Chapter 4: Economic Planning – Its evolution &
strategy
Introduction:
➢ The Constitution came into force on 26 January 1950. Subsequently, Planning Commis-
sion was set up on 15 March 1950 and the plan era started from 1 April 1951 with the
launching of the First Five Year Plan (1951-56).
➢ Economic planning in India dates back to pre-Independence period when leaders of the
freedom movement and prominent industrialists and academics got together to discuss
the future of India after Independence which was soon to come. Noted civil engineer
and administrator M. Visvesvaraya is regarded as a pioneer of economic planning in
India.
➢ His book “Planned Economy for India” published in 1934 suggested a ten year plan,
with an outlay of Rs. 1000 crore and a planned increase of 600% in industrial output per
annum based on economic conditions of the time.
Planning Commission
➢ In 1950, the Government of India formed Planning Commission under the
chairmanship of the first Prime Minister Honorable
Pandit Jawaharlal Nehru.
➢ The Prime Minister is the Ex-officio chairman of
Planning Commission which consists of experts from all
fields.
➢ It is responsible for formulation of economic plans for
the problems such as backwardness
of agriculture, food problem, illiteracy,
mass communicable diseases, high mortality rate,
large scale unemployment etc.
Economic Planning:
➢ Economic planning is a time bound programme to achieve certain objectives by
allocating available resources under the control of Planning Authority, within a specified
period of time.
➢ It is a dynamic process.
Definitions:
According to Planning Commission, “Economic Planning is a conscious and deliberate
effort made by the central authority for the mobilization and effective utilization of the
available natural, human and capital resources in order to attain certain predetermined
social and economic objectives, on the basis of a specified scheme of priorities within a
specific period of time.”
1
Characteristics of Economic Planning:
1. Central Planning Authority: There is a central planning authority in every
country which desires to have economic planning. In India it is known as Planning
Commission which is in full charge of formulation of plans. Economic Planning
involves centralized decisions.
2. A survey: A comprehensive survey of the economy is made according to the
availability and utilization of human and natural resources in a country.
3. Well Defined Goals & Objectives: Planning must be for a purpose. Its goals
and objectives should be well defined. Like in India, the main purpose of planning is
to eliminate poverty, increase per capita income, national income, etc.
4. Plan period: In many countries including India, plan period is five years. Thus it is
a time bound program.
5. Continuous process: The economic planning is a continuous process which aims
at economic development of a country.
6. Priorities and targets: The priorities are fixed according to ·the importance of
each sector in accelerating economic development. Target is the concrete step
towards the attainment of an objective.
7. Mobilization of resources: The resources needed for planning are mobilized
through various sources like taxation, domestic savings, deficit financing, external
assistance etc.
8. Evaluation: The periodic assessment of the plan such as midterm appraisal is done
to incorporate necessary changes in priorities and targets. This helps in proper
evaluation of the economic plans of a country.
Objectives of Economic planning:
1. Rapid economic growth:
➢ The basic objective of economic planning in India has been to attain rapid
economic growth.
➢ This can be achieved through development of agriculture, industry, transport
and communication and other infrastructural facilities.
2. Removal of poverty:
➢ India is facing vicious circle of poverty. Poverty
is a chronic problem which has persisted despite
economic planning for six decades. Economic
development has not been able to eradicate
poverty completely.
3. Reducing income inequalities:
➢ There exists a wide gap between the rich and the
poor which is not socially desirable and results in concentration of economic
power in few hands, which try to suppress the poor still more.
➢ Therefore Planning aims at removal of poverty and reducing inequalities of
income and wealth for the purpose of Social Justice.
2
4. Creation of employment opportunities:
➢ Unemployment and underemployment may lead to frustration, poverty, disease,
social tensions and crimes. Therefore the economic planning aims at generating
employment opportunities especially in rural India.
➢ It needs labour intensive techniques which can absorb increasing labour force.
5. Growth with stability:
➢ The market economies are unstable and often suffer from ups and downs in
economic activities which are known as trade cycles.
➢ They lead to obstacles in the progress of the country. Therefore the objective of the
planning is a 'steady progress' which means progress without fluctuations in
general price level.
