NCERT Textbook: Indian Economy (1950-1990) | Economics Class 12 - Commerce PDF Download

 Page 1


 After studying this chapter, the learners will
• come to know the goals of India’s five year plans
• know about the development policies in different sectors such as
agriculture and industry from 1950-1990
• learn to think about the merits and limitations of a regulated economy.
2
INDIAN ECONOMY
1950–1990
2024-25
Page 2


 After studying this chapter, the learners will
• come to know the goals of India’s five year plans
• know about the development policies in different sectors such as
agriculture and industry from 1950-1990
• learn to think about the merits and limitations of a regulated economy.
2
INDIAN ECONOMY
1950–1990
2024-25
17 INDIAN ECONOMY 1950-1990
2.1 INTRODUCTION
On 15 August 1947, India woke to a
new dawn of freedom. Finally we were
masters of our own destiny after
some two hundred years of British
rule; the job of nation building was
now in our own hands.  The leaders
of independent India had to decide,
among other things, the type of
economic system most suitable for
our nation, a system which would
promote the welfare of all rather than
a few.  There are different types of
economic systems (see Box 2.1) and
among them, socialism appealed to
Jawaharlal Nehru the most. However,
he was not in favour of the kind of
socialism established in the former
Soviet Union where all the means of
production, i.e. all the factories and
farms in the country, were owned by
the government. There was no private
property. It is not possible in a
democracy like India for the
government to change the ownership
pattern of land and other properties
of its citizens in the way that it was
done in the former Soviet Union.
Nehru, and many other leaders and
thinkers of the newly independent
India, sought an alternative to the
extreme versions of capitalism and
socialism. Basically sympathising with
the socialist outlook, they found the
answer in an economic system which,
in their view, combined the best
features of socialism without its
drawbacks. In this view, India would
be a socialist society with a strong
public sector but also with private
property and democracy; the government
would plan (see Box 2.2) for the
The central objective of Planning in India... is to initiate a process of
development which will raise the living standards and open out to the people
new opportunities for a richer and more varied life.
First Five Year Plan
Work These Out
ØPrepare a chart on the
different types of economic
systems prevalent in the
world. List out the countries
as capitalist, socialist and
mixed economy.
ØPlan a class trip to an
agriculture farm. Divide the
class into seven groups with
each group to plan a specific
goal, for example, the
purpose of the visit, money
expenditure involved, time
taken, resources, people
accompanying the group
and who need to be
contacted, possible places
of visit, possible questions
to be asked etc. Now, with
the help of your teacher,
compile these specific goals
and compare with long-term
goals of successful visit to
an agricultural farm.
2024-25
Page 3


 After studying this chapter, the learners will
• come to know the goals of India’s five year plans
• know about the development policies in different sectors such as
agriculture and industry from 1950-1990
• learn to think about the merits and limitations of a regulated economy.
2
INDIAN ECONOMY
1950–1990
2024-25
17 INDIAN ECONOMY 1950-1990
2.1 INTRODUCTION
On 15 August 1947, India woke to a
new dawn of freedom. Finally we were
masters of our own destiny after
some two hundred years of British
rule; the job of nation building was
now in our own hands.  The leaders
of independent India had to decide,
among other things, the type of
economic system most suitable for
our nation, a system which would
promote the welfare of all rather than
a few.  There are different types of
economic systems (see Box 2.1) and
among them, socialism appealed to
Jawaharlal Nehru the most. However,
he was not in favour of the kind of
socialism established in the former
Soviet Union where all the means of
production, i.e. all the factories and
farms in the country, were owned by
the government. There was no private
property. It is not possible in a
democracy like India for the
government to change the ownership
pattern of land and other properties
of its citizens in the way that it was
done in the former Soviet Union.
Nehru, and many other leaders and
thinkers of the newly independent
India, sought an alternative to the
extreme versions of capitalism and
socialism. Basically sympathising with
the socialist outlook, they found the
answer in an economic system which,
in their view, combined the best
features of socialism without its
drawbacks. In this view, India would
be a socialist society with a strong
public sector but also with private
property and democracy; the government
would plan (see Box 2.2) for the
The central objective of Planning in India... is to initiate a process of
development which will raise the living standards and open out to the people
new opportunities for a richer and more varied life.
