(Indian Economy) Planning And Growth - Niti Aayog & Investment Models




The architect of Indian Planning was India’s first Prime Minister Pandit Jawaharlal Nehru who conceived planning as a tool of economic and social development. While he had planning model of Soviet Russia as the basis of planning, there was also a realization that development of economy could not be left alone to the government and the public sector.

Hence, planning model adopted in India was that of a mixed economy in which both public and private sectors work hand in hand. Mixed economy as a model of economic development was adopted in 1948 even before the setting up of the planning Commission in 1950. It was in 1951 that the first Five Year Plan was formulated on the basis of democratic planning under which both public and private sectors would work together.

It was felt that State could play a significant role both in raising the rate of domestic savings as well as investment. The Planning machinery could also mobilize idle labour for creating productive assets like infrastructure apart from achieving the basic goals of social justice.

The role of public sector was to be overwhelming as this sector was expected to shoulder the major responsibility of growth, development, as well as social change with the baking of the State and the Planning Commission. Public Sector Enterprises were described as temples of modern India. The dominance of public sector found expression i9n the form of Nehru-Mahalanobis model of heavy industries which was adopted in the Second Five Year Plan beginning in 1956. It was this model which was also expected to bring about socialist pattern of society through its trickle down impact, which implied that the fruits of development of heavy industries would trickle down to the masses to bring about socialistic pattern. These expectations of planners completely misfired as heavy industry model led to concentration of economic power in the hands of a few industrialists who cornered the fruits of development of these industries on the basis of licence and quota system and Inspector Raj. It also simultaneously led to the relative neglect of agriculture due to which there were acute food shortages throughout the sixties which led to the adoption of green revolution.

Although the model of planning was democratic planning, in actual practice it was centralized planning with predominance of the public sector. Contribution of the private sector was largely by way of licences and quotas which were cornered by a handful of industrialists, so that planning was in the form of ‘planning by inducement’.

It was from 1922 that a definite shift took place in planning strategy from “planning by Inducement’ to “Indicative Planning” under which the private sector was expected to perform a much greater role than public sector. In other words, Market forces of demand and supply were to play a much bigger role in all shapers of economic activity. It was felt that the process of planning and the pattern of government activities followed hitherto had dampened people’s initiatives and their sense of responsibility towards building the nation. The process of planning, therefore, needed to be corrected in this respect and the role of planning as well as the Planning Commission needed to be redefined. The Eighth Five Year Plan 1922-97 was the first indicative planning model. This plan was prepared in the backdrop of economic reforms based on Rao-Manmohan model which, inter alia, brought about large scale de-licensing of several industries to do away with inspector raj. Globalisation and Privatisation had become key instruments throughout the world to push growth. The ideology of Thatcherism based on aggressive privatization of major government enterprises in Britain under the leadership of Margaret Thatcher was delivering results. This prompted many countries to dilute the role of government and incentivize private sector. It also saw the disintegration of communist world under the USSR.

However, throughout thereafter, Planning Commission in India continued to remain the principle policy formulation body. It was only after the 11th Five Year Plan that laud whispers were heard about the limitation of Planning Commission as the apex institution. As early as 2009. The then Prime Minister Dr. Manmohan Singh made a statement that the role of Planning Commission needs to be redefined and it should only continue to being a think tank somewhat like the Chinese model.

The Commission was seen by many as a lingering vestige of the country’s attempt to replicate the Soviet model of a planned economy. Many observers felt that there were cases where in-principle approvals, investment clearances, grants-in-aid and other decisions appeared to smack of bureaucratic red tape as also visible vestiges of communal and control inspector raj mindset.

In this backdrop it was decided in 2014 that the planning commission would be disbanded in favour of a new institution that better reflect the country’s federal structure and copes with the emerging economic challenges. It was observed that the central government was no longer the fulcrum of economic development and states will have to be taken on the board as equal stakeholders. As such there was need to revive moribund forums like the National Development Council and inter State Council to have a model of development driven by states and modelled on China’s National Development and Reforms Commission.

Accordingly, a new body to replace the planning Commission has been set up namely National institute for Transforming India or in brief NITI Aayog.

Setting up to this new body does not take away from the Planning commission its immense contribution over 60 year of functioning like evolving inclusive planning, rationalising centrally sponsored schemes, acting as spokesperson for States. Encouraging decentralised planning, facilitating economic reforms (particularly after 1991) and acting as an independent evolution machinery in terms of Government programmes and their critique. Besides the formulation of the 12th Five Year Plan clearly bears the stamp of the Planning Commission which adopted an although different pattern of preparing the plan by constituting working groups on public utilities like water and rural development as well as on Panchayati Raj headed by experts drawn from different organisations as well as from industry and research institutions.

The 21th century has seen most of the reforms in India led by the State Government rather than the Central State like Gujarat, Madhya Pradesh, and Andhra Pradesh have introduced innovative schemes with far reaching impact on the welfare of the people. Even the concept of BIMARU States has been proved wrong by excellent and pioneering work of some of the States whose growth rates has been much higher than the national average.

In this regard, it must also be mentioned that the Planning Commission has played a significant role in streamlining, rationalizing and reduction of centrally sponsored schemes through extensive consultations with States. This had resulted in taking over major responsibility by States for such activities suited to their conditions. Guidelines for several centrally sponsored schemes have accordingly been modified by the Planning Commission to suit location specific designs and other conditions of different states. Planning Commission has also been responsible in recent years for being spokesperson of States in increasing their royalty from minerals.

It is expected that the NITI Aayog will take over this role of the Planning Commission in earnest. Cooperative federalism being the main plank of centre’s functioning. Greater role is envisaged for the National Development Council set up in 1952. As a non-statutory body because it has representation of Chief Ministers of all State.

