Although India's gross domestic product (GDP) growth rate since independence has consistently increased decade by decade, industry (including manufacturing, construction, and so on) accounts for only 25 per cent of GDP (in 1950, it was 8 per cent). The manufacturing sector contributed in 2017 only about 16 per cent in the GDP, stagnating since economic reforms began in 1991. By contrast, in some Asian economies, the share of industry has exceeded 30–40 per cent while that of manufacturing, 20–30 per cent. For example, Malaysia roughly tripled its share of manufacturing value-added in GDP from 1960 to 2014 to reach about 24 per cent, while Thailand's share increased from 13 per cent to 33 per cent over the same period (Mitra et al. 2017); Vietnam too has seen a sharp increase in recent decades. In India, manufacturing has never been the leading sector in the economy other than during the second and third plan periods, and certainly not since the economic reforms.

No major country in the world has managed to reduce poverty or sustain growth over long periods of time without the manufacturing sector becoming the lead sector, driving economic growth. This is because productivity levels in industry (and manufacturing) are much higher than in either agriculture or services, and it has historically proved to be the source of productivity gains across the primary and tertiary sectors, through the spread effects of technological change. Manufacturing is an engine of economic growth because in addition to higher productivity, the manufacturing sector offers greater opportunities for economies of scale, for embodying technological progress and generates forward and backward linkages that create positive spillover effects in the economy. The growth in services after manufacturing growth is very different in nature – it is in research and development (R&D) and high-end services – while without manufacturing, they are in low-end and fragile services. This is because manufacturing provides a strong technological base in the country. Not surprising that Rodrik (2011) has demonstrated that countries with larger manufacturing sectors grow faster.

Almost all organized sector industries saw accelerated growth of output and employment from 1991–1992 to 1995–1996 (with minerals and metals, machinery, automobiles, and chemicals and petrochemicals out-performing). However, this growth of organized manufacturing decelerated between 1996–1997 and 2001–2002.

A major argument of this book is that India is at a critical juncture of its development journey, with just over two decades remaining for its demographic dividend to run out. If India is to realize this dividend, it is critical that growth is not volatile, which it has been since the economic reforms began. One of the reasons why growth is not sustained is that investment has itself been volatile, both public and private investment. Investment to gross domestic product (GDP) after rising consistently from 2003 to 2008 has fallen since then over the next 10 years.

This chapter argues that an important reason for this situation arising is the absence of long-term fiscal planning, both at the central and state government levels. In accordance with the basic Keynesian notion that public investment should draw in private investment, it is essential that public investment is sustained. However, if government consumption tends to rise (whether it is due to interest payments on past debt, salaries, or subsidies), then public investment will be adversely impacted. Hence, we argue that there is a strong case for long-term fiscal planning for the economy, which means a medium-term expenditure framework (MTEF). This dimension of the planning function was neglected, especially since the 1970s, and even in the 21st century this situation has not changed.

In addition, this chapter argues that disbanding the Planning Commission and ending any financial role for the National Institution for Transforming India (NITI) has weakened the planning function, which India's growing inter-state divergence on growth/human development performance cannot afford. The Planning Commission had acquired an extremely critical role since economic reforms began in financing human capital formation at the state level. This role has been compromised by eliminating any financial resources for NITI.

This short chapter is organized as follows. The first section discusses the need for fiscal planning which would include an MTEF. But not only does India not have an MTEF, but it has been consistently characterized by the adverse consequences of fiscal deficits, which have been typical of government budgeting. It also examines how government consumption has been a major source of persistent deficits, which must be controlled. Government consumption is undermining public investment, which is critical to sustained GDP growth.

In his Independence Day speech on 15 August 2014, Prime Minister Narendra Modi announced the demise of the Planning Commission (PC). A reader unfamiliar with Indian politics could be surprised to learn that the PC still existed rather than that it would be terminated.

