MODULE 2

Concept of Economic Planning & Development

Economic Planning refers to a deliberate effort by a government or authority to influence, direct,

or control economic activities in order to achieve specific social or economic objectives, such as
rapid economic growth, equitable distribution of income, or the reduction of poverty. In economic
planning, governments set priorities for sectors and allocate resources (capital, labor, etc.) to meet
national development goals.

Economic development, on the other hand, is the process through which a nation improves the
economic well-being of its citizens by increasing their per capita income, reducing poverty,
enhancing infrastructure, providing employment opportunities, and ensuring better healthcare,
education, and standards of living.

In India, economic planning has played a critical role in shaping the nation's development
trajectory. The Planning Commission of India, established in 1950, was the main body
responsible for formulating and overseeing the implementation of Five-Year Plans aimed at
guiding India's development.

Phases of Economic Planning in India

1. Post-Independence Era (1950–1980s):

o Heavy Industry Focus & Public Sector Dominance: The early Five-Year Plans
emphasized self-reliance, rapid industrialization, and the public sector's leading role,
following the socialist-leaning economic ideology. The first five-year plan (1951–
1956) focused on agriculture, but by the second and third plans, the focus shifted
toward heavy industries and infrastructure.
o Green Revolution: In the late 1960s and 1970s, India implemented the Green
Revolution, a program of agricultural modernization that led to food security and
the reduction of reliance on food imports.
2. Economic Liberalization (1991-present):
o Liberalization, Privatization, and Globalization (LPG) Reforms: In 1991, India
shifted from a highly controlled economic model to a more market-driven economy.
The focus moved from state-controlled industries to privatization and the
liberalization of trade and investment. This economic reform spurred growth,
increased foreign investment, and expanded private enterprise.
o Planning Commission Replaced by NITI Aayog: In 2015, the Planning
Commission was replaced by NITI Aayog (National Institution for Transforming
India). Unlike the Planning Commission, NITI Aayog is focused more on a
cooperative, decentralized approach, encouraging competitive federalism and long-
term strategic planning, as well as giving more decision-making power to the states.
Present Situation of Economic Planning & Development in India

1. Growth Trajectory:
o India is one of the fastest-growing major economies globally. In 2023, it surpassed
the UK to become the world's fifth-largest economy, with a focus on sectors like
information technology, services, manufacturing, and pharmaceuticals.
o Economic growth, however, has been uneven, with challenges such as
unemployment, income inequality, and poverty remaining significant issues.
2. Key Government Programs:
o Make in India: This initiative focuses on boosting the manufacturing sector and
creating jobs by encouraging both domestic and foreign investments in
manufacturing.
o Digital India: Aimed at transforming India into a digitally empowered society, this
initiative seeks to improve internet access, digital literacy, and infrastructure,
enabling the growth of the digital economy.
o Atmanirbhar Bharat: Meaning "Self-Reliant India," this initiative, launched
during the COVID-19 pandemic, focuses on boosting domestic industries, reducing
reliance on imports, and supporting local businesses.
3. Sectors Driving Economic Development:
o Agriculture: India remains a primarily agrarian economy, with agriculture
employing a significant portion of the population. Recent reforms, including
agricultural marketing reforms, have attempted to modernize the sector.
o Services Sector: The services sector, particularly information technology (IT),
telecommunications, and financial services, has become the largest contributor to
India’s GDP.
o Manufacturing: The government is trying to boost the manufacturing sector under
the Make in India initiative, targeting growth in sectors like electronics,
automobiles, and renewable energy.
4. Challenges Facing Development:
o Unemployment: While economic growth has been robust, job creation has not kept
pace, particularly for young people and in rural areas.
o Income Inequality: Economic benefits have been concentrated in urban areas and
among wealthier sections, leaving a large section of the rural population
underdeveloped.
o Infrastructure Deficit: While there has been progress, significant investments are
still required in infrastructure, including roads, railways, energy, and healthcare.
o Climate Change: India is vulnerable to the effects of climate change, including
extreme weather events. Balancing industrial growth with environmental
sustainability remains a significant challenge.
5. Role of NITI Aayog:
o NITI Aayog has moved away from centralized planning and focuses on creating
long-term strategies and policies, promoting competitive federalism by
encouraging states to develop region-specific plans and compete for resources.
o It also works on initiatives like the Sustainable Development Goals (SDGs) and
monitors India's progress on various global indices, while working with
international bodies to enhance India's global competitiveness.
Indian Economic System

