Category : UPSC
Planned economy is one in which the state owns (partly or wholly) and directs the economy. While such a role is assumed by the State in almost every economy, in planned economies, it is pronounced: for example in communist and socialist countries- former USSR and China till the 1970's. In such a case a planned economy is referred to as command economy or centrally planned economy or command and control economy. In command economies, state does the following
In a market economy, it is the opposite- state has a minimal role in the management of the economy- production, consumption and distribution decisions are predominantly left to the market. State plays certain role in redistribution. State is called the laissez faire state here. It is a French phrase literally meaning "Let do,"
Indicative plan is one where there is a mixed economy with State and market playing significant roles to achieve targets for growth that they together set. It is operated under a planned economy but not command economy.
Difference between Planned Economy & Command Economy
The difference between planned economy and command economy is that in the former there may be mixed economy and while in the latter Government owns and regulates economy to near monopolistic limit.
Command economies were set up in China and USSR, mainly for rapid economic growth and social and economic justice but have been dismantled in the last two decades as they do not create wealth sustainably and are not conducive for innovation and efficiency. Cuba and North Korea are still command economies.
An overview of History of Economic Planning in India
India being devastated economically after more than two centuries of colonial exploitation resulting in chronic poverty. Eradication of poverty was the driving force for the formulation of various models of growth before Independence.
In 1944 leading businessmen and i industrialists (including Sir Purshotamdas Thakurdas, JRD Tata, GD Birla and others) put forward "A Plan of Economic Development for India" -popularly known as the 'Bombay Plan'. It saw India's future progress based on further expansion of the textile and consumer industries already flourishing in cities like Bombay and Ahmedabad. It saw an important role the State in post-Independent India: to provide infrastructure, invest m basic industries like steel, and protect Indian industry from foreign competition.
Visionary engineer Sir Mokshagundam Visvesvarayya pointed to the success of Japan and insisted that 'industries and trade do not grow of themselves, but have to be willed, planned and systematically developed' - in his book titled "Planned Economy for India" (1934) Expert economists and businessmen were to do the planning. The goal was poverty eradication through growth.
The Indian National Congress established a National Planning Committee under the chairmanship of Jawaharlal Nehru. It (1938) stated the objective of planning for development was to ensure an adequate standard of living for the masses, in other words, to-get rid of the appalling poverty of the people?. It advocated heavy industries that were essential both to build other industries, and for Indian self- defence; heavy industries had to be in public ownership, for both redistributive and security purposes; redistribution of land away from the big landlords would eliminate rural poverty.
During the 1940's, the Indian Federation of Labour published its People's Plan by MN Roy that stressed on employment and wage goods. SN Agarwala, follower of Mahatma Gandhi published Gandhian Plan that emphasized on decentralization; agricultural development; employment; cottage industries etc.
Main Goals of lndian Planning
After Independence in 1947, India launched the five year plans for rapid growth.
Planning has the following long term goals
Economic growth is the increase in value of the goods and services produced by an economy. It is conventionally measured as the percent rate of increase in real gross domestic product, or real GDP- real means adjusted to inflation. Growth measures quantitative increase m goods and services.
Economic development refers to growth that includes redistributive aspects and social justice. GDP shows growth and not welfare and human development aspects like education, access to basic amenities, environmental quality, freedom, or social justice. Economic growth is necessary for development but not sufficient.
Growth is expected to spread to all sections and regions; raise resources for the Government to spend on socio-economic priorities etc. It takes a long time for growth to trickle down to all people and regions. Therefore, State plans-for an expeditious process of inclusive growth.
Modernization is improvement in technology. It is driven by innovation and investment in R & D. Education is the foundation of modernization. The more modernized the economy, the greater the value created by it.
Self-reliance means relying on the resources of the country and not depending on other countries and the MNCs for investment and growth. India embarked on the goal partly due to the colonial experience and partly due to the goal of orienting growth to development and poverty eradication. Nehru-Mahalanobis model of growth that closed Indian economy arid relied on basic industries is the main plank for self-reliance.
The term self-reliance should not be confused with self-sufficiency - the former means depending on resources of the country and avoid dependence on external flows; the latter means that the country has all the resources it needs. No country can be self- sufficient.
Social justice means inclusive and equitable growth where inequalities are not steep and benefits of growth reach all- rural- urban, man-woman; caste divide and inter- regional divides are reduced.
