Chapter 14 · Topic 14.3 · Prelims + Mains3 of 3
Economic Planning: Mobilising resources for development
Key points
- Mobilising resources.
Prelims box: facts and traps
| Source | Examples |
|---|---|
| Domestic savings | Household, corporate and public savings |
| Taxation | Direct and indirect taxes, GST |
| Borrowing | Market loans, small savings |
| Deficit financing | Borrowing to fund development spending |
| Public-sector resources | PSU surpluses, disinvestment, asset monetisation |
| External | FDI, FPI, external loans. |
- Growth = savings rate ÷ ICOR (Harrod–Domar).
- The Sub-Group of Chief Ministers was set up on 9 March 2015, following the decision of the first Governing Council meeting of NITI Aayog (8 February 2015).
- The Integrated Rural Development Programme, started in selected blocks in 1978-79, was extended to all blocks from 2 October 1980.
- Trap: “Sixth Five-Year Plan (1980-85) marked the formal adoption of indicative planning in India” is wrong. India's formal move to indicative planning came with the Eighth Plan after the 1991 reforms.
- Trap: “Optional schemes were to be funded entirely by the Centre in all States” is wrong. Optional schemes were to be shared 50:50 (80:20 for the North-Eastern and Himalayan States), with States free to choose which ones to run.
Mobilising resources for development
| Source | Examples |
|---|---|
| Domestic savings | Household, corporate and public savings |
| Taxation | Direct and indirect taxes, GST |
| Borrowing | Market loans, small savings |
| Deficit financing | Borrowing to fund development spending |
| Public-sector resources | PSU surpluses, disinvestment, asset monetisation |
| External | FDI, FPI, external loans |
Deficit financing in India has been used mainly to raise resources for economic development, at the risk of inflation if overused.
Even a high-saving economy may not grow fast if each unit of output needs a lot of capital; the 2018 answer was high capital-output ratio. Growth = savings rate ÷ ICOR (Harrod–Domar).
Despite being a high saving economy, capital formation may not result in significant increase in output due to
- weak administrative machinery
- illiteracy
- high population density
- high capital-output ratio
Show answer
Answer: (d) · UPSC official key
Mains 2020: Explain the meaning of investment in an economy in terms of capital formation. Mains 2020 Investment is spending that adds to the capital stock: machinery, buildings and infrastructure.
Explain the meaning of investment in an economy in terms of capital formation. Discuss the factors to be considered while designing a concession agreement between a public entity and a private entity.
Mains box: analysis and answer points
- Deficit financing in India has been used mainly to raise resources for economic development, at the risk of inflation if overused.
- Likely next angle: Deficit financing
- Asked: Mains 2020 (GS Paper III, 15 marks): Explain the meaning of investment in an economy in terms of capital formation. Discuss the factors to be considered while designing a concession agreement between a public entity and a private entity.
Practice
Practice MCQs (8)
With reference to the Eighth Five-Year Plan (1992-97), consider the following statements:
1. It was the first Plan prepared after the economic reforms of 1991.
2. It described human development as the ultimate goal of planning.
3. During this Plan, the role of planning moved towards an indicative one, with the private sector expected to play a larger part in investment.
Which of the statements given above is/are correct?
Answer (d) & explanation
All three statements are correct. The Eighth Plan was drawn up after the 1991 crisis and the liberalisation, privatisation and globalisation reforms. It named human development as the ultimate goal, with priority to employment, population control, literacy, health and drinking water. With the private sector given a much bigger role, planning became largely indicative: the State set direction and focused on infrastructure and social sectors.
With reference to the First Five-Year Plan (1951-56), consider the following statements:
1. It gave the highest priority to agriculture, including irrigation and power projects.
2. The growth actually achieved during the Plan was higher than its target.
3. The Community Development Programme was launched during this Plan.
Which of the statements given above is/are correct?
Answer (d) & explanation
All three statements are correct. Coming after Partition and food shortages, the First Plan put agriculture, irrigation and power first (Bhakra-Nangal, Hirakud and the Damodar Valley projects belong to this phase). Helped by good monsoons, growth of about 3.6 per cent a year beat the target of about 2.1 per cent. The Community Development Programme began on 2 October 1952 to promote rural development through blocks.
