Economic Development

Economic Development Challenges at Independence #

When India got Independence, the Indian economy was in a backward and underdeveloped state. Following problems were faced by Indian economy at the time of independence:

• Poverty and illiteracy– At the time of Independence, Majority of the Indian Population were illiterate and poor. Apart from extreme poverty and illiteracy, a ruined agriculture and industry led to Unemployment problem which further aggravated the condition of poverty in India.
• Economic Growth– The Drain of Wealth Policy by Britishers left the Indian treasures with almost nothing. Balance of Trade was also favourable to English
• Lack of Resources– India had limited financial resources during British time. The financial base of India was more or less weak to invest in Capital industries.
• Structural Distortion in Economy- These structural distortions created by colonialism in Indian economy and society made the future transition to self-sustained growth much more difficult.
• Ensuring well-being and economic development were the important challenges for the Indian leadership and to pursue these goals, they had two models of economic development, the liberal – capitalist model followed in the U.S.A. and Europe, another was the socialist model followed in U.S.S.R.
• During the debate on the model of economic development, almost everyone agreed that the development of India means economic growth and social and economic justice.
• Hence very few people supported the American style of capitalist development. There were many who got impressed by the Soviet model of development.
• India had to abandon the colonial style of functioning for commercial gains only and strive for poverty alleviation and social-economic redistribution was the primary responsibility of the then government.
• Therefore, India adopted the mixed model of economic development, which has features of both the capitalist and socialist models.

Indian Parliament in December 1954 accepted ‘the socialist pattern of society’ as the objective of social and economic policy. In fact, the model projected was of a “mixed economy” where the public and the private sectors were not only to co-exist but were to be complementary to each other and the private sector was to be encouraged to grow with as much freedom as possible within the broad objectives of the national planning. 

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Mixed Economy Model and Economic Development in Post-Independence India #

Mixed Economy Model #

• In this model, the Government and Private sector will exist together in the economy.
• A mixed economic system is a system that combines aspects of both capitalism and socialism.
• A mixed economic system protects private property and allows a level of economic freedom in the use of capital, but also allows for governments to interfere in economic activities in order to achieve social aims
• Indian Parliament in December 1954 accepted ‘the socialist pattern of society’ as the objective of social and economic policy.

In fact, the model projected was of a “mixed economy” where the public and the private sectors were not only to co-exist but where to be complementary to each other and the private sector was to be encouraged to grow with as much freedom as possible within the broad objectives of the national plan. 

Why did the Government opt for a mixed economy after Independence? #

• After independence, the newly formed government neither had sufficient resources nor the estimate of potential resources. So, the efficiency. property of getting more from scarce resources, had to be improved since the beginning. Capitalism being profit centered depicts a greater efficiency.
• But on the other hand, there lied a major chunk of population that was oppressed, downtrodden and underprivileged. It was quite apparent that the equalitye. uniform distribution of economic prosperity was much needed for sustained growth of country as a whole. Socialist economy advocates equality
• As we studied above, the Cold war was started between the USSR and USA to establish supremacy of their economic system, it would have been hard for India not to resort to only one of the ideologies. But our leaders did a good thing then, they looked at the feasibility of both (communism and capitalism) based on our country’s condition.
• Capitalism– Capitalism would mean more profit in lesser hands followed by more power. This simply means those few would have the power to influence the market as well as bystanders (the common man). Even a thin possibility of some of those few going against the interest of the government or masses would have added to the territorial tension our country was already facing. Such an economy would also mean eventually doing away with public subsidies.
• Socialist/communist economy– A decision to opt for communist economy would have highly discouraged the class of traders and merchants who were operating ever since the ages of monarchy. The government gravely needed their expertise, capital and active participation to explore the means and prospects of economic growth. Moreover, people were just out of the authoritative and rough rule of the British government. A strict practice of communism might have been perceived as the same causing a large-scale resistance.
• Above two insights made it very clear that a mixed economy was an optimal choice aimed both at increasing productivity as well as reducing inequality.
• Different five year plans showed the government’s varied emphasis on communism and capitalism.
• In the first five-year plan, the essence of communism can be seen in abolition of landlordisme. zamindari system, ryotwari system, talukdar system etc. The constitution was amended to give the legislature the ultimate authority. On the contrary, second and third plans were aimed at rapid industrialization, sufficiency of food grains, and utilisation of manpower augmented with increased budget plans for the private sector.

