2 ECONOMIC PLANNING IN INDIA

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ECONOMIC PLANNING IN

INDIA

India is a vast country with multiple problems faced by its population. The British

ruled the country for nearly two centuries and exploited its resources for their

benefit leaving the country reeling under absolute poverty. When the British left

India in 1947 there was nothing to be proud of or be happy except for the

‘freedom’. The problems were many before the Indian government. Besides mass

poverty there was the problem of food shortage and inflation. Illiteracy, lack of

health care, lack of infrastructure etc. were other serious problems facing the

country. As a long term strategy. ‘Planning’ for economic development was the

answer to solve these problems.

OBJECTIVES

After completing this lesson, you will be able to:

z define “Planning’’;

z explain the need for planning;

z list out the objectives of planning;

z describe the strategy of planning in India;

z explain new economic policy;

z point out the targets set by our planners in terms of various objectives of

planning;

z explain the achievements made with respect to the plan objectives; and

z realise the short comings or unfulfilled part of the objectives.

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2.1 MEANING OF ECONOMIC PLANNING

Economic planning is a process which involves the following steps:

(i) Preparing a list of the problems facing the economy .

(ii) Rearranging the list on the basis of priority. The top priority issue which needs

to be addressed immediately should be placed at number one and so on.

(iii) The next step is to identify the problems which are to be solved in the

immediate short run and the other problems which are to be addressed over

the long period.

(iv) Fixing a target to achieve the desired goal. The target could be a specified time

period within which the problem must be solved. If the problem is to be

addressed over long run, then it must be made clear that how much of the

problem be solved in the first period (say a year or six months) and so on.

Secondly the target could be a certain quantity to be achieved. Say in case of

production, the government can fix some target in terms of quantity.

(v) Estimating the amount of resources needed for achieving the target. Resources

include financial resource, human resource, physical resource etc.

(vi) Mobilizing the resources is another important task. This means that the

planners must know the sources of arranging the required resources. For

example, in case of financing the plan, the planners must make the budget and

spell out the different sources of finding. When the government makes plan,

one of its major source of getting funds in the tax revenue. For a business

person, one of the sources of finance is the loan from bank. When various

sources of funds are available then the planner must also decide as to how

much fund to be collected from each of these sources.

Use of the human resource is another important task to execute the plan

proposal. The planner must estimate the type of man power and the number

of persons required to carry out the task. A proper estimate on this requirement

should be given at the outset. Similarly proper estimate of physical resources

should also be provided. Physical resources include office buildings, vehicles,

furniture, stationeries etc.

(vii) Once the resources are arranged, implementation and execution process

starts in an organize manner to achieve the desired goal. To make sure that

everything is running smoothly and to rectify mistakes if any or to modify the

style of working to accommodate any change, periodic review must be done

till the final achievement is realised.

2.2 ECONOMIC PLANNING IN INDIA

India adopted a system of five yearly planning to address its various socio-

economic problems. You have already been told about the problems of Indian

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economy at the time of its independence. To remind, these problems include mass

poverty and inequality, low productivity in agriculture and storage of food grains,

lack of industrial and infrastructural development etc. Since these are to be solved

over the long period, Indian government adopted five year plan starting from first

year plan in 1951 development. The idea was to make a list of important problems

to be solved keeping in view the given resources and the capacity to arrange the

resources. Then make a review after five years of what has been done and rectify

the mistakes accordingly in the next five year plan period and so on.

Some of the great architects of Indian planning include Jawaharlal Nehru, P.C

Mahalonobis, V.R Gadgil, V.K.R.V Rao. After becoming the first prime minister

of independent India, Nehru established the Planning Commission in 1950. The

major function of the Planning Commission was to formulate plans keeping in view

the resources of the country and suggesting the best methods to utilize them

effectively and in a balanced manner. Planning commission prepared the first five

year plan (FYP) for the period 1951-1956. By 2014, India has already experienced

more than sixty years of planning with eleventh five year plans being completed are

twelfth FYP continuing.

2.3 OBJECTIVES OF PLANNING IN INDIA

The various objectives of economic planning in India are drawn keeping in view

its socio-economic problems. Accordingly the objectives as follows:

1. Economic growth

2. Increase in employment

3. Reduction in inequality of income

4. Reduction in poverty

5. Modernization of the economy

6. Ensuring social justice and equality.

Let us discuss these objectives one by one .

