Unit 2

Issues in Indian Planning

2.1 Objective and Critical evaluation (growth self-reliance)

The basic objectives of Indian planning are growth, modernisation, self-reliance, and social justice. These objectives are, in fact, the guiding principles of Indian planning. Within this basic framework of objectives, each development plan lists some priorities in the light of immediate requirements and constraints. These have, however, to be subservient to the four basic objectives indicated above.

1. The Foremost Objective: Economic Growth -The first and the foremost objective of Indian planning is the growth of the economy as rapidly as possible within a democratic framework. In a country with low per capita income and poor standard of living of the majority of the people, raising national income has naturally been the basic objective of development planning. The target growth rate of national income has generally been around 5 per cent with slightly higher rate in some of the plans, except the First Five Year Plan when the target was modest at 2.1 per cent. The anticipated rate of growth was 4.5 per cent during the Second Five Year Plan, which was raised to 5.6 per cent for the Third Five Year Plan, and further raised to 5.7 per cent for the revised Fourth Five Year Plan. However, the target was lower at 4.5 per cent for the revised Sixth Five Year Plan (1980-85). The target or the anticipated rate of growth was set at least 5 per cent for the Seventh Five Year Plan (1985-90). The growth targets for eight, ninth and tenth plan were set up at 5.6, 6.5 and 8.1 per cent respectively.

 2. Modernisation: The Second Objective- The second basic objective has been to modernise the economy. This amounts to structural and institutional changes in economic activities leading to a progressive and modern economy. This needs modernisation in all the three sectors of the economy, viz. Agriculture, industry and services. One important pursuit is the shift in the sector-wise contribution to national income from agriculture to industry and the services. Agriculture has been the largest sector among all the three sectors in terms of production and employment as a matter of the colonial legacy. Another important aspect of modernisation is development of a diversified economy that produces a large variety of goods, including capital goods. This envisages establishing new industries in the fields of engineering, chemicals, petroleum, etc. A fundamental aspect of modernisation of the economy consists in advancement of technology and innovation for making the economy efficient by upgrading the quality of products and/or reducing costs; increasing the productivity of labour and other resources. Certain institutional changes become necessary for the modernisation and development of the economy.

3. Self-reliance: The Third Objective -The third major objective of Indian economic planning was at least till 1980s to make the economy self-reliant. This implies progressively reduction and ultimately elimination of dependence on foreign aid and imports for certain critical commodities. This requires import substitution, i.e., producing the same commodities at home instead of importing them. This necessitates expansion and diversification of exports so that we are in a position to pay from our own earnings of foreign exchange. The emphasis in the case of agriculture is, however, on self-sufficiency in production of food grains and the raw materials for industrialisation. However, after July 1991, with the globalisation and opening of Indian economy, the shift has taken place towards outward orientation.

4. Social Justice: The Fourth Objective- Another important objective is to render social justice to all, more particularly to the deprived strata of the society. This implies improving the living standards of the weaker sections of the population, namely, landless agricultural labourers, artisans, members of scheduled castes and scheduled tribes, women and children etc. This also implies the reduction of inequalities in income and asset distribution, more particularly in the rural areas where land, the principal source of living, is unequally distributed. This also includes a variety of welfare schemes, namely, special employment programmes of the poor, land reforms in favour of the small farmers, supply of concessional or subsidised items for production as well as consumption Purposes.

Thus, the fundamental objectives of our development planning have been to secure rapid economic growth, modernisation, self-reliance, reduction in disparities of income and wealth, prevention of concentration of economic power, and creation of values and attitudes of a free and equal society. The vigilant reader will see that promoting one objective could facilitate another but there could be contradictions too inherent in simultaneously achieving all these objectives. Realising this, the First Plan said, ‘None of these objectives can be pursued to the exclusion of others, a plan of development must place balanced emphasis on all of these.’ The same objectives were partially echoed when in some of the plans, the objective was stated as growth with redistribution. However, when one goes through the lists of objectives given in different Plan reports one finds them couched in different language, often difficult to identify with the basic objectives suggested above. Part of the reason could be to divide the objectives on long-term as well as medium-term/short-term basis. Long-term objectives do not differ from plan to plan but short-term may differ. Long-term objectives are couched in more general terms while short-term ones are more specific. One may like to call long-term objectives as planning objectives and short-term objectives as plan objectives. Further, goals, objectives and targets are all different yet become blurred or indistinguishable at times. For instance, in all plans a target of growth rate for national income (or NDP or GDP) was stipulated but it was given as an objective only in a few of them. At times, even certain priorities and strategic means may substitute for objectives for they appear so important for the time being. Examples abound in documents of different plans. For example, in some of the plans, self-reliance, which was a basic strategy in earlier plans, was shown as a separate objective. Self-sufficiency in food grains was also indicated as objective in some of the plans while expansion of basic and heavy industry in others. In some plans one would find mention of growth with stability. In still some others, inter-regional balance is mentioned as an objective; and, perhaps, it could be stated as a separate long-term objective—also suggested as one of the functions of the National Development Council.

