Chapter2.

Indian Economy (1950-1990)

Planning commission
Indian government with the Prime Minister as a chairman formed the planning commission (which is now known as
Niti Aayog) on March 1950 and adopted five years plans for the development of the country.
Economic problem -The reasons due to which a country faces economic problems are as follows:
 Unlimited Wants (Unlimited Ends)
 Limited Resources (Scarce Resources)
 Alternative Use

The above 3 reasons create different Economic Problem in an economy which are as follows:
1. What to Produce? 1. Consumer Goods
2. Producer Goods
2. How to Produce 1. Labour Intensive Technique
2. Capital Intensive Technique
3. For whom to Produce? 1. Personal Distribution
2. Functional Distribution

Types of Economy
1. Market Economy: It is a type of economy in which the total allocation of resources is made by private capitalist
or businessman for producing goods and services. As they are basically guided for making profit.
2. Mixed economy: It is a type of economy in which both the private and public sector are participating in
productive activities. The allocation of resources is made by the government for removing the central problem of
economy with the help of private sector.
3. Central Planned Economy: It is a type of economy in which the total allocation of resources is made by central
government of the country. The government is basically guided for solving the central problem of the economy. Hence
it promotes social welfare with minimum cost.
Economic Planning
According to planning commission of India, “Economic planning refers to the utilization of country’s resources in
different development activities in accordance to the national priorities”.
Goals of Planning of India
The planning commission of India has adopted Five year plans strategy for the development of the economy. India
launches its first five year plan on 1st April 1951 for the period 1951-56. Since then we have completed 12 five year
plans (recent 5 year plan was in operation from 1st April 2012 for the period of 2012-2017.)
The planning commission decided 2 types of goals
 Long term goals – More than 20 years
 Short term goals – Need of specific purpose
Long term goals Main objectives of Five Year Plans
1. Economic Growth:
During colonial period Indian economy was stagnant in nature so the first and foremost objective of economic
planning is economic growth. Economic growth refers to the increase in productive capacity of the economy. The
basis criteria of measuring economic growth is the change in level of GDP (Gross Domestic Product)
2. Modernization:
It refers to both adoption of modern technology in the process of growth and also to put forth changes in social
outlook and ancient meaningless rituals. For example- Girls are not allowed to take education, child marriage etc.
3. Full employment:
It doesn’t refer to zero unemployment, but it refers to a situation when all those who are able and willing to work at
the market wage rate get work. The objective of full employment is to make participate in the process of grown of
the economy.
4. Equity or Equitable Distribution:
The concept of economic growth means nothing if the benefits of growth restricted to helpful of people in the Society.
It is important to ensure that the benefits of economic growth should reach the poor sections of society also, so that
it will reduce the unequal distribution of income and wealth.
5. Self-reliance:
It refers to more and more dependence on domestic goods rather than importing from rest of the world.
Short term goal:
They are those objectives which vary from plan to plan according to the need and requirements of the economy.

Five Yearly Plan

Plan and Period Focus of the plan or the principle objectives

1st Plan (1951-1956) Increase in agricultural production.
Equitable distribution of production, income and wealth.
2nd Plan (1956-1961) Increase in Industrial production.
Development of heavy industry.
3st Plan (1961-1966) Self-sufficiency in food grain production.
Generation of employment opportunities.
Three Annual Plans (1966-1969)
4th Plan (1969-1974) Accelerating the process of growth.
Price stability.
th Plan (1974-1979) Raising the living standards with a focus on weaker section of the society.
5
Annual Plans (1979-1980)
th
6 Plan (1980-1985) Removal of poverty.
Reduction of inequality.
Development of infrastructure.
7th Plan (1985-1990) Generation of employment opportunities.
Increase in agricultural productivity.
Two Annual Plans (1990-1992)
8th Plan (1992-1997) Fuller utilization of manpower by the turn of the century.
Universalisation of elementary education.
Strengthening of infrastructure.
9th Plan (1997-2002) Agricultural and rural development.
Growth with price stability.
Checking the growth of production
10th Plan (2002-2007) Improving the quality of life through better health and educational facilities
and improved levels of consumption.
Reduction in inequality through inclusive growth.
11th Plan (2007-2012) Multiple targets covering not only growth but also poverty reduction.
Improving quality of education and public health services.
Strategy of second green revolution.
Generation high quality of job.
Protection of environment.
12th Plan (2012-2017) Faster, sustainable and more inclusive growth.

