Indian Economybefore 1991, Linear Trendsand Agriculture

ECONOMICS (OPTIONAL)
FOUNDATION COURSE
for CSE 2021-2022
PAPER 2 Indian Economy:

INDIAN ECONOMY BEFORE 1991
LINEAR TREND & AGRICULTURE
by
Vibhas Jha Sir

Indian Economy before 1991: Linear trends and Agriculture Economy (Optional): Vibhas Jha Sir
UPSC ECONOMICS OPTIONAL SYLLABUS

Paper I
1. Advanced Micro-Economics:
a. Marshallian and Walrasian Approaches to Price Determination.
b. Alternative Distribution Theories: Ricardo, Kaldor, Kaleeki.
c. Markets Structure: Monopolistic Competition, Duopoly, Oligopoly.
d. Modern Welfare Criteria: Pareto Hicks & Scitovsky, Arrow's Impossibility Theorem,
A.K. Sen's Social Welfare Function.
2. Advanced Macroeconomics:
a. Approaches to Employment Income and Interest Rate Determination
b. Classical, Keynes (IS-LM) Curve,
c. Neo Classical Synthesis and New Classical Theories of Interest Rate Determination and
Interest Rate Structure.
3. Money - Banking and Finance:

a. Demand for and Supply of Money: Money Multiplier Quantity Theory of Money (Fisher, Pique
and Friedman) and Keynes’s Theory on Demand for Money, Goals and Instruments of
Monetary Management in Closed and Open Economies; Relation between Central Bank and
the Treasury; Proposal for a ceiling on the growth rate of money.
b. Public Finance and its Role in Market Economy: In stabilization of supply, allocation of
resources and in distribution and development; Sources of Govt. revenue, Forms of Taxes
and Subsidies, their incidence and effects; Limits to taxation, loans, crowding-out effects
and limits to borrowings; Public Expenditure and its effects.
4. International Economics:
a. Old and New Theories of International Trade
● Comparative Advantage
● Terms of Trade and Offer Curve.
● Product Cycle and Strategic Trade Theories.
● Trade as an engine of growth and theories of under development in an open economy.
b. Forms of Protection: Tariff and Quota.
c. Balance of Payments Adjustments: Alternative Approaches.
● Price versus Income, Income Adjustments under Fixed Exchange Rates,
● Theories of Policy Mix
● Exchange Rate Adjustments under Capital Mobility
● Floating Rates and their Implications for Developing Countries: Currency Boards.
● Trade Policy and Developing Countries.
● BOP, Adjustments and Policy Coordination in Open-Economy Macro-Model.
● Speculative attacks
● Trade Blocks and Monetary Unions.
● WTO: TRIMS, TRIPS, Domestic Measures, Different Rounds of WTO talks.
5. Growth and Development

a. Theories of Growth:
● Harrod's Model
● Lewis Model of Development with Surplus Labour
● Balanced and Unbalanced Growth
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Economy (Optional): Vibhas Jha Sir Indian Economy before 1991: Linear trends and Agriculture
● Human Capital and Economic Growth
● Research & Development and Economic Growth
b. Process of Economic Development of Less-developed Countries: Myrdal and Kuznetts on
economic development and structural change
● Role of Agriculture in Economics
● Development of less developed countries.
c. Economic Development and International Trade and Investment, Role of Multinationals.
d. Planning and Economic Development: The changing role of Markets and Planning, Private-
Public Partnership.
e. Welfare indicators and measures of growth - Human Development Indices. The basic needs
approach.
f. Development and Environmental Sustainability - Renewable and Non-Renewable Resources,
Environmental Degradation, Intergenerational equity development.
Paper II
1. Indian Economy in Pre-Independence Era: Land System and its
changes, Commercialization of agriculture, Drain theory, Laissez-
faire theory and critique. Manufacture and Transport: Jute,
Cotton, Railways, Money and Credit.
2. Indian Economy after Independence:

A. The Pre Liberalization Era:
● Contribution of Vakil, Gadgil and V.K.R.V. Rao.
● Agriculture: Land Reforms and Land Tenure System, Green Revolution and Capital Formation
in Agriculture.
● Industry Trends in composition and growth, Role of Public and Private sector, Small-Scale
and cottage industries.
● National and Per Capita Income: Patterns, Trends, Aggregate and Sectoral Composition and
changes therein.
● Broad factors determining National Income and distribution, Measures of poverty, Trends in
poverty and inequality.
B. The Post Liberalization Era:

● New Economic Reform and Agriculture: Agriculture and WTO, Food Processing, Subsidies,
Agricultural Prices and Public Distribution System, Impact of Public Expenditure on
agricultural growth.
● New Economic Policy and Industry: Strategy of Industrialization, Privatization,
Disinvestments, Role of Foreign Direct Investment and Multinationals.
● New Economic Policy and Trade: Intellectual Property Rights: Implications of TRIPS, TRIMS,
GATS and new EXIM policy.
● New Exchange Rate Regime: Partial and Full Convertibility, Capital Account Convertibility.
● New Economic Policy and Public Finance: Fiscal Responsibility Act, Twelfth Finance
Commission and Fiscal Federalism and Fiscal Consolidation.
● New Economic Policy and Monetary System. Role of RBI under the new regime.
● Planning: From Central Planning to Indicative Planning, Relation between planning and
markets for growth and decentralized planning: 73rd and 74th Constitutional amendments.
● New Economic Policy and Employment: Employment and Poverty, Rural Wages, Employment
Generation, Poverty Alleviation Schemes, New Rural Employment Guarantee Scheme.
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Indian Economy on the Eve of Independence
The Indian economy in 1947 represented a typical underdeveloped economic system which was dominated by
rural production capacity with 72% of its workforce in agriculture and allied activities producing 49.1% of its
national income.
The contribution of the industrial sector of mining, manufacturing and small enterprises was 17.1% to national
income and 10.7% to the workforce. Employment in organised industry was only 2%, lesser than even public
administration which employed 2-7% of the workforce.
Trade, transport and communication along with other services contributed 34.2% of national incomeand 17% to
the workforce. But, most of the services were primitive with lack of any technological support. The
distribution of national income and workforce in India reflected extreme backwardness which was a big
constraint on future development.
Causes for Underdevelopment

1. Stagnant and Deteriorating Agriculture
In per capita terms, agricultural growth between 1911 and 1941 was -0.72% compounded. In food
grains it was -1.14% per annum.
Commercial cropping showed higher production because better land and resources were shifted to
non-food grains but it was not sufficient to negate the downward impact of fall in food grain
production.
Reasons
a. Regressive agrarian structure that favoured the rich more
Britishers created zamindari and ryotwari systems. Landlords were favoured whodominated
the system.
Peasants had no incentive to work harder than required.
Landlords had no incentive to invest in land.
b. Internal drain of capital
It started in the 18th and 19th century, with the establishment of a permanent settlement
system under which a lot of produce by the farmer was taken away as land revenue by rich
landlords and it was then transferred to the british.
The surplus generated in agriculture did not remain in agriculture, it was rather used to finance
external trade, government administration and wars.
c. Poor technology
Complete absence of modern machinery and improved variety of seeds covered less than 12%
land till 1938-39; and this was only seen in commercial agriculture, suggesting that capacity
creation in foodgrain production was continuously suffering. British treated farmers as
providers of raw materials who could be exploited at will, not as consumers of their products.
2. Poor industrial structure

a. Conscious deindustrialisation
The Indian industrial structure was consciously destroyed by imperial control. For example,
between 1815 and 1832, cotton textile exports from India dropped by 92% and by mid-1850s
25% of British cotton exports were to India. This was because Britishers imposed taxes at
72% on Indian textile industry while British exports to India had 0% tax. Another reason was
the destruction of Indian handicraft industry which could not face the challenge from mass
produced British exports.
According to independent estimates, dependence on the agricultural sector kept increasing,
while 61% of the working population was dependent on agriculture in
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1881, 73% had become dependent on agriculture by 1921 and it remained the same till 1947.
b. Lack of capital goods sector
Till 1950, 90% of Indian capital goods were imported. Modern industries showed a growth
only in sectors that Britishers needed not in chemicals, civil aviation, etc.
c. Lack of modernity in Industrialisation
Overall, modern industry grew at 3.8% per annum after the 1st World War but it didn't cover
technologically developed industries and it was concentrated in cotton textile, jute textile and
sugar industry.
63% of total industrial value added was in these sectors, while only 2% in chemicals.
d. Unbalanced industrial development such that it was concentrated in few cities in
particular regions.
In spite of poor industrial structure where the share of manufacturing was not even 10% in total national
income and its share in employment was 2.3%, there were few legacies of British period which helped in
improved industrialisation after 1947. Like:
1. Better transportation and communication facilities