First Five Year Plan
Work These Out
ØPrepare a chart on the
different types of economic
systems prevalent in the
world. List out the countries
as capitalist, socialist and
mixed economy.
ØPlan a class trip to an
agriculture farm. Divide the
class into seven groups with
each group to plan a specific
goal, for example, the
purpose of the visit, money
expenditure involved, time
taken, resources, people
accompanying the group
and who need to be
contacted, possible places
of visit, possible questions
to be asked etc. Now, with
the help of your teacher,
compile these specific goals
and compare with long-term
goals of successful visit to
an agricultural farm.
2024-25
18 INDIAN ECONOMIC DEVELOPMENT
Box 2.1: Types of Economic Systems
Every society has to answer three questions
ØWhat goods and services should be produced in the country?
ØHow should the goods and services be produced? Should producers use
more human labour or more capital (machines) for producing things?
ØHow should the goods and services be distributed among people?
One answer to these questions is to depend on the market forces of
supply and demand. In a market economy, also called capitalism, only those
consumer goods will be produced that are in demand, i.e., goods that can
be sold profitably either in the domestic or in the foreign markets. If cars
are in demand, cars will be produced and if bicycles are in demand, bicycles
will be produced. If labour is cheaper than capital, more labour-intensive
methods of production will be used and vice-versa. In a capitalist society
the goods produced are distributed among people not on the basis of what
people need but on the basis of Purchasing Power—the ability to buy goods
and services. That is, one has to have the money in the pocket to buy it. Low
cost housing for the poor is much needed but will not count as demand in
the market sense because the poor do not have the purchasing power to
back the demand. As a result this commodity will not be produced and
supplied as per market forces. Such a society did not appeal to Jawaharlal
Nehru, our first prime minister, for it meant that the great majority of people
of the country would be left behind without the chance to improve their
quality of life.
A socialist society answers the three questions in a totally different
manner. In a socialist society the government decides what goods are to be
produced in accordance with the needs of society. It is assumed that the
government knows what is good for the people of the country and so the
desires of individual consumers are not given much importance. The
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. Unlike
under capitalism, for example, a socialist nation provides free health care
to all its citizens.  Strictly, a socialist society has no private property since
everything is owned by the state. In Cuba and China, for example, most of
the economic activities are governed by the socialistic principles.
Most economies are mixed economies, i.e. the government and the
market together answer the three questions of what to produce, how to
produce and how to distribute what is produced. In a mixed economy, the
market will provide whatever goods and services it can produce well, and
the government will provide essential goods and services which the market
fails to do.
2024-25
Page 4


 After studying this chapter, the learners will
• come to know the goals of India’s five year plans
• know about the development policies in different sectors such as
agriculture and industry from 1950-1990
• learn to think about the merits and limitations of a regulated economy.
2
INDIAN ECONOMY
1950–1990
2024-25
17 INDIAN ECONOMY 1950-1990
2.1 INTRODUCTION
On 15 August 1947, India woke to a
new dawn of freedom. Finally we were
masters of our own destiny after
some two hundred years of British
rule; the job of nation building was
now in our own hands.  The leaders
of independent India had to decide,
among other things, the type of
economic system most suitable for
our nation, a system which would
promote the welfare of all rather than
a few.  There are different types of
economic systems (see Box 2.1) and
among them, socialism appealed to
Jawaharlal Nehru the most. However,
he was not in favour of the kind of
socialism established in the former
Soviet Union where all the means of
production, i.e. all the factories and
farms in the country, were owned by
the government. There was no private
property. It is not possible in a
democracy like India for the
government to change the ownership
pattern of land and other properties
of its citizens in the way that it was
done in the former Soviet Union.
Nehru, and many other leaders and
thinkers of the newly independent
India, sought an alternative to the
extreme versions of capitalism and
socialism. Basically sympathising with
the socialist outlook, they found the
answer in an economic system which,
in their view, combined the best
features of socialism without its
drawbacks. In this view, India would
be a socialist society with a strong
public sector but also with private
property and democracy; the government
would plan (see Box 2.2) for the
The central objective of Planning in India... is to initiate a process of
development which will raise the living standards and open out to the people
new opportunities for a richer and more varied life.
First Five Year Plan
Work These Out
ØPrepare a chart on the
different types of economic
systems prevalent in the
world. List out the countries
as capitalist, socialist and
mixed economy.
ØPlan a class trip to an
agriculture farm. Divide the
class into seven groups with
each group to plan a specific
goal, for example, the
purpose of the visit, money
expenditure involved, time
taken, resources, people
accompanying the group
and who need to be
contacted, possible places
of visit, possible questions
to be asked etc. Now, with
the help of your teacher,
compile these specific goals
and compare with long-term
goals of successful visit to
an agricultural farm.
2024-25
18 INDIAN ECONOMIC DEVELOPMENT
Box 2.1: Types of Economic Systems
Every society has to answer three questions
ØWhat goods and services should be produced in the country?
ØHow should the goods and services be produced? Should producers use
more human labour or more capital (machines) for producing things?
ØHow should the goods and services be distributed among people?
One answer to these questions is to depend on the market forces of
supply and demand. In a market economy, also called capitalism, only those
consumer goods will be produced that are in demand, i.e., goods that can
be sold profitably either in the domestic or in the foreign markets. If cars
are in demand, cars will be produced and if bicycles are in demand, bicycles
will be produced. If labour is cheaper than capital, more labour-intensive
methods of production will be used and vice-versa. In a capitalist society
the goods produced are distributed among people not on the basis of what
people need but on the basis of Purchasing Power—the ability to buy goods
and services. That is, one has to have the money in the pocket to buy it. Low
cost housing for the poor is much needed but will not count as demand in
the market sense because the poor do not have the purchasing power to
back the demand. As a result this commodity will not be produced and
supplied as per market forces. Such a society did not appeal to Jawaharlal
Nehru, our first prime minister, for it meant that the great majority of people
of the country would be left behind without the chance to improve their
quality of life.
A socialist society answers the three questions in a totally different
manner. In a socialist society the government decides what goods are to be
produced in accordance with the needs of society. It is assumed that the
government knows what is good for the people of the country and so the
desires of individual consumers are not given much importance. The
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. Unlike
under capitalism, for example, a socialist nation provides free health care
to all its citizens.  Strictly, a socialist society has no private property since
everything is owned by the state. In Cuba and China, for example, most of
the economic activities are governed by the socialistic principles.
Most economies are mixed economies, i.e. the government and the
market together answer the three questions of what to produce, how to
produce and how to distribute what is produced. In a mixed economy, the
market will provide whatever goods and services it can produce well, and
the government will provide essential goods and services which the market
fails to do.
2024-25
19 INDIAN ECONOMY 1950-1990
economy with the private sector being
encouraged to be part of the plan effort.
The ‘Industrial Policy Resolution’ of
1948 and the Directive Principles of
the Indian Constitution reflected
this outlook.  In 1950, the Planning
Commission was set up with the
Prime Minister as its Chairperson. The
era of five year plans had begun.
2.2 THE GOALS OF FIVE YEAR PLANS
A plan should have some clearly
specified goals.  The goals of the five
year plans were: growth, modernisation,
self-reliance and equity. This does not
mean that all the plans have given
equal importance to all these goals.
Due to limited resources, a choice has
to be made in each plan about which
of the goals is to be given primary
importance. Nevertheless, the planners
have to ensure that, as far as possible,
the policies of the plans do not
contradict these four goals. Let us now
learn about the goals of planning in
some detail.
Growth: It refers to increase in the
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
services. A good indicator of
economic growth, in the language of
Box 2.2: What is a Plan?
A plan spells out how the resources of a nation should be put to use. It
should have some general goals as well as specific objectives which are to
be achieved within a specified period of time; in India plans were of five
years duration and were called five year plans (we borrowed this from the
former Soviet Union, the pioneer in national planning). Our plan documents
upto the year 2017 not only specify the objectives to be attained in the five
years of a plan but also what is to be achieved over a period of twenty years.
This long-term plan is called ‘perspective plan’. The five year plans were
supposed to provide the basis for the perspective plan.
It will be unrealistic to expect all the goals of a plan to be given equal
importance in all the plans. In fact the goals may actually be in conflict. For
example, the goal of introducing modern technology may be in conflict with
the goal of increasing employment if the technology reduces the need for
labour. The planners have to balance the goals, a very difficult job indeed.
We find different goals being emphasised in different plans in India.
