Introduction to Indian economy

On Aug 15, 1947, India gained freedom and finally, we were masters of our own destiny after some two hundred years of British rule.  The most important work in front of the leaders of independent India was to decide the type of economic system, most suitable for India i.e. a system which would promote the welfare of all rather than a few.

There is some economic decision which has to be taken by all economics.

  • Choice of Production – What goods and services should be produced ?
  • Choice of technology – Labour intensive or capital intensive technique should be used to produce goods and  service
  • Distribution of goods and service – How goods and services are to be distributed among people.

Economic system

It is defined as an arrangement by which the central problem (what, how, and for whom to produce) of an economy is solved. There are many types of economic systems. The 3 main types are

  1. Capitalist Economic
  2. Socialist Economic
  3. Mixed Economic
    • 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 and, therefore the central problems (what, how and for whom to produce) are solved through the market forces of demand and supply. It is also known as ‘Market Economy’.
    • Under this system, only those goods are produced that can be sold profitably either in the domestic or in the foreign market.
    • Goods are produced using cheaper techniques of production.  In case of cheap labour, labour-intensive methods of production are used and in case of costly labour, capital-intensive methods of production are used.
    • In a capitalist society, goods produced are distributed among people not on the basis of their needs but on the basis of their income or purchasing power.  This means that a sick person will be able to get medicine only when he can afford to buy it, otherwise not, even if there is urgency.
    • Socialist Economy : A socialist economy is the one in which the means of production are owned, controlled and operated by the government.
    • In a socialist society, the government decides what to produce in accordance with needs of the society.
    • The government decides how the goods are to be produced.
    • Distribution under socialism is supposed to be based on what people need and not on what they can afford to purchase.  A socialist nation provides free health care to the citizens , who need it.
    • Mixed Economy : A mixed economic system refers to a system in which the public sector and the private sector are allotted their respective roles for solving the central problems of the economy. In such economy, the government and the market together answer 3 questions : 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.

Merit: It respects the consumer’s sovereignty, enhancing the consumer’s choice and his welfare level. It allows private ownership of the means of production. Accordingly, it promotes self-interest, it facilitates direct participation by the state in the process of growth that enhances equality and social justice.

Demerit: Public sector undertakings are often found to emerge as the breeding center of inefficiency and corruption, due to the lack of accountability and lack of self-interest.

Meaning of Economic Planning

It means planned coordination and utilization of available resources in an economy to achieve certain pre-specified social and economic objectives in a time-bound program. In other words, it is a process under which a central authority defines a set of targets related to the growth and development of the country to be achieved within a specified period of timekeeping in view thof the e-resources of the country.

In 1950, the planning commission was set up under the chairmanship of Jawaharlal Nehru, the first Prime Minister of Independent India.

The industrial policy resolution of 1948 and 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 planning effort.

India has completed its 11th five-year plan and the 12th five-year plan has started. (12th Plan – 2002-17).

Planning Objectives

It refers to the long-term objectives to be achieved over a period of twenty years. it is also called the “Perspective Plan” Main objectives are

  1. Growth
  2. Modernisation
  3. Self Reliance
  4. Equity
  5. Full Employment

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 the development of the agriculture sector whereas in the second five-year plan it was on the development of heavy and basic industries. Though different goals are emphasized in different five-year plans in India, they all aim at achieving term objectives of :

  • Growth
  • Equality

Difference between Planning Objectives and Plan Objectives

               Planning Objectives                         Plane Objectives

1. They are long-term objectives 1. They are objectives to be achieved over 20 years be achieved in the short term of

period.5 years.
2.      They are general goals.2.      They are specific goals.
3.     They are common to all plans.3.     They vary from plan to plan.
4.     They aim at structural changes.4.      They aim at quantitative changes.
5.      They are also called5.      They are also called ‘Five
‘Perspective Plans’.Year Plan’.
6.        Their objectives relate to growth,6.    They are different in different
modernization, self-reliancefive-year plans. Basically the
and equity.objectives relate to growth

and equality.


It refers to an increase in a country’s capacity to produce the output of goods and services within the country.  It implies either a larger stock of productive capital or a larger size of supporting services like transport and banking, or an increase in the efficiency of productive capital and service.

