Indian Economy (1950-1990) PDF

```markdown ## 2 Indian Economy (1950–1990) **CHAPTER** **LEARNING OBJECTIVES** * 2.1 Introduction * 2.2 Economic Planning * 2.3 Goals of Five Year Plans * 2.4 Agriculture * 2.5 Industrial Development * 2.6 Foreign Trade * 2.7 Critical Appraisal of Industrial Development (1950–1990)...

```markdown ## 2 Indian Economy (1950–1990) **CHAPTER** **LEARNING OBJECTIVES** * 2.1 Introduction * 2.2 Economic Planning * 2.3 Goals of Five Year Plans * 2.4 Agriculture * 2.5 Industrial Development * 2.6 Foreign Trade * 2.7 Critical Appraisal of Industrial Development (1950–1990) ### 2.1 INTRODUCTION In the previous chapter, we have learnt that on the eve of independence, the Indian economy was completely undeveloped. After two hundred years of British rule and their exploitative policies, India finally got freedom on 15th August, 1947. Now, it was necessary to reconstruct the backward and stagnant Indian economy into a developed economy. Therefore, 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 of an economy are solved. Let us first understand the various "Central Problems" of an economy, before we proceed to different types of economic systems. **Central Problems of an Economy** The three major central problems of an economy are: 1. **What to Produce**: It involves deciding the final combination of goods and services to be produced, i.e., it involves the selection of goods and services and the quantity of each, that the economy should produce. 2. **How to Produce**: It involves deciding the technique of production, i.e. whether selected goods are to be produced with more labor and less capital (known as Labor Intensive Technique) or with more capital and less labor (known as Capital Intensive Technique). 3. **For whom to produce**: It involves deciding the distribution of output among people, i.e., it involves selection of the category of people who will ultimately consume the goods. --- ## 2.2 Types of Economic Systems Economic Systems are generally of 3 different types: **TYPES OF ECONOMIC SYSTEMS** | Capitalist Economy | Socialist Economy | Mixed Economy | | :------------------------------------------------------------------------------------ | :-------------------------------------------------------------------------------- | :---------------------------------------------------------------------------------------------------------- | | (Means of production are owned, controlled, and operated by the Private Sector) | (Means of production are owned, controlled, and operated by the Government) | (Both the Public and Private Sectors are allotted respective roles for solving Economy's Central Problems) | 1. **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. Under capitalist economy, the three central problems are solved in the following manner: * **What to Produce**: Under this system, only those goods are produced that can be sold profitably either in the domestic or in the foreign market. * **How to Produce**: Goods are produced using cheaper techniques of production. In case of cheap labor, labor-intensive methods of production are used and in case of costly labor, capital-intensive methods of production are used. * **For whom to Produce**: In a capitalist society, goods produced are distributed among people not on the basis of their needs but on the basis of their income or purchasing power. This means that a sick person will be able to get medicine only when he can afford to buy it, otherwise not, even if there is an urgency. 2. **Socialist Economy**: A socialist economy is the one in which the means of production are owned, controlled, and operated by the government. Under the socialist economy, the three central problems are solved in the following manner: * **What to Produce**: In a socialist society, the government decides what to produce in accordance with the needs of the society. * **How to Produce**: The government decides how the goods are to be produced. * **For whom to Produce**: Distribution under socialism is supposed to be based on what people need and not on what they can afford to purchase. A socialist nation provides free health care to the citizens, who need it. 3. **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. * In a mixed economy, the government and the market together solve the 3 central problems: what to produce, how to produce, and for whom to produce. * The private sector provides whatever goods and services it can produce well, and the government provides essential goods and services, which the market fails to do. **Indian Economic System** After freedom leaders of independent India (like Jawaharlal Nehru) were confused with regard to the economic system, to be followed in India. --- ## 2.3 * Some leaders were in favor of a Socialist Economy. However, in a democratic country like India, complete dilution of private ownership was not possible (as was possible in the case of the former Soviet Union). * The Capitalist Economic System did not appeal to Jawaharlal Nehru, our first Prime Minister, as under this system, there would be less chance for improvement in the quality of life of the majority of people. * As a result, the Mixed Economy (with the best features of both Socialist and Capitalist Economy) was adopted by the Indian Economy. In this view, India would be a socialist society, with a strong public sector, but also with private property and democracy. ## 2.2 ECONOMIC PLANNING After adopting the 'Mixed Economic System', the next important step for the Government was to revive the poor, backward and stagnant economy, inherited from British rule. * For the development of the Indian economy, it was necessary for the Government to 'plan' for the economy, known as Economic Planning. * Economic planning can be defined as making major economic decisions (what, how and for whom to produce) by the conscious decision of a determinate authority, on the basis of a comprehensive survey of the economy as a whole. 