Introduction: The Path of Development (1950-1990)

On 15th August 1947, India awoke to a new dawn of freedom. However, along with political independence came the massive economic challenge of nation-building. The British rule had left the Indian economy stagnant and dilapidated. The leaders of independent India, particularly the first Prime Minister Jawaharlal Nehru, had to decide on an economic system that would not only revive the economy but also ensure social justice.

The primary challenge was to design a system that would promote the welfare of the masses rather than just a wealthy few. This necessitated a deep understanding of how different economies function and making a choice that suited the unique democratic fabric of India.

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Types of Economic Systems

Every society has to answer three fundamental questions regarding the allocation of resources. These are often called the central problems of an economy:

1. What to produce? (Should we produce more food or more machines? Luxury goods or essential goods?)

2. How to produce? (Should we use more labour, which provides employment, or more machines, which increases efficiency?)

3. For whom to produce? (Who gets the final goods? Is it those who have money or those who need them?)

Based on how these questions are answered, economic systems are classified into three types:

1. Capitalist Economy (Market Economy)

In a capitalist system, the answers to the central problems are determined by the market forces of supply and demand.

Key Feature: Goods are distributed based on Purchasing Power. This means that if a person has money in their pocket, they can buy goods. For example, low-cost housing for the poor is a desperate need in many countries. However, in a purely capitalist society, builders will not build low-cost houses if the poor cannot afford to pay for them; instead, they will build luxury apartments for the rich because that is where the profit lies.

2. Socialist Economy (Command Economy)

In a socialist system, the government decides what to produce, how to produce, and how to distribute.

Key Feature: The distribution is based on Need rather than purchasing power. The government assumes responsibility for the welfare of all citizens. For instance, in a socialist nation, healthcare and education are often provided free of cost because the government believes every citizen needs them, regardless of their ability to pay. There is strictly no private property; everything is owned by the state.

3. Mixed Economy

This system is a blend of the above two. It recognizes that the market can produce consumer goods efficiently, but the government is needed to ensure social welfare and build essential infrastructure.

The distinction between these systems is summarised in the table below:

Basis	Capitalist Economy	Socialist Economy	Mixed Economy
Driving Force	Market forces of supply and demand. Production is driven by profit motive.	Government planning based on the perceived needs of society.	A combination of market forces (for consumer goods) and government planning (for essential services).
Ownership of Means of Production	Primarily owned by private individuals and firms.	Owned by the state (government). No private property allowed.	Co-existence of private and public ownership.
Distribution Mechanism	Based on Purchasing Power (ability to pay).	Based on what people need, not what they can afford.	The market distributes what it produces well; the government provides essential goods (Public Distribution System, Healthcare).
Examples	United States of America, United Kingdom.	Former Soviet Union, Cuba, China (Historically).	India, Sweden, France.

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India's Choice: The Mixed Economy

Jawaharlal Nehru was deeply influenced by the achievements of the Soviet Union, particularly their rapid industrial progress through Five-Year Plans. The concept of socialism appealed to him because it prioritized the poor.

However, there was a conflict of values:

1. Rejection of Capitalism: A capitalist system would have neglected the vast majority of Indians who were poor and lacked purchasing power. It would have widened the gap between the rich and the poor.

2. Rejection of Total Socialism: Nehru was a staunch believer in democracy. The Soviet model of socialism involved the abolition of private property and strict state control, which often curtailed individual freedom and democratic rights. It was not possible in a democracy like India to forcefully take away land and property from citizens as was done in the Soviet Union.

The "Golden Mean"

Nehru and other planners sought an alternative—a system that combined the best features of socialism (welfare and equity) without its drawbacks (loss of freedom), and the efficiency of capitalism without its cruelty (inequality).

In this Mixed Economy model:

1. The Public Sector (Government): Would control the "Commanding Heights" of the economy. This included strategic industries like defense, heavy machinery, mining, power generation, and railways. These required huge investments that the private sector could not afford or would not find profitable.

2. The Private Sector: Would be encouraged to exist and grow but would be regulated. They would primarily produce consumer goods.

3. Planning: The government would plan for the economy, setting targets and goals, and the private sector would be part of this plan effort.

This economic philosophy was formally adopted through the Industrial Policy Resolution of 1948 and was embedded in the Directive Principles of State Policy in the Indian Constitution.

