Some Problems of Development Planning: Part - Vi

P A RT - V I
SOME PROBLEMS OF DEVELOPMENT PLANNING
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Economic Planning
MEANING OF ECONOMIC PLANNING
There is no agreement among economists with regard to the meaning of the term economic planning. The term has been used very loosely in economic literature. It is often confused with communism, socialism or economic development. Any type of state intervention in economic affairs has also been treated as planning. But the state can intervene even without making any plan. What then is planning? Planning is a technique, a means to an end being the realization of certain pre-determined and well-defined aims and objectives laid down by a central planning authority. The end may be to achieve economic, social, political or military objectives. Therefore, the issue is not between a plan and no plan, it is between different kinds of plans.1 Professor Lewis has referred to six different senses in which the term planning is used in economic literature. First, there is an enormous literature in which it refers only to the geographical zoning of factors, residential buildings, cinemas and the like. Sometimes this is called town and country planning and sometimes just planning. Secondly, planning means only deciding what money the government will spend in the future if it has the money to
1. L. Robbins, Economic Policy and International Order, p. 6.
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The Economics of Development and Planning
spend. Thirdly, a planned economy is one in which each production unit (or firm) uses only the resources of men, materials and equipment allocated to it by quota and disposes of its product exclusively to persons or firms indicated to it by central order. Fourthly, planning sometimes means any setting of production targets by the government, whether for private or public enterprise. Most governments practise this type of planning if only sporadically, and if only for one or two industries or services to which they attach special importance. Fifthly, here targets are set for the economy as a whole, purporting to allocate all the countrys labour, foreign exchange, raw materials and other resources between the various branches of the economy. And, finally, the word planning is sometimes used to describe the means which the government uses to try to enforce upon private enterprise the targets which have been previously determined.2 But Ferdynand Zweig maintains that planning is planning of the economy, not within the economy. It is not a mere planning of towns, public works or separate section of the national economy, but of the economy as a whole.3 Thus planning does not mean piecemeal planning but overall planning of the economy. Some of the definitions of economic planning are: Professor Robbins defines economic planning as collective control or supersession of private activities of production and exchange. To Hayek, planning means, the direction of productive activity by a central authority. According to Dalton, Economic planning in the widest sense is the deliberate direction by persons incharge of large resources of economic activity towards chosen ends. Lewis Lordwin defines economic planning ,as a scheme of economic organization in which individual and separate plants, enterprises, and industries are treated as coordinate units of one single system for the purpose of utilizing available resources to achieve the maximum satisfaction of the peoples needs within a given time. In the words of Zweig, Economic planning consists in the extension of the functions of public authorities to organization and utilization of economic resources...Planning implies and leads to centralization of the national economy. One of the most popular definitions is by Dickinson who defines planning as the making of major economic decisions what and how much is to be produced, how, when and where it is to be produced, to whom it is to be allocated, by the conscious decision of a determinate authority, on the basis of comprehensive survey of the economic system as a whole. Even though there is no unanimity of opinion on the subject, yet economic planning as understood by the majority of economists implies deliberate control and direction of the economy by a central authority for the purpose of achieving definite targets and objectives within a specified period of time. NEED FOR PLANNING IN UNDERDEVELOPED COUNTRIES 1. To Increase the Rate of Economic Development. One of the principal objectives of planning in underveloped countries is to increase the rate of economic development. In the words of D.R. Gadgil, Planning for economic development implies external direction or regulation of economic activity by the planning authority which is in most cases, identified with the government of the state.4 It means increasing the rate of capital formation by raising the levels
2. W.A. Lewis, The Principles of Economic Planning, 1954. 3. F. Zweig, Planning of Free Societies, p. 14. 4. D.R. Gadgil, Planning and Economic Policy in India, p. 88.
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of income, saving and investment. But increasing the rate of capital formation in underdeveloped economies is beset with a number of difficulties. People are poverty-ridden. Their capacity to save is extremely low due to low levels of income and high propensity to consume. As a result, the rate of investment is low which leads to capital deficiency and low productivity. Low productivity means low income and the vicious circle is complete. This vicious economic circle can only be broken by planned development. Two methods are open to underdeveloped countries. One is planned development by importing capital from abroad which Zweig calls supported industrialization, and the other is by forced saving which he characterises as selfsufficient industrialization. 2. To Improve and Strengthen Market Mechanism. The rationale for planning arises in such countries to improve and strengthen the market mechanism. The market mechanism works imperfectly in underdeveloped countries because of the ignorance and unfamiliarity with it. A large part of the economy comprises the non-monetised sector. The product, factor, money and capital markets are not organised properly. Thus the price system exists in only a rudimentary form and fails to bring about adjustments between aggregate demand and supply of goods and services. To remove market imperfections, to mobilise and utilise efficiently the available resources, to determine the amount and composition of investment, and to overcome structural rigidities, the market mechanism is required to be perfected in underdeveloped countries through planning. 3. To Remove Unemployment. The need for planning in underdeveloped countries is further stressed by the necessity of removing widespread unemployment and disguised unemployment in such economies. Capital being scarce and labour being abundant, the problem of providing gainful employment opportunities to an ever-increasing labour force is a difficult one. It is only a centralized planning authority which can solve this. 4. Balanced Development of the Economy. In the absence of sufficient enterprise and initiative, the planning authority is the only institution for planning the balanced development of the economy. For rapid economic development, underdeveloped countries require the development of the agricultural and industrial sectors, the establishment of social and economic overheads, the expansion of the domestic and foreign trade sectors in a harmonious way. All this requires simultaneous investment in different sectors which is only possible under development planning. (a) Development of Agricultural and Industrial Sectors. The need for developing the agricultural sector along with the industrial sector arises from the fact that agriculture and industry are interdependent. Reorganisation of agriculture releases surplus labour force which can be absorbed by the industrial sector. Development of agriculture is also essential to supply the raw material needs of the industrial sector. (b) Development of Infrastructure. The agricultural and industrial sectors cannot, however, develop in the absence of economic and social overheads. The building of canals, roads, railways, power stations, etc., is indispensable for agricultural and industrial development. So are the training and educational institutions, public health and housing for providing a regular flow of trained and skilled personnel. But private enterprise in underdeveloped countries is not interested in developing the social and economic overheads due to their unprofitability. It is motivated by personal gain rather than by social gain. It, therefore, devolves on the state to create social and economic overheads in a planned way. (c) Development of Money and Capital Markets. Similarly, the expansion of the domestic and foreign trade requires not only the development of the agricultural and industrial sectors along with social and economic overheads but also the existence of financial institutions. Money and
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capital markets are undeveloped in underdeveloped countries. This factor acts as an obstacle to the growth of industry and trade. There is economic instability generated by international cyclical movements. Such maladjustments can only be removed by the state. It can decide upon the setting up of a central bank and with its help a bill market, commercial banks and other financial institutions throughout the country. It is the planning authority which can control and regulate the domestic and foreign trade in the best interests of the economy. 5. Removing Poverty and Inequalities. The planning for development is indispensable for removing the poverty of nations. For raising national and per capita income, for reducing inequalities in income and wealth, for increasing employment opportunities, for all-round rapid development and for maintaining their newly won national independence, planning is the only path open to underdeveloped countries. There is no greater truth than this that the idea of planning took a practical shape in an underdeveloped country and that this is the only hope of the resurgent underdeveloped countries of the world. The rapid development of the USSR, a poor country at the time of the October Revolution, bears testimony to this fact. To conclude with Prof. Gadgil, Planning, therefore means, in a sense, no more than better organization, consistent and far-seeing of organisation and comprehensive all-sided organization. Direction, regulations, controls on private activity, and increasing the sphere of public activity, are all parts of organizational effort.5 PLAN FORMULATION AND REQUISITES FOR SUCCESSFUL PLANNING The formulation and success of a plan require the following: 1. Planning Commission. The first prerequisite for a plan is the setting up of a planning commission which should be organised in a proper way. It should be divided and sub-divided into a number of divisions and sub-divisions under such experts as economists, statisticians, engineers, etc. dealing with the various aspects of the economy. 2. Statistical Data. A prerequisite for sound planning is a thorough survey of the existing and potential resources of a country together with its deficiencies. As Baykov puts it: Every act of planning, in so far as it is not mere fantastic castle building presupposes a preliminary investigation of existing resources.6 Such a survey is essential for the collection of statistical data and information with regard to the total available material, capital and human resources of the country. Data pertaining to the available and potential natural resources along with the degree of their exploitation, agricultural and industrial output, transport, technical and non-technical personnel, etc. are essential for fixing targets and priorities in planning. It, therefore, requires the setting up of a central statistical organization with a network of statistical bureaux for collecting statistical data and information for the formulation of the plan 3. Objectives. The plan may lay down the following objectives: to increase national income and per capita income; to expand employment opportunities; to reduce inequalities of income and wealth and concentration of economic power; to raise agricultural production; to industrialise the economy; to achieve balanced regional development; to achieve self-reliance, etc. The various goals and objectives should be realistic, mutually compatible and flexible enough in keeping with the requirements of the economy. 4. Fixation of Targets and Priorities. The next problem is to fix targets and priorities for achieving the objectives laid down in the plan. They should be both global and sectorial. Global targets
5. Ibid. 6. The Developing of the Soviet Economic System, p. 427.
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must be bold and cover every aspect of the economy. They include quantitative production targets, so many metres million tons of foodstuffs, coals, steel, fertilizers, etc., so many kilowatts of power capacity, so many metres of railways and roads, so many additional training institutions, so much increase in national income, saving, investment, etc. There are also sectoral targets pertaining to individual industries and products in physical and value terms both for the private and public sectors. Global and sectoral targets should be mutually consistent in order to attain the required growth rate for the economy. This necessitates determining priorities. Priorities should be laid down on the basis of the short-term and long-term needs of the economy keeping in view the available material, capital and human resources. Such schemes or projects which are required to be executed first, should be given top priority while the less important should have a low priority. The scheme of priorities should not be rigid but may be changed according to the requirements of the country. Thus sound governmental planning consists of establishing intelligent priorities for the public investment programme and formulating a sensible and consistent set of public policies to encourage growth in the private sector.7 5. Mobilisation of Resources. A plan fixes the public sector outlay for which resources are required to be mobilised. There are various internal and external resources for financing a plan. Savings, profits of public enterprises, net market borrowings, taxation and deficit financing are the principal internal sources of finance for the public sector. Net budgetary receipts corresponding to external assistance relate to the external sources of financing the plan. The plan should lay down such policies and instruments for mobilising resources which fulfil the financial outlay of the plan without inflationary and balance of payments pressures. At the same time, they should encourage corporate and household savings of the private sector.8 6. Balancing in the Plan. A plan should ensure proper balance in the economy, otherwise shortages or surpluses will arise as the plan progresses. There should be balance between saving and investment, between the available supply of goods and the demand for them, between manpower requirements and their availabilities, and between the demand for imports and the available foreign exchange. Aggregate savings come from various sources such as voluntary savings, taxation, profits of public enterprises, foreign remittances by nationals, etc. These must equal planned aggregate investment in fixed capital assets and inventories in the economy. The balance between the supply and demand for goods requires balancing of the available supply of consumption goods with their demand, of the supply of capital goods, materials and inventories with their requirements, of the supply of intermediate goods with their demand, and the proposed requirements of exports of goods with their supplies. Balances are also required between planned demand and supply of manpower, and between import requirements and the available foreign exchange during the plan period, In fact, two kinds of balances must be secured in a plan. The first is the physical balance which consists of balancing the planned increase in output of various goods with the amounts and types of investment. It also requires the balancing of the outputs of the various sectors of the economy. This is achieved through the input-output technique because the output of one sector or industry is the input of the other for producing its output. Physical balancing is essential for the internal consistency of the plan, otherwise such physical obstacles as lack of raw materials, manpower, etc. will develop in the economy. The second is the monetary or financial balance
7. W. A. Lewis, Development Planning, 1966. 8. For problems of resource mobilisation refer to chapters in parts Four and Five of the book.
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which consists of balancing the incomes of the people with the amount of goods available to them for consumption, the funds used for private investment and the amount of investment goods available to private investors, the funds used for public investment and the amount of investment goods produced by the public sector, and the balancing of foreign payments and receipts. The lack of these financial balances will lead to disequilibrium in the supply and demand for physical goods thereby leading to inflationary and balance of payments pressures during planning. 7. Incorrupt and Efficient Administration. A strong, efficient and incorrupt administration is the sine qua non of successful planning. But this is what an underdeveloped country lacks the most. Lewis regards a strong, competent and incorrupt administration as the first condition for the success of a plan. The Central Cabinet in an underdeveloped country should not take important economic decisions hurriedly without getting them properly examined from technical advisers. Competent administrative staff should be appointed in various ministries which should first prepare good feasibility reports of proposed projects before starting them. It should gain experience in planning and starting a project, keeping it on schedule, amending it in case of some unexpected snags, and evaluating it from time to time. Without such administrative machinery, development planning has no locus standi in an underdeveloped country. Lewis is very emphatic when he writes, In the absence of such an administration it is often much better that governments should be laissez-faire than they should pretend to plan. The phenomenal success of development planning in Russia can be attributed to a highly trained and disciplined priestly order of the Communist Party. The economics of development is not very complicated; the secret of successful plan lies more in sensible politics and good public administration.9 8. Proper Development Policy. The state should lay down a proper development policy for the success of a development plan and to avoid any pitfalls that may arise in the development process. Lewis lists the following main elements of such a development policy: (i) investigation of development potential, survey of national resources, scientific research, market research; (i) provision of adequate infrastructure (water, power, transport, and communications) whether by public or private agencies; (iii) provision of specialized training facilities, as well as adequate general education, thereby ensuring necessary skills; (iv) improving the legal framework of economy activity, especially laws relating to land tenure, corporations , commercial transactions; (v) helping to create more and better markets including commodity markets, security exchanges, banking, insurance and credit facilities; (vi) seeking out and assisting potential entrepreneurs, both domestic and foreign; (vii) promoting better utilization of resources, both by offering inducements and by operating controls against misuse; and (viii) promoting an increase in saving, both private and public. The success of a development plan can be tested mainly by examining various proposals under each of these heads. Good polices help, but they may not ensure success. Lewis, therefore, likens development planning to medicine which in the hands of a good practitioner may perform useful tricks, but it is still the case that many patients die who are expected to live, and many live who are expected to die.10 9. Economy in Administration. Every effort should be made to effect economies in administration, particularly in the expansion of ministries and state departments. The people must feel confident that every pie that they pay to the government through taxation and borrowings is properly spent for their welfare and development, and not dissipated away.11
9. W.A. Lewis, The Principles of Economic Planning, 1954 and Development Planning, 1966. 10. Development Planning, pp. 22-23 11. Shriman Narayan, Trends in Indian Planning, p. 36. Italics mine.
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10. An Education Base. For a clean and efficient administration, a firm educational base is essential. Planning to be successful must take care of the ethical and moral standards of the people. One cannot expect economy and efficiency in administration unless the people possess high ethical and moral values. This is not possible unless a strong educational base is built up whereby instructions are imparted both in the academic and technical fields. Without creating honest and efficient human beings in the country, it would not be feasible to undertake economic planning on a big scale. 11. A Theory of Consumption. According to Professor Galbraith,12 an important requirement of modern development planning is that it has a theory of consumption. Underdeveloped countries should not follow the consumption patterns of the more developed countries. The theory of consumption should be democratic and prime attention must be accorded to goods that are within the range of the model income that can be purchased by the typical family... Cheap bicycles in a low-income country are thus more important than cheap automobiles. An inexpensive electric lighting system for the villages is better than a high capacity system which runs equipment, the people cannot afford. Inexpensive radio sets are important, television belongs to another day. Above all, nothing is so important, as abundant and efficiently produced food, clothing and shelter, for these are the most universal of requirements. 12. Public Cooperation. Above all, public cooperation is considered to be one of the important levers for the success of the plan in a democratic country. Planning requires the unstained cooperation of the people. Economic planning should be above party politics, but at the same time, it should have the approval of all the parties. In other words, a plan should be regarded as a National Plan when it is approved by the representative of the people. For, without public support no plan can be success. As Lewis states: Popular enthusiasm is both the lubricating oil of planning and the petrol of economic development, a dynamic force that makes all things possible.13
PROBLEMS OF DEVELOPMENT PLANNING

