CHAPTER-2 INDIAN ECONOMY 1950-90

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On 15 August 1947, India woke to a new dawn of freedom. Among different types of
economic systems, Socialism appealed to Jawaharlal Nehru the most. Nehru and many
other leaders adopted the system of mixed economy i.e. an alternative to the extreme
versions of capitalism and socialism. It combined the best features of socialism without its
drawbacks. Thus, India would be a socialist society with a strong public sector along with
private property and democracy. The ‘Industrial Policy Resolution’ of 1948 and the
Directive Principles of the Indian Constitution reflected this outlook.

Socialism, as established in the former Soviet Union, did not appeal to Nehru as all the
means of production i.e. factories and farms were owned, controlled and operated by the
government. There was no private property. It was not possible in a democracy like India
for the government to change the ownership pattern of land and other properties as it was
done in the former Soviet Union.

Capitalist Economy is the one in which the means of production are owned, controlled and
operated by the private sector. Production is done mainly for earning profits.

In 1950, the planning commission was set up for execution and monitoring of five year
plans with the Prime Minister as its Chairperson. Then NITI Aayog was formed in 2015.
(National Institute for Transforming India).

TERMS
1. ECONOMIC PLANNING: It can be defined as making major economic decisions by the
conscious decision of a determinate authority, on the basis of a comprehensive survey of the
economy as a whole. (It means utilisation of a country's resources into different
development activities in accordance with national priorities.)
2. PLAN: A plan is a document showing a detailed scheme, program and strategy, worked
out in advance for fulfilling an objective. India adopted the system of 5 year planning from
the then Soviet Union and continued with 5 year plans up to the year 2017.
3. PLANNING OBJECTIVES: These refer to long term objectives to be achieved over a
period of 20 years, also called perspective plan.
4. PLAN OBJECTIVEs: These refer to short term objectives to be achieved for a period of
5 years which are sector specific. These form the basis for perspective plan.
5. Prasanta Chandra Mahalanobis is considered as the architect of Indian Planning.

GOALS OF OF 5 YEAR PLANS

1) GROWTH : It refers to an increase in the country’s capacity to produce the output of
goods and services within the country. It implies either of the following:
· A larger stock of productive capital.
· A larger size of supporting services like transport and banking.
· An increase in the efficiency of productive capital and services.
A good indicator of economic growth is steady increase in GDP. GDP is the
market value of all the final goods and services produced in the country during a year.
Increase in GDP implies that there are more goods and services available for the people of
the country and hence their standard of living improves. The GDP of a country is derived
from the different sectors of the economy, namely the agricultural, industrial and service
sector. The contribution made by each of these sectors makes up the structural composition
of the economy. The contribution of each sector varies from country to country.
(You can think of the GDP as a cake and growth is increase in the size of the cake. If the
cake is larger, more people can enjoy it.)

2) MODERNISATION : It has 2 aspects:

a)Use of new technology: It means adoption of new methods, machinery and tools to
increase the productivity, efficiency and finally the profit margins. For eg: a farmer can
increase the output on the farm by using new varieties of seeds instead of old ones.
Similarly, a factory can increase output by using a new type of machine.
b) Changes in social outlook: It increases awareness and outlook of the people related to
different social aspects of the economy. It means recognition of similar rights for women as
of men. For eg: a modern society makes use of the talent of women in the workplace-in
banks, factories, schools etc and does not let her confine at home.

3) SELF RELIANCE : A nation can promote economic growth and modernisation by using
its own resources or by importing them from other nations. The first seven 5 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 because of 2 reasons:
a) To reduce foreign dependence : As India was recently freed from foreign control, it is
necessary to reduce our dependence on foreign countries, especially for food.
b) To avoid foreign interference: It was feared that dependence on imported food supplies,
foreign technology and foreign capital may increase foreign interference in the policies of
our country.

4)EQUITY : The objectives of growth, modernisation and self reliance, by themselves, may
not improve the kind of life which people are living. 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, modernisation and self-reliance, equity is also
important. Every Indian should be able to meet his basic needs such as food, a decent
house, education, health care and inequality in the distribution of wealth should be
reduced.

Note: 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

IMPACT OF GOALS ON AGRICULTURE

In order to promote equity in agriculture, measures like Land Reforms and Land Ceiling
were undertaken.
1)LAND REFORMS :
· At the time of independence, the land tenure system was characterised by
intermediaries who merely collected rent from 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 USA.
· Equity in agriculture called for land reforms which primarily refers to change in
the ownership of the land holdings, to abolish intermediaries and to make the tillers
the owners of land. Its main purpose was that ownership of land would give
incentives to the tillers to invest in making improvements provided sufficient capital
was made available to them.
· The abolition of intermediaries freed about 200 lakh tenants from being
exploited by the zamindars and brought them into direct contact with the
government. The ownership rights granted to tenants gave them the incentive to
increase the output and this contributed to growth in agriculture.
· However, it was not a complete success as in some areas the former zamindars
continued to own large areas of land by making use of some loopholes in the
legislation in the following ways:
a) Tenants were evicted and the landowners claimed to be self-cultivators,
claiming ownership of the land.
b) The poorest of the agricultural labour did not benefit from the land reforms
even though he became the owner of the land.
· Land reforms were successful in Kerala and West Bengal as these states had
governments committed to the policy of land to the tiller. Unfortunately other states
did not have the same level of commitment and vast inequality in landholdings
continues to this day.