Economic Development Strategies in Post-Independence India (1947-1991)

Industrial policy evolution

•  While undertaking a difficult and complex task, India, unlike many other post-colonial societies, had certain advantages.
• First, a small but independent (Indian owned and controlled) industrial base had emerged in India between 1914 and 1947.
• By the time India gained political independence in 1947, Indian entrepreneurs had successfully competed with European enterprises in India.
• India was fortunate to have a broad societal consensus on the nature and path of development to be followed after independence.

Inclusive Economic Development Agenda (1947-1991): Self-Reliance, Industrialization, and Social Equity #

• Multi-pronged strategy of economic development based on self-reliance
• Rapid industrialization based on import-substitution, including of capital goods industries
• Prevention of imperialist or foreign capital domination
• Land reforms involving tenancy reforms
• Abolition of zamindari
• Introduction of cooperatives, especially service cooperatives
• For marketing, credit, growth to be attempted along with equity, i.e., the growth model was to be reformist with a welfare, pro-poor orientation
• Positive discrimination or reservation, for a period, in favour of the most oppressed in Indian society, the Scheduled Castes and Tribes
• State to play a central role in promoting economic development, including through direct state participation in the production process, i.e., through the public sector.
• There was agreement that India was to make this unique attempt at planned rapid industrialization within a democratic and civil libertarian framework.
• There was a wide consensus emerging around the notion that the role of the state would not only involve the proper use of fiscal, monetary and other instruments of economic policy and state control and supervision over the growth process, but also have to include direct participation in the production process through the public sector.
• It was felt that in the development of capital goods industries and other basic and heavy industries, which required huge finances and had a long-time lag for returns, the public sector would have to play a critical role.
• Great emphasis on heavy and capital goods industries in the Second Plan led to a major shift towards the public sector.
• A basic element of the strategy was the rapid development of heavy and capital goods industries in India.
• The shift in favour of heavy industry was to be combined with promoting labour-intensive small and cottage industries for the production of consumer goods.
• Another critical strategy was the emphasis on growth with equity. Hence, the issue of concentration and distribution in industry and agriculture was given a lot of attention.
• State supervision of development along planned lines, dividing activity between the public and private sectors, preventing rise of concentration and monopoly, protecting small industry, ensuring regional balance, canalizing resources according to planned priorities and targets – all this involved the setting up of an elaborate and complicated system of controls and industrial licensing, which was done through the Industries Development and Regulation Act (IDRA) of 1951.

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IRDA (1951): Fostering Economic Development Through Regulation #

• It was passed in 1951 to implement the Industrial Policy Resolution of 1948.
• This Act empowered the Government-
• To make rules for registration of existing industries
• License all new undertakings
• Rules for regulating production and development of industries in the
• Consultation with the state government on these matters.
• The act provided for the constitution of a Central Advisory Council & Development Board.
• The overall economy performed impressively compared to the colonial period.
• An important achievement in this period was the rise in the savings and investment rates.
• On the agrarian front, comprehensive land reform measures were initiated soon after independence.
• The setting up of a massive network for agricultural extension and community development work at the village level, the large infrastructural investment in irrigation, power and agricultural research had created the conditions for considerable agricultural growth in this period.
• Industry, during the first three Plans, grew even more rapidly than agriculture, at a compounded growth rate of 7.1 per cent per annum between 1951 and 1965.
• The industrial growth was based on rapid import substitution, initially, of consumer goods and particularly, since the Second Plan, of capital goods and intermediate goods.
• The growth pattern went a long way in reducing India’s near-total dependence on the advanced countries for basic goods and capital equipment, which was necessary for investment or creation of new capacity.
• By mid-1970s, India could meet indigenously more than 90 percent of her equipment requirements for maintaining her rate of investment.
• This was a major achievement, and it considerably increased India’s autonomy from the advanced countries in determining her own rate of capital accumulation.
• The weight of the public sector in the overall economy increased rapidly.
• Apart from industry and agriculture, the early planners gave utmost priority to the development of infrastructure, including education and health and Science and Technology.

Heavy industry is an industry in which large machines are used to produce raw materials or to make large objects. Examples of Heavy Industries- Shipbuilding, Space, Transportation, Construction mining Material, Chemicals, Energy, Heavy equipment etc.

Economic Planning: Guiding National Development Strategically #

Economic planning is the making of major economic decisions— by the conscious decision of a determinate authority, on the basis of a comprehensive survey of a country’s existing and potential resources and a careful study of the needs of the people. 