Importance of Agriculture in Indian economy

India is an agricultural based economy; nearly 72% of working population is engaged in agriculture (at the eve of
employment). The importance of agriculture sector in Indian economy is as follows:-
1. Contribution of GDP:
Agriculture sector contributes a significant share in the GDP of the economy. agriculture plays a dominant role
in economy GDP. (18% in 2014-15) and (16.5% in 2019-2020.)
2. Supply of good grains:
India is one of those countries which is self-sufficient in good grains. Indian agriculture sector is capable
enough to meet almost the entire food requirements of the population.
3. Source of employment:
According to the survey of 2013, nearly 47% of working population is engaged in agriculture sector.
4. Supply of raw materials:
 Besides food grains, production, agriculture sector also provides industrial raw material like cotton for textile,
seeds for oil, sugarcane for sugar mills.
5. Share of Exports:
Due to the prime exporter of raw material, agriculture sector plays an important role as an earner of foreign
exchange through export of commodities like tea, cotton, jute, coffee etc.
6. Source of revenue:
The Government generates revenue from agriculture sector through land revenue and other taxes and the
commodities produced.
7. Market for industrial sector:
Due to higher dependence of population on agriculture, the demand for industrial products use in agriculture
is also high. (Products like fertilizers, tractors, pesticides etc.)

Problems of Indian agriculture

1. Lack of irrigation facility:
The first and foremost problem of Indian agriculture is the lack of irrigation facility. Farming in India was heavily
dependent on rainfall. The criteria of rainfall decide the condition of crops, i.e. heavy rainfall means good
harvest, whereas drought causes loss in output.
2. Small and scattered holdings:
The backwardness of farming is mainly due to small holding of lands. Small framers won’t be able to adopt
modern technology which restricts them from increasing their productivity.
3. Deficiency of institutional finance:
Institutional finance refers to the arrangement of finance by registered banks or any other financial institutes.
During that period, farmers are dependent upon non institutional sources of finance (such as Zamindar,
Moneylenders, and Mahajans) for fulfilling their requirement of money. They charge very high rate of interest
from farmers.
4. Conventional outlook:
Despite innovative farming technique, Indian farmers still rely on traditional method of farming.
5. Lack of organized marketing system:
Huge number of small farmers continues to sell their output in the local market at reduced rates due to
unorganized marketing system for agriculture in the economy.

Reforms in Indian Agriculture

A. Lands Reforms (Institutional reforms)

1. Abolition of intermediaries:
The first and the most important action taken by the government is the removal of intermediaries (Zamindars).
This policy brought 200 lakh tenants into direct contact with the government. Also, this ownership right gives them
the incentive the increase output (there is no zamindar in between who takes their share of profit) and this
contributed to growth in agriculture.
2. Ceiling of land holding (land ceiling):
It refers to fixing the maximum amount of land, which could be owned by the individual. In order to promote
equity in the agriculture sector, the government specified the maximum limit of land that any individual can hold.
Any excess land beyond that limit would be taken over by the government and will be allotted to the landless
cultivators and small farmers.
3. Consolidation of holdings:
It refers to a practice to allot land to the farmer at one place as replacement for his scattered holdings here and
there. Moreover, small and scattered land is now converted into a big piece of land so that modern and innovative
technology can be applied which will increase the productivity.
4. Cooperative farming:
Joint farming by small cultivators by pooling their land and other resources to enjoy the benefits of large scale
farming is known as cooperative farming. Together farmers can buy inputs at a lower price and sell their products
at a higher cost.

