Economic Planning in India & Niti Ayog – UPSC

In this article, You will read the Economic Planning in India, Planning Commission, and Niti Ayog – for UPSC.

Economic Planning

  • Economic planning refers to any plans of economic activity which point to achieve specific social and economic outcomes. The term economic planning is used to describe the long term plans of the government of India to develop and coordinate the economy with efficient utilization of resources.The planning mechanism should have some general goals as well as specific objectives which are to be achieved within a specified period of time.
  • The philosophy of planning is that only markets and price systems cannot ensure the welfare of citizens. Apart from this, there are economic requirements such as investment in infrastructure, investment in public goods such as transport, and other public utility which are enjoyed by the society.
Types of economic planning
  • In today’s world, most economies are mixed economies. The planning can be of several types discussed below:
    • Indicative planning: It puts forward / indicates to some broad principles and guidelines to achieve some goals. Indicative planning is peculiar to the mixed economy of France. But this is quite different from the type of planning which exists in other mixed economies. By mixed economy, we mean simultaneous working of the public and private sector. It is the state which controlled the private sector in different ways, i.e. by quotas, price, licenses, etc. But under indicative planning, the private sector is not rigidly controlled to achieve the targets and priorities of the plan. The state gives full assistance to the private sector but does not control it. It, rather, directs the private sector in certain areas to implement the plan.
    • Comprehensive / Imperative Planning: It refers to centralized planning and implementation with the allocation of resources. It is used by socialist countries and each and every aspect of planning is controlled by the state. The resources are optimally used by the state in order to achieve the targets of the plan. Consumer sovereignty is sacrificed under this type of planning. The consumers get fixed quantities at fixed prices. The government policies are rigid which cannot be changed easily. Any change can adversely affect the economy.
    • Structural Planning: It aims to change the existing structures. In this type of planning the present social and economic structure is changed and a new structure emerges. In the developing countries, there is a structure planning. Big economic and social changes are brought about to usher into a new system. For instance, shift from capitalist to socialist economy can be called a structural change. Structural planning can help in accelerating the pace of economic development. The Communist countries like Russia and China followed structural planning.
    • Functional Planning: Under functional planning, there is no need to build up a new structure, rather the existing structure is corrected and modified. According to Zweig in his “The Planning of Free Societies has stated “Functional planning will only repair, not build a new, it will improve the wave of the existing order, but not supersede it. It is a conservative, or rather evolutionary type of planning which will not overturn the existing structure and moves only within its narrow border”. Thus functional planning brings no change in the economic and social set up.
    • Centralized Planning: The framing, adopting, executing supervising, and controlling of the plan is done by central planning authority. Planning authority determines targets and priorities. It is the duty of the planning authority to bring harmony in the planning process. This type of planning comes from the top to the bottom. This plan determines equality and cohesion. The central planning authority which determines the basic policies in view of the regional and local needs.
    • Decentralized planning: It is multi-level planning in which more than one institutions work for the implementation of the plan. Under this planning, the responsibility lies with local and regional officials who take economic decisions about the plan. In other words, this planning starts from the grassroots. In other words, this type of planning is from bottom to top. Under this, plan is framed by the central planning authority by consulting different administrative units of the country.
    • Perspective Planning: It refers to the long term planning of 15-20-25 years. It is implemented by breaking the plan period into smaller plans such as 5 years plans. But a perspective plan cannot mean one plan for the complete period. In a true sense, broader objectives are to be achieved in a fixed period by dividing the perspective plan into short-run plans of 4 to 6 years.
Economic Planning in India

