India's Economic Reforms

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Why Did Economic Reforms become necessary in India? What were the results of economic reforms?

India’s economy, which had been one of the largest in the world till about three hundred years ago, had steadily deteriorated during the period of British Rule which lasted till 1947.The agricultural sector suffered the most which resulted in famines and extreme poverty. The yield per acre was low and there was a persistent threat of drought and flood. There was no efficient irrigation facility. The food production was stagnant or was falling. There was no industry to manufacture goods and only the textile industry faced the industry manufactured goods from Britain. GDP growth was almost zero.

In 1947, after independence Prime Minister Jawaharlal Nehru, highly impressed with the Soviet Model of economic development, added elements of this model into the Mixed Economy model which was to be introduced in India. This included centralised planning. The Socialist Model advocated government intervention to guide the economy, including state ownership of key industries. The objective of this strategy was to achieve high and balanced economic development while introducing programs and measures to help the poor. The belief was that industrialisation was the key to economic development. As there were few entrepreneurs capable of bringing in large scale industrialisation and hence introducing a market economy would not be feasible, it was decided that the government would take the initiative to in this regard. Hence it was believed that the Soviet model would be the ideal one to adopt in this regard. Nehru was also influenced by Socialist thinkers like P C Mahalanobis. Hence this model is also known as Nehruvian - Mahalanobis model. It was this model that India followed for several years up to the 1970s. Economic growth till the 1980s was very low if not negligible.

During the period from 1950 to 1970s it is believed that there was a near stagnation of economic growth as a result of the Nehruvian economic model. But a closer look reveals that there was increase in GDP growth over each decade though quite low. There was not mush improvement in the agricultural sector till the late 1960s. The Soviet model carried the criticism that industrial development is at the cost of agriculture. The agricultural sector’s performance during this period indicated that there may be some truth in this statement. If the green revolution had not taken place, India would have faced a grave crisis in the 1970s. In India, between 1950 and 1990, the proportion GDP contributed by agriculture declined significantly but not the population depending on it. The formation of Planning Commission in 1950 and the five year plans, gave greater importance to agricultural growth and the agricultural sector gained in prominence. In the 1960s, improved agricultural practices, better seeds and use of fertilizer, soil and water conservation, land development, land consolidation, agricultural credit and marketing and price incentive resulted in improved agricultural productivity and it is the reason why India enjoys relative food security today. Till then growth in the agricultural sector was negligible.

There were internal contradictions. India had needed rapid industrialisation along with supporting the poor. Rapid industrialisation required a shift of resources from the agricultural sector to the industrial sector. 70 percent of the population were depended on agriculture and lived in the countryside hence supporting them required directing of resources to the rural economy. It also required government support for smaller labour-intensive farms at the expense of larger capital-intensive industries. Small scale units attracted government support and here the goal was to increase employment since they employed more workers per unit of output and capital. This resulted in discouraging economies of scale and encouraging high cost production. Hence India ended up...
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