The important features of the
Indian economy are as follows :
1) The Indian economy is a developing economy. It has not yet reached the level of
economic development seen in America and Europe.
2) The 1ndid economy is a mixed economy in the sense that both private sector
and public sector coexist and participate in the production process.
3) It is c-zed by high population density and population growth.
4) About one-third of the population live below poverty line. 'Vicious cycle of
poverty' operates in many sectors of the economy.
5) There is high level of unemployment and underanployment In addition, there is
'disguised unemployment' in the agricultural sector.
6) The level of technology used in production process is low in many sectors.
Modern technology has not been adopted in all sectors ofthe economy.
7) ~hae is a shortage ofphysical and economic inhstmcture. ~ransporhti&n (mak,
railways, airlines), power (electricity, gas), and communication (telephone,
Internet) have not reached all parts of the country. Even some parts of the country
'
do not have provisions for schools, colleges, hospitals, and safe drinking-water
supply17.3 GROWTH AND DEVELOPMENT
Economic development is a broader term than economic growth Economic growth
usually means the growth in production of an economy. On the other hand,
economic development includes other sectors such as literacy health, child mortality
rate, equality, regional balance, infrastructure, etc.
Similarly, in the case of the Indian economy economic growth is not enough; we
need economic development. We need better health of people, education for all,
reduction in inequality among sections of people and regions, reduction in infant
mortality rate (IMR), access to drinking water for all, etc. The government has
to devise policies and allocate government expenditure so that these facilities are
available to all. Thus the additional income generated in the economy reaches the
backward regions and the poorer sections of society. To achieve economic
development we need economic growth. In a stagnant economy, where there is
no economic growth, realization of economic development is difficult.
Measurement of the level of economic development is dificult, because it doe
not depend upon a single factor. There are a number of indicators of economic
development. These indicators could be quite varied and too many. some of the
economies.
Apart fiom low per capita income India is far below the developed economies
in terms of development indicators. Some of these indicators are consumption of
electricity, literacy rate, access to safe drinking water, empowerment of women.
17.4 MIXED ECONOMY
the Indian economy is a mixed economy where private
sector and public sector coexist and contribute to the production process. the government enters
directly into production of
goods and services which the private sector can also produce. The extent to
which the government should involve itself in the production activities is a
controversial issue. During the decades of 1960s and 1 970s the Indian government
produced whatever it could and intervened in the production decisions (what to
prodae, where to produce, what technology to use) of the private sector through
a rigorous licensing policy. We will discuss about the economic policy changes
17.5 DEMOGRAPHIC TRANSITION
Change in the size of population takes place through three demographic events:
birth, death and migration. In the Indian economy migration has played a negligible
role in population growth. Thus population growth is largely due to higher birth
rate than death rate.
In an economy there is a pattern in which demographic transition takes place.
Such transition can be divided into three stages. It has been observed that when
the level of development is low in an economy both birth rate and death rate are
high. As a result population growth rate is not that high. This is the first stage of
demographic transition. When economic development takes place the economy
moves on to the second stage - death rate declines due to availability of health
facilities and medicines but birth rate continues to remain high. This is the stage
when there is a wide gap between birth rate and death rate, and population
increases sharply. With Mer economic development, the economy moves on to
the third stage -both birth rate and death rate are low. Consequently, population
growth rate is again low in the third stage. All the developed economies are in
the third stage of demographic transition.
T17.6 SECTORAL COMPOSITION OF GDP
Economic activities can be divided into three categories: primary activities,
secondary activities and tertiary activities. Primary activities include i) agriculture,
ii) fore&y and logging, and iii) fishing. Secondary activities include i) mining , iii) electricity, gas and
water supply, and iv) construction
Tertiary activities include i) trade, ii) hotels and restaurant, iii) transport (railways,
road, air, waterways), iv) storage, v) communication, vi) banking and insurance
vii) real estate, and viii) public administration and defense. The tertiary activities
are also called service activities.
