Economic Planning is the making of major economic decisions. What and how is to be produced and to whom it is to be allocated – by the conscious decision of a determinate authority, on the basis of a comprehensive survey of the economic system as a whole.
In an economy like India, the basis socioeconomic problems like poverty, unemployment, stagnation in agricultural and industrial production and inequality in the distribution of income and wealth can hardly be solved within the framework of an unplanned economy planning is required to remove these basic maladies.
We can identify the following characteristic features of economic planning:
- Fixation of definite socio-economic targets;
- Prudent efforts to achieve these targets within a given time period;
- Existence of a central planning authority;
- Complete knowledge about the economic resources of the country;
- Efficient utilization of limited resources to get maximum output and welfare.
The Planning Commission of India is of the opinion that, “Planning is essentially a way of organizing and utilizing resources to get maximum advantage in terms of defined social ends. The two main-constituents of the concept of planning are: (a) a system of ends to be pursued, and (b) knowledge of available resources and their optimum allocation to achieve these ends. The availability of resources conditions the ends to be effectively achieved.”
Mixed economy and planning
Mixed economy is the outcome of the compromise between the two diametrically opposite schools of thought—the one which champions the ,cause of capitalism and the other which strongly pleads for the socialization of all the means of production and of the control of the entire economy by the state.
Thus, the concept of mixed economy accepts the possibility of the co-existence of private enterprise and public enterprise.
India is regarded as a good example of a mixed economy. Under the Directive Principles of the Indian Constitution, it has been laid down that the State should strive “to promote the welfare of the people by securing and protecting as effectively as it may a social order in which justice, social, economic and political, shall inform all the institutions of national life.”
In the economic sphere, the State is to direct its policy to secure a better distribution of ownership and control of the material resources of the community and to prevent concentration of wealth in the hands of a. few and the exploitation of labor. It would be impossible for the State to attain these ends implied in the directive principles unless the State itself enters the fields of production and distribution. This explains the rationale behind of economic planning. To protect the weaker sections, the State is also expected to control the distribution of essential commodities.
Similarly, by controlling the financial system, viz., insurance and banking, the State can endeavour to direct investment in socially desirable channels. Besides, in a poor and under-developed country like India, market forces based on profit motive cannot, by themselves, induce the private sector to move into infrastructural development (which involves heavy capital investment, long gestation period, low rate of return, etc.) Accordingly, the State has to promote infrastructural facilities like hydro-electric projects, irrigation; road and railway transport, and have to create conditions conducive to a higher level of investment so that national and per capita incomes of the people can be improved continuously.
Rationale of Planning in India
In India, comprehensive national planning is required to fulfil some broad social and economic objectives. The followings are some principal reasons for planning in India:
(a) Rapid Economic Development: Before Independence, the long period of British rule and exploitation had made India one of the poorest nations in the world. The main task before the national government was to undertake some positive development measures to initiate a process of development, which can be done .effectively only through the instrument of planning. The state planning mechanism has been proved to be much superior to private market operations in bringing about it a quick transition in the less-developed economics. The spectacular success of planning in some countries had inspired the national leaders to adopt the path of planning for an accelerated development of the shattered economy.
(b) Quick Improvement in the Standard of Living: The fundamental objective of planning is to bring about a quick improvement in the standard of living of the people in the less-developed countries. In an unplanned economy the country’s resources and materials cannot be employed for increasing the people’s welfare as the private capitalists in such an economy direct their activities in increasing their own profits. The path of planning has been chosen to promote a rapid rise in the standard of living of the people by efficient exploitation of resources, increasing production of most goods, and offering employment opportunities to the people.
(c) Removal of Poverty: Planning in India is necessary for the early removal of abject poverty of the people. This can be effectively done through –
- Planned increase in the employment opportunities of the people,
- Planned production of mass consumption goods and their planned distribution among the people,
- Fulfilment of minimum needs programme by providing essential facilities (e.g., housing, roads, drinking water, public health, primary education, slum improvement, etc.), and,
- Planned increase in the consumption of the poorest section of the people.
(d) Rational Allocation and Efficient Utilization of Resources: India is rich in natural resources, but these resources are not fully exploited to get maximum advantages. In the unplanned economy resources tend to be engaged in the production of these goods and services which yield maximum profits, as a result rational allocation of resources is not possible. An unplanned economy faces frequently the problem of either shortages in some sectors or surpluses in others. But such misallocation of resources can be rectified in a planned economy in which the planning authority determines the pattern of the investment of resources. In fact, the development plans in the country are now utilized for the rational allocation of investable resources.
(e) Increasing the Rate of Capital Formation: Planning can also raise the rate of capital formation in the less-developed countries like India. The surpluses of public enterprises as found in the planned economy can be utilized for investment and capital formation. In India, the governments have been increasing the rate of capital formation through the planned investment in the construction of roads, bridges, manufacturing of machineries and transport equipments etc.
(f) Reduction in Unequal Distribution of Income and Wealth: Income and wealth are not evenly distributed in India as in other less-developed countries. In the absence of planning such inequality tends to increase due to growing concentration of economic resources at the hands of a few capitalists. Besides, the capitalists in the unplanned society increase their own profits by paying less to the labourers and other suppliers of raw materials. Planning can reverse this trend through the proper guidance and control of production, distribution, consumption and investment. The development works can be so planned and so executed that the greater equality is established with the increase of income and employment.
(g) Reduction of Unemployment and Increase in Employment Opportunities: The backwardness of the different, sectors of the economy accounts for the presence of widespread unemployment, both open and disguised, in the country. The rate of economic growth usually becomes low in the unplanned society; as a result it becomes a difficult task to mitigate this serious problem without proper planning. The government can, however, increase the employment opportunities by undertaking development programs for the different sectors like agriculture, industries, social services, transport and communications, etc. Besides, labor-intensive development projects and job-oriented programs can also be undertaken to provide relief for the problem of unemployment.
