The “Master” Plan : Do centralized planning agencies help?

Akshita Manocha Words of Freedom Leave a Comment

In the last Weekly Your View, we asked you whether having a centralized planning agency has helped the country. Out of 22 poll takers, 52% said yes while 48% did not think that the agency has helped the country. Some of you even pointed out that due to inefficiency, issues in implementation or just inability to adapt planning strategies, the planning commission has not been able to do a good job.

The concept of 5 year plans as adopted by India has its roots in Gosplan of erstwhile Soviet Union. Gosplan stands for Gosudarstvenniy Komitet po Planirovaniyu i.e, state committee for planning which was formally established in 1923. In 1950, the planning commission was established with a resolution of the Council of ministers. The resolution demanded an organization not involved in day to day administration and in touch with ground realities to undertake the task of planning and assess resources. Thus, India established the Planning Commission to undertake this responsibility. The reason for adopting a planned economy in India is generally considered to be Nehru’s bent towards the Soviet model of governance. However, there are disputes regarding this view as some contest that Netaji Subhash Chadra Bose had formulated economic plans since 1938 and the British had also established a planning board for India. The school texts extol the adoption of planned economy and the concept of five year plans. We are rarely taught or rather we rarely hear any criticism of centralized planning. What we haven’t been told is that C. Rajgopalachari, the last governor – general of India and Minister of Home Affairs of the Indian Union, was opposed to central planning but the opposition was disregarded by Nehru. Professor B.R Shenoy, a classical liberal economist appointed in a panel to review the 2nd five year plan, wrote a dissent note for the second Five year plan due to the proposed state economic controls and the consequent curtailment of personal freedom and democracy. He was against the state intervention of markets for the sake of planning.

Criticism of 5 year planning and planning commission and its relevance is rare to find. We have been brought up to appreciate socialist ideas and it is difficult for us to imagine a future without a planning commission or plans. In fact one of the characteristics of a socialist economy is centralized planning. In a 1959 seminar titled Freedom and Planning, Amartya Sen discussed the question of why India needs economic planning and elaborated that the real question is not why planning but why India needs socialism. He went on to say that if India wanted growth, it cannot take the path that the industrialized nations took as it would take decades before India reached a substantial growth level and therefore a centralized planning system was required to guide and push growth. Even in 1991, when the economy was liberalized, state intervention reduced and markets opened, people did not question much the relevance of a central planning commission in the new era. There were a few editorials suggesting shifting from centralizing planning to a lesser form of indicative planning.

But the idea of doing away with planning has never occurred to us. Planning is considered to be vital for under developed and developing nations as they are to compete with much advanced industrialized economies. While we all know that the planning commission formulates five year plans with the finance commission and draws the poverty line, what we miss is its function of allocation of resources and funds. Which sector gets how much and which state gets how much? What has to be subsidized? Which sector requires more spending? It allocates funds to sectors and states, thus it sets the course for a country’s economy. From Asian to African to Latin American countries, all employ economic planning. But since the breaking down of erstwhile USSR in 1990s, countries are shifting from planned economies to market economies. The most successful example is Estonia which has been termed as one of the Baltic Tigers. It moved away from the USSR and did not adopt the centrally planned economy but adopted liberalization and industrialization. Its GDP growth rate was above 8% in 2011. It is an advanced economy according to the IMF. Similarly, look at the Asian Tigers i.e, Singapore, Taiwan, Hong Kong and South Korea. They adopted liberalized economy and achieved high growth rates as compared to closed nations like North Korea, Cuba or Russia who have not been able to grow much.

However, despite evidence of the constraining effects of central planning on economy, we have never had the courage to shift from the planned economy and adopt the spontaneous order of the market. Despite indications of obsoleteness from our planning commission itself like the low set poverty line, we continue to maintain the commission. In 2011, the commission came under attack due to its 32 rupee a day poverty line. In response, Arun Maria was tasked to make procedures and tools of planning commission compliant with 21st century. However, according to critics, the 12th 5 year plan does not reflect anything remotely related to 21st century. The new consultative process for the New Approach to the 12th Five Year Plan was written with new information but with the same people and the same mindsets.

The idea that the economy has to be planned is central to our socialist approach despite liberalization in 1991. Welfare programs are popular measures which reap votes whereas capitalists and businessman are portrayed as evil since they have profits and income which we do not possess. Instead of asking for an environment which creates opportunities for poor through reduced licensing and economic freedom, we demand programs for poor which just hands out money to them. As we can see, our planning has obviously not worked for poor. It has limited opportunities for entrepreneur and despite 12 five year plans we still have 21.9 % of people living below the poverty line and that too when the poverty line is set at 32 rupees per day for urban and 26 rupees per day for rural.

Planning is a daily task we all undertake for ourselves. We plan our days and our lives but we don’t let others plan for ourselves. The same idea applies to the government. When the government plans resource allocation for individuals, entrepreneurs or businesses it will not have the best interests of the entrepreneur in mind. It will not know the ground realities and its policies are not based on the perspective of individual but have to confirm to the idea of socialism so that it is accepted and appreciated by all. And when we use the term entrepreneur we do not restrict its meaning to CEO’s and managers, but it includes the chai wallah or the family running the local mom and pop stores. The government plans for them, deciding what they can sell and how. If central planning is replaced by free market the entrepreneur decides for himself. His self interest is profit and for profit he knows that the consumer needs to be satisfied. That is how a market functions. But planning tampers with markets. A simple example of intervention with market will be the rate of autos. We know that the autos charge excessively even if they follow the rates set by government. Had it been left to demand and supply, they would have charged what the consumer would reasonably pay for the services. But the fear that consumer will exploit the auto wallah results in a minimum price that the consumer has to pay irrespective of its reasonableness.

Neither planning nor free market can promise end of inequality and poverty but free market can ensure that an environment of opportunities is created, entrepreneurship is not thwarted and people get a chance to earn an honest living without being constrained by licenses. Ironically the same licenses are central to planning that is meant to reduce poverty. As for inequality, it is high time we understood that the world is not equal. An equal world is a myth which can be turned into a reality only by being equally bad or equally poor. Therefore, focus should be on improving the standard of living for everybody rather than aiming to bring the rich down so that they are closer to the poor.

-Akshita Manocha
Research Associate, Centre for Justice @India Institute

The opinion statistics are based on the results of our poll – Weekly Your View- posted on our social media on 22nd May,2014.