Section B

Basic of Money supply,

money supply
The total supply of money in circulation in a given country's economy at a given time.
There are several measures for the money supply, such as M1, M2, and M3. The money
supply is considered an important instrument for controlling inflation by those economists
who say that growth in money supply will only lead to inflation if money demand is
stable. In order to control the money supply, regulators have to decide which particular
measure of the money supply to target. The broader the targeted measure, the more
difficult it will be to control that particular target. However, targeting an unsuitable
narrow money supply measure may lead to a situation where the total money supply in
the country is not adequately controlled.
point in time.[1] There are several ways to define "money", but standard measures
usually include currency in circulation and demand deposits.[2][3]
Money supply data are recorded and published, usually by the government or the central
bank of the country. Public and private-sector analysts have long monitored changes in
money supply because of its possible effects on the price level, inflation and the business
cycle.[4]
That relation between money and prices is historically associated with the quantity theory
of money. There is strong empirical evidence of a direct relation between long-term price
inflation and money-supply growth. These underlie the current reliance on monetary
policy as a means of controlling inflation.[5][6] This causal chain is however contentious,
with heterodox economists arguing that the money supply is endogenous and that the
sources of inflation must be found in the distributional structure of the economy.
Money supply is divided into multiple categories - M0, M1, M2 and M3 - according to the
type and size of account in which the instrument is kept. The money supply is important
to economists trying to understand how policies will affect interest rates and growth.
M0 M1 M2 M3
explainsM0 M0 (M-zero) is the most liquid measure of the money supply. It only
includes cash or assets that could quickly be converted into currency. This measure is
known as narrow money because it is the smallest measure of the money supply
explainsM1 This is used as a measurement for economists trying to quantify the
amount of money in circulation. The M1 is a very liquid measure of the money supply, as
it contains cash and assets that can quickly be converted to currency.
explainsM2 M2 is a broader classification of money than M1. Economists use M2 when
looking to quantify the amount of money in circulation and trying to explain different
economic monetary conditions.
explainsM3 This is the broadest measure of money; it is used by economists to estimate
the entire supply of money within an economy.
Money Supply
Money supply is divided into multiple categories - M0, M1, M2 and M3 - according to the
type and size of account in which the instrument is kept. The money supply is important
to economists trying to understand how policies will affect interest rates and growth.
DEFICIT FINANCING AND INFLATION
Introduction
The government is committed to socio-economic responsibilities for breaking the vicious circle
of poverty and uplifting the economic conditions of the masses and developing the economy
into a self-reliant one. In 1950, it was thought that these objectives could be achieved through
the process of planned economic development. Throughout the period of planned economic
development in the country one basic problem has been that of mobilisation of resources.
Sources of financing economic development are broadly divided into domestic and foreign
sources. Domestic sources of finance at the disposal of the government consist of taxation,
public borrowing, government savings which include surpluses of public enterprises and
deficit financing. The foreign finances consist of loans, grants and private investments. All
these sources of finance have their social costs and benefits on the basis of which an upper
limit can be determined for the use of any one method of financing development. Since the
financial requirements of development are enormous and all various sources have their own
limitations, it becomes almost essential to make use of all the sources as far as possible. The
choice is not between which one is to be used but between the various combinations of using
all of them. Thus both the domestic and foreign sources of finance have their own place and
importance in a developing country. It is essential to formulate appropriate policies for
different sources of finance and successful implementation of these policies is required for
achieving the desired objectives of rapid economic development.
Taxation is an old source of government revenue. Not only that, it is also regarded as the most
desirable method of financing public investment in developing countries. But it is a well
known fact that taxation has a narrow coverage in developing countries and the tax
revenuetnational income ratio isnot only low but the increase in this ratio is also very slow
during the process of development.
Hence various conventional sources of finance, such as taxation. public borrowing, having
been found to be inadequate, deficit financing has been resorted to for meeting the resource
gap. The idea of resorting to deficit financing for economic development, which is of relatively
recent origin, has remained very controversial.
Definition
In one sense by deficit financing we mean the excess of government expenditure over its
normal receipts raised by taxes, fees, and other sources. In this definition such
expenditure whether obtained through borrowing or from the banking system measures
the budget deficit.Deficit financing is said to have been used whenever government
expenditure exceeds its receipts.
In under-developed countries deficit financing may be in
two forms:
a) Difference between overall revenue receipts and
expenditure
b) Deficit financing may be equal to borrowing from the
banking system of the country.
Definition
Macroeconomics: Planned expenditure by a government to put more money into
the economy than it takes out by taxation, with the expectation that increased
business activity will bring enough additional revenue to cover the shortfall. Also
called deficit spending.
ROLE DEFICIT FINANCING
Deficit financing has been resorted to during three different situations in which objectives and
impact of deficit financing are quite different. These three situations are war, depression and
economic development.
Deficit financing during war
Deficit financing has its historical origin in wlr finance. At the time of war, almost every
government has to spend more than its revenue receipts from taxes and borrowings.
Government has to create new money (printed notes or borrowing from the Central Bank) in
order to meet the requirements of war finance. Deficit financing during war is always
inflationary because monetary incomes and demand for consumption goods rise but usually
there is shortage of supply of consumption goods.
Deficit financing during depression
The use of deficit financing during times of depression to boost the economy got impetus
during the great depression of the thirties. It was Keynes who established a Xgositive role for
deficit financing in industrial economy during the period of ,depression. It was advocated that
during depression, government should resort to construction of public works wherein
purchasing power would go into the hands of people and thereby demand would be
stimulated. This will help in fuller utilization of already existing but temporarily idle plants and
machinery. Deficit spending by the government during depression helps to start the stagnant
wheels of productive machinery and thus promotes prosperity.
Deficit financing and economic development
Deficit financing for development, like depression deficit financing, provides stimulus to
economic growth by financing investment, employment and output in the economy. On the
other hand "development deficit financing7' resembles "war deficit. financing" in its effect on
the economy. Both are inflationary though the reasons for price rise in both the cases are
quite different. When government resorts to deficit financing for development, large sums are
invested in basic heavy industries with long gestation periods and in economic and social
overheads. This leads to immediate rise in monetary incomes while production of
consumption goods cannot be increased immediately with the result that prices go up. It is
also called the inflationary way of financing development. However, it helps rapid capital
formation for economic development.
- 14.4 DEFICIT FINANCING AND INFLATION
Deficit financing in a developing country is inflationary while it is not so in an advanced
country. In an advanced country the government resorts to deficit financing for boosting up
the economy. There is alround unemployment of resources which can be employed by raising
government investment through deficit financing. The result will be an increase in output,
income and employment and there is no danger of inflation. The increase in money supply
leading to demand brings about a corresponding increase in the supply of commodities and
hence there is no increase ' in price level. But, when, in a developing economy, the
government resorts to deficit financing for financing economic development the effects of this
on the economy are quite different. Public outlays financed by newly-created money
immediately create monetary incomes and, due to low standards of living and high marginal
propensity to consume in general, the demand for consumption of goods and services
increases. But if the public investment is on capital goods, then the increased demand for the
consumer goods will not be satisfied and prices will rise. Even if the outlay is on the
production of consumption goods the prices may rise because the monetary incomes
will rise immediately while the production of consumer goods will take time and in the
meanwhile prices will rise. Though investment is being continuously raised (through taxation,
borrowing and external assistance), most of it goes to industries with long gestation period
and for providing basic infrastructure. Though there is effective demand, resource5 lie under
or unemployed. Lack of capital, technical skill, entrepreneurial skills etc. are responsible in
many cases for unemployment or underemployment of resources in a developing economy.
Under such conditions, when deficit financing is resortea to, it is sure to lead to inflationary
conditions. Besides, in a developing economy, during the process of economic development,
the velocity of circulation of money increases through the operation of the multiplier effect.
This factor is also inflationary in character because, on balance, effective demand increases
more than the initial increases in money supply. Deficit financing gives rise to credit creation
by commercial banks because their liquidity is increased by the creation of new money. This
shows that in a developing economy total money supply tends to increase much more than
the amount of deficit financing, which also aggravates inflationary conditions. The use of
deficit financing being expansionary becomes inflationary also on the basis of quantity theory
of money.

