chapter 2-1950-1990 (2024).pdf

2 INDIAN ECONOMY 1950–1990 After studying this chapter, the learners will come to know the goals of India’s five year plans know about the development policies in different sectors such as agriculture and industry from 1950-...

2 INDIAN ECONOMY 1950–1990 After studying this chapter, the learners will come to know the goals of India’s five year plans know about the development policies in different sectors such as agriculture and industry from 1950-1990 learn to think about the merits and limitations of a regulated economy. 2024-25  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 2.1 INTRODUCTION answer in an economic system which, in their view, combined the best On 15 August 1947, India woke to a features of socialism without its new dawn of freedom. Finally we were drawbacks. In this view, India would masters of our own destiny after be a socialist society with a strong some two hundred years of British public sector but also with private rule; the job of nation building was property and democracy; the government now in our own hands. The leaders would plan (see Box 2.2) for the of independent India had to decide, among other things, the type of economic system most suitable for Work These Out our nation, a system which would promote the welfare of all rather than Ø Prepare a chart on the a few. There are different types of different types of economic systems prevalent in the economic systems (see Box 2.1) and world. List out the countries among them, socialism appealed to as capitalist, socialist and Jawaharlal Nehru the most. However, mixed economy. he was not in favour of the kind of socialism established in the former Ø Plan a class trip to an Soviet Union where all the means of agriculture farm. Divide the class into seven groups with production, i.e. all the factories and each group to plan a specific farms in the country, were owned by goal, for example, the the government. There was no private purpose of the visit, money property. It is not possible in a expenditure involved, time democracy like India for the taken, resources, people government to change the ownership accompanying the group pattern of land and other properties and who need to be of its citizens in the way that it was contacted, possible places done in the former Soviet Union. of visit, possible questions Nehru, and many other leaders and to be asked etc. Now, with the help of your teacher, thinkers of the newly independent compile these specific goals India, sought an alternative to the and compare with long-term extreme versions of capitalism and goals of successful visit to socialism. Basically sympathising with an agricultural farm. the socialist outlook, they found the INDIAN ECONOMY 1950-1990 17 2024-25  Box 2.1: Types of Economic Systems Every society has to answer three questions Ø What goods and services should be produced in the country? Ø Howshould the goods and services be produced? Should producers use more human labour or more capital (machines) for producing things? ØHow should the goods and services be distributed among people? One answer to these questions is to depend on the market forces of supply and demand. In a market economy, also called capitalism, only those consumer goods will be produced that are in demand, i.e., goods that can be sold profitably either in the domestic or in the foreign markets. If cars are in demand, cars will be produced and if bicycles are in demand, bicycles will be produced. If labour is cheaper than capital, more labour-intensive methods of production will be used and vice-versa. 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. That is, one has to have the money in the pocket to buy it. 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. As a result this commodity will not be produced and supplied as per market forces. 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. A socialist society answers the three questions in a totally different manner. 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 and how they should be distributed. In principle, distribution under socialism is supposed to be based on what people need and not on what they can afford to purchase. Unlike under capitalism, for example, a socialist nation provides free health care to all its citizens. Strictly, a socialist society has no private property since everything is owned by the state. In Cuba and China, for example, most of the economic activities are governed by the socialistic principles. 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. 