship programmes of employment generation being implemented by the
Central government are:
Swarnjayanthi Gram Swarojgar Yojana (SGSY)
It was launched in April 1999 as a major programme for self-employment of the rural
poor after restructuring the then existing Integrated Rural Development Programme
(IRDP) and combining it with other allied schemes like TRYSEM, DWCRA, SITRA,
GKY and Million Wells Scheme for effective implementation under a single banner
called SGSY.
Prime Minister's Employment Generation Programme (PMEGP)
The scheme was announced by the Prime Minister on 15 August, 2008 in his address
from the Red Fort. This is credit linked scheme formed by merging erstwhile REGP and
PMRY scheme.
KVIC is the nodal agency at the national level.
Its main aim is to generate continuous and sustainable employment opportunities in rural
and urban areas of the country.
Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA)
MGNREGA guarantees 100 days of employment in a financial year to a rural household
whose adult members are willing to do unskilled manual work. This Act is an important
step towards the realisation of the right to work. It is also expected to enhance people's
livelihood on a sustained basis, by developing the economic and social infrastructure in
rural areas.
Swarna Jayanti Shahari Rozgar Yojana (SJSRY)
This scheme came into effect on 1 December 1997 with an aim to provide gainful
employment to the urban unemployed and under-employed poor by encouraging them to
set up self-employment ventures.
The government has launched this rationalised SJSRY to replace the three existing
schemes -- Nehru Rozgar Yojana (NRY), Urban Basic Services for the Poor (UBSP), and
PM's Integrated Urban Poverty Eradication Programme (PMI UPEP).
Pradhan Mantri Gram Sadak Yojana (PMGSY)
The scheme comes under the authority of the ministry of rural development and was
begun on 25 December 2000.
The goal was to provide roads to all villages (1) with a population of 1,000 persons and
above by 2003, (2) with a population of 500 persons and above by 2007, (3) in hill states,
tribal and desert area villages with a population of 500 persons and above by 2003, and
(4) in hill states, tribal and desert area villages with a population of 250 persons and
above by 2007.
Samagra Awas Yojana (SAY)
Launched in 1999-2000, this is a comprehensive housing scheme with a view to ensure
the integrated provision of shelter, sanitation and drinking water. The basic objective of
SAY is to improve the quality of life of the people as well as the overall habitat in rural
areas.
Pradhan Mantri Gramodaya Yojana (PMGY)
PMGY was launched in 2000-01 in order to achieve the objective of sustainable human
development at the village level. The PMGY envisages allocation of additional central
funds to the states for basic minimum services in order to focus on certain priority areas.
PMGY has five components, namely primary health, primary education, rural shelter,
rural drinking water and nutrition.
Sampoorna Grameen Rozgar Yojana (SGRY)
SGRY was launched in September 2001 by merging the erstwhile schemes of Jawahar
Gram Samridhi Yojana (JGSY) and Employment Assurance Scheme (EAS). The
objective is to provide additional wage employment in the rural areas and food security,
along with the creation of durable community, social and economic infrastructure in rural
areas. The SGRY is open to all rural poor in need of wage employment and desire to do
manual work.
Rural Housing Schemes
Rural housing schemes such as Indira Awaas Yojana (IAY) aim at providing dwelling
units, free of cost to the poor families of the SCs, STs, freed bonded labourers and also
the non- SC/ST persons living below poverty Line (BPL) in the rural areas.
The scheme is funded on a cost-sharing basis of 75:25 between the Centre and states.
Antyodaya Anna Yojana (AAY)
AAY was launched in December 2000. Under the scheme, one crore of the poorest among
the BPL families covered under the targeted PDS are identified and 25 kg of food grains
were made available to each eligible family at a highly subsidized rate of Rs 2 per kg for
wheat and Rs 3 per kg for rice. This quantity has been enhanced from 25 to 35 kg with
effect from April, 2002.
Annapurna
Launched with effect from 1st April, 2000, it aims at providing food security to meet the
requirement of those senior citizens who, though eligible, have remained uncovered under
the national old age pension scheme (NOAPS).
The scheme is targeted to cover 20% of persons eligible to receive pension under
NOAPS. Funds are released to the food and civil supplies department of the state
governments in one instalment. This department ties up with Food Corporation of India
(FCI) to release food grains district-wise after payment at central issue price (CIP) at FCI
offices.
Valmiki Ambedkar Awas Yojana (VAMBAY)
VAMBAY was kicked off in December 2001 targeted to improve the living conditions of
the urban slum dwellers living below the poverty line without adequate shelter. The
scheme has the objective of facilitating the construction and up-gradation of dwelling
units for slum dwellers. Besides, it offers a healthy environment through community
toilets under Nirmal Bharat Abhiyan, a component of the scheme. The Centre offers a
subsidy of 50%, the balance 50% is arranged by the state government.

Unit 4th
India - Economic Growth and
Development
 Indian
Economic Growth

• India has sustained rapid growth of GDP for most of the last two decades leading to rising
per capita incomes and a reduction in absolute poverty. Per capita incomes (measured in
US $) have doubled in 12 years
• But India has one third of all the people in the world living below the official global
poverty line.
It has more poor people than the whole of sub-Saharan Africa
• Per capita income is $1,270, placing India just inside the Middle Income Country
category
• India's per capita income is 1/20th that of the UK
• Life expectancy at birth is 65 years and 44% of children under 5 are malnourished. The
literacy rate for the population aged 15 years and above is only 63% compared to a 71%
figure for lower middle income countries.
• Despite a strong attempt to become an open economy, exports of goods and services from
India account for only 15% of GDP although this will rise further in the years ahead
• India runs persistent trade and fiscal deficits and has suffered from high inflation in recent
years  India's growth rate has slowed and high inflation is a constraint on
competitiveness and growth.
• Investments by Indian businessmen abroad have overtaken foreign direct investment for
the first time – reflecting a lack of confidence among Indian entrepreneurs about their
home economy

Development path
India has followed a different path of development from many other countries. India went
more quickly from agriculture to services that tend to be less tightly regulated than heavy
industry.
That said there are some emerging manufacturing giants in the Indian economy.

Supply-side factors supporting Indian growth and development

1. A fast-growing population of working age. There are 700 million Indians under the age of
35 and the demographics look good for Indian growth in the next twenty years at least.
India is India is experiencing demographic transition that has increased the share of the
working-age population from 58 percent to 64 percent over the last two decades.
2. India has a strong legal system and many English-language speakers – this has been a key
to attracting inward investment from companies such as those specialising in IT out-
sourcing.
3. Wage costs are low in India and India has made strides in recent years in closing some of
the productivity gap between her and other countries at later stages of development.
4. India's economy has successfully developed highly advanced and attractive clusters of
businesses in the technology space – witness the rapid emergence of Bangalore as a hub
for global software businesses. External economies of scale have deepened their
competitive advantages in many related industries.

Growth and Development Limiters for India

Despite optimism for India's prospects for economic growth and development, there are a
number of obstacles which may yet see growth and development falter.

• Poor infrastructure - notably in transport and power networks

• Low productivity and weak human capital. A high % of workers are low-skilled and work
in small businesses
• High inflation and a persistent trade deficit
• Low national savings as a share of GDP, low share of capital investment
• Relatively closed economy - India is a net importer of primary products

Indian Development – An Infrastructure Gap

India is a good case study to use when discussing the problems that persist when a
country cannot rely on adequate critical infrastructure such as roads, railways, power and
basic sanitation. India wants to build $1 trillion worth of infrastructure in the next five
years but the government expects the private sector to fund half of it – this is unlikely!
Poor infrastructure hurts the Indian economy in numerous ways:

1. Causes higher energy costs and irregular energy supplies for nearly every business and
especially India emerging manufacturing sectors – there were huge power black outs in
2012
2. It is more expensive to transport products across the country and it creates delays at ports
hamper export businesses and delays at airports which increases the cost of international
freight.
3. It makes India less attractive to inward FDI
4. It adds to the cost of living and limits the extent to which millions of India's lowest
income families can escape extreme poverty
5. A creaking infrastructure damages the reputation and potential of India's tourism industry

Despite these growth constraints, India's expansion far exceeds that of the vast majority
of developed nations – to put this into some context, India is delivering 30 years of US
economic advance every ten years!

Relative importance of services in India

• One of the key differences for India contrasted with countries such as China, Japan and
South Korea is that the Indian economy is heavily reliant on service industries especially
in her export sector
• The country has a comparative advantage in many service industries such as business
software.
• One consequence of this structural difference in the economy is that India has not yet
seen the rapid urbanization experienced in other nations; more than 60 per cent Indians
still live in rural areas.
• Productivity growth in Indian agriculture has been fairly low and this has limited the
potential to release people from the land to move into towns and cities and find work in
manufacturing
sectors.

India's

Budget Deficit
Cleaning the Ganges
In a report on India in the Financial Times in 2012, it was claimed that
“India's failure to adopt enough of the large-scale, labour-intensive manufacturing that
has propelled the successful development of China and other east Asian countries is now
regarded as one of the greatest weaknesses of the Indian economy."
India's growth has been impressive in recent years but this is a country whose
development is hampered by endemic structural problems. India requires significant
investment in infrastructure, manufacturing and agriculture for the rapid growth rates of
the last fifteen to twenty years to be sustained.
Poverty Estimation In India –
 C Rangarajan and Tendulkar Committee – Hello friends welcome To StudyDhaba.com
.Here We are Sharing One Of the Most important issue – Poverty Estimation in India.

Poverty Estimation In India

• Poverty in India is Big issues for Government .

• To Measures Exact numbers of Poor People And Per capita expenditure various
methods Had been adopted by Government of India.
• The official measure of Indian government, before 2005, was based on food
security and it was defined from per capita expenditure for a person to consume
enough calories and be able to pay for associated essentials to survive.
• Since 2005, Indian government adopted the Tendulkar methodology which moved
away from calorie anchor to a basket of goods and used rural, urban and regional
minimum expenditure per capita necessary to survive.
• The Planning Commission has been estimating the number of people below the
poverty line (BPL) at both the state and national level based on consumer
expenditure information collected as part of the National Sample Survey
Organization (NSSO) since the Sixth Five Year Plan.
• The latest available data from such surveys is from NSSO conducted in 2004-05.

Government Of India Formed various Committees for Poverty Estimation In India

1. Alagh Committee (1977),

2. Lakdawala Committee (1989)
3. Tendulkar Committee (2005)
4. Saxena committee
5. Hashim Committee
6. C . Rangarajan Committee ( 2012)

Tendulkar committee report on poverty

In 2005, another expert group to review methodology for poverty estimation, chaired by
Suresh Tendulkar, was constituted by the Planning Commission to address the following
three shortcomings of the previous methods:

1. consumption patterns were linked to the 1973-74 poverty line baskets (PLBs) of
goods and services, whereas there were significant changes in the consumption
patterns of the poor since that time, which were not reflected in the poverty
estimates;
2. there were issues with the adjustment of prices for inflation, both spatially (across
regions) and temporally (across time); and
3. earlier poverty lines assumed that health and education would be provided by the
State and formulated poverty lines accordingly
It recommended four major changes: List of Recommended Changes are Given below

1. A shift away from calorie consumption based poverty estimation;

2. A uniform poverty line basket (PLB) across rural and urban India;
3. A change in the price adjustment procedure to correct spatial and temporal issues
with price adjustment; and
4. Incorporation of private expenditure on health and education while estimating
poverty.

The Committee recommended using Mixed Reference Period (MRP) based estimates, as
opposed to Uniform Reference Period (URP) based estimates that were used in earlier
methods for estimating poverty.

It based its calculations on the consumption of the following items: cereal, pulses, milk,
edible oil, non-vegetarian items, vegetables, fresh fruits, dry fruits, sugar, salt & spices,
other food, intoxicants, fuel, clothing, footwear, education, medical (non-institutional and
institutional), entertainment, personal & toilet goods, other goods, other services and
durables.

The Committee computed new poverty lines for rural and urban areas of each state. To do
this, it used data on value and quantity consumed of the items mentioned above by the
population that was classified as poor by the previous urban poverty line.

It concluded that the all India poverty line was Rs 446.68 per capita per month in rural
areas and Rs 578.80 per capita per month in urban areas in 2004-05. The following table
outlines the manner in which the percentage of population below the poverty line
changed after the application of the Tendulkar Committee’s methodology.

Poverty Line Estimation In India . Comparison Given below read and Understand both
Methods of Poverty Estimation in India
Committees Tendulkar C Rangarajana

Set Up By Planning Commission Planning Commission

Set Up In 2005 2012

Committees Tendulkar C Rangarajana

Submitted Report 2009 2014

Per capita Expenditure Monthly Expenditure of

Poverty Estimation Method
Monthly family of five.

Urban Poverty Line Per Day per

33 47
Person
 1000 1407
Urban Poverty Line Per Month
per Person

Urban Poverty Line Per

Month, Family of Five 5000 7035
Members

Rural poverty line Per Day

27 32
Per Person
816 972
Rural poverty line (Rs) per Month
Per Person

Rural poverty line (Rs) Per

month Family Of Five 4080 4860
Members

BPL ( Below Poverty Line ) In

27 crore 37 crore
crore
only calorific value in
Calorie Expenditure Calorie +Protein + fat
Expenditure
Calories In Rural Areas 2400 2155

Calories In Urban areas 2100 2090

Only counts Expenditure on 1-food

Main Focus Areas food, health, education, 2- nonfood items such as
clothing. education, 3-healthcare,
4-clothing,
Committees Tendulkar C Rangarajana

5-transport
6-rent.
7- non-food items that
meet nutritional
requirements.

• C Rangarajan Committee Was Set up By Planning commission In 2012 And

Submitted Report In 2014.
• The Planning commission had set up the five-member expert group under
Rangarajan to review the methodology for measurement of poverty.
 • The committee was set up in the backdrop of national outrage over the Planning
Commission’s suggested poverty line of Rs 22 a day for rural areas.
• The Rangarajan committee estimation is based on an independent large survey of
households by Center for Monitoring Indian Economy (CMIE).
• It has also used different methodology wherein a household is considered poor if
it is unable to save.
• The methods also include on certain normative levels of adequate nourishment,
clothing, house rent, conveyance, education and also behavioral determination of
non-food expenses.
• It also considered average requirements of calories, protein and fats based on
ICMR norms differentiated by age and gender.
• Based on this methodology, Rangarajan committee estimated the number of poor
were 19 per cent higher in rural areas and 41 per cent more in urban areas than
what was estimated using Tendulkar committee formula.
• Tendulkar, an economist, had devised the formula to assess poverty line in 2005,
which the Planning Commission had used to estimate poverty in 2009-10 and
201112

Economic Inequality in India: Levels, Causes

Economic Inequality
A wealthy business-person and a comfortably-off college/university lecturer are
materially unequal but a lecturer is not poor. Social inequality means that certain
individuals or groups have more material resources than others. Poverty implies some
insufficiency in the material resources of an individual or group. There is considerable
disagreement about the concept of ‘poverty’. Is not being able to afford scooter poverty?
Is not being able to send one’s child to a good English-medium school poverty? Some
might include such situations in poverty, but others may hold that such situations involve
inequality rather than poverty.
The exploitation of the poor by the rich can be contained by reducing the level of
inequality between the rich and the poor, which in turn depends upon reducing poverty
through economic reforms. If economic reforms bring about steady and sustained growth
in the economy (which, in fact, is their main objective), the poor could benefit in two
ways. First experience has shown that growth (particularly the agricultural growth)
trickles down to the poor. Second, sustained growth creates an environment which is, on
the whole, congenial for empowerment of the poor. The dependence of the poor on the
groups dominating them becomes less precarious owing to expansion of opportunities for
employment, education, occupational mobility, and for achieving higher social status.
The poor would also find it easier to mobilise for political action at the same time as
pragmatic considerations induce a mood favouring accommodating the poor among the
groups confronting them.
It may be pointed here that the economic reforms undertaken so far have definitely helped
achieve some stable and sustained growth. The Economic Survey presented in the
parliament in May 1998 had shown that growth was not adequate. But, the figures now
show that we did fairly well in the last one decade or so. The growth of GDP is now
rising. There is increase in the growth rate in agriculture as well as industry.
Agricultural production in 1999-2000 is expected to be more by 6.5 per cent in
comparison to 1998-99. There has been little increase in the export growth. Inflation was
just 1.7 per cent in first week of August 1999. Thus, though the economic reforms are
taking place, yet many support measures are needed to make them work effective.

