DIVYA JAISWAL

1904
A71318219001
B.A. (H) ECONOMICS, SEM-4
2019-2022

BOOK REVIEW
THE INDIAN ECONOMY: PROBLEMS AND PROSPECTS
BY BIMAL JALAN
YEAR- 1992
PUBLISHER- PENGUIN BOOKS

Indian Economy: Problems and Prospects is a compilation of 13 essays;

edited and updated by Bimal Jalan, former Governor of Reserve Bank of
India and a renowned economist. The book is about the history of the
Indian economy since the independence the changes and challenges
faced, and how crises were resolved. Each essay is written by eminent
economic thinkers in 1991 and 1992 and is in exact form and they
provide the complete overview of India’s journey since independence
and talks about key economic issues, which are relevant.
The first essay ‘The Colonial Legacy’ was written by Bipan Chandra and is about features of
the Indian economy during the colonial era and its relation to the underdevelopment and
stagnation of the country. It talks about the ‘drain theory’ and the situation of each sector
(agriculture, industry, services, and exports) is explained with data. It also gives data of
various economic indicators to give the reader an idea of the situation of India at that time
like ‘In 1950, the per capita availability of cereals and pulses was 394.9 g per day…..infant
mortality rate was between 175-190 per 1000 live births…..average life span Indian could
expect to have was 32 years.’ It also gives reasons for Indian nationalists being cautious of
foreign investments even after independence and adopting self-reliance and protectionist
policies as quoted from the book ‘The nationalists also emphasized on the protection of
nascent industries and asked for changes in the policies in favor of Indian industries’.
The second essay ‘Forty Years Later’ by V.M. Dandekar is an analysis of the economy 40
years after independence i.e. from 1950 to 1990. It talks about the various policies and the
growth rate of GDP, population growth, sectoral analysis, financial resources of the country
and concludes with the New Economic Policy of 1991. 
The essay highlights the fact that the growth rate doubled but in 40 years and not in 27 years
as it was expected to in First Plan. The regional disparities in development are also
highlighted with SDP (State Domestic Product) statistics, Bihar, Madhya Pradesh, Orrisa, and
Uttar Pradesh being the worst-performing states. Dandekar identified the growing population
rate as a threat and also through his analysis showed how it is putting pressure on the limited
resources and that there is a need for effective family planning programs. He also gave
importance to technological breakthroughs in agriculture to increase production and raised
concern about the loss-making public sector and the heavy regulations on the private sector-
'All such regulations and controls inevitably lead to the growth of bureaucracy, inhibiting
enterprise and industry.' The ‘rationing of capital’ approach resulted in a situation where the
loss-making past investments were not allowed to close leading to further erosion of potential
savings. To protect the domestic industry from foreign competition, there were many trade
barriers. 
All these lead to India having less foreign capital, outdated technology, and our industries not
being competitive enough. The domestic produce was costly and of poor quality and the
growth of the country suffered which was reflected in the finances of the government. The
revenue deficit was 17.59% of revenue receipts in 1989-90, while the revenue expenditure
grew, development expenditure stagnated at 10% of GDP. For this, the government borrowed
from RBI and other foreign sources. This further fuelled inflation in the country and
increased the burden of external debt on the government and, at the end of 45 years of
independence, the country was facing a critical situation at both internal and external fronts.
Dandekar was one of the economists supporting the new policy of 1991, he concluded by
saying “India can only grow as a part of the world economy, not in isolation, and that means
rapid growth of exports, enough to pay for the inevitably growing imports. That self-reliance
properly understood and it can be achieved only through growth and not stagnation.”
The paper by Rakesh Mohan ‘Industrial Policy and Controls’ dwells deeper into the analysis
of the industrial sector in India, tracing the history of industrial control in India. The industry
controls can be traced back to Second World War, and these were continued and expanded
after independence, as it was believed that the state should regulate the use of national
resources and that it is necessary to protect domestic industries from foreign competition.
While the immediate post-independence policies were in line with the needs of industries, the
policies became restrictive in the mid-1960s. The need for a license and government
directives for everything- investments, expansion, import of raw materials, etc. - lead to
inefficiencies, which became apparent later. The 1965-1980 period was indeed a dark period
for Indian industry. Finally, the reforms under the new economic policy were undertaken. As
concluded by Rakesh Mohan “The future direction of industrial development has to be based
far more on understanding of the incentive effects of the whole tariff and excise structure,
monetary and financial policies and government investment policies……It must be
understood that such reforms cannot be carried out in our customary piecemeal fashion: they
have to be accomplished in an organized and planned manner and phased systematically
over the next two to three years.”
C.H. Hanumantha Rao’s paper ‘Agriculture: Policy and Performance” highlighted the
importance of agriculture for India, and bought the subject of decreasing public and private
investments in agriculture to light. He also talked about the importance of institutional factors
and the need for technological advancements like the use of biotechnology for the growth of
this sector and to increase the yields. The impact of the green revolution was seen in selected
areas hence had led to regional disparities and class divisions between those who have access
to technology and those who don’t. But this was resolved soon in the mid- 1980s due to
various reasons like the decline in prices of food grains, development in other regions,
migration of labour force, etc. Rao emphasized on ramping up investments in agricultural
infrastructure and research, and this is relevant even in the current times for the economy’s
