Planning Commission & Niti Ayog : The Torch Bearer for the Economic Development Of India

Author : CA A. K. Jain

-Chapter Headings-

A. Preamble : Planning Commission

B. Evolution of the Five-Year Plans

C. Shortcomings :

1. Bureaucratic Inefficiencies and Red Tape :
2. Inefficient Public Sector Enterprises :
3. Lack of Incentives for Innovation and Efficiency :
4. Balance of Payments Crisis :
5. Heavy Subsidies and Deficit Financing :
6. Underperformance of Agriculture :
7. Global Comparison :
8. Dependency on Foreign Aid :
9. Regional Disparities :
10. Environmental Concerns :

D. Key Achievements of Five Yearly Planning :
1. Industrial Development :
2. Agricultural Growth :
3. Infrastructure Development :
4. Social Sector Advances :
5. Transition to Market Economy :
6. Sustainable Development Goals (SDGs) :
7. Decentralized Planning :
8. Innovation and Technology :

Preamble : Niti Aayog, The Think Tank

A. Accomplishment Credited to NITI Aayog
1. Policy Innovation :
2. Ease of Doing Business :
3. Aspirational Districts Program :
4. Digital Transformation :

B. Scope for Improvement :
1. Policy Implementation Monitoring :
2. Data-Driven Decision Making :
3. Collaboration with States :
4. Innovation and Technology Integration :
5. Public Awareness and Feedback Mechanisms :
6. Evaluation and Impact Assessment :
7. Sustainable Development Goals (SDGs) Integration :
8. Inequality and Regional Disparities :
9. Criticism of Consultative Process :

Economic Planning In Other Countries
1. India :
2. United States :
3. China :
4. Russia :
5. Australia and Canada :

Conclusion

Preamble

The Indian Five-Year Plans were a series of comprehensive economic development initiatives implemented by the Indian government since independence in 1947. Initially inspired by the Soviet model of mixed economy or socialist pattern with centralized economic planning, India's planning system aimed to achieve rapid industrialization, technological advancement, and social welfare. This concept due to inherent limitations and weakness failed to deliver.

The failure of the mixed economy or socialist pattern in India can be attributed to bureaucratic inefficiencies, unproductive public sector enterprises, lack of innovation, fiscal deficits, and a severe balance of payments crisis. The economic reforms initiated in 1991 marked a significant shift towards a more market-oriented economy, leading to improved growth rates, reduced poverty, and greater integration with the global economy.

With economic liberalization reforms initiated in 1991, India shifted towards a market-oriented economy, reducing the centrality of Five-Year Plans in economic policy formulation. Subsequently, the Planning Commission, which formulated the Five-Year Plans, was replaced by the NITI Aayog (National Institution for Transforming India), signalling a departure from the centralized planning model towards a more decentralized and flexible approach to economic development.

Evolution of the Five-Year Plans

The first Five-Year Plan (1951-1956) focused on agriculture, power, and social services, aiming to achieve a growth rate of 2.1%. Subsequent plans shifted emphasis towards heavy industries, infrastructure, and self-reliance, with varying success rates. The planning process evolved with each plan incorporating feedback and adjusting priorities based on changing economic circumstances. Some of the major shortcomings and achievements are mentioned below.

Shortcomings : The mixed economy or socialist pattern of economy adopted by the Indian government after independence in 1947 was designed to combine the strengths of both the public and private sectors. However, several factors contributed to its limited success and eventual need for significant economic reforms. Here are some key reasons for limited success of five year centralised planning.

1. Bureaucratic Inefficiencies and Red Tape :
The Indian economy was heavily regulated through the License Raj, which required businesses to obtain numerous permits and approvals to start and operate. This system led to significant delays, corruption, and stifling of entrepreneurship. One of the significant criticisms of the Five-Year Plans is the gap between planning and implementation. Many projects faced delays, cost overruns, and inefficiencies due to bureaucratic red tape, corruption, and lack of coordination among various stakeholders.

