Chapter 1st

Indian Economy on the Eve of Independence

British Rule
The British Rule over India changed the course of history in India. The foundation of British
Empire in India was laid by Battle of Plassey, fought in 1757.

Purpose of British Rule: The main purpose of the British rule in India was to use Indian
economy as feeder economy for the development of British economy. They exploited India’s
natural as well as human resources for the glory of their own country.

LOW LEVEL OF ECONOMIC DEVELOPMENT UNDER COLONIAL RULE

Features of Indian Economy
Before the arrival of British Rule
(i) Prosperous Economy: India was an independent, self-reliant and prosperous economy.
(ii) Agrarian Economy: Agriculture was the main source of livelihood for most people and it
engaged about two-third of the total population.
(iii) Well known handicraft Industries: India was also known for its handicraft industries in the
fields of cotton and silk textiles, metal and precious stone works, etc. handicraft products
enjoyed a worldwide market due to its reputation of fine quality of material used and the high
standards of craftsmanship.

During the British Rule

The economic policies pursued by the Colonial Government (British Government) in India, were
concerned more with the protection and promotion of their own economic interests, than with the
development of the Indian economy. Their policies brought a fundamental change in the
structure of Indian economy. They transferred the country in a supplier of raw materials and
consumer of finished industrial products from Britain.

Meaning of Colonialism
Colonialism refers to a system of political and social relations between two countries, of which
one is the ruler and the other is its colony. The ruling country not only has political control over
the colony, but it also determines the economic policies of the dominated country.

Low Level of National Income and Per Capita Income

The economic condition of a nation can be judged with the data of national income and per
capita income.
 However, no sincere attempt was made by the British Government to estimate India’s national
and per capita income.
 Attempts were made by experts like Dadabhai Naoroji, William Digby, Findlay Shirras,
V.K.R.V. Rao and R.C. Dessai. But all these estimates produced conflicting and inconsistent
results.
 However, estimates of Dr. Rao on national and per capita incomes were considered very
significant.
 Most of the studies revealed that country’s growth of aggregate real output during the first
half of the twentieth century was less than 2 per cent and only 0.5 per cent growth in per
capita output per year.

AGRICULTURAL SECTOR
During the pre-British period, the condition of Indian agriculture was not at all satisfactory.
 Nearly 85 per cent of the country’s population lived mostly in villages and derived livelihood,
directly or indirectly from agriculture.
 Even with this large proportion of population engaged in agriculture, the country was not self-
sufficient in food and raw materials for industry.

Reasons for Stagnation in Agricultural Sector

1. Land Settlement System: The most important reason for stagnation in agricultural sector was
the introduction of ‘Zamindari System’ by the colonial government.
 Under this system, profits accruing out of agricultural sector went to the zamindars in the
form of ‘lagaan’.
 The main interest of the zamindars was only to collect lagaan regardless of the economic
condition of the cultivator.
 The dates for depositing specified sums of lagaan to British Government were also fixed,
failing which the zamindars were to loss their rights.
 The zamindars and the colonial government did nothing to improve the condition of
agriculture.
2. Commercialization of Agriculture: means production of crops for sale in the market rather
than for self -consumption.
 During the British rule, farmers were given higher price for producing cash crops (like
cotton or jute), so that such crops could be used as raw material for British Industries.
 Thus. British rule promoted shifting of crops from food crops to cash crops.

Commercialization of Agriculture resulted in Famines

 During the British rule, agriculture was commercialized to cater to the needs of the
British industries for necessary raw materials.
 The British industrialists were always in need of raw materials like cotton, jute,
groundnut, sugarcane etc. to keep their factories running.
 By offering high prices, the Indian peasants were attracted to production of commercial
crops instead of food crops.
 The extent of commercial agriculture went so far as to make many peasants purchase
their food requirements from shops in towns.
 This fall in production of food crops was responsible for frequent famines in India during
the British days.

3. Low Level of Productivity: Low levels of technology, lack of irrigation facilities and
negligible use of fertilisers resulted in low level of productivity.
 The cultivator had neither the means nor any incentive to invest in agriculture.
 The zamindar had no roots in the villages, while the British rule spent little on
agricultural, technique or mass education.
  All this made it difficult to introduce modern technology, which caused a perpetually low
level of productively.
4. Adverse- affects of partition: India’s agricultural production received a further set back due
to the country’s partition at the time of independence.
 A sizeable portion of the undivided country’s highly irrigated and fertile land went to
Pakistan.
 Almost, the whole of Jute producing area became part of East Pakistan (now
Bangladesh). India’s Jute goods industry, which had enjoyed a world monopoly so far,
suffered heavily for lack of raw material.
5. Scarcity of Investment: Agriculture was facing scarcity of investment in terracing, flood
control and drainage. Some farmers changed their cropping pattern from food crops to
commercial crops, a large section of tenants, small farmers and sharecroppers neither had
resources and technology nor had incentive in agriculture. Sharecropping is a form of
agriculture in which a landowner allow a tenant to use the land in return for a share of the
crops produced on their portion of land.

INDUSTRIAL SECTOR
Like agriculture, India could not develop a sound industrial base under the British rule. The poor
state of Industrial sector during the British rule is illustrated in the following points:
1. De- industrialisation – Decline of handicraft Industry: British Government systematically
destroyed Indian handicraft industries and no modern industrial base was allowed to come up.
The primary motive of British rule behind the de- industrialization was two-fold:
1. To get raw materials from India at cheap rates to be used by upcoming modern industries in
Britain’
2. To sell finished products of British industries in Indian market at higher prices. The two-fold
policy of British rule was enforced to ensure the maximum advantage of their home country.

Reason for Decline of handicraft Industry

The main reason was the introduction of ‘Discriminatory Tariff Policy’ by the colonial
government. This policy allowed free export of raw materials from India and free Import of final
goods of British industry to India. But, heavy duty was imposed on the export of Indian
handicrafts.
As a result, Indian markets were full of finished goods from Britain which were low priced. It led
to the decline of Indian handicrafts, both in the domestic market as well as the export market.

2. Adverse affects of decline of decline of handicraft Industry: Decline of handicraft

industries adversely affected the Indian economy in the following ways:
(i) High Level of Unemployment : The decline of Indian handicrafts resulted in unemployment on
a mass scale. The displaced artisans were forced to take up agriculture for their livelihood. This
increased the burden of population on villages and over-crowding in agriculture.
(ii) Import of Finished Goods: The Indian made goods could not withstand the foreign
competition of machine made cheap goods. It encouraged the import of manufactured goods
from Britain.
3. Lack of Capital Goods Industries: Capital goods industry refer to those industries which
can produce machine tools, which are, in turn, used for producing articles for current
consumption.
  During the British rule, there was hardly any capital goods industry to promote further
industrialization in India.
 British rulers did not pay any attention for their promotion as they always wanted Indians to
be dependent on Britain, for the supply of capital goods and heavy equipment.
4. Low contribution to Gross Domestic product (GDP): The growth rate of the new industrial
sector and its contribution to the GDP remained very small.
5. Limited role of public Sector: The limited area of operation of the public sector was also a
significant reason for drawback of the industrial sector. The Public sector remained confined
only to the railways, power generation, communications, ports and some other
departmental undertakings.

Modern Industries operating during independence

Due to initiative of the private sector, modern industries started to come up during the second
half of the 19th century.
 The industries established in this period were mainly confined to cotton textile and jute
mills and their progress remained very slow.
 The cotton textile mills were mainly dominated by Indians and were located in the
western parts of the country, namely, Maharashtra and Gujarat.
 The jute mills dominated by the foreigners were mainly concentrated in Bengal.
 The major breakthrough was setting up of Tata iron and Steel Company (TISCO) in the
year 1907 in Jamshedpur (Bihar).
 A few other industries in the fields of sugar, cement, paper, etc. also came up after the
Second World War.