II. Implications for Macroeconomic Policy

The IDMF conceptual framework provides an empirical basis for systematically
coordinating fiscal and monetary policy as complementary rather than alternative policy
tools. [11]
Monetary Policy.
The primary objective of monetary policy should be to manage the GDP growth rate more
precisly, by an explicit and open Monetary Policy Formula (rather than indirectly and secretly
through interest rates), to achieve a stable "soft landing" (asymptotic) approach towards the
economy's maximum non-inflationary operating rate and lowest unemployment rate. Control
of interest rates should be delegated to fiscal policy; control of non-monetary sources of
inflation to other policy tools.
Monetary Policy Formula: [12]
Real M1 growth = Policy-target real GDP growth rate
rate + [13]
Current trend value of the MDR growth
rate
Fiscal Policy
In the IDMF conceptual and policy framework, the federal deficit is considered as one
component -- along with consumer, business and rest-of-world borrowing -- of total borrowing
in the National Credit Balance. But the federal deficit (or surplus) differs fundamentally from
other sectors' borrowing in that the federal government can (if it wishes) control the
stabilization component of its borrowing (see below) by controlling the growth -- and
unemployment rate -- of the whole economy -- as the U.S. Federal Reserve and the Clinton
Administration so effectively demonstrated during 1992-99.
Thus, the main objective of fiscal policy -- as distinguished from budget policy -- should be to
maintain a stable National Credit Balance (between the economy's total supply and
demand for credit), at appropriate low real interest rates. It can best do this by pro-actively
adjusting the amount of the total budget deficit (positive or negative) so as to compensate
for destabilizing changes in private consumer and business borrowing.
To do this most effectively -- with optimum public understanding and political support -- the
deficit must be separated, explicitly and clearly, into its two functional economic
components, the Policy Budget Deficit, and the Stabilization Deficit: [14]
The Policy-Budget Deficit -- the deficit component controlled by political tax and
spending decisions. This is also traditionally called the structural -- or full-employment, or
standardized-employment -- deficit, because it is an estimate of what the deficit would be
with a constant (policy-determined) rate of unemployment (in the U.S., preferably below 4%).