2. Inefficient Public Sector Enterprises :
Many public sector enterprises were poorly managed, leading to low productivity and financial losses. These enterprises often became bloated with excessive staffing due to political pressures.

3. Lack of Incentives for Innovation and Efficiency :
Heavy state control over key sectors reduced competition and incentives for innovation. Private sector participation was limited, leading to technological stagnation. For example , in the automotive sector, lack of competition meant that Indian consumers had limited choices and faced high prices for substandard vehicles.

4. Balance of Payments Crisis :
By the late 1980s, India faced a severe balance of payments crisis. Foreign exchange reserves dwindled to the point where they could cover only a few weeks of imports. In 1991, India's foreign exchange reserves had plummeted to less than $1 billion.

5. Heavy Subsidies and Deficit Financing :
The government’s emphasis on subsidies and welfare programs without corresponding revenue generation led to high fiscal deficits. For an example, the agricultural sector received substantial subsidies, but without accompanying reforms, this led to inefficiencies and distortions in the market.

6. Underperformance of Agriculture :
While the Green Revolution initially boosted agricultural production, it later faced diminishing returns due to lack of further technological innovation and investment.

7. Global Comparison :
Countries like South Korea, Taiwan, and later China, adopted more market-oriented reforms earlier and witnessed rapid economic growth and poverty reduction. South Korea’s GDP per capita grew from about $100 in 1960 to over $10,000 by 1990, whereas India’s grew much more slowly.

8. Dependency on Foreign Aid :
In the initial stages, the plans heavily relied on foreign aid and assistance, which raised concerns about sovereignty and long-term sustainability. The Second Five-Year Plan (1956-1961) saw substantial assistance from countries like the Soviet Union and the United States.

9. Regional Disparities :
Development remained uneven across regions, with disparities among different states. The benefits of economic development were often unevenly distributed, exacerbating income inequality and disparities between urban and rural areas. States like Bihar and Odisha lagged behind in development.

10. Environmental Concerns :
Rapid industrialization and urbanization during the planning era led to environmental degradation, including pollution and depletion of natural resources.

Key Achievements of Five Yearly Planning

Spearheaded by the Planning Commission, Five Yearly Planning was an ambitious initiative aimed to harness resources efficiently, reduce regional disparities, and propel the nation towards self-sufficiency. Some of the major achievements of five year planning system are listed here in below.

1. Industrial Development :
The first Five-Year Plan (1951-1956) laid the foundation for industrial growth by prioritizing heavy industries such as steel, power, and infrastructure. The establishment of Bhilai Steel Plant, Bokaro Steel Plant, Hindustan Aeronautics Limited and the Damodar Valley Corporation. By the end of the first plan, industrial production had shown significant growth, setting the stage for future expansions.

2. Agricultural Growth :
Agriculture, being the backbone of India's economy, received substantial attention under the planning framework. Initiatives like the Community Development Program aimed at modernizing agriculture, enhancing irrigation facilities, and promoting rural electrification. Green Revolution strategies introduced during subsequent plans (1960s onwards) further revolutionized agricultural productivity, ensuring food security and rural prosperity.

3. Infrastructure Development :
The planning era witnessed massive investments in infrastructure, including roads, railways, ports, and telecommunications. Projects like the construction of the Bhakra Nangal Dam for irrigation and hydroelectric power, and the establishment of the Indian Institutes of Technology for technical education, underscored the commitment to modernizing India's infrastructure backbone.

4. Social Sector Advances :
Centralized planning prioritized social welfare and human development through initiatives like the establishment of premier educational and research institutions, healthcare facilities, and rural development programs. The establishment of the All India Institute of Medical Sciences (AIIMS) and the expansion of primary education exemplify efforts towards building a skilled and healthy workforce.

Transition to Market Economy

With economic liberalization reforms initiated in 1991, India shifted towards a market-oriented economy, reducing the centrality of Five-Year Plans in economic policy formulation. Subsequently, the Planning Commission, which formulated the Five-Year Plans, was replaced by the NITI Aayog (National Institution for Transforming India), signalling a departure from the centralized planning model towards a more decentralized and flexible approach to economic development.