1. Economic Growth : The objective of achieving economic growth implies that

the real national income and per capita income must grow every year at a

targeted rate. Real national income is the measure of national income at a given

years price or at a constant price. Real per capita income is the average income

of individuals in the economy. It is argued that in order to achieve higher

standard of living for each individual /household and the society as a whole ,

both per capita income and national income must grow in real terms. Since

income represents purchasing power, increase in income will enhance the

purchasing power of people and the country. When purchasing power will

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increase then individuals can buy more goods and services to satisfy their

wants. The country as a whole can pay for its purchases from abroad called

import. Increase in real income also means that the output level or quantity of

output is higher than before. Here output includes output in different sectors

of the economy such as agricultural output, industrial output and services to

satisfy the needs of India’s growing population increase in output every year

has to be achieved. To achieve higher rate of output the economy must increase

its rate of investment to create infrastructure and capital stock. Infrastructure

includes power projects, roads, railways, airports, ports, telecommunication

network, buildings etc. Capital stock includes plant, machinery, banking and

insurance etc. Investment in all these things is necessary to achieve economic

growth in real income, hence the planners of the country set a target for growth

in each five year plan keeping in view the growth of population and demand

for goods and services etc.

2. Increase in Employment: Employment refers to engagement of the labour

force in gainful economic activity such as production of goods and services.

Income is generated through the production process where the production

process involves employment of factors of production provided by the

households. You know that factors of production include land, labour, capital

and organization/entrepreneurship. These factors are owned by the households

of the country. As factors are scarce resources and needed to produce goods

and services, it is important for the government to create opportunities where

in they can be properly used/utilized. The production capacity of an economy

depends on the amount of the factor resources it possesses. The required

amount of output can be generated if these factors of production get employment.

The value of the output then can be distributed among the factors as their

income in the form of wage for labour, rent to the owner of land and building,

interest to the owner of capital and profit to the entrepreneur. If the country

is not able to create employment opportunities to gainfully engage the factors

of production, the required amount of output can not be produced and hence

income can not be generated. Take the example of labour resources in the

country. You know that the population of the country supplies labour force

who are in the age group of 15 to 59 years. Every year due to increase in

population the number of people in the labour force is also increasing. Most

of them are also educated. If there is no enough scope to get employment then

they will remain unemployed and unutilized. Infact the unemployment situation

in India is very bad. Besides causing increase in consumption without

corresponding increase in production, unemployment also is a cause of various

social problems such as poverty and crime etc. So planners of the Indian

economy put creation of employment as a major objective of five year plans.

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INTEXT QUESTIONS 2.1

1. Economic growth means

(a) Increase in real national income

(b) Removal of inequality

(d) None of the above

2. National income can be increased by

(a) Increase in population

(b) Increase in the rate of investment

(d) Decrease in price level

3. Who are the owner of factors of production

(a) Government

(b) Rest of the world

(d) Firms and industries

4. Labour force comes from the population in the age group of

(a) 4 to 14

(b) 60 to 75

(d) 15 to 59

3. Reduction in Inequality of Income : India is a country with diverse economic

standard of its population. This means that in terms of income level, India lacks

uniformity. A large section of India’s population belong to lower income group

and termed as poor where as a few are very rich with very high level of income.

Income disparity is a major concern of the social angle, women are the worst

affected in terms of income standard irrespective of their caste or religion.

Similarly the scheduled caste and scheduled tribe population belong to the

marginalized section of Indian society as they are at the bottom of the pyramid

of development. One of the major reasons of inequality in income is the unequal

distribution of asset holding such as per capita land holding, possession

movable and immovable property from inheritance etc. A majority of India’s

population live in rural area and work in agriculture. But a few are big land

lords and majority are marginal or small farmers and agricultural labourers.

Agricultural labourers are so called because they do not have their own land

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to cultivate and move from one place to another in search of job on a daily or

weekly wage basis. Their situation in worse because of their own illiterary and

lack of scope to organize themselves. One to their low income they do not have

anything to begin to their reset generation on the otherhand landlords enjoy

higher returns to their property and due to existence of law of inheritance the

property remains with their future generations. Hence, rich remains rich and

poor remains poor in the country due to possession and lack of private property

respectively. India is badly affected due to this inequality . The poor people are

not able to support the market due to lack of purchasing power where too

much purchasing power with the rich has caused wasteful consumption to

increase. Most of the social evils are created due to inequality. Hence, our

planners aimed at reducing the inequality in income distribution through

planning.