Researchers often assume that institutions never die; they find a new mission. This was true for a long time about the PC. Founded in 1950 inspired by the socialist leaning views of Jawaharlal Nehru, the successive governments in the 1960s, 1970s, and 1980s continued working with it. In 1991, when the liberalization of the Indian economy began, the PC was not dissolved. In its own words, it ‘respond[ed] and adjust[ed] to the changes quickly and creatively’ (PC 1992: 1). Some analysts considered that the commission then moved from directive planning to prescriptive planning. However, criticism was growing. The commission was said, among other things, to be inefficient, to be a vestige of the Soviet style planning, and to propose always another version of the same plan.

The PC represents an interesting case of an institution that has survived radical changes (the liberalization of the economy) and whose end came suddenly, signalled in a few sentences. Shiv Visvanathan remarked in The Hindu on 26 August 2014 that

The PC occupies indeed an important place in the history of India and Indian development. Scholars agree that it played a crucial role in the type of development that India followed after independence. However, even if most economic analyses of India mention the five-year plans (FYPs), the PC as an institution remains little studied.

This is why this book proposes to look backwards, examining the history of the idea of planning and the history and experiences of planning in India. It also looks forward, trying to evaluate, beyond ideologies, what role the practice of planning has and should have in contemporary India.

The question ‘Does India need central planning?’ should be answered at both theoretical and empirical levels. This question requires to be answered because, when the Indian Planning Commission (PC) was disbanded and its concomitant five-year plans abandoned at the end of 2014, there was little substantive reasoning why this was done.

Economists who have some sense of the historical evolution of institutions (for example, the market and the state) in the now industrialized countries (all capitalist) know that laissez-faire in the economy/society never really existed anywhere, ever. There actually is no economy in the world that is not ‘planned’, to a smaller or greater degree (see Chapter 1 in this volume for more on this argument).

This chapter has three sections. The first section addresses the question above and discusses the theoretical and empirical arguments why planning is still needed in India. The next section discusses the functions that the erstwhile PC performed, what the current National Institution for Transforming India (NITI) does, and what should be the possible functions of a planning institution in a country the size of India in a rapidly globalizing economy. The final section examines how the planning function in India should be structured in terms of organization and human resources for effective functioning.

Why Planning? The Theoretical and Historical Argument

The market economy in the currently industrialized countries would not have come into existence but for the state; the state was critical in establishing key institutions of the market economy – land and labour were two such factors of production (Polanyi 1944). In the United Kingdom, the state was responsible for bringing land into the market economy through its programme of enclosing common land; thereby, it also set in motion a process which ultimately led to the creation of a national market for labour (Moore 1968).

While the Industrial Revolution began in England in the last quarter of the 18th century, it can hardly be said that an integrated national economic system existed until the second quarter of the 19th century. No market economy was conceivable that did not include a market for labour; but to establish such a market, especially in England's rural civilization, a complete transformation of the traditional fabric of society was needed.

India is probably unique among developing countries, and certainly among emerging market economies and middle income countries, in having 93 per cent of its labour force in informal employment (defined as those who don't have any social insurance). This is a higher share than that found in both middle income Southeast Asia as well as Latin American economies. With such an overwhelming proportion of its workforce living without any social insurance and also with limited social assistance, and with 22 per cent of its population in 2011–12 (or 268 million persons) below the national poverty line, the question is inevitable: should the state be thinking seriously about ensuring basic social insurance for at least 268 million people?

If the state wishes to influence the quality of life of wage workers in the unorganised sector, it faces two courses of action. It could focus on improving the conditions of work in the unorganised enterprises, and/or it could act to bring such workers under a social insurance mechanism.

There is very little hope that the state can influence the work conditions of those in the unorganised sector. Can the state expect to successfully improve the conditions of work (for example, hours of work, hazardous nature of work and hence safety conditions, wage rates, which are all demands made in the otherwise excellent report of the National Commission on Enterprises in the Unorganised Sector – 2008) in the prevailing labour market conditions, where there is excess supply of labour, where the unorganised sector workers themselves are fragmented and not organised into unions, where they suffer from imperfect information, and where they are not fully aware of their limited rights and, to make it even more difficult, they are mostly illiterate or barely literate? If the pre-requisites for improving their conditions of work do not exist, it is obvious that the state should focus its attention on improving the social protection for such workers, i.e., social insurance and social assistance. That is, the state should prioritise this objective (Mehrotra, 2008). This is one of the central arguments of this chapter.

