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Economic planning is not undertaken in any country, and it was not undertaken in India, out of either pure cussedness or academic adventurism. This is important because, by and large, the implications of some of the arguments that are going round in general and among economists in particular seem to indi­cate something of the kind.

There can be little doubt that a very considerable part of sheet steel released at controlled rates is be­ing diverted to manufacture of luxury items. Similarly, stainless steel, imported at a low price through allo cation of scarce foreign exchange, is providing large unearned profits for the initial quota-holders.

It is obviously desirable, in both cases, to raise the prices at the first round so that the benefit of the ultimate high price paid by the consumer accrues to the State rather than to favoured individuals.

There cannot be any doubt that a considerable misuse of capital is taking place through the undertaking of low priority projects which is made possible by the low rates of interest. It follows that there is a strong case for raising the rates of interest in order to ensure economic use of capital.

Arguments boxed- on such examples are frequently advanced to support the thesis that the entire system of controls should be scrapped.

These examples of misallocation of resources are, however, the classical results of price control without adequate control of incomes and rationing of the scarce commodities at a physical level.

The point. however, is that the Indian economy does not lack physical controls entirely.

Allocation of scarce resources, whether it is foreign exchange or sheet steel, has been undertaken precisely to meet the need of physical allocation corresponding to the controlled prices.

Provided, therefore,that this allocation through licensing is done adequately and done all along the way there is no reason why the shifts in prices arising from price control and rationing would be wholly unsatisfactory. The diagnosis, therefore, should relate not to whether some distortion in relation to intended allocations have taken place but whether the allocation effort has been fundamentally under­mined.

This is of course, quite separate from what could have been done to secure a satisfactory allocation.

IT is i m p o r t a n t to examine some of the assumptions under w h i c h

the system of controls in I n d i a has been b u i l t up, in so far as they are deducible f rom the frame of thei r operat ion. The regula tory system on w h i c h I n d i a n p l a n n i n g has so far depended is made up l a rge ly of three basic controls , and two dis­t inc t paths of direct interference. The regula tory mechanism consists o f :

i ) Con t ro l of capital issues.

i i ) Exchange control and alloca­t i o n of fore ign exchange, th rough i m p o r t l icensing, and

i i i ) A l l o c a t i o n of scarce raw mater ia ls t h r o u g h a process of l icensing, at regulated prices. The three regula tory tools are supposed to operate w i t h i n the l i m i t s o f :

i ) the d i s t r ibu t ive and regula­t ive effects of government income and expenditure process, and

i i ) d i rec t government entry h i t " c ruc ia l product ive act ivi t ies , in terms of the i ndus t r i a l p o l i c y resolu­tions.

The question to be answered is whether the machinery is adequate for achieving an appropriate a l lo­cation of goods and services out­side the pr ice mechanism as envis­aged in the plans. The a l loca t ion p rob lem has two broad aspects. One is the prevent ion of resources f r o m flowing in to channels that are undesirable f rom the standpoint of the p l a n . The other is the direct ion of resources into the purposes of p l an .

Outcome Entirely Foreseeable It is obvious that there is no

mechanism by which certain re­sources can be directed towards any specific use except by direct state pa r t i c ipa t ion in the par t icu la r acti­v i ty , in so far as it conforms to the terms of the indus t r ia l po l i cy reso­lut ions. A l l the other means at the disposal of the government are nega­tive and can only be used to chan-nelise resources seeking to get directed. Under these circumstances the regulative machinery can only choose between appl icat ions based on calculat ions of pr ivate gains. No machinery has been created by

wh ich certain types of co-ordinating ac t iv i ty could be proposed and brought into being. In p r inc ip le , the technique of permissive licens­i n g can on ly succeed if the appl i ­cations are exhaustive in their coverage of possible economic acti­vit ies. In an atmosphere of short age of entrepreneurship such a ma­chinery is ha rd ly l i ke ly to be effec­t ive, and it is l i k e l y to be even less so when entrepreircurship con­sists very largely of w o r k i n g round the government regula tory mecha­nisms.

The outcome, in terms of p lan achievements, have thus been en­t i r e l y foreseeable. A certain amount of costly indust r ia l iza t ion by direct pub l i c sector par t ic ipat ion, and some indi rec t effects of persistent excess of expenditure have un­doubtedly been achieved over the past twelve to thirteen years. As for the rest, it is not so much trial the achievements have been ha i l ing and uncer ta in , but what has been achieved is very largely unrelated to what was sought to be achieved.

