Ramesh Singh Summary: Evolution of the Indian Economy | Indian Economy for UPSC CSE PDF Download

The Background

• India's economy at Independence was deeply troubled, having served primarily the interests of the United Kingdom during colonial rule.
• Agriculture and industry faced structural issues, with minimal state involvement.
• The colonial state focused on exporting primary products from India and importing British goods, neglecting India's development.
• Social sectors like education were ignored, leading to a predominantly illiterate population with low life expectancy.
• Industrialization was hindered, with infrastructure serving raw material exploitation rather than industrial growth.
• The economy showed near stagnation with minimal growth in production or productivity.

Economic Performance Under British Rule

• India saw very low economic performance under British colonial rule.
• Per capita growth was almost non-existent from 1600 to 1870 and remained meager until Independence.
• Repeated famines and epidemics reflected socio-economic neglect by the British government.

Economic Vision at Independence

• Political leaders and industrialists post-Independence aimed for a strategic economic transformation.
• Consensus existed on key issues like state responsibility for development, public sector importance, heavy industry promotion, and economic planning.
• The government faced the daunting task of organizing the economy amidst challenges and nationalist expectations.
• Strategic decisions taken post-Independence heavily influenced India's economic trajectory.

Challenges and Economic Transformation

• Post-Independence, India faced the challenge of steering economic growth amidst a challenging landscape.
• Decisions made by political leaders post-Independence significantly shaped India's economic future.
• Key decisions taken by 1956 had a lasting impact on India's economic journey.
• The evolution of the Indian economy necessitates a deep understanding of its historical development.

Prime Moving Force: Agriculture vs. Industry

A significant debate in India revolves around choosing the sector that would spearhead its developmental process. Historically, the Indian government favored industry as the primary driving force of the economy. However, the question of whether agriculture would have been a better choice for fostering development continues to be a topic of heated discussion among experts.

• Every economy has to go for its development through exploitation of its natural and human resources. There are priorities of objectives set by the economy which is attempted to be realised in a proper time frame.
• The availability and non-availability of resources are not the only issues which make an economy decide whether to opts for agriculture or industry as its prime moving force.
• There are many more socio-political compulsions and objectives which play their roles in such decision making.
• Given the available resource base it seems an illogical decision as India lacked all those prerequisites which could suggest the declaration of industry as its prime mover:

Almost no presence of infrastructure sector, i.e., power, transportation and communication. Negligible presence of the infrastructure industries, i.e., iron and steel, cement, coal, crude oil, oil refining and electricity.
(i) Lack of investible capital—either by the government or the
(ii) Absence of required technology to support the process of industrialisation and no research and development.
(iii) Lack of skilled manpower.
(iv) Absence of entrepreneurship among the people
(v) Absence of a market for industrial goods.
(vi) Many other socio-psychological factors which acted as negative forces for the proper industrialisation of the economy.

Given India's natural endowments and historical context, the agriculture sector appeared to be the obvious choice as the prime moving force (PMF) of the economy for several reasons:

1. Natural Resources: India possessed fertile land suitable for extensive cultivation.
2. Human Capital: The workforce required for agriculture did not need advanced training or education.

However, the economic trajectory of independent India was significantly influenced by the visionary leadership of Jawaharlal Nehru. This influence is so profound that the economic strategies of the time are often referred to as Nehruvian Economics. Despite the natural inclination towards agriculture, several factors led to a focus on industrialization:

1. Global Ideology: The dominant global ideology, supported by institutions like the World Bank and the International Monetary Fund, favored industrialization as a path to rapid economic growth and development.
2. Defense Needs: The experience of World War II highlighted the importance of defense power, which relies on a robust industrial base alongside advancements in science and technology. India needed a strong industrial base to ensure national security and act as a deterrent.
3. Modernization and Social Change: Prior to independence, there was a consensus among social scientists and nationalist leaders that India required significant social change and modernization. Industrialization was seen as a key driver of this transformation.
4. Proven Efficacy: By the time India gained independence, the success of industrialization in fostering economic growth was well established globally.

