Study Material of Indian economic development for class XII
INDIAN ECONOMY 1950-1990
Economic Planning
Economic Planning is a process, under which a central planning authority, keeping in view the
resources of the country, enforces economic programs & policies, in order to achieve predetermined objectives related to growth and development, within a specified time period.
According to planning commission “Economic planning means utilization of countries
resources into different development activities in accordance with national priorities.”
Economic planning was first conceived by Soviet Union in 1928. Unlike Soviet Union,
India adopted a mixed economy- combining comprehensive planning with private ownership of
means of production as well as free play of market forces.
Planning commission was set up 15, March 1950, with Prime minister as its
chairperson.
After 12th five-year plan Planning Commission is replaced by NITI Aayog (National Institution
for Transforming India).
TYPES OF ECONOMIC SYSTEM
There are three types of economic system in the world –
1. Capitalist Economy:  Capitalist economy is one in which the decision relating to “what, how & whom to
produce” are left to the free play of market forces/economy.
 Profit maximization is sole/ principal consideration behind production decision.
 Means of productions are owned by private people.
 Role of government is confined to maintenance of law and order.
Merits:
 Promotes self-interests.
 Profits are maximized.
 GDP growth is accelerated.
Demerits:
 Ignores collective interests.
 Rich people-oriented production, poor peoples are deprived.
 Growth without social justice.
2. Socialist Economy:  Socialistic economy is one in which decision relating to “what, how & whom to
produce” are taken by the central authority.
 Principle of the welfare of the society as a whole is the prime consideration.
 Direct participation of government in production process.
 Ownership of the private property is not allowed.
Merits:
 Equality of distribution of income.
 Growth process becomes inclusive.
 Based on the principal of social justice.
3. Mixed Economy:  Mixed Economy is one in which decision relating to “what, how & whom to
produce” are left to free play of market forces, but with an overall control of central
authority.
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Study Material of Indian economic development for class XII
 Both private & public sectors simultaneously operate as agents of growth.
THE GOALS OF THE FIVE-YEAR PLANS
Objectives are broadly classified in two ways: Long Terms: - are common to all five-year plans. These are followingA. Growth:  Economic growth implies a consistent increase in GDP/ level of output / flow of goods &
services in the economy, over a long period of time.
 Increase in GDP may become ineffective or may not increase if population size continues
to increase.
 So long time goal is to increase GDP, significantly, so that it is not neutralized by the
increase by the increase in population size of the country.
 Increase in GDP depends on two factors
a) Increase in resource base of the country. Planning in India aims at that natural
resources of country are fully explored.
b) Increase in productivity through innovative technology and improvement of
technology.
B. Modernization:  Modernization means updating & adopting modern technologies in the area of economic
activity to increase productivity & production.
 Production and Growth progress increases exponentially by the use of science and
technology in modern age.
 which in turn raises opportunities of employment, Implying a positive correlation between
modernization & employment generation.
 Modernization also means change in social outlook – such as empowering of women so
that they can also contribute to process of production & social prosperity.
C. Self- Reliance:  Self-Reliance means dependence of domestically produced goods, particularly food grains.
 Avoiding imports if those goods which could be produced domestically.
 Dependency on foreign imports (like food supply, technology, foreign capital etc), may
expose India's fragile economy & sovereignty vulnerable to advanced countries
 Like in 1965 USA stopped exports of food grains.
 Hence, India embarked upon the process of planned economic growth, with a view to
achieving self-sufficiency in food grains production.
D. Equitable distribution or Equity:  means the benefits of growth must spread across larger section of the society, so that
distribution of income becomes equitable.
 instead of rich tends to become richer and poor continue to struggle.
 Equitable distribution of income implies social equality, which is principle objective of
planning termed as social justice.
E. Full Employment
 Full employment means, those who are able to work and are willing to work must get work.
 This is social objective of planning.
 The objective of full-employment focuses on inclusive growth which includes
Prepared by Narendra Parmar, PGT(Economics), KV No. 1 (Army), Jodhpur
Study Material of Indian economic development for class XII
a) More and more people should participate in the process of production.
b) Benefits of growth must be shared across wider sections of society.
2. Short Run Objective: - Depending on ground realties. Each plan would be designed as a
distinct plan with distinct set of objectives.
In brief, short run objective refer to plan to plan strategy, with a view to achieving long
run objectives.
Five Year plan
I
II
III
Time span
April 1, 1951 to March 31,1956
April 1, 1956 to March 31,1961
April 1, 1961 to March 31,1966
Short term goals
Higher Agricultural Production
Increase in Industrial production
Self-sufficiency in food grain
Generation
of
employment
opportunities
Three Annual Plans April 1, 1966 to March 31, 1969
VI
April 1, 1969 to March 31,1974
Accelerating the process of growth
Price stability
V
April 1, 1974 to March 31,1979
Alleviation of poverty
Annual Plan April 1,1979 to march 31, 1980
VI
April 1, 1980 to March 31,1985
Poverty eradication
reduction of inequality
infrastructure development
VII
April 1, 1985 to March 31,1990
Generation
of
employment
opportunities
Two Annual plans April 1, 1990 to March 31, 1992
VIII
April 1, 1990 to March 31,1997
Full employment & universalization of
education
IX
April 1, 1997 to March 31, 2002 Growth,
price
stability,
and
environmental sustainability
X
April 1, 2002 to March 31, 2007 Better quality of life and inclusive
growth
XI
April 1, 2007 to March 31, 2012 Poverty reduction, job creation and
protection of environment
XII
April 1, 2012 to March 31, 2017 Sustainable as well as inclusive growth
Prepared by Narendra Parmar, PGT(Economics), KV No. 1 (Army), Jodhpur
Study Material of Indian economic development for class XII
Features of economic policy pursued under planning till 1991
1. Heavy reliance on public sector:
 In Industrial policy resolution, 1956, 17 industries were reserved for public sector against
12 industries for private sector.
