Indian Economy, 5th edition (9 page)

2. Industrial Needs

India had opted for the industry sector as its prime moving force, as we saw in the earlier pages. Now there were some areas of industries which the government had to invest in, due to several compulsive reasons. For industrialisation and its success, every economy needs the healthy presence of some ‘basic industries’ which are also known as the ‘infrastructure industries’.
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There are six basic industries which every industrialising economy requires, namely—

(i)
Iron and Steel

(ii)
Cement

(iii)
Coal

(iv)
Crude oil

(v)
Oil refining and

(vi)
Electricity.

[
Note:
At present, there are eight
Core Industries
in India (with the Base: 2004-05=100), six existing
‘basic/infrastructure industries’
with two new additions i.e.
Natural Gas
and
Fertilizer
. Core Industries together have a combined weight of 37.90 per cent in the Index of Industrial Production (IIP). Individual percentages of them are – Coal (weight: 4.38%); Crude Oil (weight: 5.22%); Natural Gas (weight: 1.71%); Petroleum refinery (weight: 5.94%); Fertiliser (weight: 1.25%); Steel (weight: 6.68%); Cement (weight: 2.41%); and Electricity (weight: 10.32%).]

Similar to the infrastructure sector, these basic industries also require high level of capital, technology, skilled manpower and articulation in entrepreneurship which was again considered not feasible for the private sector of the time to manage. Even if the private sector supplied goods from the ‘basic industries’ they might not be able to sell their products in the market due to the lower purchasing power of the consumers. Perhaps, that is why again the responsibility of developing the basic industries was taken up by the government.

Out of the six basic industries the cement sector was having some strength in the private and in iron and steel sector a lone private company was present. The coal sector was controlled by the private sector and crude oil and refining was just a beginning by them. The level of demands of an industrialising India was never to be met by the existing strength of the basic industries. Neither the required level of expansion in them was possible by the existing number of private players. With no choice left, the government decided to play the main role in them. In many of them we as a result, see a natural monopoly for the PSUs, again.

3. Employment Generation

The PSUs were also seen as an important part of the employment generation strategy. A government in, democratic set up, cannot think only economics but it has to realise the sociopolitical dimensions of the nation too. The country was faced with the serious problem of poverty and the workforce was increasing at a fast rate. Giving employment to the poor people is time-tested tool of poverty alleviation. The PSUs were thought to create enough jobs for the employable workforce of the economy.

There was also felt an immediacy for a social change in the country. The poverty of a greater section of the country was somehow connected to the age-old caste system which propitiated the stronghold of the upper castes on the ownership of land which was the only means of income and livelihood for almost above 80 per cent of the population. Along with the ambitious policy of the land reforms the Government had decided to provide reservations to the weaker sections of the society in the government jobs. The upcoming PSUs were supposed to put such jobs at the government disposal which could have been distributed along the decided reservation policy—such reservations were considered an economic tool for social change.

In the highly capital-intensive sectors in which the government companies were going to enter, managing investible funds to set them up was not going to be an easy task. The government did manage the funds with sources like taxation, internal and external borrowing and even taking last refuge in the printing of fresh currencies. The government went to justify the high taxation and heavy public indebtness in supplying employment to the Indian employable population.

The PSUs were considered by the government as the focus of the ‘trickle-down effect’. The government did everything to set up and run the PSUs as the benefits were supposed to percolate to the masses, finally reinforcing growth and development in the country. Employment in the PSUs was seen as the effort of the trickle down theory, simply said. At a point of time, Nehru even mentioned the PSUs as the ‘temples of modern India’. The government went to commit even a job in every household via the PSUs—without calculating the dimensions of the future labourforce in the country and the required resources to create the jobs at such a high scale. But the government went on creating new PSUs without analysing the fiscal repercussions—moreover believing them to be the real engine of equitable growth. Employment generation responsibility of the PSUs was extended to such an extent by the government that most of them had over-supply of the labour force which started draining its profits on account of the salaries, wages, pensions and the provident funds (latter two had late financial impact).

4. Profit and Development of the Social Sector

The investment to be made by the government in the PSUs was in the nature of asset creation and these entities were to be involved in production activities. It was natural for the government to gain control over the profits and dividends accruing from them. The goods and services the PSUs were to produce and sell were going to provide disposable income to the government. The government had a conscious policy of spending the income generated by the PSUs. They were to be used in the supply of the ‘social goods’ or what is called the ‘public goods’. And thus, India was to have a developed social sector.
b
y social goods the government meant the universal supply of certain goods and services to the Indian people. They included education, healthcare, nutrition, drinking water, social security, etc. in India. It means that the PSUs were also visioned as the revenue generators for the development of the social sector. Due to many reasons the PSUs would not be able to generate as much profit as was required for the healthy development of the social sector. This eventually hampered the availability of public goods in the country. In place of giving profits back to the government, a very high number of the PSUs started incurring huge losses and required budgetary supports as a regular phenomenon.

