Chapter – 2: ‘Indian Economy 1950-1990’
- The central objective of Planning in India is to initiate a process of development which will raise the living standards and open out to the people new opportunities for a richer and more varied life — First Five Year Plan
Types of Economic Systems
- In a market economy, also called capitalism, only those consumer goods will be produced that are in demand.
- In a socialist society the government decides what goods are to be produced in accordance with the needs of society.
- 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.
What is a Plan?
- A plan spells out how the resources of a nation should be put to use.
- 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 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.
- Our five-year plans do not spell out how much of each and every good and service is to be produced. This is neither possible nor necessary (the former Soviet Union tried to do this and failed).
- It is enough if the plan is specific about the sectors where it plays a commanding role, for instance, power generation and irrigation, while leaving the rest to the market.
- 1 Introduction
- 2 The Goals of Five Year Plans
- 3 Industry and Trade
- 4 Trade Policy: Import Substitution
- 5 Conclusion
- The leaders of independent India had to decide, among other things, the type of economic system most suitable for our nation.
- Socialism appealed to Jawaharlal Nehru the most.
- He was not in favour of the kind of socialism established in the former Soviet Union where all the means of production, i.e. all the factories and farms in the country, were owned by the government. There was no private property.
- Nehru, and many other leaders and thinkers of the newly independent India, sought an alternative to the extreme versions of capitalism and socialism.
- In this view, India would be a socialist society with a strong public sector but also with private property.
- 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 Goals of Five Year Plans
- The goals of the five-year plans are: growth, modernisation, self-reliance and equity.
- Due to limited resources, a choice has to be made in each plan about which of the goals is to be given primary importance.
- 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 economics, 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.
Mahalanobis: the Architect of Indian Planning
- He was a statistician, Prasanta Chandra Mahalanobis.
- 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 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.
- His contributions to the subject of statistics brought him international fame.
- In 1946 he was made a Fellow (member) of Britain’s Royal Society, one of the most prestigious organisations of scientists
- Mahalanobis established the Indian Statistical Institute (ISI) in Calcutta and started a journal, Sankhya. Both, the ISI and Sankhya, are highly regarded by statisticians and economists all over the world to this day.
- 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.
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 becomes 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 (this marked the onset of globalisation in the country.
- To increase the production of goods and services the producers have to adopt new technology.
- 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.
- 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.
- 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.
- 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.
- Let us now see how the first seven five-year plans, covering the period 1950-1990, attempted to attain these four goals and the extent to which they succeeded in doing so, with reference to agriculture, industry and trade.
- During the colonial rule there was neither growth nor equity in the agricultural sector. The policy makers of independent India had to address these issues which they did through land reforms and promoting the use of ‘High Yielding Variety’ (HYV) seeds which ushered in a revolution in Indian agriculture.
- At the time of independence, the land tenure system was characterised by intermediaries (variously called zamindars, jagirdars etc.) who merely collected rent from the actual tillers.
- 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.
- Just a year after independence, steps were taken to abolish intermediaries and to make the tillers the owners of land.
- ‘Land ceiling’ was another policy to promote equity in the agricultural sector. This means 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.
- However, the goal of equity was not fully served by abolition of intermediaries. In some areas the former zamindars continued to own large areas of land by making use of some loopholes in the legislation.
- The land ceiling legislation also faced hurdles. 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.
- Land reforms were successful in Kerala and West Bengal because these states had governments committed to the policy of land to the tiller.
The Green Revolution:
- At independence, about 75 per cent of the country’s population was dependent on agriculture.
- 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.
- 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 first phase of the green revolution (approximately mid 1960’s upto mid 1970s), the use of HYV seeds was restricted to the more affluent states such as 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 use of HYV seeds primarily benefited the wheat-growing regions only.
- The spread of green revolution technology enabled India to achieve self-sufficiency in food grains
- Growth in agricultural output is important but it is not enough. If a large proportion of this increase is consumed by the farmers themselves instead of being sold in the market. 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. The low-income groups, who spend a large percentage of their income on food, benefited from this decline.
- 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 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. 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 subsidised fertilisers 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 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.
- Subsidies are meant to benefit the farmers but a substantial amount of fertiliser subsidy also benefits the fertiliser industry. Therefore, it is argued that there is no case for continuing with fertiliser subsidies.
- Some believe that the government should continue with agricultural subsidies because farming in India continues to be a risky business. 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. This is an achievement to be proud of. 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). The answer is that the industrial sector and the service sector did not absorb the people working in the agricultural sector. Many economists call this an important failure of our policies followed during 1950-1990.
Industry and Trade
- Five year plans place a lot of emphasis on industrial development.
- There were two well-managed iron and steel firms — one in Jamshedpur and the other in Kolkata
Public and Private Sectors in Indian Industrial Development:
- The state had to play an extensive role in promoting the industrial sector.
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.
- This resolution classified industries into three categories.
- first category comprised industries which would be exclusively owned by the state
- the second category 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;
- the third category consisted of the remaining industries which were to be in the private sector.
- Although there was a category of industries left to the private sector, 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. The purpose of this policy was to promote regional equality. 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. License to expand production was given only if the government was convinced that the economy required a larger quantity of goods.
- 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 invest-ment allowed on the assets of a unit.
- 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.
- 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.
- It is believed that small-scale industries are more ‘labour intensive’ 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.
Trade Policy: Import Substitution
- The industrial policy that we adopted was closely related to the trade policy.
- In the first seven plans, trade was characterised by what is commonly called an inward looking trade strategy. This strategy is called 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. 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.
Effect of Policies on Industrial Development:
- 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 six per cent annual growth rate of the industrial sector during the period is commendable.
- 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.
- 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.
- 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.
- 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. This, along with other problems, led the government to introduce a new economic policy in 1991.
- The progress of the Indian economy during the first seven plans was impressive indeed.
- 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.
- 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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