Indian EconomyClass 11 Indian Economic Development Notes

Introduction

After gaining freedom on 15 August 1947, India's leaders faced the enormous task of nation-building. A crucial decision was choosing an economic system that would promote the welfare of all citizens, not just a select few. The leaders, particularly India's first Prime Minister, Jawaharlal Nehru, were drawn to socialism but rejected the extreme version of the Soviet Union, where the government owned all property and there was no democracy.

Instead, they sought a middle path between the extremes of capitalism and socialism, leading to the adoption of a mixed economy.

Types of Economic Systems

Every economy must answer three basic questions: What to produce? How to produce? and How to distribute it? Different systems answer these in different ways.

• Capitalist Economy: In this system, also called a market economy, market forces of supply and demand answer the three questions.

  • What to produce? Only goods that are in demand and can be sold profitably.
  • How to produce? Using the cheapest methods, whether that means more labor or more machines.
  • How to distribute? Based on Purchasing Power—the ability to buy goods. If you can't afford something, you don't get it, even if you need it. [!example] In a pure market economy, low-cost housing for the poor might not be built because the poor lack the purchasing power to create "demand," even though the need is great. Nehru felt this system would leave most Indians behind.

• Socialist Economy: In this system, the government makes all the economic decisions based on the needs of society.

  • The government decides what goods are produced, how they are produced, and how they are distributed.
  • Distribution is based on what people need, not what they can afford. For example, a socialist nation might provide free healthcare to all.
  • Strictly, there is no private property; the state owns everything.

• Mixed Economy: This is a blend of both systems, which is what India adopted.

  • The market provides whatever goods and services it can produce well.
  • The government provides essential goods and services that the market fails to provide.
  • This approach aimed to combine the best features of socialism (social welfare) with a system that allowed for private property and democracy.

The Era of Planning

To guide the mixed economy, India adopted a system of economic planning. In 1950, the Planning Commission was established with the Prime Minister as its Chairperson. This marked the beginning of the Five Year Plans.

• A plan spells out how a nation's resources should be used to achieve specific goals within a set period.
• India's plans were for five years and were inspired by the model used in the former Soviet Union.
• These plans also set long-term goals for a twenty-year period, known as a 'perspective plan'.

The Goals of Five Year Plans

The Five Year Plans were built around four central goals. While not all goals could be given equal importance in every plan, they formed the guiding principles of India's development from 1950-1990.

Growth

This refers to increasing the country's capacity to produce goods and services. A good indicator of growth is a steady increase in the Gross Domestic Product (GDP), which is the total market value of all final goods and services produced in a country in a year.

• Economic growth is like increasing the size of a cake; if the cake is larger, more people can enjoy a piece.
• The GDP is derived from three main sectors: the agricultural sector, the industrial sector, and the service sector. The contribution of each sector makes up the structural composition of the economy.

Modernisation

This goal involved two key aspects:

1. Adoption of new technology: Using new technology to increase the production of goods and services. For example, a farmer using new seed varieties or a factory using a new type of machine.
2. Changes in social outlook: This included modern ideas like recognizing that women should have the same rights as men and encouraging their participation in the workforce.

Self-reliance

This meant avoiding imports of goods that could be produced within India.

• This policy was seen as necessary to reduce dependence on foreign countries, especially for essential items like food.
• Having recently been freed from foreign rule, leaders feared that dependence on foreign supplies, technology, and capital could make India's sovereignty vulnerable to foreign interference.

Equity

Growth, modernisation, and self-reliance alone do not guarantee a better life for everyone. A country can have high growth and modern technology while most of its people live in poverty. Therefore, equity was a crucial goal.

• Equity means ensuring that the benefits of economic prosperity reach the poor sections of society.
• It aims to reduce inequality in the distribution of wealth and ensure every Indian can meet basic needs like food, a decent house, education, and healthcare.

Agriculture

During colonial rule, India's agricultural sector was stagnant and unequal. After independence, policymakers addressed this through two major initiatives: land reforms and the Green Revolution.

Land Reforms

At independence, the land tenure system was dominated by intermediaries like zamindars and jagirdars, who collected rent from the actual farmers but did nothing to improve the land. This led to low productivity. To promote equity, land reforms were introduced, which primarily involved changing the ownership of landholdings.

• Abolition of Intermediaries: The government took steps to abolish the zamindari system and make the tillers the actual owners of the land. The idea was that ownership would give farmers the incentive to invest in improvements and increase output. This policy brought around 200 lakh tenants into direct contact with the government.
• Land Ceiling: This policy fixed the maximum size of land that could be owned by an individual. The purpose was to reduce the concentration of land ownership in a few hands and redistribute surplus land to the landless.

Limitations of Land Reforms:

• The goal of equity was not fully achieved. Former zamindars found loopholes in the laws to retain large areas of land.
• In some cases, landowners evicted tenants and claimed to be "self-cultivators" to keep the land.
• Big landlords challenged the land ceiling legislation in courts, delaying its implementation and using the time to register their lands in the names of relatives.
• The poorest agricultural laborers, like sharecroppers and the landless, did not benefit from these reforms.
• Land reforms were only truly successful in states like Kerala and West Bengal, where the state governments were strongly committed to the policy.

The Green Revolution

The stagnation in Indian agriculture was permanently broken by the Green Revolution. This refers to the large increase in the production of food grains (especially wheat and rice) resulting from the use of High Yielding Variety (HYV) seeds.

• Requirements: HYV seeds required the correct use of fertilizers and pesticides, as well as a regular supply of water through reliable irrigation.
• First Phase (mid-1960s to mid-1970s): The use of HYV seeds was limited to more affluent states like Punjab, Andhra Pradesh, and Tamil Nadu, and primarily benefited wheat-growing regions.
• Second Phase (mid-1970s to mid-1980s): The technology spread to a larger number of states and benefited more crops.

