Indian Economy at Independence

Study Notes

India was largely rural, with an overwhelmingly illiterate population, and over 80% of the population lived in rural areas.
The literacy rate was just above 18% and life expectancy was barely 32 years in 1951.
The country had a deeply stratified society characterized by extreme heterogeneity in many ways.

The Nehruvian model, which supported social and economic redistribution and industrialization directed by the state, dominated India's economic policy after independence.
Centralized economic planning and direction were at the core of India's development strategy.
The Planning Commission of India was established to plan India's economic development in line with the socialistic strategy.
The five-year plans were developed, implemented, and monitored by the Planning Commission.

Rapid industrialization was the cornerstone of Nehru's development strategy.
The concept of 'planned modernization' meant systematic planning to support industrialization.
The Industrial Policy Resolution (1948) envisioned an expanded role for the public sector and licensing to the private sector.
The state was granted a monopoly in strategic areas such as atomic energy, arms, and ammunition, and railways.
The rights to new investments in basic industries were exclusively given to the state.

The policies in the 1950s were guided by two economic philosophies: Nehru's visualization of building a socialistic society with emphasis on heavy industry, and Gandhi's philosophy of small-scale and cottage industry and village republics.
The Industrial Policy Resolution of 1956 provided a comprehensive framework for industrial development but was lopsided, supporting an enormous expansion of the public sector.
This led to the dampening of private initiative and enterprise.

India followed an open foreign investment policy and a relatively open trade policy until the late 1950s.
A balance of payments crisis emerged in 1958, causing concerns regarding foreign exchange depletion.
This led to a gradual tightening of trade and reduction in investment-licensing of new investments requiring imports of capital goods.

India's average annual rate of growth of GDP during the first three decades after independence (1950-80) was a modest 3.5 percent.
The thrust of the first decade and a half was on capital goods, such as dams, power plants, and heavy industrialization, rather than consumer goods.