Third Part
Q. Bring out the important features of the Indian economy.
A. The important features of the Indian economy are as follows :
1) The Indian economy is a developing economy. It hasn’t yet reached the level of economic development seen in America and Europe.
2) The Indian 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 characterized 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 underemployment 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 of the economy.
7) There is a shortage of physical and economic infrastructure . Transport (Road, 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 supply.
Q. Distinguish between growth and development
A. 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 factors such as literacy, health, child mortality rate, equality, regional balance, infrastructure, etc
Q. What are the reasons for the government to enter into production activities?
A. The reasons for the government to enter into production activities are -
1) Infrastructure such as road, ports, dams, etc., require huge investment but the rate of return is very low in the short run. Thus no private entrepreneur would be interested in providing roads, which prompts the government to come forward.
2) There are natural monopolies such as electricity generation, railways, etc., where a single producer can serve the entire market.
3) There are certain production activities which have so much social benefits that the government should produce these goods and services (e.g., schools and colleges, hospitals, banks, etc.)
4) The government may enter into production activities to fulfill some other social objectives instead of profit motive. These objectives could be employment generation, regional balance and social uplift of the downtrodden.
Q. Explain the three stages of demographic transition
A. 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 more 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. In case of India , till 60s both birth rate and death rate were quite high, thus population grew at a lower rate. However, population growth rate accelerated afterwards and reached a peak during 1980-81. A positive sign is that in the recent census the annual population growth rate has come down below 2 per cent. Some of the states such as Kerala, Tamilnadu and Punjab have reached a reasonably lower birth rate. However, in some of the major states such as Uttar Pradesh, Bihar, Rajasthan and Madhya Pradesh population growth rate is very high.
Q. What are the changes observed in the sectoral composition of GDP-in India?
A. The important changes are decline in share of primary sector( agriculture,forest and logging, fishing) , increase in share of secondary(mining, manufacturing, electricity, gas and water supply, and construction) and tertiary or service sectors( trade, hotels and restaurant, transport (railways,road, air, waterways), storage, communication,banking and insurance, real estate, and public administration and defense).
Q. Explain the concept of disguised unemployment.
A. Disguised employment means when too many people were employed to do a job which far less hands can achieve without affecting the output. This term is often used in agriculture sector where more number of people are employed for output that can be achievable through less people .
Q. What are the modes of transfer of funds from Center to the States?
A. There are three modes of transfer of funds from the Center to the states. First, the center 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 Commission every five years, which suggests criteria of such sharing between the Center and the states on the one hand, and amongst different states on the other.
The second mode of transfer of funds from the Center to the states is the grants and loans extended to states for implementing development plans. The states receive grants and loans from the Center which supplement the revenue generated at the state level. The Planning Commission allocates funds to states as per formula devised by the National Development Council.
The third mode of transfer of funds from the Center 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 Center (under ‘central schemes’)or the states are asked to contribute a proportion of the cost (in the case of 'centrally sponsored schemes').
Q. Outline the basic objectives of Indian planning.
A. The basic objectives of planning in India were envisaged as of economic growth, employment, self-reliance and social justice. 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.
# Rapid industrialization with particular emphasis on the development of basic 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.
Q. Bring out the important aspects of the new development strategy in plan strategy in
the Indian planning process.
A. Some of the changes are -
# Greater flexibility in fiscal and monetary policies;
# Shift in the policy from the focus on national targets to taking cognizance of the performance of different states in the country and efforts towards bridging interstate inequality;
# Ensuring equity and social justice;
# Bringing full capacity utilization in the manufacturing sector;
# Reduction in the gestation lags of industrial and infrastructural investments;
# Rationalization of labor laws and regulations;
# Introducing financial sector reforms so that the viability and stability of financial institutions improves financial sector in India should be able to and willing to finance a range of activities that are of crucial importance both for growth and development.
# Re-examination of the subsidies provided to agricultural sector,
# Revival of public investment in irrigation and water management;
# Removal of the reservation policy for small scale industries in a phased manner, without adversely affecting employment opportunities;
# Development of telecommunications, energy, and housing sector on a priority basis;
# Making an decisive impact on the quality of life of the majority of people especially poor and marginalized, and
# Settling socio-economic targets by making social interventions.
Q. Outline the changes in plan strategy in the Indian planning process.
A. During the early phase (1951-60) the emphasis was mainly on growth, that is, to raise the level of output in the economy. There were three main aspects such as
i) developing sound base for initiating the long term growth of the economy,
ii) a comparatively high priority to industrialization, and
iii) emphasis on the development of capital goods
The Second Five Year Plan was built on a strategy of long term development of the economy. Since the draft of this Plan was prepared by P. C. Mahalanobis & Nehru was the PM of the country this strategy is often called Nehru-Mahalanobis growth strategy which emphasised on industrialization of the economy, particularly heavy industries.
With the beginning of the Third Plan (1961-66) it was felt that the Indian economy has entered the 'take off stage and the first two FWs generated the necessary institutional mechanism for rapid economic development. Consequently in the Third FYP a goal of 'self reliance' was set. Leaning from the experience of the first two FYPs, the Third FYP accorded a high priority to agriculture along with the emphasis on the development of the basic industries.
India observed a 'plan holiday' during 1966-69.
In 1969 when the FYP was resumed the objective of economic growth and self reliance was not given up. But the main emphasis got shifted from heavy industry to quick yielding projects and small scale industry. Similarly creation of infrastructure including roads was given priority. For development of agricultural sector high yielding varieties (HYV) of seeds and chemical fertilizer were given priority as compared to community development.
The Fourth FYP set before itself two principal objectives: rapid growth in gross domestic product
(GDP) and progressive achievement of self-reliance.
The Fifth FYP (1974-79) was introduced at a time when India was in deep economic crisis due to global hike in crude oil prices. Since the planners were interested in the slogan of 'garibi hatao' and attainment of self-reliance it was envisaged to achieve these objectives through better distribution of income, higher rates of growth & by direct attack on the problem of unemployment, underemployment and acute poverty.
The Fifth Plan was terminated by the new Janata Party government one year before its completion and the Sixth FYP was adopted. In fact, India had two Sixth FYPs practically (1978-83 and 1980-85). The Sixth FYP adopted by the Janata Party (1978-83) was discarded in 1980 with the change in government at the center. The Sixth Plan (1978-83) admired the achievements of earlier
Plans in India but criticized the Nehru-Mahalanobis growth strategy holding it responsible for unemployment, growing poverty, concentration of economic power in the hands of few and widening of income and wealth inequalities. The focus of the Sixth Plan (1978-83) was increasing the employment potential in agriculture and allied activities, was introduced by the congress government, planners rejected the approach of Janata Party and brought back the earlier model of growth. In order to tackle the problem of poverty there was direct attack on poverty by adopting programmes like Integrated Rural Development Programme (IRDP) and National Rural Employment Programme (NREP).
The Seventh FYP (1985-1990) was introduced with a change in the development strategy. It was envisaged to bring down the rate of population growth because the gains of growth often got neutralized by fairly high growth rates of population.There were four basic elements that signify a change in the strategy in this Plan. First, it gave importance to higher agricultural production by relying more on new technology. Second, it undermined the role of public sector and induced promotion of private sector through industrial deregulation. Third, with liberalization of imports,
it aimed at raising efficiency in the manufacturing sector. Fourth, necessary changes in
industrial and export-import policies were made so that the role of the state changes from a
regulatory to facilitatory authorities.
The Eighth (1992-97), Ninth (1997-02) & Tenth(2002-07) are guided by the measures of
improving the performance and increasing the efficiency of the economy. The focus in these FYPs is different compared to earlier Plans, where people are not mere beneficiaries of development; they are active participants in the development process. Unlike earlier Plans where a centralized approach is followed, the Plans after 1990 have stressed more on decentralized and participatory approach of development.
Eleventh (2007-12) envisions an economy and provides for an opportunity to restructure existing policies with inclusive growth. It aimed at putting the economy on a sustainable grow the trajectory with as growth rate of the per cent. The key element of the strategy for inclusive growth is to provide access to basic facilities such as health, education, clean drinking water.
Q. 1) Which sector got the highest priority during the First and Second Five Year
Plans?
a) Transport and communication
b) Industry
c) Irrigation and Flood Control
A. b) Industry
Q. Third Five Year plan gave priority to which sector?
a) Transport and Communication
b) Power
c) Village and Small Scale Industries
A. b) Power
Q. Seventh Plan onwards, which sector got prominence by a sizeable percentage
of resource allocation?
a) Energy
b) Transport, industry and minerals
c) Agriculture and Allied services
A. a) Energy
Q. What were the basic features of the Second Five-Year Plan Strategy?
A. The Second Five Year Plan, launched in 1956-57, was part of a general strategy of development. The framework of the Second Five-Year Plan, with minor modifications, remained the mainstay of all future plans and policies till the beginning of the 1990s. Heavy industry, import substitution and placing of key industries with the public sector were the key features of the Second Five Year Plan.
The architect of the Second Five Year Plan was P. C. Mahalanobis. The central idea behind the Second Five Year Plan was that to raise the standard of living of the people, the economy needed to grow very fast. And for the economy to grow very fast, the planners felt that industrialization was the key. Industrialization meant that plants and machinery had to be set up which produce output. The Second Five Year Plan stressed the production of those machines that produce other machines as output. These industries where machines produce other machines and equipment are called heavy industry. Thus the basic idea was that the productive capacity of the economy itself had to be increased. Consumer goods, being goods that are used up for consumption,do not increase productive capacity. So the argument was that while those machines that produce cars or shirts or watches are important, even more important are the machines that would produce the machines that would produce cars or shirts or watches. Heavy industry was thus one of the central features of the Second Plan. The other key idea 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 colonized nation and subsequent mistrust of foreign trade. Since the planners relied on heavy industry, it was recognized that huge investments would be required. The policymakers felt that the private sector would neither be willing nor able to make these huge investments. Hence these heavy industries, infrastructure like power, and areas of strategic interests like Defence production were kept with the Public sector.
Q. Discuss some broad sources of the thinking that went into formulating a strategy for development immediately after Independence.
A. National leader, 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, industrialization is a must. And to industrialize rapidly, the process must be organized and planned. Similarly, the so called Bombay Plan (1944) by a group of industrialists also emphasized industrialization. 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.
Q. Describe some fundamenti1 instruments of controls in the economy which were in operation in the period 1951-9 1.
A. Industries in the private sector were regulated by the provisions of the Industries (Regulation and Development) Act, 1951. 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. The government kept with itself key infrastructure, 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. In the external sector, there was the exchange control system under which exporters had to surrender export earnings to the Reserve Bank of India at the official exchange rate and take earnings in domestic currency. There was import licensing under which a firm had to obtain permission to import raw materials or capital inputs or consumer goods. 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. There were several types of control that were put in place: industrial licensing system; exchange control system; import licensing; capital issues control price controls; and other ad-hoc measures and controls for 'priority sectors'. After nationalization, banks were subjected to directed and selective credit controls, controls on deposit and lending rates, and various types of reserve requirements.
Q. Describe the.performance of the agricultural and industrial sectors in India in the period since Independence till the end of the 1980s.
A. Agriculture - Agricultural Production as a whole has grown at a fairly constant rate of 2.6 percent per annum over the period 1951 - 1990. In the 1950s, much of the increased production came through the expansion of cultivated area. Later on, the scope for bringing in additional area under cultivation decreased. Then in the mid- 1960s the New Agricultural Strategy, popularly known as the 'Green Revolution', was launched. This entailed the use of four complementary inputs
i) High Yielding Variety (HYV) seeds,
ii) chemical fertilizers,
iii) machineries such as tractors and harvester-threshers, and
iv) irrigated water facilities.
India achieved self-sufficiency in food grains during the mid-1970s, that is India no longer resorts to massive imports of food grains but sustained use of high yielding seeds and intensive cultivation has led to deteriorating soil fertility. Ground-water has been over exploited, so that there is a depletion in water-table.
Industry - The share of manufacturing in the country's GDP increased six-fold between the 1951-55 and 1 985-90. Growth in manufacturing was faster in the first three plans than during the late 1960s and 1970s. The late 1980s saw a revival of industrial growth. Over the period 195 1-90 medium and large industry grew faster than small and cottage industries. Also within the small sector, household type industries sing traditional techniques declined sharply. In 1950 about 65 per cent of industrial output consisted of consumer goods, about 25 per cent was intermediate goods and the rest capital goods. By the late 1980s, the three categories had roughly equal shares in factory sector output. Another characteristic of Indian industry has been the rise in indigenous enterprise and the emergence of several new centers of manufacturing.
Q. Discuss the concept of economic reforms.
A. Economic reform means certain necessary changes in economy are undertaken to
improve the performance of economy and strengthen it with such measures.
In country like India with its 'mixed economy’, with a large private sector, but with pervasive
state presence in the economy, and a host of controls and regulations economic reforms
were initiated. 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.
Q. What was the rationale for the economic reforms which were launched in India in 1991 And describe some measures taken for reforms in the domestic sector of the economy since 1991.
A. In June 1991, foreign exchange balance was down to $ 1 billion, which was just enough
to pay for six weeks' imports. The economy was in a severe balance-of-payments crisis. At the same time, there was a severe fiscal crisis. Although the economy had grown by over 5 per cent per annum in the second half of the 1980s - this rate of growth was higher than in previous time-periods - this growth was achieved at the cost of considerable fiscal extravagance and wastefulness. In order to tackle the crisis, India had to approach the International Monetary Fund (IMF) and the World Bank for loans. In return, the IMF and the World Bank suggested certain structural adjustments such as reduction in fiscal deficit, devaluation of currency and opening up of the economy. Under the Structural Adjustment scheme , the World Bank suggested reforms which called for changes in the basic structure of the economy. It necessitated replacement of quantitative restrictions and resource
allocation processes with market-based price signals and incentives. The overall objective
conditionalities was of IMF to bring in Macroeconomic Stabilization, which required reduction in fiscal deficits (broadly, the difference between government expenditure and revenues) and balance of payments deficit (the difference between payments made to foreign countries and earnings from foreign countries). We now discuss some measures towards domestic liberalization adopted in India since 1991. In July and August 1991, the government announced a new Trade Policy (here 'trade' means foreign trade). On 24'" July 1 99 1, the government made a statement on Industrial Policy.
The 1991 reform did away with industrial licensing, except for a few industries for location-related reasons or for environmental considerations. The reforms also removed the requirement of import Licenses, except for most consumer goods. Restrictions were eased for foreign direct investment ad portfolio investment (investment in financial markets). Sectors where private (both domestic and foreign) investments were earlier prohibited, such as power, saw private investments being allowed. Steps were taken for disinvestment of equity in public sector enterprises (called privatization).
Q. Bring out the important features of the Indian economy.
A. The important features of the Indian economy are as follows :
1) The Indian economy is a developing economy. It hasn’t yet reached the level of economic development seen in America and Europe.
2) The Indian 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 characterized 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 underemployment 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 of the economy.
7) There is a shortage of physical and economic infrastructure . Transport (Road, 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 supply.
Q. Distinguish between growth and development
A. 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 factors such as literacy, health, child mortality rate, equality, regional balance, infrastructure, etc
Q. What are the reasons for the government to enter into production activities?
A. The reasons for the government to enter into production activities are -
1) Infrastructure such as road, ports, dams, etc., require huge investment but the rate of return is very low in the short run. Thus no private entrepreneur would be interested in providing roads, which prompts the government to come forward.
2) There are natural monopolies such as electricity generation, railways, etc., where a single producer can serve the entire market.
3) There are certain production activities which have so much social benefits that the government should produce these goods and services (e.g., schools and colleges, hospitals, banks, etc.)
4) The government may enter into production activities to fulfill some other social objectives instead of profit motive. These objectives could be employment generation, regional balance and social uplift of the downtrodden.
Q. Explain the three stages of demographic transition
A. 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 more 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. In case of India , till 60s both birth rate and death rate were quite high, thus population grew at a lower rate. However, population growth rate accelerated afterwards and reached a peak during 1980-81. A positive sign is that in the recent census the annual population growth rate has come down below 2 per cent. Some of the states such as Kerala, Tamilnadu and Punjab have reached a reasonably lower birth rate. However, in some of the major states such as Uttar Pradesh, Bihar, Rajasthan and Madhya Pradesh population growth rate is very high.
Q. What are the changes observed in the sectoral composition of GDP-in India?
A. The important changes are decline in share of primary sector( agriculture,forest and logging, fishing) , increase in share of secondary(mining, manufacturing, electricity, gas and water supply, and construction) and tertiary or service sectors( trade, hotels and restaurant, transport (railways,road, air, waterways), storage, communication,banking and insurance, real estate, and public administration and defense).
Q. Explain the concept of disguised unemployment.
A. Disguised employment means when too many people were employed to do a job which far less hands can achieve without affecting the output. This term is often used in agriculture sector where more number of people are employed for output that can be achievable through less people .
Q. What are the modes of transfer of funds from Center to the States?
A. There are three modes of transfer of funds from the Center to the states. First, the center 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 Commission every five years, which suggests criteria of such sharing between the Center and the states on the one hand, and amongst different states on the other.
The second mode of transfer of funds from the Center to the states is the grants and loans extended to states for implementing development plans. The states receive grants and loans from the Center which supplement the revenue generated at the state level. The Planning Commission allocates funds to states as per formula devised by the National Development Council.
The third mode of transfer of funds from the Center 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 Center (under ‘central schemes’)or the states are asked to contribute a proportion of the cost (in the case of 'centrally sponsored schemes').
Q. Outline the basic objectives of Indian planning.
A. The basic objectives of planning in India were envisaged as of economic growth, employment, self-reliance and social justice. 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.
# Rapid industrialization with particular emphasis on the development of basic 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.
Q. Bring out the important aspects of the new development strategy in plan strategy in
the Indian planning process.
A. Some of the changes are -
# Greater flexibility in fiscal and monetary policies;
# Shift in the policy from the focus on national targets to taking cognizance of the performance of different states in the country and efforts towards bridging interstate inequality;
# Ensuring equity and social justice;
# Bringing full capacity utilization in the manufacturing sector;
# Reduction in the gestation lags of industrial and infrastructural investments;
# Rationalization of labor laws and regulations;
# Introducing financial sector reforms so that the viability and stability of financial institutions improves financial sector in India should be able to and willing to finance a range of activities that are of crucial importance both for growth and development.
# Re-examination of the subsidies provided to agricultural sector,
# Revival of public investment in irrigation and water management;
# Removal of the reservation policy for small scale industries in a phased manner, without adversely affecting employment opportunities;
# Development of telecommunications, energy, and housing sector on a priority basis;
# Making an decisive impact on the quality of life of the majority of people especially poor and marginalized, and
# Settling socio-economic targets by making social interventions.
Q. Outline the changes in plan strategy in the Indian planning process.
A. During the early phase (1951-60) the emphasis was mainly on growth, that is, to raise the level of output in the economy. There were three main aspects such as
i) developing sound base for initiating the long term growth of the economy,
ii) a comparatively high priority to industrialization, and
iii) emphasis on the development of capital goods
The Second Five Year Plan was built on a strategy of long term development of the economy. Since the draft of this Plan was prepared by P. C. Mahalanobis & Nehru was the PM of the country this strategy is often called Nehru-Mahalanobis growth strategy which emphasised on industrialization of the economy, particularly heavy industries.
With the beginning of the Third Plan (1961-66) it was felt that the Indian economy has entered the 'take off stage and the first two FWs generated the necessary institutional mechanism for rapid economic development. Consequently in the Third FYP a goal of 'self reliance' was set. Leaning from the experience of the first two FYPs, the Third FYP accorded a high priority to agriculture along with the emphasis on the development of the basic industries.
India observed a 'plan holiday' during 1966-69.
In 1969 when the FYP was resumed the objective of economic growth and self reliance was not given up. But the main emphasis got shifted from heavy industry to quick yielding projects and small scale industry. Similarly creation of infrastructure including roads was given priority. For development of agricultural sector high yielding varieties (HYV) of seeds and chemical fertilizer were given priority as compared to community development.
The Fourth FYP set before itself two principal objectives: rapid growth in gross domestic product
(GDP) and progressive achievement of self-reliance.
The Fifth FYP (1974-79) was introduced at a time when India was in deep economic crisis due to global hike in crude oil prices. Since the planners were interested in the slogan of 'garibi hatao' and attainment of self-reliance it was envisaged to achieve these objectives through better distribution of income, higher rates of growth & by direct attack on the problem of unemployment, underemployment and acute poverty.
The Fifth Plan was terminated by the new Janata Party government one year before its completion and the Sixth FYP was adopted. In fact, India had two Sixth FYPs practically (1978-83 and 1980-85). The Sixth FYP adopted by the Janata Party (1978-83) was discarded in 1980 with the change in government at the center. The Sixth Plan (1978-83) admired the achievements of earlier
Plans in India but criticized the Nehru-Mahalanobis growth strategy holding it responsible for unemployment, growing poverty, concentration of economic power in the hands of few and widening of income and wealth inequalities. The focus of the Sixth Plan (1978-83) was increasing the employment potential in agriculture and allied activities, was introduced by the congress government, planners rejected the approach of Janata Party and brought back the earlier model of growth. In order to tackle the problem of poverty there was direct attack on poverty by adopting programmes like Integrated Rural Development Programme (IRDP) and National Rural Employment Programme (NREP).
The Seventh FYP (1985-1990) was introduced with a change in the development strategy. It was envisaged to bring down the rate of population growth because the gains of growth often got neutralized by fairly high growth rates of population.There were four basic elements that signify a change in the strategy in this Plan. First, it gave importance to higher agricultural production by relying more on new technology. Second, it undermined the role of public sector and induced promotion of private sector through industrial deregulation. Third, with liberalization of imports,
it aimed at raising efficiency in the manufacturing sector. Fourth, necessary changes in
industrial and export-import policies were made so that the role of the state changes from a
regulatory to facilitatory authorities.
The Eighth (1992-97), Ninth (1997-02) & Tenth(2002-07) are guided by the measures of
improving the performance and increasing the efficiency of the economy. The focus in these FYPs is different compared to earlier Plans, where people are not mere beneficiaries of development; they are active participants in the development process. Unlike earlier Plans where a centralized approach is followed, the Plans after 1990 have stressed more on decentralized and participatory approach of development.
Eleventh (2007-12) envisions an economy and provides for an opportunity to restructure existing policies with inclusive growth. It aimed at putting the economy on a sustainable grow the trajectory with as growth rate of the per cent. The key element of the strategy for inclusive growth is to provide access to basic facilities such as health, education, clean drinking water.
Q. 1) Which sector got the highest priority during the First and Second Five Year
Plans?
a) Transport and communication
b) Industry
c) Irrigation and Flood Control
A. b) Industry
Q. Third Five Year plan gave priority to which sector?
a) Transport and Communication
b) Power
c) Village and Small Scale Industries
A. b) Power
Q. Seventh Plan onwards, which sector got prominence by a sizeable percentage
of resource allocation?
a) Energy
b) Transport, industry and minerals
c) Agriculture and Allied services
A. a) Energy
Q. What were the basic features of the Second Five-Year Plan Strategy?
A. The Second Five Year Plan, launched in 1956-57, was part of a general strategy of development. The framework of the Second Five-Year Plan, with minor modifications, remained the mainstay of all future plans and policies till the beginning of the 1990s. Heavy industry, import substitution and placing of key industries with the public sector were the key features of the Second Five Year Plan.
The architect of the Second Five Year Plan was P. C. Mahalanobis. The central idea behind the Second Five Year Plan was that to raise the standard of living of the people, the economy needed to grow very fast. And for the economy to grow very fast, the planners felt that industrialization was the key. Industrialization meant that plants and machinery had to be set up which produce output. The Second Five Year Plan stressed the production of those machines that produce other machines as output. These industries where machines produce other machines and equipment are called heavy industry. Thus the basic idea was that the productive capacity of the economy itself had to be increased. Consumer goods, being goods that are used up for consumption,do not increase productive capacity. So the argument was that while those machines that produce cars or shirts or watches are important, even more important are the machines that would produce the machines that would produce cars or shirts or watches. Heavy industry was thus one of the central features of the Second Plan. The other key idea 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 colonized nation and subsequent mistrust of foreign trade. Since the planners relied on heavy industry, it was recognized that huge investments would be required. The policymakers felt that the private sector would neither be willing nor able to make these huge investments. Hence these heavy industries, infrastructure like power, and areas of strategic interests like Defence production were kept with the Public sector.
Q. Discuss some broad sources of the thinking that went into formulating a strategy for development immediately after Independence.
A. National leader, 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, industrialization is a must. And to industrialize rapidly, the process must be organized and planned. Similarly, the so called Bombay Plan (1944) by a group of industrialists also emphasized industrialization. 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.
