THE STRATEGY OF PLANNING-IN INDIA

In order to achieve the long-term and short-term objectives set in the each five year, specific
strategies are required. It involves allocation resources across different sectors of the economy in
tandem with the specified objectives. It involves selection choices like development of
agricultural sector or industrial sector, public sector or private sector involvement, closed
economy or open economy model. Indian planning strategies can be split into two phases: pre-
1991 phase and post – 1991 phase.

Pre 1991 Phase or Pre-reform Phase

During pre – 1991 phase (1951 to 1990), India followed the strategy of planning with greater
reliance on the public sector along with a regulated private sector. Following strategies are
followed during 1951-91 phase:

Heavy Reliance on Public Sector

Greater reliance was placed on public sector compared to private sector. As private sector
was not able to invest in large amount for development of heavy industries, government
turned towards public sector for provision of essential and basic needs for the people. At
the same time private sector was not willing to provide the services in backward regions
of the country.

Regulated Expansion of Private Sector

Private sector was restricted to few areas of activities. New legislations were created for
the restriction for the restriction of private sector.

Development of Heavy Industries

Government invested heavily in development of Heavy industry like iron industry.

Protection of Small Scale Industry

Small scale industry was protected by means of establishment of boards for different
small scale industries and reserving few areas of production exclusively for the small
scale industry.

Inward Looking Trade Strategy

Domestic industry was protected from competition in the international market. Heavy
import duty was imposed to curb competitive imports, while domestic industries were
encouraged to produce domestic substitutes of essential imports.

Thrust on Savings and Investment

Promotion of savings and investment was the undisputed objective of monetary and fiscal
policies of the government. Savings are induced through high rate of interest. Tax
concessions were to mobilise savings.

Restriction on Foreign Capital

Several types of restrictions were imposed on foreign direct investment. To control and
regulate it, Foreign Exchange Regulation Act (FERA) was enforced.

Adherence to Centralised Planning

State level plans were aligned in sync with the over all objectives and strategy of growth
as specified in Five Year Plans.

• Pre 1991 Phase or Pre-reform Phase

Strategy of planning in India witnessed a marked shift in the year 1991. Following are main
changes observed under NEP (new economic policy):

 Fiscal policy and monetary policy have been reoriented to facilitate the free play of
market forces.
  Foreign capital in the form of FDI (Foreign direct investment) and FII (Foreign
Institutional Investment) are encouraged.
 Import restrictions are restricted to the minimum, while export promotion has been
accorded a high priority.
 Competition rather than controls have become the fulcrum of growth process.
 Direct participation of the government is significantly tempered and confined only to
strategic industries such as atomic energy, minerals and railways.
 Partial convertibility of Indian Rupee.

Recently, the concept of Sustainable development is included as main feature of the strategy of
planning in India. Sustainable development refers to the development of present generation by
taking into consideration of the future generations.

Following are some notable reasons for change in economic policy:

1. Mounting Fiscal Deficit and revenue deficit: Fiscal deficit and revenue deficit of the
country are increased due to the policies followed before the 1990’s governments.
2. Balance of Payments (BoP) Crisis: Heavy dependence on imports resulted in  a BoP
crisis.
3. Gulf Crisis: On account of Iraq war in 1990-91, prices of petrol started increasing.
Remittances from gulf countries are also stopped.
4. Fall in Foreign Exchange Reserves: In 1990-91, India’s foreign exchange reserves
lowered to such a level that these were not enough even to pay for an import bill of 10
days.
5. Rise in Prices: In India prices happened to rise rapidly. Expansion in money supply was
the principal cause of inflationary pressures. In turn, this was related to deficit financing.
Country has experienced the situation of stagflation.
6. Dismal Performance of Public Sector Undertakings (PSUs):Public sector undertakings
were showed dismal performance.

On account of all these factors, the government shifted to New Economic Policy.
Three Principal Components of New Economic Policy

Liberalisation, Privatisation and Globalisation are the three principal components of New
Economic Policy. Liberalisation of the economy means freedom of the economy from
restrictions of the Government. Liberalisation was expected to break the deadlock of low
investment by exposing the economy to the forces of supply and demand.  Privatisation refers to
allowing private sector to enter in those areas of production which were previously reserved for
the public sector. Also, existing public enterprises are either wholly or partially sold to private
sector. It was considered to be the fittest option to stave off problems of public sector enterprises.
Globalisation means integrating domestic economy with rest of the world under conditions of
free flow of trade and factors of production across borders. Globalisation results in flow of
capital and technology from developed countries into the Indian economy.