A fiscally responsible budget policy aims to maintain this deficit close to zero.
Moreover, to maintain stable social insurance contribution and benefit rates, a fiscally
responsible Policy Budget also separates social insurance and pension Trust Fund reserves
from the current operating budget and treats them as part of the economy's Primary Saving,
as private business firms are required to do -- and as the Flow of Funds accounts do.
Thus, the current U.S. "unified budget" surplus is a fiscally irresponsible accounting fiction,
rather than a real surplus which can be responsibly re-allocated. [15]
The Stabilization Deficit -- total deficit minus the Policy-Budget Deficit. Governments have
traditionally allowed this component to be controlled passively, by the economy. In this
context, economists call it an "automatic stabilizer" because economic fluctuations
automatically cause changes in government borrowing opposite to the corresponding changes
in private business and consumer borrowing. But this stabilization effect is only partial and
depends on the very business fluctuations that should be avoided. However, if the
Stabilization Deficit is managed pro-actively, it becomes a powerful and precise fiscal policy
tool that can be systematically coordinated with monetary policy.
FASTA. The most efficient policy device for pro-actively managing the Stabilization Deficit
would be an explicitly temporary Formula-Administered Stabilization Tax Adjustment of
the most potentially flexible tax rate[16] -- usually the withholding tax on computer-calculated
payrolls. Until the FOFA can provide a reliable empirical basis for these adjustments, the
formula should target stable real interest rates at historically normal levels. When interest
rates are above normal (usually indicating excessive private borrowing), the Stabilization
Deficit is reduced by a higher tax rate; when interest rates are below normal (usually
indicating insufficient private borrowing), the Stabilization Deficit is increased by a lower tax
rate. If made relatively frequently (e.g. monthly or quarterly) in relatively small increments,
these adjustments would be almost unnoticable by most taxpayers. (For a more in-depth
treatment, see the FASTA Summary.)
Managing the Stabilization Deficit by an automatic formula would tend to depoliticize it and
make it more easily understandable and acceptable to financial markets, legislative bodies
and the general public. It would also help to educate the public on the crucial relationship
between private and public borrowing.
Implication for International Monetary Fund policy.
The IMF needs to adopt the IDMF conceptual framework. It highlights the apparent failure of
the International Monetary Fund to distinguish between the two functionally-very-different
deficit components, and the counterproductive nature of their demands for budget "austerity"
and total deficit reduction in severely depressed economies.
Economic Development(Structural change)
and Economic Trends(economic growth)
An essential insight of classical development economics was that economic growth is
intrinsically linked to changes in the structure of production. According to this view,
industrialization is the driver of technical change, and overall productivity increases are
mainly the result of the reallocation of labour from low- to high-productivity activities. The
present chapter investigates to what extent this view is still relevant today and thus how the
degree and nature of structural change explain the diverging growth trends between
developing countries.
Economic growth requires structural change
Productivity growth in developed countries mainly relies on technological innovation. For
developing
countries, however, growth and development are much less about pushing the technology
frontier and much more about changing the structure of production towards activities with
higher levels of productivity. Th is kind of structural change can be achieved largely by
adopting and adapting existing technologies, substituting imports and entering into world
markets for manufacturing goods and services, and through rapid accumulation of physical
and human capital. A few developing countries have been able to undertake original research
and development in some fields, but technological innovation continues to be highly
concentrated in the industrialized world.
These fundamental diff erences in the nature of the growth process between developed and
developing countries remain subject to considerable debate among economists. Among the
most important analytical developments in recent decades has been the explicit recognition
by the so-called new growth theories of the role of external economies in human capital
formation and technological innovation, dynamic economies of scale associated to learning by
doing, and institutional factors in the growth process. These new insights have moved away
from the more traditional perspective that accumulation of capital was the key to economic
development. They also held the promise of a better linking of policies to economic growth
performance.
On the other hand, economists who follow the tradition of classical development thinking
have held that economic growth in developing countries is about structural change towards
high-productivity sectors and that industrialization plays a key role in that process (Ros,
2000). According to this view, the development of the modern industrial sector will contribute
more in dynamic terms to overall output growth, because of its higher productivity growth
which results from increasing returns to scale3 and gains from innovations and learning by
doing.4 The underemployed labour force of the rural sector, but increasingly also of the urban
informal sector, provides a fairly elastic supply of labour that allows this process to take place
without facing signifi cant labour supply constraints.
Productivity and output growth reinforce each other
Notions similar to those of classical development thinking are also embedded in the early,
non-neoclassical growth theories of Verdoorn (1949) and Kaldor (1957, 1978), among others.
Kaldor (1978) suggested that productivity and output growth reinforced each other. The
positive eff ect of productivity increases on output growth has been extensively discussed in
the economics literature. Learning by doing, innovations and sectoral linkages are all factors
that infl uence productivity positively when growth accelerates. Indeed, as the economy
expands, these factors become more important for productivity growth as more resources
become available for investment in new technology and for the training of workers. Learning
by doing and experience accumulated during the production process by both entrepreneurs
and labourers are also essential for productivity growth and these factors become increasingly
important when growth is dynamic.
Less unemployment can lead to higher productivity growth
If resources initially are not fully utilized—because of un- and underemployment—not only will
growth lead to better utilization of existing resources, but productivity growth will also
accelerate as resources are shifted from low- to high-productivity activities, an idea consonant
with classical development thinking. Inversely, slow economic growth will lead to increasing
underutilization of resources and hence to adverse eff ects on productivity. In this sense, the
association that is usually established between slow productivity performance and slow
economic growth may have its basis not in a lack of technological change, but rather in the
growing underutilization of resources that characterizes a low-growth environment, refl ecting
the reverse causality mentioned above. In other words, if resources are not fully utilized or are
underutilized, weak productivity performance may be the result rather than a determinant of
low output growth.
The degree and nature of structural change explain the diverging growth
trends among developing countries
Building upon these foundations, one can develop a broader perspective on structural change
and growth. In this view, dynamic structural change involves more than just growth of
industry and modern services. It is about the ability to constantly generate new activities as
well as about the capacity of the new activities to absorb surplus labour and to promote the
integration of production sectors within the domestic economy. From this angle, the industrial
sector tends to have larger potential to induce deeper domestic integration by processing raw
materials and semi-industrial inputs and requiring a number of ancillary services. In this
sense, only when it is based on or can help create strong domestic linkages, will integration
into the world economy generate rapid technological progress and contribute to high and
sustained growth

