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CHAPTER 2

The Environment and Development


Introduction
IN recent years, economists have become increasingly aware of the implication of
environmental issues for the success of development efforts. Communities may inadvertently
destroy or exhaust the resources on which they depend for survival. Rising pressures on
environmental resources in developing countries can have severe consequences for self-
sufficiency, income distribution, and future growth potential in the developing world. It is
poorest 20 per cent of the world’s population that will experience the consequences of
environmental ills most acutely. Severe environmental degradation, due to population
pressures on marginal land, had led to falling farm productivity and per capita food production.
Since the cultivation of marginal land is largely the domain of lower income groups, the losses
are suffered by those who can least afford them. Similarly, the inaccessibility of sanitation and
clean water mainly affects the poor and is believed to be responsible for 80 per cent of diseases
worldwide. Because the solution to these and many other environmental problems involve
enhancing the productivity of resources and improving living conditions among the poor,
achieving environmentally sustainable growth is synonymous with the widely accepted
definition of economic development.
Though there is considerable dispute concerning the environmental costs associated with
various economic activities, consensus is growing among development economists that
environmental considerations
should form an integral part of policy initiatives. The exclusion of environmental costs from
calculations of GNP is largely responsible for the historical absence of environmental
considerations from development economics. Damage to soil, water supplies, and forests
resulting from unsustainable methods of production can greatly reduce long-term national
productivity but will have a positive impact on current GNP figures. It is thus very important
that the long-term implications of environmental quality be considered in economic analysis.
Rapid population growth and expanding economic activity in the developing world are likely to
do extensive environmental damage unless steps are taken to mitigate their negative
consequences.

The Basic Issues


According to todaro, seven basic issues define the environment of development .the seven
issues are: (1) the concept of sustainable development, and linkages between the environment
;(2) population and resources; (3) poverty; (4) economic growth; (5) rural development; (6)
urbanization and (7) the global economy. We briefly discuss each in turn.

Sustainable Development and Environmental Accounting


Environmentalists have used the term sustainability in an attempt to clarify the desired balance
between economic growth on the one hand and environmental preservation on the other.
Although there are many definitions, basically sustainability refers to “meeting the needs of the
present generation without compromising the needs of future generations”. For economists, a
development path is sustainable if the stock of overall capital assets remains constant or rises
over time. Implicit in these statement is the fact that future growth and overall quality of life
are critically dependent on the quality of the environment. The natural resource base of a
country and the quality of its air, water, and land represents a common heritage for all
generations. To destroy the endowment indiscriminately in the pursuit of short-term economic
goals penalizes both present and, especially, future generations. It is therefore important that
the development policy makers incorporate some form of environmental accounting into their
decisions.
In light of rising consumption levels worldwide combined with high rates of population growth,
the realization of sustainable development will be a major challenge. We must ask ourselves,
what are realistic expectations about sustainable standards of living? From present information
concerning rapid destruction of many of the world’s resources, it is clear that meeting the
needs of a world population that is projected to grow by an additional 3 billion in the next 50
years will require radial and early changes in consumption and production patterns.

Population, Resources, and the Environment


Rapidly growing populations have led to land, water, and fuelwood shortage in rural areas and
to urban health crises resulting from lack of sanitation and clean water. In many of the poorest
regions of the globe, it is clear that increasing population density has contributed to serve and
accelerating degradation of the various resources that these growing populations depend on
for survival. To meet expanding LDC needs, environmental devastation must be halted and the
productivity of existing resources stretched further so as to benefit more people. If increase in
GNP and food production are slower than population growth, per capita levels of production
and food self-sufficiency will fall. Ironically, the resulting persistence of poverty would be likely
to perpetuate high fertility rates, given, that the poor are often dependent on large families for
survival.

Poverty and Environment


It is true that environmental destruction and high fertility go hand in hand, they are both the
direct outcome of a third factor i.e. absolute poverty. For environmental policies to succeed in
developing countries, they must first address the issues of landlessness, poverty and lack of
access to institutional resources. Insecure land tenure rights, lack of credit and inputs, and
absence of information often prevent the poor from making resources-augmenting investments
that would help preserve the environmental assets from which they derive their livelihood.
Hence preventing environmental degradation is more often a matter of providing institutional
support to the poor than fighting an inevitable process of decay.

Growth versus the Environment


Evidence indicates that the worst perpetrators of environmental destruction are the billion
richest and billion poorest people on earth. It has even been suggested that the bottom billion
are more destructive
Than all four billion people in between. It follows that increasing the economic status of the
poorest group would provide an environmental windfall. However, as the income and
consumption levels of everyone else in the economy also rise, there is likely to be a net increase
in environmental destruction. Meeting increasing consumption demand while keeping
environmental degradation at a minimum will be no doubt a challenging task.

Rural Development and the Environment


To meet the expanded food needs of rapidly growing LDC populations, it is estimated that food
production in developing countries will have to be double by 2010. Because land in many area
of the developing world is being unsustainably over-exploited by existing populations, meeting
these output targets will require radial changes in the distribution, use, and quantity of
resources available to the agricultural sector. And because women are frequently the
caretakers of rural resources such as forests and water supplies and provide much of the
agricultural supply of labour, it is of primary importance that they be integrated into
environmental programmes. In addition, poverty alleviation efforts much target women’s
economic status in particular in order to reduce their dependence on unsustainable methods of
production.

Urban Development and the Environment


Congestion, vehicular and industrial emissions, and poorly ventilated household stoves also
inflate the tremendously high environmental costs of urban crowding. Lost productivity of ill or
diseased workers, contamination of existing water sources, and destruction of infrastructure, in
addition to increased fuel expenses incurred by people having to boil unsafe water, are just a
few of the costs associated with poor urban conditions. Research reveals that the urban
environment appears to worsen at a faster rate than urban population size increases, so that
the marginal environmental cost of additional residents rises over time.

The Global Environment


As total world population grows and incomes rise, net global environmental degradation is
likely to worsen. Some trade-offs will be necessary to achieve sustainable world development.
Consequences of Environmental Damage
The most pressing environmental challenges in developing countries in the next few decades
will be cause by poverty. These will include health hazards created by lack of access to clean
water and sanitation, indoor air pollution from biomass stoves, and deforestation and severe
soil degradation-all most common where households lack economic alternatives to
unsustainable patters of living. World Development Report 1992 lists the environmental
problems, their effect on health and productivity as bellow:
(i) Water pollution and water scarcity causing more than two million deaths and billions
of illnesses a year.

The effect on productivity is reflected in declining fisheries; rural household time and
municipal costs of providing safe water; constraint on economic activity because of
water shortages.

(ii) Air pollution causing many acute and chronic health impacts; excessive urban
particulate matter levels are responsible for 300,000 to 700,000 pre-mature deaths
annually and for half of childhood chronic coughing; 400 million to 700 million people,
mainly women and children in poor rural areas, affected by smoky indoor air.

Effect on productivity is restrictions on vehicle and industrial activity during critical


episodes; effect of acid rain on forests and water bodies.

(iii) Solid and hazardous wastes causing spread of diseases by rotting garbage and blocked
drains; risks from hazardous wastes typically local but often acute.

The productivity will be effected by pollution of groundwater resources.


(iv) Solid degradation resulting in reduced nutrition for poor farmers on depleted soils;
greater susceptibility to drought.

Field productivity losses in range of 0.5 per cent to 1.5 per cent of gross national
product (GNP) common on tropical soils; off-site siltation of reservoirs, river-transport
channels, and other hydrologic investments.
(v) Deforestation causing localized flooding, leading to death and disease.
Its effect on productivity will be loss of sustainable logging potential and of erosion
prevention, watershed stability, and carbon sequestration provided by forests.

(vi) Loss of biodiversity causing potential loss of new drugs.

The effect on productivity will be through reduction of ecosystem adaptability and loss
of genetic resources.

(vii) Atmospheric changes causing possible shifts in vector-borne diseases; risks from
climatic natural disasters; diseases attributable to ozone depletion (perhaps 300,000
additional cases of skin cancer a year worldwide; 1.7 million cases of cataracts).

The effect on productivity will be through sea-rise damage to costal investments;


regional changes in agricultural productivity; disruption of marine food chain.

In the 1980s, per capita levels 0f arable land fell by 1.9 per cent annually, leading to worsening
land shortages, which have forced many of the poorest onto marginal land with extremely
limited cultivability. It is estimated that over 60 per cent of poorest people residing in
developing countries struggle for survival on agriculturally marginal soils. This trend is greatly
worsened in some areas of the developing world by developing inequalities in the distribution
of land, which force an ever-growing class of landless workers onto increasingly taxed,
ecologically sensitive soils. The growing intensification of cultivation on fragile lands leads to
rapid soil degradation and loss of productivity. Roughly 270,000 square kilometers of soil lose
virtually all of their productivity each year. An area greater than the size of India and china
combined, over 1.2 billion acres, has been significantly degraded. The resulting annual loss in
agricultural productivity is estimated to be between 0.5 per cent and 1.5 per cent of annual
worldwide GNP. As a result of rapid population increases and the failure of agricultural
production to keep pace, per capita food population declined in 69 countries during the 1980s.

The Indian Case


The record of economic and social development in India since independence, though highly
uneven and far from exemplary, includes
Substantial overall progress in many fields. The same period, however, has also been one of
formidable environmental plunder-Deforestation, falling groundwater tables, polluted rivers
and ponds as well as polluted air that we breathe.
In view of these contrary trends, there has been a temptation in public discussions to think of
‘development’ and ‘environment’ in antagonistic terms. Many of these deteriorating
environmental trends are clearly linked with heightened economic activity, e.g., industrial
growth, increased energy consumption, more intensive irrigation, commercial felling of trees,
and other such activities that tend to be linked with economic expansion. ‘Development’ is,
thus, held responsible, for the damage. On the other side, environmental activists are often
accused of being anti-development , since the advocates of accelerated growth often see
environmentalists as being unwelcoming (if not obstructive) of economic progress for fear of its
adverse environmental impact. Dreze and sen do not agree with the confrontational view,
which places development and environment on a collisional path. According to them many
human freedoms and components of the quality of life are dependent on the integrity of the
environment (involving the air we breathe, the water we drink, the epidemiological
surroundings in which we live, and so on),development cannot but be sensitive to the quality of
the environment. The opportunity to live the kind of lives that people value-and have reason to
value-depends inter alia on the nature and robustness of the environment. In the sense,
development has to be environment-inclusive.
While human activities that accompany the process of development may have destructive
consequences, it is also within human power to enhance and improve the environment in
which we live. For example, greater female education and women’s employment resources.
Similarly, the spread of school education and improvements in its quality can make us more
environmental conscious. Better communication and a richer media can also make us more
aware of the need of environment-oriented thinking. It is easy to find many other example of
such interconnections. In general, seeing development in terms of increasing the effective
freedom of human beings brings the constructive agency of people in environment-friendly
activities directly within the domain of developmental achievements. Development is
empowering and that power can be used to preserve and enrich the environment.
The assessment of development should be inclusive of environmental concerns. We must also
take note of various ways in which the process of development may influence the nature of the
environment and the values that are invoked in assessing it. This recognition does not, in any
way, change the basic fact that the process of economic development can also have very
destructive environmental consequences, sometimes even swamping the constructive
perspective. But it is important to see the relationship between development and the
environment in all adequately broad way, taking note of the constructive prospects as well as
destructive possibilities.

