Ch 2 Indian Economy 1950–1990

Chapter 2, “Indian Economy 1950–1990,” examines the development policies and planning strategies adopted by India in the four decades after independence. The chapter begins by explaining the different types of economic systems:capitalism (market economy where goods are distributed based on purchasing power), socialism (government decides production and distribution based on needs), and mixed economy (combination of both).

India’s leaders, particularly Jawaharlal Nehru, found the answer in an economic system that combined the best features of socialism without its drawbacks:a socialist society with a strong public sector but also with private property and democracy. In 1950, the Planning Commission was set up with the Prime Minister as its Chairperson, and the era of Five Year Plans began.

The chapter introduces Prasanta Chandra Mahalanobis as the architect of Indian planning, whose ideas formed the basis of the Second Five Year Plan. The four main goals of the Five Year Plans were: growth (increase in GDP), modernisation (adoption of new technology and changes in social outlook), self-reliance (avoiding imports of goods that could be produced in India to reduce dependence on foreign countries), and equity (ensuring benefits of economic prosperity reach the poor and reducing inequality in wealth distribution).

The chapter then examines agricultural development during this period. The major policy initiatives were land reforms and the Green Revolution. Land reforms included: abolition of intermediaries (zamindars, jagirdars) to make tillers the owners of land, giving them incentives to invest in improvements; and land ceiling (fixing the maximum size of land an individual could own) to reduce concentration of land ownership.

These reforms freed about 200 lakh tenants from exploitation, but the goal of equity was not fully served:loopholes allowed former zamindars to retain land, and the poorest agricultural labourers did not benefit. The Green Revolution (mid-1960s to mid-1980s) refers to the large increase in food grain production resulting from the use of High Yielding Variety (HYV) seeds, especially for wheat and rice. These seeds required fertilisers, pesticides, and regular water supply.

In the first phase (mid-1960s to mid-1970s), HYV seeds were restricted to more affluent states like Punjab, Andhra Pradesh, and Tamil Nadu, primarily benefiting wheat-growing regions. In the second phase (mid-1970s to mid-1980s), the technology spread to more states and crops. The Green Revolution enabled India to achieve self-sufficiency in food grains, no longer dependent on imports.

The marketed surplus (the portion of agricultural produce sold in the market) increased, benefiting low-income groups through lower relative food prices. However, the chapter notes that despite these achievements, about 65 per cent of the population continued to be employed in agriculture even as late as 1990, indicating slow structural transformation.

The chapter also presents the debate over subsidies:some economists argue subsidies should be phased out as they burden government finances, while others contend farming remains risky and poor farmers cannot afford inputs without subsidies.

The chapter then covers industrial development and trade policy. The Industrial Policy Resolution of 1956 formed the basis of the Second Five Year Plan and classified industries into three categories: first category (exclusively owned by government), second category (private sector could supplement public sector, with government taking sole responsibility for starting new units), and third category (remaining industries left to private sector).

The private sector was kept under state control through a system of licenses:no new industry was allowed without a government license, and even existing industries needed licenses to expand output or diversify production. This policy was used to promote industry in backward regions (easier to obtain licenses) and to ensure quantity of goods produced did not exceed requirements.

Small-scale industries (maximum investment of rupees five lakh in 1950, now one crore) were promoted as they are more labour-intensive and generate more employment; they were shielded from large firms through reservation of products, lower excise duty, and bank loans at lower interest rates. Regarding trade policy, India adopted an inward-looking trade strategy called import substitution:aiming to replace imports with domestic production.

Protection from imports took two forms: tariffs (taxes on imported goods making them more expensive) and quota (specifying quantity of goods that can be imported). This policy was based on the notion that industries of developing countries could not compete with more developed economies, and to prevent foreign exchange from being spent on luxury imports.

The chapter concludes with an assessment of achievements and drawbacks. Achievements include: industrial sector’s share of GDP increased from 13 per cent (1950-51) to 24.6 per cent (1990-91); industrial sector became well diversified; India became self-sufficient in food grains; zamindari system was abolished. However, criticisms include: many public sector enterprises incurred huge losses but continued functioning; the permit-license raj led to misuse where industrialists obtained licenses to prevent competitors rather than start new firms; excessive regulation prevented efficiency improvements; protection from foreign competition led to lack of incentive to improve quality; Indian policies were ‘inward oriented’ and failed to develop a strong export sector. These factors, along with the changing global economic scenario, led the government to introduce a new economic policy in 1991, which is the subject of the next chapter.