India's Planning

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  • 7/7/2014 Evernote shared notebook: economics India

    https://www.evernote.com/pub/crazyphoton/economicsindia/#st=p&n=72b3a577-53c5-4558-ac74-4952adf6b989 1/9

    Planning

    Thursday, March 8 2012, 1:03 PM

    Eminent Economists

    Gadgil

    1. He was a pioneer of cooperative movement in India and had setup the Maharastra sugar cooperatives. In his PhD thesis, he criticized the policy of deindustrialising India and

    showed Lewis model (transition of surplus labor from agriculture to organized sector) was not applicable to India.2. He was a great persuader and persuaded the bureaucracy and others about the utility of planning. He wanted to encourage local bodies and reign in bureaucrats.

    3. He strongly believed that the deprived class should get its fair share and for this the rich had to be regulated. He introduced the concept of decentralized planning. This concept

    has been included in the 74th Amendment and now Zila Parishads are required to prepare District Development Plans.

  • 7/7/2014 Evernote shared notebook: economics India

    https://www.evernote.com/pub/crazyphoton/economicsindia/#st=p&n=72b3a577-53c5-4558-ac74-4952adf6b989 2/9

    Vakil (Bombay Plan)

    Q. Throw light on wage goods model of CN Vakil and PR Brahmanand. (2011, II, 15)

    Features

    1. Wage goods are the typical consumer goods necessary for subsistence and work. Since not all capital goods are related to wage good production, only those capital goods should be encouraged which help in wage goods. This integrated wage goods complex should grow at a rate higher than population growth in order to absorb disguised

    unemployment.

    2. The disguised labor earns .w which is the APPL in agriculture. If he is employed in the wage goods sector, he will be paid w. So increment for him will be (1-).w. Thus he

    consumes less and produces more. So a multiplier effect comes into play.

    3. This surplus is the savings which if channelized back, can fuel multiplier growth. Also since the capital-output ratio is lower, lower savings is required for growth.

    4. This would lead to equal distribution of wealth. Locationally it will be defused, non inflationary. No dependence on foreign capital.

    5. Since diminishing returns will creep in, population growth needs to be stabilized before output gets stabilized.

    Limitations

    1. It ignores TFP gains.

    2. It ignores the necessity of forward and backward linkages, development of infrastructure.

    3. It will only lead to short term gains.

    4. It is high cost and inefficient. Contrary to modern factory system of production.

    Comparison with Mahalonobis Plan

    1. Mahalonobis was not concerned with employment which was central to Gadgil.

    2. Mahalonobis plan was inflationary since capital goods investments have long gestation period. So while AD increases, AS doesn't.3. Gadgil was more of a private venture plan, Mahalonobis was left oriented plan.

    4. Gadgil model was the export oriented model pursued by SE Asian countries while Mahalonobis model was an import substitution model.

    Other Contributions

    1. He did a study of India's fiscal policy and proved that Indian interests were not always kept in mind. He then asserted that in following India's fiscal policy, Indian interests only should matter.

  • 7/7/2014 Evernote shared notebook: economics India

    https://www.evernote.com/pub/crazyphoton/economicsindia/#st=p&n=72b3a577-53c5-4558-ac74-4952adf6b989 3/9

    VRV Rao

    1. He was an eminent educationalist and was education minister under JLN. He founded DSE, IISSc.

    2. He was associated with NI accounting and the modern system of statistics collection was setup by him.

  • 7/7/2014 Evernote shared notebook: economics India

    https://www.evernote.com/pub/crazyphoton/economicsindia/#st=p&n=72b3a577-53c5-4558-ac74-4952adf6b989 4/9

  • 7/7/2014 Evernote shared notebook: economics India

    https://www.evernote.com/pub/crazyphoton/economicsindia/#st=p&n=72b3a577-53c5-4558-ac74-4952adf6b989 5/9

    History

    Initial Efforts

    1. In 1938, a National Planning Committee was setup with Nehru as its head. But it had no experience in planning and all it did was to highlight the set of problems an independent In

    dia would need to handle urgently.

    2. In 1945, M N Roy came up with a People's Plan.

    3. A group of leading industrialists too came up with their own plan chalking out clear priorities and approach. This is called Bombay Plan.4. In 1950, Nehru setup the Planning Commission with some politicians, industrialists and retired civil servants. They took help of leading economists of the nation, however, at

    that time economics had not developed much and economists were not of much help.

