Model Answer
0 min readIntroduction
Prior to 1991, India’s economic growth was characterized by a ‘Hindu rate of growth’, a term coined by economist Raj Krishna in 1980, signifying a persistently low annual growth rate of around 3.5%. This period, spanning from independence in 1947 to the early 1990s, was defined by a centrally planned economic system, import substitution industrialization, and a significant role for the public sector. Understanding the trends in GDP at factor cost during this era necessitates examining the evolving economic policies and their impact on various sectors. The focus was on self-reliance and reducing dependence on foreign aid, but this came at the cost of efficiency and competitiveness.
Early Years (1947-1965): Laying the Foundation
The initial years after independence focused on rebuilding the economy and establishing a basic industrial base. The First Five-Year Plan (1951-56) prioritized agriculture and irrigation, achieving a growth rate of 2.1%. The Second Five-Year Plan (1956-61) emphasized industrialization, particularly heavy industries, guided by the Mahalanobis model. GDP growth averaged around 4.15% during this period. However, the 1962 Indo-China war and the subsequent droughts disrupted economic progress.
The Period of Stagnation (1965-1980): The ‘Hindu Rate of Growth’
This period witnessed a significant slowdown in economic growth. The Indo-Pak wars of 1965 and 1971, coupled with recurring droughts and the oil shocks of the 1970s, severely impacted the economy. The emphasis on import substitution led to protectionism and reduced competitiveness. The public sector expanded rapidly, often resulting in inefficiencies. The average GDP growth rate during this period hovered around 3.5%, earning it the moniker ‘Hindu rate of growth’. Nationalization of banks in 1969 aimed at directed credit but also led to inefficiencies.
The 1980s: A Brief Acceleration
The 1980s saw a modest acceleration in GDP growth, averaging around 5.6%. This was driven by increased public investment, a relaxation of some industrial licensing requirements, and a surge in remittances from Non-Resident Indians (NRIs). However, this growth was unsustainable, fueled by rising fiscal deficits and a growing balance of payments crisis. The Gulf crisis in 1990 further exacerbated the economic situation.
Sectoral Contributions to GDP (Pre-Reform Period)
Agriculture remained the dominant sector throughout the pre-reform period, contributing significantly to GDP. However, its contribution gradually declined over time as the share of the industrial and service sectors increased. The industrial sector, despite being prioritized, grew at a relatively slow pace due to various constraints, including licensing requirements, capacity restrictions, and infrastructure bottlenecks. The service sector remained relatively small but began to gain prominence in the 1980s.
| Sector | Average Contribution to GDP (1950-1980) | Average Contribution to GDP (1980-1991) |
|---|---|---|
| Agriculture | ~50-55% | ~30-35% |
| Industry | ~20-25% | ~25-30% |
| Services | ~20-25% | ~35-40% |
Limitations of the Pre-Reform Economic Model
- Excessive Regulation: A complex system of licensing, permits, and controls stifled private sector initiative and innovation.
- Public Sector Inefficiency: The dominance of the public sector led to inefficiencies, corruption, and a lack of accountability.
- Protectionism: High tariffs and import restrictions shielded domestic industries from competition, reducing their competitiveness.
- Fiscal Deficits: Rising government spending and low tax revenues led to persistent fiscal deficits.
- Balance of Payments Crisis: A growing trade deficit and declining foreign exchange reserves created a balance of payments crisis in 1991.
Conclusion
The pre-reform period in India was characterized by a slow and often unstable growth trajectory. While the initial focus on self-reliance and social welfare was commendable, the rigid economic policies and inefficiencies of the public sector ultimately hindered economic progress. The ‘Hindu rate of growth’ reflected the systemic limitations of the prevailing economic model, paving the way for the sweeping economic reforms of 1991, which aimed to liberalize the economy and accelerate growth. The legacy of this period continues to shape India’s economic landscape today.
Answer Length
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