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After India attained her independence, the leaders had to decide on the kind of economic system which will suit and promote the interests of the masses of India and not just a few individuals. Jawaharlal Nehru found socialism appealing but he did not favour the brand of socialism which was followed in the Soviet Union where the government owned all the factories and farms. No private property existed. In a democracy like India, such a situation was impossible.

Nehru and the other leaders of independent India sought an alternative to the extreme kinds of capitalism and socialism practiced in the world elsewhere. They formed an economic system which combined the best of both capitalism and socialism, though leaning towards the outlook of socialism. Accordingly, India was to be a socialist society with a very strong public sector but also with private property and democracy.

The government would plan for the economy while encouraging the private sector to be a part of the plan effort The 'Industrial Policy Resolution' of 1948 and the Directive Principles of the Indian Constitution mirrored this outlook. The Planning Commission was set up in 1950 and the Prime Minister was its chairperson. With the setting up of the planning commission, the era of five year plans had begun.

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