INDIAN ECONOMY 1950-90

Q1. Discuss the various types of economist system.

Ans. Capitalist Economy: A capitalist economy is the one in which the means of production are owned, controlled and
operated by the private sector. Production is done mainly for earning profits. So, the central problems (what, how and
for whom to produce) are solved through the market forces of demand and supply.

Socialist Economy: A socialist economy is the one in (collective/public) ownership of the means of production, and
economic decisions are taken by some central authority of the government with a view to maximize social welfare.

A Mixed Economy: A mixed economic system refers to a system in which the public sector and the private sector are
allotted their respective roles for solving the central problems of the economy.

All economies are mixed economies, with elements of both capitalist and socialist economies. India is a mixed economy.

A mixed economy is the one in which there is private as well as public ownership of production. Production decisions are
governed largely by the principle of profit maximization, but not without checks and balances of social justice.

Q2. What do you mean by economic planning?

Ans. Economic planning is a process under which a central authority (like Planning Commision of India) defines a set of
targets related to growth and development of the country to be achieved within a specified period of time, keeping in
view the resources of the country. "Economic planning means utilisation of country's resources into different
development activities in accordance with national priorities", states Planning Commission.

Q3. Why India decided to opt mixed economy system?

Ans.

 The leaders of independent India had to decide the type of economic system most suitable for our nation, a system
which would promote the welfare of all rather than a few.

 There are different types of economic systems and among them, socialism appealed to Jawaharlal Nehru the most.
However, he was not in favour of the kind of socialism established in the former Soviet Union where all the means of
production, ie, all the factories and farms in the country, were owned by the government. There was no private
property.

 It is not possible in a democracy like India for the government to change the ownership pattern of land and other
properties of its citizens in the way that it was done in the former Soviet Union. Nehru, and many other leaders and
thinkers of the newly independent India, sought an alternative to the extreme versions of capitalism and socialism,
combined the best features of socialism without its drawbacks

 In this view, India would be a socialist society with a strong public sector but also with private property and
democracy ; the government would plan for the economy with the private sector being encouraged to be part of the
plan effort.

 The ‘Industrial Policy Resolution’ of 1948 and the Directive Principles of the Indian Constitution reflected this
outlook. In 1950, the Planning Commission was set up with the Prime Minister as its Chairperson. The era of five
year plan had begun.
Q4. Why did India opt for planning?

Ans. After gaining independence, the next important step for the Indian government was to revive the poor, backward
and stagnant economy, inherited from the British rule. So, for the systematic and overall development of Indian
Economy, India opted for planning.

Q5. Define a plan.

Ans. Plan is a document showing detailed scheme, program and strategy, worked out in advance for fulfilling an
objective.

Q6. Define Perspective Plan.

Ans. This long term plan is called 'Perspective Plan'. The five year plans are supposed to provide the basis for the
Perspective Plan.

Q7. Explain the common / long term objectives of the five year plans.

Ans.

1. Growth: It refers to increase in the country's capacity to produce the output of goods and services within the
country.

 It implies either a larger stock of productive capital, or a larger size of supporting services like transport and banking,
or an increase in the efficiency of productive capital and services. A good indicator of economic growth, in the
language of Gross Domestic Product (GDP).

 The GDP is the market value of all the goods and services produced in the country during a year. It is necessary to
produce more goods and services if the people of India are to enjoy a more rich and varied life.

2. Modernisation: To increase the production of goods and services the producers have to adopt new technology. For
example, a farmer can increase the output on the form by using new seed varieties instead of using the old ones.
Similarly, a factory can increase output by using a new type of machine. Adoption of new technology is called
modernisation.

 However, modernisation does not refer only to the use of new technology but also to changes in social outlook such
as the recognition that women should have the same rights as men.

 In a traditional society, women are supposed to remain at home while men at work. A modern society makes use of
the talents of women in the work place- in banks, factories, schools etc. and such a society in most occassions is also
prosperous.

3. Self-reliance: A nation can promote economic growth and modernization by using its own resources or by using
resources imported from other nations.

