Plus One Economics Chapter 2
Plus One Economics Chapter 2

Plus One Economics Chapter 2

Chapter 2

Indian Economy 1950 – 1990

Plus One Economics Chapter 2


The British rule that started in India with the conquest of Plassy in 1757, lasted for about two centuries. It came to an end on 15″ August 1947. As a result of colonial rule, Indian economy became a crippled, backward and unbalanced one. The country inherited grave economic problems from her colonial past.

The leaders of independent India took two important decisions regarding the future of the country.:

  • Economically, India chose a mixed economy
  • Politically, India chose parliamentary democracy

Economic Systems

Since the demand for resources is more than their availability, we have to choose from among the various uses to which they may be put. Our choice has to be such that the maximum of our wants can be satisfied. This is often referred to as the economic problem. Economics thus deals fundamentally with choices in the use of resources.

The economic problem with its roots in scarcity gives rise to the central problems of an economy These problems can be discussed under the following heads: the problems of allocation of resources, the problem of efficiency, the problem of full utilization of resources and the problem of growth of resources.

Types of Economic Systems

Economic systems can be broadly divided into: Capitalism, Socialism and Mixed economy.

Capitalism, Socialism, Mixed Economy

Based on the above questions are answered and decisions taken, economic systems can be classified into three: Capitalism, Socialism and Mixed Economy. Capitalism is an economic system in which the factors of production are owned and managed private individuals for profit. Spirit of enterprise and profit motive is the guiding principles of capitalist system.

Socialism is an economic system in which means of production are owned by the state and by the government or community and in which production is based on the welfare of the community and not for the profit of few individuals.

Mixed Economy is an economic system in which the public sector and private sector exist side by side and operate for the welfare of the community.

Capitalist Economy

  • The forces of demand and supply operating through the market solve central problems.

  • Goods and services in demand are produced.

  • Low cost production technique adopted.

  • Profit motive.

  • If labour is scarce and capital cheap, capital intensive production will be used and vice versa.

  • Goods and services will be distributed on the basis of purchasing power of the people.

Socialist Economy

  • The government or the planning authority takes decisions on what goods and services are to be produced and how.

  • The government decides on methods of production and distribution.

  • Welfare motive.

  • The government owns and manages all means of production.

  • Only the public sector exists.

Mixed Economy

  • A mixture of capitalism and socialism.

  • Takes advantages of capitalism and socialism and removes their disadvantages.

  • Public sector and private sector co-exist.

  • Government provides goods and services which people need.

  • Those who cannot buy from the market are taken care of by the government.

Socialism became popular after the Second World War. So most leaders of the newly independent countries had a socialist bias. At the same time, they wanted to avoid the deficiencies of both capitalism and socialism. Leaders like Jawaharlal Nehru adopted the mixed economy model. Therefore, the Indian government decided that:

  • The public sector will play a dominant and leadership role.

  • The private sector will also play an active role. But it will be regulated and controlled by the government.

  • The economy will be comprehensively planned.

What is Planning ?

Planning is a process by which resources are allocated according to predetermined manner so as to achieve certain goals and targets within a specified time period.


It is a deliberate Process to be implemented

  • in a predetermined manner

  • to achieve certain objectives

  • using limited resources effectively and properly


Architect of Indian Planning

India started planning from 1951 onwards. We adopted the Soviet Model Five Year Plans. We also have perspective planning which gives details of targets to be achieved in 20 years time. Long term plans are called ‘perspective plans’. The architect of Indian planning was Prasanta Chandra Mahalonobis. He was a Statistician of international repute. He established the Indian Statistical Institute (ISI) in Calcutta and started a journal called ‘Sankhya’.

The Goals of Five Year Plans

Indian five year plans have clearly specified goals like Growth, Modernisation, Self-reliance and Equity.


