Economics of Development and Planning: One Mark Questions, Book Back Answers and Notes

About Economics of Development and Planning

Medium ~90 min study

A rise in a country's total output is not the same thing as development. Growth is a number: real per capita income goes up. Development asks what happened to people's lives along the way. Did absolute poverty fall? Did inequality and unemployment come down? Do more people have food, housing, health care and schooling? Development also changes social structures, attitudes and institutions, which is why the textbook calls it a multi-dimensional process.

The chapter then looks at what drives development. Some factors are economic, such as natural resources, capital formation and marketable surplus in agriculture. Others are non-economic, such as human resources, technical know-how, political freedom, social organisation and freedom from corruption. Poor countries also face the vicious circle of poverty: low income means low saving, low saving means low investment, and low investment keeps productivity and income low.

The second half is about planning. You will trace India's planning history from Sir M. Vishveshwarayya's proposal in 1934, through the Planning Commission set up in 1950 and its five-year plans, to NITI Aayog in 2015. Make a small table of dates and names for the pre-independence plans, and be ready to say how NITI Aayog differs from the Planning Commission.

What you'll learn

• Distinguish economic growth (quantitative) from economic development (quantitative plus qualitative).
• Describe the main features of underdeveloped economies and the obstacles they face.
• Explain the supply-side and demand-side circles of poverty and how balanced growth breaks them.
• List the major milestones of planning in India with their dates and the people linked to them.
• Compare centralised, top-down planning with decentralised, bottom-up planning.
• Describe the objectives and functions of NITI Aayog and what cooperative federalism means.

Before you start

• Basic macroeconomic terms such as Gross National Product and per capita income.
• The roles of the public and private sectors in a mixed economy.

Economics of Development and Planning explained

Development and Planning: The Main Ideas

Growth and Development Are Different

Economic growth is a steady, long-run increase in real per capita income. It is a quantitative change. Economic development is growth plus qualitative change: a shift of workers from subsistence farming to industry and services, a fall in poverty and inequality, and better health and literacy. A simple way to remember it: growth is usually discussed for developed countries expanding what they already have, while development is the concern of underdeveloped countries that need structural change. Development cannot happen without some growth, but growth can happen without development.

Determinants of Development

Economic determinants include natural resources, the rate of capital formation, marketable surplus in agriculture and the condition of the financial system. Non-economic determinants matter just as much: human resources, technical know-how, political freedom, social organisation and an administration free of corruption. A country can build factories, but without skilled people, stable politics and honest institutions, that capital will not deliver lasting progress.

The Vicious Circle of Poverty

Ragnar Nurkse described poor countries as caught in a circular set of forces. On the supply side, low income leads to low saving, low saving leads to low investment, low investment keeps productivity low, and low productivity brings back low income. On the demand side, low income means low purchasing power, a small market gives firms little reason to invest, and the result is again low productivity and low income. Balanced growth, meaning investment in many related industries at the same time, is the suggested remedy. Workers in each new industry buy the goods produced by the others, so the market widens and investment becomes worthwhile.

Planning in India

After independence, India chose planning as the way to use scarce resources well, speed up industrialisation and reduce regional imbalance. Before 1947 there were several proposals: Vishveshwarayya's ten-year plan (1934), Nehru's National Planning Committee (1938), the Bombay Plan of eight leading industrialists (1944), S.N. Agarwal's Gandhian Plan (1944) and M.N. Roy's People's Plan (1945). The Planning Commission was set up on 15 March 1950, and through the five-year plans the state directed investment into heavy industry, infrastructure and agriculture.

NITI Aayog

On 1 January 2015 the Planning Commission was replaced by NITI Aayog (National Institution for Transforming India). The Planning Commission worked top-down and decided plan allocations for states. NITI Aayog is a policy think tank. It works with the states on a bottom-up basis (cooperative federalism) and ranks states on performance to encourage healthy competition among them (competitive federalism). It does not hand out plan funds to states.

Common mistakes to avoid

• Using growth and development as if they mean the same thing. Growth is only a rise in output or income; development also needs qualitative change in people's lives.
• Describing the vicious circle of poverty only through low saving. There is also a demand-side circle, caused by low purchasing power and a small market.
• Writing that NITI Aayog allocates plan funds to states. It is an advisory think tank and has no power to impose allocations.
• Treating the Planning Commission and NITI Aayog as the same body under a new name. The Planning Commission planned top-down; NITI Aayog works bottom-up with the states.

Test yourself on these with the practice test, then check the worked reasoning in the solved MCQs.

Frequently asked questions

How do economic growth and economic development differ?

Economic growth is a quantitative increase in a country's real per capita income over time. Economic development is wider: it includes growth, but also a fall in poverty, inequality and unemployment and structural change in the economy, such as workers moving out of subsistence agriculture.

What is the vicious circle of poverty?

It is a circle of forces that keeps a poor country poor. Low income means low saving, which limits investment and capital formation, which keeps productivity and income low. Low income also means low demand, and a small market discourages new investment, so the same result follows from the demand side.

How can a country break the vicious circle of poverty?

Balanced growth is the usual answer. If many complementary industries are started together, the workers in each industry buy the output of the others. The market becomes large enough to make private investment profitable, and the demand-side circle is broken.

What were the main pre-independence planning attempts in India?

Sir M. Vishveshwarayya proposed a ten-year plan in 1934 in his book Planned Economy for India. Nehru set up the National Planning Committee in 1938. Eight leading Bombay industrialists put forward the Bombay Plan in 1944, a fifteen-year investment plan. S.N. Agarwal gave the Gandhian Plan in 1944, focused on agriculture and village economy, and M.N. Roy drew up the People's Plan in 1945, which stressed mechanised agriculture and state supply of consumer goods.

Why was NITI Aayog set up in place of the Planning Commission?

The Planning Commission followed a centralised, top-down approach and fixed plan allocations for states. NITI Aayog, set up on 1 January 2015, is a policy think tank that works with states as partners. It supports bottom-up planning that respects regional differences, which is what cooperative federalism means.

What is the difference between centralised and decentralised planning?

In centralised planning one national authority draws up the plan, sets targets and takes the main decisions for every sector. In decentralised planning, states and local bodies prepare, carry out and monitor their own plans according to local needs, within the national framework.