GS Notes

6. Economics Notes 12

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Elaborate Notes

BACKGROUND OF PLANNING IN INDIA

  • Imperative Planning / Centralized Planning:

    • Also termed authoritative planning or planning by direction, this is a top-down approach where a central authority (e.g., a Planning Commission) sets socio-economic goals and targets, and allocates resources for their achievement. The private sector, if it exists, has a secondary and highly regulated role.
    • This model was heavily influenced by the Soviet Union’s GOSPLAN, which achieved rapid industrialization through a series of Five-Year Plans starting in 1928.
    • In the Indian context, while not fully imperative, the early phase of planning (until the 1980s) had strong elements of this approach, with the public sector designated as the “commanding heights of the economy,” a term popularised by Jawaharlal Nehru. The state had a dominant role in investment, production, and regulation.
    • Gandhian Alternative: In contrast, Mahatma Gandhi advocated for decentralized planning, rooted in the village as a self-sufficient unit (gram swaraj). His economic philosophy, which can be partially seen in the ‘Gandhian Plan’ formulated by Sriman Narayan Agarwal in 1944, emphasized village and cottage industries, trusteeship (where the wealthy hold their excess wealth in trust for society), and a bottom-up approach to development. This was considered more idealistic and was not the primary model adopted post-independence, which favoured the Nehru-Mahalanobis model of state-led heavy industrialization.

  • Long-term Objectives of Indian Planning:

    • Economic Growth: The primary goal was to increase the Gross Domestic Product (GDP). The First Five-Year Plan was explicitly based on the Harrod-Domar Model, which posits that the growth rate of an economy is directly proportional to the rate of savings and investment (s) and inversely proportional to the capital-output ratio (k). The model suggested that by increasing government investment, a higher growth rate could be achieved.
    • Poverty Alleviation: This objective saw only partial success. While poverty rates declined, India’s performance lagged behind that of countries like China, which, starting from similar levels in the 1980s, achieved a much more dramatic reduction in poverty through state-led investment in agriculture, rural enterprises, and export-oriented manufacturing.
    • Reduce Inequality: This goal gained prominence from the Eighth Five-Year Plan (1992-97) onwards, with an explicit focus on “human development.” Earlier plans aimed to reduce inequality through land reforms and progressive taxation, but with limited success.
    • Self-Reliance (Atmanirbharata): This was a cornerstone of early planning, driven by the desire to reduce dependence on foreign aid, capital goods, technology, and food grains. The experience with food aid under the US Public Law 480 (PL-480) program, which was perceived as having political strings attached, strengthened this resolve. Success was achieved in food security (Green Revolution), building a domestic capital goods industry, and accumulating foreign exchange (FOREX) reserves post-1991. However, dependence persists in critical areas like crude oil, advanced manufacturing technology, and edible oils.
    • Handling Unemployment: This has been a persistent challenge. The planning model often favoured capital-intensive heavy industries over labour-intensive sectors, leading to a situation of “jobless growth.”

  • Indicative Planning / Decentralized, Flexible Planning:

    • Post the economic reforms of 1991, there was a paradigm shift. The state’s role moved from being a primary producer and regulator to a facilitator. In indicative planning, the state sets broad targets and creates a policy environment to encourage the private sector to achieve them.
    • This shift was complemented by governance reforms, notably the 73rd and 74th Constitutional Amendment Acts (1992), which constitutionally mandated Panchayati Raj Institutions and Urban Local Bodies. This was a structural move towards decentralized, bottom-up planning, where local bodies are empowered to prepare and implement plans for economic development and social justice.
    • The Eighth Five-Year Plan marked the formal transition from a predominantly imperative to an indicative planning framework.
    • Post-8th FYP Challenges: The government faced the dual challenge of promoting growth through structural reforms (requiring infrastructure investment) while also ensuring an inclusive economy (requiring welfare spending). Additionally, empowering local governments through fiscal devolution increased pressure on the exchequer, contributing to a higher fiscal deficit.

POVERTY

  • Conceptual Focus: India’s official poverty estimates have historically focused on Absolute Poverty, which is defined by a minimum level of income or consumption required to meet basic needs (the poverty line), often based on a minimum calorie intake. This contrasts with Relative Poverty, which is measured in relation to the average income or wealth of a society.

