NCERT-Class-11-Economics.pdf

 CONTENTS FOREWORD iii UNIT I : DEVELOPMENT POLICIES AND EXPERIENCE (1947-1990) 1-35 CHAPTER 1: INDIAN ECONOMY ON THE EVE OF INDEPENDENCE...

 CONTENTS FOREWORD iii UNIT I : DEVELOPMENT POLICIES AND EXPERIENCE (1947-1990) 1-35 CHAPTER 1: INDIAN ECONOMY ON THE EVE OF INDEPENDENCE 3 – LOW LEVEL OF ECONOMIC DEVELOPMENT UNDER THE COLONIAL RULE 4 – A GRICULTURAL S ECTOR 5 – INDUSTRIAL SECTOR 7 – F OREIGN TRADE 8 – D EMOGRAPHIC C ONDITION 9 – O CCUPATIONAL S TRUCTURE 10 – I NFRASTRUCTURE 11 CHAPTER 2 : INDIAN ECONOMY 1950-1990 16 – THE GOALS OF FIVE YEAR PLANS 19 – A GRICULTURE 22 – INDUSTRY AND TRADE 27 – TRADE POLICY: IMPORT SUBSTITUTION 30 UNIT II : ECONOMIC REFORMS SINCE 1991 36-56 CHAPTER 3 : LIBERALISATION, PRIVATISATION AND GLOBALISATION : AN APPRAISAL 38 – BACKGROUND 39 – LIBERALISATION 41 – PRIVATISATION 44 – G LOBALISATION 45 – INDIAN ECONOMY DURING REFORMS: AN ASSESSMENT 48 UNIT III: CURRENT CHALLENGES FACING THE INDIAN ECONOMY 57-178 CHAPTER 4 : POVERTY 59 – WHO ARE THE POOR? 60 – HOW ARE POOR PEOPLE IDENTIFIED? 63 – THE NUMBER OF POOR IN INDIA 66  – WHAT CAUSES P OVERTY? 68 – POLICIES AND PROGRAMMES TOWARDS POVERTY ALLEVIATION 72 – POVERTY ALLEVIATION PROGRAMMES — A CRITICAL ASSESSMENT 75 CHAPTER 5 : HUMAN CAPITAL FORMATION IN INDIA 82 – WHAT IS HUMAN CAPITAL? 84 – SOURCES OF HUMAN CAPITAL 84 – HUMAN CAPITAL AND HUMAN DEVELOPMENT 90 – HUMAN CAPITAL FORMATION IN INDIA: GREAT PROSPECTS 91 – EDUCATION SECTOR IN INDIA 92 – FUTURE PROSPECTS 94 CHAPTER 6 : RURAL DEVELOPMENT 99 – WHAT IS RURAL DEVELOPMENT? 100 – CREDIT AND MARKETING IN RURAL AREAS 101 – AGRICULTURAL MARKET SYSTEM 104 – DIVERSIFICATION INTO PRODUCTIVE ACTIVITIES 106 – SUSTAINABLE DEVELOPMENT AND ORGANIC FARMING 110 CHAPTER 7 : EMPLOYMENT: GROWTH, INFORMALISATION AND OTHER ISSUES 116 – WORKERS AND E MPLOYMENT 118 – PARTICIPATION OF PEOPLE IN EMPLOYMENT 119 – SELF-EMPLOYED AND HIRED WORKERS 120 – EMPLOYMENT IN FIRMS, FACTORIES AND OFFICES 123 – GROWTH AND CHANGING STRUCTURE OF EMPLOYMENT 124 – INFORMALISATION OF INDIAN WORKFORCE 127 – UNEMPLOYMENT 130 – GOVERNMENT AND EMPLOYMENT G ENERATION 132 CHAPTER 8 : INFRASTRUCTURE 139 – WHAT IS INFRASTRUCTURE? 140 – RELEVANCE OF INFRASTRUCTURE 141 – THE STATE OF INFRASTRUCTURE IN INDIA 141 – ENERGY 144 – HEALTH 149 xii CHAPTER 9 : ENVIRONMENT AND SUSTAINABLE DEVELOPMENT 162 – ENVIRONMENT — DEFINITION AND FUNCTIONS 163 – STATE OF INDIA’S ENVIRONMENT 167 – S USTAINABLE D EVELOPMENT 171 – STRATEGIES FOR SUSTAINABLE DEVELOPMENT 172 UNIT IV : DEVELOPMENT EXPERIENCES OF INDIA : A COMPARISON 179-197 WITH NEIGHBOURS CHAPTER 10 : COMPARATIVE DEVELOPMENT EXPERIENCES OF 181 INDIA AND ITS NEIGHBOURS – DEVELOPMENTAL PATH — A SNAPSHOT VIEW 182 – D EMOGRAPHIC INDICATORS 185 – GROSS DOMESTIC PRODUCT AND SECTORS 186 – INDICATORS OF HUMAN DEVELOPMENT 189 – DEVELOPMENT STRATEGIES — AN APPRAISAL 190 GLOSSARY 198-206 xiii  UNIT I DEVELOPMENT POLICIES AND EXPERIENCE (1947-90) The two chapters in this unit give us an overview of the state of the Indian economy as it was at the eve of independence till after four decades of planned development, which was a path that India chose. This meant that the Government of India had to take a series of steps such as the establishment of the Planning Commission and announcement of five year plans. An overview of the goals of five year plans and a critical appraisal of the merits and limitations of planned development has been covered in this unit.  1 INDIAN ECONOMY ON THE EVE OF INDEPENDENCE After studying this chapter, the learners will become familiar with the state of the Indian economy in 1947, the year of India’s Independence understand the factors that led to the underdevelopment and stagnation of the Indian economy.  “India is the pivot of our Empire... If the Empire loses any other part of its Dominion we can survive, but if we lose India, the sun of our Empire will have set.” Victor Alexander Vruce, the Viceroy of British India in 1894 1.1 INTRODUCTION rapidly expanding modern industrial The primary objective of this book, base. An understanding of the Indian Economic Development, is to exploitative nature of this relationship familiarise you with the basic features is essential for any assessment of the of the Indian economy, and its kind and level of development which development, as it is today, in the the Indian economy has been able to aftermath of Independence. However, it attain over the last six decades. is equally important to know something about the country’s economic past even 1.2 LOW LEVEL OF ECONOMIC as you learn about its present state and DEVELOPMENT UNDER THE future prospects. So, let us first look at COLONIAL RULE the state of India’s economy prior to the India had an independent economy country’s independence and form an before the advent of the British rule. idea of the various considerations that Though agriculture was the main shaped India’s post-independence source of livelihood for most people, development strategy. yet, the country’s economy was The structure of India’s present- characterised by various kinds of day economy is not just of current manufacturing activities. India was making; it has its roots steeped in particularly well known for its history, particularly in the period when handicraft industries in the fields of India was under British rule which cotton and silk textiles, metal and lasted for almost two centuries before precious stone works etc. These India finally won its independence on products enjoyed a worldwide market 15 August 1947. The sole purpose of based on the reputation of the fine the British colonial rule in India was quality of material used and the high to reduce the country to being a feeder standards of craftsmanship seen in all economy for Great Britain’s own imports from India. Box 1.1: Textile Industry in Bengal Muslin is a type of cotton textile which had its origin in Bengal, particularly, places in and around Dhaka (spelled during the pre-independence period as Dacca), now the capital city of Bangladesh. ‘Daccai Muslin’ had gained worldwide fame as an exquisite type of cotton textile. The finest variety of muslin was called malmal. Sometimes, foreign travellers also used to refer to it as malmal shahi or malmal khas implying that it was worn by, or fit for, the royalty. 4 INDIAN ECONOMIC DEVELOPMENT  The economic policies pursued by Rao whose estimates of the national the colonial government in India were and per capita incomes during the concerned more with the protection colonial period were considered very and promotion of the economic significant. However, most studies did interests of their home country than find that the country’s growth of with the development of the Indian aggregate real output during the first economy. Such policies brought about half of the twentieth century was less a fundamental change in the structure than two per cent coupled with a of the Indian economy — transforming meagre half per cent growth in per the country into a net supplier of raw capita output per year. materials and consumer of finished industrial products from Britain. 