History Of Economic Development In India After 1947
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Today, Indian economy is the 10th largest in the world by nominal GDP and the 3rd largest by purchasing power parity. India is a member of BRICS (Brazil, Russia, India, China, South Africa) and one of the G-20 major economies. But India has come a long way in terms of economic growth since its independence in 1947.
Indian economy and its journey since independence
Before the British came, India was called “The Golden bird”. Agriculture was the major occupation of the people here. Trade was also profound between south east Asia and India. After the Britishers came; there was a major change in agricultural policies in India; They commercialized the agriculture policies of India and agriculture suffered-production fell down. During the colonial period; Indian economic growth was minimal and then India finally got its independence in 1947. During the time of independence; when we were making plans for our country; we chose a policy of mixed economy i.e. a mixture of both capitalism and socialism; trying to avoid the shortcomings of both methods. Prime Minister Jawaharlal Nehru along with the statistician Prasanta Chandra Mahalanobis formulated and influenced India’s economic policy. Their strategy was to ensure rapid development of heavy industry by both public and private sectors and based on direct and indirect intervention of government, rather than any of the extreme style of capitalist or socialist country.
What is Mixed Economy?
There are primarily two types of economies – capitalist or free market economy and socialist economy. Mixed economy is a median between these two main economies taking some characteristics of either of them. The capitalist or free market economy is marked by private ownership of the major means of production, i.e. land, labour, capital and entrepreneurship. There is profit motive that drives the organisers of these factors of production which is owned by the government in socialist economy. The production is done not with a motive of profit but to satisfy the needs of the people. In mixed economy, both the public and private ownership of factors of production go side by side. The government keeps an overall control on the business activities of private entrepreneurs. The capitalist economy, also known as free market economy, is characterised by private ownership of resources, profit motive and consumers’ sovereignty. The price is determined by the market forces of demand and supply.
Consumers will buy goods if the price suits them, the sellers will sell if they are able to make some profit at that price. The producers will manufacture those goods which are easily sold in the market. There is little intervention by the government which plays only a supervision role. America, England and France are examples of capitalist economy. The socialist economy is marked by the state ownership of factors of production. Goods are produced as per the needs of the citizens. Each person works according to his capacity and gets as per his need. The state determines the level and type of production which is distributed equitably among the people. Some examples of socialist economies are China, Poland and Russia.
In a mixed economy, the public and private sector exist side by side. Some factors of production are owned by the state and some are in the private hands. The public undertakings generally are the basic industries or strategic industries which are necessary from the defense point of view. Although private sector is allowed to exist, it is subject to government control. The prices are determined by the forces of demand and supply, but the government exercises control and intervenes by imposing a maximum limit on the prices of goods. If the seller charges more price, the consumer can lodge a complaint in the Consumer Court.
Effect of Mixed Economy on the Trade Policy of India
After the Independence of India, our foreign trade policy became an integral part of our general economic policy and planned development. It was meant to sub serve the objectives of our planned growth. Factually, however, we made several mistakes, such as, over-dependence upon official regulation and import substitution. In contrast, insufficient attention was paid to building up our export competitiveness and diversification into new export items and new export markets. Our trade policy, prior to the one adopted in July 1991, may be examined with reference to the following time spans. 1947 to 1952:
Theoretically speaking, during this period, we could have liberalise our imports to some extent by drawing upon our accumulated sterling reserves (that is, foreign exchange reserves in the form of British currency on account of trade surplus during World War II). However, the British authorities were not in a position to allow a free use of these balances. The reason was that, having suffered during the War; British economy was not able to supply us with our import needs against our accumulated sterling balances. We could meet our import needs only from the US and for that we had to sell pounds, buy dollars and pay the US exporters. But on account of destruction caused by the War, Britain was itself in need of aid from the USA.