• Indian Economic Planning

1. 1. Planning before independence
   2. Planning after independence

Planning before independence #

Planning after independence #

Planning Commission: Shaping India’s Future through Five-Year Plans

• The scope of the resolution by which Planning Commission was formed:
• Every individual should have the right to an adequate means of livelihood.
• Material resources of community ownership and control should serve the common good.
• Economic system should operate in such a way that use of ‘means of production’ and ‘wealth’ should not result in the well-being of a particular community and to the detriment of the society.
• As in the then U.S.S.R [United Soviet Socialist Republic], the Planning Commission of India opted for a five-year plan.
• The government of India prepares a document that has a plan for all its income and expenditure for the next 5 years.
• Accordingly, the budget of the central and all the state governments is divided into parts:
  • Non ‘Planned’ Budget – This is spent on routine items on a yearly basis.
  • Planned Budget – This is spent on a Five-year basis as per the priorities fixed by the plan.
• A five year plan has the advantage of permitting the government to focus on the larger picture and make long term intervention in the economy. (5-year plan in detail was covered in Economy notes)

Objectives of Planning Commission #

• To make an assessment of the material, capital and human resources of the country, including technical personnel and to investigate the possibilities of augmenting such resources as are found to be deficient in relation to the nation’s requirements.
• To formulate a plan for the most effective and balanced utilisation of the country’s resources.
• To determine priorities as between projects and programmes accepted in the plan.
• To indicate the factors that retard economic development and to determine conditions which should be established for the success of the plan.
• To determine the nature of the machinery to secure the successful implementation of the plan.
• To appraise from time to time the progress of the plan and to recommend the necessary adjustments of policy and measures.
• To make recommendations either for facilitating the discharge of its duties or tor a consideration of the prevailing economic conditions, current policies, measures and development programmes; or for an examination of problems referred to it for advice by the Central or State Government.

National Development Council: Apex Decision-Making for India’s Development #

• It was founded in August, 1952.
• It was presided over by the Prime Minister.
• It is the apex body for decision creating and deliberations on development matters in India.
• It gives the final approval to the 5-year plan of India.

Key Five-Year Plans and NITI Aayog: Shaping India’s Development Path #

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Indian Economic Development: 1965-1999 Challenges and Transformations #

THE MID-1960S: CRISIS AND RESPONSE #

• Two successive monsoon failures of 1965 and 1966, added to the burden on the agriculture which was beginning to show signs of stagnation, and led to a fall in agricultural output.
• The rate of inflation rose rapidly.
• The inflation was partly due to the droughts and partly due to the two wars of 1962 (with China) and 1965 (with Pakistan) which had led to a massive increase in defence expenditure.
• The balance of payments situation, fragile since 1956–57, deteriorated further.
• The dependence on foreign aid, which had been rising over the first three Plans, now increased sharply due to food shortages as well as the weakness of balance of payments.
• The USA, the World Bank and the IMF wanted India to:
• Liberalize its trade and industrial controls
• Devalue the rupee
• Adopt a new agricultural strategy
• The method chosen for meeting the balance of payments crisis and reducing the fiscal deficit was involving drastic cuts in government expenditure rather than increases in tax levels.
• The immediate imperative was seen to be:
• Restoring of the health of India’s balance of payments situation
• Creation of sufficient foreign exchange reserves
• Removal of dependence on food imports by improving agricultural production and creating food reserves.
• The major private commercial banks in India were nationalized in 1969.
• The same year, the Monopolies and Restrictive Trade Practices (MRTP) Act, severely restricting the activities of large business houses, was passed.
• Insurance was nationalized in 1972.

•  The coal industry was nationalized in 1973.
• The Foreign Exchange Regulation Act (FERA) was passed in 1973, putting numerous restrictions on foreign investment and the functioning of foreign companies in India, making India one of the most difficult destinations for foreign capital in the world.

FERA Act (1974-1999): Transforming Foreign Exchange Regulations and Its Impact on Economic Development #

• It came into force with an effect from January, 1974.
• It deals in foreign exchange and securities and the Transactions which had an indirect impact on the foreign exchange and the import and export of currency.
• It was repealed in 1999 by the Government of Atal Bihari Vajpayee.
• It replaced by the Foreign Exchange Management Act, which liberalized foreign exchange control and restrictions on foreign investment.
• A strategic plan was made after the mid-1960s to improve the balance of payments situation, create food security, introduce anti-poverty measures and reduce dependence on imports for critical inputs like oil.
• The Green Revolution strategy of introducing a package of high-yield variety (HYV) seeds, fertilizers and other inputs in a concentrated manner to some suitable select areas paid immediate dividends in creating food security and poverty reduction.
• The rural poverty index continued to show a decline in these crisis years as rural employment and incomes were maintained through government programmes using the surplus food stocks.
• Apart from food self-sufficiency, certain other features emerged that pointed towards a greater autonomy of the Indian economy and increased self-reliance.
• A new feature of the 1980s was the phenomenal increase in new stock market issues, the stock market thus emerging as an important source of funds for industry.