17.7 EMPLOYMENT STRUCTURE
India being the second largest country in tern of population, it has a large labour
- force (people who are able to and willing to work). In the year 1999-2000 there
were 39.7 crore employed workers in the country, which is about 40 per cent
of the total population. The remaining 60 per cent population in the country are
dependents. Thus for every worker there is 1.5 dependents. These dependents
constitute children, aged and the unemployed. Because of high population growth
rate the percentage of children in India is higher than in developed'countries.
17.8 INTER-GOVERNMENTAL FISCAL RELATIONS
We have different layers of govemment with specific power and
14 Features of the Indian Economy responsibilities defined by the Indian Constitution. Taking into
account the
amendments made so far the Constitution provides for three layers of government:
Central, State and Local. In order to carry out its responsibilities the government
at each level has been assigned powers to impose taxes on individuals and
organizations based on criteria such as income, expenditure, production and certain
economic transactions. The major source of revenue for the central government
is income tax (on individuals and corporations), central excise, and custom duties
(on imports of goods). On the other hand, there is a long list of taxes assigned
to the states (including taxes on alcoholic beverages, agricultural income, and
land) but the major source of tax revenue for the states is the sales tax. The tax
base of the local governments is limited to local services and production.
There are three modes of transfer of hds fiom the Centre to the states. First,
the centre collects certain taxes (particularly, personal income tax and excise
duties) and allocates a share of the tax proceeds to the states. In order to
streamline such allocation the constitution provides for setting up of a Finance
The second mode of transfer of funds from the Centre to the states is the grants
and loans extended to states for implementing development plans. As you know,
while preparing the Five Year Plans the Centre sets targets and investments by
different sectors of the economy. Against this backdrop the states prepare their
annual plans which is approved by the Planning Commission. The states receive
grants and loans hm the Centre which supplement the revenue generated at the
state level. The Planning Commission allocates fuhds to states as per formula
devised by the National Development Council.
The third mode of transfer of funds from the Centre to the states is the grants
given by central ministries to their counterparts in different states for specified
projects. Such projects are wholly Med by the Centre (under 'central schemes')
or the states are asked to contribute a proportion of the cos,
UNIT 18 PLANNING IN INDIA
When India attained independence in 1947, not only was its economy in a stagnant
condition but also sluggish one. A very important and economically developed
part had gone to West Pakistan and India literally had to start from the scratch.
Obviously the immediate solution to the otherwise dilapidated economy was not
to rely on the market mechanism and private enterprise alone and rather adopt
a combination of state and market forces, the roles of which were to be decided
by the economic planning as an instrument of economic development. Consequently
Planning Commission was set in 1950 to assess the re&irements of the economy
for the proper utilization of resources. India opted central planning as an instrument
of economic development based on the experience of socialist countries, but
adapted to Indian democratic network.
18.2 GENERAL APPROACH TOWARDS PLANNING
India opted for planning with exactly the same purpose even before independence.
Both left wing and right-wing leaders were equally vehement supporters of planning
in pre-independent India Their view was that if India is to industrialize, the planning
must have a strategy for (i) heavy engineering and machine making industry (ii)
research institutes and (iii) electric power or energy. Role of small scale industries
was also stressed. As a result, we saw famous Bombay Plan (1944) ernphasising
on industrialization as a general approach towards planning.
History of Planning
On the eve of Independence, India had to confront three immediate problems:
influx of refuges, food shortages and mounting milation. Accordingly the immediate
objective of the first five year plan was to rehabilitate the refugees. Rapid
agricultural development was envisaged as long-term strategy to give 'big push',
to the economy, as per Rosentein Rodan. According to him, "an economy, if it
has stagnated for a long period, would not grow unless, a big push is given to it."
18.3 PLAN OBJECTIVES
Planning in India has the features of mixed economy where public and private
sector. are assigned major and complementary roles. The basic objectives of
planning in India were envisaged as of economic growth, employment, self-reliance
and social justice. Apart from these basic objectives each p!m had its own
specific objectives depending upon the respective needs, possibilities and constraints
As given in the Second Five Year Plan (FYP) document there are four basic
objectives of planning in India, viz.,



a sizeable increase in the national income so as to raise the level of living in the
country.
apid industrialisation with particular emphasis on the development ofbasic and
heavy industries;


a large expansion of employment opportunities; and
reduction of inequalities in income and wealth and a more even distribution of economic
power.