Development planning has to face the following problems: 1. Inadequate Statistical Data. One of the major problems of development planning has been the inadaquacy of statistical data concerning all aspects of the economy. There are gross errors in the estimation of accurate data in many fields of the economy, such as population, capital, labour, employment, input-output coefficients, exports and imports, etc. 2. Problems of Macroeconomic Estimates. In a development plan, macroeconomic estimates are made on the most desirable time path of total national product or income, total savings and total investment. For instance, at the time of formulation of the plan, these figures are knows for a base year. The problem is to find the optimum level of total savings or the saving income ratio. The optimum level is that in which it is desirable to save more or less in the economy. But it is not possible to arrive at such an optimum level of savings. 3. Limitations of the Use of Models. Another problem is the use of models mostly of the Tinbergen type. These models require specific targets and instruments to attain stated objectives. These objectives have to be made in some kind of index and there have to be as many instruments as there are independent targets. This is a complex process and also misleading, as the plan is
12. J.K. Galbraith, Economic Development in Perspective, 1962. 13. Principles of Economic Planning, op.cit., p. 128.
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often a political document of the ruling party. Further, targets and instruments are not really separable as in the case of taxation, exchange rates, etc., though they change in the process of planning. 4. Constant Prices. A development plan is based on the assumption that prices remain constant during the plan period. In this case, estimates are likely to go awry because price changes are inevitable under development planning. Price changes may be related to internal factors, to rise in exports or/and rise in import prices. Moreover, pricing of products and services are not linked with the physical or financial outlays of the plan which make the calculation of physical or financial targets and their achievements unrealistic. 5. No control over Private Sector Plan. A development plan provides for schemes of allocations for both public and private sectors. Since the government is not in a position to fully control the private sector, the plan relating to the private sector is never implemented as per the physical targets and financial allocations. This creates problems for the success of the plan. 6. Constant Capital-Output Ratio. A development plan assumes a constant capital-output ratio. The capital-output ratio is an important element on which the projections of a plan are based. It tells that each addition to the capital stock leads to a proportional addition to the national product. In an underdeveloped country, the capital-output ratio is not calculable in a meaningful way. In the earlier stages of development, it is usually more than assumed and as the economy develops, it starts declining. Moreover, a country that uses large amounts of foreign capital, the capital-output ratio may be considerably higher than the assumed ratio. If the country has capital-intensive long-gestation projects, the capital-output ratio will be much higher. 7. Problem of Fixed Relation between Factor Inputs and Outputs. A major problem in plan models is that they assume a fixed relationship between factor inputs and outputs. In fact, their relationships are variable within a wide range. The inputs in underdeveloped countries are scarce. So the outputs are not rigidly related to such inputs. Rather, there are other important factors that affect outputs. 8. Lack of Coordination between Plan Policies and Annual Budgets. There are many institutional rigidities and scarcities in underdeveloped countries which lead to lack of coordination between plan policies and annual budgets. Consequently, the annual budget does not reflect and implement the plan policies. This is a serious problem of development planning. 9. Problem of Balancing the Plan. Another problem is balancing of physical and financial plans and of different segments of the economy. It is not possible to attain internal consistency in an underdeveloped country due to such factors as the availability of resources, technical progress, rate of investment, etc. The level of technology needed for achieving the various targets laid down in the plan may be low. Unexpected failure of crops may restrict the supply of farm products. Industrial production may fall due to the shortage of power. 10. Uncertainties. A development plan faces many uncertainties which make it difficult to implement it. These may arise due to foreign exchange crisis or balance of payments problem, unreliable statistical data, inflationary pressures, international recession, internal unrest, disputes with neighbouring countries, etc. Such uncertainties create problems in plan implementation. PLANNING BY DIRECTION AND PLANNING BY INDUCEMENT Professor Lewis draws a distinction between planning by direction and planning by inducement for the purpose of mobilizing resources of the plan.
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PLANNING BY DIRECTION
Planning by direction is an integral part of a socialist society like that of China and Russia. 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 pre-determined targets and priorities. Such planning is comprehensive and encompasses the entire economy. As Lange has stated: With regard to the socialist sector the national plan represents a binding directive. The targets of the national plan and its financial provision represent orders to be carried out of the various ministries and the enterprises subject to them. They are duty bound to carry out the directives of the plan. The State holds the commanding posts in its hands by taking over the entire private industrial and agricultural sectors, and banking and transport. Without such concentration the State would lack the means to carry out the tasks of the plan. Provisions in the plan would be mere pious wishes without any guarantee of realization attached to them.15 Its Drawbacks. But planning by direction has got some drawbacks. First, planning by direction is associated with a bureaucratic and totalitarian regime. There is complete absence of consumers sovereignty. People are not allowed to spend and consume according to their choice. Even the right to choose ones occupation does not exist. Both the consumer and labour markets are determined by the planning authority. Rationing and price controls are the main props of planning by direction which lead to corruption and nepotism. Thus there is no economic freedom. As aptly pointed out by Hayek, Economic planning would involve directions of almost the whole of our life. There is hardly any aspect of it, from our primary need to our relations, with our family and friends, from the nature of our work to the use of our relations, with our family and friends, from the nature of our work to the use of our leisure, over which the planner would not exercise his conscious control.16 Secondly, planning by direction is always unsatisfactory because the present economic system is exceedingly complex. In order to increase the output of a commodity, planning requires the increase in the output of all complementaries or a reduction in the output of substitutes. And when such decisions are to be taken in the case of innumerable commodities, it becomes an extremely difficult task, and targets are never fulfilled. As Lewis remarks, In planning by direction the result is always a shortage of some things, and a surplus of others. Thirdly, planning by direction is always inflexible. Once a plan has been drawn, it becomes impossible to revise any part of it, necessitated by circumstances. For, it is an extremely difficult task to alter a part of the plan without altering the whole of it. So the plan has to be carried through as an integrated whole despite the various pitfalls. Fourthly, as a corollary to the above, as the plan proceeds the fulfillment of targets under planning by direction becomes a difficult task. The more one tries to overcome the difficulties of planning by direction, the more costly the fulfillment of targets become in terms of resources. Fifthly, planning by direction develops what Lewis calls the tendency to procrustean (have one type or size). It leads to excessive standardization because it makes production process easy. 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, and in foreign trade it is in many lines fatal to success. Moreover, production of only one type of standard good in each line of production is inimical to the growth of initiative and enterprise. There is no urge to innovate.
15. O. Lange, Essays on Economic Planning, pp. 14-16 16. F. W. Hayek, Road to Serfdom.
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Lastly, planning by direction is a costly affair. It requires an army of clerks, statisticians, economists, and other trained personnel. Large funds are spent on conducting innumerable surveys and censuses. Despite all these defects in planning by direction, the experience of China and Russia is a clear testimony to the fact that this type of planning is the most effective technique for accelerating the growth rate of the economy. 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. If the planning authority wishes to encourage the production of a commodity, it can give subsidy to the firms. And if it finds scarcity of goods in the market, it can introduce price control and rationing. In order to increase the rate of capital formation, the planning authority can then undertake public investment and/or encourage private investment. It can adopt a suitable monetary policy and at the same time a taxation policy which encourages investment and discourages consumption. Thus planning by inducement is able to achieve the same results as are likely to be achieved in planning by direction but with less sacrifice of individual liberty. Its Difficulties. But planning by inducement is beset with a number of difficulties which may make it less successful as compared to planning by direction. (i) It is maintained that 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. Proper adjustment between demand and supply is difficult to achieve. Shortages are frequent and they necessitate price control and rationing which are the forms of direction. In such a situation, planning by inducement merges into planning by direction. (iii) Similarly, monetary and fiscal measures alone are inadequate to induce planned development of the economy by raising the rate of capital formation. It is very difficult to raise the rate of capital formation in an underdeveloped country because of the low levels of income and saving. People have a tendency to utilize their savings in unproductive channels. On the other hand, planning by direction is more useful for this purpose. CONCLUSION Whether a country should adopt the method of planning by direction or planning by inducement depends entirely on the system of government. A full-fledged socialist country will adopt planning by direction. On the other hand, a capitalist economy will adhere to the technique of the planning by inducement. But both these planning techniques are complementary. They cannot be placed into water-tight compartments. Both of them are indispensable and at the same time practicable in underdeveloped countries. The state alone is incapable of developing the economy in such countries. It lacks not only in financial but also in administrative resources. So it leads the private sector to work and expand under its direction and control. For this, inducements can be given in the form of subsidies and tax exemptions. Savings, investment, consumption and
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productions can be directed into right directions. The state can obtain resources through deficit financing, borrowing and taxation. It can also set up basic and heavy industries and undertake social and economic overheads. Thus the best course for an underdeveloped country is to have a judicious blending of the two. India has adopted a middle course of action in her development plans, a mixed economy in which both planning by direction and planning by inducement are playing their respective roles.
FINANCIAL AND PHYSICAL PLANNING