Consequences of Environmental Plunder


What, then, are the main reasons for being concerned about environmental degradation in
India and its relation with current patterns of development? Are there real reasons for
disquiet? There, certainly, are overwhelming reasons for the concern.
First, environmental degradation has compromised or ‘undone’ many of the improvements that
were otherwise made possible by greater economic prosperity. For instance, it is arguable that,
due to rising congestion and pollution, the quality of life in some India’s larger cities is lower
today than it was twenty years ago, in spite of a large increase in per-capita incomes. In rural
areas, too, environmental degradation had often considerably diluted if not defeated the gains
of economic development. In districts such as Kalahandi in Orissa, for instance, the collapse of
the environmental base-especially forests-has undermined people’s traditional livelihoods and
forced a large proportion of the workforce into seasonal or permanent migration (Dreze,
2001d). while Kalahandi occasionally makes headlines for extreme cases of starvation (if not
‘famine’ ), there is a much larger story behind the headlines, in which environmental
degradation plays a major role as a casual antecedent of chronic hunger and deprivation (Dreze
and sen, 2005).
Second, the present trends of environmental decline are not only intolerable already, they are
also incompatible with the basic requirements of sustainable development. To illustrate, air
pollution levels in Delhi are already much above WHO standards, yet the number of motorized
vehicles-which account for the bulk of the problem-continues to grow at more than 10 per cent
year (Table 2.1). clearly, something needs to be done, has to be done soon, given the
cumulative effects of this growth. Similarly, present trends of rapid
Decline of groundwater tables in large parts of country are utterly unsustainable, and call for
urgent attention.
Notes: a based on all-India sample survey of 23,263 households in urban areas (including
4,073 households in Delhi).
b Bangalore, Calcutta, Chennai, Delhi, Hyderabad, Mumbai combined.
Sources: Centre for science and Environment (1999), vol. ii, pp. 113, 115, 121, 124, 125, 127.
Third, in many cases environmental plunder is an infringement of distributive justice and the
basic rights of the underprivileged. In urban area, for instance, a minority of car owners cause
massive pollution, congestion, noise, tension and accidents-all at the expense of the public at
large. The people whose lives are impoverished and shattered in this way are often among the
poorest in the society, from street vendors to pavement dwellers.
The distributive aspects of environmental plunder have a gender dimension, too. The well-
being and freedom of many rural Indian women depend vitally on environmental resources,
including convenient access to water, fodder, and fuel, and this connection is often far closer
than those that link men to these environmental resources. As a result, women frequently
suffer disproportionately from environmental degradation.

Public Policy
State intervention to halt environmental degradation in India has been so far rather weak in
comparison with the magnitude of the problem. In fact, not only has public policy tolerated
environmental plunder for a long time, it has even, in many cases, actively encouraged it. For
one thing, government projects (from dams and mines to firing ranges and nuclear tests) are
themselves a major cause of environmental damage. For another, public policy has often
subsidized or otherwise encouraged the destruction of the environment by private parties. For
instance, the depletion of groundwater resources (especially by large farmers) has been
accelerated by electricity subsidies, sugarcane subsidies, and plentiful credit for energized
water extraction devices.
Environmental irresponsibility in public policy has both political and ideological roots. To start
with, environmental irresponsibility frequently draws on the often-repeated prejudice that a
little bit of environmental vandalism is the price one has to pay for economic development, at
least in its early stages. Some have been argued that environmental protection is a ‘bourgeois’
or ‘western’ concern, best addressed after economic prosperity has been achieved. This carries
with its suggestion that meanwhile environmental degradation should be tolerated.
Public policy in India has tended to be heavily influenced by powerful lobbies that thrive on the
private appropriation of environmental resources: mining companies, timber contractors,
sugarcane mills, car manufactures, the plastic industry, to name a few. Sugarcane subsidies, for
instance, have far more to do with the political influence of large farmers and mill owners than
with the merits of the case. Similarly, public regulation of the ‘polybag’ has been fiercely
opposed by the plastic industry.
Against this background of irresponsibility and apathy, environmental activists have tended to
seek help from the judiciary. The nineties have seen an unprecedented wave of ‘public interest
litigation’ on environmental matters. In some cases (e.g. relating to pollution in Delhi)
judgements favourable to the environmental cause have been obtained. ‘judicial activism’,
however, has important limitations as a means of environmental protection.
Judicial activism has played a fruitful role in generating public awareness of, and media interest
in, environmental problems, and in giving some strength (indeed a much needed strength) to
environmental pressure groups. However, judicial activism on its own is not an adequate and
sustainable basis for environmental protection. A more comprehensive approach is needed,
which must also incorporate other ways of giving environmental problems the attention they
deserve.
We still have a long way to go, but environmental activism has gained some considerable
ground in India today, and shows promise of advancing more.
CHAPTER- 3
India’s Economy at Independence
Introduction
The pre-independence period was a period of near stagnation for the Indian economy. At the
time of independence, Indian economy was caught up in a vicious circle of poverty
characterized by one of the lowest per capita consumption and income levels among the
countries of the world. Low income levels resulted in low levels of saving and capital formation
and, therefore, low productivity and low level of income and this vicious circle perpetuated
poverty in the country. Further, the size of the market being limited because of low incomes,
entrepreneurs had little incentives for making investments in diversified fields and, therefore,
the productivity in the economy continued to be low thereby perpetuating low incomes and
mass poverty.
Judged in terms of per capita incomes and standard of wellbeing, the Indian economy remained
more or less stagnant during the colonial regime. Quoting from the First Five Year Plan
document: “this is primarily because the basic conditions under which an economy can
continuously expand has been lacking. The impact of modern industrialism in the latter half of
the 19th century was felt in this country initially through imports of machine-made goods from
abroad which reacted adversely on the traditional pattern of economic life, but did not create
the impulse for development along new lines. The transition that followed was characterized
not by expansion of industry and a diversification of the economic structure but by a decay of
Indian’s traditional arts, crafts and industries and by an increasing pressure of population on
land. This retrogression led to a decline in productivity per person engaged in agriculture, the
adverse effects of which were
perhaps softened to some extent by the shock absorbing capacity of the old institution of the
joint family. The result was a continuous increase in under-employment. In such an
environment there could be little economic or social progress. Whatever surpluses might have
been available in the system under these conditions were directed to the purchase of imports,
partly of better finished products from abroad and partly of equipment for the new
transportation system designed primarily in the interest of foreign commerce. The
responsibility for promoting modern commerce and industry came to be concentrated in the
hands of certain classes in the urban areas, and up to the end of the nineteenth century the
only major large-scale industries which had taken root in the country were textiles. Little
attention was paid to improvement of agriculture or to the needs of the rural areas.”
Indian economy at the time of independence was overwhelmingly rural and agricultural in
character with nearly 85 per cent of the population living in the villages and deriving their
livelihood from agricultural and related pursuits using traditional, low productivity techniques.
The backwardness of Indian economy is reflected in its unbalanced occupational structure with
70 per cent of working population engaged in agriculture. Even with the large proportion of
population engaged in agriculture, the country was not self-sufficient in food and raw materials
for industry. The average availability of food was not only deficient in quantity and quality but
also precarious as exhibited in recurrent famines. Illiteracy was as high as 84 per cent; majority
of children (60 per cent) in the 6-11 age group did not attend school. Mass communicable
disease were wide-spread and in the absence of a good public health service, mortality rates
were very high (27 per thousand). Thus the economy was faced with the problems of mass
poverty, ignorance and diseases which were aggravated by the unequal distribution of
resources between groups and regions.
The India of 1947, under British rule, showed all the signs of what is today called an
underdeveloped country.

The Relative Importance of Various Industrial Activities


Consumption of National Income
The low degree of economic development can be judged from the following official statistics
(Estimates of National Income 1948-49 to
1955, c.s.o., p. 3). They show how income is distributed according to each type of industry.
As can be seen, agricultural activities contributed nearly 50 per cent to India’s national income.
Mines, factories, and small craftsmen’s work contributed only one-sixth, even lower than the
figure for trade, transport and communications and hardly greater than that for other services.

The Working Forces


The relative importance of the various industrial activities can also be seen from statistics
showing the distribution of labour.

Seventy-two per cent of the total working force was occupied in agriculture, whereas the
organized industries employed only about 2 per cent, a figure lower than the number of
administrative workers (2.7 per cent). Less than 11 per cent of the working force was employed
in all the forms of industry, less than 8 per cent in trade and transports, less than 10 per cent in
other services. These statistics speaks for low level of industrialization.
But despite lack of industrialisation it is important, from a social point of view, to realize that
there are a large number of wage-earners in the working population: nearly 38 per cent. Among
these, industrial wage-earners are a weak minority (about 11 per cent including transport and
communications), the large majority being agricultural labourers.
The high percentage of agricultural workers is obviously not the result of a modern capitalist
agricultural systems, but is simply evidence of agricultural over population. A large proportion
of the Indian peasantry did not own land (or owned practically none) and could not always
manage to find employment.
Little industrialization, low agricultural output, a low figure of national income per capita, very
sluggish economic progress, considerable unemployment and under-employment: these were
some of the main characteristics of India’s social and economic situation just after
independence.

THE AGRARIAN SCENE


Stagnating Agriculture
Colonialism became a fetter on India’s agricultural and industrial development. Agriculture
stagnated and even deteriorated over the years, especially during the first half of the 20th
century when the full impact of colonialism began to felt. Per capita agricultural production
declined at a rate of 0.72 per cent per year during 1911-1941 (Blyn, 1966). The situation was
worse insofar as per capita food grain output was concerned: during the same period, it
declined by 29 per cent, i.e., at a rate of 1.14 per cent per year. Even though the per capita non-
foodgrain output grew by 14 per cent, it failed to make up for the decline in foodgrain output
(Blyn, 1966).
The per capita consumption was much below the minimum recommended by dieticians, 460
gms against the recommended 510-520 gms. Even this low level of consumption required
massive importation. From 1948 to 1951, imports of cereals tended to increase: in 1951, they
rose to 4.7 million tonnes, which was about 10 per cent of domestic production. These and
other food imports cost India more than Rs.200
Crore (in 1951) and thus counter-balanced more than 20 per cent of her export receipts. Such a
situation in a country where more than 70 per cent of the population is occupied in agriculture
called for drastic action.
Whatever the absolute growth in agricultural output, it is occurred mainly because of the
increase in crop-acreage. The rate of increase in all-crop yield per acre was near-zero during
1911-1941. While all-crop and food grain yields declined by 0.02 and 0.44 per cent per year,
non-food grain yield went up by 1.15 per cent per year (Blyn, 1966). The increase in yield of
non- food grains was basically at the cost of food grains yields, as cultivators shifted better and
irrigated land and capital resources to commercial crops in order to earn cash.

Causes
(i) Regressive Organic Structure
The stagnation in agriculture is basically explained by the fact that colonialism
transformed the agrarian structure in India and made it extremely regressive. As is
well-known, the zamindars in zamindari areas failed to invest in land and relied on
rack-renting, while the peasant proprietors fell into the clutches of the
moneylenders and lost control over their lands. Sub-infeudation, tenancy and
sharecropping increasingly dominated both the zamindari and ryotwari areas.
(ii) Internal Drain of Capital
Agricultural surpluses were siphoned from agriculture without any quid pro quo,
thereby subjecting it to an internal drain of capital. Throughout the 18 th and 19th
centuries, high land revenue demand ate into the peasant’s surplus and even his
subsistence. But the government spent very little on improving agriculture as was
done, for instance, in Japan. The landlord, old or new, took no interest in agricultural
beyond collecting rent. They found rack-rent and usury far more profitable than
making productive investment in land. The moneylenders and merchants used their
increasing share of agricultural surplus to intensify usury or to take possession of
land to become landlords.
In many areas, a rich peasantry developed as a result of commercialization and
tenancy legislation but it too, quickly used its saving to buy land to become landlords
or to turn to usury as moneylenders. One result was that no capitalist farming
developed except in a few pockets. On the other hand, the vast mass of small
peasants, tenants and sharecroppers had no resources or incentive to invest in the
improvement of agriculture. Moreover, whatever savings some sections of peasants
were able to make over time were usually knocked off by famine, scarsity and
economic depression.