18.4 PLAN STRATEGY
Indian f lans followed a strategy where not only the immediate needs
were recognised but a long term perspective was also given for overall development
of the economy. On the eve of Independence, lndia had to cohnt three immediate
problems, viz., i) influx of refbgees, ii) food shortages, and iii) high inflation.
Accordingly the immediate objective of First Five Year Plan (1951-56) was to
consolidate the economy.
In order to understand the strategy under different Plans in India, the process of
planning and development in India can be divided into the following four phases:
The Early phase;
Development strategy in the sixties;
Development strategy in the seVennties and eighties; and
New development strategy.
Following points bring out the shift in the strategy of the Plans during this phase:
a Greater flexibility in fiscal and monetary policies;
a Shift in the policy hm the focus on national targets to taking cognizance of the
performance ofdifferent states in the country and efforts towards bridging interstateinequality;
a Ensuring equity and social justice;
. a Bringing 111 capacity utilisation in the manufacturing sector;
a Reduction in thegestation lags of industrial and inhtructural investments;
a Rationalisation of labour laws and regulations;
a Introducing financial sector refoms so that the viability and stability of financial
institutions improves financial sector in India should be able to and willing to
finance a range developmental projects.
18.5 RESOURCE ALLOCATION IN THE INDIAN PLANS
Investment pattern of Indian Plans reflects the objectives and
implementation of
actual planning strategy. Therefore, it is important to look at the resome
allocation
under various Plans. For a better view of resource allocation the
economy can
be divided into three main sector -, ~.e., agriculture, industry and
infrastructure.
Importance of agriculture is self-evident as majority of population in India
still
depends on it. Economic development and modernization process are
inter-related
as no country can develop without giving due emphasis to the
development of
industry. Similarly, for sustaining the long tern development of an
economy
infrastructure play a very significant role. Unless transport and
communication
facilities are expanded no industry or business can flourish, unless
power genetaton
is given due attention the whole programme of industrialisation can
suffer; and
agricultural development cannot take place without expanding inigation
facilities.
UNIT 19 PERFORMANCE OF THE INDIAN ECONOMY
19.2 THE FORMULATION OF A DEVELOPMENT STRATEGY
The basic strategy of development adopted in India was the following.
Ever since Independence, a rapid rise in national income and in the
standard of living has been the stated goal of development. Even for
removal of poverty it was felt that the economy has to display high rates
of growth. Redistribution of existing wealth was not thought entirely
feasible; it was also thought that there would not be much to
redistribute. So faith was placed on the growth process. However,
growth, though necessary, was by no means sufficient to transform the
economy and also to uphold the ideals of the Constitution. Thus, social
justice became an added and enduring objective. Along with this, because
India had just emerged from colonial rule. The basic strategy of
development adopted in India was the following. Ever since
Independence, a rapid rise in national income and in the standard of living
has been the stated goal of development. emoval of poverty it was felt
that the economy has to display high rates of growth. Redistribution of
existing wealth was not thought entirely feasible; it was also thought
that there would not be much to redistribute. So faith was placed on the
growth process. However, growth, though necessary, was by no means
sufficient to transform the economy and also to uphold the ideals of the
Constitution. Thus, social justice became an added and enduring
objective. Along with this, because India had just emerged from colonial
rule, there was a mistrust of the international economy, and faith was
placed on 'self reliance'. By the Second Five Year Plan, self-reliance took
the form of 'import-substitution'. Later, in the Fourth Five Year Plan, selfreliance came to be seen as less and less reliance on foreign investment.
Thus, growth with social justice and self-reliance defined in the aforementioned sense, remained the central and enduring objectives of
development for a long time. National leaden, specially Left-wing ones
like Nehru and Subhas Bose were not the only proponents of planning. As
early as 1934, noted industrialist Sir M. Visveswaraya wrote his book
Planned Economy for India. He argued that for India to prosper,
industrialisation is a must. And to industrialise rapidly, the process
must be organised and planned. Similarly, the so called Bombay Plan
(1944) by a group of industrialists also emphasised industrialisation. After
Independence, first the Congress party in 1953, and then the Parliament
in 1954 accepted 'socialistic pattern of society' as the objective of
economic and social policy.
