Indian Economy - 1 & 2 Modules

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INDIAN ECONOMY

Semester – III

Student Workbook

2023

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INDIAN ECONOMY
Credits: 03 45 Hours

Course Outcomes:
CO1. Demonstrate knowledge of the characteristics of Indian economy.
CO2. Discuss various programmes implemented under economic planning.
CO3. Assess the policy measures for poverty alleviation and unemployment.
CO4. Illustrate the importance of industry and services sector in India

Unit I: India as a Developing Economy (9 hours)


Colonial exploitation and drain Theory - Indian economy since independence - Characteristics
of Indian economy - New facets of Indian economy; Transition of Indian economy -National
income estimates – Trends & patterns

Unit II: Economic Planning in India (9 hours)


Evolution of planning in India - Achievements and failures of five-year plans in India -
12thFive-yearplan - NITI Aayog

Unit III: Demographic Features, Poverty and Unemployment (9 hours)


Broad demographic features of Indian Population - Migration and Urbanization - Occupational
structure - Employment and unemployment in India- employment trends, structure, nature and
estimates of unemployment - Major employment programmes- MGNREGS - Poverty in India-
Poverty alleviation programmes

Unit IV: Agricultural Sector (9 hours)


Agriculture production and production trends - Land reforms - Agricultural price policy -
Agricultural finance policy - Food security and Public distribution system - Agriculture and
WTO - Farmer welfare schemes in India - Recent issues

Unit V: Industrial & Service Sector (9 hours)


Industrial policy reforms - New Industrial policy 1991 - Recent trends in industrial growth and
diversification - Public sector enterprises and their performance, privatization and
disinvestments - Recent issues- MSME crisis - Service sectors- Role, pattern and performance
of service sector - IT & ITES- Role & performance

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Reference Texts
1. Brahmananda P.R. and V.R.Panchamukhi,(Ed) - The Development Process of the
2. Government of India Economic Survey, Ministry of Finance, New Delhi
3. Indian Economy.
4. R.B.I – Report on Currency &Finance
5. Rudder Dutt and K.P.M.Sundaram (2018). Indian Economy, S.Chand& Company Ltd.
6. S.K.Mishra and V.K.Puri (2018). Indian Economy, Himalaya Publishing House
7. Uma Kapila (2008). Indian Economy since Independence (Ed), 19th Edition,
8. Xavier V K et. al (2022): Indian Economics: Issues and Policy, Magi’s Publications,
Bengaluru, Karnataka 560093

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INDIAN ECONOMY
Unit I: India as a Developing Economy
Objectives
This module will discuss about the various ways of how Britishers exploited India by
appreciating the concepts of Economic drain and colonialism. The module will highlight
the various trends and statistical data pre and post-independence of Indian economy.

1.1.Colonial exploitation and drain Theory.


1.2.Indian economy since independence
1.3.Characteristics of Indian economy
1.4.New facets of Indian economy
1.5.Transition of Indian economy
1.6.National income estimates
1.7.Trends & patterns

1.1.Colonial Exploitation: Forms and Consequences


The major form through which the exploitation of India was done was trade. Later, the British
started making investments in Indian industries and the process of economic drain started
through investment income in the form of dividends and profits. In addition to this, India had
to pay the costs of British administration, in the form of home charges. They included salaries
of British officers (both civil and military), payment of pensions, furloughs and other benefits,
as also interest payments on sterling debt.
The main forms of colonial exploition were:
(i) Trade policies aimed at developing a colonial pattern of trade in which India would become
an exporter of foodstuffs and raw materials and an importer of manufactures.
(ii) Encouragement of British capital to take up direct investment in Indian consumer goods
industries.
(iii) Encouragement of finance capital, through the managing agency system, to appropriate a
major portion of the profits through various malpractices; and
(iv) To force India to pay the costs of British administration as well as to finance the wars and
expeditions undertaken by the British Government.

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Exploitation through Trade Policies
Trade policies were used against India by the East India Company and later by the British
Government to drain away wealth from India to feed the expanding British industry with raw
materials and also to encourage the trend towards commercialisation of agriculture so that the
Indian economy could be transformed as an appendage of the British colonial system. Thus,
trade policies were a very convenient, but a potent source of exploitation.
1. Exploitation of cultivators to boost indigo-export : East India Company wanted to
encourage indigo export. Some (500 to 1000) European planters were settled in Bengal.
They were given land at a very nominal price. They forced the cultivators on their land
to cultivate and sell the indigo plant at a very low price. Even other zamindars were
compelled to allocate a portion of their land for indigo cultivation. Once an agreement
was signed with a zamindar or aryot accepted the advance for cultivation he had to
suffer the ruthless exploitation of the indigo planters who made fabulous profits from
its export.
2. Exploitation of artisans through Company agents to deliver cotton and silk fabrics
much below the market price : During the 18th century, the East India Company
wanted to benefit from the export of Indian cotton and silk fabrics which enjoyed a
world-wide reputation. For this purpose, the Company made use of agents called as
Gomastas. The gomastas who were Indians in the employment of the Company, would
go to the village and force the artisans to sign a bond to deliver a certain quantity of
goods at a price to be fixed by the gomasta. The price fixed was at least 15 per cent and
in extreme cases, even 40 per cent lower than the market price. In case, an artisan
refused to accept the advance offered by the Company’s gomasta, he was punished by
flogging and in certain cases, by imprisonment. In this way, through the Company’s
gomastas, the East India company was able to procure cotton and silk fabrics at very
low prices. Thus, the poor artisan was squeezed so that the East India Company made
huge profits through the export of these fabrics. The ruthlessness of the Company was
so inhuman that the artisans worked like bonded labour and this explains their growing
pauperisation.
3. Exploitation through the manipulation of import and export duties : Though Great
Britain professed to be a follower of free trade, but her trade policies towards Indian
goods only revealed that she never followed the policy of free trade. During the 18th
century. Indian goods, specially cotton and silk fabrics, enjoyed a lead over the British
goods. The aim of British trade policies was to destroy the supremacy of the Indian
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goods, protect the interests of British industries and ultimately succeed in penetrating
the Indian market by the machine-made goods.

Exploitation through export of British Capital to India


In the early phase of colonialism, the chief instrument of exploitation was trade but later the
British thought of encouraging investment in India. There were three principal purposes of
these investments. Firstly after the first war of Indian Independence (1857), which, the British
described, as the Mutiny, it was realised by the Government that for the effective control and
administration of the country, it was essential that an efficient system of transport and
communication should be developed. Secondly, in order to effectively exploit the natural
resources of India, it was essential to develop public utilities like generation of electricity and
water works. Thirdly, to promote foreign trade so that food and raw materials collected in
various mandis are quickly transported abroad and the manufactures imported in India are
quickly distributed in various markets, the British thought it necessary to link railways with
major ports on the one hand and the marketing centres (mandis) on the other. This explains
why railway development in India was planned in such a manner that it served the colonial
interests. Thus, the major fields of direct foreign investments were as under :

Fields of direct foreign investments


(1) Economic overheads and infrastructure like railways, ports, shipping, generation of electric
energy, water works, roads and communications;
(2) for promoting mining of coal, gold and petroleum and metal-lurgical industries;
(3) for promoting commercial agriculture, investments in tea, coffee and rubber plantations;
(4) to undertake investments in consumer goods industries like cotton and jute textiles,
matches, woollen textiles, paper, tobacco, sugar, etc;
(5) investments in banking, insurance and trade; and
(6) some investments were made in machine building, engineering industries and chemicals.
All these investments were undertaken by the British multi-nationals operating through their
subsidiaries. Some of these investments took the form of loans to the British Government in
India in the form of sterling debts.

Two major forms of investment


(i) Direct private foreign investment in India was made in coal, mining companies, in jute
mills, tea, coffee, rubber plantations and in sugar.
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(ii) Sterling loans given to the British Government in India and public and semi-public
organisations to undertake investments in railways, ports, electricity undertakings and other
public utilities. These loans represented sterling debt.

Exploitation through finance capital via the Managing agency system


Indian business did not possess any experience of the organisation of modern industry by
setting up joint stock companies. The British merchants who had earlier set up trading firms
acted as pioneers and promoters in several industries like jute, tea and coal. These persons were
called as managing agents.

The managing agency firms may be described as partnerships of companies formed by a group
of individuals with strong financial resources and business experience. The managing agency
firm is entitled to the management of the whole affairs of the Company unless otherwise
provided in the agreement.

The principal functions of the managing agents were as follows :


(i) to do the pioneering work of floating new concerns;
(ii) to provide their own funds and also to arrange for finance by acting as the guarantors;
(iii) to act as agents for the purchase of raw materials, stores, equipments and machinery;
(iv) to act as agents for marketing of the produce; and
(v) to manage the affairs of the business.

Exploitation through payments for the costs of British administration


The British employed a large number of British officers for the military and civil administration
of the country. The British officers in the army were given a separate cadre and were paid much
higher salaries and allowances than their Indian counterparts. All the top-ranking positions
were monopolised by the British officers.

