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In an economy there are lot of players and components in constant interaction with each other. Government sector has always played a vital role in the creation, regulation and distribution of goods and services in an economy. The government therefore comes up with a plan or strategy to perform and regulate the main functions in an economy of production, distribution and consumption. It also is a value driven concept where the government ensures ideals of a welfare state like equity and socio-economic development of its citizens. Hence the aspect of economic planning becomes the broad framework of how the economy of a country functions and flourishes. Let us look at the planning system in India in detail in this chapter.

Planning Definition

Planning is deliberate choice of economic priorities and allocation of resources for achieving certain objectives in a given period of time.

The Making Of Major Economic Decisions –What And How Much Is To Be Produced And To Whom It Is To Be Allocated By The Conscious Decision Of A Determinate Authority, On The Basis Of A Comprehensive Survey Of The Economic System As A Whole” – H.D.Dickinson

Planning under a democratic system may be defined as the technical coordination, by disinterested experts of consumption, production, investment trade, and income distribution in accordance with social objectives set by bodies representative of the nation. – Indian Planning Commission, 1949.


It is an economic system where the government has control over the production and pricing of goods and services. In a planned economy, the government decides which goods and services to produce, the production and distribution method, and the prices of goods and services. Therefore, it is the central planner. Because the government sets and controls all aspects of business in a planned economy, there is no competition.

Market economy

In a free market economic system, the economy is based on the powers of supply and demand with little or no government intervention. A market economy is fundamentally one where entrepreneurs are free to control and co-ordinate productive resources in order to pursue profit by creating outputs that are more valuable than the inputs they use up, and free to fail and go out of business if they do not.

Market-oriented economies produce better economic outcomes, but differ on the precise balance between markets and central planning that is best to provide Stability, Equity, And Long Term Benefits. Therefore there is an alternative model of mixed economy.


A mixed economic system has features of both the planned and a free market system. A mixed economy is partly controlled by the government and partly based on the forces of supply and demand.  Most of the main economies in the world are now mixed economies, which operate under a mix of socialism and capitalism. Most mixed economies use fiscal or monetary policies to stimulate growth during economic slowdowns.

Generally, a mixed economic system involves a public and private sector. There is limited government regulation in a mixed economy. In the mixed economy, governments allow corporations to profit, but they will limit this through taxation or by imposing tariffs to control the macroeconomic factors.

Economic welfare is an important feature of mixed economy. It is achieved by both the public as well as the private sector. Public Sector seeks to avoid regional inequalities, provides large employment opportunities and often its price policy is guided by considerations of economic welfare rather than by profit motive. On the other hand, private activities are influenced through monetary and fiscal policies to make them contribute to economic welfare of the society at large level by production and distribution of resources. It boosts the consumption levels in an economy.

Types of planning

Regional, National and International Planning

Regional planning refers to the decentralized control exercised over the region of a particular country. When economic planning is applied for the nation as a whole, it is known as National Planning.

International planning is meant for a state of affairs in which the resources of more than one country are the property of the countries as a whole.


The framing, adopting, executing supervising and controlling the plan is done by central planning authority. Planning authority determines targets and priorities. This type of planning comes from the top to the bottom. This plan determines the equality and cohesion. The central planning authority which determines the basic policies in view of the regional and local needs.

All investment decisions are taken in accordance with goods and targets fixed by the central planning authority. All economic decisions like what to produce, how to produce, where to produce and to whom it is to be allocated are exclusively decided by the central authority. All aspects of the economy are controlled by the central authority. The prices and wages are also fixed by the planning authority. This planning is inflexible due to which it has less adaptability. There is no economic freedom at all. Further, the disequilibrium arising on account of centralized planning cannot be easily corrected. It is same as planned economy.

Decentralized Planning:

Under this planning, responsibility lies with local and regional officials who take economic decisions about the plan. In other words, this planning starts from the grass roots. In other words, this type of planning is from bottom to top. Under this, plan is framed by the central planning authority by consulting different administrative units of the country.

The plan incorporates plans under central, state and local schemes. Also plans are prepared for different industries too. But individual firms are free to take their own decisions about investment and output. Prices are determined by market mechanism even though there are government controls. There is complete economic freedom in consumption, production and exchange. This plan has been adopted in England and France.

Functional planning:

Under functional planning, there is no need to build up new structure, rather the existing structure is corrected and modified. Thus functional planning brings no change in the economic and social set up.

Structural Planning:

In this type of planning the present social and economic structure is changed and a new structure emerges. In the developing countries, there is a structure planning. Big economic and social changes are brought about to usher into a new system.

For instance, shift from capitalist to socialist economy can be called a structural change. Structural planning can help in accelerating the pace of economic development. The Communist countries like Russia and China followed structural planning.

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