FOREIGN TRADE
India has been an important trading nation since ancient times. However, the restrictive policies
adopted by the colonial government adversely affected the structure, composition and volume of
India’s foreign trade.
1. Exporter of Primary Products and Importer of Finished Goods: India became an
exporter of primary products such as raw silk, cotton, wool, sugar, indigo, jute, etc. and an
importer of finished consumer goods like cotton, silk and woolen clothes and capital goods
like machinery, produced in the British Industries
2. Monopoly Control of British Rule: British Government maintained a monopoly control
over India’s exports and Imports.
 More than ½ India’s foreign trade was restricted to Britain while the rest was allowed
with few other countries like China, Ceylon (Sri Lanka) and Persia (Iran).
 The opening of Suez Canal in 1869 served as a direct route for the ships operating
between India and Britain.
3. Drain of Indian wealth during British rule: Under the British rule, India became an
exporter of primary products (raw materials) and an importer of finished goods. There was
huge export surplus due to excess exports. However, export surplus was used:
(i) To make payments for expenses incurred by an office set up by the colonial government
in Britain.
(ii) To meet expenses on war fought by the British government.
(iii) To import invisible items.
 Trade through the Suez Canal
Suez Canal is an artificial waterway running from north to south across the Isthmus of Suez in
north-eastern Egypt.
 The opening of Suez Canal in 1869 reduced the cost of transportation and made access to
the Indian market easier.
 The Canal provided a direct trade route for ships operating between Britain and India and
avoided the need to sail around Africa.
 Strategically and economically, it is one of the most important waterways in the world.

DEMOGRAPHIC CONDITION
Demographic conditions during the British Rule exhibited all features of a stagnant and
backward Indian economy.
 1st official Census: The first official census was conducted in the year 1881. Though
suffering from certain limitations, the census revealed unevenness in India’s population
growth. From 1881 onwards, census operations were carried out after every ten years.
 1921: Year of Great Divide: before 1921, India was in the first stage of demographic
transition. The second stage of transition began after 1921. So, the year 1921 is described
as the ‘year of the Great Divide’.
The demographic condition during the Colonial rule is described in the following points:
1. High Birth Rate and Death Rate: Birth rate refers to number of children born per
thousand in a year. Death rate refers to number of people dying per thousand persons in a
year. Both birth rate and death rate were very high at nearly 48 and 40 per thousand
respectively.
2. Extremely Low Literacy rate: The overall literacy level was less than 16 per cent. Out
of this, the female literacy level was at a negligible low of about 7 per cent.
3. Poor health Facilities: Public health facilities were either unavailable to large mass of
population or, when available, were highly inadequate. As a result, water and air-borne
diseases were widespread and took a huge toll on life.
4. High Infant Mortality Rate: Infant mortality rate refers to number of infants dying before
reaching one year of age per 1,000 live births in a year. The infant mortality rate was quite
alarming – about 218 per thousand, in contrast to the infant mortality rate of 44 per
thousand in 2011.
5. Low Life Expectancy: Life Expectancy refers to the average number of years for which
people are expected to live. Life expectancy was also very low 44 years, in contrast to
present 68 years.
6. Widespread Poverty: There was no reliable data about the extent of poverty. But, there
is no doubt that extensive poverty prevailed in India during the colonial period. The overall
standard of living of common people in India was very low and there was widespread
poverty in the country.

OCCUPATIONAL STRUCTURE
Occupational structures refers to distribution of working persons across different industries and
sectors. During the colonial period, the occupational structure of India showed little sign of
change. The state of occupational structure during the British rule can be summarized as under:
1. Predominance of Primary Occupation: The agriculture sector accounted for the largest
share of workforce with approximately 75%. The manufacturing and service sectors
accounted for the remaining 25%.
2. Regional Variation: Another striking aspect was the growing regional variation.
 The states of Tamil Nadu, Andhra Pradesh, Kerala, Karnataka, Maharashtra and West
Bengal witnessed a decline in dependence of workforce on the agricultural sector with a
commensurate increase in the manufacturing and service sector.
 However, during the same time, there had been increase in the share of workforce in
agriculture in states such as Orissa, Rajasthan and Punjab.

INFRASTRUCTURE
The infrastructure facilities during British rule were very poor. Some efforts were made to
develop basic infrastructure like roads, railways, ports, water transports, posts and telegraphs.
But, the main motive behind such infrastructural development was to serve various colonial
interests.
1. Roads: The colonial administration could not accomplish much on construction of roads due
to scarcity of funds.
 The roads that were built, primarily served the interests of mobilising the army and shifting
raw materials.
 There always remained an acute shortage of all weathers roads to reach out to rural areas
during the rainy season. As a result, people living in these areas suffered badly during natural
calamities and famines.
2. Railways: The most important contribution of the British rule was to introduce railways in
India in 1850. The railways affected the structure of the Indian economy in two important
ways.
(i) Railways enabled people to undertake long distance travel. It broke geographical and
cultural barriers and promoted national integration.
(ii) It enhanced commercialization of Indian agriculture, which adversely affected the
comparative self sufficiency of the village economics in India.
3. Air and Water Transport: British Government took measures for developing the water
and air transport. However, their development was far from satisfactory.
Indian waterways proved to be uneconomical, as in the case of the Coast Canal on the
Orissa coast. This canal was built at a huge cost, but it failed to complete with the railways,
and finally, canal had to be abandoned.
4. Communication: Posts and telegraphs were the most popular means of communication.
 The introduction of the expensive system of electric telegraph in India served the
purpose of maintaining law and order.
 The postal services, despite serving a useful public purpose, remained all through
inadequate.

Reason for Infrastructural Development

The basic objective of British Government to develop infrastructure was not to provide basic
amenities to the people, but to serve their own colonial interest.
1. The Roads were built for mobilizing the army within India and for drawing out raw
materials from the countryside to the nearest railway station or port and to send these to
England or other lucrative foreign destinations.
2. Railways were developed by the Britishers mainly for three reasons :
(i) To have effective control and administration over the vast Indian territory;
(ii) To make profits through foreign trade by linking railways with major ports;
(iii) To make profitable investment of British funds in India.
3. The system of Electric Telegraph was introduced at a high cost to serve the purpose of
maintaining law and order.

POSITIVE CONTRIBUTIONS OF BRITISH RULE

British Rule also had some positive effects on the Indian economy. They are discussed as under:
1. Self-sufficiency in food grain production: Commercialization of agriculture initiated by
British Government resulted in self-sufficiency in food grain production.
2. Better means of transporation: Development of roads and railways provided cheap and
rapid transport system and opened up new opportunities of economic and social growth.
3. Check on Famines: Roads and railways worked as a great check on the occurrence and
impact of famines as food supplies could be transported to the affected areas in case of
droughts.
4. Shift to Monetary Economy; British rule helped Indian economy to shift from barter
system of exchange (exchange of goods for goods) to monetary system of exchange.
5. Effective administrative setup: The British Government had an efficient administration
system, which served as a ready reckoner- politicians.

STATE OF INDIAN ECONOMY ON THE EVE OF INDEPENDENCE

During the British rule, the Britishers transformed the Indian economy into a colonial, backward,
semi-feudal, stagnant, backward, depleted and amputated economy.
1. Colonial Economy: In India, colonial exploitation is a long history, spread over nearly 200
year.
 British rule resulted in huge drain of wealth from India, in order to facilitate growing
British industry with the supply of raw materials from India.
 They also encouraged commercialization of Indian agriculture to transform Indian
economy into a British colony.
 The impact of the British colonial policy was deep on India, even at the time of
Independence.

2. Semi-feudal Economy: By the close of the British period, there were two aspects of the
Indian economy.
 Introduction of Feudal System: The land settlement system gave birth to feudal relations
(landlord-tenant relations). The landlords used to charge very high rate of lagan and
were very cruel to the cultivators.
 Introduction of Capitalist System: The establishment of modern industries led to
creation of two classes-capitalist and labourers.
So, India inherited the features of both feudal and capitalized system in the Indian economy.
3. Stagnant Economy: A stagnant economy is one which is growing at a very low rate. On the
eve of independence, Indian economy was a stagnant economy as country’s growth of
aggregate real output during the first half of 20th century was less than 2 per cent and growth
in per capita output was only 0.5 per cent.
4. Backward Economy: At the end of British rule, Indian economy was backward and
underdeveloped. The main reasons for the backwardness of Indian economy were;
 Low level of productivity;
 Low per capita income;
 Traditional methods of agriculture;
 High birth and death rate;
 Mass illiteracy.
5. Depleted (or Depreciated ) Economy: At the time of independence, Indian economy was a
‘Depleted Economy’. Depleted Economy refers to an economy, where no arrangements
have been made to replace the physical assets, depreciated due to excessive use.
 During the 2nd World War, Indian industries had to work beyond their capacities to meet
the increased demand of plant, machinery, equipments, etc. for the war.
 However, British rulers did not make any arrangements to replace the depreciated
physical assets. As a result, British rulers had left a seriously depleted economy.
6. Amputated Economy: The Britishers policy of ‘divide and rule’ always promoted
discrimination between groups on the basis of religion, caste, language and culture.
 As a result, on the eve of Independence, country was geographically divided into two
parts; India and Pakistan.
 Partition of the country virtually disrupted the economy due to: (i) problem of
rehabilitation of large number of refugees from Pakistan ; and (ii) Shortage of raw
materials for jute and cotton mills as most of the cotton and jute growing areas went to
Pakistan.
 Chapter 2nd
ECONOMIC PLANNING
After two hundred years of British rule and their exploitative policies, India finally got freedom
on 15 August, 1947. Now, it was necessary to reconstruct the backward and stagnant Indian
economy into a developed economy. Therefore, the most important task before the Government
of independent India was to decide the type of ‘Economic System’ , which would be most
suitable for India. Economic system refers to an arrangement by which central problems of an
economy are solved.

