THE INDIAN

ECONO M Y SIN CE
INDEP EN DEN CE
GROUP 5
 MEMBERS
KESHAV
DHRUV UDAY SAR T H AK
A L
GOYAL KAUSH IK
RAWAT SIN GH

BA ECONOMICS BA MATHEMATICS BA MATHEMATICS BA ECONOMICS

HONOURS HONOURS HONOURS HONOURS

H Q SK A AN MANAN
TANIS MU
MA GG U KREJ A
KHERA KU

BA MATHEMATICS BA SOCIOLOGY BA MATHEMATICS

HOINOURS HONOURS HONOURS
THE LEGACY OF COLONIAL RULE
DURING COLONIAL ERA
·British ruled India for almost 2 0 0 years.
Govt. economic policies in India were concerned more with
promoting British economic interests than with advancing
the interests of Indian population.
The govt. adopted a "laissez faire" attitude. It is a policy of
minimum
governmental interference in the economic affairs of individuals
& society.
Govt. supported large investment in railways to facilitate transportation
of raw materials but investment in irrigation, education, roads and
other development oriented infrastructure were limited.
Per capita income of India during colonial era was less than 2
percent. During 1945-46 the per capita income rose to maximum of
223.8 rupees.
Around 85 percent of the population were engaged in agricultural
sector but contribution to the GDP was only 50 percent (Disguised
unemployment). Level of productivity was extremely low. Low
productivity implies low output which further implies food shortage.
Industries employed less than one-tenth of labor, modern industry
employing some 3 million people out of 140 million. People were
largely engaged in small and cottage industry but contribution of
these industries to Real GDP was limited.
Literacy rate was very low in early twentieth century that is around
12 percent. Infant mortality rate was 218 per thousand live birth.
There was a lack of proper healthcare system. Furthermore, mass
communicable diseases like malaria, smallpox were widespread.
·Under the guidance of planning and development Dept. Created by
central govt., a great deal of useful work was done between 1944
and 1946 to outline the broad strategy and policies for developing
major sectors and to translate them into concrete programmes and
projects. Several new industrial projects (notably fertilizers,
locomotives and newsprint) were under construction and
negotiations for others (including steel, machine tools and telephone
equipment) were in progress.
POST INDEPENDECE PERIOD
·The government's main concern in economic policy was
to control persistent and severe inflationary pressures and
to alleviate shortages of essential food items which had
been aggravated by the Partition.

·The Industrial Policy Resolution of 1948 signalled

acceptance of the principle that the government will have a
major role in initiating and regulating development in one
of the key sectors of the economy.
 FIRST PLAN
It is no longer possible to think of development as
a process merely of increasing the available
supplies of material goods; it is necessary to
ensure that simultaneously a steady advance is
made towards realization of wider objectives such
as full employment and removal of inequalities.
STRATEGY FOR GROWTH
The attainment of a high rate of growth has, therefore, been a major
goal of policy. A coordinated programme of development, with the
state playing a leading role, was seen to be essential for raising the
rate of savings, bringing an integrated, long-term viewpoint to bear
on determination of sectoral priorities, and regulating the flow of
scarce resources to areas of high priority, if need be, by
implementing key projects on its own initiative.
The elements of the growth strategy as outlined above are
common to successive five-year plans .
Thus, the First Plan was The Second Plan was
essentially a collation of more of a plan in that it
public investment defined the development
projects, most of which strategy in more
were already under precise terms and
construction or had been articulated the rationale
prepared as part of the for emphasizing rapid
Postwar Reconstruction expansion in the
Programme domestic production of
metals.
THERE WERE VARIOUS RESTRICTIONS TO
THE PATH OF GROWTH
Shortage of savings and foreign exchange were seen to be the critical
constraints on growth.
There was a sharp deterioration in balance of payments during the late
1950s arising partly from stagnation of exports and more importantly
due to the earlier liberal import policy.
Population of INDIA was increasing rapidly which was a great
obstacle for the implementation of plans.
The overall strategy of development outlined in the Second Plan had
attracted a great deal of adverse criticism for its alleged neglect of
agriculture, and its inability to solve the unemployment problem.
 Economic trends since 1950
Living standards
6
1 2
Growth of output Agriculture

Environmental
forces

3 4 5
Industry Capital formation Expansion of public
sector
 Growth of output
◉ Aggregate real output during 1970—1 to 1972—3 averaged slightly
more than double the level of 1950-1 to 1952-3.