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In other words, the p l a n administ­ra t ion appears to have fa i led to a very large extent in d i rec t ing re­sources to areas that w o u l d not have attracted resources under the operat ion of free m a r k e t economy, but where for the purposes of sus-tained g rowth , it was necessary that adequate resources be directed.

This has not been because the theory of adjust ing relative profit­a b i l i t y th rough selective lower ing of inpu t prices is by i tse l f f a u l t ) , bu t because in an atmosphere do­minated by tack of var ied entrepre-neurship, the negative machinery alone that was avai lable for a l lo­cation purposes was not adequate for achieving the desired end. In addi t ion , the input-output re la t ion­ships were not adequately studied or understood, to enable the Gov­ernment machinery to interfere w i t h the input allocations a l l a long the l ine in the manner necessary for achieving the desired end. And finally, the government was u n w i l ­l i n g to interfere w i t h the ove ra l l income d i s t r ibu t ion in an effort to make its l i m i t e d regulatory ac t iv i ­ties effective.

Achievement Not by Design

Paradoxica l ly , therefore, the p lan­n ing effort has been as successful as expected not because it was bad­ly adminis tered, bu t because the essential m i n i m u m that is necessary to achieve a p lanned a l locat ion of strategic resources in supercession of the free p r i c i n g system was never rea l ly t r ied out a t a l l . In consequ­ence, a whole set of act ivi t ies that w o u l d have co-ordinated the ac t iv i ­ties actually licensed and increased their p r o f i t a b i l i t y never came up at a l l , for want of sponsoring, result­ing in a l l - round poor performance of the permi t ted act ivi t ies and up­set t ing various expectations.

What makes the M i d - t e r m A p p r a i ­sal of the T h i r d P lan pathetic is not that the achievements are being now found inadequate, but that it is not yet being acknowledged that what has been achieved is not on account of what was conceived as p l a n n i n g at a l l , but is very large­ly an accidental resultant of a whole complex of uncoordinated activit ies that gave the government merely enough brashness to run down the foreign balances and persist w i t h excess income generation. B a r r i n g the r ea lm of pub l i c sector under­takings in the f ie ld of i ron and steel

p roduc t ion in a general way, the essential mechanism by w h i c h the missing complementari t ies that migh t have lead to sustained development has not been visualized and creat­ed at a l l , except in isolated eases and that more by accident than by design. One c r i t e r ion of successful p l ann ing that emerges f r o m the dis­cussion is that the sectoral and over­a l l output-capital ratios must be larger than output-capi ta l ra t io at the enterprise and indust ry level on account of complementari t ies affect­ed by p lanned a l loca t ion . It is a test that can be meaningfu l ly appl ied to check p lan achievement.

Differential Profitability

Economies of a l locat ion and control depend on p roduc ing differ­ential p ro f i t ab i l i t y by lower ing the prices of selected control led inputs. The process involves w o r k i n g back in to inputs invo lved in the produc­t ion of the inputs, on to the u l t i ­mate factor incomes. I t fe l lows that provided the input-output relations are adequately understood and the process of control led a l locat ion of inputs is carr ied out a l l a long the l ine, there is no reason why there should be any bui l t - in-dis tor t ions in the economy. In other words, there is no reason why such an economy w o u l d not be in a temporary equi­l i b r i u m . I t follows also that since the process does not involve price control and ra t ion ing of a l l the items, but of selected items only , existence of a free market in which demand and supply w i l l have to work themselves out through differ­ential pr ice changes, is not incon­sistent w i th the existence of such an e q u i l i b r i u m .

Thus, if sheet steel is p r i m a r i l y needed for manufac tur ing ra i lway wagons or ships, and if the lower­ed sheet steel prices enable wagon manufactur ing , or ship b u i l d i n g companies to have dif ferent ia l pro-fit rates that make them acceptable for investment a l loca t ion purposes, it does not matter a great deal if a smal l part of the sheet steel is used for m a k i n g refrigerators and the low price of the sheet steel leads to enormous profits in the refrige­rator indus t ry because of the un­requited demand in the refrigera­t i on market on account of uncont­r o l l e d incomes. S i m i l a r l y , i f chro­m i u m steel is p r i m a r i l y needed for machine tools and surgical instru­ments and if these industries can be

carr ied on wi thout ra is ing prices a l l a long the l ine at reasonable prof i ts because of the low input prices of c h r o m i u m steel, it does not matter a great deal if there is a large pr ice p r e m i u m in the c h r o m i u m steel market , in so far as it is used for domestic- utensil manufacture. The p r e m i u m arises because there is ob­vious ly a large unrequited purchas­ing power in the domestic utensil market . As a matter of fact, the existence of a l imi ted free market in respect of a rationed input i tem is not in the least an argument against price control and in favour of free p r ic ing , except to people who are already convinced about the super ior i ty of free p r i c ing on other grounds.