CRITICAL EVALUATION (GROWTH SELF RELIANCE)

An average annual growth rate of gross domestic product of 5.5 per cent, self-reliance and redistribution of consumption for the removal of poverty over the Plan period were the three accepted objectives of the Fifth Five-Year Plan as enunciated in the Approach to the Plan. The details of the planning model underlying the Approach document were supplied in a Technical Note that was circulated to the panel of economists in April 1973. The same planning model (with a change in the price base from 1971-72 to 1972-73) is said to form the basis of the Draft Fifth Five-Year Plan released recently.

The model is found to be inadequate in its institutional specification and operationally unsatisfactory. The empirical basis for the three major policy-oriented conclusions emerging from it is found to be a poor approximation to the realised experience in the recent past, thereby making suspect their economic feasibility in practice. Because of the inadequate institutional specification of the model and the absence of a simultaneously worked-out policy-frame, the problems of evolving policy measures ex post are shown to be intractable. It is not at all surprising, therefore, that the commitments on self-reliance and removal of poverty have been considerably diluted in the Draft Plan-although certain exogenous factors have been held responsible for this, especially for throwing overboard the objective of self-reliance. Even in the absence of these exogenous factors, the pronounced biases in the numerical parametric specification of the model, the inappropriate institutional specification and the socio-political infeasibilities involved in working out the policy-frame ex post facto for the redistributive objective would have led to the same result.

2.2 Employment generation inequality reduction

Rising economic growth has reduced inequality in low-income and emerging market countries over the years. In good economic times, young people working helps reduce inequality in both groups of countries. But when growth slows down and jobs are lost, more young people out of work in low-income countries leads to a rise in inequality

The subject of inequality is central when examining the challenges of employment-generation and decent work (International Labour Organization, 2007). The evident worsening of economic and social inequality in the past three decades raises an important question on the impact, that such trends have had on the growth of employment and work opportunities. Although well-known economic models have postulated that some inequality promotes investment and economic growth, certain empirical evidence indicates that a high degree of inequality has a negative impact on subsequent economic outcomes. Moreover, better wealth redistribution can indeed promote sustainable economic growth which would generate a relative improvement in work opportunities for lower income groups and for lower-income countries.

The relationship between inequality and long-term growth has been closely studied, but the relationship between short-term fluctuations in growth and inequality—both in good times and in bad times—is a rich mine for more research.

To study this relationship, we decided to use an approach called mediation analysis, most often used in psychology, but rarely used in macroeconomics.  The idea is to identify what the driving force is behind why something happens, and how these are connected.  Another big advantage is it can help pinpoint how important the different driving forces behind any changes may be. 

This matters because if policymakers know more about why something is happening, they can design better policies to tackle it head on. 

We defined good times and bad times in a given year using two criteria: first, whether a country’s GDP per capita growth rate was positive or negative, and second the difference between that number and the country’s average GDP per capita growth rate between 1981 and 2014.

We looked at the impact of good and bad economic times on inequality through unemployment, access to finance, and government spending.  We found that in low-income and emerging market countries, unemployment, especially among young people, is an important driver of inequality during good and bad times.

In good times, reduced unemployment in general explains 41 percent of the reduction in inequality in low-income and emerging market economies. Young people working more explains about over one third of that reduction. In bad times, 28 percent of the increase in inequality is because of an increase in unemployment.  The increase in unemployment among young people is a key contributor to the rise in inequality. 