18 INDIAN ECONOMIC DEVELOPMENT 2024-25  Box 2.2: 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 were of five years duration and were 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. It will be unrealistic to expect all the goals of a plan to be 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, a very difficult job indeed. We find different goals being emphasised in different plans in India. India’s five year plans did 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. economy with the private sector being of the goals is to be given primary encouraged to be part of the plan effort. importance. Nevertheless, the planners The ‘Industrial Policy Resolution’ of have to ensure that, as far as possible, 1948 and the Directive Principles of the policies of the plans do not the Indian Constitution reflected contradict these four goals. Let us now this outlook. In 1950, the Planning learn about the goals of planning in Commission was set up with the some detail. Prime Minister as its Chairperson. The era of five year plans had begun. Growth: It refers to increase in the country’s capacity to produce the 2.2 THE GOALS OF FIVE YEAR PLANS output of goods and services within A plan should have some clearly the country. It implies either a specified goals. The goals of the five larger stock of productive capital, year plans were: growth, modernisation, or a larger size of supporting self-reliance and equity. This does not services like transport and mean that all the plans have given banking, or an increase in the equal importance to all these goals. efficiency of productive capital and Due to limited resources, a choice has services. A good indicator of to be made in each plan about which economic growth, in the language of INDIAN ECONOMY 1950-1990 19 2024-25  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. Source: Sukhamoy Chakravarty, ‘Mahalanobis, Prasanta Chandra’ in John Eatwell et.al, (Eds.) The New Palgrave Dictionary: Economic Development, W.W. Norton, New York and London. 20 INDIAN ECONOMIC DEVELOPMENT 2024-25  Box 2.4: 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 which will be discussed in chapter 3). economics, is steady increase in the the producers have to adopt new Gross Domestic Product (GDP). The technology. For example, a farmer can GDP is the market value of all the increase the output on the farm by final goods and services produced in using new seed varieties instead of the country during a year. You have using the old ones. Similarly, a factory studied this concept in Class X as can increase output by using a new well. You can think of the GDP as a type of machine. Adoption of new cake and growth is increase in the technology is called modernisation. size of the cake. If the cake is larger, However, modernisation does not more people can enjoy it. It is refer only to the use of new technology necessary to produce more goods but also to changes in social outlook and services if the people of India are such as the recognition that women to enjoy (in the words of the First Five should have the same rights as men. In Year Plan) a more rich and varied life. a traditional society, women are The GDP of a country is derived supposed to remain at home while men from the different sectors of the work. A modern society makes use of economy, namely the agricultural the talents of women in the work place sector, the industrial sector and the — in banks, factories, schools etc. — service sector. The contribution and such a society in most occassions made by each of these sectors makes is also prosperous. up the structural composition of the economy. In some countries, Self-reliance: A nation can promote growth in agriculture contributes economic growth and modernisation more to the GDP growth, while in by using its own resources or by some countries the growth in the using resources imported from other service sector contributes more to nations. The first seven five year plans GDP growth (see Box 2.4). gave importance to self-reliance which means avoiding imports Modernisation: To increase the of those goods which could be production of goods and services INDIAN ECONOMY 1950-1990 21 2024-25  Work These Out Ø Discuss in your class the changes in technology used for (a) Production of food grains (b) Packaging of products (c) Mass communication Ø Find out and prepare a list of major items that India imported and exported during 1990-91 and 2018-19. (For this, see P. 145 also). (a) Observe the difference (b) Do you see the impact of self-reliance? Discuss. For getting these details you may refer to Economic Survey of the latest year. produced in India itself. This policy needs such as food, a decent house, was considered a necessity in order to education and health care and reduce our dependence on foreign inequality in the distribution of wealth countries, especially for food. It is should be reduced. understandable that people who were Let us now see how the first seven recently freed from foreign domination five year plans, covering the period should give importance to self- 1950-1990, attempted to attain these reliance. Further, it was feared that four goals and the extent to which dependence on imported food they succeeded in doing so, with supplies, foreign technology and reference to agriculture, industry foreign capital may make India’s and trade. You will study the policies sovereignty vulnerable to foreign and developmental issues taken up interference in our policies. after 1991 in Chapter 3. Equity: Now growth, modernisation 2.3 AGRICULTURE and self-reliance, by themselves, may not improve the kind of life which You have learnt in Chapter 1 that people are living. A country can have during the colonial rule there was high growth, the most modern neither growth nor equity in the technology developed in the country agricultural