PROJCT TOPIC: IS INDIA A SOCIALIST OR A CAPITALIST ECONOMY?

DONE BY: P.Kanmani

ROLL NO. BA0140027
BALLB (HONS) SEC A 2ND YEAR.

WHAT IS SOCIALISM?
Socialism is a model of development in which the means of production is collectively owned and
managed by the public and the end is distributed proportionally. It is a society which seeks to end
the class division. There are different facets of socialism. But the most common meaning is the
above stated meaning. A socialist economy seeks to establish a welfare state. That is the gains
out of the state owned production are utilized by the state to provide for people free education,
health care, housing and other essential services. When the state provides such facilities it is said
that there will be no class or racial division as these institutions are state owned and there is no
divide between the rich and poor as every individual has equal access to these institutions set up
by the state. The market is controlled by the state as the state decides the main economic
questions such as what to produce, how to produce and in what quantities to produce. Resource
mobilization is done by the state. Different types of socialist models:
USSR: The United Soviet Socialist Republic was formed in 1922 with the main aim to make the
republic a socialist state. They followed a model of socialism and communism. In this case the
state is run by a single party that is the communist party and the means of production is managed
and owned by the state. The party elects its leaders and there are no democratic elections.
Mixed model: This is a model in which features of both capitalism and socialism are combined
and formulated. A best example of this is India. Both public and private property are
concurrently owned and managed.
Nordic model, social democracy: This includes a combination of free market capitalism with a
comprehensive welfare state and collective bargaining at the national level. The motive is to
provide for a universalist welfare state. The aim is therefore to provide for social benefits to
people like pension and free education and health care at the same time provide for private
ownership of property and free trade. This does not entirely build the socialist model but takes
elements of the welfare state.
WHAT IS CAPITALISM?
The mist general definition of Capitalism is, it is an economic system in which private actors
own and control property in accordance with their own interests, and demand and supply freely
set prices in markets in a way that can serve the best interests of society. Hence as Adam Smith
puts it the transactions take place in such a way that each members self interest is pursued but in
such pursuance there is an unseen force which take care of the societys interest as a whole.
Main features of capitalism:
1. private property, which allows people to own both tangible assets such as land and houses
and intangible assets such as stocks and bonds.
2. Self interest: people can pursue their own needs and this will determine the market
demand and supply of the commodity.

3. There is competition between firms. Since the entry into the markets have no barriers
there is free competition between firms which motivate firms to perform better.
4. Limited role of the government, that is to protect the rights of private citizens and
maintain an orderly environment that facilitates proper functioning of markets. This is the
only role assigned to the state and the state does not have any other obligations to
discharge.
Main differences between a socialist and a capitalist economy:
Capitalism

Socialism

1. Ownership of means
of production.

Individual or private
ownership.

Collective or state
ownership.

2. Determining
Demand and supply

Market forces determine the

two variables.

Not in all cases but in some

cases the state determines
the demand and supply.

3. Role of government

Mere maintenance of law

and order in society

The government has the

responsibility to distribute
the income in an equitable
manner and provide for
welfare for the individuals.

INDIAN ECONOMIC MODEL OF DEVELOPMENT POST INDEPENDENCE. (1950- 1990)

India had attained independence in an era of cold war between the two super powers USSR and
U.S.A. These super powers each advocated a model of development. The USSR advocated the
Socialist Model of development and the U.S.A. the capitalist model of development. Any
country that joined the two alliances adopted the respective model of development. India was not
interested in joining either of the super powers. Hence it founded the Non Aligned Movement
along with a few other like minded countries. On a similar note India adopted an economic
system that was neither entirely capitalistic nor entirely socialistic in nature. It incorporated
principles of both in its model of economic development. This model came to be known as the
mixed economy or mixed model of economic development.

