CHAPTER – 2

INDIAN ECONOMY (1950- 91)

Planning Commision
Indian government with the Prime Minister as a chairman formed the planning commission (which is now
known as Niti Aayog) set up in March 1950 and adopted five year plans for the development of the country.
The era of economic planning had begun in Indai with the launching of First Five year Plan on 1 st April 1951
for the period 1951-56. Since then we have completed 12th Five year plan in 2017.

Planning Commision – An organization setup by the government of India. It is responsible fro making
assessment of all resources of the country, augmenting deficient resources, formulating plans for the most
effective and balanced utilization of resources and determining priorities.
Economic problem -The reasons due to which a country faces economic problems are as follows:-
1. Unlimited Wants (Unlimited Ends)
2. Limited Resources (Scarce Resources)
3. Alternative Use

The above 3 reasons creates different Economic Problem in an economy which are as follows:-

What to produce For whom to produce

1. Consumer Goods 1. Personal Distribution

2. Producer Goods 2. Functional Distribution

How to produce

1. Labour IntensiveTechnique
2. Capital IntensiveTechnique

Types of Economy
1. Market Economy:- It is a type of economy in which the total allocation of resources is made by private
capitalist or businessman for producing goods andservices. As they are basically guided for making profit.
2. Mixed economy:- It is a type of economy in which both the private and public sector are participating in
productive activities. The allocation of resources is made bythe government for removing the central problem of
economy with the help of private sector.
3. Central Planned Economy :- It is a type of economy in which the total allocationof resources is made by
central government of the country. The government is basically guided for solving the central problem of the
economy. Hence it promotes socialwelfare with minimum cost.

Economic Planning
Economic Planning refers to the consciously directed efforts of organizing and using resources for productive
purpose by a central authority for achieving certain predetermined and well defined objectives or goals within
a specified period of time.
According to planning commission of India, “Economic planning refers to the utilizationof country’s resources
in different development activities in accordance to the national priorities”.
Economic planning is the technique through which the underdeveloped countries are attempting to accelerate
their rate of economic development.
In India Plans were of five year duration and were called five year plans (we borrowed this from the former
soviet union, the pioneer in National planning).
PLAN : A Plan show how the resources of nation should be put to use. It should have some general goals as
well as specified objectives which are to be achieved within a specified period of time.
In India plans are of five years duration and are called five year plan.
Goal of Planning of India
Objective of Plan – Plan specific or short period objectives are called objectives of plan. (In India 5 years)
These vary from plan to plan and determined in accordance with long period objectives.\
Objectives of Planning – Long period objectives which are common to all five year plan are objectives of
planning.These are also called Perspective Plan.

The planning commission of India has adopted Five year plans strategy for the development of the economy.
India launches its first five year plan on 1st April 1951 for the period 1951-56. Since then we have completed
12 five year plans (recent 5 year plan was in operation from 1st April 2012 for the period of 2012-2017).
The government would plan for the economy with the private sector being encouraged to be part of plan effort.
The 'Industrial Policy Resolution' of 1948 and the Directive Principles of the Indian Constitution reflected this
outlook.
PGT ECONOMICS - BHAVESH SONI (8349965291)
 Long Term goals
1. Economic Growth
(a) The basic aim of economic planning in India is the rapid growth of the economy through development in
all the major sectors of the economy.
(b) Growth refers to increase in the country's capacity to produce the output of goods and services within t
country. It implies an increase in the efficiency of productive live capital and services.
(c) The measure or indicator of economic growth, in the language of economics, is steady increase in the 'Gross
Domestic Product' (GDP).
(d) The gross domestic product (GDP) of a country is derived from the different sectors (agricultural,industrial
and service) of the economy.
(e) The contribution made by each sector, namely the agricultural sector the industrial sector and the service