6. Creation of Regional balance:
➢ Regional imbalance in development exists due to several historical, geographical
and Locational factors.
➢ The economic growth takes place only when there is a balanced regional
development. So a major objective of economic planning is to develop backward
areas.
7. Self-reliance:
➢ Self - reliance means that a country produces all what it consumes. In order to
achieve it in food grains, agriculture should be given top priority.
➢ Similarly too much dependence on imports is not desirable especially during war
and economic fluctuations. So emphasis should be given on import substitution
which would provide employment, promote exports and reduce imports.
8. To raise the rate of Capital Formation:
➢ Capital formation means creation of capital assets such as machinery, raw
materials, tools and equipments, energy etc. It is the pre-condition of economic
development.
➢ Low rate of capital formation causes slow rate of economic development.
9. Rapid Development of Agriculture and Industry:
➢ The Development of both agriculture and industry will help to raise the national
income of the country. Since 65% of India's population depends on agriculture for
its livelihood, its modernization should be given priority.
10. Social objectives:
➢ A number of social objectives are important for raising the quality of life of people
in India. Human Development Index is the modern parameter for judging the quality
of life. It covers education, health and per capita income.
3
An Overview of the Five Year Plans in India:
First Five-Year Plan:
➢ It was formulated for the period 1951-56, when India was confronting the problems
of huge influx of refugees, food shortage and severe inflation. The plan, thus, focused
on the primary sector, that is, the agricultural sector to increase the food
production in India to overcome the crisis.
➢ The monsoon was favorable to agriculture in those years and therefore, the production
increased. The first five-year plan was quite successful as the targeted growth rate was
2.1 percent and the achieved growth rate was 3.6 percent.
Second Five-Year Plan:
➢ It was formulated for the period 1956-61 and it focused on rapid industrialisation. The
plan aimed at the development of heavy and basic industries and conceived
that agricultural sector could be given lower priority as it has been able to achieve its
targets in the previous plan. The second plan achieved only a moderate success due to
the severe shortage of foreign exchange on account of huge imports to meet the
requirements of the industrial sector. The actual growth rate achieved in the plan was
4.3 percent against the target of 4.5 percent.
Third Five-Year Plan:
➢ It was formulated for the period 1961-66. The third five- year plan was prepared with
the mindset that India has entered the ‘take-off stage’ and it is time for it to become a
self-reliant and self-generating economy. The plan gave priority to both
agriculture as well as the industrial sector.
➢ However, the Indo-China conflict in 1962 and the Indo-Pakistan conflict in 1965 made
the plan a complete failure as huge amount of expenditure had to be allocated to meet
the defence requirements. The actual growth rate achieved in the plan was 2.8 percent
as against the target of 5.6 percent.
➢ The failure of the third plan led to the formulation of three annual plans for the years
1966-67, 1967-68 and 1968-69, before the launch of the fourth plan. The period from
1966 to 1969 was, therefore, termed as “Plan Holiday”. It was during this period that
green revolution was introduced to overcome the food crisis. Green revolution
advocated the use of high-yielding variety of seeds, fertilizers, pesticides and extensive
use of irrigation.
Fourth Five-Year Plan:
➢ It was formulated for the period 1969-74 and had two basic objectives growth with
stability and progressive achievement of self-reliance. It stressed upon the
growth of the agricultural sector. While the plan aimed at a highly ambitious growth
rate of 5.7 per cent, it could achieve only 3.3 percent. This failure could be attributed to
the huge influx of refugees from Bangladesh and the Indo-Pakistan war in 1972.
Fifth Five-Year Plan:
4
➢ It was formulated for the period 1974-79 and proposed two main objectives
removal of poverty and attainment of self-reliance. The plan aimed at achieving its
objectives by achieving high growth rate, equitable distribution of income and increase
in domestic savings. However, the plan was an utter failure due to high levels of inflation.
➢ With the Janta Government taking over the power, the plan was terminated in 1978. The
growth rate achieved during this period was 4.8 percent as against the target of 4.4
percent.
➢ The Janta Government formulated the sixth five-year plan for the period 1978-83 with
the objective of creating employment opportunities. The Janta Government, to its
misfortune, lasted only for two years and was replaced by the Congress Government
that came up with a different plan.
