Indian economic planning aimed to achieve predetermined goals through state regulation and control of economic activity. Planning involved setting priorities, mobilizing resources, and creating organizations to execute comprehensive economic plans. Early plans focused on infrastructure, agriculture, and industrial development to raise savings rates and productivity. Later plans prioritized capital goods to rapidly industrialize and fulfill targets in a nearly closed economy with inelastic exports. Indian planning was democratic, indicative, decentralized, and development-oriented to solve issues like poverty and inequality through growth.

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Economic planning as a technique of achieving certain self-defined and predetermined goals
within a given period of time has been very popular amongst the policy makers. Planning is a sort
of conceiving, initiating, regulating and controlling economic activity by the State according to set
priorities with a view to achieving well defined objectives within a given time span. Planning is a
sort of making of major economic decisions on the basis of a comprehensive survey of the
economic system as a whole.
In his book ‘Problems of Economic Planning’, E. F. M. Dublin has defined economic
planning as follows: ‘To plan is to act with a purpose to choose and choice is the essence of
economic planning.’
In the words of Dickinson, ‘Economic planning is the making of major economic
decisions of a determinate authority on the basis of comprehensive survey of the economy as a
whole.’
The planning commission of India is of the opinion that planning is essentially a way of
organizing and utilizing resources to get maximum advantage in terms of defined social ends. The
two main constituents of the concept of planning are:
(a) system of ends to be pursued and b) knowledge as to available resources and their
optimum allocation to achieve these ends. The availability or resources conditions the ends to be
efficiently achieved.
Thus, we can identify the following characteristic feature of economic planning:
(i) formation of objectives or goals;
(ii) fixing targets to be achieved and priorities of productions for each sector of the
economy;
(iii) mobilization of the financial and other resources required for the execution of the plan;
(iv) creation of the necessary organization or agency for the execution of the plan;
(v) creating assessment machinery for assessing the progress made;
There are several varieties of economic planning. We mention some of them below.
(i) Planning by direction and planning by inducement:
Professor Lewis draws a distinction between planning by direction and planning by
inducement.

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Planning by direction
Planning by direction is an integral part of a socialist society like that of the erstwhile Soviet
Union. It entails complete absence of laissez faire. There is one central authority which plans,
directs and orders the execution of the plan in accordance with predetermined targets and priorities.
Such planning is comprehensive and encompasses the entire economy.
Drawbacks
Firstly, planning by direction is associated with a bureaucratic and totalitarian regime. There
is complete absence of consumers’ sovereignty.
Secondly, planning by direction is always inflexible. Once a plan has been drawn it
becomes impossible to revise any part of it.
Thirdly, planning by direction develops what Lewis calls the ‘tendency to procrustean’. It
leads to excessive standardization. A standardized product is manufactured without any varieties.
Lewis maintains that “standardization is frequently an engine of progress but it is also frequently
the enemy of happiness”.
Lastly, planning by direction is a costly affair. It requires an army of clerks, statisticians,
economists, and other trained personnel.
Planning by inducement
Planning by inducement is democratic planning. It means planning by manipulating the
market. There is no compulsion but persuasion. There is freedom of enterprise, freedom of
consumption and freedom of production. But these ‘freedoms’ are subject to state control and
regulation. People are induced to act in a certain way through various monetary and fiscal
measures.
Difficulties:
(i) The incentives offered may not be adequate for the producers and consumers to act the
way the state desires them to behave. It may upset the government plans.
(ii) Since the actual working of the plan is left to the market forces, surpluses or shortages
are bound to arise.
(iii) Monetary and fiscal measures alone are inadequate to induce planned development of
the economy by raising the rate of capital formation.
(ii) Indicative planning and imperative planning:
Indicative planning:
Indicative planning is peculiar to the mixed economy of France. In a mixed economy, the
public and private sectors work together. In indicative planning the private sector is neither rigidly
controlled nor directed to fulfill the targets and priorities of the plan. Even then, the private sector is

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expected to fulfill the targets for the success of the plan. The state provides all types of
facilities to the private sector but does not direct it, rather indicates the areas in which it can help in
implementing the plan. In the French system of planning, the public sector comprises basic sectors
like coal cement steel, transportation, fuel fertilizers farm machinery electricity tourism, etc. In
these sectors the fulfillment of production and investment targets is imperative.
Imperative planning:
Under imperative planning all economic activities and resources of the economy operate
under the direction of the state. There is complete control over the factors of production by the
state. The entire resources of technology country are used to the maximum in order to fulfill the
targets of the country are used to the maximum in order to fulfill the targets of the plan. There is no
consumers sovereignty in such planning.
(iii) Democratic planning:
In democratic planning, the philosophy of democratic government is accepted as the
ideological basis. People are associated at every step in the formulation and implementation of the
plan. A democratic plan is characterized by the widest possible consultations with the various state
government and private enterprises at the stage of preparation. It seeks to avoid all clashes and tries
to harmonies all opinions that are for the groups and associations plays a major role in its
execution. The plan is fully debated in the parliament, and the state legislatures and in the private
forums.
Democratic planning respects the institution of private property. Nationalization is resorted
to the limited extent absolutely necessary and reasonable compensation is paid in all cases. Price
mechanism is allowed to play its due role. The government only seeks to influence economic and
investment decision in the private sector through fiscal and monetary measures. The private sector
operates side by side with the public sector. India is a unique experimentation in democratic
planning.
Thus planning in a mixed economy like India, has the following features
a) Democratic Planning:
Indian planning process is democratic in nature because the plan document is placed before
the Parliament for public discussion and debated upon before its finalization.
b) Indicative Planning:
In India, Government provides all types of facilities to the private sector but does not direct
it, rather indicates the areas in which it can help in implementing the plan. In fact the planning
authority only indicates the course of action to be followed by the producers to achieve the plan