  • Causes of Limited Success in Poverty Alleviation:

    • Over-reliance on Trickle-Down Theory: Until the Fifth Five-Year Plan (1974-79), which introduced a direct attack on poverty with the slogan Garibi Hatao, there was a prevailing belief that the benefits of aggregate economic growth would automatically “trickle down” to the poorest sections. This theory, associated with economists like Arthur Lewis, proved inadequate in the Indian context due to structural inequalities.
    • Implementation Issues & Leakages: Government schemes were plagued by corruption and administrative inefficiency. A famous observation attributed to Prime Minister Rajiv Gandhi in 1985 stated that for every rupee spent by the government on welfare, only 15 paise reached the intended beneficiary. The Planning Commission itself noted significant leakages.
    • Neglect of Agriculture: The planning process, especially from the Second Plan onwards, prioritized industry. This was a critical failure, as a majority of the population and the poor were dependent on agriculture. Research by scholars like Montek Singh Ahluwalia has shown that agricultural growth has a significantly stronger impact on poverty reduction than industrial growth. A 1% growth in agriculture is estimated to be 2-3 times more effective in reducing poverty.
    • Capital-Intensive Growth: The focus on heavy industries created limited employment opportunities for the large, unskilled labour force.
    • Marketisation of Basic Services: With the gradual withdrawal of the state post-1991, essential services like education and health became increasingly privatized and expensive, making them inaccessible to the poor and pushing many into poverty due to high out-of-pocket expenditure.
    • Multidimensional Nature of Poverty: Poverty is not merely a lack of income. As conceptualized by Nobel laureate Amartya Sen in his “Capability Approach,” poverty is the deprivation of basic capabilities and freedoms. This multidimensional view encompasses social exclusion, gender inequality, lack of political voice, and poor access to health and education, a concept now captured in indices like the Multidimensional Poverty Index (MPI).

  • Poverty Trap: This refers to a self-perpetuating cycle where poverty leads to conditions (e.g., poor nutrition, lack of education, ill health) that prevent individuals from earning enough to escape poverty. Low income leads to low savings and investment, which in turn leads to low productivity and perpetuates low income, making human capital ineffective.

  • Environmental Kuznets Curve (EKC):

    • This theory, named after economist Simon Kuznets, posits an inverted U-shaped relationship between per capita income and environmental degradation. In the initial stages of economic development, pollution and resource depletion increase. After a certain level of per capita income is reached (the turning point), environmental degradation begins to decrease as countries can afford and demand cleaner technologies and stronger environmental regulations. This curve is a subject of intense debate, with critics arguing that the relationship does not hold for all pollutants and that global environmental problems (like climate change) may not be resolved by individual countries getting richer.

ECONOMIC PLANNING

  • Rationale for Planning in India:
    • Failure of the Market Mechanism: At independence in 1947, the Indian economy was characterized by colonial exploitation, backward agriculture, nascent industry, and widespread poverty and illiteracy (life expectancy was around 32 years). It was widely believed by the national leadership, including Nehru, that the free market (laissez-faire) mechanism alone could not address these deep-seated structural problems or generate the large-scale investments needed for infrastructure and industrial development. The Great Depression of the 1930s had also undermined faith in unregulated markets globally.
    • Ensuring Social Justice: A free market economy rewards based on existing assets and skills, which would have exacerbated inequalities in a society as stratified as India. State intervention through planning was seen as essential to direct resources towards poverty reduction, employment generation, food security, and balanced regional development.
    • Mobilization and Allocation of Scarce Resources: India was a capital-scarce country. Planning was a tool to mobilize domestic savings and foreign aid and channel these limited resources into priority sectors (like heavy industry, power, irrigation) to achieve long-term, self-sustaining growth in an egalitarian manner.

FIVE-YEAR PLANS

  • First Five-Year Plan (1951-56):

    • Focused on addressing the immediate problems of food shortages, refugee influx, and inflation.
    • Prioritized agriculture, irrigation, and power projects. Major projects like the Bhakra-Nangal Dam and Hirakud Dam were initiated. It was based on the Harrod-Domar model emphasizing savings and investment. The plan was largely successful, achieving a growth rate of 3.6% against a target of 2.1%.

  • Second Five-Year Plan (1956-61):

    • Marked a decisive shift towards rapid industrialization based on the Prasanta Chandra Mahalanobis model. This model emphasized investment in heavy, capital goods industries (like steel, machinery) with the logic that this would build a strong industrial base for long-term growth (a trickle-down effect through ancillary industries and employment).
    • The Industrial Policy Resolution of 1956 (IPR 1956) was adopted, which reserved key industries for the public sector, leading to the system of extensive licensing, permits, and regulations known as the “License Raj.”
    • While focusing on heavy industry, it also gave space to cottage and small-scale industries for generating employment and producing consumer goods.

