CHAPTER 3-EVOLUTION OF THE INDIAN ECONOMY support.
support. If India would have gone for import this would have required enough foreign reserves and a
After 1757, when the East India Company took over the governance of Bengal, the British relationship
with India became exploitative, as exports to Britain and opium exports to China were financed out of
the tax revenue from Bengal. There was also no significant transfer of European technology to Asia.
THE BACKGROUND: At the time of inepenence: 1. During the half century before India became
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independent, the world was having accelerated development and expansion in its agriculture and
industry on the shoulders of the active role being played by the states, with the same happening in the
UK itself 2. Throughout the colonial rule, the economic vision that the state had was to increase lndia's
capacity to export primary products, and increase the purchase/import of the British manufactured
goods and raise revenues to meet the drain of capital as well as meet the revenue requirements of the
imperial defence. 3. The social sector was a neglected area for the British rulers which had a negative
impact on the production and productivity of the economy. At the time of Independence, its literacy was
only 17 per cent with 32.5 years of life expectancy at birth. 4. Industrialisation of India was also
neglected by the colonisers-the infrastructure was not built to industrialise India but to exploit its raw
materials. Indian capitalists were highly dependent on British commercial capital and many sectors of
the industry were dominated by British firms. 5. The pre-independence period was altogether a periodof
near stagnation showing almost no change in the structure of production or in the levels of productivity
-
the aggregate real output during the first half of the 20th century estimated at less than 2 per cent a
year or less. The repeated famines and disease epidemics during the second half of the nineteeth
century and the first half of the twentieth century show the greatest socio-economic irresponsibility and
neglect of the British government in India. the dominant lot of people which included businessmen an
politicians, who were going to lay down the foundation stones of the independent Indian economy were
almost having consensual view, even before the Independence, on many major strategic issues:() State
/governments should be given a direct responsibility for development. (i) An ambitious and vital role to
be assigned to the public sector. (i) Necessity for the development of heavy industries. (iv)
Discouragement to foreign investment. (v) The need for economic planning
PRIME MoVING FORCE: AGRICULTURE VS. INDUSTRY: Every economy has to go for its
development through exploitation of its natural and human resources. The availability and non
availability of resources (natural as well as human) are not the only issues which make an economy
decide whether to opts for agriculture or industry as its prime mOving force. Ihere are many more socio
political compulsions and objectives which play their roles in such decision making.* The political
leadership selected industry as the leading force of the economy after Independence (already decided
by the dominant group of the nationalist leaders way back in the mid-1930s when they felt the need for
economic planning in India before seting up the National Planning Committee in 1938) the
declaration of industry as its prime mover seems illogical as India lacked all pre-requsites: (0 Almost no
presence of infrastructure sector, i.e., power, transportation and communication. (i) Negligible
presence of the infrastructure industries (ii) Lack of investible capital-either by the government or the
private sector. (iv) Absence of required technology to support the process of industrialisation and no
research and development. (v) Lack of skilled manpower. (Vi) Absence of entrepreneurship among the
people. (vi) Absence of a market for industrial goods. (vii) Many other socio-psychological factors
which acted as negative forces for the proper industrialisation of the economy. agriculture sector was
the obvious choice as the prime moving force of the economy because: (0 The country was having the
natural resource of fertile land which was fit for cultivation. (i) Human capital did not require any kind
of higher training. By only organising our land ownership, irrigation and other inputs to agriculture,
India could have gone for better prospects of development. Once there was no crises of food, shelter,
basic healthcare, etc., to the masses, one goal of development could have been realised-a general
welfare of the people. Then India could have gone for the expansion of industries. (similar thing was
done by People's Republic of China did the same in 1949-it declared agriculture as its prime moving
force for the economy. The surplus generated out of agriculture was suitably invested to develop the
pre-requisites for industrialisaton and the country went for it in the 1970s) reasons India went for
industry as its prime moving force in place of an obvious and logical choice of agriculture: () as Indian
agriculture was using traditional tools and technology, its modernisation as well as future
mechanisation (later to some extent) would have been blocked due to the lack of indigenous industrial