BACKGROUND:
Pre colonial era:
A vicious cycle of poverty largely due to low income levels because of which there were low
savings which lead to low capital formation. This cycle continued as a result of which there was
no incentive for entrepreneurs to invest. This basically resulted in low productivity. Britain had
made India a mere exporter of raw materials and a importer of finished goods which destroyed
the traditional handicrafts and other industries in India. Hence India was a heavy importer of
finished goods. This worsened the condition of traditional Indian workers. Ownership of
agricultural land was mainly concentrated in the hands of a few known as landlords who were
often not the ones who tilled the land.

Post colonial era:

The colonial era had left us with,
1.
2.
3.
4.
5.

Stagnation in the agriculture.

Stagnation in the development of industries.
A large importer of machinery and final goods.
A decline in the traditional industries.
Poverty.

All this warranted for such a state plan according to the framers of our economic plan.
The post colonial economic policy especially in the nehruvian era mainly focused on:
1. Self reliance.
2. Import substitution.
3. Export reduction.
Basically these three policies are what was the main goal of the economic policies. The reasons
for these are that india which had heavily depended upon Britain for the finished goods and for

many other purposes no more wanted to be dependent on the foreign country. By way of import
substitution the nation could rely on its own resources and not be dependent on the other
countries for imports. And the fear was that once there is dependence on another countrys
resources then the influence of that country on the domestic economy both economically and to
some extent politically is dangerous for an economy which has just come out of the clutches of
colonialism.
Self reliance means the ability to sustain oneself. If the exports were reduced then there would be
enough resources to first take care of ones own economy and the development in the creation of
capital good means that the country need not borrow technology to take care of ones own
population.
Features of the mixed economic policy:
CAPITALIST FEATURES:
1. Private ownership of property was a fundamental right.
2. Industries could function in any sectors of the economy except the commanding heights
of the economy.
3. Private individuals could set their own goals and resource mobilization.
SOCIALIST FEATURES:
The state had exclusive control over the major sectors of the economy also known as the
commanding heights of the economy. These were the Defence, Telecommunication and
Railways. In these sectors the private individuals cannot intervene or invest in these sectors.
The state placed regulations on imports by fixing tariffs on imports. This discouraged imports.
The state placed licensing mechanisms on the private sector. This means that to set up an
industry the private individual needs to seek permission from the state to do the same. This was
basically to encourage private sector investments in areas where the private individual would not
invest, this included rural areas also.
State also intervened in the agricultural sector to redistribute land.
Apart from this the state also invested in industries that were open for private investment. This
state owned and regulated industries were known as the public sector industries. This was not
because the private sector could not invest in such industries, it was because certain basic
commodities needed lower pricing and another aim was to provide for employment. For example
the modern foods company was a bread making company owned by the government and the aim
of this sector was not profit but it was to provide basic bread at affordable prices to the people.

GOALS AND REASONS BEHIND THE ADOPTION OF THE MIXED ECONOMIC

MODEL:

Policy makers thought that the problem of investments arose due to the low amount of savings
by the population. Hence one of the goals was to increase the percentage of savings of every
person so that it could enable them to make future investments. A way of increasing savings was
through state intervention that is by providing state plans as to how much to save and where to
invest etc.
The second most important factor was that leaving the economy to the free market system means
that there will be an upliftment of the upper middle classes of the society that is that part of the
society which have enough potential to make investments and benefit out of it and there would
not be an equitable growth. It was also thought that sectors that accelerated the development of
the country will not benefit from such an economy.
A predominant part of the population was involved in agriculture. But even then the income
generated by this sector was not proportionate to the population involved in it. The problem was
that the surplus that accrued from the agricultural sector was taken by a small part of the
population who were never themselves involved in actual cultivation of land. Hence this part of
the population never made investments for the improvements in the field of agriculture or to
enhance production. This is one of the major reasons that kept the agricultural production
relatively low. Hence here the state felt that its intervention was necessary to take the land from
this small population who were non cultivating landlords and redistribute this land to the
cultivating population. This means to the peasant farmers who actually tilled the land. this was
also one of the factors that warranted state intervention.
The state also had other responsibilities such as providing for basic needs of the population such
as proving for free schooling for the population, basic sanitation facilities which the state did not
know if such problems could be solved by the market economy.
Another goal was to make it possible for making large scale projects such as building up of dams
and roads and provide for basic infrastructure facilities and which do not provide immediate
returns. Such projects needed a huge amount of capital which were often beyond the capacity of
private investors.
The ultimate goal was to secure social justice which is known to be best when carried on by the
state. So the goal was not to provide for a complete state control of resources but the goal was to
provide for an efficient public sector that served the larger public good and also provide some
plans for the private sector to organize its activities.