  • Third Five-Year Plan (1961-66):

    • Aimed to make India a “self-reliant” and “self-generating” economy. It was based on the idea that the economy had entered the “take-off stage,” a concept from W.W. Rostow’s ‘The Stages of Economic Growth’ (1960).
    • It sought to balance industrialization with agricultural production. Key institutions were established:
      • Food Corporation of India (FCI) in 1965 for procurement, storage, and distribution of food grains.
      • Agricultural Prices Commission in 1965 (renamed Commission for Agricultural Costs & Prices (CACP) in 1985) to recommend minimum support prices (MSP).
      • Industrial Development Bank of India (IDBI) in 1964 as an apex financial institution for industry.
    • The plan was a failure, derailed by the Sino-Indian War (1962), Indo-Pak War (1965), and severe drought (1965-66).

  • Plan Holiday (1966-69):

    • Due to the failures of the Third Plan, three annual plans were implemented instead of a full Five-Year Plan.
    • This period witnessed the onset of the Green Revolution, which introduced high-yielding variety (HYV) seeds, fertilizers, and irrigation, particularly in Punjab, Haryana, and Western UP.
    • The Indian Rupee was devalued for the first time in 1966 to boost exports.

  • Fourth Five-Year Plan (1969-74):

    • Based on the Gadgil strategy, with the twin objectives of “growth with stability” and “progressive achievement of self-reliance.”
    • Renewed focus on agriculture and social justice.
    • Major events included the nationalization of 14 major commercial banks in 1969 to align the banking sector with national priorities.
    • The Monopolies and Restrictive Trade Practices (MRTP) Act, 1969 was enacted to prevent the concentration of economic power. Post-1991, with increased M&A activity, this act was replaced by the Competition Act, 2002, and the Competition Commission of India (CCI) was established to promote fair competition.

LONG-TERM OBJECTIVES (CRITICAL ANALYSIS)

  • Unemployment: The problem persisted due to:

    • Stagnation of Manufacturing: The sector’s share in GDP remained stagnant, failing to absorb surplus labour from agriculture.
    • Stringent Labour Laws: Laws like the Industrial Disputes Act made it difficult for firms to fire workers, discouraging formal hiring and promoting contractualisation.
    • MSME “Dwarfs”: Many Micro, Small, and Medium Enterprises remain small for decades, failing to scale up and create jobs due to regulatory and credit constraints. This was highlighted in the Economic Survey 2018-19.
    • Over-Tertiarization: The service sector grew rapidly post-1991, but many service jobs were low-skilled or required high skills, creating a mismatch for the available labour force.
    • Disguised Unemployment: Prevalent in agriculture, where more people are employed than are productively needed.
    • Skill Gap: A disconnect between the education system, which emphasizes rote learning, and the skills demanded by industry.

  • Link between Informalization and Globalization:

    • Post-1991 Liberalisation, Privatisation, and Globalisation (LPG) reforms exposed domestic firms, especially MSMEs, to intense foreign competition.
    • To remain competitive, firms and incoming MNCs adopted cost-cutting measures, chief among them being the use of contract labour, which offered flexibility and lower costs. This led to the informalization of the workforce, with workers lacking job security, social security benefits, and legal protection. The rise of the gig economy is a modern extension of this trend.

TYPES OF ECONOMIC PLANNING

  • Rolling Plan:

    • This concept, advocated by economist Gunnar Myrdal, involves a dynamic planning process where targets and allocations are revised annually based on performance and changing conditions. It consists of three plans running concurrently: an annual plan, a medium-term plan (3-5 years), and a long-term perspective plan (10-20 years).
    • It was introduced in India by the Janata Party government for the year 1978-79 but was terminated when the Congress government returned to power in 1980 and reinstated the traditional Five-Year Plan model with the Sixth Plan.

  • Perspective Planning:

    • This involves setting long-term goals over a 15-20 year horizon. These broad objectives are then operationalized through a series of shorter-term (e.g., five-year) and annual plans. This provides a long-term direction while allowing for medium-term flexibility.
    • NITI Aayog has adopted this approach with its 15-year Vision, 7-year Strategy, and 3-year Action Agenda documents.