A good indicator of economic growth is a steady increase in GDP.  GDP refers to the market value of all the goods and services produced in the country during a year.


It refers to the adoption of new technology, new methods of production, and also changes in social outlook eg. : 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.

Modernization also changes social outlook like gender empowerment, women should have the same rights as men. Earlier the women stayed at home while men work. But modern society makes use of the talents of women in the bank, factories, schools, etc, and such a society becomes prosperous.

But more advanced technology requires less labor per unit of output & thus creates unemployment.

Self Reliance

It 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

  • Self sufficency in food grain
  • Fall in foreign aid and reduced dependence on imports which is possible when there is growth in domestic production.
  • Rise in exports

The rise in the contribution of industries in GDP

Equity It means a reduction in inequality of income or wealth uplifting weaker sections of the society and more even distribution of economic power. It aims at raising the standard of living of all people and promoting social justice by reducing inequalities of income and wealth and also by up-

lifting weaker sections of the society like landless workers, small and marginal farmers, economically poor and backward people, etc. So India aims “development with social justice”.

Full Employment

Full employment refers to a situation when all the people in the working-age group are actually engaged in some gainful employment. In other words, those who can work and are willing to work must get work. This is an extremely important social objective of planning. Jobless growth is meaningless growth, particularly in a country encountering a serious challenge of poverty and unemployment. Thus ‘full employment as a common goal, of five-year plans is as important as economic growth itself.\

Features of Economic Policy Pursued from 1950 till 1990

1. 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 first FYP model was Harrod – Domar model of development economics. First FYP had a target of 2.1 % per annum growth in national income. Top priority was given to the development of the agricultural sector that would lead to a higher rate of economic growth. The national income creased 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 is the strategy of development that had three main aspects: (1) developing a sound base for initiating the process of long-term growth; (2) high priority to industrialization; and (3) emphasis on the development of capital goods industries against consumer goods industries. This strategy has also been termed the import-substituting strategy. The stress is on self-reliance.

Accordingly, the highest priority was given to heavy and basic industries. The plan aimed at 4.5 percent per annum growth of the economy. The actual achievement was, however, only 4 percent per annum growth in the national income. The big-sized plan, a wrong assessment of the food situation, and fast growth of industrialization 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)

In this plain, the public sector was assigned the role of :

  • promoting the growth of infrastructural facilities,
    • creation of capacity in the basic and capital goods industries, and
    • 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 percent per annum growth in national income, achieving self-sufficiency in foodgrains, and expanding basic industries so that the requirements of further industrialization 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 1965
    • Drought in 1965-66 (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 percent 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
Indian economy by

2. Phase II. Equity Oriented Development Strategy (1966 – 1990) 1. 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 the green revolution. The emphasis shifted towards technological reforms in agriculture to increase the productivity of output. The new package of the policy included :

  • development of high-yielding varieties of seeds.
  • use of chemical based fertilizers and pesticides
  • commercial sources of energy
  • 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. Plan Objectives

               Plan                        Emphasis or focus areas

               First PYP (1951-56)     Agricultural development

Second PYP (1956-61)Import substitution led growth, heavy and basic industries

               Third PYP (1961-66)   Economic sufficiency

Fourth PYP(1969-74) Technological reforms in agriculture, growth with stability

               Fifth PYP (1974-79)    Elimination of poverty

               Sixth FYP (1980-85)    Food and fuel strategy

Seventh PYP (1985-90) Human resource development

Eighth PYP (1992-97) Privatisation, liberalization, and globalization

Ninth PYP (1997-2002) Growth with social justice and equity

Tenth PYP (2002-2007)Growth with social justice and equity

Eleventh PYP (2007-12)Faster, broad-based and inclusive growth

Twelfth PYP (2012-17) Faster, sustainable, and more inclusive growth Failures of Indian Plans :

Indian plans could not produce desired results as is clear from the following :

  1. Slow Growth Rate : Economic growth has one of the major objectives of Indian Planning. We have achieved some growth but it has not been adequate. Our actual growth rates have been lower compared to targeted growth rates. Data given in table below show this.

