NATIONAL LAW UNIVERSITY ODISHA

B.B.A. LL.B
SEMESTER- IV
READING MATERIAL
BUSINESS ECONOMICS

Prepared by
Dr Madhubrata Rayasingh
Asst Professor (Economics)
Email: madhubrata@[Link]
Mobile: (+91)9439912624
Module 5: Macroeconomic Problems & Policies

- Unemployment & Poverty in India- Employment Policy; MGNREGA and Social

Auditing; The Mauritian Miracle; Reasons Behind Less Creative Jobs; Informality of
Employment in India;
- Multidimensional Poverty Index; Amartya Sen’s Capability Poverty Measure; Critical
Evaluation of Poverty Alleviation Programmes
- Business Cycle- Depression, Recovery, Boom, Recession; Theories of Trade Cycle
- Inflation and Deflation- Concept, Types, Causes & Impact
- Monetary Policy and Fiscal Policy- Definition, Instruments, Working; Synthesis of
Fiscal and Monetary Policies i.e., Policy Mix
- Sustainability and Climate Change: India and the World
____________________________________________________________________________________________________

Subject ECONOMICS

Paper No and Title 8- Economic Planning In India: Overview & Challenges

Module No and Title 18- Poverty

Module Tag ECO_P8_M18

ECONOMICS PAPER No. : 8- ECONOMIC PLANNING IN INDIA :

OVERVIEW AND CHALLENGES
MODULE No. : 18- POVERTY
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TABLE OF CONTENTS
1. Learning Outcomes
2. Introduction
2.1HumanPovertyIndex
3. Relative and Absolute Poverty
3.1 Relative poverty
3.2 Absolute poverty
3.3 Poverty line
4. Causes of poverty
4.1 Different causes of poverty in India
4.2 Measures to reduce poverty
5. Summary

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OVERVIEW AND CHALLENGES
MODULE No. : 18- POVERTY
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1. Learning Outcomes
After studying this module, you shall be able to

 Know the concept of Poverty

 Learn the types of Poverty
 Identify poverty line and poverty ratio
 Evaluate how poverty is measured
 Analyze the causes of Poverty

2. Introduction
Poverty is a multi-dimensional concept. It is basically a socio-economic phenomenon in
which a portion of the society is deprived of the basic amenities of life. The definition of
poverty has differed from country to country and also time to time for a nation. The third
world countries exhibit higher levels of poverty than the developed world.

Though attempts have been made in all countries to define poverty, but the difference
arises as to ‘what minimum standard of living’ should be. The similarity happens because
everyone is unanimous on deprivation concept. The concept of Poverty in developed
countries is significantly different from India because the average person is able to afford
a much higher standard of living there. Invariably, there is an effort in all definitions of
poverty to approach ‘the average level of living’ and the acceptance of the existence of
inequalities. To quote Swami Vivekananda “In human society too much wealth or too
much poverty is a great impediment to the higher development of the soul. It is from the
middle classes that the great ones of the world come. Here the forces are very equally
adjusted and balanced”.

Amartya Sen's ‘Capability Approach’ adds a new dimension to understanding poverty.

He points out that poverty cannot be measured properly by income or even the goods and
services available to the people or even by utility as conventionally accepted. What really
matters is not the things a person has but what a person can do or does with those things.
Thus, it is the capability to function that decides welfare and therefore happiness.

2.1 HUMAN POVERTY INDEX (HPI)

The Human Poverty Index was introduced by the United Nation’s Human Development
Report in 1997 with a view to measuring the extent of deprivation and the degree of
poverty in a country. The HPI Index uses the same parameters as are used in the Human
Development Index (HDI) such as, Longevity, Knowledge and Living standards. The
HPI Index also includes other parameters as:
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1. Vulnerability to death at a relatively early age as measured by percentage of people

with probability of death before the age of forty years.

2. Adult illiteracy rate as measured by percentage of illiterate adults in total adult

population.

3. Living standards as measured by three variables, viz/; the percentage of people with
access to

(i) health services

(ii) safe drinking water

(iii) malnourished and underweight children below the age of five years.

The HPI is the average of the above three components and measures deprivation on a
scale of one to one hundred. The Countries with high HDI rankings have lower HPI
rankings. In India, the HPI value is around thirty, showing a medium level of deprivation.

3. RELATIVE AND ABSOLUTE POVERTY

Two types of standards have been commonly used in economic parlance: The Absolute
and The Relative.

3.1 RELATIVE POVERTY:

Relative poverty refers to the income or asset position of one class or group of people in
comparison with the other classes or groups, or one individual vis-a –vis the other. The
essential point of significance is that poverty of one is relative to the richness of the other.
For example, an average middle class person is relatively poor when compared to an
upper middle class person. The upper middle class person is relatively poor in
comparison to the richer persons. This kind of comparison does not take into account the
level of economic conditions, whether he is sufficiently endowed or not. The condition of
the person is understood in relation to what others have. The concept of relative poverty
is essentially a problem of inequality: inequality of income and ownership of assets.

3.2 ABSOLUTE POVERTY:

The concept of Absolute poverty is associated with a minimum level of living or minimum
consumption requirements of food, clothing, house, health and so on. Therefore, absolute poverty
can be defined as the ‘inability to achieve the minimum requirements of life, health and efficiency
ECONOMICS PAPER No. : 8- ECONOMIC PLANNING IN INDIA :
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MODULE No. : 18- POVERTY
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due to very low income or inadequate assets’. Poverty is viewed as a ‘state of absolute
deprivation’ Absolute poverty is defined in terms of a certain normative minimum level of living
operationally measured by’ consumption expenditure’ that is necessary to ensure that ‘ minimum
desirable level of living’. Therefore, all those people who are deprived of these minimum
consumption requirements are categorized as poor.

The minimum consumption requirements includes

i. a reasonable satisfactory nutritional diet

ii, reasonable clothing, housing etc

iii. Access to minimum level of education, health, water facilities etc.

Absolute poverty is a more comprehensive concept than relative poverty, as it manifests itself in
denial of basic/minimum ‘human requirements’ of food, clothing, shelter , education ,health and
so on. The eradication of absolute poverty is challenging but nonetheless one of the most
important priority of every country. Thus, a state of absolute poverty is characterized by low life
conditions in the form of disease, illiteracy, malnutrition, and squalor which denies a minimal
state of human existence. Poverty is also taken as ‘denial of human rights’ and is a major
challenge for the planners,

3.3 POVERTY LINE:

Absolute poverty is measured by ‘Poverty Line’ which refers to some cut-off level in terms of
consumption or income level. The extent of poverty in a country is measured by the number of
people who live below the poverty line and their ratio to the total population.(poverty ratio).

Poverty line is drawn on the basis of expenditure that is necessary to secure the minimum
acceptable living standard, according to the work and efficiency. Poverty line is drawn on the
basis of a minimum necessary nutritional requirement, which is expressed in calorie intake of a
person (2,400 calories for rural and 2100 calories for urban areas). The minimum calorie intake
for rural areas is higher than the urban areas because rural people put in more physical efforts in
comparison to the population in urban areas.

Poverty ratio is the ratio of the number of people below poverty line to the total population. The
poverty ratio is high in the rural areas in comparison to the urban areas.

The Planning Commission estimates poverty using data from sample surveys on household
expenditure carried out by National Sample Survey Organization (NSSO) every five year. It
defines poverty line on the basis of monthly per capita consumption expenditure (MPCE). The
methodology used by the Planning Commission is based on the recommendations of experts.

The Expert group headed by late Prof. Suresh Tendulkar in its report in December 2009 has
measured the poverty lines at all India level as monthly per capita consumption expenditure
(MPCE) of Rs. 447 for rural areas and Rs. 579 for urban areas in 2004-05.
ECONOMICS PAPER No. : 8- ECONOMIC PLANNING IN INDIA :
OVERVIEW AND CHALLENGES
MODULE No. : 18- POVERTY
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Poverty lines and poverty ratio have been updated by the Planning Commission. It has been
estimated as Rs 673 for rural areas and Rs 860 for urban areas in [Link] based on these
cut-off, the percentage of people living below the poverty line in the country was 29.8 percent in
2009-10.

TABLE 1: POVERTY RATIO AND NUMBER OF PEOPLE BELOW POVERTY LINE

YEARS POVERTY RATIO NUMBER

(crores)
1973-74 54.9 32.1
1977-78 51.3 32.9
1983-84 44.5 32.3
1987-88 38.9 30.7
1993-94 36.0 32.0
2004-05 27.5 30.2

Source: Planning Commission Reports and Economic Survey of India (various issues)

TABLE 2: NUMBER AND PERCENTAGE OF POOR –RURAL -URBAN

Year Number of poor (million) Poverty Ratio (percent)

Rural Urban Total Rural Urban Total
1973-74 261 60 321 56.4 49.0 54.9
1977-78 264 65 329 53.1 45.2 51.3
1983-84 252 71 323 45.7 40.6 44.5
1887-88 232 75 307 39.1 38.2 38.9
1993-94 244 76 320 37.3 32.4 36.0
2004-05 221 80.8 302 28.3 25.7 27.5
2009-10 278.2 76.5 354.7 33.8 20.9 29.8

Source: Planning Commission Reports and Economic Survey of India (various issues)

From the Table 2, we can see that the incidence of poverty is higher in the rural areas than the
urban areas. It is also clear that the overall poverty ratio is declining at the all India average. The
decline in the number of rural poor in spite of rapid increase in population has been caused

(i) due to the large number of anti-poverty programmes launched by the government from time
to time.

(ii) due to the effects of migration wherein rural population moves to towns and cities in search
of better economic avenues/employment and consequent urbanization .

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4. CAUSES OF POVERTY:

4.1 DIFFERENT CAUSES OF POVERTY IN INDIA

The World Bank in its Report, World Development Report (2005), pointed out that on the
basis of the International poverty line rate of $1 per day, 34.7 percent of the population in
India in 1999-00 would be placed below poverty line. This shows that the problem of
poverty is chronic in India and needs to be tackled through developmental measures.
Poverty still exists in spite of six decades of planning and specific poverty removal
schemes. Poverty is deep rooted on account of various reasons, out of which the most
important ones are:

1. Rapid growth of population:

Rapid increase in population has been a major factor responsible for high incidence of
poverty. Between 1951 and 2001, about 66 crores of people were added to the existing
population. From 36 crores in 1951, the population in 2014 is 120 billion. Unfortunately;
the pace of development has been slow. During the period 1951-81, there was a massive
increase in population on account of a high birth rate and a rapidly declining death rate.
The growth rate of population per annum was 1 percent at the time of independence
increased to 2.22 percent in 1981, tended to moderate to 2.14 percent in 1991 and came
down to 1.93 percent in 2001 and is 1.72 percent in 2011. Heavy population means
higher burden of dependents and consequently low savings and investments and a low
level of economic growth. Thus, high population growth and a slow rate of economic
growth depress the growth rate of per capita income.

2. Underdeveloped structure of the economy:

Indian economy still exhibits pockets of backwardness, particularly evident in the

agricultural sector. Since, a majority of the population depend on agriculture for
livelihood, the low productivity of the sector leads to low levels of income and poverty.
Not only agriculture, our industrial sector too is slow and the lack of infrastructure leads
to a slow growing output. Higher productivity of sectors has led to overall GDP growth
rate and low levels/negligible poverty in developed countries.

3. Inequalities in income and Asset ownership:

An important reason for wide scale poverty is the growing inequalities in income
distribution and ownership of assets. Because of lack of education, skill and so on, a large
section of population are unable to reap opportunities to develop. The rich becomes richer
and the poor becomes poorer. Most of the development opportunities are pocketed by
few. The World Development Report, 2001-02 of the World Bank points out that the top

ECONOMICS PAPER No. : 8- ECONOMIC PLANNING IN INDIA :

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MODULE No. : 18- POVERTY
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20 percent of people in India have a 46 percent share of national income while the bottom
20 percent have less than 8 percent share. Inequality perpetuates further inequality.

4. Chronic unemployment and Underemployment:

India is a vast country with chronic unemployment –seasonal, structural, frictional, and
open and underemployment. There are problems of educated unemployment and
disguised unemployment .Though large number of employment schemes have been
launched by the governments but the number of job seekers is too large in comparison to
the jobs created. There is huge backlog of unemployed youths resulting in
unemployment, poverty.

5. Inflation:

Rising prices/inflation is a common feature of developing economies. Rising prices leads

to falling purchasing power and real incomes. The fixed income group suffers immensely
as compared to the business class. Particularly, the unorganized sector comprising of
casual workers, labourers, rickshawallahetc are driven to poverty on account of rising
prices.

4.2 MEASURES TO REDUCE POVERTY:

Apart from the following indirect measures for countering poverty, there are direct
measures/anti-poverty schemes running both at urban and rural areas.

1. Accelerate the growth rate of GDP- develop agriculture, promote village and small
industries to create employment opportunities.

2. Growth should be employment oriented.

3. Inclusive growth process – emphasis on rural areas, marginal sections of society,

4. Reducing inequalities in income and asset ownership-

5. Reduce the growth rate of population

6. Impart vocational training along with education

7. Design proper monetary policy to control price rise.

ECONOMICS PAPER No. : 8- ECONOMIC PLANNING IN INDIA :

OVERVIEW AND CHALLENGES
MODULE No. : 18- POVERTY
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8. Poverty alleviation programmes should be accompanied by asset creation, self-

employment initiatives.

9. Programmes to ensure accessibility to minimum standards of education, health, roads,

drinking water.

The Anti-poverty programmes were designed to make a direct attack on poverty. These
programmes included self-employment and income generating schemes for the poor like,

IRDP (Integrated Rural Development Programme, Training of Rural Youth for Self
Employment (TRYSEM), Rural Landless Employment Guarantee Programme (RLEGP),
National Rural Employment Programme. These were redesigned and restructured and
merged to form a single programme named Swarnajayanti Gram Yojana (SGSY) from
April 1, 1999.

The objective of the SGSY is to help the poor families to cross the poverty line by
providing them income yielding assets- such as sewing machines to poor women, pair of
bullocks to plough,-through a mix of government subsidies and bank loans.

The Pradhan Mantri Gramodaya Yojana (PMGY) launched in 2000-01 for alleviation of
poverty in rural areas.

The Indira AwasYojana (IAY) a major scheme launched to build houses (free of cost) for
the poor.

Antodaya Anna Yojana (AAY) launched in 2000 to provide highly subsidized foodgrains
to the poor people.

The National Food for Work programme was launched in november14,2004 in 150
backward states of India with the objective of providing more opportunities of wage
employment and ensuring minimum nutritional levels for the rural poor.

The National Rural Employment Guarantee Act (NREGA) was passed in 2005 to
enhance the livelihood security of people in rural areas by generating wage employment
through works that develop infrastructure base of the area. The NREGA provides that
every State government shall make a scheme for providing not less than 100 days of
guaranteed work in a financial year to every household in the rural areas,

The ValmikiAmbedkarAwasYojana (VAMBAY) was launched in 2001 to help the urban

slum dwellers by facilitating the construction and up gradation of dwelling units and to

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provide a healthy urban environment. Under the scheme, public toilets are also
constructed.

The Jawaharlal Nehru National Urban Renewal Mission (JNNURM) was launched in
2005-06 for poverty removal in the urban areas. The mission comprises of (i) basic
services to the urban poor (ii) Integrated Housing and Slum Development (IHSDP). This
programmes will help the urban poor in construction of houses and upgradation of slums.

5. Summary

 Poverty is a multi-dimensional concept. It is basically a socio-economic

phenomenon in which a portion of the society is deprived of the basic amenities
of life.
 The definition of poverty has differed from country to country and also time to
time for a nation. The third world countries exhibit higher levels of poverty than
the developed world.
 Though attempts have been made in all countries to define poverty, but the
difference arises as to ‘what minimum standard of living’ should be. The
similarity happens because everyone is unanimous on deprivation concept.
 The concept of Poverty in developed countries is significantly different from
India because the average person is able to afford a much higher standard of
living there. Invariably, there is an effort in all definitions of poverty to approach
‘the average level of living’ and the acceptance of the existence of inequalities.
 AmartyaSen‘s ‘Capability Approach’ adds a new dimension to understanding
poverty. He points out that poverty cannot be measured properly by income or
even the goods and services available to the people or even by utility as
conventionally accepted. What really matters is not the things a person has but
what a person can do or does with those things. Thus, it is the capability to
function that decides welfare and therefore happiness.
 The Human Poverty Index was introduced by the United Nation’s Human
Development Report in 1997 with a view to measuring the extent of deprivation
and the degree of poverty in a country.
 The HPI Index uses the same parameters as are used in the Human Development
Index (HDI) such as., Longvity, Knowledge and Living standards. The HPI Index
also includes other parameters as: Vulnerability to death at a relatively early age
as measured by percentage of people with probability of death before the age of
forty years. Adult illiteracy rate as measured by percentage of illiterate adults in
total adult population. Living standards as measured by three variables, viz/; the
percentage of people with access to health services, safe drinking water,
malnourished and underweight children below the age of five years.
 The HPI is the average of the above three components and measures deprivation
on a scale of one to one hundred. The Countries with high HDI rankings have

ECONOMICS PAPER No. : 8- ECONOMIC PLANNING IN INDIA :

OVERVIEW AND CHALLENGES
MODULE No. : 18- POVERTY
____________________________________________________________________________________________________

lower HPI rankings .In India, the HPI value is around thirty, showing a medium
level of deprivation
 Relative poverty refers to the income or asset position of one class or group of
people in comparison with the other classes or groups, or one individual vis-a –vis
the other.
 The essential point of significance is that poverty of one is relative to the richness
of the other. The concept of relative poverty is essentially a problem of inequality:
inequality of income and ownership of assets.
 The concept of Absolute poverty is associated with a minimum level of living or
minimum consumption requirements of food, clothing, house, health and so on.
 Therefore, absolute poverty can be defined as the ‘inability to achieve the minimum
requirements of life, health and efficiency due to very low income or inadequate assets’.
 Poverty is viewed as a ‘state of absolute deprivation’ Absolute poverty is defined in terms
of a certain normative minimum level of living operationally measured by’ consumption
expenditure’ that is necessary to ensure that ‘ minimum desirable level of living’.
 .
 Absolute poverty is a more comprehensive concept than relative poverty, as it manifests
itself in denial of basic/minimum ‘human requirements’ of food, clothing, shelter ,
education ,health and so on.
 The eradication of absolute poverty is challenging but nonetheless one of the most
important priority of every country. Thus, a state of absolute poverty is characterized by
low life conditions in the form of disease, illiteracy, malnutrition, and squalor which
denies a minimal state of human existence.
 Poverty is also taken as ‘denial of human rights’ and is a major challenge for the
planners,
 Absolute poverty is measured by ‘Poverty Line’ which refers to some cut-off level in
terms of consumption or income level.
 The extent of poverty in a country is measured by the number of people who live below
the poverty line and their ratio to the total population. (Poverty ratio).
 Poverty line is drawn on the basis of expenditure that is necessary to secure the minimum
acceptable living standard, according to the work and efficiency.
 Poverty line is drawn on the basis of a minimum necessary nutritional requirement, which
is expressed in calorie intake of a person (2,400 calories for rural and 2100 calories for
urban areas). The minimum calorie intake for rural areas is higher than the urban areas
because rural people put in more physical efforts in comparison to the population in
urban areas.
 Poverty ratio is the ratio of the number of people below poverty line to the total
population.
 The poverty ratio is high in the rural areas in comparison to the urban areas.
 The Planning Commission estimates poverty using data from sample surveys on
household expenditure carried out by National Sample Survey Organization (NSSO)
every five year. It defines poverty line on the basis of monthly per capita consumption
expenditure (MPCE). The methodology used by the Planning Commission is based on
the recommendations of experts.

ECONOMICS PAPER No. : 8- ECONOMIC PLANNING IN INDIA :

OVERVIEW AND CHALLENGES
MODULE No. : 18- POVERTY
____________________________________________________________________________________________________

 The Expert group headed by late Prof. Suresh Tendulkar in its report in December 2009
has measured the poverty lines at all India level as monthly per capita consumption
expenditure (MPCE) of Rs. 447 for rural areas and Rs. 579 for urban areas in 2004-05.
 Poverty lines and poverty ratio have been updated by the Planning Commission. It has
been estimated as Rs 673 for rural areas and Rs 860 for urban areas in [Link]
based on these cut-off, the percentage of people living below the poverty line in the
country was 29.8 percent in 2009-10.
 Poverty is deep rooted on account of various reasons, out of which the most
important ones are: Rapid growth of population, underdeveloped structure of the
economy, Inequalities in income and Asset ownership, chronic unemployment
and Underemployment, inflation.
 MEASURES TO REDUCE POVERTY:
 Accelerate the growth rate of GDP- develop agriculture, promote village and
small industries to create employment opportunities, Growth should create
employment
 Inclusive growth process – emphasis on rural areas, marginal sections of society,
 Reducing inequalities in income and asset ownership- , Reduce the growth rate of
population
 Impart vocational training along with education, Design proper monetary policy
to control price rise.
 Poverty alleviation programmes should be accompanied by asset creation, self-
employment initiatives, Programmes to ensure accessibility to minimum
standards of education, health, roads, drinking water.

ECONOMICS PAPER No. : 8- ECONOMIC PLANNING IN INDIA :

OVERVIEW AND CHALLENGES
MODULE No. : 18- POVERTY
____________________________________________________________________________________________________

Subject ECONOMICS

Paper No and Title 8: Economic Planning in India: Overview & Challanges

Module No and Title 20: Unemployment

Module Tag ECO_P8_M20

ECONOMICS PAPER No. 8: Economic Planning in India: Overview &

Challenges
MODULE No. 20: Unemployment
____________________________________________________________________________________________________

TABLE OF CONTENTS
1. Learning Outcomes
2. Introduction
3. Theories of Unemployment
4. Types of Unemployment
5. Causes of Unemployment
6. Consequences of Unemployment
7. Unemployment in India at a glance
8. Looking Ahead

ECONOMICS PAPER No. 8: Economic Planning in India: Overview &

Challenges
MODULE No. 20: Unemployment
____________________________________________________________________________________________________

1. Learning Outcomes
After studying this module, you shall be able to know about

 The basic categorization of unemployment

 The reasons and consequences of unemployment
 Reasons for soaring unemployment in India
 Policy actions needed to cure this issue

2. Introduction

Unemployment is a glaring problem in mostly every nation today. Developed, developing

or underdeveloped countries all face the problem with the difference lying in the extent of
unemployment. According to a report by the International Labour Organisation over 201
million people were unemployed in 2014 around the world, which were over 31 million
more than before the start of the global crisis of 2008. The global unemployment is
expected to increase by 3 million in 2015 and by a further 8 million in the following four
years. Youth, especially young women, continue to be disproportionately affected by
unemployment. Approximately 74 million young people (aged 15–24) were looking for
work in 2014. The youth unemployment rate is practically 3 times higher than the
unemployment rate of their adult counterparts. The heightened youth unemployment
situation is common to all regions and is occurring despite the trend improvement in
educational attainment. This is creating social discontent.
This paper takes us through the basic concepts of Unemployment and the possible
measures how to create more jobs and bring down the unemployment rate.
Unemployment can be defined as a state where people who are willing to work are
unable to find work and earn a living. It occurs when the supply of labour is more than
the demand for labor. To know the extent of unemployment we calculate what is known
as the unemployment rate. It is calculated as a percentage by dividing the number of
unemployed individuals by all individuals currently in the labour force. There are many
debates regarding the causes, consequences and solutions for unemployment.

ECONOMICS PAPER No. 8: Economic Planning in India: Overview &

Challenges
MODULE No. 20: Unemployment
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3. Theories of Unemployment

Time and again there have been various economic literature on unemployment to explain
the root cause of unemployment. These have addressed the problem
1. Classical Theory: According to this theory market is characterized with a smooth
labour demand and supply curve. The wage rate adjusts itself to ensure there is
equilibrium between demand for labour and supply for labour. Since the market is
free to adjust, everyone seeking a job finds a job. The figure represents a labor
market where demand curve and supply curve of labour are given. The
equilibrium is marked as “E” which is point of intersection of both the curves. At
E labour demand is equal to labour supply. At In such a scenario there is no
involuntary unemployment. At any point above E there will be unemployment.
Classical economics argue 40
that unemployment in this
35
case can only occurs due
obstruction in the functioning 30
of the labour market. These 25
E
obstructions can be
20
interventions such as wage rate Supply of
unionization, bureaucratic 15 labour
work rules, minimum wage 10
Demand for
laws, taxes, and other 5 labour
regulations that according to
0
them discourage the hiring of 10 20 30 40 50 60 70
workers. This theory units of labour
proposes getting rid of all
regulations and social
programs that hinder the functioning of a free market. The recommendation is
based on the principle of laissez faire i.e. leave it alone.
2. Keynesian Theory: This theory on unemployment on the other hand sheds light
upon the cyclical nature of unemployment and recommends government
interventions in the economy will reduce unemployment during recessions. It
emphasizes on recurrent shocks that suddenly reduce aggregate demand for goods
and services and thus reduce demand for workers. A reduction in demand calls for
organisations to cut down on production and costs, which means they lay-off
workers. Thus according to this theory unemployment is a result of fall in
aggregate demand. Keynesian models recommend government interventions
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Challenges
MODULE No. 20: Unemployment
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designed to increase demand for workers; these can include financial stimuli,
publicly funded job creation, and expansionist monetary policies. Keynes
believed that the root cause of unemployment is the desire of investors to receive
more money rather than produce more products, which is not possible without
public bodies producing new money.

4. Types of Unemployment

In addition to the above mentioned theories of unemployment, there are a few

categorizations of unemployment that are used to more precisely show the effects of
unemployment within the economic system

1. Voluntary Employment: At a very basic level, unemployment can be broken

down into voluntary unemployment- unemployment due to people willingly
leaving previous jobs and now looking for new ones
2. Involuntary unemployment- It is the unemployment that occurs due to people
getting laid off or fired from their previous jobs and needing to find work
elsewhere. Involuntary unemployment as a larger problem than voluntary
unemployment since voluntary unemployment likely reflects utility-maximizing
household choices.
3. Frictional Unemployment: Frictional unemployment is unemployment that
occurs when people are moving from one job to another for a better opportunity.
The transitional period when a person is looking for a job and when he finds one
he is considered unemployed. However such employment usually lasts for shorter
periods and is not a cause of concern from the economy’s point of view. Students
looking for jobs for first time, an individual looking for a new job because of
location change or a women re-entering the work force after having children are
all examples of frictionally employed people.
4. Cyclical Unemployment: Cyclical or demand deficient unemployment is the
unemployment that occurs due to business cycles. In periods of high economic
growth or economic boom there is high demand for goods and services and
companies hire more people to produce more to meet the increasing demand.
However during recessions or depressions when there is low demand companies
tend to lay-off workers to cut down production and costs. This leads to a situation
ECONOMICS PAPER No. 8: Economic Planning in India: Overview &
Challenges
MODULE No. 20: Unemployment
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where supply of labor is more than the demand for labour, thus unemployment.
Since this kind of unemployment is associate with business cycles its called
cyclical unemployment. As the economy recovers the unemployment tends to
naturally disappear. Thus the cause of concern for economists is not cyclical
unemployment but the root cause of recession, which causes it.
5. Structural Unemployment: There are two ways to look at structural
unemployment. One way is that such kind of unemployment occurs because some
labor markets have more workers than there are jobs available, and for some
reason wages don't decrease to bring the markets into equilibrium. Another way is
that structural unemployment results when workers possess skills that aren't in
high demand in the marketplace and lack skills that are in high demand. In other
words, structural unemployment results due to a mismatch between workers' skills
and employers' needs. Structural unemployment is considered as a significant
problem, because structural unemployment tends to be largely of the long-term
nature and retraining workers is not a cheap or easy task.
6. Disguised Unemployment: This kind unemployment mostly occurs in
developing and underdeveloped economies where the agriculture sector is the key
source of employment. Since agriculture is a family occupation and income is on
sharing basis there are usually more people working on a piece of land than
required. The marginal productivity of an additional workers is zero or negligible.
Works who contribute nothing towards the output are said to be disguisedly
unemployed.
7. Seasonal unemployment: It is unemployment that occurs because the demand
for some workers varies widely over the course of the year. For example, Pool
lifeguards. Seasonal unemployment can be thought of as a form of structural
unemployment, mainly because the skills of the seasonal employees are not
needed in certain labor markets for at least some part of the year. Seasonal
unemployment is considered less chronic as it forms a regular pattern and
resurfaces from time to time.
8. Technological Unemployment: This kind of unemployment occurs when due to
adoption of a new technology workers are displaced. This one of the most
prevalent today. The use of new technology is not only bringing down costs but
ECONOMICS PAPER No. 8: Economic Planning in India: Overview &
Challenges
MODULE No. 20: Unemployment
____________________________________________________________________________________________________

also producing better products. Thus there is greater incentive to move towards
better technology. However the adoption in technology is at much faster rate than
the creation of new opportunities of the workers displaced. The economies are not
able to absorb the millions losing jobs.

5. Causes of Unemployment
The theories on unemployment and the categorizations gives us basic understanding of
the kind of unemployment that exists in different countries. The major concern of any
country is structural unemployment as this long-term unemployment and various policy
actions are required to bring down this kind of unemployment. We will now discuss
various reasons for structural unemployment.

1. Slow growth of GDP: In developed economies, there is a strong link relation

between GDP growth and employment creation. A sluggish growth of GDP can
dampen job creation.

2. Rapid changes in technology: The use of modern technology is the one of the
biggest reasons for increase in unemployment. It’s a cause that is common
worldwide. As technology is progressing there is lesser need for manual labour
and more demand for skilled labour. The developed nations are faster in adjusting
in adjusting to the new technology have lesser people unemployed as they gave
better educational and training facilities. However the countries where major
labour force is unskilled the issue is even bigger. The new technology is
displacing hundreds of people, as they don’t have the necessary skills or the
institutions to develop these skills.

3. Lack of capital: Most countries, which face high unemployment, are those who
have shortage of capital. When new projects start they create million jobs for both
skilled and unskilled labour. However countries facing shortage of capital cannot
invest in such projects to create such jobs. Moreover the lack of capital inhibits a
country’s capacity to build institutions to train labour and meet the growing
market demand. Thus such countries have large pool of unskilled labour force.

4. Over Population: Another reason for high unemployment is high rate of

population growth. Large population puts a pressure on the economy’s resources
and further aggravates the unemployment issue.

5. Low Level of Education: As the technology is advancing there is a demand for

skilled labour force. However if the educational level in a country is low then it
cannot have a skilled set of labour force. Thus unemployment increases due to
low level of education.
ECONOMICS PAPER No. 8: Economic Planning in India: Overview &
Challenges
MODULE No. 20: Unemployment
____________________________________________________________________________________________________

6. Poverty: Another major reason for high unemployment in a country is mass level
poverty. Poverty means people cannot afford good educational facilities. This
means that level of education is low and thus these people cannot get a job as they
do not meet the desired level of skill set. Thus either it increases structural
unemployment or disguised unemployment.

7. Poor performance of Agriculture sector: This issue is relevant for all countries
that have agriculture as a primary sector. This sector creates disguised
employment at large scale. Eg. In India agriculture provides employment to
approximately 60% of the population where its contribution to GDP is just 15.1.
This means the marginal productivity of an additional labour is negligible. Just
like India most of the developing and underdeveloped countries are agrarian in
nature and stuck in between the transition from agriculture to service sector
oriented economy

6. Consequences of Unemployment

1. Increase in Poverty: unemployment as defined earlier is the state where people

willing to work are unable to find work. Thus if people cant find work it means
they don’t have money which increases the extent of poverty.

2. Increase in Inequality: Unemployment has led to increase in the income gap

among people. Since the rich are able to afford better education hence better skills
they get easily absorbed in the labour market. However the poor or the less
privileged that have lesser access are unable to find jobs matching their skills.
Thus this further increased the inequality gap.

3. Low level of living Standard: No income means people cannot afford basic
amenities such as a clean drinking water and sanitation also. Thus countries that
have high unemployment rate have a low standard of living.

4. Less Access to healthcare: Poverty due to lack of unemployment opportunity

further inhibits the unemployed from accessing healthcare services. Poor health
itself constraints physical strength of workers lowering further employment
opportunities.

5. Social Cost: As we all know an empty mind is a devil’s workshop the increase in
unemployment is directly related to the growth of crime rate. People unable to
find jobs find themselves stealing murdering and getting all sorts of crimes to

ECONOMICS PAPER No. 8: Economic Planning in India: Overview &

Challenges
MODULE No. 20: Unemployment
____________________________________________________________________________________________________

make money. Social cost is also in terms of loss in self-esteem of a person looking
for a job. He/she may have the skills but due to lack of demand for his skills
he/she is unable to find the job for his/her potential. Incase the person in question
doesn’t want to settle for anything lower he/she might remain unemployed which
also lowers the self-esteem.

6. Loss of national output: Unemployment also involves a loss of potential national

output. This is because when an economy is operating below full employment
level it implies GDP is below potential. It is a waste of scarce resources.
Moreover lack of opportunities may cause some people to permanently move out
of labour market because they have lost the motivation of looking for a job. This
can have a negative effect on long run aggregate supply and thereby damage the
economy’s growth potential. Some economists call this the “hysteresis effect”.
When unemployment is high there will be an increase in spare capacity - in other
words the output gap will become negative and this can have deflationary forces
on prices, profits and output.

7. Fiscal costs: Government loss comes in form of loss of potential tax revenue and
higher spending on welfare benefits and unemployment benefits. This results in
increase in pressure on the budget deficit. This increases the risk of government
raising taxes to meet the deficit or cutting down various expenditures.

7. Unemployment in India at a glance

The unemployment situation in India currently is quite grim. It has averaged around 9%
from the period from 1983-2014. Most of the unemployment is structural in nature,
which means the economy is not able to absorb the growing labour force. Since India is
an agrarian economy major source of occupation is this sector. However the growth in
this sector has been very slow. The agriculture sector employs approximately 60% of the
labour force but only contributes around 15.1% to the GDP. 1/3 of the labour force in this
sector is disguisedly unemployed. The wages are extremely low due to large labour
supply. Agricultural labourers and self-cultivating farmers constitute approximately 42
and 47 percent of the rural poor. Most of these people are stuck in the vicious circle of
poverty. Low wages in this sector have further increased poverty and inequality. The low
wages have forced people to seek work outside which has led to the growth in the
informal sector. This sector consists of all the people who have shifted out of agriculture
and yet not found work in the secondary or tertiary sectors. It consists of cobblers,
hawkers, barbers, plumbers etc.
Low productivity of the agriculture, over population, High income Inequality, low
educational level and acute poverty are factors that have contributed to unemployment.
Government has tried to implement many employment generation schemes of which
MGNREGA being the biggest. This scheme ensured 100 days of unemployment to
workers enrolled under this scheme.

ECONOMICS PAPER No. 8: Economic Planning in India: Overview &

Challenges
MODULE No. 20: Unemployment
____________________________________________________________________________________________________

Food for work is another such program providing wage employment in drought-affected
areas where wages are paid partly in cash and partly in food grains. Prime Minister
Employment Generation Program is another initiative by the GOI to promote self-
employment ventures/projects in both rural and urban India.

Government has also initiated training programs to enhance the skills of the people. But
poor implementation of these programs have not only failed the policies but increased the
fiscal burden also.

8. Looking Ahead

Now the big question that arises is how can an ailing job market be cured and what can
be done to create more jobs and promote decent work. There are few policy actions that
can be taken by the government to reduce unemployment.

1. Increase aggregate demand: Increase in aggregate demand means increase in

output to meet the demand. This means organizations need to hire more workers
to increase production. This can be done through an expansionary monetary
policy or an expansionary fiscal policy.

2. Government Expenditure of Infrastructure and Public Works Projects: Most

developing countries do not have adequate infrastructure. So one of the best ways
to create jobs is public expenditure on infrastructure such as roads, buildings,
hospitals schools etc. This not only creates demand for skilled workers like
engineers and managers who design such structures but also unskilled workers
like masons and plumbers.

3. Developing institutes and better training programs: Another step towards

combatting unemployment is to develop institutes, which gives training to
workers. There is mass level unemployment due to a mismatch between the
demand for skill and supply. To bridge the gap a government needs to build
institutions which give professional training so that can get a better opportunities
in the market. Building such institutes it self gives employment opportunities to
people who have the ability to give the training like teachers for example.

4. Support to small and medium scale enterprises: Large organizations have

easier access to capital and economies of scale in operation. However banks
reluctance to fund the small-scale operations that have little or no cash and
uncertain prospects and a relatively small number of customers. The central
government should shoulder some of the risk of small business loans and provide
new incentives for banks to lend to smaller businesses.

ECONOMICS PAPER No. 8: Economic Planning in India: Overview &

Challenges
MODULE No. 20: Unemployment
____________________________________________________________________________________________________

Government should support the struggling business enterprises as they have the
potential to create many job opportunities.

5. Providing Unemployment Benefits: Unemployment benefits should be provided

to those who register them as unemployed with an undertaking that they will
actively look for work. This is a form a social security for the unemployed. It
prevents them from falling into acute poverty. Increase in unemployment also
means fall in the purchasing power of these people. By government ensuring
social security to these people government can prevent fall in aggregate demand
and ensure the unemployed do not resort to crime and other means of income.

Unemployment is a disease affecting millions of people world wide and it is time joint
effort be made to cure this problem.

ECONOMICS PAPER No. 8: Economic Planning in India: Overview &

Challenges
MODULE No. 20: Unemployment
2/27/25, 8:45 PM Breaking India’s Jobless Growth Trap

DAILY Course
Noida | IAS GS Foundation EDITORIAL BASED
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Indian Economy

BREAKING INDIA’S JOBLESS GROWTH TRAP

09 Jul 2024 16 min read

Tags: GS Paper - 3 Employment Growth & Development Skill Development Human Resource GS Paper - 2

Government Policies & Interventions


This editorial is based on “Welfarism is not the solution for India’s job problem, skill creation is” which was published in The
Indian Express on 09/07/2024. The article highlights the urgent need to address India's unemployment crisis by implementing
long-term job creation policies, emphasizing vocational training, wage subsidies, and basic income supplements to boost

demand and create sustainable employment opportunities.

For Prelims: Share of Manufacturing Sector in India’s GDP, Economic recession, Skill India, Gig economy, Industry 4.0, Skill
India Mission, Pradhan Mantri Kaushal Vikas Yojana, Apprentice Protsahan Yojana, Production Linked Incentive Schemes,
e-SHRAM Portal.

For Mains: Reasons for India’s Jobless Growth, Major Government Initiatives to Bridge the Employment Gap.


India's urban landscape is a canvas of ambition. Modern metropolises pulsate with economic activity, attracting a steady stream
of young graduates seeking their fortunes. For countless young Indians, the city lights represent the beacon of opportunity. They

arrive with dreams of a better life, fueled by years of education and ambition. However, these dreams are increasingly deferred by
the harsh reality of urban unemployment.

India faces a critical challenge of creating good-quality jobs, especially for its young population. This issue has persisted across

decades, with economic growth failing to keep pace with job creation. India needs to shift focus on creating a future-proof
workforce equipped to navigate the demands of the evolving Indian economy. By addressing this challenge head-on, India can
ensure its cities remain engines of growth and opportunity for all.

Why Is India's Economic Growth Not Corresponding with Sufficient Job Creation?

Paradox of High-Skill, Low-Employment Sectors: India's economic growth has been predominantly
driven by services and capital-intensive manufacturing sectors, which typically generate fewer
jobs relative to their economic output.

The IT sector, for instance, contributes significantly to GDP but employs only about 4.5 million
people directly.

This trend is further exemplified by the recent push for advanced manufacturing, such as in
semiconductors and electronics.

While these industries boost economic indicators, they often fall short in creating large-scale
employment opportunities, particularly for the less skilled workforce.

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Premature Deindustrialization and Its Impact: India is experiencing premature deindustrialization,

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where the share of manufacturing in both GDP and employment begins to decline at a much lower
level of per capita income compared to developed countries.

This trend, partly driven by global competition and automation, limits the ability of the
manufacturing sector to absorb surplus labor from agriculture, traditionally a key pathway for jo
creation in developing economies.

Impact of Global Economic Trends: India's job market is increasingly influenced by global economic
trends. Protectionist policies in developed economies have affected India's export-oriented

industries, impacting job creation in these sectors.

Moreover, global supply chain disruptions, economic recession (over 4.25 lakh tech employees
lost jobs in 2023) have highlighted vulnerabilities in certain industries and their employment

 potential.

Skill Mismatch: The rapid pace of technological change has created a significant gap between the
skills demanded by the job market and those possessed by the workforce.

The 2015 Report on National Policy on Skill Development and Entrepreneurship had estimated
that only 4.7% of the total workforce in India had undergone formal skill training, highlighting a
severe shortage of job-ready skills.

Recent initiatives like Skill India, while ambitious, have struggled to meet targets and ensure
successful job placements.

 This mismatch not only leads to unemployment but also underemployment, where individuals
work in roles below their qualification level or potential.

Informal Sector Dominance: Over 90% of India's workforce is employed in the informal sector,
characterized by lower productivity, limited job security, and minimal social protections.

This prevalence of informal work not only affects job quality and worker welfare but also
hampers overall economic productivity and the ability to create sustainable, high-quality jobs.

The gig economy and platform-based work have created new employment opportunities but
also introduced job market precarity.

These platforms offer flexible work but often lack job security, benefits, and career growth
prospects.

Demographic Dividend Challenge: India adds approximately 12 million people to its workforce
annually, creating an immense pressure on job creation.

To absorb these new entrants and address existing unemployment, the economy needs to
generate 10-12 million jobs per year.

However, job creation has consistently fallen short of this target.

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2/27/25, 8:45 PM Breaking India’s Jobless Growth Trap

This failure to harness

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potentially leading to social unrest and economic instability.

'Missing Middle' and MSME Subsidence: India's industrial landscape is marked by a predominance
of very small firms (with less than 50 workers) and a few very large corporations, with a
conspicuous absence of mid-sized firms.

This 'missing middle' phenomenon hampers job creation, as mid-sized firms typically have the
highest potential for employment generation and scaling up.

The lack of adequate growth from small to medium enterprises stunts overall job creation in
 the formal sector.

Also, the MSME sector, initially hit by demonetization and further exacerbated by the COVID-
19 pandemic, continues to struggle in its recovery efforts, hampering job growth.

Impact of Automation and AI: Emerging technologies, particularly automation and artificial
intelligence, are reshaping the job landscape across sectors.

The McKinsey Global Institute estimates that 9% of India's workforce could be displaced by
automation by 2030.

While these technologies create new job roles, they often require high-skill levels, potentially
 exacerbating unemployment among less skilled workers.

Mismatch Between Academia and Industry 4.0: India's traditional education system, often fails to
equip students with the critical thinking and practical skills required in the modern job market.

The India Skills Report found that only 47% of Indian graduates were employable in 2019,
highlighting a significant gap between academic qualifications and job readiness.

 This mismatch not only leads to unemployment among graduates but also creates
inefficiencies in the labor market, where companies struggle to find suitable candidates despite
a large pool of job seekers.

Regional Disparities in Growth and Job Creation: Economic growth and job opportunities in India
are heavily concentrated in a few urban centers, leading to significant regional imbalances.

This concentration creates migration pressures, with workers moving from less developed
regions to urban areas in search of employment.

What are the Major Government Initiatives to Bridge the Employment Gap?

Skill Development and Training Programs:

Skill India Mission: Launched in 2015, this flagship program aims to train millions of youth in
industry-relevant skills through various schemes like Pradhan Mantri Kaushal Vikas Yojana
(PMKVY) and National Skill Development Corporation (NSDC).