NITI Aayog has since started its work and its task force on agriculture has recommended big bang reforms to address the politically sensitive issue of frequent spurt in crop prices. These include guaranteed prices for at least half of the key crops, setting up of a unified national agriculture market, changing land lease laws and creating a mechanism to facilitate easy exit for farmers who want to move out of agriculture. The comprehensive report prepared in this regard task about the need to address issue of bad weather, fluctuation in crop prices and demand and supply problems.

The Aayog has also taken over appraisal of the ambitious high-speed railway network.

The Twelfth Five Year Plan (2012-17) prepared under the UPA Government lays down a GDP growth target of 8 per cent with its theme of faster, sustainable and more inclusive growth. It lays down 25 indicators for this pattern of growth, major highlights of the plan are as follows.

1. Growth Rates: DP 8.2 percent, agriculture 4 per cent, manufacturing 7 per cent, Industry 7.6 per cent and Services 9 percent.

2. Poverty and Employment: Head-count ratio of consumption poverty to be reduced by 10 percentage points over the preceding estimates by the end of Twelfth Five Year Plan. Generate 50 million new work opportunities in the non-farm sector and provide skill certification to equivalent numbers during the Twelfth Five Year Plan.

3. Education
(a) Mean Years of Schooling to increase to seven years by the end of Twelfth Five Year Plan.
(b) Enhance access to higher education by creating two million additional seats for each age cohort aligned to the skill needs of the economy.
(c) Eliminate gender and social gap in school enrolment (that is, between girls and boys, and between SC,s STs, Muslims and the rest of the population) by the end of Twelfth Five year Plan.

4. Health
(a) Reduce IMR to 25 and MMR to 1 per 1000 live births, and improve child Sex Ration (0-6 years) to 950 by the end of the Twelfth Five Year Plan.
(b) Reduce total Fertility Rate to 2.1 by the end of Twelfth Five Year Plan.
(c) Reduce under-nutrition among children aged 0-3 years to half of the NFHS-3 levels by the end of Twelfth Five Year Plan.

5. Infrastructure, including Rural Infrastructure:
(a) Increase investment in infrastructure as a percentage of GDP to 9 percent by the end of Twelfth Five Year Plan.
(b) Increase the Gross Irrigated Area from 90 million hectare to 103 million hectare by the end of Twelfth Five Year Plan.
(c) Provide electricity to all villages and reduce AT&C losses to 20 percent by the end of Twelfth Five Year Plan.
(d) Connect all villages with all weather roads by the end of Twelfth Five Year Plan.
(e) Increase rural tele-density to 70 percent by the end of Twelfth Five Year Plan.
(f) Ensure 50 percent and rural population has access to 55 LPCD piped drinking water supply and 50 percent of gram panchayats achieve the Nirmal Gram Status by the end of Twelfth Five Year Plan.

6. Environment and Sustainability
(a) Increase green cover (as measured by satellite imagery) by 1 million hectare every year during the Twelfth Five Year Plan.
(b) Add 30000 MW of renewable energy capacity in the Twelfth Plan.
(c) Reduce emission intensity of GDP in line with the target of 20 percent to 25 percent reduction by 2020 over 2005 levels.

7. Service Delivery
(a) Provide access to banking services to 90 percent Indian house-holds by the end of Twelfth Five Year Plan.
(b) Major subsidies and welfare related beneficiary payments to be shifted to direct cash transfer by the end of the Twelfth Plan, using the Aadhar platform with linked bank accounts.

The plan identifies twelve core areas that require fresh approach to produce the desired results. These are Enhancing capacity for higher GDP growth, enhancing skills and faster generation of employment, managing environment, well regulated markets, land, labour, capital and goods, decentralization and empowerment, Technology and innovation, Secure Energy future for India, Accelerated development of transport infrastructure, Rural Transformation and Sustainable agriculture, Managing urbanization, Better Prevention and curative health care and improved access to quality education.


Economic growth and development poses various challenges to policy makers to adopt a strategy which fulfils not only the aspirations of people but also ensures long term, sustainable growth to encompass all the sectors of the economy. In this regard, the choice of an appropriate investment model becomes paramount India’s planned growth since the Second Five Year Plan (1956-61) was based on an investment model called the Nehru-Mahalnobis model which was a four-sector model version of the two-sector Harrod-Domar model.

Many investment models have been put forward by various economists after the Second World War which can address growth aspirations of a majority of developing economies which got freedom after the war. A list of some prominent models Is given below.

(i) Lewis model of development with surplus labour.
(ii) Harrod-Domar model based on experiences of advanced economies.
(iii) Public Private Partnership model- mainly to meet the demand for infrastructure.
(iv) BOT models-based on Build, Operate, Transfer/Build Operate Lease transfer or Own Operate Transfer.
(v) Private Finance Initiative model based on the responsibility of private sector to design construct and operate an infrastructure facility.
(vi) Foreign Direct Investment including FDI in green field investment and brown-field investment.
(vii) Foreign Portfolio Investment.

Performance of the Indian economy has been lackluster in the last few years due to both domestic and global factors. On domestic front the economy has been in the grip of what Economic Survey 2014-15 calls macroeconomic vulnerability expressed by “Macro Economic Vulnerability Index” which comprises three variables viz. fiscal deficit, inflation and current account deficit. The first two are on the domestic front while the third one is on the external front of balance of payments. However, conditions have radically changed in 2015 during which both inflation and current account deficit have come down to much below the critical level. Yet, performance of the economy has not been up to the mark as global factors like slowdown in eurozone and more importantly the recent slowdown in China are a cause of serious concern.


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