'P. C. Mahalanobis' is known as the Architect of Indian Economic Planning. For a detailed discussion on him, refer to the Power Booster Section. * The Industrial Policy Resolution of 1948 and the Directive Principles of the Indian Constitution assigned a leading role to the public sector. The private sector was also encouraged to be part of the plan efforts. * To make economic planning effective, the Government of India set up the Planning Commission in 1950, under the chairmanship of the then Prime Minister Pandit Jawaharlal Nehru. * The purpose of the commission was to carefully assess the human and physical resources of the country and to prepare the Plans for the effective use of resources. * The Planning Commission fixed the planning period at five years, which began the era of 'Five Year Plans'. **Note**: It must be noted that 'Planning Commission' is no more in existence. On 1st January 2015, a Cabinet Resolution was passed to replace the Planning Commission with the newly formed NITI Aayog (National Institution for Transforming India). **Explore More About "Plan"** | | | | :------------------------------- | :--------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | | **Meaning of Plan** | Plan is a document showing detailed scheme, program and strategy, worked out in advance for fulfilling an objective. | | **Reason for Making Plans** | Planning is done to achieve some predetermined goals within a specified time period. It involves detailed analysis of the problems at hand and making conscious decisions to solve them. | | **Duration of Each Plan** | In India, plans are made for a duration of five years and are known as 'Five Year Plans' (The concept of Five Year Plans was borrowed from the former Soviet Union). | | **Content in Plans** | 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. | --- ## 2.4 ## 2.3 GOALS OF FIVE YEAR PLANS The five-year plans have been concerned with the removal of economic backwardness of the country to make India a developed economy. * The five-year plans have also taken care to ensure that the weaker sections of the population benefit from the economic progress of the country. * The first five-year plan was launched by our first Prime Minister, Pandit Jawaharlal Nehru in parliament. It was launched for a period starting from April, 1951 and ending on 31st March, 1956. The 12th Five Year Plan of the Government of India (2012-17) was India's last Five-Year Plan. In between these years, some annual plans were also introduced. * Each five-year plan listed the basic Goals of India's development, which served as the guiding principles of Indian planning. * These basic Goals are: * (i) Growth * (ii) Modernization * (iii) Self-reliance * (iv) Equity **FOUR BASIC GOALS OF FIVE YEAR PLANS** | Growth | Modernisation | Self-reliance | Equity | | :---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | :--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | :---------------------------------------------------------------------------------------------------------------------- | :--------------------------------------------------------------------------------------------------------------------------- | | (Aims to increase the Country's Capacity to produce goods) | (Aims at the Adoption of New Technology and change in Social Outlook) | (Aims to make the economy self-reliant) | (Aims to ensure that everyone gets basic needs to reduce inequalities | | As all the goals cannot be given equal importance in all the plans, different goals are emphasised in different plans in India. However, the planners have to ensure that, as far as possible, the policies of the plans do not contradict the four goals mentioned above. | | | | Let us now discuss these four goals in detail. **Growth** The stagnation during the British rule forced the planners to make Economic Growth is the first and the foremost objective of Indian plans. * Growth refers to an increase in the country's capacity to produce the output of goods and services within the country. * Growth 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 a steady increase in the Gross Domestic Product (GDP). * GDP refers to the market value of all the final goods and services produced in the country during a period of one year. Increase in GDP or availability of goods and services enables people to enjoy a more rich and varied life. * The GDP of a country is derived from the different sectors (Agricultural sector, Industrial sector and Service sector) of the economy. --- ## 2.5 * 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. * The contribution of each economic sector to the GDP makes up the structural composition of the economy. 