B. General Reforms

1. Expansion of irrigation facility:

 In order to increase the productivity of agriculture, the government of India specially focused on providing proper
and permanent irrigation facility. In 1951, approx. 17 % of land was under permanent means of irrigation.
According to World Bank, about 35% of total agricultural land in India reliably irrigated in 2010.
2. Institutional credit:
Regional rural banks have been set up by the government of India to fulfill the requirements of agricultural credit.
A National Bank for Agriculture and rural development (NABARD) has been set-up as an apex institution in the
field of rural credit in 1982.
3. Support policy:
According to this policy, the government assures a Minimum support price (MSP) to the farmers for their excess
output. The farmers are free to sell their products in the market at prevailing rate, but in case the market rate is
lower than the MSP, then the government will purchase their output.
4. Regulated Markets and Co-Operative Marketing Societies:
A regulated market or controlled market is a system where the government controls the forces of demand and
supply, such as who is allowed to enter and what prices may be charged.

C. Green Revolution or Technical Reforms

Green revolution refers to sudden and spectacular increase in agriculture productivity due to the use of high yielding
variety of seeds. After independence, although around 72% of population was engaged in agriculture sector, but the
level of productivity was very low. The government initiated many technological measures, this continuous and
intensive efforts breaks the stagnancy in agriculture sector which was regarded as green revolution.
It includes:
1. Use of High yielding variety of seeds
2. Use of Chemical Fertilizers
3. Use of pesticides for crop protection
4. Scientific crop Rotation
5. Modernized means of cultivation

Achievements of Green Revolution

1. Increase in production:
The basic and the fundamental achievement of green revolution is a massive increase in production and
productivity of food grains in the economy. It increases from 82 million tons in 1960-61 to 176 million tons in
1990-91.
2. Increase in national income:
The economic condition automatically increases with the increase in production and level of productivity of food
grains in the economy.
3. Increase in Marketable surplus:
It refers to the portion of agriculture production which is sold in the market by the farmers after self consumption.
Due to increase in the level of productivity, higher amount of good grains can be produced on the same amount
of land, due to which farmers can now sell their food grains in the market even after self-consumption.
4. Benefit to low income groups:
Due to availability of large amount of food grains in the market, their price declines as comparison to other items
of consumption. The low income group who spend large proportion of their income on food, benefited from this
decline in relative price.
5. Change in farmer’s outlook:
Due to increase in production and productivity the outlook of farmers towards agriculture is now changed. Farmers
are no longer viewed as a source of subsistence, it is considered as commercial venture as well.
6. Buffer Stock of food grains:
The green revolution enabled the government to procure sufficient amount of food grains to build a stock of food
grains which could be utilised in times of shortage of food grains in the market.

Failure of green Revolution

1. Limited crops only:
Sudden rise in output due to green revolution mainly restricted to the production of food grains only (wheat and
rice). There is no such increment in the production other crops like pulses, jute, cotton etc.
2. Uneven benefits:
 The concept of using HYV seeds and modern technology comes with the huge investment, whereas the majority
of farmers in India are small and marginal. The gains of green revolution mainly attracted towards big farmers
only. It ultimately leads to increase in income inequality between small and big farmers.
3. Soil degradation:
Intensive use of Pesticides and chemical fertilizers has negative effect on land. Production of wheat and rice
requires huge amount of water, fertilizers and pesticides which results in alarming rate of groundwater depletion
and soil degradation.
4. Uneven spread:
The concept of green revolution is not spread over the whole country, only few states like Punjab, Haryana,
Tamilnadu, and Maharashtra had made a great impact. While the impact on other states was relatively
insignificance

Industrial Reforms
In the context of growth and development of a country, industrial sector always plays a dominant role. In the economy
like India, the growth of industrial sector is necessary for the economic and monetary prosperity of country.
Industrial sector provides
1. More stable source of employment
2. Promotes modernization
3. Increase national income
4. Boost the growth potential of an economy
5. Increases the amount of exports
6. Helps to modernize agriculture
At the time of independence, the industrial sector was in the immature stage, only few industries represent the whole
sector. So, the government of India decided to put attention on the development of this sector.

