What is Economic Planning?

Economic Planning refers to the system in which the central authority sets targets, programs, and policies to achieve those specified targets and policies within a specific period. The primary purpose is to achieve optimum utilisation of the resources. With this, social welfare, along with growth, can be maximised.

Economic Planning means the utilisation of a country’s resources in different development activities as per the national priorities.

– Planning Commission.

Features of Economic Planning

1. In the public sector, the Industrial Policy Resolution of 1948 and the Directive Principles of the Indian Constitution reflected a leading role. Moreover, the private sector was also promoted to be a part of the plan.
2. The government set up the Planning Commission of India under the chairmanship of Prof. Mahalanobis in 1950. With this, the idea of economic planning became the reality.
3. The Commission mainly aims to evaluate the country’s human and physical resources and make plans for the effective utilisation of the resources.
4. The Planning Commission fixed five year period for Economic Planning which set the era of the Five-Year Plan (borrowed from the former Soviet Union).
5.  In the Indian Constitution, economic and social planning exists in the concurrent list of the Seven Schedules.

On 15 August 1947, India gained Independence from the two hundred years of British rule. Finally, India became the master of its destiny, and the job of building the nation is now in the hands of the people of India. After Independence, it was necessary to rebuild the stagnant economy into a journey of a developing country. Therefore, the Indian leaders had to decide on an economic system that would be most appropriate for the nation and that would facilitate public welfare. 

An economic system is a mechanism with the help of which the government plans and allocates accessible services, resources, and commodities across the country. It means that with the help of the economic system, government solves the central problems of an economy. 

Central Problems of the Economy

1. What to Produce: It includes deciding which goods and services and in what quantity must be produced in a country. A country has limited resources like land, labour, and capital. Thus it is essential to decide what goods must be produced and in what quantity.

2. How to Produce: It includes deciding the techniques of production. There are two types of techniques (i) labour-intensive, and (ii) capital-intensive. Labour-intensive goods are produced with more labour and less capital involvement; whereas, capital-intensive goods are created with more capital and less labour involvement. The selection of techniques depends upon the cost of technology and the amount of the goods required.

3. For Whom to Produce: It involves deciding which goods are to be produced and for which section of society, i.e., who will consume the goods. For example, all sections of society require essential goods like wheat and rice, but there is a demand for luxury goods by a few sections of society. So the government creates a balance between the two.

Types of Economic Systems

Three different types of economic systems can be used to address the central issues. 

1. Market/Capitalist Economy: An economic system in which the private sector owns, controls, and utilizes the means of production is known as a Market Economy. An example of this system is the USA. Here, the market forces of demand and supply, play an essential role in determining the price of goods and services. The primary purpose of production in this economy is to earn profits.

2. Socialist Economy: An economic system in which the government owns, controls, and utilizes the means of production is known as a Socialist Economy. An example of this system is in China. The government of China plays a vital role in determining the price of goods and services. The primary purpose of production in this economy is to promote public welfare.

3. Mixed Economy: An economic system that includes the best features of the socialist and capitalist economy is known as a Mixed Economy. Simply put, it is a mixture of capitalist and socialist economies.

Indian leaders (like Jawaharlal Nehru) adopted this model (Mixed Economy) in India in which both the public and private sector perform their roles in solving the central problems of the country. After adopting Mixed Economy, the next step for the government was to plan for the future, i.e., Economic Planning.