Indian Economy (1950-1990)-Types of Economic Systems - NCERT Notes UPSC

Post-independence, it was decided that India would be a socialist society with a strong public sector but also with private property and democracy where the government would plan for the economy with the private sector being encouraged to be part of the planning effort. 

The ‘Industrial Policy Resolution’ of 1948 and the Directive Principles of the Indian Constitution reflected this outlook.

Read further to upgrade your UPSC preparation and elevate your prep for the upcoming UPSC Mains 2022 examination. 

Types of Economic Systems 

Capitalist

• The production and distribution depend on the market forces of supply and demand. 
• Only those consumer goods that are in demand will be produced.
• If labour is cheaper than capital, more labour-intensive methods of production will be used and vice-versa.
• The goods produced are distributed among people not on the basis of what people need but on the basis of Purchasing Power which is the ability to buy goods and services.

Socialist

• The government decides what goods are to be produced in accordance with the needs of society.
• The government decides how goods are to be produced and how they should be distributed.
• Strictly, a socialist society has no private property since everything is owned by the state.
• In principle, distribution under socialism is supposed to be based on what people need and not on what they can afford to purchase. 
• Strictly, a socialist society has no private property since everything is owned by the state.

Mixed

• In a mixed economic system, the government and the market together decide what to produce, how to produce and how to distribute. 
• In general, the market provides whatever goods and services it can produce well, and the government will provide essential goods and services that the market fails to do.

Five-year Plans

A plan spells out how the resources of a nation should be put to use in order to achieve the goals as well as specified objectives within a specified period of time. In India, plans were of five years duration and were called five-year plans (borrowed from the former Soviet Union, the pioneer in national planning).

In 1950, the Planning Commission was set up with the Prime Minister as its Chairperson. 

Goals of five-year Plans

The five-year plans had four major goals, which were provided varied importance in different plans based on the availability of resources. These goals were: 

• Growth: Increase in the country’s capacity to generate more economic output by producing more goods and services within the country. 
• A good indicator of economic growth is the steady increase in the Gross Domestic Product (GDP). 
• Modernisation: The adoption of new technology in order to increase the production of goods and services is called modernisation. For example, a farmer can increase the output on the farm by using new seed varieties instead of using the old ones.
• Modernisation is not only limited to the use of new technology but also to changes in social outlook such as the recognition that women should have the same rights as men. 
• Self-reliance: It means avoiding imports of those goods which could be produced in India itself.

• First, seven five-year plans gave importance to self-reliance.  This policy was considered a necessity in order to reduce our dependence on foreign countries, especially for food.
• Further, it was feared that dependence on imported food supplies, foreign technology and foreign capital may make India’s sovereignty vulnerable to foreign interference in our policies. 
• Equity: It is important to ensure that the benefits of economic prosperity reach the poor sections as well instead of being enjoyed only by the rich. 
• Every Indian should be able to meet his or her basic needs such as food, a decent house, education and health care and inequality in the distribution of wealth should be reduced. 

The first seven five-year plans covering the period 1950-1990, attempted to realize these goals in different sectors as follows: 

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Agriculture

Land Reforms

• At the time of independence, the land tenure system was characterised by intermediaries (variously called zamindars, jagirdars etc.) who merely collected rent from the actual tillers of the soil without contributing towards improvements on the farm.
• Equity in agriculture called for land reforms which primarily refer to change in the ownership of landholdings, in favour of the actual tiller. 
• The land ceiling was another policy which fixed the maximum size of land which could be owned by an individual. 
• Positive aspects of land reforms:

• The ownership conferred on tenants gave them the incentive to increase output and this contributed to growth in agriculture. 
• Land reforms were successful in Kerala and West Bengal because these states had governments committed to paying the policy of land to the tiller. 
• Steps were taken to abolish intermediaries and to make the tillers the owners of the land.
• The abolition of intermediaries meant that the tenants came into direct contact with the government.  
• Limitations of Land Reforms:

• In some areas, Zamindars evaded these legislations by exploiting loopholes.
• The poorest of the agricultural labourers (such as sharecroppers and landless labourers) did not benefit from land reforms.
• The big landlords challenged the legislation in the courts, delaying its implementation.
• They used this delay to register their lands in the name of close relatives, thereby escaping from the legislation.
• In some states, it did not become very successful and vast inequality continues. 

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The Green Revolution

• It refers to the large increase in production of food grains resulting from the use of high-yielding variety (HYV) seeds, especially for wheat and rice.
• Background
• At independence, productivity in the agricultural sector was very low because of the use of old technology and the absence of required infrastructure for the vast majority of farmers. 

• India’s agriculture vitally depended on the monsoon and if the monsoon fell short the farmers were in trouble unless they had access to irrigation facilities which very few had.
• The stagnation in agriculture during colonial rule was permanently broken by the green revolution.
• Benefits from the Green Revolution 

• The spread of the green revolution enabled India to achieve self-sufficiency in food grains. 
• The price of food grains declined relative to other items of consumption.
• Low-income groups benefited from this decline in relative prices.
• The government was able to procure sufficient amounts of food grains to build a stock which could be used in times of food shortage.
• Limitations of the Green Revolution

• The use of these seeds required the use of fertiliser and pesticide in the correct quantities as well as a regular supply of water, hence the green revolution benefited the farmers who had access to such facilities. 
• As a result, in the first phase of the green revolution (approximately mid 1960s upto mid 1970s), the use of HYV seeds was restricted to the more affluent states such as Punjab, Andhra Pradesh and Tamil Nadu.
• The use of HYV seeds primarily benefited the wheat-growing regions only.
• It increased the disparities between small and big farmers.
• HYV crops were also more prone to attack by pests.