Thus, we were compelled to adopt an overall restrictive import policy supplemented by measures for boosting exports to the US. One of the steps for boosting exports to the dollar area was devaluation of the rupee in September 1949. However, the export promotion measures had a limited impact. This was because our economy was facing a widespread scarcity of both essential and exportable goods. In addition, the Indian authorities failed to relax restrictions on exports including those in the form of export quotas, export duties and export controls. Thus, relying solely upon devaluation of the rupee for remedying trade deficit could not be expected to succeed. 1952 to 1957:
This period was marked by an overall, though limited, liberalisation of our foreign trade. There was a perceptible improvement in our food supply, and exports were encouraged by removal or relaxation of some export restrictions. But our exports could not increase significantly due to a widespread scarcity of supplies. Moreover, our exports were mainly primary sector items. As yet, we were not in a position export industrial products and at competitive rates. On the other hand, liberalisation of imports led to a tremendous increase in our imports. Deficit trade balance depleted our foreign exchange reserves. And, in the absence of adequate capital inflows, we were forced to reverse our trade policy. 1956-57 to 1965-66:
This period was marked by a persistent shortage of foreign exchange and deficit trade balance. But our trade policy laid greater emphasis on import restrictions than on increasing export earnings. A reformulated rigorous trade regime made an extensive and simultaneous use of not only overall import controls, but also of controls meant for specified individual items. The trade regime was also backed by an elaborate system of “exchange control” (that is, a set of restrictions on making payments in foreign exchange). Faced with a persistent shortage of foreign exchange, the authorities also initiated steps for numerous trade agreements with Soviet Russia and other Eastern European countries for barter trade and trade based on rupee payments.
At the same time, it was realized that a long-term solution of the problem of deficit balance of trade lay in increasing and diversifying our exports. However, we failed to relax the bureaucratic grip upon our exports. An effective solution to this problem would have been that of removing official controls and regulations and providing export subsidies. This, however, hardly took place rather, exporters had to surrender their earnings of foreign exchange to the authorities. This amounted to a major disincentive for them, particularly because they could easily sell their products within the sheltered domestic market at high profit margins. Also, the policy of depending upon traditional trade partners with insufficient exploration and development of new markets continued to be a hallmark of our foreign trade policy. For meeting our payment obligations, we tried to increase our external borrowings (which eventually made us heavily indebted to foreign countries).
Another strategy adopted for solving our deficit trade balance was that of import substitution. This policy suffered from some fundamental drawbacks. In several cases, it involved use of imported technology which added not only to our current import needs but also increased our future maintenance imports. Dogged by bureaucratic intervention and monitoring, delays and cost over-runs became an integral part of our import substitution projects. 1965-66 to 1975-76:
This period of our foreign trade policy started with devaluation of the rupee on 6″‘ June, 1966. During the preceding period discussed above, some recommendations for reformulation of our trade policy was made by the Mudaliar Committee (1962). However, the recommendations were meant to be implemented without dismantling the bureaucratic regulatory framework and planning. They included, among others, increased allocation (obviously by the authorities) of raw materials to export-oriented industries, income tax relief on export earnings, export promotion through import entitlement, setting up of an Export Promotion Advisory Council, and a Ministry of International Trade. This way, even this Committee stuck to the prevalent atmosphere of those times, and recommended, not the strengthening of market forces, but that of the administrative controls and government intervention.
Such an approach suffers from some inherent drawbacks and is prone to failure. During the period under consideration, the structure of our economy was such that it was not possible to reverse our deficit trade balance simply by devaluing rupee. Since we failed to take appropriate follow up steps, our balance of trade worsened from a deficit of Rs.599 crore in 1965-66 to Rs. 921 crore in 1966-67. However, the situation started improving from the following year, and by 1970-71 our trade deficit had declined to Rs. 99 crore, and in 1972-73 we had, for the first time, a trade surplus of Rs. 104 crore. But this situation proved to be unsustainable in the wake of a major hike in petroleum prices. Our trade deficit, with a transitory surplus of Rs. 68 crore in 1976-77, continued to rise till 1990-91. 1975- 76 to 1990-91:
The beginning of 1975-76 marked an adoption of liberal import policy by the government which, backed by certain measures, was expected to effectively tackle the problem of persistent trade deficit. During 1977-79, import of essential goods was also liberalised as a means for checking inflationary price rise. However, this was the period when we were also faced with restricted export markets on the one hand and increasing import prices on the other. The result was that our trade deficit increased from Rs.1085 crore in 1978-79, to Rs. 2725 crore in 1979-80 and further to Rs. 5838 crore in 1980-81. It is noteworthy that in 1981 we had to go in for an IMF loan. And IMF, as matter of policy, insisted on several pre-conditions. It insisted that we should try to remedy deficit trade balance by measures of export promotion and also use import liberalisation as a means for export promotion. This approach was also endorsed by the Landon Committee (1981). However, this policy could not help us in reducing trade deficit.