sector makes up the structural composition of GDP. As the country develops, it undergoes' Structural change in
the GDP.
(f) The real objective of economic planning is to increase real per capita income as it will increase when
production in the country will be more than the increase in the population growth.
GDP: Market value of the all the final goods and services produced in the country during a year.
2. Modernisation: Modernisation does not refer only to the use of new technology but also to changes in social
outlook such as the recognition that women should have the same rights as men.
- It is a never objective which was explicitly mentioned for the first time in the sixth plan.
- Modernisation of the Indian economy has been one of the objectives of the recent plans to make the economy
advanced and progressive.
Modernisation implies four types of changes:
(a) Shift in the sectoral composition of output: With the aim of increasing the share of industrial and service
sectors in GDP.
(b) Development of diversified economy: That produces a large variety of goods. This requires establishment
of new industries producing engineering, chemical, petroleum and similar products.
(c) Use of advanced and more efficient techniques: To increase the production of goods and services.
(d) Institutional Changes: Like financial institutions (Banks etc.), Educational institutions (Schools, Colleges
etc.) for human development and developing economic infrastructure (Railways, road network power, irrigation,
etc.
Modernisation and employment generation as goal of planning are complementary, not contradictor to
each other. Modernisation (in terms of adopting new technology) implies increase in productivity.
Implying lesser requirement of labour per unit of output. But it does not imply a fall in the level of
employment in the economy. Because, with increase in productivity, level of production activity and the
level of income tend to rise. Rising income implies a rising demand for goods and services. When demand
for goods and services rises, the producer's plan for higher level of output. It results in increase in
employment opportunities.
3. Self-reliance: Self-reliance implies attainment of self-sustaining and self-generating growth in of reduce our
dependence on foreign countries. Self-reliance means the state of non-dependence on world for the financial
resources. Self-sufficiency refers to the state of non-dependence upon rest world for the essential supplies in the
domestic economy.
(a) Self-reliance means avoiding imports of those goods which could be produced in the country its other words
a nation can promote economic growth and modernisation by using its own resources.
(b) Self-reliance has become an important objective of economic planning in India. First seven five year plans
gave importance to self reliance.
(c) Self-reliance implies elimination of dependence on imports of certain commodities such as food grains,
fertilizers, raw materials, machinery and equipment etc. by increasing the domestic production of such
commodities.
(d) The objective of self-reliance was stated in the third plan but it was made as one of the objective of 5th plan.
The policy of self-reliance was considered a necessity because of two reasons
 To reduce foreign dependence: After independence, it is necessary to reduce our dependence on
foreign countries, especially for food.
 To avoid Foreign Interference: It was feared that dependence of imported technology and foreign
capital may increase foreign interference in the food policies of our country.
4. Equity: Equity or equitable distribution of income means gap between rich and poor should be less i.e.
disparity on the basis of income should be less. To achieve it higher taxes on rich so that their disposable income
can increase and provide subsidies to the poor so that their purchasing capacity can increase.
 First three objectives may not improve spread across all sections of the society the kind of life which
people are living. Benefits of growth must, so that the distribution of income becomes equitable.
 It is important to ensure that the benefits of economic prosperity reach the poor sections of the country.
So, another objective of economic planning in India is “Equity”.
 Equity implies(a) economic planning in India is 'equity. Reduction of inequalities in the distribution of
income and wealth. (b) Removal of Removal of Poverty was taken as the specific objective from the
fifth plan (1974-79).poverty: Every Indian should be able to meet his or her basic needs such as food, a
decent house, education and health core.
 Removal of poverty was taken as the specific objective from the fifth plan (1974-79).
 Under the slogan 'Garibi Hatao', the fifth plan adopted the 'Minimum needs programme.

