On 15 August 1917, India gained freedom. The most important work in front of the leaders of independent India was to decide the type of economic system most suitable for India: a system which would promote welfare of all rather than a few. There are some economic decisions which have to be taken by all economies:
- Choice of production. What goods and services should be produced?
- Choice of technology. Which technique of production (ie, labour-intensive technology a capital-intensive) should be used to produce goods and services?
- Distribution of goods and services. How are goods and services to be distributed among people?
Types of Economic System
The three main types of economic system are:
- Capitalist Economy
- Socialist Economy
- Mixed Economy
An economy is an organisation of economic activities which provides people with the means to work and earn a living.
- Capitalism. It is a system in which all basic problems of an economy ie, what, how and for whom to produce, are solved by market forces e, demand and supply. All the factors of production are owned by private individual. Competition is the main feature of the economy Individual profit acts as incentive to work. It automatically operates through price mechanism. There is no government interference. This system is also called free market economy or laissez-faire economy. Consumers are free to consume what they like. Producers are free to produce what they want to produce. Labourers are free to choose their occupation. Factors of production are transferred from less profitable area to more profitable area automatically. Producers produce those goods and services whose demand is high in the market, yielding high profit. Producers use such technique of production which causes least cost of production per unit of output.
Merits. The major merit of this system is that it encourages self-interest and accelerates the pace of economic growth.
Demerits. The major drawback is that this system ignores the collective interest of whole economy. The poorer and weaker sections of the society become vulnerable to uncertainties of the market. Rich becomes richer and poor becomes poorer.
- Socialism. It is a system in which all the basic problems of an economy ie, what, how and for whom to be produce are solved by economic planning or the government. All economic decisions are taken by government. In this economy, government plays a major role. All the
Factors of production are owned by government. Social welfare is the motive of functioning of the government. This economy is also called centrally planned economy. Consumers, producers and all others are free but their freedom is controlled I.e they are free up to a certain limit. Planning authority decides what to produce and which method of production is to be used. In short, it is the central planning authority which solves all the central problems directly by incorporating the solution in the plan itself Merits. An important merit of this system is that the government or central planning Authority solves all the concerned problems keeping in view the collective interest of the society as a whole. It ensures social equality. Thus, growth with social justice is the principle merit of socialism.
Demerits. In this system the consumer’s sovereignty is restricted. Consumers can only consume what the government offers. There is no incentive to work. There is no permission to accumulate private property.
- Mixed Economy. It is an economic system in which all basic or central problems of an economy are solved by both government or central planning authority and market mechanism or price mechanism i.e, the forces of demand and supply. It is because in this economy, there is co-existence of public and private sector, government or central planning authority takes decision overall and specially for public sectors while price mechanism works in private sector Central planning authority aims to maximize social welfare while the market forces ensure maximization of individual profit.
Merits. This system provides choice to consumers. It raises consumer’s welfare level. It allows private ownership of factors of production. It promotes self-interest that triggers the pace of growth. It also facilitates direct participation by the state in the process of economic growth and enhances equality with social justice.
Demerits. Under public sector, units are often found to emerge as the breeding centres of inefficiency and corruption due to lack of accountability and efficiency. That is why privatisation takes place in such an economy.
Features of Three Economic Systems.
ECONOMIC PLANNING
India achieved independence in 1947. The colonial government left India in a poor, backward and stagnant situation. From that time efforts have been made to solve people’s problems in a sovereign Indian republic through a system of federal parliamentary democracy. Political Independence has no meaning without economic prosperity Planning was undertaken to sustain political independence and generate economic prosperity.
Meaning of Economic Planning–
Planning Economic planning means planned co-ordination and utilisation of available resources in an economy to achieve certain pre-specified social and economic objectives in a time bound Programme, According to Jawaharlal Nehru, economic planning does not simply mean making a List of activities to be followed nor it is political idealism. It is one of the most popular creed of
Modern times. It is a superior way of developing an economy. It is essential to ensure quick Building of the productive capacity of an economy. According to H.D. Dickenson, “Economic Planning helps in taking major economic decisions-what 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.” In 1950, Planning Commission was set up under the chairmanship of Jawaharlal Nehru, the then and the first Prime Minister of Independent India .
“Economic Planning means utilisation of country’s resources into different development activities in accordance with national priorities’’, states Planning Commission.
The Industrial Policy Resolution of 1948 and the Directive Principles of the Indian Constitution Assigned a leading role to the public sector in the development of the economy. The private sector was also encouraged to be part of the plan effort.
