Home > Archives (2006 on) > 2014 > Planning in a Modern Economy: Is its Role Over in India?

Mainstream, VOL LII No 37, September 6, 2014

Planning in a Modern Economy: Is its Role Over in India?

Saturday 6 September 2014, by Arun Kumar

The Independence Day speech of the PM announced that the Planning Commission, set up in 1950, would be closed. Given that this institution has played a central role in the way the government functioned in India, does this announcement presage a major institutional change in governance? A new body/think-tank is supposed to replace this institution. Would this proposed institution essentially do what the Planning Commission did but under a different name and rubric? One may also ask whether in spite of the many perceived failures of the Planning Commission in India, planning is still needed.

 Big companies in their annual reports announce plans whether to increase their market share, introduce new products, etc. Individuals plan to save to build their homes or give their children good education, etc. Political parties plan to come to power by polarising the voters, etc. Narendra Modi planned for the last many years to become India’s PM. So, we are all planners.

However, these are all examples of individual or firm-level planning while what the Planning Commission was supposedly doing was economy-wide planning. What is the difference? Those with faith in the capitalist ideology oppose system-wide planning while favouring planning by individuals and firms in a given milieu. After 1991, when India embarked on the path of marketisation, planning was downgraded and since then the role of the Planning Commission has been increasingly questioned. However, none of the governments since then has eliminated it because they found uses for it. The Modi Government may also need it but is making a political point by announcing a break from the Nehruvian path of development.

All economies face the problem of change over time. Time is divided between the past, present and the future. We are always in the present. The past is already gone and is a parameter of the system. The real complication is that the future is ahead and unknown. So, there will always be uncertainty associated with it. What is planned may not be achieved so that there is failure of expectations and consequent problems. If we look at the future just ahead, it is a continuation of the past so not too uncertain. But if we look further ahead, the uncertainty is larger and the possibility of failure greater.

If all economic agents act in an atomistic fashion, without any coordination, they face very large uncertainty. If the aggregate economic system has some coordination, it gives all the economic agents some guidance to plan their actions and that reduces the uncertainty for them. But, the aggregate system itself faces uncertainty which cannot be eliminated. However, it may be moderated by government actions.

Left to its own device, a capitalist economy was found to go through business cycles with booms and busts which is costly, especially for the poor. It is only with increased government intervention the world over since the mid-1930s that the major cycles have been moderated and replaced by political business cycles. So, for individuals and firms in a capitalist economy, macro coordination is important. The global economic downturn starting 2007 did not turn into a depression because of massive government interventions in the major world economies.

Many successful economies of today have not had central planning and done well while India in spite of planning has lagged far behind. So, it is legitimate to ask whether systemic planning is at all needed. In 1947, India was extremely poor and backward. The savings rate was 8.6 per cent. Yet, the ambition of the ruling elite was to copy Western modernity and become like a European country. That required massive investment in infrastructure, like education, health, transportation, energy, basic goods and so on. The imperative was that there be full utilisation of scarce resources and elimination of waste through coordination of economic activity. So, planning was needed as an optimising exercise—how best to utilise resources to achieve rapid growth?

The Bombay Plan was drafted in 1944 by several of the Indian big businessmen associated with the Congress party. It suggested the need for a large public sector to create the necessary infrastructure for the economy to modernise since the private sector was short of capital. The need for optimal use of resources followed from it. The USSR had used planning to grow rapidly and was a readymade example to follow. Nehru and Bose were impressed with the Soviet model and were ready to emulate it.

Modern-day economies face many situations of market failure. In such situations, neo-classical paradigm suggests the need for government intervention to help achieve optimality. What the markets cannot achieve has to be obtained via government intervention. In 1870, the governments of the OECD countries spent nine per cent of the GDP. By 1990 they were spending 43 per cent of the GDP. As the economies grew and more and more situations of market failure came to the fore, government intervention increased. So, it is not just in the poor countries that government intervention is needed. Markets are known to work on the basis of the ‘dollar vote’. If one has more purchasing power one can influence the market more. Markets ‘marginalise the marginal’. Thus, they are not able to cater to the basic needs of the poor. The implication is that the poorer countries need larger government intervention than the rich countries.

With competing demands optimisation is needed. The Modi Government wishes to start 100 mega cities, eliminate filth and dirt everywhere, start bullet trains and so on; all commendable ideas. But the government would not spend only on these projects. The existing schemes would continue. The new projects would have to be initiated while continuing with most of the existing priorities. How can this be done without a new prioritisation and sequencing which requires planning?

If the bullet trains idea is pursued, it would absorb most of the scarce resources available with the railways so that the rest of the system would be starved of funds and begin to break down. Thus, overall there may be even greater inefficiency while some bullet trains run. Hence, a balance will have to be struck. Similarly, if 100 mega cities are planned and that requires lakhs of crore of investment per city, then the funds for existing cities and villages—which are anyway crumbling—will fall further short so that there would be enclaves of development and massive increase in disparities. Therefore, proper prioritisation and sequencing is needed to implement some of these grand schemes.

India anyway faces major regional disparities. It is being argued that the States should have greater autonomy to do what they would like to. In a federal structure this is essential. Any plan should be based on the needs of its components and not just be top-down. Consider banking in India. It collects savings and lends to those in need of funds—mostly businesses. Market-based investments go where profitability is higher, so funds flow out of the poorer States to the richer ones aggravating the existing disparities. As it is, the poor States generate less savings and of that also if a bulk goes to the richer ones, their investment levels would further lag behind those of the advanced States. Thus, the gap would widen between the backward and advanced States.

