Charanjeet's

BUREA OF COMMERCE
/24, Moti Nagar, New Delhi-110015, C.No. 9811397161, 011-41410649,

CHAPTER-2
Indian Economy (1950-1990)
Introduction
After two hundred years of British rule and their exploitative policies, India inally got freedom on 15h
August 1947. Now, it was necessary to reconstruct the backward and stagnant Indian economy into a
India
developed economy. Therefore, the most important task before the Government of independent
was to decide the type of 'Economic System', which would be most suitable for India.
Economic System refers to an arrangement by whlch central problems of an economy are

solved.

Types of Economic Systems:

Economic Systems are generally of 3 different types:

TYPES OF ECONOMIC sYSTEMS

Capitalist Economy Socialist Economy Mixed Economy

(Means (Both Public and Private Sector
of production are owned, (Means of production are owned,
controlled and operated by the
controlled and operatedby are allotted respective roles for
Private Sector) Government.) solving Economy's Central Problems)

Q.1 State the three central problem of an economy.

Ans. The centralproblems of an economy are as follows
a) What to produce? An economy has millions of commodities to produce. It has to decide
whether to produce luxury goods or wage goods or it may have to decide between capitald
goods and consumer goods and so on. Having decided what to produce, it also has to decide
how much to produce.

b) How to produce? The next choice is the choice of technique of production. Every economy
faces the problem of as to how resources should be combined for the production of a given
commodity. Depending upon the abundance of a particular resource, an economy mayy
choose between labour intensive and capital intensive techniques.
c) For whom to produce? What goods should be consumed and by whom depends upon how
national product is distributed among people/factor owners.
All central problems arise due to scarcity of resources having alternatives uses.

Q.2 Define Capitalstie Economy

Ans. It is an economic system in which major economic decisions () what gods and services are to be
produced, (i) how goods and services are to be produced, and (ii) how goods and services are
to be distributed are left to the free play of the market forces, supply and demand. There is a
private ownership of the means of production, and all economic decisions are taken with a
view of maximising profits.

Princtple Merit: The principal merit of this system is that it fosters self-interest, and
accordingly accelerates the pace of economic growth.

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 To make economic planning effective, the Government of India set up Planning Commission
in 1950, with the Prime Minister as the Chairman.

T h e purpose of the Commission was to carefully assess the human and physical resources
of the country and to prepare the Plans for the effective use of resources.

The Planning Commission fixed the planning period at ive years, which began the era of
Five Year Plans'.

The first five year plan was launched for a period starting from 1st April, 1951 and ending
on 31st March, 1956.
Note: Planning Commission is the central authority of India, which formulates India's five year
plans among other unctions. t was cstablished in 1950. In India, Prime Minister is the
Chairperson ot Planning Commission. It is important to note that the Planning Commission has
now been abolished. In February 2015, it has been rechristened as Policy Commission'
The role of the policy commission is to evolve policies to accelerate the pace of growth and
development in the country.

Q.7 Define a
plan.
Ans. Plan is a document showing detailed scheme, program and strategy, worked out in advance for
fulilling an objective.

9.8 Why should plans have goals?

Ans. Bvery plan should have specified goals. Plan without goal is like life without soul. While a plan
specifies the means and ways to allocate scarce resources to achieve proposed targets, goals are
the ulumate targets, the achievement.OI which ensures the success of plans. Thus, plans must
include the goals.

Q.9 What are the examples of Economie Spheres of planning?

Ans. Agriculture, industry, transportation and trade are the examples of economic spheres of
planning

9.10 What are the examples of Social Spheres of planning

Ans. Education, health and housing are the principal examples of social spheres (or areas) of
planning.

Q.11 What is meant by Comprehenstve Planning?

Ans. Planning that covers both social and economic spheres of growth is called Comprehensive
Planning.
.12 meant
Ans.
What is by economic growth?
Economic growth implies a consistent increase in GDP or a consistent increase in the level of
output, or a consistent increase in the flow of goods and services in the economy over a long
period of time.