A similar situation prevailed in the civil administration. All the key positions and top ranks
were manned by British officers. They were also paid fabulous salaries and allowances. Besides
this, they were provided with other benefits for the maintenance of their children. These officers
had immense administrative powers. They could award contracts for supplies and stores and
thus the contractors paid them commissions for the favours. These unauthorised earnings had
also become a part of the system. These officers, after a certain specified period of service
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could seek retirement and thus were entitled to benefits of pension. The payments which were
remitted to England out of the savings of the officers living in India and also on account of
pension and other benefits were called as family remittances. These payments were a heavy
drain on our resources. Besides, India had also to pay interest on sterling loans raised for the
construction of railway and irrigation works. Payments accruing on account of interest on debts
incurred by India and those connected with civil departments in India, such as pensions,
gratuities, furlough allowances, and payments for stores purchased in India — all taken
together were called Home Charges. In 1931, the payments accruing to Britain on account of
home charges amounted to ` 43 crores.

Not only that, but India was also forced to pay for the various wars of the East India Company
like the Mysore and Maratha Wars, the Afghan and Burmese Wars. The British forced the
Indian people to pay through their nose for their expeditions to Prussia, Africa etc. The entire
cost of the telegraph line from England to India was charged from India.

During the two World Wars, India exported more to Britain than it imported. Against this
positive balance of trade, Britain authorised the Government of India to issue more currency
on the backing of the Sterling Balance held in England. India exported more and imported less.
The Sterling Balances, therefore, represented the sweat, the tears and the toil of the millions of
the poor people of India. But Great Britain by its policy only exported inflation to India. This
accounted for a much larger rise of the price level in India during the war. It imposed a heavy
burden on the Indian people.

The consequences of the various forms of exploitation were that :


(i) India remained primarily an agricultural country and its agriculture became commercialised
to serve the interests of Great Britain by exporting tea, coffee, spices, oilseeds, sugarcane and
other foodstuffs, besides other raw materials.
(ii) India which was an industrially advanced country during the 16th and 17th century was
not permitted to modernize her industrial structure during the 18th and 19th century. Her
handicrafts were destroyed and she became an importer of manufactured goods.
(iii) The British employed the policy of discriminating protection along with imperial
preference to have complete control over the Indian market. This also helped to provide safe
and secure avenues for the British investors in India.

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(iv) The British developed the economic infrastructure in the form of railways and irrigation
and electricity works with a view to promote foreign trade and exploit India’s natural resources
to their advantage. Direct British investment was made in consumer goods industries like tea,
coffee and rubber plantations, but no effort was made to develop heavy and basic industries.
(v) The Managing Agency System did help to promote consumer goods industries in the initial
phase, but became exploitative in character later. It appropriated nearly 50 per cent of the gross
profits as managerial remuneration.
(vi) The British exploited India through the economic drain via home charges. India was also
forced to pay for several wars like Afghan and Burmese Wars. This was indicative of the highly
exploitative character of the British rule.

The net result of the British policies was poverty and stagnation of the Indian economy.

Poverty of the Masses and the Economic Drain


Dadabhai Naoroji, a distinguished Indian economist, in his classic paper on the ‘Poverty of
India’(1876), emphasized that the drain of wealth and capital from the country which started
after 1757 was responsible for absence of development of India. According to Dadabhai
Naoroji. “The drain consists of two elements—first, that arising from the remittances by
European officials of their savings, and for their expenditure in England for their various wants
both there and in India : from pensions and salaries paid in England : and second that arising
from remittances by non-official Europeans.” This implies that India had to export much more
than she imported in order to meet the requirements of the economic drain. During the period
of the East India Company, an outright plunder in the form of gift exactions and tributes was
carried out. Dadabhai Naoroji. Y.S. Pandit and S.B. Saul have estimated the annual drain for
various periods. Taking the estimates based on the balance of payments alone, Saul’s figure for
1880 amounts to 4.14% of the Indian national income. Irfan Habib, therefore, writes : “The
fact that India had to have a rale of saving of 4% of its national income just to pay the Tribute
must be borne in mind when economists speak of the lack of internal capacities for
development, or the low per capita income base, from which the British could not lift the
Indians, however, much they tried.’’

The economic drain of wealth prevented the process of capital creation in India but the British
brought back the drained out capital and set up industrial concerns in India owned by British
nationals. The government protected their interests and thus the British could secure almost a
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monopoly of all trade and principal industries. The British component of industries established
in India further drained off Indian wealth in the form of remittances of profits and interest.
Thus, the economic drain which commenced right from the inception of the British rule acted
as a drag on economic development till 1947.

1.2.Colonialism and Modernization


The British economists have always upheld that the backwardness of the Indian economy and
its failure to modernize itself was largely due to the value system, i.e.. spiritualism, asceticism,
the caste system, joint family, etc. Similarly, the British economists have always argued that
Indian capital was proverbially shy, it always sought safe avenues of investment and thus
lacked the basic quality of adventure, which is an essential condition for dynamic
entrepreneurship. Dr. Bipan Chandra who has examined the impact of colonial rule in
modernizing India rejects both these arguments for absence of modernization as mere
shibboleths. He writes : “It is a historical fallacy to assume that India under British rule did not
undergo a fundamental transformation, or that it remained basically traditional.” But the
modernization of India was brought within the political parameters of a colonial economy.
Thus, the colonial links between India and Britain resulted in the progress of the Industrial
Revolution in Britain while it meant the modernization of those sectors of the Indian economy
which strengthened the process of integration of the Indian economy with British capitalism.
“It was, therefore, not an accident nor was it historically exceptional that India was integrated
into world capitalism without enjoying any of the benefits of capitalism, without taking part in
the industrial revolution. It was modernized and underdeveloped at the same time.”

It is also not correct to argue that British capital showed a spirit of adventure. The British
developed the railways in India under the Guarantee System which assured a minimum return
on whatever capital they invested. Similarly, the development of tea and coffee plantations or
investment in jute industry was undertaken only when the British investor felt attracted by high
profits available in these areas. Not only that, the entire policy of protection was aimed at
protecting British industrial and commercial interests. The introduction of the clause of most
favoured nation treatment’ further made it clear that along with profit maximization, the British
used the arm of the state to obtain security maximization. There is, therefore, no basis for the
assertion that British capital was more adventurous than Indian capital.

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The British rule was a long story of the systematic exploitation by an imperialistic government
of a people whom they had enslaved by their policy of divide and rule. The benefits of British
rule were only incidental, if any. The main motive of all British policies was to serve the
interests of England. Thus, in 1947 when the British transferred power to India, we inherited a
crippled economy with a stagnant agriculture and a peasantry steeped in poverty. As Jawaharlal
Nehru put it : “India was under an industrial capitalist regime, but here economy was largely
that of the procapitalist period, minus many of the wealth-producing elements of that pre-
capitalist economy. She became a passive agent of modern industrial capitalism suffering all
its ills and with hardly any of its advantages.”

1.3.Characteristics of Indian Economy


Introduction
A close look at the economic development of India during the British period reveals that
whenever India’s colonial economic links in terms of foreign trade and inflow of foreign capital
were disrupted, Indian economy made strides in industrial development. During the 20th
century, the colonial economic links were interrupted thrice : first, during the First World War
(1914-18) and second, at the time of the Great Depression (1929-34) and third during the
Second World War (1939-45). In other words, free flow of foreign trade and capital meant
economic stagnation in India, while their absence (partial or total) provided an opportunity for
Indian capital to open up avenues of industrial growth in areas choked off by imports.

Characteristics of Indian Economy


The Indian economy in the pre-British period consisted of isolated and self-sustaining villages
on the one hand, and towns, which were the seats of administration, pilgrimage, commerce and
handicrafts, on the other. Means of transport and communication were highly underdeveloped
and so the size of the market was very small. To understand pre-British India, it is essential to
study the structure of the village community, the character of towns, the character of internal
and foreign trade, the state of the means of transport and communications.

The structure and organisation of villages


The village community was based on a simple division of labour. The farmers cultivated the
soil and tended cattle. Similarly, there existed classes of people called weavers, goldsmiths,
carpenters, potters, oil pressers, washermen, cobblers, barber-surgeons, etc. All these

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occupations were hereditary and passed by tradition from father to son. These craftsmen were
paid a stipend out of the crops at the harvest time in lieu of the services performed.

Most of the food produced in the village was consumed by the village population itself. The
raw materials produced from primary industries were the feed for the handicrafts. Thus the
interdependence of agriculture and hand industry provided the basis of the small village
republics to function independently of the outside world. Sir Charles Metcalfe writes in this
connection : “The village communities are little republics having nearly everything they want
within themselves; and almost independent of foreign relations. They seem to last where
nothing lasts. This union of the village communities, each one forming a separate little state by
itself... is in a high degree conducive to their happiness, and to the enjoyment of a great portion
of freedom and independence.” The villages did acknowledge some out-side authority, may be
that of a local princeling, who in turn may be under a Muslim Nawab or a Hindu king, by
paying a portion of the agricultural produce varying between one-sixth to one-third or even in
some periods one-half as land revenue. The land revenue sustained the government.

The agriculturists could be further divided into the land-owning and the tenants. Labour and
capital needed was either supplied by the producers themselves out of their savings or by the
village landlord or by the village moneylender.

The structure and character of the towns


Towns had come into being principally on account of the following three reasons :
1. Towns were the places of pilgrimage or sacred religious centres. Important examples
of such towns were Allahabad, Banaras, Gaya, Puri, Nasik etc.
2. Towns were the seat of a court or the capital of a province. In this category may be
included Delhi, Lahore, Poona, Lucknow, Tanjore, etc. These towns lost their
importance as the prop of the court was withdrawn.
3. Towns were trading or commercial centres. These towns existed on important trade
routes. Mirzapur, Bangalore, Hubli, etc. are examples of this category.