Apprenticeship Initiatives: Schemes like Apprentice Protsahan Yojana (APY) incentivize

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Apprenticeship Initiatives: Schemes like Apprentice Protsahan Yojana (APY) incentivize
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companies to hire apprentices, providing on-the-job training and experience for young
individuals,

Under this Scheme 50% of prescribed stipend paid to the apprentices is shared by the
Government of India.

Incentivizing Job Creation:

Aatmanirbhar Bharat Rojgar Yojana (ABRY): Introduced during the pandemic, this scheme
provides wage subsidies to employers who create new jobs and retain existing ones.

 Production Linked Incentive (PLI) Schemes: These schemes offer financial incentives to
companies in specific sectors (like electronics, automobiles) to boost domestic manufacturing
and create jobs.


Fostering Entrepreneurship and Self-Employment:

Pradhan Mantri Mudra Yojana (PMMY): Provides microloans to aspiring entrepreneurs for
starting or expanding small businesses.

Stand-Up India: This initiative aims to promote entrepreneurship among women and Scheduled
Castes/Scheduled Tribes by facilitating bank loans.

Addressing the Informal Sector:

e-SHRAM Portal: This online platform aims to register informal workers, improving their access
to social security benefits and potentially formalizing their employment.

State-Specific Initiatives:

Indira Gandhi Urban Employment Guarantee Scheme- Rajasthan


What Measures can be Adopted to Boost Job Creation in India?

Localized Skill Ecosystems: Create micro-level skill development hubs aligned with local industry
needs.

These hubs would offer tailored training programs based on the specific requirements of
industries in each region, ensuring a direct pipeline of skilled workers to local employers.

Green Jobs Transition Fund: Establish a dedicated fund to support workers transitioning from
carbon-intensive industries to green jobs.

This fund would provide retraining, relocation assistance, and temporary income support,
facilitating a smoother shift towards a sustainable economy while minimizing unemployment.

Gig Worker Cooperatives: Promote the formation of worker-owned cooperatives in the gig
economy. These cooperatives would provide gig workers with better bargaining power, shared
resources, and a safety net, while still maintaining the flexibility of gig work.
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AI Job Augmentation Program: Implement a national program to train workers in AI-assisted job
roles. Instead of viewing AI as a job destroyer, this initiative would focus on creating new job
categories that combine human skills with AI capabilities, increasing overall productivity and
employment.

Circular Economy Job Clusters: Develop specialized industrial clusters focused on circular
economy principles. These clusters would create jobs in recycling, upcycling, and sustainable
product design, fostering a new sector of employment while addressing environmental concerns.

Micro-Manufacturing Networks: Encourage the creation of decentralized, small-scale

manufacturing units connected through digital platforms.

This network can be led by MSMEs through credit guarantee schemes that would enable
distributed production, reducing the need for large factories while creating jobs in smaller
 towns and rural areas.

Nano-Entrepreneur Incubation Zones: Establish specialized zones in tier-2 and tier-3 cities focused
on nurturing ultra-small businesses.

These zones would provide shared resources, mentorship, and market linkages for
entrepreneurs starting with as few as 10-15 employees, targeting rapid scaling to 40-50
employees within 1-2 years.

Precision Agriculture Employment Initiative: Launch a nationwide program to train and employ
youth in high-tech, precision agriculture techniques.

This would include drone operations for crop monitoring, data analytics for yield optimization,
and IoT-based farm management, creating a new category of tech-savvy agricultural
professionals.

Accelerating the Passage of DESH Bill: Accelerating the passage of the DESH Bill, which replaces
the Special Economic Zones Act, can create a flexible framework for attracting investments and
generating employment.

It facilitates the development of specialized hub development based on regional strengths

through more GIFT Cities like Gujarat’s, while enabling partnerships with economically similar
cities abroad.

Also, by integrating the sister cities concept, India can foster international economic
cooperation, facilitating skill development, technology transfer, and market access.

Drishti Mains Question:

Discuss the challenges faced by India's job market in keeping pace with economic growth. What long-term policies can b
implemented to address these issues?

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IAS Preparation (/free-ias-prep/) > UPSC Preparation Strategy (/free-ias-prep/upsc-exam-strategy/) > Mgnrega

(/free-ias-prep/mgnrega/)

Mahatma Gandhi National Rural Employment

Guarantee Act (MGNREGA)

Latest Update about MGNREGA UPSC

In March 2023, the government declared new wage rates for unskilled manual workers under
the Mahatma Gandhi National Rural Employment Guarantee Act, 2005.

MGNREGA UPSC Notes

Download PDF Here

News in detail:

For the financial year 2023-24, under sub-section(1) of Section 6 of the Mahatma
Gandhi National Rural Employment Guarantee Act, 2005, the Ministry of Rural
Development has notified the new wage rates. It will become effective from 1st April
2023.

Changes in the Consumer Price Index – Agriculture Labour (CPI-AL) is used by the
Ministry of Rural Development to revise the wages under MGNREGA.

Recent changes introduced in wages:

Wage hike ranges from Rs. 7 to Rs. 26 per day, which is an increase of 2% to 10%.

As per the wage revisions carried out, the highest rate of wage, which is Rs. 357 per
day has been fixed for Haryana and the lowest wage of Rs. 221 per day has been fixed
for Madhya Pradesh and Chhattisgarh.

The highest percentage increase has been recorded for Rajasthan, where wages
rose from Rs. 231 per day in 2022-23 to Rs. 255 per day for 2023-24, making a 10.39%

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3/19/25, 11:15 AM MGNREGA (Mahatma Gandhi National Rural Employment Guarantee Act) Notes For IAS Preparation

hike.

The lowest percentage hike is reported in Goa, where wages increased from Rs. 315
per day in 2022-23 to Rs. 322 per day in 2023-24.

The Union Government has made it mandatory for payments to be made for MGNREGA
beneficiaries through the Aadhar-Based Payment System or ABPS. Know more about this
development in the link, payment system for MGNREGA ([Link]
prep/mgnrega-payment-system-upsc-notes/).

The Union government has allocated Rs.72000 crores for The Mahatma Gandhi National Rural
Employment Guarantee Act, (MGNREGA) scheme in 2021-22. Candidates should know about
Mahatma Gandhi NREGA as it holds importance not only while you are an IAS Exam
([Link] aspirant but also when you become an administrator,
knowledge of this scheme will be helpful.

Quick Facts about MGNREGA UPSC:

MGNREGA Full Form Mahatma Gandhi National Rural Employment Guarantee

Act

When was the MGNREGA 2nd February 2006

Scheme officially launched?
The Mahatma Gandhi National Rural Employment
Guarantee Act was passed on 23rd August 2005

What was MGNREGA earlier It was known as the National Rural Employment
called? Guarantee Act

Are MGNREGS and MGNREGA the MGNREGS is a scheme which is based on the MGNREGA
same? (Act)

Number of Districts covered As of 11th February 2021; 708 districts are covered
under the MGNREGA Scheme?

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3/19/25, 11:15 AM MGNREGA (Mahatma Gandhi National Rural Employment Guarantee Act) Notes For IAS Preparation

Key Stakeholders under Wage seekers

MGNREGA Gram Sabha (GS)

Three-tier Panchayati Raj Institutions (PRIs)

Programme Officer at the Block level

District Programme Coordinator (DPC)

State Government

Ministry of Rural Development (MoRD)

Civil Society

Other stakeholders (In line departments,

convergence departments, Self-Help Groups
(SHGs)

What is MGNREGA Job Card? It is a document that renders a worker entitled for work
under the MGNREGA Scheme

Mandate of Mahatma Gandhi Provision of at least 100 days of work that provides
NREGS guaranteed wage in a financial year

MGNREGA Official Website [Link]

MGNREGA Notes are important for the Civil Services Examination ([Link]
services-exam/) preparation. Candidates can get notes of similar important topics from
the links below:

1. Indian Polity Notes for UPSC ([Link]

2. Important Acts in India ([Link]

3. Supreme Court Judgements in India ([Link]

supreme-court-judgments-upsc/)

4. Government Schemes ([Link]

MGNREGA & Workers Crisis – COVID Pandemic

Finance Minister Nirmala Sitharaman on March 26th, 2020, workers under the MGNREGA would
get a hike of Rs. 2000 each on average. It was also announced that three crore senior citizens,
persons with disabilities, and widows will get a one-time additional amount of Rs 1,000 in two
instalments which will be provided through DBT (Direct Benefit Transfer) over three months. This
announcement was made as an initiative towards the loss caused by the Covid-19 outbreak.
The 21-day lockdown was expected to cost the Indian Economy a cost of around 9 lakh crores.

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3/19/25, 11:15 AM MGNREGA (Mahatma Gandhi National Rural Employment Guarantee Act) Notes For IAS Preparation

Funds worth Rs 31,000 crore are also to be provided to augment medical testing, screening, and
providing better healthcare facilities to those who have been affected financially due to the
COVID-19 outbreak.

It is an important topic for the General Studies Syllabus ([Link]

prep/syllabus/upsc-mains-general-studies-paper-syllabus/) of the UPSC for Civil Services
Exam 2023. This government scheme is covered under Economic and Social Development for
Prelims and Economy for Mains.

Enhance your UPSC 2024 ([Link] preparation today!

To practice questions on Economy and Government Schemes for Prelims, check out:

UPSC MCQ: Economy ([Link]

IAS Prelims: UPSC MCQs On Government Schemes ([Link]

mcq-government-schemes/)

MGNREGA History:
In 1991, the P.V Narashima Rao government proposed a pilot scheme for generating
employment in rural areas with the following goals:

Employment Generation for agricultural labour during the lean season.

Infrastructure Development

Enhanced Food Security

This scheme was called the Employment Assurance Scheme which later evolved into the
MGNREGA after the merger with the Food for Work Programme in the early 2000s.

Objectives of MGNREGA:
The Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) has the following
objectives:

Provide 100 days of guaranteed wage employment to rural unskilled labour

Increase economic security

Decrease migration of labour from rural to urban areas

MGNREGA differentiates itself from earlier welfare schemes by taking a grassroots-driven

approach to employment generation. The programs under the act are demand-driven and
provide legal provisions for appeal in the case, work is not provided or payments are delayed.
The scheme is funded by the central government which bears the full cost of unskilled labour
and 75% of the cost of material for works undertaken under this law. The central and state
governments audit the works undertaken under this act through annual reports prepared by

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the CEGC (Central Employment Guarantee Council) and the SEGC (State Employment
Guarantee Councils). These reports have to be presented by the incumbent government in the
legislature.

A few salient features of the scheme are:

It gives a significant amount of control to the Gram Panchayats for managing public
works, and strengthening Panchayati Raj Institutions. Gram Sabhas are free to accept or
reject recommendations from Intermediate and District Panchayats.

It incorporates accountability in its operational guidelines and ensures compliance and

transparency at all levels.

Ever since the scheme was implemented, the number of jobs has increased by 240% in the past
10 years. The scheme has been successful in enhancing economic empowerment in rural India
and helping overcome the exploitation of labour. The scheme has also diminished wage
volatility and the gender pay gap in labour. This can be substantiated by the following data
available at the official site of MGNREGA:

1. 14.88 crores MGNREGA job cards have been issued (Active Job Cards – 9.3 crores)

2. 28.83 crores workers who gained employment under MGNREGA (2020-21) out of which
active workers are 14.49 crores.

What is the role of Gram Sabha and Gram Panchayat in MGNREGS?

The role of Gram Sabha in the Mahatma Gandhi National Rural Employment Guarantee
Scheme is tabled below:

Role of Gram Sabha in MGNREGS

It lists down the works priority-wise w.r.t the potential of the local area

It monitors the work executed within the Gram Panchayat

It acts as the primary forum for social audits

It also works as a platform to resolve all workers’ queries related to any MGNREGA work

The role of Gram Panchayat in the Mahatma Gandhi National Rural Employment Guarantee
Scheme is tabled below:

Role of Gram Panchayat

It is authorized with the role to receive job applications

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3/19/25, 11:15 AM MGNREGA (Mahatma Gandhi National Rural Employment Guarantee Act) Notes For IAS Preparation

After receiving the applications, it is responsible for verifying them

All households are registered by the Gram Panchayat

The MGNREGS job cards are issued by the Gram Panchayat

It is responsible to allot work within 15 days from the application submission

It prepares an annual report that covers the achievement of the scheme

It holds Rozgar Diwas at every ward once a month

Role of State Governments in MGNREGS

The important roles of the state government in executing the MGNREGA scheme are:

1. It frames rules charting out the state’s responsibility under the act.

2. It sets up the State Employment Guarantee Council.

3. State Employment Guarantee Fund (SEGF) is established by state governments.

4. It makes sure to dedicate the Employment Guarantee Assistant (Gram Rozgar Sahayak),
the PO and the staff at the State, district, cluster and Gram Panchayat level; for the
execution of the scheme.

MGNREGA – State Employment Guarantee Council (SEGC)

The State Employment Guarantee Council is responsible for advising the state government for
the implementation of the MGNREG scheme. Some important functions of SEGC under MNREGS
are:

1. The suggestion of improvements in the execution of the scheme.

2. Evaluation and monitoring of the scheme.

3. To recommend proposals of the works to the central government.

4. To appraise the districts about the scheme and its features.

5. To prepare an annual report to be submitted by the state government before the state
legislature.

This law and the employment guarantee schemes which are part of its provisions are
important from the IAS exam point of view. UPSC aspirants should read about this government
scheme in detail as questions related to this topic are asked in the Prelims exam and in General
Studies paper II. The questions for government schemes like MGNREGA are classified under
Welfare schemes, and the topic has a significant overlap with topics like human development,
poverty, and hunger.

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3/19/25, 11:15 AM MGNREGA (Mahatma Gandhi National Rural Employment Guarantee Act) Notes For IAS Preparation

Technocratic Subversion of MGNREGA

In recent months, MGNREGA employees from all over the nation have been peacefully
protesting as members of the NREGA Sangharsh Morcha, a national alliance of labour unions. A
multitude of complaints, including late wage payments, unfavourable working conditions, and
insufficient MGNREGA scheme execution, are to blame for the protests.

News in detail:

Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) workers demand

1. adequate funds for work and timely wages,

2. release of pending funds to West Bengal,

3. revocation of mandatory attendance using the National Mobile Monitoring System

(NMMS) app ([Link]
nmms-app-upsc-notes/), and

4. revocation of wage payments using the Aadhaar-based payment systems (ABPS).

Read more on the MGNREGA payment system ([Link]

payment-system-upsc-notes/) in the linked article.

Way forward

The majority of Indians cannot perceive and evaluate how their government is acting
since the state has placed so much emphasis on “seeing” its citizens.

According to democratic dogma, individuals should be able to clearly “see” the state, not
the other way around. If not, people’s respect for and confidence in them are at risk.

It’s important to handle the MGNREGA corruption cases. But for that, social audits must be
strengthened rather than adding to the struggles of already overworked women.

It is important to examine the causes of ineffective fund management and take action to
improve it.

Additionally, officers who are found guilty of misusing funds should face legal action.

By increasing awareness and making it more inclusive, the participation of women and
members of underprivileged classes must increase.

Frequently Asked Questions Mahatma Gandhi National Rural

Employment Guarantee Act (MGNREGA)
Q1 What is the aim of MGNREGA?

MGNREGA aims to enhance livelihood security in rural areas by providing at least 100 days
of wage employment in a financial year to every household whose adult members
volunteer to do unskilled manual work.

[Link] 7/15
 Research Paper No. 2009/36
The Mauritian Success Story
and its Lessons
Arvind Subramanian*
June 2009

Abstract

This paper examines different explanations—initial conditions, openness to trade and

FDI, and institutions—of the Mauritian growth experience since the mid-1970s. We
show that arguments based on openness to trade and FDI are either misleading or
incomplete. Even when correctly articulated, openness appears to be a proximate rather
than an underlying explanation for the Mauritian experience. The institution-based
explanation offers greater promise. Ultimately, however, the econometric results
indicate that existing explanations may be incomplete. Some idiosyncratic factors,
particularly Mauritian diversity and the responses to managing it, may provide the
missing pieces in the story of Mauritius’s success.

Keywords: Mauritius; growth; institutions, openness

JEL classification: F1, F4, O2, O4, O5

Copyright © UNU-WIDER 2009

*PetersonInstitute for International Economics, Center for Global Development, Washington, DC: email:
asubramanian@[Link]
This study has been prepared within the UNU-WIDER project on Country Role Models for Development
Success, directed by Augustin Kwasi Fosu.
UNU-WIDER gratefully acknowledges the financial contributions to the project by the Finnish Ministry
for Foreign Affairs, and the financial contributions to the research programme by the governments of
Denmark (Royal Ministry of Foreign Affairs), Finland (Finnish Ministry for Foreign Affairs), Sweden
(Swedish International Development Cooperation Agency—Sida) and the United Kingdom (Department
for International Development).
ISSN 1810-2611 ISBN 978-92-9230-207-8
and developed the sugar sector rather than taxed it. While the rest of Africa killed its
cash cow, Mauritian sugar industry has thrived. The role of institutions in achieving this
is elaborated in greater detail in the concluding section.
Table 5
Mauritius and other countries with respect to indices of institutions

Fast-growing Other developing

Institutional quality index Mauritius (a Africa countries countries

ICRGE (b 7.23 4.54 6.86 4.29

Protection against expropriation (c 8.06 5.75 8.54 6.47
Democracy (d 0.75 0.25 0.47 0.51
Participation index (d 0.8 0.3 0.49 0.44
Rule of law (e 1996 0.76 -0.70 0.48 -0.18
2006 0.81 -0.67 0.59 -0.40
Control of corruption (e 1996 0.45 -0.58 0.41 -0.19
2006 0.37 -0.59 0.44 -0.45

Notes: (a For ICRGE and Protection Against Risk of Expropriation, Mauritius has fitted values.
(b ICRGE (International Country Risk Guide) index is a measure of institutional quality that
contains aspects of government that affect property rights or the ability to carry out
business. It is published by a private firm that provides consulting services to international
investors.
(c For ICRGE index and index of protection against the risk of expropriation the scale is
between 0-10, with higher values indicating better institutional quality.
(d Participation measures the extent of competitiveness of political participation. This index is
taken from the Polity III dataset of Jaggers and Gurr (1995), who define it as the ‘extent to
which non-elites are able to access institutional structures for political expression’ (it is
rescaled to range from 0 to 1 in Rodriguez and Rodrik (1999). The democracy index also
ranges from 0 to 1.
(e Rule of law and control of corruption are from the World Bank’s governance indicators.

4 Mauritius’s uniqueness: institutions, diversity, and social conflict

The foregoing discussion can be summarized as follows: first, the Mauritian growth
performance between 1960 and 1990, and especially since the 1970s, has been
exceptional. In standard cross-country growth regression models, Mauritius is an
outlier, implying that conventional determinants of growth do not fully capture the
country’s performance.

Second, initial conditions have had an ambiguous, and on balance a negative impact on
subsequent growth performance. Its initial inheritance of human capital and
demographic characteristics were favourable, but its higher level of initial income,
commodity dependence, unfavourable geography have exerted a drag on growth.
Certainly, in the growth race, Mauritius did not receive a stagger relative at least to
countries in Africa (Table 6 in Subramanian and Roy 2003 indicates that the initial
conditions disadvantaged Mauritius relative to all groups of developing countries.)
Mauritius’ inheritance implied a drag on growth of about 1 percentage point relative to
the average African country and close to 2 percentage points relative to the fast growers.

18
 Table 6
Breakdown of Mauritian growth

Difference in Mauritian growth from baseline

growth of:
Other
Fast-growing developing
Explanatory variable Africa countries countries

Catch-up -2.33 -1.33 -1.41

Life expectancy 1.51 0.29 0.68

Inheritance Landlocked 0.19 0.06 0.06

variables Tropical climate -0.09 -0.26 -0.34

Natural resource bundance -0.35 -0.65 -0.55

Etholinguistic fractionalization 0.01 -0.03 -0.05
Total inheritance -1.06 -1.98 -1.61

Openness -0.20 -1.93 -0.47

Central government savings -0.43 -0.53 -0.08

Policy variables
Avg. national savings ratio -0.001 -0.02 -0.006

Institutional quality 0.75 0.10 0.82

Note: Estimates are based on the Sachs and Warner (1997) basic regression.
Source: Author’s calculation.

Third, Mauritius adopted a distinctive approach to openness. It has not had an open
trade regime in any conventional sense; on the contrary, its import regime for much of
the 1970s, 1980s, and 1990s has been highly restrictive. The distinctiveness has been
how Mauritius prevented an import tax from becoming an export and trade tax. Through
a mixture of: segmentation of the import competing and export sectors, and heavy
intervention to promote the latter, initially though more liberal labour market policies
but also through the tax system; and a competitive exchange rate, part of the anti-export
bias was offset. The institutional distinctiveness—that gave effect to segmentation—
was the creation of EPZs. These were the heterodox aspects of Mauritius’ openness
strategy. However, it is the preferential access provided by Mauritius’ trading partners,
in sugar and textiles and clothing, and the resulting implicit export subsidization, that
has allowed the anti-export bias to be fully offset. Thus, while there are shades of East
Asian-style (particularly Korea and Taiwan) interventionism in Mauritius’ trade and
development strategy, a substantial role was played by trading partners (to a much
greater extent than in the case of East Asia) in boosting trade performance. The
emphasis on heterodox policies by Rodrik (1999a) therefore needs to be qualified.

But it should be underscored that while Mauritian policy offset the anti-export bias,
neutrality rather than a pro-trade bias was achieved. In other words, Mauritian trade
performance was average, not exceptional as in the case of the tigers of East Asia (as is

19
clear from Figure 5). Thus, Mauritian trade performance cannot explain Mauritius’
exceptional growth performance. It was a super-grower but not a super trader.15

But these are proximate rather than underlying causes of Mauritian growth success
because the favourable trade environment and the creation of EPZs were not unique to
Mauritius. Other developing countries had similar trade opportunities and adopted
similar policies but failed where Mauritius succeeded. To some considerable extent,
strong domestic institutions have contributed substantially to Mauritian success, and are
a good candidate for underlying explanations of the Mauritian miracle. Compared with
many developing countries, Mauritius has since independence been a democracy and
developed strong participatory institutions.

The econometric results, however, suggest that even after accounting for the role of
institutions there is a sizable unexplained component to Mauritian growth. Cross-
country growth models, by definition, cannot capture country-specific idiosyncratic
effects. In Mauritius, there were many. But one particularly important one, ironically,
appears to be the very diversity and ethnic fragmentation that Meade lamented as a
curse.

Diversity had three important benefits: it was a repository of communities (or diasporas)
that turned out to have important linkages with the rest of the world, creating positive
externalities for the country; it forced the need for economic balance that explains the
preservation of the cash cow, namely the sugar sector; and third, it forced the need for
participatory political institutions that were important in maintaining stability, law and
order, rule of law, and mediating conflict.

First, the role of business and social networks in promoting trade and investment has
attracted increased research interest in recent years. Rauch and Casella (1998) develop a
model of trade that reflects the difficulty of introducing one’s product in a foreign
market. Access to local sources that can provide information about the market then
facilitate entry and one prominent source of information transmission is coethnicity. A
well-known example of the role of ethnic networks in trade is provided by the overseas
Chinese who have created formal or informal societies that help in information flows
and even at times in enforcement of contracts. Head, Ries and Wagner (1997) find that
immigrants significantly increase trade between Canada and the source countries. Rauch
(1999) presents evidence that common language and colonial ties play an important role
in international trade.

Just as business and social networks are important for trade they are conceivably
important for investment owing to similar mechanisms. Mauritius has a small Chinese
population which played an important role in attracting the first wave of foreign direct
investment flows from Hong Kong SAR. Entrepreneurs from Hong Kong SAR chose
Mauritius as an investment location to circumvent the quotas on exports of textiles and
clothing from Hong Kong SAR. In a similar vein, the offshore financial sector has
grown because of the Indian diaspora which led to the signing of a double taxation
treaty between Mauritius and India. As a result, Mauritian offshore centres have

15 That Mauritius was not an exceptional trader is demonstrated more formally in Subramanian and Roy
(2007: table 12).

20
mediated large financial flows to India and Mauritius has become the largest investor in
India.

Diversity had other important consequences. Here, one should emphasize a distinctive
element of Mauritian diversity. There was a nice, almost symbiotic separation of
economic and political power in Mauritius. Compared to resource-rich countries in
Africa, for instance Ghana and Nigeria, where the economic power and political power
were vested in the same authority, Mauritius did not have a system of a ruling elite that
derived economic power from the control over resources. Economic power was vested
in the minority French community.

This had one important consequence: Mauritius managed to avoid one of the major
mistakes made in most of resource-rich Africa, namely of killing the cash cow. Thus,
agriculture and the resource sector were taxed in much of Africa (Ghana, Kenya,
Tanzania). In part, this was imbued by ideology—the push towards import-substituting
industrialization. But the newly-independent government in Mauritius—of a distinctly
socialist persuasion—was as susceptible to this siren call.16 Yet, the call was resisted.
Political economy played an important role. The cash cow in the case of Mauritius was
the sugar sector and owned predominantly by the minority French community. On the
one hand, it was farsighted of the majority Indian community not to have nationalized
or heavily taxed this sector. Equally, the economic elite—the French—exercised their
clout and ensured that an adverse outcome to them did not result. The fact of the
cleavage between the economic elite (a political minority) and the political elite and the
need to achieve balance between the two in a newly-independent state thus ensured the
fortunes of the sugar sector.

In return for guaranteeing the rights of the sugar owners, the political majority did
implicitly extract a compromise in terms of transferring some of the rents from sugar to
itself. One important aspect of this transfer was a large, relatively well paid, civil
service (staffed predominantly by the majority Indian community) and a generous
system of social protection, particularly related to pensions. The success of the sugar
industry in Mauritius can thus be seen as an example of what can be termed as optimal
rent-sharing between the political (predominantly Indian) and economic elites
(predominantly non-Indian).

Diversity also had important political consequences. To some extent, Mauritius had no
choice but to evolve such institutions. Just prior to independence, in a referendum on
this question, 44 per cent of the population (virtually the entire non-Indian population)
rejected independence and wished to stay as a British colony. Assuaging the misgivings
of such a large section of the population made participatory politics in the post
independence era a necessity.17 These institutions have ensured free and fair elections,
the rule of law, a vibrant and independent press, and respect for property rights all of
which have made Mauritius an attractive investment location.

16 The first Prime Minister, Sir Seewoosagur Ramgoolam, was a Fabian socialist and wedded
ideologically to a socialist model of development.
17 The extraordinary effort devoted to assuaging minority interests is reflected in the ‘best loser’ system
introduced under the British which guaranteed adequate representation to all the communities in
Mauritius, even if they did not emerge victorious in elections. This system has helped to keep the
participation and interest of the minorities groups in the democratic process.

21
3/19/25, 11:17 AM What is the informal economy and how many people work in it? | World Economic Forum

ECONOMIC GROWTH

What is the informal economy

and how many people work in it?
Jun 4, 2024

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3/19/25, 11:17 AM What is the informal economy and how many people work in it? | World Economic Forum

Women are overrepresented in unregulated work in developing economies.

The World Economic Forum’s Global Gender Gap Report shows women earn less than
men in informal roles.

For billions of people worldwide, making a living happens entirely off the books.

From street vendors to unregistered ride shares, domestic workers to handicraft makers –
working in the informal economy is the only way to make ends meet. Understanding the
scale, impact and challenges of informal work is crucial for creating inclusive policies and
sustainable development.

What is the informal economy?

The International Monetary Fund (IMF) defines the informal economy as; “activities that have
market value and would add to tax revenue and GDP if they were recorded”. Another
definition, from the women’s advocacy organization WIEGO, describes the informal economy
as “a diversified set of economic activities, enterprises, jobs and workers that are not
regulated or protected by the state”.

It’s also important to understand what the informal economy does not cover. Despite the
stigma attached to informal work, illegal activities such as drug running or people trafficking
are not included. In fact, WIEGO and other organizations are working to dispel what they
term “the myth of the shadow economy”, where informal work is associated with crime and
unethical activities.

Have you read?

How microlending for women can address the gender gap and help
alleviate global poverty

9 leaders reveal how to make decent work a reality for everyone

Why we need a new focus on skills amid the technological disruption

of the jobs market

[Link] 3/10
3/19/25, 11:17 AM What is the informal economy and how many people work in it? | World Economic Forum

That’s a view supported by Erika Kraemer-Mbula, Professor of Economics at the University o

Johannesburg in South Africa. Speaking at the World Economic Forum’s
#SpecialMeeting2024 in Saudi Arabia, she explained the context of informal work.

“We are referring to entrepreneurs that are providing legitimate products and services but
that do not comply with some of the regulatory requirements. Perhaps they don't have a
permit. They don't have registration of the business. That is what we talk about when we talk
about the informal economy.”

Kraemer-Mbula went on to say that many people working in today’s flexible economy don’t
realize they are operating in the informal sector.

“We are now in this space where freelancers and … high-skilled individuals are also engaged
in informal activities providing all sorts of consulting, research and creative activities. So I
think we have to acknowledge first and foremost, how diverse the informal economy is and
how it manifests in different regions and in different contexts.”

How big is the informal economy?

It can be tempting to think that unregulated work only happens on the margins of society –
but in many regions it accounts for the bulk of economic output.

According to the International Labour Organization (ILO) – more than half of the global labou
force is engaged in informal work. The IMF says 60% of all workers are involved in
unregulated jobs. That amounts to around two billion workers employed in informal jobs and
four out of every five businesses are not formally registered.

Measuring informality

More than 2 billion people, or 60% of the global workforce, are employed informally. Image: International Labour
Organization

While informal work is most prevalent in emerging and developing economies, it is not
exclusively confined to them. Research from the IMF finds that; “on average it represents 35
percent of GDP in low- and middle-income countries versus 15% in advanced economies.

“Latin America and sub-Saharan Africa have the highest levels of informality, and Europe and
East Asia are the regions with the lowest levels of informality.”

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3/19/25, 11:17 AM What is the informal economy and how many people work in it? | World Economic Forum

DISCOVER

How is the World Economic Forum promoting equity

in the workplace?

Show more

How does informal work widen gender

gaps?
The World Economic Forum’s Global Gender Gap Report 2023 says informal work pushes
women into unregulated roles with poor working conditions more frequently than men. Four
out of every five jobs (80%) created for women are in the informal economy while, for men,
the rate is two out of every three jobs (66%), it says.

An OECD/ILO report finds “informal employment is more common among women than men
in sub-Saharan Africa, Latin America, southern Asia and, more generally, in low- and lower-
middle-income countries. Up to 92% of all employed women in low-income countries are in
informal employment, compared with 87% of men.

The financial consequences for women with few options other than informal work can be
significant. According to UN Women, more than 342 million women and girls will be living on
less than $2.25 per day by 2030. Part of the explanation for this, the UN says, is that “the
gender pay gap originates from ingrained inequalities … (and) women, particularly migrant
women, are overrepresented in the informal sector”.

Leaders are increasingly recognizing the vast economic contribution that women
entrepreneurs in the informal sector are making. Speaking at #SpecialMeeting2024,
Wamkele Mene, Secretary General of the African Continental Free Trade Area said their role
must not be understated.

“Women traders are the drivers of Africa's informal economy. In February, the African Union
heads of state adopted the Protocol on Women and Youth in Trade. That is a first-of-its-kind
protocol that moves us beyond expressions of aspiration for SMEs to be part of inclusion,
particularly those that are led by women.”

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3/19/25, 11:17 AM What is the informal economy and how many people work in it? | World Economic Forum

How can policy help address challenges

faced by those in the informal economy?
Policy approaches like increasing access to finance, skills training, property rights and
extending legal protections can help transition informal operations into the formal sector over
time.

There is no single quick fix to formalize informal work and many challenges to be overcome,
as advocacy group WIEGO points out. “Formalization of the informal economy can take
different forms: registration, taxation, organization and representation, legal frameworks,
social protection, business incentives and support.”

Formalizing the jobs of billions of people – and the unregulated businesses that employ them
will take time. WIEGO urges governments to take a long-term view with a range of steps that
lead to varying degrees and types of formality.

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[Link] 6/10
3/19/25, 11:19 AM Employment Generation Schemes/ Programmes of Government of India | Directorate General of Employment (DGE) | GoI |In…

English हिन्दी

भारत सरकार GOVERNMENT OF INDIA

Directorate General of Employment (DGE) | GoI |India

श्रम एवं रोजगार मंत्रालय
Ministry of Labour and Employment

 About Us ▼ Acts and Rules Citizen Corner ▼ Schemes & Activities ▼ Division ▼

Documents & Publications ▼ Public Grievance ▼ Media ▼ Employee Corner ▼ Jobs ▼

National Classification of Occupations ▼ National Industrial Classification ▼

Occupational Shortage Index (OSI)

[Link] 1/14
3/19/25, 11:19 AM Employment Generation Schemes/ Programmes of Government of India | Directorate General of Employment (DGE) | GoI |In…

Aatmanirbhar
Bharat Rojgar
Yojana (ABRY)

Central Employment
Exchange

Model Career
Centre (MCC) &
Interlinking Of
Employment
Exchanges

National Career
Service Center for
SC/STs

National Career
Service Centers for
Differently Abled

National Career
Service(NCS)

National
Employment
Services(NES)

Employment
Generation
Schemes/
Programmes of
Government of India

Bulletin on Job
Opportunities in
India

Employment Generation Schemes/ Programmes of Government of

India
Employment generation coupled with improving employability is the priority of the Government. Accordingly, the
Government of India has taken various steps for generating employment in the country. The efforts comprise of
various long term schemes/ programmes/ policies for making the country self-reliant and to create employment
opportunities. A brief on Employment Generation Schemes/ Employment Promotion Programmes of the
Government alongwith their website detail is given below:

Employment Generation Schemes/ Programmes of Government of In

Sr. Name of the Ministry Remarks

No. Scheme/
Programme

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3/19/25, 11:19 AM Employment Generation Schemes/ Programmes of Government of India | Directorate General of Employment (DGE) | GoI |In…

1 Atmanirbhar Ministry of Aatmanirbhar Bharat Rojgar Yojana (ABRY) was launched

Bharat Rojgar Labour and as part of Atmanirbhar Bharat package 3.0 to incentivize e
Yojana Employment employment along with social security benefits and restora
(ABRY) Covid-19 pandemic. The website link for the scheme is http
bharat-rojgar-yojana-abry

2 Pradhan Ministry of Pradhan Mantri Rojgar Protsahan Yojana (PMRPY) was la

Mantri Rojgar Labour and incentivise employers for creation of new employment. The
Protsahan Employment March, 2019 will continue to receive the benefit for 3 years
Yojana the scheme i.e. upto 31st March, 2022.
(PMRPY)

3 National Ministry of Project for transformation of the National Employment Serv

Career Labour and related services like job matching, career counselling, voca
Service (NCS) Employment development courses, apprenticeship, internships etc. This
Project components namely - (i) NCS Portal ([Link]); (ii) M
Interlinking of Employment Exchanges. The website is http

4 Mahatma Ministry of Rural MGNREGA is to provide at least 100 days of guaranteed w

Gandhi Development to every rural household whose adult members volunteer to
National Rural website link for the scheme is [Link]
Employment
Guarantee Act
(MGNREGA)

5 Pradhan Ministry of Rural The Garib Kalyan Rojgar Abhiyaan (GKRA) is a 125-day A
Mantri Garib Development Minister on 20th June, 2020 with a mission to address the i
Kalyan Rojgar and similarly affected rural population by Covid-19 pandem
Abhiyaan strategy of providing immediate employment & livelihood o
(PMGKRA) distressed, to saturate the villages with public infrastructure
boost the income generation activities and enhance long te
giving focus on 25 works in 116 selected districts across 6
Rs. 50,000 crore.

6 Aajeevika - Ministry of Rural Aajeevika - National Rural Livelihoods Mission (NRLM) wa

National Rural Development Development (MoRD), Government of India in June 2011. A
Livelihoods support by the World Bank, the Mission aims at creating eff
Mission platforms of the rural poor, enabling them to increase hous
(NRLM) livelihood enhancements and improved access to financial
Mission is [Link]

7 Pt. Deen Ministry of Rural Deen Dayal Upadhyaya Grameen KaushalyaYojana (DDU
Dayal Development development program for rural poor youth under National R
Upadhyaya since September, 2014. Rural Youth in the age group of 15
Grameen scheme. Sub component of NRLM which is a placement lin
Kaushlya rural poor. The website link for the scheme is [Link]

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3/19/25, 11:19 AM Employment Generation Schemes/ Programmes of Government of India | Directorate General of Employment (DGE) | GoI |In…

Yojana (DDU-
GKY)

8 Rural Self Ministry of Rural RSETIs are Rural Self Employment Training Institutes, an
Employment Development Development (MoRD) to have dedicated infrastructure in e
and Training training and skill upgradation of rural youth geared towards
Institutes RSETIs are managed by banks with active co-operation fro
(RSETIs) State Governments. The details is at website:[Link]

9 PM- SVANidhi M/o Housing & Prime Minister Street Vendor's Atma Nirbhar Nidhi (PM SV
Scheme Urban Affairs 2020 to provide collateral free working capital loan to Stree
to resume their businesses which were adversely affected
down. The details of the scheme is at the website:[Link]

10 Deendayal M/o Housing & To reduce poverty and vulnerability of the urban poor house
Antyodaya Urban Affairs gainful self employment and skilled wage employment opp
Yojana - appreciable improvement in their livelihoods on a sustainab
National grassroots level institutions of the poor. The mission would
Urban with essential services to the urban homeless in a phased
Livelihoods scheme is [Link]
Mission (DAY-
NULM)

11 Prime Ministry of Micro, Prime Minister’s Employment Generation Programme (PM

Minister’s Small & Medium subsidy programme aimed at generating self-employment
Employment Enterprises of micro-enterprises in the non-farm sector by helping tradi
Generation youth. The details can be seen from the website: [Link]
Programme employment-generation-programme-pmegp
(PMEGP)

12 Pradhan Ministry of Pradhan Mantri MUDRA Yojana (PMMY) is a scheme laun

Mantri Finance on April 8, 2015 for providing loans up to 10 lakh to the non
MUDRA enterprises. These loans are classified as MUDRA loans u
Yojana by Commercial Banks, RRBs, Small Finance Banks, MFIs
(PMMY) approach any of the lending institutions mentioned above o
portal [Link] . Under the aegis of PMMY, MU
namely 'Shishu', 'Kishore' and 'Tarun' to signify the stage of
needs of the beneficiary micro unit / entrepreneur and also
next phase of graduation / growth. The website for the sche

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13 Pradhan Ministry of Skill Pradhan Mantri Kaushal Vikas Yojana (PMKVY) is the flags
Mantri Development Development and Entrepreneurship (MSDE) implemented
Kaushal Vikas and Corporation (NSDC). The objective of this Skill Certification
Yojana Entrepreneurship to take up industry relevant skill training that will help them
(PMKVY) details of the scheme is at the website: [Link]

14 National Ministry of Skill National Apprenticeship Promotion Scheme (NAPS) was la

Apprenticeship Development Government of India to promote the Apprenticeship in the c
Promotion and incentives, technology and advocacy support. The scheme
Scheme Entrepreneurship viz., (i) Sharing of 25% of prescribed stipend subject to a m
(NAPS) per apprentice with the employers and (ii) Sharing of basic
Rs. 7,500 per apprentice. The details of the scheme is at
website:[Link]

Other details of the scheme is also at website: [Link]

15 Production- 13 Ministries Hon'ble Finance Minister, Smt Nirmala Sitharaman has ann
Linked Crores for the Production Linked Incentive (PLI) Schemes
Incentive (PLI) national manufacturing champions and to create 60 lakh ne
Scheme production of 30 lakh crore during next 5 years. The details
[Link]

16 PM GatiShakti At present 21 PM GatiShakti National Master Plan (PMGS-NMP) was lau

- National Ministries/ providing multimodal connectivity infrastructure to various e
Master Plan Departments are Committee on Economic Affairs (CCEA) accorded approva
for multi-modal involved. GatiShakti National Master Plan on 21st October 2021. PM
connectivity approach for economic growth and sustainable developme
engines, namely, Railways, Roads, Ports, Waterways, Airp
Infrastructure. The details is at website: [Link]

17 Indian Ministry of Government has approved on 19th January, 2022 for the co
Footwear and Commerce and Scheme namely, ‘Indian Footwear and Leather Developme
Leather Industry 31.03.2026 or till further review, whichever is earlier. IFLDP
Development (i) Sustainable Technology and Environmental Promotion (
Programme of Leather Sector (IDLS), (iii) Establishment of Institutional
(IFLDP) Footwear and Accessories Cluster Development (MLFACD
Brands in Leather and Footwear Sector and (vi) Developm
can be seen from the website: [Link]
development-program

18 Pradhan Ministry of The Pradhan Mantri Mega Integrated Textile Region and A
Mantri Mega textiles for setting up 7 Mega Textiles Parks which aims to develop
Integrated industrial infrastructure facility for entire value-chain of the

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Textile Region and processing sector and will enhance the production and
and Apparel industry and create employment opportunities. The details
Parks (PM- website:[Link]
MITRA)

19 Future Skills Ministry of MeitY has initiated “Future Skills PRIME”- a programme for
PRIME Electronics and Manpower for Employability in 10 new/emerging technolog
Information The website for the scheme is [Link]
Technology

Flagship programmes of the Government that have the potential to generate p

Sr. Name of the Ministry Remarks

No. Scheme/
Programme

1 Digital India Ministry of Digital India is a flagship programme of the Government of Ind
Electronics society and knowledge economy. The details of the scheme is
and
Information
Technology

2 Atal Mission Ministry of The mission of AMRUT is providing basic services (e.g. water
for Housing and amenities in cities which will improve the quality of life for all, e
Rejuvenation Urban Affairs priority. The details of the scheme is available at website: http
and Urban transformation-amrut-reforms
Transformation
(AMRUT)

3 Make in India DPIIT, Ministry ‘Make in India’ initiative was launched on September 25, 2014
of Commerce innovation, building best in class manufacturing infrastructure
& Industry development. The details is at the website: [Link]

4 Smart Cities Ministry of Smart Cities Mission was launched by the Hon’ Prime Ministe
Housing & promote cities that provide core infrastructure, clean and sust
Urban Affairs citizens through the application of ‘smart solutions’. The Missi
through comprehensive work on social, economic, physical an
website: [Link]

5 Shyama M/o Rural The Shyama Prasad Mukherji Rurban Mission (SPMRM) follo
Prasad Development preserve and nurture the essence of rural community life with
Mukherji the facilities perceived to be essentially urban in nature, thus c
Rurban Shyama Prasad Mukherji Rurban Mission (SPMRM) is to stim
Mission and create well planned Rurban clusters. The details of the sc

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6 The National Ministry of To coordinate the development of the industrial corridors, with
Industrial Commerce & growth in manufacturing and urbanization. The details is at we
Corridor Industry

7 Stand up India Department of Stand-Up India Scheme for financing SC/ST and/or Women E
Scheme Financial to facilitate bank loans between 10 lakh and 1 Crore to at leas
Services, and at least one woman borrower per bank branch for setting
Ministry of manufacturing, services, agri-allied activities or the trading se
Finance): shareholding and controlling stake should be held by either an
at website: [Link]

8 Start Up India DPIIT, Ministry Startup India is a flagship initiative of the Government of India
of Commerce inclusive ecosystem for innovation and entrepreneurship in In
& Industry

9 Pradhan Ministry of Pradhan Mantri Awas Yojana – Urban is a flagship Mission of

Mantri Awas Housing & Housing and Urban Affairs (MoHUA), was launched on 25th J
Yojana – Urban Affairs among the EWS/LIG and MIG categories including the slum d
Urban households by the year 2022, when Nation completes 75 yea
approach wherein the Housing shortage is decided based on
Nodal Agencies (SLNAs), Urban Local Bodies (ULBs)/ Implem
Primary Lending Institutions (PLIs) are main stakeholders wh
PMAY(U). The details of the scheme is at website:[Link]

10 Swachh Ministry of Jal To accelerate the efforts to achieve universal sanitation cover
Bharat Shakti India had launched the Swachh Bharat Mission on 2nd Octob
Mission- Districts, States and Union Territories in India declared thems
Grameen 150th birth anniversary of Mahatma Gandhi, by constructing o
website:[Link]

11 Swachh Ministry of The Swachh Bharat Mission - Urban (SBM-U), launched on 2

Bharat Mission Housing & defecation and achieving 100% scientific management of mun
- Urban (SBM- Urban Affairs objectives of the mission are Elimination of open defecation, E
U), Municipal Solid Waste Management, To effect behavioral cha
awareness about sanitation and its linkage with public health,
environment for private sector participation in Capex (capital e
details is available at website:[Link]
[Link]#:~:text=The%20Swachh%20Bharat%20Mission

12 Pradhan Ministry of Under Pradhan Mantri Garib Kalyan Yojana (PMGKY), Gover
Mantri Garib Labour and and 12% employee’s share under Employees Provident Fund
Kalyan Yojana Employment March to August, 2020 for the establishments having upto 10
(PMGKY) Rs. 15000/-. Details of the scheme is at the link: [Link]
2021/SchemeCOVID_24_10042020.pdf

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Women Centric Schemes to improve the employability of women

Sl. Name of the Ministry Remarks

No. scheme/
programmes

1 Mission Ministry of Women and ‘Mission Shakti’ is a scheme in mission mode

Shakti Child Development aimed at strengthening interventions for
women safety, security and empowerment. It
seeks to realise the Government’s commitment
for „women-led development‟ by addressing
issues affecting women on a life-cycle
continuum basis and by making them equal
partners in nation-building through
convergence and citizen-ownership. It seeks to
focus on proposing strategies for improving
convergence across Ministries/Departments
and at different levels of governance. It also
seeks to promote greater participation and
support of Panchayats and other local level
governance bodies, apart from strengthening
digital infrastructure support, last mile tracking
and Jan Sahabhagita. Mission Shakti has two
sub-schemes -‘Sambal’and ‘Samarthya’.

