Development Experience And Economic Reforms Unit 6 Notes

Development Experience And Economic Reforms

Indian Economy On the Eve Of Independence 

In British era India’s natural resources, iron ores, gold mines, wealth and manpower were intensely exploited. There were no efforts made to calculate India’s per capita income due to lack of interest. 

Britishers were only interested in promoting their own industries. The Indian economy on the eve of independence was struggling to find the path and it showed poor growth.

Agricultural Sector on the Eve of Independence

Before 1947, agriculture was the main source of income for India, because 85% of the population lived in villages where livelihood completely depended on agriculture.

The Indian economy on the eve of independence with respect to agriculture was very poor, it was facing massive stagnation and continuous deterioration. 

There were three main reasons of poor agriculture on the eve of independence 

Low level of productivity: The productivity and output per hectare of land were very low, in spite of the large cultivation area.

High vulnerability level: Agricultural activities were totally dependent on climatic conditions.  Poor rainfall generally led to a low output level. No efforts were made by the British to rectify irrigation problems. 

The effects of the zamindari system: In this system, the landlords used to take rent from farmers despite their poor economic conditions. This leads to high stress among farmers which results in a stagnant agricultural sector.

Extensive commercialization of agriculture: It  refers to switchover from cultivating for self to cultivating for sale in the market. Which deteriorates farmers’ condition due to the existence of middlemen. Hence, the stagnation of the Indian agricultural sector.

Indian economics system and common goals of Five Year Plans.

Indian Economics System

The Indian economics policies after post independence were influenced by the colonial experience. From 1947 to 1991, this Economics System was based on social democratic-based policies.

These policies included protectionism, import substitution, intervention of the state in labor and financial markets, industrialization, central planning, large public sector, business regulation and public ownership which led to slow growth and corruption.

The Indian economy has moved to a market-based system with economic liberalization in 1991. The growth rate of the economy increased tremendously in 2000’s with healthier economic reforms and policies. India has become the second-fastest growing major economy in the world by 2008.

In the whole economics system around 54% of the GDP comprises the service industry while 29% is the industrial sector and 17% is the agricultural sector. 

The core occupation in India is agriculture which employs 60% of the population, 28% of the population is employed in the service sector and the rest 12% are in the industrial sector. This work force amounts to half a billion workers.

The main agricultural products of India are rice, wheat, jute, tea, sugarcane, cotton, oilseed, poultry and fish. 

Textiles, steel, chemicals, information technology enabled services and software, food processing, petroleum, machinery, steel, and cement are the major industries. 

Now the Indian economy is the world’s sixth largest.  

Five Year Plan

The Constitution of India came into force on 26 January 1950.  Subsequently, the Planning Commis­sion was also set up on 15 March 1950 and the actual planning started from 1 April 1951 with the launch of the First Five Year Plan (1951-56). This planning was similar to the central planning in the Soviet Union.

Five year economic planning is a short-term plan which outlines the long-term goals of a nation, spanning twenty years.

It is used to describe the long term plans of the government of India to develop and coordinate the economy with efficient utilization of resources for economic growth and development of the nation

The Goals of the Five Year Plans

Development Experience And Economic Reforms The Goals of the Five Year Plans

There are basically four generalized goals of a five year plan.

Growth

Growth is the first and the most basic goal of an economic plan to increase the Gross Domestic Product (GDP) of the country. GDP measures the growth of an economy. Higher the GDP the better is the economic policies of the country.

This economic growth happens with an increased production capacity of goods and services. Growth in all three basic sectors (agricultural, industrial and service) are important to make up the structural composition of the GDP.

Modernisation 

Modernisation is integration of technology to boost the economy. Innovation, inventions, and advancement in technology play a huge role in upgrading our economy and increasing its output. 

For example, introduction of modern agricultural techniques increases the output. The Indian economy also saw a major boom in the IT industry due to modernization.

Self Reliance

A new economy promotes make in India. This basically means that anything we are capable of producing domestically we should not import.

This step ensures not only to make us self-reliant but also to protect our sovereignty. Importing basic essentials from other nations would make us dependent on them. After 1991, the government opened up our economy to the global markets once we had already established a domestic base.

Equity

Development of the economy is not complete without developing our society. So, it is essential that these benefits reach to all members of the society. This is where equity comes in.

