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ECONOMIC PLANNING

Economic Planning refers to the path of actions in terms of policy measures to be followed in future in pursuance of
predetermined objectives. As defined by the planning commission, economic planning is the utilization of the country's
resources for development activities in accordance with national priorities. It is a conscious and judiciously carried out
process for optimum utilization of existing resources in order to fulfill some well defined objectives.

Types of planning
Planning can be categorized into various categories on the basis of the following:

1. Role of the government


(a) Imperative Planning
It is also known as directive / totalitarian / authoritarian planning or planning by direction/ command. Under imperative
planning, the central planning authority decides about each and every aspect of the economy. The targets set and the
processes delineated to achieve them are to be strictly followed. This type of planning is generally practiced in the
socialist economies.
(b) Planning by inducement .
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Under such kind of planning, state regulates the private sector through the use of 'various incentives and disincentives
(i.e. fiscal, monetary and industrial policy measures), so that the private sector may cooperate in fulfilling the targets
and priorities of the plan. This kind of planning is generally practiced in mixed economies.
(c) Indicative Planning
It is also known as soft or facilitatory planning. Under it, state sets broad parameters and goals for the economy and
endeavours to achieve them through persuasion and facilitation. The state provides all types of facilities to the private
sector and indicates the areas, in which it can help in implementing the plan. It is based on French model of planning
and generally practiced in capitalistic economics. It has been pursued in India since the eighth five year plan.

2. Extent of people's participation


(a) Centralised Planning
Under centralised planning, there is a central planning authority which formulates the plan, fix objectives, targets and
priorities for every sector of the economy. There is a central control arid all economic activities are directed in
accordance with a single plan.
(b) Decentralised Planning
It is also known as democratic planning, planning from below, and grass root planning. A decentralized plan is
characterized by the widest possible consultations with the various state governments and the private sector at the
stage of formulation and implementation of the plan. The central plan incorporates plans under the central schemes
and plans for the states as well as the district and village level plans.
3. On the basis of time period.
(a) Perspective Planning
The term perspective planning refers to the long term planning in which long range targets are set in advance for a
period of 15, 20 or 25 years. It sets broader objectives and targets which are to be achieved in various short period
plans.
(b) Medium and short term Planning
Medium term plans set the targets for a period of 4, 5 or 6 years while short term plans are the annual plans which
deals with precise targets of one year duration. A perspective plan provides a background to the short term plans.

4. On the basis of mode of resource allocation


(a) Physical Planning
In Physical planning, an overall assessment is made of the available real resources such as raw materials, manpower
etc. Such resources are then allocated among various sectors of the economy, so that bottlenecks may not appear
during the working of the plan.
(b) Financial Planning
In financial planning, resources are estimated and allocated in terms, of money. The Indian Planning Commission
pointed out that "The essence 'of financial planning is to ensure that demand and supply are matched in a manner
which exploits physical potentialities as fully as possible without major and unplanned changes in the price structure.

5. On the basis of flexibility or rigidity


(a) Rolling Plan
In a rolling plan, every year three new plans are made and acted upon. First, a short term plan is formulated for the
current year in the form of annual budgets. Second, there is a medium term plan which contains targets and
techniques to be followed during the plan period. Third, a perspective plan is presented every year in which the

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broader goals are stated and the outlines of future development and forecast. It is a continuous planning process as
the plan is revised every year in the light of new information.
Rolling plan was introduced in India by the Janta Government in 1978 as the sixth Five Year Plan (1978-1983). But the
congress government abandoned it in 1980 and relaunched the sixth five year plan (1980-85) as a fixed plan.
(b) Fixed Plan
A fixed plan lays down definite aims and objectives which are required to be achieved during the plan period, say 4, 5,
6 or 7 years. Physical targets and financial outlays are seldom changed except under emergencies.