4. Reduction in Poverty : Another major objective of planning in India is

“reduction In poverty”. At the time of independence more than fifty percent of

India’s population was poor. By the year 2014, nearly 27 to 28 percent of

India’s population is under poverty as per governments estimates. You will

come to know about the manner in which poverty is estimated in India in the

lesson on poverty and employment. For the time being let us confine our notion

of poverty to the situation where in an individual is unable to satisfy his/her

basic minimum needs of life. There are lot of people in the country who are not

even getting a square meal a day. Lack of employment is a major cause of

poverty . It is aggarated by unequal distribution of national wealth and income.

Poverty is termed as a curse on human dignity and it has seriously tarnished the

image of India in the world. Developed countries do not count India seriously

due to its inability to remove poverty. It is proper planning to remove poverty

completely from the country.

5. Modernisation of the Economy : India has been a country of continuous

exploitation by foreign powers such as the Mughals who ruled for more than

two hundred years and the British who also ruled the country for another two

hundred years. The British in particular, left the country in dine poverty and

underdevelopment when they handed over power to Indian government in

1947. Because of the historical reasons Indian economy could not rise from its

traditional level of functioning. It remained an agrarian economy and industrially

backward. There was no development in now technology and technological

upgradation. Lack of modern technology is a major reason for Indian economy

to suffer from low productivity in agriculture and lack of industrial development.

At the time of independence and for many more years after that, the major

contributor to India’s GDP because of underdeveloped industrial and service

sector. Combined with his lack of better education and skill development of the

population, the occupational structure has also remained biased towards

agriculture. Hence, to reverse such trend it is necessary to change the structure

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of GDP of India by improving the quality of human resources and developing

industries and service sector. This can be done by modernization of the

economy.

6. Ensuring Social Justice and Equility : Indian planning also aimed at

achieving a socialistic pattern of society. It can be achieved by ensuring its

population social justice and equity. In fact all the objectives said above are

necessary to achieve social justice. But the sufficient condition for sustaining

social justice and equitable distribution of income is to introduce reforms in

various sectors by changing the age old systems which have perpetuated

poverty and inequality and obstructed development of industrial and service

sector or caused low productivity in agriculture. So the planners thought to

introduce reforms in agriculture and economic policy so that they facilitate

growth and equitable distribution of the benefits of development.

INTEXT QUESTIONS 2.2

1. One of the reasons of inequality in income is

a. Existence of private property

b. Lack of equal distribution of wealth

c. Both of the above

d. None of the above

2. Which of the following sector used to have larger share in India’s GDP at the

time of its independence

a. Industry b. Agriculture

c. Service d. None of the above

2.4 NEED FOR PLANNING

A major part of the question about need for planning has been answered in the

meaning of planning itself described above. There we said that planning involves

various steps for effective implementation and execution. Infact the number of

problems facing Indian economy is very high. Each problem is complex in nature

and cannot be solved in a short period. Take the example of the problem of poverty.

There is no method by which this problems can be solved immediately. The

government must collect data to know the number of people affected by poverty

and its nature. Collection of data itself is a very huge task keeping in view India’s

vast geographical area and lack of accessibility to many areas. In a democracy , the

government is duty bound to formulate policies after proper debate and discussions

which takes time. Then mobilization of adequate resources and provision of

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resources to continue the programme over a long period are two most important

things to solve the problem of poverty. Without proper planning it cannot be done.

Planning is also necessary to avoid wasteful expenditure, minimize cost meet the

target in time and optimal use of resource.

2.5 STRATEGY OF PLANNING

By strategy we mean the use of correct approach /method/formula for achieving

the target under planning. In the first plan period of 1951-56, no specific strategy

was adopted during this time the government of India gave more emphasis to

agriculture keeping in view the fact that majority of India’s population depend on

agriculture and there was the immediate issue of adequate food grain supply to

address food shortage. The first five year plan was a great success as the targeted

growth rate was achieved so India was in a position to adopt a long term strategy

for planning in future. The development strategy was accordingly spelt out

explicitly in the second plan period of 1956-61. The strategy was to give emphasis

on – 1. Industrialization, 2. Within industrialization more emphasis on heavy

industries.