1.3 AGRICULTURAL SECTOR Obviously, the colonial government never made any sincere attempt to India’s economy under the British estimate India’s national and per colonial rule remained fundamentally capita income. Some individual agrarian — about 85 per cent of the attempts which were made to measure country’s population lived mostly in such incomes yielded conflicting and villages and derived livelihood directly inconsistent results. Among the or indirectly from agriculture. However, notable estimators — Dadabhai despite being the occupation of such Naoroji, William Digby, Findlay Shirras, a large population, the agricultural V.K.R.V. Rao and R.C. Desai — it was sector continued to experience Box 1.2: Agriculture During Pre-British India The French traveller, Bernier, described seventeenth century Bengal in the following way: “The knowledge I have acquired of Bengal in two visits inclines me to believe that it is richer than Egypt. It exports, in abundance, cottons and silks, rice, sugar and butter. It produces amply — for its own consumption — wheat, vegetables, grains, fowls, ducks and geese. It has immense herds of pigs and flocks of sheep and goats. Fish of every kind it has in profusion. From rajmahal to the sea is an endless number of canals, cut in bygone ages Fig. 1.1 India’s agricultural stagnation from the Ganges by immense labour for under the British colonial rule navigation and irrigation.” Take note of the agricultural prosperity in our country in the seventeenth century. Contrast it with agricultural stagnation around the time when the British left India, around 200 years later. INDIAN ECONOMY ON THE EVE OF INDEPENDENCE 5 stagnation and, not infrequently, regardless of the economic condition unusual deterioration. Agricultural of the cultivators; this caused productivity became incrementally immense misery and social tension low though, in absolute terms, the among the latter. To a very great sector experienced some growth due extent, the terms of the revenue to the expansion of the aggregate area settlement were also responsible for under cultivation. This stagnation in the zamindars adopting such an the agricultural sector was caused attitude; dates for depositing specified mainly because of the various sums of revenue were fixed, failing systems of land settlement that which the zamindars were to lose their were introduced by the colonial rights. Besides this, low levels of government. Particularly, under the technology, lack of irrigation facilities zamindari system which was and negligible use of fertilisers, all implemented in the then Bengal added up to aggravate the plight of Presidency comprising parts of India’s the farmers and contributed to present-day eastern states, the profit the dismal level of agricultural accruing out of the agriculture sector productivity. There was, of course, went to the zamindars instead of the some evidence of a relatively higher cultivators. However, a considerable yield of cash crops in certain areas of number of zamindars, and not just the country due to commercialisation the colonial government, did nothing of agriculture. But this could hardly to improve the condition of help farmers in improving their agriculture. The main interest of the economic condition as, instead of zamindars was only to collect rent producing food crops, now they were Work These Out Compare the map of British India with that of independent India and find out the areas that became parts of Pakistan. Why were those parts so important to India from the economic point of view? (Refer, to your advantage, Dr Rajendra Prasad’s book, India Divided). What were the various forms of revenue settlement adopted by the British in India? Where did they implement them and to what effect? How far do you think those settlements have a bearing on the current agricultural scenario in India? (In your attempt to find answers to these questions, you may refer to Ramesh Chandra Dutt’s Economic History of India, which comes in three volumes, and B.H. Baden-Powell’s The Land Systems of British India, also in two volumes. For better comprehension of the subject, you can also try and develop an illustrated agrarian map of British India either by hand or with the help of your school computer. Remember, nothing helps better than an illustrated map to understand the subject at hand). 6 INDIAN ECONOMIC DEVELOPMENT producing cash crops which were to ensured to the maximum advantage of be ultimately used by British their home country — Britain. In the industries back home. India’s unfolding economic scenario, the agricultural production received a decline of the indigenous handicraft further set back due to the country’s industries created not only massive partition at the time of independence. unemployment in India but also a new A sizeable portion of the undivided demand in the Indian consumer country’s highly irrigated and fertile market, which was now deprived of the land went to Pakistan; this had an supply of locally made goods. This adverse impact upon India’s output demand was profitably met by the from the agriculture sector. increasing imports of cheap Particularly affected was India’s jute manufactured goods from Britain. industry since almost the whole of the During the second half of the jute producing area became part of nineteenth century, modern industry East Pakistan (now Bangladesh). began to take root in India but its India’s jute goods industry (in which progress remained very slow. Initially, the country had enjoyed a world this development was confined to the monopoly so far), thus, suffered setting up of cotton and jute textile heavily for lack of raw material. mills. The cotton textile mills, mainly dominated by Indians, were located in 1.4 INDUSTRIAL SECTOR the western parts of the country, As in the case of agriculture, so also namely, Maharashtra and Gujarat, in manufacturing, India could not while the jute mills dominated by the develop a sound industrial base under foreigners were mainly concentrated in the colonial rule. Even as the country’s Bengal. Subsequently, the iron and world famous handicraft industries steel industries began coming up in declined, no corresponding modern the beginning of the twentieth century. industrial base was allowed to come The Tata Iron and Steel Company up to take pride of place so long (TISCO) was incorporated in 1907. A enjoyed by the former. The primary few other industries in the fields of motive of the colonial government sugar, cement, paper etc. came up after behind this policy of systematically de- the Second World War. industrialising India was two-fold. The However, there was