natural dependence on foreign countries. () The dominant ideology around the world as well as in the
WB and the IMF was in favour of industrialisation as a means to faster growth, which could be
translated into faster development. It was possible not only to industrialise faster on these supports of
the organisations but there was a hope for emerging as an industrial exporter in the future. Basically,
going for the agriculture sector was considered a symbolof backwardness' at that time. (ii) The
second World War has proved the supremacy of defence power. For defence a country needs not only
the support of science and technology, but also an industrial base. By opting for industries as the prime
moving force of the economy India tried to solve many challenges simultaneously-first, industry will
give faster growth, second, agriculture will be modernised in time and third the economy will be able to
develop its Own defence against external threats. (iv) Even before Independence, there was a socio
economic consensus among social scientists along with the nationalist leaders, that India needed a
boost towards social change as the country lagged behind in the areas of modernisation. Such felings
also made the political leadership of the time go in favour of wholehearted industrialisation. (v) By the
time India got her independence the might of industrialisation was already proven and there were no
doubts regarding its efficacy. The last decade of the 20th century (i.e., the decade of the 1990s) saw
major changes takingplace in the world economic idea about the agriculture sector. It was no more a
symbol or backwardness tor an economy that empnasises on the agriculture sector as the engine of
growth and development. A major shift took place in the Indian economic thinking when the
government announced in 2002 that from now onwards, in place of industry, agriculture will be the
prime moving force of the economy; announced by Planning commisSion as the economy commenced
the Tenth Plan (2002-07). As per the Planning Commission such a policy shift will solve the three
major challenges faced by the economy: (0) Economy ill be able to achieve food security with the
increase in agricultural production. Besides, the agricultural surplus will generate exports in the
globalising world economy benefiting out of the WTO regime. (i) The challenge of poverty alleviation
will be solved to a great extent as the emphasis will make agriculture a higher income-generating9
Occupation and induce growth in the rural economy by generating more gainful employment. (i) The
situation of India as an example of 'market failure' will cease. Agriculture and allied activities remained
the major source of livelihood for nearly half of the Indian population-its share in employment being
48.7 per cent, with 16.5 percent contribution in the GDP, Once India started the process of economic
reforms, it commenced in the industrial sector. reforms in the agriculture sector were initiated a bit late
(early 2000s) because: () Agriculture being always open for the private sector, it was now difficut to go
for further privatisation for encouraging investments. (1) Lack of awareness about the contOurs of the
economic reforms among the farm community. (in) heavy dependency of population on agriculture for
livelihood could not permit the government to go for the right kind of agricultural reforms at the right
time-first, the industrial sector (via manufacturing) needed expansion to lessen the population
dependency on the agriculture sector. The major reform needs and the hurdles being faced may be
summed up in the following points: (0) A national agri-market is the need of the hour, but there lacks a
political will among the majority of states to put in place a right kind of Agricultural Produce Market
Committees. () The need of promoting corporate investrment in the farm sector is hurdled by the lack
of an effective and transparent land acquisition law. (in) Labour reforms needs fine-tuning to promote
industrial farming, which is hurdled by the complex labour laws of the country.(iv)Farm mechanisation
is hindered by the lack of investment in industries. (v) Research and development needs huge
investment from the private sector, but there lacks a conducive atmosphere for it. (vi) Right kind of
downstream and upstream requirements' together with a proper kind of 'supply chain management' is
absent in the area of agri-goods. (vi) Expansion of the right kind of commodity trading in agri-
commodities. (vii) Strengthening the farm sector to face the competition posed by the agricultural
sector of the developed world, with regard subsidies and prices, in wake of the globalising world
economy. (ix) Making farming remunerative to check farm crisis of contemporary times. right policy
steps in this sector requires a high degree of federal maturity in the country which can be created by
increased awareness among tarmers together with the right government support to prevent farm
distress
PLANNED AND MIXED ECONOMY: need for economic planning for Independent India: India was not
only facing regional disparities at the level of resources, but inter-regional disparities were also
prevalent. Mass poverty was to be remedied.Through economic planning, the government could play
an active role in the allocation of resources and mobilise them for equitable growth and development.