Q.13 What is meant by selfsufficiency?

Ans. Self-suficiency means dependence on domestically produced goods, particularly food grains.

Q.14
Ans.
What is meant by full employment?
It refers to a situation when there is no involuntary unemployment, i.e., all those who are
willing to work at the prevailing wage rate are able to get work. However, frictional, structural
and voluntary unemployment may be prevailing even when full employment is said to occur.

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 Principal Demerit: The principal demerit is that it ignores the collective interest or socia
interest. The poorer sections O1 the society become vulnerable to uncertainties of the market.

Q.3 What is Socialist Economy?

Ans. It is an economic system in which major cconomic decisions (what to produce, how to produce
and for whom to produce) are taken by the government, keeping in view the collective interest
of the society as a whole.
Principle Merit: While promoting collective interest, socialism, ensures social equality. Thus,
growth with social justice is the principal merit of socialism.
Principal Demerit: It gives no choice to the consumers, or it docs not respect consumers
sovereignty. As a consumer, you are to consume what the government offers you for
a s accumulation of private property
1s

consumption. Also0, it is a system devoid of incentives,

not allowed. Perhaps, it is owing to its serious demerits that this system has crurnbled in most
countries where it was initially adopted.

Q.4 What is Mixed Economy?

for
Ans. It is an economic system in
produce)
major
which economic decisions (what, how and whom to
are taken by the central government authority as well as are left to the free play of the
market forces. While the market forces would ensure maximisation of individual profits, the
central government authority would ensure maximisation of social welfare. Both private and
government sectors co-exist to foster self-interest and social interest, respectively.

Principle Merit: It respects consumer's sovereignty, enhancing consumer's choice and his
welfare level. It allows private ownership; it promotes self-interest that triggers the pace of

growth.
Principal Demerit: Public sector undertakings are often found to emerge as the breeding
centres of inefficiency and corruption, due to the lack of accountability and lack of self-interest.
Which is why, there is an emerging trend towards privatisation.

Q.5 Why did India adopted the Mixed Economy

Ans. After the freedom, leaders of independent India (like Jawaharlal Nehu) were confused with
Tegard to economiC sy'stem, to be followed in'lndia.
.Some leaders inspired by the extraordinary success of planning in Soviet Union were in
favour of Socialist Economy. However, in a democratic country like India, complete dilution
of private ownership was not possible (as was possible in case of the former Soviet Union).
Capitalist Economy System did not appeal to Jawaharlal Nehru, our first Prime Minister, as
under this system, there would be less chances for improvement in quality of life of majority
of people.
.As a result, Mixed Economy (with best features of both Socialist and Capitalist Economy)
was adopted by the Indian Economy. In this view, India would be a socialist society, with a
strong public sector, but also with private property and democracy.

Q.6 Why id India opt for Economic Planning?

Ans. After adopling the 'Mixed Economic System, the next important step for the Government was to
revive the poor, backward and stagnant economy, inherited from the British rule
.For the development of Indian economy, it was necessary for the Governiment to plan for
the economy, known Economic
as
Plannirng
.Economic planning can be defined as making major economic decisions (what, how and for
whom to produce) by the conscious decision of a determinate authority, on the basis of a
comprehensive survey of the economy as a whole.