Monetary Policy and Fiscal Policy of India

Monetary policy in a planned economy of India cannot be framed independently
of fiscal policy as achieving growth with price stability are the objectives of both these
policies. In India the Reserve Bank of India has often adopted accommodative monetary
policy to Government’s fiscal policy.
Prior to 1991 when economic reforms were initiated the basic goal of monetary
policy was to neutralize the impact of large fiscal deficits of the Government. To boost
public sector investment for accelerating economic growth there was large increase in
Government expenditure under various Five Year plans which was financed by
borrowing by the Government and deficit financing (i.e., monetatisation of budget
deficit).
Both Government borrowing from the market and deficit financing leads to the increase
in aggregate demand and have therefore potential for causing inflation. Therefore, to
ensure adequate funds to meet the borrowing requirements of the Government the
statuary liquidity ratio (SLR) of the banks was raised to the maximum limit of 38.5 per
cent. That is, banks were to buy government securities to this extent.
Besides, to check inflation, cash reserve ratio (CRR) of banks was raised to a high level
of 15 per cent. The high cash reserve leaves less funds with the banks to lend to the
private commercial sector. In this way large expansion of credit for private sector was
prevented.
To quote C. Rangarajan the former Governor of the Reserve Bank of India, “Until the
overall reforms process was initiated in 1991 the basic goal of monetary management
took the form of compensatory increase in the cash reserve ratio (CRR) for banks,
controls on the growth of commercial credit (mainly to the private enterprises sector) and
adjustments of administered interest rates. The fixation of CRR and SLR at their
maximum levels crowded out credit for the commercial sector. Thus, even when money
supply was growing at a rapid rate, private sector could not get the needed credit for
financing industry and trade”.
Explaining the monetary policy adopted prior to reform process of 1991, Dr. Y.V.
Reddy, also a former Governor of the Reserve Bank of India writes, “given the command
and controlled nature of the Indian economy, the RBI had to resort to direct instruments
like interest rate regulation selective credit control and cash Reserve Ratio (CRR) as
major policy instruments. These instruments were used to neutralize the monetary impact
of the Government is budgetary operations”.
In the recent post-reform years, mainly, 2008-09 accommodative nature of monetary
policy to the Government’s fiscal policy may be noted. In October 2008, a severe global
financial crisis gripped the world economy following from the bankruptcy of Lehman’s
brothers in the US. This affected the growth of our exports and also led to the capital
outflows from the Indian economy leading to the depreciation of the Indian economy and
crash in Indian stock market. As a result, industrial and overall growth of the Indian
economy started declining.
To check the economic slowdown the Government increased its expenditure, especially
on infrastructure projects, and cut indirect taxes such as excise duty service tax to boost
private sector investment and expenditure. To supplement and accommodate Government
expansionary policy, the Reserve Bank reversed its earlier tight monetary policy in
October 2008 and to boost private sector investment it reduced its repo rate from 9 per
cent in July 2008 to 7.5 per cent in Oct. 2008 and further to 4.75 per cent in March 2009.
Similarly, RBI reduced cash reserve ratio (CRR) from 9 per cent in July 2008 to
6.5 per cent in Oct. 2008 and further to 5 per cent in March 2009 to make more funds
available with banks to buy Government securities for financing sits borrowing and also
to the private sector for expanding investment.
Thus, the RBI’s monetary policy has been accomodatory in the sense that it provided
support to Government’s fiscal stimulus package to promote investment and growth.
When in the later half of 2009-10 inflation rate again started rising the RBI began the
process of withdrawing from the accommodative monetary policy stance in Oct. 2009
and started tightening its monetary policy to fight inflation.
 Centre-State Financial Relations in India
The distribution of powers in countries adopting the federal system of government
defines the financial relations between the Central and State governments.
However, there are some special problems that have to be solved within the federal
financial system in determining the basis of division and the amount that should he
divided between the Centre and the State.
Development of Thought:
The Indian Constitution provides for the appointment of a Finance Commission every
five years to determine the criteria and amount of finance to be divided between the
Centre and the States. Transfer of resources takes places in the following three ways:
share in taxes and duties, grants and loans.
However transfers through the Finance Commission contribute only about one-third of
the total transfers from the Centre to the States. The rest are channeled through the
Planning Commission and discretionary grants from the Centre to the States.
This has led to arbitrary distribution with backward states suffering a disadvantage and
has led to an erosion of state autonomy. The revenue raising capacity of the states is also
restricted because of the nature of the taxes assigned to them.
The scope of the Finance Commission should therefore be enlarged to reduce the
interference of the Centre in the financial management of the States. In the context of
raising revenues the recommendation of the Tenth Finance Commission to increase the
role of industry, needs to be seriously considered.
Conclusion:
Ultimately the basic issue is efficiency in fiscal management and self restraint. In the
context of resources mobilization, the tax structure needs to be rationalized and tax
evasion and other loopholes need to be plugged.
Before the question of division of finances between Centre and State arises, it is
necessary to determine the basis of division and the amount that should be divided.
The Indian Constitution recognizes that due to changing needs and circumstances it might
become necessary to change the criteria and amount of vision between the two levels of
government (Centre and State) from time to time. Hence it did not lay down any hard and
fast rules in this regard.
Instead it provided for the appointment of a Finance Commission at the expiry of every
year or earlier, if necessary, to investigate these questions.
The Commission appointed under Article 280 of the Constitution and is entrusted with
the task of recommending;
(i) The distribution between the Union and the States of the net proceeds of taxes which
are to be, or may be, divided between them and the location between the States of the
respective shares of such proceeds;
(ii) The principles which should govern the grants-in-aid of the revenue of the States out
of the Consolidated Fund of India; and
(iii) Any other matter referred to the Commission by the President in the interests of
sound finance.
The Ninth Finance Commission was appointed with N.P.K. Salve as deputy chairman in
June 1987. It submitted its Second Report in December 1989. The Tenth Finance
Commission was constituted with the deputy chairmanship of K.C. Pant.
The Finance Commissions have concerned themselves with allocating net proceeds from
income tax, Union excise duties, additional duties of excise, estate duty in respect of
property other than agricultural land, grants in-aid in lieu of jute export duty (issue that
concerned the first two Commissions only), taxes railway fares and freights (levied for
the first time in 1957), and grants-in-aid to fill in the budgetary gaps of the States.
In addition, some Finance Commissions gave grants for up gradation of standards of
administration. The Sixth and Seventh Finance Commissions were also asked to
undertake a general review of the State’s indebtedness to the Centre and examine the
policy and arrangements in regard to the financing of relief expenditure.
The Twelfth finance commission with Mr. M.S. Ahluwalia as Deputy Chairman is
moving ahead with economic reforms.
The main taxes shared between the Centre and the State governments are the income tax
and the Union excise duties though recommendations regarding some other taxes (e.g.
estate duty) are also generally made.
The principle that has been followed in deciding this division is that taxes likely to have
an effect upon the economic life of the country as a whole are leaved by the levied by the
Centre while taxes which have no effect in States other than the known ones from which
they are collected are levied by the States.
However, since 10 per resources of the Central government yield a substantial surplus,
while
State governments experience heavy deficits, a mechanism of transfer of resource from
the Centre to the States has been provided. In addition to this, Article 275 those of the
Constitution provides for grants-in-aid to the States in need of assistance.
Different sums can be fixed for different States, so that the weaker States can be given
specific assistance to meet the necessary expenditure in the proper discharge of their
duties to the people. Article 282 provides for grants by the Union government to the State
governments for any public purpose. Under Article 275 grants-in-aid are fixed on the
advice of the Finance Commission, while under Article 282 grants can be fixed by the
Central government on its own discretion. The States governments also borrow from the
Centre to carry out the various developmental and rehabilitation programmes. Thus
transfer of resources from the Centre to the State government takes place in the following
three ways-(i) share in taxes and duties, (ii) grants, and (iii) loans. In addition to transfer
of resources from the Centre to the States according to the recommendations of the
Finance Commission, there are two other sources of transfer- (i) assistance for Plan
purposes from the Planning Commission, and (ii) discretionary grants from the Centre to
the States.
These sources of transfer have contributed substantially more resources than statutory
transfers (which are transfers through the Finance Commission) and reflect the
considerable power that the Central government enjoys in influencing the decision-
making process at the State level. For most of the period of planning, statutory transfers
have remained less than one-third of total transfers, the remaining two-thirds having
been contributed by the Planning Commission as assistance for Plan purpose or by the
Central Government under the head of ‘discretionary grants’.
There were no objective criteria to decide the distribution of non-statutory transfers and
this introduced an element of arbitrariness in the whole scheme. Everything depended on
what the Centre thought about the needs of the States. Basically, Plan assistance was
meant to enable the State to undertake certain schemes according to Plan priorities.
In actual practice, however, the States were presented with a choice of schemes-each with
predetermined proportions of loans and grants assistance.
Though the Planning Commission had no statutory basis (as against the Finance
Commission which is an ad quennial body statutorily set up to recommend devolution
of resources from the Centre to the States), it tended to take up the functions of the
Finance Commission and for a considerable period of planning, has remained the more
important source of transfer. Since it was not guided by any objective criteria, the
whole scheme introduced arbitrariness in the determination of resource transfers.
It was only from 1969-70 onwards that objective criteria were adopted for the Plan
assistance among the States. The formula used for the purpose was known as the Gadgil
formula which gave 60 per cent weight age to population, percent to per capita income if
below national average, 10 per cent of tax effort in relation to per capita income, 10
percent to continuing major and medium irrigation projects, and 10 per cent to special
problems of individual States (like relating to metropolitan areas, floods, chronically
drought affected areas tribal areas).
Under the new formula, it is stated that 30 per cent of total Plan assistance would be
given in the form of grants and 70 per cent in the form of This provision did not apply to
Jammu and Kashmir, Assam and North- Eastern States in whose case 10 percent was to
be given in the form of loans and rest 90 per cent in the form of grants.
In its meeting held in August 1980, the National Development Council accepted a
modified Gadgil formula raising the percentage of resources to be transferred to the
States whose per capita income was less than the national average from 10 per cent to
20 per cent. Under the modified Gadgil formula 60 percent of the assistance is to be
given on basis of population, 20 per cent the States having per capita income below the
national average, per cent on basis of per capita tax effort and 10 per cent for special
problems.
The Constitution provides for division of financial powers between the Centers the States.
However the revenue-raising capacity of the States is restricted use of the nature of taxes
assigned to them. Since land is limited, the scope increasing land revenue is also limited.
Similarly, taxes on agricultural income, excise duties on intoxicants, taxes on motor
vehicles, entertainments, etc., are comparatively less elastic than the taxes assigned to the
Centre. Sales Tax the only tax levied by the States which has substantial elasticity.
Because of economic progress registered by the country in the last three decades, the base
of income tax, Union excise duties, customs duties and other important central taxes has
expanded considerably. This has given immense powers to the central government to
increase its resources with the passage of time.
This lure of financial relations between the Centre and the State governments elastic
sources of revenue for the States and more elastic sources of revenue the Centre places
the States at a distinct disadvantage.
While demands on States’ resources are increasing rapidly because of the pressure of
development ices, especially in the field of social welfare, their income has failed to ease
correspondingly.
Accordingly, vertical imbalances have accentuated over years and the dependence of the
State governments on the Centre has considerably increased. This has made them
vulnerable to increasing pressure in the Central government to its lines.
Where the State government belongs a different political party these pressures give rise to
open conflict seriously jeopardizing the effectiveness of the policy measures introduced
by the concerned State government.
This “strong Centre and the weak States” arrangement was introduced intentionally by
the framers of the Constitution in a bid to stall the divisive fore operating in the economy.
The partition and its after effects created a strong public opinion in favour of such an
arrangement. The one-party rule at the Centre and the States further cemented this
relationship arid the role of the Stat became more and more secondary. As pointed out in
the Document on Cent State Relations’ adopted by the West Bengal government in
December 19791 structure of the Indian Constitution is more unitary than federal.
By vesting residuary powers in the Centre and by keeping 47 items in the concurrent list
strengthened the base of Central control and vested the Central government with
practically unlimited powers to interfere in the governance of States.
Though and order is a State subject, the Centre has not hesitated in interfering in this field
through the establishment of the Central Reserve Police, the Border Security Force, the
Industrial Security Force, etc. Education, which was till recently State subject, has been
transferred to the concurrent list by the 42nd amendment to the Constitution.
All these processes in the political field have considerably eroded independence of the
States and their political and economic powers.
Therefore quite recently, demands for increase in State autonomy have been raised
various quarters. While no one denies the importance of a strong Centre for preserving
the integrity of the nation, it is necessary to give a serious thought these demands.
Grant of a certain amount of autonomy, at least in the sphere originally contemplated by
the Constitution, is necessary to fulfill the democratic ambitions of the people. A ‘strong
Centre’ without ‘strong States’ is not conceivable.
Transfers through the Finance Commission (which is a statutory body) contribute only
about one-third of total transfers from the Centre to the Stat this means that about two-
thirds of the transfers are channeled through the Planning Commission or the Central
Government directly. For a consider period of planning, the Planning Commission was
not guided by any object criteria to determine the share of different States in its assistance
and this introduced an aura of arbitrariness in the whole transfer mechanism.
Since the Centre contributed a large amount of resources in the form of discretion- grants
to the States, it acquired considerable powers to affect the decision making process at the
State level.
This led to a further erosion of autonomy of the Stat.
The process of resource transfers through the Planning Commission and the Finance
Commission has failed in correcting the “horizontal imbalance” among the federating
units and disparities in their per capita incomes are growing. Plan assistance is provided
70 per cent in the form of loans and 30 per cent in the form of grants.
Since the ratio is a fixed one and does not discriminate between advanced and backward
States, it amounts to discrimination against backward States.
Since advanced States have a relatively better economic position the; should be granted a
greater percentage of resources in the form of loans while backward States should receive
a larger percentage in the form of grants.
Noncompliance to this common sense logic has resulted in a paradoxical situation where
the comparatively richer States received a higher per capita grant than poorer States.
For example, during 1969-70, rich States like Punjab and Haryana received a higher per
capita grant than the poor States like Uttar Pradesh. Madhya Pradesh, Bihar and Andhra
Pradesh. Bihar with lowest per capita income also received the lowest per capita grant.
As far as transfers through the Finance Commission are concerned, all Finance
Commissions sought to give due importance to backward States. However, there was no
clear-cut bias in favour of backward States. The ultimate result was that advanced States
cornered a major share of the actual devolution of resources from the Centre to the States.
For example, the four advanced industrial States of Maharashtra, Gujarat, Tamil Nadu
and West Bengal have consistently obtained more than one-third of total income tax
transfers. However, the distribution of proceeds from Union excise duties was more
judicious.
All Finance Commissions gave undue importance to budgetary needs while deciding the
allocation of grants-in-aid. They did not realize that advanced States could also incur
large budgetary deficits (even deliberately at times) and qualify for larger grants-in-aid.
This led to a paradoxical situation in some instances as richer States got more grants-in-
aid compared to poorer States:
The third constituent of resource transfer, viz., discretionary grants is not guided by any
distinct philosophy of helping the poorer States to a greater extent. It is guided more by
political consideration than by anything else. In any case, discretionary grants also do not
seem to have helped the backward States more m-a-vis the advanced States.
In suggesting any reforms in the federal finance structure, the above problems should be
constantly kept in mind. It is also imperative to remember that the Centre-State financial
relations form a part of Centre-State relations in general whose character is to a larger
extent, political.
It is unfortunate that in this country, the question of State autonomy is raised mostly to
gain political advantages and is not guided by sound economic logic as it should be.
Excepting the two communist parties which have argued for State autonomy on clear
economic grounds, all other parties clamoring for State autonomy have narrow sectarian
outlook.
This is the basic reason why in this country ‘regional’ is viewed as something ‘anti-
national’. Selfish and corrupt politicians have stalled the process of true federalism.
Therefore, a smooth and truly beneficial federal financing stem in this country can evolve
only when a true federal spirit develops.
Since is not foreseeable in the immediate future, a compromise has to be struck between a
‘strong Centre’ policy and ‘State autonomy’ demand. Politically the centre should remain
strong but it should reduce its interference in the financial sphere of the States. To
accomplish this, some of the steps that can be initiated in the first instance are:
The scope of the Finance Commission should be enlarged considerable since it is a
statutory body. This would reduce the interference of the Centre in the financial
management of the States and the ‘arbitrariness of discretionary grants’ that accompanies
such interference.
In addition, it would reduce the atmosphere of suspicion and distrust in the States over the
role of the Centre in federal finance system.
Some States have demanded the setting up of a permanent Finance Commission instead
of one constituted in five years. This is sought to be justified on the following
considerations: (i) a permanent Finance Commission would reduce the scope for the
Central government to make discretionary transfers in an ad hoc manner to the States.
Since under the existing provision. Finance Commissions are appointed once in about
five years; the scope for making discretionary grants by the Centre automatically grew.
This introduced an element of arbitrariness in the transfer mechanism.
The Finance Commission, being an impartial body, would be able to ensure that Central
transfers were not made to particular States on considerations which may not be fair or
acceptable to the rest of the States; and (ii) when a Finance Commission is appointed, it
has to start on a clean slate, collect the material required for its work from the State
governments and the Central government, and then initiate such studies and analysis as it
requires.
A permanent Finance Commission (as the Australian Grants Commission in Australia)
would be able to keep under review various aspects of the finances of the Centre and the
state governments, special features of particular States, and the factors which affect heir
finances. This suggestion did not find favour with the Seventh Finance Commission since
it felt that if a permanent Commission is set up, there might well be a tendency for
members to be regarded as full time employees of the Central government. This would be
unhealthy from the point of view of the Commission’s function vis-a-vis the State
governments.
Besides, under the present arrangement, new persons with a fresh approach and unbiased
opinions can be inducted into the Finance Commission. On these grounds, the Seventh
Finance Commission did not support the idea of a permanent Commission.
However, it called for the establishment of an expert non-political agency by the Central
government to perform such functions as the Secretariat of the Commission is expected to
perform. In addition, it can be entrusted to play a watching and advisory role with regard
to Centre-State financial relations generally.
This is a sound suggestion and should be implemented. The expert non-political agency
can collect vital information regarding Centre-State finances to enable the Finance
Commission (whenever appointed) to start work without loss of time. It can also
oversee the implementation of the recommendations of the Finance Commission as
accepted by the Central government. In addition to these measures, adequate steps
should be undertaken to narrow down inter-State disparities by adopting a set of criteria
distinctly biased in favour of backward States. This can be ensured by giving more
weight age to backwardness reflected through various economic and social indicators
like per capita income, level of literacy, road length, administrative services, hospital I
beds, etc.
Further it is necessary to enlarge the very quantum of resources transferred from the
Centre to the States. In this context, the proposal of the Rajamannar Committee to widen
the base of devolution of resources to the States by including
Corporation tax, customs duties and all excise duties in the divisible pool, needs
consideration. These taxes and duties are highly elastic and can help inconsiderably
enlarging the revenue base of the States which are in dire need of more finance to fulfill
the social and economic responsibilities which the development process is forcing them
to shoulder.
The Tenth Finance Commission established under the chairmanship of K.C. I Pant
recommended a major role for industry in the field of public finance.
Looking at both vertical and horizontal equity i.e. sharing of resources between the Union
and the states and again, among the states, the nexus between industry, trade and the
public finance can hardly be over emphasized.
The programme for removing the distortions in the industrial policy in the context of the
changing global economic scene was set in motion in the Eighties but it gathered greater
momentum in the last few years. Major changes have taken place in the industrial
policy. As the economy opens up and becomes more and more outward looking, greater
challenges and opportunities will come our way. These have to be carefully and
comprehensively assessed and the emerging possibilities fully exploited.
The major tasks of the Finance Commission are to assess the resource position and the
needs of the Central and the state governments, and to consider issues like reduction of
fiscal deficit, striking a balance between revenue receipts and expenditure and creating
surplus for capital investment, and the efficiency of fiscal management of governments.
What is of crucial concern at this stage is not only what the state can do to promote
industry but also as to how industry would be able to help governments in raising
resources in a sustainable manner?
A question which is being posed by some knowledgeable people is regarding the fate of
the weaker states which have comparatively fewer logistical advantages. In this regime,
with foreign investment playing a more meaningful role, the choice of location would
obviously be greatly influenced by the availability of social and economic infrastructure.
If industry goes where infrastructure is, as it perhaps would, how would the weaker states
compete unless the quality and spread of their infrastructure is improved to an acceptable
level? And this is where the states may look to the captains of industry for a helping hand
especially in areas of physical infrastructure like power, roads and communication and
also the human infrastructure i.e., professionally and technically trained manpower which
would meet the emerging requirements of industry and industry related services.
In their anxiety to woo industry, the states have been following for many years the policy
of offering packages of incentives, including tax concessions. This has sometimes
resulted in unhealthy competition among the states, abandonment of revenues, and even
destabilization of industry.
On the subject of consignment tax many states have, favored the imposition of
consignment tax which, it was stated, would curb evasion of sales tax presently taking
place in the garb of branch transfers and consignment dispatches while often such
transactions are, in effect, inter-state sales.
It has also been urged that far from distorting the present pattern of trade, imposition of
consignment tax would lead to smoother flow of trade and better tax compliance.
Sales tax barriers, or octroi barriers, or barriers against the movement of food grain etc.,
lead to wastage of man-hours through idle time, wastage of fall and reduction in the
efficiency of the capital employed through lower turnaround of vehicles.
The industry’s views on the matter would be welcome particularly on how to replace the
fiscal and physical barriers through more sophisticated ways of compliance with the law.
Another basic question which needs to be considered by the Centre and the state
governments is whether the ever increasing demand on the governments, Central or state,
can continue to be satisfied without reordering priorities, without insisting upon greater
efficiency in fiscal management and without exercising some measure of self restraint.
 Sources of Government Revenue
The following points highlight the nine main sources of government revenue. The
sources are: 1. Tax 2. Rates 3. Fees 4. Licence Fee 5. Surplus of the public sector units 6.
Fine and penalties 7. Gifts and grants 8. Printing of paper money 9. Borrowings.
Source # 1. Tax:
A tax is a compulsory levy imposed by a public authority against which tax payers cannot
claim anything. It is not imposed as a penalty for only legal offence. The essence of a tax,
as distinguished from other charges by the government, is the absence of a direct quid pro
quo (i.e., exchange of favour) between the tax payer and the public authority.
Tax has three important features:
ADVERTISEMENTS:
(i) It is a compulsory contribution, to the state from the citizen. Anyone refusing to
pay tax is punished under law. Nobody can object to taxation on the ground that he is
not getting the benefit of certain state services,
(ii) It is the personal obligation of the individual to pay taxes under all circumstances,
(iii) There is no direct relationship between benefit and tax payment.
Source # 2. Rates:
Rates refer to local taxation, i.e., taxation levied by (or for) local rather than central
government. Normally rates are proportional to the estimated rentable value of business
and domestic properties. Rates are often criticised as being unrelated to income.
Source # 3. Fees:
ADVERTISEMENTS:
Fee is a payment to defray the cost of each recurring service undertaken by the
government, primarily in the public interest.
Source # 4. Licence fee:
A licence fee is paid in those instances in which the government authority is invoked
simply to confer a permission or a privilege.
Source # 5. Surplus of the public sector units:
The government acts like a business- person and the public acts like its customers. The
government may either sell goods or render services like train, city bus, electricity,
transport, posts and telegraphs, water supply, etc. The government also earns revenue
from the production of commodities like steel, oil, life-saving drugs, etc.
Source # 6. Fine and penalties:
They are the charges imposed on persons as a punishment for contravention of a law. The
main purpose of these is not to raise revenue from the public but to force them to follow
law and order of the country.
Source # 7. Gifts and grants:
ADVERTISEMENTS:
 Gifts are voluntary contribution from private individuals or non-government donors to the
government fund for specific purposes such as relief fund, defence fund during war or an
emergency. However, this source provides a small portion of government revenue.
Source # 8. Printing of paper money:
It is another source of revenue of the government. It is a method of creating extra
resources. This method is normally avoided because if once this method of financing is
started, it becomes difficult to stop it.
Source # 9. Borrowings:
Borrowings from the public is another source of government revenue. It includes loans
from the public in the form of deposits, bonds, etc. and also from the foreign agencies and
organisations.