While the above four are the long term goals of the planning process, each five year plan has specific objectives and priorities.
History of Planning
First Plan (1951-56)
The First Plan stressed more on agriculture, in view of large scale import of food grains and inflationary pressures on the economy. Other areas of emphasis were power and transport. The annual average growth rate during the First Plan was estimated as 3.61% as against a target of 2.1%. Renowned economist KN Raj, who died in 2010 was one of the main architects of India's first five-year plan.
Second Plan (1956-61)
With agricultural targets of previous plan achieved, major stress was on the establishment of heavy industries. Rate of investment was targeted to increase from 7% to 11%. The Plan achieved a more than targeted growth rate of 4.32%. This Plan envisaged to give a big push to the economy so that it enters the take off stage It was based on Nehru-Mahalanobis model self- reliance and basic-industry driven growth.
Third Plan (1961-66)
It tried to balance industry and agriculture. The aim 6f Third Plan was to establish a self-sustaining economy. For the first lime, India resorted to borrowing from IMF, Rupee was also devalued for the first time in 1966. India's conflict with Pakistan and repeated droughts also contributed m the failure of this Plan.
As the Third Plan experienced difficulties on the external front (war with China in 1962 and Pakistan in 1965); and the economic troubles mounted on the domestic front- inflation, floods, forex crisis- the Fourth Plan could not be started from 1966. There were three annual plans till 1969. This period is called plan holiday that is when five year plans are not implemented. The-Annual Plans were: 1966-67, 1967-68 and 1968-69.
Fourth Plan (1969-74)
The main objective of this Plan was growth with stability. The Plan laid special emphasis on improving the condition of the under-privileged and weaker sections through provision of education and employment. Reducing the fluctuations in agricultural production was also a point of emphasis of this Plan. The Plan aimed at a target growth of 5.7% and the achievement against this was 3.2 1%.
Fifth Plan (1974-79)
The main objective of the Plan was Growth for Social Justice. The targeted growth rate was 4.4% and we achieved 4.8%. It was cut short by the Janata Party that came to power in 1977.
Sixth Plan (1980-1985)
Removal of poverty was the foremost objective of Sixth Plan.
Another area of emphasis was infrastructure, which was to be strengthened for development of both industry and agriculture. The achieved growth rate of 5.7% was more than the targeted one.
Direct attack on poverty was the main stress of the Plan.
Seventh Plan (1985-90)
This Plan stressed on rapid growth in food-grains production and increase in employment opportunities. The growth rate of 5.81% achieved in this Plan was more than the targeted one, the plan saw the beginnings of liberalization of Indian economy.
The 8th Plan could not start in 1990 due to economic crisis and political instability. There were two annual plans- plan holiday.
Eighth Plan (1992-1997)
This Plan was formulated keeping in view the process of economic reforms and restructuring of the economy. The main emphasis of this Plan were
It was indicative plan for the first time. The Plan was formulated in a way so as to manage the transition from a centrally planned economy to market led economy. The targeted annual average rate of growth of the economy during Eighth Plan was 5.6%. Against this, we achieved an average annual growth of 6.5%.
The Plan was based on Rao-Man Mohan Singh model of liberalization.
Ninth Five Year Plan (1997-2002)
The salient features of the Ninth Five Year Plan are a target annual average growth rate of 6.5 per cent for the economy as a whole, and a growth rate of 3.9 per cent for agriculture sector, among others. The key strategies envisaged to realise this target rest on attaining a high investment rate of 28.2 percent of GDP at market prices. The domestic saving rate, which determines the sustainable level of investment, is targeted at 26.1 per cent Of the GDP. Care has been taken to ensure achievement of a sustainable growth path in terms of external indebtedness as well as fiscal stability. Rate of growth achieved was 5.4%
Growth Performance in the Five Year Plans (per cent per annum).
First Plan( 1951-56)
Third Plan( 1961-66)
Fourth Plan (1969-74)
Fifth Plan( 1974-79)
Sixth Plan( 1980-85)
Eiehth Plan (1992-97)
Ninth Plan( 1997-2002)
Tenth Plan (2002-2007)
The economy is expected to expand by 9% per cent hi 2010-11 having achieved 8.9% real growth in the first half of 2010-2011. It may rise to 10 per cent in the terminal year of the 11th Plan. Government set an average annual growth target of 9 per cent for the 11th Plan - beginning with 8.5 per Cent in the first 21 and closing with 10 per cent in 2011-12. The MTA document said the economy exceeded expectations m 2007-08, with a growth rate of 9 per cent, but the momentum was interrupted in 2008-09 because of the global financial crisis. Following the global meltdown, the growth rate slipped to 6.7 percent in 2008-09 from over 9 per cent in the preceding three years. In the year 2009-10, the growth rate was 7.6%.