2.6 JUSTIFICATION OF THE STRATEGY OF

INDUSTRIALIZATION

In order to address the problems related to poverty, unemployment, economic

growth, self reliance etc. The Indian planners adopted the strategy of industrialization

in the country in general and establishing heavy and basic industries in particular.

The arguments offered in favour of industrialization and heavy industries

strategy are as follows:

1. India’s population has been over depended on agriculture resulting in crowding

of rural area, pressure on land, fragmentation of land holding, underemployment

and unemployment with fixed amount of land available for cultivation, more

population makes the amount of per capita availability of land very small or nil.

This has resulted in inequality in distribution of land and ultimately affecting

agricultural production badly. Industrialization is the only answer to shift the

surplus labour engaged in agriculture to industries and release the pressure on

land.

2. Industrial activities provide more job opportunities than agricultural activities.

So industrialization will help getting employment for the jobless in the country.

3. Industrialization is necessary for the growth of agriculture itself . Industries

use raw materials from agriculture and agriculture sector needs industrial

equipment and machinery such as pump set, tractor, electricity etc.

4. Establishment of basic and heavy industries must be given priority. Examples

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of basic and heavy industries are iron and steel, aluminium, heavy chemicals,

heavy electrical etc. These are capital goods industries. Every economy needs

such type of industries because they procedure machinery and equipment

needed to establish other industries which can produce consumer goods for the

satisfaction of wants. So the heavy industries are the backbone of the economy.

It should be noted that after the adoption of heavy industry strategy the

government of India created public sector to establish and manage such

industries. Some of the examples are steel authority of India limited (SAIL),

Bharat aluminium company (BALCO), Bharat heavy electrical limited (BHEL),

National aluminium company (NALCO), etc.

5. Besides heavy and basic industries, Indian government has also given emphasis

on developing the micro, small and medium industries. These industries are

defined on the basis of investment limit and can be established by private

individuals. The advantage of these industries include: promotion of self

employment as well as generating employment furthers, use of local resources,

reducing inequality of income as they can be owned by individuals etc.

2.7 NEW ECONOMIC POLICY

As said above, the heavy industry strategy was implemented under the ownership

and management of the public sector. The government made budgetary provisions

for the public sector to create infrastructure and establish industries. The process

went on for more than three decades. However, an evaluation of the performance

of the public sector by the government itself found that barring a few, more than

half of the public sector units have been running on losses. There was gross

mismanagement and labour problems falling the public sector units. It was a major

shock to the government to find all these short comings of public sector. The failure

of the public sector on various fronts was seen as one of the major reasons for lack

of all round development of the country in the area of industrialisation, removal

of poverty and unemployment etc. Hence in 1991, the central government came

out with a new economic policy resolution. The main feature of this policy are:

(i) Liberalization

(ii) Privatization

(iii) Globalization

The policy is also popularly called LPG model of development.

Meaning of and Need for Liberalization

Liberalization means withdrawal of controls and regulations by the government on

establishment and running of industries in the country. Till 1991, all the public

sector units were practically under the government even if they were called

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autonomous bodies. There were lot of interventions by the ministries of the

government in functioning of the public sector. This resulted in politilization and

fall in professionalism and inefficiency. In order to overcome this problem the

government decided to stop political intervention in the running of the public

sector units by signing a memorandum of understanding. According to this the

management of public sector units will be given autonomy to function but they will

also be accountable.

Another important feature of liberalization is to do away with the licensing system.

Earlier it was mandatory for any private individual or organization to seek

permission from the government to start any industrial activity. There was heavy

rush and long queue before the window of the concerned government department

to get a license. This system slowly gave rise to delays in getting license.

Government officials started taking bribes to clear files. Such corrupt practices

brought bad name to the government. So in 1991 government decided to abandon

the licensing system and allowed the interested individuals to start their industrial

activity without any permission. However, permission is still required only in case

of strategic industries such as medicine, defence equipments etc.