(iii) Poor Technology


Another reason for the stagnation of productivity in agriculture was the near
absence of change in its technological basis or its productive technique and inputs.
As Blyn points out, the type of equipment used changed very little till 1941. Modern
machinery was conspicuous by its absence. Improved seeds covered about 1.9 per
cent of all crop-acreage in 1922-23 and 11.1 per cent in 1938-39, these being largely
confined to non-food cash crops. The amount of chemical fertilizer used was
insignificant and confined to its imports which averaged less than 2,000 tonnes per
year during 1898-1923 and 99,452 tonnes in 1939. On the other hand, because of
the decline in the proportion of cattle to acreage there was, after 1930, considerable
decline in the availability of drug for fertilizer (Blyn, 1966).
As far as agricultural education was concerned, there were only nine agricultural
colleges with 3,110 students in 1946 (Blyn, 1966). There was hardly any investment
in terracing, flood-control, drainage and desalinization of soil. Irrigation was the only
field in which some progress was made so that during the early 1940s, 26.7 per cent
of the total cultivated area was irrigated, with government works irrigating about
15.5 per cent of the total cultivated area. An adverse factor was the increase in
subdivision of landholdings into smaller sizes and fragmentation and scattering of
these holdings. It is also to be noted that commercialization did not change the unit
or organization of productive activity (e.g. capitalist farming) or lead to improved
technology-only better soil and available water and other resources were diverted
from food crops to commercial crops.
INDIA’S INDUSTRIAL PRODUCTION AND ITS STRUCTURE
Another aspect of India’s economic backwardness was he state of its industry in spite of her
vast industrial resources which make India one of the richest countries in the world.

India’s Industrial Resources


India’s iron ore deposits are estimated at 21 thousand million tonnes, which is a quarter of the
total world deposits.
India’s deposits of manganese are the third largest in the world, being estimated at 112 million
tonnes, 100 million tonnes of which have been precisely located in Madhya Pradesh and the
Bombay region. India also possesses deposits of chromium, gold, bauxite and various non-
ferrous metals, which are important raw material for atomic industries. Finally, gypsum also
exists, as does mica, the latter deposit being one of the largest In the world.
India is equally rich in her energy potential. It is estimated that 60 thousand million tonnes of
economically workable coal lie beneath surface. Lignite exists mainly in the Madras region,
Rajasthan, Saurashtra, Kashmir, and Kutch. Petroleum reserve are little explored. Hydro-electric
power reserves are immense: they are estimated at some 41 million kw.
India’s resources as a whole would give her a leading position in world industry, in particular
the steel and engineering industries and the chemical industries based on coal.
Given this potential, we may now examine the state of India’s industrial development
immediately after independence.

The Decline of Traditional Industry and the Development of Modern Industry


India’s industrial situation in 1948 was the result of a long period of change in which modern
industry replaced the traditional crafts.
Foreign trade statistics best show the effects of ‘deindustrialisation’. India, still an exporter of
manufactured products at the end of the 18th century, becomes an importer. From 1815 to
1832 India’s cotton exports dropped by 92 per cent. In 1850, India was buying one quarter of
Britain’s cotton exports. All industrial products shared this fate.
The ruin of the traditional trades and crafts was the result of the British commercial policy.
Restriction were upon Indians exporting to the west, while favours were granted to British
exporters, who flooded the Indian markets.
Modern industries began to develop during the second half of the 19 th century but their
progress was exceeding slow and stunted. Up to the very end of the colonial period, the level of
industry and technology remained low. During the 19th century, industrial development was
confined to cotton and jute textiles. The iron and steel industry developed after 1907 while the
sugar, cement and paper industries and few engineering firms came up in the 1930s.
Still, as late as 1946, cotton and jute textiles accounted for nearly 30 per cent of all workers
employed in factories.
According to the census of manufacturing in 1951, which covered the larger enterprises, of the
total value added in manufacturing, 56.8 per cent originated in cotton and jute textiles, 6.6 in
sugar, 8.4 in engineering, 7.6 in steel, 4.1 in chemicals and 2.1 in cement.
Consequently, even though modern industry developed quite fast after 1918-its rate of growth
being 3.8 per cent per annum-it had little impact on the overall economic situation for its share
In the national income at the end of the British rule at 7.5 per cent was quite insignificant. In
1913, it was 3.8 per cent (CEHI, 1984). Modern industry perhaps barely compensated for the
displacement of traditional handicrafts.
The poor state of India’s industrialization is brought out by many indices. For example, in 1939,
out of a population of nearly 389 million (1941 census) only about 2 million were employed in
modern industries-the figure of those employed in factories working all the year round was 1.5
million. In 1951, only about 2.3 per cent of the labour force was employed in modern
industries. According to the planning commission, the number of persons engaged in
processing and manufacturing (including artisanal industries) fell from 10.3 million in 1901 to
8.8 million in 1951 even through the population increased by
nearly 40 per cent. Moreover, in 1951, of the industrial output, at least 60 per cent by the
unorganized, small enterprises.
A very important feature of India’s industrial structure was the virtual absence of capital or
procedures goods industry. Indian industries had to rely almost wholly on imported machinery
and machine tools. In 1950, India met nearly 90 per cent of its need for machine tools through
imports.
Similarly, modern banking and insurance were grossly underdeveloped. In 1946, class A and B
banks had 4,644 officers or one office for 90,000 inhabitants. Underdeveloped banking and
insurance meant that the Indian entrepreneurs could not mobilise the available capital. Also,
British-controlled banks starved Indian industry of funds and favoured British-owned and
controlled enterprises.
The growth of foreign trade and the rapid construction of railways which could have been the
positive factors, unfortunately became instruments for the underdevelopment of the Indian
economy. Increasing imports did not supplement and aid indigenous industry or help create ‘a
new and effective demand’ and consequently new industries. Under conditions of free trade,
imports displaced indigenous handicrafts and artisanal industries and prevented the rise of new
industries.
In the absence of a simultaneous industrial revolution, railways and only introduced a
commercial revolution and future colonialized the Indian economy. The layout of railway lines
and the railway freight rates policy promoted the export of raw materials and distribution of
imported goods for they encouraged traffic with ports as against traffic between inland centers.
The railways also did not have any forward or backward linkages. They had encouraged the
steel and machine industry, not in India but in Britain. They had served as a social overhead not
for Indian but British industry and their external economies were exported back to Britain.
Till the late 1930s, foreign capital dominated the industrial and financial fields and controlled
the foreign trade network as also part of the internal trade that fed into exports, British firms
dominated coal mining, jute industry, shipping, banking, insurance and tea and coffee
plantations.
It is important to keep in view, in this respect, that foreign investment rarely marked a transfer
to India of capital from abroad. It
was far less than the unilateral transfer of capital of the ‘drain’ from India. Three other
characteristics of foreign investment were important.
(i) It contributed to ‘the guided underdevelopment’ of India by concentrating on the
production and export of raw materials and foodstuffs.
(ii) It went into sectors which catered to foreign markets and not to India’s home market.
(iii) ‘The multiplier effects in terms of income, employment, capital, technical knowledge,
and growth of external economies of these investments were largely exported back to
the developed countries’.

Some Other Economic Indicators of Economic Backwardness


We may also very briefly outline certain other indicators of economic backwardness and
underdevelopment. In 1950, the per capita availability of cereals and pulses was 394.9
grammes per day; of cloth10 metres a year. The death rate was 27.4 per 1,000 persons and the
infant mortality rate wasbetween 175-190 per 1,000 live births. An average Indian could expect
to have a life span of barely 32 years. Epidemics like smallpox, plague and cholera and diseases
like dysentery and diarrhea, malaria and other fevers carried away millions. Malaria affected
nearly one-fourth of the population. In 1943, there were 10 medical colleges turning out about
700 graduates and 27 medical schools. In 1951, there were only 18,000 graduate doctors in
independent India. The vast majority of towns had no sanitation and large parts of those cities
which had, were kept out of the modern system, sanitation being confined to lines and other
areas where Europeans and rich Indians lived. A modern water supply system was unknown in
villages and absent in a large number of towns. A vast majority of towns were without
electricity for rural areas was unthinkable. The vast majority of Indian’s had no access to
education.
We may sum up India’s economic profile at the time of independence as: stagnating per capita
national income, abysmal standard of living, stunted industrial development and the bulk of the
population dependent on stagnation, low-productivity semi-feudal agriculture.
Some Positive Features
However, during the 1930s and 1940s some major developments occurred in the Indian
economy, which imparted it a certain strength and provided a base for post-independence
economic development. These positive features related to the development of a small but
independent (Indian-owned-and-controlled) industrial base and the rise of a substantial
indigenous industrial capitalist class with an independent economic and financial base.
During and after the First World War, several consumer industries, such as textiles, sugar, soap,
matches and paper, underwent a process of rapid import substitution, so that, by 1939, India
was more or less self-sufficient in her major consumer goods requirements. There also occurred
a certain diversification and sophistication in industrial production. Some intermediate capital
goods industries such as iron and steel, cement, basic chemicals, metallurgy and engineering
also began to develop. In the 1930s, there was also a significant shift of capital from usury,
trade and landlordism to industry. In other words, surplus was increasingly getting into the
hands of those who would invest it.
Furthermore, in contrast to the 19th century, industrial development in the post-1918 period
was increasingly getting oriented towards the internal or home market and this too on the basis
of indigenous raw materials. Thus, the link between indigenous industry and agriculture was
becoming stronger; and a manifold increase in internal trade occurred after 1914 at the same
time as the volume of international trade was showing a general decline.
By 1947, India also possessed a core of scientific and technical manpower. Unlike the 19th or
early 20th century situation, when managerial as well as technical personnel were mostly
foreign even in Indian-owned industries. Now, most of them are Indian, exceptions being
provided by a small number of highly specialized experts. India also had a small but quite well-
developed skilled labour force both in consumer force both in consumer goods industries such
as textiles and sugar and in the more sophisticated steel, metallurgical and engineering sectors.
There was one other area of economic strength. India was no longer a debtor country. By the
end of the second world war, it was able to liquidate its foreign public debt of nearly Rs. 450
crore and replace it with sterling assets of over Rs. 1700 crore because of Britain’s wartime
purchases in India which imposed a regime of forced savings on India.
Another feature which facilitated the process of economic development in post-colonial India
was the rise, after 1914, of a strong indigenous capitalist class with an independent economic
and financial base. The considerable industrial development had been led by an indigenous
bourgeoisie that was basically independent or national.
Taking advantage of the two world wars and the great Depression and the consequent
loosening of links with the metropolis. Indian capital was gradually able to significantly increase
its weight in the Indian economy. Investment under Indian control grew considerably faster
than European investment. Even through multinational corporations made their entry into India
after 1918, the growth of foreign capital was far slower than that of Indian capital.
It was Indian capital, rather than foreign capital, that pioneered new industries and thus
accounted for the overwhelming proportion of the new investments after 1920 in sugar, paper,
iron and steel, glass, heavy chemicals, shipbuilding, sewing machines and textile machinery.
By 1944, Indian capital controlled over 60 per cent of the large industrial units employing 1,000
or more workers (Mukherjee and Mukherjee in EPW, Vol. 23, No. 11, 1988).
It is also significant that Indian capital controlled the bulk of internal trade and part of external
trade. Moreover, whatever the extent of the growth of capitalism in agriculture, foreign finance
or enterprise had no role to play in it, except in tea and coffee plantations.
Thus, at independence, there was available, an indigenous entrepreneurial class which could be
a major agency for carrying out the developmental plan perspective of the newly independent
state unlike several African countries which at independence although adopted grand plan
schemes, often borrowing from the Indian blueprint, but lacked an indigenous agency to carry it
through.
CHAPTER-4
Planning in India
Development Strategy and Role of State
Evolution of Planning
JUST after the attainment of Independence, the Government of India set up the planning
commission in 1950 to make an assessment of the material, capital and human resources of the
country and to formulate a plan for most effective and balance utilization of the country’s
resources.
The launching of the First Five Year Plan in April 1951 initiated a process of development aimed
not merely at raising the standards of living of the people but also opening out to them new
opportunities for a richer and more varied life. This was sought to be achieved by planning for
growth, and social justice.
The First Five Year Plan consists one of the clearest early formulations of the need for planning
and of the state’s role in it. Planning, it pointed out, involves “acceptance of a clearly defined
set of objectives in terms of which to frame overall policies…, formulating of a strategy for
promoting the realization of the ends defined…, and working out a rational solution to problem-
an attempt to coordinate means and ends”.
Certainly, achieving higher living standards for the Indian people was seen to be a major goal
after independence. A great deal of thought and discussion in planning for independence
focused on the need for rapid economic growth and rising living standards. Nehru and Gandhi
had, indeed, differed on what economic policy should be, but the two leaders agreed on the
centrality of economic development goals as a top priority after independence.
At independence, India was a predominantly agricultural economy, with more than 70 per cent
of the population deriving its livelihood from agriculture, and just under 50 per cent of gross
domestic product (GDP) originating in agriculture. The Nehruvian view-derived predominately
from Fabian socialism- endorsed the need for rapid development led by state economic activity
and planning. The first few years after independence were naturally focused predominately on
establishing institutions.
Interestingly, the early planning document regarded the chief barrier to accelerated growth as
the then- low Indian savings rate, and set out a 25- year perspective. The planning commission
documents stated that a major challenge was to raise the Indian saving rate to 20 per cent and
concluded that, if that could be attended, Indian economic growth could achieve a satisfactory
rate of 5 per cent annually.