Planning before Independence

  • First of all the idea of planned economy was crystallized in 1930s when our national leaders came under the influence of socialist philosophy. India’s Five-year plans were very much impressed by the rapid strides achieved by the USSR through five years plans.
  • In 1934, Sir M. Visvesvaraya had published a book titled “Planned Economy in India”, in which he presented a constructive draft of the development of India in the next ten years. His core idea was to lay out a plan to shift labour from agriculture to industries and double up National income in ten years. This was the first concrete scholarly work towards planning. The economic perspective of India’s freedom movement was formulated during the thirties between the 1931 Karachi session of the Indian National Congress, 1936 Faizpur session of the India National Congress.
  • National Planning Committee: The first attempt to develop a national plan for India came up in 1938. In that year, Congress President Subhash Chandra Bose had set up a National Planning Committee with Jawaharlal Nehru as its president. 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 Eight Industrialists of Bombay viz. 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 Economic Development for India”. This is known as the “Bombay Plan”. This plan envisaged doubling the per capita income in 15 years and tripling the national income during this period. Nehru did not officially accept the plan, yet many of the ideas of the plan were inculcated in other plans which came later.
  • People’s Plan: People’s plan was drafted by MN Roy. This plan was for ten years period and gave the greatest priority to Agriculture. The nationalization of all agriculture and production was the main feature of this plan. This plan was based on Marxist socialism and drafted by M N Roy on behalf of the Indian federation of Lahore.
  • Gandhian Plan: This plan was drafted by Sriman Nayaran, principal of Wardha Commercial College. It emphasized the economic decentralization with primacy to rural development by developing the cottage industries.
  • Sarvodaya Plan: Sarvodaya Plan (1950) was drafted by Jaiprakash Narayan. This plan itself was inspired by Gandhian Plan and Sarvodaya Idea of Vinoba Bhave. This plan emphasized on agriculture and small & cottage industries. It also suggested freedom from foreign technology and stressed upon land reforms and decentralized participatory planning.
  • Planning and Development Department: In August 1944, The British Indian government set up the “Planning and Development Department” under the charge of Ardeshir Dalal. But this department was abolished in 1946.
  • Planning Advisory Board: In October 1946, a planning advisory board was set up by the Interim Government to review the plans and future projects and make recommendations upon them.

Planning Commission

  • Immediately after independence in 1947, the Economic Programme Committee (EPC) was formed by All India Congress Committee with Nehru as its chairman.
  • This committee was to make a plan to balance private and public partnerships and urban and rural economies. In 1948, this committee recommended forming of a planning commission.
  • In March 1950, in pursuance of declared objectives of the Government to promote a rapid rise in the standard of living of the people by efficient exploitation of the resources of the country, increasing production, and offering opportunities to all for employment in the service of the community, the Planning Commission was set up by a Resolution of the Government of India as an advisory and specialized institution.
  • Planning Commission was an extra-constitutional body, charged with the responsibility of making assessments of all resources of the country, augmenting deficient resources, formulating plans for the most effective and balanced utilization of resources, and determining priorities. Jawaharlal Nehru was the first Chairman of the Planning Commission.
National Development Council
  • Government of India could take the initiative to set up the planning commission only by virtue of a provision in the constitution that made Economic & Social planning an item in the Concurrent list. The Resolution to set up a planning commission was actually based upon the assumption that the roots of center-state cooperation should be deeper. Later, in 1952, the setting up of the National Development Council was in fact a consequence of this provision.

Features of Indian Planning

  • The planning era has ended with planning commission but here are some of the key features of Indian planning for academic purposes
  • Five Year Planning
    • India’s plans are of the 5-year period. The five-year plans integrated the short-term objectives with long-term objectives.
  • Comprehensive Planning
    • The focus of the planning was not only on economic parameters but also on social parameters of growth and development. On one side, it focused on the acceleration of the pace of growth, on other side, it focussed to minimize vertical and horizontal disparities. The focus of comprehensive planning was to achieve ‘inclusive growth.
  • A Tilt towards the Public Sector and Regulation of the Market Forces
    • Even though India adopted mixed economy, it encouraged more participation of the public sector in development process. Private sector was controlled through legislative restrictions like the MRTP Act (to check on the growth of monopolies). Public sector is involved in provision of food grains and essential goods to people through a comprehensive public distribution system (PDS).
    • Since 1990’s the strategy was changed. Now the private sector is encouraged more to participate in the development process.
  • Democratic Planning
    • At the formulation level as well as at the implementation level of plans, India followed the democratic approach. Planning commission prepares the draft plan and it was approved by the National Development Council (NDC) body, which included stakeholders from state governments. Opinions of various organizations and experts are taken into consideration while formulating the plans. While implementing the plans, a bottom-up approach was followed with the involvement of democratic bodies at village and district levels.
  • Prospective and Perspective Planning
    • Indian planning incorporated both short-term and long-term programs of growth and development. The integration of both strategies is required to exploit the potential of the growth process.
  • Central Planning Authority
    • Planning Commission was established in 1950 as a central authority to develop the plans and to oversee the implementation.
  • Economic and Social Spheres of Planning
    • In planning objectives along with economic development goals, social development goals are included.
  • Financial Planning
    • Indian planning involves the allocation of funds to various sectors and activities, rather than achieving the physical targets of the plan.