Equity ensures that all citizens of our country have their basic needs for food, housing, clothing. It also reduces the wealth gap and the inequality in our society.

Main Problems and  Policies of  agriculture 

Problems of Agriculture 

Instability

Agriculture in India is largely depends on monsoon, which results fluctuations in production of food-grains year after year.

Land Ownership

Large portion of land in India are owned by a- rich farmers, landlords and money-lenders. Vast majority of farmers own very little amount of land, or no land at all.

Sub-Division of Land

Due to over population and break­down of the joint family system, there is continuous sub-division of agricultural land into smaller and smaller plots. Sometimes small farmers are forced to sell a portion of their land to repay their debt which creates further sub-division of land.

Excess Labourers

Problem of surplus labour amd unemploy­ment further pushes the wage rates below the sub­sistence levels.

Neglect of Crop Rotation

Due to illiteracy farmers do not un­derstand this important crop rotation system. They use the same type of crop and, resulting the land loses its fertility considerably.

Inadequate use of manures and fertilisers

Due to inadequate use of manures and fertilizers Indian agriculture produce less than Japa­nese or Chinese agriculture.

Use of poor quality seeds

Majority of farmers uses poor quality and unimproved seeds which gives less yield.

Less use of efficient farm equip­ment

Most farmers in India still uses traditional system of farming instead of using modern equipment. Another problem is size of most of the plots are so small that using big equipments are impossible.

Agricultural Marketing

Indian farmers faces difficulty in marketing their crops. Because of small size and scattered nature of agricultural holdings, the productivity per acre is low.

Agricultural Credit

Most of Indian farmers are always in debt. Once the farmer falls into debt they never come out of it. Large part of the liabilities of farmers is ‘ancestral debt’. Farmers passes their debt to their successors.

Policies of Agriculture 

For raising the level of income and standard of living of farmers within a definite time frame, the government made some agriculture policies. These policies are formulated for all round and comprehensive development of the agricultural sector.

The main objectives of agricultural policy in India is to remove the major problems of the agricultural sector related to improper and inefficient uses of natural resources, predominance of low-value agriculture and insignificant progress of co­operative farming and other self-help institutions.

Main Policies

To improve the productivity of inputs by purchasing HYV seeds, fertilizers, pesticides, irrigation projects etc.

To increase per hectare value-added rather than raising physical output 

To protect the interest of poor and marginal farmers by abolishing intermediaries 

To introduce modern technology in agricultural operations and application of improved agricultural inputs like HYV seeds, fertilizers etc.

To check environmental degradation of the natural base of Indian agriculture.

To promote agricultural research and training facilities and provide such research among the farmers by establishing a close linkage between research institutions and farmers.

To remove bureaucratic obstacles on the farmers and Co-operative societies so that they can work independently.

To introduce technically sound, environmentally non-degrading and non-hazardous and socially acceptable use of natural resources of the country for promoting the concept of sustainable agriculture

To provide food and nutritional security to large population. Special efforts will be made for raising the productivity and production of crops.

To encourage application of biotechnology, remote sensing technologies, energy saving technologies, pre- and post-harvest technologies, and technology for environmental protection. 

Industrial Policy of 1956

The Industrial Policy of 1956 has an important role to the public sector, and fair treatment to the private sector. This policy laid stress on states which must strengthen and expand financial institutions that extend financial assistance to private industry and cooperative enterprises.

This policy states that the government would continue pursuing a policy of supporting  industries through tax concessions and subsidies.

This policy helped to reduce regional disparities in industrial development. It states that facilities for development will be made available to industrially backward areas.

This policy recognised the role of foreign capital in a country’s development. The foreign capital supplement provides more resources for investment and relieves pressure on Balance of payments.

The Industrial Policy, 1956 states that the programme of rapid industrialisation in India will create large demand for managerial and technical personnel. 

This policy recognised the important role of labour as a partner in the task of development. It emphasizes the provision of adequate incentives to workers and improvement in their working and service conditions. 

Foreign Trade Policy 

India’s Foreign Trade Policy (FTP) provides the basic framework of promoting exports and trade. FTP is periodically reviewed to adapt to the changing domestic and international scenario.

India’s FTP is responsible for multilateral and bilateral commercial relations, special economic zones (SEZs), state trading, export promotion, trade facilitation, and development and regulation of certain export oriented industries and commodities.

