(IGP) IAS Pre: GS - Indian Economy - Economy Concepts: Socio-economic Planning (Part -2)

The government intends to convert the (Planning Commission) into a think-tank to generate original ideas in the very broad domain of economic policy for the government to then act on. (It will also be the government agency responsible for acting as an interface with other independent think-tanks and NGOs). The PM would like the commission to engage more directly with the "polity", presumably with various ministries in the Central and state governments, and be able to persuade them to implement certain ideas or "plans" generated by the government's own think tank. That isn't radically different from its existing role — the Planning Commission has few direct powers of execution in any case and must rely on the power of persuasion to sell its ideas to the Centre and states.

Interestingly enough, the new role sought for the Planning Commission seems to be very similar to the role played by the National Advisory Council, which also generates ideas within, coordinates with NGOs and civil society and then tries to "persuade" the government to act. NAC's focus so far has been social sectors whereas a systems reforms commission can take on a broader gambit of issues, including public finances, infrastructure and so on.

The government's move to revamp and gradually transformthe Planning Commission into a System Reforms Commission is & major step that can make the institution more relevant to a market economy. The idea is to metamorphose the plan panel from a reactive agency into a strategic thinking group, which maps out risks and opportunities by focusing on issues The shrinking role of the government in mobilising and controlling investments has pushed the Planning Commission to focus more on issues related to enforcing fiscal discipline in the central and state governments, including in the various ministries, departments and public sector enterprises.

According to Arun Maira, PC member, (the Planning Commission will gradually transform itself into a Systems Reforms Commission for resolving the systemic problems of the 21st Century over the next two-three years as desired by Prime Minister Marimohan Singh). (It will restructure itself to serve three essential functions: build a larger network around its members with think tanks and opinionmakers, produce thought papers at a faster pace and communicate more lucidly with polity).

After Montek Singh Ahluwalia, Planning Commission Deputy Chairman, first admitted last December that the Plan panel cannot work in a silo, Arun Maira, formerly with Boston Consulting Group, India, and appointed Plan panelmember in the second UP A term, was assigned the task of revamping the Planning Commission.

National Development Council

(The National Development Council is not a Constitutional body nor a statutory body) (not set up by an Act of the Parliament). (Union Cabinet set up the NDC in 1952) with the following functions • To prescribe guidelines for the formulation of the national plan.

• To consider the national plans formulated by the Planning Commission.
• To assess the resources for the plan and recommend a strategy for mobilizing the resources.
• To consider important questions of socioeconomic policy affecting development of the nation.
• To review the progress of the five year plan midcourse and suggest measures for achieving the original targets.

(NDC is headed by the Prime Minister of India and comprising of all Union Cabinet Ministers, Chief Ministers of all the States and Administrators of Union Territories and Members of the Planning Commission). Ministers of State with independent charge are also invited to the deliberations of the Council.

The National Development Council (NDC) has a special role in our federal polity. (It is the apex body for decision making and deliberations on development matters). It has the explicit mandate to study and approve the Approach Plan to the Five year Plans and the Five Year Plan documents. (The mid-term reviews of the Five year Plans are considered by the NDC). (In fact,, without the NDC approving, the Five Year Plan does not come into effect).

55th meeting of NDC was held in July 2010 to approve the MTR of the 11th FYP. The CMP of the UPA Government (2004) says that NDC will be activated. It will meet at least three times in a year and in different state capitals . It will be developed as an effective instrument of cooperative federalism.

Mixed economy

India is a mixed economy combining features of both capitalist market economies and socialist command economies. Thus, there is a regulated private sector (the regulations have decreased since liberalisation) and a public sector controlled almost entirely by the government. (The public sector generally covers areas which are deemed too important;) or not profitable enough for the private sector). Thus such services as railways and postal system are carried out by the government. Since independence, various phases have seen nationalisation of such areas as banking, thus bringing theminto the public sector, on one hand, and privatisation of some of the Public Sector Undertakings during the liberalisation period on the other

Financial resources for the Five year Plans

(The resources for the Plan come from

• Central budget
• State budgets PSEs
• Domestic private sector and
• FDI)

A Note on Gross Budgetary Support

Resources of the Centre consist of both budgetary resources including external assistance routed through the budget and the Internal & Extra Budgetary Resources (IEBR) of Central Public Sector Enterprises (CPSEs). (The quantum of budgetary resources of the Centre) which (is available for providing overall budgetary support to the plan (is divided into two parts) viz. (budgetary support for Central Plan (including U.Ts without Legislature) and Central Assistance for States') Plans (including U.Ts with Legislature). A part of the budgetary resources allocated as budgetary support for the Central Plan is used for providing necessary support to CPSEs. (GBS is the amount from the central Budget that goes to fund the plan investments during the plan period).