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targets. For example, in case of India, the whole agricultural sector is in private hands, but
govt. lays down detailed targets for this sector. Again the govt. of India (GOI) extends different
types of incentives to this sector to carry out those targets. Hence Indian plans do not carry the
element of compulsion, though there might be regulation and regimentation of economic activities.
This shows that the planning process in India is indicative in nature.
c) Decentralised Planning:
At present the planning procedure in India can be termed as ‘planning from below’ rather
than ‘planning from above’ because the planning process starts at the village level. At first, the
village- level planning begins at ‘Panchayat’ level and culminate into block level planning. For
example, in the case of West Bengal, there is a ‘Black Level Planning Committee’(BLPC) with the
Block Development Officer as its Chairman. Different village panchayats submit their plans to the
BLPC. These BLPCs again submit their respective plans to the District Planning Committee
(DPC). All these DPCs, after careful consideration and scrutiny of these Plan drafts, submit their
respective district level plans to the State Planning Board (SPB). At last, this SPB submits the State
Level Plan draft to the Planning Commission. In this way, the actual needs of the rural people or
the people at the grass-root level are reflected in the planning system of India.
Under this decentralized planning process, allocation of resources among different
economic activities is mostly done by the price mechanism or free market forces.
d) Comprehensive Planning :
The planning system in India may be regarded as comprehensive planning because it
encompasses all field of economic activity. However, under the liberalized economic framework at
present, the share of public sector investment in total investment is likely to decline in future
because the government now gives more emphasis on privatization. Hence the range of sectors and
sub-sectors directly under the public outlay may shrink. So the planning process would no longer
be comprehensive, it will only be ‘partial planning’.
e) Development-oriented Planning:
One of main features of Indian planning system is that it aims at economic growth and
development of our country. In view of some perspective growth process, this planning system
wants to solve the problems of unemployment, poverty, income inequality, inflation etc. through
different short-term plan programmes. It also aims at a self-sustained growth through rapid
industrialization.
As India was among the first colonial countries in Asia to become independent, it had no
experience to draw upon except its own. The nationalist leadership was acutely aware of the need

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for industrialization to modernize the economy and was convinced that Government
support and involvement were essential for the task. The rapid industrialization of the Soviet
Union was widely acknowledged as a great achievement and Jawaharlal Nehru was fascinated by
what he saw when he visited the U.S.S.R. in 1927.
The regeneration of the Indian economy became a pronounced aim of the freedom struggle
with planning as the effective way of achieving it. The Congress Party established a national
planning committee under the Chairmanship of Nehru nearly a decade before the country became
free. Indian businessmen prepared a national plan in 1944, known as Bombay Plan, which had no
objection to the central role of the state in the process of industrialization.
In the early fifties, development economics was itself as its early experimental stage. The
Keynesian analysis of the determinants of the level of activity as extended by Harrod-Domar
models was being taken up by economists for elaboration and application to developing countries.
This analysis laid heavy emphasis on increase in capital stock as the key element for economic
growth. It was thought that underdevelopment was the result of deficiency of capital and
consequently there was need for the government to promote capital formation and allocate it
according to priorities. Since the low level of per capita income acted as a constraint the need for
mobilizing domestic savings and supplementing them with foreign aid become major requirements
for filling the savings gap in order to finance investment and generate the desired rate of growth.
Another element of concern was Indian exports. As Indian exports consisted mostly of goods of
inelastic demand, its growth was not expected to be very high. This view, which was also endorsed
by the economists like Raul Prebisch and Ragnar Nurkse, came to be known as ‘export pessimism’.
But during the post-war period, the world witnessed a trade boom. In these circumstances the
concepts of ‘Big Push’ and ‘Balanced Growth’ gained wide acceptability.
The major aims of these plans were a high growth rate, national self-reliance, full
employment and reduction of income inequalities. To achieve these goals a capital goods sector
was given high priority in the process of industrialization that was launched. This was based on the
proposition that many basic industries, the transport system and other social overheads would be
necessary before the secondary manufacturing industry could get started. Investment in such
industries takes place in large lamps or not at all. It was argued that the growth of the investment
goods sector must precede the growth of consumption. This expansion of capital goods industry or
‘machine-making industry’ would lay down the basis of rapid industrialization. Recognizing that
these industries were going to be capital intensive and not likely to generate much employment in
the short run expansion of small and cottage industries was to be encouraged as a means of
providing employment and also to meet the increased demand for consumption goods.

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The plans were implemented in the framework of a mixed economy with an
increasing role for the public sector and a state regulated private sector. Thus government policy
focused on: (i) increasing a public service share in the total capital stock through the allocation of
new investments between the public and private sectors;(ii) reservations of new investment in basic
and heavy industries, mostly for the public sector; (iii) regulation of industries in the private sector
to secure their development in conformity with the Plan objectives; and iv) agrarian reforms, rural
institution building and improvement of farm practices. This strategy was fairly clearly articulated
for the decade covering the Second Five Year Plan (1956 – 61) and Third five year plan (1961 –
66), the First five year plan (1951 – 56) being essentially a period of preparation.
During independence, Indian economy was structurally backward. The underlying causes of
structural backwardness were:
(i) Acute deficiency of material capital: The basic constraint on development was
acute deficiency of material capital which prevented the introduction of more productive
technologies.
(ii) Low capacity to save: The limitation on the speed of capital accumulation was seen to
lie in the low capacity to save.
(ii) Structural limitations on savings being converted into investment: It was
assumed that even if the domestic capacity to save could be raised by means of suitable fiscal and
monetary policies, there were structural limitations preventing conversion of savings into
productive investment.
(iii) Diminishing returns in agriculture: Indian agriculture was subject to secular
diminishing returns. It was assumed that industrialization would allow surplus labor currently
underemployed in agriculture to be more productively employed in industries which operated
according to increasing returns to scale.
(iv) Limitation of market mechanism: If the market mechanism were accorded
primacy this would result in excessive consumption by the upper income groups, along with
relative under investment in sectors essential to the accelerated development of the economy.
(v) Tolerance toward inequality: While unequal distribution of income was considered
to be a ‘bad thing’ a precipitate transformation of ownership of productive assets was held to be
detrimental to the maximization of production and savings. In other words, there was a tolerance
towards income inequality, provided it was not excessive and could be seen to result in a higher
rate of growth than would be possible otherwise.