sector. The policy makers itself, and also have most of its people of independent India had to address living in poverty. It is important to these issues which they did through ensure that the benefits of economic land reforms and promoting the use prosperity reach the poor sections as of ‘High Yielding Variety’ (HYV) seeds well instead of being enjoyed only by which ushered in a revolution in the rich. So, in addition to growth, Indian agriculture. modernisation and self-reliance, Land Reforms: At the time of equity is also important. Every Indian independence, the land tenure system should be able to meet his or her basic was characterised by intermediaries 22 INDIAN ECONOMIC DEVELOPMENT 2024-25  Box 2.5: Ownership and Incentives The policy of ‘land to the tiller’ is based on the idea that the cultivators will take more interest — they will have more incentive — in increasing output if they are the owners of the land. This is because ownership of land enables the tiller to make profit from the increased output. Tenants do not have the incentive to make improvements on land since it is the landowner who would benefit more from higher output. The importance of ownership in providing incentives is well illustrated by the carelessness with which farmers in the former Soviet Union used to pack fruits for sale. It was not uncommon to see farmers packing rotten fruits along with fresh fruits in the same box. Now, every farmer knows that the rotten fruits will spoil the fresh fruits if they are packed together. This will be a loss to the farmer since the fruits cannot be sold. So why did the Soviet farmers do something which would so obviously result in loss for them? The answer lies in the incentives facing the farmers. Since farmers in the former Soviet Union did not own any land, they neither enjoyed the profits nor suffered the losses. In the absence of ownership, there was no incentive on the part of farmers to be efficient, which also explains the poor performance of the agricultural sector in the Soviet Union despite availability of vast areas of highly fertile land. Source: Thomas Sowell, Basic Economics: A Citizen’s Guide to the Economy, New York: Basic Books, 2004, Second Edition. (variously called zamindars, jagirdars Land ceiling was another policy to etc.) who merely collected rent from promote equity in the agricultural the actual tillers of the soil without sector. This means fixing the maximum contributing towards improvements size of land which could be owned by on the farm. The low productivity of an individual. The purpose of land the agricultural sector forced India to ceiling was to reduce the concentration import food from the United States of of land ownership in a few hands. America (U.S.A.). Equity in agriculture The abolition of intermediaries called for land reforms which primarily meant that some 200 lakh tenants refer to change in the ownership of came into direct contact with the landholdings. Just a year after government — they were thus independence, steps were taken to freed from being exploited by the abolish intermediaries and to make the zamindars. The ownership conferred tillers the owners of land. The idea on tenants gave them the incentive to behind this move was that ownership increase output and this contributed of land would give incentives (see Box to growth in agriculture. However, the 2.5) to the tillers to invest in making goal of equity was not fully served improvements provided sufficient by abolition of intermediaries. In capital was made available to them. some areas the former zamindars INDIAN ECONOMY 1950-1990 23 2024-25 continued to own large areas of land monsoon and if the monsoon fell short by making use of some loopholes in the farmers were in trouble unless the legislation; there were cases they had access to irrigation facilities where tenants were evicted and the which very few had. The stagnation in landowners claimed to be self- agriculture during the colonial rule cultivators (the actual tillers), claiming was permanently broken by the green ownership of the land; and even when revolution. This refers to the large the tillers got ownership of land, the increase in production of food grains poorest of the agricultural labourers resulting from the use of high yielding (such as sharecroppers and landless variety (HYV) seeds especially for labourers) did not benefit from land wheat and rice. The use of these seeds reforms. required the use of fertiliser and The land ceiling legislation also pesticide in the correct quantities as faced hurdles. The big landlords well as regular supply of water; the challenged the legislation in the application of these inputs in correct courts, delaying its implementation. proportions is vital. The farmers who They used this delay to register their could benefit from HYV seeds required lands in the name of close relatives, reliable irrigation facilities as well as thereby escaping from the the financial resources to purchase legislation. The legislation also had fertiliser and pesticide. As a result, in a lot of loopholes which were the first phase of the green revolution exploited by the big landholders to (approximately mid 1960s upto mid retain their