Chapter 2: INDIAN ECONOMY 1950 - 1990


Usually the economy of the country is based on who shall answer the questions like what to produce? How to produce? How to distribute what is produced? These questions when answered by the market forces mean a capitalist economy, when answered by government then a socialist economy and a mixed economy is where jointly these questions are answered.

Post Independence Dilemma

Indian planners after independence were attracted to the socialist scheme as it gave an opportunity for all to grow. But they were not inclined towards the extreme form of socialism that was seen in USSR where no private property is allowed and state control over all industries is seen. They wanted a mixed economy where the state shall control industry which isn’t attractive to private sector and the market shall work on things it can do profitably.

India after independence decided to take the industrial route to growth. This was a debatable point as the country had no industrial infrastructure, no capital, no entrepreneurial spirit in the citizens and absence of skilled manpower, market and technology. In contrast China followed Agriculture as the main mover of the economy and used its human capital to ensure freedom from food imports and achieved a general welfare of the people. Once it gave the people enough purchasing power for a market to thrive, it went for industrialization in the 1970’s and became an industrial powerhouse.

Indian leadership might have many reasons for choosing industry over agriculture as Indian agriculture was primitive and would have needed the support of indigenous industry for development. The leading international agencies like World bank and IMF too supported industrialization as a path to economic development than agriculture. Second World War had demonstrated the importance of having a strong industrial base.

China had however proved that agriculture could be the prime mover of the economy and after 1990’s the situation would change in India too. In 2002 the planning commission had declared that henceforth “Agriculture” would be the prime mover of the economy. The reason for this was too achieve food security and avail the benefits of the open trade regime under WTO.

The rural masses would benefit the most and also as large sections of the populations depend on it, any benefit to agriculture sector would benefit them too. Hence India moved towards achieving a second green revolution for sustainable development of agriculture. India also had become an example of “Market failure” which meant that the industry was producing goods but the demand to these was muted as many lacked the purchasing power as agriculture couldn’t give them that.

India and National Income

India and developing countries calculate income at factor cost and developed countries prefer market cost. The calculation of National Income is done at constant prices (price during a base year) and not current prices (constant prices + inflation). Developing countries prefer calculating at factor cost as taxation rates are different at different states. They also prefer calculating National income at Base year unlike Developed countries which do it at current prices. This is because inflation is unstable in India unlike the developed countries.

The income also is of multiple types like nominal (wage one gets in hand), real (nominal wage minus inflation). If inflation is 10% then a person who earned Rs. 91 last year and earns Rs. 100 this year shows an increase in nominal income by 10% but real growth of wage is 0% due to inflation. Hence for India calculating real income at constant rates helps in understanding impact of poverty alleviation measures.

Growth and Development

Growth and development are two aspects of economic development. The growth is quantitative and measures the volume of production and income but development measures the quality of life and standard of living. Hence although growth may be high but need not be same as high development. This is because the income that is rising might not be going into improving health, education etc. and in the long term may bring down growth. Thus growth and development are cyclical and influence each other.

Five Year Plans

The idea of five year plans was taken from USSR but the Indian innovation to it was that the private sector too was included in it. The focus of each plan was self reliance, equity, growth or modernization. The planning commission setup in 1950 with the PM as chairman set the planning era in motion. The planning set pace during the second five year under the guidance of renowned statistician P. C. Mahanobolis. He established the Indian statistical institute and was known as the architect of Indian planning.


Indian five year plans
                                                                                Fig 1: Five year plans

With the growth of Indian economy the structural change was seen in the Indian system. The agriculture sector which dominated India Pre independence had declined in its contribution to GDP. The share of services increased as is seen in modern economies and this was accelerated post – 1991 when the era of globalization began.


The planner wanted domination of public sector in the growth of the economy. The private sector would play a complimentary role. This thinking dominated the planning process from 1950-90. This thinking had several positives and negatives too. 

The focus on self reliance in agriculture led to green revolution being adopted. The green revolution made India from an importer of food crops to an exporter. The industrial policy too focused on domination of state. The sectors of industry were divided into three: total state control, private control and joint control but with the state taking the lead in establishing new units. Though the private sector was allowed to start industrialization it was controlled by the state indirectly through a system of licenses.

History of Planning in India

Visvesvaraya plan: He was the diwan of mysore and a popular civil engineer. He had proposed the “Visvesvaray Plan” which wanted democratic capitalism with an emphasis on industrialization. His plan focused on shifting workforce from agriculture to industrialization.

FICCI proposal: The federation of Indian capitalists also emphasized on the need for planning to achieve structural reforms and help the country reach its full potential. It also wanted a “National Planning Commission” to implement this policy. The focus of this model was on the important role of state in the economy. This line of thinking had emerged from the economists like Dadabhai nauroji, MG Ranade who doubted the capability of the market economy, this was further reinforced by the failure of the capitalism during the Great Depression and the rise of the command economies i.e. socialist countries and also popularity of the Keynesian economics.

