Chapter 2 INDIAN ECONOMY 1950–1990

The Goals Of Five Year Plans

Every plan needs clear goals. The Indian five year plans aimed to achieve four main objectives: growth, modernisation, self-reliance, and equity. While all plans pursued these goals, the emphasis on each could vary depending on the limited resources available in each planning period. Planners strived to ensure that policies across different plans were consistent with these overarching goals.

Growth

Economic growth refers to increasing the country's capacity to produce goods and services. This can be achieved through a larger stock of productive capital, expansion of supporting services (transport, banking), or improving the efficiency of existing capital and services. A common measure of economic growth is the steady increase in the **Gross Domestic Product (GDP)**, which represents the market value of all final goods and services produced domestically in a year. Increasing GDP means producing more, enabling people to enjoy a richer and more varied life, as articulated in the First Five Year Plan. GDP is contributed by three main sectors: agriculture, industry, and services. The relative contribution of each sector defines the structural composition of the economy, which changes as a country develops.

Modernisation

Modernisation involves adopting new technology to increase productivity and output. This could be using improved seeds in agriculture or new machinery in factories. Beyond technology, modernisation also entails changes in social outlook, such as recognizing equal rights for women and utilizing their talents in the workforce. A society that leverages the skills of all its members is often more prosperous.

Self-reliance

Self-reliance, a key goal in the first seven five year plans, meant reducing dependence on foreign countries by avoiding the import of goods that could be produced domestically. This policy was crucial for a nation newly freed from foreign rule, particularly to ensure food security. Dependence on imported food, foreign technology, or capital was feared to make India's sovereignty vulnerable to external influence on its policies.

Equity

The goals of growth, modernisation, and self-reliance alone do not guarantee improved living standards for the entire population. Equity is essential to ensure that the benefits of economic prosperity are not confined to the wealthy but also reach the poor. Equity aimed to enable every Indian to meet basic needs like food, housing, education, and healthcare, and to reduce inequalities in wealth distribution.

The first seven five year plans (1950-1990) focused on achieving these four goals, particularly in the sectors of agriculture, industry, and trade.

Agriculture

As noted in the previous chapter, agriculture under colonial rule suffered from stagnation and a lack of equity. Independent India's policymakers addressed these issues through land reforms and promoting the use of High Yielding Variety (HYV) seeds, which initiated the Green Revolution.

Land Reforms

At the time of independence, India's land tenure system was dominated by intermediaries like Zamindars and Jagirdars, who collected rent but did little to improve farming conditions. This led to low agricultural productivity and reliance on food imports. Land reforms were crucial to achieve equity in agriculture. Key policies included:

1. Abolition of Intermediaries: Steps were taken soon after independence to abolish intermediaries, bringing approximately 200 lakh tenants into direct contact with the government. This freed them from exploitation and granted them ownership of the land, providing incentives to invest and increase output.
2. Land Ceiling: Policies were enacted to fix the maximum size of land an individual could own, aiming to reduce the concentration of land ownership among a few landlords.

While the abolition of intermediaries was largely successful in freeing tenants, equity goals were not fully met. Loopholes in legislation allowed former Zamindars to retain large landholdings. Tenants were sometimes evicted, with landowners claiming to be cultivators themselves. The poorest agricultural laborers, such as sharecroppers and landless workers, did not benefit from these reforms. Land ceiling laws also faced challenges, with landlords delaying implementation through legal challenges and exploiting loopholes to transfer land to relatives. Land reforms were most successful in states with strong political commitment, like Kerala and West Bengal, but vast landholding inequality persists elsewhere.

The Green Revolution

Given that about 75% of the population depended on agriculture at independence, and productivity was low due to old technology and limited infrastructure, breaking the stagnation was vital. The Green Revolution marked a significant breakthrough, leading to a large increase in food grain production, especially wheat and rice, through the use of **HYV seeds**.