hardly any intention was, first, to reduce India to capital goods industry to help the status of a mere exporter of promote further industrialisation in important raw materials for the India. Capital goods industry means upcoming modern industries in industries which can produce machine Britain and, second, to turn India into tools which are, in turn, used for a sprawling market for the finished producing articles for current products of those industries so that consumption. The establishment of a their continued expansion could be few manufacturing units here and INDIAN ECONOMY ON THE EVE OF INDEPENDENCE 7  Work These Out Prepare a list showing where and when other modern industries of India were first set up. Can you also find out what the basic requirements are for setting up any modern industry? What, for example, might have been the reasons for the setting up of the Tata Iron and Steel Company at Jamshedpur, which is now in the state of Jharkhand? How many iron and steel factories are there in India at present? Are these iron and steel factories among the best in the world or do you think that these factories need restructuring and upgradation? If yes, how can this be done? There is an argument that industries which are not strategic in nature should not continue to be in the public sector. What is your view? On a map of India, mark the cotton textiles, jute mills and textile mills that existed at the time of independence. there was no substitute to the near exporter of primary products such as wholesale displacement of the raw silk, cotton, wool, sugar, indigo, country’s traditional handicraft jute etc. and an importer of finished industries. Furthermore, the growth consumer goods like cotton, silk and rate of the new industrial sector and woollen clothes and capital goods like its contribution to the Gross Domestic light machinery produced in the Product (GDP) remained very small. factories of Britain. For all practical Another significant drawback of the purposes, Britain maintained a new industrial sector was the very monopoly control over India’s exports limited area of operation of the public and imports. As a result, more than sector. This sector remained confined half of India’s foreign trade was only to the railways, power generation, restricted to Britain while the rest was communications, ports and some allowed with a few other countries like other departmental undertakings. China, Ceylon (Sri Lanka) and Persia (Iran). The opening of the Suez Canal 1.5 FOREIGN TRADE further intensified British control over India has been an important trading India’s foreign trade (see Box 1.3). nation since ancient times. But the The most important characteristic restrictive policies of commodity of India’s foreign trade throughout the production, trade and tariff pursued colonial period was the generation of by the colonial government adversely a large export surplus. But this affected the structure, composition and surplus came at a huge cost to the volume of India’s foreign trade. country’s economy. Several essential Consequently, India became an commodities—food grains, clothes, 8 INDIAN ECONOMIC DEVELOPMENT  Work These Out Prepare a list of items that were exported from and imported into India during the British rule. Collect information from the Economic Survey for various years published by the Ministry of Finance, Government of India, on various items of export from India and its imports. Compare these with imports and exports from the pre-independence era. Also find out the names of prominent ports which now handle the bulk of India’s foreign trade. kerosene etc. — became conspicuous invisible items, all of which led to the by their acute scarcity in the domestic drain of Indian wealth. market. Furthermore, this export surplus did not result in any flow of 1.6 DEMOGRAPHIC CONDITION gold or silver into India. Rather, this was Various details about the population used to make payments for the of British India were first collected expenses incurred by an office set up through a census in 1881. Though by the colonial government in Britain, suffering from certain limitations, it expenses on war, again fought by the revealed the unevenness in India’s British government, and the import of population growth. Subsequently, Box 1.3: Trade Through the Suez Canal Not to scale Suez Canal is an artificial waterway running from north to south across the Isthmus of Suez in north-eastern Egypt. It connects Port Said on the Mediterranean Sea with the Gulf of Suez, an arm of the Red Sea. The canal provides a direct trade route for ships operating between European or American ports and ports located in South Asia, East Africa and Oceania by doing away with the need to sail around Africa. Strategically and economically, it is one of the most important waterways in the world. Its opening in 1869 reduced the cost of transportation Fig.1.2 Suez Canal: Used as highway and made access to the Indian market between India and Britain easier. INDIAN ECONOMY ON THE EVE OF INDEPENDENCE 9 every ten years such census operations particularly, the infant mortality were carried out. Before 1921, India rate was quite alarming—about 218 was in the first stage of demographic per thousand in contrast to the transition. The second stage of present infant mortality rate of 63 per transition began after 1921. However, thousand. Life expectancy was also neither the total population of India nor very low—32 years in contrast to the the rate of population growth at this present 63 years. In the absence of stage was very high. reliable data, it is difficult to specify the The various social development extent of poverty at that time but there indicators were also not quite is no doubt that extensive poverty encouraging. The overall literacy level prevailed in India during the colonial was less than 16 per cent. Out of this, period which contributed to the the female literacy level was at a worsening profile of India’s population negligible low of about seven per of the time. cent. Public health facilities were either unavailable to large chunks of 1.7 O CCUPATIONAL STRUCTURE population or, when available, were During the colonial period, the highly inadequate. Consequently, occupational structure of India, i.e., water and air-borne diseases were distribution of working persons across rampant and took a huge toll on different industries and sectors, life. No wonder, the overall mortality showed little sign of change. The rate was very high and in that, agricultural sector accounted for the Fig. 1.3 Poverty, malnutrition and poor health facilities also cause the population to grow slowly 1 0 INDIAN ECONOMIC DEVELOPMENT  behind this development was not to Work These Out provide basic amenities to the people but to subserve various colonial Can you find out the interests. Roads constructed in India reasons