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The Planning Commission

To execute this vision of a planned mixed economy, the Planning Commission was set up in 1950. A specific definition and structure were established to guide the nation's resources.

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This institution was responsible for assessing the country's resources and drafting plans for their most effective and balanced utilization. (Note: In 2015, the Planning Commission was replaced by the NITI Aayog).

The Goals of Five-Year Plans

After Independence, the Government of India set up the Planning Commission in 1950 to oversee the economic development of the country. The strategy adopted was that of Five-Year Plans. This concept was borrowed from the former Soviet Union, the pioneer in national planning.

What is a Plan?

A plan spells out how the resources of a nation should be put to use. It acts as a blueprint for the country's economic future.

1. Perspective Plan: Our plan documents usually specified the objectives to be attained in the five years of a plan, but they were guided by a long-term vision. A plan that sets goals to be achieved over a period of twenty years is called a 'perspective plan'.

2. Balancing Goals: It is unrealistic to expect all goals to be given equal importance in every plan. Sometimes, goals may be in conflict. For instance, introducing modern technology (modernisation) might reduce the need for labour, which conflicts with the goal of increasing employment. Planners have to balance these difficulty.

The goals of the five-year plans were focused on four central pillars: Growth, Modernisation, Self-reliance, and Equity.

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Mahalanobis: The Architect of Indian Planning

Planning in the real sense of the term began with the Second Five-Year Plan. This plan laid down the basic ideas regarding the goals of Indian planning and was based on the ideas of Prasanta Chandra Mahalanobis.

Key Contributions:

1. He established the Indian Statistical Institute (ISI) in Calcutta and started the journal Sankhya.

2. He is regarded as the architect of Indian planning because the Second Plan, which focused on heavy industrialization, was based on his model.

3. He was a Fellow of Britain's Royal Society and successfully invited distinguished economists from around the world to advise India on economic development.

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Goal 1: Growth

Growth refers to the increase in the country's capacity to produce the output of goods and services within the country.

The GDP Concept: A good indicator of economic growth is the steady increase in the Gross Domestic Product (GDP). The GDP is the market value of all the final goods and services produced in the country during a year. $$ \text{GDP} = \text{Value of all final goods and services produced} $$

The Cake Analogy: You can think of the GDP as a cake. Growth is an increase in the size of the cake. If the cake is larger, more people can enjoy it. For a country like India, producing more is essential for a richer and more varied life.

Structural Composition and The Service Sector

The GDP is derived from three sectors: Agriculture, Industry, and Services. The contribution made by each of these sectors makes up the structural composition of the economy.

Structural Change: Usually, as a country develops, the share of agriculture declines, and the share of industry becomes dominant. At higher levels of development, the service sector takes the lead.

The Indian Anomaly: In India, the structural change was peculiar. While the share of agriculture in GDP declined (from more than 50%), the share of the Service Sector grew rapidly, bypassing the industrial phase seen in other countries. By 1990, the service sector contributed 40.59% to the GDP, more than agriculture or industry.

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Goal 2: Modernisation

To increase the production of goods and services, producers have to adopt new technology. However, in the Indian context, modernisation was defined broadly to include social changes as well.

1. Technological Modernisation: This involves the adoption of new methods of production. For example, a farmer can increase output by using High Yielding Variety (HYV) seeds instead of old ones, and factories can use new machines.

2. Social Modernisation: Modernisation also refers to changes in social outlook. A traditional society often restricts women to the household. A modern society recognizes that women should have the same rights as men. Using the talents of women in the workplace (banks, factories, schools) makes the society more prosperous.

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Goal 3: Self-reliance

The first seven five-year plans gave immense importance to self-reliance. This means avoiding imports of those goods which could be produced in India itself.

Why was this necessary?

1. Food Security: India was dependent on food imports from the USA immediately after independence. Developing domestic agriculture was vital to stop this dependence.

2. Sovereignty: It was feared that dependence on foreign food, technology, and capital would make India’s sovereignty vulnerable to foreign interference.

3. Foreign Exchange: By reducing imports, India could save limited foreign exchange reserves.

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Goal 4: Equity

Growth, Modernisation, and Self-reliance are not enough if the benefits do not reach the common man. A country can be rich and modern, yet have a vast population living in poverty.

The Concept of 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.

