[Indian Economic Development] Chapter 2: Indian Economy 1950-1990

Indian Economy 1950-1990

After independence in 1947, India chose a path of planned economic development to overcome colonial underdevelopment. For the period 1950-1990, this meant a series of Five Year Plans directed by the Planning Commission under a mixed economy framework — combining public and private enterprise.

• The broad goals of Indian planning were captured in four words:
• Growth — increasing national income and per capita income
• Modernisation — adopting new technology and shifting from traditional to industrial methods
• Self-Reliance — reducing dependence on foreign countries for goods, technology, and aid
• Equity — distributing the benefits of growth to all sections, especially the poor

• Agriculture employed the majority of Indians. Key interventions included:
• Land Reforms — abolition of Zamindari, tenancy reforms, land ceiling laws to redistribute land to the landless
• Green Revolution (mid-1960s onward) — introduction of High Yielding Variety (HYV) seeds, expanded irrigation, and use of fertilisers boosted wheat and rice production dramatically, mainly in Punjab, Haryana, and western Uttar Pradesh
• Food security — creation of buffer stocks and the public distribution system (PDS)

The Industrial Policy Resolution of 1956 classified industries into three schedules: Schedule A (only government), Schedule B (both public and private), Schedule C (private sector). Heavy industries like steel, coal, power, and railways were reserved for the public sector. This policy was guided by the Nehru-Mahalanobis model, which argued that heavy industry investment was the key to long-term growth.

India built major public sector units (PSUs): Steel Authority of India (SAIL), Bharat Heavy Electricals (BHEL), Oil and Natural Gas Corporation (ONGC), etc.

• India adopted Import Substitution Industrialisation (ISI) — producing at home what was previously imported. This was enforced through:
• High tariff walls (import duties)
• Licensing system (companies needed licences to import)
• Foreign exchange controls

This protected domestic industry but also created inefficiencies and reduced global competitiveness.

• By the 1970s-80s, an elaborate system of licences, permits, and quotas governed almost every business decision. A firm had to obtain:
• Industrial licence to start production
• Import licence to buy foreign inputs
• Capacity licence limiting how much it could produce

This bureaucratic maze stifled competition and innovation and came to be called the "Licence-Permit Raj."

Example 1: Five Year Plans — prioritisation
The First Plan (1951-56) focused on agriculture and rehabilitation. The Second Plan (1956-61), designed by P.C. Mahalanobis, shifted focus to heavy industries. If Rs. 100 of total plan outlay was spent, the Second Plan devoted about Rs. 20 to industry vs. Rs. 12 in the First Plan, signalling the industrialisation thrust.

Example 2: Green Revolution impact
Before the Green Revolution, India produced roughly 11 million tonnes of wheat (1960). By 1978, production crossed 20 million tonnes. HYV seeds, irrigation canals, and subsidised fertilisers made this possible. But benefits were concentrated in irrigated regions, widening regional inequality.

Example 3: Public Sector Dominance
In 1956, about 5 public sector undertakings existed. By 1991, there were over 240 PSUs employing millions. However, many PSUs ran at losses, burdening the government budget. For example, a PSU producing steel at Rs. 15,000 per tonne when the market price was Rs. 12,000 required government subsidies to survive.

Example 4: Land Ceiling — an illustration
A ceiling law limits land ownership to, say, 30 acres per family. If a landlord owns 100 acres, the surplus 70 acres must be surrendered. The government then redistributes this to landless farmers. While well-intentioned, implementation was weak because landlords used "benami" transfers to avoid ceilings.

Example 5: Import Substitution in Action
India needed refrigerators in the 1960s. Instead of importing them, the government gave a licence to an Indian firm to manufacture refrigerators domestically, using tariffs to keep foreign brands out. The domestic firm was protected, but the refrigerator was expensive and of lower quality than global standards.

Example 6: The Mahalanobis Model Logic
If a country wants more consumer goods in the future, it must first build machines that make those goods (capital goods). Mahalanobis argued: invest in steel plants (capital goods) now → produce more machines → eventually produce more cloth, cycles, and food. This is the "two-sector" logic: priority to capital goods.

Example 7: Small Scale Industries (SSI) Reservation
To protect employment, certain products (e.g., pickles, candles, leather shoes) were "reserved" for small scale industries — large companies could not produce them. This preserved many jobs but also meant these products could not benefit from large-scale production efficiency, keeping costs higher for consumers.