UNIT--I

Technological Progress and Economic Growth

Introduction
Technical progress is defined as new, and better ways of doing things, and new
techniques for using scarce resources more productively.

An improved technology yields greater output from the same quantity of resources.

A formal neo-classical definition of technical progress states that it is an autonomous

phenomen causing the aggregate production function of an economy to shift upwards. This
brings about a higher level of output for each different level of capital-labor ratio.

Technical progress involves two activities: process innovation and product innovation.

No sharp distinction between process innovation and product innovation because a new
process requires, same product innovation and product innovation involves some elements
of a new process.

Process innovation is placed much emphasis because many literatures concern much on
the effects of technical change on factor productivity or new ways of satisfying existing
wants, rather than on satisfying new wants.

Producing a new technology involves two processes: invention and innovation.

Invention entails the conception of a basic idea. This is the product of laboratory
scientists. Innovation is the application of that idea to something directly useful to
humankind. This is the work of engines.
 Innovation provides more efficient and cheaper ways to make existing goods. It can also
result in creating new products.

Joseph Schumpeter states that technical progress is partly technological and partly
economic in nature. Inventions are the emergence of new scientific or technological ideas
that may be part of a random, exogenous process. An innovation is an economic process
that occurs as a response to perceived profit opportunities, through an act of foresight of
the capitalist entrepreneurs, who create or realize these opportunities though innovations.

2 The characteristics of technological progress

Technology is a complex set of knowledge, ideas and methods and is likely to be the
result of a variety of different activities, both intentional and accidental.

Technological progress is a gradual process consisting of a sequence of small increments

lying along a continuous path.

For examples, a generator and electric lights were demonstrated in 1876. Until six years
later, Thomas Edison opened the first commercial generator to power electric lights in the
Wall Street district of New York. Only in the 1930s, 60 years later, the Rural Electrification
Act provided the financing to bring electric power to most rural areas of the United States.

It seems that the new idea spreads slowly initially, then it begins to be applied more
often, gradually attaining widespread acceptance and adoption; and finally it reaches 100%
diffusion as the last potential users are won over.

While the growth path of technology is continuous, it does not generally exhibit a
constant slope or growth rate; technology can grow rapidly, stagnate, or even decline.
The path may take sudden sharp turns.

Technology is partially nonrival in nature. If one person uses an idea or method, that does
not prevent another from using it. Thus the marginal cost of using a particular form of
technology is zero, meaning that competitive market forcer will tend to drive the price of
existing technology toward zero.
 Creativity and innovation will tend to be very low if nonrival ideas are freely used by
anyone. Therefore, the creators of the new ideas get no reward from their creator of an
idea to use the product or process exclusively for a specified number of years.

For example, the Coca-Cola Company has kept its formula secret for over 100 years; its
idea is protected by the complexity of a formula that no one has been able to reproduce
exactly.

Some growth economists describe technology as path-dependent. The ability to create

new technologies depends on the level of technology already accumulated. It means that
previous technologies are often difficult to abandon.

Often, technology is not excludable. If old knowledge is not available, then others
cannot create new knowledge. Thus, patent laws set limits on the length of time that a
patent remains in effect.

The formal recognition of intellectual property rights is likely to facilitate the spread of
technology. Patents and copyrights permit the owners of intellectual property to sell and
sent their rights to others.

As long as the price for the use of the idea exceeds the possible loss of monopoly profit,
the owner of the idea should be willing to let others use the idea.

If a certain idea can be productively used elsewhere in the economy, others should be
willing to pay for the right to use the idea.

4.2 The causes of technological progress

(1) Research and development (R&D) spending decisions made by firms

With the increase of R&D spending, it is more likely for a firm to discovery and develop a
new product.

If the new product is successful, the firm’s future profits will increase. If the expected
present value of profits exceeds the expected cost of research, the firm will start on a new
R&D project.

(4) Patent laws

Weaker protection of new products, smaller expected profits can be gained from new
products. Thus, lesser incentives for firms to engage in R&D.

Even in the presence of patent laws, protection is incomplete. Other firms may learn
ways of making another product not covered by the patent. They may learn how to make a
better product, thus eliminating the market for the original product.

(3) The fertility of research

If research is very fertile, it means R&D spending leads to many new products. Firms will
have more incentives to do R&D, and R&D and technological progress will be higher.

(4) The appropriability of research results

 If firms cannot fully capture the profits from the development of new products, they will
not engage in R&D and technological progress will be slow.

Determinants of the appropriability of research results:

a. If it is widely believed that the discovery of a new product will lead to a subsequent
quicker puce in the discovery of other better products, there may be little payoff to
bring first. Thus, a highly fertile field of research may not generate high levels of R&D.

b. Too little protection will lead to little R&D. Too much protection will make it difficult
for new R&D. Hence, R&D will be lowered.

(5) Innovations may occur in response to pressures on the commodity markets.

With the rise of population and the increase of the scarcity of land, greater pressure on the
demand for agricultural commodities. This may induce innovations in agriculture to takes
advantage of increasing profit opportunities.

(6) Innovations are most likely to occur in rapid growing sectors of the economy.

Market expansion increases profitability and makes firms to reap the benefits of scale –
economies, which are characteristic of modern industrial innovations.

Greater demand makes available investible funds that are required for new net
investment. Firms in the industry will put in a better position to absorb any potential risks
associated with new technology.

(7) Continuous competition in oligopolistic markets may lead firms to invest resources in a
systematic search for new technology.

4.4 Technological progress as an externality to investment

Bradford De Long and Lawrence Summers found a strong statistical correlation between
investment in productive equipment and the countries’ rate of economic growth. Their
statistical analysis found that equipment investment causes economic growth.

Indeed, new ideas and technologies are in some ways linked to the specific equipment,
buildings, and tools used in production.

Some statistical studies suggest that the effect of equipment investment on economic
growth is stronger in development investment on economic growth is stronger in
developing economies in the early stages of industrialization than it is in the more
developed economies.

New technologies often seemed to be embodied in new machines, and the introduction
of a new technology usually coincided with the introduction of new machines or
equipment.
 Structures also enable new ideas and methods to be implemented. New ideas cannot be
put into practice unless people are trained to apply and use them. Without an investment
in education and training, much new technology would not be used.

Therefore, technological progress is not an independent process, completely separate

from investment in equipment, structures, and human capital.

4.5 Learning by doing

The fact that economic growth accelerated over the past 200 years implies that we have
also learned to create new methods, tools, and ideas at a more rapid pace.

Learning-by-doing process is also a potential source of economic growth because

experience causes per-worker output to rise.

For an economy as a whole, learning could remain a constant proportion of the doing.
New firms replace old ones, new production runs replace the production runs of older
products. Each new firm product, or industry leads to another complete phase of learning
by doing, and thus in the whole economy and over time there may be overall reduction in
learning.

Individual firms and industries begin new production runs when the learning by doing
form further production of old products diminishes, even though initially costs may be
higher when new products are introduced.

Eventually, learning by doing reduces cost below those of the previous production run,
and across all firms and industries, economy wide learning by doing, combined with
continued introduction of new products and process, reduces unit costs over time.

Learning has long been suggested as a potential source of technological progress. But
the learning-by-doing model does not address the motivations for learning.

Learning just happens without a conscious effort. Technological progress is endogenous

because it is related to other variables within the model, but the learning-by-doing model
is short on explaining how production generates learning.

The fact that a lot of doing does not seem to be accompanied by much learning suggests
that learning is not an incidental and automatic consequence of doing.

4.6 Growth as the result of costly innovative activity

Philippe Aghion and Peter Howitt, Gene Grossman and Elhanan Helpman, and Paul
Romer are those who have developed models of endogenous growth based on the
assumption that R&D activities are carried out by profit – seeking entrepreneurs. R&D is
regarded as a costly activity that is carried out with the intent to produce new products
and earn temporary profits.

Since the cost of R&D activities must be covered, the assumption of imperfect
competition is introduced. The greater the potential profit earned by the monolistic
producer, the greater will be the amount of innovative activity.

Endogenous technological progress is a function of the supply of labor L, future profit π,

the amount of resources needed to create an innovation β and the interest rate with
which future profit is discounted r.
 i.e. g = f ( L, π, β, r )

Where g = the number of innovations per year.

The cost of innovation and the present value of innovation determine the equilibrium
amount of resources that competitive entrepreneurs devote to innovative activity.

The number of innovations per year remains constant if nothing else in the model
changes. But that implies slower growth as the total number of accumulated innovations
grows.

The number of innovations per year must grow in line with the accumulated level of
technology if the growth of technology is to remain constant.

4.7 R&D model formulated by Romer (1990), Grossman and Helpman

(1991), and Aghion and Howitt (1992)
Assume that the effectiveness of labor (A) represents knowledge or technology.

Production function in which labor, capital, and technology are combined to produce
improvements in technology.

Both the R&D and goods production functions are assumed to be generalized Cobb-
Douglas production functions.

The fraction of output saved and the fractions of the labor force and the capital stock
used in the R&D sector are taken as exogenous and constant.
 There are two sectors, a goods-producing sector where output is produced and a R&D
sector where additions to the stock of knowledge are made.