◉ The role of government in foreign trade, especially imports, has

steadily increased, with state trading agencies accounting for nearly
40 per cent of total import licences issued in 1973—4 (compared to
10 percent in 1967-8).

◉ The trend growth rate of around 3.6 per cent per annum is about
two to three times the estimated rate during the first half of the
century.

13
 Agriculture
The greater dynamism of agriculture in the
post-Independence era is clearly the result
of larger, more intensive and better
coordinated programmes undertaken as
part of the five-year plans.
The trend growth rate of cropped
area between 1949—50 and 1970
—1 was roughly 1.3 per cent a
year.
Between 1950—1 and 1971-2, gross irrigated area
has increased by 16 million hectares; fertilizer
consumption has risen from less than 100,000
tonnes in 1950-1, to nearly 2.2 million tonnes a
year in the early seventies; a countrywide network
of extension services has been built; crop
research has been greatly intensified, made more
purposive and better organized.

The net output of agriculture

The major part of the and related activities is
additions to crop output was estimated to have risen by
the result of improvements in over 50 per cent since 1950.
yields per unit area which
averaged around 1.7 per cent
a year.
 Industry

The net output of mining and

The textile and agricultural
manufacturing industries has risen
processing industries have
some 160 per cent and that of
expanded, other lines of
modern industry by over 250 per
manufacture have grown even
cent.
faster.

The expansion in metallurgical, Industries producing

chemical and engineering intermediate products and
industries has been especially capital equipment expanded
rapid. much faster than consumer
goods industries.
 Modern small-scale industry has
been expanding very rapidly and the
government's programme by way of
technical guidance, financial
assistance and the provision of
common service facilities has made
The government's programmes to a substantial contribution to this
help other segments of traditional process.
industry have produced mixed
results.