When an economy grows, its agriculture, industry and services grow. Growth of all these sectors and activities is captured in the growth of Gross Domestic Product (GDP). GDP is the money value of all goods and services produced in the domestic territory of a country in a year. Economic growth is the rate of growth of GDP. India’s growth rate in 2015 – 16 was 7.6 per cent. This means India’s GDP grew by 7.6 per cent in 2015 – 16.

According to some economists, economic growth refers to increase in the country’s capacity to produce goods and services (growth potential of the economy). When the capacity to produce increases, it leads to GDP growth.

GDP is composed of contribution from the agricultural sector, the industrial sector and the services sector. This is known as the sectoral or structural composition of GDP. As an economy grows, the contribution of agriculture to GDP declines and the contribution of industry and services increases.

In developed countries like the U.S.A., U.K., France, Germany, Japan, etc., the contribution of agriculture to GDP is less than 2 per cent. In developing countries like India, the share of agriculture in GDP is declining. The share of services sector is increasing. This trend will continue. See table.

Table 2.1 Sectoral composition of GDP in India
Sector Contribution to GDP
1950 – 51 1970 – 71 1990 – 91 2010 – 11 2014 – 15
Primary Sector

(Agriculture and allied activities)

59.26 48.23 34.52 14.5 16.1
Secondary Sector


13.29 19.91 24.49 22.9 23.3
Tertiary Sector

(Services including construction)

28.03 32.18 40.58 62.6 60.6
Source:Central Statistical Organisation

Service Sector

As an economy grows, it will undergo some structural changes. The structure of its GDP and the occupational structure will change.

When development occurs, the share of the agricultural sector diminishes and the share of industrial sector increases. When development is at its peak the service sector contributes more than the other two sectors. In India, in 1951, the agricultural sector had contributed 59%; that of service sector was only 28%. But during 1990-1991 services sector went up to 40.58%. In 2014-15 it was 60.6%.

The GDP growth rate in India in the planning era was much higher than the growth rate in the British period. In the first three decades of be Fee, the growth rate was low at 3.5 per cent per annum. This increased to 5.7 per cent in the eighties and 5.8 per cent in the nineties. In recent years the growth rate has increased sharply. See table.

Table 2.2 Average growth rate of GDP
Period GDP Growth rate

(Average annual)

1900 – 1950 around 2 per cent
1950 – 51 to 1959 – 60 3.59
1960 – 61 to 1969 – 70 3.95
1970 – 71 to 1979 – 80 2.94
1980 – 81 to 1989 – 90 5.79
1990 – 91 to 1999 – 2000 5.80
2000 – 01 to 2009 – 10 7.26
2015 – 16 7.6
Source: 1900 – 1950: Independent estimates

1950 – 51 to 2015-2016: Central Statistical Organisation


Modernisation means adoption of modern technology. Modernisation increase productivity. Modernisation of farms, factories and services raises productivity. India’s Five Year Plans consistently aimed at modernising the economy.

Modernisation has another meaning also. This is modernisation in outlook. Modern societies are superior to traditional societies. The traditional Indian society gave inferior status to women. Women remained at home while men went out to work. Productivity in such a society was low. In modern societies where there is occupational freedom and mobility, equal status to women (gender justice) and equality of opportunity, productivity will be higher. Indian Society is getting progressively modernised. But we have a long way to go.


Self-reliance means relying on one self or reducing dependence on others. For a country self-reliance means relying on own resources for development. During the first seven five year plans India did not rely on foreign resources like foreign technology, foreign capital, etc. We followed a policy of import substitution, that is, substituting imports with domestic production. This policy of self-reliance was a natural response to colonialism. A country which was politically subjugated by the East India Company would be naturally reluctant to rely on foreign assistance and resources. The policy of self-reliance produced good results. India became self sufficient in food. We succeeded in building a well diversified industrial system.


Equity means reduction in inequality. Growth, modernisation and self-reliance become meaning less in the absence of equity. It is possible that an economy may achieve high growth, attain modernisation and self-reliance and yet, a sizeable chunk of the population may be living in poverty. This is unjust. It is important to ensure that the benefits of growth reach the poor people. Every Indian should have the basic needs of food, clothing, shelter, basic education and health care.

