A close examination of the notions of planning and freedom, as they were understood and adopted in the 1950s and ’60s, and as we understand them today, would clearly bring out how the world has changed between then and now. It is not just the world of reality, the way the different countries organized their affairs within the inter-relationship of production, consumption and investment activities, but also the world of ideas, the conceptual categories that have undergone radical changes in the last thirty to forty years. The terms ‘planning’ and ‘freedom’ have very different connotation today from those in earlier days.

Freedom meant positive and negative freedom, even in those days, although somehow negative freedom in the sense of non-interference by the state or powerful authorities in the ways an individual behaved, was regarded as basic for any democratic society. However, for India, like many other developing countries, positive freedom in the sense of expanding capabilities of individual members of the society was taken as a more important guide for public action.

Usually the policies to protect negative freedom should not come in conflict with policies for promoting positive freedom and in most cases they should compliment each other. However, in many developing countries where resources are limited and the choices available to people to lead a meaningful life are not in plenty, there can be occasions when the policies supporting these two different kinds of freedom may turn out to be conflicting and incompatible. The society then has to decide the possible trade-off between them. Planning comes in as an instrument to minimize the cost of the trade-off.

The problem became quite apparent in the choice of economic policies in poor countries like India, in the world of the ’50s and the ’60s. The best illustration of economic policies protecting negative freedom would be the freeing of market forces from all kinds of interventions and inflexibilities to allow individual market players complete freedom of operations. In theory, free market operations should promote competition and efficiency to get the highest output and income from the existing resources and, under some assumptions, to get their optimum growth over time. In practice, however, even in most developed industrial countries, such free market operations do not always produce the optimal outcome of either current or future incomes.

 

In developing countries where initial stock of resources are very limited, markets grossly imperfect and distribution of income extremely uneven, protecting negative freedom through liberalization and deregulation of markets often results in outcomes that violate essential positive freedoms for large sections of population. A lack of education, health, shelter and employment opportunities prevent the negative freedom of free market operations from expanding their capabilities, the freedom to be what they want to be and the freedom to do what they want to do.

The negative freedom of a free market operation, by enriching the rich and bypassing the poor can then be seen quite openly as conflicting with positive freedoms. Policies promoting such negative freedom would require to be regulated and restrained in a carefully calibrated and coordinated manner. Planning could then be seen as nothing but a programme of coordinating such policies. Instead of supplanting the market, planning could play the role of making the market operate better, to promote the positive freedoms of the people expanding their capabilities.

In the world of the ’50s and ’60s, in many countries, especially those who had come out of the colonial rule and were striving for the removal of poverty and economic transformation, planning and free-market economy were often viewed not as complimentary but antagonistic to each other. Positive intervention by the state, not only to improve health, nutrition, education and shelter which were essential requirements of an adequate standard of living for the millions of poor people, but also for the development of infrastructure – roads, transport, power and communication – were seen as an essential domain of public intervention. Promoting them could be described as positive freedom.

Without such public intervention, market economies were considered as only helping those who had market power, the rich and propertied people. State intervention for correcting this imbalance through larger social investments would call for transfer of resources from the relatively well to do, by policies that would naturally affect the free market economies, and redistribute resources contravening the market forces. State intervention to promote positive freedom was then generally seen as coming in conflict with free-market operations. Planning was essentially regarded as coordinated public investment and policies of intervention to correct the market economy. That is how planning was conceived in most economies in those years.

 

In some developing countries like India, the reach of planning went much further. Although these countries were far removed from any social arrangement resembling socialism, they were inspired by the success of socialist countries in the removal of poverty, malnutrition and lack of education, and also by their very rapid economic transformation and industrial development through centralized planning. The Indian policy-makers were deeply impressed by the Soviet system of planning, especially the model of industrialization built on rapid growth of the basic and heavy industries. The Mahalanobis model of the second five year plan and beyond, inspired by the Soviet planning model, broke away systematically from the operations of the market economy.

