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Unit I- Indian Economy 1950-1990

Meaning of Planning, Introduction to Different Economic Systems


In this lesson we will go through the following topics. 

  • Meaning of Planning
  • Origin of Planning
  • Introduction to Different Economic Systems

Meaning of Planning

Often, we come across the word plan while using sentences such as what's the plan, let us make a plan, etc. What does the term plan mean? For an individual or a group of individuals a plan is a proposed list of goals to be achieved within a specific period of time. Similar to this, for an economy, a plan specifies a set of objectives that an economy aims to achieve within a certain period of time. The process of planning is undertaken by the central authority of a country that drafts the plan comprising of objectives to be achieved keeping in mind the needs of  all the sections of the economy. It suggests how and where the resources of an economy should be utilised. Particularly, it suggests the optimum ways to utilise the scarce available resources to achieve the enlisted goals. A plan specifies not only the objectives that are to be achieved but also the achievements made in accordance with the last plan. Plans have both specific as well as general goals. Some of the common goals are economic growth, modernisation, self-reliance and equity. However, it might also happen that various goals are conflicting to each other. For example, modernisation reduces employment. So, a caution must be taken so as to maintain a balance among different goals.

Origin of Planning

Soon after independence, India faced an important choice to opt either for capitalism or socialism. The extraordinary success of planning in the Soviet Union was an inspiration for India. However, Indian political and economic conditions were not favourable to opt for complete socialism as in the Soviet Union. Thus, India decided to adopt socialism but with a difference. Going by the system of socialism, India too laid a strong emphasis on public sector. Along with this, it also stressed on the active participation of the private sector in a democratic framework. In other words, a mixed role of both the public sector as well as the private sector was sought. Thus, India opted for a comprehensive planning technique with equal importance to both economic and social sectors.

In accordance with the decision, the Planning Commission was established in the year 1950. This institution was established with the motive that the government would undertake comprehensive planning for the nation as a whole. It was suggested that public sector would lay down the basic economic framework and private sector would be encouraged for their active contribution to the economic growth. For this, India opted for the system of five-year plans. The first five-year plan in India was formulated for the period 1951-56. Since then, India has formulated and completed eleven five-year plans (till now).

Introduction to Different Economic Systems

It is of strategic importance for an economy to decide what goods and services to be produced, how it is to be produced and for whom it is to be produced. These questions are answered differently in different economic systems. The economic systems can be divided into the following three broad categories.

1. Free Market or Capitalist System

In a free market economy or a capitalist economy, the decisions regarding what, how and for whom to produce are governed by the market forces. In other words, demand and supply are of strategic importance in this type of economic system. Only those goods and services are produced that have greater demand and that ensure greater profitability. However, those goods that have low profitability will not be produced even if demand exists for them. For example, services such as free health will not be provided even though they are in demand as they are not profitable. This system does not acknowledge any kind of government intervention. For the production of goods and services, the choice of the factors of production is guided by the availability and the cost of factors of production. That is, those factors of production are used that are readily available and are relatively cheaper. Since the decisions regarding the production are solely based on the market forces of demand and supply, the economic growth is accelerated. However, the distribution of the goods and services is based on the purchasing power. Only those consumers can purchase the goods and services who can afford them. As against this, those consumers who do not have the purchasing capacity will not be able to consume the goods and services. Thus, in this economic system, the welfare of the people is adversely affected.

2. Socialist System 

Under socialist economic system, the decisions regarding the central problems of what to produce, how to produce and for whom to produce are taken by the government. As against the capitalist system, where the production and consumption decisions are taken on the basis of demand and supply, in the socialist system the main decisive factor is the welfare of the society as a whole. In other words, the needs of the society are given prime importance in the decision making by the government. The government ensures that social equality is maintained. 

The private players are devoid of any participation in the economy. The process of production is undertaken by the government. Also, the distribution of various goods and services is carried out by the government. The consumers in this economic system are not free to choose what they want to consume, rather they consume what is provided to them by the government. Although, this system ensures welfare in the society, but with the working of the government it is often found that corruption and inefficiency creep in the system.

3. Mixed Economy 

This economic system identifies the role of both the private sector as well as the government. While on one hand, private players aim at maximisation of individual profits, on the other hand, government aims at maximisation of welfare of the society. Thus, while the participation of market forces ensures accelerated growth, on the other hand, interference of the government ensures social welfare and equality. In the private sector, the production of goods and services is carried out in accordance with the market forces of demand and supply. Those goods and services are produced by the private sector which are in demand and are profitable. As against this, the production of certain key goods and services that are essential from the welfare perspective such as education, health, defence, etc. are provided by the government. India is an idealistic model of mixed economy. 


In this lesson we will analyse the various objectives of five-year planning in India.

Objectives of Five Year Plans in India

As we know, a plan is a proposed list of goals that an economy wants to achieve within a specific period of time. However, every plan should have certain specified objectives or goals. While a plan specifies the m...

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