Achievements of Planning

In the last about 60 years since India became a Republic, the National Income has increasedmany times. Today, (India is the third largest economy in Asia) with about $1.4 trillion GDP after China and Japan; is the 11th largest economy in the world). (India is the fourth largest in the world as measured by purchasing power parity (PPP)), with a gross domestic product (GDP) of about $4 trillion- USA, China, Japan, India. In the face of global recession, India posted 6.7% rate of growth in 2008-09 and 7.6% in 2009-10 and (is the second fastest growing major economy after China)The first half of 2010- 1 saw the growth rate at 8.9%.

Poverty dropped to about 20% of the population- the criterion used is monthly consumption of goods valued less than Rs. 211.30 per capita for rural areas and Rs. 454.11 for urban areas (2006) Social indicators improved e though there is a long way to go- IMR,MMR, literacy, disease eradication etc. The industrial infrastructure is relatively strong - cement, steel .fertilizers, chemicals, etc Agricultural growth is also gaining momentum with food grains production at 233 mt in 2010. (Forex reserves are $300 b (January 2011) which) is a dramatic turnaround from 1991 when we had a billion dollars.

More than 1.7 lakh MW of power capacity is installed by the end of 2010 India has emerged as a back office if the world and its prowess in software is growing.

(India ranks fourteenthworldwide in factory output. India ranks fifteenth worldwide in services output). There has been considerable expansion of higher, education. At the time of Independence there were 20 universities and 591 colleges, while today, there are almost 500 universities and 21,000 colleges. Literacy levels are 75%(2010).

The failures of planning are equally clear

• Poverty still plagues about 360million (Tendulkar)
• Inflation on CPI and food inflation are rising relentlessly hurting the poor-. 14.4% is the food inflation I December 2010.
• Unemployment is high
• Regional imbalances are intensifying
• Malnutrition haunts about half the children in India.

Indicative planning

(Indicative planning) was adopted since 8 five year plan (1992-97). It (is characterized by an economy where the private sector is given a substantial role). (State would turn its role into a facilitator from that of a controller and regulator).

It was decided that trade and industry would be increasingly freed from government control and that planning in India should become more and more indicative and supportive in nature. In other words, the remodeling of economic growth necessitated recasting the planning model from imperative and directive hard') to indicative (soft) planning. Since the Government did not contribute the majority of the financial resources, it had to indicate the policy direction to the corporate sector and encourage them to contribute to plan targets.  Government should create the right policy climatepredictable, irreversible and transparent- to help the corporate sector contribute resources for the plan: fiscal, monetary, forex and other dimensions. Indicative planning is to assist the private sector with information that is essential for its operations regarding priorities and plan targets. Here, the Government and the corporate sector are more or less equal partners and together are responsible for the accomplishment of planning goals. Government, unlike earlier, contributes less than 50% of the financial resources. Government provides the right type of policies and creates the right type of milieu for the private sector-including the foreign sector to contribute to the results.

Indicative planning gives the Government an opportunity to give the private sector encouragement to achieve growth in areas where the country has inherent strengths. It is known to have brought Japan results in shifting towards microelectronics. In France, too indicative planning was in vogue. Planning Commission would work on building a long-term strategic vision of the future. The concentration would be on anticipating future trends and evolving strategies for competitive international standards. Planning will largely be indicative and the public sector would be gradually withdrawn from areas where no public purpose is served by its presence. (The new approach to development will be based on "a re-examination and re-orientation of the role of the government"). (This point is particularly stressed in thedevelopment strategy of the Tenth Five Year Plan (2002-2007)). Indicative planning was not contemplated at the beginning of fifties as there was hardly any corporate sector in India and Governmentshouldered almost the entire responsibility of socioeconomic planning.

Rolling Plan

(It was adopted in India in 1962), in the aftermath of Chinese attack on India, in the Defence Ministry in India). (Professor Gunnar Myrdal (author of famous book ‘Asian Drama') recommended it for developing countries in his book - Indian Economic Planning in Its Broader Setting).

In this type, every year three new plans are made and implemented- annual plan that includes annual budget; five year plan that is changed every year in response to the economic demands; and perspective plan for 10 or 15 years into which the other two plans are dovetailed annually. (Rolling plan becomes necessary in circumstances that are fluid).

Financial Planning

Here, physical targets are set in line with the available financial resources. (Mobilization and setting expenditure pattern of financial resources is the focus in this type of planning).

Physical planning

Here, (the output targets are prioritized with intersect oral balance). Having set output targets, the finances are raised.

Nehru-Mahalanobis Model of Economic Growth

Indian economy at the time of independence was characterized by dependence on exports of primary commodities; negligible industrial base; unproductive agriculture etc.