behind frequent prior to the advent of the British rule occurrence of famines in India before independence? were not fit for modern transport. The You may read from Nobel colonial administration also could not Laureate Amartya Sen’s accomplish much on this front due to book, Poverty and Famines. a paucity of funds. The roads that were Prepare a pie chart for built primarily served the purposes of the occupational structure mobilising the army within India and in India at the time of drawing out raw materials from the independence. countryside to the nearest railway station or the port to send these to far largest share of workforce, which away England or other lucrative usually remained at a high of 70-75 foreign destinations. There always per cent while the manufacturing and remained an acute shortage of all- the services sectors accounted for only weather roads to reach out to the rural 10 and 15-20 per cent respectively. areas during the rainy season. Another striking aspect was the Naturally, therefore, people mostly growing regional variation. Parts of the living in these areas suffered then Madras Presidency (comprising grievously during natural calamities areas of the present-day states of Tamil and famines. Nadu, Andhra Pradesh, Kerala and The British introduced the Karnataka), Maharashtra and West railways in India in 1850 and it is Bengal witnessed a decline in considered as one of their most the dependence of the workforce on important contributions. The railways the agricultural sector with a affected the structure of the Indian commensurate increase in the economy in two important ways. On manufacturing and the services the one hand it enabled people to sectors. However, there had been an undertake long distance travel and increase in the share of workforce in thereby break geographical and agriculture during the same time in cultural barriers while, on the other states such as Orissa, Rajasthan and hand, it fostered commercialisation of Punjab. Indian agriculture which adversely affected the comparative self- 1.8 I NFRASTRUCTURE sufficiency of the village economies in Under the colonial regime, basic India. The volume of India’s export infrastructure such as railways, ports, trade undoubtedly expanded but its water transport, posts and telegraphs benefits rarely accrued to the Indian did develop. However, the real motive people. The social benefits, which the INDIAN ECONOMY ON THE EVE OF INDEPENDENCE 1 1  Fig. 1.4 First Railway Bridge linking Bombay with Thane, 1854 Indian people gained owing to the introduction of the railways, were thus Work This Out outweighed by the country’s huge economic loss. There is a perception still Along with the development of going around that in roads and railways, the colonial many ways the British dispensation also took measures for administration in India was quite beneficial. This developing the inland trade and sea perception needs an lanes. However, these measures were informed debate. How far from satisfactory. The inland would you look at this waterways, at times, also proved perception? Argue this uneconomical as in the case of the out in your class — ‘Was Coast Canal on the Orissa coast. the British Raj good for Though the canal was built at a huge India’? cost to the government exchequer, yet, it failed to compete with the railways, which soon traversed the region running parallel to the canal, and had to be ultimately abandoned. The introduction of the expensive system of electric telegraph in India, similarly, served the purpose of maintaining law and order. The postal services, on the Fig.1.5 Tata Airlines, a division of Tata and Sons, was established in 1932 other hand, despite serving a useful inaugurating the aviation sector in India public purpose, remained all through 1 2 INDIAN ECONOMIC DEVELOPMENT inadequate. You will learn more about modernisation, diversification, capacity the present status of various building and increased public infrastructure in Chapter 8. investment. Foreign trade was oriented to feed the Industrial Revolution in 1.9 CONCLUSION Britain. Infrastructure facilities, By the time India won its independence, including the famed railway network, the impact of the two-century long needed upgradation, expansion and British colonial rule was already public orientation. Prevalence of showing on all aspects of the Indian rampant poverty and unemployment economy. The agricultural sector was required welfare orientation of public already saddled with surplus labour economic policy. In a nutshell, the and extremely low productivity. The social and economic challenges before industrial sector was crying for the country were enormous. Recap An understanding of the economy before independence is necessary to know and appreciate the level of development achieved during the post- independence period. Under the colonial dispensation, the economic policies of the government were concerned more with the protection and promotion of British economic interests than with the need to develop the economic condition of the colonised country and its people. The agricultural sector continued to experience stagnation and incremental deterioration despite the fact that the largest section of Indian population depended on it for sustenance. Systematic policies pursued by the British-India government led to the collapse of India’s world famous handicraft industries without contributing, in any significant manner, to its replacement by a modern industrial base. Lack of adequate public health facilities, occurrence of frequent natural calamities and famines pauperised the hapless Indian people and resulted in engendering high mortality rates. Some efforts were made by the colonial regime to improve infrastructure facilities but these efforts were spiced with selfish motives though, in the long run, the independent Indian government built on this base the country’s future economic and social development plan. INDIAN ECONOMY ON THE EVE OF INDEPENDENCE 1 3  EXERCISES 1. What was the focus of the economic policies pursued by the colonial government in India? What were the impacts of these policies? 2. Name some notable economists who estimated India’s per capita income during the colonial period. 3. What were the main causes of India’s agricultural stagnation during the colonial period? 4. Name some modern industries which were in operation in our country at the time of independence. 5. What was the two-fold motive behind the systematic de- industrialisation effected by the British in pre-independent India? 6. The traditional handicrafts industries were ruined under the British rule. Do you agree with this view? Give reasons in support of your answer. 7. What objectives did the British intend to achieve through their policies of infrastructure development in India? 