1. Every Indian should be able to meet basic needs: Food, a decent house, education, and health care.

2. Inequality in the distribution of wealth should be reduced.

Therefore, the ultimate goal of planning in India was "Growth with Equity".

Agriculture Sector Reforms (1950-1990)

At the time of independence, the Indian agricultural sector was in a dismal state. Approximately 75 per cent of the country’s population was dependent on agriculture, yet productivity was extremely low due to the use of archaic technology and a lack of infrastructure. To address these issues, the government adopted a two-pronged strategy: Land Reforms (to address equity) and the Green Revolution (to address growth).

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1. Land Reforms

The agricultural system under British rule was characterized by intermediaries (Zamindars, Jagirdars) who collected rent from the actual tillers without contributing towards improvements on the farm. This discouraged investment in agriculture.

Land reforms primarily refer to changes in the ownership of landholdings. The government implemented two major measures:

A. Abolition of Intermediaries

Steps were taken to abolish intermediaries and make the tillers the owners of the land. This move brought some 200 lakh tenants into direct contact with the government and freed them from exploitation.

B. Land Ceiling

This policy fixed the maximum size of land which could be owned by an individual. The purpose was to reduce the concentration of land ownership in a few hands. Surplus land was acquired by the government and redistributed among landless labourers.

Concept: Ownership and Incentives

Why was "Land to the Tiller" such a critical policy? It is based on the economic principle of Incentives.

The Logic: Cultivators will take more interest in increasing output if they are the owners of the land. Ownership enables the tiller to make a profit from the increased output.

The Counter-Example (Soviet Union): In the former Soviet Union, farmers did not own the land; it was owned by the state. Consequently, farmers had no incentive to be efficient. It was common to see farmers packing rotten fruits along with fresh ones because they did not suffer the losses of unsellable goods, nor did they gain from high-quality sales. In India, ownership gave the tillers the incentive to work hard and invest in the land.

Critique of Land Reforms

While successful in states like Kerala and West Bengal, land reforms faced hurdles elsewhere:

1. Big landlords challenged the legislation in courts to delay implementation.

2. They used loopholes to register land in the names of close relatives to escape ceiling limits.

3. Many poor agricultural labourers and sharecroppers did not benefit.

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2. The Green Revolution

Despite land reforms, productivity remained low. India relied on monsoons and had to import food grains from the United States. The Green Revolution broke this stagnation.

Definition: It 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.

Requirements for Success

The use of HYV seeds was not simple; it required a correct proportion of inputs:

1. Fertilisers and Pesticides: HYV seeds needed heavy doses of chemical fertilizers.

2. Regular Water Supply: These seeds were water-intensive, necessitating reliable irrigation facilities.

Phases of Green Revolution

Phase	Period	Coverage
First Phase	Mid-1960s to Mid-1970s	Restricted to affluent states (Punjab, Andhra Pradesh, Tamil Nadu) and mainly wheat growing regions.
Second Phase	Mid-1970s to Mid-1980s	Spread to a larger number of states and benefited more crop varieties.

Marketed Surplus

Growth in agricultural output is only economically significant if it reaches the market. The portion of agricultural produce which is sold in the market by the farmers after meeting their own consumption needs is called Marketed Surplus.

$$ \text{Marketed Surplus} = \text{Total Output} - \text{Self Consumption} $$

Due to the Green Revolution, a good proportion of rice and wheat was sold in the market, leading to a decline in food prices, which benefited low-income groups.

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3. The Debate Over Subsidies

To enable small farmers to buy expensive inputs (HYV seeds, fertilizers), the government provided subsidies. Now, economists debate whether these should continue.

Viewpoint	Argument
Against Subsidies	1. Subsidies were meant to incentivize early adoption; that purpose is served. 2. They are a huge burden on government finances. 3. Benefits largely go to the fertilizer industry and rich farmers in prosperous regions.
For Subsidies	1. Farming is a risky business in India. 2. Most farmers are poor and cannot afford inputs without help. 3. Removing them will increase the gap between rich and poor. 4. The solution is to target subsidies better, not remove them.

Concept: Prices as Signals

This debate is closely linked to how prices function in a market. Prices are signals about the availability of goods.

1. Normal Scenario: If water is scarce, its price should be high. This high price signals consumers to use water carefully (e.g., drip irrigation).