India's economic system is a mixed economy, which combines elements of both capitalism and
socialism. In this system:

 Public and private sectors coexist: The public sector focuses on key industries such as
defense, infrastructure, and public utilities, while the private sector plays a dominant role
in areas like manufacturing, services, and consumer goods.
 Market-driven growth with government intervention: The economy is largely driven
by market forces, but the government actively intervenes through policies and regulations
to promote social equity, reduce poverty, and ensure balanced regional development.

Industrial Policy of the Government of India

Industrial policy refers to the strategies and initiatives undertaken by the government to promote
industrial growth and development. Over the decades, India's industrial policies have evolved
significantly.

Historical Evolution of Industrial Policy

1. Pre-1991 (License Raj):

o Government tightly regulated industries through licensing, quotas, and tariffs.
o The public sector dominated critical industries, and private sector participation was
limited by stringent controls.
2. Post-1991 (Economic Reforms and Liberalization):
o In 1991, India introduced Liberalization, Privatization, and Globalization
(LPG) reforms to open the economy.
o Licenses were abolished for most sectors, and foreign direct investment (FDI) was
encouraged.
o Emphasis shifted from public sector control to private sector and global
competition.

Latest Industrial Policy Initiatives

India does not have a single "latest" overarching industrial policy document but instead promotes
sector-specific and cross-sectoral policies. However, the most significant recent strategies include:

1. Make in India:
o Launched in 2014 to make India a global manufacturing hub.
o Focus on 25 sectors, including automobiles, pharmaceuticals, textiles, electronics,
and renewable energy.
o Objectives: Increase manufacturing's share in GDP, create jobs, attract foreign
direct investment, and improve infrastructure.
2. Production Linked Incentive (PLI) Schemes:
o Aims to incentivize companies to enhance their production capacities in key sectors
like electronics, pharmaceuticals, textiles, automobiles, and renewable energy.
 o The PLI scheme provides financial incentives based on the incremental sales of
goods produced in India over a specific period.
3. Atmanirbhar Bharat (Self-Reliant India):
o Launched in 2020, this initiative emphasizes boosting domestic industries, reducing
reliance on imports, and promoting local manufacturing.
o Focuses on creating a strong, resilient economy through investment in industries
like defense, electronics, renewable energy, and pharmaceuticals.
4. National Infrastructure Pipeline (NIP):
o The government has laid out plans to invest $1.4 trillion in infrastructure
development from 2019 to 2025.
o Focus areas include roads, railways, airports, ports, and digital infrastructure, which
are critical for industrial growth.

Foreign Trade Policy

The Foreign Trade Policy (FTP) of India aims to enhance the country’s international trade by
promoting exports and regulating imports. The policy typically spans five years and is reviewed
annually. The most recent policy, Foreign Trade Policy 2023-2028, focuses on the following:

1. Targeting Exports Growth:

o The government aims to achieve $2 trillion in goods and services exports by 2030.
o Key focus areas include textiles, electronics, engineering goods, chemicals,
pharmaceuticals, and IT services.
2. Promotion of E-commerce Exports:
o The new policy promotes exports via e-commerce platforms, which are expected
to grow significantly. The government has also simplified the e-commerce export
process, including introducing e-EXIM platforms for streamlining logistics.
3. Districts as Export Hubs:
o The government plans to identify and develop districts as specialized export hubs.
This initiative aims to promote region-specific products, such as handicrafts,
textiles, and agricultural produce, from different parts of India.
4. Market Access Initiatives:
o The policy emphasizes creating new trade relationships and expanding into non-
traditional markets, including Africa, Latin America, and the CIS (Commonwealth
of Independent States) countries.
o India is working on expanding bilateral trade agreements with several countries,
including the UK, the EU, and the UAE.
5. Export Promotion Schemes:
o Schemes like the Merchandise Exports from India Scheme (MEIS) and Service
Exports from India Scheme (SEIS) provide financial incentives for exporters in
goods and services sectors.
o The Remission of Duties and Taxes on Export Products (RoDTEP) scheme
reimburses embedded taxes not refunded by other schemes.
Fiscal Policy of India