Towns had a life much different from the villages. There existed a large variety of occupations
and trades in towns. They catered to wider markets.

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1.4.Industries and Handicrafts in Pre-British India
The popular belief that India had never been an industrial country, is incorrect. It was true that
agriculture was the dominant occupation of her people but the products of Indian industries
enjoyed a worldwide reputation. The muslin of Dacca, the calicos of Bengal, the sarees of
Banaras and other cotton fabrics were known to the foreigners. Egyptian mummies dating back
to 2000 B.C. were wrapped in Indian muslin. Similarly, the muslin of Dacca was known to the
Greeks under the name Gangetika.

The chief industry spread over the whole country was textile handicrafts. The high artistic skill
of the Indian artisans can be visualised from this account given by T.N. Mukherjee : “A piece
of the muslin 20 yards long and one yard wide could be made to pass through a finger ring and
required six months to manufacture.”Besides the muslins, the textile handicrafts included
chintzes of Lucknow, dhotis and dopattas of Ahmedabad, silk, bordered cloth of Nagpur and
Murshidabad. In addition to cotton fabrics, the shawls of Kashmir, Amritsar and Ludhiana were
very famous.

Not only that India was also quite well-known for her artistic industries like marble-work,
stone- carving, jewellery, brass, copper and bell-metal wares, wood-carving, etc. The cast-iron
pillar near Delhi is a testament to the high level of metallurgy that existed in India.

The Indian industries “not only supplied all local wants but also enabled India to export its
finished products to foreign countries.”Thus, Indian exports consisted chiefly of manufactures
like cotton and silk fabrics, calicos, artistic wares, silk and woollen cloth. Besides, there were
other articles of commerce like pepper, cinnamon, opium, indigo, etc. In this way, Europe was
a customer of Indian manufactures during the 17th and 18th centuries. It was this superior
industrial status of India in the pre-British period that prompted the Industrial Commission
(1918) to record :

“At a time when the West of Europe, the birth place of modern industrial system, was inhabited
by uncivilised tribes, India was famous for the wealth of her rulers and for high artistic skill of
her craftsmen. And even at a much later period, when the merchant adventurers from the West
made their first appearance in India, the industrial development of this country was, at any
rate, not inferior to that of the more advanced European nations.”

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Commercialisation of Agriculture (1850-1947)
Another noteworthy change in Indian agriculture was its commercialisation that spread
between 1850-1947. Commercialisation of agriculture implies production of crops for sale
rather than for family consumption. At every stage of the economic history of the nation, a part
of the agricultural output is produced for the market. Then, what distinguished commercial
agriculture from normal sales of marketable surplus ? It was a deliberate policy worked up
under pressure from British industries. By the middle of the nineteenth century. Industrial
Revolution had been completed in England. There was a tremendous demand for raw materials,
especially cotton, jute, sugarcane, groundnuts for the British industries. By offering a higher
bait of market price, the peasants were induced to substitute commercial crops for the food
crops as the former were more paying than the latter. Consequently, the peasants shifted to
industrial crops and in some districts, the movement for commercial agriculture became so
strong that the peasants started buying foodstuffs from the mandis for their domestic needs.
This led to a fall in the production of food and, consequently this period is marked by the
occurrence of most terrible famines in the economic history of India. Commercial agriculture
was also, to some extent, the result of the mounting demands of the land revenue by the state
and excessive rents by the landlords from the peasantry.

The process of commercial agriculture necessitated by the Industrial Revolution was intensified
by the development of an elaborate network of railway in India after 1850. Railways linked the
interior of the country with ports and harbours, urban marketing centres and thus Indian
agriculture began to produce for world markets. Large quantities of wheal from Punjab, jute
from Bengal and cotton from Bombay poured in for export to England. The same railways
which carried commercial crops from the various parts of the country, brought back the foreign
machine-made manufactures to India. Thus, railways and link-roads connecting the hinterland
of country with commercial and trading centres were instrumental in intensifying commercial
agriculture on the one hand and sharpening competition of machine-made goods with Indian
handicrafts, on the other. These factors led to the ruin of Indian industries.

Famines and Famine Relief in India


The new land system and commercialisation of Indian agriculture produced very adverse
economic consequences on the Indian economy. These influences retarded, nay halted, the
process of industrialisation the Indian economy, created “built-in depressors” in agriculture and
were responsible for the occurrence of famines in India.
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The Nature of Famines in India
Before the advent of modern means of transport, especially railways, the famines in India were
localised scarcities of food in those regions where the crops had shrunk on account of bad rains.
Both the construction of railways and the growth of trade after 1860 brought about a radical
change in the nature of famines. Previously a famine meant extreme hunger and the population
had to undergo suffering on account of lack of food because there were no means of
transporting the surplus foodgrain even if it was available in other parts of the country. The
position after 1860 was that the rapid means of transport made it possible to carry food from
one region to the other without much loss of time. But periods of famine were invariably
periods of high food prices and extensive agricultural unemployment. Therefore, the mass of
the poor people found it impossible to purchase food. Consequently, the earlier famines were
described as food famines but later ones are more appropriately described as purchasing power
famines. The Famine Commission (1898) made it abundantly clear when it emphasized that
food was “always purchasable in the market though at high and in some remote places at
excessively high prices.” Two factors were responsible for pushing up food prices : First, an
impending shortage of food meant hoarding and speculation which helped to push up the price
level very fast. Secondly, government did not allow any decrease in the export of food grains
even in the lean years. Consequently, the speculator and the Government both accentuated the
gravity of the problem.

1.5.Process of Industrial Transition in India


The process of industrial transition in the British period is broadly divided into industrial
growth during the 19th century and industrial progress during the 20th century. It was mainly
the private sector--whether indigenous or foreign-- that carried industrialisation forward. Only
after the First World War some protection was granted to Indian industries otherwise Indian
industry had to weather all storms and face world competition on its own strength. This explains
the slow growth of industrialisation.

Private enterprise and industrial growth in the 19th century


The outstanding industrial events of the 19th century were the decline of indigenous industries
and the rise of large-scale modern industries. This change was brought about by private
enterprise. The rise of large-scale industries was slow in the beginning but by the close of the
19th century, the movement was more rapid.

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The period 1850-55 saw the establishment of the first cotton mill, first jute mill and the first
coal mine. In the same period, the first railway line was laid in India. In a period of 25 years,
that is, by the last quarter of the 19th century, there were 51 cotton mills and 18 jute mills.
During the same period, India produced one million tonnes of coal per annum and the Indian
railways had a mileage of 8,000. By the end of the 19th century there were 194 cotton mills
and 36 jute mills, and coal production had risen to over 6 million tonnes per annum. In spite of
the very rapid increase in industrialisation and the fact that the foundations for the development
of modern industries for the utilisation of coal and iron resources were laid by the end of the
19th century, India was being gradually converted into an agricultural colony of the British. By
1900, India had become a great exporter of rice, wheat, cotton, jute, oilseeds, tea, etc. and an
importer of British manufactures. In this way India had become an appendage of the British
colonial system.

During the 19th century, it was but natural that British business should pioneer industrial
enterprise in India. The Britishers had experience of running industries at home. British
enterprise received maximum state-support. Besides, much of the business developed in India
was related either to the Government or interests in some way connected with Britain. Though
industrialisation was started by the British in the 19th century, the Britishers were more
interested in their profit and not in accelerating the economic growth of India.

Private enterprise and industrial growth in the first half of the 20th century
Over 70 cotton mills and nearly 30 jute mills were set up in the country. Coal production was
more than doubled. Extension of railways continued at the rate of about 800 miles per annum.
The foundation of iron and steel industry was finally laid during this period.

The war of 1914-18 created enormous demand for factory goods in India. Imports from
England and other foreign countries fell substantially. Besides, the government demand for
war-purposes increased considerably. As a result, great stimulus was given to the production
of iron and steel, jute, leather goods, cotton and woollen textiles. Indian mills and factories
increased their production and were working to full capacity. But on account of the absence of
heavy industries and also of the machine tools industry, they could not develop fast enough.

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Causes of slow growth of private enterprise in India’s industrialisation (1850-1957)
It is important to find out the reasons why Indian industry did not expand significantly relative
to the rest of the economy over the hundred years before Independence.

1.6.Trends and Structure of National Income Since 1951


Introduction
In an economy, every sector utilises natural, human and material resources and contributes to
the aggregate flow of goods and services during a given time period. Each specific period may
be described in terms of a year. The income earned by a country’s people, including labour and
capital investment in a year is hence called national income. A variety of measures of national
income and output are used in economics to estimate total economic activity in a country or
region, including Gross Domestic Product (GDP), Gross National Product (GNP), and Net
National Income (NNI). All are especially concerned with counting the total amount of goods
and services produced within some “boundary”. The boundary is usually defined by geography
or citizenship, and may also restrict the goods and services that are counted. For instance, some
measures count only goods and services that are exchanged for money, excluding bartered
goods, while other measures may attempt to include bartered goods by imputing monetary
values to them.