Meaning of and Need for Privatization

Privatization implies opening of the door of industrial activities to the private

sector which was exclusively reserved for public sector only except nuclear enemy

and defence. Since basic and heavy industries were strictly under public sector

there was no room for competition. The quality of product and services deteriorated

due to lack of competition from other companies. As a result the consumers were

the major looser because they did not get quality products and the delivery system

and other services were also very poor. So the government decided to allow and

encourage the entry of private sector in the areas earlier reserved for public sector

only. As a result private sector entry was seen in tele communication, civil aviation

etc. The government also decided to disinvest some of the public sector companies

by selling part of their assets to public.

Meaning of and Need for Globalization

Globalization is a process in which attempts are made by the different countries in

the world to allow free flow of goods and services, labour technology, investments

etc. India is a member of world trade organization (WTO) which is the nodal

agency to promote globalization. In 1991 industrial policy, India adopted soft

attitude towards foreign companies to do their business in India in order to

promote competition. It also committed itself to abolish or reduce tariff on import

of commodities. On the otherhand, India also adopted policies to promote exports.

The government also allowed foreign companies to hold 51 percent share or more

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in case of their collaboration with Indian companies so that they can function freely

and as the owner. This will also facilitate transfer of latest technology into Indian

territory.

INTEXT QUESTIONS 2.3

1. Liberalization aims at retaining the licencing system. True or False

2. Privatization policy will help in enhancing competition in the market.

True or False

3. Globalization aims at imposing tariff on imported goods. True or False

2.8 ACHIEVEMENTS OF ECONOMIC PLANNING

Economic planning in India was started in 1951. As said earlier, there were certain

objective of economic planning which include: achieving economic growth in

terms of increase in real national and per capita income, increase in the level of

employment, removal of inequality in the distribution of income removal of

poverty, ensuring social and economic justice etc. By 2014, India has completed

63 years of planning and has entered into twelfth plan period. It is high time to know

the achievements of planning keeping in view its objectives. Let us discuss them.

1. Achievements in Economic Growth

Achieving economic growth was a major objectives of planning. To achieve

growth it is necessary to achieve increase in national income and per capita income

as well as increase in production of agricultural and industry sectors. A review of

different plans shows that, the first five year plan was a success as it achieved a

growth rate of 3.6 per cent against a target of 2.1 percent growth rate in national

income. Then except for 5

and 6

plans, during the other plan periods i.e. from

second to eleven five year plan the targeted growth rate in national income could

not be achieved.

Similarly, The per capita income has attained growth but the rate of growth has

been very slow. For example : During the first 30 years of planning the per capita

income grew at a very slow rate of 1.2 per cent per year. Recently this growth rate

has increased to some extent. Coming to agriculture, the food grain production has

gone up from 51 million tones at the beginning of the first plan to 257.4 million

tones in 2011-12. Particularly the production of rice, wheat has been spectacular,

but production of pulses and oil seeds etc., has been below target.

In terms of industrial development, a major achievement has been the diversification

of Indian industries. There has been expansion of transport and communications,

growth in generation and distribution of electricity and considerable progress in

steel, aluminium, engineering goods, chemicals, fertilizers and petroleum products.

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During the planning period, the per capita availability consumer goods and other

essential items has increased considerably. The goods worth mentioning here

include-cereals, sugar, milk, egg, edible oil, tea, cloth and electricity.

2. Creation of Infrastructure

India has achieved a great deal in the area of creation of infrastructure. There has

been large expansion roads and railway networks. Domestic air travel has

increased significantly. Expansion of irrigation and hydro-electric projects has

given boost to agricultural production. There has been growth in establishment of

towns and cities due to increase in urban infrastructure. Communication network

in the form of mobile telephony, internet has expanded tremendously.

3. Development in Education

One of the brightest areas of achievements of planning has been the development

in education in India. There has been a significant increase in the enrolment of

children at school level. There are 378 universities and 18,064 colleges in India

which is a good development for higher education. India has also 1.52 lakh higher

secondary and 10.43 lakh primary and upper primary schools.

4. Development of Science and Technology

Another significant area of achievement has been the growth in science and

technology including the increase in technical and skilled manpower. India’s march

in space research has been noticed by the developed countries. It has made impact

in the field of nuclear energy as well. Today India’s Dependence on foreign experts

for consultation has reduced. On the contrary it is now able to send technical

experts to many foreign countries in the middle east, Africa etc.