The HYV technology required specific inputs: correct quantities of fertilizer and pesticide, and a regular water supply. Initially, in the first phase (mid-1960s to mid-1970s), the use of HYV seeds and the resulting benefits were limited to more affluent states (Punjab, Andhra Pradesh, Tamil Nadu) and primarily wheat-growing regions. In the second phase (mid-1970s to mid-1980s), the technology spread to more states and a wider variety of crops.

The Green Revolution enabled India to achieve self-sufficiency in food grains, ending dependence on other nations for food. This increased output was largely available as marketed surplus (produce sold by farmers in the market), contributing to the economy. The relative prices of food grains declined, benefiting low-income groups who spent a large portion of their income on food. The government also procured sufficient food grains to build buffer stocks for times of scarcity.

However, the HYV technology posed risks, particularly increasing disparities between small and big farmers (as only the latter could afford the necessary inputs) and making crops vulnerable to pest attacks. Fortunately, government interventions mitigated these risks. The government provided low-interest loans and subsidized fertilizers, making inputs accessible to small farmers, who eventually achieved similar output levels to large farmers. Government research institutes helped reduce the risk of pest attacks. The extensive role of the state was crucial in ensuring that small farmers also benefited from the Green Revolution.

The Debate Over Subsidies

The economic rationale for agricultural subsidies remains a debated topic. Subsidies were initially seen as necessary incentives for farmers, especially small ones, to adopt the risky HYV technology. Some economists argue that once the technology is profitable and widely adopted, subsidies should be phased out. They also point out that subsidies benefit the fertilizer industry and wealthier farmers in prosperous regions more than the intended poor farmers, while being a significant financial burden on the government.

Others argue that subsidies are still essential because Indian farming is risky, and most farmers are poor and cannot afford inputs otherwise. Eliminating subsidies could increase inequality. They suggest focusing on ensuring that only poor farmers receive subsidies rather than abolishing them entirely. By the late 1960s, the Green Revolution had boosted agricultural productivity, making India self-sufficient. However, a large proportion (around 65%) of the population remained employed in agriculture by 1990, even though output could have been achieved with fewer people. This is seen by some economists as a failure of policy during 1950-1990, as the industrial and service sectors did not generate enough employment to absorb the agricultural workforce.

Industry And Trade

Economists believe that industrial development is key for poor nations to progress, providing stable employment and promoting modernization. Recognizing this, India's five year plans heavily emphasized industrial development. At independence, India's industrial base was narrow, mainly confined to cotton and jute textiles, with a few iron and steel firms. Expanding and diversifying this base was crucial for economic growth.

Public And Private Sectors

A major policy question was the respective roles of the government and the private sector. At independence, Indian industrialists lacked the capital and the domestic market was not large enough for major industrial investments. This necessitated a significant role for the government in promoting industry. Additionally, the commitment to a socialist pattern of society led to the government taking control of the 'commanding heights' of the economy – vital industries – with the public sector leading and the private sector playing a complementary role.

Industrial Policy Resolution 1956 (IPR 1956)

The Industrial Policy Resolution of 1956 (IPR 1956) operationalized this approach and formed the basis of the Second Five Year Plan. It classified industries into three categories:

• Category 1: Industries exclusively owned by the government.
• Category 2: Industries where the private sector could supplement public sector efforts, but the government was responsible for starting new units.
• Category 3: Remaining industries open to the private sector.

Even industries in the private sector were subject to state control through a system of licenses. A license was required to start a new industry or expand output/diversify production in an existing one. This licensing policy was used to promote regional equality by making it easier to obtain licenses for setting up industries in economically backward areas, often with additional concessions like tax benefits and lower electricity tariffs. It was also intended to regulate production quantity based on the economy's needs.

