Everything you need to know about economic planning in India.

Brief History of Economic Planning:

The concept and the idea of planning is indeed an old one used in different senses by different authors. In most, economic planning ‘was essen­tially a war-time phenomenon’.

For instance, Germany gave the concept of planning a concrete shape during the First World War and this concept was sent to the cold storage once the war was over.

However, the most notable capitalist countries— the United States and the United Kingdom— successfully applied the use of planning to achieve war priorities during the Second World War. Since planning involves a deliberate governmental effort for achieving some macroeconomic social objectives over the long run, intervention by the govern­ment in these economies is of ‘indicative’ variety.


This means that in the fulfillment of macroeconomic goals, no command or dictates of the government or the planning authority is entertained as is done in socialist countries. Planning in socialist countries is, by nature, ‘authoritarian’ or a ‘direc­tive’ one where planning involves strict govern­ment regulation as opposed to the ‘free play of market forces’.

However, the belief in the virtues of a ‘free market economy’ came under big assault in the inter-War years (1919-38) when the Soviet experi­ment of centralised economic planning for a 5-year period (1928-33) made her as ‘second world power’ next to the USA. Indeed, after the October Revolution (1917), the then Soviet Union seceded first from the market economy and undertook centralised economic planning for a 5-year period, 1928-33.

After the World War II, Central and Eastern Europe and the Baltic states and subse­quently China, North Korea and Vietnam under­took national planning. This vast experiment of economic planning in socialist states was a lesson for the Third World countries which attained inde­pendence from the colonial rule in the 1940s and 1950s.

Seeing the success of the Russian experi­ment of planning, India launched her ‘democratic planning’ on 1 April 1951. In the 1960s, India became a ‘model country’ for the newly indepen­dent states that made efforts to centralize control of production and allocate resources through state planning. The basic philosophy at that time was: government is good and the market is bad.


Meanwhile, disillusionment with planning started gathering its force in the 1970s and 1980s as governments faulted in many directions. Euphoria over planning snaked because of corruption, governance failure, state capture by vested interests, etc. Market is good and govern­ment is bad argument started gathering storm in the 1980s. In Eastern Europe, government deficit rose to a great height resulting in a high inflation. There was virtually a total breakdown of distribu­tion and transpiration even of basic necessities. Grey and black markets flourished.

Thus, to correct the inefficiencies of economic planning, market solution was deemed to be an ideal solution. The experience of government failure in many deve­loping countries and the emergence of market economies even in China, Central and Eastern Europe and the Commonwealth of Independent States (CISs) of the former Soviet Union served as policy lessons to the Third World countries of the South.

However, against this backdrop, one can only argue that planning has a great role to play in many areas in the developing economies. The following section starts with the meaning and rationale of economic planning.

Meaning of Economic Planning:

Economic planning is often regarded as a technique of managing an economy. When the structure of an economy becomes complex and subject to rapid change and transformation (due to population growth, discovery of resources, indus­trialisation, etc.,) some sort of advance thinking becomes necessary to resolve that complexity and to prepare the economy for those changes. Such preparation is nothing but planning.


Economic planning, to most people, means state intervention in an economy, as opposed to the ‘free’ play of market forces. However, any form of state intervention must not be confused with planning. It may be noted that such governmental intervention can be thought of as concerted, deliberate attempt of alternative method of allocating economic resources to achieve some pre­determined goals— either to replace or supplement the market mechanism. From this idea, one can argue that economists are divided over the concept of economic planning.

One author defined economic planning as collective control or suppression of private activities of production and exchange. To another economist, planning means the direction of productive activity by a central authority. It is evident then that the basis of authority is different.

An economic plan is simply a specific set of quantitative targets (e.g., faster economic growth, higher consumption, lower unemployment, reduction in income-consumption inequality, etc.,) to be achieved within a scheduled time, with a strategy for attaining those targets. Economic planning is thus an exercise of organising and utilising scarce resources and allocating them in accordance with the pre-determined priorities so as to have maximum social welfare.

An economic plan is regarded as a programme of action; it is not a guarantee for action. It may also be taken to mean an instrument for regulating a free private enterprise economy. In short, a good plan is one which makes adequate provision for and ensures that its targets are properly fulfilled.