Introduction

There has been a growing chorus of opinion in India that redistributive programmes of the government have been relatively ineffective, that the benefits do not reach the poor, and that there is a case for introducing forms of social assistance that have so far not been tried extensively (Kapur and Mukhopadhyaya, 2007; Prahalad et al., 2009; Ministry of Finance, 2009; Nilekani Committee Report, 2011). The case has been made that like other emerging market economies India too should seriously consider this form of social assistance. Latin American countries were the first to introduce conditional cash transfers (CCTs), and in recent years, a few Asian countries have also been doing so (for example, Indonesia, the Philippines).

This chapter makes the case for an unconditional cash transfer, which would guarantee a minimum income to the poor (as determined by the Tendulkar poverty line). It also makes the case for six other CCTs that should be considered for introduction by the central government. However, it cautions that there are pre-requisites for introducing CCTs that are not yet present fully in the Indian governance system, though they are in the process of being put in place. Hence, a hurried introduction of cash transfers, conditional or unconditional, would be fraught with risks, and vulnerable to implementation problems as serious as those that beset the prevailing delivery system for redistributive programmes. It also argues that financing for the CCTs is not difficult, and it shows clearly where the finance can be found – by converting existing subsidies or programme funding into CCTs.

It is useful to clarify that the Direct Benefits Transfers (DBT) that the Government of India announced in late 2012 are not the subject of this chapter. The DBTs are only providing for the efficient transfer of money from existing cash transfers – social pensions (old age, widows, disabled) and scholarships for students – directly into bank accounts of beneficiaries, who were hitherto being provided cheques that were then cashed at a bank, whether or not the beneficiary has a bank account. The cheque payment system is inconvenient for beneficiaries because it encourages ‘commission agents’ and bank/post office clerks to demand ‘rents’.

A credible strategy for achieving inclusive growth in India requires an understanding of the limitations of India's unprecedented high economic growth experienced within the last decade (averaging 8.4 per cent per annum at factor cost over 2003–04 and 2011-12). One limitation of the growth process was discussed in the previous chapter – the relative stagnation of agriculture and the rural distress. This chapter points to several major paradoxes in this economic growth story – especially related to non-agricultural employment – which are a barrier to ensuring inclusiveness in growth.

However, we must begin by noting an important dimension of emerging inclusiveness for which evidence is available. Rapid economic growth within the last decade has been accompanied by a greater degree of social inclusion of the most marginalised communities of India's highly socially stratified society – SC, ST and Muslims; as has been noted in chapter 1. One significant finding of the India Human Development Report 2011 was that most of the social indicators – health, education, employment, access to electricity, water and sanitation – of SCs, STs and Muslims have been improving faster during the decade of the 2000s than the rate at which the same indicators have improved for the nation's population as a whole. We take this faster improvement to be an indicator of convergence in outcomes of human well-being between the marginalised and the rest of the population. However, the paradox is that while indicators of human well-being are improving faster, thus leading to social inclusion of the marginalised, the evidence for labour-intensive growth while clearly present is weaker. (We define inclusive growth as being one where output growth is accompanied by employment growth, especially in non-agricultural occupations, at least as large as the number of new entrants in the labour force, even though employment growth may be proportionally lower than output growth in a given period.) Besides most non-agricultural employment growth is taking place in informal jobs in unregistered enterprises. This is the first paradox discussed in this chapter (section 4.1).

There is a second paradox. Mainstream economic theory assumes that a rise in the rate of output growth will be accompanied by a rise in employment growth, unless accompanied by a still greater rise in rate of growth of labour productivity (the Kaldor-Verdoorn law).