Government Initiatives for Employment Generation in India

The initiatives undertaken by the government of India since independence for employment generation are:

1. Nehru Rozgar Yojana
2. National Food for Work Programme
3. Training of Rural Youth for Self-employment
4. National Rural Employment Programme
5. Rural Landless Employment Guarantee Programme
6. Jawahar Rozgar Yojana
7. Rural Employment Generation Programme
8. Prime Minister’s Rozgar Yojana for Educated Unemployed Youth
9. Swarna Jayanti Shahari Rozgar Yojana

10.Swarnjayanti Gram Swarozgar Yojana

     11.Sampoorna Grameen Rozgar Yojana

     12.National Rural Employment Guarantee Scheme

2.3 Poverty removal

The ways for removing poverty are-

(i) Population Control:

Population in India has been increasing rapidly. Growth rate of population is 1.8%. For removal of poverty the growth rate of population should be lowered.

(ii) Increase in Employment:

Special measures should be taken to solve the problems of unemployment and disguised unemployment. Agriculture should be developed. Small scale and cottage industries should be developed in rural areas to generate employment.

(iii) Equal distribution of Income:

Mere increase in production and control on population growth will not remove poverty in India. It is necessary that inequality in the distribution of income should be reduced.

(iv) Regional poverty: In States like Orissa, Nagaland, U.P and Bihar etc. the percentage of the poor to the total population is high. Govt. Should give special concession for investment in these regions. More PSUs should be established in these states.

(v) Problem of Distribution:

The public distribution system (PDS) should be strengthened to remove poverty. Poor section should get food grains at subsidized rates and in ample quantity.

(vi) Fulfilment of minimum needs of the Poor:

Govt. Should take suitable steps to meet minimum needs of the poor e.g., supply of drinking water and provision of primary health centres and primary education.

(vii) Increase in the productivity of the Poor:

To remove poverty, it is necessary to increase productivity of the poor. The poor should be given more employment. More investment should be made in public and private sectors to generate employment.

(viii) Changes in techniques of Production:

India should adopt labour intensive techniques of production. We should have technical development in our economy in such a way that labour resources could be fully employed.

(ix) Stability in Price Level:

Stability in prices helps to remove poverty. If prices continue to rise, the poor will become poorer. So, Govt. Should do it best to keep the prices under control.

(x) Development of Agriculture:

The agriculture should be developed to remove poverty. Rapid rate of growth of agriculture production will help to remove urban as well as rural poverty. Agriculture should be mechanized and modernized. Marginal farmers should be given financial assistance.

(xi) Increase in the rate of growth:

Slow rate of growth is the main cause of poverty. So, growth rate must be accelerated. In 2003-04 the growth rate has been 6.5% despite that 26% of population remains below poverty line.

2.4 Saving and Investment

The relationship between saving, investment and economic growth has puzzled economists ever since economics became a scientific discipline. Generally, a portion of income is saved and put into investment. In a closed economy, the economy as a whole can save only as much as its income. The economy as a whole may reduce the consumption expenditure in relation to a given level of income and consequently increase its propensity to save. An exogeneous increase in the desire to save leads to an unchanged level of saving but at a lower level of income. If we define both saving and investment as the difference between gross domestic product and consumption, it may tend to be interpreted in terms of cause-and-effect relationship.

The role of domestic saving and domestic investment in promoting economic growth has received considerable attention in India and also in many countries around the world. The central idea of Lewis’s (1955) traditional theory was that an increase in saving would accelerate economic growth, while the early Harrod-Domar models specified investment as the key to promoting economic growth. On the other hand, the neoclassical Solow (1956) model argues that the increase in the saving rate boosts steady-state output by more than its direct impact on investment, because the induced rise in income raises saving, leading to a further rise in investment. Jappelli and Pagano (1994) claimed that saving contribute to higher investment and higher GDP growth in the short-run, whereas, the Carroll-Weil hypothesis (Carroll and Weil, 1994) states that it is economic growth that contributes to saving, not saving to growth.

The optimism about the Indian economy has been on an ascent in recent years. This has led to a resurgence of interest in the linkages among saving, investment and economic growth in India. Further, the recent empirical literature on saving made the interest towards the themes of capital accumulation, technological progress and economic growth - a shift away from the 1980s and the 1990s when discourse on macroeconomic issues was dominated by concerns with short term stabilisation and adjustment. Since the inception of economic planning in India, the emphasis has been on saving and investment as the primary instruments of economic growth and increase in national income. One of the objectives of economic plan (for e.g., Eleventh five-year plan) is to increase the production in the economy and thus economic growth. To increase the production, capital formation is considered as the crucial determinant; and capital formation has to be backed by the appropriate volume of saving. Increase in saving, use of the increased saving for increased capital formation, use of the increased capital formation for increasing saving, and use of the increased saving for a further increase in capital formation constituted the strategy behind economic growth. Though, classical growth models support the hypothesis of saving promoting economic growth, Carroll-Weil hypothesis contradicts with the argument.