Though lIndia was constitutionally declared a federation of states, in the process of planning, the
authority of regulation, directing and undertaking economic activities got more and more centralised in
the Union government. contemporary experiences which influenced india to go for a planned economy
1. the Great Depression of 1929 and the reconstruction challenges after the second world War had
made expets to conclude in favour of a state intervention in the economy 2. it was the same time that
the command economies (i.e., state economies) of the soviet Union and the East European countries
started making news about their faster economic growth. 3. The idea of a dominant role for the state in
the economy to neutralise market failure situations (as happened during the period of the Great
Depression when demand fell down to the lowest levels) was gaining ground around the world. .
EConomic planning was considered to help states to mobilise resources to realise the prioritised
objectives in a well-defined time frame. organisational nature of the economy-1. The idea of
planning in India was inspired from the soviet planning which was a command economy and did not
Suit the requirements of democratic India, which was till now a privately owned economy. 2. Though
there was an example of a capitalistic-democratic system going tor planning, France by that time
(1947), it had little experience to offer the Indian policymakers (France had gone for a mixed economy
by 1944-45). 3. the roles of the state and the market was defined clearly by the planners in the very
first Plan itself. it stated that though a more or less complete nationalisatiorn of the means of
production and extensIve system of government controls on the allocation of resources and on the
distribution of the national product may seem promising, it was neither necessary nor desirable when
viewed against the background of the objectives and in the light of practical considerations. Public
ownership of the means of production may be necessary in certain cases; public regulation and control
in certain others. Planning under recent conditions thus means, in practice, an economy guided and
directed by the state and operated partly through direct state action and partly through private initiative
and effort. East Asian Miracle: The East Asian economies were able to sustain a high growth rate over
three decades. this had revived again the discussions regarding the respective roles of the state and
the market as well as the nature of the state's role in the economy. The kind of conclusions drawn were
very similar to the view presented in India's First Plan itself which was presented by the World Bank in
1993. The real nature of the Indian brand of mixed economy, though beautifully outlined in 1951 itself,
went through a process of detailed evolution in the decade of the 1950s. By the end of the 1950s, the
concept of the mixed economy was almost buried and rose from hibernation only by mid-1980s and
finally early in 1990s, in the wake of the process of economic reforms. In a sense, India was
increasingy getting more dependent on the private sector for the promotion of growth and
development. in early 2015, the Government replaced the Planning Commission, with the NITI Aayog
with the aim of overhauling' the very process and method of planning in the country. Co-operative
federalism, bottom-up approach, holistic and inclusive development with the need of an Indian model of
development are some of the hallmarks of the new design.
EMPHASIS ON THE PUBLIC SECTOR: since the state was to be given an active and dominant role in
the economy, a giant structure of the government-controlled enterprises to be known as the public
sector undertakings (PSUs) naturally developed. reasons behind the ambitious expansion of the PSUs
can be explained in the face of the following major requirements: 1. Infrastructural Needs- ~At the eve
or Independence, India was having almost no presence or basic intrastructure liKe power, transport and
communication. There was just a beginning in the area of railways, and post and telegraph. Power was
restricted to selective homes of government and the princely states. Expansion of the infrastructure
sector was considered not possible by the private sector of the time as they could possibly not manage
() heavy investment (in domestic as wellas foreign currencies), (i) technology, (ii) skilled manpower,
and (iv) entrepreneurship. ~ Even if these inputs were available to the private sector, it was not feasible
for them as there was no market for such infrastructure. They needed either subsidised or almost free
Supply as the masses lacked the market-determined purchasing capacity. this has led to such a
*
dominant state presence in Indian infrastructure sctor that many areas have obvious government
monopolies-as in power, railways, aviation, telecommunication, etc. 2. Industrial Needs-~ For
industrialisation to take place, the presence of certain industries is essential (theese are called by
different names-basiC industries, infrastructure industries, core industries, core sector). To the initial
group of six industries, in 2013 two new industries (Natural Gas and Fertilisers) were added which hada