It is only when there is overall coordination of investment that the poorer States may have a chance to catch up. Yet, in spite of coordination through the Planning Commission and Finance Commission, disparities across States have increased. Disparities within States have also increased. Maharashtra, one of the most advanced States, has Vidarbha which is one of the most backward areas with a high rate of farmers’ suicides. So, do these examples contradict the idea that planning is better than no planning? Not really. Imagine if coordination at least at the level of the public sector was not there, how much wider the disparities would have been. There would have been severe social and political costs, like far greater migration and regional conflicts.

Reduction of disparities and inequalities require a degree of coordination. According to neo-classical theory, markets cannot affect redistribution so government intervention is needed. Unfortunately, modern-day economies are also plagued by policy failure. For the Indian economy, the rapid growth of the black economy (presently, over 50 per cent of the GDP) has led to increasing policy failure and non-fulfilment of targets. Only a fraction of the money sent by the Centre reaches the ground leading to policy failure. According to Rajiv Gandhi in 1988, only 15 paise reaches the ground and, according to the Supreme Court, now that figure is even less. The existence of the black economy leads to lower tax collection so that the economy appears to be resource-short. Due to the flight of capital, the opportunity cost to the economy is more than a trillion dollars in the last 65 years. Black economy also leads to wastage of resources through activities which are like ‘digging holes and filling holes’. Thus, the economy operates at much below its potential.

India embarked on the course of central planning in 1950 and its rate of growth rose sharply, industry diversified, infrastructure improved and so on. However, the top-down approach adopted by the self-centred ruling elite did not prioritise rural areas, agriculture and the marginalised sections. This resulted in the failure of planning and severe problems in the drought years of 1966 and 1967. The economy lived from ‘ship to mouth’ with food imported under PL-480. The US extracted concessions for rescuing a sinking Indian economy and the rupee was sharply devalued. Planning was downgraded with three years of plan holidays in 1967 to 1969. This was the turning-point for planning in India. When planning was revived after 1969, various Ministries and States became more assertive and planning largely became ex-post. Political interference in the PSUs increased sharply leading to its many problems. Planning continued in form but not in essence. The Fourth Plan had the vision of eliminating poverty. Mrs Gandhi had come to power in 1971 on the ‘Garibi Hatao’ plank. But the top-down approach of the policy-makers came in the way of its success.

Planning has to be ex-ante and not ex-post. At the end of the year, money would have been spent by the different parts of the economy and by each of the Ministries but it would be uncoordinated (ex-post) but without a vision or an advance plan (ex-ante). We can list many things like what the present government has done but to implement them one needs to have coordination between various requirements.

In 1977, the Janata Government came to power and proposed a rolling plan to end Plans. But, it was too busy squabbling and could not push for major changes. However, it did down-grade the public sector and its R&D effort was set back with long-term consequences. For instance, the collaboration between the BHEL and Soviets was replaced by that with the KDW of Siemens which refused to part with technology. The Fertiliser Corporation (FCI) was split up so that technology for upgrading of the 900 tonnes-per-day plants was lost. The 1350 tonnes-per-day plants were imported.

In 1980, India went to the IMF due to the BoP problems following severe drought and the Iran and Afghanistan problems. That is when the consumerist phase of the economy started and imports grew sharply. India’s foreign debt rose during the decade of the 1980s from $ 10 billion to $ 93 billion. This along with the Iraq war of the late 1980s led to a huge BoP crisis and this time there was no Soviet Union to help bail India out—it had collapsed. The IMF and World Bank forced marketisation of the economy and planning was further downgraded. Formulating the Plan itself became difficult and each Plan document got ready only a few years into the Plan. Joan Robinson had perceptively observed that planning cannot succeed with a large private sector. The poor have been left to their own devices so that disparities have widened significantly—consequently, India has one of the largest number of billionaires and the largest number of poor.

The UPA saw the revival of the importance of the Planning Commission because the Deputy Chairperson was close to the Prime Minister. But that did not lead to the restoration of planning because both of them believed in promoting markets. The Plan size was arbit-rarily cut year after year to meet the fiscal deficit targets. The ‘growth-at-any-cost’ strategy was adopted with little attention to the cost imposed on the environment, rural areas and the poor; little coordination was attempted.

In brief, the failure of planning in India is due to the black economy, the top-down approach adopted by the ruling elite and its being downgraded over the last many decades. Then, is it not legitimate to close the Planning Commission and end planning which is anyway formal only? But then, which agency will perform the many essential functions listed above? This needs to be understood rather than throwing the baby with the bathwater. Can the Ministry of Finance replace the Planning Commission? Not really. It is largely for accounting—to collect revenue and allocate them keeping the deficit under check. So, its task is to cut expenditures of Ministries and not to do overall coordination or give a vision. In the rush to break with the Nehruvian path, is the Planning Commission being closed little realising that it may reappear in another form?

[The article is based on sections from the author’s book, Indian Economy since Independence: Persisting Colonial Disruption, New Delhi: Vision Books.]

The author is the Sukhamoy Chakravarty Chair Professor, Centre for Economic Studies and Planning, School of Social Sciences, Jawarhal Nehru University, New Delhi. He is also the President, JNU Teachers’ Association (JNUTA). He can be contacted at nuramarku@gmail.com and arunkumar@ mail.jnu.ac.in