 Motive behind this was to achieve Objectives of socialistic goals through comprehensive
development of public sector.
2. Regulated development of Private sector
 Industrial (Development and Regulation) Act,1948 license and registration were
necessary for new industries.
 Monopolies and Restrictive Trade Practices Act, 1969 placed several restrictions on
expansion of existing industries.
 These regulations on private sector were to prevent concentration of economic power
in the private hands.
3. Protection of small-scale industries and Regulation of Large-scale industries
 Small-scale industries were provided protection from competition
 Certain areas of production were exclusively reserved for small-scale industries.
 Several boards (Handloom Boards & Silk Board) were established to promote SSIs.
4. Development of Heavy Industries of strategic Significance
 Industries like electricity generation, engineering goods and Steel and Iron Industries
were to be developed on priority basis.
5. Focus on saving and investment
 High interest rates were offered to promote saving.
 Investment was induced through subsidies and capital grants.
6. Protection from foreign competition
 High import duty (qualitative restrictions) and qualitative restrictions were imposed on
Imports.
7. Focus on Import substitution
 Domestic production of goods which were imported from abroad.
 Aiming to save foreign exchange and become self-sufficient.
8. Restriction on Foreign capital
 FDI was controlled and regulated through FERA (Foreign exchange and regulation act).
 Aimed to minimize economic control on domestic market by foreigners.
9. Centralized planning
 Aimed to avoid state level contradictions with overall strategy of growth.
Success (Achievements) of planning
1. Increase in national Income
 Prior to planning National income of India increased at 0.5% per annum.
 Increase in National Income during 1st plan 4.6% per annum (Target 2.1%).
 Between 2nd and 10th plan (Target 5% per annum) but target was achieved only between
5th and 10th plan.
 Increase in National Income during 11th plan 7.5% per annum (Target 9%).
 Increase in National Income during 12th plan 6.7% per annum (Target 8%).
2. Increase in per capita income
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Study Material of Indian economic development for class XII
 It implies greater per capita availability of goods and services.
 During 1st plan growth was 2.7%, 11th plan 6% and 12th plan recorded a growth rate of
5.3% per annum.
3. Rise in saving and investment
 During the planning period there was significance rise in rate of saving and investment.
Plan & Year
1950-51
11th plan (2011-12)
12th plan (2015-16)
Rate of saving Rate of investment
9.5 %
9.3 %
31.3 %
32.3 %
33.3 %
4. Institutional and technical change in Agriculture
Land Reforms
 Abolition of intermediaries.
 Modernization and regularization of rent.
 Land ceiling
 Consolidation and Optimizing holding.
Improvement of technology
 Through High Yielding Variety of seeds.
 Revolutionary rise in agricultural product and productivity.
5. Growth and diversification of Industry
 During the period of planning growth of industrial production has been around 7 % per
annum.
 Consumer goods industries has have subsequently grown to achieve self-sufficiency.
 Indian economy 10th largest economy in the world.
6. Economic Infrastructure
 Indian railways are one of the largest railway networks in world.
 Power generation capacity increased from 2300 MW in 1950-51 to 330891 MW in 2017.
 Revolutionary growth in IT sector.
7. Employment
8. International trade
Failure of Planning in India
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Abject Poverty
21.2% of Indian population is living Below Poverty Line.
These people are not getting even the essentials of life.
50% of absolutely poor in the world are living in India.
High rate of inflation
Indian economy failed to tackle inflationary problem in the country.
Real income of the people didn’t increase significantly during the planning period.
Prices recorded a steep rise during planning periods accept first five-year plan.
Unemployment
4. Inadequate Infrastructure
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Study Material of Indian economic development for class XII
5. Skewed Distribution
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Study Material of Indian economic development for class XII
Features, problems and Policies of Agriculture
Importance of Agriculture
1. Contribution to GDP
 Agriculture makes a significance contribution to GDP in India.
 In 1951 contribution of agriculture in GDP was 51%.
 In 2016-17 contribution of agriculture in GDP was 17.4%.
 This decline does not the decline in importance of agriculture in economy.
 It indicates relatively faster growth of secondary and tertiary sectors.
2. Supply of wage goods
 wage goods are necessities of life.
 Such as wheat, rice, pulses, oil seeds etc.
 Agriculture provides wage goods to 121 crore of people in India.
3. Source of Employment
 Agriculture is a significant source of employment in India.
 Over 50% of population is engaged in agriculture.
 It is principal source of subsistence for people in India.
4. Supply of Raw material
 As a supplier of raw material, agriculture is of primary significance for the growth of
industrial sector.
 It supplies raw material to industries like cotton to textile industry, sugarcane to sugar
mills etc.
5. Source of demand for Industrial goods
 Agriculture is important source of demand for Industrial goods.
 Capital goods like Tractors, harvester-machines and other ancillary equipment are
demanded by Agriculture sector.
 Thus, agricultural prosperity leads to Industrial prosperity.
6. Contribution to International Trade
 Agriculture makes significant contribution in India’s International trade.