Time Period of Planning in India–
India has completed her 12th Five Year Plan (FYP).A Plan is a document showing detailed scheme, program and strategy worked out in advance for fulfilling an objective.
Planning Objectives vs Plan Objectives –
Planning Objectives refer to long-term objectives to be achieved over period of twenty years. It is also called ‘Perspective plan’. The basis of perspective plan is the five year plan. Main planning objectives are:
- Growth
- Modernisation
- Self-reliance
- Equity
Plan Objectives refer to short-term objectives to be achieved over a period of five years, Plan objectives are sector specific, in the first five year plan, the stress was on development of agriculture sector whereas in the second five year plan it was on development of heavy and basic Industries. Though different goals are emphasised in different five year plans in India, they all aim at achieving term objectives of:
(a) Growth
(b) Equality The difference between planning objectives and plan objectives is given in Table
Difference between Planning Objectives and Plan Objectives
Objectives of Planning in India
Modernisation–
It refers to adoption of new technology, new methods of production and changes in social outlook. For example, adoption of high yielding variety of seeds, gender empowerment, etc. Modernisation as an objective implies the use of advanced technology Advanced technology requires less labour per unit of output. Thus, modernisation creates unemployment.
- 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:
- Self-sufficiency in foodgrains
- Fall in foreign aid and reduced dependence on imports which is possible when there is growth in domestic production.
- Rise in exports.
- Rise in contribution of industries in gross domestic product (GDP).
Economic Growth.
Economic growth is an increase in the 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..-over a long period of time. When an economy attains such a stage of growth, it does not require the assistance of external agencies.
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.
Indian economy—Goals, features, Problems and Policies for class 11 and 12th
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, etc.
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
- Handicapped people
Higher levels of growth and social justice are two main objectives of India’s economic Planning. It is important to strike a judicious balance between these two complementary objectives. In fact, the two objectives are clubbed together as ‘Development with Social Justice’.
Features of Economic Policy Pursued from 1950 till 1990
. Phase I. Growth Oriented Development Strategy (1951-1965): Import Substituting Industrialisation
First Five Year Plan (1951-56)–
The first FYP was a modest plan, essentially a ‘repair plan’, made to take care of the severe damage to the Indian economy caused by war, famine (1943) and partition of the sub- continent in 1947. The first FYP model was Harrod-Domar model of development economics. First FYP had target of 2.1% per annum growth in national income. Top priority was given to the development of agricultural sector. The idea was that agricultural development would lead to higher rate of economic growth. The performance of the plan was better due to good harvests. 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) strategy of development adopted during the second FYP was essentially an import substitution led growth. It was a ‘metal’ and ‘machine’ strategy. Mahalanobis strategy of development had three main aspects: (1) developing a sound base for initiating the process of long-term growth; (2) high priority to industrialisation, and (3) emphasis on development of capital goods industries against consumer goods industries. This strategy has also been termed import-substituting strategy. The stress is on self-reliance.
Accordingly, the highest priority was given to heavy and basic industries. The adoption of this strategy meant rapid development of the public sector. Industrial allocation was raised rapidly and investment in other sectors, especially agriculture, was reduced. The plan aimed at 4.5 per cent per annum growth of the economy. The actual achievement was, however, only 4 per cent per annum growth in the national income. The big sized plan, a wrong assessment of the food situation and fast growth of industrialisation led to various imbalances in the economy in the form of:
- Food shortage
- Price rise
- Foreign exchange problem
- Unemployment
The 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 stress on the development of agriculture and allied activities. In this plan, 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, and
(c) reducing the concentration of economic power through public ownership of means of production. As a result there was considerable expansion in infrastructural facilities like irrigation projects, rail and road transportation, etc., as well as investment in directly productive activities like iron and steel, coal, power projects, heavy electricals and many basic industries.
The plan aimed at securing about 5.6 per cent per annum growth in national income, achieving self-sufficiency in foodgrains, and expanding basic industries so that the requirements of further industrialisation could be met. However, the performance of the plan fell very much short of expectations. The reasons were:
- Two consecutive years of bad harvests (1965-67)
- War with China in 1962 and with Pakistan in 19652
- Drought in 1965 followed by another drought in 1966-67)
- Devaluation of rupee .
These increased the dependence of the economy on imports and depressed the rate of growth of the economy. The growth rate came down to 2.2 per cent per annum. The failure during the third plan created so much distress in the economy that planning was abandoned for full three years. (There were three annual plans from 1966 to 1969.)
