CHAPTER 2

Indian Economy (1947-90)

FIVE YEAR PLANS IN INDIA: GOALS
AND ACHIEVEMENTS
WHAT IS ECONOMIC PLANNING?

 Economic planning refers to a system under which a central authority (like

Planning Commission in India after independence) sets a set of targets and
specifies a set of programmes and policies to achieve those targets within the
specified period of time. The principal focus is on the rational management of
the scarce resources. The resources are to be so rationally (optimally) utilised
that the social welfare is maximised along with GDP growth.
 "Economic planning means utilisation of country's resources in different
development activities in accordance with national priorities." -Planning
Commission
 In India, the idea of economic planning became a reality with the setting up of
Planning Commission in 1950, under the chairmanship of Prof. Mahalanobis. [It
is important to note that the Planning Commission has now been abolished. In
January 2015, it has been replaced by 'NITI Aayog'. The role of NITI Aayog is to
make such policies that accelerate the pace of GDP growth.]
NEED FOR PLANNING IN INDIA

 India inherited from the British a backward and stagnant economy. It was
backward as the level of output and productivity were low. And, it was
stagnant as the GDP growth was tardy (extremely low). Such an economy
could not be left to the market forces of supply and demand to trace its
path of growth and development. It needed a big push of investment,
supported by the government. Hence, the recourse to economic
planning.
TYPES OF ECONOMIES: CAPITALIST, SOCIALIST AND
MIXED ECONOMIES

 Capitalist Economy
A capitalist economy is defined as the one in which means of production
are owned by the individuals, and the individuals are free to take their
economic decisions, as guided by the principle of profit maximisation.
 Features
(i) There is a private ownership of the means of production.
(ii) Means of production are used in a manner such that the profits are
maximised.
(iii) The role of the government is largely confined to the maintenance of
law & order and defence of the country.
Merit and Demerit of Capitalism

Merit
The principal merit of this system is that it promotes self-interest. Profits are
maximised, and GDP growth is accelerated.

Demerit
The principal demerit of this system is that it ignores 'collective interest' of the
society. Only those goods are produced which yield high profits. Accordingly,
production is directed to satisfy needs of the rich. The poor people suffer
deprivation. There is growth without social justice.
Socialist Economy

A socialist economy is the one in which there is a social

(collective/public) ownership of the means of production, and
economic decisions are taken by some central authority of the
government with a view to maximise social welfare.
Features
 Means of production are collectively owned by the society as a
whole. Or, there is a public ownership of the means of production.
 Means of production are used in a manner such that social
welfare is maximised.
 There is a direct participation of the government in the process of
production. The role of the government is not merely confined to
law & order and defence.
Merit and Demerit of Socialism

Merit
Socialist economy achieves 'equality' in the distribution of income. Growth
process becomes inclusive, and is based on the principle of social justice.

Demerit
The principle demerit is that GDP growth remains a slow process. This is
because, production is not directed by the principle of 'profit maximisation'.
Instead, it is directed by the principle of 'Equity and Justice'. It is owing to this
demerit that the erstwhile socialist economies like Soviet Union and China had
to switch over to market economy from the controlled economy.
Mixed Economy (Indian Economic System)

A mixed economy is the one in which there is private as well as public

ownership of the means of production. Production decisions are
governed largely by the principle of profit maximisation, but not
without checks and balances of social justice.
Features
 Means of production are owned by the private entrepreneurs as
well as the government.
 In the private sector, production decisions are governed by the
principle of profit maximisation, while in the public sector, social
welfare rules the roost.
 Both private and public sectors play a significant role in the
process of production.
Merit and Demerit of Mixed Economy

Merit
The principle merit of a mixed economy is that it combines the merits of
capitalist as well as a socialist economy. On the one hand, GDP growth is
encouraged because private entrepreneurs are free to focus on 'profit
maximisation'. On the other hand, 'social justice' or equality is promoted
because the government sector places high priority on the maximisation of
social welfare.
Demerit
The principle demerit is that the government sector is often inflicted with
corruption, leading to low level of efficiency/productivity. It is owing to this
demerit, that the mixed economies (like India) are gradually opting for
privatisation of the public enterprises. It may be noted that most economies
of the world are now mixed economies where production decisions are
governed largely by the market forces of demand and supply, but are
regulated by way of direct or indirect intervention by the government.
LONG PERIOD AND SHORT PERIOD GOALS OF
PLANNING IN INDIA

 Long Period Goals are common to all the Five Year Plans and are
therefore generally studied as Common Goals of Five Year Plans or
Objectives of Planning.
 Short Period Goals are plan-specific and are generally studied as
Objectives of Plans.
 Why should Plans have Goals?
 Without goals, there is no planning. In fact, planning is defined as a
strategy that defines how to allocate the country's scarce resources to
different uses with a view to achieving a given set of goals. These goals
often relate to growth and social justice.
Long Period Goals/ Common Goals of Five year
Plan – (1) GDP Growth