PGT ECONOMICS - BHAVESH SONI (8349965291)

 5. Full Employment: Full employment is a situation when everyone who is able and willing to work at the
market wage rate, is working i.e. is engaged in some job activity which brings him income (Value of his
services.)
 It implies that there should be higher rate of active participation of the working age group in economic
activities of the country (in the process of economic growth).
 It also rules out the existence of poverty and unemployment.
 Full employment is a common goal of five year plans and is directly related to economic growth.

Five Yearly Plan

Plan and Focus of the plan or the principle objectives

Period
1st Plan ∙ Increase in agricultural production.
(1951-1956) ∙ Equitable distribution of production, income and wealth.

2nd Plan ∙ Increase in Industrial production.

(1956-1961) ∙ Development of heavy industry.
3st Plan ∙ Self-sufficiency in food grain production.
(1961-1966) ∙ Generation of employment opportunities.
Three Annual Plans (1966-1969)
4th Plan ∙ Accelerating the process of growth.
(1969-1974) ∙ Price stability.

5th Plan ∙ Raising the living standards with a focus on weaker section of
(1974-1979) the society.
Annual Plans (1979-1980)
6th Plan ∙ Removal of poverty.
(1980-1985) ∙ Reduction of inequality.
∙ Development of infrastructure.
7th Plan ∙ Generation of employment opportunities.
(1985-1990) ∙ Increase in agricultural productivity.
Two Annual Plans (1990-1992)
8th Plan ∙ Fuller utilization of manpower by the turn of the century.
(1992-1997) ∙ Universalisation of elementary education.
∙ Strengthening of infrastructure.
9th Plan • Agricultural and rural development.
(1997-2002) • Growth with price stability.
• Checking the growth of production
10th Plan ∙ Improving the quality of life through better health and
(2002-2007) educational facilities and improved levels of consumption.
∙ Reduction in inequality through inclusive growth.
11 th
Plan ∙ Multiple targets covering not only growth but also poverty
(2007-2012) reduction.
∙ Improving quality of education and public health services.
∙ Strategy of second green revolution.
∙ Generation high quality of job.
∙ Protection of environment.
12th Plan ∙ Faster, sustainable and more inclusive growth.
(2012-2017)
∙
Appraisal of Planning In India (1950-1990): Agriculture
Role of Agriculture in Indian Economy (Importance):
The importance of agriculture in the Indian economy is clear from the following facts.
(a) Share in GDP: Agriculture sector contributes a significant proportion of the GDP of India. It was 14.5
percent in 2010-11.
(b ) Source of Employment: According to the survey of 2013, nearly 47% ofworking population is engaged
in agriculture sector.
(c) Supply of Foodgrains: India is one of those countries which is self-sufficient in good grains. Indian
agriculture sector is capable enough to meet almost the entire food requirements of the population.
(d) Supply of Raw Materials: Besides food grains, production, agriculture sector also provides industrial raw
material like cotton for textile, seeds for oil,sugarcane for sugar mills.
(e) Market for Industrial Products:
(f) Share in Exports: Agriculture plays an important role as an earner of foreign exchange through exports of
agricultural commodities like Tea, Cotton, Jute, Fruits, Tobacco, Coffee, Sugar, Oil, spices etc.
PGT ECONOMICS - BHAVESH SONI (8349965291)
 (g) Source of Revenue: The govemment revenue from agriculture in the form of land revenue, revenue from
other taxes imposed on the commodities purchased by farmers.
(h) Development of Trade and Transport
Issues or Policies of Agriculture:
(a) Low Productivity; (b) Disguised Unemployment; (c) high dependency on Rainfall;
(d) Subsistence Farming; (e) Outdated Technology; (f) Conflicts between tenant and landlords;
(g) Small Land holdings.
Policies of Indian Agriculture: Agriculture policy of reforms in agriculture of the Indian government during
the five-year plans consist of the following important measures.
Measures to promote growth in Agricultural Sector
 Land Reforms
 Green Revolution or Technical Reforms
 Infrastructural facility(General Reform)
(A) Institutional Reforms (Land Reforms)
Various institutional changes in the agrarian system have been undertaken in the country for raising agricultural
production and providing incentives to the cultivators. These institutional changes are land reforms. The main
land reforms undertaken include:
1. Abolition of Intermediaries:
 At the time of independence the land tenure system in India was characterised by intermediaries called
'Zamindars', 'Jagirdars' etc. who merely collected rent from the actual tiller of the soil without
contributing towards improvements on the farm.
 After independence, steps were taken by the govt, to abolish intermediaries and to make the tillers the
owners of land.
 The policy of 'Land' to the 'tiller' is based on the idea that ownership of land would give incentives to
the tillers to invest in making improvements for increasing output.
 Equity in agriculture called for "Land reforms which primarily refer to change in the ownership of
landholdings.
Achievements : The abolition of intermediaries meant that some 200 lakh tenants come into direct contact with
the government they were thus free from being exploited by the Zamindars. The ownership conferred on tenants
gave them the incentive to increase output and this contributed to growth in agriculture.
Problems : In some areas the former zamindars continued to own large areas of land by making use of some
loopholes legislation. There were cases where tenants were evicted and the land owners claimed to be self
cultivators,The poorest of the agricultural labourers did not benefit from the land reforms.
2. Land Ceiling:
 To promote equity in the agricultural sector 'Land ceiling' on land holding was imposed.
 Land ceiling means fixing the maximum size of land which could be owned by an individual or a family.
 The purpose of land celling was to reduce the concentration of land ownership in a few hands. The
surplus land was resumed by the government and redistributed among small land holders or landless
farmers.
3. Tenancy Reforms: Tenancy reforms were for fixation of rents paid by tenants, security of tenure and
conferment of ownership rents on tenants.
4. Cooperative Farming: Joint farming by small cultivators by pooling their land and other resources to rea
the benefits of large scale farming is known as cooperative farming.
5. Consolidation of Land Holdings: Due to Giving a particular farmer land at one place in lieu of his different
plots of land. It saves the cost of cultivation.
The land reforms programme was an instrument for agricultural development and social up-liftment of poor
rural masses.
Land reforms were more successful in Kerala and West Bengal because these states had governments committed
to the policy of land to the tiller.

(B) Technological Measures: Green Revolution

At the time of independence, about 75% of the country's population was dependent on agriculture. Productivity
in the agriculture sector was very low because of the use of old technology, absence of required infrastructure,
dependence on monsoon.
Green Revolution: It refers to the large increase in production of food grains result in yielding variety (HYV)
seeds especially for wheat and rice.
The 'Green Revolution' became the government's most important programme Green Revolution (New
Agricultural Technique) was introduced as a 'Package Programme' to include joint an simultaneous application
of high-yielding variety (HYV) seeds, fertilizers, pesticides, adequate irrigation, agricultural machinery etc.

PGT ECONOMICS - BHAVESH SONI (8349965291)

 The new technology was nicknamed as 'Green revolution' because it came suddenly, spread quickly and brought
dramatic results in the form of large increase in agricultural productivity over a short span of time.