India’s five year plans did not spell out how much of each and every
good and service is to be produced. This is neither possible nor necessary
(the former Soviet Union tried to do this and failed). It is enough if the plan
is specific about the sectors where it plays a commanding role, for instance,
power generation and irrigation, while leaving the rest to the market.
2024-25
Page 5


 After studying this chapter, the learners will
• come to know the goals of India’s five year plans
• know about the development policies in different sectors such as
agriculture and industry from 1950-1990
• learn to think about the merits and limitations of a regulated economy.
2
INDIAN ECONOMY
1950–1990
2024-25
17 INDIAN ECONOMY 1950-1990
2.1 INTRODUCTION
On 15 August 1947, India woke to a
new dawn of freedom. Finally we were
masters of our own destiny after
some two hundred years of British
rule; the job of nation building was
now in our own hands.  The leaders
of independent India had to decide,
among other things, the type of
economic system most suitable for
our nation, a system which would
promote the welfare of all rather than
a few.  There are different types of
economic systems (see Box 2.1) and
among them, socialism appealed to
Jawaharlal Nehru the most. However,
he was not in favour of the kind of
socialism established in the former
Soviet Union where all the means of
production, i.e. all the factories and
farms in the country, were owned by
the government. There was no private
property. It is not possible in a
democracy like India for the
government to change the ownership
pattern of land and other properties
of its citizens in the way that it was
done in the former Soviet Union.
Nehru, and many other leaders and
thinkers of the newly independent
India, sought an alternative to the
extreme versions of capitalism and
socialism. Basically sympathising with
the socialist outlook, they found the
answer in an economic system which,
in their view, combined the best
features of socialism without its
drawbacks. In this view, India would
be a socialist society with a strong
public sector but also with private
property and democracy; the government
would plan (see Box 2.2) for the
The central objective of Planning in India... is to initiate a process of
development which will raise the living standards and open out to the people
new opportunities for a richer and more varied life.
First Five Year Plan
Work These Out
ØPrepare a chart on the
different types of economic
systems prevalent in the
world. List out the countries
as capitalist, socialist and
mixed economy.
ØPlan a class trip to an
agriculture farm. Divide the
class into seven groups with
each group to plan a specific
goal, for example, the
purpose of the visit, money
expenditure involved, time
taken, resources, people
accompanying the group
and who need to be
contacted, possible places
of visit, possible questions
to be asked etc. Now, with
the help of your teacher,
compile these specific goals
and compare with long-term
goals of successful visit to
an agricultural farm.
2024-25
18 INDIAN ECONOMIC DEVELOPMENT
Box 2.1: Types of Economic Systems
Every society has to answer three questions
ØWhat goods and services should be produced in the country?
ØHow should the goods and services be produced? Should producers use
more human labour or more capital (machines) for producing things?
ØHow should the goods and services be distributed among people?
One answer to these questions is to depend on the market forces of
supply and demand. In a market economy, also called capitalism, only those
consumer goods will be produced that are in demand, i.e., goods that can
be sold profitably either in the domestic or in the foreign markets. If cars
are in demand, cars will be produced and if bicycles are in demand, bicycles
will be produced. If labour is cheaper than capital, more labour-intensive
methods of production will be used and vice-versa. In a capitalist society
the goods produced are distributed among people not on the basis of what
people need but on the basis of Purchasing Power—the ability to buy goods
and services. That is, one has to have the money in the pocket to buy it. Low
cost housing for the poor is much needed but will not count as demand in
the market sense because the poor do not have the purchasing power to
back the demand. As a result this commodity will not be produced and
supplied as per market forces. Such a society did not appeal to Jawaharlal
Nehru, our first prime minister, for it meant that the great majority of people
of the country would be left behind without the chance to improve their
quality of life.
A socialist society answers the three questions in a totally different
manner. In a socialist society the government decides what goods are to be
produced in accordance with the needs of society. It is assumed that the
government knows what is good for the people of the country and so the
desires of individual consumers are not given much importance. The
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. Unlike
under capitalism, for example, a socialist nation provides free health care
to all its citizens.  Strictly, a socialist society has no private property since
everything is owned by the state. In Cuba and China, for example, most of
the economic activities are governed by the socialistic principles.