Achieving this equity has been an important goal of planning in India.

Impact of Five Year Plans on Indian Economy

Now, let us examine how the first seven Five Year Plans (1951 to 1990) attempted to achieve these goals, and to what extent they succeeded. We will examine this with reference to agriculture, industry and trade.


Agriculture suffered during the colonial period. The Zamindari system created inequity in land ownership. Zamindars became owners of the land. Actual tillers of the soil did not get any land. So they did not have any interest in improving productivity. Thus, the British policy created both inequity and low productivity. After independence, the Government of India began formulating policies to solve the problem.

Two major initiatives were introduced in agriculture. They were:

  • Land reforms

  • Green revolution

Land Reforms

Land reforms mainly aimed at achieving equity in land distribution. The motto of land reforms was ‘land to the tiller’. If the tiller is made the owner of land he will invest in land to increase production.

Land reforms consisted of the following policy initiatives

  • Abolition of intermediaries like Zamindars

  • Distribution of land to the tiller

  • Fixing ceiling on agricultural holdings and declaring land above ceiling as surplus land

  • Redistribution of surplus land among the landless

This policy was very progressive in theory. But, in practice it faced many difficulties. The abolition of intermediaries made 200 lakh tenants owners of land. The declaration of land ceilings and redistribution of surplus land faced resistance in many areas. Some loopholes in the law were exploited by the landlords to claim ownership of land. Some big landlords challenged the law in courts. This delayed the implementation of the law. In the mean- time, the landlords registered the land in the name of relatives. The rich and powerful landlords defeated land reforms in many areas.

Land reforms were successfully implemented in states like Kerala and West Bengal. But even here the reforms had major deficiencies. For instance, the poor landless agricultural workers who really worked on land did not get any land. Most of the agricultural labourers belonged to scheduled castes and scheduled tribes. These poor and marginalised sections did not benefit from land reforms.

The Green Revolution

India was a predominantly agrarian economy at the time of independence. 75 per cent of population depended on agriculture for their living. Agricultural productivity was low due to traditional farming and poor irrigation facilities. Agriculture was a ‘gamble in the monsoons’. India had to depend on food imports and food aid from countries like America. This dismal situation was changed the Green Revolution. Green Revolution refers to a significant improvement in agricultural production which resulted from the new agricultural strategy adopted in 1964-65.


Father of Indian Green Revolution

In the first phase of the Green Revolution (1965-1975), the new strategy was confined to states like Punjab, Tamil Nadu and Andhra Pradesh. Also the increase in production happened mainly in wheat. Therefore, Green Revolution came to be criticised as Wheat Revolution.

In the second phase of the Green Revolution (1975 – 1985), the new strategy spread to more states and more crops.

Important ingredients of the Green Revolution were:

  • Use of High Yielding Variety (HYV) seeds.

  • Use of chemical fertilisers and pesticides.

  • Irrigation.

  • Use of modern implements like tractors, pump sets, etc.

  • Marketing facilities for agricultural produce.

  • Provision of credit facilities to farmers at low rates of interest.

See the following table:

Table 2.3
Year Food Grain Production

(In million tonnesl)

1950 – 51 50.8
1960 – 61 82
1970 – 71 108.4
1980 – 81 129.6
1990 – 91 176.4
2000 – 01 196.8
2010 – 11 244.5
2013 – 14 264.8
2014 – 15 252.68
Source: Economic Survey

Benefits of Green Revolution

  • India became self sufficient in food grains.

  • Increased marketed surplus (The surplus after meeting farmers’ requirements that can be sold in the market).

  • Reduced dependence on imports and food aid.

  • Reduced prices of food grains benefiting poor people.

  • Enabled the government to create buffer stock of food grains to be used during times of food shortage.

  • Enabled distribution of food grains to the poor through Public Distribution System (PDS).