Thinkers on development emphasised industrialisation as the basic
growth strategy Performance of the
because they had learnt of the experience of Europe and USA which had
gone
Indian Economy
through industrial revolution. This had transformed their economies and
raised
their national incomes and the standard of living of their people severalfold. It
marked the beginning of a new epoch of 'modem economic growth' as
economist
Simon Kunets put it. The industrial revolution was made possible by the
application of science and technology and inventions like steam engine,
power-loom, modem harvester-thresher and so on. Later on the Soviet
Union also industrialised as a socialist nation, vhth the 'commanding
heights' ofthe economy -the heavy industry, power and infiastructureunder state control. Moreover, the USSR had also become a military
power. The USSR had transformed its economy in a matter of
decades. All this had impressed the Indian leaders.
The First Five Year Plan was a basic collection of projects, did not have
much physical targeting and merely sought to indicate directions of
planning.
The Second Five Year Plan, launched in 1956-57, was part of a general
strategy of development, and was accompanied by other policy measures.
The network of the Second Five-Year Plan, with minor modifications,
remained the mainsteamof all future plans and policies till the beginning
of the 1990s.
The other key id& in the Second Plan was the desire to conserve foreign exchange,
as well as to put into operation the idea that imports of machinery and equipment
from abroad had to be curtailed., This strategy where imports are substituted by
domestically produced version of the same thing is called import substitution
strategy. No doubt, this was prompted by the experience of India as a colonised
nation and subsequent mistrust of foreign trade. Not only was foreign trade not
seen as an engine of growth, it was actually thought that developing nations and
their domestic industries would be adversely affected by foreign trade.
19.3 SOME POLICY INSTRUMENTS FOR REGULATION AND CONTROL
In
addition to the presence of a large public sector in industry, the government had
an elaborate system of regulation and control for the private sector through
promulgation of various Acts. Industries in the private sector were regulated by
the provisions of the Wtries (Regulation and Development) Act, 195 1. Secondly,
to prevent the growth of private monopolies and the concentration of economic
power, the government enacted the Monopolies and Restrictive Trade Practices
Act in 1969. Thirdly, in order to regulate the import of inputs and final goods,
the Foreign Exchange Regulation Act (FERA) was enacted in 1973. Government
regulations were not only for industry, but also for agriculture, finance and foreign
trade sectors. Let us now consider some of these regulations. The government kept with itself
key inflastructure, core and heavy industries. For private industry, an entrepreneur had to
obtain a license to invest, or expand capacity, or change output mix, or relocate his industry.
For the capital markets (markets for financial assets like equity shares and
debentures), if a company wanted to float shares or borrow funds by offering
debt instruments, there was capital issues control under which access to debt and
equity markets was regulated. Other than this, there was price control on several
consumption goods and key inputs such as coal, iron, petroleum, etc.
19.4 PERFORMANCE OF THE INDIAN ECONOMY OVER APPRAISAL
(see page 38 39)
19.5 PERFORMANCE OF THE INDIAN ECONOMY IN THE ERA OF. ECONOMIC REFORMS for
historical reasons,
it so happened that since the 1950s when several developing nations embarked
on their journey of development, a great faith was placed on the state in most of
these nations for steering the economy. Some nations, like China and Cuba, were
outright Socialist, with the machinery and productive resources almost entirely
owned and controlled by the state. Others, like India, were 'mixed economies',
with a large private sector, but with pervasive state presence in the economy, and
a host of controls and regulations. In all of these nations, it began to be felt by
the late 1970s, that the performance was not matching the promise. So, in almost
all countries, the state began to lessen its control over the economy and open
more areas of economic activity to the private sector. In some cases the process
of privatization was imitated with selling part, or sometimes all, of ownership of
State-owned companies. Another important feature of these reforms has been
Increased integration of the nation with the international economy.
