Economic Planning

The Bombay Plan was a proposal for economic development put forth in 1944 by a group of prominent Indian industrialists. This plan envisioned a significant role for the government in the core sectors of the economy. Crucially, it aimed for this governmental presence without diminishing the role or scope of the private sector, suggesting a mixed economic approach where both public and private enterprises would coexist and contribute to national development.

Economic planning can be broadly categorized into Imperative Planning and Indicative Planning, each reflecting different degrees of state control and involvement in the economy. Imperative Planning is characterized by a centralized approach to planning, implementation, and resource allocation, where the state exercises complete control over all aspects. This type of planning is typically found in socialist countries. In contrast, Indicative Planning involves the government proposing a set of broad principles and recommendations to achieve specified objectives. Under this model, the government provides support to the private sector but does not exert direct control over it; instead, it directs the private sector to implement plans in particular areas. India's planning approach, initially more centralized, shifted to a more indicative nature starting with the Ninth Five-Year Plan in 1997.

When India became independent on 15 August 1947, it inherited an economy shaped by nearly two centuries of British colonial rule. The sole purpose of British colonial rule was to reduce India to a raw material supplier for Britain's rapidly expanding modern industrial base. Understanding this exploitative relationship is essential for assessing India's post-independence development strategy. Colonialism led to the complex but complete integration of the Indian economy with the world capitalist system, though in a subservient position. From the 1750s, India's economic interests were entirely subordinated to those of Britain. This imposed a peculiar structure of production and international division of labour where Britain produced high-technology, high-productivity, and capital-intensive goods, while India supplied foodstuffs and raw materials like cotton, jute, oilseeds, tobacco, and minerals, importing manufactured products from Britain. --- ### Low Level of Economic Development Under Colonial Rule Before British rule, India had an independent economy. Agriculture was the main source of livelihood for most people, yet the economy was characterised by various kinds of manufacturing activities. India was particularly well known for its handicraft industries in cotton and silk textiles, metal and precious stone works. These products enjoyed a worldwide market based on quality of material and craftsmanship. The economic policies pursued by the colonial government were concerned more with protection and promotion of the economic interests of Britain than with the development of the Indian economy. Such policies brought about a fundamental change in India's economic structure — transforming the country into a supplier of raw materials and consumer of finished industrial products from Britain. **Growth data:** Most studies find that the country's growth of aggregate real output during the first half of the twentieth century was less than **two per cent**, coupled with a meagre **half per cent growth** in per capita output per year. Notable estimators: Dadabhai Naoroji, William Digby, Findlay Shirras, V.K.R.V. Rao, R.C. Desai. Net savings of the Indian economy from 1914 to 1946 was barely 3% of GNP. The colonial state denied state support to industry and agriculture, imposing free trade and refusing tariff protection for Indian industries. --- ### Agricultural Sector India's economy under the British remained fundamentally agrarian — about **85 per cent** of the country's population lived mostly in villages and derived livelihood directly or indirectly from agriculture. Despite being the occupation of such a large population, the agricultural sector experienced stagnation and frequent deterioration. Agricultural productivity became low. In absolute terms, the sector experienced some growth due to expansion of aggregate area under cultivation, but stagnation was mainly because of the various systems of **land settlement** introduced by the colonial government. **Zamindari System:** - Implemented in the then Bengal Presidency comprising parts of India's present-day eastern states - The profit accruing out of the agriculture sector went to the zamindars instead of the cultivators - The interest of the zamindars was only to collect rent regardless of the economic condition of the cultivators - **Revenue settlement:** Dates for depositing specified sums of revenue were fixed; failing which zamindars were to lose their rights - This caused immense misery and social tension Other causes of agricultural stagnation: - Low levels of technology - Lack of irrigation facilities - Negligible use of fertilisers - India's agriculture was starved of investment in terracing, flood-control, drainage and desalinisation of soil - A small section of farmers changed from food crops to **cash crops** (to be used by British industries); large section of tenants, small farmers and sharecroppers had neither resources nor technology nor incentive to invest The agrarian structure was dominated by landlords, moneylenders, merchants, and the colonial state, who appropriated more than half of the total agricultural production. Their interest was confined primarily to collecting land revenue, with very little spent on improving agriculture. The tax system was regressive, heavily burdening peasants while bureaucrats, landlords, and merchants paid hardly any taxes. Ruined artisans, failing to find alternative employment, crowded into agriculture as tenants, sharecroppers, and agricultural labourers, leading to extreme subdivision and fragmentation of land into small holdings. --- ### Industrial Sector India could not develop a sound industrial base under colonial rule. The country's world-famous **handicraft industries declined** — they created not only massive unemployment in India but also a new demand in the consumer market for cheap manufactured goods from Britain. The collapse of Indian handicraft and artisanal industries was due to competition from cheaper imported British manufacturers (along with imposed free trade) and high import duties imposed by Britain and other European countries on Indian goods, effectively closing European markets to Indian manufacturers after 1820. During the second half of the nineteenth century, modern industry began to take root in India but its progress remained very slow. Initially confined to setting up of cotton and jute textile mills: - Cotton textile mills: mainly dominated by Indians; located in western parts (Maharashtra, Gujarat) - Jute mills: mainly concentrated in Bengal; dominated by foreigners In the 19th century, industrial development was confined to cotton, jute, coal, and tea industries. By the 1930s, sugar, cement, and paper industries also developed. **Tata Iron and Steel Company (TISCO):** Incorporated in **1907**. Iron and steel industries began coming up in the beginning of the twentieth century. A few other industries in fields of sugar, cement, paper also came up after World War II. As late as 1946, cotton and jute textiles accounted for nearly 30% of all workers employed in factories. In 1950, India met about 90 percent of its machine tool needs through imports. However, there was **no capital goods industry** to help promote further industrialisation. Capital goods industry = produces machine tools which are in turn used for producing articles for current consumption. A serious weakness of Indian industrial effort was the almost complete absence of heavy or capital goods industries, which prevented rapid and independent industrial development. Without capital goods industry, there was no substitute to the near wholesale displacement of traditional handicraft industries. The colonial government's policy of systematically de-industrialising India was two-fold: 1. Reduce India to the status of a mere exporter of important raw materials for upcoming modern industries in Britain 2. Turn India into a sprawling market for finished products of those industries The growth rate of new industrial sector's contribution to GDP remained very small. Foreign capital dominated the industrial and financial fields and controlled foreign trade. British firms held sway over coal mining, jute industry, shipping, banking, insurance, and tea and coffee plantations, and even controlled many Indian-owned companies through managing agencies. Public sector remained confined only to railways, power generation, communications, ports and some other departmental undertakings. --- ### Foreign Trade India had been an important trading nation since ancient times. But the restrictive policies of the colonial government adversely affected the structure, composition and volume of India's foreign trade. India became an exporter of primary products (raw silk, cotton, wool, sugar, indigo, jute) and an importer of finished consumer goods (cotton, silk, woollen clothes) and capital goods (light machinery produced in Britain's factories). **Britis

