indian economy first phase.pptx

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Economic Policies followed by the Indian Govt., from

1950s to the present

I Phase From 1951-52 to 1964-65- avg. annual growth rate

of 4%.

II Phase-1965-81 , growth rate 3.2%

III Phase-1981-90,growth rate of 5%.

IV Phase-1991, continued late, growth Rate-6.5%, nearly 9%

from 2003 onwards except for 2008-09.



Phase I-(1951-1965)

• Nehruvian Socialist rate of growth" is used to referto the low annual growth rate of the economy of India before 1991.

• It stagnated at around 3.5% from 1950s to 1980s,while per capita income growth averagedextremely low 1.3% a year.

• At the same time, Pakistan grew by 8%,Indonesia by 9%, Thailand by 9%, S.Korea by

10% and in Taiwan by 12%.

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Phase I(1951-1965): Takeoff under a Liberal Regime

• The key element in Nehru’s thinking on trade policy- India needed to beindependent of the world markets, it’s essential for maintaining political

independence.

• Instead of import barriers Nehru’s philosophy was – interventions inproduction via public sector participation & licensing of private sectorinvestment to progressively align the domestic production basket with theconsumption basket.

The Discovery of India

“ The Objective of the country as a whole was the attainment as far as possible of national self sufficiency . International trade was certainly

not excluded, but we were anxious to avoid being drawn into thewhirlpool of Economic Imperialism.– The first charge on the country’s produce should be to meet the domestic needs of food, raw material &manufactured goods and the surplus production would not be dumped in the foreign markets rather for exchange of such commodities as wemight require.”



Bombay Plan contd..

• Indian businessmen supported Nehru’s idea on Central Planning.

• They too believed that free trade and laissez-faire policies of British

Raj- root of country’s economic problems.

• They had benefited from the British Raj’s intervention in the

interwar years.

• High tariffs on imported goods- allowed them to control themarket.



First Election-1952• J.L.N appointed new cabinet-technocrat C.D

Deshmukh- Fin. Minister, T.T. krishnamachari (T.T.K)-

Commerce minister

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First Five Year plan- Progressive liberalization

• B.K Nehru quoted (Jt. Sec. In charge of InternationalFinance in the ministry of Finance).

I- TTK was keen to expand investment and the economy, and would notled fears of the depletion of foreign exchange reserves get in the wayof imports.

II – Consumer Goods import – including items – cutlery, hardware,

electric goods, an integral part of the import basket.Presence of imports of household consumer goods is indicative of a

relatively relaxed trade regime.

III- During 1950s “ established importers” who were licensed to importgoods for sale to other buyers were allowed to operate relatively

free.

Evidences



Year Exports/GDP Imports/GDP

1950-51 6.1 6.1

1951-52 6.8 8.4

1952-53 5.6 6.8

1953-54 4.7 5.4

1954-55 5.6 6.6

1955-56 5.6 7.1

1956-57 4.7 6.5

1957-58 4.2 7.8

1958-59 3.9 6.1

1959-60 4.1 6.1

1960-61 3.7 6.5

1961-62 3.6 6.0

1962-63 3.5 5.8

1963-64 3.5 5.4

1964-65 3.1 5.11965-66 2.9 5.1

Merchandise Imports and

Exports as Proportions of

the GDP (1950-67)

Morarji Desai as FinanceMinister

T.T krishnamachari

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Restrictions on Imports: Morarji Desai as FM

•

The policy of benign neglect on the trade policy frontcontinued till the end of 1957.

• B.K Nehru quoted –The reserves were by now beginning to

get so low that that threw as a danger of not meeting

obligations.

• The First Foreign exchange budget was presented in the

middle of 1958- Morarji Desai had become the Finance

minister.

• This was the beginning of India’s turn to a much more

restrictive trade and investing license regime.



An open Foreign Investment Regime

• Both Congress and left Wing party hostile to Future Foreign Investment

in the country. INC advocated the elimination of existing foreign capital

from the key industries. Industrial Policy Regulation (IPR)1948 shared

these sentiments.

It should recognize that participation of foreign capital, industrial

technique & knowledge required for the rapid industrialization but it is

necessary the conditions under which they participate should be carefullyregulated in the national interest.

• Only Concession IPR1948 indirectly made- Govt. would not nationalize

any business holdings & takeover of any foreign firm for 10 years.

• Despite of hostility PM J.L.N saw a clear need for foreign investment in

India. He seized the initiative from the opponent and incorporated none

of the restrictive provisions mentioned in IPR in the Foreign Policy

Statement he delivered to the parliament in April 1949.



An open Foreign Investment Regime contd..

• Foreign Policy statement 1949 says:

Govt. would encourage new foreign capital by framing policies toenable foreign capital investment on terms and Conditions that are

mutually advantageous.

• Although majority ownership by Indians –preferred- Govt. will notobject to foreign capital having control of a concern for limited

period, if it is found to be of national interest.

• The findings of a census survey by RBI, 1969, reported :Total firms-827 private firms with foreign partnership of some kind.

• Of these 591 had equity participation(262 having majority foreign

holdings), remaining 236-had technical collaboration agreements.



A Restrictive Industrial Policy Regime• Policy toward industry were considerably more restrictive than those toward

trade .