Congress plan: The National planning committee was formed under guidance of SC Bose and under the chairmanship of J Nehru. The committee has many sub committees and ministers and policy makers of the Congress governments at the states. Although its work was interrupted due to the WW-II, the interim government did work on its recommendations. It should be noted that idea of central planning was not encouraged by Mahatma Gandhi.

Bombay plan: This was proposed by many top industrialists of the country like Tata and Birla. The members of the NPC too were present in small numbers in this planning committee. Like the NPC the reforms suggested in the Bombay plan would be influenced by the New Economic Policy of USSR and the New Deal of USA. The focus was on industrialization, state control over strategic sectors, encouragement to micro, small and medium enterprises, achievement of full employment, reduction in income inequality and inter regional disparities.

Gandhian plan: Gandhiji never agreed to the ideas of state control over economy, industrialization and centralization. His view was focus on agriculture, encourage decentralization and self- contained villages. The Gandhian plan was proposed to include these features. The plan was to focus on agriculture and industries but only agri-based small and cottage industries. Since these depend on agriculture.

The NPC however didn’t agree with this plan and impasse was avoided when the Gandhians were pacified by Nehru saying that industrialization wouldn’t be at the cost of cottage industries. People participation was also emphasized in this plan but that too wasn’t seen in the NPC plan which focused on establishing a power structure and create a top down planning system.

The planning system in India was done to achieve socio-economic objectives. However planning was focused only to achieve the economic objectives (growth, poverty allieiation, jobs etc) and the social objectives were left to the political process to handle. Hence the matters related to reservations in education and jobs, land reforms, inter caste marriages etc don’t fall under purview of planning.

Investment models:

These are processes by which money is put into a productive activity to earn income. It can be done directly by investing in primary, secondary or tertiary sectors or indirectly through share market instruments.

Phase I: 1951 - 1969

During the phase a state led development was seen as the government utilised every possible way of mobilizing resources towards industry and the core sectors. The social sectors like health and education got delayed funding due to the preoccupation with industrialisation. In some instances the events like wars would delay the resource allocation process.

Phase II: 1970 – 1973

This phase saw private capital emerge and the government formed joint ventures with the private sector to start industries in areas where the private sector could open but had not due to lack of technical knowledge or finances.

Phase III: 1974- 1990

In this phase the government in a limited manner opened up the economy to the foreign sector by means of allowing foreign capital in sectors open to the private enterprises. This had a restriction that only “technology transfer” was the mode of investment allowed and there was a cap on the total value of it. Thus direct or indirect foreign investment like FDI / FII was barred. Even foreign investment in sectors that were controlled by government was barred.

This was a poor decision as investment capital was less with the government and so key sectors saw a demand and supply mismatch. The South Asian economies that had started in the same manner as India opened their economies for both direct and indirect investment and soon flourished. They became known as “Asian tigers”. The privatization of PSU’s of the non-strategic sectors was also done by these nations unlike India. Since government crowded out the capital, the private sector saw limited availability of funds for its needs both short term (working capital) and long term (capital investments).

Phase III: 1990 onwards

Due to the Balance of payments crisis seen in the wake of the Gulf war on 1990’s the saw a structural changes in the economy and entry of both private sector and foreign sector in Indian economy. The greater participation was ensured and today barring nuclear sector and railway operations all areas are open to private and foreign investment and companies. This has also changed the government’s approach to various sector development. Earlier the government would crowd out cheap capital by issuing bonds and getting money through market borrowings at low rates but similar initiatives were not allowed to the private sector.

Now, the government has put in place mechanisms that allow for cheap investment capital for the private sector too. This has been done through establish investment funds, viability gap funding, FDI / FII, External commercial borrowing and permissions to raise capital from markets and public and lowering interest rates.

The government has recognised the efficiency of private sector in execution by partnering with it on various development projects in the infrastructure sector. This has been done through PPP.

Trade Policy

The trade policy too complemented the industrial policy and the first 7 plans wanted import substitution. The planner however never seriously considered any impetus to the exports. This policy had good results as in 40 years the share of industry to GDP doubled. This meant development of the country. The Indian industry too saw diversification and expansion of its market. This was due to protection of competition from foreign industries and the policy favoring small scale industries. However now the economists are critical of the state of the economy and favor privatization of non strategic P.S.U and fully opening economy to private and foreign industries.

The negatives seen were that the Indian industry had a captive market and were insulated from competing with other industries of foreign countries and hence they had no incentive to improve their working. The monopoly of state owned industry in certain sector where private parties could have provided good service to hampered the economy. The industrialists were busy in permit License Raj and could not focus on starting new industry or expanding production. It was seen that this system also led to also was misused by some industrialist to prevent others from opening new industries by capturing the licenses.

Owning to this it was felt that there is a need for a new economic policy and this was started in 1991.

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