RAYAT COLLEGE OF LAW,

RAILMAJRA.

INDIAN ECONOMY
PROJECT
TOPIC: ANALYSE THE CONCEPT, OBJECTIVES
AND STRATEGIES OF ECONOMIC PLANNING.

Submitted to: Submitted by:

MS. NITIKA SONI SAMRIDHI CHHABRA
B.COM LLB( SECTION C)
R.NO- 16630
 ACKNOWLEDGEMENT

First of all, I would like to thank Almighty God for giving me the
strength to complete my assigned work on time and with efficiency.
Then my teacher Ms. Nitika Soni deserves a special thanks for assigning
me with this project. It was a great experience which enhanced my
knowledge and experience. Then I would like to thank the department
for providing such opportunities. Last but not the least I would thank my
parents and friends for their immense cooperation.
 ECONOMIC PLANNING IN INDIA

Economic planning is the making of major economic decision, what and how much is to be
produced, and to whom it is to be allocated by the conscious decision of a determinate authority,
on the basis of a comprehensive survey of the economic system as a whole.

Professor Lewis has referred to six different sense in which the term economic planning is used
in economic literature. “First, there is an enormous literature in which it refers only to the
geographical zoning of factors, residential buildings, cinemas and the like. Sometimes this is
called town and country planning and sometimes just planning. Secondly, ‘planning’ means only
deciding what money the government will spend in the future, if it has the money to
spend.Thirdly, a ‘planned economy’ is one in which each production unit (or firm) uses only the
resources of men, materials and equipment allocated to it by quota and disposes of its product
exclusively to persons or firms indicated to it by central order. Fourthly, ‘planning’ sometimes
means any setting of production targets by the government, whether for private or public
enterprise.

Most governments practice this type of planning if only sporadically, and if only for one or two
industries or services to which they attach special importance. Fifthly, here targets are set for the
economy as a whole, purporting to allocate all the country’s labour, foreign exchange, raw
materials and other resources between the various branches of the economy.And, finally, the
word ‘planning’ is sometimes used to describe the means which the government uses to try to
enforce upon private enterprise the targets which have been previously determined.”

Economic Planning is essentially a way of organizing and utilizing resources to maximum

advantage in terms of social ends.

ECONOMIC PLANNING IN INDIA – IMPORTANCE OF ECONOMIC PLANNING IN

INDIA

Planned economy has not been established in any country in a day or in a year. Planning in
practice has a history of its growth and change over few decades. History of economic growth in
some countries reveals that planning has been painfully evolved and its growth or change is
attributed to certain factors which have facilitated the growth of planned economy in an
increasing number of countries.

Its development is the extensive and intensive. It is intensive in the sense that its process of
perfection is never complete. It is always subject to improvement. Its requirements are greatly
changing, certain historical factors have profoundly favoured the development of planned
economy. A variety of factors have led to the adoption of planning in various countries.

ECONOMIC PLANNING IN INDIA- OBJECTIVES OF INDIAN PLANNING

The main objectives of plan-ning in India include the following: for capital formation and
investment.

(VII) SELF-RELIANCE: Our plans also aimed at “self-reliance”. It deals with the freedom
from the need to import and therefore a policy of “import substitution” regardless of its cost.
This objective should have been taken to mean “ability to pay for our imports through our export
earnings”. Thus, we should have added to our export capacity and competitive strength in
international markets.

(VIII) PRECEDENCE TO PUBLIC SECTOR: In our planned growth, public sector was
assigned a place of precedence over the private sector so as to acquire commanding heights of
the economy and be in a position to use it for guiding the private sector along chosen lines. This
was done while ignoring the fact that public sector undertaking is inherently less efficient than
private ones.

STRATEGIES OF ECONOMIC PLANNING

Indian planners formulated a definite strategy of planned economic development keeping this
objectives in mind. Determination of such strategic aims are mostly based on critical appraisal
made by the commission keeping in view the political, economic and social aspects of the
country.

The strategy of plan aimed at reaching the cherished targets through a succession of medium
term plans. In this connection Mr. I.G. Patel observed, “Strategy implied essentially a deliberate
choice-a-choice to the joint and timing and manner of attack on the problems at hand.”