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Q.15 What are the Long Perlod Goals of Planning tn India?
Or
What are the Long Perlod Objectives of Planning in India?
Ans. Planning in India focuses on five long period goals/objectives, as under:
a) Growth' in terms of Inerease tn GDP and Per Capita GDP: An important long period
objective of Five Year Plans is to ensure that there is a consistent increase in GDP over time
and that it is reflected as inrease in per capita GDP. In other words, increase in GDP must
be so significant that it i s not neutralized by the increase in population size of the country.
Per capita availability of goods and services must consistently increase, implying an increase
in standard of living of the people over a long period of time. Of course, when we talk of
increase in the flow of goods and services, it has got to be consistent over a long period of
time. Only then, any increase in the level of output would qualify to be termed as 'economic
growth'.
b) Full Employment: It is another long period objective of Five Year Plans in India. Full
employment refers to a situation when all the people in the working age group (refcrring to
those who are able to work and willing to work at the market wage rate) are actually engaged
in some gainful employment. In other words, those who are able to work and are willing to
work must get work. This is an extremely important social objective of planning. It implies
that the process of economic growth in the country is not hijacked by richer sections of the
society. Instead, there must be a high rate of participation by the masses in the process of
economic growth.
c)Equitable Distribution or Equity: Economic growth would become a meaningless exercise
if the benefits of it accrue to only a handful of people in the society. Growth that causes a
wedge between rich and the poor, or the growth that causes economic divide' finds no
justification in terms of Goals of Planning. Benefits of growth must spread across larger
sections of the society, so that the distribution of income becomes equitable. Equitable
distribution of income implies social cquality i.e. every Indian should be able to meet his or
her basic needs (tood, house, educauon and health care) in short, cquity aims to raise the
standard of living of all people and promote social justice
d) Modernisation: Indian planners have always recoganised the need for modernisation of
society to raise the standard of living of people. Modernisation includes:
) Adoption of New Technology: Modernisation aims to increase thc production of
goods and services through use of new technology. For example: a farmer can
increase the output on the farm by using new seed varieties instead of using the old
ones. Similarly, a factory can increase output by using a new type of machine.
ii) Change in social outlook: Modernisation also requires change in social outlook,
such as gender empowerment or providing equal rights to women. A society will be
more civilised and prosperous if it makes use of the talents of women in the work
place
e) Selfreliance: The third major objective is to make the economy self-reliant.
Self-reliance under Indian conditions means overcoming the need of external
assistance. In other words, it means to have development through domestic
resources
.To promote economic growth and modernisation, the five year plans stressed on the
use of owm resources, in order to reduce our dependence on foreign countries.
T h e policy of self-reliance was considered a necessity because of two reasons:
To reduce foreign dependence: As India was recently freed from foreign control,
it is necessary to reduce our dependence on foreign countries, especially for

food. So, stress should be give to attain self-reliance.

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 It was feared that dependence on imported 1ood
>To avoid Foreign Interterence:
supplies, foreign technology and foreign capital may increase foreign
interference in the policies of our country.

Q.16 hat is plan holtday'?

when the operation of the five years plans was suspended.
Ans. holiday was the period
Plan

ratio'.
Q.17 Define 'capital output unit of output.
Ans. Capital output ratio means number of units of capital required to produce one

Q.18 Explain 'growth with equtty' a s a planning obfectiue.

and equity are the two important aspects of India's
five year plans. While growth
Ans.
Both growth the increase in GDP over a long period of time equity refers
to a n equitable distribution
relers
of GDP to so that the benefits due to higher economic growth are shared by all sections of
the welfare of
Growth itselff is desirable but growth in itself does not guarantee
populauon.
people. Growth is assessed by the market value of goods and services (GDP) and it may be
of
possible that the services that
goods and are produced may not benefit the majority
population. In other words, only a few with high level of income may get the share of GDP.
Hence, growth with equity is a rational ar desirable objective of planning This objective
ensures that the benefits of high growth are shared by all the people equally and, this not only
leads to reduction of inequality of income, but also enables everyone to be self-reliant.

Q.19 Does modernisation planning objective

as a create contradiction in the lüght of
employment generation? Explain.
Ans. No, modernisation as a planning objective does not contradict employment generation. In fact
both modernisationand employment-generation are positively correiated.While modernisation
refers to the use of new and modern technology in production process that may make some
people lose their jobs in the initial stages. But gradually, the use of modern technology and
inputs will raise the productivity and consequently the income of the people that will further
raise the demand for goods and services. In order to fulfill this increased demand, there will be
more job opportunities that will lead more people to be hired and, hence, more employment
opportunities will be generated. Hence. bothmodernisationand employment generation are not
contradictory but are complementary to each other.