With reference to the Sixth Five-Year Plan (1980-85), consider the following statements:
1. It was launched after the incoming government dropped the rolling plan of 1978-80.
2. The Integrated Rural Development Programme was extended to all the blocks of the country during this Plan.
3. It marked the formal adoption of indicative planning in India.
Which of the statements given above is/are correct?
Answer (a) & explanation
Statements 1 and 2 are correct. The government that returned to power in 1980 ended the rolling plan and launched a fresh Sixth Plan (1980-85), with removal of poverty as its main thrust. The Integrated Rural Development Programme, started in selected blocks in 1978-79, was extended to all blocks from 2 October 1980. Statement 3 is wrong: India's formal move to indicative planning came with the Eighth Plan after the 1991 reforms.
With reference to the rationalisation of Centrally Sponsored Schemes recommended by the Sub-Group of Chief Ministers (2015), consider the following statements:
1. The Sub-Group was constituted after a decision taken in the first meeting of the Governing Council of NITI Aayog.
2. For core schemes, the Centre-State funding ratio was to be 60:40 for most States and 90:10 for the North-Eastern and Himalayan States.
3. Optional schemes were to be funded entirely by the Centre in all States.
Which of the statements given above is/are correct?
Answer (a) & explanation
Statements 1 and 2 are correct. The Sub-Group of Chief Ministers was set up on 9 March 2015, following the decision of the first Governing Council meeting of NITI Aayog (8 February 2015). It divided schemes into core and optional ones; for core schemes the sharing pattern was 60:40 for general States and 90:10 for the eight North-Eastern and three Himalayan States, with Union Territories fully funded. Statement 3 is wrong: optional schemes were to be shared 50:50 (80:20 for the North-Eastern and Himalayan States), with States free to choose which ones to run.
Which Five-Year Plan, for the first time, set State-wise growth targets and a list of monitorable targets for key development indicators?
Answer (b) & explanation
The Tenth Plan (2002-07) aimed at about 8 per cent annual growth, enough to double per capita income in ten years. It was the first Plan to set State-wise growth targets, worked out with the States, and to list monitorable targets for indicators such as poverty, literacy, infant mortality and forest cover, so that progress could be tracked beyond GDP growth alone.
The Working Group on District Planning (1984), which recommended broad-based district planning bodies and the decentralisation of planning functions to the district level, was chaired by
Answer (b) & explanation
The Planning Commission's Working Group on District Planning (1984) was chaired by C.H. Hanumantha Rao. It recommended decentralising functions, powers and finances to the district, setting up District Planning Bodies with district planning cells and planning officers. Earlier, the Working Group on Block-Level Planning (1978) under M.L. Dantwala had proposed the block as the link between village and district planning.
With reference to the Ninth Five-Year Plan (1997-2002), consider the following statements:
1. It was launched in the fiftieth year of India's Independence.
2. The growth rate actually achieved during the Plan exceeded its target.
3. It gave priority to agriculture and rural development in order to generate productive employment and reduce poverty.
Which of the statements given above is/are correct?
Answer (c) & explanation
Statements 1 and 3 are correct. The Ninth Plan began in 1997, the fiftieth year of Independence, with the theme of growth with social justice and equality. Its first objective was priority to agriculture and rural development to generate productive employment and eradicate poverty. Statement 2 is wrong: against a target of 6.5 per cent (cut from an initial 7 per cent), growth averaged only about 5.5 per cent, hit by the East Asian crisis and a global slowdown.
With reference to the Fifth Five-Year Plan, consider the following statements:
1. Removal of poverty and attainment of self-reliance were its two main objectives.
2. It was terminated in 1978 by the Janata Government, a year before its scheduled end.
3. The Twenty-Point Programme was launched during the period of this Plan.
Which of the statements given above is/are correct?
Answer (d) & explanation
All three statements are correct. The Fifth Plan (1974-79) named removal of poverty and self-reliance as its main aims. The Janata Government that came to power in 1977 ended it in March 1978, one year early, and replaced it with a rolling plan. The Twenty-Point Programme was announced in July 1975, within the Plan period, to tackle poverty and improve living standards.
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In 150 words, explain the significance of Economic Planning with one recent example.
Flashcards (2)
High ICOR means?
More capital per unit of output; slower growth.
Growth = savings rate ÷ ?
ICOR (Harrod–Domar).
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