Short Notes and Summary
The period from 1950 to 1990 is a critical epoch in the history of the Indian economy. Following its independence in 1947, India needed to rebuild its economy, damaged by colonial rule, and prepare a path for modern economic growth. The economic choices made during this period laid the foundation for India's current economic landscape.
Economic Planning:
Five-Year Plans: Introduced in 1951, inspired by the Soviet Union's planning model. These plans laid out the strategic goals for sectors of the economy and targeted growth rates.
Objectives: The primary objectives were modernization, self-reliance, growth, and social justice.
Planning Commission: Established to assess and allocate resources efficiently.
Industrial Policy:
1948 Policy Resolution: Classified industries into three categories; those that would be state-owned, those in which the state would participate, and those left to the private sector.
1956 Industrial Policy Resolution: Further stressed on the dominant role of the State in industrial development.
Agriculture:
Green Revolution: Initiated in the late 1960s, it focused on increasing food grain production by promoting High Yield Variety (HYV) seeds, fertilizers, and irrigation.
Land Reforms: Efforts were made to redistribute land, with mixed results across states. Zamindari was abolished in many states.
Trade and Foreign Policy:
Import-Substitution Industrialization (ISI): This approach prioritized domestic production of goods to reduce dependence on imports.
Rupee Devaluation: The rupee was devalued multiple times, most notably in 1966, to boost exports.
License Raj: The regulatory system was characterized by a plethora of licenses and regulations governing the conduct of businesses in India.
Public Sector and Infrastructure:
Public Sector: The state played a dominant role in the establishment of industries, especially in sectors seen as strategic or requiring large investments.
Infrastructure: Major dams like Bhakra Nangal and projects like the National Highways were initiated.
Challenges Faced:
Famines and Food Crisis: Despite the Green Revolution, India faced severe food shortages, notably in the mid-1960s.
Balance of Payments Crisis: India faced foreign exchange crises, leading to borrowing from international institutions.
Political Instability: Economic policies were influenced by the political climate, including wars with neighbors and internal political shifts.
Conclusion:
From 1950 to 1990, India’s economic landscape underwent significant transformations. While the focus was on self-reliance and state-driven growth, by the end of this period, there was a realization that reforms were necessary for greater liberalization and integration with the global economy, leading to the economic liberalization of the 1990s.
Discussion Questions:
How did the Five-Year Plans impact the trajectory of India's development?
What were the pros and cons of the License Raj?
How did the Green Revolution change India's agricultural landscape?
Why was self-reliance such a crucial goal for India post-independence?
How did global events, like the oil crisis of the 1970s, impact India's economy?
Engaging with this topic helps understand the foundation of India's economic journey and the factors that led to its major shift in policy in the 1990s.
Detailed Notes
1. Introduction to Economic System Choice Post-Independence
Background: Post-independence, India needed to establish an economic system ensuring the welfare of its citizens.
Options: Capitalist or Socialist system.
Decision: Despite Nehru's inclination towards socialism, India adopted a Mixed Economy System.
Reason: To avoid the excessive government control like the former USSR.
Fact: Most global economies today follow a mixed system.
Legal Backing: The decision was solidified in the ‘Industrial Policy Resolution’ of 1948 & the Directive Principles of State Policy.
Trivia: What are the other countries today with a mixed economy? What benefits does it bring?
After Independence, the leaders of India had to decide an Economic System which would look at the welfare of all its citizens. They had to choose between Capitalist or Socialist system.
Even though Socialist system appealed to Jawaharlal Nehru, he did not want to adopt the socialist system of the former USSR - where the government had excessive control. It was not an ideal system for a democracy like India.
The leaders of independent India sought for a mix between the extremes of socialist and capitalism systems combining the best of both the systems: Mixed Economy System. Most economies today in the world are mixed.
These choices of mixed economic system were reflected in the ‘Industrial Policy Resolution’ of 1948 and the Directive Principles of State Policy in the Indian constitution.
To steer India’s development plans, a Planning Commission was setup with Prime Minister as its chairperson. In 2014, it was dissolved an another body called NITI Aayog was established in its place by a cabinet resolution.