Indian economy—Goals, features, Problems and Policies for class 11 and 12th
Equity Oriented Development Strategy (1966-1990)
Annual Plans (1966-69)
To overcome the agricultural stagnation, a new strategy of agricultural development was formulated during ‘the annual plan’ period. It was called green revolution.
The Emphasis shifted towards technological reforms in agriculture in order to increase the productivity of output. The new package of policy included:
(a) development of high-yielding varieties of seeds
(b)Use of chemical based fertilizers and pesticides
(c) commercial sources of energy
(d)Controlled water supply
The new strategy was supported by an introduction of a price support policy on a fairly remunerative basis which made agriculture prices downwardly fixed.
The new agricultural strategy produced many changes for future planning. The first change was regarding the input base of the agriculture sector. Earlier, input base for agriculture sector was provided by the agriculture sector itself. But with the New Agricultural Strategy (NAS), the use of industrial inputs in agriculture increased which made the agriculture- industrial linkage two-way
2.Fourth Five Year Plan (1969-74)
Learning lessons from the third plan, the Fourth FYP (1969-74) emphasised growth with stability. It emphasised:
(a)Reducing fluctuations in agricultural production
(b) reducing dependence on foreign assistance
A 5.7 per cent per annum growth in national income was aimed. However, due to poor monsoons and shortage of critical inputs (especially power), the actual achievement was much lower at 3.4 per cent per annum
3. Fifth Five Year Plan (1974-79)
The fifth FYP policy measures did not give any bold redistributive scheme. The plan stressed that elimination of poverty required a rising rate of growth of domestic Product
The plan aimed at only 4.4 per cent per annum increase in the national income. The overall performance of the economy during this plan was not bad. The national income Increased at a rate of 4.9 per cent per annum.
4.The Sixth Five Year Plan (1980-85)
The strategy of sixth FYP centered around food and fuel. With the extension of Green Revolution, the use of chemical and oil based inputs and use of commercial sources of energy increased in the agriculture sector. Even in the industrial sector, the ‘petrochemical and related industries’ and ‘consumer durables’ were the engines of growth in contrast to metals’ and ‘machines’ of the Mahalanobis period.
The sixth plan marked a notable shift in the perception of what constituted India’s anti- poverty strategy. So far the emphasis had been to have growth so that its positive effects would trickle down to the poor. The focus shifted to formulating programmes specifically directed to the target group of the poor. The special programmes aimed at tackling poverty problem were introduced, like short-term wage employment in rural areas.
The plan aimed at a 5.2 per cent per annum increase in the national income. The target set for the Sixth Plan was achieved. It was possible mainly due to:
(a) good agricultural performance
(b) rapid growth in the service sector
5 .The Seventh Five Year Plan (1985-90)
The Seventh Plan focused on enhancing improvement in existing facilities. This was closely linked with measures for human resource development, Le, education, technical training and health.
The Seventh Plan strategy aimed at a direct attack on the problems of poverty, unemployment and regional imbalance. Many anti-poverty programmes were made centrepieces of the planning strategy to solve the problem of unemployment. The plan aimed at extending Green Revolution to new areas through its emphasis on raising the productivity of rice in the Eastern region and in dryland areas.
The plan aimed at a 5 per cent per annum growth in national income. Due to bumper harvest in some years, the agricultural sector recorded impressive growth. As a consequence, the economy witnessed a 6 per cent annum growth rate during the Seventh Plan. Although the target was exceeded during this plan, actual achievements were marked by severe fluctuations in the economy.
Summing up-From 1951 till 1990
The twin objectives of planning during this period were to bring growth with welfare. The central theme running through all the FYPs has been to bring about:
(a) speedy growth of national income to achieve development and modernisation of both agriculture and industry.
(b) to remove poverty, unemployment and ignorance.
(c) to ensure equitable distribution of income.
D) To reduce concentration of economic power.
e)To build social order in which all people share equal opportunities for economic and social advancements;
The major objectives of planning in India have, thus, been stepping up the growth rate of an economy, modernisation of agriculture and industry, achieving self-reliance and promoting social justice.
The biggest problem in achieving these objectives, as Prof. A.K. Sen pointed out, is that there is a sharp conflict among growth and welfare objectives and they cannot be achieved simultaneously.
Table 2.4 gives the targeted and realised growth rates.
