2. Indian Economy (1950-1990)

Indian economy sandeep garg notes pdf

Central Problems of an Economy

The three major central problems of an economy are:

1. What to Produce: It involves deciding the final combination of goods and services to be produced, i.e., it involves selection of goods and services and the quantity of each, that the economy should produce.
2. How to Produce: It involves deciding the technique of production, i.e. whether selected goods should be produced with more labour and less capital (known as Labour Intensive Technique) or with more capital and less labour (known as Capital Intensive Technique).
3. For whom to produce: It involves deciding the distribution of output among people, i.e., it involves selection of the category of people who will ultimately consume the goods.

Types of Economic Systems

Economic Systems are generally of 3 different types:

1. Capitalist Economy: A capitalist economy is the one in which the means of production are owned, controlled and operated by the private sector. Production is done mainly to earn profits. So, the central problems are solved through the market forces of demand and supply.
2. Socialist Economy: A socialist economy is the one in which the means of production are owned, controlled and operated by the government.
3. Mixed Economy: A mixed economic system refers to a system in which the public sector and the private sector are allotted their respective roles for solving the central problems of the economy.

Economic Planning

After adopting the ‘Mixed Economic System’, the next important step for the Government was to revive the poor, backward and stagnant economy, inherited from the British rule.

• For the development of Indian economy, it was necessary for the Government to ‘plan’ for the economy, known as Economic Planning.
• Economic planning can be defined as making major economic decisions (what, how and for whom to produce) by the conscious decision of a determinate authority, on the basis of a comprehensive survey of the economy as a whole.
• The Industrial Policy Resolution of 1948 and the Directive Principles of the Indian Constitution assigned a leading role to the public sector. Private sector was also encouraged to participate in the plan’s efforts.
• The Planning Commission fixed the planning period at five years, which began the era of ‘five year plans’.

Goals of Five Year Plans

The five year plans have been concerned with the removal of economic backwardness of the country and making India a developed economy.

These basic Goals are:

Growth

Modernization

Self – reliance

Equity

1. Growth – The stagnation during the British rule forced the planners to make Economic Growth as the first and foremost objective of Indian plans.

(i) Growth refers to and increase in the country’s capacity to produce the output of goods and services within the country.

• Either a large stock of productive capital;
• Or a larger size of supporting like transport and banking;
• Or an increase in the efficiency of productive capital and services.

(ii) A good indicator of economic growth, in the language of economics, is steady increase in the Gross Domestic Product (GDP).

2. Modernization- Indian planners have always recognized the need for modernization of society to raise the standard of living of people. Modernization includes:

1. Adoption of New Technology: Modernization aims to increase the production of goods and services through the use of new technology. For example – a farmer can increase the output on the farm by using new seed varieties instead of using the old ones.
2. Change in social outlook: Modernization also requires a change in social outlook, such as gender empowerment or providing equal rights to women.

3. Self – reliance – The third major objective is to make to economy self-reliant.

To promote economic growth and modernization, the five year plans stressed on the use of won resources, in order to reduce our dependence on foreign countries.

• To reduce foreign dependence
• To avoid Foreign Interference

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Features (or problems) of Agriculture

Following were some of the main features (or Problems) of Indian agricultural sector between 1950 and 1990:

1. Low Productivity:- Indian agricultural sector was known for its low productivity. Lack of knowledge was responsible for stagnation in this sector.
2. Disguised Unemployment:- It refers to a state in which more people are engaged in work than are really needed. There were very high incidents of disguised unemployment in the sector during 1950 and 1990.
3. High dependency on Rainfall:- Due to poor agricultural techniques, farmers depended largely on rainfall. There was minimum growth of this sector in the year that receives the least rainfall.
4. Subsistence Farming:- It is the practice of growing crops only for one’s own use without any surplus for trade. There were also very high incidents of subsistence farming.
5. Outdated Technology:- There were many obsolete technologies and harvesting machines. Harvesting was generally done manually and was very tedious.

Policies for Growth of Agriculture

The measures undertaken to promote the growth in the agricultural sector can be broadly categorized as ‘Land Reforms’ and ‘Green Revolution’.