Patterns of growth and structural change,

Developing economies grow faster as the importance of the industrial and services sectors
increases
and that of agriculture decreases. Fast growth in China, South-East Asia and South Asia was
associated with a rapid decline in the importance of agriculture and strong expansions of
industry and services during 1970-2003. In contrast, sluggish long-term growth after the
1970s in the semi-industrialized countries and in Central America and the Caribbean as well
as in countries in the Middle East and the Commonwealth of Independent States (CIS) was
associated with a process of deindustrialization (of variable intensity). In these groups, growth
was generally concentrated in the services sector with the share of agriculture in output also
declining or remaining stagnant.
The economy of China underwent an impressive and rapid structural change
These aggregate patterns may further hide important diff erences across regions and
countries. Th e Asian countries followed a dynamic pattern of structural change. China is the
most important case in point. Starting around 1978, its economic system went through a
gradual change from Soviet-style central planning towards greater market orientation. Despite
its large population, China witnessed an impressive and rapid change in the sectoral
composition of output. Between 1970 and 2003, the share of manufacturing and mining in
overall output increased from 28 per cent to 60 per cent, while the share of agriculture
dropped from 49 to 12 per cent.
South Asia, and particularly India, showed an early shift towards services
South Asia showed less dynamism and structural change relative to the fi rst-tier newly
industrialized economies in East Asia. Th e share of manufacturing and mining peaked at 22
per cent of total output in the region in the 1990s, up from 14 per cent in 1970. Th e pattern
for the region largely refl ected what had happened in India. Most recently, India’s growth has
been driven by a fast-growing service sector. By the traditional standards of patterns of
structural change, this trend implies a premature shift into services given the relatively low
income level of the country.
Investment patterns and structural change

