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APPROACH – ANSWER : ECONOMICS TEST 1- 1892 (2022)

1. Can a multi-dimensional poverty index (MPI) be a better indicator than poverty line in the context of
India? (10 Marks)
Approach:
 Define poverty
 Explain the comparative advantages/disadvantages of the MPI over the poverty line. Recent
controversies regarding the poverty line can also be covered
 Conclude accordingly
Answer:
Internationally poverty is measured on the basis of a monetary threshold (currently $1.9 a day) which
reflects the value of goods needed by an adult to sustain his/her life. India estimates poverty through
consumption based poverty line approach proposed by Suresh Tendulkar committee. At present,
poverty line in India is fixed at an expenditure of Rs 33/day in urban areas and Rs 27/day in rural areas.
As per 2011 census, 22% of Indian population lives below poverty line. However, several economists
criticize measuring poverty on the basis of income alone and suggest a more comprehensive measure
such as MPI for that.
Advantages/disadvantages of MPI over poverty line:
 Defining a poverty line has been a controversial issue in India. Different committees (such as
Tendulkar committee and Rangarajan committee) have come out with different methodologies and
the absolute number of poor varies in each of them. Besides, the consumption based method has
also been criticized for keeping the poverty line deliberately low and ambiguous.
 The poverty line is also an unsophisticated measure of poverty. It fails to address the complexities
around poverty. For example, some people may be technically above the poverty line, they might
have other vulnerabilities such as disables and old people in the family, impact of climate change,
threat of violence etc. Similarly, in certain areas with a very strong presence of the state or NGOs,
households who do not reach the minimum income level may access goods and services anyway.
 The poverty line concept measures poverty uni-dimensionally in terms of income or consumption
only. Whereas, MPI is a more comprehensive measure that covers incidence of poverty as well as its
intensity on the basis of 10 indicators including years of schooling, child enrolment, mortality (any
age), nutrition, electricity, sanitation, drinking water, flooring, cooking fuel and asset ownership.
 The government can decompose MPI by region, by particular groups, and by indicators to analyze
which groups suffer most and in which dimensions. It also represents several MDG/SDG targets.
Therefore, it is a more actionable and policy-relevant indicator.
However, MPI also suffers from several limitations e.g. it does not measure intra-household
inequalities and inequality among the poor.

2. How does an age structure changing towards a lower ‘dependency ratio’ create a demographic
advantage or ‘dividend’? Explain in the context of India. (10 Marks)
Approach:
 Define dependency ratio and demographic dividend and bring out a brief picture of India in
the context.
 Elaborate on how a low dependency ratio creates a demographic advantage.

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  Discuss the concerns and conclude by emphasizing on the initiatives taken and some future
efforts to fully realize the benefits of demographic dividend for India.
Answer:
Dependency ratio refers to the number of children aged 0 to 14 years plus the number of persons aged
65 years or above per 100 persons aged 15 to 64 years. Reduction in dependency ratio is the result of
declining birth rates and rise in average life term generally in the 3rd stage of demographic transition
model. It creates a situation wherein the ratio of working population to the total population is high –also
termed as the ‘demographic dividend’. According to census 2011, more than 63% of the population in
India is in the age group of 15-59 years. Dependency ratio has reduced in all the States and UTs though
there are variations among states (e.g. Kerala, Goa, and Himachal Pradesh have higher old age
dependency).
A lower dependency ratio is a source of economic growth and prosperity in the following ways:
 Creates a large labor force in the economy - This is subject to adequate human development, skill
development, gender-equality and creation of job opportunities.
 Increases the savings of individuals and the Nation as a whole - More people in the working age
group creates wealth in households. Falling birth rates reduce the overall expenditure required to
provide basic necessities for the under 14 age group (which is yet to be productive). This translates
into more savings for the household. Savings rate will get a boost if adequate financial inclusion is
ensured and social security nets are put in place. An increased national saving will help in allocation
of resources to priority areas like infrastructure development.
 Increases per capita GDP - It translates into better living standards for the population.
 Creates Gender Parity – A reduction in dependency ratio invariably follows a declining fertility rate.
Low fertility will imply that more resources will be allocated to a child in a household which will
translate into better human development indicators. It also ensures higher participation of women
in the workforce, lower health expenditure per household and better health outcomes for women.
This is subject to creation of a society free from evils of female-foeticide and which provides equal
opportunities to both the genders.
Various steps have been taken by the Government to reap the benefits of the favourable age structure
in India. For example: Skill India Mission for improving employability, Jan Dhan Yojana for Financial
Inclusion, Beti Bachao Beti Padao for improving the child sex ratio, Pradhmantri Beema schemes for
providing social security net etc. It is to be remembered that demographic dividend in India is just a
window of opportunity which will eventually close as the larger pool of working age people eventually
turns older. Hence it is imperative to create enabling conditions to reap its full benefits.