Q. Describe some fundamenti1 instruments of controls in the economy which were in operation in the period 1951-9 1.
A. Industries in the private sector were regulated by the provisions of the Industries (Regulation and Development) Act, 1951. 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. The government kept with itself key infrastructure, 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. In the external sector, there was the exchange control system under which exporters had to surrender export earnings to the Reserve Bank of India at the official exchange rate and take earnings in domestic currency. There was import licensing under which a firm had to obtain permission to import raw materials or capital inputs or consumer goods. 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. There were several types of control that were put in place: industrial licensing system; exchange control system; import licensing; capital issues control price controls; and other ad-hoc measures and controls for 'priority sectors'. After nationalization, banks were subjected to directed and selective credit controls, controls on deposit and lending rates, and various types of reserve requirements.
Q. Describe the.performance of the agricultural and industrial sectors in India in the period since Independence till the end of the 1980s.
A. Agriculture - Agricultural Production as a whole has grown at a fairly constant rate of 2.6 percent per annum over the period 1951 - 1990. In the 1950s, much of the increased production came through the expansion of cultivated area. Later on, the scope for bringing in additional area under cultivation decreased. Then in the mid- 1960s the New Agricultural Strategy, popularly known as the 'Green Revolution', was launched. This entailed the use of four complementary inputs
i) High Yielding Variety (HYV) seeds,
ii) chemical fertilizers,
iii) machineries such as tractors and harvester-threshers, and
iv) irrigated water facilities.
India achieved self-sufficiency in food grains during the mid-1970s, that is India no longer resorts to massive imports of food grains but sustained use of high yielding seeds and intensive cultivation has led to deteriorating soil fertility. Ground-water has been over exploited, so that there is a depletion in water-table.
Industry - The share of manufacturing in the country's GDP increased six-fold between the 1951-55 and 1 985-90. Growth in manufacturing was faster in the first three plans than during the late 1960s and 1970s. The late 1980s saw a revival of industrial growth. Over the period 195 1-90 medium and large industry grew faster than small and cottage industries. Also within the small sector, household type industries sing traditional techniques declined sharply. In 1950 about 65 per cent of industrial output consisted of consumer goods, about 25 per cent was intermediate goods and the rest capital goods. By the late 1980s, the three categories had roughly equal shares in factory sector output. Another characteristic of Indian industry has been the rise in indigenous enterprise and the emergence of several new centers of manufacturing.
Q. Discuss the concept of economic reforms.
A. Economic reform means certain necessary changes in economy are undertaken to
improve the performance of economy and strengthen it with such measures.
In country like India with its 'mixed economy’, with a large private sector, but with pervasive
state presence in the economy, and a host of controls and regulations economic reforms
were initiated. 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.
Q. What was the rationale for the economic reforms which were launched in India in 1991 And describe some measures taken for reforms in the domestic sector of the economy since 1991.
A. In June 1991, foreign exchange balance was down to $ 1 billion, which was just enough
to pay for six weeks' imports. The economy was in a severe balance-of-payments crisis. At the same time, there was a severe fiscal crisis. Although the economy had grown by over 5 per cent per annum in the second half of the 1980s - this rate of growth was higher than in previous time-periods - this growth was achieved at the cost of considerable fiscal extravagance and wastefulness. In order to tackle the crisis, India had to approach the International Monetary Fund (IMF) and the World Bank for loans. In return, the IMF and the World Bank suggested certain structural adjustments such as reduction in fiscal deficit, devaluation of currency and opening up of the economy. Under the Structural Adjustment scheme , the World Bank suggested reforms which called for changes in the basic structure of the economy. It necessitated replacement of quantitative restrictions and resource
allocation processes with market-based price signals and incentives. The overall objective
conditionalities was of IMF to bring in Macroeconomic Stabilization, which required reduction in fiscal deficits (broadly, the difference between government expenditure and revenues) and balance of payments deficit (the difference between payments made to foreign countries and earnings from foreign countries). We now discuss some measures towards domestic liberalization adopted in India since 1991. In July and August 1991, the government announced a new Trade Policy (here 'trade' means foreign trade). On 24'" July 1 99 1, the government made a statement on Industrial Policy.
The 1991 reform did away with industrial licensing, except for a few industries for location-related reasons or for environmental considerations. The reforms also removed the requirement of import Licenses, except for most consumer goods. Restrictions were eased for foreign direct investment ad portfolio investment (investment in financial markets). Sectors where private (both domestic and foreign) investments were earlier prohibited, such as power, saw private investments being allowed. Steps were taken for disinvestment of equity in public sector enterprises (called privatization).
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