The Gandhian Plan was an economic planning proposal authored by Sriman Narayan Agarwal in 1944. This plan was distinct in its emphasis, focusing primarily on the promotion of agriculture within the Indian economy. Additionally, it advocated for the development and encouragement of village and cottage industries. The foundational principles and recommendations of the Gandhian Plan were rooted in the economic ideas espoused by Mahatma Gandhi.

Equity, alongside growth, modernisation, and self-reliance, was one of the four main goals of India's Five Year Plans. This objective recognised that economic progress alone might not improve the living conditions for all citizens, as a country could experience high growth and modern technology while a significant portion of its population remained in poverty. Therefore, ensuring that the benefits of economic prosperity are distributed to the poor sections of society, rather than being concentrated solely among the rich, became a critical aspect of planning. The goal of equity aimed to ensure that every Indian could fulfill basic needs such as food, a decent house, education, and health care. It also sought to reduce inequalities in the distribution of wealth. To achieve equity in the agricultural sector, policies like land reforms were introduced, focusing on changes in landholding ownership and fixing maximum land sizes (land ceiling) to prevent concentration of land in a few hands. Although facing challenges and loopholes, government interventions during the Green Revolution, such as providing low-interest loans and subsidised inputs to small farmers, were crucial in preventing increased disparities and ensuring that small farmers also benefited from the new technology. Similarly, in the industrial sector, policies promoting industries in backward regions and supporting small-scale industries through reservations and concessions aimed at promoting regional equality and generating employment, thereby addressing equity concerns. The debate over agricultural subsidies also often includes arguments for their continuation to prevent increased inequality between rich and poor farmers, thus upholding the goal of equity.

Modernisation is one of the four principal goals of India's Five Year Plans, alongside growth, self-reliance, and equity. This objective broadly encompasses two key aspects. Primarily, it refers to the adoption of new technologies by producers to enhance the output of goods and services within the country. This involves implementing advanced methods and machinery, for instance, a farmer using new seed varieties or a factory deploying a new type of machine to increase production efficiency. Beyond technological advancement, modernisation also signifies a shift in social outlook. It includes the recognition and implementation of changes in societal attitudes, such as ensuring women possess the same rights as men. A modern society is characterized by its utilisation of women's talents across various professional fields, including banks, factories, and schools, rather than restricting them to traditional roles. Such societies are frequently observed to be more prosperous. While modernisation is a crucial planning goal, planners must also balance it with other objectives, as introducing modern technology can sometimes conflict with goals like increasing employment if the new technology reduces the need for human labour. The first seven Five Year Plans (1950-1990) aimed to achieve this goal among others.