Sixth Five-Year Plan:
➢ It was introduced by the Congress Government for the period 1980-85. It was based
on Nehru’s model of growth and aimed at a direct attack on the problem of poverty
by creating conditions for increasing employment opportunities. Many employment
generation schemes such as Training of Rural Youth for Self Employment (TRYSEM) and
Integrated Rural Development Programme (IRDP) were introduced.
➢ Though the plan progressed as perceived by the planners during the first four years, a
severe famine occurred in the fifth year i.e., 1984-85. Therefore, the agricultural output
declined drastically. However, the economy still managed to grow at 5.7 percent as
against the target of 5.2 percent.
Seventh Five-Year Plan:
➢ It was formulated for the period 1985-1990 and it aimed at accelerating food grain
production, creating employment opportunities and raising labor productivity.
The focus of the plan was on ‘food, work and productivity’. The plan was quite successful
and recorded a growth rate of 6 per cent as against the targeted growth rate of 5 per
cent.
Eighth Five-Year Plan:
➢ This plan could not be formulated in 1990 due to uncertain political situation at the
centre. Therefore, two annual plans for the years 1990-91 and 1991-92 were formulated.
During 1991, India had to face severe balance of payment crisis. The debt burden was
mounting and the fiscal deficit was widening.
➢ The inflation level was rising and the industrial sector was going through a recession.
Because of this crisis and the pressure from International Organisations such as IMF, the
government led by P.V. Narasimha Rao introduced the economic reforms in 1991, post
which the eighth plan was launched in 1992 for the period 1992-97 reflecting the
reforms with various structural adjustment policies.
➢ The role of the private sector increased and several liberalisation measures were
introduced. As a result, the growth rate was the highest as compared to the previous
5
plans. The eighth plan achieved a growth rate of 6.8 percent as against the targeted
growth rate of 5.6 percent.
Ninth Five-Year Plan:
➢ It was formulated for the period 1997-2002 and its aim was to achieve “growth
with social justice and equality”. The plan recognised the critical role of the state
in the social sectors such as health care, education and infrastructure, since the market
forces, by themselves, may not make these areas attractive to the private sector.
➢ The plan stressed upon the need for public investment in these areas. The ninth plan
aimed at a GDP growth rate of 7 percent. However, due to poor performance of the
economy during 1997-98, the growth target was revised to 6.5 percent. Yet, the target
could not be achieved and the economy grew only at a rate of 5.4 percent.
Tenth Five-Year Plan:
➢ It was formulated for the period 2002-2007. It was realised that the development
goals cannot be achieved by targeting the economic growth alone. Therefore, the
tenth five year plan set forth measurable targets on development indicators such as
infant mortality rate, literacy, access to electricity, sanitation facilities, sustainable food
production and environment.
Eleventh Five-Year Plan:
➢ It was formulated for the period 2007-2012 and the plan document was titled
“Towards faster and more inclusive growth”. With the objective of achieving fast and
inclusive growth, the eleventh plan had set targets for various socio-economic
indicators.
Twelfth Five-Year Plan:
➢ It was formulated for the period 2012-2017 and it focused on achieving faster,
inclusive and sustainable growth.
➢ It aimed at achieving an inclusive growth by reducing poverty, reducing inequality,
empowering people and by bringing in balanced regional development. The goals
towards sustainable development focused on environmental sustain ability,
improvements in health and education sector and development of physical
infrastructure such as transport, telecommunication, power etc.
➢ It had set a growth target of 8 percent and had set monitor able targets for poverty,
education, health, infrastructure, environment and sustainability. It also aimed at
providing banking services to 90 percent of the households and introduced Adhaar
based direct cash transfer of subsidies and welfare payments.
The Planning Commission was replaced by the think tank called NITI Aayog (National
Institution for Transforming India).