 India exports tea, coffee, cashewnuts, tobacco, jute and spices.
 Exports are source of foreign exchange which caters the need of imports of defensegoods and crude oil.
7. Support to Transport Industry
 Agriculture offers a crucial support to transport industry.
 Railways and roadways are bulk carriers of agriculture products in India.
 Thus, Agriculture is a significance source of demand for transport industry.
8. Wealth of Nations
 A significant component of country’s wealth belongs to agriculture sector.
 In terms of fixed assets, land occupies the highest rank in India.
 Capital worth crores of rupees invested in major and minor irrigation projects.
Features of Indian agriculture
1. Low Productivity
 Productivity means output per hectare of land.
 It is low in India as compared to advanced nations.
 Table shows the comparison of productivity (Tonnes per hectare)
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Study Material of Indian economic development for class XII
Country / productivity
India
China
Vietnam
UK
USA
World average
Rice Wheat Maize
3.6 3.1
2.6
6.8 6.5
5.8
5.8
9.0
10.7
4.5 3.3
5.6
2. Disguised unemployment
 Disguised unemployment occurs when number of persons engaged in a work is more
than what is actually needed.
 Even if some workforce is withdrawn, output doesn’t change.
 This unemployment is a distinct feature of Indian agriculture.
 This shows backwardness and poverty.
3. Dependence on rainfall
 Agriculture in India is heavily dependent on rainfall.
 Consequently, agricultural production is highly uncertain.
 Thus, growth process fails to be stable.
4. Subsistence farming
 Farming in India is subsistence oriented.
 Objective of the farming is to secure subsistence for family.
 Subsistence farming fails to generate surplus for investment.
 This leads to stagnation in agriculture.
5. Lack of modern inputs and Backward technology
 Inputs like chemical fertilizers. pesticides and insecticides are not judiciously used.
 Bulk of the farms in India are small in size.
 Most of the farming population in India is poor.
 Thus, use of backward technology becomes compulsive choice.
 Consequently, productivity remains low.
6. Small Holdings
 This is a characteristic feature of Indian farming.
 Use of machines becomes difficult.
 This marginal farming forces to be farming as a source of subsistence rather than profit
or investment.
7. Landlord-tenant conflict
 In India actual tillers are not the owner of the land.
 Huge areas are cultivated by the tenants.
 Most of the product is taken by the owner as rent.
 Tenant often gets the bare minimum.
 No surplus is left with the tenants for reinvestment.
 Thus, agriculture tends to stagnant.
Problems of Indian Agriculture
1. Lack of permanent means of irrigation:
 Agriculture in India is heavily dependent on rainfall.
 It makes agriculture vulnerable.
 Droughts cause a substantial loss of output.
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Study Material of Indian economic development for class XII
2.
3.
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5.
6.
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 Stability in agriculture output requires that permanent means of irrigation are developed
across all part of the country.
Deficiency of financial:
 This is another problem faced by Indian Agriculture.
 For agricultural finance small farmers depends upon non-institutional sources.
 These sources charge very high interest rates.
 Institutional sources are extremely scarce in relation to needs of farmers.
 High cost of borrowing leads to vicious circle of poverty.
 Lack of finance hinders the growth of Indian agriculture.
Conventional Outlook:
 This is yet another problem of Indian agriculture.
 Considering farming as mean of subsistence, Indian farmers continues to rely on
conventional wisdom.
 Less risk bearing capacity and tendency of Indian farmers hinders undertaking risk for
profit.
Small & Scattered holding:
 Agricultural land holding in India is small and scattered.
 Small holding do not allow use of modern technology.
 It also increases the cost of management.
Exploitive Agrarian Relations
 Most of the tillers are not the owner of land.
 Relying on rental income, owner tend to exploit the actual tillers by imposing high
rent.
 Agriculture in India is is only a source of subsistence rather than profit.
Lack of organized market System:
 Most of the small farmers sell their product in the local market at less price.
 They are obliged to sell their product to mahajans or moneylenders in return of the
loans they take from these middlemen.
Reforms in Indian Agriculture
Institutional Reforms
Abolition of intermediaries:
 Intermediaries (Zamindari system) have been abolished.
 Ownership of land has been transferred to actual tiller (Peasants).
 This was done to stop exploitation of tillers by the zamindars.
Regulation of Rent:
 To keep a check on illegal extortion of peasants, rents have been fixed.
 Rent are not to exceed 1/3rd of the total value of crop.
Consolidation of Holding:
 Consolidation is a process of allotting land to farmer at one place.
 Scattered land holding increases the cost of cultivation.
 Consolidation of holding saves the cost of cultivation.
 By 2004, more than 1633 lakh hectares of land was brought under this.
Ceiling on Land-Holding:
 Ceiling on holding size has been imposed to promote equality in the distribution of
land.
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Study Material of Indian economic development for class XII
 Ceiling on Maximum size of cultivable land holding that an individual can owe.
 The surplus land was distributed among small holders and landless labourers.
5) Cooperative Farming:
 Cooperative farming increases the bargaining power of the farmers.
 It also helps to buy inputs at lower prices.
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Technical reforms
Use of HYV (high Yielding variety) Seeds
 High Yielding variety of seeds have replaced the conventional varieties.
 Use HYV seeds have increased crop productivity manifold times.
 National seed corporation has been set up to promote growth and distribution of
HYV seeds.
Use of chemical fertilizers
 Use of chemical fertilizers has been considerably increased over time.
