Economic development is the process by which a nation improves the economic, political, and

social well-being of its people. The term has been used frequently by economists, politicians, and
others in the 20th and 21st centuries. The concept, however, has been in existence in the West for
centuries. Modernization, Westernization, and especially Industrialization are other terms people
have used while discussing economic development. Economic development has a direct
relationship with the environment and environmental issues.[further explanation needed]

Whereas economic development is a policy intervention endeavor with aims of economic and
social well-being of people, economic growth is a phenomenon of market productivity and rise
in GDP. Consequently, as economist Amartya Sen points out, "economic growth is one aspect of
the process of economic development".

Growth and development

Economic growth deals with increase in the level of output, but economic development is related
to increase in output coupled with improvement in social and political welfare of people within a
country. Therefore, economic development encompasses both growth and welfare values.

Dependency theorists argue that poor countries have sometimes experienced economic growth
with little or no economic development initiatives; for instance, in cases where they have
functioned mainly as resource-providers to wealthy industrialized countries. There is an
opposing argument, however, that growth causes development because some of the increase in
income gets spent on human development such as education and health.

According to Ranis et al., economic growth and development is a two-way relationship.

According to them, the first chain consists of economic growth benefiting human development,
since economic growth is likely to lead families and individuals to use their heightened incomes
to increase expenditures, which in turn furthers human development. At the same time, with the
increased consumption and spending, health, education, and infrastructure systems grow and
contribute to economic growth.

In addition to increasing private incomes, economic growth also generate additional resources
that can be used to improve social services (such as healthcare, safe drinking water, etc.). By
generating additional resources for social services, unequal income distribution will be mitigated
as such social services are distributed equally across each community, thereby benefiting each
individual. Concisely, the relationship between human development and economic development
can be explained in three ways. First, increase in average income leads to improvement in health
and nutrition (known as Capability Expansion through Economic Growth). Second, it is believed
that social outcomes can only be improved by reducing income poverty (known as Capability
Expansion through Poverty Reduction). Lastly, social outcomes can also be improved with
essential services such as education, healthcare, and clean drinking water (known as Capability
Expansion through Social Services). John Joseph Puthenkalam's research aims at the process of
economic growth theories that lead to economic development. After analyzing the existing
capitalistic growth-development theoretical apparatus, he introduces the new model which
integrates the variables of freedom, democracy and human rights into the existing models and
argue that any future economic growth-development of any nation depends on this emerging
model as we witness the third wave of unfolding demand for democracy in the Middle East. He
develops the knowledge sector in growth theories with two new concepts of 'micro knowledge'
and 'macro knowledge'. Micro knowledge is what an individual learns from school or from
various existing knowledge and macro knowledge is the core philosophical thinking of a nation
that all individuals inherently receive. How to combine both these knowledge would determine
further growth that leads to economic development of developing nations.

Yet others believe that a number of basic building blocks need to be in place for growth and
development to take place. For instance, some economists believe that a fundamental first step
toward development and growth is to address property rights issues, otherwise only a small part
of the economic sector will be able to participate in growth. That is, without inclusive property
rights in the equation, the informal sector will remain outside the mainstream economy, excluded
and without the same opportunities for study.

Economic Growth And Development

 Economic growth means an increase in real national income / national output.

 Economic development means an improvement in the quality of life and living standards,
e.g. measures of literacy, life-expectancy and health care.
 Ceteris paribus, we would expect economic growth to enable more economic
development. Higher real GDP enables more to be spent on health care and education.
 However, the link is not guaranteed. The proceeds of economic growth could be wasted
or retained by a small wealthy elite.

Economic growth measures an increase in Real GDP (real output). GDP is a measure of the
national income / national output and national expenditure. It basically measures the total volume
of goods and services produced in an economy.

Economic development

Development looks at a wider range of statistics than just GDP per capita. Development is
concerned with how people are actually affected. It looks at their actual living standards and the
freedom they have to enjoy a good standard of living.

Measures of economic development will look at:

 Real income per head – GDP per capita

 Levels of literacy and education standards
 Levels of healthcare e.g. number of doctors per 1000 population
 Quality and availability of housing
 Levels of environmental standards
 Life expectancy.

Measures of economic development

Measuring economic development is not as precise as measuring GDP because it depends on
what factors are included in the measure.

There are several different measures of economic development, such as the Human development
index (HDI)

Factors affecting economic growth in developing countries

 Levels of infrastructure – e.g. transport and communication

 Levels of corruption, e.g what percentage of tax rates are actually collected and spent on
public services.
 Educational standards and labour productivity. Basic levels of literacy and education can
determine the productivity of the workforce.
 Levels of inward investment. For example, China has invested in many African countries
to help export raw materials, that its economy needs.
 Labour mobility. Is labour able to move from relatively unproductive agriculture to more
productive manufacturing?
 The flow of foreign aid and investment. Targeted aid, can help improve infrastructure and
living standards.
 Level of savings and investment. Higher savings can fund more investment, helping
economic growth.