Financial planning refers to the technique of planning in which resources are allocated in terms of money while physical planning pertains to the allocation of resources in terms of men, materials and machinery . FINANCIAL PLANNING Finance is the main key to economic planning. If sufficient finances are available, it is not difficult to achieve physical targets. But without the stipulated financial resources, it is not possible to carry the plan to its successful culmination. Financial planning is essential in order to remove maladjustments between supplies and demands and for calculating costs and benefits of the various projects. The Indian Planning Commission points out that: The essence of financial planning is to ensure that demands and supplies are matched in a manner which exploits physical potentialities as fully as possible without major and unplanned changes in the price structure.17 In the case of financial planning the outlay is fixed in terms of money and the estimates are made on the basis of various hypotheses regarding the growth of the national income, consumption, imports, etc., to cover this outlay by taxation, savings and the increase in the cash holding. This consists in establishing an equilibrium between the incomes of the population wages, incomes of peasants and othersand the amount of consumers goods which will be available to the population... Further it must establish equilibrium between that part of incomes of the population which will be used for private investment and the amount of investment goods made available to private investors. Finally, in the public sector a balance must be established between the financial funds made available for investment purposes and the amount of investment goods which will be produced or imported. In addition to these balances, it is necessary to establish the balances of foreign payments and receipts.18 Financial planning is thus thought to secure a balance between demands and supplies, avoid inflation and bring about economic stability. Its Limitations. But this appears to be an exaggerated view, for financial planning has its limitations in an underdeveloped country. First, measures to mobilize financial resources through taxation may adversely affect the propensity to save. Secondly, in an underdeveloped country there is a vast subsistence non-monetized sector and a small organized money sector. Thus there is bound to be an imbalance between the two sectors. This will lead to shortages in supplies and to an inflationary rise in prices. As a result, physical targets are likely to be upset.
17. Second Five-Year Plan, p. 16. 18. O. Lange, Economic Development, Planning and International Cooperation, 1961.
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Thirdly, it is possible that supplies can be increased through imports, but they will lead to balance of payments difficulties from which underdeveloped countries already suffer. Fourthly, financial planning is not free from various bottlenecks, especially inflationary rise in prices. It is, therefore, more appropriate to use it in sectoral planning rather than in overall planning. Lastly, financial planning is unsuited to an underdeveloped economy where this means not merely loss of potential income but also a threat to the character of balanced social development because it results in an insufficient provision of employment at average wages relative to the increase in the population and thus increases inequality between those who are privileged to obtain employment and those whose needs both for work and income necessarily remain unmet. PHYSICAL PLANNING Physical planning is an attempt to work out the implications of the development effort in terms of factor allocations and product yields so as to maximize incomes and employment.19 The physical balance consists in a proper evaluation of the relations between investment and output... Investment coefficients are computed. These coefficients indicate the amount of investment and also the composition of that investment in terms of various kinds of goods needed in order to obtain an increase of output of a product by a given amount. For example, how much iron, how much coal, how much electric power is needed in order to produce an additional ton of steel. On this basis, the planned increase in output of various products is balanced with the amounts and types of investment. It is also necessary to balance the outputs of the various sections of the economy because the output of one branch of the economy serves as an input for producing the output of another branch. Financial planning is only a means to achieve this end. Lack of financing to carry out an investment project in an underdevelped country ordinarily does not reflect the lack of physical resources but in physical planning an overall assessment is made of the available real resources such as raw materials, manpower, etc., and how they have to be obtained so that bottlenecks may not appear during the working of the plan. Physical planning requires the fixation of physical targets with regard to agricultural and industrial production, sociocultural and transportation services, consumption levels and in respect of employment, income and investment levels of the economy. There must be proper balances in the various targets set in the plan. Moreover, physical planning has to be viewed as an overall long-term planning rather than a short-term piecemeal planning. Professor Balogh stresses the importance of physical planning in these words: The only politically sound and morally responsible strategy involves steady pressure up to the limits of physical resources. It involves hair-sharp sectoral balance and concentration of attention on the widening of supply bottlenecks as they arise. The soundness of a plan from a national point of view can be tested only by the strain it causes. A lessening of strain, the accumulation, for instance, of foreign reserves, means that the system is not being driven to the utmost of its physical capacity.20 Its Limitations. But physical planning has certain limitations in an underdeveloped country. First, the most formidable problem in such economies is the lack of statistical data and information with regard to the available physical resources. If physical targets are fixed beyond the availability of resources on the basis of inaccurate data, planning will end in a fiasco. Secondly, another problem is that of balancing the different segments of the economy. It is not
19. Second Five-Year Plan, op.cit., p. 14. 20. Notes on Indian Economic Strategy (Mmg. ISI).
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possible to attain internal consistency of a high order in an underdeveloped country due to its inherent structural difficulties. The country may not have reached that state of technology needed for achieving the targets laid down. There may be unexpected failure of harvests thus restricting the supply of agricultural commodities. Or, industrial production itself may fall due to the shortage of power supply. Thirdly, such shortages in physical targets are bound to lead to inflationary pressures through an increase in prices. An inflationary process is extremely harmful for an underdeveloped economy where levels of income and saving are already very low. Lastly, physical planning without financial planning is always a negation of planning in an underdeveloped country. If plans are drawn on the basis of physical resources without any regard to the availability of financial resources, plan targets can never be fulfilled. In India, due to the lack of financial resources in the closing year of the Second Plan, the size of the plan had to be pruned to the turn of Rs 200 crores, the extent of financial shortage. CONCLUSION Now the question is should an underdeveloped country adopt the technique of financial planning or physical planning? The answer to this question depends on the political structure of the state. In socialist states like Russia, these is physical planning. Since there is the absence of private property and all the resources belong to the state, finance never acts as a bottleneck. Lack of finance to carry out an investment project reflects lack of physical resources to do so or an allocation decision to use these resources elsewhere in the national economy. The financial part of planning is only an instrument of social accounting in a socialist state. It is meant to translate the values of inputs and outputs in terms of money to calculate costs, profits, incomes and prices. In a capitalist country, financial planning is as much important as physical planning. Both are complementary. Both are mutually consistent. For effective planning, both are needed together. As Mahalanobis pointed out: The physical targets of production must be balanced in terms of physical quantities of raw materials, machinery, energy, transport, etc., and also in terms of manpower and of the flow of money. Incomes are generated in the very process of production, and supplies are utilized through market operations. Planning requires that aggregate income should be balanced with expenditure, savings should match investments, and the supply and demand of individual goods and services should be balanced in terms of money so as to avoid any inflationary rise in prices or undesirable shifts in prices, physical and financial planning are different asperts of the same reality. Thus both the techniques are required to be integrated in development planning. Physical targets should be balanced in terms of the available financial resources, while larger financial resources should be mobilized in order to fulfil physical targets for accelerating the pace of development.
PERSPECTIVE PLANNING AND ANNUAL PLANNING

