Indian Economy (1950–1990)

After independence, India chose the path of economic planning to develop its weak economy. India became a mixed economy — combining a large public sector with a private sector. The Planning Commission was set up in 1950 (with the Prime Minister as chairman) to prepare Five-Year Plans — plans setting targets for the economy over five-year periods. (In 2015 the Planning Commission was replaced by NITI Aayog.)

The plans pursued four long-term goals of planning:

• Growth — increasing the country's output (GDP) and capacity to produce.
• Modernisation — adopting new technology and changing social outlook (e.g. equal rights for women).
• Self-reliance — avoiding dependence on imports and foreign aid by producing things at home.
• Equity — ensuring the benefits of growth reach all, reducing inequality and poverty.

The early plans shaped India's strategy. The First Five-Year Plan (1951–56), based on the Harrod–Domar model, gave top priority to agriculture and irrigation (e.g. the Bhakra-Nangal dam), to recover from the food shortages of partition. The Second Five-Year Plan (1956–61), based on the Mahalanobis model, shifted the focus to heavy industry (steel plants, machine-making) in the public sector, believing that building basic industries was the key to long-term growth. These two priorities — agriculture and heavy industry — defined India's planned development for decades.

Since most Indians depended on farming, agriculture was central to planning. Two big efforts were made to transform it: land reforms and the Green Revolution.

Land reforms aimed to make landholding fairer and farming more productive. They included:

• Abolition of intermediaries (zamindari abolition) — ending the exploitative zamindar class so that the actual tiller could own the land. This was the most successful reform.
• Tenancy reforms — giving tenants security and fair rents.
• Land ceiling — fixing a maximum amount of land a person could own, so surplus land could be given to the landless. (This was poorly implemented in many states.)
• Consolidation of holdings — combining scattered small plots into one, to farm more efficiently.

The biggest breakthrough was the Green Revolution of the mid-1960s. It was the use of High-Yielding Variety (HYV) seeds, along with more fertilisers, irrigation and modern methods, which dramatically raised the output of wheat and rice. Its results were historic: India moved from food shortages and dependence on imports to self-sufficiency in food grains, and the government could build a buffer stock for food security. However, the Green Revolution had limits — its benefits were concentrated in a few regions (Punjab, Haryana, western UP) and mainly helped larger farmers, increasing some inequalities. Still, achieving food self-sufficiency was one of independent India's greatest successes.

Industrial development was the other pillar of planning. The framework was set by the Industrial Policy Resolution of 1956 (IPR 1956), which classified industries into three categories: those exclusively for the public sector (defence, heavy industry), those where the public sector would lead but private firms could join, and those left to the private sector (under licensing). The public sector was given the "commanding heights" of the economy.

The public sector (government-owned firms) was thus made the leader of industrialisation. The reasons: private firms lacked the capital for huge basic industries (steel, power, machinery), and the government wanted to reduce inequality, develop backward regions and keep key industries in public hands. Large public-sector units like the steel plants (Bhilai, Rourkela, Durgapur) were built in this period.

India also followed a strategy of import substitution — producing goods at home instead of importing them, to become self-reliant. Domestic industry was protected from foreign competition through high tariffs (taxes on imports) and quotas (limits on imports). Industries also needed a government licence to start, expand or change production (the "licence raj").

This strategy had successes — India built a broad industrial base and reduced dependence on imports. But it also had serious drawbacks: protected from competition, many industries became inefficient and produced poor-quality, high-cost goods; the licence system caused delays, red tape and corruption; and the economy grew slowly (the so-called "Hindu rate of growth" of about 3.5% a year). By 1990 these problems, along with a financial crisis, set the stage for the major economic reforms of 1991 — the subject of the next chapter.