Nature and Scope of Planning:

Economic planning is not peculiar to a socialist economy. Planning, as viewed in different countries, varies from one economic system to the other. In other words, the nature and scope of planning is largely governed by the types of economic systems. This means that the content of economic planning as seen in a capitalist economy is different from that of a socialist economy. For instance, directive planning as practised in a socialist economy differs from indicative planning as viewed in a capitalist economy.

Planning in Socialist Economy:

Under socia­lism, as means of production are owned by the state, the government formulates and implements plans where only governmental control and regulation direct economic activities to achieve the societal goals. This kind of planning is known as directive planning/centralized planning/impe­rative planning/planning from above.

This kind of planning replaces free market principles. With regard to this kind of planning, the national plan represents a binding directive. The targets of national plan and its financial provision represents orders to be carried out by the various ministries and the enterprises controlled by them. Planning by direction clearly reflects a bureaucratic and totalitarian outlook.

Planning in a Capitalist Economy:

Truly speaking, planning has no role to play in a capita­list economy. In spite of this, some sort of planning, call it indicative planning, is associated with capita­lism. Arthur Lewis remarks: “The state can plan as much as it wants but it should plan not by direc­tion, but by manipulating the market.” In a capi­talist country, planning is initiated at a decentralised level.

The implementation of the plan is not by command or order of a central planning autho­rity. Planning, here, is indicative in nature. Here the private sector works rather in an uncontrolled manner. The state acts as an agent of forecasting or consultation in the sense that superior economic information in the form of forecasts will be provided by the state to the private sector.

Planning in a Mixed Economy:


Less developed countries are engaged in development planning. Further, these economies are known as mixed economies. In these economies, one finds private sector as well as government ownership and control over resources. In other words, mixed economies are characterised both by government activity, intervention and action of market forces. Certain areas are kept reserved for public sector so as to attain maximum growth.

But, through various instruments of control, private businesses are made to fall in line with the objectives and targets of the national plan. Thus, planning under mixed economy reflects both market inducement and state control. Indian planning—a classic example of planning in a mixed economy—is a democratic planning. Being democratic planning, it is a decen­tralized one as opposed to socialist centralized planning. Further, it is called planning from below.

Rationale of Planning:

The basic task of economic planning in developed countries is one of controlling the trade cycle fluctuations—the ups and downs of economic activity. But in less developed countries, planning is the way of securing higher growth by harnessing the available natural and human “resources as far as possible. The task is one of securing economic development and, thus, this kind of planning is called developmental planning.

Generally, poor economies experience vicious cycle of poverty. For growth, these countries are required to break this vicious circle which by no means is easy to accomplish. Now, it is a histori­cally testified truth that it is never accomplished under free enterprise market economy. Herein lies the rationale of planning in a less developed country.


Several economic and institutional arguments are advanced towards the rationale of planning.

These are:

Limitations of Free Market:

It is said that free market allocates resources efficiently through the Smithian so-called invisible hand or price mecha­nism. This mechanism determines an economy’s decision of what, how, and for whom to produce. It is argued that decentralized decision-making is more efficient. In other words, market works, market is efficient, and market is good.

But, in real life, markets do not work efficiently. As far as resource efficiency is concerned, markets fail. Hence the name market failure. It is an outcome that results in economic inefficiency. Market failure means any market performance that is judged to be less superior than the best attainable outcome. In the real world, markets fail to achieve allocational efficiency of society’s scarce resources.


Monopoly or any form of imperfect competition distorts market signals thereby adversely affecting people’s interests. ‘Public goods’ is an example of market failure. Free market is shy of delivering public goods since these goods are non-exclusive and non-rivalrous in character. Since people are unwilling to share the costs of public goods, such must be subsidised or provided by the government if they are to be produced efficiently.

‘Externalities’ also cause market failure. With externalities, consumers or producers do not have to pay all the costs of their activities or are unable to get all the benefits. Thus, externalities cause allocational inefficiency of resources.

Further, in poor developing countries, goods market and inputs market are not well-organised. It then results in distorted prices that give wrong signals and incentives. Thus, the building up of an efficient organised market requires government to play an effective role so that resources are allocated efficiently.

This market failure argument is definitely an incentive to opt for economic planning both in developed and developing economies. In view of this, planning has become an essential and integral part of development programmes as a universal strategy.