 The first seven five year plans gave importance to self-reliance which means avoiding imports of those goods which
could be produced in India itself. This policy was considered a necessity in order to reduce our dependence on
foreign countries especially for food.
 It is understandable that people who were recently freed from foreign domination should give importance to self
reliance. Further, it was feared that dependence on imported food supplies, foreign technology and foreign capital
may make India's sovereignty vulnerable to foreign interference in our policies.
4. Equity: The objectives of growth, modernisation and self-reliance, by themselves, may not improve the kind of which
people are living. A country can have high growth, the most modern technology developed in the country itself, and also
have most of its people living in poverty.

 It is important to ensure that the benefits of economic prosperity reach the poor sections as well instead of being
enjoyed only by the rich.

 So in addition to growth, modernisation and self-reliance, equity is also important. Every Indian should be able to
meet his or her basic needs such as food, a decent house, education and health care and inequality in the
distribution of wealth should be reduced.

Q.8 Does modernisation as a planning objective create contradiction in the light of employment generation? Explain.

Ans. The given statement is correct. Modernisation as a planning objective implies use of advanced technology i.e.
machines which will change the production techniques from labour intensive to capital intensive. Thus, requires less
labour per unit of output. Thus, modernisation may creates unemployment in short run..

But Modernisation also includes changes in social outlook such as the recognition that women should have the same
rights as men implies such structural and institutional changes in the economic activities that can change the feudal
economy into a progressive and independent economy. Sometime it appears that modernisation stands in contradiction
to employment generation but both the concept modernisation and employment generation are complementary to
each other. Modernisation in the long run provides number of employment opportunities.

Q.9 Why was it necessary for a developing country like India to follow self- reliance as a planning objective?

Ans. The policy of self-reliance was considered a necessity because of two reasons.

• To reduce foreign dependence: As India was recently freed from foreign control, is necessary to reduce our
dependence on foreign countries, especially from food. So, stress should be given to attain self-reliance.

• To avoid Foreign Interference: It was feared that dependence on imported food supplies, foreign technology and
foreign capital may increases foreign interference in the policies of our country.

Q.10 What is sectoral composition of service sector should contribute maximum. Is it necessary that the of an
economy? Comment.

Ans. Structural composition refers to contribution made by agricultural, industrial and service sector in the gross
domestic product of the country.

No, it is not necessary that the service sector contributes maximum to GDP of an economy. However, by 1990, the share
of the service sector was maximum at 40.59%. This phenomenon of growing share of the service sector marked the
beginning of globalisation in the country.

Mahalanobis: the Architect of Indian Planning

Many distinguished thinkers contributed to the formulation of India's five year plans. Among them, the name of
the statistician, Prasanta Chandra Mahalanobis, stands out.

Planning, in the real sense of the term, began with the Second Five Year Plan. The Second Plan, a landmark
contribution to development planning in general, laid down the basic ideas regarding goals of Indian planning: this
plan was based on the ideas of Mahalanobis. In that sense, he can be regarded as the architect of Indian planning.
Q11. Explain major land reform measures taken after independence.

Land Reforms: At the time of independence, the land tenure system characterised by intermediaries (variously
called zamindars, jagirdars etc) who merely collected rent from the actual tillers of the soil without contributing
towards improvements on the farm

 The low productivity of the agricultural sector forced India to import food from the United States of America
(U.S.A.). Equity in agriculture called for land reforms which primarily refer to change in the ownership of
landholdings.
 Land reforms were needed to achieve the objective of Equity in agriculture.

1. Abolition of Intermediaries
Indian Government took various steps to abolish intermediaries and make tillers the owners of land.
 The idea behind this step was that ownership of land would give incentives to the actual tillers to make
improvements (provided sufficient capital was made available to them)
 The abolition of intermediaries brought 200 lakh tenants into direct contact with the government.
 The ownership rights granted to tenants gave them incentive to increase output and this contributed to
growth in agriculture.

2. Land Ceiling
Land Ceiling refers to fixing specified limit of land, which could he owned by an individual.

 Beyond the specified limit, all lands belonging to a particular person would be taken over by the government
and will be allotted to the landless cultivators and small farmers.
 The purpose of land ceiling was to reduce the concentration of land ownership in few hands.
 Land ceiling helped to promote equity in the agricultural sector.
2. Ownership Rights for Tenants

Legislation have been passed to transfer ownership rights on tenant-cultivators. In some states, tenants were made
the owners and asked to pay compensation to previous owners. It gave tenants the incentive to increase output and
this contributed to growth in agriculture.

