INDIAN ECONOMY (1950-90)

Introduction
India got freedom on 15th August, 1947.
The most important task before the government of independent India was to decide the type of
‘economic system’, which would be most suitable for India.
Economic system refers to an arrangement by which central problems (what to produce? how
to produce? and for whom to produce?) of an economy are solved.
Economic systems are generally of three types:

Capitalism, Socialism and Mixed economy

Basis Market Economy or Centrally Planned or Mixed Economy
Capitalism Socialism
1 Nature It is a free economy where It is a planned economy Important decisions are
market forces demand and where all the economic taken by govt. and
supply organize all the activities are regulated economic activities are
economic activities. by the govt. conducted by the market.
2 Motive Profit Social welfare Profit motive in private
and social welfare in public
sector
3 Role of There is no direct The govt. plays an Full control in public sector
govt. intervention of the Govt. active role in the process and partial control in
of production. private sector.

4 Production In this production done on Production is done on Both demand and need is
the basis of demand. the basis of need of the taken into account.
Society.
5 Central Solved through price Solved through planning Both by price mechanism
Problems mechanism. mechanism. & planning mechanism.
6 Competition Competition exists. No competition exists. Competition exists in
private sector only.
7 Merits It fosters self interest and It ensures social justice. It ensures consumer’s
economic growth increases. sovereignty.

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8 Demerits It overlooks social interest. It ignores consumer’s Public & private sector
sovereignty might show inefficiency &
corruption if guided by self-
motive.

Socialism appealed to Jawaharlal Nehru the most.

Nehru and many leaders decided that India would be a socialist society with a strong public sector
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.
India followed ‘mixed economy’ system.

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 (we borrowed this from
the former Soviet Union, the pioneer in national planning)
Our plan documents upto the year 2017 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 were supposed to provide the basis for the perspective
plan.
Economic Planning:
It refers to the systematic efforts by government agencies, to bring about quantitative and
qualitative improvements in the economy within a pre-determined time frame work.
All the economic planning has been formulated through five year plans.
Mahalanobis regarded as the Architect of Indian Planning.
Planning Commission :
An organisation set up by the Government of India. It is responsible for making assessment of all
resources of the country, augmenting deficient resources, formulating plans for the most effective
and balanced utilisation of resources and determining priorities.
It was set in 1950 with the Prime Minister as its Chairperson. (Planning Commission is no longer in
existence. On 1st January 2015, a Cabinet Resolution was passed to replace it with NITI (The
National Institution for Transforming India) Aayog.

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 COMMON GOALS OF FIVE YEAR PLANS
1. Growth
 Growth 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 is steady increase in the Gross Domestic Product
(GDP).The GDP is the market value of all the goods and services produced in the country during a
year.
 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.
 In some countries, growth in agriculture contributes more to the GDP growth, while in some
countries the growth in the service sector contributes more to GDP growth.

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.

2. Modernisation
 Modernisation means adopting new ideas and ways of doing things.
 Modernization can be seen from many angles, e.g. economic angle and social angle
 From economic angle it refers to adopting new technology, new management techniques in
production of goods and service.
For example, a farmer can increase the output on the farm by using new seed varieties instead
of using the old ones. Similarly, a factory can increase output by using a new type of machine.
 From social angle it refers to changes in social outlook, such as gender empowerment or
providing equal rights to women.
 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 occasions is also prosperous.

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 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.
3. Self-reliance
 It means reducing dependence on foreign aid.
 A nation can promote economic growth and modernisation 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 because of two reasons:
in order to reduce our dependence on foreign countries, especially for food
to avoid foreign interference in our policies.
4. Equity
 Equity means fair and equitable distribution of benefits of economic growth among people,
reducing gap between rich and poor and reducing 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.
 It helps in reducing tensions in the society.
 It aims to raise the standard of living of all people and promote social justice.