Thus the strategy of economic planning in India is mostly influenced by the following issues:

(I) MAHALANOBIS MODEL OF GROWTH;

(II) HEAVY INDUSTRY STRATEGY;

(III) EMPLOYMENT OBJECTIVE

(IV) SOCIAL OBJECTIVES OF DEVELOPMENT STRATEGY AND

(V) SOCIAL OBJECTIVES AND STRATEGY BETWEEN GROWTH AND

UNBALANCED GROWTH.

(I) MAHALANOBIS MODEL OF GROWTH:

Although the First Plan did not show any clear strategy of development but the formulation of a
strategy of development was attempted by Indian planners from the Second Plan onwards. Prof.
P.C. Mahalanobis was the real architect of the Second Plan and accordingly he introduced a clear
strategy of development based on Russian experience. This strategy gave too much emphasis on
investment in heavy industry for attaining industrialisation which was assumed as the basic
condition for rapid and accelerated economic development of the country. The basic strategy of
the Second plan was to raise the purchasing power of the people through investment in heavy
industries in the public sector and also by making adequate expenditure on health, education and
social services and to control the undesirable inflationary pressure by meeting the increasing
demand for consumer goods by arranging a planned supply of those goods. Accordingly, Prof.
Mahalanobis wrote, “In the long run, the rate of industrialisation and the growth of national
economy would depend on increasing the production of coal, electricity, iron and steel, heavy
machinery, heavy chemicals and heavy industries generally which would increase the capacity of
capital formation. Our important aim is to make India independent as quickly possible, of foreign
imports of producer goods so that the accumulation of capital would’ not be hampered by
difficulties in securing supplies of essential producer goods from other countries. The heavy
industries must, therefore, be expanded with all possible speed.”

In respect of basic strategy, Prof. P.C. Mahalanobis observed, “to increase investments in the
heavy industries and also expenditure on services, to increase purchasing power and create fresh
demand and on the other hand, to increase supply of consumer goods by increasing investment
and production as much as possible in the small household industries to meet the new demand.”

Thus this strategy was conceived and followed in such a manner that the plan would become
successful in creating larger employment opportunities, building a strong capital base and also
increasing the productive and technical capacity within the country.Thus the main stress was laid
on the introducing relief type of employment opportunity and income for those downtrodden
people who were poorly employed and not contributing to the net product of the country.
Therefore, cottage and small scale industries was expected to play a pivotal role for generating
employment Opportunities. Thus planning has been considered as an organised attempt of
matching a continuously increasing demand for a continuously increasing production leading to a
steadily expanding economy.Thus development of basic and heavy industry has been considered
as an important objective of Indian planning which is again considered as a pre-requisite for
achieving and sustaining economic growth in the long run.

(II) HEAVY INDUSTRY STRATEGY:

The strategy of planning as envisaged in the Mahalanobis model of growth emphasised on

investment in heavy industry for achieving accelerated industrialisation process which was
assumed as the basic condition for rapid economic development. Accordingly, Jawahar Lai
Nehru, the first Prime Minister of India also argued in favour of heavy industry for attaining
industrialisation.
Accordingly, he observed, “If we are to industrialise, it is of primary importance that we must
have the heavy industries which build machines.” He further stated that “There are some who
argue that the we must not go for heavy industry but for lighter ones. Of course we have to have
light industries also but it is not possible to industrialise the nation rapidly without concentrating
on the basic industries which produce industrial machines which are utilised in industrial
development.”

The planners of the country justified their strategy of attaining rapid economic development
through the process of rapid industrialisation on the ground that:

(a) Indian economy was basically an agrarian economy at the time of independence;

(b) Indian agriculture was over-burdened with heavy pressure of population on land and the
productivity of agriculture was very low;

(c) Rapid industrialisation was considered as a basic condition for the development both
agriculture and other sectors;

(d) Productivity of labour in the manufacturing sector is quite higher than that of agriculture and

(e) The income elasticity of demand for various industrial goods, was quite higher and the
manufactured goods were also having higher export opportunities.

