Indian Economy is now one of the largest economy of the world. We must know the real story of our economic growth from 1947 to till date. This journey of Indian economy can be divided into three phases.
First is from 1947 to 1964, which is also known as the Nehruvian Era. Next is from 1964 to 1990 and third is from 1991 to till date.
First Phase of India from 1947 to 1964
First of all, Phase 1, 1947 to 1964. As you know, 2000 years of exploitative colonialism made the backbone of Indian economy very weak. To rebuild it, PM Nehru and other leaders chose the mixed economy model. Mixed economy means an economy where both private and public sectors coexist. We can understand this by the economic model of US and USSR. US economy is a fully capitalist economy where private sector dominates.
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On the other hand, USSR’s economy was dominated by the public sector, which can also be called a socialist economy. Opposite to this, India chose an economic model where both public and private sectors coexist. Immediately after independence, India’s first industrial policy resolution was issued in April 1948. This policy forced production to increase and its equitable distribution. Along with that, the responsibility of industry development was handed over to the state. The first step towards the mixed economy was to outline the role of the public and private sectors in India.
The IPR divided the industries into four broad categories according to the role of the government and private parties. Under which arms and ammunition manufacturing, atomic energy, railway and transport were kept. Under which coal, iron and steel, ship building, aircraft manufacturing, telephone, telegraph, wireless and mineral oil industries were classified. These industries were very basic for the development of the economy and were kept under the central government.
But the existing private companies operating in these industries were given permission to continue operations for 10 years. And after 10 years, in exchange for fair compensation, the government was planning to takeover them. But this takeover never happened. After this, came the number 3, regulated industries. In this segment, automobiles, heavy machinery, chemicals, fertilisers, sugar, paper, cotton, cement and woollen textile industries were included.
These industries were important for the masses and for this reason, the government of India kept them under its regulation. After this, in the fourth category comes private industries, which were kept open for private players and cooperatives.
As you can understand, in this way, IPR 1948 laid the foundation for a mixed economy. Where private and public sector enterprises co-existed and accelerated the growth of the Indian economy.
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Economy and the 5 year plans
Now let’s talk about the 5 year plans. Friends, the planned economic development in India started in 1951 as the first 5 year plan. If we talk about economic planning, the Indian National Congress formed the National Planning Committee in 1938 under the presidency of Subhash Chandra Bose. But if we talk about the history of the 5 year plan, its origin was first started by Joseph Tallin in the late 1920s in the USSR. Which was adopted by India after independence.
To execute the 5 year plans, Jawaharlal Nehru’s cabinet set up the planning resources in 1950. The planning commission was the body on which the country’s resources were assessed and their most effective utilisation was the responsibility. Earlier, the 8 5 year plans were more focused on the growth of the basic and heavy industries. But with the 9th 5 year plan of 1997, the emphasis on the public sector was reduced.
Friends, now let’s understand the 5 year plans one by one.
What was in First 5 Year Plan 1951-1956
First, the first 5 year plan, 1951-1956. The first 5 year plan was based on the Harrod-Dorman model, whose main focus was agricultural development, price stability, power and transport. And for this, irrigation projects like Bhakra Dam and Hirakud Dam were launched. In this plan, India registered 3.6% against the target growth of 2.1%. Then in 1953, the first wave of nationalisation took place, in which Kalinga Airways was nationalised along with Tata Owned Air India. After the nationalisation of LIC, huge resources came under the control of the Indian state, whose misuse resulted in one of the biggest financial scandals of independent India, the Mundra scandal, which was exposed by PM Nehru’s son-in-law Firoz Gandhi in public. After which, Finance Minister T.T. Krishnamachari had to resign.
Second 5 year plan, 1956-1961.
Friends, the second 5 year plan is also called the Mahal Nobis plan and it was focused on Swadeshi or self-reliance. To strengthen economic independence, the government focused on basic heavy industries for the manufacturing of producer or capital goods. Along with this, the responsibilities of household sector, village and cottage industries were entrusted. Large machine building industry creation was expected as a basis for the expansion of secondary industries. And from decentralised cottage industries, job creation was expected with minimum social dislocation, Hydroelectric power projects, Bhilai Steel Power Plant, Durgapur Steel Plant and Raourkela Steel Plant were established during this period. Under this plan, coal production was increased and a new railway line was added. In the second 5 year plan, PC Mahal Nobis used the ideas of socialist investment inspired by USSR in the large public sector, in which heavy industries were prioritised over consumer goods and import substitution was promoted more than exports. These ideas of Mahal Nobis were continued in the third 5 year plans.