Capital accumulation is no longer viewed—as in some of the early theories of economic

development—
as the only driving force of economic growth. Th is does not mean, however, that investment
is not important. Capital investment is essential to economic development and growth, as it is
a major carrier of technological change and productivity increases. It also plays a crucial role
in the development of infrastructure and the construction of urban centres, where
manufacturing and services cluster. In combination with other factors, capital accumulation
also sets off structural changes. Economic transformation thus will require changes in patterns
of accumulation as new resources are invested in new sectors of the economy, thus increasing
their contribution to overall output.
The composition of investment also matters for growth performance. A review of empirical
studies by the United Nations Conference on Trade and Development (UNCTAD) (2003)
suggests that investment in machinery and equipment contributes more strongly to growth
than does investment in construction. Comparable data on the composition of investment by
commodity—for example, machinery and buildings—are scarce and hence evidence is
somewhat dispersed. Also, as argued in chapter IV, the “optimal” composition of investment
also depends on the level of development of the economy, with investments in infrastructure
exercising significant growth effects at relatively lower income levels
Investments in financial and business services are supportive of industrial
growth
Investment data by sector of destination are even less readily available. Yet, it is possible to
argue that the anticipated structural change in developing countries implies that much of
investment will initially move into the industrial sector. At higher stages of development,
economies are likely to invest in (a technologically advanced) manufacturing sector and
financial and business-oriented service sector. For instance, in developed economies, such as
the United States of America and Japan, where the service sector provides over 60 per cent of
output, most of investment is expected to go towards services
Employment, productivity and structural change
For the economy as a whole, labour productivity growth can be achieved through
technological
progress and/or by moving resources from low- to higher-productivity sectors. As mentioned
earlier, the type of productivity growth achieved by the latter approach tends to be more
important for the developing countries. The introduction of new technology and a structural
shift of the economy may, however, cause employment problems if output is not increased
(since, by definition, the higher-productivity sectors use less workers per unit of output).
Hence, sufficient dynamism (output growth) in the higher-productivity sectors will be required
in the process of structural change if remunerative jobs are to be generated for all workers
and the creation of unemployment is to be prevented.
In countries without a labour surplus and where the agricultural sector had access to capital
and technological knowledge, the lag in productivity growth between agriculture and industry
was not observed. This was the case, for example, in Argentina, Canada and New Zealand,
where land was not a constraint. In many other developing countries, however, a relatively
slow rise in agricultural productivity might well also have reflected rapid population growth
and the lack of employment opportunities elsewhere, both of which may imply growing
underutilization of labour in the rural sector.
Conclusions
Diverging patterns of growth among developing countries are also visible in diff erences in
terms of structural change. An examination of the patterns of structural change over the past
four decades indicate that the fast-growing East and South Asian economies were clearly
characterized by dynamic transformations. Economies with relatively little structural change
lagged behind, particularly those in sub-Saharan Africa. Sluggish long-term growth in the
middle-income countries of Latin America and the Caribbean as well as in countries in Central
and Eastern Europe, the Middle East and the former Soviet Union has been associated with a
process of deindustrialization. In these countries, growth—and particularly employment
growth—has been concentrated in low-productivity services, with agriculture and industry
remaining nearly stagnant. Fast growth in East and South Asia, in contrast, has been
associated with a rapid decline in the importance of agriculture and strong expansions of both
the industrial and modern service sectors.
These fast-growing economies also show sustained increases in labour productivity and labour
has moved from low- to high-productivity sectors, including modern service sectors. In the
regions with low-growth performance, the employment shift to the service sector has been
rather pronounced. However, in contrast with the service sectors of Asia, those of sub-
Saharan Africa, Latin America and the former Soviet Union have shown declining productivity,
as many workers have sought employment in services with low productivity and weak
linkages with the more dynamic sectors of the economy, owing to lack of job creation in other
parts of the economy.
Dynamic structural change involves strengthening economic linkages within the economy—in
other words, integrating the domestic economy—and productivity improvements in all major
sectors. The degree of integration of the domestic economy also influences how much
countries are able to gain from international trade and investment. The following chapters
explore how the external environment, macroeconomic policies and governance structures
have shaped these diff erences in patterns of structural change.

ECONOMIC DEVELOPMENT ISSUES

Community economic development is a major concern for residents and local officials in rural
areas as
population and economic stagnation continues. Local economic development practices have
undergone several waves since the second world war. Initially, attention was paid almost
exclusively to attracting large manufacturing plants to drive the local economy. Smoke-stack
chasing efforts, including tax and expenditure incentives, were adopted by many small and
medium size communities in rural areas. A growing realization that the number of large
manufacturing firms was insufficient for meeting local economic development needs caused
policy-makers to turn attention to small business already in the community with potential for
expanding operations. The "grow your own" philosophy became popular as local officials
worked with local entrepreneurs and firms to start new businesses or expand existing ones.
While a large proportion of new jobs occur within small companies, policy-makers
have come to realize that small companies have a high risk of failure and it takes a large
number of these small businesses to create many jobs in the community. Thus, a "third
wave" of economic development policies was created to include strengthening the
competitiveness of small businesses, increasing the skills of local labor markets, and
promoting the competitive environment of regions. Flexible manufacturing networks (FMNs),
tailored educational programs, and school-business partnerships are examples of these
activities.
This Community Economics Newsletter reports results from the Illinois Rural Life Panel,
created in 1989 to gather information on views and attitudes of residents in 76 nonmetro
counties in Illinois. The Panel contains approximately 2,000 residents who are surveyed
annually about policies and issues facing rural Illinois.