Objectives of Planning

  • In India objectives of planning are mainly classified as long-term objectives and shortterm objectives.
  • Long-term objectives try to solve the socio-economic issues that the country is facing over the years. It includes increase in national income or per-capita income, achieving full employment, social justice and equitable distribution, poverty alleviation, self-sufficiency, and modernization, etc. Achieving all these objectives would be termed as ‘Growth with Social Justice’. Short-term objectives are planning specific to be achieved within the plan itself. They are often concerned with the allocation of resources to various sectors of the economy according to immediate demand as envisaged by the policymakers.

Long-term Objectives

  • Equity and Social Justice
    • The fruits of economic growth should benefit large sections of the society. Development of few sections of society will lead to inequality in society. Indian planning should aim at reducing such inequalities so that the benefits of economic development percolate down to the lower strata of the society.
  • Eradication of Poverty
    • Eradication of poverty is one of the long-term objectives of the planning in India. Fifth and Sixth five-year plans primarily focussed on the eradication of the poverty problem in India.
  • Modernization
    • Modernisation means updation of technical know-how and adoption of new technologies for the betterment of society. Productivity of the economy can be raised many-fold with the use of innovative and modern technology. Green Revolution and IT revolution are the best examples of how technology can transform a country. Modernization also includes issues like the empowerment of women.
  • Self-sufficiency
    • Self-sufficiency means dependence on domestically produced goods, particularly food grains. The basic idea was not to expose India’s fragile economy to political diktats of the rest of the world as it happened in 1965 when the U.S.A., threatened to stop exports of food grains to India unless the latter stopped the then war with Pakistan.

Short Period Objectives

  • Short period objective have been varying from plan to plan depending on current needs of the economy.

