Indian Economy(1950-1990) [pre-liberalization era]

Types of Economic Systems:

The idea evolves with three basic questions being answered

1. What goods and services should be produces?
2. How should we produce them?(Use more labor or more capital)
3. How should these goods and services be distributed?

1. Capitalism:
   • We depend solely on Market forces of supply and demand

   • Questions	Answer
     1	Produce only those goods and services which are in demand either in domestic or in foreign markets
     2	If labor is cheaper than capital Use labor-intensive methods of production otherwise use capital intensive methods
     3	Goods are distributed not on the basis of what people needbut on the basis of their purchasing power example: low cost housing is much needed by poor but That will not count as demand in market sense because poor people don't have enough money to back that demand.

1. Socialist Economy:
   • The government decides what to produce based on the need and not on market forces

   • Questions	Answer
     1	The government takes decision based on what is the need of citizens
     2	The government decides how to produce it
     3	distribution under socialism is supposed to be basedon what people need and not on what they can afford to purchase For Example: socialist nation provides free health care to all its citizens. Strictly, a socialist society has no private property since everything is owned by the state

1. Mixed Economies:
   • market will provide whatever goods and services it can produce well, and the government will provide essential goods and services which the market fails to do.

Plan documents and five year plan:

• 5-year plan serves as a basis for perspective plan(20 years)
• Our five year plans do not spell out how much of each and every good and service is to be produced.

• Goals are:

  Growth, Modernization, self-reliance and equity

• These 4 terms are prioritized rather than giving them equal importance.

GDP:

• It is the market value of all the goods and services produced in a country in a given year.
• It is derived from different sectors of economy(Agri. , Industrial and service).
• The contribution made by each sector makes the Structural Composition of economy

Reforms (1950-1990) 5-year plans

Agriculture

1. Land Reforms:
   • Main motive was to enforce equity in agriculture , land to tiller.
   • tillers won't benefit form the increased production as the land was not their own==>Poor productivity
   • Land reforms changed the ownership of land holdings, abolished Zamindars

1. Land ceiling:
   • Provide an upper bound on size of land owned.
   • Because older zamindars continued to hold large areas of land making use of Loopholes
   • Big landlords challenged it in courts.
   • Successful only in Bengal and kerala elsewhere still a problem with it.

1. Green Revolution:
   • 75% population agri. Dependent ==>agri. Was monsoon dependent==>Problem
   • Also no proper national irrigation system.
   • Solution being ↑↑ production by using HYV seeds.
   • HYV + proper irrigation + fertilizer + pesticide => Phase1 implemented in AP, Punjab, T.Nadu.
   • Result was domestic demand met and also Marketed surplus=>Reduced food prices.
   • To also include poor farmers(coz the HYV were prone to pest attack) in the benefit, government provides loans and subsidized fertilizer.

     • Pro's of subsidy	Cons
       Encourage farmer to test new technology	Does not benefit the target group
       Farmers are poor in India and hence it provide support	Burden on government finances
       Bridges the gap b/w rich and poor hence should not be removed	Leads to wastage of subsidized resources

   • One drawback was that till 1990's 65% of population still agriculture dependent . Although it's contribution had significantly reduced.[The Industrial and svc. Sector could not absorb the people working in agriculture sector.]

1. Industry and Trade:
   • Industry provide more stable jobs and overall prosperity compared to agriculture.
   • Lack of capital and confidence among the people , so industry was planned on soviet lines
   • Opportunity was also for private sector but through license under state control.
   • It was easier to get license if industry was in backward area==>to promote industrialization of back areas, also concessions were given(we can easily spot a drawback here)
   • Production quantity was again limited by government license.

1. Small Scale Industries:

• Karve committee proposed small scale industry for promoting rural-development.

1. Maximum investment allowed was up to 5 lacs now(1 crore)
2. Some goods were for production only through them, to shield them against competition.
3. They are more labor intensive so generate more Employment.
4. They were also given concessions such as lower excise duty and bank loans at lower interest Rates

1. Trade policy : Import substitution
   • Import substitution is an inward looking policy, protects domestic firms from foreign competition
   • Instead of importing cars, domestic industries are encouraged to manufacture cars in India.
   • Used tariffs(import taxes) and Quotas(limit on imports) to discourage imports.
   • View was also to save expensive foreign exchange wasted on import of luxury items, since exports were not booming back then
   • Effect of policy on Industry:
     • The six per cent annual growth rate of the industrial sector during the period is commendable.
     • Indian Industry became Highly diversified by 1990's
     • Promotion of small scale industries gave opportunity to those with less capital
     • Protection form foreign competition developed Indigenous industry
   • Bad Effects of policy
     • PSU's without competition in some sectors were until late 1990's, which could be opened to private sector.
     • Many public sector firms incurred huge losses but continued to function because it is difficult to close a government undertaking even if it is a drain on the nation’s limited resources.(people loose jobs and loss of public welfare)
     • The license provision was misused by big Industrialists, to prevent license approval of their competitors.
     • The excessive regulation came to be known as Permit license Raj hindered the growth of many firms
     • Import bans provided the domestic producers with Captive Market so they did not improve product quality and consumer suffered. So we change policy in 1991.