The development plans in India have already given proper stress for increasing employment. The steps have been taken to create both short-term and long-term employment opportunities in various sectors like agriculture, industry, small and village industries, irrigation works, construction, etc.
(h) Reorganization of Foreign Trade: Economic planning in the less-developed countries can bring about fundamental Changes in the foreign trade structure of such countries like India. The foreign trade structure may be reoriented from primary producing economy to the industrialized economy. Through proper controls of import and effective promotion of export of industrial goods the development plans can reorganize the foreign trade structure. In India, the trade policy has been reoriented to realize some cardinal objectives such as import control and substitution, export promotion and growth of economy. Owing to such development the trade structure is no longer regarded as colonial as it was before Independence.
(i) Regional Balanced Development: Economic planning in India can correct the regional imbalances in development. Proper development programs may be taken for the all-round development of backward areas, so that all the regions are sufficiently developed. More and more industries are to be set up in the less-developed areas and the Plans should provide for dispersal of industries.
(j) Other Considerations: Indian economy requires planning for other purpose also such as the removal of the shortages of essential goods, attainment of self- sufficiency in essential goods such as food grains and key materials, economic self-reliance, establishment of social justice for increasing economic facilities for weaker and neglected sections of the people etc.
The aforesaid discussion points to the supreme necessity of economic planning in India. It is now fully realized that without planning the country would not be able to initiate a process of quick economic growth.
Objectives of planning in India
In India, the First Five year plan began in the year 1951-52. Although the objectives of these plans were different, we can identify some of the basic long-term and broad objectives of Indian planning. These are:
(i) Raising the growth rate: The economic planning in India was to bring about rapid economic growth through the growth in agriculture, industry, power, transport and communications and different other sectors in our economy. Further, the growth in real national income was considered to be the basis for an increase in per Capita real income and an improvement in the physical quality of life for, the maximum number of people. The growth, in national output must be higher than the growth rate in population for an increase in per capita output. Indian planners aimed at increasing national income and per capita income on the assumption that the continuous growth in national income and per capita income would remove the problem of poverty and raise the standard of living for the maximum people of the country.
(ii) Raising the investment-income ratio: Growth in investment as a proportion of national income was also one of the important long-term objectives of Indian five year plans.
(iii) Achieving self-reliance: This objective was considered to be an important objective for keeping the growth activity free from political pressures of dominant capitalist countries of the world. India had to import a huge quantity of food grains from abroad for a considerable period. Again, she had to depend on foreign countries for the import of heavy machinery, transport equipment, machine tools, electrical instruments, etc. This was required for the expansion of the industrial sector and for building, a strong infrastructural base in India after independence. Hence, it was quite natural that the developed capitalist countries, supplying food grains, machinery and capital to India, used to take full advantage of their strong bargaining power, by imposing different conditions while extending such help. In many cases, the domestic economic policies are also influenced by such conditions. Because of all these reasons, a self-reliant economic growth became a major objective of economic planning in India, particularly since the inception of the Third Five Year Plan.
(iv) Removing unemployment: Removal of unemployment and underemployment can be regarded as a precondition for the elimination of poverty.
It was assumed by Planning Commission that an increase in investment would accompany not only an increase in national output but also a rise in employment opportunities. This argument was put forward by the Planning Commission quite explicitly during the Third Five Year Plan. The planning commission however, believed that the removal of unemployment would lead to increase in GDP, on the one hand and improve the standard of living of the people on the other.
(v) Reducing the incidence of poverty: Various plan documents have all along indicated that the policy of the Government of India is to reduce the incidence of poverty. The problem of poverty has been conceived as one of low productivity of a large section of the people. Hence, to remove these handicaps of the poor and to integrate them in the growth process, alleviation of poverty became one of the broad objectives of Indian planning. So, the long run objective was to free the economy from the vicious circle of poverty which encircles the economy, not only with poor purchasing power, low savings, low capital formation, low productivity and low level of national output, but also with a poor physical quality of life.
(vi) Reducing income inequalities: Indian planners visualized the creation of a socialistic pattern of society where each member of the society would get equal opportunities in the fields of education, health, nutrition, occupation, etc. Hence, they felt the need for reducing income and wealth inequalities in our society. These inequalities have their roots in the feudal system. Hence, reduction in income and wealth necessitated the abolition of semi-feudal relations of production in Indian villages. Thus; the objective was to abolish the ‘Zamindari’ system, impose ceilings on land-holdings and distribution of surplus land among the landless in rural areas.
Income and wealth inequalities arising out of industrialization and growth were far more complex. The Planning Commission felt the need for imposing some restrictive and fiscal measures e.g., by imposing higher rates of direct taxes on high incomes, to tackle this problem. Further, to reduce the disparity between urban and rural sectors, the Planning Commission suggested various measures to raise agricultural productivity, development of agro-based industries, a fair price to farmers for their products, etc.
The Planning Commission stated its policy towards income inequalities in the Fourth Plan document. It emphasized economic growth with the hope that the poor will benefit from it and thus, income inequalities would be reduced.
A part from these long-term objectives the Sixth plan of India recognized one more objective of modernizing the production process. The implications of this modernization were to shift the sectoral comparison of national income, diversification of productive activities and advancement of technology.
Modernization, as per the view of the Planning Commission, also implied introduction of modern technology, both in industrial and agricultural activities. It also implied an emergence of new types of banking, insurance and marketing institutions, which would facilitate the dynamics of growth process.
In the following sections, we will discuss how far the above mentioned broad objectives have been fulfilled. We shall also focus on the Ninth Plan of India.