Indian Economy 1950-1966

Venkatesh Athreya
 Phases of India’s Economic Growth
Since Independence
PHASE I: 1950-1966
• Rapid growth led by public sector investments and
import substitution.
• Incomplete land reforms
• Stagnant exports and rising imports
• Poor resource mobilization

Three-fold Crisis of 1965-66: Food, Foreign

Exchange and Rupee Resources
 State of Economy1950
Composition of GDP
Sector Shares in GDP
Modern large scale industry 7 %,
Small industry 10%,
Agriculture 49 %,
Services and Construction 34 %
 State of Economy1950
• Employment 1951, Sectoral Shares

Factories and Mines 2.5 %

Small Enterprises 7%

Agriculture 71.8 %

Services etc. 18.7 %

Finance and Industry Policies 1950-1966

• 1948 and 1956 IPRs: Public Sector to build

infrastructure

• Long term development finance from DFIs: IDBI,

IFCI, ICICI, LIC, UTI

• Foreign collaboration and finance

• Subtle Shifts in IPR 1956 from IPR 1948

Industrial Policies: IPR 1948 and IPR 1956

• Focus on continuous increase in production by

all possible means
• A progressively active role for the State in the
development of industries
• Private enterprise has a valuable role to play
• Arms and ammunition, Atomic energy, Railway
transport exclusive monopoly of the Central
Government.
• New enterprises in Coal, Iron and Steel, Aircraft,
Shipbuilding, Telecom and Mineral oils to be in
public sector
Industrial Policies: IPR 1948 and IPR 1956

• Foreign capital to be carefully regulated in the

national interest
• Major interest in ownership, and effective
control, should always be in Indian hands
• Training of suitable Indian personnel for
eventually replacing foreign experts to be
insisted upon.
• The tariff policy to prevent unfair foreign
competition and to promote the utilisation of
India’s resources without imposing unjustifiable
burden on the consumer.
 Agricultural Policies
• Limited Land Reforms: Abolition of absentee
landlordism, Tenancy Reforms and Land
Ceilings- Uneven implementation
• Major State Investments in irrigation, rural
transport, electrification and communication
• No major changes in agrarian structure but
some limited changes in operation of credit,
labour and lease markets
Rates of Growth of GDP,% per annum

Sector 1900-1947 1950-1965

Primary 0.4 2.6

Secondary 1.5 6.8

Tertiary 1.7 4.5

GDP 0.9 4.0

Industrial Growth and Structural Change,
1950-1966

• Industrial growth 7 % per annum

• Gr rate of factory employment 1.7%. 3.9 % and

5.8% per annum resp. in the first three plans

• IIP(1956=100): 1951- 73.5, 1966- 192.6

• Significant Structural Change: Growth of Capital

Goods Sector and Infrastructure Industries
 Annual Agricultural Growth
Rates(%), 1951-1965
Item Area Output Yield Per capita
output Index

Non-foodgrain 2.4 3.3 0.9 1.2

Foodgrain 1.5 3.1 1.5 1.0

 Agriculture 1950-1965
1950-51 1966-67
Land Utilisation
(Million Hectares)

Net Sown Area (NSA) 118.7 137.2

Net Irrigated Area (NIA) 20.9 26.9

 The Second phase of Indian
Development 1966-1980

Three-fold nature of the crisis of 1965- 66: Food, Foreign

Exchange and Rupee resources

Responses to the crisis:

Cutback in public investment
Devaluation of the rupee
A new agricultural strategy

•Overall assessment: Relative stagnation

 The Second Phase 1966-1980
• ‘Plan Holiday’, 1966-69

• Cutback in public investment as response to the

resources crisis

• Impact of cutback on industry and economic growth:

The Long Recession

• Some recovery in Industry, post 1975-76, with growth

in consumer durables
 The Second Phase 1966-1980

• Devaluation as a response to the balance of

payments crisis: the underlying logic

• Inflation as the consequence of devaluation

• Sharp rise in the prices of essentials

• Political consequences in 1967

 The Second Phase 1966-1980
• Response to the foodgrain crisis: The Green
Revolution, officially the New Agricultural
Strategy or NAS.
• Basic Elements of NAS:
 Technology: HYV seeds, chemical fertilisers and
pesticides; water management; mechanization.
 Policies: Procurement, Credit, Subsidies,
Extension, Research, PDS
 Green Revolution
• Breakthrough in yield levels of rice and
wheat, using HYVs
• Technology package included HYVs,
chemical fertilisers, pesticides
• Realisation of high yields required assured
irrigation and careful observance of
recommended cultivation practices
 Green Revolution
• Requirement of assured irrigation limited the
reach of the new technology and its benefits
both in terms of area under cultivation and
across farmers with different endowments.
• The higher yields related mostly to rice and
wheat, and did not extend to most other grain
crops to begin with.
• Likewise, increases in rice and wheat production
occurred in a regionally concentrated manner
 TRIENNIAL AVERAGE FOODGRAINS OUTPUT BY
GROUPS OF STATES, 1974-1985 (000 TONS)

Period Gp I Gp II Gp III All-India

1974-75 to
1976-77 31,818.0 41,331.6 37,526.1 110,675.8

1977-78 to
1979-80 37,138.6 43,882.9 41,648.3 122,669.7

1980-81 to
1982-83 44,608.8 46,233.2 39,958.7 130,800.7

1983-84 to
1985-86 53,242.7 47,868.8 48,349.1 149,460.6

Group I: Punjab, Haryana, U.P.