Fraction aL of the labor force is used in the R&D sector and fraction 1− aL in the goods-
producing sector. Fraction aK of the capital stock is used in the R&D sector and fraction 1−
aK in the goods-producing sector.

Two sectors can use the full stock of knowledge (A).

The quantity of output produced at time t:

=
Y(t) [ (1− aK) K(t) ] α [ A(t) (1− aL) L(t) ] 1−α ,0<α<1 (1)

(1) implies constant returns to capital and labor.

The production of new ideas depends on the quantities of capital and labor engaged in
research and on the level of technology:

A(t) = G[ ak k(t) , aL L(t) , A(t) ] (2)

Under the assumption of generalized Cobb-Douglas production function for knowledge,

it is not assumed to have constant returns to scale to capital and labor:

A(t) = B[ aK K(t) ] [β aL L(t) ] γ A(t)θ , β> 0, γ ≥ 0, B>0 (3)

where B is a shift parameter in order to analyze the results of changes in other

determinants of the success of R&D.

No restriction is placed on since there exists no strong basis for restricting how increases
in the stock of knowledge affect the production of new knowledge.


If θ= 1 , A is proportional to A; the effect is stronger if θ > 1, and is weaker if θ < 1.

=
Depreciation is set to zero: K(t) sY(t) (4)

= ≥
Treat population growth as exogenous: L(t) nL(t), n 0 (5)
4.7.1 R&D model without capital
(A) The dynamics of knowledge accumulation

Without capital, set α=β= 0. Equations (1) and (3):

Y(t) = A(t) (1− aL) L(t) (6)

A(t) = B[ aL L(t) ] γ A(t)θ (7)

The growth rate of A, gA(t) :

AA(t)(t) = B[ aL L(t)A(t) ] γ A(t)θ = B aLγ L(t)γ A(t)θ−1 (8)

Since B and aL are constant, whether gA is rising, falling, or constant depends on the

behavior of LγAθ−1.

Equation (7) implies that gA is always positive.

Equation (8) implies the growth rate of gA :

)
dgdtA(t = gA dt θ−2

A 
⋅ d dt(t) 

= BaL L(t)γ A(t)θ−1 γ LL((tt)) + (θ −1) AA((tt)) 

= gA(t)[ γ n+ (θ−1) gA(t)] (9)

shows that gA is rising, gA > 0, if γ n+(θ−1) gA is positive. gA is falling, gA < 0,


if γ n+(θ−1) gA is negative. In steady state, γ n+(θ−1) gA = 0, gA = 0 :

 γn *
= ≡ gA (10)
1−θ
gA

In case of θ < 1, (9) implies that when θ < 1, gA < 0 , gA is galling if gA exceeds g*A .

gA > 0, gA is rising if gA is less than g*A .

Ultimately, gA converges to g*A . Once g*A is reached, both A and Y/L grow steadily at

this rate, thus the economy is on a balanced growth path.


implies that g*A is an increasing function of the rate of population growth n.

The model does not imply that countries with greater population enjoy greater income
growth. It only means that higher worldwide population growth raises worldwide income
growth.

Higher population is beneficial to the growth of worldwide knowledge in the sense that
the larger the population is, the more people there are to make new discoveries.

When θ < 1 and n = 0, equation (9) implies:

=
gA(t) [(θ−1) gA(t)] gA(t) < 0
it adding to the stock of knowledge becomes more difficult, gA is negative and hence
growth would slow sown in the absence of population growth.
(10) also implies that although the rate of population growth affects long-run growth,
the fraction of the labor force engaged in R&D (aL ) does not.

When θ < 1, the increase in aL has only a level effect (slope remains zero) but not a
growth effect on the path of A.

Although (8) implies that the increase in aL causes an immediate increase in gA , the
level of A moves gradually to a parallel path higher than its initial one. This is the level
effect.

When θ > 1, equation (9) implies that gA is increasing in gA. Such gA is positive, it
also implies that gA must be positive.

The economy now exhibits ever-increasing growth rather than converging to a balanced
growth path. The more rapidly gA rises, the more rapidly its growth rate rises.
The increase in aL leads to an ever-widening gap between the new path of A and its original
path.

When θ = 1, equation (8) and (9) become:

gA(t) = BaLγ L(t)γ (11) gA(t) = γ n gA(t)

(12)

(12) implies that if population growth is positive, gA is growing over time.

(12) also implies that if n = 0 or γ = 0, gA is constant over time. There is no adjustment

toward a balanced growth path. The economy immediately exhibits steady growth.
 As equation (6) (7) (11) shown, the growth rate of knowledge, output, and output per
worker are all equal to BaLγ Lγ. Thus, in this case αL affects the long-run growth rate of the
economy.

(B) The importance of returns to scale to produced factors

This model states that knowledge is the only produced factor.

If θ = 1, 1% increase in A causes only 1% increase in A. This implies the jump in A has
no effect on its growth rate.

If θ > 1, 1% increase in A causes more than 1% increase in A. This implies the increase
in A raises the growth rate.

If θ < 1, 1% increase in A results in an increase of less than 1% in A, and so the growth
rate of knowledge falls.

4.7.2 R & D model with capital

The model is now described by equations (1) (3) (5) including two endogenous stock
variables A and K.

Subs. (1) into (4):

= = −
K(t) sy(t) s [(1 aK ) K ] [ α A(1− aL) L] 1−α

= s (1− aK ) α K α (1− aL) 1−α A 1−α L 1−α (13)

Divide both sides of (13) by K(t) and define CK ≡ s(1 - aK)α(1 - aL)1-α:
 KK((tt)) ≡ gK(t) = s(1− aK )α(1− aL)1−α KKα (AL)1−α

= CK  A(Kt)(Lt)(t) 1−α

(14)

since  AL 1−α = (AL)1−α(K−1)1−α = (AL)1−αK−1+α =  KKα (AL)1−α

K 

Whether gK is rising, falling, or holding constant depends on the behavior of AL/K.

The growth rate of AL/K, gK:


g K= gA +n− gK (15)

Positive relationship between gA and gK:

dgK = 1> 0
dgA

If gA + n – gK > 0, gK is rising, gK > 0. If gA + n – gK < 0, gK is falling, gK < 0.

If gA + n – gK = 0, gK is constant, gK = 0.
Divide both sides of (3) by A(t):

AA((tt)) ≡ gA(t) = B(aKK)β (aLL)γ Aθ−1 = BaKβKβaLγLγ Aθ−1

≡ CAK(t)βL(t)γ A(t)θ−1 where CA ≡ BaKβaLγ 16)

dgA(t) = CA BK(t)β ⋅ dKdt(t) ⋅L(t)γ A(t)θ−1 + K(t)β ⋅ A(t)θ−1 ⋅ γL(t)γ−1 ⋅

dLdt(t) 
dt

+ K(t)βL(t)γ(θ − 1)A(t)θ−2 ⋅ dAdt(t) 

K ( t ) L ( t)
= CA BK(t)β ⋅ K ( t ) ⋅L(t)γ A(t)θ−1 + γL(t)γ L (t ) K(t)β ⋅
A(t)θ−1

+ (θ − 1)K(t)βL(t)γ A(t)θ−1 A(t)

 A(t)

 = CAK(t)βL(t)γ A(t)θ−1β KK((tt)) + γ LL((tt)) + (θ − 1)
AA((tt)) 

the behavior of gA(t) depends on βgK +γn+ (θ−1)gA

dgA(t)

dt
gA (t) = β gK + γ n+ (θ −1) gA (17)


(17) implies that gA is rising when β gK +γ n+ (θ−1) > 0 and vice versa. gA is constant
when β gK +γ n+ (θ−1) = 0 .

n
: The set of points where gA is constant has an intercept of − β gA is

constant => gA = 0 => β gK +γ n = ( 1−θ ) gA

n
γ
when gA = 0, β gK = - γ n => − β
The set of points where gA is constant has a slope of :

β gK = (1−θ) gA −γ n => gA = ( 1− θ ) βgA − γ n

where θ < 1 => the slope is positive

Positive relationship between gA and gK:

dgA = β > 0
gK

Equation (3) shows that the degree of returns to scale to K and A in knowledge
production is β + θ.

When β + θ < 1, the slope of (1 – θ)/ β is greater than 1. thus, the locus of points
where gA = 0 is stepper than the locus where gK = 0.

Regardless of where gA and gK begin, they converge to point E where gA and gK
are zero:

=
From (15): set gK 0 => gA* + n− gK* = 0 (18)
 =
From (17): set gA 0 => β gK* + γ n− (θ −1) gA* = 0 (19)

Rearrange (18): gK* = gA* + n (20)

Subs. (20) into (19):

β (gA* + n) + γ n + (θ − 1) gA* = 0 => β gA* + β n+ γ n+ (θ −1) gA* = 0

=> β gA* + ( β + γ ) n+ (θ −1) gA* = 0

=> −( ββ+− γθ )+ n1 = gA* => gA* = 1( −β (+θγ+ )β n)

(21)

(20) shows that the long-run growth rate of the economy is endogenous, and long-run
growth is an increasing function of population growth and is zero if population growth is
zero.

The fraction of the labor force and the capital stock engaged in R & D, aL and aK, do not
affect long-run growth.

When β + θ > 1, the loci where gA and gK are constant diverge. Regardless of where
the economy starts, it eventually enters the region between the two loci.

The growth rates of A and K, and the growth rate of output increase continually.
 When β + θ = 1, the slope (1 - θ) / β = 1, and thus the loci of gA and gK have the
same slope:

From (15): as gK = 0, gA = gK – n => slope = 1

If n > 0, the gK = 0 line lies above the gA = 0 line.

Regardless of where the economy starts, it eventually enters the region between the two loci.
The growth rates of both A and K, and the growth rate of output increase continually.

If n = 0, the two loci lie on top of one another. Regardless of where the economy
begins, it converges to a balanced growth path.
 SKILL -5th SEMESTER
Mathematical economics
Role of Mathematics in Economics
Mathematics is a science of space numbers. It is no more a branch of economics. However,
tools of mathematics are frequently applied to interpret economics phenomena. Thus
mathematical analysis is merely an approach to economic analysis. It should not and does
not differ from the non-mathematical analysis. The purpose of any theoretical analysis is to
derive a set of conclusions or theorems from a given set of assumptions via a process of
reasoning. In mathematical economics the assumptions and conclusions are stated in
mathematical symbols rather than in words and in equations rather than in sentences.
The use of mathematics in economics substantiates the following advantage;,

(i) The language of mathematics used is more concise and precise.

(ii) There exists a rich treasure of mathematical theorems at our disposal which can
be used to interpret economic theories.
(iii) It enables us to distinguish between different variables such as exogenous and
endogenous variables, implicit and explicit variables involved in the economic
theories.

Thus mathematical economics refers to application of mathematics to purely theoretical

aspects of economic analysis with little or no error of measurement of the variables under
study.

Some mathematical tools used in economics

1. Matrices and Determinants: Matrices and determinants are applied in various
phenomena of economic analysis and management such as linear programming, game
theory, General equilibrium analysis, input-output analysis etc.
2. Functions, Limits and Continuity: The concepts of functions, limits and continuity are
of fundamental importance in economics. These concepts enable us to have a clear
understanding of the nature of the function, and its derivatives i.e the study of
changes that occur in one variable as a result of change in other (dependent) variable.
These concepts are very useful in demand, supply analysis and production and
consumption function.
3. Maxima and Minima: The concepts of maxima and minima play a very useful role in
almost all fields of micro and macro economics. The concepts are used to understand
utility maximization of the consumers, profit maximization and cost minimization of
the producers.
4. Differential equations and difference equations: Differential equations are used
frequently in economics. They are used to establish the conditions for dynamic
stability micro economic models of market equilibrium and to trace the time path of
 economic variables under various conditions. They are used to find total cost and total
revenue functions from the marginal cost and marginal revenue functions.

Difference equations are widely used in economics to determine the conditions of

dynamic stability in lagged economic models such as cobweb model, Harrod- Domer
Growth model etc.

Coordinate Geometry
Straight Line: A straight line is defined as a connection of two collinear points. The equation of a
straight line is generally written as

Y = mx + c
Which is a linear equation. Here ‘m’ is called the slop of the line and ‘c’ is called the
intercept.
Slope of line: The slope of line is a measure of steepness. The slope of line measures the
change in the dependent variable y (Δy) divided by a change in the independent variable
x (Δx). The greater of absolute value of the slope, the steeper the line and vice versa. A
positively sloped line moves up from left to right and a negatively sloped straight line
moves down from left to right. The slope of a horizontal line for which Δy = 0, is zero.
The slope of a vertical line for which Δx = 0 does not exist.

Let P(x1, y2) and P(X2, Y2) are two points on a line. Then the slope m of the line is

defined as m = (Δy/ Δx) = (y2 – y1)/ (x2 – x1) = vertical change / horizontal

change
Solved problems
Q 1. Find the distance between two points (1,4) and (3,5).
Ans. To find the distance between any two points. We use the formula

AB = √ (x2 – x1)2 + (y2 – y1)2

Here x1 = 1, x2 = 3 and y1 =4, y2 = 5

Therefore AB = √ ( 3 -1)2 + (5 -4)2 = √4 +1 = √5.

Q2. Find the distance between two points (4, -6) and (3, 8).
Ans. Here x1 = 4, x2 = 3 and y1 = -6, y2 = 8

Therefore AB = √(x2 –x1)2 + (y2 –y1)2 = √ (3-4)2 + (8+6)2 = √ 12 + 142 = √ 1 + 196 = √ 197.

Q3. Find the slope of line passing through two points (-1,0) and (1,0).
Ans. The slope m = (Δy)/(Δx) = (y2-y1)/ (x2-x1)= 0-0/1- (-1) = 0/ 2 = 0.
Q4. Find the slope of the line passing through points (0.0) and (2,5)
Ans. Here x1 =0, x2 =2 and y2= 0, y1= 5
Slope (m) = (Δy)/(Δx) = (y2-y1)/ (x2-x1)= 5-0/2-0 = 5/2.
Q5. Find the slope of line 3y = 9x -2
Ans. 3y = 9x -2 can be re written as
Y = (9x -2)/ 3 = 3x – 2/3
Comparing with y = mx +c we get
Slope (m) = 3
Q6. Find the slope and intercept of the line(√3x)+ y =12.
Ans. (√3x) +y =12 or y = - (√3x) + 12
Comparing with y = mx + c we get
Slope (m) = -√3, and intercept (c) = 12
Q7. Find the equation of a straight line whose slope is -2/5 and intercept is 6.
Ans.Given m= -2/5 and c=6
Therefore the equation of the st. line is y = mx + c
i.e y = (-2/5) x + 6 or 5y = -2x +6×5

or 5y + 2x – 30 = 0 is the required

equation.

Equation of a straight line in intercept form

The equation of a st. line making intercepts ‘a’ and ‘b’ on x-axis and y-axis is respectively is

given by x/a +y/b =1

Q8. Find the equation of a st. line making intercepts 2 and -5 on x-axis and y-axis
respectively

Ans. The equation of a st. line in intercept form is x/a + y/b =1

Here a =2, b =-5, therefore the required equation is x/2 + y/-5 =1
Or 5x -2y = 10 (Ans)
Q9.Find equation of a st. line passing through points (3,5) and (4,7).
Ans. The equation of a st. line passing through two points (x1,y1) and (x2,y2)

is given by y - y1 = [(y2 – y1)/ (x2 – x1)] (x –x1) here x1 = 3, x2 = 4 and y1 =5 ,

y2 = 7 so the equation is y – 5 = [(7-5)/(4-3)] (x-3) or y -5 = 2 (x-3) or y -5 =

2x -6 hence y = 2x -1 Ans.

Q10. Find the linear demand function for the following demand schedule for watches sold
at 2 different prices
No. of watches sold price per unit
20 90
30 60
Ans. Here demand curve passes through two points with co-ordinates (20,90) and(30,60)
The linear demand curve passing through 2 points (x1,y1) and (x2,y2)

is given by y – y1 = [(y2-y1)/(x2-x1)] (x-x1)

Where x = quantity demand and y = price

Therefore the linear demand curve is
Y -90 = [(60-90)/(30-20)](x-20)
Or y-90 = -30/10 (x -20) = -3 (x -20) = -3x +60
Or y + 3x -150 = 0 Ans.

Parabola
Definition: A parabola is a set of points each of which is equidistant from a given point
called the focus (s) and from a given line called a directrix (ZM). The directrix is parallel to
and at a distance ‘a’ from the y-axis. Its equation is x +a =0

The line through the focus (s) and perpendicular to the directrix (ZM) is called the ‘axis’ of
the parabola. The point on the axis midway between the focus (s) and directrix (ZM) is
called the vertex. The line segment joining two points of a parabola and is known as Latus
rectum whose length is equal to 4a.