The phrase perspective planning refers to long-term planning in which long range targets are set in advance for a period of 15, 20 or 25 years. A perspective plan, according to the Indian Planning Commission, is a blueprint of developments to be undertaken over a longer period. A perspective plan, however, does not imply one plan for the entire period of 15 or 20 years. In reality, the broader objectives and targets are to be achieved within the specified period of time
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by dividing the perspective plan into several short-period plans of four, five or six years. Compared with the perspective plan, the short-period plan makes for greater precision. It is easier to look ahead over short periods than over very long periods. Moreover, many unpredictable changes can vitiate the long-term data. Therefore, a perspective plan is always split up into short-term plans. Not only this, a five-year plan is further broken up into annual plans so that each annual plan fits into the broad framework of the five-year plan. Plans of either kind are further divided into regional and sectional plans. Regional plans pertain to regions, districts and localities being further split up into sectional plans for agriculture, industry, foreign trade, transportation, etc. These sectional plans are divided into further sub-plans for each branch such as a plan for food grains, a plan for iron and steel, a plan for exports and so on. All these plans and sub-plans are related to the perspective plan. A perspective plan reflects long-term targets, while the current plans and sub-plans are the necessary support for the former to achieve those targets. Planning is a continuous process and cannot be isolated for short periods. Thus, the present Five- Year Plan is a projection and continuation of the previous plans, and it will lead to the subsequent plans. Planning is a continuous movement towards desired goals and because of this, all major decisions have to be made by agencies informed of these goals and the social purpose behind them. Even in considering a five-year period, forward and long-term planning has always to be kept in view. Indeed perspective planning is the essence of the planning process. 21 The main purpose of a perspective plan is thus to provide a background to the shorter-term plans, so that the problems that have to be solved over a very long period can be taken into account in planning over a shorter term. Above all one can express in a perspective plan those forces, the effects of which can be estimated with reasonable certainty over long periods. These include growth of population, the influence of education, which is only apparent over long periods, and the growth of general technological factors which have been shown in the past as a measure of regularity. Factors that are exposed to rapid changes, such as harvest yields, which are dependent on the weather, and other factors that are exposed to fruitous or irregular fluctuations cannot be, and for the most part also do not need to be taken into account.22 Mahalanobis observes that perspective planning is necessarily a continuing process and has two broad aspects. One is current planning directed to projects included in the annual plans within the framework of the five-year plan. The successive five-year plans themselves would have to be fitted into a larger framework of perspective planning with a wide time horizon of 10, 20 or 30 years or even more. Perspective planning would be primarily concerned with the technical and scientific aspects of long-term growth of the economy. Studies and researches would be directed to solving practical problems and would be broadly of a type of operational research (although some problems of basic research would no doubt arise from time to time). This would call for the active cooperation of a large number of engineers, technologists, economists, statisticians and workers in practically all fields of both natural and social sciences.23 There is Perspective Planning Division in the Planning Commission of India which is entrusted with the task of perspective planning. The idea of perspective planning was mooted in 1920 with the launching of the first long-term plan for the electrification of Russia the famous GOELRO plan. Up to 1958, Russia had been having five-year plans for its economic development. But in 1959, it embarked upon a twenty21. Third Five-Plan. Italics mine. 22. J. Tinbergen, Development Planning, 1976. Italics mine. 23. P.C. Mahalanbis in Sankhaya, December 1955.
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year plan for 1960-80, the target figures for 1959-65 having been regarded as an integral element of their long-term plan for economic development. In India also, the five-year plans visualize the problem of economic development from a longer perspective. Demerits of Perspective Planning. Planning for fixed periods is essential to start with because it goads the people and the government to move on the path laid down in the perspective plan. But it is not without certain serious demerits. First, such a plan is rigid because necessary or desirable adjustments to unforeseen changes or corrections of errors may not be made, and the adaptations that are made will tend to occur abruptly between plan periods. Thus it is not feasible administratively. Secondly, psychologically... the compulsion to revise the plan downward when no formal provision for this is made can have demoralizing effects. This is illustrated by the experience in India after 1957, when those in authority issued contradictory statements and were even tempted into pious falsification of the facts. This tended to spread confusion, cynicism, and defeatism in business, in the administration, and among the public. More flexible planning could have prevented some of the miscalculations of foreign exchange requirements and some of the faults in the handling of import licences in the beginning of this period. According to Myrdal, perspective planning should, therefore, be started during an experimental period.24
INDICATIVE PLANNING AND IMPERATIVE PLANNING

