SUSHANT ROHIDAS VELIP
For The Goan
Political economy is an interdisciplinary discipline that combines perspectives from political science and economics to examine the relationship between politics and markets. India’s economic trajectory since 1947 is a story of dramatic policy pivots driven by the search for financial stability and national development. We started as an inward-looking, state-steered economy aimed at total self-sufficiency. But mounting structural bottlenecks forced a shift, most notably the 1991 market reforms that plugged the country into global supply chains. Today, India attempts a delicate balancing act by promoting domestic capacity through agendas like ‘Make in India’ and ‘Atmanirbhar Bharat’ while maintaining an active footprint in international trade.
EARLY PLANS, ISI, AGRICULTURAL TURMOIL
When colonial rule ended in 1947, India inherited a thoroughly broken economy defined by razor-thin industrial output, systemic poverty, and sharp regional imbalances. To tackle this, early policymakers opted for a state-led mixed economy framework. Central planning took centre stage in 1951 with the launch of the Five-Year Plans. The initial plan concentrated heavily on basic agriculture, but subsequent iterations shifted gears towards heavy, state-directed industrialisation.
When India gained independence, the main goal was pretty simple: become completely self-reliant. To make this happen, the government rolled out a strategy called Import Substitution Industrialisation (ISI) in 1951. The idea was to boost local manufacturing and cut down on foreign imports. Early on, it actually worked well for kickstarting heavy industries like steel. But there was a major catch. This whole push for economic independence was controlled by the “License Raj” (1947–1991). If you were an everyday entrepreneur trying to start or grow a business, you had to jump through an insane amount of hoops just to get the government’s permission to operate.
The government thought they were protecting local businesses from outside competition, but the plan completely backfired. Without any global competition keeping them on their toes, local industries became inefficient, and technological growth basically stalled out. Instead of building a booming economy, all that heavy red tape just killed off great ideas by leaving them stuck in government waiting rooms.
India’s agricultural sector was on the brink of crisis in the late 1960s. Driven by severe food shortages, the state engineered the Green Revolution to ensure survival. Led by M.S. Swaminathan, widely known as the Father of India’s Green Revolution, the initiative used advanced genetics to cross-breed Norman Borlaug’s Mexican seeds with native Indian wheat. Introducing these high-yielding crops and modern inputs successfully brought basic food security to the nation. However, while this secured food grain sovereignty, it came at the cost of deepening regional socio-economic divides (Heginbotham, 1973).
Shortly after reshaping agriculture, the state moved to consolidate control over the financial sector. In 1969, Prime Minister Indira Gandhi nationalised 14 major commercial banks. This sweeping change drastically expanded credit access for rural populations, but it permanently tied the banking sector to political mandates, leaving behind structural distortions that echoed straight into the late 1980s.
WARS AND TURN TO AUTARKY
Geopolitical shocks repeatedly threw domestic economic planning off course. External conflicts—the 1962 border war with China, followed by wars with Pakistan in 1965 and 1971—reshaped public expenditure. The defeat in 1962 exposed severe military weakness, forcing the government to divert scarce developmental capital towards defence budgets. The 1965 war compounded this fiscal pressure while severely disrupting agricultural supply lines.
Yet, these crises inadvertently accelerated self-reliance in defence manufacturing, pushing policy closer to economic autarky. By 1971, despite operating under severe macroeconomic stress, India managed to secure significant diplomatic alignment and international aid post-war, which helped stabilise the immediate fiscal shock. Each conflict ultimately forced the political establishment to recalibrate strategic priorities.
1991 CRISIS AND LIBERALISATION
By the late 1980s, India’s state-dominated economic model was buckling under its own weight. Although the government attempted some incremental deregulations during the decade to shake off the sluggish “Hindu rate of growth” (Basu, 2008), the deep structural rot remained untouched. High fiscal deficits, swelling public debt, and an unsustainable import bill eventually triggered a crushing balance-of-payments crisis in 1991.
With foreign exchange reserves depleted to just weeks’ worth of imports, the country was forced into action. In 1991, Prime Minister P.V. Narasimha Rao and Finance Minister Dr. Manmohan Singh introduced the sweeping New Economic Policy, rolling out the framework of Liberalisation, Privatisation, and Globalisation (LPG). This bold move dismantled the restrictive “License Raj” and scaled back state monopolies (Panagariya, 2008). It marked the definitive end of India’s strict reliance on Import Substitution Industrialisation (ISI) and finally opened the nation to global trade. The structural shift yielded immediate and dramatic results: capital inflows surged, market efficiency improved, and India rapidly transformed into one of the world’s fastest-growing major economies.
MODERN REGIME
The post-2014 landscape brought another major policy shift. In 2015, the government formally abolished the Planning Commission, replacing it with NITI Aayog, a policy think-tank built to foster federal cooperation and modern strategic policy design. Around the same time, the state introduced ‘Make in India’ in 2014 to revitalise sluggish manufacturing and attract global FDI. This internal market was further unified in 2017 through the Goods and Services Tax (GST), a massive indirect tax reform that swept away fragmented state-level taxes.
When the COVID-19 shock hit in 2020, economic policy pivoted again with the launch of the ‘Atmanirbhar Bharat’ (Self-Reliant India) initiative. While this package shares structural similarities with early ISI (Import Substitution Industrialisation) policies, emphasising domestic production and reduced import reliance, it operates under a different philosophy. Instead of isolationism, modern industrial policy targets export-led competitiveness, technological scale, and integration into global supply chains.
India’s political economy over the last eight decades has come full circle. It moved from rigid, state-controlled import substitution to wide-reaching market deregulation, before settling into a modern synthesis that combines targeted industrial protection with global market engagement. Historical security crises, balance-of-payments shocks, and global pandemics have continuously forced the government to adapt. Today, as India navigates shifting geopolitical dynamics, its economic apparatus remains a pragmatic mix of market forces and strategic state direction.
(The writer is an Assistant Professor at the Department of Political Science at the CES College of Arts and Commerce, Cuncolim)