After independence, India faced the problem of high inflation due to post-war dislocation and partition. And the middle class held businessmen and merchants responsible for high inflation. Due to Mahal Nobis model, the shortage of consumer goods increased and inflation increased. Apart from this, due to economic inefficiencies and resource misallocation, these policies became an obstacle for growth. Mixed economy became the worst feature of socialism and capitalism.
Controls suppressed growth and mixed economy failed to deliver social justice and welfare. To address these problems, the government made some policy corrections and adapted new industrial policy 1956. Industrial policy revolution i.e. IPR 1956 In December 1954, Parliament accepted socialist pattern of society as the objective of social and economic policy. Industrial and other policies were to be governed on the basis of these principles and directions, which widened the scope of the public sector. Under this, 17 basic strategic importance industries like iron, steel and mining etc. were reserved for the public sector. The logic behind reserving these industries for the state was that only the state could provide the required huge scale of investment for these industries. In IPR 1956, industries were divided into three categories.
1. Schedule A 17 industrial areas like atomic energy, defence related industries, aircraft, iron and steel and electricity generation etc. were kept in the exclusive monopoly of the central government.
2. Schedule B 12 industrial areas like fertilisers, road, transport, sea transport etc. were included in Schedule B. New undertakings were to be established in Schedule C. Private players were also expected to be supplemented by the state.
3. Schedule C In Schedule C, remaining industries were opened for the private sector. In Schedule C, the scope was limited for the private sector due to which entrepreneurship and competition did not get enough push.
The industries which were open for the private sector were crippled due to stringent rules and licence raj. By the time the second IPR, i.e. Industrial Policy Resolution, could come into force in 1956, the third five-year plan was ready.
The third five-year plan ran from 1961 to 1966
The third five-year plan ran from 1961 to 1966. By the time of the conception of this plan, according to experts, the Indian economy was in the take-off stage. Due to this reason, the third five-year plan took a step towards a self-reliant and self-generating economy. In this plan, agriculture was the main focus to support the export industry. But due to the severe drought in 1962 Sino-India war, 1965 India-Pakistan war and 1965-1966, this plan could not achieve its target. Impressed by the economic model of the Soviet Union, India continued its focus towards heavy industries, which had to be paid by agriculture and light consumer industries.
The strategy of the first three five-year plans was that once the growth process was established, the institutional changes would trickle down the benefits of this growth to the lowest status of society. But contrary to this, during these five-year plans, the growth was so weak that an adequate surplus could not be generated, which was a prerequisite for the success of the trickle-down mechanism. The performance of the public sector could not pace up capital accumulation and could not reduce inequality. Due to the lack of enough support, agricultural growth was also constrained and the population continued to grow rapidly. These first three five-year plans did not fail completely, but were not even sufficient for India’s development. So friends, this was the story of the Nehruvian era from 1947 to 1967.
Post-Nehru era & Indian Economy
Now let’s look at the economic journey of the post-Nehru era. In the third five-year plan, the rupee was devalued to boost exports, but this was not very successful. And with this, the fourth five-year plan was postponed due to the recession in the economy. And from 1966 to 1969, this period was called the plan holiday, where three annual plans were introduced instead of one five-year plan.
Due to the prevailing agricultural crisis and severe food shortage, the main focus of this annual plan was agriculture. And at the same time, a new agricultural strategy was implemented, which focused on the widespread distribution of H5E seeds, extensive use of fertilisers and proper irrigation and soil conservation. Due to the monsoon failures of 1965 and 1966, agricultural growth remained stagnant and inflation reached 12%. And food prices increased by 20%.
In addition, due to the 1962 Sino-India war and 1965 IndiaPakistan war, the fiscal deficit of 1966-67 reached 7.3%. During the Indo-Pakistan war, the US suspended its food aid programme PL-488 and refused to renew this agreement. The US, World Bank and IMF wanted India to liberalise its economy, devalue the rupee and adopt a new agricultural policy. After which, the rupee was nominally devalued to 36.5% and Indira Gandhi carried out trade liberalisation in the mid-1960s.
But this liberalisation was already failing to tackle recession, inflation and export failures. Mainly, the major factors responsible for 1966-67 were major growth and policy failures. After 1967, a series of radical economic policies were launched which had a long-term effect on India’s economic development. In 1969, Monopoly and Restrictive Trade Practises Act i.e. MRTP was passed which severely restricted the trade practises of large business houses and such measures were passed which increased government control and intervention.
