INDIAN ECONOMY 1950-1990

On 15th August 1947, India gained freedom. The most important work in front
of leaders of independent India was to decide the type of economic system
which would be suitable for India
Economic System: Economic system is defined as an arrangement by which the
central problems of an economy are solved. There are three main types of
economic system
1) Capitalist economy
2) Socialist economy
3) Mixed economy
CAPITALIST ECONOMY:
Capitalism is a political economic system based on private property and private
profit. In this system prices are determined by market forces and demand and
supply. This type of system is also called laissez-faire or free market economy. It
exists in north America, japan, Australia, western Europe etc.
The main features are
a) Private Ownership Of Property: In capitalism, all factors of production
(land, labour, capital and organisation) are owned and managed by the
private sector. All utilities are owned by private firms.
b) Freedom Of Enterprise: In capitalism, individuals are free to choose any
job they like and are free to save and invest in whatever form they choose.
c) Profit Motive Of Production: in capitalism private units are guided by
maximisation of profit as the only motive.
d) Price Mechanism Guides Production Decisions: In a capitalist economy
price mechanism guides production decisions i.e. What to produce, how
much to produce, and how to produce. Price mechanism is a process
where price is determined by market forces of demand and supply. There
is no intervention of the government. In price mechanism, price serves as
a signal to the producers to decide what to produce and to the consumers
to decide what to consume.
e) Existence Of Competition: Competition prevails in capitalist economies.
Competition and price mechanism coordinate all activities of producers
and consumers in an efficient and optimal manner.
 f) Consumers Are Supreme: In a capitalist economy, consumers preferences
guide production. It is called consumer sovereignty and they are free to
consume whatever they like.
g) Very Unequal Distribution Of Income: Under capitalism, there is right of
inheritance i.e. legal heirs will become owners of the property after death
of the owner.
h) Absence Of Role Of Government: The government does not interfere in
the functioning of the private enterprises. Every activity is determined by
the price mechanism.
Merits Of Capitalist Economy:
a) Encourage Economic Activities: All individual and firms can follow their
profit motive, which in turn encourage economic activities in the capitalist
economy.
b) Maximum Efficiency: Under capitalist economy, maximum efficiency is
ensured because a stiff competition. Only those who are able to produce
at least cost and sell at the lowest prices are able to survive in the market.
c) Dynamic economy: In a capitalist economy, there are continuous
innovations and diversifications which give it a dynamic status.
d) Rapid Economic Growth: there is fast growth in output, economic
development under capitalism.
Demerits Of Capitalist Economy: Karl Marx said, “Capitalism contains seeds of
its own destruction.
a) Unequal Distribution Of Income And Wealth: In a capitalist economy
there is very unequal distribution of income and wealth. So production
gets affected by the demand of the rich society rather then the need of
poor society. The society is divided into two sections, rich and poor. This
results in class war and exploitation of the people.
b) Business Instability: Since there is no role of the government production
decisions are taken by millions of entrepreneurs. The result may be
overproduction and business instability.
c) Consumer Exploitation: In capitalist economies there is a bias favour of
monopolies which have profit maximisation as the only motive.
d) Misallocation of productive resources: In capitalist economies resources
are allocated where profits are maximum. There is no place for social
welfare.
SOCIALIST ECONOMY
Socialist economy is a planned or command economy based on the public
ownership of property and social motive. Prices are determined by the central
planning authority. Some of the socialist countries are Hungary, Yogoslavia,
Bulgaria etc.
The main features are
a) Public Ownership Of Property Of Factors Of Production: There is social
or collective ownership of means of production in a socialist economy.
Profits earned by different enterprises goes to the State from where they
are utilised for social welfare motives.
b) No Freedom Of Enterprise: In a socialist system, there is no freedom to
enterprise to choose their production combinations. The central authority
is the state which plans and decides what, how and whom to produce
according to the social and economic goals set by it.
c) Social Welfare Motive: Social welfare and not profit maximisation is the
only basis of production activities. Entire net earnings goes to state.
d) Planning Mechanism Guides Production: The price mechanism is
replaced by central planning authority. The central authority decides
what, how and for whom to produce. The government owns the resources
and has the power to enforce the decisions on all major economic
problems.
e) No Competition: Since there is no profit motive, there is no incentive to
compete.
f) Absence Of Consumer Sovereignty: Consumers in a socialist system are
not independent to decide what to consume. They can consume only
those goods which are produced in the state.
g) Restriction On Freedom Of Occupation: In a socialist system, equal work
opportunities are provided to every citizen of the country.
h) Inequalities Of Income Greatly Reduced: In a socialist system, work is
ensured to everybody. Earnings differ according to the nature of work and
ability of the worker. Sincere efforts are made to reduce income
inequalities.
i) Complete Role Of Government: The central planning allocates all
resources according to the pre-specified goals and objectives to attain
maximum social welfare.