'Structural Composition' refers to the number of people engaged in different sectors. **Share of the Service Sector in GDP increased**: By 1990, the share of the service sector was 40.59%, more than that of agriculture or industry. This phenomenon of growing share of the service sector was accelerated in the post 1991 period, which marked the beginning of globalization in the country. **Modernisation** Indian planners have always recognised the need for modernisation of society to raise the standard of living of people. Modernisation includes: * **Adoption of New Technology**: Modernisation aims to increase the production of goods and services through the use of new technology. 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. * **Change in social outlook**: Modernisation also requires a change in social outlook, such as gender empowerment or providing equal rights to women. A society will be more civilized and prosperous if it makes use of the talents of women in the workplace. **Modernization in the words of the Draft outline of 6th Plan** "The term modernisation connotes (indicates) a variety of structural and institutional changes in the framework of economic activity." Modernisation implies: * Shift in sectoral composition of production and diversification of activities; * An advancement of technology and institutional innovations. so as to transform a feudal colonial economy into a modern and independent economy. **Self-reliance** The third major objective is to make the economy self-reliant. * Self-reliance under Indian conditions means overcoming the need of external assistance. In other words, it means to have development through domestic resources. * To promote economic growth and modernisation, the five-year plans stressed the use of own resources, in order to reduce our dependence on foreign countries. * 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, it is necessary to reduce our dependence on foreign countries, especially for 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 increase foreign interference in the policies of our country. **Equity** The objectives of growth, modernisation, and self-reliance, by themselves, may not improve the kind of life, which people are living. * So, it is important to ensure that benefits of economic prosperity are availed by all sections (rich as well as poor) of the economy. --- ## 2.6 * In addition to the objectives of growth, modernization and self-reliance, equity is also important. * According to Equity, every Indian *should be able to meet his or her basic needs* (food, house, education, and health care) *and inequality in the distribution of wealth should be reduced*. * In short, Equity aims to raise the standard of living of all people and promote social justice. Let us now discuss, how the first seven five year plans (from 1950 to 1990) attempted to attain the four goals and the extent to which they succeeded in doing so, with reference to 'Agriculture, 'Industry' and 'Trade'. ## 2.4 AGRICULTURE In the previous chapter, we have learnt that there was neither growth nor equity in the agricultural sector during the colonial rule. * At the time of independence, the land tenure system was characterised by intermediaries (like zamindars) who merely collected rent (lagaan) from the actual tillers of the soil. * The low productivity of the agricultural sector forced India to import food from the United States of America. * The agricultural sector accounted for the largest share of workforce with approximately 70-75 per cent. So, agricultural development was focused right from the First Five Year Plan. **Features (or Problems) of Agriculture** Following were some of the main features (or Problems) of Indian agricultural sector between 1950 and 1990: 1. **Low Productivity**: The Indian agricultural sector was known for its low productivity. Lack of knowledge was responsible for stagnation in this sector. 2. **Disguised Unemployment**: It refers to a state in which more people are engaged in work than are really needed. There were very high incidents of disguised unemployment in the sector during 1950 and 1990. 3. **High Dependency on Rainfall**: Due to poor agricultural techniques, farmers depended largely on rainfall. There was minimum growth of this sector in the year that receives the least rainfall. 4. **Subsistence Farming**: It is the practice of growing crops only for one's own use without any surplus for trade. There were also very high incidents of subsistence farming. 5. **Outdated Technology**: There were many obsolete technologies and harvesting machines. harvesting was generally done manually and was very tedious. 6. **Conflicts between Tenant and Landlords**: Farmers were often a part of a critical contract that bound them to their landlords. Landlords used to extract huge amount of interest from farmers and deprived them of their necessities. 