Phases of Green Revolution

In the first phase of the 'Green Revolution' (mid 1960s upto mid 1970s), the use of HYV seeds was restricted to
Punjab, Andhra Pradesh and Tamil Nadu. The use of HYV seeds primarily benefitted the wheat growing regions
only.
In the second phase of the 'Green Revolution' (mid-1970s to mid 1980s), the HYV technology spread to a larger
number of states and benefitted more variety of crops.
Father of 'Green Revolution in India: Dr. M.S. Swaminathan.
HYV seeds were developed in Mexico by Dr. Norman Borlong. (Amencari Agricultural Scientist).
Effects of Green Revolution: (Achievements)
(a) Increase in Production: The major achievement of the Green Revolution has been a substantial increase in
production of foodgrains.
(b) Self-Sufficiency: The spread of Green revolution technology enabled India to achieve self-sufficiency in
food grains. We no longer had to be at the mercy of America or any other country nation's food requirements. ,
for meeting our nation’s food requirement.
(c) Marketed Surplus: The Portion of agricultural production which is sold in the market by the farmers is
called marketed surplus. A good proportion of rice and wheat produced during the Green Revolution period was
sold by the farmers in the market.
(d) Benefit to low-income Groups: During Green Revolution a large proportion of increase in output was
sold by the farmers in the market. As a result, the price of food grains declined relative to other items of
consumption. The low-income groups, who spend a large percentage of their income on food, benefitted
from this decline in relative prices.
(e) Increase in Income: A significant increase in food grains production and productivity led to increase in
the income of farmers and improve their economic conditions.
(f) Buffer Stock: The Green revolution enabled the government to procure sufficient amount of food grains to
build a stock which could be used in time of food shortages.
(g) Increase in Productivity: The Green revolution brought about a sharp rise in the yield of land in respect of
foodgrains. The yield per acre of wheat increased by 3.5 times 1960-61 and 2010-11.
Weakness or short comings of Green Revolution
(a) Increase in the disparities of Income: Green Revolution increased the disparities between small and a big
farmers, since only the big farmers could afford the required inputs, thereby raping most of the benefits of Green
Revolution.
(b) Pest Attack: The HYV crops were also more prone to attack by pests and the small farmers who adopted,
this technology could lose everything in pest attack.
(c) Confined to Food Crops: Green Revolution has remained confined to wheat and rice only. Progress in
major commercial crops like cotton, jute, oil-seeds has been very slow.
(d) Regional Inequalities: Effect of Green Revolution has taken place only in Punjab, Haryana, Maharashtra,
Tamil Nadu, Uttar Pradesh, Andhra Pradesh. It thus has created regional inequalities.
(e) Risk of Ecological Degradation: The achievements of Green Revolution were at the expense of ecology
and environment. Extensive dependence on chemicals and pesticides has decreased the land fertility and
damages environment.
(f) Undesirable Social Effects: The increasing use of farm machinery has created the problem of surplus
labour in the agricultural sector. Landlords have now found it more profitable to cultivate land them

(C) Infrastructural Facilities

Another important measure initiated by the government is the expansion of infrastructure. These include credit,
marketing, education, agricultural research, etc.
(i) Institutional Credit: Institutional credit facilities for the farmers have been expanded through cooperatives
and commercial banks.Regional rural banks have been set up to meet the needs of agricultural credit.A National
Bank for Agriculture and Rural Development (NABARD) has been set up as an apex institution in the field of
rural credit in 1982.
(ii) Agricultural Marketing:
Regulated markets have been step up to improve the system of agricultural marketing Co-operative marketing
societies have also been established. facilities have been expanded to build up adequate buffer stocks of
foodgrain Storage and warehousing
(iii) Fixation of Minimum Support Prices and Procûrement Prices:
To ensure fair returns to the farmers as part of agricultural price policy the government has been fixing the
minimum support prices and procurement prices for a number of agricultural commodities like wheat, paddy
etc.
Minimum support prices are fixed so as to ensure that prices of agricultural commodities do not fall below these
prices. The government is ready to buy foodgrains at the declared minimum prices.
Procurement prices are the prices at which the government purchases the needed quantity of foodgrain for
maintaining the public distribution system and for building up buffer stocks.
Procurement prices are fixed at a higher level as compared to the MSP.
The government has build up an elaborate food security system in the form of public distribution system.
PGT ECONOMICS - BHAVESH SONI (8349965291)
 The 'Commission for agricultural costs and prices (CAGP) has been established by the government for this
purpose.

(iv) Food Security System:(PDS) during the planning period. PDS ensures availability of foodgrains at cheap
and subsidized rates PDS also helps the government in maintaining buffer-stock of foodgrains in order to meet
any situation shortage of foodgrains during the years of low production to the consumers.
(v) Agricultural Subsidy Policy: Under this policy the government is providing various inputs like irrigation,
fertilizers and power to the farmers at subsidised prices. The farmers get these inputs at prices below the market
prices. The objective of subsidy policy is to motivate the farmers to switch over to modern inputs in agriculture.
This will help in increasing agricultural production and productivity.
The Debate Over Subsidies
 In the farmers at lower prices than the market prices. context of agriculture, subsidy refers to availability
of inputs (irrigation, fertilizers, power) to farmers at lower price than the market price.
 The economic justification of subsidies In agriculture is, at present, a hot debated questions.
 It is generally agreed that it was necessary to use subsidies to provide an incentive for adoption of the
new HYV technology by farmers in general and small fanners in particular. Any new technology will
be looked upon as being risky by farmers. Subsidies, were, therefore, needed to encourage farmers to
test the new technology.
Subsidies should be given:
Some economists believe that the government should continue with agriculture because:
 Subsidies are needed to encourage farmers to test the new technology.
 Farming in India continues to be a risky business. Most farmers are very poor and they will not be able
to afford the required inputs without subsidies.
 Eliminating subsidies will increase the inequality between rich and poor farmers and violate the
goal of equity.
Subsidies should not be given
 Some economists believe that once the technology is found profitable and is widely adopted, subsidies
should be phased out since the purpose has been served.
 The subsidy largely benefits the farmers in the more prosperous regions. Therefore, there is no case for
continuing with fertiliser subsidies. It does not benefit the target group and it is a huge burden on the
government finances.
Critical Appraisal of Agricultural Development (1950-1990)
 By the late 1960s agricultural productivity had increased sufficiently to enable the country to be self-
sufficient in food grains.
 On the negative side, some 65% of the country's population continued to be employed in agriculture
even as late as 1990.
 The industrial sector and the service sector did not absorb the people working in agriculture as a result
large proportion of the population was engaged in agriculture. This was the important failure of policies
followed during 1950-1990.
 Economists believe that as the nation becomes more prosperous, the proportion of GDP
contributed by agriculture as well as the proportion of population working in the sector declines.
 In India, between 1950 and 1990, the proportion of GDP contributed by agriculture declined
significantly but not the population depending on it (67.5% in 1950 to 64.9% by 1990).