What is a Plan?
Planning in India
Definition: A plan describes how an economy utilizes resources to achieve goals in a set period.
E.g., 5-year duration plans, inspired by the USSR. The long-term vision (20 years) is termed as ‘Perspective Plan’.
Planning Commission: Established with PM as chairperson. In 2014, replaced by NITI Aayog.
Challenges: Balancing technological advancements with employment opportunities
A plan lays out how an economy would utilize its resources under some defined general and specific goals which are to be achieved within a specific time period.
Borrowed from the former USSR, the plans in India were of 5 year duration, but also described the vision of what was to be achieved in the next 20 years. This long term plan was called the ‘Perspective Plan’
There is always a need to balance the goals of the plans. For eg. Introduction of modern technology that might reduce labour employment. The Indian planners needed to carefully design the plans to avoid conflict of development goals.
Prasanta Chandra Mahalnobis is often referred to as one of the key formulator and architect of Indian planning. He was a statistician and established ISI (Indian Statistical Institute) in Kolkata and also published a journal called Sankhya.
Goals Of The Five Year Plans
. Goals of Five Year Plans (FYPs)
Growth: Enhance country’s production capacity. GDP indicates growth.
Modernization: Adopting advanced technology, and ensuring societal advancements like gender equality.
Self Reliance: Reduce dependency on foreign goods.
Equity: Distribute development benefits uniformly to reduce poverty and income disparity.
Not all plans give equal importance to all goals. A choice has to be made to due to limited resources. The planners have to ensure that these goals should not contradict each other.
1. Growth
Increase country’s capacity to produce goods and services - by improving capital stock, greater support services such as transportation, banking etc.
A good measure of growth is the GDP of a country - final value/market value of all goods and services produced within the boundary of the country.
The GDP of a country is derived from the different sectors of the economy, namely the agricultural sector, the industrial sector and the service sector. The contribution made by each of these sectors makes up the structural composition of the economy.
2. Modernisation
Adoption of new technology and techniques to increase productivity along with change in social outlook such as gender equality and rights for all sections of society is referred to as Modernization.
3. Self Reliance
Avoiding imports of those goods which can be manufactured within the country to reduce dependence on foreign goods.
Moreover, India had recently got independence from foreign domination and did not wish to compromise their sovereignty. (The ability to take decisions without any external influence)
The first 7 FYPs, focussed on developing self reliance in India - especially for food. This was translated in the Green Revolution that ensured self sufficiency in food grains.
4. Equity
It is important to ensure that benefits of development are shared equally among all the participants in an economy. An equitable distribution of income and opportunities ensure that the number of people living in poverty are reduced.
They should be able to meet their basic needs and income inequality should be reduced.
Stages of Development
Generally in initial stages of development, the economy is dependent on just natural resources and thus the primary sector is the most important sector. But with development of better farming practices and HYV seeds, the production in the primary sector increased with less number of people required to work in the sector.
The people who were earlier farming now started to work as artisans, in army and started trading the goods they produced such as wine, pottery etc. But with advent of modern technology and after industrial revolution, a lot of people started working in factories and there was an increase in number of people working in the secondary sector. This made the secondary sector important at that time.
In the last 100 years there has been further development of technology which has created newer jobs in services sector. Now most people in developed countries work in Services Sector.
Prima Sector Secondary Sector
For Agriculture Development
The policy makers had to address issues of equity, growth, modernization and self reliance in. Indian agriculture.
They focussed on Land Reforms and Use of HYV Seeds to usher Indian agriculture into a revolution.
Land Reforms
Abolition of Intermediaries and systems of Zamindari, Jagidari where only collected rent and did little to improve the conditions of the tiller/farmer. As a result 200 lakh tenant came into direct contact with the government thus freeing them of exploitation from Zamindars.
Change in ownership of land holdings - ownership of land given to the tiller. It would give them an incentive and would encourage them to invest in improving agricultural productivity.
Land Ceiling was imposed to promote equity - i.e fixing the maximum size of land that could be owned by an individual. It would help in reducing concentration of land in hands of few.