2)LAND CEILING :
· It was another policy to promote equity in the agricultural sector.
· This means fixing the maximum size of land which could be owned by an
individual.
· Its purpose was to reduce the concentration of land ownership in a few hands.
· The land ceiling legislation faced hurdles. The big landlords challenged the
legislation in court and delayed its implementation. They used this delay to register
their lands in the name of close relatives, thereby escaping from the legislation.

#THE GREEN REVOLUTION : Green revolution refers to the tremendous increase in

production of food grains (specially for wheat and rice) resulting from the use of High
Yielding Variety (HYV) seeds, fertilisers, pesticides as well as regular supply of water.
At independence about 75% of the country’s population was dependent on agriculture. It
was characterized with following features:
· Productivity in the agricultural sector was very low because of the use of old
technology and absence of required infrastructure for the vast majority of farmers.
 · India’s agriculture is vitally dependent on monsoon and in case of shortage of
monsoon, farmers had to face a lot of troubles as very few farmers had access to
artificial sources of irrigation.

ADVANTAGES OF GREEN REVOLUTION

a)It enabled India to achieve self sufficiency in food grains. India was no longer at the
mercy of America, or any other nation, for the food requirements. The I phase of
Green Revolution (mid 1960s to mid 1970s) was restricted to the more affluent states
like Punjab, Andhra Pradesh and Tamil Nadu which were primarily wheat growing
states. The II phase of Green revolution (mid 1970s to mid 1980s) spread to a larger
number of states and benefited more variety of crops.
b)Green revolution resulted in Marketable Surplus (the portion of agricultural produce
which is sold in the market by the farmers after self consumption) . As a result of the
sale of marketable surplus, the price of food grains declined relative to other items of
consumption. The low income group, who spend a large percentage of their income
on food, benefited from this decline in relative prices.
c) It enabled the government to procure sufficient amount of food grains to build a
buffer stock which could be used in times of food shortage.

DISADVANTAGES OF GREEN REVOLUTION

1.One risk was that it would increase the disparity 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.
2.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.
But these fears did not come true as to make green revolution a success, the
government took following measures:
1. The government provided loans at a low interest rate to small farmers and subsidised
fertilisers so that they could also have access to the needed inputs. This initiative
equaled the output on small farms and large farms.
2. The risk of small farmers being ruined when pests attack their crops was
considerably reduced by the services rendered by the government research institutes.

#SUBSIDY : Subsidy means supply of certain inputs to the farmers at a price lower than
the market rate. In the initial phase of the green revolution, subsidies were necessary in
order to provide an incentive and encouragement for adoption of new HYV technology by
farmers in general and small farmers in particular.

ARGUMENTS AGAINST SUBSIDIES

1. Some Economists believed that since objective of profitability has been achieved by
providing subsidies to the farmers, so subsidies should be phased out.
2. Subsidies on fertilisers are meant to help the farmers but this way we are also
helping the fertiliser industry by giving benefit of larger market without any
compensation.
3. It does not benefit the target group only as even the rich farmers continue to enjoy
 the benefit of subsidies.
4. It is a huge burden on the government’s finances.
5. Subsidies can lead to wasteful consumption and overproduction. 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.
6. Fertiliser and pesticide subsidies result in overuse of resources which can be harmful to
the environment and may hurt the soil, water and animals.

ARGUMENTS IN FAVOUR OF SUBSIDIES

1. The government should continue with agricultural subsidies as farming in India
continues to be a risky business. Most farmers are so poor that withdrawal of
subsidies would make it difficult for them to buy essential inputs. They may not be able
to cope with it.
2. Withdrawal of subsidies would increase the inequality between rich and poor
farmers and violate the goal of equity.
Thus, the debate continues till date. The solution is not to abolish the
subsidies but the government should take correct steps to ensure that only the poor
farmers enjoy the benefits.

CRITICAL APPRAISAL OF AGRICULTURAL DEVELOPMENT

1) By late 1960s, Indian agricultural productivity had increased sufficiently to enable the
country to be self-sufficient in food grains.
2) By late 1990s, 65%of the country’s population continued to be employed in agriculture.
Between 1950 and 1990, the proportion of GDP contributed by agriculture declined
significantly but not the population depending on it. The reason for such a large proportion
of the population being dependent on agriculture was that the industrial and service sectors
did not absorb the people working in the agricultural sector. This was the main cause of
failure of our economic policies followed during 1950-90.

