Chapter 2 - Indian Economy 1950-1990

Indian Economy

1950-1990

 

Introduction

 

• The leaders of independent India had to decide, among other things, the type of economic systemmost suitable for our nation, a system which would promote the welfare of all rather than a few.

 

• There are different types of economic systems and among them, socialism appealed to Jawaharlal Nehru the most.

 

• However, he was not in favor of the kind of socialism established in the former Soviet Union where all the means of production, i.e. all the factories and farms in the country, were owned by the government. There was no private property. It is not possible in a democracy like India for the government to change the ownership pattern of land and other properties of its citizens in the way that it was done in the former Soviet Union.

 

• Nehru, and many other leaders and thinkers of the newly independent India, sought an alternative to the extreme versions of capitalism and socialism.

 

• Basically sympathizing with the socialist outlook combined the best features of socialism without its drawbacks. In this view, India would be a socialist society with a strong public sector but also with private property and democracy

 

 

The Goals of Five Year Plans

 

• A plan should have some clearly specified goals. The goals of the five year plans are: growth, modernization, self-reliance and equity.

 

• This does not mean that all the plans have given equal importance to all these goals. Due to limited resources, a choice has to be made in each plan about which of the goals is to be given primary importance.

 

Growth: 

• It refers to increase in the country’s capacity to produce the output of goods and services within the country.

 

• It implies either a larger stock of productive capital, or a larger size of supporting services like transport and banking, or an increase in the efficiency of productive capital and services.

 

• A good indicator of economic growth, in the language of economics, is steady increase in the Gross Domestic Product (GDP).

 

• The GDP is the market value of all the goods and services produced in the country during a year.
• The GDP of a country is derived from the different sectors of the economy, namely the agricultural sector, the industrial sector and the service sector.

 

• The contribution made by each of these sectors makes up the structural compositionof the economy.

 

 

 

Modernization: 

 

• To increase the production of goods and services the producers have to adopt new technology.

 

• Adoption of new technology is called modernization.

 

• However, modernization does not refer only to the use of new technology but also to changes in social outlook such as the recognition that women should have the same rights as men.

 

• In a traditional society, women are supposed to remain at home while men work. A modern society makes use of the talents of women in the work place and such a society in most occasions is also prosperous.

 

 

Self-reliance: 

• A nation can promote economic growth and modernization by using its own resources or by using resources imported from other nations.

 

• The first seven five year plans gave importance to self-reliance which means avoiding imports of those goods which could be produced in India itself.

 

• This policy was considered a necessity in order to reduce our dependence on foreign countries, especially for food.

 

• It is understandable that people who were recently freed from foreign domination should give importance to self-reliance.

 

• Further, it was feared that dependence on imported food supplies, foreign technology and foreign capital may make India’s sovereignty vulnerable to foreign interference in our policies.

 

Equity: 

• It is important to ensure that the benefits of economic prosperity reach the poor sections as well instead of being enjoyed only by the rich.
• So, in addition to growth, modernization and self-reliance, equity is also important. Every Indian should be able to meet his or her basic needs such as food, a decent house, education and health care and inequality in the distribution of wealth should be reduced.

Agriculture

 

Land Reforms: 

• At the time of independence, the land tenure system was characterized by intermediaries who merely collected rent from the actual tillers of the soil without contributing towards improvements on the farm.

 

• The low productivity of the agricultural sector forced India to import food from the United States of America (U.S.A.).

 

• Equity in agriculture called for land reformswhich primarily refer to change in the ownership of landholdings.

 

• Just a year after independence, steps were taken to abolish intermediaries and to make the tillers the owners of land. The idea behind this move was that ownership of land would give incentives to the tillers to invest in making improvements provided sufficient capital was made available to them. 

 

• Land ceilingwas another policy to promote equity in the agricultural sector. This means fixing the maximum size of land which could be owned by an individual. The purpose of land ceiling was to reduce the concentration of land ownership in a few hands.