The current Foreign Trade Policy since 2015 is to focus on improving India’s market share in existing markets and products as well as exploring new products and new markets. 

India’s Foreign Trade Policy also helps exporters to leverage benefits of GST. It is closely monitoring export performances, improving ease of trading across borders, increasing realization from India’s agriculture-based exports and promoting exports from MSMEs and labour intensive sectors. 

The DoC has also sought to make states active partners in exports. As a consequence, state governments are now actively developing export strategies based on the strengths of their respective sectors.

As per current WTO rules India needs to eventually phase out subsidies and move towards fundamental systemic measures in the future.

Economic Reforms since 1991:

Features and appraisals of LPG

Liberalisation, globalisation and privatisation (LPG policy)

The new design of economic reforms at the beginning of the 1990s was known as liberalisation, privatisation, and globalisation model or LPG. The main purpose of this design was to make the Indian economy as the fastest developing economies across the globe with the abilities to complement the world’s biggest economies.

The LPG model was incorporated in manufacturing financial services and business targeted at boosting the nation’s economy to a more competent level, which impacted the country’s overall economic growth.

Liberalisation

Liberalisation is the process of elimination of control of the state over economic activities. It provides a greater autonomy to the business enterprises in decision-making and eliminates the government interference.

With the arrival of liberalisation, the government has controlled the private sector organisations to conduct business transactions with fewer restrictions.

This liberalisation has opened economic borders to foreign companies and investments. Earlier, they encountered many barriers viz. tax laws, foreign investment restrictions, accounting regulations, and legal issues. 

The economic liberalisation reduced all barriers and waived a few restrictions over the control of the economy to the private sector.

Reforms Under Liberalisation

  • Deregulation of the Industrial Sector
  • Financial Sector Reforms
  • Tax Reforms
  • Foreign Exchange Reforms
  • Trade and Investment Policy Reforms
  • ExternalSector Reforms
  • Foreign Exchange Reforms
  • Foreign Trade Policy Reforms

Impact of Liberalisation

The Good

  • Free flow of capital : It enhances the flow of capital by making it affordable for  the businesses to reach the capital from investors and take a profitable project.
  • Diversity for investors: Every investor will be benefitted by investing a portion of their business into a diversifying asset class.

The Bad

  • The weakening of the economy: Restoration of the political power and economic power will lead to weakening the entire Indian economy.
  • Technological impact: Fast development in technology impacts small scale industries, either they adjust to changes or shut their businesses.
  • Mergers and acquisitions: Due to merger of small businesses with big companies the employees of the small companies may need to enhance their skills which may take time that lead to non-productivity and can be a burden to the company’s capital.

Privatisation

Privatisation is the migration of something from the public sector to the private sector. Government services and operations may also be privatised. 

In this process private entities are working with the government plans that had earlier been the work of state-run companies. Some instances involve law enforcement, revenue collection, and prison management.

Privatisation of the public sector companies by selling off parts of the equity of Public Sector Enterprises to the public is known as disinvestment.

Government companies are transformed into private companies in two ways.

Transfer of ownership

  • By the withdrawal of the government ownership 
  • By the sale of public sector companies.

Disinvestment

By selling off parts of the equity of PSUs to the private sector to improve financial discipline and facilitate modernisation.

Other methods of privatisation.

  • Public sale of shares
  • Public auction
  • Public tender
  • Direct negotiations
  • Transfer of state control of enterprises 

Globalisation

Globalisation is the integration of the economy of the nation with the world economy. It is a multifaceted aspect. It is directed at transforming the world towards a greater interdependence and integration.

Globalisation includes the creation of networks and  transforming social, economical, and geographical barriers.  

The growth of foreign investment has increased drastically in the field of corporate, retail, and the scientific sector in the country.

Globalisation also impacts on the social, monetary, cultural, and political areas. In recent years, it has increased due to improvements in transportation and information technology. 

Globalisation in the Indian economy

Indian society has changed drastically after urbanisation and globalisation. The new economic policies have had a direct influence in forming the basic framework of the economy.

Economic policies also performed an essential role in planning levels of savings, employment, income, and investments in the society.

Globalisation in India increased employment with the opportunity of special economic zones (SEZ) and export processing zones (EPZ)

Another factor in India is cheap labour. This feature motivates the big companies to outsource employees from India which cause more employment.