MAHALANOBIS STRATEGY

At the time of the formulation of the Second Five Year Plan, Prof.P.C. Mahalanobis who was
friend and adviser to Late Prime Minister Jawaharlal Nehru and who was one time member of
Planning Commission,  prepared a growth model with which he showed that to achieve a rapid
long- term rate of growth it would be essential to devote a major part of the investment outlay to
building of basic heavy industries.

Mahalanobis strategy of development emphasising basic heavy industries which was adopted
first of all in the Second Plan also continued to hold the stage in Indian planning right up to the
Fifth Plan which was terminated by the Janata Government in March 1978, a year before its full
term of five years.

The main elements of Mahalanobis strategy of development are as follows:

1. Role of Heavy Industry: At the time of independence, Indian economy was dependent
excessively on agriculture. The industrial sector was heavily/dominated by traditional industries
such as textiles and sugar. Therefore, diversification of industries into newer areas was a natural
desire. However, the Indian development strategy went further than that. The Second Plan
Mahalanobis model maintained that if industrialization has to be rapid enough, the country must
aim at developing basic and heavy or capital goods industries. In his two sector model, he
divided the entire economy into investment goods industries (R) and consumer goods industries
(c) We can consider machines to be of two types those that produce directly consumer goods and
those which make only more machines. Mahalanobis model considered development of basic
industries which make “machines to make more machines”. Heavy industry was expected to
increase the country’s capacity for capital formation and the general rate of industrialization so
that India could ultimately become independent of the import of foreign producer goods. Basic
and heavy industries were defined to include industries such as iron and steel, non ferrous metals
machines building, coal and heavy chemicals.

2. Role of Foreign capital & aid recognized:

The strategy considered the role of foreign capital and aid in the development of the country.
The burden of foreign grant would be borne by domestic savings . The need to increase of
exports was emphasized.

3. Role of Agriculture: The Committee admitted agriculture to be the main stay of economy.
The self- sufficiency was must to reduce dependence on Import of food grains. It was reasoned
that industrial growth cannot be achieved without advancements in agriculture.

4. Role of Small industries recognized: In the early years of planning the policies for the
development of small scale sector were promotional through the use of various concessions and
licensing framework. They emphasized the need for promoting greater integration between large
scale and small scale industries. The fourth five year plan stressed for the first time, the
competitive rather than the complementary aspect of the development of small scale and large
scale sectors. Hence there was a shift to protectionist policies toward the small scale sector, in
the form of reservation. The number of items reserved for production in the small sector stood at
around 800 in 1989.

5. Role of Public Sector and Private Sector:

A second major feature of the Indian industrial strategy was to carve out a prominent role for the
public sector in the planning for industrialization. The strategy of development did not lay
emphasis only on industrialization, but it was also an import-substitution oriented strategy. Such
a strategy entails on attempt to replace commodities that are being imported with domestic
sources of production and supply. It is a policy of reduced dependence on imports and self-
reliant growth. Thus there was a strong accent on the creation of domestic capacity in the
direction of producing capital goods to produce more capital goods. Thus Central importance
was assigned to the Public sector and was first articulated in the Industrial Policy Resolution of
1956 and subsequently incorporated in the Second Five Year Plan.

Within the guidelines of state intervention and under the leadership of the Public Sector, the
Private sector was expected to make its contribution in a mixed economy framework as
envisaged by the planners. In areas which were left for the private sector, a clear role was feel for
the state intervention as articulated in the Second Five Year Plan, i.e. The government policy can
influence regulate and control) the private decisions through fiscal measure, licensing and to the
extent necessary, through direct physical allocations, so as to promote and facilitate the
realization of the targets proposed. The Public Sector was thus expected to shape the entire
pattern of investments in the economy.

Achievements of Mahalanobis strategy:

1. The strategy helped in developing of heavy industry and expansion of capital goods sector.

2. Economic infrastructure (in the form of communication, transportation, energy, power,

irrigation etc) has been expanded considerably.

3. Significance expansion of social infrastructure( education, medial and health care facilities)
has been seen over the years.

4. increase in savings and investment rates.

Short comings of Mahalanobis strategy:

1. Agriculture development required considerable investment in new technologies like better
varieties of seeds, irrigation facilities, power supply fertilizers, tools and machinery, pesticides
ect which has been inadequate.

2. Heavy industries highly dependent on import of capital goods. Besides this increased
imports widened the trade deficit an BOP imbalance.

3. Small scale industries were ignored, leading to employment problems.

4. The expansion of public sector led to emergence of high cost economy, characterized by
large capital investments, operational inefficiencies and low return on investment.