Function of Planning Commission
The Planning Commission was constituted in March, 1950 by a Resolution of the Government of India, and works under the overall guidance of the National Development Council. The Planning Commission consults the Central Ministries and the State Governments while formulating Five Year Plans and Annual Plans and also oversees their implementation. The Commission also functions as an advisory body at the apex level.
The 1950 resolution setting up the Planning Commission outlined its functions as to:
Organisational Structure of Planning Commission
The Prime Minister is the ex officio Chairman of the Planning Commission. Deputy Chairperson enjoys the rank of a cabinet minister. A member of the Planning Commission enjoys the rank of a Minister of State in the Union Government. Cabinet. Ministers with certain important portfolios act as part-time members.
The Deputy Chairman and the full time Members of the Planning Commission function as a composite body in the matter of detailed plan formulation. They provide advice and guidance to the subject Divisions of the Commission in the various exercises undertaken for the formulation of Approach to the Five Year Plans and Annual Plans. Their expert guidance is also available to the subject Divisions for monitoring and evaluating the Plan programmes, projects and schemes.
The Planning Commission functions through several-technical subject Divisions. Each Division is headed by a Senior Office designated as Pr. Adviser / Adviser / Add Adviser/Jt Secretary/Jt Adviser.
Planning Commission Divisions
The General Divisions functioning in the Planning Commission are:
The Subject Divisions are:
The Programme Evaluation Oganisation undertakes evaluation studies ho assess the impact of selected Plan Programmes / Schemes in order to provide useful feedback to planners and implementing agencies.
The Commission is a corner-stone of our federal structure, a think-tank; helps to balance the priorities and expenditures of the Ministries of the Union Government throws up ideas on policies for structural and perspective changes; and is a reservoir of research.?
Relevance of Planning in India
There has been a national debate about the relevance of planning in the era of liberalization where the state controls and regulations are dismantled to a great extent and market forces are given large role. The investment of the government for the five year plans is also on decline. The trend began in the 7th plan and strengthens into the Eleventh Plan.
It is true that the quantitative aspects of planning in terms of control over economy are being selectively phased out arid the nature of planning process is undergoing a qualitative change. Planning is important for
the following reasons in the era of liberalization
In a federal democracy like ours, the principal task of planning is to evolve a shared vision among not only the federal units but also among other economic agents so that the efforts of all the actors become convergent towards the national priorities, the role of planning is to develop a common policy stance for center and states. Also, the task of federal policy coordination is central to Indian Planning. For example, the need to invite foreign investment in infrastructure areas like power need central- state coordination as the necessary legislation and administrative changes involve both.
While the growth process can be made the responsibility of the corporate sector to a greater degree, its direction and distribution are to be steered by planned public intervention so that regional imbalances are reduced and socio economic inequities are set right. For example, directing the growth of the large industry into the backward areas and technology intensive areas to realize national goals.
The nature of instruments available to planners in the implementation has changed. Quantitative Controls have yielded place to qualitative ones .The planning process has to focus on the need for planning for policy.
Planning at the grass roots level that is participatory is very crucial for- improving the delivery systems and proper use of the resources. The role of the government is thus to facilitate participatory planning.
Environmental priorities are a major concern of planning
Planning is necessary for the sectors like energy, communication, transport and so on as private sector needs to be guided into the national plan.
In the era of globalization where corporates are not expected to plan beyond the growth of a particular unit, the role of safeguarding national interest is that of planning by the State. For example, being subjected to various discriminative trade practices by EU, USA and so on, the Indian farmers, manufacturers and exporters have to fight sophisticated battles in the WTO for which the legal services and information and building up bargaining power are best provided by the State.
Thus, planning continues to be relevant and ever more so for the following reasons
Changing role of Planning Commission
From a highly centralized planning system, the Indian economy is gradually moving onwards indicative planning where hard planning is no longer undertaken. The role of the Planning Commission accordingly changes. The Commission concerns itself with the building of a long term strategic Vision of the future and decide on priorities of nation. It works out sectoral targets and provides promotional stimulus to the economy to grow in the desired direction.
