Basic Characteristics of Indian Economy

Low per capita real income, high rate of population growth, the cycle of poverty, an agro-based economy, income disparities, slow capital formation, poor infrastructural development, an imperfect market, Lack of skilled manpower, outdated technology, corruption, and a backward society are the basic characteristics of the Indian economy.

Per Capita income:

India is universally known as a country with low per capita income. A nation’s per capita income is calculated by the total sum of money earned, divided by the total population of the country. This may not reflect each individual’s actual income but shows the average annual income for an Indian citizen. Real income per capita is a measure of a country’s economic well-being that takes into account the purchasing power of its citizens. It is calculated by dividing the country’s gross domestic product (GDP) by its population and then adjusting for inflation. India’s per capita GDP grew 7.9% to a new peak of ₹2.12 lakh in FY24, nearly double of FY16. However, comparing India’s per capita income with the rest of the world shows that India lags far behind many other countries. For example, per capita income in the US is 15 times higher than that in India, while per capita income in China is more than three times higher than that in India.

High rate of population growth:

India is the most populous country in the world with one-sixth of the world’s population. India’s population grew from 361 million in 1951 to almost 1.42 billion in 2024. According to UN estimates, India overtook China in having the largest population in the world with a population of 1,425,775,850 at the end of April 2023, a 0.81% increase from 2022. The large population means the available resources would have to be shared among a large number of people, and hence each person will have fewer resources. The current population of India in 2024 is 1,441,719,852, a 0.92% increase from 2023. The growth rate of the population is ever-increasing. Hence, the available employment opportunities are not enough for the entire population. This means a great portion of the population is left unemployed, and that’s why a lot of the Indian population is below the poverty line. This also results in low per capita income. Hence, the increasing growth rate of the population hurts the Indian population.

Cycle of Poverty:

The cycle of poverty has been defined as a phenomenon where poor families become impoverished for at least three generations. The cycle of poverty is created when families permanently lack the resources to meet their most basic needs. Fundamentally, the cycle starts when a child is born into a poor family with zero or limited resources to create opportunities for advancement. The poor start with a very low level of capital per person, and then find themselves trapped in poverty because the ratio of capital per person falls from generation to generation. The amount of capital per person declines when the population is growing faster than capital is being accumulated. This vicious cycle of poverty is also known as generational poverty.

In India, poverty is officially linked to a nutritional baseline measured in calories (food energy method). The poverty lines thus defined correspond to a total household per capita expenditure sufficient to provide, in addition to basic non-food items —clothing, and transport — a daily intake of 2400 calories per person in rural areas and 2100 in urban areas. Individuals who do not meet these calorie norms fall below the poverty line. The number of undernourished people in India has declined in the last 15 years to 224.3 million in 2019-2021, according to a U.N. report, which also said that there are more obese adults and anaemic women in the world’s second most populous country.

Agro-based economy:

The Indian Economy is called an agro-economy because the agriculture sector is one of the major contributors to the country’s total GDP. Also, the sector provides jobs to more than half of the country’s population. India ranks second worldwide in farm outputs. As per the Indian Economic Survey 2020 -21, agriculture employed more than 50% of the Indian workforce and contributed 20.2% to the country’s GDP. However, agriculture’s share in India’s economy has progressively declined from 35% in 1990-91 to 15% in 2022-23 due to the high growth rates of the industrial and services sectors. A major concern for Indian agriculture is the very low productivity of this sector. The land has strong population pressure to feed a large number. Due to rural population pressure, the available land area per capita is very small and there is no benefit to obtaining higher yields.

Income disparities:

According to the World Inequality Report 2022, India is among the most unequal countries in the world. The top 10 percent of the population gets 57 percent of national income and the top 1 percent gets 22 percent – one of the most unequal income distributions. There are similar gaps in wealth; the top 1% owns 58% of India’s wealth. Today, the richest 10% in India controls 80% of the nation’s wealth, according to a 2017 report published by Oxfam (Oxford Asset Management), an international confederation of agencies fighting poverty. Another way to look at it: In India, the wealth of 16 people is equal to the wealth of 600 million people.  Further, many other people are very vulnerable, hovering just above the poverty line. The groups at greater risk of falling back into poverty include women, informal workers, and inter-state migrants. Women are only 23 percent of the labour force. According to a recent report, around 25% of Indian households don’t have access to electricity, and 97 million people lack safe drinking water. Sanitation services are not available to 840 million people.

