ECONOMICS PART-1

CHAPTER 1 : India 1947

1. Obviously, the colonial government never made any sincere attempt to estimate India’s national and per capita income. Some individual attempts which were made to measure such incomes yielded conflicting and inconsistent results. Among the notable estimators — Dadabhai Naoroji, William Digby, Findlay Shirras, V.K.R.V. Rao and R.C. Desai.

2. The French traveller, Bernier, described seventeenth century Bengal in the following way: “The knowledge I have acquired of Bengal in two visits inclines me to believe that it is richer than Egypt.

The Bengal famine of 1943 is one amongst the several famines that occurred in British administered Bengal. It is estimated that around 3 million people[1] died from starvation and malnutrition during the period.

3. The Tata Iron and Steel Company (TISCO) was incorporated in 1907. However, there was hardly any capital goods industry to help promote further industrialisation in India. Capital goods industry means industries which can produce machine tools which are, in turn, used for producing articles for current consumption.

4. More than half of India’s foreign trade was restricted to Britain while the rest was allowed with a few other countries like China, Ceylon (Sri Lanka) and Persia (Iran).

5. 1921, The various social development indicators were also not quite encouraging. The overall literacy level was less than 16 per cent.

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Chapter 2 : Indian Economy 1950-1990


The central objective of Planning in India is to initiate a process of Development which will raise the living standards and open out to the people New opportunities for a richer and more varied life. (First Five Year Plan)

• Types of Economic Systems
  Every society has to answer three questions
  1. What goods and services should be produced in the country?
  2. How should the goods and services be produced? Should producers use
  more human labour or more capital (machines) for producing things?
  3. How should the goods and services be distributed among people?
  One answer to these questions is to depend on the market forces of supply and demand. In a market economy, also called capitalism, only those consumer goods will be produced that are in demand, i.e., goods that can be sold profitably either in the domestic or in the foreign markets.
  In a capitalist society the goods produced are distributed among people not on the basis of what people need but on the basis of what people can afford and are willing to purchase. This means that a sick person will be able to use the required medicine only if he/she can afford to buy it; if they cannot afford the medicine they will not be able to use it even if they need it urgently. Such a society did not appeal to Jawaharlal Nehru, our first prime minister, for it meant that the great majority of people of the country would be left behind without the chance to improve their quality of life. A socialist society answers the three questions in a totally different manner. In a socialist society the government decides what goods are to be produced in accordance with the needs of society. It is assumed that the
  government knows what is good for the people of the country and so the desires of individual consumers are not given much importance. The government decides how goods are to be produced and how they should be distributed.
  Most economies are mixed economies, i.e., the government and the market together answer the three questions of what to produce, how to produce and how to distribute what is produced. In a mixed economy, the market will provide whatever goods and services it can produce well, and the government will provide essential goods and services which the market fails to do.


• Ownership and Incentives
  
  It was not uncommon to see farmers packing rotten fruits along with fresh fruits in the same box. Now, every farmer knows that the rotten fruits will spoil the fresh fruits if they are packed together. This will be a loss to the farmer since the fruits cannot be sold. So why did the Soviet farmers do something which would so obviously result in loss for them? The answer lies in the incentives facing the farmers. Since farmers in the former Soviet Union did not own any land, they neither enjoyed the profits nor suffered the losses.( Source: Thomas Sowell, Basic Economics: A Citizen’s Guide to the Economy, New York: Basic Books, 2004, Second Edition.)
  


• In India plans are of five years duration and are called five year plans (we borrowed this from the former Soviet Union, the pioneer in national planning). Our plan documents not
  only specify the objectives to be attained in the five years of a plan but also what is to be achieved over a period of twenty years. This long-term plan is called ‘perspective plan’. The five year plans are supposed to provide the basis for the perspective plan. The ‘Industrial Policy Resolution’ of 1948 and the Directive Principles of the Indian Constitution reflected this outlook. In 1950, the Planning Commission was set up with the Prime Minister as its Chairperson. The era of five year plans had begun.
  


• The GDP of a country is derived from the different sector’s of the economy, namely the agricultural sector, the industrial sector and the service sector. The contribution made by each of these sectors makes up the structural composition of the economy.
  
  Goals of five years plans:
  1. Growth
  2. Modernization
  3. Self Reliance
  4. Equity
  


• Equity in agriculture called for land reforms which primarily refer to change in the ownership of landholdings.
  Land ceiling was another policy to promote equity in the agricultural sector. This means fixing the maximum size of land which could be owned by an individual.
  Land reforms were successful in Kerala and West Bengal because these states had governments committed to the policy of land to the tiller. Unfortunately other states did not have the same level of commitment and vast inequality in landholding continues to this day.
  


• The first phase of the green revolution (approximately mid 1960s upto mid 1970s), the use of HYV seeds was restricted to the more affluent states such as Punjab, Andhra Pradesh and Tamil Nadu. Further, the use of HYV seeds primarily benefited the wheat growing regions only. In the second phase of the green revolution (mid-1970s to mid-1980s), the HYV technology spread to a larger number of states and benefited more variety of crops.
  
  The portion of agricultural produce which is sold in the market by the farmers is called marketed surplus.
  


• In India, between 1950 and 1990, the proportion of GDP contributed by agriculture declined significantly but not the population depending on it (67.5 per cent in 1950 to 64.9 per cent by 1990). Why was such a large proportion of the population engaged in agriculture although agricultural output could have grown with much less people working in the sector? The answer is that the industrial sector and the service sector did not absorb the people working in the agricultural sector. Many economists call this an important failure of our policies followed during 1950-1990.
  


• Industrial Policy Resolution 1956 (IPR 1956): This resolution classified industries into three categories. The first category comprised industries which would be exclusively owned by the state; the second category consisted of industries in which the private sector could supplement the efforts of the state sector, with the state taking the sole responsibility for starting new units; the third category consisted of the remaining industries which were to be in the private sector. No new industry was allowed unless
  a license was obtained from the government.
  


• The production of a number of products was reserved for the small-scale industry; the criterion of reservation being the ability of these units to manufacture the goods. They were also given concessions such as lower excise duty and bank loans at lower interest rates.
  


• Trade policy: In the first seven plans, trade was characterised by what is commonly called an inward looking trade strategy. Technically, this strategy is called import substitution. This policy aimed at replacing or substituting imports with domestic production. The effect of tariffs and quotas is that they restrict imports and, therefore, protect the domestic firms from foreign competition.
  


• It is now widely held that state enterprises continued to produce certain goods and services (often monopolising them) although this was no longer required. An example is the provision of telecommunication service. The government had the monopoly of this service even after private sector firms could also provide it. Due to the absence of competition, even till the late 1990s, one had to wait for a long time to get a telephone connection. Another instance could be the establishment of Modern Bread, a bread-manufacturing firm, as if the private sector could not manufacture bread! In 2001 this firm was sold to the private sector. The point is that no distinction was made between (i) what the public sector alone can do and (ii) what the private sector can also do. For example, even now only the public sector can supply national defense and free medical treatment for poor patients.