TRANSFORMATIVE PLANNING
Whither Economic Planning?
MK Datar General Manager, IDBI Bank Ltd., Mumbai 1/20/2011 1:34:46 AM
Immediately after gaining political independence in 1947, India adopted a path of planned economic development. Though different opinions were expressed on several occasions about the need and desirability of planning itself or some aspect of it later, there were no two opinions about need for National Economic Planning at the time of independence. Even Indian industrialists accorded an important role to public sector investment as reflected in Bombay Plan prepared even before independence. Lack of development under the foreign rule meant paramount need for becoming self reliant. Further if foreign capital was excluded, in absence of a significant presence of domestic private capital the state needed to assume an active role in the development process. Hence the need to develop Indian industries with a strong support from state through public sector enterprises be it steel mills, power plants, petrochemical complexes; in effect all sectors which needed large investments but private enterprise was unable to undertake. This explains the observed unanimity for National Economic Plan with an important role for public sector investments. Planning Commission (PC) was set up through a cabinet resolution in 1950. Government controls on imports and domestic capacity creation in order to create a protective and conducive environment for Indian industries to flourish were other tools to supplement the planning process.
Planning Commission
Importance of planning and PC was highlighted by the fact that it was chaired by the Prime Minister himself. PC had a mix of members with technical background and politicians. Jawaharlal Nehru’s commitment to the idea of planned development guided the evolution of planning in the initial years. The success of Soviet Union, so obvious in 1940s and 1950s, too had influenced contemporary thinking about Indian Planning.
The mandate given to the PC was quite wide. It was charged with the responsibility of making assessment of all resources in the country, augmenting deficient resources, formulating plans for the most effective and balanced utilization of resources and determining priorities. It was expected to appraise from time to time progress achieved in each stage of the plan and to recommend the adjustment of policy. It was also to offer its advice on any specific issue if referred to it by the central or state Governments. Also no role was envisaged for PC in implementation which was the responsibility of various ministries in central government and / or state governments. The initial mandate given to the PC did not quite reflect the role of private sector participants. Even though Public sector investment was to have a key role in maintaining overall plan outlays, private investment was rarely lower than 35 / 40% of total investment. The mandate appeared not recognizing the market system that co-ordinates the activities of such participants nor did it reflected the need for a decentralised planning process in a federal entity. But activities of the PC in subsequent period were impacted by operation of both these factors. This paper represents an attempt to present a broad stroke picture of the evolution of planning in India and it also dares to predict the future course of direction.
Plan Strategy and Performance
The First Five year plan has very succinctly put what the planning should aspire to achieve. “The central objective of planning in India at the present stage is to initiate a process of development which will raise living standards and open out to the people new opportunities for a richer and more varied life” (Introduction to First Five Year Plan). In subsequent plans, the objectives became more comprehensive and perhaps also ambitious, to include creation of “socialistic pattern of society, gaining “commanding heights of the economy”, and achieving “reduction of inequalities in income and wealth and achieving “more even distribution of power”. These, without doubt, were desirable goals but these depended very heavily on role and efficiency of public sector enterprises. (PSEs) which were expected to generate adequate surpluses consistently and plough it back through fresh investments in desired sectors. The system of industrial licenses was to be a means to prevent concentration of income and wealth. Subsequent studies, however, revealed that the very system helped large industrial houses to corner licenses and help retain their monopoly status.
After successful First Five Year Plan, the Second Five Year Plan unveiled a strategy of accelerated development through development of heavy & capital intensive industries. This disturbed the initial consensus about the planning process. Brahmananda & Vakil, inter alia, argued the need to accord priority for agriculture, instead of heavy & capital goods industries, so that supply of wage goods could be enlarged. The underachievement of the planning process was reflected in slower than targeted growth during the third five year plan period (Table 1). This coupled with two wars and a severe draught necessitated a plan holiday for three years. Planning resumed in 1969 when Fourth Five Year Plan was launched. But there were two other occasions (in 1979-80 and 1990-91) when Five Year Plans were replaced by Annual Plans. (Table 1).
Centralized planning process in a diverse country like India with a federal constitution should be considered little bit anachronistic. In 1972 Planning Commission advised state governments to set up state planning boards as apex planning bodies with chief Minister as the chairmen and the finance minister, Planning Minister and technical experts representing various departments and disciplines as members. This scheme envisaged decentralization of planning process to the district and ultimately block level. While decentralization has taken some roots at the state level, further decentralization to lower levels of governments, notwithstanding constitutional amendments to strengthen Panchayat Raj institutions, remains an unachieved goal.
Persistent lackluster growth performance of the Indian Economy during 1960s and 1970s drew critical attention to shortfalls in planning process & development policies pursued by Government of India. Spectacular growth performance by other countries, the so called Asian tigers in particular, led to demands for shift from closed economy approach and its substitution by an export oriented outward looking approach giving more lee way to private initiatives and competitive markets. A variety of critiques of planning experiences in India, in particular, and prescriptions for future improvements in it are reflected in Ahluwalia, Bardhan, Chakravarty and Patnaik.
