India emerged from colonial rule as a free nation in 1947. It soon set about the task of developing its economy and raising the standards of living of its people in right earnest. The major ‘project’ that India embarked upon has been called nation building, economic development and transformation is an integral part of that project.
When India became free, it inherited a set of institutions and policy framework from earlier times. Also the economy was at a low level of development. Given this level of development, given the institutional framework of the economy, and with the instruments and resources at its disposal, the policy makers devised a set of strategies to push forward the growth and development of the economy.
The basic strategy of development adopted in India was the following. Ever since Independence, a rapid rise in national income and in the standard of living has been the stated goal of development.
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Even for removal of poverty it was felt that the economy has to display high rates of growth. Redistribution of existing wealth was not thought entirely feasible; it was also thought that there would not be much to redistribute. So faith was placed on the growth process.
However, growth, though necessary, was by no means sufficient to transform the economy and also to uphold the ideals of the Constitution. Thus, social justice became an added and enduring objective. Along with this, because India had just emerged from colonial rule, there was a mistrust of the international economy, and faith was placed on ‘self-reliance’.
By the Second Five Year Plan, self-reliance took the form of ‘import- substitution’. Later, in the Fourth Five Year Plan, self- reliance came to be seen as less and less reliance on foreign investment. Thus, growth with social justice and self-reliance defined in the aforementioned sense, remained the central and enduring objectives of development for a long time.
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Even before Independence, national leaders were convinced about the efficacy of planning for a poor country such as India. The National Planning Committee appointed by the Indian National Congress and headed by Jawaharlal Nehru submitted its report in 1938.
The Committee felt that India had to industrialise. The three essentials for this were thought to be: (i) heavy engineering and machine-making industry, (ii) scientific research institutes, and (iii) electric power. The committee was of the view that even with international interdependence among nations, and even allowing for cottage and small-scale industries, to be economically strong, India must be industrialised in terms of big-scale industries and develop its power sector.
National leaders, especially Left-wing ones like Nehru and Subhash Bose were not the only proponents of planning. As early as 1934, noted industrialist Sir M. Visveswaraya wrote his book Planned Economy for India. He argued that for India to prosper, industrialisation is a must.
And to industrialise rapidly, the process must be organised and planned. Similarly, the so called Bombay Plan (1944) by a group of industrialists also emphasised industrialisation. After Independence, first the Congress party in 1953, and then the Parliament in 1954 accepted ‘socialistic pattern of society’ as the objective of economic and social policy.
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Thinkers on development emphasised industrialisation as the basic growth strategy because they had learnt of the experience of Europe and USA which had gone through industrial revolution. This had transformed their economies and raised their national incomes and the standard of living of their people several-fold. It marked the beginning of a new epoch of ‘modern economic growth’ as economist Simon Kuznets put it.
The industrial revolution was made possible by the application of science and technology and inventions like steam engine, power-loom, modern harvester-thresher and so on. Later on the Soviet Union also industrialised as a socialist nation, with the ‘commanding heights’ of the economy the heavy industry, power and infrastructure under state control. Moreover, the USSR had also become a military power. The USSR had transformed its economy in a matter of decades. All this had impressed the Indian leaders.
Soon after Independence, the first Resolution on Industrial Policy, in April 1948, stressed the importance of planning for the economy and expressed the desire that a National Planning Commission be set up for the formulation and execution of development programmes. The Planning Commission was set up in 1950.
The First Five Year Plan was a basic collection of projects, did not have much physical targeting and merely sought to indicate directions of planning. The main contours of almost all future strategy till 1991, as well as giving the basic structure and also the thrust of economic strategy emerged with the second Five Year Plan.
The Second Five Year Plan, launched in 1956-57, was part of a general strategy of development, and was accompanied by other policy measures. The framework of the Second Five-Year Plan, with minor modifications, remained the mainstay of all future plans and policies till the beginning of the 1990s.
The architect of the Second Five Year Plan was P. C. Mahalanobis. The central idea behind the Second Five Year Plan was that to raise the standard of living of the people, the economy needed to grow very fast. And for the economy to grow very fast, the planners felt that industrialisation was the key.
Industrialisation meant that plants and machinery had to be set up which produce output. The Second Five Year Plan stressed the production of those machines that produce other machines as output. These industries where machines produce other machines and equipment are called heavy industry.
Thus the basic idea was that the productive capacity of the economy itself had to be increased. Consumer goods, being goods that are used up for consumption, do not increase productive capacity.
So the argument was that while those machines that produce cars or shirts or watches are important, even more important are the machines that would produce the machines that would produce cars or shirts or watches. Heavy industry was thus one of the central features of the Second Plan.
The other key idea in the Second Plan was the desire to conserve foreign exchange, as well as to put into operation the idea that imports of machinery and equipment from abroad had to be curtailed. This strategy where imports are substituted by domestically produced version of the same thing is called import substitution strategy.
No doubt, this was prompted by the experience of India as a colonised nation and subsequent mistrust of foreign trade. Not only was foreign trade not seen as an engine of growth, it was actually thought that developing nations and their domestic industries would be adversely affected by foreign trade.
Since the planners relied on heavy industry (and infrastructure like power and electricity, for which hydroelectric and thermal power plants and dams were set up Nehru used to call dams ‘the temples of modern India’), it was recognised that huge investments would be required.
The policy-makers felt that the private sector would neither be willing nor able to make these huge investments. Hence these heavy industries, infrastructure like power, and areas of strategic interests like Defence production – the ‘commanding heights of the economy’ were kept with the Public sector.
We see that heavy industry, import substitution and placing of key industries with the public sector were the key features of the Second Five Year Plan. But it is not true that the Second Five Year Plan completely neglected other sectors of the economy.
In the 1950s itself important institutions for rural development like the Community Development Programme and Panchayati Raj were started. A handloom sector and Khadi and Village Industries Commission were set up and encouraged.
Also the Planning Commission undertook a study to look at the minimum requirements to raise the standards of living of the poorer sections over the subsequent 15 years. The Second Plan is often criticised on the ground that it pursued a strategy that focused on growth while neglecting distribution and not adequately attacking poverty.
Was there no alternative to the Mahalanobis model of growth as spelled out above? Two economists C.N. Vakil and PR. Bramananda, did not think so. They had propounded a plan model about the same time as Mahalanobis.
In their model they stressed production of agricultural products and those goods consumed by the poorer sections of the society. These goods, bought by wages are called wage-goods.