Structural Constraints and the Development Strategy


According to chakravarti “the underlying causes of structural backwardness were perceived as
follows. First, the basic constraint on development was seen as being an acute deficiency of
material capital, which prevented the introduction of more productive technologies. Secondly,
the limitation on the speed of capital accumulation was seen to lie in the low capacity to save.
Thirdly, it was assumed that even if the domestic capacity to save could be raised by means of
suitable fiscal and monetary policies, there were structural limitations preventing conversion of
saving into productive investment. Fourthly, it was assumed that whereas agriculture was
subject to secular diminishing returns, industralisation would allow surplus labour currently
underemployed in agriculture to be more productively employed in industries which operated
according to increasing returns to sale. A fifth assumption was that if the market mechanism
were accorded primacy, this would result in excessive consumption by the upper-income
groups, along with relative under-investment in sectors essential to the accelerated
development of the economy. Sixthly, while unequal distribution of income was considered to
be a ‘bad thing’, a precipitate transformation of the ownership of productive assets was held to
be detrimental to the maximization of production and savings. In other
words, there was a tolerance towards income inequality, provided it was not excessive and
could be seen to result in a higher rate of growth than would be possible otherwise”.
Given all these perceptions, it was felt that economic theory indicated that the basic questions
related to how much to save, where to invest, and in what forms to invest could be best
handled with the help of a plan.
“It will be observed from the above that the Indian planners subscribed to a basically supply-
side view of the planning problem. The argument that domestic demand can possibly be a
constraint on the growth process was not even mentioned as a hypothesis that needed to be
rejected. The reason, presumably, was the belief that with an active state policy on investment,
all possible slack in the economic system would be utilized. Statistically considered, the
argument was right. There was little Keynesian-type unemployment in India in the early fifties.
There was consequently justification for concentrating on factors promoting saving or
productive accumulation. Indian planners could at that stage maintain that what mattered
most was growth in the aggregate level of investment. That led them to look into areas where
public investment could be more fruitfully deployed, in the long term. There were three major
possibilities which could be expected to balance supply with demand along a growing trend.
First, public investment would be concentrated in the area of infrastructure.
Secondly, public investment could be directed primarily towards agriculture.
Thirdly, public investment could be directed primarily towards industrial development.
Indian planners obviously did attempt all three, as any reasonable planner can be expected to
do in such situations. The First Five-Year Plan (1950-1955) focused on the first two types of
investment. At the time of the Second Five-Year Plan (1955-1960), however, a major change
was brought about. Indian planners operated on the assumption of a low elasticity of export
demand accompanied by a system of strict import allocation. Thus, they were in reality
operating on the assumption of a nearly closed economy. In such an economy, if saving were to
be substantially raised from a low initial level of around 5 per cent in 1950 to 20 per cent in
1975, inter-sectoral consistency over time would
demand that the productive capacity of the capital goods sector would have to rise at an
accelerated rate to convert growing savings into additional real investment. It was, therefore,
the need to raise the real saving rate that led Indian planners to accord primacy to a faster rate
of growing in the capital goods sector, although doubtless there could have been other
considerations such as building up defence capability.
“Indian planners ignored the trade option as a major source of growth? The issue was posed at
the time when the second Five-Year Plan was formulated. A projection of the balance of trade
was attempted in the plan document, and the planners concluded that no significant increase in
export earnings in the short run could be expected. However, they recognized that ‘it is only
after industrialization has proceeded some way that increased population will be reflected in
larger export earnings…”
“The argument, briefly, was as follows. The development of a heavy capital goods base over a
period of time would led to the diversification of the export basket in the direction of the
manufactured goods, leading to an expanded demand for consumer goods, would be met by
pursuing ‘capital-light’ methods of production.”

Role of the State as Visualised in the Fifties


At this time in the early 1950s it was believed that the state could play a significant role both in
raising the domestic rate of savings and in putting it to more productive use. Pre-industrial
economies are predominantly rural and agricultural in character. They have land tenure
systems in which a substantial part of the surplus over subsistence needs of cultivators and
farm labourers gets appointed by a small class of non-cultivating land owners and
intermediaries (especially under the zamindari system and other feudal forms of tenure) and
used for non-essential consumption. Abolition of such exploitative and socially wasteful land
tenure systems could release surplus for productive investment. Land reform combined with
taxation of agriculture (either directly or indirectly by influencing prices of agricultural
commodities relative to that of manufactures) are means of exploiting this potential. Both
require strong state intervention.
Apart from its role in maintaining law and order, defining and protecting property rights,
enforcement of contracts and the like, the state has to take the primary responsibility for
providing elementary education, basic health care, safe drinking water and other facilities
which are in the nature of basic needs in any civilized society and which, in addition, have
beneficial effects on the general level of productivity. The latter effects-which are referred to as
external economies-raise questions as to whether the market mechanism can secure the
appropriate sharing of costs and benefits. Where externalities ( beneficial or otherwise) happen
to be significant, direct state intervention is necessary and justified.
Projects (e.g., road networks, major irrigation, steel plants, railways) which calls for investments
on a scale far beyond the capacity of individual investor and/or are in the nature of natural
monopolies (e.g., public utilities) from another category where direct involvement of the state
is deemed justifiable. In most cases even if the private sectoris allowed to operate, the need for
effective mechanisms to define and enforce standards, norms of efficiency, “fair” rate of return
on investment and the like is universally accepted. All of this calls for state regulation, through
not necessary direct ownership and operation. During the early phases of Indian planning, given
that indigenous industrial entrepreneurs were few in number and had relatively limited
resources, the industrialists themselves favoured a large, direct role for the state in many of
these activities.
The government can also help development by creating conditions which induce people to save
more. Low rates of savings are of course partly a reflection of low levels of income. But those
who have relatively large incomes may prefer to spend on current consumption rather than
save when there are relatively limited opportunities for investments that offer attractive
returns. A relatively stagnant, slow growing economy implies that profitable opportunities for
investment are limited. State intervention can help expand such opportunities in several ways.
Public mobilization of idle labour for creating productive assets especially roads, irrigation, land
improvement, schools, rural hospitals, etc. increase the potential productivity of private
resources and thereby create profitable private investment opportunities. Under certain
conditions, increased public expenditure can enlarge the scope for profitable investment by
creating additional demand for goods and services. Both these effects are likely to be
considerably strengthened if there is a coordinated programme of investments for ‘balanced
development’ ensuring that supplies of key inputs and services grow in step with the demand
for them. This aspect is particularly important in the case of activities which are closely inter-
related. With a coordinated programme, the risk of shortages or excess of particular goods or
services are substantially reduced. Reduced risks induce business to invest more.
Finally strong state intervention is a logical corollary of the goals of social justice and preventing
concentration of power which have been explicitly incorporated among the directive priciples
of state policy in the constitution. In addition, the director principles lay emphasison:
1. Securing to all citizens the right to an adequate means of livelihood;
2. Ensuring that distribution of ownership and control of material resources is regulated in a
manner which best serves the common good;
3. Preventing the concentration wealth and means of production; and
4. Protecting children from being forced to work or being exploited on account of economic
necessity.
Through these provisions lacked legal sanction, they do reflect the importance attached to
‘social justice’ and have shaped the scope and nature of state intervention.
Altogether, as the First Plan put it, whether one thinks of the problem of capital formation or of
the introduction of new techniques or of the extension of social services or of the overall
realignment of the productive forces and class relationships in society, one inevitably comes to
the conclusion that a rapid expansion of the economic and social responsibilities of the state
will alone be capable of satisfying the legitimate expectations of the people. This need not
involve complete nationalization of the means of production or elimination of private agencies
in agriculture or business and industry. It does however means a progressive widening of the
public sector and a reorientation of the private sector to the needs of a planned economy (first
plan).

Evolution of Strategy and Priorities


The First Plan provided an incisive general analysis of the nature of the country’s development
problem and various options for
Mobilizing resources and achieving development with more equal distribution. There was
special emphasis on the role of mass mobilization of idle rural labour and land reform. But on
balance the plan rejected radial solutions (especially in respect of redistribution of existing
wealth and incomes). The plan projected, rather optimistically, that savings and investment as a
proportion of national income would rise from an estimated 5-6 per cent in the early 1950s to
20 per cent by 1968-69 and stabilize at that level thereafter. Aggregate income was expected to
double in approximately 20 years and per capita income in 27 years.
The successful completion of the modest first plan was followed by a very ambitious Second
Five-Year Plan. The plan’s author, P.C.Mahalanobis, provided an analytical foundation for it with
a closed-economy growth model with two sectors, one of which produced consumer goods and
the other investment goods, with sector- specific capital as the only factor of production.
The fundamental insight of this model was that the greater the proportion of investment
devoted to increasing the capacity of the investment-goods sector, the faster the long-run
growth in consumption and investment. In the strategy based on this model, rapid long-run
growth was to be achieved without much sacrifice of short-run consumption by concertrating
scarce investment in expanding capital-goods-producing (and intermediate-goods-producing)
heavy industry. Current consumption demand was to be met by employing abundant labour
resources to manufacture consumer goods using labour-intensive methods that required little
capital (Srinivasan & Tendulkar, 2003).
The second plan underlined the political constraints on any radical solutions to redressing
inequalities are re-emphasised rapid growth and diversification of economic activity through
industrialization as essential for achieving and maintaining full employment at a rising level
productivity. It went on to define a coherent overall strategy whose central elements included
stepping up the rate of investment (but at a more moderate pace than envisaged in the first
plan) and a conscious policy of developing an indigenous heavy industry base (comprising
metallurgical, chemical and machine building industries) to lay the foundation for accelerated
self-reliant growth, with a leading role for the public sector. Accordingly, the 1956 industrial
policy resolution emphasized that the state must play a progressive role in the development of
industries and as the Resolution puts it “the adoption of socialist pattern of society as the
national objective, as well as the
need for planned and rapid development, require that all industries of basic and strategic
importance, or in the nature of public utility services, should be in the public sector. Other
industries which are essential and require investment on a scale which only the state, in
present circumstances, could provide, have also to be in public sector. The State has, therefore,
to assume direct responsibility for the future development of industries over a wider area”. The
encouragement of labour-intensive forms of producing mass consumer goods was seen to be a
potentially important way of reconciling the conflict between emphasis on heavy industry
(which would generate faster growth of income and employment in the long run) and the need
to generate adequate jobs for the current unemployed and unemployed in the transitional
period.
The dominant growth orientation articulated in the Mahalanobis import substitution based
industrialization strategy of the second plan and which was continued into the third plan. Thus,
the economic growth was expected to take place through the modern industrialization. The
industrialization in turn, was expected to be a replica of the same process that had taken place
in the historical past in the advanced countries. However, the relatively greater emphasis on
the long-term growth in an import-substitution oriented strategy required a modification in the
industrialization process. This considered of a strong accent on the creation of domestic
capacity in the direction of producing capital goods to produce more capital goods. In this
strategy, the public sector was expected to play a dual role of (a) promoting the growth of
infrastructural facilities and the creation of capacity in the basic and heavy industries, and (b)
reducing the concentration of economic power through the expansion of public ownership of
means of production.
An attempt was made with a reasonable success in implementing the long-term growth
maximizing Mahalanobis strategy during the second and the Third Five Year Plans. There was,
as a result, a considerable acceleration in public sector investment in infrastructure (roads,
railways, major and medium irrigation) and indirectly productive investments in universal
intermediates like steel, coal, and heavy electrical machinery. Although the encouragement to
the cottage, village and small scale industries as a means of providing employment as well as
expanding the supplies of consumer goods were conceived as part of this strategy, very little
was achieved in this regard. Similar was the fate in regard to the policies towards the reduction
of inequalities.
As rightly pointed out by Kaushik Basu “the actual policy regime that India followed in its early
days of independence was a mixture of the two competing (and almost contradictory) visions. A
soviet-style planning system was developed, but without the state having a monopoly of
control over the resources. Capitalism was allowed to flourish, but a large bureaucracy was
nurtured. Huge investments were made in basic industries, but at the same time several sector
were protected as belonging to the small-scale sector. Capitalism was criticized but it was also
relied upon. Socialism was never practiced, but the rhetoric of socialism was the norm. A
burgeoning bureaucracy became the surrogate for socialism”.
However, in terms of aggregate performance, this phase recorded a fairly sustained 8 to 10 per
cent compound growth rate of industrial output, 3 to 3.5 per cent compound growth rate in the
foodgrains output and around 1.75per cent growth rate in per capita income. All these growth
rates represented a sharp acceleration over the pre-independence past. A diversified industrial
structure came to be established. This was taken to be a success of the planning efforts.
Planning was regarded during this period as a “going”.
Thus, the first phase spanning roughly over the first three Five Year Plan periods was
characterized by fairly sustained growth in per capita incomes, distinct acceleration in public
sector investment and in the growth of industrial output. This phase was dominated by the
growth oriented development strategy.