Benefits of the Green Revolution:

• Self-Sufficiency: It enabled India to achieve self-sufficiency in food grains, ending its dependence on other nations for food.
• Marketed Surplus: A good portion of the increased produce was sold in the market by farmers, a concept known as marketed surplus. This increased the supply of food grains and caused their prices to decline relative to other goods, benefiting low-income groups who spend a large part of their income on food.
• Buffer Stock: The government was able to procure enough food grains to build a stock that could be used during times of food shortage.

Risks and Government Intervention:

• There was a fear that the Green Revolution would only benefit big farmers, as they were the only ones who could afford the expensive inputs like fertilizers and irrigation.
• To prevent this, the government provided loans at low interest rates to small farmers and subsidized fertilizers. This ensured that small farmers could also access the new technology and benefit from it.
• Government-established research institutes also helped reduce the risk of pest attacks on HYV crops.

The Debate Over Subsidies

The use of subsidies in agriculture remains a hotly debated topic.

• Arguments for Subsidies:

  • They were necessary initially to encourage farmers to adopt the new, risky HYV technology.
  • Farming in India continues to be a risky business, and most farmers are poor and cannot afford inputs without subsidies.
  • Eliminating subsidies could increase inequality between rich and poor farmers, violating the goal of equity.

• Arguments Against Subsidies:

  • Once a technology is widely adopted and profitable, subsidies should be phased out as their purpose has been served.
  • A large portion of the fertilizer subsidy benefits the fertilizer industry and prosperous farmers, not the intended poor farmers.
  • Subsidies are a huge burden on the government's finances.
  • They can encourage wasteful use of resources, such as cultivating water-intensive crops in water-scarce regions because water is subsidized or free.

Industry and Trade

Developing a strong industrial sector was a major focus of the Five Year Plans, as industry provides more stable employment than agriculture and promotes modernization and overall prosperity.

Public and Private Sectors in Industrial Development

At independence, India's industrial base was very narrow, largely confined to cotton textiles and jute. A key question was what role the government and private sector should play.

• Private industrialists lacked the capital to undertake the large investments needed for development.
• The market was not big enough to encourage major projects.
• For these reasons, and due to the socialist-leaning policies, the government decided to play a leading role. The public sector was to control the "commanding heights of the economy," while the private sector would play a supporting role.

Industrial Policy Resolution 1956 (IPR 1956)

This resolution formed the basis of the Second Five Year Plan and laid out the framework for industrial development. It classified industries into three categories:

1. Industries exclusively owned by the government.
2. Industries where the private sector could supplement the efforts of the public sector, but only the government could start new units.
3. The remaining industries, which were left to the private sector.

Even though a category was left for the private sector, it was kept under state control through a system of licenses, often called the permit license raj.

• No new industry could be started without a license from the government.
• An existing industry needed a license to expand output or diversify its production.
• This policy was used to promote regional equality by making it easier to get licenses for industries in backward areas.

Small-Scale Industry

In 1955, the Village and Small-Scale Industries Committee, known as the Karve Committee, highlighted the potential of small-scale industries for promoting rural development.

• Small-scale industries are considered more 'labour intensive', meaning they use more labor than large-scale industries and thus generate more employment.
• To protect them from large firms, the government reserved the production of certain goods for the small-scale sector and provided concessions like lower taxes and bank loans at lower interest rates.

Trade Policy: Import Substitution

India's industrial policy was closely linked to its trade policy. For the first seven plans, India followed an inward-looking trade strategy called import substitution.

• The Goal: To replace or substitute imports with domestic production. [!example] Instead of importing cars from a foreign country, the government encouraged industries to produce them in India.
• Protection from Imports: The government protected domestic industries from foreign competition using two main tools:
  • Tariffs: A tax on imported goods, making them more expensive to discourage their use.
  • Quotas: A limit on the quantity of goods that can be imported.
• The Rationale: It was believed that industries in developing countries were not in a position to compete with those from developed economies. Protection would give them time to grow and learn to compete.

Effect of Policies on Industrial Development

Achievements:

• The industrial sector's contribution to GDP increased from 13% in 1950-51 to 24.6% in 1990-91.
• The industrial sector became well-diversified, moving beyond just textiles and jute.
• The promotion of small-scale industries created opportunities for people without large amounts of capital.
• Protection from foreign competition allowed indigenous industries in sectors like electronics and automobiles to develop.

Criticisms:

• Inefficiency of the Public Sector: Many public sector firms incurred huge losses but continued to operate because it was difficult to close a government undertaking. They became a drain on the nation's resources. The government also ran businesses like hotels and bread manufacturing, which the private sector could have managed efficiently.
• The Permit License Raj: The licensing system was misused by big industrialists to get a license simply to prevent competitors from starting new firms. This excessive regulation stifled efficiency and entrepreneurship.
• Lack of Competition: Protection from foreign competition created a captive market for domestic producers. With no incentive to improve, they often sold low-quality goods at high prices.
• Neglect of Exports: The inward-looking policy failed to develop a strong export sector.

Conclusion

The first seven Five Year Plans (1950-1990) saw impressive progress. India's industries became far more diversified, and the country achieved self-sufficiency in food production thanks to the Green Revolution. The exploitative zamindari system was abolished through land reforms.

However, there were significant shortcomings. Many public sector enterprises were inefficient. Excessive government regulation prevented the growth of entrepreneurship. In the name of self-reliance, domestic producers were protected from competition for too long, which discouraged them from improving the quality of their goods. By the late 1980s, there was a widespread feeling that the economic policy needed reform. This led to the introduction of the New Economic Policy in 1991.