Issues in Successful Implementation of Land Reforms
In some areas former Zamindars used loopholes in the legislation on land ceiling and continued to own large pieces of land.
They used the delay to get the lands registered in their names and that of their relatives thus finding the loopholes in the system.
Some big land lords also opposed the legislation in the court thus leading to delay in its implementation.
Some zamindars claimed themselves to be actual tillers
Land reforms were successful in Kerala and West Bengal because these states had governments committed to the policy of land to the tiller. Unfortunately other states did not have the same level of commitment and vast inequality in landholding continues to this day.
Green Revolution
India’s agriculture vitally depends on the monsoon and if the monsoon fell short the farmers were in trouble unless they had access to irrigation facilities which very few had. This stagnation was broken by the Green Revolution
It refers to the large increase in production of food grains resulting from:
The use of high yielding variety (HYV) seeds especially for wheat and rice.
The use of these seeds required the use of fertiliser and pesticide in the correct quantities as well as regular supply of water.
To benefit from HYV seeds, farmers required reliable irrigation facilities and financial resources to purchase pesticides, insecticides and fertilizers.
As a result , in its first phase, the Green Revolution was restricted to rich farmers in rich states such as is Punjab, Andhra Pradesh and Tamil Nadu.
In the second phase of the green revolution (mid-1970s to mid-1980s), the HYV technology spread to a larger number of states and benefited more variety of crops.
The spread of Green Revolution enabled India to be self sufficient in crop production and we were no longer dependent on other countries for import of our food requirements (specially for rice and wheat)
The surplus food was now marketed/sold thus adding to the economic output of the country. The portion of agricultural produce which is sold in the market by the farmers is called marketed surplus.
A good proportion of the rice and wheat produced during the green revolution period (available as marketed surplus) was sold by the farmers in the market. As a result, the price of food grains declined relative to other items of consumption.
As a result, the price of food grains declined relative to other items of consumption. The low-income groups, who spend a large percentage of their income on food, benefited from this decline in relative prices.
The green revolution enabled the government to procure sufficient amount of food grains to build a stock which could be used in times of food shortage.
While the nation had immensely benefited from the green revolution, the technology involved was not free from risks.
One such risk was the possibility that it would increase the disparities between small and big farmers - since only the big farmers could afford the required inputs, thereby reaping most of the benefits of the green revolution.
Moreover, the HYV crops were also more prone to attack by pests and the small farmers who adopted this technology could lose everything in a pest attack.
Fortunately, these fears did not come true because of the steps taken by the government.
The government provided loans at a low interest rate to small farmers and subsidized fertilizers so that small farmers could also have access to the needed inputs.
Since the small farmers could obtain the required inputs, the output on small farms equaled the output on large farms in the course of time.
As a result, the green revolution benefited the small as well as rich farmers. The risk of the small farmers being ruined when pests attack their crops was considerably reduced by the services rendered by research institutes established by the government.
The Debate over Subsidies:
It is generally agreed that it was necessary to use subsidies to provide an incentive for adoption of the new HYV technology by farmers in general and small farmers in particular.
Subsidies were, therefore, needed to encourage farmers to test the new technology. Some economists believe that once the technology is found profitable and is widely adopted, subsidies should be phased out since their purpose has been served.
Further, subsidies are meant to benefit the farmers but a substantial amount of fertilizer subsidy also benefits the fertilizer industry and among farmers, the subsidy largely benefits the farmers in the more prosperous regions.
Therefore, it is argued that there is no case for continuing with fertilizer subsidies it does not benefit the target group and it is a huge burden on the government finances\\
In Favour of Subsidies:
On the other hand, some believe that the government should continue with agricultural subsidies because farming in India continues to be a risky business.
Most farmers are very poor and they will not be able to afford the required inputs without subsidies. Eliminating subsidies will increase the inequality between rich and poor farmers and violate the goal of equity.
Thus, by the late 1960s, Indian agricultural productivity had increased sufficiently to enable the country to be self-sufficient in food grains.
On the negative side, some 65 % of the country population continued to be employed in agriculture even as late as 1990.