Central Problems of an Economy

The three major problems of an economy are:
1. What to Produce: it involves deciding the final combination of goods and services to be
produced, i.e., it involves selection of goods and services and the quantity of each, that the
economy should produce.
2. How to Produce: It involves deciding the technique of production, i.e., whether selected
goods be produced with more labour and less capital (Labour Intensive Technique) or with
more capital and less labour (Capital Intensive Technique).
3. For whom to produce: It involves deciding the distribution of output among people, i.e., it
involves selection of the category of people who will ultimately consume the goods.

Types of Economic Systems

1. Capitalist Economy: A capitalist economy is the one in which the means of production are
owned, controlled and operated by the private sector. Production is done mainly for earning
profits. So, the central problems (what, how and for whom to produce) are solved through the
market forces of demand and supply.
Under capitalist economy, the three central problems are solved in the following manner:
 What to produce: Under this system, only those goods are produced that can be sold
profitably either in the domestic or in the foreign market.
 How to Produce: Goods are produced using cheaper techniques of production. In case
of cheap labour, labour- intensive methods of production are used.
 For whom to produce: In a society, goods produced are distributed among people not on
the basis of their needs but on the basis of their income or purchasing power. This
means that a sick person will be able to get medicine only when he can afford to buy it,
otherwise not, even if there is urgency.
2. Socialist Economy: A social economy is the one in which the means of production are
owned, controlled and operated by the government. Under socialist economy, the three
central problems are solved in the following manner:
  What to Produce: In a socialist society, the government decides what to produce in
accordance with needs of the society.
 How to Produce: The government decides how the goods are to be produced.
 For whom to Produce: Distribution under socialism is supposed to be based on what
people need and not on what they can afford to purchase. A socialist nation provides
free health care to the citizens, who need it.
3. Mixed Economy: A mixed economic system refers to a system in which he public sector and
the private sector are allotted their respective roles for solving the central problems of the
economy.
 In mixed economy, the government and the market together solve the 3 central
problems: what to produce, how to produce, and for whom to produce.
 The private sector provides whatever goods and services, it can produce well, and the
government provides essential goods and services, which the market fails to do.

India adopted the Mixed Economy

After the freedom, leaders of independent India (like Jawaharlal Nehru) were confused with
regard to economic system, to be followed in India.
 Some leaders were in favour of Socialist Economy. However, in a democratic country
like India, complete dilution of private ownership was not possible (as was possible in
case of the former Soviet Union).
 Capitalist Economic System did not appeal to Jawaharlal Nehru, our first Prime Minister,
as under this system, there would be less chances for improvement in quality of life of
majority of people.
 As a result, Mixed Economy (with best features of both Socialist and Capitalist
Economy) was adopted by the Indian Economy. In this view, India would be a socialist
society, with a strong public sector, but also with private property and democracy.

ECONOMIC PLANNING
 For the development of Indian economy, it was necessary for the Government to ‘plan’
for the economy, known as Economic Planning.
 Economic planning can be defined as making major economic decisions on the basis of
a comprehensive survey of the economy as a whole.
 The Industrial Policy Resolution of 1948 and the Directive Principles of the Indian
Constitution assigned a leading role to the public sector. Private sector was also
encouraged to be part of the plan efforts.
 To make economic planning effective, the Government of India set up Planning
Commission in 1950, with the Prime Minister as the Chairman.
 The purpose of the Commission was to carefully assess the human and physical resources
of the country and to prepare the Plans for the effective use of resources.
 The Planning Commission fixed the planning period at five years, which began the era of
‘Five Year Plans’.

What is “Plan”
Meaning of plan: Plan is document showing detailed scheme, program and strategy, worked out
in advance for fulfilling an objective.
Reason for Making Plans: Planning is done to achieve some predetermined goals within a
specified time period. It involves detailed analysis of the problems at hand and making conscious
to solve them.
Duration of Each Plan: In India, plans are made for duration of five years and are known as
“Five Year Plans’ (The concept of Five Year Plans was borrowed from the former Soviet
Union).
Content in Plans: Our plan documents not only specify the objectives to be attained in the five
years of a plan, but also, what is to be achieved over a period of twenty years. This long-term
plan is called ‘Perspective Plan’. The five year plans are supposed to provide the basis for the
perspective Plan.

GOALS OF FIVE YEAR PLANS

1. Growth: The stagnation during the British rule forced the planners to make Economic Growth
as the first and the foremost objective of Indian plans.
 Growth refers to increase in the country’s capacity to produce the output of goods and
services within the country.
 Growth implies:
 Either a larger stock of productive capital;
 Or a larger size of supporting services like transport and banking;
 Or an increase in the efficiency of productive capital and services.
 A good indicator of economic growth, in the language of economics, is steady increase in
the Gross Domestic Product (GDP).
 GDP refers to market value of all the final goods and services produced in the country
during a period of one year. Increase in GDP or availability of goods and services enables
people to enjoy a more rich and varied life.
 The GDP of a country is derived from the different sectors (Agricultural sector, Industrial
sector and Service sector) of the economy.
 In some countries, growth in agriculture contributes more to the GDP growth, while in
some countries, growth in service sector contributes more to GDP growth.
 The Contribution of each sector makes up the structural composition of the economy
.
Share of Service Sector in GDP Increased: By 1990, the share of the service sector was 40.59
per cent more than that of agriculture or industry. This phenomenon of growing share of the
service sector was accelerated in the past 1991 period, which marked the beginning of
globalization in the country.

2. Modernisation: Indian planners have always recognized the need for modernization of
society to raise the standard of living of people. Modernisation includes:
 Adoption of New Technology: Modernisation aims to increase the production of goods and
services through use of new technology. For example, a farmer can increase the output on
the farm by using new seed varieties instead of using the old ones. Similarly, a factory can
increase output by using a new type of machine.
  Change in social outlook: Modernisation also requires change in social outlook, such as
gender empowerment or providing equal rights to women. A society will be more
civilized and prosperous if it makes use of talents of women in the work place

3. Self-reliance: The third major objective is to make the economy self-reliant.

 Self-reliance under Indian conditions means overcoming the need of external assistance. In
other words, it means to have development through domestic resources.
 To promote economic growth and modernisation, the five year plans stressed on the use of
own resources, in order to reduce our dependence on foreign countries.
 The policy of self-reliance was considered a necessity because of two reasons:
 To reduce foreign dependence: As India was recently freed from foreign control, it is
necessary to reduce our dependence on foreign countries, especially for food. So,
stress should be give to self-reliance.
 To avoid Foreign Interference: It was feared that dependence on imported food
supplies, foreign technology and foreign capital may increase foreign interference in
the policies of our country.
4. Equity: The objectives of growth, modernisation and self-reliance, by themselves, may not
improve the kind of life, which people are living.
 So, it is important to ensure that benefits of economic prosperity are availed by all sections
(rich as well as poor) of the economy.
 According to Equity, every Indian should be able to meet his or her basic needs (food,
house, education and health care0 and inequality in the distribution of wealth should be
reduced.
 In short, Equity aims to raise the standard of living of all people and promote social
justice.