03
The net output of mining and
New industrial houses have
manufacturing industries has
come into being, and some
risen some 160 per cent and
of them have recorded very
that of modern industry by over
rapid growth.
250 per cent.
Capital formation
Capital formation had maintained a
steady increase through the first three
plans. Total investment in 1965- 6 was
nearly five times the 1951-2 level in
nominal terms, and more than thrice as
large in real terms. The ratio of
investment to national income had risen
from 5 or 6 percent at the beginning of
the first plan to 14 per cent at the end
of the third. And despite the subsequent
setbacks, the rate of investment in
1973-4 was more than twice the 1950-1
 Expansion of public
sector
In 1950-1, 70 per cent of the total recurrent budget of
the centre and states was absorbed by defence,
maintenance of law and order, and general
administration. Public sector ownership and control of
investments were confined to irrigation works,
electricity, railways and communications. Altogether,
the importance of the public sector in relation to total
economy was marginal.
LIVING
STANDARDS
PERFORMANCE IN RELATION TO
OBJECTIVES LEVEL AND EFFICIENCY OF
INVESTMENTS FOREIGN AID AND TRADE
PERFORMANCE IN
RELATION TO
·While the transformation of the Indian economy from stagnation to continuous
OBJECTIVES
growth and diversification is important, the rate of progress has been slower than
that of many other emerging countries, and definitely slower than planned and
expected.
·In comparison to the 5% or more average yearly increase expected for the Second
and future plans, the index of crop output has grown at roughly 3.25 percent every
year. Similarly, output in organised industry has increased at a rate of 6 to 7% each
year, compared to an expected rate of 10 to 12%. As a result, aggregate national
output growth has continuously lagged behind the target, ranging from 4.7 percent in
the Second Plan to 5.5 percent in the Fourth.
·One important reason for this was the rapid growth of population. The decline
in mortality rates, largely as a result of control of communicable diseases,
·The performance of industries, as that of agriculture, has fallen persistently short
of targets both in the aggregate and in key sectors. There are also signs of some
slowing down in the growth of industrial output. The index of manufacturing,
which had risen by 54 per cent between 1950 and 1965, rose by barely 24 per
cent in the subsequent seven years.
·The deceleration of overall growth has resulted in an even sharper reduction in
the rate of increase of per capita real incomes. The per capita consumption of
food and clothing — which reflects the living standard of the vast mass of the
population - is currently no higher than in 1964-5; and have in fact been
below that level in several intervening years.
LEVEL AND EFFICIENCY OF
INVESTMENT
·Capital formation has not only fallen more or less consistently
behind target but, following a period of steady increase up to
1965—6, suffered a severe setback both in absolute terms and as a
proportion of NDP.
·And despite substantially larger inflow of foreign assistance in
1966 and 1967-largely a reflection of massive food aid — public
sector plan outlays had to be cut back. The combination of inflation
and sagging demand for capital goods also dampened private
investment.
·Despite a vigorous effort to increase taxes, which in the
circumstances must be considered bold, the government has
had to incur large budget deficits to finance its expenditures,
thus aggravating the forces of inflation. Persistent inflation has
resulted in real capital formation growing considerably
slower than nominal investment expenditures.
The substantial increase in the investment rate has not resulted
in any improvement in the growth rate of aggregate real
output
FOREIGN AID AND
TRADE
· Though imports account for a very small fraction of GDP and
foreign aid has financed, on the average, only one-fifth of the
investments during the last two decades, the economy remains
highly vulnerable to foreign exchange shortages. The objective of
self-reliance has also proved elusive.
· In the early 1950s, India had comfortable foreign exchange reserves
and, despite stagnant exports, could manage the additional import
needs of a modest investment programme without recourse to
large-scale foreign assistance.
·Liberal licensing policies added to import demand. With exports stagnant,
balance of payment deficits, and hence the inflow of external resources, rose
sharply.
·The relative stagnation of exports during the 1950s was largely the result
of government's inability to contain the growth of domestic consumption of
traditional export commodities and a rather passive attitude to promoting
new exports.
·The relatively slow growth in volume of imports since 1966, which is an
important explanation for recent increase in reserves, was essentially due to
near-stagnation of investment, and a persistent recession in industry.
PUBLIC SAVINGS
One of the major disappointments of the last two decades has been the failure
to expand public savings both as an instrument for raising the overall savings
rate and for giving the state greater command over the pool of national savings
After a period of relative stagnation during the early 1950s, government savings
in absolute terms recorded a more or less sustained increase during the Second
and the Third Plans.
The subsequent three years witnessed a sharp reduction partly as a result of
slower growth of revenues and partly due to the impact of inflation on cost of
government. There has been a significant improvement since and, by 1970—1,
government savings had exceeded Rs. 7.5 billion, nearly Rs. 2 billion more than
the previous peak of 1965- 6.