Economists have found that as a nation becomes more prosperous, the proportion of GDP contributed by agriculture as well as the proportion of population working in the sector declines considerably.
In India, between 1950 and 1990, the proportion of GDP contributed by agriculture declined significantly but not the population depending on it (67.5 % in 1950 to 64.9 % by
1990).
Industry and Trade
Economists have found that poor nations can progress only if they have a good industrial sector.
Industry provides employment which is more stable than the employment in agriculture it promotes modernization and overall prosperity. It is for this reason that the five year plans place a lot of emphasis on industrial development.
Public and Private Sectors in Indian Industrial Development
No Capital: At the time of independence, Indian industrialists did not have the capital to undertake investment in industrial ventures required for the development of our economy
Underdeveloped Market : The market was not big enough to encourage industrialists to undertake major projects even if they had the capital to do so.
It is principally for these reasons that the state had to play an extensive role in promoting the industrial sector.
In addition, the decision to develop the Indian economy on socialist lines led to the policy of the state controlling the commanding heights of the economy, as the Second Five Year plan put it.
This meant that the state would have complete control of those industries that were vital for the economy. The policies of the private sector would have to be complimentary to those of the public sector, with the public sector leading the way.
Industrial Policy Resolution 1956 (IPR 1956):
In accordance with the goal of the state controlling the commanding heights of the economy, the Industrial Policy Resolution of 1956 was adopted.
This resolution formed the basis of the Second Five Year Plan, the plan which tried to build the basis for a socialist pattern of society.
Features of Industrial policy resolution of 1956 were:
New classification of Industries: Industries were classified into three schedule depending upon role of state.
Schedule-A- 17 industries listed in schedule-A whose future development would be the responsibility of state.
Schedule-B- 12 industries were included in schedule-B, Private sector could supplement the efforts of the Public Sector, with the state taking sole responsibility for starting new units.
Schedule-C - Other residual industries were left open to private sector.
Stress on the role of cottage and small scale industries.
Industrial licensing: Industries in the pvt. sector could be established only through a licence from the government.
Industrial concessions were offered- Pvt. entrepreneurs for establishing industry in the backward regions of the country. Such as tax rebate and concessional rates for power supply.
Although there was a category of industries left to the private sector, the sector was kept under state control through a system of licenses. - No new industry was allowed unless a license was obtained from the government. This policy was used for promoting industry in backward regions it was easier to obtain a license if the industrial unit was established in an economically backward area.
- In addition, such units were given certain concessions such as tax benefits and electricity at a lower tariff. The purpose of this policy was to promote regional equality.
Small-Scale Industry:
A small-scale industry is defined with reference to the maximum investment allowed on the assets of a unit. This limit has changed over a period of time.
In 1950 a small-scale industrial unit was one which invested a maximum of rupees five lakhs at present the maximum investment allowed is rupees five crore. (25 lakhs to 5 crore)
It is believed that small-scale industries are more labour intensive i.e., they use more labour than the large-scale industries and, therefore, generate more employment.
But these industries cannot compete with the big industrial firms it is obvious that development of small-scale industry requires them to be shielded from the large firms.
For this purpose, the production of a number of products was reserved for the smallscale industry the criterion of reservation being the ability of these units to manufacture the goods.
They were also given concessions such as lower excise duty and bank loans at lower interest rates.
Trade Policy: Import Substitution
The industrial policy that we adopted was closely related to the trade policy.
In the first seven plans, trade was characterized by what is commonly called an inward looking trade strategy. Technically, this strategy is called import substitution.
Import Substitution: This policy aimed at replacing or substituting imports with domestic production.
In this policy the government protected the domestic industries from foreign competition.
Protection from imports took two forms: tariffs and quotas.
Tariffs are a tax on imported goods they make imported goods more expensive and discourage their use.
Quotas specify the quantity of goods which can be imported. The effect of tariffs and quotas is that they restrict imports and, therefore, protect the domestic firms from foreign competition.
The policy of protection is based on the notion that industries of developing countries are not in a position to compete against the goods produced by more developed economies.