5. Expansion of Foreign Trade

Due to industrialization in the country, India’s dependence on import of capital

goods has delivered. Many items, which were imported earlier are being produced

domestically. Due to industrial progress, India is also able to export manufacturing

and engineering goods.

INTEXT QUESTIONS 2.4

1. During which plan period, the actual growth rate of national income was more

than the targeted growth rate.

(a) Second plan (b) First plan

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2. The growth rate of per capita income was higher in the beginning of plan period

as compared to the period in the beginning of 21

century.

True or False.

2.9 DRAWBACKS OR FAILURES OF PLANNING

Besides the achievements as told above, there are many unfulfilled tasks which the

planning in India is yet to achieve completely.

1. Failure to Remove Poverty and Inequality completely :

Even after more than sixty years of planning, India has not been able to remove

poverty completely. More than 240 million people are still under absolute poverty

according to official estimates. The situation is worse in rural area. The government

has introduced many antipoverty measures. But they have not been very successful

so far.

Similarly, there is no significant improvement in the distribution of income and

asset holding resulting in existence of inequality. The number of lanless agricultural

labourers is very high as compared to the land holding population. The process of

industrialization has helped some big industrial houses. This has resulted in

concentration of economic wealth and power in few hands. This trend must be

reversed if India wants to achieve equity and social justice.

2. Problem of Unemployment Persists :

Inspite of growth in income and output, India’s employment situation has not

improved much. Due to faster growth of population and labour force the situation

has worsened further. According to official estimates India’s unemployment rate

is 6.6%. There is also huge backlog of unemployment due to lack of creation of

required amount of jobs every year.

3. Failure to Curtail Corruption and Black Money :

Existence of rampant corruption in various public offices is a matter of grave

concern in India. Common person faces a lot of problem in getting things done

without giving bribe. Infact corruption has become a major political issue in

elections. Various forms of corruption include paying or accepting bribe, non-

payment of tax to government, political influence to get contract, secret

understanding among sellers to increase price etc. Corruption has given rise to

black money which is not accounted anywhere but very much in circulation. A

sizeable portion of India’s GDP is unaccounted . Black money creates inflation and

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pressure in the society. It is also the root cause of inequality in distribution of

income as people who possess black money grow richer at the cost of common

citizen.

WHAT YOU HAVE LEARNT

z To solve its various economic problems India adopted Five year plans starting

from 1951.

z The objectives of planning include : economic growth, increase in employment,

removal of inequality and poverty and achieving social justice and equity.

z India adopted the strategy of industrialization with emphasis on basic and

heavy industries to achieve the desired objectives.

z Even if the national income and the per capita income of India have recorded

growth rates during planning period, the growth rates are below the target.

z India’s progress in infrastructure, education, science and technology and

foreign trade has been note worthy.

z Significant drawbacks of planning in India include inability to eradicate

poverty, inequality and unemployment completely.

z Corruption in public places and prevalence of black money are major threats

to development in India.

z In 1991 the government adopted new economic policy in order to rectify the

problems associated with public sector to promote industrialization and to

achieve faster economic growth.

z The new economic policy is called LPG model i.e. Liberalization, Privatization

and globalization.

z LPG policy aims at removing licensing policy, promoting competition in the

market and encouraging free trade in the world.

TERMINAL EXERCISE

Short answer type questions

1. Give the meaning of planning ?

2. Write two objectives of planning in India ?

3. Name two types of resources needed for planning with examples ?

4. Give one justification for adopting the strategy of industrialization ?

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Long answer type questions

1. Explain the steps involved in the process of planning ?

2. Discuss the objectives of removal of inequality and poverty ?

3. Which strategy did India adopt to achieve the plan target and why ?

4. Explain the objectives of economic growth and increase in employment under

planning in India ?

5. Explain 3 achievements of economic planning in India ?

6. Evaluate the performance of planning in removing poverty and inequality ?

7. Write a short note on achievement of planning with respect to economic

growth?

8. Comment on the development of infrastructure in India?

9. Give reasons for adopting a new economic policy?

10. Explain the LPG model of the government to promote economic growth?

ANSWERS TO INTEXT QUESTIONS

2.1

1. (a) 2. (b) 3. (c) 4. (d)

2.2

1 (a) 2. (b)

2.3

1. False 2. True 3. False

2.4

1. (b) 2. False