3. Rising income inequality is a widespread concern for advanced as well as emerging economies.
Illustrate how inequality impedes economic growth. Also, examine the steps taken by India to tackle
income inequality. (10 Marks)
Approach:
 Introduce the answer by illustrating the rising income inequality.
 Discuss the impact of income inequality on economic growth.
 Analyze the initiatives by India to reduce income inequality.
Answer:
Widening income inequality is the defining challenge of our time. In advanced economies, the gap
between the rich and poor is at its highest level in decades. Inequality trends have been more mixed in
emerging markets and developing countries (EMDCs), with some countries experiencing declining
inequality, but pervasive inequities in access to education, health care and finance remain.
Wealth is now even more concentrated at the top level, exacerbating the overall disadvantage of low-
income households. In 2012, the bottom 40% owned only 3% of total household wealth. In contrast, the
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 top 10% controlled half of all total household wealth and the wealthiest 1% owned 18%. The top 1%
share almost 10% of total income worldwide.
Economic Growth and Income Inequality:
 Inequality affects growth drivers. Higher inequality lowers growth by depriving the ability of lower-
income households to stay healthy and accumulate physical and human capital.
 For instance, it can lead to underinvestment in education as poor children end up in lower-quality
schools and are less able to go on to college. As a result, labor productivity could be lower than it
would have been in a more equitable world.
 Increasing concentration of incomes could also reduce aggregate demand and undermine growth,
because the wealthy spend a lower fraction of their incomes than middle- and lower-income groups
 Inequality dampens investment and hence growth by fueling economic, financial and political
instability. Extreme inequality may damage trust and social cohesion and thus is also associated with
conflicts, which discourage investment.
 A growing body of evidence suggests that rising influence of the rich and stagnant incomes of the
poor and middle class have a causal effect on crises, and thus directly hurt short- and long-term
growth. In particular, studies have argued that a prolonged period of higher inequality in advanced
economies was associated with the global financial crisis of 2008.
Examining steps taken by India to reduce Income inequality:
 Social protection is a cushion for those at the bottom against the effects of inequality. Social
protection policies play an important role in reducing poverty and inequality and supporting
inclusive growth by boosting human capital. However, India fares poorly in case of social protection
measures. The global average on social spending is 8.8% of GDP. Among BRICS nations, India spends
the lowest proportion of public expenditure on social protection around 4%, while the highest is
Brazil with 21.2%.
 The performance of existing protection measures is dismal in terms of access, quality and equity.
Health, education and nutrition schemes face great challenges.
 Taxation policy is critical in income redistribution. Regressive tax code and complex tax structure has
resulted in widespread tax evasion in India. The redistributive role of fiscal policy could be reinforced
by greater reliance on wealth and property taxes, more progressive income taxation, removing
opportunities for tax avoidance and evasion. Government is in the process to reform the tax code in
India. However, the rate of reforms is dismal. Direct tax code, Goods and Services tax proposals are
still awaiting the approval by the Parliament.