**NITI Aayog (National Institution for Transforming India)** was established via a resolution of the Union Cabinet on **1 January 2015**, replacing the Planning Commission. It is the premier policy think tank of the Government of India, providing directional and policy inputs, as well as relevant technical advice to the Centre, states and UTs. The Planning Commission was abolished and NITI Aayog was established to better serve the needs and aspirations of the people and to bring states to act together in national interest — fostering **cooperative federalism**, recognizing that strong States make a strong nation. **Governing Council:** Comprises the Prime Minister of India, Chief Ministers of all States, and Union Territory administrators. It is the premier body for evolving a shared vision of national development priorities, sectors and strategies, and presents a platform to discuss inter-sectoral, inter-departmental and federal issues in order to accelerate the implementation of the national development agenda, in the spirit of Ek Bharat, Shrestha Bharat. **Key Difference from Planning Commission:** - Planning Commission was advisory but had powers to **allocate funds** to ministries and states — this function now lies with the **Finance Ministry**. - States in Planning Commission era had limited role and some limited function in the National Development Council; needed to interact yearly with the Planning Commission to get annual plan approved. - NITI Aayog has a **bottom-up approach** (vs. Planning Commission's top-down). - NITI Aayog has all Chief Ministers and UT administrators in its Governing Council; states have greater role and say in planning/implementation of policies. **NITI Aayog's Key Objectives:** - Evolve shared vision of national development with active involvement of states - Foster cooperative federalism through structured support initiatives and mechanisms with the States on a continuous basis, recognizing that strong States make a strong nation. - Develop mechanisms to formulate credible plans at the village level, aggregating progressively upward - Ensure national security interests in economic strategy - Pay special attention to sections at risk of not benefiting from economic progress - Design strategic and long-term policy and programme frameworks and initiatives, and monitor their progress and their efficacy. The lessons learnt through monitoring and feedback will be used for making innovative improvements, including necessary mid-course corrections. - Provide advice and encourage partnerships between key stakeholders and national and international like-minded Think tanks, as well as educational and policy research institutions. - Create a knowledge, innovation and entrepreneurial support system through a collaborative community of national and international experts, practitioners and other partners. - Offer a platform for resolution of inter-sectoral and inter departmental issues in order to accelerate the implementation of the development agenda. - Maintain a state-of-the-art Resource Centre, be a repository of research on good governance and best practices in sustainable and equitable development as well as help their dissemination to stake-holders. - Actively monitor and evaluate the implementation of programmes and initiatives, including the identification of the needed resources so as to strengthen the probability of success and scope of delivery. - Focus on technology upgradation and capacity building for implementation of programmes and initiatives. - Undertake other activities as may be necessary in order to further the execution of the national development agenda, and the objectives mentioned above. **Key Initiatives of NITI Aayog:** - **Aspirational Districts Programme** (now Aspirational Blocks Programme in Budget 2023-24: 500 blocks) - **Poshan Abhiyan** (nutrition mission) - **Atal Innovation Mission** (innovation and entrepreneurship) **NITI Aayog Indices:** - Health Index - School Education Quality Index (SEQI) - SDG India Index - Digital Transformation Index (DTI)

The People’s Plan was an economic development proposal for India, drafted in the year 1945 by M. N. Roy. This plan outlined specific priorities for the Indian economy during the post-independence period. It distinctly gave the greatest priority to agricultural production, recognizing its fundamental importance. In addition to agriculture, the People's Plan also placed significant emphasis on the manufacture of consumer goods, aiming to cater to the immediate needs of the population. Furthermore, the plan highlighted the necessity for the development of a robust communication and transport network, understanding these as critical infrastructure for economic progress and connectivity across the nation.

