Types of Economic System Capitalism
• In a market economy, known as capitalism, only those consumer goods will be produced that are in demand, i.e., goods that can be sold profitably either in domestic or in foreign markets.
• In a capitalist society, goods produced are distributed among people not based on what people need but based on Purchasing Power—the ability to buy goods and services. That is, one has to have money in pocket to buy it.
• Capitalism encourages self – interest and accelerates pace of economic growth.
• Low-cost housing for poor is much needed but will not count as demand in market sense because poor do not have purchasing power to back demand. As a result, this commodity will not be produced and supplied as per market forces.
• This system ignores collective interest of whole economy. poorer and weaker sections of society become vulnerable to uncertainties of market .
• In a socialist society, government decides what goods are to be produced following needs of society. This is assumed that government knows what is good for country’s people, so desires of individual consumers are not given much importance.
• government decides how goods are to be produced and how they should be distributed. In principle, distribution under socialism is supposed to be based on what people need and not on what they can afford to purchase.
• Socialism ensures social equality. Thus, growth with social justice is principal merits of socialism.
• A socialist society has no private property since everything is owned by state. In Cuba and China, for example, most of economic activities are governed by socialistic principles.
• In this system consumer’s sovereignty is restricted. Consumers can only consume what government offers.
• Most economies are mixed economies, i.e., government and market together decide what to produce, how to produce, and how to distribute what is produced.
• In a mixed economy, market will provide whatever goods and services it can produce well, and government will provide essential goods and services that market fails to do.
• 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 pace of growth.
Goals of Five-Year Plans Plan
• A plan spells out how resources of a nation should be put to use.
• Economic planning means utilisation of a country’s resources into different development activities in accordance with national priorities. It should have some general goals as well as specific objectives that are to be achieved within a specified period of time.
• In India, plans were of five years duration and were known as five-year plans [we borrowed this from former Soviet Union].
• Planning Commission was set up in 1950. Prime Minister was its chairman.
• Planning Commission has now been abolished. In February 2015, it has been re-named as NITI Aayog. role of NITI Aayog is to make policies to accelerate pace of growth and development in country.
• A plan should have some specified goals. goals of five-year plans were: growth, modernisation, self-reliance, and equity.
• It refers to an increase in country’s capacity to produce output of goods and services within country.
• A good indicator of economic growth, in language of economics, is a steady increase in Gross Domestic Product [GDP].
• GDP is market value of all final goods and services produced in country during a year.
• GDP of a country is derived from different sectors of economy, namely agricultural sector, industrial sector, and service sector.
• contribution made by each of these sectors makes up structural composition of economy.
• To increase production of goods and services producers have to adopt new technology. adoption of new technology is known as modernisation.
• Modernisation refers to changes in social outlook such as recognition that women should have same rights as men.
• Modernisation as an objective implies use of advanced technology. Advanced technology requires less labour per unit of output. Thus, modernisation creates unemployment.
• Equity refers to reduction in inequality of income or wealth, uplifting weaker section of society and a more even distribution of economic power.
• Growth, modernisation, and self-reliance, by themselves, may not improve kind of life which people are living. This is important to ensure that benefits of economic prosperity reach poor sections as well instead of being enjoyed only by rich.
• So, in addition to growth, modernisation, and selfreliance, equity is important.
• Every Indian should be able to meet his or her basic needs such as food, a decent house, education, and health care and inequality in distribution of wealth should be reduced.
• A nation can promote economic growth and modernisation by using its own resources or by using resources imported from other nations.
• first seven five-year plans gave importance to self-reliance which means avoiding imports of those goods which could be produced in India itself.
• This policy was considered a necessity to reduce our dependence on foreign countries, especially for food. It was feared that dependence on imported food supplies, foreign technology, and foreign capital may make India’s sovereignty vulnerable to foreign interference in our policies.
• During colonial rule, there was neither growth nor equity in agricultural sector.
• policy-makers of independent India had to address these issues which they did through land reforms and promoting use of ‘High Yielding Variety’ [HYV] seeds which ushered in a revolution in Indian agriculture.
• British ruler had introduced a new land tenure system in India. It was of three types – Zamindari, Mahalwari & Ryotwari system.
• At time of independence, land tenure system was characterised by intermediaries [variously known as zamindars, jagirdars.] who merely collected rent from actual tillers of soil without contributing towards improvements on farm.
• Equity in agriculture known as for land reforms which primarily refer to changes in ownership of landholdings.
• After independence, steps were taken to abolish intermediaries and to make tillers owners of land.
• land ceiling was another policy to promote equity in agricultural sector. This means fixing maximum size of land that can be owned by an individual.
• purpose of land ceiling was to reduce concentration of land ownership in a few hands.
• ownership conferred on tenants gave them incentive to increase output and this contributed to growth in agriculture.
