Chapter- 2

Classification of Planning
2) Meaning, Characteristics of different types of planning and their relative merits and demerits.
Planning takes different forms on the basis of:
 Differences in time periods
 Institutions affected
 Extent of activities covered
 Modes of executing the plan, etc
Therefore, the types of planning are:
 Short term, Medium term, and Long term planning
 Regional, National, and International planning
 Structural and functional planning
 Centralized and Decentralized Planning
 Physical and Financial Planning
 Rolling and Fixed Planning
We are now going to look the detail characteristics, advantages, dis-advantages and limitation for
each of the planning types.
2.1) Planning by Inducement and Planning by Direction

Sometimes countries try to achieve objectives of planning in an indirect manner. There is private
enterprise throughout the economy and market mechanisms in full operation. The State just offers certain
inducements and incentives. This is what a predominantly capitalistic economy like the American
economy would do. As against induced planning or indicative planning, there is compulsory planning or
planning by direction under a central directing authority.

A) Planning by inducement

Planning by inducement is often referred to as indicative planning. In this type of planning, the planner
either subsidizes production or controls prices, if it is intended to increase the consumption of a
commodity. The first acts on the supply side and the latter, on the demand side. Cheaper price is an
inducement for the consumer and subsidy an inducement for the producer. This is, planning through the
market mechanism. The citizen wants freedom of choice in consumption. This freedom exerts pressure
for free adjustment of production to consumption. Similarly, the worker demands freedom to choose his
own job. This means that besides consumers' market there must also be a labor market. This leaves a

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narrow sphere for State control.

The basic idea is that the market controls the entrepreneur and State can control the entrepreneur by
controlling the market. The State tries to manipulate the market by means of incentives and inducements
through price fixation, taxation and subsidies. The government seeks to influence economic and
investment decisions by offering incentives to entrepreneurs via fiscal and monetary policies but does
not control or regulate the functioning of the economy directly. Planning by inducements avoids swollen
bureaucracy. Thus, it is planning by persuasion rather than compulsion. There is freedom of enterprise,
freedom .of production and consumption subject to some regulation or control by the state.

However, immobility of resources imposes serious limitations on planning by inducement. This

immobility creates shortages which cannot be eliminated merely by price control and rationing.
Measures have to be taken not only to distribute supplies equitably but also to augment supplies. There
are writers who are not prepared to consider indicative planning as planning in the real sense of the word.
According to them, there can be no planning without direct orders or directions so as to compel
economic activities to conform to the plan programs and objectives.

The merits of indicative planning are:

 Consumer's sovereignty remains intact

 There is freedom of enterprise
 It is flexible
 It is democratic.
As against these merits, there are some demerits too:

 It fails to achieve the objectives of planning or targets of production

 The private entrepreneurs care more for profit than for the growth of the economy
 The fiscal and monetary policies of the government are not so successful in the under-
developed countries; controls lead to black markets.
 The producers may not find the incentives offered by the state attractive enough to follow the
state guide-lines. The disincentives for the consumers may not be deterrent enough to curb
wasteful consumption
 The working of the market forces fail to bring about proper adjustment between demand and
supply and thus create imbalances in the economy.
B) Planning by direction

Planning by direction implies minute and detailed instructions being given both to producers and

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consumers. A list of all commodities to be produced with the quantity of each has to be prepared as well
as a separate list for each of the complements and substitutes. Planning by direction is very
comprehensive. It covers the entire economy. There is complete concentration of economic authority in
the state. There is one authority which is in sole charge of planning, directing and execution of the plan in
accordance with pre-determined targets and priorities. Only planning by direction can guarantee the
success of the plan, otherwise the targets would turn out to be mere pious wishes. This means that the
economic plan should have at its back the full authority of the state not merely in planning but also in its
implementation or execution. As Dr. Oskar Lange observes, "With regard to the socialist sector the
national plan represents a binding directive. The targets of the national plan and its financial provisions
represent orders to be carried out of the various ministries and the enter prises subject to them. They are
duty bound to carry out the directives of the plan."