 

• The ownership conferred on tenants gave them the incentive to increase output and this contributed to growth in agriculture.

 

• However, the goal of equity was not fully served by abolition of intermediaries. In some areas the former zamindari continued to own large areas of land by making use of some loopholes in the legislation

 

• The land ceiling legislation also faced hurdles. The big landlords challenged the legislation in the courts, delaying its implementation.

 

• They used this delay to register their lands in the name of close relatives, thereby escaping from the legislation.

 

• The legislation also had a lot of loopholes which were exploited by the big landholders to retain their land. Land reforms were successful in Kerala and West Bengal because these states had governments committed to the policy of land to the tiller.

 

 

 

The Green Revolution: 

• India’s agriculture vitally depends on the monsoon and if the monsoon fell short the farmers were in trouble unless they had access to irrigation facilities which very few had.

 

• The stagnation in agriculture during the colonial rule was permanently broken by the green revolution.

 

• This refers to the large increase in production of food grains resulting from the use of high yielding variety (HYV) seeds especially for wheat and rice.

 

• The use of these seeds required the use of fertilizer and pesticide in the correct quantities as well as regular supply of water; the application of these inputs in correct proportions is vital.

 

• The farmers who could benefit from HYV seeds required reliable irrigation facilities as well as the financial resources to purchase fertilizer and pesticide.

 

• As a result, in the first phase of the green revolution (approximately mid 1960s up to mid 1970s), the use of HYV seeds were restricted to the more affluent states such as Punjab, Andhra Pradesh and Tamil Nadu.

 

• Further, the use of HYV seeds primarily benefited the wheat-growing regions only.

 

• In the second phase of the green revolution (mid-1970s to mid-1980s), the HYV technology spread to a larger number of states and benefited more variety of crops.

 

• The spread of green revolution technology enabled India to achieve self-sufficiency in food grains; we no longer had to be at the mercy of America, or any other nation, for meeting our nation’s food requirements.

 

• Growth in agricultural output is important but it is not enough. If a large proportion of this increase is consumed by the farmers themselves instead of being sold in the market, the higher output will not make much of a difference to the economy as a whole.

 

• If, on the other hand, a substantial amount of agricultural produce is sold in the market by the farmers, the higher output can make a difference to the economy.

 

• The portion of agricultural produce which is sold in the market by the farmers is called marketed surplus. A good proportion of the rice and wheat produced during the green revolution period was sold by the farmers in the market.

 

• As a result, the price of food grains declined relative to other items of consumption. The low-income groups, who spend a large percentage of their income on food, benefited from this decline in relative prices.

 

• The green revolution enabled the government to procure sufficient amount of food grains to build a stock which could be used in times of food shortage.

 

• While the nation had immensely benefited from the green revolution, the technology involved was not free from risks.

 

• One such risk was the possibility that it would increase the disparities between small and big farmers—since only the big farmers could afford the required inputs, thereby reaping most of the benefits of the green revolution.

 

• Moreover, the HYV crops were also more prone to attack by pests and the small farmers who adopted this technology could lose everything in a pest attack.

 

• Fortunately, these fears did not come true because of the steps taken by the government. The government provided loans at a low interest rate to small farmers and subsidized fertilizers so that small farmers could also have access to the needed inputs.

 

• Since the small farmers could obtain the required inputs, the output on small farms equaled the output on large farms in the course of time.

 

• As a result, the green revolution benefited the small as well as rich farmers.

 

• The risk of the small farmers being ruined when pests attack their crops was considerably reduced by the services rendered by research institutes established by the government.

 

 

The Debate over Subsidies: 

 

• It is generally agreed that it was necessary to use subsidies to provide an incentive for adoption of the new HYV technology by farmers in general and small farmers in particular.

 

• Subsidies were, therefore, needed to encourage farmers to test the new technology. Some economists believe that once the technology is found profitable and is widely adopted, subsidies should be phased out since their purpose has been served.