Structural Inefficiencies and Economic Constraints: A Call for Reform in India’s Economic Development Model #

• The first set of problems related to the emergence of structural features led to inefficiency.
• The import-substitution industrialization (ISI) strategy based on heavy protection to indigenous industries was effective in deepening and widening India’s industrial base and giving the economy freedom from foreign dependence.
• However, the excessive protection through import restrictions started leading to inefficiency and technological backwardness in Indian industry.
• This situation was further aggravated by the so-called ‘Licence Quota Raj’, that is, a complete set of rules, regulations and restrictions which stifled entrepreneurship and innovation.
• The Reservation of certain areas for small-scale industries meant excluding some areas from the advantages of scale and larger resources for R&D activities.
• This made the sector often internationally uncompetitive, leading to India losing out to its competitors in many areas.
• The large public sector in India, which controlled ‘the commanding heights’ of the economy, also began to emerge as a major source of inefficiency.
• Over time, political and bureaucratic pressure on the public-sector undertakings gradually led to most of them running at a loss.
• The Licensing, MRTP Act, small-scale reservation and the like made entry or expansion of business very difficult,

• Since the mid-1970s virtually no exit was possible for inefficient lossmaking companies as they could not close down or retrench without government permission.
• All this led to the investment efficiency in India being very low or the capital-output ratio being very high.
• India failed to make a timely shift from the export pessimism inherent in the first three Plans.
• India did reasonably well till the mid-1960s, basing herself on an inward-oriented, import substitution based strategy.
• However, India failed to respond adequately to the new opportunities thrown up by the changing world situation despite the availability of the East Asian experience.
• More and more sections emerged which made strong, articulate demands on state resources.
• However, the Government was increasingly unable either to meet these demands and fully or diffuse the clamour for them. This resulted in the gradual abandoning of fiscal prudence from about the mid-1970s.
• The gradual erosion of fiscal prudence was reflected in government expenditure rising consistently, mainly because of the proliferation of subsidies and grants, salary increases with no relationship to efficiency or output, over staffing and other ‘populist’ measures such as massive loan waivers.
• The growing government saving-investment gap and the fiscal deficit had a negative impact on the balance of payments and debt situation.
• The prejudice against foreign direct investment (FDI), which still remained, led to this excessive dependence on foreign debt rather than foreign equity capital, and inadequate returns on the borrowings led to an unsustainable debt service burden.
• India’s foreign exchange reserves fell from $5.85 billion in 1980–81 to $4.1 billion in 1989– 90, and in the next year (1990– 91) they fell drastically by nearly half to $2.24 billion, enough only for one month’s import cover.
• India’s international credit rating was sharply downgraded and it was becoming extremely difficult to raise credit abroad.
• The crisis pushed India into initiating a process of economic reforms and structural adjustment.

1991 Economic Reforms: Liberalization, Privatization, Globalization (LPG) #

Background #

• The origin of the financial crisis can be traced from the inefficient management of the Indian economy in the 1980’s. In the late 1980’s government expenditure began to exceed its revenue by such large margins that it became unsustainable.
• Inflation was rising, imports grew in excess to the export to such a level that foreign exchange reserves declined to a level that it was not adequate to finance imports for more than two weeks.
• Even there was insufficient foreign exchange to pay the interest to international lenders.
• To overcome this aggravated economic situation, India approached the World Bank and IMF and received $7 billion as loan to manage the crisis. In return, these institutions wanted the Indian government to open up the economy by removing restrictions of several sectors and reduce the role of government in many areas and remove trade restrictions.
• India had no choice but to accept these conditions and announced the New Economic Policy.
• The Crux of the policy was to remove the barrier to the entry of private firms and to create a more competitive environment for the economy.
• These reforms can be classified into two types:

Economic Reforms #

1. Stabilization Measures
2. Structural Reform Measures

• The government initiated a variety of policies which fall under three heads viz. Liberalization, Privatization and Globalization, “LPG Policy“. The first two are policy strategies & the last one is the outcome of these strategies.