MAHALANOBIS : THE ARCHITECT OF INDIAN PLANNING

 Mahalanobis was born on 29th June, 1893 in Calcutta (now Kolkata).
 He was educated at the Presidency College in Calcutta and at Cambridge University in
England.
 In 1946, he was made a Fellow (member) of Britain’s Royal Society, one of the most
prestigious organisations of scientists.
 Mahalanobis established the Indian Statistical Institute (ISI) in Calcutta and started a journal,
Sankhya, which still serves as a respected forum for statistics to discuss their ideas.
 He is best remembered for the Mahalanobis distance, a statistical measure. He made
pioneering studies in anthropometry in India. His contributions to the subject of statics
brought him international fame.
Contribution of Mahalanobis in Indian Planning
In India, planning in the real sense, began with the Second Five Year Plan. The Second Plan laid
down the basic ideas regarding goals of Indian planning, which was based on the ideas of
Mahalanobis. In that sense, he can be regarded as the architect of Indian planning.
During the second plan period, Mahalanobis invited many distinguished economists from India
and abroad to advise him on India’s economic development. Mahalanobis will always be
remembered for playing a vital role in putting India n the road to economic progress.

AGRICULTURAL
  At the time of independence, the land tenure system was characterized by intermediaries
(like zamindars) who merely collected rent (lagaan) from the actual tillers of the soil.
 The low productivity of the agricultural sector forced India to import food from the United
States of America.
 The agricultural sector accounted for the largest share of workforce with approximately 70-
75 per cent. So, agricultural development was focused right from the First Five Year plan.
 The measures undertaken to promote the growth in the agricultural sector can be broadly
categorized as ‘land Reforms’ and ‘Green Revolution’.

Features (Problem) of Agriculture

1. Low Productivity: Agriculture sector was known for its low productivity. Lack of
knowledge was responsible for stagnation in this sector.
2. Disguised Unemployment: It refers to state in which more people are engaged in work
than are really needed. There was very high incidents of disguised unemployment during
1950-1990.
3. High dependency on Rainfall: Due to poor irrigation facilities, farmers largely
depended on rain fall. Bad monsoon means low productivity.
4. Subsistence Farming: There was a practice of growing crops only for self consumption
without any surplus for trade.
5. Outdated Technology: There were many obsolete technologies and harvesting
machines. Harvesting was generally done manually and was very tiresome
6. Conflict between Tenant and Landlords: Farmers under a contract were bound them to
their landlords. Landlords used to extract huge amount of lagaan from farmers and
deprived them of their necessities.
Land Reforms
Land Reforms primarily refers to change in the ownership of landholdings. Land Reforms
measures have been introduced by various underdeveloped and developing countries, for
attaining a rational land distribution pattern and viable farming structure.
 There was a great need for land reforms in a country like India, where majority of its
population still depends on agriculture.
 Land reforms were needed to achieve the objective of Equity in agriculture.
Abolition of Intermediaries
Indian Government took various steps to abolish intermediaries and to make tillers, the owners
of land.
 The idea behind this step was that ownership of land would give incentives to the actual
tillers to make improvements (provided sufficient capital was made available to them).
 The abolition of intermediaries brought 200 lakh tenants into direct contact with the
government.
 The ownership rights granted to tenants gave them the incentives to increase output and
this contributed to growth in agriculture.
 However, the goal of equity was not fully served by abolition of intermediaries because
of following reasons;
(i) In some areas, the former zamindars continued to own large areas of land by making
use of some loopholes in the legislation;
(ii) In some cases, tenants were evicted and zamindars claimed to be self-cultivators;
 (iii) Even after getting the ownership of land, the poorest of the agricultural labourers did
not benefit from land reformers.
Let us now discuss ‘Land Ceiling’, which was one of the very important measures
towards land reforms in the country.

Land Ceiling
It refers to fixing the specified limit of land, which could be owned by an individual.
 Beyond the specified limit, all lands belonging to a particular person would be taken
over by the Government and will be allotted to the landless cultivators and small
farmers.
 The purpose of land ceiling was to reduce the concentration of land ownership in few
hands.
 Land ceiling helped to promote equity in the agricultural sector.
 However, Land ceiling legislation was challenged by the big landlords. They delayed its
implementation. This delay time was used by them to get the land registered in the name
of close relatives, thereby escaping from the legislation.
Conclusion: Land reforms were successful in Kerala and West Bengal because governments
of these states were committed to the policy of land reforms. Unfortunately, other states did not
have the same level of commitment and vast inequality in landholdings continued.

Green Revolution
Green Revolution refers to the large increase in production of food grains due to use of high
yielding variety (HYV) seeds. Green Revolution is the spectacular advancement in the field of
agriculture.
At the time of independence, about 75 per cent of the country’s population was dependent on
agriculture.
 India’s agriculture vitally depends on the monsoon and in case of shortage of monsoon,
the farmers had to face lot of troubles.
 Moreover, the productivity in the agricultural sector was very low due to use of
outdated technology and absence of required infrastructure.
 As a result of intensive and continued effort of many agricultural scientists, this
stagnation in agriculture was permanently broken by the “Green Revolution’.

Origin of Green Revolution

In the Kharif season (1966), India adopted High Yielding Varieties Programme for the first time.
The programme was successful due to:
 High Yielding Varieties (HYV) of seeds;
 Adequate irrigation facilities;
 Application of fertilizers, pesticides, insecticides, etc.
In this way, a new technology was gradually adopted in Indian agriculture. This new strategy is
also popularly known as modern agricultural technology or Green Revolution.

HYV seeds: Main Reason for Agricultural Revolution

Agricultural revolution occurred due to (high yielding varieties (HYV) of seeds}, which raised
agricultural yield per acre to incredible heights.
  These seeds can be used in those places where there are adequate facilities for drainage
and water supply.
 As compared to other ordinary seeds, these seeds need heavy doses of chemical fertilizers
(4 to 10 times more fertilizers) to get the largest possible production.
 So, to derive benefit from HYV seeds, Indian farmers need to have;
 Reliable irrigation facilities; and
 Financial resources (to purchase fertilizers and pesticides).

Indian Economy experienced the success of Green Revolution in 2 phases;

1. In the first phase (Mid 60s to Mid 70s), the use of HYV seeds was restricted to more
affluent states ( like Punjab, Andhra Pradesh, Tamil Nadu, etc.). Further, the use of HYV
seeds primarily benefitted the wheat growing regions only.
2. In the second phase (Mid 70s to Mid 80s), the HYV technology spread to a larger
number of states and benefitted more variety of crops.
Important Effects of Green Revolution
The spread of Green Revolution technology enabled India to achieve self-sufficiency in food
grains. India was no longer at the mercy of America, or any other nation, for the food
requirements.
1. Attaining Marketable Surplus: Green Revolution resulted in “Marketable Surplus”.
Marketable Surplus refers to that part of agricultural produce which is sold in the market
by the farmers after meeting their own consumption requirement.
 Growth in agricultural output makes a difference to the economy only when large
proportion of this increase is sold in the market.
 Fortunately, a good proportion of rice and wheat produced during the green
revolution period was sold by the farmers in the market.
2. Buffer Stock of Food Grains: The green revolution enabled the government to procure
sufficient amount of food grains to build a stock which could be used in times of food
shortage.
3. Benefit to low-income groups: As large proportion of food grains was sold by the
farmers in the market, their prices declined relative to other items of consumption. The
low-income groups, who spend a large percentage of their income on food, benefited
from this decline in relative prices.

Risks involved Under Green Revolution

While the nation had immensely benefited from the green revolution, the technology involved
was not free from risks.
(i) Risk of Pest Attack: The HYV crops were more prone to attack by pests. So, there was a
risk that small farmers who adopted technology could lose everything in a pest attack.
However, this risk was considerably reduced by the services rendered by research
institutes established by the Government.
(ii) Risk of Increase in Income Inequalities: There was a risk that costly inputs (HYV
seeds, fertilizers, etc.) required under green revolution will increase the disparities
between small and big farmers since only the big farmers could afford the required
inputs.
However, due to favourable steps taken by the government, these fears did not come true.
The government provided loans at a low interest rate to small farmers so that they could also
have access to the needed inputs.
Since the small farmers could obtain the required inputs, the output on small farms equaled the
output on large farms in the course of time. As a result, the green revolution benefited the small
as well as rich farmers.

