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Economic Policy Reforms in Post Independence India

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Economic Policy Reforms in Post Independence India
Author: Prof. Devashree Roychowdhury (B.Arch, M.Plan, M.Sc), Architecture & Urban Planning, P P
Savani University, Surat, Gujarat, India; Founder, CTW India - Planning Cities
Email ID: devashree.roychowdhury@ppsu.ac.in; ctw.planningcities@gmail.com

Abstract

The Indian economy post-independence has seen many highs and lows since then and now in a
span of 75 years. Currently, India stands as the world's fifth-biggest economy after overtaking the
United Kingdom which ruled India for a period of 200 years. This paper discusses the key changes
made to the existing laws and policies in India after 1947 to stabilize the economy and improve
India’s financial sector. These significant changes made to the economic policies are referred to as
the ‘economic reforms’.
This paper also highlights the genesis of India’s private enterprise and the measures taken to boost
the private sector and to promote the 'ease of doing business’ in India. It also focuses on the role
of private enterprises in contributing to India’s ranking in the global economy in the present times.
The first part of the paper introduces the 12 Five-year Plans from 1951 to 2017 and the Key
Reforms implemented in India like the Bombay Plan 1944, Nationalization of Banks 1969,
Abolishing Privy Purse 1971, End of Licence Raj 1991, New Economic Policy 1991 (LPG
Reforms), Black Money and Imposition of Tax Act 2015, Foreign Direct Investment (FDI),
Goods and Services Tax (GST), and Demonetization 2016. The second part of the paper focuses
on highlighting India’s approach toward formalizing and revitalizing the economy and most
importantly toward redefining governance and the new measures taken for transforming India’s
development narrative.

Keywords

Economic Policy, Economic Reforms, Development Economics, Post-Independence India,

Private Enterprise, National Planning and Development, Economic Development, Economic
Growth

The first economic model of India was driven by the concept of the state’s primacy over individual
enterprise. “PM Jawaharlal Nehru’s development model envisaged a dominant role of the state as
an all-pervasive entrepreneur and financier of private businesses.” (Mint, 2019) The economic
situation in India at the time of the independence was very unstable with only a marginal (less than
a sixth) number of Indians falling in the literate category. The country was poor because of the
colonization by Britain and the resultant deindustrialization. (Tharoor, 2016) The figures show a
sharp decline in India’s share of world income from 22.6% in 1700 to 3.8% in 1952. Europe’s
share of World Income was 23.3% almost equal to India’s share in 1700. (Kant, 2023)

Before understanding PM Jawaharlal Nehru’s development model, let us understand the Bombay
Plan 1944 – A Plan of Economic Development for India envisioned by a group of leading
industrialists and technocrats in 1944 who assisted in the setting up of the Reserve Bank of India
(RBI) and Federation of Indian Chambers of Commerce and Industry (FICCI). They also
supported the Congress during the freedom struggle and were a part of the Viceroy’s executive
council during World War - 2 (Deccan Herald, 2021)

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The plan’s objective was to triple India’s GDP in 15 years and to raise India’s per capita income
and standard of living. The focus of the plan was to incorporate these objectives in three leaps
spread out over five years, much similar to the design of the five-year plans developed by the
Nehru Government after independence which prioritized agriculture, industrialization and
transition to a services economy. (Deccan Herald, 2021)

As per the study conducted by different analysts, it is considered that India’s businessmen were in
favour of a state-dominated economy. A few others might have a contradicting view of the
previous statement. As established the business community of India needed the government’s
intervention in all fields of business activities and to have a holistic approach toward economic
development.

The Key Factor of the ‘Bombay Plan’ in contributing to India’s economic trajectory was in creating
industries for the production of power and capital goods. Basic goods and consumer goods were
the two segments in which the industry was divided, which included power, mining, metallurgy,
engineering, transport, and cement in the basic part and consumer goods manufacturing in the
second part, also very essential and not to be neglected, giving importance to the setting up of the
small-scale industries. (Desai, Sanjaya, & Baru, 2018) Other focus sectors included irrigation
coverage, soil health and increasing productivity through cooperative farming in Agriculture.

The plan not only focused on industrial and commercial development but also on defining the
standard of living by not just income but through social parameters like a balanced diet, shelter,
clothing, health and education.

