Chapter 1 NATURE AND PLANNING OF INDIAN ECONOMY
MEANING OF ECONOMY
Economy is a framework in which economic activities are carried out, in the form of investment, production and consumption etc. The basic units of an economy are household and production units. Household Provides factor of production to farms. Production is transformation of imports into outputs.The modern economy is a complex system. It allocates limited resources and distribute output among a large number of agents mainly individuals,firms and governments.
It also allows for the possibility that each agent’s action can directly or indirectly affect other agent’s actions. Economics is the study of labour, land and investment of money, income, production, taxes and government expenditures. Aadam Smith is know as Father of Economics.
Branches of Economic
The two branches of Economics are as follows
- Microeconomics
It studies the economy as a whole and it’s features like national income, employment, poverty, balance of payments and inflation.
- M acroeconomics
it studies the economic activities at a micro level.It examines the economic behaviour of individual units such as consumers, businessman, household to understand how decisions are mad in the face of scarcity and what effects they have.
classification of economy
Every economy is a system which the production of goods and services is organised to safety the wants of people. on the organisation production process the economic system are classified into three types: capitalist economy, state economy( or socialist economy) and mixed economy.
1. Capitalist Economy
Capitalism is a system of economic organisation characterised by the private ownership and use of capital with profit motive.Everyone has the freedom to from any firm anywhere he like provided he has the requisite capital and ability.
It is based on the doctrine of Laissez Faire which would mean that the state interference in economic activity should be kept down to the minimum. Price is determined by the forces of demand and supply. It proposed that the Invisible hand of the market forces will bring a state of equilibrium to the economy and a general well being to the countrymen.
Advantages of capitalist economy are
. Increase in productivity
. Increased efficiency
. Flexible system, non- interference of the state
. Technological improvement
. increased wealth generation
Disadvantages of capitalist economy are
. Extreme inequalities in income and wealth leads to monopoly
. Over- production leads to glut in the market and hence depression
.Mechanisation and automation leads to unemployment
. Welfare is ignored and exploitation station of labour.
- Socialist Economy in a state economy, the decisions related to production, supply and price were all suggested to be taken by the state only.Such economics Were also know as Centralised economy or centrally panelled economy. The socialist economy of erstwhil USSR emphasised the collective ownership of the means of production(property and asset) and it also described a large role to the state in running the economy. Communist economy of China advocated state ownership of all properties including even labour and absolute power to state in running the economy. Advantages of state economy are
. economic stability
. Maximisation of social welfare
. Absence of monopoly
. Basic needs are met and no extreme inequality.
Disadvantages of state economy are
.Bureaucratic expansion
. No freedom of occupation
. Absence of competition makes the system inefficient.
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3. Mixed Economy
In this system, we find the characteristics of capital both capitalism and socialism.Both private and public Enterprises operate simultaneously.The government intervenes of regulate private enterprises in several ways.
The capitalistic economics faced a serious setback during the Great Depression of 1930s.The ideas of self correcting quality of the market and the invisible hand of Adam Smith failed to check the slowdown of market and the depression. John Maynard Keynes suggested a strong government intervention in the economy.
Advantages of mixed economy are
.Sovereighty to choose what to to produce and what to consume under the government’s regulation
. Less income inequality, monopolies may be existing, but under close supervision of the government.
Manages inflation rates, unemployment and incomes inequality in accordance with social objectives.
It removes socially undersirable consequences of private production. e.g. pollution control, in regional imblances,poverty etc.
Disadvantages of mixed economy are
. heavy taxes reduced incentives to work har
. less efficient than private sector
. expcessive control over business activity can add costs.
3. Mixed Economy
In this system, we find the characteristics of capital both capitalism and socialism.Both private and public Enterprises operate simultaneously.The government intervenes of regulate private enterprises in several ways.
The capitalistic economics faced a serious setback during the Great Depression of 1930s.The ideas of self correcting quality of the market and the invisible hand of Adam Smith failed to check the slowdown of market and the depression. John Maynard Keynes suggested a strong government intervention in the economy.
Advantages of mixed economy are
.Sovereighty to choose what to to produce and what to consume under the government’s regulation
. Less income inequality, monopolies may be existing, but under close supervision of the government.
Manages inflation rates, unemployment and incomes inequality in accordance with social objectives.
It removes socially undersirable consequences of private production. e.g. pollution control, in regional imblances,poverty etc.
Disadvantages of mixed economy are
. heavy taxes reduced incentives to work hard
. less efficient than private sector
. expcessive control over business activity can add costs.
Economic Consequences of Colonial Rule
Nearly 200 years of colonial rule hand transformed the basic structure of the economy, in a negative way.The country once famous for it’s posperous agriculture and robust manufacturing turned into huge market for British made goods,famines become frequent occurrences.The brife analysis of various sector of Indian economy on the eve of Independence has been given below.
Agricultural Sector
Agricultural production stagnated and even deteriorated under the imperial rule,especially during the first half of 20th century.Not only the per capita agricultural production declined,the per capita consumption was also much below the minimum recommended level.Causes for stagnation in agricultural sector the follows
. The new land tenure system that was introduced by British rule created three forms of land revenue system i.e. zamindari,Mahalwari and Ryotwari system.Especially under the zamindari system, the zamindars failed to invest in land and relied on rock-renting,while the peasant faced exploitation and fell into the clutches of moneylenders.The high land revenue ate into peasant,s surplus and even his subsistence and there was no encouragement for peasant to increase productin.
. The British rulers did not invest much to increase irrigation facilities and the technological upgradation in India.
. British rulers initiated commerciali -sation of agriculture in which they encouraged the production of cash crops.
. It transformed the basic cropping structure of the Indian agriculture cash crops such as a cotton, Indigo were given more preference than food crops. As a result famine became frequent occurrences.
. The partition of the country also Adversely affected India’s agricultural production. It created is a serious problem of shortage of raw materials for Jute mills of Calcutta and textile mills and Bombay and Ahmedabad. Also, rich food producing areas of the West Punjab and the Sindh went to Pakistan which created food crises in India.
. There was hardly any investment in modernisation and mechanisation of agriculture.An adverse factor was the increase in sub- division of landholdings into smaller sizes.
. Despite majority of our population being employed in agriculture sector, we had to import food granis to meet our own needs.
Industrial sector
Due to discriminatory policies towords India, the industrial sector was not able to develop a sound industrial base under the colonial rule. Even the country’s famous handicraft industries declined,no modern industral base was allowed to proliferate due to one sided free trade policies by government.
The primary motive of the colonial government behind this policy of systematically de- industrialising India was two fold, which are as follows
- To get raw material from India at cheaper rate and thus to reduce India into a mere exporter of raw material to the British industries.
2.To sell British manufactured goods in India at higher prices.
Decline of the handicraft Industries further adversely affected the prevailing economic scanario in the following ways
. It created large- scale unemployment in the country.Unemployed craftsmen migrated from cities to villages, which increased the burden of population on villages and agriculture.
.Consumer demand in the Indian market could not be met by the supply of locally made goods.This encouraged the import of goods made in Britain.
Characteristics of industrial sector on the eve of Independence are
. The growth rate of the industrial sector and its contribution towards the GDP was very low.
.There was hardly any capital goods industry to help promote further industrialisation in India.
.There was very limited area of operation for the public sector. Public sectors in those days reminded confined to railways, power generation, communication, ports and the some other department undertaking.
.An almost absence of infrastructure factor, like power, transport and communication in India.
.Negligible presence of infrastructure Industries, like Iron and steel cement, coal, crude oil, oil refinery and electricity.
.Lack of investible capital with both the government and the private sector.
.An absence of required technology to support industrialisation there was also no Research and Development(R&D) in India.
.Lack of skilled and literate manpower.
.Absence of the market for the industrial goods.
first modern industry
(First modern Industry that came in India was textile industry.The credit for beginning of iron and steel industries in India during the British rule goes to Jamshed Ji Tata. Tata Iron and Steel company knows as TISCO was incorporated in August, 1907 and it established its first plant in Jamshedpur.The plant started producing producing iron in 1912.)
Infrastructure Sector
Infrastructure development is essential for any industrial development.It helps in achieving competitiveness and reduce production costs.
Under the colonial regime,basic infrastructure such as railways, sports, water transport,ports and telegraphs did develop.However, the real motive behind this development was not to provided basic amenities of to the people but to subserve various colonial interests.Roads constructed in India prior to the advent of the British rule were not fit for modern transport.
The roads that where built primarily served the purpose of mobilising the army within India and drawing out raw material from the countryside to the nearest railway station or the ports to send these to far away England or other foreign destinations and to transport imported(foreign manufactured goods) to Indian villages.
The British rulers introduced railways in1850 and Indian railways began operations in 1853 with following features
It provided cheap and rapid transport system is especially full distant travel.
.It created new investment opportunities for British capitalist. They were insured hefty return for their investments.
.It help to in controlling famines, through not in large scale.It promoted foreign trade but benefited British more than Indians. It encouraged the process of industrialisation.
.Despit constructions of railways, the backward Industries such as iron, locomotives etc did not develop as this was imported from England.
Along with the development of roads and railways, the colonial dispensation also took measures for developing the inland water trade and sea lanes.However these measures were from satisfactory. The introductions of the electric Telegraph in India, similarly saved to the purpose of maintaining law and order. The postal services, on the other hand,despit serving a useful public purpose, remained all inadequate.
Till the late 1930s foreign capital dominated the industrial and financial fields and controlled the foreign trade network as also the part of internal trade that fed into exports.British firms dominated the coal mining, just industry, shipping, banking and Insurance and tea and coffee plantations.
In this context, it is worth noticing that foreign investment rarely market the transfer, to India of capital from aboard.It was far less than the unilateral transfer of capital or the drain from India.
Development of Indian Economy (Before Independence)
Some major developments in 1930s and 1940s imparted strength and provided a base for post independence economic development.
some of these developments are given below
.These included a small but independent industrial base and the rise of substantial indigenous industrial capitalist class.This class rose dispite discriminatory policies of British government.
.There are also occurred a certain diversification and sophistication in industrial production which made India more or less,self- sufficient in major consumer goods requirements.
.The industrial development in the post 1918 period was increasingly getting oriented towards the internal market on the basis of indigenous raw material.
The link between the indigenous industry and agriculture became stronger and saw an increase in internal trade with gradual decline in the volume of international trade.
.By the time of independence, India had a small but quite will developed skilled labour force, both in consumer and Engineering sectors.
.Another area of economic strength was the India was no longer a debtor country.In the backward of two World Wars and the Great Depression, investment under Indian control grvw considerably faster then European investment.
.Even though multinational companies made their entry into India after 1918,the growth of foreign capital was far slower than that of Indian capital.The overwheling proportion of new investment was on account of Indian capital, rather than foreign capital.
.Thus,at Independence,an indigenous entrepreneurial class was readily available with adequate capital base which could chalk out the developmental plan and make India a prosperous nation.
.India is endowed with rich natural resources( fertile and, good iron ore, coal deposits and other materials).
. With advent of Second World War, the demand for goods increased in the Western world.So, Indian industrial sector was a major beneficiary in the process.
Choice of Economic System for India
The choice of economic system for India are as follows
.In the era of post independence, Indian policymakers were faced with numerous challenges.
.One of the important challenges was the nature of economy(capitalist, socialist, maked) that Indian economy was going to adopt.Colonial experience which was exploitative and with exposure to well planned economic model of Soviet Union made the choice easier for Indian policymakers.
.So our domestic policy tilted towords protectionism, emphasis on import substitution and Central planning.
.A large number of government run public sector enterprises were set up to meet various developmental goals.
. Private sector was accorded limited role with veriety regulations.So our economic model was mixed economy with a slight tilt towards socialism.
.By late 1990s, the world saw a sea- change and most of the countries embraced the mixed economic model, to such an extent that it is hard to proof a true capitalist or socialist economy today.
.India adopted LPG reforms i.e.liberalisation,privatisatin and globalisation in early 90s which accorded considerable role to the private sector and investments in India.
ECONOMIC PLANNING
planned economy is one in which the state at least partially owns and directs the economy.In this economic system investment and production decisions are embodied in a plan formulated by a central public authority.The state decides the priorities and objectives for the economy for long and short- term.
Types of economic planning
Based on the approach and nature of the planning methods, the models of economic planning can be classified as follows
Imperative planning
This kind of planning was followed by the command economies.Such planning model sets very specific goals for each sector of the economy.It is also known as directive or target planning.Under socialist system, like USSR, all economic decisions were centralised in the hand of the state.
Features of such planning model are as follows
.Quantitative target for growth and development
. state control of resource.
.Negligible role of market,no independent the price mechanism
.No/negligible private participation in the economy
Such economices were also known as Centrally Planned Economy e.g.USSR,China, Poland,Hungary, Austria and Romania.
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INDICATIVE PLANNING
This model of planning was used by democratic, liberal states.The main Idea behind this model is that planning is required only to provide a framework to the economy.
Thus,this kind of planning model gives a wide degree of autonomy and freedom to the private sector.
The early use of such model was done by French,with its 1st six year plan in 1947, which came to be known as.
Monnet Plan.Indicative planning is also called basic structure planning, as the government select a few sectors/industries, at the core of development for which planning is necessary.
NORMATIVE PLANNING
This type of planning gives less emphasis upon the social and institutional dimensions of the society.Here, planner merely search for the best possible results in relation to the established goals,giving less important to the issues like caste,creed, region, language, etc.Thus,this is not a very popular model of economic planning among the modern states.
SYSTEMS PLANNING
This model gives due importance to the socio-institutional factors.It is planning from social-technical point of view, but only suitable for a country which has a lesser degree of social diversity.The economic survey 2012-13 advocated a need for the systems approach of planning in India, as there is a need to connect the policies with the customs and traditions of the people, to enhance their acceptability.
[ History of economic planning in
India
The first blueprint of India Planning was given by Sir M Visvesvaraya.
His idea of state planning in emphasised on industrialisation,as he proposed a shift from agriculture to industries and targeted to double the Nnational income in one decade.Congress under presidentship of Subhas Bose, constituted the National planning committee in 1938 with Jawaharlal Nehru as it’s head.The committee favouried in the didection of rapid industrialisation.Bombay plan was proposed in 1944-45 by leading Indian capitalist like Purushotamdas thakurdas,JRD Tata and GD Birla,this plan also argued that economy could not grow without government intervention and regulation.
In 1944, Shriman Narayan Agrawal proposed Gandhian plan which proposed decentralised economic structure for India with self contained villages.The people plan (1945) under MN Roy stressed on employment generation and labour welfare. in 1950,Sarvodaya plan was prepared by Jayaprakash Narayan, similar to Gandhian plan he also put emphasis on cottage industries, agriculture and principle of Social Justice. ]