It is assumed that if the domestic industries are protected they will learn to compete in the course of time.
Effect of Policies on Industrial Development
The achievements of India industrial sector during the first seven plans are impressive indeed.
The proportion of GDP contributed by the industrial sector increased in the period from 11.8% in 1950-51 to 24.6% in 1990-91.
The rise in the industry share of GDP is an important indicator of development. The 6 % annual growth rate of the industrial sector during the period is commendable.
No longer was Indian industry restricted largely to cotton textiles and jute in fact, the industrial sector became well diversified by 1990, largely due to the public sector.
The promotion of small-scale industries gave opportunities to those people who did not have the capital to start large firms to get into business.
Protection from foreign competition enabled the development of indigenous industries in the areas of electronics and automobile sectors which otherwise could not have developed.
Issues with Public Enterprises?
- In spite of the contribution made by the public sector to the growth of the Indian economy, some economists are critical of the performance of many public sector enterprises.
- The point is that after four decades of Planned development of Indian Economy no distinction was made between
• What the public sector alone can do
• What the private sector can also do..
- Many public sector firms incurred huge losses but continued to function because it is difficult to close a government undertaking even if it is a drain on the nation limited resources.
- This does not mean that private firms are always profitable. However, a loss-making private firm will not waste resources by being kept running despite the losses.
The need to obtain a license to start an industry was misused by industrial houses - a big industrialist would get a license not for starting a new firm but to prevent competitors from starting new firms.
- Permit License Raj : The excessive regulation of what came to be called the permit license raj prevented certain firms from becoming more efficient. More time was spent by industrialists in trying to obtain a license or lobby with the concerned ministries rather than on thinking about how to improve their products.
- The protection from foreign competition is also being criticized on the ground that it continued even after it proved to do more harm than good.
- Reduction in Choices : Due to restrictions on imports, the Indian consumers had to purchase whatever the Indian producers produced. The producers were aware that they had a captive market so they had no incentive to improve the quality of their goods.
- A few economists also point out that the public sector is not meant for earning profits but to promote the welfare of the nation.
- The public sector firms, on this view, should be evaluated on the basis of the extent to which they contribute to the welfare of people and not on the profits they earn.
- Regarding protection, some economists hold that we should protect our producers from foreign competition as long as the rich nations continue to do so. Owing to all these conflicts, economists called for a change in our policy.
Conclusion
The progress of the Indian economy during the first seven plans was impressive indeed. - Our industries became far more diversified compared to the situation at independence.
India became self- sufficient in food production thanks to the green revolution.
Land reforms resulted in abolition of the hated zamindari system. However, many economists became dissatisfied with the performance of many public sector enterprises.
Excessive government regulation prevented growth of entrepreneurship. In the name of self-reliance, our producers were protected against foreign competition and this did not give them the incentive to improve the quality of goods that they produced.
Our policies were inward oriented and so we failed to develop a strong export sector. The need for reform of economic policy was widely felt in the context of changing global economic scenario, and the new economic policy was initiated in 1991 to make our economy more efficient.
Model NCERT Exercise Answers
1. Define a plan.
1. A plan is a detailed proposal or strategy for achieving a specific goal or set of goals over a defined period. It outlines the steps or actions needed to move from the current state to the desired state. A plan often includes:
Objective(s): Clearly defined and achievable goals or results that the plan aims to accomplish.
Resources: An outline of the resources (like time, money, manpower, materials) that are required and available to achieve the objectives.
Actions/Steps: A sequential list or a set of actions that need to be taken to reach the objective.
Timeframe: The duration or timeline within which the plan is to be executed and the objectives are to be achieved.
Metrics/Indicators: Benchmarks or standards to measure the progress and effectiveness of the plan.
Contingencies: Backup strategies or alternative actions in case the primary plan encounters obstacles or fails.
In different contexts, a plan might have additional components. For example, in project management, a plan might also include risk assessments, stakeholder analyses, and budget considerations. In the context of the Indian economy as mentioned in the provided content, a plan refers to how the economy utilizes its resources to achieve its developmental goals within a set period, typically a duration of five years.