LATER FIVE-YEAR PLANS

  • Sixth Five-Year Plan (1980-85):

    • Marked a shift towards infrastructure development and a direct attack on poverty under the slogan Garibi Hatao.
    • The official poverty line was defined based on a standardized daily calorie intake (2400 kcal for rural, 2100 kcal for urban areas), based on the Alagh Committee (1979) recommendations.
    • Key institutions: National Bank for Agriculture and Rural Development (NABARD) was established in 1982, and the Export-Import (EXIM) Bank of India in 1981.

  • Seventh Five-Year Plan (1985-90):

    • Emphasized food, work, and productivity. Focused on rapid food grain production, increasing employment opportunities, and programs for education and social security.
    • The economy started a process of gradual liberalization and import substitution was given high importance.

  • Eighth Five-Year Plan (1992-97):

    • Launched in the backdrop of the 1991 economic crisis, this plan operationalized the LPG reforms. It is often called the “Rao-Manmohan” plan.
    • It marked a reorientation of the economy towards a market-based model and focused on human development. The Mid-Day Meal Scheme was launched nationwide in 1995.

  • Ninth (1997-2002), Tenth (2002-07), Eleventh (2007-12), and Twelfth (2012-17) Plans:

    • These plans continued the reform process with increasing focus on social sectors and inclusiveness.
    • 9th Plan: “Growth with Social Justice and Equality.”
    • 10th Plan: Launched National Rural Employment Guarantee Act (NREGA) in 2005 and National Rural Health Mission (NRHM) in 2005.
    • 11th Plan: Theme was “Towards Faster and More Inclusive Growth.” It was implemented during the Global Financial Crisis of 2008.
    • 12th Plan: Theme was “Faster, More Inclusive and Sustainable Growth,” adding the crucial dimension of environmental sustainability to the planning objectives.

ACHIEVEMENTS AND CRITICISMS OF FIVE-YEAR PLANS

  • Achievements:

    • Established a diversified industrial structure and a strong capital goods base.
    • Achieved self-sufficiency in food grains.
    • Developed significant scientific and technological capabilities (e.g., in space and atomic energy).
    • Created substantial economic infrastructure in transport, communication, and irrigation.
    • Improved social indicators like life expectancy, literacy rates, and infant mortality.

  • Criticisms:

    • Regional Imbalances: Growth was concentrated in certain regions (e.g., the “BIMARU” states lagged behind).
    • Inefficiency of Public Sector Undertakings (PSUs): Many PSUs became loss-making and inefficient due to lack of competition, political interference, and bureaucratic management.
    • Politicization of Planning: The allocation of resources and projects was often influenced by political considerations rather than economic rationale.
    • The slow average growth rate during the first three decades of planning (around 3.5%) was pejoratively termed the “Hindu rate of growth” by economist Raj Krishna.

On January 1, 2015, the Planning Commission was replaced by the NITI Aayog (National Institution for Transforming India), shifting its role from a resource allocator to an advisory think tank promoting “Cooperative Federalism.”

Prelims Pointers

  • Imperative Planning: Also called authoritative or centralized planning. Used in socialist economies.
  • Indicative Planning: Government acts as a facilitator; role of private sector is encouraged. Adopted by India post-1991.
  • Gandhian Plan (1944): Formulated by Sriman Narayan Agarwal.
  • First FYP (1951-56): Based on the Harrod-Domar Model. Focus on Agriculture and Irrigation.
  • Second FYP (1956-61): Based on the Mahalanobis Model. Focus on rapid industrialization and heavy industries.
  • Industrial Policy Resolution (IPR): Adopted in 1956.
  • Third FYP (1961-66): Aimed for a ‘take-off’ stage of the economy.
  • Key Institutions Established:
    1. IDBI: 1964
    2. FCI: 1965
    3. Agricultural Prices Commission (now CACP): 1965
    4. EXIM Bank: 1981
    5. NABARD: 1982
  • Plan Holiday: 1966-69. Three annual plans were made. Green Revolution started. Rupee was devalued in 1966.
  • Fourth FYP (1969-74): Based on the Gadgil Strategy. Nationalization of 14 banks (1969). MRTP Act enacted (1969).
  • Rolling Plan: Introduced by the Janata Government in 1978 for 1978-79.
  • Sixth FYP (1980-85): Slogan was Garibi Hatao. Poverty line based on food calorie method was standardized.
  • Eighth FYP (1992-97): Implemented LPG reforms. Mid-Day Meal Scheme launched in 1995.
  • Ninth FYP (1997-2002): Sarva Shiksha Abhiyan (SSA) launched in 2001.
  • Tenth FYP (2002-07): NREGA (2005) and National Rural Health Mission (2005) were launched. National Food for Work Programme (NFWP) was launched in 2004.
  • Eleventh FYP (2007-12): Theme was “Towards Faster and More Inclusive Growth.”
  • Twelfth FYP (2012-17): Theme was “Faster, More Inclusive and Sustainable Growth.”
  • NITI Aayog: Replaced the Planning Commission on January 1, 2015. It is an advisory think tank.