 

Although in hindsight we see that the Soviet model did not generally work the way it was intended to. Possibly such a model was practically doomed to failure from the very beginning in a country like India. In a vast diversified country like ours, with a functioning democracy that allows different political and social groups to assert themselves, there was virtually no alternative to depending on the market economy for decentralized decision-making by the millions of agents. Unfortunately, the state authorities were tempted to exercise their power to invest and reallocate resources, ignoring the pulls and pushes of the markets. In the process they not only failed to achieve the results they were aiming at, but created widespread inefficiency and market distortions resulting in large-scale corruption and a black economy. The Indian policy-makers in their zeal to promote radical economic transformation and high GDP growth were attracted by the Soviet model and considered systematic market intervention as a necessary cost for promoting such outcomes of positive freedom.

It will of course not be right to say that the Indian economic policy in the ’50s and ’60s was a complete failure because of its over-emphasis on central planning and wide ranging market interventions. It has today become fashionable to castigate the first 30 years of Indian economic development after independence between 1950 and 1980 as a period of the ‘Hindu’ rate of growth, which was sluggish and lethargic, trapped in a low level of equilibrium. The economy grew on the average at about 3.5 per cent when the population grew at 2.12 per cent a year. The per capita income in these 30 years grew at 1.4 per cent a year, which was clearly inadequate to make any dent on the living standards of our people. But this was really attributable to our high population growth during this period, because a growth of GDP at 3.5 per cent for 30 years for a poor developing country like India was not a mean achievement with its entire legacy of backwardness and underdevelopment of the colonial period.

Indeed, that rate of growth was three times the growth of 1.18 per cent a year for the period between 1919 to 1947, immediately before independence. The growth rate picked up significantly in the 25 years between 1980 and 2005, when it was 5.56 per cent a year, but that was about only 60 per cent higher than the Hindu growth of the previous 30 years. But because of a decline in population growth to about 1.8 per cent a year during this period, the per capita income recorded a much higher growth than the previous period.

 

One is not saying that the Indian economy could not have grown at a higher rate than it did during 1950 to 1980. The rigidity of our planning system and market distortions and inefficiencies, no doubt left a huge burden on the economy. Possibly, some alternative policies could have removed the market inefficiencies and achieved a much higher growth. But the fact remains that despite the distortions introduced by market interventions in that planning period, the Indian economy built up a substantial capacity to grow and transform the productive conditions of the economy. Undoubtedly, the build up of such productive capacity proved very useful in pushing the growth rate significantly after the market reforms were introduced and the rigidity of the planning system based on controls and disincentives significantly reduced.

 

Since the 1990s, the projected antagonism between planning and market of the first 30 years has tended to disappear. As the inefficiencies of the centralized system of planning became increasingly apparent, the Indian policy-makers moved gradually but unmistakably towards liberalizing the market economy. The world policy climate also underwent significant change in the ’70s and ’80s as the Chinese economy embraced the market system and centralized planning in the Soviet Union literally collapsed. Most countries in the world systematically gave up their interventionist policies and began introducing market competition in all productive activities.

In a sense, the pendulum swung to the other extreme of policy formulation from interventionist planning towards a minimal state, involving the states in productive activities only when it was absolutely necessary and that also for a temporary period. The ’80s and ’90s were the years when the so-called Washington Consensus ruled supreme with the privatization of public enterprises, deregulation of domestic markets and liberalization of international trade and capital flows. The idea behind all these was that interventions that attempt to promote positive freedom do not work and often prove much more expensive than what liberalizing markets could ensure through increased growth and revenue realization, financing all forms of development expenditure.

 

However, the policy-makers also realized that positive freedoms did require promotional and affirmative actions, that freedom of markets on its own could not deliver public goods like health, education, infrastructure and social development. All this was for a very simple reason – liberalization of markets would produce very little incentive to attract socially beneficial investments. So, planning came back again in all development policies in the ’90s, not in the sense of centralized intervention or regulatory restraints, but in the sense of coordinated policies of providing incentives and disincentives, maintaining cross-sectional and inter-temporal consistency.

I started this article by defining planning of policies and liberalization of markets in such a manner as to make them complimentary to each other. For many years, such complimentarity was not apparent or appreciated but with the passage of time and experience of the policy exercises of different countries, we have again realized the essential complimentarity of these two approaches. A society considers the objectives of social development with equity and justice as a primary concern of government through which it derives legitimacy, especially in a democracy. We have learnt that markets alone cannot realize these objectives. We have also learnt that without markets and their flexible operations, public policy alone cannot achieve them. They have to work together, complement and reinforce each other. That way, the basic problem which was posed in the first year of Seminar, almost 50 years ago, can be effectively resolved.