combined weight of 42.2 in the new series of Index of Industrial Production (IP) is 40.2. industries
(their percentage weights in lIP given in brackets) (0) Refinery products (11.29) (i) Electricity (7.99) (ii)
:
Steel (7.22) (iv) Coal (4.16) () Crude Oil (3.62) (vi) Natural Gas (2.77) (vi) Cement (2.16) (vii) Fertilisers
(1.06)Similarto the infrastructure sector, these basic industries also require high level of capital,
technology, skilled manpower and articulation in entrepreneurship which was again considered not
feasible for the private sector of the time to manage. Even if the private sector supplied goods from the
"basic industries, they might not be able to sell their products in the market due to the lower purchasing
power of the consumers. Perhaps, that is why again the responsibility of developing the basic industries
was taken up by the government. 3. Employment Generation -
Giving employment to the poor people
is a time-tested tool of poverty alleviation. The PSUs were thought to create enough jobs for the
employable workforce of the economy~to bring about social change in the country the government
decided to provide reservations to the weaker sections of thesociety in government jobs. The PSUs
were supposed to put such jobs at the disposal of the government which could have been distributed
along the decided reservation policy The funds for highly capital-intensive sectors in which the
government companies were going to enter were managed with sources like taxation, internal and
external borrowing and even taking last refuge in the printing of fresh currencies. The government went
to justify the high taxation and heavy public indebtness in supplying employment to the Indian
employable population. The PSUs were considered by the government as the focus of the trickle
down effect. The government did everything to set up and run the PSUs as the benefits were supposed
to percolate to the masses, finally reinforcinggrowth and development in the country. 4. Profit and
Development of the Social Sector~ The investment to be made by the government in PSUs was in the
nature of asset creation and these entities were to be involved in production activities. The goods and
services the PSUs produced and sold provided disposable income to the government. ~ PSUs were
visioned as revenue generators for the development of the social sector. The government had a
conscious policy of spending the income generated by the PSUs in the supply of the 'social goods like
education, healthcare, nutrition, drinking water, social security, etc. ~ Due to many reasons the PSUs
would not be able to generate as much profit as was required for the healthy development of the sOCial
sector eventually hampered the availability of public goods in the country. 5. Rise of the Private Sector -
PSUs, through supplying the infrastructure and the basic industries to the economy, slowly created a
base for the rise of private sector industriesother aims of PSUS connected areas of developmental
concerns, such as, self-sufficiency in production, balanced regional development, spread of small and
ancillary industries, low and stable prices, and long-term equilibrium in balance of payment.~ By the
mid-1980s consensus across the world (including the IMF & World Bank) regarding the inefficiency
-
and under-performance of the PSUs (in the wake of the idea of the Washington Consensus); led to a
process of privatisation and disinvestment of the PSUs among majority of the economies in the world
incl india By mid-2000s (in the wake of the US sub-prime crisis) new consensus emerged among the
-
international organisations that state/government need not exit the economy; slowed down
privatisation of the PSUs across the world - India ~ less ambitious disinvestment policy from 2003-04
to 2015-16 (the government has decided to own controlling shares among the divested PSUs). ~ Since
2016-17 financial year, the government has decided to restart the process of 'strategic disinvestment
in which the ownership of the PSUs may also be transferred to the private sector). Such a policy was
also launched by the government in 2000 which was paused by the UPA-I in 2003-04. The government
has also decided in favour of selling increased shares of the PSUs to the foreign institutions, at par with
the domestic financial institutions. [because of need of promoting investment in the economy; need of
the government to quit undesirable areas and expanding into areas of need and where private sector
will not enter(welfare actions); revenue generation by stake sale and enhanced profit from the PSUs (by
selling majority stakes in the PSUs at one hand the government will de-burden itself from the owner's
responsibility, while on the other hand its share of revenue from the divested PSUs will increase as the
new owner will run the enterprise on market principles); etc.
CHAPTER4- ECONOMIC PLANNING
DEFINITION: by H. D. Dickinson economic planning is, the making of major economic decisions
what and how much is to be produced and to whom it is to be allocated by the conscious decision of a
determinate authority, on the basis of a comprehensive survey of the economic system as a whole."