“The plan elucidated 3 principles underlying their choice of an economic system, stating, first, that
there should be sufficient scope for the play of individual initiative and enterprise; secondly that
the interests of the community should be safeguarded by the institution of adequate sanctions
against the abuse of individual freedom, and thirdly that the state should play a positive role in the
direction of economic policy and the development of economic resources”. (Desai, Sanjaya, &
Baru, 2018) (Kant, 2023)

The National Planning Committee (NPC) was set up and appointed in 1938 to formulate
economic principles for an independent nation - India. (Nehru, 1946) The proposed Bombay Plan
was an effort to design an economic roadmap for India led by the private sector, overlapping with
the NPC of Congress. “However, the crucial difference remained in the role of the public and
private sectors.” (Kant, 2023)

The Indian government set up the planning commission in 1950 for planning and tracking India’s
growth. The tasks included resource allocation, implementation and appraisal of five-year plans.
“The need for centralized planning was agreed upon by the private sector and the government
alike as reiterated by the NPC of the congress in 1938 and the Bombay Plan in 1944, which had
elucidated the need for a central planning body to direct resources and investments”. (Kant, 2023)

Genesis of the Private Enterprise

According to history, a few castes dominated the business industry. “Trading, banking and general
business activities remained in the domain of a few communities and regions.” (Kant, 2023) , In
the 1950s in Urban India, as described in the book ‘Made in India’, ‘Gadgil’ mentions the trader-
merchant class held a high socioeconomic status without any political influence. Individual and
family-run businesses were seen as prominent in that context and most of the families were also

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able to accumulate a generous amount of wealth and resources out of their business ventures. It
is to be noted that even with sufficient accumulation their investments were in the form of
jewellery and mostly limited to their homes rather than investing outside in other industries.

As per the records, trader’s associations existed since the 15th century. The most documented
system comes from the merchants of Gujarat. Some of the prominent issues during that time were
the problems of slow modes of transportation which affected internal trade negatively. The
markets were divided into small regional segments instead of large and unified ones. As established
that the business system at that time was decentralized and disconnected and many smaller traders
and brokers were involved and controlling the selling and trading of the products. Presently, we
have a similar kind of system working in many of the agricultural markets. From the pre-colonial
times, financing and brokerage aspects were relevant within the scope of trader-merchants,
artisans, weavers, craftsmen and others. The Author in his book ‘Made in India’ discusses initial
banking houses controlled by trader’s associations during that period and specialized in 3
functions: the first was money changing as several currencies were in circulation in India; the
second was issuing bills of exchange securely. “The bigger banking houses usually had a Pan-India
reach through a network of correspondents” (Kant, 2023); the third was the role they played in
the governance finance sector.

The Indian industry faced significant challenges because of the impact of colonial policy and
India’s deindustrialization. “From being a net exporter of goods for much of its history, India
became a net importer” (Kant, 2023), where India had an edge over the sectors like garments and
textiles. The business landscape in India was hugely impacted after the start of the Industrial
Revolution in Great Britain. As noted, “it brought down the prices of textiles, steam-powered
vessels, and canals drove down transportation costs”. This eroding competitiveness led to the
deindustrialization of India. As mentioned in the book ‘Made in India’, the author notes that
“Clingingsmith and Williamson argue that it was due to supply side issues and not the global price
movements that Indian industry lost competitiveness” during that time. Political upheaval was
another issue caused due to the eroding competitiveness of the Indian Industry, post the
dissolution of the Mughal Empire and natural calamities.

It has been established by the researchers that the 'colonial period' created opportunities for private
enterprise and thus, new forms of banking, managing agencies and chambers of commerce
emerged. A few of the important events related to this sector is the Joint Stock Companies Act,
of 1857 which helped in creating the corporate sector and the emergence of the system of
managing agencies. In 1970, the ‘Government of India’ abolished this system and it played an
important role in the development of modern Indian Enterprise.

India’s Five-Year Plans

The first five-year plan launched in 1951 focused on the agriculture and irrigation sector for making
up for the foreign reserve losses on food grain imports. (Krishna, 2013) The plan was a success
with an economic growth of 3.6% much higher than the target growth of 2.1%. The 1951 - 1956
plan was a success because of the achievement of food, self-sufficiency and control of prices. The
first plan implemented by the Nehru government was based on Harrod-Domar Model.