Targeted and Actual Growth Rate

 Plans Targeted          Actual
  Growth RateGrowth Rate
First Plan (1951 – 56)2.23.6
Second Plan (1956 – 61)4.63.9
Third Plan (1961 – 66)5.02.3
Fourth Plan (1969 – 74)5.53.3
Fifth Plan (1974 – 78)5.54.9
Sixth Plan (1980 – 85)5.25.4
Seventh Plan (1985 – 90)5.05.8

The overall growth rate during the whole planned period has been about 3.8 percent which cannot be regarded as satisfactory.

  • Increase in Unemployment : Another important objective of Indian planning has been to create more and more employment opportunities for the growing labour force. But these have proved inadequate in relation to the requirements.

During the last 20 years, the growth rate of employment in India has been 2.2 percent whereas the growth rate of labor supply has been 2.6 percent. Due to this gap, the magnitude of unemployment in India has risen. At the end of the first plan, the total number of unemployed was 53 lakh which increased to 230 lakh at the end of the seventh plan.

  • Self – reliance : The ultimate goal of Indian planning is to make the country self – relient. We no longer want dependence on foreign aid. During the last 35 years a significant progress seems to have been made towards the achievement of this objective. However, we still depend upon imports of the techn9ology and heavy machinery for our modern industrial plants. Furthermore, our failure in the field of self reliance can be best judged from the fact that our deficit in the balance of payments is widening. The deficit in the balance of payment (BOP) was to the tune of % 42 crore during the first plan which increased to ˆ 38,313 crore in the seventh plan. BOP deficit implies the excess of visible and invisible imports over visible and invisible exports.
  • Failed to Achieve Goal of Socail Justice : Growth with social justice has been the central objective of Indian Planning.
  • Although, we have achieved some growth but our performance in terms of social justice has been far from satisfactory.
  • During the entire planning period inequalities of income and wealth have further aggravated.
  • The percentage of people living below poverty line has not changed much.

To sum up we may say that our plans have only made limited progress. We have to go a long way to get desired results. We must look for the causes that are responsible for the limited success of planning in India.

Q. Explain features of Economic policy pursued under planning till 1991?

The features of economic policy between the period 1951-1991, as under :

  1. Heavy Reliance on Public Sector :

Although, in the post-independence period. India adopted a system of a mixed economy, the characteristic feature of economic policies before 1991 was that greater importance was given to the public sector than the private sector. For instance, in Industrial Policy 1956, as many as 17 industries were exclusively reserved for the public sector as against 12 industries earmarked for the private sector. It was realized that the objective of the socialistic pattern of society could be achieved only through a comprehensive development of public sector enterprises.

  • Regulated Development of Private Sector :

Economic policies before 1991 imposed several restrictions on the private sector. For instance, under the Industrial (Development and Regulation) Act 1948 new industry could not be established without obtaining a necessary license and getting itself registered. Similarly, under the Monopolies and Restrictive Trade Practices Act, 1969, several restrictions were imposed on the expansion of industries. The principal idea was not to allow the concentration of economic power through private enterprises.

  • Protection of small Scale Industry and Regulation of Large Scale Industry :

While the large-scale industry was regularised through such acts as MRTP, the small-scale industry was offered protection in various ways. Certain areas of production were exclusively reserved for small-scale industries. Financial institutions were developed to cater exclusively to the needs of small-scale industries. Also, several boards (like Handloom Board and Silk Board) were established to promote the products to small-scale industries in the global market.

  • Thrust on Saving and Investment :

Saving and investment were identified as the key determinants of economic growth. High-interest rates were offered to promote saving, while investment was induced through subsidies and capital grants.

  • Protection from Foreign Competition :

Domestic industry was protected from foreign competition. High import duties and quantitative restrictions were levied on imports.

  • Focus on Import Substitution :

International trade carried a focus on import substitution. It implied the domestic production of goods that were imported from abroad.

  • Restriction on Foreign Capital :

Foreign direct investment was controlled and regulated through Foreign Exchange Regulation Act (FERA). Loans from abroad were accorded higher priority than FDI.

Q.    Why should plans have goals?

Ans. Plans should have goals or objectives which the country wants to achieve in a specific time period. Without goals, the planners would not know which sector of the economy should be developed on a priority basis.

Q.    Why did India opt for planning?

Ans. 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. Q. Define a plan.

Ans. A plan is a document showing a detailed scheme, program and strategy worked out in advance for fulfilling an objective.

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