Industry
 At the time of independence, the variety of industries was very narrow-largely confined to cotton textiles
and jute. There were two well-managed iron and steel firms (one in jamshedpur and the other in Kolkata).
 Since independence, India has been trying to build up a sound industrial base and the five year plans
place a lot of emphasis on industrial development.
 India has experienced numerous changes in the industrial structure during the planning result, India has
emerged as a leading industrial country.

Economists have found that poor nation can progress only if they have a good industrial sector because:
 Industry provides employment (which is more stable than agriculture).
 It promotes modernisation and overall prosperity.
 It increases the growth rate of economy.
 It is the base of self-reliant economy
 It is the base of development of infrastructure
A) Role of Public Sector in Industrial Development:
 The decision was taken that the state had to play an extensive role in promoting the industrial sector.
This meant that the state would have more complete control of those industries that were vital for the
economy. The policies of the private sector would have to be complimentary to those of the public sector,
with the public sector leading the way.
 For industrial development of India role of public sector was considered by the policy makers due
to following reasons:
PGT ECONOMICS - BHAVESH SONI (8349965291)
 (a) Lack of Capital: At the time of independence, Indian industrialists did not have the capital to
undertake investment in industrial ventures required for the development of our economy.
(b) Size of Market: The market was not big enough to encourage industrialists to undertake major
projects even if they had the capital to do so.

(c) Low Inducement to invest: The private investors lacked inducement to invest. It was owing to
limited size of market and low per capita income.
(d) Socialism: The decision to develop the Indian economy on socialist lines led to the policy of the
state controlling the commanding heights of the economy, as the second five year plan put it.

B) Industrial Policy Resolution 1956 (IPR 1956)

Industrial Policy: It is a comprehensive concept which covers all the procedures, principles, policies, rules and
regulations to control the industrial undertakings of a country and shape the pattern of industrialization.

In accordance with the goal of the state controlling the commanding heights of the economy, the industrial
policy resolution of 1956 was adopted. It was formed on the basis of the second five year plan.

Important Provisions of the 1956 resolution were:

1. Classification of Industries:
The resolution classified industries into three categories. These categories were.
(a) Schedule A: The first category comprised industries which would be exclusively owned by the state. the
category, 17 industries were included.
(b) Schedule B: The second category consisted of industries in which the private se the efforts of the state
sector, with the state taking the sole responsibility for star schedule 12 industries were placed.
(c) Schedule C: The third category consisted of the remaining industries which were sector. In this schedule,
all the remaining industries were included.
2. System of Licensing:
(a) The private sector was kept under state control through a system of license. No new industry was allowed
unless a license was obtained from the government.
(b) Even an existing industry had to obtain a license for expanding output or for diversitying production. i.e
producing a new variety of goods.
(c) License to expand production was given only if the government was convinced that the economy required a
larger quantity of goods.
3. Removing Regional Disparities: It was easier to obtain a license it the industrial unit was established i an
economically backward area. In addition, such units were given certain concessions such as tax benefit and
electricity at a lower tariff. The purpose of this policy was to promote regional equality.
4. Foreign Capital:
The government recognized the need for securing the participation of foreign capital and enterprise. There
domestic and foreign capital the government was to assume a leading role in the process of industrialisation,
will be no discrimination between concessional rates.
5. Industrial Sops: While the private entrepreneurs were offered many types of industrial sops i.e. industrial
concession for establishing industry in the backward regions of the country, These sops include
(i) tax holiday for the new established industrial units in the backward regions, and
(ii) power supply at concessional rates.

C) Small-Scale Industry:
In 1955, the village and small-scale industries committee (karve committee), noted the possibility of using
small-scale industries for promoting rural development.
Small-scale industries are more labour intensive i.e., they use more labour than the large scale industries and
therefore generate more employment.
To protect small-scale industry with big industrial firms, the production of a number of products was reserved
for the small-scale industry. They were also given concessions such as lower excise duty and bank loans at
lower interest rates.

Small-Scale Industry Limit: lt is defined with reference to the maximum investment allowed on the assets
of a unit. This limit has changed over a period of time. In 1950 a small-scale industrial unit was one which
invested a maximum of rupees five lakh. At present the maximum investment allowed is rupees one crore.
Critical Appraisal of Industrial Development (1950-1990)
Achievements:
The achievements of India's industrial sector during the first seven plans are as follows.
(a) Increase in the proportion of GDP: The proportion of GDP contributed by the industrial sector increased
in the period from 13% in 1950-51 to 24.6% in 1990-91. The rise in the industry's share of GDP is an important
indicator of development.
(b) Commendable Growth Rate: The six percent annual growth rate of the industrial sector during the
period is commendable.
(c) Diversification of Industrial Structure: The industrial sector became well diversified by 1990, largely due
to the public sector. Industrial structure has been widely diversified with the development of consumer goods,

PGT ECONOMICS - BHAVESH SONI (8349965291)

 heavy and capital goods, machine making industries.
(d) Growth of Small-Scale Industries: The promotion of small-scale industries gave opportunities to those
people who did not have the capital to start large firms to get into business.
(e) Protection from Foreign Competition: Protection from foreign competition enabled the development of
indigenous industries in the areas of electronics and automobile sectors which could not have developed.