1.7.Trends and Structure of National Income


According to the National Income Committee, “A national income estimate measures the
volume of commodities and services turned out during a given period, counted without
duplication.” Thus, a total of national income measures the flow of goods and services in an
economy. National Income is a flow and not a stock. As contrasted with national wealth which
measures the stock of commodities held by the nationals of a country at a point of time, national
income measures the productive power of an economy in a given period to turn out goods and
services for the satisfaction of human wants.

Pre-Independence Period Estimates


Several estimates of national income were prepared in the British period. Notable among the
estimators were : Dadabhai Naoroji (1868), William Digby (1899), Findlay Shirras (1911, 1922
and 1931), Shah and Khambatta (1921), V.K.R.V. Rao (1925-29 and 1931-32) and R.C. Desai
(1931-40).

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In the pre-independence estimates, Dadabhai Naoroji, Shah and Khambatta, Findlay Shirras,
Wadia and Joshi estimated the value of the output of the agricultural sector and then added a
certain percentage as the income of the non-agricultural sector. The assumptions of most of
these estimators were arbitrary and hence devoid of any scientific basis. Dr. V.K.R.V. Rao
made use of a combination of census of output and census of income methods. He divided the
economy of India into two categories. In the first category were included agriculture, pastures,
mines, forests, fishing and hunting. Output method was to be used to evaluate the product
derived from these sectors. In the second category were included industry, trade, transport,
public services and administration, professions, liberal arts and domestic service. For these
occupations, census of income method was used. To these two sub-totals was added the income
from house property and other items which could not be covered under the above categories.
From the gross aggregate income so obtained were excluded the values of goods and services
consumed in the process of production. By adding the net income earned from abroad, an
estimate of national income was computed.

Most of these estimates were the results of the efforts of individuals and as such they suffered
from serious limitations. The arbitrary assumptions of the authors undermined the reliability of
the estimates. Besides, these estimates were based on statistics from the agricultural sector
which were highly undependable.

Post-Independence Period Estimates


Soon after Independence, the Government of India appointed the National Income Committee
in August, 1949, so as to compile authoritative estimates of national income. The Committee
consisted of Professor P.C. Mahalanobis. Professor D.R. Gadgil and Professor V.K.R.V. Rao.
The final report of the National Income Committee appeared in 1954. The report was a
landmark in the history of this country because for the first time, it provided comprehensive
data of national income for the whole of India. The principal features of the National Income
Committee report were as under :
1. During 1950-51, agriculture which also included animal husbandry, forestry and
fisheries contributed nearly half of the national income.
2. Mining, manufacturing and hand trades contributed about one-sixth of the total income.
3. Commerce, transport and communications accounted for a little more than one-sixth of
the total national income.

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4. Other services such as professions and liberal arts, administrative services, domestic
services, house property accounted for about 15 per cent of national income.
5. The share of commodity production was about two-third of the national income. The
term commodity production includes material production derived from agriculture,
mining, factory establishments, hand trades, etc.
6. Services accounted for about one-third of total national income. Services sector
includes commerce, transport and communications, administrative services, liberal arts,
domestic services etc.
7. The share of the government sector in net domestic product was 7.6 per cent in 1950-
51. Along with it, the share of the government in national expenditure was 8.2 per cent.
8. The margin of error in the calculation of national income estimates worked out at about
10 per cent.

National Income Committee and C.S.O. Estimates


For the post-independence period, we have five series in national income estimates.
1. Conventional Series : provided national income data at current prices and at 1948-49 prices
for the period 1948-49 to 1964-65. The conventional series divided the economy into 13
sectors. Income from six sectors i.e., agriculture, animal husbandry, forestry, fishery, mining
and factory establishments is calculated by the output method and income from the remaining
seven sectors, i.e., small enterprises, organised banking and insurance, commerce and
transport, professions, liberal arts and domestic service, public authorities, house property and
rest of the world is computed by census of income method.

2. Net Output Method : In agriculture, the output of each crop is estimated by multiplying the
area sown by the yield per hectare. For obtaining the average yield crop cutting experiments
were conducted. From the gross value of output so obtained, deductions for the cost of seed,
manures and fertilisers, market charges, repairs and depreciation are made so as to derive
net value of the product from agriculture. For animal husbandry, forestry, fishery, mining
and factory establishments, estimates of production are multiplied with market price so as
to obtain the gross value of the output. From the gross value of output deductions are made
for cost of materials used in the process of production and depreciation charges etc. to
obtain net value added of each sector.

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3. Net Income Method : In order to obtain the contribution of small enterprises an estimate for
the total number of workers employed in different occupations classified under small
enterprises is prepared. On the basis of sample surveys, the average earnings per head are
obtained. By multiplying the total number of persons employed with the average earnings per
head, the contribution of small enterprises is estimated. To provide for factor payments other
than wages and salaries, an addition of 20 per cent to the money earnings is made.

For Banking and Insurance the balance sheets of the firms provide the requisite information.
Wages, salaries, directors’ fees and dividends (distributed and undistributed) are all added to
get the net contribution of the sector. For commerce and transport and for professions, liberal
arts and domestic services, the procedure is the same as for small enterprises.

For public sector, wages, salaries, pensions, other benefits, dividends or surplus, etc., are added
up to arrive at the contribution of the public sector. To this is added the contribution of
government construction and this gives the total contribution of the public sector.

National Income Series at 1960-61 prices : This series provided national income data at
current prices and at 1960-61 prices for the period 1960-61 to 1975-76.

Another series was started with 1970-71 as base year instead of 1960-61.
Estimates based on different base years indicate differences in magnitudes, even when they are
deflated at constant prices either at 1948-49 or 1960-61 or 1970-71 prices. This is due to the
differences in weights used for the series. The Central Statistical Organisation (CSO) brought
out another Series on national income with 1980-81 as base year in place of the series with
1970-71 as the base year.

CSO Revised National Income Series with 1999-00 as Base Year


The Central Statistical Organisation (CSO) has revised the existing series of national accounts
with 1993-94 as the base year with a new series with 1999-00 as the base year. Besides shifting
the base year, the New Series incorporates improvements in terms of coverage and to the extent
possible, the recommendations of the United Nations System of National Accounts, 1993 (1993
UNSNA) have been incorporated.

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The improvements in terms of coverage are the following :
(a) Inclusion of production of salt through sea water evaporation and the production of
betel leaf, toddy, goat, buffalo and camel milk, duck eggs and meat production from
unregistered slaugh-tering.
(b) Expenditure made on few tree crops during the gestation period and setting up of
wind energy systems are included in the estimates of output of construction sector.
(c) A new category of ‘valuables’ has been included in the gross capital formation, in
line with the recommendations of 1993 UNSNA.
(d) Economic activities of other communication, renting of machinery and other
equipment without operator, computer related activities in unorganized segment,
coaching centres, social work with accommodation, recreational and cultural activities
have been included.

Trends in National Income Growth and Structure


In order to understand the impact of planning in India, a study of trends in national income is
necessary. It would be, therefore, better if the trend in national income and changes in the
structure of national product are analysed over the last 57 years of planning.

Trends in net national product and per capita income


Figures of national and per capita income are collected at current prices. But figures of national
income at current prices do not give a correct picture about the growth of the economy, for the
increase in national income at current prices reflects the combined influence of two factors viz.,
(a) the increase in the production of real goods and services and (b) the rise in prices. If the
increase in national income is due to the first factor, it is an indicator of real growth because it
implies that more goods and services become available to the people. If it is due to the second
factor, it represents an unreal inflation of national income in money terms. Consequently,
national income figures are deflated at constant prices to eliminate the effect of any change of
price level during the period. National income figures at constant prices, therefore, become
comparable, but they conceal the population effect. To eliminate the effect of growth of
population, per capita national product or per capita income is calculated. Whereas the growth
of the net national product at constant prices is an index of the total productive effort on the
part of the community and indicates the rate of growth of goods and services in the economy,
the growth of per capita income at constant prices is an indicator of the change in the standard
of living of the people.
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CSO has provided a series of national income data at 1999-00 from 1950-51 to 2007-08.
Although this indicates slightly different growth rates for different period, but this was
inevitable because of coverage and a change is procedure.

Annual Growth Rates during the plans


During the First Plan, annual average growth rate of NNP was 4.4 per cent (at 1999-00 prices),
which to declined 3.8 per cent during the Second Plan. However, during the Third Plan, annual
average increase in national income slumped down to 2.6 per cent which was just sufficient to
neutralize the growth of population. This is indicated by the fact that there was 0.4 rate of
growth of per capita income during the Third Plan. This was largely the consequence of a
serious drought in 1965-66 and thus the growth rate got depressed. This was followed by
another drought year as also a business recession. After 1967-68 the economy started picking
up and the growth rate showed signs of improvement. During the Fourth Plan (1969-74) period,
the average annual rate of growth of national income declined to 3.1 per cent and that of real
per capita income to 0.8 per cent per annum. The sharp increase in prices during 1972-73 and
1973- 74 and the shortfalls in production on account of lower utilisation of capacity were the
principal factors responsible for a lower growth rate during the Fourth Plan.

During the Fifth Plan (1974-79) the average annual increase in national income was of the
order of 4.9 per cent and that of per capita income was barely 2.6 per cent. On the whole, the
performance of the economy during the Fifth Plan can be considered very satisfactory.

