History of Indian Industries

India through a predominantly agrarian economy, had its own type of village or cottage industries capable of producing good quality goods. Some historians also opine that India was on the verge of the industrial revolution when British conquest happened because the authority of Mughals was disintegrating and the society was ripe for a revolution. They argue that British conquest distorted the potential developments by laying down the foundations of a new type of empire. Whatever may be the ground realities about the possibility of capitalist conversion when British reached India, by the time they left India the industrial sector was in complete ruins.

We needed rapid development of the Industrial sector and we focused on capital goods industries for the same in the second five-year plan. The first question which was to be decided when we decided to promote rapid industrialisation was whether we should depend on the Public sector or private sector to initiate growth. But the private sector was not sufficiently developed in India at the time of Independence to take up a huge task. The Private sector will be willing to participate actively only if we can assure policy stability and at the time of independence, there was a lot of apprehensions and Indian democracy was regarded as an experiment. So, the willingness was also less in private players.

Our policy of promotion of small-scale industries and socialistic ideals of preventing concentration of economic power also were not supportive of the private sector. Due to these aim, we had reserved vital industries for the public sector. We wanted autonomous investment by the government should help in the development of infrastructure and atmosphere conductive of private sector investment.

We had our first Industrial Policy in 1948 and the next one in 1956 in this direction. In 1956 reclassification of Industries was done to strengthen the Public Sector. Apart from the reservation of some industries for Public sector, licensing was required to start private industries also in the unreserved sectors. These slowed down the development of Private Sector.

1973 Industrial Policy was a turning point in the direction that it allowed joint sector for the first time. It enabled joint ventures between a public sector partner and a private sector partner. 1980 policy was the major change in direction which started liberalisation in reality. The government has started to focus on social sector spending and was not in a position to invest more in wealth economy and the Private sector was developed enough to play a better role. Increased demand for manufactured products and incidences of smuggling, hoarding and black marketing warranted a change from the era of restriction to an era of promotion. Norms of licensing were relaxed and plants were allowed to increase the capacity of production to actual installed capacity to promote the private sector.

But the real change in the direction of policy happened in 1991 Industrial policy where we actually opened up the economy for the private sector and also moved in a direction to allow foreign companies to compete with India.

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Other Problems of Indian Agriculture

One important problem of Indian Agriculture is irrigation. This is aggravated by perennial nature of Peninsular Rivers. At the same time, Intensive agriculture with Chemical fertilizers and HYV seeds need more water. The monsoon dependency of our agriculture sector was not much conductive in increasing the productivity beyond a limit.

We can see that there is a cyclical pattern in Indian monsoon with few years of good rain followed by a few years of low rainfall. So during the years of good monsoon, we experience bumper crops and during the years of a shortfall in monsoon, we experience a shortfall in agricultural production also. This affects the food grains more as food grains were promoted more in the green revolution. So we have a cyclical surplus alternating with the shortage of food grains in India.

It can be managed by storing the surplus for utilisation in shortage years. For this improvement of storage capacity as well as improvement in the quality of storage is important. Supply chain management is important to ensure transportation of goods without damage and loss from point of production to point of utilisation.

Another issue is continued shortage of Pulses Oil seeds and vegetables. Due to the distorted production with incentives favouring food grains, the other food crops were neglected and pulses suffered the most. With faster development per capita income increased and more and more people wanted to move away from food grains to diverse food items. This further increased the demand for pulses. A large majority of Indians being vegetarian also added to the pressure because in India protein requirement is managed through pulses where it is managed through non-vegetarian food items in most of the other countries. Unsurprisingly India is the largest producer, importer and consumer of Pulses. We need to promote more cultivation of pulses and other food products to make up for this issue.

Availability of proper seeds suitable for local climatic conditions also poses a challenge for Indian Agriculture. Development of new and better seeds which can be more sustainable is needed. There should also be a mechanism to ensure the quality of seed, and prevent fraudsters selling spurious seeds by institutions and laws for the same.

There is another increasing worry that Indian Agriculture is becoming more and more unsustainable by increased dependency on artificial inputs. There is a need to rationalise the use of chemical fertilizers and pesticides. Pesticides also kill the useful organisms in the soil. Many times the environemntal damage is beyond calculation by monetray values and affects the future of our agriculture.

Increased protection by governement also lead to less competetive agricultural practices. Farmers are not motivated to innovate and follow newwer more productive methods because of incentives guaranteed by governemnt. This redunadancy is also a big issue faced by Indian Agricukture.

