Development Experience 1947-90 & Economic Reforms since 1991

At independence, India carried the economic structure a colonial ruler had shaped for its own benefit. The opportunity blockers were three: a stagnant agriculture that absorbed the mass of the population, a stunted industrial base serving the export needs of the ruler, and a foreign trade whose surplus flowed toward the British treasury.

• Agriculture: stagnant, low-yielding and heavily dependent on the monsoon, holding a third of the national income and most of the employment.
• Industry: a low industrial base, with the traditional handicrafts declining and the modern industry restricted to a few enclaves, cotton textiles, jute and tea.
• Foreign trade: a colonial pattern, the country exporting raw materials to Britain and importing its manufactures, with the export surplus appropriated by the ruler.
• Infrastructure and human capital: poor transport, no organised capital market, and a low literacy of about 17 per cent at independence.
• Official estimates of the period understated the real income and poverty, so the statistical base had to be rebuilt after independence.

The First Five Year Plan began in 1951 with the legislature targets of growth, modernisation, self-reliance and equity. The aims were not abstract: growth raised the size of the economy, modernisation changed its technology and outlook, self-reliance reduced dependence on foreign capital, and equity narrowed the gap between the rich and the poor. The plans pursued all four with the emphasis shifting from plan to plan.

• Growth: an increase in the gross domestic product of the country, the quantitative measure of development.
• Modernisation: the adoption of new technology, changes in the social outlook and the movement of production from the old to the new.
• Self-reliance: a reduction in the dependence on foreign capital, imports and aid, building the capacity to grow from within.
• Equity: a more even distribution of income and the reduction of poverty, the qualitative face of development.
• Growth versus equity: the two were often in tension, the growth required of the industrial sector pulling resources from the poor, and the plans constantly balancing the pair.

Agriculture was the first priority of the planning era because it employed a majority of the population and because the plan's growth had to feed the workforce. The strategy ran on two tracks, institutional measures — land reforms, cooperation, irrigation — and the new agricultural strategy of the green revolution, which combined high-yielding varieties of seeds with fertilisers, pesticides and assured irrigation.

• The green revolution: the high-yielding varieties of wheat and rice, with the complementary inputs, raised foodgrain productivity sharply from the late 1960s.
• Land reforms: the abolition of the intermediaries, the ceiling on landholdings and the consolidation of holdings.
• Cooperative credit and marketing: the rural credit cooperatives and the cooperative sale of farm produce.
• Irrigation and extension: the new seeds needed assured water, so the state pushed canals, tubewells and the extension services.
• The achievement: the country moved from depending on imports to near self-sufficiency in foodgrains.
• The limitation: the gains were concentrated in the wheat and rice heartlands and among the larger farmers with the resources for the new inputs.

Industry was planned through the Industrial Policy Resolution of 1956, which reserved the public sector for the key industries and left the rest to the private sector under a system of licences, quotas and protection. The policy built a vast and diversified industrial base, but it also bred the licence raj of controls and inefficiencies.

• The IPR of 1956: the industries were divided into three lists — those reserved for the public sector, those for the joint sector with private participation, and those open to the private sector.
• The public sector: steel, minerals, defence equipment and other key industries; the state underwrote the heavy investment and the social returns.
• The small-scale sector: protected from the large, reserved for the labour-intensive production of many consumer goods.
• The import-substitution and protection: the domestic industry was shielded from foreign competition behind tariffs and quotas.
• The achievement: the industrial base grew, the capital goods and heavy industries were established, and the entrepreneurial class matured.
• The failure: the licence raj bred inefficiency, high cost and corruption, the public sector under-performed, and the cost of protection fell on the consumer.

Foreign trade in the planning years was tightly controlled to support self-reliance. Exports were dominated by the primary and the labour-intensive goods, imports by machinery and the raw materials the domestic industry lacked, and the balance was managed through the exchange controls and the tariffs.

• The pattern of exports: tea, coffee, cotton textiles, jute and the labours; the manufactured goods gradually raised their share.
• The pattern of imports: the machinery, petroleum and the capital goods for the industrialisation.
• The policy instruments: tariffs, quotas and the exchange controls to manage the trade.
• The achievement: the domestic industry was protected and the import of consumer goods was kept out.
• The limitation: the protection bred the high-cost, low-quality base, and the export performance lagged the plans' targets.

The balance-of-payments crisis of 1991 forced a change of course, the new economic policy of liberalisation, privatisation and globalisation, the three words that summarise the whole reform. Liberalisation opened the economy to market forces, privatisation reduced the role of the state in industry, and globalisation integrated the economy with the world trade.

• Liberalisation: the abolition of the industrial licensing (except a few), the relaxation of the limits on expansion, the freeing of trade and the removal of price controls.
• Privatisation: the reduction of the public-sector reservation to three industries, the raising of private and foreign stakes, and the disinvestment of the state's equity.
• Globalisation: the outward orientation of trade and investment, the lowering of tariffs and quotas, and the entry of foreign direct investment.
• The withdrawal of the state: the state's role moved from the running of industry to the provision of the enabling framework.
• The appraisal: the reforms raised the growth rate and the efficiency of the economy, but the benefits were uneven across regions and sectors, and the small units suffered in the open competition.
• The two late appraisals the syllabus names: the demonetisation of 2016 and the introduction of the Goods and Services Tax, and the assessment of their effects.

The unit yields short factual questions on the period 1947-90 and evaluative questions on the reforms. The factual answers follow a fixed pattern, the aim, the sector, the policy and the outcome, and the evaluative answers give an achievement and a limitation.

• Describe the condition of the Indian economy at independence.
• State the aims and goals of the five year plans.
• Explain the role of the green revolution in the agriculture of India.
• Explain the industrial policy of 1956 and its consequences.
• Define liberalisation, privatisation and globalisation with one measure each.
• Appraise the economic reforms of 1991 — the achievements and the limitations.
• Evaluate the effects of demonetisation and the goods and services tax.