2. Strong capitalist class with large savings
3. Unified code of law
4. Rational and modern thought process
In totality, the impact of British control on India was negative on industrial development in particular and
economic development in general. This was because most economic activity was concentrated on production
of raw material for export supported by liberal trade of manufacturing goods into the country which created
deindustrialisation.
The financial sector was controlled by the Britishers which perpetuated more industrial control in the
economy with the foreigners. It also resulted in depriving the economy from multiplier effects in terms of
income, employment, capital, technical knowledge and financial expertise which generally accompanies an
economy in its initial period of industrialisation.
The institutional mechanisms with respect to trade and industry were not conducive to growth within India, it
was more programmed for growth of Britain.
Rationale for Planning
1. When India won independence in 1947, it was very backward economically and the general consensus
was that planning was required for the economic development of the country.
2. Social justice
Planning was advocated in the country for designing poverty alleviation programmes, tackling the
unemployment problem and employing human resources in a fruitful manner.
3. In a society plagued by highly skewed income distribution, competitive markets would have dictated a
pattern of investment in conflict with the overall long-term objectives of the country.
In developing economies, the choice of development projects has to be based on social benefits rather
than private profitability, hence the need for planning.
4. Efficient development of infrastructure
India was severely lagging behind in infrastructure development. However, there was a presence of
basic infrastructure in certain regions and complete absence in others. Therefore, it was needed that
considering large resource requirements, balanced regional growth requirements and equitable
distribution requirements, planned infrastructure growth should be done in India.
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Features of Indian Plans
1. Indicative economic planning
The Indian plans did not carry an element of compulsion or inevitability as found in the planning of
socialist countries. The Indian plans generally laid down targets even for those sectors over which the
government had no control. The main reason for this state of affairs was the presence of the mixed
economy.
2. Physical planning
Physical planning implies allocation of resources in terms of men, material and power to accomplish
the targets laid down in plan documents. P.C. Mahalanobis and Pitambar Pant who influenced the
framing of the second FYP most were physical planners.
3. Indian planning has all along focused on social planning rather than pure economic planning.Because of
its social nature, the impact of all those factors that affect the political environment has been very
much visible on Indian planning as well.
Objectives of Economic Planning
1. Economic growth
2. Self-reliance
3. Removal of unemployment
4. Reduction in income inequalities
5. Elimination of poverty
6. Modernisation and
7. Inclusiveness and sustainability of growth
Economic growth has always remained in focus on the main objective of Indian FYPs. Even when some other
objectives were stated emphatically in some FYPs, the objective of growth retained its preeminent position.
High priority to economic growth seemed justified, particularly, when we view it in the context of a long
period of stagnation in the 19th and early 20th century. Therefore, once the country gained independence, the
unequivocal choice of the decision-makers was for economic growth.
Evaluation of Planning Structure
The estimation of national income in India was initiated during the British period but most of the estimates did
not have a very strong scientific basis. The first serious estimate of national income recognised in the country
was by V.K.R.V. Rao who made use of a combination of census of outputand census of income method.
After independence, the government of India appointed the National Income Committee in August,1949.
The report of the committee appeared in 1954 and for the first time a comprehensive data of national income
for the whole of India was provided. The committee divided the economy into three major sectors:
a. Agriculture and allied sectors (Primary sector)

b. Secondary sector
- Mining and quarrying
- Manufacturing
- Electricity, gas and water supply
- Construction
c. Services sector
- Trade, hotels, transport and communication
- Finance, real estate, insurance and business services
- Community, social, personal services
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The estimates were taken by using a combination of net output method in agriculture and net income method
in other sectors. The plan period before 1991 can be divided into three broad phases - 1951-65, 1965-80 and
1980-91.
First Stage (1951-1965)
The first FYP targeted a growth rate of 2.1% per annum and achieved 4.6% per annum. The first bold target
was fixed in 2nd FYP (4.5% per annum at constant price). The government achieved a growth rate of 4.1%
which was strong enough considering the economic structure inherited from the colonial era.
The third FYP was more ambitious and set a target of 5.6% per annum but it could achieve a growth of only
3.3%.
Analysis of Growth During 1951-65
1. Growth mostly took place due to fast industrialisation - manufacturing sector and construction sector
were showing fast growth in this time period and they were supported by electricity, gas and water
supply, which was growing at more than 10%.
2. Growth was supported by capital formation at a fast rate.
3. Agriculture growth was steady at 3% per annum.
4. The growth was supported by increase in public administration and community services which were
growing at more than 4%.
The period saw good enough growth in different sectors of the economy and national income over the entire
period was showing a steady increase. It increased from Rs.2,55,405 lakh crore in 1950- 51 to approx Rs.4
lakh crore by 1965. But, there were several structural and economic problems that remained and influenced
growth possibilities. They were:
a. Dependence on agriculture to achieve growth continued throughout the period. Agriculture kept
contributing more than 50% of GDP and any slowdown in agriculture had a disproportionate effect on
growth in the economy.
b. Occupational structure was showing no significant impact of changing.
c. The growth was healthy but not without disruptions. There was a slowdown in 1957-58 (BOP crisis),
1961-62 (agriculture crisis) and 1964-65 (war) to the extent that the government hadto take emergency
policy measures.
d. Self sufficiency with respect to food grains was still not achieved, mainly due to lack of technical and
institutional growth.
e. Consumer goods industry, especially consumer non-durables, did not record a significant increase in
production.
Therefore, the theory of trickle down that was envisaged during the first 3 FYPs could not succeed in spite of
healthy growth achieved during the period.
Basis of All Plans Till 1991
There were three main aspects of the strategy of development in the earlier period:
1. Developing a sound base for initiating the process of long-term growth.
Under the circumstances, it was strategically a correct policy to direct all efforts towards solving the
problems that the country faced at the time and lay down a foundation for planned development in the
future.
2. High priority to industrialisation
The strategy for long-term development was spelt out in the second FYP. The draft outline of this plan
was prepared by P.C. Mahalanobis whose contribution in formulating this strategy is well known.
There were several reasons why Indian planners gave a high priority to industrialisation.
- At the time of independence, the country was industrially backward and thus establishment of new
industries on a big scale and development of the traditional industry was an imperative necessity.
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- Productivity of labour is highest in the industrial sector. Thus, the need to establishindustries
and push up the GDP.
- Excessive pressure of population on land and need to transfer the surplus labour.
- Industrialisation induces development in other sectors.
3. Emphasis on development of capital goods industries

The dependence on foreign countries for capital equipment is a big obstacle to development. It also
makes the country vulnerable to external pressures. Lacking in capitalfor development purposes, India
at the time of independence thus had no option but to adopt the strategy of ‘unbalanced growth’. It
was not possible to develop both the capital goods and consumer goods industries. Growth of
consumer goods industries and agriculturewas left to market forces.
Import Substitution
Looking from a slightly different angle, the Mahalanobis strategy of development would seem to be resting on
import substitution. The strategy of import substitution is based on infant industry argument. Such a strategy
enables the developing countries to develop their industrial structure behind tariff walls (i.e., without a fear of
competition from other countries). Once the process of industrialisation is initiated in this way, it tends to
become self-sustaining. The experience of many developing countries shows that import substitution starts
predominantly with the manufacture of finished consumer goods that were previously imported and then
moves on, more or less rapidly and successfully, to the 'higher stages of manufacture', that is, to intermediate
goods and machinery, through backward linkage effects. In the 1950s and 1960s, the import substitution
strategy dominated the industrialisation strategies of the larger Latin American countries (Brazil, Argentina,
Mexico) and a number of larger countries in South and South-East Asia (India, Pakistan,the Philippines).
In India, the first temptation in adopting an import substitution strategy came from the acute balance of
payments problem that we faced. This strategy enabled India to substitute foreign industrial goods by
domestically produced industrial goods and save foreign exchange. By imposing high import duties on foreign
industrial goods, the State also earned a sizable revenue and invested this money in programmes of economic
development. Domestic producers, on the other hand, were enabled to raise the prices of their goods and thus
earn a handsome profit. When this profit was reinvested, the process of industrial growth got a boost up.
However, the basic rationale of an import substitution policy is that it helped India - an underdeveloped
country in building up its industrial structure which in turn, is a sine qua non of economic development.
Historical evidence of many now developed countries shows that not only the share of industrial output rose
with development, but also that the growth of industries based on import substitution accounted for a large
proportion of total rise in industry.
Another argument for import substitution rests on the contention that an underdeveloped country's demand for
industrial imports increases much more rapidly than does the foreign demand for its exports. The inability of
exports to increase rapidly is due to the inability of primary exports to expand at a fast rate. Therefore, to meet
domestic demand of industrial products, the underdeveloped countries must set up import substituting
industries.
Import substitution led industrialisation is also justified on the ground that it helps in solving the problem of
unemployment and underemployment in the underdeveloped countries. The contentionof the supporters of this
argument is that a permanent solution to the problem of unemployment and underdevelopment in these
countries lies in creating employment opportunities outside agriculture. This is possible only if the process of
industrialisation is accelerated at a fast enough rate.
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The operations of the import substituting industries are themselves open to a number of objections. For instance,
the enterprises fail to develop export markets; remain continuously dependent on extensive use of imported
parts and machinery, use techniques adopted from the advanced countries and, therefore, inappropriate to the
relative factor endowments of the domestic economy; rely on second-hand of antiquated equipment, ete. These
enterprises tend to duplicate the market structure and marketing methods of the advanced countries high
distributive margins, heavy advertising, extensive product differentiation, rapid product changes, etc. -
practices which are of questionable value in the entirely different non-industrial environment of the
underdeveloped countries.
Defects of the import substitution-led industrialisation can be summarised as follows:
1. The simple and relatively easy phase of import substitution has reached, or is reaching, its limit in the
countries where industrialisation has made most progress. Any further progress in this direction
requires heavy capital expenditure showing that there are limits to import substitution in the
developing countries.
2. Because of the smallness of the national markets (in addition to other adverse factors), the costs of
production in import substituting industries are 'excessive' necessitating a recourse to very high
protective tariffs.
3. The type of import substitution industries that were generally set up were not the ones dictated by the
long term requirements of the economy but were to produce those goods which the underdeveloped
countries found it difficult to procure from other countries. This led to the setting up of many luxury
goods producing industries - a clear distortion of production structure.
4. Because of this tendency to set up non-essential goods industries as a part of the import substitution
strategy, many developing countries have been obliged to increase their dependence on imports of
essential goods particularly those required by productive activities).
5. Import substitution strategy has forced the underdeveloped countries to go in for 'excessive
protectionism’. This has generally insulated national markets from external competition, weakening
and even destroying the incentive necessary for improving the quality of output and lowering costs
under the private enterprise system. This has made the goods produced by these industries
uncompetitive in international markets and has also increased their prices in the home market.
6. Last, but not the least, import substitution-led industrialisation has operated against the declared
objective of social and economic equality which most of the developing countries have laid down in
their economie plans. This is due to the fact that protectionist policies in many developing countries
have promoted industries, which are capital intensive, employ a relatively small labour force, and tend
to accentuate income disparities (since most of theseindustries are set up by large business houses).
There were three major problems which this country was expected to face in following the above strategy of
development in the earlier phase of economic planning.
1. The possibility of scarcity of essential commodities.
When a country makes a deliberate effort to divert massive resources for the development of capital
goods industries, not much resources are left for other productive activities. In this situation, there is a
possibility that shortages of consumer goods develop. This was precisely the problem with the
strategy of development in the earlier phase of planning.
2. Raising the level of saving
The rate of saving was around 9 percent of GDP at the time of Independence. No development
planning was conceivable at this level of capital formation. The government was, however, committed
to achieve 5 percent per annum increase in the national income
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and this required adoption of various measures for raising the level of capital formation. Inthis regard,
two policy decisions deserve particular mention. First, on the completion of development projects,
whatever surplus they could generate had to be utilised for investment. Second, if mobilisation of
adequate resources of development plans was not possible. foreign capital could be invited to meet the
deficiency.
3. Payments problem caused by the import of capital equipment. Because India had no machine building
industry in the early years of economic planning, it had no choice but to import all the capital
equipment which it needed for setting up industries. This involved such a large amount of foreign
exchange that this country could not hope to earn it through exports in normal course. Hence, the
development strategy laid stress on export promotion efforts.
Appraisal of the Mahalanobis Strategy of Development
C.N. Vakil and P.R. Brahmananda had put forward an alternative approach to Indian planning at the time of
the formulation of the Second Five Year Plan. Their approach in essence was diametrically opposite to that
adopted by the planners in the mid-1950s.
1. Missing the role of wage goods as capital.

