Indian Economy 1950–1990

Written and reviewed by Devendra Dubey, Mathematics & Commerce faculty at UniDrill (M.Sc. Mathematics, Osmania University · 10 years teaching). Based on NCERT Economics Class XI (Indian Economic Development), Chapter 2.

What would you do with a poor, newly free country?

On 15 August 1947 India was politically free but economically weak, as the last chapter showed. Its leaders had to decide who would decide what to produce, how to produce it and who gets the output. Over the next four decades the answers shaped farms, factories and trade. Some of those choices brought food security and a broad industrial base. Others brought delay and inefficiency, and eventually led to the reforms of 1991. This chapter is the story of that experiment.

Choosing a system: the mixed economy

Every economy must answer three questions: what to produce, how to produce and for whom. The three systems answer them differently.

India did not follow the socialist model in which the state owns all the means of production, and it did not leave everything to private business. It chose a mixed economy, in which the government and the private sector coexist. This choice is reflected in the Industrial Policy Resolution of 1948 and in the Directive Principles of the Constitution.

Planning: the machinery

A plan spells out how a nation's resources should be used, with general goals and specific time-bound objectives. The Planning Commission was set up in 1950, with the Prime Minister as its Chairperson. India borrowed the idea of five year plans from the former Soviet Union, the pioneer in national planning. A long-term plan of about 20 years is called a perspective plan, and the five year plans are meant to provide its basis.

The First Plan covered 1951–56 and the Second Plan 1956–61. The Second Plan was designed by P.C. Mahalanobis, who also founded the Indian Statistical Institute and the journal Sankhya.

Why four goals? A plan needs targets that fit the country's needs. The Five Year Plans pursue four goals, and since resources are limited, not every plan gives all four equal weight.

Growth in GDP comes from three sectors: agriculture (primary), industry (secondary) and services (tertiary). Their relative shares are the structural composition of GDP.

Pause and predict: a plan stresses modern machinery in a factory so that output rises. Which two goals are likely to pull in different directions?

Check your answer: growth and modernisation on one side, and employment-oriented equity on the other. Machines raise output but may employ fewer workers, which is why plans cannot weight every goal equally.

The scoreboard: how the economy changed, 1950–51 to 1990–91

Look at the share of each sector in GDP. The table shows the structure shifting, and the last column converts each shift into a change in percentage points.

Each column adds up to 100%, and the three changes add up to zero.

$$\text{Sector share} = \dfrac{\text{Sector's value added}}{\text{GDP}} \times 100$$

Worked example: percentage points or percent? Agriculture's share fell from 59% to 34.9%. Step 1: the fall in percentage points is $59 - 34.9 = 24.1$. Step 2: the fall as a percent of the original share is $\dfrac{24.1}{59} \times 100 \approx 40.8\%$. A common wrong step is to call the fall 24.1% when the question asks for percentage change. Points describe a gap between two shares, while percent describes change relative to the starting share.

The workforce told a different story. The share of the workforce in agriculture was 72.1% in 1950–51 and still 66.8% in 1990–91. So the sector's contribution to GDP fell sharply but its hold on employment barely loosened, because industry and services did not absorb the surplus labour.

Why it matters. Notice the gap: agriculture's GDP share fell by about 40% of its starting value, but its employment share fell by a few points. This mismatch is the main structural weakness of the 1950–90 period.

Agriculture: land reform and the Green Revolution

At independence, land ownership was dominated by intermediaries such as zamindars and jagirdars, who collected rent and did not invest in the land. Productivity was low, and India depended on food imports, mainly from the USA. Two sets of policies tried to change this.

The idea behind all three is "land to the tiller": ownership gives the cultivator the incentive to invest. Land reforms worked best in Kerala and West Bengal, where the state governments were committed to this principle. Elsewhere progress was held back by lack of political will, loopholes in the law and long court cases.

The Green Revolution is the large rise in food grain output from High Yielding Variety (HYV) seeds, mainly of wheat and rice, used with chemical fertilisers, pesticides and regular irrigation.

What the Green Revolution achieved. Food grain output rose, which made India self-sufficient in food. The marketed surplus, the part of farm output actually sold in the market, increased. Food grain prices fell relative to other goods, which helped low-income consumers. The government was also able to build buffer stocks of food grains for emergencies.

Two views. For the exam: subsidies were needed to persuade farmers to take up new and risky HYV technology, and since farming remains risky, supporters say they are still required. Another reading: critics argue that subsidies now benefit fertiliser manufacturers and richer farmers more than the poor, distort cropping choices and burden government finances. Both sides are part of the textbook's discussion of agricultural subsidies.

By 1990 the sector still supported roughly two-thirds of the population, which is the real limit of the agricultural story.

Industry: the 1956 policy and the licence system

The Industrial Policy Resolution of 1956 (IPR 1956) was the basis of the Second Plan. It followed the idea that the state should control the "commanding heights" of the economy. It divided industries into three categories.

The private sector was kept under licensing control. No new industry could be started, expanded or diversified without a government licence. Licences were easier to obtain for backward regions, with concessions such as tax holidays and cheap electricity, to promote regional equality.

Small-scale industry received special attention. The Karve Committee (Village and Small-Scale Industries Committee, 1955) recommended a sustained push for rural employment. A small-scale unit is defined by its maximum investment in assets: ₹5 lakh in 1950, raised gradually over the years, with ₹1 crore given as the later limit. Small units are more labour-intensive than large ones. Certain products were reserved for them, with concessions such as lower excise duty and cheap bank credit.

Pause and predict: why would the government give licences more easily to backward regions?

Check your answer: to spread industry beyond a few developed areas and reduce regional inequality, the equity goal at work. Concessions such as tax holidays and cheap electricity were the incentives.

Trade: import substitution

Trade policy was inward-looking. The aim of import substitution was to replace imports with domestic production. Two tools protected domestic firms.

There were two reasons for protection. Domestic industries were new and could not face the cheaper and better products of developed economies. And foreign exchange was scarce and not to be spent on luxury imports. For these reasons serious export promotion was not undertaken until the mid-1980s.

Two views. For the exam: protection let infant industries grow and saved foreign exchange. Another reading: the textbook also records the downside. With no competitor allowed in, producers had little reason to improve, and product quality suffered. It also notes that public sector firms stayed in areas such as telecommunication and bread-making where private firms could have competed.

Assessment, 1950–1990

These weaknesses, together with excessive regulation, led to the New Economic Policy of 1991, the subject of the next chapter.

Timeline

Exam traps

60-second revision

Where this chapter connects

• Previous: Indian Economy on the Eve of Independence lists the problems this chapter's policies set out to solve.
• Next: Liberalisation, Privatisation and Globalisation: An Appraisal takes the story from the 1991 reforms onward.
• Also see: Rural Development follows up on credit, marketing and diversification in the farm sector.