Indian Economy 1950-1991 Class 12 Economics Notes | StudyTution

INTRODUCTION

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

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

The ‘Industrial Policy Resolution’ of 1948 and the Directive Principles of the Indian Constitution reflected this outlook.

In 1950, the Planning Commission was set up with the Prime Minister as its Chairperson.

The era of five year plans had begun.

Market Economy

• Free economy.
• market economy means an economy where all the resources are owned controlled and operated by private sector
• Decisions on the basis of supply and demand forces in the market.
• Producers will produce those goods which are more in demand and less in supply. Producers will use those inputs which keep their cost of production low.
• Producers will produce goods for those people Who can pay high price

CENTRALLY PLANNED ECONOMY

• Decisions are taken by the central authority.
• Centrally planned economy means an economy where all the resources are owned controlled and operated by public sector
• Maximizing social welfare.
• Goods useful for the society will be produced.
• Technique will be adopted which is socially suitable.
• Enough goods will be produced for poor section.

MIXED ECONOMY

• Market Economy + Centrally planned Economy
• Best features of both the economies.

Some areas are free, some areas are done for social considerations.

WHAT IS A PLAN

• • A plan is how to use the resources of a nation.
• It should have some general goals and specific objectives which are to be achieved.
• • India plans are of five years duration and are called five year plans.
• Our plan documents not only specify the objectives to be attained in the five years of a plan but also what is to be achieved over a period of twenty years.
• This long-term plan is called ‘perspective plan’.
• It will be unrealistic to expect all the goals of a plan to be given equal importance in all the plans.
• The planners have to balance the goals.

THE. GOALS OF FIVE. YEAR PLANS

Growth

• 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.
• The indicator of economic growth is Real Gross domestic product (GDP),It is the money value of goods and services produced measured at base year price.
• A good indicator of economic growth, in the language of economics, is steady increase in theReaalla Gross Domestic Product (GDP).
• The GDP is the market value of all the goods and services produced in the country during a year.
• It is necessary to produce more goods and services if the people of India are to enjoy a more rich and varied life.

Modernization

• Adoption of new technology to increase production of goods and services is called modernisation.
• Changes in social outlook such as the recognition that women should have the same rights as men.

Self reliance

• The first 7 five year plans gave importance to self-reliance which means avoiding imports of those goods which could be produced in India itself.
• 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.
• 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

The policy makers of independent India had to address several issues which they did through land reforms and promoting the use of ‘miracle seeds’ which ushered in a revolution in Indian agriculture.

LAND REFORMS

• Intermediaries 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 U.S.A. Equity in agriculture called for land reforms which 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.

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.
• The importance of ownership in providing incentives is well illustrated by the carelessness With which farmers in the former Soviet Union used to pack the fruits for sale.
• 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.

LAND CEILING

• Land ceiling Fixing the maximum size of land which could be owned by an individual.
• The abolition of intermediaries meant that some 200 lakh tenants came into direct contact with the government.
• However, the goal of equity was not fully served by abolition of intermediaries. In some areas the former zamindars continued to own large areas of land by making use of some loopholes in the legislation.
• 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.
• Land reforms were successful in Kerala and West Bengal.

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 seeds required the use of fertilizer and pesticide in the correct quantities.
• It also 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(mid 1960-1970) the use of HYV seeds was restricted to 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-1970 to mid-1980), the HYV technology spread to a larger number of states and benefited more variety of crops.
• 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 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.

RISKS OF GREEN REVOLUTION

• The technology involved was not free from risks.
• It would increase the disparities between small and big farmers 2) The HYV crops were also more prone to attack by pests.
• 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.
• The risk of the small farmers being ruined When pests attack their crops was considerably reduced by the services rendered by research institute established by government.

The Debate Over Subsidies

• 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.
• On the other hand, some believe that the government should continue With agricultural subsidies because farming in India continues to be a risky business.
• Eliminating subsidies will increase the inequality between rich and poor farmers and violate the goal of equity.
• The correct policy is not to abolish subsidies but to take steps to ensure that only the poor farmers enjoy the benefits.

Prices as Signals

Prices are signals about the availability of goods. Some economists point out that subsidies do not allow prices to indicate the supply of a good.

CRITICAL ANALYSIS OF AGRICULTURE

• Thus, by the late 1960 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.
• 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). c

The Service Sector

• 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.

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.
• The variety of industries was very narrow largely confined to cotton textiles and jute.
• There were two well managed iron and steel firms one in Jamshedpur and the other in Kolkata.

Market and State 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.
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.

Industrial Policy Resolution 1956

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.

SCHEDULE A Industries exclusively owned by the state.

SCHEDULE B 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.

SCHEDULE C 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.

The purpose of this policy was to promote regional equality. An existing industry had to obtain a license for expanding output or for diversifying production. This was meant to ensure that the quantity of goods produced was not more than what the economy required.

SMALL SCALE INDUSTRY

A ‘small-scale industry’ is defined with reference to the maximum investment allowed on the assets of a unit.
In 1950 maximum 5 lakhs; At present the maximum investment 1 crore.

It was believed that small-scale industries are more ‘labour intensive’.

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.

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, we focused on 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. Quotas specify the quantity of goods which can be imported.

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.

Our planners also feared the possibility of foreign exchange being spent on import of luxury goods if no restrictions were placed on imports.

Effect of Policies on Industrial Development

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

The proportion of GDP contributed by the industrial sector increased from 11.8 per cent in 1950-51 to 24.6 per cent in 1990-91.

The industrial sector became well diversified by 1990, largely due to the public sector.

The promotion of small-scale industries gave opportunities to those people who did not have the capital to start large firms.

Protection from foreign competition enabled the development of indigenous industries in ,the areas of electronics and automobile sectors.

Some economists are critical of the performance of many public sector enterprises. ‘

It is now Widely held that state enterprises continued to produce certain goods and services although this was no longer required. E.g. telecommunication service.

The point is that no distinction was made between

(i) what the public sector alone can do

(ii) what the private sector can also do.

For example, even now only the public sector can supply national defense and free medical treatment for poor patients. And even though the private sector can manage hotels well, yet, the government also runs hotels.
Many public sector firms incurred huge losses but continued to function because it is very difficult, almost impossible, 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 regulations of what came to be called the permit license raj prevented certain firms from becoming more efficient

Due to the restrictions on imports the Indian consumers had to purchase whatever the Indain producers produced

The producers had no incentives to improve the quality of their good

Competition from imports force our producers to be more efficient

Nevertheless scholars point out that the public sector is not meant for earning profit but to promote the welfare of the nation.