Economic Planning by edutap

Summary Sheet ESI- Role of economic planning

Important Points

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 Economic Planning:

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 – by the conscious decision of a determinate authority, on the basis of a comprehensive survey of the economic system as a whole. The aim of all the plans is to utilize the available resources more effectively achieving the well defined objectives during given period of time.  How important is economic planning for India?

In an economy like India, the basic 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.  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. Before going further, let us see the common types Economic Systems.  Economic System:

An economic system is the distribution of production, distribution and

consumption. It is composed of people, institutions and relationships. It addresses the problems of economics like the allocation of resources. Types of economic systems are Capitalism (Market Economy); Socialism (Planned Economy); Mixed Economy (Capitalism + Socialism). Market Economy: A market economic system relies on free markets and does not allow any kind of

government involvement in the economy. In this system, the government does not control any resources or other relevant economic segments. Instead, the entire system is regulated by the people and the law of supply and demand. For example, if bicycles are in demand, b icycles will be produced. Planned Economy: 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,

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distribution under socialism is supposed to be based on what people need and not on what they can afford to purchase. Mixed Economy: Most economies are mixed economies, i.e. the government and the market together

will decide 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. India is an example of a mixed economy.

 Types of Economic planning

Democratic Planning: 

Democratic Planning implies a system of economic order in which the authority that vests in the state is based on the support of common masses. In democratic planning, the state does not control all the means of production and does not regulate economic operations of the private economy directly.

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In democratic planning, the plan is fully debated in the Parliament, state legislature and in the private forums. The plan prepared by the planning commission is not fully accepted but it can also be rejected or modified. Thus, the plan is not forced from the above on the people but in fact, it is planning from below.

Totalitarian (authoritarian) planning:  

When planning is adopted under a dictator, it is called totalitarian planning. Under this planning, state fully controls the economic affairs, productive resources and economic decisions. The state is the final authority in allocating the productive resources and it determines in accordance with the directions of the central authority.

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Totalitarian planning shows the complete socialization of entire national economy. Under such planning, plans are formulated, controlled, financed and executed by the state and people have to do nothing in it.

Democratic planning Vs Totalitarian Planning : 

Regarding choice between democratic and totalitarian planning, some regard democratic planning as better because it gives complete freedom to consumers and producers. But this planning accelerates the pace of economic development slowly.

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Others regard democratic planning as imaginary since the interference by the government is indispensable. On the other hand, under totalitarian planning, there are big sacrifices by the public. But the pace of economic development is very fast.

Centralized planning: planning: 

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The framing, adopting, adopting, executing, supervising and controlling the plan is done by central planning authority. Planning authority determines targets and priorities. It is the duty of the planning authority to bring harmony in the planning process.

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This type of planning comes from the top to the bottom. This plan determines the equality and cohesion. The central planning authority determines the basic policies in view of the regional and local needs.

Decentralized Planning: Planning: 

Under this planning, responsibility lies with local and regional officials who take economic decisions about the plan. In other words, this planning starts from the grass roots.

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In other words, 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.

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The plan incorporates plans under central, state and local schemes. Also plans are prepared for different industries too. But individual firms are free to take their own decisions about investment and output. Prices are determined by market mechanism even though there are government controls. There is complete economic freedom in consumption, production and exchange.

Centralized Vs Decentralized Planning:

Decentralized planning is superior to centralized planning. It provides economic freedom and flexibility in the economy. Again decentralized planning provides economic freedom and incentives to the market economy while centralized planning provides cohesiveness to the economy. Functional planning: 

Under functional planning, there is no need to build up new structure, rather the existing structure is corrected and modified.

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According to Zweig in his “The Planning of Free Societies’ has stated “Functional planning will only repair, not build a new, it will improve the wave of the existing order, but not supersede it. Thus functional planning brings no change in the economic and social set up.

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Structural Planning: 

In this type of planning the present social and economic structure is changed and a new structure emerges. In the developing countries, there is a structure planning. Big economic and social changes are brought about to usher into a new system.