Shortcomings:

 It is undemocratic since the people are ignored all along. It is bureaucratic and totalitarian and, as
such, involves the treatment of human beings as mere pegs in a big bureaucratic machine. There'
is no economic freedom. Rationing and control result in black marketing and corruption.
 Owing to the complexity and many-sidedness of modern economic system, planning by direction
does not yield satisfactory results. It is too formidable a task. No person or body of persons can
perform this task satisfactorily.
 There is bound to be shortage of some and surplus of other commodities.
 Besides, this sort of planning is bound to be inflexible. The plan once prepared must be adhered
to, no part of the plan can be altered affecting the whole plan.
 The fulfillment of the plan cannot be anticipated, because conditions keep changing. Black
markets emerge to overcome the imperfections of the plan
 Planning by direction also leads to excessive standardization which impinges on consumer's
sovereignty.
 It also involves huge administrative costs-elaborate censuses, numerous forms and army of
clerks.
As Lewis remarks, "When government is doing only a few things we can keep an eye on it, but when
it is doing everything it cannot even keep an eye on itself." These are a few difficulties or
shortcomings of Planning by direction. But the choice between these two types of planning is
determined by the system of government prevailing in the country. A democratic government adopts
indicative planning whereas a' socialist state will adopt planning by direction.

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2.2) Centralized Planning and Decentralized Planning

Some other forms of planning may be centralized planning and decentralized planning. In the
case of the former, planning is done by a central authority. It is done from the top. Each citizen,
producer or consumer, has simply to carry out the instructions or the job or duty assigned to him.
Under centralized planning, the entire planning process in a country is under a central planning
authority. This authority formulates a central plan, fixes objectives, targets and priorities for
every sector of the economy. It takes all investment decisions in accordance with the goals and
targets of the plan. The principal problems of the economy, what and how much is to be
produced; how, when and where it is to be produced; and to whom it is to be allocated, are
exclusively decided by this authority. The central planning authority controls every aspect of the
economy. It fixes prices of all products and wages of all types of workers. All anticipated
financial product and factor imbalances that are likely to arise within the planning period, are
sought to be corrected in advance by the planning authority. In the case of decentralized
planning, however, we plan from the bottom. For instance, each village panchayat (locally called
it village shengo or village council) may be asked to prepare a plan for the economic
development of the village and each industry may be asked to prepare its own plan. Out of these
plans, an integrated plan may then be evolved for the country as a whole.

Alternatively decentralized planning refers to the execution of the plan from the grass roots.
Under it, a plan is formulated by the central planning authority in consultation with the different
administrative units of the country. The central plan incorporates plans under the central
schemes, and plans for the states under a federal set-up. The state plans incorporate district and
village level plans. Similarly, plans for different industries are formulated in consultation with
representatives of industries. But individual firms are free to take independent decisions about
investment and output policies, and so are individual farmers. Under decentralized planning,
prices of goods and services are primarily determined by the market mechanism despite
government control and regulation in certain fields of economic activity. There is freedom of
consumption, production and enterprise under it. However, the planning authority recommends
to the central and state governments to provide certain incentives to the private sector. It also
lays down areas of public sector activities.

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 Decentralized planning is superior to centralized planning in that it provides economic freedom
and flexibility to the economy. But its dependence on the market mechanism leads to shortages
or surpluses in the production of goods and services. They are likely to create problems for the
government because adjustments are difficult to make. For instance, shortages of goods lead to
inflation and the adoption of price controls and rationing creates more problems. Further, it is not
possible to coordinate the decisions of the planned and unplanned sectors. This is one of the
main reasons for distortions in the economy which lead to disequilibrium in the demand for and
supply of goods and services. Of the two, centralized planning provides cohesiveness to the
economy whereas decentralized planning provides economic freedom and incentives to the
market economy.

2.3) Physical and Financial Planning

A) Financial Planning
Financial planning means the planners determine how much money will have to be invested in order to
achieve the pre-determined objectives or targets. In the case of financial planning “the outlay is fixed in
terms of money and the estimates are made on the basis of various hypotheses regarding the growth of the
national income, consumption, imports, etc., to cover this outlay by taxation, savings and the increase in
the cash holding. This money is then used to mobilize the required resources. There has thus to be an
integration between physical planning and financial planning. Indian planning has been mostly financial
planning although some targets have been set in concrete and real terms, e.g., the output of food grains.

The essence of financial planning is to ensure that the demands and supplies are matched in a manner
which exploits physical potentialities as fully as possible without major and unplanned changes in the
price structure.

