Economic planning

Also called: Plan, National planning · Topic: Economic Planning in India: Goals, Models and Import Substitution · NCERT: Class 11, Ch 2 "Indian Economy 1950-1990"

Meaning

Economic planning is a plan that says how a nation's resources (money, land, labour, machines and raw materials) should be used. It has broad general goals and specific objectives (targets) that must be met within a set period.

It matters because from 1950 to 2017, India's plans decided where public money went, which sectors came first, and how the Centre shared funds with the states. Many Prelims questions on the Planning Commission, the NDC and NITI Aayog start from this idea.

Explanation

Two layers of every plan

• General goals: broad aims such as growth, modernisation, self-reliance and equity.
• Specific objectives: measurable targets, like "add this much power" or "build this much irrigation", that must be reached within a set period.
• Five-year cycle: each Indian plan ran for five years. India borrowed this idea from the former Soviet Union (USSR), which NCERT calls "the pioneer in national planning".

Perspective plan: the long view

• Perspective plan: a long-term plan of about twenty years.
• Five Year Plans were its building blocks. One 20-year perspective plan is about 4 Five Year Plans (4 × 5 = 20).
• Worked example: how the targets link up
• A perspective plan wants power supply to rise from 100 units to 400 units in 20 years.
• Total rise needed = 400 − 100 = 300 units.
• Share for each Five Year Plan = 300 ÷ 4 = 75 units.
• Path: 100 → 175 → 250 → 325 → 400.

• So the short-term targets are worked out backwards from the long-term goal.

• The Perspective Planning Division was set up inside the Planning Commission in 1958.

Indicative vs imperative planning

• Imperative (command) planning (USSR model):
• A central planning authority decides what to produce, how much, how, and at what prices.
• In the USSR this body was Gosplan.

• It tried to plan every single good, and it failed.

• Indicative planning (India's model):

• The state sets targets and directions. It does not give orders on every output.
• Indian plans never fixed the output of every good. NCERT says this is "neither possible nor necessary".

• India planned firmly only in key sectors, such as power and irrigation, and left the rest to the market.

• How indicative planning guides private firms:

• Incentives: tax benefits and cheap credit pull firms into priority sectors.
• Licences: a firm needed government permission to set up or expand a factory.
• Public investment: the state builds dams, steel plants and power stations, and private firms grow around them.

Feature	Indicative (India)	Imperative (USSR)
Who decides output	Market, with state guidance	Central authority (Gosplan)
Coverage	Key sectors only	Every good
Tools	Targets, incentives, licences, public investment	Orders, quotas, fixed prices
Private sector	Exists, guided	Almost absent

Other types of planning

• Financial planning: starts from money. First ask "how much money can we raise?", then decide what to build.
• Physical planning: starts from real inputs and outputs, such as tonnes of steel, megawatts of power and workers. First ask "what do we need?", then find the money.
• Rolling plan: the plan is revised every year and a new year is added, so it always looks five years ahead. India used one in 1978–80.
• Centralised planning: all planning is done from Delhi.
• Multi-level planning: planning is also done at state, district and panchayat level. District Planning Committees come under Art. 243ZD, added by the 74th Amendment.

In India

• Constitutional basis: "Economic and social planning" is Entry 20, List III (Concurrent List). So both the Centre and the states can make laws on planning.
• Planning Commission:
• It was set up on 15 March 1950 by a Cabinet Resolution [2].
• Its chairperson was the Prime Minister, and its first Deputy Chairman was Gulzarilal Nanda.

• It was neither constitutional nor statutory. A constitutional body is created by the Constitution. A statutory body is created by an Act of Parliament. The Commission was created by an executive order and was only advisory.

• National Development Council (NDC), 1952:

• It gave final approval to every Five Year Plan.
• Members (NCERT) were the PM, all Chief Ministers and members of the Planning Commission. PRS also lists Union Ministers [4].

• Planning is on the Concurrent List, so the states had to agree to each plan. The NDC was the place where they did.

• Money role:

• The Commission shared central plan assistance among states using the Gadgil formula (1969).
• In the later Gadgil-Mukherjee version for non-special category states, the weights were Population 60%, Per capita income 25%, Fiscal performance 7.5% and Special problems 7.5% [4].

• Special category states got 30% of Normal Central Assistance (the Centre's regular plan money for states), received as 90% grant and 10% loan. Other states got 30% grant and 70% loan [4].

• End of the plan era:

• NITI Aayog (National Institution for Transforming India) replaced the Commission. It was set up by a Union Cabinet resolution of 1 January 2015 [2][3].
• The last Five Year Plan ended in 2017. Indian plan documents up to 2017 set both five-year and twenty-year targets.
• The plan/non-plan classification of spending was abolished from Budget 2017-18 [6][7].
• NITI's Governing Council (PM as chair, Chief Ministers, LGs or Administrators of other UTs) works on the idea of cooperative federalism, meaning the Centre and the states work as partners. It was first set up in February 2015 and reconstituted in February 2021 [5].

Don't confuse with

• Imperative (command) planning: the state orders the output and price of every good (USSR, Gosplan). India's indicative planning only set targets for key sectors and guided the market.
• Perspective plan vs Five Year Plan: a perspective plan looks about 20 years ahead. A Five Year Plan is one 5-year step towards it.
• Rolling plan: it is revised every year with a new year added, so its end date keeps moving. A normal Five Year Plan has a fixed start and end. India's rolling plan ran in 1978–80.
• Planning Commission vs Finance Commission: the Planning Commission was set up by an executive order and was only advisory. The Finance Commission is a constitutional body under Art. 280 that shares taxes between the Centre and the states. It does not separate special from non-special category states when it does this [4].

Prelims Hooks

• A plan has general goals plus specific objectives to be met within a set period. India's plans were five years long, an idea borrowed from the USSR.
• "Economic and social planning" is Entry 20, Concurrent List (List III), not the Union List. This is a common trap.
• The Planning Commission was set up on 15 March 1950 by a Cabinet Resolution. It was neither constitutional nor statutory [2]. Its chair was the PM.
• A perspective plan is about 20 years long. The Perspective Planning Division was set up in 1958.
• The NDC (1952) gave final approval to Five Year Plans. NITI Aayog was set up on 1 January 2015 [2][3].
• India's planning was indicative: firm planning only in key sectors like power and irrigation. Rolling plan = 1978–80. District Planning Committee = Art. 243ZD (74th Amendment).

Mains Points

• Indicative vs command planning (GS-III):
• India planned firmly only in key sectors and let the market run the rest.
• This kept a private sector alive, so the 1991 reforms were easier than in the USSR, whose full command model failed.

• But the licences and controls in this model later grew into the "licence raj".

• Planning and federalism (GS-II):

• The Planning Commission was an advisory body made by executive order, yet it controlled central plan assistance to states through the Gadgil formula.
• So states came to depend on it, and it cut into the role of the constitutional Finance Commission.

• NITI Aayog's Governing Council, built on cooperative federalism, was meant to fix this [5].

• Long-term vision vs short-term action (GS-III):

• Perspective plans (20 years) gave direction, and Five Year Plans put them into action.
• The plan/non-plan split made governments favour new schemes, so upkeep of existing assets was neglected [6].
• Ending the split from 2017-18 lets the budget link money spent to results [6][7]. NITI continues long-term vision work without fixed five-year plans.

Related concepts

• Perspective plan
• Central planning authority

Read more

• What a plan is: indicative planning, perspective plans and the Planning Commission