PP-101: Indian Economic and Political History

Session 7

Professor Biju Paul Abraham

Public Policy & Management Group
Email: abraham@iimcal.ac.in

Sessions
7 From Idea to Implementation – Planning in
Practice (Chakravarty, 1989)

8 Command & Control - Problems of

Competitiveness (Mukherji, 2000)

9 Relaxation of Controls and its

Consequences - The Economic Crisis of
1991(Kochanek, 1986)

10 Post-Crisis Liberalization and its Impact

(Kohli, 2007)

1
 7 From Idea to Implementation –
Planning in India

The Rationale for Planning

The objectives of planning – Why plan?

Three assumptions:
o the basic constraint on development was the deficiency of a
capital-goods sector
o Industrialization provided the means for surplus labour to be
productively employed
o Government needed to control investment because if market forces
operated concentration of investment (both location and holding)
would continue and investment would flow to non-essential sectors

The objective was to make India a high-growth, self-

reliant, modern economic power by implementing five-
year plans for investment and growth

2
 Sectoral Contribution to GDP – 1951-52
to 2013-14
(Source: http://statisticstimes.com/economy/sectorwise-gdp-contribution-of-
india.php)

Institutionalizing Planning - The

Three Pillars of Planned Economic
Growth
The Industries (Development & Regulation)
Act of 1951

The Licensing System

Progressive Taxation

3
 The Industries (Development &
Regulation) Act, 1951
The most complex and comprehensive
system of control and regulation of private
sector enterprise devised worldwide
Objectives:
o regulation of investments according to plan priorities and
targets
o prevention of concentration of holding in the private sector
o balanced industrial development to reduce disparities in levels
of development
o protection and encouragement of small-scale industries

Delegated vast powers to the bureaucracy,

especially the Planning Commission, set up in
March 1950 by a Cabinet Resolution
All existing industries had to register
Licenses were required for new investments,
capacity addition or over-production
Industries were subject to regulation that
included the power to:
o investigate the operations of a firm
o assume management control if necessary
o control supply, distribution and prices of products

4
 The Act initially covered 42 industrial
.

sectors and 150 articles of manufacture

These were industrial sectors where both
the public sector and private sector were
allowed to operate in the mixed-economy
framework
Did not include sectors of exclusive state
monopoly (defence, atomic energy,
railways) or where the state had a monopoly
for setting up new industries (iron and steel,
coal, shipbuilding, telecom…)

The list was expanded in 1956 to include an

additional 26 industries and by the mid-
sixties it covered almost all industries where
the private sector was allowed to operate

10

5
 Negotiating the System
We needed to import steel and copper, and had to make the
payments to an English company. So that meant we had to: one,
get an import license; two ask the RBI to release the foreign
exchange; three get the payment released; four get the
permission to manufacture.

For foreign collaboration, like we had between TVS and Lucas,

we had to prove it was justified: how much it would cost, how
long it would last, whether expatriates were needed, then how
much they would be paid, how many days’ travelling would be
required. Each stage – each permission – took us six months to
a year. We had to set up a large office in Delhi in order to apply
to the ministries. Twice every month, my father had to fly from
Madras to Delhi

Gopal Srinivasan quoted in Patrick French, India: A Portrait

(Allen Lane/Penguin: 2011)

11

Taxation Policy - Objectives

…produce a sizeable addition to public revenue
…provide incentives for larger earnings and more
savings
…restrain consumption over a fairly wide field so as
to keep in check domestic inflationary pressures and
release resources required for investment
…initiate such changes in the tax structure as would
make tax yields progressively more responsive to
increased income and facilitate an orderly
development of the economy with due regard to the
social objectives we have adopted

– T.T.Krishnamachari, Budget Speech, 1957-58.

12

6
 Progressive Taxation
Taxation was related not just to economic
policy but to social strategy as well
Income tax rates were hiked both to collect
additional revenue and reduce disparities in
income
New Taxes were introduced
– Estate Duty (1953)
– Capital Gains Tax (1956)
– Wealth Tax (1957)
– Gift Tax (1958)

13