Targeted and Realised Growth Rates (%)
It is disappointing to observe that with the exception of the First, the Fifth, the Sixth and the Seventh FYP, the realised growth rates of the country have been lower than the Plan targets. The First Plan, had the modest efforts to correct the imbalances resulting in the wake of the Second World War and the partition of the country. It aimed at rehabilitating agriculture. The growth rate achieved was well above the target rate. The Second Plan which incorporated strategy of industrial development, achieved growth rate which was a little lower than the target rate. The growth performance of the Third and the Fourth FYT’s was indeed disappointing where the realised growth rates were far too short of the targeted rates. The Fifth Plan and the Seventh Plan managed to cross the targeted growth targets In the Sixth Plan, the overall growth rate of the country was just equal to the Plan target due to good performance of agricultural and tertiary sectors.
Short-Period Goals/Objectives of Plans
Short period objectives vary from plan to plan depending on current needs of the economy
Plan Objectives Emphasis or Focus Area
4 AGRICULTURE
Agriculture is the backbone of the Indian economy and prosperity of agriculture can largely stand for the prosperity of the Indian economy. Any change in the agriculture sector-positive of negative has a multiplier effect on the entire economy. The agriculture sector acts as a bulwark in maintaining food security and consequently, national security as well. To maintain ecological balance there must be balanced and sustainable development of agriculture and allied sectors. The11th Five Year Plan (2007-12) emphasises that agricultural development is necessary for rapid economic development of the country.
1 Features of Indian Agriculture
Main features of Indian agriculture are:
- The country has a huge variety of crops comprising of cereals, non-cereals, pulses, oilseeds, cash crops like sugarcane, cotton, jute, potato, etc.
2. Agricultural output depends largely on rainfall and other natural factors like floods, droughts, storms, etc.
3 .The historical, social and cultural background of a state affects agricultural output.
4. Over three-fourth of landholdings are of small size. Thus, agriculture is a source of livelihood for poor farmers.
5. Farming is a way of life rather than a commercial activity. Thus, production is mainly for self-consumption.
6. There is little use of machinery.
Role of Agriculture
Agriculture is the backbone of Indian economic system and economic activity. It plays a vital role in an economy About two-third of India’s population depends directly or indirectly on agriculture for livelihood and about 70 per cent of population lives in rural areas.
The role and contribution of agriculture in the Indian economy is clear from the following considerations (Source: Economic Survey 2016-17)
1. Share in National Income. Agriculture and allied sector is the main source of our national income. In 1950-51, it contributed over 50% to the national income. At present, it contributes 17.5% to India’s Gross Value Added (GVA) (% change at 2011-12 prices). Since such a large part of national income comes from the agricultural sector; it shows how important it is for our economy. Statistics reveal that share of agriculture in national income in UK is 2%; in USA 4% and in Japan 5%. It implies that these economies are far less dependent on the agricultural sector.
2 .Share in Employment. Agriculture is the largest employment providing sector in India. It provides employment to around 46.1% of the total labour force. Thus, agriculture provides means of livelihood to 46.1% of the working force. In UK and USA, agriculture provides employment to only 1.1% and 1.6% of the workforce respectively. In France, Germany and Canada, the percentage is between 1% to 3% (Human Development Report 2016).
3 .Basis or Industrial Development. In India, agriculture plays a pivotal role in the development of the industrial sector. Raw materials like cotton, wood, sugarcane, jute, oilseeds, etc. Are supplied by agriculture to manufacturing industries. If agriculture is underdeveloped, industry cannot expand because of inadequate supply of raw material unless such materials are imported from other countries.
4 .Importance in Foreign Trade. Agriculture plays an important role in country’s international trade. The contribution of this sector in total export was around 12.3 per cent in 2015-16. The main items exported are cereals, raw cotton and marine products.
5 .Importance in Household Consumption. In India, since per capita income is very low, a large proportion of the income (which is around 60 per cent) is spent on foodgrains. Agricultural products play a very significant role in fulfilling the daily requirement of people of the country.
6 . Significance for Trade and Services. A large portion of country’s trade and services depends upon agricultural operations. Most prominent of these are transport, banking, cold storage, warehouse, etc. Agricultural growth has direct impact on poverty eradication. Prosperity of agriculture can also largely stand for the prosperity of the Indian economy.
Problems of Indian Agriculture
Agricultural productivity is low, both on the basis of per worker as well per hectare of land. Problems of Indian agriculture are.
1. General problems
2 .Institutional problems
3 .Technical problems