Long Run Strategy and Policy of Economic Development

Overall, residents strongly support local economic development efforts and seem to have a
reasonable perspective on programs that might work; 95 percent reported that the focus
should be on expanding existing industries. When Panelists were asked whether economic
development efforts should focus on manufacturing, retail, or services, 74 percent reported
manufacturing. This will be difficult, given the limitations that rural areas face in
transportation deficiencies and fiscal problems experienced by schools.
Residents also are concerned about attracting high technology industries; 81 percent
supported this approach. Not always realized, however, is that many high-tech jobs are
relatively low-paying or may require specialized knowledge not provided in local schools.
The importance assigned to manufacturing may suggest that more education may be
needed about the potential for rural areas to attract manufacturing companies.
Manufacturing employment moved from large urban areas in search of lower wages in rural
areas. Next, companies moved from the higher wage North to lower wages in the South. Now
jobs are leaving the U.S. for even lower wages overseas. It is very shortsighted, indeed, for
rural communities to compete on the basis of wages.

for Economic Development

Given the interest in assisting small businesses to promote local economic development,
panelists were asked whether local governments are adequately supporting new small
businesses at present. On average, 46 percent responded that local governments are not
doing enough and only 35 percent reported sufficient assistance from local governments.
Rural residents, however do not think that local governments should be the only source
of funds for economic development. Statewide, 79 percent reported that state governments
should assist and 64 percent reported that Federal government should be directly involved.
This compares with 62 percent who reported that voluntary contributions from other sectors
should be used as well.
Panelists also are concerned about whether rural areas, in general, provide a good
opportunity for business to develop. On average, 47 percent responded that business
opportunities are below average and only 17 percent reported opportunities as above
average. Panelists also are somewhat pessimistic about opportunities in their community.
One-half reported that development opportunities in their community were below average
and 16 percent reported their community as above average in opportunities.

Conclusions
Given the concern about rural economic development, a feeling that local governments are
not doing enough to promote small businesses, and a general view that rural areas offer too
few opportunities, what types of policies are likely most effective? Studies of successful
projects in small communities reveal several common characteristics. First, residents and
policy-makers have a clear vision of what they are trying to accomplish or have a project (or
projects) clearly in mind. Second, there is strong local leadership, although it may come from
several sectors within the community. Third, local leaders have tapped into external
resources as needed. Fourth, there is broad-based community support for the projects and
there is follow-through on the economic development plan.
Perhaps the most important factor in successful economic development in rural areas
is that communities understand that local initiatives are necessary for successful
development to occur. The Federal and state governments cannot solve local issues. Rather,
local leaders and residents must build a reasonable strategy and implement it.
Economic Planning
Meaning and Need for Planning

The 20th century was an era of planning. Almost every country had some sort of planning. In
socialist countries, planning is almost a religion. Even in countries like the U.S.A. and the U.K.
with a capitalistic system, they have partial planning. The 19th century State was a Laissez
faire state. It followed a policy of non –intervention in economic affairs. But the modern State
is a Welfare State. The two World Wars, the Great Depression of 1930s and the success of
planning in former Soviet Russia have underlined the need
for planning. Planning is a gift of former Soviet Russia to the world. For, it was the first country
to practise economic planning on a national scale.
Deffination
According to Lionel Robbins, “strictly speaking, all economic life involves planning…. To plan is
to act with a purpose, to choose and choice is the essence of economic activity”.

In the words of Barbara Wootten, “Planning may be defined as the conscious and deliberate
choice of economic priorities by some public authorities”.

Many economists today agree that planning is an organized, conscious and continuous
attempt to select the basic available alternatives to achieve specific goals. Planning involves
the economizing of scarce resources.

Most of the underdeveloped countries of the world became independent only fifty or sixty
years back and most of them were poor at that time. So it became the main business of the
Governments of the newly emergent nations to provide food, clothing and shelter to their
people. For that, first of all, they had to increase their national income. Since most of them
were agricultural countries, they had to evolve some programmes for agricultural
development. Not only that, they had to industrialize their economies. And they had to
provide more jobs to their people. That means, they had to do something for expanding
employment opportunities. Further, as most of them were wedded to some kind of socialism,
they had to reduce inequalities of income and wealth. All these things, the poor countries
attempted to do by means of economic planning.

