Chapter Two

Classification of
Development Planning
In this chapter, we will discuss:
Types of planning on the basis of system of government

Types of planning on the basis of time

Types of planning on the basis of finance

Types of planning on the basis of rigidity/flexibility

 1. Planning by Direction & Planning by Inducement

a. Planning by Inducement
Planning by inducement is democratic planning. It means planning by
manipulating the market. There is no compulsion but
persuasion( encouragement) .
Here the consumers are free to consume whatsoever they like, producers are
free to produce whatsoever they wish. But such freedom of consumption and
production are subject to certain controls & regulations.
The consumers, producers and other factors of production are induced with the
help of various fiscal and monetary devices.
For example, if the planning authority wishes to encourage the production of a
commodity, it can give subsidy to the firms. And if it finds shortage of goods in
In order to increase the rate of capital formation, the planning
authority can undertake public investment and/or encourage
private investment.
It can adopt a suitable monetary policy and at the same time a
taxation policy which encourages investment and discourages
consumption.
Merits:
i. Consumer's sovereignty remains intact.
ii. There is freedom of enterprise
iii. It is flexible
iv. It is democratic

Demerits:
ii. The working of the market forces fail to bring about proper
adjustment b/n demand and supply and thus create imbalances
in the economy.
iii. The fiscal & monetary policies of the gov’t are not so successful
in the underdeveloped countries.
iv. There are profit motives more than welfare of public.
b. Planning by Direction
Planning by direction is an integral part of a socialist society like
that of China and Russia.
It entails complete absence of laissez-faire. There is one central
authority which plans, directs, and orders the execution of the
plan.
The economic authority is completely concentrated in the state;
not in the market.
Such planning is comprehensive & encompasses the entire
Demerits:
There is complete absence of consumers’ sovereignty. People are
not
allowed to spend and consume according to their choice. Even
the right to choose one’s occupation does not exist. Both the
consumer and labour markets are determined by the planning
authority.
It is always inflexible. Once a plan has been drawn, it becomes
impossible to revise any part of it.
• Despite all these defects in planning by direction, the experience
of China and Russia is a clear testimony to the fact that this type
of planning is the most effective technique for accelerating the
growth rate of the economy.
Conclusion:
Whether a country should adopt the method of planning by direction or
planning by inducement depends entirely on the system of government. A
 2. Financial and Physical Planning
a. Physical Planning
Refers to the allocation of resources in terms of men, materials & machinery.
Consider resources in real terms; not in money.
The planning authority works out how much land, labour, materials & capital
equipment will be required to implement the plan & achieve the targets.
It shows how much amount of investment will be required for a given amount of output.
Here, the planners have to determine not only the amount of
investment but also work out its composition in terms of the
various goods required to obtain a certain increase of output of
product.
• For instance, it has to be worked out as to how much of
cotton, coal or electric power and other ingredients will go
into an output of 1,000
meters of cloth. The targets are set in physical units.
Thus in physical planning we make an overall assessment of the
available real resources like raw materials, manpower and
capital equipment and devise means to mobilize them in
amounts sufficient to enable us to achieve the various targets of
production.
Difficulties of physical planning:
 In under-developed countries, there is statistical blackout
so that adequate and reliable statistics regarding the various
types of real resources are lacking. It, therefore, becomes
really difficult to lay down the targets with any degree of
certainty.
 To build up a sound sectoral balance is a tightrope dancer.
That is why when the plan is being implemented all sort of
b. Financial planning
• Financial planning refers to the technique of planning in which
resources are allocated in terms of money.
• The planners determine how much money will have to be
invested in order to achieve the predetermined objectives or
targets.
• Total outlay is fixed in terms of money on the basis of growth
rate to be achieved, various targets of production, estimates of
the required quantity of consumer goods, expenditure on the
necessary infrastructure, etc.
 Shortcomings of Financial planning:
 An attempt to raise taxes to a high level will adversely affect the capacity
of the people to save which may hamper the development process.
 In an underdeveloped country there is a vast non-monetized sector and a
small organized money sector.
 Financial planning is not free from various bottlenecks, especially
inflationary rise in prices.
Conclusion:
 Both financial planning & physical planning are complementary to one
another; and must be integrated in development process. If plans are
drawn on the basis of physical resources without any regard to the
availability of financial resources, plan targets can never be fulfilled.
 3. Perspective Planning

• Perspective planning is a long run planning where targets are

fixed for long period say 15 to 25 years. But a perspective plan
cannot mean one plan for the complete period. In a true sense,
broader objectives are to be achieved in a fixed period by dividing
the perspective plan into short-run plans of 4 to 6 years.