Debate Over Subsidies to Agriculture

Subsidy, in context of agriculture, means that the farmers get inputs at prices lower than the
market prices.
 During the initial phases of green revolution, new technology was looked upon as being
risky by the farmers.
 So, it was necessary for the Government to grant subsidies to provide an incentive for
adoption of the new HYV technology.
 However, with the passage of time, there has been debate over the huge amount of
subsidies granted by the government.
Economists in Favour of Subsidies
1. The government should continue with agricultural subsidies as farming in India continues
to be a risky business.
2. Majority of the farmers are very poor and they will not be able to afford the required
inputs without the subsidies.
3. Eliminating subsidies will increase the income inequality between rich and poor farmers
and will violate the ultimate goal of equity.
In brief, subsidies in India are necessary for poor and small farmers, to enable them to make use
of modern agricultural techniques. Necessary steps should be taken to ensure that only the poor
farmers enjoy the benefits of subsidies and not the fertilizer industry and big farmers.

Economists -Against the Subsidies

1. According to some economists, subsidies were granted by the Government to provide an
incentive for adoption of the new HYV technology. So, after the wide acceptance of
technology, subsidies should be phased out ad their purpose has been served.
2. Subsidies do not benefit the poor and small farmers (target group) as benefits of substantial
amount of subsidy go to fertilizer industry and prosperous farmers.
Therefore, there is no case for continuing with subsidies as it does not benefit the target group
and it is a huge burden on the government’s finances.

PRICES ACT AS SIGNALS

It is important to understand that prices are signals about the availability of goods.
 Higher price indicates that demand for goods is more than the supply, i.e., there is
scarcity of resource, like in case of “Petrol”. Whenever there is further rise in price of
petrol, it reflects greater scarcity and need to use less petrol or look for alternate fuels.
 Lower price indicates that supply of Goods is more than the demand.
So, it is rightly said that price act as signals with respect to availability of goods in the economy.
However, granting of subsidies does not allow prices to indicate the supply of a good. For
example, when electricity and water are provided at a subsidized rate or free to farmers, they
may be used wastefully without any concern for their scarcity. Similarly, fertilizer and pesticides
subsidies may led to overuse of resources by the farmers, which can be harmful to the
environment. So, there is a risk that subsidies may provide an incentive for wasteful use of
resources.

Critical Appraisal of Agricultural Development (1950 – 1990)

Indian economy inherited stagnant and backward agricultural sector from the British rule. So,
immediately after the independence, Indian Government undertook various measures to improve
the condition of agriculture.
 The ‘Land Reform’ measures and ‘Green Revolution’ were the greatest achievements of
the Indian Government, in enhancing the agricultural production and productivity.
 Between 1950 and 1990, there had been substantial increase in the agricultural
productivity. As a result of Green revolution, India became self-sufficient in food
production. Land Reforms resulted in abolition of zamindari system.
 The Proportion of GDP between 1950 and 1990 contributed by agriculture declined
significantly, but not the population depending on it.
 Around 65 per cent of the country’s population continued to be employed in agriculture,
even till 1990. The involvement of such a large proportion of the population in
agriculture was regarded as the important failure of policies followed during 1950 -1990.

INDUSTRIAL DEVELOPMENT
The developing countries (like India) can progress only if they have a good industrial sector.
Industry provides employment, which is more stable than the employment in agriculture.
Industrialization promotes modernization and overall prosperity. Due to this reason, Five Year
Plans stressed a lot on the industrial development.
At the time of independence, the variety of industries was very limited. The cotton textile and
jute industries were mostly developed in India. There was only two well-managed iron and steel
firms; one in Jamshedpur and the other in Kolkata. So, there was a strong need to expand the
industrial base with a variety of industries.

Role of Public Sector in Industrial Development

At the time of independence, the big question facing the policy makers was to decide the role of
government (public sector) and the private Sector in industrial development.
There was a need for a leading role of the Public Sector due to the following reasons:
1. Shortage of Capital with Private Sector: Private entrepreneurs did not have the capital
to undertake investment in industrial ventures, required for the development of Indian
economy. At the time of independence, Tatas and Birlas were the only well- known
Private enterpreneurs. As a result, Government had to make industrial investment through
Public Sector Undertakings (PSU’s)
2. Lack of Incentive for Private Sector: The Indian market was not big enough to
encourage private industrialists to undertake major projects, even if they had capital to do
 so. Due to limited size of the market, there was low level of demand for the industrial
goods.
3. Objectives of Social Welfare: The objective of equity and social welfare of the
Government could be achieved only through direct participation of the state in the
process of industrialization.
As a result, state had complete control over those industries, that were vital for the economy. The
policies of the private sector had to be complementary to those of the public sector, with public
sector leading the way.
Industrial Policy Resolution 1956
Industrial Policy is a comprehensive package of policy measures which covers various issues
connected with different industrial enterprises of the country.
 Industrial Policy is essential for devising various procedures, principles, rules and
regulations for controlling industrial enterprise of the country.
 After the Industries Policy, 1948, Indian economy had to face a series a series of
economic and political changes, which necessitated the need for a fresh industrial policy
for the country. So, on April 30, 1956, a second Industrial Policy Resolution was adopted
in India.
Classification of Industries
According to Industrial Policy Resolution 1956, the industries were reclassified into three
categories, viz, Schedule A, Schedule B and Schedule C.
1. Schedule A: This first category comprised industries which would be exclusively owned
by the state. In this schedule, 17 industries were included, like arms and ammunitions;
atomic energy; heavy and core industries; aircraft; oil; railways; shipping; etc.
2. Schedule B: In this schedule, 12 industries were placed, which would be progressively
state-owned. The state would take the initiative of setting up industries and private sector
will supplement efforts of the state. This schedule includes industries like aluminium,
other mining industries, machine tools, fertilizers, etc.
3. Schedule C: This schedule consists of the remaining industries which were to be in the
private sector. The state would facilitate and encourage the development of all these
industries. These industries were controlled by the state through a system of licenses,
enforced under Industries (Development and Regulation) Act, 1951.

Industrial Licensing
An industrial license is a written permission from the government, to an industrial unit to
manufacture goods. The Industries (Development and Regulation) Act, 1951, empowered the
government, to issue licenses for:
 Setting up of new industries;
 Expansion of existing ones; and
 Diversification of products.
According to Industrial Licensing:
1. No new industry was allowed unless is obtained from the government.
2. It was easier to obtain a license if the industrial unit was established in an economically
backward area. In addition, such units were given certain concessions, such a tax
benefits and electricity at a lower tariff. The purpose of this policy was to promote
regional equality.
 3. License was needed even if an existing industry wants to expand output or diversify
production. License to expand production was given only if the government was
convinced that there is a need for larger quantity of goods in the economy.

Small-Scale Industries (SSI)

In 1955, the village and small-scale Industries Committee (Karve Committee) recognized the
possibility of using small-scale industries to promote rural development. In 1950 a small scale
industry unit was one which invested a maximum of rupees five lakh.
Important Points about Small-scale Industries
1. Employment Generation: Small-scale industries are more labour intensive, i.e., they use
more labour than the large-scale industries and, therefore, they generate more
employment. After agriculture, small-scale industries provide employment to the largest
number of people in India.
2. Need for Protection from Big Firms: Small-scale industries cannot complete with the
big industrial firms. They can flourish only then they are protected from the large firms.
So, various steps were taken by the government for their growth.
 Reservation of Products: Government reserved production of a number of products
for the small-scale industry. The criterion for reserving the products depended on the
ability of these units to manufacture the goods.
 Various Concessions: Small-scale industries were also given concessions, such as
lower excise duty and bank loans at lower interest rates.

TRADE POLICY : IMPORT SUBSTITUTION

In order to be self-reliant in vital sectors, India has followed the strategy of replacing many
imports by domestic production.
 In the first seven plans, trade was characterized by an inward looking Trade Strategy.
Technically, this strategy is called “Import Substitution’.
 Import Substitution refers to a policy of replacement or substitution of imports by
domestic production.
 For example, instead of importing vehicles made in a foreign country, domestic industries
would be encouraged to produce them in India itself.
 The Basic aim of the policy was to protect domestic industries from foreign competition.
 The policy of Import Substitution can serve 2 definite objectives:
(i) Saving of precious foreign exchange; and
(ii) Achieving self-reliance.