Policymakers in some country might feel
that the presence of the private sector is too high. Hence, some industries ought
to be taken over by the state. Also, that the state ought to increase its presence
in the economy. Indeed such events have taken place in many countries in the
1940s, 1950s and 1960s. These policy steps could also be called 'reforms' but
this term was not in vogue then. Thus, reforms came to acquire a specific
connotation, and synonymously have come to be called 'liberalisation'
It means greater faith in individualism,
in individual enterprise, and individual liberty. The role of the state is lessened. The
suffix '-isationy suggests that it is a process, an intensification of a trend. Thus
liberalisation, simply put, is increasing the process of making the economy more
liberal. This entails a two-fold process. First, the private sector and private enterprise
is given greater play in the economy, and the role of the state is reduced. The role
of 'the market' is enlarged. Secondly, the economy is integrated more with the
global or international economy, with increased foreign trade and investment
'globalisation'
means: greater integration of the world through increased flows of goods and services
across national borders; greater investment, capital and financial flows among countries; and
faster and quicker information and communication channel
UNIT 20 ECONOMIC REFORMS IN INDIA
20.2 ECONOMIC REFORMS : RATIONALE
Since the inception of planning, growth with social justice and self-reliance have
remained the central objectives of development strategy. Import-substitution,
licenses and controls coupled with dominant role of public sector in economic
activities were the peculiar features of development strategies till July, 1991.
License - permit - quota raj led to widespread corruption. The bureaucracy was
the principal beneficiary of this system. The Government officials in collusion with
the political bosses earned huge money via conuption. Hence, it was increasingly
felt to dismantle the system of licensing and controls. Quite a large number of
public enteprks which played crucial role in setting up heavy and basic inchsthes;
social and economic inhstrwral development were king problem of inefficiency
and high cost of operation. Further, there was a high pressure of the World Trade
Organisation (WTO) to expose Indian industry to face world competition.
The industrial policy announced in 1991 provided following rationale for intducing
economic reforms:
I
3 to de-control the Indian industrial economy from unnecessary bureaucratic
controls;
@ to introduce liberalisation with a view to integrate the Indian Economy with the
world economy;
mi to remove the restrictions on foreign direct investment;
iv) to remove the restrictions of MRTP Act; and
v) to shed the load of public sector enterprises which have shown a very low rate
of return and incurring losses over the years.
20.3 CONSTITUENTS OF ECONOMIC REFORMS
Economic reforms in India refer to the set of instruments and strategies adopted
since 1991. Liberalisation, privatisation and globalisation are the three constituents
of economic reforms.
20.3.1 Liberalisation of the Economy
In the context of economic reforms, liberalisation refers to shifting of liceosedominated regime to de-licensing, deregulation and de-bureaucratisation.
Removal of Industrial Licensing: Except 18 industries relating to security and
strategic concerns, social reasons, hazardous chemicals and over-riding
environmental, all industrial licensing was abolished.
Dereservation of SSI Items: The items earlier reserved for SSI sector are
gradually being de-reserved. In the budget 2003-04,75 items and in 2005-06,
20.3.2 PRIVATISATION OF THE ECONOMY
Privatisation refers to any process that reduces the role of the state in the economic activities of the
nation. In the narrow sense privatization to the induction of private ownership in a public sector
undertaking. In a broader sense, it implies the enlargement of the scope of the private sector in
the growth of the economy.
Privatisation in the narrow sense can take the following forms:
a) Total De-nationalisation: This implies complete transfer of ownership of a
public enterprise to private hands.
b) Joint Venture: This implies partial induction of private ownership hm 25 to
50 per cent or even more in a public sector enterprise depending upon the
nature of the enterprise and state policy in this regard.
c) Workers' Co-operative: Transfer of ownership of a loss-making concern to
the workers is another form of privatisation. The basic logic of the proposal
is that workers besides receiving wages for work, would also be entitled to
a share in ownership dividend. Since workers' personal interest is linked to
the interest of the enterprise, the workers are likely to work hard to increase
productivity so that they can earn more. Such schemes were introduced in
Kamani Tubes, Central Jute and Mewar textiles, etc.
d) Token Privatisation: The sale of 5 per cent to 10 per cent shares of a
profit-making public sector enterprise in the market is known token
privatisation. The objective of such privatisation is to obtain revenue to reduce
budget deficit.