Group II: Gujarat, Rajasthan, Maharashtra, Andhra Pradesh,Karnataka, Kerala,
Tamilnadu.
Group III: All-India less Groups I and II.
 Percentage Share in Total Foodgrains Output

Gp I Gp II Gp III All India

1974-74 to
1976-77 28.75 37.34 33.91 100.0
1977-78 to
1979-80 30.28 35.77 33.95 100.0
1980-81 to
1982-83 34.10 35.35 30.51 100.0
1983-84 to
1985-86 35.62 32.03 32.35 100.0

Group I: Punjab, Haryana, U.P.

Group II: Gujarat, Rajasthan, Maharashtra, Andhra Pradesh,Karnataka,

Kerala, Tamilnadu.

Group III: All-India less Groups I and II.

 The Second Phase 1966-1980
• Political Consequences of the Crisis: The
Results of the Elections of 1967
• Split in the Congress and a ‘Left’ turn
• Bank Nationalization and Abolition of Privy
Purses
• Mrs Gandhi consolidates: 1971
Bangladesh War and India’s Fifth General
Elections
 The Second Phase 1966-1980
• Inflation and attempted wage freeze 72-73

• Oil Price Rise 1973: The First Oil Shock

• Further Inflation and Political Unrest 1974

• Internal Emergency 1975-77

 The Second Phase 1966-1980
• Fifth Plan 1974-79: Discussion on growth
with redistribution
• With emergency, prominence to (Mrs
Gandhi’s) 20-point and Sanjay Gandhi’s
(five-point) programmes
• Shift towards liberalisation
• 1977 Elections: Defeat of Emergency
regime and first coalition government at
the Centre
 The Second Phase 1966-1980
• Janata Government’s Rolling Plan

• Second Oil Shock 1978

• The severe crisis of 1979-80: Agriculture,

Inflation and BoP

• The return of Mrs Gandhi 1979-80

 Indian Economy in the 1980s

• Shift to Externally Oriented Policies with IMF

Loan

• New Economic Policies 1985-90

• Growth through loan-financed government

expenditure
 Indian Economy in the 1980s

• Stimulus to demand primarily through increased

government expenditure

• Such increases financed primarily through

borrowing

• Result: Increasing deficit levels and rising interest

payments
 Indian Economy in the 1980s

YEAR Revenue Deficit

Rs Crores

1980-81 1715

1988-89 10515

1989-90 12436

1990-91 (RE) 17,585

 Indian Economy in the 1980s

Some Fiscal Ratios of Government of India ( % GDP)

ITEM 1980-85 1985-90

Revenue Deficit 1.02 2.37

Fiscal Deficit 5.75 7.55

Interest Payments 1.70 2.83

Capital Expenditure 6.47 6.78

Tax Revenue 9.92 11.18

 Indian Economy in the 1980s

Year Budget Fiscal Public Sector

Deficit Deficit Investment minus Saving

80-81 2.5 9.0 6.9

81-82 1.6 8.4 6.5
82-83 1.3 9.5 7.1
83-84 1.0 9.6 7.3
84-85 2.2 11.2 8.7
85-86 1.3 10.4 8.6
86-87 3.1 12.3 9.4
87-88 1.7 11.6 8.5
88-89 1.3 11.2 8.9
89-90
(RE) 2.7 12.8 9.0
 Indian Economy in the 1980s

• Import liberalization, especially for capital goods to

cater to domestic elite consumption demand

• Increasing imports financed by external borrowing,

not increased exports

• Increased current account deficits despite large

remittances by Indian workers abroad

• Rising external debt and debt service obligations,

especially as commercial borrowing increases
 Indian Economy in the 1980s:
External Debt
1980 1990

• Total External Debt 20 82

(US$billion)

• Debt to private
individuals and banks 2 22
(US$billion)

• Debt Service Ratio 9% 33%

(per cent)
 Indian Economy in the 1980s: Sectoral
Performance
• Agriculture did well, growing at nearly 4 % per
annum compound between 1980-81 ad 1990-91
(Wheat 4.38 %, Rice 3.84 %)

• The Index of Industrial Production grew at 7.8 % per

annum between 1980-81 and 1989-90

• The share of the Services sector in GDP rose from

36 in 1980-81 to 39.1 % in 1990-91
 Indian Economy in the 1980s: Sectoral
Performance
Growth-rates in the Index of Manufacturing Industrial production

Compound Annual Growth Rate,

PERIOD per cent

1951 -65 7.80

1965 -70 3.30

1970-71 to 1980-81 4.05

1980-81 to 84-85 5.70

1984-85 to 89-90 8.80

Source: Economic Survey and Report on Currency and Finance, Various Issues
 Some Lessons of the 1980s
• Growth depended on fiscal stimulus, not export
expansion

• Expenditure financed by borrowing leads to

inflation/current account deficit

• Controlling inflation through imports implies

widening trade deficits

• Trade deficits will be wider still with import

liberalization and import-intensive
consumption,leading to larger volumes of external
borrowing and eventual BOP crisis
 Indian Economy in the 1980s
• If fiscal deficits had been curbed to lower inflation,
demand constraints and import liberalization
together would have led to low industrial growth
rates

• If imports had been constrained to limit current

account deficits, inflation would have been higher as
government expenditure increased through
borrowing and deficit financing
 The Fund-Bank View

• Excessive govt. presence, as regulator and

participant, stifling private initiative

• Excessive govt. spending and high fiscal

deficits

• Inadequate liberalization
 Indian Economy in the 1980s

Exports and Imports, 70s and 80s, in US dollar terms

Period Average annual rate of growth, %

Exports Imports

1971-80 15.6 23.7

1981-90 8.3 4.5