Protection from Imports through “Tariffs’ and ‘ Quotas’

Government made use of two ways to protect goods produced in India from Imports;
1. Tariffs: Tariffs refer to taxes levied on imported goods. The basic aim for imposing
heavy duty on imported goods was to make them more expensive and discourage their
use.
2. Quotas: Quotas refer to fixing the maximum limit on the imports of a commodity by a
domestic producer.
The tariff on imported goods and fixation of quotas helped in restricting the level of imports. As
a result, the domestic firms could expand without fear of competition from the foreign market.
Reasons for Import Substitution
 1. The policy of protection (in the form of Import Substitution) is based on the notion that
industries of developing countries, like India, are not in a position to compete against the
goods produced by more developed economies. With protection, they will be able to
compete in the due course of time.
2. Restriction on imports was necessary as there was a risk of drain of foreign exchange
reserves on the import of luxury goods.

CRITICAL APPRAISAL OF INDUSTRIAL DEVELOPMENT (1950 -1990)

The achievements of India’s industrial sector during the first seven plans are impressive indeed.
1. The proportion of GDP contributed by the industrial sector increased in the period from
11.8 per cent in 1950- 51 to 24.6 in 1990 – 91. This rise in industry’s share of GDP is an
important indicator of development. The 6 per cent annual growth rate of the industrial sector
during the period is also admirable.
2. Indian Industry was no longer restricted to cotton textiles and jute. It also included
engineering goods and a wide range of consumer goods. The industrial sector became well
diversified by 1990, largely due to public sector.
3. The promotion of small-scale industries gave opportunities to people with small capital to
get into business. New investment opportunities helped in generating more employment. It
promoted growth with equity.
4. Protection from foreign competition (through Import Substitution) enabled the
development of indigenous industries in the areas of electronics and automobile sectors,
which otherwise could not have developed. However, this protection had two drawbacks:
(i) Inward Looking Trade Strategy: Our policies were ‘inward oriented’ and so we failed to
develop a strong export sector.
(ii) Lack of Competition: Due to restrictions on imports, some domestic producers made no
sincere efforts to improve the quality of their goods and it forced the Indian consumers to
purchase, whatever is produced by them. The domestic industry failed to achieve
international standards of product quality.
According to some economists, we should protect our producers from foreign competition
as long as the rich nations to do so.
5. Licensing Policy helped the government to monitor and control the industrial production.
However, excessive regulation by the government created two difficulties:
(i) Misuse: it was misused by industrial houses. Some big industrialists would get a license,
not for starting a new firm, but to prevent competitors from starting new firms.
(ii) Time Consuming: The cumbersome and complex procedure for obtaining license was
very time consuming. A lot of time was spent by industrialists in trying to obtain a license.
6. Public Sector made a remarkable contribution by creating a strong industrial base,
developing infrastructure and promoting development of backward areas.
 However, the public sector continued to monopolise in certain non-essential areas, which
could be well handled by the private sector. For example, telecommunications, hotel
industry, production of goods (like Modern Bread).
 As a result, precious funds of public sector channelized into areas, where private sector
could have been easily engaged.
 Many public sector firms also incurred huge losses but continued to function because of
difficulty in closing a government undertaking.
  The monopoly of public sector in such non-essential areas was criticized by many
scholars. According to them, the role of public sector should be limited to strategic areas
(like national defence) and private sector should be given the opportunity for other non-
essential areas.
According to some economists, public sector is not meant for earning profits but to promote
the welfare of nation. So, they should be evaluated on the basis of their contribution to
welfare of the people and not on the profits they earn.

Conclusion
The progress of the Indian economy in the three sectors can be summarized as under:
In Agriculture Sector:
 India became self-sufficient in food production due to the green revolution.
 Land reforms resulted in abolition of zamindari system.
In Industrial Sector:
 The industries became far more diversified compared to the situation at independence.
However, excessive government regulation prevented their growth.
 Many economists were dissatisfied with the performance of public sector enterprises.
In Trade Sector:
 Our policies were ‘inward oriented’ and so we failed to develop a strong export sector.
 The domestic producers were protected against foreign competition in order to gain self-
reliance. However, this did not give them the incentive to improve the quality of goods
that they produced.

Chapter 3rd
Liberlisation, Privatisation & Globalisation
INTRODUCTION
Since independence, India followed the mixed economic system, by combining the advantages of
capitalist economy with those of the socialist economy.
But, in reality, the public sector dominated the control and regulation of our economy and private
sector was ignored. There was a huge investment in the public sector and very low investment in
the private sector. The dominance of public sector for about 4 decades led to establishment of
various rules and laws, which hampered the process of growth and development.
According to some scholars, the increasing role of public sector has helped Indian economy
to: (i) Achieve growth in savings; (ii) Develop a diversified Industrial sector; and (iii) Achieve
food security through sustained expansion of agricultural output.

REASON FOR ECONOMIC REFORMS (PIDHI)

The economic condition of India in the year 1991 was very miserable. It was due to the
cumulative effect of number of reasons.
1. Poor performance of Public Sector except for few public enterprises, the overall
performance was very disappointing. The income from public sector undertakings was not
very high to meet the growing expenditure
2. Deficit in balance of Payments (BOP): Deficit in BOP arises when foreign payments for
imports exceed foreign receipts from exports. Even after imposing heavy tariffs and quotas,
there was a sharp rise in imports. On the other hand, there was slow growth of exports due to
low quality and high prices of Indian goods in the international market.
3. Inflationary pressures: There was a consistent rise in the general price level in the economy
due to increase in money supply and shortage of essential goods.
4. Fall in Foreign exchange reserves: in 1991, foreign exchange reserves fell to the lowest
level and it led to the foreign exchange crisis in the country. Foreign exchange reserves
declined to a level that was not adequate:
 To finance imports for more than two weeks
 To pay the interest that needs to be paid to international lenders.
5. Huge burden of debts: The expenditure of the government was much higher than revenue.
As a result, government had to borrow money from banks, public and from international
financial institutions.
6. Inefficient Management: The origin of the financial crisis can be traced from the inefficient
management of the Indian economy.
 The government was not able to generate sufficient revenue from internal sources such
as taxation, running of public sector enterprises, etc.
 Government expenditure began to exceed its revenue by such large margins that it
became unsustainable.
 At times, the foreign exchange borrowed from other countries and international financial
institutions was spent on meeting consumption needs.

Neither was an attempt made to reduce such wasteful spending nor sufficient attention was given
to boost exports to pay for the growing imports

Crisis of 1991 Forced India for Financial help from IMF and World Bank
To manage the economic crisis of 1991, Indian Government approached the International Bank
for Reconstruction and Development (IBRD), popularly known as World Bank and the
International Monetary Fund (IMF) and received 7 billion dollar as loan.
For availing the loan, these international agencies expected India to libralise and open up the
economy by:
 Removing restrictions on the private sector;
 Reducing the role of the government in many areas; and
 Removing trade restrictions.
India agreed to the conditions of World Bank and IMF and announced the New Economic
Policy.
THE NEW ECONOMIC POLICY
The New Economic Policy (NEP) was announced in July 1991. It consisted of wide range of
economic reforms. The main aim of the policy was to create a more competitive environment in
the economy and remove the barriers to entry and growth of firms.
The New Economic Policy can be broadly classified into two kinds of measures;
1. Stabilisation Measures: They refer to short-term measures which aim at;
(i) Correcting weaknesses of the balance of payments by maintaining sufficient foreign
exchange reserves; and
(ii) Controlling inflammation by keeping the rising prices under control.
2. Structural Reform Measures: They refer to long-term measures which aim at;
(i) Improving the efficiency of the economy; and
(ii) Increasing international competitiveness by removing the rigidities in various
segments of the Indian economy.
Main Features of the New Economic Policy
The government initiated a variety of policies which fall under three heads:
1. Liberalisation 2.Privatisation 3.Globalisation
Out of liberalisation, privatisation and globalisation, the first two are policy strategies and the
third one is the outcome of these strategies.
Liberalisation, Privatisation and Globalisation or “LPG” are the supporting pillars, on which the
structure of new economic policy of our Government has been erected and implemented since
1991.