Structural Vs Functional Functi onal Planning:

Indian planning is both structural and functional because under public sector, a new economic structure is built up where as under private sector, the existing structure is modified. There is not much difference in structural and functional planning. After sometimes structural planning turns into functional planning. Perspective Planning: 

Perspective planning is a long run planning where targets are fixed for long periods, for example 15 to 25 years.

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But a perspective plan cannot mean one plan for the complete period. In a true sense, broader objectives are to be achieved in a fixed period by dividing the perspective plan into short-run plans of 4 to 6 years. The perspective plan has so many administrative difficulties due to which the fulfillment of the objectives becomes difficult.

Annual Planning or Prospective Planning: 

Annual Planning or short term planning refers to 4 to 6 years plans which are further divided into annual plans so that each annual plan may fit in short-run plan and each short-run plan may ultimately fit in the long-run plan.

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Plans are further divided into regional and sectional plans. Regional plans are linked with regions, district and localities which are further divided into sectional plans for agriculture, industry, transport, foreign trade etc.

Indicative Planning  

Indicative plan is not imperative but flexible. Under indicative planning, the private sector is not rigidly controlled to achieve the targets and priorities of the plan. The state gives full assistance to private sector but does not control it. It, rather, directs the private sector in certain areas to implement the plan.

Imperative Planning: 

It refers to that where all economic activities and resources of the country operate under the direction of the state. The resources are optimally used by the state in order to achieve the targets of the plan. Consumer’s Cons umer’s sovereignty is sacrificed under this type of planning.

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The consumers get fixed quantities at fixed prices. The government policies are rigid which cannot be changed easily. Any change can adversely affect the economy.

Rolling Planning: 

India experienced it for the first time in April 1978 under Janata Party rule and continued up to April 1980.

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In the rolling plan, every year, three new plans are made:

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There is a plan for the current year which includes annual budget and the foreign exchange budget,

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There is a plan for number of years for example 3 to 5. It is changed every year keeping in view the needs of the economy.

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A perspective plan for 10 to 20 years or more is presented where broader goals are stated. The annual plan is fitted into same year’s new year’s new 3 to 5 years plan and both are framed in the light of perspective plan.

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Rolling plan is framed with a view to remove rigidities. It considers the unforeseen changes like natural calamities or economic changes. Under this financial and physical targets are revised. In this way, the rolling plan gives the benefits of both perspective and flexible planning. But under rolling plan, long-term subjective cannot be achieved since the targets are revised every year.

Fixed Planning: Planning: 

Fixed planning is for some fixed period, say four or five or six or seven years. A fixed plan fixes definite objectives which have to be achieved during the plan period.

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Physical targets and financial outlays do not change except e xcept under emergencies. Under this plan, targets are achieved which are laid down in the plan. This plan helps in maintaining proper balance in the economy. This type of planning needs political will for its successful implementation.

Socialistic Planning: Planning:

In socialistic planning, the economy depends on economic planning. The central authority formulates a plan for the entire economy. Capitalistic Planning

Capitalistic planning is focused on the unplanned economic order which gains momentum from some invisible forces in the market. The main feature of this type of planning is the absence of a central economic plan.

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 Rationale of Planning in India

In India, comprehensive national planning is required to fulfill some broad social and economic objectives. I ndia:  The followings are some principal reasons for planning in India: Rapid Economic Development: 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. 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 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. Removal of Poverty: Planning in India is necessary for the early removal of abject poverty of the people.

This can be effectively done through – through – Planned Planned increase in the employment opportunities of the people; Planned production of mass consumption goods and their planned distribution among the people; Fulfillment of minimum needs programme by providing essential facilities (e.g., housing, roads, drinking water, public health, primary education, slum improvement, etc.). 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. 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. Increasing the Rate of Capital Formation: Planning can also raise the rate of capital formation in

countries like India. The surpluses of public enterprises as found in the planned economy can be utilized for investment and capital formation. Reduction in Unequal Distribution of Income and Wealth: Income and wealth are not evenly distributed

in India. In the absence of planning such inequality tends to increase due to growing concentration of www.edutap.co.in


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. Reduction of Unemployment 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. Reorganization of Foreign Trade: The foreign trade structure s tructure may be reoriented from primary producing

economy to the industrialized economy through economic planning. 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.

