VIII

The Rise and Fall of Indian Planning

Pronab Sen

For the past seventy years since Independence, India has followed a path of planned development, which has by and large served it well. National planning came into prominence in the fifties and sixties with India’s decision to adopt planning as the centrepiece of its development strategy, and its sequential adoption by many developing countries as they emerged from colonialism.¹ This period witnessed tremendous activity in academic research on planning models and methodologies not only in developing, but also in developed countries.

National planning came under attack in the late-seventies from international multilateral agencies (the World Bank and IMF) as well as the academic community. By the early eighties, national planning was in full retreat and was retained by just a few countries such as India. However, in the late nineties, national planning began to make a comeback, although with a changed nomenclature. Ironically, this process was led by the World Bank itself that required all countries seeking its assistance to prepare a ‘Poverty Reduction Strategy Paper’ (PRSP), which was nothing but national plans under a different rubric.

Unfortunately, during the intervening two decades, planning had disappeared from the academic radar leaving little capacity for preparing PRSPs except in a few countries like India. Nevertheless, planning has re-established its importance in country after country since then. In reverse irony, India, which was the mother lode of national planning outside the communist world, brought planning to an abrupt end with the dissolution of the Planning Commission in 2014.

This essay seeks to place economic planning in India both in its historical context and also in terms of the process leading to its end. There has been a tendency in recent years to treat the development strategy followed by India as an undifferentiated continuum, with little substantive variation from plan to plan. Nothing is further from the truth. Indian development strategies have evolved from one plan to another in response to the objective conditions of the economy and to the challenges of the moment. Some of these changes have been strikingly bold and original, others more modest; but change there has been.

The Golden Years

The first Five Year Plan was not really a plan at all, but an agenda for the reconstruction of a badly damaged country following the Partition. The Second Five Year Plan set the stage for formal planning. Its politically mandated objective was to increase the growth rate of GDP to the maximum feasible given the limitation of resources. The principal constraint was the availability of savings, and existing growth theories and models held little hope for any dramatic improvement over an extended period of time. The decision to convert the savings rate from a constraint to an additional objective bore the imprimatur of Professor P.C. Mahalanobis, who was not a politician but a technocrat. The emphasis on establishment of heavy industries through public investment, both as a means of rapid industrialization and raising the low savings rate, was certainly original in its conception.² It reflects the confidence that the political leadership of the time, led by Jawaharlal Nehru, had in the analysis and judgement of technocrats in choosing a path largely untrodden. The phased reduction of the savings constraint and the need for maximizing short-run growth required planning over multiple time horizons leading to the perspective plan (i.e. long-term planning) being set for fifteen years, while the operative plan was for five years, and annual plans were to concretize resource allocations.

The Third Plan, conceived during a period of emerging balance of payments problems and falling international prices of primary products, led to a rethinking of the strategy. A new constraint—foreign exchange—was emerging and had to be considered in addition to domestic savings. There were two possible ways to address this issue: (a) increased emphasis on exports; or (b) reducing imports through domestic production. The first would require derailment of the strategy to increase savings and the long-run productive potential of the economy. Thus, the Third Plan introduced the concept of ‘import substitution’ as a strategy for industrialization and growth. The genesis of this strategy was both political and technocratic. While gelling well with the political desire for national self-reliance, it was consistent with the ‘export pessimism’ of mainline economics of the time. Whatever be the merits of this strategy in hindsight,³ it received considerable attention, and even acclaim from academics and practising policymakers, and was widely emulated by other developing countries.⁴

There were two other notable institutional developments during this period. The first was recognition of the need to decentralize planning that was mandated by the federal nature of India’s Constitution. Indian states were to undertake state-level plans within the broad framework and resource allocation of the national plan. Technical support was provided by the Centre to the states for this purpose. Second, the import-substitution strategy required the government to intervene in the pattern of industrialization beyond the role of the public sector envisaged in the Second Plan. Detailed sectoral planning using input–output models to determine optimal industry-wise capacity creation by the private sector was institutionalized at this time.