Laissez faire policy is a luxury for modern governments. So they have economic plans. In
the developed nations of the world, they plan for economic stability. But in the
underdeveloped nations, they plan for economic growth and development.
Another main reason for the emergence of planning in underdeveloped countries is the failure
of the market mechanism. The capitalist economy is basically a market economy and price
mechanism works through the market system. The price system is a basic institution of
capitalism. The allocation of resources and distribution of rewards are done through the price
system. All decisions of the businessmen, farmers, industrialists and so on are guided by the
profit motive. If the market is perfect, price system is good. But if there is monopoly and other
types of imperfect competition, the market system fails. And it calls for government
intervention by way of planning.
The dispute between planning and Laissez faire is essentially about efficiency. The case
against Laissez faire rests on the following grounds:
1. Under Laissez faire, income is not fairly distributed. As a consequence, less important and
less urgent goods are produced for the wealthy people while the poor lack basic goods like
education, health, housing, good food and ordinary comforts. Under such a situation, the
State can control economic activity by means of planning and reduce inequalities of income
and wealth.
2. The market economy is a victim of trade cycles. And there will be alternating periods of
prosperity and depression. And during depression, there will be bad trade, falling prices and
mass unemployment. So there is need for state intervention. By means of proper planning,
the State can control trade cycles as they did in the case of former Soviet Russia.
During the latter half of the 20th century, planning was popular in many underdeveloped
countries, in addition to former Soviet Russia and Eastern European countries. It does not
mean that they believed in complete central planning. The central issue in planning is not
whether there shall be planning but what form it shall take. The debate, in fact, centered on
whether the State shall operate through the price system or by getting rid of it.
Problems of Planning in backward countries
Planning is much more necessary and much more difficult to execute in backward than in
advanced countries. First of all, “planning requires a strong, competent and incorrupt
administration” (Arthur Lewis). But most of the economically backward nations have weak,
incompetent and corrupt administration. Further, they have democratic planning. So they
cannot do things in a quick manner as was done in former Soviet Russia. They have to go
slow. And agriculture is the main stay of their economies. Since agriculture
depends upon natural factors which are uncertain, there is a lot of uncertainty about their
agricultural programmes. Over–population and low capital formation are some other
important problems of planning
in underdeveloped nations.
Characteristics of Economic Planning
In a planned economy, major economic decisions such as what and how much is to be
produced, when and where it is to be produced and to whom it is to be allocated will be
determined by a central authority such as the State, through the Planning Commission. And
the Government will have the powers of implementation. Before the Plan is drawn up, a
detailed survey of all available resources – physical resources, financial resources and human
resources – has to be made. For example, in the former Soviet Russia, after the Revolution in
1917, there was War Communism between 1918 – 1921. And there was New Economic Policy
(NEP) from 1921 to 1924. And from 1924, the Government made a detailed survey of
all available resources and only in 1928, it implemented its First Five Year Plan. After the
survey of resources, the objectives of planning will be determined. For example, one of the
long term objectives of
Soviet Planning was that Soviet Russia should catch up with the production levels of the
leading capitalist nation of the world, namely U.S.A., in steel, coal and electricity. Keeping in
mind, the objectives
of the Five Year Plan, the physical targets will be fixed. And ways and means of mobilising
financial resources will be explored. The Plan will also spell out the details in which the fruits
of planning will
be distributed in a fair and just manner. The nature of planning is determined by the type of
economic
system – capitalism, socialism, mixed economy - in which it is practised.
There will be partial planning in a capitalist economy, (e.g., U.K.) but a socialist economy is a
totally planned economy (e.g., Former Soviet Russia). In a mixed economy like India, both
public sector and private sector play important roles in economic planning.
Usually, the period of a Plan is five years. The Plan has to be drawn in advance. It is done by
the Planning Commission in India. A plan will be of a definite size and it will fix the targets for
the Plan period and it will also indicate the ways by which the financial resources are to be
mobilized for the Plan.