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(vi) Maximization of growth not contemplated: While Nehru and others did
talk about letting the national cake grow larger before an adequate standard of living could be
provided for all, they were not growth-maximisers in any sense of the term.
At the time of independence, it was felt by the policy makers that the basic questions
relating to how much to save, where to invest, and in what forms to invest could be best handled
with the help of a plan.
Firstly, according to Arthur Lewis, the central issue for development economics is to
understand how a country which saves 5% of its income is transformed into one which saves 20%
of its income. A. K. Das Gupta also defined India’s problem as one of ‘primary accumulation of
capital’. Economic plan helps achieve such savings target.
Secondly, Nurkse advanced export lag thesis, according to which Indian export was not
increasing especially because of the heavy weight of primary product is in India’s export basket.
Thus, Indian policymakers in order to augment exports stressed on development of industry,
particularly, of heavy industry, which can be achieved quickly through planning.
Thirdly, in contrast with Nurkse, who worried about horizontal inter-relationships, Indian
planners were much more concerned about vertical inter-relationships, which they sought to
achieve through planning.
The fourth argument advanced by Allyn Young was concerned with the relationship
between increasing returns and economic growth. Kaldor also emphasized the need for fast rates of
growth in manufacturing production for promoting a virtuous circle of growth.
The fifth argument is the market failure argument. The situation where market fails to
deliver, planning is the answer.
The Indian planners subscribed to a basically supply side view of the planning problem. The
argument that domestic demand can possibly be a constraint on the growth process was not even
mentioned as a hypothesis. The reason, was the belief that with an active state policy on
investment, all possible slack in the economic systems would be utilized.
There was consequently justification for concentrating on factors promoting savings or
productive accumulation. Indian planners could at that stage maintain that what mattered most was
growth in the aggregate level of investment and that the growth process as unlikely to lost steam so
long as public investment was growing at a fast pace. That led them to look into areas where public
investment could be more fruitfully deployed in the long term. There were three major possibilities.

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First, public investment would be concentrated in the area of infrastructure. Secondly,
public investment could be directed primarily towards agriculture. Thirdly, public investment cold
be directed towards industrial development. Indian planers obviously did attempt all three.
The First five year plan (1950 –55) focused on the first two types of investment. At the time
of the second five year plan however a major change was brought about. Indian planners operated
on the assumption of a law elasticity of export demand accompanied by a system of strict import
allocation. Thus they were in reality operating on the assumption of a nearly closed economy. In
such an economy, if savings were to be substantially raised from a low initial level of around 5% in
1950 to 20% in 1975. the productive capacity of the capital goods sector would have to rise at an
accelerated rate to convert growing savings into additional real investment. It was therefore the
need to raise the real savings rat equilibrium that led Indian planners to accord primacy to a faster
rate of growth in the capital goods sector.
The Second Five Year plan, which was heavily influenced by the work of Mahalanobis,
reflected to a much larger extent the necessity to build ahead of demand in the area of capital goods
production.
Indian planning exercise is often viewed as a variant of the Soviet planning model. A model
of exactly this type was developed by Feldman in 1928 in the U.S.S.R. The Indian work however
was done completely independently of Feldman’s findings. Maholanabis had in mind the so called
primacy thesis of the capital goods sector -- a policy which was also advocated by Feldman, and
adopted by the Soviet Union during the Stalinist period. The Indian development model of the mid-
fifties is probably better viewed as a variant of the Lewis model.
The adoption of a mixed economy framework with the private sector and the state
competing for scare resources made finance a major problem in its own right. A modern, capital-
intensive industrial sector was to be created side by side with private agriculture, with the continued
functioning of a private industrial sector confined to relatively labour-intensive, light consumer
goods. The idea was that accelerated investment was likely to create large profits, which should be
re-invested.
Regarding export pessimism, it was thought that the development of heavy capital goods
base over a period of time would lead to the diversification of export basket in the direction of
manufactured goods, including machinery and equipment.
Four long term objectives were set out by the planners in India. They were :
to increase production to the maximum possible extent so as to achieve higher level of
national and per capita income;

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to achieve full employment;
to reduce inequities of income and wealth and
to set up a socialist society based on equality and justice and absence of exploitation.
Prof. B.S. Minhas states: “Securing rapid economic growth and expansion of employment,
reduction of disparities in income and wealth, prevention of concentration of economic power, and
creation of the values and attitudes of a free and equal society have been among the objectives of
all our plans” (Minhas B.S. : Planning and the Poor)
Economic Growth:
Economic growth has always remained in focus as the main objective of Indian Five year
Plans. It has often been assumed that the gains of economic growth would percolate downwards
and thus inequalities would decline and poverty problem would automatically be solved. The
growth of employment was also taken for granted. The first Five Year Plan covering the period
from 1951 to 1956 had a target of 2.1 per cent per annum increase in national income. The Second
Five year Plan envisaged a target of 4.5 per cent per annum increase in national income. The Third
Five year Plan had aimed at securing an increase in national income of 5.6 per cent per annum. The
Sixth Five year Plan had aimed at 5.2 per cent p.a. increase in GDP. The Seventh plan aimed at 5.0
per cent p.a. increase in GDP. The planners had envisaged a target of 5.6 per capita cent per capita
annum increase in GDP under the Eighth plan. The growth target in the Tenth Plan was 8% and in
the Approach Paper of Eleventh Plan is between 7-- 9%.
Self-Reliance:
Self-reliance was adopted as a major objective of economic planning in this country. The
emphasis on self-reliance was not much in the first two plans. In the third plan for the first time it
was stated that the country would endeavour to become self reliant over a decade or so. The
concept of self-reliance adopted in the plan was, however, narrow. Self-reliance was defined
merely as overcoming the need for external assistance. In the Fourth Plan, the objective of self-
reliance was stated in a concrete form. The plan not only reiterated the government’s commitment
to reduce its dependence on foreign aid but also decide to do away with concessional imports of
food grains from the USA under PL 480.
Removal of unemployment:
Removal of unemployment has been mentioned as one of the objectives of economic
planning in all the five year plans, but it never got a high priority. The approach of the planning
commission till recently has been of not seeing the question of employment generation separately
from investment programmes. It was believed that as investment increased employment would also
grow. In the Third Plan document, while discussing the objectives of economic planning, the