Thus, (the turning point in India's planning strategy came with the second five-year) (1956- 61) plan. The model adopted for the plan is known as the Nehru-Mahalanobis strategy of development as it articulated by Jawahar Lal Nehru's vision and P.C. Mahalanobis was its chief architect. The central idea underlying this strategy is well conveyed by recalling the following statement from the plan document. ‘If industrialization is to be rapid enough, the country must aimat developing basic industries and industries which make machines to make the machines needed for further development.'

(The Mahalanobis model of growth is based on the predominance of the basic goods (capital goods or investment goods are goods that are used to make further goods) the goods that make up the industrial market like machines, tools factories, etc. It is based on the premise that it would attract all round investment and result in a higher rate of growth of output. That will develop small scale and ancillary industry to boost employment generation, poverty alleviation, exports etc. The emphasis was on expanding the productive ability of the system, through forging strong industrial linkages, as rapidly as possible.

Other elements of the model are

• Import substitution. Protective barriers against foreign competition to enable Indian companies to develop domestically produced alternatives for imported goods and to reduce India's reliance on foreign capital.

• A sizeable public sector active in vital areas of the economy including atomic energy and rail transport.
• A vibrant small-scale sector driving consumer goods production for dispersed and equitable growth and producing entrepreneurs.

In terms of the core objective of stepping up the rate of growth of industrial production, the strategy paid off. Rate of growth of overall industrial production picked up. The strategy laid the foundation for a well-diversified industrial structure within a reasonably short period and this was a major achievement. It • gave the base for self-reliance. However, the strategy is criticized for the imbalances between the growth of the heavy industry sector and other spheres like agriculture and consumer goods etc that resulted. It is further criticized as it relied on trickle down effect benefits of growth will flow to all sections in course of time. This approach to eradication of poverty is slow and incremental. It is believed that frontal attack on poverty is required.

The criticism is one sided as in the given context, the Mahalanobismodel was correct for growth and self-reliance.

Rao-Man Mohan Singh Model of Growth

The launching of economic reforms by the government in 1991 is driven .by the Rao-Man Mohan model -Mr. Narasimha Rao, the PMin 1991 and Finance Minister Dr. Man Mohan Singh. Its essence is contained in the New Industrial • Policy 1991 and extends beyond it too. Themodel has the following contents

• Reorient the role of State in economic management. State should re focus on social and infrastructural development, primarily
• Dismantle, selectively controls and permits in order to permit private sector to invest liberally
• Open up the economy and create competition for PSEs- for better productivity and profitability
• External sector liberalization in order to integrate Indian economy with the global economy to benefit from the resource inflows and competition.

Its success is seen in the more than 6.5% average annual rate of growth of economy during the 8th Plan (1992-1997). Forex reserves accumulated leaving the BOP crisis in history; taming of inflation; and the foreign flows- FDI` and FII increased.

Economic Reforms

Since July 1991, India has been taking up economic reforms to achieve higher rates of economic growth so that socio-economic problems like unemployment, poverty, shortage of essential goods and services, regional economic imbalances and so on can be successfully solved. The force behind the reforms is?

• Indian economy reached a level of growth and strength to benefit from an open market economy.
• Private sector in India had come of age and was willing and capable of playing amajor role
• Indian economy needed to integrate with the world with all the advantages like capital flows; technology; higher level of exports; state of art stock markets; Indian corporates can raise finances abroad and so on.

The country under the leadership ofDr.Manmohan Singh, Union Finance minister(l 991 -1996 and Prime Minister since 2004) converted the economic crisis - caused by , domestic cumulative problems of economy, political instability and gulf crisis-into an opportunity to initiate and institutionalise economic reforms to open up the economy. The deep crisis in 1991 could not be solved by superficial solutions. Therefore, structural reforms were taken up. It was realized that by closing economy to global influences, the country wasmissing on technology developments and also gains from global trade. India needed exports, FDI and FII for stability on the balance of payments front and higher growth rates for social development.Worldwide, countries were embracing market model of growth, for example China,with proven results. So, India could make the historic shift from centralized planning to market-basedmodel of growth.

Misgivings About Economic Reforms Initially reforms were feared and resisted as there was scepticismand fear as the experience in Latin American countries in the 1980s was not a success in economic and social terms. The fears related to

• Inflation as there will be little left for domestic consumption as exports would be attractive
• Large scale unemployment due to capital intensity of growth process.
• Worsening of poverty as fiscal concerns will reduce social sector expenditure
• Flood of imports as customs duties will come down.
• food security will suffer as social sector expenditure will be reduced
• Pressures on labour sector due to domestic industry's inability to compete.

Some fears have indeed come true-jobless growth and uncertainty in farming. But by and large, reforms have done well. Reforms mainly targeted the following areas :

• Dismantling the license raj so that private sector and government were on a level playing field.
• Drive public sector towards sustainable profitability and global play by dereservation; disinvestment; professionalization of management etc.

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