As against the Planning Commission's entire emphasis on the role of fixed capital, Vakil and
Brahmananda's total emphasis was on the role of wage goods as capital. Taking a serious note of the
existence of massive overpopulation in agriculture, they asserted that India needed a development
strategy whereby the concealed saving potential that existed in theform of disguised unemployment in
the countryside could be realised.
2. Preoccupation with self-sufficiency and thus unwarranted stress on import substitution. I.G. Patel
criticised the strategy of planned development adopted by the planners for its preoccupation with self-
sufficiency. In his opinion, the assumption of Indian planners that export possibilities in the earlier
phase of economic planning in general were limited was not correct and, therefore, the strategy
evolved on this basis was also not without snags.
3. The development strategy of the earlier phase had a few other snags. In the first place, the strategy
assumed that the current consumption needs would be adequately met through productive capacities
already available and in case some shortages developed, the problems could be overcome by
introducing controls. In any case, the strategy did not visualise any on this front. The experience,
however, proved that the complacency of the planners in this respect had no justification. Even in
respect of a basic commodity like foodgrains, the development strategy did not provide as to how
supply of foodgrains was to be ensured for meeting the growing demand. The measures relied upon for
this purpose were extension of irrigation and community development programmes. These measures,
however, proved to be inadequate and the country had to import foodgrains in large quantities which
generatedextra strains on the already difficult balance of payments position.
Secondly, there was a major snag in the employment aspect of development strategy. The strategy had
visualised that full employment would be attained by realising 5 percent annual increase in the national
income. It was admitted that modern industries would not generate much employment but it was
hopefully asserted that the traditional sectors meeting the demand for basic consumption goods had
the capacity to absorb all the available labour force outside the modern sector. Thus, the objective of
additional employment was to be taken care of by the policies which were parallel to, but not an
integral part of the strategyof growth.
Finally, the development strategy greatly relied on the percolation effect of growth for reduction in
income Inequalities. Now it is widely admitted that economic growth by itself may not solve or even
alleviate the problem within any reasonable time period.
Failure of Mahalanobis Strategy of Development
During the Second FYP, both saving and investment rates rose considerably and output targets were nearly
achieved. During the third plan period, however, the development process ran into serious difficulties. Some
reasons for this were:
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a. In the first place, the process of agricultural growth had slowed down, particularly because the
potentiality of raising the agricultural output through extending the area under cultivation had almost
exhausted, while the demand for food continued to increase rapidly on account of rapid growth of
population. This created an alarming situation and the country had to import large quantities of
foodgrains.
b. Another problem which the country faced was large trade deficits. Massive investments in heavy
industries had required large imports without a matching increase in exports.
c. Finally, the net saving rate instead of rising further slumped down and, as a result, on an average
around 25 per cent of the investment had to be financed by foreign aid.
During the second half of the 1960s, since the excess demand generated through a high rate of public
investment could not be matched with the supply of foodgrains and other consumer goods, an inflationary
situation developed and the general price level rose at a rate of about 8.6 per cent per annum. It was at this
juncture that several studies clearly indicated that income inequalities inthe country had not diminished during
the planning period and the gains of development had not trickled down to reach the poorest. Slow agricultural
growth in many parts of the country coupled with rapid population growth had also resulted in widespread
unemployment in large parts of rural India. The faith in the development strategy as defined in the
Mahalanobis model was shaken and a 'Plan holiday' was declared for three years.
Explanation of dual gap and its persistence in India from 1963-1991 (Discussed in class)
Second Stage (1965-1980)

The period between third and fourth FYP was very volatile for the economy and agricultural growth was less
than 2% in this period. The growth of the industrial sector also declined which continued in the 4th and 5th
FYP period. The 4th FYP (1969-74) gave a high priority to agricultural stability and its main objective was to
stabilise the economy and minimise uncertainty.
The 4th FYP showed an annual increase of 3% in national income but the plan experienced heavy fluctuations
and the objective of growth with stability remained elusive.
The 5th plan period (1974-79) created growth of 5% per annum which was higher than what was planned
(4.4%).
The growth recorded in agriculture during this time period was impressive overall but it had large fluctuations.
The average agricultural growth rate was less than 3.5% while maximum growth was observed in the
infrastructural sector. The government was spending heavily on road transport and electricity especially
between 1971-75.
The growth in industry was not very high with very less growth in capital goods and basic industries. Overall
economic growth was not stable and the expert committee of government of India under
L.K. Jha was already suggesting large scale reforms in 1977.
At the end of the second stage, Indian economy was struggling in most spheres.
a. Industrial growth was very low and was found to be negative in 1979-80.
b. Industrial structure for agricultural growth was still missing, which meant that growth inagriculture
was limited to green revolution areas.
c. Rural infrastructure especially road transport and electricity sector was not fully establishedand showed
huge underproductivity in eastern India.
d. Government control and license permit system restricted the capacity of industries and laws like MRTP
Act and FERA discouraged business by new entrepreneurs.
e. The taxation system, both direct and indirect tax was not rational with income tax rates including
surcharge going beyond 100% in certain income brackets.
Third Period (1980-91)

The 6th FYP showed a growth of 5.3% per annum but it chose 1979-80 as the base year and if the base year is
changed to 1978-79, then the growth falls to 3.8% per annum. The growth in 7th FYP
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(1985-90) was recorded at 6% and this was the first decade after independence when overall growthfor the entire
decade remained above 5%. There were several reasons for this improvement in growth.
a. Green revolution increased agricultural growth to 3.5% and the 1980s also saw the spread of the
yellow revolution and more depth in the spread of white revolution.
b. Industrial growth picked up mainly due to high domestic demand. Jayati Ghosh explains industrial
growth of this period as mainly stimulated by the government. The period, however, had three
intrinsic problems in the growth strategy due to which it could not create sustainable growth and there
was a crisis in 1991.
- Excessive government spending created a large fiscal deficit and huge inflationary pressure.
- Lack of industrial reforms which restricted the private sector from achieving high growth. It
was compounded by complete control of financial structure by the government.
- Poor reforms in the external sector resulted in large trade deficit and BOP disequilibrium.
Industrial Reforms In India