5. Rise of the Private Sector

As the PSUs will take the responsibility of supplying the infrastructure and the basic industries to the economy, a base for the rise of private sector industries will be built. With the rise of the private sector industries in the country, the process of industrialisation will be completed. Out of the many roles the PSUs were supposed to play this was the most far-sighted.
w
hatever happened to the different roles the PSUs were assigned is a totally different matter to which we will return while discussing the industrial scenario in the country. Here we have analysed why the government in India after Independence went for such an ambitious plan of expansion of the public sector.

Introduction

In order not to limit the discussion on economic planning to just an academic exercise, we need to discuss it taking real life examples from different economies. Without a historical background to planning, we would not be able to understand the meaning and role of planning in India. This small chapter intends to brief the reader on all the
whats, hows
and
whys
of the concept of economic planning with due recourse to the experiments by different countries from time to time, including India. It could also be considered a theoretical backup for the next chapter,
Planning in India.

Definition

A number of definitions have been forwarded by different economists from time to time since the term ‘planning’ entered the domain of economics. To make us develop a clear understanding of planning, we need to see only a few of them which will enable us to draw out a working definition that fits contemporary time.

A large number of economists and experts have agreed that perhaps the best definition is given by H. D. Dickinson, according to whom, economic planning is, “the making of major economic decisions—what and how much is to be produced and to whom it is to be allocated by the conscious decision of a determinate authority, on the basis of a comprehensive survey of the economic system as a whole.”

It was the National Planning Committee, set up in 1938 by the Indian National Congress which, for the first time, tried to define planning (in 1940, though, its final report was published in 1949) in India. It could be considered the broadest possible definition of planning: “Planning, under a democratic system, may be defined as the technical coordination, 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 raising of the standard of living, but must include cultural and spiritual values, and the human side of life.”
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By the late 1930s, there was an almost political consensus that independent India will be a planned economy. As India commenced economic planning by the early 1950s, the
p
lanning
c
ommission of India also went on to define planning. According to the Planning Commission, “Planning involves the acceptance of a clearly defined system of objectives in terms of which to frame overall policies. It also involves the formation of a strategy for promoting the realisation of ends defined. Planning is essentially an attempt at working out a rational solution of problems, an attempt to coordinate means and ends; it is thus different from the traditional hit-and-miss methods by which reforms and reconstruction are often undertaken”
2
.

In the post-War period, a large number of the newly independent countries were attracted towards planning. Many new forces of change kept refining the very idea of planning due to the compulsive necessities of industrialisation or the issue of sustainability of the development process. But to carry forward our discussion, we need a working as well as a contemporary definition of planning. We may define it as
a process of realising well-defined goals by optimum utilisation of the available resources.
3
While doing economic planning the government sets developmental objectives and attempts to deliberately coordinate the economic decision making over a longer period to influence, direct and in some cases even to control the level and growth of a nation’s main economic variables (i.e. income, consumption, employment, saving, investment, exports, imports, etc.).
4

An economic plan is simply a set of specific economic targets to be achieved in a given period of time with a stated strategy. Economic plans may be either comprehensive or partial. A
comprehensive plan
sets targets to cover all major aspects of the economy while a
partial plan
may go for setting such targets for a part of the economy (i.e. agriculture, industry, public sector, etc.). Taken broadly, the planning process itself can be described as an exercise in which a government first chooses social objectives, then sets various targets (i.e. economic targets), and finally organises a framework for implementing, coordinating, and monitoring a development plan.
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One very important thing which should be clear to all is that the idea of planning first emerged in its applied form and after studying and surveying the experiences of different countries who followed it, experts started theorising about planning. Thus, in the case of planning, the direction has been from practice to theory. This is why the form and the nature of planning kept changing from country to country and from time to time. As we will see in the following pages, the types of planning itself evolved through time as different countries experimented with it.

As per our working definition, we may say the following things about planning:

(i)
p
lanning is a process.
It means planning is a process of doing something. Till we have some goals and objectives left regarding our lives, the process might continue.
W
ith the changing nature of our needs, the nature and scope of the planning process might undergo several changes. Planning is not an end in itself. As processes accelerate and decelerate, change direction and course, so also does planning.

(ii)
p
lanning must have well-defined goals.
After the Second World War, several countries went for development planning. As these nations had enormous socio-economic hurdles, they first set some goals and objectives and then started their process of realising them via planning. In due course of time, there emerged a consensus that planning must have some goals and those goals should be well-defined (not vaguely defined)—so that the government’s discretionary intervention in the economic organisation could be democratically transparent and justified. Even in the non-democratic nations (i.e. erstwhile USSR, Poland, China, etc.) the goals of planning were clearly defined.
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(iii)
Optimum utilisation of the available resources.
Here we see two catch concepts.
First,
is the way of utilising the resources. Till the idea of sustainability emerged (1987) experts tried to ‘maximise’ the resource exploitation. But once the experts around the world introspected the untenability of such a method of resource utilisation, the sustainable approach was included into planning and here in entered the idea of utilising resources at its ‘possible best’ level so that environmental degradation could be at its minimum and the future generations could also be able to continue with their progress.
Second,
it is the idea of the nature resources which are available. Resources (i.e. natural as well as human) could be of indigenous origin or exogenous. Most of the countries doing planning tried to utilise their indigenous resources, yet some others tried to tap the exogenous resources too, taking leverage to their diplomatic acumen. For example, the first country going for national planning i.e. Soviet Union leveraged resources available in the East European countries. India also used exogenous resources for her development planning wherever it was necessary and possible to tap.
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By 1950s, planning had emerged as a method or tool of utilising resources to achieve any kind of goals for the policy-makers, around the world:

(i)
Trying to achieve a particular size of family for different countries came to be known as
family planning.

