INDIAN ECONOMY 1950-90

Types of Economic
Systems
Every society has to answer three questions

1. What goods and services should be produced in the country?

2. How should the goods and services be produced? Should producers use
more human labour or more capital (machines) for producing things?

3. How should the goods and services be distributed among people?

If the economy depends on the market forces of supply and demand, it is

called a market economy or capitalism.

The guiding principle is the profit motive.

In a capitalist society the goods produced are distributed among people not
on the basis of what people need but on the basis of Purchasing Power—the
ability to buy goods and services, for example, low cost housing for the poor is
much needed but will not count as demand in the market sense because the
poor do not have the purchasing power to back the demand.

Such a society did not appeal to Jawaharlal Nehru, our first prime minister, for
it meant that the great majority of people of the country would be left behind
without the chance to improve their quality of life.

In a socialist society, the government decides what goods are to be produced

in accordance with the needs of society. It is assumed that the government
knows what is good for the people of the country and so the desires of
individual consumers are not given much importance. The government
decides:
▪ how goods are to be produced
▪ how they should be distributed.

Distribution under socialism is supposed to be based on what people need

and not on what they can afford to purchase.

Most economies are mixed economies, i.e. the government and the market
together answer the three questions of what to produce, how to produce and
how to distribute what is produced. In a mixed economy, the market will
provide whatever goods and services it can produce well, and the government
will provide essential goods and services which the market fails to do.
Nehru, and many other leaders and thinkers of the newly independent India,
sought an alternative to the extreme versions of capitalism and socialism.
 They declared India a mixed economy. i.e. 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.

In 1950, the Planning Commission was set up with the Prime Minister as its
Chairperson.

What is a Plan?
A plan spells out how the resources of a nation should be put to use.

It should have some general goals as well as specific objectives which are to
be achieved within a specified period of time; in India plans are of five years
duration and are called five year plans (as in the former Soviet Union). Our plan
documents not only specify the objectives to be attained in the five years of a
plan but also what is to be achieved over a period of twenty years. This
long-term plan is called ‘perspective plan’.

The five year plans are supposed to provide the basis for the perspective plan.
All the goals of a plan are not given equal importance in all the plans. In fact
the goals may actually be in conflict. For example, the goal of introducing
modern technology may be in conflict with the goal of increasing employment
if the technology reduces the need for labour. The planners have to balance
the goals.
.

Goals of Five Year Plans

1. Economic 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.
▪ GDP is the indicator of Economic Growth which is derived from the different
sectors of the economy - Agricultural, Industrial and the services sector.

2. Modernisation
▪ It refers to those institutional changes in economic activities which make an
economy progressive and modern. It includes adoption of new technology and
Change in social outlook.
▪ Adoption of new technology - Producer can increase the output by using new
type of machine.
▪ Change in social outlook - Recognition that women should have the same
rights as men. A society would be more prosperous if it makes use of talents
of women in the workplace.
 3. Self reliance
▪ It means avoiding imports of those goods which could be produced in India
itself.
▪ Reason behind adopting Self reliance:

(a) To reduce our dependence on foreign countries for food.

(b) Dependence on imported food supplies, foreign technology and foreign

capital may make India's sovereignty vulnerable to foreign interference in our
policies.

4. Equity
▪ It means ensuring that the benefits of economic prosperity reach the poor
sections as well instead of being enjoyed only by the rich.
▪ Every Indian should be able to meet his or her basic needs such as food,
clothing, house, education and health
▪ Inequalities in the distribution of wealth should be reduced.

Mahalanobis: the Architect

of Indian Planning
The name of the statistician, Prasanta Chandra Mahalanobis, stands out as far
as planning for the Indian economy is concerned. The Second Plan, a
landmark contribution to development planning in general, laid down the basic
ideas regarding goals of Indian planning; which was based on the ideas of
Mahalanobis. He is regarded as the architect of Indian planning.

Agricultural Sector
Contributes 22% to GDP with approximately 75% of the workforce.
▪ Source of indirect livelihood for artisans, weaver, potters etc.
▪ Contributes to industries.– provider of raw materials and a market for their
goods
▪ Contributes to Exports
 Agricultural Sector reforms
LAND REFORMS
Equity in agriculture called for land reforms which primarily refer to change
in the ownership of landholdings.

Abolition of Zamindar
To make the tillers the owners of land which would give incentives to the tillers
to invest in making improvements provided sufficient capital was made
available to them.

Problems faced
▪ In some areas the former zamindars continued to own large areas of land by
making use of some loopholes in the legislation;
▪ There were cases where tenants were evicted and the landowners claimed to
be self cultivators (the actual tillers), claiming ownership of the land; and
▪ Even when the tillers got ownership of land, the poorest of the agricultural
labourers (such as sharecroppers and landless labourers) did not benefit from
land reforms.

Land Ceiling
Fixing the maximum size of land which could be owned by an individual. The
purpose of land ceiling was to reduce the concentration of land ownership in a
few hands.