2. Why did India opt for planning?
India opted for planning post-independence due to several compelling reasons:
Colonial Legacy and Economic Backwardness: After nearly two centuries of colonial rule, the Indian economy was structurally distorted and lacked the industrial development needed to support a vast population. Planning was seen as a mechanism to rectify these structural imbalances and promote balanced economic development.
Resource Scarcity: Resources, both financial and material, were scarce. Planning was seen as a way to allocate these limited resources judiciously to sectors that needed them the most.
Economic Integration and Nation-Building: India is diverse in terms of culture, geography, and economic conditions. A planned approach was seen as necessary to ensure that development was integrated and unified across the vast country, avoiding regional disparities.
Achieving Self-Reliance: The colonial period had made India overly dependent on imports for many essential goods. Planning was aimed at reducing this dependency, especially in crucial sectors like food and technology.
Social Justice: The Indian leadership was committed to ensuring that the benefits of growth reached all sections of society, especially the most vulnerable and marginalized. Economic planning was seen as a means to redistribute wealth and provide a better life for all its citizens.
Avoiding Capitalist Extremes: The Indian leadership, especially Prime Minister Nehru, was wary of the extreme inequalities that capitalist systems can sometimes produce. They wanted an economic model that would foster both growth and equity.
Influence of Socialist Models: The success of the Soviet model of planning, where rapid industrialization was achieved in a relatively short span, had a significant influence on India's decision to opt for planning.
Protection against Global Economic Shocks: The Great Depression of the 1930s showcased the vulnerabilities of free-market economies. Planning was seen as a way to insulate the Indian economy from global economic shocks and uncertainties.
Coordination and Synergy: The Indian leadership believed that a planned approach would foster better coordination among various sectors of the economy, leading to synergies and faster growth.
Controlling Economic Concentration: Without planning, there was a fear that economic power would concentrate in a few hands, leading to monopolies. A planned approach allowed for regulation and control over big industries and businesses.
In summary, given the socio-economic challenges post-independence, India viewed planning as an essential tool to guide its path towards comprehensive development, self-reliance, and social justice.
3. Why should plans have goals?
Plans should have goals for several fundamental reasons:
Direction and Purpose: Goals provide a clear direction and purpose for any plan. They define what needs to be achieved, ensuring that all efforts and resources are channeled effectively toward a defined end-point.
Motivation: Clearly defined goals serve as motivation for individuals and organizations. They inspire effort, commitment, and determination, pushing people to strive and achieve those targets.
Measurability: Goals allow for the measurement of progress. By setting specific targets, it becomes possible to evaluate how well one is progressing toward achieving the desired outcomes. This allows for timely course corrections if the plan is not proceeding as expected.
Resource Allocation: With clear goals, planners can allocate resources (like time, money, manpower) more efficiently. They ensure that the most critical objectives receive the necessary attention and resources.
Decision-making Framework: Goals offer a framework for making decisions. When confronted with multiple options, referring back to the goals can guide decision-makers in choosing the course of action most aligned with the desired outcomes.
Accountability: Goals create accountability. When targets are set, individuals, teams, or entire organizations can be held responsible for achieving them. It helps in assigning responsibilities and ensures that there's a mechanism to check whether those responsibilities are met.
Time Management: Goals help prioritize tasks and manage time effectively. Knowing what needs to be accomplished by when ensures that there's a schedule to follow, which aids in avoiding procrastination or unnecessary delays.
Clear Communication: Having defined goals helps in communicating the plan's purpose and expectations to all stakeholders involved. Everyone understands what is expected and can work in unison toward the same end.
Benchmark for Success: Goals serve as benchmarks for success. At the end of the planning period, the achievement of goals signifies the success of the plan, while missing targets indicates areas that need further attention or improvement.
Continuous Improvement: Goals provide a basis for continuous improvement. Once a goal is achieved, a new, more ambitious one can be set, ensuring ongoing development and growth.
In essence, without goals, plans would lack clarity, direction, and purpose. Goals ensure that plans are actionable, results-oriented, and aligned with broader objectives, leading to more successful outcomes.