8. Critically appraise some of the shortfalls of the industrial policy pursued by the British colonial administration. 9. What do you understand by the drain of Indian wealth during the colonial period? 10. Which is regarded as the defining year to mark the demographic transition from its first to the second decisive stage? 11. Give a quantitative appraisal of India’s demographic profile during the colonial period. 12. Highlight the salient features of India’s pre-independence occupational structure. 13. Underscore some of India’s most crucial economic challenges at the time of independence. 14. When was India’s first official census operation undertaken? 15. Indicate the volume and direction of trade at the time of independence. 16. Were there any positive contributions made by the British in India? Discuss. 1 4 INDIAN ECONOMIC DEVELOPMENT  SUGGESTED ADDITIONAL ACTIVITIES 1. Prepare a list of goods and services that were available to people in pre-independence India in rural and urban areas. Compare it with the consumption pattern of such goods and services by the people today. Highlight the perceptible difference in the people’s standard of living. 2. Find pictures of towns/villages, in your vicinity, of the pre- independence period and compare these with their present scenario. What changes can you mark? Are such changes for better or for worse? Discuss. 3. Rally around your teacher and organise a group discussion on ‘Has the zamindari system really been abolished in India’? If the consensus is negative, then what measures would you think should be taken to banish it and why? 4. Identify the major occupations followed by the people of our country at the time of independence. What major occupations do the people follow today? In the light of reform policies, how would you visualise the occupational scenario in India 15 years from now—say, 2020? REFERENCES BADEN-POWELL, B.H. 1892. The Land Systems of British India, Vols I, II and III. Oxford Clarendon Press, Oxford. BUCHANAN, D.H. 1966. Development of Capitalist Enterprise in India. Frank Cass and Co, London. CHANDRA, BIPAN. 1993. ‘The Colonial Legacy’ in Bimal Jalan (ed.), The Indian Economy: Problems and Prospects. Penguin Books, New Delhi. DUTT, R.C. 1963. Economic History of India, Vols. I and II. Ministry of Information and Broadcasting, Government of India, New Delhi. KUMAR, D. AND MEGHNAD DESAI (Eds.). 1983. Cambridge Economic History of India. Cambridge University Press, Cambridge. MILL, JAMES.1972. History of British India. Associated Publishing House, New Delhi. PRASAD, RAJENDRA. 1946. India Divided. Hind Kitabs, Bombay. SEN, AMARTYA. 1999. Poverty and Famines. Oxford University Press, New Delhi. INDIAN ECONOMY ON THE EVE OF INDEPENDENCE 1 5 2 Indian Economy 1950-1990 After studying this chapter, the learners will ⑨ come to know the goals of India’s five year plans ⑨ know about the development policies in different sectors such as agriculture and industry from 1950-1990 ⑨ learn to think about the merits and limitations of a regulated economy.  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 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 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  Box 2.1: Types of Economic Systems Every society has to answer three questions What goods and services should be produced in the country? How should the goods and services be produced? Should producers use more human labour or more capital (machines) for producing things? How 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 what people can afford and are willing to purchase. This means that a sick person will be able to use the required medicine only if he/she can afford to buy it; if they cannot afford the medicine they will not be able to use it even if they need it urgently. 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 the citizens who need it. Strictly, a socialist society has no private property since everything is owned by the state. With the collapse of the Soviet system in the last decades of the twentieth century, socialist economies in the former Soviet Union and the socialist states in Eastern Europe ceased to exist. 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  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 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. 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. 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. 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 are: 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 b a n k i n g , 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  Box 2.3: Mahalanobis: the Architect of Indian Planning Many distinguished thinkers contributed to the formulation of our 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 1946 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  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 a subsequent chapter). 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 goods and services produced in the using new seed varieties instead of country during a year. You can think using the old ones. Similarly, a factory of the GDP as a cake: growth is can increase output by using a new increase in the size of the cake. If the type of machine. Adoption of new cake is larger, more people can enjoy technology is called modernisation. it. It is necessary to produce more However, modernisation does not goods and services if the people of refer only to the use of new technology India are to enjoy (in the words of the but also to changes in social outlook First Five Year Plan) a more rich and such as the recognition that women varied life. should have the same rights as men. The GDP of a country is derived In a traditional society, women are from the different sector’s of the supposed to remain at home while economy, namely the agricultural men work. A modern society makes sector, the industrial sector and the use of the talents of women in the service sector. The contribution work place — in banks, factories, made by each of these sectors makes schools etc. — and such a society will up the structural composition of be more civilised and prosperous. the economy. In some countries, growth in agriculture contributes Self-reliance: A nation can promote more to the GDP growth, while in economic growth and modernisation some countries the growth in the by using its own resources or by service sector contributes more to using resources imported from other GDP growth (see Box 2.4). nations. The first seven five year plans gave importance to self-reliance Modernisation: To increase the which means avoiding imports production of goods and services of those goods which could be INDIAN ECONOMY 1950-1990 21  Work These Out Discuss in your class the changes in technology used for (a) Production of food grains (b) Packaging of products (c) Mass communication. Find out and prepare a list of items that India