land. Land reforms were 1970s), the use of HYV seeds was s u c c e s s f u l i n K e r a l a a n d We s t restricted to the more affluent states Bengal because these states had such as Punjab, Andhra Pradesh and governments committed to the policy Tamil Nadu. Further, the use of HYV of land to the tiller. Unfortunately seeds primarily benefited the wheat- other states did not have the same growing regions only. In the second level of commitment and vast phase of the green revolution inequality in landholding continues (mid-1970s to mid-1980s), the HYV to this day. technology spread to a larger number of states and benefited more variety The Green Revolution: At of crops. The spread of green independence, about 75 per cent of revolution technology enabled India the country’s population was to achieve self-sufficiency in food dependent on agriculture. grains; India no longer had to be Productivity in the agricultural sector at the mercy of America, or any was very low because of the use of old other nation, for meeting its food technology and the absence of requirements. required infrastructure for the vast Growth in agricultural output is majority of farmers. India’s important but it is not enough. If a agriculture vitally depends on the large proportion of this increase is 24 INDIAN ECONOMIC DEVELOPMENT 2024-25 consumed by the farmers themselves percentage of their income on food, instead of being sold in the market, benefited from this decline in relative the higher output will not make much prices. The green revolution enabled of a difference to the economy as a the government to procure sufficient whole. If, on the other hand, a amount of food grains to build a stock substantial amount of agricultural which could be used in times of food produce is sold in the market by the shortage. farmers, the higher output can make While the nation had immensely a difference to the economy. The benefited from the green revolution, the portion of agricultural produce which technology involved was not free from is sold in the market by the farmers risks. One such risk was the possibility is called marketed surplus. A good that it would increase the disparities proportion of the rice and wheat between small and big farmers—since produced during the green revolution only the big farmers could afford the period (available as marketed required inputs, thereby reaping most surplus) was sold by the farmers in of the benefits of the green revolution. the market. As a result, the price of Moreover, the HYV crops were also more food grains declined relative to other prone to attack by pests and the small items of consumption. The low- farmers who adopted this technology income groups, who spend a large could lose everything in a pest attack. INDIAN ECONOMY 1950-1990 25 2024-25  Fortunately, these fears did not should be phased out since their come true because of the steps taken purpose has been served. Further, by the government. The government subsidies are meant to benefit the provided loans at a low interest rate farmers but a substantial amount of to small farmers and subsidised fertiliser subsidy also benefits the fertilisers so that small farmers could f e r t i l ise r i n d u s t r y ; a n d a m o n g also have access to the needed farmers, the subsidy largely benefits inputs. Since the small farmers could the farmers in the more prosperous obtain the required inputs, the regions. Therefore, it is argued that output on small farms equalled the there is no case for continuing with output on large farms in the course of time. As a result, the green fertiliser subsidies; it does not benefit revolution benefited the small as well the target group and it is a huge as rich farmers. The risk of the small burden on the government’s finances farmers being ruined when pests (see also Box 2.6). attack their crops was considerably On the other hand, some believe reduced by the services rendered by that the government should continue research institutes established by the with agricultural subsidies because government. You should note that farming in India continues to be a risky the green revolution would have business. Most farmers are very poor favoured the rich farmers only if the and they will not be able to afford the state did not play an extensive role required inputs without subsidies. in ensuring that the small farmer Eliminating subsidies will increase the also gains from the new technology. inequality between rich and poor farmers and violate the goal of equity. The Debate Over Subsidies: The These experts argue that if subsidies economic justification of subsidies in are largely benefiting the fertiliser agriculture is, at present, a hotly industry and big farmers, the correct debated question. It is generally policy is not to abolish subsidies but agreed that it was necessary to use to take steps to ensure that only the subsidies to provide an incentive for poor farmers enjoy the benefits. adoption of the new HYV technology by farmers in general and small Thus, by the late 1960s, Indian far mers in particular. Any new agricultural productivity had increased technology will be looked upon as sufficiently to enable the country to be being risky