The Planning Commission supported this strategy of heavy industry on two grounds:

Firstly, investment in the heavy industry is helping the economy of the country for building up
larger volume of capital stock and that too at a faster rate.

Secondly, heavy industries would help in laying the foundation of a strong and self-reliant
economy by expanding the activities of all the sectors and also by eliminating the country’s
dependence on the imports of machinery and equipment’s from foreign countries.

The alternative approach of developing light industries would help the country to produce larger
volume of consumer goods for raising the standard of living of the people in the shorter period
and also for controlling the inflationary spiral in prices. But this alternative strategy could be
achieved by neglecting the process of accumulation of capital stock within the country.

Thus, the Planning Commission argued in favour of production of capital goods and neglected
the approach of short period availability of consumption goods. But such large scale production
of capital goods would ultimately help in producing larger volume of consumer goods.

Moreover, this heavy industry approach would enable the country to produce larger volume of
capital goods initially in the short period and then to produce a large volume of both capital
goods and consumption goods in the long period.
IMPLICATIONS OF HEAVY INDUSTRY STRATEGY:

The following are the main implications of the heavy industry strategy.

Firstly, under the Nehru-Mahalanobis model of growth followed in India, the growth of heavy
industries would be limited by the growth of consumer goods industry in the household sector.
Thus this model gave active encouragement for the development of cottage and small scale
industries producing consumer goods by using modern machinery and electricity.

Secondly, the heavy industry approach towards development also realised the importance of
agriculture in the development strategy. Thus the Mahalanobis strategy of self-sustained growth
ultimately did not neglect the agriculture and small scale and cottage industries realising its
importance for increasing the supply of consumer goods in the economy.

Thirdly, the Mahalanobis strategy assigned a dominant role to the public sector for the
development of heavy industry with a long gestation period with the intention to prevent the rise
of monopoly ownership and exploitation.

Fourthly, the development strategy also gave due importance to the growth of private sector.
Accordingly, it expected that the private sector would develop and expand its activities in the
large arena of economic activities and thereby the private sector was given an important place in
the mixed economy of the country.

Finally-, the development strategy followed in the country initially forgotten the importance of
foreign trade to derive exportable surplus and laid much emphasis on foreign trade which was
again corrected since Third Plan onwards by adopting export promotion strategy.

Critical Appraisal of Heavy Industry Strategy:

The heavy industry strategy followed in Indian Planning has been subjected to following
criticism:

(a) Neglect of Agriculture:

Heavy industry strategy of development neglected the agricultural sector which is considered as
the mainstay of Indian economy and promoted the development of heavy industries at the cost of
agricultural development.

(b) Adverse impact of the development of heavy industries:

Development of heavy industries resulted some important bearings on the economy in the form
or:

(i) Adverse balance of payments situation;

(ii) Neglect of the problem of heavy population pressure and growing unemployment leading to
necessity of raising investment in labour intensive industries;

(iii) Heavy concentration of income and wealth in the hands of few large industrial and business
houses; and

(iv) Making the planning process highly unbalanced being too much growth oriented and not
employment oriented.

(c) Growing unemployment:

Heavy industry strategy of Indian planning neglected the growing unemployment problem
initially leading to the growth of serious unemployment problem in the country.

(d) Failure of the public sector:

The investment strategy adopted in the planning gave overwhelming importance to the
development of public sector especially in basic, heavy and infrastructural industries which
ultimately failed to yield expected rate of return. Rather, the losses incurred by these PSUs
resulted emergence of high cost economy of the country.

(e) Trade deficit:

The development strategy followed in the plan, having its high import intensity, resulted growing
trade deficit of the country.

(f) Growing inequality:

The investment strategy adopted in our plans accentuated the inequalities in the distribution of
income and wealth during the plan period and thereby failed to achieve the objective of
‘socialism’, ‘economic liberty’ etc.

(g) Neglect of unorganised sector:

The development strategy followed in our plan neglected the development of unorganised sector
in which the majority of our population are engaged. This has led to a serious gap between the
privileges enjoyed by the workers engaged in the organised sector and that of unorganised sector.