Over the years, economic policies have become more open, market oriented and private sector friendly particularly since mid 1980s. There have been significant shifts in the thinking about the role of public sector. The actual performance of PSEs has not been as expected. As a result, desired higher share of public sector investment was not achieved. Moreover, the need to maintain the fiscal balance has reduced the ability of the government to commit additional resources at the disposal of PSEs. This became another reason to encourage private and foreign investments in several sectors hitherto reserved for PSEs.
As reflected in Table 2 relative contribution of Public sector investment has reduced significantly over the years. This has eroded numerical primacy of public sector investment. Plan exercises were primarily for public sector component of plan investment. Less than satisfactory performance of Public sector units has not only adversely affected target growth rate and investment pattern but also dented the Planning Commission’s ability to prepare an effective plan. Notwithstanding the technical sophistication (for example input out tables) introduced over the years, poor performance by PSEs has remained the weakest link in the planning mechanism.
Failure of PSEs also explains the need to encourage private investment in several areas including several infrastructure segments. In several segments private sector units have lost their monopoly status are required to compete with newly entered private players. Reduced public sector investment was however, compensated by higher private, including foreign, investment. This has resulted in total investment to GDP ratio increasing to over 30% which has partly contributed to recently witnessed acceleration in the rate of GDP growth.
Though relative role of public sector investment has come down, its crucial role in supply of public and merit goods remains crucial. The responsibility to provide infrastructure services in urban & rural areas would remain the primary responsibility of government. In the wake of the 2008 Great Recession the focus of public attention is turning back to role of government. Eleventh Five Year Plan has emphasized the inclusiveness of growth as an important dimension equally important as pace of growth itself. In this scenario, the efficiency of public sector undertaking and the role of PC in design & execution of Public sector investment proposals would continue to remain crucial (Table 2).
A panoramic view of the impact of Five Year plans may be gleaned from the changes in the investment pattern envisaged under different Five Year Plans (FYP). Such a comparison is necessarily very broad as the classification scheme has changed during the last sixty years. As may be seen from the data presented in Table 3 public sector had a crucial role in creation of fresh production capacities in irrigation, power, Transport, communication and different heavy and capital goods industries till 1990s. Thereafter, as private and foreign investment started flowing in, the public investment shifted to social services with a clear focus of rural areas, weaker sections. Reflecting this introduced Rural development head has received consistently growing share from the SFYP (Table-3).
Presently, the Planning Commission itself sees its role as building a long term strategic vision and playing an integrative role to achieve coordinated policy formulation. Over time the planning process need to become more decentralized as role of local governments become importance in provision of basic services like sanitation, primary health, drinking water or all weather roads. Planning Commission’s role in distribution of plan resources across different states has gained importance. Approval of Annual Plans for different state governments is one of the visible activities of the Planning Commission. However further dentralisation to local governments is desirable but the development is quite tardy.
Planning in an Open Economy
Over the years the importance of public sector in terms of its share of planned investments has declined. Moreover, the ability of state to directly intervene through licenses, permits and quotes has diminished with the process of Liberlisation, Privatisation and Globalisation. India’s growth strategy has changed from import substituting industrialization pursued during the initial plan periods in favour of export promotion & external competitiveness. The ongoing economic reforms program initiated since July 1991 has resulted in reduction of direct controls viz. trade restrictions ban on foreign technology and foreign investments.
Domestic price controls which were quite widespread till 1980s have been reduced considerably. Further, government has moved away from the objective to controlling the commanding heights of the economy to a more limited role to provide public goods particularly to weaker sections of the society. Rather than substituting the market processes through government ownership and state controls, the government seeks to follow market friendly policies to attract private, including foreign investment in a wide array of industries. In sectors where private operators are not only permitted but encouraged, the existing public sector entities face competitive business environment and are required to improve their performance. The positive effects of competitive environment are most notably visible in telecom, financial services, and air lines as also several segments of manufacturing industry in terms of range of products, lower prices and resulting higher penetration.
Though the importance of public sector has apparently declined, its role remains crucial in the delivery of different social and economic services particular to the weaker sections of the society. Therefore performance of PSEs would continue to be crucial in achievement of planned objectives. PC can play a crucial role in plan implementation if it can facilitate the process of toning up the performance of PSEs Though several features of Indian economic structure & policy have changed significantly over the years the structure and role of PC has remained broadly unchanged. It has been recently reported that the government intends to take a relook at the role and structure of the PC in the changed context of economic planning and recommend appropriate changes in the. Some have seen future role of Planning Commission as a think tank which would generate innovative and useful ideas. Unless a new role is envisaged for PC and a structure to facilitate effective discharge of it PC would remain essentially as described by Dr. Ashok Mitra an “essay writer”.
References and Additional Thinking
• Ahluwalia I (1985) Industrial growth in India; Stagnation since the mid Sixties Oxford University Press, New Delhi .
• Bardhan P.K> (1984) The Political Economy of Development in India Oxford University Press, New Delhi
• Brahmananda P. R. and C. N. Vakil (1956) Planning For an Expanding Economy, Bombay.
• Chakravarty S (1987) Development Planning; The Indian Experience Oxford University Press, New Delhi
• Patnaik Prabhat “Some Indian Debates on Planning” in Byres T.J (ed) (1998) The Indian Economy Major Debates since Independence Oxford University Press, New Delhi.
(The views expressed in the write-up are personal and do not re?ect the official policy or position of the organization.)
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