- Reforms initiated in Industrial Policy (1980) - carried forward between 1980-90.
- Policy reforms began with the 1980's IPR, because it had been observed that policies in the 1970s had
resulted in underutilisation of capacity and concentration of economic power in few hands.
- Discretionary power with authorities resulted in rent seeking activities.
- Increasing regional imbalances. For example: between 1970-80, Bihar UP Orissa and MP received
only 15% of total licenses while Maharashtra, Tamil Nadu, Gujarat and West Bengal received 46% of
total license.
- Delays in processing applications, giving authority to produce and clearance for economic activity
added to cost of doing business.
IPR 1980 and rules made thereafter brought following changes in India's industrial regime:
- Raising the limits of capital investment to get exemption from licensing.
- Relaxations in rules on MRTP, that is raising the limit of investment for national monopolies, from
Rs.20 crore to Rs.100 crore and for product mechanism against any ruling of MRTP ruling. FERA
was relaxed by allowing technological imports, increasing investment limits for foreign firms allowing
monopolies from Rs.3 crore to Rs.5 crore. The act also allowed a higher amount of imported
capital goods and it also promised a grievance redressal investment from countries such as
Mauritius through DTAA, etc.
- 28 categories of industries were brought out of licenses and 82 bulk drugs were brought outof Essential
Commodities Regulations in order to promote better FMCG production.
- Improvement in capacity utilisation scheme by liberalising capacity utilisation norms from 94% to
80% to encourage modernisation and also allowing to produce up to 49% above the given licensing
capacity compared to 20% earlier.
- Providing minimum economies of scale of operation by increasing the production limits in existing
industries by relaxation of installed capacity rule.
- Providing enhancement of investment limit for small scale industries (SSI). increasing it fromRs.5 lakhs
in 1980 to Rs.60 lakhs by 1991 for cottage industries.
In spite of peacemeal reforms and business friendly policies, industrial structure remained backward with high
cost and low quality. Economic crisis of 1991 exposed the structure entirely, resulting in big bang reforms or
first generation reforms in 1991.
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Trends in Saving and Investment Before 1991
The CSO defines savings as excess of current income over current expenditure and it is the balancing item on
income and expenditure accounts of households, producing enterprises, government administration and other
final consumers.
For the purpose of estimating domestic saving, the economy has been divided into 3 broad institutional sectors
- household, private corporate and public.
The savings of households are measured as total financial savings and savings in the form of physical assets
which are construction, machinery or equipment and stocks held by the household sector. For the rest of the
sectors, saving is taken as an increase in their reserves from their accounting data. For government
administration, saving is the budget surplus. Indian economy can be divided into different phases with respect
to growth in savings.
Phase 1 - 1950-1967 (Low saving phase)

The period between 1950-67 saw less savings rate due to two reason identified by Ray and Bose:
1. The propensity to save in agriculture was far lesser at this time and the majority population was in
agriculture.
The share of agriculture was very high in GDP which magnified this factor.
2. Government could not save much because of huge requirements to meet developmental expenditure,
import requirements and requirements to invest in the public sector.
The low saving rate resulted in large dependence on aid due to lack of foreign investment which was
not encouraged in India.
The first three FYPs did not focus directly on the financial sector. The focus was mainly on physical
infrastructure and heavy industries along with institution building to support long-term saving in the economy.
Phase 2 - 1968-69 to 1975-76 (Initial years if increase in savings rate)

The savings rate increased steadily to reach 19% of GDP at the end of this period which was considered very
healthy in the time period. The maximum contribution was done by households who saved around 12% of
GDP. This was due to three main reasons:
1. Increase in farming income after the Green Revolution (after 1972).
2. Incase in household income due to increase in government expenditure.
3. Better utilisation of savings after nationalisation of commercial banks and rapid branch expansion
with greater thrust on rural and semi-urban areas. 4000 new branches were opened in rural regions
(plus semi-urban).
Phase 3 - 1975-76 to 1979-80 (High saving phase)

Reasons:
1. Increase in agriculture and allied activities income.
2. Setting up of Regional Rural Banks (1974).
3. Increase in government saving.
4. The high saving phase was also due to large food procurement and distribution by the
government which put more disposable income with common people.
Phase 4 - 1979-80 to 1984-85 (Stagnation)

This period witnessed a decline in public sector savings due to rise in government expenditure and it also saw a
decline in household saving due to increase in consumerism. The firms were allowed to borrow from the
market with less restrictions, due to which there was a decrease in private corporate savings in this period.
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Phase 5 - 1985-86 to 1992-93 (Phase of recovery)

The savings rate increased to 22.4% from the decline of 19.8% at the end of the previous phase. This
happened due to:
1. Better returns in the stock market and expansion of corporate debentures.
2. Improvement in outreach of the mutual fund industry, including their spread in rural areas.
3. Increase in corporate saving, due to higher profitability.
Therefore, in spite of a decline in public sector saving there was significant improvement in savingsrate.
Capital Formation in India (1951-1991)

CSO defines domestic capital formation as increase in fixed capital and increase in stock of raw material,
finished goods and semi-finished goods.
The rate of investment in 1950-51 was 10.9% of GDP out of which approximately 80% was by private sector.
At the end of 1st FYP, investment had reached 12.6% of GDP, mainly due to increase in public investment in
infrastructure and heavy industries.
Increased public investment improved the level of investment to 14.6% at the end of 2nd FYP with the public
sector continuously increasing its share in total investment.
At the end of 3rd FYP, total investment reached 16.4% of GDP (1966).
The healthy investment growth in the economy was mainly due to the theory of big push that the government
wanted to pursue.
The disturbances in the first half of the 1960s had an impact on the government's capacity to invest and the rate
of investment in 1968-69 had reduced to 13.1% of GDP. Larger part of decline was observed in public
investment even though the private investment increased a little bit in this time period mainly due to capacity
creation in the consumer goods industry.
From 1968-69 until 1978-79, the government introduced several projects especially in infrastructure. This
resulted in increasing investment to 21.1% of GDP in 1978-79.
Private sector investment also increased due to increase in public investment especially in rural areas.
The recovery of the 1970s was lost during 6th FYP mainly because of excess capacity which had already been
created during the 1970s.
During 7th FYP (1985-90), investment increased to 23.7% of GDP and in 1990-91 it had reached 26%of GDP.
The growth of investment till 1989-90 was mainly due to large government expenditure which gradually
became unsustainable. Some typical features of growth of investment during 1980s are as follows:
a. Current account deficit had increased to 3.2% of GDP. The deficit could not be financed from
investment flows from the external sector.
The government relied heavily on external borrowings and this resulted in large pressure onBOP.
b. The central bank increased monetisation of government deficit, which meant that investment was
financed by printing more money which was inflationary in character. The central bank also increased
CRR to 15% (maximum limit) and SLR to 38.5% (increased from 35% by constitutional amendment
to RBI Act).
The increase in CRR and SLR along with large diversion of credit to priority detectors implied that a
comparatively lesser amount was left in the market for private industries. The liquidity shortage
resulted in crowding out of private investment.
c. Fiscal deficit increased for both centre and state due to higher expenditure and lower revenue (due to
industrial slowdown) which put further pressure on the government to borrow.
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d. Household saving and corporate saving were relatively high but not sufficient to finance the
continuously increasing government expenditure.
The capital output ratio reached the lowest recorded in independent India.
Impact of Saving and Investment on Economic Growth (Analysis)

Typical Features:
1. Growth of investment and output was mainly enabled by domestic savings. Higher domesticsavings to
finance domestic expenditure has the advantage of self-sufficiency. But throughout the plan period,
domestic saving was lesser than domestic requirements for investment and government deficit. This
resulted in higher loans (borrowings from abroad)and dependence on aid.
2. Low ICOR over the entire period.
The ICOR for India was approximately 4 for most of the period which was not because of higher
productivity of capital but due to very less usage, which reflected poorly on capacityutilisation.
3. Mixed economy resulting in support from the private sector in investment.
Lot of business was developed for private enterprise due to which throughout the period theshare of the
private sector was never below 50% of total investment except for 3rd FYP. In most of the years, the
share of the private sector was comparatively larger than the publicsector.
4. Inflation was low throughout the time period with the exception of the mid-1970s and late1980s.
Low inflation restricted growth of price but overall it also took away firm’s incentive to innovate.
Therefore, in spite of relatively higher saving and investment, the economy found itself in a low level
equilibrium trap. Lack of incentive for private sector investment in R&Ddue to weak patent rights was
another factor restricting growth.
5. Credit to GDP ratio remained low in spite of bank nationalisation which restricted growth of investment
and kept it stagnant around 20% of GDP throughout 1980s.
6. Fiscal deficit was in control in most of the year but it started deteriorating in the 1980s and it was
reflected in fall in private investment in proportional terms.
7. Both current account and capital account of BOP were in deficit due to trade deficit and large
borrowings. A lot of borrowings in the 1980s were short term in nature which meant that during an
external crisis (Gulf war), sudden demand for foreign exchange will arise and the government was not
in a position to pay it back in spite of a healthy saving and investment rate.
The period before 1991 in all decades found saving and investment in India to be higher than in other
countries at corresponding level of development. Investment in the economy was mostly in heavy goods but
quality of investment in infrastructure was very restricted. This means that in spiteof investment at a high level,
growth of GDP did not remain consistently high. It was also due to fluctuations in saving and availability of
foreign capital in this time period.
Overall, the growth rate achieved during this time period could have been higher if policy was supportive to
better utilisation of capacity.
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Agriculture in India (1947-1991)
Nature of Agricultural Production in India