Failures: Some economists are critical to the performance of industrial sector during first seven plans.
(a) Inefficiency of Public Sector Enterprises: It is now widely held that public sector enterprises continued to
produce certain goods and services although this was no longer required or private sector firms could also
provide it. For example, "Telecommunication Service". Due to the absence of competition, even till the late
1990s one had to wait for a long time to get a telephone connection.
(b) Huge losses of Public Sector Firms: Many public sector firms incurred huge losses but continued to
function because it is difficult to close a public undertaking. It was drain on the nation's limited resources.
(c) Misuse of Industrial license:The need to obtain a license to start an industry was misused by industrial
houses. A big industrialist would get a license not for starting a new firm but to prevent competitors from starting
new firms. The 'permit license raj' (excessive regulation) prevented certain firms from becoming more efficient.
(d) Lack of Competition:
Competition from imports forces our producers to be more efficient. The protection from foreign competition
is also being criticised on the ground that it continued even after it proved to do more harm than good.
Due to restrictions on imports the Indian consumers had to purchase whatever the domestic producers produced.
The producers were aware that they had a captive market and they can sell low quality items at a high price.

Trade Policy: Import Substitution

The industrial policy of 1956 was closely related to the trade policy.
In the first seven plans, trade was characterized by an 'Inward looking trade strategy". Technically, this strategy
is called import substitution.
 Import substitution: Replacing or substituting imports with domestic production. In other words
instead of importing products made in a foreign country, industries would be encouraged to produce
them in India itself.
 Export promotion: lt is a strategy to earn foreign exchange by promoting domestic exports and making
domestic industry competitive in the international market.
In this policy the government protected the domestic industries from foreign competition.
Protection from import took two forms:
(a) Tariffs:
Tariffs are a tax imposed on imported goods.
Tariffs make imported goods more expensive and discourage their use.
(b) Quotas:
Quotas refer to fixing the maximum or specify quantity of goods which can be imported.
Quotas also restricted imports.
Reasons for the policy of protection:
It was assumed that industries of developing countries like India, are not in a position to compete against the
goods produced by developed countries. If the domestic industries are protected they will learn to compete in
the course of time.
If restrictions were not placed on imports there will be possibility of foreign exchange being spent on imports
of luxury goods.
Impact of Inward looking trade policy on the domestic industry:
Good Impact:
1. High rate of Industrial growth with structural transformation
2 . Diversification of Industrial growth
3 . Opportunities in investment
Rising industry of the time is called sunrise industry. 1950-90 was an era of electronic goods industry in
the global market. Therefore, electronic industry was then called 'Sunrise Industry.
Bad Impact:
1. Growth of Inefficient Public Monopolies
2. Lack of competition implied lack of Modemisation
3. Indiscriminate spread of Public Sector Enterprises
4. Economically unviable state enterprises - A Political Compulsion.

Box 2.3 Mahalanobis: the Architect of Indian Planning

Many distinguished thinkers contributed to the formulation of our five year plans. Among them, the name the
Statistician, Prasanta Chandra Mahalanobis, stands out.
Planning in the real sense of the term, began with the Second Five Year Plan. The Second Plan, a landmark
contribution to development planning in general, laid down the basic ideas regarding goals of Indian Planning.
In that sense, he can be regarded as the architect of Indian planning Mahalanobis was born in 1893 in Calcutta.
He was educated at the Presidency College in Calcutta and at Cambridge University in England. His
contributions to the subject of statistics brought him international fame. In 1945 he was made a Fellow (member)
of Britain's Royal Society, one of the most prestigious organisations of scientists; only the most outstanding

PGT ECONOMICS - BHAVESH SONI (8349965291)

 scientists are made members of this Society.
Mahalanobis established the Indian Statistical Institutes (IST) in Culcutta and started a journal, Sankhya, which
still serves as a respected forum for statisticians to discuss their ideas. Both, the ISI and Sankhya, are highly
regarded by statisticians and economists all over the world to this day.
During the second plan period, Mahalanobis invited many distinguished economists from India and abroad to
advise him on India’s economic development.Some of these economists became Nobel Prize winners later,

which shows that he could identify individuals with tale Among the economists invited by Mahalanobis were
those who were very critical of the socialist principles of the second plan. In other words he was willing to listen
to what his critics had to say, the mark of a great scholar.
Many economists today reject the approach to planning formulated by Mahalanobis but he will always be
remembered for playing a vital role in putting India on the road to economic progress, and statisticians continue
to profit from his contribution to statistical theory.
Source: Sukhamoy Chakravarty, 'Mahalanobis, Prasanta Chandra in John Eatwell et.al, (Eds.) The New
Palgrave Dictionary: Economic Development. W.W. Norton, New York and London.