The second five-year plan from 1956 to 1961 was based on the Mahabanobis model with the prime
objective of rapid industrialization focusing on heavy industries and capital goods. “The industrial
policy of 1956 followed the socialist pattern of the society which in the words of the planning
commission meant: the basic criterion for determining the lines of advance must not be private

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profit, but social gain and that the pattern of development and the socio-economic relations should
be so planned that they result not only in appreciable increases in national income and employment
but also in greater equality in incomes and wealth. Major decisions regarding production,
distribution, consumption and investment., must be made by agencies informed by social
purpose.” (MOSPI, 2014)

The target growth was 4.5% with an actual growth of 4.3%. The second plan was moderately
successful with certain aspects like acute shortage of forex leading to pruning of development
targets and a 30% price rise.

India’s GDP was 24% in 1700; 16% in 1800; 8% in 1900 and 5% in 1947. India’s GDP had fallen
to 5% from contributing a quarter of global GDP in a span of 200-250 years. (Kant, 2023)

The third five-year plan’s agenda from 1961 to 1966 was to make India a ‘self-reliant’ and self-
generating economy. This plan’s top priority was the agriculture sector to support the production,
exports and industry. The target growth was estimated at 5.6% and the actual growth at 2.8%. The
plan was unable to meet the objectives because of the ongoing conflicts with the neighboring
countries (Chinese Aggression, 1962 and Indo-Pak War 1965) and a period of severe drought
1965-66, shifting the focus from agriculture to defence & development.

The fourth plan was postponed by three years because of the failure of the third plan and the
implementation of ‘rupee devaluation’ to boost exports and inflationary recession. The three
consecutive annual plans introduced, focused on the agriculture sector to find solutions to the
prevailing crisis and food shortage.

The fourth plan led by PM Indira Gandhi's government from 1969 to 1974 had two main
objectives of growth with stability and progressive achievement of self-reliance highlighting
agricultural growth rate and family planning programmes. The target growth rate was estimated at
5.7% and the actual growth rate was 3.3%. This plan wasn’t successful because of certain pertinent
issues to be tackled at that time. (Ghose, 2017)

One of the prime moves during this time was the ‘Banking Reforms 1969’. The main reason for
the ‘Nationalization of Banks 1969’ was the centralization of banking services to promote
uniformity. The ‘No Monopoly’ scheme in this sector was to be followed after the implementation
of nationalized banking services. “The nationalization of banks is referred to as ‘banking reform’.
India’s only woman PM took a crucial step in 1969 by the nationalization of 14 banks to meet the
growing demand for bank nationalization”. The reason behind this step was insufficient credit and
banking sector operations. During this time several non-banking financial institutions (NBFIs) and
banking financial institutions (BFIs) emerged in this sector.

The idea behind abolishing ‘Privy Purse’ was to promote the concept of inclusive India and equal
rights for all and a way to reduce the revenue deficit of the government. “The ‘Privy Purse’ was a
reward or payment made to the royal families of princely states that were forced to join
independent India in 1947. After this move, the Indian royal families had to pay taxes like everyone
else and were no longer exempted from the law.

The fifth plan from 1974 to 1979, also led by PM Indira Gandhi's government had two main
objectives, removal of poverty (garibi hatao) and attainment of self-reliance. The key aspects were
the promotion of a high rate of growth and balanced distribution of income. After the declaration
of emergency in 1975, the focus was on the PM’s 20-point programme. (MOSPI, 2014) The target
growth rate was estimated at 4.4% and the actual growth rate was 4.8%. This plan was more

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successful than the previous one. The two sixth plans from 1978 to 1980 worked on the
employment issues in contrast to Nehru Model which the Janta government criticized. “Congress
government returned to power in 1980 and launched a plan to eradicate the issues of poverty and
expanding economy.” (MOSPI, 2014)

The sixth plan from 1980 to 1985 led by PM Rajiv Gandhi's government worked on increasing
the national income, technological advancements and poverty eradication through skills and
employment-related schemes like TRYSEM and NREP. The target growth rate was estimated at
5.2% and the actual growth rate was 5.7%. This was a successfully implemented plan at all levels.
(Aguiar, 2011)

The seventh plan from 1985 to 1990 with an estimated target growth rate of 5% and an actual
growth rate of 6% focusing on food, work and productivity was also successful.