The objective of the Mission Shakti is to provide

to all women and girls including differently-
abled, socially and economically marginalized
and vulnerable groups, in need of care and
protection, with short term and long-term
services and information for their holistic
development and empowerment.

The details of the schemes may be seen at:

[Link]
guidelines-for-implementation-mission-shakti

[Link]

2 NAMO The Scheme will be The Government has approved the Central
DRONE DIDI governed at the Central Sector Scheme ‘Namo Drone Didi’ for providing
level by the Empowered Drones to the Women Self Help Groups
Committee of the (SHGs) under DAY-NRLM, with an outlay of Rs.
Secretaries of 1261 Crores. The scheme aims to provide
Department of drones to 14500 selected Women SHGs during

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Agriculture & Farmers’ the period from 2024-25 to 2025-2026 for

Welfare, Department of providing rental services to farmers for
Rural Development, agriculture purpose (application of liquid
Department of fertilizers and pesticides for the present). The
Fertilizers, Ministry of Department of Agriculture & Farmers’ Welfare
Civil Aviation and has released the Operational Guidelines this
Ministry of Women and scheme and all the stakeholders have been
Child Development. requested to make meaningful use of these
operational guidelines to ensure prompt roll out
The Implementation and and implementation of the ‘Namo Drone Didi’
Monitoring Committee Scheme.
headed by the Additional
Secretary, Department The details of the schemes may be seen at:
of Rural Development [Link]
and having representation PRID=2070029
from all other
stakeholders will be [Link]
responsible for effective didi
planning, implementation
and monitoring of the
scheme and it will provide
overall advice and
guidance to all technical
matters related to the
implementation of the
scheme.

3 Lakhpati Didi Ministry of Rural A Lakhpati Didi is a Self-Help Group member

Development who earns an annual household income of
Rupees One Lakh (Rs. 1,00,000) or more. This
income is calculated for at least four
agricultural seasons and/or business cycles,
with an average monthly income exceeding
Rupees Ten Thousand (Rs. 10,000), so that it
is sustainable.

They serve as an inspiration to the community,

not solely for their income, but for their
transformation journey through adopting
sustainable livelihood practices (farm or non-
farm or service), effectively managing
resources, and achieving a decent standard of
life.

The SHG groups have fostered collective

action and mutual support, while also serving

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as conduits for crucial financial literacy, skill

development, and livelihood assistance.
Notably, the focus has shifted beyond mere
social and financial inclusion, now aiming to
empower SHG members to pursue
entrepreneurial ventures. Their inherent skills
and potential position them well to move
towards higher income brackets. The
government is now actively supporting this
transition and initiatives like Lakhpati Didi.

Lakhpati initiative facilitates diversified

livelihood activities, by ensuring convergence
across all Government departments/ Ministries,
Private sector and Market players. The strategy
includes focused planning, implementation and
monitoring at all levels.

The details of the scheme may be seen at:

[Link]

4 Women in Ministry of Science and The Department of Science and Technology

Science and Technology (DST) is implementing a dedicated
Engineering- scheme 'Women in Science and
KIRAN Engineering-KIRAN (WISE-KIRAN)'to cater
(WISE- women of all walks of life in order to enhance
KIRAN) their participation in the field of Science and
Technology (S&T)with ultimate goal to bring
gender parity. The WISE-KIRAN Scheme is a
holistic approach to address various challenges
faced by women in their scientific journey
through different kinds of programmes.

The WISE-KIRAN Division runs the following

programs for empowering women of varied age
groups and in different domains of Science and
Technology.
The details of the scheme may be seen at:
[Link]
kiran

5 SERB – Ministry of Science and SERB – POWER (Promoting Opportunities for

POWER Technology Women in Exploratory Research) program is
(Promoting formulated to mitigate gender disparity in
Opportunities science and engineering research funding in

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for Women in various S&T programs in Indian academic

Exploratory institutions and R&D laboratories. SERB –
Research) POWER is specially designed to provide
structured effort toward enhanced diversity in
research to ensure equal access and weighted
opportunities for Indian women scientists
engaged in research and development
activities.

The details of the scheme may be seen at:

[Link]

For Shram Website

Sr. Name of the Ministry Remarks

No. Scheme/
Programme

1 Pradhan Mantri Ministry of Government of India has introduced a pension scheme f

Shram Yogi Maan- Labour& (PM-SYM) to ensure old age protection for Unorganised
dhan (PM-SYM): Employment The unorganised workers mostly engaged as home base
workers, cobblers, rag pickers, domestic workers, washe
agricultural workers, construction workers, beedi workers
other occupations whose monthly income is Rs 15,000/ p
should not be covered under New Pension Scheme (NPS
Provident Fund Organisation (EPFO). Further, he/she sh
[Link]

2 National Pension Ministry of The scheme is meant for old age protection and social se
Scheme for Labour & annual turnover is not exceeding Rs. 1.5 crore. These re
Traders, and Self- Employment shop owners, retail traders, rice mill owners, oil mill owne
employed Persons small hotels, restaurants and other LaghuVyaparis. The w
(NPS-Traders)

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3 Ministry of The PMJJBY is available to people in the age group of 18

Pradhan Mantri
Finance auto-debit. Aadhar would be the primary KYC for the ban
Jeevan
JyotiBimaYojana stretching from 1st June to 31st May and will be renewab
(PMJJBY) the insured, due to any reason. The premium is Rs. 330
subscriber’s bank account as per the option given by him
The scheme is being offered by Life Insurance Corporati
terms with necessary approvals and tie up with banks for

4 Ministry of The Scheme is available to people in the age group 18 to

Pradhan Mantri
Finance debit on or before 31st May for the coverage period 1st J
Suraksha
BimaYojana KYC for the bank account. The risk coverage under the s
(PMSBY) partial disability. The premium of Rs. 12 per annum is to
facility in one installment. The scheme is being offered by
Insurance Company who are willing to offer the product o
purpose. The website is [Link]

5 Ministry of The Atal Pension Yojana (APY) was launched on 09.05.2

Atal Pension
Finance the poor, the under-privileged and the workers in the uno
Yojana
Development Authority (PFRDA). ` The website is https:/
yojna#:~:text=Atal%20Pension%20Yojana%20%7C%20

6 Ministry of The National Social Assistance Programme (NSAP) is a

National Social
Rural Development. This programme is being implemented in
Assistance
Programme Development towards the fulfilment of the Directive Principles of State
(NSAP) undertake within its means a number of welfare measure
method=aboutus

7 Ministry of Ayushman Bharat, a flagship scheme of Government of

Ayushman
Health & achieve the vision of Universal Health Coverage (UHC).
Bharat-Pradhan
Mantri Jan Family (SDGs) and its underlining commitment, which is to "leav
ArogyaYojana Welfare and segmented approach of health service delivery to a c
(AB-PMJAY) undertake path breaking interventions to holistically addr
care) at the primary, secondary and tertiary level. The we

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8 Ministry of Health Insurance Scheme was implemented by Ministry

Health
Textiles weavers. The healthcare facility was provided through a
Insurance
Scheme for Only the annual premium was paid to the Health Insuran
Weavers (HIS) (Office of the submitted by the weavers were paid directly by Health In
Development Commissioner (Handicrafts) is implementing following Sc
Commissioner National Handicraft Development Programme (NHDP
(Handicrafts)
Comprehensive Handicrafts Cluster Development Sc

The information is in the website: [Link]

[Link]

9 Ministry of National Safai Karamcharis Finance & Development

National Safai
Social Justice the Ministry of Social Justice & Empowerment (M/o SJ&E
Karamcharis
Finance and & Section 25 of the Companies Act, 1956. NSKFDC is in o
Development Empowerment socio-economic upliftment of the Safai Karamcharis, Sca
Corporation non-loan based schemes. The website is [Link]
(NSKFDC)

10 Ministry of The Self-Employment Scheme for Rehabilitation of Manu

Self
Social Justice to rehabilitate the remaining manual scavengers and the
Employment
Scheme for & could not be done by the target date, the Scheme was ex
Rehabilitation of Empowerment beneficiaries even thereafter, if required. As per the upda
Manual manual scavengers and their dependents in 18 States/U
Scavengers ‘Prohibition of Employment as Manual Scavengers and t
(Revised)
provision of the Act.
As per the revised Scheme, identified manual scavenger
identified manual scavengers and their dependents are p
concessional loan for undertaking self-employment ventu
period up to two years, during which a stipend of Rs. 3,00
[Link]

11 Ministry of The Public Distribution System (PDS) evolved as a syste

Public
Consumer affordable prices. Over the years, PDS has become an im
Distribution
System (PDS) Affairs, Food the country. PDS is supplemental in nature and is not inte
and Public distributed under it to a household or a section of the soc
Distribution State Governments. The Central Government, through F
procurement, storage, transportation and bulk allocation
including allocation within State, identification of eligible f
Price Shops (FPSs) etc., rest with the State Government

12. Ministry of PMAY-G aims at providing a pucca house, with basic am

Pradhan Mantri
Rural and dilapidated house, by 2022. The immediate the obje
Awaas Yojana-

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Gramin (PMAY- Development house in three years from 2016-17 to 2018- [Link] minim
G) hygienic cooking space. The unit assistance has been in
1.30 lakh in hilly states, difficult areas and IAP district. Th

13. Ministry of Pradhan Mantri Kisan Maandhan Yojana is a governmen

Pradhan Mantri
Agriculture Marginal Farmers (SMF). All Small and Marginal Farmer
Kisan Maandhan
Yojana and Farmers to 40 years, whose names appear in the land records of
Welfare Under this scheme, the farmers would receive a minimum
and if the farmer dies, the spouse of the farmer shall be e
applicable only to spouse. The website is
[Link]

Note : For details of above mentioned schemes, website of respective Ministry/Department may be visited.
Disclaimer: The above list of Employment Generation Schemes/Programmes is not exhaustive.
Last updated on: 16/12/2024

ACCESSIBILITY STATEMENT / TERM & CONDITIONS / WEBSITE POLICIES / HELP / CONTACT US /

SUGGESTION BOX / SITEMAP / WEB INFORMATION MANAGER

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 GOVERNMENT OF INDIA
MINISTRY OF LABOUR AND EMPLOYMENT
LOK SABHA
STARRED QUESTION NO. *103
TO BE ANSWERED ON 11TH FEBRUARY, 2019

NATIONAL EMPLOYMENT POLICY

*103. COL. SONARAM CHOUDHARY:

Will the Minister of LABOUR AND EMPLOYMENT be pleased to state:

(a) whether the number of unemployed persons is increasing in the

country and if so, the details thereof;

(b) whether the Government is taking any concrete steps to formulate

the National Employment Policy in the country;

(c) if so, the details thereof, and

(d) if not, the reasons therefor?

ANSWER

MINISTER OF STATE (IC) FOR LABOUR AND EMPLOYMENT

(SHRI SANTOSH KUMAR GANGWAR)

(a) to (d): A statement is laid on the Table of the House.

*
STATEMENT REFERRED TO IN REPLY TO PARTS (a) TO (d) OF LOK SABHA
STARRED QUESTION NO. *103 DUE FOR REPLY ON 11-02-2019 BY COL.
SONARAM CHOUDHARY REGARDING NATIONAL EMPLOYMENT POLICY.

(a): As per the results of available labour force surveys on Employment-

Unemployment conducted by Labour Bureau, Ministry of Labour and Employment,
the estimated unemployment rate for persons aged 15 years and above on Usual
Principal & Subsidiary Status UPSS (PS+SS)approach basis in the country in
2012-13, 2013-14 and 2015-16 was 4.0%, 3.4% and 3.7% respectively.

To generate employment and improve employability, the Government of India has

taken various steps like encouraging private sector of economy, fast tracking
various projects involving substantial investment and increasing public
expenditure on schemes like Prime Minister’s Employment Generation
Programme (PMEGP) run by Ministry of Micro, Small & Medium Enterprises,
Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGA), Pt.
Deen Dayal Upadhyaya Grameen Kaushalya Yojana (DDU-GKY) scheme run by
Ministry of Rural Development and Deendayal Antyodaya Yojana- National Urban
Livelihoods Mission (DAY-NULM) run by Ministry of Housing & Urban Affairs.

Pradhan Mantri Mudra Yojana (PMMY) has also been initiated by Government
inter alia for facilitating self-employment. Under PMMY collateral free loans
upto Rs. 10 lakh, are extended to small/micro business enterprises and to
individuals to enable them to setup or expand their business activities. Till
25th January, 2019, total 15.59 crore loans have been sanctioned under the
scheme.

Pradhan Mantri Rojgar Protsahan Yojana (PMRPY) has been launched by the
Ministry of Labour and Employment for incentivising employers for
promoting employment generation. Under this scheme, Government is paying
entire employer’s contribution (12% or as admissible) towards EPF and EPS
for all eligible new employees for all sectors for 3 years. Till 4th February,
2019, the scheme covered 1.31 lakhs establishments and 1.06 crores
beneficiaries.

(b) & (d): The Government of India is in the process of evolving a comprehensive
National Employment Policy. The proposed policy inter-alia purports to address
macroeconomic policy issues, sectoral policy issues, Labour policy, micro and
small enterprises’ issues, skill development issues, issues relating to women and
vulnerable workers and incorporate suggestions for improving employment
opportunities. Consultations have been held with various stakeholders like
Ministries, State Governments, Trade Unions, Industry Associations etc. for
inputs to the Policy.

*****
Poverty alleviation programmes were reported in the Economic Survey
10.7 The strategy for poverty alleviation is 2003-04. Table 10.4 and Box 10.2
essentially two fold. Firstly, an effort is indicate developments during the current
underway to provide greater opportunity for the year.
poor to participate in the growth process by 10.8 The National Rural Employment
focusing on specific sectors, which offer such Guarantee Bill, 2004 has been introduced in
opportunities. Secondly, poverty alleviation and the Parliament in December 2004 (Box 10.3).
social sector programmes have been An outlay of Rs. 13,466.40 crore (including
strengthened and restructured with special supplementary grants) has been provided for
programmes for the weaker sections of 2004-05 for the Department of Rural
society. Details of these programmes Development.

Social Sectors 227

website : http:/[Link]
 Box 10.2 : Major poverty alleviation, employment generation and basic services programmes
National Food for Work Programme
In line with the NCMP, National Food for Work Programme was launched on November 14, 2004 in 150 most
backward districts of the country with the objective to intensify the generation of supplementary wage employment.
The programme is open to all rural poor who are in need of wage employment and desire to do manual
unskilled work. It is implemented as a 100 per cent centrally sponsored scheme and the food grains are
provided to States free of cost. However, the transportation cost, handling charges and taxes on foodgrains are
the responsibility of the States. The collector is the nodal officer at the district level and has the overall responsibility
of planning, implementation, coordination, monitoring and supervision. For 2004-05, Rs.2020 crore have been
allocated for the programme in addition to 20 lakh tones of foodgrains.
Swaranjayanti Gram Swarozgar Yojana (SGSY)
SGSY, launched in April 1999, aims at bringing the assisted poor families (Swarozgaris) above the poverty line
by organizing them into Self Help Groups (SHGs) through a mix of Bank credit and Government subsidy.
Sampoorna Grameen Rozgar Yojana (SGRY)
SGRY, launched in 2001, aims at providing additional wage employment in all rural areas and thereby food
security and improve nutritional levels. The SGRY is open to all rural poor who are in need of wage employment
and desire to do manual and unskilled work around the village/habitat. The programme is implemented
through the Panchayati Raj Institutions (PRIs).
Rural Housing – Indira Awaas Yojana (IAY)
The Indira Awaas Yojana (IAY) operationalised from 1999-2000 is the major scheme for construction of houses
for the poor, free of cost. The Ministry of Rural Development (MORD) provides equity support to the Housing and
Urban Development Corporation (HUDCO) for this purpose.
Pradhan Mantri Gramodaya Yojana (PMGY)
PMGY launched in 2000-01 envisages allocation of Additional Central Assistance (ACA) to the States and UTs
for selected basic services such as primary health, primary education, rural shelter, rural drinking water, nutrition
and rural electrification. For 2003-04 as well as 2004-05, the annual allocation of ACA for PMGY was Rs.2, 800
crore.
Rural Employment Generation Programme (REGP)
REGP, launched in 1995 with the objective of creating self-employment opportunities in the rural areas and
small towns, is being implemented by the Khadi and Village Industries Commission (KVIC). Under REGP,
entrepreneurs can establish village industries by availing of margin money assistance from the KVIC and bank
loans, for projects with a maximum cost of Rs.25 lakh. Since the inception of REGP, up to 31 March 2004,
1,86,252 projects have been financed and 22.75 lakh job opportunities created. A target of creating 25 lakh new
jobs has been set for the REGP during the Tenth Plan. 8.32 lakh employment opportunities have already been
created during 2003-04. For 2004-05, a target of creating 5.25 lakh job opportunities has been fixed.
Prime Minister’s Rozgar Yojana (PMRY)
PMRY started in 1993 with the objective of making available self-employment opportunities to the educated
unemployed youth by assisting them in setting up any economically viable activity. So far, about 20 lakh units
have been set up under the PMRY, creating 30.4 lakh additional employment opportunities. The targets for
additional employment opportunities under the Tenth Plan and in 2004-05 are 16.50 lakh and 3.75 lakh,
respectively. While the REGP is implemented in the rural areas and small towns (population up to 20,000) for
setting up village industries without any cap on income, educational qualification or age of the beneficiary, PMRY
is meant for educated unemployed youth with family income of up to Rs.40, 000 per annum, in both urban and
rural areas, for engaging in any economically viable activity.
Pradhan Mantri Gram Sadak Yojana (PMGSY)
The PMGSY, launched in December 2000 as a 100 per cent Centrally Sponsored Scheme, aims at providing
rural connectivity to unconnected habitations with population of 500 persons or more in the rural areas by the
end of the Tenth Plan period. Augmenting and modernising rural roads has been included as an item of the
NCMP.
The programme is funded mainly from the accruals of diesel cess in the Central Road Fund. In addition,
support of the multi-lateral funding agencies and the domestic financial institutions are being obtained to meet
the financial requirements of the programme.
Up to October, 2004, with an expenditure of Rs 7,866 crore, total length of 60,024 km. of road works has been
completed. The National Rural Roads Development Agency (NRRDA), an agency of the Ministry of Rural
Continue......

228 Economic Survey 2004-2005

website : http:/[Link]
 Development registered under the Societies Registration Act, provides operational and technical support for the
programme.
Drought Prone Areas Programme (DPAP), Desert Development Programme (DDP) and Integrated Wastelands
Development Programme (IWDP)
DPAP, DDP and IWDP are being implemented for the development of wastelands/degraded lands. During
2004-05 allocation of Rs. 300 crore, Rs. 215 crore and Rs. 368 crore were provided for DPAP, DDP and IWDP,
respectively. So far, during 2004-05, 2,550 projects covering 12.75 lakh hectares, 1,600 projects covering 8 lakh
hectares and 165 projects covering 8.32 lakh hectares, have been sanctioned under DPAP, DDP and IWDP,
respectively.
Antyodaya Anna Yojana (AAY)
AAY launched in December 2000 provides foodgrains at a highly subsidized rate of Rs.2.00 per kg for wheat and
Rs.3.00 per kg for rice to the poor families under the Targeted Public Distribution System (TPDS). The scale of
issue, which was initially 25 kg per family per month, was increased to 35 kg per family per month from April 1,
2002. The scheme initially for one crore families was expanded in June 2003 by adding another 50 lakh BPL
families. During 2003-04, under the AAY, against an allocation of 45.56 lakh tonnes of foodgrains, 41.65 tonnes
were lifted by the State/UT Governments. Budget 2004-05 expanded the scheme further from August 1, 2004 by
adding another 50 lakh BPL families. With this increase, 2 crore families have been covered under the AAY.
Swarna Jayanti Shahari Rozgar Yojana (SJSRY)
The Urban Self Employment Programme and the Urban Wage Employment Programme are the two special
components of the SJSRY, which, in December 1997, substituted for various extant programmes implemented
for urban poverty alleviation. SJSRY is funded on a 75:25 basis between the Centre and the States. The
expenditure during 2003-04 was Rs.103 crore. For 2004-05, the allocation is Rs.103 crore, out of which Rs.
90.38 crore were utilized by December 31, 2004.
Valmiki Ambedkar Awas Yojana (VAMBAY)
The VAMBAY launched in December 2001 facilitates the construction and upgradation of dwelling units for the
slum dwellers and provides a healthy and enabling urban environment through community toilets under Nirmal
Bharat Abhiyan, a component of the scheme. The Central Government provides a subsidy of 50 per cent, the
balance 50 per cent being arranged by the State Government. Since its inception and up to December 31, 2004,
Rs. 753 crore have been released as Government of India subsidy for the construction/upgradation of 3,50,084
dwelling units and 49,312 toilet seats under the scheme. For the year 2004-05, out of the tentative Central Fund
allocation of Rs.280.58 crore, up to December 31, 2004, an amount of Rs. 223.66 crore has been released
covering 1,06,136 dwelling units and 20,139 toilet seats.

Box 10.3 : National Rural Employment Guarantee Bill, 2004 – Salient features
z State Governments to provide at least 100 days of guaranteed wage employment in every financial year
to every household whose adult members volunteer to do unskilled manual work.
z Sampoorna Grameen Rozgar Yojana (SGRY) and National Food for Work Programme to be subsumed
within the Scheme once the Act is in force.
z Until such time as a wage rate is fixed by the Central Government, the minimum wage for agricultural
labourers shall be applicable for the scheme.
z An applicant not provided employment within fifteen days, to be entitled to a daily unemployment allowance
as specified by the State Government subject to its economic capacity, provided such rate is not less than
a quarter of the wage rate for the first thirty days during the financial year and not less than a half of the
wage rate for the remaining period of the financial year.
z Central Employment Guarantee Council to be constituted to discharge various functions and duties
assigned to the Council. Every State Government to also constitute a State Council for this purpose.
z Panchayat at the district level to constitute a Standing Committee of its members to supervise, monitor
and oversee the implementation of the Scheme within the district.
z For every Block, State Governments to appoint a Programme Officer for implementing the Scheme.
z Gram Panchayat to be responsible for identification of the projects as per the recommendations of the
Gram Sabha and for executing and supervising such works.
z Central Government to establish a National Employment Guarantee Fund. State Governments to establish
State Employment Guarantee Funds for implementation of the Scheme.
z The Scheme to be self-selecting in the sense that those among the poor who need work at the minimum
wage would report for work under the scheme.

Social Sectors 229

website : http:/[Link]
3/19/25, 11:23 AM Press Release: Press Information Bureau


Ministry of Rural Development

Poverty Alleviation Scheme in Rural India

Posted On: 26 JUL 2024 2:38PM by PIB Delhi

The Ministry of Rural Development (MoRD) has adopted multi-pronged strategies to improve the economic well-being of people in rural areas with the main
focus on increasing livelihood opportunities, empowering rural women, providing social safety net skilling of rural youth, infrastructure development etc.
through its Programmes. In this regard, the Government is implementing a number of targeted programmes such as Mahatma Gandhi National Rural
Employment Guarantee Scheme (MGNREGS), Pradhan Mantri Awas Yojana-Gramin (PMAY-G), Pradhan Mantri Gram Sadak Yojana (PMGSY), Deendayal
Antyodaya Yojana - National Rural Livelihoods Mission (DAY NRLM), Deendayal Upadhyaya Grameen Kaushalya Yojana (DDU-GKY) and National
Social Assistance Programme (NSAP) and Watershed Development Component (WDC) of the Pradhan Mantri Krishi Sinchayee Yojana (WDC-PMKSY).

Scheme-wise and State-wise details of the funds allocated and utilized under these schemes, wherever maintained, during the last five years are at Annexure.

Under various rural development schemes, Scheduled Castes (SCs), Scheduled Tribes (STs) and minority communities, wherever applicable, are also getting
the benefits. The details in this regard are as under:

i. Under MGNREGS, 655.09 lakh SC and 547.09 lakh ST Households availed employment during the last five years.
ii. Under DAY-NRLM, since inception till June, 2024, 1,97,45,021 SC household, 1,22,32,174 ST households and 80,04,414 Minority households were
brought under the ambit of the Scheme. Similarly, in respect of mobilization of Self Help Groups (SHGs), 17,88,155 SC, 11,20,624 ST and 6,88,057
Minority SHGs have been mobilized.
iii. Under PMAY-G, a total of 68,58,151houses have been sanctioned to SCs, out of which 59,06,403 houses have completed;65,89,252 houses have been
sanctioned to STs, out of which 57,21,852 houses have been completed and 35,51,510 houses have been sanctioned to minorities, out of which
33,48,652 houses have been completed.

iv. PMGSY is not an individual/community centric scheme. The roads constructed under PMGSY cater to all the strata of the society. Nevertheless, ST
areas have got specific focus in the scheme by giving special [Link] inception till 22.07.2024, a total of 8,27,419 km road length has been
sanctioned, out of which 7,65,512 Km road length has been completed. Recently, a separate vertical under PMGSY has been launched for providing
road connectivity to Particularly Vulnerable Tribal Groups (PVTG) habitations with population size upto 100. The target length is 8,000 Km with a
time span of 5 years (2023-24 to 2027-28). So, far 2,813.11 Km has already been sanctioned under Pradhan Mantri Janjati Adivasi Nyaya Maha
Abhiyan (PM-JANMAN).
v. Under DDU-GKY, 275693 SC rural youth trained and 183160 placed; 155168 ST rural youth trained and 106344 placedand 145787 minorities youth
trained and 90233 placedfrom the financial year 2019-20 to June, [Link] RSETI, 481229 SC rural youth trained and 355962 settled; 272632 ST
rural youth trained and 196131 settled and 229282 minorities trained and 163804 settled from the financial year 2019-20 to June, 2024.
vi. Under NSAP, there was no separate allocation and release of funds for ST beneficiaries before 2021-22. From 2021-22, ST beneficiaries were
identified and separate allocation of funds for ST beneficiaries was [Link], the no. of SC & ST beneficiaries under NSAP Schemes from
2021-22 to 2023-24 are as under:

Financial year No. of SC beneficiaries No. ST beneficiaries

2021-2022 5662755 2989376

2022-2023 5696683 3009053

2023-2024 5817385 3067787

vii. WDC-PMKSY is an area development programme and all the people of the project areas including Scheduled Castes (SCs), Scheduled Tribes (STs)
and Minority Communities are benefited through the interventions undertaken under the programme. Under WDC-PMKSY 2.0, from 2022-23 to 2023-
24, 1,05,009 Water Harvesting Structures have been created / rejuvenated, 1,46,659 hectares land has been brought under protective irrigation, 84,679
hectares land has been brought under plantation (Afforestation/ Horticulture), 706066 farmers have been benefitted and 12731044mandays of
employment have been generated

In 2020, NITI Aayog was identified as the nodal agency for the Multidimensional Poverty Index (MPI), responsible for constructing an indigenized index to
monitor the performance of States and Union Territories. NITI Aayog constituted an inter-ministerial MPI Coordination Committee (MPICC) including
Ministries and Departments pertaining to areas such as health, education, nutrition, rural development, drinking water, sanitation, electricity, and urban
development, among others. It also included experts from the Ministry of Statistics and Programme Implementation (MoSPI) and the technical partners –
United Nations Development Programme (UNDP) and Oxford Poverty and Human Development Initiative (OPHI). As a result, a comprehensive National
Multidimensional Poverty Index (MPI) for India was developed. The baseline report was published in November 2021 and the second edition of the National
MPI report was released in July 2023.

As per the report ‘National Multidimensional Poverty Index: A Progress Review 2023’, the proportion of individuals who are multi-dimensionally poor
declined from 24.85% to 14.96% between 2015-16 and 2019-21, resulting in 13.5crore individuals escaping multidimensional poverty during this period.

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3/19/25, 11:23 AM Press Release: Press Information Bureau
Ministry of Rural Development (MoRD) accords emphasis for targeted implementation of its schemes/projects. The programme wise factors affecting
performance are analyzed and tailored actions are taken accordingly. Some of the major strategies in this regard are:

i. In order to ensure that the schemes reach closure, the Ministry has evolved a comprehensive multi-level and multi-format system of monitoring and
evaluation of the implementation of rural development schemes, including Performance Review Committee Meetings, District Development Co
ordination and Monitoring Committee (“DISHA”) meetings, National Level Monitors (NLMs), Area Officers Schemes, Common Review Mission,
Concurrent Evaluation and Impact Assessment Studies. State specific reviews of States/UTs are also undertaken from time to time and action is taken
on the basis of their findings.
ii. The schemes of the Rural Development have been brought upon end-to-end transaction based MIS, which enables all the stakeholders to monitor status
of schemes in a real time basis. The works are photographed with geo-tags and time stamps. All the data of RD schemes are available on public
domain.
iii. In addition to above, the Ministry arranges for sufficient funds for completion of works facilitates forest clearances, coordinates convergence with
related Ministries/Agencies for manpower, technical support etc.
iv. Social Audits are also conducted for some Schemes like Mahatma Gandhi NREGS and PMAY-G. Ombudsman are also appointed for attending to any
grievances regarding MGNREGA works. In addition, grievance redressal is being given due attention in all schemes of the Rural Development.
v. States are advised to recruit adequate staff for implementation of the programme. Norms have been laid for staffing. Funds are provided for supporting
hiring of manpower and other administrative expenditure. The training and orientation of programme manpower is also arranged from time to time.
vi. Norms for administrative and technical oversight and audit have been laid down. Mobile application for inspection viz. Area Officer App has been
developed. Similar apps have been developed in other areas too and is an ongoing process depending on the requirements. The performance of officials
is monitored against them.
vii. Regular coordination with the State Govt. for preparation of the fund release proposals and documentation is made and timely advice is tendered to
them in this regard. In cases of delay, the matter is escalated to higher levels for seeking release of funds.
viii. Women networks, community based organisations and civil society organisations are mobilised for creating demand from below for proper
implementation of the schemes.
This information was given by the Union Minister of State for Rural Development, Shri Kamlesh Paswan in a written reply in Rajya Sabha today.

******

Annexure

The details of funds allocated and utilised under poverty alleviation schemes for last five years, scheme-wise and State-wise, wherever applicable/maintained,
are as under:

I. Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS)

Details of the total State-wise expenditure including State Share under Mahatma Gandhi NREGS

Sl No State/UTs Total Expenditure including state share (Rs. In lakh)

2019-20 2020-21 2021-22 2022-23 2023-24

1 Andhra Pradesh 556396.79 1096443.58 829110.23 862312.5 894055.68

2 Arunachal Pradesh 15877.82 48537.97 47833.97 58313.24 58110.77

3 Assam 144221.89 252272.06 238095.4 204199.34 243643.98

4 Bihar 337434.88 642495.98 650209.36 668395 789647.22

5 Chhattisgarh 301154.62 411232.7 397973.09 358996.99 384814.36

6 Goa 134.01 325.91 374.68 421.75 256.05

7 Gujarat 96564.67 133495.63 173542.14 197362.37 204131.25

8 Haryana 37858.09 80196.07 70701.3 47120.28 58460.49

9 Himachal Pradesh 70892.55 98882.39 108849.73 129059.16 128827.07

10 Jammu And Kashmir 100485.28 155573.05 114410.42 96867.24 121849.65

11 Jharkhand 170055.18 315040.85 333405.15 294424.01 378069.22

12 Karnataka 475247.88 563593.77 620263.69 659760.06 661238.53

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Poverty Estimation in India
[Link]/printpdf/poverty-estimation-in-india

According to recent reports, more than a quarter of the population living in rural areas of
India is below the poverty line. Out of the total population living in the rural parts of India,
25.7% is living below the poverty line whereas in the urban areas, the situation is a bit
better with 13.7% of the population living below the poverty line.

Poverty Estimation
A common method used to estimate poverty in India is based on the income or
consumption levels and if the income or consumption falls below a given minimum level,
then the household is said to be Below the Poverty Line (BPL).

Poverty Line Calculation: Poverty estimation in India is now carried out by NITI
Aayog’s task force through the calculation of poverty line based on the data captured
by the National Sample Survey Office under the Ministry of Statistics and
Programme Implementation (MOSPI).
NITI Aayog as a policy think tank has replaced Planning Commission, which was
earlier responsible for calculating the poverty line in India.

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 Consumption Versus Income Level: Poverty line estimation in India is based on the
consumption expenditure and not on the income levels because of the following
reasons:
Variation in Income: Income of self-employed people, daily wage laborers etc.
is highly variable both temporally and spatially, while consumption pattern are
comparatively much stable.
Additional Income: Even in the case of regular wage earners, there are
additional side incomes in many cases, which is difficult to take into account.
Data Collection: In case of consumption based poverty line, sample based
surveys use a reference period (say 30 days) in which households are asked
about their consumption of last 30 days and is taken as the representative of
general consumption.
Whereas tracing the general pattern of income is not possible.
Reference Period: It is the duration/period during which the survey is
conducted by NSSO workers in which they ask certain questions to
households.

Key Terms

Poverty: According to the World Bank, Poverty is pronounced deprivation in well-

being and comprises many dimensions. It includes low incomes and the inability to
acquire the basic goods and services necessary for survival with dignity.
Poverty Line: The conventional approach to measuring poverty is to specify a
minimum expenditure (or income) required to purchase a basket of goods and
services necessary to satisfy basic human needs and this minimum expenditure is
called the poverty line.
Poverty Line Basket: The basket of goods and services necessary to satisfy basic
human needs is the Poverty Line Basket (PLB).
Poverty Ratio: The proportion of the population below the poverty line is called the
poverty ratio or headcount ratio (HCR).

Need for Poverty Estimation

Impact of Welfare Schemes: Poverty estimates are not just important for academic
purposes but are also crucial to track the impact and success of various government
policies, especially social welfare schemes that are intended to eliminate poverty.
BPL Census is conducted by the Ministry of Rural Development (along with
the partnership of state), in order to identify the poor households.
Poverty Elimination Plan: The Poverty estimates in the form of poverty line are used
to formulate poor centric poverty elimination plans.
Constitutional Requirement: Poverty estimation paves the way for poverty
elimination, that in turn prepares the ground for a just and equitable society.
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Measurement of Poverty Line
Absolute Measurement of Poverty
Absolute Poverty: According to United Nations World Summit for Economic
Development, absolute poverty is a condition characterized by severe
deprivation of basic human needs, including food, safe drinking water,
sanitation facilities, health, shelter, education and information.
It depends not only on income but also on access to social services.
Poverty Threshold: The poverty threshold in absolute measurement of poverty
is set using the monetary value of the basket of essential products (required
for basic needs) and every household whose income is less than this value will
be classified as poor.
Limited Scope: Absolute measurements of poverty, used by the World Bank
and developing countries like India, rely on a poverty line which remains
constant across geographies and over time.
Criticism: Absolute measurement of poverty overlooks deprivation within
countries or the higher cost of living in developed countries.
Relative Measurement of Poverty
Relative Poverty: It is present when a household income is lower than the
median income in a particular country and is used mainly by the developed
countries.
Those who fall into the category of relative poverty are not necessarily
deprived of all basic needs, but may not experience the same standard of
living as the majority of society or in other words, they are relatively
deprived.
Poverty Threshold: In this method certain percentage of economically bottom
population is always considered below the poverty line.
Criticism: This approach, though, ignores the importance of the absolute
standard of living and assumes that relative income is all that matters for
welfare.

Data Collection Methods

Uniform Resource Period (URP): Up until 1993-94, the poverty line was based on
URP data, which involved asking people about their consumption expenditure across a
30-day recall period that is the information was based on the recall of consumption
expenditure in the previous 30 days.

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 Mixed Reference Period (MRP): From 1999-2000 onwards, the NSSO switched to an
MRP method which measures consumption of five low-frequency items (clothing,
footwear, durables, education and institutional health expenditure) over the previous
year, and all other items over the previous 30 days.
That is to say, for the five items, survey respondents are asked about
consumption in the previous one year. For the remaining items, they are asked
about consumption in the previous 30 days.

Pre-Independence Poverty Estimation

Dadabhai Naoroji through his book, “Poverty and Unbritish Rule in India” made
the earliest estimation of poverty line (₹16 to ₹35 per capita per year).
The poverty line proposed by him was based on the cost of a subsistence or
minimum basic diet (rice or flour, dal, mutton, vegetables, ghee, vegetable oil,
and salt).
National Planning Committee’s (1938) poverty line (ranging from ₹15 to ₹20 per
capita per month) was also based on a minimum standard of living perspective in
which nutritional requirements were implicit.
In 1938, the National Planning Committee was set up by Subhash Chandra
Bose under the chairmanship of Jawaharlal Nehru for the purpose of drawing up
an economic plan with the fundamental aim to ensure an adequate standard of
living for the masses.
The Bombay Plan (1944) proponents had suggested a poverty line of ₹75 per capita
per year.
The Bombay Plan was a set of a proposal of a small group of influential
business leaders in Bombay for the development of the post-independence
economy of India.

Post-Independence Poverty Estimation

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Planning Commission Expert Group (1962), working group constituted by the
Planning Commission formulated the separate poverty lines for rural and urban
areas (₹20 and ₹25 per capita per year respectively).

VM Dandekar and N Rath (1971), made the first systematic assessment of

poverty in India, based on National Sample Survey (NSS) data.
Unlike previous scholars who had considered subsistence living or basic
minimum needs criteria as the measure of poverty line, VM Dandekar and N
Rath were of the view that poverty line must be derived from the expenditure
that was adequate to provide 2250 calories per day in both rural and urban
areas.
Expenditure based Poverty line estimation, generated a debate on minimum
calorie consumption norms.
Alagh Committee (1979): Task force constituted by the Planning Commission under
the chairmanship of YK Alagh, constructed a poverty line for rural and urban areas on
the basis of nutritional requirements and related consumption expenditure.
Poverty estimates for subsequent years were to be calculated by adjusting the
price level for inflation.

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 Lakdawala Committee (1993): Task Force chaired by DT Lakdawala, based on the
assumption that the basket of goods and services used to calculate Consumer Price
Index-Industrial Workers (CPI-IW) and Consumer Price Index- Agricultural
Labourers (CPI-AL) reflect the consumption patterns of the poor, made the following
suggestions:
Consumption expenditure should be calculated based on calorie
consumption as earlier.
State specific poverty lines should be constructed and these should be
updated using the CPI-IW in urban areas and CPI-AL in rural areas.
Discontinuation of scaling of poverty estimates based on National Accounts
Statistics.

Tendulkar Committee (2009)

Expert group constituted by the Planning Commission and, chaired by Suresh
Tendulkar, was constituted to review methodology for poverty estimation and to
address the following shortcomings of the previous methods:
Obsolete Consumption Pattern: 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.
Inflation Adjustment: There were issues with the adjustment of prices for
inflation, both spatially (across regions) and temporally (across time).
Health and Education Expenditure: Earlier poverty lines assumed that health
and education would be provided by the state and formulated poverty lines
accordingly.

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 Recommendations
Shift from Calorie Consumption based Poverty Estimation: It based its
calculations on the consumption of the items like 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.
Uniform Poverty line Basket: Unlike Alagh committee (which relied on
separate PLB for rural and urban areas), Tendulkar Committee computed new
poverty lines for rural and urban areas of each state based on the uniform
poverty line basket and found that all India poverty line (2004-05) was:
₹446.68 per capita per month in rural areas
₹578.80 per capita per month in urban areas
Private Expenditure: Incorporation of private expenditure on health and
education while estimating poverty.
Price Adjustment Procedure: The Committee also recommended a new
method of updating poverty lines, adjusting for changes in prices and
patterns of consumption (to correct spatial and temporal issues with price
adjustment), using the consumption basket of people close to the poverty line.
Mixed Reference Period: The Committee recommended using Mixed Reference
Period based estimates, as opposed to Uniform Reference Period based
estimates that were used in earlier methods for estimating poverty.
Tendulkar committee computed poverty lines for 2004-05 at a level that was
equivalent, in Purchasing Power Parity (PPP) terms to Rs 33 per day.
Purchasing Power Parity: The PPP model refers to a method used to work out
the money that would be needed to purchase the same goods and services in
two countries.

Rangarajan Committee
The committee was set up in the backdrop of national outrage over the Planning
Commission’s suggested poverty line of ₹22 a day for rural areas.

Objectives
To review international poverty estimation methods and indicate whether
based on these, a particular method for empirical poverty estimation can be
developed in India.
To recommend how these estimates of poverty can be linked to eligibility and
entitlements under the various schemes of the Government of India.

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Recommendations
Methodology Used: 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.
Normative and Behavioural level: Poverty line should be based on:
Normative level of adequate nutrition: Ideal and desirable level of
nutrition.
Behavioral determination of non-food expenses: What people use or
consume as per general behavior.
Nutritional Requirement: For normative levels of adequate nutrition – average
requirements of calories, proteins and fats based on Indian Council of Medical
Research (ICMR) norms, differentiated by age, gender and activity for all-India
rural and urban regions is considered:
Calories: 2090 kcal in urban areas and 2155 Kcal in rural areas.
Protein: For rural areas 48 gm and for urban areas 50 gm.
Fat: For urban areas 28 gm and for rural areas 26 gm.
Poverty Threshold: Persons spending below ₹47 a day in cities and ₹32 in
villages be considered poor.
Based on this methodology, Rangarajan committee estimated that the
number of poor were 19% higher in rural areas and 41% more in urban
areas than what was estimated using Tendulkar committee formula.
Modified Mixed reference period: Instead of Mixed reference Period (MRP) it
recommended Modified Mixed Reference Period (MMRP) in which reference
periods for different items were taken as:
365-days for clothing, footwear, education, institutional medical care, and
durable goods.
7-days for edible oil, egg, fish and meat, vegetables, fruits, spices,
beverages, refreshments, processed food, pan, tobacco and intoxicants
30-days for the remaining food items, fuel and light, miscellaneous goods
and services including non-institutional medical; rents and taxes.
Criticism: Rangarajan committee missed the opportunity to go beyond the
expenditure-based poverty rates and examine the possibility of a wider multi-
dimensional view of deprivation.