 Economic planning in India

Economic planning in India can easily be read through dividing it into 3 parts: 1. Economic Planning before independence 2. Economic planning after independence 3. Economic planning after 1991  Economic planning in India before independence:  Economic study by Dadabhai Naraoji:

The first authentic economic study of British India was published by Dadabhai Naraoji in his book ‘Poverty and the Unbritish Rule in India’. Dadabhai India’. Dadabhai Naoroji's work focused on the drain of wealth from India into England through colonial rule. Through his work with economics, Naoroji sought to prove that Britain was draining money out of India.  Royal commission on Indian Expenditure in 1896:

Naoroji's work on the drain theory was the main reason behind the creation of the Royal commission on Indian Expenditure in 1896 in which he was also a member. This commission reviewed financial burdens on India and in some cases came to the conclusion that those burdens were misplaced. www.edutap.co.in


 Emergence of the idea of planned economy in India: Indi a: 

First of all the idea of planned economy was crystallized in 1930s when our national leaders came under the influence of socialist philosophy.

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In 1934, Sir M. Visvesvaraya had published a book titled “Planned Economy in India”, in which he presented a constructive draft of the development of India in next ten years. His core idea was to lay out a plan to shift labor from agriculture to industries and double up National income in ten years.

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The economic perspective of India’s freedom movement was formulated during the thirties

between the 1931 Karachi session of Indian National Congress, 1936 Faizpur session of India National Congress. 

National Planning Committee: The first attempt to develop a national plan for India came up in

1938. In that year, Congress President Subhash Chandra Bose had set up a National Planning Committee with Jawaharlal Nehru as its president. However the reports of the committee could not be prepared and only for the first time in 1948 -49 some papers came out.  There are various plans that were put forward for economic development in India:

Bombay Plan: In 1944 Eight Industrialists of Bombay viz. Mr. JRD Tata, GD Birla, Purshottamdas

Thakurdas, Lala Shriram, Kasturbhai Lalbhai, AD Shroff , Ardeshir Dalal, & John Mathai working together prepared “A Brief Memorandum Outlining a Plan of Economic Development for India”. This is known as “Bombay Plan”. This plan envisaged doubling the per capita income in 15 years and tripling the national

income during this period. Nehru did not officially accept the plan, yet many of the ideas of the plan were inculcated in other plans which came later. People’s Plan: People’s plan was drafted by MN Roy. This plan was for fo r ten years period and gave greatest

priority to Agriculture. Nationalization of all agriculture and production was the main feature of this plan. This plan was based on Marxist socialism and drafted by M N Roy on behalf of the Indian federation of Lahore. Gandhian Plan: This plan was drafted by Sriman Nayaran, principal of Wardha Commercial College. It

emphasized the economic decentralization with primacy to rural development by developing the cottage industries. Sarvodaya Plan: Sarvodaya Plan (1950) was drafted by Jaiprakash Narayan. This plan itself was inspired

by Gandhian Plan and Sarvodaya Idea of Vinoba Bhave. This plan emphasized on agriculture and small & cottage industries. It also suggested the freedom from foreign technology and stressed upon land reforms and decentralized dece ntralized participatory planning. www.edutap.co.in


 Economic Planning in India after Independence:

Planning Commission - Its origin: In March 1950, the Planning Commission was set up by a Resolution

of the Government of India as an advisory and specialized institution. Planning Commission Commission – Structure: Planning Commission was an extra-constitutional body, charged with

the responsibility of making assessment of all resources of the country, augmenting deficient resources, formulating plans for the most effective and balanced utilization of resources and determining priorities. Jawaharlal Nehru was the first Chairman of the Planning Commission. Originally most of the members of the commission were themselves central ministers. National Development Council (NDC): The Planning Commission as originally constituted was but an

arm of government of India. The state governments had no participation in it or had no role to play in the planning process. To remove these defects The National Development Council (NDC) (NDC) was created in 1952. The National Development Council was to consist of the Prime Minister as its chairman, the Chief Ministers of all the states and union territories and the members of the commission. Plans were formulated by the Planning Commission and approved the National Development Council before they were presented to the Parliament and the state legislatures.  Five-Year Plans-An Overview: 