Most economies are mixed economies, i.e. the government and the
market together answer the three questions of what to produce, how to
produce and how to distribute what is produced. In a mixed economy, the
market will provide whatever goods and services it can produce well, and
the government will provide essential goods and services which the market
fails to do.
2024-25
19 INDIAN ECONOMY 1950-1990
economy with the private sector being
encouraged to be part of the plan effort.
The ‘Industrial Policy Resolution’ of
1948 and the Directive Principles of
the Indian Constitution reflected
this outlook.  In 1950, the Planning
Commission was set up with the
Prime Minister as its Chairperson. The
era of five year plans had begun.
2.2 THE GOALS OF FIVE YEAR PLANS
A plan should have some clearly
specified goals.  The goals of the five
year plans were: growth, modernisation,
self-reliance and equity. This does not
mean that all the plans have given
equal importance to all these goals.
Due to limited resources, a choice has
to be made in each plan about which
of the goals is to be given primary
importance. Nevertheless, the planners
have to ensure that, as far as possible,
the policies of the plans do not
contradict these four goals. Let us now
learn about the goals of planning in
some detail.
Growth: It refers to increase in the
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
services. A good indicator of
economic growth, in the language of
Box 2.2: What is a Plan?
A plan spells out how the resources of a nation should be put to use. It
should have some general goals as well as specific objectives which are to
be achieved within a specified period of time; in India plans were of five
years duration and were called five year plans (we borrowed this from the
former Soviet Union, the pioneer in national planning). Our plan documents
upto the year 2017 not only specify the objectives to be attained in the five
years of a plan but also what is to be achieved over a period of twenty years.
This long-term plan is called ‘perspective plan’. The five year plans were
supposed to provide the basis for the perspective plan.
It will be unrealistic to expect all the goals of a plan to be given equal
importance in all the plans. In fact the goals may actually be in conflict. For
example, the goal of introducing modern technology may be in conflict with
the goal of increasing employment if the technology reduces the need for
labour. The planners have to balance the goals, a very difficult job indeed.
We find different goals being emphasised in different plans in India.
India’s five year plans did not spell out how much of each and every
good and service is to be produced. This is neither possible nor necessary
(the former Soviet Union tried to do this and failed). It is enough if the plan
is specific about the sectors where it plays a commanding role, for instance,
power generation and irrigation, while leaving the rest to the market.
2024-25
20 INDIAN ECONOMIC DEVELOPMENT
Box 2.3: Mahalanobis: the Architect of Indian Planning
Many distinguished thinkers contributed to the formulation of India’s five
year plans. Among them, the name of the statistician, Prasanta Chandra
Mahalanobis, stands out.
Planning, in the real sense of the term, began with the Second Five Year
Plan. The Second Plan, a landmark contribution to development planning
in general, laid down the basic ideas regarding
goals of Indian planning; this plan was based
on the ideas of Mahalanobis. In that sense, he
can be regarded as the architect of Indian
planning.
Mahalanobis was born in 1893 in Calcutta.
He was educated at the Presidency College in
Calcutta and at Cambridge University in
England. His contributions to the subject of
statistics brought him international fame. In
1945 he was made a Fellow (member) of
Britain’s Royal Society, one of the most
prestigious organisations of scientists; only the
most outstanding scientists are made
members of this Society.
Mahalanobis established the Indian
Statistical Institute (ISI) in Calcutta and
started a journal, Sankhya, which still serves
as a respected forum for statisticians  to
discuss their ideas. Both, the ISI and Sankhya, are highly regarded by
statisticians and economists all over the world to this day.
During the second plan period, Mahalanobis invited many
distinguished economists from India and abroad to advise him on India’s
economic development. Some of these economists became Nobel Prize winners
later, which shows that he could identify individuals with talent. Among
the economists invited by Mahalanobis were those who were very critical of
the socialist principles of the second plan. In other words, he was willing to
listen to what his critics had to say, the mark of a great scholar.
Many economists today reject the approach to planning formulated by
Mahalanobis but he will always be remembered for playing a vital role in
putting India on the road to economic progress, and statisticians continue
to profit from his contribution to statistical theory.
Source: Sukhamoy Chakravarty, ‘Mahalanobis, Prasanta Chandra’ in John
Eatwell et.al, (Eds.) The New Palgrave Dictionary: Economic
Development, W.W. Norton, New York and London.
2024-25