Role of Public/Government Sector in Industrial development

The development of industrial sector or the process of industrialization cannot be left over solely in the hands of
private entrepreneurs.
1. Lack of capital:
Handful of private industries won’t be able to arrange and invest capital up to the limit which is required for the
development of whole country. Hence the involvement of government sector should be become mandatory for
the process of industrialization.
2. Lack of incentive:
At the time of independence, the market of India was not much big enough to encourage private businessman to
undertake huge investment. Moreover, due to limited size of market, the demand for industrial goods was also
very low which restricts the industrialist to earn more.
3. Social justice:
A private industrialist always aims at maximizing wealth, whereas in order to grow the Industrial sector along the
growth of economy the main objective is to provide more and more employment opportunities rather than
concentration of wealth in few hands.
4. Development of infrastructure:
Due to huge investment and low profitability, private sector does not undertake many infrastructural projects.
So, it became mandatory for the public sector to involve in the process of industrial development.

Industrial Policy Revolution (1956)

According the industrial policy 1956, government of increases the role of public sector in the industrial development
of the economy. The main objective of this revolution is to accelerate the growth of industrial sector and prevent the
concentration of wealth and income in the hands of few individual only.

Features of Industrial Policy Revolution (IPR) 1956

1. Three-Tier classification of industries
According to this, the industrial policy 1956 divides total industries into 3 categories
Schedule A- 17 industries - Complete control of public sector.
 Schedule B- 12 industries - Those which could be established both as a private and public sector enterprises.
However the role of public sector is more dominant than of private sector. Schedule C- Remaining industries, which
are to be left open for private sector.
2. Introduction of industrial licensing:
It refers to a written permission from the government for opening or for expanding an industrial unit. According
to this policy, no new industry was allowed to survive unless and until license is obtained from government.
Moreover, license was also needed if an existing industry wants to expand or diversify production.
3. Industrial concession:
Incentive like tax rebate and subsidized rate of power supply were offered to private entrepreneurs for
establishing industries in backward and rural areas of the country. he basis motive behind this policy is to
encourage equality in income.

Small Scale Industries (SSI):

A small scale industry is presently defined as the one who investment does not exceed rupees 5 Crore. (Earlier it
was rupees 5 lakhs in 1951).

Role of Small scale industries or characteristics of SSI

1. Labour incentive:
Small scale industries proved huge amount of employment in the economy as the amount of labour in such
industries are proportionately high as comparison to big industries i.e. SSI are labour intensive, whereas big
industries are capital (machines) incentive.
2. Promotes balanced regional growth:
These industries are locational friendly, unlike big industries which are required to be set up near the raw
material hub in order to reduce the cost of transportation these industries can be easily set up at the door
step of the owner.(due to small requirements).
3. Promotes equity:
SSI requires less amount of investment as compared to big industries, which does not concentrate the power
of economy in few hands. Moreover, any one can start a small scale industry (low investment) which will bring
equal distribution of income and wealth in the economy.
4. Source of raw materials:
SSI are the source of raw materials for big industries, majority of big industries get raw materials from them
only. It builds the eco-system of flow of income in the economy.

Foreign trade policy

During colonial period India was the prime exporter of raw materials and the importer of finished goods. But after
independence, India’s foreign trade undergo with a massive change.
In order to be self-sufficient, India has followed a policy of Import substitution which is also known as inward looking
trade strategy.
Import substitution
Import substitution refers to a policy of replacement of import by domestic production. According to this policy,
instead of importing goods from foreign country, domestic industries are encouraged by giving different incentives to
produce them in India.

Government of India uses 2 ways to protect domestic goods from import

1. Tariff
It refers to the taxes levied on imported goods. The goods can be imported in India after paying heavy amount of
taxes on such goods; imposition of tax increases the price of such goods which automatically reduces its demand in
the market.

2. Quota
It refers to the government imposed trade restriction that limits the number or monetary value.