(Indian Economic Development) CHAPTER 2: INDIAN ECONOMY 1950-1990

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. 
  • 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.
  • In this view, India would be a socialist society with a strong public sector but also with private property and democracy. Every society has to answer three questions

1) What goods and services should be produced in the country?

2) How should the goods and services be produced? Should producers use more human labour or more capital (machines) for producing things?

3) How should the goods and services be distributed among people? Answer to these questions: 

From capitalist view:

  • 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. 
  • In a capitalist society the goods produced are distributed among people not on the basis of what people need but on the basis of Purchasing Power—the ability to buy goods and services. That is, one has to have the money in the pocket to buy it. 
  • Low cost housing for the poor is much needed but will not count as demand in the market sense because the poor do not have the purchasing power to back the demand. As a result this commodity will not be produced and supplied as per market forces. Such a society did not appeal to Jawaharlal Nehru, our first prime minister, 

From Socialist View:

  • 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.
  • Strictly, a socialist society has no private property since everything is owned by the state. In Cuba and China, for example, most of the economic activities are governed by the socialistic principles. 
  • 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.
  • 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.

 

What is a Plan? 

  • A plan spells out how the resources of a nation should be put to use. 
  • 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.

THE GOALS OF FIVE YEAR PLANS

  • The goals of the five year plans are: growth, modernization, self-reliance and equity. 
  • The planners have to ensure that, as far as possible, the policies of the plans do not contradict these four goals.

Growth:

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

Modernisation:

  • To increase the production of goods and services the producers have to adopt new technology. For example, a farmer can increase the output on the farm by using new seed varieties instead of using the old ones.
  • 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.

Self-reliance:

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

  • The policy makers of independent India had to address these issues which they did through land reforms and promoting the use of High Yielding Variety‘ (HYV) seeds which ushered in a revolution in Indian 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.
  • 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.
  • Land ceiling 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. The purpose of land ceiling was to reduce the concentration of land ownership in a few hands.
  • Land reforms were successful in Kerala and West Bengal because 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 landholding continues to this day.

The Green Revolution:

  • 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 fertiliser 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 fertiliser and pesticide. As a result, in the first phase of the green revolution (approximately mid 1960s upto mid 1970s), the use of HYV seeds was 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.
  • The portion of agricultural produce which is sold in the market by the farmers is called marketed surplus
  • 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).
  • Why was such a large proportion of the population engaged in agriculture although agricultural output could have grown with much less people working in the sector? The answer is that the industrial sector and the service sector did not absorb the people working in the agricultural sector.
  • Many economists call this an important failure of our policies followed during 1950-1990.

INDUSTRY AND TRADE

  • 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:
  • 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.

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-

The first category comprised industries which would be exclusively owned by the state;

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;

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: (‘labour intensive’)

  • In 1955, the Village and Small-Scale Industries Committee, also called the Karve Committee, noted the possibility of using small-scale industries for promoting rural development.
  • A  small-scale industry‘ is defined with reference to the maximum invest- ment 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 lakh; at present the maximum investment allowed is rupees one crore.

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 substi- tution.
  • 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. 

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