Types of economic system
Every economy answers three questions: what to produce, how to produce, and for whom.
- Capitalist economy: the market decides. Goods go to those who can pay. Private profit is the drive.
- Socialist economy: the government decides, based on people's needs. There is little private property.
- Mixed economy: both work together. The market supplies most goods; the government handles key areas and fairness.
India, under Nehru, chose a mixed economy with a strong public sector, a socialist pattern of society, and plans made by the Planning Commission (1950). (It was replaced by NITI Aayog in 2015.)
Goals of five-year plans
A plan says how resources should be used to reach goals in a set time. The First Plan began in 1951. Long-term goals:
- Growth: more goods and services, a rising GDP. It needs more capital and efficient transport and banking.
- Modernisation: new technology in production, and a modern outlook, like equal rights for women.
- Self-reliance: avoid depending on foreign countries, especially for food, so that no one can dictate terms.
- Equity: the benefits of growth must reach poor people too: food, a good house, education and health for all.
Plans also gave priority to some goals over others; for example, the Second Plan (P.C. Mahalanobis) stressed heavy industry.
Agriculture: institutional reform and new strategy
Institutional reform (land reforms)
- Abolition of intermediaries: zamindars were removed, and about 200 lakh tenants came into direct contact with the government.
- Land to the tiller: the person who farms the land should own it, giving an incentive to invest.
- Land ceiling: a maximum limit on land one person can own; extra land was to go to the landless. It worked well in Kerala and West Bengal, but loopholes blocked it elsewhere.
New agricultural strategy: the Green Revolution
From the mid-1960s, high-yielding variety (HYV) seeds, mainly of wheat and rice, were used with assured irrigation, fertilisers and pesticides.
- First phase (mid-1960s to mid-1970s): mainly Punjab, Andhra Pradesh and Tamil Nadu.
- Second phase (mid-1970s to mid-1980s): spread to more states and crops.
- Gains: India became self-sufficient in food grains; a marketed surplus came to markets; prices fell for poor buyers; the government built buffer stocks.
- Worries: rich farmers gained more at first; pests could harm crops; heavy use of chemicals and water. The government answered with low-interest loans and subsidised fertiliser so that small farmers also gained.
The subsidy debate
Farm subsidies helped small farmers adopt new technology, but critics say they later benefited richer farmers and fertiliser firms and strained the budget.
Industry: IPR 1956 and small-scale industry
Private industry in 1950 lacked capital and markets, so the public sector was given a leading role.
Industrial Policy Resolution 1956
- Schedule A: 17 industries owned only by the state (like arms, atomic energy, railways).
- Schedule B: the state sets up new units; private firms supplement.
- Schedule C: the rest for the private sector, under state control through licences.
- Licences were used to push industries into backward regions and to control how much was produced.
Small-scale industry
In 1955 the Karve Committee suggested using small industries for rural growth. A small unit is defined by the maximum investment in its machinery. Small units were given concessions like lower taxes and cheap loans, and many goods were reserved for them. They are labour-intensive, so they create more jobs per rupee of capital.
Try it at home
List three products in your home made by small units (like pickles, soap, chappals). Why might they need protection from big firms?
Foreign trade: import substitution
India followed an inward-looking trade strategy, also called import substitution: make at home what we used to import.
- Tariffs: taxes on imports made foreign goods dear.
- Quotas: limits on the quantity that could be imported.
- Aim: protect young Indian industries from foreign competition and save foreign exchange.
Effect of policies on industry
Industry grew from about 11.8% to 24.6% of GDP between 1950–51 and 1990–91, and grew about 6% a year. India made a wide range of goods. But many public firms made losses, licences caused delays and corruption ('licence permit raj'), and protection made firms inefficient and low in quality. Exports stayed weak.
Key formulas and definitions
- Key terms: Mixed economy: market + state together
- Five-year plan goals: growth, modernisation, self-reliance, equity
- Land ceiling: legal maximum land a person may own
- HYV seeds: high-yielding variety seeds used in the Green Revolution
- Marketed surplus: part of farm output sold in the market
- IPR 1956: Schedules A (state only), B (state leads), C (private, licensed)
- Import substitution: replacing imports with home production using tariffs and quotas
Worked examples
1. Why did India choose a mixed economy?
Pure markets might ignore the poor and key sectors, while pure state control limits freedom and efficiency. A mix lets private firms produce most goods while the state builds basic industry and ensures fairness.
2. Why is equity important alongside growth?
Growth can raise GDP while the poor stay poor. Equity makes sure benefits like food, housing, education and health reach everyone.
3. How did 'land to the tiller' raise productivity?
When farmers own the land they work, they gain from improvements, so they invest more in wells, seeds and care.
4. Food grain output went from about 51 million tonnes in 1950 to about 176 in 1990. By how many times did it grow?
176 ÷ 51 ≈ 3.5 times.
5. Why were small-scale industries protected?
They are labour-intensive and give many jobs with little capital, and they spread industry to villages. Big firms could otherwise crush them.
6. State one good and one bad effect of import substitution.
Good: Indian industries grew and a wide range of goods was made at home. Bad: without competition, firms stayed inefficient and quality was poor.
Common mistakes
- Saying land ceilings worked everywhere. They succeeded mainly in Kerala and West Bengal; loopholes weakened them elsewhere.
- Thinking the Green Revolution helped all crops equally. It was mainly wheat and rice at first.
- Writing that IPR 1956 banned private industry. Schedule C was open to private firms, with licences.
- Confusing import substitution with export promotion. It protected home industries from imports.