6
The Five year Plans:
Five Year Period Main objective Target Achievement
Plans (%) (%)
First 1951 - 56 Development of agriculture 2.1 3.6
Second 1956 - 61 Development of heavy 4.5 4.1
industries
Third 1961 - 66 Development of both 5.6 2.7
agriculture & industry
3 Annual 1966 - 69 - - -
Plans
Fourth 1969 - 74 Growth with Stability 5.7 3.3
Fifth 1974 - 78 Removal of poverty 4.4 4.8
Annual 1978 - 80 - - -
Plans
Sixth 1980 - 85 Improvement of Quality of 5.2 5.7
life
Seventh 1985 - 90 Social welfare and Poverty 5 6
eradication
Annual 1990 - 92 - - -
Plans
Eighth 1992 - 97 To give dynamism to 5.6 6.8
economy
Ninth 1997 - Social justice & Equality 7 5.35
2002
Tenth 2002 - 07 Economic growth with 8.0 7.6
developmental goals
Eleventh 2007 - 12 Inclusive growth 9.0 7.9
Twelfth 2012 - 17 Faster, inclusive and 8.0 8.2 (initially
sustainable growth intended)
7
Achievements of Economic Planning in India:
Economic planning in India, formally conceived in 1951, has come a long way in helping the
economy to tackle the challenges in various sectors and has enabled it to achieve rapid
economic progress.
Some of the major achievements of planning in India are as follows:
1. Economic Growth:
Economic planning in India has been successful in increasing the national income and the
per capita income of the country resulting in economic growth. The net national income at
factor cost increased from Rs. 4393.45 billion in 1966- 67 to Rs.45, 733 billion in 2011-12 (at
2004-05 prices). The per capita income increased from Rs.8876 to Rs.38, 048 during the
same period (at 2004-05 prices).
The average growth rate has increased from 3.5 percent during 1950 to 1970 to about 5.5
percent after 1990’s. The economy recorded a growth rate of 7.8 percent during the eleventh
five- year plan.
2. Progress in Agriculture:
The first five-year plan focused on agricultural development. However, agricultural sector
did not receive priority in the subsequent plans. Yet, with various initiatives implemented in
the agricultural sector such as the green revolution and agricultural pricing policies,
there has been a considerable increase in the output of the agricultural sector.
The index of agricultural production increased from 85.9 in 1970-71 to 165.7 in 1999-2000
(Base year- 1981-82). The production of major food grains which includes rice, wheat,
coarse cereals and pulses has increased from 77.14 million tons in 1958-59 to 252.22 tons
in 2015-16. With the introduction of green revolution, the yield per hectare of food grains
has increased from 662 kg in 1959-60 to 2056 kg in 2015-16.
Similarly, the production of commercial crops has also recorded an increasing trend.
Various reforms in the agricultural sector such as the Rashtriya Krishi Bima Yojana and
Kisan credit cards during the ninth plan and National Food Security Mission and Rashtriya
Krishi Vikas Yojana during the eleventh plan have been quite successful in improving the
performance of the agricultural sector.
3. Industrial Growth:
Economic planning has also contributed to the progress of the industrial sector. The index
of industrial production increased from 54.8 in 1950-51 to 152.0 in 1965-66 (Base year-
1960-61) which is about 176 percent increase in production during the first three five-year
plans.
It went up from 109.3 in 1981-82 to 232.0 in 1993-94 (Base year- 1980-81). Taking 2004-05
as the base year, the index of industrial production recorded an increase from 108.6 in 2005-
06 to 181.1 in 2015-16. The introduction of reforms in 1991 relieved the industrial sector
from numerous bureaucratic restrictions that were prevalent earlier.
This has led to the rapid growth of the industrial sector in India. India has made remarkable
progress in cotton textiles, paper, medicines, food processing, consumer goods, light
engineering goods etc.
8
4. Public Sector:
The public sector played a predominant role in the economy immediately after the
independence. While there were only 5 industrial public sector enterprises in 1951, the
number increased to 244 in 1990 with an investment of Rs.99, 330 cores. However, the
number of public sector enterprises fell to 217 in March 2010.
Yet, the cumulative investment went up to Rs.5, 79,920 cores. The ratio of gross profit to
capital employed increased from 11.6 percent in 1991-92 to 21.5 percent in 2004-05. Heavy
engineering and transport equipment industries recorded a 117 percent and 111 percent
growth respectively in 2006-07 over the previous year.