Types of Planning
1. Centralized Planning : In a socialist economy (eg. Former Soviet Russia), there was
centralized planning; it was planning by direction. In a socialist state, most of the means of
production are owned by the State. All basic economic decisions such as whether priority is to
be given for industrialization or for development of agriculture ; if it is decided to give
importance to industrialisation, whether to give importance to basic and heavy industries or
for consumer goods industries will be made by the central authority.
2. Planning by Inducement : In a democracy, Planning is done by inducement. For example,
ours is a mixed economy where there is a public sector and a private sector. The government
has to persuade the industries in the private sector to fulfil the goals of the Plan through
inducements such as tax concessions and by providing incentives.
3. Indicative planning – In this type of planning, the government invites representatives of
industry, and business and discuss with them in advance what it proposes to do in the Plan
under question and indicates to them its priorities and goals. Then the Plan is formulated after
detailed discussions with varied interests.
Planning in France is a good example of indicative planning. After we embraced liberalization
and privatization policies in 1991, even Indian planning, in a way, has become indicative
planning.
Economic plans can also be divided into midterm plans, shorterm plans and perspective plans.
Our Five Year Plans are in fact, midterm plans. Short term plans are Annual Plans. During the
period of implementation, Five Year Plans operated by dividing them into Annual Plans.
Perspective Plans are long term plans and the period ranges from 20 to 25 years. The Five
Year Plans are formulated
by taking into account the long term objectives of the Perspective Plan.
Rolling Plan : Unlike the Five Year Plan with fixed targets, in the case of the rolling plan, at the
end of each year, targets will be fixed by adding one more year to the Plan. That is, without
fixed targets for all the five years, depending upon the performance of the Plan in the current
year, targets will be fixed for one more year. Like this, it will go on a continuous basis. That is
the idea behind the rolling plan.
A great advantage of centralized planning is that plans can be implemented with great speed
and targets and goals can be achieved. For example, by means of planning, former Soviet
Russia transformed
its economy, which was predominantly agricultural into a predominantly industrial nation,
within a short span of 12 years. But a demerit of centralized planning is that as the State
enjoys a considerable degree of monopoly, in the absence of competition, it is rather difficult
to test the productive efficiency of state owned units. Under planning by inducement
(democratic planning), though there is a good deal of freedom for people, because of the
procedures and delays associated with the democratic process and because of
Parliamentary democracy, there will be a lot of delay in the implementation of programmes
and economic growth will be slow.

Objectives of Planning in India

The central objective of planning in India is to raise the standard of living of the people. Our
Five Year Plans aim at increasing output. At the same time, they aim at reducing inequalities
of income and
wealth and providing equal opportunities for all. Growth with social justice is our basic goal.
The major objectives of developmental planning in India may be listed as follows:
1.To raise the national income. This is known as Growth Objective ;
2.To increase investment to a certain level within a given time ;
3.To reduce inequalities in the distribution of income and wealth and to reduce concentration
of economic power over resources ;
4.To expand employment opportunities ; and
5.To remove bottlenecks in agriculture, manufacturing industry (especially capital goods) and
the balance of payments. In the agricultural sector, the main objective was increasing
agricultural productivity and attaining self–sufficiency in foodgrains. In the industrial sector,
the emphasis was on basic and heavy industries. In the foreign trade sector, the emphasis
was on having a ‘viable balance of payments position’. The strategy adopted in Indian
Planning is often referred to as ‘Mahalanobis strategy’. In this strategy, emphasis was laid on
rapid industrialization with priority for basic and heavy industries.

Tenth Five Year Plan (2002 – 2007)

The Tenth Five Year Plan aimed at explicitly addressing the issues of equity and social justice.
It fixed a target of 8 percent GDP growth rate for 2002 – 2007.
The key targets fixed for the Plan are as follows :
1.Reduction of poverty by 5 percentage points by 2007 and 15 percentage points by 2012.
2.Gainful employment to the addition to the labour force during the Plan period;
3.Universal access to Primary education by 2007 ;
4.Reduction in the decadal rate of population growth between 2001 to 2011 to 16.2 percent ;
5.Increase in literacy to 75 percent by 2007
6.Reduction in infant mortality rate (IMR) to 45 per 1000 live births by 2007 and to 28 by
2007;
7.Reduction of maternal mortality ratio (MMR) to 2 per 1000 live births by 2007 and to 1 by
2012.
8.Increase in forest and tree cover to 25 percent by 2007 and to 33 percent by 2012 ;
9.All villages to have access to potable water by 2012 ; and
10. Cleaning of all major polluted rivers by 2007.
The past experience raises doubts about fulfilment of many targets such as the GDP growth
rate of 8 percent, and fulfilment of employment target. Agriculture and small scale industries
are still at a low priority level. And there is too much of faith in the private sector

Conclusion
So far, we implemented nine Five Year Plans and we are in the last year of the Tenth Plan.
Growth with stability will be a real challenge for the government and the people. And we have
not yet solved the problem of unemployment. Though we have reduced poverty to a certain
extent, a lot has to be done in the area. An encouraging feature is since the Fifth Five Year
Plan, employment schemes have been integrated into poverty alleviation programmes. Unless
we contain the growth of population, it would be rather difficult to achieve the goals of
economic planning in India. Furthermore, we have to increase our savings, investment and
exports. Above all, the administrative machinery must become strong, competent and
incorrupt to make our economic planning a success. Since the introduction of economic
reforms in 1991, there has been a qualitative change in our planning. In due course, it may
become indicative planning.