Q12 Explain the drawbacks in Land reforms.

Ans. 1. Fault in Legislation : In some areas the former zamindars continued to own large areas of land by making use
of some loopholes in the legislation so the intermediaries were allowed to retain substantial areas of land for
personal cultivation

2 Implementation delay :The big landlords challenged the legislation in the courts, delaying its implementation.
They used this delay to register their lands in the name of close relatives, thereby escaping from the legislation

3 Lack of political will : Land reforms were successful in Kerala and West Bengal because these states had
governments committed to the policy of land to the tiller. But Unfortunately other states did not have the same
level of commitment and vast inequality in landholding continued.

4 Exploitation : Landlords often forced their tenants to voluntarily surrender the land being cultivated by them.
There were cases where tenants were expelled and Landowners claimed to be self cultivators (the actual tillers).
Q13. Write a short note on Green Revolution.
Ans. At the time of independence, about 75% country's population was dependent on agriculture.
 India's agriculture vitally depends on the monsoon, and in case of shortage of monsoon, the farmers had to
face lot of troubles.
 Moreover, the productivity in the agricultural sector was very low due to use of outdated technology and
absence of required infrastructure.
 As a result of intensive and continued efforts of many agricultural scientists, this stagnation in agriculture
was permanently broken by the 'Green Revolution

Green Revolution refers to the large increase in production of food grains due to use of high yielding variety (HYV)
seeds. Green Revolution is the spectacular advancement in the field of agriculture.

Indian Economy experienced the success of Green Revolution in 2 phases:

1. In the first phase (Mid 60s to Mid 70s), the use of HYV seeds was restricted to more affluent states (like Punjab,
Andhra Pradesh, Tamil Nadu, etc.). Further, the use of HYV seeds primarily benefited the wheat growing regions
only.
2. In the second phase (Mid 70s to Mid 80s), the HYV technology spread to a larger number of states and benefited
more variety of crops.

Q14 Discuss the achievements of Green Revolution.

Ans. 1. Self-sufficiency: The spread of Green Revolution technology enabled India to achieve self-sufficiency in food
grains. India was no longer at the mercy of America, or any other nation, for the food requirements.

2. Attaining Marketable Surplus: Green Revolution resulted in 'Marketable Surplus’. Marketable surplus refers to
that part of agricultural produce which is sold in the market by the farmers after meeting their own consumption
requirement.

3. Buffer Stock of Food Grains: 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.

4. Benefit to low-income groups: As large proportion of food grans was sold by the farmers in the market, their
prices 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.

Q15. Discuss the risks involved under green taken by the Government to overcome these.
Or
"While the nation had immensely benefited from the green revolution the technology involved was not free from
risks.” Do you agree with the given statement? Give valid reasons in support of your answer.
Or
"The Green revolution would have favoured the rich farmers only if the state did not play an extensive role in
ensuring that the small farmer also gains from the new technology.”

Ans. Risks involved Under Green Revolution While the nation had immensely benefited from the green revolution,
the technology involved was not free from risks
(i) Risk of Pest Attack: The HYV crops were more prone to attack by pests. So, there was a risk that small farmers
who adopted this technology could lose everything in a pest attack. However, this risk was considerably reduced
by the services rendered by research institutes established by the government.
 (ii) Risk of Increase in Income Inequalities: There was a risk that costly inputs (HYV seeds, fertilizers, etc.) required
under green revolution will increase the disparities between small and big farmers since only the big farmers
could afford the required inputs.

Government Role to overcome these risks.

(i) Financial help: 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.
(ii) Research institutes: The risk of the small farmers being ruined when pests attack their crops was greatly reduced
by the services provided by research institutes established by the government.

Q16. "Subsidies put a huge burden on the government's finances, but are necessary for poor and marginal
farmers." Comment.
Or
Though it is argued that there is no case for continuing with fertiliser subsidies as it does not benefit the target
group and it is a huge burden on the government's finances, yet some experts believe that the government should
continue with agricultural subsidies. What arguments do they give in favour of giving subsidies?
Or
The economic justification of subsidies in agriculture is at present. a hotly debated question. Some economists
believe that subsidies should be phased out. What arguments do these economists give against giving subsidies?