LIBERALISATION
Prior to 1991, there were large number of government restrictions in India in the areas of
licensing, import and export trade, dealings in foreign exchange, etc. In July 1991, a package of
economic reforms was announced, which marked the beginning of process of “Liberalisation” in
India. Liberalisation means removal of entry and growth restrictions on the private sector.
 Liberalisation involves deregulation and reduction of government controls and greater
autonomy (freedom) of private investment, to make economy more competitive.
 Under this process, business is given free hand and is allowed to run on commercial lines.
 The purpose of liberalisation was:
 To unlock the economic potential of the country by encouraging private sector and
multinational corporations to invest and expand; and
 To introduce much more competition into the economy and creating incentives for
increasing efficiency of operations
 The economic reforms taken by the Government under liberalization include the following:
(i) Industrial Sector Reforms (ii) Financial Sector Reforms (iii) Tax Reforms
(iv) Foreign Exchange Reforms (v) Trade and Investment Policy Reforms
Industrial Sector Reforms
In order to make necessary reforms in the industrial sector, the Government introduced is new
industrial policy on July 24, 1991. The various measures under industrial policy reforms
include;
1. Reduction in Industrial Licensing: The new policy abolished industrial licensing for all the
projects, except for a short list of industries (like liquor, defence equipments, industrial
explosives, etc).
 No licenses were needed (i) To set up new units; or (ii) Expand or diversify the
existing line of manufacture.
  However, license is required for certain industries, related to security and strategic
considerations.
2. Decreasing in role of Public Sector: One of the striking features was the substantive
reduction in the role of public sector in the future industrial development of the country. The
number of industries, exclusively reserved for the public sector, reduced from 17 to
following 3 industries: (i) Defence equipments; (ii) Atomic energy generation; and (iii)
Railway Transport.

3. De-reservation under small-scale industries: Many goods produced by small scale

industries have now been de-reserved.
 The investment ceiling on plant and machinery for small undertakings enhanced to rupees
one crore.
 In many industries, the market was allowed to determine the prices through forces of the
market (and not by directive policy of the government).
4. Monopolies and Restrictive Trade Practices (MRTP) Act: With the introduction of
liberalisation and expansion schemes, the requirement for large companies, to seek prior
approval for expansion, establishment of new undertakings, merger, amalgamation, etc. were
eliminated.

Financial Sector Reforms

(i) Change in Role of RBI: The role of SBI was reduced from regulator to facilitator of
financial sector. As a result, financial sector was allowed to take decisions on many matters,
without consulting the RBI.
(ii) Origin of Private Banks: The reform policies led to the establishment of private sector
banks, Indian as well as foreign. For example, Indian banks like ICICI and foreign banks like
HSBC increased the competition and benefitted the consumers through lower interest rates
and better services.
(iii) Increase in limit of foreign investment: The limit of
foreign investment in banks was raised to around 50 per cent. Foreign Institutional Investors
(FII) such as merchant bankers, mutual funds and pension funds were now allowed to invest
in Indian financial markets.
Though banks have been given permission to generate resources from India and abroad,
certain aspects have been retained with the RBI to safeguard the interests of the account-
holders and the nation.
(iv) Ease in Expansion Process: Banks were given freedom to set up new branches (after
fulfillment of certain conditions) without the approval of the RBI.

Tax Reforms
Tax reforms refer to reforms in government’s taxation and public expenditure policies, which
are collectively known as its ‘Fiscal Policy.’ Taxes are of two types:
 Direct Taxes consist of taxes on income of individuals as well as profits of business
enterprises. For example, Income tax and Corporate tax.
 Indirect Taxes refer to those which affect the income and property of persons through
their consumption expenditure. Indirect taxes are generally imposed on goods and services.
For example, GST
The major Tax Reforms made are:
1. Reduction in Taxes: Since 1991, there has been a continuous reduction in income and
corporate tax as high tax rates were an important reason for tax evasion. It is now widely
accepted that moderate rates of income tax encourage savings and voluntary disclosure of
income,
2. Reforms in Indirect Taxes: Considerable reform have been made in indirect taxes to
facilitate establishment of common national market for goods and commodities.
3. Simplification of Process: In order to encourage better compliance on the part of taxpayers,
many procedures have been simplified.

Foreign Exchange Reforms

The important reforms made in the foreign exchange market are;
 Devaluation of Rupee: Devaluation refers to reduction in the value of domestic currency
by the government. To overcome Balance of Payments crisis, the rupee was devalued
against foreign currencies. This led to an increase in the inflow of foreign exchange.
 Market Determination of Exchange Rate: The Government allowed rupee value to be
free from its control. As a result, market forces of demand and supply determine the
exchange value of the Indian rupee in terms of foreign currency.

Trade and Investment Policy Reforms

Before 1991, a lot of restrictions were imposed on imports to protect the domestic
industries. However, this protection reduced the efficiency and competitiveness of domestic
industries and led o the slow growth. So, the reforms in the trade and investment policy
were initiated:
 To increase the international competitiveness of industrial production
 To promote foreign investments and technology into the economy
 To promote efficiency of local industries and adoption of modern technologies.
The important trade and investment policy reforms include:
1. Removal of Quantitative restrictions on Imports and Exports: Quantitative restrictions on
imports of manufactured goods and agricultural products were fully removed from April,
2001.
2. Removal of Export Duties: To increase the competitive position of Indian goods in the
international market.
3. Reduction in Import Duties: Import duties were reduced to improve the position of domestic
goods in the foreign market. The important trade and investment
4. Relaxation in Import Licensing System: The Import licensing was abolished, except in case of
hazardous and environmentally sensitive industries. This encouraged domestic industries to
import raw materials at better prices, which raised their efficiency and made them more
competitive.

PRIVATISATION
Privatsation means transfer of ownership, management and control of public sector
enterprises to the entrepreneurs in the private sector.
Privatisation implies greater role of the private sector in the economic activities of the country.
Over the years, Indian Government has diluted its stake in several public enterprises, including
IPCL, IBP, Maruti Udyog, etc.
Privatisation can be done in two ways;
 1. Transfer of ownership and management of public sector companies from the government
to the Private Sector.
2. Privatisation of the public sector undertakings (PSU) by selling off part of the equity of
PSUs to the public. This process is known as disinvestment.
The purpose of privatisation was mainly to improve financial discipline and facilitate
modernisation. It was also believed that private capital and managerial capabilities will help in
improving performance of the PSUs.

Navaratnas and Mini Ratnas

The government also made to improve the efficiency of public sector undertakings by giving
them autonomy in taking managerial decisions.
 For instance, some PSUs have been granted special status as navaratnas and mini ratnas.
 In order to infuse professionalism and enable PSU’s to compete more effectively in the
liberalised global environment, government chose nine PSU’s (BHEL, BPCL, SAIL, etc.)
and declared as ‘Navratnas’ in 1996.
 They were given managerial and operational autonomy in taking various decisions, to run the
company efficiently and to increase their profits.
 The granting of navratna status resulted in better performance of these companies.
 Apart from this, other profit-making enterprises were granted greater operational, financial
and managerial autonomy and they were referred as “Mini Ratnas’.

GLOBALISATION
Globalisation means integrating the national economy with the world economy through
removal of barriers on international trade and capital movements.
 Globalisation is the outcome of the policies of liberalisation and privatisation.
 Globalisation is generally understood to mean integration of the economy of the country
with the world economy.
 However, it is a complex phenomenon. It is an outcome of the set of various policies that
aim to transform the world towards greater interdependence and integration.
 It involves creation of networks and activities to overtake economic, social and geographical
boundaries. In short, globalization aims to create a borderless world.
Changes made by the Globalisation of the Indian Economy
1. The New Economic Policy prepared a specified list of high technology and high
investment priority industries, in which automatic permission will be available for
foreign direct investment up to 51 per cent of foreign equity.
2. In respect of foreign technology agreements, automatic permission is provided in high
priority industry upto a sum of rupees 1 crore. No permission is now required for hiring
foreign technicians or for testing indigenously developed technology abroad.
3. In order to make international adjustment of Indian currency, rupee was devalued in July
1991 by nearly 20 per cent. It stimulated exports, discouraged imports and raised the
influx of foreign capital.
4. To integrate economy with world, the Union budget 1992-93 made Indian rupee partially
convertible and then the rupee was made fully convertible in 1993-94.budget.
5. A few five year export-import policy (1992-97) was announced by the Government to
establish the framework of globalisation of India’s foreign trade. The policy remove all
 restrictions and controls on the external trade and allowed market forces to play a greater
role in respect of exports and imports.
6. In order to bring the Indian economy within the ambit of global competition, the
government has modified the customs duty to a considerable extent. Accordingly, the
peak rate of customs duty has been reduced from 250 per cent to 10 per cent in 2007-
2008 budget.