The period 1991-92 was known as the ‘annual plan period’ and a break from the regular five-year
plans. Dr Manmohan Singh, then finance minister was the key player in incorporating the policy
of ‘ending the Licence Raj’ in India. This move helped private businesses to set up easily from
1991 when the ‘Licence Raj’ was stopped. Earlier, the support of 80 government companies was
needed for getting a Licence for starting the operations for setting up a new company and even
after a formal set-up, there were several restrictions to deal with; making the ‘doing business’
factor, a difficult process in India.

As per the research conducted by International Monetary Fund (IMF), account deficits played a
significant role in the crisis. The study says “The econometric evidence supports the position that
the current account deficits played a significant role in the crisis. It appears that a confluence of
exogenous shocks led to a loss in investor confidence and to escalating debt-service burdens that
erupted in a currency crisis. The estimates do show that the Indian rupee was over-valued at the
time of crisis in 1991”. (IMF, 2000)

Liberalization, Privatisation and Globalization (LPG) were the 3 essential components of the New
Economic Policy 1991. ‘Liberalization’ covered the aspects of “higher demand and increased
competition; adoption of new technology; development of human resources and skills; and
increased focus on customers”. ‘Privatisation’ covered the aspects of promoting the private sector
enterprises and facilitating their growth and ‘Globalization’ covered the aspects of collaborations
and carrying out enterprises with foreign organisations.

The eighth plan from 1992 to 1997 was postponed by two years because of political uncertainty at
the centre. The estimated target growth rate was 5.6% and the actual growth rate was 6.8%. This
plan, focusing on fiscal and economic reforms was also implemented successfully.

The ninth plan from 1997 to 2002 with a target growth rate of 6.5% and an actual growth rate of
5.4% focused on growth with social justice and equality. The tenth plan from 2002 to 2007 with
an estimated target growth rate of 8% and an actual growth rate of 7.6% set monitorable targets
for the key development indicators. Both these plans were moderately successful. As per the
analysts, India emerged as one of the fastest-growing economies by the end of the tenth plan.

The eleventh plan from 2007 to 2012 with an estimated growth rate of 9% and an actual growth
rate of 8% aimed at faster and more inclusive growth. “The broad vision for the eleventh Plan
included several inter-related components like rapid growth reducing poverty and creating
employment opportunities, access to essential services in health and education, especially for the
poor, extension of employment opportunities using National Rural Employment Guarantee

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Programme, environmental sustainability, reduction of gender inequality and others.” (MOSPI,
2014)

The twelfth five-year plan from 2012 to 2017 worked on the objectives of faster, sustainable and
more inclusive growth. (Rahul Gandhi's Office, 2023) The monitorable targets of the plan as
proposed by PM Manmohan Singh and Congress President Sonia Gandhi, consisted of 25 core
indicators in which under the banner of economic growth, a real GDP growth rate of 8% was
considered; an agriculture growth rate of 4%, a manufacturing growth rate of 10% was considered.
(Banerjee & Duflo, 2011) This was a moderately successful plan. (Banerjee & Duflo, 2011)

Modi Government 2014

After 2014 with the start of PM Modi's government, ‘National Institution for Transforming India
(Niti Aayog)’ was set up. The role of ‘Niti Aayog’ was to “work towards fostering cooperative
federalism through structured support initiatives and mechanisms with the states continuously,
recognizing that strong States make a strong nation. (Niti Aayog, 2023) An important evolutionary
change from the past was to replace a centre-to-state one-way flow of policy with a genuine and
continuing partnership with the states. In this sense, the Planning Process in India went through
a gradual change”. (MOSPI, 2014)

‘Ministry of Finance’ was given the role of ‘Planning Commission’ in the determination of annual
plans and transfer of plan funds to state governments post-2014.

With the start of the new government, the new Smart Plans focused on the 'Ease of Living' and
the 'Ease of Doing Business' (Prime Minister's Office, 2023). Some significant economic reforms
highlighted the onset of the new paradigm in governance. The use of digital means was promoted
in all platforms and transactions of the government for the benefit of the citizens. Single-window
clearances with the help of online forms made all government processes hassle-free and faster than
before leading to more productivity and rapid economic growth. ‘Ease of doing Business’ was the
policy every state of India had to focus on. (PMO India, 2023) Flagship initiatives like ‘Make in
India’, Startup India, Production Linked Incentives (PLI) Schemes, Attracting Foreign Direct
Investments (FDI), Goods and Services Tax (GST) 2017, Insolvency and Bankruptcy Code (IBC)
2016; Summits like Vibrant Gujarat; Focus on Micro, Small and Medium Enterprises (MSMEs)
and programmes like Aspirational Districts, Smart Cities - India (Gandhi, 2023), UDAN Aviation
Scheme, the National Infrastructure Pipeline (NIP) and investments boosted the economic growth
rate of India and are still adding to India’s Economic Development Trajectory at an enormous
scale.