Planning Commission plays an integrative role in evolving a national plan in critical areas of human and economic development. In the social sector, Planning Commission helps in schemes which require coordination and synergy like rural health, drinking water, rural energy needs, literacy and environment protection.
When planning in a vast federal country like India involves multiplicity of agencies, a high powered body like the PC can help in evolution of an integrated approach for better results at much lower costs.
In our transitional economy Planning Commission attempts to playa systems change role and provide consultancy within the Government for developing better systems. It has to ensure smooth management of the change and help in creating a culture
of high productivity and efficiency in the Government
In order to spread the gains of experience more widely, Planning Commission also plays an information dissemination role.
With the emergence of severe constraints on available budgetary resources, the resource allocation system between the States and Ministries of the Central Government is under strain. This requires the Planning Commission to play a mediatory and facilitating role, keeping in view the best interest of all concerned.
Do you think that Planning of India Emerged as the System Reform Commission?
There has been a significant change in the role of the PC since its inception in 1950. In the beginning, Planning Commission was all powerful and had the final say and the veto over every aspect - related to growth and socio-economic development- of the functioning of the Union Ministries and the State Governments. The manner of raising and utilising resources; specific allocations to particular schemes and programmes, location of enterprises, expansion and reduction of capacities, application of technologies; sources of supplies, modalities of implementation, priorities, phasing, pricing, targets and time- frames, nature of the instrumentalities, qualifications and strength of personnel of organisations, staff emoluments etc.
Since 1991, India adopted the indicative planning model, away from the kind of centralised planning on the Soviet rnodel envisaged by Jawaharlal Nehru. Now Ministries and Departments, as well as the corporate entities m the private sector, enjoy a lot of functional, financial and operational autonomy.
In the era of liberalisation, the economic players should properly be left to decide for themselves what they consider to be the appropriate courses of action on the various issues coming up before them, whether they relate to policies, schemes or investments.
The government intends to convert the Planning Commission into a think-tank to generate original ideas in the very broad domain of economic policy for the government to then act on. It will also be the Government agency responsible for acting as an interface with other independent think- tanks and NGOs. The PM would like the commission to engage more directly with the "polity", presumably with various ministries in the Central and state governments, and be able to persuade them to implement certain ideas or "plans" generated by the government's own think tank. That isn't radically different from its existing role the Planning Commission has few direct powers of execution in any case and must rely on the power of persuasion to sell its ideas to the Centre and states.
Interestingly enough, the New role sought for the Planning Commission seems to be very similar to the role played by the National Advisory Council, which also generates ideas within, coordinates with NGOs and civil society and then tries to "persuade? the government to act. NAC?s focus so far has been social sectors whereas a systems reforms commission can take; on a, broader gambit of issues, including public finances, infra-structure and so on.
The government's move to revamp and gradually transform the Planning Commission into a System Reforms Cornmission is a major step that can make the institution more relevant to a market economy. The idea is to metamorphose the plan panel from a reactive agency into a strategic thinking group, which maps out risks and opportunities by focusing on issues.
The shrinking role of the government in mobilising and controlling investments has pushed the Planning Commission to focus more on issues related to enforcing fiscal discipline in the central and state governments, including in the various ministries, departments and 'public sector enterprises.
According to Arun Maira, PC member, the Planning Commission will gradually transform itself into a Systems Reforms Commission for resolving the systemic problems of the 21st Century over the next two-three years as desired by Prime Minister Manmohan Singh. It will restructure itself to serve three essential functions: build a larger network around its members with think tanks and opinion makers, produce thought papers at a faster pace and communicate more lucidly with polity.
National Development Council & its Functions
The National Development Council is not a Constitutional body nor a statutory body (not set up by an Act of the Parliament). Union Cabinet set up the NDC in 1952 with the following functions:
NDC is headed by the Prime Minister of India and comprising of all Union Cabinet Ministers, Chief Ministers of all the States and Administrators of Union Territories and Members of the Planning Commission. Ministers of State with independent charge are also invited to the deliberations of the Council.
The National Development Council (NDC) has a special role in our federal polity. It is the apex body for decision -making and deliberations oh development matters. It has the explicit mandate to study and approve the Approach Plan to the Five year Plans and the Five Year Plan documents. The mid-term reviews of the Five year Plans are considered by the NDC. In fact, without the NDC approving, the Five Year Plan does not come into effect.