INDICATIVE PLANNING Indicative planning prevails in France. This type of planning is not imperative but flexible. Planning in socialist countries is comprehensive in which the planning authority decides about the amount to be invested in each sector, in fixation of prices of products and factors, and the types and quantities of products to be produced. There being rigidity in this type of planning if there is some distortion in one sector, it adversely affects the entire economy which cannot be remedied immediately. The French system of Planning is free from all such troubles because it is based on the principle of decentralization in the operation and execution of the national plans. It is known as indicative or soft planning as distinct from comprehensive or imperative planning. Indicative planning is peculiar to the mixed economy of France and is quite different from the type of planning that prevails in the other mixed economies of the world. In a mixed economy, the public and private sectors work together. The state controls and regulates the private sector in a number of ways so that the private sector may cooperate in fulfilling the targets and priorities of the plan. The usual methods to control this sector are licences, quotas, price and quantity determination of products, financial aid, etc. It has to work under the direction of the state. But in indicative planning the private sector is neither rigidly controlled nor directed to fulfil the targets and priorities of the plan. Even then, the private sector is expected to fulfil 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. Indicative planning has been in use in France since the Monnet Plan of 1947-50. 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 fulfilment of
24. G. Myrdal, Asian Drama, 1968.
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production and investment targets is imperative. Besides, there are certain basic actions which are considered essential for the operation of the basic sectors and are, therefore, directly under the state. They are: (i) the development of scientific and technical research including atomic energy; (ii) reduction of costs through rationalization and long-term programming; (iii) specialization and regrouping of industrial concerns; (iv) market organization of agricultural products; and (v) reconversion of old firms and retention of displaced manpower. In the remaining sectors of economy and even in the above fields where the private sector co-exists with the public sector, planning is indicative. It consists in the integration of individual planning efforts which, in isolation, are incapable of achieving their objectives. In the national plan, production and investment targets are laid down for both the public and private sectors. The basis of the national plans is the Economic Table which is made up of data pertaining to consumption, saving, investment, and foreign trade. This table shows the inputs and outputs of each sector of the economy. While framing the draft plan, the Commissariat au Plan (the French Planning Commission) discusses the plan with the representatives of the private sector in a number of commissions, known as Modernization Commissions to give the plan its final shape. There are two types of commissions, vertical and horizontal. The vertical commissions discuss and finalize the activities of the various sectors of the economy, such as agriculture, coal, steel, manufacturing, power, transportation, housing, education, public health, social welfare, etc. The horizontal commissions, on the other hand, deal with various balances in the economy between investment and saving, between income and expenditure of the state, between the inward and outward flows of foreign currency, and between financial and physical estimates. In this way, the private sector becomes a partner in the economic plan and helps in fulfilling the targets of the plan. The government provides incentives to the private sector through grants, loans, tax exemptions, etc. It gives guidance to the private sector instead of issuing directions. The private sector relies on the market conditions for production .and investment programmes. And if there is need for making adjustments in the plan due to changed market conditions, they can be made even during its execution stage. Thus there is sufficient individual freedem of choice and action in French planning. In fact, it presents a perfect compromise between freedom and planning, incorporates the merits of both the free market and planned economies and successfully avoids their demerits. Criticisms. However, the success of indicative planning presupposes that every branch of activity is promised the possibility of acquiring its production factors and selling its goods on a balanced market. The promise, however, is only kept if everybody plays the game. The promise acts merely as an incentive. It is not binding on any body. But the actual experience of indicative planning in France shows that firms do not play the game when the development programme does not coincide with their profit expectations. Often monopolistic organisations do not care for the incomes policy laid down by the government and use their power for personal benefit. Moreover, under conditions of price inflation, the government interferes with the market mechanism by resorting to direct controls instead of monetary and fiscal policies. Thus the working of indicative planning in France casts doubts about its being a golden mean between free market and planned economies. 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.
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The entire resources of the country are used to the maximum in order to fulfil the targets of the plan. There is no consumers sovereignty in such planning. The consumers get commodities in fixed quantities at fixed prices. Often the commodities are rationed. Production of commodities is in accordance with government policies. What and how much to produce such decisions are taken by the managers of firms and factories on the direction of the planning commission or a central planning authority. Since the government policies and decisions are rigid, they cannot be changed easily. If there is some bottleneck in fulfilling production targets at any stage, it adversely affects all related sectors of production. If managers of industries do not carry out production plans properly, production falls which undermines the entire production process in the economy. Imperative planning is in operation in China and Russia.
DEMOCRATIC PLANNING AND TOTALITARIAN PLANNING

TOTALITARIAN PLANNING To many economists like Hayek and Lippman, planning is incompatible with democracy. Hayek goes to the extent of saying that what was promised to us as the Road to Freedom was in fact the High Road to Serfdom. But Hayek has in mind totalitarian planning which is comprehensive. In totalitarian or authoritarian planning there is central control and direction of all economic activities in accordance with a single plan. There is planning by direction where consumption, production, exchange, and distribution are all controlled by the state. In authoritarian planning, the planning authority is the supreme body. It decides about the targets, schemes, allocations, methods and procedures of implementation of the plan. There is absolutely no opposition to the plan. People have to accept and rigidly implement the plan. Economic and political powers are polarised and social life is regimented. There is thus no democratic freedom in authoritarian planning which is extremely rigid. But there are others who hold the view that a planned society can be far more free society than the competitive laissez-faire order which it has come to replace. Whatever be the degree of deliberate control and direction of economic forces in totalitarian planning, it is for making the economic system perfect, and maintaining stability, and achieving rapid growth. Moreover, as pointed out by Professor Myrdal, I find no example in history where democracy has been lost because of too much planning and state intervention, but plenty of examples on the contrary.25 He, therefore, favours the Soviet type of planning for the underdeveloped countries of South-East Asia because it is scientific and efficient as compared to an unplanned economic system. Though authoritarian planning can help in achieving the targets within the stipulated period and according to schedule, yet the price which the people of underdeveloped countries shall have to pay in the form of the loss of economic, social and political freedoms is enormous. It is, therefore, better to have democratic planning and achieve the same results without, at the same time, sacrificing these freedoms totally. DEMOCRATIC PLANNING Democratic planning implies planning within democracy. 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 governments and private
25. G. Myrdal, An International Economy,1959.
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enterprises at the stage of preparation. It seeks to avoid all clashes, and tries to harmonise all opinions that are for the welfare of the people. Cooperation of different agencies, and voluntary 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. The plan prepared by the Planning Commission is not accepted as such. It can be accepted, rejected or, modified by the Parliament of the country. Thus the plan is not forced upon the people from above. It is planning from below. 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 decisions in the private sector through fiscal and monetary measures. The private sector operates side by side with the public sector. There is healthy competition between the two for the fulfilment of the plan targets. Democratic planning aims at the removal of inequalities of income and wealth through peaceful means by taxation and government spending on social welfare and social security schemes. Individual freedom prevails. People enjoy social, economic and political freedoms. India is a unique experimentation in democratic planning. Planning in India is being carried out under a democratic government which is elected under universal suffrage. There is no undue encroachment on the rights and liberties of the people in the execution of the plans. There is freedom to own private property and in the event of expropriation adequate compensation is paid. Private sector co-exists with public sector. The latter operates under the guidance, help and supervision of the government. There is no force in the implementation of the five-year plans which are fully discussed and debated both within and outside the Parliament. People enjoy the fundamental rights of freedom of speech, association, occupation etc. The planning procedure in India is democratic. Criticisms. Critics are not lacking in characterising democratic planning as a myth. They opine that democracy is not to be found anywhere, so there cannot be democratic planning either. Some sort of state intervention is inevitable even in democratic planning whereby economic freedom becomes a farce. The institution of controls in various forms on consumption, production and distribution viz., price controls and rationing, industrial licensing, monopoly regulation, import restrictions, state trading, etc., do not make for economic freedom. Indias planning is of an imperative type in democratic context... .It is a half way house between command and free economy, imbibing the disadvantages of both without the advantages of the either. It has its inbuilt difficulties which hinder progress. Socialist economy can follow its own path of growth, capitalist countries their own, planned economy in a democracy operates between the two, divided between public and private sector. In India the relationship between the two has been far from ideal.26 It is contended by Professor William Letwin that the Planning Commisssion in India does not possess an autonomous status in the real sense of the term. It is a part of the ruling party. The Chairman of the Planning Commission is the Prime Minister. The National Development Council, the most important body, is already without constitutional and statutory authority which derives its power from the simple fact that its members are the Prime Minister and opposition members, the chief ministers of all the states. The resultant plan is politics. Thus Indian planning is democratic in constitutional form, in that the chief decisions are made by
26. K.N. Bhattacharyya, Planning: Economic and Economy, 1971.
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elected representatives of the people, it is not democratic in substance. We do not agree with Professor Letwin because in democratic planning the plan must reflect the aspirations of the masses as represented by the ruling party in the Parliament. Thus Indian planning is democratic both constitutionally and in substance, for some sort of controls and state intervention are essential for lifting the economy out of the morass and for the welfare of the masses. It is, however, felt that Indian planning in its democratic set-up should be indicative rather than imperative as has been the experience of France.
ROLLING AND FIXED PLANS