2. Effect of Subsidies: When the government provides water or electricity for free (or at a subsidized rate), it distorts this signal. Farmers may use water wastefully or grow water-intensive crops in water-scarce regions.

Conclusion: While subsidies help the poor, they can lead to the wasteful use of resources because the "price signal" that indicates scarcity is missing.

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Answer:

Industry and Trade Policy (1950-1990)

Economists have found that poor nations can progress only if they have a robust industrial sector. While agriculture provides food, industry provides employment which is more stable than employment in agriculture. Furthermore, industrialisation promotes modernisation and overall prosperity.

At the time of independence, the variety of industries in India was extremely narrow. It was largely confined to cotton textiles and jute. There were only two well-managed iron and steel firms — one in Jamshedpur (Tata Iron and Steel Company) and the other in Kolkata (IISCO). To develop the economy, India needed to expand this industrial base.

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1. Public and Private Sectors in Industrial Development

The biggest question facing the policy makers in 1947 was: What should be the role of the government and the private sector?

The Indian government decided that the state (Public Sector) would play an extensive role in promoting the industrial sector. This decision was based on three practical reasons:

1. Lack of Capital: Indian industrialists at that time did not have the huge capital required to undertake major industrial projects (like steel plants, fertilizer factories, or dams).

2. Small Market Size: Even if they had the capital, the domestic market was not big enough to encourage them to invest. The demand for industrial goods was low because the population was poor.

3. Socialist Goal: The objective of equity and the socialist pattern of society required that the government control the "Commanding Heights" of the economy (vital strategic sectors).

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2. Industrial Policy Resolution (IPR) 1956

The Industrial Policy Resolution of 1956 was a landmark policy that laid the roadmap for India's industrial development. It formed the basis of the Second Five-Year Plan, which tried to build the basis for a socialist pattern of society.

Classification of Industries

The IPR 1956 classified industries into three categories:

Category	Ownership/Control	Examples
Schedule A (First Category)	Exclusively owned by the State (Government).	Arms and ammunition, Atomic energy, Railways, Air Transport.
Schedule B (Second Category)	State-owned, but Private sector can supplement efforts. New units started only by State.	Mining, Machine tools, Fertilizers.
Schedule C (Third Category)	Remaining industries left to the Private Sector.	Consumer goods, small manufacturing.

The System of Industrial Licensing (License Raj)

Although the third category was left to the private sector, the government kept strict control over it through the Industries (Development and Regulation) Act, 1951. No new industry was allowed unless a license was obtained from the government.

Purpose of Licensing:

1. Regional Equality: The policy was used to promote industry in backward regions. It was easier to obtain a license if the industrial unit was established in an economically backward area. Such units were also given concessions like tax benefits and electricity at lower tariffs.

2. Control over Production: Licenses were needed not just for starting a new firm, but also for expanding production capacity or for diversifying production (producing a new variety of goods). This ensured that resources were not wasted on producing luxury goods when essential goods were needed.

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3. Small-Scale Industry (SSI)

In 1955, the Village and Small-Scale Industries Committee (also called the Karve Committee) recognized the potential of small industries for rural development.

Definition: A 'small-scale industry' is defined with reference to the maximum investment allowed on the assets of a unit.

1. In 1950, the limit was ₹ 5 lakh.

2. At present, the limit is ₹ 1 crore.

Why promote SSIs?

Small-scale industries are Labour Intensive, meaning they use more human labour per unit of capital compared to large-scale industries. Large industries are often capital intensive (using more machines). In a country like India with a large population and unemployment, SSIs are crucial for generating employment.

Protection for SSIs

Since small industries cannot compete with big industrial firms (like Tata or Birla), the government shielded them:

1. Reservation: The production of a number of products (e.g., garments, footwear) was reserved exclusively for the small-scale sector.

2. Concessions: They were given benefits such as lower excise duty and bank loans at lower interest rates.

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4. Trade Policy: Import Substitution

The industrial policy was closely linked to the trade policy. In the first seven plans, India followed an Inward Looking Trade Strategy, technically known as Import Substitution.

Definition: This policy aimed at replacing or substituting imports with domestic production. For example, instead of importing vehicles made in the USA or UK, industries would be encouraged to produce them in India itself.