Positive and Negative Traits of Globalisation

The process of globalisation through liberalisation and privatization policies, has produced
positive as well as negative results, both for India and other countries.
In Favour of Globalisation
Globalisation resulted in:
 Greater access to global markets;
 Advanced technology;
 Better future prospects for large industries of developing countries to become important
players in the international arena,
Against Globalisation
Globalisation has been criticized by some scholars because according to them:
 Benefits of globalisation accrue more to developed countries as they are able to expand
their markets in other countries.
 Globalisation compromises the welfare and identity of people belonging to poor countries.
 Market-driven globalisation increases the economic disparities among nations and people.
Outsourcing
Outsourcing refers to contracting out some of its activities to a third party which were earlier
performed by the organisation. For example, many companies have started outsourcing security
service to outside agencies on a contractual basis.
 Outsourcing is one of the important outcomes of the globalisation process.
 It has intensified in recent times because of the growth of fast modes of communication,
particularly the growth of Information Technology (IT).
 With the help of modern telecommunication links, the text, voice and visual data in respect
of these-service is digitized and transmitted in real over continents and national boundaries.
 India has become a favourable destination of outsourcing for most of the MNC’s because of
low wage rate and availability of skilled manpower. For example, Indian Business Process
Outsourcing (BPO) companies are already gaining prominence and earning precious foreign
exchange.
 Some of the services outsourced to India include:
(i) Voice-based business processes (known as BPO or Call Centres);
(ii) Record Keeping;
(iii) Accountancy;
(iv) Banking services;
(v) Music Recording;
(vi) Film editing;
(vii) Book transcription;
 (viii) Clinical advice, etc.
World Trade Organisation (WTO)
Origin of World Trade Organisation (WTO)
Prior to WTO, General Agreement on Trade and Tariff (GATT) was established as global trade
organisation, in 1948 with 23 countries. GATT was set up to administer all multilateral trade
agreements by providing equal opportunities to all countries in the international market. WTO
was founded in 1995 as the successor organisation to the GATT.
 The WTO agreements cover trade in goods as well as services, to facilitate international
trade.
 At present, there are 159 member countries of WTO and all the members are required to
abide by laws and policies framed under WTO rules.
 An important member of WTO, India has been in the front position of framing fair global
rules, regulations and advocating the interests of the developing world.
 India has kept its commitments make to the WTO. India has taken reasonable steps to
liberalise trade by removing quantitative restrictions on imports and reducing tariff rates.
 Some major Functions of WTO:
1. Facilitate international trade through removal of tariff as well as non-tariff barriers;
2. Raising production capacity and ensure optimum utilization of world resources
3. Environment Protection
4. Increasing greater market access to all member countries

Fire

Should India be a member of WTO?

Some of scholars are of the view that there is no use for a developing country like India to be a
member of the WTO. According to them;
(i) Major volume of international trade occurs among the developed nations; and
(ii) Developing countries are being cheated as they are forced to open up their markets
for developed countries and are not allowed access to markets of developed countries.

Important Terms:
Bilateral Trade: Trade between two countries is known as Bilateral Trade.
Multi-lateral Trade: Trade between more than two countries is known as Multi-lateral Trade.
Tariff barriers: The barriers which are imposed on imports to make them relatively costly and
to protect the domestic production, are known as Tariff barriers.
Non-Tariff barriers: The barriers which are imposed on the amount of imports and exports are
known as Non-Tariff barriers.

AN APPRAISAL OF LPG POLICIES (ECONOMIC REFORMS)

Economic reforms created mixed reactions at different levels. Let us discuss some of the positive
and negative aspects of economic reforms.
Arguments in Favour of Economic Reforms
The following are some of the important arguments advanced in favour of economic reforms:
 1. Increase in rate of Economic Growth: The growth of GDP increased from 5.6 per cent
during 1980-91 to 6.1 per cent during 1992-2001. This shows that there has been an increase
in the overall GDP growth in the reform period.
 During the reform period, the growth of agriculture and industrial sectors has declined,
whereas the growth of service sector has gone up. This indicates that the growth is
mainly driven by the growth in the service sector.
 Currently, the growth rate of GDP is estimated to be more than 8 per cent.
2. Inflow of foreign Investment: The opening up of the company has led to the rapid increase
in foreign direct investment (FDI). Rhe foreign investment (FDI and foreign institutional
investment) increased from about US 100 million dollar in 1990-91 to US 150 billion dollar
in 2003-04.
3. Rise in Foreign Exchange Reserves: Foreign exchange reserves reached the level of
25,186 million dollar at the end of March, 1995 as compared to only 3,962 million dollar in
1989-90. At present, India is the 6th largest foreign exchange reserve holder in the world,
with 2,91,300 million dollar at the end of November 2013.
4. Rise in Exports: During the reform period, India experienced considerable increase in
exports of auto parts, engineering goods, IT software and textiles.
5. Control on Inflation: Increase in production, tax reforms and other reforms helped in
controlling the inflation. The annual rate of inflation reduced from the peak level of 17 per
cent in 1991 to around 7,6 per cent in 2012-13.
6. Increase in role of private Sector: Abolition of licensing system and removal of
restrictions on entry of the private sector, in areas earlier reserved for the public sector, have
enlarged the area of operation of the private sector.
Criticism of Economic Reforms
Critics have raised a series of criticism against the New Economic Reforms, especially in the
areas of employment, agriculture, industry, infrastructure development and fiscal management.
1. Growth and Employment: Though the GDP growth rate has increased in the reform period,
but such growth failed to generate sufficient employment opportunities in the country.
2. Reform in Agriculture: The new economic policy has neglected the agricultural sector as
compared to industry, trade and services sector.
(i) Reduction of public investment: Public investment in agriculture sector, especially in
infrastructure, which includes irrigation, power, roads market linkages and research
and extension (which played a crucial role in the Green Revolution), has been
reduced in the reform period.
(ii) Removal of subsidy: Removal of fertilizer subsidy increased the cost of production,
which adversely affected the small and marginal farmers.
(iii) Liberalisation and reduction in import duties: After the commencement of WTO, a
number of policy changes were made; (a) Reduction in import duties on agricultural
products; (b) Removal of minimum support price; (c) lifting of quantitative
restrictions on agricultural products. All these policies adversely affected the Indian
farmers as they have to face increased international competition.
(iv) Shift towards cash crops: Due to Export-oriented policy strategies in agriculture, the
production shifted from food grains to cash crops for the export market. It led to rise
in the prices of food grains.
3. Reform in Industry: Industrial growth recorded a slowdown due to the following reasons:
 (i) Cheaper Imported Goods: Due to globalisation, there was a greater flow of goods and
capital from developed countries and as a result, domestic industries were exposed to
imported goods. Cheaper imports replaced the demand for domestic goods and
domestic manufacturers started facing competition from imports. For example,
cheaper Chinese goods pose a big threat to Indian manufacturers.
(ii) Lack of infrastructure facilities: The infrastructure facilities, including power supply,
have remained inadequate due to lack of investment
(iii) Non-tariff Barriers by Developed countries: All quota restrictions on exports of
textiles and clothing have been removed from India. But some developed countries,
like USA have not removed their quota restrictions on import of textiles from India.
4. Disinvestment: The government has always fixed a target for disinvestment of PSUs. For
instance, in 1998-99, the target was rupees 5,000 crore, whereas, government was able to
mobilise rupees 5,4000 crore.
However, according to some scholars, the disinvestment policy of government was not
successful because:
 The assets of public sector undertakings (PSUs) were under-valued and sold to the
private sector.
 Moreover, such proceeds from disinvestments were used to compensate shortage of
government revenues rather than using it for the development of PSUs and building
social infrastructure in the country.
5. Reform and Fiscal Policy: The tax reduction in the reform period was done to generate
larger revenue and to curb tax evasion. But, it did not result in increase in tax revenue for the
government.
 Tariff reduction decreased the scope for raising revenue through customs duties.
 Tax incentives provided to foreign investors to attract foreign investment further reduced
the scope for raising tax revenues.

6. Spread of Consumerism: The new policy has been encouraging a dangerous trend of
consumerism by encouraging the production of luxuries and items of superior consumption.
7. Unbalanced Growth: Growth has been concentrated only in some select areas in the
services sector, such as telecommunication, information technology, finance, entertainment,
travel and hospitality services, real estates and trade, rather than vital sectors, such as
agriculture and industry, which provide livelihood to millions of people in the country.