ROLLING PLAN Professor Myrdal was the first economist to advocate a rolling plan for developing countries in his book Indian Economic Planning in its Broader Setting. India did not experiment it for the first time in 1978. It was introduced for purposes of defence after the Chinese aggression in 1962 and has been a great success in making the country almost self-sufficient in the manufacture of sophisticated arms and ammunitions, frigates and aircraft, and helped to prepare it to face Pakistan twice. It was introduced in Indian planning by the Janata Government on April 1, 1978 and was given up on April 1, 1980 with the coming to power of the Indira Government. In a rolling plan, every year three new plans are made and acted upon. First, there is a plan for the current year which includes the annual budget and the foreign exchange budget. Second, there is a plan for a number of years, say three, four or five. It is changed every year in keeping with the requirements of the economy. It contains targets and techniques to be followed during the plan period, along with price relationships and price policies. Third, a perspective plan for 10, 15 or 20 or even more years is presented every year in which the broader goals are stated and the outlines of future development are forecast. The annual one-year plan is fitted into the same years new three-four- or five-year plan, and both are framed in the light of the perspective plan. For example, if planning is started in 1970 in a country, there would be three plans under the technique of rolling plan: an annual plan for 1970, a five-year plan for 1970-75, and a 20year plan for 1970-90. The broad aims and objectives are laid down in the 20-year perspective plan. When the plan starts in 1970, there will be an annual plan in every subsequent year, that is, 1971, 1972 and so on. The five-year plan for 1970-75 will also roll on for the subsequent periods by shedding each previous year so as to become a plan for 1971-76, 1972-77 and so on. Since planning is a continuous process, every year the plan is revised in the light of new information, improved data and improved analysis. At each revision it will be well to look into the future a number of years which is determined by the nature of the factual circumstances.... If five years is deemed to be a suitable horizon, this number of years may be applied at each of the yearly revisions in the sense, one would always be working in the beginning of a five-year period. Merits. The concept of rolling plan is devised to overcome the rigidities encountered in the fixed five-year plans. In the rolling plan, there are plan targets, projections and allocations that are not fixed for the five-year period but are liable to revision every year in keeping with the changing conditions of the country. It not only provides greater flexibility but also a clearer perspective and a better view of the priorities. Being flexible, a rolling plan is more realistic than a flexible plan. It takes into consideration such unforeseen natural and economic changes as floods, drought, war, hike in oil prices, etc.,
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which may affect the economy adversely. Under a rolling plan, financial and physical targets can be revised in keeping with such changes. But such revisions are not possible under a fixed plan. Thus the rolling plan combines the advantages of both perspective and flexible planning. Demerits. But critics are not lacking in pointing towards certain demerits of this technique of rolling plan. They point out that since the targets are likely to be revised every year, it is not possible to achieve the targets laid down in the plan within a fixed time period. Such frequent revisions also make it difficult to maintain proper balances in the economy which are essential for its balanced development. Again, when the plan is continuously revised, it creates uncertainties in the private and public sectors of the economy. Both sectors lose the urge to make changes in their production plans or to proceed in accordance with the previouly laid down targets. To achieve bigger targets becomes out of question. Moreover, constant revisions of the targets of the plan develop an attitude of non-commitment and apathy among the planners and the public which do not augur well for the future development of such a country. Further, the success of the rolling plan depends on a strong communication system from the village to the headquarters of the planning body. This requires a large manpower base trained in the collection of data at the village, block, district and state levels. The data are required to be processed. This necessitates the installation and operation of the latest computerised system which is very costly and is difficult to operate in an underdeveloped country. Leaving aside this aspect, the success of a rolling plan depends upon the extent to which data are collected, communicated and computerised regularly. It also depends on the ability of the planning machinery to cope with the work of continuous revisions of the five-year plan every year in the light of the changing natural or economic conditions. But it is not within the competence of the planning machinery in an underdeveloped country to collect, communicate and computerise data accurately and regularly throughout the year from different sectors of the economy. Again, for the rolling plan to be successful, up-to-date knowledge of progress as well as the shortcomings in the implementation of projects are absolutely essential. Unfortunately, such information is today so widely scattered that for all practical purposes it does not exist. And, at any rate, it is far from up-to-date and quite insufficient to roll the plan. To organise such information and the capacity to use it is, therefore, the prime need. As this obviously cannot be done overnight it would be advisable, to start with, for the rolling exercise to be confined to selected sectors in which the required information can be effectively organised. These were the difficulties which led to the abandonment of this technique of rolling plan in such underdeveloped countries as Burma and Mexico. But it has been a success in such developed countries as Japan and Poland. FIXED PLAN In contrast to the rolling plan, there is a fixed plan for four, five, six or seven years. A fixed plan lays down definite aims and objectives which are required to be achieved during the plan period. For this purpose, physical targets are fixed along with the total outlay. Physical targets and financial outlays are seldom changed except under emergencies. Planning in Russia and India is of the fixed type. Economic plans in Russia are of seven years, while they are of five years in India. Merits. Such planning has certain merits which make it superior to rolling planning. 1. One of the merits of this type of planning is that it fixes targets and priorities rigidly for achieving the objectives laid down in the plan. Targets are bold and cover every aspect of the economy. They are meant to be fulfilled both by the public sector and the private sector during
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the fixed period of the plan. It is thus a challenge to both the sectors which make all-out efforts to achieve them through mutual cooperation and healthy competition. 2. It helps in maintaining proper balances in the economy. As the plan is for a fixed period, every effort is made to avoid scarcities of physical and financial resources. For this, priorities are laid down on the basis of the short-term and long-term needs of the economy in keeping with the available material, human and financial resources. On the basis of the various priorities of the plan, monetary, fiscal and direct policy measures are adopted to maintain proper balances in the economy. Such balances can be maintained under a fixed plan rather than in a rolling plan. 3. There is no element of uncertainty in this type of planning. The planning machinery, the public sector and the private sector are definite about the objectives and targets of the plan which are to be achieved during a given plan period. They, therefore, do their best to achieve them within that period. 4. When there is a fixed plan with given objectives and targets, it ensures public cooperation and political will to make the plan a success. This is because people know and realise that the success of the plan will bring manifold benefits to them by the end of the plan in the form of rising incomes, larger employment opportunities, improved agricultural facilities, more power for agriculture and industry, etc. 5. Such a plan helps in reviewing changes in national income, investment, saving, consumption; and the performance of the different sectors of the economy in the previous plan. Consequently, the fields of success and failure are pointed out and efforts are made to have a better performance and to overcome failures in the current plan. Plan evaluations are also made during the plan period. All this provides an opportunity to the planners to bring stability in the economy while the plan is still in progress. Demerits. Despite these merits, fixed plans, as they are in vogue in India, have certain demerits. 1. The fixed plans in India have no connection either with available physical or financial resources. The main aim has been to fulfil the financial targets by all means through deficit financing, heavy taxation, larger borrowings and through massive foreign aid, irrespective of their adverse effects on the economy. The actual achievements have always fallen short of physical targets. Spending huge sums without matching results in physical terms has led to distortions in the price structure and availability of essential commodities. This has often led to Plan holidays, as between 1966-68. Often a FYP (five year plan) is started on schedule but the actual plan is brought out after the lapse of 21/2 years, as was the case with the Fifth FYP. A mid-term appraisal is done after three years which is nothing but a post-mortem exercise, an exercise in futility. By the time this report is published, the next plan is due which is again delayed because the necessary figures relating to the various variables and sectors of the economy are not available in time. 2. The present system of fixed plans fails to take into account unforeseen changes which may occur in the economy during the period of FYP. They may be natural forces, such as floods, cyclone or famine or economic such as hike in oil prices or external such as war. There may also be difficulties of achieving the targets or of obtaining resources as laid down in the plan. A rolling plan offers flexibility to such factors changing from time to time. Some discrepancies are also likely to creep in between forecasts and actuality in the process of planning even in an ordinary way. Thus there is always the need for a built-in capacity in the planning system to correct such mistakes. 3. Besides, a fixed FYP is unsuited for large projects which are not merely lumpy but have a
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long gestation period of ten to fifteen years, such as river valley projects. Such projects spill over the FYP period and have to wait for fresh sanction at the beginning of the next FYP. This results in the slowing of the pace of progress of the project. Therefore, such projects cannot be tied down to a rigid framework of a FYP and need to be adjusted in a rolling plan. 4. Similarly, the problems of poverty and unemployment cannot be solved in a period of five years. Right from the second FYP, our plans aimed at the eradication of these two scourges of modern civilisation but achieved little towards this direction. They are long-term problems which can be solved within the framework of a rolling plan in a perspective period of 10, 15 or 20 years. 5. Last but not the least, the industrial development in India during the last 60 years of planning has been extremely uneven and unbalanced. In fact, industrial development has been urban development as in advanced countries which goes against our socio-economic set-up. There has been concentration of industries in and around urban centres. There is thus the need for a policy of balanced regional development which necessitates decentralisation of industries near rural and. backward areas. This is essentially a long-term problem which requires a rolling plan for its solution. Conclusion. These demerits of fixed planning are not so serious as to discard it in favour of rolling planning. Physical and finacial shortages are bound to arise in every type of planning. They are not peculiar to a fixed plan and they can be better faced and overcome during a fixed plan period. As regards the long-term problems of poverty, unemployment, inequalities and regional imbalances are concerned, they can be gradually solved within the framework of a number of fixed plans. Projects with long gestation period can also be completed under two or three plans. In fact, all long-term problems and projects form part of a perspective plan which is contained in every five-year plan document. The present five year plan is a projection and continuation of the previous plans and it leads to subsequent plans. Thus all long-term problems of an economy can be solved by a series of fixed plans.
PLANNING UNDER CAPITALISM AND SOCIALISM