Deficiencies (limitations/weaknesses) of Green Revolution

The green revolution was not free from limitations. The following weaknesses were noted in this regard.

  • It increased the disparity between rich and poor farmers. It benefited rich farmers more.

  • The HYV crops were prone to attack from insects and pests.

  • In the first phase, the Green Revolution was mainly a wheat revolution.

  • High dose of chemical fertilisers, pesticides and insecticides poisoned the soil.

  • Heavy dependence on irrigation facilities.

  • Increased use of machinery caused unemployment.

The Debate Over Subsidies

The new agricultural strategy was based on modern farming, with the use of HYV seeds, chemical fertilisers, pesticides and irrigation This is more expensive than traditional farming. Therefore, to encourage farmers to adopt the new strategy, the government provided HYV seeds, chemical fertilisers, electricity for pumpsets, etc. at subsidised rates. In short, the agricultural subsidy burden increased.

The issue is: ‘Is this subsidy justified?’

Arguments in favour

Supporters of subsidy argue in favour of on the following ground:

  • Subsidies attract more people to agriculture.

  • Subsidies are essential to encourage farmers to try new methods in agriculture.

  • Subsidies are inevitable in India where agriculture is a non-profit making business.

  • Subsidies help poor peasants to buy modern agricultural inputs.

  • Subsidies reduce the inequality between the rich and poor farmers.

  • Subsidies provide great relief to farmers to overcome loss due to unfavourable weather conditions.

  • Subsidies help to spread agriculture and to increase agricultural produce.

Arguments Against

Those who oppose subsidy points out that:

  • Rich farmers corner the subsidy.

  • A major part of fertiliser subsidy goes to the fertiliser industry.

  • Subsidy need not be given once new technology is adopted and agriculture made profitable.

  • Government loses a lot of money which could have been otherwise used for helping the poor.

  • Failure in allocation of subsidies to real beneficiaries.

  • Giving subsidies when agriculture becomes unprofitable should no longer be continued.

  • Subsidised inputs make agriculturists unaware of their real value resulting in wastage of resources.

There is a major paradox in Indian agriculture at present. Since independence the share of agriculture in GDP has substantially declined. It declined from 59.26 per cent in 1951 to 16.1 per cent in 2015-16. But the percentage of people depending on agriculture did not show the same downward trend. It declined from 67.5 per cent in 1951 to only 52 per cent by 2015. The reason for this mismatch is that the industrial sector and the services sector could not absorb people from the agriculture sector. This is a major failure of the policies we followed from 1951 to 1991.

Industry and Trade

Industrialization is essential for economic growth and development and creation of permanent jobs. This is why industrialization is given importance in policy formulation and planning.

By the time of independence, cotton textiles and jute had developed in India. There were two prominent iron and steel firms, one in Jamshedpur_and the other in Kolkata. But we needed to speed up industrialization to achieve fast growth and development.

Public and Private Sectors in Indian Industrial Development

What should be the role of the public sector in industrialization? What should be the role of the private sector? This is an ideological and policy issue. In socialist countries the state plays the leading role in industrialization. In capitalist countries the market plays the leading role. In India, industrialization after independence was led by the state, because:

  • We adopted the socialistic pattern of society. Our economic policy had a clear socialist bias.

  • At the time of independence the private sector did not have adequate resources for massive investment.

  • Since the country was poor, the market was not big enough for big investment.

Even though industrialization was led by the public sector, the private sector also was allowed to play an important role. The role of the state and the market is laid down in the industrial policy.

Industrial Policy Resolution 1956 (IPR 1956)

After independence, India adopted the ‘commanding heights principle’ in industrialization. According to this principle, the commanding heights of the economy (basic and key industries like iron and steel, capital goods, etc.) will be owned and operated by the government. The second Five Year Plan was based on the commanding heights principle.

IPR 1956 classified industries into three;

  • Industries exclusively owned by the state.

  • Industries in which the private sector can co-exist with the public sector, but playing only a supplementary role. Here new units will be set up only in the public sector.