India, China and Pakistan all started their development planning at roughly the same time. All three countries had similar growth rates and per capita incomes till the early 1980s. The last three decades have taken these countries to very different developmental levels. **Reform initiation years:** - China: **1978** (structural reforms on own initiative — NOT forced by international agencies) - Pakistan: **1988** - India: **1991** (forced by IMF/World Bank conditionalities) --- ### Historical Development Strategies **India:** Five Year Plans starting with First Five Year Plan for 1951-56. Till March 2017, India followed Five Year Plan-based development model. Since 2018, Pakistan is working on its 12th Five Year Plan. **China:** - After establishment of People's Republic (1949): all critical sectors, enterprises and lands brought under government control - **Great Leap Forward (GLF):** Initiated in 1958; aimed at industrialising the country on massive scale; communes set up in rural areas; by 1958, there were **26,000 communes** covering almost all farm population - GLF met with problems: severe drought caused famine in China killing about **30 million people**; when Russia withdrew its professionals (during Russia-China conflict), industrialisation process affected - **Great Proletarian Cultural Revolution (1966-76):** Mao introduced this; students and professionals sent to work and learn from the countryside - **Reforms introduced in 1978** (present-day fast industrial growth): Initial phase — reforms in agriculture, foreign trade, investment; commune lands divided into small plots, allocated for use (not ownership) to individual households; allowed to keep all income from land after paying stipulated taxes. Later phase — industrial sector reforms; **Special Economic Zones (SEZs)** set up to attract foreign investors; **dual pricing** system introduced - China is working on **15th Five Year Plan (2021-25)** **Pakistan:** - Mixed economy model with co-existence of public and private sectors - Late 1950s-1960s: variety of regulated policy framework for import substitution-based industrialisation - Green Revolution led to mechanisation and increase in public investment in infrastructure → rise in food grain production - 1970s: **nationalisation** of capital goods industries - Late 1970s-1980s: shift to denationalisation and private sector encouragement - Received financial support from western nations and remittances from emigrants to Middle East - 1988: reforms initiated - Announced first Medium Term Development Plan in 1956 --- ### Demographic Indicators (Table 8.1, 2021-23) | Country | Estimated Population (million) | Annual Growth | Density (per sq km) | Sex Ratio | Fertility Rate | Urbanisation | |---------|-------------------------------|---------------|---------------------|-----------|----------------|--------------| | India | 1428 | 0.81 | 473 | 930 | 2.0 | 36% | | China | 1411 | **-0.10** | 150 | 898 | **1.2** | **65%** | | Pakistan | 240 | **1.96** | 300 | 948 | **3.4** | 38% | Key observations: - Population growth: highest in Pakistan, followed by India, then China (China negative) - China's **one-child norm** (introduced late 1970s) is major reason for low population growth; led to decline in sex ratio and will result in more elderly people — led China to allow couples to have two children - Sex ratio biased against females in all three countries; scholars cite son preference - Fertility rate: lowest in China (1.2), highest in Pakistan (3.4) - Urbanisation: highest in China (65%); India has only 36% urban population --- ### GDP and Sectoral Composition **GDP (PPP, 2022):** - China: US $35 trillion (second largest in world) - India: US $15 trillion - Pakistan: US $1.5 trillion (~10% of India's GDP; India's GDP is about 42% of China's) **Annual GDP Growth (Table 8.2):** | Country | 1980-90 | 2015-2017 | 2024 | |---------|---------|-----------|------| | India | 5.7% | 7.3% | 6.5% | | China | 10.3% | 6.8% | 5.0% | | Pakistan | 6.3% | 5.3% | 3.1% | - In 1980s, China had near double-digit growth and Pakistan was ahead of India - China's present growth attributed to reforms introduced in 1978 **Sectoral Share of Employment and GDP (Table 8.3, 2022):** | Sector | India GVA | China GVA | Pakistan GVA | India WF | China WF | Pakistan WF | |--------|-----------|-----------|--------------|----------|----------|-------------| | Agriculture | 18% | **8%** | 24% | 43% | 23% | 36% | | Industry | 28% | 38% | 21% | 26% | 32% | 26% | | Services | 54% | 54% | 55% | 31% | 45% | 38% | Key observations: - All three countries: service sector contributes highest share of GDP - China: followed classical development pattern (agriculture → manufacturing → services); India and Pakistan shifted directly from agriculture to services - China's industrial sector maintained high growth rate; India and Pakistan — industrial sector growth not as strong - Despite decades of planned development, majority of workforce in all three countries still depends on agriculture (India has highest dependency at 43%) --- ### Human Development Indicators (Table 8.5, 2017-2023) | Item | India | China | Pakistan | |------|-------|-------|---------| | HDI Value | 0.685 | **0.797** | 0.544 | | HDI Rank | 130 | **78** | 168 | | Life Expectancy at Birth (years) | 72.0 | **78.0** | 67.6 | | Mean Years of Schooling | 6.9 | **8.0** | 4.3 | | GNI per capita (PPP US$) | 9,047 | **22,029** | 5,501 | | People Below Poverty Line (%) | 21.9* | **0.0** | 21.9 | | Infant Mortality Rate (per 1000) | 25.5 | **4.8** | 51 | | Maternal Mortality Rate (per lakh) | 103 | **23** | 154 | | Access to Sanitation (%) | 78 | **96** | 71 | | Access to Drinking Water (%) | 93 | **98** | 91 | | Undernourishment (%) | 17 | **3** | 19 | *Note: India 2019-21; Pakistan 2023. Key observations: - China is ahead of India and Pakistan on most indicators - NCERT: China's HDI improvements were attributed NOT to reform process but to **strategies adopted in the pre-reform period** (basic health services, equitable distribution of food grains through commune system, land reforms) - Maternal mortality: India 103, China 23, Pakistan 154 — India and Pakistan have failed to save women from maternal mortality - China has smallest share of poor among the three countries --- ### Development Strategies Assessment **China's strength:** - Introduced structural reforms on own initiative (NOT due to World Bank/IMF pressure) - Used 'market system without losing political commitment' - Retained collective ownership of land; allowed individuals to cultivate → brought prosperity to vast number of poor - Pre-reform period investments in education, health, land reforms, decentralised planning → improved social and income indicators even before 1978 reforms - Each reform measure first implemented at a smaller level, then extended on massive scale; decentralised government enabled assessment of economic, social and political costs **Pakistan's challenge:** - Reform process led to worsening of all economic indicators - Reforms were not on an institutionalised process of technical change but on good harvest — good harvest = good economy; bad harvest = stagnation - Proportion of poor: >40% (1960) → 25% (1980) → rising again in recent decades - Most foreign exchange earnings from remittances from emigrants in Middle East; exports of highly volatile agricultural products; growing dependence on foreign loans **India's position:** - India, with democratic institutions, performed moderately, but majority of people still depend on agriculture - Scholars point to political instability, over-dependence on remittances and foreign aid, volatile agricultural performance as reasons for Pakistan's slowdown ---

The Sarvodaya Plan was an economic development proposal drafted in 1950 by Jayaprakash Narayan. This plan primarily focused on promoting small and cotton industries, in addition to emphasizing agricultural development. A notable feature of the Sarvodaya Plan was its suggestion for India to be free from dependence on foreign technology. Furthermore, the plan placed significant stress on the implementation of land reforms as a crucial element of its economic strategy.