National Planning Committee, set up in 1938 by the Indian National Congress which, for the first time,
tried to define planning (in 1940, though, its final report was published in 1949) in India according to
which "Planning, under a democratic system, may be defined as the technical coordination, by
disinterested experts of consumption, production, investment, trade, and income distribution, in
accordance with social objectives set by bodies representative of the nation. Such planning is not only
to be considered from the point of view of economics, and raising of the standard of living, but must
include cutural and spiritual values, and the human side of life." According to the Planning
Commission, Planning involves the acceptance of a clearly defined system of objectives in terms of
which to frame overall policies. It also involves the formation of a strategy for promoting the realisation
of ends defined. Planning is essentially an attempt at working out a rational solution of problems, an
attempt to coordinate means and ends; it is thus different from the traditional hit-and-miss methods by
which reforms and reconstruction are often undertaken", working definition of planning: a process of
realising well-defined goals by optimum utilisation of the available resources. While doing economic
planning the government sets developmental objectives and attempts to deliberately coordinate the
economic decision making over a longer period to influence, direct and in some cases even to control
the level and growth of a nation's main economic variables (i.e., income, consumption, employment,
saving, investment, exports, imports, etc.).~ An economic plan is simply a set of specific economic
targets to be achieved in a given period of time with a stated strategy. It may be either comprehensive
plan which sets targets to cover all major aspects of the economy or a partial plan which sets such
targets for a part of the economy (i.e., agriculture, industry, public sector, etc.). AS per the working
definition: (0) Planning is a process: The government first chooses social objectives, then sets various
targets (i.e., economic targets), and finally organises a framework for implementing, coordinating and
monitoring the development plan. Til some goals and objectives are left, the process might continue. (ii
Planning must have well-defined goals: planning must have some goals and those goals should be well-
defined so that the governmen's discretionary intervention in the economic organisation could be
democratically transparent and justified. Even in the non-democratic nations (i.e., erstwhile USSR
Poland, China, etc.) the goals of planning were clearly defined. (in) Optimum utilisation of the available
resources: a. way of utilising the resources: TI the idea of sustainability emerged (1987) experts tried
to maximise the resource exploitation. since then sustainable approach was included into planning
and here in entered the idea of utilising resources at its possible best, so that environmental
degradation could be at its minimum and the future generations could also be able to continue with
their progress. b. available natural resources: Most of the countries doing planning tried to utilise their
indigenous resources, yet some tried to tap the exogenous resources too, taking leverage of their
diplomatic acumen. planning had emerged as a method or tool of utilising resources to achieve any
kind of goals for policymakers: () Trying to achieve a particular size of family for different countries
(family planning) (i) The process of providing suitable physical and social infrastructure for the
upcoming urban areas (town/urban planning) (ii) A country trying to optimise the use of its revenues
for different categories of expenditures (financial planning/bugeting) (iv) at the macro and micro levels,
there might be any number of planning processes-agricultural planning, industrial planning, irrigation
planning, road planning.house planning, etc. Many countries announced that they will be planned
economies, yet some others didn't go for any such policy announcements inspite of having many
aspects of economic planning. The soviet Union, Poland, China, France, India are examples of the
former category while the USA, Canada, Mexico fall in the latter category.