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Planning Commission had argued that as national income grows in response to increased
investment and development outlay, the demand for labour rises and employment expands.
The main weakness of this approach is that it ignores the fact that an increase in investment
does not automatically create larger employment. For the growth of employment besides an
increase in investment, the choice of techniques should also be correct.
Reduction in income inequalities:
Reduction in income inequalities has been mentioned as one of the objectives of economic
planning in India. However, in terms of priority it always got a very low place. The Planning
Commission had spelt out its approach in respect of income inequalities in the Fourth Plan. In its
opinions, fiscal measures at best can reduce disposable income at the top and thus their importance
for eliminating income inequalities is limited. It stressed the need for raising the living standards of
the poor by accelerating the pace of growth on the assumption that the gains of development will
percolate downward. In the Fifth Plan though removal of poverty was mentioned as a major
objective, only a passing reference was made to the problem of income inequalities. The Sixth Plan
did not spell out concrete measures to be followed for eliminating income inequalities. The neglect
of this objective arose out of the conviction of the planners that economic growth will automatically
reduce income inequalities.
Elimination of Poverty:
The removal of poverty as an objective of economic planning was mentioned explicitly for
the first time in the draft Fifth Plan. Until the late 1970s, decision-makers in the government and
the Planning Commission were of the view that the trickle-down effects of growth could alleviate
poverty in the country in the coming years. It was thus stated in Fifth Plan(1978-83), “Without any
redistribution the poverty percentage should fall from 46 per capita cent at present to 27 per cent
after 10 years if the assumed rates of growth materialized.” This was certainly an unwarranted
optimism, as the past record of growth in this country did not lend support to it. The government
soon recognized this fact. The Planning Commission in the Sixth Plan document thus stated, “The
incidence of poverty in the country is still very high. Thus determined measures are necessary to
combat poverty. A substantial increase in the overall rate of growth of the economy will no doubt
create favorable conditions for a reduction in poverty and unemployment. However, in the light of
past experience it will not be realistic to rely solely on the growth process to find a solution to the
problem. Specific policy measures will be needed not only to influence the composition of output
in favour of mass consumption goods, but also to ensure a more even regional and class distribution
of output, paying special attention to stimulating growth in more backward regions. In addition, the
ongoing poverty eradication programmes aimed at the specified target groups of population will
have to be improved and properly implemented.

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Modernization:
Indian planners have always recognized the role of science and technology in the country’s
development. Application of science and sophisticated technology in production raises the output
level and overtime accelerates the pace of economic growth. At the time of Independence India was
very much deficient in technical know-how.
The country’s dependence on the import of technology was considerable. Keeping in view
the problems which often arise from a country’s dependence on foreign technology, the planners
from the very beginning stressed the importance of Research and Development (R & D). However,
until the Sixth Plan modernization was never on the agenda of any plan.
In the Sixth Plan for the first time the objective of modernization was explicitly mentioned.
While spelling out the concept of modernization the planners gave it a very wide meaning. The plan
document stated “The term modernization connects a variety of structural and institutional changes
in the framework of economic activity.” It thus implied a “shift in the sectoral composition of
production, diversification of activities, an advancement of technology and institutional
innovations” so as to transform “a feudal and colonial economy into a modern and independent
economy.”
In the Seventh Plan the concept of modernization was narrowed down. For the planners now
modernization refers primarily to technological advances. In agriculture it implies increased use of
fertilizers and HYV seeds, extension of irrigation facilities, improvement in water management,
change in the pattern of energy use and greater mechanization. It is hoped that all these measures in
course of time will spread green revolution to new areas. In industry several major technological
advances have taken place in the world “of which the more important flow from three sources:
a) the application of computers and electronics to production process; b) improvements in fuel
efficiency of prime movers and other industrial equipment; and c) the use of new materials.”
Possible areas of conflict between different objectives in the short run can be noted as
follows:
1. Rapid Economic Growth and Employment: The process of economic growth can
be accelerated by the use of capital-intensive high technology of production. But this type of
technology is generally labour-displacing. Thus a choice made in favour of this type of technology
could only be at the cost of employment generation in the economy. Likewise, labour intensive tech
niques of production, generally create large employment opportunities. But such techniques are
relatively less efficient; more employment may be created only at the cost of possible higher rate of
growth.

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2. Economic Growth and Equality: If the objective of equity is pursued
seriously even by attempting redistribution of wealth and income, it may have diverse effects on the
rate of economic growth. The propensity to save of the richer sections of the society is generally
higher than the propensity to consume. A redistribution of income and wealth in favour of poor
would only mean that the available resources are being diverted from saving to current
consumption. Howsoever desirable this diversion may be from the social point of view, it cannot be
practiced for long as it would adversely affect the rate of economic growth and this would end up in
equal distribution of poverty rather than equal distribution of wealth.
3. Economic growth and balanced regional development: Balanced regional
development would require diversion of resources from relatively less developed regions to
backward regions. In the former regions, generally, the developed infrastructure is available which
adds to the efficiency of the resources. On the other hand, the same amount of investment in
backward regions with hardly any infrastructural facilities would result in relatively lower growth;
thus, the balanced regional growth can be had only at the cost of efficient utilization of resources.
4. Economic growth and price stability: A gradually rising price level generally
results in rising profits, that stimulate private investment. On the other hand, stationary price level
will have adverse effect on the rate of profit investment and growth in the economy.
Thus, there appears to be a conflict among the different objectives at least in the short-run;
though in the long run, various objectives may supplement and reinforce each other. In the short
run therefore it may be necessary to spell out the “trade offs” among different objectives in various
plans.
Phase I: 1950-1965
Growth-objective: Capital First Strategy or Mahalanobis Strategy
The first three five year plans of India are generally treated separate from all the others. The
First Plan (1950 – 55) was not a plan in the sense of constituting an internally co-ordinated set of
investment decisions. The real break with the past came with Second Five Year Plan (1955 – 60).
This saw the articulation of what may be called the ‘Nehru-Mahalanobis Strategy’ of development.
It focused on the need to achieve self-sufficiency in the production of capital goods as the first
priority with the view to enhancing the output of consumer goods at a later stage. It emphasized on
the rapid growth and diversification of economic activity through industrialization as essential for
achieving and maintaining full employment at a rising level of productivity. It sought to step up the
rate of investment and to develop an indigenous heavy industry base (comprising metallurgical,
chemical and machine building industries) with a view to laying foundation for accelerated self-