Planning Strategy

  • In order to achieve the long-term and short-term objectives set in the each five years, specific strategies are required. It involves the allocation of resources across different sectors of the economy in tandem with the specified objectives. It involves selection choices like the development of agricultural sector or industrial sector, public sector or private sector involvement, closed economy or open economy model. Indian planning strategies can be split into two phases: pre-1991 phase and post – 1991 phase.
Pre 1991 Phase or Pre-reform Phase
  • During the pre – 1991 phase (1951 to 1990), India followed the strategy of planning with greater reliance on the public sector along with a regulated private sector. Following strategies are followed during the 1951-91 phase:
  • Heavy Reliance on Public Sector
    • Greater reliance was placed on the public sector compared to the private sector. As the private sector was not able to invest in a large amount for development of heavy industries, the government turned towards the public sector for provision of essential and basic needs for the people. At the same time private sector was not willing to provide the services in backward regions of the country.
  • Regulated Expansion of Private Sector
    • Private sector was restricted to few areas of activities. New legislations were created for the restriction for the restriction of the private sector.
  • Development of Heavy Industries
    • Government invested heavily in the development of Heavy industries like the iron industry.
  • Protection of Small Scale Industry
    • Small scale industry was protected by means of the establishment of boards for different small-scale industries and reserving few areas of products exclusively for the small-scale industry.
  • Inward Looking Trade Strategy
    • Domestic industry was protected from competition in the international market. Heavy import duty was imposed to curb competitive imports, while domestic industries were encouraged to produce domestic substitutes of essential imports.
  • Thrust on Savings and Investment
    • Promotion of savings and investment was the undisputed objective of monetary and fiscal policies of the government. Savings are induced through the high rate of interest. Tax concessions were to mobilize savings.
  • Restriction on Foreign Capital
    • Several types of restrictions were imposed on foreign direct investment. To control and regulate it, Foreign Exchange Regulation Act (FERA) was enforced.
  • Adherence to Centralized Planning
    • State level plans were aligned in sync with the overall objectives and strategy of growth as specified in Five Year Plans.
Post-1991 Phase (Post-reform Phase)
  • The strategy of planning in India witnessed a marked shift in the year 1991. Following are main changes observed under NEP (new economic policy):
    • Fiscal policy and monetary policy have been reoriented to facilitate the free play of market forces.
    • Foreign capital in the form of FDI (Foreign direct investment) and FII (Foreign Institutional Investment) are encouraged.
    • Import restrictions are restricted to the minimum, while export promotion has been accorded a high priority.
    • Competition rather than controls have become the fulcrum of the growth process.
    • Direct participation of the government is significantly tempered and confined only to strategic industries such as atomic energy, minerals, and railways.
    • Partial convertibility of Indian Rupee.
    • Recently, the concept of Sustainable development is included as the main feature of the strategy of planning in India. Sustainable development refers to the development of the present generation by taking into consideration of future generations.
  • Following are some notable reasons for the change in economic policy:
    • Mounting Fiscal Deficit and revenue deficit: Fiscal deficit and revenue deficit of the country are increased due to the policies followed before the 1990’s governments.
    • Balance of Payments (BoP) Crisis: Heavy dependence on imports resulted in a BoP crisis.
    • Gulf Crisis: On account of Iraq war in 1990-91, prices of petrol started increasing. Remittances from gulf countries are also stopped.
    • Fall in Foreign Exchange Reserves: In 1990-91, India’s foreign exchange reserves lowered to such a level that these were not enough even to pay for an import bill of 10 days.
    • Rise in Prices: In India, prices happened to rise rapidly. Expansion in money supply was the principal cause of inflationary pressures. In turn, this was related to deficit financing. The country has experienced the situation of stagflation.
    • Dismal Performance of Public Sector Undertakings (PSUs): Public sector undertakings were showed dismal performance.
    • On account of all these factors, the government shifted to New Economic Policy.
  • Three Principal Components of New Economic Policy
    • Liberalisation, Privatisation, and Globalisation are the three principal components of New Economic Policy.
    • Liberalisation of the economy means freedom of the economy from restrictions of the Government. Liberalization was expected to break the deadlock of low investment by exposing the economy to the forces of supply and demand.
    • Privatisation refers to allowing the private sector to enter in those areas of production which were previously reserved for the public sector. Also, existing public enterprises are either wholly or partially sold to the private sector. It was considered to be the fittest option to stave off problems of public sector enterprises.
    • Globalisation means integrating the domestic economy with the rest of the world under conditions of free flow of trade and factors of production across borders. Globalization results in inflow of capital and technology from developed countries into the Indian economy.

The shortcoming in the planning process: Why planning Commission was abolished?

  • The planning process in India, particularly after liberalization, had become erratic due to several reasons such as:
    • It was focused on theoretical tools such as sophisticated mathematical models. These models did not work on the ground many a time because they were based on input/output coefficients that are highly aggregative. This was mainly due to data problems.
    • Planning documents generally resulted in duplication of the jobs of central ministries and the states by setting up parallel divisions in the planning commission itself.
    • During the successive plan periods, the targeted goals were compromised in the most arbitrary way. This was mainly because of the faulty budgeting resulting in absence of annualized break-up of targets set in the plan.
    • The multi-year budgeting in our country has its own problems. The rationale behind multi-year budgeting is that different programs have different time spans. For example, Bharat Nirman was launched for a four-year period 2005-09, while JNNURM was launched for seven years beginning in 2006. However, five years is too long a period and almost every plan immediately started dwindling after its launch. It could be more logical if a plan could be prepared for 3 years timeframe and the fourth and fifth years would be set as tentative plans. Further, the five-year plans were not in sync with the annual budgeting exercise. In the absence of a budget system that helps a five-year plan get implemented annually, the five-year planning remained at best as an academic exercise.
    • The plan/non-plan distinction in government expenditures had lost its relevance and needed to be abolished.
    • Dwindling flow of central assistance for state plans and the cessation of on-lending to the states by the center, the system of Annual Plan approval with the states had lost its significance and needs to be done away with.
    • The system of transfers from the center needed to be reformed.

Lost credibility of the planning commission

  • Successive governments had used the planning commission as a parking lot for decent placement for the favorable officers and academics, who could not be accommodated anywhere else as its members. Its credibility was lost due to its theoretical reports and data mining which generally did not stand correctly on the ground.
  • In the words of finance minister Arun Jaitley, the Planning Commission was useful in a command economy structure, which is not relevant today. India is a diversified country and its states are in various phases of economic development along with their own strengths and weaknesses. The planning commission used a “one size fits all” approach and imposed policies on states and tied allocation of funds with projects it approved.