(iii) Employment Objectives of Development Strategy:

The development strategy of planning in India initially neglected the employment objectives. In-
spite of having heavy population pressure and growing unemployment problem, the planners
failed to take adequate steps for generating employment opportunities for the growing millions
of people of the country.
It was mostly due to the conflict between the ‘rapid growth’ and ‘increase in employment
opportunities’ that prevailed among the planners and experts of the country in the initial decade
of planning. It was mostly from the third plan onwards and more specifically from the Sixth Plan
onwards the employment generation programme got its due importance in Indian planning
process.

(IV) SOCIAL OBJECTIVES OF DEVELOPMENT STRATEGY:

One of the important aspect of Mahalanobis strategy of development is increase in the level of
production along with attainment of better and more equal distribution of income and wealth.
Indian planners were also influenced by Fabian socialist strategy of adopting fiscal policy of
taxation and public expenditure so as to achieve two important social objectives of planning, i.e.,
the elimination of inequalities in the distribution of income and wealth and secondly the
establishment of socialist society based equality and justice.

While the progressive income tax, capital gains tax, estate duty, gift tax wanted to transfer a part
of surplus income and wealth from the richer sections to the government, the public expenditure
on public health, education, sanitation, housing, social welfare programmes etc. was attempted to
promote the level of welfare of the lower and weaker sections of Indian society.

However, the Indian planners did not make any attempt for undertaking measures for direct
redistribution of wealth and properties so as to reduce the degree of disparities of income and
wealth and also to check concentration of economic power excepting their half hearted attempts
to introduce land reforms and ceiling on land holdings in rural areas of the country.

(V) CHOICE OF STRATEGY BETWEEN BALANCED GROWTH AND UNBALANCED

GROWTH IN INDIA:

In the early part of the development process since independence, India was in a dilemma to
select a proper development strategy between balanced growth and unbalanced growth. At that
time, India was suffering from scarcity of resources and factor inelasticity’s.

Thus it was really a difficult choice for India to adopt the strategy of balanced growth from the
very beginning. Mr. P.C. Mahalanobis, the architect of Indian planning, could realise this
deficiency of the country in right proportion.
While selecting a proper development strategy for the Second Five Year Plan in India, Mr.
Mahalanobis aptly suited that India could ill-afford to concentrate equally on the development of
all sectors of the economy at that moment.

Eulogizing this idea, Mr. Mahalanobis observed in his “Talks on Planning” that establishing
heavy machinery industry is considered as the most appropriate decision and the course of action
for India from the economic point of view.

The development of such industry would provide necessary machines and other capital
equipment’s to the other basic industries, viz., steel, fertilizers, textile, aluminium, cement etc.
Then Mr. Mahalanobis attached the second highest priority to the development of industries
producing synthetic raw materials. With the development of these industries, the production of
some other items like steel, coal, electricity, aluminium, cement, fertilizers, transport
equipment’s etc. would increase which ultimately leads to a development of a wide range of
consumer goods industries.

Thus Mahalanobis’s idea is having some conformity with the theory of balanced growth. In a
socialist country, the level of consumption is controlled to a modest level during the initial stage
of its development and thereby the country can channelize its investment towards capital goods
industries. But in a mixed economy like India, the Government is having a little control over the
production system and investment decisions.

With the growth of income of elite class of the society, the demand for consumer goods
including luxury and semi-luxury goods started to increase, leading to a huge expansion of
consumer goods industries in the private sector and expansion in its output. Thus due to such
move, simultaneous growth of various industries takes place.

Thus in-spite of its submission towards the strategy of unbalanced growth, the strategy fails to
work in India. In spite of experiencing a huge energy crisis, India failed to attract sufficient
investment in the power sector although the flow of investment in the automobile industry and
other white goods industry started to pile up due to its growing demand from the urban and rural
elites and increasing profitability.

Considering this present trend, Indian planners and policy makers has started to compromise
between these two strategies and has been synchronizing the investment flow into the various
sectors of the economy. This is no doubt a departure from our previous stand based on
Mahalanobis model to a compromise bid under the present changed scenario.