During the Seventh Plan (1985-90), India’s NNP grew on the average at the rate of 5.5 % per
annum and the annual growth of per capita NNP was 3.3 %. Obviously, Seventh Plan achieved
its objective of 5 per cent growth rate of NNP along with 3 % targeted growth rate of per capita
NNP. This was a welcome development.

Trends in distribution of national income by industrial origin


The following broad trends in the changing composition of the domestic production are
revealed:
(1) The share of the primary sector which includes, agriculture, forestry and fishery has gone
down from 55.4 percent of GDP in 1950-51 to 38 percent in 1980-81 and further declined to
14.3 per cent in 2010-11. The main cause of the decline is a rapid fall in the share of

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agriculture alone. There is also a contraction in the share of forestry from about 6 percent in
1950-51 to nearly 0.7 per cent in 2010-11. The share of fishery has remained more or less
constant around 1 percent throughout the period.
(2) The share of industry which includes mining, manufacturing, electricity, gas & water
supply and construction has shown a steady increase from 15 per cent in 1950-51 to 24 percent
in 1980-81 and 27.9 per cent in 2010-11.
Two major components of industry are manufacturing and construction. The share of
manufacturing increased form 8.9 per cent in 1950-51 to 15.8 per cent in 2010-11. Similarly,
the share of construction improved from 4.4 per cent in 1950-51 to 7.9 per cent in 2010-11.
(3) The share of the service sector has three components; (a) Trade, Transport, Storage and
Communication, (b) Finance, Insurance, Real Estate and Business Services and (c)
Community, Social and Personal Services. The share of the service sector indicated a sharp
improvement from 29.6 percent in 1950-51 to about 57.8 percent in 2010-11. There was a
significant increase in the share of trade, transport and communications from only 11.3 percent
in 1950-51 to 27.0 percent in 2010-11. The expansion of transport, especially road transport
and communications, during the last decade of mobile revolution has been the major
contributor to this increase.

The share of finance, insurance, real estate and business services marginally declined from 7.7
percent in 1950-51 to 7.5 percent in 1980-81 and thereafter improved to 17.4 percent in 2010-
11.

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The process of economic development involves a rapid expansion of public administration
especially a rapid expansion of economic and welfare services such as education, health and
family welfare. Taking community and personal services a group, there was an improvement
in its share from 10.6 percent in 1950-51 to 13.4 percent in 2010-11.

The structural change in the composition of national income by industrial origin is the
consequence of the process of economic growth initiated during the plans. Since the growth
process involved a rapid expansion of manufacturing in the organised sector, the share of
manufacturing was bound to indicate a relatively sharp increase. However, agriculture did not
indicate a fast rate of growth.

As is evident, the rate of growth of agriculture showed a decline from 3 per cent during 1950-
51 and 1960-61 to 1.5 per cent during 1970-71 and 1980-81 and thereafter, it picked up to 3.4
per cent during 1980-81 and 1990-91. However, it declined to 2.6 per cent during 1990-91 and
2000- 01 and then improved to 3.79 percent between 2004-05 and 2010-11.

The theory of economic growth also supports the structural change in the composition of
national product. The distribution of gross domestic product in developed countries indicates a
much higher share of industry and services and a relatively lower share for agriculture. The
disparity in per capita incomes between developed and underdeveloped countries is largely a
reflection of the disparity in the structure of their economies.

As industrialisation spreads it brings about an improvement in the share of industry and


services. Indian economy is passing through this process of transition from an agricultural
economy to an industrialized one. In this process, a structural change in the composition of
national income is inevitable. This structural change is taking place, though at a slow pace. The
main reason for the slow rate of structural change in domestic output is the slow rate of growth
of the manufacturing output.

As is expected during the process of growth, India also experienced an improvement in the
share of the tertiary sector. This was largely due to an expansion in transport and
communication, banking and insurance and public administration. The rate of growth in all the
components of the tertiary sector was 4.9 per cent per annum during 1950-51 and 1990-91
which was higher than the overall rate of growth of gross domestic product (i.e., 4.1 per cent)
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in the economy. During 2004-05 and 2010-11, the growth rate of tertiary sector has picked up
to more than 10 per cent.

There is a sudden jump of the Indian economy to pass on to the stage of a post-industrial
‘service’ economy without completing the phase of industrialisation. This only underlines the
need for strengthening the manufacturing sector by stepping up the process of industrialisation.
The changing structure of national income needs to be further strengthened by stepping up the
programme of industrialisation. This does not imply a neglect of agriculture, but for
accelerating the growth process in agriculture, industrialisation of the economy with emphasis
on agro- based industries and industries supplying inputs to agriculture is a sine qua non. It is
only then that the process of transition of the Indian economy from a developing to a developed
economy will be accomplished.

The share of public sector in gross domestic product was 14.9 per cent in 1970-71, it rose to
25.9 per cent in 1993-94 and then declined to 20.8 per cent in 2008-09. The gradual increase
in the share of the public sector is the direct result of the expansion of the economic activities
of the State, both on side of enlarging administrative services and of increasing productive
activities in public enterprises during the first four decades of development. Thereafter,
economic reforms intiated in 1991 stressed the need for restricting the area of operation of
public enterprises. It emphasized phasing out of enterprises incurring losses and withdrawing
from such sectors like consumer goods, hotels etc. which served no social purpose. The factors
contributing to the increase in the share of non-departmental enterprises are the setting up of
new industries, expansion of existing enterprises, nationalisation of coal mining companies,
banks and insurance and the like, and merger of private electricity companies into electricity
boards.

Urban and Rural Income Break-up


National Accounts Statistics (1999) and (2006) and give a break-up of the net domestic product
for the rural and urban sectors separately. The data reveal that as against 62.4 per cent of the
total NDP being contributed by the rural sector in 1970-71, its share in NDP declined to 54.3
per cent in 1993-94. Consequently, during the 23 year period, the share of the urban sector in
NDP improved from 37.6 per cent to 45.7 per cent. The per capita NDP for the rural sector was
` 529 in 1970-71 and that of the urban sector was ` 1,294. Thus urban-rural disparity ratio in

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per capita NDP was 2.45. However, this ratio declined marginally to 2.34 in 1993-94 since per
capita NDP for urban sector as ` 13,525 as against ` 5,783 for the rural sector.
However, between 1993-94 and 1999-00, the first phase after the introduction of economic
reforms, witnessed a further decline in the share of rural sector to NDP to about 48 per cent.
Not only this, per capita NDP in 1999-00 for rural areas was ` 10,683 and for urban areas stood
at ` 30,183. The urban-rural disparity ratio increased to 2.82 in 1999-00 as against 2.34 in 1993-
94. This is not a healthy trend.

Changing Structure of Rural GDP


Dr. Rajesh Shukla and K.A. Siddiqui of the National Council of applied Economic Research
(NCAER) have studied the changing structure of Rural GDP. The main findings of the study
are :
1. Average annual growth rate of rural GDP which was 2.3 percent during 1970-80
improved to 4.8 percent during 1980-93. It rose further to 5.0 percent in 2007-08 and
declined to 4.3 percent in 2008-09 - a year in which recession adversely affected the
growth rate.
2. Break-up of the sectoral shares of rural GDP reveals that whereas the share of
agriculture in 1970-71 was 73.8 percent and the combined share of industry and
services was 26.2 percent in rural GDP, there is a continuous decline in the share of
agriculture and it came down to 42 percent in 2007-08. As against it, the share of both
industry and services indicated a continuous increase and their combined share was 58
percent in 2007-08.
These trends reveal that a structural transformation of the rural economy is taking place
and the nonfarm sector is emerging as the major contributor to rural GDP. This is also
borne out by the CSO’s Economic Census 2005, according to which, about a fifth of
nonfarm rural workforce is employed in agricultural establishments, while four-fifth
worked in non-agricultural establishments.
Such a transformation is a trend in the right direction and is very desirable because
about 60 percent of India’s population cannot live on the 19 percent share of India’s
GDP in agriculture.

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Share of Organised and Unorganised Sector in NOP
Organised enterprises are defined by the CSO as all enterprises which are either registered or
come under the purview of any of the Acts and/or maintain annual accounts and balance sheets.
Among the Unorganised enterprises are included all unincorporated enterprises and household
industries other than the Organised ones which are regulated by any of the Acts and which do
not maintain annual accounts and balance sheets.

From the data given in Table 10, it is evident that the share of the organised sector has risen
from 30 per cent in 1980-81 to 42.9 per cent in 2007-08. Consequently, the share of the
unorganised sector declined from 70 per cent to 57.1 per cent during the same period. It may
also be noted that the share of the organised sector in mining, manufacturing etc. improved
from 56.8 per cent to 70.2 per cent and that in the services sector improved from about 40 per
cent in 1980-81 to 46 per cent in 2007-08. On the other hand, in agriculture, forestry and
fishing, the contribution of the unorganised sector slightly declined 95.2 per cent in 1980-81 to
91.2 per cent in 2007-08. The shift in the composition of NDP from the unorganised to the
organised sector is a consequence of the process of development.