Box 2.5 Ownership and Incentives

The policy of 'land to the tiller' is based on the idea that the cultivators will take more interest - they will have
more incentive-in increasing output if they are the owners of the land. This is because ownership of land enables
the tiller to make profit from the increased output. Tenants do not have the incentive to make improvements on
land since it is the landowner who would benefit more from higher output. The importance of ownership in
providing incentives is well illustrated by the carelessness with which farmers in the former Soviet Union used
to pack fruit for sale. It was not uncommon to see farmers packing rotten fruits along with fresh fruits in the
same box. Now, every farmer knows that the rotten fruits will spoil the fresh fruits it they are packed together.
This will be a loss to the farmer since the fruits cannot be sold. So why did the Soy oviet farmers do something
which would so obviously result in loss for them? The answer lies in the incentives facing the farmers. Since
farmers in the former Soviet Union did not own any land, they neither enjoyed the profits nor suffered the losses.
In the absence of ownership, there was no incentive on the part of farmers to be efficient, which also explains
the poor performance of the agricultural sector in the Soviet Union despite availability of vast areas of highly
fertile land.

Box 2.6 Prices as Signals

It is important to understand that prices are signals about the availability of goods. If a good becomes scarce, its
price will rise and those who use this good will have the incentive to make efficient decisions about its use based
on the price. If the price of water goes up because of lower supply, people will have the incentive to use it with
greater care; for example, they may stop watering the garden to conserve water. We complain whenever the
price of petrol increases and blame it on the government. But the increase in petrol price reflects greater scarcity
and the price rise is a signal that less petrol is available - this provides an incentive to use less petrol or look for
alternate fuels.
Some economist point out that subsidies do not allow prices to indicate the supply of a good. When electricity
and water are provided at a subsidised rate or froe, they will be used wastefully without any concern for their
scarcity. Farmers will cultivate water incentive crops if water is supplied free, although the water resources in
that region may be scarce and such crops will further deplete the already scarce resources. If water is
priced to reflect.
Question and Answers
Q. 1 Define a plan.
Answer: Plan is a written document that provides the information about the schemes, programs and strategies
that are to be undertaken in future for achieving the future goals and objectives.
Q. 2 Why did India opt for planning?
Answer: At the time of independence in 1947, Indian economy was in a very poor and backward condition. So
it was a challenge for Indian government to solve the problems of people and to provide them a better living
condition. Planning was undertaken to sustain political independence and to generate economic prosperity.
India wanted to opt socialism like Soviet Union and so it went for planning to emphasize on public sector as
well as to allow active participation of private sector. The planning commission was established in 1950.
Q. 3 Why should plans have goals?
Answer: Goals are the targets for which plans are made. Plan specifies the methods and strategies regarding
the allocation of resources for the attainment of proposed targets or goals.
Goal is an important part of a plan without which the plan will be like life without soul. Thus, we can say that
every plan must have a goal so that it can be achieved within a specified period of time and ensure the success
of the plan.
Q. 4 What are High Yielding Variety (HYV) seeds?
Answer: High yielding variety seeds are the miracle seeds which result in high production level when combined
with adequate water supply, fertilizers, pesticides, etc.
Q. 5 What is marketable surplus?
Answer: Marketable surplus is that part of total agricultural output which is sold in the market by the farmer
after fulfilling his own need. We can define it as the excess of total farm output over the own consumption of
farmers.

PGT ECONOMICS - BHAVESH SONI (8349965291)

 Q. 6 Explain the need and type of land reforms implemented in the agriculture sector.
Answer: After independence the land reforms were necessary
To promote the agricultural productivity
• To remove intermediaries and make a direct link between farmer and government and
• To bring equity in agriculture
• The land reforms that were implemented in agricultural sector
• Tenancy reforms and Reorganization of agriculture