Very high profits were recorded by petroleum, telecommunication services, power
generation, coal and lignite, financial services, transport services and minerals and
metal industries. The government has eliminated a number of restrictions on the
operational and financial powers of the Navaratnas, Miniratnas and several other profit
making public sector enterprises.
5. Infrastructure:
Development of infrastructure such as transport and communication, power, irrigation
etc., is a pre-requisite to rapid economic growth and development. Expansion of transport
facilities enables easy movement of goods and services and also enlarges the market.
Irrigation projects contribute significantly to rural development.
Power projects help in meeting the growing demand for power by both industrial and
household sector. The total road length increased from about 400,000 km in 1951 to about
4.7 million km in 2011. India has the second largest road network in the world with about
5,472,444 kilometers of road, as on March 31, 2015.
The route length of the Indian railway network has increased from about 53,596 km in 1951
to about 64,450 km in 2011. The investment in infrastructure as a percentage of GDP was
about 5.9 percent during the tenth plan and increased to about 7.2 percent during the
eleventh plan.
6. Education and Health Care:
Education and health care are considered as human capital as they contribute to increased
productivity of human beings. Considerable progress was achieved in the education as well
as health sector during the five-year plans. The number of universities increased from
about 22 in 1950-51 to 254 in 2000-01. There were about 22 central universities, 345 state
universities, 123 deemed universities and about 41,435 colleges in 2016.
The number of institutions in higher education has increased to over 100 percent since 2008.
With the growth in the number of institutions, the literacy rate in India has increased from
16.7 percent in 1950-51 to 74.04 percent in 2011. With improvements in the health
infrastructure, India has been able to successfully control a number of life threatening
diseases such as small pox, cholera, polio, TB etc.
7. Growth of Service Sector:
Service sector is the key contributor to the economic growth of India. The service sector
contributed to about 53.2 percent of the gross value added growth in 2015-16. The
contribution of the IT sector to India’s GDP increased from about 1.2 percent in 1998 to 9.5
percent in 2015. The service sector has recorded a growth rate of about 138.5 percent in the
last decade.
9
Financial services, insurance, real estate and business services are some of the leading
services that have been recording a robust growth in the past few years. The rapid growth
of the service sector in India could be attributed to the inflow of huge amount of FDI in
this sector. India’s share of service exports in the world service exports has increased from
0.6 percent in 1990 to 3.3 percent in 2011.
8. Savings and Investment:
Savings and Investments are major driving forces of economic growth. The gross domestic
savings in India as a proportion of GDP has increased from 8.6 percent in 1950-51 to about
30 percent in 2012-13. The gross capital formation has increased from 8.4 percent in 1950-
51 to 34.70 in 2012-13. Capital accumulation is the key to economic development. It helps
in achieving rapid economic growth and has the ability to break the vicious circle of poverty.
9. Science and Technology:
India is the third most preferred destination for technology investments. It is among the top
most countries in scientific research and space exploration. India is also making rapid
progress in nuclear technology. ISRO has made a record of launching 104 satellites in one
go on a single rocket. India today has the third largest scientific manpower after U.S.A
and Russia.
The government has undertaken various measures such as setting up of new institutions for
science education and research, launching the technology and innovation policy in
2013, strengthening the infrastructure for research and development in universities, and
encouraging public- private partnership etc.
10. Foreign Trade:
On the eve of independence, India’s primary exports were agricultural commodities and UK
and US were its major trading partners. India was largely dependent on other countries for
various capital and consumer goods. However, with the development of heavy industries
during the five-year plans, India has been able to reduce its dependence on other countries
and was able to achieve self-reliance in a number of commodities.
With the liberalisation of trade, India now exports about 7500 commodities to about 190
countries and it imports about 6000 commodities from about 140 countries. The exports of
the country increased from Rs. 54.08 billion in 1977- 78 to Rs. 17,144.24 billion in 2015-16.
And imports have increased from Rs. 60.20 billion in 1977-78 to Rs. 24, 859.27 billion in
2015-16.