Self-reliance was one of the four clearly specified goals of India's Five Year Plans, alongside growth, modernisation, and equity. This objective was particularly emphasized during the first seven Five Year Plans, covering the period from 1950 to 1990. The essence of self-reliance was defined as avoiding the import of goods that could be produced domestically within India. This policy was considered crucial for several reasons. Firstly, it aimed to reduce India's overall dependence on foreign countries, especially regarding essential items like food. The emphasis on self-reliance was also a natural outcome for a nation recently freed from foreign domination, fostering a desire to control its own economic destiny. Secondly, there was a significant concern that continued reliance on imported food supplies, foreign technology, and foreign capital could potentially make India's sovereignty susceptible to external interference in its domestic policies. The pursuit of self-reliance manifested in various policy measures, such as the inward-looking trade strategy of import substitution, which sought to replace foreign goods with domestic production. Significant progress towards self-reliance was achieved in certain sectors; for instance, the Green Revolution technology enabled India to attain self-sufficiency in food grains, thereby reducing its dependence on other nations for meeting its food requirements.

The Great Leap Forward (GLF) was a campaign initiated in China in 1958 with the primary objective of industrializing the country on a massive scale. As part of this initiative, people were actively encouraged to establish industries in their backyards. Concurrently, in rural areas, a system of "communes" was introduced. Under this commune system, agricultural lands were cultivated collectively by the people. By 1958, approximately 26,000 communes had been established, encompassing nearly all of China's farm population. However, the GLF campaign encountered significant problems. A severe drought devastated China, leading to the death of about 30 million people. Additionally, conflicts between Russia and China resulted in Russia withdrawing its professionals who had been assisting China's industrialization efforts. Despite the extensive land reforms, collectivization, the Great Leap Forward, and other initiatives, China's per capita grain output in 1978 remained at the same level as it was in the mid-1950s.

China's Economic Reforms, initiated in 1978, marked a significant shift in the country's economic strategy, laying the groundwork for its rapid industrial growth. Unlike India and Pakistan, China introduced these structural reforms on its own initiative, driven by the new leadership's dissatisfaction with the slow pace of growth and lack of modernisation under Maoist rule. The Maoist vision, which emphasized decentralisation, self-sufficiency, and shunning foreign technology, goods, and capital, was perceived to have failed, with per capita grain output in 1978 being stagnant compared to the mid-1950s. The reforms were introduced in phases, beginning with the agriculture, foreign trade, and investment sectors. In agriculture, commune lands were divided into smaller plots and allocated to individual households for use (not ownership), allowing them to retain income after paying stipulated taxes. Later, reforms extended to the industrial sector, permitting private firms and township and village enterprises (owned by local collectives) to produce goods. State-Owned Enterprises (SOEs) were made to face competition. A dual pricing system was implemented, where fixed quantities of inputs and outputs were bought and sold at government-fixed prices, while the remainder traded at market prices. To attract foreign investment, Special Economic Zones (SEZs) were established. This phased and experimental approach, often starting reforms at a smaller level before wider implementation, contributed to the success and broad support for the reforms, leading to significant prosperity, particularly in rural areas.

The economic reforms in Pakistan were initiated in 1988. This period of reform followed earlier policy shifts in the late 1970s and 1980s, which focused on denationalisation and encouraging the private sector. During these preceding decades, Pakistan also received financial support from western nations and significant remittances from emigrants working in the Middle-east, which contributed to stimulating economic growth and creating a conducive environment for new investments. A key distinction noted by scholars is that, unlike China's structural reforms introduced in 1978 on its own initiative, the reforms in Pakistan (and India) were reportedly "forced upon" the countries by international agencies. Post-1988, scholars argue that this reform process led to a worsening of all economic indicators in Pakistan. The GDP growth rate and its sectoral contributions did not show improvement when compared to the 1980s. Reasons for this slowdown and the re-emergence of poverty include agricultural growth and food supply being based primarily on good harvests rather than an institutionalised process of technical change. Furthermore, Pakistan's foreign exchange earnings were heavily dependent on remittances from workers in the Middle-east and the export of highly volatile agricultural products, alongside a growing reliance on foreign loans and increasing challenges in repayment.

Upon achieving independence, India's leaders faced the task of nation-building, including establishing an economic system that would promote widespread welfare. Influenced by socialist outlook but seeking an alternative to extreme capitalism and socialism, they opted for a mixed economy model with a strong public sector and private property, where the government would plan for the economy. The era of Five Year Plans began with the establishment of the Planning Commission in 1950. A plan, in India, was a five-year document outlining how national resources would be used, specifying general goals and specific objectives. These plans also provided the basis for a 'perspective plan', a long-term plan for twenty years. The clearly specified goals of India's Five Year Plans were **growth, modernisation, self-reliance, and equity**. It is recognized that not all plans gave equal importance to all these goals due to limited resources, necessitating choices about primary importance in each plan. Planners also had to ensure that policies, as far as possible, did not contradict these four overarching goals, even though some goals might actually be in conflict (e.g., modern technology reducing labour needs).