Tenancy reforms is concerned with

• Rent regulation
• Security of tenure and Ownership rights of tenants
Reorganization of agriculture is concerned with -
• The distribution of land
• Consolidation of holdings and Co-operative farming
Q. 7 What is Green Revolution? Why was it implemented and how did it benefit the farmers? Explain in
brief.
Answer: The significant and continuous increase in agricultural production due to the use of high yielding
variety seeds, irrigation facilities, and fertilizers is known as green revolution.
The benefits of green revolution can be summarized as below
1. In beginning the green revolution was limited to wheat and rice and so it succeeded in removing the ruler
poverty of the states engaged in growing wheat and rice.
2. The traditional methods of farming were transformed into modern methods of farming.
3. It solved the problem of seasonal unemployment to a great extent because it became possible to grow more
than one crop on a piece of land and so the workers could be engaged throughout the year.
Q. 8 Explain growth with equity as a planning objective.
Answer: Growth with equity means development with social justice. After independence the Indian government
had two objectives - one was economic growth and the second equity.
Economic growth means increase in national income and GDP and equity means reduction in inequality, up-
liftmen of the weaker sections of society, and equal distribution of economic power.
When the both objectives are attained together it means growth with equity.
Q. 9 Does modernization as a planning objective create contradiction in the light of employment
generation? Explain.
Answer: Modernization as a planning objective means introducing new technologies. The use of advanced
technology requires less labour for one unit of output so in some way modernization create unemployment at
the beginning, but in long run modernization will not contradict with employment generation because with help
of modern technology the GDP will increase, which will increase the income and demand and this will require
more output and hence it will generate job opportunities.
Q. 10 Why was it necessary for a developing country like India to follow self-reliance as a planning
objective?
Answer: Self-reliance means avoiding the import of such goods which could be produced domestically. The
benefits of self-reliance are
• Self-sufficiency in food grains
• Decreased imports and increased exports
• Increased Gross Domestic Product
• Economic growth and modernization
Therefore, for a developing country like India self-reliance as a planning objective is very important so as to
improve the economic condition of the country and to make it independent.
Q. 11 What is sectoral composition of an economy? Is it necessary that the service sector should contribute
maximum to GDP of an economy? Comment.
Answer: Sectoral composition of an economy means the contribution of each sector in the GDP of the country.
Countries having maximum contribution from the service sector in their GDP are economically developed.
Q. 12Why was public sector given a leading role in industrial development during the planning period?
Answer: The public sector was given a leading role in Industrial Development during the planning period due
to the following reasons-
- For creating strong industrial base
- For developing the infrastructure and for development of the backward areas
- For equal distribution of economic power
- To remove inequality of income and wealth
- For employment generation
- For self-reliance
- To mobilize savings and for earning Foreign Exchange
Q. 13 Explain the statement that green revolution enabled the government to procure sufficient food
grains to build its stocks that could be used during times of shortage.
Answer: The given statement is quite true. Green revolution enabled the farmers to produce more of food grains
and to sell the extra production, that is the production left after their own consumption, in the market.
Government purchase food grains either directly from the farmers or from the market at minimum prices and
keep stock which can be used during the period of emergencies.
After Green Revolution we have no more dependency on other countries for supply of food grains rather we
PGT ECONOMICS - BHAVESH SONI (8349965291)
 became self-reliant mainly in the field of producing food grains and also became exporter of food grains to other
under developed nations.
Q. 14 While subsidies encourage farmers to use new technology, they are a huge burden on government
finances. Discuss the usefulness of subsidies in the light of this fact.
Answer: Subsidy means the economic benefit given by the government directly or indirectly to the domestic
producers of goods and services. Agricultural subsidy means the benefit given to the farmers for using new and
advanced technologies and producing more food grains.
These subsidiaries are important because-

• They provide an incentive for adoption of new technology by the farmers specially the small farmers.
• It assures farmer against the risk of new technology.
• It provides hedging against the risk of climatic conditions and brings equity between rich and poor farmers by
enabling the poor farmers to use modern technology and imports.
However, these subsidies are burden for the government and arguments against agricultural subsidies are
• The objective of granting subsidies was adoption of new technology in agriculture and as the new technology
has been widely adopted so now the subsidy should be removed.
• After certain limit subsidies provided incentive for the wasteful use of resources.
• The rich farmers also enjoy the benefits of subsidies though they don't require it.
• Subsidies benefit the fertilizer industry more than the farmers.
Q. 15 Why, despite the implementation of green revolution, 65 per cent of our population continued to be
engaged in the agriculture sector till 1990?
Answer: After green revolution the Indian agricultural production increased substantially and made India self-
reliant in terms of food grains but the increase was limited to wheat and rice. These crops were produced in few
states of India and so the farmers of other state started looking job in manufacturing and service sector but the
economy was not ready to absorb this wider section of community so the major part of the population was
forced to remain dependent upon agriculture because the manufacturing and service sector were facing slow
growth and this is the reason due to which 65% of our population continued to be engaged in agriculture even
after green revolution till 1990.
Q. 16 Though public sector is very essential for industries; many public- sector undertakings incur huge
losses and are a drain on the economy's resources. Discuss the usefulness of public sector undertakings
in the light of this fact.
Answer: Public sector undertakings are useful because
a) They create strong industrial base
b) They prevent concentration of economic power
c) They help in employment generation
d) They help in import substitution
e) The help in removing regional imbalance and play major role in development of backward areas
f) They help in the development of the infrastructure
Q. 17 Explain how import substitution can protect domestic industry.
Answer: Import substitution means producing goods in own country than importing them. The government
protected the domestic industries from foreign competition by the policy of import substitution.
For this purpose, two important steps were taken -
At first tax or duty was imposed on import which made the imported goods expensive and
Secondly quota was fixed for the quantity of goods that can be imported.
Q. 18 Why and how was private sector regulated under the IPR 1956?
Answer: Under the IPR 1956 the private sector was given minimum role. Before starting operation, the new
industries were required to obtain license from government, which was given after a proper scrutiny by the
government.
The private sector was regulated to promote regional equality and to promote industry in backward regions
Q. 19 Match the following:
1. Prime Minister A. Seeds that give large proportion of output
2. Gross Domestic B. Quantity of goods that can be imported
3. Quota C. Chairperson of the planning combussion
4. Land Reform D. The money value of all the final goods and services within the
economy in one year
5. HYV Seeds E. Improvements in the field of agriculture to increase its productivity
6. Subsidy F. The monetary assistance given by government for production
activities.
Answers-
Prime Minister-Chairperson of the planning commission
Gross Domestic The money value of all the final goods and services produced within the economy in one year
Quota Quantity of goods that can het imported
Land Reforms - Improvements in the field of agriculture to increase its productivity
HYV Seeds - Seeds that give large proportion of output
Subsidy - The monetary assistance given by government for production activities.

PGT ECONOMICS - BHAVESH SONI (8349965291)

 IMPORTANT DATES -

PGT ECONOMICS - BHAVESH SONI (8349965291)