13. 13
reliant growth, with the public sector playing the leading role. This type of
industrialization had both backward and forward linkages. A significant part of investible resources
was deliberately diverted towards the creation of productive capacity in the capital gods sectors.
Indian planners deliberately ignored issues relating to the distributional aspect. It was ruled out on
the ground that only redistribution can reduce poverty. In the language of Nehru ‘Without growth
only poverty can be redistributed’. In the Mohalanobis model, consumption could grow over a
period of time only if there were a prior increase in the capacity of capital goods sectors.
The dominant growth orientation was articulated in the Mahalanobis strategy of the Second
Plan and continued into the Third Plan (1960 – 65). Thus, the economic growth was expected to
take place through the modern industrialization. In this strategy the public sector was expected to
play a dual role of (a) providing the growth of infrastructural facilities and the creation of capacity
in the basic and heavy industries and (b) reducing the concentration of economic power through the
expansion of public ownership of means of production. Thus it was observed that in the first three
five year plans, the growth objective was given precedence over the poverty eradication objective.
It was thought that economic growth would have ‘tickle down’ effect and as a result, equality
objective will be realized.
While the Mohalanobis strategy was expected to step up the rate of growth and fulfill the
growth objective, there had been doubts that whether it would fulfill the employment objective. It
was recognized that emphasis on the heavy capital-intensive industries might not generate much
employment at least in short-run. For employment-generation particularly in the rural sector, the
planning has pinned its hope on the development of handloom sectors and small scale industries
and also on the policy of community development and development of co-operatives.
Phase : II : 1965 – 1974: Plan Holiday and Agriculture First Strategy
The atmosphere changed dramatically after the draught and the foreign exchange crisis of mid
sixties. The sudden increase in defense expenditure consequent to the armed conflicts with China and
Pakistan and leveling off of foreign aid all in the short span of three years (1962 – 65) put the economy
under severe strain. A crisis occurred when two consecutive droughts hits the country in 1966 and 1967
and real GDP declined in absolute terms.
The sharp deterioration of the economic situation and the security environment highlighted
two main weakness of the existing strategy namely, the relative neglect of agriculture and a critical
dependence on foreign aid. Due to inward looking strategy Indian export busket was not
diversified in 1950s. under the stress of circumstances some policy changes were made to
encourage growth like some relaxation of control on private sector to enable it to play a larger role
in the economy, greater emphasis on exported promotion by sharp devaluation of Indian rupees in
1966. however there was a poor response of exports to the devaluation which aggregated the

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foreign exchange shortage. The level of public investment suffered sharp cuts, which
dampened private investment as well. In fact it took merely a decade for the level of investment to
regain the 1965 – 66 level.
Planning was put on hold for nearly three years : 1965 – 66 to 1968 – 69 . These three years
has been called planning holiday years. To overcome the agricultural stagnation, a new strategy of
agricultural development was formulated during the annual plan. This strategy carried over into the
fourth 5YP (1969 – 70). Since mid 1960s there were a drastic changes in the agricultural sector
changes were so drastic and remarkable that we can call it green revolution.
The 5 year planning process was renewed from 1969 However, hardly anything was done to
put more substance in planning instead the focus shifted to employment generation objective
country to their professed aims, the plans had not substantially reduced mass poverty or socio
economic inequalities. This is reflected in a reiteration of the socialist commitment of the GOI bank
nationalization the passing of monopolies and Restrictive trade practices Act, the attempted
nationalization of wholesale trade in food grains and later the adoption of “Garibi Hatao” and the
20 point programme.
The idea of self reliance was not new. The 3rd
and 4th
5Yps had discussed the ultimate
objective of elimination of concessional External assistance. Thanks to green revolution, self
reliance or agricultural sector had been achieved.
Phase III: (1974 – 80) : Growth with Redistribution
The Mohalanobish strategy adopted in 1950’s and 1960’s, although erected a diversified solid
industrial base, but it failed to eradicate poverty through trickle down effect. This was because initial
distribution of income-yielding assets such as land distribution was very unequal. It was true that
marginal rate of taxes on non-agricultural income was very high, but too negligible to reduce income-
inequalities. The situation became worse because the publicly-owned capital stock could not be
channelized in desired direction, partly due to improper setting up and inefficient running of public
sectors and partly due to fact that government did not posses enough clarity of objectives for the public
sector.
In 1972, the then Indian Prime Minister Mrs. Indira Gandhi gave political slogan “Garibi
Hatao” i.e. eradicate poverty. The Planning Commission had by then also accepted the flaws of the
“big push-high growth” strategy and actively supported the political initiatives of expansion of anti-
poverty programmes.
The Fifth Five Year Plan (1974 – 79) for the first time tried to correlate the problem of
poverty eradication with growth process. This Plan was based on the strategy of “redistributon with
growth”. The Fifth Five Year Plan had made a specific investment strategy so that there could be a
redistribution of consumption from the top 30% to bottom 30% of the population. This strategy had

15. 15
revealed that if the minimum needs of the people were to be met, it was necessary to pay
greater attention to agriculture and energy. It was observed that given the supply constraints in the
economy, it was necessary to introduce additional poverty eradication measures to make a dent in
the poverty problem. As a result, several anti-poverty programmes had been introduced like Work
for Food (1978), SFDA , MFAL etc.
Despite some political disturbance the fiscal and balance of payments situations was
manageable in the 1970s. The forex position was exceptionally favorable largely due to migrant
workers in West Asia whose number increased dramatically as a result of the oil boom.
After the competition of 5th
FYP we had an annual plan in 1979 – 80 simply due to unstable
political situation at Centre. That annual plan had no separate situation at central. That annual plan
had no separate economic significance.
Phase – IV : (1980-1990): Modernization and Outward-looking Strategy
This phase comprises two five year plans: 6th
FYP(1980--1985) and 7th
FYP (1985 – 1990).
The draft of the 6th
5YP came up with frank admission that the most important objectives of
economic planning have not been achieved. The objectives were identified as i) the attainment of
full employment; ii) the attainment of self-reliance; iii) eradication of poverty; iv) creation of an
egalitarian society.
Due to inward-looking strategy in the 1950s, India’s share in world exports had declined
from 1.91% in 1950 to about 0.4% in to 1970’s. However, over this period several East Asian
countries made rapid progress by adopting outward-looking strategy. The process of liberalization
within the domestic economy started during this period. Industrial sector performed well. The
average economic growth was around 5% per annum during 1970’s. Various ‘sun-rise’ industries
had been set up under private sector during this period. But the health of the economy was not
good. The performance of public sector became worse during this time, especially in terms of
profitability. Rajiv Gandhi government embarked on an aggressively expansionist policy without
any attempt to mobilize adequate revenues. As a result, the fiscal deficit was growing fast and there
was no hesitation in financing it through borrowing or deficit finance. At the same time the forex
position deteriorated due to slow-down in export. The cumulative effect of large commitment on
account of non-development imports during the early eighties forced the government to take
international commercial borrowing at hard terms. The BOP situation worsened with forex reserve
dwindling. The price level rose alarmingly.