• Land reforms were successful in Kerala and West Bengal because these states had governments committed to policy of land to tiller whereas other states did not have same level of commitment and vast inequality in landholding continues to this day.
• At independence, about 75% of country’s population was dependent on agriculture.
• Productivity in agricultural sector was very low because of use of old technology and absence of required infrastructure for vast majority of farmers.
• stagnation in agriculture during colonial rule was permanently broken by green revolution. This refers to large increase in production of food grains resulting from use of high-yielding variety [HYV] seeds, especially for wheat and rice.
• use of these seeds requires use of fertiliser and pesticide in correct quantities as well as a regular supply of water; application of these inputs in correct proportions is vital.
• farmers who could benefit from HYV seeds required reliable irrigation facilities as well as financial resources to purchase fertiliser and pesticides.
• In first phase of green revolution [approximately mid-1960s up to mid-1970s], use of HYV seeds was restricted to more affluent states such as Punjab, Andhra Pradesh, and Tamil Nadu. use of HYV seeds primarily benefited wheat-growing regions only.
• In second phase of green revolution [mid- 1970s to mid-1980s], HYV technology spread to a larger number of states and benefited more variety of crops.
• spread of green revolution technology enabled India to achieve self-sufficiency in food grains.
• portion of agricultural produce that is sold in market by farmers is known as a marketed surplus.
• A good proportion of rice and wheat produced during green revolution period [available as marketed surplus] was sold by farmers in market.
• green revolution enabled government to procure a sufficient amount of food grains to build a stock that could be used in times of food shortage.
• government provided loans at a low-interest rate to small farmers and subsidised fertilisers so small farmers could have access to needed inputs.
• As a result, green revolution benefited small as well as rich farmers.
• In India, between 1950 and 1990, proportion of GDP contributed by agriculture declined significantly but not population dependent on it [67.5% in 1950 to 64.9% by 1990].
Industry and Trade
• Industry provides employment that is more stable than that in agriculture; it promotes modernisation and overall prosperity. This is for this reason that five-year plans placed a lot of emphasis on industrial development.
• At time of independence, Indian industrialists did not have capital to undertake investment in industrial ventures required for development of Indian economy; nor was market big enough to encourage industrialists to undertake major projects even if they had capital to do so.
• decision to develop Indian economy on socialist lines led to policy of government controlling commanding heights of economy, as Second Five Year Plan put it.
• This meant that government would have complete control of those industries that were vital for economy.
• policies of private sector would have to be complimentary to those of public sector, with public sector leading way.
• In accordance with goal of state controlling commanding heights of economy, Industrial Policy Resolution of 1956 was adopted as on 30th April, 1956.
• Industrial policy is a comprehensive package of policies which covers various issues connected with different enterprises of country.
• This resolution formed basis of Second Five Year Plan, plan which tried to build basis for a socialist pattern of society.
• This resolution classified industries into three categories.
• first group was made up of industries that state would own completely. In this group, there were 17 industries, such as arms and ammunition, atomic energy, heavy and core industries, aircraft, oil, railways, shipping. In second group, there were 12 industries that would become state-owned one by one. government would take lead in setting up industries, and private sector would help. It includes industries like those that make aluminium, other types of mining, machine tools, fertilisers. third group was rest of industries that were to be run by private sector.
• No new industry was allowed unless a license was obtained from government.
• This policy was used for promoting industry in backward regions; it was easier to obtain a license if industrial unit was established in an economically backward area.
• purpose of this policy was to promote regional equality.
• In 1955, Village & Small-Scale Industries Committee, known as Karve Committee, noted possibility of using small-scale industries for promoting rural development. A ‘small-scale industry’ is defined as maximum investment allowed on assets of a unit. This limit has changed over a period of time. This is believed that small-scale industries are more ‘labour-intensive’ i.e., they use more labour than large-scale industries and, therefore, generate more employment.
• But these industries cannot compete with big industrial firms; it is obvious that development of small-scale industries requires them to be shielded from large firms. For this purpose, production of several products was reserved for small-scale industry.
Trade Policy: Import Substitution
• industrial policy that India adopted was closely related to trade policy.
• In first seven plans, trade was characterised by what is commonly known as an inward-looking trade strategy. Technically, this strategy is known as import substitution.
• This policy aimed at replacing or substituting imports with domestic production. In this policy, government protected domestic industries from foreign competition.
• policy of protection was based on notion that industries of developing countries were not in a position to compete against goods produced by more developed economies. It was assumed that if domestic industries were protected, they would learn to compete over time.
• proportion of GDP contributed by industrial sector increased in period from 13% in 1950-51 to 24.6% in 1990-91.
• progress of Indian economy during first seven plans was impressive. India became selfsufficient in food production.