Finance holds the key to the success of a plan. If the country is able to raise adequate financial resources,
the success of the plan is assured. But failure to raise the enquired resources will spell its failure. It will
not be able to achieve the targets set out for it.

Financial planning has its own limitations:

 An attempt to raise taxes to too high a level will adversely affect the capacity of the people
to save which may hamper the development process.
 Owing to smallness of organized money sector and the existence of a larger non-monetized
sector, the estimates of financial resources may go wrong. Even the physical targets may be
upset. Imbalances between the monetized and non -monetized sectors may result in

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 shortages and in inflationary pressures. Hence financial planning is more suitable for sector
planning than for overall planning.
 Financial planning is not free from various bottlenecks, especially inflationary rise in
prices. It is, therefore, more appropriate to use it in sectoral planning rather than in overall
planning.
 It is possible that supplies can be increased through imports, but they will lead to balance of
payments difficulties from which underdeveloped countries already suffer.
B) Physical Planning
In physical planning, the planning authority has to work out how much land, labour, materials
and capital equipment will be required to implement the plan and achieve the targets set out for
it. Physical planning makes for concreteness in planning.. As is stated in India's Second Five
Year Plan, physical planning "is an attempt to work out the implications of the development
effort in terms of factor allocations and product yield's so as to maximize incomes and
employment". It is an input-output analysis. It implies proper evaluation of the relationship
between investment and output. In physical planning, the planners have to determine not only the
amount of investment but also work out its composition in terms of the various goods and
services required to' obtain a certain increase of output of product. For instance, it has to be
worked out as to how much of cotton, coal or electric power and other ingredients will go into an
output of 1,000 meters of cloth. That is how calculations have to be made for each type of goods
to achieve the targeted quantity. In this way, planned increase in the output of various goods is
matched with the amounts and various types of investments. Financial planning is only a means
to achieve the various targets laid down in the plan.

Thus, in physical planning, we make an overall assessment of the available real resources like
raw materials, manpower and capital equipment and devise ways and means to mobilize them in
amounts sufficient to enable us to achieve the various targets of production. These targets are
laid in physical terms, e.g., so many tons of steel, food grains, coal, sugar and so many million
meters of cloth, etc., in agricultural and industrial sectors and also for economic overheads like
roads and rail kilometers) etc., or so many buildings to be created, so many doctors and
engineers to be trained and the number and type of educational institutions, and so on. But the
various targets have to be properly matched and balanced. The test of the soundness of planning
lies in the avoidances of imbalances, stresses and strains of any type in the economy.

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It is not to be understood that physical planning is a straight and simple affair and presents no
difficulties. Rather, there are formidable difficulties in the following ways:
In the under-developed countries, there is statistical blackout so that adequate and reliable
statistics regarding the various types of real resources are lacking. It, therefore, becomes
really difficult to lay down the targets with any degree of certainty.
Such shortages in physical targets are bound to lead to inflationary pressures through an
increase in prices. An inflationary process is extremely harmful for an underdeveloped
economy where levels of income and saving are already very low.
To build up a sound sectoral balance is also a tight ropedancer. That is why when the plan is
being implemented all sort of stresses and strains, bottlenecks, shortages and gluts and
inflationary pressures appear to thwart the planners' effort.
Physical planning is not enough to prepare a sound plan for economic development. It has to
be supplemented with financial planning. If this is not done, the economic plan will go down
against financial rocks. Lack of adequate financial resources have been a major cause of the
failure on planning in India.
2.4) Long-term, medium-term, and short term planning
This classification of plans is based on the division of time into long, medium and short periods.
Long-term planning covers 10, 15, 20 and even more years. Medium term extends over 3 to 5
years and even up to 7 to 10 years and Short-term plans relate to as short a period as one year.
A) Long-term plans
Long-term planning is becoming quite popular these days to take a longish view of the future of
the economy. The statistical techniques now available make it possible to forecast reasonably
well the course of events for such a long period of time.

Characteristics of long term planning

Greater freedom of choice:- the number and intensity of constraints on choices are much less
in long-term planning
Broadened scope: - It is possible to over-reach the narrow frame of purely economic
considerations and to explore social and human implication of economic development.
The resource availability over a longer period is much greater and more flexible than in a
short period.

