Lecture1

Indian Economy

Indian Economy in the Pre-British

Erastructure and organization of villages
The
The

village communities were small self

sustaining republic
1/6th -1/3th of agricultural produce to Muslim
Nawab or Hindu King.
Panchayat: three distinct classes
i) the agriculturalist: land-owning and tenants
ii) the village artisans
iii) the village officials
Supply of labour and capital: producers, landlords
or money lenders

Towns
On account of the three reasons:
Places of pilgrimage
Seat of a court or capital of provinces
Trading or commercial centers

Industries and handicrafts

Silk
Textile
Muslin clothes

Economic consequences of British conquest

East India Company: 1757-1858
Rule of British Government : 1858-1947
England passing through the period of Industrial Revolution
Impact on India:
Decline of Indian handicrafts
Growth of new land system
Commercialization of Indian agriculture
Process of industrial transition

Decline of Indian handicrafts

Disappearance of princely courts
Competition of machine made goods
Mercantilist policy of Britain
New forms of demand
De-industrialization: pressure of population on land
In the mid of 19th century-55%; 1901: 68%; 1931: 72%
This increase shows how the reliance on industrial for

employment was being reduced.

The land system

Land settlement in 1793
Zamindari system: (Bengal)
Ryotwari system: (Bombay, Madras, North-eastern

and western India)

Depressed the agriculture and peasantry
Commercialization of agriculture
Tremendous demand for cotton, jute and oil seeds

for British industries

Substitution of commercial crops for food crops
Production for sale rather than self consumption

Industrial transition
Rise of large scale modern industries by private

enterprises
1850-55: first cotton mill, Jute mill and coal mine
Cotton mills
Jute mills
1st quarter of 19th cent;
51
18
End of 19th century
194
36
Industrial growth in the first half of 20th century
Wars of 1914 and 1939
Tariff protection to Indian industries: First fiscal
commission recommendation accepted by GOI.
Slow growth of private enterprise: Unimaginative
private enterprise and less capital availability

Colonial exploitation
Exploitation through Indigo export
Exploitation of artisans- Gomastas
Through investment
Private foreign direct investment: coal, mining, jute mill,

tea, coffee, rubber plantation and sugar

Government: railways, ports and electricity
These investments were to fulfill the objective of colonial
power.
End outcome
Indian agriculture
Though industrially advance 16th and 17th century could
modernize
Discriminatory policy
Direct investment no effort to develop heavy and basic
industries
Was there any modernization?

Indian economy at Independence

Vicious circle of poverty
Under employment
Low degree of economic development
Sector

1. Agriculture, Animal
husbandry, forestry,
fisheries
2. Mines, manufacturing,
small enterprises
3. Trade, Transport and
Communications
4. Others

National
income
(1948-49) per
cent

Work force
(1950-51) per
cent

49.1

72.3

17.1

10.7

18.5

7.7

15.7

9.3

Planning period
Planning Period
1
2
3
4
5
6
7
8
9
10
11
12

1951-56
1956-61
1961-66
1966-69 (plan holiday)
1969-74
1974-79
1979-83(didnt complete, change in govt.)
1980-85
1985-90
1990-92 (No plan)
1992-97
1997-2002
2002-07
2007-12
2012-17 (Running)

Planning and the market

Planning involves acceptance of a clearly defined set of

objectives in terms of which to frame overall policies,

formulation of a strategy for promoting the realization of
the ends defined, and working out a rational solution to
problems-an attempts to coordinate means and ends.
Nehru and Gandhi differed on

what economic policy

should be, but agreed on rising the level of standard of
living.

Nehruvian Fabian Socialism-endorsed the need for rapid

development led by state economic activity and planning.