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International Poverty Line

The World Bank defines a person as extremely poor if she is living on less than 1.90
international dollars a day, which are adjusted for inflation as well as price
differences between countries.
Asian Development Bank too has its own poverty line which is currently at $ 1.51 per
person per day.

Challenges
Components of PLB: Determining components of Poverty Line Basket (PLB) is one of
the challenges of poverty line estimation because of the price differentials (of
constituents of basket) which vary from state to state and period to period.
Demographic and Economic Dynamics: Further, consumption patterns,
nutritional needs and prices of components keep on changing as per dynamics of
macro economy and demography.
Lack of consensus among the states over the acceptance of Tendulkar and Rangrajan
committee report.
Some states such as Odisha and West Bengal supported the Tendulkar Poverty
Line while others such as Delhi, Jharkhand, Mizoram etc. supported Rangarajan
report.
The current official measures of poverty are based on the Tendulkar poverty
line, fixed at daily expenditure of ₹27.2 in rural areas and ₹33.3 in urban areas is
criticised by many for being too low.

Way Forward

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 Redefining Poverty lines: Poverty lines have to be recalibrated depending on
changes in income, consumption patterns and prices, as India is now a middle-
income country, with an estimated per capita income of around $9,000 in purchasing
power parity.
According to economists poverty line of $3.20 translates into ₹ 75 a day, or a
68% higher than the Tendulkar poverty line.
Viable Poverty line: It makes sense to set the poverty line at a level that allows
households to get two square meals a day and other basic necessities of life.
Hybrid of Absolute and Relative Measurement of Poverty: The hybrid approach
which would measure poverty from the perspective of a common global standard of
living and relative poverty within countries.
The poverty line in case of hybrid model would be equivalent to the income
required to achieve a certain welfare status, which includes basic nutrition and
social inclusion.
Political Economic Equilibrium: Indian political, policy and administrative systems
have to adjust to the new realities of the transition to a middle- income country, in
which poverty does not mean living at the edge of hunger but, rather, lack of income
to take advantage of the opportunities thrown up by a growing economy.
The focus of government spending should be on the provision of public goods
rather than subsidies.

For Mind Map

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3/19/25, 11:25 AM NATIONAL MULTIDIMENSIONAL POVERTY INDEX | Current Affairs | Vision IAS

NATIONAL MULTIDIMENSIONAL
POVERTY INDEX
Posted 15 Feb 2024 Updated 22 Mar 2024
5 min read

Why in the news?

NITI Aayog released a discussion paper titled ‘Multidimensional
Poverty in India since 2005 - 06’.

About Multidimensional poverty

It refers to a measure that considers various factors or dimensions
beyond income to assess and understand poverty.
Multidimensional poverty encompasses the various deprivations
experienced by poor people in their daily lives – such as poor health,
lack of education, inadequate living standards, poor quality of work,
the threat of violence, among others.
Ending poverty in all its forms everywhere, the aim of Sustainable
Development Goal (SDG) 1 , entails viewing poverty not solely in
relation to income and consumption, but as relating to other
multiple capabilities.

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Measurement of multidimensional poverty:

The Multidimensional Poverty Index (MPI ) assesses poverty at the
individual level. Alkire-Foster Method is most often used to compute
MPIs.
Global MPI (GMPI): It is a globally recognized comprehensive
measure that captures poverty in multiple dimensions beyond
monetary aspects.
GMPI Report was first released by the Oxford Poverty and Human
Development Initiative (OPHI) and the United Nations Development
Programme (UNDP) since 2010.
It covers 100 developing countries and captures the acute
deprivations in health, education, and living standards that a
person faces simultaneously.
If a person is deprived in a 1/3 rd or more of ten (weighted)
indicators, the GMPI identifies them as ‘MPI poor.
National MPI (NMPI): It retains the 10 original indicators of the
global MPI model and has added two indicators , viz., Maternal
Health and Bank Account, in line with India’s national priorities.
MPI value is arrived at by multiplying the headcount ratio (H) and
the intensity of poverty (A), reflecting both the share of people in
poverty and the degree to which they are deprived.
Headcount ratio (H): It indicates proportion of
multidimensionally poor in the population.
Intensity of poverty (A): It indicates average proportion of
deprivations which is experienced by multidimensionally poor
individuals.
Under the government’s Global Indices for Reforms and Growth
(GIRG) initiative, NITI Aayog is the nodal agency for MPI.

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3/19/25, 11:25 AM NATIONAL MULTIDIMENSIONAL POVERTY INDEX | Current Affairs | Vision IAS

GIRG monitors India’s performance on various important social

and economic parameters.
NITI Aayog uses National Family Health Survey (NFHS) to measure
the NMPI.
The latest NMPI, ‘National Multidimensional poverty: A Progress
Review -2023’ is based on the data of NFHS 4 and 5.

Key finding of the recent discussion paper

Decline in MPI: Headcount Ratio decreased from 29.17% in 2013-14
to 11.28% in 2022-23.
24.82 crore Indians escaped multidimensional poverty in last 9
years.
Intensity of Poverty is also declining which shows that extent of
deprivation among the deprived population is falling.
The pace of decline in poverty headcount ratio was much faster
between 2015-16 to 2019-21 compared to 2005-06 to 2015-16.
Poverty declining across indicators: All 12 indicators of MPI have
recorded significant improvement.
Cooking Fuel and Housing have the highest deprivation level of
deprivation.
Child & Adolescent Mortality , Electricity , and Bank Account
have the lowest deprivation levels.
Regional decline in MPI: Poorer states record faster decline in
poverty indicating reduction in disparities.
Uttar Pradesh, Bihar, Madhya Pradesh, Odisha, and Rajasthan saw
fastest reduction in the proportion of multidimensional poor.
Attainment of SDG: I ndia on track to achieve SDG Target 1.2
(reducing multi-dimensional poverty by at least half) much ahead of
2030.
Factors responsible for decline in MPI: Various government
programs including PM Ujjwala Yojana , Saubhagya, and
transformative campaigns like Swachh Bharat Mission and Jal Jeevan
Table of Content
Mission have collectively elevated living conditions and overall well-
being of people.
1. Polity & Governance

[Link] 5/10
Multidimensional Poverty Index 2023
For Prelims: Multidimensional Poverty Index, UNDP, Poverty, Education, Health, Standard of Living.

For Mains: Multidimensional Poverty Index.

Source: DTE

Why in News?

Recently, the Global Multidimensional Poverty Index (MPI) 2023 has been released by the United
Nations Development Programme (UNDP) and the Oxford Poverty and Human Development
Initiative (OPHI).

The MPI measures “interlinked deprivations in health, education and standard of living that
directly affect a person’s life and wellbeing”.

What are the Key Highlights of the Index?

Global Outlook:
Globally, 1.1 billion people (18% of the total population) out of 6.1 billion people, are
acutely multidimensionally poor and live in acute multidimensional poverty across 110
countries.
Sub-Saharan Africa has 534 million poor and South Asia has 389 million.
These two regions are home to approximately five out of every six poor people.
Children under 18 years old account for half of MPI-poor people (566 million).
The poverty rate among children is 27.7%, while among adults it is 13.4 %.
Outlook for India:
Poverty in India: India still has more than 230 million people who are poor.
The UNDP defines, “Vulnerability — the share of people who are not poor but have
deprivations in 20 - 33.3% of all weighted indicators — can be much higher.
India has some 18.7% population under this category.
India’s Progress in Poverty Reduction: India is among 25 countries, including
Cambodia, China, Congo, Honduras, Indonesia, Morocco, Serbia, and Vietnam, that
successfully halved their global MPI values within 15 years.
Some 415 million Indians escaped poverty between 2005-06 and 2019-21.
The incidence of poverty in India declined significantly, from 55.1% in 2005/2006
to 16.4% in 2019/2021.
In 2005/2006, approximately 645 million people in India experienced
multidimensional poverty, a number that decreased to about 370 million in
2015/2016 and further to 230 million in 2019/2021.
Improvement in Deprivation Indicators: India progressed significantly in all the three
deprivation indicators: Health, Education, Standard of living.
Decline in poverty has been equal as well, cutting across regions and socio-
economic groups.
 The poorest states and groups, including children and people in
disadvantaged caste groups, had the fastest absolute progress.
The percentage of people who were multidimensionally poor and deprived of
nutrition decreased from 44.3% in 2005/2006 to 11.8% in 2019/2021, and child
mortality fell from 4.5% to 1.5%.

What are the Recommendations?

There is a need for context-specific multidimensional poverty indices that reflect national
definitions of poverty.
While the global MPI provides a standardized methodology, national definitions offer a
comprehensive understanding of poverty specific to each country.
It is crucial to consider these context-specific indices to evaluate and address poverty effectively.

What is the Global Multidimensional Poverty Index?

About:
The index is a key international resource that measures acute multidimensional poverty
across more than 100 developing countries.
It was first launched in 2010 by the OPHI and the Human Development Report Office of the
UNDP.
The MPI monitors deprivations in 10 indicators spanning health, education and standard of
living and includes both incidence as well as intensity of poverty.
MPI Indicators and Dimensions:

//

A person is multidimensionally poor if she/he is deprived in one third or more (means 33%
or more) of the weighted indicators (out of the ten indicators). Those who are deprived in one half
or more of the weighted indicators are considered living in extreme multidimensional poverty.

UPSC Civil Services Examination Previous Year Question (PYQ)

Prelims

Q. The Multi-dimensional Poverty Index developed by Oxford Poverty and Human Development
Initiative with UNDP support covers which of the following? (2012)

1. Deprivation of education, health, assets and services at household level

 2. Purchasing power parity at national level
3. Extent of budget deficit and GDP growth rate at national level

Select the correct answer using the codes given below:

(a) 1 only
(b) 2 and 3 only
(c) 1 and 3 only
(d) 1, 2 and 3

Ans: (a)

Mains

Q. Despite Consistent experience of high growth, India still goes with the lowest indicators of human
development. Examine the issues that make balanced and inclusive development elusive. (2016)

PDF Refernece URL: [Link]

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3/19/25, 11:27 AM Sen’s Capability Approach | Internet Encyclopedia of Philosophy

Sen’s Capability Approach

The Capability Approach is defined by its choice of focus upon
the moral significance of individuals’ capability of achieving the
kind of lives they have reason to value. This distinguishes it from
more established approaches to ethical evaluation, such as utili-
tarianism or resourcism, which focus exclusively on subjective
well-being or the availability of means to the good life, respec-
tively. A person’s capability to live a good life is defined in terms
of the set of valuable ‘beings and doings’ like being in good
health or having loving relationships with others to which they
have real access.

Amartya Sen The Capability Approach was first articulated by the Indian
economist and philosopher Amartya Sen in the 1980s, and re-
mains most closely associated with him. It has been employed extensively in the context of hu-
man development, for example, by the United Nations Development Programme, as a broader,
deeper alternative to narrowly economic metrics such as growth in GDP per capita. Here
‘poverty’ is understood as deprivation in the capability to live a good life, and ‘development’ is
understood as capability expansion.

Within academic philosophy the novel focus of Capability Approach has attracted a number of
scholars. It is seen to be relevant for the moral evaluation of social arrangements beyond the de-
velopment context, for example, for considering gender justice. It is also seen as providing foun-
dations for normative theorising, such as a capability theory of justice that would include an ex-
plicit ‘metric’ (that specifies which capabilities are valuable) and ‘rule’ (that specifies how the ca-
pabilities are to be distributed). The philosopher Martha Nussbaum has provided the most in-
fluential version of such a capability theory of justice, deriving from the requirements of human
dignity a list of central capabilities to be incorporated into national constitutions and guaran-
teed to all up to a certain threshold.

This article focuses on the philosophical aspects of the Capability Approach and its foundations
in the work of Amartya Sen. It discusses the development and structure of Sen’s account, how it
relates to other ethical approaches, and its main contributions and criticisms. It also outlines
various capability theories developed within the Capability Approach, with particular attention
to that of Martha Nussbaum.

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counts ‘fetishize’ resources as the embodiment of advantage, rather than focusing on the rela-
tionship between resources and people. Nevertheless Sen acknowledges that although the distri-
bution of resources should not be the direct concern in evaluating how well people are doing, it
is very relevant to considerations of procedural fairness.

3. Core Concepts and Structure of Sen’s Capability

Approach
This section provides a technical overview of Sen’s account.

a. Functionings and Capability

When evaluating well-being, Sen argues, the most important thing is to consider what people
are actually able to be and do. The commodities or wealth people have or their mental reactions
(utility) are an inappropriate focus because they provide only limited or indirect information
about how well a life is going. Sen illustrates his point with the example of a standard bicycle.
This has the characteristics of ‘transportation’ but whether it will actually provide transporta-
tion will depend on the characteristics of those who try to use it. It might be considered a gener-
ally useful tool for most people to extend their mobility, but it obviously will not do that for a
person without legs. Even if that person, by some quirk, finds the bicycle delightful, we should
nevertheless be able to note within our evaluative system that she still lacks transportation. Nor
does this mental reaction show that the same person would not appreciate transportation if it
were really available to her.

The Capability Approach focuses directly on the quality of life that individuals are actually able
to achieve. This quality of life is analyzed in terms of the core concepts of ‘functionings’ and
‘capability’.

Functionings are states of ‘being and doing’ such as being well-nourished, having shel-
ter. They should be distinguished from the commodities employed to achieve them (as
‘bicycling’ is distinguishable from ‘possessing a bike’).

Capability refers to the set of valuable functionings that a person has effective access to.
Thus, a person’s capability represents the effective freedom of an individual to choose be-
tween different functioning combinations – between different kinds of life – that she has
reason to value. (In later work, Sen refers to ‘capabilities’ in the plural (or even ‘free-
doms’) instead of a single capability set, and this is also common in the wider capability
literature. This allows analysis to focus on sets of functionings related to particular as-
pects of life, for example, the capabilities of literacy, health, or political freedom.)

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Figure 1. Outline of the core relationships in the Capability Approach

Figure 1 outlines the core relationships of the Capability Approach and how they relate to the
main alternative approaches focused on resources and utility. Resources (such as a bicycle) are
considered as an input, but their value depends upon individuals’ ability to convert them into
valuable functionings (such as bicycling), which depends, for example, on their personal physi-
ology (such as health), social norms, and physical environment (such as road quality). An
individual’s capability set is the set of valuable functionings that an individual has real access to.
Achieved functionings are those they actually select. For example, an individual’s capability set
may include access to different functionings relating to mobility, such as walking, bicycling, tak-
ing a public bus, and so on. The functioning they actually select to get to work may be the public
bus. Utility is considered both an output and a functioning. Utility is an output because what
people choose to do and to be naturally has an effect on their sense of subjective well-being (for
example, the pleasure of bicycling to work on a sunny day). However the Capability Approach
also considers subjective well-being – feeling happy – as a valuable functioning in its own right
and incorporates it into the capability framework.

b. Valuation: Which Functionings Matter for the Good Life?

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Sen argues that the correct focus for evaluating how well off people are is their capability to live
a life we have reason to value, not their resource wealth or subjective well-being. But in order to
begin to evaluate how people are performing in terms of capability, we first need to determine
which functionings matter for the good life and how much, or at least we need to specify a valua-
tion procedure for determining this.

One way of addressing the problem is to specify a list of the constituents of the flourishing life,
and do this on philosophical grounds (Martha Nussbaum does this for her Capability Theory of
Justice). Sen rejects this approach because he argues that it denies the relevance of the values
people may come to have and the role of democracy (Sen 2004b). Philosophers and social scien-
tists may provide helpful ideas and arguments, but the legitimate source of decisions about the
nature of the life we have reason to value must be the people concerned. Sen therefore proposes
a social choice exercise requiring both public reasoning and democratic procedures of decision-
making.

One reason that social scientists and philosophers are so keen to specify a list is that it can be
used as an index: by ranking all the different constituents of the flourishing life with respect to
each other it would allow easier evaluation of how well people are doing. Sen’s social choice ex-
ercise is unlikely to produce collective agreement on a complete ranking of different function-
ings, if only because of what Rawls called the ‘fact of reasonable disagreement’. But Sen argues
that substantial action-guiding agreement is possible. First, different valuational perspectives
may ‘intersect’ to reach similar judgments about some issues, though by way of different argu-
ments. Second, such agreements may be extended by introducing ‘ranges’ of weights rather than
cardinal numbers. For example, if there are four conflicting views about the relative weight to be
attached to literacy vis-à-vis health, of ½, ⅓, ¼ and 1/5, that contains an implicit agreement that
the relative weight on education should not exceed ½, nor fall below 1/5, so having one unit of
literacy and two of health would be better than having two units of literacy and one of health.

Sen does suggest that in many cases a sub-set of crucially important capabilities associated with
basic needs may be relatively easily identified and agreed upon as urgent moral and political pri-
orities. These ‘basic capabilities’, such as education, health, nutrition, and shelter up to mini-
mally adequate levels, do not exhaust the resources of the capability approach, only the easy
agreement on what counts as being scandalously deprived. They may be particularly helpful in
assessing the extent and nature of poverty in developing countries. However, taking a basic ca-
pability route has implications for how the exercise of evaluating individuals’ capability can pro-
ceed, since it can only evaluate how well people’s lives are going in terms of the basics.

c. Evaluation: What Capability do People Have to Live a

Good Life?
Evaluating capability is a second order exercise concerned with mapping the set of valuable
functionings people have real access to. Since it takes the value of functionings as given, its con-
clusions will reflect any ambiguity in the valuation stage.

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Assessing capability is more informationally demanding than other accounts of advantage since
it not only takes a much broader view of what well-being achievement consists in but also tries
to assess the freedom people actually have to choose high quality options. This is not a purely
procedural matter of adding up the number of options available, since the option to purchase a
tenth brand of washing powder has a rather different significance than the option to vote in
democratic elections. For example, Sen argues that the eradication of malaria from an area en-
hances the capability of individuals living there even though it doesn’t increase the number of
options those individuals have (since they don’t have the ‘option’ to live in a malarial area any-
more). Because the value of a capability set represents a person’s effective freedom to live a
valuable life in terms of the value of the functionings available to that individual, when the
available functionings are improved, so is the person’s effective freedom.

The capability approach in principle allows a very wide range of dimensions of advantage to be
positively evaluated (‘what capabilities does this person have?’). This allows an open diagnostic
approach to what is going well or badly in people’s lives that can be used to reveal unexpected
shortfalls or successes in different dimensions, without aggregating them all together into one
number. The informational focus can be tightened depending on the purpose of the evaluation
exercise and relevant valuational and informational constraints. For example, if the approach is
limited to considering ‘basic capabilities’ then the assessment is limited to a narrower range of
dimensions and attempts to assess deprivation – the shortfall from the minimal thresholds of
those capabilities – which will exclude evaluation of how well the lives of those above the
threshold are going.

As well as being concerned with how well people’s lives are going, the Capability Approach can
be used to examine the underlying determinants of the relationship between people and com-
modities, including the following (Sen 1999, 70-71):

(1) Individual physiology, such as the variations associated with illnesses, disability, age,
and gender. In order to achieve the same functionings, people may have particular needs for
non-standard commodities – such as prosthetics for a disability – or they may need more of
the standard commodities – such as additional food in the case of intestinal parasites. Note
that some of these disadvantages, such as blindness, may not be fully ‘correctable’ even with
tailored assistance.

(2) Local environment diversities, such as climate, epidemiology, and pollution. These
can impose particular costs such as more or less expensive heating or clothing
requirements.

(3) Variations in social conditions, such as the provision of public services such as edu-
cation and security, and the nature of community relationships, such as across class or eth-
nic divisions.

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(4) Differences in relational perspectives. Conventions and customs determine the com-
modity requirements of expected standards of behaviour and consumption, so that relative
income poverty in a rich community may translate into absolute poverty in the space of ca-
pability. For example, local requirements of ‘the ability to appear in public without shame’
in terms of acceptable clothing may vary widely.

(5) Distribution within the family – distributional rules within a family determining, for
example, the allocation of food and health-care between children and adults, males and
females.

The diagnosis of capability failures, or significant interpersonal variations in capability, directs

attention to the relevant causal pathways responsible. Note that many of these interpersonal
variations will also influence individuals’ abilities to access resources to begin with. For exam-
ple, the physically handicapped often have more expensive requirements to achieve the same ca-
pabilities, such as mobility, while at the same time they also have greater difficulty earning in-
come in the first place.

4. Applying Sen’s Capability Approach

The concept of a capability has a global-local character in that its definition abstracts from par-
ticular circumstances, but its realization depends on specific local requirements. For example,
the same capability to be well-nourished can be compared for different people although it may
require different amounts and kinds of food depending on one’s age, state of health, and so on.
This makes the Capability Approach applicable across political, economic, and cultural borders.
For example, Sen points out that being relatively income poor in a wealthy society can entail ab-
solute poverty in some important capabilities, because they may require more resources to
achieve. For example, the capability for employment may require more years of education in a
richer society

Many capabilities will have underlying requirements that vary strongly with social circum-
stances (although others, such as adequate nourishment, may vary less). For example, the ‘abil-
ity to appear in public without shame’ seems a capability that people might generally be said to
have reason to value, but its requirements vary significantly according to cultural norms from
society to society and for different groups within each society (such as by gender, class, and eth-
nicity). Presently in Saudi Arabia, for example, women must have the company of a close male
relative to appear in public, and require a chauffeur and private car to move between private
spaces (since they are not permitted to use public transport or drive a car themselves). Strictly
speaking the Capability Approach leaves open whether such ‘expensive’ capabilities, if consid-
ered important enough to be guaranteed by society as a matter of justice, should be met by mak-
ing more resources available to those who need them (subsidized cars and chauffeurs), or by re-
vising the relevant social norms. The Capability Approach only identifies such capability failures

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and diagnoses their causes. However, if there is general agreement in the first place that such
capabilities should be equally guaranteed for all, there is a clear basis for criticizing clearly un-
just social norms as the source of relative deprivation and thus as inconsistent with the spirit of
such a guarantee.

The capability approach takes a multi-dimensional approach to evaluation. Often it may seem
that people are generally well-off, yet a closer analysis reveals that this ‘all-things-considered’
judgement conceals surprising shortfalls in particular capabilities, for example, the sporting
icon who can’t read. Capability analysis rejects the presumption that unusual achievement in
some dimensions compensates for shortfalls in others. From a justice perspective, the capability
approach’s relevance here is to argue that if people are falling short on a particular capability
that has been collectively agreed to be a significant one, then justice would require addressing
the shortfall itself if at all possible, rather than offering compensation in some other form, such
as increased income.

Capability evaluation is informationally demanding and its precision is limited by the level of
agreement about which functionings are valuable. However, Sen has shown that even where
only elementary evaluation of quite basic capabilities is possible (for example, life-expectancy or
literacy outcomes), this can still provide much more, and more relevant, action-guiding infor-
mation than the standard alternatives. In particular, by making perspicuous contrasts between
successes and failures the capability approach can direct political and public attention to ne-
glected dimensions of human well-being. For example, countries with similar levels of wealth
can have dramatically different levels of aggregate achievement – and inequality – on such non-
controversially important dimensions as longevity and literacy. And, vice versa, countries with
very small economies can sometimes score as highly on these dimensions as the richest. This
demonstrates both the limitations of relying exclusively on economic metrics for evaluating de-
velopment, and the fact that national wealth does not pose a rigid constraint on such achieve-
ments (that GNP is not destiny). Such analyses are easily politicized in the form of the pointed
question, Why can’t we do as well as them?

Philippines South Africa

Gross National Income per $ 4,002 $9,812

capita (ppp)

Life expectancy (years) 72.3 52

Mean years of schooling 8.7 8.2

Figure 2. Perspicuous contrasts: The Philippines does more with less

(Data from the 2010 UNDP Human Development Report)

5. Criticisms of Sen’s Capability Approach

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2/27/25, 8:50 PM Periodic Labour Force Survey (PLFS) Report 2023-24

Indian Economy Noida | IAS GS Foundation Course | date 09 January | 6 PM Call Us

PERIODIC

LABOUR FORCE SURVEY (PLFS) REPORT 2023-24
26 Sep 2024 11 min read

Tags: GS Paper - 2 GS Paper - 3 Employment Growth & Development Skill Development Human Resource Government Policies & Interventions

For Prelims: National Statistical Office (NSO), Periodic Labour Force Survey (PLFS), Formal Jobs, Reverse Migration, Informalisation, Automation,
Digitisation, Goods and Services Tax (GST), MSMEs, Green Jobs.

For Mains: Status of employment in India, Challenges associated with creation of formal jobs.

Source: BS

Why in News?

Recently, the National Statistical Office (NSO) released the annual Periodic Labour Force Survey (PLFS) report 2023-24, showing the unemployment rate
stagnated at 3.2% that raises concerns about the inability to generate enough formal jobs.

What are the Key Highlights of the PLFS report 2023-24?

Stagnant Unemployment Rate: The unemployment rate for 2023-24 remained unchanged at 3.2%, the same as in 2022-23.

This marks the first time since the inception of the PLFS in 2017-18 that the unemployment rate has not shown a year-
on-year decline.

Labour Force Participation Rate (LFPR): It showed a significant increase in LFPR to 60.1% in 2023-24 from 57.9% in 2022-
23 at national level.

The rural LFPR rose to 63.7%, while the urban LFPR increased to 52%. It suggests more people are seeking work in rural
areas, possibly due to reverse migration or limited urban job opportunities during and after the pandemic.

LFPR represents the share of people either working or seeking work in the population.

Increasing Trend in Worker Population Ratio (WPR): WPR was 58.2% in the year 2023-2024. The same for male and female
was 76.3% and 40.3% respectively.

WPR is defined as the percentage of employed persons in the population.

Marginal Improvement in Job Quality: There was a marginal improvement in job quality, with the share of salaried or regular
wage workers increasing by 0.8 percentage points to 21.7%.

Urban and Rural Divergence: The unemployment rate in rural areas showed a slight increase, rising to 2.5% in 2023-24 from
2.4% in 2022-23.

In contrast, the urban unemployment rate improved, falling to 5.1% from 5.4%.

Gender Disparity: The unemployment rate for women rose to 3.2% (up from 2.9% in 2022-23), while for men, it slightly
decreased to 3.2% from 3.3%.

Increase in Self-Employment and Unpaid Work: The share of people engaged in self-employment, including unpaid
household work and small businesses, increased to 58.4% from 57.3% in 2022-23.

Self-employment includes both entrepreneurial ventures and precarious informal work, making it a mixed indicator of job
quality.

Challenges in Creating Decent Jobs: The inability of the economy to generate enough decent jobs is pushing more people
into self-employment, often in the informal sector or unpaid family roles.

The share of wage employment remains significantly lower than in the pre-pandemic period highlighting the difficulty in
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2/27/25, 8:50 PM Periodic Labour Force Survey (PLFS) Report 2023-24
The share of wage employment remains significantly lower than in the pre pandemic period, highlighting the difficulty in
Noida | IAS GS Foundation Course | date 09 January | 6 PM Call Us
creating formal and secure jobs.

What are Key Facts About the PLFS Report?

About: It is conducted by the NSO under the Ministry of Statistics and Programme Implementation (MoSPI) to

 measure the employment and unemployment situation in India.

It was developed to address the limitations of earlier labour force surveys conducted by the National Sample
Survey Office (NSSO).

 Two Primary Objectives of PLFS: It was designed with two major objectives for measuring employment and
unemployment:

First Objective: To measure the dynamics of labour force participation and employment status at short intervals
(every three months) for urban areas using the Current Weekly Status (CWS) approach.

Second Objective: To measure labour force estimates for both rural and urban areas using the Usual Status and
CWS parameters.

Innovations in Sampling Design and Data Collection: The PLFS introduced changes in the sampling design and the
structure of the schedule of inquiry compared to the previous quinquennial surveys conducted by the NSSO.

The PLFS also included additional data, such as the number of hours worked, which was not collected in the
earlier quinquennial rounds of the NSSO.

What are Government’s Initiatives Related to Employment?

Support for Marginalised Individuals for Livelihood and Enterprise (SMILE)

PM-DAKSH (Pradhan Mantri Dakshta Aur Kushalta Sampann Hitgrahi)

Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA)

Pradhan Mantri Kaushal Vikas Yojana (PMKVY)

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2/27/25, 8:50 PM Periodic Labour Force Survey (PLFS) Report 2023-24
Start-Up India Scheme
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Rozgar Mela

Why India Struggles to Generate Enough Formal Jobs?

Increasing Informalisation in Employment: The rise in employment in agriculture, and construction is tied to increased
informalisation.

As these are generally unprotected by labour laws, with no access to social security, or job security.

Technological Advancements: The introduction of AI and IoT threatens job prospects for even skilled workers, further
complicating the employment scenario. There is growing concern that automation and digitisation will reduce labour

demand.

Examples, such as layoffs in IT firms shows automation can reduce job opportunities, even for skilled workers.

Growing Jobseekers: The increase in educated job seekers, particularly those with graduate degrees, raises concerns about

the availability of suitable jobs, as the demand for such employment appears to be shrinking.

Policy Missteps: Policy like demonetization in 2016 and the poorly implemented Goods and Services Tax (GST) in 2017
have adversely affected MSMEs, leading to a further decline in job creation which employs most of India’s workforce.

Stagnant Service Sector: The output share of sectors like transport, storage, communication, and financial services
remained steady but their employment share dropped from 6% to 5%, with financial services falling below 1%.

Skill Mismatch: Despite the government's focus on skilling, the share of workers in skilled jobs fell from 18% in 2018-19 to
14% in 2022-23.

This, along with widening inequality and a declining worker-to-population ratio highlights the growing unemployment
challenges.

Way Forward

Sectoral Diversification: Investments in manufacturing, renewable energy, and technological innovation can create jobs with
greater productivity and higher wages.

Strengthening MSMEs: Micro, Small, and Medium Enterprises (MSMEs) need targeted financial support, tax relief, and a

streamlined regulatory environment to help them recover and expand their employment capacity.
Human-Centric Tech Adaptation: Emphasis should be placed on encouraging innovation in sectors that have high labour
absorption capacity, such as renewable energy, healthcare, and sustainable manufacturing, which are less likely to be fully
automated.

Industry-Aligned Skill Development: The government’s skilling initiatives should be aligned with current and future industry
needs and include training in emerging fields such as green jobs, AI ethics, cybersecurity, and data analytics.

High-Potential Service Sectors: The focus should also be on encouraging the growth of new-age services like e-commerce,
logistics, and online education, which have the potential to generate employment for a variety of skill levels.

Drishti Mains Question:

Despite economic growth, why does India struggle to generate enough formal jobs for its population, suggest measures.

Periodic Labour Force Survey PLFS Report : Latest update |…

|…

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3/19/25, 11:29 AM Press Release: Press Information Bureau

Ministry of Finance

Union Budget 2024-25: Pathway to ‘Viksit Bharat’

Prioritizing Skill Development for Employment

Growth
Posted On: 24 JUL 2024 6:38PM by PIB Delhi

The Union Budget 2024-25 outlines a comprehensive strategy to achieve 'Viksit Bharat' by focusing on nine
key priorities that aim to create abundant opportunities for all citizens. Together, these initiatives are
designed to propel India towards a developed nation status.

1. Productivity and resilience in Agriculture

2. Employment & Skilling

3. Inclusive Human Resource Development and Social Justice

4. Manufacturing & Services

5. Urban Development

6. Energy Security

7. Infrastructure

8. Innovation, Research & Development and

9. Next Generation Reforms

The Union Budget 2024-25 prioritizing skilling and employment highlights the crucial role these aspects
play in nation-building. Skilling equips the workforce with the necessary competencies to meet industry
demands, fostering innovation and productivity. Employment not only ensures economic stability but also
empowers individuals, enhancing their quality of life and contributing to overall societal progress.

With one of the youngest populations, a median age of 28, India can harness its demographic dividend by
nurturing a workforce that is equipped with employable skills and prepared for the needs of the industry.
Sixty-five per cent of India’s fast-growing population is under 35, and many lack the skills needed by a
[Link] the Union Budget 2024,Industrial Training Institutes (ITIs). 1/5
3/19/25, 11:29 AM Press Release: Press Information Bureau

modern economy. Estimates show that about 51.25 per cent of the youth is deemed employable. However, it
must be noted that the percentage has improved from around 34 per cent to 51.3 per cent in the last decade.

Source: India Skills Report, Wheebox

This sets the stage to discuss various government schemes and initiatives aimed at bolstering skill
development and bridging the employability gap among India's burgeoning young population.

Government's Focus and Commitment Towards Skill Development

The Government of India has demonstrated a strong commitment to skill development through various
comprehensive initiatives aimed at enhancing employability and fostering entrepreneurship. Under the Union
Budget 2024-25, a notable highlight is the announcement of a new centrally sponsored scheme under the
Prime Minister’s package, in collaboration with state governments and industry. This scheme aims to skill
20 lakh youth over five years and upgrade 1,000 Industrial Training Institutes (ITIs).

Additionally, the Model Skill Loan Scheme will be revised to facilitate loans up to ₹7.5 lakh with
government-backed guarantees, benefiting 25,000 students annually. For those ineligible for existing
schemes, financial support for loans up to ₹10 lakh for higher education in domestic institutions will be

[Link] the Union Budget 2024,Industrial Training Institutes (ITIs). 2/5

3/19/25, 11:29 AM Press Release: Press Information Bureau

provided, with e-vouchers offering annual interest subvention of 3% for 1 lakh students each year.

In alignment with these new measures, the government continues to support established programs. The
National Policy on Skill Development & Entrepreneurship (NPSDE) continues to bridge gaps, improve
industry engagement, and expand apprenticeship opportunities. Pradhan Mantri Kaushal Vikas Yojana
(PMKVY) has successfully trained over 1.42 crore individuals since 2015, integrating over 1,000 educational
institutions as Skill India Centres. The Craftsmen Training Scheme (CTS), with 14,955 ITIs, focuses on long-
term vocational training, showing significant female participation growth. Jan Shikshan Sansthan (JSS)
targets non/neo-literates, having trained 26.36 lakh individuals from FY19 to FY24, with women constituting
82% of beneficiaries.

The National Apprenticeship Promotion Scheme (NAPS) has engaged 32.38 lakh apprentices and increased
industry participation, highlighting substantial growth in female apprentices. Entrepreneurship training is
bolstered by institutions like the National Institute for Entrepreneurship and Small Business Development
(NIESBUD) and the Indian Institute of Entrepreneurship (IIE), which have collectively trained 4.64 lakh
individuals from FY19 to FY24. The Skill India Digital Hub launched in August 2023, enhances access to
skilled resources and integrates multiple government initiatives, engaging over 60 lakh learners.

Targeted skilling efforts extend to emerging sectors such as Green Hydrogen and the PM Vishwakarma
initiative, which upskill diverse populations. Skilling India at global standards is advanced through Skill
India International Centers and international partnerships with countries like Australia, Germany, etc.,
promoting mutual recognition of qualifications and international mobility. The National Skill Development
Corporation (NSDC) drives industry collaboration through innovative finance mechanisms like the Skill
Impact Bond, which has trained and placed thousands of youths, including a significant proportion of
women. The Directorate General of Training (DGT) partners with major corporations to provide industry-
relevant skills training, preparing trainees for Industry 4.0 and beyond.

In conclusion, while India faces significant challenges with its skill gap, the government's proactive
initiatives have shown progress in bridging this divide These efforts address talent shortages and prepare
India's youth for a global economy, emphasizing the need for sustained investment and collaboration.

Efforts to Boost Employment

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3/19/25, 11:29 AM Press Release: Press Information Bureau

The government has unveiled a robust package to bolster employment and skill development, targeting 4.1
crore youth over five years. This includes three Employment-Linked Incentive Schemes to enhance job
creation and support employees and employers. Scheme A - First Timers offers up to ₹15,000 in three
installments for first-time employees registered with EPFO, encouraging new workforce entrants. Scheme B
- Job Creation in Manufacturing provides incentives for EPFO contributions for both employees and
employers in the first four years of employment, fostering job creation in the manufacturing sector. Scheme
C - Support to Employers reimburses up to ₹3,000 per month for two years towards EPFO contributions for
each additional employee, easing the financial burden on employers and promoting workforce expansion.
Further, a new scheme for internships will provide opportunities for 1 crore youth in 500 top companies,
offering valuable industry exposure and experience.

The government is also taking significant steps to facilitate higher participation of women in the workforce.
This includes establishing working women hostels and crèches in collaboration with industry partners,
organizing women-specific skilling programs to enhance their employability, and promoting market access
for women-led Self-Help Group (SHG) enterprises, empowering women economically and socially.

Through these initiatives, the government is not only addressing immediate employment needs but also
building a sustainable framework for long-term skill development and job creation. This comprehensive
approach aims to equip India's youth with the necessary skills and opportunities to thrive in a rapidly
evolving global economy, thereby maximizing the nation's demographic dividend.

Reference

[Link]
[Link]
PRID=2035609#:~:text=Budget%20Estimates%202024%2D25%3A,receipt%3A%20%6025.83%20lakh%20crore
[Link]
[Link]
********

Santosh Kumar/Sarla Meena/Ritu Kataria/Sheetal Angral/Apoorva Mahiwal

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3/19/25, 11:30 AM Employment News

( [Link]

([Link] In-Depth Jobs

Issue no 19, 10 - 16 August 2024

Budget 2024-25: Transforming Education, Employment & Skilling Sector

The Union Budget 2024-25 has introduced an ambitious Prime Minister's package featuring five
major schemes designed to enhance employment and skill development. Over the next five years,
these initiatives aim to support 4.1 crore young people, with a total allocation of Rs. 2 lakh crore.
Further, the budget has specifically allocated Rs. 1.48 lakh crore to transform the education,
employment and skilling sector. After the Finance Minister Smt. Nirmala Sitharaman presented the
Budget in Parliament, Minister of Education Shri Dharmendra Pradhan emphasised that the
government's priorities are education, skill development, job creation, research and innovation. He
described these priorities as a people-centric, growth-oriented, inclusive and progressive approach.
He also highlighted that school and higher education, along with employment and skill development,
are of paramount importance. These factors will play a crucial role in guiding India towards
becoming a 'Viksit Bharat' by 2047.
School Education: The National Education Policy (NEP) 2020 emphasises that education should
foster core values and principles through a range of skills. This includes foundational skills like
literacy and numeracy, as well as higher-order skills such as critical thinking and problem-solving.
Additionally, it highlights the importance of social and emotional skills, including cultural awareness,
empathy, teamwork, leadership and communication. The policy framework underscores the need to
establish a strong foundation for students at the school level, which is crucial for their lifelong
development.
Recognising the crucial role of school education, the Government of India has allocated a record Rs.
73,498 crore to the Department of School Education and Literacy in this budget. This represents an
increase of Rs. 12,024 crore (19.56%) compared to the 2023-24 annual budget. Autonomous bodies
such as the Kendriya Vidyalaya Sangathan (KVS) and Navodaya Vidyalaya Samiti (NVS) have also
received their highest-ever allocations, with Rs. 9,302 crore for KVS and Rs. 5,800 crore for NVS.
This marks an increase of Rs. 802 crore for KVS and Rs. 330 crore for NVS. Additionally, funding
for flagship schemes like SAMAGRA SHIKSHA (Rs. 4,500 crore), PM POSHAN (Rs. 2,467 crore)
and PM-SHRI (Rs. 3,250 crore) has been increased compared to the previous fiscal year.
Higher Education: India's higher education sector is undergoing a significant transformation with
the implementation of the National Education Policy 2020. The policy emphasises flexible, holistic
and multidisciplinary education, promoting inclusivity, equity, autonomy and accountability. It aims
to address national needs and align with international standards by introducing a flexible curriculum,
credit system, multiple entry and exit points, skill development, vocational training, research,
innovation and the use of mother tongues and technology in teaching, learning and evaluation. The
goal is to increase the Gross Enrollment Ratio (GER) to 50% by 2035, creating approximately 5 crore

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3/19/25, 11:30 AM Employment News
new seats in higher education. To streamline these efforts, the policy proposes the establishment of
the Higher Education Commission of India (HECI), National Research Foundation (NRF), National
Education Technology Forum (NETF) and Academic Bank of Credits (ABC).
In light of higher education reforms, the Department of Higher Education has been allocated Rs.
47,619.77 crore in the 2024-25 budget. This represents an increase of Rs. 3,525.15 crore (8%)
compared to the 2023-24 fiscal year. Central Universities have received the largest allocation of Rs.
15,928 crore, up by Rs. 4,314.03 crore from the previous budget. Indian Institutes of Technology
(IITs) have been allocated Rs. 10,202.5 crore, an increase of Rs. 841 crore, while National Institutes
of Technology (NITs) have been given Rs. 5,040 crore, up by Rs. 219.40 crore. Additionally, Indian
Institutes of Science Education and Research (IISERs) have been allocated Rs. 1,540 crore, the Indian
Institute of Science (IISc) Rs. 857 crore and Deemed Universities Rs. 596 crore.
Major schemes of higher education such as Pradhan Mantri Uchchatar Shiksha Abhiyan (PM-USHA)
[erstwhile Rashtriya Uchchatar Shiksha Abhiyan (RUSA)] have been allocated Rs. 1814.94 Crore,
followed by Institutions of Eminence (IoE, Rs. 1800 Crore), Pradhan Mantri Uchhatar Shiksha
Protsahan Yojna (PM-USP, Rs. 1558 Crore), National Apprenticeship Training Scheme (NATS, Rs.
600 Crore), National Mission in Education through ICT (NMEICT, Rs. 480 Crore), Multidisciplinary
Education and Research Improvement in Technical Education (MERITE-EAP, Rs. 200 Crore) and
Establishment of 3 Centres of Excellence (CoEs) in Artificial Intelligence (Rs. 255 Crore)
respectively.
Further, the Govt. of India has made a provision to provide financial support through loan up to 10
Lakh for higher education. The loan amount will directly be given to one lakh students annually
through e-vouchers along with an interest subsidy of 3% on the loan amount. UGC Chairman Prof.
M. Jagadesh Kumar expressed that the UGC will continue to work in synergy with all the
stakeholders to ensure the efficient use of funds, furthering its mission of advancing standards of
higher education across the country.
Employment Opportunities: The Finance Minister has announced implementation of three schemes
for 'Employment Linked Incentive' as a part of the Prime Minister's package. These schemes will be
based on registration in the Employees' Provident Fund Organisation (EPFO) and will mainly focus
on recognising first-time employees and providing assistance to both employees and employers. The
schemes are:
Scheme I is associated with 'First Timers': This scheme, aimed at benefiting 2.1 crore youth over the
next two years, will provide a one-month wage subsidy to individuals entering the workforce for the
first time in all formal sectors. Eligible employees must have a monthly salary of up to Rs. 1 lakh.
The subsidy, provided through direct benefit transfer in three installments of up to Rs. 15,000, will be
available to first-time employees registered with EPFO. This support is designed to assist both
employees and employers by easing the hiring of newcomers and aiding their adjustment period
before they become fully productive. Employees must complete a mandatory online financial literacy
course before receiving the second installment. Additionally, if the employment of a first-time hire is
terminated within 12 months, the employer will be required to refund the subsidy.
Scheme II is related to job creation in manufacturing: Designed to significantly increase the hiring of
first-time employees in the manufacturing sector, this scheme will provide incentives for additional
employment, benefiting an estimated 30 lakh young people entering the workforce and their
employers. The incentive, linked to EPFO contributions, will be granted directly to both the employee
and employer over the first four years of employment. If the employment of a first-time hire is
terminated within 12 months of recruitment, the employer will be required to repay the subsidy.
Scheme III is associated with support for employers: This employer-focused scheme will cover
additional hires across all sectors for salaries up to Rs. 1 lakh per month. The government will
reimburse employers up to Rs. 3,000 per month for two years for EPFO contributions related to each
additional employee.
Skill Opportunities: A new centrally sponsored scheme will be introduced under the Prime
Minister's Package for Skilling in collaboration with state governments and industry. The scheme will
cover 20 lakh students, who will be provided skill training over a period of five years.
Modernisation of 1000 Industrial Training Institutes (ITIs): In order to focus on skill
development, 1000 Industrial Training Institutes in Hub-and-Spoke-Model will be upgraded and
modernised with an allocation of
Rs. 60,000 in collaboration with state governments and industry. The budget for this project will be
shared by the Govt. of India (Rs. 30,000 crore), by state governments (Rs. 20,000 crore) and by
industry (Rs. 10,000 crore). These ITIs will align course content with skill requirements of industry to
train 20 Lakh students over the next five years under Prime Minister's Package for Skilling.
Revised Model Loan Scheme: The government has introduced a revamped 'model skill loan scheme'
to improve access to skill development courses by significantly increasing the maximum loan limit
from Rs 1.5 lakh to Rs 7.5 lakh. Originally launched in 2015, the previous scheme experienced
limited uptake due to inadequate loan limits. Announced in the Union Budget 2024-2025, the updated

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3/19/25, 11:30 AM Employment News
scheme is designed to assist 25,000 students annually and now includes Non-Banking Financial
Companies (NBFCs), NBFC-MFIs (micro-finance institutions), and small finance banks as eligible
lenders. The revised scheme will offer access to a broader range of skill courses, including those not
aligned with the National Skill Qualification Framework (NSQF), and will feature non-NSQF courses
available on the Skill India Digital Hub platform.
Internship in Top Companies: A comprehensive scheme to provide paid internships to 1 crore youth
in top companies has also been launched in order to boost employment opportunities. Finance
Minister Smt. Nirmala Sitharaman mentioned that the scheme will provide internship opportunities in
500 top companies to 1 crore youth over a period of five years. These paid internships will provide 12
months exposure to the real-life business atmospheres, professions and employment. An internship
allowance of Rs. 5000/- per month along with a one-time assistance of Rs. 6000/- will be provided to
the youth. It has been expected from the companies that they will cover the training costs and 10% of
the internship expenses from their fund of Corporate Social Responsibility (CSR). Further, it has also
been decided that the government will incentivise 30 Lakh youth entering the job market by
contributing one month's Provident Fund (PF).
Women Empowerment through Participation in Workforce: In order to increase participation of
women in the workforce, working women's hostels and creches shall be established and women-
centric skill programmes are to be introduced through partnerships and collaborations for better
training.
Overall, the Annual Budget of India 2024-25 focuses on substantial investments in education,
employment and skilling, which is highly essential to transform the education system as per the
national as well as international scenario and to boost employment and skill opportunities as per the
need of the market. The focus of the government on these strategic areas aim to create a robust
ecosystem which will address these issues by equipping the youth with education, skilling and
employment opportunities. However, the most important aspect is its implementation through
mapping and reviewing the exact status from time to time in coordination with various stakeholders
such as central, state governments and industry at the ground level. This people centric, inclusive,
progressive and sustainable approach will pave the way for Viksit Bharat by 2047.
(The Author is Assistant Professor (Stage III), Department of Mass Communication, Central
University of Jharkhand, Ranchi. Feeback on this article can be sent to
[Link]@[Link]).
Views expressed are personal.