Economic growth without development

It is possible to have economic growth without development. i.e. an increase in GDP, but most
people don’t see any actual improvements in living standards.

1. Economic growth may only benefit a small % of the population. For example, if a
country produces more oil, it will see an increase in GDP. However, it is possible, that
this oil is only owned by one firm, and therefore, the average worker doesn’t really
benefit.
2. Corruption. A country may see higher GDP, but the benefits of growth may be syphoned
into the bank accounts of politicians
3. Environmental problems. Producing toxic chemicals will lead to an increase in real GDP.
However, without proper regulation, it can also lead to environmental and health
problems. This is an example of where growth leads to a decline in living standards for
many.
4. Congestion. Economic growth can cause an increase in congestion. This means people
will spend longer in traffic jams. GDP may increase but they have lower living standards
because they spend more time in traffic jams.
5. Production not consumed. If a state-owned industry increases output, this is reflected in
an increase in GDP. However, if the output is not used by anyone then it causes no actual
increase in living standards.
6. Military spending. A country may increase GDP by spending more on military goods.
However, if this is at the expense of health care and education it can lead to lower living
standards.
 Under Developed Economy

Anybody would know an underdeveloped country when he sees one. It is a country

characterised by poverty, with beggars in the cities, and villagers eking out a bare subsistence in
the rural areas.

It is a country lacking in factories of its own. It usually has insufficient roads and rail-roads,
insufficient government services and poor communication. It has few hospitals and few
institutions of higher learning.

Most of its people cannot read and write. In spite of the generally prevailing poverty of the
people, it may have isolated islands of wealth with a few persons living in luxury. Its banking
system is poor, small loans have to be obtained through money-lenders who are little better than
extortionists.

Characteristics

The following characteristics of an underdeveloped economy are found in the Indian economy:

1. Low per Capita Income:

An underdeveloped country is a poor country. The per capita income of the people of India is
very low in comparison with that of the USA, the UK, Canada, Australia and Japan. In 1992-93
India’s per capita income was as low as Rs. 6248 (current prices) while it was 40 times higher in
the USA, India’s poverty was the legacy of the colonial rule.

The low per capita income is reflected in the low standards of living of the people. In India food
is the major item of consumption and about 75 per cent of the income is spent on it compared to
20 per cent in advanced countries.

People in India mostly take cereals and other starches to the total absence of nutritional foods
such as meat, egg, fish and dairy products. Education is an integral part of the country’s
development process; yet only 52 per cent people of India are literate.

People live in extremely insanitary conditions and without any proper medical care. Thirty-five
per cent of the people are below the poverty line, who are ill-fed, ill-clothed, ill-housed and ill-
educated. Poverty is the basic problem facing the country.

2. Inequitable Distribution of Wealth and Income:

Like most underdeveloped countries the distribution of income and wealth in India is inequitable.
The gap between the haves and the have-nots over the years has actually widened and there has
been concentration of wealth and economic power in the hands of a few to the detriment of the
common people.
This is not surprising because private ownership of the means of production inevitably leads to
concentration of wealth in a few hands. Income inequalities result from the concentration of
wealth and capital.

Economic growth in a capitalist economy has a tendency to increase disparities in income

distribution. The various estimates made by different committees indicate that the inequalities of
income and wealth have widened rather than narrowed as a result of planned economic
development in India. The problem of mass poverty is a corollary to income inequalities.

3. Predominance of Agriculture:

In an underdeveloped country two-thirds of the people live in rural areas and their main
occupation is agriculture. A developed economy is generally a highly industrialised country
where agriculture occupies a comparatively less important place.

The larger part of the national income is derived from agriculture and allied pursuits whereas the
share of the manufacturing sector is only 17 per cent of the national income. In a developed
economy, a comparatively smaller proportion of the population is dependent on agriculture; it is
only 3 per cent in the USA whereas in India about 65 per cent of the population is dependent on
agriculture.

The heavy concentration in agriculture is a symptom of poverty. Agriculture as the main

occupation of the people of India is mostly unproductive. It is mainly carried on in an old fashion
way with obsolete methods of production.

As a result, the yield from land is very low and the peasants continue to live at a bare subsistence
level. In the recent past, attempts have been made to adopt modern agricultural technology which
has increased agricultural productivity. Even then yields for major food crops in India are much
below those in the USA or Japan or UK.

4. Deficiency of Capital:

Another criterion of underdevelopment is the low ratio of capital availability per head of
population. An underdeveloped economy is an economy in which the available stock of goods is
not sufficient to employ the total available labour force on the basis of modern technique of
production.

Not only the existing stock of capital is small but the current rate of capital formation is also very
low. Because of shortage of capital, there is a tendency to invest the available capital in farming
and labour-intensive consumer goods industries rather than in the heavier capital-intensive
capital goods industries.