1. Land Reforms – Land Reforms primarily refer to change in the ownership of landholdings. Land reform measures have been introduced by various underdeveloped and developed and developing countries, for attaining ad rational land distribution pattern and viable farming structure.

1. Abolition of Intermediaries – Indian Government took various steps to abolish intermediaries and to make tillers, the owners of land. Aim behind ‘Lnad to the Tiller’ the idea behind this step was that step was that ownership of land would give incentives too the actual tillers to make improvements and to increase output. The abolition of intermediaries brought 200 lakh tenants into direct contact with the government. The ownership rights granted to tenants gave them the incentive to increase output and this contributed to growth in agriculture.
2. Land Ceiling – Land Ceiling refers to fixing the specified limit of land, which could be owned by and individual. Beyond the specified limit, all lands belonging to particulars person would be taken over by the Government and will be allotted to the landless cultivators and small farmers. The purpose of land ceiling was to reduce the concentration of land ownership in a few hands.

2. Green Revolution – At the time of independence, about 75% of the country’s population depended on agriculture. India’s agriculture vitally depends on the monsoon and in case of shortage of monsoon, the farmers had to face lot of troubles. Green Revaluation refers to the large increase in production of food grains due to use of High Yielding Variety (HYV) or miracle seeds especially for wheat and rice.

HYV Seeds: Main Reason for Agricultural Revolution

• Theses seeds can be used in those places where there are adequate facilities for drainage and water supply.
• As compared to other ordinary seeds, these seeds need heavy doses of chemical fertilizers (4 to 10 times more fertilizers) to get the largest possible production.
• So, to derive benefit from HYV seeds, Indian farmers need to have:

i. Reliable irrigation facilities; and

ii. Financial resources (to purchase fertilizers and pesticides).

Indian Economy experienced the success of Green Revolution in 2 phases:

1. In the first phase – (Mid 60s to Mid 70s), the use of HYV seeds was restricted to more affluent states (like Punjab, Andhra Pradesh, Tamil Nadu, etc.). Further, the use of HYV seeds primarily benefited the wheat growing regions only.
2. In the second phase – (Mid 70s to Mid 80s), HYV technology spread to a larger number of states and benefited a wider variety of crops.

Important Effects of Green Revolution (or Merits of Green Revolution)

1. Attaining Marketable Surplus – Green Revolution resulted in ‘Marketable Surplus’. Marketable or Marketed surplus refers to that part of agricultural produce which is sold in the market by the farmers after meeting their own consumption requirement.
2. Buffer Stock of Food Grains – The green revolution enabled the government to procure sufficient amount of food grains to build a stock which could be used in times of food shortage.
3. Benefit to low-income groups – As a large proportion of food grains were sold by farmers in the market, their prices declined relative to other items of consumption.

Risks involved Under Green Revolution (or Demerits of Green Revolution)

• Risk of Pest Attack – The HYV crops were more prone to attack by pests. So, there was a risk that small farmers who adopted this technology could lose everything in a pest attack.
• Risk of Increase in Income Inequalities – There was a risk that costly inputs (HYV seeds, fertilizers, etc.) required under green revolution will increase the disparities between small and big farmers since only the big farmers could afford the required inputs.

Debate over Subsidies to Agriculture

Subsidy, in the context of agriculture, means that the farmers get inputs at prices lower than the market prices. In other words, Subsidy is the financial assistance provided by the government to producers to fulfill their social welfare objectives.

Economists in Favour of Subsidies

1. The government should continue with agricultural subsidies as farming in India continues to be a risky business.
2. Majority of the farmers are very poor and they will not be able to afford the required inputs without the subsidies.
3. Eliminating subsidies will increase the income inequality between rich and poor farmers and violate the ultimate goal of equity.

Economists Against the Subsidies

1. Benefit to fertilizer industries and prosperous farmers – Subsidies do not benefit the poor and small farmers (target group) as benefits of substantial amount of subsidy go to fertilizer industries and prosperous farmers.
2. Fiscal Burden – Economists argue that subsidies are a huge burden on government’s finances.