by farmers. Subsidies self-sufficient in food grains. This is an were, therefore, needed to encourage achievement to be proud of. On the farmers to test the new technology. negative side, some 65 per cent of the Some economists believe that once country’s population continued to be the technology is found profitable employed in agriculture even as late as and is widely adopted, subsidies 1990. Economists have found that as 26 INDIAN ECONOMIC DEVELOPMENT 2024-25  Box 2.6: Prices as Signals You would have learnt in an earlier class about how prices of goods are determined in the market. It is important to understand that prices are signals about the availability of goods. If a good becomes scarce, its price will rise and those who use this good will have the incentive to make efficient decisions about its use based on the price. If the price of water goes up because of lower supply, people will have the incentive to use it with greater care; for example, they may stop watering the garden to conserve water. We complain whenever the price of petrol increases and blame it on the government. But the increase in petrol price reflects greater scarcity and the price rise is a signal that less petrol is available— this provides an incentive to use less petrol or look for alternate fuels. Some economists point out that subsidies do not allow prices to indicate the supply of a good. When electricity and water are provided at a subsidised rate or free, they will be used wastefully without any concern for their scarcity. Farmers will cultivate water intensive crops if water is supplied free, although the water resources in that region may be scarce and such crops will further deplete the already scarce resources. If water is priced to reflect scarcity, farmers will cultivate crops suitable to the region. Fertiliser and pesticide subsidies result in overuse of resources which can be harmful to the environment. Subsidies provide an incentive for wasteful use of resources. Think about subsidies in terms of incentives and ask yourself whether it is wise from the economic viewpoint to provide free electricity to farmers. a nation becomes more prosperous, the sector. Many economists call this an proportion of GDP contributed by important failure of our policies agriculture as well as the proportion of followed during 1950-1990. population working in the sector declines considerably. In India, 2.4 INDUSTRY AND TRADE between 1950 and 1990, the Economists have found that poor proportion of GDP contributed by nations can progress only if they have agriculture declined significantly but a good industrial sector. Industry not the population depending on it provides employment which is more (67.5 per cent in 1950 to 64.9 per cent stable than the employment in by 1990). Why was such a large agriculture; it promotes modernisation proportion of the population engaged and overall prosperity. It is for this in agriculture although agricultural reason that the five year plans placed output could have grown with much a lot of emphasis on industrial less people working in the sector? The d e v e l o p m e n t. Yo u m i g h t h a v e answer is that the industrial sector and studied in the previous chapter that, the service sector did not absorb the at the time of independence, the people working in the agricultural variety of industries was very narrow INDIAN ECONOMY 1950-1990 27 2024-25  Work These Out Ø A group of students may visit an agricultural farm, prepare a case study on the method of farming used, that is, types of seeds, fertilisers, machines, means of irrigation, cost involved, marketable surplus and income earned. It will be beneficial if the changes in cultivation methods could be collected from an elderly member of the farming family (a) Discuss the findings in your class. (b) The different groups can then prepare a chart showing variations in cost of production, productivity, use of seeds, fertilisers, means of irrigation, time taken, marketable surplus and income of the family. Ø Collect newspaper cuttings related to the World Bank, International Monetary Fund, World Trade Organisation (and meets of G7, G8, G10 countries). Discuss the views shared by the developed and developing countries on farm subsidies. Ø Prepare pie charts on the occupational structure of the Indian economy available in the following table. Discuss the possible reasons for the change in the shape of pies. Sector 1950–51 1990–91 Agriculture 72.1 66.8 Industry 10.7 12.7 Services 17.2 20.5 Ø Study the arguments for and against agricultural subsidies. What is your view on this issue? Ø Some economists argue that farmers in other countries, particularly developed countries, are provided with high amount of subsidies and are encouraged to export their produce to other countries. Do you think our farmers will be able to compete with farmers from developed countries? Discuss. — largely confined to cotton textiles Public and Private Sectors in Indian and jute. There were two well- Industrial Development: The big managed iron and steel firms — one question facing the policy makers was in Jamshedpur and the other in — what should be the role of the Kolkata — but, obviously, we needed