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Indian Economy - CMA

Meaning of an Underdeveloped Economy

On several occasions, we hear the experts of Economics referring to India as an underdeveloped or a less-developed economy. While it is evident that as a country we still have miles to go before we call ourselves a truly developed nation, what exactly is the meaning of an underdeveloped economy? In fact, what is the concept of development according to Economics? In this article, we will explore the meaning of an underdeveloped economy and talk about the Indian context.

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Before, we look at the concept of development, let’s take a peek at our Economy’s key strengths and performance in recent years.

Key Strengths of the Indian Economy

As a country, India has some strong macro-fundamentals and performance. During the years 2005/06 to 2011/12, the key strengths of the Indian Economy were:

  • High savings and investment ratios
  • Excellent growth prospects
  • Strong and highly competitive organizations in the private sector
  • Robust regulatory framework
  • Economic liberalization
  • High-quality human capital or a highly educated workforce
  • A strong domestic demand
  • Innovation ingrained in society
  • A Strong external liquidity position
  • Steadily increasing Government revenues

These strengths have therefore led to significant growth in our country’s macroeconomic parameters as shown below:

Parameters 2005/06 2011/12 Percentage Change
Real Gross Domestic Product(GDP)(INR Billion) 32,542 52,220 60% increase
Real Per Capita GDP(INR) 33,548 46,221 38% increase
Exports(US $ Billion) 103 303 194% increase

 

While the figures certainly look promising, India still has a lot of ground to cover. The per-capita income (PCI) of an Indian is still considerably lower than most of the other countries in the world like the UK, USA, Japan, etc.

Learn more about the methods of measuring the National Income here in detail.

Meaning of an Underdeveloped Economy

India is still battling a lot of problems like illiteracy, poverty, child mortality, etc. As a nation, we have to defeat these enemies before the world starts looking at us as an emerging economy. In order to comprehend the meaning of an underdeveloped economy, let’s first look at the concept of development.

What is the concept of Development?

By now, we know that the National Income and Economic Welfare are two separate entities. A high National Income does not imply Economic Welfare. In fact, there are various other factors like education, health, political stability, prosperity (cultural and social), etc. which constitute welfare.

Similarly, growth and development are also separate aspects. Growth, in simple terms, means quantitative improvement. On the other hand, development considers growth as well as various aspects of human development.

Therefore, we can classify all the countries around the world into two broad categories – Developed and Developing countries. A developing country means that even though the country is underdeveloped, it has initiated the process of development. Take a look at the following diagram:

underdeveloped economy and classification of economies

As you can see in the figure above, a developing economy is sub-divided into Low, Middle, and High-Income groups. Further, the Middle-Income group is broken down into Lower-Middle-Income group and Upper-Middle-Income group.

In the current scenario, two Asian economies – India and China are developing faster than the other High-Income countries. In fact, as of 2011, China has already entered the Upper-Middle-Income group with a PCI (per capita income) of $4940. India, with a PCI of $1410 in 2011/12 has a long way to go.

Solved Question on Underdeveloped Economy

Q1. How are developing countries sub-divided based on their income?

Answer:

If the per capita income of a developing country is:

  • Less than $ 1025 – it is a Low Income Developing Country
  • Greater than $ 1026 but less than $ 4035 – it is a Low Middle Income Developing Country
  • Greater than $ 4036 but less then $ 12475 – it is an Upper Middle Income Developing Country
  • Also, if the PCI > $ 12476 – it is a High Income Developing Country
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