PLANNING UNDER CAPITALISM Planning under capitalism is not based on any central plan. In the absence of a central plan, the means of production are owned privately. Production is also carried out by private enterprise. It is not planned by the government. Market prices are determined by market forces and are not set by the government. So under capitalist planning, the institutions of private ownership, private enterprise and price mechanism continue to operate. Given these institutions, there is no comprehensive planning under capitalism. The state plans on a limited scale to harness selfinterest to the service of the community as a whole, and to supplement the price system, as well as ensuring that it works efficiently.27 To achieve these tasks, the government of a capitalist economy performs three functions: (1) It adopts appropriate measures to maintain aggregate demand which is neither too smalll nor too large so that recession or inflation is avoided. For this, the government regulates the actions of private enterprise. It establishes healthy monetary and credit institutions, and adopts fiscal measures in keeping with the economic situation of the country. (2) It prevents monopoly
27. F.W. Paish, Benhams Economic, 8/e, p. 56.
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concentration. Monopoly distorts the price mechanism under capitalism. It restricts output to keep up prices so that less resources are employed. To check monopoly and monopolistic practices, the government adopts anti-monopolistic measures and even nationalises some of the monopolistic corporations for the benefit of the community at large. (3) The government adopts measures for the satisfaction of communal wants in the form of public health measures, public parks, roads, bridges, museums, zoos, education, flood control measures, etc. All these activities of the government are not coordinated by any central plan. Thus planning under capitalism is confined to the regulatory activities of the government so as to avoid recession or inflation, to prevent monopoly concentration, to raise the standard of living of the people and to create conditions for the smooth functioning of the price mechanism with a sufficient degree of competition. PLANNING UNDER SOCIALISM Planning under socialism is based on a central plan. There is a central planning authority or board which formulates a plan for the entire economy. There is complete centralisation of economic power in the central planning authority. It fixes the plan objectives, priorities and targets. It organises and allocates the resources of the economy by deliberate direction and control for the purpose of achieving definite objectives and targets laid down in the plan during a specified period of time. The central problems of an economy, what and how much is to be produced; how, when and where it is to be produced; and to whom it is to be allocated, are exclusively decided by it. The central plan has definite socio-economic objectives. These objectives may concern aggregate demand, full employment, satisfaction of communal demand, allocation of factors of production, distribution of national income, amount of capital accumulation, economic development, and so forth. To achieve these objectives, the planning authority owns and controls the means of production and distribution. All mines, farms, factories, financial institutions, distributing agencies such as shops, stores, internal and external trade, means of transport and communications, etc. are owned, controlled and regulated by government departments and state corporations under the overall supervision and control of the planning authority. Production in the different sectors of the economy is governed by priorities and targets of the plan. Production of consumer goods is generally governed by the preferences of consumers and the available commodities are distributed to them at fixed prices. Under socialist planning, consumers sovereignty is confined only to the choice of socially useful commodities which the planning authority deems fit to produce and provide to the people. The pricing process under socialist planning does not operate freely but works under the control and regulation of the central planning authority. According to Dickinson, socialist planning and the pricing process are not opposed to each other. Rather, they are complementary principles of economic regulation. The former supports the latter in four ways: First, to give general direction to the socialist economy. Second, to make decisions where market indications are lacking. Third, to eliminate cyclical fluctuations in economic activity. Fourth, to deal with special emergencies. Thus the pricing process plays an important role under socialist planning even though prices are fixed by the planning authority. There are market prices at which consumer goods are sold. There are also accounting prices on the basis of which managers decide about the production of consumer goods and investment goods, and also about the choice of production methods. The pricing process does not regulate the plan. It is subservient to the central plan.
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Conclusion. Socialist planning is superior to capitalist planning. The adoption of planning under capitalism fails to bring economic efficiency, to avoid wastage of resources, to check monopolistic practices fully to reduce inequalities of income and wealth, and to avoid booms and slumps. This is borne out by the experience of all capitalist countries. On the other hand, socialist planning provides greater economic efficiency because the means of production are not left to the market forces. Rather, they are controlled and regulated by the planning authority in the most efficient manner. Moreover, there is greater welfare due to less inequality under socialist planning. The central plan aims at providing socially useful goods and services. As the planning authority owns, controls and regulates all the means of production and distribution. Every citizen is paid his remuneration according to his ability, education and training, thereby reducing inequalities. Finally, under socialist planning, the planning authority is able to avoid deflationary and inflationary trends by a better coordination of the actions of various producing units and making full use of available resources.
CENTRALISED AND DECENTRALISED PLANNING

Planning may be centralised or decentralised. This division is made from the viewpoint of the execution of plans. Under centralised planning, the entire planning process in a country is under a central planning authority. This authority formulates a central plan, fixes objectives, targets and priorities for every sector of the economy. It takes all investment decisions in accordance with the goals and targets of the plan. The principal problems of the economy, what and how much is to be produced; how, when and where it is to be produced; and to whom it is to be allocated, are exclusively decided by this authority. The central planning authority controls every aspect of the economy. It fixes prices of all products and wages of all types of workers. All anticipated financial product and factor imbalances that are likely to arise within the planning period, are sought to be corrected in advance by the planning authority. Oscar Lange rejects centralised planning because of its undemocratic character. The entire planning process is based on bureaucratic control and regulation. Naturally, such planning is rigid. There is no economic freedom and all economic activities are directed from above. Shortages and mistakes arising during the course of planning are not likely to be rectified because of the absence of decentralised decision-making. On the other hand, decentralised planning refers to the execution of the plan from the grass roots. Under it, a plan is formulated by the central planning authority in consultation with the different administrative units of the country. The central plan incorporates plans under the central schemes, and plans for the states under a federal set-up. The state plans incorporate district and village level plans. Similarly, plans for different industries are formulated in consultation with representartives of industries. But individual firms are free to take independent decisions about investment and output policies, and so are individual farmers. Under decentralised planning, prices of goods and services are primarily determined by the market mechanism despite government control and regulation in certain fields of economic activity. There is freedom of consumption, production and enterprise under it. However, the planning authority recommends to the central and state governments to provide certain incentives to the private sector. It also lays down areas of public sector activities. Decentralised planning is superior to centralised planning in that it provides economic freedom and flexibility to the economy. But its dependence on the market mechanism leads to shortages or surpluses in the production of goods and services. They are likely to create problems for the
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government because adjustments are difficult to make. For instance, shortages of goods lead to inflation and the adoption of price controls and rationing creates more problems. Further, it is not possible to coordinate the decisions of the planned and unplanned sectors. This is one of the main reasons for distortions in the economy which lead to disequilibrium in the demand for and supply of goods and services. Of the two, centralised planning provides cohesiveness to the economy whereas decentralised planning provides economic freedom and incentives to the market economy.
CORRECTIVE PLANNING AND DEVELOPMENT PLANNING

A number of maladjustments arise in a capitalist economy. When the government plans and adopts various fiscal, monetary and direct control measures to rectify them, this is called corrective planning. If the economy suffers from inflationary pressures, the government adopts such corrective measures as a contractionary monetary policy, raising tax rates, reducing consumption, investment and public expenditure. It may also adopt a surplus budgetary policy. In the event of a depression, corrective planning includes an expansionary monetary policy, reduction in tax rates, stimulation of consumption, increase in private and public investment, and a deficit budgetary policy. Excessive inequalities of income distribution and concentration of monopoly power are also sought to be reduced under corrective planning. To reduce inequalities of income distribution, corrective planning requires the adoption of such measures as imposition of heavier burdens on the higher income groups through death duties, steeply progressive income taxes, increased expenditure on public works and social security, etc. To control monopoly concentration, the government may encourage competitive small business, start public enterprises, pass anti-monopoly laws and even nationalise monopolistic industries. Planning in the United States and in other capitalist countries is of the corrective type. Development planning is meant to develop the economy as a whole. It involves the application of a rational system of choices among feasible courses of investment and other development actions. 28 For this, it relies to a large extent on the market mechanism. Under development planning, the government formulates a development plan for the whole economy. It includes consideration of the most important economic aggregates such as total saving, investment, output, government expenditure and foreign transactions. It also explores sectoral relationships in the overall framework of the economy. In particular, it lays down investment priorities for the public sector. Public investments cover the whole infrastructure of the economy including investments in health, education and training. The private sector is considered a partner in the development efforts of the economy. The government does not use force on the private sector to get the plan implemented. Rather, it provides incentives through monetary, fiscal and direct control measures. At the same time, the government adopts measures to restrict unproductive activities so that private investment is channelised into productive activities. Development planning is primarily related to the. development activities of underdeveloped countries. Since such countries have a number of economic, social and political obstacles to development, it is not possible to make development planning a success even by the best policies. Lewis observes in this connection: Good policies help, but do not ensure success. Development planning is in this respect like medicine; the good practitioner knows some useful tricks; but it
28. A. Waterstone, Lessons of Experience, in Leading Issues in Economic Development, Gerald M. Meier, (ed.), 2/e, 1970.
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is still the case that many patients die who are expected to live, and many live who are expected to die.29
PLANNING IN A MIXED ECONOMY

