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Chapter 2 Indian economy (1950-1990) class 12th Commerce

Concept Introduction

Economic system refers to the arrangement by which central problem of an economy are solved …

  1. What to Produce
  2. How to produce
  3. Whom to produce


  1. Capitalist Economy: A capitalist economy is the one in which the means of production are owned, controlled and operated by the private sector. Production is done mainly for earning profits.

Under capitalist economy, the three central problems are solved in the following manner:

2. What to produce: Under this system, only those goods are produced that can be sold profitably either in the domestic or in the foreign market.

3.How to Produce: Goods are produced using cheaper techniques of production. In case of cheap labor, labor- intensive methods of production are used. In case of costly labor, capital intensive methods of production are used.


For whom to produce: goods produced are distributed among people not on the basis of  their needs but on the basis of their income or purchasing power.


  1. Socialist economy

A social economy is the one in which the means of production are owned, controlled and operated by the government.

Under socialist economy, the three central problems are solved in the following manner

  1. What to produce:

In this, the government decides what to produce in accordance with needs of the society.


  1. Whom to produce: For whom to Produce: Distribution under this economy is based on what people          >< need>
  2. How to produce: How to Produce: The government decides how the goods are to be produced.


  1. Mixed economy :

A mixed economy is the one in  which the means of production are owned, controlled and operated by the government and private sector.

In mixed economy, the government and the market together solve the 3 central problems: what to produce, how to produce, and for whom to produce.

  • The private sector provides whatever goods and services, it can produce well, and the government provides essential goods and services, which the market fails to do.


Mixed economy

India adopted the Mixed Economy

After the freedom, leaders of independent India (like Jawaharlal Nehru) were confused with regard to economic system, to be followed in India.

  • Some leaders were in favor of Socialist Economy. However, in a democratic country like India, complete dilution of private ownership was not possible whereas, Capitalist Economic 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 was the best features of both Socialist and Capitalist Economy which 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.


Concept - Economic Planning

The Planning Commission fixed the planning period at five years, which began the era of ‘Five Year Plans’.

After adopting the “Mixed Economic System’, the next important step for the Government was to revive the poor, backward economy...

  • For the development of Indian economy, it was necessary for the Government to ‘plan’ for the economy, known as Economic Planning.
  • 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.
  • To make economic planning effective, the Government of India set up Planning Commission in 1950, with the Prime Minister and the Chairman.
  • The 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 five years, which began the era of ‘Five Year Plans’.


Concept Goals of Five-year plan

  1. Growth

It enables people to enjoy a more rich and varied life.


  • Growth refers to increase in the country’s capacity to produce the output of goods and services within the country.
  • Growth implies:
  1. Either a larger stock of productive capital;
  2. Or a larger size of supporting services like transport and banking;
  3. Or an increase in the efficiency of productive capital and services.


  • A good indicator of economic growth, in the language of economics, is steady increase in the Gross Domestic Product (GDP).
  • GDP refers to market value of all the final goods and services produced in the country during a period of one year. Increase in GDP or availability of goods and services enables people to enjoy a more rich and varied life.
  • The GDP of a country is derived from the different sectors (Agricultural sector, Industrial sector and Service sector) of the economy.
  • In some countries, growth in agriculture contributes more to the GDP growth, while in some countries, growth in service sector contributes more to GDP growth.
  • The Contribution of each sector makes up the structural composition of the economy


  1. Modernization

Indian planners have always recognized the need for modernization of society to raise the standard of living of people. Modernization includes:

  • Adoption of New Technology: Modernization aims to increase the 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.
  • Change in social outlook: Modernization  also requires change in social outlook, such as gender empowerment or providing equal rights to women. A society will be more civilized and prosperous if it makes use of talents of women in the work place


  1. Self-reliance

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 modernization, the five year plans stressed on the use of own resources, in order to reduce our dependence on foreign countries.
  • The policy of self-reliance was considered a necessity because of two reasons:
  1. 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 self-reliance.
  2. To avoid Foreign Interference: It was feared that dependence on imported food supplies, foreign technology and foreign capital may increase foreign interference in the policies of our country….