 Chemical fertilizers are used to increase product and productivity.
Use of insecticides and pesticides
 Steps have been initiated to protect crop against diseases and insect by using
insecticides and pesticides.
 Fourteen Central Plant Protection Centres have been set up.
 Integrated pest management program was adopted along with HYV technology.
Scientific farm management practices
 Scientific methods of farming relate to (i) Selection of crops and their quality, (ii).
Preparation of soil, (iii). Rotation of crop, (iv). Selection of seed, And (v). use of
improved fertilizers.
 Intensive Agriculture Area Program have been introduced.
 Integrated Rural Development Program has been launched to speed up the process
of growth in agriculture.
 23 Agriculture Universities are working to promote research on scientific
cultivation.
Mechanized means of cultivation
 Cheap credit facilities are provided by cooperative societies, Rural Banks and
Commercial Banks.
 Agro-Industries Corporations have been set-up for this purpose.
General reforms
Expansion of irrigation Facilities
Several major and minor irrigation projects have been launched across different parts of
country.
In 1951, only 17% of land was covered by permanent means of irrigation.
Now it is 45% of land covered under irrigation.
Provision of Credit
Cooperative societies have been set-up to provide credit to the farmers at low interest rates.
Rural Development banks and Commercial Banks have also been catering the needs of
farmers.
In 1982, NABARD (National Bank for Agriculture and Rural Development) was
established to institutionalize credit facilities to farmers at national level.
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Study Material of Indian economic development for class XII
3) Regulated Market and Cooperative marketing societies
 Regulated markets have been established across all parts of country
 This offers remunerative price to the farmers and protect them against the exploitation by
the middlemen.
 These markets are governed by the committees appointed by the government.
 Cooperative marketing societies have been established to enhance bargaining power of the
farmers.
 Provision of storage of crop is made by the societies on behalf of the member farmers.
4) Price Support Policy
 Government assures a minimum support price to the farmer for his produce.
 This policy protects interests of farmers against uncertainties.
 The government is committed to buy surplus produce from farmers at minimum support
price.
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Achievements of Agrarian Reforms: Green Revolution
From a backward and stagnant sector of the economy, agriculture has emerged t be a
developing sector of economy.
The achievements have been so substantial that it came to be known as Green revolution.
Green revolution started in India in the year 1967-68.
In the year 1967-68, food-grain production increased by 25%.
India became self-sufficient in the production of food-grain.
In the first phase of green revolution (mid 1960s up to mid-1970s) the scope was restricted
to more affluent states as- Panjab, Andhrapradesh & Tamilnadu.
The use of HYV seeds primarily benefited the wheat growing regions only.
In the second phase (mid 1970s to mid-1980s) the Green Revolution spread over a large
number of states & benefited more variety of crops.
Green revolution enabled India to achieve self-sufficiency in food grains.
Features of Green Revolution
1). Spurt in crop Productivity:
 There has been substantial increase in the crop productivity
Year
Productivity in Kgs/hectare
Wheat
Rice
Maize
1951
660
665
704
2016-17 3216
2550 2664
 This substantial increase in crop productivity marked the end of long period stagnation in
Indian agriculture.
2). Substantial rise in Acreage:
 HYV technology has significantly reduced the time lag between sowing and harvesting of
crop
 It also led to a substantial rise in gross area under cultivation.
In 1950-51, gross area under cultivation was 13 crore hectare which now is 19 crore hectares.
3). Shift from subsistence farming to Commercial Farming:
 A substantial rise in output started generating Marketed surplus.
 This was a gradual shift from subsistence farming to commercial farming.
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Study Material of Indian economic development for class XII
 This is a sign of growth and development.
4). Change in farmer’s Outlook:
 Farming is considered as a commercial venture instead of a source of subsistence.
5). Self-Sufficiency in Food-grain Production:
 Due to Green Revolution India became self-sufficient in the field of food-grain production.
 India also started maintaining buffer-stocks of food-grains.
Limitations of Green Revolution:
1). Limited Crops:
 Rise in output is confined mainly to production of food-grains (wheat and Rice).
 There has not been similar rise in production of other produce like pulses and other
commercial crops like jute, cotton and tea etc.
2). Un-even Spread:
 Green revolution made remarkable impact in states like Punjab, Haryana, Maharashtra and
Tamilnadu.
 But in states like Bihar, Madhyapradesh, Odisa and Eastern UP, its impact was relatively
insignificant.
3). Limited Farming Population:
 Majority of beneficiaries of Green Revolution were rich farmers.
 HYV technology requires expensive inputs which are beyond the reach of marginal
farmers.
 The gains of Green Revolution have eluded these marginal farmers.
4). Economic Divide:
 The gulf between rich and poor farmer has increased over time.
 Loan waivers schemes by government are frequently offered.
 Yet, Suicide among the farmers is emerging to be a serious challenge.
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Study Material of Indian economic development for class XII
Strategies of industrial Growth (1947-1990)
Importance of Industries
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Epicenter of Economic growth
As GDP rises. A structural transformation in the economy takes place.
Therefore 2nd five-year plan emphasized on industrialization.
Industry replaced agriculture as an engine of growth.
Source of Employment
Disguised unemployment is a major problem of Indian agriculture.
Industries provide employment which is more stable than Agriculture.
Therefore, these surplus agricultural labour can easily be employed in Industrial sector.
Source of Mechanized means of Farming
Industry plays an important role in modernization and mechanize of agriculture.
Use of machinery (like Tractors, Harvesters etc.) in farming has become possible only
because of development of Industries.
Due to this farm products have risen exponentially which resulted in the Green Revolution.
Imparts dynamism to Growth Process
Industrialization increases the rate of growth
It has added new dimensions to human life.
It has generated a wave of consumerism (endless consumption of a wide variety of goods
and services).
Growth of Civilization
Industrialization led to urbanization.
Which led to growth of civilization.
Quality of life, education and skill of people improved.
Diverse societies came closer to each-other, the world economies are merging in to a global
economy.
Infrastructural Growth
Industrial growth and infrastructural growth are interrelated to each other.
Industrial spread across the country lead to spread of infrastructural facilities (like banking,
transportation and communication etc.) across the country.
Factors necessitating Direct Participation of State (Public Sector) in Industrial
Development
1) Lack of Capital
 Industrial development in India needed a big push.
 Indian industrialists didn’t have sufficient capital to undertake investment in industrial
ventures.
 Because of this lack of capital by the private sector, government had to undertake capital
investment through PSUs (Public Sector Undertakings).
2) Low inducement to Investment
 Indian market was not big enough to encourage industrialists to undertake major project.
 This owe to low level of demand and low level of income.
 There was a vicious circle operating like this
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Study Material of Indian economic development for class XII
Low Income Low Demand Low Inducement to Invest Low Investment Low Income
 A big push of public investment was required to break this vicious circle.
3) Growth with Social Justice
 This objective could be achieved through the policy of “the state controlling the
commanding heights of the economy”.
 To avoid concentration of wealth in few hands in form of profit (which if driving force of
private investment).
 This objective of socialistic economy could be achieved only through direct participation
of government in the production process.
Industrial Policy Resolution, 1956 (IPR, 1956)
1) Classification of Industries
 Industrial Policy Resolution (1956): - it was adopted in second five-year plan with a view
to increase regional equality and industrialization of country.
 It classified industry into three categories1. State owned industry: -These industries exclusively owned by govt.
It includes 17 industries like Atomic Energy, Arms and Ammunitions, Oil and Railways
etc.
2. Public-Private coexistence industry: -Mostly dominated by state owned industries along
with supplementary contributions made by private industries.
It includes 12 industries like fertilizers, machine tools, aluminium etc.
3. Private Sector: -These industries exclusively owned by individuals.
These industries were under control of government through Industrial Development and
Regulation Act 1951.
2) Industrial Licensing
 The private sector was kept under state control through a system of licenses.
 This policy was used for promoting industrialization in backward regions.
 Basic idea behand this was to bring regional equality.
 The license was compulsory for establishing new industry, and for expansion of industry
also.
 This was to regulate the allocation of resources and to promote social welfare.
3) Industrial Concessions
 Private entrepreneurs were offered various concessions for establishing industry in the
backward regions.
 These industrial concessions such as tax holidays and subsidized power supply encouraged
private sector to invest in backward regions.
 It was done to promote regional equality.
Small Scale Industries
According to Village & small-scale industries committee (or Karve committee, 1955) " An
industry with maximum investment capacity of Rupees five lakh in 1950 (but now it has been
raised to 5 crores) is considered as small-scale industry".
Characteristics of SSI
1) SSI is Labour-Intensive and employment Friendly
 SSI are generally more Labor-Intensive. They use more labour than large-scale industries.
Prepared by Narendra Parmar, PGT(Economics), KV No. 1 (Army), Jodhpur
Study Material of Indian economic development for class XII
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Therefore, they generate more employment.
For Indian economy these industries are good as India is a “labour surplus” economy.
Goal of full-employment can be achieved by promoting SSIs.
SSI Shows Locational Flexibility and therefore Equity Oriented (inter-regional
equality)
Large scale industries are generally established near the source of raw material.
This is because of their huge raw material requirement; it saves the transportation cost.
One the other hand, SSIs have locational flexibility.
Therefore, these are distributed over the entire length and breadth of the country.
It is therefore equity-oriented leading to regional equality.
SSI needs small Investments and therefore Equity oriented (sections of society)
SSIs need small investment, compared to Large Scale industries.
Accordingly, it avoids the concentration of economic power.
SSIs provide greater employment per unit of investment.
It promotes equity across different sections of society.
Salient Features of the strategies of Industrial Growth during the period 1950-1990:
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Public enterprises were to play central role in the process of industrialization.
Private enterprises were to play only a secondary role in the process of industrialization.
System of License and permit prevailed during this period.
Process of industrialization focused on “Import Substitution”. Priority of production was
given to those goods which were being imported from other countries.
Domestic industries were protected from global competition by the means of qualitative
and quantitative restrictions on trade (Quota and Tarif).
Large scale industry was to be developed with a view to building an infrastructural base in
the country.
Small scale industry was to be developed with a view to achieving the objectives of full
employment and equity.
Good Effects
Economic growth got a big push. There was about 6% annual increase in output during the
period 1950-1990.
There was a marked diversification in the industrial sector. Sunrise industry (electronics in
particular) marked its emergence in the domestic market.
Growth of Large-scale industry (like Rourkela and Bhilai Steel Plant) projected an
infrastructural shift in the Indian economy.
Growth of SSI made a substantial contribution in achieving the objectives of growth with
justice.
2) Bad Effects
 Public sector monopoly gradually turned out to be “dead social weight”. Inefficiency,
Leakage and corruption became the principal characteristic. By incurring huge losses,
public sector led to inefficient use of scarce national resources.
 Protection of domestic industry stimulated its growth. But it failed to achieve international
standards of product quality.
Prepared by Narendra Parmar, PGT(Economics), KV No. 1 (Army), Jodhpur
Study Material of Indian economic development for class XII
 Saving foreign exchange through import substitution proved to be inefficient policy
instrument. Foreign exchange reserve started shrinking and by the end of 1990 these stocks
reached their bottom. India had to pledge gold reserve with world bank to salvage our
borrowings.
Prepared by Narendra Parmar, PGT(Economics), KV No. 1 (Army), Jodhpur
Study Material of Indian economic development for class XII
FOREIGN TRADE
Export and import of goods and services across different countries is called Foreign
(International) Trade.
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India’s Foreign Trade at the time of Independence
Under the British rule Indian foreign trade suffered colonial exploitation.
Britishers used India as a supplier of raw material to cater the industrial needs of British
industries.
India was exporter of raw material like raw silk, wool, cotton, jute, indigo etc.
Besides this Britishers used India as a market of finished industrial products.
Therefore’ India was importer of British finished goods.
Britain maintained monopoly over India’s imports and exports.
The composition of exports and imports made Indian economy backward and stagnant.
Huge trade surplus was used by the colonial government for their administrative expenses.
Indian’s Foreign Trade After Independence
Volume and Composition of Indian Foreign Trade showed following noticeable changes.
Composition of foreign trade
 There was a decline in percentage share of agricultural exports. It was because
 India started using its farm product as raw material for its domestic Industry.
 A substantial rise in India’s population has raised the domestic consumption of farm
products.
Decline in percentage share of exports of conventional items
 Conventional items of exports include jute, tea, minerals etc.
 Because of planned development programs, domestic demand of conventional items went
up
 Consequently, their share in total exports fall.
Increase in percentage share of manufactured goods
 There was increase in percentage share of export of machine-made goods.
 It was a result of planned development programs initiated by government.
 Presently ‘gems and jewellery’ is India’s highest exporting category of goods.
Direction of foreign trade
 Direction of foreign trade underwent significant changes.
 There was a change in direction of exports.
 Before 1951, India’s bulk of exports were with Britain, America and Commonwealth
countries.
 At present India deals with almost all the countries like Australia, New Zealand, Japan and
countries of European union.
 There was a substantial change in imports trade too.
 At the time of independence India used to import from UK and America.
 Now India import from Russia, Japan, European Union, Australia, New Zealand etc.
Inward looking trade strategy (Import substitution Policy)
 To attain self-reliance, India followed a policy of policy of protection.
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Study Material of Indian economic development for class XII
 Import Substitution Policy refers to policy aimed at replacing or substituting imports with
domestic products.
 Import-substitution policy implies domestic production of those goods which economy has
been importing from rest of world.
 This strategy was adopted to (i) Save the foreign exchange and (ii). Achieve self-reliance.
 Protection policy includes quantitative restrictions (Quota) and qualitative restrictions
(tariff) on imports.
 Restrictive trade policy includes tariff and quota
 Tariff (qualitative restrictions) is a tax on imported goods, which make imported goods
more expensive and discourage their demand.
 Quota (quantitative restrictions) refers to specify/ fixes the quantity of a goods which can
be imported.
Effects of inward-looking policy
Good Impact
1) High rate of Industrial growth with structural transformation
2) Diversification of Industrial Growth
3) Opportunities of Investment
Bad Impacts
1) Growth of Inefficient Public Monopolies
2) Lack of competition implied lack of modernization
3) Indiscriminate Spread of Public Sector Enterprises
4) Economically Unviable State Enterprises
Prepared by Narendra Parmar, PGT(Economics), KV No. 1 (Army), Jodhpur
Study Material of Indian economic development for class XII
ECONOMIC REFORMS SINCE 1991
In 1991 India introduced economic reforms to pull the country out of economic
crisis and to accelerate growth rate.
India adopted policy of Liberalization, Privatization and
Globalization, in place of licensing, quota, and permits.
Liberalization
Privatization
Globalization
{LPG}
Licensing
Quota
Permits
{LQP}
Why Economic Reforms were Needed
Following were the reasons1. Increase in Fiscal Deficit
o Fiscal deficit means differences between the total expenditure and total receipts of
the gov. in a financial year.
o High fiscal deficit is bad because
 it indicates poor financial health of economy.
 It triggers inflation which hinders the growth process.
 It lowers the faith of international institutions (like World bank).
o Prior to 1991(or after 1980) India’s fiscal deficit had been mounting every year on
account of continuous increase in non-developments expenditure.
o Deficit was 5.4% of GDP in 1981-8 rose to 8.4% in 1990-91.
o Interest payments on debt was 10% of total government expenditure in 1980 rose
up to 36.4% of govt. expenditure in 1990.
o Economy was moving towards debt trap.
2. Mounting Adverse Balance of Payments
 In 1980-81 BOP {value of total exports – value of total imports} was adverse, to the tune
of 2214 crores and it rose up to 17,367 cr. in 1990-91.
 Accordingly, the burden of foreign debt service {repayment of loan installments and
payments of interest} increased tremendously, which further deteriorate/worsen BOP.
 Borrowing from rest of world which were 12% of GDP shot up to 23% of GDP in 199091.
3. Gulf Crisis
 Petrol price shot up owing to Iraq war in 1990-91.
 India used to receive huge amount of remittance from gulf countries in foreign exchange,
all which stopped totally.
4. Fall in Exchange Reserve
 In 1990 India’s foreign exchange reserves were not enough to pay an import bill for even
10 days.
 Foreign exchange was 8151 cr. in 1986-87 declined to 6252 cr. in 1990.
 Situation grew so acute that government had to mortgage country’s gold with The World
Bank to discharge its foreign debt service obligation.
Prepared by Narendra Parmar, PGT(Economics), KV No. 1 (Army), Jodhpur
Study Material of Indian economic development for class XII
5. Rise in Price (inflation)
 Average annual rate of inflation {a persistent rise in general price level} increased from
6.7% to 16.7%.
 Main reason of inflation was rapid increase in supply of money, due to excessive resort
to deficit financing {i.e. borrowing from RBI, by the govt. to meet its deficit}.
 Deficit financing was around 3%.
 RBI offered this loan by printing new currency notes. Consequently, cost of product also
went up.
 Because of inflation the crisis deepened from bad to worse.
6. Poor performance of public Sector Undertaking (PSUs)
 Overall performance of public sector was disappointing.
 PSUs turned out to be breeding centres of corruption.
 Most of PSUs suffered losses because of poor performance that degenerated in to
liability.
 India left with no option but to approach World Bank & IMF for economic asylum.
7. Inefficient management
 Due to faulty management, the rules and laws which aimed at controlling and regulating
the economy ended up in hampering the process of growth and development.
 Due to lack of finance, defective policies and inefficient administration led to need of
New Economic Policy.
NEW ECONOMIC POLICY 1991
The economic crisis related to external debt compelled govt. to new set of policy
measures which changed the direction of our development Strategies.
India had to approach International Bank for Reconstruction and Development (IBRD) or
World Bank and International Monetary Fund (IMF) and received $7 billion-dollar loan to
manage crisis, provided that India would adopt the policy of liberalization and openness.
Elements of new economic policy
Liberalization, privatization and globalization are three main elements of NEP.
Objective
Short run: - in short run stabilization measures were adopted to intended to correct BOP and
bring down inflation.
Long run: - structural reforms were introduced aimed at improving the efficiency of the
economy and increasing its international competitiveness by removing the rigidities in various
segments of Indian economy.
MAIN FEATURES OF NEW ECONOMIC POLICY
LIBERLIZATION
Liberalization of economy means freedom of producing units from direct or physical
controls imposed by the govt.
Liberalizations were based on the assumption that market forces would guide the economy
in a more effective manner than govt. control.
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Study Material of Indian economic development for class XII
Economic Reforms under Liberalization
(A)Industrial Sector Reforms
1). Abolition of Industrial licensing
 Before 1991 start of new industry or expansion of existing industry were to obtain licence
from government.
 In 1991 a new industrial policy was announced abolishing the requirement of licensing
except for these industries –
 1. Liquor 2. Cigarette 3. Defence equipment 4. Industrial explosive 5. Dangerous
chemicals 6. Drug & pharmaceutical.
2). Contraction of Public Sector
 Under the new economic policy, the number of Industries reserved for public sector were
reduced to 17 to 8.
 In 2010-11, the number of these industries were merely reduced to 3
 The only industries which are reserved for public sector are (1). Defense equipment (2).
Atomic energy generation. (3). Railway transportation.
3). De-reservation of production by small scale industries
 Many production areas which were earlier reserved for SSIs were de-reserved.
 Market forces were allowed to determine allocation of resources rather than directive
policy of the government.
 Investment limit for SSI has been increased to 5 crores.
4). Price Determination by market forces
 Prior to 1991, there were control on price fixation by the industry as per the directive
policy of government.
 But now in many industries, the market has been allowed to determine prices through
market forces of demand and supply.
5). Import of capital goods
 Liberalization also implied freedom for the industrialists to import capital goods with a
view to upgrade their technology.
 But now there is a freedom to import capital goods and technology in order to develop
strong infrastructure base of the country.
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Financial Sector Reforms
Financial sectors {commercial banks, stock exchange etc.} are regulated by RBI.
Liberalization implying a substantial shift in role of the RBI from regulator to a
facilitator of the financial sector.
i.e. RBI would only facilitate the free play of market forces and leave to the commercial
banks to decide their own interest structure.
Now competition prevails rather than control.
Free play of market forces has led to emergence of private banks – both domestic as well
as international – in the Indian banking industry.
Result of these changes, financial sector in India has shown a multi-dimensional growth
and is playing a significant role in growth and development of the country.
Fiscal Reforms
Prepared by Narendra Parmar, PGT(Economics), KV No. 1 (Army), Jodhpur
Study Material of Indian economic development for class XII
 It is widely recognized fact that a simple and moderate tax structure raises tax
compliance and revenue of the govt.
 Rate of corporate taxing, direct and indirect taxes have been substantially lowered, in
order to facilitate the establishment of common natural market for goods and
commodities.
 Now tax structure has been simplified and moderated.
 This has raised tax compliance and therefore tax revenue of the government.
 Introducing VAT {value added tax} was another step to ensure uniform application of
tax in all states of the country.
 Now GST has been introduced to simplify and introduce a unified tax system in India.
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External Sector Reforms
Foreign Exchange reforms
Foreign exchange reforms were triggered in 1991 with the devaluation of the Indian
currency against foreign currencies, as an immediate measure to resolve the balance of
payment crisis.
This led to in an increase to the inflow of foreign exchange, as devaluation implies a fall in
the value of home currency against foreign currencies.
This implies that foreign currency can buy more in India than before.
This increased the demand of Indian exports which made some favourable changes in state
of BOP.
In the wake of liberalization, now exchange rate is determined by the forces of supply &
demand in the international market.
Foreign Trade Policy Reform
 Foreign trade policy underwent a comprehensive change.
 Tariff restriction have been considerably moderated, rather withdrawn from many of the
items of exports and imports.
 Instead of policy of protection to the domestic industries, now there is a policy of
“survival of the fittest”.
 Presently it is the competition that prevail and not the quota and tariff.
 Efficiency is the benchmark of growth, not merely expansion.
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Salient Feature of the Trade Policy after Liberalization
Abolition of import quotas.
Abolition of import licensing {except non-environment friendly & hazardous items}
Moderation of import-duty to enhance competitiveness of the domestic market.
Withdrawal of import-duty to enhance competitiveness of Indian goods in the external
market.
2. PRIVATISATION
 Privatization is the process of involving the private sectors in the ownership or operation
of the state-owned enterprises.
 It happens in two ways:
 By withdrawing of the govt. from ownership and management of public sector
companies.
Prepared by Narendra Parmar, PGT(Economics), KV No. 1 (Army), Jodhpur
Study Material of Indian economic development for class XII
 By outright sale of public sector enterprise/companies.
 Disinvestment refers to a situation when the government sells off a part of or a part of its
share capital of PSUs to public/ private players.
 It is taken as a remedial measure to improve production & managerial efficiency, as well
as to facilitate modernization.
 Govt. has also made attempts to improve the efficiency of PSUs by giving them
autonomy in taking managerial decisions.
 For instance, some PSUs have been granted special status as Navaratanas & Miniratanas.
Gains of Privatization
 Privatization implies ‘self-interest’ over ‘social interests’. Hence efficiency becomes the
condition of survival for workers. High productivity is the obvious results.
 Privatization enhances competitiveness – both national and international.
 Competition induces up-gradation and modernization which contributes in growth and
development.
 Privatization promotes diversification of production.
 Privatization promotes consumer’s sovereignty.
Losses of Privatization
 Socialist pattern of society (Social interest) is left behind as it promotes ‘self-interest’.
 Privatization encourages the free play of market forces. Goods are produced for those
who can purchase them.
 Weaker section of the society suffer deprivation.
GLOBALISATION
 Globalization means integrating the country’s economy with the economy of other
countries, under condition of free flow of trade & capital, and movement of persons
across borders.
 It is defining as process associated with increasing openness, growing economies
interdependence and deepening economies integration, in the world economy.
 Globalization is the outcome of the policies of privatization and liberalization.
Policy measures undertaken under Globalization
Increase in Equity limit of Foreign Investment
 The equity limit of foreign investment which earlier were 49, has been increased. Now it
ranges between 51 to 100%.
 In 47 high priority industries FDI allowed up to the extent of 100%.
 Export trading houses have been allowed 100% FDI.
Partial convertibility of Rupee
 Partial convertibility refers to the sale and purchase of foreign currency at market prices.
 Partial convertibility of Rupee was allowed by the government in 1992-93 budget and
full convertibility was allowed in 1993-94 budget in current account.
 It was allowed for import & export of goods and services, payment of interest and
dividends, remittance to meet family expenses.
Long-Term trade policy
 Under this policy all restrictions and controls on foreign trade has been removed.
 Barring some specific goods, most of goods are traded free of restrictions.
Prepared by Narendra Parmar, PGT(Economics), KV No. 1 (Army), Jodhpur
Study Material of Indian economic development for class XII
Modification of tariff
 In conformity with NEP, custom duties and tariffs imposed have been gradually reduced.
 The ones which are still prevailing have been modified to encourage competitiveness and
promote international trade.
Withdrawal of Quantitative Restrictions
 Since 2001, the quantitative restrictions on all trade have been totally withdrawn.
 This is in conformity with India’s commitment with WTO.
Positive impacts of Globalization
 Globalization has turned the world in to one whole or creating a borderless world as it
provides easy access to global market.
 Economy is now exposed to advanced technology and is able to develop indigenous
products in international markets.
 It has increased possibilities of large industries of developing countries to become
important players in the international market.
 It has interlinked the technological changes all over the world.
Negative Impacts of Globalization
 Globalization is a strategy of developed countries to expand their market in other
countries.
 Market driven Globalization has widened the economic disparities among nations and
people.
 Globalization has compromised the welfare and identity of people belonging to poor
countries.
Outsourcing
 Outsourcing refers to system of hiring business services from the outside of the world
(like call centre, medical transcription etc.)
 India is emerging as an important destination of outsourcing particularly BPO (business
process outsourcing) because of
 Availability of cheap labour in India or relatively low wage rate in India
 Revolutionary growth of IT sectors in India.
World Trade Organisation (WTO)
 WTO has replaced GATT (General Agreement on trade and Tariff) in 1995.
 GATT was established in 1948 with 23 countries as global trade organization.
Functions of WTO
 WTO established a rule-based trading regime in which nations cannot place arbitrary
restrictions on trade.
 It facilitates bilateral and multilateral trade by removing tariff and non-tariff barriers.
 It aims at enlarging production and trade of services to ensure optimum utilization of
world resources.
 It helps in providing greater market access to all member countries as It provides greater
opportunities to all countries in the international trade.
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