The equation of a parabola with vertex at origin is given by y2 = 4ax. This is a right handed
parabola.

The equation of a left handed parabola is similarly given by y2 = -4ax.

The equation of an upward parabola is given by y2 = 4ay.

Similarly the equation of a downward parabola is given by x2 = -4ay

If the vertex of the parabola is the point (h,k) instead the point of origin, the above four
cases become

Equation Directix

(i) (y-k)2 = 4a (x-h) x=h–a

 (ii) (y-k)2 =- 4a (x-h) x = h +a
(iii) (x-h)2 = 4a (y-k) y=k-a
(iv) (x-h)2 = 4a (y-k) y = k +a

Q1. Find the focus and directrix of the parabola y2 = 8x.

Sol. y2 = 8x.

Compare it with the general equation of the parabola y2 = 4ax; we get

4a = 8 or a = 2
Therefore co-ordinates of focus are (a,0) = (2,0)
Directrixis x + a = 0 or x + 2 = 0

Q2. Find the focus ,directrix and lalusrectrum of the parabola. y2 = -16x
Sol. y2 = -16x

Compare it with left handed parabola y2 = -4ax. We get

i.e -4a = -16 or a = 4
Therefore the co-ordinates of focus are (-4,0)
The directrix is x – a = 0 or x -

4 = 0 L. R = 4a = 4 . 4 = 16.

Q3. Find the standard form for the parabola y2 + 2y -12x -3 =0

Sol. y2 + 2y -12x -3 =0

Or y2 + 2y +1 = 12x +4

Or ( y + 1)2 = 12 (x +1/3)

Compare it with (y –k)2 = 4a (x-h).

we get K = -1, h = -1/3 or vertex is

( -1/3, -1)

4a = 12 or a = 3
Therefore the directrix is x = h-a = (-1/3) – 3 = -10/3
Or x + 10/3 = 0
The focus is (h+a, k) = (-1/3)+3, -1 = 8/3, -1

Q4. Find the vertex focus and directrix for the parabola y = x2 +4x

Sol. y = x2 +4x

(x+4)2 = y +4

Compare it with (x –h)2 = 4a (y –k) – case iii

above we get h = -2, k = -4

therefore vertex is ( h, k) = (-2,-4) since 4a = 1 a

= ¼ therefore focus is (h, k+a) = (-2, -4+1/4) = (-2,

-15/4) Directrix is y = k –a

Or y = -4-1/4 or y = -17/4
Or y + 17/4 = 0 Ans
Q5. Find the co-ordinates of vertex, focus, equation of directrix and latus rectrum for the
parabola

X2 – 2x – 12y + 25 =0

Sol. X2 – 2x – 12y + 25 =0

X2 – 2x = 12y – 25

( x -1)2 -1 = 12y -25 or ( x -1)2 = 12y -24

( x -1)2 = 12 (y-2) which is an upword parabola.

Compare it with general form of upword parabola ( x -h)2 = 4a

(y-k) we get h =1, k =2 therefore coordinates of vertex are (h,k) =

(1,2), since 4a = 12 or a = 3 coordinates of focus are (h, k+a) = (1,

2+3) = (1,5)

Directrix is given by y = k –a
Or y= 2-3 = -1 or y = -1 or y + 1 = 0
L.R = 4a =4.3 =12
Q6. A firm produces an output at variable cost given by П= ax3 – bx2 +cx. Show that average
variable cost
(AVC) is a parabola

Sol. VC =ax3 – bx2 +cx

Therefore AVC = (ax3 – bx2 +cx)/x = ax2 – bx +c.

Denoting AVC by y. we get Y = ax2 – bx +c ax2 – bx = y –c a(x2 – bx/a) =

y –c or a[(x – b/2a)2 – b2/4a2] = y –c a[(x – b/2a)2] = y –c+b2/4a2 = y-

(4ac -b2)/4a or (x – b/2a)2] =1/a[ y- (4ac -b2)/4a] which is of the form

(x –h)2 = 4a (y –k) is an upword parabola

Q7. Show that the demand curve corresponding to the demand law P = 4 – (x 2/100)is a
parabola

Sol. P = 4 – (x2/100) where P = price and x =demand

Therefore TR = P.x = x (4- x2/100) = 4x – x3/100

Therefore A.R = T.R/ x =[ 4x – (x3/100)]/x = 4 – x2/100

Since AR is also the demand curve and denoting AR by y we get

Y =4 – x2/100 or x2/100 = 4 -y or x2 = -100(y-4)

Which is a down word parabola of the form (x –h)2 = -4a (y –k). so the demand curve is a
parabola.

Rectangular Hyperbola
Definition: A rectangular hyperbola is defined as the locus of a point which moves in such a
way that the product of its perpendicular distance from a fixed line to each is a positive
constant say C2. Fixed lines perpendicular to each other are called asymptotes and their
point of intersection is called the centre of rectangular hyperbola.
Equation of rectangular Hyperbola
By definition PLx PK = c2 where c2 is a constant i.exy = c2 which is a equation of a rectangular
hyperbola. In case the asymptotes of rectangular hyperbola are parallel to axis and the
centre of rect. Hyp. is (a,b), then the equation of the rectangular hyperbola becomes

(x –a) (x – b) = c2

Average fixed cost defined as total fixed cost divided by level of output i.e TFC/x is
represented by a rectangular hyperbola. In this case output axis and cost axis are the
asymptotes and the product of the distance of any point on AFC curve from the two axis is
always equal to fixed cost ( a positive constant)
Q. if the total cost curve is П = ax (x +b)/x +c, where a, b and c are +ve constants. Show that
average cost curve is rectangular hyperbola.
Sol. TC = П = ax (x +b)/x +c
Therefore AC = П/x = *ax (x +b)/x +c+/x =a (x +b)/x +c
Let AC is denoted by y we get
Y = a (x +b)/x +c or y(x+ c) = a(x +b) or xy +yc

= ax +ab ax –ay –cy = -ab or ax + ac –xy –cy

= -ab + ac a (x +c) – y(x +c) = -ab +ac

(x +c) (a –y) = -ab +ac

(x +c) (y-a) = ab – ac which is the form ( x –a) (y-b) = c2, so it is a rectangular hyperbola.
Functions
Definition: A function f is a rule which assigns to each value of a variable (x) called the
argument of the function, one and only one value [f(x)] referred to as the value of the
function at x. The domain of a function refers to the set of all possible values of x; the range
is the set of all possible values for f(x).
functions are generally defined by algebraic formulas. A function is usually expressed as
Y = f(x) in which y is dependent variable and x is independent variable and ‘f’ denotes the
unspecified relationship between y and x. It is a single valued function since there is a
unique y in the range for each specified x. The converse may not necessarily be true.

Types of function
Functions frequently used in economics are
1.Constant functions: A zero degree polynomial function is a called a constant function e.g
f(x) = k
where k = constant.
2. Linear Function: A polynomial function of degree 1 is called a linear function e.g
f(x) = mx + c. where m and c are constants.

3. Quadratic Function: A polynomial function of degree 2 is called aQuadratic

function e.g f(x) = ax2 + bx + c where a≠0

4.Polynomial function: A function of the form

f(x) = anxn + an-1 xn-1 + an-2 xn-2 +……..+ao where n is non- negative integer, an≠ 0 is called
apolynomial function

5.Rational function: A function expressed as the ratio of two polynomials is called a rational
function. Thus y = f(x)/g(x) where f(x) and g(x) are both polynomials in x is a rational
function.

6.Even function: A function f is said to be an even function if f (-x) = f(x). e.g f (x) = x 2 +4 is an
even function for all values of x.

7.odd function: A function f is said to be odd function if f(-x) = -f(x) e.g. f (x) = x3 is an odd
function for all values of x.
8.Monotone Function: A function is monotone if it is either increasing or decreasing. A
function is increasing if f(x1) < f(x2) for x1< x2.
A function is decreasing if f(x1)> f(x2) for x1< x2.
9.Non Algebraic function: A function is said to be non algebraic function if the relation
which involves the finite terms and variables are not affected by the operation of addition,
subtraction, multiplication, division, powers and roots, exponential function, logarithmic
function, trigonometric function are called non-algebraic functions.

Solved Problems
Q1.Given f(x) = x2 + 4x -5. Find f(2) and f (-3)

Sol. (i) f (x) = x2 + 4x -5

Put x = 2 we get f (2) = 22 + 4.2 -5 = 4 + 8 -5 = 7

(ii) Put x = -3 we get

F(-3) = (-3)2 +4. (-3) -5 = 9 – 12 – 5 = -8 Ans

Q2. f(x) = x2 -5x +3 (i) f(0), (ii) f (-2) (iii) f(1/2)

Sol. (i) f(x) = x2 -5x+3

Put x = 0 we get f(0) = 0 – 5.0 +3 = Ans.

(ii) put x = -2 we get f(-2) = (-2)2 -5

(-2) +3 4 + 10 +3 = 17 Ans

(III) put x = 1/2 we get f (1/2) = (1/2)2 -5 (1/2) +3 = ¼ -5/2

+ 3 = (1 – 10 +12)/4 = ¾ Ans.

Q3. If f(x) = e-x , find f(-a)/f(b)

Sol. F (x) = e-x

Put x = -a we have f(-a) = e-(-a) = ea

Put x = b we get f(b) = e-b

Therefore f(-a)/f(b) =ea /e-b = e a-(-b) = ea+bAns

Q4. If f(x) = x2 -5x +3 then find f(f(x))

Sol. f(x) = x2 -5x +3

Put x = f(x) =x2 -5x +3

Therefore f(f(x)) = (x2 -5x +3)2 -5(x2 -5x +3) +3 = x4 + 25 x2 +9 -10x3 +-30x +6x2 -5x2 +25x -15 +3

f(f(x)) = x4 -10x3 +26x2 -5x -3 Ans

Q5. If f(x) = (1/x) +ax and f(1/5) = 28/5 find the value of a.

Sol. f(x) = (1/x) + ax

Put x = 1/5 we get f(1/5) = (1/1/5)+ a.(1/5)

f(1/5) = 5 + a/5 since f(1/5) = 28/5 we get

5 +a/5 = 28/5 or a/5 = (28/5)- 5 = 3/5 or a

= 3 Ans

Limits
Definition: If the functional values f(x) of a function f draw closer to one and only one finite real
number L for all values of x as x draws closer to ‘a’ from both sides, but does not equal a, L is defined
as the limit of f(x) as x approaches ‘a’ and is written as

Lim f(x) = L
x→a

Solved problems

Q1. Evaluate (i) Lim ( x-7)/x2 -49 (ii)) Lim ( x-7)/x2 -49 (iii) ) Lim ( x2 -4)/x -2 (iv)Lim ( x2 -9)/x -3
x→7 x→-7 x→2 x→-3

Sol. (i) Lim ( x-7)/x2 -49 = Lim (x-7)/(x-7)(x+7) = 1/(7+7) = 1/14 Ans
x→7 x→7

(ii)) Lim ( x-7)/x2 -49 = Lim (x-7)/(x-7)(x+7) = 1/(17+7) = 1/0

x→-7 x→-7
Hence limit does not exist.

(III) Lim ( x2 -4)/x -2 By factorizating the numerator

x→2

Lim (x+2) (x-2)/ (x-2) =-2 +2 =0 Ans

x→2

(iv)Lim ( x2 -9)/x -3 By factorizating the numerator

x→-3

Lim (x-3) (x+3)/ (x-3) =-3 +3 =0 Ans

x→-3

Q2. Evaluate Lim (x2 – 2x -24)/ x-6

 x→6
Sol By factorizing the numerator
Lim (x-6) (x +4)/ x-6 = Lim (x+4) = 6+4 =10 Ans
x→6 x→6

Q3. Evaluate Lim (3x2 – 7x )/ 4x2- 21

x→∞
Sol. As x→∞ numerator and denominator become infinite. In such a case we must divide all terms
by the highest power of x in the function.

Thus divide both numerator and denominator by x2

Lim (3x2 – 7x )/ 4x2- 21 = Lim [{(3x2 – 7x )/x2}/ (4x2- 21)/x2] = Lim (3 – 7/x )/ (4 – 21/x2) = ¾
x→∞ x→∞ x→∞
since as x→∞ , 1/x, 1/x2, 1/x3 →∞

Q4. Evaluate Lim 4x3 -7x2+8x)/ 4x4 +8x2

x→∞
Do your self
Q5 Prove that Lim [(x+h)m –xm]/h = mxm-1
h→0
Sol. Lim [(x+h)m –xm]/h = Lim [xm (1 + h/x)m–xm]/h
h→0 h→0
Expanding by bi-nominal theorem
=Lim [xm (1 +m h/x) + m(m-1)/2Ị (h/x)2 + m(m-1)(m-2)/3Ị (h/x)3 +……………..-xm]/h
h→0
=Lim [xm (1 +m h/x) + m(m-1)/2 (h/x)2 + m(m-1)(m-2)/6 (h/x)3 +……………..-1]/h
h→0
=Lim [xm (h/x) (m + m(m-1)/2 (h/x) + m(m-1)(m-2)/6 (h/x)2 +……………..+/h
h→0
= ( xm/x) m = xm-1. mAns

Q6. Evaluate Limit(x2 -16)/ (√x2 +9) -5

x→4
sol. Limit (x -16)/ (√x +9) -5
x→4
it assumes the form 0/0 when x =4. By rationalization. We get
. Limit (x2 -16)/ (√x2 +9) -5x* (√x2 +9) -5+/*(√x2 +9) -
5] x→4
=. Limit [(x2 -16) (√x2 +9) +5 +/ (√x2 +9)2 -52
x→4

=. Limit [(x2 -16) (√x +9) +5 +/ x2 +9 -25

x→4
=. Limit [(x2 -16) (√x2 +9) +5 ]/ (x2 -16)
x→4
=. Limit (√ x2 +9) +5 =(√ 42 +9) +5 = 5+5 =10 Ans
x→4
Continuity
Definition: A function which has no breaks in its curve is called a continuous function. It can be
drawn with out lifting the pencil from the paper. A function ‘f’ is continuous at x = a, if
(1) F(x) is defined i.e
exists at x =a
(2) Lim f(x) exists and
x→a
(3) Lim f(x) = f(a)
x→a
All these three conditions must be satisfied for a function to be continuous
Q1. Indicate whether the following functions are continuous at the specified points
(i) f(x) = 5x2 -8x+9 at x =3 sol.
2
f(x) = 5x -8x+9 Put x =3 we
get f(3) = 5.32 -8.3 +9 = 45-24+9 =
30 therefore f(3) exists
(ii) Lim f(x) = Lim 5x -8x +9 = 5.32 -8.3
+9 = 30 x→3 x→3
Therefore limit exists at x =3
since f(3) = Lim f(x) =
30 x→3
Hence f(x) is continuous at x =3
Q2. f(x) = (x2 + 3x +12)/x-3 at x =4
2
Sol. f(x) = (x +3x +12)/x-3 Put x = 4
(i) 2
f(4) = (4 +3.4 +12)/4-3 = 40/1 = 40
(ii) lim (x2 +3x +12)/x-3 = (42 +3.4 +12)/4-3 = 40/1 = 40 x→4
since f(4) = Lim f(x), the function is continuous at
x =4 x→4
2
Q3. f(x)= (x-3)/x -9 at x =3
Sol.f(x)= (x-3)/x2-9
(i) f(3) =( 3-3)/32 -9 = 0/0 so f(3) does not exist
Thus the function is not continuous at x=3, even if its limit exists at x =3
(ii) Lim (x-3)/x2 -9 = Lim x-3/(x-3)(x+3) = Lim 1/x+3 = 1/3+3 =
1/6 x→3 x→3x→3
(iii) Since Lim f(x) = 1/6 ≠ f(3)
x→3
hence it is not continuous at x =3
Derivative
Definition: Given a function y = f(x), the derivative of the function written as f’ (x) or dy/dx is
defined as f’(x) =dy/dx = Lim *f(x +Δx) – f(x)+/Δx
Δx→0
Or f’(x) = dy/dx = Lim [f(x +h) –f(x)]/h
h→0

Rules of Differentiation
The process of finding the derivative of a function is called Differentiation.1In the
previous chapter, the required derivative of a function is worked out by taking the
limit of the difference quotient. It would be tedious, however, to have to do this
every time we wanted to find the derivative of a function, for there are various rules
of differentiation that will enable us to find the derivative of a desired function
directly. Students are advised to equip themselves with the following rules to be able
to apply them in the subsequent topics like marginal analysis, optimisation
(Unconstrained and Constrained) problems.