Fiscal Policy refers to the government's use of revenue collection (mainly through taxes) and
public expenditure to influence the economy. India's fiscal policy is managed by the Ministry of
Finance and is essential for addressing macroeconomic challenges such as inflation,
unemployment, and economic growth.

Recent Fiscal Policy Measures

1. Tax Reforms:
o Goods and Services Tax (GST): Introduced in 2017, GST unified India's complex
indirect tax structure, subsuming multiple taxes into one tax system. It has
simplified tax compliance for industries and enhanced revenue collection.
o Corporate Tax Cuts (2019): The government reduced the corporate tax rate from
30% to 22% to attract investment and stimulate business growth. For new
manufacturing companies, the rate was further reduced to 15%.
2. Public Investment in Infrastructure:
o The government has prioritized public spending on infrastructure to spur economic
growth. The National Infrastructure Pipeline (NIP) and Gati Shakti programs
focus on multi-modal infrastructure development.
o Investment in railways, highways, renewable energy, and digital infrastructure
continues to be a key fiscal policy tool to generate employment and boost industrial
development.
3. Fiscal Stimulus during the COVID-19 Pandemic:
o The government launched a series of stimulus packages under the Atmanirbhar
Bharat Abhiyan. These packages included liquidity support for MSMEs, direct
income support for vulnerable sections, tax relief, and investment in healthcare and
infrastructure.
4. Debt Management:
o India has been managing its fiscal deficit (the gap between government expenditure
and revenue). While the pandemic increased the deficit, the government aims to
bring it down to 4.5% of GDP by FY2025 through prudent spending and enhanced
revenue generation.
5. Public Sector Reforms:
o The government is actively reducing its involvement in non-strategic sectors by
privatizing loss-making public sector enterprises and promoting strategic
disinvestment.
Monetary Policy in India

Monetary policy refers to the actions taken by a country's central bank to control the money supply,
interest rates, and inflation to achieve macroeconomic stability and promote economic growth. In
India, the Reserve Bank of India (RBI) is responsible for formulating and implementing
monetary policy.

Objectives of Monetary Policy in India

1. Price Stability: Controlling inflation is a primary goal of the RBI. Stable prices are
essential for sustainable economic growth.
2. Economic Growth: RBI aims to balance controlling inflation while promoting economic
growth by ensuring adequate credit flow to industries.
3. Exchange Rate Stability: Maintaining a stable currency is important for trade and
investment, and the RBI intervenes in foreign exchange markets as needed.
4. Financial Stability: RBI monitors the health of banks and financial institutions to ensure
the stability of the financial system.

Instruments of Monetary Policy

1. Repo Rate: This is the rate at which the RBI lends to commercial banks. A higher repo
rate increases borrowing costs, reducing inflation, while a lower repo rate promotes
borrowing and investment.
2. Reverse Repo Rate: The rate at which the RBI borrows money from banks. It helps in
absorbing excess liquidity from the banking system.
3. Cash Reserve Ratio (CRR): The percentage of total deposits that banks are required to
keep with the RBI. Increasing the CRR reduces liquidity in the banking system.
4. Statutory Liquidity Ratio (SLR): The portion of deposits banks must invest in
government securities. Changing the SLR affects the availability of funds for lending.
5. Open Market Operations (OMOs): The buying and selling of government securities by
the RBI to manage liquidity.
6. Liquidity Adjustment Facility (LAF): A tool for managing short-term liquidity
imbalances by offering repo and reverse repo options to banks.

