Indian Economy (1947-1991): Types, Five Year Plans, IPR 1956

Introduction

• The period from 1947 to 1991 in the Indian economy is characterized by significant economic policies and transformations. Post-independence, the government adopted a mixed economy model, combining elements of socialism and capitalism. 
• Key initiatives during this period included the implementation of Five-Year Plans aimed at industrialization, agrarian reforms to address rural poverty, and the establishment of public sector enterprises in strategic industries.
• The Green Revolution in the 1960s and 1970s led to increased agricultural productivity, while the nationalization of banks and industries in the 1960s aimed to promote economic equity and development.
• By the late 1980s, India faced serious economic challenges, including a balance of payments crisis, slow industrial growth, and fiscal deficits. In response, the government initiated significant economic reforms in 1991, ushering in an era of liberalization, privatization, and globalization. 
• These reforms aimed to open up the Indian economy to foreign investment, promote competition, and enhance efficiency, laying the foundation for India’s emergence as a global economic powerhouse in the subsequent decades.

Types of Economic Systems

• Capitalist System: Goods produced are distributed among people not based on what people need but based on Purchasing Power.
• Socialist System: The government decides what goods are to be produced by the needs of society.
• Mixed Economic System: Market  provides whatever goods and services it can produce well, and the government  provides essential goods and services which the market fails to do.
  • India is a socialist society with a strong public sector but also with private property and democracy.

The Five-Year Plans

• Establishment of the Planning Commission: For planned economic development through five year plans the Planning Commission was established in 1950 with the Prime Minister as its Chairperson.
• Establishment of NITI Ayog: In 2015,  NITI Aayog replaced the Planning Commission making planning a more decentralized process. The Five Year Plan system was also discontinued. 
• Objectives of Five-Year Plans
• • Growth: Denotes the increase in a country’s capacity to produce goods and services; 
    • May be reflected in a larger stock of productive capital or an increase in the efficiency of productive capital and services.
  • Modernisation: Refers to the adoption of new technology which helps in increasing the production of goods and services and  changes in outlook like the recognition of equal rights for women.
  • Self-reliance: Refers to the usage of a nation’s own resources to increase production rather than using imported materials. 
    • The first seven five-year plans gave importance to self-reliance. 
  • Equity: Aims to reduce the inequality in the distribution of wealth. 
    • Equity in agriculture was implemented through Land reforms and land ceiling.

Industry and Trade

• From the second five year plan onwards industrial development was given special attention.

Industrial Policy Resolution 1956 (IPR 1956)

• Aligned on the lines of socialist principles and formed the basis for the Second Five-Year Plan. 
• It classified industries into 4 categories:
  • State Monopolies: Encompassed the manufacturing of arms and ammunition, atomic energy, and railway transport, exclusively under the government’s monopoly.
  • Basic Industries: Industries like coal, iron and steel, shipbuilding, aircraft manufacturing, telephone, telegraph, wireless, and mineral oils, crucial for economic development, were under the central government. 
    • However, existing private companies in these sectors were permitted to continue.
• Regulated Industries: Sectors such as automobiles, heavy machinery, chemicals, fertilizers, sugar, paper, cement, cotton, woolen textiles, etc., 
  • These were subject to government regulation (pricing, production quantity, etc.) due to their importance to the masses.
• Private Industries: All other industries were open to operation by the private sector and cooperatives.
• Small-Scale Industry
  • In 1955, the Village and Small-Scale Industries Committee (Karve Committee) highlighted the role of small-scale industries in promoting rural development. 
  • A Small-Scale Industry is defined with reference to the maximum investment allowed in an industry.  
  • At present, the maximum investment allowed is rupees one crore.
• Trade Policy: Policy of Import Substitution
  • First 7 Five Year Plans (FYPs) followed a trade policy called import substitution which aimed at substituting imports with domestic production using tariffs and quotas. 
  • Tariffs: Tax on imported goods which are imposed to make imports expensive;  
  • Quotas: Quantity of imported goods which restrict imports. 
• Effect of Policies on various sectors
  • Contribution of Agriculture to the GDP was reduced in 1991
  • Contribution of the industrial sector increased from 13% (1950-51) to 24.6% (1990-91).
  • There was a significant increase in the contribution of the service sector from 28% (1950-51) to 40.5% (1990-91).

Conclusion

• The period from 1947 to 1991 marked a significant phase in India’s economic history characterized by mixed economic policies, with a dominant role for the public sector and extensive government regulation. 
• Despite initial achievements in areas such as agriculture and industrialization, the economy faced challenges such as low growth rates, fiscal deficits, and external imbalances. 
• The balance of payments crisis of 1991 prompted a paradigm shift towards liberalization, privatization, and globalization, also known as New Economic Policy ushering in an era of economic reforms aimed at unleashing the potential of the Indian economy.