Q.20 why was t necessary for a developing country tke India to follow selfreiance as a
planning objective?
Ans. Self-reliance implies discouraging the imports of those goods that could be produced
domestically. Achieving self-reliance is of prime importance for a developing country like, India
as otherwise, it would increase the country's dependence on foreign products. Dependence on
foreign goods and services can promote economic growth of India but this would not contribute
to the development of domestic productive resources. Dependence on foreign goods and services
provides impetus to foreign country's industries at the cost of domestic infant industries.
Further, imports drain away the scarce foreign reserves that are of prime importance to any
developing and underdeveloped economy. Therefore, achieving self-reliance is an important
objective lor developing countries in order to avoid themselves from being acquiescent to the
developed nations.

Q.21 Explain the need and type of land reforms tmplemented in the agricultural sector.
Ans. The need for land reforms in India was very necessary due to the following reasons:
a Disguised Unemplosment: It refers to a state in which more people are engaged in work
was very high incidents of disguised unemployment in the
than are really needed. There
sector during 1950 and 1990.

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 The well in
b) Low Irrigation Faciity: irrigated
and area
was only
permanent irrigated
1951. The major part of area was dependent on rainfall and, consequently, agriculture
17%
suffered from low level of production

c) Land Tenure System: There were three types of land tenure systems namely, the Zamindari
System, the Mahalwari System and the Ryotwari System prevalent in the Indian agricultural
sector at the time of independence. The common feature of these three systems was that the
land was mostly cultivated by the tenants and the land revenues were paid by them to their
landlords. This led to the exploitation of tenants in the form of exorbitant rents.
In
d Size of Land Holdings: The size of land holdings owned by the farmers was very small.
addition, the land holdings were fragmented. This obstructed the use of modern techniques.
e) Lack of Initiative: As most of the land was owned by the landlords, so the farmers lacked
initiative and neither had enough means to undertake mechanised methods of cultivation.

N Traditional Approach and Low Productivity: Indian farmers used to rely on the
conventional and the traditional inputs and methods and climate conditions that hampered
the productivity of agricultural sector,

9) Absence of Marketing System: Duc to the absence of well developed marketing system, the
farmers used to rely on the intermediaries to seli their product in the market. These
intermediaries used to purchase the farm products at a very low price and sell them at
higher price at market. Consequently, the correct proît share did not acerue to the iarmer
and, hence, this led to the lack of finance and investment on farm.

Marketising Agricultural: Agricultural was basically for subsistence and, therefore, less
amount of agriculural product was offered for sale in the market Hence. the need was felt
to encourage the farmers to increase their production and offer a greater portion of their
products for sale in the market.
Due to the above problems in the Indian agricultural, it was very necessary to undertake land
reforms. Land reforms comprise of the following steps:

a) Abolishing Intermediaries: The prime focus of land reforms was, to abolish intermediaries
ike Zamindars, Jagirdars, etc. There were many steps undertaken to make the tillers, the
owners of land. The idea behind this step was that ownership of land would be incentives to
the actual tillers to make improvements (provided sufficient capital was made available to
them). The abolition of intermediaries brought 200 lakh (2 crore) tenants into direct contact
with the government.

Regulation
b) first of Rent: The cultivators were exploited in the form of exorbitant rents. In the
five year plan, the maximum rent fixed was one-fourth or one-fifth of the total farm
produce (except in Punjab and Haryana where it one-third). The regulations of rent not
was

reduced the burden but also enabled them with greater portion of
only
finance to invest on 1arm.
from the tenants

c) Consolidation of Holdings: As the land holdings were small and also fragmented, so it was
land holdings for the u s e of modern and advanced
very necessary to consolidate the
the total of land in their
technology. The farmers were given consolidated holdings equal to
various fragmented plots. This enabled them the benefits associated with the large scale
production.
hold. The
d) Land Ceilings: It means legislated fixed amount of land that a n individual may
basic motive behind this step was to promote equality of ownership of land holdings. This
eradicated the concentration of land holdings in few hands. Government used to confiscate
the excess land over the fixed amount of land and distribute it among the landless farmers,

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