16. 16
Thus, the 1980s ended with low growth rate, high inflation rate, poor forex
reserve position, vanishing international confidence on India—a situation unprecedented in the
post-independence India.
Phase–V:(1991 onwards): Economic Liberalisation, Social and Human Development
The economic crisis was predicted in the late 1980s. Political incertainty at the centre and
two general elections within three years and Gulf war in 1991 made the already bad situation into
worse. The situation because so severe that again two year ‘planning holiday’ had to be announced.
The planning process was renewed from 1992.
The Eighth FYP (1992 – 97) documents raised an important question that in the background
of our experience of planning for development over the last forty years and under the strong
imperatives for change as they have emerged now ‘what will be the role of planning in the future?’
Despite the centralized democratic planning process practiced in India, the market has
determined allocations in a major segment of the economy. Public sector of course has expanded
with a wide ranging influence on the economic life of the nation. The lack of cost consciousness of
the public sector, its increasing ineffectiveness in achieving the targets and depletion of its
resources, crippling its ability to carry on its activities without high-cost borrowing have compelled
us to define and limit its role and lay down the objective principles of its operations. The process of
planning and the pattern of government activities followed hitherto have dampened people’s
initiatives and their sense of responsibility towards building the nation. The process of planning
needs to be corrected in this respect.
It is no doubt due to public sector investment, our industrial base has been diversified and
expanded. Indian economy grew over 5% in the 1980’s. But, there were 400 million people lived
below the poverty line without sufficient nutrition, proper health-care facilities and electricity.
Around 40% of Indians were illiterate also. In terms of human development indices we were far
below the world standard. In the first forty years of planning, the planners did not give adequate
attention to the development of social indicators. So far, resource allocation had been the
predominant role of the Planning Commission. This has to change now. Instead of looking for mere
increases in the plan outlays, the emphasis should be on increases in the efficiency of utilization of
the allocation being made. Investment planning is needed for creating social infrastructure and
human development. Planning is necessary to take care of the poor and the downtrodden who have
little asset-endowment to benefit from the natural growth process. Further planning process has to
manage the flow of resources across the region for accelerated removal of regional disparities.
In this new era, state gradually creates larger the space for the market. However, planning
process is necessary where market mechanism is inadequate for protection of poor people,

17. 17
environment, forests and ecology. However in this phase, growth objective is also
dominant objective with social and human development objectives.
Phase I: 1950-1965
The growth achieved since 1951 was significant but not impressive. For the fifteen year
period of the three plans ending in early 1966, GDP increased by 3.8 per cent per annum.
Agricultural output rose annually by 2.8 per cent per annum and industrial output by 7.3 per cent
per annum. These achievements were below the plan targets and below the average for the
developing countries taken together. However, the plans did succeed in significantly extending land
under cultivation and irrigation, abolishing intermediary and rent-receiving tenures and conferring
rights of ownership on some groups of tenants. Similarly, in the field of industry a diversified
industrial structure with greatly enlarged capacity in basic sectors particularly metals and machine-
building, heavy-chemicals transport and communications, was established. Equally important was
the development of new managerial skills, technical know-how and designing capacity.
But while the Third Plan was still in progress, events took place which imposed unforeseen
burdens on the economy. The sharp increase in defense expenditures consequent on armed conflicts
with China and Pakistan and the leveling off of foreign aid, all in the short span of three years
(1962 – 65) put the economy under severe strain. These strains reached crisis proportions when two
consecutive droughts hit the country in 1966 and 1967. GDP in these two years fell in absolute
terms. The sharp deterioration of economic circumstances and the security environment demanded
adjustments in policy and reflection on the direction of changes needed in the structure of the
economy.
Phase : II : 1965 – 1974:
The impact of adverse circumstances brought into view two principal weakness of technology
economic strategy which had been followed. One was the inter-sectoral imbalance between agriculture
and industry, and the other was the underestimation of foreign aid requirements. It became clear that
some change in policy were required to make the plans more viable.
The relative neglect of agriculture which had become feasible because of the availability of
U.S. Public Law 480 supplies, was sought to be rectified with the introduction and spread of new
‘seed-cum-fertilizer technology’ made possible by breakthroughs in research in plant generics just
around that time. The adoption of new agricultural technology combined with increased investment
in irrigation and incentive farm prices was a major shift of policy.

18. 18
The main adjustment to lower levels of foreign aid was made by economizing on
imports and implicitly therefore by reducing the aggregate and sectoral growth targets. There were
at the same time other shifts of emphasis in policy to encourage growth. These shifts covered a
wide range; a greater role for price incentive, relaxation of some controls on the private sector to
enable it to play a larger part in the economy and a greater effort at export promotion. Resources
were concentrated on the completion of the ongoing and quick-yielding projects of shorter
maturity. This was the doctrine of growth with stability.
The longer term planning exercise was suspended while three Annual Plans were executed
with a view to consolidating the short-run gains before the next phase of growth could be initiated.
For that phase, preparations had to be made for mobilization of resources and setting an appropriate
policy environment. But the general direction of policy was towards the strengthening of the
process of liberalization that had been initiated under the stress of circumstances. The decision to
devalue the rupee in 1966, which was not meant merely to correct the overvaluation of the rupee,
was expected to reinforce this process. Around the decision was also woven an aid package that
was expected to underwrite the liberalization program and to enable the country to dismantle much
of the regulatory system especially in the area of trade and industry policies.
In the event, however devaluation did not push up the exports as its proponents had hoped.
The export earnings for 1966 – 67 declined in 1967 by 8 per cent. In 1968 – 69 they were a mere 4
per cent above the level of 1964 – 65. Nor did the aid package that was to accompany the decision
materialize.
Evidently the mood of the donors had changed. it was no longer the mood of the early
sixties when they had endorsed the general framework and priorities of the Third plan before it
commenced and made a declaration of intent to provide on soft terms the foreign exchange for the
gap in the resource budget. The deterioration on the foreign aid front in the wake of devaluation
was indicated by the decline in aid from U.S. $ 1.3 billion in 1965 – 66 to under $1 billion in 1967
– 68. The anticlimax to the high expectation of aid was reached in 1972 – 73 when there was an
outflow of $120 million as a result of the famous “Nixon tilt”. Thus finally ended the effort to
mobilize aid to do away with aid after crossing the hump” as it was called at that time.
The immediate economic consequences and political fallout of the devaluation episode were
disastrous. Worse than that, it case a long shadow on economic policy making in the country. The
formulation of the Fourth Plan (1969 – 74) had to be postponed till 1969. The interval was covered
with three annual plans, popularly described as the “Plan holiday” period.
The plan holiday, however, coinciding as it did with rapid changes in the political
leadership at the center and in several states had an important political impact. The Nehruvian
consensus on the management of a long run course of the economy broke down in the wake of