Monetary Policy Committee (MPC)

 In 2016, the government introduced the Monetary Policy Committee (MPC), a six-
member body responsible for deciding the policy interest rates to achieve inflation
targeting.
 The current inflation target is 4% (+/- 2%), meaning inflation is allowed to fluctuate
between 2% and 6%. This framework aims to ensure price stability.
Bank Reforms in India

Bank reforms in India have been aimed at modernizing the banking system, improving efficiency,
and making the sector more resilient to economic challenges. These reforms have evolved since
India's independence, with key phases post-1991 due to financial liberalization and the global
financial crisis in 2008.

Key Banking Sector Reforms

1. Nationalization of Banks (1969 and 1980):

o Major private banks were nationalized to increase government control over the
banking sector, ensure financial inclusion, and provide more access to credit for
rural areas and priority sectors.
2. Post-Liberalization Reforms (1991):
o Following the 1991 economic crisis, India introduced wide-ranging banking sector
reforms under the recommendations of the Narasimham Committee. Key reforms
included:
 Reducing government control over banks.
 Allowing the entry of private sector banks and foreign banks.
 Improving banking efficiency by setting capital adequacy norms and
improving non-performing asset (NPA) management.
 Promoting greater financial autonomy to public sector banks.
3. Bank Consolidation:
o To improve operational efficiency and financial strength, several public sector
banks have been merged. For example, in 2019-2020, the government merged 10
public sector banks into four large entities.
o This move is aimed at creating globally competitive banks that are better equipped
to handle large credit requirements and withstand economic shocks.
4. Insolvency and Bankruptcy Code (IBC) 2016:
o The IBC was introduced to address the growing problem of NPAs in the banking
sector by providing a time-bound insolvency process for companies and
individuals.
o This law has improved the resolution of bad loans and provided better recovery
mechanisms for banks.
5. Recapitalization of Banks:
o The government has periodically injected capital into public sector banks to
strengthen their balance sheets, especially to deal with rising NPAs. Recent
recapitalization efforts were part of the Indradhanush Plan and other
recapitalization bonds.
6. Digital Banking Reforms:
o The government and RBI have encouraged digital banking through the promotion
of payment platforms like Unified Payments Interface (UPI), digital wallets, and
online banking services.
o Initiatives like Pradhan Mantri Jan Dhan Yojana (PMJDY) have aimed to bring
unbanked populations into the formal banking system by providing access to zero-
balance accounts and digital payment systems.
 7. Banking Regulation (Amendment) Act, 2020:
o This amendment brought cooperative banks under the supervision of the RBI,
improving their governance and financial soundness.
8. NBFC Reforms:
o Non-Banking Financial Companies (NBFCs) have also undergone reforms to
improve their regulatory framework, especially after the IL&FS crisis in 2018. The
RBI has tightened the rules for NBFCs in terms of asset quality, liquidity
management, and capital requirements.

Challenges of the Indian Economy

Despite significant growth and reforms, the Indian economy faces multiple challenges, which
hinder its potential for higher and more inclusive growth. Key challenges include:

1. Unemployment and Jobless Growth

 The Indian economy has struggled with the problem of jobless growth, especially in the
formal sector. While the economy grows, sufficient jobs are not created, especially for the
youth.
 Unemployment rates remain high, particularly among educated youth, as the labor market
struggles to absorb the growing workforce.

2. Income Inequality

 Economic growth has been unevenly distributed, with wealth concentrated among a small
elite. While urban areas and wealthy regions benefit from globalization and reforms, large
sections of rural India remain impoverished.
 This inequality has led to disparities in access to healthcare, education, and infrastructure.

3. Rural Distress and Agrarian Challenges

 Agriculture, which employs nearly half of the Indian workforce, contributes less than 20%
of GDP. Low productivity, poor infrastructure, dependence on monsoons, and inadequate
access to credit continue to plague the sector.
 Farmer protests over inadequate minimum support prices (MSP), water scarcity, and
rising input costs reflect the deep-rooted problems in India's agricultural sector.