1. Sustainable Development Goals (SDGs) :
The contemporary development agenda focuses on achieving sustainable development goals, necessitating a more holistic and inclusive approach beyond traditional economic indicators.

2. Decentralized Planning :
There's a growing emphasis on decentralized planning, empowering local governments and communities to address regional disparities and ensure grassroots participation in development initiatives.

3. Innovation and Technology :
Embracing innovation and technology-driven growth has become imperative for India to compete globally and address emerging challenges such as climate change and digital divide.

Niti Aayog, The Think Tank

Preamble

NITI Aayog, or the National Institution for Transforming India, was established on January 1, 2015, to replace the erstwhile Planning Commission, with the aim of fostering cooperative federalism and promoting sustainable development goals. It serves as the premier policy think tank of the Government of India, providing both directional and policy inputs to various ministries and states.

The NITI Aayog’s action agenda is a comprehensive document outlining the framework of policy changes. Implementation of these policies is meant to take place in the short term in India. The NITI Aayog action agenda is part of a larger vision document that has now replaced the erstwhile five year plans of the planning commission.

Accomplishment Credited to NITI Aayog

1. Policy Innovation :
NITI Aayog has been instrumental in introducing innovative policies and initiatives, such as the Atal Innovation Mission , which aims to promote entrepreneurship and innovation among Indian youth.It has initiated reforms in areas such as agriculture, healthcare, education, and infrastructure. For instance, the Aayog introduced the National Health Policy 2017 and the National Education Policy 2020, aiming to modernize and improve these sectors.

2. Ease of Doing Business :
The institution has played a significant role in improving India's ranking in the Ease of Doing Business index, facilitating reforms at both the central and state levels to streamline regulations and boost investment.Through its continuous efforts to streamline regulations, reduce bureaucracy, and enhance transparency, India's position in the global rankings has significantly improved from 142nd in 2014 to 63rd in 2019.

3. Aspirational Districts Program :
One of NITI Aayog's flagship initiatives, the Aspirational Districts Program, targets socio-economic development in 112 backward districts across India, focusing on key indicators like healthcare, education, and infrastructure.

4. Digital Transformation :
NITI Aayog has actively promoted digital transformation and the adoption of emerging technologies through initiatives like the National Strategy for Artificial Intelligence and the Blockchain Policy Framework.

Scope for Improvement

NITI Aayog, the premier policy think tank of the Government of India, has a crucial role in guiding India's economic and social policies. While it has made significant strides since its inception in 2015, several areas for improvement exist.

1. Policy Implementation Monitoring :
One of NITI Aayog's key roles is to monitor the implementation of policies across various sectors. However, there have been instances where policies formulated by NITI Aayog have faced challenges in effective implementation. For example, the rollout of GST (Goods and Services Tax) faced initial implementation hurdles despite NITI Aayog's endorsement and support.

2. Data-Driven Decision Making :
While NITI Aayog emphasizes data-driven policy making, there is room to enhance the quality and timeliness of data used. For instance, improving data collection methodologies in sectors like agriculture and healthcare could lead to more accurate policy recommendations. Case in point, the Pradhan Mantri Fasal Bima Yojana faced criticism due to discrepancies in crop yield data used for insurance payouts.

3. Collaboration with States :
NITI Aayog's mandate includes fostering cooperative federalism by working closely with state governments. Strengthening this collaboration could lead to more effective policy implementation at the grassroots level. The example of the Aspirational Districts Programme highlights successes where local challenges are addressed through targeted interventions and partnerships with states.

4. Innovation and Technology Integration :
Leveraging emerging technologies such as AI and block chain for policy formulation and monitoring could enhance efficiency and transparency. For instance, incorporating block chain in subsidy distribution systems can reduce leakages and ensure benefits reach intended beneficiaries.