growth.
 ‘Issues in Financial Sector Reform’ written by C. Rangarajan and Narendra Jadhav,
examines the financial sector. India’s financial sector was dominated by public sector
institutions, and this helped to extend credit even to the remote areas of the country. They
emphasized ‘deregulation, particularly of interest rates, combined with strict prudential
standards of capital adequacy and provisioning. The banking system has improved its
operational efficiency and there have been several deregulations and technological
advancements in this sector over years. There has been an emergence of private sector banks,
entry of foreign banks, new credit products, and decline in interest rates, and increased
competitiveness of the financial sector, but there is still a long way to go.
The issues of balance of payments and public debt are well explained in Bimal Jalan’s essay-
‘Balance of Payments’ and Raja J. Cehlliah’s essay ‘Growth of Indian Public Debt’. Bimal
Jalan in his essay tells that the balance of payment problems started since the beginning of the
Second Five Year Plan, and he divides this into 3 sub periods- 1956-76-first period, 1976-
80- second period, and 1980-92 third period. Each period had different reasons and intensities
of the problem. Bimal Jalan gives a detailed account of the three periods and also the reasons
for the problems. The situation was worse at beginning of the Eighth Plan and then the
reforms were introduced. The paper suggests several policy changes to boost exports,
increase capital inflows, and manage foreign exchange flexibility; and since then a lot of
changes have been made. Raja Cehlliah, in his paper, has pointed out the need to maintain the
public debts and deficits to a certain level to ensure the stability of the fiscal system. He
defines public debt as '…..indebtedness of all the three levels of government and all public
enterprises, to the domestic private sector and the external sector.' Cehlliah said that it is
important to reduce primary and fiscal deficits to ensure stability. Cehlliah’s paper can be
further supported by Sudipto Mundle and M. Govinda Rao’s paper- ‘Issues in Fiscal Policy ’,
which raises the issues about the fiscal policy. They pointed out the multi-dimensional fiscal
crisis; growing deficits and rising debts, rising interest costs, highly distorted tax structure,
stagnant non-tax revenue, etc. This also resulted in stagflation and a severe balance of
payment problem. Mundle and Rao, like Cehlliah, have also emphasized on reducing
government consumption expenditure and subsidies to reduce the fiscal deficit.
Jyoti and Kirit Parikh’s paper, ‘Energy Policy: Problems, Perceptions and Reforms’ deals
with the ‘energy problem’ in India. They describe the energy problem as the ‘problem of
providing fuels or energy in its various forms at reasonable cost to those who need them,
wherever they are’. India’s energy consumption has been low and nearly 33% of it is
obtained from non-conventional sources (e.g. firewood, animal dung, etc.). Despite various
investment allocations and government policies, the energy problems persisted. The demand
has also increased with the increasing population, which emphasizes the search for alternative
and sustainable sources of energy. Also, there is a need to decrease the transmission and
distribution losses and pricing policies need to be revised.
The growing population is still the biggest challenge for India. Pravin Visaria in his essay
‘Population’ evaluated the population growth in India, policies related to contraception,
fertility rate, literacy and unemployment, the status of women and has also given a case study
of Kerala and Tamil Nadu in reducing fertility rates. Visaria has suggested many initiatives
that can help to lower the growth rate of population and has also emphasized improving
productivity, literacy, and access to health services.
High population raises the problem of unemployment. In India, the majority of the labor force
is engaged in the agricultural sector. T.S. Papola’s essay, ‘The Question of Unemployment’
discusses employment in different sectors, technical issues involved in the calculation of
employment, prospects, and various schemes. Many experts have highlighted the ‘jobless
growth’ in India in the 1990s. Also, he has raised the issue of invisible unemployment, which
leads to the problem in the accounting of the unemployment statistics. Also, there has been a
trend of declining employment elasticities. Papola explained the in the medium and long run,
there is a need to expand the industrial sector to generate more employment, and that
flexibility in labor policies is needed.
The last two essays discuss the politics, laws, and reforms. Pranab Bardhan’s paper ‘A
Political-Economy Perspective on Development’. The political ideology influences the laws
and economic policies of the country. He raised the fact that the rise in the number of
pressure groups has seriously interfered in the management and accumulation of the public
economy. He has raised issues of corruption and raise in ‘middlemen’ in every field. Bardhan
has raised the question of whether this will affect further reforms and policies and has shown
hope that the growing middle-class will demand policy changes and reduce political
corruption. The essay, by Kaushik Basu ‘Markets, Laws and Government’ has talked about
the ‘institutional’ aspects of the economy and the need for immediate and efficient
implementation of new policies for effective markets. He defines an effective market as ‘…
one which operates freely within the structure of norms and legal institutions set by
government and Parliament’. He further adds that the problem with the Indian economy is
freedom in the wrong domain need for more freedom in domains of international trade,
industry, entry, and exit of firms.
To conclude, I would say that that there is a need for appropriate policies and timely
implementation of these in various sectors of the economy for achieving the country’s long-
term development objectives. The book gives insights into the various sectors of the economy
in detail and hence is a must-read for anyone who wants to understand the Indian Economy
better. It also highlights important issues which are still relevant, like the need for a
technological breakthrough in agriculture, population control, better health and education
facilities, and to reduce government consumption expenditure and subsidies, etc.