Economic Planning in India

Economic planning refers to the systematic process where a central authority defines specific economic targets and formulates strategies to achieve these targets within a set timeframe. This approach, an integral part of a socialist economy, involves decisions about what to produce, in what quantity, using which methods, and how the goods are to be distributed. In this article, you will learn about Economic Planning, its objectives, features and types of Economic Planning. Economic Planning is very important topic for GS Paper-3 Economy of UPSC CSE Exam. To explore more interesting Class 12 and Class 11 Economics concepts similar to Economic Planning in India, check out other articles of IASToppers. 

Table of Content

• What is Economic Planning in India?
• Objectives of Economic planning in India
• Features of Economic Planning in India
• Types of Economic Planning in India
• Failures and Limitations of India’s economic planning
• Conclusion
• FAQs on Economic Planning in India

What is Economic Planning?

• An economic plan refers to set of specific economic targets to be achieved in a given period of time with a pre-defined strategy.
• Economic Planning is the essential feature of the Socialist Economy.
• The concept of economic planning in India was derived from USSR’s 5-year planning model.
• Economic planning is in the Concurrent List of Seventh Schedule of the Indian Constitution.

Various Definitions of Economic Planning

• Professor H.D. Dickinson: Economic planning involves a central authority making critical economic choices based on a thorough analysis of the entire economy. These choices encompass what to produce, the quantity, the production method, location, and distribution of the goods.
• Planning commission of India: “Planning involves the acceptance of a clearly defined system of objectives in terms of which to frame overall policies. It also involves the formation of a strategy for promoting the realisation of ends defined. Planning is an attempt at working out a rational solution of problems, an attempt to coordinate means and ends; it is thus different from the traditional hit-and-miss methods by which reforms and reconstruction are often undertaken”.

Objectives of Economic planning in India

• Economic Growth: Real national income and per capita income must grow every year at a targeted rate.
• Increase in Employment: Generating employment opportunities, involving the workforce in economic activities, is a significant objective.
• Self-Sufficient: The nation should achieve self-sufficiency in food grains and essential industrial materials like iron and steel.
• Reduction in Inequality of Income: Each plan strives to lessen economic inequalities.
• Social Justice: Indian planning seeks to establish a socialist societal model by alleviating poverty for the most impoverished and reducing wealth and income disparities.
• Economic Modernization: The absence of modern technology contributes to low agricultural productivity and stunted industrial growth in the Indian economy. Addressing this issue requires altering the GDP structure by developing industries and the service sector.
• Social Welfare and Services: The five-year plans aim to enhance labor welfare, advance the economic status of disadvantaged groups, and provide social welfare for the impoverished.
• Regional Development: A priority of the five-year plans is to facilitate the rapid economic growth of underdeveloped regions, promoting regional equality.

Features of Economic Planning in India

Below are the Features and Characteristics of economic planning in India:

• It is a process which may undergo several changes as per the changing nature of people’s needs.
• It must have well-defined goals.
• It must utilise the available resources optimally.
• Before the emergence of sustainability concept (1987), states were focused on resource exploitation. The concept of ‘Sustainability’ was included into planning after experts realised the unavailability of such resources. However, many countries used natural resources for doing planning.

Types of Economic Planning in India

1. Imperative Planning:

• Also known as directive or target planning, these are typical in state-controlled economies, such as socialist or communist nations.
• In this system, the state directs all economic activities and resources within the country.
• Consumer choice is restricted, as goods are available in limited quantities at set prices. Government policies are inflexible, and there is no room for private involvement in the economy.
• However, many countries have since transitioned away from this model.
  • In 1985, China implemented the “open door policy” to decentralize economic power and rescue its economy.
  • Likewise, in 1985, the Soviet Union initiated political and economic reforms known as perestroika (restructuring) and glasnost (openness) to save its economy.

2. Indicative Planning:

• Indicative plan is not imperative but flexible. Due to the rigidity of this planning, any shortcoming in one sector can negatively impact the economy, making it difficult to correct.

Key Features

• Each country following the indicative planning is mixed economy.
  • Indicative planning is peculiar to the mixed economy of France (i.e., Monnet Plan). However, under this, the private sector is not rigidly controlled to achieve the targets and priorities of the plan.
• Countries that follow this planning have mixed economies.
• It works through the market (price system).
• In socialist nations, the planning authority determines investment in each sector and sets product prices. The primary decisions are what to produce and in what quantities.
• These economic policies can either promote or discourage private sector involvement in economic decision-making.Top of Form

3. Regional, National and International Planning

• Regional planning refers to the decentralized control exercised over the region of a particular country.
• National planning: When economic planning is applied for the nation as a whole, it is known as National planning.
• International planning is meant for a state of affairs in which the resources of more than one country are the property of the countries as a whole.

4. Centralized and Decentralized Planning

• Centralized planning: Centralized planning involves economic decisions made by the central authority or government, including the formulation of economic plans, setting targets, and priorities.
• Decentralized planning: Under this, responsibility lies with local and regional officials who take economic decisions about the plan. This type of planning is from bottom to top. Under this, plan is framed by the central planning authority by consulting different administrative units of the country.

5. Structural and Functional Planning

• Structural Planning: Structural Planning refers to changing the current social and economic structure to create a new one, such as the abolishment of existing land-lord-system and nationalization of industries and transport systems.
• Functional Planning: Itfocuses on correcting and modifying the existing structure without creating a new one.