 (1) GDP Growth: Increase in GDP (gross domestic product) implies

increase in the level of output in the economy. It implies an increase in
the flow of goods and services in the economy. When the increase in
the flow of goods and services is consistent over a long period of time,
it is called 'economic growth'. Thus, GDP growth leads to economic
growth.
 Increase in GDP depends on two factors: (i) Increase in resource-base
of the country, and (ii) Increase in productivity (output per unit of input)
through innovative technology.
 Planning in India is to ensure that natural resources are fully explored
and production technology is continuously improved. So that, GDP
growth achieves a momentum.
Long Period Goals/ Common Goals of Five year
Plan – (2) Full Employment

 (2) Full Employment: Full employment refers to a situation when

all the people who are able to work and willing to work at the
market wage rate are getting work. In other words, those who are
able to work and are willing to work must get work. This is a social
objective of planning. The objective of full employment focuses on
'inclusive growth'.
 It implies that:
 (i) more and more people should participate in the process of
growth, and
 (ii) benefits of growth must be shared across wider sections of the
society. It amounts to achieving 'growth with social justice:
Full Employment does not mean a situation of
Zero Unemployment

Full employment by no means should be considered as a situation of zero

unemployment.
1. In an economy, there is always some natural rate of unemployment,
which is the minimum rate of unemployment caused by structural changes
in the system of production.
2. Structural changes, by and large, are related to the introduction of new
technology in the production system. Because of these changes, people
tend to remain unemployed for some time till they adapt themselves to
these changes.
3. Natural rate of unemployment (also, called structural unemployment) is
consistent with a situation of full employment.
Long Period Goals/ Common Goals of Five year
Plan – (3) Equitable Distribution or Equity:

 (3) Equitable Distribution or Equity: Economic growth would become a

meaningless exercise if the benefits of growth accrue to only a handful of
people in the society.
 1. Growth serves virtually no purpose in a society where rich tend to
become richer and the poor continue to struggle even for the essential of
life.
 2. Benefits of growth must spread across all sections of the society, so that
the distribution of income becomes equitable.
 3. Equitable distribution of income implies social equality and this is one of
the principal objectives or goals of planning in India.
Equal Distribution and Equitable Distribution

Equal distribution would mean every individual in the society gets the
same share in the country's national income. It would imply a situation
when a doctor gets the same salary as a clerk in the hospital. No
society would ever seek a situation like this.

Equitable distribution, on the other hand, refers to a situation when

differences in income are allowed but only within certain limits. These
differences are socially unwarranted and are to be proportionate to
the differences in qualifications and skills of different individuals in the
society
Long Period Goals/ Common Goals of Five year
Plan – (4) Modernisation:

 (4) Modernisation: It refers to updation and adoption of modern

technology in the process of growth. As noted earlier, output can be
increased either by increasing the pool of resources or by using
innovative technology.
 Modern age is the age of science and innovations. Science has offered
us new ways of doing things, such that productivity in farms and factories
has shown an exponential rise over time.
 Green Revolution in Indian agriculture is a well known example of how
technology can bring about revolutionary changes in output.
 Recently, IT revolution has redefined the concept of domestic production
through BPO (Business Process Outsourcing).
 However, modernisation in the context of goals of plans in India, has a
social angle as well. Here, it refers to modernisation of social outlook.
Conventional wisdom (wisdom without a valid reason) must give way to
modern outlook. It includes issues like empowerment of women so that
(like men) they also participate in the process of production and
contribute to the process of economic and social prosperity.
Modernisation and Employment Generation:
Complementary OR Contradictory?

Modernisation as planning objective was not expected to contradict

with employment generation. Both as goals of planning were taken as
complementary to each other. The complementary between the two
was expected to work as under:

1) Modernisation leads to increase in productivity

2) Increase in productivity leads to higher level of production activity
and higher levels of income in the economy implying a rising
demand for goods and services in the economy
3) Expansion of demand leads to expansion of employment
opportunities

However, of late the nature of growth process has taken a dramatic

turn. Technology has emerged as the principal driver of growth
process. And the nature of technology is such that it is substituting
labour rather than supplementing it. Consequently, ‘jobless growth’ is
emerging to be challenge for the politicians and the planners.
Long Period Goals/ Common Goals of Five year
Plan – (5) Self-reliance and self-sufficiency:

 (5) Self-reliance and self-sufficiency: Self-reliance refers to the state of

non-dependence on the rest of the world for the financial resources. Self-
sufficiency refers to the state of non-dependence upon the rest of the
world for the essential supplies (particularly food grains) in the domestic
economy. This goal was accorded a high priority during the first seven
plans.
 The basic idea was not to expose Indian economy to political pressures
from rest of the world simply because we are dependent upon them for
the supply of essential goods. Indeed, it happened in 1965, when USA
threatened to stop exports of food grains to India if it did not stop the then
war with Pakistan.
 India wanted to be self-sufficient in food grain production to avoid the
uncertainties of supplies from rest of the world.
ACHIEVEMENT OF THE GOALS (Not
included in the syllabus)

 Increase in National Income

 Reforms in Agriculture
 Growth and Diversification of Industry
 Economic Infrastructure
 Social Infrastructure
 International trade
FAILURE OF PLANNING (Not included in the
syllabus)

 Failed to eradicate poverty

 Failed to curb the high rate of inflation
 Failed to contain crises of unemployment
 Failed to generate economic and social infrastructure needed to bring
momentum in the process of growth.