DAILY

CLASS NOTES
NCERT: Indian Economy

Lecture - 08
Employment and Poverty or
Rural Development
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Employment and Poverty or Rural Development

Poverty Estimation:

 After the independence of India, various steps were taken by the Government to

determine the estimation of poverty or poverty line.

 The poverty line is a threshold below which individuals or families are considered

to be living in poverty. It is often defined in terms of a minimum level of income

or consumption necessary to meet basic needs.

 The determination of the poverty line is influenced by various factors, including

the country’s level of development and its prevailing social norms and economic

conditions.

 The Alagh Committee was constituted in 1979 and headed by Y.K. Alagh to carry out

surveys and determine the poverty line for rural and urban areas.

 The committee recommended that the poverty line should be defined on the basis

of calorie intake.

 The people consuming less than 2400 calories in rural areas or less than 2100

calories in urban areas will be considered poor. The calorie intake limit is set high

for rural areas because more physical work is involved in rural lifestyles than in

urban areas.
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 The Lakdawala Committee was formed by the Government in 1993.

 The committee defined the poverty line not only on the basis of calorie intake but
also on shelter and clothing.
 Tendulkar Committee was formed by the Government in 2005, headed by Suresh
Tendulkar.
 It tried to define poverty on the basis of expenditure done by the people.
 Those people whose monthly per capita expenditure is less than Rs 1000 in urban
areas and less than Rs 816 in rural areas will be considered poor.
 Monthly per capita expenditure means the expenditure incurred by an individual
per month.
 Based on the above poverty estimation method, approximately 21.9% of people
live Below Poverty Line in India.
 The Rangarajan Committee headed by Dr C. Rangarajan was formed in 2014.
 It defined the poverty line on the basis of monthly family expenditure.
 Those families whose monthly family expenditure is less than Rs 7035 in urban
areas and less than Rs 4860 in rural areas will be considered as poor.
 Monthly family expenditure
means the expenditure of a
family per month. The Family
here includes an average of 5
members.
 According to this poverty
estimation method,
approximately 29% of people
are poor in India.
 The Government considers the report of the Rangarajan Committee as faulty
because it increased the percentage of poor people in India. Therefore, the
Government presently considers and follows the report of the Tendulkar
Committee.
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Absolute vs Relative Poverty:

Absolute Poverty Relative Poverty

 Absolute poverty is a state in which  Relative poverty is a state in which a

a person is unable to meet basic person is unable to enjoy normal comforts

needs for living. of life which are enjoyed by a large number

of people in society.

 Example: A person living on the  Example: An engineer earning 12 lakh per

roadside not able to afford food, annum will consider himself relatively poor

clothing, and shelter which are basic in front of billionaire Mukesh Ambani, who

necessities of life is considered to be is the richest person in India.

living in Absolute Poverty.

Measures to Reduce Poverty:

 This topic will include all the current social security schemes introduced by the

Government to help the poor live a decent life.

Marginal Propensity to Consume (MPC):

 Marginal means a small change in the present things.

 Marginal Propensity to Consume is the change in consumption per unit change in

income.

 MPC is defined as the proportion of an aggregate raise in pay that a consumer spends

on the consumption of goods and services, as opposed to saving it.

 Example: Suppose an individual receives a salary equal to Rs 5000 and gets Re 1

as a bonus. The person spends 60 paise and saves 40 paise out of this Re 1. Then

the MPC would be 0.6 (60 paise/Re 1). This shows the percentage of money

consumed out of the raise in salary of the individual.

 The value of MPC will always be less than or equal to 1 but never more than 1.
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 It will be equal to 0 when the person consumes nothing (equal to Rs 0) out of the
money received whereas it will be equal to 1 when the person consumes all the money
received and saves nothing.

MPC = 0 Consumption is Rs 0 out of the aggregate raise in pay.

0 < MPC > 1 Consumes some amount out of the aggregate raise in pay.

MPC = 1 Consumes the whole amount received out of the aggregate raise
in pay.

Marginal Propensity to Save (MPS):

 Marginal Propensity to Save is the change in savings per unit change in income.
 MPS refers to the proportion of a pay raise that a consumer saves rather than spends
on immediate consumption.
 Example: Suppose an individual receives a salary equal to Rs 5000 and gets Re. 1
as a bonus. The person spends 60 paise and saves 40 paise out of this Re 1. Then
the MPS would be 0.4 (40 paise/Re 1). This shows the percentage of money saved
out of the total money received by the individual.
 The sum of marginal propensity to consume and marginal propensity to save will
always be equal to 1.

MPC + MPS = 1

 The value of MPS will always be less than or equal to 1 but never more than 1.
 It will be equal to 0 when the person saves nothing (equal to Rs 0) out of the money
received whereas it will be equal to 1 when the person saves all the money received
and consumes nothing.

MPS = 0 Saving is Rs 0 out of the money received.

0 < MPS > 1 Saves some amount out of the money received.

MPS = 1 Saves the whole amount received.

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Paradox of Thrift:

 Paradox means having contradictory qualities or situations or phases. Thrift means the

quality of using money carefully and not wastefully.

 People generally believe that if he/she saves money then the savings of the country will

also increase in the future. But in reality, when everybody starts to save money, the

products of the companies don’t get sold as no one wants to spend in the market. Thus

in the long term, the revenues of the company decline which negatively impacts the

salary given to the employees of the company. The salary of the employees would be

reduced and thus they would no longer be in a position to save.

 This shows the paradox situation wherein the individual thinks that his/her saving

would increase the saving of the company but in reality, it actually deteriorates

the condition of the economy.

 The Paradox of Thrift suggests that when individuals in an economy collectively increase

the proportion of their income that they save, the total value of savings in the economy

may not necessarily increase. It can either decline or remain unchanged.

 The Paradox of thrift occurs when an increase in the overall savings rate in an economy

does not necessarily lead to total higher savings.

 Example: During the COVID-19 pandemic people started to save thinking about

the uncertainties in the future. No one was spending money in the market thus

the companies started facing a difficult situation as their products were not getting

sold. The companies started to cut the salaries of their employees. In fact, many

people were fired from their jobs also to cut the cost of the company. The economic

condition deteriorated and people were no longer in a position to save money.

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