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 A comprehension of resource availability makes for greater freedom of choice in respect of
planned activities as compared to medium term and short-term planning periods.

Purpose of long term planning

Long-term planning in the first place provides a vista vision of the future. This period is long
enough to allow for structural changes to take place and to work themselves out. Changes which
are associated with civilization, societies and modern science and technology can be taken
account of in this length of time. Such a long –range frame of time thus enables one to
encompass economic and non-economic movements. This helps in presenting a total view of the
future.
In the context of this future vision, planners perceive objectives and availabilities of means for a
society in the light of its philosophy or ideology which inspires the lifestyles of that particular
society.

Merits of long-term planning

Besides the important purpose which long-term planning serves, it has certain merits, among
these; one may mention three principal beneficial implications.
A. Educative: - long term planning provides an opportunity of informing and explaining to the
public the major problems that are posed by the future society, the available choices and the
limitations which surround these choices. It helps in preparing more realistic medium and short-
term plans
B. Explanatory: - A long-term perspective is helpful in enlightening the decision makers and
those who are to implement the plans. The information made available under this type of
planning ensures integration of short-term plans into a longer-term framework. This enables the
planning authority to make adequate preparation for the solution of problems that may arise in
the future. Besides, perspective plans make it possible to assess the long-term implications of
medium term and short-term decisions.
C. Stimulant: - Long-term plans by making obvious future choices and by reducing uncertainties
enable decision-makers to act boldly in respect of decisions for shorter term plans. Public
opinion too gets adequately stimulated because perspective plans open up prospects for progress

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and reduce incomprehension of the implications of the present. Such knowledge on the part of
the public reduces hesitations in respect of short-term plans.

Limitations of long term planning

The future is uncertain. In case this type of planning is confined to prognostic forecasting
(foretelling), no firm thinking on the subject will be possible.

B) Medium-term plans
They extend from three to ten years. They fall between the long-period and short-period plans.
They have a two-fold significance. First, they act as link between the long period and the short-
period plans, and thereby connect the chain of time. Second, these plans draw upon the horizon
chalked out in the long-term perspective plan, and at the same time present a framework for
drawing up short period plans. It has Rationale in Development activities like road building,
training man power, rising of saving as percentage of national income fall under this type of
planning. The period is enough for planners to remedy mistakes in the early years of planning.
Medium-term plans are generally indicative in nature, and provide the framework for the action
to be embodied in short-term plans.

C) Short-term plans
Short-term plans are also annual plans because the action for the period of one year is linked
with the budgets of government, usually presented after every one year. These plans are also
called controlling plans mainly for two reasons. Firstly, Government gets authority from
parliament to spend money, which is usually for one year. Secondly, It is during this one-year
period that resources are actually matched to requirements or targets. Thus the actual operation
of any plan is controlled in the one-year document. One year plans, on the other hand, have the
task of setting out how the government’s policy should be carried in to effect.”
Summary
Long-term plans specify (clarify) the perspective and vision of a society
Medium term plans concretize aspirations, many of them in quantitative terms, for a
shorter-period.
Short-term plans provide for action.

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2.5) Fixed and Rolling Plans
A) Fixed planning
It refers to the unchanging period of time for which a plan is prepared. For example, a plan for a
period of five years, 1975-80, will be a plan for this period alone. The plan for this period will
run its full course of five years. After this will begin another plan of five years, spanning the next
period from 1980 to 1985. And so on. While the fixity of period is the basis of this type of
planning, there is more that goes with it than the given length of time. Fixity implies that the
targets that have been formulated /quantified are equally fixed. So are the means that have been
designed for the purpose. The plan thus is unchangeable for the period of five years. Fixity on
both the time period and the targets is the hallmark of fixed plans. A fixed plan is thus a plan that
remains fixed (given) for a specified time period. Sometimes important changes can be
incorporated in fixed plans. For example, this may happen when resources fall far short of needs.
A Fixed plan lays down definite aims and objectives which are required to be achieved during
the plan period. For this purpose, physical targets are fixed along with the total outlay. Physical
targets and financial outlays are seldom changed except under emergencies.

