Macroeconomics

The future of economic planning in India

  • Blog Post Date 09 September, 2014
  • Perspectives
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Economic planning has been a central tenet of India’s development strategy since independence. In this article, Pronab Sen – former Principal Adviser to the Planning Commission of India – presents his views on the criticisms leveled against Indian planning from time to time, and reflects upon the continuing utility of planning in the future.



Since its independence more than 65 years ago, India has followed a path of planned development, which has by and large served it well. However, the continuance of economic planning as a central tenet of the development strategy of the country should not be based on mere inertia, but on a realistic assessment of its relevance in the future. It is, therefore, entirely appropriate that we take stock of our experiences with planning, particularly with the traditional input-output based planning models, and reflect upon its continuing utility in the future.

Key achievements of planning in India

Our development strategy and attitudes and approaches towards growth and development, as reflected in the Plans, have undergone various shifts over the years in response to the objective conditions of the economy and challenges of the moment. Some of these changes have been strikingly bold and original, others more modest; but change there has been. Whatever be the criticism of Indian planning, it cannot be accused of being either static or unimaginative. By and large, the track record too has not been bad. We have managed to decisively reverse the trend of falling per capita incomes that had characterised the first 50 years of this century, and have steadily accelerated our growth rates from an average of 3.5% per year during the 30-year period from 1950 to 1980 to 5.5% during the 1980s to 6.5% during the 1990s and further to 7.6% in the 2000s. Food security is no longer a matter of pressing concern, and the scourge of famines seems to have been decisively eliminated from the country. The incidence of poverty has also been brought down, although not as fast as we would have liked.1 Social indicators have shown significant improvement from the abysmally low levels that existed at the time of independence.

Criticisms of Indian planning

Despite these achievements, however, in recent years Indian planning has come under attack from a number of quarters, both within and outside the country. Countries which for long had centrally-planned economies have abandoned planning, at least overtly. It sometimes comes as a surprise to people abroad that India continues to preserve planning as a central pillar of its development strategy despite having had a vibrant market economy for many years now.

Within the country, dissatisfaction with planning emanates from two main directions. First, there is a view that planning is synonymous with statism, and is symptomatic of a desire of the government to intervene excessively in economic matters. Second, the fact that a number of developing countries have performed better than India by following different growth strategies is laid at the door of planning. Much of the criticism is misinformed, since it represents not a criticism of planning as such, but either of its ideological underpinning or of the success it has achieved in India.

In so far as the first criticism is concerned, it relates to a particular form of planning – namely, investment planning, whereby the government determines the quantum of investment that will go into any sector or even industry. The argument appears to be that central planners are less competent to take and direct investment decisions than entrepreneurs operating under the discipline of market forces. While this view is certainly true at the present stage of development of the Indian economy, there are two points that need to be made to place the issue in perspective.

First, it needs to be realised that investment planning in its pristine sense has not existed in India at least for the last thirty years, when the dilution and eventual dismantling of the industrial licensing regime was initiated.2 Second, investment planning in the sense of working out the investment requirements of different sectors of the economy in order to ensure inter-sectoral consistency continues to be valid, and will be so until such time as India becomes a capital-surplus country and the importance of public investment diminishes significantly. Interestingly enough the Indian corporate sector appears to share this view. The experience at the Planning Commission indicates that the single largest user of the Plan projections is in fact the private corporate sector, which recognises the value of sectoral forecasts made in a consistent, economy-wide framework for its own investment decisions.

The second stream of criticism is even less valid, at least as far as the manner in which it is usually couched. The first major error that is commonly made is to base the criticism on inter-country comparisons and not on the basis of counterfactual simulations. The simple fact is that development experiences will differ across countries for a host of reasons, of which the approach taken towards development strategy is only one. Political, social and cultural factors are just as important, and it is difficult to make allowances for these in a cross-country context. The second error lies in assuming that the countries with which India is being compared do not have planning as well. This is generally simply not correct. Almost every country which has performed well in recent years has strong planning systems, perhaps even stronger and more empowered than ours.

Functions of planning that continue to be valid

The principal function of planning, especially in a federal system, is to evolve a shared vision of and commitment to the national objectives and development strategy not only in the government at all levels, but also among all other economic agents. No development strategy can be successful unless each component of the economy works towards a common purpose with full realisation of the role it has to play within an overall structure of responsibilities. For this to happen, the vision and strategy have to be clearly articulated in a formal document that is readily available to all players in the national economy. This function will always remain valid, and its proof is that there is no country in the world which does not have such a vision articulated at the highest level of government.3

Another function of planning which needs to be recognised is that in a dynamically evolving world, conditions change continuously and the development strategy also has to evolve in a consistent and proactive manner. This can only be done through a system which tracks emerging trends both in the international and domestic economies, analyses the opportunities and dangers, and indicates the direction for policy change.

An issue which is often raised is whether there is still relevance for the Planning Commission in the new scenario or can its functions be carried out by some other agency. Arguably, there are certain functions which the Planning Commission is best equipped to perform. For instance, a body like the Planning Commission is required in order to address the national objectives of poverty alleviation, population control, employment generation and balanced regional development in a holistic manner. Leaving these issues to sectoral ministries runs the danger of the inter-linkages and synergies being overlooked. The Planning Commission is also best equipped to evolve a long-term economic strategy for the development of the country.

Another area where the Planning Commission is relevant is in coordinating the economic activities of the central and state governments and among the central ministries. There is no other agency that is better equipped to play this role. India is a federal country in which the authority and responsibility for handling various public activities are vested in different tiers of the government by our Constitution. Coherent policymaking, however, requires that some agency ensures that these different and autonomous tiers do not work at cross-purposes. For this it is essential to have an institution which has an economy-wide mandate. This function will become increasingly more important in the future as the process of globalisation continues. Under the Constitution, the authority to enter into international treaties and arrangements vests only in the central government. Thus, there is always the possibility that the developmental responsibilities which are vested in the states may come in conflict with international obligations unless there is a coordinating mechanism which can ensure convergence.

Looking ahead

All this is not to say, however, that the planning methodology should not change so as to reflect the new economic realities and the emerging requirements. It has, it must, and it will. Let me then turn to what I perceive to be the role of modeling techniques in meeting the demands that are placed on planning systems and planners from time to time. First of all, let me reiterate the point that I have made earlier – inter-sectoral balancing and investment planning, at least in the sense of working out the optimal investment programme, which has been the centre-piece of Indian planning since the Second Plan, will continue to remain important in the foreseeable future. Despite the much greater openness of the Indian economy, our very size and diversity will ensure that imports will continue to play a relatively small role in the economy, except in a very few products. Thus, the central planning problematique of estimating sectoral investment needs will remain, and consequently so will the use of traditional input-output based planning models.

A main issue in this context is that the nature of production processes has changed dramatically in the past decade or so, especially in terms of the usage of information technology and other services. Most input-output systems have simply not incorporated these linkages in any meaningful manner, although they have now become crucial to any sectoral analysis of the economy. I recognise of course that this is not easy to do since the standard assumptions may not, and probably do not, apply in such cases, but it can lead to serious projection errors. Considerable research needs to go into this.

Another issue relates to the ability of the planner to influence actions of private investors in terms of products and processes. In the absence of instruments for directing private investment allocations, a decision has to be taken as to the level of disaggregation at which indirect policy measures can be operational. By and large, a little thought should convince one that while policy can exert some influence at the broad activity level, there will be very little traction at the product level.

A more important conceptual issue relates to the nature of the planning problem itself. In a controlled or directed economy, it is only necessary to work out a feasible path from the initial condition to the target. In a largely market economy this is not sufficient. Although working out the traditional feasible path continues to be necessary, it needs to be complemented by an assessment of the path the economy is likely to take on a business-as-usual basis. The planning problem then is how to move from the projected path to the desired. Thus, in addition to the standard planning model, there is need to have two other models: (a) a projection model; and (b) a model which adequately captures the effect of policy measures on key behavioural parameters. At the present state of modeling knowledge, these additional dimensions can be captured to some extent by macro-econometric forecasting and computable general equilibrium (CGE) models respectively.4 Considerable work, however, needs to be done in developing a multi-model framework which can allow such analysis to be done in an integrated manner.5

A significant beginning in this direction was made in the Ninth Five Year Plan. In sharp contrast to the past, the Ninth Plan did not lay down investment patterns in a deterministic manner. It indicated the sectoral investment requirements, the investment that is likely to occur and thereby the areas which may receive excessive or insufficient resources. Such an analysis focuses attention on the sectors which require policy change in order to achieve the desired targets. However, the projected sectoral investments were obtained from a partial equilibrium approach, rather than a proper econometric model. This approach was further strengthened and refined in the Tenth Plan with macro-econometric models being specifically commissioned for the Plan. The Eleventh Plan went even further and attempted to use existing CGE models to inform policy choice.

The Twelfth Plan extended the formal modeling approaches of the three earlier Plans by undertaking a scenario-building exercise using a systems approach, with very good effect indeed. In future years this cocktail approach to modeling for Plans will need to be strengthened and made more precise and accurate.

This article is a shorter version of an essay titled “Economic planning: the past and the future” prepared by the author for the International Symposium in honour of Prof. Y.K. Alagh, organised by the Institute for Human Development (IHD) in New Delhi in March 2014.

The author is former Principal Adviser, Planning Commission of India.

Notes:

  1. There has been a sharp improvement in the pace of poverty reduction during the post-2004 period, which coincides with the period during which there was focus on creating rural off-farm work opportunities.
  2. The dilution of the licensing regime actually begins in 1984 and not 1991 as popularly believed.
  3. The Poverty Reduction Strategy Paper (PRSP) prepared by the World Bank for numerous developing countries are nothing but plans in disguise.
  4. Dynamic general equilibrium models may, someday, prove very useful in this regard, but we are not there yet.
  5. It does not seem possible, at least at this stage, that one grand unified model will be able to address all the dimensions of the planning problem as outlined above.
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