Concept of Economic Planning

Economic planning has become a craze in modern times in developing countries. It acquired a tremendous support after the end of World War II when advanced but disrupted economies had to be rehabilitated and the under-developed economies were fired with the ambition of rapid economic development. Planning has become popular due to basic defects of capitalism and free enterprises and owing to the realization that, unless a free enterprise economy is regulated and controlled, it would not ensure stable growth or maximise social welfare. For the developing countries like India, economic planning is a sine qua non for acceleration of growth, alleviation of regional and sectoral disparities and mobilisation of public and private resources in desired channels. Although both the advanced and the under developing countries follow economic planning, but planning in advanced countries is corrective in nature made to ensure economic stability while in developing countries, it is developmental planning made to ensure rapid growth. Meaning of planning Planning may be defined as the conscious and deliberate choice of economic priorities by some public authority. It is the making of major economic decisionswhat and how much 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 economic system as a whole. Planning is a mechanism for coordinating economic decisions. In the word of the Second Five -Year Plan of India, economic planning is essentially a way of organising and utilising resources to maximise advantage in terms of defined social ends. The two main constituents of the concept of planning are: a system of ends to be pursued and knowledge as to the available resources and their optimum allocations. Thus, planning, in short, may be defined as conceiving, initiating, regulating and controlling economic activity by the State according to set priorities with a view to achieving well-defined objectives within a given time. The main steps of planning are: 1. formulation of objectives or goals; 2. fixing targets to be achieved and priorities of production of each sector of the economy; 3. mobilisation of the financial and other resources required for the execution of the plan; 4. creation of the necessary organisation or agency for execution of the plan; and 5. creating assessment machinery for assessing the progress made. Forms of Planning 1. Authoritarian and Democratic Planning In authoritarian planning, government is the sole centralised agency, which draws the plan and implement it. It is more comprehensive, systematic, rigid and efficient. In democratic planning, the plan is prepared by an expert body called planning commission which is outside the government or the executive and is finally approved by legislature which represents the people. It is based on the system of free enterprise, but economic

activity outside the public sector is sought to be regulated and guided indirectly by providing incentives for investment through fiscal and monetary policies. 2. Planning by Inducement and Planning by Direction Planning by inducement is often referred to indicative planning. In this type of planning, the planner either subsidises production or control prices, if it is intended to increase the consumption of a commodity. The first acts on the supply side and the latter on the demand side. Cheaper price is an inducement for the consumer and subsidy is an inducement to the producer. This is planning through the market mechanism. The basic idea is that the market controls the entrepreneur and the state can control the entrepreneur by controlling the market. The state tries to manipulate the market by means of incentives and inducements through price fixation, taxation and subsidies. The government seeks to influence economic and investment decisions by offering incentives to entrepreneurs via fiscal and monetary policies but does not control or regulate directly the functioning of the economy. Thus, it is planning by persuasion rather than compulsion. There is freedom of enterprise, freedom of production and consumption subject to some regulation or control. However, there are writers who are not ready to consider the indicative planning as planning in true sense as there can be no planning without direct order or directions. Planning by direction is very comprehensive. It covers the entire economy. There is complete concentration of economic authority in the state. There is one authority, which is in sole charge of planning, directing, and execution of the plan in accordance with the pre-determined targets and priorities. Only planning by direction can guarantee the success of the plan, otherwise the target would turn out to be mere pious wishes. Planning by direction implies detailed instructions being given both to producers and consumers. A list of all commodities to be produced with the quantity of each has to be prepared. 3. Centralised and Decentralised Planning Centralised planning is done from the top. Each citizen, producer or consumer has simply to carry out the instructions or the job or duty assigned to him. The apex planning body makes centralized plan. In India centralized plans are prepared by the Planning Commission and approved by the parliament. Central authority executes the plan through its subordinate staff. In case of decentralized planning, plan is prepared from the grassroots level. For instance, each village panchayat may be asked to prepare a plan for the economic development of the village and each industry may be asked to prepare its own plan. Out of these plans, an integrated plan may then be evolved. Under Centralised planning, the higher authority delegates the power the lower governments or lower bureaucracy to execute and implement plans at state, district or block level, while under decentralized planning, power to make plan is devolved to lower level government. The lower government works as a coordinate not subordinate to higher government in decentralized planning. 4. Physical and Financial Planning In physical planning, the planning authority has to work out how much land, materials, capital equipment will be required to implement the plan and achieve the

targets set out for it. As stated in the Second Five-Year Plan, physical planning is an attempt to work out the implication of the development effort in terms of factor allocation and product yields so as to maximise income and employment. It is an input-output analysis. In physical planning, the planners have to determine not only the amount of investment but also work out its composition in terms of the various goods and services required to obtain a certain increase of output of product. Thus in physical planning, we make an overall assessment of the available real resources like raw materials, manpower, and capital equipment and devise ways and means to mobilise them for achieving the targeted output. These targets are laid in physical terms e.g. so many tons of steel, food grains, coal, etc. In case of financial planning, the planners determine how much money will have to be invested in order to achieve the pre-determined objectives or targets. Total outlay is fixed in terms of money on the basis of growth rate to be achieved, the various targets of production, estimates of the required quantity of consumer goods and the various services, expenditure on the necessary infrastructure, etc., as well as revenue from taxation, borrowings and savings. This money is then used to mobilise the required resources. There has, thus, to be integration between physical and financial planning. Objectives of Planning Achieving full employment Maximisation of National income and raising standard of living of common masses Rural industrialisation Self-sufficiency in food and raw materials Reduction of inequalities Reduction of regional imbalances

Concept of Stock and Flow

A measurement of quantity of any commodity or money or assets at a point of time is called stock, while a measurement of quantity over a specific period of time is called stock. Unlike stock that is not a function of time, a flow measures quantity passing per minute, hour, day or whatever. A common analogy is to a reservoir. The water entering and leaving the reservoir is a flow, but that water actually in the reservoir at any one point of time is a stock. For example, income is a flow and wealth is a stock.