MODULE I

DEVELOPMENT POLICIES AND EXPERIENCE (1947-1990)

• LOW LEVEL OF ECONOMIC DEVELOPMENT UNDER COLONIAL RULE

✓ Economic Exploitation: The British rule in India focused on exploiting the country for
their own benefit.
✓ Decline in Economic Share: India's share of the world economy significantly decreased
during British rule.
✓ Destruction of Handicrafts: British policies ruined India's traditional handicrafts
industry.
✓ Ruralization: The decline of handicrafts led to more people relying on agriculture.
✓ Falling Per-Capita Income: The average income of Indians declined during British rule.
✓ Commercialization of Agriculture: Agriculture was forced to focus on producing cash
crops for export.
✓ Land Tenure Systems: The British introduced new land systems that exploited peasants.
✓ Famines: Frequent famines occurred due to economic policies and natural disasters.
✓ Unfavorable Trade: India became an exporter of raw materials and importer of finished
goods.
✓ Backward Agriculture: Agriculture remained backward due to poor land management
and lack of investment.
✓ Lack of Industrialization: The British discouraged industrial development in India.
✓ Low Standard of Living: Poverty, malnutrition, and limited healthcare were common.
✓ Infrastructure Development: While some infrastructure was developed, it primarily
served British interests.
✓ British colonial rule had a devastating impact on India's economy, leading to low
economic development, poverty, and a decline in living standards.

DEVELOPMENT AND STRUCTURAL CHANGE OF THE INDIAN ECONOMY

SINCE INDEPENDENCE
✓ Post-Independence Focus: India prioritized eradicating poverty, unemployment, and
inequality after gaining independence.
✓ Economic Policies: The government implemented various economic policies, including
the New Industrial Policy, Planning Commission, and Five-Year Plans.
✓ Structural Changes: The economy has undergone significant structural changes, with a
shift from agriculture to industry and services.
✓ Sectoral Contributions: The share of the primary sector (agriculture) in GDP has
declined, while the secondary (industry) and tertiary (services) sectors have grown.
✓ Employment Shifts: Employment has shifted from agriculture to non-farm sectors.
 ✓ GDP Growth: India's GDP has grown significantly since independence, although it
faced periods of low growth.
✓ Per-Capita Income: Per-capita income has increased, but India still ranks relatively low
compared to developed countries.
✓ Industrial Development: Basic industries like steel, cement, and energy have been
developed.
✓ Infrastructure Development: India has invested in infrastructure, including roads,
railways, and social facilities.
✓ Welfare Programs: The government has implemented various welfare programs to
address social issues.
✓ Banking Sector: The banking sector has undergone significant changes, with
nationalization and privatization.
✓ The Indian economy has made substantial progress since independence, but challenges
such as poverty, inequality, and unemployment persist.

ECONOMIC POLICIES FOLLOWED BETWEEN THE 1950S AND 1980S

Economic policies aim to boost economic growth and achieve socio-economic development.
After India gained independence, various governments implemented policies to address
issues like poverty, unemployment, and inequality.
From the 1950s to the 1980s, India followed a mixed economy model, involving both the
public and private sectors. The public sector played a major role in areas like energy,
infrastructure, and banking, while partial liberalization began in the 1980s.

Two Phases of Economic Development:

1. 1950-1980: Socialist Phase
This period focused on developing India's version of socialism, which involved government
control over industries and banks, and policies to limit private activity. The public sector
played a key role, and there were strict regulations like the Monopolies and Restrictive Trade
Practices (MRTP) Act (1969). A license system was also introduced to control businesses.

2. 1980 onwards: Market-Oriented Phase

Economic liberalization began in the 1980s and led to fewer controls, with a shift towards
encouraging private sector participation and reducing government restrictions. This phase
focused on export promotion and reducing import barriers.
Industrial Policies (1950s-1980s): The government gave importance to the public sector
through industrial policies in 1948, 1956, 1977, and 1980, with the aim to:
Increase production and promote balanced regional development.
Support small industries for employment.
Prevent economic monopolies (through the MRTP Act, 1969).
Encourage self-reliance by limiting foreign investments (through FERA, 1973).
The system of licensing restricted new businesses, leading to the "license raj."
Five-Year Plans (1950s-1980s): India introduced centralized planning and five-year plans to
guide development. Major plans included:
1. First Plan (1951-1956): Focused on agriculture.
2. Second Plan (1956-1961): Focused on industrialization (P.C. Mahalanobis model).
3. Third Plan (1961-1966): Aimed for balanced growth.
4. Fourth Plan (1969-1974): Focused on stability and self-reliance.
5. Fifth Plan (1974-1979): Targeted poverty eradication.
6. Sixth Plan (1980-1985): Aimed at poverty reduction and self-reliance.
7. Seventh Plan (1985-1990): Focused on growth, modernization, and social justice.
Agriculture Sector (1950s-1980s): Agriculture was seen as vital for India's development.
Policies aimed at increasing production, improving credit access for farmers, and reducing
income inequality in rural areas. Major initiatives included:

The Green Revolution.

