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INDIAN ECONOMY
UNIT – 3
Economic planning:
Economic planning refers to a coordinating mechanism outside the mechanisms of
the market. There are various types of planning procedures and different ways of
conducting economic planning. As a coordinating mechanism for socialism and an
alternative to the market, planning is defined as a direct allocation of resources;
contrasted to the indirect allocation of the market.
An economy primarily based on central planning is referred to as a planned
economy. In a centrally planned economy, the allocation of resources is
determined by a comprehensive plan of production which specifies output
requirements. Planning may also take the form of directive planning or indicative
planning.
Most modern economies are mixed economies incorporating various degrees of
markets and planning. A distinction can be made between physical planning (as in
pure socialism) and financial planning (as practiced by governments and private
firms in capitalism). Physical planning involves economic planning and coordination
conducted in terms if disaggregated physical units; whereas financial planning
involves plans formulated in terms of financial units.

Types of Economic Planning

 Directional planning- Directional type of planning followed by countries
which believe in socialism. The targets of plans are pre-
determined and executed with the help of the government in power. In
Directional type of planning all things are under control of the
state including, financial institutions, industrial sector, transport,
infrastructure, etc.
 Planning by inducement- This planning is independent planning. In this
type, the state regulates and controls the process of production, forming
the enterprise and various patterns of consumption. The
government formulates various monetary and fiscal policies to regulate the
Indian economy effectively.
 Perspective planning- Perspective planning is long term planning for a time
period of 20 to 25 years. It’s an outline of development to be
undertaken over a longer period in a phased manner. They can further be
divided into annual plans. These five-year plans generally maintain
continuity.
 Indicative Planning- Indicative planning is a comparatively flexible type (soft
planning) of planning, as it is different from comprehensive or imperative
planning. It works on decentralized principles in the completion of target
plans. In this planning, the targets for the public sector are mandatory while
for the private sector they are only indicative. It was initially used in
countries like France and Japan.
 Imperative Planning- In this, the government in
power directs and controls all the Indian economy activities and resources
in the Indian economy. All available resources are used
with high efficiency to complete set targets of the plan. Since the
government’s decision and policymaking is very rigid, they are to be
followed by the market players. Imperative planning is in use
in Russia and China.
 Democratic planning- The basic ideology in democratic planning is to form
the democratic form of government. Plans are prepared according to
the requirements and needs of the people. The discussion with various
parties involved in the economy is the main principle of democratic planning.
Aim of democratic planning is eradicating inequalities of income and wealth.
 Fixed planning- Plans are prepared for a fixed period of time. The objectives
and targets of a fixed plan are to be achieved within the plan period. Physical
targets and spending on these targets are often not changed except during
an emergency. Fixed planning is used in India.
 Centralized Planning- The centralized authority plans and formulates all
planning activities in the country in centralized planning. This authority fixes
targets for all industries and fixes priorities for all sectors. It takes all the
investment decisions according to the goals and targets set in the plan.
 Decentralized Planning- In decentralized planning, the plans are executed at
grass root level. In this, the plan is prepared by central authority along with
discussion with all the administrative units in the country whether at state
 level or district level. Plans for industries are prepared with full
discussion with all the major representative stakeholders in the industries.

PRE-INDEPENDENCE PLANNING IN INDIAN ECONOMY

 Visvesvaraya published his book “Planned Indian economy” in 1934. In this
book he presented a constructive draft of the development of India in 10
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. This was the first
concrete scholarly work towards planning.
 The Indian economy perspective of India’s freedom movement was
formulated during the Karachi session of INC (1931), Faizpur session of INC
(1936).
 National Planning Committee (1938) – was the first attempt to develop a
national plan for India. This committee was set up by Congress
president Subhash Chandra Bose and was chaired by Jawaharlal
Nehru. However, the reports of the committee could not be prepared and
only for the first time in 1948-49 some papers came out.
 Bombay Plan – In 1944, Industrialists of Bombay including 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 Indian Economy Development for
 India” which was popularly known as Bombay Plan. This plan
envisaged doubling the per capita income in 15 years and tripling the
national income during this period.
 In August 1944, The British Indian government set up a “Planning and
Development Department” under the charge of Ardeshir Dalal. But this
department was abolished in 1946.
 People’s Plan – Plan was based upon Marxist socialism and drafted by M N
Roy. This plan was for a ten-year period and gave greatest priority to
Agriculture. Nationalization of all agriculture and production was the main
feature of this plan.
 Gandhian Plan (1944) – Put forward by Sri Shriman Narayan in 1944 who
was principal of Wardha Commercial College. It was a modest kind of plan.
Plan emphasized economic decentralization with primacy
to rural development by developing cottage industries.
 Sarvodaya Plan (1950) – Plan was drafted by Jaiprakash Narayan inspired by
Gandhian plan as well as Sarvodaya Idea of Vinoba Bhave. It emphasized
small and cotton industries and agriculture as well. Plan also stressed upon
land reforms and decentralized participatory planning.

POST-INDEPENDENCE
 Economic Programme Committee (EPC) – formed by All India Congress
Committee (AICC) with Nehru as its chairman. The aim of this committee was
to make a plan which could balance private and public partnership and urban
and rural economies. The EPC recommended in 1948 to form a permanent
Planning Commission in India.
 In March 1950 in pursuance of declared objectives of the Government, the
Planning Commission was set up by a Resolution, with Jawaharlal Nehru as
the first Chairman of the Planning Commission.
 The Planning Commission was 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.
Democratic Socialism: Nehru was greatly influenced by the
achievements of Soviet Planning; The philosophy was to not only check
the growth of monopolistic tendencies of the private sector but also
provide freedom to the private sector to play for the main objective of
social gain rather than Indian economy gain.
Unpacking the Objectives of Five-Year Plans
GROWTH
 Growth refers to an increase in the country’s capacity to produce the output
of goods and services within the country.
 Good indicator of Indian economic growth is the steady increase in the
country’s Gross Domestic Product (GDP) – the market value of all the goods
and services produced in the country during a year.
 The GDP of a country is derived from the different sectors (Primary,
Secondary and Tertiary) of the Indian economy – the contribution made by
each of these sectors makes up the structural composition of the Indian
economy.
MODERNIZATION
 Steps taken by a factory to increase output by using a new type of machine
and technology is called modernization.
 Modernization also leads to changes in social outlook such as the recognition
that women should have the same rights as men.
SELF RELIANCE
 A nation can promote Indian economy growth and modernization by using
its own resources or by using resources imported from other nations.
 The first seven five-year plans gave importance to self-reliance which
means avoiding imports of those goods which could be produced in India
itself, in order to reduce our dependence on foreign countries, especially for
food.
  There was a fear that dependence on imported food supplies, foreign
technology and foreign capital may make India’s sovereignty vulnerable to
foreign interference in our policies.
 Recently, PM stressed for a self-reliant India (Atma Nirbhar Bharat) in the
backdrop of the Covid-19 outbreak.
EQUITY
 To ensure that the benefits of Indian economy prosperity reach the poor
sections as well instead of being enjoyed only by the rich – every Indian
should be able to meet his or her basic needs such as food, a decent house,
education and health care; and reducing inequality in the distribution of
wealth.

Building the Indian Economy: The Simplified Nehru-Mahalanobis

Model
 The turning point in India’s planning strategy came with the second five-
year (1956- 61) plan.
 The model adopted for the plan is known as the Nehru-Mahalanobis
strategy of development as it was articulated by Jawahar Lal
Nehru’s vision and P.C. Mahalanobis was its chief architect.
 The Mahalanobis model of growth was based on the predominance of the
basic goods (Capital goods or investment goods that are used to make
further goods).
 It was based on the premise that it would attract all round investment and
result in a higher rate of growth of output in the Indian Economy.
 That will develop a small scale and ancillary industry to boost employment
generation, poverty alleviation, exports etc.
Other elements of the model were –
 Import substitution – Protective barriers against foreign competition to
enable Indian companies to develop domestically produced alternatives for
imported goods.
  A sizable public sector active in vital areas of the Indian economy including
atomic energy and rail transport.
 A vibrant small-scale sector driving consumer goods production for
dispersed and equitable growth and producing entrepreneurs.
Model Effects: Impacts on the Indian Economy
 In terms of the core objective of raising the rate of growth of industrial
production, the strategy was successful.
 Rate of growth of overall industrial production picked up.
 The strategy laid the foundation for a well-diversified industrial
structure within a reasonably short period and this was a major achievement
in the Indian Economy.
 It gave the base for self-reliance.
Criticism –
 Visible imbalances between the growth of the heavy industry sector and
other spheres like agriculture and consumer goods etc.
 It heavily relied on trickle-down effects. The benefits of growth will flow to
all sections in course of time in the Indian Economy.
 Eradication of poverty is slow and incremental.

Strategy for Indian Economy – RAO-MANMOHAN SINGH MODEL OF

GROWTH
Indian Economy reforms since 1991 are based upon Rao-Manmohan model
(Narsimha Rao – PM and Manmohan Singh – Finance minister)
Features of model
 Selectively dismantle controls and permits in order to permit the private
sector to invest liberally.
 Reorient the role of the state in Indian economy management. State should
refocus on social and infrastructural development.
  External sector liberalization in order to integrate the Indian economy with
the global economy to benefit from the resource flow and competition.
 Open up the Indian economy and create competition for PSEs – for better
profitability, productivity and efficiency.
 Forex reserves accumulation thus alleviating the BoP pressures and the
foreign flows – FDI and FII increased. Indian economy became competitive.
 Its success is seen in the more than 6.5% average annual rate of growth of
the Indian economy during the 8th Plan (1992-1997). Forex reserves
accumulated leaving the BOP crisis in history; taming of inflation; and the
foreign flows- FDI and FII increased.

Five-Year Plans: Duration and Performance Analysis in Indian Economy

  Duration – from 2012 to 2017.
 Objective – “Faster, More Inclusive and sustainable growth”
 Growth rate target is 9%.
 Broad Objectives of 12th Five Year Plan
1. To reduce poverty
2. To improve regional equality across states and within states
3. To improve living conditions for SCs, STs, OBCs, Minorities
4. To generate attractive employment opportunities for Indian youth.
5. To eliminate gender gaps.
 Economic Growth
1. Real GDP Growth Rate of 8.0 per cent.
2. Agriculture Growth Rate of 4.0 per cent.
3. Manufacturing Growth Rate of 10 per cent.
4. Every State must have an average growth rate in the Twelfth Plan preferably higher
Twelfth than
Five
Year that achieved in the Eleventh Plan.
Plan  Head-count ratio of consumption poverty to be reduced by 10
percentage points over the
preceding estimates by the end of Twelfth FYP.
 Mean Years of Schooling to increase to seven years by the end of Twelfth FYP.
 Reduce IMR to 25 and MMR to 1 per 1,000 live births, and improve Child Sex Ratio
(0–6 years) to 950 by the end of the Twelfth FYP.
 Reduce Total Fertility Rate to 2.1 by the end of Twelfth FYP.
 Increase green cover (as measured by satellite imagery) by 1 million hectare every
year
during the Twelfth FYP.
 Increase investment in infrastructure as a percentage of GDP to 9 per cent by the
end of
Twelfth FYP
 Provide access to banking services to 90 per cent Indian households by the end of
Twelfth FYP.

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Unnati Agarwal
(Assistant Professor)