Economic Systems
The nature and scope of planning is largely determined by the nature of the economic system
in which it is practiced. Economies can be classified into the following categories:
1. Socialist Economy : It is characterized by the existence of public enterprise or state ownership of capital in all the
important spheres of the economic activity. All important economic decisions are undertaken by the planning authority.
Such economies generally pursue planning by direction or imperative planning. .
2. Capitalistic Economy : It is characterised by the existence of private enterprise and ownership of all important
means of production. Resources are allocated by the operation of the price mechanism by which' buyers and sellers
determine what goods and services will be bought and sold in the market, in what quantities and at what prices. Such
economies generally pursue indicative planning, as the role of planning authority and government is minimal.
3. Mixed Economy : It is characterized-by the presence of the features of socialism as well as that of capitalism i.e.
public sector co-exist with the private sector. Resources are allocated on the basis of the modified price mechanism,
that is on the basis of demand and supply with selective government intervention. Such economies generally pursue
planning by inducement i.e. government regulates the activities of the private sector through persuasive measures like
tax holidays, subsidies etc.
4. Communist Economy : It is an extreme form of a socialist economy in which all means of production are owned
and operated by the state and private property is not allowed. It is modeled on the notion of the Karl Marx i.e. "from
each according to his ability, to each according to his needs." Socialism is said to be the preparatory stage to the
attainment of a communist society but it has not yet established in any of the socialist country.

Features of Indian Planning


The important characteristics of the economic planning in India are as follows :
(1) Indicative Planning : Indian planning has assumed indicative character since the Eighth Five Year Plan (1992-97)
(2) Decentralised and Democratic Planning : People are involved at various stages of preparation and
implementation of the plans.
(3) Comprehensive Planning : Planning process encompasses each and every sector of the Indian economy.
.(4) Physical and Financial Planning: Resources are assessed and allocated in both real
;
and money terms.
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(5) Perspective Planning : The five year plans sets objectives and targets beyond the plan period eg. the 10 plan sets
certain targets to be accomplished by 2012.

Core Plan : The concept of core plan enables the planning authority in formulating effective plans through realistic
assessment of the resources. Under a core plan, the Planning Commission asks the states to submit their projected
revenue estimates. On the basis of these estimates, Planning Commission determines the expenditure, heads for state
Annual Plans.

Ideas on Planning before Independence


 Dr. M. Visvesvaraya made a landmark in the history of economic planning by writing a book entitled, Planned
Economy for India, in 1934.
 The National Planning Committee was set up in 1938 under the chairmanship of late Pandit Jawahar Lai
Nehru. It prepared a draft outline of the economic progress of the country
• Bombay Plan was prepared by eight prominent businessmen of the country in 1944.
 People's Plan was prepared by Shri M.N Roy in the year 1944.
 Inspired by economic views of Mahatma Gandhi, Shri Shriman Narayan constructed a 'Gandhian Plan in the
same year (i.e. 1944)
 However, none of these plans could materialize because of the indifferent attitude of the foreign rulers.

Planning in India

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The era of economic planning started in India on April 1, 1951 when the First Five Year Plan was launched, since then
nine Five Year Plans have been completed besides seven years of break in the form of Annual Plans/The country has
now entered the Tenth Five Year Plan period.
The country has now entered the Tenth Five Year Plan period have been completed besides seven years of break in
the form of Annual Plans/The country has now entered the Tenth Five Year Plan period.

Planning Commission

The Planning Commission is an extra- constitutional and non-statutory body set up on 15th March, 1950 by a
government resolution. It was constituted as an advisory body to the Union Government for the formulation of plans.
The main function of the commission is to estimate the resources and to prepare a plan for the most effective and
balanced utilization of the country's resources. The prime minister is its ex-officio chairman. The tenure of its members
and vice-chairman is not fixed. There is no qualification for its members. The number of its members as well as their
appointment and removal depends on the discretion of the government.

Planning Commission reconstituted (as on 06.06.2009 )


Chairman: Dr. Manmohan Singh (Prime Minister)
Vice-chairman: Dr. Montek Singh Ahluwalia (Economist)
Members
B K Chaturvedi , Prof. Abhijit Sen Continuing ,Dr.(Ms.) Syeda Hameed, Arun Maira , Mihir Shah , K.Kasturirangan ,
Narendra Jadhav , Saumitra Chaudhuri

National Development Council (NDC)


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The National Development Council (NDC) was constituted on 6 August, 1952 as an adjunct to the Planning
Commission to associate the states in the formulation of plans. The NDC is also an extra-constitutional body. Its main
function is to provide suggestions to the Planning Commission regarding the formulation of plans, to give final shape to
the plans arid to evaluate their implementation. A plan is published only after its ratification by the NDC.
The Prime Minister is its ex-officio chairman and the secretary of the Planning Commission serves as its secretary. In
the beginning, only the chief ministers of the states were its members, but after 1967 all the ministers of the Union
Cabinet, administrators of the states ruled by the centre and all the members of the planning commission were
included as its members.

Goals of Planning
Planning in India derives its objectives from the Directive Principles of State Policy enshrined in the
constitution. Goals and objectives of planning can be summerised into two categories i.e. short-term and long term
goals. Short term goals of a plan refers to the immediate and most important targets which a particular plan
endeavours to achieve. Such goals , are called focus of plan as they reflect the strategy of a particular plan. On the
other hand, long-term objectives of planning are the general guiding principles of the planning process and reflects the
aspirations of a welfare state. The long term objectives of planning in India have been more or less same in almost all
the Five-Year Plan and as follows:
(1) To accelerate the pace of economic growth in order to raise the standard of living of the people. That is to achieve
higher levels of national income and per capita income.
(2) To achieve self-reliance in respect of the production of foodgrains, development of basic industries, technological
know-how and foreign exchange earnings. It aims to eliminate
; vulnerability of the Indian economy to international pressures and disturbances.
(3) To ensure social justice to the people by eliminating , poverty, unemployment and inequalities of income and
wealth.
(4) To modernize the economy by bringing about structural and institutional changes in the framework of economic
activity.
Self sufficiency and self-reliance: Self sufficiency implies that a country produces all commodities it requires within the
country without having to import them while self -reliance implies that a country has sufficient foreign exchange
reserves to pay for its imports.

Review of Planning

FIRST PLAN (1951 to 1956)


Focus : Agriculture and Community Development Projects
The first five-year Plan aims to reconstruct the economy, stimulate economic growth, control inflation and resolve food
crisis. It accorded highest priority to agriculture including irrigation and power projects and launched community
development projects.
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SECOND PLAN (1956-61)
Focus : Rapid industrialisation based or heavy and basic industries.
It is based on the model prepared by Prof. PC. Mahalanobis. Its strategy was to give a big push to the economy
through the development of heavy industries in the public sector. It adopted 'socialistic pattern of society as a goal of
planning.

THIRD PLAN (1961-66)


Focus : Self-reliance in food grains and industrialisation.
This plan aims at making India a self-reliant and self-generating economy. It envisages to further the process of
industrialization along with emphasis on foodgrains production. It achieved a low growth rate due to various adverse
factors like the Indo-China war of 1962, Indo-Pak war of 1965 and severe drought conditions.
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Plan Holiday (1966-69)
On account of the adverse economic situation, government postponed the fourth plan and declared 'plan holiday'.
During this period three annual plans were prepared to stabilize the economy. Green revolution and intensive area
development programme were launched during this period.

FOURTH PLAN (1969-74)


Focus : Growth with stability and self-reliance.
It aims to reduce fluctuations in agricultural production and the impact of uncertainties of foreign aid. It encouraged the
production of commodities of general consumption and controlled the expansion of money supply to curb inflation.
FIFTH PLAN (1974-78)
Focus : Removal of poverty and achieve self-reliance
The plan aims to achieve self-reliance in foreign exchange reserves through export promotion and import substitution.
To raise the consumption, standard of the people below the poverty line, the National Programme .of Minimum Needs
was launched, which included provision of drinking water, primary education, medical facilities etc.
The Rolling Plan-(1978-80):
Janta Government terminated the fifth plan a year in advance and launched a rolling plan as sixth plan. But it was
terminated by the congress government in 1980.

SIXTH PLAN (1980-85)


Focus : Removal of poverty, employment generation and technological self-reliance.
The plan envisages to modernize the economy in order to increase the efficiency of utilization of resources and to
increase productivity. Major employment generation programmes were launched during the plan period.

SEVENTH PLAN (1985-90)


Focus : Food, work and productivity.
This plan emphasized policies and programme which aimed at rapid growth, in foodgrains production, increased
employment-opportunities and productivity within the framework of basic tenets of planning i.e. growth, modernization,
self-reliance and social justice.

Plan Holiday (1990-92)


Launch of the eighth plan was postponed for two years by the government due to economic crises and political
instability at the centre .The macro economic condition of the economy deteriorated in late 1980s due to high fiscal
deficits, poor performance of the public sector enterprises and severe inflation. Some adverse international
developments like Gulf War, rise in international crude oil prices and disintegration of the former USSR precipitated
the crises.
In order to overcome the crises, the government of India had to seek financial, assistance from the
International Monetary Fund (IMF) and the World Bank. The desired assistance was provided under certain conditions,
under which the government was obliged to implement stabilization and structured adjustment progamme (SAP).

EIGHTH PLAN (l992-97)


Focus : Growth with a human face
The plan envisages to reorient the nature of planning process from centralized to an indicative type in accordance with
the economic reforms of 1991. The plan emphasized on human development, larger role for the private sector,
development of infrastructure and greater role of markets to infuse economic efficiency.

NINTH PLAN (1997-20.02)


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Focus : Growth with social justice and equity.
The plan seeks to carry forward the economic reforms programme of 1991.
The specific objectives of the Ninth ;Plan included : (i) priority to agriculture and rural development with a view of
generating adequate productive employment and eradication of poverty; (ii) accelerating the. growth rate of the
economy with stable prices; (iii) ensuring food and nutritional security for all, particularly the vulnerable sections of
society. The plans delineated the following three areas where markets are likely to be imperfect and hence, state
intervention is desirable, viz. Quality of life of citizens, Generation of productive employment, Regional balance.

TENTH PLAN (2002-2007)


The plan has set monitorable targets for a few key indicators of human development and broad objectives as well as
the macro-economic targets. It has also outlined the policy approach for achieving various objectives and targets.
Objectives : Doubling per-capita income in next 10 years, Enhancement of well being, To ensure equity, social
justice and sustainability, Increasing high quality employment opportunities, Containment of population and
conservation of environment, Reduce inter-state inequalities, etc.

ELEVENTH FIVE YEAR PLAN (2007-12)


The National Development Council at its 54th meeting on December 19, 2007, adopted the
Eleventh Five Year Plan starting from 2007-08. The Eleventh Five Year Plan builds on the strength of average growth
of 7.8 per cent of GDP achieved in the Tenth Five Year Plan period, the highest in any plan period so far, and targets
an average growth of 9 per cent during the Plan. The Planning Commission projects an increase in public sector
resources for the Plan from 9.46 per cent of GDP in the Tenth Five Year Plan to 13.54 per cent in the Eleventh Five
Year Plan. The Plan highlights that this depends critically on achievement of buoyancy in tax revenue, effective control
over consumption expenditure and subsidies, and an improvement in the resource mobilizing capacity of PSUs both at
the Central level and at the State level. It notes that developments like implementation of FRBM Act, 2003, the Twelfth
Finance Commission (TFC) award for 2005-10, emergence of service tax as a very promising source of revenue, Sixth
Central Pay Commission award (forthcoming) and the proposed unified Goods and Service Tax (GST) (from April 1,
2010) will have implications on financing of the Eleventh Five Year Plan.
The Centre’s Gross Budgetary Support (GBS) for the Eleventh Five Year Plan is estimated at Rs. 14,21,711 crore at
2006-07 prices, out of which Central assistance to States and UTs plan works out to Rs. 3,24,851 crore. IEBR of
CPSUs is estimated at Rs.10,59,711 crore. Total resources available for the Central Plan are projected at Rs.
21,56,571 crore. Plan resources of States & UTs have been projected to be Rs.14,88,147 crore at 2006-07 prices.As
per the Eleventh Five Year Plan document, the most notable feature of the Eleventh Five Year Plan projections is
relatively modest dependence on borrowings amounting to 38.9 per cent of the
total plan resources compared with 73.9 per cent in the Tenth Five Year Plan realization.
The Eleventh Five Year Plan focuses on poverty reduction, ensuring access to basic physical infrastructure, and
better access to health and education services, while giving importance to
bridging regional, social and gender disparities. The allocation of the outlays of the Eleventh Five
Year Plan to various sectors has been in terms of the sectoral priorities. It indicates a substantial increase, over the
Tenth Five Year Plan, in the combined Centre and States allocations, of public sector resources for social services,
energy, industry and agriculture.

SECTORAL ALLOCATION OF THE PLAN RESOURCES

S. No. Sector Allocation in Rs.


crore
1 Social Services 1102327
2 Energy 854123
3 Transport 572443
4 Rural Development 301069
5 Irrigation 210326
6 Industry 153599
7 Agriculture 136382
8 Communication 95380
9 Science and Technology 87933
10 Other Economic Services 62523
11 General Services 42283
12 Area Programmes 26329
Total 3644718
Source: Planning Commission

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FUNDING OF THE PLAN

S.No. Sources of Funding Rs. crore at 2006-07


prices
1 Borrowings including net 1417145 (38.9%)
MCR 1188535 (32.6%)
2 Resources of PSE’s 1039039 (28.5%)
3 Balance from Current
Revenues
Total 3644718 (100%)

Macroeconomic Parameters
S. Parameters Tenth Plan Eleventh Plan (Target)
No. (Actual)
1 Investment Rate (% of GDP) 32.4 36.7
2 Saving Rate(% of GDP) 30.9 34.8
3 Current Account Deficit(% of GDP) 1.5 1.9
4 ICOR 4.3 4.1
5 GDP Growth(% per annum) 7.8 9.0

ECONOMIC REFORMS

The entire period of economic planning in India can be divided into two different phases - the first phase
spreading over the plan period from 1950-51 to 1990; while the second phase commences from 1991. The first phase
laid down the basic objectives and strategies of development while the second phase showed a significant shift in the
original objectives and strategies of planning leading to economic reforms.

FIRST GENERATION REFORMS


The Economic Reforms of 1991 or the New Economic Policy is a complete reversal of the previous policies.
These economic reforms were based on three premises - liberalization, privatization and globalization (LPG). These
reforms seek to free the Indian economy from undue controls, give greater freedom to the more efficient private sector
and integrate the Indian economy with the world economy. These reforms aimed at putting an end to the government’s
license, quota and permit (LQP) raj by initiating the LPG mantra.

Economic Liberalization: It implies providing greater freedom to economic agents to take their
own economic decisions. It generally means leaving the economy to free market forces with least
government interference.
Privatization: It implies providing a greater role to private capital and enterprise in the functioning
of an economy
Globalisation: It implies increasing the integration of an economy with the world economy. It is
achieved by removing the restrictions on the movement of goods and services, capital,
technology and people across nations.

Salient features of the New Economic Policy


The economic reforms (First Generation Reforms) introduced the following policy changes:
• Delicensing : Industrial licensing system has been abolished for most of the industries.
• Dereservation : The industries which were exclusively reserved for the public sector were dereserved except for a
few.
• Deregulation: The industrial laws like Monopolies and Restrictive Trade Practices (MRTP) Act, Industrial Disputes Act
etc. were amended to ease restrictions on economic units.
• Disinvestment: The government, proposed to sell the government equity (share capital) in certain public sector units
(PSUs) to the private sector.
• Easing of trade barriers: The restrictions on imports and exports were removed and tariffs were lowered.
• Encouragement to foreign capital and technology: Restriction on the operations of the multinational corporations
(MNCs) was removed and Foreign Exchange Regulation Act (FERA) was replaced by Foreign Exchange Management
Act (FEMA) to allow freer inflow of foreign investments.
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• Taxation reforms: The tax rates and tax slabs were rationalized, taxation system was simplified and the loopholes in
the administration were plugged.
• Fiscal Reforms: The government enacted the Fiscal Responsibility and Budget Management Act (FRBMA) and
reduced the non-plan expenditure to reduce budgetary deficits.
• Banking Reforms: The interest rate structure was deregulated, foreign banks were allowed to establish their branches
in India, and greater autonomy was provided to the banks.

SECOND GENERATION REFORMS


Economic reforms programme that began under the Rao-Manmohan Model of the economic reforms in 1991
aimed at delicensing and decontrolling vital sectors of the economy. It involved abolishing industrial licensing, opening
of trade, disinvestment and privatization, tax reforms, private financing of infrastructure like power and telecom etc.
The 1991 policy had two parts firstly to extricate the economy out of the deep macroeconomic morass by undertaking
‘stabilisation measures’ and secondly to bring about certain ‘structural changes’ in the economy. The first step was
mainly a short-term measure while the second was generally of the nature of medium to long term and designed to
free the supply side of the economy. They were implemented with intent to remove those microeconomic market
imperfections that were created largely by the long state intervention.
These reforms have, however, left the factor markets such as labour market, capital market, natural- resources
etc. mostly untouched. The aim of the second generation reforms is to bring reform into these areas. The name,
‘second generation does not imply that we have successfully completed the first generation of reforms and should
move to the next higher level.
Infact, the two generations of reforms are overlapping. Such reforms are complementary as well as supplementary to
the First Generation Reforms. So, the second generation reforms have two dimensions i.e. to carry forward first
generation reforms and to initiate reforms in new areas.
I. Carry forward first generation reforms
(a) Banking Sector Reforms: Such reforms should be extended to encompass the entire financial sector. Reforms
should be initiated in money and capital markets in the form of dematerialization, corporatisation and demutualization
of stock exchanges.
(b) Taxation reforms: CENVAT should be converted into full-fledged VAT. Reforms should also be extended to the
fiscal policy like reduction of the public expenditure, containing of deficits and government borrowings, downsizing
government staff etc.
(c) Trade policy reforms: External sector should be further liberalized by reducing the trade barriers and liberalizing
the forex regulation and introduction of the capital account convertibility.
(d) Industrial Sector: Industry should be further deregulated by adopting liberal competition policies, dereservation for
SSI, privatization and strategic disinvestment.
II. Initiation of reforms in new areas
(a) Labour sector reforms: At present firms have no flexibility to downsize when needed and to restructure and
reorganize business through sale, acquisition and merger. Although the intention behind these laws was to protect
employment but it actually discouraged growth of new employment. Reforms are therefore needed in labour laws.
(b) Agricultural sector reforms: Such reforms aimed at liberalizing agri-trade by lifting restrictions on the movement,
storage, transportation of agricultural commodities within the country. Agriculture should be accorded the status of
industry by ensuring .flow of institutional credit and other inputs.
(c) Extending reforms to the states: All the basic services such as education, health are delivered at the state level.
The state government needs administrative reforms to improve its performance and accountability for better utilisation
of the available resources.
(d) Legal reforms: Laws should ensure effective enforcement of the contractual rights and obligations. The laws should
be clear and transparent, procedures must be speedy and judiciary should be independent of politics. Further reforms
should be backed by appropriate legislations like Fiscal Responsibility and Budget Management Act, Competition Act,
Insolvency Act .etc.
(e) Institutional reforms: It involves setting up regulatory bodies in sectors where government control is given up and
private players are invited like in power, telecom, and insurance sectors.
Second generation reforms initiated in late 1990's was based on general agreement that the process of economic
reforms must be strengthened and deepened. These reforms intensified the process of Liberlisation, Privatisation and
Globalisation (LPG).

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