19. 19
political fragmentation after the general election of 1967 and more particularly after the
split in the Congress party in 1969.
The disappointment caused by slow growth, growing population pressure and rising
unemployment had generated a widespread feeling that poverty could not be reduced as a by
product of the normal growth of the economy. As early as 1962, the Planning Commission had
prepared a paper on the ‘implication of planning for a Minimum Level of living’ which directed
attention to the issues of poverty alleviation. But five years later, the idea of a ‘direct assault on
poverty’ acquired strong political support. Their demands gave a radical turn to the government’s
economic policies in a manner that resulted in the reversal of the earlier liberal trends. The
consequences of the new turn were making demands on additional resources for short term
amelioration of chronic economic problems alongside a more stringent licensing policy which was
adopted in 1970. The sentiment against concentration of economic power translated itself into more
restrictive measures against big business; large business houses were put under the jurisdiction of
the Monopolies Commission to monitor and approve their new investment proposals.
The problems posed by the resources constraint, especially of foreign exchange, for the
framers of the Fourth Plan were made more difficult by an uncertain political situation. The
planners failed, for lack of political support, to find any viable solution to the resource constraint.
Nor did the planning commission come up with a set of policies that would have yielded a higher
growth rate by the improved use of available resources such as those locked up in the public sector.
In its basic approach the Fourth plan was not much different from its predecessors. It drew
up its resource position on the usual optimistic assumptions and postulated a growth rate of 5.5 per
cent per annum. Not unexpectedly, the rate hovered between 3 per cent and 3.5 per cent per annum.
The target rate had to be revised downwards in a mid-term appraisal. Thus, the eight-year period
i.e. the three years of Plan holiday and the Fourth Plan period, did not show an improvement in the
performance of the economy. In fact, some key indicators showed deceleration which was
particularly marked in gross domestic as well as fixed capital formation and GDP originating in the
manufacturing sector. From 1966 to 1970, the real public investment declined even in absolute
terms. Thus, not only was growth not picking up but the bases for future growth were in fact getting
eroded. The most notable exception to this gloomy picture was provided by agriculture which
registered improvement in its growth performance, particularly in food grain production .
The disappointment with aid and aid givers introduced an added element of realism and
caution, leading to a significant reduction in current account deficit and also in the imports of food
grains from their earlier high levels. These results gave substance to the political stance of self
reliance.

20. 20
Phase III: (1974 – 80) :
Before the Fourth plan was completed, India had to face the Bangladesh crisis of 1971. This
was followed by the drought in 1972 and the first oil shock in 1973. The sharp increase in inflation and
the consequent political turmoil exacerbated the country’s formidable development problems and
complicated the preparations of the fifth plan (1975 – 80). Although the plan was formulated with the
usual 5.5 per cent per annum target growth rate, it was overshadowed by the compelling necessities of
short-term adjustments even before its implementation. Keeping the balance of payments manageable
curbing inflation and preventing drastic cuts in the investment programs became the dominant concerns
of policy.
The sudden deterioration in the balance of payments was handled with the help of large
drawings on the international monetary fund, including the funds oil facility and larger aid from the
India consortium and the world bank supplemented by oil purchases on deferred payment a million ton
wheat loan from the Soviet Union and an export promotion drive. The export drive yielded handsome
results; an over 20 percentage growth rate (7 – 8 per cent in volume terms) from 1973 – 74 to 1977 – 78
an impressive performance by Indian standards. The export earnings plus the unforeseen expatriate
remittance played a key role in sustaining the balance of payment during this period. Indeed, for a
couple of years, balance of payments during this period. Indeed for a surplus emerged in the current
account which encouraged the government to take measures to liberalize imports and reduce controls.
Inflation, which had reached an annual rate of 23 per cent in 1973 – 74 and escalated further to
about 30 per cent by the middle of 1974, became alarming. A two-pronged attack was made to curb it.
This consisted of an effort to increase essential commodities in short supply, on the one hand, and
strong measures to curb demand on the other. These measures were further helped by a bumper crop.
The anti inflation measures proved very successful. At the end of January 1976 wholesale prices were 8
per cent below the previous year. The effective control of domestic inflation well below the rate of
international inflation had also a favorable effect on export growth.
Thus by 1976 – 77 the economy had adjusted to the oil price hiked and other disturbances
attendant on it. The effort an export promotion had succeeded. And more than that while keeping
imports at the same level in volume terms, the GDP growth rate accelerated. Compared to other oil
importing countries, India handled the crisis reasonably well and its policymakers could think of
steering the economy in a longer term perspective. In fact the investment rate went up from 18.1 per
cent to 22.6 per cent between 1975 – 76 and 1978 – 79 in constant terms.
Phase – IV : (1980-1990):
The second oil price hike which came in 1979, followed in the early 1980s by the severest
recession in the world economy since the Great Depression. Once again, the adverse impact of the new
oil price hike was compounded by a severe drought. However, the impact on the balance of payments of
further deterioration in the terms of trade and the need to import some food grains was moderated by
increased in expatriate remittances. But more than that, the balance of payments was restored to

