The centralized approach to planning pursued so far in poor countries of Asia and Africa has not succeeded in bringing about widespread change in rural life. The trickle down effect has failed, and with it has come a growing realization of the need to make a direct attack on the problem of rural poverty by initiating action at the local level through an area planning approach whereby plans for the integrated development of small areas would be formulated and implemented by local people (Nyerere; and Government of India, 1978a). This planning from below, or grass roots planning, is expected to result in plans for better utilization of rural resources, through local people having better awareness of their needs and preferences and fuller information on the conditions and possibilities of their areas. The area level planners, having a more intimate knowledge of the interdependence of activities at the micro level, would be in a better position to develop integrated programmes which avoid duplication and produce maximum impact with minimum cost. Moreover, a better implementation of development programmes would be ensured through more realistic planning and greater involvement of local people in plan formulation and implementation (Government of India, 1978b). However, it is not always realized that, in view of the economies of scale which may be present, an overriding concern with decentralized planning, in particular with the objectives of local self-reliance and full utilization of local resources to the neglect of comparative advantage and regional specialization, may tend to offset the beneficial aspects of area planning mentioned above, and, therefore, need not result in an optimal situation. Whether or not it will result in a consistency between local and national plans in an interdependent, multiregional economy is another and a far more important question; for the failure of aggregate supply to match with aggregate demand, or of the structure of production to be in harmony with the composition of national demand is bound to have an unfavourable effect on the pace of development, especially in a public sector dominated economy like India's where supply and demand imbalances tend to provide grounds for slow working of enterprises resulting in delayed execution of projects. However, in the absence of much work on decentralized planning, very little is known on this aspect (Arrow and Hurwicz, Goreux and Manne; Malinvaud; Uzawa; and Westphal). Hence, it is proposed to examine this question in some detail, spell out its implications for rural development, and deal with the manner in which the problem posed here can be resolved. The discussion will be conducted primarily in the light of the institutional characteristics of the Indian economy and against the background of its considerable experience of development. However, the treatment of the subject matter will be made as general as possible.