In 1991, India faced a severe economic crisis primarily related to its external debt and balance of payments. The government was unable to meet its repayment obligations for foreign borrowings, and foreign exchange reserves plummeted to a level insufficient to finance imports for even two weeks. This crisis, compounded by rapidly rising prices of essential goods, stemmed from the inefficient management of the Indian economy in the 1980s, where government expenditure consistently exceeded revenue, and borrowings became unsustainable. To manage this crisis, India approached the International Bank for Reconstruction and Development (IBRD), also known as the World Bank, and the International Monetary Fund (IMF), securing a $7 billion loan. The international agencies attached conditionalities to this loan, requiring India to liberalise and open its economy by reducing the government's role, removing restrictions on the private sector, and easing trade barriers. In response, India announced the New Economic Policy (NEP), comprising a wide array of economic reforms. These reforms were broadly categorised into two groups: stabilisation measures and structural reform measures. Stabilisation measures were short-term, focusing on correcting weaknesses in the balance of payments and bringing inflation under control by maintaining sufficient foreign exchange reserves and curbing rising prices. Structural reform policies were long-term, designed to enhance the economy's efficiency and boost its international competitiveness by eliminating rigidities across various economic segments. These structural reforms primarily manifested through policies of liberalisation, privatisation, and globalisation.

After independence, India chose a **mixed economy** model — combining features of socialism (public sector in commanding heights) and capitalism (private property, market). The **Planning Commission** was established in **1950** with the Prime Minister as Chairperson. The era of Five-Year Plans began with the First Plan in 1951. The concept of five-year plans was borrowed from the former Soviet Union, which was a pioneer in national planning. India's plan documents up to 2017 included both five-year objectives and a twenty-year 'perspective plan'. **Industrial Policy Resolution (IPR) 1948:** Independent India's first industrial policy. Classified industries into four categories: 1. **State Monopolies:** Arms & ammunition, atomic energy, railway transport — exclusive government monopoly. 2. **Basic Industries:** Coal, iron & steel, ship building, aircraft manufacturing, telephone, telegraph, wireless, mineral oils — under central government; existing private companies allowed to continue. 3. **Regulated Industries:** Automobiles, heavy machinery, chemicals, fertilizers, sugar, paper, cement, cotton, woollen textiles — government regulated pricing and production quantity. 4. **Private Industries:** All other industries open to private sector and cooperatives. **IPR 1956:** In December 1954, Parliament accepted socialist pattern of society as the objective. IPR 1956 reserved 17 industries exclusively for the public sector (iron & steel, mining, machine tool manufacture, heavy electrical plants). This resolution classified industries into three categories: 1. Industries exclusively owned by the government. 2. Industries where the private sector could supplement public sector efforts, with the government solely responsible for new units. 3. Remaining industries for the private sector. The private sector was kept under state control through a system of licenses. **Planning Objectives:** Economic Growth, Modernization, Self-Reliance, Equity. These goals were balanced across different plans, with specific emphasis given based on limited resources. Modernisation also encompassed changes in social outlook, such as recognizing women's rights and their participation in the workforce. **Types of Planning:** - **Imperative Planning:** Centralized; used in socialist countries (Soviet model). - **Indicative Planning:** Government proposes principles and directs private sector without controlling it. India shifted to more indicative planning from 9th Plan (1997). India’s five-year plans did not specify the production of every single good and service, a model that the former Soviet Union attempted and failed at. **Five Year Plans — Key Focus:** - **1st Plan (1951-56):** Agriculture; Bhakra Dam, Hirakud Dam initiated; transport and communication. - **2nd Plan (1956-61):** Mahalanobis model; heavy industry in public sector; steel plants at Bhilai (Soviet), Durgapur (British), Rourkela (West German); capital goods industries; Import Substitution Industrialization (ISI). Planning, in the real sense, began with this plan. - **3rd Plan onward:** Continued ISI and public sector focus until death of Nehru. - **8th Plan (1992-97):** First post-liberalization plan. - **9th Plan (1997-2002):** Shift to indicative planning; reduced public sector emphasis. - **12th Plan (2012-17):** Last Five-Year Plan. **Mahalanobis Model (Calcutta School):** Developed by Prof. P.C. Mahalanobis (Indian Statistical Institute). Core idea: invest heavily in capital-intensive heavy industries (public sector) to build machines that build other machines. Self-reliance; import substitution. Led to heavy industry domination but slow growth and "Hindu Rate of Growth" (3.5% per annum). Mahalanobis is regarded as the architect of Indian planning. **Bombay School (C.N. Vakil, P.R. Brahmanand):** Alternative strategy — employ surplus unskilled labour to produce "wage goods" (simple consumer goods). Labour-intensive, quick returns, export-oriented. Similar to East Asian development model. Was rejected in favour of Mahalanobis model. **Other Pre-Planning Models:** - **Sarvodaya Plan (1950):** Jayaprakash Narayan; emphasized small/cotton industries and land reforms. - **Bombay Plan (1944):** Proposed by industrialists (JRD Tata, GD Birla) — government in core sectors, private sector retained role. - **People's Plan (1945):** M.N. Roy; gave greatest priority to agricultural production. - **Gandhian Plan (1944):** Sriman Narayan Agarwal; promoted agriculture and village/cottage industries. **Structural Problems of the Era (1950-1991):** 1. **Licence Raj** — Industries Development and Regulation (IDR) Act 1951: controlled entry, expansion, technology, output, location, import content. Formalized licensing that became notorious for delays and corruption. Licensing was also used to promote regional equality by making it easier to establish industrial units in backward areas, offering tax benefits and lower electricity tariffs. 2. **MRTP Act 1969** — Any business group with assets above Rs. 20 crore declared a monopoly; severely restricted growth. Raised to Rs. 100 crore in mid-1980s; scrapped in September 1991. 3. **SSI Reservations** — 47 items reserved for small scale since 1967; expanded to over 800 items by March 1987. The Village and Small-Scale Industries Committee (Karve Committee) in 1955 advocated for SSIs for rural development. 4. **Import Substitution Industrialization (ISI)** — inward-looking; aimed at replacing imports with domestic production; failed to exploit globalization that East Asian tigers (Singapore, Malaysia, Thailand, Taiwan) participated in. Protection from imports took the form of tariffs and quotas. No serious thought was given to promoting exports until the mid-1980s. **"Hindu Rate of Growth":** Term coined by **Prof. Raj Krishna** for India's 3.5% GDP growth rate in the first three decades post-independence. Broken in the 1980s under Rajiv Gandhi's reforms (relaxation of licenses, export incentives) — GDP crossed 5.5%. **Savings, Investment, GDP (Historical):** - 1900-1950: GDP Growth 0.7%, Savings 3%, Investment 5% - 1950-1965: GDP Growth 3.5%, Savings ~11%, Investment ~14% - 1965-1980: GDP Growth 3.5%, Savings ~20%, Investment ~22% - 1980-1990: GDP Growth 5.5% (Rajiv Gandhi reforms) - India's savings in 2019-20: ~28% of GDP (vs. China's 40%+) - The industrial sector's contribution to GDP increased from 13% in 1950-51 to 24.6% in 1990-91.