We need a comprehenesive policy to make a suucesful ‘Evergreen Revolution’ (Sustainable green revolution) to over come this issues with enough role for market without unwanted interference from government.

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Administered Prices & Fertiliser Subsidies in India

As green revolution increased the factor cost/input cost of agriculture and necessitated the use of chemical fertilisers, in order to support the farmers, we came up with fertiliser subsidy.

The fertiliser subsidy in India works based on Administered Price Mechanism(APM) for fertilisers. The government decides the price at which the fertilisers should be sold in the market under APM. But this will demotivate the producers of fertilisers as they may not get sufficient profits as they have to sell their product at price decided by the government. So government introduces Retention Prising Scheme(RPS) to support the producers. Under RPS, the government pays an amount to the producers to retain them in this business, which is different for each producer. The amount paid by the government is the difference between Retention Price and Administered Price. Currently, RPS is only for Urea and government support Urea producers by repaying 12% of the net worth of the company if it meets minimum efficiency norms.

Net worth (sometimes called net or wealth) is the total assets minus total outside liabilities of an individual or a company. Net worth is used when talking about the value of a company or in personal finance for an individual’s net economic position. Put another way, net worth is any asset owned minus any debt owed.

As the subsidy is given on the net worth of the producing unit, if the unit is more efficient in production, it may be able to make a smaller loss in the market under APS and get more profit from RPS. So, big manufacturers with larger capital and better technology have a chance to make a bigger profit by syphoning the government money while fewer benefits are passed on to the farmers. Since it rewards high capacity utilisation and penalises low capacity utilisation, units would have reason to deliberately understate capacity in order to make their utilisation achievements sound higher.

Government studied this issue and currently there is a suggestion to change the basis of RPS from individual manufacturing unit to pool of manufacturers using same raw material and process. All domestic fertiliser units are to be broken up into six groups based on the feedstock they use and how old they are. The six groups are pre-’92 gas-based, post-’92 gas-based, pre-’92 naphtha-based, post-’92 naphtha/furnace oil-based, LSHS-based and mixed fuel-based. Average retention prices of each of these groups will be determined and that will become the price offered to all units in a group.

There is also a suggestion to decontrol the prices by allowing partial open market sales at a fixed ceiling price and gradually decontrol the prices of Urea.

The Phosphatic and Potassic fertilisers are under a decontrolled regime as of now and are sold at indicative maximum retail prices (MRPs). The government also provides a subsidy on some decontrolled fertilisers. In the case of phosphatic fertilisers like di-ammonium phosphate, the subsidy is available only on domestic production, whereas in the case of potassic fertilisers like muriate of potash it is extended even to import because there is no domestic production.To foster the balance use of fertilizers; government implimented Nutrient Based Subsidy (NBS) policy from 2010 for fertilizers other than Urea. The fertilizers included in this scheme include 22 grades of decontrolled fertilizers and 15 grades of complex fertilizers. These fertilizers are provided to the farmers at the subsidized rates based on the nutrients (N, P, K & S) contained in these fertilizers.

We also saw that the green revolution increased the production of foodgrains in India. The increased production lead to more supply of food grains and hence pushed the demand supply equilibrium towards the low demand-low price side. Already green revolution lead to increase cost of inputs in agriculture. The increased factor cost along with decreased selling price pressurised farmers and was capable of causing loss to the farmers. To prevent this government came up with Minimum Support Price system in agricultural products. The minimum support prices are announced by the Government of India at the beginning of the sowing season for certain crops on the basis of the recommendations of the Commission for Agricultural Costs and Prices (CACP).

Minimum support price is the price declared by the government as an insurance to the producer. In case of bumper crops and sudden fall in prices due to increased supply, government agencies would buy the products at the declared MSP.
Earlier governement also used to decalre a separate procurement price for purchasing the Food grains for PDS. If prices were normal(not a bumper crop and market prices not too low) procurement price was lower than the open market price and higher than the MSP. This was discontinued later.

While this Administered Price Mechanism was designed as a support to farmer, the continued MSP policy due to political reasons has caused issues in the market.

Higher MSP for Food grains was a contributing factor for increased production of wheat and rice, compromising on pulses and vegetables, which lead to intercrop disparity. Similarly uncontrolled procurement from market lead to huge buffer stocks with government beyond the storage capacity of Food Corporation of India. This has lead to improper storage, damage and wastage.