The Fourth Plan came after one of the most difficult periods of Indian economic history. The period from 1965 to 1967 witnessed one of the worst droughts and consequent famines in large parts of north India. At the same time, all aid was cut off to India by donor countries on account of the Indo-Pakistan War of 1965, including food. This traumatic experience brought food security to the forefront of policy imperatives, which was further buttressed by the observation that sustained industrialization was not possible without adequate provision of wage-goods.⁵ Thus, a third constraint was introduced into growth theory—the wage-goods constraint. The necessary efforts to address the agricultural constraint meant greater involvement of the Centre in agricultural development—a state subject under the Constitution. This Plan was also characterized by the introduction of another concept that became popular in the international discourse much later—environmental sustainability.

The Fifth Plan too was path-breaking in that it recognized that growth and industrialization by themselves would not necessarily improve the living conditions of the poor—a recognition which only recently finds echo in the development position of the World Bank. The strategic thinking in this instance was purely politically driven by one of the most potent slogans of independent India—Garibi Hatao⁶—coined by Indira Gandhi. The concepts of ‘minimum needs’ and directed anti-poverty programmes were innovations of this recognition. However, this also involved the Centre treading further into the domain of the states. The Fifth Plan also marked a point of departure from the Mahalanobis model and adoption of the Harrod–Domar model. This was a clear pointer to the view that was emerging at that time that savings may no longer be the main constraint to long-run growth.⁷ In effect, therefore, it could be moved back to being a constraint instead of an objective.⁸

Disenchantment and Demoralization

The Sixth Plan represented a shift towards a more ‘technocratic’ planning approach, where the plan targets became more ‘realistic’ than ‘visionary’, as they were in the preceding four plans. This persisted for the next three plans as well. It also marks the beginning of disenchantment with planning within the political leadership.

Nevertheless, this plan, for the first time, explicitly recognized the success of the Mahalanobis heavy industrialization strategy in raising the national savings rate. That had created a situation where the savings constraint was no longer binding and excess capacities were becoming evident in certain industries. This especially applied to steel and petroleum products in which India had moved from being a large importer to a net exporter. A shift in the pattern of industrialization, with lower emphasis on heavy industries and more on infrastructure, began here. But in the absence of a compelling vision, this plan was, at best, an exercise in incrementalism.

The Seventh Plan represented the culmination of this shift in perspective. It may be termed as the ‘infrastructure’ plan. The government was slowly withdrawing from leading the economy. There was a re-evaluation of the import-substitution strategy and a shift towards a more liberal trading regime. The strategic change was not decided by technocrats but by the political leadership, especially Prime Minister Rajiv Gandhi, who did not believe in planning and made it known to all.⁹ However, the technocrats were to convert the politically dictated strategy to an operational blueprint. In hindsight, a demoralized Planning Commission did a half-hearted job and, in particular, did not clearly address the potential risks of the new strategy.

The Eighth Plan was overtaken by the foreign exchange crisis of 1991 triggered by the Gulf War, and the economic reforms that came in its wake. The dramatic events and policy initiatives of the two-year plan holiday period between 1990 and 1992 demanded a full reappraisal of the planning methodology. The Eighth Plan represents the first efforts at planning for a market-oriented economy. Although the shift in planning did not entirely take place, the economy performed unexpectedly well, recording an average annual growth rate of 6.7 per cent.¹⁰ However, the Planning Commission could claim little credit for this performance.

The growth momentum could not be maintained in the Ninth Plan, even though the planning methodology had adjusted to reflect the new conditions. It recognized that private investment was central to attaining Plan targets and was driven by the functioning of the financial sector of the country. For the first time in Indian planning, the financial sector became an integral part of the Plan. This added a fourth constraint —the financial constraint—which is quite distinct from the savings constraint. It recognizes that weaknesses in the financial sector can potentially prevent the economy from absorbing investible resources available.

The other critical point about the Ninth Plan is that again, for the first time in the Indian planning history, it recognized the possibility that demand rather than investible resources could be the main constraint to growth and, as a consequence, fiscal policy needed to be brought into the planning framework rather than being left entirely to the finance ministry.¹¹ The warning was not heeded by the economic administration in the country. Pressures of fiscal rectitude following implementation of the Fifth Pay Commission award led to a sharp reduction in public investment for the Centre and states, precipitating a cyclical economic downturn. Agricultural failure in three out of the five years exacerbated the problem with tight monetary measures for checking inflation adding to fiscal pressures.