4. Infrastructure Deficit

 India's infrastructure, including roads, railways, ports, and power supply, is inadequate
to support the high levels of growth needed for industrial expansion and global
competitiveness.
 Although significant progress has been made with initiatives like Bharatmala and
Sagarmala, there is still a long way to go.
5. Inflationary Pressures

 While inflation has been under control in recent years, food and fuel inflation remain
volatile, especially during crises such as the pandemic or global geopolitical tensions (e.g.,
Russia-Ukraine war).
 Supply chain disruptions can often lead to price hikes, especially in essential
commodities.

6. Non-Performing Assets (NPAs) in the Banking Sector

 Despite banking reforms, the Indian banking sector continues to struggle with high levels
of NPAs. While the IBC has helped resolve some of the bad loans, further efforts are
needed to manage the banking sector's financial health.

7. Slow Industrial Growth

 The manufacturing sector’s contribution to GDP has been relatively stagnant, and the
government’s Make in India initiative has not yet fully realized its potential.
 Challenges include low productivity, inadequate technological innovation, and complex
regulations.

8. External Vulnerabilities

 India remains vulnerable to external shocks, such as fluctuations in global crude oil prices,
trade wars, and global financial crises, which can impact the current account deficit and
exchange rate stability.

9. Climate Change and Environmental Concerns

 India is highly susceptible to the effects of climate change, such as erratic monsoons,
rising temperatures, and extreme weather events. This poses risks to agriculture, water
availability, and overall economic stability.
 Balancing economic growth with environmental sustainability remains a significant
challenge.
Rural Development in India

Rural development refers to the process of improving the quality of life and economic well-being
of people living in rural areas, typically outside cities and towns. In India, rural development is a
key focus area due to the large proportion of the population residing in rural regions
(approximately 65% of India’s population). The government has initiated various programs to
promote rural development through infrastructure building, agricultural improvement, poverty
alleviation, skill development, and improving access to essential services like health and education.

Key Objectives of Rural Development in India

1. Poverty Alleviation: Reducing the high levels of poverty in rural areas.

2. Employment Generation: Creating opportunities for sustainable livelihoods.
3. Agricultural Development: Improving agricultural productivity, irrigation, and crop
diversification.
4. Infrastructure Development: Providing better roads, housing, sanitation, electricity, and
water supply.
5. Education and Health: Enhancing literacy rates, skill development, and access to
healthcare services.
6. Financial Inclusion: Expanding access to banking, credit, and insurance services for rural
populations.

Major Rural Development Programs and Schemes

1. Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA)

 Launched in 2005, MGNREGA aims to provide at least 100 days of guaranteed wage
employment in a financial year to rural households.
 The scheme focuses on building rural infrastructure, water conservation, afforestation, and
improving agricultural productivity.
 It helps reduce rural-urban migration by providing employment opportunities at the village
level and acts as a social safety net for the rural poor.

2. Pradhan Mantri Awas Yojana – Gramin (PMAY-G)

 This housing scheme aims to provide affordable housing to rural families who are
homeless or living in dilapidated houses.
 The target is to construct 2.95 crore houses by 2022.
 Financial assistance is provided to the beneficiaries for constructing pucca houses (houses
with permanent structures).

3. Pradhan Mantri Gram Sadak Yojana (PMGSY)

 Launched in 2000, PMGSY focuses on providing all-weather road connectivity to

unconnected rural areas.
  The scheme aims to improve the rural road network, thereby enhancing access to markets,
schools, health facilities, and employment opportunities.
 As of recent data, a significant portion of rural roads has been built, drastically reducing
the isolation of remote villages.

4. Deen Dayal Upadhyaya Grameen Kaushalya Yojana (DDU-GKY)

 This program is focused on skill development and providing training to rural youth to
improve employability.
 DDU-GKY aims to bridge the gap between rural and urban skill requirements by offering
training in various sectors such as retail, hospitality, healthcare, construction, and more.
 It targets youth from economically weaker sections and offers employment-linked training
with the goal of creating wage and self-employment opportunities.