Initially, MSP was higher than market price only when there was bumper crops and sudden fall in prices. But due to political nature of demands MSPs were raised many times, and MSPs gradually grew bigger than market price. This manipulates the demand supply equilibrium and creates artificial demands in the market and leads to price fluctuations in the market also. Currently, MSPs are supposed to be dictating market prices and causing uncontrolled food inflation in Indian Economy.

MSP policy insulates the farmers from risks of the market and competetion. Though it is good in short term, it discourages the farmer from introducing better farming practices and improving the productivity in the long run. This is also a reason why Indian agriculture failed to develop beyond green revolution.

We need to rationalise MSP to overcome this problems. MSPs should be slowly withdrawn or kept at a fair price in such a way that it can be invoked only when there is a distress year. In normal situation market should be allowed to operate by the forces of demand and supply.

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Rural Credit & Agricultural Financing

Rural credit was suffering from inefficiencies even after many measures and a committee was appointed by RBI to review arrangements for institutional credit for agriculture and rural development under the chairmanship of Shri B. Sivaraman. Following the recommendations of this committee National Bank for Agriculture and Rural Development (NABARD) was established in 1982. The agricultural credit functions of RBI and refinance functions of the then Agricultural Refinance and Development Corporation was transferred to NABARD for providing undivided attention, forceful direction and pointed focus to the credit problems arising out of integrated rural development.

NABARD was set up with Rs100 Crore initial corpus with the major share of RBI and minor share of Government of India. In 2011, Government bought back the shares from RBI and now owns more than 99% of shares in NABARD and RBI owns the remaining in the total capital of 5000 Crores.

Now NABARD acts as a refinancing agent for State Cooperative Banks, RRBs etc with an aim to promote institutionalized rural credit and agriculture. NABARD also supports state governments by providing credit for rural development activities through the cooperative sector. It also acts as Apex Bank supervising Cooperative Banks and RRBs while Rural banks of Commercial Banks can opt to be supervised by NABARD. NABARD also assists development of institutions and capacity building in rural credit institutions by various schemes and programmes.
We already saw that commercial banks hesitate to lend to farmers due to the high rate of defaults and low rate of repayment. Some of them are wilful defaulters who expect to be benefitted by Loan waiver schemes of the government. Government announces waivers to agricultural loan occasionally as a response to the political pressure. Most of the beneficiaries of these schemes are wilful defaulters who took the agricultural loan and used it for other purposes. But we cannot ignore the fact that agriculture in India is highly dependent on Monsoon and crop failure occurs once in few seasons necessitating support to the farmers.

To manage wilful defaulters, Government announced Interest Subvention Scheme on agricultural credit with eligibility limited to those who repay loans on time. Interest subvention is basically a subsidy on interest due to credit availed. The aim was to incentivise and promote proper repayment. However, incentivising repayment is not considered as advisable by many experts because it is additional subsidy burden as well as it amounts to admitting that non-repayment is a norm.

Kisan Credit Card Scheme was introduced by Government of India to ensure availability of credit to eligible farmers without repeating the time-consuming bank credit screening processes. It provides short term loans for a single cropping season or up to 12 months and the card is valid for five years, subject to annual renewals. If Crop failure happens during a particular season, the repayment can be rescheduled with extension up to four years. KCC scheme also reduces chances of default as subsequent credits are affected in case of defaults.

To overcome loan defaulting due to crop failure, the government introduced agricultural Insurance. After many unsuccessful schemes, governemnet came up with National Agricultural Insurance Scheme. National Agricultural Insurance Scheme” (NAIS) or “Rashtriya Krishi Bima Yojana” (RKBY) covers all food crops (cereals and pulses), oilseeds, horticultural and commercial crops and all farmers, both loanees, and non-loanees. There was a variable premium based on crop and area. 50% subsidy on premium was provided to encourage farmers to join this scheme with a plan to phase out subsidy in 5 years.

Now we have launched The Pradhan Mantri Fasal Bima Yojana (Prime Minister’s Crop Insurance Scheme) with a uniform premium of only 2 percent to be paid by farmers for Kharif crops, and 1.5 percent for Rabi crops. The premium for annual commercial and horticultural crops will be 5 per cent.

This takes care of many of the issues related to agricultural and rural credit in India. Apart from this we also have to ensure enough returns on capital from agriculture to ensure the growth of agriculture. This was the aim of many of the subsidies and administered price mechanism in the agricultural sector.

