Economic Planning
• Planning under a democratic system may be defined as the technical co-ordination, by disinterested experts, of consumption, production, investment, trade and income distribution, in accordance with social objectives set by bodies representative of the nation. Such planning is not only to be considered from the point of view of economics and the raising of the standard of living but must include cultural and spiritual and the human side of life.
Economic Planning refers to the system in which the central authority sets targets, programs and policies to achieve those specified targets and policies within a specific period. The primary purpose is to achieve optimum utilization of the resources. With this social welfare along with growth can be maximized.
PLAN MODELS
Gandhian Model
Mahatma Gandhi was a keen supporter of agriculture. His belief was always to make decentralisation and a self-contained nation. He didn’t follow either centralisation, industrialisation, or state control over the economy. Agriculture-based small businesses and cottage industries were encouraged by him. These beliefs were opposed by the National Planning Commission. Jawaharlal Nehru assured that industrialisation will not hamper the establishment and encouragement of cottage enterprises. The major focus of the National Planning Commission was to construct a power-based economy and also lay down a top-down planning system which was not in synchronization with the Gandhian plan.
The National Planning Commission wished to lay focus on the goals of poverty reduction, setting up more jobs for individuals as well as economic growth. The Gandhian Model was laid down keeping in mind these socio-economic goals and assigning it to the respective process.
Which Five-Year Plan is Known as the Gandhian Model?
The Third Five-Year Plan can be referred to as the Gandhian Model. It commenced from 1961-1966 under the leadership of Pandit Jawaharlal Nehru. The major objectives of the Third five- year plan were the establishment of an independent economy. Such an economy was based on the idea of establishing a self-reliant and self-generating economy, enhancement of agriculture and improvement in the production of wheat. This plan was also known as the Gadgil Yojana. D.R. Gadgil was
the Deputy Chairman of the Planning commission during the tenure of this five-year plan.
Sarvodaya Plan
• The “Sarvodaya Plan” was written in 1950 by Jai Prakash Narayan. Sarvodaya is a Sanskrit phrase meaning ‘development of all’ or ‘universal uplift’. Gandhi used the phrase for the perfection of his own political theory because it appeared in the title of his 1908 translation of John Ruskin’s economics pamphlet, Unto This Last.
• In order to achieve economic development, the Sarvodaya plan proposed and highlighted the significance of agricultural and village industries, particularly small- scale textile and cottage industries. The plan was negative about the use of foreign technology and advocated the Luddite way.
• The plan’s emphasis on decentralised participatory people planning and land reforms was its most significant and widely praised component.
People’s Plan
• M N Roy was the author of the People’s Plan, which was written by the Indian Federation of Labour’s Post-War Re-Construction Committee.
• The object of the Plan is to provide for the satisfaction of the immediate basic needs of the Indian people within a period of ten years. This objective is to be achieved by expanding production and by ensuring an equitable distribution of the goods produced. Therefore, the Plan prescribes increased production in every sphere of economic activity. However, its writers place a strong focus on agricultural growth because they think that unless agriculture which is the largest industry in the nation becomes profitable, people’s purchasing power would not increase.
Bombay Plan
• In 1944, towards the end of WWII, on the heels of the Bengal Famine, the Quit India movement, and the inevitability of independence, JRD Tata and seven other leading industrialists and executives of the era – G D Birla, Purshottamdas Thakurdas, Ardeshir Shroff, Kasturbhai Lalbhai, Ardeshir Dalal, John Matthai, Lala Shri Ram came together to write a manifesto for the Indian economy post-independence. It was dubbed The Bombay Plan, or more formally A Plan of Economic Development for India. Its authors helped set up the Reserve Bank of India (RBI), Federation of Indian Chambers of Commerce and Industry (FICCI), supported the Congress during the freedom struggle, and even sat on the Viceroy’s executive council during WWII.
The Bombay Plan was a two-part statement written by Indian businessmen and academics as they navigated the struggles and constraints imposed on them by the British Raj during WWII, and a way for them to indicate to future governments how they envisioned India’s political economy after independence. The plan aimed to triple India’s GDP in 15 years, and significantly increase India’s per-capita income to improve overall living standards. It planned to achieve these aims through three ‘leaps’, each spread out over five years, analogous to the five-year plans developed by the Nehru government after independence, which prioritised agriculture, industrialisation and then a transition to a services economy.
The Harrod-Domar Growth Model
• The Harrod-Domar models of economic growth are based on the experiences of advanced capitalist economies to analyse the requirements of steady growth in such economy. The Harrod-Domar economic growth model stresses the importance of savings and investment as key determinants of growth.
The model emphasises on the dual character of investment:
It creates income which is regarded as the ‘demand effect’.
It augments the productive capacity of the economy by increasing its capital stock which is regarded as the ‘supply effect’ of investment.
• The Harrod model is based on three growth rates. One, there is the actual growth rate which is determined by the saving ratio and the capital-output ratio. It shows short- run cyclical variation in the rate of growth. Two, there is the warranted growth rate which is the full capacity growth rate of income in an economy. Three, there is the natural growth rate which is regarded as ‘the welfare optimum’. It may also be called the potential or the full employment rate of growth.
The Mahalanobis Model
• Also known as Nehru-Mahalanobis model.
The foundation of this growth model is the preponderance of basic products, which include factories, machinery, tools and other items that make up the industrial market (capital goods, also known as investment goods, are goods that are used to make additional goods).
• The goal was to establish strong industry ties as quickly as feasible in order to increase the system’s productive capacity.
Industrial Policy Resolution 1956 (IPR 1956)
• The Industrial Policy Resolution of 1956 was enacted with the intention of the state dominating the highest echelons of the economy.
• This resolution served as the foundation for the Second Five Year Plan, an attempt to establish the framework for a socialist social structure.
• Three categories were created for industries by this resolution.
• The first group included industries that the government would own outright; the second group included industries where the public sector could be supplemented by the private sector, with the government bearing the exclusive responsibility for establishing new units; the third group included the remaining industries that were to be owned by the private sector.
• The private sector was allowed to handle some industries, but a licencing system maintained state control over the industry.
• New industries were prohibited unless they secured a government licence. The goal of this policy was to advance industry in underdeveloped areas.
• To advance regional equity was the goal of this strategy.
• Even an established industry has to get a licence in order to diversify its production and increase output (creating new kinds of items).
Liberalization, Privatization and Globalization
Liberalization
• The rules and laws which were aimed at regulating economic activities became major hindrances in growth and development. Liberalization was introduced to put an end to these restrictions and open various sectors of the economy.
•
Though a few liberalization measures were introduced in the 1980s in areas of industrial licensing, export-import policy, technology upgradation, fiscal policy and foreign investment, reform policies initiated in 1991 were more comprehensive.
• Some important areas, such as the industrial sector, financial sector, tax reforms, foreign exchange markets and trade and investment sectors which received greater attention in and after 1991.
Deregulation of Industrial Sector
• In India, regulatory mechanisms were enforced in various ways: industrial licensing under which every entrepreneur had to get permission from government officials to start a firm, close a firm or decide the amount of goods that could be produced private sector was not allowed in many industries some goods could be produced only in small-scale industries controls on price fixation and distribution of selected industrial products.
• Many of these limitations were lifted by the reform measures that were implemented in and after 1991. Almost all product categories were exempt from industrial licencing, with the exception of alcohol, cigarettes, hazardous chemicals, industrial explosives, electronics, aerospace and pharmaceuticals and medications.
• The only industries which are now reserved for the public sector are a part of atomic energy generation and some core activities in railway transport. Numerous products made by small-scale businesses are now deserving. The market has been permitted to set prices in the majority of industries.
Financial Sector Reforms
• Financial sector includes financial institutions, such as commercial banks, investment banks, stock exchange operations and foreign exchange markets. The Reserve Bank of India (RBI) oversees the regulation of the financial industry in India.
• The RBI decides the amount of money that the banks can keep with themselves, fixes interest rates, nature of lending to various sectors, etc.
• One of the major aims of financial sector reforms is to reduce the role of RBI from regulator to facilitator of the financial sector. This implies that a number of choices made by the financial industry might be permitted to be made without first contacting the RBI.
• The reform policies led to the establishment of private sector banks, Indian as well as foreign.
• The cap on foreign investments in banks was increased to approximately 74%. The ability to open new branches and streamline their current branch networks without RBI clearance has been granted to banks that meet specific requirements.
• Though banks have been given permission to generate resources from India and abroad, certain managerial aspects have been retained with the RBI to safeguard the interests of the account-holders and the nation.
• Foreign Institutional Investors (FII), such as merchant bankers, mutual funds and pension funds, are now allowed to invest in Indian financial markets.
Tax Reforms
• Tax reforms are concerned with the reforms in the government’s taxation and public expenditure policies, which are collectively known as its fiscal policy.
• Indirect and direct taxes are the two categories of taxes. The category of direct taxes includes levies on both corporate earnings and individual income. With the belief that high income tax rates were a major contributing factor to tax evasion, there has been a steady decrease in individual income taxes since 1991.
• It is now widely accepted that moderate rates of income tax encourage savings and voluntary disclosure of income. The company tax rate has gradually decreased from its previous extremely high level.
• Efforts have also been made to reform the indirect taxes, taxes levied on commodities in order to facilitate the establishment of a common national market for goods and commodities.
• In 2016, the Indian Parliament passed a law, Goods and Services Tax Act 2016, to simplify and introduce a unified indirect tax system in India. This law came into effect from July 2017. This is expected to generate additional revenue for the government, reduce tax evasion and create ‘one nation, one tax and one market’.
• Simplifying is another aspect of reform in this field. Many procedures have been made simpler, and the rates have also been significantly reduced, in an effort to encourage taxpayers to comply with the law better.
Foreign Exchange Reforms
• The first important reform in the external sector was made in the foreign exchange market. In 1991, as an immediate measure to resolve the balance of payments crisis, the rupee was devalued against foreign currencies. As a result, there was a rise in foreign exchange influx.
• It also set the tone to free the determination of rupee value in the foreign exchange market from government control. Now, more often than not, markets determine exchange rates based on the demand and supply of foreign exchange.
Trade and Investment Policy Reforms
• Liberalization of trade and investment regime was initiated to increase international competitiveness of industrial production and also foreign investments and technology into the economy.
• The aim was also to promote the efficiency of local industries and adoption of modern technologies.
India was imposing quantitative import limits in an effort to safeguard its own businesses. This was promoted by maintaining extremely high tariffs and strict import controls. Due to these regulations, the industrial sector’s expansion was slowed and its efficiency and competitiveness were decreased.
• The trade policy reforms aimed at (i) dismantling of quantitative restrictions on imports and exports (ii) reduction of tariff rates and (iii) removal of licensing procedures for imports.
• Import licencing was done away with the exception of industries that were environmentally delicate or dangerous.
• Quantitative restrictions on imports of manufactured consumer goods and agricultural products were also fully removed from April 2001. Export duties have been removed to increase the competitive position of Indian goods in the international markets.
Privatization
• It means giving up control or direction of a business held by the government. There are two ways that government- owned businesses can become private: either they are sold outright or the government removes itself from administration and ownership of the public sector businesses.
• Privatization of the public sector enterprises by selling off part of the equity of PSEs to the public is known as disinvestment. The purpose of the sale, according to the government, was mainly to improve financial discipline and facilitate modernisation.
• It was also envisaged that private capital and managerial capabilities could be effectively utilized to improve the performance of the PSUs.
• The government anticipated that privatisation would give FDI a significant boost. Additionally, the government has tried to increase PSU efficiency by granting them managerial autonomy. As an illustration, certain PSUs have been given unique status as miniratnas, navratnas, and maharatnas.
Globalization
• Although globalization is generally understood to mean integration of the economy of the country with the world economy, it is a complex phenomenon.
• It is an outcome of the set of various policies that are aimed at transforming the world towards greater interdependence and integration.
• It involves creation of networks and activities transcending economic, social and geographical boundaries. Globalization attempts to establish links in such a way that the happenings in India can be influenced by events happening miles away. It is establishing a world without borders or uniting the entire world.
Outsourcing
• One of the significant results of the globalisation process is this. When a business engages in outsourcing, it means that it is hiring regular services from outside, primarily from other nations, that were formerly handled internally or domestically (such as security, computer services, legal advice, and advertising, which are all handled by different company divisions).
• As a form of economic activity, outsourcing has intensified, in recent times, because of the growth of fast modes of communication, particularly the growth of Information Technology (IT). Many of the services such as voice-based business processes (popularly known as BPO or call centres), record keeping, accountancy, banking services, music recording, film editing, book transcription, clinical advice or even teaching are being outsourced by companies in developed countries to India.
• With the help of modern telecommunication links including the Internet, the text, voice and visual data in respect of these services is digitized and transmitted in real time over continents and national boundaries.
• Most multinational corporations, and even small companies are outsourcing their services to India where they can be availed at a cheaper cost with reasonable degree of skill and accuracy.
• The low wage rates and availability of skilled manpower in India have made it a destination for global outsourcing in the post-reform period.
Benefits of the LPG Reforms
• The LPG reforms in India have had significant positive impacts on the Indian economy. They helped overcome a balance of payments crisis, reduced dependence on foreign loans and helped the government address its fiscal deficit by privatizing inefficient PSUs. The policy also fostered economic growth by reducing government restrictions, encouraging private market entry, and establishing India as a major developing country. There is a change in occupational structure with a decline in the percentage share of the labour-force in the agricultural sector and a rise in the services sector. The Economic Census of India estimates that around 41.89 million rural people are employed in non-agricultural establishments which registered a growth rate of 4.56 % during 1998- 2005. Steady transition to urbanisation over the years is leading to the decline in the rural share in population, workforce and GDP of the country. Foreign exchange reserves have increased by 20 times and foreign direct investment (FDI) by 150% as a result of the economy’s opening up. Between 1990–1991 and 2003–2004, international investment which comprises both foreign direct and foreign institutional investment rose from roughly US $100 million to US $150 billion. During the reform era, India was regarded as a prosperous exporter of engineering items, auto components, textiles, and IT software.
• However, the reforms faced criticism for their negative impacts on the agriculture sector, income inequality, and difficulties faced by local businesses. Following the reform, the agricultural sector’s contribution to the Indian economy has gradually decreased. Traditionally accounting for 29% of India’s GDP in 1991, agriculture currently only makes up roughly 15% of the country’s GDP. With more than 56% of the workforce, Agriculture and Allied Activities has the lowest GVA per worker in terms of levels.
Despite these challenges, the LPG Reforms allowed India to emerge from an economic crisis, reduce its dependence on loans, and become a major developing economy