About Us

Employment News is the flagship journal for job seekers published by the Ministry of Information and Broadcasting, Government of
India. It was launched in 1976 with a view to provide information on employment opportunities to the unemployed and under employed
youth of the country. The journal is published in English(Employment News), Hindi (Rozgar Samachar) and Urdu (Rozgar Samachar).

Read More...  ([Link])

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2/27/25, 8:57 PM Business Cycle (Economic Cycle)

Home / Indian Economy / Business Cycle (Economic Cycle)

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Business Cycle (Economic Cycle)

Last updated on May 22nd, 2024 Posted on May 22, 2024 by NEXT IAS Team  7148

Business Cycle, also known as Economic Cycle or Trade Cycle, gives a crucial insight into
the fluctuating levels of economic activities and growth in an economy. By depicting the
periods of expansion and contraction in economic activities, they provide critical inputs to
policymakers, businesses, and investors for decision-making. This article of NEXT IAS aims
to study in detail the Business Cycle (Economic Cycle or Trade Cycle), its meaning, and
different phases such as Recession, Depression, Recovery & Boom, along with various
types of economic recovery.

1. Meaning of Business Cycle or Economic Cycle

2. Phases of Business Cycle

2.1. Peak
2.2. Recession
2.2.1. Technical Recession
2.3. Depression
2.4. Trough
2.5. Recovery
2.6. Expansion
2.7. Boom
3. Cyclicity of Business Cycle

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4. Relation between Inflation and Business Cycle

5. Types of Shapes of Economic Recovery

5.1. Z-shaped Recovery

5.2. V-Shaped Recovery
→ 5.3. U-shaped Recovery
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5.4. W-shaped Recovery

Meaning of Business Cycle or Economic Cycle

A Business Cycle is also known as Economic Cycle or Trade Cycle.
It refers to various stages of rise and fall in the economy and reflects the fluctuations in
economic activity that an economy undergoes over a long period.

“The business cycle is the periodic but irregular up-and-down movements in economic
activity measured by fluctuations in real GDP and other macroeconomic variables. It is not
a regular, predictable, or repeating phenomenon like the swing of the pendulum of a clock.
Its timing is random and, to a large degree, unpredictable”. —Parkin and Bade

Phases of Business Cycle

Economic activities in an economy are characterized by expansion in one period and
contraction in the subsequent period. These fluctuations in economic activities are
termed Business Cycle Phases or Economic Cycle Phases.
Business Cycle Phases are also called Business Cycle Stages.
The different Phases or stages of Economic Cycle represent the different levels of
economic activities in terms of production, investment, employment, etc.
The RBI releases the monthly RBI Bulletin, which provides the current statistics and
state of the economy.
Based on this, the growth or downfall of the economy and the current phase of
Economic Cycle can be analyzed.
Different Business Cycle Phases or Economic Cycle Phases are described in detail
below.

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Peak
The ‘Peak Stage’ of the Business Cycle is the situation when all the economic
indicators are at their peak stage of growth.
At this stage, prices hit their highest level after which the economy stops growing.
Thus, the economy is said to peak out.

Recession
Recession is a slowdown or a massive contraction in economic activities.
In other words, when the economy starts to contract, it is called the phase of the
Recession.
In this stage, there is a slowdown in production and low growth in sales and income.
Accordingly, economic indicators such as GDP, corporate profits, employment, etc.,
fall during the Recession.

Technical Recession
When the Indian economy faces a downfall for two consecutive quarters and this results in
the decreased GDP of the country, it is said to be a state of Technical Recession.

Depression
Depression refers to a severe and prolonged recession that lasts three or more years or
leads to a decline in real Gross Domestic Product (GDP) of at least 10% in a given year.
A depression results in a severe and prolonged downturn in economic activity and is
marked by low business and consumer confidence.
The Great Depression of 1929 is considered to be the most classic example of a
depression in economic history.

Trough
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A trough, in economic terms, refers to a stage in the business cycle where economic
activities are bottoming, or where prices are bottoming, before a rise.
In other words, Trough is the end of the depression stage, leading to the path of
recovery.
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Recovery
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Economic recovery is the phase of the business cycle, which comes following a
recession and is characterized by a sustained period of improving business activity.
Thus, Recovery can be said as the stage of a turnaround of the economy.
Normally, during an economic recovery, Gross Domestic Product (GDP) grows, incomes
rise, and unemployment falls as the economy rebounds.
The prices are low due to the earlier phase of the Depression. The low prices generally
lead to an increase in demand for goods, augmenting production, and hence leading to
a revival in industrial production.
Also, the Government takes various measures to boost demand and production in the
economy with the help of fiscal and monetary policies which helps the economy to
recover.

Expansion
Expansion is the first stage in a new business cycle.
A phase of expansion reflects an increase in income, employment, production, and
sales.

Boom
Boom refers to a period of increased commercial activity within either a business,
market, industry, or economy as a whole.
A period of Boom for an economy is marked by significant GDP growth.
Recovery is the pre-condition for an economy to enter into this stage of the Economic
cycle.

Cyclicity of Business Cycle

Under the Boom phase, an economy enters into the zone of high growth rate which is
usually characterized by a high level of demand, high investment, greater lending by the
financial institution, employment opportunity, increasing rate of inflation, high national
income, high standard of living, etc.

During this phase, the existing capacity of plants is over-utilized. Unsustainable levels of
lending and investment put pressure on both the financial institutions and the business
firms. Labor and raw material shortages start to develop.

Ultimately, scarcity of resources leads to rising costs. This ultimately slows down the
economic expansion and paves the way for contraction. Thus, the whole cycle repeats
once again.

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Relation between Inflation and Business Cycle

There’s a complex relationship between the business cycle and inflation. Usually, during
economic expansions, demand for goods and services rises. Accordingly, businesses ramp
up their production to meet the increased demand, which, in turn, leads to increased
inflation.

On the other hand, during economic contractions, economic activity slows down. This can
lead to lower demand for goods and services and hence reduced inflation.

However, it is to be noted that the relationship between the two isn’t always perfectly
linear. Other factors, like government policies and global events, can also influence inflation
rates.

Types of Shapes of Economic Recovery

Economies don’t always bounce back from recessions in the same way. The path to
recovery can take different shapes or forms.
Different types of Shapes of Economic Recovery are depicted using alphabetic letters
that resemble the graph of economic growth rate.
Some prominent examples of Shapes of Economic Recovery are – Z-shaped Recovery,
V-shaped Recovery, U-shaped Recovery, W-shaped Recovery, and L-shaped
Recovery.
All these Shapes of Economic Recovery are discussed in detail in the sections that
follow.

Z-shaped Recovery
It is the most optimistic scenario in which the economy quickly rises after an economic
crash.
It makes up more than for lost ground before settling back to the normal trend line,
thus forming a Z-shaped chart.

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In this economic disruption lasts for a small period wherein more than people’s
incomes, it is their ability to spend is restricted.

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V-Shaped Recovery
It is the next-best scenario after a Z-shaped recovery in which the economy quickly
recoups lost ground and gets back to the normal growth trend line.
In this, incomes and jobs are not permanently lost, and the economic growth recovers
sharply and returns to the path it was following before the disruption.

U-shaped Recovery
It is a scenario in which the economy, after falling, struggles around a low growth rate
for some time, before rising gradually to usual levels.
In this case, several jobs are lost and people fall upon their savings.
If this process is more long then it is called the “Elongated U-shaped Recovery”.

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W-shaped Recovery
In a W-shaped Recovery, growth falls and rises, but falls again before recovering, thus
forming a W-like chart.
The double dip depicted by a W-shaped recovery can be due to several reasons such
as a second wave of the pandemic.

L-shaped Recovery
In this, the economy fails to regain the level of GDP even after years go by.
The shape shows that there is a permanent loss to the economy’s ability to produce.

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 IMF Staff Papers
Vol. 49, No. 3
© 2002 International Monetary Fund

What Caused the 1991 Currency Crisis in India?

VALERIE CERRA and SWETA CHAMAN SAXENA*

Which model best explains the 1991 currency crisis in India? Did real overvalua-
tion contribute to the crisis? This paper seeks the answers through error correc-
tion models and by constructing the equilibrium real exchange rate using a
technique developed by Gonzalo and Granger (1995). The evidence indicates that
overvaluation as well as current account deficits and investor confidence played
significant roles in the sharp exchange rate depreciation. The ECM model is
supported by superior out-of-sample forecast performance versus a random walk
model. [JEL F31, F32, F47]

I n mid-1991, India’s exchange rate was subjected to a severe adjustment. This

event began with a slide in the value of the rupee leading up to mid-1991. The
authorities at the Reserve Bank of India slowed the decline in value by expending
international reserves. With reserves nearly depleted, however, the exchange rate
was devalued sharply on July 1 and July 3 against major foreign currencies.
India’s 1991 crisis provides an interesting case study with certain features that
are distinct from popular theoretical models. Although some elements were
present, the crisis cannot adequately be described as a first generation currency
crisis model. It also didn’t follow the second generation models, nor the more
recent literature that emphasizes financial sector weakness, overlending cycles,
and contagion. In addition, despite progress in liberalizing trade and capital flows,
India is still relatively closed and capital inflows have been well below those in

*Valerie Cerra is an Economist in the European I Department of the IMF. Sweta Chaman Saxena is
an Assistant Professor at the University of Pittsburgh. We would like to thank Timothy Callen, Charles
Engel, Robert Flood, David Goldsbrough, and Christopher Towe for helpful comments on this and earlier
versions of this paper, and Janet Bungay for editorial suggestions.

395
 Valerie Cerra and Sweta Chaman Saxena

other Asian economies. Therefore, India’s 1991 crisis contrasts with the 1997
crisis that hit the very open Asian countries.
First generation models of currency crisis (Krugman, 1979; Flood and Garber,
1984) illustrate the collapse of an exchange rate peg under monetization of
government deficits. The collapse can occur quickly, well before reserves have
been depleted. The sudden collapse comes about due to the perfect mobility of
capital, which moves to maintain uncovered interest parity. In a perfect foresight
version of a first generation model, instantaneous capital flows ensure that there
are no jumps in the exchange rate that would represent a profit opportunity for
speculators. When the shadow value of the exchange rate crosses the fixed rate,
there is a sudden loss of reserves and increase in interest rates, and the currency
begins to depreciate. In models with uncertainty, interest rates rise before the
attack, reflecting the higher probability of devaluation, and the exchange rate can
jump.
India’s 1991 crisis cannot be explained well by the first generation models due
to India’s very restrictive capital controls. Prior to 1991, capital flows to India
predominately consisted of aid flows, commercial borrowings, and nonresident
Indian deposits (Chopra and others, 1995). Direct investment was restricted,
foreign portfolio investment was channeled almost exclusively into a small
number of public sector bond issues, and foreign equity holdings in Indian compa-
nies were not permitted. While deposits to Indian banks by nonresident Indians
were allowed, restrictions were placed on the interest paid. Even in 1996, after
some post-crisis liberalization measures, India’s capital controls were among the
most restrictive in the world based on an index constructed from the IMF’s Annual
Report on Exchange Arrangements and Exchange Restrictions (Tamirisa, 1999).
Montiel (1994) finds that India’s capital controls have been relatively effective.
Therefore, first generation models are not suitable depictions of India’s crisis, nor,
given its limited capital inflows, are models developed to explain the 1997 Asian
currency crisis, such as problems with intermediation by the domestic banking
system or overlending booms.
Another class of models focuses on exchange rate misalignment and devalua-
tion cycles in developing countries with capital controls. These models share some
features with the first generation models; namely, expansionary fiscal policies are
inconsistent with the pegged exchange rate. With a closed capital account,
however, the dismantling of inconsistent policies occurs through the goods
markets, rather than through the asset markets as in the first generation models.
Edwards (1989) presents an extensive analysis of exchange rate misalignments
and crises in developing countries, including those with restricted external
regimes. His analysis distinguishes between traded and nontraded goods.
Monetization of large public deficits generates a higher domestic price level.
Given a fixed nominal exchange rate or a crawling peg set at a rate lower than
inflation, the real exchange rate appreciates and the trade balance deteriorates.
Reserve loss is gradual over a long period of time. The exchange rate crisis occurs
when reserves are finally depleted or when they reach a lower bound set by the
government. The currency is devalued to a level that permits a trade surplus and
reserve accumulation for some time. With an unchanged fiscal policy that

396
 WHAT CAUSED THE 1991 CURRENCY CRISIS IN INDIA?

continues to monetize high deficits, this model illustrates an ongoing cycle of

reserve loss and exchange rate misalignment, followed by devaluation and reserve
gain.
Flood and Marion (1997) consider the optimal size and frequency of devalua-
tions for a country that pegs its exchange rate, maintains capital controls, and
experiences real appreciation. Studying a sample of Latin American countries,
they find evidence that higher drift in real appreciation shortens the life of the peg,
but increases the size of adjustment. Higher variance in the real exchange rate
increases the time on a peg and the adjustment size. India’s real exchange rate
appeared to have minimal drift and low variance. The model implies that the
optimal size of India’s devaluations should be small, but the optimal frequency of
adjustment would be ambiguous.
The Mundell-Fleming model describes exchange rate adjustment under condi-
tions of sticky prices.1 In the case of low capital mobility, fiscal expansion leads
to higher interest rates and output, and large current account deficits that exceed
capital inflows. The balance of payments deficit can be corrected with a devalua-
tion, which improves the trade balance and also results in higher output and
interest rates. Given sticky prices, the real exchange rate is constant until the
nominal devaluation occurs, which generates an equivalent real devaluation.
Macroeconomic policies in India exhibited some differences compared to
Edwards’s model and to Latin American currency crises. Although India was
running high public deficits (Figure 1), the financing of the deficits did not center
on monetization. Some of the financing was achieved through revenue from finan-
cial repression (Kletzer and Kohli, 2001), but much of it came through borrowing,
including from external sources. Unlike the Latin cases in which monetization of
deficits led to extremely high rates of inflation, India’s inflation was broadly
similar to that of its trading partners. While India’s exchange rate was officially
pegged to a basket of currencies with small fluctuation margins prior to 1992, its
trade-weighted nominal exchange rate and U.S. dollar rate depreciated steadily
over the second half of the 1980s. This trend would require small frequent deval-
uations, consistent with the Flood and Marion model. The rate of nominal depre-
ciation (Figure 2) was considerably faster than the relative inflation differential
and the real exchange rate depreciated as well (Figure 3). Therefore, some of the
conditions assumed by Edwards—high domestic inflation in combination with a
nominal exchange rate fixed to a low inflation country—do not appear to have
been met. Instead, nominal exchange rate adjustment outpaced adjustment through
the price level.
In official descriptions of the event, India’s exchange rate crisis has been
attributed to continued current account deficits leading up to the crisis (Figure 4),
made worse by problems related to the Gulf War; and a loss of confidence in the
government as political problems compounded the weak credibility associated
with high fiscal deficits.2 A more detailed description of the shocks and external
sector performance is provided in the next section. India’s macroeconomic

1See Fleming (1962) and Mundell (1963 and 1964).

2See Rangarajan (1991a, 1991b, 1993, 1994, and 1996).

397
3/19/25, 11:33 AM Economic Issues 8 -- Why Is China Growing So Fast?

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ECONOMIC
Why Is China Growing So Fast?
ISSUES Zuliu Hu
NO. 8 Mohsin S. Khan
©1997 International Monetary Fund
June 1997
Other Titles in this
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[Preface] [Why Is China Growing So Fast?] [Measuring Growth]

[A Surprising Find] [Why the Productivity Boom?] [A More In-Depth Look]
[Conclusion] [Author Information]

Preface
The Economic Issues series aims to make available to a broad
readership of nonspecialists some of the economic research being
produced in the International Monetary Fund on topical issues. The
raw material of the series is drawn mainly from IMF Working Papers,
technical papers produced by Fund staff members and visiting
scholars, as well as from policy-related research papers. This material
is refined for the general readership by editing and partial redrafting.

The following paper draws on material originally contained in IMF

Working Paper 96/75, "Why Is China Growing So Fast?" by Zuliu Hu
and Mohsin S. Khan of the IMF's Research Department. Rozlyn
Coleman prepared the present version. Readers interested in the
original Working Paper may purchase a copy from IMF Publication
Services ($7.00).

Why Is China Growing So Fast?

In 1978, after years of state control of all productive assets, the
government of China embarked on a major program of economic
reform. In an effort to awaken a dormant economic giant, it
encouraged the formation of rural enterprises and private businesses,
liberalized foreign trade and investment, relaxed state control over
some prices, and invested in industrial production and the education
of its workforce. By nearly all accounts, the strategy has worked
spectacularly.

While pre-1978 China had seen annual growth of 6 percent a year

(with some painful ups and downs along the way), post-1978 China
saw average real growth of more than 9 percent a year with fewer and
less painful ups and downs. In several peak years, the economy grew
more than 13 percent. Per capita income has nearly quadrupled in the
last 15 years, and a few analysts are even predicting that the Chinese
economy will be larger than that of the United States in about 20
years. Such growth compares very favorably to that of the "Asian
tigers"--Hong Kong, Korea, Singapore, and Taiwan Province of
China--which, as a group, had an average growth rate of 7-8 percent
over the last 15 years.

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3/19/25, 11:33 AM Economic Issues 8 -- Why Is China Growing So Fast?

Curious about why China has done so well, an IMF research team
recently examined the sources of that nation's growth and arrived at a
surprising conclusion. Although capital accumulation--the growth in
the country's stock of capital assets, such as new factories,
manufacturing machinery, and communications systems--was
important, as were the number of Chinese workers, a sharp, sustained
increase in productivity (that is, increased worker efficiency) was the
driving force behind the economic boom. During 1979-94
productivity gains accounted for more than 42 percent of China's
growth and by the early 1990s had overtaken capital as the most
significant source of that growth. This marks a departure from the
traditional view of development in which capital investment takes the
lead. This jump in productivity originated in the economic reforms
begun in 1978.

Measuring Growth
Economists studying China face thorny theoretical and empirical
issues, mostly deriving from the country's years of central planning
and strict government control of many industries, which tend to
distort prices and misallocate resources. In addition, since the Chinese
national accounting system differs from the systems used in most
Western nations, it is difficult to derive internationally comparable
data on the Chinese economy. Figures for Chinese economic growth
consequently vary depending on how an analyst decides to account
for them.

Although economists have many ways of explaining--or modeling--

economic growth, a common approach is the neoclassical framework,
which describes how productive factors such as capital and labor
combine to generate output and which offers analytical simplicity and
a well-developed methodology. Although commonly applied to
market economies, the neoclassical model has also been used to
analyze command economies. It is an appropriate first step in looking
at the Chinese economy and yields useful "benchmark" estimates for
future research. The framework does, however, have some limitations
in the Chinese context.

Original data for the new IMF research came from material released
from the State Statistical Bureau of China and other government
agencies. Problematically, the component statistics used to compile
the Chinese gross national product (GNP) have been kept only since
1978; before that, Chinese central planners worked under the concept
of gross social output (GSO), which excluded many segments of the
economy counted under GNP. Fortunately, China also compiled an
intermediate output series called national income, which lies
somewhere between GNP and GSO and is available from 1952 to
1993. After making appropriate adjustments to the national income
statistics, including adjusting for indirect business taxes, these data
can be used to analyze the sources of Chinese economic growth.

A Surprising Find
Much previous research on economic development has suggested a
significant role for capital investment in economic growth, and a
sizable portion of China's recent growth is in fact attributable to
capital investment that has made the country more productive. In
other words, new machinery, better technology, and more investment
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3/19/25, 11:33 AM Economic Issues 8 -- Why Is China Growing So Fast?

in infrastructure have helped to raise output. Yet, although the capital

stock grew by nearly 7 percent a year over 1979-94, the capital-output
ratio has hardly budged. In other words, despite a huge expenditure of
capital, production of goods and services per unit of capital remained
about the same. This pronounced lack of capital deepening suggests a
constrained role for capital. The labor input--an abundant resource in
China--also saw its relative weight in the economy decline. Thus,
while capital formation alone accounted for over 65 percent of pre-
1978 growth, with labor adding another 17 percent, together they
accounted for only 58 percent of the post-1978 boom, a slide of
almost 25 percentage points. Productivity increases made up the rest.

It turns out that it is higher productivity that has performed this

newest economic miracle in Asia. Chinese productivity increased at
an annual rate of 3.9 percent during 1979-94, compared with
1.1 percent during 1953-78. By the early 1990s, productivity's share
of output growth exceeded 50 percent, while the share contributed by
capital formation fell below 33 percent. Such explosive growth in
productivity is remarkable--the U.S. productivity growth rate
averaged 0.4 percent during 1960-89--and enviable, since
productivity-led growth is more likely to be sustained. Analysis of the
pre- and post-1978 periods indicates that the market-oriented reforms
undertaken by China were critical in creating this productivity boom.

The reforms raised economic efficiency by introducing profit

incentives to rural collective enterprises (which are owned by local
government but are guided by market principles), family farms, small
private businesses, and foreign investors and traders. They also freed
many enterprises from constant intervention by state authorities. As a
result, between 1978 and 1992, the output of state-owned enterprises
declined from 56 percent of national output to 40 percent,while the
share of collective enterprises rose from 42 to 50 percent and that of
private businesses and joint ventures rose from 2 to 10 percent. The
profit incentives appear to have had a further positive effect in the
private capital market, as factory owners and small producers eager to
increase profits (they could keep more of them) devoted more and
more of their firms' own revenues to improving business
performance.

China's recent productivity performance is remarkable. By

comparison, productivity growth for the Asian tigers hovered around
2 percent, sometimes slightly more, for the 1966-91 period. China's
rate of almost 4 percent simply puts it in a class by itself.

Why the Productivity Boom?

Exactly how did China's economic reforms work to boost
productivity, especially in an economy still burdened by extensive
government controls? In the important rural sector the story is
particularly interesting.

Prior to the 1978 reforms, nearly four in five Chinese worked in

agriculture; by 1994, only one in two did. Reforms expanded property
rights in the countryside and touched off a race to form small
nonagricultural businesses in rural areas. Decollectivization and
higher prices for agricultural products also led to more productive
(family) farms and more efficient use of labor. Together these forces
induced many workers to move out of agriculture. The resulting rapid
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3/19/25, 11:33 AM Economic Issues 8 -- Why Is China Growing So Fast?

growth of village enterprises has drawn tens of millions of people

from traditional agriculture into higher-value-added manufacturing.

Further, the post-1978 reforms granted greater autonomy to enterprise

managers. They became more free to set their own production goals,
sell some products in the private market at competitive prices, grant
bonuses to good workers and fire bad ones, and retain some portion
of the firm's earnings for future investment. The reforms also gave
greater room for private ownership of production, and these privately
held businesses created jobs, developed much-wanted consumer
products, earned important hard currency through foreign trade, paid
state taxes, and gave the national economy a flexibility and resiliency
that it did not have before.

By welcoming foreign investment, China's open-door policy has

added power to the economic transformation. Cumulative foreign
direct investment, negligible before 1978, reached nearly US$100
billion in 1994; annual inflows increased from less than 1 percent of
total fixed investment in 1979 to 18 percent in 1994. This foreign
money has built factories, created jobs, linked China to international
markets, and led to important transfers of technology. These trends
are especially apparent in the more than one dozen open coastal areas
where foreign investors enjoy tax advantages. In addition, economic
liberalization has boosted exports--which rose 19 percent a year
during 1981-94. Strong export growth, in turn, appears to have fueled
productivity growth in domestic industries.

In one final area, price reform, the Chinese have proceeded

cautiously, granting a fair amount of autonomy to producers of
consumer goods and agricultural products but much less to other
sectors. Several bouts of inflation have buffeted the Chinese economy
in the past two decades, deterring the government from implementing
full-scale price liberalization. High rates of growth also raise
inflationary worries. Inflation may pose the single greatest threat to
Chinese growth, though thus far it has been largely contained.

A More In-Depth Look

As with any national economy, China has unique characteristics that
the researcher must properly account for.

First, many researchers cite the periodic political crises that seized
China before 1978 as a factor obscuring pre-1978 economic strength.
Because the political climate in China was so much in flux, these
commentators argue, the economic pictures before and after 1978
cannot be compared with any accuracy. This proposition was
evaluated by dropping from the analysis the 1958-70 subperiod,
which encompasses the Great Leap Forward and the Cultural
Revolution. The result is that pre-1978 productivity increased only
modestly as a result, from 1.1 to 1.6 percent.

Second, in the 1953-78 period Chinese central planners invested

heavily in the urban industrial sector and restricted migration from the
country into the cities. Could the abandonment of this policy after
1978 itself explain the strong performance of the economy? Did these
sectoral shifts drive growth, or did productivity? In the event,
although these sectoral shifts are important, they do not eliminate the
independent rise in productivity associated with the reforms.

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Third, some commentators maintain that if the productivity growth

was a one-time shot of adrenaline to the body economic, it is certainly
not sustainable. In fact, productivity gains have been steady
throughout 1979-94 and even increased during 1990-94. If the post-
reform period is broken into three distinct phases, each associated
with a different set of reforms, sizable productivity gains are evident
in each subperiod. This indicates that the Chinese were able to carry
over initial productivity gains to other parts of the economy.

Finally, one can scrutinize the analysis for measurement problems. In

particular, are the capital-stock data calculated properly and were
there any measurement errors relating to the input data? Regarding
the capital-stock measurement, since the Chinese national income
statistics exclude the value of residential housing and since outlays
for new housing rose during 1978-94, the investment figures should
be adjusted accordingly. When this is done, there is no change to the
pre-1978 productivity growth estimate and a modest increase in the
post-reform productivity growth rate, which corroborates the general
story. Could an overvaluation of the initial capital stock have biased
the findings? More conservative estimates of the capital stock were
used to re-analyze the data, but there is no strong evidence to refute
the findings. Although the pre-1978 productivity gains become
negative, the post-reform productivity rate is unaffected.

Another more significant problem with capital-stock data is that

Chinese asset surveys do not produce capital stock estimates
consistent with the investment data in the national accounts. The
difficulties of bridging this statistical gap are considerable. The
analytical findings of this study were compared with those obtained
by economists who had computed the data somewhat differently. On
the productivity side, the studies differed in emphasis but not in
essence: as a body, the available evidence corroborates productivity
improvements as a significant source of post-1978 growth, even when
divergent capital-stock calculations are employed. The outside
estimates of productivity growth vary from about 2 percent to nearly
4 percent for the 1979-94 period.

Regarding other input data, a study was made of the potential for a
differential bias that might overstate the post-reform growth relative
to the pre-reform period. This problem might arise because centrally
planned economies are prone to the overreporting of output and the
underestimating of prices. As it happens, although enterprise
managers have traditionally tended to overreport output in an effort to
meet production targets set by the government, the incentives to do so
have probably declined in the reform era as managers have faced less
strict state control. It is unlikely, therefore, that performance in the
post-1978 era has been overstated relative to earlier eras.

The underdeflating of nominal output could be a more serious source

of bias. The piecemeal character of price reform--with some sectors
liberalized and others not--means that selecting an appropriate
deflator for the post-1978 period is difficult. Yet, the central planning
period may also have seen an underdeflation of output, since
repressed inflation was probably widespread (as manifested in
shortages, black market trading, and long waits for certain goods).
Thus, the measurement problem, while real, probably does not much
alter the basic conclusion about substantial productivity gains after
1978.
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3/19/25, 11:34 AM The Global Financial Crisis | Explainer | Education | RBA

The Global Financial Crisis

Download the complete Explainer PDF 117KB

The global financial crisis (GFC) refers to the period of extreme stress in global financial markets and
banking systems between mid 2007 and early 2009. During the GFC, a downturn in the US housing
market was a catalyst for a financial crisis that spread from the United States to the rest of the world
through linkages in the global financial system. Many banks around the world incurred large losses
and relied on government support to avoid bankruptcy. Millions of people lost their jobs as the major
advanced economies experienced their deepest recessions since the Great Depression in the 1930s.
Recovery from the crisis was also much slower than past recessions that were not associated with a
financial crisis.

Main Causes of the GFC

As for all financial crises, a range of factors explain the GFC and its severity, and people are still
debating the relative importance of each factor. Some of the key aspects include:

1. Excessive risk-taking in a favourable macroeconomic environment

In the years leading up to the GFC, economic conditions in the United States and other countries
were favourable. Economic growth was strong and stable, and rates of inflation, unemployment and
interest were relatively low. In this environment, house prices grew strongly.

Expectations that house prices would continue to rise led households, in the United States especially,
to borrow imprudently to purchase and build houses. A similar expectation on house prices also led
property developers and households in European countries (such as Iceland, Ireland, Spain and some
countries in Eastern Europe) to borrow excessively. Many of the mortgage loans, especially in the
United States, were for amounts close to (or even above) the purchase price of a house. A large
share of such risky borrowing was done by investors seeking to make short-term profits by ‘flipping’
houses and by ‘subprime’ borrowers (who have higher default risks, mainly because their income and
wealth are relatively low and/or they have missed loan repayments in the past).

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3/19/25, 11:34 AM The Global Financial Crisis | Explainer | Education | RBA

Banks and other lenders were willing to make increasingly large volumes of risky loans for a range
of reasons:

Competition increased between individual lenders to extend ever-larger amounts of housing loans
that, because of the good economic environment, seemed to be very profitable at the time.

Many lenders providing housing loans did not closely assess borrowers’ abilities to make loan
repayments. This also reflected the widespread presumption that favourable conditions would
continue. Additionally, lenders had little incentive to take care in their lending decisions because
they did not expect to bear any losses. Instead, they sold large amounts of loans to investors,
usually in the form of loan packages called ‘mortgage-backed securities’ (MBS), which consisted of
thousands of individual mortgage loans of varying quality. Over time, MBS products became
increasingly complex and opaque, but continued to be rated by external agencies as if they were
very safe.

Investors who purchased MBS products mistakenly thought that they were buying a very low risk
asset: even if some mortgage loans in the package were not repaid, it was assumed that most
loans would continue to be repaid. These investors included large US banks, as well as foreign
banks from Europe and other economies that sought higher returns than could be achieved in their
local markets.

2. Increased borrowing by banks and investors

In the lead up to the GFC, banks and other investors in the United States and abroad borrowed
increasing amounts to expand their lending and purchase MBS products. Borrowing money to
purchase an asset (known as an increase in leverage) magnifies potential profits but also magnifies
potential losses. [ 1] As a result, when house prices began to fall, banks and investors incurred large
losses because they had borrowed so much.

Additionally, banks and some investors increasingly borrowed money for very short periods, including
overnight, to purchase assets that could not be sold quickly. Consequently, they became increasingly
reliant on lenders – which included other banks – extending new loans as existing short-term loans
were repaid.

3. Regulation and policy errors

Regulation of subprime lending and MBS products was too lax. In particular, there was insufficient
regulation of the institutions that created and sold the complex and opaque MBS to investors. Not

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3/19/25, 11:34 AM The Global Financial Crisis | Explainer | Education | RBA

only were many individual borrowers provided with loans so large that they were unlikely to be able
to repay them, but fraud was increasingly common – such as overstating a borrower's income and
over-promising investors on the safety of the MBS products they were being sold.

In addition, as the crisis unfolded, many central banks and governments did not fully recognise the
extent to which bad loans had been extended during the boom and the many ways in which
mortgage losses were spreading through the financial system.

How the GFC Unfolded

US house prices fell, borrowers missed repayments

The catalysts for the GFC were falling US house prices and a rising number of borrowers unable to
repay their loans. House prices in the United States peaked around mid 2006, coinciding with a
rapidly rising supply of newly built houses in some areas. As house prices began to fall, the share of
borrowers that failed to make their loan repayments began to rise. Loan repayments were
particularly sensitive to house prices in the United States because the proportion of US households
(both owner-occupiers and investors) with large debts had risen a lot during the boom and was
higher than in other countries.

Stresses in the financial system

Stresses in the financial system first emerged clearly around mid 2007. Some lenders and investors
began to incur large losses because many of the houses they repossessed after the borrowers missed
repayments could only be sold at prices below the loan balance. Relatedly, investors became less
willing to purchase MBS products and were actively trying to sell their holdings. As a result, MBS
prices declined, which reduced the value of MBS and thus the net worth of MBS investors. In turn,
investors who had purchased MBS with short-term loans found it much more difficult to roll over
these loans, which further exacerbated MBS selling and declines in MBS prices.

Spillovers to other countries

As noted above, foreign banks were active participants in the US housing market during the boom,
including purchasing MBS (with short-term US dollar funding). US banks also had substantial
operations in other countries. These interconnections provided a channel for the problems in the US
housing market to spill over to financial systems and economies in other countries.

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3/19/25, 11:34 AM The Global Financial Crisis | Explainer | Education | RBA

Failure of financial firms, panic in financial markets

Financial stresses peaked following the failure of the US financial firm Lehman Brothers in September
2008. Together with the failure or near failure of a range of other financial firms around that time,
this triggered a panic in financial markets globally. Investors began pulling their money out of banks
and investment funds around the world as they did not know who might be next to fail and how
exposed each institution was to subprime and other distressed loans. Consequently, financial markets
became dysfunctional as everyone tried to sell at the same time and many institutions wanting new
financing could not obtain it. Businesses also became much less willing to invest and households less
willing to spend as confidence collapsed. As a result, the United States and some other economies
fell into their deepest recessions since the Great Depression.

Policy Responses
Until September 2008, the main policy response to the crisis came from central banks that lowered
interest rates to stimulate economic activity, which began to slow in late 2007. However, the policy
response ramped up following the collapse of Lehman Brothers and the downturn in global growth.

Lower interest rates

Central banks lowered interest rates rapidly to very low levels (often near zero); lent large amounts
of money to banks and other institutions with good assets that could not borrow in financial markets;
and purchased a substantial amount of financial securities to support dysfunctional markets and to
stimulate economic activity once policy interest rates were near zero (known as ‘quantitative easing’).

Increased government spending

Governments increased their spending to stimulate demand and support employment throughout the
economy; guaranteed deposits and bank bonds to shore up confidence in financial firms; and
purchased ownership stakes in some banks and other financial firms to prevent bankruptcies that
could have exacerbated the panic in financial markets.

Although the global economy experienced its sharpest slowdown since the Great Depression, the
policy response prevented a global depression. Nevertheless, millions of people lost their jobs, their
homes and large amounts of their wealth. Many economies also recovered much more slowly from
the GFC than previous recessions that were not associated with financial crises. For example, the

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US unemployment rate only returned to pre-crisis levels in 2016, about nine years after the onset of
the crisis.

Stronger oversight of financial firms

In response to the crisis, regulators strengthened their oversight of banks and other financial
institutions. Among many new global regulations, banks must now assess more closely the risk of the
loans they are providing and use more resilient funding sources. For example, banks must now
operate with lower leverage and can’t use as many short-term loans to fund the loans that they make
to their customers. Regulators are also more vigilant about the ways in which risks can spread
throughout the financial system, and require actions to prevent the spreading of risks.

Australia and the GFC

Relatively strong economic performance

Australia did not experience a large economic downturn or a financial crisis during the GFC. However,
the pace of economic growth did slow significantly, the unemployment rate rose sharply and
there was a period of heightened uncertainty. The relatively strong performance of the Australian
economy and financial system during the GFC, compared with other countries, reflected a range of
factors, including:

Australian banks had very small exposures to the US housing market and US banks, partly because
domestic lending was very profitable.

Subprime and other high-risk loans were only a small share of lending in Australia, partly because
of the historical focus on lending standards by the Australian banking regulator (the Australian
Prudential Regulation Authority (APRA)).

Australia's economy was buoyed by large resource exports to China, whose economy rebounded
quickly after the initial GFC shock (mainly due to expansionary fiscal policy).

Also a large policy response

Despite the Australian financial system being in a much better position before the GFC, given the
magnitude of the shock to the global economy and to confidence more broadly, there was also a
large policy response in Australia to ensure that the economy did not suffer a major downturn. In
particular, the Reserve Bank lowered the cash rate target significantly, and the Australian Government

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Research Paper Commerce E-ISSN No : 2454-9916 | Volume : 9 | Issue : 4 | April 2023

A
COMPARATIVE
STUDY
OF
THE
IMPACT
OF
INFLATION

AND
DEFLATION
IN
THE
INDIAN
ECONOMY

Imran Husain
Research Scholar, Department of Commerce, Deen Dayal Upadhyaya Gorakhpur University, Gorakhpur, UP

ABSTRACT
This study focuses mainly on the impact of inflation and deflation in India. Inflation is the rate of increases in prices over a given period of time, e.g., one year. Inflation
is typically a wider measure, such as the overall increase in prices or the increases in the cost of living in a country. But it can also be more narrowly calculated—for
specific goods, such as food, or for services, such as a haircut, for example. Whatever the context, inflation represents how much more expensive the relevant set of
goods or services has become over a certain period, most commonly a year. Deflation is generally a decline in the prices of goods and services. Deflation will take place
naturally if and when the money supply of an economy is limited. Deflation in an economy indicates deteriorating conditions or situations.

As a result, the rate of inflation is increasing. Inflation is a sustained rise in overall price levels. Moderate inflation is associated with economic growth and the
development of a country, while high inflation can signal an overheated economy. Deflation is normally linked with significant unemployment and low productivity
levels of goods and services. The term "deflation" is often mistaken with "disinflation." While deflation refers to a decrease in the prices of goods and services in an
economy, disinflation is when inflation increases at a slower rate.

KEYWORDS: Inflation, Deflation, Economy, Unemployment, Productivity, Goods and Services.

INTRODUCTION tain a stable economy.

Inflation refers to a rapid increase in the general price level. Its effects cause a Ÿ Walking inflation, also known as trotting inflation, is a situation when
decline in purchasing power and the value of money. In other words, the impact the prices rise up to 10%. Walking inflation gives a cautionary signal for
of inflation is that it reduces the purchasing power of households due to an the occurrence of galloping inflation.
increase in prices. The impact of inflation is felt across different sectors of the Ÿ Galloping inflation refers to the state of the economy when the prices of
economy, which are favourable to some and unfavourable to others. It occurs as a goods and services increase at a rapid rate of 10% or more.
result of a mismatch between the supply and demand for money, changes in pro- Ÿ Hyperinflation: Hyperinflation is experienced by an economy when
duction and distribution costs, or an increase in product taxes. Inflation is mea- prices skyrocket more than 50% in a month. The primary cause of such sit-
sured by the Consumer Price Index in India. uations is the rise of the money supply in an economy that is not supported
by GDP growth.
The term deflation refers to a general fall in the prices of commodities. Although
it may appear to be beneficial, it is not good for the economy. Deflation is com- Causes of Inflation
monly linked to economic slowdowns, low or poor productivity, and job losses. Factors increasing demand:
Inflation lowers the value of money or lowers the purchasing power of money, Ÿ Increase in public expenditure; increase in exports
while deflation raises it. This encourages consumers to save money now in order Ÿ reduction in taxation
to buy products later, when they are cheaper. And as a result of this economic Ÿ Black money
behaviour, growth slows down even more. Deflation reduces production of Factors decreasing supply:
goods and services due to a reduction in demand from consumers. A reduction in Ÿ Shortage of factors of production: raw material; man
the production of goods and services leads to reduced investments, a reduction in Ÿ Hoarding by traders and consumers; natural causes (floods, earthquakes);
the salaries of employees, and also increases unemployment. All these lead to a Ÿ Increase in the cost of production.
massive reduction in the economic growth of the nation.
Impact of inflation
OBJECTIVE OF STUDY The effect of inflation on the economy can be stated as follows:
The study is based on the following objectives: Ÿ The effect of inflation is not distributed evenly in the economy. There are
Ÿ To study the types and causes of inflation and deflation. chances for hidden costs for different goods and services in the economy.
Ÿ To comparative study of the impact of inflation and deflation. Ÿ Sudden inflation rates are harmful to an overall economy. They lead to
Ÿ To study the various control techniques of inflation and deflation. market instability and thereby make it difficult for companies or busi-
nesses to plan a budget for the long term.
Review of Literature
Ÿ Research paper 'Impacts & Aspects of Inflation: A Study on Indian Econ- Positive Impact
omy' analysis by Rahul Soni and Vikas Kumar Chouhan. According to Stimulates Economic Growth:- Inflation kept at a modest level fosters economic
this study, inflation has a direct effect on how much money households growth by increasing firms' profit margins in the near run, encouraging them to
have to spend or save, which in turn hurts both spending and saving or boost output and supply. No Deficiency in Demand: It signifies that there is no
investing. demand shortage in the economy, which raises profitability expectations and
Ÿ Inflation and Economic Growth in India –An Empirical Analysis by encourages businesses to invest and expand production capacity.
Prasanna V Salian1, Gopakumar. K2. According to this study, the infla- Ÿ Increased Profits for Producers
tion-growth nexus in India has been systematically analyzed. The impor- Ÿ Increased employment and earnings
tant conclusion is that any increase in inflation from the previous period Ÿ Shareholders income increases.
negatively affects growth. Ÿ Borrowers' Advantages
Ÿ Governments' tax revenue improves
Research Methodology
Ÿ This research paper is conceptual and descriptive. It is social research and Negative Impact
research based on secondary data for the proper finding and analysis. Sec- Deteriorates Standard of Living: People's quality of life is lowered when their dis-
ondary data is collected from news papers, periodicals, books, journals, cretionary income is reduced. Creates shortages of goods, Inflationary pressures
and websites. may lead to shortages of products if people begin stockpiling in anticipation of
future price increases.
Types of Inflation- Ÿ Real-Income falls for groups with fixed income.
Following are the four main types of inflation: Ÿ Income Distribution Inequality Rises
Ÿ Creeping inflation is a situation where inflation in an economy increases Ÿ Lenders will sustain losses.
gradually. It is one of the mildest types of inflation and is required to main- Ÿ The rupee may depreciate.
Copyright© 2023, IERJ. This open-access article is published under the terms of the Creative Commons Attribution-NonCommercial 4.0 International License which permits Share (copy and redistribute the material in any
medium or format) and Adapt (remix, transform, and build upon the material) under the Attribution-NonCommercial terms.