In the Indian context, though empirical studies exist on the role of saving and investment in promoting economic growth, these provide only partial analysis. Moreover, some empirical studies support the classical growth theory, some studies agree with the Carroll-Weil hypothesis and some do not support either of these. To illustrate, Sinha (1996) looked at the causality between the growth rates of gross domestic saving and economic growth, and found that there was no causality running in either direction. In a study, Mühleisen (1997) found significant causality from growth to saving but rejected causality from saving to growth for all forms of saving. In another study, Sinha and Sinha (2008) examined the relationships among growth rates of the GDP, household saving, public saving and corporate saving for the period 1950 to 2001 and found that economic growth produced higher saving in various forms and never the other way around. Verma (2007) employed the ARDL co-integration approach to determine the long run relationship of GDS, GDI and GDP for the period 1950-51 to 2003-04 and supported the Carroll-Weil hypothesis that saving does not cause growth, but growth causes saving.

It appears that there is no comprehensive study available on the analysis of the interdependence between saving and investment of the household, private corporate and public sectors with that of economic growth.

2.5 Mobilization of Internal and External financial

Mobilizing is the process of assembling and organizing things for ready use or for a achieving a collective goal. The term mobilization of resources should be seen in the same context. Mobilization of resources means the freeing up of locked resources.

Every country has economic resources within its territory known as domestic resources. But often they might not be available for collective use. The percentage of resources used when compared to the potential is often very low. For a country to grow, identification and mobilization of its resources is necessary. It should be available for easy use and for central and state level planning.

1. Natural Resources – Coal, Petroleum, Natural Gas, Water, Spectrum etc.
2. Human Resources – The labour force and intellectual capacity of a nation.

The proper utilization of these resources leads to generation of economic resources – savings, investment capital, tax etc. While mobilisation of resources is considered, the mobilisation of economic resources (financial resources) should also be studied.

Mobilization of Natural Resources

India, though a country with sufficient reserves, due to policy bottlenecks, is importing coal and iron. This is increasing our Current Account Deficit.

Mobilization of Human Resources

Organizing human potential for ready use is necessary for growth of India. In-fact, as country of 125 crore people, India now is eyeing more on its human resource potential. The demographic dividend is also in favour of India.

• Mobilization of human resources highlights the need to empower human resources.
• Weaker sections like women, children, SC, ST, OBC etc should be brought into mainstream.
• There should be right employment opportunities for human resources, and when there is lack of skill the job demands, there should be skill development programs.
• Utilize the demographic dividend.
• India is currently levering on its technologists – engineers, doctors and scientists.

In business, internal sources of finance delineate the funds raised from existing assets and day to day operations of the concern. It aims at increasing the cash generated from regular business activities. For this purpose, evaluation and control of costs are made, along with reviewing the budget. Moreover, the credit terms with customers are verified, so as to effectively manage the collection of receivables.

Internal sources of finance include selling of surplus inventories, ploughing back of profit, accelerating collection of receivables, and so on.

External sources of finance refer to the cash flows generated from outside sources of the organization, whether from private means or from the financial market. In external financing, the funds are arranged from the sources outside the business. There are two types of external sources of finance, i.e., long term source of finance and short-term sources of finance. Further on the basis of nature, they can be classified as:

• Debt financing: The source of finance wherein fixed payment has to be made to the lenders is debt financing. It includes:
  • Bank loans
  • Corporate Bonds
  • Leasing
  • Commercial Paper
  • Trade Credit
  • Debentures

• Equity Financing: Equity is the major source of finance for most of the companies which indicate the share in the ownership of the firm and the interest of the shareholders. The firms raise capital by selling its shares to the investors. It includes:
  • Ordinary shares
  • Preference shares

References:

1.     Agrawal, A.N.: Indian Economy

2.     Dutta, R.& Sunderam, K. P.M.: Indian Economy