used to import and export during 1950-51 and 1990-91. (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 education and health care and to reduce our dependence on foreign inequality in the distribution of wealth countries, especially for food. It is should be reduced. understandable that people who Let us now see how the first seven were recently freed from foreign five year plans, covering the period domination should give importance 1950-1990, attempted to attain these to self-reliance. Further, it was feared four goals and the extent to which that 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 ‘miracle seeds’ which ushered in a well instead of being enjoyed only by revolution in Indian agriculture. the rich. So, in addition to growth, 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  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 the promote equity in the agricultural 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 continued to own large areas of land in trouble unless they had access to by making use of some loopholes in irrigation facilities which very few the legislation; there were cases where had. The stagnation in agriculture tenants were evicted and the during the colonial rule was landowners claimed to be self- permanently broken by the green cultivators (the actual tillers), claiming revolution: this refers to the large ownership of the land; and even when increase in production of food grains the tillers got ownership of land, the resulting from the use of h i g h poorest of the agricultural labourers yielding variety (HYV) seeds (such as sharecroppers and landless especially for wheat and rice. The use labourers) did not benefit from land of these seeds required the use of reforms. fertiliser and pesticide in the correct The land ceiling legislation also quantities as well as regular supply faced hurdles. The big landlords of water; the need for these inputs in challenged the legislation in the correct proportions is vital. The courts, delaying its implementation. farmers who could benefit from HYV They used this delay to register their seeds required reliable irrigation lands in the name of close relatives, facilities as well as the financial thereby escaping from the legislation. resources to purchase fertiliser and The legislation also had a lot of pesticide. As a result, in the first phase loopholes which were exploited by of the green revolution (approximately the big landholders to retain their mid 1960s upto mid 1970s), the use land. Land reforms were successful of HYV seeds was restricted to the in Kerala and West Bengal because more affluent states such as Punjab, these states had governments Andhra Pradesh and Tamil Nadu. committed to the policy of land to the Further, the use of HYV seeds tiller. Unfortunately other states did primarily benefited the wheat- not have the same level of growing regions only. In the second commitment and vast inequality in phase of the green revolution landholding continues to this day. (mid-1970s to mid-1980s), the HYV technology spread to a larger number The Green Revolution: At independence, of states and benefited more variety about 75 per cent of the country’s of crops. The spread of green population was depende nt on revolution technology enabled India agriculture. Productivity in the to achieve self-sufficiency in food agricultural sector was very low grains; we no longer had to be at the because of the use of old technology mercy of America, or any other nation, and the absence of required for meeting our nation’s food infrastructure for the vast majority of requirements. farmers. India’s agriculture vitally Growth in agricultural output is depends on the monsoon and if the important but it is not enough: if a monsoon fell short the farmers were large proportion of this increase is 24 INDIAN ECONOMIC DEVELOPMENT consumed by the farmers themselves large percentage of their income on instead of being sold in the market, food, benefited from this decline in the higher output will not make relative prices. The green revolution much of a difference to the economy enabled the government to procure as a whole. If, on the other hand, a sufficient amount of food grains to substantial amount of agricultural build a stock which could be used produce is sold in the market by the in times of food shortage. farmers, the higher output can make While the nation had immensely a difference to the economy. The benefited from the green revolution, portion of agricultural produce the technology involved was not free which is sold in the market by the from risks. One such risk was the farmers is called marketed surplus. possibility that it would increase the Fortunately, as pointed out by the disparities between small and big famous economist C.H. Hanumantha farmers — since only the big farmers Rao, a good proportion of the rice could afford the required inputs, and wheat produced during the thereby reaping most of the benefits green revolution period (available as of the green revolution. Moreover, marketed surplus) was sold by the the HYV crops were also more prone farmers in the market. As a result, to attack by pests and the small the price of food grains declined farmers who adopted this relative to other items of consumption. technology could lose everything in The low-income groups, who spend a a pest attack. INDIAN ECONOMY 1950-1990 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 fertiliser subsidies; it does not benefit of time. As a result, the green the target group and it is a huge revolution benefited the small as well burden on the government’s finances as rich farmers. The risk of the small (see also Box 2.6). farmers being ruined when pests On the other hand, some believe attack their crops was considerably that the government should continue reduced by the services rendered by with agricultural subsidies because research institutes established by the farming in India continues to be a government. You should note that risky business. Most farmers are very the green revolution would have poor and they will not be able to favoured the rich farmers only if the afford the required inputs without state did not play an extensive role subsidies. Eliminating subsidies will in ensuring that the small farmer also increase the inequality between rich gains from the new technology. and poor farmers and violate the goal The Debate Over Subsidies: The of equity. These experts argue that if economic justification of subsidies in subsidies are largely benefiting the agriculture is, at present, a hotly fertiliser industry and big farmers, debated question. It is generally the correct policy is not to abolish agreed that it was necessary to use subsidies but to take steps to ensure subsidies to provide an incentive for that only the poor farmers enjoy the adoption of the new HYV technology benefits. 