NCERT Summary: Economy Planning- 1

Table of Contents
1. Planned Economy
2. Market Economy
3. Indicative Plan
4. Difference between Planned and Command Economy
5. History of Economic Planning in India
6. Main Goals of Indian Planning
7. History of Planning - Five Year Plans and Related Periods
8. The Planning Commission - Functions and Organisation
9. Relevance of Planning in India
10. Changing Role of the Planning Commission
11. From Planning Commission to a Systems Reforms Role
12. Concluding Remarks
View more

Planned Economy

Planned economy denotes an economic system in which the State directs major economic activity and owns important means of production either partly or wholly. While the State performs economic functions in most countries, the role of the State is especially pronounced in a planned economy. In extreme forms-commonly called command economy, centrally planned economy or command and control economy-the State specifies what is to be produced, in what quantities, how resources will be allocated and often fixes prices.

• Control of major sectors: The State controls key sectors of the economy (for example heavy industry, infrastructure and natural resources).
• Legislation and redistribution: The State legislates use of resources and directs the distribution of income and output.
• Planning production and prices: The State decides what should be produced, the quantities and often the prices at which goods are sold.
• Restrictions on private ownership: Private property may be heavily restricted or not allowed in strategic sectors.

Market Economy

Market economy is the opposite model in which the State has a limited role in resource allocation; production, consumption and distribution decisions are predominantly determined by market forces-demand and supply. The State retains a role in areas such as public goods, correction of market failures and redistribution to ensure social justice. The classical term for minimal-state intervention is laissez-faire (French: "let do").

Indicative Plan

An indicative plan is applied in a mixed economy where both State and markets play roles. Under indicative planning the State sets broad objectives, suggests targets and provides policy signals to guide private and public investment. Indicative plans are advisory and facilitative in character and do not impose direct command controls as in a centrally planned economy.

Difference between Planned and Command Economy

The phrase planned economy can include a spectrum of arrangements from mixed economies with significant State guidance to full command economies. In contrast, a command economy implies near-total State ownership and regulatory control, with little role for market signals or private initiative. Historically, fully command economies were characteristic of the former USSR and China (until reforms began) and are still associated with countries such as North Korea and Cuba.

History of Economic Planning in India

India's interest in planned economic development gained strength because the country emerged from colonial rule with pervasive poverty, weak industrial infrastructure and serious agrarian problems. Planning was seen as the principal instrument to accelerate growth, reduce poverty and bring about social justice.

Before independence several proposals and ideas were advanced:

• The Bombay Plan (1944): Prominent industrialists-including Sir Purushottamdas Thakurdas, J. R. D. Tata and G. D. Birla-put forward "A Plan of Economic Development for India" (commonly called the Bombay Plan). It envisaged a major role for the State in providing infrastructure, investing in basic industries (for example steel) and protecting nascent Indian industries through tariffs and other measures.
• Sir Mokshagundam Visvesvaraya: In his book Planned Economy for India (1934) he argued that industries and trade require deliberate planning and systematic development, drawing lessons from Japan's industrial success.
• National Planning Committee (1938): Set up by the Indian National Congress under the chairmanship of Jawaharlal Nehru, the Committee stated planning's objective as ensuring an adequate standard of living and eliminating mass poverty. It recommended public ownership of heavy industries for both redistributive and security reasons and land reforms to reduce rural poverty.
• Other contributions included the People's Plan (by MN Roy) emphasising employment and wage goods, and proposals inspired by Mahatma Gandhi that emphasised decentralisation, agricultural development and cottage industry.

Main Goals of Indian Planning

Since independence India adopted successive Five-Year Plans. The long-term goals of planning in India have generally included the following:

• Growth: Increase in the real value of goods and services produced in the economy, normally measured by the growth rate of real Gross Domestic Product (real GDP).
• Modernization: Technological improvement, higher productivity and expansion of modern industries supported by investment in research, education and skill formation.
• Self-reliance: Reducing excessive dependence on external economic flows and foreign control over key sectors; relying primarily on domestic resources and capabilities.
• Social justice: Inclusive and equitable distribution of the benefits of growth so that regional, rural-urban, gender and caste-based disparities are reduced.

It is important to distinguish economic growth from economic development. Growth denotes a quantitative increase in output (GDP). Development includes qualitative aspects such as improvements in education, health, basic amenities, environmental quality and social freedoms. Growth is a necessary condition for development but not sufficient by itself; planned public intervention is often required to ensure distributional outcomes and human development.

Self-reliance should not be conflated with self-sufficiency. Self-reliance means depending primarily on domestic resources and building national capacity while engaging internationally as needed; no modern economy is fully self-sufficient.

History of Planning - Five Year Plans and Related Periods

First Plan (1951-56)

The First Plan emphasised agriculture because food shortages, imports of foodgrains and inflationary pressures were pressing problems. The Plan also prioritised power and transport infrastructure. The annual average growth rate during the First Plan has been estimated at about 3.61% against a stated target of around 2.1%. Noted economist K. N. Raj was among the main architects of India's early planning process.

