When the British left India, its economy was steeped in poverty, and chronic stagnation. The per capita income has not shown any significant growth over the past half a century. Agriculture situation was precarious and industrial growth was only marginal.
The partition of the country had made the economic position critical. There was thus urgent necessity for India to accomplish substantial development in a short span of time so as to render some stability to its economy.
It was under these circumstances that the country launched itself on the course of planned development with the First Five-Year Plan in 1951. Need for planned development has been felt because of the following reasons.
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(i) Unequal Income distribution:
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Inequalities in income distribution are widespread in India. In an unplanned free market economy every producer produces those goods which offer highest profit. Since it is the better-off sections of society who can pay the price and make production profitable for the producers, the result would be that luxury and semi-luxury goods would be produced The poor, on the other hand, would the denied even the basic necessities of life because a necessity rather than luxury in a poor country.
(ii) Increase in Saving, Investment and Capital Formation:
In a country where average income is low, rate of savings and investment is also small. Consequently the development process does not gather momentum. Planning thus becomes necessary to
(a) make best of the available savings,
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(b) to step up the rate of saving through governmental efforts such as incentive on savings, e.g., tax rebates, etc.,
(c) mopping up compulsory saving through taxes and compulsory saving schemes, (d) securing foreign aid for development and
(d) use of newly created currency (deficit financing) for investment. In this way under the plans private savings, public savings and foreign savings are all added up and used for investment or capital formation. This ensures a higher pace of development for the economy.
(iii) Market Driven Development May Ignore Long Term Projects:
The development process in a market economy is guided by profit motive. Long term development projects which involve huge investment and have a very long life but give low annual returns would remain neglected. The country may thus not gave large irrigation projects, electricity plants, basic and heavy industries which are so essential for long term development
(iv) Need for Investment in Social:
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Sectors Social sectors comprising of education, health housing etc., may remain neglected in a market economy because these activities are not seen to be very profitable activities. But investment in these activities improves health and efficiency of work force and steps up the tempo of development. Hence government has to step in and make planned investment in these activities.
Besides these, planning is also necessary to protect environment. Unchecked private activity guided by profit motive may lead to environmental degradation and ecological imbalance. To protect environment governmental action and planning are essential. Planning is also necessary for promoting social welfare of weaker sections of society which may remain ignored in a private market-driven economy.