PLANNING CALENDER OF INDIA (Non- evaluative)

PLAN PERIOD OBJECTIVE
(APRIL TO MARCH)
I 1951-56 Raise agricultural production
II 1956-61 Rapid industrialization
III 1961-66 Self –sufficiency in foodgrains
Annual 1966-67
Annual 1967-68
Annual 1968-69
IV 1969-74 Self –reliance
V 1974-79 Self reliance and removal of poverty
Annual 1979-80
VI 1980-85 Self reliance

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 VII 1985-90 Self-sufficiency in food, strengthening
infrastructure
Annual 1990-91, 1991-92
VIII 1992-97 Self-sufficiency in food, generating export
surplus, strengthening infrastructure
IX 1997-2002 Improve quality of life
X 2002-2007 Improve quality of life
XI 2007-2012 Sustainable and inclusive growth
XII 2012-2017 Inclusive growth
15 Yr vision plan 2017…..

Box 2.3: 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. Mahalanobis was born in 1893 in Calcutta.
He was educated at the Presidency College in Calcutta and at Cambridge University in England. His
contributions to the subject of statistics brought him international fame. In 1945 he was made a Fellow
(member) of Britain’s Royal Society, one of the most prestigious organisations of scientists; only the most
outstanding scientists are made members of this Society. Mahalanobis established the Indian
Statistical Institute (ISI) in Calcutta and started a journal, Sankhya, which still serves
as a respected forum for statisticians to discuss their ideas. Both,
the ISI and Sankhya, are highly regarded by
statisticians and economists all over the world to this day.
During the second plan period, Mahalanobis invited many
distinguished economists from India and abroad to advise him on India’s
economic development. Some of these economists became
Nobel Prize winners later, which shows that he could identify individuals
with talent. Among the economists invited by Mahalanobis were those
who were very critical of the socialist principles of the second plan.
In other words, he was willing to listen to what his critics had to say,
the mark of a great scholar.
Many economists today reject the approach to planning formulated by
Mahalanobis but he will always be remembered for playing a vital role in
putting India on the road to economic progress, and statisticians continue
to profit from his contribution to statistical theory.

AGRICULTURE
Features
The main features of agricultural sector at the time of independence were:
1. 85% of the population was dependent on agriculture. About 70% of workforce was engaged in
agricultural sector.
2. Defective land settlement system dominated by Zamidari system.
3. Low level of technology.
4. Lack of investment.
(discussed in chapter-1)
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 Problems

The main problems faced by the agricultural sector at the time of independence are following:
1. Related to Land
 Exploitation by zamidars: The land owners were called zamidars who got their land cultivated from
farmers. The main problems in this system were: charging excessive rents in the form of share in
the produce; neglecting investments on farms. This led to exploitation of tenants.
 Unequal distribution of land: Just like there are rich and poor persons, there were rich and poor
farmers. Rich farmers owned large amounts of land. Poor farmers owned small pieces of land.
There was also a third category called landless cultivators.
2. Low productivity
The main problem was low productivity, i.e. output per hectare of land. The low productivity of the
agricultural sector forced India to import food from the United States of America (U.S.A.).
It was caused by:
 Use of old technology
 Lack of infrastructure
 Lack of access to irrigation facilities
These problems made agriculture sector underdeveloped.
There was neither equity nor growth. There was stagnation.
(to extend the content more points can be added from topic- Agriculture on the Eve of
Independence)

POLICIES FOR GROWTH OF AGRICULTURE SECTOR DURING

PLANNING PERIOD
Agrarian reforms
With a view of tackling the problems of Indian agriculture, the government has taken a series of
reform measures since independence. These reforms are popularly known as Agrarian reforms.
These are broadly classified as Institutional Reforms also called land reforms and New Agricultural
Strategy / TECHNICAL REFORMS /or Green Revolution.

Land reforms or Institutional Reforms

 Land reforms refer to change in the ownership of landholdings.
 Equity in agriculture called for land reforms.

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1. Abolition of intermediaries
 Steps were taken to abolish intermediaries and to make the tillers the owners of land. The idea
behind this move was that ownership of land would give incentives to the tillers to invest in making
improvements provided sufficient capital was made available to
them.
 The abolition of intermediaries meant that some 200 lakh tenants came into direct contact with the
government — they were thus freed from being exploited by the zamindars.
2. Land ceiling
 It was the another policy to promote equity in the agricultural sector.
 Land ceiling means fixing the maximum size of land which could be owned by an individual.
Beyond the specified limit, all lands belonging to a particular person would be taken by the
government and will be allotted to the landless and small farmers.
 The purpose of land ceiling was to reduce the concentration of land ownership in a few hands.
 The ownership conferred on tenants gave them the incentive to increase output and this contributed
to growth in agriculture.
 But, 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.