Second Plan (1956-61)

The Second Plan shifted emphasis to the expansion of heavy industry and the public sector, guided by what became known as the Nehru-Mahalanobis model, which prioritised basic industries and capital goods production. The target was to raise the rate of investment substantially (for example from about 7% to 11% of GDP). The Plan's average growth performance is recorded at about 4.32%.

Third Plan (1961-66)

The Third Plan sought to achieve a balanced growth between industry and agriculture and to move towards a self-sustaining economy. The period saw external shocks, wars (1962 with China; 1965 with Pakistan), droughts and other difficulties. India also resorted to external borrowing and the Indian rupee was devalued in 1966. These developments contributed to the difficulties in meeting Plan objectives.

Annual Plans and Plan Holiday (1966-69)

Because of the strains of the early 1960s-external wars, internal economic pressures and the balance of payments crisis-the regular Fifth-Year Plan cycle was interrupted. Instead of a Fourth Plan beginning immediately, the Government implemented three Annual Plans for 1966-67, 1967-68 and 1968-69. This period is sometimes called a "plan holiday" since Five-Year Plans were not in force.

Fourth Plan (1969-74)

The Fourth Plan aimed for "growth with stability," with special emphasis on the under-privileged through measures in education and employment, and on reducing agricultural production fluctuations. The Plan's targeted growth was about 5.7%; the achievement was around 3.21%.

Fifth Plan (1974-79)

The Fifth Plan's principal theme was growth for social justice. The targeted growth rate stood near 4.4% and the Plan recorded an achievement of about 4.8%. The Plan period was politically interrupted in 1977 when the Janata Party came to power.

Sixth Plan (1980-85)

The Sixth Plan put poverty eradication at the forefront and prioritised infrastructure to boost both industry and agriculture. The achieved growth rate (about 5.7%) exceeded the target and the Plan mounted a direct attack on poverty through targeted measures.

Seventh Plan (1985-90)

The Seventh Plan emphasised increasing foodgrain production rapidly and expanding employment opportunities. The Plan's average growth of about 5.81% exceeded its target. This Plan also witnessed the early signs of economic liberalisation.

Plan Holiday and Eighth Plan (1992-1997)

Political instability and economic crisis delayed the Eighth Plan start until 1992. The Eighth Plan was prepared in the context of the structural reforms that began in 1991 and became the first Plan described as largely indicative. The Plan's broad emphases included:

• Stabilising the adverse balance of payments situation on a sustainable basis.
• Improving trade and the current account position.
• Placing human development (health, education, poverty reduction) at the centre of planning.

The Eighth Plan targeted an average annual growth rate of about 5.6% and achieved an average of around 6.5%, reflecting the initial gains from liberalisation and the Rao-Manmohan Singh reform strategy.

Ninth Plan (1997-2002)

The Ninth Plan set a target average growth rate of 6.5% for the economy as a whole and 3.9% for agriculture. It envisaged a high investment rate (target near 28.2% of GDP at market prices) and a domestic saving rate target of 26.1% of GDP, aiming to ensure fiscal and external sustainability. The recorded average growth rate for the Ninth Plan period was about 5.4%.

Tenth and Eleventh Plans - Growth Performance

The later Plans (Tenth and Eleventh) set higher growth targets in the context of globalisation and increased private investment. The Eleventh Plan (2007-12) set an ambitious average annual growth target near 9%, beginning with about 8.5% and aiming to reach 10% by the terminal year. India's growth reached about 9% in 2007-08 but slowed sharply during the global financial crisis to about 6.7% in 2008-09; it recovered to 7.6% in 2009-10. The narrative of these Plans emphasised both high growth and strengthening human development outcomes.

The Planning Commission - Functions and Organisation

The Planning Commission was constituted in March 1950 by a Resolution of the Government of India. It worked under the overall guidance of the National Development Council and served as the principal advisory and coordinating body for Five-Year and Annual Plans. While formulating plans it consulted central ministries and state governments and also oversaw implementation.

The 1950 Resolution listed the principal functions of the Planning Commission as follows:

• Assess the material, capital and human resources of the country, including technical personnel, and study how to augment deficient resources.
• Formulate plans for the most effective and balanced utilisation of the country's resources.
• On the basis of priorities, define stages for implementation of the Plan and propose resource allocations for each stage.
• Identify factors impeding economic development and recommend the necessary social and political conditions for successful execution of the Plan.
• Determine the institutional machinery required to ensure successful implementation of each stage of the Plan.
• Appraise progress from time to time and recommend adjustments of policy and measures where necessary.
• Make interim or ancillary recommendations to facilitate discharge of its duties or to advise the Central or State Governments on specific referred problems.

Organisational Structure

The Prime Minister was the ex-officio Chairman of the Planning Commission. The Deputy Chairperson enjoyed the rank of a Cabinet Minister; full-time members held ranks equivalent to Ministers of State. Certain Cabinet Ministers served as part-time members. The Deputy Chairperson and full-time members collectively guided detailed plan formulation, monitoring and evaluation.

