(a) Describe the major components used in Human Development Index (HDI) by the United Nations Development Programme (UNDP). Write…

(a) HDI: components, limitations and remedies

The UNDP’s Human Development Index is a composite of three dimension indices. The life expectancy index uses life expectancy at birth, bounded between 20 and 85 years. The education index combines mean years of schooling of adults aged 25 and above, bounded 0–15, and expected years of schooling for children, bounded 0–18. The GNI per capita index uses the logarithm of GNI per capita in 2021 PPP (2017 PPP up to HDR 2023/24), bounded $100–$75,000. Each dimension is normalised to 0–1 and the HDI is the geometric mean, so a shortfall in one dimension cannot be fully offset by another, though limited substitutability remains. Methodological limitations are that equal weights are value-laden and not derived from evidence; the geometric mean still assumes some substitutability and hides distributional gaps; it omits inequality, sustainability, political freedom, gender, health quality and subjective well-being; and cross-country comparability is affected by data quality, PPP conversion, cultural differences and arbitrary bounds. Remedies include the Inequality-adjusted HDI, which applies an inequality correction to the HDI; the Multidimensional Poverty Index, which uses non-substitutable deprivation thresholds; the Gender Development Index and Gender Inequality Index for gender gaps; the planetary pressures-adjusted HDI (introduced by UNDP in 2020), which discounts HDI for carbon emissions and material footprint; and the Genuine Progress Indicator for environmental and social quality. To reduce arbitrary weighting and substitutability, UNDP can use participatory or revealed-preference weighting, principal-component or minimum-distance methods, and publish sensitivity analysis, while retaining a minimum-dimension rule so no single high score compensates for severe deprivation.

(b) Kuznets’ inverted U

Kuznets’ inverted U hypothesis says inequality first rises and then falls as per-capita income grows. In early stages, industrialisation draws labour from low-productivity, relatively equal agriculture to higher-wage but more unequal urban sectors, so the population-weighted inequality first rises; capital accumulates faster than labour, and political pressure for redistribution is weak. Later, education, social security, urbanisation, trade-union strength and democratic politics compress incomes. Empirically the curve is not universal; turning points vary, and some countries show persistent inequality. East Asian economies such as South Korea and Taiwan grew fast with low inequality, and Piketty shows that inequality has risen again in rich countries since 1980, so the downturn is not automatic.

For developing countries, the hypothesis is useful as a warning, not a promise: growth may widen inequality before policies reverse it. India must therefore pair growth with early redistributive measures—MGNREGA (now succeeded by the VB-G RAM G Act, 2025), PDS, mid-day meals, health and education spending, land and credit reforms—so that structural transformation does not become a permanent rise in inequality.

(c) Harrod’s knife-edge

In Harrod’s model, the warranted rate of growth, Gw = s/Cr, is the rate at which firms are willing to expand, where s is the savings rate and Cr the capital-output ratio. The natural rate, Gn, is the maximum sustainable rate determined by labour-force growth and technical progress. Knife-edge instability arises because actual growth, G, is not automatically pulled back to Gw. Actual growth satisfies G = s/C, where C is the actual capital-output ratio. If G exceeds Gw, then C is below the required Cr, capital is short, firms find excess demand and expand investment, pushing G still higher; if G falls below Gw, they cut back, so deviations reinforce rather than correct. If Gw exceeds Gn, the economy tends towards chronic stagnation with idle capacity; if Gw is below Gn, it tends towards inflationary booms while labour unemployment grows. Harrod’s static expectations assumption—firms expect past growth to continue—prevents adjustment through prices, wages or factor substitution. Domar’s equivalent formulation reaches the same growth equation through the dual (income-generating and capacity-creating) character of investment and a fixed capital-output ratio, but it has no separate natural rate, so Harrod’s version makes the instability clearer. Solow’s neoclassical model resolves this by allowing factor substitution, a variable capital-output ratio, diminishing returns and interest-rate adjustment, so the economy converges to a steady state.