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Chapter: 12th Economics : Chapter 11 : Economics of Development and Planning


collective control or suppression of private activities of production and exchange



Planning is a technique, a means to an end being the realization of certain pre- determined and well-defined aims and objectives laid down by a central planning authority. The end may be to achieve economic, social, political or military objectives.


Economic Planning is “collective control or suppression of private activities of production and exchange”.-Robbins-

“Economic Planning in the widest sense is the deliberate direction by persons in-charge of large resources of economic activity towards chosen ends”.- Dalton


1.  Economic Planning in India

Consists of economic decisions, schemes formed to meet certain pre-determined economic objectives and a road map of directions to achieve specific goals within specific period of time. The current thinking of economic planning is fairly new, somewhat rooted in Marxist socialism. In the 20th century, intellectuals, theorists, thinkers from Europe put forward the idea of state involvement to stop capitalism and the inequality of society.

Soviet Union adopted economic planning for the first time in 1928 that enabled the country to turn into an industrial superpower. The idea of economic planning was strengthened during the Great Depression in 1930s. The outbreak of the World War II also required adequate and suitable planning of economic resources for the effective management after the effects of post war economy.

After Independence, in 1948, a declaration of industrial policy was announced. The policy suggested the creation of a National Planning Commission and the elaboration of the policy of a mixed economic system. On January 26, 1950, the Constitution came into force. In logical order, the Planning Commission was created on March 15, 1950 and the plan era began on April 1, 1951 with the launch of the first five year plan (1951 -56). The evolution of planning in India is stated below:

1. Sir M. Vishveshwarya (1934): a prominent engineer and politician made his first attempt in laying foundation for economic planning in India in 1934 through his book, “Planned Economy of India”. It was a 10 year plan.

2. Jawaharlal Nehru (1938): set-up “National Planning Commission” by a committee but due to the changes in the political era and second World War, it did not materialize.

3. Bombay Plan (1940): The 8 leading industrialists of Bombay presented “Bombay Plan”. It was a 15 Year Investment Plan.

4. S. N Agarwal (1944) gave the “Gandhian Plan” focusing on the agricultural and rural economy.

5. M.N. Roy (1945) drafted ‘People’s Plan”. It was aiming at mechanization of agricultural production and distribution by the state only.

6. J.P. Narayan (1950) advocated, “Sarvodaya Plan” which was inspired by Gandhian Plan and with the idea of Vinoba Bhave. It gave importance not only for agriculture, but encouraged small and cottage industries in the plan.

After considering all the plans, in the same year Planning Commission was set up to formulate Five Year Plan in India by Jawaharlal Nehru. He was the first Chairman of Planning Commission, Government of India.


2.  Case for planning

The economic planning is justified on the following grounds.

1. To accelerate and strengthen market mechanism: The market mechanism works imperfectly in underdeveloped countries because of the ignorance and unfamiliarity with it. A large part of the economy comprises the non-monetized sector. The product, factor, money and capital markets are not organized properly. Therefore the planned economy will be a better substitute for free economy.

2. To remove unemployment: Capital being scarce and labour being abundant, the problem of providing gainful employment opportunities to an ever-increasing labour force is a difficult task. The need for planning in underdeveloped countries is further stressed by the necessity of removing widespread unemployment and disguised unemployment in such economies.

3. To achieve balanced development: In the absence of sufficient enterprise and initiative, the planning authority is the only institution for planning the balanced development of the economy. For rapid economic development, underdeveloped countries require the development of the agricultural and industrial sectors, the establishment of social and economic overheads, the expansion of the domestic and foreign trade sectors in a harmonious way.

i) Development of Agriculture and Industrial Sectors: The need for developing the agriculture sector along with the industrial sector arises from the fact that agriculture and industry are interdependent. Reorganization of agriculture releases surplus labour force which can be absorbed by the industrial sector. Development of agriculture is also essential to supply the raw material needs of the industrial sector.

ii) Development of Infrastructure: The agriculture and industrial sectors cannot develop in the absence of economic and social overheads. The building of canals, roads, railways, power stations, etc., is indispensable for agricultural and industrial development. Infrastructure involves huge capital investment long gestation period and low rate of return. The state alone can provide strong infrastructural bases through planning.

iii) Development of Money and Capital Markets: The expansion of the domestic and foreign trade requires not only the development of agricultural and industrial sectors along with social and economic overheads but also the existence of financial institutions. Money and capital markets are not adequate in underdeveloped countries. This factor acts as an obstacle to the growth of industry and trade. So planning alone can provide sound money market and capital market.