Problems faced
▪ 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.
▪ The legislation also had a lot of loopholes which were exploited by the big
landholders to retain their land.
▪ 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
▪ This 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; the application of these
inputs in correct proportions is vital.
▪ The farmers who could benefit from HYV seeds required reliable irrigation
facilities as well as the financial resources to purchase fertiliser and pesticide.

Benefits
1. Marketable Surplus

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.

2. Reduction in the price of food grains

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.

3. Buffer Stock

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. Self Reliance

The spread of green revolution technology enabled our economy to achieve

self-sufficiency in food grains.

Economy 1950-1990
Drawbacks
1. Increase income disparities

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.

2. Prone to pest attack

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.

3. Confined only to few states

Only those states could reap the benefits of Green revolution which can
access the New Agricultural Strategy.

Conclusion:
The rapidly increasing problems of land degradation, deforestation, soil
erosion, environmental pollution, depletion of biodiversity, increased incidence
of mosquito borne diseases, pest resurgence, lowering of ground water table
are the results of Green revolution in India.

Steps taken by the government to reduce income

disparities caused by Green Revolution
1. The government provided loans at a low interest rate to small farmers and
subsidised fertilisers 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 equalled the output on large farms in the course of
time. As a result, the green revolution benefited the small as well as rich
farmers.

2. 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 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.

Arguments in favour of subsidies

1. Encouragement to farmers

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. Any
new technology will be looked upon as being risky by farmers. Subsidies were,
therefore, needed to encourage farmers to test the new technology.

2. To help farmers afford inputs

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.

3. Goal of equity

Eliminating subsidies will increase the inequality between rich and poor
farmers and violate the goal of equity. Subsidies bring about equity between
rich and poor farmers by enabling the poor farmers to use modern technology
and inputs.

Arguments against subsidies

1. Benefit to fertiliser industry and big farmers
Subsidies are meant to benefit the farmers but a substantial amount of
fertiliser subsidy also benefits the fertiliser industry; and among farmers, the
subsidy largely benefits the farmers in the more prosperous regions.

2. Burden on Government

It does not benefit the target group and it is a huge burden on the
government’s finances. Fiscal imbalance paves the way for macroeconomic
imbalances creating inflation, lowering growth and creates inability to finance
imports.

Conclusion: If subsidies are largely benefiting the fertiliser industry and big
farmers, the correct policy is not to abolish subsidies but to take steps to
ensure that only the poor farmers enjoy the benefits.

Trends in Occupational
Structure
Despite the implementation of Green Revolution, more than 65% of the
country's population continued to be employed in the agricultural sector till
1990-
 Industrial Sector
Industry provides employment which is more stable than the employment in
agriculture.
▪ It promotes modernisation and overall prosperity.

IPR, 1956
This resolution classified industries into three categories.

Category 1
Industries which would be exclusively owned by the state

eg. Arms and ammunition, atomic energy, railways, shipbuilding.

Category 2
Industries in which the private sector could supplement the efforts of the state
sector, with the state taking the sole responsibility for starting new units

eg. Chemical industry, essential drugs, fertilizers.

Category 3
Industries which were to be in the private sector.

SMALL SCALE INDUSTRIES

Definition: Industrial unit with the maximum fixed investment of rupees one
crore

Importance:
▪ Used for the promotion of rural development.
▪ Important source of employment.
▪ Encourage equality in the distribution of income and wealth.

Small Scale industries are promoted through:

▪ Reduction in excise duties.
▪ Provision of bank loans at low interest rates.
▪ Provision of cheap electricity.
▪ Exemption of certain labour laws.
▪ Reservation for production of certain products.
 The Service Sector
As a country develops, it undergoes ‘structural change’. In the case of India,
the structural change is peculiar. Usually, with development, the share of
agriculture declines and the share of industry become dominant. At higher
levels of development, the service sector contributes more to the GDP than
the other two sectors.

In India, the share of agriculture in the GDP was more than 50 per cent—as we
would expect for a poor country. But by 1990 the share of the service sector
was 40.59 per cent, more than that of agriculture or industry, like what we find
in developed nations. This phenomenon of growing share of the service sector
was accelerated in the post 1991 period.

Foreign Trade
▪ Import substitution trade policy

This policy 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.
▪ The government protected the domestic industries from foreign competition
through 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.

Reasons for protection from foreign competition:

1. It is assumed that if the domestic industries are protected they will learn to
compete in the course of time.

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

Critical Evaluation of the

Industrial and Trade Policy
Positive Effects
▪ 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 industrial sector recorded an annual growth rate of six per cent.
1. Diversification of the industrial sector: Indian industry was not restricted
largely to cotton textiles and jute and became well diversified by 1990, largely
due to the public sector.
2. Promotion of small-scale industries: The SSI gave opportunities to those
people who did not have the capital to start large firms to get into business.
3. 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
1. 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.
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 their products.
3. No incentive to improve the quality of products: 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.
Owing to all these conflicts, economists called for a change in our policy.
This, along with other problems, led the government to introduce a new
economic policy in 1991.