Mixed economy is a compromise between the two economic systems, capitalism and socialism. It is a system which is free from the evils of both capitalism and socialism but integrates the good features of both. That is why it is known as mixed economy which is a golden means between capitalism and socialism. It is through planning that the merits of a socialist economy are imparted and the defects of capitalism are sought to be removed in a mixed economy. Planning in a mixed economy is not comprehensive in the sense of socialist plaiming. It divides the economy into public and private sector for the purpose of economic development. The public sector is under the direct control of the government which regulates its production and distribution. All services in which the profit expectations are low and investments are large with long gestation period are operated under the public sector, such as rail, road and air transport, power generation plants, posts and telegraphs, etc. There are in fact public utilities which are operated by the state for public welfare. Besides, defence, atomic energy, heavy, basic and strategic industries are all operated in the public sector. The plan allocates investment, lays down targets and fixes priorities for this sector. There is the private sector in which individuals manage what they own, usually in farming, industry and retailing. Keeping the public interest in view, the state regulates the working of this sector by giving suggestions, subsidies, credit facilities, raw materials, cheap power, concessional transport facilities, tax holidays, concessions, etc., and by administrative controls and directions. If certain industries do not work satisfactorily or operate against public interest, the state nationalises them by paying appropriate compensation. A sector based on the principles of cooperation also exists in a mixed economy. It is usually to be found in farming, dairying, consumer purchases, and in small manufacturing. The cooperative sector is organised by the people with the assistance of state cooperative agencies to reduce exploitative market tendencies and to inculcate spirits of cooperation and self-help. Merits. Planning in a mixed economy has the following merits: 1. Planning in a mixed economy is meant to provide all the freedoms of capitalism, such as freedom of consumption, freedom of production, freedom of occupation, freedom to hold property, etc. But these freedoms cannot be enjoyed absolutely and at the cost of public welfare. So the government puts checks on these freedoms by proper regulation and control of such economic activities as the production and distribution of essential commodities in order to prevent their hoarding and black-marketing, and even rationing them in the event of acute shortages, of private property for an equitable distribution, of monopoly concentration of economic power, etc. 2. The ultimate aim of planning in a mixed economy is to remove the evils of capitalism and to promote the maximum welfare of the people. These objectives are achieved through the various measures outlined above. Besides, to protect workers from capitalist exploitation, the state passes labour laws and fixes minimum wages, working hours, etc. and provides social security in the form of life insurance, unemployment insurance pension, provident fund, maternity benefits, free education, recreational facilities, etc. The state also aims at reducing inequalities of income distribution through these measures.
29. W.A. Lewis, Development Planning, p. 23.
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3. Planning in underdeveloped countries is primarily based on the concept of mixed economy. The main aim of such planning is to increase the growth rate of the economy, given the various limiting factors in such countries. For this, planning in a mixed economy envisages a high rate of capital formation through various monetary, fiscal and physical control measures; through foreign aid, comprehencive exchange control and protective tariffs; and through public and private investments so that the economy develops in a balanced way. Thus planning in a mixed economy affords the advantages of resolute government action in overcoming existing barriers to economic growth, does not involve an amount of central integration exceeding the capacity of its bureaucracy, and fosters a maximum of cooperation between private business and government. Demerits. Despite these merits, planning in a mixed economy is faced with certain problems which make it difficult to achieve the objectives and targets of the plan. First, there is non-cooperation between the two sectors. The experience of the working of mixed economies reveals that the government treats the private sector like a step-child and imposes many restrictions on it. The private sector is taxed heavily. It has to operate under numerous controls and bureaucratic capitalism. On the other hand, the public sector is given preference over the private sector in all matters. Thus bitterness and non-cooperation develop between the two sectors which lead to the non-fulfilment of the plan targets. Since the private sector operates on the basis of the market mechanism, shortages lead to rise in prices which spread to the public sector. This is because both the sectors are dependent on each other for supplies of raw materials, intermediate products, etc. Second, planning in a mixed economy involves the expansion of the public sector whereby public outlay is increased. But enough financial resources are not available in an underdeveloped country to meet large plan outlays. This leads to deficit spending, thereby leading to inflationary pressures within the economy. Third, the public sector is a big burden on the financial plan. Bureaucratic control leads to inefficiency. There is over staffing of the personnel, red tapism, corruption and nepotism. As a result, production falls and losses emerge. Moreover, the majority of public undertakings being of long-gestation period and involving huge investments, they continue to operate under losses for a number of years. Thus shortages of goods continue which accentuate inflationary pressures.
PLANNING MODELS
Planning models have been increasingly used in underdeveloped countries for the drawing up of plans for economic development. A model expresses relationships among economic variables which explain and predict past and future events under a set of simplifying assumptions. In other words, a model consists of a series of equations, each of which represents the association among certain variables. In this sense, a planning model is a series of mathematical equations which help in the drawing up of a plan for economic development. Broadly, a model may have endogenous and exogenous variables. Endogenous variables are those whose values are determined from within the system such as national income, consumption, saving, investment, etc. On the other hand, exogenous variables are determined from outside the system such as prices, exports, imports, technological changes, etc. A planning model specifies relationships between endogenous and exogenous variables and aims at ensuring the consistency of the proposed plan for economic development. It is meant to yield an optimally balanced collection of measures, known as Model Targets, which can help the planning authority in the drawing of
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an actual plan. A UN study defines a planning model as that based on precise knowledge of medium and long-term economic aims, which is mathematically expressed in the form of a preference function and reflects the initial conditions of the economy including economic policy measures already proposed and show the most probable path of economic development.30 Planning models are of three types: aggregate, multisector and decentralisation. Aggregative models trace the optimal paths of development overtime of such economy-wide aggregates as income, saving, consumption, investment, etc. The Harrod-Domar Models and the Two-Gap Models are of this type. But it is not possible to build highly aggregative models in UDCs because of the lack of accurate data and computational devices. Multisector models are designed which connect macroeconomic aggregates with the sectors constituting the operational content of the plan. The Mahalanobis Two-Sector and Four-Sector Models are of this type. Multisector models are also set in terms of input-output models. They are consistency models based on the Leontief inter-industry system. The Consistency Model for Indias Fourth Plan by Manne, Rudra and others, and the model of Indian Fifth Plan were framed in terms of the input-output models. Further, optimising or linear programming models are also multisector planning models. They extend the consistency models of the input-output type to optimization of income or employment or any other quantifiable plan objective under the constraints of limited resources and technological conditions of production. Such models can be static or dynamic. Static LP models solve the systems of equations for optimal solutions in relation to a single year, while dynamic LP models explain the optimal growth path over the entire plan period. Decentralised models have sector or project level variables which are used to prepare models for individual sectors or projects. Such models are useful in the early stages of a countrys economic development when information is available for only individual sectors or projects. The usefulness of planning models in actual plan-making are: (a) to provide a frame for the checking of the consistency or the optimality of the official plan targets; (b) to provide a frame for the actual setting of targets; (c) to provide a frame for the evaluation and selection of projects; and (d) to provide an insight into the structure of the economy and its dynamics to help better policy decisions.31
30. UN, ECE, Development in the Construction and Use of Macroeconomic Models 1968. 31. Ashok Rudra, Indian Plan Models, p. 201.

Some Problems of Development Planning: Part - Vi

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Some Problems of Development Planning: Part - Vi

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P A RT - V I

SOME PROBLEMS OF DEVELOPMENT PLANNING

The Economics of Development and Planning

The Economics of Development and Planning

The Economics of Development and Planning

PROBLEMS OF DEVELOPMENT PLANNING

The Economics of Development and Planning

The Economics of Development and Planning

FINANCIAL AND PHYSICAL PLANNING

The Economics of Development and Planning

PERSPECTIVE PLANNING AND ANNUAL PLANNING

The Economics of Development and Planning

INDICATIVE PLANNING AND IMPERATIVE PLANNING

The Economics of Development and Planning

DEMOCRATIC PLANNING AND TOTALITARIAN PLANNING

The Economics of Development and Planning

ROLLING AND FIXED PLANS

The Economics of Development and Planning

The Economics of Development and Planning

PLANNING UNDER CAPITALISM AND SOCIALISM

The Economics of Development and Planning

CENTRALISED AND DECENTRALISED PLANNING

CORRECTIVE PLANNING AND DEVELOPMENT PLANNING

The Economics of Development and Planning

PLANNING IN A MIXED ECONOMY

The Economics of Development and Planning

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