Essay on Economic Planning in India

Essay on Economic Planning in India!

Plan Formulation Vs. Implementation: Conflict between Growth and Equity:

1. Continuing Unemployment:

In India, achievement of growth did not ensure full development nor did it lead to removal of poverty, which have consistently been the goals of economic planning. Mainly due to implementation failure, there was more unemployment at the end than at the beginning of each Plan. The consequence of continuing unemployment was a larger growth rate and perpetuation of poverty.

2. Population Exploising:

The strategy of eradicating poverty through growth has largely failed as the number of the poor in proportion to the total population has kept on increasing. Faced with growing poverty, the poor are increasingly losing faith in Plan premises.

3. Growing Inequality:

Another fact of poverty is inequality in income and wealth distribution and concentration of economic power in the private corporate sector. The egalitarian policies to narrow down inequalities in income and wealth have largely failed, as is evident from the deteriorating share of the bottom 20% households in the nation’s income and consumption expenditures, as also in rural and urban areas.

Even after nearly 60 (1951-2008) years of planning there is an economic polarisation between classes, with the rich living in luxury, using goods and services sought often in the developed Western world, and the poor saddled with living standards that are unbelievably low.

The striking contrast between the rich and the poor in India is unparalleled in any civilized society. In the face of glaring inequalities, it is the non- poor classes which have been the major beneficiary of most of the policies ostensibly adopted for the benefit of the poor. The pattern of resource allocation is clearly in favour of producing goods and services for the rich, rather than for the poor. All these indicators make the ‘Garibi Hatao’ slogan a farce.

Formulation of a correct economic policy is one thing, and its implementation quite another. In India, there has all along been a wide gap between planned policies and their actual implementation. Consequently, it is widely held that Indian Plans are ‘political documents’ or ‘statements of hope’ and were no longer arouse enthusiasm among the general public.

Compliance with existing laws and regulations can go a long way in achieving the goals of economic planning, including equality in income and wealth distribution. There can be no social justice for the weaker sections if the executors of egalitarian policies have a vested interest in retaining their social and economic power. The foremost task ahead before the nation is enforcement of law, and narrowing down the gap between a Plan and its implementation.

The Role of Planning in a Liberalised Economy:

Planning is, no doubt, a programme of action regarding the future. It is also a technique of managing an economy. It is an instrument for controlling the private sector of the economy. India has adopted a programme of planned economic development since 1951. However, in spite of planning, India has not achieved satisfactory growth in the first four decades of planning (1951-91).

It has also failed to alleviate poverty and ensure equity. Moreover, the poor performance of the controlled planned economy ultimately led to a collapse (in 1989) of socialism in the erstwhile Soviet Union and, since then, several East European countries.

In India, after several years of poor growth performance, a crisis situation developed in May, 1991. And the Government adopted a policy of economic liberalisation in June 1991, by removing some controls and relaxing others.

This virtually amounted to a partial departure from planning and a bold step toward a market based economy. Planning was no longer considered to be a technique of controlling the private sector of the economy. It was just taken as a broad framework for guiding the economy in the desired direction.

Failure of Planning:

India’s Plans have failed to achieve their basic goals. The economic conditions of the poor have not improved much in the first four decades of planning. So, planning had lost its relevance to the masses who most probably had have lost faith in planning. This is why the 8th Plan (1992-97) generated hardly any excitement unlike the first Seven Plans. The reason was not that the Eight Plan was bad compared to the earlier Plans.

The same was true for the Ninth Plan (1997-2002). Both were good Plans, at least on paper. But in reality, they left much to be denied. Since, no Plan is effective without active support and participation of the people at the grass root level, planning has lost its relevance. Planning no longer seems important. So, it generates no hope, and no longer excites imagination.

Neglect of Policies:

Planners themselves are responsible for this disillusionment with planning. In the past, all Plans have emphasised the need for official allocation of resources. This preoccupation with allocative efficiency and optimality, along with a neglect of policies, has resulted in such inefficiency of resource use that India’s growth performance in the first four decades (1951 -90) of planning left much to be desired.