4th Five-Year Plan 1969-1974
4th Five-Year Plan 1969-1974 In the 4th Five-Year Plan, the growth target was set at 5.7% and India registered a growth rate of 3.3%. During the Indo-Pak war, the Allies did not supply essential equipment and raw materials so in the 4th Five-Year Plan, growth with stability and self-reliance were the main focus. To support the progress of other sectors, the main emphasis was given on agricultural growth. But this plan was considered as a failure. In 1969, PM Indira Gandhi nationalised the entire banking system and in 1972, LIC was nationalised. Apart from this, government control was also increased and the Foreign Exchange and Regulation Act of 1973 put numerous restrictions on the functioning of foreign investment and foreign companies which made India one of the most difficult destinations for foreign capital.
5th Five-Year Plan 1974-1979
5th Five-Year Plan 1974-1979 India registered a growth target of 4.4% against 4.8%. The draft of the 5th Five-Year Plan was prepared in the backdrop of the economic crisis by D.P. Dhar. Due to the increase in oil prices, the situation of runaway inflation developed in India due to which the situation of severe economic crisis arose. In the 5th Five-Year Plan, the removal of poverty and attainment of self-reliance were the two main objectives. Along with this, high rate of growth, better distribution of income and growth of domestic rate of savings were set as key instruments. In 1975, with the amendment of electricity supply, the central government entered the field of power generation and transmission. Apart from this, the Indian National Highway System was introduced and the Minimum Needs Programme was introduced in the first year of this plan which was prepared by D.P. Dhar.
In the 5th Five-Year Plan, India aimed for a growth target of 4.4% and registered an actual growth target of 4.8%. In 1978, Murarji Desai rejected the 5th Five-Year Plan and introduced the 6th Five-Year Plan in which employment generation was the main focus which was then rejected by the Indira Gandhi government.
Three types of plans were proposed in the 5th Five-Year Plan. In the first plan, the annual budget was included and the second plan was kept for a fixed number of years. This was changed according to the Indian economy and the third plan was curated with a long-term vision. The flexibility of the rolling plan was its biggest advantage and it overcame the rigidity of the previous five-year plans in which the projections and allocations were adjustable according to the changing needs of the economy. But this flexibility was also its biggest disadvantage because the targets were revised every year. Due to these frequent revisions, there was a lack of stability in the economy and this ultimately became a complex plan.
6th Five-Year Plan
The 6th Five-Year Plan was the first step towards economic liberalisation and it is considered to be the end of Nehruvian Socialism. The main focus of the 6th Five-Year Plan was to increase national income, modernisation of technology and continuous decrease in poverty and unemployment. Price control was eliminated and ration shops were closed due to which food prices increased and the cost of living also increased. In 1982, on the recommendation of the Shivaraman community, the National Bank for Agriculture and Rural Development i.e. NABARD was established for the development of rural areas and family planning was introduced to control overpopulation.
With the 6th Five-Year Plan, the Military Five-Year Plans Planning Commission was coterminated. In the 6th Five-Year Plan, the growth target was 5.2% and India registered a growth of 5.7% and this plan is considered to be a successful plan.
The 7th Five-Year Plan
The 7th Five-Year Plan was led by PM Rajiv Gandhi and this plan upgraded technology and stressed on improving the productivity level of industries. The main focus of this plan was to establish growth in economic productivity, generate employment through food grains production and social justice. Social justice, modern technology use, agricultural development, anti-poverty programmes, developing India as an independent economy, etc. were important thrust areas of the 7th Five-Year Plan. Apart from this, attaining self-sustained growth by 2000 was also one of the main focus areas of this plan.
The target of the 7th Five-Year Plan was 5% and India registered a growth of 6.01%. Due to economic instability, no Five-Year Plans were made during this period and instead, annual plans were made. Due to issues like political uncertainty, deteriorating balance of payment, increasing debt burden, widening budget deficits, recession and inflation, the 8th Five-Year Plan was postponed for 2 years. After the 1991 foreign exchange crisis, economic reforms were brought under the leadership of PM PV Narasimha Rao and Finance Minister Dr. Manmohan Singh. Let’s take a look at the liberalisation, privatisation and globalisation i.e. LPG reforms that came in 1991. Rajiv Gandhi made some marginal changes in the direction of liberalising the economy but issues like Licence Raj, MRTP Act, Nationalisation of Bank, Inward Looking Trade Policies and Import Substitution Industrialisation were still big hurdles for economic growth. In the second half of the 1980s, there was an enormous trade deficit due to which India had to do more short-term borrowing.
Till the early 1980s, the government did substantial borrowing to support various development programmes which led to weak macroeconomic growth as well as increased pressure on balance of payment. Not only this, due to the Kuwait invasion, oil prices and India’s import bill increased and declining exports gave rise to the Indian foreign exchange crisis. To save the weakening economy, the Government of India pledged 67 tonnes gold to the Union Bank of Switzerland and Bank of England and raised $600 million.
In June 1991, PM PV Narasimha Rao and Finance Minister Dr. Manmohan Singh introduced LPG reforms. The main motive of these reforms was to integrate the Indian economy with the global economy through trade, investment and technology flow and to create a business-friendly environment for Indian entrepreneurs. The modernisation of the industry was a major highlight of the 8th Plan. Due to LPG reforms, increasing foreign debt and deficit came under control. Meanwhile, on 1st January 1995, India became a member of the World Trade Organisation.
Now let’s see what changes LPG reforms introduced in the economy.
1. Fiscal Stabilisation The reduction of the central government’s fiscal deficit is a substantial precondition for economic growth and to ensure this, export subsidies were abolished.
2. Fertiliser subsidies were partially restructured.
3. Development expenditure was also restructured.
4. To end the Licence Raj, the Industrial Licencing MRTP Act was abolished and many critical industries were opened for private players. 5. MSME sector items were delicensed and the complex import control regime was dismantled.
6. New economic policy was highly supportive for foreign investment in a wide range of activities.
7. Rupee was further devalued by 24%
8. In March 1993, India shifted from a fixed exchange rate to a market-based exchange rate or floating exchange rate.
9. Rupee was made fully convertible in the current account but in the capital account, it remained partially convertible.
10. Tax reforms reduced the maximum marginal rate of personal income from 56% to 40% and reduced corporate tax from 51.75% to 46%.
11. Government retained 51% shares in PSUs and carried out limited disinvestments.
12. Banking sector was opened for private sector and several new banking licences were distributed.
13. Opposition parties, some experts and many industrialists were against the reforms of 1991.
14. But the impact of these reforms quickly became visible.
15. By 1995, along with economic growth, new industries also opened up
16. Entertainment like Star Plus also opened in India.
17. Because of Y2 phenomenon in India, software companies like Wipro and Infosys also emerged.
18. With technological change and communication revolution, BPO sector started in India.
19. Foreign companies like American Express opened BPO offices in India. 20. In mid-90s, Indian economy was growing strongly.
21. Lacunas of Indian policy framework also emerged.
22. The biggest consequence was the famous Harshad Mehta scandal.
23. Government established Securities and Exchange Board of India. 24. Telecom Regulatory Authority of India and Competition Commission of India were established to regulate other sectors.
25. 9th Five-Year Plan 1997-2002
26. Target Growth 6.5%
27. Actual Growth 5.4%
28. This plan was prepared under United Front Government and its main focus was
29. Growth with Social Justice and Equality30. Involving private sector, increasing FDI flow and developing Government’s role as a facilitator
31. Focussing on social sector like health, education etc.
32. These were the main aims of 9th plan.
33. Under the leadership of PM Adil Bihari Bajpai,
34. 9th plan tried to use unexplored potential and talent of economy.
35. Government provided strong social support for complete elimination of poverty.
36. 8th plan’s success proved that India is ready to move towards fast development.
37. In 9th plan, both public and private sectors put joint efforts to ensure economic development.
38. In both rural and urban areas,
39. General public and government agencies also contributed to economic development.
40. With adequate resources, special action plans i.e. SAPs were developed to complete the target in a stipulated time.
41. Under SAPs, sectors like agriculture, social infrastructure, information technology and water policy were covered.
42. In 9th 5-year plan, total public sector outlay was 8,59,200 crores.
43. 9th plan focused on rapid economic growth and quality of life of citizens.
44. Social justice and equality were the prime focus of this plan.
45. Through population control, agriculture and rural development,
46. Employment generation, poverty reduction, primary health care facilities,
47. Primary education, scheduled caste and scheduled tribes empowerment in agriculture
48. Economic growth with self-reliance and stable price were some major objectives of 9th plan.
49. 9th plan had 6.5% target growth against which India registered 5.4% actual growth.
50. For country’s overall socio-economic development, 9th plan framed new measures to overcome past weaknesses.
51. In any well-planned economy, participation of general population with government agencies
52. Combined efforts of public and private sectors are considered essential to ensure country’s growth.
53. In 1998, India successfully conducted its second nuclear test in Pokhran.
54. In 1999, India faced Kargil war.
55. Under PM Atal Bihari Vajpayee, India started to aspire for world-class infrastructure
56. Golden quadrilateral, metro and airport construction were started.
57. Mobile phones and internet were also expanded, which had a huge impact in the coming decade. Let’s see the development of 10th plan in 2002-2007.
58. India had 8% growth target in 10th plan and registered 7.6% actual growth.
59. Policy formulators recognised that economic growth cannot be the only objective of national growth.
60. In addition to percentage growth, monitorable targets were set for some key indicators.
61. In literacy rate, gender gap reduction
62. Reduction in infant and maternal mortality rate
63. Improvement in literacy
64. Access to potable drinking water
65. Prime moving force of economy was declared
66. Governance was considered as an important factor of development Let’s move to 11th plan, which was implemented in 2007-2012.
67. 9% growth target was set in 11th plan and registered 8% actual growth.
68. Aim of 11th 5-year plan was towards faster and more inclusive growth.
69. In the end of 10th plan, India was one of the fastest growing economy in the world.
70. Competitiveness was increasing in industrial sector
71. Foreign investors were showing interest in investing in India.
72. Savings and investment rates were also increasing.
73. Some sections of society, especially SCs, STs and minorities were still trapped in poverty, malnutrition, mortality and unemployment. Let’s move to 12th 5-year plan, which was implemented in 2012-2017. This plan set 8% growth target and registered 6.5% actual growth. 12th plan’s broad vision is reflected in its subtitles, faster, sustainable and more inclusive growth. To achieve sustainable and inclusive growth, poverty reduction, reducing inequality, empowerment of people, environmental sustainability, better education, skill development, health, nutrition and information technology were focused on development of human capital. Development of institutional capabilities, development of infrastructure is also a part of this plan.
In 12th plan, up to 1 trillion US dollars investment was targeted, which was expected to reduce government subsidy burden from 2% to 1.5% of GDP. In non-agricultural sector, 50 million new job creation, gender and social gap removal in school enrolment, malnutrition reduction in 0-3 year olds, electricity installation in villages, providing drinking water to 50% of rural population, increasing green coverage from 1 million every year and giving access to banking services to 90% of households were important objectives of 12th 5-year plan. UID was developed as a platform for cash subsidy transfer.
12th 5-year plan was the last plan in series of 5-year plan. The last deputy chairman of planning commission was Montek Singh Aluwalia. Planning commission was driving India’s growth vehicle with control and command approach for 6 decades inspired by socialist regime of USSR. On 1st January 2015, Niti Aayog replaced planning commission. To envisage maximum governance and minimum government vision, Niti Aayog emphasised bottom-up approach and laid the foundation of cooperative federalism. PM was designated as chairman of newly established Niti Aayog and Arvind Panagriya was appointed as its first vice chairman.
Apart from this, chief ministers of all states and members of its governing council were appointed. Niti Aayog has two hubs. Team India Hub and Knowledge and Innovation Hub which functions as Niti Aayog’s think tank. 15-year roadmap, 7-year vision strategy and action plan, AMRUT, Digital India, Atal Innovation Mission, Medical Education Reforms, Agricultural Reforms etc. were major initiatives of Niti Aayog. India is a diversified country and all states have different economic conditions, strengths and weaknesses. To make India competitive in today’s global economy, one-size-fits-all approach was needed to take innovative steps to move forward. Apart from Niti Aayog, India took more important steps like Insolvency and Bankruptcy Code November 2016. After 2008 financial crisis, banks provided easy loans but in this process, resources were misallocated and in 2012-13, nonperforming assets i.e. NPAs started increasing.
In 2013, India was included in the list of Fragile 5 Economies. To harmonise India’s scattered and divergent bankruptcy law, IBC code was enacted. IBC’s enactment was an important step in the direction of reducing piled up non-performing assets and protracted resolution of banks. Apart from this, on the recommendation of Urjit Patel Commission, Monetary Policy Committee was established in 2016. Its main objective was to provide reasonable price stability, ensure exchange rate stability, stabilise business cycle and achieve fast economic growth rate.
In 2017, to unify and synchronise indirect taxes, Goods and Services Tax was introduced which created a common and unified market in the country. To address poverty directly, Jan Dhan Yojana, Swachh Bharat Abhiyan, Ujjwala Scheme, Har Ghar Jal schemes were implemented. To reduce fiscal burden and to increase the involvement of private players, government started disinvestment under Department of Investment and Public Asset Management.
In March 2020, due to Covid-19 pandemic, lockdown was imposed in India and schemes like Pradhan Mantri Gareeb Kalyan Yojana were launched for people affected by the lockdown. And to make India competitive in post-Covid world, Aatmanirbhan Bharat Mission was launched. So as we saw that in 1947, Aatmanirbhan Bharat Mission was launched.