Protection from Foreign Competition

The government protected domestic industries from foreign competition using two tools:

1. Tariffs: A tax on imported goods. This makes imported goods more expensive, discouraging their use and encouraging people to buy domestic goods.

2. Quotas: This specifies the maximum quantity of goods which can be imported.

Answer:

Impact: This policy helped develop a diversified industrial base (electronics, automobiles). However, the lack of competition also meant that Indian producers had no incentive to improve the quality of their goods, as the Indian consumer had no choice but to buy whatever was produced domestically (a "captive market").

Critical Appraisal and Conclusion (1950-1990)

The economic journey of India from 1950 to 1990 is a tale of mixed results. While the country managed to break the shackles of colonial stagnation, the policies adopted—specifically the heavy reliance on the public sector and strict regulation of the private sector—eventually led to economic inefficiencies. A critical appraisal requires us to weigh the achievements against the failures.

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Achievements of the Planning Era

The first seven five-year plans laid the foundation for India's economic infrastructure. The progress was impressive when compared to the pre-independence era.

1. Structural Transformation and Diversification

At the time of independence, Indian industry was restricted to cotton textiles and jute. By 1990, the industrial sector became well-diversified. The public sector successfully built a strong base in heavy industries like steel, power, and engineering.

The following table illustrates the shift in the economy's structure over four decades:

Sector	1950-51	1990-91
Agriculture	59.0	34.9
Industry	13.0	24.6
Services	28.0	40.5

The rise in the industrial sector's share from 13% to 24.6% is a significant indicator of development.

2. Self-Sufficiency in Food

Perhaps the greatest achievement was the Green Revolution. India moved from a "ship-to-mouth" existence (depending on imports) to becoming a nation that could feed itself and even hold buffer stocks.

3. Promotion of Indigenous Industry

The policy of protectionism (Import Substitution) allowed domestic industries, such as electronics and automobiles, to take root. Without protection, these "infant industries" might have been crushed by established foreign competitors.

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Failures and Criticisms

Despite these successes, by the late 1980s, the flaws in the economic model became glaringly obvious. Economists point to several major policy failures.

1. Inefficiency of the Public Sector

Initially, the public sector was envisioned to control the "Commanding Heights" of the economy (strategic sectors). However, over time, the government started venturing into non-essential areas.

The Problem of Overreach: The government began manufacturing goods that the private sector could have easily handled. For instance, the government ran hotels and even manufactured bread (e.g., the firm Modern Bread). Critics argued that the government should concentrate on important services like defense and education, rather than competing with private bakers and hoteliers.

The Problem of Losses: Many Public Sector Undertakings (PSUs) incurred huge losses. However, they continued to function because it is politically difficult to close a government undertaking (due to trade unions and job protection). These loss-making firms became a severe drain on the nation's limited financial resources.

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2. The Permit License Raj

The system of industrial licensing, meant to regulate the economy, turned into a hurdle for growth.

1. Misuse: Big industrial houses would secure licenses not to start new firms, but to prevent competitors from starting them.

2. Inefficiency: Industrialists spent more time lobbying with ministries to get licenses than thinking about how to improve their products. This bureaucratic tangle was famously called the "Permit License Raj."

3. Adverse Effects of Protectionism

While protection helped industries start, continuing it for too long proved harmful.

Lack of Quality: Because imports were restricted, Indian consumers were forced to buy whatever Indian producers manufactured. The producers had a Captive Market. Without the fear of foreign competition, they had no incentive to upgrade their technology or improve product quality. (e.g., The Indian car market was dominated by outdated models like the Ambassador and Fiat for decades).

4. Failure to Absorb Labour

A major failure of the planning period was the inability of the industrial and service sectors to generate enough employment to shift the population away from agriculture. Even in 1990, about 65% of the population was still stuck in agriculture, despite its contribution to GDP falling significantly.

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Conclusion

The progress of the Indian economy during the first seven plans was impressive but insufficient.
1. We achieved self-sufficiency in food and a diversified industrial base.
2. However, excessive government regulation (License Raj) stifled entrepreneurship.
3. The inward-looking trade policy insulated Indian industry from global competition, leading to inefficiency and poor quality.

By 1991, India faced a severe economic crisis. The need for reform was widely felt. This context set the stage for the introduction of the New Economic Policy in 1991, which moved India towards Liberalisation, Privatisation, and Globalisation (LPG).

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