Structural constraints
1. Acute deficiency of material capital, which prevented the
introduction of new technologies
2. Limitation on the speed of capital accumulation (low
capacity to save)
3. Structural limitation in converting saving in to investment
even if saving can be increased (by assumption)
4. Agriculture faces diminishing return-industries to operate
such that increasing return to scale. Hence, it will absorb
surplus labour from agriculture.
5. Market mechanism may lead to excessive consumption
by upper income group causing relative under investment
in sectors required for accelerating economy.
6. Income inequality was acceptable within certain limit as
long as it fuels the economic growth.

Need of plan to decide about:

How much to save?
How much to invest?
What form to invest?

Supply side view of planning

Basic objectives of Indias five year plans: growth,

employment, self-reliance and social justice

First five year plan (1951-56): focused on infrastructure

and agriculture
Second five year plan(1956-61): economic stability- big

push to economy-industrial policy of 1956 with the

objective of raising saving and real income
Closed economy argument: import substitution and infant

industry argument
Emphasis on the development of basic and heavy

industries

Role of state
Maintain law and order
Abolition of exploitative and socially wasteful land

tenancy system-land reform

Defining and Protecting property rights, enforcement
of contract
Primary education, health and safe drinking water-add
to the productivity
Project-Rail road, irrigation and steel
Public mobilization-to get out of vicious circle of
poverty

State intervention: direct principles of state policy in

the constitution
Adequate means of livelihood
Distribution of ownership and control of material
resources
Preventing concentration of wealth
Protecting children from being forced to work
No legal sanction-social justice

Evolution of strategy and priorities

Very

ambitious second five year plan - P. C.

Mahalanobis
Fundamental insight-greater proportion of investment
devoted to increasing the capacity of the investmentgoods sector, faster the long run growth in capital and
investment.
Adoption of socialist pattern of society
Third plan (1961-66): the strategy continued to third
plan
Import substitution
Dual role of public sector-infrastructure, basic and heavy

industries-reduction of concentration of economic power

Public sector: Phase I

Industrial output growth : 8 - 10%
Food grains output growth : 3 - 3.5%
Per capita income growth : 1.75%
Mid-sixties: two war-two droughts-two famineforeign exchange crisis
Financing from IMF and World Bank
Food security-forefront of policy imperatives

Fourth five year plan(1969-74)

Emphasis on food security
programmes
Fifth plan (1974-79)

and

anti-poverty

Sixth plan (1980-85):

Recognized the success of Mahalanobis heavy
industrialization strategy-increase in saving
Shift began-lower on heavy industries and more
emphasis on infrastructure

Seventh

plan (1985-90): infrastructure planrepresents the culmination of shift

Eighth plan(1992-97): After the liberalisation of
the economy
Role of Govt. decrease
Fiscal plan and budget management law:inefficiency and waste

Role of planning in market economy

Indicative in nature: to provide information necessary

as a guide to action that applies for both the public

and private sector
Prescriptive: influencing the behavior of both public
and private agents to serve public goals such as
suggesting tax policy, measures to create incentive for
economic agents to save and invest, to protect the
environment, promote employment, and so on.
Coordinating: to harmonize and/or coordinate the plans
of different ministries and government agencies.

Redefine the role of state

The government, the state and the market
The state is a border concept-includes the govt.,

legislature, political system and judiciary

Close interdependence between market and govt.
Instance of rapid liberalization in some countries

have lead to economic and social problems

PPP: Cooperative action decreases transaction cost

Goals of five year plans

1.1951-56:
Rehabilitation
of
refugees,
increase
agricultural production and control inflation
2.1956-61: Rapid industrialization,1956 industrialization
policy, basic and heavy industries ( iron and steel,
heavy chemicals and heavy engineering)
3.1961-66:
self-realisation
and
self
generating
economy(also gave important to agriculture)
Three annual plans (1966-69)

4.1969-74: growth and stability and progressive

achievement of self-reliance-Garibi hatao. Targeted
5.5% growth

Goals of five year plans

5. 1974-79. 1973 oil price crisis-growth and social justiceremoval of poverty and attainment of self reliance.
Terminated by Janata party.
6. Two sixth plans
1978-83: First by Janata party-critisized the concentration of

power in the hand of few people-focus on enlargement of

employment potential in agriculture and allied activitiesencouragement

of

household

and

small

industries

for

consumer goods to raise the income of lowest income classes.