Land reforms.
The establishment of institutions like Regional Rural Banks (1975) and NABARD (1982).

External Sector (1950s-1980s): India’s trade policies emphasized self-reliance, with high
import duties and restrictions on foreign investments. The rupee was devalued in 1966, and
foreign technology imports were controlled.

Foreign Trade Policy (1950s-1980s): The government initially focused on import substitution
but later introduced export promotion strategies. Export growth was slow in the 1950s and
1960s but improved in the 1970s.
The policies of the 1950s-1980s did not achieve rapid economic growth. In the early 1990s,
India adopted market-oriented reforms, leading to liberalization, privatization, and
globalization (LPG).

Mixed Economic Framework

The economic system can be classified into three types: Capitalist, Socialist, and Mixed
Economy. This classification is based on the role of market forces and government control in
economic activities. A mixed economy combines elements of both capitalism and socialism,
where the private and public sectors operate together. This idea gained popularity after J.M.
Keynes published The General Theory of Employment, Interest, and Money in 1936, which
criticized the laissez-faire approach of pure capitalism.
India adopted the mixed economic model after gaining independence, first declaring it in the
Industrial Policy Resolution of 1948. Under this system, some industries are fully owned by
the government, others by private individuals, and some are partnerships between the two
(Public-Private Partnership or PPP). While the government controls major sectors like
defense and atomic energy, the private sector is also guided by government policies.
Since the economic reforms of 1991, known as the Liberalization, Privatization, and
Globalization (LPG) program, the role of the private sector has grown significantly, and it is
now considered a key driver of India’s economic growth. Key features of India’s mixed
economy are as follows:

1. Government as Regulator and Facilitator: The private and public sectors coexist, but the
government enacts laws to prevent unfair practices by private companies and encourages
their growth through measures like export subsidies.
2. Monopoly in Strategic Sectors: The public sector controls strategic industries such as
defense and atomic energy.
3. Balancing Profit and Welfare: The public sector focuses on public welfare, while the
private sector aims for profit. However, the government ensures that private sector growth
benefits society as a whole.
4. Economic Planning: The government uses economic planning to guide the growth of both
the public and private sectors, ensuring balanced and coordinated development.
5. Free and Controlled Economic Growth: The mixed economy combines free enterprise with
government control, allowing both to contribute to development.
6. Pricing Mechanisms: The public sector often uses administered pricing (e.g., in public
distribution systems), while the private sector follows market pricing based on supply and
demand.

Merits of a Mixed Economy:

Provides freedom to producers and consumers.
Encourages private initiative while ensuring optimum use of resources.
Promotes public welfare and safeguards marginalized groups.
Competition between the private and public sectors boosts efficiency.
Both sectors contribute to building socio-economic infrastructure, making it suitable for
developing countries.
Demerits of a Mixed Economy:
Delays in decision-making, especially in the public sector, can slow down progress.
Government controls can hinder private sector growth.
Private entrepreneurs may fear nationalization of their businesses.
The system can be unstable, with risks of corruption and black markets.
A mixed economy aims to achieve rapid economic development while preventing
exploitation and restrictive practices. It requires effective coordination between the public
and private sectors. The 1991 reforms shifted the focus to a more market-friendly approach,
attracting both private and foreign investment to support India’s growth.

Market Intervention Policy and Import Substitution

In the early years of post-independence India, the government focused heavily on market
intervention and import substitution as part of its economic policy. This approach was
intended to regulate economic activities, promote domestic industries, and reduce
dependency on foreign goods. Below are detailed explanations of both policies:

Market Intervention Policy

Market intervention refers to the actions taken by the government to influence or regulate
economic decisions made by individuals, organizations, or industries to maximize social
welfare. The policy is designed to address market failures, promote inclusive growth, and
ensure social equity rather than focusing solely on commercial profit.