The following steps have been taken towards privatisation of the Indian economy:
a Permitting the entry of the private corporate sector in such core sectors as steel,
telecommunications, ports, airlines and power; and
a No fresh budgetary support for Public Sector Enterprises (PSEs). This will lead
for new projects and expansion;
a no new Central Public Sector undertakings (Ps Us) will be set up in the
CQ'Jntry;
a issue of equity to the public by the identified PSUs; and
a outright sale of identified PSUs.
Disinvestment
52 As part of the ongoing privatisation, the shares of public sector undertakings are being sold in
the market with the objective of obtaining revenue to reduce budget
deficit. This policy has been referred to as disinvestments
20.3.3 Globalisation of the Economy Economic Reforms in India
Globalisation means the economic integration of the country with the rest of the
world. In other words, it is a process of integrating the various economies of the
world without creating any hindrances in the flow of goods and &ces, technology,
capital and labour. This involves four components:
3 Reduction of trade baniers in the fom of custom duties or quantitative dctions
or quotas so as to permit free flow of goods and services among different
economies; Creation of an environment in which free flow of capital (or investment) can
take place between nation-states; flow of technology; and
iv) Creation of an environment in which flow of labour or human resources can
take place among different countries of the world.
Advantages of Globalisation
Globalisation generates many advantages for a developing economy like India.
Among these, the more important ones can be briefly summed up as follows:
a Globalisation helps in removing inefficiency. In the absence of globalisation
prolonged protection of domestic industry has serious damaging effects on cost
stnrcture. Ind&es habitually fall asleep under protective umbrellas and become
careless about cost.
B Globalisation serves to give a boost to the long-run average growth rate of the
economy by: (i) improving the allocative efficiency of resources; (ii) reducing the
capital output ratio; and (iii) inmasing the labour productivity.
C Globalisation helps to restructure the production and trade pattern in favour of
labour-intensive goods and labour-intensive techniques.
D Foreign capital is athcted to exploit the professional export opportunities along
the above lines. With the entry of foreign capital, updated technology also enters
the country.
E with the entry of foreign co*tion and the removal of import tariffbaniers,
domestic indwtry will be subject to pricereducing and quality-improving effects
in the domestic economy.
F Uneconomic import substitution will slowly disappear and cheaper imports,
particularly of capital goods, will reduce the capital-output ratio in
man*& Lower prices of manufbctured goods will improve the terms of
trade in favour of agriculture.
a The main effect of globalisation is felt in the consumer goods industries. As
there is a large domestic demand for these goods, employment opportunities
would expand and over a period of time, the trickle down effect will operate
and the proportion of people below the poverty line will go down.
Disadvantages of Globalisation
Globalisation has its pitfalls also. Among these, the more important ones can be
identified as follows:
Globalisation process is in essence a tremendous redistribution of economic
power at the world level. This will increasingly translate into redistribution of
economic power. Economically weak nations my be dominated by economically
powerful nations.
Globalisation process challenges some familiar assumptions. Until now, for
instance, it was conventional wisdom that technological change and increases in
productivity would translate into more jobs and higher wases. But in the last few
years, technological changes have eliminated more jobs than they have created.
It is becoming harder in the industrially developed democratic countries to ask
the public to go through the pains and uncertainties of structural adjustment for
the sake of benefits yet to come.
Globalisation has sounded the death-knell of village and small industries. These
cannot stand up to competition against the well-organised MNCs.
20.4 ASSESSMENT OF ECONOMIC
REFORMS
In the First and Second Five Year Plans, the goals of economic development
were identified as under:
1) A higher rate of growth of GDP;
2) Enlargement of employment potential leading to full employment;
3) Removal of poverty;
4) Promotion of equity in distribution of income; and
5) Removal of regional disparity between the rich and the poor states.
The END