POLICY POST NEHRU TILL 1991:

This time period is post the death of Nehru and the coming of Indira Gandhi and Rajiv Gandhi.
As the congress was a party leaning towards the left Indira Gandhis government focused more
on socialism than liberalism. This was shown first in her policy of 1969 which led to the
nationalization of 14 banks in india and later on the incorporation of the word Socialist in the
preamble of the constitution of India. In the modern days this word in the preamble has a
different notion from what was actually conceptualized as we no more follow a complete
socialist model of economic development. One reason for this can be political in nature. Indira
Gandhi drew a majority of votes from the poor and the margenalised. So she had made her
policies in such a way that it attracted this section of the population.
Merits and demerits of nationalization of banks:
Merits:
a. Social welfare: when banks are nationalized they become public sector undertakings.
This means that they are not profit oriented mainly and focus on developing the various
sectors of the economy that need development. They can contribute more to sectors
which do not provide immediate returns but in the long run provide for profits.
b. Geographical reach: banks can now be set up in rural and remote areas which was earlier
not focused upon by the banking sector as for the private sector banks in such areas did
not provide for much profit. This the government does by providing the licensing
scheme. This scheme provides for benefits for those banks which have branches in rural
areas and other untouched areas.
c. Priority lending: now the nationalized banks can lend as per the priority sector. For
example agriculture being the main occupation of several and the highest contributor to
the national income more investment in the agricultural sector can be enabled through
priority sector lending.
DEMERITS:
The demerits of the this nationalization of banks are that there is now more bureaucratic control
over the banking system than before. Above this, maintaining these banks are a burden on the
government as the government has to maintain the extended branches and its employees. Then
the next criticism leveled against these banks are the reduced efficiency and low profitability.
The latter speaks for itself and reduced efficiency in the sense the employees efficiency.
But post the death of Indira Gandhi Prime Minister Rajiv Gandhi has been a major individual in
planning the liberalization reforms. This process started in the latter half of the 1980s during the
Rajiv Gandhi government. The economic policy reforms finally came about in the year 1991.

THE LIBERALISATION, PRIVATISATION AND GLOBALISATION POLICY a step

towards capitalism or liberalization.
India was faced with a huge balance of payment crisis in the year 1990. To settle this crisis India
had to borrow money from financial institutions like the World Bank and the International
Monetary Fund. These institutions lend to countries on one condition that they adopt the policy
of economic development in the west.
Hence India had to move away from its earlier policies and revise a policy in such a way that it
moved India away from its socialistic feature. Commonly known as the LPG policy it mainly
focused on reforms in the following areas:
Liberalisation:
1. At first licenses were needed to set up industries. But now there was a process of
deregulation where the necessity of the licensing was removed and it was kept for only a
few categories of industries such as Chemical manufacturing industries, liquor industries
and other hazardous industries.
2. The number of goods that were reserved for the small scale industries to manufacture
now became unreserved.
3. Import tariffs were removed to ensure free movement of goods and trade.
4. The percentage of foreign investment in India was now increased and both foreign direct
investment and foreign institutional investment were encouraged.
Privatisation:
1. Disinvestment: many public sector enterprises now were thrown open to the private
sector to invest and shares of the PSUs were sold in the market to the private sector. This
process of selling a share of the PSUs is known as disinvestment.
2. Private ownership of means of production became the predominant form of ownership
and the private was allowed to invest in a wider range of areas.
Globalisation:
1. This essentially means integration of the domestic economy into the world economy. This
is characterized by four flows. Flow of capital, technology, people and ideas. As stated
above India was now open to foreign investment and hence with foreign firms entering
into India especially in the service sector ensured that India remained integrated with the
worlds economy. Free trade between the countries were now enabled hence now India
became dependent on other nations for its imports and it also exports its goods to the
other nations.
GROWTH OF DIFFERENT SECTORS OVER THE YEARS:

TABLE SHOWING THE GROWTH RATES OF THE OVER TIME OF THE THREE
SECTORS OF INDIAN ECONOMY.
SECTOR

1900-01 TO 1946-47

1947-48 TO
1999-2000
2.5

1950-51 TO 1964-65.

PRIMARY

0.4

2.6

SECONDARY

1.5

5.5

6.8

TERTIARY

1.7

5.0

4.5

GDP

0.9

4.1

4.0

GDP PER CAPITA

0.1

1.9

1.9

POPULATION

0.8

2.0

2.0

Source: Sivasubramoniam (2005).

GROWTH IN REAL GDP.
Period
1950s
1960s
1970s
1980s
1990s
2000
X plan 2002-07
XI plan 200712

Agriculture
2.7
2.5
1.3
4.4
3.2
2.5
2.4
3.3

(% per annum)
Industry
5.6
6.3
3.6
5.9
5.7
7.7
9.2
6.7

Services
3.9
4.8
4.4
6.5
7.3
8.6
8.8
9.9

GDP
3.6
4.0
2.9
5.6
5.8
7.2
7.6
7.9

Source: Central Statistical Organization.

As the analysis shows the growth rate in the pre 1990s was relatively slow and in fact in the
1970s there was a very meager growth rate. But post the reforms the growth rate in the
economy has shot up to higher levels.

A critical analysis of the economic policies:

The Nehruvian economic policy:

Criticisms:
a. Overburdening of the state: it is said the public sector took up too many responsibilities
and it entered into industries in which there could have been an effective private sector.
This according to the critiques has reduced the efficiency of the public sector. It is said
that too much weightage has been given to the public sector.
b. Closed economy: the criticism meted out against this is that since India has advocated a
closed economic model in the beginning in order to improve the domestic industries, the
domestic industries due to the lack of competition were not concentrating on
improvement. Hence as there were no competition from the outside world the domestic
industries focused less on quality improvement of goods.
c. Failure in the land reforms policy: even thought the first five year plan had promulgated
for reforms in ownership of agricultural land it did not have a far reach and this land still
came to be held in the clutches of the landlords. Hence there was not much improvement
in production in the agricultural sector.
d. The ideology: it is said the Nehru was influenced by the model of Fabian socialism which
existed at that time in the soviet union. this ideology was criticized as it led to the
collapse of the USSR and hence Nehru was also criticized for adoption of such model as
it was seen as the major factor that led to the balance of payment crisis in 1991.
e. Investment in the primary education: it is said that the Nehru mahalanobis model
mainly concentrated on the development of a heavy goods industry and focused less on
the primary education for its population. This hindered the process of growth as
education helps or aids in the advancement of the economy as the people are more aware
of their surroundings. This is also seen as the reason why India was behind the East Asian
nations when it came to economic growth during this period. The East Asian nations had
a higher rate of growth as they had focused more on the provision of education.1
Merits and a possible counter to the above criticisms:
a. India was set in a background were state intervention was necessary as most of the
population were poverty stricken and it was a necessity to increase the per capita income
of the individual. So for a more equal and fairer distribution of wealth the state
intervention was deemed to be of a necessity. In this case the aim of the public sector is
not to make profits and hence such industries would work with a motive to provide for
the people.
b. Import substitution was adopted as a measure to correct the colonial misgivings. The
colonial power had entirely destroyed the Indian industries and had made India into a
mere exporter of raw materials and an importer of finished goods. Indian industries had
suffered a major setback. In such a case it was necessary for the country to first grow its
own domestic industry before facing foreign competition.
1 The recovery of India economic growth in the Nehru era PULAPRE
BALAKRISHANAN.