 

• Further, subsidies are meant to benefit the farmers but a substantial amount of fertilizer subsidy also benefits the fertilizer industry; and among farmers, the subsidy largely benefits the farmers in the more prosperous regions.

 

• Therefore, it is argued that there is no case for continuing with fertilizer subsidies; it does not benefit the target group and it is a huge burden on the government’s finances

 

• On the other hand, some believe that the government should continue with agricultural subsidies because farming in India continues to be a risky business.

 

• Most farmers are very poor and they will not be able to afford the required inputs without subsidies. Eliminating subsidies will increase the inequality between rich and poor farmers and violate the goal of equity.

 

• Thus, by the late 1960s, Indian agricultural productivity had increased sufficiently to enable the country to be self-sufficient in food grains.

 

• On the negative side, some 65 per cent of the country’s population continued to be employed in agriculture even as late as 1990.

 

• Economists have found that as a nation becomes more prosperous, the proportion of GDP contributed by agriculture as well as the proportion of population working in the sector declines considerably.

 

• In India, between 1950 and 1990, the proportion of GDP contributed by agriculture declined significantly but not the population depending on it (67.5 per cent in 1950 to 64.9 per cent by 1990).

 

 

 

Industry and Trade

 

• Economists have found that poor nations can progress only if they have a good industrial sector.
• Industry provides employment which is more stable than the employment in agriculture; it promotes modernization and overall prosperity. It is for this reason that the five year plans place a lot of emphasis on industrial development.

 

Public and Private Sectors in Indian Industrial Development: 

• At the time of independence, Indian industrialists did not have the capital to undertake investment in industrial ventures required for the development of our economy; nor was the market big enough to encourage industrialists to undertake major projects even if they had the capital to do so.

 

• It is principally for these reasons that the state had to play an extensive role in promoting the industrial sector. In addition, the decision to develop the Indian economy on socialist lines led to the policy of the state controlling the commanding heights of the economy, as the Second Five Year plan put it.

 

• This meant that the state would have complete control of those industries that were vital for the economy. The policies of the private sector would have to be complimentary to those of the public sector, with the public sector leading the way.

 

 

Industrial Policy Resolution 1956 (IPR 1956):

• In accordance with the goal of the state controlling the commanding heights of the economy, the Industrial Policy Resolution of 1956 was adopted.

 

• This resolution formed the basis of the Second Five Year Plan, the plan which tried to build the basis for a socialist pattern of society.

 

• This resolution classified industries into three categories.

1. The first category comprised industries which would be exclusively owned by the state;
2. the second category consisted of industries in which the private sector could supplement the efforts of the state sector, with the state taking the sole responsibility for starting new units;
3. The third category consisted of the remaining industries which were to be in the private sector.

 

• Although there was a category of industries left to the private sector, the sector was kept under state control through a system of licenses.

 

• No new industry was allowed unless a license was obtained from the government. This policy was used for promoting industry in backward regions; it was easier to obtain a license if the industrial unit was established in an economically backward area.

 

• In addition, such units were given certain concessions such as tax benefits and electricity at a lower tariff. The purpose of this policy was to promote regional equality.

 

 

Small-Scale Industry: 

• A ‘small-scale industry’ is defined with reference to the maximum investment allowed on the assets of a unit. This limit has changed over a period of time.

 

• In 1950 a small-scale industrial unit was one which invested a maximum of rupees five lakhs; at present the maximum investment allowed is rupees one crore.

 

• It is believed that small-scale industries are more ‘labour intensive’ i.e., they use more labour than the large-scale industries and, therefore, generate more employment.

 

• But these industries cannot compete with the big industrial firms; it is obvious that development of small-scale industry requires them to be shielded from the large firms.

 

• For this purpose, the production of a number of products was reserved for the small-scale industry; the criterion of reservation being the ability of these units to manufacture the goods.

 

• They were also given concessions such as lower excise duty and bank loans at lower interest rates.