Low capital formation:

The state of low capital formation is called capital deficiency. Savings and investments are the most important sources of capital formation. The root cause of capital deficiency in developing countries like India is the low level of real national and per capita income which limits the motives of savings and investments. Another cause of the low rate of capital formation is the lack of demand and supply for capital. Lack of demand only refers to the demand for capital of the private investors and is not considered from the point of view of the economy as a whole. The lack of incentives for private investment arises primarily from the small size of the domestic market. If the people are poor and the size of the market is small, private investment will not be very profitable and incentives for investment will automatically be poor.

Poor infrastructural development:

India’s transportation and logistics infrastructure is inadequate, leading to poor connectivity between production centers and markets. This results in increased transportation costs, long lead times, and difficulties in accessing raw materials and finished goods. One of the reasons for the slow development of infrastructure is resistance from farmers or local communities whose land is being acquired. Large road and energy projects can take several months to be awarded and if processes are not clear and impartial enough, investors hardly mobilize resources to bid.

An imperfect market:

An imperfect market is a situation where there are many sellers, but they are selling heterogeneous (dissimilar) goods as opposed to the perfect competitive market scenario.

There are four types of imperfect markets: – Monopoly (only one seller) – Oligopoly (few sellers of goods) – Monopolistic competition (many sellers with highly differentiated products) – Monopsony (only one buyer of a product).

Effect of the imperfect market:

Imperfect markets affect the GDP growth of a country and also result in a Monopoly over the prices and products. Because of the monopoly prices are said to be high and are charged for more than what is produced. There are high barriers to entry and exit in imperfect markets and the consumers get incomplete information about the prices of different products. Along with this, there are small sections of buyers and sellers in imperfect markets.

Lack of skilled manpower: India has a demographic dividend, but this advantage can only be used productively if the labour force is qualified. There is abundant manpower in the nation, but there is a dearth of skilled labour. Although various vocational training efforts have been made by the government to teach the unskilled workforce, there are still many sections of the poor who are clueless and need to be provided with the benefit of these schemes.

Outdated technology:

According to the India Inequality Report 2022[(Digital Divide by Oxfam (Oxford Asset Management)], approximately 70 percent of the population has poor or no connectivity to digital technologies while more than 60 percent of Indian households remain digitally illiterate. One of the reasons is the lack of investment in infrastructure. The developing countries’ economies depend mostly on outdated technology for producing goods and services in their economy and hence they could not compete with other developing and developed countries that all use improved technology for producing goods and services. As a result because of the use of outdated technology, gets trapped in low equilibrium growth.

Corruption: Even while the government is working hard to ameliorate the lives of those trapped in extreme poverty, little of the aid reaches the recipients because of rampant corruption and bureaucracy in the nation.

Backward Nation:

India is a rich country inherited by poor people. Despite India being culturally rich and having abundant resources, India is a backward Nation. The following are some of the reasons for the backwardness of our country.

* Up to 43% of women of working age (about 153 million) in India only do domestic work, indicating the scale of their exclusion from the workforce.

* A quarter of Indians are illiterate, with 10% of those aged six to 14 dropping out of school.

* Nearly half of all homes (47%) lack piped drinking water and sanitation.

* Diarrheal disease is an important public health problem among under-five children in developing countries. Diarrhea kills over half a million children each year, roughly 120,000 of them in India. Fortunately, the use of oral rehydration salts (ORS) could avert nearly all of these deaths. (Source: Journal of Global Health Reports). About 88% of Diarrhea deaths are caused by poor sanitation.

About 20% of India’s population lives below the poverty line. Poverty makes it difficult for people to access education, healthcare, and other basic needs. The states of Bihar, Uttar Pradesh, Madhya Pradesh, Rajasthan, and Odisha, account for 45% of India’s population and 35% of its land area. But they contribute only 28% of national income and are home to 53% of the people who live below the official poverty line in India. This represents an underutilization of our most abundant resource, people, and also our most scarce resource, land. It also suggests that there is a vast potential for development, which could transform India if only it can be mobilized.

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