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  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 place 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  Work These Out 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. Collect newspaper cuttings related to the World Bank, Inter national 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. Prepare pie charts on the occupational structure of the Indian economy available in the following table. Sector 1950–51 1990–91 Agriculture 72.1 66.8 Industry 10.7 12.7 Services 17.2 20.5 Study the arguments for and against agricultural subsidies. What is your view on this issue? 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 Market and State 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 investment in industrial ventures Although there was a category of required for the development of our 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 state had to government. This policy was used for play an extensive role in promoting the promoting industry in backward industrial sector. In addition, the regions; it was easier to obtain a decision to develop the Indian economy license if the industrial unit was on socialist lines led to the policy of the established in an economically state controlling the commanding backward area. In addition, such heights of the economy, as the Second units were given certain concessions Five Year plan put it. This meant that such as tax benefits and electricity the state would have complete control at a lower tariff. The purpose of this of those industries that were vital for policy was to promote regional the economy. The policies of the private equality. sector would have to be complimentary Even an existing industry had to to those of the public sector, with the obtain a licen se fo r expan din g public sector leading the way. output or for diversifying production (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 the larger Year Plan, the plan which tried to quantity 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 state; the second category using small-scale industries for consisted of industries in which the promoting rural development. A private sector could supplement the ‘small-scale industry’ is defined with efforts of the state sector, with the reference to the maximum invest- state taking the sole responsibility for ment allowed on the assets of a unit. starting new units; the third category This limit has changed over a period consisted of the remaining industries of time. In 1950 a small -scale which were to be in the private sector. industrial unit was one which invested INDIAN ECONOMY 1950-1990 29 a maximum of rupees five lakh; at Tariffs are a tax on imported goods; present the maximum investment they make imported goods more allowed is rupees one crore. expensive and discourage their use. It was believed that small-scale Quotas specify the quantity of goods industries are more ‘labour intensive’ which can be imported. The effect of i.e., they use more labour than the tariffs and quotas is that they restrict large-scale industries and, therefore, imports and, therefore, protect the generate more employment. But these domestic firms from foreign industries cannot compete with the competition. big industrial firms; it is obvious that The policy of protection is based development of small-scale industry on the notion that industries of requires them to be shielded from the developing countries are not in a large firms. For this purpose, the position to compete against the production of a number of products goods produced by more developed was reserved for the small-scale economies. It is assumed that if the industry; the criterion of reservation domestic industries are protected being the ability of these units to they will learn to compete in the manufacture the goods. They were course of time. Our planners also also given concessions such as lower feared the possibility of foreign excise duty and bank loans at lower exchange being spent on import of interest rates. luxury goods if no restrictions were placed on imports. Nor was any 2.5 TRADE POLICY: IMPORT SUBSTITUTION serious thought given to promote exports until the mid-1980s. The industrial policy that we adopted was closely related to the trade Effect of Policies on Industrial policy. In the first seven plans, Development: The achievements of trade was characterised by what India’s industrial sector during the is commonly called an inward first seven plans are impressive looking trade strategy. Technically, indeed. T h e p r o p o r t i o n o f G D P this strategy is called import contributed by the industrial substitution. This policy aimed at sector increased in the period from replacing or substituting imports 11.8 per cent in 1950-51 to 24.6 per with domestic production. For cent in 1990-91. The rise in the example, instead of importing industry’s share of GDP is an vehicles made in a foreign country, important indicator of development. industries would be encouraged to The six per cent annual growth rate produce them in India itself. In this of the industrial sector during the policy the government protected the period is commendable. No longer domestic industries from foreign was Indian industry restricted largely competition. Protection from imports to cotton textiles and jute; in fact, the took two forms: tariffs and quotas. industrial sector became well 30 INDIAN ECONOMIC DEVELOPMENT  Work These Out 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 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). diversified by 1990, largely due to chapter that initially public sector 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. The in the areas of electronics and government had the monopoly of this automobile sectors which otherwise service even after private sector firms could not have developed. could also provide it. Due to the In spite of the contribution made absence of competition, even till the by the public sector to the growth of late 1990s, one had to wait for a long the Indian economy, some economists time to get a telephone connection. are critical of the performance of Another instance could be the many public sector enterprises. It establishment of Modern Bread, a was proposed at the beginning of this bread-manufacturing firm, as if the INDIAN ECONOMY 1950-1990 31 private sector could not manufacture regulation of what came to be called bread! In 2001 this firm was sold to the permit license raj prevented the private sector. The point is that certain firms from becoming more no distinction was made between (i) efficient. More time was spent by what the public sector alone can do industrialists in trying to obtain a and (ii) what the private sector can license or lobby with the concerned also do. For example, even now only ministries rather than on thinking