New Economic Policy (1991) – Transforming Economic Development through LPG #

Post-Reform Economic Development and reforms (1991 Onwards) #

The process of reforms started in 1991, as an immediate fiscal correction:

• Making exchange rate more realistically linked to the market
• Liberalization of trade and industrial controls like free access to imports.
• Considerable dismantling of the industrial licensing system and the abolition of the MRTP Act.
• Reform of the public sector including gradual privatization
• Reform of the capital markets and the financial sector.
• SEBI was established in 1992 to regulate the securities market.
• Removing a large number of the restrictions on multinational corporations and foreign investment and welcoming them, particularly foreign direct investment
• The growth rate of India’s GDP which had fallen to a 8 per cent in the crisis year of 1991–92 recovered quickly to 5.3 per cent by 1992–93 and rose further to 6.2 per cent in 1993– 94
• The capital goods sector, which had demonstrated negative growth rates for a few years, bounced back to nearly 25 per cent growth in 1994–95.
• The central government’s fiscal deficit, which had reached 8.3 percent of GDP in 1990–91, was reduced and averaged roughly 6 per cent between 1992-97.
• The external sector also showed considerable improvement. Exports, which registered a decline of 1.5 per cent in dollar terms during 1991-92, recovered quickly and maintained an average growth rate of nearly 20 per cent between 1993-96.
• The overall external debt – GDP ratio for India fell from a peak of 41 per cent in 1991–92 to 28.7 per cent in 1995–96.
• The Calculations based on several different indicators of poverty show that poverty, mainly rural poverty, marked a significant rise only in 1992–93 and its causation was linked mainly to a drought and fall in food grain output in 1991–92, leading to a rise in food prices, and weakly to the stabilization programme.
• However, all the poverty indicators showed that by 1993–94 there was much improvement in the poverty situation.
• The improvement in the poverty situation was helped by the fact that the government increased the overall Social Services and Rural Development expenditure from 1993–94.
• The annual rate of inflation, which touched a high of 17 per cent in August 1991, was brought down to below 5 per cent in 1996.

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Key Economic Developments and Initiatives #

Economic Developments: PL-480 Programme #

• It refers to Public Law 480, also known as ‘Food for Peace’ was a US funding program for food to provide overseas aid. This program was signed by President Dwight D. Eisenhower commonly known as PL-480.
• This made poor nations pay the US in their own currency. This program brought humiliation for India as it was very dependent on the foreign supplied food and led to the need of Food Security.
• The issue of devaluation and to accept this ‘Ship to Mouth’ aid (food came directly from the ships into the hungry mouths due to acute shortages) was unpopular and drew a huge criticism against Mrs. Gandhi.
• Each instance increased deficit spending, further accelerating the already severe inflation. Besides, the World Bank fell short of its promised aid inflows to India.
• The Indian government took steps to counter soaring inflation, but it turned out to be very unpopular and laid the foundation for distrust between the people and the government.
• India was quick to learn from its PL- 480 mistake.
• As a result, it imported 18,000 HYV seeds from Mexico and ushered in a new stepping stone in the name of Green Revolution.
• Today India is not only self-sufficient in agriculture rather a net exporter of agriculture produces.

Economic Developments: Public Distribution System #

• PDS is a food security system which was launched in India in June 1947. It was established under the Ministry of Consumer Affairs, Food and Public Distribution and it is managed jointly by the state government. Under this scheme, the subsidized food and non-food items are distributed.
• Subsidized food items are distributed through Fair Price Shops/ Ration Shops.
• The food items include wheat, rice, sugar whereas non-food items include kerosene.
• PDS is maintained by Food Corporation of India (FCI).
• In June 1992, it was converted to Revamped PDS (RPDS) and launched in 1775 blocks of the country.
• After 5 years, Targeted PDS (TPDS) was introduced. PDS helped in stabilizing the food prices and ready availability of food grains.
• On the other hand, due to inefficiency in the system, food grains get spoiled because of bad weather conditions and improper monitoring.
• In the present scenario, PDS has been put under Right to Food Act, 2013, which has now become a legal right.

Economic Developments: Abolition of Privy Purse #

• At the time of integration of the states, this move drew a little criticism as the main motive was the consolidation and the integration process.
• The Privileges given to the rulers were actually against the principles of equality and social and economic justice which was laid down in the Constitution of India.
• Later in the year 1971, Indira Gandhi proposed the nation to abolish Privy Purse.
• The Constitutional (Twenty-Sixth Amendment) Act, 1971 was then successfully passed and led to the abolition of Privy Purse.
• The rationale behind the abolition was based on the requirement of the government to decrease the revenue deficit.

Economic Developments: Garibi Hatao #

• “Garibi Hatao Desh Bachao” was the theme and slogan of Indira Gandhi during the 1971 election.
• The slogan was well crafted to reach out directly to the poor and marginalized section of society, especially the unprivileged groups.
• It was part of the five-year plan.
• Indira’s political opponents campaigned on the slogan ‘Indira Hatao’ (Remove Indira), Indira retooled it to “Garibi Hatao” (Remove Poverty).
• This slogan had a considerable impact and Indira was now looked upon by many as India’s saviour.