Degree of Distortion

The p r o b l e m really starts when the residual free purchasing power-assumes so large a propor t ion in re la t ion to the cont ro l led pares of the economy that it can d i rec t ly or indi rec t ly tamper w i t h the al locat ion machinery and thereby cause licens­ed low-priced inputs to be diverted f rom the regulated to the unregulated parts of the economy. In other words, if the income that the communi ty wou ld l ike to spend on refrigerators or stainless steel utensils is so large that profits in these industries are high enough to divert sheet steel or c h r o m i u m steel f rom wagon b u i l d ­ing or machine tool industry', then the p rob lem becomes ominous and threatens to frustrate the purposes of planned a l loca t ion . This sort of diversion of scarce resources f r o m cont ro l led or essential to uncontrol­led or non-essential industries can be effected either by s imple corrup-tion or by distortions in the pol icy of l icensing and con t ro l . As a matter of fact, sma l l distortions of both the types may be there a l l along but the magnitude of the pro­b l e m and the resul t ing economic strain w o u l d depend upon the level of social m o r a l i t y on the one hand and adminis t ra t ive efficiency on the other.

The essential point is not that such a tendency towards d is tor t ion exists but that the degree of distor­t ion that may arise in any part i­cular si tuation is so large as to v i t i ­ate the a l locat ion process. The evi­dence on the basis of which policy changes may be argued is. there­fore, the relative magnitude of scarce commodities allocated to one

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regulated purpose that have moved out or been ac tual ly used in an un­regulated one. The c r i t e r ion is one of specific misuse and not the gene­ra l appearance of intermediate pro­ducts in the unregulated markets at some stage of the other.

The question, therefore, is not that of free p r i c i n g versus controls, hut one of the actual efficiency of the licensing system consciously adop­ted for a l locat ion of resources under p l ann ing . As the mat ter now stands, on ly if i t can be shown that the me­thod of a l loca t ion chosen was either faulty or has been found to he i n ­effective, does the question of aban­doning the system arise. It does not fol low, however, that the abandonment has to be in favour of comparat ively greater use of free p r i c i n g . The case can be made out for a more closely regulated al loca­t ion than has been attempted so far. The final decision must emerge out of the understanding of the l i m i t a ­tions of the system of control and licensing ac tual ly in operation.

Since the system of l icensing and control replaces to a large extent the pr ice system and since the suc­

cess of the p l an is l i n k e d in a b i g way w i t h the success of the system, i t is impor tan t to consider the man­ner in w h i c h the efficiency of the system could be judged. Unfor tu ­nately, one looks in va in for an adequate consideration, or even for an awareness of the problem and that, after more than twelve years of p l a n n i n g !

The Success Assumption

The idea that if something is en­trusted to the adminis t ra t ion i t w i l l be efficiently performed is so naive that it does not even m e r i t serious consideration. Bu t this naive assump­t ion seems to be at the bo t tom of a l l the discussions on the subject. The extent of the lack of awareness is indicated by the fa i lure to use the obvious indicators of unautho­rised use of scarce commodities. The necessary in fo rmat ion can be gathered f rom the indust r ia l statis­tics already collected, i f they could be l inked up specifically w i th the use of scarce commodities by the various indus t r ia l units, f u l l records of wh ich are available wi th the gov­ernment. S i m i l a r l y , no at tempt has been made to find out the re la t ion between the q u a l i t y and value of

scarce commodi ty a l loca t ion and the f inal chain of activities dependent thereon. Estimates of unauthorised use of essential scarce commodit ies can likewise be at tempted wi thout any great difficulty, as many of the items involve o n l y the large pro­ductive units.

Since, however, the government has proceeded on the assumption that it is in a posi t ion to at tain ab­solute success, it has not cared to evolve a machinery by wh ich its re­lat ive success cou ld be effectively measured. The success assumption, therefore, is i tself a measure of the fa i lure of the operat ion of the con­t r o l l i n g system. On the other hand, however, no case has been actual ly made out of the fa i lu re of the sys­tem, though there is prima facie evidence of par t ia l misuse and break­down. It is impor tan t that the sys­tem be careful ly examined before it is scrapped. The r igh t remedy may s t i l l be to t ighten the controls and to regulate income d is t r ibu t ion more specifically in order to give the con­t ro l l ed activit ies a chance to produce the results that they have been desi­gned to produce, rather than to break up the system that has been so far b u i l t .

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