Merits Of Socialist Economy
a) Optimum Utilisation Of Resources: Socialist economy ensures optimum
utilisation of all human and natural resources. Production takes place
according to social welfare motive and not profit motive. Efforts are made
to develop all regions of economy.
b) Satisfaction Of Consumer’s Need: Since production of goods and services
is according to society’s need, and not according to the needs of rich
people, the real needs of the people in the society get satisfied. Goods
essential for health and efficiency are supplied at nominal price.
c) Equal Distribution Of Income And Wealth: A socialist economy brings
about comparative equality of income and wealth.
Demerits Of Socialist Economy
a) Inaccurate Calculation Of Cost: In a socialist system, resources are in the
hands of the government. Government is not competent to correctly
calculate the price of factors and services.
b) Bureaucratic Setup: The socialist system has a bureaucratic setup and
they are not efficient in running business units because they lack
motivation, fear public criticism, lack required training in economics and
management etc.
c) Concentration Of Power In Government Hands: There is obvious
corruption, whenever economic powers is in the hand of the authority.
A MIXED ECONOMY
Socialism appealed to Nehru. In Soviet Union, all of the production was
owned by the government. But this was not possible in Indian democracy to
change the ownership pattern of land and other properties. So many leaders
decided to have an alternative to capitalism and socialism – called mixed
economy.
All economies are mixed economies with the elements of both capitalist and
socialist economies. India is a mixed economy.
The main features are
a) Ownership of property is both by private and public sector.
b) There is freedom of enterprise in the private sector but no freedom in
public sector.
 c) Private sector producers with profit motive and public sector with welfare
motives.
d) In the private sector price mechanism solves the basic problems whereas
in the public sector, the government guides the production decisions.
e) Competition exists but is limited to the private sector.
f) Consumer’s sovereignty exists.
g) Considerable inequality of income exists.
h) Full role of the government in the public sector and limited role in the
private sector. Price mechanism plays its role in the private sector of the
mixed economy and decides what, how and for whom to produce.
Merits Of Mixed Economy
a) It gives proper scope for full play of private initiative and profits motive.
b) Freedom of enterprise and price mechanism are allowed to influence the
allocation of resources and efficiency in the production.
c) Social interest and welfare motives replaces self interest and private proft
in the public sector.
d) Planned economic development ensures stability and balanced
development.
e) Competition between the private sector and the public sector industries
is generated to maximise productivity.
f) Presence of both public sector and private sector is an effective
compromise between the two extremes of market economy and
controlled economy.
Demerits Of Mixed Economy
a) Fear Of Nationalisation: A serious criticism against mixed economy is that it
may not remain a mixed economy for a long time. The public sector generally
expands to such as large extent that it takes over the private sector. Also it
cannot control the private sector industries which are outside the government
preview.
b) Inefficiency And Corruption: Mixed economic system is also characterised by
red-tapism, high degree of corruption and absence of competition. This leads
to slowing down of economic growth, wastefulness and economic inefficiency.
c) Concentration Of Economic Power: Mixed economy result in emergence of
modern big corporations which exploit small producers, workers, and
consumers. Thus, there is concentration of economic power in the hands of
private sector, politicians and top bureaucrats.
ECONOMIC PLANNING
Economic planning means planned coordination and utilisation of available resources
in an economy to achieve certain pre-specified social and economic objectives in a
time bound programme.
H.D.Dickenson: Economic planning helps in taking major economic decisions what and
how to produce and how much to produce and to whom it is to be allocated, by the
conscious decision of a determinate authority on the basis of comprehensive survey
of the economic system as a whole.
Planning Commission: economic planning means utilisation of country’s resources
into different development activities in accordance with national priorities.
First planning commission was set up in 1950 under the chairmanship of Jawaharlal
Nehru.
India has completed her 11th Five Year Plan (FYP) and the 12th FYP has started. A plan
is a document showing detailed scheme, program and strategy worked out in advance
for fulfilling of objectives.
Planning objectives vs. Plan objectives
Planning objective refers to long-term objectives to be achieved over a period of
twenty years. It is also called the ‘Perspective Plan’. The basis of perspective plan is
the five year plan. Main planning objective are
a) Growth
b) Modernisation
c) Self-reliance
d) Equity
Plan objective refers to short-term objective to be achieved over a period of five years.
These plans are not sector specific. In the first five years the stress was on
development of heavy and basis industries. Though the goals laid down in all the Indian
FYP are different they all aim at achieving term objectives of growth and equality.
Objective planning in India.
Main long-term objectives of planning are
Modernisation: it refers to adoption of new technology, new methods of production
and changes in the social outlook. For example: adoption of high yielding variety of
seeds, gender empowerment etc. It also implies the use of advanced technology.
Advanced technology requires less labour per unit of output.