Following are some of the rules of Differentiation.

1. Constant Function Rule

The derivative of a constant function (𝑥) = 𝐴 , where A is a constant, is zero.
I.e. if (𝑥) = 𝐴 then 𝑓′(𝑥) = 0
The reason for 𝑓′(𝑥) = 0 for 𝑓(𝑥) = 𝐴 is easy to see intuitively by having a look at
the graph (Fig 2.1) of a constant function. The graph is a horizontal straight line with
a zero Slope throughout.
Example 2.1. Given (𝑥) = −5 𝑓′(𝑥) = 0
(𝑥) = 10 𝑓′(𝑥) = 0

1
Differentiation is an operation that transforms a function 𝑓 into another function𝑓′.
2. Linear Function Rule
The derivative of a linear function (𝑥) = 𝑎 + 𝑏𝑥 with and 𝑏 constants is
equal to 𝑏. For example the derivative of a function (𝑥) = 3 + 2𝑥 is 2.it is
obvious that the derivative of a linear function is the multiplicative constant
of the variable. The important implication of this result is that for a linear
function the rate at which variable y changes with respect to a change in 𝑥 is
same at every value of 𝑥.

Example 2.2. Find the derivative of

a. 𝑞 = 10 − 2𝑝 ; where q is quantity demanded and p the price

b. 𝐶 = 5 + 𝑌 ; where C is consumption , Y is income

Solution a. Given 𝑞 = 3 − 2𝑝 ⇒ dq = −2 means that quantity demanded falls by

two - ----
𝑑𝑝
units for every one unit increase in the price ( s

Given

⇒𝑑𝑐/dY=1/2

The derivative 𝑑𝑐 or 𝐶′ is called marginal propensity to consume (mpc). In the above

example
𝑑𝑦
the value of mpc = 0.5 > 0 . the graphical exposition of the function is shown in fig.2.3.
 3. Power Function Rule.

The derivative of a function (𝑥) = 𝑥𝑛; where n is any arbitrary constant is 𝑛 multiplied by the
variable raised to the power 𝑛 − 1.

i.e if 𝑓(𝑥) = 𝑥𝑛 then

𝑓′(𝑥) = 𝑛𝑥𝑛−1.

For = 2, the rule was already confirmed in the example 10 of the previous chapter.

Few remarks about the power function (𝑥) = 𝑥𝑛

 If 𝑛 > 1; the derivative of the function will be increasingfunction of 𝑥

 If 𝑛 = 1; the drivative of the function will remain constant function and will be equal
to 1  If 𝑛 < 1; the derivative of the function will be decreasing function of .

Example 2.3. find the derivative of the following functions given below and draw there
respective Graphs to illustrate the remarks about power function.

a. (𝑥) = 𝑥 b. (𝑥) = 𝑥 c. (𝑥) = 𝑥

Solution. a). Given 𝑓(𝑥) = 𝑥 ⇒ 𝑓′(𝑥) = 𝑥2−1 =

𝑥

b) Given 𝑓(𝑥) = 𝑥 ⇒ 𝑓′(𝑥) = 1 [∵ 𝑥 = 𝑥1 ]

 c) Given 𝑓(𝑥) = 𝑥 ⇒ 𝑓′

the diagramatic exposition of the above functions is shown in Fig. 2.4.2

2
If x is considered as Labour input, then the three graphs portrays increasing, constant and decreasing marginal physical productivity of
Labour.
 3.1. Generalised Power Function Rule

The generalised power function is symbolically written as (𝑥) = (𝑥) where 𝑔 is a

differentiable function and 𝑛 is any real number. The derivative of such function is

𝒇′(𝒙) = 𝒏[𝒈(𝒙)]𝒏−𝟏. 𝒈′(𝒙)

The above result shows, while differentiating power function, multiply the original index (𝑛)
by 𝑔(𝑥) raised to the power diminished by unity and also by the derivative 𝑔′(𝑥).

Example 2.4. Differentiate by applying power function rule to following functions

a. (𝑥) = 𝑥−12 b. 𝑓(𝑥) = 3(𝑥)4 c. (𝑥) = (𝑥2 + 3𝑥4)5 d. 𝑓

Solution a) Given (𝑥) = 𝑥−12 ⇒ 𝑓′(𝑥) = −12𝑥−12−1 = −12𝑥−13

b) Given (𝑥) = 3𝑥4 ⇒ ′(𝑥) = 3 .4. 𝑥4−1 = 12𝑥3.

c) Given 𝑓(𝑥) = (𝑥2 + 3𝑥4)5

Here (𝑥) = (𝑥2 + 3𝑥4) ⇒ 𝑔′(𝑥) = 2𝑥 + 12𝑥3

∴ 𝑓′(𝑥) = 5 (𝑥2 + 3𝑥4)5−1. (2𝑥 + 12𝑥3)

= 5(𝑥2 + 3𝑥4)4. ( 2𝑥 + 12𝑥3)

1 1 −1

d) Given 𝑓 ⇒ 𝑓′(𝑥) = 𝑥2−1 = 𝑥2

2

4. The derivative of Sum and Difference.

The derivative of sum (difference) of two functions is equal to the sum (difference) of their
derivatives. i.e.

if 𝑓(𝑥) = 𝑔(𝑥) + ℎ(𝑥), then 𝑓′(𝑥) = 𝑔′(𝑥) + ℎ′(𝑥) and (∗) if

𝑓(𝑥) = 𝑔(𝑥) − ℎ(𝑥), then 𝑓′(𝑥) = 𝑔′(𝑥) − ℎ′(𝑥) (∗∗)

The rule set out above for the case of a combination of two functions only. But, if more than
two functions appear in a combination, the rules can be applied several times in succession
to give the derivative. It can be noticed, however, that the sum and difference rule extends
at once to give the derivative of the algebraic sum of a number of functions as the similar
algebraic sum of the derivatives of the separate functions. For example,

If 𝑓(𝑥) = 𝑔(𝑥) + ℎ(𝑥) + 𝑤(𝑥) , then 𝑓′(𝑥) = 𝑔′(𝑥) + ℎ′(𝑥) + 𝑤(𝑥)

And if 𝑓(𝑥) = 𝑔(𝑥) − ℎ(𝑥) − 𝑤(𝑥) , then 𝑓′(𝑥) = 𝑔′(𝑥) − ℎ′(𝑥) − 𝑤(𝑥)
 The important deductions from (∗) and (∗∗) concerns the behaviour of constants in the
process of derivation. A constant (additive) can be regarded as the case of a function of 𝑥
which does not change in value as 𝑥 varies. This means that the derivative of constant is
zero. Hence an additive constant disappears when the derivative is taken.3

To better under as to why constant if added to a function disappears on differentiating.4

Consider two functions 𝑓(𝑥) = 𝑥2 and 𝑓(𝑥) = 𝑥2 + 𝐴, where A is a constant and plot them
the figure that emerges (fig 2.5) clearly reveals that the slope (derivative) of the functions at
every point is same, the only difference that is apparent is that the graph of the later
function is A steps away from the graph of the former function.

Example 2.5. Find the derivative of the following functions.

a. (𝑥) = 3𝑥4 + 2𝑥3 − 𝑥2 + 10

b. 𝑓
c. (𝑥) = 𝑎𝑥2 + 𝑏𝑥 + ; where 𝑎, 𝑏, 𝑐 are constants

Solution. a) Given (𝑥) = 3𝑥4 + 2𝑥3 − 𝑥2 + 10

𝑓′(𝑥) = 3𝑓′(𝑥4) + 2𝑓′(𝑥3) − 𝑓′(𝑥2)

= 3 .4 𝑥3 + 2 .3 𝑥2 − 2𝑥

= 12 𝑥3 + 6𝑥2 − 2𝑥

3
Multiplicative constants remain unaffected by taking the derivative of a function. If 𝑓(𝑥) = 2𝑥4 ; then 𝑓′(𝑥) = 2 𝑓′(𝑥4) = 8𝑥3
4
This fact provides mathematical explanation of the well known economic principle that fixed costs of a firm does not affect its marginal cost.
 b) Given 𝑓
3

𝑓′(𝑥) = 𝑓′(𝑥)2 + 2𝑓′(𝑥)

= (𝑥) + 2

c) Given 𝑓(𝑥) = 𝑎𝑥2 + 𝑏𝑥 + 𝑐

𝑓′(𝑥) = 𝑎𝑓′(𝑥2) + 𝑏𝑓′(𝑥)

= 2𝑎𝑥 + 𝑏

5 product function Rule

If (𝑥) = ℎ(𝑥). (𝑥), then

𝑓′(𝑥) = ℎ(𝑥). 𝑔′(𝑥) + 𝑔(𝑥). ℎ′(𝑥)

In words: the derivative of the product of two functions is equal to the derivative of the first
function times the derivative of the second function plus the second function times the
derivative of first function. The significant point to remember about the product function
rule is that the derivative of the product of two functions is not the simple product of their
separate derivatives i.e. 𝑓′(𝑥) ≠ 𝑔′(𝑥). ℎ′(𝑥). For example if ℎ(𝑥) = 𝑥2 and 𝑔(𝑥) = 4𝑥 then
(ℎ. 𝑔). (𝑥) =
( 2). (4𝑥) = 4𝑥3 it is obvious here that (ℎ. 𝑔)′(𝑥) = 12𝑥2 is
not equal to ℎ (𝑥). 𝑔 (𝑥) = (2𝑥). (4) = 8𝑥.
′ ′

Verification by Product Rule: if (𝑥) = (𝑥)2. (4𝑥)

Consider ℎ(𝑥) = (𝑥)2 and 𝑔(𝑥) = 4𝑥 then

By applying product rule

𝑓′(𝑥) = ℎ(𝑥). 𝑔′(𝑥) + 𝑔(𝑥). ℎ′(𝑥)

= 2(4) + 4𝑥(2𝑥) = 4𝑥2 + 8𝑥2 = 12𝑥2

The same result was obtained when we first multiply the two functions and then
differentiate the result directly. The obvious question that emerges is that why do we need
product rule when we have another option of multiplying the functions and taking the
derivative of the product directly. One response to the query is that multiplying first and
then differentiating is applicable when the functions are given in some specific form, but the
product rule is applicable even when the functions are given in general form. 5

Example 2.6. Find the derivative of the following functions

5
For further exposition see Chiang A. C. Fundamental Methods of Mathematical Economics (4th ed.), McGraw-Hill (2005).
 a. (𝑥) = 3𝑥4(2𝑥5 + 5𝑥) b. 𝑓 c. (𝑥) = (𝑥4 + 1) ( 3 + 2)
𝑥

solution. a) Given (𝑥) = 3𝑥4(2𝑥5 + 5𝑥)

Let (𝑥) = 3𝑥4 and ℎ(𝑥) = (2𝑥5 + 5𝑥)

Then 𝑔′(𝑥) = 12𝑥3 and ℎ′(𝑥) = (10𝑥4 + 5).plug in these values in product rule formula

𝑓′(𝑥) = 𝑔(𝑥). ℎ′(𝑥) + ℎ(𝑥). 𝑔′(𝑥)

= 3𝑥4(10𝑥4 + 5). (2𝑥5 + 5𝑥). (12𝑥3) = 54𝑥8 + 75𝑥4

b) Given 𝑓

Let and

Differentiating (𝑥) and ℎ(𝑥) separately and substitute the values in the product rule formula

𝑔′ and ℎ(𝑥) = (𝑥 + 2) ⇒ ℎ′(𝑥) = (𝑥)

∴ 𝑓′(𝑥) = 𝑔(𝑥). ℎ′(𝑥) + ℎ(𝑥). 𝑔′(𝑥)

c) Given 𝑓(𝑥) = (𝑥4 + 1) ( 𝑥3 + 2)

𝑥

Let (𝑥) = (𝑥4 + 1) and ℎ(𝑥) = ( 𝑥3 + 2)

𝑥

Differentiating (𝑥) and ℎ(𝑥) separately and substitute the values in the product rule
formula

𝑔′(𝑥) = 4𝑥3 − 𝑥 1
2 and ℎ′(𝑥) = 3𝑥2

∴ 𝑓′(𝑥) = 𝑔(𝑥). ℎ′(𝑥) + ℎ(𝑥). 𝑔′(𝑥)

= (𝑥4 + 𝑥1) (3𝑥2) + ( 3 + 2)(4𝑥3 − 𝑥 1 )

2
 6. Derivative of the Quotient of two Functions (Quotient Rule)

If (𝑥) = (𝑥) ; where 𝑔(𝑥) and ℎ(𝑥) are both differentiable at 𝑥 and ℎ(𝑥) ≠ 0
then ℎ(𝑥)
ℎ( ′

𝑓′(𝑥) = 𝑥).𝑔
(𝑥) − 𝑔2(𝑥).ℎ′(𝑥)
[ℎ(𝑥)]

In words: The derivative of a quotient is equal to the derivative of the numerator times the
denominator minus the numerator times the derivative of the denominator, all divided by
the square of the denominator.

Note: in the product rule formula, the two functions appear symmetrically, so that it is easy
to remember. In the quotient rule however, the expression in the numerator must be in the
right order. The simplest way to check whether the order of the expression in the numerator
is appropriate or not, imagine that ℎ(𝑥) = 1 so thatℎ′(𝑥) = 0. If on substituting the formula
reduces to 𝑔′(𝑥) then the signs are correct and if it reduces to −𝑔′(𝑥), then the signs are
wrong.

Example 2.7. Find the derivative of the following functions

a. (𝑥) = 𝑥𝑥 +−11 where 𝑥 ≠ 1

b. (𝑥) = 5 2𝑥𝑥6+2−3𝑥54 c. (𝑥) = (𝑥𝑥) d. 𝑓 𝑥

Solution a) Given 𝑓(𝑥) = 𝑥 +1 where 𝑥 ≠ 1

𝑥−1

let (𝑥) = 𝑥 + 1 and ℎ(𝑥) = 𝑥 − 1 differentiate them individually we have.

𝑔′(𝑥) = 1 and ℎ′(𝑥) = 1 substitute the value in the formula

′(𝑥)=

ℎ(𝑥).𝑔′([𝑥ℎ)( −𝑥
)𝑔]2(𝑥).ℎ′(𝑥) 𝑓

=( 𝑥−1)((1𝑥)−−1()𝑥2+1)(1) = 𝑥−(𝑥1−−1𝑥)−21 = −2

5𝑥6+3𝑥4

b) Given 𝑓(𝑥) = 2𝑥2−5

Let (𝑥) = 5𝑥6 + 3𝑥4 and ℎ(𝑥) = 2𝑥2 − 5 differentiate individually we have

𝑔′(𝑥) = 30𝑥5 + 12𝑥3 and ℎ′(𝑥) = 4𝑥 , substitute the values in the formula

𝑓′(𝑥) = ℎ (𝑥).𝑔′([𝑥ℎ)( −𝑥 )𝑔]2(𝑥).ℎ′(𝑥)

(2𝑥2−5).(30𝑥5+12𝑥3)−(5𝑥6+3𝑥4).(4𝑥) 40𝑥7−138𝑥5−60𝑥3

= (2𝑥2−5) 2 =
(2𝑥2−5) 2

c) Given 𝑓(𝑥) = 𝑐 (𝑥)

If in the above example 𝑥 is considered as the level of output and (𝑥) as the cost of
producing 𝑥 units then 𝑓(𝑥) = 𝑐 (𝑥) turns out to be general average cost function.
𝑥

Let (𝑥) = 𝑐(𝑥) and ℎ(𝑥) = 𝑥 differentiating individually we have

𝑔′(𝑥) = 𝑐′(𝑥) and ℎ′(𝑥) = 1 substitute the values in the formula

𝑓′(𝑥) = ℎ (𝑥).𝑔′([𝑥ℎ)( −𝑥 )𝑔]2(𝑥).ℎ′(𝑥)

𝑥 𝑥 𝑥

The economic meaning of the expression (∗) is that for positive output levels(𝑥 > 0), the

marginal cost 𝑐′(𝑥) exceeds the average cost 𝑐 (𝑥) if and only if the rate of change of the
𝑥
average cost as output increase is positive.

a) Given 𝑓
𝑥

Let and ℎ(𝑥) = 𝑥 differentiating 𝑔 and ℎ individually we have

𝑔′ and ℎ′(𝑥) = 1 substitute the values in the formula

′(𝑥)

= ℎ(𝑥).𝑔′([𝑥ℎ)( −𝑥
)𝑔]2(𝑥).ℎ′(𝑥) 𝑓

𝑥
 = 2𝑥
2 =2 𝑥2
7. Function of a function rule Chain Rule or Composite Function Rule

If 𝑧 is a function of 𝑦, and 𝑦 is a function of 𝑥, that is if 𝑧 = 𝑓(𝑦) and 𝑦 = 𝑔(𝑥) then 𝑧 is

called the composite function of 𝑥 and the derivative of 𝑧 with respect to 𝑥 is equal to the
derivative of 𝑧 with respect to 𝑥, times the derivative of 𝑦 with respect to 𝑥.this is expressed
symbolically as.
𝑑𝑧 𝑑𝑧 𝑑𝑦
=
𝑑𝑥 𝑑𝑦 𝑑𝑥

The main idea behind the chain rule is that the change in the value of the variable 𝑥 affects
the variable 𝑦, according to the function 𝑦 = (𝑥), and a change in the variable 𝑦, in turn,
affects the variable 𝑧 according to the function 𝑧 = (𝑦).