Limitations of National Income Estimation in India


“National income is nothing more than a simple linear aggregation of income accruing to the
factors of production supplied by the normal residents of the country in question.” Thus, while
making an estimate of national income millions of economic quantities have to be added up.
For this purpose, some basic judgements and social criteria based on the mores and traditions
of a society are to be kept in mind. “Incidentally, in the literature on the System of Material
Production (SMP) used to be employed by the erstwhile centrally-planned economies, the
services were divided into two parts — material (or productive) and non-material (or
unproductive) services. Material or productive services comprised transport and
communication and commerce covering wholesale and retail activities, including restaurants.
Essentially all other personal and most public services were excluded from the concept of
material production in the SMP, whereas in the System of National Accounts (SNA), no such
distinction is made and all services are said to render production activities.” National Accounts
Statistics in India include all services unlike the System of Material Production (SMP) followed
in erstwhile socialist countries like Hungary and Soviet Russia. Similar controversy exists
regarding the inclusion of Government administrative services. There is a difficult question for
an estimator to answer: “which part of the government’s general administration is service to
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business firms, enters into the value of its product and hence should not be counted and which
part is service to the people as individuals and consumers and should be counted . . . Likewise,
in considering what is consumption in the process of production and what is net product, the
estimator merely, follows the judgement of society—which views net product as what is
available either for consumption of individuals, personally or collectively or for additions to
capital stock.”

Besides these conceptual problems, there are a number of limitations of national income
estimation which have a particular relevance in India.

The output of the non-monetised sector : While calculating national output, the assumption
normally made is that the bulk of the commodities and services produced are exchanged for
money. India, where agriculture is carried on a subsistence basis, a considerable portion of the
output does not come to the market for sale but is either consumed by the producers themselves
or is bartered away with other producers in exchange for other goods and services. To ignore
this portion of the output in agriculture would reduce the national output considerably. At
present, there is no objective method of finding out the total output of food crops and the
amount consumed at home. Hence, the difficulty that arises in India is to find out the imputed
value of the produce of the non-monetised sector and add it to the value of the monetised sector.

Non-availability of data about the income of small producers or household enterprises :


Another limitation in India is that a very large number of producers carry on production at a
family level, or run household enterprises on a very small scale. Most of these small producers
or entrepreneurs are so illiterate that they have either no idea of maintaining accounts or they
do not feel the necessity of keeping regular accounts. Commenting on this the National Income
Committee wrote : “An element of guess-work, there-fore, invariably enters into the
assessment of output, especially in the large sectors of the economy which are dominated by
the small producer or the household enterprise.”

Absence of data on income distribution : The National Accounts Statistics do not generate
any data on income distribution of households or persons. For this purpose, instead of making
inquiries about household income or related variables, the National Sample Survey
Organisation (NSSO) have used data on consumer expenditure and collected through a pilot
survey on distribution of income, consumption and savings during 1983-84 in 5 selected states
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and 4 metropolitan cities. Al-though these surveys were questioned on the basis of the small
size of their samples, it was found that household incomes (Y) based on direct enquiries were
lower by 30-40 per cent than those derived indirectly as the sum of consumption and saving
(C+S). Conceding that the experience was disappointing, the NSSO has suggested full-scale
pilot surveys on household income, saving and consumption. There is a strong need to compile
data on income distribution so that the spread effects of the growth process on low income
households can be properly analysed.

Unreported illegal income : Studies about black economy pertaining to India have shown that
a significant part of the economy operates as hidden or subterranean economy and the income
generated in it goes as unreported income. According to a study by Dr. Arun Kumar, black
economy accounted for about 40 percent of total income generated (Gross National Product),in
2000-01. Obviously, national income estimates to that extent are under-estimates. It is also a
fact that the size of the black economy has been growing over time and as such the magnitude
of error on account of this factor alone has been becoming larger and larger.

Terminal Questions
Section A (5 Marks)
1. Explain the major forms of colonial exploitation
2. Explain the fields of direct foreign investments
3. List out the principal functions of the managing agents and explain in your own words
4. Explain the consequences of the various forms of exploitation
5. Explain about the structures and organisation of villages
6. Explain about Rural GDP
7. Highlight the Trends in distribution of National Income by Industrial Origin.
Section B
1. Discuss in detail about the exploitation through Trade Policy
2. Explain in detail about the Post-Independence Estimates
3. Explain in detail about the Limitations of National Income Estimation in India
Section C
1. Discuss in detail about the various Trends and Structures of Indian Economy (Pre-
Independence Period Estimates and Post-Independence Period Estimates).
2. Discuss the types of National Income Estimates.

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Unit II: Economic Planning in India (9 hours)
2.1.Evolution of planning in India
2.2.Achievements and failures of five-year plans in India
2.3.12th Five-year plan
2.4.NITI Aayog

2.1. Economic Planning in India – Five Year Plan


The term economic planning is used to describe the long-term plans of the Government of India
to develop and coordinate the economy with efficient utilization of resources. Economic
Planning in India started after Independence in the year 1950, it was deemed necessary for
economic growth and development of the nation.

Long term objectives of Five-Year Plans in India are:


• High Growth rate to improve the living standard of the residents of India.
• Economic stability for prosperity.
• Self-reliant economy.
• Social justice and reducing the inequalities.
• Modernization of the economy.

The idea of economic planning for five years was taken from the Soviet Union under the
socialist influence of first Prime Minister Pt. Jawahar Lal Nehru.

• The first eight five-year plans in India emphasised on growing the public sector with
huge investments in heavy and basic industries, but since the launch of Ninth five-year
plan in 1997, attention has shifted towards making government a growth facilitator.

Objectives of Economic Planning in India


The following were the original objectives of economic planning in India:
• Economic Development: This is the main objective of planning in India. Economic
Development of India is measured by the increase in the Gross Domestic Product
(GDP) of India and Per Capita Income

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• Increased Levels of Employment: An important aim of economic planning in India is
to better utilise the available human resources of the country by increasing the
employment levels.
• Self Sufficiency: India aims to be self-sufficient in major commodities and also
increase exports through economic planning. The Indian economy had reached the take-
off stage of development during the third five-year plan in 1961-66.
• Economic Stability: Economic planning in India also aims at stable market conditions
in addition to the economic growth of India. This means keeping inflation low while
also making sure that deflation in prices does not happen. If the wholesale price index
rises very high or very low, structural defects in the economy are created and economic
planning aims to avoid this.
• Social Welfare and Provision of Efficient Social Services: The objectives of all the
five year plans as well as plans suggested by the NITI Aayog aim to increase labour
welfare, social welfare for all sections of the society. Development of social services in
India, such as education, healthcare and emergency services have been part of planning
in India.
• Regional Development: Economic planning in India aims to reduce regional
disparities in development. For example, some states like Punjab, Haryana, Gujarat,
Maharashtra and Tamil Nadu are relatively well developed economically while states
like Uttar Pradesh, Bihar, Orissa, Assam and Nagaland are economically backward.
Others like Karnataka and Andhra Pradesh have uneven development with world class
economic centres in cities and a relatively less developed hinterland. Planning in India
aims to study these disparities and suggest strategies to reduce them.
• Comprehensive and Sustainable Development: Development of all economic sectors
such as agriculture, industry, and services is one of the major objectives of economic
planning.
• Reduction in Economic Inequality: Measures to reduce inequality through
progressive taxation, employment generation and reservation of jobs has been a central
objective of Indian economic planning since independence.
• Social Justice: This objective of planning is related to all the other objectives and has
been a central focus of planning in India. It aims to reduce the population of people
living below the poverty line and provide them access to employment and social
services.

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• Increased Standard of Living: Increasing the standard of living by increasing the per
capita income and equal distribution of income is one of the main aims of India’s
economic planning.

Evolution of Planning in India


Economic planning in India dates back to pre-Independence period when leaders of the
freedom movement and prominent industrialists and academics got together to discuss the
future of India after Independence which was soon to come. Noted civil engineer and
administrator M. Visvesvaraya is regarded as a pioneer of economic planning
in India. His book “Planned Economy for India” published in 1934 suggested a ten-year plan,
with an outlay of Rs. 1000 crore and a planned increase of 600% in industrial output per annum
based on economic conditions of the time.

The Industrial Policy Statement published just after independence in 1948 recommended
setting up of a Planning Commission and following a mixed economic model. Here are the
major milestones related to economic planning in India:

• Setting up of the Planning Commission: 15 March 1950


• First Five-Year Plan: 9 July 1951
• Dissolution of the Planning Commission: 17 August 2014
• Setting up of NITI (National Institution for Transforming India) Aayog: 1 January 2015

Setting up the NITI Aayog was a major step away from the command economy structure
adopted by India till 1991. The Planning Commission’s top-down model of development had
become redundant due to present economic conditions and NITI Aayog approaches economic
planning in a consultative manner with input from various state governments and think tanks.