Merits
It makes for boldness in planning i.e. under such a planning one can design for higher
objectives with larger resources, with little fear of their being scuttled down.
It ensures effective implementation:- because this type of planning presupposes commitment
to the plan.
It provides for stability in the economy: - because it imparts certainty to the functioning of
the system.
Fixed plans act as performance-test to check on the efforts made, their adequacy or
inadequacy and success/ failure to locate the points that deserve approbation/ disapproval as
also to draw lessons there from.
There is a “checking” mechanism built into the planning system. Everyone will therefore be
subjected to scrutiny.
There is bound to be disciplined thinking and action in respect of the formulation of policies
and their execution.
Demerits

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 Weaknesses arise from the inflexibility of such plans. Plan targets are rigidly fixed.
Changes cannot be easily made.
Wastage of resources prevails if the plan gets out of tune with the reality.
B) Rolling plans
As the name implies, it involves the rolling of a plan at intervals, usually one year, so that it
continues to be a plan of certain number of years. To illustrate a rolling plan let us take a
hypothetical plan for the five year period, 1980 –1985. After the first year is over in 1980,
another year 1986 is added, so that it becomes a five year plan for 1981-1986. In 1982, one year,
namely 1981, gets dropped, and 1987 added. As a result in 1982 there is again a five-year plan of
1982-1987. And so on and so forth. Thus as the first year is over, the fifth year is stretched into
the next year. The time-span of such plans roll, shedding the initial one year, and adding one as
the terminal year. Thus, every year the time-horizon is kept for the five-year period.
Hence the Features of rolling plans are:
They are based on unfixed dates,
Revisions and adjustments are part and parcel of the technique of rolling planning and the
Provision for change: - rolling plans always beep open the door for changes.
Merits
Flexibility:- this methodology enables planners to keep their options open and make
necessary changes if and when circumstances require. The rigidities of fixed planning are
tackled here.
Realism:- this type of planning is a realistic exercise. The targets and the provisions for them
remain feasible propositions in view of the revisions and adjustments that are made as per
changes in the circumstances surrounding the plan.
Being flexible a rolling plan is more realistic than a fixed plan. It takes into consideration
such unforeseen natural and economic changes.
Demerits
It creates uncertainty: - one serious drawback is that it causes uncertainty, something that
knocks the very bottom out of the planning itself. Because of the recurring changes, both the
private sector and the government remain unsure of each other’s responses.
It lacks boldness: - rolling plans make planners timid, as a result less than possible or
desirable is attempted.

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 Since these plans are prone to revisions, these exercises become a cover for not making
difficult decisions or taking courageous measures.
Every time a difficult situation arises, there will be the temptation of adopting the easier
course of revising downward the targets of plans. Such a planning would amount to doing
what can be done without planning. It is contended that the rational of planning lies in
achieving more than what can be done in a market or non-planning situation.
Lacks commitment: - rolling plans preclude any commitment to planning.
Weak discipline: - there are no fixed goals and means nor enough will to back it up. There is
little basis for expecting any disciplined thinking and action in respect of the formulation of
policies and their execution.
Inadequate test: - they do not provide any test to check the performance of the economy. In
the absence of established provisions, it is impossible to judge whether and to what extent
implementation has taken place. Besides, there will be no urge or need to assess the
magnitude of deviation from the original plan.
2.6 Structural and functional planning
This classification of planning is done interms of whether it is associated with institutional
changes or not. In case changes in socio-economic institutions are part and parcel of planning is
called structural planning. However, in functional planning no changes or at least no big changes
in the socio- economic structure of society are involved planning is done within the framework
of existing institutions.
These two types of planning have different implications; in particular in respect of the nature of
changes in these usher in, the objectives these aim at, and the requirements for their
implementation. Structural planning is associated with big changes in the set-up of a country, in
addition to the changes in such economic magnitudes as national income, investment, etc. As
against this, under functional planning, it is by and large the economic magnitudes that undergo
changes with the socio-economic framework of society refining infect. It is therefore no surprise
to find that while a structural planning cause many and often major upsets in the lives of the
people, functional planning causes no such upsets but only tiny vibrations in the lifestyles of the
people.
Another aspect of the differing implications of the two types of planning is related to objectives.
When the objective is development of under developed country, structural planning is a more

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suitable form lower labor- productivity in these countries is caused by backward moves and
defective origination in addition to inadequate productive investment and primitive techniques. A
change in the socio-economic milieu is of great necessity, even a prior condition, for the rapid
development of the economy.
Still another important consequence differentiating one from the other is in respect of the
requisites for their implementation. In case of structural changes can be brought about
successfully as per plan if at least three things are available-administrative personal which is
adequate in competence and number to cope with new situations; public enthusiasm which lets
the changes percolate among the masses who will be immediately affected by the institutional
changes; and leadership at different levels which is bestowed with clear perception of the aims
and implications of the structural changes and which is developed and dedicated to such changes.
Since structural planning involves in part or in fall the demolition of the old and the building of
the new, the existence of these three conditions is of utmost significance. As against this,
functional planning is less demanding in terms of administrative resources, public enthusiasm
and leadership. This type of planning works with in the existing structure of institutions. The
changes in it at best amount to repairing the existing system and /or improvement in its working.
Thus, the tasks before the planning authority are much less, and to an extent much easier,
compared to those under structural planning. The requirements for its implementation are
therefore not new, nor many.

2.7. Regional, National and International planning

These types of planning largely rest on the basis of spatial l(geographical) differences. Within a
nation, planning for separate regions is described as regional planning. National planning
includes the whole of a country whose geographical area is determined politically. International
planning refers to the planning of countries at the world level.

A) Regional planning
This type of planning is carried out within the framework of national scheme to better meet the
special needs of a region and the wants of its population. Regional planning has a two-fold
dimension
a. It is part of the national plan

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 b. It is a plan on its own merit.
Some scholars view regional planning as a one-dimensional scheme. According to this view,
regional planning is planning for a region and the national economy comes into the picture only
to be controlled for the purposes of executing a regional plan.
Its rationales are:
Special needs: - there are special needs of regions which require separate treatment
because they are not properly or fully dealt with in national plans.
National plans do not necessarily fulfill all the needs which are peculiar to regions.
Special capabilities:- certain regions are endowed with special capabilities like the
availability of certain types of labor, or skill or certain natural factors like proximity to
shortest sea routes to other countries, etc.
Regional Differences:- Regional difference in terms of levels of economic development,
natural resources, culture and language, etc are so large that it becomes necessary to have
regional plans to accommodate regional peculiarities and aspirations into the national
plan.

B) National planning
National planning has two essential features which make it possible to identify it from the other
two types of planning namely:-
a) It is planned with the political boundaries of a nation.
b) There is one political regime that has a full control over the entire area.

Rationale
National planning is the only sort that must exist before one can even legitimately speak of
regional or international planning. Further, the other two types of planning draw off from
national plans in the sense that both, at the present level of consciousness when
internationalism is still not mature, cater to the needs of and are subservient to national
plans.
The resources of a country are effectively utilized in the sense that politically it becomes
possible to make full use of national resources.
Centralized control which national planning permits makes for a rational use of resources.

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 National planning becomes useful when combined with the other two types, in respect of
full use of a nation’s resources and for a healthy growth of international trade and the
efficient economic structure of the countries.
C) International planning
International planning concerns countries at the world level. If all the countries plan the use of
their resources through a single agency with political authority, it can be cherished. “World
planning.” Short of that, any planning effort among countries may be called “international
planning”. The sphere of activities planned depends upon the extent to which the participant
countries agree.
Activities covered: - The scope of international planning differs with differences in the activities
covered and the number of countries involved. From the angle of activities covered, one can
distinguish two distinct patterns in extreme forms with so many falling in between the two. In an
extreme pattern, one may conceive of countries merging into one another, giving rise to a new
politico-economic unit. This amounts to pooling of all resources, leading to full-scale planning as
if it is national planning. Example:-1 COMECON (the council) for mutual Economic
Association of the communist or socialist countries.
At the other extreme can be another form, under which the participant countries retain their
individuality in terms of economic policies in respect of trade and exchange, but join hands in
planning one or a few activities. Example2:-Coffee Board
Number of countries: - the number of countries, depending upon the size of the participating
countries, fixes the area falling under international planning. In other words, it determines the
scope of planning horizontally or geographically. For example, Food and Agricultural
Organization. International planning is thus mostly in the nature of cooperation and mutual
assistance among member countries.

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