Key aims of the market intervention policy include:

Minimizing Economic Fluctuations: Governments intervene during recessions or inflation by
adjusting fiscal policies (e.g., subsidies) and monetary policies (e.g., money supply) to reduce
the harsh effects of economic cycles.
Supporting Farmers: The government ensures minimum income for producers through
schemes like Minimum Support Prices (MSP), buffer stock operations, and Agricultural
Produce Market Regulation Act (APMC), which protect farmers from exploitation.
Controlling Prices of Essential Commodities: Policies like the Public Distribution System
(PDS) and the National Food Security Act ensure the availability of basic commodities at
affordable prices.
Discouraging Harmful Goods: Governments impose high taxes on items like alcohol and
drugs to discourage consumption.
Promoting Economic Fairness: Redistribution of wealth through taxes and welfare programs
helps reduce economic disparities.
IMPORT SUBSTITUTION
Import substitution is a policy aimed at reducing dependency on foreign goods by
encouraging domestic production. This strategy, known as inward-oriented growth, focuses
on replacing imports with locally produced goods to meet internal demand and achieve self-
sufficiency.

Key features of India's import substitution policy:

Protection of Domestic Industries: High tariffs and quotas were imposed on foreign goods to
protect local industries from international competition.
Promotion of Domestic Production: The policy encouraged the growth of local industries,
which created employment and reduced foreign dependency.
Saving Foreign Exchange: By reducing imports, India saved valuable foreign exchange,
which could be used for essential imports.

Forms of Protection: Protection was provided through two main mechanisms:

1. Quota System: Limited the quantity of goods that could be imported.
2. Tariff Policy: Imposed taxes on imported goods, making them more expensive than
domestic products.
Market intervention policies in India were designed to stabilize the economy, protect
vulnerable groups, and promote fairness. Import substitution, on the other hand, focused on
reducing imports and boosting domestic production. While these policies were successful in
promoting self-reliance in the early years, India's current economic strategy has shifted
towards an outward-oriented economy that encourages foreign trade, export promotion, and
the inflow of foreign capital.

OBJECTIVES AND STRATEGY OF PLANNING IN INDIA

Economic planning has been a fundamental approach for addressing the various economic
challenges India faced post-independence. The process was mainly executed through the
Five-Year Plans, developed and monitored by the Planning Commission (now replaced by
NITI Aayog). The goals of these plans were rooted in the ideals of the Directive Principles of
State Policy (DPSP) and aimed to promote economic growth and human development.

Economic Planning: Meaning and Definition

Economic planning involves the systematic and scientific utilization of resources to achieve
specific national objectives within a set time frame. Hayek defined it as the direction of
productive activities by a central authority. In India, the Five-Year Plans aimed to boost
national income, employment, reduce poverty, and address economic inequality.

Objectives of Planning
The objectives of the Five-Year Plans in India can be grouped into two categories: long-term
and short-term.
A. Long-Term Objectives
1. High Growth Rate: One of the primary objectives has been to accelerate economic growth
to solve various socio-economic problems. The plans aimed at inclusive and sustainable
growth for present and future generations.
2. Social Justice: Planning in India has always aimed to promote social justice by eliminating
discrimination and empowering marginalized sections of society, including women and
economically backward classes.
3. Economic Equality: Plans aimed to reduce economic disparities through measures like
progressive taxation and reservation of jobs for underprivileged groups.
4. Employment Generation: Achieving full employment has been a long-term objective of
economic planning, with the aim to reduce poverty through increased investment and job
creation.
5. Economic Self-Reliance: Achieving self-reliance by reducing dependency on foreign aid
and focusing on domestic resources for development was a key goal, with special emphasis
on food and energy security.

B. Short-Term Objectives
The short-term objectives, which varied with each Five-Year Plan, included:
Agricultural and Industrial Development
Modernization of Banking
Poverty Eradication
Employment Generation
Women Empowerment
Improvement in Health and Education Services
Infrastructural Development