7. **Small Land Holdings**: Most of the land holdings of the farmers were small. Small land holding is a hindrance in the process of agricultural growth as farming can be carried out by only labour intensive techniques, i.e. use of machines becomes difficult. Moreover, farmers use their produce (which is obviously less due to small holdings) more for their own use rather for sale in the market. --- ## 2.7 **Policies for Growth of Agriculture** The measures undertaken to promote the growth in the agricultural sector can be broadly categorised as 'Land Reforms' and 'Green Revolution'. ``` |------------------------------------------------------------------|----------------------------------------------------------------------------------------------| | MEASURES TO PROMOTE GROWTH IN AGRICULTURAL SECTOR | |------------------------------------------------------------------|----------------------------------------------------------------------------------------------| | Land Reforms | Green Revolution | | (Involves change in ownership of landholdings through | (Refers to large increase in the production of food grains | | abolition of intermediaries and land ceiling) | due to the use of HYV seeds) | |------------------------------------------------------------------|----------------------------------------------------------------------------------------------| ``` **Land Reforms** Land Reforms primarily refer to change in the ownership of landholdings. Land reform measures have been introduced by various underdeveloped and developing countries, for attaining a rational land distribution pattern and viable farming structure. * There was a great need for land reforms in a country like India, where the majority of its population still depends on agriculture. * Land reforms were needed to achieve the objective of Equity in agriculture. **Abolition of Intermediaries** The Indian Government took various steps to abolish intermediaries and to make tillers the owners of the land. * **Aim behind 'Land to the Tiller'**: The idea behind this step was that ownership of the land would give incentives to the actual tiller's to make improvements and to increase output (provided sufficient capital was made available to them). Tenants do not have any incentive to make improvements on land since it is the owner of the land who benefits more from higher output. Ownership of land will enable the tiller to make a profit from the increased output. \*The importance of 'Land to the Tiller' can be justified with the following incident that happened in the former soviet union. ... Since farmers did not own any land they neither enjoyed the profits nor suffered the losses. In the absence of ownership rights, there was no incentive on their part to be efficient. * The abolition of intermediaries brought 200 lakh tenants into direct contact with the government. * The ownership rights granted to tenants gave them an incentive to increase the output and this contributed to growth in agriculture. *However, the goal of equity was not fully served by the abolition of intermediaries because of the following reasons:* (i) In some areas, the former zamindars continued to own large areas of land by making use of some loopholes in the legislation; (ii) In some cases, tenants were evicted and zamindars claimed to be self-cultivators; (iii) Even after getting the ownership of land, the poorest of the agricultural labourers did not benefit from land reforms. --- ## 2.8 Let us now discuss 'Land Ceiling', which was one of the very important measures towards land reforms in the country. **Land Ceiling** Land Ceiling refers to fixing the specified limit of land, which could be owned by an individual. * Beyond the specified limit, all land 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 the land ceiling was to reduce the concentration of land ownership in few hands. * Land ceiling helped to promote equity in the agricultural sector. * However, 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. **Conclusion** Land reforms were successful in Kerala and West Bengal because governments of these states were committed to the policy of land reforms. Unfortunately, other states did not have the same level of commitment and vast inequality in landholdings continued. **New Agricultural Strategy: Green Revolution in India** The new agricultural strategy was adopted in India during the Third Plan, i.e., during the 1960s. The traditional agricultural practices followed in India were gradually being replaced by modern technology and agricultural practices. The aim of this strategy was to raise agricultural production and productivity in selected regions of the country through the introduction of modern inputs like fertilizers, credit, marketing facilities, etc. **Green Revolution** At the time of independence, about 75% of the country's population was dependent on agriculture. * India's agriculture vitally depends on the monsoon and in case of a shortage of monsoon, the farmers had to face a lot of troubles. * Moreover, the productivity in the agricultural sector was very low due to the 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 permanently broken by the 'Green Revolution.' **Green Revolution refers to the large increase in the production of food grains due to the use of high yielding variety (HYV) or miracle seeds, especially for wheat and rice. Green Revolution is the spectacular advancement in the field of agriculture.