NITI Ayog

  • NITI Aayog (Policy Commission) or National Institution for Transforming India was established via a Union Cabinet resolution on January 1, 2015, as a premier Policy Think Tank of the Union Government. It’s an extra-constitutional, non-statutory, and advisory body.
  • NITI Ayog does not have the power to impose policies. By establishing NITI Ayog the government wants to act as an “enabler” and leave impetus to provide a platform for cooperative federalism to the newly established body.
  • India was probably the first non-communist country which went for central planning. Starting with Harrod-Domear Model and later statistics of the Mahalanobis model, the planning commission. Set out sector-specific output and investment targets. It was strong enough to have a final say on resource allocation.
  • Most underdeveloped states including North-Eastern states had to suffer due to the dogged prescription of the one-size-fits-all scheme by the planning commission. The NITI Ayog seeks to give up the one size fits all prescription for a huge country like India with lots of vertical and horizontal imbalances.
  • Aims and Objectives of Niti Aayog
    • To work as an advisory body to give directional and strategic inputs to Union Government and also State governments on request.
    • Put an end to the slow and tardy implementation of the policy by fostering inter-ministry, inter-state and center-state coordination.
    • To foster cooperative federalism by evolving a shared vision of national development priorities on the principle of Strong states makes a strong nation.
    • To replace the top-down development approach with a bottom-top development approach. It would develop mechanisms to formulate credible plans to the village level and aggregate these progressively at higher levels of government.
    • To design a policy framework for weaker sections of society that may not have benefited from economic progress.
    • To create a knowledge, innovation, and entrepreneurial support system via a community of national and international experts, practitioners, and partners.
    • To serve as a platform for the resolution of inter-sectoral and inter-departmental issues in order to accelerate the implementation of the development agenda.
    • To monitor and evaluate the implementation of programs, and focus on technology up-gradation and capacity building.
  • Composition of NITI Ayog
Composition of NITI Ayog
  • Further, the NITI Aayog has full time members (number unspecified), part time members (maximum 2, these would be scholars from universities and research institutions), Ex-officio members (maximum 4, these are ministers from Union Council of Ministers), Special Invitees (appointed by PM for fixed tenure. Finally, there is a Chief Executive Officer (CEO) of the Niti Ayog, who is appointed by Prime Minister and has a rank similar to Secretary to the Government of India.
Composition of NITI Ayog
objectives of niti aayog
7 pillars of niti aayog
Difference between Niti Ayog and Planning Commission
  • Planning Commission was an advisory body, and so is Niti Ayog. But the key difference between them is that while the former had powers to allocate funds to ministries and states; this function will be now of finance ministry. Niti Ayog is essentially a think tank and a truly advisory body. Other differences are as follows:
    • The role of states in the planning commission era was limited. The states annually needed to interact with the planning commission to get their annual plan approved. They had some limited functions in the National Development Council. Since Niti Ayog has all chief ministers of states and administrators of UT in its Governing Council, it is obvious that states are expected to have a greater role and say in the planning/ implementation of policies.
    • The top-down approach is reversed in Niti Ayog. It will develop mechanisms to formulate credible plans to the village level and aggregate these progressively at higher levels of government.
    • The provision of the regional council is there in Niti Ayog to address local/regional development issues.
    • One of the new functions of Niti Ayog is to address the need of the National Security in the economic strategy. How this is to be done – is yet to be watched.
    • While the planning commission formed Central Plans, Niti Ayog will not formulate them anymore. It has been vested with the responsibility of evaluating the implementation of programs. In this way, while Niti Ayog retains the advisory and monitoring functions of the Planning commission, the function of framing Plans and allocating funds for Plan assisted schemes has been taken away.
    • The governing council, which has all chief ministers of states and administrators of the Union Territories sounds much like the National Development Council.
Challenges before NITI Ayog
  • NITI Ayog has to overcome two key challenges:
    • Accessing high-quality researchers in multiple disciplines who can partner with policymakers.
    • Creating a willingness among policymakers to learn from evidence instead of relying solely on institutions or ideologies.

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