Strategy of Planning
Economic planning in India has evolved through various strategic models, adjusting to the
changing needs and available resources:
1. Harrod-Domar Strategy: Adopted in the First Five-Year Plan (1951-1956), this model
emphasized the role of savings and the capital-output ratio in determining economic growth.
2. Nehru-Mahalanobis Strategy: Used during the Second to Fifth Five-Year Plans, it focused
on heavy industrialization and the inward-looking strategy of import substitution, aiming for
self-reliance.
3. Gandhian Strategy: Developed by Acharya Shriman Narayan Agarwal, this strategy
emphasized agriculture and village industries, focusing on employment-oriented growth.
4. Wage-Goods Model: Proposed by C.N. Vakil and P.R. Brahmananda, this model prioritized
mechanization of agriculture and increasing food production to sustain industrial growth.
5. LPG Strategy: Introduced in the 1990s under the New Economic Policy, the Liberalization,
Privatization, and Globalization (LPG) model opened the Indian economy to foreign
investment and reduced government control over industries.
6. Equity & Social Justice Strategy: The 10th Five-Year Plan focused on reducing income
disparities and empowering marginalized communities.
7. Inclusive and Sustainable Growth: The 11th and 12th Five-Year Plans promoted inclusive
growth that benefited all sections of society while focusing on sustainability to ensure
intergenerational equity.
The overarching aim of India's economic planning has been to achieve rapid economic
growth and social development while balancing the needs of present and future generations.
The planning strategies, while evolving over time, have consistently focused on achieving
economic equality, social justice, and self-reliance, adjusting to the global and domestic
economic environment.

HISTORY OF PLANNING IN INDIA

Economic planning in India formally began in 1951 with the introduction of the First Five-
Year Plan. Here's an overview of key developments in the history of Indian planning:
1. M. Visweswarayya: Considered the father of Indian planning, Visweswarayya published
the book "Planned Economy for India" in 1934, which laid the foundation for future planning
initiatives.
2. 1938: Under the Indian National Congress, led by Subhas Chandra Bose and Jawaharlal
Nehru, the National Planning Committee was established, although it was interrupted by
World War II.
3. 1944 - The Bombay Plan: A group of 8 industrialists from Bombay (now Mumbai)
presented this plan, which aimed to boost industrial development, but it was not
implemented.
4. The Gandhian Plan: Proposed by Shriman Narayan in 1944, it emphasized self-reliance
and small-scale, rural industries in line with Gandhian principles.
5. The People’s Plan (1945): M.N. Roy, a political thinker, introduced this plan focused on
nationalization and social welfare but it did not take root.
6. The Sarvodaya Plan (1950): Formulated by Jayaprakash Narayan, it was based on
Gandhian ideals but was not executed nationally.
7. 1950 - Planning Commission: The Planning Commission of India was formed on 15th
March 1950, adopting the Russian model of planning. This Commission was a non-
constitutional and non-statutory body responsible for strategizing and implementing
development.
8. National Development Council (NDC): Established on 6th August 1952, the NDC became
the highest decision-making body for economic planning, aiming to promote balanced
development across the country. It comprised the Prime Minister, Union Cabinet Ministers,
Chief Ministers of all States, and Planning Commission members.
9. Self-Reliance (Third Plan): The Third Five-Year Plan (1961-1966) aimed to make India
self-reliant within a decade, focusing on reducing dependence on foreign aid and promoting
domestic growth.
10. Modernization (Sixth Plan): The Sixth Five-Year Plan (1980-1985) introduced
modernization as an objective for the first time, focusing on technological advancement and
infrastructure.
11. NITI Aayog (2015): The Planning Commission was replaced by NITI Aayog on 1st
January 2015, under the government of Narendra Modi. NITI Aayog focuses on
decentralizing planning and bringing in private-sector participation.

Dr. Manmohan Singh: Chaired the 10th, 11th, and the first two years of the 12th Five-Year
Plans, with Montek Singh Ahluwalia as Deputy Chairman. They aimed for 4% growth in the
agricultural sector.
Mokshagundam Visvesvaraya: An influential figure in Indian planning, recipient of the
Bharat Ratna in 1955, and remembered as one of India's foremost engineers.
India's planning history reflects an ongoing evolution, from centralized five-year plans aimed
at rapid growth and industrialization to the current decentralized approach under NITI Aayog,
focusing on inclusive and sustainable development.