The CMP of the UPA Government (2004) says that NDC will meet at least three times in a year and in different state capitals. It will be developed as an effective instrument of cooperative federalism.
A mixed economy combining features of both capitalist market economies and socialist command economies. Thus, there is a regulated private sector (the regulations have decreased since liberalisation) and a public sector controlled almost entirely by the government. The public sector generally covers areas which are deemed too important or not profitable enough for the private Sector.
Financial Resources for the Five year Plans
The resources for the Plan come from
Resources of the Centre consist of both budgetary resources including external assistance routed through the budget and the Internal & Extra Budgetary Resources (IEBR) of Central Public Sector Enterprises (CPSEs). The quantum of budgetary resources if the 'Centre which is available for providing overall budgetary support to the plan is divided into two parts viz, budgetary aupport for Central Plan (including U.Ts, without Legislature) and central Assistance for States' Plans (including U.Ts with Legislature). A part of the budgetary resources allocated as budgetary support for the Central Plan is used for providing necessary support to CPSEs.
GBS is the amount from the central Budget that goes to fund the plan investments during the plan period.
Achievements of Planning
In the last about 60 years since India became a Republic, the National Income has increased many times. Today, India is the third largest economy in Asia with about $1.4 Trillion GDP after China and Japan is the 11th Largest economy in the world. India is the fourth largest in the world as measured by purchasing power parity (PPP), with a gross domestic product (GDP) of about $4 trillion- USA, China, Japan, India.
In the face of global recession, India posted 6.7% rate of growth in 2008-09 and "6% in 2009-10 and is the second fastest growing major economy after China. The first half of 2010-11 saw the growth rate at 8.9%.
Poverty dropped to about 20% of the population- the criterion used is monthly consumption of goods valued less than Rs. 211.30 per capita for rural areas and Rs. 454.11 for urban areas (2006) Social indicators improved though there is a long way to go-IMR, MMR, literacy, disease eradication etc. The industrial infrastructure is relatively strong - cement, steel, fertilizers, chemicals, etc Agricultural growth is also gaining momentum with food grains production at 233 mt in 2010.
Forex reserves are $292.8 b (January 2C'12) which is a dramatic turnaround from 3S91 when we had a billion dollars.
More than 1.7 lakh MW of power capacity is installed by the end of 2010.
India has emerged as a back-office of the world arid its prowess in software is growing.
India ranks fourteenth worldwide in factory output.
India ranks fifteenth worldwide in services output.
There has been considerable expansion of higher education. At the time ?of Independence there were 20 universities and 591 colleges, while today, there are almost 500 universities and 21,000 colleges. Literacy levels are 75% (2011).
Indicative planning was adopted since 8th five year plan (1992-97). It is characterized by an economy where the private sector is given a substantial role. State would turn its role into a facilitator from that of a controller and regulator.
It was decided that trade and industry would be increasingly freed from government control and that planning in India should become more and more indicative and supportive in nature. In other words, the remodeling of economic growth necessitated recasting the planning model from imperative and directive ('hard') to indicative (soft) planning. Since the Government did not contribute the majority of the financial resources, it had to indicate the policy direction to the corporate sector and encourage them to contribute to plan targets. Government should create the right policy climate- predictable, irreversible and transparent to help the corporate sector contribute resources for the plan fiscal, monetary, forex and other dimensions.
Indicative planning is to assist the private sector with information that is essential for its operations regarding priorities and plan targets. Here, the Government and the corporate sector are more or less equal partners and together are responsible for the accomplishment of planning goals. Government, unlike earlier, contributes less than 50% of the financial resources. Governrnent proved the right-type of policies and creates the right type of milieu for the private sector-including the foreign sector to contribute to the results.
Indicative planning gives the Government an opportunity to give the private sector encouragement to achieve growth in areas where the country has inherent strengths. It is known to have brought Japan results in shifting towards microelectronics In France, too indicative planning was in vogue.
Planning Commission would work on building a long-term strategic vision of the future. The concentration would be on anticipating future trends and evolving strategies for competitive international standards.
Planning will largely be indicative and the public sector would be gradually withdrawn from areas where no public purpose is served by its presence. The new approach to development will be based on "a re-examination and re-orientation of the role of the government" This point is particularly stressed in the development strategy of the Tenth Five Year Plan (2002-2007).