The Equity Argument:

It was believed earlier that the market mechanism fosters efficiency. Further, the policymakers of the Third World countries in the 1950s and 1960s argued that higher economic growth would ensure equity and justice. However, our experiences tell us a different story: its trickledown effect does not occur.

Thus, markets fail to achieve not only efficiency but also equity. The most important aim of the government of the so-called developing mixed economies is to promote equity. Market forces operate in such a manner that income and wealth get concentrated in the hands of a few. High economic growth then bypasses the under-privileged.


In other words, growth becomes exclusive, instead of being an inclusive one. Again, private investors do not like to invest in physical infrastructures and social sectors like health, education, etc. Economic planning is assumed to help in these directions. Government can utilise its investible resources to provide the basics of life for a larger segment of population. Planning process can help to break the vicious circle of poverty. Planned adjustment can ensure fairness and justice.

The Resource Mobilisation Argument:

Resour­ces are always limited, and for developing econo­mies too. Under the circumstance, wastage or ill- direction of investible resources may be thought of as criminal offence. Resources are to be utilised judiciously. Private investors put their money in manufacturing quick return-yielding lipstick, face powder, and other elitist consumption goods than articles of primary necessity.

Investment in such low-priority areas is governed by the motive of private profitability. But social benefits must be the benchmark for allocating investible resources in productive ventures. Government intervention is deemed necessary so as to channel scarce resources into the most productive projects with a view to optimising societal gains. The following quote from a 1965 report of a United Nations Conference on planning is worth presenting:

“It is an integral task of planning to achieve the best possible use of scarce resources for economic development. The need for using appropriate criteria for selecting projects arose because of the failure of market mechanism to provide a proper guideline. In less developed economies, market prices of such factors of production as labour, capital, and foreign exchange deviated substantially from their social opportunity costs and were not, therefore, a correct measure of the relative scarcity or abundance of the factor in questions.”

Learning by Experience Argument:

It is strongly argued that economic planning can help poor Third World countries of Asia and Africa to come out from colonial domination. Such colonial relationship for the last few hundred years created a wide gap between the developed countries and less developed countries. After winning political independence most of these countries opted for economic planning so as to have higher growth and improved living standards of the masses.

These economies must not rely on market mechanism and need to address their problems in the light of state intervention and planning. Planned intervention provides the necessary background to challenge the economic supremacy of the developed economies and in the process this can be seen as essential for self-reliant growth.

The Attitudinal or Psychological Argument:


There is a further element—enthusiasm of the people about the growth prospects—which can also be delivered by planning. A planned economy may encourage people to participate in various socio­economic programmes, such as illiteracy drive, elimination of killer diseases, removal of poverty, etc. The importance of participation in social change is undeniable. Indeed, actual participation and public action help in changing governmental influence and its priorities.

Thus, by involving people .in various planned programmes, the government can destroy religious taboos and old customs, casteism and many other conservative outlooks which act as drag on economic develop­ment. A congenial socio-psychological climate can better be established if governmental interference in market economies takes place. A progressive government, through its development planning, can best provide the needed incentives to overcome inhibiting and reactionary forces, like sectionalism, fundamentalism, casteism. This then brings about material and social advancement.


On the contrary, the prevailing neoliberal economic thought suggests that the market mechanism and competition can attain allocational efficiency better than a comprehensive macro-economic planning. The practice of planning pursued in different countries has failed to bring many of the benefits expected from it. One talks about implementation failure, institutional failure, etc.

No longer, planning is considered a sacred cow; it cannot work well. But from a realistic frame of mind one can contest this market supremacy. Allocative decisions in developing countries cannot be left, however, to the market forces. It is the market imperfection that leads to wrong resource allocation. Further, its role in establishing distributive justice is subject to serious scrutiny.

Anyway, there are both market failures and plan failures. Plans and markets indeed are not thought to be as incompatible opposites. What is now recommended is rather a ‘balanced growth’ of both planning and market.

Planning or government intervention in a market-oriented deregulated economy should:


(i) Ensure that markets function in a manner desired by people;

(ii) Plan action in areas where externalities emerge;

(iii) Lobby for the poor so as to fulfill social objectives; and

(iv) Maintain macroeconomic stability so that the interests of the poor, vulnerable are not compromised.

Thus, planning has a great role to play in a poor, developing deregulated liberal economy. The context of planning needs to be changed.