government and the private sector in to expand the industrial base with a industrial development? At the time of variety of industries if the economy independence, Indian industrialists did was to grow. not have the capital to undertake 28 INDIAN ECONOMIC DEVELOPMENT 2024-25 investment in industrial ventures Although there was a category of required for the development of Indian industries left to the private sector, economy; nor was the market big the sector was kept under state enough to encourage industrialists to control through a system of licenses. undertake major projects even if they No new industry was allowed unless had the capital to do so. It is principally a license was obtained from the for these reasons that the erstwhile government. This policy was used for governments had to play an extensive promoting industry in backward role in promoting the industrial sector. regions; it was easier to obtain a In addition, the decision to develop the license if the industrial unit was Indian economy on socialist lines led established in an economically to the policy of the government controlling the commanding heights of backward area. In addition, such the economy, as the Second Five Year units were given certain concessions plan put it. This meant that the such as tax benefits and electricity government would have complete at a lower tariff. The purpose of this control of those industries that were policy was to promote regional vital for the economy. The policies of the equality. private sector would have to be Even an existing industry had to complimentary to those of the public obtain a license for expanding sector, with the public sector leading output or for diversifying production the way. (producing a new variety of goods). Industrial Policy Resolution 1956 This was meant to ensure that the (IPR 1956): In accordance with the quantity of goods produced was not goal of the state controlling the more than what the economy commanding heights of the economy, required. License to expand the Industrial Policy Resolution of production was given only if the 1956 was adopted. This resolution government was convinced that the formed the basis of the Second Five economy required a larger quantity Year Plan, the plan which tried to of goods. build the basis for a socialist pattern of society. This resolution classified Small-Scale Industry: In 1955, the industries into three categories. The Village and Small-Scale Industries first category comprised industries Committee, also called the Karve which would be exclusively owned by Committee, noted the possibility of the government; the second category using small-scale industries for consisted of industries in which the private sector could supplement the promoting rural development. A efforts of the public sector, with the ‘small-scale industry’ is defined with government t a k i n g t h e s o l e reference to the maximum invest- responsibility for starting new units; ment allowed on the assets of a unit. the third category consisted of the This limit has changed over a period remaining industries which were to o f t i m e. In 1950 a small -scale be in the private sector. industrial unit was one which invested INDIAN ECONOMY 1950-1990 29 2024-25 a maximum of rupees five lakh; at imported goods; they make imported present the maximum investment goods more expensive and discourage allowed is rupees one crore. their use. Quotas specify the quantity It is believed that small-scale of goods which can be imported. The industries are more ‘labour intensive’ effect of tariffs and quotas is that they i.e., they use more labour than the restrict imports and, therefore, protect large-scale industries and, therefore, the domestic firms from foreign generate more employment. But these competition. industries cannot compete with the big The policy of protection was based industrial firms; it is obvious that on the notion that industries of development of small-scale industry developing countries were not in a requires them to be shielded from the position to compete against the large firms. For this purpose, the goods produced by more developed production of a number of products economies. It was assumed that if the was reserved for the small-scale domestic industries were protected industry; the criterion of reservation they would learn to compete in the being the ability of these units to course of time. Our planners also manufacture the goods. They were also feared the possibility of foreign given concessions such as lower excise exchange being spent on import of duty and bank loans at lower interest luxury goods if no restrictions were rates. placed on imports. Nor was any serious thought given to promote 2.5 TRADE POLICY: IMPORT SUBSTITUTION exports until the mid-1980s. T h e i n d u s t r i a l p o l i c y t h a t India Effect of Policies on Industrial adopted was closely related to the Development: The achievements of trade policy. In the first seven plans, India’s industrial sector during the trade was characterised by what is first seven plans are impressive commonly called an inward looking indeed. T h e p r o p o r t i o n o f G D P trade strategy. Technically, this contributed by the