The evolution of planning in India is a fascinating journey that has shaped the country's
economic and social development. India's planning process can be divided into several distinct
phases, each marked by different approaches, policies, and objectives. Here is an overview of
the evolution of planning in India:

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List of Five-Year Plans in India [1951-2017]
Five Year Plans Years Goals Impact
• The main goal • Net domestic
was to improve product increased
the agriculture by 15%, while the
sector. achieved growth
• Target was to rate stood at 3.6%
achieve an • Five Indian
average annual Institutes of
growth rate of Technology (IITs)
2.1% in the gross were created.
domestic product • University Grants
First Five-Year (GDP) over the Commission was
1951 – 1956
Plan five-year period. established to
provide money and
improve higher
education in India.
• Industrial growth
fell short of its
target due to a lack
of investment in
heavy industries
and slow growth in
the private sector
• To promote
• The plan did not
industrialization
meet its target
in the country
growth rate of 4.5%
• Mahalanobis
Second Five Year and only managed
1956 – 1961 model was used
Plan to achieve a growth
in the 2nd Five
rate of 4.27%
Year plan.
• New industries
• Target of the plan
were established,
was to achieve an

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annual growth and infrastructure
rate of 4.5% in was improved.
the Gross • The plan also led to
Domestic the establishment
Product of hydroelectric
power projects
and five steel plants
were built in places
like Rourkela,
Durgapur, and
Bhilai
• To promote
agriculture,
industry, and
social welfare • Only achieved an
• Aimed to actual growth rate
increase the of 2.4%
economic growth • The plan helped set
rate to 5.6% per up many primary
year. schools in rural
Third Five Year • The goal of this areas and created
1961 – 1966
Plan plan was to create state electricity and
a self-sufficient education boards
economy with a • The states were
focus on given responsibility
agriculture and for secondary and
increasing wheat higher education.
production.
However, it
failed due to wars
and drought.
• The third five- • The three annual
Three Annual Plans 1966 – 1969
year plan was plans focused on a

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unsuccessful revamped
due to various agriculture-based
reasons strategy which
including wars included the
and other issues. utilization of
• Therefore, the fertilizers on an
value of the increased level,
Indian rupee good-quality seeds,
decreased in the and the
global market conservation of
leading to high soil.
inflation.
• This led to the
postponement of
the next five-
year plan in
India.

• To reduce the • The plan promoted


concentration of the Green
wealth and Revolution, which
economic power aimed to increase
and to achieve agricultural
growth with productivity by
stability and self- using better crops,
Fourth Five Year
1969 – 1974 reliance. irrigation, and
Plan
• The Fourth Five fertilizers.
Year Plan was • The plan didn’t
created based on achieve its target
the Gadgil growth rate of 5.6%
formula. and only had an
• Target growth actual growth rate
rate – 5.6% of 3.3%

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• Government
introduced several
initiatives like
amending the
Electricity Supply
• Aimed to reduce
Act in 1975,
poverty, increase
launching a
employment
Twenty-point
opportunities,
program in 1975,
Fifth Five Year improve the
1974 – 1979 and implementing
Plan justice system,
the Minimum
boost agricultural
Needs Programme
production, and
• The plan was
strengthen
successful as it
defence
achieved a growth
rate of 4.8%,
exceeding the target
of 4.4%

• The sixth five year


plan was
• The Janata Party
introduced twice,
lost power and the
one of which was
Congress
introduced by the
government took its
ruling Janata
place. The new
Rolling Plan 1978 – 1980 Party. The party
government later
mainly laid stress
rolled out a new
on the matter of
plan which aimed
unemployment.
towards poverty
It was majorly
alleviation.
focused on the
criticism of the

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Nehru
government.
• The goal was to
have a 5.2%
growth, but they
actually achieved a
5.7% growth.
• The Sixth Five
• Focused on Year Plan was also
investing money, significant because
changing it marked the
infrastructure, and beginning of
Sixth Five Year
1980 – 1985 growing the economic
Plan
economy. liberalization in
• Target Growth India.
Rate – 5.2% • They made a new
bank called the
National Bank for
Agriculture and
Rural
Development to
help people in rural
areas.
• The goal of the
• Achieved growth
Seventh Five Year
rate – 6.01%
Plan was to make
• The Seventh Five
India more self-
Year Plan focused
Seventh Five Year sufficient, create
1985 – 1990 on agriculture,
Plan in India more jobs, and
small businesses,
improve
and improving
technology.
roads and
• Target growth rate
technology.
– 5%

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• The plan aimed to
promote social
justice and help the
poor, increase the
productivity of
farmers, and make
India more
independent.
• The Eighth Five
Year Plan was the
beginning of a new
economic approach
called
internationalization,
relaxation, and
• To promote commercialization
entrepreneurship, in India.
support small and • The plan gave
Eighth Five Year
1992 – 1997 medium-sized priority to energy,
Plan
enterprises, and allocating 26.6% of
enhance the skills the budget to it.
of the labor force • Overall, it was
successful in
achieving its
objectives, and the
economy of India
grew at an average
annual rate of 6.8%
during this period.
• The focus of the • Achieved growth
Ninth Five Year plan was to rate – 5.4%
1997 – 2002
Plan in India achieve growth • The government
along with social planned to spend a

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justice and total of ₹859,200
equality. crores on public
• Target Growth projects.
Rate – 6.5% • It introduced new
measures called
Special Action
Plans to help
achieve targets on
time with enough
resources.
• The GDP growth
rate during the plan
period was 7.5%,
• Its main goal was which was close to
to increase India’s the target of 8%
per capita income • Poverty rates also
Tenth Five Year
2002 – 2007 over the next 10 decreased, and
Plan
years and reduce significant
the poverty ratio progress was made
to 15% by 2012 in the areas of
health, education,
and infrastructure

• The main focus of


the Eleventh Five
Year Plan was to
• Although the plan
achieve rapid and
aimed for a growth
Eleventh Five Year inclusive growth.
2007 – 2012 rate of 9%, it
Plan • The 11th Five
achieved a growth
Year Plan aimed
rate of 8%
to increase the
number of 18–23-
year-olds enrolled

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in higher
education by
2011-12

• The 12th Five


Year Plan had • The key areas of
three main focus under the
objectives: Twelfth Five Year
growth, Plan were
inclusiveness, infrastructure
Twelfth Five Year
2012 – 2017 and development, skill
Plan
sustainability. development,
• It aimed to health, education,
achieve an agriculture, energy,
average annual and the
growth rate of 8% environment

1. The Pre-Independence Era (1947 and earlier):


o Before India gained independence from British rule in 1947, there were limited
planning efforts. However, some provinces, like Bombay and Madras, initiated
economic planning exercises during the 1930s and 1940s.
2. The First Five-Year Plan (1951-1956):
o The Planning Commission, established in 1950, formulated India's first Five-
Year Plan.
o This plan focused on agricultural development, irrigation, power generation,
and industrialization.
o The public sector played a crucial role, with an emphasis on state-led
industrialization through the establishment of public sector enterprises.
3. The Second Five-Year Plan (1956-1961):
o The second plan aimed to develop heavy industries and build a self-reliant
industrial base.

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o This period saw the establishment of several public sector enterprises in steel,
chemicals, and machinery sectors.
o The plan also focused on promoting social welfare, education, and healthcare.
4. The Third Five-Year Plan (1961-1966):
o This plan shifted its focus to agriculture, with an emphasis on increasing
agricultural production and productivity.
o It aimed to achieve food self-sufficiency and address rural poverty.
o The plan also aimed to boost exports and diversify the industrial sector.
5. The Fourth Five-Year Plan (1969-1974):
o This plan was formulated during a period of economic instability and focused
on stabilizing prices and accelerating economic growth.
o It aimed to reduce poverty and inequality, improve agricultural productivity, and
promote small-scale industries.
6. The Fifth Five-Year Plan (1974-1979):
o This plan faced challenges due to the oil crisis and high inflation.
o It focused on poverty alleviation, employment generation, and strengthening the
agricultural sector.
o The plan also highlighted the need for decentralized planning and community
development.
7. The Sixth Five-Year Plan (1980-1985):
o The plan aimed at accelerating economic growth, promoting social justice, and
reducing poverty.
o It emphasized agricultural development, rural infrastructure, and employment
generation.
o This period also witnessed a shift towards more liberal economic policies.
8. The Seventh to Tenth Five-Year Plans (1985-2007):
o These plans focused on economic liberalization, globalization, and market-
oriented reforms.
o The emphasis shifted from state-led planning to a more market-driven approach.
o Economic liberalization policies were introduced to encourage private
investment, foreign direct investment, and entrepreneurship.
9. The Eleventh Five-Year Plan (2007-2012):
o This plan aimed to achieve inclusive growth by focusing on sectors such as
agriculture, healthcare, education, and infrastructure.
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o It emphasized social development, poverty reduction, and environmental
sustainability.
It is important to note that the planning process in India has evolved over time to adapt to
changing socio-economic conditions and policy priorities. The approach has shifted from a
more centralized, state-led planning model to a more decentralized and market-oriented
approach, with a focus on inclusive and sustainable development.

2.2. Five-Year Plans in India


The five-year plans in India were a series of comprehensive economic development initiatives
implemented by the government to promote growth and address various socio-economic
challenges.