Self-Reliance: Self-Reliance means reducing dependence on imports of those goods
which can be produced within the country itself. Every country wants to achieve self-
reliance since dependence on imports for necessary goods invites foreign interference
in domestic policies. India wanted to be self-reliant which means it wants
a) Self-sufficiency in food grains.
b) Fall in foreign aid and reduced dependence on imports which is possible when
there is growth in domestic production.
c) Rise in exports.
d) Rise in contribution of industries in gross domestic product (GDP).
Economic Growth: Economic growth is an increase in aggregate output of goods and
services in a country in a given period of time. Economic growth implies a sustained
expansion in economic activities – trade agriculture industry etc.
The indicator of economic growth is GDP. GDP is the market value of all goods and
services produced in the country in one year. The contribution made by each sector of
an economy gives the structural composition of an economy.
Equity: equity refers to reduction in inequality of income or wealth, uplifting weaker
sections of the society and a more even distribution of economic power. The socialist
pattern of our society aims at raising the standard of living of all people and promoting
social justice by reducing inequalities of income and wealth.
Economic inequalities can be reduced by redistribution of land in rural areas,
progressive taxation, licensing policy, check on monopolistic tendencies.
Equity can be raised by uplifting weaker sections of the society. The weaker sections
of the society are
a) Landless workers.
b) Small and marginal farmers.
c) Economically poor and backward people
d) Handicapped people.
ACHIEVEMENTS AND FAILURES OF PLANNING FROM 1950-1990
Phase I- Growth oriented Development strategy (1951-65): Import Substituting
Industrialisation.
First Five-Year Plan (1951-56)
a) The first FYP was modest plan, essentially a repair plan made to take care of the
severe damage to the Indian Economy caused by war, famine and partition of
the sub-continent in 1947.
b) It had target of 2.1% per annum growth of national income.
 c) Top priority was given to agriculture sector as agriculture development would
lead to higher rate of economic growth.
d) The national income increased at the rate of 3.6% per annum.
Second Five-Year Plan (1956-61)
The Mahalanobis (named after P.C.Mahalanobis who prepared the second FYP)
adopted a strategy of development by import substitution industrilisation led growth.
It was a metal machine strategy. It had three main aspects
a) Development of sound base for initiating the process of long-term growth.
b) High priority to industrialisation and emphasis on development of capital
goods industries against consumer goods industries.
c) The stress was on self reliance.
The highest priority was given to heavy and basic industry. This meant rapid
development of public sector. Industrial allocation was raised rapidly and investment
and other sectors, especially agriculture was reduced. The plan aimed at 4.5% growth
however it achieved only 4% growth in national income.
A wrong assessment of the food situation and fast growth of industrialisation led to
various imbalances in the economy in the form of
a) Food shortage
b) Price rise
c) Foreign exchange problem
d) Unemployment.
Third Five-Year Plan (1961-66)
The third FYP kept the basic elements of industrial strategy laid down by the earlier
plan and also laid down the stress on the development of agriculture and allied
activities. Public sector was assigned the role of
a) Promoting the growth of infrastructural facilities.
b) Creation of capacity in the basic and capital goods industries.
c) Reducing the concentration of economic power through public ownership of
means of production. Result was expansion of infrastructural facilities like
irrigation projects, rail and road transportation etc
The plan aimed growth of 5.6% per annum in national income, achieving self-
sufficiency in food grains and expanding basic industries. However, the plan fell very
much short of expectations due to
a) Two consecutive years of bad harvests (1965-67)
b) War with china in 1962 and with Pakistan in 1965
 c) Draught in 1965-66 followed by another in next year.
d) Devaluation of rupee.
The growth rate came down to 2.2% per annum. The failure during the third plan
created so much distress in the economy that planning was abandoned for full three
years.

PHASE II : EQUITY ORIENTED DEVELOPMENT STRATEGY (1966-1990)

Annual plans (1966-69) -To overcome the agricultural stagnation a new strategy of
agriculture development was formulated during the annual plan period. It is called
“Green Revolution” In 1964, Lal Bahadur Shastri became Prime Minister and
appointed C. Subramaniam as Minister of Food and Agriculture. Together, Shastri
and Subramaniam worked to encourage an increase in food grain production via
increased government support of agricultural production. To do this, they took the
recommendation of the Foodgrains Prices Committee that the government should
offer incentive prices for grain that are higher than procurement and market prices.
Additionally, Subramaniam favoured building up government reserves of grain by
purchasing it on the open market at incentive prices. With these policies in place, the
price of wheat increased by 33 percent between 1964 and November 1965. By 1967,
Indian grain production increased steadily.
In August 1965, Subramaniam publishes a plan, "Agricultural Production in the
Fourth Five Year Plan: Strategy and Programme," that truly marks the Indian
government's commitment to the Green Revolution.