The structure of India’s present day economy has its roots steeped in history, particularly in the period when India was under British rule which lasted for almost two centuries before India became independent on 15 August, 1947. The sole purpose of the British colonial rule in India was to reduce the country to being a raw material supplier for Great Britain’s rapidly expanding modern industrial base.
The economic policies pursued by the colonial government in India were concerned more with the protection and promotion of the economic interests of their home country than with the development of the Indian economy. Such policies brought about a fundamental change in the structure of the Indian economy - transforming the country into supplier of raw materials and consumer of finished industrial products from Britain.
India’s economy under the British colonial rule remained fundamentally agrarian. About 85% of the country’s population lived mostly in villages and derived livelihood directly or indirectly from agriculture. The agricultural sector was saddled with surplus labour and extremely low productivity. The industrial sector was crying for modernization, diversification, capacity building and increased public investment. Foreign trade as oriented to feed the Industrial Revolution in Britain. Infrastructure facilities, including the famed railway network, needed upgradation, expansion and public orientation.
Prevalence of rampant poverty and unemployment required welfare orientation of public economic policy. In a nutshell, the social and economic challenges before the country were enormous.
Nehru, and many other leaders and thinkers of the newly independent India, sought an alternative to the extreme versions of capitalism and socialism. Basically sympathising with the socialist outlook, they found the answer in an economic system which combined the best features of socialism without its drawbacks. In this view, India would be a socialist society with a strong public sector but also with private property and democracy.
The Industrial Policy Resolution of 1948 and the Directive Principles of the Indian Constitution reflected this outlook.
At the time of independence, the land tenure system was characterized by intermediaries (zamindars) who merely collected rent from the actual tillers of the soil without contributing towards improvements on the farm.
Equity in agriculture called for land reforms which changed the ownership of land holdings, abolish intermediaries and make the tillers the owners of land. Land ceiling policy was used to fix the maximum size of land which could be owned by an individual.
The stagnation in agriculture during the colonial rule was permanently broken by the green revolution. This refers to the large increase in production of food grains
resulting from the use of high yielding variety (HYV) seeds especially for wheat and rice. The use of these seeds required the use of fertilizer and pesticide in the correct quantities as well as regular supply of water.
Green revolution technology enabled India to achieve self-sufficiency in food grains.
Industry provides employment which is more stable than the employment in agriculture. It also promotes modernization and overall prosperity.
The government had to play an extensive role in promoting the industrial sector. The government had complete control of those industries that were vital for the economy. The policies of the private sector were complimentary to those of the public sector, with the public sector leading the way.
Industrial Policy Resolution (IPR), 1956
In accordance with the goal of the state controlling the commanding heights of the economy, the Industrial Policy Resolution of 1956 was adopted. This resolution formed the basis of the Second Five Year Plan. 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 (through licenses).
Import Substitution: Trade Policy
The industrial policy was closely related to the trade policy. In the first seven plans, trade was characterized by inward looking trade strategy. This policy aimed at replacing or substituting imports with domestic production. In this policy, the government protected the domestic industries from foreign competition.
Effect of Policies on Industrial Development
The proportion of GDP contributed by industrial sector increased from 11.8% in 1950-51 to 24.6% in 1990-91. Industries became far more diversified compared to the situation at independence.
One of the major drawbacks in the industrial sector was the inefficient functioning of the public sector as it started incurring losses leading to drain on the nation’s limited resources.
Excessive government regulation prevented growth of entrepreneurship. The producers were protected against foreign competition and this did not give them the incentive to improve the quality of goods. Inward oriented policies failed to develop a strong export sector. The need for reform of economic policy was widely felt in the context of changing global economic scenario, and the new economic policy was initiated in 1991 to make Indian economy more efficient.