The basic overview of Five-Year Plan in India along with the timeline, target growth, and
actual growth is as under:
Plan Timeline Target Growth Actual Growth
First Five-Year Plan 1951 – 1956 2.1 % 3.6 %
Second Five Year 4.5% 4.3%
1956 – 1961
Plan
Third Five Year Plan 1961 – 1966 5.6% 2.8%
Three Annual Plans 1966 – 1969 – –
Fourth Five Year
(1969 – 74) 5.7% 3.3%
Plan
Fifth Five Year Plan (1974 – 79) 4.4% 4.8%
Rolling Plan (1978 – 80) – –
Sixth Five Year Plan (1980 – 85) 5.2% 5.7%
Seventh Five Year
(1985 – 90) 5.0% 6.0%
Plan
Eighth Five Year
(1992 – 97) 5.6 % 6.8%
Plan
Ninth Five Year Plan (1997- 2002) 6.5% 5.4%
Tenth Five Year Plan (2002 – 2007) 8% 7.6%
Eleventh Five Year
(2007 – 2012) 9% 8%
Plan

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Twelfth Five year
(2012-2017) 8% –
Plan

Here are some of the notable achievements and failures of the five-year plans in India:
Achievements:
1. Agricultural Growth: The five-year plans played a significant role in boosting
agricultural productivity and food production in India. Various irrigation projects,
research and development, and infrastructure development helped improve agricultural
practices and increase yields.
2. Industrial Development: The plans emphasized industrialization and the development
of key sectors such as steel, coal, power, and heavy machinery. This led to the
establishment of several public sector enterprises and contributed to India's industrial
growth.
3. Infrastructure Development: The five-year plans focused on developing
infrastructure, including transportation, communication, and power networks.
Construction of roads, railways, ports, and power plants improved connectivity and
facilitated economic activities.
4. Education and Healthcare: The plans emphasized the expansion of education and
healthcare facilities. Significant investments were made in building schools, colleges,
hospitals, and primary health centers, leading to increased literacy rates and improved
healthcare outcomes.
5. Poverty Alleviation and Social Welfare: The plans aimed to reduce poverty and
improve the standard of living for marginalized sections of society. Initiatives like the
Integrated Rural Development Program (IRDP) and the National Rural Employment
Guarantee Act (NREGA) provided employment opportunities and social security
measures.

Failures:
1. Implementation Challenges: The execution of the five-year plans faced various
challenges such as delays, inadequate monitoring, and corruption. These factors often
hindered the effective implementation of planned projects and targets.

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2. Regional Imbalances: Despite efforts to promote balanced regional development, the
plans struggled to address regional disparities. Disparities between rural and urban
areas and the uneven distribution of resources remained persistent challenges.
3. Inefficient Public Sector: The expansion of the public sector during the plans led to
the growth of inefficient and bureaucratic institutions. This often resulted in low
productivity, wastage of resources, and a lack of competitiveness.
4. Limited Agricultural Reforms: While the plans focused on agricultural growth, they
fell short in implementing comprehensive reforms in the agricultural sector. Issues such
as fragmented land holdings, inadequate access to credit, and lack of modern
technology persisted, limiting the sector's potential.
5. Inadequate Employment Generation: Despite efforts to create employment
opportunities, the plans struggled to generate sufficient jobs to meet the growing
population's demands. This resulted in unemployment and underemployment,
particularly among the youth.

It is important to note that the achievements and failures of the five-year plans varied across
different plan periods and were influenced by factors such as changes in government policies,
global economic conditions, and internal challenges faced by the Indian economy.

During this period, China aimed to achieve sustainable and balanced economic growth while
focusing on social development and environmental protection. The plan emphasized shifting
the economic model from being export-driven and investment-led to being more consumption-
driven and innovation-oriented. Some of the key goals and priorities of the 12th Five-Year Plan
included:
1. Economic Restructuring: The plan aimed to rebalance the economy by reducing
reliance on exports and investment, and promoting domestic consumption and services
sector development.
2. Innovation and Technology: There was a focus on promoting innovation, research
and development, and upgrading industries to enhance China's competitiveness in the
global market.
3. Urbanization: The plan aimed to promote sustainable urbanization, improve
infrastructure, and provide better living conditions for the growing urban population.
4. Social Welfare: The plan emphasized the development of social welfare programs,
including healthcare, education, social security, and poverty alleviation.
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5. Environmental Protection: Addressing environmental challenges and promoting
sustainable development were key priorities, including reducing pollution, conserving
resources, and promoting clean energy.

It's important to note that plans and policies may have evolved since 2015, and I do not have
information on any specific developments or revisions to the 12th Five-Year Plan after my
knowledge cutoff in September 2021. For the most up-to-date information, it would be best to
refer to official sources or recent news updates on China's economic and social development
plans.

2.3. The Twelfth Five-Year Plan (2012-2017):


o This plan aimed to achieve faster, sustainable, and more inclusive growth.
o It focused on infrastructure development, skill enhancement, and promoting
innovation and entrepreneurship.
o The plan also highlighted the importance of inclusive and sustainable
development.
o The Twelfth Five Year Plan (2012-2017) was the last plan period for India’s
planning process.
The Period after the Twelfth Five-Year Plan:
o Since the completion of the Twelfth Five-Year Plan, India has not formulated
any new official Five-Year Plans.
o After the completion of the twelfth five-year plan, the Indian government
decided to discontinue the Five-Year Plan system and shift to a more flexible
approach focused on achieving sustainable development goals.
o The government has shifted its focus towards long-term strategic planning,
policy initiatives, and sector-specific programs such as "Make in India,"
"Digital India," "Smart Cities Mission” and “National Development
Agenda,” which is aimed at achieving sustainable development goals.

2.4. NITI Aayog


NITI Aayog, short for National Institution for Transforming India, is a policy think tank of the
Government of India. It was established on January 1, 2015, to replace the Planning

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Commission. NITI Aayog serves as the premier policy-making body that provides strategic and
technical advice to the central and state governments in India.

The primary objective of NITI Aayog is to foster cooperative federalism by involving the states
in the economic policy-making process. It promotes sustainable development by formulating
medium and long-term strategic plans for various sectors of the economy. NITI Aayog aims to
achieve inclusive growth, enhance the welfare of citizens, and ensure effective governance.

The key functions of NITI Aayog include:


1. Formulating strategic and long-term plans for economic development.
2. Providing technical expertise and guidance to the central and state governments.
3. Monitoring and evaluating the implementation of policies and programs.
4. Collaborating with international organizations and research institutions to exchange
knowledge and best practices.
5. Promoting innovation, entrepreneurship, and the use of technology for development.
6. Addressing specific policy issues and challenges through specialized task forces and
committees.
7. Facilitating cooperative federalism by engaging with state governments and promoting
their participation in policymaking.

NITI Aayog consists of a governing council headed by the Prime Minister of India, with Chief
Ministers of states and union territories, along with senior government officials and experts, as
its members. It operates through various verticals and specialized divisions to focus on different
sectors and policy areas.

Overall, NITI Aayog plays a crucial role in shaping India's development agenda and providing
policy recommendations to achieve sustainable and inclusive growth.

From Five-Year Plans to NITI Aayog:


Transforming India's Economic Planning Paradigm
The transition from the traditional five-year budget framework to the establishment of the NITI
Aayog as a transformational step in Indian economic policy. These changes marked a departure
from the traditional five-year budget and were aimed at providing market-oriented reforms and

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inclusive growth. Let us explore the reasons for these changes, the role of NITI Aayog and a
shift towards collaborative results-driven policies.

Replacing the Planning Commission


In 2014, the NDA government decided to abandon the traditional five-year monetary policy
framework in India. There were several reasons for this decision, The Government of India
recognized that the centrally planned approach to the traditional five-year plan was
incompatible with the changing global economic environment and India’s aspirations for
economic liberalization and required market-oriented reforms ín In addition to restructuring
large enough to allow market forces to affect in addition, the government emphasized the
importance of decentralized planning and empowerment of state and local governments in the
decision-making process to meet specific needs and priorities emphasizing the role of each
category. The aim of this approach was to ensure equitable development policies, which have
encouraged equitable development in different countries. Moreover, it moved away from short-
term goals and deadlines and adopted a long-term vision of economic growth. Through a
holistic and strategic approach, they aimed to develop a comprehensive vision of the country’s
future development and prosperity, enabling it to adapt to emerging challenges and
opportunities.

Although the traditional five-year plan was discontinued, the government continued to
implement sector-specific policies and projects. These targeted sectors such as infrastructure,
agriculture, health, education and technology. Initiatives like Make in India and Digital India
are examples of the government’s commitment to growth and development through targeted
policies focused on specific sectors, meaning deviations from strategic plans as it is located
around the center.

NITI Aayog: A Policy Think Tank for Collaborative Governance


Established in 2015, the NITI Aayog replaced the Planning Commission of India and took on
a new role in formulating the country's economic policy and development plans. Unlike the
Planning Commission which had a centralized planning mechanism, the NITI Council acts as
a policy think tank, providing strategic and technical advice to government encouraging
cooperation It focuses on joint planning and on evidence production, with participation by
states in policy formulation and implementation. The NITI Aayog has come out with a long-
term vision document titled "Strategy for a New India @75", which outlines the
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government's priorities and objectives for the next 15 years in line with the Sustainable
Development Goals.

In addition, it prepares a three-year plan outlining key policy interventions, reforms and
initiatives to achieve short-term objectives Draw focus away from output-based planning
Develop local plans and initiatives in areas like infrastructure, digital transformation,
sustainable development, collaborate with ministries, states and stakeholders for
comprehensive planning and effective implementation Through NITI Aayog has played a
pivotal role in restructuring the Indian economy modernize it, promote inclusiveness and
promote sustainable development.

Terminal Questions
Section A (5 Marks)
1. Summarize the long-term objectives of Five-Year Plans in India
2. Explain the major milestones related to economic planning in India.
3. Describe the functions of NITI Aayog.

Section B (9 Marks)
1. Enumerate the objectives of economic planning in India.
2. Discuss the various achievements and failures of the five-year plans in India.

Section C (12 Marks)


1. Explain in detail about the various Five-Year Plans in India

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