The Commission functioned through technical subject and general divisions, each headed by senior officers (Principal Adviser/Adviser/Additional Adviser/Joint Secretary/Joint Adviser). The Programme Evaluation Organisation (a part of the Commission) undertook evaluation studies to assess the impact of selected Plan programmes and to provide feedback for policy and implementation improvement.

Planning Commission Divisions

The divisions broadly fell into two categories:

• General Divisions concerned with economy-wide policy and resource matters.
• Subject Divisions concerned with specified sectors or fields of development.

General Divisions

• Development Policy Division
• Financial Resources Division
• International Economics Division
• Labour, Employment and Manpower Division
• Perspective Planning Division
• Plan Coordination Division
• Project Appraisal and Management Division
• Socio-Economic Research Unit
• State Plan Division (including Multi-Level Planning, Border Area Development, Hill Area Development and North-Eastern Region)
• Statistics and Surveys Division
• Monitoring Cell

Subject Divisions

• Agriculture Division
• Backward Classes Division
• Communication & Information Division
• Education Division
• Environment and Forests Division
• Health & Family Welfare Division
• Housing, Urban Development & Water Supply Division
• Industry & Minerals Division
• Irrigation & Command Area Development Division
• Power & Energy Division (including Rural Energy, Non-Conventional Energy Sources and Energy Policy Cell)
• Rural Development Division
• Science & Technology Division
• Social Welfare & Nutrition Division
• Transport Division
• Village & Small Industries Division
• Western Ghats Secretariat

Relevance of Planning in India

With liberalisation and globalisation from the 1990s onwards, the form and instruments of planning changed: quantitative controls gave way to policy guidance, fiscal incentives and regulatory frameworks. Nevertheless, planning retained several important functions:

• Federal cooperation and coordination: In a federal polity, planning fosters a shared vision among the central and state governments and enables coordinated policy and legislative changes (for example in infrastructure projects requiring centre-state cooperation).
• Equitable growth: The State can steer investment and policy to reduce regional imbalances and ensure that backward areas and disadvantaged groups receive priority.
• Environment-friendly development: Planning can integrate environmental priorities into long-term development choices and ensure sustainable resource use.
• Defending national interests: In global economic negotiations (for example in trade forums), the State's planning role includes protecting national producers and ensuring that domestic interests are represented and defended.
• Inter-sectoral balance: Planning helps ensure balanced development across sectors (energy, transport, agriculture, industry) so that bottlenecks do not hamper overall growth.

Planning at the grassroots level-participatory planning-increases accountability and improves delivery of public services. In the post-liberalisation era the instruments of planning have become more qualitative (policy, incentives, regulatory frameworks) rather than hard quantitative controls; the State's responsibility shifted more to facilitation, coordination and setting strategic priorities.

Changing Role of the Planning Commission

Over time, India's planning architecture moved from a highly centralised model to an indicative and facilitative model. The Planning Commission's role evolved from exercising direct control over resource allocation and project selection to undertaking strategic visioning, policy advocacy, sectoral coordination and monitoring.

The Commission played an integrative role by developing national plans in critical human and economic development areas, promoting synergy between schemes (for example linking rural health, drinking water, rural energy and literacy), and disseminating research and best practices across departments and states. It also provided consultancy to government departments to redesign systems, manage change and improve governance efficiency.

As budgetary constraints tightened, the Commission increasingly acted as a mediator between the Centre and the states on resource allocation and fiscal discipline, and as a facilitator for reforms and policy convergence.

From Planning Commission to a Systems Reforms Role

There has been ongoing debate on converting the Planning Commission into a body focused on systems reform rather than centralised resource control. Since the early 1990s and particularly under subsequent governments, the Commission's role was gradually reoriented towards:

• Being a strategic think tank to generate policy ideas and propose systemic changes;
• Acting as an interface with independent think tanks, civil society and states to build consensus on reforms;
• Persuading ministries and state governments to adopt improved systems, rather than directly imposing detailed allocations and targets.

Critics and proponents both recognised that the Commission lacked direct executionary powers and that its influence depended on persuasion, research credibility and policy leadership. The National Advisory Council (NAC) performed a somewhat similar coordinating and idea-generation role in the social sectors, while a proposed Systems Reforms Commission would have broader reach across public finances, infrastructure and regulatory reform.

Proponents argued that a reoriented Planning Commission could become a Systems Reforms Commission focused on mapping risks and opportunities, producing timely thought papers, building wider networks with think tanks and opinion makers, and communicating policy recommendations more effectively. According to statements by Planning Commission members (for example Arun Maira), the institution was expected to evolve towards these functions within a few years, emphasising research, networks and communication with the polity.

Concluding Remarks

Planning in India has continuously adapted to changing domestic and global contexts. Its core objectives-accelerated growth, modernization, self-reliance and social justice-remain relevant, while instruments and institutional roles have shifted from direct control to coordination, facilitation and system-level reforms. The evolution of planning institutions reflects the balance sought between the State's steering role and the market's operational role in achieving inclusive and sustainable development.