Example 2.8. Differentiate the following (Using Chain Rule)

a. = 𝑦10 Where 𝑦 = 2 + 3𝑥 b. 𝑦 = (3𝑥2 + 7)10 c. 𝑦 = 𝑥 − 𝑥6 ;where 𝑥 = 1 +

𝑧
1

Solution.

a) Given 𝑧 = 𝑦10 Where 𝑦 = 2 + 3𝑥

Differentiate 𝑧 with respect to 𝑦 and 𝑦 with respect to 𝑥

𝑑𝑧 9 and 𝑑𝑦 = 3
= 10𝑦
𝑑𝑦 𝑑𝑥

Substitute the values in the formula

𝑑𝑧 = 𝑑𝑧 . 𝑑𝑦 = 10𝑦9. 3 = 30𝑦9 = 30(2 + 3𝑥)9

𝑑𝑥 𝑑𝑦 𝑑𝑥

b) Given 𝑦 = (3𝑥2 + 7)10 let 𝑦 = 𝑢10 where 𝑢 = 3𝑥2 + 7

Differentiating 𝑦 with respect to and 𝑢 with respect to 𝑥

𝑑𝑦 9 and = 6𝑥
= 10𝑢
𝑑𝑢 𝑑𝑥

Substitute the values in the formula

𝑑𝑦 = 𝑑𝑦 . 𝑑𝑢 = 10𝑢9. 6𝑥 = 60𝑥. 𝑢9 = 60( 3𝑥2 + 7)9

𝑑𝑥 𝑑𝑢 𝑑𝑥
 c) Given 𝑦 = 𝑥 − 𝑥6 ; where 𝑥 = 1 + 1
𝑧

Differentiate 𝑦 with respect to 𝑥 and 𝑥 with respect to 𝑧

𝑑𝑦 𝑑𝑥 = 1 − 6𝑥5 and 𝑑𝑥𝑑𝑧 = −𝑧21

Substitute the values in the formula

𝑑𝑦𝑑𝑧 = 𝑑𝑦𝑑𝑥 . 𝑑𝑥𝑑𝑧 = (1 − 6𝑥5) (−𝑥21 ) = 1 − 6(1 𝑧 + 1)5. ( −𝑧21)

Example 2.9. Given a profit function of a firm = 𝑓(𝑦), where output 𝑦 is a function of labour
input L, or 𝑦 = 𝑔(𝐿),find 𝑑𝜋 By using Chain rule.
𝑑𝐿

Solution. Given 𝜋 = (𝑦) and 𝑦 = (𝐿)

Differentiating 𝜋 with respect to 𝑦 and 𝑦 with respect to L

𝜋′ Or = 𝑓′(𝑦) and 𝑦′ Or 𝑑𝑦 = 𝑔′(𝐿)

𝑑𝑦 𝑑𝐿

Substitute the values in the formula

𝑑𝜋 𝑑𝜋 𝑑𝑦 ′(𝑔(𝐿). 𝑔′(𝐿). 6
= . Or 𝑓
𝑑𝐿 𝑑𝑦 𝑑𝐿

8. Inverse Function Rule.

If = 𝑓(𝑥) , an inverse function 𝑥 = 𝑔(𝑦),that is 𝑔(𝑦) = 𝑓−1(𝑦) exists if each value of 𝑦

yields one and only one value of 𝑥.if the inverse function exists, the inverse function rule
states that the derivative of the inverse function is the reciprocal of the derivative of the
original function that is

𝑑𝑥 1
=
𝑑𝑦 𝑑𝑦
𝑑𝑥
Alternatively we can write

𝑓
−1(𝑦) = 𝑓′1(𝑥)

Example 2.10. Find the derivative for the inverse of the following functions:
 6
The Leibniz’s notation of remembering chain rule although easy suffers from the defect of not
specifying where

𝑑𝜋 𝑑𝑦 ′(𝑔(𝐿). 𝑔′(𝐿) makes it the derivatives ( , ) are

actually calculated second way of writing the chain rule i.e. 𝑓

𝑑𝑦 𝑑𝐿
obvious that 𝑓′ is calculated at 𝑔(𝐿) where as 𝑔′ is calculated at 𝐿.
a. 𝑦 = 𝑚𝑥 b. 𝑞 = 𝐿1⁄2 c. 𝐿 = 𝑞2 d. 𝑄 = 30 − 3𝑃

Solution. a) Given 𝑦 = 𝑚𝑥

Differentiating with respect to 𝑥 we have

𝑑𝑦
=𝑚
𝑑𝑥
𝑑𝑥 1 1
∴ = =
𝑑𝑦 𝑑𝑦 𝑚
𝑑𝑥

b) Given 𝑞 = 𝐿1⁄2

Differentiating with respect to we have

𝑑𝑞 1
=
𝑑𝐿 2√𝐿

𝑑𝐿 1 1
∴ = = = 2√𝐿
𝑑𝑞 𝑑𝑞 1
𝑑𝐿 2√𝐿

c) Given 𝐿 = 𝑞2

Differentiating with respect to q we have

𝑑𝐿
= 2𝑞
𝑑𝑞

𝑑𝑞 1 1
∴ = =
𝑑𝐿 𝑑𝐿 2𝑞
𝑑𝑞
 D ) Given 𝑄 = 30 − 3𝑃

Differentiating with respect to 𝑃 we have

𝑑𝑄
= −3
𝑑𝑝
𝑑𝑝 −1
∴ =
𝑑𝑄

1.1. Higher Order Derivatives : Convexity and Concavity of a Function

Up to this point we were dealing with the first order derivatives 𝑓′(𝑥) or 𝑑𝑦 .since the first
𝑑𝑥
derivative of a function is also a function of 𝑥, it too should be differentiable with respect to
𝑥 ,provided the conditions of differentiability are first satisfied. The method of obtaining the
second and even higher order derivatives of a function introduces nothing new. Once the
first order derivative is obtained by the suitable method already discussed, the second order
derivative is obtained by further use of the rules, this time applied to the first derivative is
considered as a function of 𝑥.the second order derivative of a function (𝑥) denoted by

(𝑓′(𝑥)) 𝑑2𝑦
𝑓′′(𝑥) or 𝑑𝑥 or 𝑑𝑥2

In economics we obtain many useful results by focussing on the first and second derivative
of a function. The sign, positive or negative in particular, of a second derivative of a function
leads us to an important and simple method of determining the convexity or concavity of a
function.

 A twice differentiable function (𝑥) is strictly convex at 𝑥 = 𝑥0 if 𝑓′′(𝑥0) > 0 . This means
that the function (𝑥) changes at an increasing rate as 𝑥 increases through the value
𝑥0.
 A twice differentiable function (𝑥) is strictly concave at 𝑥 = 𝑥0 if 𝑓′′(𝑥0) < 0 . This
means that the function (𝑥) changes at a decreasing rate as 𝑥 increases through the
value 𝑥0.

A function whose second derivative is sometimes positive and sometimes negative is neither
convex nor concave everywhere. However, we can, sometimes find intervals over which the
function is either convex or concave. Some possible shapes of strictly convex and concave
functions are shown in fig. 2.6
 Example 2.11. check the convexity or concavity of the following.

a. (𝑥) = 10 − 𝑥2 b. (𝑥) = 𝑥2 c. (𝑥) = − (𝑥)3 + 10𝑥2 + 5𝑥; where 𝑥 ≥ 0

Solution.

a) Here 𝑓(𝑥) = 10 − 𝑥2

Differentiating with respect to 𝑥

𝑓′ (𝑥) = −2𝑥

Differentiating again with respect to 𝑥 we have

𝑓′′ (𝑥) = −2 < 0

Since the second derivative is less than zero, it confirms that the given function is strictly
concave.6

b) Given 𝑓(𝑥) = 𝑥2

Differentiating with respect to 𝑥

6
The precise geometric classification of a strictly concave function is that if we choose any two points on its curve and join them by a straight
line, the line segment will lie completely below the curve except at the end points. For strict convex functions, the line segment will lie entirely
above the curve.
 𝑓′ (𝑥) = 2𝑥

Differentiating again with respect to 𝑥 we have

𝑓′′ (𝑥) = 2 > 0

Since the second derivative is greater than zero, it confirms that the given function is
strictly convex.

c) Given 𝑓(𝑥) = − (𝑥)3 + 10𝑥2 + 5𝑥

Differentiating with respect to 𝑥

𝑓′ (𝑥) = −2𝑥2 + 20𝑥 + 5

Differentiating again with respect to 𝑥

𝑓′′ (𝑥) = −4𝑥 + 20

Since 𝑥 can take values greater than or equal to zero. It follows that the function is
convex on the interval [0, 5) and concave on the interval (5,∞).That is

𝑓′′ (𝑥) = −4𝑥 + 20 > 0 When 𝑥 < 5 (convex)

𝑓′′ (𝑥) = −4𝑥 + 20 < 0 When 𝑥 > 5 (concave)

OR

Rules of differentiation
1. Constant function Rule: The derivative of a constant function f(x) =k, where k is constant is
zero Example, given f(x) =8, f’(x) =0.
2. Linear function Rule: The derivative of linear function f(x) = mx +b is equal to m, the coefficient
of x. f(x) = 3x +2. Then f’(x) = 3 Ans Given f(x)= 5 –(1/4)x, then f’(x) = - 1/4
3. Power function Rule: The derivative of a power function f(x) =kxn where k is a constant and n
is any real number is equal to the coefficient k times the exponent n multiplied by the variable
x raised to power n-1.
i.ef(x) = k. xnthen f’(x) = km.xn-1 example f(x)
= 4x3 then f’(x) = 4.3 x3-1 = 12 x2Ans
 4. The Rule of Sums and Differences: The derivative of a sum of two functions f(x) = g(x) + h(x)
where g(x) and h(x) are both differentiable is equal to the sum of the derivative of the
individual functions. Similarly, the derivative of the difference of two functions is equal to the
difference of the derivatives of the function.
Given f(x) = g(x) ±h(x), then f’(x) = g’(x) ±h’(x)
Example (i) f(x) = 12 x5 -4x4 then f’(x) = 12.5x4 – 4.4 x3 = 60x4 -16x3
(iii) f(x) = 9x2 +2x -3 then f’(x) = 9.2x +2 -0 = 18x +2 Ans
5. The Product Rule: The derivative of a product f(x) =g(x). h(x) where g(x) and h(x) are both
differentiable functions, is equal to the first function multiplied by the derivative of the 2 nd
function plus the 2nd function multiplied by the derivative of the first function i.e
Given f(x) = g(x) .h(x) then f’(x) =g(x).h’(x) +h(x).g’(x)
Example Given f(x) = (3x)(2x-5) then dy/dx = f’(x) = 3x3 (d/dx)(2x-5) +(2x-5) d/dx(3x3)
=3x3. 2 +(2x-5)(9x2) = 6x3 + 18x3 -45 x2 = 24 x3 – 45 x2Ans
6. The quotient Rule: The derivative of a quotient f(x) = g(x) / h(x) where g(x) and h(x) are both
differentiable and h(x) ≠ 0 is equal to the denominator times the derivative of the numerator
minus the numerator times the derivative of the denominator all divided by the denominator
squared. Give f(x) = g(x) / h(x) then f’(x) = *h(x).g’(x) –g(x)h’(x)+/*h(x)+2
Example f(x) = 5x3/(4x+3) then f’(x) = *(4x+3)(15x2) -5x3 (4)]/(4x+3)2 = (60 x3 +45x2 -20x3)/(4x
+3)2 = (40x3 +45x2)/ (4x +3)2Ans

Solved Problems
1. Differentiate the following using appropriate rules (i) f(x) =17 (ii) y =-12 (iii) y =8x 4 (iv) y = -6x5
(v)f(x) = 18 √x
Sol. (i) f(x) =17 therefore f’(x) = 0
(ii) Y = -12 therefore dy/dx = y’= 0
(iii) Y = 8x4 , dy/dx = y’ = 32 x4-1 = 32x3
(iv) Y = -6x5 , dy/dx = y’ = -6.5 x5-1 = -30 x4
(v) f(x) = 18 √x = 18x1/2 , f’(x) = 18. ½ (x(1/2)-1) = 9x-1/2 =9/√x Ans

Q2. Differentiate (i) y= (4x2 -3) (2x5) (ii) y = 7x9 (3x2 – 12)
Sol. (i) y= (4x2 -3) (2x5) using product rule we have
dy/dx = (4x2 -3) d/dx(2x5)+(2x5) d/dx (4x2 -3) =(4x2 -3) (10x4) + (8x) (2x5)
= 40 x6 -30x4 +16x6= 56x6 -30x4
(ii) y = 7x9 (3x2 – 12) using product rule dy/dx =7x9d/dx (3x2 – 12) + (3x2 – 12) d/dx (7x9)

=7x9 (6x) +(3x2 – 12)63x8 =42x10 + 189x10 -756x8 =231x10 -756x8Ans

Q3. Differentiate (i) y = ( 10x8 -6x7)/2x (ii) y = 4x5 / 1-3x x≠ 1/3

Sol. (i) y =( 10x8 -6x7)/2x then dy/dx = [2x d/dx( 10x8 -6x7) - ( 10x8 -6x7)d/dx(2x)]/(2x)2

= [( 80x7 -42x6)2x -( 10x8 -6x7)2]/ 4x2 =[( 160x8 -84x7) -( 20x8 -12x7)]/ 4x2 =(140x8 -72x7)/ 4x2

=4x2(35x6 -18x5)/ 4x2 = (35x6 -18x5) Ans

(ii) y = 4x5 / 1-3x dy/dx = [d/dx(4x5)(1-3x) - 4x5 d/dx(1-3x)]/ (1-3x)2 = [(20x4)

(1-3x) - 4x5 (-3)]/ (1-3x)2

=(20x4- 60x5+12x5)/ (1-3x)2 =(20x4- 48x5)/ (1-3x)2Ans

Q3. If y = (1 -√x)/ 1+√x) find out the dy/dx

Sol: y = (1 -√x)/ (1+√x) Differential using quotient

rule dy/dx = *(1+√x) d/dx (1 -√x) - (1 -√x) d/dx

(1+√x)+/(1+√x)2

= *(1+√x) ( -1/2x-1/2) - (1 -√x) (1/2x-1/2)+/(1+√x)2 = [ (-1/2√x)(1+√x) - (1/2√x) (1-√x)+/(1+√x)2

= (-1/2√x) -1/2 - 1/2√x +1/2+/(1+√x)2 = -2/2√x+/(1+√x)2

dy/dx =-1/√x(1+√x)2Ans

Q4. A demand function is given as q = 50 – 5p. Compute the price elasticity of demand at p=5.