The land ceiling legislation was challenged by the big landlords. They delayed its implementation.
This delay time was used by them to get the land registered in the name of close relatives, thereby
escaping from the legislation.
 Land reforms were successful in Kerala and West Bengal because these states had governments
committed to the policy of land to the tiller.
3. Regulation of rent Terms of rent were fixed i.e. 1/3rd / 1/4th /1/5th of the value of crop.

4. Consolidation of land holdings means the system in which small and scattered land holdings of a
farmer is converted into a big farm so that benefits of mechanization can be availed.

5. Cooperative farming was also introduced, so that the farmers could work together as a large group
availing the advantages of large-scale cultivation while retaining their individual ownership.

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 GREEN REVOLUTION/TECHNICAL REFORMS
The stagnation in agriculture during the colonial rule was permanently broken by the green
revolution.
 Green Revolution 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.
 HYV seeds required reliable irrigation facilities as well as the financial resources to purchase
fertiliser and pesticide.
 1st Phase (mid 1960s upto mid 1970s) the use of HYV seeds was restricted to the more affluent
states such as Punjab, Andhra Pradesh and Tamil Nadu. The use of HYV seeds primarily
benefited the wheat growing regions only.
 2nd phase (mid-1970s to mid-1980s), the HYV technology spread to a larger number of states
and benefited more variety of crops.

Benefits
1. Self-sufficiency
 The spread of green revolution technology enabled India to achieve self-sufficiency in food grains;
India no longer had to be at the mercy of America, or any other nation, for meeting its food
requirements.
2. Marketed 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.
3. Reduction in prices
As production of food grains increased, the price of food grains declined relative to other items of
consumption. So, availability and affordability is achieved.
4. 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.
5. Increase in Income
 Since the Green Revolution was limited to wheat and rice for a number of years, its benefits were
enjoyed by wheat and rice growing areas of Punjab, Haryana, Western Uttar Pradesh and Andhra
Pradesh.
 The income of farmers in these States grew sharply.
 Green Revolution succeeded in removing rural poverty in these States.

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 6. Increase in Employment
 Green Revolution solved the problem of seasonal unemployment to a great extent because with the
possibility of growing more than one crop on a piece of land, more working hands were needed
throughout the year. Also, package inputs required better irrigation facilities which raised the
employment rate.
(Any other relevant point can be written)

Drawbacks
1. 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. It result in increasing the
disparities.
2. Prone to pest attack- 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. Limited crops- The effect of green revolution confined to limited crops like wheat, rice, bajra,
maize etc. It has limited effect on commercial crops like tea, rubber, jute etc.
4. Regional disparities- The effect of green revolution has been only in Punjab, Haryana, Tamil
Nadu, Maharashtra, Uttar Pradesh and Andhra Pradesh. Thus, there were regional inequalities.
5. Environmental issues- The Green Revolution has also been widely criticized for causing
environmental damage. Excessive and inappropriate use of fertilizers and pesticides has polluted
waterways, poisoned agricultural workers, and killed beneficial insects and other wildlife. Irrigation
practices have led to salt build-up and eventual abandonment of some of the best farming lands.
Ground water levels are retreating in areas where more water is being pumped for irrigation than
can be replenished by the rains. And heavy dependence on a few major cereal varieties has led to
loss of biodiversity on farms.

Steps taken by the government to overcome the drawbacks :

 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. As a result, the green revolution
benefited the small as well as rich farmers.
 The government provided subsidized fertilizers so that small farmers could have access to needed
inputs.
 The risk of pests attack was considerably reduced by the services rendered by research institutes
established by the government.

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 Subsidies: A debate
 Subsidy means that the farmers get inputs at prices lower than the market price.
 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.
 The Govt of India. has been providing two types of subsidies:
i) subsidies on agricultural inputs.
ii) subsidies on food supplies to PDS.