International Education & Research Journal [IERJ] 06

Research Paper E-ISSN No : 2454-9916 | Volume : 9 | Issue : 4 | April 2023
Types and Causes of Deflation Fiscal Measures-
Deflation can be particularly harmful to borrowers, who may be forced to repay Ÿ Cuts in expenditure
their debts in money that is worth more than the money they borrowed, as well as Ÿ Increase in taxes
to financial market participants who invest in or speculate on the prospect of ris- Ÿ Increase in savings
ing prices. Ÿ Surplus budget
Ÿ Public debt
Types of deflation: There is bad deflation, which is when demand for a good
aggregate or service falls faster than aggregate supply. Then there is good defla- Other Measures-
tion; deflation is considered good when aggregate supply grows faster than Ÿ Raise production
aggregate demand. Ÿ Rational wage policy
Ÿ Price control
There are five main causes of deflation. Ÿ Rationing
Ÿ Decrease in aggregate demand or low confidence
Ÿ Increased productivity Control of Deflation
Ÿ Technological advances We know what causes deflation, but how can it be controlled? Deflation is more
Ÿ decrease in the supply of currency difficult to control than inflation due to some of the limitations that monetary
Ÿ Monetary policy authorities run into. Some ways to control deflation are:
Ÿ Changes to monetary policy
Impact of deflation Ÿ decrease interest rates
Deflation may have the following impacts: Ÿ Unconventional monetary policy

Reduction in Business Revenues Fiscal policy is when the government changes its spending habits and tax rates to
influence the economy. When there is a risk of deflation or it is already happen-
In an economy with deflation, businesses have to cut the prices of their goods and ing, the government can lower taxes to keep more money in the citizen's pockets.
services by a lot to stay in business. As reductions in prices take place, revenues They can also increase their spending by issuing stimulus payments or offering
begin to drop. incentive programmes to encourage people and businesses to start spending
again and move the economy forward.
Lowered Wages and Layoffs
When revenues begin to drop, businesses need to find means to reduce their Conclusion-
expenses to meet objectives. One way is by reducing wages and cutting jobs. Inflation may be due to the supply of money increasing its demand. Other factors,
This adversely affects the economy as consumers will now have less to spend. like a decrease in production or high expenditures on consumable items, etc., can
Ÿ Low Growth: High unemployment and low levels of making goods and cause inflation if not matched with their demand. There are different types of
services are usually signs of deflation. inflation: hyperinflation, creeping inflation, cost-push inflation, demand-pull
Ÿ Reduces consumer spending: When prices are falling, people are more inflation, stagflation, etc. It is the steady rise of prices for goods and services over
likely to postpone purchases because they will be cheaper later. a period of time and has more effects. As inflation erodes the value of money, it
Ÿ Increase the real value of debt: Deflation increases the real value of encourages consumers to spend and stock up on items that are slower to lose
money and debt. value. It decreases the cost of debt and lessens unemployment. Deflation has
been around for as long as inflation has, but it does not occur as often. Inflation is
There is also one positive effect of deflation: an increase in the general price level, whereas deflation is a decrease in the gen-
Ÿ Greater Export Competitiveness: If most other economies are suffering eral price level. If we think of inflation and deflation in terms of percentages,
from inflation, a positive effect of deflation could be increased export com- inflation would be a positive percentage while deflation would be a negative per-
petitiveness. Exports will be profitable as the cost of products and services centage.
falls.
RFERENCES

TABLE 1:GREENINITIATIVESINTHEAREAOFWATERMANAGEMENT
Comparative study of the impact of inflation and deflation-
BASE OF COMPRISION INFLATION DEFLATION
1.

2.
Michael D. Bordo, John Landon Lane, & Angela Redish, Good versus Bad Deflation:
Lessons from the Gold Standard Era, Nation Bureau of Economic Research, February,
2004.
[Link]
3. [Link]
Impact on demand Demand for products and Demand for products and 4. [Link]
services decrease in deflation. 5. [Link]
services increase in
6. [Link]
inflation. 7. [Link]
8. Rattan J. Bhatia Inflation, Deflation, and Economic Development, INTERNA-
Impact on National Income No impact on national income. National income declines as a
TIONAL MONETARY FUND STAFF PAPERS
result of deflation.

Is it beneficial? Moderate levels of inflation Calculated based on only the

is considered good for the amount that is availed.

economy.
Consequences seen Distribution of income is There is a rise in level of

not equal as a result of unemployment in the nation as a

result of deflation.
inflation.
Impact on Purchasing Power of Decreases the purchasing Increases the purchasing power
Money power of money. of money.

Control of Inflation
Ÿ Inflation can be controlled by a monetary policy, which is one common
method of managing inflation. A policy aims to reduce the supply of
money within an economy by lowering the prices of bonds and raising
interest rates.
Ÿ The RBI can purchase or sell government securities from or to the public.
To control inflation, the RBI sells securities in the money market, which
sucks out excess liquidity from the market. As the amount of liquid cash
decreases, demand goes down. This part of monetary policy is called the
open market operation.

Monetary Measures-
Ÿ Credit Control
Ÿ De-monetization of currency
Ÿ issue of new currency

07 International Education & Research Journal [IERJ]

Inflation: Types, Causes and Effects
Inflation and unemployment are the two most talked-about words in the
contemporary society.

These two are the big problems that plague all the economies.

Almost everyone is sure that he knows what inflation exactly is, but it remains a
source of great deal of confusion because it is difficult to define it unambiguously.

1. Meaning of Inflation:
Inflation is often defined in terms of its supposed causes. Inflation exists when
money supply exceeds available goods and services. Or inflation is attributed to
budget deficit financing. A deficit budget may be financed by the additional
money creation. But the situation of monetary expansion or budget deficit may
not cause price level to rise. Hence the difficulty of defining ‘inflation’.

Inflation may be defined as ‘a sustained upward trend in the general level of

prices’ and not the price of only one or two goods. G. Ackley defined inflation as ‘a
persistent and appreciable rise in the general level or average of prices’. In other
words, inflation is a state of rising prices, but not high prices.

It is not high prices but rising price level that constitute inflation. It constitutes,
thus, an overall increase in price level. It can, thus, be viewed as the devaluing of
the worth of money. In other words, inflation reduces the purchasing power of
money. A unit of money now buys less. Inflation can also be seen as a recurring
phenomenon.

While measuring inflation, we take into account a large number of goods and
services used by the people of a country and then calculate average increase in the
prices of those goods and services over a period of time. A small rise in prices or a
sudden rise in prices is not inflation since they may reflect the short term
workings of the market.

It is to be pointed out here that inflation is a state of disequilibrium when there

occurs a sustained rise in price level. It is inflation if the prices of most goods go
up. Such rate of increases in prices may be both slow and rapid. However, it is
difficult to detect whether there is an upward trend in prices and whether this
trend is sustained. That is why inflation is difficult to define in an unambiguous
sense.

Let’s measure inflation rate. Suppose, in December 2007, the consumer price
index was 193.6 and, in December 2008, it was 223.8. Thus, the inflation rate
during the last one year was

223.8- 193.6/ 193.6 x 100 = 15.6

As inflation is a state of rising prices, deflation may be defined as a state of falling

prices but not fall in prices. Deflation is, thus, the opposite of inflation, i.e., a rise
in the value of money or purchasing power of money. Disinflation is a slowing
down of the rate of inflation.

2. Types of Inflation:
As the nature of inflation is not uniform in an economy for all the time, it is wise
to distinguish between different types of inflation. Such analysis is useful to study
the distributional and other effects of inflation as well as to recommend anti-
inflationary policies. Inflation may be caused by a variety of factors. Its intensity
or pace may be different at different times. It may also be classified in accordance
with the reactions of the government toward inflation.

Thus, one may observe different types of inflation in the

contemporary society:
A. On the Basis of Causes:
(i) Currency inflation:
This type of inflation is caused by the printing of currency notes.

(ii) Credit inflation:

Being profit-making institutions, commercial banks sanction more loans and
advances to the public than what the economy needs. Such credit expansion leads
to a rise in price level.

(iii) Deficit-induced inflation:

The budget of the government reflects a deficit when expenditure exceeds
revenue. To meet this gap, the government may ask the central bank to print
additional money. Since pumping of additional money is required to meet the
budget deficit, any price rise may the be called the deficit-induced inflation.

(iv) Demand-pull inflation:

An increase in aggregate demand over the available output leads to a rise in the
price level. Such inflation is called demand-pull inflation (henceforth DPI). But
why does aggregate demand rise? Classical economists attribute this rise in
aggregate demand to money supply. If the supply of money in an economy ex-
ceeds the available goods and services, DPI appears. It has been described by
Coulborn as a situation of “too much money chasing too few goods.”

Keynesians hold a different argument. They argue that there can be an

autonomous increase in aggregate demand or spending, such as a rise in con-
sumption demand or investment or government spending or a tax cut or a net
increase in exports (i.e., C + I + G + X – M) with no increase in money supply.
This would prompt upward adjustment in price. Thus, DPI is caused by monetary
factors (classical adjustment) and non-monetary factors (Keynesian argument).

DPI can be explained in terms of Fig. 4.2, where we measure output on the
horizontal axis and price level on the vertical axis. In Range 1, total spending is
too short of full employment output, YF. There is little or no rise in the price level.
As demand now rises, output will rise. The economy enters Range 2, where
output approaches towards full employment situation. Note that in this region
price level begins to rise. Ultimately, the economy reaches full employment
situation, i.e., Range 3, where output does not rise but price level is pulled
upward. This is demand-pull inflation. The essence of this type of inflation is that
“too much spending chasing too few goods.”
(v) Cost-push inflation:
Inflation in an economy may arise from the overall increase in the cost of
production. This type of inflation is known as cost-push inflation (henceforth
CPI). Cost of production may rise due to an increase in the prices of raw
materials, wages, etc. Often trade unions are blamed for wage rise since wage rate
is not completely market-determinded. Higher wage means high cost of
production. Prices of commodities are thereby increased.

A wage-price spiral comes into operation. But, at the same time, firms are to be
blamed also for the price rise since they simply raise prices to expand their profit
margins. Thus, we have two important variants of CPI wage-push inflation and
profit-push inflation.

Anyway, CPI stems from the leftward shift of the aggregate supply
curve:

B. On the Basis of Speed or Intensity:

(i) Creeping or Mild Inflation:
If the speed of upward thrust in prices is slow but small then we have creeping
inflation. What speed of annual price rise is a creeping one has not been stated by
the economists. To some, a creeping or mild inflation is one when annual price
rise varies between 2 p.c. and 3 p.c. If a rate of price rise is kept at this level, it is
considered to be helpful for economic development. Others argue that if annual
price rise goes slightly beyond 3 p.c. mark, still then it is considered to be of no
danger.

(ii) Walking Inflation:

If the rate of annual price increase lies between 3 p.c. and 4 p.c., then we have a
situation of walking inflation. When mild inflation is allowed to fan out, walking
inflation appears. These two types of inflation may be described as ‘moderate
inflation’.

Often, one-digit inflation rate is called ‘moderate inflation’ which is not only
predictable, but also keep people’s faith on the monetary system of the country.
Peoples’ confidence get lost once moderately maintained rate of inflation goes out
of control and the economy is then caught with the galloping inflation.

(iii) Galloping and Hyperinflation:

Walking inflation may be converted into running inflation. Running inflation is
dangerous. If it is not controlled, it may ultimately be converted to galloping or
hyperinflation. It is an extreme form of inflation when an economy gets shatter-
ed.”Inflation in the double or triple digit range of 20, 100 or 200 p.c. a year is
labelled “galloping inflation”.

(iv) Government’s Reaction to Inflation:

Inflationary situation may be open or suppressed. Because of anti-inflationary
policies pursued by the government, inflation may not be an embarrassing one.
For instance, increase in income leads to an increase in consumption spending
which pulls the price level up.

If the consumption spending is countered by the government via price control

and rationing device, the inflationary situation may be called a suppressed one.
Once the government curbs are lifted, the suppressed inflation becomes open
inflation. Open inflation may then result in hyperinflation.
3. Causes of Inflation:
Inflation is mainly caused by excess demand/ or decline in aggregate supply or
output. Former leads to a rightward shift of the aggregate demand curve while
the latter causes aggregate supply curve to shift leftward. Former is called
demand-pull inflation (DPI), and the latter is called cost-push inflation (CPI).
Before describing the factors, that lead to a rise in aggregate demand and a de-
cline in aggregate supply, we like to explain “demand-pull” and “cost-push”
theories of inflation.

(i) Demand-Pull Inflation Theory:

There are two theoretical approaches to the DPI—one is classical and other is the
Keynesian.

According to classical economists or monetarists, inflation is caused by an

increase in money supply which leads to a rightward shift in negative sloping
aggregate demand curve. Given a situation of full employment, classicists
maintained that a change in money supply brings about an equiproportionate
change in price level.

That is why monetarists argue that inflation is always and everywhere a monetary
phenomenon. Keynesians do not find any link between money supply and
price level causing an upward shift in aggregate demand.
According to Keynesians, aggregate demand may rise due to a rise in consumer
demand or investment demand or government expenditure or net exports or the
combination of these four components of aggreate demand. Given full
employment, such increase in aggregate demand leads to an upward pressure in
prices. Such a situation is called DPI. This can be explained graphically.
Just like the price of a commodity, the level of prices is determined by the
interaction of aggregate demand and aggregate supply. In Fig. 4.3, aggregate
demand curve is negative sloping while aggregate supply curve before the full
employment stage is positive sloping and becomes vertical after the full employ-
ment stage is reached. AD1 is the initial aggregate demand curve that intersects
the aggregate supply curve AS at point E1.
The price level, thus, determined is OP1. As aggregate demand curve shifts to AD2,
price level rises to OP2. Thus, an increase in aggregate demand at the full
employment stage leads to an increase in price level only, rather than the level of
output. However, how much price level will rise following an increase in
aggregate demand depends on the slope of the AS curve.
(ii) Causes of Demand-Pull Inflation:
DPI originates in the monetary sector. Monetarists’ argument that “only money
matters” is based on the assumption that at or near full employment excessive
money supply will increase aggregate demand and will, thus, cause inflation.

An increase in nominal money supply shifts aggregate demand curve rightward.

This enables people to hold excess cash balances. Spending of excess cash
balances by them causes price level to rise. Price level will continue to rise until
aggregate demand equals aggregate supply.

Keynesians argue that inflation originates in the non-monetary sector or the real
sector. Aggregate demand may rise if there is an increase in consumption
expenditure following a tax cut. There may be an autonomous increase in
business investment or government expenditure. Government expenditure is
inflationary if the needed money is procured by the government by printing
additional money.
In brief, increase in aggregate demand i.e., increase in (C + I + G + X – M) causes
price level to rise. However, aggregate demand may rise following an increase in
money supply generated by the printing of additional money (classical argument)
which drives prices upward. Thus, money plays a vital role. That is why Milton
Friedman argues that inflation is always and everywhere a monetary phenom-
enon.

There are other reasons that may push aggregate demand and, hence, price level
upwards. For instance, growth of population stimulates aggregate demand.
Higher export earnings increase the purchasing power of the exporting countries.
Additional purchasing power means additional aggregate demand. Purchasing
power and, hence, aggregate demand may also go up if government repays public
debt.

Again, there is a tendency on the part of the holders of black money to spend
more on conspicuous consumption goods. Such tendency fuels inflationary fire.
Thus, DPI is caused by a variety of factors.

(iii) Cost-Push Inflation Theory:

In addition to aggregate demand, aggregate supply also generates inflationary
process. As inflation is caused by a leftward shift of the aggregate supply, we call
it CPI. CPI is usually associated with non-monetary factors. CPI arises due to the
increase in cost of production. Cost of production may rise due to a rise in cost of
raw materials or increase in wages.

However, wage increase may lead to an increase in productivity of workers. If this

happens, then the AS curve will shift to the right- ward not leftward—direction.
We assume here that productivity does not change in spite of an increase in
wages.

Such increases in costs are passed on to consumers by firms by raising the prices
of the products. Rising wages lead to rising costs. Rising costs lead to rising
prices. And, rising prices again prompt trade unions to demand higher wages.
Thus, an inflationary wage-price spiral starts. This causes aggregate supply curve
to shift leftward.

This can be demonstrated graphically where AS1 is the initial aggregate supply
curve. Below the full employment stage this AS curve is positive sloping and at
full employment stage it becomes perfectly inelastic.
Intersection point (E1) of AD1 and AS1 curves determine the price level (OP1). Now
there is a leftward shift of aggregate supply curve to AS2. With no change in
aggregate demand, this causes price level to rise to OP2 and output to fall to OY2.
With the reduction in output, employment in the economy declines or
unemployment rises. Further shift in AS curve to AS3 results in a higher price
level (OP3) and a lower volume of aggregate output (OY3). Thus, CPI may arise
even below the full employment (YF) stage.
(iv) Causes of Cost-Push Inflation:
It is the cost factors that pull the prices upward. One of the important causes of
price rise is the rise in price of raw materials. For instance, by an administrative
order the government may hike the price of petrol or diesel or freight rate. Firms
buy these inputs now at a higher price. This leads to an upward pressure on cost
of production.

Not only this, CPI is often imported from outside the economy. Increase in the
price of petrol by OPEC compels the government to increase the price of petrol
and diesel. These two important raw materials are needed by every sector, espe-
cially the transport sector. As a result, transport costs go up resulting in higher
general price level.

Again, CPI may be induced by wage-push inflation or profit-push inflation. Trade

unions demand higher money wages as a compensation against inflationary price
rise. If increase in money wages exceed labour productivity, aggregate supply will
shift upward and leftward. Firms often exercise power by pushing prices up
independently of consumer demand to expand their profit margins.

Fiscal policy changes, such as increase in tax rates also leads to an upward
pressure in cost of production. For instance, an overall increase in excise tax of
mass consumption goods is definitely inflationary. That is why government is
then accused of causing inflation.

Finally, production setbacks may result in decreases in output. Natural disaster,

gradual exhaustion of natural resources, work stoppages, electric power cuts, etc.,
may cause aggregate output to decline. In the midst of this output reduction,
artificial scarcity of any goods created by traders and hoarders just simply ignite
the situation.

Inefficiency, corruption, mismanagement of the economy may also be the other

reasons. Thus, inflation is caused by the interplay of various factors. A particular
factor cannot be held responsible for any inflationary price rise.

4. Effects of Inflation:
People’s desires are inconsistent. When they act as buyers they want prices of
goods and services to remain stable but as sellers they expect the prices of goods
and services should go up. Such a happy outcome may arise for some individuals;
“but, when this happens, others will be getting the worst of both worlds.”

When price level goes up, there is both a gainer and a loser. To evaluate the
consequence of inflation, one must identify the nature of inflation which may be
anticipated and unanticipated. If inflation is anticipated, people can adjust with
the new situation and costs of inflation to the society will be smaller.

In reality, people cannot predict accurately future events or people often make
mistakes in predicting the course of inflation. In other words, inflation may be
unanticipated when people fail to adjust completely. This creates various
problems.

One can study the effects of unanticipated inflation under two

broad headings:
(a) Effect on distribution of income and wealth; and

(b) Effect on economic growth.

(a) Effects of Inflation on Distribution of Income and Wealth:

During inflation, usually people experience rise in incomes. But some people gain
during inflation at the expense of others. Some individuals gain because their
money incomes rise more rapidly than the prices and some lose because prices
rise more rapidly than their incomes during inflation. Thus, it redistributes
income and wealth.

Though no conclusive evidence can be cited, it can be asserted that

following categories of people are affected by inflation differently:
(i) Creditors and debtors:
Borrowers gain and lenders lose during inflation because debts are fixed in rupee
terms. When debts are repaid their real value declines by the price level increase
and, hence, creditors lose. An individual may be interested in buying a house by
taking loan of Rs. 7 lakh from an institution for 7 years.

The borrower now welcomes inflation since he will have to pay less in real terms
than when it was borrowed. Lender, in the process, loses since the rate of interest
payable remains unaltered as per agreement. Because of inflation, the borrower is
given ‘dear’ rupees, but pays back ‘cheap’ rupees. However, if in an inflation-
ridden economy creditors chronically loose, it is wise not to advance loans or to
shut down business.

Never does it happen. Rather, the loan-giving institution makes adequate

safeguard against the erosion of real value. Above all, banks do not pay any
interest on current account but charges interest on loans.

(ii) Bond and debenture-holders:

In an economy, there are some people who live on interest income—they suffer
most. Bondholders earn fixed interest income: These people suffer a reduction in
real income when prices rise. In other words, the value of one’s savings decline if
the interest rate falls short of inflation rate. Similarly, beneficiaries from life
insurance programmes are also hit badly by inflation since real value of savings
deteriorate.

(iii) Investors:
People who put their money in shares during inflation are expected to gain since
the possibility of earning of business profit brightens. Higher profit induces own-
ers of firm to distribute profit among investors or shareholders.

(iv) Salaried people and wage-earners:

Anyone earning a fixed income is damaged by inflation. Sometimes, unionised
worker succeeds in raising wage rates of white-collar workers as a compensation
against price rise. But wage rate changes with a long time lag. In other words,
wage rate increases always lag behind price increases. Naturally, inflation results
in a reduction in real purchasing power of fixed income-earners.

On the other hand, people earning flexible incomes may gain during inflation.
The nominal incomes of such people outstrip the general price rise. As a result,
real incomes of this income group increase.

(v) Profit-earners, speculators and black marketers:

It is argued that profit-earners gain from inflation. Profit tends to rise during
inflation. Seeing inflation, businessmen raise the prices of their products. This
results in a bigger profit. Profit margin, however, may not be high when the rate
of inflation climbs to a high level.

However, speculators dealing in business in essential commodities usually stand

to gain by inflation. Black marketers are also benefited by inflation.

Thus, there occurs a redistribution of income and wealth. It is said that rich
becomes richer and poor becomes poorer during inflation. However, no such
hard and fast generalisation can be made. It is clear that someone wins and
someone loses during inflation.
These effects of inflation may persist if inflation is unanticipated. However, the
redistributive burdens of inflation on income and wealth are most likely to be
minimal if inflation is anticipated by the people. With anticipated inflation,
people can build up their strategies to cope with inflation.

If the annual rate of inflation in an economy is anticipated correctly people will

try to protect them against losses resulting from inflation. Workers will demand
10 p.c. wage increase if inflation is expected to rise by 10 p.c.

Similarly, a percentage of inflation premium will be demanded by creditors from

debtors. Business firms will also fix prices of their products in accordance with
the anticipated price rise. Now if the entire society “learn to live with inflation”,
the redistributive effect of inflation will be minimal.

However, it is difficult to anticipate properly every episode of inflation. Further,

even if it is anticipated it cannot be perfect. In addition, adjustment with the new
expected inflationary conditions may not be possible for all categories of people.
Thus, adverse redistributive effects are likely to occur.

Finally, anticipated inflation may also be costly to the society. If people’s

expectation regarding future price rise become stronger they will hold less liquid
money. Mere holding of cash balances during inflation is unwise since its real
value declines. That is why people use their money balances in buying real estate,
gold, jewellery, etc. Such investment is referred to as unproductive investment.
Thus, during inflation of anticipated variety, there occurs a diversion of resources
from priority to non-priority or unproductive sectors.

(b) Effect on Production and Economic Growth:

Inflation may or may not result in higher output. Below the full employment
stage, inflation has a favourable effect on production. In general, profit is a rising
function of the price level. An inflationary situation gives an incentive to
businessmen to raise prices of their products so as to earn higher volume of
profit. Rising price and rising profit encourage firms to make larger investments.

As a result, the multiplier effect of investment will come into operation resulting
in a higher national output. However, such a favourable effect of inflation will be
temporary if wages and production costs rise very rapidly.
Further, inflationary situation may be associated with the fall in output,
particularly if inflation is of the cost-push variety. Thus, there is no strict
relationship between prices and output. An increase in aggregate demand will
increase both prices and output, but a supply shock will raise prices and lower
output.

Inflation may also lower down further production levels. It is commonly assumed
that if inflationary tendencies nurtured by experienced inflation persist in future,
people will now save less and consume more. Rising saving propensities will
result in lower further outputs.

One may also argue that inflation creates an air of uncertainty in the minds of
business community, particularly when the rate of inflation fluctuates. In the
midst of rising inflationary trend, firms cannot accurately estimate their costs
and revenues. That is, in a situation of unanticipated inflation, a great deal of risk
element exists.

It is because of uncertainty of expected inflation, investors become reluctant to

invest in their business and to make long-term commitments. Under the circum-
stance, business firms may be deterred in investing. This will adversely affect the
growth performance of the economy.

However, slight dose of inflation is necessary for economic growth. Mild inflation
has an encouraging effect on national output. But it is difficult to make the price
rise of a creeping variety. High rate of inflation acts as a disincentive to long run
economic growth. The way the hyperinflation affects economic growth is summed
up here. We know that hyper-inflation discourages savings.

A fall in savings means a lower rate of capital formation. A low rate of capital
formation hinders economic growth. Further, during excessive price rise, there
occurs an increase in unproductive investment in real estate, gold, jewellery, etc.
Above all, speculative businesses flourish during inflation resulting in artificial
scarcities and, hence, further rise in prices.

Again, following hyperinflation, export earnings decline resulting in a wide

imbalances in the balance of payment account. Often galloping inflation results in
a ‘flight’ of capital to foreign countries since people lose confidence and faith over
the monetary arrangements of the country, thereby resulting in a scarcity of
resources. Finally, real value of tax revenue also declines under the impact of
hyperinflation. Government then experiences a shortfall in investible resources.

Thus economists and policymakers are unanimous regarding the dangers of high
price rise. But the consequence of hyperinflation are disastrous. In the past, some
of the world economies (e.g., Germany after the First World War (1914-1918),
Latin American countries in the 1980s) had been greatly ravaged by
hyperinflation.

The German inflation of 1920s was also catastrophic:

During 1922, the German price level went up 5,470 per cent. In 1923, the
situation worsened; the German price level rose 1,300,000,000 (1.3 billion)
times. By October of 1923, the postage in the lightest letter sent from Germany to
the United States was 200,000 marks. Butter cost 1.5 million marks per pound,
meat 2 million marks, a loaf of bread 200,000 marks, and an egg 60,000 marks!
Prices increased so rapidly that waiters changed the prices on the menu several
times during the course of a lunch!! Sometimes, customers had to pay the double
price listed on the menu when they observed it first!!! A photograph of the period
shows a German housewife starting the fire in her kitchen stove with paper
money and children playing with bundles of paper money tied together into
building blocks!

Currently (September 2008), Indian economy experienced an inflation rate of al-

most 13 p.c.—an unprecedented one over the last 16 or 17 years. However, an all-
time record in price rise in India was struck in 1974-75 when it rose more than 25
p.c. Anyway, people are ultimately harassed by the high dose of inflation. That is
why, it is said that ‘inflation is our public enemy number one.’ Rising inflation
rate is a sign of failure on the part of the government.
3/19/25, 11:39 AM Hyper Inflation in Zimbabwe - Economics Help

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Hyper Inflation in Zimbabwe

13 November 2019 by Tejvan Pettinger

In 2008, Zimbabwe had the second highest incidence of hyperinflation on record. The
estimated inflation rate for Nov 2008 was 79,600,000,000%

That is effectively a daily inflation rate of 98.0. Roughly every day, prices would double.
It was also a time of real hardship and poverty, with an unemployment rate of close to
80% and a virtual breakdown in normal economic activity. The hyper-inflation was
caused by printing money in response to a series of economic shocks.

(The highest hyperinflation rate was Hungary 1946 with a daily inflation of 195%) 

Causes of hyper-inflation in Zimbabwe

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3/19/25, 11:39 AM Hyper Inflation in Zimbabwe - Economics Help

Government printing money in response to:

High national debt
Decline in economic output.
Decline in export earnings.
Price controls which exacerbate shortages.
Lack of confidence in government, economy and political life.
Expectations of hyperinflation

In the late 1990s, the Zimbabwe government introduced a series of land reforms.
This involved redistributing land from the existing white farmers to black
farmers. But, with little experience, the new farmers struggled to produce food,
and there was a large fall in food production.
The economy experienced a sharp fall in output (both agricultural and
manufacturing), and this caused a collapse in bank lending.
The government began increasing the rate at which they were printing money
and increasing the money supply. This started with printing money to finance a
war in the Congo and also to increase the salaries of officials and soldiers. But, as
the economic crises worsened, printing money became a very short-term
solution to try and placate people relying on government pay.
With the economy in decline, government debt increased. To finance the higher
debt, the government responded by printing more money, which caused more
inflation. Inflation meant bondholders saw a fall in the value of their bonds and
so it was hard to sell future debt.
The economy also experienced many shortages of goods.

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3/19/25, 11:40 AM Slow But Not Steady: The Fight Against Stagflation in the 1970s | The Denny Center for Democratic Capitalism | Georgetown …

The Denny Center for Democratic Capitalism

Slow But Not Steady: The Fight Against

Stagflation in the 1970s

DECEMBER 12, 2023 by Ian Stubbs (L’24)

21
Shares

In his latest piece on economic history, Denny Center Student Fellow Ian
Stubbs (L'24) considers the 1970s stagflation crisis and it's implications for
modern economic policy.

Many fear that a recession is looming in the United States. Despite consistently strong job growth
in recent quarters, cracks in the global economy and concerns over a possible bursting of the
tech bubble are causing economists and ordinary people alike see a potentially dark future for
the U.S. economy. In fact, some have articulated a more specific concern that the U.S. will soon
face another case of stagflation. Though the stagflation of the 1970s was several decades ago, its
impact continues to haunt many U.S. citizens who remember all too well the difficulties of that
time. By looking at what exactly caused the stagflation of the 70s, the U.S. may be able to insulate
itself from (or at least mitigate) future stagflation.

This paper begins by explaining what stagflation is as well as why it was so unexpected at the
time. Next, I’ll address stagflation’s impact in the United States. Third, I’ll introduce an internal
contributor to stagflation in the form of the Employment Act of 1946. Finally, I’ll analyze an
external contributor in the two oil shocks of the 1970s.

THE WORST OF BOTH WORLDS: WHAT IS STAGFLATION?

Most people are familiar with the general concept of inflation. Simply put, it occurs when the
supply of money in an economy outpaces the production of goods and services. [1] This in turn
results in the prices of goods and services increasing. [2] In this context, stagnation references an
economic environment with high unemployment. Normally, inflation and unemployment share
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an inverse relationship. Stagflation reflects when these two trends move in the same direction. As
British politician Iain Mcleod (the man who coined the term) put it: “We now have the worst of
both worlds — not just inflation on the one side or stagnation on the other, but both of them
together. We have a sort of ‘stagflation’ situation, and history in modern terms is indeed being
made.” [3] He was right to describe it as “history being made,” because many economists at the
time believed stagflation was not possible. [4] This unprecedented condition, in part, explains
why it was so dominant for at least a decade in the U.S. It’s hard to fix something that no one
knew was possible in the first place. So, considering how unlikely this event seemed, what did
stagflation actually look like in the United States?

STAGFLATION HITS HOME: STAGFLATION IN THE U.S.

For average Americans, the impacts of stagflation were easy and frightening to witness. The
prices of basic necessities rose continuously, and many consumers felt forced to buy now as they
feared prices would rise even higher in the future. [5] This in turn spurred even more inflation as
consumer demand seemed to rise everyday. The government tried to mitigate some of the harm
by pegging certain payments (like the ones for social security) to the consumer price index, as
this was one of the best tools for taking inflation into account. [6] In fact, the annual rate of
consumer price increases in 1965 was 1.07% but would rise to 13.70% by 1980. [7] The annual
rate would not subside to levels seen in 1965 until 1986. [8] Ironically, one of the major
contributors to this ever-increasing inflation () was the Employment Act of 1946.

A Call to Action Taken Too Far: The Employment Act of 1946

As noted in the previous paper on the Great Depression, The Employment Act of 1946 gave the
government the explicit responsibility to promote “employment, production, and purchasing
power.” [9] This mandate was also applied to the Federal Reserve, which was tasked with creating
the monetary conditions to achieve these goals. [10] This prerogative would help lead to inflation
in the United States for two main reasons. First, as noted above, it gave the government an
obligation to be proactive in trying to maintain the best economic conditions. Second, given that
this law came out of the Great Depression where government intervention in monetary policies
proved helpful, it became the focal point of the government in satisfying their obligations to the
public.

However, the problem actually arose from the government assumption that a certain monetary
policy would always work. There was a dominant assumption that a “stable, exploitable
relationship between unemployment and inflation” existed. Specifically, it was believed you could

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keep unemployment at low rates by allowing slightly higher rates of inflation. This assumption,
known as the “Phillips Curve,” was criticized by leading economists Edmund Phelps and Milton
Friedman who feared that a higher than anticipated inflation would be needed to keep
unemployment low, which in turn would exacerbate unemployment perpetuating a dangerous
cycle. [11] Unfortunately, Phelps and Friedman’s concerns came true as the government tried to
rectify the inflation crisis with further increases in interest rates in the hopes that this would
stabilize unemployment. The economic hardships of this policy were compounded by a major
external shock.

Liquid Gold Beats the Dollar: The Oil Shocks of the 1970s

Few commodities in the modern era hold as much sway over the global economy as oil. Even as
countries today move away from traditional fossil fuels, the reverberations of oil and gas price
fluctuations were most recently seen following the outbreak of the war in Ukraine. Still, few oil
and gas shocks reach the same magnitude as the ones that occurred in the 1970s. The first shock
came in October of 1973. [12] There are two likely causes of this shock. The first coincides with
U.S. aid to Israel. In response to $2.2 billion dollars of emergency aid being made available to
Israel during the Yom Kippur War, OPEC issued an oil embargo against the United States. [13] At
the same time the devaluation of the U.S. dollar throughout the 1970s caused OPEC to stop
quoting oil prices off of the dollar and start using the price of gold. This rapidly raised the price of
gold and damaged the value of the dollar. In turn, the U.S. domestic oil industry lacked the
production capabilities to make up for the shortfall caused by the embargo. [14] This contributed
significantly to unemployment and inflation as it both made the costs of production higher for
many consumer items and stretched the already limited resources of American citizens. Worse
still this was only one of the oil shocks the U.S. faced in the 1970s. The second oil shock of the
1970s occurred between 1978 and 1979. [15] Unlike the embargo of the 1973 oil shock, this crisis
was caused by the 1978 revolution in Iran. The infighting and subsequent regime change in Iran
resulted in a 7% decline in world oil production. Between 1979 and 1980, oil prices doubled. [16]
Despite the added pressure caused by this shock, the Federal Reserve remained concerned that
attempting to slow inflation would hurt unemployment. This concern combined with oil prices
rising contributed to a 9% increase In the Consumer Price Index by the end of 1979. [17]

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The Necessary Costs: Escaping Stagflation

By the 1980s, stagflation had become a way of life and the Philip’s Curve’s promise had been
shattered. To escape stagflation, the Federal Reserve accepted that they had to choose
combatting inflation or unemployment alone and let the other suffer, at least for the short term,
to rectify the economic situation. The Reserve went with inflation and slowly worked to raise
interest rates and slow monetary reserve growth. This resulted in a particularly hard recession
from 1981 to 1982. Unemployment reached a peak of 11% but annual inflation was back down to
5%.[18] Thanks to the change in course of inflation, public confidence in the economy rose again
and unemployment retreated.

The Stagflation of the 1970s fundamentally changed how the U.S. government viewed the
economy. Particularly at the macroeconomic level, the stagflation crisis exposed major blind
spots in how the economy was assessed. The role of public expectations shifted from a backdrop
consideration to a key takeaway in determining how the economy will perform under certain
policies. For example, the absolute faith in the Philip’s Curve encouraged early policymakers to
ignore the fact that consumers and business owners quickly began anticipating future inflation
which only compounded the unemployment problem rather than helping to resolve it. Another
change came from the use of time-consistent policy choices. Time-consistent policies describe
policies that do not sacrifice long-term benefits for short-term gains.[19] The absence of these
kind of policies formed the backdrop of early stagflation policies, which instead focused on slow,
small policy changes that did not hurt the economy in the short-term, but allowed the
underlying problems of inflation to fester. The final change relates to public expectations: policy
credibility.[20] Returning to the Philip’s Curve, the policies clear shortcomings gave the public
(and likely many government officials) no reason to believe in the Federal Reserve’s continued
endorsement of it. In turn, this led to skepticism about new policies that hurt the adoption of the
policy and weakened public confidence that the economy was changing for the better.

CONCLUSION
It is eerie to see some of the parallels between the economic conditions of the 1970s and our
world today. However, it is just as important to note the differences in terms of economic
mentality especially at the government level. Further, where inflation continued to rise over the
course of several years in the 1970s, recent inflation has come down considerably from its 2022
spike. Further, the external shocks that compounded many of the existing problems in the 70s
seem to have been less impactful on the health of the global and U.S. domestic economy under
current conditions. Nonetheless, there are important lessons to draw from the stagflation of the
1970s, and they can hopefully be applied today to ensure we can avoid such a crisis again.

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3/19/25, 11:41 AM Difference Between Monetary & Fiscal Policy: UGC NET Economics Notes

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Difference Between Monetary & Fiscal Policy: UGC NET Economics

Notes
Last Updated on Mar 18, 2025

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Monetary policy refers to central bank activities oriented to influence the quantity of money and credit
in an economy. Fiscal policy refers to the government decisions on taxation and expenditure. All these
tools of monetary and fiscal policy have to be used for modulating economic activity over time. The
two most powerful remedies-to-tools in the management and stabilization of economies are monetary
and fiscal policies. These policies are broadly aimed at influencing aggregate demand, economic
growth, repetitive employment, rates of inflation, and other macroeconomic indicators. While their
goals may be similar, they work through different mechanisms with varying roles in the making of
economic policy.

Monetary and fiscal policy is a vital topic to be studied for the economics related exams such as the
UGC NET Economics Examination.

In this article, the readers will be able to know about the following:

Monetary and Fiscal Policy Overview

Difference Between Monetary and Fiscal Policy
Interdependence of Monetary and Fiscal Policy
Relation Between Monetary and Fiscal Policy

Monetary and Fiscal Policy Overview

Money related approach is when the government or central bank arranges how much cash is insides
the economy and captivated rates to form the economy make. Fiscal policy is when the government
determines how to spend and how much to tax citizens to assist the economy. When the economy is
sluggish, the government may spend more cash or reduce taxes to assist businesses and individuals. If
the economy is increasing too rapidly, they may increase taxes or reduce expenditures in order to
decrease the growth.

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3/19/25, 11:41 AM Difference Between Monetary & Fiscal Policy: UGC NET Economics Notes

Fiscal Policy vs Monetary Policy

The two most centrally circuitous procedures by which central banks and governments endeavor to
channel monetary development and in this way stabilize it are cash related course of action and
financial course of action. Although the policy goals, such as promotion of growth and maintaining
inflation in tight check, are identical, the method with which they operate is different, and different
players are involved. The information regarding fiscal policy vs monetary policy has been provided
below.

Aspect Fiscal Policy Monetary Policy

Definition Refers to government decisions on Involves central bank actions to

spending, taxation, and borrowing to manage money supply, interest rates,
influence economic activity. and credit conditions.

Authority Determined and implemented by Implemented by the central bank

government bodies (legislature and (independence varies by country).
executive).

Objectives Economic growth, Price stability, Price stability, Economic growth,

Employment levels, Income distribution Employment, Financial stability

Instruments Government spending, Taxation Open market operations, Discount

policies, Borrowing and debt rates, Reserve requirements
management

Impact on Direct impact on aggregate demand Indirect impact through interest rates
Economy and consumption. Long-term and credit availability. Short-term
investment in infrastructure and social adjustments to economic
programs. fluctuations.

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3/19/25, 11:41 AM Difference Between Monetary & Fiscal Policy: UGC NET Economics Notes

Adjustment Often involves longer implementation Can be implemented relatively

Speed periods due to legislative processes quickly, with interest rate changes
and budget cycles. having immediate effects on the
economy.

Flexibility Less flexible in responding to short- More flexible in adjusting to

term economic changes compared to economic changes due to quicker
monetary policy. implementation and reversibility.

Interdependence of Fiscal and Monetary Policy

One of the establishments of macroeconomic organization inside the cutting edge economy would be
the related of financial and cash related approach. While fiscal and monetary policies work
independently, much more often than not they tend to influence each other and get interlinked
regarding their effect on the economy. Here's how they interact and their interdependence:

Interdependence of Fiscal and Monetary Policy

The interdependence of monetary and fiscal policy would become one of the pillars of macroeconomic
management in the contemporary economy. While both policies aim to affect economic activity
through various channels and methods, their fundamental objective is the same: maintaining stable
growth and controlling inflation while maintaining financial stability.

Economic Stimulus and Stability

Quantitative stimulus and stability are measures taken by the government, central banks, or other
monetary authorities to support economic growth and maintain stable economic conditions. To achieve
this, governments follow stimulus policies in times of economic downswing or recession, which are
typical of enhanced government expenditure and tax cuts with an aim to influence consumer demand
and business investment.

Control of Inflation

Control of inflation is one of the key objectives of economic policy aimed at obtaining price stability
and preserving the general purchasing power of a country's currency. Basically, it results in a general
rise in the level of prices, to the effect that the money's value is eroded; at worst, destabilizing
economies.

Financial Market Stability

This refers to the received efficient functioning of the capital market, retention of investor confidence,
and protection of general health of the economy. As such, it covers stability in the banking systems,
financial markets, and preventing systemic risk. Policy and regulatory environments of governments
and central banks assist in achieving financial stability through prudential regulations, supervision of
institutions, and frameworks for crisis management.

Exchange Rate Management

Among other things, the trade rate decides the level of swelling, the competitiveness of worldwide
exchange, and capital streams; governments and central banks intercede in money markets to stabilize
trade rates, whereas financial arrangement devices are utilized to impact capital streams. The

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3/19/25, 11:41 AM Difference Between Monetary & Fiscal Policy: UGC NET Economics Notes

management of the exchange rate is focused on the policies and strategies to affect the value of a
country's currency in relation to other international currencies.