Recovery and Relapse

The Tenth Plan marked the return of visionary planning to India after a long period of incrementalism. It sought to double national per capita income and create a hundred million jobs in the next ten years. These targets were largely motivated by the emerging demographic pattern. The single biggest challenge to Indian planners and policymakers at least for the next two decades would be to provide employment to a labour force growing faster than ever before. Demographic projections indicated that although there might be a reduction in the rate of population growth, the growth rate of the working-age population had peaked during the Ninth Plan period at about 2.4 per cent per annum and would decline only gradually thereafter. The growth rate of the labour force, however, was likely to be slower at 1.8 per cent per annum, but this needed to be seen against the past record in creation of work opportunities. During the eighties and early nineties, the average rate of growth of employment—a proxy for work opportunities—had been around 2 per cent per year, but dropped sharply to around 1 per cent during the latter part of the nineties. Therefore, if the immediate past trends in work creation continued into the future, the country faced the possibility of adding about 2.5 million people to its unemployed each year. Such a situation was clearly insupportable.¹²

It was further realized that creation of work opportunities in the macro sense in itself may not solve unemployment and poverty. Since the growth of the labour force was regionally uneven, the spatial pattern of creation of work opportunities became extremely relevant. It would have been naïve to believe that there were no barriers or costs to large-scale internal migration. This confluence was a planning issue, which could not be left entirely to markets. It was noted that there would always be a tendency for private investment to move to developed regions, which would accentuate regional disparities. Unless public intervention, particularly in infrastructure, could redress the initial imbalance, matters would become progressively worse.¹³ Therefore, the Tenth Plan emphasized regional balance and for the first time had a separate plan document on states.¹⁴

The Eleventh Plan too was visionary in a different way: it introduced the concept of ‘inclusive growth’.¹⁵ Along with concerns on employment and infrastructure,¹⁶ it focused on human resources, especially health and skill-development. The prescience of this became evident during the course of the Plan. As the economy accelerated to a 9 per cent growth trajectory, skill shortages emerged in almost all sectors other than agriculture. By the middle of the Plan it was clear that skills, and not investible resources, had become the binding constraint on the economy, and would remain so for the foreseeable future. On the other hand, underemployment of the unskilled or semi-skilled labour continued to pose challenges. Thus, increasing alternative work opportunities in rural areas was a key element of the Plan.¹⁷ But the objectives also led to a sizeable increase in the Centre’s involvement in state matters. The Plan was also overtaken by global events. The global financial crisis of 2008–09 and the severe drought of 2009 took their toll. Although the economy recovered fairly rapidly, the growth momentum had been damaged. In addition, the success of the Tenth and the early years of the Eleventh Plan in raising the growth rate of the economy and incomes of the rural poor led to a sharp increase in demand for non-cereal foods. Since the supply response was inadequate, food inflation accelerated and continued to remain in double digits.

Therefore, the Twelfth Plan was not framed under favourable circumstances. The global economy was slow in recovering and the Indian economy too had lost its momentum. Corporate investment, which had led the high growth performance of the Tenth and Eleventh Plans, was floundering for several reasons, including tight monetary policy and regulatory bottlenecks. By now it was clear that the Indian economy was substantially integrated with the global economy and its growth path could no longer be viewed independently of international developments. The Plan, therefore, was less about new initiatives and more about bringing coherence in the development policy environment. Its basic premises remained more or less the same as that of its predecessor with focus on the measures necessary to improve the impact of initiatives.

The Path to the End

The national planning experience in India is most instructive in terms of the processes that were employed and their impact on the resentment that built up across a range of stakeholders. The Second and Third Plans had very little by way of consultations, but that did not really affect ownership or accountability since there was a very high level of decentralization. The plans scrupulously stayed away from areas in the domain of the states. They were also not overly prescriptive with regard to the domains of most Central ministries other than laying down the broad contours of policy. In view of the limited coverage of these plans, both the information and the feedback needs were relatively modest and could be obtained without any great information flow from the subordinate units.

The downside of this hands-off approach was that since each state was left to its own devices without any real central guiding principle, they formulated their own plans independent of each other. The net result was a wide array of development experiences across the states of the country, leading to increasing divergence between them. The second problem was that there was no rational basis for the Centre to determine the amount of central funds to be allocated to each state for their development needs. This led to a certain degree of resentment among states that accused the Centre of allocating funds on a political basis rather than on any objective economic or development criteria. This was despite the fact that the Centre and almost all states were governed by the same political party until the early seventies. Matters worsened subsequently as more states came under other parties.