Indicative planning was not contemplated at the beginning of fifties as there was hardly any corporate sector in India and Government shouldered almost the entire responsibility of socio-economic planning.
It was adopted in India in 1962, in the aftermath of Chinese attack on India Professor Gunnar Myrdal (author of famous book' Asian Drama') recommended it for developing Countries m his book ? Indian Economic Planning m Its Broader Setting.
In this type, every year three new plan are made and implemented annual plan that includes annual budget; five year plan that is changed every year in response to the economic demands; and perspective plan for 10 or 15 years into which the other two plan are dovetailed annually. Rolling plan becomes necessary in circumstances that are fluid.
Here, physical targets are set in line with the available financial resources. Mobilization and setting expenditure pattern of financial resources is the focus in this type of planning
Here, the output targets are prioritized with inter-sect oral balance. Having set output targets, the finances are raised.
Nehru-Mahalanobis Model of Economic Growth
Indian economy at the time of Independence was characterized by dependence on exports of primary commodities, negligible industrial base; unproductive agriculture etc.
Thus, the turning point in India planning strategy came with the second five year (1956-61) plan. The model adopted for the plan is known as the Nehru Mahalanobis strategy of development as it articulated by Jawahar Lal Nehru's vision 'and P.C. Mahalanobis was its chief architect. The central idea underlying this strategies well- conveyed by recalling the following statement from the plan document. 'If industrialization is to be rapid enough, the country must aim at developing basic industries and industries which make machines to make the machines needed for, further development.?
The Mahalanobis model of growth is based on the predominance of the basic goods (capital goods or investment goods are goods that are used to make further goods; the goods that make up the industrial market like machines, tools, factories, etc). It is based on the premise that it would attract all round investment and result in a higher rate of growth of output. That will develop small scale and ancillary industry to boost employment generation, poverty alleviation, exports etc. The emphasis was on expanding the productive ability of the system, through forging strong industrial linkages, as rapidly as possible.
Other elements of the model are
Import substitution: Protective barriers against foreign competition to enable Indian companies to develop domestically produced alternatives for imported goods and to reduce India's reliance on foreign capital.
A sizeable public sector active in vital areas of the economy including atomic energy and rail transport.
A vibrant small-scale sector driving consumer goods production for dispersed and equitable growth and producing entrepreneurs.
In terms of the core objective of stepping up the rate of growth of industrial production, the strategy paid off. Rate of growth of overall industrial production picked up. The strategy laid the foundation for a well-diversified industrial structure a within a reasonably short period and this was a major achievement. It gave the base for self- reliance.
However, the strategy is criticized for the imbalances between the growth of the heavy industry sector and other spheres like agriculture and consumer goods etc that resulted. It is further criticized as it relied on 'trickledown effect- benefits of growth will flow to all sections in course of time. This approach to eradication of poverty is slow and incremental. It is believed that frontal attack on poverty is required.
The criticism is one sided as in the given context, the Mahalanobis model was connect for growth and self-reliance.
Rao-Man Mohan Singh Model of Growth
Ans. The launching of economic reforms by the government, in 1991 is driven by the Rao-Manmohan model - Mr. Narasimha Rao, the PM in 1991 and Finance Minister Dr. Man Mohan Singh. Its essence is contained in the New Industrial Policy 1991 and extends beyond it too. The model has the following contents.
Reorient the role of State in economic management. State should refocus on social and' infrastructural development, primarily.
Dismantle, selectively controls and permits in order to permit private sector to invest liberally.
Open up the economy and create competition for PSEs- for better productivity and profitability.
External sector liberalization in order to integrate Indian economy with the global economy to benefit from the resource inflows and competition.
Its success is seen in the more than 6.5% average annual rate of growth of economy during the 8th Plan (1992-1997). Forex reserves accumulated leaving the BOP crisis in history, taming of inflation, and the foreign flows- FDF and FII increased.
Economic Reforms in India
Since July 1991, India has been taking up economic reforms, to achieve higher rates of economic growth so that socio-economic problems like unemployment, poverty, shortage of essential goods and services, regional economic imbalances and so on can be successfully solved. The force behind the reforms is
Indian economy reached a level of growth and strength to benefit from an open market economy.
Private sector in India had come of age and was willing and capable of playing a major role.
Indian economy needed to integrate with the world with all the advantages like capital flows, technology, higher level of exports, state of art stock markets, Indian corporates can raise finances abroad and so on.
The country under the leadership of Dr. Manmohan Singh, Union Finance minister (1991-1996 and Prime Minister since 2004) converted the economic crisis -caused by, domestic cumulative problems of economy, political instability and gulf crisis-into an opportunity to initiate and institutionalize economic reforms to open up the economy. The deep crisis in 1991 could not be solved by superficial solutions. Therefore, structural reforms were taken up.
It was realized that by closing economy to global influences, the country was missing on technology developments and also gains from global trade. India needed exports, FDI and FII for stability on the balance of payments front and higher growth rates for social development. Worldwide, countries were embracing market model of growth, for example China, with proven results. So, India could make the historic shift from centralized planning to market-based model of growth.
What are the targeted areas of reforms?
Reforms mainly targeted the following areas:
Dismantling the licence raj so that private sector and government were on a level playing field
Drive public sector towards sustainable profitability and global play by dereservation; disinvestment; professionalization of management etc.
Fiscal reforms for stabile economic growth.
Banking sector is deregulated and made to conform to stringent reforms for higher competitive strength and performance globally.
Move towards free float of rupee and relaxation of controls on convertibility; aggressive export promotion; FDI and FII inflows etc.
Reforms were prioritized and sequenced in such a way as to make them sustainable and render further reforms feasible. For example, first generation reforms involved essentially non-legislative government initiatives- reduce SLR and CRR for the banking sector. Disinvestment of the PSEs. Deregulation of the rupee gradually and later make exchange rate of the rupee market-driven and so on. The second generation reforms involve legislative reforms and touch a wider section of the society- labour reforms; GST, FDI expansion etc. The former prepares the economy for the latter.
Positive Impact of Reforms in India
The reforms gained consensus and showed positive results as can be seen below.
Rates of growth went up
BOP crisis has been solved in the first few years and today the country has about $300b forex reserves (2011 January)
Services sector (tertiary sector) has grown in importance and today contributes almost57% of GDP (2010) emerging as a global player-India being the global back office.
Exports have performed well and have recovered handsomely even while the world continues to be trapped in near recession conditions. It accounting for many jobs and quality Indian products
Resilience of the economy in the face of Great Recession which is still not resolved
Consumer choice has increased
Tax-GDP ratio is at 11% of GDP (2010)
Nature of external debt has changed and the short term component is less
Indian companies are listed on Nasdaq and New York Stock Exchange and raised billions of dollars for investment
FIIs and FDI has picked up.
Indian corporates have acquired global majors like Jaguar and Anglo-Dutch steel maker Corus; Bharati bought Zain's African telecom operations (2010).
Second Generation Reforms (In lndian Context)
Having begun with the reforms in all the above sectors and seen the economy benefit from them, the second generation reforms were initiated by the end of 1990's. The reason for calling the latter set of reforms SGR is that they followed the initial reforms which laid the foundation for the reform process to deepen. It is a matter of sequencing in line with prioritization; economic preparation; consensus-building and so on. In a fact, unless the success in material and human terms of the initial reforms was demonstrated, the next round of 'difficult' reforms would not be possible.
In 2001, the Economic Advisory Council of the Prime Minister advised on the second generation reforms- labour law flexibility, pension reforms based on employee Contribution and the pension funds being deployed m the stock market; value added tax and GST; liberalized FDI including FDI in retail etc.
Second generation reforms are difficult as they are directly involved with the daily lives of people like
However, unless the SGRs are carried out, investment and growth will suffer with long term adverse consequences for poverty alleviation and employment generation. As the long term benefits of the reforms are bound to show in terms of higher growth rates and more social welfare, consensus needs to be built for successful legislation and implementation of SGRs.
Main Objective of 12th Five Year Plan
The twelfth plan has the following objectives:
Agriculture and Rural Development
Target at least 4% growth for agriculture. Cereals are on target for 1.5 to 2% growth. We should concentrate more on other foods, and on animal husbandry and fisheries where feasible
Land and water are the critical constraints. Technology must focus on land productivity and water use efficiency.
Farmers need better functioning markets for both outputs and inputs. Also, better rural infrastructure, including storage and food processing
States must act to modi1 APMC Act/ Rules (exclude horticulture), modernize land records and enable properly recorded land lease markets.
RKVY has helped convergence and innovation and gives State governments flexibility. Must be expanded in Twelfth Plan
MGNREGS should be redesigned to increase contribution to land productivity and rain-fed agriculture. Similarly, FRA has potential to improve forest economies and tribal societies. But convergence with NRLM required for enduring rural livelihoods
Revisit India's water balance estimates basin-wise. Must map all aquifers over next five years to facilitate aquifer management plans
AIBP is not achieving its objectives. It must be restructured to incentivize irrigation reform and efficiency of resource use. Setting of Water Regulatory Authority must be a precondition. Strong case for higher priority to watershed management
Separation of electricity feeders for agriculture can improve quality of power availability
Proportion of water recycled by urban India and industry to be raised to protect rater levels, and improve surface and groundwater quality
Rational water use may need
New Groundwater Law reflecting public Trust Doctrine New Water Framework Law (as in the EU)
Need to evolve political consensus. Perhaps discuss in a special NDC
Need National Water Commission to monitor compliance with conditionalities imposed in the investment clearance of important projects
Manufacturing performance is weak. Need to grow at 11-12% per year to create 2 million additional jobs per year. Growth in 11th Plan is in 8% ballpark
Indian industry must develop greater domestic value addition and more technological depth to cater to growing domestic demands and improve trade balance
Tune-up FDI and trade policies to attract quality investment in critical areas
Improve business regulatory framework: cost of doing business?, transparency incentives for R&D, innovation etc.
Land and infrastructure constraints are a major problem. States should develop "special industrial zones' with good connectivity and infrastructure
'Clusters' need to be supported to enhance productivity of MSMEs
Better consultation and co-ordination in industrial policy making
Some sectors should be given special attention because they contribute most to our objectives eg:
Create large employment: textiles and garments, leather and footwear; gems and jewelry; food processing industries Deepen technological capabilities: Machine tools; IT hardware and electronics.
Provide strategic security telecom equipment; aerospace; Shipping; defence equipment Capital equipment for infrastructure growth: Heavy electrical equipment; Heavy transport and earth- moving equipment.
Sectors with global competitive advantage: automotive; pharmaceuticals and medical equipment MSMEs: innovation, employment and enterprise generation
'Sectoral plans are being prepared for each of the above with involvement of industry associations and the concerned Ministries
Education and Skill Development
Must aim at universalisation of secondary education by 2017
Must aim at raising the Gross Enrolment Ratio (GER) in Higher Education to 20 percent by 2017 and 25 percent by 2022.
Must focus on quality of education (11th Plan emphasis was on quantity). Must invest in faculty development and teachers' training
Must aim at significant reduction in social, gender and regional gaps in education. Targets to be set for this purpose
Major curriculum reforms in vocational skill development to ensure employability in response to changing market needs
Development and operationalisation of S PPP models in School and Higher Education in accordance with the needs of a fast growing economy
Research and innovation in higher education must be encouraged with cross- J linkages between institutions and industry
Better health is not only about curative care, but about better prevention clean drinking water, sanitation and better nutrition, childcare, etc. Convergence of schemes across Ministries is needed
Expenditure on health by Centre and States to increase from 1.3% of GDP to at least 2.0%, and perhaps 2.5% of GDP by end of 12th Plan
Desperate shortage of medical personnel. Need targeted approach to increase seats in medical colleges, nursing colleges and other licensed health professionals. Improve quality of NRHM services vs. quantity of NRHM infrastructure. Structured involvement of PRIs/CSOs can help
Role of PPP in secondary and tertiary healthcare must be expanded
Health insurance cover should be expanded to all disadvantaged groups
Focus on women and children; ICDS needs to be revamped
Commercial energy demand will increase at 7% p.a. if GDP grows at 9%. This will require a major supply side response and also demand management
Energy pricing is a major issue. Petroleum and Coal prices are significantly below world prices and world prices are unlikely to soften.
Power Sector Issues
Other Energy Sources
Demand Side Management
Expansion in supply will need to be supported by demand side management
Rational energy pricing will help. Energy standards for high energy consuming industry, electrical appliances, energy efficient buildings or enhanced use of electric! Hybrid vehicles
Resource Allocation Priorities in 12th Plan
Issues for Special Category States
North Eastern States contribute only 10% share for most CSS
States such as J&K, HP and Uttarakhand have to contribute normal state share under many CSS
Governance and Empowerment
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