The Planning Commission of India believed that a policy focused on industrialization would address three major economic challenges:

1. Food Security: Increasing agricultural production would ensure food security. Agricultural surplus could be exported, benefiting India in the globalizing world economy under the World Trade Organization (WTO) regime.
2. Poverty Alleviation: Emphasizing agriculture could turn it into a higher income-generating sector, thereby fostering growth in the rural economy and creating gainful employment opportunities.
3. Market Failure: The industrialization strategy aimed to address India's market failures by creating a more diversified and resilient economy.

In summary, while agriculture was a logical choice given India's natural resources and labor force, the global emphasis on industrialization, coupled with the need for modernization, defense, and poverty alleviation, led to a focus on developing a strong industrial base under the guidance of Nehruvian economic principles.

Planned and Mixed Economy

Upon gaining independence, India was declared a planned and mixed economy, a concept recognized by political leaders well before independence. The country faced significant regional and inter-regional disparities in resources, leading to widespread poverty. Economic planning was thus seen as a crucial tool to address these disparities and promote equitable growth and development.

Key aspects of India's economic planning included:

1. Resource Allocation and Mobilization: The government aimed to actively allocate and mobilize resources to alleviate the prevalent mass poverty and promote equitable growth.
2. Centralized Authority: Although India was constitutionally a federation of states, the planning process centralized economic regulatory authority within the Union government. This centralization was deemed necessary to effectively direct and undertake economic activities.
3. Global Influences: India's choice for a planned economy was influenced by global events such as:
   • The Great Depression of 1929, which highlighted the failures of unregulated markets.
   • Post-World War II reconstruction challenges.
   • The success of command economies in the Soviet Union and Eastern European countries.
4. State Role in Economy: During the 1950s and 1960s, there was a global consensus among policymakers that significant state intervention was necessary to address market failures, a notion reinforced by the experiences of the Great Depression.
5. Necessity for Economic Planning: For newly independent developing nations like India, economic planning was essential to effectively mobilize resources and achieve specific developmental goals within defined timeframes.

In India, the decision to adopt a planned economy required clarity on its nature—whether it would be a state economy or a mixed economy, as planning was incompatible with a free market system. Jawaharlal Nehru, with his strong socialist inclinations, played a pivotal role in shaping India's post-independence planning initiatives. His vision aimed to define the state's role in the economy clearly.

The initial plans by Indian planners outlined the respective roles of the state and the market in the economy, emphasizing the government's responsibilities relative to the private sector. This delineation aimed to propel economic growth and ensure that the planning process addressed the country's socio-economic challenges effectively.

Techniques of Planning and Public Sector Expansion

• The concept of planning involves nationalization of production means and extensive government control over resource allocation and distribution of goods.
• Planning ideally should minimize coercion and rely on a combination of public and private sector efforts for economic realignment.
• Public resources should be primarily used for new investments rather than acquiring existing productive capacities.

Evolution of Economic Planning in India

• The 1950s and 1960s witnessed a global trend favoring state intervention in economies, which was later challenged by the East Asian Miracle.
• India's economic model evolved from a mixed economy concept in the 1950s to a more market-oriented approach by the 1990s.

The Shift from Planning Commission to NITI Aayog

• In early 2015, India replaced the Planning Commission with NITI Aayog, aiming to revamp the planning process based on six decades of development planning experiences.
• The new approach emphasizes co-operative federalism, holistic development, and an indigenous model of growth.

Atmanirbharta Push

Self-reliance has always been a core objective of India's planning efforts. In response to the COVID-19 pandemic, the government announced a renewed push for self-reliance in 2020-21 with the launch of the Atmanirbhar Bharat Abhiyan (Self-Reliant India Campaign). This initiative aims to achieve self-reliance through five key pillars: Economy, Infrastructure, System, Vibrant Demography, and Demand. Notably, this is the first time the government has defined clear pillars to guide this objective.

The Five Pillars of Atmanirbhar Bharat Abhiyan

1. Economy: Revitalizing and transforming the economic landscape to ensure robust and sustainable growth.
2. Infrastructure: Developing modern infrastructure that meets current needs and anticipates future demands.
3. System: Implementing a technology-driven system to enhance efficiency and productivity.
4. Vibrant Demography: Leveraging India’s demographic advantage to fuel economic development.
5. Demand: Boosting domestic demand through a variety of measures to stimulate the economy.