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Sources and Issues of Agricultural Financing

Before Green revolution, most of the inputs were developed by farmers themselves. Seeds were made by farmers using traditional methods, fertilizers were mostly green manure and cow dung which were locally available. But the Green Revolution changed the characteristics of revolution and necessitated more capital for successful agriculture and financing agriculture became a new concern.

In India, the institutionalized system of financing was ill-developed especially in villages and farmers had to depend on non-institutionalised financiers or money lenders. The exploitation was very high, with interest rates too big and many a time money lenders dictated the terms of loans. At the time of Independence, 90% of agricultural finance was covered by this group.

Initially, the most important institutionalized mechanism to finance agriculture was Cooperatives. They were started in India in 1904 but had a limited impact in the society at that time.

The cooperatives operating in ground level are called Primary Credit Societies. All farmers who take loan should be members of this PCS and contributes to the initial capital which is very low and insufficient at times. The PCS are members of District Cooperative Banks. The DCBs provide the loan to PCS which then lend to the farmers.

These District Cooperative Banks are members of State Cooperative Banks and are refinanced by them. State Cooperative banks are formed with state assistance. In PCS, the profit gained is pooled so as to sustain the lending activities.

Insufficiency of Cooperatives and continued exploitation by money lenders forced the government to come up with more measures and Regional Rural Banks were started in 1975. This was after the failure of Lead bank schemes to ensure proper financial inclusion in spite of government support. Regional Rural Banks are
subsidiaries created by a shareholding of Central Government, State Government and a Sponsor Bank in ratio, 50:15:35.

The government could set up banks from time to time wherever it considered necessary under RRB act of 1976 and every bank was to be sponsored by a “Public Sector Bank”. However, they were planned as the self-sustaining credit institution which was able to refinance their internal resources in themselves and was excepted from the statutory pre-emptions. The RRB concept was based upon the policy that they would lend only to the weaker sections of rural society, charging lower interest rates, opening branches in remote and rural areas and keep a low-cost profile. But the commercial motivation was absent and they started making losses in short period.

The viability of RRBs was questioned and Narasimhan Committee recommended merger of RRBs with sponsor banks as a corrective measure. Recapitalisation, mergers etc are other solutions. Currently, Amalgamation of RRBs is under processing where many RRBs merge together to form a larger entity.

The third source of agricultural finance was commercial banks lending to farmers. Initially, it was very less as credit worthiness was very low in the sector and defaulters are more.

The government came up with a separate regulator in form of NABARD to ensure the financial viability of Rural credit and introduced schemes like Kisan Credit Card and Agricultural Insurance to prevent defaulters.

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Green Revolution

As we saw earlier, Green revolution is an input oriented revolution and inputs in case of agriculture includes Land, Water(Irrigation), Seeds, Fertilisers and pesticides and Labour Cost. We already saw the status of landholding in India and the need for consolidation of land holdings. Now, Let us see the other inputs one by one and impact of green revolution on each input.

We learnt that Green revolution was basically ‘the use of technology to improve the quality of inputs in agriculture’. The main step in Green revolution was to use High Yielding Variety of seeds or Hybrid varieties of seeds instead of naturally available or traditionally used seeds.

Use of HYV seeds increased the productivity by giving more yield per hectare of agricultural land and the green revolution is considered a success story to that extent that we are a food grain surplus nation now, in contrast with highly famine-prone and food grain importing India before green revolution. But presenting success story alone would be an injustice to the ground reality related to Indian agriculture.

Due to circumstances of Food grain shortage overemphasis was laid on the production of food grains and in due course of time, the pulses and oil seeds were ignored. This has lead to a huge demand-supply mismatch in cases of Pulses and oilseeds. This is considered as the Intercrop disparity caused by the green revolution. Shortage of Pulses and Oilseeds is the cause for high inflation in their prices, and quality of food of large sections of poor people is compromised due to this.

Apart from this, the use of HYV seeds necessitated more investments in irrigation. Most of the HYV seeds are less resistant to drought compared to traditional verities and needs more water. These seeds were also less resistant to pests and there was a need to use chemical pesticides to solve this issue. Extensive agricultural practices with higher input cost and higher profit motive lead to extensive use of Chemical fertilisers also. HYV seeds themselves were costlier than traditional seeds. All these factors increased the capital requirement for agriculture.