Sol Given q = 50 – 5p

Differentiate with respect to p we get.

dq/dp =-5, Now at p = 5, q = 50 – 5.5 =25

Ep=( -dq/dp) (p/q)= - (-5) . 5/25 = 1 Ans

Q5. For the law of demand q = 20/p+1, find elasticity at p=4

Sol. Given q = 20/ p+1

Diff. w. r .t p we getdq/dp = [(p+1) d/dp(20) -20 d/dp(P+1)]/(p+1)2 = (p+1)(0) – 20 (1)]/(p+1)2

dq/dp = -20/(p+1)2

now at p =4, dq/dp = -20/(4+1)2 = -4/5 also at p

=4, q = 20/4 +1 = 4 therefore Ep = -dq/dp (p/q)

= -(-4/5) (4/4 )= 4/5 Ans

Q6. Given the demand curve represented by p =100 – 5q (i) Find marginal revenue for any output (ii)
Find MR when output (q=0) and q=4

Sol. P = 100- 5q, therefore R = p.q = q(100-5q) = 100q -5q2

Diff, w r t q we get, dR/dq = 100 -10q, sincedR/dq = MR

Therefore MR = 100 – 10q

(ii) when q=0, MR =100 and when q =4 , MR = 100- 10(4) = 60 Ans

Q7. The total cost is given as C= 0.005x3 – 0.02 x2 – 30x +3000Find total cost (i) when output (x) = 4

(ii) AC when output =10 (iii) MC when output =3

Sol. (i) C = 0.005x3 – 0.02 x2 – 30x +3000 at x =4

C =0.005(4)3 – 0.02 (4)2 – 30(4) +3000 = 0.320 – 0.32 – 120 +3000 = 2880 Ans

AC = TC/x= C/x = [0.005x3 – 0.02 x2 – 30x +3000 ]/x

AC = 0.005x2 – 0.02 x – 30 +3000/x at x =10

AC = 0.005(10)2 – 0.02(10) – 30 +300 = 500 – 0.20 – 30 +300 = 270.3

MC = dc/dx = d/dx (0.005x3 – 0.02 x2 – 30x +3000) = 3(0.005x2) – 2 (0.02 x) – 30 = 0.015x2 – 0.04x –
30

At x =3 , MC = 0.015(3)2 – 0.04(3) – 30 =0.135 – 0.12 – 30 = - 29. 985 Ans

Integration: Differentiation is the process of finding the derivative f’(x) of a function f(x). Frequently
in economics, however, we know that the rate of change of a function f’(x) and want to find the
original function f(x). Reversing the process of differentiation and finding the original function from
the derivative is called Integration. The original function f(x) is called the integral of f’(x)

Thus f /
(x) f(x)c

Rules of Integration:
1. The integral of a constant is ∫kdx =kx +c where c is
constant
2. ∫xn dx = (xn+1) /(n+1) 3. ∫x-1 dx =∫1/x dx = logx +c.
4. The integral of an exponential function is ∫akx dx =akx/(kloga) + c
5. The integral of a natutal exponential function is ∫ekx dx = (ekx /k) +c
6. The integral of the sum or difference of two or more functions equals the sum or difference
of their integrals ∫*f(x) + g(x)+ dx = ∫f(x) dx +∫g(x) dx

Solved Problems
Q1 Evaluate (i) ∫x4 dx (ii) ∫√x dx (iii)∫6x2 dx
Sol. (i) ∫x4 dx =(x4+1/4+1) + c = (x5 /5 ) + c Ans
 (ii) ∫√x dx = ∫x1/2 dx = (x1/2 +1/ ½ +1) +c = (x3/2 /3/2) +c = 2/3 x3/2 +c Ans
(iii) ∫6x2 dx = 6∫x2 dx =6 (x2+1 / 2+1) +c =6/3( x3) +c =2 x3 +c Ans
Q2. Evaluate ∫(3x2 – x -1) dx
Sol.∫(3x2 –x -1)dx =∫3x2dx -∫x dx -∫ dx = 3 (x2+1 /2+1) – x1+1/1+1) –x +c =3/3 (x3) -1/2 (x2) –x
+c = x3 -1/2(x2) –x +c Ans
Q3. Find ∫3x-1 dx
Sol. ∫3x-1 dx =3∫(1/)x dx = 3 log x +c Ans
Q4. Find (i) ∫9ex dx (ii)∫9e-3x dx

Sol. (I) ∫9ex dx = 9∫exdx =9ex +c , Since ex dx = ex

(ii)∫9e-3x dx = 9∫e-3x dx = 9 e-3x /-3 +c = -3e-3x +c Ans

Q5. Evaluate ∫ x (x2+1)3/2dx by substitution method

Sol. Put u = x2 +1.

Diff. w r t x we get du/dx = 2x

Therefore x dx = ½ du

Hence ∫x (x2 +1)3/2 dx =∫u3/2 (1/2) du =1/2 ∫u3/2 du =[ ½ (u(3/2)+1)/(3/2)+1]+c =[ ½ (u5/2)/5/2]+c

=[ ½ (u5/2)(2/5)]+c = 1/5 (u5/2) +c

Sub. The value of u we get

1/5 (x2 +1)5/2 +c Ans

Q6. Evaluate ∫*x/√1+x2]dx

Sol. ∫*x/√1+x2]dx Put 1+x2 =u

Diff. w r t x we get du/dx = 2x

therefore xdx = (1/2) du

∫*x/√1+x2+dx = 1/2∫*du/√u+ =

1/2∫u-1/2du = [½ (u(-1/2)+1)/(-

1/2)+1] +c =1/2 [u1/2/1/2] +c

=u1/2 +c

Substitute the value of u we get √(1+x2) +c Ans

Q7. Evaluate ∫*x5/x12+1]dx

Sol. Put x6 = u and diff w r t x we get

du/dx =6x5 therefore x5 dx = 1/6 du

∫*x5/x12+1+dx = 1/6 ∫*du/u2+1] =1/6 tan-1 u +c= 1/6 tan-1 x5 +c Because ∫dx/x2+1 = tan-1 x

Q8. Evaluate ∫*2x -7/3 (x2 -7x+6)2]dx

Put x2 -7x +6 =u and diff w r t x we get du/dx = 2x -7

∫*2x -7/3 (x2 -7x+6)2]dx = ∫du/3u2 = 1/3∫ (1/u2) du = 1/3 ∫u-2 du = 1/3 (u-2+1 /-2+1) +c = -1/3 u-1 +c

= -1/3 (1/u) +c =[ -1/3 (1/ x2 -7x +6)] +c ans

Q9 Evaluate∫*ex /1 +ex]dx

Sol. ∫*ex /1 +ex]dx

Put 1 +ex=u and diff. w r t x we get du/dx = ex and du = ex dx

Therefore ∫*ex /1 +ex]dx = ∫*du /u+ = log u +c

Substitute the value of u we get

∫*ex /1 +ex]dx = log (1+ex) +c

Q10. If MR = 800 -8q -18q2. Find TR and demand function.

SolMR = 800 -8q -18q2

TR = ∫MRdq +c =∫(800 -8q -18q2)dq+c = ∫800dq -8∫qdq -18∫q2dq +c

= 800q – (8q2/2) – (18q3/3) +c =800q – 4q2 – 6q3 +c

Demand function P =Tr/q

Or P =(800q – 4q2 – 6q3 )/q = 800 – 4q – 6q2Ans

Q11. If marginal cost function is MC = 1 + 2x +x2, Find total cost and cost function at fixed cost of Rs
100.

Sol. MC = 1 + 2x +x2

Therefore TC =∫MC dx =∫(1 + 2x +x2) =∫1dx+∫2x dx+∫x2 dx =x +2x2/2+x3/3 +c =x +x2+x3/3 +c

When x =0, fixed cost = 100 we have 100 = 0+ 0+ 0 +c or c = 100

Therefore TC = x + x2 +(x3/3) +100

AC = TC/x =[x + x2 +(x3/3) +100]/x =1+ x +(x2/3) +100/x Ans

 Some Applications of Differentiation – Single Variable Case

In economics the differential calculus has had many prolific applications. It is

convenient at this stage to list some of the functional relationships which recur most
frequently in the work of the economists:

 A production function Q= f(L) which records the maximum amount of output

that can be produced with given amount of labour.
 A cost function C = f(Q)records the total expenses C associated with production
level Q.
 A utility function U(Q), which measures the pleasure that the individual derives
from the ownership of some quantity of Q of some commodity.
 A revenue function P.Q= Q.F(Q), which shows the total income of the firm when
it sells Q units of a commodity at the price P per unit; Economists have then
adopted the following terminology:

dQ
Marginal product is the name given to
dL

Marginal cost refers dc/dq

.
Marginal utility refers to du
dq

Marginal revenue refers to dP (P.Q)

/dQ

Example 3. (a) For the total revenue function TR = 500q − 2q2, Find the value of MR
when q= 20

(b) If P = 80− 4q is the linear demand function, write out the total revenue and
hence the marginal revenue functions
Solution:
d(TR)
(a) MR = = 500 – 4q
𝑑𝑞
Thus when q = 20
MR = 500 – 80 = 420

(b) We know by definition that TR = pq.

⇒ TR = (80− 4q) q = 80q − 4q2

d(TR)
MR = =
80 – 8q
dq

Example 4. Given the following total cost function, determine the level of output
thatminimises the average cost and marginal cost:
TC = q3 − 24q2 +
600q

Solution: convert the total cost function into average cost by dividing by q

AC = q2 − 24q + 600

Now to find the minimum of the average cost function, set the first derivative of AC
function equal to zero.

d(AC)
= 2q − 24 = 0
⇒ q = 12 dq

At q = 12, the average cost function reaches its optima. The next step is to take the
second derivative of the average cost function to determine whether q=12 is its
minimum or not.

d2(AC)

=2>
0 dq

Since the second derivative of the average cost function is positive, it confirms that the
function is minimum at q=12

Now for the marginal cost function, following the same analogy

d/dq (TC) =
MC=3q2 --48q + 600
To find the minimum point on the MC curve, set the first derivative of the marginal cost
function equal to zero
MC′ = 6q − 48 = 0 ⇒ q = 8

At q=8, the MC function reaches its optima. The next step is to take the second
derivative of the MC′ to determine whether q = 8 is its minimum or not

MC′′ = 6 > 0

Since the second derivative of the MC function is positive this implies that the MC
function is minimum at q= 8.

Example 5. If C(x) is the total cost function, then using calculus show that at AC =MC
at the minimum point of AC.
Solution. By definition AC = C(x)
x

For the minimum value of the AC, we first set the first derivative equal to zero

AC′ = X (C′(X)−C(X) = 0 ⇒ AC′ = C′(X) − C (X) = 0 ⇒ C′(X) = C (X) ⇒ MC

=AC
X2 X X

Thus MC = AC only at minimum value of AC.

3.3.1. Profit Maximisation of a Firm

We will now see how calculus can help a firm maximise its profit. From the very
elementary economics, the students are well acquainted with the marginal cost equals
marginal revenue as a perquisite for profit maximisation. Let us see the derivation of
this condition. If R(Q) is the revenue function of a0 firm and C(Q) the cost function.
From these it follows that a profit function 𝛑 may be formulae as

π = R(Q) − C(Q) ..................................

(i) A firm sets its output where its marginal profit is zero.

We obtain this result formally using first order condition for a profit maximisation. We
set the first derivative of the profit function, equation (i) with respect to quantity equal
to zero.
dπ
= 0 .................................................
(ii) dQ

Equation (ii) is a necessary condition for profit to be maximised. Sufficiency requires,

in addition, that the second order condition hold:
d2π
 < 0 ....................................................... (iii)
dQ2
Because profit is a function of revenue and cost, we can state the above in one additional
way. The first order condition can be stated by setting the first order derivative of π =
R(Q) − C(Q) equal to zero.

Dπ dR dC

Dq dQ dQ

= MR − MC = 0 ⇒ MR = MC .................................................. (iv)

Equation (iv) is a first order condition which states that for profit to be maximised, the
marginal cost must be equal to marginal revenue of the output.
For profit to be maximised, the second order condition must hold.
d2π d2R d2C d(MR) d(MC)
= − = − <0
dQ 2 dQ 2 dQ 2 dQ dQ

That is, for profit to be maximised, the slope of the marginal revenue curve,
d(MR)/dQ must be
less than the slope of the marginal cost, (d(MC))/dQ curve.
The above conditions are illustrated in Fig.2.9. in Fig.2.9(a) we have drawn the total cost
and revenue curves and in Fig 2.9(b) the marginal curves are drawn.
 The necessary condition for profit maximisation is MR =MC.But as the diagram
shows, we have two points A and B.which one should it be ? at point A the slope of the
smaller than the slope of the marginal revenue curve i.e. d (MR) > d(MC).thus point A or
the out put
dQ dQ
level Q1 violates the sufficient condition for relative maximum. It is point B or the output level Q3
MR curve is numerically

where both necessary as well as sufficient conditions are

satisfied. 7
Example 6. Given the total cost function C = 5q +q 2 and the demand function q = 400 -
20p.
50
(a) Find the total revenue function
(b) Maximise the total revenue function
(c) Maximise profit function

7
In general TR= p(Q).Q
d(TR) dp(Q).Q p(Q)dQ dp(Q)
MR =
= = + . Q dQ dQ dQ dQ
 Solution: (i) We know that

TR = p. q

Let us first change the demand function

q
p = 20 −
20
Then TR = (20 − q ) q = 20q − q 2
20 20
(ii) In order to maximise the total revenue function, find the critical value(s) by
setting set the first derivative of TR function equal to zero
d(TR) q
= 20 − =0
dq 10

And we have q = 200

At critical value the total revenue function is maximised provided the sufficient
condition is satisfied
That is d
2(TR )
2
< 0 dq
d2(TR) 1
=−
< 0 dq2
10
Thus total revenue is maximised at q = 200 and the maximum total revenue is
TR = 20q − q 2 = 20(200) − ( 200)2 = 4000 − 2000 =

2000
20 20
(i) The profit function of the firm is
7q2
π = TR − TC = 15q −
100
In the above equation, the first term on the right side is the price or average revenue. the second term
is the slope
dp(Q) dp(Q) of the demand curve times the number of units sold. Under
monopoly MR<P because < 0 while under dQ dQ

perfect competition MR=P=AR

The first order condition for profit maximisation is

dπ d(TR) d(TC)
=
− =0
 dq dq dq

= 20 − q−

5− q= 0
10 25
⇒ q = 107 (Approximately)

Whether profit are maximised at q = 107, we need to ensure that the sufficient
condition is
satisfied
That is d
2π2 <

0 dq
d2π
d2(T
R)
d2(C
) 1
12
= dq2
−
dq2 = − 10
− 25 < 0 dq
Thus profit are maximised at q = 107 and the maximum profit are π = 803

3.3.2. Short run production analysis

Short run is the production period in which the input L is allowed to vary by keeping K
constant.
Thus the general format of the short run production function is written as Q= f (L,𝐾),
where 𝐾
denotes the constant amount of the capital. The short run production function in its cubic
form is drawn in the fig 2.10 (a) and the corresponding marginal and average
productivities are shown in 2.10 (b). the Marginal product curve cuts the average
product curve at its maximum. We can show this result mathematically.
LetQ = f(L, K)
The average product for labour would be (keeping capital K constant)

Q f(L, K)
=
L
The first order maximisation condition for the average product of L is,

Q
d( ) L.f′(L,K)−f(L,K)
dL L
L = 2 =0 ...................... (i)
 d2(Q)
Provided L < 0 dL

From (i) we have

f ′(L, K ) =
f(L,K) L

Or MPL = APL

From above it is obvious that marginal product curve hits average product curve when
average product is at its maximum. One more point which is significant in the figure
2.10 (b) is that marginal product reaches maximum at a smaller input of labour.

Example 7. Consider a production function given by the sixth degree equation

Q = AL2K2 − BL3K3 where A,B >0 find

 (a) Average product of labour
(b) Marginal product of labour
(c) Show that APL = MPL at the maximum of APL

(d) Show that MPL reaches maximum at lower input level than APL

Solution:

Letting AK2 = X1 and BK3 = X2 so that the production function is now given as

Q = X 1L2 − X 2L3

Now by definition

APL=X1L − X2L2 and MPL = 2 X1L − 3X2L2

Now for the maximisation of the APL,set the first derivative of APL=0
i.e. APL′ = X1 − 2X2L = 0 X
⇒L= 1
2X
2

the second order condition for the maximisation is APL′′ < 0

APL′′ = − 2X2 < 0

Thus APL is maximised at L = 2XX12 and the maximum value is

X2
(APL) L =
X1
= X122
X
At this point theMPL
value of MPL is
obtained simply
by substituting
the value L = 2X1
in
2
function
X1 . 2X12 − 3X2.
(MPL) L = X1 = 2 (2XX12)2 X
2X
2

(MPL) L = X1 = XX1222 = (APL)

L = 2XX1
2
 Thus we see that APL = MPL at the maximum of APL

Now, for the maximisation of MPL we follow the same procedure

Set the first derivative of the MPL equal to zero

MPL′ = 2X1 − 6X2L = 0 ⇒ X
L= 1
3X
2

The second order condition for the maximisation is MPL′′ < 0

MPL′′ = − 6X2 < 0

Thus MPL is maximised at L = 3XX12 and the maximum value is

X2

(MPL) L =
X =
X12
AP reaches maximum at L = X1 and MP
reaches maximum at L = X1 . Since X1,
X2, L > 0 , MP
2X 3X
2 2

reaches its maximum at a smaller input of labour than AP.

Matrices
Definition of matrix: A matrix is a rectangular array of numbers, parameters or variables each of which
has carefully ordered place within the matrix. The numbers are referred to as elements of the matrix.
The numbers in the horizontal line are called rows; the numbers in the vertical line are called columns.
The number of rows ‘m’ and columns ‘n’ defines the dimensions of the matrix (m×n