4. What are the different approaches for measurement of National Income? Explain the difficulties in
estimation of national income by each of these approaches. What steps have been taken in recent
times to improve accuracy in national income accounting? (15 Marks)
Approach:
 Briefly explain the concept of national income.
 Mention the different approaches to measure it along with the difficulties faced.
 List the steps taken to improve accuracy in national income accounting.
Answer:
National Income is the money value of final flow of output of goods and services produced within an
economy over a period of time, usually one year and net factor income earned from abroad. It can be
measured using the following three Methods:
 Product/Value Added Method- The aggregate value of the final goods and services in different
sectors of the economy like industry, agriculture etc. is calculated by determining the total
production that was made during the specific time period. Difficulties in its estimation are:
o Data available is neither sufficient nor accurate or sufficiently detailed.
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 o Non-monetised: a significant part of the product (like agriculture) in rural India is bartered which
makes their valuation difficult.
o Self-consumption: The small farmers who constitute a sizeable number in India produce goods
mainly for their own use. The value of such goods cannot be computed.
o Valuation of a new good at constant prices: When a new commodity is produced for the first
time, it is easy to know its current price but difficult to get its constant price.
 Factor Income Method- National income is measured as the total sum of the factor payments (land,
labor, capital and entrepreneurship) received during a certain time period, i.e. income received by
various facrors of production. Difficulties in its estimation are:
o Ignorance: Majority of the people in India are illiterate, uneducated and ignorant. They do not
maintain account of their income and expenditure.
o Lack of occupational classification: In India, many people earn their living from more than one
occupation making it difficult to know the main source and consequently a large part of income
gets excluded from national income.
 Expenditure Method- it measures the national income as the sum total of expenditures made by
individuals on personal consumption, firms on private investments and government authorities on
government purchases. Difficulties in its estimation are:
o Transfer payments: All government expenditure on transfer payments are excluded from
national income.
o Fixed capital consumption: it is quite difficult to measure the correct value of consumption of
fixed capital (e.g. machines etc.) during the year.
o Double counting: it is difficult to exclude expenditure on all intermediate goods and services.
The Central Statistics Office (CSO) has adopted a new method of GDP calculation which is in line with the
United Nations System of National Accounts, 2008. It made following changes in the calculation of
national income accounting:
 Changing the base year: The CSO changed the base year from 2004-2005 to 2011-2012.
 Replacing factor costs with market prices: The concept of Gross Value Added (GVA) is considered to
be a better indicator to measure economic activities as it includes not only the cost of production
but also product subsidies and taxes.
 Widening of the data pool: The new GDP incorporates more comprehensive data on corporate
activity than the old one.
 Changes in calculation of labour income: in the new series, an Effective Labour Input (ELI) method is
used.
 Changes in calculation of agricultural income: Value addition in agriculture is now taken beyond
farm produce.
Also, based on the recommendations of NL Sarda committee, government is considering creation of one
single database for inflation, industrial output and employment.

5. What is unemployment? Discuss various types of unemployment existing in India. (15 Marks)
Approach
 Define unemployment
 Explain various kinds of unemployment in Indian context
 Conclude
Answer:
Unemployment is defined as a situation in which a mentally and physically capable person is willing to
work at the existing wage rate, but does not get a job to work. It is measured as:

Unemployment rate = (Unemployed workers / Total Labour Force) X 100

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 Types of unemployment existing in India:
 Open unemployment: It is a situation where in a large section of the labour force does not get a job
that may yield them regular income. When the labour force expands at a faster rate than the growth
rate of economy, such unemployment occurs.
 Disguised Unemployment: It is a situation in which more people are doing work than actually
required. Even if some are withdrawn, production does not suffer. It happens due to rapid growth of
population and lack of alternative job opportunities e.g. overcrowding in agriculture.
 Seasonal Unemployment: Such unemployment occurs during certain seasons in industries and
occupations such as agriculture, tourism, ice factories, etc. People remain unemployed in off-
seasons.
 Cyclical unemployment: It occurs during recessions of economic cycle. It is a short run phenomenon
and disappears on recovery of the economy.
 Voluntary Unemployment: When people choose not to work. It happens when people are not able
to find employment that matches their expectations.
 Structural Unemployment: It occurs when the skills, experience, and education of workers do not
match job openings.
 Frictional Unemployment: It refers to the period between job transitions. People are regarded as
unemployed while they are attempting to find a new job.
 Casual unemployment: When a person is employed on day-to-day basis (unorganised sector),
unemployment may take place due to short term-contracts, shortage of raw materials, fall in
demand, change of ownership, etc.
Other than these major types of unemployment existing in India, underemployment is also rampant.
Here people are either employed on a part-time basis or undertake a job where lesser qualification is
required e.g. post graduates applying for posts of peon. The faulty education system also adds to the
unemployment by creating a mismatch between skills imparted and those required by the industries e.g.
a large number of engineering graduates in India remain unemployed due to this.

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