5. Public Awareness and Feedback Mechanisms :
Enhancing public engagement and feedback mechanisms can ensure policies are more inclusive and responsive to citizens' needs. The MyGov platform and initiatives like the Atal Innovation Mission are steps in this direction, but further outreach efforts could improve effectiveness.

6. Evaluation and Impact Assessment :
Strengthening mechanisms for evaluating the impact of policies post-implementation is critical. Robust impact assessment frameworks can help in course correction and refinement of policies. For example, the evaluation of the Swachh Bharat Mission has shown mixed results in terms of sanitation coverage and behavioral change.

7. Sustainable Development Goals (SDGs) Integration :
While NITI Aayog has aligned national policies with SDGs, integrating these goals more deeply into sectoral policies and tracking progress rigorously could enhance India's progress towards achieving the SDGs by 2030. Case studies from sectors like renewable energy adoption and healthcare accessibility can illustrate successes and challenges.

8. Inequality and Regional Disparities :
While NITI Aayog aims to promote inclusive growth and reduce regional disparities, progress in this regard has been uneven, with certain regions and marginalized communities continuing to lag behind in terms of development indicators.

9. Limited Fiscal Autonomy :
Unlike its predecessor, the Planning Commission, NITI Aayog lacks fiscal powers, which limits its ability to allocate funds and directly influence resource allocation for developmental projects.

10. Criticism of Consultative Process :
Some stakeholders have criticized NITI Aayog for its top-down approach to policy formulation, which they argue does not sufficiently involve states, local bodies, and civil society organizations in the decision-making process.

By addressing these areas, NITI Aayog can further strengthen its role as a catalyst for policy reform and economic development in India. Implementing targeted improvements supported by case studies, figures, and factual analysis will be crucial in achieving sustained positive impact across sectors.

Economic Planning In Other Countries

The method of economic planning varies significantly between developed countries and countries like India, where centralized bodies such as the Planning Commission (now replaced by Niti Aayog) play a crucial role in national economic planning. Here’s a comparative look at the planning methods in India versus some developed countries like the United States, China, Russia, Australia, and Canada:

India :
India historically followed a socialist-inspired economic planning model with a central planning authority, first the Planning Commission and now Niti Aayog, tasked with formulating Five-Year Plans and guiding national economic policies. Key features include:

1. Centralized Planning :
The Planning Commission (now Niti Aayog) formulated Five-Year Plans outlining national priorities, targets, and resource allocations across sectors like agriculture, industry, and social development.

2. Top-down Approach :
Decision-making was largely centralized, with the Planning Commission/Niti Aayog influencing policy and resource allocation at the national level.

3. Mixed Economy :
India maintained a mixed economy with both public and private sectors, with planning aimed at balanced growth and social equity.

4. Example :
During the Green Revolution (1960s-70s), the Planning Commission focused on agricultural modernization to achieve food self-sufficiency, impacting national food security policies.

United States:
The United States contrasts sharply with India in its approach to economic planning:

1. Market-driven :
The U.S. largely relies on market forces to allocate resources, with minimal central planning. Government intervention tends to be sector-specific (e.g., infrastructure, defense).

2. Decentralized :
Economic decisions are decentralized, with states, local governments, and private enterprises playing significant roles.

3. Regulatory Approach :
Government agencies (e.g., Federal Reserve) manage monetary policy, but long-term economic planning is less centralized and more market-responsive.

4. Example :
The U.S. federal government sets broad economic policies (e.g., tax codes, trade policies) but leaves detailed planning to states and private enterprises.

China :
China represents a unique blend of central planning and market mechanisms:

1. State-led Planning :
The Chinese government sets strategic economic goals and targets through Five-Year Plans overseen by agencies like the National Development and Reform Commission (NDRC).

2. State-Owned Enterprises (SOEs) :
Significant sectors are dominated by SOEs, which align with national planning objectives (e.g., infrastructure, heavy industry).

3. Market Reforms :
Since the late 1970s, China has gradually introduced market-oriented reforms while maintaining central planning control.

4. Example :
China's recent Five-Year Plans emphasize technology innovation and sustainable development goals, influencing global markets.