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• Proactive steps taken by the government to bridge the limitations:

• Loans at a low-interest rate to small farmers and subsidised fertilisers to make needed inputs accessible. 
• Research institutes were established to give advice on reducing pest attack risk.
• In the second phase of the green revolution (mid-1970s to mid-1980s), the HYV technology spread to a larger number of states and benefited more variety of crops.
• The green revolution favoured the rich farmers only but due to the extensive role of government, small farmers in various states got benefited. 

The Debate over Agricultural Subsidies

• It is generally agreed that it was necessary to give subsidies to provide an incentive for the adoption of the new HYV technology by general and small farmers in particular. 
• The government recognised the need for subsidies as farming in India continues to be a risky business as:
• Most farmers are very poor, and they will not be able to afford the required inputs without subsidies. 

• Eliminating subsidies will increase the inequality between rich and poor farmers and violate the goal of equity.
• The correct policy is not to abolish subsidies but to take steps to ensure that only the poor farmers enjoy the benefits.
• On the contrary, subsidies in agriculture are criticised on the following grounds:

• Subsidies should be phased out since their purpose has been served.
• The subsidy largely benefits the farmers in the more prosperous regions.
• It does not benefit the target group and it is a huge burden on the government’s finances.
• Subsidies are meant to benefit the farmers, but a substantial amount of fertiliser subsidy also benefits the fertiliser industry.

Industry and Trade

Poor nations can progress only if they have a good industrial sector. The industry provides employment which is more stable than the employment in agriculture; it promotes modernisation and overall prosperity. It is for this reason that the five-year plans placed a lot of emphasis on industrial development. 

The erstwhile governments had to play an extensive role in promoting the industrial sector as:

• Indian industrialists did not have the capital to undertake investment in industrial ventures important for the nation’s development.
• The market was not big enough to encourage investment. 
• Indian economic development on socialist lines led to the policy of the government controlling the commanding heights of the economy (as put by the second five-year plan).  

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Industrial Policy Resolution 1956 

This resolution formed the basis of the Second Five Year Plan, the plan which tried to build the basis for a socialist pattern of society. This resolution classified industries into three categories. 

• The first category comprised industries which would be exclusively owned by the government.
• The second category consisted of industries in which the private sector could supplement the efforts of the public sector, with the government taking the sole responsibility for starting new units.
• The third category consisted of the remaining industries which were to be in the private sector. This sector was kept under state control through a system of licenses.

• No new industry was allowed unless a license was obtained from the government. 
• Even an existing industry had to obtain a license for expanding output or for diversifying production (producing a new variety of goods). 
• This policy was used for promoting industry in backward regions.

Small-Scale Industry

• It is defined with reference to the maximum investment allowed on the assets of a unit. This investment limit has changed over a period of time.
• In 1950 a small-scale industrial unit was one which invested a maximum of rupees five lakh; at present, the maximum investment allowed is rupees one crore.
• In 1955, the Village and Small-Scale Industries Committee (Karve Committee), noted the possibility of using small-scale industries for promoting rural development.
• Small-scale industries are more ‘labour intensive’ i.e., they use more labour than the large-scale industries and, therefore, generate more employment.
• Thus, the production of a number of products was reserved for the small-scale industry; the criterion of reservation being the ability of these units to manufacture the goods.
• For the development of small-scale industries, they were given concessions such as lower excise duty and bank loans at lower interest rates. 

Trade Policy: Import Substitution

• In the first seven plans, trade was characterised by an inward-looking trade strategy. Technically, this strategy is called import substitution.

• This policy aimed at replacing or substituting imports with domestic production. 
• Under this policy, the government protected the domestic industries from foreign competition in two forms: 
• Tariffs: A tax on imported goods; they make imported goods more expensive and discourage their use. 
• Quotas: It specifies the quantity of goods which can be imported.

• Tariffs and quotas are the tools which restrict imports and, therefore, protect domestic firms from foreign competition.
• It was assumed that if the domestic industries were protected, they would learn to compete in the course of time. 
• The policy of protection was based on the notion that industries of developing countries were not in a position to compete against the goods produced by more developed economies. 
• It was assumed that if the domestic industries were protected, they would learn to compete in the course of time. 
• There was also a fear of the possibility of foreign exchange being spent on the import of luxury goods if no restrictions were placed on imports.

Effect of Policies on Industrial Development

• Positive effects

• The proportion of GDP contributed by the industrial sector increased in the period from 13 per cent in 1950-51 to 24.6 per cent in 1990-91. Registering a commendable six per cent annual growth rate.
• The industrial sector became well-diversified by 1990.
• The promotion of small-scale industries gave opportunities to people with limited capital.
• Protection from foreign competition enabled the development of indigenous industries in areas like the electronics and automobile sectors. 
• Negative effects

• State enterprises continued to produce certain goods and services (often monopolising them) although this was no longer required.
• Many public sector firms incurred huge losses but continued to function because it is difficult to close a government undertaking even if it is a drain on the nation’s limited resources.
• Licensing norms were misused by industrial houses, often spending more time in trying to obtain a license or lobby with the concerned ministries rather than on thinking about how to improve their products.
• The excessive regulation of what came to be called the permit license raj prevented certain firms from becoming more efficient.
• Due to restrictions on imports, the Indian consumers had to purchase whatever the Indian producers produced, and the producers enjoyed a captive market. 

The progress of the Indian economy during the first seven plans was impressive indeed. Indian policies were ‘inward oriented’ that failed to develop a strong export sector. The need for reform of economic policy was widely felt in the context of changing global economic scenarios, and the new economic policy was initiated in 1991 to make the Indian economy more efficient. 

Interesting Terms

• Gross Domestic Product (GDP): It is the market value of all the final goods and services produced in the country during a year. 
• Marketed Surplus: The portion of agricultural produce which is sold in the market by the farmers. 

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