IMPACT OF GOALS ON INDUSTRY AND TRADE

The five year plans placed a lot of emphasis on industrial development as :
a)Industry provides employment which is more stable than the employment in agriculture
b)It provides modernisation and overall prosperity.

The variety of industries was very narrow at the time of independence. They were largely
confined to cotton textiles and jute. Following steps were taken for the development of the
Industrial base as there were only 2 well managed iron and steel firms –one in Jamshedpur
and the other in Kolkata.
1.Public and Private sectors in Indian Industrial development
 At the time of independence, the role of government and private sector
in industrial development was not clear. State had to play an extensive role in promoting
the industrial sector as:
· 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.
· The market was not 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, according to the
second Five year plan. It meant complete control of the state over those industries
which were vital for the economy. The Public sector would lead and the policies of
the private sector would be complementary to it.
2. Industrial Policy resolution (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. (It formed
the basis of the 2nd Five Year Plan). It categorised industries into 3 categories:
a) The first category comprised industries which would be exclusively owned by the
state.
b) 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.
c) The third category consisted of the remaining industries which were to be in the
private sector. The Private sector had to follow following rules and regulations:
· No new industry was allowed unless a license was obtained from the
government. This policy was used for promoting industry in backward regions.
Such units were given certain concessions such as tax benefits and electricity at a
lower tariff. The purpose of this was to promote regional equality.
· Even an existing industry had to obtain a license for expanding output or for
diversifying production in order to ensure that the quantity of goods produced was
not more than what the economy required. License to expand production was given
only if the government was convinced that the economy required a larger quantity
of goods.

3. Small Scale Industry

In 1955, the village and small scale industries committee, also called the Karve committee,
noted the possibility of using small-scale industries for promoting growth and development.
The industry in which the maximum investment allowed is Rupees one crore
is called Small Scale Industry. (1950- 5 lakhs)
a) They are more labour intensive and therefore generate more employment.
b) The production of a no. of products was reserved for the Small scale industry as they
cannot compete with the big industrial firms; the criteria of reservation was the
ability of these units to manufacture the goods.
c) They were also given concessions such as lower excise duty and bank loans at lower
interest rates.
TRADE POLICY: IMPORT SUBSTITUTION
The industrial policy was closely related to the Trade Policy. Inward looking trade strategy
or import substitution aimed at replacing imports with domestic production. For eg:
instead of importing vehicles made in a foreign country, industries would be encouraged to
produce them in India itself. In this policy, the government protected the domestic
industries from foreign competition and restricted imports in 2 forms:
· Tariffs: Tariffs are a tax on imported goods, which makes them more expensive
and discourage their use.
· Quotas: It specifies the quantity of goods which can be imported.
RATIONALE BEHIND PROTECTION
1. Industries of developing countries were not in a position to compete against the
goods produced by more developed economies. With protection, the domestic industries
would be able to compete in due course of time.
2. We can check the import of luxury goods and save foreign exchange.
3. It can help in promoting exports.

EFFECTS OF POLICIES ON INDUSTRIAL DEVELOPMENT

1. The proportion of GDP contributed by the industrial sector increased from 13 %
in 1950-51 to 24.6 % in 1990-91, which is an important indicator of development.
2. The 6% annual growth rate of the industrial sector is commendable.
3. The industrial sector became well diversified by 1990, largely due to the public sector. It
was no longer restricted to Cotton Textiles and Jute.
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 which otherwise could not have
developed.

DISADVANTAGES OF POLICIES ON INDUSTRIAL DEVELOPMENT

1. State enterprises continued to produce certain goods and services with monopoly
although this was no longer required. For eg: telecommunication service. The government
had the monopoly of this service even though private sector firms could also provide it. Due
to the absence of competition, one had to wait for a long time to get a telephone connection.
Another example is the establishment of Modern Bread, a bread manufacturing firm, as if
the private sector could not manufacture bread.
2. No distinction was made between:
· What the public sector can do alone
· What the private sector can also do.
For eg: even now, only the public sector can supply national defense products.
Even though the private sector can manage hotels well, yet, the government also runs
hotels. Thus, the state should get out of those areas which the private sector can manage
and instead it should concentrate on other important services which private sector
cannot handle.
3. 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.
However, a loss making private firm will not waste resources by being running
despite the losses.
4. The need to obtain a license to start an industry was misused by the industrial
houses: a big industrialist would get license not only for starting a new firm but to
prevent its competitors from starting new firms. The permit license raj prevented
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.
5. Due to restrictions on imports, the Indian consumers had to purchase whatever the
Indian producers produced. The producers had no incentives to improve the quality
of their goods as they were getting higher prices for their low quality items. The
protection of domestic industries from foreign competition did more harm than
good.
According to some economists, the public sector is not meant for earning profits but to
promote the welfare of the nation. So they should be evaluated on the basis of their
contribution to the welfare of the people and not on the profits they earn.

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 selfreliance,
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 scenarios, and
the new economic policy was initiated in 1991 to make our economy more efficient. This is
the subject of the next chapter.