Some Important Observation

1. Prices as Signals – Prices act as signals about the availability of goods. When a good becomes scarce, its price tends to rise and those who use this good are required to make efficient decisions about its use based on the price. For example – with the outspread of coronavirus, sanitizers, infrared thermometers, oximeters, masks, etc.
2. Subsidies may also be beneficial for the economy and society – According to some economists, there are some positive points in favor of agricultural subsidies like;

By providing agricultural subsidies (for seeds, fertilizers, etc.), the government aims to make sure that everyone get the food they need.

3. Subsidies may lead to wasteful use of resources – According to some economists, there are some points against the agricultural subsidies, like:

• When electricity is provided at a subsidized rate or free, it will be used wastefully without any concern for its scarcity.
• When water is supplied free to the farmers, then they may cultivate water-intensive crops, even though the water resources in that region may be scarce.

Industrial Development

Developing countries (like India) can progress only if they have a good industrial sector. Industry provides employment, which is more stable than the employment in agriculture. Industrialization promotes modernization and overall prosperity. Due to this reason, five year plans stressed a lot on the industrial development.

Role of Public Sector in Industrial Development

1. Shortage of Capital with Private Sector – Private entrepreneurs did not have the capital to undertake investment in industrial ventures, required for the development of Indian economy.
2. Lack of Incentive for Private Sector – The Indian market was not big enough to encourage private industrialists to undertake major projects, even if they had capital to do so. Due to the limited size of the market, there was a low level of demand for industrial goods.
3. Objective of Social Welfare –  The objective of equity and social welfare of the Government could be achieved only through direct participation of the state in the process of industrialization.

Industrial Policy Resolution 1956

Industrial Policy is a comprehensive package of policy measures that covers various issues connected with different industrial enterprises of the country.

• Industrial Policy is essential for devising various procedures, principles, rules and regulations for controlling industrial enterprise of the country.
• After the Industrial Policy of 1948, the Indian economy had to face a series of economic and political changes, which necessitated the need for a fresh industrial policy for the country.

Classification of Industries

According to Industrial Policy Resolution 1956, the industries were reclassified into there categories, viz., Schedule A, Schedule B and Schedule C.

1. Schedule A – This first category comprised industries which would be exclusively owned by the state.
2. Schedule B – In this schedule, 12 industries were placed, which would be progressively state-owned. The state would  take the initiative of setting up industries and private sector would supplement the state’s efforts.
3. Schedule C – This schedule consisted of the remaining industries which were to be in the private  sector.

Small- Scale Industry (SSI)

A small-scale industry is defined with reference to the maximum investment allowed on the assets of a unit. This limit has changed from rupees five lakh in 1950 to present limit of rupees one crore.

Important Points about Small-scale Industries

1. Employment Generation – Small – scale industries are more labour intensive, i.e., they use more labour than the large – scale industries and, therefore, they generate more employment.
2. Need for Protection from Big Firms – Small-scal industries cannot compete with big industrial firms. They can flourish only when they are protected from the large firms. To, various steps were taken by the government for their growth.

Protection form Imports through Tariffs and Quotas

Government made use of two ways to protect goods produced in India from imports:

1. Tariffs – Tariffs refer to taxes levied on imported goods. The basic aim for imposing heavy duty on imported goods was to make them more expensive and discourage their use.
2. Quotas – Quotas refer to non-tariff barriers imposed on the quantity of imports and exports. They fix the maximum limit on the imports of a commodity by a domestic producer.

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 economics. With protection, they will be able to compete in the due course of time.
2. Restriction on imports was necessary as there was a risk of drain of foreign exchange reserves on the import of luxury goods.

Arguments against import substitution

1. The policy of import substitution encourages the production of goods for domestic consumption only and prohibits sale to other countries. It can cause a loss of money due to the absence of would trade.
2. Some domestically manufactured products can be more costly (due to scarcity of some resources) in the country, while at the same time, they can be imported at a cheaper rate from other countries. Moreover, due to the lack of competition, the inefficiency in the domestic industries might decrease.
3. The economy can be less productive if it tries to manufacture everything domestically.

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