industrial strategy is called import substi- sector increased in the period from tution. This policy aimed at replacing 13 per cent in 1950-51 to 24.6 per cent or substituting imports with domestic i n 1 9 9 0 -9 1. T h e r i s e i n t h e production. For example, instead of industry’s share of GDP is an importing vehicles made in a foreign important indicator of development. country, industries would be The six per cent annual growth rate encouraged to produce them in India of the industrial sector during the itself. In this policy the government period is commendable. No longer protected the domestic industries was Indian industry restricted largely from foreign competition. Protection to cotton textiles and jute; in fact, the from imports took two forms: tariffs industrial sector became well and quotas. Tariffs are a tax on diversified by 1990, largely due to 30 INDIAN ECONOMIC DEVELOPMENT 2024-25  Work These Out Ø Construct a pie chart for the following table on sectoral contribution to GDP and discuss the difference in the contribution of the sectors in the light of effects of development during 1950-91. Sector 1950-51 1990-91 Agriculture 59.0 34.9 Industry 13.0 24.6 Services 28.0 40.5 Ø Conduct a debate in your classroom on the usefulness of Public Sector Undertakings (PSUs) by dividing the class into two groups. One group may speak in favour of PSUs and the other group against the motion (involve as many students as possible and encourage them to give examples). the public sector. The promotion was required in a big way. It is now of s m a l l - s c a l e i n d u s t r i e s gave widely held that state enterprises opportunities to those people who did continued to produce certain goods not have the capital to start large and services (often monopolising firms to get into business. Protection them) although this was no longer from foreign competition enabled the required. An example is the provision development of indigenous industries of telecommunication service. This in the areas of electronics and industry continued to be reserved for automobile sectors which otherwise the Public Sector even after it was could not have developed. realised that private sector firms In spite of the contribution made could also provide it. Due to the by the public sector to the growth of absence of competition, even till the the Indian economy, some economists late 1990s, one had to wait for a long are critical of the performance of time to get a telephone connection. many public sector enterprises. It was Another instance could be the proposed at the beginning of this establishment of Modern Bread, a chapter that initially public sector bread-manufacturing firm, as if the INDIAN ECONOMY 1950-1990 31 2024-25 private sector could not manufacture regulation of what came to be called the bread! In 2001 this firm was sold to permit license raj prevented certain the private sector. The point is that firms from becoming more efficient. after four decades of Planned More time was spent by industrialists development of Indian Economy no in trying to obtain a license or lobby distinction was made between (i) what with the concerned ministries rather the public sector alone can do and than on thinking about how to improve (ii) what the private sector can also their products. do. For example, even now only the The protection from foreign public sector supplies national competition was also being criticised defense. And even though the private on the ground that it continued even sector can manage hotels well, yet, after it proved to do more harm than the government also runs hotels. This good. Due to restrictions on imports, has led some scholars to argue that the Indian consumers had to the state should get out of areas purchase whatever the Indian which the private sector can manage producers produced. The producers and the government may concentrate were aware that they had a captive its resources on important services market; so they had no incentive to which the private sector cannot improve the quality of their goods. provide. Why should they think of improving Many public sector firms incurred quality when they could sell low huge losses but continued to quality items at a high price? function because it is difficult to close Competition from imports forces our a government undertaking even if it producers to be more efficient. is a drain on the nation’s limited A few economists also point out resources. This does not mean that that the public sector is not meant private firms are always profitable for earning profits but to promote the (indeed, quite a few of the public welfare of the nation. The public sector firms were originally private sector firms, on this view, should be firms which were on the verge of evaluated on the basis of the extent closure due to losses; they were then to which they contribute to the welfare nationalised to protect the jobs of the of people and not on the profits they workers). However, a loss-making earn. Regarding protection, some private firm will not waste resources economists hold that we should by being kept running despite the protect our producers from foreign losses. competition as long as the rich The need to obtain a license to start nations continue to do so. Owing to an industry was misused by all these conflicts, economists called industrial houses; a big industrialist for a change in our policy. This, would get a license not for starting a alongwith other problems, led the new firm but to prevent competitors government to introduce a new from starting new firms. The excessive economic policy in 1991. 