In 1951, agriculture was characterised by very low productivity in terms of both per worker and per hectare.
45% of total production of farmers came from their own subsistence requirement. In 1951- 52, the basic picture
of Indian agriculture was qualitatively traditional method of production.
The main reasons that kept agriculture backward were:
1. Feudal production relations in agriculture.
2. Presence of landless workers.
3. Usurious practice.
4. Dualism in the labour market.
5. Fluctuations and instability in the crop market.
The gross cropped areas was 131.89 mn hectares in 1951 and only 22.56 million hectares had assured irrigation
(17.1%).
With all the developments, even by 2011-12, the area under assured irrigation was only 47%. Therefore,
agriculture remained a gamble of monsoon where any variation in rainfall had morethan a proportionate
impact on agricultural production.
The problem was compounded by lack of facilities to protect the farmers from floods and droughtwhich created
large fluctuation in crops produced.
According to Hanumantha Rao, the increase in instability is due to adverse agro-climatic conditions in which
new technology is used because new technology dependent on new pesticides and fertilisers is more water
intensive and its output is heavily elastic with respect to availability of water.
The lack of diversity in agriculture is also a reason why the cropping pattern has been inconsistent. No single
plan can be implemented due to diversity of agro-climatic regions and resourceavailability in India.
A lot of backwardness in Indian agriculture in the first two decades after independence (upto GreenRevolution)
was mainly due to lack of both technological factors and institutional mechanisms to support high
productivity. This meant that India needed both technical improvement and institutional improvement to
remain productive and meet its requirements in the mid 1960s.
Land Reforms
Land reforms are measures taken to improve the structure of ownership of landholdings and tenancyrelated issues
in agriculture to improve overall production relations and agricultural productivity. Land reforms consists of:
a. Abolition of intermediary
b. Tenancy reforms
c. Land ceiling
d. Land consolidation
New theories also include:
1. Saving the tribal land from encroachment by non-tribals.
2. Provision of land to downtrodden and women in rural areas.
Abolition of Zamindari
Abolition of Zamindari Act was passed immediately after independence and reformed in 1951. Removing
Zamindari was easier in areas of temporary settlement like UP and MP because landrecords were available
but it was very difficult in areas of permanent settlement like Bihar, Odisha,Bengal, Rajasthan and Saurashtra
due to complete absence of land records.
Officially, the intermediaries were completely abolished by the end of 1st FYP and government records
suggest that 173 mn hectares of land was appropriated from landlords and distributed among 20 crore
peasants.
Assessment of the system:
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1. Lot of time was spent in the entire process. Example, places like West Bengal took four and half years
to pass the law.
2. Personal cultivation was a big loophole due to which many tenants were evicted and uptoland ceiling
the landlords made sure that they did not lose any land.
3. A new and dominant class of rural capitalists emerged from earlier landlords whichmaintained strong
control in the rural system.
Note: Kerala and West Bengal were notable exceptions to this rule. Kerala in 1959 made eviction of tenants
illegal, allowed sharecroppers to purchase land and defined family households with a land ceiling of 10 acres.
Tenancy Reforms
Tenancy reforms are related to protecting rights of the tenant with respect to security of tenure,improvement in
conditions of tenancy and protecting tenants by regulating rent on the land.
Three major decisions were taken by the government with respect to tenancy reforms:
a. Regulation of Rent
In the British period, the range in which rent was fixed was between 34% to 80%. In someplaces in
Punjab and Himachal Pradesh, rent was normally at 75% (of total production).
After independence, during the first FYP, total rent was fixed by the central government tobe between
20-25%.
State governments were overruling legislations, creating categories and sub-categories. Continuous
violations of limits set by the central government was taking place due to strongsocio-economic hold of
landlords in the region.
Another reason was lack of awareness about the law.
b. Security of Tenure
The laws passed after independence ensured:
- No removal of tenants outside the law of the state.
- Land taken from tenants could be used only for personal cultivation.
- Even if the land was taken away, the tenant had to be paid compensation in termsof the
minimum area taken from the land.
But the degree of protection given by security of tenure did not materialise as expected because of ambiguity
in definition of the term tenant (sharecroppers were not recognised as tenant), ambiguity in definition of
personal cultivation, lack of proper availability of land records and possibility of voluntary surrender.
In the 4th FYP, it was suggested that voluntary surrender will be accepted only if it is made to the government
but a legislation was passed only by Gujarat, Karnataka, Kerala, Odisha and West Bengal.
c. Ownership Rights of Tenants
All states had to introduce ownership rights by 1981-82 as envisioned in the first FYP but only West
Bengal, Kerala and Karnataka passed a law.
Some states allowed repurchase of land to the tenant at government fixed prices but it did not become
successful because tenants did not have the capacity to buy the land even at subsidised rate and
landlords did not have willingness to sell to the tenant.
Land Ceiling
It is a statutory absolute limit on the amount of land that an individual may hold. There are
two types of land ceiling:
a. Ceiling on future holdings
b. Ceiling on existing holdings
But the government implemented it on existing ceilings and created a select committee to decideupon four
main questions;
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1. To what land ceiling will apply?
2. At what level the land ceiling should be fixed?
3. What exemptions should be made?
4. How much compensation to be given by state?
The Case for Ceilings

1. The social rationale
It is argued that in a poor economy where the supply of land is limited while the number ofclaimants is
excessively large, it is socially unjust to allow a small number of people to holda large part of land and
thereby subjugate the interests of millions of labourers to the interests of this handful minority. A large
number of people belonging to this privileged class of landlords function merely as absentee landlords
and their land continues to be cultivated by landless labourers and petty peasants. Therefore, the social
inequalities and exploitation cannot be eliminated unless and until land taken away from the hands of
the landlords andhanded over to the toiling masses. The basic aim of the ceiling laws is to accomplish
this objective through elimination of "excessive ownership of land”.
2. Improving the position of the poor.
The income of the poor who receive land as a result of redistribution (consequent upon imposition of
ceilings) is expected to rise pulling them above the poverty line. According toFAO, "Redistribution of
only 5 percent of farmland in India, coupled with improved access to water, could reduce rural
poverty level by 30 percent under what would otherwise be, so that in Indian conditions land and
water reform would be a key approach." This shows that redistribution of land is likely to make a
fundamental improvement in the position of the rural poor.
3. The efficiency argument.
There are economists who maintain that small farms can be more efficiently managed in comparison
to large farms. For example, C.H. Hanumantha Rao has pleaded for redistribution of land after careful
examination of Farm Management Data.
According to Rao, small farms also offer more opportunities for employment because they are less
capital-intensive as compared to large farms.
4. Inculcating the spirit of cooperation.
It has been argued that once surplus land is obtained after fixation of ceiling limit, it can be distributed
among the beneficiaries on the condition that they form cooperatives for its cultivation and
management. This practice will enable the hitherto landless labourers and petty peasants to learn the
techniques of social management and joint cultivation on the one hand, and enable them to realise the
benefits of large-scale farming as well.
Case Against Ceiling

The case against the ceiling rests basically on two grounds.
1. The break-up of large holdings into a number of small holdings will affect the economic
efficiency of the farms adversely and production will decline. In a nutshell, the advantages of
large-scale farming will be lost; and
2. The growth of output and employment may also slow down in the long-run owing to the
reduction in savings and investment, because the small farmers consume away a large
proportion of their income than do the large farmers.
However, both of these arguments are not correct. As pointed out by C.H. Hanumantha Rao, in India there is
as yet no clear evidence of economies of scale. Therefore, to argue that productivity will decline as a result of
break-up of large holdings into small holdings, is not correct. Moreover, evidence suggests that farmers are
able to augment their operational holdings in response to the changing technological and economic factors.
As far as the second argument is concerned, Rao
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points out that even if this possibility is admitted, the share of poorer classes in the long-run may increase as
compared to what they would have obtained in the absence of redistribution of land. This is likely to increase
their consumption and, as a consequence, their efficiency. This, in turn, would mean an increase in output-
capital ratio. Therefore, the decline in saving, if any, as a result of improved distribution may be more than
compensated by improvement in the output-capital ratio, so that output may grow faster with an improved
distribution. Further, such a growth processensures that the gains of development accrue to the poorer sections.
Assessment
Land ceiling has not been successful as:
a. Only 2% of net sown area reported under the ceiling.
b. Prevalence of Benami transactions.
c. Another problem observed was deliberately transferred barren lands under ceiling to make sure that
they can be repurchased.
Consolidation of Landholdings
Consolidation of landholdings is generally promoted to solve the problem of land fragmentation. It is expected
that it will allow better agricultural practice and improve productivity of landholdings. It was initiated during
the second FYP but right from the beginning it had major objections from several states. States like Andhra
Pradesh, Tamil Nadu, Kerala and all seven northeastern states didn't even pass a law for land consolidation.
The major problems cited by these states were:
a. Difference in quality of soil
b. Lack of records
c. Lack of adequately trained staff to manage consolidation
d. Sentimental attachment of peasants to land
The Agricultural Export Committee in 1959, promoted land consolidation by suggesting that:
a. It will help in controlling wastage of land.
b. Difficulty in modernisation.
c. Difficulty in land management due to disputes over boundaries.
However., not even 1/3rd of the potential area could be consolidated due to the problem mentioned above.
Apart from those problems, another important reason was misuse of “Major AreaRule”, that is, consolidation of
holdings such that contiguous plots are distributed in the favour of major land holders.
Critical Evaluation of the Programme

As stated above, consolidation has been done only on 1/3rd of the consolidable area of the country. Only in
Punjab and Haryana the task has been completed so far. In some States, the task has not even been initiated.
Thus, the progress of the programme is highly unsatisfactory. This is because of the following factors:
(1) Since quality of soil differs from land-to-land, it became difficult to allot land of the same quality and
productivity to the farmer as was held by him previously.
(2) The farmer is generally attached to his land emotionally and sentimentally. Therefore, he doesnot willingly
cooperate with the Consolidation Officer.
(3) Many State governments were preoccupied with immediate land reform programmes. viz., abolition of
intermediaries, tenancy reforms, etc., and, accordingly. postponed action on consolidation measures.
(4) In many areas reliable and up-to-date land records are not available. Consequently, disputes arise in fixing
the ownership of land; and
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(5) Many States lack adequate and trained staff to carry out the programme of consolidation. This has delayed
the implementation of the programme.
A common complaint heard in consolidation proceedings in villages is that the rich and the influential often
manage to get fertile and well situated land, whereas the poor and uninfluential get inferior lands.
Cooperative Farming
This reform has been advocated to solve the problems created by subdivision of holdings. The idea is that
farmers having very small holdings should join hands and pool their lands for the purpose of cultivation. 85
percent of holdings in India are below 2 hectares and 44.6 percent of total operated area is under them.
Cultivation on such small farms cannot be considered profitable. At most, they can only provide a level of
subsistence to the farmers. However, if such small and marginal farmers pool their land and resources.
implements, etc., and cultivate jointly, they can reap profits of large-scale farming.
Arguments in Favour of Cooperative Farming