Our imports rose faster than our exports. Trade deficit shot up from Rs. 2725 crore in 1979-80 to Rs. 5838 crore in 1980-81 and with some variations, rose to Rs. 8763 crore in 1985-86, and further to Rs. 10645 crore in 1990-91. Though Abid Hussain Committee (1985) advocated an approach of balancing import liberalisation with export promotion, the government continued with its emphasis on import liberalisation by claiming that it was necessary to do so for export promotion. It may be noted here that the measures adopted by the government in the latter half of 1980s did result in a rapid increase in our volume of trade, but the increase was an imbalanced one. Our exports increased by nearly two and half times between 1985-86 and 1989-90, but increase in imports was faster still. In 1990-91, our exports and imports had reached Rs. 32553 crore and Rs. 43198 crore respectively as against Rs. 6711 crore and Rs. 12549 crore in 1980-81.
A concomitant result of this new policy was our growing need to borrow from abroad. This added to our external indebtedness and cost of debt servicing. The Import-Export Policy announced on April 30, 1990, for a period of three years revealed a shift in government thinking. It accepted that that our balance of payments position could be improved not so much through import restrictions as through export promotion. Consequently, it quickened the pace of import liberalisation coupled with added incentives for export promotion. Amongst other measures, it expanded the list of imports under Open General License (OGL) and introduced a scheme of automatic licensing up to 10 per cent of the value of the previous year’s import license. It also modified various other provisions and regulatory measures. However, in totality, the trade continued to be over-regulated. By this time, it was amply realised by observers and analysts that our trade policy was not fully compatible with our social and economic objectives and it did not fit in with the realities of international markets. While there was an all-round recognition of the need for a more fundamental change in our policy, the liquidity crisis of 1991 necessitated an immediate shift in it. Policy Since 1991:
In July 1991 came a radical shift in our trade policy. From being a primarily inward looking one, it changed into a primarily outward looking one. The new policy now – was more balanced. It moved away from bureaucratic management towards market-orientation and ushered in an era of a systematic and a phased liberalisation of our external sector. It tried to streamline, albeit to a limited extent, the trade procedures. It claimed to adopt a path of long-term and stable reforms of our trade regime. It also aimed at a sustainable solution of our persistent trade deficit by following a strategy of in-built incentives for exports and disincentives for unnecessary imports. The new policy started with a two-fold import strategy. Imports were categorised into two parts. Imports of fertilisers, POL and edible oils were to be allowed as per need, whereas entitlements to all other imports were linked to exports by enlarging and liberalising the replenishment license scheme.
This overall strategy contained the following major components: 1. Before the introduction of this trade policy, exporters were provided an incentive in the form of Replenishment (REP) Licenses, that is, in the form of import entitlements. The REP rates varied between 5 to 20 percent of f.o.b. value of the export. In the new policy, a REP was renamed an Exim Scrip, with a higher uniform rate of 30%. And, as an added incentive to exporters, it was also made freely tradable. 2. An important merit of the Exim scheme was that its incentive value varied in inverse proportion to import needs of the exporters. An exporter needing fewer imports than his entitlement could sell the balance of import entitlements in the market at a premium. 3. To discourage unnecessary imports, the new policy abolished the system of granting supplementary import licenses. Henceforth, importers were required to buy their requirements by purchasing import entitlements from Exim holders.