Long-term Economic Sustainability

Foundation, healthcare, instruction, and innovation ventures increment efficiency and competitiveness,
but long-term financial maintainability requires judicious money related administration, forward-
looking financial arranging, and economical financial arrangements. Long-term economic sustainability
identifies a policy and strategy for sustained economic growth, improved living standards, and the
preservation of natural resources for future generations.

Relation Between Monetary Policy and Fiscal Policy

Both monetary arrangement and financial approach offer assistance to control a country's economy;
financial arrangement incorporates government investing and tax assessment, whereas money related
arrangement controls the cash supply and intrigued rates. Together, the two policies help to ensure
that the economy is growing at the right pace and does not become too fast or slow; for example,
when the economy is struggling, the government can use both policies to help it recover. Together,
they help to create a balanced and healthy economy for everyone.

Conclusion

The monetary and fiscal policies are two major wheels of the economy that encompass activities for
economic development. In monetary policy, the supply of money supersedes the rate of interest with a
view to influencing economic activity. Fiscal policy consists of government expenditure, taxation, and
borrowing. Such policies, fully directed towards having stable economic growth with very low instances
of unemployment and low controlled inflation, try to have a well-balanced and resilient economy
amidst diverse economic challenges. Each of these has mechanisms and implications that policymakers,
economists, and businesses must understand in order to negotiate the complexities of modern
economies effectively.

Monetary and fiscal policy is a vital topic for several competitive exams. It would help if you learned
other similar topics with the Testbook App.

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3/19/25, 11:42 AM Learning how Monetary and Fiscal Policies Affect Markets | PIMCO

A word about risk: All investments contain risk and may lose value. Investing in the bond market is subject to risks, including market,
interest rate, issuer, credit, inflation risk, and liquidity risk. The value of most bonds and bond strategies are impacted by changes in
interest rates. Bonds and bond strategies with longer durations tend to be more sensitive and volatile than those with shorter durations;
bond prices generally fall as interest rates rise, and low interest rate environments increase this risk. Reductions in bond counterparty
capacity may contribute to decreased market liquidity and increased price volatility. Bond investments may be worth more or less than
the original cost when redeemed. Equities may decline in value due to both real and perceived general market, economic and industry
conditions.

PIMCO does not provide legal or tax advice. Please consult your tax and/or legal counsel for specific tax or legal questions and
concerns.

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There is no guarantee that these investment strategies will work under all market conditions or are appropriate for all investors and
each investor should evaluate their ability to invest for the long term, especially during periods of downturn in the market. Outlook and
strategies are subject to change without notice.

PIMCO as a general matter provides services to qualified institutions, financial intermediaries and institutional investors. Individual
investors should contact their own financial professional to determine the most appropriate investment options for their financial
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3/19/25, 11:43 AM Policy Mix: Overview, History, Examples and How It Works

TRADE

ECONOMY GOVERNMENT & POLICY

Policy Mix: Overview, History, Examples

and How It Works
By WILL KENTON Updated January 09, 2022
Fact checked by ARIEL COURAGE

What Is a Policy Mix?

A policy mix may be any combination of complementary fiscal and monetary
policies that a country adopts to manage its economy or to respond to a
particular economic crisis.

The policy mix is usually made up of contributions from the nation's central
bank, such as the Federal Reserve in the U.S., and its federal government.

KEY TAKEAWAYS
A policy mix is a combination of measures enacted by both fiscal and
monetary policymakers in order to strengthen or stabilize a nation's
economy.
Monetary policy is managed by a nation's central bank while the
federal government is responsible for fiscal policy.
Fiscal policy involves spending money and raising money. Monetary
policy is the control of the money supply.
Although governments and central banks have different goals and time
horizons, they may work together to stimulate (or cool) economic
growth.

How a Policy Mix Works

A country's economic policy consists of two components—its fiscal policy and
its monetary policy.

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3/19/25, 11:43 AM Policy Mix: Overview, History, Examples and How It Works

TRADE

A nation's fiscal policy is made up of all of its programs that involve

spending money and raising money. These programs exist in part to support
crucial components of the economy such as employment, inflation, and
demand for goods and services.
The nation's monetary policy is imposed by its central bank, which controls
the supply of money, primarily by controlling short-term interest rates.

In most democratic countries, elected federal legislatures control fiscal policy,

while independent central banks handle monetary policy. In the U.S. this is the
Federal Reserve (known as the Fed).

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3/19/25, 11:43 AM Policy Mix: Overview, History, Examples and How It Works

TRADE

Governments and central banks generally share a broad set of goals. They
include a low unemployment rate, stable prices, moderate interest rates, and
healthy growth.

Fiscal and monetary policymakers employ different tools to accomplish these

goals and often stress different priorities.

Governments are run by elected officials who must win popular approval from
the general public at regular intervals, and that fact has an impact on the timing
and the nature of the policies they act upon. Central bankers are technocrats
who don't directly answer to voters. This gives them the ability to act
independently.

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3/19/25, 11:43 AM Policy Mix: Overview, History, Examples and How It Works

TRADE

Example of a Policy Mix

So how does this all work? In good times and bad, controlling inflation is a
prime example of a problem with a policy mix solution.

Inflation occurs when prices rise and the purchasing power of a single unit of
currency declines. This means that people buy fewer goods and services
because their money doesn't stretch as far as it once did.

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3/19/25, 11:43 AM Policy Mix: Overview, History, Examples and How It Works

TRADE
The problem spirals, leading to a drop in consumer and business spending.
Some businesses cut back production in light of poor demand. Others put off
plans to expand, waiting for better times. This leads to higher unemployment,
among other effects.

A nation's federal government and central bank may step in to help curb
inflation through a policy mix. For instance, the government may implement tax
cuts to encourage consumers or businesses, or both, to spend more money.

At the same time, its central bank may reduce interest rates in order to
encourage new investments by both consumers and businesses. The central
bank may also increase the money supply, giving the banks an incentive to lend
out more money.

The Great Recession

Broadly speaking, this was the policy mix that characterized the response to the
2008 financial crisis in the United States. The crisis was ushered in by a collapse
in the housing market, rising interest rates, and defaulting subprime borrowers.

This had a domino effect that led to a crash in the global financial market,
ultimately resulting in the Great Recession.

Fiscal and monetary policy can also push in different directions. The central
bank might ease monetary policy while fiscal policymakers pursue austerity
measures. This is what happened in Europe following the same financial crisis.

Or legislators, eager to win popular support, may decide to cut taxes or boost
spending despite a tight labor market and inflationary pressures. These actions
could force the central bank to raise interest rates.

Special Considerations
There are times when fiscal and monetary policymakers actually work together.

For example, the government may opt to provide fiscal stimulus by cutting
taxes and increasing spending. The central bank may decide to provide
monetary stimulus by cutting short-term interest rates. In response to a crisis,
that combination of actions can stabilize or even jump-start economic activity.
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3/19/25, 11:43 AM Policy Mix: Overview, History, Examples and How It Works

The COVID-19 Pandemic

TRADE
The COVID-19 pandemic which started in early 2020 threatened incalculable
damage to the economies of nations around the world. Periodic shutdowns of
retail businesses, restrictions on travel, and supply chain disruptions began,
ended, and resumed unpredictably. Family routines were upended as work-at-
home policies were hastily put in place. Many people lost their jobs, or quit
them for fear of contagion.

This is the U.S. policy mix that was put in place in response:

The Federal Reserve cut interest rates, and vowed to keep rates at or near zero
as long as necessary. It also began purchasing debt securities in massive
amounts in order to help stabilize the financial markets. [1]

Newly-elected President Joe Biden and the Congress pushed through an

unprecedented package of direct assistance to those who had been hurt
financially by the pandemic. Much of this assistance was targeted specifically to
groups most severely impacted, including parents of school-age children, the
unemployed, and small businesses. [2]

In a commentary, a contributor to VoxEU, a policy analysis publication, argued

that no nation could have gotten through the COVID-19 crisis without
coordinated action by fiscal and monetary policymakers. [3]

ARTICLE SOURCES

Partner Links

[Link] policy mix is a,spending money and raising money. 6/10

 VOXEU / COLUMNS

In this section

VOXEU COLUMN MONETARY POLICY

Cash and the economy: Evidence from India’s demonetisation

Gabriel Chodorow-Reich / 20 Aug 2019

India's demonetisation in 2016 reduced the volume of currency in circulation by 75% overnight. This column uses new data sources to
quantify impacts on economic activity and credit growth after the unprecedented natural experiment. These effects can teach us about
the short-run economic disruption and long-run benefits of demonetisation.

AUTHORS

Gabriel Chodorow-Reich
Associate Professor of Economics, Harvard University

Economists continue to debate the role that money plays in society. This is partly because large-scale experiments featuring money are rare
(Ramey 2016). In 2016, India’s 'demonetisation' was one such natural experiment. At 8:15pm on 8 November, Prime Minister Narendra Modi
gave an unscheduled nationally televised address. He announced that, to combat black money, the two largest denomination notes would
cease to be legal tender at midnight. Holders of these 500 rupee ($7.50) and 1,000 rupee ($15) notes could deposit them at banks, but could
not use them in transactions.

The notes would be replaced by new 500 rupee and 2,000 rupee notes. The difficulty of printing new notes, however, meant that the amount
of currency in circulation that could be used for transactions declined sharply, recovering only after several months.

Demonetisation occurred in an otherwise stable macroeconomic environment and did not affect other aspects of monetary policy, such as
the liabilities of the Reserve Bank of India (RBI), or the target interest rate. Eventually, more than 99% of the demonetised currency was
converted into deposits (RBI 2018), so that broader monetary aggregates such as M3 did not change.

An overnight impact

[Link] 1/5
 Gita Gopinath, Prachi Mishra, Abhinav Narayanan and I have analysed this episode (Chodorow-Reich et al. 2019). Figure 1 shows the path of
large legal tender notes as a share of total pre-demonetisation currency. These notes accounted for about 86% of currency outstanding at the
time of the announcement. But the government had printed new notes equal to only about 10% of the pre-demonetisation stock of currency,
so that total currency usable as legal tender declined by 75%, literally overnight.

Figure 1 Large denomination legal tender as a share of total pre-demonetisation currency in India, 2016

We used a comprehensive data set from the RBI covering a cross-section of Indian districts (roughly 600 districts partition the country) to
construct a local area demonetisation shock, as the ratio of post-demonetisation to pre-demonetisation currency in each month. This
recognises that, while extreme, at a national level the demonetisation episode is only a single observation, and other economic shocks may
have occurred during the period.

On the other hand, this is challenging. There are no official, high frequency measures of economic activity at the district level. We combine
data from, among others, ATM withdrawals, satellite data on human generated nightlight activity – a proxy for economic output (Vernon
Henderson et al. 2012 – a new survey-based measure of employment, e-wallet and debit card transactions, and deposit and credit growth.

Effects of demonetisation
Figure 2 summarises the main results. Each sub-figure plots an outcome against the demonetisation shock. The blue circles represent a
district, with circle size proportional to district GDP. The red dots show averages in each of 30 bins of the demonetisation shock.

The variation on the horizontal axis shows the usefulness of a cross-sectional approach. While essentially all districts experienced a
contraction in cash in the period following demonetisation, with the average district experiencing a contraction in currency of 55 log points,
there was significant variation across districts. The 10th percentile district had a 78 log point decline, while the 90th percentile district had a
30 log point decline.

Figure 2 Impact of demonetisation across districts

[Link] 2/5
 We find that districts that experienced more severe demonetisation shocks had:

larger contractions in ATM withdrawals;

larger reductions in economic activity, as measured by satellite data on human-generated nightlight activity and a survey-based measure
of employment;

slower credit growth; and

faster adoption of alternative payments technologies, such as e-wallets and point-of-service cards.

These cross-sectional patterns are evidence against the neutrality of money during India's demonetisation. They also shed light on the
special role of currency in modern India.

During demonetisation, broad money aggregates did not change but output nonetheless fell. However, the cross-sectional difference in
output implied by these figures is vastly smaller than the decline in currency itself. This difference suggests that individuals found ways to
avoid using legal tender to conduct transactions, for example by convincing retailers to open an informal line of credit, or to accept old
notes, or by switching to electronic forms of payment. The analysis suggests that two substitutions were e-wallet payments and debit cards.

The cross-sectional responses show the cash shortage caused by demonetisation was followed by a contraction in employment and
nightlights-based output. By December 2016 the contraction, relative to the counterfactual paths of these variables, was 3 percentage points.
This translates into a smaller year-on-year growth rate in 2016Q4, which was 2 percentage points lower that the counterfactual.

Similarly, the effect on credit implies the currency contraction reduced the quarterly growth rate of credit by 2 percentage points in 2016Q4.

These effects peak in the months immediately following demonetisation and dissipate over the months that follow. The decline we inferred
from the cross-sectional approach exceeds the actual decline in official GDP during this period. Our approach has the advantage that it relies
on measures such as nightlight activity and survey employment that capture informal sector activity. In contrast, official GDP does not
depend on high-frequency measures of informal sector activity, a point acknowledged by the government itself (Department of Economic
Affairs 2017).

Lessons of demonetisation
Demonetisation was an unprecedented episode, but its lessons may apply in other settings. For example, what economic costs would result
if a country left the euro, and had to print a new national currency? Or, in a country such as Sweden that already largely uses electronic
payment, what would happen if the national payments network were to suffer an outage? Our results suggest substantial economic
disruption in these events.

Finally, while our research focuses on the short-term impact of demonetisation, there may be potential long-term benefits from
improvements in tax collection, a shift towards savings in non-financial instruments, and non-cash payment. Even in the short run,
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3/19/25, 11:45 AM Environmental Degradation Causes, Effects and Solutions

Donate

STORIES OF LIFE CHANGE

Causes, Effects and Solutions to

Environmental Degradation
March 15, Philippe Lazaro, Plant With About Our 32
2023 Purpose Work Comments

Environmental degradation is an increasingly pressing issue that affects us

all. It is caused by a variety of factors, ranging from human activities to
natural disasters, and its effects can be devastating. Many of these effects
cause further degradation, which means that environmental degradation’s
impact works in a downward cycle. Fortunately, there are solutions, and we
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3/19/25, 11:45 AM Environmental Degradation Causes, Effects and Solutions

can all work together to mitigate the impacts of environmental degradation.

Plant With Purpose exists to help reverse this cycle and create a more
sustainable future for communities all around our planet.

This farmer in Burundi cuts trees and makes charcoal to supplement his
shrinking agricultural output. He understands the negative environmental
impact, but continues in order to feed his family.

As we seek to address the causes and effects of environmental degradation,

climate change is impossible to ignore. Around the world, climate change is
already disrupting seasons’ natural rhythms and creating excalatingweather
events such as extreme heat, drought, destructive storms, flooding, and
more. This intense and increasingly unpredictable weather is worsening
erosion and drastically changing landscapes. Floods carry away large
amounts of sediment and deposit it elsewhere, leading to a loss of nutrients
in the soil. On the other hand, droughts are leading to soil erosion through
strong winds and lack of water. Both storms and droughts are especially
damaging in rural, agricultural communities where the environment is a
core source of income.

Low income nations have contributed little to climate change, and

consistently have the smallest amounts of emissions (in fact, farmers help to
sequester carbon). However, these nations are often most vulnerable to
climate change’s effects. As climate change continues to escalate we will see

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3/19/25, 11:45 AM Environmental Degradation Causes, Effects and Solutions

the result in farmers being unable to farm their ancestral lands, forcing some
to become climate refugees in search of places where their families can get
enough to eat. Environmental degradation at this scale doesn’t have to
continue. If we understand these causes and effects, and work together to
pursue sustainable solutions, we can create a sustainable future for both
people and planet.

Causes
Poverty
Poverty is a major contributor to environmental degradation. About 85%
percent of the world’s poor live in rural areas and rely on agriculture for their
livelihood, so they understand more than most how important it is to protect
the natural environment. But people living in poverty often experience
hunger and food insecurity, and in desperation, they may over-exploit
natural resources. For example, trees are frequently harvested to turn into
charcoal, which can be sold for quick cash. Trees may also be cut down or
burned so the land can be used as additional farmland. These processes lead
to deforestation, air pollution, and additional unsustainable practices that
harm the environment.

Poverty causes environmental degradation in other ways, as well. People

living in poverty may not have access to education about environmental
issues or the resources to invest in sustainable practices. Poverty also makes
people more likely to engage in activities that are harmful to the
environment, such as burning wood for fuel or dumping waste into rivers
and streams. These activities have long-term negative impacts on the
environment, including air and water pollution, soil erosion, and loss of
biodiversity. As the environment is degraded over time, farming conditions
get worse, and farmers are forced to continue over-exploiting the
environment to make ends meet. Poverty and environmental degradation
quickly become a vicious cycle.

Deforestation
Deforestation is the permanent destruction of forests to make the land
available for other uses. It is one of the leading causes of environmental
degradation because it disrupts the water cycle, reduces biodiversity, and
contributes to climate change.
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3/19/25, 11:45 AM Environmental Degradation Causes, Effects and Solutions

Trees play an important role in the water cycle because they absorb water
from the ground and release it into the atmosphere. Without healthy trees
to regulate water levels, the water cycle is disrupted and the surrounding
area is more susceptible to droughts and floods. These natural disasters can
be devastating for farming communities. Additionally, deforestation leads to
soil erosion, desertification and other land degradation issues.

Deforestation also has a negative impact on biodiversity. As trees are cut

down, protected plant and animal species lose their natural habitat. Forests
become smaller and more isolated which limits species’ movements,
reduces genetic diversity, and makes animals more vulnerable to hunters
and poachers.

Finally, deforestation causes environmental degradation by releasing carbon

dioxide into the atmosphere. Over time, this incremental increase in carbon
dioxide has a big impact on the natural environment by magnifying the
other negative effects of deforestation.

Soil Damage
Soil damage is another cause of environmental degradation because
healthy soil is critical for a healthy environment. The soil supports the health
of native plants and local farms, and it plays an important role in regulating
air and water quality. Healthy soil can even mitigate the effects of droughts
and floods, especially in an area with steep slopes. When soil is damaged,
the environment is more susceptible to extreme weather events.

Soil damage also contributes to environmental degradation in several other

ways. It can lead to increased air and water pollution, as the dust particles
are carried away by wind and deposited in other areas. Soil erosion can also
lead to decreased biodiversity, reducing the amount of natural habitat
available for plants and animals. All of these effects of soil erosion have
serious environmental consequences and should be considered when
developing land management strategies.

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Local farmers rest from heavy work clearing fire breaks, reducing the risk of
bushfires that can devastate farms and communities. Bushfire rates are
increasing due to climate change.

Effects
There are many things that serve as both causes and effects of
environmental degradation. This is in part because unsustainable
environmental practices may help us make ends meet in the short term, but
they have long term harmful effects on our natural environment. In this way,
environmental degradation can feel like a very difficult cycle to break out of.

Poverty
In many rural areas, people rely on agriculture and the environment for their
livelihood. As the environment is degraded, agriculture becomes a much
less sustainable source of income for these families. And yet, many farmers
turn to strategies like deforestation, overgrazing, and pollution to make ends
meet – even though these strategies all contribute to environmental
degradation and can lead to decreased crop yields and water shortages.
Overconsuming from the environment in this way leads to poverty, because
it leaves people unable to produce enough food to feed their families in the
long term. This cyclical relationship between poverty and the environment
reflects the severity of our environmental crisis.
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3/19/25, 11:45 AM Environmental Degradation Causes, Effects and Solutions

Chanceline, a rural farmer in the Democratic Republic of the Congo,

describes this cycle like this: “I was exclusively dependent on agriculture to
support my family… Relying only on agriculture hindered my development. I
also dreamed of starting some commerce, but I never had the financial
resources to get started with my dream.”

As extreme weather events damage crops and reduce crop yields across
Eastern Africa, people like Chanceline have struggled to produce enough
food to feed their families. As farming becomes less reliable, diversifying
income sources is increasingly important for rural families.

Deforestation
As environmental degradation worsens poverty, it drives people towards
overharvesting of resources, namely, trees. When the environment is
degraded, people are more likely to deforest an area to access the fertile
forest soil for agricultural and other uses. Trees may be cut down to sell the
wood, create charcoal, or turn forests into additional farmland. Deforestation
also occurs when land is cleared for agricultural or industrial purposes or
when forests are burned to create space for urban development. All of these
activities lead to a decrease in the amount of forested land available, which
can have a devastating impact on the environment.

Soil Damage
Soil damage is another effect of environmental degradation. Climate change
causes unpredictable weather, which makes the soil compacted, increases
the soil density and reduces the amount of air and water that can be held in
the soil. Over time, this weather, combined with steep terrain, leads to
erosion, which removes valuable topsoil and reduces the soil’s fertility. As the
environment is degraded, the soil salinity increases, limiting plants’ ability to
absorb water and nutrients. Soil damage can also be caused by human
activity like overgrazing and deforestation.

Over time soil erosion has serious environmental consequences, like a

decrease in soil fertility, increased sedimentation in waterways, and an
increased risk of flooding. In addition, soil erosion means loss of topsoil and
essential vitamins and minerals, which are essential for plant growth and
food production.

Further Vulnerability
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When people living in rural areas experience environmental degradation

and increasing poverty, they often resort to desperate measures to make
ends meet. Many times, children are taken out of school to work on their
farm, or may be sold as child brides. Young girls are disproportionately likely
to experience this, contributing to the education gap between men and
women in rural areas. When the environment suffers, gender equality and
education suffer as well.

Some people resort to migration, either to more urban areas or other

countries, in search of sufficient work opportunities. Other people migrate
because environmental degradation has made their homes unsafe. When
temperatures increase, and flooding and droughts become more common,
farming can be an unreliable source of income or even destroy
neighborhoods and farmlands. The world is seeing an increase in climate
refugees – people who are displaced from their homes because of climate-
related events like floods and other natural disasters. Unfortunately, traveling
to a new home can be dangerous, and displaced rural people in new cities or
countries are especially vulnerable to exploitation. Environmental
degradation is a significant contributor to human trafficking and violent
activity.

Solutions
Challenges like poverty, deforestation, and soil damage are both causes and
effects of environmental degradation. This means that when one of these
causes grows out of control, it sets off the other causes, and they all grow
more severe. For example, climate change may trigger higher rates of soil
erosion and drive rural farmers deeper into poverty. Then the farmers turn to
unsustainable agricultural practices to provide for their families, the soil is
eroded even further, and the impact of climate change is exacerbated. The
relationship between these causes and effects can lead to a very difficult life
for someone living in a rural area that has been degraded.

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3/19/25, 11:45 AM Environmental Degradation Causes, Effects and Solutions

These farmers practice agroforestry, or planting trees among crops.

Agroforestry is a way to increase soil health and reduce erosion, resulting in
higher crop yields.

Anicet in Burundi explains how his struggle with poverty was related to
famine and food insecurity: “Before, we were living in extreme poverty and a
state of panic because we could not find enough food. There were years
when we only ate once a day,” he shares.

But what is Anciet supposed to do when the few available opportunities to

earn cash threaten to fan the flames of environmental degradation? This is
the problem Plant With Purpose helps solve.

Solutions to poverty, climate change, and environmental degradation exist.

When these solutions are applied holistically, they can turn cycles of poverty
into cycles of abundance.

Regenerative Farming
Regenerative farming is an agricultural practice that integrates methods like
cover crops and crop rotation to restore the health of the soil and reverse
environmental damage. Regenerative farming is a great solution to
environmental degradation because it improves and strengthens the
fertility, structure, and organic matter in the soil. With more effective
agricultural practices, farmers can reduce the use of synthetic fertilizers and
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pesticides, promoting healthier microbial activity in the soil. Regenerative

farming also improves water retention and reduces water runoff, which
helps reduce soil erosion and improve water quality.

In addition to improving soil health, regenerative farming also restores

biodiversity by increasing the number of beneficial insects, birds, and other
wildlife. This helps to create a more balanced ecosystem that can better
resist pests and diseases. By reducing the use of synthetic fertilizers and
pesticides, regenerative farming creates a safer environment for local wildlife
and helps protect waterways from contamination.

Finally, regenerative agriculture increases farmer crop yields, which alleviates

poverty and prevents farmers from turning to unsustainable agricultural
practices in the future.

As poverty is reduced, so too are the demands that it places on an

ecosystem.

Tree Planting
Planting trees is another effective way to prevent environmental
degradation because trees are one of the most powerful natural defenses
against environmental stress. Trees absorb carbon dioxide and other
pollutants from the air, helping to reduce air pollution. They also provide
shade and shelter, helping to reduce the urban heat island effect by cooling
urban areas. Tree roots help reduce soil erosion by stabilizing the soil,
conserve water by reducing runoff, and provide a natural filter for water that
passes through the soil. In flood-prone areas, trees can be great natural
barriers that protect communities from excess water. Finally, trees provide a
habitat for local wildlife and help to maintain biodiversity. Planting trees is a
simple and effective way to help protect the environment from degradation.

Savings & Loan Opportunities

Savings and loan opportunities can be an effective tool in preventing
environmental degradation. At Plant With Purpose, these opportunities take
the shape of Purpose Groups – a self-governed group of farmers who work
together to save money and make investments in their farms and
communities. According to our latest impact study, participants in our
programs have 225% more savings than their peers. These savings provide
farmers with access to capital for projects that promote sustainability, or
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simply provide families with a non-destructive means to grow financially and

overcome poverty. With more savings, people in rural communities have the
means and margin to conserve and restore natural resources, such as forests
and wetlands.

Spiritual Renewal
Spiritual renewal is a powerful tool for preventing environmental
degradation. A restored relationship with the Creator helps us recognize our
interdependence with the rest of creation. This recognition helps us develop
a sense of responsibility for the environment and a desire to protect it.
Spiritual renewal can also lead to stewardship: more mindful consumption,
greater respect for the environment, and more sustainable practices.
Additionally, spiritual renewal inspires us to take action to protect the
environment, such as engaging in conservation efforts, reducing waste, and
advocating for environmental policies.

While a variety of solutions for environmental degradation exist, it’s

important to implement them holistically. One of these solutions alone,
without the integration of other activities, is likely insufficient to reverse
environmental degradation. For this reason, Plant With Purpose establishes
Purpose Groups in rural communities. These Purpose Groups are platforms
that serve as farmer field schools, savings and loan groups, and spiritual
communities. Participants in our programs are equipped with the
agricultural, economic, and spiritual tools they need to transform the
environment in their communities.

“I am convinced that this new venture will make it easier for me to save even
more money in the near future. I want to apply that towards growing my
business,” explains Chanceline, exemplifying how her savings and
investments create a cycle of abundance. “The Purpose Group curriculum
has helped me learn to make contour canals fixed with grasses and shrubs. I
have also planted agroforestry and indigenous trees and used mulching and
organic fertilizer combined with Mucuna green manure to improve the
health of our farm.”

Stories like Chanceline’s are evidence that when we invest in the right
holistic solutions, we can have a long-lasting impact on lives and
environments around the world. Protecting the environment is not a lost

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3/19/25, 11:45 AM Economic development | Definition, Examples, Programs, Importance, & Facts | Britannica Money

Household Finance Investing Trading Retirement Companies

Finance & the Economy Economic Concepts

economic development
Print Cite Share Links

Written by Hla Myint, Anne O. Krueger

Fact-checked by The Editors of Encyclopaedia Britannica
Updated: Mar. 02, 2025 • Article History

Table Of Contents

economic development, the

process whereby simple, low-
income national economies are
transformed into modern
industrial economies. Although
the term is sometimes used as a
synonym for economic growth,
generally it is employed to [Link]

describe a change in a country’s

economy involving qualitative as Key People: Esther Duflo • Abhijit
well as quantitative Banerjee • Gunnar Myrdal • Theodore

improvements. The theory of William Schultz • Jagdish Bhagwati

economic development—how
primitive and poor economies can
evolve into sophisticated and relatively prosperous ones—is of critical
importance to underdeveloped countries, and it is usually in this context
that the issues of economic development are discussed.

Economic development first became a major concern after World War II.
As the era of European colonialism ended, many former colonies and
other countries with low living standards came to be termed
underdeveloped countries, to contrast their economies with those of the
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developed countries, which were understood to be Canada, the United

States, those of western Europe, most eastern European countries, the
then Soviet Union, Japan, South Africa, Australia, and New Zealand. As
living standards in most poor countries began to rise in subsequent
decades, they were renamed the developing countries.

There is no universally accepted definition of what a developing country is;

neither is there one of what constitutes the process of economic
development. Developing countries are usually categorized by a per capita
income criterion, and economic development is usually thought to occur
as per capita incomes rise. A country’s per capita income (which is almost
synonymous with per capita output) is the best available measure of the
value of the goods and services available, per person, to the society per
year. Although there are a number of problems of measurement of both
the level of per capita income and its rate of growth, these two indicators
are the best available to provide estimates of the level of economic well-
being within a country and of its economic growth.

It is well to consider some of the statistical and conceptual difficulties of

using the conventional criterion of underdevelopment before analyzing the
causes of underdevelopment. The statistical difficulties are well known. To
begin with, there are the awkward borderline cases. Even if analysis is
confined to the underdeveloped and developing countries in Asia, Africa,
and Latin America, there are rich oil countries that have per capita
incomes well above the rest but that are otherwise underdeveloped in their
general economic characteristics. Second, there are a number of technical
difficulties that make the per capita incomes of many underdeveloped
countries (expressed in terms of an international currency, such as the
U.S. dollar) a very crude measure of their per capita real income. These
difficulties include the defectiveness of the basic national income and
population statistics, the inappropriateness of the official exchange rates
at which the national incomes in terms of the respective domestic
currencies are converted into the common denominator of the U.S. dollar,
and the problems of estimating the value of the noncash components of
real incomes in the underdeveloped countries. Finally, there are
conceptual problems in interpreting the meaning of the international
differences in the per capita income levels.
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Although the difficulties with income measures are well established,

measures of per capita income correlate reasonably well with other
measures of economic well-being, such as life expectancy, infant mortality
rates, and literacy rates. Other indicators, such as nutritional status and
the per capita availability of hospital beds, physicians, and teachers, are
also closely related to per capita income levels. While a difference of, say,
10 percent in per capita incomes between two countries would not be
regarded as necessarily indicative of a difference in living standards
between them, actual observed differences are of a much larger
magnitude. India’s per capita income, for example, was estimated at $270
in 1985. In contrast, Brazil’s was estimated to be $1,640, and Italy’s was
$6,520. While economists have cited a number of reasons why the
implication that Italy’s living standard was 24 times greater than India’s
might be biased upward, no one would doubt that the Italian living
standard was significantly higher than that of Brazil, which in turn was
higher than India’s by a wide margin.

The interpretation of a low per capita income level as an index of poverty

in a material sense may be accepted with two qualifications. First, the level
of material living depends not on per capita income as such but on per
capita consumption. The two may differ considerably when a large
proportion of the national income is diverted from consumption to other
Subscribe
purposes; for example, through a policy of forced saving. Second, the
poverty of a country is more faithfully reflected by the representative
standard of living of the great mass of its people. This may be well below
the simple arithmetic average of per capita income or consumption when
national income is very unequally distributed and there is a wide gap in
the standard of living between the rich and the poor.

The usual definition of a developing country is that adopted by the World

Bank: “low-income developing countries” in 1985 were defined as those
with per capita incomes below $400; “middle-income developing
countries” were defined as those with per capita incomes between $400
and $4,000. To be sure, countries with the same per capita income may
not otherwise resemble one another: some countries may derive much of
their incomes from capital-intensive enterprises, such as the extraction of
oil, whereas other countries with similar per capita incomes may have
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more numerous and more productive uses of their labour force to

compensate for the absence of wealth in resources. Kuwait, for example,
was estimated to have a per capita income of $14,480 in 1985, but 50
percent of that income originated from oil. In most regards, Kuwait’s
economic and social indicators fell well below what other countries with
similar per capita incomes had achieved. Centrally planned economies are
also generally regarded as a separate class, although China and North
Korea are universally considered developing countries. A major difficulty
is that prices serve less as indicators of relative scarcity in centrally
planned economies and hence are less reliable as indicators of the per
capita availability of goods and services than in market-oriented
economies.

Estimates of percentage increases in real per capita income are subject to a

somewhat smaller margin of error than are estimates of income levels.
While year-to-year changes in per capita income are heavily influenced by
such factors as weather (which affects agricultural output, a large
component of income in most developing countries), a country’s terms of
trade, and other factors, growth rates of per capita income over periods of
a decade or more are strongly indicative of the rate at which average
economic well-being has increased in a country.

Economic development as an objective of policy

Motives for development

The field of development economics is concerned with the causes of
underdevelopment and with policies that may accelerate the rate of
growth of per capita income. While these two concerns are related to each
other, it is possible to devise policies that are likely to accelerate growth
(through, for example, an analysis of the experiences of other developing
countries) without fully understanding the causes of underdevelopment.

Studies of both the causes of underdevelopment and of policies and

actions that may accelerate development are undertaken for a variety of
reasons. There are those who are concerned with the developing countries
on humanitarian grounds; that is, with the problem of helping the people

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T000230 pollution haven hypothesis
The pollution haven hypothesis, or pollution haven effect, is the idea that
polluting industries will relocate to jurisdictions with less stringent environ-
mental regulations. Empirical studies of the phenomenon have been ham-
pered by the difficulty of measuring regulatory stringency and by the fact
that stringency and pollution are determined simultaneously. Early studies
based on cross sections of data found no significant effect of regulations on
industry locations. Newer studies that use panels of data to control for
unobserved heterogeneity or instrumental variables to account for simulta-
neity have found statistically significant, reasonably sized effects.

The pollution haven hypothesis (or pollution haven effect) posits that ju-
risdictions with weak environmental regulations – ‘pollution havens’ – will
attract polluting industries relocating from more stringent locales. The
premise is intuitive: environmental regulations raise the cost of key inputs to
goods with pollution-intensive production, and reduce jurisdictions’ com-
parative advantage in those goods. The Heckscher–Ohlin model provides the
theoretical foundations by showing that regions will export goods that use
locally abundant factors as inputs. Empirically, however, robust evidence
that industries shift production to less stringent jurisdictions has proven
elusive.
Econometric studies of the pollution haven effect have typically focused on
reduced-form regressions of a measure of economic activity on some measure
of regulatory stringency and other covariates:
Y i ¼ aRi þ X 0i bi þ ei ð1Þ
where Y is economic activity, R is regulatory stringency, X is other char-
acteristics that will affect Y, and e is an error term. The pollution haven
hypothesis is that estimates of @Y/@R will be negative (^ao0). The empirical
literature contains a wide variety of implementations of (1). Some studies
focus on international trade, where Yi represents, say, net exports from
country i, and the right-hand side contains country characteristics. Others
focus on employment, foreign direct investment, or new manufacturing plant
births. Equation (1) has also been used to examine the pollution haven hy-
pothesis at the level of sub-national jurisdictions, such as US states or coun-
ties. Some studies have further disaggregated Y by industry, in the
expectation that environmental regulations have a larger effect on pollut-
ing industries than on clean ones.
On the right-hand side of (1), finding an appropriate measure of regulatory
stringency (R) is not simple. The problem is not merely one of collecting the
appropriate data; merely conceiving of data that would represent R is dif-
ficult. What we want to know is how much more costly production is in a
given jurisdiction relative to others, due to the jurisdiction’s environmental
regulations. These environmental compliance costs could take many forms:
environmental fees or taxes, permitting costs, regulatory delays, emissions
limits that require installation of costly technology, the threat of lawsuits,
product or process redesign, forgone output, and so forth. Some attempts to
measure these costs involve creating indices by weighting various country or
state characteristics such as environmental agencies’ budgets, public aware-
ness of environmental problems, the international environmental agreements
the country has joined, states’ congressional delegations’ voting on environ-
mental issues, or other general indicators. Other studies have used measure-
ments of pollution directly, arguing that, for example, high sulphur emissions
2 pollution haven hypothesis

are evidence of lax regulations. Studies based on US data have used measures
of manufacturers’ pollution abatement expenditures by state or industry,
using the US Census Bureau’s Pollution Abatement Costs and Expenditures
(PACE) survey, which ran from 1973 to 1994 and resumed in 2005.
None of these measures of R is ideal for testing the pollution haven hy-
pothesis. The compiled indices of stringency are inherently ad hoc, and typ-
ically not available in more than one cross section. Using pollution directly
as a proxy for stringency is also problematic. High levels of pollution could
be symptomatic of lax of regulations, or could mean that the jurisdiction,
finding itself with a poor environment, must enact stringent regulations to
reduce pollution. This is true in the United States, where counties that are
out of compliance with national air-quality standards are required by the
federal Clean Air Act to enforce stricter emissions laws. Even direct measures
of abatement costs from the PACE are troublesome. States with the highest
average abatement costs are those with the most polluting industrial com-
positions. Estimates of (1) in which average abatement costs proxy for R find
that more polluting industries locate in places with higher abatement costs –
the opposite of the pollution haven effect.
Even if we had available an ideal measure of regulatory stringency, R, two
further econometric issues complicate estimates of eq. (1): unobserved het-
erogeneity and simultaneity. The first problem is that some unobserved
characteristics of the jurisdictions or industries being studied are likely to be
correlated with both economic activity and regulatory stringency. A country
with an unobserved comparative advantage in a polluting good (abundant
high-sulphur coal or proximity to markets) is likely to both export that good
and enact strict environmental regulations. This means that R and e are
correlated in (1), and estimates of a^ will be biased. In fact, cross-section
comparisons sometimes find that countries with higher stringency have more
polluting activity, which is in turn easily mistaken for evidence of the Porter
hypothesis that environmental regulations promote competitiveness (Porter
and van der Linde, 1995).
The simplest solution to the problem of unobserved heterogeneity is to
estimate a panel-data version of (1) and include fixed effects by jurisdiction
or industry, whatever the relevant unit of observation:
Y it ¼ ni þ aRit þ X 0 bit þ eit ð2Þ
These fixed effects (ni) capture the unobserved characteristics of jurisdictions
or industries that make them likely to have both strict environmental reg-
ulations and high levels of activity. However, including fixed effects requires
panel data on regulatory stringency, which makes measuring stringency in
the first place even more difficult.
The second econometric issue confronting estimates of (1) and (2) is that
economic activity and pollution regulations may be determined simultane-
ously. The pollution haven hypothesis suggests that environmental regula-
tions affect exports, but the reverse may also be true: exports may affect
regulations. If trade increases incomes, and environmental quality is a nor-
mal good, trade could increase voters’ demand for strict environmental reg-
ulations. Or, increased pollution caused by trade could increase local demand
for strict environmental regulations. In theory the straightforward solution
to this problem is to use instrumental variables. In practice this means find-
ing instruments for a variable, R, that is difficult to measure in the first place.
In the panel context (2), it means finding something that changes over time, is
correlated with Rit, and is uncorrelated with eit.
The empirical studies that employ these techniques span more than 30
years, and are growing in number. While enumerating them here would be
pollution haven hypothesis 3

impractical, their broad lessons are becoming clear. The first generation of
empirical work on the pollution haven hypothesis used cross sections of data
and made no attempt to control for unobserved heterogeneity or simulta-
neity. Most of them found small insignificant effects of environmental reg-
ulations, a few found counter-intuitive positive effects, and none found
robust significant support for the pollution haven hypothesis. This early
literature is summarized in Jaffe et al. (1995, p. 157): ‘Overall, there is rel-
atively little evidence to support the hypothesis that environmental regula-
tions have had a large adverse effect on competitiveness.’
In recent years, economists have begun to use panels of data and fixed-
effects models to control for unobserved heterogeneity, and instrumental
variables to control for simultaneity. In contrast to the earlier cross-section
studies, this newer work has tended to find statistically significant, reason-
ably sized evidence of pollution havens. It is catalogued in detail by
Brunnermeier and Levinson (2004), and summarized in Copeland and Taylor
(2004, p. 48), who write that ‘after controlling for other factors affecting
trade and investment flows, more stringent environmental policy acts as a
deterrent to dirty-good production’.
One example of this recent literature exploits the US Clean Air Act, which
mandates that every county in the United States achieve the same minimum
level of ambient air quality. Federal law requires counties that fail to attain
this standard to implement more stringent regulations. A convenient aspect
of this law for pollution haven research is that from the perspective of any
single county the law is exogenous. Neither the law’s first enactment in 1970
nor any subsequent tightening of the air quality standards has been a func-
tion of any one county’s characteristics. This suggests that an indicator for
whether a particular county is in compliance with the national standards
makes a good instrument for the stringency of that county’s environmental
regulations. Non-compliance changes over time, is correlated (positively)
with stricter regulations, and is unlikely to be correlated with eit. Using this
strategy, Becker and Henderson (2000) find that a county’s failure to meet
the national air quality standards reduces the number of new plants being
built by four heavily polluting industries by between 26 and 45 per cent.
Greenstone (2002) shows that these non-attainment counties had about
590,000 fewer jobs, $37 billion less capital stock, and $75 billion less output
(in 1987 US dollars) between 1972 and 1987 than counties that met the
national standards.
An important caveat should accompany findings of this type: they are
positive, or descriptive, rather than normative. These tests of the pollution
haven hypothesis merely measure whether industry relocates to less stringent
jurisdictions; they have no welfare implications. Nevertheless, advocacy
groups with widely varying agendas have seized on the issue. Some envi-
ronmental groups express concern about pollution increases, resulting either
from the trade-induced change in the pollution havens’ industrial compo-
sitions or from the increase in overall economic activity due to trade. Man-
ufacturing interests and labour unions in developed countries worry that the
pollution haven effect means a loss of domestic profits and jobs. Free trade
advocates fear that protectionist interests will use environmental regulations
as a justification for trade barriers, or as a direct protectionist mechanism by
lobbying for lower environmental standards as a form of subsidy to man-
ufacturers. Anti-globalization protestors claim that trade liberalization will
exacerbate all of these outcomes: degrading environmental quality in devel-
oping countries, weakening manufacturing in developed countries, and de-
terring all countries from setting sufficiently strict environmental standards.
3/19/25, 11:48 AM Environmental Kuznets curve - Economics Help

   Menu

Environmental Kuznets curve

11 September 2019 by Tejvan Pettinger

Definition: The environmental Kuznets curve suggests that economic development

initially leads to a deterioration in the environment, but after a certain level of
economic growth, a society begins to improve its relationship with the environment and
levels of environmental degradation reduces.

From a very simplistic viewpoint, it can suggest that economic growth is good for the
environment.

However, critics argue there is no guarantee that economic growth will lead to an
improved environment – in fact, the opposite is often the case. At the least, it requires a
very targeted policy and attitudes to make sure that economic growth is compatible
with an improving environment.

Diagram of Kuznets Curve

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3/19/25, 11:48 AM Environmental Kuznets curve - Economics Help

Causes of Environmental Kuznets curve

1. Empirical evidence of declining pollution levels with economic

growth. Studies found that higher economic growth in the US led to increased
use of cars, but at the same time – due to regulation, levels of air pollution (in
particular sulphur dioxide levels declined). See: Kuznets curve a Primer
2. Spare income with growth. With higher rates of economic growth, people
have more discretionary income after paying for basic necessities; therefore, they
are more amenable to paying higher prices in return for better environmental
standards.
3. Focus on living standards as opposed to real GDP. Traditional economic
theory concentrates on increasing real GDP and rates of economic growth. But
there is a growing awareness the link between economic growth and living
standards can be weak. Focusing on living standards can become politically
popular.
4. Improved technology. The primary driving force behind long-term economic
growth is improved technology and higher productivity. With higher
productivity, we can see higher output, with less raw materials used. For
example, since the 1950s, the technology of car use has significantly improved

fuel efficiency. In the 1950s, many cars had very low miles per gallon. In recent
years, car manufacturers have made strides in reducing fuel consumption and
have started to develop hybrid technology.