The strongest argument in favour of cooperative farming and, in fact, its basic rationale is that it is an effective
method of solving the problems created by small, uneconomic holdings. Holdings subdivided into small and
non-viable farms can be pooled together through this method and joint cultivation on the pooled land enables
the members to reap all benefits of large-scale farming. Since the agricultural inputs like seeds, fertilisers,
manures, etc., are purchased by the society in bulk they are likely to cost less. Therefore, agricultural inputs
can be made available to the members at a cheaper rate. Big agricultural implements and machinery like
tractors, harvesting machines, etc., which small individual farmers cannot purchase can now be purchased on
a collective basis by the society and can be rented out to individual members as and when the needarises.
Agriculture can be planned on a more scientific basis and advantages of technical innovations and new
agricultural practices can be reaped on a fuller basis. The task of looking after the crops and crop planning can
be done more satisfactorily. It is often observed that the personal labour of the farmer, bullocks and other
resources remains underutilised when land is distributed into small uneconomic holdings. However, when all
land is pooled together, as under cooperative farming, all such resources can be utilised fully and to the best
advantage.
Another advantage of cooperative farming is that the marketable surplus of foodgrains and industrial raw
materials can be obtained more easily from large farms and can be transported to the market on a bulk basis in
an easier way. Thus, agricultural surplus can be located and transported more easily.
In addition to all these economic benefits, there are social and political arguments also that can be put forward
in favour of cooperative farming. The adoption of cooperative farming is likely to inculcate the spirit of
cooperation among members of the society which can go a long way in inspiring mutual confidence, collective
action, joint thinking and feeling of fraternity and friendship among the members.
Critical Evaluation of Cooperative Farming in India

Cooperative farming, on a voluntary basis, has been officially accepted as the way out in tackling the problem
of full and proper utilisation of the land surface. However, so far no substantial progress has been made.
Problems of motivation and organisation met within this approach have not yet been successfully solved on
any significant scale. Moreover, it has not been sponsored actively enough by any large group or body of
opinion within the country.
It seems that the motivations behind the formation of cooperative farming societies were not genuine. In most
cases, they were formed not by poor and small farmers but by large farmers with
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a view mainly to receiving certain benefits from the government. In some cases societies were organised by
the members of the same family to evade laws. Very few farming cooperatives are true cooperatives formed
by small cultivators. Their experience is not too heartening because theyare too small and too poor.
The working of the cooperative farming societies has also revealed that their management lacked the
necessary professional skill and the willingness to do the work effectively. Inefficient administration
combined with corrupt practices eroded the confidence of the members of the society who were soon
disillusioned by the experiment of cooperative farming. Thus, there was a reverse tendency in operation-
break-up of the society and reversal to individual farming. This failure discouraged other peasants also who
were either planning to join the existing societies or to form new societies.
The Twelfth Five Year Plan proposed that there should be a comprehensive assessment of all land available
with the government, including ceiling surplus land, uncultivated wasteland, and so on. Land that emerges as
surplus should be distributed to groups of Disadvantaged and Women (D&W) farmers rather than to individual
families. The land so distributed could either be registered in the group's name, or it could be given to them
under a very long-term lease arrangement.
Evaluation of Land Reforms in India

Snags in Legislation
1. Definition of personal cultivation

As noted in the section on Assessment of Zamindari Abolition, the definition of personal cultivation
was highly unsatisfactory. Nowhere did it mean what it should have actually meant, ie, cultivation by
one's personal labour. These flaws in the definition of personal cultivation have been a major factor in
large-scale ejectment of tenants.
2. Limits for retention of land for personal cultivation
Not only was the definition of personal cultivation defective, intermediaries were allowed to retain
substantial areas of land for personal cultivation. This enabled zamindars to resume large areas of land
for cultivation defeating the very object of zamindari abolition. Only their name has changed. While
previously they were known as zamindars, they are nowknown as 'absentee landlords’.
3. Transfer of land to family members
To escape the laws relating to land ceiling, the zamindars indulged in large-scale transfer of land to
their family members. For quite some time there was no law in some States to prevent such transfers.
In States where such laws existed, the benevolent definition of personal cultivation provided with
sufficient scope for zamindars to circumvent them. This reduced the effectiveness of the ceiling laws
considerably.
4. Definition of tenant inadequate
In some States, share-croppers were not accorded the status of tenants though they cultivated a
substantial part of land. Therefore, laws relating to tenancy reform could not be used for protecting
their rights. It has also been estimated that a considerable number of tenants in India are oral and
informal.
5. The problem of voluntary surrender
Landlords often forced their tenants to voluntarily surrender the land being cultivated by them. For
this purpose, tenants were often threatened and even beaten up. The poor tenants had no strength to
match the force of landlords and often evicted the lands under such pressures voluntarily.
6. Inadequacies in ceiling laws
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As noted earlier, the levels of ceilings as among different States and within different areas of the same
State differed considerably. This created a lot of confusion and frequent disputes.
Lack of Political Will

The effective implementation of any law requires some amount of political will and determination on the part
of the authorities. Radical laws like the land reform laws which aim at restructuring the entire property
relations in the countryside require a substantial amount of courage and determination for implementation.
Given the tardy progress of land reforms, it seems that the governments were not interested in the
implementation of the legislations enacted but were merely trying to wear the progressive and socialistic look
while continuing to function under the directions and pressures of large farmers. The political advantages of
adopting this two-faceted policy of expressing sympathy to the poor while aligning with the rich outweighed
all the considerations andthis reduced all land reform measures to a mere farce.
The lack of political will is amply demonstrated by the large gaps between policy and legislation and between
law and its implementation.
Apathy of Bureaucracy
Side by side with the lack of political will goes the apathy of bureaucracy in implementing the landreforms. In
fact, both are intricately linked up together and the latter flows from the former. This would be evident from the
fact that wherever enthusiastic administrators sought to implement the land reforms strictly they were
immediately transferred elsewhere by the political bosses. This dampened the spirits of the dynamic
administrators in bureaucracy and had an overall demoralising effect. It has also been observed that a
number of persons in the higher echelons of theadministration are substantial landowners themselves. The
corrupt political bureaucratic, and largefarmer lobby nexus has served the interests of the participants very well
and all of them have benefited from it. The administrator has joined hands with the politician to grab land
declared surplus and meant to be distributed among landless and rural poor.
The very instruments of implementing land reforms have turned into instruments of subverting land reforms.
The nexus between the politicians, administrators and large landowners has brought the "rich peasant power"
into the limelight. This rich peasant power dominates State governments, regional and local administration
and serves as the principal instrument of land grabbing and as a strong impediment in the implementation of
land reforms.
Way Forward
Land reform is mainly targeted to provide equitable allocation of resources and to create improvement in
productivity. The improvement in productivity is not only due to institutional reasons but also technical. It has
been observed in India that land productivity with respect to farming is inversely related to size of the land
when one moves from large landholdings (more than 10 hectares) to medium landholdings (between 5 and 10
hectares).
Land reform can be made more efficient by implementing the following techniques:
1. Redistributing excess land with respect to the size of beneficiaries landholding expeditiously and
connecting land redistribution to self-employment schemes of the government.
2. The government should prioritise preparation, maintenance and computerisation of land records,
identifying sharecroppers as tenants and maintain a timely record of all possessionof land.
3. Special attention should be given to tribals and transfer of agricultural land to a non- agriculturist
should be restricted.
4. The definition of personal cultivation should be broadened so that cultivators bear all the cost, the
cultivator must use his own labour and his family labour, the cultivator must residefor a greater part near
land and cultivation should be the main source of income.
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5. In case of any dispute, legal aid should be available to the peasant and the onus of proving land
ownership should be on the landlord.
Green Revolution
Indian agriculture was one of the most productive farming systems at the time of independence, which was
due to both institutional and technical factors. The underproductivity resulted in lack of sufficiency in both
foodgrains and cash crops, which then had to be imported. It resulted in a large drain of foreign exchange
which was already scarce in the country.
After the BOP crisis of 1957, the government of India invited a team of experts funded by Ford Foundation to
suggest improving productivity in Indian agriculture.
The team submitted a report titled “India’s Food Crisis and Steps to Meet It” in april 1959. The report stressed
in modern inputs, provision of credit and provision of marketing facilities.
In 1960, the government introduced Intensive Area Development Programme (IADP) to seven districts in
seven states to promote better farming techniques.
In 1965, the programme was expanded to include 114 districts and it was called Intensive Agriculture Area
Programme (IAAP). From 1966, the government introduced High Yielding Variety Programme (HYVP)
across states of Punjab, Haryana and Western UP.
HYVP was introduced in Kharif season as a package programme with HYV seeds, assured irrigation, chemical
fertilisers and industrial insecticides. The government gave five main reasons for introducing the new
technique:
1. It was considered the only means of making a breakthrough in the shortest span of time.
2. Agricultural inputs were scarce and it was not possible to meet the needs of the entire country,
hence it was initiated in selected regions.
3. In HYVP was introduced to remove the dependence of the country on foreign aid for foodgrains and
to save foreign exchange reserves.
4. The demonstration effect for farmers in other regions once the programme was successful to expand
and spread it across the country.
5. Politically, it was becoming impossible to continue with lack of self-sufficiency in food
production.
Therefore, HYVP was mainly introduced in wheat and rice with the intention to include coarse cereals (maize,
jowar and bajra) at a later stage. A significant exclusion was pulses from all policydiscussions.
Benefits of Green Revolution