Some state governments promoted green revolution with increased zeal and provided assistance to the farmers as capital in form of subsidised loans and additional incentives for using HYV seeds. In those states, Agriculture was highly successful and farmers become rich in a short period. Apart from Policy, geography was also responsible for this phenomenon. Rivers in the Northern plain are perennial and can be used for irrigation round through year, while peninsular rivers are non-perennial and cannot give water for irrigation throughout the year. Geography and policy resulted in the faster growth of agriculture in North Indian Plains especially Punjab and Haryana but slower development in south India. This has lead to a sort of Interstate disparity in the development of agriculture.

Extensive use of Chemicals has also lead to adverse impact on soil texture and quality increasing the dependency on chemical fertilisers. If this continues for a longer period agriculture may not be sustainable anymore. In this background, we talk about Evergreen Revolution or Sustainable Green Revolution. Similarly, to remove the intercrop disparity we are talking about a rainbow revolution where all the crops are promoted at the same pace.

Shortage of Pulses in India requires some expansion. India is biggest producer and importer of pulses. This is mainly due to dependency on pulses for proteins, as the majority of the population is vegetarians. Diversification of food habits may also reduce dependency on pulses.

Green Revolution increased the capital expenditure in agriculture at a very fast pace, causing the need for financing agricultural activities.

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History of Indian Agriculture

Indian Agriculture was in a pathetic state of affairs at the time of Independence. The country which was a surplus economy had already faced famines during the British era. The wrong land revenue policy and agricultural policy of British Government in India can be attributed to this. Agricultural Policy promoted Plantation agriculture and cash crops to give raw materials for industries in England, while land revenue policy alienated the land from tillers and gave it to Zamindars or money lenders. Most of the new land owners were Absentee Landlords.

The First Five-Year Plan was a much-needed step in the direction to correct these anomalies and it was a huge success. Food production rose from 52.2 million tonnes in 1951-52 to 65.8 million tonnes in 1955-56, whereas the plan target was only 61.6 million tonnes. In the succeeding Five-Year Plans we ensured that agriculture is taken care off. But the growth rates were not sufficient to make a surplus after feeding the fast-growing population. Hence we introduced Green Revolution in the 1960s.

Green Revolution was program intending to increase the production and productivity of Indian Agriculture. To increase production alone, we can increase the area under cultivation. But we needed to increase productivity also to ensure faster growth rates. To increase productivity we took the help of technology. Hence Green Revolution is also called as the technology-oriented revolution in Indian Agriculture. The technology was primarily used to improve the quality of inputs in Indian Agriculture.

Before going to details of Green Revolution lets briefly see the problems faced by Indian Agriculture at that time. We have already seen that land was with Zamindars and money lenders. At the time of Independence, it was decided that we need to return the land to the actual tillers. Land reforms were done for ensuring this. The aims of Land reforms in India was to remove impediments like absentee landlordism to increase in agricultural production as arise from the agrarian structure inherited from the past and to eliminate all elements of exploitation and social injustice within the agrarian system, to provide security for the tiller of soil and assure equality of status and opportunity to all sections of the rural population.

The first of the reforms was to abolish Zamindari who were intermediaries who used to collected the rents and revenues from tillers in Pre-independence revenue system, and who eventually became owners of the land. This was coupled with a ceiling on land holdings to enable redistribution of surplus land to landless farmers. The land held beyond the cap decided by the government was to be seized and redistributed. These reforms were successful only in a few states as there were irregular recordings of land holdings and improper recognition of Zamindar and actual tiller. This necessitated proper tenancy reforms to improve the contractual terms including security of tenure for the tiller.

If a tiller has to utilise Good Agricultural Practices(GAP) which ensures proper care of land to avoid over-exploitation and ensure sustenance without land degradation if he is sure about the possibility of he himself tilling the land for more seasons. Similarly, the Landowner will be willing to give land for a long term only if there is assurance of ownership and there is an assurance that long period of holding will not lead to claims of ownership. Proper laws with terms and conditions of contract should be put in place for this purpose.

But wherever the policy of redistribution of land was successful, the limitation in land holding reduced the amount of land with subsequent generations and increase in population and now land holding has reduced drastically so that most of the farmers are small or marginal holders of land, and has to focus on subsistence agriculture rather than commercial agriculture. Those who have very small land holdings even decide not to cultivate due to other economic opportunities and lack of profitability in agricultural activities leading to underutilization of available land. Now, the need in such areas is to ensure proper consolidation of land holdings and prevent fragmenting.