Black Money and Imposition of Tax Act, 2015 is an Indian Parliament Act which imposes penalties
on income generated through corruption like black money, hidden foreign assets and income and
aims to bring such money and assets held outside the country back into the country. In this
context, ‘Black Money’ refers to the ‘Undisclosed Foreign Income and Assets’ of the citizens of
India.

In July 2017, GST was put into effect by PM Modi. Before GST, it was ‘VAT’ that was
implemented by the PM Atal Government. GST is a simplified tax structure which established a
single national market and supported the initiatives “Make in India” and “Ease of Doing
Business”. The implementation of GST also helped increase investments and employment
opportunities. One of the important aspects is “it removes the application of taxes at every stage

6
of supply. Small traders and enterprises are benefitting from this tax system; agriculture, trade and
industry benefit because of the reduced compliance costs. (unacademy, 2023)

“GST is known as the Goods and Services Tax. GST as an indirect tax has replaced many indirect
taxes in India like VAT, services tax, excise duty and others. It is levied on the supply of goods
and services and is a single domestic indirect tax law for the entire country.” (cleartax, 2023)

In November 2017, Rs 500 and Rs 1000 banknotes were demonetized by PM Modi in India.
Demonetization had both positive and negative aspects. The positive aspects include “reducing
the use of black money, increasing cash in the banking system, stopping the handling of fake
currency, reducing all possible finances for illegal activities.” As the ‘demo’ announcement was
made at 8 pm on 8th Nov 2017 to be put into effect from midnight, the local inhabitants had to
face a lot of issues to cope with the money problem on such short notice. One of the game-
changing aspects was the rise in digital payments, cashless transactions and the opening of bank
accounts.

Foreign Direct Investment (FDI) is a valuable financial capital for the development of Indian
Enterprises and the Economy. Indian companies benefit and businesses flourish when we have
investments from foreign corporations. Modi Government’s primary agenda was to increase the
inflows of FDI in various sectors after 2014. In the year 2020, PM Modi declared that as per the
estimations, “India had managed to attract 20% more FDI than it did in 2019” and that the
investments were bound to increase in the coming years. It is to be noted that in the year 2019-20,
Inflows of FDI into India were $74 billion.

Start-up India’s objective was to boost ‘Ease of Doing Business’ (EODB) by supporting the
Founders/ Ideators with their business plans. EODB is an index published in the World Bank
Ranking of different nations concerning their performance in EODB evaluated through the
EODB indicators for each decided criterion. (Times of India, 2022) Start-up India helped increase
employment opportunities and promoted income generation in India. It was set up in January
2016 by PM Narendra Modi. The scheme helped people to get more interested in the business
sector and be able to be job givers. “Provision of financial assistance, easy access to government
bids, having a better workflow, enhanced networking opportunities, better interacting and learning
platforms, one-stop solution” from registration to taking it to the next level is all covered in this
scheme. (unacademy, 2023)

Conclusion

This paper intended to study the efforts of all the governments since independence in realizing
the aspirations of India as a nation. This paper also studied the involvement of the business sector
and the emergence of private enterprises in India with the constant goal of contributing towards
India’s Economic Development. It was observed that during the course of 75 years, different
government organisations with specific ideologies and support of private enterprises and other
stakeholders came up with their set of plans and proposals to augment the economic progress of
India. A few of them were able to implement these objectives successfully and a few others were
not but the ‘learning factor’ for the specific issues prevalent in India remained the same from the
very beginning. We are still dealing with some of these issues and are yet to find concrete solutions
to achieve these development goals. India is a vast nation and has come a long way from being
shattered to rejoicing in the present development paradigm. In India, making a noteworthy
difference in terms of improvement takes a long time to be planned and executed on the ground.

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 The present government’s ideas and proposals are effective and the Indian economy now stands
as the fastest growing in the world; moving with the same pace and order, the Inclusive-Liveable
India aims to reach the target of a $5 trillion economy by the year 2025.

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