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The idea of Five year planning was taken from the erstwhile Soviet Union under socialist influence of first Prime Minister Jawaharlal Nehru. The first Five-year Plan was launched in 1951 and two subsequent five-year plans were formulated till 1965, when there was a break because of the Indo-Pakistan Conflict. Two successive years of drought, devaluation of the currency, a general rise in prices and erosion of resources disrupted the planning process and after three Annual Plans between 1966 and 1969, the fourth Five-year plan was started in 1969.

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The Eighth Plan could not take off in 1990 due to the fast changing political situation at the Centre and the years 1990-91 and 1991-92 were treated as Annual Plans.

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The Eighth Plan was finally launched in 1992 after the initiation of structural adjustment policies. For the first eight Plans the emphasis was on a growing public sector with massive investments in basic and heavy industries, but since the launch of the Ninth Plan in 1997, the emphasis on the public sector has become less pronounced and the current thinking on planning in the country, in general, is that it should increasingly be of an indicative nature.

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Features of each of the following plans are as follows :

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 What are the achievements of Planning Commission of India?

The average growth rate during the planning period has been little more than 4% per annum. Thus, the growth in the per capita income has been just around 2%. Plan wise, there has been mixed experience of success and failure. Some Modernization: This is evident from a variety of changes in the structural and the institutional set-

up of the economy. In respect of the structural changes, the noteworthy developments are: steady change in the composition of national income with a higher share of national income originating in the manufacturing sector; and a considerable diversification of products with many new industries coming into the picture. Some Success at Self-reliance: Self-reliance implies that nation must have economic security, food

security, energy security, environmental security and political and social security. During the last six decades considerable progress has been made towards the achievement of this goal. Little Rendering of Social Justice: The number of the poor below the poverty line has no doubt declined

but the magnitude of poverty continues to be large. According to Planning Commission estimates, poverty ratio declined from 36 per cent in 1993-94 to 27.5 per cent in 2004-05. www.edutap.co.in


In regard to the employment, there has again been some improvement. But the total situation has not changed much with rampant underemployment and seasonal unemployment, particularly in the rural areas.  Economic Planning in India since 1991:

The process of economic economic reforms was started by the government of India in 1991 for taking the country out of economic difficulty and speeding up the development of the country. It consists of LPG i.e. Liberalization, Privatization and Globalization. Liberalization: Liberalization means to unshackle the economy from bureaucratic cobweb to make it

more competitive. Following are its chief features: To do away with the necessity of having a license for most of the industries; Freedom in determining the scale of business activities; Removing restrictions for the movement of goods and services from one place to another ; Freedom to fix the prices of goods and

services; Reduction in the rate of taxes ; Freedom from unnecessary control over economy; Simplifying import-export procedure; Simplifying the process of attracting foreign capital and technology. Privatization: In brief, privatization means such an economic process through which some s ome public sector

undertaking is brought either partially or completely under private ownership. Broadly speaking, establishing a new enterprise in private sector instead of public sector is also privatization. Not only this, depriving public sector of the job of production which was earlier reserved for it or transferring its production, without depriving it, to the private sector also amounts to privatization. Globalization: Globalization means integrating the economy with the rest of the world. Following are its

chief features: Free flow of goods and services in all the countries; Free flow of capital in all the countries; Free flow of information and technology in all the countries; Free movement of people in all the countries; The same conflict-solving technique in all the countries.

 NITI Aayog:

The National Institution for Transforming India, also called NITI Aayog, was formed via a resolution of the Union Cabinet on January 1, 2015. NITI N ITI Aayog is the premier policy ‘Think Tank’ of the Government of India, providing both directional and policy inputs. While designing strategic and long term policies and programmes for the Government of India, NITI Aayog also provides relevant technical advice to the Centre and States. www.edutap.co.in


The Government of India, in keeping with its reform agenda, constituted the NITI Aayog to replace the Planning Commission instituted in 1950.