Mains Insights

1. The Agriculture vs. Industry Debate in Indian Planning:

  • Nehru-Mahalanobis View (Pro-Industry): The dominant view in the early years was that rapid industrialization, particularly of heavy and capital goods industries, was the only way to break the colonial economic structure, achieve self-reliance, and create a modern, powerful nation. Agriculture was seen as a source of surplus labour and food for the industrial workforce but not the primary engine of growth.
  • Gandhian & Alternative View (Pro-Agriculture): Critics like C. Rajagopalachari and economists like B.R. Shenoy argued that neglecting agriculture and consumer goods industries was a grave error. They contended that focusing on agriculture, the livelihood of over 70% of the population, would have directly addressed poverty, boosted rural demand, and created a more sustainable growth path.
  • Consequences of the Chosen Path: The focus on heavy industry led to long-term benefits like a diversified industrial base. However, in the short to medium term, it resulted in a neglect of agriculture (leading to food crises), a shortage of consumer goods (fuelling inflation), and limited job creation, which ultimately constrained the overall growth process.

2. The Ineffectiveness of the “Trickle-Down” Approach:

  • Cause: The underlying assumption that wealth created at the top would naturally percolate down to the masses failed to account for deep-rooted structural inequalities in India, such as the caste system, unequal land ownership, and lack of access to education and credit for the poor.
  • Effect: This led to a pattern of development where economic growth coexisted with persistent poverty and rising inequality. It necessitated a policy shift from the Fifth Plan onwards towards direct poverty alleviation programs (Garibi Hatao), which, despite their own implementation flaws, acknowledged the failure of the trickle-down mechanism.

3. Planning Shift: From Imperative to Indicative (Post-1991):

  • Causative Factors: The 1991 Balance of Payments crisis, the collapse of the Soviet Union (which discredited centralized planning), and internal inefficiencies of the public sector forced a fundamental rethinking of the state’s role in the economy.
  • Nature of the Shift: The state moved from being a ‘controller’ to an ‘enabler’. The focus shifted from direct investment and production to creating a favourable policy environment for the private sector, investing in social and physical infrastructure, and regulating markets to ensure fair competition.
  • Impact on Governance: This economic shift was complemented by a political shift towards decentralization (73rd/74th Amendments), aiming to make planning more responsive to local needs. However, challenges of fiscal capacity and functional autonomy for local bodies remain.

4. The Challenge of “Jobless Growth” and Informalization:

  • Structural Cause: India’s growth trajectory post-1991 has been led by services and capital-intensive manufacturing, which have a low elasticity of employment (i.e., a 1% increase in GDP leads to a less than 1% increase in jobs).
  • Globalization’s Role: Increased competition post-LPG reforms incentivized firms to enhance flexibility and cut costs, leading to widespread contractualization and informalization of labour. This weakened the bargaining power of labour and suppressed wage growth.
  • Policy Implication: This necessitates a multi-pronged strategy focusing on: (i) Promoting labour-intensive manufacturing (e.g., textiles, leather, food processing), (ii) Reforming labour laws to encourage formal hiring, (iii) Massive investment in skill development to bridge the education-industry gap, and (iv) Providing social security to workers in the informal and gig economy.

5. From Planning Commission to NITI Aayog: Evolution or Revolution?

  • Debate: Is NITI Aayog a fundamentally new institution, or is it merely the Planning Commission in a new form?
  • Argument for Revolution (A New Body): NITI Aayog is a departure as it has no power to allocate funds, a key function of the Planning Commission. It acts as an advisory ‘think tank’ promoting “cooperative federalism” by involving states as equal partners, unlike the top-down approach of the Commission.
  • Argument for Evolution (Continuation): It continues the core function of long-term strategic planning for the nation (e.g., its 15-year Vision document). It still plays a crucial role in monitoring government programs and providing policy inputs, albeit through persuasion rather than financial control. The shift reflects an adaptation of the planning process to the realities of a more market-oriented and federalized Indian economy.

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