Changing Perceptions
The fifities and sixties were marked by relatively strong and stable governments under the
control of the congress both at the centre and in the states as well as a clear commitment to,
and support for planning from the political leadership. The planning commission could impart a
sense of vision, direction and an integrated overall perspective on the desired course of the
economy. This provided a framework in which investment allocations could be decided and the
justification for particular projects and programmes could be evaluated. The commission
acquired prestige and began to play an important role in mediating the claims of different
ministries, of the centre vis-à-vis the
states and of different states over limited development resources. It also pioneered
independent evaluation of the actual working of selected schemes and their impact. According
to Tendulkar “Whatever success that had been claimed for the growth oriented development
strategy of the first phase could be attributed to the credibility of the planning process”.
The atmosphere changed dramatically after the drought and the foreign exchange crisis of the
mid-sixties. The sudden increase in defence expenditure consequent to the armed conflicts
with china and Pakistan and the levelling-off of foreign aid, all in the short span of three years
(1962-1965), put the economy under severe strain. A crisis occurred when two consecutive
droughts hit the country in 1966 and 1967 and real GDP declined in absolute terms.
The sharp deterioration of the economic situation and the security environment highlighted
two main weaknesses of the existing strategy, namely, the relative neglect of agriculture and a
critical dependence on foreign aid.
The two-year period 1965 and 1966 witnessed the worst drought in recent memory and
consequent famines in large parts of north India. At the same time, all aid was cut off to India
by the donor countries on account of the Indo-Pakistan war of 1965, including food aid. The
consequence was a virtual collapse of the economy, and recourse had to be taken to
extraordinary financing from the international monetary fund (imf) and the world bank, which
were accompanied by stiff conditionalities.
This traumatic experience brought food security into the forefront of our policy imperatives,
which was further buttressed by the observation that sustained industrialization was not
possible without adequate provision of wage-goods. The Fourth Plan, conceived after three
years of plan holiday, therefore, had to have food security as its centre-piece.
The Fifth plan recognized that growth and industrialization would not necessary improve the
living conditions of the people, particularly the poor. The concepts of “minimum needs” and
directed anti-poverty programmes were innovations of this plan, whatever may have been the
success achieved in implementing them effectively. The Fifth Plan also marks the beginning of a
period of steady increase in the growth rate of the economy, which continued right through to
the Eight Plan.
The sixth plan for the first time recognized that the success of the Mahalanobis heavy
industrialization strategy in raising the saving rate of the country had created a situation where
excess capacities were becoming evident in certain industries. A shift in the pattern of
industrialization, with lower emphasis on heavy industries and more on infrastructure, begins
here. The Seventh plan represent the culmination of this shift. In perspective, it may justifiably
be termed as the infrastructure plan. It was also during this period that a reappraisal of the
import-substitution strategy begins, and a gradual liberalization of the Indian economy is
initiated.
The Eighth Plan was overtaken by the crisis of 1991, and the economic reforms that came in its
wake. The dramatic events and policy initiatives of the two-year plan holiday period between
1990 and 1992 demanded a full reappraisal of the planning methodology, and the Eighth Plan
represents the first efforts at planning for a market-oriented economy.
Jean Dreze and Amartya sen (1995) pointed out “Four decades of allegedly ‘interventionist’
planning did little to make the country literate, provided a wide-based health service, achieved
comprehensive land reforms, or end the rampant social inequalities that blight the material
prospects of the underprivileged”.
Thus, the Eighth Five Year Plan documents states that “in the background of our experience of
planning for development over the last forty years and under the strong imperatives for change
as they have emerged now, a question is generally asked: what will be the role of planning in
future?

The Role of Planning


“when the term ‘planning’ was, for the first time, officially defined in the First Five Year plan
document the term used was “democratic planning” as distinct from a ‘plan based on
regimentation’. The centralized planning of the type practiced in socialist economies did not
exist in India, ever. In practice, the market has determined allocations in a major segment of
the economy. public sector, of course, has expanded with a wide ranging influence on the
economic life of the nation. The lack of cost consciousness of the public sector, its increasing
ineffectiveness in achieving the targets and depletion of its recources,
crippling its ability to carry on its activities without high-cost borrowing have compelled us to
define and limit its role and lay down the objective principles of its operations. The process of
planning and the pattern of government activities followed hitherto have dampened people’s
initiatives and their sense of responsibility towards building the nation. The process of planning
needs to be corrected in this respect.
“As a corollary to this, the role of planning commission needs to be redefined. It has to play an
integrative role in developing a holistic approach to the policy formulation in critical and inter-
sectoral areas of human and economic development. The existing multiplicity of agencies is not
only wasteful but also counter-productive because of the long repetitive procedures and the
diffusion of authority involved. An integrated approach can lead to better results at much lower
cost. So far, resource allocation has been the predominant role of the planning commission.
This has to change. Instead of looking for mere increases in the plan outlays the emphasis
should be on increases should be on increases in the efficiency of utilization of the allocations
being made and the prospects of a return on the investments. The planning in our country still
has a large role to play. Planning is necessary to take care of the poor and the downtrodden
who have little asset endowments to benefit from the natural growth process. Future planning
process has to manage the flow of resources across regions for accelerated removal of regional
disparties. Certainly there are areas in which markets cannot play an allocative role. Market
mechanism is never adequate for protecting environment, forests, and ecology. Planning and
market mechanism should be so dovetailed that one is complementary to the other. Market
mechanism must serve as an ‘efficiency promoting device’, while planning will be the larger
guiding force, keeping the long term social goals in the perspective” (Ninth Plan Document).

Redefining the Role of State


The approach paper to the Tenth Five Year Plan stated that an important aspect of the
redefinition of strategy that is needed relates to the role of government. It is now generally
recognized that government in the past tended to take on too many responsibilities, imposing
severe strains on its limited financial and administrative capabilities and also stifling individual
initiative. An all pervasive government role may have appeared necessary at a stage were
private sector capabilities were undeveloped, but the situation has changed dramatically in this
respect. India now has a strong and vibrant private sector. The public sector is
much less dominant than it used to be in many critical sectors and its relative position is likely
to decline future as government ownership in many existing public sector organization is
expected to decline to a minority. It is clear that industrial growth in future will depend largely
upon the performance of the private sector and our policies must therefore provide an
environment which is conducive to such growth.
This is not to say that government has no role to play or only a minimalist role, in promoting
development. On the contrary, government has a very important role but a different one from
that envisaged in the past. There are many areas, e.g. the social sectors, where its role will
clearly have to increase. There are other areas, e.g. infrastructure development, where gaps are
large and private sector cannot be expected to step in significantly. In these areas the role of
government may have to be restructured. It will have to increase in some areas of
infrastructure development which are unlikely to attract private investment e.g.
telecommunications, power, ports, etc., the private sector can play a much larger role provided
an appropriate policy framework is in place. Here, the role of the government needs to change
to facilitate such investment as much as possible while still remaining a public sector service
provider for quite some time. In all these areas, the role of government as a regulatory ensuring
a fair deal for consumers, transparency and accountability, and a level playing field is also
extremely important.
Redefining the role of the government to reflect the changed circumstances facing the
economy must be an important aspect of future strategy. This redefining is necessary both at
the central government level and also at state government level.
According to Kaushik Basu “there is need now for India to move more strongly forwards with
the reforms, allow private firms to enter sectors earlier kept reserved for state owned
enterprises (this is more important than privatization), open the economy further, and, in
particular, allow Indian companies to go for larger acquisitions abroad. But one must be aware
that there are no panaceas in economic policy. One has to be prepared for flexibility, to
experiment with policy but be ready to adjust, alter, and on occasion even do a u-turn,
depending on the evidence coming in. To stick with one policy, unbendingly, is to make the
same mistake of policy stubbornness that led India to its present predicament”.
Taking the example of openness, he states, “while there is need to push ahead with this in
today’s India, including a future lowering of
Traffic barriers and even greater mobility of capital, it is not obvious that these reforms, if
implemented in the 1960s, would have automatically yielded benefits for the country. These
are several laws and institutional features of Indian industry that handicap our domestic
producers”. For example, there are some industries, such as handicrafts and toys, which are
marked as belonging to the small-scale sectors. Large-scale factory production is not permitted
in this industries. Imagine what would happen if India suddenly opened up the doors to all
imports, without liberalizing this sector. Foreign producers would manufacture the same goods
in large-scale modern factories, lower there per-unit cost of production, and outcompete the
Indian producers, handicapped by the Indian laws. This would still cause gains from trade, true,
but may inhibit the future development of Indian industry. Moreover, the free flow of capital
could cause destabilizing currency crises. And, not surprisingly, prominent economists such as
jagdish bhagwati have advised against full convertibility on the capital account for developing
countries, observing that “the optimal speed at which one liberalizes is not necessarily the
fastest”.
The same is true for globalization, which create great opportunities, says Kaushik Basu. But to
maintain that it has no costs is to make the same mistake of overconfidence that served India
so poorly in the past. Globalization is likely to bring prices of the weaker economies into
alignment with prices in the industralised nations. Given that the price of illiterate labour is
close to zero in industrialised nations, this means that the illiterate population of developing
nations will tend to become extremely impoverished if there is globalization without
complementary government intervention. According to basu, “in a country like India where 35
per cent of the people are illiterate, globalization can contribute to increasing poverty and
inequality. It is important to recognize this not in order to thwart globalization but to prepare
for and benefit from it”.