  1. Equity

So, it is important to ensure that benefits of economic prosperity are availed by all sections (rich as well as poor) of the economy.

In addition to the objectives of growth, modernization and self-reliance, equity is also important.

  • According to Equity, every Indian should be able to meet his or her basic needs (food, house, education and health care and inequality in the distribution of wealth should be reduced.
  • In short, Equity aims to raise the standard of living of all people and promote social justice.


Concept Agriculture

  1. Land reforms - Land Reforms primarily refers to change in the ownership of landholdings.

Indian Government took various steps to abolish intermediaries and to make tillers, the owners of land.

  • The idea behind this step was that ownership of land would give incentives to the actual tillers to make improvements (provided sufficient capital was made available to them).
  • The abolition of intermediaries brought 200 lakh tenants into direct contact with the government.
  • The ownership rights granted to tenants gave them the incentives to increase output and this contributed to growth in agriculture.
  • However, the goal of equity was not fully served by abolition of intermediaries because of following reasons;
  1. In some areas, the former zamindars continued to own large areas of land by making use of some loopholes in the legislation;
  2. In some cases, tenants were evicted and zamindars claimed to be self-cultivators;
  3. Even after getting the ownership of land, the poorest of the agricultural labourers did not benefit from land reformers.


Land celling

Land ceiling means fixing the specifies limit of land , which could be owned by an individual.

  • Beyond the specified limit, all lands belonging to a particular person would  be taken over by the Government and will be allotted to the landless cultivators and small farmers.
  • The purpose of land ceiling was to reduce the concentration of land ownership in few hands.


  1. Green revolution

Green revolution refers to the large increase in the production of food grains due to use of high yielding variety seeds.

Green Revolution refers to the large increase in production of food grains due to use of high yielding variety (HYV) seeds.

HYV seeds: Main Reason for Agricultural Revolution

  • These seeds can be used in those places where there are adequate facilities for drainage and water supply.
  • As compared to other ordinary seeds, these seeds need heavy doses of chemical fertilizers (4 to 10 times more fertilizers) to get the largest possible production.
  • So, to derive benefit from HYV seeds, Indian farmers need to have;
  1. Reliable irrigation facilities; and
  2. Financial resources (to purchase fertilizers and pesticides).


Indian Economy experienced the success of Green Revolution in 2 phases;

  1. In the first phase (Mid 60s to Mid 70s), the use of HYV seeds was restricted to more affluent states ( like Punjab, Andhra Pradesh, Tamil Nadu, etc.). Further, the use of HYV seeds primarily benefitted the wheat growing regions only.
  2. In the second phase (Mid 70s to Mid 80s), the HYV technology spread to a larger number of states and benefitted more variety of crops.


Important Effects of Green Revolution

The spread of Green Revolution technology enabled India to achieve self-sufficiency in food grains. India was no longer at the mercy of America, or any other nation, for the food requirements.

Debate over subsidies in agriculture

Subsidy, means that the farmers get inputs at prices lower than the market prices.

  • So, it was necessary for the Government to grant subsidies to provide an incentive for adoption of the new HYV technology.


Economists in Favor of Subsidies

  1. The government should continue with agricultural subsidies as farming in India continues to be a risky business.
  2. Majority of the farmers are very poor and they will not be able to afford the required inputs without the subsidies.
  3. Eliminating subsidies will increase the income inequality between rich and poor farmers and will violate the ultimate goal of equity.

In brief, subsidies in India are necessary for poor and small farmers, to enable them to make use of modern agricultural techniques. Necessary steps should be taken to ensure that only the poor farmers enjoy the benefits of subsidies and not the fertilizer industry and big farmers.


Economists -Against the Subsidies

  1. subsidies were granted by the Government to provide an incentive for adoption of the new HYV technology.
  2. Subsidies do not benefit the poor and small farmers (target group) as benefits of substantial amount of subsidy go to fertilizer industry and prosperous farmers.

Therefore, there is no case for continuing with subsidies as it does not benefit the target group and it is a huge burden on the government’s finances.