Failures/Defects/Shortcomings of Five-Year Plans in India

Despite the achievements, several shortcomings marked India's Five-Year Plans:
1. Lack of Considerable Improvement in Standard of Living: Despite efforts, the plans failed
to significantly uplift the general standard of living. India still ranks low on the Human
Development Index (131 out of 189) and the World Happiness Report (139 out of 149 in
2021).
2. Unemployment: Unemployment persisted, with figures rising drastically from 53 lakhs
during the first plan to 53 million by the end of the eighth plan.
3. Inadequate Growth in Production Sectors: The growth of agriculture and industry remained
slow. The "Hindu Rate of Growth" (around 3.5% GDP growth and 1.3% per capita income
growth) from the 1950s to the 1980s highlights this inadequacy.
4. Inflation: Inflation, particularly food and non-food inflation, worsened, affecting household
incomes and undermining the gains of economic growth.
5. Income Inequality: Inequality in income distribution worsened despite efforts. The gap
between the rich and poor widened, with a paradox of India being rich in resources but home
to millions of poor citizens.
6. Poor Implementation: Planning in India was often undermined by poor execution, with
much of the benefits absorbed by the wealthier classes due to corruption and bureaucratic
inefficiency.
7. Shortfall in Targets: Many plans failed to achieve their targets due to resource shortages,
under-utilization, and poor administration.
8. Weak Economic Base: Even after 12 Five-Year Plans, the fundamentals of the Indian
economy remained weak. Agriculture, while central, remained vulnerable to monsoon
failures, and issues like farmer suicides persisted.
9. Malnutrition: India continued to have one of the highest rates of child malnutrition in the
world. Over 42% of underweight children and 31% of stunted children globally are in India.
10. Poverty: Despite poverty alleviation programs, around 34% of India's population still
lives on less than $1 a day, and 80% on less than $2, according to World Bank estimates.

Achievements of Five-Year Plans

India's Five-Year Plans did result in substantial gains across sectors:
1. Economic Growth: Over the decades, India's economy has grown significantly, becoming
the fifth-largest in the world. From a GDP of $0.037 trillion in 1960, it reached $2.9 trillion in
2019.
2. Infrastructure Development: Notable improvements in transport, communication,
irrigation, and power generation were achieved, contributing to overall economic progress.
3. Industrial Development: India's industrial base strengthened, particularly in heavy
industries, steel production, and power generation. The second Five-Year Plan, based on the
Mahalanobis strategy, was pivotal in this regard.
4. Agricultural Reforms and Green Revolution: Land reforms and pro-farmer programs
helped reduce exploitation in the agricultural sector. The Green Revolution transformed India
from a food-importing nation to a food-exporting one.
5. Growth of the Public Sector: Nationalization of major industries and banks created jobs,
supported welfare schemes, and spurred industrial growth.
6. Employment Generation: Various plans aimed at generating employment. While not fully
adequate, these efforts did reduce unemployment in key sectors.
7. Scientific and Technological Development: Significant investments in science and
technology propelled advances in biotechnology, space research, defense, and IT.
8. Social Services: Education, healthcare, family planning, and sanitation improved over the
course of five-year plans, helping raise social welfare levels.
9. Structural and Institutional Changes: The plans facilitated a shift in the economy toward
modern industries and services, advancing technological adoption and agricultural practices.
10. Increased Savings and Investment: Domestic savings and investment rates rose
significantly, contributing to economic resilience.

While India's Five-Year Plans contributed to significant economic and social development,
they fell short in areas like unemployment, income inequality, and poverty eradication. The
plans helped transform India into a rising economy, but implementation flaws and the
persistence of structural issues meant many goals were only partially achieved. Going
forward, institutions like NITI Aayog aim to address these shortcomings with strategies for
inclusive, sustainable growth.
The Eleventh Five-Year Plan (2007-2012) aimed to achieve faster and more inclusive growth,
with a particular focus on improving income, education, health, women and child welfare,
infrastructure, and environmental sustainability. However, the global financial crisis of 2008
affected its targets, forcing the plan to revise its goal from a 9% growth rate to 8.1%. Despite
setbacks, the plan's emphasis on inclusive growth helped frame policies that attempted to
bring benefits across sectors such as agriculture, industry, and services.

Achievements of the Eleventh Plan:

1. Income and Poverty: The GDP growth rate was revised but achieved an average of 8%, and
the agriculture sector grew at 3.7%, close to its 4% target. However, employment generation
remained below expectations.
2. Education: Notable progress was made in expanding elementary and higher education,
with the Right to Education (RTE) Act introduced in 2009. Literacy rates improved, and
dropout rates reduced, although some targets fell short.
3. Health: Maternal and infant mortality rates were reduced, and access to healthcare
expanded, although public health expenditure remained lower than required.
4. Infrastructure: Significant strides were made in rural electrification and road connectivity,
alongside an increase in private-public partnerships for infrastructure development.
5. Environment: Progress in expanding forest cover and improving urban air quality was
made, though some targets were missed due to slow execution.
Challenges:
The 2008 financial crisis slowed down the economy, impacting GDP growth.
Some social targets, particularly related to health and education, were not fully achieved due
to funding and implementation gaps.
While the Eleventh Plan set ambitious targets for inclusive and sustainable growth, external
global events and domestic challenges limited its full realization. However, the plan laid
important groundwork for future policy directions, especially in areas like education and
infrastructure.