  • Remaining industries were completely left to the private sector. But, they will be controlled and regulated by the state.

This control was exercised through licensing to promote balanced regional growth (regional equality) by setting up industries in backward regions. Licences were also required for expansion and diversification into new areas.

Small-scale Industry

The government appointed the village and small-scale industries committee (Karve Committee) in 1955. This committee recommended promotion of small-scale industries for the promotion of employment and development of rural areas. A small scale industry is defined with reference to the maximum investment allowed on the assets of a unit. In a small scale industrial unit the maximum investment allowed was ₹ 5 lakh (1950). Today, the maximum limit is ₹ 1 crore.

The government accepted the Karve committee’s recommendations. Accordingly, production of many goods were reserved for the small-scale sector. Concessions like tax exemptions, lower taxes, low interest loans, priority in government purchase, etc. were also given to the small-scale sector.

Significance of Small-scale Industry

  • Small-scale industries require less capital.

  • Small-scale industries are labour-intensive; so they create more job opportunities.

  • Small-scale industries use local or domestic resources as raw material, they need not depend on imports.

  • Small-scale industries help in village development and welfare.

  • They are eco-friendly and do not harm the environment.

  • They use agricultural products as raw material, thereby helping development of the agricultural sector.

Drawbacks of small-scale industries

  • Subsidies and tax rebates increase government’s financial burden.

  • Over-protection of small scale industries adversely affected large-scale industries.

  • Many industries started in back ward areas suffered from power shortage.

  • Lack of proper market for goods produced by small-scale industries.

  • Absence of basic amenities, lack of credit facilities, etc., are other drawbacks.

Trade Policy: Import Substitution

Import substitution means substituting imports with domestic production. It aims at reducing dependence on foreign countries. The policy of import substitution leads to the policy of protection. Protection is the policy of protecting domestic industry from foreign competition. Infant industry needs protection from cheaper products produced in developed countries.

Protection is given through Tariffs and Quotas.

Tariffs are duties imposed on imports/exports. Import duties are used for protecting domestic industry from foreign products. Imposition of import duties raises the prices of foreign products. It will help Indian industries from competition.

Quotas are quantitative restrictions on imports. It allows only a limited quantity of the product to be imported.

Effect of Policies on Industrial, Development


  • The contribution of industrial sector to GDP increased from 11.8 per cent in 1950-51 to 24.6 per cent in 1990-91.

  • During 1950-51 to 1990-91, the industrial sector grew by 6 per cent per year.

  • India’s industrial sector became highly diversified. At the time of Independence our industrial structure was dominated by cotton textiles, jute and steel. By 1990-91, the industrial structure had become highly diversified with large number of industries such as metals, chemicals, capital goods, pharmaceuticals, petroleum refining, automobiles, etc.

  • Small-scale industries created many entrepreneurs and millions of jobs.

  • Growth of indigenous industries through protection.


  • The system of licensing created ‘licence-permit raj’. It created a huge bureaucracy characterised by red-tape and corruption. Public sector in many cases incurred huge losses. Absence of competition led to inefficiency in management.

  • Reservation for public sector created public sector monopoly. Efficient private sector companies were not allowed to enter into reserved areas. This harmed the interest of consumers. Benefits of competition became clear after liberalization of 1991. Example: Telecom, insurance, automobiles, etc.

  • Protection through high import duties created inefficient units. Protection was not withdrawn after some time.

  • Public sector entered into unnecessary areas like production of bread, photographic films, hotel industry, etc., wasting precious resources.

  • The industrial policy instead of regulating industry, restricted private initiative and enterprise.

Because of these reasons, industrial growth achieved was below the actual potential. This necessitated a rethink on industrial policy in 1991.


India achieved reasonable success during the period 1950-1951 to 1990-1991. But we also suffered major drawbacks.

Assessing our achievements and failures led to a rethink on industrial policy and economic reforms in 1991.

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