1. Very fast increase in production of cereals
In the first decade after GR the increase was registered with respect to wheat and after 1977 it was
experienced in rice and by mid 1980s it spread to certain coarse cereals (especially maize) and oil
seeds. Total cereal production increased from 69 million tonnes in 1960-61 to 108 million tonnes in
1970-71 and 265 million tonnes in 2013-14. The production of wheat increased from 11 million tonnes
to 96 million tonnes from 1961 to 2011 and production of rice increased from 35 million tonnes to 105
million tonnes over the sametime period.
Pulses fluctuated by large values. The production was 13 MT in 1961 to 8 MT in 1979 and again 19
MT in 2012 (highest ever production) to 16 MT in 2015.
2. Increase in production of commercial crops
The larger increase in production mainly picked up in the period of 1980 to 1990, with major increases
recorded in oilseeds and vegetables like potato, which increased production not due to increase in area
but due to increase in productivity of the crop. For example, oilseeds increased from 7 MT in 1961 to
only 9 MT by 1979 but then jumped to 19 MT by 1990-91 (33 MT in 2014-15). The production of
potatoes increased from 3 MT in 1961 to 15 MT by 1991
22 | P a g e
and production of sugarcane doubled in the same time period (1961-1991). The increase incommercial
crops productivity not only supported higher income for cultivators but it also strengthened forward
linkages of agriculture with industry. It can be considered as one of the reasons for agro-based
industries which used oilseeds and cotton, as their prime inputs recorded one of the fastest growth in
this time period (1980s to 1990s).
3. Significant changes in cropping pattern after Green Revolution
In the last 45 years after the Green Revolution, three major conclusions can be drawn fromthe events.
a. Cropping pattern amongst cereals deviated away from pulses and moved towards wheat and
rice. Pulses which had 1/3rd of the total area devoted to food grain in the 1960s now get
reduced to less than 12% region. Even with respect to share of production, which was 16% of
total foodgrain in 1961 which is now (2013-14) only 7%of total foodgrain.
b. Among wheat and rice the proportion of wheat kept increasing with respect to rice and
increased from 31% in 1960-61 to 90% in 2013-14. This mainly happened due to the early
lead taken by wheat in the initial stage of green revolution.
c. In the case of cash crops, a lot of diversity has been observed but a worrying trend has been
the use of unconducive cropping patterns to promote commercial agriculture in an adverse
agro-climatic region.
4. Boost to agricultural employment
There are two factors which promoted employment in agriculture after green revolution:
a. Multiple cropping patterns (on an average growing 2 crops in a year became a norm than
exception) and multiple cropping required more agricultural workers. It also reduced seasonal
unemployment especially in states which could diversify into alliedactivities.
b. Agricultural employment also improved the Green Revolution due to higher agricultural
productivity which increased both average product and marginal product which increased
earning possibilities and kept more workers.
5. Increased the linkage between agriculture and industry
Both backward and forward linkages improved due to GR. The new technique implemented after GR
created higher demand for industrial inputs like chemical fertilisers, artificial pesticides. The forward
linkages were strong since the british period. They became stronger with faster production of cash
crops.
One of the major contributions of GR has been to break the general stereotype of Indian agriculture
being the least productive, feudalistic and backward system which was inherently incapable of
producing more.
Criticisms of Green Revolution

1. Indian agriculture still is a gamble in monsoon.
Agricultural production has shown discontinuous growth after GR , mainly restricted by lackof assured
irrigation and heavy dependence on cereal production on rainfall.
It can be observed from the time series of agricultural data which kept showing years of high growth,
immediately followed by years of decline. In 1970-71, foodgrain production 108 MT, the government
started with a policy to stop imports and production fell to 95 MT next year forcing the government to
import food grains again. The trend continued with sharp fluctuations in 1979-80 and 1986-87. Food
grain production crossed 200 MT for the first time in 2001-02, immediately followed by a decline to
174 MT in 2002-03. The same trend has been observed in 2013-14 and 2014-15. All the years of low
production in the above example have been years of poor monsoon. Therefore, the Green Revolution
has not
23 | P a g e
been able to stabilise agricultural production, even though it has been enabled to increase overall
production of food grains substantially.
2. Growth of capitalist farming in Indian agricultural
The growth of capitalist farming in India after GR was mainly due to large funds received by very fast
increase in agricultural productivity. But, it could only promote more hiring of labour and large scale
farming in certain states without the essential capitalist institutions of market and competition. Out of
81 million farm households, 6% of big farmers accounted for 40% of cultivated land. This meant that
heavy investments made by them left very less scope for poors and middle class farmers.
In Punjab especially after 1975 heavy investment in agriculture was made by “Gentlemen farmers”or
“Progressive farmers”, who were ex-servicemen, retired civil servants and government officers from
different departments who invested heavily on farm land and covered 27% of the total cultivable area.
Large mechanisation of agriculture followed this type of cultivation and mainly helped the rich
farmers who were already endowed.
3. Side tracked the need for institutional reforms
Lack of ownership rights, lack of credit facilities for the rural poor, lack of insurance facilities for
small farmers and lack of proper technical support were all reasons for poor agricultural performance
which lost prominence after increased [production due to GR. It was found that the average return to
the farmer with large landholding and ownership well defined was 2.8 times (180%) the cost of
production. But, in case of sharecroppers the same return cam e down to 42% mainly because in the
sharecropping system even the cost of fertiliser was incurred by the tenant who generally borrowed at
a very high interest rate inthe market.
4. Increased disparity in income
The technological changes which promoted mechanised agriculture with benefits of large scale
farming created income disparity not only between regions but also between people. In absolute terms
the gains have been shared by all sections. For example, the rise in real wages and employment, and
even the income of small farmers has seemingly increased in areas with technological improvement
but it did not increase at rates faster than the existing rich due to which rural inequality kept
increasing.
It also resulted in changing socio-economic conditions in these regions. For example, majority of
cultivators with small landholding (2-3 acre) could not produce enough surplus to invest in land their
land was acquired by rich farmers who could generate sufficient surplus.
Similarly, the condition of landless labour became more tentative with respect to the landlord due to
heavy mechanisation. The presence of machines made it possible to give more bargaining power to
the landlord and it allowed the landlord to keep a larger proportion of gains from agriculture.
5. Problems of individual displacements
The biological innovations like HYV seeds and better fertilisers were good for the workers because
they improved productivity on land. But, agricultural economists like C.H. Hanumantharao concluded
that mechanical innovations were labour saving and displaced not only the workers but also animals.
The paper buy economists like Arjan Singh and Billings attempted to quantify labour displacement
from wheat growing areas of Punjab and it found, out of total workers displaced 55% were due to
tractors replacing them and 37% were due to threshers replacingthem.
They concluded that between 1969 and 1981, 2.34 lakh workers were displaced. Therefore, they
suggest that GR should be accompanied by rural industrialisation to absorb displaced workers.
24 | P a g e
Evaluation of Green Revolution
1. Wrong to speak of it in terms of complete agricultural revolution.
The upward trend in production and productivity, both was observed in few crops and in few regions.
But, it is not completely observed pervasively in all the crops. As long as that does not happen, calling
the event an agricultural revolution is premature.
The already better off have improved and large farmers have more opportunities, but a revolution will
require more expansive presence.
2. Technological upgradation happened but institutional development did not materialise. New
technology based on water supply and expenditure on machines makes it imperative to provide proper
credit facilities and develop rental markets to improve production capacitiesin rural areas.
3. It has created several conflicts in rural areas.
The conflicts have been observed with respect to large farmers and small farmers, landlords and tenants
and employers and employees. The only method to end this conflict is to provide back end support which
can create equitable growth and pursue a frontal attack on feudalistic approach.
From 1991 till 2004, agricultural development did not attain much prominence because the new
economic policy was put in more stress on industrial and service growth.
In 2004, the government appointed the National Commission of Farmers with the mandate to bring
the 2nd GR or evergreen revolution, that is, to increase productivity of Indian agriculture
continuously. The committee identified farmers as a larger group including landless agricultural
labour, sharecroppers, tenants, fishermen, poultry farmers and even tribals with shifting cultivation.
The committee observed several problems in Indian agriculture which created lack of productivity
increase in crops. They were:
1. Institutional support to poor farmers is weak. For example; there is a severe lack of storage
facility, marketing facility and credit facility.
2. In spite of increasing MSP, the cost of production after the mid 1990s became higher than the
MSP promised by the government due to the increasing price of diesel and other inputs.
3. Capital formation declined in 1990s and kept declining till 2005-06 when the trend was
reversed from 11th FYP but the damage to rural infrastructure and lack of production capacity
had been done by then.
4. Growing indebtedness in the rural farming system was a cause of concern. This happened due
to three main reasons; lack of institutional credit, higher risk of cultivation due to high cost
involved with the new technology and lack of crop insurance.
Policy Steps Required for 2nd GR and Evergreen Revolution