21. 21
manageable limits by import substitution in two very important commodities: food grains and
petroleum.
Had India’s terms of trade not deteriorated sharply during the period between the two oil
shocks, its capacity to import and to accelerate growth would have improved significantly. Even so, the
Sixth Plan (1980 – 85) was by and large successful. GDP increased at the annual rate of 5.5 per cent for
the Plan period (target 5.2 percent). The growth rate is somewhat exaggerated because the base year
(1979 – 80) was a drought year and therefore one of poor performance. However if we make allowance
for this, the growth rate was around 4.5 per cent a year which is a percentage point above the traditional
growth rate of about 3.5 per cent. Even for the decade of the Fifth and Sixth Plan the actual growth rate
has been about a percentage point above the traditional level.
Even more important than the improvement in the aggregate growth rate are the changes in
some key sectors of the economy. Agriculture appears to have become more resilient and less
vulnerable to bad weather. There was also a marked increase in the output of petroleum, power
generation use of natural gas, cement fertilizer and coal. During the Sixth Plan period there was also
some decline in the incidence of poverty. According to the Planning Commission, the percentage of
people below the poverty line declined from 48.3 per cent in 1977 – 78 to 37.4 per cent in 1985. There
is however some misplaced emphasis about the causes for this decline. The credit for this is given to
expanded programs of the Integrated Rural Development Program (IRDP) and other anti-poverty
programmes. But there is considerable evidence to suggest that, apart from some useful elements in
these programmes their contribution to employment expansion is limited and their financial and
administrative costs are heavy. The decline in the incidence of poverty is perhaps better explained by
the remarkable progress made by agriculture whose growth exceeded the target of 3.8 per cent.
This generally creditable performance is lessened by that of the manufacturing sector, which has
never really regained the momentum is lost in the mid sixties. During the sixth plan period this sector
grew at a meager 4.3 per cent rate, well below the modest target of 6.5 per cent set on the plan. All in
all, the sixth plan can be said to have market a transition to a slightly higher growth path for the Indian
economy.
A more important and hopefully more enduring contribution of the Sixth Plan may turn out to
be the confidence it has given the Government to pursue more consistently the policy changes that were
made under the compulsion of circumstances brought about by External turbulence, particularly those
emanating from the two oil shocks.
The main sources of funds for plan financing in India are :
(i) Balance from current revenue of government;
(ii) Surpluses of public enterprises;
(iii) Borrowings;

22. 22
(iv) Additional resources mobilization;
(v) External assistance and
(vi) Deficit financing
The balance from current revenue (BCR) that is the excess of government’s revenue over non –
play current expenditure (item 1 above) and resources raised additionally through new measures
undertakes during a plan period (item 4) together with the surpluses of public sector enterprises (item 2)
constitute public savings and were expected to be a major sources of finance for the plans, being the
least inflationary instrument for raising resources for public investment expenditure. the other domestic
source of finance is borrowings and deficit financing (item 3 and 6).
Looking at the pattern of financing, one finds that plan financing in India depended primarily on
domestic sources. External assistance has constituted no more than 12 per cent of technology total
outlay in the recent plans (4th
5th
6th
7th
and 8th
plan). While in the fourth and the fourth plan, external
assistance contributed about 12 per cent to plan finances, in sixth plan 7.7 per cent , in seventh plan 9
per cent and in the 8th
plan the net inflow from abroad although projected at 6.6 per cent turned out to
be little less than 4 per cent.
The most important sources of financing are additional resource mobilization (ARM) and
domestic borrowings. The term ARM represents the resources which the government and the public
enterprises at the centre and in the states (the federating units of the Indian union are expected to raise
over and above the surplus which their budgets are likely to generate. This surplus is worked out after
projecting the current revenues and non plan current expenditure in the five years of a given plan
period, assuming normal growth in both revenues and expenditures. The growth rates of revenues of
government are derived on the basis of past trends and/ or their elasticities with respect to major
determinants (e.g. with respect to GDP in the case of income tax). Similarly in the case of public
enterprises, the growth is worked out on the basis of the existing structure of prices and costs. The
ARM figures are based on an assessment of what the government at the centre and in the states and the
public enterprises run by them can raise through additional efforts such as by raising the tax rates or
intensifying collection efforts and cutting down non plan expenditures. In the case of public enterprise
ARM represents what they can raise by revising their prices upwards or by cutting costs and improving
their operational efficiency.
Borrowings currently the biggest single item of domestic resources for the plans, are made up of
market borrowings, small savings state provident funds loans from financial institutions and
miscellaneous capital receipts. Market borrowings come mainly from the subscription primarily by the
commercial banks. The commercial banks are required compulsorily to keep a fraction of their deposits
in government securities to maintain what is called the statutory liquidity ratio and this has been a major
instrument for channelising the flow of household savings into the public sector. The other sources of
borrowings are the small savings.

23. 23
Schemes designed to garner the savings of the household in the form of deposits with
post offices which are spread all over the country reaching the far corners of rural areas, state provident
funds and deposits of other financial institutions like the Life Insurance Corporation of India, General
Insurance Corporation of India and so on.
The biggest single item of domestic resources for the plan comprises borrowings viz market
borrowings, small savings state provident funds term loans from financial institutions and
miscellaneous capital receipts. Borrowings constituted 40 per cent to 58 per cent of plan finance (42 per
cent in the 4th plan, 30.5 per cent in the 5th plan 41.5 per cent in the 6th plan, 58 per cent in the 7th plan
and for the 8th plan against the projected figure of 46.5 per cent in the actual turned out be 63.1 per cent
of the total finances). Amaresh Baghchi points out that as a result of the large shortfalls in budgetary
savings and in adequate surpluses of PSUs, borrowings. Total domestic borrowings contributed
anything between 40 and 60 per cent to plan finance in recent years (6th
, 7th and 8th plan) as compared
to about one firth to one fourth in most of the earlier plans. Inadequacy of current revenues to meet even
current expenditure has resulted in the use of borrowed funds to meet current expenditure leading close
to what is called an internal debt trap. The main factor responsible for the falling contribution of the
central budget to the financing of the plans in the mounting burden or non-plan expenditure in the form
of interest payments and subsidies on food and fertilizers.