At the time of independence one of the major concerns for our leaders was to choose the economic system which would best suit the nation. Then Prime Minister Jawaharlal Nehru chose socialism over capitalism, as he considered state has to play a bigger role for country’s development. Unlike socialism followed in USSR, in which state had a control over every enterprise and farm, Nehru was in favor of mixed economy with major stake held by the govt. The other reason was India as a democratic country had to oblige the freedom of its citizens as well.
To build an efficient economic system, it needed an effective planning. So in 1950 govt. introduced its first five year plan, this plan (and plans that followed) were meant to create strategies and tactics to handle the resources of the nation at utmost level over the period of five years. There were four main objectives, first was Growth, which was related to increase in the capacity of goods and services produced in the country, the best way to measure it was through GDP (which is the total value of final goods and services produced in a nation). Second was Modernization, India had a terrible industrial sector due to British policies which had turned it into a mere exporter of raw materials, even the tools used by farmers were quite old and out of date, modernization also symbolizes the advancement in social structure other than technology like equal opportunities for women. Third was Self-Reliance, to reduce the dependence on other developed countries and be a master of its own destiny. India had to borrow from other countries at different occasions, whether it was for food or money, five year plans objective was to reduce this dependency and make India more independent. Fourth was Equity, based on “what was the use if the country had a high GDP and latest technology but the opportunities and success is not equally distributed among its people”, Planning Commission recommended a growth without equity is useless.
At the time of independence nearly 75% of our population was dependent on agriculture, worst the land was unequally distributed, and poor farmers had to work under zamindars who gave them less wages. To stop this kind of practice govt. introduced land reforms which distributed land ownership among small farmers and tillers. This was seen as a profitable step as ownership of land was directly related to incentives. A farmer would work harder in his land as the profit reaped from it would benefit him directly than working in some other farm as a laborer.
Land sealing was another step to reduce big farmers from holding huge stakes, it helped to create more land for the poor and needy farmers. Though the system had its own loop holes and big farmers and zamindars took full advantage of it, for instance many divided their land and transferred it to close relatives to manipulate the law of land sealing, some forcibly over took the land from poor farmers taking advantage of their helpless situations while others filed cases in court delaying the complete procedure. Though there were some states like West Bengal and Kerala, that did exceptionally well in implementing these laws.
In spite of these drawbacks, there were some initiatives taken by the govt. that proved quite fruitful. One such initiative was Green Revolution, which meant introduction of High Yielding Variety (HYV) seeds which would produce more crops in the same land than traditional crops and as a result increase the profit for farmers. But Green Revolution came with its own conditions like excessive irrigation facilities than normal, pesticides availability, etc. Due to such demands it was first implemented in the states where these needs could easily be fulfilled and later was introduced in the whole nation.
Green Revolution came with high investments as it was not a cheap seed to buy and the maintenance it demanded at farms further added up the cost. To protect poor farmers’ interest govt. launched subsidy, a scheme through which farmers could buy and maintain at a low cost as the govt. would bear the remaining price. This was done so that green revolution benefits couldn’t get restricted to big and rich farmers alone.
Though the concept of ‘subsidy’ didn’t come without its criticism, there is a school of experts which believe subsidy (or subsidies) leads to exploitation of resources or under estimation by the people, for instance if the electricity is provided to the farmers free of cost then they would tend to over use it than required. Also, subsidy benefitted more of fertilizers and pesticides making companies who could sell their products at huge profits to govt. But, the other school believes subsidy is important to encourage people to buy the products and to protect the interest of the poor.
Industry and Trade
Indian industrialists at that time neither had enough capital to set-up privately held big enterprises nor was the market so lucrative, on the other hand govt. wanted a control of state in these enterprises as per the basis of social economy. Hence, all big enterprises which could drive the economy were run by the govt.
In 1956, govt. introduced Industrial Policy Resolution which was the basis of the second five year plan. It classified industries into three categories. First, in which industries would be owned by state, second, in which private companies could partly contribute with govt. (though only govt. has the authority to start a new units) and third in which private sector had full ownership.
Third category had full private ownership but it was brought under state control through licenses which meant to start or operate a new industry its owner must have official approval or permit from the govt. Even to diversify or expand the business one required the license. It was easy to obtain a license in remote and less developed states or cities in order to promote industrial sector in them. License system was introduced to restrict quantity of goods produced to the total quantity required by the people. This system had its own flaw as the licenses soon became the monopoly of rich and powerful and a hectic process for others, thanks to red-tapism.
Small scale industries were also promoted by the govt. in various ways. A certain quantity of goods was restricted for them in order to save them from big players. These were much labor intensive and only those were classified as small scale which comes under a certain cap.
Trade Policy: Import Substitution
For first seven months, Indian govt. focused hard on generating products made in the country than importing them from abroad. It was done to protect our industries and to save our foreign reserves from over spending. To curb imports govt. introduced tariff and quota. Tariff meant to give tax on imported products in order to make it more expensive and quota restricted the flow of quantity of goods in the country. Some say due to this measure Indian industries grew in a big way while others say that the govt. took a long time to get rid of this law and to introduce the concept of liberalization.
PS: The above context is based on a chapter from a book on Indian economy.