Chapter 2 — Indian Economy 1950–1990

Chapter 2, titled 'Indian Economy 1950–1990', covers India's economic policies from independence to 1990. It explains why India chose a mixed economy, the goals of Five Year Plans, and key developments in agriculture (land reforms, Green Revolution) and industry (IPR 1956, licensing, import substitution).

The four goals were growth (increase in the country's capacity to produce goods and services, measured by GDP), modernisation (adoption of new technology and progressive social outlook), self-reliance (avoiding imports of goods that could be produced domestically), and equity (ensuring economic prosperity reaches the poor and basic needs are met for all).

India's leaders, led by Jawaharlal Nehru, were sympathetic to socialist ideals but rejected the Soviet model where the government owned all property. They also rejected pure capitalism, which distributes goods based on purchasing power rather than need. A mixed economy combined the best features of both: private property and democracy alongside a strong public sector and government planning.

The Planning Commission was a body set up in 1950 with the Prime Minister as its Chairperson to formulate India's Five Year Plans. A plan spells out how the resources of a nation should be put to use and specifies objectives to be achieved within five years. India borrowed the concept of five-year plans from the former Soviet Union.

Prasanta Chandra Mahalanobis was a statistician born in 1893 in Calcutta who is regarded as the architect of Indian planning. The Second Five Year Plan, which laid down the basic ideas regarding the goals of Indian planning, was based on his ideas. He established the Indian Statistical Institute (ISI) in Calcutta and started the journal Sankhya. In 1945 he was made a Fellow of Britain's Royal Society.

Land reforms primarily referred to changes in the ownership of land holdings. Just after independence, steps were taken to abolish intermediaries (zamindars, jagirdars) who collected rent without contributing to improvements, so that tillers would become owners of land. A second measure was land ceiling — fixing the maximum size of land an individual could own to reduce concentration. The abolition of intermediaries brought some 200 lakh tenants into direct contact with the government. Land reforms succeeded in Kerala and West Bengal but faced loopholes and evasion elsewhere, and the poorest agricultural labourers such as sharecroppers did not fully benefit.

The Green Revolution refers to the large increase in food grain production resulting from the use of High Yielding Variety (HYV) seeds, especially for wheat and rice. It occurred in two phases: the first (approximately mid-1960s to mid-1970s) was limited to more affluent states like Punjab, Andhra Pradesh, and Tamil Nadu; the second (mid-1970s to mid-1980s) spread to a larger number of states and more crops. The Green Revolution enabled India to achieve self-sufficiency in food grains and allowed the government to build food stocks for use in times of shortage.

Marketed surplus is the portion of agricultural produce that is sold in the market by farmers, as opposed to what farmers consume themselves. During the Green Revolution period, a good proportion of rice and wheat was sold as marketed surplus. This caused food grain prices to decline relative to other items, which benefited low-income groups who spend a large percentage of their income on food.

The IPR 1956 was adopted in accordance with the goal of the state controlling the commanding heights of the economy and formed the basis of the Second Five Year Plan. It classified industries into three categories: the first comprised industries exclusively owned by the government (e.g., national defence); the second consisted of industries where the private sector could supplement public sector efforts, with the government taking sole responsibility for new units; and the third consisted of the remaining industries left to the private sector, though still subject to licensing.

Under the licensing system, no new industry could start, and no existing industry could expand output or diversify production, without obtaining a government license. This was meant to control the quantity of goods produced and promote regional equality. However, it was widely misused: big industrialists obtained licenses not to start new firms but to prevent competitors from entering the market. Industrialists spent more time lobbying for licenses than on improving their products, and excessive regulation was seen as a major drawback of India's economic policy between 1950 and 1990.

Import substitution was an inward-looking trade strategy aimed at replacing imports with domestic production. The government protected domestic industries from foreign competition through tariffs (a tax on imported goods, making them more expensive) and quotas (limits on the quantity that could be imported). The policy was based on the belief that industries in developing countries could not initially compete with those of developed economies and needed protection to learn to compete over time. It was criticised later for removing the incentive for Indian producers to improve quality and for not developing a strong export sector.

On the achievement side, India became self-sufficient in food grains through the Green Revolution, the zamindari system was abolished, and industry diversified greatly — the industrial sector's share of GDP rose from 13% in 1950–51 to 24.6% in 1990–91. On the failure side, about 65% of the population was still engaged in agriculture by 1990 (the industrial and service sectors did not absorb excess agricultural labour), many public sector enterprises incurred huge losses, the licensing system stifled competition and efficiency, and the lack of export promotion left the economy 'inward oriented'.

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