In **1991**, India faced an acute economic crisis relating to its external debt — the government could not make repayments on its borrowings from abroad. **Foreign exchange reserves** had dropped to levels insufficient to finance imports for more than a fortnight. Rising prices of essential goods further compounded the crisis. India approached the **World Bank (IBRD)** and the **IMF** and received $7 billion as loan to manage the crisis. In exchange, India agreed to conditionalities of World Bank and IMF and announced the **New Economic Policy (NEP)** — also called the **LPG reforms** (Liberalisation, Privatisation, Globalisation). The thrust was towards creating a more competitive environment in the economy and removing barriers to entry and growth of firms. This represented a significant shift from the state-controlled economic model, which had previously seen increased nationalization of sectors and stringent regulations like the [[economics/market-structures/license-raj-and-industrial-licensing.md|License Raj]] and the Monopoly and Restrictive Trade Practices (MRTP) Act, both of which were largely dismantled as part of these reforms. Earlier attempts at liberalization and devaluation in the mid-1960s had been perceived as failures, leading to a reversal of such policies, while limited reforms were also introduced by the Rajiv Gandhi government in the mid-1980s. Two categories of policies: 1. **Stabilisation measures:** Short-term; to correct weaknesses in balance of payments and bring inflation under control (maintain sufficient foreign exchange reserves, keep prices under control) 2. **Structural reform policies:** Long-term; aimed at improving efficiency of the economy and increasing international competitiveness --- ### Liberalisation Rules and laws that were aimed at regulating economic activities became major hindrances in growth and development. Liberalisation was introduced to end these restrictions and open various sectors. **Deregulation of Industrial Sector:** Before 1991, regulatory mechanisms included: - Industrial licensing (Industrial Licensing Policy): every entrepreneur had to get permission from government officials to start a firm, close a firm, or decide the amount of goods that could be produced - Private sector not allowed in many industries - Some goods could only be produced in small-scale industries - Price fixation and distribution of selected industrial products by government After 1991 reforms: - Industrial licensing abolished for almost all product categories except: alcohol, cigarettes, hazardous chemicals, industrial explosives, electronics, aerospace, drugs and pharmaceuticals - Only industries reserved for public sector: a part of atomic energy generation and some core activities in railway transport - Many goods produced by small-scale industries have now been **dereserved** - In most industries, market allowed to determine prices **Financial Sector Reforms:** - Financial sector includes commercial banks, investment banks, stock exchanges, foreign exchange market - Regulated by **Reserve Bank of India (RBI)** - Major aim: reduce role of RBI from **regulator to facilitator** of financial sector - Foreign investment limit in banks raised to around 74 per cent - Banks given freedom to set up new branches without RBI approval (if fulfilling certain conditions) - **Foreign Institutional Investors (FII):** merchant bankers, mutual funds, pension funds now allowed to invest in Indian financial markets **Tax Reforms (Fiscal Policy):** - Two types: **Direct taxes** (on incomes of individuals and businesses) and **Indirect taxes** (on goods and services) - Since 1991: continuous reduction in taxes on individual incomes (high income tax was causing tax evasion) - Corporation tax rate: very high earlier, gradually reduced - **GST (Goods and Services Tax):** In 2016, Indian constitution amended to empower state and union governments to impose GST. Implementation led to creation of common national market; reduced tax evasion; 'one nation, one tax, one market' **Foreign Exchange Reforms:** - 1991: rupee **devalued** against foreign currencies (immediate measure to address balance of payments crisis) - Led to increased inflow of foreign exchange - Now markets determine exchange rates based on demand and supply **Trade and Investment Policy Reforms:** - India was following regime of **quantitative restrictions** on imports (kept tariffs very high) — reduced efficiency and competitiveness - Trade policy reforms: (i) dismantling quantitative restrictions on imports and exports; (ii) reduction of tariff rates; (iii) removal of licensing procedures for imports - Import