ORIGIN AND EXPANSION OF PLANNING: 1. Regional Planning: ~USA first used regional planning
afterthe Tennessee Valley Authority (TVA) was set up in 1916-for a large-scale rehabilitation in south-
eastern USA covering parts of seven states. primary aim: flood control, soil conservation and
providing electricíty; also involved in many related activities such as industrial development, forestry,
wildlife conservation, town planning.construction of road and rail, encouraging sound agricultural
practices and malaria control in the defined region. ~ success of TVA in realising its well-defined goals
inspired countries around the world in the coming decades-the Damodar Valley Corporation (DVC) in
-
India (1948), the Volta River Project in Ghana (1966), etc. 2. National Planning: The official experiment
in the area of national planning is rooted in the Bolshevik Revolution of Russia (1917) [the Soviet Union]
Joseph Stalin announced its policy of central planning lcaled Gosplanj for the Soviet Union along with
collectivisation of agriculture and forced-draft industrialisation The Soviet Union went for its first five
year plan for the period 1928-33 with the slogan "great leap forward" In the first Soviet Plan, heavy
industries was favoured over light industry, and consumer goods were the residual sector after all the
other priorities had been met. We see the same emphasis in the Indian planning process. During the
early 1940s, the concept of national planning was borrowed by France and the world saw national
planning being initiatedby a hitherto capitalist economy as well as by a non-centralised political system
(e, democratic system) arter announcing itself as a mixed economy
TYPES OF PLANNING [based on type of economic system prevalant in the countryl:1. Imperative
Planning ldirective/target planningl: planning process followed by the state economies (.e, the
*
socialist or communist) is known as the imperative planning. two main variants socialist system and
-
communist system (i.e., China of the past) In the case of the Soviet Union a little bit of 'market' did
exist Basic features of such planning: (0) Numerical (i.e., quantitative) targets of growth and
development are set by the plan. () As the state controls the ownership rights over the resources, it is
very much possible to realise the above-cited planned targets. (11) almost no role for the market, no
price mechanism with all economic decisions to be taken in the centralised way by the state
government. (v) no private participation in the economy Such economies are also Kknown as the
Centrally Planned Economies-the USSR, Poland, Hungary, Austria, Romania, etc., and finally China. by
the late 1980s, the whole world of the state economies had moved towards market economy by the late
1980S through economic rerorms to overcome stagnation in their economies leading to death or
imperative planning. 2. Indicative Planning: planning in systems which were nether state economies
*
nor communist/socialist political systems identifying features of indicative planning: (0) they were
mixed economies. (i) works through the market (price system) rather than replacing it. (i) side by side
to setting numerical/quantitative targets, a set of economic policies of indicative nature is also
announced by the economies to realise the plan targets. (iv) the indicative nature of economic policies
basically encourage or discourage the private sector in its process of economic decision making
rance commenced its Tirst siX year plan in 194/ [ Known as Monnet Plan (he was the Tirst chairman
of the General Planning Commission and the then Cabinet Minister for planning in France)]. This plan is
also sometimes described as the basic sector Planning as the government had selected eight basic
industries as the core of development in which the nature of planning was almost imperative, i.e., under
state monopoly. Other economic activities were open for private participation for which indicative kind
of policy-planning. in 1965, UK commenced planning with the National Plan and abandoned in 1966
after being overtaken by events (a balance of payment crisis resulting ina deflationary package of
measures). Since then the UK never went for planning. USA never went for a formal national planning.
We may have a reflex of indicative planning in the USA if we look at the Presidential Reports which
come after regular intervals which are just 'benchmarks in the area of resource utilisation and
governmetal announcements of its objectives
other types of planning: from the territorial point of view, planning could be regional or national. From
the political point of view planning could be central, state or local. Similarly, from the participatory point
of view, planning has been categorised into centralised and decentralised. From the temporal point of
view planning could be long-term or short-term (in relative sense). Similarly, planning can be sectoral
and spatial too. While sectoral planning emphasises the specific sector in the economy (i.e., agriculture,
industry or the services), in the spatial planning development is seen in spatial framework (which aims
at influencing the distribution of people and activities in spaces). classification of planning, on the
basis of value system of the society- 1. The systems approach: it is largely value-neutral and remains
fully focussed on the economic aspects of development. Socio-cultural variables are not given much
importance in it and it goes quite mechanically targeting the planned goals. The most important part of
this approach was its neutrality to the social diversities. Isuited India perfectly} 2. The normative
approach: t is value-based, remaining in contormity to the value system of the target population
-having quite diversified approach to development It got recognition among the experts and
policymakers after two major international events-firstly, it was the publication of the first World
Happiness Report (2012) and secondly, the World Development Report 2015 (World Bank) The
Economic Survey 2010-11 is the first document of the Government of India which advocates the need
for a normative approach to planning in India. It is believed that until a programme/scheme run by the
governments are not able to connect with the customs, traditions and ethos of the population, their
acceptability will not be of the desired level among the target population. with Government of India
replacing of the erstwhile Planning Commission by the NITI Aayog (a policy think tank) in jan 2015,
India has officially moved towards normative planning as specitfied by its guiding vision and functions

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