Small-Scale Industry

In 1955, the Karve Committee (Village and Small-Scale Industries Committee) suggested promoting small-scale industries (SSIs) for rural development. SSIs are defined by their maximum investment on assets (this limit has changed over time, from ₹5 lakh in 1950 to ₹1 crore currently). SSIs are considered more labour-intensive, thus generating more employment. To protect them from competition with large firms, the production of certain goods was reserved for SSIs, and they received concessions like lower excise duty and interest rates on loans.

Trade Policy: Import Substitution

India's industrial policy was closely linked to its trade policy, which followed an inward-looking strategy focusing on import substitution during the first seven plans. This strategy aimed to replace imports with domestic production.

Inward Looking Trade Strategy (Import Substitution)

The policy of import substitution encouraged domestic industries to produce goods that were previously imported. For example, instead of importing foreign-made vehicles, domestic production was promoted.

Protection From Foreign Competition (Tariffs and Quotas)

To protect domestic industries, the government restricted foreign competition through two main measures:

• Tariffs: Taxes on imported goods that make them more expensive and less appealing to consumers.
• Quotas: Limits on the quantity of specific goods that can be imported.

This protectionist policy was based on the idea that developing economies needed time to build their industries before they could compete with developed economies. It was also driven by a concern that unrestricted imports, especially of luxury goods, would lead to the spending of valuable foreign exchange. Promoting exports was not a major focus until the mid-1980s.

Effect Of Policies On Industrial Development (Achievements)

India's industrial sector made impressive achievements during the first seven plans (1950-1990). The contribution of the industrial sector to GDP increased significantly from 13% in 1950-51 to 24.6% in 1990-91. The annual growth rate of 6% in the industrial sector during this period was commendable. The industrial base diversified significantly, largely due to the public sector's efforts. Promotion of SSIs provided opportunities for entrepreneurs with limited capital. Protection from foreign competition fostered the development of indigenous industries, such as in the electronics and automobile sectors, which might not have developed otherwise.

Criticism Of Public Sector Performance

Despite contributions, many public sector enterprises (PSEs) were criticized for inefficiency and incurring significant losses. Critics argued that PSEs continued to operate in areas (like telecommunications or even bread manufacturing) where the private sector could perform effectively, often enjoying monopolies that led to poor service and lack of innovation. Closing loss-making PSEs was difficult despite their drain on resources. Some scholars argued that the state should exit areas manageable by the private sector and focus resources on essential services only the government could provide.

Criticism Of Licensing Policy ('Permit License Raj')

The licensing system ('Permit License Raj') was misused. Big industrialists sometimes obtained licenses not to start new firms but to prevent competitors from entering the market. Excessive regulation hindered efficiency, with industrialists spending more time lobbying for licenses than improving their products.

Criticism Of Protectionism

Protection from foreign competition, while initially intended to nurture domestic industries, was criticized for continuing even when it became counterproductive. Domestic producers, facing a captive market due to import restrictions, had little incentive to improve product quality, as consumers had no choice but to buy locally produced goods, even if they were of low quality and high price. Competition from imports is seen as forcing domestic producers to be more efficient.

Some economists argue that the public sector's goal should be welfare, not just profit, and its performance should be judged by its contribution to people's well-being. Regarding protection, some feel it should continue as long as developed nations protect their own producers. These conflicting views contributed to calls for policy changes.

Conclusion

The Indian economy made notable progress during the first seven five year plans (1950-1990). Industries became significantly more diversified than at independence, and the Green Revolution achieved self-sufficiency in food grains, ending reliance on imports. Land reforms, particularly the abolition of the Zamindari system, were implemented. However, there were also areas of concern. Many public sector enterprises were inefficient and incurred losses. Excessive government regulation under the licensing system hindered entrepreneurship and efficiency. The protectionist policy, while aiding some indigenous industries, reduced incentives for quality improvement in domestic production and failed to develop a strong export sector due to its 'inward-oriented' nature. Recognizing the need for economic policy reforms in the context of changing global conditions, a new economic policy was initiated in 1991 to enhance the Indian economy's efficiency.