Shortcomings of Economic Planning in India:
1. Slow Growth:
The planning process in India has been able to achieve considerable increase in the national
income and per capita income. Yet, the rate of increase has been slow as compared to
developing countries like China, which have been able to achieve more than 10 percent
growth rate consistently. India was able to achieve a growth rate of only about 4 to 5 percent
during the pre-reform period. It was only during the post reform period that is after 1991,
that the country could experience a growth rate of over 7 percent.
10
2. Neglect of Agriculture:
The five year plans failed to pay attention to the agricultural sector except for the first five-
year plan. As a result, the agricultural growth rate declined from 3.62 percent in 1991-92 to
0.81 percent during 2009-10. And the share of agriculture in GDP declined from about 50
percent during 1950-51 to about 16 percent of the GDP in 2015.
3. Unemployment:
The plans have failed to address the problem of unemployment which is a cause of many
social evils. The unemployment rate has marginally reduced from 8.35 percent during 1972-
73 to about 6.53 percent in 2009-10. It was about 4.19 percent in 2013. The growth rate of
employment has recorded a decline from 2.61 percent in 1972-73 to 1.50 percent during
2009-10. The employment in primary sector recorded a negative growth rate of 0.13 percent
in 2009-10.
4. Widespread Poverty:
Failure to address the problem of unemployment has resulted in widespread poverty in the
country. The first four plans failed to address the problem of poverty. It was only during the
fifth five-year plan that measures were taken to tackle poverty directly by introducing
various poverty alleviation programmes. These programmes, however, have achieved only
limited success. The poverty rate in India declined from about 26.1 percent in 2000 to 21.9
percent in 2011.
5. Inflation:
Poverty is aggravated under the situation of inflation. The five-year plans have not been able
to stabilise the prices due to which there has been a steep rise in the general prices. The
inflation rate was around 10 percent in 2012.
6. Rising Inequality:
With rapid economic growth, the country has been witnessing a rise in the level of inequality.
It has been estimated that the richest 1 percent own about 58 percent of the country’s
wealth. Poor performance of the agricultural sector and lack of investments in rural
infrastructure are cited as the primary reason for such rising inequalities.
7. Political Instability:
Political instability and inefficient administration are the major hurdles in successful
implementation of the plans. Though the plans are formulated after complete analysis of
the economic situation, most of the plans fail to achieve the targets due to inefficient
administration, corruption, vested interests and red tapism.
The achievements and failures of the economic planning in India, thus, reveal the underlying
gaps in the process of planning. It is an undeniable fact that the current level of growth and
development that the country has achieved could not have been possible without planning.
11
NITI AAYOG
[Link] - For answers
[Link] - for Ref
Export Processing Zones:
[Link]
[Link]
processing-zone
Export Oriented Units:
[Link]
[Link]
units-scheme
12
EPZ (Export Processing EOU (Export SEZ (Special Economic
Basis
Zone) Oriented Unit) Zone)
A designated industrial A specially notified
An individual unit
zone set up mainly for economic area treated as
Meaning committed to exporting
export-oriented foreign territory for trade
its entire production.
manufacturing. purposes.
Must be located within a Operates within a
Can be set up anywhere
Location government-approved specifically notified
in India with approval.
export zone. geographical area.
Primarily
Scope of Mainly manufacturing for Manufacturing, services,
manufacturing and
Activities exports. trading, IT, logistics, etc.
limited service exports.
Established under
Legal Operates under Foreign Governed by SEZ Act,
government policy (no
Framework Trade Policy guidelines. 2005 and SEZ Rules, 2006.
separate Act).
Required to export
Primarily export-focused;
Export Required to export most or entire production
DTA sales allowed with
Obligation all production. (limited DTA sales
applicable duties.
allowed).
Customs duty exemptions Duty-free import of Extensive tax holidays,
Tax & Duty
and limited tax inputs and capital duty exemptions, and
Benefits
concessions. goods. financial incentives.
Provides basic industrial Depends on local Provides world-class
Infrastructure infrastructure within the infrastructure outside infrastructure and single-
zone. the zone. window clearance.
Earlier model introduced Introduced to promote Advanced and expanded
Concept Stage in 1965 (Kandla EPZ exports without location version of EPZ introduced
first). restriction. under SEZ Act, 2005.
13