At the core of NITI Aayog’s creation Aayog’s creation are two hubs – hubs – Team Team India Hub and the Knowledge and Innovation Hub. The Team India Hub leads the engagement of states with the Central government, while the Knowledge and Innovation Innovation Hub builds NITI’s think-tank think -tank capabilities. These hubs reflect the two key tasks of the Aayog.  The NITI Aayog will comprise the following: 

Prime Minister of India as the Chairperson

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Governing Council comprising the Chief Ministers of all the States and Lt. Governors of Union Territories

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Regional Councils will be formed to address specific issues and contingencies impacting more than one state or a region. These will be formed formed for a specified tenure. The Regional Councils Councils will be convened by the Prime Minister and will comprise of the Chief Ministers of States and Lt. Governors of Union Territories in the region. These will be chaired by the Chairperson of the NITI Aayog or his nominee.

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Experts, specialists and practitioners with relevant domain knowledge as special invitees nominated by the Prime Minister.

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The full-time organizational framework will comprise of, in addition to the Prime Minister as the Chairperson:

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Vice-Chairperson: To be appointed by the Prime Minister

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Members: Full-time

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Part-time members: Maximum of 2 from leading universities research organizations and other

relevant institutions in an ex-officio capacity. capacity. Part time members will be on a rotational rotational basis.  Ex Officio members: Maximum of 4 members of the Union Council of Ministers to be nominated by the Prime Minister. 

Chief Executive Officer: To be appointed by the Prime Minister for a fixed tenure, in the rank of

Secretary to the Government of India.  Secretariat as deemed necessary.

 How is NITI Aayog different from the Planning Commission?

Planning Commission was an advisory body, and so is Niti Ayog. But the key difference between them is that while the former had powers to allocate funds to ministries and states; this function will be now of finance ministry. Niti Ayog is essentially a think tank and a truly advisory body. www.edutap.co.in


 How does NITI Aayog promote co-operative federalism?

NITI Aayog acts to allow states to deepen their policy engagement with the Central Government. For this purpose, NITI’s Governing council includes Chief Ministers of all States and Lieutenant Governors/ Administrators of Union Territories. Taking the involvement of States in the country’s policy decisions a step further, it also constituted Sub-Groups of Chief Ministers to settle complex issues. In its very first year, NITI Aayog hosted three sub-groups of Chief Ministers on three crucial policy issues – Swachh – Swachh Bharat, Skill Development and Centrally-Sponsored Schemes.  Future Targets by NITI Aayog :

NITI Aayog has laid out a roadmap to help Asia’s third largest economy cross the $10 trillion mark by 2032. The policy agency said that India can become a $10 trillion economy by 2032 if it increases its growth rate from 7% to 10% annually, starting this year. The agency said such a growth rate could eradicate poverty and generate over 175 million new jobs. The flip side: side: If it doesn’t improve its growth rate from 7%, India will still have about 6% of its population living below poverty line in 2032. Currently, about 12.9% of the Indian population, or 172 million people, live below the poverty line. The current rate of growth would reduce reduce poverty, but since India’s population is expected to grow to over 1.4 billion by 2030, it would not eradicate it.  Plans put forth by NITI Aayog :

India’s 12th Five-Year Five-Year Plan, the last one, ended on 31st March, 2017. NITI Aayog has put forth three types of plans for the economic development of India.

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The 15-year vision document has a seven-year strategy document for 2017-24 as the 'National Development Agenda.' Separately, a three-year 'Action Agenda' from 2017-18 to 2019-20 is also under works to assess funding requirements. The three-year agenda is further divided into seven parts, with a number of specific action points for each part to boost economic growth.

Worksheet Click the next green button on the bottom of your screen to view the Work sheets Worksheets on this topic. Work sheet consists of 1. Fill in the blanks 2. True /False 3. MCQs 4. Match the column This will give new dimensions to your learning and will test how much you can apply

So do not forget and attempt this Worksheet. Happy Learning!!!

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Economic Planning by edutap

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