Economic Planning in India
Economic planning is the process of organizing economic operations by developing precise policies and programs in order to achieve a predetermined goal. The former Soviet Union was the first to investigate and use economic planning, with their first five-year plan beginning in 1928. However, it was not until the 1920s and 1930s that the world outside the Soviet Union became aware of the intricacies of economic planning, thanks to the migration of east European economists to the United Kingdom and the United States.
The idea of planning as an instrument of economic progress captivated many democracies and colonies at the time. Indian socialists, nationalists, and academics began to advocate for the necessity for economic planning in India in the 1930s.
Many new recommendations for immediate planning were made throughout this decade, but the British government remained essentially impervious to them. However, when India gained independence and opted to pursue a planned economic pattern, these proposals served their purpose.
Some of the key economic plans that shaped India’s economic planning are listed below:
- The Visvesvaraya Plan
- The FICCI Proposal
- The Congress Plan
- The Gandhian Plan
- The People’s Plan
- The Sarvodaya Plan
- To avoid reducing the subject of economic planning to a purely academic exercise, we must discuss it using real-world examples from various economies. We wouldn’t be able to comprehend the purpose and role of planning in India without first learning about its history. This brief chapter aims to introduce the reader to all of the whats, hows, and whys of economic planning, with a focus on the various experiments conducted by various countries, including India, over time. It could also serve as a theoretical primer for the following chapter, Planning in India.
- Since the term ‘planning’ entered the sphere of economics, a number of meanings have been proposed by various economists. We only need to observe a few of them to gain a clear knowledge of planning, which will allow us to come up with a working definition that is appropriate for our time.
- A large number of economists and experts have agreed that H. D. Dickinson’s definition of economic planning is the best: “the conscious decision of a determinate authority, on the basis of a comprehensive survey of the economic system as a whole, to make major economic decisions—what and how much is to be produced and to whom it is to be allocated by the conscious decision of a determinate authority.”
- The National Planning Committee, established in 1938 by the Indian National Congress, was the first in India to attempt to define planning (its final report was issued in 1949). It could be thought of as the broadest definition of planning: “In a democratic society, planning can be described as the technical coordination of consumption, production, investment, commerce, and income distribution by disinterested specialists in conformity with social objectives specified by entities representing the nation.” Such planning must take into account not just economics and enhancing the standard of living, but also cultural and spiritual values, as well as the human side of existence.”
- By the late 1930s, practically everyone agreed that an independent India would be a planned economy. By the early 1950s, India had begun economic planning, and the planning commission of India had defined planning. “Planning entails the acceptance of a well defined set of objectives in terms of which to formulate overall policies,” according to the Planning Commission. It also entails developing a plan for encouraging the achievement of set goals. “Planning is fundamentally an endeavor to work out a reasonable solution to issues, an attempt to coordinate means and aims; it differs from the customary hit-or-miss methods by which reforms and reconstruction are frequently carried out.”
- A vast number of newly independent countries were drawn to planning in the postwar period. Many fresh forces of change keep refining the basic idea of planning due to the compulsive needs of industrialisation or the question of sustainability of the development process. But to move forward our discussion, we need a working as well as a modern definition of planning. We may define it as a process of accomplishing well-defined goals by best utilisation of the available resources. While doing economic planning the government sets developmental objectives and attempts to deliberately coordinate the economic decision making over a longer period to influence, direct and in some cases even to control the level and growth of a nation’s main economic variables (i.e., income, consumption, employment, saving, investment, exports, imports, etc.) .
- An economic plan is essentially a set of specified economic aims to be attained in a given period of time with a declared method. Economic plans may be either comprehensive or limited. A comprehensive plan sets aims to encompass all major aspects of the economy, whereas a partial plan may opt for setting such targets for a segment of the economy (i.e., agriculture, industry, public sector, etc). (i.e., agriculture, industry, public sector, etc.). Taken broadly, the planning process itself can be regarded as an exercise in which a government first defines social objectives, then establishes various targets (i.e., economic targets) , and ultimately arranges a framework for implementing, coordinating and monitoring the development plan.
- One thing that should be evident to everyone is that the concept of planning first appeared in its applied form, and specialists began theorizing about it after analyzing and assessing the experiences of many countries that followed it. In the case of planning, this has resulted in a shift from practice to theory. As a result, the form and nature of planning differed from country to country and across time. The sorts of planning themselves evolved over time as different countries experimented with it, as we will see on the next pages.
Functions of Economic Planning
(I) Planning is a step-by-step procedure. It suggests that planning is a method of carrying out a task. The process may continue till we have some goals and objectives remaining in our lives. The type and breadth of the planning process may alter in response to the changing nature of our needs. Planning isn’t a goal in and of itself. Planning changes when processes accelerate and slowdown, change direction, and change course.
(ii) Planning must have clear objectives. Following WWII, various countries embarked on growth planning. Because these countries faced significant socioeconomic challenges, they first set specific goals and objectives and then began the process of achieving them through planning. Over time, a consensus arose that planning must have some aims, and those goals must be well-defined (not poorly defined) in order for the government’s discretionary intervention in the economy to be publicly transparent and justified. Even in non-democratic countries (such as the former USSR, Poland, China, and others), planning goals were well specified.
(iii) The most efficient use of existing resources. We can see two interesting ideas here. The first is how the resources are used. Experts attempted to’maximise’ resource extraction until the concept of sustainability was introduced in 1987. However, once experts from all over the world realized that such a method of resource utilization was unsustainable, the sustainable approach was incorporated into planning, and the concept of using resources to their ‘possible best’ was born, so that environmental degradation could be kept to a minimum and future generations could continue to progress. The second concept is that of available natural resources. Resources (both natural and human) may be indigenous or external in origin. Most countries that were planning tried to use their own resources, but several also tried to tap into exogenous resources, leveraging their diplomatic clout. For example, the Soviet Union, which was the first country to implement national planning, took advantage of resources available in Eastern Europe. Exogenous resources were also employed by India in her development strategies whenever they were essential and feasible.
By the 1950s, planning had become a strategy or instrument for policymakers all over the world to use resources to attain any kind of goal:
(I) Attempting to reach a specific family size for different countries became known as family planning.
(ii) Town/urban planning refers to the process of providing appropriate physical and social infrastructure for existing or future urban regions.
(iii) Financial planning refers to a country’s attempt to optimize the utilization of its resources for various categories of expenditures. Budgeting is another term for financial planning. Every budget, whether it is for the government or for the private sector, is nothing more than a financial planning exercise.
(iv) Similarly, there could be a variety of planning processes at the macro and micro levels—agricultural planning, industrial planning, irrigation planning, road planning, housing planning, and so on.
Simply said, the process of planning is the art of reaching any form of objective by utilizing the resources available to us. For example, students in a class may be able to join the class at the appropriate time despite the fact that they are staying in various locations. How are they able to achieve this? They must all schedule their time so that they may all join the class at the same time, despite the fact that their homes are not all within walking distance of the session. Everyone may have their own method of time management—some may have bed-tea, while others may not; some may have breakfast at home, while others may choose to eat breakfast at the campus canteen, and so on.
It suggests that we are always organizing our days, even if we aren’t aware of it or haven’t stated it yet. In the case of countries, the same is true. Many countries have declared themselves to be planned economies, while others have made no such declarations. The Soviet Union, Poland, China, France, and India are instances of the former, whereas the United States, Canada, and Mexico are examples of the latter. But we’re talking about the deliberate planning process here. As different countries begin their planning processes, some methodologies, instruments, and styles of planning will emerge.
Beginnings and Expansion Planning
Planning is a technique for accelerating economic advancement. It has been tried by various countries at various times and at various levels. We can observe them as follows:
- Planning for the Region For the first time, planning was used as part of a country’s development policy at the regional level. After the Tennessee Valley Authority (TVA) was established in 1916 for a large-scale rehabilitation in south-eastern USA involving portions of seven states, it was the United States that initiated the first regional planning. The TVA/regional plan was involved in many related activities such as industrial development, forestry, wildlife conservation, town planning, road and rail construction, encouraging sound agricultural practices, and malaria control in the defined region, with the primary goal of flood control, soil conservation, and electricity provision. The Damodar Valley Corporation (DVC) in India (1948), the Volta River Project in Ghana (1966), and other countries used the US experience of regional planning to achieve their well-defined goals, and it became a role model and source of inspiration for many countries around the world in the following decades.
- National Strategic Planning The official experiment in national planning may be traced back to Russia’s Bolshevik Revolution in 1917 — the Soviet Union. Dissatisfied with the rate of industrialisation, Joseph Stalin unveiled the Soviet Union’s central planning strategy in 1928. Apart from economic planning, Stalin proclaimed the collectivization of agriculture and forced-draft industrialization as other radical new policy objectives in 1928. For the years 1928–33, the Soviet Union implemented its first five-year plan, giving the world its first taste of national planning. The iconic Soviet slogan “great leap forward” was coined to promote fast industrialisation by instituting national economic planning. The nature and extent of Soviet planning (known as the Gosplan) will have direct or indirect consequences for all countries that adopted economic planning, whether state, capitalist, or hybrid. India’s planning approach was to be influenced directly by Soviet planning. Heavy industries were prioritized over light industries in the first Soviet Plan, and consumer goods were the last priority once all other goals were accomplished. In India’s planning process, we observe the same emphasis. After World War II, the Soviet model of economic planning extended to East European countries, and the People’s Republic of China adopted it in its purest form (1949). France borrowed the notion of national planning in the early 1940s, and the world witnessed national planning being implemented by a formerly capitalist economy as well as a decentralized political structure (i.e., democratic system). Following its declaration as a mixed economy, France began government economic planning.
Various Planning Methodologies
After the Soviet Union pioneered national planning, several more countries followed suit, though with varying techniques and practices. Though there are many different types of planning, the most significant one is based on the sort of business (i.e., state economy, mixed economy). Planning has been categorised into two sorts over time, depending on the type of economic system in place in the country.
- Necessary Planning Imperative planning refers to the planning process used by state economies (i.e., socialist or communist). This type of planning is referred to as directive or target planning. There were two basic types of such planning. All economic decisions were centralized in the hands of the state in the socialist system, with community ownership of resources (except labour). All resources were to be owned and used by the state in the communist system (i.e., China in the past) (including labour). As a result, communist China served as the purest example of this type of planning. Even after Stalin’s enactment of agricultural collectivisation in 1928, only 94 percent of Soviet peasants were able to participate in the process. The following are the basic characteristics of such planning:
(I) The plan establishes numerical (i.e., quantitative) growth and development targets. In the next 5 or 6 years, for example, five lakh tonnes of steel, two lakh tonnes of cement, 10,000 kilometers of national highways, 5,000 elementary schools, and so on will be produced/built.
(ii) Because the state owns the resource ownership rights, the above-mentioned projected targets are very likely to be met.
(iii) There is essentially no role for the market, no price system, and all economic choices are made by the state/government in a centralised manner.
(iv) There is no private sector participation in the economy; the government is the sole source of revenue.
This type of planning was used by the Command Economies. As a result, such economies as the USSR, Poland, Hungary, Austria, Romania, and others, as well as China, are known as Centrally Planned Economies. Essentially, it was the exodus of some of the world’s greatest economists from the Soviet Bloc to the United Kingdom and the United States that sparked a thorough examination and debate on the nature and purpose of planning in command economies. After WWII, many of these economists returned to their home countries to serve and, in some cases, suffer the revolution there. In the postwar era, it was their clear and current economic thought that laid the groundwork for the concept of a mixed economy. One of them was Oskar Lange, a famous Polish economist who suggested and created the term “market socialism” in the 1950s after returning home to serve as Chairman of the Polish State Economic Council (similar to India’s Planning Commission). Not just Poland, but also other state economies at the time, rejected his market socialist views.
After the Cultural Revolution (1966–69) in China, which caused an economic slowdown in the country that had embraced a soviet-style central planning system after 1949, this sort of planning achieved its pinnacle. China decentralized a huge degree of economic power under Deng Xiaoping (1977–97) when he announced the open door policy in 1985 to preserve the economy. Under the communist political framework, China’s open door policy was an endeavor toward’market socialism’ (a popular student demand for political reform in favour of democracy was ruthlessly repressed in Tiananmen Square in 1989). In 1985, the Soviet Union, led by Mikhail Gorbachev, embarked on a process of political and economic reforms known as prestroika (i.e., restructuring) and glasnost (i.e., openness) in order to salvage the state economy’s failed economic experiments. From 1989 onwards, several East European economies adopted similar economic changes. By the late 1980s, the whole world of state economies had shifted to a market economy. Since then, none of the countries have adhered to the principle of mandatory planning.
- Preliminary Planning Following the start of Soviet planning, the concept of planning drew the attention of the democratic world over the next two decades. Some of these economies began to implement national planning at some point. The nature of their planning was distinct from command economies because they were neither state economies nor communist/socialist political systems. Economists and academics have dubbed this type of planning “indicative planning.” The following are the distinguishing characteristics of suggestive planning:
(I) Following the suggestive planning, every economy was a mixed economy.
(ii) Unlike a centrally planned economy (where countries adopt imperative planning), suggestive planning works with rather than substitutes the market (price system).
(iii) In addition to declaring numerical/quantitative targets (as is done in imperative planning), the economies declare a set of suggestive economic measures to achieve the plan’s objectives.
(iii) the illustrative nature of economic policies presented in such planning essentially encourages or discourages the private sector in its economic decision-making process.
Following its conversion to a mixed economy during the mid-1940s, France launched its first six-year plan in 1947, which became known as the Monnet Plan (he was the first chairman of the General Planning Commission and the then Cabinet Minister for planning in France). Later on, the term “Monnet Plan” came to mean “indicative planning.” The government had chosen eight key industries as the basis of development in which the nature of planning was almost mandatory, i.e., under state monopoly. This plan is also known as basic sector planning (these sectors were owned by the private sector till 1944 when France went for their nationalisation). Other economic activities were available to private participation, necessitating a specific type of governmental planning. Both France and Japan have had remarkable success with suggestive planning. The National Plan, which began in 1965 and was abandoned in 1966 after being overtaken by events, was the first attempt at national planning in the UK (a balance of payment crisis resulting in a deflationary package of measures). Since then, the United Kingdom has never gone for planning.
Though the United States was the first to adopt economic planning as a tool for economic advancement (with the Tennessee Valley Authority at the regional level in 1916), it never went for a comprehensive national plan. In the 1940s, some economists advocated for the implementation of national planning. If we look at the Presidential Reports, which occur at regular intervals, we may see a reflex of suggestive planning in the United States.
These reports are just ‘benchmarks’ in the area of resource utilization and government announcements of its goals—basically, they are attempting to urge the private sector to work toward public goals. Any growth target could only be met through suggestive planning, as practiced by the mixed economy, if the public and private sectors cooperated together. This is why, in addition to the plan aims, governments must declare a set of suggested measures to encourage and urge the private sector to accelerate their economic operations toward the plan targets.
Following WWII, practically all newly independent countries followed the path of planned growth. Despite the fact that they followed an overarching paradigm of suggestive planning, several of them had a strong preference for imperative planning. The overwhelming tilt toward imperative planning, like in India, could only be rectified once the economic reform movement began in 1991.
Today, because the globe is dominated by mixed economies, every country’s development planning must be purely suggestive. Following the revival of the role and necessity of the market in promoting growth and development through the Washington Consensus (1985), the World Trade Organisation (1995), and the Santiago/New Consensus (1998), only indicative planning has remained possible, with the state playing only a minor role in the economy, particularly in areas of social importance (nutrition, healthcare, drinking water, education, social security, and so on).
Depending on the point of view we are considering, there are numerous other styles of planning. Planning could be regional or national, for example, from a territorial standpoint. Planning might be central, state, or local from a political standpoint. Similarly, planning has been divided into centralised and decentralised categories in terms of participation.
Planning can be long-term or short-term, depending on the time frame (in relative sense). Likewise, planning can be both sectoral and geographical. While sectoral planning focuses on a single economic sector (such as agriculture, industry, or services), spatial planning focuses on the geographic framework (which seeks to influence how people and activities are distributed in space).
The ‘value system’ of the society—systems and normative planning—is one key classification of planning that has been in the news for the past few years. The systems approach to planning is primarily value-neutral, with a strong focus on economic development. Socio-cultural elements aren’t given much weight in it, and it’s all about achieving the pre-determined objectives.
This became the most popular planning method around the world since it was in line with modern-day democratic ideas such as secularism, equality, and other democratic goals. The most essential aspect of this strategy was that it was socially neutral. Because India’s socio-cultural diversity was so great, such a planning method was ideal. The value-based approach to planning is the normative approach. This planning procedure adheres to the target population’s value system, which is highly diverse in its approach to development.
The world mainly avoided this planning technique, and it was never tested at a macro level until the first decade of the twenty-first century. With the increasing acceptance of behavioural economics, normative approaches are gaining traction around the world. After two major international events—first, the publication of the first World Happiness Report (2012), and second, the World Development Report 2015 (World Bank), with the latter highlighting the importance and impact of including behavioural dimensions of people in formulating public policies—it gained a greater level of recognition among experts and policymakers.
The Government of India’s Economic Survey 2010–11 is the first document to propose for a normative approach to planning in India. It is considered that until a government-run program or scheme can connect with the community’s habits, traditions, and ethos, its acceptability will not be high enough among the target demographic. Establishing an empathetic contact between the programs/schemes and the target population is increasingly regarded as a critical part of policymaking and planning. The experiences of India and other countries throughout the world have influenced this shift in thinking.
The Planning Commission was superseded with the NITl Aayog by the Indian government in January 2015. (a policy think tank). If we look at the new body’s functions and guiding principles, we can see that India has officially shifted to normative planning—the new body must follow a development model that is “all-encompassing, all-inclusive, and holistic.” The NITI Aayog has also been requested to help the country tap into the vigor and energy of the foundations of our ethos, culture, and nourishment as part of this process.
In recent years, we’ve seen the government use nudges to change people’s behavior in order to achieve a targeted socioeconomic outcome aimed at development—that is, utilizing behavioral insights to formulate economic policies. Normative planning encompasses all of these policy initiatives.