However, small sector and producers of life saving drugs and equipment were exempted from this restriction and remained entitled to import licenses. 4. As an additional measure for curbing unnecessary imports, all additional licenses granted to export houses were abolished. 5. All items under the Limited Permissible List were to be imported under the new scheme. The category of Unlisted OGL was abolished and all items falling under this category were also brought under the new scheme. 6. The new policy set a goal of removing all import licensing for capital goods and raw materials (with the exception of a small negative list) in three years. 7. The government was to aim at decanalising (that is, leaving to market forces) the trading of all non-essential items. 8. The government believed that, as a result of liberalisation of trade regime and recent currency devaluation, there was no need to retain the Cash Compensatory Scheme for encouraging exports.
Hence, this scheme was abolished with effect from 3rdJuly 1991. 9. A month later, in August 1991, a new package of incentives was announced for export-oriented units (EOUs) and Export Promotion Zones (EPZs). Summary of Economic Development Strategy after Independence: (i) Both public and private sectors were allotted to carry business activities. Public sector was allotted activities like coal, mining, steel, power, roads etc. Private sector was allotted to establish industries subject to control and regulations in the form of law. (ii) Public sector was given major push by the Government. Maximum revenues in this sector was invested which increased from Rs. 81.1 crore in First Five-Year Plan (1951-56) to Rs 34,206 crores in Ninth Five-Year Plan (1992-97) (iii) Public sector was given importance in order to eliminate poverty, unemployment etc. (iv) Public sector contributed to the industrialisation of the economy. It also helped Indian economy to achieve a considerable degree of self-sufficiency.
Crisis of 1990-91:
Balance of Payments (BoP) crisis had its origin from the fiscal year 1979-80 onwards. By the end of the 6th plan, India’s BoP deficit (Current account) rose to Rs. 11384 crore. It was the mid of 1980s when the BoP issue occupied the centre position in India’s macroeconomic management policy. The second Oil shock of 1979 was more severe and the value of the imports of India became almost double between 1978-78 and 1981-82. From 1980 to 1983, there was global recession and India’s exports suffered during this time. The trade deficit was not been offset by the flow of the funds under net invisibles. Apart from the external assistance, India had to meet its colossal deficit in the current account through the withdrawal of SDR and borrowing from IMF under the extended facility arrangement. A large part of the accumulated foreign exchange fund was used to offset the BoP. During the 7th plan, between 1985-86 and 1989-90, India’s trade deficit amounted to Rs. 54, 204 Crore. The net invisible was Rs. 13157 Crore and India’s BoP was Rs. 41047 Crore.
India was under a sever BoP crisis and in 1991, India found itself in her worst payment crisis since 1947. The things became worse by the 1990-91 Gulf war, which was accompanied by double digit inflation. India’s credit rating got downgraded. The country was on the verge of defaulting on its international commitments and was denied access to the external commercial credit markets. In October 1990, a Net Outflow of NRI deposits started and continued till 1991. The only option left to fulfill its international commitments was to borrow against the security of India’s Gold Reserves. The prime Minister of the country was Chandra Shekhar and Finance Minister was Yashwant Sinha. The immediate response of this Caretaker government was to secure an emergency loan of $2.2 billion from the International Monetary Fund by pledging 67 tons of India’s gold reserves as collateral. This triggered the wave of the national sentiments against the rulers of the country. India was called a “Caged Tiger”.
On 21 May 1991, Rajiv Gandhi was assassinated in an election rally and this triggered a nationwide sympathy wave securing victory of the Congress. The new Prime Minister was P V Narsimha Rao. P V Narsimha Rao was Minister of Planning in the Rajiv Gandhi Government and had been Deputy Chairman of the Planning Commission. He along with Finance Minister Manmohan Singh started several reforms which are collectively called “Liberalization”. This process brought the country back on the track and after that India’s Foreign Currency reserves have never touched such a “brutal” low. In 1991, the following measures were taken: In 1991, Rupee was once again devaluated. Due to the currency devaluation the Indian Rupee fell from 17.50 per dollar in 1991 to 45 per dollar in 1992. The Value of Rupee was devaluated 23%. Industries were delicensed. Import tariffs were lowered and import restrictions were dismantled. Indian Economy was opened for foreign investments. Market Determined exchange rate system was introduced.
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