The Government, the State and the Market


Although the completing virtues of the market mechanism and governmental action have been
much discussed in the literature, the comparative merits of the two forms of economic decision
are so thoroughly context-dependent that it makes little sense to espouse a general ‘pro
market’ view. For proper understanding, the distinct between the state and the government
may be of some
Significance. The state is, in many ways, a broader concept, which includes the government, the
legislature that votes on public rules, the political system that regulates elections, the role that
is given to opposition parties, and the basic political rights that are upheld by the judiciary. A
democratic state makes it exceedingly difficult for the rulling government to be unresponsive to
the needs and values of the population at large.
There is a similar question about the context-dependence of the role of the market mechanism.
The recent history of Asia and Africa provides a plentiful examples of market exchanges being
used to make profits out of the miseries of millions. There are also cases where the market
manages to misjudge the extent of a shortage quite badly, and causes suffering- even chaos-as
a result. Thus, to make general ‘pro market’ view without conditions attached is no less
problematic than taking a general ‘pro government’ view (Dreze and Sen, 2002).
There is a close interdependence between market and governance. In particular, the operation
and successes of the market mechanism can be deeply influenced by the nature of
governmental arrangements and actions that go with it. As Basu puts it “There is no escape
from the need for purposive, intelligent action from government. Government or good
governance, is a concomitant of efficient markets, not a substitute” (Basu, 2004).
Markets can hardly function in the absence of legal provisions and justiciable rights to property
and contractual entitlements. The disastrous results of indiscriminate liberalization and whole
privatization in Russia in the 1990s illustrate the penalities of ignoring the basic recognition that
the effective functioning of the market mechanism is highly contingent on adequate
institutional foundations.
Also the government may have a major role in initiating and facilitating market-reliant
economic growth. We have example of such successful capitalist countries such as Germany
and Japan. More recently, the role of the government has received much attention in
interpreting the so-called ‘East Asian miracle’-the remarkable economic success of the newly
industrializing countries in East Asia (in particular south Korea, Taiwan, Hong Kong, Singapore,
and more recently China and Thailand).
Public debates-in India as well as elsewhere-are often dominated by one-sided presentations,
reflecting either uncritical faith in the market or blind opposition to it. Indeed, there are signs of
both ‘market mania’ and ‘market phobia’ in the sharp exchanges that characterize debates on
this subject (Dreze and Sen, 2002).
Market mania involves complete faith in the efficiency and other virtues of the market,
regardless of context. It calls for indiscriminate deregulation and privatization. Market mania
played a role in Russia’s rush towards a market economy in the nineties with its catastrophic
results.
In India, a common form of market mania is the notion that radical deregulation is all it would
take to ‘Kick-start the economy’. This believe according to Dreze and Sen is naïve in several
ways. First, it is based on a narrow reading of the impediments that are holding the Indian
economy. The relevant failures go much beyond a lack of market incentives, and also include
widespread illiteracy and undernourishment, inadequate infrastructure, the paralysis of the
legal system, endemic corruption, dismal public services, to cite a few concerns. Market mania
overlooks the lack of preconditions in the Indian economy for the kind of take-off that has
followed market-oriented reforms in countries such as China and Vietnam.
In fact there is a deep complementarity between market efficiency and state action. The
performance of the market is highly contingent in various forms of state action, from the
provision of an adequate legal framework to redistributive policies. One implication of these
complementaries is that liberalization does not necessarily diminish the importance of state
action. This applies even to regulation itself, in so far as a relaxation of one type of rules often
calls for developing new rules of a different type. For instance, allowing private entry into new
sectors (such as medical insurance or electricity distribution), which may be considered as a
form of deregulation, calls for an adequate overseeing framework, especially if these sectors
have features (e.g. economies of scale, information asymmetries, pervasive externalities) that
interface with the efficiency of the market mechanism. Even in western ‘market economies’,
including the United States, this necessity is well recognized.

Cooperative Action
Besides State intervention and the market mechanism there is the third alternative way of
coordinating economic activity i.e. cooperative action.
Development itself opens up new opportunities for social cooperation. The recent expansion of
cooperative action on a global scale (involving concerns such as environmental protection, the
debt crisis and world peace) is one example of this process.
Just as the state and the market are highly complementary institutions (even though they are
often seen in antagonistic terms), a similar relation holds between cooperative action on the
one hand and the state or the market on the other. In a democratic society, the priorities and
actions of the state depend on organized public demands, and other aspects of a board political
process in which cooperative action can achieve depends to a considerable extent on the
opportunities created through state action, e.g. the level of education in the community, the
accountability of government institutions, and the legal framework of civic associations.
Thus, cooperative action and market institutions are often compatible or even complementary.
For instance, the efficiency of the market mechanism can be greatly enhanced by cooperative
social norms that reduced so-called ‘transaction costs’. Indeed, markets can flourish more easily
when contracts are not typically broken and do not have to be rescued by litigation.
According to Dreze and Sen, the tendencyto concentrate on the negative role of government
has contributed to another bias in the liberalization debate, namely, the neglect of what can be
achieved through cooperative action. This neglect is particularly serious if we acknowledge the
wide-ranging nature of the reforms that are required in India, not only in economic matters but
also in the social and political domains. There is urgent need not only for more efficient and
equitable economic institutions, but also for uprooting corruption, protecting the environment,
eradicating caste inequalities, preventing human rights violations, restoring the credibility of
the legal system, halting the criminalization of politics (to cite a few major concerns). These
different fields of reforms are no less important than the kinds of ‘economic reforms’ that have
captured most of the attention in the 1990s. They are indeed best seen in an integrated
perspective, where the promotion of human freedoms (rather than just the acceleration of
economic growth) is the overarching goal. In that perspective, cooperation action acquires a
new importance, insofar as it has a major bearing on many of these broader fields of economic
and social life where reform is needed. To illustrate, eradicate corruption or protecting the
environment are not just matters of sound government policy; they also involve cooperative
action of various kinds e.g. public vigilance against bribery and community management of local
environmental resources. According to Dreze and Sen, the liberalization debate in India in its
present form is too narrow in at least three respects: (1) over-concentration on the negative
roles of the government, (2) over-preoccupation with narrowly ‘economic’ reforms, and (3)
neglect of the role of cooperative action in economic and social reform.
CHAPER- 5
Economic Reform and Liberalisation
Debate on Liberalisation
The most common connotation of the term liberalization when used in the context of economic
policy is that of reducing government regulation of economic activity and the space for the
state intervention (expect in the all-important matter of guaranteeing private property rights)
and allowing for the unfettered operation of market forces in determining economic processes.
The recent focus on economic liberalization, in India as well as in other developing and formerly
socialist countries, has created the widespread impression that this is a qualitatively new
approach. Indeed, the arguments in favour of the market-determination of economic processes
and resource allocation, and the counter-arguments based on notions of market failure or
inadequacy of markets in meeting social goals, are almost as old as the discipline of economics.
By the mid-20th century, state intervention in the economy and government controls on
economic activity were widely accepted and justified across the world, not only on grounds of
‘equity’ and the need to achieve particular social goals which were not inevitably delivered by
the market mechanism, but also theoretically in terms of the possibilities of market failures.
The important areas of market failures have typically been identified in microeconomic terms
as those of public goods, externalities, industries characterized by increasing returns to scale
situations of incomplete or asymmetric information, and in macroeconomic terms the
persistence of aggregate unemployment and
the emergence of sectoral imbalances. For developing economies, which were seen to have
structural constraints on growth which had to be overcome, the consensus was that late
industrialization required systematic and planned government economic activity with limited,
controlled and directed market functioning. This seemed obvious because of the nature of
economies with low savings (Nurkse, 1955), inadequately developed physical infrastructure, the
presence of numerous externalities in production (Rosenstein-rodan, 1943; Scitovsky, 1954),
the likelihood of strong forward and backward linkages in investment and production
(Hirschman, 1958) and the need for major ‘catching up’ in terms of technology (Gerschenkron,
1962). In other words, the consensus was that liberated markets alone could not deliver
‘development’, and that systematic state intervention at the very least to guide markets, was
essential.
Opposition to these ideas favouring state control and limiting of free market operations, which
was evident from their inception but gained ground in the period since 1980, has usually
stressed the ubiquity of ‘government failures’ in development as well as the numerous cited
inefficiencies and sub- optimal outcomes associated with such state intervention. Consequently
the case for liberalization of internal and external markets and freeing economic agents from
government controls and regulations has been made not only on the libertarian grounds, but
also, and more significantly, in terms of the greater micro-economic efficiency and functional
superiority which are supposed to characterize free-market-based systems of economic
organization.
The Indian debates have mirrored these basic arguments, and in addition have been contoured
by the structural characteristics of the Indian economy as well as the imperatives of particular
periods. In the post –independence years, the debates surrounding issues of state control and
liberalization appear to be continuous and complex, yet the argument in each area and period
of time have been surprisingly interchangeable.
The Indian government at independence inherited a very ‘liberal’ economy with far fewer
controls on both internal and external markets than are to be found in even the most market-
oriented regimes across the world today. The main government regulations in operation were
the wartime controls on food, and these became the subject of the first significant policy
debate. Subsequently, the policy ground has shifted
Between liberalisers and those arguing for more central planning and controls. In each period
of major shift, the change in strategy has come about as a response to a particular constraint,
whether in food or the balance of payments or the fiscal position, and both in periods of
greater emphasis to planning and those in which the market mechanism was given greater
primacy, the expectation has been that the adoption of one type of strategy would enable the
economy to overcome that constraint. However, since there have been basic political economy
failures reflecting the nature of state and society, these strategies in either direction have
provided at best temporary palliatives, and have been unable to resolve the basic problems of
development.

ECONOMIC REFORM
The Background
After pursuing an inward-looking development strategy with the state assuming an important
role for more than four decades, India decided to take a historic step of changing tracks in
1991. It embarked on a comprehensive reform of the economy to widen and deepen its
integration with the world economy as a part of structural adjustment. There seems to be a
general consensus on the desirability of reforms to dismantle the bureaucratic regulatory
apparatus evolved over the years that may have outlived its utility. However, there has been
considerable debate on the contents of the reform package, their sequencing and the pace,
their implementing and their impact.
After a period of relatively robust economic performance in the late 1980s, the Indian economy
entered into a period of unprecedented liquidity crisis during 1990-91. This crisis was a
combined effect of a number of events coinciding. These includes collapse of the Soviet Union
that has emerged as India’s major trading partner. The Gulf War that erupted in January 1991
worsened the balance of payments crisis not only with the rising oil prices but also by causing a
virtual stoppage of remittance from Indian workers in the Gulf. These events coupled with
political uncertainty prevailing in the country led international credit rating agencies to lower
India’s rating both for short and long-term borrowings. The erosion of international markets
difficult but also led to outflow of deposits of non-resident Indians with Indian banks. These
developments together brought the country to the verge
Of default with respect to external payments liability which could be averted by resorting to
borrowings from the IMF under the standby arrangements and CCF and by mortgaging gold to
the Bank of England. This was complemented by emergency measures to restrict imports.

The Macroeconomic Crisis


The macroeconomic crisis was precipitated mainly by the growth of the public spending
through the 1980s that increased the budget deficit as a proportion of our GNP, although
external shocks played a contributory role.
The state of our public finances had indeed reached crisis proportions by the end of the 1980s.
The public debt-to-GNP ratio increased through the 1980s, going up to almost 60 per cent at
the end of the decade, implying a double of the ratio at the end of the previous decades. As is
now well-known, the proximate reasons for this situation were the failure of the public sector
to generate investible resources and the explosive growth of government current spending that
saw the budget deficit as a proportion of GDP rising from 6.4 to 9 per cent during the 1980s.
According to Jagdish Bhagwati and T.N.Srinivasan, the question must be addressed: did the
microeconomic inefficiencies have anything to do with this, or was “profligacy” the true, final
and sole cause of the macroeconomic crisis? Evidently, it was the former.
Of course, the failure of the public sector enterprises to generate profits (and hence their
contribution to the macro crisis) is a microeconomic efficiency failure. But, in turn, because
these enterprises have dominated the provision of infrastructure and critical intermediates,
their inefficiency has led to downstream inefficiencies in a multiplier fashion. Then again, the
restrictive trade and industrial licensing framework, for instance, led to serious loss of efficiency
by reducing the scale of output, eliminating effective competition, creating bottlenecks. The
result was to reduce the returns from our investments and our growth rate. In turn, surely the
revenues raised from the economy, for any given tax rates, were adversely affected, the
political ability to raise tax rates in a situation of slowly-growing incomes was impaired, and the
necessity to undertake budgetary expenditures to support the creation of public sector jobs
and for consumption were also increased-all factors contributed to the budget deficit crisis.
The rise in foreign borrowing was a major component of the fiscal crisis, reflecting in turn the
excess of domestic expenditure over income.
Thus, as evident from the external public-sector debt (and not just the domestic public sector
debt) increased greatly as a proportion of GNP during the 1980s, rising to 21 per cent by 1987-
88. This increase in external indebtedness meant that debt service as a proportion of efforts
increased more than threefold to 32 per cent in 1996-97 from 1980-81.
The macro imbalance, fuelled by the budget deficit and financed by the external borrowings
and the decumulation of reserves, was accompanied by accelerated inflation to double-digit
levels.
Given the magnitude of the fiscal and balance of payment problems, there can be no question
about the need for structural adjustment. But there were questions about its context as well as
viewing it primarily as a means of liberalization and opening of the economy.