1980-85: Second by the congress govt.-direct

attack on
by creation of condition of
expanding economy (5.4 % growth).
7. 1985-90: Emphasize on food grain growth,
increase in employment opportunity and raise
productivity. Known as infrastructure plan.
1990-95: The plan approved-but series of
changes in govt. at centre-the fourth version of
8th plan implemented
8. 1992-97: Economic crisis caused by BoP crisisrising debt burden-increase in budget deficitmounting inflation

9.1997-2002: Growth, social justice and equality

10.2002-2007: Indicative planning
11. 2007-2012 : towards faster and more inclusive
growth
12. 2012-2017: inclusive growth
Plan Outlays
Public sector outlay has increase from 1960
Cr(first plan) to 7,05,820 Cr ( Ninth plan)

Sectoral outlays(

Rs in Crore

Pla
n

Agricultur
e+
Irrigation

power Industr Transport Social

y
+
service
Communi
.

Total

600

260

120

520

460

1960

950

440

1080

1300

830

4600

1750

1250

1970

2120

1490

8580

3810

2450

3630

3240

2770

15900

8740

7400

9580

6870

6840

39430

26130

30750

16950

17680

17780

109290

48100

61690

29220

41000

38720

218730

101150

12890
0

47890

101550

105570

485460

201442

21924
3

60362

236085

223909

941041

Pattern of financing
1. Domestic Budgetary Resources (DMR): raised from
a. surplus current revenues(current revenue-current
expenditure)
b. contribution of public enterprises
c. mobilization of internal private saving, through
market borrowing, small savings and provident
funds etc.
d. additional resource mobilization in the form of
additional taxes and additional revenue from public
enterprises.
2. External sources
3. Deficit financing: Excess of expenditure are income
financed through borrowing from RBI.

 Sources of plan finance

Plan

DMR(%)

External
Assistance(%)

Deficit
Financing(%)

73

10

17

56

24

20

59

28

13

74

13

13

82

15

78

14

75

16

86

Initially shifted to deficit financing and foreign

borrowing
But after third plan intended to become self
sufficient
Components of DMR (%) as source of finance for
component 1
2 3
4
5
6
7
8
different
plans. a, b, c, d as given in slide 28.
s
a

25

-1

-5

-2

13

-8

-10

34

35

3
1

25

40

28

41

58

62

13

2
3

34

27

37

30

17

--

Total from
DMR

73

5
6

59

74

82

78

75

86

Merits and demerits of different plan

financing
1. Taxation: direct taxes-progressive in nature and
indirect taxes- leads to increase in prices- tax
revenues are in adequate even to pay for current
expenditure.
2. Profit of public under taking: performance of
state electricity boards (SEB) and State Road
Transport Units (SRTUs) not so good.
3. Market loans and small savings: payment of
interest and return of principal amount in the
future where as in case of taxes no future
implication.
4. Foreign Assistance
5. Deficit financing

Review of 55 years of planning

Annual average growth rate
1950-51 to 1980-81: 3.4%
1980-81 to 1996-97: 5.5%
1996-97-2001-02 : 6.2%
Progress in:
Agriculture
Industry
Economic infrastructure
Diversification of export and import substitution
Science and Technology
Educational system
Public sector undertakings

Growth performance

( NNP at factor cost-1993-94

prices)
Plan

Target

Actual

First

2.1

3.6

Second

4.5

4.1

Third

5.6

2.8

Fourth

5.7

3.3

Fifth

4.4

4.8

Sixth

5.2

5.7

seventh

Eighth

5.6

6.8

Ninth

6.5

5.4

Tenth

7.6

Eleventh

Twelfth

Key Failure
Gross inefficiency of production of PSUs
Unemployment
Failure to eliminate poverty
In equality of income