Russia :
Russia’s planning approach has evolved from Soviet-era central planning:

1. Transition to Market Economy :
Post-Soviet Russia shifted from centralized planning to a market economy, though state influence remains significant in strategic sectors (e.g., energy, defense).

2. Economic Liberalization :
Government policies focus on deregulation, privatization, and attracting foreign investment.

3. Regional Disparities :
Economic planning addresses regional disparities and economic diversification efforts.

4. Example :
Russia's economic strategy under Vladimir Putin includes infrastructure development (e.g., energy pipelines) to strengthen geopolitical influence.

Australia and Canada :
Both countries feature market-driven economies with limited central planning :

1. Resource-based Economies :
Australia and Canada emphasize resource extraction (e.g., mining, agriculture) with policies to manage environmental impacts and indigenous rights.

2. Decentralized Governance :
States and provinces play significant roles in economic planning, aligning with federal policies on issues like environmental regulation and infrastructure.

3. Example :
Australia's planning focuses on sustainable development (e.g., renewable energy transition), while Canada's policies address regional economic disparities (e.g., Northern development initiatives).

In summary, while India historically relied on centralized economic planning through institutions like the Planning Commission and now Niti Aayog, developed countries like the United States, China, Russia, Australia, and Canada emphasize market-driven mechanisms with varying degrees of state intervention in strategic sectors and regional development. The balance between centralized planning and market dynamics shapes each country's approach to economic growth, resource allocation, and social welfare.

Conclusion

Both the Planning Commission and NITI Aayog have played significant roles in shaping India's development trajectory, but each has faced criticism for shortcomings. Let's delve into their strengths and weaknesses:

Planning Commission provided a centralized framework for economic planning fostering national development goals. It played a crucial role in India's initial success in achieving self-sufficiency in agriculture. However, states had limited say in planning, leading to a "one-size-fits-all" strategy that did not work well. Bureaucratic hurdles, lack of follow up and accountability blemished the effectiveness. Besides, the initial focus was primarily on economic growth, neglecting crucial social welfare aspects.

In NITI Aayog greater state involvement in planning is intended to create more responsive and adaptable policies but lacks the financial resource allocation authority of the Planning Commission, is hindering its ability to influence change. Besides, as a body directly under the Prime Minister's office, there's a concern of potential political bias in its policy recommendations. The long-term effectiveness of its approach compared to the established Planning Commission model remains to be proven.

The NITI Aayog should come up with new reforms, with clue from the neighbouring countries, for example from the experience of the now industrialized Chinese state. It ensured after its market-oriented economic reforms began China created special economic zones to push manufacturing and export-oriented industries. The general rules of business were eased in these zones, marked out in areas with better infrastructure and access to cheap labour for investors. Indian special economic zones that came up decades later lacked such push and better incentives to attract foreign investors in numbers and size to give China a competition. China made a shift by promoting green energy like solar power and reducing its dependence on coal massively. China has emerged as the second-largest solar energy producer. India may emulate Chinese example to reduce its dependence on coal and oil, most of which it imports. China with its proper implementation of strategies became the “factory of the world” that was backed by an industrial policy that is driven by the Reforms Commission and the National Development. Similarly, in all Southeast Asian and East Asian countries, industrial policy has always been planned and has been executed as part of the five-year or longer-term plans.

While Southeast Asian and East Asian countries still have and had five-year plans, the thing that was also integral to their planning was the productive use of labour, the most abundant factor of these countries, through an export-oriented manufacturing strategy. Such strategies have been lacking in India’s planning.

Being the strategic gizmo of government policy decisions for economic development, NITI Ayog should focus on the implementation rather than only focusing upon the recommendations of the policies. It should also be focussing upon the reforms and informing the government as to where it will have to face the consequences for non-implementation of its policies and where it is falling short. The establishment of NITI Aayog gave positive results but there is a need to change and focus on areas that have been discussed in this article.

 

Author : CA A. K. Jain
Email: caindia@hotmail.com
Cell: +91 9810046108

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