INDIAN ECONOMY 1950-1990

  ECONOMIC SYSTEM

 An Economic system is an order of an economy.  Thus. an economic system is a system of production, resource allocation and distribution of goods and services within a society.

Capitalism (Free Economy/ Market Economy/ Laissez Faire)

Resources are owned, managed and controlled by private individuals. The private individuals.

Its main aim to earn maximum profits.

Market forces i.e. demand for and supply of goods determined the price. Government’s role is limited.

Socialism (Planned Economy)

 Resources are owned by the society. The Government undertakes the production of goods and services. The aim, of production is welfare of the people.

Economic Planning solves the basic questions.

Mixed Economy 

It is a combination of capitalism and socialism. Private and Public sectors co exist.

 REASONS BEHIND THE ADOPTION OF

 MIXED ECONOMY

   

   (i) Economic condition of India was backward at the time of Independence. So, we wanted both private public sectors to take our country to progress.

   (ii) Socialism was adopted as our national goal. So, importance was given to the growth of public sector.

   (iii) India became a democratic country. So, people had to be given the right to own resources.

Prasanta Chandra Mahalanobis: The Architect of Indian Planning

Planning commission was set up in 1950 to formulate Plans in India. 

The Prime Minister is the Chairman of the Planning Commission. In 2015, Niti Ayog was set up to replace Planning Commission.

According to the planning commission, “Economic Planning refers to the utilization of country’s resources in to different development activities in accordance with national priorities”.

India opted for planning because:

   (I) India adopted mixed economy as her economic system. It is a combination of socialism and capitalism. Planning is needed to solve the basic questions in the public sector.

   (ii) India wanted to achieve quick economic progress in order to abolish poverty and unemployment. Planned use of resources is necessary for quick economic progress.

   (iii) India wants the equitable distribution of resources and income. Planning would help to achieve this goal.

The Goals of Five-Year Plans are - Growth, Modernisation, Self-reliance and Equity.

1. Growth:

Economic growth refers to increase in production capacity.

GDP is a good indicator of Economic Growth.

 In economic planning importance is given to the development of agriculture, industry and service sectors. 

This will help in increasing the GDP. More goods and services will be available to the people.

2. Modernisation:

It refers to adoption of modern technology. New methods of production should be adopted in primary, secondary and tertiary sectors. 

This help to increase productivity. Plans give importance to the development of Science and Technology.

Modernisation also refers to modernization of society. Education must spread among the people. Condition of women should improve. Social evils should be abolished.

3. Self-reliance:

Self reliance means dependence on domestically produced goods.

Dependence on other countries for food and other essential commodities may harm our freedom to take independent decisions on world affairs.

Efforts to achieve self reliance will help in the growth of home industries.

Self reliance will generate employment opportunities and reduce the problems of unemployment and poverty.

4. Equity:

Socialism is one of our National Goals. The benefits of economic growth should reach the poorer sections of the society.

 Everyone should be able to enjoy the basic facilities of life. Poverty has to be abolished. 

The gap between the rich and poor should be reduced. 

Plans contained several programmes for the poor people.

Growth with equity is an important planning objective.

     

AGRICULTURAL DEVELOPMENT DURING THE PERIOD FROM 1950 TO 1990

Land Reforms:

Land reforms refer to the steps taken to provide ownership rights to the real tillers. 

The land tenure system introduced by the colonial government in India was unjust. The land was owned by intermediaries standing between the tiller and the soil.

These intermediaries did not take any step to increase agricultural productivity. 

Our agricultural sector was in a backward condition at the time of independence. 

So, land reforms were needed.

Land Ceiling 

The government fixed the maximum area of land that can be owned by an individual. 

If anyone owned more than the fixed ceiling, the government could take over the surplus land and distribute it among the landless.

    REASONS BEHIND THE FAILURE OF LAND REFORMS

    (i) Zamindars made use of the loopholes of the land reform laws. They continue to own large areas of land.

   (ii) Land ceiling laws were challenged in the court by the Zamindars. Then they registered their surplus lands in the name of their relatives.

   (iii) In many places heavy rent is collected from the peasants.

  (iv) The land lords evict the peasants from the land that they cultivate.

Subsidy 

    Subsidy is an amount of money  given by the Government to an industry or business  keep the price of a commodity or service low.

   Arguments against subsidies

    (i) Soon after independence, it was necessary to give subsidies to encourage the farmers to adopt the new technology. Now, the new technology is widely adopted and it is profitable. So, subsidies can be abolished.

    (ii) Subsidies mostly benefit only the fertiliser industry and the rich farmers. The poor farmers and agricultural workers are not benefited.   (iii) The government has to spend a major part of its income to provide subsidies. So, the government does not have adequate resources for developmental activities.

    (iv) Subsidies encourage the farmers to use more fertilisers than required. This destroys the natural fertility of the soil.

      Arguments in favour of subsidies

   (i) Farming in India is risky. Subsidies are needed to encourage the farmers to take the risk.

   (ii) Most of the farmers are poor. They cannot afford to buy the agricultural inputs without subsidies.

   (iii) Abolition of subsidies will widen the gap between the rich and the poor.

Green Revolution (or Technological Reforms): 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 along

with the use of fertiliser and pesticide in the correct quantities as well as regular supply of water.

Reasons for the adoption of Green Revolution:

a. At the time of independence, about 75% of the country’s population was dependent on agriculture.

b. Productivity in the agricultural sector was very low because of the use of old technology andthe

absence of required infrastructure for the vast majority of farmers.

c. India’s agriculture vitally depends on the monsoon and if the monsoon fell short the farmers had to face lot of troubles.

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

revolution.

Indian Economy experienced the success of Green Revolution in two phases:

a. In the first phase of the green revolution (mid 1960s upto mid1970s), the use of HYV seeds was

restricted to more affluent states such as Punjab, Andhra Pradesh, Tamil Nadu. Further the use ofHYV

seeds primarily benefited the wheat growing regions only.

b. In the second phase of the green revolution (mid1970s to mid1980s), the HYV technology spread to a larger number of states and benefited more variety of crops.

                BENEFITS OF GREEN REVOLUTION

    (i) Agricultural output increased enormously. So, farmers had marketable surplus.

    (ii) Income of the farmers increased. They could come above the poverty line.

   (iii) India could achieve self sufficiency in food grains. Famines could be avoided.

    (iv) The government could collect huge quantities of food grains from the farmers and maintain a buffer stock.

    (v) Fertiliser industry developed. It provided employment to many people.

                Negative effects of Green Revolution

   (i) Green Revolution benefited only the rich farmers. The new technology was expensive. Marginal and small farmers did not have money needed to adopt it.

   (ii) Green Revolution was limited to few crops like wheat and rice.HYV seeds were not available for many crops.   

    (iii) Use of chemicals and over irrigation resulted in the degradation of soil.

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 1956 was adopted. This

resolution formed the basis of the Second Five Year Plan. Main features of this policywere:

1. Classification of industries into three categories:

a. The first category comprised industries which would be exclusively owned by 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 newunits;

c. the third category consisted of the remaining industries which were to be in the private sector.

2. Industrial Licensing: Private sector was kept under state control through a system oflicenses.

An industrial license is a written permission from the government, to an industrial unit to

manufacture goods. According to Industrial Licensing –

(i)No new industry was allowed unless a license was obtained from the government.

(ii)  It was used for promoting industry in backward regions as it was easier to obtain a license ifthe

industrial unit was established in an economically backward area. In addition, such units were

given concessions such as tax benefits and electricity at a lower tariff. The purpose of this

policy was to promote regional equality.

(iii) Even an existing industry had to obtain a license for expanding output or for diversifying

production (producing a new variety of goods). This was meant to ensure that the quantity of

goods produced was not more than what the economy required.

(iv) License to expand production was given only if the government was convinced that economy

required a larger quantity of goods.

   Privileges to the enterprises set up in   Backward areas

    (i) It was easy to get license if the unit is set up in a backward area.

    (ii) Units in backward areas were given several tax concessions.

   (iii) The Government provided electricity to them at lower rates.

    (iv) They could get land at low rates.

SMALL SCALE INDUSTRIAL SECTOR

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 investment allowed on the assets of

a unit. 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.

Importance of SSI

(i) Small-scale industries generate more employment than the large-scale industries as they are more

labour intensive i.e., they use more labour (and less capital).

(ii)  SSIs cannot compete with the big industrial firms; it is obvious that development of small-scale

industry requires them to be shielded or protected from the large firms So, various steps were taken

by the govt. for (protection as well as) the development of SSI.

Steps taken by the government to promote SSIs

a) The production of a number of products was reserved for the small-scale industry; the criterionof

reservation being the ability of these units to manufacture the goods.

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

Trade Policy (1950-1990) / Import Substitution Policy

Import Substitution policy aimed at replacing or substituting imports with domestic production.

It is also called ‘inward looking trade strategy’.

The main objective of this policy of the government was to restrict imports and protect the domestic

industries from foreign competition.

Protection from imports took two forms: tariffs and quotas. (instruments for import restrictions)

i. Tariffs are monetary restrictions in the form of tax on imported goods; they make imported goods

more expensive and discourage their use.

ii. Quotas are non-monetary or quantitative restrictions on imports, specify the quantity of good

which

can be imported.

The effect of tariffs and quotas is that they restrict imports and therefore, protect the domestic firms from

foreign competition.

Reason for Import Substitution:

1) The policy of protection (in the form of Import Substitution) is based on the notion that industries of

developing countries like India 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 willlearn

to compete in the course of time.

2) Our planners also feared the possibility of foreign exchange being spent on import of luxury goods

if no restrictions were placed on imports.

    Positive impact of the Economic Policy followed from 1950 to 1990 on the Industrial Development of India.

    (i) Contribution of Industrial Sector to GDP increased from 11.8 percent in 1950 – 51 to 24.6 percent in     1990 – 91.

   (ii) Annual growth rate of industrial sector increased to 6 percent.

   (iii) Industrial Sector became diversified. We started making all the goods needed for our people.

   (iv) Basic and key industries and capital goods industries developed.

   (v) Promotion of small scale industries enabled even ordinary people to start industrial units.

  (vi) Protection from foreign competition helped domestic industries to develop.

    Negative Impact of the Economic Policy followed from 1950 to 1990 on the Industrial Development of India

     (i) Public Sector units became less efficient and many of them became sick units.

    (ii) Big industrial units misused the system of license. They would get license not to start a unit but to prevent competitors from starting new units.

    (iii) The Permit License Raj discouraged private investors and prevented the growth of industrial sector.

    (iv) Lack of competition reduced the quality of services and goods provided by our producers.

    (v) Corruption and malpractices became widespread in the country.

FOREIGN TRADE 

    (i) India followed a policy of import substitution. Instead of importing goods from other countries, efforts were made to produce those goods in India.

    (ii) Indian industries were not capable to compete with foreign companies. So, steps were taken to protect them.

   (iii) Heavy import duty was imposed on imported goods.

    (iv) The Government fixed import quota for several goods.

      Two forms of protection for domestic industries

    (i) Tariff Protection: The Government imposed heavy import duty on imported goods. vThis measure protected our industries from foreign competition.

     (ii) Quotas: Quotas specify the quantity of goods that can be imported. Government fixed import quotas.

                         Protection saved our industries from foreign competition. It helped domestic industries to develop. Protection also reduced the use of foreign exchange to buy consumer goods.

      Main features of the economic policy prior to 1990

    (i) India adopted mixed economy. We wanted to develop both public and private sectors.

    (ii) Economic Planning was introduced in order to achieve economic growth with equity.

    (iii) Land Reforms were introduced to make the real tiller the owner of the land.

    (iv) Public sector was given more importance in our industrial policy.

    (v) Restrictions were imposed on private sector. The system of license was introduced

    (vi) India followed an inward looking foreign trade policy. Heavy import duty and import quotas were introduced to protect domestic industries.

    Positive impact of Economic Policy from 1950 to 1990 on Indian Economy.

    (i) Contribution of Industrial Sector to GDP increased from 11.8 percent in 1950 – 51 to 24.6 percent in    1990 – 91. Annual growth rate of industrial sector increased to 6 percent.

   (ii) Industrial Sector became diversified. We started making all the goods needed for our people.

   (iii) India could achieve self sufficiency in food grains. Green Revolution improved the living condition of our farmers.

   (iv) Land Reforms helped many farmers to become owners of land

    Negative Impact of Economic Policy from 1950 to 1990 on Indian Economy

    (i) Public Sector units became less efficient and many of them became sick units.

    (ii) The Permit License Raj discouraged private investors and prevented the growth of industrial sector.

   (iii) Lack of competition reduced the quality of services and goods provided by our producers.

   (iv) India failed to develop our export sector. Balance of Trade became unfavourable.