• The long-run objectives are so divided into short- run that one by
one all the objectives are achieved in the long-run. In other words,
short run plans pave way for the achievement of long run motives.
• The main purpose of a perspective plan is to provide a
background to the shorter terms plans, so that the problems that
have to be solved over a very long period can be taken into
account in planning over short-terms.

Demerits of Perspective Planning:

• Such a plan is rigid because necessary or desirable

adjustments to unforeseen changes or corrections of errors
may not be made.

• It has so many administrative difficulties due to w/c the

fulfilment of the objectives becomes difficult.
 4. Rolling and Fixed Plans
a. Rolling Plan:
 It refers to the rolling/flexibility of a plan at intervals usually one
year, so that it continues to be a plan of certain number of years.
 Rolling plan is framed with a view to remove rigidities.
 It considers the unforeseen changes like natural calamities or
economic changes. Under this financial and physical targets are
revised.
• But under rolling plan, long-term objective cannot be achieved
since the targets are revised every year. Such changes cannot
maintain proper balances in the economy so as to achieve balanced
development.
Merits of Rolling Plan:
a) Rolling plans are flexible and can be altered in later phases.
b) The rolling plan allows for revisions and adjustments.
Demerits of Rolling Plan:
c) Rolling plan is furnished with uncertainty, as there is no fixation
of economic objectives.
d) In rolling plans, the planners are always reluctant in taking
difficult decisions or taking courageous decisions.
e) Under rolling plan, there is a lack of commitment.
b. Fixed planning:
 Fixed planning is for some fixed period, say 4 or 5 or 6 or 7 years.
 A fixed plan fixes definite objectives which have to be achieved
during the plan period.
 Physical targets & financial outlays do not change except under
emergencies.
 Under this plan, targets are achieved which are laid down in the
plan.
• This plan helps in maintaining proper balance in the economy.
Further, there is no uncertainty in this type of planning.
Merits of Fixed Planning:
(a) There is a boldness in planning. This is the essence of planning that
the planners will not bow down before the obstacles.
(b) There is effective implementation of plan.
(c) Targets of fixed plan are certain & this certainty in objectives brings
stability to the economy.
(d) Fixed plans ensure discipline for the planning process.
Demerits of Fixed Planning:
a) Fixed plans are inflexible plan. They cannot be altered in later
phases.
b) There is no revision of economic objectives and targets as there is no
alteration.
c) If not properly formulated and implemented, it leads to wastage of
resources.
Planning under Mixed Economy

• Most economists suggest the operation of mixed economy because both

extreme capitalistic and socialistic system are not suitable.
Capitalistic or free enterprise economy are characterised by lot of
problems including misallocation of resources, market imperfections,
monopolies, oligopolies, labour exploitation, widening gap between
haves and have-nots, and consumer’s exploitation.
On the other hand, socialistic form of economy may create the problems
like State’s monopoly and supremacy, bureaucratic hold, corruption, red
tapism, VIP-system, loss of consumer’s sovereignty, standardisation of
products, poor quality of products, less foreign trade, etc.
• While in case of mixed economy, consumer’s sovereignty, private property
ownership and operation of price mechanism are ensured.
• The public sector also works parallel to private sector.
• The public sector in a mixed economy consists of those projects which
require heavy funds like railways, air transportation, roads, bridges,
underpasses, power generation, irrigation, telecommunication, research, etc.
• The government also addresses people’s basic needs like employment,
health, and education.
• In under-developed countries, the government also provides housing
facilities to poor families.
• To avoid labour exploitation and consumer’s exploitation, the government
promulgates anti-monopoly and anti-cartel laws.
• In mixed economies, the government even adopts safety measures against
pollution and unhealthy working conditions in factories, offices, etc.
• In case of agricultural sector, the government provides short term loans to
farmers, and imports farm machines.