32 INDIAN ECONOMIC DEVELOPMENT 2024-25 2.6 CONCLUSION entrepreneurship. In the name of self- reliance, Indian producers were The progress of the Indian economy protected against foreign competition during the first seven plans was and this did not give them the impressive indeed. Our industries became far more diversified compared incentive to improve the quality of to the situation at independence. India goods that they produced. Indian became self- suf ficient in food policies were ‘inward oriented’ that production thanks to the green failed to develop a strong export revolution. Land reforms resulted in sector. The need for r e f o r m of abolition of the hated zamindari economic policy was widely felt in the system. In industrial sector, many context of changing global economic economists became dissatisfied with scenario, and the new economic policy the performance of many public sector was initiated in 1991 to make enterprises. Excessive government Indian economy more efficient. This is regulation prevented growth of the subject of the next chapter. Recap Ø After independence, India envisaged an economic system which combines the best features of socialism and capitalism — this culminated in the mixed economy model. Ø All the economic planning has been formulated through five year plans. Ø Common goals of five year plans are growth, modernisation, self-sufficiency and equity. Ø The major policy initiatives in agriculture sector were land reforms and green revolution. These initiatives helped India to become self-sufficient in food grains production. Ø The proportion of people depending on agriculture did not decline as expected. Ø Import substitution policy initiatives in the industrial sector raised its contribution to GDP. Ø 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. INDIAN ECONOMY 1950-1990 33 2024-25  EXERCISES 1. Define a plan. 2. Why did India opt for planning? 3. Why should plans have goals? 4. What are High Yielding Variety (HYV) seeds? 5. What is marketable surplus? 6. Explain the need and type of land reforms implemented in the agriculture sector. 7. What is Green Revolution? Why was it implemented and how did it benefit the farmers? Explain in brief. 8. Explain ‘growth with equity’ as a planning objective. 9. Does modernisation as a planning objective create contradiction in the light of employment generation? Explain. 10. Why was it necessary for a developing country like India to follow self-reliance as a planning objective? 11. What is sectoral composition of an economy? Is it necessary that the service sector should contribute maximum to GDP of an economy? Comment. 12. Why was public sector given a leading role in industrial development during the planning period? 13. Explain the statement that green revolution enabled the government to procure sufficient food grains to build its stocks that could be used during times of shortage. 14. While subsidies encourage farmers to use new technology, they are a huge burden on government finances. Discuss the usefulness of subsidies in the light of this fact. 15. Why, despite the implementation of green revolution, 65 per cent of India’s population continued to be engaged in the agriculture sector till 1990? 16. Though public sector is very essential for industries, many public sector undertakings incur huge losses and are a drain on the economy’s resources. Discuss the usefulness of public sector undertakings in the light of this fact. 34 INDIAN ECONOMIC DEVELOPMENT 2024-25  17. Explain how import substitution can protect domestic industry. 18. Why and how was private sector regulated under the IPR 1956? 19. Match the following: 1. Prime Minister A. Seeds that give large proportion of output 2. Gross Domestic B. Quantity of goods that can be imported Product 3. Quota C. Chairperson of the planning commission 4. Land Reforms D. The money value of all the final goods and services produced within the economy in one year 5. HYV Seeds E. Improvements in the field of agriculture to increase its productivity 6. Subsidy F. The monetary assistance given by go v e r n m e n t f o r p r o d u c t i o n activities. REFERENCES B HAGWATI , J. 1993. India in T ransition: Freeing the Economy. Oxford University Press, Delhi. D ANDEKAR, V.M. 2004. Forty Years After Independence, in Bimal Jalan, (Ed.). The Indian Economy: Problems and Prospects. Penguin, Delhi. J OSHI, V IJAY. and I.M.D. LITTLE. 1996. India’s Economic Reforms 1991-2001. Oxford University Press, Delhi. M OHAN, RAKESH. 2004. Industrial Policy and Controls, in Bimal Jalan (Ed.). The Indian Economy: Problems and Prospects. Penguin, Delhi. R AO, C.H. HANUMANTHA. 2004. Agriculture: Policy and Performance, in Bimal Jalan, (Ed.). The Indian Economy: Problems and Prospects. Penguin, Delhi. INDIAN ECONOMY 1950-1990 35 2024-25