There are a number of reasons for capital deficiency: (i) shortage of savings, (ii) the tendency of
the meager savings to go into conspicuous consumption and (iii) speculative investment rather
than productive investment.
Over the planning period both savings and investment rates have risen in India. In 1992-93, the
rates of gross domestic saving and gross domestic capital formation were 13.5 and 16.0 per cent
respectively.

Such rates of capital formation are generally considered enough to achieve a reasonably high rate
of growth but in India this has not been the case. This appears to be due to the fact the capital-
output ratio has become more unfavourable than was assumed by the planners.

5. High Rate of Population Growth:

Like all other underdeveloped countries, the population of India has been increasing at an
alarmingly high rate. India’s population was 85 crores in 1991 as against 68 crores in 1980 and
the country has the second largest population in the world next to China.

The country is passing through the second stage of demographic transition which is characterised
by a falling death rate without a corresponding decline in birth rate. At present the rate of
increase of population in India is 2.5 per cent per annum which comes to 15 million persons per
annum.

This has resulted in population explosion which neutralises the small gains of development
which the country has made during the period of economic planning. An increase in population
raises the ratio of people to land and other sources of raw materials and as a result, production
tends to decline per unit of variable cost in the concerned industries.

This trend is clearly visible in Indian agriculture. Over the years per head agricultural land has
steadily declined due to rapid growth of population.

Underdeveloped countries have also a shorter life expectancy which means a smaller fraction of
their population is available as effective labour force.

Life expectancy at birth is 59 years in India whereas in the USA it is 70 years. Low life
expectancy means that there are more children to support and few adults to provide for them
which inhibit the rate of economic growth.

Another feature of the demographic pattern in underdeveloped countries is that a much larger
proportion of the total population is in the younger age group. In India, population below 15
years of age accounts for nearly 40 per cent of the total population while it ranges between 23
and 25 per cent in the USA and the UK.

6. Unemployment and Underemployment:

Widespread unemployment and underemployment is an important feature of the Indian

economy. Owing to huge population, the supply of labour far exceeds the demand for labour. It
is very difficult to provide gainful employment to all.
The main reason is that there is a shortage of capital. India does not have sufficient amount of
capital to expand industries so that the entire labour force is absorbed.

The nature of unemployment in India is different from what it is in the developed countries. In a
developed economy, unemployment is of a cyclical nature and occurs due to lack of effective
demand. In contrast, unemployment in India is structural and has arisen due to lack of capital.

The Committee of Experts on unemployment pointed out that 30 million persons were
unemployment in India in 1981.

What is more serious is that the number of unemployed is on the increase. In agricultural sector
there is widespread disguised unemployment while in the urban areas there is open
unemployment.

There are two reasons for urban unemployment. First, the failure of the industrial sector to
expand at a fast enough rates has resulted in industrial unemployment. Secondly, expansion of
education has created demand for white collar jobs which the country’s urban economy has
failed to provide.

7. A Dualistic Economy:

All the underdeveloped countries including India have a dualistic economy. One is the market
economy and the other is the subsistence economy.

One is in the urban areas and the other is in the rural areas. One is developed and the other is
undeveloped. The modern or the developed part contains mainly the large scale industry, mines
and plantations.

It is well organised and highly monetised. It uses the modern techniques of production. Workers
and employers in this sector are well organised. Monetary and fiscal measures of regulation are
quite effective. This advanced sector of the economy accounts for a small part of the whole
economy.

The primitive part mainly comprises agriculture and is confined to rural areas. This is very
backward and money does not play an important part in this sector. There is a high degree of
self-sufficiency and people do very little buying and selling as most of the transactions are of a
barter type.

A large part of the credit is supplied by the traditional money-lenders. Monetary and fiscal
measures of regulation are not very effective. Indian peasant is born in debt, lives in debt and
dies in debt. Income of the people of this inorganised sector is very low. Thus, the Indian
economy is characterised by economic dualism.

8. Technical Backwardness:
The state of technology in the underdeveloped countries is backward. On account of the absence
of technological development, India has continued to use old, outdated and primitive methods of
production which were discarded by the developed countries long ago.

Deficiency of capital hinders the process of scrapping the old techniques and equipment and its
replacement with modern techniques, etc. Illiteracy and absence of skilled labour are the other
major hurdles in the spread of techniques in the backward economy.

However, it is gratifying to note that the level of technology is rapidly increasing in the country
and India has the largest number of technically qualified personnel in the third world countries

Nature Of Indian Economy.

Basically Indian economy is a mixed economy. It's a developing economy.

Agricultural is the main occupation and still around 70% people are involved in
agricultural sector, wide spread poverty. The ability to save is very low ,low capital
formation, low investment, population grows at a high rate about 2% per annum.
The standard of living of the people is very low.pee hectare and per worker
productivity is very low, backward production techniques, low real per capita
income, widespread unequal income distribution.