The level of compensation also increased as compared to the domestic companies due to the skill and knowledge a foreign company offers. 

The standard of living of an individual has increased, which is notified with the purchasing behaviour of a person, especially with those who are associated with foreign companies. 

Concepts of Demonetization 

Demonetization is the act of removal a currency unit of its status as legal tender (coins or banknotes that must be accepted if offered in payment of a debt).

It occurs whenever there is a need to change the national currency. The current forms of money are pulled from circulation and replaced with new notes or coins. 

Demonetization is used as a tool to stabilize the currency and fight inflation, it is to facilitate trade and access to markets, and to push informal economic activity into more transparency and keep the economy away from black and gray markets.

Removing of currency is a drastic intervention into an economy because it directly affects the medium of exchange used in all economic transactions. 

It can help stabilize existing economic problems, or it can cause chaos in an economy, if undertaken suddenly or without warning. Demonetization is undertaken by nations for a number of reasons.

Demonetization in India

In India demonetization has been tried as a tool to modernize a cash-dependent developing economy and to combat corruption. 

In 2016, the Indian government decided to demonetize the 500 and 1000 rupee notes which were the two biggest denominations in its currency system and accounted for 86 percent of the country’s circulating cash. 

With little warning, India’s Prime Minister Mr. Narendra Modi announced to the citizens on Nov. 8, 2016, that ₹ 500 and ₹ 1000 notes were worthless with immediate effect. People  had to exchange them for newly introduced ₹ 2000 and ₹ 500 notes.

The government’s goal was to combat India’s thriving underground economy on several fronts: eradicate counterfeit currency, fight tax evasion (only 1 percent of the population pays taxes), eliminate black money gained from money laundering and terrorist financing activities. It was also to promote a cashless economy. 

Individuals with huge sums of black money from parallel cash systems were forced to take out their large-denomination notes to a bank, which was by law required to acquire tax information on them. 

If the owner of that cash could not provide proof of making any tax payments on the cash, a penalty of 200 percent of the owed amount was imposed.

Concept of GST

The goods and services tax is a value-added tax levied on most goods and services sold for domestic consumption which is paid by consumers.

This tax is included in the final price and paid by consumers at point of sale and passed to the government by the seller.

Companies add the GST to their product price and a customer who buys the product pays the sales price inclusive of the GST. 

Most countries have a single unified GST system, which means that a single tax rate is applied throughout the country. 

In this unified GST platform country’s merge central taxes (e.g., sales tax, excise duty tax, and service tax) with state-level taxes (e.g., entertainment tax, entry tax, transfer tax, sin tax, and luxury tax) and collect them as one single tax. 

Few countries, such as Canada and Brazil, have a dual GST structure. Compared to a unified GST economy where tax is collected by the central government and then distributed to the states, in a dual system, the central GST (CGST) is applied in addition to the state sales GST (SGST).

For example, the central government levies a 5% tax and some states also levy a state tax  which varies from 7% to 10%. A consumer’s receipt will clearly mention the CGST and SGST rate that was applied to their purchase value. 

France was the first country to implement the GST in 1954, since then, many countries have adopted this tax system in some form or another. viz. Canada, Vietnam, Australia, Singapore, United Kingdom, Monaco, Spain, Italy, Nigeria, Brazil, South Korea, and India.

India adopted a dual GST structure in 2017, which was the biggest economic reforms in the country’s tax structure. The main reason for incorporating the GST was to eliminate tax on tax, or double taxation, which cascades from the manufacturing level to the consumption level.

India has implemented the following tax rates: 

  • A 0% tax rate applied to certain foods, books, newspapers, cotton cloth etc.
  • A rate of 0.25% applied to cut and semi-polished stones.
  • A 5% tax on household necessities such as sugar, spices, tea, and coffee.
  • A 12% tax on computers and processed food.
  • An 18% tax on hair oil, toothpaste, soap, and industrial intermediaries.
  • The final bracket, taxing goods at 28%, applies to luxury products, including refrigerators, ceramic tiles, cigarettes, cars, and motorcycles.

Development Experience (1947-90) and Economic Reforms since 1991 Unit 6 CBSE, class 12 Economics notes. This cbse Economics class 12 notes has a brief explanation of every topic that NCERT  syllabus has.

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