Role of Subsidies

 Small farmers were given low-interest loans and fertiliser subsidies by the government, ensuring
that they had access to the necessary inputs. As a result, both small and large farmers benefited
from the green revolution.
 The services provided by government-established research institutes significantly lowered the
chance of small farmers being wrecked when pests attack their crops.

Arguments in favour of subsidies

1. Risky business: The govt. should continue with agricultural subsidies as farming in India continues
to be a risky business.
2. Poor farmers: Most of the farmers are very poor and they will not be able to afford the required
inputs without subsidies.
3. Incentive: Subsidies act as an incentive for adoption of the new technology by farmers in general
and small scale farmers in particular. Subsidies help small farmers to continue production so that
food security of the nation can be ensured.
4. Equity: Eliminating subsidies will increase the inequality between rich and poor farmers and
violate the goal of equity.

Arguments against subsidies

1. Do not benefit the target group: 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.
 Huge burden on the government’s finances: As Government has to spend lot of money for
subsidies.

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 Pupose fulfilled: The economists believe that as the government grants subsidies to poor farmers
as an incentive for them to adopt new HYV technology, then it should phase out subsidies once the
new technology is widely accepted, and the purpose of granting subsidies has been fulfilled.
 Wastage of Resources: Subsidies that are supplied at a considerably lower rate than the market rate
may result in resource waste. Subsidized electricity, for example, results in energy waste.

INDUSTRY and TRADE

Industry provides :
1. Employment which is more stable than the employment in agriculture;
2. it promotes modernization
3. & overall prosperity.

Features
 Slow growth of modern industry-largely confined to cotton textiles and jute. There were two well
managed iron and steel firms — one in Jamshedpur and the other in Kolkata.
 Absence of capital goods industries
 Limited public sector (explain as per marks)

Problems
 The overall problem was underdevelopment and stagnation.
There was need to create modern industries and the capital goods industries.
 The big question facing the policy makers was — what should be the role of the government and
the private sector in industrial development?

Why Public sector has to play the lead role?

The state had to play an extensive role in promoting the industrial sector due to the following
reasons:
1. Shortage of capital with private sector: 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.
2. Lack of incentives:The market was not big enough to encourage industrialists to undertake major
projects even if they had the capital to do so.
3. Objective of social welfare: This objective of socialistic pattern of society could be achieved only
through the direct participation of the government in the process of industrialization.

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 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.

Industrial Policy
It is a comprehensive package of policy measures which covers various issues connected with
different industrial enterprises of the country.
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.

Following were the features of IPR:

1. Classification of industries:
This resolution classified industries into three categories.
 The first category (Schedule A) comprised industries which would be exclusively owned by
the state. This category included 17 industries like atomic energy, oil, railways etc.
 The second category (Schedule B) consisted of 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,
It included 12 industries like fertilizers, machine tools, aluminium etc.
 The third category consisted of the remaining industries which were to be in 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
2. Industrial Licensing
 Although there was a category of industries left to the private sector but the sector was kept under
state control through a system of licenses.
 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.
 Even an existing industry had to obtain a license for expanding output or for diversifying
production (producing a new variety of goods).
 This was meant to ensure that the quantity of goods produced was not more than what the economy
required.
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 License to expand production was given only if the government was convinced that the economy
required a larger quantity of goods.

3. Industrial concessions
 The units established in an economically backward area were given certain concessions such as tax
benefits and electricity at a lower tariff.
 The purpose of this policy was to promote regional equality (means growth and development of all
the regions equally.)

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.
 In 2006, the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006, was enacted
and different limits were set for the identification of these enterpises. These limits were again
revised in 2020.
Role of SSI

1. SSI Provides Employment

Small-scale industries are more ‘labour intensive’ i.e., they use more labour than the large- scale
industries and, therefore, generate more employment.
2. SSI Brings Balanced Regional Development

Most of the small scale industries are set up in backward and rural areas. It removes regional
disparities by industrializing rural and backward areas and brings balanced regional development.
Thus promotes equity.