licensing abolished (except hazardous and environmentally sensitive industries) - Quantitative restrictions on manufactured consumer goods and agricultural products removed from **April 2001** - Export duties removed to increase competitiveness of Indian goods --- ### Privatisation Privatisation = shedding ownership or management of a government-owned enterprise. Government companies converted into private companies in two ways: 1. Withdrawal of government from ownership and management of public sector companies 2. Outright sale of public sector companies **Disinvestment:** Privatisation of PSEs by selling off part of equity to the public. Purpose: improve financial discipline, facilitate modernisation, utilise private capital and managerial capabilities. Disinvestment targets set every year; in 1991-92, government targeted Rs 2,500 crore through disinvestment. **Maharatnas, Navratnas, Miniratnas:** To improve efficiency of PSUs by giving them autonomy in managerial decisions, government identifies PSEs and declares them: - **Maharatnas:** e.g., Indian Oil Corporation Limited (IOCL), Steel Authority of India Limited (SAIL) - **Navratnas:** e.g., Hindustan Aeronautics Limited, Mahanagar Telephone Nigam Limited, Indian Railway Catering and Tourism Corporation Limited - **Miniratnas:** e.g., Bharat Sanchar Nigam Limited (BSNL), Airport Authority of India --- ### Globalisation Globalisation = integration of the economy of a country with the world economy. More correctly: the outcome of policies aimed at transforming the world towards greater interdependence and integration, involving creation of networks transcending economic, social and geographical boundaries. **Outsourcing:** A company hires regular service from external sources (mostly from other countries) which was previously provided internally. Growth of IT and fast modes of communication (particularly Internet) have intensified outsourcing. India has become a destination for global outsourcing due to low wage rates and availability of skilled manpower. **World Trade Organisation (WTO):** - Founded in **1995** as successor to **GATT (General Agreement on Tariffs and Trade)** - GATT established in **1948** with 23 countries as the global trade organisation to administer all multilateral trade agreements - WTO provides equal opportunities to all countries in international market for trading purposes - Aims to establish a rule-based trading regime; nations cannot place arbitrary restrictions on trade - India has kept its commitments towards liberalisation of trade made in the WTO --- ### Assessment of LPG Reforms **Growth and GDP (Table 3.1 data):** - Post-1991 India witnessed rapid growth in GDP on a continual basis for two decades - GDP growth increased from 5.6% (1980-91) to 9.4% (2021-22) - Service sector showed high growth throughout; industrial sector growth fluctuated - GDP growth mainly driven by service sector **Success areas:** - Rapid increase in foreign direct investment and foreign exchange reserves - FDI/FII: from about US $100 million (1990-91) to US $23 billion (2022-23) - Foreign exchange reserves: from US $6 billion (1990-91) to US $646 billion (2023-24) - India = one of largest foreign exchange reserve holders in the world - Successful exporter of auto parts, pharmaceutical

The Mahalanobis Model represents a strategy for economic development primarily associated with the Calcutta school of thought in India during the 1950s. Propounded by Professor Prasanta Chandra Mahalanobis, this model advocated for a move towards capital-intensive and heavy industrialization, with the public sector taking the lead in establishing key industries. The central idea was to build large, state-owned enterprises in sectors like steel and heavy machinery, which would produce "machines that built other machines" – essentially, capital goods necessary for the development of downstream and consumer goods industries. While these capital-intensive facilities would initially employ fewer people and yield low returns over long gestation periods, the model posited that a larger share of investment allocated to capital goods production, if maintained indefinitely, would ultimately lead to a greater final output, even of consumer goods, over time. The private sector was envisioned to play a complementary role within this mixed economic framework. This model was significantly influential and was adopted as the basis for India's Second Five-Year Plan (1956-61), aiming to strengthen the foundation of economic independence by developing basic heavy industries for producer goods, while decentralized cottage industries focused on consumption goods.