Planning in India

The first principle

Growth needs investment, and investment needs saving, so a poor country must decide how much of today's small output to set aside for tomorrow and where to put it. In 1950 India's private capital was too scarce and too cautious to build steel plants, dams and power grids on its own, so the state took on that decision through planning. As the economy grew and markets deepened, the state's role shifted from deciding investment to coordinating and enabling it, which is the journey from the Planning Commission to the National Institution for Transforming India (NITI Aayog).

The core

Why India chose to plan

• Ideas before independence. M. Visvesvaraya's Planned Economy for India (1934), the National Planning Committee set up by the Congress under Jawaharlal Nehru in 1938, the Bombay Plan of leading industrialists (1944), the Gandhian Plan (1944), M. N. Roy's People's Plan (1945) and Jayaprakash Narayan's Sarvodaya Plan (1950) all agreed that the state must lead investment, though they differed on how far.
• The constitutional basis. "Economic and social planning" is entry 20 of the Concurrent List, and the Directive Principles in Article 39 ask the state to distribute material resources for the common good and prevent the concentration of wealth.
• The Planning Commission. It was set up by a Cabinet resolution on 15 March 1950 with the Prime Minister as chairperson, so it was neither constitutional nor statutory. The National Development Council (NDC), formed in 1952 with the Prime Minister, Union ministers and all Chief Ministers, approved each Plan and gave it national standing.
• Kinds of planning. Imperative or command planning, as in the Soviet Union, fixes outputs and prices by order; indicative planning, as in post war France, sets targets for the public sector and signals priorities to private firms. India began with a large public sector inside a mixed economy and became openly indicative from the Eighth Plan.

The arithmetic behind the Plans

• The Harrod–Domar relation. If s is the share of output saved and invested and v is the incremental capital output ratio (ICOR), the capital needed to raise output by one rupee, then the growth rate g = s ÷ v. The First Plan rested on this logic, and later Plans ran it backwards to find the investment a growth target required.
• A worked example. With a saving rate of 30 per cent and an ICOR of 4, growth is 30 ÷ 4 = 7.5 per cent; if capital is used wastefully and the ICOR rises to 6, the same saving gives only 5 per cent. To reach 9 per cent growth with an ICOR of 4, investment must be 9 × 4 = 36 per cent of gross domestic product (GDP). The example shows why Plans cared both about raising saving and about using capital efficiently.
• The Mahalanobis model. P. C. Mahalanobis designed the Second Plan around the idea that investing in capital goods, such as steel and machine tools, raises the economy's future capacity to invest and therefore its long run growth. That logic, with the Industrial Policy Resolution of 1956, gave the public sector the commanding heights of heavy industry.

The Plans and their aims

• Building, 1951 to 1966. The First Plan put irrigation, power and agriculture first and beat its growth target of 2.1 per cent; the Second built steel plants and heavy industry; the Third aimed at self reliance but was derailed by the wars of 1962 and 1965 and the droughts of the mid 1960s.
• Crisis and poverty, 1966 to 1980. Three annual plans from 1966 to 1969, the plan holiday, saw the start of the Green Revolution. The Fourth Plan sought growth with stability, and the Fifth made the removal of poverty a goal; the Janata government ended the Fifth Plan in 1978 and replaced it with a rolling plan, revised every year.
• Growth and anti poverty programmes, 1980 to 1992. The Sixth Plan spread the Integrated Rural Development Programme (IRDP), and the Seventh stressed food, work and productivity; annual plans followed in 1990 to 1992 during the balance of payments crisis.
• Indicative planning, 1992 to 2017. The Eighth Plan, the first after the reforms of 1991, made human development its focus; the Ninth sought growth with social justice and equity; the Tenth set a target of 8 per cent with monitorable social targets; the Eleventh aimed at faster and more inclusive growth with a 9 per cent target; and the Twelfth sought faster, more inclusive and sustainable growth at 8 per cent. The Twelfth Plan ended on 31 March 2017 and was the last.