5. National Rural Livelihood Mission (NRLM) – Deendayal Antyodaya Yojana

 The NRLM, launched in 2011, is aimed at creating sustainable livelihoods for the rural
poor by organizing them into self-help groups (SHGs).
 It promotes financial inclusion, entrepreneurship, and income generation through skill
development, access to credit, and market linkages.
 The focus is on women-led SHGs, which are provided with financial assistance and
capacity-building opportunities to start and expand small businesses.

6. Pradhan Mantri Krishi Sinchai Yojana (PMKSY)

 This scheme was introduced to improve irrigation coverage and ensure the efficient use
of water resources in agriculture.
 The motto “Har Khet Ko Pani” (water for every field) emphasizes increasing irrigation
access, improving water-use efficiency, and reducing the dependence on monsoons.
 It aims to enhance agricultural productivity through better irrigation techniques like drip
irrigation and micro-irrigation.

7. Swachh Bharat Mission – Gramin (SBM-G)

 The rural component of the Swachh Bharat Mission, launched in 2014, aimed to make
rural India open defecation free (ODF) by constructing toilets and promoting sanitation
awareness.
 SBM-G encourages behavioral change towards hygiene and the use of toilets, reducing
health risks related to poor sanitation.
 The scheme has been instrumental in improving rural sanitation coverage and access to
clean drinking water.

8. Saubhagya Scheme (Pradhan Mantri Sahaj Bijli Har Ghar Yojana)

 Launched in 2017, Saubhagya aims to provide universal household electrification to all

rural and urban households.
  The scheme has focused on electrifying remote villages and improving the reliability and
accessibility of electricity in rural areas.
 It plays a critical role in enhancing quality of life, boosting rural industries, and improving
education and healthcare facilities.

9. National Social Assistance Programme (NSAP)

 NSAP provides financial assistance to the elderly, widows, and persons with disabilities in
the form of pensions.
 It is aimed at supporting the social security of vulnerable sections of rural society.
 The program includes various sub-schemes like the Indira Gandhi National Old Age
Pension Scheme, Widow Pension Scheme, and Disability Pension Scheme.

10. Shyama Prasad Mukherji Rurban Mission (SPMRM)

 Launched in 2016, this mission focuses on developing urban-like infrastructure in rural

areas through the creation of Rurban clusters.
 It aims to create growth hubs in rural areas by improving education, health, sanitation, and
economic infrastructure, thus bridging the rural-urban divide.

Key Challenges in Rural Development

1. Poverty and Inequality: Despite numerous efforts, a large segment of the rural population
continues to live below the poverty line. Income inequality remains a significant challenge,
especially between rural and urban areas.
2. Agricultural Dependence: Many rural households still depend on agriculture, which is
subject to the vagaries of monsoon, low productivity, and fluctuating market prices.
Limited access to modern farming techniques, irrigation, and credit facilities continues to
hamper agricultural development.
3. Inadequate Infrastructure: While progress has been made in terms of roads, housing,
and sanitation, many rural areas still lack access to quality healthcare, education, and
electricity. Poor connectivity and limited access to basic services continue to hinder overall
development.
4. Skill Gaps and Employment: A lack of technical and vocational skills among rural
youth limits their employability, both in agricultural and non-agricultural sectors. The
mismatch between available jobs and workforce skills further exacerbates unemployment.
5. Financial Inclusion: Although financial inclusion has improved with schemes like Jan
Dhan Yojana, many rural populations still lack access to banking services, formal credit,
and insurance products.
6. Digital Divide: The rural-urban digital divide remains a major issue, with inadequate
access to the internet and digital literacy hampering rural communities' ability to fully
participate in the modern economy.
7. Environmental Challenges: Climate change and environmental degradation (e.g.,
deforestation, soil erosion, and water scarcity) disproportionately affect rural areas that rely
on agriculture and natural resources.