(ii)
The process of providing suitable physical and social infrastructure for the erstwhile or the upcoming urban areas came to be known as
town/urban planning.

(iii)
A country trying to optimise the use of its revenues for different categories of expenditures came to be known as
financial planning.
Financial planning is more popularly known as
budgeting.
Every budget, be it of the government or of the private sector is nothing but excercises in the area of financial planning.

(iv)
Similarly, at macro and micro levels, there might be any number of planning processes—agricultural planning, industrial planning, irrigation planning, road planning, house planning, etc.

Simply said, the art of achieving any kind of goal by the use of the resources we have is the process of planning. We may cite a very general example—students of a class are able to join the class at the right time coming from different places of their stay. How they are able to do so? All of them must be planning their time in such a way that they are able to join the class at the same time though their places of residence are not at an equal distance from the class. All might be having their own way of time planning—some might be having bed-tea, some might not, some might be having breakfast at their place, yet some others might think to take their breakfast in the college canteen, etc.

It means that even if we are not consciously planning or have not announced it as yet, we are always planning our days. Same is correct in the case of countries also. Many countries announced that they will be planned economies yet some others didn’t go for any such policy announcements. The
s
oviet Union, Poland, China, France, India are examples of the former category while the USA,
C
anada, Mexico fall in the latter category.
8
But here we are concerned with the conscious process of planning. There will be some methods, some tools and types of planning emerging through time as different countries will start their processes of planning.

Origin and Expansion of
Planning

Planning as a method of achieving faster economic progress has been tried by different countries at different times and at different levels. We may see them as under:

1. Regional Planning

It was at the regional level that planning was used as a part of development policy by any country for the
first time.
It was the USA which started the first regional planning after the Tennessee Valley Authority (TVA) was set up in 1916—for a large-scale rehabilitation in south-eastern USA covering parts of seven states. With the primary aim of flood control, soil conservation and providing electricity, the TVA/the regional plan was also involved in many related activities such as industrial development, forestry, wildlife conservation, town planning, construction of road and rail, encouraging sound agricultural practices and malaria control in the defined region.
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The US experience of regional planning became such a success in realising its well-defined goals that it emerged as a role model and an object of inspiration for many countries around the world in the coming decades—the Damodar Valley Corporation (DVC) in India (1948), the Volta River Project in Ghana (1966), etc.

2. National Planning

The official experiment in the area of national planning is rooted in the Bolshevik Revolution of Russia (1917)—the Soviet Union. Dissatisfied with the pace of industrialisation, it was in 1928 that Joseph Stalin announced its policy of central planning for the Soviet Union. The collectivisation of agriculture and forced-draft industrialisation were other radical new policy initiatives announced by Stalin besides economic planning in 1928.
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The Soviet Union went for its first five year plan for the period 1928-33 and the world was to have its
first
experience of
national planning.
The famous Soviet slogan “great leap forward” was initiated for rapid industrialisation through the introduction of economic planning at the national level. The nature and scope of Soviet planning (called
the Gosplan
) will have its direct or indirect bearings on all those countries who went for economic planning, be they state economies or capitalist or mixed economies. India was to have direct bearings of Soviet planning on its planning process. In the first Soviet Plan, heavy industry was to be favoured over light industry, and consumer goods were to be the residual sector after all the other priorities had been met. We see the same emphasis in the Indian planning process.
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The Soviet model of economic planning spread to the East European countries, especially after World War II and found its purest form of such planning in the People’s Republic of China (1949). During the early 1940s, the concept of national planning was borrowed by
F
rance and the world saw national planning being initiated by a hitherto capitalist economy as well as by a non-centralised political system (i.e. democratic system). France started economic planning at the national level after announcing itself a mixed economy.

Types of Planning

After the first national planning was started by the Soviet Union, many more countries followed it but with variations in their methods and practices. Though there are many variants of planning the most important one is on the basis of the type of economic organisation (i.e. state economy, mixed economy). During the course of evolution, planning has been classified into two types, based upon the type of economic system the economy has:

1. Imperative Planning

The planning process followed by the state economies (i.e the socialist or communist) is known as the imperative planning. Such planning is also called as
directive
or
target planning.
Such planning had two main variants. In the
s
ocialist system, all economic decisions were centralised in the hands of the state with collective ownership of resources (except labour). In the
c
ommunist system (i.e. China of past) all resources were to be owned and utilised by the state (including labour, too). Thus, communist China was the purest example of such planning. In the case of Soviet Union a little bit of ‘market’ did exist—even after the collectivisation of agriculture was enacted by Stalin in 1928 only 94 per cent of Soviet peasants could be included in the process.
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Basic features of such planning are as under: