1. 1nd.Soc. Agril. Statist.61(3), 2007 : 281-294

Reflections on Planning in India!

Pronab Sen2

Ministry of Statistics and Programme Implementation, Govt. of India, New Delhi

It gives me great pleasure to be here with you at the 6151Annual Conference of the IndianSociety of Agricultural Statistics. I am indeed deeply conscious of the honour that has been conferredon me by your invitation to deliver the Dr. Rajendra Prasad Memorial Lecture. The luminaries whohave graced this lectern in the past leave me with a feeling of profound humility, and indeed a senseof inadequacy at being able to meet the standards they have set. Nevertheless, it is a challenge I ammore than happy to accept; if for no other reason than as a tribute to my illustrious precursors.

Since our independencemore than 60years ago, Indiahas followeda path of planned development.This has over the years been a topic of debate and discussion, of strongly-held views both for andagainst. Nevertheless, it has persisted, and continues to do so. However, planning is only a tool,despite the ideological baggage that it has acquired, and its continuance should not be based on mereinertia, but on a realistic assessment of its relevance. It is, therefore, entirely appropriate that at thisjuncture of our history we take stock of our experiences with planning, and reflect upon its continuingutility in the future.

GROWTH THEORY: THE BASIS OFPLANNING

Beforeentering intothe history of planning in India,it may be desirable to briefly sketch the path of progressin the analytical basis of all macroeconomic planning:namely growth theory. Plans and planning models arealways based on a particular growth theory, whetherexplicitly or implicitly, and the appropriateness of themodel is perhaps best gauged in terms of theappropriateness of the underlying growth theory.Therefore, any appraisal of planning processes requiresa minimum degree of familiarity with the underlyingtheory.

Likemost of economics,growththeory isconcernedwith maximizingan objectivefunction(the rateof growth

.J Dr. Rajendra Prasad Memorial Lecture delivered at 61-"

Annual COfiferenceof the Indian Soc;:ietyof AgriculturalStatistics at Birsa Agricultural University, Kanke,Ranchi-834006 (Jharkhand)

2 Formerly Principal Adviser, Perspective Planning,Planning Commission, Government of India. This paperreflects the personal views of the author and not those ofthe Government of India.

ofGDP [g(y)] in this instance) subjecttothe limitationsplaced by certain exogenous constraints. In its simplestand most commonly used form, the growth rate isspecified as a functionof the rate of capital accumulationor investments

g(y) = ilv (1)

where i = the investment rate (investmentlGDP)

v = incremental capital-output ratio (ICOR)

In the earliest growth models, it was believed thatthe primary constraint on accumulation was theavailability of savings, behaviour of the economy. Thisgave the famousHarrod-Domar 'warranted' growth path

g(y) = slv (2)

where s = marginal propensity to save

Initially both's' and 'v' were treated as parameters,so that the maximal attainable growth rate was seen tobe outside the control of the policy-makers. The policyproblem then was to attain and maintain the warrantedgrowth rate, which was complicated by the 'saddle-point'nature ofthe growth path whereby even minor deviations

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from the path would lead to instability. It was, however,quickly realized by development theorists and plannersthat neither of the arguments could be treated asparameters. Three main lines of generalization emerged:(a) effect of income distribution on's' (Pasinetti),(b) technological change (Kaldor), and (c) effect of theeconomic structure on's' and 'v' (Mahalanobis/Feldman).

Although these developments led to a considerableincrease in the sophistication of growth models, theessential problem remained simple - a single constraint.The real importance of these researches lay elsewhere. Itwas in the recognition that policies could be directed notonly towards attaining the maximal growth rate for aparametrically given constraint, but they could also bedirected toward relaxing the constraint itself. There werealso the first stirrings of dissatisfaction with the singleconstraint model. This was most often articulated byapplied economists and planners in terms of the'absorptive capacity' of an economy, or the ability of aneconomic system to utilize productively the possibleinvestments.

The first major complication was introduced in theearly 1960sby Hollis Chenery in his 'Two-Gap' model,which explicitly recognized the role of imports in thecreation and effective utilization of productive capacity.The 'Savings constraint' of the earlier models was,therefore, supplemented by a 'Foreign Exchangeconstraint' . As it happened, the full significance of the'Two-Gap' model was not realized until much later. Inthe early versions, the classical assumption of a savings-constrained investment function continued to be made.

Thishada serendipitouseffecton the relationshipbetweenthe two constraints. The intlow of foreign exchange inthe form of foreign savings (either aid or debt) wouldaugment the availability of both foreign exchange andinvestible resources. Likewise, efforts at relaxing thedomestic savings constraint would also tend to relax theforeign exchange constraint. Thus, there was apparentlyno real contlict between the two.

The most valuable contribution of the 'Two-Gap'model was in opening up the closed-economy structureof the earlier models. This added an entirely i1~Wdimension to development policy and planning. Inparticular, it laid emphasis on the trade-off betweencurrent production and capacity creation, and itssensitivity to the allocation of imports between capitalgoods and intermediates.Perhaps equally importantly, it

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implicitly raised the likelihood of capacity under-utilisation - which was assumed away in earlier models.In practical terms, it also provided the most compellingjustification for development aid and the continuingexpansion of the multilateral aid agencies.

This model has been the most durable in so far as

its intluence on policy recommendations is concerned.This is not the least because it provides the intellectualraison d'etre for the multilateral aid agencies, who arenow the dominant purveyors of development advice inthe world. But this is of course not all. This model is. ifproperly utilized, a very powerful one and sheds light ona number of important policy decision such as whetherto follow an export-ledstrategy or an import-substitutingone, when and how much to borrow on the internationalmoney markets, whether and on what terms to allowforeign direct investments, etc. lts place in the tool-kit ofthe development planners is unquestionable.

The next important conceptual development in thisfield was the introduction of the 'Agricultural constraint'to growth in the 1970s. This was uniquely an Indiancontribution and arose out of the development experiencesof the country. But its application range is very muchwider. Unfortunately, it came at a time when developmentand growth theory were already in retreat and as a result,had much less impact than it deserves. The basic argumentof this theory is that in a poor and primarily agriculturalcountry, slow growth of the agricultural sector places alimit on the maximum non-inflationary rate of GDPgrowth which may be very different from the savings orthe foreign exchange-constrained rates. The simplestversion of this relationship is as follows

g(y) = n + [g(a) - n]/E (3)

where g(a) = exogenously given growth rate ofagriculture

n = growth rate of populationE = income elasticity of demand for

agricultural output

Simple though the above expression may be, thistheory isof a considerablyhigherdegreeof sophisticationthan its precursors. In the first instance, it recognizesthat growth and development are not synonymoustermsandthatdevelopmentpolicieshaveobjectives(in this case,intlation) beyond the maximization of the GDP growthrate. Second, it emphasizesthe importanceof the sectoralbreak-up of developing countries in terms of the relative

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efficiencies of investment and their amenability to policyinfluences. Third, and perhaps most importantly, it hingsout starkly the interaction between the growth constraints,and the need to be aware not only of the immediatelybinding constrained, but also the extent of slack availablein the others.

The 'dual economy'modelsof Lewis,Jorgensenetc.capture only a part of the implications ofthe agriculturalconstraint model, and are really the building blocks forit. In order to do full justice to poor, dominantlyagricultural economies, the 'wage goods' constraint hasto be married to the macro-economic issues of income

distribution, inflation, balance of payments etc. whichthis theory seeks to do.

Thenextadditionto the family of growthconstraintsis the 'Fiscal constraint', which originated in the LatinAmerican Neo-Structuralist school in the 1980s. This

constraint is based on the insight that productiveutilization of production capacities requires acorresponding input of certain key infrastructuralfacilities. This is an important insight in itself sincealthough the standard savings-constrained planningmodelscantake intoaccountin:&astructuralrequirements,the longgestationlags in infrastructuresectorscan inhibitgrowth unless planning is done sufficiently in advance.However, in addition, this theory points out that in mostdevelopingcountries, in:&astructuralinvestmentsare andcan be carried out almost entirely by the government orthe parastatals. If in such a situation the government isunable to raise the necessary resources in a non-inflationary manner, either capacity utilization will fallor fresh private investments will not be made. In eithercase, the growth rate of GDP will be adversely affectedand may well fall short of the rates permitted by thesavings or the foreign exchange constraints.

Like the agricultural constraint, this one toorecognizesthe peculiaritiesand the imperativesthat guidepolicy-making in developing countries. It also brings tothe forefront the need for having and active public sector.Market forces clearly cannot be relied upon to provideall the necessary inputs for growth and development. Italso explicitly highlights capacity utilization as animportant adjustment variable, which had only beenimplicitinthe earliermodels.Thismodelhas an importantdimension which is missing in all the others - it draws awell-defineddistinctionbetweenrealand financialsectors.

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All the earlier models were in essence real in nature and

discussion 'ofmonetary and financial issues were morein the nature of qualifications. It is this dimension thathighlights the importance of the type and the recipientsof foreign capital inflows - a feature which should havebeen central to the two-gap models, but was not.

The 1990s threw up an entirely new growthconstraint, which can be termed as the 'FinancialIntermediationconstraint'. This explicitlyrecognizesthefact that the existence of adequate savings may notnecessarily translate to a commensurate level ofinvestment since the two processes of saving andinvestment are intermediated by the financial sector ofthe economy which mobilizes savings, on the one hand,and finances investments, on the other. Inefficiency inthis intermediation process or incomplete financialmarkets can lead to situations where actual investment

falls short of the level permitted by available savings.This constraint in some ways can be considered to be apart of the larger intellectual stream of the 1990s whichis termed as the 'Endogenous Growth' theories. Thesetheories focus primarily on institutional characteristicswhich determine growth processes, and are more rootedin microeconomic theory than its predecessors, whichwere mainly macroeconomic in nature. Anothercomponentof the endogenousgrowththeorywhich needsto be mentioned in the present context is 'skills', whichhas become a major issue in India today.

At present, therefore, there are at least five distinctconstraints to growth which have been identified in theliterature and have been analysed to a greater of lesserextent. However, these are not all that there is to

development strategy formulation. Each country has aset of minimum socially necessary conditions thateconomic policy has to address. Inflation has already beenmentioned in this context. There can be a number of

others. A few which are of relevance to India, for instance,

may be mentioned - a minimum rate of employmentgrowth, poverty alleviation, and balanced regionaldevelopment. Any formulation of development policieshas to retain awareness of these conditions and how theylimit attainment of feasible growth targets. This really isthe substance and subject of planning. Therefore, althoughall macroeconomic planning is based on growth theories,development planning has dimensions which go wellbeyond the limits of these theories.

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INDIAN PLANNING:A THUMBNAIL SKETCH

It should be apparent from the preceding discussionthat the theoretical recognition of the complexity ofgrowth processes has evolved significantly over the years.The question is whether Indian planning has shown thesame degree of dynamism. There has been a tendency inrecent years to view the development strategy followedby India for the first fifty odd years after independenceas an undifferentiated continuum, with little substantivevariation from Plan to Plan. Nothing could be furtherfrom the truth. Indian development strategies have evolvedfrom one Plan to another in response to the objectiveconditions of the economy and to the challenges of themoment. Some of these changes have been strikingly boldand original, others more modest; but change there hasbeen. Today, therefore, I would like to start by takingthis opportunity to briefly reflect upon the shifts that havetaken place in our development strategy and in ourattitudes and approaches towards planning over the years,and to present a point of view which may be at variancewith some of the recent popular discourse on the subject.

The First Five Year Plan in today's jargon would becalled a 'virtual plan' . It never really existed on paper. Itwas in essence a reconstruction strategy following theimmense damage that had taken place duringindependence and the partition of the country. The agendawas no doubt set by circumstances, but the foundationsfor the future were clearly also set during this period.One of the most important of these is that the statisticalsystem as we know it today was created during this periodunder the guidance of Prof. P.C. Mahalanobis. Even withhindsight, we can only marvel at the originality andprescience that went into designing the statistical system.Everywhere else in the world, especially at that time,statistical systems relied almost exclusively onadministrative records, with periodic censuses tosupplement the demographic data. However, thesecountries did not have to cope with the huge size andinformal nature of the Indian economy. .

The Second Five Year Plan, whkh more than any'other bore the imprimatur of Prof. Mahalanobis, set thestage of our essential development strategy during theearly years. This Plan was not based on the Harrod-Domar growth model, which was the reigning theory ofthe day, and relied on what is now called the Feldman-Mahalanobismodel- a completely heterodox approach.

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The emphasis on the establishment of heavy industries,both as a means of rapid industrialization and for raisingthe lowsavingsrateof the economy,wascertainlyoriginalin its conception,and reflectsthe tremendous confidencethat our economic leadership had in its analysis andjudgement. The most remarkablefeature of this Plan wasthat it was visionary in that it set targets which wereconsiderably more ambitious than what would bewarranted by a business-as-usual approach.

The Third Plan,conceivedduringa periodof seriousbalance of payments problems and falling internationalprices of primary products, introduced the concept ofimport substitution as a strategy for industrialization.Whatever be the merits of this strategy in hindsight, itreceived considerable attention, and even acclaim, fromacademicsand practicingpolicy-makers,and was widelyemulated by other developing countries. It is interestingthat the Third Planmodelembodiedall the characteristics

of the "Two-Gap"model,butprecededChenery's seminalpaper by several years. The main difference of coursewas that while Chenery sought a solution to the problemin foreign aid, the Indian planners looked for anindigenous and self-reliant answer.

The Fourth Plan came after one of the most difficult

periods ofIndian economic history.The two-year period1965 to 1967 witnessed the worst drought in recentmemory and consequent famines in large parts of northIndia.At the sametime, all aid was cut off to India by thedonor countries on account ofthe Indo-Pakistan Warof

1965, including food aid. This traumatic experiencebrought food security into the forefront of our policyimperatives, which was further buttressed by theobservation that sustained industrialization was not

possible without adequate provisionof wage-goods.ThisPlan followed four years of 'plan holiday' where alleconomicpolicybecame subordinateto a singleobjective- food security. Unfortunately, the "Agriculturalconstraint" in the sense of evaluating the opportunitiesoffered by non-binding savings and foreign exchangeconstraints was not embedded in the Plan, perhapsbecause it was yet to be articulated. The net result was arelatively non-visionary and unambitious Plan, whichunfortunatelyset the trend for futurePlans.Nevertheless,this Plan was also characterised by the introduction ofanotherconcept, whichhas onlyrecentlybecomepopularin the international discourse - environmental

sustainability.

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The Fifth Plan was path-breaking in a completelydifferent sense in that it recognized that growth andindustrializationwouldnot necessarilyimprovethe livingconditions of the people, particularly the poor - arecognitionwhichonlynowfindsecho inthe developmentposition beingtaken by the WorldBank. The concepts of"minimumneeds" and directed anti-povertyprogrammeswere imiovationsof this Plan. The Fifth Plan also marks

a point of departure from the Mahalanobis model, and areversion to the Harrod-Domar. The significance of thisshift has perhaps not been fully appreciated, but it is aclear pointer to the view that was emerging at that timethat savings may no longer be the main constraint togrowth.

The Sixth Plan, for the first time, explicitlyrecognized that the success of the Mahalanobis heavyindustrialization strategy in raising the savings rate ofthe country had created a situation where the savingsconstraint was perhaps no longer binding and indeedexcess capacities were becoming evident in certainindustries.A shift inthe pattern of industrialization,withlower emphasis on heavy industries and more oninfrastructure, begins here. By this time, however,planning was in retreat and the "Infrastructuralconstraint" was not really evaluated in the manner itshould have been. As a consequence, the institutionalchanges which should have been ushered in at this timesimply did not happen.

The Seventh Plan represents the culmination of thisshift in perspective, and may justifiably be termed as the'Infrastructure Plan'. There was a significant shift in thepattern of public expenditure towards infrastructure, butinstitutional changes were again not really contemplated.More importantly, the fiscal consequences of the largerinfrastructure outlays were not taken into account, as itshould have been if the Latin American 'Fiscal constraint'

had been factored in. It was also during this period that areappraisal of the import-substitution strategy and a shifttowards a more liberal trading regime begins. Theconsequence of the expanded public investmentprogramme and liberalization of the trading regime wasa steady widening of the balance of payments deficit anda gradual reemergence of the foreign exchange constraint.It is clear with hindsight that one of the principal reasonswhy the collateral consequences of addressing immediateconcerns was not recognized is that the Indian planningsystem never developed any short-run macroeconomicframework which could take account of these

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implications. Planning models are usually too complexto build in such features.

The Eighth Plan was overtaken by the crisis of 1991,and the economic reforms that came in its wake. The

dramatic events and policy initiatives of the two-year planholiday period between 1990 and 1992 demanded a ful!reappraisal of the planning methodology, and the EighthPlan represents the first efforts at planning for a market-oriented economy. In particular, a more complete andbetter articulated macroeconomic framework was

introch;;;e,cIin this Plan, though the modeling of privateinvestment behaviour was rudimentary at best. Althoughthe shift in planning did not entirely take place, theeconomy performed unexpectedly well, recording anaverage annual growth rate of6.7 per cent.

Unfortunately, this growth momentum could not bemaintained in the Ninth ?lan, even though the planningmethodology had adjusted substantially to reflect the newconditions. The critical point to note about the Ninth Planis that for the first time in Indian economic history it

recognised the possibility that demand rather thaninvestible resources could become the main constraint to

growth. The warning was, however, not entirely taken toheart by the economic administration in the country. Thepressures of fiscal rectitude in the face of theimplementation of the Fifth Pay Commission award ledto a sharp reduction in public investment both at theCentre and the States, which precipitated a cyclical down-turn in the economy. Agricultural failure in three out ofthe five years exacerbated the problem. But the NinthPlan was conceptually important for two reasons. First,it explicitly married planning and macroeconomictechniques, which is essential for any planning for amarket economy. Second, for the first time in Indianplanning history, the Ninth Plan attempted to integratethe financial sector into the planning framework.

The Tenth Plan marked the return of visionary

planning to India after a long period of incrementalism.It sought to double the per capita income of the countryin the next ten years and to create 100 million jobs overthe same period. To a large extent, these targets weremotivated by the demographic pattern that was emerging.It is quite clear that the single biggest challenge to Indian

planners and policy makers at least for the next decadewill be to provide employment to a labour force which is

growing faster than ever before. The demographic

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projections indicate that although there is likely to be asteadyreduction in the rate of population growth in thecountry, the growth rate of the working age populationattained a historical peak during the Ninth Plan period atabout 2.4 per cent per annum and has declined onlygradually thereafter. The growth rate of the labour force,however, is likely to be slower at 1.8to 2.1 per cent perannum, but even this needs to be seen against our pastrecordin creationof workopportunities.Duringthe 1980sand early 1990s the average rate of growth ofemployment, which is a proxy for work opportunitieshad been around 2 per cent per year, but it apparentlydropped sharply to around 1 per cent during the latterpart of the 1990s and strongly recovered to nearly 2.8per cent in the first half of the 2000s. Data problemsapart, it appears that on a sustained basis, the rate ofemployment creation is probably in the range of 1.8to 2per cent per year, and much of even this is in agriculturewith its disguised unemployment characteristics.Therefore, ifthe immediate past trends in work creationcontinue intothe future,the country faces the possibilityof adding about 2 million people to the ranks of theunemployed each year. Such a situation is clearlyinsupportable. As we are all aware, unemployment notonlyentailshighhumancosts,butalso imposessignificantcostson societyinterms of socialunrestand deteriorationof law and order.

It should be realised, however,that creation of workopportunities in itself may not solve the problem ofunemploymentand poverty.Sincethe growthof the labourforce is unevenly distributed in the different regions ofthe country,the pattern of creation of work opportunitiesbecomesextremelyrelevant. It wouldbe naIveto believethat there are no barriers or costs to large-scalemigration

within the country.Howthi~confluence can be achievedis a planning issue, and cannot entirely be left to themarkets. In particular, there will always be a tendencyfor private investment to focus on the already developedregions,which willaccentuateregionaldisparities.Unlesspublic intervention, particularly in infrastructure, cangraduallyredressthe initialimbalance,matterswill simplybecome progressively worse. Therefore, the Tenth Planlaid considerable stress on the issue of regional balanceand for the first time has a separate volume on States. Inaddition, the Tenth Plan also clearly pointed out the

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emerging skills constraint and the need to move decisivelyon this issue.

Thus, whatever be the criticism of Indian planning,it cannot be accused of being either static orunimaginative. The Indian Plans have either anticipatedor, at worst, closely followed the development of growththeory. In fact this is a record of which we can be justlyproud. By and large, the track record too has not beenbad. We have managed to decisively reverse the trend offalling per capita incomes that had characterised the first50 years of this century, and have steadily acceleratedour growth rates from an average of 3.5 per cent peryear during the 30 year period from 1950 to 1980 to 5.5per cent during 1980s, to 6.3 per cent during 1990s, andfurther to 6.9 per cent during 2000s. Food security too isno longer a matter of pressing concern, although it mayreemerge in the future, and the scourge offamines seemsto have been decisively eliminated from the country. Theincidence of poverty has also been brought down,although not as fast as we would have liked. Socialindicators have shown significant improvement from theabysmally low levels that existed at the time ofindependence.

PLANNING UNDER SIEGE: A DEFENCE

Despite these achievements, however, in recent yearsIndian planning has come under attack from a number ofquarters, both within and outside the country. As we areall aware, the winds of change are sweeping across theglobe. Countries which for long had centrally plannedeconomies are steadily reorienting themselves to a moremarket-oriented system. It sometimes comes as a surpriseto people abroad that India continues to preserve planningas a central pillar of its development strategy despitehaving had a vibrant market economy for many yearsnow: I would like to submit to you that there is nocontradiction at all; and planning has just as important arole to play in a market-economy as it did in a controlledone.

Within the country, dissatisfaction with planningemanates from two main directions. First, there is a view

that planning is almost synonymous with statism, and issymptomatic of a desire of the government to interveneexcessively in economic matters. Second, the fact that anumber of developing countries have performed betterthan India by following different growth strategies is laidat the door of planning. Much of the criticism, I believe,

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is misinformed, since it represents not a criticism ofplanningper-se,but eitherof its ideologicalunderpinningor 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, investmentplanning, whereby the government determines thequantum of investment that will go into any sector oreven industry. The argument appears to be that centralplannersare lesscompetent to take and direct investmentdecisionsthanentrepreneursoperatingunderthe disciplineof market forces. While this view is certainly true at thepresentstageof developmentof the Indianeconomy,thereare two points that need to be made to place the issue inperspective.

First, it needsto be realised that investmentplanningin its pristine sense has not existed in India at least forthe last fifteen years, when the dilution and eventualdismantling of the industrial licensing regime wasinitiated. Second, investment planning in the sense ofworking out the investment requirements of differentsectors of the economy in order to ensure inter-sectoralconsistency continues to be valid, and will be so untilsuch time as India ~ecomes a capital surplus countryand the importance of public investment diminishessignificantly. Interestingly enough the Indian corporatesector appears to share this view. Our experience at thePlanningCommissionindicatesthat the singlelargestuserof the Plan projections is in fact the private corporatesector, which recognises the value of sectoral forecastsmade in a consistent, economy-wide framework for itsown investmentdecisions.

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 basethe criticism on inter-country comparisons and not onthe basis of counterfactual simulations. The simple factis that development experiences will differ betweencountries for a host of reasons, of which the approachtaken towards development strategy is only one. Political,social and cultural factors are just as important, and it isdifficult to make allowances for these in a cross-countrycontext. The second error lies in assuming that thecountries 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 recentyears has strong planning systems, perhaps even strongerthan ours.

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All this is not to say, however, that the planningmethodology should not change so as to reflect the neweconomic realities and the emerging requirements. It must,it has and it will. A significant beginning was made in theNinth Five Year Plan itself. In sharp contrast to the past,the Ninth Plan did not lay down investment patterns in adeterministic manner. It indicated the sectoral investment

requirements, the investment that is likely to occur andthereby the areas which may receive excessive orinsufficient resources. Such an analysis focuses attentionon the sectors which require policy change in order toachieve the desired targets. This approach to my mind iswhat policy planning is all about, and it has been furtherstrengthened and refined in the Tenth Plan. The TenthPlan had also explicitly taken into account the emergenceof endogenous business cycles in the Indian economy andthe need to develop a medium-term approach whichidentifies and reacts to turning points in the growth cycle.You will have noticed the startling similarity between thisform of national planning with the corporate plans madeby large corporate houses. No economic entity which hasa long term vision can operate effectively in the absenceof a mechanism by which future scenarios are generated,opportunities and threats are analysed, and a consistentstrategy evolved. In future years this approach will needto be strengthened and made more precise and accurate.

The other principal function of planning in a federalsystem is to evolve a shared vision of and a sharedcommitment to the national objectives and thedevelopment strategy not only in the Government at alllevels, but also among all other economic agents. Nodevelopment strategy can be successful unless eachcomponent of the economy works towards a commonpurpose with the full realisation ofthe role that it has toplay within an over-all structure of responsibilities. Forthis to happen, the vision and the strategy have to beclearly articulated in a formal document which is readilyavailable to all players in the national economy. Thisfunction will always remain valid, and its proof is thatthere is no country in the world which does not havesuch a vision articulated at the highest level ofgovernment.

Finally, the third function of planning which needsto be recognised is that in a dynamicallyevolvingworld,conditions change continuously and the developmentstrategy also has to evolve in a consistent and pro-activemanner. This can only be done through a system whichtracks emerging trepds both in the international and the

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domestic economies, analyses the opportunities anddangers, and indicates the direction for policy change.

One issue which is often raised is whether there isstill a relevance for the Planning Commission inthe newscenarioor can the functionsbe carriedout by someotheragency. My answer would be that there are certainfunctions which the Planning Commission is bestequipped to perform. For instance, a body like thePlanning Commission is required in order to address thenational objectives of poverty alleviation, populationcontrol, employment generation and balanced regionaldevelopment in a holistic manner. Leaving these issuesto the sectoral Ministries runs the danger of the inter-linkagesand synergies being overlooked. The PlanningCommission is also best equipped to evolve a long-termeconomic strategy for the development of the country.Ithas brought out a Vision 2020 Document outlining thepriorities for the country over the next twenty years andthe challengeswe will face. Wehope that it will lead to anational debate and eventually to a consensus on thedevelopment strategythat we need to follow.

Another area where the Planning Commission isrelevant is in coordinating the economic activities of thecentral and state governments and among the centralministries.There isno otheragencythat isbetterequippedto play this role. As you are aware, India is a federalcountry in which the authority and responsibility forhandling various public activities are vested in differenttiers of the government by our Constitution. Coherentpolicy-making, however, requires that some agencyensures that these different and autonomous tiers do not

work at cross-purposes. For this it is essential to have aninstitution which has an economy-wide mandate. Thisfunctionwill become increasingly more important inthefuture as the process of globalisation continues. Underthe Constitution, the authority to enter into internationaltreaties and arrangements vests only in the CentralGovernment. Thus, there is always the possibility thatthe developmental responsibilities which are vested inthe States may come in conflict with internationalobligations unless there is a coordinating mechanismwhich can ensure convergence.

CONCEPTUAL ISSUES IN DEVELOPMENTSTRATEGY FORMULATION

Having argued for the continuing relevance ofplanning, the question that now needs to be addressed is

the manner in which the planning methodology mustevolve in order to take into account the greater marketorientation and increasing complexity of the Indianeconomy, its growing integration with the internationaleconomy,and the persistence of poverty and other formsof deprivation. It should be apparent that the emergenceor recognition of additional constraints to growth hasrendered simplistic the view that accumulation andefficient use of capital is the sole or even primary basisof growth which underlay virtually all of developmentplanning and policy in the earlier years. While it remainstrue that sustained growth is impossible withoutaccumulation, there is need to retain awareness of thenature and interrelationship of all the constraints if thesacrifices made in current consumption and well-beingimplied by savings are not to be rendered in fructuous.Indeed, the new role of planning is to ensure that theeconomyoperatesat the maximumgrowth ratewarrantedby the binding constraint of the moment, whichever itmay be, and the slack available in the others are utilizedto their fullest for relaxing the binding constraint overtime.

Of the five growth constraints identified in theprevious section, four - namely foreign exchange,agriculture, fiscal (or infrastructure) and financial- areconsideredas structuralconstraints, in the sensethat theyoriginate from rigidities in specific sectors. This is incontrast to the general demand-supply indication givenby the savings constraint. This distinction between thestructural constraints and the savings constraint has acrucial bearing on the conduct of policy.

In a structurally-constrainedeconomy,the very factthat the saving-constrained growth rate is greater thanthe attainable implies that the investment necessary toattainthe maximumconstrainedgrowthmustbe lessthanthe ex-ante savings. This is not a serious problem incentrally planned economies where either consumptionor planned investments in long gestation projects can beeasily adjusted, but it creates complications in a marketor a mixed economywhere private investmentsare large.Regardless of the nature of the investment demandfunction, if private investors are not willing to tolerateincreasing capacity under utilization, ex-ante privateinvestment demand is likely to fall considerably short ofex-ante savings. Thus, a generalized aggregate demandproblem arises, whereby the actual demand constrainedgrowth rate falls short of even the structurally constrainedone. Moreover, depending upon the specification of the

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investment demand function, the system may well becomeunstable or at the very least display large cyclical swingsaround a relatively low trend growth rate.

This problem is precisely analogous to the wellknown instability probkiu ~iigrowth theory which ariseswhen the Harrodian warranted rate exceeds the natural

rate. In such a scenario, public expenditure becomescrucial in order to avoid problems of current demand.The issue that needs to be worked out is the necessarylevel of public expenditure. Let the savings constrainedgrowth rate be approximated by the Harrodian warrantedrate as given in equation (3). Ifthe structurally constrainedrate is 'g' then 'v.g' is the growth in capacity required tomaintain the constrained rate. If the private sector left toitself increased capacity at the rate' i' then the governmentmust spend at a rate of(v.g-i) in creating capacity and at(s-v.g-t), where 't' is the marginal propensity to tax, onnon-capacity creating expenditure on domestic goods andservices in order to avoid aggregate demand problemsand the resulting instability. This emphasis on non-capacity creating expenditures by the government is mostimportant and is totally ignored in virtually all ofmainstream economics literature. There is a generalfeeling among most economists and laymen that non-investment expenditures of the government are a deadloss to the system and should be held to a minimum. Thisis simply not correct. Under certain circumstances, over-invl;:sLffientcan be almost as bad as under-investment since

it can lead to cyclical behaviour, and this must be bornein mind. The experience of the period from the mid-1990sto the mid-2000s should be a permanent reminder of theadverse consequences of high-amplitude business cycles.

Therefore, in a situation where the binding constraintto growth is other than the savings constraint, thegoverriinent not only has to decide on the total level ofpublic expenditures, but also its break up into investmentand consumption on the grounds of macroeconomicstability. This also has to be seen against the backdrop ofclaims on government finances on the grounds of sociallynecessary objectives. Monitoring the necessary level ofgovernment expenditure, although theoreticallydeterminate, is not easy since the parameters are likely tochange over time. However, in a predominantlyagricultural economy, a rise in aggregate demand will,ceteris paribus, raise the prices of agricultural goodsrelative to those of other sectors. This of course does not

apply to sectors which have administered prices. Thus, aconvenient rule of thumb for judging the adequacy of

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public expenditures is provided by the agricultur~l/manufacturing terms of trade. So long as this figure, ona trend basis, does not move against agriculture, publicexpenditure levels may deemed to be adequate.

In general, this sort of expansionary governmentbehaviour contains a danger of inflation. If there is adownward rigidity of non-agricultural prices because ofmark-up pricing and a ratchet effect in wage formation,an improvement in agricultural terms of trade can comeabout onlythroughan inflationaryprocess.This,however,is a necessary cost of maintaining growth levels underuncertainty and should not be a cause for concern unlessindexation is so prevalent in the system as to make anyinflationarypressureexplosive.In suchcases the solutionisnot to permitthe emergenceof a demandsqueeze-basedrecession, the dangers of which have already beendiscussed, but to reduce the extent of indexationthroughpolitical processes. Unfortunately, the standardprescriptions for inflation are all based on a savings-con~~rainedview of the economy.As a result, the knee-jerk reactIOn ;" to prescribe a dose of monetary and/orfiscal contraction.

When the fiscal constraint is in operation, however,the danger is much more serious. Since, by definition,the government is unable to raise the required resourcesfor bridging the gap between ex-ante savings andinvestments through non-inflationary means, monetaryexpansion is the most likely result. In the short run, undernormal conditions and with widely dispersed holdings ofcash balances, nothing much may happen. If, on the otherhand, the cash balances are held by a few or if theeconomy is disturbed by exogenous shocks which leadto a switch in portfolios from money balances tospeculative real commodity stocks, an inflationary cyclemay be triggered off. In the longer run, however, if thefiscal problem is not solved, any adequatf' and steadyrate of growth will inevitably be associated withaccelerating inflation.

In addition to the general problem discussed above,there are a number of other differences that arise in policymaking under different operative constraints. First, issuesof resource generation and allocative efficiency are muchless important for structurally constrained economies thanfor savings constrained ones. The primary objectives ofmedium and long run policy making for the former shouldbe to stabilize the constraining sector and then tomaximize the growth of the other sectors within the limits

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set by either the acceptable level of inflation or by thebalance of payments as the case may be. If d0ing sorequires that allocative efficiency be s~c!'iiicedit mustnecessary be accepted.

In this context mention must be made of the largevolume of literature that has been developed in recentyearsonthe 'rent seeking' or directlyunproductive(DUP)activitiesthat are createdby importrestrictionsingeneral,and quotas in particular. The argument is that in suchrestrictive regimes real productive factors are used notfor production but for cornering scarcity rents. Thisrepresents a net loss to the economy. It should beremembered, however, that this argument applies onlywhen the resources used in the DUP activity are theconstraining factors. For the most part, such resourcesare capitaland notagriculturalgoodsor foreignexchange.Thus, the argument applies mostly to savings, fiscal offinancial-intermediation constrained economies - a

distinction not drawn by the proponents of this theory,although it is obviously crucial. In the case of the fiscalconstraint, it may be argued that tax evasion is a majorsource of such funds and therefore compounds theproblem. However, it seems to be a little far fetched toclaim that tax evasion is resorted to for generating slushfunds - the implication is a very peculiar form of the'Laffer curve' indeed.

Second, the effects of one-off aid and foreignborrowing are very different under the various constraints.With the savings and the fiscal constraints, foreignresource inflows do not cause output to be higher in theshort to medium run, but allow extra capacities to beinstalled for higher output in later years. With the otherthree constraints, however, foreign funds can have a moreimmediate impact by allowing the import of constraininggoods, if the resources are so used. These windfall foreignexchange receipts, therefore, cause only step changes inoutput levels under the agriculture and foreign exchangeconstraints with very little growth effects, but have thepotential for a more sustained growth raising effect underthe savings and the fiscal constraints.

Sustained inflows of aid or debt receipts, on the otherhand, have the potential of raising growth rates in allcases. The magnitude of these effects, however, is verydifferent between different structural constraints. The

output response of the economy to additions in import

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capacity in any year depends upon the foreign exchangemultiplier.Withthe foreignexchange constraint, importsare required only for the non competitive forms ofimported goods. With the agricultural and the fiscalconstraints, however, marginal requirements ofagricultural goods or competitive imports ofinfrastructural capital goods also have to be provided.As a result, the foreign exchange multiplier in any givencountry and at a given constrained level of output isalways less in agriculture or fiscal constrained one.

Third, domestic income policies which attempt tobring out desired income distributions also have verydifferenteffectsdependinguponthe operativeconstraint.With the savings constraint, if marginal propensity tosave is positively related to real income levels, all otherconsiderations apart, greater inequality of incomes willceteris paribus result in a higher (lower) rate of growth.In the short run, however, the effects are asymmetric, inthat increased savings may well result in the demandconstraintbecomingeffectivesuchthat the levelof currentoutput falls, whereas decreased savings will have nooutput expanding effect since the problem of one of anoverall supply constraint. The most likely outcome insuch a case will be a deterioration of the balance of

payments and a tightening of the foreign exchangeconstraint.

With the foreign exchange constraint, where thebottleneck is a shortage of producer goods or relativeluxuries, both of which are demanded more out of non-wage incomes than wages, a more (less) egalitarianincomes policy'will increase (decrease) the constrainedgrowth rate. In case of the agricultural constraint,however,where the bottleneck is in necessities which areprimarilywage goods, increasedegalitarianism will tendto reduce the rate of growth.The fiscal constraint, unlikethe other, places a direct limitation on the conduct of anincomes policy. Since taxes are assumed to be rigid, anyfiscal redistribution necessarily implies a reduction inpublic investments in favour of higher currentexpenditures.This will almost always lead to a reductionin the growthrate. The problemgets furthercompoundedif the t~x system is truly progressive. In such cases,income redistribution will lead to a reduction in tax

receipts and hence to a further tightening of the fiscalconstraint.

REFLECTIONS ON PLANNING 11'1INDIA

SHORT RUN POLICY MAKING INDEVELOPING COUNTRIES

The points made above relate to the longer-runconsideration that must underlie the formulation of anydevelopmentstrategy.Atiictinctionisoftendrawnbetweendevelopment strategy and short-run policy making formeeting exogenous shocks. This is wrong. It should berememberedthat all economic shocks affect each of the

constraints to a greater or lesser extent. The policyresponse should, therefore, be based on an awareness ofwhich constraint bites post shock and the extent of slackavailable in the others. Proximate indicators may welllead to inoptimalpolicy responses.

A major source of short run fluctuations indeveloping countries is weather-related agriculturalfailure. In most cases this is a transient shock and doesnot affectthe longrun position of the various constraintsin any significantmanner. It is, therefore, unnecessary totake any steps which would lead to irreversible changesinthe economicstructure.The immediateoutcomeof such

shocks is some degree of inflation. It is, however,importantto bearinmindthe factthatwith anoligopolisticindustrial structure, relative price adjustments can takeplace onlywith someinflation. Such inflation,therefore,should be viewed not as a disequilibrium, but as anadjustment phase in which relative prices are adjustingtc :~anged supply conditions within a 'competitive'marketframework.

Efforts at curbing such inflation by contractionarymeans are distinctly counterproductive. In the firstinstance, it can be achieved only by reducing non-agriculturaloutput - which simply means adding outputcontractionto output contraction.Moreover,the massivereduction inthe incometerms of trade ofthe agriculturalsector caused by this may trigger off hardship selling ofassets, and consequently lead to an unalterable structuralchangewithin the sector.This will almost certainly havelonger run consequences on the position of the variousconstraints and on the attainment of socially necessaryobjectives.

The alternatives to contraction are either to imposea wage-price freeze on the non-agricultural sector as awhole which reduces non-agricultural real incomes at agivenoutput level,or simplyto allow inflationto continueandmakewhat adjustmentsare required. The first optionin general,will imply a tightening of the savings, fiscal

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and agricultural constraints, and a relaxation of theforeign exchange one. Thus, other than the political andadministrative problems involved,this option is credibleonly when the foreignexchangeconstraint is bindingandslack is available in the others.

As far as the second option is concerned, the majorproblem lies in the balance of payments implications.The rise in the domestic price level will ceteris paribuslead to increased non-competitiveness of domestic

products vis-a-vis foreign ones, and thereby to adeterioration of the trade balance. The subsequent pricedecline which will occur with the recovery of agriculturaloutput does not in itself solve the problem since non-agricultural prices would have settled at a permanentlyhigher level. Financing the increased trade gap by drawingdown reserves or by borrowing is a temporary measurewhich is permitted only if the foreign exchange constraintis non-binding. In all other cases, some form of real

effective exchange rate adjustment must be implemented.

The otIler major source of exogenous shocks isinternational developments such as the oil price shocksor world recession. If the shock is a transient one, and

the foreign exchange constraint is not binding, financingthe increased trade gap or minor reallocation of importsis usually sufficient. If, on the other hand, the foreignexchange constraint is binding, some reduction in short-

run growth performance is inevitable. This may beachieved by an appropriate reduction in the import-intensive components of government expenditure, suchas public investments. It should be noted, however, that

in such a situation there is a strong danger of a generalizeddemand problem arising which will drive down the growthrate to below that warranted by the foreign exchangeconstraint. Therefore, care must be taken to ensure that

the cut-back in import-intensive government expenditureis matched by an increase in domestic f'xpenditures.

In the case of more permanent international shocks,

which involve a shift not only in the intercept of the foreignexchange constraint function but also in the slope, anentire reappraisal has to be made of the constraintsscenario. If the foreign exchange constraint remains non-binding, nothing much needs to be done except for somereallocation of imports for ensuring that the reduction inthe slack falls only on non-essential imports and not onessential ones. If, however, the foreign exchangeconstraint replaces some other as the binding constraint,

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the entire policy framework will have to be re-evaluatedin order to accommodate this new reality. Failure LVdoso will involve large and totally avoidabb ::osts.

The confusion between the short run and the longrun is rampunt.Most often it involvestreating short-termtransient changes as if they are permanent. Sometimes,however, it works in the opposite direction as well. Aclassic example of this is the paradox that has beenobserved of, efforts at increasing urban employment indeveloping countries actually leading to even greaterurban unemployment in the medium to long urn. Thisphenomenon,which has received considerable attentionin the development literature, strongly suggests theexistence of adjustment mechanisms which are usuallynot present in developed countries and which argue foran entirely different macro-economics for developingcountries.Unfortunately,such an integrationof the microeconomic phenomenon with the development strategy'framework is as yet not available.

Another such instance relates to the advice that isfrequently given to developing countries which havechronic balance of payments problems to allow largeinflows of direct foreign investment. Although themotivation is more often than not ideological, thearguments are usually couched in terms of short runpositive BOP effects. It can be shown, however, that indevelopingcountries such inflows will almost invariablybe associated with a negative BOP effect in the shortrun. Thus, if any argument in favour of such a policy isto be advanced it must be made in long-run terms, andincorporated into a wider policy framework.

PLANNING NEEDS AND RELEVANT

TECHNIQUES

It should be clear from the previous sections thatthe nature of planning in an open market economy isconsiderably more complex than in a closed commandeconomy.The planningsystemnot onlyhas to set avisionfor the economy, but also chart out the policy measureswhich will allow that vision to be realized in a smooth,sustained manner without short-run disruptions. Thisrequires a wider variety of analytical instruments thanhave been deployed so far, which places new demandson the statistical system of the country. There is also aneed for far greater degree of coordination between thelong-termplanners and the short-run policy makers,suchas the Ministry of Finance and the Reserve Bank. The

importance of institutions has again reemerged as a majorconsideration for planners, which was very much a partof our early planning systems but had been relegated tothe back-burner for many years.

Let me first turn to what I perceive to be the new

analytical demands that are being placed on planningsystems and planners. First of all, let me reiterate the

point that I have made earlier - intersectoral balancingand investment planning, at least in the sense of workingout the optimal investment programme, will continue toremain important in the foreseeable future. Despite themuch greater openness of the Indian economy, our verysize and diversity will ensure that imports will continueto playa relatively small role in the economy, except in a

very few products. More importantly, traditional planningmodels are the only analytical tools that we have at presentwhich can accommodate the 'visioning' role of planning.All other tools are limited for this purpose. Thus, thecentral planning problematique of estimating sectoralinvestment needs for a visionary target will remain, and

consequently so will the use of traditional planningmodels. For this, input-output analysis is essential. Themain issue in this context is that the nature of productionprocesses has changed dramatically in the past decade orso, especially in terms of the usage of information

technology and other services. Most input-output systemshave simply not incorporated these linkages in anymeaningful manner, although they have now becomecrucial to any sectoral analysis of the economy. I recogniseof course that this is not easy to do since the standardLeontieff assumptions may not, and probably do not,apply in such cases, but it can lead to serious projectionerrors unless they are incorporated satisfactorily.Considerable research needs to go into these issues, butthere does not appear to be sufficient academic interestin this area within India.

Secondly, the planning models need to besignificantlyre-specified in order to take into account allthe new growth constraintsthathavebeen identifiedoverthe years. This too is no easy task since the behaviouralspecification of someof these constraintshave not reallybeen worked out for the Indian economy, and nor arethere sufficient international practices which can bereadily drawn upon. It is also more than likely that thedata base for estimating the parameters of many of theseconstraints may not even exist today. It is essential,

REFLECTIONS ON PLANNING IN INDIA

therefore, that academic research into planning modelswith more than one constraint has to take place in rightearnest, and we cannot today rely on others in view ofthe virtual dem~se of interest in planning in almost alldeveloped countries. As far as data is concerned, the

statistical system in the past has risen to the challengesthrown up by the planners and policy-makers, and thereis no reason to believe that it cannot do so again providedthat the data needs are worked out in sufficient detail bythe theorists.

However, planning models, especially those whichare used to embody a vision, have two major limitationsthat have to be addressed by other forms of modelingwithin a consistent conceptual framework. First, althoughplanning models are ideally suited to trace the path thatthe economy will need to follow in order to attain the

targets set by the vision, they are not designed to projectthe trajectory the economy is likely to take on a business-as-usual basis. In the absence of the latter, it is impossibleto determine the nature and magnitude of the interventionsthat the government needs to take, both in terms of policiesand programmes, in order to move the economy from itsprojected growth path to the desired. Macroeconometric

models with suitable sectoral disaggregations are bestsuited for this purpose, and it is necessary to have suchmodels as a complement to the planning model. It shouldbe ensured, however, that the closure of such aneconometric model is chosen carefully and reflects thebinding constraint of the moment.

Second, neither planning models normacroeconometric models are particularly suitable fordetermining the impact of specific policies and otherinterventions on the parameters of the economy. The twotaken together certainly give an indication of theparametric changes that are desirable given the visionand the likely business-as-usual trajectory, but they donot accommodate the effects of policy changes per se.Therefore, in order to determine the most effectiveinterventions, recourse has to be taken to models that areexplicitly designed to perform this function. The class ofmodels known as "computable general equilibrium"(CGE) models falls into this category, and are especiallysuitable for market economies where prices playadominant role in determining equilibrium. Some of thesemodels can also be used to determine the effect that

policies may have on income distribution and, with fairlystringent assumptions, even on poverty.

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Thus, the modern planner needs to have more than

one analytical arrow to his bow if he is to do justice toplanning for a market economy. This may not in itselfappear to be a daunting task, but the fact is that developingeven one large economy-wide model is an extremely time-consuming and resource-intensive task. The problembecomes even more intractable if these models have to

be embedded in a global framework, which has todaybecome a necessity as the Indian economy progressivelybecomes more integrated with the global. Fortunately,there is no reason why all of these tasks have to be carriedout by the national planning system itself. Bothmacroeconometric and CGE models are in great demandby corporate houses for their own corporate planning,and there are a number of non-government initiatives inbuilding and operating such models for such customers.Moreover, there are several good models of theinternational economy available with various degrees ofdisaggregation. The task of the planner then is to identifysuch existing models which best suit her purpose and todevelop networks that will enable these models to "speak"with each other. One function that cannot be outsourced,however, is the planning model, which has to reflect thepriorities and constraints faced by the planner herself.

In the Indian context, however, macroeconomic oreconomy-wide planning is only one component of thelarger planning system that is essential for thedevelopment of the country. This is by no means a newrecognition. Indian planning has always been supposedto operate in a tiered manner where the Centre developedthe economy-wide strategy and States worked out morespecific interventions taking into account the specificneeds and capabilities of each State. Ideally, the State-level plans were expected to aggregate to the nationaltargets, barring a few sectors which did not come underthe States' domain. Unfortunately, this has almost neverhappened since there was no method through which suchreconciliation could be carried out.

One of the main points made in the Tenth Plandocument is that the role of the States in economic

development of the country is becoming progressivelymore important, but the planning capacity in most Stateshas been seriouslyeroded. For this reason, the TenthPlanspecified a State-wisebreakdown of the major targets inorder to enable the Statesto plan more effectively.Giventhe federal nature of our country, there are limitations onthe extent to which the Planning Commission can go inmaking state-level plans. This will have to be done by

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the States themselves, and they require considerableassistance in rebuilding their planning capabilities.Unfortunately, the existing data system does not permitthe application of standard planning techniques whichare used at the national level for planning at the Statelevel. More importantly, the nature of planning at theState level should be different from that used at the

national level. States, by and large, do not havemacroeconomicinstrumentsavailableto them,and almostall State-levelpolicy interventionsare eitherat the meso-or even the micro-level.This recognitiondictates the useof completely different planning techniques. The fact,however, is that most states attempt to apply techniquessimilarto those used for national planning.This is simplywrong, but we cannot blame the States for it. Economicliterature does not have any well-established body ofliterature on planning at the sub-national level.

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The problem has been further compounded with the73rd and 74th Constitutional Amendments, which havecreated the third tier of Government. It is a Constitutional

requirement that the Zilla Parishads must develop DistrictPlans. Unfortunately, no one has any real idea as to howsuch plans are developed. It is obviously clear that districtplans will have to be mainly micro-intervention oriented,but it does not take away from the need to assess theimpact of each intervention. Moreover, the data-base tomake such assessments does not exist at present, andwill not exist until the theoretical methodologies are firstworked out. Therefore, I believe that considerabletheoretical research needs to be done to evolve suitable

planning methodologies for these lower tiers .ofGovernment. Indian planning will remain incomplete untilthis is done and the data bases established for this purpose.