These are the context in which we have to consider the agricultural initiatives by the government of India like Green Revolution.

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Institutional mechanism for planning in India

We saw the decision of the government of newly independent India was to set up a planned economy with five-year plans in the model of USSR. The planning commission was constituted as an expert body to advise government and formulate the five-year plan, by an executive resolution of the cabinet.
The planning commission had a structural organisation which reports directly to the prime minister of India. The prime minister himself was the ex-officio chairman of Planning Commission with a nominated deputy chairman with the rank of cabinet minister.
The first step in the process of formulating a Five Year Plan is the preparation of a paper on `Approach to the Plan’ done by the commission. The paper is first considered at the meeting of the full Planning Commission, then by the Union Cabinet and finally by the National Development Council. After approval by the Council, it is placed before the Parliament. While initiating work on the approach at the national level, the State Governments are also advised to take preliminary steps for formulating their approach.
National development council was an advisory body to planning commission chaired by the prime minister of India with the Union Cabinet Ministers, Chief Ministers of all States or their substitutes, representatives of the Union Territories and the members of the Planning Commission as its members. Its primary aim was to secure the cooperation of states in planning and ensure balanced regional development.
After the Approach Paper is approved by the National Development Council, the Planning Commission addresses the Central Ministries and State Governments for undertaking the exercise of formulating detailed proposals for the Five Year Plan. In the process of finalising the Plan, the Planning Commission, if deemed necessary, may also consult the Consultative Committee of Members of Parliament attached to the Ministry of Planning representatives of organised groups of industrialists, labour leaders, agriculturists, social scientists and other experts.
The Central and State Plans, together with the scheme of financing for these, as finally formulated are incorporated in the draft Five-Year Plan. After approval by the full Planning Commission and the Union Cabinet, the Plan is presented to the National Development Council. After the Council has approved/endorsed the Plan, it is laid on the tables of both Houses of the Parliament.
However, recently Prime Minister of India announced his decision to scrap Planning Commission and replace it with NITI Aayog.
The National Institution for Transforming India Aayog or NITI Aayog, is a Government of India policy think-tank established by Prime Minister Narendra Modi to replace the Planning Commission. The aim of NITI Aayog is to bring about a decentralised planning in contrast with centralised planning by Planning Commission and hasten the development process in a balanced manner.
NITI Aayog has the prime minister of India as the chairperson, with a nominated vice chairperson and three full-time members who are experts from the field. Maximum of four cabinet ministers can be appointed as ex-officio members and there can be a maximum of two part-time members from leading universities research organisations and other relevant institutions on a rotational basis.
It has a Governing Council comprising the Chief Ministers of all the States and Union territories with Legislatures and lieutenant governors of other Union Territories and Regional Councils will be formed to address specific issues and contingencies impacting more than one state or a region.
There will be secretary level officer appointed by the prime minister of India with a fixed tenure as the Chief executive Officer.
In contrast to the planning commission which formulated plans and decided on state wise and sector wise allocation of funds, NITI Aayog will be a think tank who works as a “policy-formulation-hub”. The finances and allocation will be left to the ministry of finance. NITI Aayog is supposed to promote more indicative planning with cooperation from states and considering the needs of the states at first. The focus of plan may be limited to core areas and many of the details of the functioning of this new body corporate are still to evolve.
We have seen that the issue faced by India during the initial years of independence was primarily related to food scarcity and the first five-year plan was a significant step towards promoting agriculture in India. Let us see the problems faced by our agriculture sector and various measures we took through the years in following few articles.

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Economic Planning in India

Our leaders were very much clear that there is a need for planned growth of the economy to overcome the underdeveloped status of newly independent India. Many of our leaders were inspired by the soviet model of development and decided to go for a similar planned development strategy. The planning commission was established under the chairmanship of Prime Minister and was designated with the job of creating five-year plans for developing India.

Five-year plans are documents describing the growth targets, estimates if resources, priorities and strategies etc.

The second five-year plan designed by P C Mahalanobis was instrumental in pursuing the unbalanced growth strategy by focussing on basic goods and capital goods industries so that the forward linkages will propel the higher levels of production. This strategy was followed till the 1980s. But failure in creating forward linkages and high level of imbalance forced us to change the focus from basic goods to consumer goods.

Planning in India includes Indicative planning and Imperative planning. Indicative planning is when the direction of policy is given by the plan document and stakeholders are motivated to follow the suit. There may be some incentives for following the plan direction. But it is not mandatory for stakeholders. But in the case of imperative planning, the plan is binding on all stakeholders. India has a mixture of both plans because some of the provisions are mandatory and non-confirmation can be penalised.

Indian planning is unique in the sense that it includes Economic Planning and Social Planning. It talks about economic goals as well as social goals.

First Five Year Plan:
The first plan had a huge emphasis on agriculture. The economy was stagnant at the time of independence and there was an acute shortage of food grains.Industries in India was not developed enough and primarily consisted of cottage industries.Our exports were limited to primary products. We targeted a growth rate of 2.1% and achieved 3.6% in the first five-year plan designed by K. N Raj.

Second Five Year Plan:
Second Plan was designed to ensure rapid industrialisation. We could improve the share of industries in GDP from 3% to 18%. We also attained a growth rate of 4.2% against the target of 4.5%. The food shortage was still an issue and we had to manage with imports from the US.

Third Five Year Plan:
The objective of the third five-year plan was a Self-reliant and Self-sustained economy. We wanted to increase the production to a level where we can overcome the need to import things and this was called ‘Import Substitution’. We started Public Sector Units (PSU) to ensure production levels.
An economy can be self-sustained only when there is a huge growth rate. Issues in minor sectors should not affect the overall growth and development, and high growth rate will cushion the impact of minor issues. Though we wanted to attain self-sufficiency in Technology, Consumer Goods and Capital Goods, we were far away from actual self-reliance due to the shattered state of the economy at independence. Industries were set up in many sectors, only after Independence.
We had an ambitious target of 5.6% growth rate in this plan and we could achieve only 2.7% and the plan was officially declared as a failed plan.

Reasons for the failure of this plan includes the Leadership crisis after the demise of Nehru, Wars with China and Pakistan and Failure of monsoons.

Annual Plans/Rolling Plans:
Between 1966 and 1969 we had three annual plans and achievements of this period was green revolution.

Fourth Five Year Plan:
Self-reliance was the objective of the fourth five-year plan with emphasis on growth and stability. Our targets were at the level of the third plan itself we could achieve only 3.3% growth. Inflation was highest with problems of shortage of money with the government. 1971 war and oil crisis of 1972-73 due to Suez Canal Issue also affected this plan. However, this plan was not officially declared as a failure.

This plan was marked by aggressive policies of Indira Gandhi, like Nationalisation of Banks, the passage of Monopolistic and Restrictive Trade Practices Act to control industries and Foreign Exchange Regulation Act to control foreign exchange.

Fifth Five Year Plan:
Though the theme was Poverty Eradication, there were no schemes for the same in first three years as the plan design was more due to political need from agitations in the country by Jayaprakash Narayan. It went through the National Emergency and ultimately resulted in first non-Congress government.

Annual Plans:
Between 1979 and 80 we again had annual plans due to political instability.

Sixth Five Year Plan:
This plan was designed by Planning Commission itself and had an emphasis on Structural Change of the Economy. We wanted to induce faster development in the secondary and tertiary sector.We introduced Industrial Policy of 1980 to enable faster Industrial Development. Huge profits incurred by PSUs and the need for resources to run Employment generation and Poverty eradication schemes left government at a handicap to invest more and the only remaining choice was to allow the private sector to play a significant role. Hence we started liberalisation of licensing and perspective planning with long term goals.

Seventh Five Year Plan:
This plan was also designed by Planning Commission and talks about modernisation. This plan is almost similar to the previous one and had its emphasis on liberalisation. The plan wanted to promote investment in technology to modernise existing plans as well as to expand the economy to promote modern sectors like food processing and electronics.

The political instability resulting from the internal politics and Bofors Scam lead to economic crisis during this period and we faced the biggest crisis during this period. Credit rating agencies reported that India may default and USSR was not in a position to help due to their internal problems. Hence, we were forced to go for non-concessional assistance(high-interest short-term loans) and was forced to pledge gold to Banks ofJapan England and Switzerland.

Annual Plans:
1991 and 1992 we had annual plans with congress governments with a thin majority. We got a conditional loan from IMF and we announced ‘ The New Industrial Policy-1991.

Eighth Five Year Plan:
The plan, developed by John W Miller focussed on Human Resource Development and reforms were directed towards Liberalisation, Privatisation and Globalisation. In spite of many changes in government, the plan was not postponed.