    1st FYP

    Targets

    1. Savings: Domar Model says: I / I = Y / Y = Savings Rate x Marginal Efficiency of Capital. MEC = Y / I. It is assumed here that GDP growth is investment led. So efforts

    were made to increase the savings rate of the economy. Initially SR was 5% and the target was to make it 20% by 1967 (end of 3rd Plan) and maintain at that level till 1975. If

    that happened India could achieve a growth of 5% p.a.

    Philosophy

    1. Basic cause for backwardness was seen in lack of capital accumulation and not lack of demand. So the focus should be on investments.

    2. Lack of capital accumulation was due to lack of savings.

    3. Even if domestic savings could be raised there were structural problems in converting these savings into investments.4. Agriculture is subject to diminishing returns but industry is not and it can absorb surplus labor from agriculture.

    5. A reliance on market mechanism would increase wealth in the hands of rich and lead to over consumption and lack of capital accumulation. At the same time a revolutionary

    redistribution of assets would be counter productive as well. So inequality to a certain degree can be tolerated.6. The 1st FYP document better understood the need of indicative planning in a mixed economy and sought to coordinate the industrial planning with the formulation of other

    economic policies like customs, excise, fiscal, EXIM policy etc. The second and later plans were more concerned merely with allocation of public resources and much less with

    policy formulation and coordination.

    2nd FYPPhilosophy

    1. The pillars of Nehru - Mahalonobis strategy were - (a) high savings rate, (b) heavy industry bias, (c) protectionist policies and public sector, (d) import substitution, and (e)

    socialistic pattern of society.

    2. Mahalonobis made 2 modifications: (a) Harrod Domar assume that additional Investment comes from profits made. Mahalonobis changed it to state generated since India was to follow socialistic path. (b) Harrod Domar have single sector economy. Mahalonobis changed it to 2 sector and 4 sector.

    Performance

    1. Industrial output grew @ 8 - 10% p.a. Food grains grew @ 3% p.a. Per capita income grew @ 1.75% p.a.

    Mahalanobis' 2 Sector Model

    = Y / I (in capital goods sector)

    c = Y / I (in consumer goods sector) = Share of capital goods sector in Investment

    c = Share of consumer goods sector in Investment

    = Initial Investment / Initial Y = { * (. + c.c)/.}.{(1+ .)^t -1}

    Heavy Industries vs Light Industries

    1. Long term growth argument: It is clear that over a long term, higher the k, higher the growth. So he stressed on investing in commanding heights of the economy, to sacrifice present consumer goods for capital goods.

  • 7/7/2014 Evernote shared notebook: economics India

    https://www.evernote.com/pub/crazyphoton/economicsindia/#st=p&n=72b3a577-53c5-4558-ac74-4952adf6b989 6/9

    2. Import substitution argument: India will no longer need to rely on imports of foreign capital goods which are the critical imports.

    3. Savings: If a high savings rate is to be achieved and sustained profitable investment opportunities have to be provided on a sustained basis. Such opportunities will only arise

    and remain if we invest in capital goods.

    Implications of Heavy Industries Strategy

    1. Small scale and wage good industries: The importance of wage goods industries was recognized in the plan documents. It was acknowledged that heavy industries have long

    gestation period and in the situation of increased money but no corresponding increase in supplies inflation would result. Moreover population was increasing and increasing population needed increased consumer goods. But the production of consumer goods was left to private small scale sector since factories didn't offer a huge advantage over

    small units and also input-output ratio was large and gestation period was small.

    2. Place of agriculture: Agriculture's importance was also recognized in the plan documents and it was emphasized that India can't progress until we have to import food. Food

    inflation and scarcity could easily derail any planning.3. Place of public sector: It was given a dominant role since the gestation period was long, profits were low so private sector would not be capable. This would help check

    monopolies, give government better control of economy and help usher in a socialistic pattern of society.

    4. Role of private sector: Large areas of economy were left to private sector but it was expected to play a complementary role to public sector. It had to function harmoniously

    with the planning objectives.5. Role of foreign trade and capital: Foreign capital in the form of aid was heavily relied upon due to lack of domestic savings as well as foreign exchange reserves. Export

    promotion was envisaged but was neglected.

    6. Emp