Dimensions

• Economic. Planning built a broad industrial base, national laboratories, dams and a food secure country, but tight licensing and a loss making public sector held growth near 3.5 per cent a year for three decades, a pace the economist Raj Krishna called the Hindu rate of growth.
• Federal. The Planning Commission decided Plan grants to States through the Gadgil formula (1969) and its later revisions, and through centrally sponsored schemes, so States saw it as a central body that overrode their priorities. This is a main reason it was replaced.
• Decentralised. The 73rd and 74th Amendments of 1992 required gram panchayats and municipalities to plan for their areas, and Article 243ZD requires a District Planning Committee to consolidate these plans, though in many States these bodies remain weak.
• Social. Plans carried the state's social goals, from the Minimum Needs Programme of the Fifth Plan to the inclusive growth agenda of the Eleventh, which is the subject of the inclusive growth note.
• Institutional. Critics called the Planning Commission a super Cabinet, because it shaped ministry budgets without answering to Parliament; NITI Aayog was designed as a think tank without that power over funds.

In practice

• From Commission to NITI Aayog. The end of the Planning Commission was announced on 15 August 2014, and NITI Aayog was created by a Cabinet resolution on 1 January 2015. The Governing Council, with the Chief Ministers of all States and of Union Territories with legislatures and the Lieutenant Governors of the other Union Territories, took over the federal role of the NDC.
• The end of Plan spending. From the Union Budget of 2017-18 the old split of spending into Plan and non Plan was dropped in favour of revenue and capital spending, and transfers to States now flow through the Finance Commission and the ministries rather than through a planning body.
• New planning documents. In place of five year plans, NITI Aayog published a Three Year Action Agenda for 2017-18 to 2019-20 and the Strategy for New India @75 (2018), and now works towards the Viksit Bharat @2047 goal of a developed India by the centenary of independence.
• Competitive federalism. NITI Aayog ranks States on indices such as the Sustainable Development Goals (SDG) India Index, on which India's composite score rose from 57 in 2018 to 71 in 2023-24, and it runs the Aspirational Districts Programme (2018) for 112 lagging districts and the Aspirational Blocks Programme (2023) for 500 blocks.
• Innovation and evaluation. The Atal Innovation Mission (2016) funds Atal Tinkering Labs in schools and incubators, and the Development Monitoring and Evaluation Office (DMEO) attached to NITI Aayog evaluates central schemes.

Issues and way forward

• Advice without money. NITI Aayog cannot allocate funds, so its influence depends on persuasion and on the indices it publishes; tying its evaluations to budget decisions, through outcome budgets, would give its work more weight.
• States need their own capacity. Many State planning boards are thin, and several States have remodelled them on NITI Aayog; strong State think tanks and District Planning Committees would make planning genuinely bottom up, as the 73rd and 74th Amendments intended.
• Long horizons and short terms. A vision for 2047 outlasts many governments, so it needs interim targets that are measured and published, which DMEO's evaluations and the SDG framework can supply.
• Coordination in a market economy. Infrastructure, energy transition and skilling still need the state to coordinate many actors, which is why tools such as PM Gati Shakti for infrastructure are a form of indicative planning without five year plans.

Common confusions

• Planning Commission and Finance Commission. The Planning Commission was an executive body that made Plans and gave Plan grants, while the Finance Commission is a constitutional body under Article 280 that recommends how taxes are shared between the Union and the States.
• NDC and the Governing Council. The NDC approved Five Year Plans, while the Governing Council of NITI Aayog discusses national priorities and has no Plan to approve.
• Plan holiday and rolling plan. The plan holiday of 1966 to 1969 replaced a Five Year Plan with three annual plans after crisis, while the rolling plan of 1978 to 1980 was a five year plan revised every year.
• Imperative and indicative planning. Imperative planning commands outputs, while indicative planning sets targets for the state and signals priorities to private firms.

For the exam

• Keyword bank: Planning Commission (1950), National Development Council, Harrod–Domar model, incremental capital output ratio, Mahalanobis model, commanding heights, plan holiday, rolling plan, indicative planning, NITI Aayog (2015), Governing Council, cooperative and competitive federalism, Aspirational Districts Programme, Viksit Bharat @2047, District Planning Committee.
• Previous year questions: Practise the previous year questions on this topic →
• Use in an answer:
  • Introduction with data: Twelve Five Year Plans from 1951 to 2017 moved India from a growth target of 2.1 per cent in the First Plan to targets of 8 and 9 per cent in the last three.
  • Introduction with a source: The Cabinet resolution of 1 January 2015 created NITI Aayog to foster cooperative federalism through structured support to the States, replacing a Commission that had planned from the centre since 1950.
  • Conclusion: Planning in India has changed from deciding investment to coordinating it, and its success now rests on how well NITI Aayog and the States turn long term vision into measured outcomes.
  • Conclusion: The Plans built the base on which the reforms of 1991 grew, and the lesson of both eras is that the state is most useful where markets alone cannot coordinate.