Rationale for the Reforms


As is now well-understood, India faced a macroeconomic crisis that required immediate
attention when Prime Minister Rao took office. This crisis had to be attended to forthwith. But,
as in many South American countries in the 1980s, the macroeconomic crisis became also the
occasion for undertaking substantial microeconomic (or what are sometimes called
“structural”) reforms that had been long overdue.
In fact, these structural reforms were necessary because we had evidently failed to generate
adequate rates of growth of income and of per capita income. Not merely did India’s weak
performance in this regard fall below her own expectations as defined in the earlier plans, it
also put India behind many other developing countries, and way behind the super performers
in the Far East.
“Indeed, it is necessary to appreciate that we had become marginalized in the world economy.
Not merely were our growth, and hence all else such as poverty alleviation, unsatisfactory, the
multiplying success stories were to be found elsewhere. Increasingly, many of our economic
policies were also seen as wittingly foolish, impossible to explain as sensible. Among these were
our maze of sensible. Among these were our maze of senseless bureaucratic controls on
production and investment. Perhaps the most compelling reason for reforms was then to clean
the house and to restore India eventually to the position of respect in the world economy and
polity that she enjoyed during the years of Prime Minister Nehru’s stewardship”.
Macroeconomic Reforms
By the time the crisis of 1991 occurred, there was considerable support among key figures in
and out of government for the view thata through going reform was necessary to pull the
economy out of the morass it had gotten into.
The reform package outlined by Manmohan Singh in 1991 had three distinct components:
(1) Fiscal stabilization to check the growing fiscal deficit and contain it at a much lower level
in such a manner that public investments in basic social and economic infrastructure
could be substantially stepped up without generating inflationary pressures;
(2) Internal liberalization to increase competitive pressures, leaving enterprises free to make
their production and investment decisions in the light of market conditions and enlarging
the scope and freedom for private enterprises.
(3) Integration with the global economy by removing controls on foreign trade and exchange
rates, lowering tariffs and rationalizing their structure and substantially relaxing
regulations regarding external capital flows and a proactive policy for attracting foreign
direct investment. This package, it was claimed, would release powerful growth impulses
and lift the economy to a high growth trajectory comparable to that of East Asia. This
view prevailed and has come to be accepted by successive governments since.
The policy changes brought into force since July 1991 fall broadly into two categories. The first
set of measures is part of what is normally known as stabilization policy. The second set of
measures come under the category of structural reform policies. As Rangarajan rightly points
out, while the stabilization policies were intended to correct the lapses and put the house in
order in the short term, the structural reform policies were intended to accelerate economic
growth over the medium term. Structural reform policies cannot succeed unless a degree of
stabilization has been brought about. But stabilization by
itself will not be adequate unless structural reforms are undertaken to avoid the recurrence of
the problems faced in the recent period.

Structural Reforms
Structural reforms were broadly in the area of industrial licensing and regulation, foreign trade
and investment and the financial sector. There is considerable unanimity among the economists
about the need to reduce and, as far as possible, eliminate barriers to the entry and expansion
of firms. The policy of licensing as has been practiced in the past has had no particular merit
and, in fact, the Approach Document of the Eighth Plan submitted in May 1990 had also said:
“A return to the regime of direct, indiscriminate and detailed controls in industry is clearly out
of question. Past experience has shown that such a control system is not effective in achieving
the desired objective. Also the system is widely abused and leads to corruption, delays and
inefficiency”. In relation to foreign trade policy, the aim was to liberalise the regime with
respect to imports and try to bring about a closer link between exports and imports.
As regards import duties the policy has been gradual even through it is accepted by all that the
tariff rate in India is perhaps the highest even among the developing countries. A progressive
reduction becomes essential in order to avoid a high-cost economy. As regards foreign
investment, the new policy measures certainly make a break with the past. In an era in which
capital is mobile and moving across borders in a big way and where technology transfer is
through investment, we cannot can afford to close our country to the flow of foreign
investment. In fact, the flow of foreign investment into the country has been meagre. If
retained earnings are excluded the flow is almost negligible. The relaxations that we have made
in relation to foreign investment are yet very modest as compared with the concessions offered
by much developing countries. Many of the fears expressed in this context are in the nature of
putting the cart before the horse. We must take action when and if it becomes apparent that
the flow of foreign investment is excessive and it is undermining the domestic economy.
Finally, in relation to the financial sector it has to be noted that while there has been a
considerable widening and deepening of the Indian financial system, many inefficiencies have
crept into the system during the past 15 years. An administered interest rate structure had put
the whole system in a straight-jacket. The extent of cross-subsidisation in lending rates has
undermined the profitability of the banking system.
Equally, due to various pressures, the quantity of loan assets has also deteriorated. With low
profitability, the banking system in particular has not been in a position to provide adequately
for loan losses. The capital of the Indian banking system is woefully inadequate. Thus, a reform
of the financial system to provide greater autonomy to the institutions both in terms of the
interest rate structure and operational matter had become necessary.

Implementation of the Agenda


The implementation of the agenda of the reforms over the eight years has covered the
followings:
Trade Policy Reform: A major reform of trade policy regime has been effected since 1991. The
import licensing system has been dismantled. All non-traffic barriers (NTBs) have been phased
out from all tradables except consumer goods. In spite of stiff resistance from rich industrialists
on cutting tariffs, all finance ministers starting from Manmohan Singh in 1991, P. Chidambaram
forcefully fought on the subject of tariff and tariffs have indeed been substantially done away
with. Besides India has also undertaken a major commitment to liberalise its trade regime
under WTO Agreement.

Removal of QRs
The process of removal of import restrictions, which began in 1991, has been completed in a
phased manner with removal of restrictions on 715 items (Exim Policy 2001-02). Out of these
715, 342 are textile products, 147 are agricultural products including alcoholic beverage and
226 are other manufactured products including automobiles.
Industrial Policy Reforms: although some liberalization and streamlining of the industrial policy
had been effected in the mid-1980s,the New Industrial Policy (NIP) announced on July 24, 1991
and subsequent amendments brought far-reaching changes in the policy regime governing
industrial investments. The NIP dismantled the industrial licensing (or approval) system that
regulated the industrial investments in the country by abolishing the requirement of obtaining
an industrial license from the government in all except 14 specified industries. These specified
industries need to be regulated in view of environmental hazards, national security or social
well-being considerations.
NIP has thrown open new industries and services to private including foreign private sector by
pruning the list of ‘Industries Reserved for the Public Sector’. Only six industries, which are now
reserved for exclusive development by public sector, include those considered sensitive from
national security point of view. Thus, a large number of industries and services including
infrastructure such as telecommunication, roads, ports, power generation, petroleum refining
have become accessible to the private sector. NIP accords a much more liberal attitude to
foreign direct investment (FDI) than ever in post-Independence India. The policy allows
automatic approval system for priority industries by the Reserve Bank of India within two
weeks subject to their fulfilling specified equity norms. A more favourable treatment is also
accorded to non-resident India (NRI) investors who are allowed up to 100 per cent ownership
priority industries.
A Foreign Investment Promotion Board (FIPB) has been set up to consider all other proposals
that do not qualify for automatic clearance. However, to bring transparency into the working of
FIPB, elaborate guidelines and time frame of six weeks in normal cases are also specified. FIPB
is authorized to negotiate with foreign investors in person to expedite the clearances. FIPB is
empowered to approve up to 100 per cent foreign ownership in cases involving transfer of high
technology, projects producing predominantly for exports, energy and infrastructural projects,
consultancy or trading companies. The restriction on investments by large industrial houses and
foreign controlled companies under the MRTP Act were also abolished.
A phased programme of disinvestment of public ownership sector corporation has been
launched. A Disinvestment Commission followed by Department of Disinvestment was set up to
make recommendations on the phasing of the disinvestments.
The outward investments by Indian enterprises were liberalized and proposals fulfilling certain
norms could now be granted automatic approval.
Exchange Rate Reforms: The rupee was devalued twice in July 1991 leading to a 20 per cent
depreciation in its value. The partial convertibility of rupee on the trade account was
announced in the 1992-93 budget that was subsequently broadened to full convertibility on
current account by August 1994.
Capital Market: The Capital Issues Control Act was repealed and the Securities and Exchange
Board of India (SEBI) was set up as a watchdog for regulating the functioning of the capital
market. SEBI has
focused on regulatory reform of the capital market as well as on market modernization. Online
trading and dematerialized trading have been introduced. Companies have been allowed to buy
back their own shares subject to the regulations laid down by SEBI.
In September 1992, the government announced guidelines for investments by foreign
institutional investors (FIIs) in the Indian capital market. FIIs were now welcome to invest in all
types of securities traded on the primary and secondary market with full repatriation benefits
and without restrictions on either volume of trading or lock-in-period.
Financial Sector: In January 1993, a package of financial sector reforms was announced that
included permission to new private sector banks including foreign joint ventures. The
government has also established a policy regime for functioning of private non-banking finance
companies (NBFCs) and agencies for rating their credit worthiness.
Thus, the government since 1991 has undertaken a comprehensive reform of the economy. In
addition to the government budget-making to restricting budget deficits.

National Structural Adjustment Programme


All these reforms- and the list is far from exhaustive- calls for a high order of political
management. In the first place, the sense of the crisis, the imperative need for systemic reform
and the rationale for the main element of the reforms need to be effectively communicated to
all levels of government and to the people at large. Second, the task of structural reform should
not be viewed as the responsibility of the Centre alone. States spend nearly as much as the
centre. They are responsible for key segments of infrastructure (namely electricity, roads and
water supply) as well as the social welfare and anti-poverty programmes; the implicit subsidies
(unrecovered costs) passing through the State budgets are some 60 per cent more than the
Central budget; and the State governments taken as a whole also show a substantial and
growing revenue deficit. Unless the States also show a high degree of fiscal discipline-which
must necessarily consist of a mixture of measures designed to raise revenues, contain
expenditure growth and improve the effectiveness of expenditures-it would be hardly possible
to bring down the overall fiscal deficit without impinging adversely on the expansion and
improvement of essential infrastructure (so crucial for the success of trade and industrial
liberalization) and on the
employment and anti-poverty programmes (which provide a safety net for the vulnerable
segments).
Given this, and the vast ramifications of structural adjustment, one would expect a serious and
sustained effort by the centre to take the States fully into confidence about the nature and
magnitude of the crisis facing the economy and the rationale for and implications of the
‘structural adjustment’ programme, even while impressing on them the contribution they have
to make and the responsibilities they have to share in order to make the programme a success.
What we need is a national structural adjustment programme based on the maximum possible
understanding and consent among the States and the centre. Apart from informal meets, the
NDC and inter-state council provide formal mechanisms for informing, counselling and
discussing these issues with the states. Unfortunately these have not been used to any
significant extent in shaping the adjustment reforms.
In the final analysis no structursl adjustment programme can be effectively implemented
without broad-based political support. This support will not be easy to muster merely on the
basis of promises of faster growth of income and employment and of lower rate of inflation at
the end of the adjustment process. It requires not only a great deal of public education about
the need for and rationale of policy changes but also to generate a felling that the costs of
adjustment-by way of lower subsidies, higher price of utilities and services, higher taxes,
insistence on productivity norms, the redeployment and even some retrenchment of workers,
restraints on increase in wages and salaries, restricting the scope for using public institutions
for political patronage at every level- are being shared equitably. As it is farmers are being
asked to pay more for water, electricity and fertilisers; workers to accept wage restraints,
retrenchment and closures; and the users of PDS to pay higher prices for food grains, sugar,
kerosene and transport services. Necessary as all these are, they also provoke-and
understandably so-a great deal of resistance. And the farm lobby and trade unions are forces to
reckon with. Their opposition can, however, be to some extent mitigated by measures to
contain the adverse effects on employment and incomes specially for the vulnerable segments
of the population.

Safety Net
A ‘safety net’ for workers in the organized sector who may lose their jobs in the process of
adjustment is on the agenda. It is extremely important, at a minimum, to ensure that the
employment and anti-poverty
programmes and access of the poor to the PDS do not get whittled down in the name of fiscal
crisis.
Above all it is essential to demonstrate that the better off segments, especially in urban areas,
bear their due share of the costs of adjustment. The government must show greater willingness
and ability to deal with this class, make them pay the taxes due from them, pay for the full cost
of public services they use, and take measures to enforce greater austerity among them than is
currently in evidence. As Vaidyanathan has rightly remarked, “Regrettably, the tendency is to
assume that nothing much can be done to make tax administration effectively enforce existing
tax laws relating to income, wealth and property. Amnesties and incentives to flush out black
money reflect this presumption and tantamount to sanctifying a culture of non-compliance
with the law among the well-to-do. So is the plea for lowering of the tax rates on the ground
that it will reduce incentives for evasion. There is also a vocal lobby for raising the exemption
limit for income tax, removing restrictions on the level of executive compensation, and
reducing excise duty on durables and other goods largely catering to the better-off segments in
the face of recession. Should the government yield to these pressures, the effective tax burden
on the well-to-do will be reduced-even as all other classes are being asked to bear hardships for
the sake of the ‘larger good’. Can we really expect a democratic polity to support, or is it even
proper to expect it to support, such an iniquitous sharing of the cost of adjustments”?

Macroeconomic Impact of Reforms


The compound rate of growth for the second half of 1980s was 5.8 per cent per annum.
Compared to that for the post-reform period excluding 1991-92 as year of exceptional crisis,
the average for 1992-1998 comes to 6.5 per cent per annum. The average rate for the 1993-94
to 1998-99 period (based on the new series of GDP) comes to 6.8 per cent. Similarly, the trend
rate for the post-reform period estimated at 6.9 per cent is higher than 5.5 per cent applicable
for the 1980s. The post-reform growth, therefore, has been at least 1.1 percentage points
higher than the average rate achieved during the pre-reform period.
Signs of industrial revival: recent trends and surveys do indicate that the industry may finally be
coming out of the recession. Liberalization is expected to bring efficiency and productivity gains
in the industry.
FDI Inflows: Liberalization of FDI policy regime has been an important aspect of the reforms.
Compared to approvals of FDI in 1991, the approvals of FDI inflows since the liberalization of
policy in 1991 reveal a dramatic jump.
While the magnitudes of inflows have recorded impressive growth, they are still at a small level
compared to the country’s potential. Furthermore, one of the objectives of the current reforms
of policies is to remove impediments for export-oriented manufacture in general and to attract
MNEs to locate efficiency-seeking FDI in the country. These investments could help India in
expanding manufactured exports by using her as an export platform. The majority of the recent
approvals of FDI, however, aim to exploit India’s sizeable and expanding domestic market. The
efficiency seeking or export-oriented FDI have yet to start flowing to the country in a
considerable manner.

Fiscal Adjustment and Stabilisation


A key aspect of the structural adjustment programmes is to resist the fiscal deficits of the
governments. Table 5.1 summarises the trends in budget deficit of the central government in
the late 1980s and 1990s. In the second half of 1980s, the fiscal imbalance worsened with
average fiscal deficit rising to 8.2 per cent of GDP compared to 6.3 per cent in the early 1980s
(Economic Survey, 1992-93). Compared to this, the average fiscal deficit in the post-reform
period has been 5.7 per cent of GDP. This suggests that the government has succeeded in
managing the fiscal situation quite well.
However, the extent of fiscal deficits tends to mask the method adopted by the method
adopted by the government to balance the budget and its implications.
Firstly, the revenue deficit which represents the gap between revenue receipts and revenue
expenditure has increased in the post reform period (at 2.9 per cent) on average compared to
an average of 2.6 during the second half of 1980s. This implies that the government has been
unable to contain its current expenditure. Therefore, fiscal deficit has been contained either by
reducing capital investment or by raising capital receipts such as borrowings or disinvestment
of public sector holdings of the government. A rising level of revenue deficit has
thus been sustained with government borrowings of the revenue deficit to finance its
consumption expenditure rather than producing a revenue surplus to finance capital
expenditure in social sectors (and defence) which do not yield a future income flow to the
exchequer. Deepak Nayyar among other analysts, has argued that such a fiscal regime “is not
sustainable in medium-term for it is bound to fuel inflationary pressures or strain the balance of
payments, and thus disrupt the process of growth”.

Secondly, Fiscal adjustment has been achieved by squeezing public investment rather than
government consumption. Capital expenditure as
a proportion of total government expenditure has declined steadily from 30.18 per cent in
1990-91 to 21.8 per cent in 1998-99 (Table 5.2). As a proportion of GDP, capital expenditure has
come down from 5.5 per cent to 3.6 per cent during the same period.

Finally, it has been shown that the burden of adjustment has been unequal in that it has led to
declining expenditures on social such as education, health and poverty alleviation.
Panchamukhi and Mahendra Dev have observed a decline in social sector spending especially
during the early post-reform period. Hence, concerns have been raised regarding the levels of
human development.
Prices: An important focus of the stabilization programme is to bring the rate of inflation under
check. The rate of change in wholesale and consumer prices suggest that the overall trend in
prices has been on decline since 1992. One striking trend noticeable from Table 5.3 is the
growing divergence between the rate of inflation based on wholesale prices and that for
consumer price index since 1993-94. Until 1993-94 the two rates generally converged. Since
1995-96, the consumer price index based rate of inflation has exceeded that of one based on
wholesale prices by a wide margin. The diverging trend in the wholesale and consumer prices
has been explained in terms of the change in the weighting scheme for the two indices. The
consumer price index has a 57.0 per cent weight of the food group compared to just 27.5 per
cent in WPI. The divergence between the two indices therefore, reflects
substantial increase in food prices in the 1990s. Besides, a spurt in prices of housing, medical
care and personal care has also contributed to the rise in CPI. The rise in food prices and other
goods of mass consumption at a faster rate than prices of other goods also indicates that
sharing of burden of adjustment by different sections of society has been uneven and weaker
sections may have been affected more.

Political Resistance to Reform


Political resistance to the reform measures was to be expected from diverse sources, for
diverse reasons and with varying force. Industrialists and exporters had most reason to
welcome the new economic policy. But their enthusiasm has waned over time and given place
to demand for a variety of protective measures.
The ‘middle class’ with access to higher professional education constitute perhaps the most
enthusiastic supporters of the new economic policy. Most of the large and growing number of
non-resident Indians
(NRIs) and those employed in the burgeoning software industry belong to this group.
Globalization has vastly improved the opportunities and earning potential of this class both
within and outside the country. One has only to see the veritable explosion in salaries of
executives and professional personal in recent years. Some of the most ardent and passionate
advocates of free markets, globalization and capital account convertibility belong to these class.
The strongest opposition comes from farmers and from workers in the organized sector
including, especially those employed in the public sector. Farmers have fiercely, and so far su
ccessfully, resisted any increase in the price of inputs in the name of reducing subsidies. Their
argument is that farmers are unable to recover costs at current level of input and output prices
and that farm prices are too low to enable them to have a ‘decent’ income. Subsidising inputs
and pegging output prices higher than warranted by the balance between supply and demand
is neither fiscally feasible nor a visible way of raising farmers’ incomes to a higher level and
even less so for ensuring their progressive improvement. Moreover, since there is much scope
for increasing the productivity of water and fertilizers, higher prices do not necessarily mean an
increase in unit costs. On the other hand, by encouraging excessive use of scarce resources, low
input prices damage the environment and endanger long-term sustainability of agriculture.
Labour in the organized sector is the other locus of strong and organized resistance to the
reform: Organised sector (registered factories, financial institutions, government agencies,
public sector (undertakings) constitute barely 10 per cent of the country’s workforce (and 20
per cent of the non-agricultural workforce). Trade unions, through largely confined to this
segment of this segment of the economy, have played, and continue to play a key role in
protection the interests of their members and in influencing state policy. They comprise an
important section of the better-off segments of the population (most of them belong in the top
quartile of the population in terms of per capita income) and get the lion’s share of the benefits
of subsidized or free facilities and services (higher education, healthcare, public transport,
electricity, water) provided by the state.
Unions in the organized sector have had considerable success in securing better wages, working
conditions and other benefits for workers in this sector and also legislative protection against
lay-off and retrenchment. Several of the activities, especially in the public sector, being crucial
to the orderly governance and smooth functioning of
economy and society, those employed in them are strategically positioned to resist lay-offs,
redeployment, restraint on salaries and benefits.
All this is threatened by proposals to permit flexibility in hiring and firing, retrenchment and
redeployment of excess workforce, privatization of public undertakings, allowing market forces
a greater role in determining wages; and measures to check leakages and corruption. As
consumer, they also stand to lose by increased user charges for public services and possibly
having to pay more taxes. The fierce resistance of trade unions to reforms-especially in the
public sector-is hardly surprising.

Concerns Regarding Social and


Political Implications of Reform
Overarching the resistance from particular interest groups are wider concerns about the larger
social and political implications of the reform. These include several apprehensions:

 That trade liberalization and domestic regulation and disbanding protection for small
industry would have huge and widespread adverse effects on employment and
incomes;
 That inn the name of fiscal consolidation, expenditures are being squeezed and the
compression is at the expense of pro-poor programmes (like basic social services,
social welfare, security and poverty alleviation);
 That in the same of providing incentive for enterprise and professional skills,
inequalities are allowed to increase;
 That the policy of open door for foreign capital are agreeing to the jurisdiction of
international organisations (like World Trade Organisation) created under unequal
treaties in an unequal world dominated by the developed countries reduces the
country’s autonomy and makes it vulnerable to external pressure and interference;
 An added dimension is the increasing concern about the consequences of pursuing
current patterns of development for the environment and sustainability.
According to Vaidyanathan, criticism based on these concerns taken as paranoia or
ideologically motivated, would be serious mistake.
Impact of the New Economic Policy on the Vulnerable Sections
Coming to the issue of the impact of the new economic policy on the vulnerable sections,
Rangarajan argues, “analytically, we need to address two sets of issues. One is either the new
economic policy affects in any way the specific policy measures that we normally undertake in
order to improve the conditions of the poor. Second, is there anything in the new economic
policy which per se has an anti-poor bias? The new economic policy which may be a convenient
expression to refer to the measures introduced since July 1991 is not the total economic policy
of the Government. There are many other elements which continue to remain as an internal
part of the overall economic policy. Among these are the measures which can be broadly
termed as anti-poverty programmes. In the total economic policy there are four elements
which can be identified as being meant specifically for poverty alleviation:
“First, since agriculture is the mainstay of the majority of the population, growth in agriculture
and, therefore, resources allocated for agriculture are an important part of the attack on
poverty. This is not an acceptance of the trickle-down theory. It I common knowledge that in
states in which agriculture has made spectacular progress poverty levels have come down.
Therefore, allocation of resources for agriculture is an important indicator.
“Second, we have evolved over time a reasonably satisfactory food security system. An integral
part of this is the public distribution system. With all its shortcomings, the public distribution
system has played a notable role in avoiding acute conditions of scarcity and met to a certain
extent the minimum requirements.
“Third, there has been a substantial expansion in programmes which are intended to provide
additional employment. The various employment guarantee schemes as well as the credit-
related integrated rural development programmes are examples of such programmes.
“Fourth, exopenditure on education and health also has an important bearing on reducing
poverty levels.
Is there anything in the new economic policy which is inherently anti-poor?

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