4. To remove poverty and inequalities: Planning is the only path open to underdeveloped countries, for raising national and per capita income, reducing inequalities and poverty and increasing employment opportunities. Has it happened in India in the last 65 years?

Hence, Arthur Lewis says, “Planning is more necessary in backward countries to devise ways and means and to make concerted efforts to raise national income”


3.  Case against planning

The failure of market mechanism invited state intervention in economic activities through planning. The prime goals of economic planning are stabilization in developed countries and growth in LDCs. But the economic planning also is not free from limitations. It may retard private initiatives, hamper freedom of choice, involve huge cost of administration and stop the automatic adjustment of price mechanism. The arguments against planning are discussed below.

1. Loss of freedom

The absence of freedom in decision making may act as an obstacle for economic growth. Regulations and restrictions are the backbone of a planned economy. The economic freedom comprises freedom of consumption, freedom of choice of occupation, freedom to produce and the freedom to fix prices for the products. Under planning, the crucial decisions are made by the Central Planning Authority. The consumers, producers and the workers enjoy no freedom of choice. Therefore, Hayek explains in his book ‘Road to Serfdom’ that centralized planning leads to loss of personal freedom and ends in economic stagnation. The decisions by the Government are not always rational. But, freedom to private producers will be misused; profit will be given top priority, welfare will be relegated.

2. Elimination of Initiative

Under centralized planning, there will be no incentive for initiatives and innovations. Planning follows routine procedure and may cause stagnation in growth. The absence of initiatives may affect progress in following ways.

a. The absence of private ownership and profit motive discourages entrepreneurs from taking bold decisions and risk taking. Attractive profit is the incentive for searching new ideas, new lines and new methods. These are missing in a planned economy.

b. As all enjoy equal reward under planned economy irrespective of their effort, efficiency and productivity, nobody is interested in undertaking new and risky ventures.

c. The bureaucracy and red tapism which are the features of planned economy, cripple the initiative as they cause procedural delay and time loss. The ease of doing business is disrupted. It is because of this, even socialist countries like Russia and China offer incentives to private enterprises.

3. High cost of Management

No doubt the fruits of planning such as industrialization, social justice and regional balance are good. But the cost of management of the economic affairs outweighs the benefits of planning. Plan formulation and implementation involve engagement of an army of staff for data collection and administration. As Lewis remarks, “The better we try to plan, the more  planners  we  need”.   Inadequate data,  faulty  estimations  and  improper implementation of plans result in wastage of resources and cause either surplus or shortages.

4. Difficulty in advance calculations

Price mechanism provides for the automatic   adjustment   among price, demand and supply in a Laissez Faire economy. The producers and consumers adjust their supply and demand based on  price  changes.  There  is  no  such mechanism  in  a  planned  economy. Advance calculations in a precise manner are impossible to make decisions regarding the consumption and production. It is also very difficult to put the calculations into practice under planning. Excess supply and excess demand can also happen in the market oriented economy. Infact it has happened in many expitalistic economies, including the US.

The arguments against planning are mostly concerned with centralized and totalitarian  planning.The democratic planning, planning by inducement and decentralized planning especially under mixed  economies  give  equal  role  for private sector and public sector. Planned economy  appears  to  be  more  efficient operationally  than  a  market  economy.So the question is not one of plan or no plan but one of the type of plan. The right mix of market mechanism and state intervention  in  right  proportion  will promise  accelerated  economic growth accompanied by  stability and social justice.

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