c. The land reforms policy did turn out to have many loopholes of which the landlords took
advantage of. But it was effective in abolishing the Zamindari system. It was successful
in some states where the implementation by the state was effective.
d. During the time Nehru had adopted the policy the socialist policy was in the mainstream
and had shown a good amount of growth at that time. It was only later on did it suffer a
collapse. Hence this model of economic development was attractive to most countries
and hence it was adopted by India as well.
Apart from this it should be noted that there were certain projects that could not have come up if
it was not for state intervention. For example the construction of dams and hydroelectricity
projects. No private sector was willing to take up such a huge risk and investment as there were
no inputs for investment. Such areas would have taken long to develop if not for the state
investment. And achieving self reliance was a major part of the policy as India at that time did
not want to depend on any foreign country for resources and the British had left the country in
dire poverty.
Policy from 1991 to 2014.
The LPG policies have shown a drastic growth rate in the Indian economy. The balance of
payment crisis was over by 1993. This also reduced the burden of the state as those industries
that the state thought could be managed by the private sector also were successfully disinvested.
And more and more foreign investment was brought in which increased the employment
opportunities. Now that the Indian domestic industries were faced with heavy competition to
improve their quality of goods. Apart from this since imports have become more free the
customers have a wide variety of goods and services to choose from.
A free market economy is said to be more efficient in nature as it enables competition. With
competition each individual is forced to produce more and without compromising the quality.
Criticism:
First of all when foreign goods started entering into the Indian markets, the poor have also
suffered a major setback. Small scale industries in rubber making, the American silk industry and
even the rag pickers face competition due to cheap imported rubber, cheap silk from China and
scraps from other countries respectively. Apart from this farmers face a difficulty as their cost of
farming has drastically increased due to lower supply of subsidies. There are many small farmers
who were dependent on these subsidies due to reasons like crop failure, no proper irrigation
facilities etc. with privatization the unorganized sector has grown and there are no more trade
unions to fight for employee benefits and increase in salaries. Moreover employment is less
secure. Disinvestment is also being criticized as instead of disposing non performing assets of
the PSUs the government have started disinvestment of profit making PSUs. disinvestment of
PSUs means laying off of a number of workers as this is one of the consequences of
disinvestment.

Conclusion:
India is neither entirely a socialist nor a capitalist economy. From the beginning it had adopted a
mixed model of economic development. In the beginning it was seen to be leaning towards
socialism but from the 1990s it has adopted a path towards liberalization. We can say that India
has tried and tested the different combinations and this has resulted in the various policy changes
in the Indian economy. It is also to be noted that the concept of India as a welfare state has not
lost its colour. Even though India has adopted liberalization the state still provides for a large
variety of welfare policies. The economic model changes with the change in governments. This
can be seen as the left and right wing politics. From the 2004 to2014 with the UPA which is a
coalition of the congress focused on liberalization even then it had a wide range of welfare
policies as its ideology is that of a welfare state. But now with the change in government in the
center headed by the National democratic Alliance policies are now moving towards a capitalist
regime. Their popular phrase to advocate this is minimum government and maximum
governance. With India still facing a poverty crisis it cannot be entirely shifted to a capitalist
model as still state expenditure on things like primary education, subsidies for agriculture etc are
required and hence it cannot be restricted to just the maintenance of law and order. So from the
chambers of socialism India had moved to now a process of capitalization.

REFERENCES.
1. Planning, Market and the State. Uma Kapila.
2. Indian economy since independence. Uma kapila.