Ans. Favor of Subsidies to Agriculture

 Risky Business The government should continue with agricultural subsidies because farming in India continues to be
a risky business.
 Income inequality Eliminating subsidies increase the income inequality between rich and poor farmers and will
violate the ultimate goal of equity.
 Poverty Majority of the farmers are very poor and they will not be able to the required inputs without the subsidies.

Against of Subsidies to Agriculture

Burden on Govt It is a huge burden on the government's finances. Some economist believe that once the technology
is found profitable and is widely adopted, subsidies should be phased out since their purpose has been served.

Benefit to rich farmers Subsidies do not benefit the poor and small farmers (target group) as benefits of large
amount of subsidy go to fertilizer industry and prosperous farmers.

Q17. Critically appraise the development of agriculture between 1950 and 1990.
 Land Reform measures and 'Green Revolution' helped in enhancing agricultural production and productivity.
 Indian agricultural productivity had increased sufficiently to enable the country to be self-sufficient in food
grains. This is an achievement to be proud of.
 Land Reforms resulted in abolition of zamindari system.
 On the negative side, some 65 per cent of the country's 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 per cent in 1950 to 64.9 per cent by 1990).

 Why was such a large proportion of the population engaged in agriculture although agricultural output
could have grown with much less people working the sector?
 The answer is that the industrial sector and the service sector did not absorb the people working in the
agricultural sector. Many economists call an important failure of our policies followed during 1950-90.

Q18. Why was public sector given a leading role in industrial development during the planning period ?

Ans. At the time of independence, the big question facing the policy makers was to decide the pattern of ownership of
industries. The aim was to determine the role of the government and the private sector in the industrial development.
There was a need for a leading role of the Public sector due to the following reasons :

 Shortage of Capital with Private Sector : Private entrepreneurs did not have the capital to undertake
investment in the industrial ventures, required for the development of Indian economy. At the time of
independence, Tatas and Birlas were the only well known private entrepreneurs. As a result, Government
had to make industrial investment though Public Sector Undertakings (PSU's).
 Lack of Incentive for Private Sector: The Indian market was not big enough to encourage private
industrialists to undertake major projects, even if they had capital to do so. Due to the limited size of the
market, there was low level of demand for the industrial goods.
 Objective of Social Welfare : The objective of equity and social welfare of the government could be
achieved only through direct participation of the state in the process of industrialisation.

Q19. Explain the features of Industries policy Resolution (1956)

Or

How was private sector regulated under the IPR 1956?

Ans. 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.

Classification of industries: This policy classified industries into 3 categories.

Schedule A The first category included 17 industries like arms and ammunition, atomic energy, heavy and core
industries, aircraft, oil railways, shipping etc. which would be exclusively owned by the state.

Schedule B The second category included 12 industries in which the private sector could supplement the efforts of the
state. But the state takes the sole responsibility for starting new included in this category.

Schedule C The third category consisted of the remaining industries which were to be in the private sector.

II Industrial Licensing : Private sector was kept under state control through a system of industrial licensing. According to
industrial licensing policy, No new industrial was allowed unless a licence was obtained from the the government. It was
easier to obtain a licence if the 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 policy was to promote regional
equality & industrial development in backward regions.

Licence was required even if an existing industry wants to expand output or diversify production (producing a new
variety of goods).

It was given only if the government was convinced that there is need for larger quantity of goods in the economy.

Q20. Discuss the role of small-scale industries in the generation of employment. How did the government promote
and protect small-scale industry?
Ans. Small-Scale Industry : In 1955, the Village and Small-Scale Industries Committee, also called the Karve Committee,
noted the possibility of using small-scale industries for promoting rural development.

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 lakh: at present the maximum investment allowed is rupees one crore.

Role of small Scale industries: it was believed that small scale industries (SSIS) are more labour intensive' ie., they use
more labour than the large-scale industries and, therefore, generate more employment SSIS, were given high priority to
achieving the goals of employment and equity.

Protection to small-scale industry Small-scale industries cannot compete with 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 small- scale 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.

Q21. Though public sector is very essential for industries, many public sector undertakings incur huge losses and are a
drain on the economy's resources. Discuss the usefulness of public sector undertakings in the light of this fact.