The recurrent expenditures of central and state governments
taken together have risen somewhat faster than their combined
revenues: though the growth of developmental expenditures
(consisting mostly of agricultural and rural development,
education, health and social services) has been considerably
faster than average, and though their share in total expenditure
has risen from 27 to 28 per cent in 1950-1 to 41 per cent in
1970-1, the major part of the increase in total expenditures has
been on account of non-developmental categories
PUBLIC
ENTERPRISE
Compared to public savings through the budget, the retained earnings of
public sector enterprises are negligible. Until 1970—1, savings have
been zero or negative in three years and never exceeded Rs. 3 0 0
million in absolute terms and 5 per cent as a proportion of total public
savings. In 1970-1, they reached Rs. 9 0 0 million, still barely 10 per
cent of public savings. Nor is there any sign of a sustained
improvement.
The low level of savings generated by public enterprises is all the more
striking in relation to the volume of investments which they represent.
During the last twenty years, investments in public industrial enterprises
alone add up to more than Rs. 3 0 billion. The rate of return to
investment has been consistently and substantially lower than in the
private sector.
INCOME DISTRIBUTION AND LIVING
STANDARDS
other elements of land reform, namely, ceilings and protection of tenants,
have not been conspicuously successful. The amount of surplus land
acquired and distributed under ceiling laws has been very small. The
substantial decline in the area leased-in relative to total operated area since
the mid 1950s, appears to be as much due to resumption of leased land by
owners for self-cultivation as to acquisition of ownership rights by tenants.
Overall, while there has been some improvement in distribution of owned land
(the proportion of households not owning any land has declined), the impact
on the landless and small landholders has been but marginal. The number of
households not cultivating any land has increased three-fold between 1954
and 1971 and those cultivating less than 2| hectares (including those
cultivating none) has risen some 4 0 percent over this period
FOUR FACTORS AFFECTING
PERFORMANCE
The sheer dimensions of mass poverty and the perceived need to find a
speedy solution to the problem were powerful arguments for seeking a
high rate of development combined with measures for reducing
inequalities.
In the case of sectors like agriculture, the public sectors' role is
essentially to facilitate output growth in the private sector by creating,
expanding and improving the infrastructure and by maintaining assured
and remunerative prices for outputs relative to inputs.
It is now apparent that the factors determining the diffusion of new
techniques are far more complex: it takes time for individual farmers to
learn new techniques and adapt them to their specific circumstances;
Close to half the public sector programmes relates to areas
(notably agriculture, irrigation, education, health and power)
which fall within the purview of the states.
In principle, the state governments are free to formulate
policies and programmes in respect of these areas.
However, the interests of planned development, which are
supposed to promote coordinated and efficient use of the
country's resources in the larger national interest, as well as to
redress regional imbalances, require a degree of central
direction and control over the scale and priorities of the state
plans.
In general, organizations and procedures have not been adapted to the
requirements of efficient construction and management of projects.
The methods of organization, manning and control of public sector
projects, being largely a carry-over from an era when the
developmental functions were relatively unimportant, are clearly ill-
suited to these tasks.
the top managerial personnel were as a rule drawn from the ranks of
the general civil service who had neither the professional background
nor the experience needed to manage the construction of large
projects (at any rate in industry and power)
The fact that these personnel were liable to frequent transfers and that, in
any case, their careers were not determined solely, or even primarily, by
their performance as project managers, reduced the pressure to achieve
and maintain a high standard of efficiency.
Striking a proper balance between these competing considerations
required an integrated view of research, design capability and develop.
ment of machine industry in the framework of a long-term plan.
Performance of the private industrial sector fell short of expectations
partly because of the elaborate systems of licensing and controls which
were a source of considerable delay in implementation of private sector
projects.
he major part of the explanation for non-fulfilment of targets for private
industry, however, is to be found in the shortfalls of agricultural programmes
and the failure of the public sector to realize its targets, in terms both of real
investment and production targets for key in- termediate and capital goods.
Since a good part of private industrial expansion, especially in intermediate and
capital goods, was directly dependent on the public sector demand, the inability
of the public sector to achieve the targeted levels of real in vestment meant
that the demand for a variety of private sector manufactures was less than the
plan projections.
Compromises to accommodate rival claims of different regions and classes are
inevitable, especially under conditions of a plural polity prevailing in India.
 LIMITED
FLE XIB IL IT Y IN
POLICY
AGRICULTURAL PROGRESS 1950-1971
GROWTH OF PRODUCTION IN INDUSTRIES
CONCLUSIO N