** Dr. Norman E. Borlaug, an American agricultural scientist, is considered to be the 'Father of the Green Revolution'. He was awarded the Nobel Peace Prize in 1970 for breeding higher-yielding varieties. In India, it was mainly found by M.S. Swaminathan. --- ## 2.9 **More: Origin of Green Revolution** In the kharif season (1966), India adopted High Yielding Varieties Programme for the first time. The programme was successful due to: * High Yielding Varieties (HYV) of seeds; * Adequate irrigation facilities; * Application of fertilizers, pesticides, insecticides, etc. In this way new technology was gradually adopted in Indian agriculture. This new strategy is also popularly known as modern agricultural technology or Green Revolution. In the year 1967-68, food grain production increased by nearly 28.8% more than 1966-67 level. This success was attributed to the new agricultural strategy and India became self-sufficient in the production of food grains. **HYV Seeds: Main Reason for Agricultural Revolution** Agricultural revolution occurred primarily due to the miracle of new wonder seeds (high yielding varieties (HYV) of seeds), which raised agricultural yield per acre to incredible heights. * These seeds can be used in those places where there are adequate facilities for drainage and water supply. * As compared to other ordinary seeds, these seeds need heavy doses of chemical fertilizers (4 to 10 times more fertilizers) to get the largest possible production. * So, to derive benefit from HYV seeds indian farmers need to have:reliable irrigation facilities and financial resources. 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.Important Effects of Green Revolution **Important Effects of Green Revolution** 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. 1. **Attaining Marketable Surplus**: Green Revolution resulted in *Marketable Surplus*. Marketable or Marketed surplus refers to that part of agricultural produce which is sold in the market by the farmers after meeting their own consumption requirement. * Growth in agricultural outputmakes a difference to the economy only when large proportion of this increase is sold in the market. * Fortunately a good proportion of rice and wheat produced during the green revolution period was sold by the farmers in the market. --- ## 2.10 1. **Buffer Stock of Food Grains**: The green revolution enabled the government to procure sufficient amounts of food grains to build a stock which could in used in times of food shortage. 2. **Benefit to low-income groups**: As a large proportion of food grains was sold by the farms 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. **Risks Involved Under Green Revolution** The nation had immensely benefited from the technology, but it involved some Risks. 1. Risk of Pest Attack: The HYU crops were more Prone to attack by pests. 2. Risk of Increase in Income Inequalities: There was a risk that costly inputs(HYV) "However due *Government* gave a low interest rate which small farmers could also access" So it was found that the result after the input's had equaled the small to rich Therefore as a result this benefited both in equal parts **Debate over Subsidies to Agriculture** **Subsidy, in context of agriculture, means that farmers get inputs at prices lower than the market Prices**. In other words, Subsidy is the financial assistance provided by the government to Producers to fulfil its social welfare objectives. * During the initial phase's of The Green Revolution, New technology was looked upon as being risky by the famers. * So it was necessary for the *Government* to grant subsidies to provide an incentive for adoption of the new HYV Technology. * "However, with the passage of time there has been debate over the Huge Ammount of subsidies granted by the government. **Let us discuss Points in Favor and Against the grant of Subsidies.** **Economists in Favour of Subsidies**(1) 1. The*Government* should connote with Agriculture subsidies as farming in Indian Connote to Be a risky business ( --- ## 2.11 2. Majority of the farmers are very poor and they will not e able to afford the required inputs with out the Subsidies. 3. Eliminating Subsidies Will increase the income Inequality and it will violate the equality. in Breif" **Subsidies in India are necessary to Enable *Poor and Small Farmers* ** To make wise use of those Resources" Only allow *Poor Farmers to be a part of their Plan and not the fertilizer and Big Farmers.* Economic Against the subsidies 1. The Government Granted in Incentive for Adoption of New Technology", *It Should BE Phase Out once The Technology Has ben Seared.* """: *Subsidies do not the poor farmers and small farmers it goes to prosper farmers. therefore the Case of containing with the subsidies is because it dose not belong to that group" Some Imported" Observatorions! **PRICES AS SIGNALS** Price signal the Availability of prices of good When a good becomes Scarce its price goes up example Covid *Sanitizers, oxymeters' and it goes on* It is a signal less patrol and look for turnitive fuels. **Subsidies may lead wasteful use of those resource" An example "Electric"" Will use and *Free"" It will be wasted* When water gets super free they may grow *water*even there's no water for that water to grow ( The environment will be harmed" because the pesticide" ***Critical Appraisal of Agricultural Development (1950 -1990)*** Indian economy" inherited ""Land form", Green Revolution THE GREATEST Achi. --- ## 2.12 ## Between 1950 and 1990"