Ans. It is true that many public sector undertakings are incurring huge losses. However, they are still very useful and
crucial for the economy. They are needed

 To create a strong industrial base. Public sector plays an important role in development of those industries
which require heavy investment and hgave long term gestation period.
 To develop infrastructure.
 To promote development of backward areas
 To generate employment opportunities
 To control and manage industries of strategic areas (like national defence, atomic energy etc.). Moreover, public
sector is not meant for earning profits but to promote the welfare of the nation. So, they should be evaluated on
the basis of their contribution to welfare of the people and not on the profits they earn.

Q22. Explain how import substitution can protect domestic industry. Why did the policy makers adopt such policy of
protection?

Ans. Import Substitution Policy

In the first seven plans, foreign trade was characterized by what is commonly called an inward looking trade strategy.
Technically, this strategy is called import substitution, which aimed at replacing or substituting imports with domestic
production.

For example, instead of importing vehicles made in a foreign country, industries would be encouraged to produce them
in India itself.

Protection of domestic industries from foreign competition

In import substitution policy the government protected the domestic industries from foreign competition.

Reason for protection 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.
  Our planners also feared the possibility of foreign exchange being spent on import of luxury goods if no
restrictions were placed on imports.

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.

Q23. "The achievements of India's industrial sector during the first seven plans are impressive indeed." Do you agree
with the above statement? Give reasons in support of your answer.

Or

Critically evaluate the industrial development during the period of 1950 to 1990.

Ans. Critical Evaluation of the Industrial and Trade Policies

Positive Effects

1. Increase in the share GDP: The achievements of India's 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 per cent in 1950-51
to 24.6 per cent in 1990-91 The rise in the industry's share of GDP is an important indicator of development

2. Diversification of industrial sector: 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.

3. Promotion of small-scale industries: 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.

4. Development of indigenous industries: Protection from foreign competition enabled the development of indigenous
industries in the areas of electronics and automobile sectors which otherwise could not have developed.

Drawbacks/Criticisms

1. Inefficient functioning of the public sector: One of the major drawbacks in the industrial sector was the inefficient
functioning of the public sector. 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's limited resources.

Initially public sector was required in a big way. It is now widely held that state enterprises continued to produce certain
goods and services (often monopolising them) although this was no longer required.

For example, the provision of telecommunication service. This industry continued to be reserved for the Public Sector
even after it was realised that private sector firms could also provide it. Due to the absence of competition, even till the
late 1990s, one had to wait for a long time to get a telephone connection. In 2001 this firm was sold to the private
sector.

Similarly, even now only the public sector supplies national defense. And even though private sector can manage hotels
well, yet, the government also runs hotels.

The government should get out of areas which the private sector can manage and government may concentrate its
resources on important services which the private sector cannot provide.
2. Excessive regulation of industries: 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 products. Moreover, 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.

3. No incentive for producers to improve the quality of products in the absence of foreign competition: 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.

Q24. "The progress of the Indian economy during the first seven plans was impressive indeed." Do you agree with the
above statement? Give valid reasons in support of your answer.

OR

Briefly discuss the progress of Indian economy during the first seven plans in the agriculture, industrial and trade
sector.

Ans. The given statement is not totally correct.

In Agriculture Sector:

 India became self-sufficient in food production due to the green revolution.

 Land reforms resulted in abolition of zamindari system.

In Industrial Sector:

No doubt, during 1950-1990, our industries became far more diversified compared to the situation at independence.
The 6% annual growth rate of the industrial sector during the period is commendable.

However, excessive government regulation prevented their growth.

Many economists became dissatisfied with the performance of many public sector enterprises (PSEs). They incurred
huge losses but continued to function because it was difficult to close a government undertaking even if it was a drain
on the nation’s limited resources, (Some scholars argue that public sector firms should be evaluated on the basis of
social welfare and not the profits they earn.)

Excessive government regulation through permit license raj’ prevented growth of entrepreneurship. More time was
sent by industrialist in trying to obtain a license or lobby with the concerned ministries rather than on thinking about
how to improve their products. Even, 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.

In Trade Sector:

Our inward-looking trade strategy failed to develop a strong export sector

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 they produced. The producers were aware that they had a captive market.

Due to restrictions on imports the Indian consumers had to purchase whatever the producers produced and sell at a
high price.