Ninth Five Year Plan:
Ninth Plan aimed at equitable distribution and growth with equality and we could achieve a growth rate of 5.4%. There was a sudden decline in growth rate due to South East Asian Crisis, Sanctions after the nuclear test, Kargil War and the terror attack in the US.

Tenth Five Year Plan:
This plan was affected by the global slowdown in 2003-04. 2004 showed a sudden boom and African Countries were growing at 6%.

Eleventh Five Year Plan:
The objective was Inclusive development.

Twelfth Five Year Plan
Faster, More inclusive and Sustainable Growth

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Sectors of the Economy & The Need for Unbalanced Growth Strategy

The economy is primarily a system of production of goods and services. This production is classified into three different sectors for a clear understanding of the structure of the economy and for effective design and implementation of development strategies.

The first sector is called Primary Sector and it is related to extraction of raw materials. Natural resources are transformed into primary products in this sector, which are further used by other sectors. This sector includes Agriculture, Fishing, Forestry, Mining and Quarrying.

The second sector is called Secondary Sector and is mainly concerned with manufacturing. This sector uses the products of primary sector(raw materials) and adds value to it by modifying it and transforms them into goods.

‘Tertiary Sector’ is the third one which is related to the provision of services to customers and businesses. Hence, it is also called service sector.

As per the ‘Three sector hypothesis’ in economic theory, the main focus in an economy shifts from Primary sector, through the secondary sector and finally to Tertiary sector. Development is identified as the structural change in the economy from primary to later ones. It is supposed to lead to increased quality of life, reduction of poverty and unemployment, improvement of education, etc.

Though there is a gradual change in the structure of the economy during development, all the sectors also grow in quantity. In an underdeveloped economy primary sector will be responsible for most of the production, say 80% for an example. While development is happening the share shrinks to maybe 60% of GDP. But during the same period, the size of the economy will also increase from 10 crore rupees to 15 crore rupees. So, what was 80% translates to 8 crores in the initial times while 60% of 15 crores becomes 9 crores. You can see that there is a growth in the size of all sectors in spite of the change in structure and reduced share of some sectors.

In India, we classify industries into, four different types. Capital Goods Industry, Basic Goods Industry, Intermediate Goods Industry and Consumer Goods Industry. Capital Goods Industry includes the industries that manufacture plants and machines used to produce other goods. Basic Goods industries are those core industries which may not be directly contributing much value to the economy, but are unavoidable for the growth of the economy. This includes Petroleum, Coal, Gas, Cement, Fertilizer etc. Sometimes a product from one industry may be a raw material for another industry. Such Industries which produce goods which connect two sectors are called Intermediate Goods Industry. For example, steel can be an intermediary good which is used to make heavy machinery in a capital goods industry or in making a household instrument in consumer goods industry. Consumer Goods Industry includes all the goods which are used by general public in common.

Consumer goods are again divided into durable goods and non-durable goods. Non-Durable goods are those perishable goods which we consume immediately after purchasing. It includes all the consumables which we use up in short time period like Food Items, Toiletries etc. Durable goods are those goods which can be used repeatedly for a longer period of time. The Electronic instruments, utensils etc are classified as durables. They are also called white goods as they were initially made up of steel or aluminium which is white in colour. For statistical purposes, the difference between these two types of goods is taken as a minimum shelf life of 3 years.

The debate among policy makers who try to induce development was that whether the development should be balanced or unbalanced. In a balanced growth strategy, the government gives equal importance to all sectors of the economy and tries to develop them equally. But in the case of an unbalanced growth strategy, the government focuses only one of the sectors and wait for others to develop on its own.

Those who support unbalanced strategy argues that the sectors in the economy are interlinked and expansion in one sector will force the growth in other sectors. For example, if government actively develops sugar industry, the demand for sugar cane will go up. The demand causes the increase in price and attracts more farmers to grow sugar cane. This is how due to the backwards linkage of sugar industry sugarcane agriculture develops. similarly, if there is surplus sugar and price of sugar come down the industries like sweets manufacturing, using sugar as a raw material will increase their production. Seeing their success more such industries will come up. Due to the forward linkage, more sectors develop. If the backwards and forward linkages of an industry are not capable of pulling up the related industries, the growth will not be sustainable and will be of short duration only.

Economic constraints of the economy also is a reason for unbalanced growth strategy. As the government doesn’t have enough money to invest in all sectors, it carefully chooses and invests in those sectors which have more linkages and can make whole of the economy move.

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