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3/19/25, 11:48 AM Environmental Kuznets curve - Economics Help

5. Solar and renewable energy. A good example of how improved technology

has reduced potential for environmental damage is the progress in solar
technology. In recent years, the cost of solar energy has significantly fallen –
raising the prospect of clean technology. See: Solar technology
6. De-industrialisation. Initially, economic development leads to shifting from
farming to manufacturing. This leads to greater environmental degradation.
However, increased productivity and rising real incomes see a third shift from
industrial to the service sector. An economy like the UK has seen
industrialisation shrink as a share of the economy. The service sector usually has
a lower environmental impact than manufacturing.
7. Role of government regulation. Economic growth and development usually
see a growth in the size of government as a share of GDP. The government are
able to implement taxes and regulations in an attempt to solve environmental
externalities which harm health and living standards.
8. Diminishing marginal utility of income. Rising income has a diminishing
marginal utility. The benefit from your first £10,000 annual income is very high.
But, if income rises from £90,000- £100,000 the gain is very limited in
comparison. Having a very high salary is of little consolation if you live with
environmental degradation (e.g. congestion, pollution and ill health). Therefore
a rational person who is seeing rising incomes will begin to place greater stress
on improving other aspects of living standards.

Criticisms of Kuznets Environmental Curve

1. Empirical evidence is mixed. There is no guarantee that economic growth

will see a decline in pollutants.
2. Pollution is not simply a function of income, but many factors. For
example, the effectiveness of government regulation, the development of the
economy, population levels.
3. Global pollution. Many developed economies have seen a reduction in
industry and growth in the service sector, but they are still importing goods from
developing countries. In that sense, they are exporting environmental
degradation. Pollution may reduce in the UK, US, but countries who export to
these countries are seeing higher levels of environmental degradation. One
example is with regard to deforestation. Higher-income countries tend to stop
the process of deforestation, but at the same time, they still import meat and
furniture from countries who are creating farmland out of forests.
4. Growth leads to greater resource use. Some economists argue that there is
a degree of reduced environmental degradation post-industrialisation. But, if 
the
economy continues to expand, then inevitably some resources will continue to be

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3/19/25, 11:48 AM Environmental Kuznets curve - Economics Help

used in greater measure. There is no guarantee that long-term levels of

environmental degradation will continue to fall.
5. Countries with the highest GDP have highest levels of CO2 emission.
For example, US has CO2 emissions of 17.564 tonnes per capita. Ethiopia has by
comparison 0.075 tonnes per capita. China’s CO2 emissions have increased
from 1,500 million tonnes in 1981 to 8,000 million tonnes in 2009.

Conclusion

The link between levels of income and environmental degradation is quite weak. It is
possible economic growth will be compatible with an improved environment, but it
requires a very deliberate set of policies and willingness to produce energy and goods in
most environmentally friendly way.

Related

Does economic growth bring increased living standards?

Measuring living standards

 environment
 pollution
 Supernormal Profits
 Pros and cons of socialism

10 thoughts on “Environmental Kuznets curve”

zaka shohe
25 October 2015 at 9:31 am

What cause environmental degradation?

[Link] 4/10
Economics of Climate Change in India
For Prelims: Global Climate Risk Index 2021, Climate risk events, World Health Organization (WHO),
Heat Stress, International Energy Agency (IEA), Panchamrit, National Action Plan on Climate Change,
Perform, Achieve and Trade (PAT) Initiative, The Pradhan Mantri Ujjwala Yojana

For Mains: Impact of Climate Change on India’s Macroeconomy, India’s Initiatives to Tackle Climate
Change.

Why in News?

Over the past months there have been several stories about how extreme weather events have
disrupted normal life in India. The Global Climate Risk Index 2021 had ranked India 7th in the list
of most affected countries in terms of exposure and vulnerability to climate risk events.

Climate change being one of the most pressing challenges of the 21st century poses
significant risks not only to the environment, human health and food security, but also
economic development.

//
How does Climate Change Affect India’s Macroeconomy?

About:
Climate change can adversely affect both the supply side (the productive
potential) and the demand side (the consumption and investment) of the
economy.
It can also have spillover effects across regions and sectors, as well as cross-
border impacts and contagion risks.
Impacts:
Reduced Agricultural Output: Climate change can severely disrupt crop cycles and
cause low agricultural yield due to changes in temperature, precipitation
patterns, pest infestation, soil erosion, water scarcity, and extreme weather events
such as floods and droughts.
Agriculture, with its allied sectors, is the largest source of livelihood in India and
contributes significantly to the economy. Low yields can hit the rural economy
and push inflation in urban areas as well.
Disruption of the Fisheries Sector: Rising sea surface temperatures due to climate
change can disrupt the distribution and behaviour of fish species.
Some species may move to cooler waters or shift their migratory patterns,
affecting the availability of fish in certain regions. This can lead to changes in
fish catch composition and abundance, impacting the livelihoods of
fishermen.
Increased Health Costs: Climate change can increase the incidence and severity of
diseases such as malaria, dengue, cholera, heat stroke, respiratory infections,
and mental stress.
It can also affect the nutrition and well-being of vulnerable groups such as
 children, women, elderly, and poor. Health costs can reduce disposable
income, lower labour productivity, and increase public expenditure.
According to the WHO, between 2030 and 2050, climate change is expected to
cause approximately 2,50,000 additional deaths per year, from
malnutrition, malaria, diarrhoea and heat stress.
Damaged Infrastructure: Climate change can damage physical infrastructure such as
roads, bridges, railways, ports, airports, power plants, water supply systems, and
buildings due to sea level rise, coastal erosion, landslides, storms, floods, and heat
waves.
Damaged infrastructure can disrupt economic activity, trade, and connectivity
and increase maintenance and replacement costs.
For instance, India spent USD 3 bn of economic damage caused by floods
in the last decade which is 10% of the global economic loss.
Reduced Industrial Output: Climate change can increase operational costs and
reduce profits in the industrial sector due to factors such as new climate-friendly
regulations, reduced utilisation of old stock, relocation of production processes and
activities due to climate-related losses.
India could contribute to 34 million out of 80 million global job losses due to
heat stress-associated productivity decline by 2030.
Energy Crisis: According to the the International Energy Agency (IEA), India’s primary
energy demand will double by 2030.
Energy and climate share a distinctive relationship such that rising temperatures
demand a surge in energy usage to assist the process of mitigating the heat
effects.
Impact on Financial Services: Climate change can put pressure on financial services due
to increased credit risk for banks and financial institutions. It can affect borrowers'
ability to repay loans due to climate-related events such as floods, hurricanes, or
droughts.
These events can damage properties, disrupt supply chains, and impact
businesses' profitability, potentially leading to loan defaults and credit
losses.
It can also increase insurance claims and disrupt travel and hospitality
services due to reduced demand, cancellations, and safety concerns.

What are India’s Initiatives to Tackle Climate Change?

Panchamrit: India has presented the following five nectar elements (Panchamrit) of India’s
climate action:
Reach 500 GW Non-fossil energy capacity by 2030.
50% of its energy requirements from renewable energy by 2030.
Reduction of total projected carbon emissions by 1 billion tonnes from now to
2030.
Reduction of the carbon intensity of the economy by 45% by 2030, over 2005
levels.
Achieving the target of net zero emissions by 2070.
National Action Plan on Climate Change:
It aims at creating awareness among the representatives of the public, different agencies
of the government, scientists, industry and the communities on the threat posed by
climate change and the steps to counter it.

What More can India do to Combat the Impacts of Climate Change?

Enhancing Carbon Sequestration: India can enhance its carbon sequestration potential by
expanding its forest and tree cover, restoring degraded lands, promoting agroforestry,
and adopting low-carbon farming practices.
Carbon sequestration can not only offset emissions but also provide multiple co-
 benefits such as biodiversity conservation, soil fertility improvement, water
security, livelihood support, and disaster risk reduction.
Building Climate Resilience: India can build its climate resilience by strengthening its disaster
management systems, improving its early warning and forecasting capabilities, investing in
climate-proof infrastructure, developing climate-smart agriculture, enhancing health care
services, and empowering local communities and institutions.
Driving India's Green Transportation Revolution: There is a need to promote electric
vehicles (EVs) by establishing a robust charging infrastructure network and offering incentives for
EV adoption.
Introducing innovative public transportation solutions such as electric buses,
shared mobility services, and smart traffic management systems can reduce
congestion and emissions.
Climate Smart Agriculture: There is a need to encourage sustainable farming practices by
promoting organic farming, agroforestry, and precision agriculture.
Integrating technology-driven solutions such as remote sensing, IoT devices, and AI-
based analytics can optimise resource utilisation, reduce water consumption,
and enhance crop productivity.

UPSC Civil Services Examination, Previous Year Question (PYQ)

Prelims

Q.1 In the context of India’s preparation for Climate-Smart Agriculture, consider the following
statements: (2021)

1. The ‘Climate-Smart Village’ approach in India is a part of a project led by the Climate Change,
Agriculture and Food Security (CCAFS), an international research programme.
2. The project of CCAFS is carried out under Consultative Group on International Agricultural
Research (CGIAR) headquartered in France.
3. The International Crops Research Institute for the Semi-Arid Tropics (ICRISAT) in India is one of the
CGIAR’s research centres.

Which of the statements given above are correct?

(a) 1 and 2 only

(b) 2 and 3 only
(c) 1 and 3 only
(d) 1, 2 and 3

Ans: (d)

Q.2 Which of the following best describes/describe the aim of ‘Green India Mission’ of the
Government of India? (2016)

1. Incorporating environmental benefits and costs into the Union and State Budgets thereby
implementing the ‘green accounting’.
2. Launching the second green revolution to enhance agricultural output so as to ensure food security
to one and all in the future.
3. Restoring and enhancing forest cover and responding to climate change by a combination of
adaptation and mitigation measures.

Select the correct answer using the code given below.

(a) 1 only
(b) 2 and 3 only
(c) 3 only
(d) 1, 2 and 3
 Impact of Climate Change on Indian Economy 47

Section IV
Tackling Climate Change:
a multi-stakeholder
approach
 Impact of Climate Change on Indian Economy 48

Section IV
Tackling Climate Change:
a multi-stakeholder approach
With the rising level of awareness on climate change issues, notably in knowledge, policy and institutional systems from
risks stemming from it and the impact on a global, national, all sections of the society. Going forward, an orchestrated
sub-national and individual level, it is important to mainstream strategy requires the blended expertise and collaboration
climate change considerations into all aspects of decision- between Governments, civil society, academia, businesses and
making. Achieving this for a country like India, with unique the financial sector players. The report in its concluding section
challenges (as listed above) and untapped opportunities, brings out the importance of interconnected and aggregated
requires a systemic response involving transformative changes, response from the entire stakeholder spectrum.

The report in its

concluding section
brings out the
importance of Role of
Policymakers
Role of
Academia
Role of
Business
Role of
Central Banks
Role of
Financial
Role of
Industry-led
interconnected Institutions Coalitions

and aggregated
response from the
entire stakeholder
spectrum.
 Impact of Climate Change on Indian Economy 49

There is a dichotomy Role of Policymakers

in terms of impact Globally, countries are aware about the long term impact of from climate impacts, pollution, and public health crises.
climate change and have come together to tackle this challenge in Collaboration and partnerships would ensure that climate
of climate change the form of commitments under the landmark Paris Agreement policies are fair, equitable and support businesses and
being observed in and adoption of the Sustainable Development Goals (SDGs). communities, by ensuring the benefits for all
National-level action in the form of enabling policies, ambitious
the future, which targets and cross-country collaboration, to pool in technology
 Promote capacity building for leveraging opportunities-
The post-pandemic scenario has clearly established the
gives very little and finance will lay the foundation of strong climate action. There
importance of skilled workforce to tackle the sudden
are increasing number of regulations by governments to address
incentives for any climate change. For instance, when Kyoto Protocol was signed
situations and uncertainties that may threaten economies.
Climate change impacts are no exceptions, and its impacts
policy change in the in 1997, there were only 72 laws or policies addressing climate
are clearly visible. The Paris Agreement has also assessed
change, in 2018, the number of laws and acts have reached well
present. over 1,50099. Some of the countries have net-zero targets in place
the importance of capacity building and education towards
climate action. This will ensure there are no gaps in public
by law including Sweden, UK, France, Denmark, New Zealand,
awareness and could push international support to build,
Hungary, Japan, South Korea, and China. Specifically, in terms of
retain and upskill the organizational or institutional
climate change, it is important to:
capacity. Efficient and effective plans, involving capacity
 Support climate modelling research techniques- As building activities, will foster an environment that is
highlighted previously, there is a need for more reliable data necessary to meet the economic as well as climate action
on climate change specific to India28. DST CoE at IIT Delhi, goals
is one of the few centers, with a focus on India-specific
 Building Incentive Models- There is a dichotomy in terms
research on climate modelling. The research outcomes will
of impact of climate change being observed in the future,
feed into designing the policy fabric and building long-term
which gives very little incentives for any policy change in
strategies. Therefore, research and innovation should be
the present. However, numerous studies have established
promoted through specific institutions or providing grants to
that incorporating climate change considerations in the
think-tanks and academic institutions
national development plans create jobs, support domestic
 Institutionalize enabling policy framework- Policymakers and global growth in climate-aligned sectors and result in
and regulators can aid the current situation of building climate overall sustainable development
action strategies by either formulating new policies or by
incorporating climate considerations in the existing policies.
Analyzing future climate policy scenarios and promoting
investments in low-carbon infrastructure can bootstrap the
99
LSE (2018). Policy brief Global trends in climate change economy as it focuses on long-term resilience. Any delay in
legislation and litigation: 2018 snapshot. [Link] introducing effective policies in the current situation post the
[Link]/GranthamInstitute/wp-content/uploads/2018/04/
Global-trends-in-climate-change-legislation-and-litigation- pandemic will further expose all sectors to costly damages
2018-snapshot-3pdf
 Impact of Climate Change on Indian Economy 50

Role of Academia

As already highlighted, it is important to promote greater provides insights to businesses, policymakers and civil society
research in the field of climate change, to better understand organizations, educate future leaders and innovate practical
its impacts and devise strategies to tackle it. Climate scientists, solutions to aid climate action. Some of the most reputed
researchers and professors are playing an instrumental role in universities and educational institutions across the world
this direction by sharing critical inputs on arriving at the future house specific departments, centres of excellence and host
projections of climate change, developing forward-looking educational programs, aimed towards further enhancing the
scenarios, undertaking assessments and developing predictive capacity and technical know-how to deal with climate change.
models. The academic sector bridges the knowledge gap and

A Case study by United Nations University (UNU):

The Economics of Climate Adaptation (ECA) in San Salvador

Key Messages: The Economics of Climate Adaptation hazards. It provides key information for programme-based
(ECA) framework is a valuable approach to (1) provide approaches, insurance approaches and has the potential to
local decision-makers with the fact base to develop support National Adaption Plans’ development. Recently,
their adaptation strategy, (2) foster the development of KfW, the German development bank, decided to implement
investments portfolio to include more loan and program two pilot studies in Bangladesh and El Salvador using the
based finance, as well as climate risk insurance, approaches, ECA methodology. The main objectives were to support
not least in the context of (3) the future challenge of National decision-makers in developing their adaptation strategy
Adaptation Plans (NAPs), and to (4) learn for its climate and to develop a climate change adaptation (CCA) measures
screening procedure. investment portfolio. This case study presents the main
finding, reflects on stakeholder capacity development and
Introduction lessons learned.

This case study in San Salvador offers a rare example of Context

how risk modelling, via capacity building and stakeholder
engagement, helps to unlock climate finance. El Salvador and its capital city, San Salvador experience a
high rate of urbanization putting increasing pressure on its
The Economics of Climate Adaptation100 framework offers a ecological and environmental systems. It has also a limiting
systematic and transparent approach that fosters trust and effect on potential areas to grow for the community. Climate
initiates in-depth inter-sectoral stakeholder discussions. change is increasing this pressure by rising the economic
100
[Link]
The methodology can be flexibly applied from the national and environmental impacts of river floods, tropical storms
Economics-of-Climate-Adaptation_EN__002_.pdf down to the local level to different sectors and different and landslides in the country.
 Impact of Climate Change on Indian Economy 51

The Economics of The main challenges facing the implementation of the study
included that the ECA framework principles, developed by
the feasibility of ECA approach to prepare climate change
adaptation measures in urban areas. KfW identified the
Climate Adaptation the reinsurance sector, were never applied to poor and ECA framework as a valuable approach to foster the
vulnerable people. Could a monetarization of climate risk development of KfW’s CCA portfolio to include more loan
approach grasp the impact on those most vulnerable, but whose and program based finance as well as climate risk insurance
offers a unique assets are worth the least? How to quantify assets with a approaches.
very marginal value? Can the ECA framework possibly unlock
contribution, climate finance by quantifying the impacts of various range The Economics of Climate Adaptation approach offers a
which combines of assets for different hazards? How to raise ownership unique contribution, which combines risk assessment,
for a method requiring advance skills in modelling and adaptation measures and risk transfer. Its results allow a
risk assessment, climatology? flexible identification of cost-effective climate adaptation
adaptation Figure 22: Including poor and vulnerable people. Mapping
measures for a variety of projects and sectors. The ECA
is powered by a unique open-source modelling platform
measures and risk at the household levels in a highly clustered urban area in CLIMADA101 and it evaluates current and potential costs of
transfer. San Salvador (UNU-EHS & KfW, 2016) climate change and how to prevent them by determining
a location’s total climate risk –calculated by combining
existing climate risks, climate change and the value of
future economic development.

The Economics of Climate Adaptation (ECA) addresses in

particular the following questions:
 What is the potential climate-related damage over the
coming decades?
 How much of that damage can be averted, using what
type of CCA measures?
 What investments will be required to fund those
measures -and will the benefits of these investments
outweigh the costs?

In San Salvador, the study concentrated on three types of

Developing a Climate Adaptation Investment Portfolio climate hazards: Flood risk, landslides and tropical winds.
The choice of these hazards, as well as numerous decision
In 2015 KfW started to implement two pilot studies in regarding exposure, the definition of study areas, were the
Bangladesh (Barisal) and El Salvador (San Salvador) testing results of extensive stakeholder consultation with the main
101
[Link] partners of the project.
 Impact of Climate Change on Indian Economy 52

Results/solutions Lessons learned

The ECA Study in San Salvador offers a large range of results. The studies showed both strengths and limitations of
First, a ranking of the best investments in term of adaptation the ECA methodology as well as the need for capacity
measures was discussed between KfW and possible development and stakeholder engagement for quantitative
stakeholders. These measures included infrastructural risk analytics, especially for bridging between analysis and
projects but also Ecosystem-Based Adaptation (EbA) investment.
measures such as reforestation. The benefits of more than
28 measures were evaluated. It showed the crucial role that a multi-stakeholder
engagement approach can play in developing countries.
Second, the ECA Studies in San Salvador showed that the The existing set of skills often available in academia and the
ECA framework and CLIMADA can be used to evaluate and private sector, allow countries to embed the ECA approach
quantify climate risk, as well as adaptation measures for the in their structures and therefore foster a more sustainable
poor and vulnerable population. approach.

Third, strong limitation due to the complexity of the To achieve success, climate analytics, needs to be embedded
approach, the set of skills necessary to its implementation, in local structures. Its systematic and transparent approach
forced the stakeholders to put a particular emphasis on builds trust and initiates in-depth stakeholder discussion
capacity building. Partners such as the UCA, a university, across sectors helping to avoid a premature restriction on
in San Salvador, but also UNU-EHS in Bonn developed particular measures.
several lectures, manual and guidebooks to disseminate
the method.
Figure 23: Spatial distribution of benefits for ecosystem-
based adaptation. A good entry point for stakeholder
engagement.
 Impact of Climate Change on Indian Economy 53

Role of Business

As seen in the previous sections, the impact of climate  Strategise: Post identification, assessment and
change on certain sectors can disrupt the business-as- quantification of risks, it is important to dovetail these
usual, supply chains and pose threat on the profitability or considerations in the business model through adoption of
even sustainability of organizations. Many business risks social impact models, Environment, Social & Governance
are directly or indirectly influenced due to changes in the (ESG) integration strategies, innovative products and
climate. Thus, certain steps (shared in figure below) taken services which incorporates environmental and social
by businesses can help save costs, enhance productivity, aspects across their life cycle, adopting integrated
boost employee motivation, make the supply chain robust, operational excellence models and Climate-related
benefit the environment and influence the economy in a business outlook. The role of top management, investors
positive way. and policymakers is critical in outlining some of these
 Assess: For any business, it is necessary to assess priorities and ensuring they are part of the core business
the impact of climate change on the functioning of models. Workforce or the human capital will play the
the business including the supply chain, as a starting essential role in actualizing the laid out climate strategy
step. At a time where governments, investors and  Report and disclose: Transparent and robust reporting
consumers are becoming increasingly conscious, it is on sustainability and ESG-related parameters, including
imperative for any business to know where they stand climate risks, helps in measuring progress against the
in terms of identifying the risks so that they can set targets, serves as an important tool for communicating
clearly defined targets and benchmark its performance company’s sustainability strategy to critical stakeholders
against the identified key performance indicators (KPI). including government, regulators and investors, to name
Some of the KPIs significant to businesses that can be a few. There are plethora of frameworks and reporting
considered are emissions to air, water, land, resource platforms available including Global Reporting Initiative
consumption and waste generation (GRI), Taskforce on Climate-related Financial Disclosures
 Quantify: With right tools emanating from research (TCFD) recommendations, Sustainability Accounting
and analytics, it is possible to quantify the risks due Standards Board (SASB), Carbon Disclosure Project (CDP),
to climate change, create scenarios and set targets to Climate Disclosure Standards Board (CDSB), Sustainable
decarbonize and reduce build-up of such risks Development Goals (SDG) Compass, Principles for
Responsible Banking, Integrated Reporting (IR)
 Impact of Climate Change on Indian Economy 54

Impact of Climate Change on Indian Economy | Recommendations

Quantify Report

Assess Strategise

Social Impact Innovation &

Climate-related Role of Operational
models & ESG technological
business outlook Stakeholders excellence model
integration advancement

Investors Policymakers Workforce

 Impact of Climate Change on Indian Economy 55

Role of Central Banks

Central Banks are increasingly focussing on the linkage

The Basel between financial stability and climate change risks. There
released in April 2020, it has been concluded that majority
of the Basel Committee members consider it appropriate to
Committee on are initiatives being led by central banks globally that focus address Climate-related financial risks within their existing
on understanding, managing and enhancing transparency regulatory and supervisory frameworks103.
Banking Supervision on Climate-related risks. The TCFD recommendations, which
has recently provides a voluntary framework for financial institutions to UK’s Prudential Regulation has issued supervisory statements
disclose on climate risks and Central Banks and Supervisors on enhancing firms’ approaches to managing Climate-related
established a high- Network for Greening the Financial System (NGFS), which financial risks and implementing TCFD recommendations.
level Task Force brings together central banks and supervisors to better In a recent development104, firms have been advised to fully
understand and manage the financial risks and opportunities embed their approaches to manage Climate-related financial
on Climate-related of climate change, will play a key role going forward. NGFS in risks by the end of 2021. The European Central Bank (ECB) also
Financial Risks 2020 published recommendations to manage Climate-related
and environmental risks102. The Basel Committee on Banking
recently published105 a guide which explains the expectation
from banks to manage Climate-related and environmental
(TFCR). Supervision has recently established a high-level Task Force on risks and disclose such risks transparently as part of the
Climate-related Financial Risks (TFCR). In its recent stocktake current prudential framework.
report of members’ initiatives on Climate-related risks,

The Reserve Bank of India (RBI), in its recent Annual Report, mentioned about the adverse impacts of
climate change on the most critical sector of the Indian economy i.e. agriculture. India’s central bank,
Moody’s Analytics (2020). NGFS Publishes
cognizant of the increasing extreme weather events including droughts, cyclones, shift in the rainfall
102

Recommendations to Better Manage Environmental Risks.

[Link]
27-20-ngfs-publishes-recommendations-to-better-manage-
patterns and depleting groundwater, has highlighted the rise in global warming as a likely cause for
environmental-risks decline in crop yields and farmer incomes. Given the agrarian nature of India’s economy, impact on
103
Bank for International Settlements (2020). Climate-related
financial risks: a survey of current initiatives. agriculture will result in an additional stress on the overall economy, financial system of the country
[Link]
104

prudential-regulation/letter/2020/managing-the-financial-
and the inflation rates. The RBI also emphasized on the need for a suitable framework to identify,
[Link] assess and manage the financial risks arising out of climate change.
[Link]
105

date/2020/html/ssm.pr200520~[Link]
 Impact of Climate Change on Indian Economy 56

Several global banks Role of financial institutions  Encouraging non-financial disclosures towards enhanced
transparency & accountability, including fast-tracking
have taken ambitious Financial institutions, being central to an economy, have a implementation of TCFD recommendations
critical role to play in tackling the impacts of climate change
commitments to and facilitate transition towards a low carbon economy. India,
 Enhancing climate literacy, which includes training and
diversifying human resource skills, to include social,
advance climate despite its unique developmental challenges, has emerged
environmental & developmental practitioners for greater
as an active player in the global climate action space by
action. displaying exemplary political will, evident from its ambitious
understanding of risks and opportunities to provide
financing solutions
NDC targets and aggressive plans to scale critical sectors like
renewable energy and e-mobility. As per International Finance
Several global banks have taken ambitious commitments
Corporation (IFC), South Asia has a climate related investment
to advance climate action. For instance, HSBC committed
opportunity of USD 3.4 trillion (from 2018 to 2030), of which
to provide USD 100 billion of finance and investments by
India alone presents a potential of USD 3.1 trillion in key
2025, towards clean energy, low-carbon tech, and projects
sectors such as renewable energy, green buildings, transport
contributing to the Paris agreement and SDGs. BNP Paribas
infrastructure, electric vehicles, and climate smart agriculture,
pledged to have zero exposure to coal by 2030 in the European
to name a few. In order to channelize investments at scale and
Union and by 2040 worldwide. Citi has committed to a five-
break barriers, developing a sustainable finance architecture106
year USD 250 billion Environmental Finance Goal to finance
to include favorable policies, innovative financial structures and
and facilitate transition to a low carbon economy. The Indian
accountability frameworks is extremely important, including:
financial sector, which is at a classic inflection point, must follow
 Demystifying Climate-related financial risks, including suite and be future ready, thus emerging as the backbone to
physical and transition risks and articulating a clear climate fuel sustainable development and economic growth.
action strategy and governance framework to provide a
unified approach
 Adopting a targeted approach to finance climate-aligned
sectors to mainstream sustainable finance. Innovation of
products and services with positive environmental and
social outcomes and implementation of forward-looking
practices like climate stress testing of the portfolio are
important aspects
 Strengthening governance and risk management
frameworks through Board-level Committees, and
embedding climate/ESG risks into lending decisions and
tracking of impact
Adapted from YES BANK’s report Innovating pathways to
106

Sustainable Finance in India

 Subject ECONOMICS

Paper No and Title Paper No. 15: Environmental Economics

Module No and Title Module No.23 : Concept of Environmental Sustainability:

Environment and Development Debate
Module Tag ECO_P15_M23

ECONOMICS Paper No. 15: Environmental Economics

Module No.23 : Concept of Environmental Sustainability: Environment and
Development Debate
 Table of Contents
LEARNING OUTCOMES ...........................................................................................................................................
1. INTRODUCTION .....................................................................................................................................................
2. CONCEPT OF SUSTAINABILITY ........................................................................................................................
THE SIX CORE CONCEPTS OF SUSTAINABILITY ..............................................................................................................
3. ECONOMISTS’ VIEWPOINT ................................................................................................................................
4. ECOLOGISTS’ VIEWPOINT .................................................................................................................................
4.1 SUSTAINABLE YIELDS .............................................................................................................................................
4.2 RESILIENCE ............................................................................................................................................................
5. SOCIO-POLITICAL VIEWPOINT .......................................................................................................................
6. SUMMARY ................................................................................................................................................................

ECONOMICS Paper No. 15: Environmental Economics

Module No.23 : Concept of Environmental Sustainability: Environment and
Development Debate
 Learning Outcomes

After studying this module, you will be able:

 To acknowledge the limits that environmental constraints offer to economic growth
 To review the ways in which economic activity affects the natural environment
 To introduce the concepts of sustainability
 To explain the distinction between the concept of 'weak' and 'strong' sustainability
 To learn about the importance of substitution possibilities in ensuring constant
consumption opportunities far into the future

1. Introduction
Development and sustainability issues have remained at the core of concern for a majority of
class of environmental economists. These issues were first highlighted in a book The Limits to
Growth (Meadows et al, 1972), which held environmental constraints as a significant factor in
slowing down of world economic system in the middle of the twenty-first century. The book
received a mixed response from the economists but was able to stimulate economists’ interest in
environmental resources. The limits discussed in this book were in terms of:

 The amount of land available for agriculture;

 The amount of agricultural output producible per unit of land in use;
 The amounts of non-renewable resources available for extraction;
 The ability of the environment to assimilate wastes arising in production and
consumption, which falls as the level of pollution increases.

All these proposed limits would result in sudden and uncontrollable decline in both population
and industrial output amid unrestricted industrialization and resource extraction. Concerted
efforts would then be needed to restore ecological and economic stability that is sustainable far
into the future. Thus it becomes important to explore existing and effective substitutes of
environmental services to overcome various limits to growth. Daly (1987) discussed two aspects
of limits to growth. First the bio-physical limits governed by laws of thermodynamics and other
dynamics of ecosystems. The second aspect talks about the will or desirability of growth, rather
than its feasibility. Daly states the following propositions about limits to growth:

 The future generations pays the price of current generations’ pursuits of growth in terms
of depleted stock of resources.
 Growth is in turn affected by the extinction or reduction in the number non-human
species whose habitat is taken over for higher growth rates.
 The growth or will to grow is usually driven by vested interests and a scientific-
technocratic worldview.

ECONOMICS Paper No. 15: Environmental Economics

Module No.23 : Concept of Environmental Sustainability: Environment and
Development Debate
 The discussion on limits to growth brings to the fore the interrelationship between economics
and environmental sciences which can be understood with examples of environmental impacts of
trade expansion and climate change.
Trade expansion does offer economic benefits and various empirical studies testify that these
economic benefits trickle down to elevate living standards of poor people as a group in the
society. However, the environment consequences of trade expansion need to be assessed before a
case for free trade is proposed on the basis of economic benefits it offers. Poor countries are
usually rich in endowment of natural resources like forests or fisheries. Expansion of trade may
only mean extraction of these resources at the expense of livelihood of many poor people. For
eg. timber concessions to private logging firms in order to promote exports cause deforestation
which in turn leads to increased siltation and risk of floods. The victims are the scattered group
of poor farmers and coastal fishermen who are usually not compensated by private logging firms,
making the firms’ private cost of logging less than the true cost of logging. This reasserts that the
environmental impacts of free trade must not be ignored. Climate change is another concern that
intertwines the environment and economics. Intergovernmental Panel on Climate Change
(IPCC), an organization representing mainstream scientific opinion, apprehends climate change
to be the result of exploitative human activity. Emission of carbon dioxide (CO₂) into the
atmosphere is one of the most important factors that influence climate change. CO₂ absorbs
infra-red heat at a constant rate and at a higher rate than nitrogen and oxygen—the main
constituent parts of the atmosphere. Hence an increased amount of CO₂ in the air leads to
warming up of air. According to scientists at IPCC, indiscriminate burning of fossil fuels to
catalyze economic growth is responsible for large increases in CO₂. In the United States, for
example, 38% of the CO₂ produced in 2012 came from generating electricity and 32% came
from vehicle emissions (the rest came from industrial processes, buildings and other smaller
CO₂ production). People also contribute to release of CO2 when they cut down forests for
farmland and pasture (The Economist, 2 Nov 2014).

Sustainable Development has many dimensions to it apart from just ecology and environment. In
this module we discuss various concepts of sustainability emanating from its interdisciplinary
nature.

2. Concept of sustainability
Sustainability translates into the ethical concern for future generations and the need to
incorporate this concern into current planning and decision making of economic activities. The
concern for future generation affects the use of environmental resources in current production
and also the current decision making process. There are various parameters through which
sustainability issues can be comprehended and one of them is through our understanding of
different consumption patterns. Utility functions where consumption is the only argument, and
where utility increases with consumption is a standard proposition to address intertemporal
distribution issues. The idea of sustainability as non-declining consumption is the concept of
sustainability that is most widely used in economic analysis. However, constant consumption for
indefinite time period into the future, at any rate other than zero, satisfying various constraints of

ECONOMICS Paper No. 15: Environmental Economics

Module No.23 : Concept of Environmental Sustainability: Environment and
Development Debate
 social welfare maximization problem might not be sufficient to explain and address sustainability
issues in totality.

The six core concepts of sustainability

The following core concepts of sustainability define a sustainable state as where:

1) The utility or consumption is non-declining through time.

2) The resources are managed so as to maintain production opportunities for the future.
3) The natural capital stock is non-declining through time.
4) The resources are managed so as to maintain a sustainable yield of resource services.
5) The minimum conditions for ecosystem resilience is satisfied through time.
6) The consumption approach to environmental sustainability, where consumption needs to be
optimized over time and space.
7) Consensus building and institutional development are considered imperatives for sustainable
development.

3. Economists’ viewpoint
Two first two concepts are the economic concepts of sustainability. A sustainable state is one in
which utility/consumption is non-declining through time and in which resources are managed so
as to maintain production opportunities for the future. Definitions proposed by various
economists in support of these concepts are given in table 4.1
Table 4.1

Definitions of Sustainability
Pezzy 1992, pg Sustainability is defined as non-declining utility of a representative
323 member of society for millennia into the future
Page 1977, pg Preserving opportunities for future generations as a common sense minimal
202; 1982, pg 205 notion of intergenerational justice
Brundtland Report, Sustainable development is development that meets the needs of the
WECD (1987, present without compromising the ability of future generations to meet
P43) their own needs
Solow 1986 We have no obligation to our successors to bequeath a share of this or that
resource. Our obligation refers to generalised productive capacity or, even
wider, to certain standards of consumption/living possibilities over time
Jha and Murthy When we say that a contemporaneous profile of consumption is not
(2000) sustainable, then it probably means that a switch in consumption either
spatially and/or over time would improve global welfare, again perceived
as a magnitude referring to the indefinite future

Constant consumption and equal opportunities are closely linked in economics. For many
economists, the opportunities that matter are consumption opportunities. In this sense sustainable

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Module No.23 : Concept of Environmental Sustainability: Environment and
Development Debate
 development is not only about leaving behind stocks of resources for our future generations, but
rather the capability to do things we do with those resources. In other words sustainability
involves providing same consumption opportunities if not any more to our future generations so
that they have the capabilities to do the same things that we do using the current stock of
resources. If we cannot bequeath to our successors something that is a substitute for non-
renewable resources, then to honour our ethical commitment, we do have an obligation 'to
bequeath a share of the resources that we currently use.
The third concept of sustainable state (non declining natural capital) brings us to the
differentiation between weak and strong sustainability. Both the perspectives of sustainability
(weak and strong) define sustainability in form of constant utility or consumption through time.
However they differ in the ways in which the state of constant consumption (or utility) is
realized. As developed in the literature, the weak versus strong sustainability debate makes
extensive use of the notion of 'natural capital'. To explain this concept we first define total stock
of capital as sum of human made capital and natural capital. Human made capital consists of
physical (plant, equipment, buildings and other infrastructure), human capital (stocks of learned
skills) and intellectual capital (disembodied skills and knowledge like state of technology).
Whereas, the natural capital may refer to all naturally provided stock like water, soil, forest,
fisheries etc.
This way of classifying production inputs helps in denoting the economy's production function
in summary representative form as

Q = F (L, KN, KH)

where L represents labour, KN natural capital and KH human-made capital. Within this
framework, the difference between weak and strong sustainability lies in the extent of the
substitution possibilities between KN and KH. Proponents of strong sustainability argue that
sustainability requires the level of KN to be non-declining. This conforms to the third core
concept of sustainability. Proponents of weak sustainability argue that it requires the sum of KN
and KH must be non-declining. Sustainability as non-declining KN assumes that possibilities for
substituting KH for KN are limited.

4. Ecologists’ viewpoint
The fourth and fifth core concepts of sustainability reflect the viewpoint of ecologists. The fourth
core concept is based on the sustainable yields in the economy and the fifth is based on meeting
minimum requirements to uphold resilience of ecosystem. Both the concepts are explained
below along with the observations on the general approach to policymaking process that is
frequently advocated by ecologists.

ECONOMICS Paper No. 15: Environmental Economics

Module No.23 : Concept of Environmental Sustainability: Environment and
Development Debate
 4.1 Sustainable yields

Existing stocks of renewable resources like flaura and fauna have the potential to grow by the
means of natural reproduction. Their stock size in any given period depends upon the balance
between the rate of their natural growth and the rate of harvest. If in any period the resource
harvest exceeds its natural growth, stock size reduces. However, if the harvest is less than natural
growth, stock size grows. Stock size of a few renewable resources may fall continuously or even
exhaust if the rate at which they are harvested, exceeds the rate at which they replenish
themselves. If the rate of harvest is the same as the rate of natural growth, stock size remains
constant and the resource can be used indefinitely into the future at a constant rate. If for a period
of time the stock being harvested remains equal to the amount of net natural growth of the
resource and these magnitudes remain constant over a sequence of consecutive periods, it is
called the steady-state harvesting. The constant magnitude being harvested is called the
sustainable yield as, in the absence of exogenous shocks, it can be maintained or sustained,
[Link] concept of sustainable yield runs into difficulty in the case of extraction of non-
renewable natural resources. For non-renewable resources, natural growth is zero, so that the
only sustainable rate of harvest for a non-renewable resource is zero. However, this situation
may be partly countered if some proceeds from the economic progress made with the use of non
renewable resources can be used to generate the capacity to provide substitutes for the resource.

4.2 Resilience
Concept of resilience is of fundamental importance in ecology. Holling (1973, 1986) describes
resilience as the propensity of an ecosystem to retain its functional and organizational structure
following a disturbance, without undergoing catastrophic or discontinuous change. Resilient
ecosystem does not necessarily imply that all of its component populations remain stable. If the
ecosystem continues to function in the same way, even after a component population
disappearing as a result of disturbance, the ecosystem is said to exhibit resilience.
In more technical interpretation, resilience relates to the size of the parameters of the
relationships determining ecosystem structure and function in terms, say, of energy flows
through the system. A resilient ecosystem is characterized by parameters that are not affected by
shocks to the system. However, some economic activities appear to reduce resilience, but the
extent of this cannot be known ex-ante. In other words, we can judge the resilience of ecosystem
after a disturbance has taken place but we may not be able to infer ex-ante that ecosystem will
remain resilient far in future against any shock that comes by. Uncertainty pervades the
behaviour of ecological systems, and hence one cannot know in advance that whether some
system is resilient or not.
This is the reason why ecologists give more importance to uncertain nature of ecosystem while
conceptualising the sustainability problem and considering policy responses to it. Ecologists
advocated the precautionary principle according to which, valid opinions against any action that
may have adverse environmental impacts must be presented, before the action is permitted.
Thus for approval on the action, it should be necessary to show convincingly that such adverse
impacts will not occur. Maintaining the safe minimum standard is another closely related idea
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Module No.23 : Concept of Environmental Sustainability: Environment and
Development Debate
 wherein actions that may entail irreversible adverse environmental impacts should not be
undertaken unless it can be shown that not undertaking the action, would give rise to un-
acceptably large social costs.

4.3 Consumption Priority View

“Human activity (anthropogenic) is essentially the cause of environmental degradation. In as
much as human activity as is necessary for a minimal standard of living, it is justified.
Accordingly, much of degradation that is caused in the process of such human activity is
warranted. This lays down the basis for the notion of sustainability. If current economic
activity causes degradation of the environment beyond such justifiable limits it compromises
the health, standard of living and the very existence of future generations (Murthy (2011), p.
289).

This notion of sustainability does not endorse ‘non-declining consumption through time,’ which
is based on the notion of a continuous increase in the level of consumption. The alternative
though in this approach is that sustainability is a problem of optimization and not the sustenance
of a certain level of consumption. This can be achieved by redistribution of consumption across
time and space. It does not rule out increase in consumption in repressed economies. It does not
rule out suppression of consumption in such economies where it is excessive. In this sense, ‘non-
declining consumption’ is not desirable in any absolute sense. This new notion of sustainability
is not based on natural resource economics. Nor is it based on neo-classical economics. It is also
not based exclusively on social discount rate. It does not treat technology and production as the
basis of sustainability. The level and distribution of consumption is the purported basis of the
new notion of sustainability.

5. Socio-Political Viewpoint
The sixth core concept of sustainability puts in place consensus building and institutional
development as vital components in discussion of sustainability. Although economists and
ecologists do recognize that sustainability issues entail both socio-political and cultural
dimensions, this sort of view of sustainability is found mainly in the writings of political
scientists and sociologists. This view lays primary focus on developing processes to ensure
sustainable development, rather than looking at outcomes or constraints. Some important
definitions of sustainability justifying this view point were proposed by de Graaf et al (1996).

.... development of a socio-environmental system with a high potential for continuity because it
is kept within economic, social, cultural, ecological and physical constraint it is kept within
economic, social, cultural, ecological and physical constraints.

and
... development on which the people involved have reached consensus

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Module No.23 : Concept of Environmental Sustainability: Environment and
Development Debate
 For many years, it was thought that the eradication of poverty required well-designed
development programmes that were largely independent of considerations relating to the natural
environment. But perspectives have changed post 1970’s. During the 1970s, a concern for
sustainability took form of the international political agenda as was widely discussed in a series
of international conferences. The common feature of these debates was the interrelationship
between poverty, socio-economic & cultural development and the state of the natural
environment. It has now become difficult to separate environmental objectives from other social
and political objectives as their interdependence cannot be ignored. Rather such interdependence
is seen as both pervasive and complex. Perhaps the 1987 report of the World Commission on
Environment and Development, popularly known as Brundtland report set the agenda for much
of the subsequent discussion of sustainability with the institutional dimension.
In political terms the Brundtland report was an influential piece of work which highlighted that
sustainability problems are set in the framework of economy-environment interdependence.
Thus, according to the Brundtland report

Environment and development are not separate challenges: they are inexorably linked.
Development cannot subsist on a deteriorating environmental base; the environment cannot be
protected when growth leaves out of account the costs of environmental protection (p37).

The Brundtland report simply urges that national governments merge environmental and other s
considerations in their decision making as conventional approaches to the sustainability issues
may not be sufficient. Though the brundtland report stressed upon economic systems with
environmental dimensions, the proponents of institution and consensus building consider
cultural development, political will and feasibility as additional core components of
sustainability. In proposing a new strategy, de Graaf et al. urge that one must not view the
attainment of sustainability as simply a technical problem. Necessary and sufficient conditions
for sustanaibility cannot represent the problem comprehensively in the presence of fundamental
limits to our ability to know the consequences of human behaviour.
Consensus building should be attempted through negotiations. The notion of negotiation that de
Graaf et al had in mind was very broad, referring to an institutional process of social choice that
involves people as widely as possible, and involves a process of trade-offs in which all benefit
from the avoidance of environmental disturbances. According to de Graaf et al, research should
be focused on the structure and management of these negotiations, and on the supply of relevant
information about avertable problems steerable development.

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Development Debate
 6. Summary
The sustainability from economic perspective is constant, or non-declining, consumption (or
utility) where as ecologists are more concerned about properties of biosphere such as resilience
and maintaining healthy equilibrium between man-made and natural processes. Ecologists’
perspective is similar to the idea strong sustainability, whereas economists’ are drawn towards
the concept of weak sustainability. However, one must also note that these concepts fall
somewhat short in explicitly specifying the duration of time over which sustainability is to
operate. If the idea of sustainability is to influence the policy makers, it must lay focus the time
horizons in which the state of sustainability can be reproduced in perpetuity.

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Module No.23 : Concept of Environmental Sustainability: Environment and
Development Debate