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The exports of an underdeveloped country usually consist of raw materials or ores or fruits or some staple products. Often the extraction or cultivation of these raw material exports is in the hands of foreign companies.

Whatever be the criteria, India is at present an underdeveloped economy.


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

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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.

Categories: Industry


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