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Despite popular phrases like market-friendly state and consumer-friendly markets, economic planning remains the foundation of policy-making worldwide. It symbolizes national independence and offers a medium for society or its representatives to articulate the country’s economic conditions, challenges, aspirations, and strategic goals. As one scholar puts it: “It reflects the determination to take charge rather than be driven by economic forces.”
Economic Planning is defined as “a continuous process involving decisions about alternative resource use to achieve specific future goals.” This planning is implemented by a central authority like the state. A typical development plan may include:
A survey and diagnosis of the current economic situation
Policy objectives aligned with future development goals
Strategies for achieving these objectives
A macro-economic projection for the overall economy
In traditional planning, the process begins with a review of recent economic trends, including output, investment, saving, consumption, government spending, balance of payments, and population. Growth paths and targets are then framed accordingly.
The nature of economic planning varies depending on the economic system in which it operates:
Here, planning is indicative and democratic. The state limits itself to:
Formulating plans
Using indirect controls and issuing guidelines
Since it lacks effective policy instruments to enforce specific industrial or firm-level targets, its impact is inherently limited.
This model employs imperative, totalitarian planning based on directions. It mandates production units to strictly follow state plans and meet set targets.
Planning in mixed economies must balance the strengths and limitations of both systems. It cannot rely solely on indicative planning, nor can it enforce total control without monopoly over resources. It involves:
A mix of direct and indirect controls
Maintaining visibility without being overly rigid
Planning plays a crucial role in UDCs due to the following factors:
Optimal resource use: Planning enables rational selection of the best input combinations amidst severe resource constraints.
Identifying economic and social deficiencies: It highlights areas that require urgent attention for development.
Mobilizing resources and savings: Planning ensures adequate investment through quantitative assessment of development problems.
Institutional reform: It supports significant structural changes and expands public participation and cooperation.
Inter-generational equity: Planning can prioritize future generations’ needs better than market mechanisms. The Galenson-Leibenstein criterion illustrates how higher present investment fosters long-term growth.
Policy impact assessment: With improved planning tools and statistical data, inter-sectoral linkages can be better understood and policy outcomes more accurately predicted.
Despite its importance, planning often suffers from:
Lack of reliable statistical and technical data
Social structural weaknesses
Shortage of skilled personnel
Poor organization and management, especially in large public enterprises
Addressing these limitations may require comprehensive remedial measures.
India has completed about six decades of economic planning from 1951 to 2011. The country’s experience is unique due to practicing planning within a democratic mixed economy. This system faces multiple strains and stresses, compounded by India’s diversity and heterogeneity, which pose special developmental challenges. Against this backdrop, Indian economic planning offers an interesting case study.
Note: The rise of development economics as a sub-discipline coincided with India’s first three Five Year Plans. Prominent economists of that era engaged deeply with India’s planners, influencing both the practical plans and development theory internationally.
At independence, India faced a daunting task of reversing the legacy of colonial economic policies. With a fragmented, distorted economy, poor infrastructure, low human resource development, and weak living standards, the imperative was clear: the state could no longer be a passive observer.
Pioneers of development economics such as Simon Kuznets, Rosenstein Rodan, Ragnar Nurkse, Hans Singer, and Arthur Lewis widely recommended a leading role for the State, providing a strong intellectual foundation for central planning.
The National Planning Commission was established in March 1950 as a non-statutory, non-constitutional body by executive order. Its key functions included:
Over time, the Indian economy moved from centralized planning toward indicative planning, where the Commission focused on long-term strategic vision and national priorities.
The Planning Commission’s major task was to formulate plans for the effective and balanced utilization of the country’s resources. The First Five Year Plan covered the period 1951-56, marking India’s formal entry into the era of economic planning starting on 1st April 1951.
The primary goal of earlier plans in India was ‘rapid economic growth with social justice’ to build a self-reliant egalitarian economy. Within this broad objective, the early plans emphasized:
Securing increase in national income
Pushing up the rate of investment
Ensuring social justice and equity
Providing additional employment
Adopting measures to alleviate bottlenecks in three high-priority areas: agricultural production, manufacturing capacity, and the balance of payments.
While the broad objectives remained consistent, priorities evolved over time. Removal of poverty was a high priority in the First Five Year Plan, reiterated in subsequent plans.
The Sixth Five Year Plan explicitly introduced the objective of modernisation of the economy, implying:
A shift in sectoral composition of production
Diversification of activities
Advancement of technology and institutional innovations
Transformation from a feudal and colonial economy into a modern and independent economy
Two additional objectives were later added to complement earlier goals:
Maximising the usage of resources by areas
Achieving price competitiveness and price stability by lowering protection and reducing the gap between demand and supply of commodities and factors.
Despite gradual increases in economic growth rates, objectives of social justice and self-reliance remained elusive. The Eleventh Five Year Plan introduced the objective of achieving faster and more inclusive growth.
Inclusive growth refers to a process where sustained GDP expansion contributes to enlarging four key dimensions:
Opportunity: The economy should generate more and varied ways for people to earn a living and increase incomes over time.
Capability: The economy should provide means for people to create or enhance capabilities to exploit opportunities.
Access: The economy should enable bringing opportunities and capabilities together.
Security: The economy should provide means for protection against temporary or permanent loss of livelihood.
The concept of inclusiveness transcends mere poverty reduction, representing a broader approach to distributional objectives. Distributional objectives are not an “add-on” but integral to the growth structure aimed for.
Accordingly, strategies to achieve objectives have adapted over time to reflect changing emphases.
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