Criticism and Support

• Criticism: Some critics have expressed reservations, likening the Abhiyan to the previous "Make in India" initiative, suggesting it might face similar challenges and limitations.
• Support: Other experts view the Abhiyan in the context of the vulnerabilities exposed by the pandemic in global supply chains. They argue that the initiative represents India's effort to redesign its economic future, emphasizing resilience, environmental sustainability, and economic diplomacy.

Broader Implications

The Atmanirbhar Bharat Abhiyan reflects India's strategic shift towards greater self-reliance and resilience, aiming to reduce dependency on global supply chains and fortify its economic position. This initiative also highlights India's commitment to sustainable development and adapting to potential future disruptions.

Emphasis on the Public Sector 

• At the time of India's independence, it was firmly established that the state would play a dominant and proactive role in the economy. This led to the creation of government-controlled enterprises known as Public Sector Undertakings (PSUs).
• Despite criticisms, there were valid reasons for the significant investments in PSUs. These reasons ranged from natural necessities to consequential factors.
• PSUs were set ambitious objectives that were crucial for maintaining a mixed economy. It is essential to conduct an impartial analysis of their roles in the Indian economy amidst ongoing debates about privatization.

1. Infrastructural Needs

• Every type of economy, whether agrarian, industrial, or post-industrial, requires adequate infrastructure such as power, transportation, and communication to grow and develop.
• India, at the time of Independence, lacked sufficient infrastructure in these critical areas. The private sector was unable to address this gap due to the immense capital, technology, skilled manpower, and entrepreneurship required.
• The private sector also faced challenges in creating a market for such infrastructure, which was essential but not financially viable for private entities.
• Given these circumstances, the responsibility for developing and managing the infrastructure sector fell on the government. Government intervention was necessary as the masses did not have the purchasing power to support these essential services at market rates.
• Key sectors like power, railways, aviation, and telecommunication ended up with significant government involvement, often resulting in government monopolies due to the necessity of state support.

• India focused on the industrial sector for development, necessitating investment in key industries like Refinery products, Electricity, Steel, Coal, Crude Oil, Natural Gas, Cement, and Fertilisers.
• These industries collectively accounted for 40.27% in the Index of Industrial Production.
• Basic industries required significant capital, technology, skilled labor, and entrepreneurial coordination, which the private sector found challenging to manage.
• The government took up the responsibility of developing basic industries due to inadequate private sector capacity.

• PSUs played a crucial role in employment generation as part of a broader poverty alleviation strategy.
• Employing the workforce was essential for social and economic development, considering the increasing population and poverty issues.
• The government aimed to bring social change by providing jobs, especially to marginalized sections through reservations in government jobs.
• Setting up capital-intensive PSUs required substantial funds acquired through various means like taxation, borrowing, and currency issuance.
• PSUs were envisioned as drivers of the "trickle-down effect," where benefits would reach the masses and stimulate overall growth.
• The government's focus on PSU-led employment generation sometimes led to an oversupply of labor, impacting profitability due to high labor costs.

• The government's investment in Public Sector Units (PSUs) aimed at asset creation and production activities, leading to control over profits and dividends.
• PSUs were intended to provide goods and services, generating disposable income for the government to invest in social goods like education, healthcare, and social security.
• However, due to various factors, many PSUs struggled to generate sufficient profits, impacting the development of the social sector and availability of public goods.

• As PSUs focused on infrastructure and basic industries, a foundation for private sector growth was laid, completing the industrialization process.
• While PSUs were envisioned to fulfill various roles, the rise of the private sector was a significant outcome, marking a shift in the country's industrial landscape.
• PSUs were assigned roles beyond profit-making, including promoting self-sufficiency, balanced regional development, and supporting small industries.
• They played a crucial role in the country's growth, although by the mid-1980s, concerns about inefficiency arose globally.
• This led to a wave of privatization and disinvestment of PSUs, aligning with neo-liberal economic policies advocated by international bodies like the IMF and World Bank.
• India, following this trend, initiated a series of disinvestment policies, with varying degrees of privatization, aiming to enhance efficiency and promote investment.