It was felt that much higher growth rate could have been achieved if simple economic policies were followed. What was even more distressing was that the growth performance has been poor despite consistent rise in both saving and investment rates.

Planning did not ensure equity or distributive justice either. No doubt various efforts were made to eradicate poverty but the results of these efforts were not satisfactory. Poverty persists in abundant measures even today.

Thus, the main reason for disillusionment with planning is the perpetuation of poverty in an economy, where the growth performance itself has been dismal. Most planners stressed import substitution, self-reliance and dominant role of the state and the public sector. But they have failed in fulfilling the objectives of poverty alleviation and satisfaction of basic needs.

Resource Allocation through Markets:

The failure of planning in bringing redistribution with growth brought into focus the importance of efficiency not only in the allocation but also in the use of resources. It was felt in the early 1990s that market mechanism and competition could attain these efficiencies better than central planning has been able to do.

Is Planning Needed Now?

The reforms initiated in June 1991 sought to promote competition and ensure efficiency in resource use; to exploit the opportunities of trade in a globalized economy; to free entrepreneurs from bureaucratic constraints on scale of production—choice of location and techniques as well as of product mix; to make imports and exports easier; to facilitate ease of entry; and to provide easy access to adequate credit and technology. Indian industries are now free to take decision regarding their products, processes, places of location and plant size.

Most imports no longer require an import license and tariffs have been reduced. The process of financial liberalisation has begun and fiscal reforms (such as reduction of fiscal deficit and prudence in government expenditure) are also on their way. So, the question has naturally arisen: Is planning needed in a deregulated market economy? If so, what is its exact role?

Need for Planning:

The basic justification for planning in a liberalised economy has been expressed in the Prime Minister’s foreword to the Eighth Plan-

The market can be expected to bring about an ‘equilibrium’ between ‘demand’— backed by purchasing power— and ‘supply’, but it will not be able to ensure a balance between ‘need’ and ‘supply’.

Even today, 37% of the population is so poor that it does not have enough income to meet its ‘needs’, and government intervention is necessary as before. So, during the Tenth Plan period (2002-07) the trend towards transition to a liberalised economy had to be managed and, therefore, the poor had to be protected with special programmes and care.

Fulfilling Social Objectives:

Giving up central planning of the conventional, target-setting, license-permit regime variety, does not mean giving up social objectives. In truth, if we are to reach, the objectives better and faster a reliance on markets and decentralisation is desirable. Of course, markets must function well and the government has a role in ensuring this.

Planning as a Transfer (Redistribution) Mechanism: HRD:

In addition, planning is needed to provide transfers. A crucial role of planning is in designing and monitoring redistributive programmes. An important redistributive measure is promoting human resource development.

According to Prof. Amartya Sen, elementary education and primary health care can improve the skills of the poor as also their ability to acquire marketable skills. A more equitable distribution of knowledge and skills will surely improve social welfare.

Need for Informational Decentralisation:

Decentralisation of economic decisions still serves to be the most practical approximation in a liberalised market based economy and requires vast amounts of information which the government alone can provide.

Provision of Public Goods:

There is another area of government action or planning, viz., provision of public goods and services. There is also the need for provision of optimum use of environmental resources through appropriate prices.

Inter-regional Equity:

Another objective of planning which is still valid is the promotion of international equity in development. Backward regions—just like poor people—need protection. The government can help backward regions through development of infrastructure and provision of other incentives.

Role of Planning in a New Era:

Therefore, the role of planning is:

1. To ensure that all markets function well.

2. To plan public action in areas where externalities create natural monopolies.

3. To act as a forum for the poor in decision-making.

4. To maintain macroeconomic stability to prevent real incomes of the poor from falling.

Greater equity can be brought about faster by investing in skill formation, in human resource development, and by providing health and education to the poor too.

Employment Creation:

Planning should also concern itself with programmes of targeted transfers such as employment guarantee schemes in order to provide immediate relief to the poor at the national level. The availability of an alternative employment opportunity increases the power of unskilled workers to demand fair wages. This, in its turn, will increase the value of labour.

The above targets are achievable, and proper should be the central theme of planning in Indians liberalised economy. However, planning cannot be done in isolation without economic policy formulation. Planning and policy analysis must be integrated. The Plan models are not, yet, adequate for this purpose.

Rapid economic growth with greater equity has been one of the basic objectives of plan­ning in India. Each five year plan set for itself a target for raising national income and per capita income. The Ninth Plan (1997-2002) recognised the organic link between rapid eco­nomic growth and the quality of life of the people.

It also recognised the need to continue high growth policies which seek to alleviate poverty and reduce inequality in the distribution of income and wealth. The focus of the Plan can be described as growth with social justice and equity.

The objective of social justice as incorporated in the plan documents has two main dimen­sions, viz.:

(1) An improvement in the living standards of the poorest group in society; and

(2) A reduction in inequality in asset distribution. Poverty alleviation and raising average standard of living have been the two central objectives of economic planning in India.

Among the basic objectives of planning listed in various plan documents is the objective of reducing income inequalities. However, the importance attached to the distributional objective relative to the goal of accelerating economic growth has varied from plan to plan. Very low priority was attached to the equity objective in the first fifteen years of planning (1950-51 to 1965-66). Since then its importance has been increased in successive plan documents.

However, the objectives of the plan were not mutually consistent. Faster growth of industries led to increase concentration of wealth and economic power in private hands. Industrial licensing policy, instead of reducing such concentration, increased it.

Agriculture and Food Production:

The First Plan (1951-56) laid emphasis on agriculture. The stress was on increased production of food grains. Largely due to this, increased emphasis was given on public irrigation as a leading input into agriculture and production of food grains (cereals and pulses) increased from 52 mn. tonnes in 1951 to 66 mn. tonnes in 1956.

Heavy Industries:

In the Second Plan (1956-61), there was a shift of emphasis from agriculture to heavy indus­tries. It highlighted the necessity to build capital goods industries, following the Mahalanobis model. The Government followed a strategy of industrialisation which hoped to succeed by forging strong industrial linkages, both ‘backward’ and ‘forward’.

The strategy worked well at least for some time. The rate of growth of industrial production was impressive. There occurred a disproportionate growth of the heavy industries sector, which was more striking than what the planners could imagine. However, of more immediate concern for planners was reduction of imports needed to achieve self-reliant growth.

The Third Plan:

The general pattern of development followed in the Third Plan (1961-66) necessarily flowed, in large part, from the basic approach and experience of the Second Plan. Agriculture was accorded the maximum priority in this plan. There was a complete shift of emphasis from the ‘heavy capital goods sector’.

Thus, in its initial formulation, at least, the Third Plan differed from the Second. However, it was not clear from the Plan document whether the planners had fully compre­hended the nature of the changed priorities and their lack of congruence with the Second Five Year Plan strategy.

Comments:

Compared with the First Plan, there was a relative de-emphasis on agriculture in the Second Plan. This was so in terms of investment allocation ratios, both planned and realised. This implies an urban bias at the root of India’s development planning which was especially pro­nounced in the Second Five Year Plan and not significantly different in the Third.

The Second Plan stressed a redistributive strategy for land which, it was thought, could form the basis for a progressive agrarian structure. It was expected that such a structure would bring about the envisaged increase in agricultural output through the adoption of cooperative farming practices.

Such farming was supposed to provide the ultimate solution not only to India’s food problem but also to the problem of rural inequality. It was felt that the proposed programme of community development and national extension would constitute an essential catalyst in the process, along with irrigation, financed from public budgets.

The planners’ strategy during the Second and Third Five Year Plans was based on the age- old thesis that during the early stages of industrialisation it was necessary for agriculture to contribute to the building up of modern industrial sector by supplying cheap food and cheap labour. Apart from increasing productivity, this would help in maintaining a low rate of wage in the industrial sector and this help the process of capital accumulation by generating surplus.

During this period, the Government imported food on a large-scale under PL 480 (largely against payment in rupees and partly as a gift). The main objective was to maintain a ‘cheap food regime’ for promoting faster economic growth.

Three Annual Plans (1966-69):

Two major shocks in the 1960s led to substantial changes in agricultural strategy. Due to sharp increases in defence spending after India-China Border Conflict of 1962, there were severe cutbacks in public investment.

As an acceleration principle started working in an opposite direction, there emerged significant excess capacity in the heavy and capital goods sectors. Secondly, due to two successive monsoon failures in 1965 and 1967 food production declined sharply.

This problem was solved temporarily by additional large-scale imports of US wheat. But what became clear was that a basic imbalance had arisen between the demand for food and its supply.

This was the combined result of three things:

(a) Population explo­sion;

(b) Exhaustion of the possibilities for increasing the cultivable areas; and

(c) The dimin­ished effectiveness of regional crop specialisation.

So, the Government was forced to abandon the method of five year planning in favour of annual plans which required much financial resources than five year plans. The Govern­ment was also forced to cut back public investment sharply.

This inevitably dampened the economy by reducing the demand for a whole range of products turned out by the private sector. The annual plans exposed one of the main weaknesses of the Mahalanobis strategy, viz., the idea that what was physically possible and desirable could also be rendered finan­cially feasible.

Distributional Aspects in the First Three Plans:

Indian plans have ignored issues relating to the distribution of income. No doubt the Second Plan mentioned three main issues as deserving serious attention, viz., education, health and land redistribution. In the Third Plan, distributional considerations were even more strongly emphasised.

One of the objectives of the plan was to reduce the spread between the higher and the lower incomes and to raise the level of the minimum. However, there was no clearly laid out strategy which could be expected to raise the ‘minimum level’— at least, not one which could match the industrialisation targets articulated with great eloquence in the first two plans.

Conflict between Growth and Equity:

The Mahalanobis world linked consumption with the stock of capital goods which was tied to producing consumer goals. In this model, consumption could grow over a period of time only if there were prior increase in capacity of the capital goods sector. The pride of place in plan formulation was given to choice between present and future.

The crucial viable in the model was the time needed to equip the economy with a large enough capital stock, higher than would be possible by direct attempts at redistribution. The model failed as a redistributive device because the initial distribution of income-yielding assets such as land was very unequal and the state had very few instruments of control to siphon off rising private incomes into additional public savings.

Social justice in the Indian context implies poverty alleviation and reduction in income inequalities. Although planners were in favour of poverty alleviation as the central concern for planning, they considered some degree of inequality in incomes as an essential part of the growing economy.

The Fifth Plan sought to achieve inter-sectorally consistent growth rates of output that would be necessary to raise the average per capita consumption level of the lowest three deciles to a stipulated figure. In order that the average of this group could be raised progressively over time, especially after taking into account a population growth rate of 2% per annum, it was considered essential to allow for positive investment levels in the terminal year.

It was thought that if a higher growth rate could be achieved, the extent of the reduction required in the average consumption level of the three top deciles would be smaller. In other words, a higher rate of growth would help in achieving the minimum level of living for the poor without creating much social pressure.

However, Indian planning experience shows that if the growth rate of around 5-6% p.a. was the maximum that could be achieved it was impossible to bring about a significant reduction in poverty, howsoever defined, without attacking the problem directly.

Due to the inflationary pressures generated as a result of serious harvest failures in 1972-73 and the oil crisis of 1973 the approval to the Fifth Plan (1974-79) had to be redrafted and its ambitious redistribution objectives had to be diluted.

According to Prof. S. Chakravorty, from the point of sustainability, the most significant redistributive measures should centre around improving the productivity of small and medium farmers, especially those engaged in the production of food grains, along with employment guaranteed schemes in rural areas.

A one-sided emphasis on one or the other may not prove sufficient either due to inadequate output or due to inadequate purchasing power. This can be significantly supplemented by a programme of education, health and nutrition. Each has a major effect on improving productiv­ity benefits besides conferring substantial consumption benefits. In addition, a programme of population limitation can also serve as redistributive measure.

For ensuring greater equity it is necessary to ensure security of tenure, and improve the conditions of agricultural labourers, as also the conditions relating to crop-sharing contracts (especially how input costs are to be shared).

Fifth and Sixth Plans:

During the Fifth and Sixth Plans (1974-79 & 1980-85) there had been a shift of emphasis away from heavy industries to a strategy centering around ‘food’ and ‘fuels’. With a growing popu­lation and limited natural resources emphasis had to be placed on improving the productivity of land through greater diffusion of technological improvements which would not add to the ex­isting backlog of unemployed and underemployed.

No doubt planners felt that growth rate per se would not be sufficient to remove poverty. Instead, it would be more desirable to undertake specific measures to remove poverty. Thus, poverty removal programmes were made an integral part of the Fifth and subsequent plans. However, all plans have failed to solve the problem.

The main reason for this is that instead of following an aggressive approach emphasizing sustainable employment creation the planners have adopted a number of anti-poverty and pub­lic distribution measures.

Throughout the plan period there has emerged a conflict between output and employment objectives. Due to the adoption of capital-intensive rather than labour-intensive production techniques, adequate employment generation was not possible.

Indian plans have also failed to narrow the disparities in incomes and property ownership.

Moreover, by failing to control the prices of food and essential consumer goods the planners have denied economic justice to the masses. Over the entire plan period, prices of foodstuffs and essential consumer goods rose much faster than those of luxuries and semi-luxuries.

Indian plans have also failed to reduce concentration of economic power. Instead, monopoly has increased during the last 60 years. Finally, due to poor implementation of the land reform measures at the state levels, it has not been possible to reduce rural inequality. Rather, with agricultural growth, rural inequality has increased.

A Final Balance Sheet of 55 Years (1951-2006):

In short, Indian plans have been characterised by crisis of implementation. There was a gap between plan formulation and plan implementation or between theory and practice. Although the rate of growth of the Indian economy picked up during the plan period, Indian plans have failed to provide employment to its growing labour force, eliminate poverty and reduce concentration of income and wealth through institutional reform. Moreover, the benefits of economic infrastructure, created during the plan period, have been enjoyed by the rich and affluent, mainly those located in urban areas.

In short, Indian plans have failed to achieve these universally accepted goals, viz., full employment, poverty alleviation and the creation of just (more equal) society.

The Tenth Plan (2002-07):

The Tenth Plan suggested that economic growth cannot be the only objective for national plan­ning. So development objectives are to be defined not just in terms of increases in GDP or per capita income but in broader terms, i.e., in terms of enhancement of human well-being.

This should include not only an adequate level of consumption of food and other types of consumer goods but also access to basic social services—especially education, health, availability of drinking water and basic sanitation.

This should also include the expansion of economic and social opportunities for all individuals and groups and greater participation in decision making. The Tenth Plan had set suitable targets in these areas to ensure significant progress towards improvement in the quality of life of all people.

Due the Tenth Plan period, the planners were able to push forth the objective of rail the GDP growth rate to 9% in 2006-07. But the plan has failed to percolate the benefits of growth due the live among the poor and weaker section of the society.

Consequently faults is indes Perced (27.5% of the population) output. Moreover, the level of uplifment was as light as 8.3% in 2006-07. This is was the Eleventh Plan has taken some effective meaning to promote inclusive growth.

Conclusion:

In the ultimate analysis it becomes clear that the equity-related objectives of the Plans which are extremely important are intimately linked to the growth objective. So there is no conflict between the two in the real sense. The two have to go hand in hand.

For example, high growth rates are essential if we are to provide a sufficient expansion of sustainable gainful employ­ment opportunities to the expanding labour force and ensure a sufficient increase in incomes of the poor and the weaker sections of society (the so-called deprived or the disadvantaged). So the relationship between growth and equity is not just a one-way relationship.

Sustained high growth rates may not be sustainable if they are not accompanied by a disper­sion of purchasing power that can create adequate domestic demand needed to support the increase in output. No doubt growth has strong direct poverty reduction effects. It is high time planners and policymakers took note of this reality and eliminated the frictions and rigidities which stand in the way.