Concept Industrial Development

Economists have found that developing countries can progress only if they have a good industrial sector. Industry provides employment which is more stable than the employment in agriculture; it promotes modernization and overall prosperity. At the time of independence, the variety of industries was very narrow, — largely confined to cotton textiles and jute. There were two well managed iron and steel firms — one in Jamshedpur and the other in Kolkata — but, obviously, we needed to expand the industrial base with a variety of industries if the economy was to grow.

Role of public sector in industrial development


1 Shortage of capital with private sector

Shortage of Capital with Private Sector: At the time of independence, Tatas and Birla’s were the only well- known Private entrepreneurs. Private entrepreneurs did not have the capital to undertake investment in industrial ventures… As a result, Government had to make industrial investment through Public Sector Undertakings (PSU’s)


2.Lack of incentives for private sector

The Indian market was not big enough to encourage private industrialists to undertake major projects, even if they had capital to do so. Due to limited size of the market, there was low level of demand for the industrial goods.


3.Objective of social welfare

The objective of equity and social welfare of the Government could be achieved only through direct participation of the state in the process of industrialization.


Industrial policy resolution 1956

Industrial Policy is a comprehensive package of policy measures which covers various issues connected with different industrial enterprises of the country.

  • After the Industries Policy, 1948, Indian economy had to face a series a series of economic and political changes, which necessitated the need for a fresh industrial policy for the country. So, on April 30, 1956, a second Industrial Policy Resolution was adopted in India.


Classification of Industries

  1. Schedule A: This first category comprised industries which would be exclusively owned by the state. In this schedule, 17 industries were included, like arms and ammunitions; atomic energy; heavy and core industries; aircraft; oil; railways; shipping; etc.
  2. Schedule B: In this schedule, 12 industries were placed, which would be progressively state-owned. The state would take the initiative of setting up industries and private sector will supplement efforts of the state. This schedule includes industries like aluminum, other mining industries, machine tools, fertilizers, etc.
  3. Schedule C: This schedule consists of the remaining industries which were to be in the private sector.


Industrial licensing

An industrial license is a written permission from the government, to an industrial unit to manufacture goods. The Industries (Development and Regulation) Act, 1951, empowered the government, to issue licenses for:

  • Setting up of new industries;
  • Expansion of existing ones; and
  • Diversification of products


Small scall industry (SSI)

In 1955, the village and small-scale Industries Committee was also known as (Karve Committee) A ‘small-scale industry’ is defined with reference to the maximum investment allowed on the assets of a unit. This limit has charged from five lakh in 1950 to present limit of rupees one crore.

 Small-scale industries are more labour intensive, i.e., they use more labour than the large-scale industries and, therefore, they generate more employment. After agriculture, small-scale industries provide employment to the largest number of people in India. Small-scale industries cannot complete with the big industrial it is obvious that the development of small-scale industry requires them to be shielded from the large firms. For this purpose, the production of a number of products was reserved for the small-scale industry. The criterion of reservation being the ability if these units is to be manufactured the goods. they were also given concessions, such as lower excise duty and bank loans at lower interest rates.


Concept Foreign trade

  1. Saving precious foreign exchange
  2. Achieving self sufficiency

Protect domestic industry from foreign competition

Foreign trade in India include all imports and export to and from India.

Import substitution erfs to a policy of replacement or substitution of imports by domestic production….

For eg: instead of importing vehicle made in a foreign country , domestic industries would be encouraged to produce them in India self…

The policy of import substitution can serve definite objectives:

  1. Saving of precious foreign exchange
  2. Achieving self-reliance


Protection from import through traffic and quotas

  1. Tariffs: tariffs refers to taxes levied on imported goods . the basic aim for imposing heavy duty on imported goods was to make them expensive and discourage their use.
  2. Quotas: quotas refer to fixing the maximum limit on the imports of a commodity by a domestic producer.

The tariffs on imported goods and fixation of quotas helped in restricting the level of imports. As a result, the domestic firm could expand without fear of competition from the foreign market.

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