• Mahalanobis Model-on which rested the 2nd Five Year Plan suggested growth of

heavy Industries.

Question: Who should build the heavy industry?

National independence objective: Country could not rely on foreign firms even if

they are willing to invest in this sector- which they were not in any case.

Resources of Indian private firms were too meager to allow them to fulfill the task.

Public Sector- only viable option.

Flaws with the policy:

1) It underestimated the benefits of foreign trade via. Specialization in products of

comparative advantage.

2) Expansion of its role. Leadership greatly overestimated the role of govt. to

efficiently perform a wide variety of functions.

e.g. First Five year plan- few projects- govt. could manage with limited capacity; but

as economy grew larger & complex diseconomies of management grew.



Steel- Central to Revolution- Mahalanobis

Major Emphasis of II Five Year Plan- Steel

1) Rourkela(Orissa) West German Loan

2)Durgapur(W. Bengal) British Loan

3)Bhilai (M.P) Soviet Union

4)Bokaro ( Jharkhand)- U.S didn’t help then Soviet Union. India tilted

towards Soviet Union.

Alternative vision of Bombay Economists-C.N Vakil and P.R Brahmanand

(neither glamorous nor technically rigorous)

•Huge disguised unemployment in countryside•Surplus labor should be engage in making consumer goods- toys,

bicycles, shoes, clothes radios.

•Low capital, low risk, attract many entrepreneurs- rapid returns on investment.

It was ignored.



Role of the Public Sector-1948 Industrial Policy Regulation

1. Industries- State Monopolies. Limited to atomic energy, arms & ammunitions,and railways.

2. Basic Industries in which state would have the exclusive right to new investments,

though it could invite pvt. Sector cooperation if in national interest. 6 industries-Iron & Steel, shipbuilding, Mineral oils, Coal , Aircraft Production&Telecommunication equipment.

3. Industries of National Importance that the state might regulate & license inconsultation with the state governments. 18 industries.

4. All other industries that would be open to the privates sector without constraints.

1956- Industrial Policy Regulation• 3 categories of Industry.

1) Schedule A-State Monopolies+ state reserved the right to seek cooperation fromprivate sector.9 industries from (1+2 of IPR 1948)+9 other heavy industries, etc.

2) Schedule B- Open to private sector but state would increasing establish newundertakings in them.12- Minerals& Aluminum and other not included in Schedule1.

3) Schedule C - Industries to be developed principally through initiative & enterprise

of the public sector. The state reserved the right to enter in them as well.



QUESTION

Why India was able to shift its growth rate from less

than 1 % in the first half of the twentieth century to

4.1% in the first 14 years of the post independence

era?

b bl



Probable Answers1) At independence, India inherited a largely honest & efficient

bureaucracy & judiciary; strong Political Leadership under Nehru& a vibrant entrepreneurial class.

2) Since Economy was not very complex& no. of projects were small

3) While the general direction of the policy was towards increasedcontrols, especially after mid 1958 but implementation of controls was not as vigorous in the early years as in the later

years.4) Since the foreign investment regime was still relatively open &

the domestic machinery sector still in its infancy, machineryimports were less likely to be denied. Thus entrepreneurs wereable to access the benefits of the innovations embodied in

foreign machinery & management with relative ease.

5) Finally growth was sustained by borrowing abroad. But this wasan unsustainable strategy & carried the seeds of crisis. Twoconsecutive droughts-1965-66 and 1966-67 was thrown Indiainto an explicit crisis.

Fi t S f I d d t I di



First Scam of Independent India

Independent India's first dramatised financial irregularity was “the

Jeep Scandal” (1948), which related to the purchase of army jeeps for the country. The charge was that the then Indian High Commissioner to

Britain, V.K. Krishna Menon, bypassed protocol to sign a Rs. 80 lakh

deal with a foreign firm. The case was closed in 1955 and soon Menon,

against whose personal integrity there was not a shred of evidence,

joined the Jawaharlal Nehru Cabinet.

The “Cycle Imports Scandal,” reported in 1951, saw the first conviction

in a major corruption case, when an ICS Secretary to the Government of

India, S.A. Venkataraman, went to prison for accepting bribes and the

conviction was upheld by the Supreme Court.

h l



Mundhra scandal-1958•Sale of fraudulent shares by a Calcutta-based businessman, Haridas

Mundhra, to the Life Insurance Corporation of India.

•Issue raised by Feroze Gandhi (INC), represented the Rae Bareli seat in

the Parliament of India.

• Prime Minister Nehru constituted a one-member commission headed

by Justice M.C. Chagla to investigate the deal.

After finding that a prima facie case had been made out against the

businessman, Justice Chagla concluded that Mundhra had sold fictitious

shares to the LIC and defrauded it to the tune of Rs. 1.25 crore.

The businessman was convicted and sentenced to a long imprisonment

and Krishnamachari was obliged to quit the Cabinet.

A point to be noted is that in these early cases, the judgments came in

an unbelievably short time.



India’s single most important mistake

India ignored the critical importance of International trade. Rather than turn to outward

oriented policies that exploited the export

potential in labor- intensive products, as Koreadid in early 1960s. India pushed import

substitution deeper and deeper. Moreover ever

tightening licensing policy even hampersdomestic competition as well.

indian economy first phase.pptx

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