1. Enhancement of soil health
The recent analysis shows that one of the major problems arising due to the Green Revolution was
negative impact on productivity of soil mainly due to soil degradation. The new technique was
implemented mainly with the intention of increasing output andconcerns related to health of soil
were generally ignored. In states like Punjab, instances of dominance of chemical fertilisers making
fertile agricultural land into a wasteland has beenreported by several independent studies since 1995. The
Economic Survey (2013-14) suggests that soil upgradation can be done by introducing micro nutrients
like nitrogen fixation, developing capacity through root charging and macronutrients and practices
like levelling of land for the entire village to include bioman more efficiently.
Macronutrients can be supplemented by encouraging organic manures so that soil health is not
adversely affected by intensive cultivation.
25 | P a g e
2. Provision of better irrigation and water supply facility
There are several suggestions regarding augmentation of water supply. The suggestions are both from
the supply side and demand side. The supply side suggestions mainly focussed on saving water by
using better techniques while supplying it to the land, while demand side management relates to
discouraging those subsidies which are water extracting in nature. The Agricultural Reform
Committee suggested 3 important measures, that is,
a. To bring 10 million hectares of agricultural area every year under Bharat Nirman for
supporting it with better irrigational structure, like renovating existing wells and ponds.
b. Another suggestion given was to ask the farmers to shift away from water extracting crops in
the coastal region and produce crops related to sea water farming. Eg mangroves.
c. It also suggests that canal and tank irrigation areas should have proper usage of water and
farmers should be encouraged to maintain the traditional system of water harvesting and
recharge of surface water.
The Economic Survey 2013-14 and agricultural economists like Sainis propagate thatsprinkler
irrigation should be practised only in canal and tank areas. A study done by Gulati and Saini
over 50 villages in Punjab and Himachal Pradesh estimated that shifting to sprinkler irrigation
in case of close space can save upto 30% of water usage. Another study by the same two
people with respect to sugarcane cropping in Maharashtra in 2008-09 concluded that 50%
saving can be done on average, if irrigation of row crops is done through drip irrigation. The
study also suggested that farmers should be educated to understand the importance of new
techniques.
The suggestion giver in ES 2015-16 about converting all expenditures on drip irrigation
investment to qualify as infrastructure expenditure can be implemented to improve better
water management.
Developing drip irrigation technique is also useful in fertigation which is supplying nutrients
directly to the crop by fixing drip irrigation and fertiliser supply.
It is also suggested that more emphasis should be put to improve dryland farming sothat water
conservation becomes easier. The ES 2014-15 suggested that multiple crops in dryland should
be discouraged. Alternative activities like cattle farming canbe encouraged to support at local
governance level. It can also be developed by accepting cattle and other draught animals as
collateral for loans.
3. Improving the credit system
One of the institutional reforms missing from Indian agriculture system is improvement in the
credit provision. The rate of interest has been kept at 7% on crop loans but it is suggested that
it should be brought down to 4%. It is also possible to create an agricultural risk fund to
manage sudden crop loss for the farmers. Initiation of Rashtriya Krishi Bima Yojana and
Fasal Bima Yojana has been a good beginning in this field. The provision in Fasal Bima
Yojana has been a good beginning in this field. The provision in Fasal Bima is not only to
provide insurance but also to provide financial literacy is very important. Credit provisioning
can also be improved by developing gender sensitivity like allowing farmers to transfer
property rights to their wives who can then use the asset if there is a sudden loss.
Micro credit institutions have proven to be more useful in not only disbursal of credit but also
recovery of loans as compared to larger institutions. The coverage of Kisan Credit Card can
also be expanded with improvement in coverage of Jan Dhan Yojana.
26 | P a g e
4. Market reforms and production improvements through better crop selection. Agricultural
markets are still segmented and this hurts the farmer with respect to his productioncapacity. Removal of
legal restrictions will also reduce the gap between what rural producers getand what urban consumers pay
(reducing the no. of intermediaries). Market reforms will also helpin production planning so that the entire link
starting from cultivation to consumption to commenceis a complete chain, where every participant is equally
treated. It has been observed that smalleufoons like allowing farmers to sell their crop beyond APMC
intermediaries has helped us inimproving productivity & agriculture.
All the above issues can be implemented properly only with better infrastructure support like storage capacity
(warehousing, electricity generation, transportation facility and institutional reforms like making agriculture
more balanced with respect to scale of production and restricting the capacity of private firms to take away
farmer’s choices.
27 | P a g e
Evaluation of Public Investments in Agriculture

In the pre 1991 period, most investments done was by the public sector mainly in the field of irrigation
facilities and transportation. From 1950-60, canal irrigation and rural transport was focussed upon, which
continued in the next decade with investments also in power generation. In the 1970's public investment was
in the same sectors and also extended to storage facilities, but private investments also cropped up in soil
conservation techniques, ground levelling and mechanisation. This was the impact of new technology and
government support through the creditstructure of Regional Rural Bank (RRB).
Between 1970 and 1980, public investment was mainly in the field of transportation, electricity generation and
canal irrigation. A new trend was observed with public investment spreading into developing storage facilities,
credit markets (setting up of RRBs) and developing rural marketing structure. The private sector investment
remained confined to personal land improvement and soil conservation. Mechanisation started spreading to
states like Tamil Nadu, Karnataka, Andhra Pradesh and Gujarat. Most of the investment is mechanization was
done by funds made available from RRBs.
Between 1980 to 2005, investment was 8%-10% of agricultural GDP. Public investment started showing
decline with the beginning of economic reform and the trend continued till 9th FYP (till 2002).
Private sector investment increased during this period and in 1999 it was found to be 85% of total investment
in agriculture. But, increase in private investment was mainly done to save cost by investing in labour saving
and water conservation machines. Even land development was confined to private land which meant that the
benefit of investment was mainly with the private sector (richlandlords).
Reasons for Changing Investment Pattern in 1990
1. Decrease in government’s capacity to invest because under new economic policy, controlling the deficit
was a key variable. It was observed that government investment decreased from 4% of agricultural
GDP to 2% of agricultural GDP, while private investment increased from 4% of agricultural GDP to
8% of agricultural GDP. This meant that overalL capital formation was done mainly for private
benefits.
2. Improvement in terms of trade for agriculture. The terms of trade shifted in favor of agriculture from
the 1980s to 1990s. It was 0.9 in the 1980s and it became 1.1 in the 1990s.This happened mainly due to
liberalisation which removed protection for industry and introduced competition (brought industrial
prices down). The surplus generated by favourable terms of trade gave opportunity to private farmers
to invest more.
3. Decrease in public investment also took place because the government shifted to providing more
agricultural subsidies in place of fixed investment. The share of subsidies given directly or indirectly to
agriculture increased 3.5 times between 1990 and 2005.
4. The trend of falling public investment input was reversed between 2005 and 2014. The ratio of gross
capital formation to agricultural GDP increased from 13.5% to 21.2%. Both public and private
investment increased due to high complementarity between them.
Major increase in public investment has been on rural electrification, rural roads, construction of community
building and developing warehousing. Encouraged by public investment, private investment has also
increased from 8% of agricultural GDP in 1990s to 12% between 2005 and 2015.This has brought about major
improvements in agricultural productivity with agricultural growth recorded at 4% per annum in 9th FYP and
first three years of 10th FYP.
Further improvement is investment capacity can be brought about by putting major thrusts on landdevelopment,
developing check-dams and small irrigation, improving social infrastructure like education, health and
sanitation facilities and using the increased productivity to develop non-farmsector in rural areas by government
policy to encourage alternate sources of employment for ruralworkers. Therefore, a combination of public and
private investment is needed to assure stable agriculture growth.
28 | P a g e

Indian Economybefore 1991, Linear Trendsand Agriculture

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Indian Economybefore 1991, Linear Trendsand Agriculture

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ECONOMICS (OPTIONAL)

PAPER 2 Indian Economy:

Vibhas Jha Sir

UPSC ECONOMICS OPTIONAL SYLLABUS

3. Money - Banking and Finance:

5. Growth and Development

2. Indian Economy after Independence:

B. The Post Liberalization Era:

Causes for Underdevelopment

2. Poor industrial structure

1. Better transportation and communication facilities

Rationale for Planning

Objectives of Economic Planning

Evaluation of Planning Structure

a. Agriculture and allied sectors (Primary sector)

First Stage (1951-1965)

Basis of All Plans Till 1991

3. Emphasis on development of capital goods industries

Appraisal of the Mahalanobis Strategy of Development

1. Missing the role of wage goods as capital.

Second Stage (1965-1980)

Third Period (1980-91)

Industrial Reforms In India

Trends in Saving and Investment Before 1991

Phase 1 - 1950-1967 (Low saving phase)

Phase 2 - 1968-69 to 1975-76 (Initial years if increase in savings rate)

Phase 3 - 1975-76 to 1979-80 (High saving phase)

Phase 4 - 1979-80 to 1984-85 (Stagnation)

Phase 5 - 1985-86 to 1992-93 (Phase of recovery)

Capital Formation in India (1951-1991)

Impact of Saving and Investment on Economic Growth (Analysis)

Nature of Agricultural Production in India

The Case for Ceilings

Case Against Ceiling

Critical Evaluation of the Programme

Arguments in Favour of Cooperative Farming

Critical Evaluation of Cooperative Farming in India

Evaluation of Land Reforms in India

1. Definition of personal cultivation

Lack of Political Will

Benefits of Green Revolution

Criticisms of Green Revolution

Policy Steps Required for 2nd GR and Evergreen Revolution

Evaluation of Public Investments in Agriculture

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