3. SSI Helps in Mobilization of Local Resources

It helps to mobilize and utilize local resources like small savings, entrepreneurial talent, etc., of
the entrepreneurs, which might otherwise remain idle and unutilized. Thus it helps in effective
utilization of resources.

4. SSI Complements Large Scale Industries

SSI plays a complementary role to large scale sector and supports the large scale industries.

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5. SSI Ensures Social Advantage

SSI helps in the development of the society by reducing concentration of income and wealth
in few hands.

6. Develops Entrepreneurship

It promotes self-employment and spirit of self-reliance in the society. Development of small

scale industries helps to increase the per capita income of India in various ways. It facilitates
development of backward areas and weaker sections of the society.

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.
Steps taken by Govt. to protect SSI
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.

TRADE POLICY: IMPORT SUBSTITUTION

In the first seven plans, trade was characterised by what is commonly called an inward looking
trade strategy. Technically, this strategy is called import substitution.

Import Substitution : A policy of the state for development of economy in which import of goods is
generally substituted by domestic production (through import controls, tariffs and other
restrictions) with a view to encourage domestic industry on grounds of self-sufficiency and domestic
employment.

 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.
 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.

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 Why Import Substitution?/ Advantages of Import Substitution
 Protecting Domestic Industries: Industries of developing countries were not in a position to
compete against the goods produced by more developed economies. The domestic industries will
learn to compete in the course of time.
 Saving Foreign Exchange: There was a risk of drain of foreign exchange reserves on import of
luxury goods.
 Employment: It helped in solving the problem of unemployment as industrialization takes place at
a fast rate and absorbs unemployed people.
 Strong Industrial Base: The policy has enabled the country to achieve industrial diversification.It
helped in building a strong industrial base in our country and directly led to the economic growth.

Limitations of Import Substitution Policy

 Reduced competitiveness
 Lower quality goods
 Potential inefficiency in resource allocation.
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. Competition from imports forces our producers to be more
efficient. In the absence of competition Indian manufacturers continued to produce costly and low
quality goods.

Effect of Policies on Industrial Development

Achievements
The achievements of India’s industrial sector during the first seven plans are impressive indeed.
1. Rise in Industrial share of GDP
 The proportion of GDP contributed by the industrial sector increased in the period from 13 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. The six per cent
annual growth rate of the industrial sector during the period is commendable.
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. It included engineering
goods and wide range of consumer goods.

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3. Promotion of SSI
 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. Thus promoted employment.

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.

Criticism/Failures of Industrial Policy

The public sector has played a key role in the development of a diverse industrial structure.
However, the public sector is also under much criticism on the following grounds.
1. Inefficient functioning of the public sector
 One of the major drawbacks in the industrial sector was the inefficient functioning of the public
sector as it started incurring losses leading to drain on the nation’s limited resources.
2. Monopolistic tendencies
 Restricting certain industries entirely to the public sector led to monopolistic tendencies. State
enterprises continued to produce certain goods and services although this was no longer required.
For example: 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.
One had to wait for a long time to get a telephone connection.
Another instance could be the establishment of Modern Bread, a bread-manufacturing firm, as
if the private sector could not manufacture bread! In 2001 this firm was sold to the private sector.
This was all due to the absence of competition with private sector.
3. Lack of specific distinction in production
After four decades of Planned development of Indian Economy no distinction was made between (i)
what the public sector alone can do and (ii) what the private sector can also do.

For example, even now only the public sector supplies national defense. And even though the
private sector can manage hotels well, yet, the government also runs hotels. This Way precious
public sector funds are being channelized into areas where private sector can operate.
4. PSU’s faced huge losses
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. 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.

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5. Licensing Policy

 The excessive regulation of what came to be called the permit license raj (A term used to denote
the rules and regulations framed by the government to start, run and operate an enterprise for
production of goods and services in India.) prevented certain firms from becoming more efficient.
Entrepreneurs wasted a lot of time to obtain license.
 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.
6. Protection policy
 The protection from foreign competition is also being criticized. 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. Competition from imports forces our producers to be more efficient. In the absence of
competition Indian manufacturers continued to produce costly and low quality goods.

 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.
 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.

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