This arms-length arrangement began to change from the Fourth Plan and gained momentum from the Fifth. In the forty years since, the encroachment of the Centre into domains of the states has increased progressively from agriculture to social protection (anti-poverty programmes) to a wide variety of social services. As a consequence, the national plan increased steadily in both scope and level of detail.¹⁸ Correspondingly, the planning process too became increasingly elaborate and complex. In particular, formal political consultations became necessary. This was carried out through meetings with state governments usually led by the chief ministers. The main consultation was on ‘the Approach Paper to the Plan’. The Approach Paper and the final plan document were placed before the National Development Council (NDC)—headed by the prime minister and including the Union Cabinet and all state chief ministers—for approval, at which time the political leadership in principle could demand changes in these documents.

This procedure could have elicited a fair degree of buy-in, provided that the follow-up processes were better. As things stood, state-level consultations were meticulously documented, but no feedback was ever provided on which suggestions were accepted and which were not, along with appropriate justification. States, quite rightly, felt the consultation was merely a façade for the Centre to do as it pleased. The NDC meetings were even more pro forma with the states convinced that their views did not count. The decentralization process progressively worsened over the years and steadily eroded the degree of buy-in, first among states and then even among the ministries. Its effects on accountability were even worse. Originally, the Centre transferred a block grant to states for development purposes, which was used by the latter to fund programmes designed and implemented by them.¹⁹ Later, carve-outs were made from the total state allocations for specific purposes of national importance, with the design and implementation left to the discretion of the state governments. Up to this point, there was considerable ownership of the Plan by the states despite reservations on consultation. This began changing from the Fifth Plan with Central ministries becoming more involved in matters belonging to the domain of the states through Centrally Sponsored Schemes (CSS) implemented by the states but partially funded by the Centre.²⁰

Initially, the CSS were designed by the Central ministries. The unified designs were then imposed on all participating states. States resented the imposition and had little accountability for failure of the CSS. To make matters worse, the CSS reduced funds available for states from the Central allocations, as well as the amount available from their own funds. This was yet another blow to ownership by the states and a source of even greater resentment. Given the complexity that was introduced by the CSS, which at their peak numbered more than 350, the state governments, usually led by their chief ministers, had to come to the Planning Commission to finalize the state plans. This was quite rightly considered humiliating by state politicians and gave rise to a deep-seated anger amongst them.

During this period, the Planning Commission did not interfere with the design and implementation of the CSS, except to undertake cost-benefit appraisal of the proposed project. This approach ensured that there was full ownership and accountability of the schemes, at least in the Central ministries. Later, however, the Planning Commission also began interfering with the design of the CSS. This was the kiss of death, since it removed both ownership and accountability among not only the states but also the Central ministries. To a large extent, the eventual demise of the Planning Commission was probably the outcome of this over-reach, since it led to widespread resentment in all other tiers of government.

Rise of the Phoenix

One of the earlier acts of Prime Minister Narendra Modi, who carried his resentment as a state chief minister to New Delhi, was to announce the dissolution of the Planning Commission and its replacement with a new entity—the NITI Aayog.²¹ The intent was made amply clear—old-style Central planning was out; a new-style reforms agenda was in. With this step, India, supposedly the world’s last surviving bastion of Central planning, would join the rest of the world in embracing a market-led process of growth and development. It was, however, quite clear even at the outset that the NITI Aayog would eventually have to be mandated to develop a formal strategic plan for the country, even though the nomenclature may be changed.²²

The NITI Aayog has been entrusted with developing a fifteen-year vision, a seven-year strategy and a three-year implementation framework. Although the term ‘plan’ is scrupulously avoided, it is quite obvious that planning is back. This is a good thing. After all, the principal function of planning is to evolve a shared commitment to a common vision and an integrated strategy among all stakeholders. No development strategy can be successful unless each component of the system works towards a common purpose with the full realization of the role that it has to play within an overall structure of responsibilities.²³ The NITI Aayog mandate meets this requirement, but the devil is in the details.