 

 

Trade Policy: Import Substitution

 

• The industrial policy that we adopted was closely related to the trade policy.

 

• In the first seven plans, trade was characterized by what is commonly called an inward looking trade strategy. Technically, this strategy is called import substitution.This policy aimed at replacing or substituting imports with domestic production.

 

• In this policy the government protected the domestic industries from foreign competition. Protection from imports took two forms: tariffs and quotas.

 

• Tariffs are a tax on imported goods; they make imported goods more expensive and discourage their use.

 

• Quotas specify the quantity of goods which can be imported. The effect of tariffs and quotas is that they restrict imports and, therefore, protect the domestic firms from foreign competition.

 

• The policy of protection is based on the notion that industries of developing countries are not in a position to compete against the goods produced by more developed economies.

 

• It is assumed that if the domestic industries are protected they will learn to compete in the course of time.

 

 

 Effect of Policies on Industrial Development: 

• The achievements of India’s industrial sector during the first seven plans are impressive indeed.

1. The proportion of GDP contributed by the industrial sector increased in the period from 11.8 per cent in 1950-51 to 24.6 per cent in 1990-91.
2. The rise in the industry’s share of GDP is an important indicator of development. The six per cent annual growth rate of the industrial sector during the period is commendable.
3. No longer was Indian industry restricted largely to cotton textiles and jute; in fact, the industrial sector became well diversified by 1990, largely due to the public sector.
4. The promotion of small-scale industries gave opportunities to those people who did not have the capital to start large firms to get into business.
5. Protection from foreign competition enabled the development of indigenous industries in the areas of electronics and automobile sectors which otherwise could not have developed.

 

• In spite of the contribution made by the public sector to the growth of the Indian economy, some economists are critical of the performance of many public sector enterprises.

 

• The point is that after four decades of Planned development of Indian Economy no distinction was made between

              (I) what the public sector alone can do

              (ii) What the private sector can also do.

 

• Many public sector firms incurred huge losses but continued to function because it is difficult to close a government undertaking even if it is a drain on the nation’s limited resources.

 

• This does not mean that private firms are always profitable. However, a loss-making private firm will not waste resources by being kept running despite the losses.

 

• The need to obtain a license to start an industry was misused by industrial houses; a big industrialist would get a license not for starting a new firm but to prevent competitors from starting new firms.

 

• The excessive regulation of what came to be called the permit license rajprevented certain firms from becoming more efficient. More time was spent by industrialists in trying to obtain a license or lobby with the concerned ministries rather than on thinking about how to improve their products.

 

• The protection from foreign competition is also being criticized on the ground that it continued even after it proved to do more harm than good.

 

• Due to restrictions on imports, the Indian consumers had to purchase whatever the Indian producers produced. The producers were aware that they had a captive market; so they had no incentive to improve the quality of their goods.

 

• A few economists also point out that the public sector is not meant for earning profits but to promote the welfare of the nation.

 

• The public sector firms, on this view, should be evaluated on the basis of the extent to which they contribute to the welfare of people and not on the profits they earn.

 

• Regarding protection, some economists hold that we should protect our producers from foreign competition as long as the rich nations continue to do so. Owing to all these conflicts, economists called for a change in our policy.

 

 

 

Conclusion

 

• The progress of the Indian economy during the first seven plans was impressive indeed.

 

• Our industries became far more diversified compared to the situation at independence. India became self- sufficient in food production thanks to the green revolution.

 

• Land reforms resulted in abolition of the hated zamindari system. However, many economists became dissatisfied with the performance of many public sector enterprises.

 

• Excessive government regulation prevented growth of entrepreneurship. In the name of self-reliance, our producers were protected against foreign competition and this did not give them the incentive to improve the quality of goods that they produced.

 

• Our policies were ‘inward oriented’ and so we failed to develop a strong export sector. The need for reform of economic policy was widely felt in the context of changing global economic scenario, and the new economic policy was initiated in 1991 to make our economy more efficient.