the public sector can supply national about how to improve their products. defense and free medical treatment The protection from foreign for poor patients. And even though competition is also being criticised on the private sector can manage hotels the ground that it continued even well, yet, the government also runs after it proved to do more harm than hotels. This has led some scholars to good. Due to restrictions on imports, argue that the state should get out the Indian consumers had to of areas which the private sector can purchase whatever the Indian manage and the government may producers produced. The producers concentrate its resources on were aware that they had a captive important services which the private market; so they had no incentive to sector cannot provide. improve the quality of their goods. Many public sector firms incurred Why should they think of improving huge losses but continued to quality when they could sell low function because it is very difficult, quality items at a high price? almost impossible, to close a Competition from imports forces our government undertaking even if it is producers to be more efficient. a drain on the nation’s limited Nevertheless, scholars 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 2.6 CONCLUSION entrepreneurship. In the name of self- reliance, our 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. go ods that they produced. Our India became self- sufficient in food policies were ‘inward oriented’ and so production thanks to the green we failed to develop a strong export revolution. Land reforms resulted in sector. The need for r efor m of abolition of the hated zamindari economic policy was widely felt in the system. However, many economists context of changing global economic became dissatisfied with the scenario, and the new economic policy performance of many public sector was initiated in 1991 to make our enterprises. Excessive government economy more efficient. This is the regulation prevented growth of subject of the next chapter. Recap After independence, India envisaged an economic system which combines the best features of socialism and capitalism — this culminated in the mixed economy model. All the economic planning has been formulated through five year plans. Common goals of five year plans are growth, modernisation, self-sufficiency and equity. 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. The proportion of people depending on agriculture did not decline as expected. Policy initiatives in the industrial sector raised its contribution to GDP. 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  EXERCISES 1. Define a plan. 2. Why did India opt for planning? 3. Why should plans have goals? 4. What are miracle 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 our 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  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. T he 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 HAGWA TI , 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  UNIT II ECONOMIC REFORMS SINCE 1991 After forty years of planned development, India has been able to achieve a strong industrial base and became self-sufficient in the production of food grains. Nevertheless, a major segment of the population continues to depend on agriculture for its livelihood. In 1991, a crisis in the balance of payments led to the introduction of economic reforms in the country. This unit is an appraisal of the reform process and its implications for India. 3 LIBERALISATION, PRIVATISATION AND GLOBALISATION: AN APPRAISAL After studying this chapter, the learners will understand the background of the reform policies introduced in India in 1991 understand the mechanism through which reform policies were introduced comprehend the process of globalisation and its implications for India be aware of the impact of the reform process in various sectors.  There is a consensus in the world today that economic development is not all and the GDP is not necessarily a measure of progress of a society. K.R. Narayanan 3.1 I NTRODUCTION policy measures which changed the direction of our developmental You have studied in the previous strategies. In this chapter, we will chapter that, since independence, look at the background of the crisis, India followed the mixed economy measures that the government has framework by combining the adopted and their impact on various advantages of the market economic sectors of the economy. system with those of the planned economic system. Some scholars argue 3.2 BACKGROUND that, over the years, this policy resulted in the establishment of a variety of The origin of the financial crisis can rules and laws which were aimed at be traced from the inefficient controlling and regulating the management of the Indian economy economy and instead ended up in the 1980s. We know that for hampering the process of growth and implementing various policies and development. Others state that India, its general administration, the which started its developmental path government generates funds from from near stagnation, has since been various sources such as taxation, able to achieve growth in savings, running of public sector enterprises developed a diversified industrial etc. When expenditure is more than sector which produces a variety of income, the government borrows to goods and has experienced sustained finance the deficit from banks and expansion of agricultural output also from people within the country which has ensured food security. and from international financial In 1991, India met with an institutions. When we import goods economic crisis relating to its external like petroleum, we pay in dollars debt — the government was not which we earn from our exports. able to make repayments on its Development policies required that borrowings from abroad; foreign even though the revenues were exchange reserves, which we very low, the government had generally maintain to import petrol to overshoot its revenue to meet and other important items, dropped problems like unemployment, poverty to levels that were not sufficient for and population explosion. The even a fortnight. The crisis was continued spending on development further compounded by rising prices programmes of the government did of essential goods. All these led the not generate additional revenue. government to introduce a new set of Moreover, the government was not LIBERALISATION, PRIVATISATION AND GLOBALISATION: AN APPRAISAL 39 able to generate sufficiently from manage the crisis. For availing the internal sources such as taxation. loan, these international agencies When the government was spending expected India to liberalise and open a large share of its income on areas up the economy by removing which do not provide immediate restrictions on the private sector, returns such as the social secto