6. Democratic and Totalitarian Planning

Democratic planning:

• Democratic Planning involves an economic order where the state authority is based on the support of common masses, and the state does not control all means of production and does not regulate economic operations of the private economy directly.

Key Features:

• State does not control all the means of production and does not regulate economic operations of the private economy directly.
• As a consequence of democratic planning, mixed economy comes into being. Public and Private Sectors operate side by side.
• Central Planning Authority has direct control over Public Sector.
• Private sector is indirectly controlled by the Central Planning Authority in the national interest through fiscal and monetary measures.
• People enjoy economic, social and religious freedom.
• People’s co-operation is sought in the preparation as well as in achieving the targets of the plan by giving them proper incentives.
• There is importance both of price mechanism and government-decisions.
• It is quite a flexible planning. There is enough scope to modify-the targets of private sector.
• Its main objective is to raise the standard of living of the people quickly. As such, consumer goods industries are given as much importance as heavy industries.

Totalitarian Planning:

When planning is adopted under a planning, it is called totalitarian dictator. Under this, state fully controls the economic affairs, productive resources and economic decisions.

Key Features:

• In this, public sector alone functions and Government has full and direct control.
• Central Planning Authority formulates a comprehensive plan for the entire economy. There is no economic freedom.
• People’s welfare can be sacrificed at the expense of rapid economic development and planning of the country.
• Means of production are controlled by the government those functions as an entrepreneur. Private enterprise has no place in it.

7. Rolling and Fixed Planning

Rolling Planning:

• Rolling plan was advocated by Prof. Myrdal for the development of developing countries.
• India experienced it for the first time in April 1978 and continued up to April 1980.
• In the rolling plan, every year, three new plans are made:
  • Plan for the current year,
  • Plan for number of years say 3 to 5 and
  • Perspective plan for 10 to 20 years or more where broader goals are stated.
• Under this, financial and physical targets are revised. In this way, the rolling plan gives the benefits of both perspective and flexible planning.

Fixed Planning:

• A fixed plan fixes definite objectives which have to be achieved during the plan period. Physical targets and financial outlays do not change except under emergencies.
• This plan helps in maintaining proper balance in the economy and removes uncertainty.

Failures and Limitations of economic planning in India

Below were the problems of economic planning in India.

1. Lack of Perspective in Planning

1. Absence of a Far-sighted Approach

• For an effective planning, a country’s plan should have two features:
  • i) Planning based on thorough assessments and
  • ii) Focus on Long-term goals besides the short-term goals.
• A critical challenge in India’s economic strategy has been launching succeeding plans without proper review of the previous one due to:
  • Absence of nodal body for data collection at the national level;
  • The federal structure of India with high reliance on states leading to data collection delays; and
  • Slow delivery of data.

Government’s efforts:

• Based on the recommendations of the National Statistical Commission (Chaired by C. Rangarajan), 2000, the government is deliberating to establish a comprehensive body for data collection from local entities across India.
• After the commencement of the Tenth plan, Government is giving focus on setting long-term goals.

2. Inability to Encourage Equitable Growth and Progress

• The strategic economic management in India failed to promote balanced regional growth and development due to political influences leading to disparities in fund allocation to states.

Government’s efforts:

• Introduction of ‘Differential development strategy’ in Tenth Plan. The strategy gives funding to a state based on its situation. (More needy states get more funds from centre).
• Encouraging states with inferior infrastructure for equitable regional growth (as such states will lack support from the private sector due to lesser profitability.)

3. Highly Centralised Nature of Planning

• Despite measures like multi- level planning, the lack of proper financial provisions for local bodies led to a primarily centralized economic strategy in India.

4. Asymmetrical Employment Strategy

• From the 2nd plan, significant emphasis was placed on Public Sector Units (PSUs) engaged in capital-intensive industries. However, they did not generate sufficient employment.

5. Excessive Emphasis on PSUs

• Prolonged focus on PSUs resulted in state monopolies in certain areas.
• Since several PSUs were underperforming, a gap emerged in the supply and demand for key goods and services produced by the PSUs.

6. Agriculture Overshadowed by the Industry

• Due to the excessive attention given to the industrial sector, the development of agriculture sector was heavily ignored.
• This neglect raised concerns about food security and threatened the livelihood of those relying on agriculture.

7. Faulty Industrial Location Policy

• Many new industrial entities (PSUs) were set up in the less developed regions of India, where easy access to raw materials, affordable labor, and efficient transportation were not available.
• In addition, these areas did not develop as they lacked a skilled labor force required by the PSUs.

8. Wrong Financial Strategy

• The government made numerous attempts such as introducing a highly complex and liberal tax structure, bank nationalization, etc., to garner resources for PSUs.
• This led to tax evasion, the problem of shadow economy, and diminishing capital for the private sector.
• Moreover, several non-plan expenses like subsidies and salary expansion led to a shortage of funds to implement planned activities.

9. Politicisation of the Planning Process

• The politicization of the Planning Process, particularly in less mature democracies like India, often overlooked the objectives of economic planning due to political considerations.Top of Form

Conclusion

The strategy of economic planning in India, deeply rooted in its history, has played a pivotal role in shaping the country’s trajectory of growth and development. The journey through the history of economic planning in India reveals a dynamic shift from a rigid centrally planned economy to more liberal and market-oriented strategies. This strategy has continually evolved to keep pace with the changing socio-economic landscape of the country, with each Five-Year Plan reflecting the prevailing priorities. Additionally, the intertwining of economic and social planning has been a consistent theme throughout, recognizing that true progress includes both financial prosperity and social welfare.

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FAQs(frequently asked question)